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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For Quarter Ended: June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Transition Period from to
Commission file number: 0-15159
RENTRAK CORPORATION
(Exact name of registrant as specified in its charter)
OREGON 93-0780536
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification no.)
7700 NE Ambassador Place, Portland, Oregon 97220
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 284-7581
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (x) No ( )
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 July 31, 2003, the Registrant had 9,581,542 shares of Common Stock
outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2003 and March 31, 2003
Consolidated Statements of Income for the three-month periods ended
June 30, 2003 and June 30, 2002
Consolidated Statements of Cash Flows for the three-month periods
ended June 30, 2003 and June 30, 2002
Notes to Consolidated Financial Statements
2
RENTRAK CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
June 30, March 31,
2003 2003
-----------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 10,647,719 $ 10,063,541
Accounts receivable, net of allowance for doubtful
accounts of $589,888 and $748,139 8,083,375 9,706,485
Advances to program suppliers 469,812 418,101
Assets held for sale (Note E.) 702,702 -
Income tax receivable 89,595 81,085
Deferred tax asset 2,759,858 2,796,908
Other current assets 2,211,308 2,430,334
-----------------------------------------------------
Total current assets 24,964,369 25,496,454
PROPERTY AND EQUIPMENT, net 1,974,212 2,404,763
DEFERRED TAX ASSET 944,921 894,083
OTHER ASSETS 1,779,451 1,931,133
-----------------------------------------------------
TOTAL ASSETS $ 29,662,953 $ 30,726,433
=====================================================
The accompanying notes are an
integral part of these consolidated
balance sheets.
3
RENTRAK CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
June 30, March 31,
2003 2003
----------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 11,744,184 $ 12,710,999
Accrued liabilities 788,985 1,143,785
Accrued compensation 716,094 610,022
Deferred revenue 116,422 156,692
----------------------------------------------------
Total current liabilities 13,365,685 14,621,498
----------------------------------------------------
LONG-TERM LIABILITIES:
Lease obligations, deferred gain and
customer deposits 625,693 668,039
----------------------------------------------------
Total long-term liabilities 625,693 668,039
----------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value;
Authorized: 10,000,000 shares, none issued - -
Common stock, $.001 par value;
Authorized: 30,000,000 shares
Issued and outstanding: 9,512,360 shares
at June 30, 2003 and 9,471,612 shares at
March 31, 2003 9,512 9,472
Capital in excess of par value 39,830,175 39,655,212
----------------------------------------------------
Cumulative other comprehensive income 180,879 180,879
Accumulated deficit (24,348,991) (24,408,667)
----------------------------------------------------
Total Stockholder's Equity 15,671,575 15,436,896
----------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 29,662,953 $ 30,726,433
====================================================
The accompanying notes are an
integral part of these consolidated
balance sheets.
4
RENTRAK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Three Months Ended
June 30, 2003 June 30, 2002
----------------------------- -----------------------------
REVENUES:
PPT $ 13,052,691 $ 17,866,110
Other 5,645,733 4,561,331
----------------------------- -----------------------------
18,698,424 22,427,441
----------------------------- -----------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales 14,180,913 18,289,619
Selling, general, and administrative 4,470,649 4,000,448
Net gain from litigation settlement - (361,847)
----------------------------- -----------------------------
18,651,562 21,928,220
----------------------------- -----------------------------
INCOME FROM OPERATIONS 46,862 499,221
----------------------------- -----------------------------
OTHER INCOME (EXPENSE):
Interest income 55,439 -
Interest expense (6,049) -
----------------------------- -----------------------------
49,390 -
----------------------------- -----------------------------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAX
PROVISION 96,252 499,221
INCOME TAX PROVISION 36,576 189,704
----------------------------- -----------------------------
INCOME FROM CONTINUING
OPERATIONS 59,676 309,517
LOSS FROM DISCONTINUED
OPERATIONS, NET OF TAX BENEFIT
OF $0 AND $88,881 - (145,014)
----------------------------- -----------------------------
NET INCOME $ 59,676 $ 164,503
============================= =============================
EARNINGS (LOSS) PER SHARE:
Basic:
Continuing operations $ 0.01 $ 0.03
Discontinued operations - (0.01)
----------------------------- -----------------------------
Total $ 0.01 $ 0.02
============================= =============================
Diluted:
Continuing operations $ 0.01 $ 0.03
Discontinued operations - (0.01)
----------------------------- -----------------------------
Total $ 0.01 $ 0.02
============================= =============================
The accompanying notes are an
integral part of these consolidated
statements.
