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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 - K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for fiscal year ended March 31, 2003 or
____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-15159
RENTRAK CORPORATION
(exact name of registrant as specified in its charter)
Oregon 93-0780536
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
7700 NE Ambassador Place, Portland, Oregon 97220
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (503) 284-7581
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common stock $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes____ No X
As of September 30, 2002, the aggregate market value of the registrant's common
stock held by non-affiliates of the registrant, based on the last sales price as
reported by NASDAQ, was $36,074,493.
As of June 23, 2003, the Registrant had 64,702,942 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR THE 2003 ANNUAL MEETING OF THE
SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART II and III OF THIS FORM
10-K
1
TABLE OF CONTENTS
Item PART I Page
1. Business 3
2. Properties 9
3. Legal Proceedings 9
4. Submission of Matters to a Vote of Security Holders 9
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
6. Selected Financial Data 11
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
7A. Quantitative and Qualitative Disclosures About
Market Risk 25
8. Financial Statements and Supplementary Data 26
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 58
Disclosure
PART III
10. Directors and Executive Officers of the Registrant 58
11. Executive Compensation 58
12. Security Ownership of Certain Beneficial Owners 58
and Management and Related Stockholder Matters
13. Certain Relationships and Related Transactions 58
14. Controls and Procedures 58
PART IV
15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 60
2
PART I
ITEM 1. BUSINESS
GENERAL
- -------
The Company's primary business continues to be the collection, processing,
analysis and presentation of rental and sales information regarding
videocassettes ("Cassettes"), digital videodiscs ("DVD's"), and Video Games
(collectively "Units") leased to home video specialty stores and other retailers
by way of its Pay Per Transaction system (the "PPT System"). Under the Company's
PPT System, home video specialty stores and other retailers that rent (Units) to
consumers ("Retailers"), including grocery stores and convenience stores, lease
Units, and other media from Rentrak for a low initial fee and share a portion of
each retail rental transaction with the Company. The Company included Video
Games as part of the PPT system in fiscal 2003. The Company's PPT System
generated 78 percent, 73 percent and 80 percent of total revenues in fiscal
years 2003, 2002 and 2001, respectively.
The Company has engaged in additional lines of business through the following
subsidiaries:
3PF.COM, Inc. ("3PF") provides order processing, inventory management, and
fulfillment services to retailers and wholesalers and to other businesses
requiring just-in-time fulfillment. In June 2003, the Company agreed to sell
3PF's operating assets at its Wilmington, Ohio, facility. (See Note 3 of the
Notes to the Consolidated Financial Statements.)
BlowOut Video, Inc., sold cassettes and DVD's through its Website
www.blowoutvideo.com, and through three retail outlets. Operations of BlowOut
Video, Inc., were fully discontinued in fiscal year 2003. (See Note 2 of the
Notes to the Consolidated Financial Statements.)
PAY-PER-TRANSACTION SYSTEM
- --------------------------
The Company distributes Units principally to home video specialty stores through
its PPT System. The PPT System enables Retailers to obtain Units at a
significantly lower initial cost than if they purchased the Units from
traditional video distributors.
After the Retailer is approved for participation in the PPT System, Units are
leased to the Retailer for a low initial fee (the "Order Processing Fee") plus a
percentage of revenues generated by the Retailer from rentals to consumers (the
"Transaction Fee"). The Company retains a portion of each Order Processing Fee
and Transaction Fee and remits the remainder to the appropriate motion picture
studios or other licensee or owner of the rights to certain video programming,
or video game publishers, ("Program Suppliers") that hold the distribution
rights to the Units. Due to the lower cost of "bringing Units in the door",
Retailers generally obtain a greater number of Units under the PPT System than
the traditional distribution method. The intended benefit to the Retailer is a
higher volume of rental transactions, as well as a reduction in capital cost and
risk. The intended benefit to the Program Supplier is an increase in the total
number of Units shipped, resulting in increased revenues and opportunity for
profit. The intended benefit to the consumer is the potential of finding more
copies of certain newly released hit titles and a greater selection of other
titles at Retailers participating in the PPT System ("Participating Retailers").
The Company markets its PPT System throughout the United States and Canada, as
well as in the United Kingdom through a subsidiary. Following the sale of a 5.6
percent interest in Rentrak Japan Co., Ltd. ("Rentrak Japan"), a Japanese
corporation which markets a similar service to
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video retailers in Japan, in October 2001, the Company no longer received
revenues from the Asian markets.
In February 1998, the Company entered into a Shareholders Agreement and a PPT
License Agreement with Columbus Holdings Limited and Rentrak UK Limited (Rentrak
UK) to develop the Company's PPT distribution and information processing
business in the United Kingdom through Rentrak UK. The PPT Agreement remains in
force in perpetuity, unless terminated due to material breach of contract,
liquidation of Rentrak UK, or nondelivery, by the Company to Rentrak UK, of all
retailer and studio software, including all updates. Pursuant to the PPT
Agreement, during the term of the PPT Agreement, the Company will receive a
royalty of 1.67% of Rentrak UK's gross revenues from any and all sources.
Rentrak currently owns 92% of Rentrak UK while Rentrak Japan holds 8%. From
inception, Rentrak UK did not generate income or positive cash flow and, as a
result, the Company wrote down substantially all long-lived assets including
goodwill and certain fixed assets totaling $222,000 in fiscal 2000. Through
March 2003, Rentrak UK improved its performance producing minimal income and
cash flow. Management of the Company has made changes to decrease the cost of
operations, including space and staffing costs, and it is continuing to closely
evaluate the financial performance of operations. Management is currently
considering various alternatives including selling or closing down Rentrak UK's
operations.
The Company currently offers substantially all of the titles of a number of
non-Video Game Program Suppliers, including Buena Vista Pictures Distribution,
Inc., a subsidiary of The Walt Disney Company, Paramount Home Video, Inc.,
Universal Studios Home Video, Inc., Twentieth Century Fox Home Entertainment
(formerly Fox Video), a subsidiary of Twentieth Century Fox Film Corporation and
MGM Home Entertainment, a subsidiary of the Metro Goldman Meyer Company. The
Company's arrangements with all of its Program Suppliers are of varying
duration, scope and formality. In some cases, the Company has obtained Units
pursuant to contracts or arrangements with Program Suppliers on a title-by-title
basis and in other cases the contracts or arrangements provide that all titles
released for distribution by such Program Supplier will be provided to the
Company for the PPT System. Many of the Company's agreements with Program
Suppliers, including all major Program Suppliers, may be terminated upon
relatively short notice. Therefore, there is no assurance that any of the
Program Suppliers will continue to distribute Units through the PPT System,
continue to have available for distribution titles which the Company can
distribute on a profitable basis, or continue to remain in business. Even if
titles are otherwise available from Program Suppliers to the Company, there is
no assurance that they will be made available on terms acceptable to the
Company. During the last three years, the Company has not experienced any
material difficulty acquiring suitable Units for the Company's markets on
acceptable terms and conditions from Program Suppliers that have agreed to
provide the same to the Company. The Company has one Program Supplier that
supplied product that generated 16 percent, two that generated 15 percent, and a
fourth that generated 11 percent of Rentrak revenues for the year ended March
31, 2003. There were no other Program Suppliers who provided product that
generated more than 10 percent of revenues for the year ended March 31, 2003.
The Company currently receives a significant amount of product from four Program
Suppliers. Although management does not believe that these relationships will be
terminated in the near term, a loss of any of these suppliers could have an
adverse effect on the Company's operating results.
4
Certain Program Suppliers have requested, and the Company has provided,
financial or performance commitments from the Company, including advances,
warrants, or guarantees, as a condition of obtaining certain titles. The Company
determines whether to provide such commitments on a case-by-case basis,
depending upon the Program Supplier's success with such titles prior to home
video distribution and the Company's assessment of expected success in home
rental distribution. The Company currently continues this practice with one
Program Supplier for movies and three Program Suppliers for Video Games.
Distribution of Cassettes, DVD's, and Video Games ("Units")
- -----------------------------------------------------------
The Company's proprietary Rentrak Profit Maker Software (the "RPM Software")
allows Participating Retailers to order Units through their Point of Sale
("POS") system software and provides the Participating Retailers with
substantial information regarding all offered titles. Ordering occurs via a
networked computer interface. To further assist the Participating Retailers in
ordering, the Company also produces a monthly product catalog called "Ontrak."
To be competitive, Participating Retailers must be able to rent their Units on
the "street date" announced by the Program Supplier for the title. Rentrak has
contracted with 3PF to distribute Rentrak's Units via overnight air courier to
assure delivery to Participating Retailers on the street date. The freight costs
of such distribution comprise a portion of the Company's consolidated cost of
sales.
Computer Operations
- -------------------
To participate in the Company's PPT System, Participating Retailers must install
Rentrak approved computer software and hardware to process all of their rental
and sale transactions. Participating Retailers are required to use one of the
POS software vendors approved by the Company as conforming to the Company's
specifications. The Company's RPM Software resides on the Participating
Retailer's POS computer system and transmits a record of PPT transactions to the
Company over a telecommunications network. The RPM Software also assists the
Participating Retailer in ordering newly released titles and in managing the
inventory of Units.
The Company's information system processes these transactions and prepares
reports for Program Suppliers and Participating Retailers. In addition, it
determines variations from statistical norms for potential audit action. The
Company's information system also transmits information on new titles and
confirms orders made to the RPM Software at the Participating Retailer location.
Retailer Auditing
- -----------------
From time to time, the Company audits Participating Retailers in order to verify
that they are reporting all rentals and sales of Units on a consistent, accurate
and timely basis. Several different types of exception reports are produced
weekly. These reports are designed to identify any Participating Retailers whose
PPT business activity varies from the Company's statistical norms. Depending
upon the results of the Company's analysis of the reports, the Company may
conduct an in-store audit. Audits may be performed with or without notice and
any refusal to allow such an audit can be cause for immediate termination from
the PPT System. If audit violations are found, the Participating Retailer is
subject to fines, audit fees, immediate removal from the PPT System and/or
repossession of all leased Units.
5
Seasonality
- -----------
The Company believes that the home video industry is highly seasonal because
Program Suppliers tend to introduce hit titles for movies at two periods of the
year, early summer and Christmas. Since the release of movies to home video
usually follows the theatrical release by approximately six months (although
significant variations occur on certain titles), the seasonal peaks of movies
for home video also generally occur in early summer and at Christmas. The
Company believes its volume of rental transactions reflects, in part, this
seasonal pattern, although changes in Program Suppliers' titles available to the
Company, and Participating Retailers may tend to obscure any seasonal effect.
The Company believes such seasonal variations may be reflected in future
quarterly patterns of its revenues and earnings.
Retailer Financing Program
- --------------------------
In 1992, the Company established a Retailer Loan Program whereby, on a selective
basis, it provided financing to Participating Retailers that the Company
believed had the potential for substantial growth in the industry. The
underlying rationale for this program was the belief that the Company could
expand its business and at the same time participate in the rapid growth
experienced by the video retailers in which it invested. During fiscal 2001, the
Company discontinued new financings under this program and provided reserves of
$6.6 million representing the entire outstanding balance of the program loans.
The Company continues to seek enforcement of agreements entered into in
connection with this program in accordance with their terms to the extent
practicable.
Competition
- -----------
The Cassette, DVD, and Video Game distribution business is a highly competitive
industry that is rapidly changing. The traditional method of distributing these
Cassettes, DVD's, and Video Games ("Units") to Retailers is through purchase
transactions; i.e., a Retailer purchases Units from a distributor and then
offers the Units for rental or sale to the general public. As described in
greater detail above (see "Pay-Per-Transaction System"), the Company's PPT
System offers Participating Retailers an alternative method of obtaining Units.
Accordingly, the Company faces intense competition from all of the traditional
distributors, including Ingram Entertainment, Inc., VPD, and Video One Canada,
Ltd. These and other traditional distributors have extensive distribution
networks, long-standing relationships with Program Suppliers and Retailers, and,
in some cases, significantly greater financial resources than the Company.
In the last two years certain traditional distributors have taken steps to offer
Units to Retailers on a revenue sharing basis. For example, several traditional
distributors have executed licensing agreements with Supercomm, Inc.
("Supercomm"), now a wholly-owned subsidiary of Columbia TriStar Home
Entertainment, to market product on revenue sharing terms. Several traditional
distributors have also executed revenue sharing agreements with motion picture
studios ("Studios").
The Company also competes with Supercomm in two additional areas: (1)
domestically - for processing data for certain Studios' direct relationships
with Blockbuster Video and other Retailers; and (2) internationally in certain
markets. Supercomm also processes data for traditional distributors such as
Ingram who then compete with the Company for revenue sharing Units as well as
traditional Units.
6
The Company also faces direct competition from the Studios. Beginning in 1997,
several major Studios offered Retailers discounted pricing if such Retailers
substantially increased the quantity of Units purchased. Also, some major
Studios have offered Units to Retailers on a lease basis. In addition, all major
Studios sell Units directly to major Retailers including Blockbuster, the
world's largest chain of home video specialty stores. The Company believes most
of the major Studios have executed direct revenue sharing agreements with
Blockbuster and Hollywood Entertainment, the world's second largest chain of
home video specialty stores. The Company also believes that certain Studios have
executed direct revenue sharing agreements with several other large Retailers.
The Company does not believe that the Studios have executed direct revenue
sharing agreements with other smaller Retailers, but there can be no assurance
that they will not do so in the future.
The Studios also compete with the Company by releasing certain Unit titles on a
"sell-through" basis; i.e., they bypass the traditional rental period by selling
the Units directly to consumers at a price of approximately $9.95 -- $19.95. To
date, such "sell-through" distribution has generally been limited to certain
newly released hit titles with wide general family appeal. However, because the
Company's PPT business is partially dependent upon the existence of a rental
period, a shift toward such "sell-through" distribution, particularly with
respect to popular titles, could have a material adverse effect on the Company's
business.
The Company also competes with businesses that use alternative distribution
methods to provide video entertainment directly to consumers, such as the
following: (1) direct broadcast satellite transmission systems; (2) traditional
cable television systems; (3) pay-per-view cable television systems; and (4)
delivery of programming via the Internet. Each of these distribution methods
employs digital compression techniques to increase the number of channels
available to consumers and, therefore, the number of movies that may be
transmitted. Technological improvements in this distribution method,
particularly "video-on-demand," may make this option more attractive to
consumers and thereby materially diminish the demand for Unit rentals. Such a
consequence could have a material adverse effect on the Company's business.
Foreign Operations
- ------------------
On December 20, 1989, the Company entered into an agreement with Culture
Convenience Club, Co., Ltd. ("CCC"), a Japanese corporation, which is Japan's
largest video specialty retailer. Pursuant to the agreement, the parties formed
Rentrak Japan, a Japanese corporation. Rentrak Japan was formed to implement the
PPT System in Japan. The Company provided its PPT technology and the use of
certain trademarks and service marks to Rentrak Japan, and CCC provided
management personnel, operating capital, and adaptation of the PPT technology to
meet Japanese requirements.
Beginning in 1994, the Company became entitled to a royalty of 1.67% for all
sales of up to $47,905,000 plus one-half of one percent of sales greater than
$47,905,000 in each royalty year (June 1 - May 31). Additionally, the Company
received one-time royalty payments of $1,000,000 in fiscal year 1995 and
$1,000,000 in fiscal year 1999. In December 1999, the Company received a
prepayment of $2,500,000 in exchange for $4,000,000 of credit related to the
annual royalty, which was recognized in revenues as royalties were earned under
the terms of the contract.
Effective April 2, 2001 the Company and Rentrak Japan entered into a
restructuring agreement of their relationship. The Company transferred exclusive
rights to implement its PPT System within specified countries in the Far East,
including related trademark and other intellectual property rights, to Rentrak
Japan. In exchange for the transfer, Rentrak Japan made a lump sum payment
7
of $5.7 million to the Company and released certain of the Company's payment
obligations totaling approximately $1.3 million. As part of the transaction,
Rentrak Japan's obligation to pay annual royalties to the Company in connection
with use of its PPT System was terminated. (See Note 1(b) of the Notes to the
Consolidated Financial Statements.)
DIRECT REVENUE SHARING
- ----------------------
The Company provides direct revenue sharing ("DRS") services to various
Suppliers that also participate in the PPT System. The DRS services consist of
data collection, tracking, auditing and reporting of revenue sharing rental and
sales transactions for the Suppliers, of large retail chain video store
customers that rent Cassettes, DVD's and Video Games and engage in revenue
sharing arrangements directly with these Suppliers. The Company utilizes its
computer software it developed to collect, track, audit and report the results
to the Suppliers under established agreements on a fee for service basis.
BUSINESS INTELLIGENCE SERVICES
- ------------------------------
The Company has begun to transform itself into a leading provider of business
intelligence ("BI") services, by taking advantage of the capabilities it built
through its PPT System services in the entertainment industry. During fiscal
2003 the Company invested over $4 million in the continued research and
development of its suite of software and services consisting of Box Office
Essentials, VideoGame Essentials, Retail Essentials, VOD Essentials, Calendar
Essentials and Supply Chain Essentials for the entertainment industry and
beyond. The Essentials software and services provides unique data collection,
management, analysis and reporting resulting in business intelligence
information valuable to the Company's clients who use these services. The
Company began providing Box Office Essentials services to clients beginning in
the fourth quarter of fiscal 2003. The Company believes that the investments it
made in fiscal 2003 and those it intends to make in fiscal 2004 should begin to
generate additional revenues and contributions to profits of the Company over
the next 12 to 24 months.
