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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: December 31, 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 January 31, 2004, the Registrant had 9,709,281 shares of Common Stock
outstanding.
1
PART I - FINANCIAL INFORMATION Page
Number
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2003
and March 31, 2003 (unaudited) 3
Condensed Consolidated Statements of Operations for the
three-month periods ended December 31, 2003 and
December 31, 2002 (unaudited) 5
Condensed Consolidated Statements of Operations for the nine-month
periods ended December 31, 2003 and December 31, 2002
(unaudited) 6
Condensed Consolidated Statements of Cash Flows for the nine-month
periods ended December 31, 2003 and December 31, 2002
(unaudited) 7
Notes to Condensed Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3 Quantitative and Qualitative Disclosures About Market Risk 26
Item 4 Controls and Procedures 26
Part II - OTHER INFORMATION
Item 1 Legal Proceedings 27
Item 6 Exhibits and Reports on Form 8-K 28
Signature 29
Exhibit Index 30
2
RENTRAK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
December 31, March 31,
2003 2003(1)
---------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 6,923,650 $ 10,063,541
Accounts receivable, net of allowance for doubtful
accounts of $706,966 and $748,139 11,476,629 9,910,532
Advances to program suppliers 1,685,687 418,101
Income tax receivable 142,803 81,085
Deferred tax asset 3,375,367 2,796,908
Other current assets 1,504,563 2,226,287
---------------------------------------------------------
Total current assets 25,108,699 25,496,454
PROPERTY AND EQUIPMENT, net 2,324,778 2,404,763
DEFERRED TAX ASSET 919,392 894,083
OTHER ASSETS 1,022,813 1,931,133
---------------------------------------------------------
TOTAL ASSETS $ 29,375,682 $ 30,726,433
=========================================================
(1) Derived from Rentrak's audited consolidated financial statement as of March 31, 2003
The accompanying notes are an
integral part of these consolidated
financial statements.
3
RENTRAK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
December 31, March 31,
2003 2003(1)
-------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 11,266,909 $ 12,710,999
Accrued liabilities 772,276 1,143,785
Accrued compensation 523,501 610,022
Deferred revenue 316,956 156,692
-------------------------------------------------------
Total current liabilities 12,879,642 14,621,498
-------------------------------------------------------
LONG-TERM LIABILITIES:
Lease obligations, deferred gain and
customer deposits 349,735 668,039
-------------------------------------------------------
Total long-term liabilities 349,735 668,039
-------------------------------------------------------
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: 9,700,020 shares
at December 31, 2003 and 9,471,612 at
March 31, 2003 9,700 9,472
Capital in excess of par value 40,838,794 39,655,212
Accumulated other comprehensive income 180,879 180,879
Accumulated deficit (24,883,068) (24,408,667)
-------------------------------------------------------
16,146,305 15,436,896
-------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 29,375,682 $ 30,726,433
=======================================================
(1) Derived from Rentrak's audited consolidated financial statement as of March 31, 2003
The accompanying notes are an
integral part of these consolidated
financial statements.
4
RENTRAK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended December 31,
2003 2002
------------------------------------------------------------------
REVENUES $ 19,402,730 $ 21,279,830
------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales 13,995,528 18,030,371
Selling, general, and administrative 3,960,758 3,743,390
------------------------------------------------------------------
17,956,286 21,773,761
------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 1,446,444 (493,931)
------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 41,025 11,354
Interest expense (2,415) -
------------------------------------------------------------------
38,610 11,354
------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAX
PROVISION (BENEFIT) 1,485,054 (482,577)
INCOME TAX PROVISION (BENEFIT) 563,880 (183,382)
------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS 921,174 (299,195)
LOSS FROM DISCONTINUED
OPERATIONS, NET OF TAX BENEFIT
OF $78,850 AND $46,193 (128,649) (75,369)
------------------------------------------------------------------
NET INCOME (LOSS) $ 792,525 $ (374,564)
==================================================================
NET INCOME (LOSS) PER SHARE:
Basic:
Continuing operations $ 0.09 $ (0.03)
Discontinued operations (0.01) (0.01)
------------------------------------------------------------------
Total $ 0.08 $ (0.04)
==================================================================
Diluted:
Continuing operations $ 0.09 $ (0.03)
Discontinued operations (0.01) (0.01)
------------------------------------------------------------------
Total $ 0.08 $ (0.04)
==================================================================
The accompanying notes are an integral
part of these condensed consolidated
financial statements.
5
RENTRAK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended December 31,
2003 2002
-------------------------------------------------------------------
REVENUES $ 52,362,037 $ 64,481,753
-------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales 40,358,628 53,330,943
Selling, general, and administrative 12,714,726 11,299,645
Net gain from litigation settlement - (361,847)
-------------------------------------------------------------------
53,073,354 64,268,741
-------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (711,317) 213,012
-------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 163,892 82,854
Interest expense (10,240) -
-------------------------------------------------------------------
153,652 82,854
-------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAX
PROVISION (BENEFIT) (557,665) 295,866
INCOME TAX PROVISION (BENEFIT) (211,913) 112,429
-------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS (345,752) 183,437
LOSS FROM DISCONTINUED
OPERATIONS, NET OF TAX BENEFIT
OF $78,850 AND $304,367 (128,649) (496,599)
-------------------------------------------------------------------
NET LOSS $ (474,401) $ (313,162)
===================================================================
NET INCOME (LOSS) PER SHARE:
Basic:
Continuing operations $ (0.04) $ 0.02
Discontinued operations (0.01) (0.05)
-------------------------------------------------------------------
Total $ (0.05) $ (0.03)
===================================================================
Diluted:
Continuing operations $ (0.04) $ 0.02
Discontinued operations (0.01) (0.05)
-------------------------------------------------------------------
Total $ (0.05) $ (0.03)
===================================================================
The accompanying notes are an
integral part of these condensed consolidated
financial statements.