5
RENTRAK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended June 30,
------------------------------------
2003 2002
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 59,676 $ 164,503
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on disposal of discontinued operations - 145,014
Depreciation and amortization 267,230 470,950
Amortization of warrants - 15,000
Recovery of doubtful accounts (83,774) (170,000)
Deferred income taxes 36,577 100,823
Change in specific accounts:
Accounts receivable 1,706,884 (93,023)
Advances to program suppliers (51,711) (508,750)
Income tax receivable (8,510) (7,725)
Other assets 193,049 2,069,227
Accounts payable (966,815) (1,026,666)
Accrued liabilities & compensation (248,728) (18,265)
Deferred revenue and other liabilities (82,616) (254,651)
------------------------------------
Net cash provided by operating activities 821,262 886,437
------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (361,722) (619,956)
------------------------------------
Net cash used in investing activities (361,722) (619,956)
------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock - (810,001)
Issuance of common stock 124,638 526,119
------------------------------------
Net cash provided by (used in) financing activities 124,638 (283,882)
------------------------------------
NET CASH PROVIDED (USED) BY CONTINUING OPERATIONS 584,178 (17,401)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS - 194,980
------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 584,178 177,579
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 10,063,541 12,028,684
------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $10,647,719 $12,206,263
====================================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for income taxes,
net of refunds received $ 8,510 $ 12,236
NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of note payable for the purchase of common stock - 239,074
The accompanying notes are an integral
part of these consolidated statements.
6
RENTRAK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of
RENTRAK CORPORATION (the "Company"), have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations. The results of operations for the three-month period ended June
30, 2003 are not necessarily indicative of the results to be expected for the
entire fiscal year ending March 31, 2004. The Condensed Consolidated Financial
Statements should be read in conjunction with the Consolidated Financial
Statements and footnotes thereto included in the Company's 2003 Annual Report to
Shareholders.
The Condensed Consolidated Financial Statements reflect, in the opinion of
management, all material adjustments (which include only normal recurring
adjustments) necessary to present fairly the Company's financial position,
results of operations and cash flows.
The Condensed Consolidated Financial Statements include the accounts of the
Company, its majority owned subsidiaries, and those subsidiaries in which the
Company has a controlling interest after elimination of all inter-company
accounts and transactions. Investments in affiliated companies owned 20 to 50
percent are accounted for on the equity method.
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 does not believe that these provisions will have a material impact on
its consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities: an Interpretation of ARB No. 15" (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 consolidated by their primary beneficiaries
if they do not effectively disperse risks among parties involved. The primary
beneficiary of
7
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 consolidated financial statements.
8
NOTE B: Net Income Per Share
Basic earnings per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
periods. Diluted earnings per common share is computed on the basis of the
weighted average shares of common stock outstanding plus common equivalent
shares arising from dilutive stock options and warrants.
The weighted average number of shares of common stock equivalents and net income
used to compute basic and diluted earnings per share for the three-month periods
ended June 30, 2003 and 2002 were as follows:
3-Months Ended 3-Months Ended
June 30, 2003 June 30, 2002
------------------------------------ ------------------------------------
Basic Diluted Basic Diluted
Weighted average number of shares of
common stock outstanding used to
compute basic earnings (loss) per
common share 9,482,386 9,482,386 9,886,817 9,886,817
Effect of dilutive stock
Options and warrants - 337,176 - 420,803
----------------- ------------------ ----------------- ------------------
Weighted average number of shares of
common stock used to compute diluted
earnings (loss) per common share
outstanding and common stock equivalents 9,482,386 9,819,562 9,886,817 10,307,620
================= ================== ================= ==================
Net income (loss) used in basic and
diluted earnings (loss) per common share:
Continuing operations $ 59,676 $ 59,676 $ 309,517 $ 309,517
Discontinued operations - - (145,014) (145,014)
----------------- ------------------ ----------------- ------------------
Net income (loss) $ 59,676 $ 59,676 $ 164,503 $ 164,503
================= ================== ================= ==================
Earnings (loss) per common share:
Continuing operations $ 0.01 $ 0.01 $ 0.03 $ 0.03
Discontinued operations - - (0.01) (0.01)
----------------- ------------------ ----------------- ------------------
Earnings (loss) per common share $ 0.01 $ 0.01 $ 0.02 $ 0.02
================= ================== ================= ==================
Options and warrants to purchase approximately 400,000 and 1,300,000 shares of
common stock for the three month periods ended June 30, 2003 and 2002,
respectively, were outstanding but were not included in the computation of
diluted EPS because the exercise prices of the options and warrants were greater
than the average market price of the common shares and as such would be
antidilutive.