FORMOVIES.COM
- -------------
Formovies.com is a website designed by the Company and dedicated to assist
consumers in finding a local video store where they can rent and/or purchase
video products they are specifically seeking. Consumers can find a particular
movie of their choice by searching on various attributes of that title. Once
found they can then determine the closest video store that carries that product.
Trademarks, Copyrights, and Proprietary Rights
- ----------------------------------------------
The Company has registered its "RENTRAK", "PPT", "Pay Per Transaction",
"Ontrak", "BudgetMaker", "DataTrak", "Prize Find" , "BlowOut Video", "Fastrak",
"GameTrak", "RPM", "Videolink+", "Unless You're Rich Enough Already",
"Sportrak", "Movies For The Hungry Mind", "VidAlert", "Active Home Video",
"Movie Wizard", and "Gotta Have It Guarantee" marks under federal trademark
laws. The Company has applied and obtained registered status in several foreign
countries for many of its trademarks. The Company has filed an application to
register its "Essentials" trademark. The Company claims a copyright in its RPM
Software and considers it to be proprietary. The Company has also filed notice
and claims a copyright on its Essentials software.
8
Employees
- ---------
As of March 31, 2003, including all subsidiaries, the Company employed 293
active employees. The Company considers its relations with its employees to be
good.
Financial Information About Industry Segments
- ---------------------------------------------
See Note 13 of the Notes to the Consolidated Financial Statements for
information regarding the Company's business segments.
Website
- -------
The Company maintains its website at www.rentrak.com. The Company makes its
periodic and current reports available, free of charge, on its website as soon
as reasonably practicable after such material is electronically filed with, or
furnished to, the SEC.
ITEM 2. PROPERTIES
The Company currently maintains its headquarter offices in Portland, Oregon
where it leases 48,800 square feet of office space. The lease began on January
1, 1997 and expires on December 31, 2006. The Company's subsidiary, 3PF,
maintains one distribution facility in Wilmington, Ohio and one in Columbus,
Ohio where it leases 121,600 and 388,264 square feet, respectively. These
distribution facilities also include administrative office space. These two
distribution facility leases expire on December 31, 2010 and February 28, 2008,
respectively. (See Note 3 of the Notes to the Consolidated Financial Statements
regarding the sale of 3PF's assets and the impact to the leases of these two
distribution facilities.)
ITEM 3. LEGAL PROCEEDINGS
The Company may from time to time be a party to legal proceedings and claims
that arise in the ordinary course of its business. In the opinion of management,
the amount of any ultimate liability with respect to these potential actions is
not expected to materially affect the financial position or results of
operations of the Company as a whole. The Company currently has no material
outstanding litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock, $.001 par value, is traded on the Nasdaq National
Market, where its prices are quoted under the symbol "RENT". As of June 2, 2003
there were approximately 300 holders of record of the Company's common stock. On
June 2, 2003, the closing sales price of the Company's common stock as quoted on
the Nasdaq National Market was $5.99.
The following table sets forth the reported high and low sales prices of the
Company's common stock for the periods indicated as regularly quoted on the
Nasdaq National Market.
-------------------------------------------------------------
QUARTER ENDED HIGH LOW
-------------------------------------------------------------
JUNE 30, 2001 $4.90 $2.99
-------------------------------------------------------------
SEPTEMBER 30, 2001 $3.74 $2.86
-------------------------------------------------------------
DECEMBER 31, 2001 $5.93 $3.00
-------------------------------------------------------------
MARCH 31, 2002 $8.00 $5.50
-------------------------------------------------------------
June 30, 2002 $7.20 $4.58
-------------------------------------------------------------
September 30, 2002 $5.03 $3.27
-------------------------------------------------------------
December 31, 2002 $5.79 $3.76
-------------------------------------------------------------
March 31, 2003 $6.00 $4.31
-------------------------------------------------------------
DIVIDENDS
- ---------
Holders of the Company's common stock are entitled to receive dividends if, as,
and when declared by the Board of Directors out of funds legally available
therefore, subject to the dividend and liquidation rights of any preferred stock
that may be issued.
No cash dividends have been paid or declared during the last five fiscal years.
The present policy of the Board of Directors is to retain earnings to provide
funds for operation and expansion of the Company's business. The Company does
not intend to pay cash dividends in the foreseeable future.
10
ITEM 6. SELECTED FINANCIAL DATA
(In Thousands Except Per Share Amounts)
Year Ended March 31,
2003 2002 2001 2000 1999
-----------------------------------------------------------------------
Statement of Operations Data
Revenues:
Order processing fees $ 15,081 $ 16,866 $ 18,563 $ 22,331 $ 21,854
Transaction fees 42,258 44,102 55,752 61,476 72,240
Sell-through fees 8,558 7,324 8,431 9,826 12,280
Communication fees 1,185 1,136 1,509 2,099 2,228
Fulfillment 15,266 15,342 20,137 8,337 6,395
Other 3,872 11,224 3,668 3,624 3,227
-----------------------------------------------------------------------
Total revenues 86,220 95,994 108,060 107,693 118,224
-----------------------------------------------------------------------
Operating costs and expenses:
Cost of sales 70,962 71,979 86,808 87,617 99,807
Selling and administrative expense 14,786 17,282 31,002 25,360 15,555
Net (gain) loss on litigation settlements (362) (1,563) (225) (7,792) 1,099
Asset impairment 844 424 - - -
-----------------------------------------------------------------------
Total operating cost and expenses 86,230 88,122 117,585 105,185 116,461
Income (loss) from continuing operations (10) 7,872 (9,525) 2,508 1,763
Other income (expense) 179 7,913 (2,149) (1,389) 597
-----------------------------------------------------------------------
Income (loss) from continuing operations before
income tax (provision) benefit and loss from
discontinued operations 169 15,785 (11,674) 1,119 2,360
Income tax (provision) benefit (85) (5,998) 4,356 (275) (919)
-----------------------------------------------------------------------
Income (loss) from continuing operations 84 9,787 (7,318) 844 1,441
Income (loss) from discontinued operations (1) (582) (793) (259) 2,581 602
-----------------------------------------------------------------------
Net income (loss) $ (498) $ 8,994 $ (7,577) $ 3,425 $ 2,043
-----------------------------------------------------------------------
Earnings (loss) per share:
Basic:
Continuing operations $ 0.01 $ 0.94 $ (0.61) $ 0.08 $ 0.13
Discontinued operations (0.06) (0.08) (0.02) 0.25 0.06
-----------------------------------------------------------------------
Net income (loss) $ (0.05) $ 0.86 $ (0.63) $ 0.33 $ 0.19
=======================================================================
Diluted:
Continuing operations $ 0.01 $ 0.92 $ (0.61) $ 0.08 $ 0.13
Discontinued operations (0.06) (0.07) (0.02) 0.24 0.05
-----------------------------------------------------------------------
Net income (loss) $ (0.05) $ 0.85 $ (0.63) $ 0.32 $ 0.18
=======================================================================
Common shares and common share equivalents
used to compute diluted EPS 9,779 10,613 11,985 10,759 11,057
2003 2002 2001 2000 1999
-----------------------------------------------------------------------
Balance Sheet Data
Working Capital $ 0,875 $11,676 $ 3,866 $ 9,360 $ (293)
Total Assets 30,726 38,612 39,126 50,473 46,262
Long-term Liabilities 668 496 1,175 - -
Stockholders' Equity 15,437 17,278 11,387 18,081 12,274
(1) See Note 2 of the Notes to the Consolidated Financial Statements. Fiscal
years 1999 and 2000 include the discontinued operations of BlowOut
Entertainment.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements
- --------------------------
Certain information included in the Annual Report on Form 10-K (including
Management's Discussion and Analysis of Financial Condition and Results of
Operations regarding revenue growth, gross profit margin and liquidity)
constitute forward-looking statements that involve a number of risks and
uncertainties. Forward looking statements may be identified by the use of
forward-looking words such as "may", "will", "expects", "intends",
"anticipates", "estimates", or "continues" or the negative thereof or variations
thereon or comparable terminology. The following factors are among the factors
that could cause actual results to differ materially from the forward-looking
statements: the Company's ability to continue to market the PPT System
successfully, the financial stability of the Participating Retailers and their
performance of their obligations under the PPT System, the closure of subsidiary
operations, 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 Units from Program Suppliers. This
Annual Report on Form 10-K further describes some of these factors. (References
to Notes are to Notes to the Consolidated Financial Statements included in Item
8 of this report.)
Results of Operations
- ---------------------
Fiscal 2003 Compared to Fiscal 2002
PPT Operations and Other Continuing Subsidiaries
- ------------------------------------------------
For the fiscal year ended March 31, 2003, the Company's total consolidated
revenue decreased $9.8 million to $86.2 million from $96.0 million in the prior
fiscal year. Total consolidated revenue includes the following PPT System fees
in the PPT business segment: order processing fees generated when Cassettes,
DVD's and Video Games ("Units") are ordered by and distributed to Participating
Retailers; transaction fees generated when Participating Retailers rent Units to
consumers; sell-through fees generated when Participating Retailers sell Units
to consumers; communication fees when Participating Retailers' point-of-sale
systems are connected to the Company's information system; and sell-through fees
when Participating 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, other revenue includes charges to customers of
the Company's subsidiary 3PF which provides e-commerce order processing,
fulfillment and inventory management services, and royalty payments from Rentrak
Japan through 2002.
The decrease in total consolidated revenue in fiscal 2003 was primarily due to
the fact that in 2002 the Company earned royalties and other revenues from
Rentrak Japan totaling $6.4 million. The Company's arrangement with Rentrak
Japan ended in fiscal 2002. In fiscal 2003 the Company earned $0 revenue from
Rentrak Japan (See Note 1b). The
12
decrease in consolidated revenue was additionally due to (1) a decline in the
number of rental turns of the Units in the stores; and (ii) PPT "output
programs" and other PPT programs under which the program supplier and the
Company agreed to charge a lower order processing and transaction fee in
exchange for Retailers committing to take an increased total number of Units.
These programs were a response to the shift from the VHS cassette format to the
DVD format and resulted in an increased total number of Units leased but a
reduced amount of fees per Unit.
In fiscal 2003, the PPT business segment revenues were $71.0 million, a decrease
of $3.3 million, or 4 percent, from $74.3 million in fiscal 2002. The decrease
consisted of the following items. Order processing-fee revenue decreased to
$15.1 million from $16.9 million in fiscal 2002, a decrease of $1.8 million, or
11 percent. Transaction-fee revenue totaled $42.3 million, a decrease of $1.8
million, or 4 percent, from $44.1 million the previous fiscal year. Sell-through
revenue was $8.6 million in fiscal 2003 as compared to $7.3 million in fiscal
2002, an increase of $1.3 million or 18 percent. Communication fee revenue was
$1.2 million in fiscal 2003 as compared to $1.1 million in fiscal 2002, an
increase of $0.1 million, or 9 percent.
Also included in the PPT business segment are the following other revenues: (i)
direct revenue sharing fees totaling $3.1 million in fiscal 2003, a decrease of
$0.8 million, or 21 percent, from $3.9 million in fiscal 2002; and (iii) royalty
and other revenues totaling $0.7 million in fiscal 2003 and $0.8 million in
fiscal 2002. The direct revenue sharing fee decrease was substantially due to
the termination of an agreement between one of the Company's major studio
customers and a major retailer. The Company believes that that agreement will
soon be renewed.
Cost of sales in the PPT business segment consists of order processing costs,
transaction costs, sell through costs and freight costs, and represents the
direct costs to produce the PPT revenues. Order processing costs, transaction
costs and sell through costs represent the amounts due the Program Suppliers
that hold the distribution rights to the cassettes, DVD's and Video Games
("Units") under agreement with the Company. Freight costs represent the cost to
pick, pack and ship orders of Units to the Participating Retailers.
Cost of sales for the PPT business segment in fiscal 2003 decreased to $55.7
million from $57.3 million the prior fiscal year, a decrease of $1.6 million, or
3 percent. The change is primarily due to the factors that led to changes in
revenue as noted above. In fiscal 2003 the Company's PPT business segment gross
profit margin decreased to 22 percent from 23 percent the previous year. The
decrease in gross margin is partially due to an increase in warrant
amortization. Management elected to fully amortize the remaining unamortized
value of warrants as of March 31, 2003 previously issued to a customer in
conjunction with a service agreement based on the expectation that the customer
would not be utilizing the services of the Company in future periods. (See Note
9)
Selling, General & Administrative expenses in the PPT business segment consist
of the indirect costs to sell, administer and manage the PPT business. These
expenses consist primarily of compensation and benefits, development, marketing
and advertising costs, legal and professional fees, communications costs,
depreciation and amortization of tangible fixed assets and software, real and
personal property leases, as well as other general corporate expenses.
13
PPT business segment selling and administrative expenses were $12.4 million in
fiscal 2003 compared to $12.3 million in fiscal 2002. This increase of $0.1
million, or 1 percent, was primarily attributable to costs associated with the
development of new software and services including Box Office Essentials, the
Company's recently developed software and service that collects and reports
information on theatrical releases of movie titles for the studios. Item 1.
Business - Business Intelligence Services of this report further describes
certain of these factors.
The net gain from the litigation settlement with a prior customer of the
Company, Hollywood Entertainment, was $1,563,000 for fiscal 2002 and $362,000
for fiscal 2003. The $1,563,000 of proceeds from the claim settled in fiscal
2002 was received in May 2002 from Hollywood Entertainment and related to a
breach of a fulfillment contract. In April 2002, in a confidential settlement
agreement, Hollywood agreed to pay an additional $362,000 to the Company to
resolve all outstanding issues between the two parties.
PPT other income (expense) was an expense of $0.1 million in fiscal 2003
compared to income of $8.1 million for fiscal 2002, a decrease of $8.2 million.
This decrease is primarily due to an $8.0 million recognition of other income
related to the business restructuring with Rentrak Japan in fiscal 2002 (See
Note 1b).
As a result of the above, for the fiscal year ended March 31, 2003, the Company
recorded pre-tax income of $3.4 million, or 5 percent of total revenue, from its
PPT business, compared to pre-tax income of $19.9 million, or 25 percent of
total revenue, in the prior fiscal year including royalty revenue and other
income from the Rentrak Japan business restructuring (See Note 1b),
The Cassette, DVD, and Video Game distribution business is a highly competitive
industry that is rapidly changing. The effect of these changes could have a
material impact on the Company's operations. Item 1. Business--Competition of
this report further describes certain of these factors.
Included in other consolidated revenue are the results from other subsidiaries,
primarily the operations of 3PF.
Revenues in the 3PF business segment generally consist of storage fees,
receiving fees, handling fees, special service fees, freight charges and other
fees. These fees represent the continuum of services provided by 3PF from: (i)
receipt of client product(s) into the distribution facility; (ii) storage of the
client product(s); (iii) the picking and packing services (handling) and other
special services for client product(s) to prepare for shipment , and: (iv)
freight charges for the administration of the client shipping and the charges by
various carriers to ship the clients' product to their customers.
Cost of sales in the 3PF business segment consist of freight, compensation,
agency employees, supplies, occupancy, equipment leases and depreciation, and
represent the direct costs to produce the fulfillment revenues. Freight
represents the charges by various carriers to 3PF to ship its clients' products
to their customers. Compensation and agency employees represent the costs of
management and staff cost directly involved in the daily fulfillment operations.
Occupancy represents the facility costs of the real property to conduct the
fulfillment operations. Equipment leases and depreciation represent the cost of
equipment and other assets used in the fulfillment operations.
14
Selling, General & Administrative expenses in the 3PF business segment consist
of the indirect costs to sell, administer and manage the fulfillment business.
These expenses consist primarily of compensation and benefits, development,
marketing and advertising costs, legal and professional fees, communications
costs, depreciation and amortization of tangible fixed assets and software,
personal property leases, as well as other general corporate expenses.
Total revenues from 3PF were $15.3 million for fiscal 2003 and $15.3 million for
fiscal 2002. Cost of sales was $15.3 million, an increase of $0.6 million from
the $14.7 million recorded in fiscal 2002. This increase is primarily due to the
on-going carrying cost of unutilized distribution facility capacity. As a
percentage of total 3PF revenue, total cost of sales was 100 percent and 93
percent for fiscal 2003 and 2002, respectively. Selling and administrative
expenses decreased to $2.4 million in fiscal 2003 from $4.1 million in fiscal
2002, a decrease of $1.7 million. As a percentage of total revenue, selling and
administrative expenses decreased to 16 percent for fiscal 2003 from 27 percent
for the prior fiscal year. The $1.7 million decrease was primarily due to
decreased compensation, advertising, travel and entertainment expenses and other
costs as the Company continued to adjust its overhead infrastructure to better
fit the operating size of its business.