6
RENTRAK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended December 31,
-------------------------------------------------
2003 2002
----------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (474,401) $ (313,162)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss on disposal of discontinued operations 128,649 496,599
Compensation expense related to stock repurchase - 326,121
Gain on sale of assets (94,951) -
Tax benefit from stock option exercise 313,007 -
Loss on write-down of lease deposit 400,000 -
Depreciation and amortization 628,848 817,084
Amortization of warrants - 45,000
Recovery of doubtful accounts (305,767) (645,000)
Deferred income taxes (603,768) (135,480)
Change in specific accounts:
Accounts receivable (1,260,330) 2,171,178
Advances to program suppliers (1,267,586) (42,021)
Income tax receivable (61,718) (47,628)
Other assets 585,912 2,021,701
Accounts payable (1,444,090) (2,612,178)
Accrued liabilities & compensation (379,180) (491,855)
Deferred revenue and other liabilities (119,083) (28,157)
----------------------- ----------------------
Net cash provided by (used in) operating activities (3,954,458) 1,562,202
----------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,223,810) (909,872)
Proceeds from sale of 3PF assets 800,000 -
Repayment of note receivable 273,354 -
Disposition (purchase) of other assets 133,177 (97,429)
----------------------- ----------------------
Net cash used in investing activities (17,279) (1,007,301)
----------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations (38,957) (46,243)
Repurchases of common stock - (2,182,269)
Issuance of common stock 870,803 283,593
----------------------- ----------------------
Net cash provided by (used in) financing activities 831,846 (1,944,919)
----------------------- ----------------------
NET CASH USED IN CONTINUING OPERATIONS. (3,139,891) (1,390,018)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS. - 904,646
DECREASE IN CASH AND CASH EQUIVALENTS (3,139,891) (485,372)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 10,063,541 12,028,684
----------------------- ----------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,923,650 $ 11,543,312
======================= ======================
7
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for -
Income taxes, net of refunds received $ 61,718 $ 66,241
NON-CASH TRANSACTIONS
Forgiveness of note receivable in exchange for stock - (377,565)
Disposal of property and equipment through finance lease - 900,000
The accompanying notes are an integral
part of these condensed consolidated
financial statements.
8
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
have been condensed or omitted pursuant to such rules and regulations. The
results of operations for the three-month and nine-month periods ended December
31, 2003 are not necessarily indicative of the results to be expected for the
entire fiscal year ending March 31, 2004. The 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 and
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.
NOTE B: Net Income (Loss) Per Share
Basic net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the periods. Diluted net income (loss) per common share is computed by
dividing net income (loss) by the weighted average shares of common stock
outstanding plus potential common stock arising from dilutive stock options and
warrants.
The weighted average number of shares of common stock and potential common stock
and net income used to compute basic and diluted net income (loss) per share for
the three-month and nine-month periods ended December 31, 2003 and 2002 were as
follows:
9
Note B: Net Income (loss) Per Share
3-Months Ended 9-Months Ended
December 31, 2003 December 31, 2003
----------------------------------- -----------------------------------
Basic Diluted Basic Diluted
Weighted average number of shares of
common stock outstanding used to
compute basic net income (loss)
percommon share 9,630,830 9,630,830 9,563,460 9,563,460
Effect of dilutive stock
options and warrants - 630,426 - -
----------------- ----------------- ----------------- -----------------
Weighted average number of shares of common
stock used to compute diluted net
income (loss) per common share outstanding
and common stock equivalent 9,630,830 10,261,256 9,563,460 9,563,460
================= ================= ================= =================
Net income (loss) used in basic and diluted
net income (loss) per common share:
Continuing operations $ 921,174 $ 921,174 $ (345,752) $ (345,752)
Discontinued operations (128,649) (128,649) (128,649) (128,649)
----------------- ----------------- ----------------- -----------------
Net income (loss) $ 792,525 $ 792,525 $ (474,401) $ (474,401)
================= ================= ================= =================
Net Income (loss) per common share:
Continuing operations $ 0.09 $ 0.09 $ (0.04) $ (0.04)
Discontinued operations (0.01) (0.01) (0.01) (0.01)
----------------- ----------------- ----------------- -----------------
Net Income (loss) per common share $ 0.08 $ 0.08 $ (0.05) $ (0.05)
================= ================= ================= =================
Note B: Net Income (loss) Per Share
3-Months Ended 9-Months Ended
December 31, 2002 December 31, 2002
------------------------------------ ------------------------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Weighted average number of shares of
common stock outstanding used to compute
basic net income (loss) per common share 9,520,705 9,520,705 9,684,744 9,684,744
Effect of dilutive stock
options and warrants - - - -
------------------------------------ ------------------------------------
Weighted average number of shares of
common stock used to compute diluted net
income (loss) per common share outstanding
and common stock equivalents 9,520,705 9,520,705 9,684,744 9,684,744
==================================== ====================================
Net income (loss) used in basic and diluted
net income (loss) per common share:
Continuing operations $ (299,195) $ (299,195) $ 183,437 $ 183,437
Discontinued operations (75,369) (75,369) (496,599) (496,599)
------------------------------------ ------------------------------------
Net income (loss) $ (374,564) $ (374,564) $ (313,162) $ (313,162)
==================================== ====================================
Net Income (loss) per common share:
Continuing operations $ (0.03) $ (0.03) $ 0.02 $ 0.02
Discontinued operations (0.01) (0.01) (0.05) (0.05)
------------------------------------ ------------------------------------
Net Income (loss) per common share $ (0.04) $ (0.04) $ (0.03) $ (0.03)
==================================== ====================================
Options and warrants to purchase approximately 10,000 shares of common stock for
the three month period ended December 31, 2003, 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. Options and warrants to purchase
approximately 2,000,000 shares of common stock for the three month period ended
December 31, 2002, and approximately 1,900,000 and 1,700,000 shares of common
stock for the nine-month periods ended December 31, 2003 and 2002, respectively,
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.