9
NOTE C: Business Segments, Significant Suppliers and Major Customer
The Company classifies its services in three business segments, PPT, 3PF.COM,
Inc. ("3PF") and Other. The PPT business segment includes the following business
activities: the PPT System whereby under its Pay-Per-Transaction (PPT) revenue
sharing program, the Company enters into contracts to lease videocassettes,
digital videodiscs ("DVD's"'), and video games, (collectively "Units"), from
Program Suppliers (producers of motion pictures and licensees and distributors
of home videocassettes and DVD's, and video game publishers) which are then
leased to Participating Retailers for a percentage of the rentals charged by the
Participating Retailers to their customers; data tracking and reporting services
provided by the Company to motion picture studios; Essential(TM) business
intelligence services, Box Office Essentials(TM) and Supply Chain
Essentials(TM), recently developed and currently being provided to customers;
and internet services provided by formovies.com, Inc., a subsidiary. 3PF is a
subsidiary of the Company that provides order processing, fulfillment and
inventory management 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 E).
The Other business segment formerly included BlowOut Video, Inc., (BlowOut
Video) a video retailer, which the Company elected to discontinue during the
three-month period ended June 30, 2002 (See Note D).
10
Business Segments
Following are the revenues, income (loss) from continuing operations, and
identifiable assets of the Company's business segments as of and for the periods
indicated (unaudited):
Three Months Ended June Three Months Ended June
30, 2003 30, 2002
-----------------------------------------------------
Revenues before Intersegment Eliminations
PPT $ 14,578,741 $ 18,920,580
3PF 4,649,827 4,069,910
-------------------------- -------------------------
$ 19,228,568 $ 22,990,490
========================== =========================
Intersegment Revenue Eliminations
PPT $ - $ -
3PF (530,144) (563,049)
-------------------------- -------------------------
$ (530,144) $ (563,049)
========================== =========================
Revenues from External Customers
PPT $ 14,578,741 $ 18,920,580
3PF 4,119,683 3,506,861
-------------------------- -------------------------
$ 18,698,424 $ 22,427,441
========================== =========================
Income (Loss) from operations:
PPT $ 98,784 $ 1,294,622
3PF (51,922) (795,401)
-------------------------- -------------------------
$ 46,862 $ 499,221
========================== =========================
Identifiable Assets June 30, 2003 March 31, 2003
-----------------------------------------------------
PPT $ 24,971,572 $ 25,801,989
3PF 4,691,381 4,924,444
-------------------------- -------------------------
$ 29,662,953 $ 30,726,433
========================== =========================
The Company currently offers substantially all of the titles of a number of
Program Suppliers, including Buena Vista Pictures Distribution, Inc., a
subsidiary of The Walt Disney Company, Paramount Home Video, Inc., Universal
Studios Home Video, Inc., Twentieth Century Fox Home Entertainment (formerly Fox
Video), a subsidiary of Twentieth Century Fox Film Corporation and MGM Home
Entertainment, a subsidiary of the Metro Goldman Meyer Company. For the
three-month period ended June 30, 2003, the Company had one program supplier
whose product generated 23 percent and a second that generated 11 percent of
Rentrak revenue. No other program supplier provided product that generated more
than 10 percent of revenue for the three-month period ended June 30, 2003. One
customer accounted for 17 percent of the Company's revenue in the three-
11
month period ended June 30, 2003. The agreement with this fulfillment customer
expired July 31, 2003. The customer has notified the Company of their intent not
to renew this agreement.