In June 2002, 3PF entered into an agreement to sublease approximately 194,000
square feet of its distribution facility in Columbus, Ohio to its largest
customer. The term of the lease expires July 31, 2006. The sublease requires
monthly rent payments to 3PF under amounts, terms and conditions similar to
3PF's master lease for this facility. Additionally in June 2002 in conjunction
with the facility sublease, 3PF entered into a financing lease with this
customer for the existing equipment within this distribution facility and the
associated costs for additional equipment to configure the layout to the
customer's specifications. This lease, upon expiration, contains a $1.00
purchase option. The financing lease for the equipment was recorded as a note
receivable in the amount of $1,838,062 payable to 3PF in monthly installments.
The current and long-term portions of this note receivable were $496,947 and
$1,076,395 respectively. The transaction resulted in a deferred gain in the
amount of $509,044 which is being recognized as interest income by 3PF ratably
throughout the life of the lease.
In 2003, management determined that it is unlikely that 3PF would achieve its
business plans and initiated a plan to sell the assets of 3PF. Prior to March
31, 2003, it was determined that, more likely than not, substantially all of
3PF's assets would be sold or otherwise disposed of. As a result of this
determination, management assessed during the quarter ended March 31, 2003, the
current and historical operating and cash flow losses, prospects for growth in
revenues and other alternatives for improving the operating results of 3PF
Accordingly, management performed an assessment of the fair value of the 3PF
assets under the guidelines of SFAS 144, Accounting for the Impairment of
Long-Lived Assets. This assessment resulted in 3PF recognizing an asset
impairment expense during the three-month period ended March 31, 2003 in the
amount of $844,041 for the write down of its assets to estimated fair market
value of approximately $800,000.
On June 17, 2003 the Company announced it signed a definitive agreement to sell
substantially all of the assets of 3PF at the Wilmington, Ohio, operation. The
agreement covers all equipment and leasehold improvements at 3PF's leased
distribution facility in Wilmington, Ohio, as well as a portion of its working
capital. As part of the agreement,
15
3PF as lessee and Rentrak as guarantor have been released from the lease. The
cash purchase price of $800,000 is approximately equal to the net book value of
the assets sold at March 31, 2003. During the sale negotiations, the Company
received notification from 3PF's largest customer, serviced exclusively from the
leased distribution facility in Columbus, Ohio, that it does not intend to renew
its fulfillment service contract upon the scheduled expiration at July 31, 2003.
As a result, the Columbus, Ohio distribution facility lease is not included in
the asset sale transaction. The Columbus, Ohio distribution facility has been
used exclusively to service this customer and as of August 1, 2003 will not be
in use. The Company plans to begin the settlement of this lease obligation
immediately upon the closing of the asset sale transaction which is expected to
occur in the 2003 second fiscal quarter.
See Note 3 of the Consolidated Financial Statements regarding other aspects of
3PF.
3PF other income (expense) was an expense of $250,000 in fiscal 2002 compared to
$0 in fiscal 2003. This expense was due to the write-off of an unrealizable
investment previously made in a former customer.
As a result of the foregoing factors, for the fiscal year ended March 31, 2003,
3PF recorded a pre-tax loss of $3.2 million, or 21 percent of total revenue.
This compares with pre-tax loss of $4.1 million, or 27 percent of total revenue,
in fiscal 2002. As a result of this aforementioned asset sale, the Company
expects its consolidated revenues and costs, as a result of the revenues and
costs that were historically associated with the discontinuance of the 3PF
operations, to decrease in fiscal year 2004 as a result.
As a result of the above, for the fiscal year ended March 31, 2003, the Company
recorded consolidated pre-tax income from continuing operations of $168,905, or
less than 1 percent of total consolidated revenue, compared to consolidated
pre-tax income from continuing operations of $15.8 million, or 16 percent of
total consolidated revenue, in the prior fiscal year.
The consolidated effective tax rate for continuing operations for fiscal 2003
and fiscal 2002 was 50 percent and 38 percent, respectively.
Discontinued Operations
- -----------------------
Due to the significant increase in sell through activity throughout the
industry, the operations of BlowOut Video did not 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 called 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. As of March 31, 2003,
all operations had ceased. 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 $2.6 million and a net loss of $0.6 million,
or $0.06 per share, operating three stores in the year ended March 31, 2003,
compared with revenues of $6.6 million and a net loss of $0.8 million or $0.07
per diluted share, during the year ended March 31, 2002, during which it
operated seven stores.
16
Fiscal 2002 Compared to Fiscal 2001
PPT Operations and Other Continuing Subsidiaries
- ------------------------------------------------
For the year ended March 31, 2002, the Company's total consolidated revenue
decreased $12.0 million to $96.0 million from $108.0 million in the prior fiscal
year. Total consolidated revenue includes the following PPT System fees in the
PPT business segment: order processing fees generated when Cassettes, DVD's, and
Video Games ("Units") are ordered by and distributed to Participating Retailers;
transaction fees generated when Retailers rent Units to consumers; sell-through
fees generated when Participating Retailers sell Units to consumers;
communication fees when Participating Retailers' point-of-sale systems are
connected to the Company's information system; and buy out fees when
Participating Retailers purchase Units at the end of the lease term. PPT
business segment revenues also include direct revenue sharing fees from data
tracking and reporting services provided by the Company to Studios, as well as
charges for internet services provided by the Company's subsidiary
formovies.Com, Inc. In addition, total consolidated revenue includes charges to
customers of the Company's subsidiary 3PF which provides e-commerce order
processing, fulfillment and inventory management services (See Note 3), and
royalty payments from Rentrak Japan. The other segment formerly included BlowOut
Video, Inc., a video retailer, which the Company elected to discontinue during
the three month period ended June 30, 2002 (See Note 2).
The decrease in total consolidated revenue in fiscal 2002 was primarily due to a
decrease in the PPT System revenues in the PPT business segment as the result
of: (i) a decline in the number of total titles released to the PPT System, as
well as the number of theatrical titles released and the box office performance
of those titles; and (ii) PPT "output programs" and other PPT programs that
result in an increased total number of Units leased for a reduced amount of fees
per Unit whose rental volume produced a decline in revenue. In addition, PPT
System revenue was also affected by the willingness of program suppliers to
engage in direct revenue sharing arrangements with the largest retailer chains.
These changes caused decreases in the Company's PPT System order processing-fee
revenue as well as its transaction-fee revenue. The PPT business segment revenue
decline was partially offset by an increase in direct revenue sharing fees as
the result of increased business activity from these Studio agreements. The
decrease in total consolidated revenue was additionally due to decreased revenue
from 3PF's services resulting primarily from the loss of customers. These
revenue decreases were partially offset by the royalty revenue as the result of
a business restructuring with Rentrak Japan in fiscal 2002 (See Note 1).
In fiscal 2002, PPT business segment revenues were $74.3 million, a decrease of
$12.5 million, or 14 percent, from $86.8 million in fiscal 2001. During the
year, order processing-fee revenue decreased to $16.9 million from $18.6 million
in fiscal 2001, a decrease of $1.7 million, or 9 percent. Transaction-fee
revenue totaled $44.1 million, a decrease of $11.7 million, or 21 percent, from
$55.8 million the previous fiscal year. Sell-through revenue was $7.3 million in
fiscal 2002 as compared to $8.4 million in fiscal 2001. Communication fee
revenue was $1.1 million in fiscal 2002 as compared to $1.5 million in fiscal
2001, a decrease of $0.4 million, or 27 percent.
Also included in the PPT business segment are the following other revenues: (i)
direct revenue sharing fees totaling $3.9 million in fiscal 2002, an increase of
$2.0 million, or 105
17
percent, from the $1.9 million in fiscal 2001; and (ii) royalty and other
revenues totaling $0.8 million in fiscal 2002 and $0.6 million in fiscal 2001.
Royalty and other revenue from Rentrak Japan totaled $6.4 million during fiscal
2002, as a result of the business restructuring with Rentrak Japan, compared to
$1.1 million in Rentrak Japan royalty revenue in the previous fiscal year.
Cost of sales in the PPT business segment consist of order processing costs,
transaction costs, sell through costs and freight costs, and represent the
direct costs to produce the PPT revenues. Order processing costs, transaction
costs and sell through costs represent the amounts due the motion picture
studios, video game publishers or other licensee or owner of the rights to
certain video programming ("Program Suppliers") that hold the distribution
rights to the videocassettes, DVD's and video games ("Units") under agreement
with the Company. Freight costs represent the cost to pick, pack and ship orders
of Units to the Participating Retailers.
Cost of sales for the PPT business segment in fiscal 2002 decreased to $57.3
million from $68.4 million the prior fiscal year, a decrease of $11.1 million,
or 16 percent. The change is primarily due to the factors that led to changes in
revenue as noted above. In fiscal 2002 the Company's PPT business segment gross
profit margin, excluding the royalty revenue from Rentrak Japan, increased to 23
percent from 21 percent the previous year.
Selling, General & Administrative expenses in the 3PF business segment consist
of the indirect costs to sell, administer and manage the fulfillment business.
These expenses consist primarily of compensation and benefits, development,
marketing and advertising costs, legal and professional fees, communications
costs, depreciation and amortization of tangible fixed assets and software,
personal property leases, as well as other general corporate expenses.
PPT business segment selling and administrative expenses were $12.3 million in
fiscal 2002 compared to $25.5 million in fiscal 2001. This decrease of $13.2
million, or 52 percent, was primarily attributable to the following items all
reported in the quarter ended September 30, 2000: (i) a $1.3 million severance
payment to the Company's former chairman and chief executive officer; (ii) $0.6
million in legal costs and proxy solicitation costs incurred by the Company
related to the proxy contest at the 2000 annual shareholders meeting; (iii) $0.4
million in costs to reimburse the dissident shareholder group for their legal
and other costs associated with the proxy contest; (iv) $6.1 million of costs
associated with the reserve or write-off of investments related to customers
participating in the Company's Retailer Financing Program; (v) $1.0 million in
write-offs of investments and other assets deemed by the Company to be
non-realizable; (vi) $1.4 million in write-offs of accounts receivable based on
the Company's assessment of the collectibility of those accounts due to changes
in the financial condition and payment ability of those customers and (vii) a
$0.5 million loss realized on the sale of stock received previously by the
Company pursuant to the settlement of a claim with a prior customer. The $6.1
million of costs associated with the accounts receivable reserve and write off
of investments related to the Company's retailer financing program. This program
consisted of $5.1 million trade accounts receivable due from two customers as a
result of PPT revenue transactions and a $925,216 equity investment in one of
the companies. Both these customers declared bankruptcy in the quarter ended
September 30, 2000, giving rise to this charge. Additionally, the Company's
legal costs in fiscal 2002, related to the PPT business, decreased by
approximately $1.6 million from the prior fiscal year.
18
The net gain from the litigation settlement with a prior customer of the
Company, Hollywood Entertainment, was $1,563,000 for fiscal 2002 compared to
$225,000 for fiscal 2001, an increase of approximately $1.4 million. While the
settlements in both fiscal years were related to the same prior customer, they
related to separate claims. The $1,563,000 of proceeds from the claim settled in
fiscal 2002 was received in May 2002 from Hollywood Entertainment and related to
a breach of a fulfillment contract while most of the proceeds from the
settlement relating to the $225,000 recognized in fiscal 2001 were received in
fiscal 2000 when the claim was finalized; the $225,000 represents the receipt of
an insurance settlement in fiscal 2001 relating to this claim.
PPT other income (expense) was an expense of $2.1 million in fiscal 2001
compared to income of $8.1 million for fiscal 2002, an increase of $10.3
million. This increase is primarily due to: (i) a $0.1 million decrease in
interest income; (ii) a $0.8 million decrease in interest expense due to the
payoff of the line of credit at the beginning of fiscal 2002; (iii) a decrease
in loss on the sale of investment securities, a loss realized on the sale of
stock received previously by the Company pursuant to the settlement of a claim
with a customer and the write-off of assets, or write-down of various assets to
their net realizable value, totaling $1.7 million in fiscal 2001 compared to $0
in fiscal 2002; and (iv) a $8.0 million recognition of other income related to
the business restructuring with Rentrak Japan in fiscal 2002.
As a result of the above, for the fiscal year ended March 31, 2002, the Company
recorded pre-tax income of $19.9 million, or 25 percent of total revenue, from
its PPT business, including royalty revenue and other income from the Rentrak
Japan business restructuring, compared to a pre-tax loss of $7.9 million, or 9
percent of total revenue, in the prior fiscal year.
The Cassette and DVD distribution business is a highly competitive industry that
is rapidly changing. The effect of these changes could have a material impact on
the Company's operations. Item 1. Business--Competition of this report further
describes certain of these factors.
Included in other consolidated revenue are the results from other subsidiaries,
primarily the operations of 3PF.
Revenues in the 3PF business segment generally consist of storage fees,
receiving fees, handling fees, special service fees, freight charges and other
fees. These fees represent the continuum of services provided by 3PF from: (i)
receipt of client product(s) into the distribution facility; (ii) storage of the
client product(s); (iii) the picking and packing services (handling) and other
special services for client product(s) to prepare for shipment , and: (iv)
freight charges for the administration of the client shipping and the charges by
various carriers to ship the clients' product to their customers.
Cost of sales in the 3PF business segment consist of freight, compensation,
agency employees, supplies, occupancy, equipment leases and depreciation, and
represent the direct costs to produce the fulfillment revenues. Freight
represents the charges by various carriers to 3PF to ship its clients ` products
to their customers. Compensation and agency employees represent the costs of
management and staff cost directly involved in the daily fulfillment operations.
Occupancy represents the facility costs of the
19
real property to conduct the fulfillment operations. Equipment leases and
depreciation represent the cost of equipment and other assets used in the
fulfillment operations.
Selling, General & Administrative expenses in the 3PF business segment consist
of the indirect costs to sell, administer and manage the fulfillment business.
These expenses consist primarily of compensation and benefits, development,
marketing and advertising costs, legal and professional fees, communications
costs, depreciation and amortization of tangible fixed assets and software,
personal property leases, as well as other general corporate expenses.
Total revenues from 3PF decreased to $15.3 million for fiscal 2002 compared to
$20.1 million for fiscal 2001, a decrease of $4.8 million, or 23 percent. This
decrease was primarily due to the loss of two key customers, one at the end of
fiscal 2001 and the other early in 2002, whose fiscal 2001 revenues totaled
approximately $9.7 million, offset partially by significant fiscal 2002 growth
of revenues from 3PF's largest customer and modest revenues from the addition of
new customers in fiscal 2002. Cost of sales was $14.7 million, a decrease of
$3.7 million from the $18.4 million recorded in fiscal 2001. This decrease is
primarily due to the corresponding decrease in revenue noted above, offset by
the on-going carrying cost of unutilized distribution facility capacity. As a
percentage of total 3PF revenue, total cost of sales was 96 percent and 92
percent for fiscal 2002 and 2001, respectively. Selling and administrative
expenses decreased to $4.1 million in fiscal 2002 from $5.5 million in fiscal
2001, a decrease of $1.4 million. As a percentage of total revenue, selling and
administrative expenses increased to 27 percent for fiscal 2002 from 24 percent
for the prior fiscal year. The $1.4 million decrease was primarily due to a $0.7
million recovery of an amount reserved in fiscal 2001 for the anticipated
non-collection of one of 3PF's trade accounts due the Company as the result of a
bankruptcy filing by the customer. This decrease was also the result of
decreased compensation, advertising, travel and entertainment expenses and other
costs as the Company adjusted its overhead infrastructure to better fit the
operating size of its business. The Company expects to continually evaluate its
selling and administrative expenses and appropriately align them in conjunction
with the overall size of business it is operating.
3PF's other income (expense) was an expense of $250,000 in fiscal 2002 compared
to $0 in fiscal 2001. This expense was due to the write-off of an unrealizable
investment previously made in a former customer.
As a result of the foregoing factors, for the fiscal year ended March 31, 2002,
3PF recorded a pre-tax loss of $4.1 million, or 27 percent of total revenue.
This compares with pre-tax loss of $3.8 million, or 19 percent of total revenue,
in fiscal 2001.
As a result of the above, for the fiscal year ended March 31, 2002, the Company
recorded consolidated pre-tax income from continuing operations of $15.8
million, or 16 percent of total consolidated revenue, compared to a consolidated
pre-tax loss from continuing operations of $11.7 million, or 11 percent of total
consolidated revenue, in the prior fiscal year.
The consolidated effective tax rate providing the tax provision for continuing
operations for fiscal 2002 was 38.0 percent, compared to a consolidated
effective tax rate of 37.3 percent providing the tax benefit for fiscal 2001.
20
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 called 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. As of
March 31, 2003, all operations had ceased. 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, whose operations were completely discontinued during fiscal 2003
as described above, generated revenues of $6.6 million and a net loss of $0.8
million, or $0.07 per diluted share, in the year ended March 31, 2002, compared
with revenues of $9.8 million and a net loss of $0.3 million or $0.02 per share,
during the year ended March 31, 2001.
FINANCIAL CONDITION
At March 31, 2003, total assets were $30.7 million, a decrease of $7.9 million
from $38.6 million a year earlier. The Company had $10.1 million of cash on hand
at March 31, 2003 compared to $12.0 million at March 31, 2002, a decrease of
$1.9 million (see the Consolidated Statement 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 March 31, 2003,
primarily due to a reduction in revenue. Other current assets decreased $1.3
million from $3.7 million at March 31, 2002, to $2.4 million at March 31, 2003.