10
NOTE C: Business Segments, Significant Suppliers and Major Customers
The Company classifies its services in three business segments, Entertainment,
Fulfillment and Other. The Entertainment 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, including Box Office
Essentials(TM), Business Intelligence 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. The
Fulfillment business segment consists of 3PF which is a subsidiary of the
Company that provided order processing, fulfillment and inventory management
services to retailers and wholesalers and to other businesses requiring
just-in-time fulfillment. Effective July 1, 2003, the Company completed the sale
of 3PF's operating assets at its Wilmington, Ohio, facility. 3PF ceased all of
its remaining operations at its Columbus, Ohio, facility on July 31, 2003. As of
December 31, 2003, a majority of the identifiable assets of 3PF relate to a note
receivable from a former customer. (See Note E). The Other business segment
formerly included BlowOut Video, Inc. (BlowOut Video), a video retailer, which
the Company discontinued during the three-month period ended June 30, 2002 (See
Note D).
11
Business Segments
- -----------------
Following are the revenues, income (loss) from continuing operations, and
identifiable assets of the Company's continuing business segments for the
periods indicated (unaudited):
Nine Months Ended Nine Months Ended Three Months Ended Three Months Ended
December 31, 2003 December 31, 2002 December 31, 2003 December 31, 2002
--------------------- ------------------- ------------------- -------------------
Revenues before
Intersegment Eliminations:
Entertainment $ 47,737,738 $ 53,315,821 $ 19,402,730 $ 15,499,116
Fulfillment 5,154,443 12,786,135 - 6,314,907
--------------------- ------------------- ------------------- -------------------
$ 52,892,181 $ 66,101,956 $ 19,402,730 $ 21,814,023
--------------------- ------------------- ------------------- -------------------
Intersegment Revenue
Eliminations:
Entertainment $ - $ - $ - $ -
Fulfillment (530,144) (1,620,203) - (534,193)
--------------------- ------------------- ------------------- -------------------
$ (530,144) $ (1,620,203) $ - $ (534,193)
--------------------- ------------------- ------------------- -------------------
Revenues from External
Customers:
Entertainment $ 47,737,738 $ 53,315,821 $ 19,402,730 $ 15,499,116
Fulfillment 4,624,299 11,165,932 - 5,780,714
--------------------- ------------------- ------------------- -------------------
$ 52,362,037 $ 64,481,753 $ 19,402,730 $ 21,279,830
--------------------- ------------------- ------------------- -------------------
Income (Loss) from
Operations:
Entertainment $ 597,012 $ 2,412,778 $ 915,588 $ (201,830)
Fulfillment (1,308,329) (2,199,766) 530,856 (292,101)
--------------------- ------------------- ------------------- -------------------
$ (711,317) $ 213,012 $ 1,446,444 $ (493,931)
--------------------- ------------------- ------------------- -------------------
December 31, 2003 March 31, 2003
--------------------- --------------------
Identifiable Assets:
Entertainment $ 27,702,434 25,801,989
Fulfillment 1,673,248 4,924,444
--------------------- --------------------
$ 29,375,682 $ 30,726,433
--------------------- --------------------
12
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, MGM Home Entertainment, a subsidiary of
Metro Goldwyn Mayer, Inc., Paramount Home Video, Inc., Twentieth Century Fox
Home Entertainment (formerly Fox Video), a subsidiary of Twentieth Century Fox
Film Corporation, Universal Studios Home Video, Inc., and Warner Home Video. For
the three-month period ended December 31, 2003, the Company had one program
supplier whose product generated 35 percent, a second that generated 14 percent,
and a third that generated 13 percent of Rentrak revenue. No other program
supplier provided product that generated more than 10 percent of Rentrak revenue
for the three-month period ended December 31, 2003. One customer accounted for
21 percent of the Company's revenue in the three-month period ended December 31,
2003. For the nine-month period ended December 31, 2003, the Company had one
program supplier whose product generated 17 percent, a second that generated 15
percent, and a third and fourth that each generated 13 percent of Rentrak
revenue. No other program supplier provided product that generated more than 10
percent of Rentrak revenue for the nine-month period ended December 31, 2003. No
customer accounted for more than 10 percent of the Company's revenue in the
nine-month period ended December 31, 2003.