For the three-month period ended June 30, 2002, the Company had one program
suppliers whose product generated 18 percent, a second that generated 17
percent, a third whose product generated 15 percent, and a fourth whose product
generated 11 percent of Rentrak revenue. No other program supplier provided
product that generated more than 10 percent of revenue for the three-month
period ended June 30, 2002. One customer accounted for 12 percent of the
Company's revenue in the three-month period ended June 30, 2002.
NOTE D: 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 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 $1.0 million and a net loss of $145,014, or
$0.01 per share, in the three-month period ended June 30, 2002.
Note E: 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 at June 30, 2003, are $496,947 and
$962,943 respectively. The transaction resulted in a deferred gain in the amount
of $509,044 that is being recognized as interest income by 3PF ratably
throughout the life of the lease.
In fiscal 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
12
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 or
Disposal 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.
In June 2003, the Company signed a definitive agreement to sell substantially
all of the assets of 3PF at the Wilmington, Ohio, operation for $800,000. 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.
The Company announced it had completed this asset sale transaction, effective
July 1, 2003, and has received the cash purchase price in full. At June 30,
2003, the Company classified and reported the value of these assets held for
sale on the consolidated balance sheet. The operations of 3PF have not been
reported as discontinued operations as the continuing involvement criteria
outlined in FASB Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets have not been met.
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 did 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 was 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 is not in use. The Company is currently in the
process of negotiating the termination of this lease obligation and depending on
the outcome of the negotiations, may record a charge in future periods in
accordance with FASB Statement No. 146, Accounting for Costs Associated with
Exit or Disposal Activities.
Note F: Debt Compliance
In May 2002, the Company entered into an agreement for a new secured revolving
line of credit. The line of credit carries a maximum limit of $4,500,000 and was
to expire July 1, 2003. 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. The Company has the choice of either the bank's prime
interest rate or LIBOR +2 percent. The line is secured by substantially all of
the
13
Company's assets. The terms of the credit agreement include certain financial
covenants requiring: (1) $15 million ($16 million previous to June 16, 2003) 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 June 30,
2002; and (4) achievement of specified current and leverage financial ratios.
Based upon the financial results reported as of June 30, 2003 and for the
three-month period then ended, the Company has determined it is in compliance
with the financial covenants. At June 30, 2003 and August 11, 2003 the Company
had no outstanding borrowings under this agreement.
NOTE G: Stock-Based Compensation
At June 30, 2003, the Company has various stock-based compensation plans,
including 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 measurement dates. The following
table illustrates the effect on net income (loss) and net income (loss) per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation.
Three Months Ended
June 30,
2003 2002
------------- ----------------
Net income, as reported $ 59,676 $ 164,503
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects (182,344) (279,953)
------------- ----------------
Pro forma net income (loss) $ (122,668) $ (115,450)
============= ================
Earnings (loss) per share:
Basic - as reported $ 0.01 $ 0.02
Diluted - as reported $ 0.01 $ 0.02
Basic-pro forma $ (0.01) $ (0.01)
Diluted-pro forma $ (0.01) $ (0.01)
These pro forma effects of SFAS 123 may not be indicative of the future.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
Certain information included in Management's Discussion and Analysis of
Financial Condition and Results of Operations constitute forward-looking
statements that involve a number of risks and uncertainties. Forward-looking
statements are identified by the use of forward-looking words such as "may",
"will", "expects", "intends", "anticipates", "estimates", or "continues" or the
negative thereof or variations thereon or comparable terminology. The following
factors are among the factors that could cause actual results to differ
materially from the forward-looking statements: the Company's ability to
continue to market the Pay Per Transaction ("PPT") System successfully, the
financial stability of Participating Retailers and their performance of their
obligations under the PPT System, non-renewal of the Company's line of credit,
business conditions in the home video industry and general economic conditions,
both domestic and international, competitive factors, including increased
competition, expansion of revenue sharing programs other than the PPT System by
Program Suppliers, new technology, and the continued availability of prerecorded
videocassettes ("Cassettes"), digital videodiscs ("DVD's") and videogames from
Program Suppliers. Such factors are discussed in more detail in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 2003. (References
to Notes are to Notes of the Consolidated Financial Statements included in Item
1 of this report.)