Current assets of discontinued operations decreased to $0 at March 31, 2003 from
$2.2 million at March 31, 2002 as the BlowOut Video operations had ceased.
Property and equipment decreased $1.5 million from $3.9 million at March 31,
2002 to $2.4 million at March 31, 2003, primarily due to the impairment of 3PF
equipment and the sale of equipment to one of 3PF's customers (See Note 3).
Other assets increased $0.7 million from $1.2 million at March 31, 2002 to $1.9
million at March 31, 2003 due to a financing lease with one of 3PF's customers.
At March 31, 2003, total liabilities were $15.3 million, a decrease of $6.0
million from $21.3 million at March 31, 2002. Accrued liabilities increased $0.6
million from $0.5 million at March 31, 2002 to $1.1 million at March 31, 2003.
Accounts payable decreased $5.5 million from $18.2 million at March 31, 2002 to
$12.7 million at March 31, 2003, primarily due to the timing of studio and other
vendor payments, and as a result of lower revenues and associated cost of sales.
Net current liabilities of discontinued operations decreased to $0 at March 31,
2003 from $0.4 million at March 31, 2002 as the BlowOut Video operations had
ceased. Total deferred revenue decreased approximately $0.2 million from $0.4
million at March 31, 2002 to $0.2 million at March 31, 2003.
At March 31, 2003, stockholders' equity was $15.4 million, a decrease of $1.9
million from $17.3 million at March 31, 2002. Most of this decrease in
stockholders' equity is attributable to: (i) the reduction in common stock and
capital in excess of par value as the
21
result of the repurchase of 386,800 shares during fiscal 2003 under the
Company's stock repurchase program; and (ii) the increase in the accumulated
deficit due to the consolidated net loss of $0.5 million for fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, the Company had cash and other liquid investments of $10.1
million, compared to $12.0 million at March 31, 2002. At March 31, 2003 the
Company's current ratio (current assets/current liabilities) was 1.74 compared
to 1.56 a year earlier.
In May 2000 the Company obtained a line of credit with a lender in an amount not
to exceed the lesser of (a) $12 million or (b) the sum of 85% of the net amount
of eligible accounts receivable. Interest under the line was payable monthly at
the bank's prime rate plus 1/4% (5.0% at March 31, 2002). The line was secured
by substantially all of the Company's assets. The terms of the credit agreement
include financial covenants requiring: (1) $15 million of tangible net worth to
be maintained at all times; (2) a consolidated net profit to be achieved each
fiscal year equal to or exceeding $1.00, and (3) $5 million of working capital
to be maintained at all times. The agreement also restricted the amount of loans
and indebtedness and limited the payment of dividends on the Company's stock,
among other restrictions. Based upon the financial results reported as of March
31, 2002 and the twelve month period then ended, the Company was in compliance
with the three financial covenants at March 31, 2002. At March 31, 2002, the
Company had no outstanding borrowings under this agreement.
On May 26, 2002, the Company canceled its line of credit described above. On May
30, 2002, the Company entered into an agreement for a new secured revolving line
of credit. The line of credit carries a maximum limit of $4,500,000 and expires
on July 1, 2003. The Company has the choice of either the bank's prime interest
rate or LIBOR +2%. The line is secured by substantially all of the Company's
assets. The terms of the credit agreement include financial covenants requiring:
(1) $16 million of tangible net worth to be maintained at all times; (2) a
consolidated net profit to be achieved each fiscal quarter beginning with the
quarter ending September 30, 2002 of a minimum of $1.00; (3) minimum year to
date profit of $1.00 (excluding certain exempted expenses) beginning with the
quarter ending September 30, 2002; and (4) achievement of specific current and
leverage financial ratios. Based upon the financial results reported as of March
31, 2003, and for the three and twelve month periods then ended, the Company has
determined it is not in compliance with the tangible net worth covenant at March
31, 2003, and net profit financial covenants for the periods ended March 31,
2003. The Company has obtained a waiver of non-compliance with these financial
covenants at March 31, 2003 and for the three and twelve month periods ended
March 31, 2003. At March 31, 2003 and June 24, 2003, the Company had no
outstanding borrowings under this agreement.
Effective June 16, 2003, the bank extended the current line of credit to the
Company through October 1, 2003, under the same general terms and conditions
while the Company and the bank finalize a new line of credit. The Company
believes the new line of credit will be finalized not later than October 1,
2003.
In 1992, the Company established a Retailer Loan Program whereby, on a selective
basis, it provided financing to Participating Retailers that the Company
believed had the potential for substantial growth in the industry. The
underlying rationale for this program was the
22
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.
The Company's sources of liquidity include its cash balance, cash generated from
operations and its available credit resources. Based on the Company's current
budget and projected cash needs, the Company believes these available sources of
liquidity will be sufficient to fund the Company's operations and capital
requirements for the fiscal year ending March 31, 2004.
23
Rentrak Corporation
Table of Contractual Obligations
As of March 31, 2003
- ------------------------------------------------------------------------------------------------------------------
Contractual Obligations Payments due by period
- ------------------------------------------------------------------------------------------------------------------
Total Less than 1 1-3 years 3-5 years More than 5
year years
- ------------------------------------------------------------------------------------------------------------------
Capital Lease Obligations $309,416 $110,508 $198,908 - -
- ------------------------------------------------------------------------------------------------------------------
Operating Lease Obligations 13,689,501 2,634,692 5,289,028 $4,204,122 $1,561,659
- ------------------------------------------------------------------------------------------------------------------
Purchase Obligations 475,871 475,871 - - -
- ------------------------------------------------------------------------------------------------------------------
Executive Compensation 3,540,049 1,859,562 1,625,987 54,500 -
- ------------------------------------------------------------------------------------------------------------------
Total 18,014,837 5,080,633 7,113,923 4,258,622 1,561,659
- ------------------------------------------------------------------------------------------------------------------
Critical Accounting Policies
- ----------------------------
The Company considers as its most critical accounting policies those that
require the use of estimates and assumptions, specifically, accounts receivable
reserves and studio guarantee reserves. In developing these estimates and
assumptions, the Company takes into consideration historical experience, current
and expected economic conditions and other relevant data. Please refer to the
Notes to the Consolidated Financial Statements for a full discussion of the
Company's accounting policies.
Allowance for Doubtful Accounts
- -------------------------------
Credit limits are established through a process of reviewing the financial
history and stability of each customer. The Company regularly evaluates the
collectibility of accounts receivable by monitoring past due balances. If it is
determined that a customer may be unable to meet its financial obligations, a
specific reserve is established based on the amount the Company expects to
recover. An additional general reserve is provided based on aging of accounts
receivable and the Company's historical collection experience. If circumstances
change related to specific customers, overall aging of accounts receivable or
collection experience, the Company's estimate of the recoverability of accounts
receivable could materially change.
Studio Reserves
- ---------------
The Company has entered into guarantee contracts with certain program suppliers
providing titles for distribution under the PPT system. These contracts
guarantee the suppliers minimum payments. The Company, using historical
experience and year to date rental experience for each title, estimates the
projected revenue to be generated under each guarantee. The Company establishes
reserves for titles that are projected to experience a shortage under the
provisions of the guarantee. The Company continually reviews these factors and
makes adjustments to the reserves as needed. Actual results could differ from
these estimates and could have a material effect on the recorded studio
reserves.
24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has considered the provisions of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments." The Company
had no holdings of derivative financial or commodity instruments at March 31,
2003. 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.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Item Page
Independent Auditors Report 27
Consolidated Balance Sheets as of March 31, 2003 28
and 2002
Consolidated Statements of Operations for the Years 29
Ended March 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity 30
for the Years Ended March 31, 2003,
2002 and 2001
Consolidated Statements of Cash Flows for the Years 31
Ended March 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements 32
Financial Statement Schedules -- 57
Schedule II
Schedules not included have been omitted because they are not applicable
or the required information is shown in the financial statements or
notes thereto.
26
Independent Auditors' Report
The Board of Directors
Rentrak Corporation:
We have audited the accompanying consolidated balance sheets of Rentrak
Corporation and subsidiaries as of March 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended March 31, 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Rentrak Corporation
and subsidiaries as of March 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 2003 in conformity with accounting principles generally accepted
in the United States of America.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplementary
information included in Schedule II required by the Securities and Exchange
Commission is presented for purposes of additional analysis and is not a
required part of the basic consolidated financial statements. Such information
has been subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic consolidated financial statements
taken as a whole.
KPMG LLP
Portland, Oregon
June 9, 2003
27
RENTRAK CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2003 and 2002
Assets 2003 2002
------------------- -------------------
Current assets:
Cash and cash equivalents $ 10,063,541 12,028,684
Accounts receivable, net of allowance for doubtful accounts
of $748,139 and $1,086,143 9,706,485 11,237,396
Advances to program suppliers 418,101 1,042,768
Income tax receivable 81,085 70,000
Deferred tax assets 2,796,908 2,295,567
Other current assets 2,430,334 3,660,457
Current assets of discontinued operations -- 2,180,360
------------------- -------------------
Total current assets 25,496,454 32,515,232
Property and equipment, net 2,404,763 3,879,819
Deferred tax assets 894,083 1,002,882
Other assets 1,931,133 1,214,394
------------------- -------------------
Total assets $ 30,726,433 38,612,327
=================== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 12,710,999 18,192,630
Accrued liabilities 1,143,785 549,277
Accrued compensation 610,022 1,338,748
Deferred revenue 156,692 379,106
Current liabilities of discontinued operations -- 379,298
------------------- -------------------
Total current liabilities 14,621,498 20,839,059
------------------- -------------------
Long-Term Liabilities:
Lease obligations, deferred gain and customer deposits 668,039 495,586
------------------- -------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value. Authorized 10,000,000 shares, none issued -- --
Common stock, $0.001 par value. Authorized 30,000,000 shares;
issued and outstanding 9,471,612 shares in 2003 and
9,866,283 shares in 2002 9,472 9,866
Capital in excess of par value 39,655,212 41,730,216
Notes receivable -- (377,565)
Cumulative other comprehensive income 180,879 180,453
Accumulated deficit (24,408,667) (23,910,288)
Less deferred charge - warrants -- (355,000)
------------------- -------------------
Total stockholders' equity 15,436,896 17,277,682
------------------- -------------------
Total liabilities and stockholders' equity $ 30,726,433 38,612,327
=================== ===================
See accompanying notes to consolidated financial statements.
28
RENTRAK CORPORATION AND SUBSIDIARIES
Consolidated Statement of Operations
Years ended March 31, 2003, 2002 and 2001
2003 2002 2001
------------------- ------------------- -------------------
Revenues:
PPT $ 67,081,943 69,646,207 86,114,522
Other 19,138,418 26,347,775 21,945,527
------------------- ------------------- -------------------
86,220,361 95,993,982 108,060,049
------------------- ------------------- -------------------
Operating costs and expenses:
Cost of sales 70,961,730 71,979,415 86,808,205
Selling and administrative 14,786,806 17,281,843 31,001,766
Net gain from litigation settlements (Note 11) (361,847) (1,563,153) (225,000)
Asset Impairment 844,041 424,177 --
------------------- ------------------- -------------------
86,230,730 88,122,282 117,584,971
------------------- ------------------- -------------------
Income (loss) from operations (10,369) 7,871,700 (9,524,922)
------------------- ------------------- -------------------
Other income (expense):
Interest income 204,283 195,628 307,240
Interest expense (25,009) (17,598) (768,599)
Gain (loss) on investments -- (231,820) (597,124)
Gain on Rentrak Japan transaction (Note 1) -- 7,967,233 --
Other -- -- (1,090,190)
------------------- ------------------- -------------------
179,274 7,913,443 (2,148,673)
------------------- ------------------- -------------------
Income (loss) from continuing operations
before income taxes 168,905 15,785,143 (11,673,595)
Income tax (provision) benefit (84,657) (5,998,355) 4,355,603
------------------- ------------------- -------------------
Net income (loss) from continuing
operations 84,248 9,786,788 (7,317,992)
Loss from discontinued operations, net of
tax benefit of $357,094, $485,884, and $158,972 (582,627) (792,757) (259,376)
------------------- ------------------- -------------------
Net income (loss) $ (498,379) 8,994,031 (7,577,368)
=================== =================== ===================
Earnings (loss) per common share:
Basic:
Continuing operations $ 0.01 0.94 (0.61)
Discontinued operations (0.06) (0.08) (0.02)
------------------- ------------------- -------------------
Net income (loss) $ (0.05) 0.86 (0.63)
=================== =================== ===================
Diluted:
Continuing operations $ 0.01 0.92 (0.61)
Discontinued operations (0.06) (0.07) (0.02)
------------------- ------------------- -------------------
Net income (loss) $ (0.05) 0.85 (0.63)
=================== =================== ===================
See accompanying notes to consolidated financial statements.
29
Rentrak Corporation and Subsidiaries
Consolidate Statements of Stockholders' Equity
For The Years Ended March 31, 2001, 2002, and 2003
COMMON STOCK Capital in
Number of excess of Notes
shares Amount par value receivable
------ ------ --------- ----------
Balance At March 31, 2000 10,514,561 $10,515 44,445,199
Issuance of common stock under employee
stock option plans 1,721,060 1,721 8,026,400 -
Net loss - - - -
Change in net unrealized gain (loss) on
investment securities, net of tax - - - -
Total comprehensive loss
Issuance of notes receivable (7,728,186)
Amortization of warrants - - - -
--------------------------------------------------------
Balance At March 31, 2001 12,235,621 12,236 52,471,599 (7,728,186)
Repurchase of common stock (1,188,400) (1,188) (4,523,061) -
Issuance of common stock under employee
stock option plans 227,812 227 732,511 -
Issuance of common stock 87,000 87 136,473 -
Repurchase of common stock for
Cancellation of notes receivable (1,495,750) (1,496) (7,349,125) -
Net income - - - -
Change in net unrealized gain (loss) on
investment securities, net of tax - - - -
Cumulative Translation Adjustments - - - -
Total comprehensive income
Income tax benefit from stock option exercise - - 261,819 -
Cancellation of notes receivable - - 7,350,621
Amortization of warrants - - - -
--------------------------------------------------------
Balance At March 31, 2002 9,866,283 9,866 41,730,216 (377,565)
Repurchase of common stock (386,800) (386) (1,821,066) -
Issuance of common stock under employee
stock option plans 91,129 91 348,424 -
Repurchase of common stock for cancellation
of notes receivable (99,000) (99) (377,466) -
Net loss - - - -
Cumulative Translation Adjustments - - - -
Total comprehensive loss
Retirements of warrants - - (300,000) -
Income tax benefit from stock option exercise - - 75,104 -
Cancellation of notes receivable - - 377,565
Amortization of warrants - - - -
--------------------------------------------------------
Balance At March 31, 2003 9,471,612 $ 9.472 39,655,212 -
========================================================
Cumulative
other Deferred
comprehensive Accumulated charge Comprehensive
income deficit warrants Total income (loss)
------ ------- -------- ----- -------------
Balance At March 31, 2000 (264,684) (25,326,951) (783,492) 18,080,587
Issuance of common stock under employee
stock option plans - - - 8,028,121
Net loss - (7,577,368) - (7,577,368) (7,577,368)
Change in net unrealized gain (loss)
on investment securities, net of tax 215,112 - - 215,112 215,112
----------------
Total comprehensive loss $(7,362,256)
================
Issuance of notes receivable - (7,728,186)
Amortization of warrants - - 368,492 368,492
------------------------------------------------------------------------------
Balance At March 31, 2001 (49,572) (32,904,319) (415,000) 11,386,758
Repurchase of common stock - - - (4,524,249)
Issuance of common stock under employee
stock option plans - - - 732,738
Issuance of common stock - - - 136,560
Repurchase of common stock for cancellation
of notes receivable - - - (7,350,621)
Net income - 8,994,031 - 8,994,031 8,994,031
Change in net unrealized gain (loss) on
investment securities, net of tax 49,572 - - 49,572 49,572
Cumulative Translation Adjustments 180,453 - - 180,453 180,453
---------------
Total comprehensive income $ 9,224,056
===============
Income tax benefit from stock option - - - 261,819
exercise
Cancellation of notes receivable - - - 7,350,621
Amortization of warrants - - 60,000 60,000
------------------------------------------------------------------------------
Balance At March 31, 2002 180,453 (23,910,288) (355,000) 17,277,682
Repurchase of common stock - - - (1,821,452)
Issuance of common stock under employee
stock option plans - - 348,515
Repurchase of common stock for cancellation
of notes receivable - - - (377,565)
Net loss - (498,379) - (498,379) (498,379)
Cumulative Translation Adjustments 426 - - 426 426
---------------
Total comprehensive loss ($497,953)
===============
Retirements of warrants - - - (300,000)
Income tax benefit from stock option
exercise - - - 75,104
Cancellation of notes receivable -
- - 377,565
Amortization of warrants - - 355,000 355,000
------------------------------------------------------------------------------
Balance At March 31, 2003 180,879 (24,408,667) - 15,436,896
==============================================================================
30
RENTRAK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 2003, 2002, and 2001
2003 2002 2001
-------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (498,379) 8,994,031 (7,577,368)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss on disposal of discontinued operations 582,627 792,757 259,376
Loss (gain) on and write-off of disposition of
assets (3,654) 414,486 1,687,314
Gain on Rentrak Japan transactions -- (7,967,233) --
Tax Benefit from stock option exercise (75,104) (261,819) --
Loss on write-down of property and equipment 844,041 424,177 --
Depreciation and amortization 1,356,022 1,438,449 1,266,515
Amortization of warrants 355,000 60,000 368,492
Provision (credit) for doubtful accounts (1,142,138) (1,546,301) 7,455,734
Retailer financing program reserves -- 50,000 545,478
Reserves on advances to program suppliers -- -- 95,959
Deferred income taxes (242,334) 5,433,705 (4,646,420)
Change in specific accounts:
Accounts receivable 2,673,049 1,361,934 4,058,840
Advances to program suppliers 624,667 235,397 1,558,642
Income tax receivable (11,085) 209,160 (109,860)
Notes receivable and other current assets 1,528,395 (117,663) 2,011,420
Accounts payable (5,481,631) (193,441) (6,538,948)
Accrued liabilities and compensation (134,218) (387,563) 960,716
Deferred revenue and other liabilities (49,535) (1,365,477) (756,912)
-------------------------------------------------------------------
Net cash provided by
operating activities 325,723 7,574,599 638,978
-------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (1,607,421) (1,379,111) (2,947,221)
Proceeds from sale of investments -- 161,513 1,605,555
Net Proceeds from sale of investment in Rentrak Japan -- 2,509,500 --
Proceeds from the sale of 3PF stock -- 1,000,000 --
Additions (dispositions) of other assets and
intangibles (128,943) 385,515 (792,672)
-------------------------------------------------------------------
Net cash provided by (used in) investing activities (1,736,364) 2,677,417 (2,134,338)
-------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (payments) on line of credit -- (1,917,705) 1,917,705
Net payments on notes payable -- -- (500,000)
Repurchase of common stock and warrants (2,121,452) (633,749) --
Issuance of common stock 348,515 732,738 299,932
Issuance of common stock to non-employees -- 136,560 --
-------------------------------------------------------------------
Net cash provided by (used in)
financing activities (1,772,937) (1,682,156) 1,717,637
-------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (3,183,578) 8,569,860 222,277
Net cash provided (used) by discontinued operations 1,218,435 135,907 (927,631)
Cash and cash equivalents at beginning of year 12,028,684 3,322,917 4,028,271
-------------------------------------------------------------------
Cash and cash equivalents at end of year $ 10,063,541 12,028,684 3,322,917
===================================================================
See accompanying notes to consolidated financial statements.