For the three-month period ended December 31, 2002, the Company had one program
supplier whose product generated 19 percent, and a second that generated 14
percent of Rentrak revenue. No other program supplier provided product that
generated more than 10 percent of revenue for the three-month period ended
December 31, 2002. One customer accounted for 24 percent of the Company's
revenue in the three-month period ended December 31, 2002. The agreement with
this customer expired July 31, 2003. For the nine-month period ended December
31, 2002, the Company had one program supplier whose product generated 18
percent, a second that generated 16 percent, and a third and fourth that each
generated 13 percent of Rentrak revenue. No other program supplier provided
product that generated more than 10 percent of Rentrak revenue for the
nine-month period ended December 31, 2002. One customer accounted for 16 percent
of the Company's revenue in the nine-month period ended December 31, 2002. The
agreement with this customer expired July 31, 2003.
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 classify results of BlowOut Video operations
as discontinued.
13
In January 2004, the Company was notified by the purchaser of a portion of
BlowOut Video's operations of their intent to default on a note receivable due
to the Company. As such, the Company provided an approximate $0.2 million
reserve for the remaining balance of this note receivable in the three-month
period ended December 31, 2003. This reserve resulted in a reported loss, net of
tax benefit, from these discontinued operations of $128,649, or $0.01 per share
in the three-month and nine-month periods ended December 31, 2003. BlowOut Video
generated revenues of $0.6 million and a net loss of $75,369, or $0.01 per
share, in the three-month period ended December 31, 2002 and it generated
revenues of $2.5 million and a net loss of $496,599, or $0.05 per share, in the
nine-month period ended December 31, 2002.
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 December 31, 2003, are $482,842
and $803,041, 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 was 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 or
Disposal of Long-Lived Assets. This assessment resulted in 3PF recognizing an
asset impairment 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 covered 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
14
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 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 was used exclusively to service this
customer and as of August 1, 2003 was not in use. During the three-month period
ended December 31, 2003 the Company completed the termination of this 3PF lease
obligation for the Columbus, Ohio distribution facility, effective December 1,
2003, for a cost of $650,000. This lease termination included the assignment of
the sublease 3PF had in place with its former largest customer for approximately
194,000 square feet of this facility. As a result, the Company recorded a
pre-tax credit to 3PF's cost of sales of $650,000 during the three-month period
ended December 31, 2003, representing a partial recovery to the pre-tax charge
the Company made to 3PF's cost of sales in the amount of $1.3 million during the
three-month period ended September 30, 2003. This charge, established in
accordance with FASB Statement No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, represented the Company's estimate of the cost to
terminate this lease at that time. The following table summarizes the lease
termination charges during the fiscal year:
Liability Non-Cash Total
-------------------------- -------------------------- ---------------------
March 31, 2003 $ - $ - $ -
Accrual 900,000 400,000 1,300,000
Reversal (650,000) - (650,000)
Payments - - -
-------------------------- -------------------------- ---------------------
December 31, 2003 $ 250,000 $ 400,000 $ 650,000
========================== ========================== =====================
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 carried a maximum limit of $4,500,000 and was
to expire July 1, 2003. Effective June 16, 2003, the bank extended the line of
credit to the Company through October 1, 2003, under the same general terms and
conditions while the Company and the bank finalized a new line of credit.
Effective September 15, 2003, the bank amended and extended the current line of
credit with the Company through September 1, 2004. The Company elected to reduce
the maximum amount available under the line to
15
$2,000,000. The Company has the choice of either the bank's prime interest rate
minus 0.5 percent or LIBOR plus 2 percent. The credit line is secured by
substantially all of the Company's assets. The terms of the credit agreement
include certain financial covenants requiring: (1) a consolidated net loss for
the fiscal quarter ended September 30, 2003, not to exceed $2,000,000; (2) a
consolidated net profit to be achieved each fiscal quarter beginning with the
quarter ended December 31, 2003 of a minimum of $1.00, and consolidated net
profit not less than $1.00 on an annual basis, determined at fiscal year end
March 31, 2004; and (3) achievement of specified current and leverage financial
ratios. Based upon the financial results reported as of December 31, 2003 and
for the three-month period then ended, the Company has determined it is in
compliance with the financial covenants. At December 31, 2003 and February 12,
2004, the Company had no outstanding borrowings under this agreement.
NOTE G: Stock-Based Compensation
At December 31, 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 Nine Months Ended
---------------------------------------------------------------------------
December 31, December 31,
2003 2002 2003 2002
---------------------------------------------------------------------------
Net income (loss), as reported $ 792,525 $ (374,564) $ (474,401) $ (313,162)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (231,493) (279,953) (616,951) (839,859)
---------------------------------------------------------------------------
Pro forma net income (loss) $ 561,032 $ (654,517) $ (1,091,352) $(1,153,021)
===========================================================================
Net income (loss) per share:
Basic - as reported $ 0.08 $ (0.04) $ (0.05) $ (0.03)
Diluted - as reported $ 0.08 $ (0.04) $ (0.05) $ (0.03)
Basic - pro forma $ 0.06 $ (0.07) $ (0.11) $ (0.12)
Diluted - pro forma $ 0.05 $ (0.07) $ (0.11) $ (0.12)
The effects of applying SFAS 123 for providing proforma disclosures for the
period presented above are not likely to be representative of the effects on
reported net income (loss) for future periods because options often vest over
several years and additional options generally are granted each year.