Results of Operations
Continuing Operations - Domestic PPT Operations and Other Continuing
- --------------------------------------------------------------------------------
Subsidiaries
- ------------
For the three-month period ended June 30, 2003, total revenue decreased $3.7
million, or 17 percent, to $18.7 million from $22.4 million for the three-month
period ended June 30, 2002. Total 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 buy out fees
generated 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 motion
picture studios ("DRS"), revenues from Box Office Essentials(TM) and Supply
Chain Essentials(TM), part of the Company's Essential (TM) business service
offerings, as well as charges for internet services provided by the Company's
subsidiary formovies.com, Inc. In addition, total revenue includes charges to
customers of the Company's subsidiary 3PF.COM, Inc. ("3PF"), which
15
provided order processing, fulfillment and inventory management services to
retailers and wholesalers and other businesses requiring just-in-time
fulfillment until July 31, 2003. In June 2003, the Company agreed to sell 3PF's
operating assets at its Wilmington, Ohio facility (See Note E). The Other
business segment formerly included revenues from BlowOut Video, Inc. (BlowOut
Video), a video retailer, which the Company elected to discontinue during the
three month period ended June 30, 2002 (See Note D.).
The $3.7 million decrease in total revenues for the three-month period ended
June 30, 2003 is primarily due to the decrease in PPT System order processing
fees and transaction fees. As the home video industry increasingly shifts from
VHS to DVD format, the revenue sharing programs offered by studios are shifting
toward low or no up-front fees and typically a rental window of 30 days rather
than 60 days, resulting in increased pressure on the number of rental
transactions per Unit during the shortened rental window. Total order processing
and transaction fees decreased a combined $4.9 million during the three-month
period ended June 30, 2003 compared to the three-month period ended June 30,
2002. Order processing fees decreased due to a higher percentage of Units
shipped during the three-month period ended June 30, 2003 with zero to reduced
up front fees in the revenue sharing terms from newer studio contracts, creating
a change in the order processing fee mix of Units shipped during those periods,
and resulting in a decline in the order processing fees per Unit from period to
period in fiscal 2003 compared to fiscal 2004. Transaction fees decreased
primarily due to a 19 percent reduction in rental transactions resulting in
fewer rental turns of the Units in the Participating Retailers' stores during
the three-month period ended June 30, 2003 compared to rental activity for the
same period in fiscal 2003. These decreases in order processing and transaction
fees were partially offset by a net increase of approximately $0.6 million in
other revenues attributable to the Company's business intelligence service
offerings, Box Office Essentials and Supply Chain Essentials, recently developed
and now being provided to Company customers. 3PF revenues before inter-company
eliminations increased approximately $0.5 million during the same three-month
period from $4.1 million to $4.6 million, primarily due to increased business
activity from 3PF's largest customer during the three-month period ended June
30, 2003.
Total cost of sales for the three-month period ended June 30, 2003 decreased to
$14.2 million from $18.3 million for the three-month period ended June 30, 2002,
a decrease of $4.1 million, or 22 percent. A significant portion of this
decrease in cost of sales is primarily attributable to the $4.3 million net
decrease in PPT business segment revenues noted above. The receipt of a $0.5
million credit from a studio during the three-month period ended June 30, 2003
also impacted this decrease as it was credited against cost of sales. The credit
related to the historical performance of titles under the agreement with the
studio. Total cost of sales as a percent of total revenues was 76 percent for
the three-month period ended June 30, 2003 compared to 82 percent for the
three-month period ended June 30, 2002. The decrease in cost of sales as a
percent of total revenues is also due to the recognition of approximately $0.6
million of revenue from Box Office Essentials and Supply Chain Essentials
services during the three-month
16
period ended June 30, 2003 which have related costs classified as selling,
general and administrative expenses, and a gross margin improvement of $0.5
million from 3PF during the three-month period ended June 30, 2003.
Total selling, general and administrative expenses were $4.5 million for the
three-month period ended June 30, 2003, compared to $4.0 million for the
three-month period ended June 30, 2002, an increase of $0.5 million, or 13
percent. The increase in selling, general and administrative expenses for the
three-month period is primarily the result of: (1) an increase in the PPT
business segment's overall overhead costs of approximately $0.7 million during
the period, primarily attributable to costs associated with the development of
new software and the provision of these services for the Company's essential
business intelligence service offerings 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, as well as
Calendar Essentials and Supply Chain Essentials; and (2) an approximate $0.2
million decrease in 3PF's overall fulfillment overhead costs during the
three-month period ended June 30, 2003 due to improved cost controls.