31
(1) Business of the Companies, Summary of Significant Accounting Policies,
and Other Items
(a) Introduction
Rentrak Corporation (the Company) (an Oregon corporation)
classifies its services in three segments, PPT, 3PF, and Other.
The Company is principally engaged in the processing of
information regarding the rental and sale of video cassettes and
DVD's (Units) and the distribution of prerecorded Units to the
home video market throughout the United States and Canada using
its Pay-Per-Transaction (PPT) revenue sharing program.
Under its PPT program, the Company enters into contracts to lease
Units from program suppliers (producers of motion pictures and
licensees and distributors of home video cassettes and DVD's)
which are then leased to retailers for a percentage of the
rentals charged by the retailers.
The Company's consolidated subsidiary, 3PF, provides order
processing and inventory management services to e-tailers,
wholesalers, and businesses requiring just-in-time fulfillment.
The Company's wholly owned subsidiary BlowOut Video, Inc. sold
video cassettes and DVDs through its three retail video stores
operating under the name of BlowOut Video. The Company elected to
discontinue the operations of BlowOut Video during the three
month period ended June 30, 2002 (See Note 2).
(b) Rentrak Japan
In December 1989, the Company entered into an agreement with
Culture Convenience Club Co., Ltd. (CCC), Rentrak's business
partner in Rentrak Japan, to develop the Company's PPT
distribution and information processing business in certain
markets throughout the world.
On June 16, 1994, the Company and CCC amended the agreement.
Pursuant to this amendment, the Company received a royalty of
1.67% for all sales of up to $47,905,000, plus one-half of 1%
(0.5%) of sales greater than $47,905,000 in each fiscal year. In
addition, the Company received a one-time royalty of $2 million,
of which $1 million was paid in fiscal 1995 and $1 million was
paid in fiscal 1999. The term of the Agreement was extended from
the year 2001 to the year 2039.
In December 1999, the Company received a prepayment of $2,500,000
in exchange for $4,000,000 of credit related to the annual
royalty described above. This credit was being recognized as
revenue as royalties were earned under the terms of the contract.
As discussed below, this contract was terminated in fiscal 2002,
with Rentrak Japan forfeiting their rights to the remaining
$700,000 prepayment.
During fiscal year 2001, Rentrak and Rentrak Japan began
discussions regarding their business. Effective April 2001, the
Company entered into an agreement with Rentrak Japan amending the
above 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,
32
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 in perpetuity.
Consideration for the above items included a cash payment from
Rentrak Japan to the Company of approximately $5,700,000 for
royalties, forfeiture by Rentrak Japan of any right of return of
the 1999 prepaid royalty of $700,000, and forgiveness by Rentrak
Japan of approximately $567,233 of receivables due to Rentrak
Japan from the Company. Of these amounts, $6,400,000 was recorded
in other revenue as royalty revenue consistent with the
historical treatment of royalty payments. The remaining $567,233
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%
interest in Rentrak Japan. 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
these stock sales approximated $6,400,000. In return, Rentrak
Japan sold 1,004,000 shares of the Company's common stock back to
the Company on April 2, 2001 for approximately $3,890,500. The
$3,890,500 purchase price for this common stock transaction was
determined based upon the approximate market value that Rentrak's
stock was being traded at that time. The sale of the Rentrak
Japan stock resulted in a gain of $6,400,000 as the Company had
written this investment down to zero due to recurring losses
during the initial years of Rentrak Japan's operations. The value
of Rentrak Japan stock was determined in the negotiations of the
agreement. This gain is included in other income in the
accompanying consolidated statement of operations.
Finally, Rentrak Japan purchased 17,000 shares of 3PF common
stock on April 27, 2001 for $1,000,000. The purchase price of the
stock was based on a valuation of 3PF made at that time. No
minority interest was recorded as 3PF had negative shareholders
equity and 3PF is solely dependent on Rentrak for support. As a
result of the purchase, Rentrak Japan holds one percent of the
outstanding equity of 3PF.
In summary, total net cash proceeds from the above transactions
was $3,509,500 which was comprised of the $1,000,000 from the
sale of 3PF stock and $2,509,500 representing the net proceeds of
the sales of Rentrak Japan stock and Rentrak stock.
The total gain included in other income was $7,967,233 which was
comprised of the $1,000,000 from the sale of 3PF stock,
$6,400,000 from the sale of Rentrak Japan stock, and $567,233
resulting from the forgiveness of liabilities due to Rentrak.
Based upon the results of the transactions noted above occurring
in the year ended March 31, 2002, the Company had no further
contractual obligations to, or ownership in, Rentrak Japan.
33
(c) Rentrak UK Limited
In February 1998, the Company entered into a Shareholders
Agreement and a PPT License Agreement with Columbus Holdings
Limited and Rentrak UK Limited (Rentrak UK) to develop the
Company's PPT distribution and information processing business in
the United Kingdom through Rentrak UK. The PPT Agreement remains
in force in perpetuity, unless terminated due to material breach
of contract, liquidation of Rentrak UK, or nondelivery, by the
Company to Rentrak UK, of all retailer and studio software,
including all updates. Pursuant to the PPT Agreement, during the
term of the PPT Agreement, the Company will receive a royalty of
1.67% of Rentrak UK's gross revenues from any and all sources.
Rentrak currently owns 92% of Rentrak UK while Rentrak Japan
holds 8%. From inception, Rentrak UK did not generate income or
positive cash flow and, as a result, the Company wrote down
substantially all long-lived assets including goodwill and
certain fixed assets totaling $222,000 in fiscal 2000. Through
March 2003, Rentrak UK improved its performance producing minimal
income and cash flow. Management of the Company has made changes
to decrease the cost of operations, including space and staffing
costs, and it is continuing to closely evaluate the financial
performance of operations. Management is currently considering
various alternatives including selling or closing down Rentrak
UK's operations.
(d) Basis of Consolidation
The consolidated financial statements include the accounts of the
Company, its majority owned subsidiaries, and those subsidiaries
in which the Company has a controlling interest after elimination
of all intercompany accounts and transactions. Investments in
affiliated companies owned 20% to 50% are accounted for by the
equity method.
(e) Management Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates. 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.
(f) Revenue Recognition
The PPT agreements generally provide for an initial order
processing fee and continuing transaction fees based on a
percentage of rental revenues earned by the retailer upon renting
the Units to their customers. The Company recognizes
order-
34
processing fees as revenue when the Units are shipped to the
retailers and recognizes transaction fees when the Units are
rented to the consumers. Initial order processing fees cover the
direct costs of accessing Units from program suppliers, handling,
packaging and shipping of the Units to the retailer. Once the
Units are shipped, the Company has no further obligation to
provide services to the retailer.
Revenues derived from fulfillment activities are recognized when
products are shipped and/or services are provided.
In September 1999, the Company received a $2,500,000 prepayment
from a customer in exchange for $4,000,000 in credit related to a
long-term agreement. This prepayment related to subsequent
periods and therefore was recorded as deferred revenue on the
consolidated balance sheet. The revenue was recognized as
revenues were earned under the terms of the contract, $659,892
during fiscal 2001, $500,172 during fiscal 2002, and $379,106
during fiscal 2003. The entire amount had been recognized as of
March 31, 2003.
An officer of the Company held the position of President of a
corporation that had one store participating in the PPT program.
The Company recognized revenues from this store of $14,294 in
fiscal 2002 and $29,195 in fiscal 2003.
(g) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased
with a maturity of three months or less at acquisition to be cash
equivalents.
(h) Investment Securities
Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities (SFAS 115),
requires the Company to classify and account for its security
investments as trading securities, securities available for sale
or securities held to maturity depending on the Company's intent
and ability to hold or trade the securities at time of purchase.
Securities available for sale are stated on the balance sheet at
their fair market value with an adjustment to stockholders'
equity reflected in other comprehensive income (loss) as change
in net unrealized gains and losses, net of tax. Securities held
to maturity are stated at amortized cost. Detail of the proceeds
from the sales of available for sale securities and realized
gains and losses on sales of equity securities for the years
ended March 31 are as follows:
35
Proceeds Gross gains Gross losses
---------------- ----------------- -------------------
2003 $ -- -- --
2002 161,513 33,150 (14,970)
2001 1,605,555 9,570 (606,694)
When, in management's opinion, available for sale securities have
experienced an other than temporary decline, the amount of the
decline in market value below cost is recorded in the statement
of operations as a loss on investments. The Company did not have
any investment securities as of March 31, 2003 and 2002,
respectively.
During fiscal 2002, the Company wrote-off a cost basis investment
in a customer totaling $250,000 as the customer filed for
bankruptcy. During fiscal 2001, the Company wrote-off a cost
basis investment related to a customer of $925,216 because the
customer filed for bankruptcy. In addition, the Company wrote-off
a cost basis investment related to a film production of $164,974
as management determined that this investment would not be
recovered through future returns.
(i) Allowance For Doubtful Accounts
Credit limits are established through a process of reviewing the
financial history and stability of each customer. The Company
regularly evaluates the collectibility of accounts receivable by
monitoring past due balances. If it is determined that a customer
may be unable to meet its financial obligations, a specific
reserve is established based on the amount the Company expects to
recover. An additional general reserve is provided based on aging
of accounts receivable and the Company's historical collection
experience. If circumstances change related to specific
customers, overall aging of accounts receivable or collection
experience, the Company's estimate of the recoverability of
accounts receivable could materially change.
(j) Financial Instruments
A financial instrument is cash or a contract that imposes or
conveys a contractual obligation or right, to deliver or receive,
cash or another financial instrument and they include accounts
receivable, accounts payable, and money market. The estimated
fair value of all material financial instruments approximated
their carrying values at March 31, 2003 and 2002.
(k) Property and Equipment
Depreciation of property and equipment is computed on the
straight-line method over estimated useful lives of three to
seven years for furniture and fixtures, three to ten years for
machinery and equipment and three years for capitalized software.
Leasehold improvements are amortized over the lives of the
underlying leases or the service lives of the improvements,
whichever is shorter.
36
(l) Capitalized Software
Capitalized software, included in Property and Equipment, net,
consists of costs to purchase and develop internal-use software.
This also includes costs to develop software for customer use in
various services, including theatrical data recovery and
fulfillment. Amortization of capitalized software is computed on
a straight-line basis over 3 to 5 years, depending on the
estimated useful life of the software. Amortization expense
related to capitalized software was $212,794, $108,807 and
$81,606 for the years ended March 31, 2003, 2002, and 2001
respectively. See Note 4.
(m) Income Taxes
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes (SFAS 109). Under the asset and liability method
specified by SFAS 109, deferred tax assets and liabilities are
determined based on the temporary differences between the
financial statement basis and tax basis of assets and liabilities
as measured by the enacted tax rates for the years in which the
taxes are expected to be paid.
(n) Studio Reserves
The Company has entered into guarantee contracts with certain
program suppliers providing titles for distribution under the PPT
system. These contracts guarantee the suppliers minimum payments.
The Company, using historical experience and year to date rental
experience for each title, estimates the projected revenue to be
generated under each guarantee. The Company establishes reserves
for titles which are included in accounts payable that are
projected to experience a shortage under the provisions of the
guarantee. The Company continually reviews these factors and
makes adjustments to the reserves as needed.
(o) Foreign Currency Translation
Adjustments from translating foreign functional currency
financial statements into U.S. dollars are included in cumulative
other comprehensive income in the consolidated statement of
stockholders' equity. Transaction gains and losses that arise
from exchange rate fluctuations on transactions denominated in a
currency other than the local currency are included in results of
operations.
(p) Earnings Per Share
Basic earnings per common share is computed by dividing net
income by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per common share
is computed on the basis of the weighted average shares of common
stock outstanding plus common equivalent shares arising from
dilutive stock options.
The weighted average number of shares of common stock and common
stock equivalents and net income (loss) used to compute basic and
diluted earnings (loss) per share for the years ended March 31
were calculated as follows:
37
2003 2002 2001
------------------------- -------------------------- ---------------------------
Basic Diluted Basic Diluted Basic Diluted
---------- ------------- ------------ ------------ ------------ -------------
Weighted average number 9,641,378 9,641,378 10,415,314 10,415,314 11,985,023 11,985,023
of shares of common
stock outstanding
Dilutive effect of
exercise of stock
options -- 137,894 -- 197,459 -- --
Weighted average number
of shares of common
stock outstanding and
common stock equivalents 9,641,378 9,779,272 10,415,314 10,612,773 11,985,023 11,985,023
Net income (loss):
Continuing
operations $ 84,248 84,248 9,786,788 9,786,788 (7,317,992) (7,317,992)
Discontinued
operations (582,627) (582,627) (792,757) (792,757) (259,376) (259,376)
---------- ------------- ------------ ------------ ------------ -------------
Net income (loss) $ (498,379) (498,379) 8,994,031 8,994,031 (7,577,368) (7,577,368)
========== ============= ============ ============ ============ =============
Earnings (loss) per
share:
Continuing operations $ 0.01 0.01 0.94 0.92 (0.61) (0.61)
Discontinued (0.06) (0.06) (0.08) (0.07) (0.02) (0.02)
operations
---------- ------------- ------------ ------------ ------------ -------------
Earnings (loss) per share
common share $ (0.05) (0.05) 0.86 0.85 (0.63) (0.63)
========== ============= ============ ============ ============ =============
Options and warrants to purchase approximately 1,000,000 and
2,300,000 shares of common stock were outstanding during the
fiscal years ended March 31, 2003 and 2002, respectively, but
were not included in the computation of diluted EPS because the
exercise price of the options and warrants was greater than the
average market price of the common shares. Options and warrants
to purchase 3,200,000 shares for the year ended March 31, 2001,
were outstanding but were not included in the computation of
diluted EPS because their effect would be antidilutive due to a
loss for the period.
(q) Stock-Based Compensation
As discussed in Note 9, "Stockholders Equity", employees and
non-employee directors have been granted options under the
Company's stock option plans. Rentrak accounts for stock-based
compensation utilizing the intrinsic value method in accordance
with the provisions of Accounting Principles Board Opinion No.