16
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 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 Pay Per Transaction ("PPT") System successfully, the
financial stability of participating retailers and their performance of their
obligations under the PPT System, non-renewal of the Company's line of credit,
business conditions in the video industry and general economic conditions, both
domestic and international, competitive factors, including increased
competition, expansion of revenue sharing programs other than the PPT System by
program suppliers, new technology, the continued availability of prerecorded
videocassettes ("Cassettes") and digital videodiscs ("DVD's") and video games
from program suppliers and market acceptance of the Company's Essential(TM)
business intelligence products. 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.
Results of Operations
Continuing Operations - Entertainment Operations and Other Continuing
- ---------------------------------------------------------------------
Subsidiaries
- ------------
For the three-month period ended December 31, 2003, total consolidated revenue
decreased $1.9 million, or 9 percent, to $19.4 million from $21.3 million for
the three-month period ended December 31, 2002. For the nine-month period ended
December 31, 2003, total consolidated revenue decreased $12.1 million, or 19
percent, to $52.4 million from $64.5 million for the nine-month period ended
December 31, 2002.
Total revenue includes the following PPT revenue sharing fees in the
Entertainment business segment: order processing fees generated when Cassettes
and DVD's ("Units") are ordered by and distributed to retailers; transaction
fees generated when retailers rent Units to consumers; sell-through fees
generated when retailers sell Units to consumers; communication fees when
retailers' point-of-sale systems are connected to the Company's information
system; and buy out fees generated when retailers purchase Units at the end of
the lease term. Entertainment business segment revenues also include direct
revenue sharing fees from data tracking and reporting services provided by the
Company to program suppliers ("DRS"), revenues from Box Office Essentials(TM),
Supply Chain Essentials(TM), Business Intelligence Essentials(TM), and Home
Video Essentials(TM), part of the Company's Essential(TM) business intelligence
service
17
offerings, as well as charges for Internet services provided by the Company's
subsidiary formovies.com, Inc. In addition, total consolidated revenue includes
the Fulfillment business segment representing charges to customers of the
Company's subsidiary 3PF.COM, Inc. ("3PF"), which provided order processing,
fulfillment and inventory management services to Internet 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 $1.9 million decrease in total consolidated revenues of the Company for the
three-month period ended December 31, 2003 is primarily due to a decrease in 3PF
revenue as 3PF ceased providing services to its customers as of July 31, 2003
(See Note E). 3PF revenues, excluding intercompany activity, decreased from $5.8
million to $0.0 million during the three-month period ended December 31, 2003.
This decrease in the Company's 3PF revenues was partially offset by increases in
its PPT order processing and transaction fees, as well as, increases in revenues
from its DRS services and the Company's Essential(TM) business intelligence
service offerings. Entertainment business segment revenues increased 25 percent
or $3.9 million from $15.5 million for the three month period ended December 31,
2002, to $19.4 million for the three month period ended December 31, 2003, as
PPT Units shipped increased 177 percent during the three-month period ended
December 31, 2003 compared to the three-month period ended December 31, 2002.
This product shipment increase was primarily due to a recent VHS/DVD revenue
sharing program the Company entered into with a new major supplier in
combination with the increase in orders from a large customer for that
supplier's product. The Company expects this increase in orders from this
customer to continue for at least the next three fiscal quarters, representing
the remaining portion of a purchase commitment the customer has with the
Company. The Company also expects increases in orders from other customers for
this supplier's product. The Company's total order processing and transaction
fees from all suppliers' products increased a combined $1.9 million, or 15
percent, for the three-month period ended December 31, 2003 compared to the
three-month period ended December 31, 2002.
The 15 percent revenue increase in order processing and transaction fees
compared to the 177 percent increase in Units shipped during the three-month
period ended December 31, 2003 is primarily attributable to (i) 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 the Participating Retailers' commitment to order and accept an
increased total number of Units, and (ii) a decline in the number of rental
turns of the Units in the Participating Retailers' stores. These programs were
an economic response to the changing dynamics of the home video rental market,
as a result of the shift from the VHS cassette format to the DVD format, and has
resulted in an increased total number of Units leased by Participating Retailers
with a corresponding reduced amount of fees per leased Unit earned by the
Company and
18
the program suppliers. The Company expects this trend in product programs to
continue. In addition, there was an approximate $2.0 million net increase in
other revenues from the PPT business segment. This increase included increases
of approximately $0.6 million in DRS revenues, $0.5 million in sell-through
fees, and $0.9 million in revenues from the Company's business intelligence
service revenues. The Company expects its sell-through revenue increases to
continue as the result of changed terms and conditions in the new product
programs.