The net gain from the litigation settlement with a prior customer of the
Company, Hollywood Entertainment, was $0.4 million for the three-month period
ended June 30, 2002.
Operating income from continuing operations for the three-month period ended
June 30, 2003 was approximately $47,000 compared to operating income from
continuing operations of $0.5 million for the three-month period ended June 30,
2002. The decline was primarily due to: (1) the decrease in PPT business segment
revenues and associated gross margin during the three-month period ended June
30, 2003; (2) the increase in selling, general and administrative expenses, as
noted above; and (3) the recognition of the net gain from a litigation
settlement during the three-month period ended June 30, 2002.
Other income increased from no income for the three-month period ended June 30,
2002 to approximately $49,000 for the three-month period ended June 30, 2003.
The effective tax rate during the three-month periods ended June 30, 2003 and
2002 was 38 percent.
As a result, for the three-month period ended June 30, 2003, the Company
recorded income from continuing operations of approximately $60,000, or less
than 1 percent of total revenue, compared to income from continuing operations
of $0.3 million, or approximately 1 percent of total revenue, in the three-month
period ended June 30, 2002. The decrease in income from continuing operations is
primarily attributable to: (1) the decrease in PPT business segment revenues and
associated gross margin during the three-month period ended June 30, 2003; (2)
an increase in selling, general and administrative expenses during the
three-month period ended June 30, 2003; and (3) the recognition of a
17
$0.4 million net gain from litigation settlement in the three-month period ended
June 30, 2002.
Discontinued Operations
As discussed in Note D., during the three-month period ended June 30, 2002, the
Company elected to discontinue store operations of its retail subsidiary BlowOut
Video, Inc. BlowOut Video generated revenues of $1.0 million and a net loss of
$145,014, or $0.01 per share, in the three-month period ended June 30, 2002.
Financial Condition
At June 30, 2003, total assets were $29.7 million, a decrease of $1.0 million
from $30.7 million at March 31, 2003. As of June 30, 2003, cash increased $0.5
million to $10.6 million from $10.1 million at March 31, 2003 (See the
Consolidated Statements of Cash Flows in the accompanying Consolidated Financial
Statements). Net accounts receivable decreased $1.6 million from $9.7 million at
March 31, 2003 to $8.1 million at June 30, 2003, primarily due to a reduction in
PPT business segment revenues for the three-month period ended June 30, 2003.
Assets held for sale were $0.7 million as of June 30, 2003, compared to $0 as of
June 30, 2002. Property and Equipment decreased approximately $0.4 million from
$2.4 million at March 31, 2003 to $2.0 million at June 30, 2003. Both the
decrease in property and equipment and the increase in Assets held for sale are
associated with the sale of 3PF assets to a third party (See Note E.)
At June 30, 2003, total liabilities were $14.0 million, a decrease of $1.3
million from $15.3 million at March 31, 2003. Accounts payable decreased $1.0
million from $12.7 million at March 31, 2003 to $11.7 million at June 30, 2003,
primarily due to the timing of studio and other vendor payments, and as the
result of lower PPT business segment revenues and associated cost of sales
during the three-month period ended June 30, 2003.
At June 30, 2003, total stockholders' equity was $15.7 million, an increase of
$0.3 million from the $15.4 million at March 31, 2003. Common stock and capital
in excess of par value increased, on a combined basis, $0.1 million from $39.7
million at March 31, 2003 to $39.8 million at June 30, 2003, primarily due to
the exercise of employee stock options. Accumulated deficit decreased $0.1
million from $24.4 million at March 31, 2003 to $24.3 million at June 30, 2003
due to the net income from the three-month period then ended.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, the Company had cash of $10.6 million compared to $10.1
million at March 31, 2003. The Company's current ratio (current assets/current
liabilities) was 1.87 at June 30, 2003 compared to 1.74 at March 31, 2003.