25, "Accounting For Stock Issued To Employees." Accordingly, no
compensation expense is recognized for fixed option plans because
the exercise prices of employee stock options equal or exceed the
market prices of the underlying stock on the dates of grant. Had
compensation expense for these plans been determined in
accordance with SFAS 123, the Company's net income (loss) and
earnings (loss) per common share reflected on the March 31, 2003,
2002, and 2001 consolidated statements of operations would have
been the following unaudited pro forma amounts:
38
Net income (loss): 2003 2002 2001
---- ---- ----
As reported:
(7,317,992)
Continuing operations $ 84,248 9,786,788
Discontinued operations (582,627) (792,757) (259,376)
-------------------- --------------------- -----------------------
Net Income (loss) $ (498,379) 8,994,031 (7,577,368)
Pro forma:
Continuing operations $ (1,103,090) 9,225,241 (7,897,817)
Discontinued operations (582,627) (792,757) (259,376)
-------------------- --------------------- -----------------------
Net Income (loss) $ (1,685,717) 8,432,484 (8,157,193)
==================== ===================== =======================
Basic earnings per share:
As reported:
Continuing operations $ $0.01 $0.94 ($0.61)
Discontinued operations ($0.06) ($0.08) ($0.02)
-------------------- --------------------- -----------------------
Earnings (loss) per share $ ($0.05) $0.86 ($0.63)
==================== ===================== =======================
Pro forma:
Continuing operations $ ($0.11) $0.89 ($0.66)
Discontinued operations ($0.06) ($0.08) ($0.02)
-------------------- --------------------- -----------------------
Earnings (loss) per share $ ($0.17) $0.81 ($0.68)
==================== ===================== =======================
Diluted earnings per share:
As reported:
Continuing operations $ $0.01 $0.92 ($0.61)
Discontinued operations ($0.06) ($0.07) ($0.02)
-------------------- --------------------- -----------------------
Earnings (loss) per share $ ($0.05) $0.85 ($0.63)
==================== ===================== =======================
Pro forma:
Continuing operations $ ($0.11) $0.86 ($0.66)
Discontinued operations ($0.06) ($0.07) ($0.02)
-------------------- --------------------- -----------------------
Earnings (loss) per share $ ($0.17) $0.79 ($0.68)
==================== ===================== =======================
These pro forma effects of SFAS 123 may not be indicative of the future.
(r) Advertising Expense
Advertising costs are expensed as incurred and reimbursements are
deducted as received. Advertising expense, net of advertising
reimbursements, totaled approximately $0, $216,683, and $627,662
for the fiscal years ended March 31, 2003, 2002, and 2001,
respectively.
(s) Statements of Cash Flows
The Company had the following noncash transactions for the fiscal
years ended March 31:
39
2003 2002 2001
------------------- ------------------- -------------------
Cash paid (received) for:
Interest $ -- 27,329 253,211
Income taxes, net of refunds 45,566 125,380 111,701
Noncash financing and investing activities:
Change in unrealized gain (loss)
on investment securities,
net of tax -- 49,572 215,112
Receipt (forgiveness) of note
receivable for issuance of
stock (377,565) (7,350,621) 7,728,186
Forgiveness of debt from Rentrak
Japan -- 567,233 --
(t) Comprehensive Income
Comprehensive income includes charges or credits to equity that
are not the result of transactions with shareholders. Components
of the Company's comprehensive income consist of the change in
unrealized gain (loss) on investment securities (net of tax), net
of the reclassification adjustment for gains (losses) included in
net income (loss) as of March 31 are as follows:
2003 2002 2001
------------------ ------------------- -------------------
Foreign currency translation
adjustments $ 426 180,453 ---
Unrealized gains (losses) on securities:
Holding gains (losses) arising
during the period, net of tax --- 60,844 (12,470)
Less reclassification
adjustment for gains (losses)
included in net income,
net of tax --- 11,272 (227,582)
------------------ ------------------- -------------------
Change in unrealized
gain on
investment securities,
net of tax --- 49,572 215,112
------------------ ------------------- -------------------
Other comprehensive
income $ 426 230,025 215,112
================== =================== ===================
40
(u) Impairment of Long-Lived Assets
Long-lived assets, such as property, plant and equipment, and
purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the fair
value of the asset. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell,
and depreciation ceases. During fiscal 2003, the Company
performed an assessment of the fair value of 3PF assets. See Note
3.
(v) New Accounting Standards
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which is effective
for exit or disposal activities initiated after December 31,
2002. SFAS 146, once adopted, updates the guidance in EITF Issue
No. 94-3. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when
the liability is incurred, whereas EITF No. 94-3 had allowed for
recognition of the liability at the commitment date to an exit
plan. The Company adopted SFAS 146 effective March 31, 2003 and
will apply the provisions of SFAS 146 to exit or disposal
activities initiated after adoption.
In December 2002, the FASB issued SFAS 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure." SFAS 148
amends the transition and disclosure provisions of SFAS 123. See
"--Stock-Based Compensation" above for pro forma disclosures
required by SFAS 148. The Company is currently evaluating SFAS
148 to determine if it will adopt SFAS 123 to account for
stock-based compensation using the fair value method and, if so,
when to begin transition to that method.
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others" (FIN 45). During the quarter ended March 31, 2003, the
Company adopted the disclosure provisions of FIN 45, which
require increased disclosure of guarantees, including those for
which likelihood of payment is remote. FIN 45 also requires that,
upon issuance of a guarantee, the guarantor must recognize a
liability for the fair value of the obligation it assumes under
that guarantee. The initial recognition and measurement
provisions of FIN 45 are to be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The
Company does not believe that these provisions will have a
material impact on its financial statements.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities: an Interpretation
of ARB No. 51" (FIN 46). FIN 46 addresses consolidation by
business enterprises of entities in which equity investors do not
have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support
from other parties. Variable interest entities are required to be
41
consolidated by their primary beneficiaries if they do not
effectively disperse risks among parties involved. The primary
beneficiary of a variable interest entity is the party that
absorbs a majority of the entity's expected losses or receives a
majority of its expected residual returns. The consolidation
requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003 and apply to existing
entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain new disclosure requirements apply to
all financial statements issued after January 31, 2003. The
Company does not believe that these provisions will have a
material impact on its financial statements.
In November 2002, the Financial Accounting Standards Board
Emerging Issues Task Force issued its consensus concerning
Revenue Arrangements with Multiple Deliverables ("EITF 00-21").
EITF 00-21 addresses how to determine whether a revenue
arrangement involving multiple deliverables should be divided
into separate units of accounting, and, if separation is
appropriate, how the arrangement consideration should be measured
and allocated to the identified accounting units. The guidance in
EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The Company is
currently evaluating the impact of the adoption of EITF 00-21 on
its consolidated financial statements.
(w) Reclassifications
Certain reclassifications have been made to prior year amounts to
conform to the current year presentation.
42
(2) 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 called 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. As of March 31, 2003, all
operations had ceased. Rentrak is continuing to sell its contractually
available end-of-term PPT revenue sharing product through broker
channels. Prior year amounts have been restated to appropriately
classify results of BlowOut Video operations as discontinued.
BlowOut Video generated revenues of $2.6 million and a net loss of $0.6
million, or $0.06 per share, operating three stores in the year ended
March 31, 2003, compared with revenues of $6.6 million and a net loss
of $0.8 million or $0.07 per diluted share, during the year ended March
31, 2002, during which it operated seven stores. BlowOut Video
generated revenue of $9.8 million and a net loss of $0.3 million, or
$0.02 per share during the year ended March 31, 2001.
(3) 3PF Transactions
In June 2002, 3PF entered into an agreement to sublease approximately
194,000 square feet of its distribution facility in Columbus, Ohio to
its largest customer. The term of the lease expires July 31, 2006. The
sublease requires monthly rent payments to 3PF under amounts, terms and
conditions similar to 3PF's master lease for this facility.
Additionally in June 2002 in conjunction with the facility sublease,
3PF entered into a financing lease with this customer for the existing
equipment within this distribution facility and the associated costs
for additional equipment to configure the layout to the customer's
specifications. This lease, upon expiration, contains a $1.00 purchase
option. The lease for the equipment resulted in a note receivable in
the amount of $1,838,062 payable to 3PF in monthly installments. The
current and long-term portions of this note receivable were $496,947
and $1,076,395 respectively. The transaction resulted in a deferred
gain in the amount of $509,044 which is being recognized as interest
income by 3PF ratably throughout the life of the lease.
In 2003, management determined that it is unlikely that 3PF would
achieve its business plans and initiated a plan to sell the assets of
3PF. Prior to March 31, 2003, it was determined that, more likely than
not, substantially all of 3PF's assets would be sold or otherwise
disposed of. As a result of this determination, management assessed
during the quarter ended March 31, 2003, the current and historical
operating and cash flow losses, prospects for growth in revenues and
other alternatives for improving the operating results of 3PF
Accordingly, management performed an assessment of the fair value of
the 3PF assets under the guidelines of SFAS 144, Accounting for the
Impairment of Long-Lived Assets. This assessment resulted in 3PF
recognizing an asset impairment expense during the three-month period
ended March 31, 2003 in the amount of $844,041 for the write down
43
of its assets to estimated fair market value of approximately $800,000.
On June 17, 2003, the Company announced it had signed a definitive
agreement to sell substantially all of the assets of 3PF at the
Wilmington, Ohio, operation. The agreement covers all equipment and
leasehold improvements at 3PF's leased distribution facility in
Wilmington, Ohio, as well as a portion of its working capital. As part
of the agreement, 3PF as lessee and Rentrak as guarantor have been
released from the lease. The cash purchase price of $800,000 is
approximately equal to the net book value of the assets sold at March
31, 2003. During the sale negotiations, the Company received
notification from 3PF's largest customer, serviced exclusively from the
leased distribution facility in Columbus, Ohio, that it does not intend
to renew its fulfillment service contract upon the scheduled expiration
at July 31, 2003. As a result, the Columbus, Ohio distribution facility
lease is not included in the asset sale transaction. The Columbus, Ohio
distribution facility has been used exclusively to service this
customer and as of August 1, 2003 will not be in use. The Company plans
to begin the settlement of this lease obligation immediately upon the
closing of the asset sale transaction.
(4) Property and Equipment
Property and equipment, at cost, consists of:
March 31
----------------------------------------
2003 2002
------------------ ------------------
Furniture and fixtures $ 3,731,743 7,877,283
Machinery and equipment 1,235,533 2,183,128
Leasehold improvements 1,063,753 1,440,295
Capitalized software 988,902 434,228
----------------------------------------
----------------------------------------
7,019,931 11,934,934
Less accumulated depreciation (4,615,168) (8,056,115)
------------------ ------------------
$ 2,404,763 3,878,819
================== ==================
(5) Retailer Financing Program
In 1992, the Company established a retailer financing program whereby,
on a selective basis, it provided financing to Participating Retailers
that the Company believed had potential for substantial growth in the
industry. In connection with these financings, the Company typically
made a loan and/or equity investment in the Participating Retailer. In
some cases, the Company obtained a warrant to purchase stock in the
Participating Retailer. As part of such financings, the Participating
Retailer typically agreed to cause all of its current and future retail
locations to participate in the PPT System for a designated period of
time (usually 5-20 years). These financings are speculative in nature
and involve a high degree of risk and no assurance of a satisfactory
return on investment can be given.
44
The loans are reviewed for impairment in accordance with FASB Statement
of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan (SFAS 114). A valuation allowance has been
established for the amount by which the recorded investment in the loan
exceeds the measure of the impaired loan. As the financings are made,
and periodically throughout the terms of the agreements, the Company
assesses the recoverability of the amounts based on the financial
position of each retailer. The amounts the Company could ultimately
receive could differ materially in the near-term from the amounts
assumed in establishing the reserves.
As of March 31, 2003 and 2002 the Company had invested or loaned
approximately $6,600,000 under the program and had provided reserves of
approximately $6,600,000. These balances are included in other assets.
The activity in the total reserves for the retailer financing program
is as follows for the fiscal years ended March 31:
2003 2002 2001
-----------------------------------------------
Beginning balance $ 6,575,754 6,598,514 5,684,183
Additions to reserve -- 50,000 925,216
Write-offs -- -- --
Recoveries (45,000) (72,760) (10,885)
-----------------------------------------------
Ending balance $ 6,530,754 6,575,754 6,598,514
===============================================
During fiscal 2001, the Company discontinued new financings under this
retailer financing program. Write-offs of receivables related to
customers associated with this program, but not included in the
reserves for the retailer financing program, during fiscal 2001 were
$5.15 million.
(6) Line of Credit
In May 2000 the Company obtained a line of credit with a lender in an
amount not to exceed the lesser of (a) $12 million or (b) the sum of
85% of the net amount of eligible accounts receivable. Interest under
the line was payable monthly at the bank's prime rate plus 1/4% (5.0%
at March 31, 2002). The line was secured by substantially all of the
Company's assets. The terms of the credit agreement included financial
covenants requiring: (1) $15 million of tangible net worth to be
maintained at all times; (2) a consolidated net profit to be achieved
each fiscal year equal to or exceeding $1.00, and (3) $5 million of
working capital to be maintained at all times. The agreement also
restricted the amount of loans and indebtedness and limited the payment
of dividends on the Company's stock, among other restrictions. Based
upon the financial results reported as of March 31, 2002 and the twelve
month period then ended, the Company was in compliance with the three
financial covenants at March 31, 2002. At March 31, 2002, the Company
had no outstanding borrowings under this agreement.
On May 26, 2002, the Company canceled its line of credit described
above. On May 30, 2002, the Company entered into an agreement for a new
secured revolving line of credit. The line of credit carries a maximum
limit of $4,500,000 and expires on July 1, 2003. The Company has the
choice of either the bank's prime interest rate or LIBOR +2%. The line
is secured by substantially all of the Company's assets. The terms of
the credit agreement include financial covenants requiring: (1) $16
million of tangible net
45
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 March 31, 2003, and for the three and twelve month
periods then ended, the Company determined it is not in compliance with
the tangible net worth covenant at March 31, 2003, and net profit
financial covenants for the periods ended March 31, 2003. The Company
has obtained a waiver of non-compliance with these financial covenants
at March 31, 2003 and for the three and twelve month periods ended
March 31, 2003. At March 31, 2003 and June 24, 2003, the Company had no
outstanding borrowings under this agreement.
Effective June 16, 2003, the bank extended the current line of credit
to the Company through October 1, 2003, under the same general terms
and conditions while the Company and the bank finalize a new line of
credit. The Company believes the new line of credit will be finalized
not later than October 1, 2003.
(7) Related Party Transaction
Dr. Joon S. Moon, a Rentrak Director, received a fee totaling $241,500
for his services in negotiating the business restructuring transaction
with Rentrak Japan in fiscal 2002. Dr. Moon also received a fee in the
amount of approximately $48,000 in connection with the October 2001
sale of the remaining 180,000 shares of Rentrak Japan stock held by
Rentrak in fiscal 2002 (See Note 1).
SWR Corporation, which is owned by Paul A. Rosenbaum, Chairman and
Chief Executive Officer, received a total of $16,209 as payment for the
rental of office space.
(8) Income Taxes
The provision (benefit) for income taxes is as follows for the fiscal
years ended March 31:
2003 2002 2001
------------------ ------------------- -------------------
Current tax (benefit) provision:
Federal $ 45,001 309,585 --
State -- 31,000 --
------------------ ------------------- -------------------
45,001 340,585 --
Deferred tax (benefit) provision (317,438) 5,171,886 (4,514,575)
------------------ ------------------- -------------------
Income tax (benefit) provision $ (272,437) 5,512,471 (4,514,575)
================== =================== ===================
The reported provision (benefit) for income taxes differs from the amount
computed by applying the statutory federal income tax rate of 34% to
income before provision (benefit) for income taxes as follows for the
fiscal years ended March 31:
46
2003 2002 2001
------------------- ------------------- -------------------
Provision (benefit) computed at statutory
rates $ (262,077) 4,932,211 (4,111,261)
State taxes, net of federal benefit (30,833) 580,261 (468,098)
Amortization of warrants 120,700 22,800 140,027
Amortization of intangibles (121,522) (121,522) (121,522)
Other 21,295 98,721 46,279
------------------- ------------------- -------------------
$ (272,437) 5,512,471 (4,514,575)
=================== =================== ===================
Deferred tax assets and (liabilities) from continuing operations are
comprised of the following components at March 31, 2003 and 2002:
2003 2002
------------------- -------------------
Deferred tax assets:
Current:
Allowance for doubtful accounts $ 241,643 222,643
Program supplier reserves 501,120 510,842
Foreign tax credit 49,246 --
Net operating loss carryforward 1,153,302 960,244
Unrealized loss on investments 118,785 119,015
Deferred revenue 145,043 144,060
Other 587,769 338,763
------------------- -------------------
Total current deferred tax assets 2,796,908 2,295,567
------------------- -------------------
Noncurrent:
Depreciation 53,479 204,996
Retailer financing program reserve 360,089 663,040
Deferred gain 127,995 --
Other 352,520 134,846
------------------- -------------------
Total noncurrent deferred tax assets 894,083 1,002,882
------------------- -------------------
Total deferred tax assets $ 3,690,991 3,298,449
=================== ===================
As of March 31, 2003, the Company has estimated net operating loss
carryforwards for federal income tax return purposes of approximately
$3,400,000, which expire through 2023.
(9) Stockholders' Equity
Stock Options and Warrants
Options were granted under the 1986 Stock Option and the Director's
Stock Option Plans. As of March 31, 1997, there were no options
available to grant under the 1986 Stock Plan.
47
Effective March 31, 1997, the Company adopted the 1997 Non-Officer
Employee Stock Option Plan. The aggregate number of shares which may be
issued upon exercise of options under the plan may not exceed 800,000.
In August 1997, the Company adopted the 1997 Equity Participation Plan.