The $12.1 million decrease in total consolidated revenues for the nine-month
period ended December 31, 2003 is primarily due to a decrease in 3PF revenue and
PPT System order processing fees and transaction fees. These decreases were
partially offset by an increase in revenues from DRS and the Company's
Essential(TM) business service offerings. 3PF revenues, excluding intercompany
activity, decreased approximately $6.6 million during this same nine-month
period from $11.2 million for the nine-month period ended December 31, 2002 to
$4.6 million for the nine-month period ended December 31, 2003, due to ceasing
3PF operations as of July 31, 2003 (See Note E). Entertainment business segment
revenues decreased despite the fact that PPT Units shipped increased 62 percent
during the nine-month period ended December 31, 2003 as compared to the
nine-month period ended December 31, 2002. Total order processing and
transaction fees decreased a combined $7.3 million during the nine-month period
ended December 31, 2003 compared to the nine-month period ended December 31,
2002. This decrease in Entertainment business segment revenue is primarily
attributable to (i) 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 the Participating Retailers' commitment to order
and accept an increased total number of Units, and (ii) a decline in the number
of rental turns of the Units in the Participating Retailers' stores. These
decreases in order processing and transaction fees were partially offset by the
positive effects from increased shipments of Units attributable to a new VHS/DVD
revenue sharing program with a new major supplier. Additionally, these decreases
in order processing and transaction fees were partially offset by an approximate
$3.1 million net increase in other revenues from the Entertainment business
segment. This increase in other revenues included increases of approximately
$0.6 million in DRS revenues, $0.4 million in sell-through fees, and $2.1
million in revenues from the Company's Essential(TM) business intelligence
services offerings. The Company expects its sell-through revenue increases to
continue as the result of changed terms and conditions in the new product
programs.
Cost of Sales in the Entertainment business segment consists of order processing
costs, transaction costs, sell through costs and freight costs, and represents
the direct costs to produce the PPT revenue sharing revenues. Cost of Sales in
the Fulfillment business segment generally consists of storage fees, receiving
fees, handling fees, special service fees, freight charges and other fees, and
represents the direct costs to produce 3PF revenues. Total cost of sales for the
three-month period ended December 31, 2003 decreased to $14.0 million from $18.0
million for the three-month period ended December 31, 2002, a decrease of $4.0
million, or 22 percent, primarily due to a decrease in 3PF cost of sales of $6.6
million as the result of 3PF ceasing operations July 31, 2003 and recording a
partial
19
recovery of $650,000 to the $1.3 million lease termination charge during the
three month period ended September 30, 2003 (See Note E). This decrease is
partially offset by an approximate $2.6 million increase in cost of sales
primarily attributable to the $2.4 million net increase in Entertainment
business segment order processing, transaction, and sell-through revenues noted
above. Cost of sales as a percent of total revenues was 75 percent for the
three-month period ended December 31, 2003 compared to 80 percent for the
three-month period ended December 31, 2002 for the Entertainment business
segment. The decrease in Entertainment business segment cost of sales as a
percent of total revenues is primarily due to the approximately $0.9 million in
revenues from the Company's Essential(TM) business service offerings during the
three month period ended December 31, 2003, with nominal related cost of sales,
compared to no revenue from these business offerings in the three-month period
ended December 31, 2002. Excluding the increase in Essential(TM) business
service revenues, total cost of sales as a percent of revenues would have been
78 percent for the three-month period ended December 31, 2003.
Total cost of sales for the nine-month period ended December 31, 2003 decreased
to $40.4 million from $53.3 million for the nine-month period ended December 31,
2002, a decrease of $12.9 million, or 24 percent. Cost of sales in the
Fulfillment business segment decreased $7.4 million due to the related decline
in 3PF revenues as a result of ceasing operations July 31, 2003. The cost of
sales decrease includes a net $650,000 charge related to costs of terminating
3PF's Columbus, Ohio, facility lease in the nine-month period ended December 31,
2003 (See Note E). In addition, approximately $5.5 million of the total cost of
sales decrease is primarily attributable to the overall $6.9 million decrease in
Entertainment business segment order processing, transaction, and sell-through
revenues as noted above. The Entertainment business segment cost of sales as a
percent of total revenues was 73 percent for the nine-month period ended
December 31, 2003 compared to 78 percent for the nine-month period ended
December 31, 2002. The decrease in Entertainment business segment cost of sales
as a percent of total revenues is primarily due to the approximately $2.1
million in revenues from the Company's Essential(TM) business service offerings
during the nine month period ended December 31, 2003, with nominal related cost
of sales, compared to no revenue from these business offerings in the nine-month
period ended December 31, 2002. In addition, the decrease is due to the receipt
of a $0.5 million credit from a program supplier during the three-month period
ended June 30, 2003. Excluding the increase in Essential's revenues and the
program supplier credit, total cost of sales as a percent of total revenues
would have been 78 percent for the nine-month period ended December 31, 2003.