18
In May 2002, the Company entered into an agreement for a new secured revolving
line of credit. The line of credit carries a maximum limit of $4,500,000 and was
to expire July 1, 2003. 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. The Company has the choice of either the bank's prime
interest rate or LIBOR +2 percent. The line is secured by substantially all of
the Company's assets. The terms of the credit agreement include certain
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 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 June 30, 2002; and (4) achievement
of specified current and leverage financial ratios. Based upon the financial
results reported as of June 30, 2003 and for the three-month period then ended,
the Company has determined it is in compliance with the financial covenants. At
June 30, 2003 and August 11, 2003 the Company had no outstanding borrowings
under this agreement.
The Company's sources of liquidity include its cash balance, cash generated from
operations and its available credit resources. Based on the Company's current
budget and projected cash needs, the Company believes that its available sources
of liquidity will be sufficient to fund the Company's operations and other cash
requirements for the fiscal year ending March 31, 2004.
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 2003 Consolidated Financial Statements in the Company's 2003 Annual
Report on Form 10-K for a full discussion of the Company's accounting policies.
Allowance for Doubtful Accounts
- -------------------------------
Credit limits are established through a process of reviewing the financial
history and stability of each customer. The Company regularly evaluates the
collectibility of accounts receivable by monitoring past due balances. If it is
determined that a customer may be unable to meet its financial obligations, a
specific reserve is established based on the amount the Company expects to
recover. An additional general reserve is provided based on aging of accounts
receivable and the Company's historical collection experience. If circumstances
change related to specific customers, overall aging of accounts receivable or
collection experience, the Company's estimate of the recoverability of accounts
receivable could materially change.
19
Studio Reserves
- ---------------
The Company has entered into guarantee contracts with certain program suppliers
providing titles for distribution under the PPT system. These contracts
guarantee the suppliers minimum payments. The Company, using historical
experience and year to date rental experience for each title, estimates the
projected revenue to be generated under each guarantee. The Company establishes
reserves for titles that are projected to experience a shortage under the
provisions of the guarantee. The Company continually reviews these factors and
makes adjustments to the reserves as needed. Actual results could materially
differ from these estimates and could have a material effect on the recorded
studio reserves.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company has considered the provisions of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments." The Company
had no holdings of derivative financial or commodity instruments at June 30,
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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
An evaluation of the Company's disclosure controls and procedures (as defined in
Rule 13(a) - 15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")) was carried out under the supervision and with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer as of the end of the period covered by this report (the "Evaluation
Date"). Based upon this evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures as of the Evaluation Date were effective to ensure that
information required to be disclosed by the Company in the reports it files or
submits under the Exchange Act is (i) accumulated and communicated to the
Company's management (including the Chief Executive Officer and Chief Financial
Officer) as appropriate to allow timely decisions regarding required disclosure
and (ii) recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
Changes in Internal Controls over Financial Reporting
- -----------------------------------------------------
The Company maintains a system of internal control over financial reporting
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.
In the three months ended June 30, 2003, there has been no change in the
Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, its internal control
over financial reporting.
21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time a party to legal proceedings and claims that
arise in the ordinary course of its business, including, without limitation,
collection matters with respect to customers. In the opinion of management, the
amount of any ultimate liability with respect to these types of actions is not
expected to materially affect the financial position, results of operations or
cash flows of the Company as a whole.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See the Exhibit Index on page 24 hereof.
(b) Reports on Form 8-K . A report on Form 8-K was filed on June 25, 2003,
reporting under Item 5, Other Events, the sale of substantially all of the
assets of 3PF, as well as, furnishing information regarding results of
operations for the three month and twelve months ended March 31, 2003, under
Item 13, Results of Operations and Financial Condition.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated this 13th day of August, 2003
RENTRAK CORPORATION
By: /s/ Mark L. Thoenes
-----------------------------------------------
Mark L. Thoenes
Chief Financial Officer
Signing on behalf of the registrant
23
EXHIBIT INDEX
The following exhibits are filed herewith:
Exhibit
Number Exhibit
- ------ -------
10.1 Amendment to Employment Agreement dated April 1, 1998 with F. Kim Cox
dated March 31, 2003.
10.2 Amendment to Revolving Line of Credit agreement with Wells Fargo
dated June 16, 2003.
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
24