The aggregate number of shares which may be issued upon exercise of
options under the plan shall not exceed 2,075,000, including an
increase of 475,000 shares approved by the Board and the Company's
shareholders in fiscal 2003. The plans are administered by the
Compensation Committee of the Board which determines the terms and
conditions of options issued under the plans. Options granted to date
under the plans are exercisable over one to five years and expire ten
years after date of grant. As of March 31, 2003, the Company had
337,776 and 561,488 options available to be granted under the 1997
Non-Officer Employee Stock Option Plan and 1997 Equity Participation
Plan, respectively.
The Company has elected to account for its stock-based compensation
plans in accordance with APB 25, under which no compensation expense
has been recognized as the Company has issued options at or greater
than fair market value. The Company has computed for pro forma
disclosure purposes the value of all options granted during fiscal
years 2003, 2002, and 2001, using the Black-Scholes option pricing
model as prescribed by SFAS 123 and the following assumptions:
2003 2002 2001
------------------- ------------------- -------------------
Risk-free interest rate 3.57 - 5.45% 4.08 - 5.47% 4.77 - 6.82%
Expected dividend yield 0% 0% 0%
Expected lives 5 - 10 years 5 - 10 years 5 - 10 years
Expected volatility 77.69% 81.28% 78.21%
The table below summarizes the plans' activity:
Options outstanding
----------------------------------------
Weighted
Number of average
shares exercise price
------------------ -------------------
Balance at March 31, 2000 3,859,702 $ 4.60
Granted:
Option price = fair market value 393,575 3.80
Option price > fair market value 5,420 4.61
Issued (1,721,060) 4.67
Canceled (872,948) 5.12
------------------ -------------------
Balance at March 31, 2001 1,664,689 4.07
Granted:
Option price = fair market value 403,000 3.29
Issued (227,812) 3.22
Canceled (210,453) 4.84
------------------ -------------------
Balance at March 31, 2002 1,629,424 3.97
Granted:
Option price = fair market value 619,350 5.24
Issued (112,043) 4.18
Canceled (153,312) 4.02
------------------ -------------------
Balance at March 31, 2003 1,983,419 $ 4.35
================== ===================
48
Using the Black Scholes methodology, the total value of options granted
during fiscal years 2003, 2002, and 2001 was approximately $2,450,000,
$970,000, and $1,040,000, respectively, which would be amortized on a
pro forma basis over the vesting period of the option typically one to
four years. The weighted average fair value of options granted during
the years ended March 31, 2003, 2002, and 2001 was $5.24, $3.29, and
$3.82, respectively. Options to purchase 1,186,440, 978,380, and
1,026,899 shares of common stock were exercisable at March 31, 2003,
2002, and 2001, respectively. These exercisable options had weighted
average exercise prices of $4.06 $4.31, and $4.39 at March 31, 2003,
2002, and 2001, respectively.
The following table summarizes information about stock options
outstanding at March 31, 2003:
Options outstanding Options exercisable
------------------------------- -------------------------------
Weighted Weighted Weighted
Outstanding average average Exercisable average
as of March remaining exercise as of March exercise
31, 2003 contractual price 31, 2003 price
Range of exercise prices life
----------------------------- --------------- -------------- --------------- --------------- --------------
$ 1.00 - 2.59 40,000 7.8 $ 2.188 15,000 $ 2.188
2.60 - 6.49 1,877,419 5.8 4.294 1,161,440 4.033
6.50 - 9.78 66,000 8.6 7.252 10,000 9.500
--------------- ---------------
1,983,419 1,186,440
=============== ===============
The Company issued two separate warrants in 1995 and 1998, which were
valued by an outside valuation firm using standard warrant valuation
models.
Warrants to purchase 1,423,750 shares of the Company's common stock
were issued in fiscal 1995 in connection with a supply agreement with a
program vendor. The warrants had an initial exercise price of $7.13
with 284,750 warrants vesting immediately and 284,750 vesting over the
following 4 years, subject to the supplier providing a minimum of one
theatrical title each year of the vesting period. The warrants, which
had expiration dates through 2005, were valued at $2,335,662 and were
expensed over the initial 5 years of the agreement. In November 1996,
the Company adjusted the number of shares of common stock under which
the warrant could be exercised to 1,543,203 shares and decreased the
price to $6.578 per share. This adjustment was done in connection with
the distribution of common stock of Blow Out Entertainment, Inc. in
November 1996. The adjustment was done pursuant to the suppliers
agreement that required the Company to adjust the warrant if a
distribution of the Company's assets occurred. During 2002, 308,641
warrants expired, leaving a balance of 1,234,562. During the quarter
ended September 30, 2002, 309,041 warrants expired leaving a balance of
925,521.
In November 2002, Rentrak and the program supplier entered into a
cancellation agreement to cancel the remaining 925,521 outstanding
warrants. Under the cancellation agreement, Rentrak paid the program
supplier $300,000 in cash in consideration for the cancellation of the
warrants. The $300,000 cash payment was charged to paid-in-capital as a
settlement of an equity interest in the Company. In addition, Rentrak
agreed to pay
49
the program supplier 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 of 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 March 31, 2003 due to the
contingent nature of this supplemental consideration.
The value of the warrants issued in July 1998 was recorded as a
deferred charge in equity of $600,000. These warrants relate to a
10-year supply agreement entered into with a major customer. The value
of the warrants was amortized to expense as services were provided. The
warrants expired without being exercised in 2000. Management elected to
fully amortize the remaining unamortized value of these warrants as of
March 31, 2003, based on the expectation that the customer would not be
utilizing the services of the Company in future periods.
In fiscal 2003, 2002 and 2001, expense associated with the above
warrants was approximately $355,000, $60,000 and $368,000,
respectively. As of March 31, 2003, no warrants were outstanding and
all amounts had been amortized to expense.
In May 1995, the board of directors approved a shareholders' rights
plan designed to ensure that all of the Company's shareholders receive
fair and equal treatment in the event of certain proposals to acquire
control of the Company. Under the rights plan, each shareholder
received a dividend of one right for each share of the Company's
outstanding common stock, entitling the holders to purchase one
additional share of the Company's common stock. The rights become
exercisable after any person or group acquires 15% or more of the
Company's outstanding common stock, or announces a tender offer which
would result in the offeror becoming the beneficial owners of 15% or
more of the Company's outstanding stock. Prior to the time that a
person or group acquires beneficial ownership of 15% or more of the
Company's outstanding stock, the board of directors, at their
discretion, may waive this provision with respect to any transaction or
may terminate the rights plan.
Executive Loan Program
In June 2000, the board of directors approved an offer to make loans
available to those officers of the Company who were under an employment
contract for the purpose of allowing them to exercise their vested,
unexercised "out of the money" employee stock options. The purpose of
this program was to enable executives to exercise certain of their
options and thereby hold shares resulting from the exercise of such
options in advance of a possible spin-off or split-up of 3PF, and to
enhance the Company's efforts to retain its key employees. The loans
under this program bear interest at the federal funds rate in effect on
the date of the loan and interest is payable annually. The principal
amount of the loan is due on the earliest to occur of: (1) one year
prior to the expiration of the term of the borrower's current
employment agreement with the Company, (2) one year after the borrower
leaves the Company's employment unless such departure follows a "change
of control" (as defined in the loan agreements), (3) five years from
the date of the loan, or (4) one year from the date of the borrower's
death. The loans are secured by the stock purchased upon the exercise
of the options. The loans are without recourse (except as to
50
the stock securing the loans) as to principal and are with full
recourse against the borrower as to interest. The offer to make these
loans expired September 30, 2000. Prior to September 30, 2000, several
employees accepted this offer and obtained loans from the Company.
Because the loan proceeds were immediately used to pay the exercise
price of the options to the Company, there was no net outflow of cash
from the Company in connection with these loans.
During fiscal 2002, a former officer of the Company, who was loaned, on
June 16, 2000, $6,629,386 to purchase 1,362,008 shares of stock upon
exercise of his employee stock options and, during the quarter ended
September 30, 2000, was loaned $721,235 to purchase 133,742 shares of
stock upon exercise of his employee stock options, terminated his
agreements with the Company. Accordingly, the common stock and related
notes receivable totaling $7,350,621 were reversed in a noncash
transaction.
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.
(10) Commitments
Leases The Company leases certain facilities and equipment under
operating leases expiring at various dates through 2011. Approximate
rental payments over the term of the leases exceeding one year are as
follows:
Year ending March 31:
2004 $ 2,634,692
2005 2,660,993
2006 2,628,035
2007 2,408,360
2008 1,795,762
2009 and thereafter 1,561,659
------------------
$ 13,689,501
==================
The leases provide for payment of taxes, insurance, and maintenance by
the Company. The Company also rents vehicles and equipment on a
short-term basis. Rent expense under operating leases was approximately
$3,159,000, $3,581,000, and $2,954,000 for the fiscal years ended March
31, 2003, 2002, and 2001, respectively.
Guarantees and Advances
The Company has entered into guarantee contracts with program
suppliers. In general, these contracts guarantee the suppliers minimum
payments. In some cases these guarantees are paid in advance. Any
advance payments made by the Company that will be realized within the
current year are included in advances to program suppliers. The
51
long-term portion is included in other assets. Both the current and
long-term portion are amortized to cost of sales as revenues are
generated from the related cassettes.
The Company, using empirical data, estimates the projected revenue
stream to be generated under these arrangements and accrues for
projected payments or reduces the carrying amount of advances to
program suppliers for any amount that it estimates will not be fully
recovered through future revenues. As of March 31, 2003 and 2002, the
Company has reserved approximately $1,318,737 and $1,344,320,
respectively, for potential unearned shortages under advance
arrangements. As of March 31, 2003 and 2002, the Company has reserved
approximately $800,000 and $1,000,000, respectively, for potential
unearned shortages under guarantee arrangements.
On March 22, 1999, the Company's then subsidiary BlowOut Entertainment,
Inc. ("BlowOut"), filed for Chapter 11 of the Federal Bankruptcy Code
in the United States Bankruptcy Court for the District of Delaware. At
that same time BlowOut filed a motion to sell substantially all the
assets of BlowOut. BlowOut is not related to the Company's wholly owned
subsidiary BlowOut Video, Inc. The sale, to a third party video
retailer, was approved on May 10, 1999 and closed on May 17, 1999. The
Company was the principal creditor of BlowOut. In 1996, the Company had
agreed to guarantee up to $7 million of indebtedness of BlowOut
(Guarantee). Pursuant to the terms of the Guarantee, the Company agreed
to guarantee any amounts outstanding under BlowOut's credit facility.
As the sale of the BlowOut assets were not sufficient to cover the
amounts due under this facility, the Company, pursuant to the
guarantee, has agreed to a payment plan to fulfill BlowOut's obligation
under its credit facility. The payments, as made, were recorded as a
reduction of "net current liabilities of discontinued operations" on
the accompanying balance sheet. As of March 31, 2002, all amounts
related to this obligation had been paid.
Other
In June 2000, the Company entered into an agreement with one of its
customers to modify an existing contract. Under the terms of the
agreement the customer made a payment to the Company in the amount of
$2,500,000 in exchange for cancellation of the exclusivity clause in
the contract requiring the customer to acquire all of its PPT product
from the Company and for future fulfillment services to be provided to
the customer by the Company's subsidiary 3PF. Subsequent to the signing
of the agreement, the customer took the position that it was entitled
to a refund of the payment, as additional agreements were not finalized
as of the date required by the agreement. Therefore, the entire payment
was recorded as deferred revenue on the Company's balance sheet at June
30, 2000.
On March 31, 2001, the Company entered into a settlement agreement with
the customer whereby the contract modification was resolved and both
parties were released from claims related to the above issues. $1.6
million of the $2.5 million payment was consideration for the recovery
of lost business related to the cancellation of the exclusivity clause
in the contract and was recorded as revenue. The remaining $900,000 was
held by the Company as a credit to be applied toward future billings to
this customer created by orders of PPT product from the Company. The
terms of the settlement agreement provided a $900,000 credit available
to be applied to future receivables with $75,000 available each
calendar quarter beginning with the first quarter of 2001. The
long-term portion of this credit has been included in other long-term
liabilities on the accompanying consolidated balance sheet.
52
(11) Contingencies
During fiscal 2001, the Company received a final reimbursement for
legal costs related to a fiscal year 2000 legal settlement of $225,000
which is included in net gain from litigation expense in the
accompanying consolidated statement of operations.
In November 15, 2000, 3PF filed a proceeding with the American
Arbitration Association against Reel.com, Inc., a division of Hollywood
Entertainment Corporation (Hollywood), for breach of a servicing,
warehousing, and distribution agreement, and against Hollywood in
connection with its guarantee of the obligations of Reel.com, Inc.,
under the agreement. On March 13, 2002, an arbitrator awarded damages
to the Company of $1,563,153 related to the November 15, 2000 claim.
This amount is reflected as a gain and is included in net gain from
litigation settlements in the accompanying consolidated statement of
operations. In April 2002, in a confidential settlement agreement,
Hollywood agreed to pay an additional $361,847 to the Company to
resolve all outstanding issues between the two parties.
On February 20, 2001, the Company filed a complaint against Ron Berger,
Chairman and Chief Executive Officer and a director of Rentrak until
September 2000, in the Circuit Court of the State of Oregon for the
County of Multnomah (No. 0102-01814), seeking cancellation of shares of
Rentrak common stock acquired by Mr. Berger through an option loan
program offered to the Company's officers in June 2000 and damages for
the conversion of an automobile and computer equipment plus an
over-advance payment of business expenses less setoffs. On or about
March 29, 2001, Mr. Berger filed a counterclaim seeking damages of
approximately $1.76 million plus attorney fees from the Company for
conversion of Mr. Berger's director's fees and dividends from Rentrak
Japan, breach of an agreement to compensate Mr. Berger for cancellation
of options to purchase Company stock, failure to pay accumulated wages
and compensation, breach of an agreement to provide options to purchase
stock in 3PF, and failure to provide certain insurance benefits. On
June 15, 2001, the Company filed an amended complaint alleging tort
claims arising out of Mr. Berger's activities as an officer and
director of the Company involving Video City, Inc., and seeking damages
of not less than $6,000,000. Effective May 6, 2002, the parties
resolved the litigation pursuant to a confidential settlement agreement
pursuant to which the parties agreed to dismiss their respective
lawsuits and to seek nothing further from the other in litigation.
The Company may from time to time also be a party to legal proceedings
and claims that arise in the ordinary course of its business. In the
opinion of management, the amount of any ultimate liability with
respect to these actions is not expected to materially affect the
financial position or results of operations of the Company. The Company
currently has no outstanding litigation.
(12) Employee Benefit Plans
On January 1, 1991, the Company established an employee benefit plan
(the 401(k) Plan) pursuant to Section 401(k) of the Internal Revenue
Code for certain qualified employees. Contributions made to the 401(k)
Plan are based on percentages of employees' salaries. The total amount
of the Company's contribution is at the discretion of the board of
directors. Contributions under the 401(k) Plan for the years ended
March 31, 2002 and 2001 were approximately $86,000 and $82,000,
respectively. As of March 31, 2003, the
53
board of directors had not made a decision regarding contributions for
the year ended March 31, 2003.
The Company has an Employee Stock Purchase Plan (the Plan). The board
of directors has reserved 200,000 shares of the Company's common stock
for issuance under the Plan, of which 135,481 shares remain authorized
and available for sale to employees. All employees meeting certain
eligibility criteria may be granted the opportunity to purchase common
stock, under certain limitations, at 85% of market value. Payment is
made through payroll deductions.
Under the Plan, employees purchased 1,213 shares for aggregate proceeds
of $5,740, 3,079 shares for aggregate proceeds of $11,005, and 4,000
shares for aggregate proceeds of $13,561, in fiscal 2003, 2002, and
2001, respectively.
(13) Business Segments, Significant Suppliers, and Major Customer
The Company classifies its services in three segments, PPT, 3PF and
Other. Other services include amounts received pursuant to previous
royalty agreements, primarily from Rentrak Japan.
Business Segments
------------------------ -------------------------- ---------------------------
2003 2002 2001
------------------------ -------------------------- ---------------------------
Revenues before Intersegment Eliminations
PPT $ 70,954,521 $ 74,474,692 $ 87,656,114
3PF 17,380,544 17,521,877 23,389,443
All Other - 6,395,754 1,130,654
------------------------ -------------------------- ---------------------------
$ 88,335,065 $ 98,392,323 $ 112,176,211
------------------------ -------------------------- ---------------------------
Intersegment Revenue Eliminations
PPT $ - $ (218,204) $ (863,818)
3PF (2,114,704) (2,180,137) (3,252,344)
------------------------ -------------------------- ---------------------------
$ (2,114,704) $ (2,398,341) $ (4,116,162)
------------------------ -------------------------- ---------------------------
Revenues from External Customers
PPT $ 70,954,521 $ 74,256,488 $ 86,792,296
3PF 15,265,840 15,341,740 20,137,099
All Other - 6,395,754 1,130,654
------------------------ -------------------------- ---------------------------
$ 86,220,361 $ 95,993,982 $ 108,060,049
------------------------ -------------------------- ---------------------------
Income (Loss) from Operations:
PPT $ 3,264,435 $ 6,269,712 $ (6,867,000)
3PF (3,274,804) (3,858,411) (3,788,576)
All Other - 5,460,399 1,130,654
------------------------ -------------------------- ---------------------------
$ (10,369) $ 7,871,700 $ (9,524,922)
------------------------ -------------------------- ---------------------------
Identifiable Assets
PPT $ 25,801,989 $ 29,145,059 $ 25,073,174
3PF 4,924,444 5,831,188 8,935,935
Discontinued Operations - 3,636,080 5,117,139
------------------------ -------------------------- ---------------------------
$ 30,726,433 $ 38,612,327 $ 39,126,248
------------------------ -------------------------- ---------------------------
54
The Company has one program supplier that supplied product that
generated 16 percent, two that generated 15 percent, and a fourth that
generated 11 percent of the Company's revenues for the year ended March
31, 2003. The Company has one program supplier that supplied product
that generated 17 percent, a second that generated 16 percent, and a
third that generated 13 percent of the Company's revenues for the year
ended March 31, 2002. The Company has one program supplier that
supplied product that generated 19 percent, a second that generated 15
percent, and a third that generated 13 percent of the Company's
revenues for the year ended March 31, 2001. There were no other program
suppliers who provided product accounting for more than 10 percent of
sales for the years ended March 31, 2003, 2002, and 2001.