Selling, general and administrative expenses in the Entertainment business
segment consist of the indirect costs to sell, administer and manage the PPT
revenue sharing business as well as the Company's Essential(TM) business service
offerings, consisting primarily of, but not limited to, compensation and
benefits, development, marketing and advertising costs, legal and professional
fees, communication costs, depreciation and amortization of tangible fixed
assets and software, as well real and personal property leases. Selling, general
and administrative expenses in the Fulfillment business segment consist of the
indirect
20
costs to sell, administer and manage the 3PF fulfillment business, consisting
primarily of, but not limited to, compensation and benefits, development,
marketing and advertising costs, legal and professional fees, communications
costs, depreciation and amortization of fixed assets and software, as well as
real and personal property leases. Total selling, general and administrative
expenses were $4.0 million for the three-month period ended December 31, 2003,
compared to $3.7 million for the three-month period ended December 31, 2002, an
increase of $0.3 million, or 6 percent. The increase in selling, general and
administrative expenses for the fiscal 2004 three-month period is primarily the
result of: (1) an increase in the Entertainment business segment's overall
overhead costs of approximately $0.7 million during the period, primarily
attributable to costs associated with the Company's Essential(TM) business
service offerings including Box Office Essentials, Business Intelligence
Essentials(TM) and Supply Chain Essentials(TM); and (2) an approximate $0.5
million decrease in 3PF's overall fulfillment overhead costs during the
three-month period ended December 31, 2003 due to ceasing operations July 31,
2003.
Total selling, general and administrative expenses were $12.7 million for the
nine-month period ended December 31, 2003, compared to $11.3 million for the
nine-month period ended December 31, 2002, an increase of $1.4 million, or 13
percent. The increase in selling, general and administrative expenses for the
nine-month period is primarily the result of: (1) an increase in the
Entertainment business segment's overall overhead costs of approximately $2.5
million during the period, of which $1.8 million is attributable to the
Company's Essential(TM) business service offerings noted above; and (2) an
approximate $1.1 million decrease in 3PF's overall fulfillment overhead costs
due to ceasing operations July 31, 2003.
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
December 31, 2003 was $1.4 million compared to an operating loss from continuing
operations of $0.5 million for the three-month period ended December 31, 2002.
The improved operating results for the fiscal 2003 three-month period were
primarily due to the increase in Entertainment business segment revenues and
associated gross margin combined with the reduction of 3PF lease termination
costs of $650,000 (See Note E). Operating loss from continuing operations for
the nine-month period ended December 31, 2003 was $0.7 million. This compares to
operating income of $0.2 million for the nine-month period ended December 31,
2002. The decline in operating results for the fiscal 2004 nine-month period was
primarily due to the decrease in PPT revenue sharing revenues and associated
gross margin combined with the 3PF lease termination costs noted above.
Other income (expense) increased from income of $11 thousand for the three-month
period ended December 31, 2002 to $39 thousand for the three-month period ended
December 31, 2003, primarily due to interest earned on the note
21
receivable due from one of 3PF's clients (See Note E). Other income (expense)
increased from income of $83 thousand for the nine-month period ended December
31, 2002 to $154 thousand for the nine-month period ended December 31, 2003,
primarily due to interest earned on the note receivable due from one of 3PF's
clients (See Note E).
The effective tax rate during the three and nine-month periods ended December
31, 2003 and 2002 was 38 percent.
As a result, for the three-month period ended December 31, 2003, the Company
recorded net income from continuing operations of $0.9 million, or 5 percent of
total revenue, compared to net loss from continuing operations of $0.3 million,
or 1 percent of total revenue, in the three-month period ended December 31,
2002. The increase in net income from continuing operations is primarily
attributable to the increase in revenues and associated gross margin from the
Entertainment business segment and the reduction of costs associated with
closing 3PF operations and recording a partial recovery of $650,000 to the prior
period lease termination charge as noted above. For the nine-month period ended
December 31, 2003, the Company recorded net loss from continuing operations of
$0.3 million, or less than 1 percent of total revenue, compared to income from
continuing operations of $0.2 million, or less than 1 percent of total revenue,
in the nine-month period ended December 31, 2002. The decrease in net income
from continuing operations is primarily attributable to the decrease in revenues
and associated gross margin from the Entertainment business segment as noted
above and the costs associated with closing 3PF operations.
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. In January 2004, the Company was notified by the purchaser of a
portion of BlowOut Video's operations of their intent to default on a note
receivable due to the Company. As such, the Company provided an approximate $0.2
million reserve for the remaining balance of this note receivable in the
three-month period ended December 31, 2003. This reserve resulted in a reported
loss, net of tax benefit, from these discontinued operations of $128,649, or
$0.01 per share in the three-month and nine-month periods ended December 31,
2003. BlowOut Video generated revenues of $0.6 million and a net loss of
$75,369, or $0.01, per share, in the three-month period ended December 31, 2002
and it generated revenues of $2.5 million and a net loss of $496,599, or $0.05
per share, in the nine-month period ended December 31, 2002. Management does not
anticipate any further significant activities or events related to the
discontinued operations.