The Company currently receives a significant amount of product from
four program suppliers. Although management does not believe that these
relationships will be terminated in the near term, a loss of one of
these suppliers could have an adverse effect on operating results.
The Company has one customer that accounted for 14 percent of the
Company's revenue in the year ended March 31, 2003. The same customer
accounted for 11 percent of the Company's revenue in the year ended
March 31, 2002. There were no other customers that accounted for more
than 10 percent of the Company's revenue in fiscal 2003, 2002, and
2001. The agreement with this fulfillment customer expires July 31,
2003. The customer has notified the Company of their intent not to
renew this agreement.
55
RENTRAK CORPORATION
QUARTERLY FINANCIAL DATA
FOR THE QUARTERS ENDED JUNE 30, 2001 TO MARCH 31, 2003
JUNE 30, MARCH 31,
QUARTER ENDED: 2002 SEPTEMBER 30, 2002 DECEMBER 31, 2002 2003
----------------------------------------------------------------------------------
REVENUE $22,427,441 $20,774,482 $21,279,830 $21,738,608
NET INCOME:
CONTINUING OPERATIONS $309,517 $173,115 $(299,195) $(99,189)
DISCONTINUED OPERATIONS (145,014) (276,216) (75,369) (86,028)
----------------------------------------------------------------------------------
NET INCOME $164,503 $(103,101) $(374,564) $(185,217)
----------------------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON SHARE:
BASIC:
CONTINUING OPERATIONS $0.03 $0.02 ($0.03) ($0.01)
DISCONTINUED OPERATIONS (0.01) (0.03) (0.01) (0.01)
----------------------------------------------------------------------------------
NET INCOME (LOSS) $0.02 ($0.01) ($0.04) ($0.02)
----------------------------------------------------------------------------------
DILUTED:
CONTINUING OPERATIONS $0.03 $0.02 ($0.03) ($0.01)
DISCONTINUED OPERATIONS (0.01) (0.03) (0.01) (0.01)
----------------------------------------------------------------------------------
NET INCOME (LOSS) $0.02 ($0.01) ($0.04) ($0.02)
----------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31, 2001 MARCH 31, 2002
QUARTER ENDED: 2001 (Note 1) SEPTEMBER 30, 2001 (Note 2) (Note 3)
----------------------------------------------------------------------------------
REVENUE $27,076,878 $22,046,339 $24,311,261 $22,559,504
NET INCOME:
CONTINUING OPERATIONS 4,946,693 526,179 2,272,542 2,041,374
DISCONTINUED OPERATIONS (251,780) (128,065) (33,854) (379,058)
----------------------------------------------------------------------------------
NET INCOME 4,694,913 398,114 2,238,688 1,662,316
----------------------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON SHARE:
BASIC:
CONTINUING OPERATIONS $0.44 $0.05 $0.23 $0.21
DISCONTINUED OPERATIONS (0.02) (0.01) 0.00 (0.04)
----------------------------------------------------------------------------------
NET INCOME (LOSS) $0.42 $0.04 $0.23 $0.17
----------------------------------------------------------------------------------
DILUTED:
CONTINUING OPERATIONS $0.44 $0.50 $0.23 $0.20
DISCONTINUED OPERATIONS (0.02) (0.01) 0.00 (0.04)
----------------------------------------------------------------------------------
NET INCOME (LOSS) $0.42 $0.49 $0.23 $0.16
----------------------------------------------------------------------------------
56
(1) The June 30, 2001 quarter included results from the Rentrak Japan
restructuring agreement. The agreement resulted in the recognition of
$6.4 million in royalty revenue and a $5.6 million gain in other income
during the quarter.
(2) The December 31, 2001 quarter included recovery of a specific allowance
in the amount of $0.9 million, established in the June 30, 2001
quarter, for doubtful accounts related to a customer of the Company's
subsidiary, 3PF. The quarter also included other income of $2.4 million
related to the Rentrak Japan restructuring.
(3) The March 31, 2002 quarter included recognition of a $1.6 million gain
from a litigation settlement with a prior customer, as well as recovery
in the amount of $0.7 million of a specific allowance, established in
the December 31, 2000 quarter, for doubtful accounts related to a
customer of the Company's subsidiary, 3PF.
Rentrak Corporation
Valuation and Qualifying Accounts
Schedule II
Balance at Additions Write Offs
Beginning of (Reductions) to Charged Balance at End of
Year Ended: Period Reserve Against Reserves Recoveries Period
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts
March 31, 2001 $ 836,945 $7,455,734 $(7,670,968) $ 1,468,364 $ 2,090,075
March 31, 2002 2,090,075 (1,546,301) (1,598,046) 2,140,415 (1,086,143)
March 31, 2003 1,086,143 (1,142,138) (447,732) 1,251,866 748,139
Advances to program
suppliers reserve
March 31, 2001 $ 1,276,078 $ 93,959 $ - $ - 1,370,037
March 31, 2002 1,370,037 - (25,717) - 1,344,320
March 31, 2003 1,344,320 - (25,583) - 1,318,737
Other Current Assets-
Retailer Financing Program reserve
March 31, 2001 $ 494,935 $ 343,500 $ - $ - 838,435
March 31, 2002 838,435 - - - 838,435
March 31, 2003 838,435 - - - 838,435
Other Assets-
Retailer Financing Program reserve
March 31, 2001 $ 5,189,248 $ 581,715 (10,884) $ - $5,760,079
March 31, 2002 5,760,079 50,000 (72,760) - 5,737,319
March 31, 2003 5,737,319 - (45,000) - 5,692,319
57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) to Form 10-K, the information called for by
this item 10 is incorporated by reference from the Company's definitive Proxy
Statement for its 2003 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended. See "Election of Directors",
"Executive Officers" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934."
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3) to Form 10-K, the information called for by
this item 11 is incorporated by reference from the Company's definitive Proxy
Statement for its 2003 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended. See "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Pursuant to General Instruction G(3) to Form 10-K, the information called for by
this item 12 is incorporated by reference from the Company's definitive Proxy
Statement for its 2003 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended. See "Security Ownership of Certain
Beneficial Owners and Management" and "Equity Compensation Plan Information>"
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3) to Form 10-K, the information called for by
this item 13 is incorporated by reference from the Company's definitive Proxy
Statement for its 2003 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended. See "Compensation Committee
Interlocks and Insider Participation" and "Certain Relationships and
Transactions".
ITEM 14. 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
58
"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.
59
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
-----------------------------
The following documents are filed as part of the Report:
Consolidated Financial Statements: The Consolidated
Financial Statements of the Company are included in
Item 8 of this Report as follows:
Independent Auditors Report
Consolidated Balance Sheets as of March 31, 2003
and 2002
Consolidated Statements of Operations for the Years
Ended March 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity
for the Years Ended March 31, 2003,
2002 and 2001
Consolidated Statements of Cash Flows for the Years
Ended March 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
--------------------------------------
Consolidated Financial Statement Schedules:
-------------------------------------------
The following consolidated financial statement
schedule has been included in Item 8 of this Report:
Schedule II - Valuation and Qualifying Accounts
Schedules not included have been omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
(a)(3) Exhibits: The exhibits required to be filed pursuant to
Item 601 of Regulation S-K are set forth in the
Exhibit Index.
(b) Form 8-K Reports. During the fourth quarter of fiscal 2003, the
Company filed no reports on Form 8-K.
(c) Exhibits (See Exhibit Index)
60
1. A shareholder may obtain a copy of any exhibit included in this
Report upon payment of a fee to cover the reasonable expenses of
furnishing such exhibits by written request to Rentrak Corporation, PO
Box 18888, Portland, Oregon 97218.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
RENTRAK CORPORATION
By /S/ F. Kim Cox
--------------------------------------
F. Kim Cox, President
Date June 26, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and the dates indicated.
Principal Executive Officer and Director:
By /S/ Paul A. Rosenbaum June 26, 2003
------------------------
Paul A. Rosenbaum, Chairman and Chief
Executive Officer and Director
Principal Financial And Accounting Officer:
By /S/ Mark L. Thoenes June 26, 2003
--------------------------
Mark L. Thoenes, Senior Vice President
Chief Financial Officer
Majority of Directors:
By /S/ Cecil D. Andrus June 26, 2003
---------------------------
Cecil D. Andrus, Director
By /S/ George H. Kuper June 26, 2003
------------------------
George H. Kuper, Director
By /S/ Joon S. Moon June 26, 2003
--------------------------
Joon S. Moon, Director
By /S/ James G. Petcoff June 26, 2003
------------------------
James G. Petcoff, Director
By /S/ Stanford Stoddard June 26, 2003
------------------------
Stanford Stoddard, Director
62
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Paul A. Rosenbaum, certify that:
I have reviewed this annual report on Form 10-K of Rentrak Corporation;
Based on my knowledge, this annual 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 annual report;
Based on my knowledge, the financial statements, and other financial information
included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
Presented in this annual 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 annual
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: June 26, 2003
By: /s/ Paul A. Rosenbaum
- -------------------------
Paul A. Rosenbaum
Chairman and Chief Executive Officer
63
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Mark L. Thoenes, certify that:
I have reviewed this annual report on Form 10-K of Rentrak Corporation;
Based on my knowledge, this annual 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 annual report;
Based on my knowledge, the financial statements, and other financial information
included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
Presented in this annual 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 annual
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: June 26, 2003
By:/s/ Mark L. Thoenes
- ----------------------
Mark L. Thoenes
Chief Financial Officer
64
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 Annual Report of Rentrak Corporation (the "Company") on
Form 10-K for the period ended March 31, 2003, 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
June 25, 2003
In connection with the Annual Report of Rentrak Corporation (the "Company") on
Form 10-K for the period ended March 31, 2003, 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
June 25, 2003
65
EXHIBIT INDEX
The following exhibits are filed herewith or, if followed by a number in
parentheses, are incorporated herein by reference from the corresponding exhibit
filed in the report or registration statement identified in the footnotes
following this index:
Exhibit
Number Exhibit
2 Agreement Concerning Changes to Business Cooperation Agreement
(Framework) between Rentrak
Japan Co., Ltd. and Rentrak Corporation. (1)
3.1 Amended and Restated Articles of Incorporation and amendments
thereto. (2)
3.2 1995 Restated Bylaws, as amended to date. (3)
10.1* 1986 Second Amended and Restated Stock Option Plan and Forms
of Stock Option Agreements. (4)
10.2* Amendment to 1986 Second Amended and Restated Stock Option
Plan dated May 19, 2000. (5)
10.3* Amended and Restated Employment Agreement with Marty Graham
dated May 17, 1997. (7)
10.4* Addendum to Employment Agreement with Marty Graham dated
June 8, 2000. (8)
10.5* Amendment to Employment Agreement with Marty Graham dated
September 1, 2000. (9)
10.6* Employment Agreement with Christopher E. Roberts dated
November 1, 2002. (9)**
10.7* The 1997 Equity Participation Plan of Rentrak Corporation,
as amended.
10.8* Form of Non-Qualified Stock Option Agreement under 1997
Equity Participation Plan. (13)
10.9* Form of Incentive Stock Option Agreement under 1997 Equity
Participation Plan. (14)
10.10* Employment Agreement with F. Kim Cox dated April 1, 1998. (11)
10.11 Revolving Line of Credit Agreement with Wells Fargo Bank
dated June 15, 2002. (12)
10.12* Employment Agreement with Mark L. Thoenes dated January 1,
2001. (13)
66
10.13* Employment Agreement with Timothy J. Erwin dated November 1,
2002. (14)
10.14 Rights Agreement dated as of May 18, 1995, between Rentrak
Corporation and U.S. Stock Transfer Corporation. (15)
10.15* Letter Agreement between Rentrak Corporation and Joon S. Moon
entered into as of March 15, 2001. (16)
10.16* Incentive Stock Option Agreement with Paul A. Rosenbaum dated
March 30, 2001. (17)
10.17* Non-Qualified Stock Option Agreement with Paul A. Rosenbaum
dated March 30, 2001. (18)
10.18* Employment Agreement with Amir Yazdani dated July 1, 2001. (19)
10.19* Employment Agreement with Paul A. Rosenbaum dated October 1,
2001. (20)
10.20* Consulting Agreement between 3PF.Com, Inc., and
George H. Kuper dated June 13, 2001. (21)
10.21* The 1997 Non-Officer Employee Stock Option Plan of
Rentrak Corporation. (22)
10.22* Amendment to the 1997 Non-Officer Employee Stock Option Plan
of Rentrak Corporation. (23)
10.23* Second Amendment to the 1997 Non-Officer Employee Stock Option
Plan of Rentrak Corporation. (24)
10.24* Third Amendment to the 1997 Non-Officer Employee Stock Option
Plan of Rentrak Corporation. (25)
10.25 Letter Agreement between Rentrak Corporation and Disney
Enterprises, Inc., dated November 15, 2002. (26)
10.26* Employment Agreement with Kenneth M. Papagan dated
November 18, 2002, together with form of
incentive stock option agreement. (27)
10.27* Employment Agreement with Ronald Giambra dated
July 1, 2002. (28)
21 List of Subsidiaries of Registrant.
23 Consent of KPMG LLP., independent auditors.
67
99.1 Description of Capital Stock of Rentrak Corporation. (32)
99.2 Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350.
99.3 Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350
68
* Management Contract or Compensatory Plan or Arrangement.
** Portions omitted pursuant to a request for confidentiality treatment filed
with the Securities and Exchange Commission.
1. Filed as Exhibit 2 to Form 8-K filed on April 17, 2001.
2. Filed in Form S-3 Registration Statement, File No. 33-8511, filed on
November 21, 1994.
3. Filed as Exhibit 3.1 to Form 10-Q filed on February 14, 2001.
4. Filed as Exhibit 10.1 to 1993 Form 10-K filed on June 28, 1993
(File No. 0-15159).
5. Filed as Exhibit 10.30 to 2000 Form 10-K filed on June 29, 2000.
6. Filed as Exhibit 10.1 to Form 10-Q filed on November 3, 1997.
7. Filed as Exhibit 10.23 to 2000 Form 10-K filed on June 29, 2000.
8. Filed as Exhibit 10.13 to 2001 Form 10-K filed on June 29, 2001.
9. Filed as Exhibit 10.4 to Form 10-Q filed on February 14, 2003.
10. Filed as Exhibit 10.10 to 2002 Form 10-K filed on June 28, 2002.
11. Filed as Exhibit 10.2 to Form 10-Q filed on November 6, 1998.
12. Filed as Exhibit 10.1 to Form 10-Q filed on February 14, 2003.
13. Filed as Exhibit 10.25 to 2001 Form 10-K filed on June 29, 2001.
14. Filed as Exhibit 10.3 to Form 10-Q filed on February 14, 2003.
15. Filed as Exhibit 4 to Form 8-K filed on June 5, 1995.
16. Filed as Exhibit 10.29 to 2001 Form 10-K filed on June 29, 2001.
17. Filed as Exhibit 10.30 to 2001 Form 10-K filed on June 29, 2001.
18. Filed as Exhibit 10.31 to 2001 Form 10-K filed on June 29, 2001.
19. Filed as Exhibit 10.1 to Form 10-Q filed on November 13, 2001.
20. Filed as Exhibit 10.1 to Form 10-Q filed on February 14, 2002.
21. Filed as Exhibit 10.28 to 2002 Form 10-K filed on June 28, 2002.
22. Filed as Exhibit 4.1 to Form S-8 filed on June 5, 1997.
23. Filed as Exhibit 4.1 to Form S-8 filed on October 29, 1997.
69
24. Filed as Exhibit 10.31 to 2002 From 10-K filed on June 28, 2002.
25. Filed as Exhibit 10.1 to Form 10-Q filed on November 13, 2002.
26. Filed as Exhibit 99 to Form 8-K filed on November 18, 2002.
27. Filed as Exhibit 10.2 to Form 10-Q filed on February 14, 2003.
28. Filed as Exhibit 10.5 to Form 10-Q filed on February 14, 2003.
29. Filed as Exhibit 99 to 2001 Form 10-K filed on June 29, 2001.
70