22
Financial Condition
- -------------------
At December 31, 2003, total assets were $29.4 million, a decrease of $1.3
million from $30.7 million at March 31, 2003. As of December 31, 2003, cash
decreased $3.2 million to $6.9 million from $10.1 million at March 31, 2003 (see
the Consolidated Statements of Cash Flows in the accompanying Consolidated
Financial Statements). The reduction in cash balance is primarily attributable
to (i) terms of various combined VHS/DVD revenue-sharing agreements and reflects
differences in the timing of the Company's collection of revenue-sharing funds
from participating retailers and the Company's remittance of the portion of
those funds owed to program suppliers, and (ii) the continued investment
required for the development of the Company's Essential(TM) business service
offerings. Net accounts receivable increased $1.6 million from $9.9 million at
March 31, 2003 to $11.5 million at December 31, 2003, primarily due to an
increase in PPT revenues. At December 31, 2003, advances to program suppliers
were $1.7 million, an increase of $1.3 million from $0.4 million, primarily due
to the timing of release dates for certain titles and the addition of a new
program supplier. These amounts represent the unearned portion of guarantees
with certain program suppliers. In some cases, these guarantees are paid in
advance. At December 31, 2003, other current assets were $1.5 million, a
decrease of $0.7 million from $2.2 million at March 31, 2003. The decrease in
other current assets is due to a decline in pre-paid expenses, payments received
on a note receivable, and decreased deferred costs due to a lower average order
processing fee per unit. Other assets decreased $0.9 million from $1.9 million
at March 31, 2003 to $1.0 million at December 31, 2003. The decrease in other
assets is associated with the write-off of the security deposit on 3PF's
Columbus facility (See Note E), and the reserve established on the note
receivable related to the Blowout Video store sale (See Note D).
At December 31, 2003, total liabilities were $13.2 million, a decrease of $2.1
million from $15.3 million at March 31, 2003. Accounts payable decreased $1.4
million from $12.7 million at March 31, 2003 to $11.3 million at December 31,
2003, primarily due to the timing of program supplier and other vendor payments.
Accrued compensation decreased $0.1 million from $0.6 million at March 31, 2003,
to $0.5 million at December 31, 2003, in part due to 3PF's ceasing operations as
of July 31, 2003.
At December 31, 2003, total stockholders' equity was $16.1 million, an increase
of $0.7 million from the $15.4 million at March 31, 2003. Common stock and
capital in excess of par value increased, on a combined basis, $1.2 million from
$39.7 million at March 31, 2003 to $40.9 million at December 31, 2003, primarily
due to the exercise of employee stock options. Accumulated deficit increased
$0.5 million from $24.4 million at March 31, 2003 to $24.9 million at December
31, 2003 due to net loss from the nine-month period.
23
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, the Company had cash of $6.9 million compared to $10.1
million at March 31, 2003. The Company's current ratio (current assets/current
liabilities) was 1.95 at December 31, 2003 compared to 1.74 at March 31, 2003.
In May 2002, the Company entered into an agreement for a new secured revolving
line of credit. The line of credit carried a maximum limit of $4,500,000 and was
to expire July 1, 2003. Effective June 16, 2003, the bank extended the line of
credit to the Company through October 1, 2003, under the same general terms and
conditions while the Company and the bank finalized a new line of credit.
Effective September 15, 2003, the bank amended and extended the current line of
credit with the Company through September 1, 2004. The Company elected to reduce
the maximum amount available under the line to $2,000,000. The Company has the
choice of either the bank's prime interest rate minus 0.5 percent or LIBOR plus
2 percent. The credit line is secured by substantially all of the Company's
assets. The terms of the credit agreement include certain financial covenants
requiring: (1) a consolidated net loss for the fiscal quarter ended September
30, 2003, not to exceed $2,000,000; (2) a consolidated net profit to be achieved
each fiscal quarter beginning with the quarter ending December 31, 2003 of a
minimum of $1.00, and consolidated net profit not less than $1.00 on an annual
basis, determined at fiscal year end March 31, 2004; and (3) achievement of
specified current and leverage financial ratios. Based upon the financial
results reported as of December 31, 2003 and for the three-month period then
ended, the Company has determined it is in compliance with the financial
covenants. At December 31, 2003 and February 12, 2004, 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 existing entertainment
operations, the development of its new business intelligence services, and other
cash requirements for the fiscal year ending March 31, 2004.
Rentrak Corporation
Table of Contractual Obligations
As of December 31, 2003
- -----------------------------------------------------------------------------------------------------------
Contractual Obligations Payments due by period
- -----------------------------------------------------------------------------------------------------------
Less than 1 - 3 3 - 5 More than
Total 1 Year Years Years 5 Years
- -----------------------------------------------------------------------------------------------------------
Capital Lease Obligations $ 226,535 $ 110,508 $ 116,027 $ - $ -
- -----------------------------------------------------------------------------------------------------------
Operating Lease Obligations $ 2,299,932 $ 805,224 $ 1,494,708 $ - $ -
- -----------------------------------------------------------------------------------------------------------
Purchase Obligations $ 1,024,037 $ 1,024,037 $ - $ - $ -
- -----------------------------------------------------------------------------------------------------------
Executive Compensation $ 2,520,059 $ 1,554,650 $ 965,409 $ - $ -
- -----------------------------------------------------------------------------------------------------------
Total $ 6,070,563 $ 3,494,419 $ 2,576,144 $ - $ -
- -----------------------------------------------------------------------------------------------------------
24
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.
Studio Reserves
- ---------------
The Company has entered into guarantee contracts with certain program suppliers
providing titles for distribution under the PPT system. These contracts
guarantee minimum payments to the suppliers. 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.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company has considered the provisions of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments." The Company
had no holdings of derivative financial or commodity instruments at December 31,
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 December 31, 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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time a party to legal proceedings and claims that
arise in the ordinary course of its business, including, without limitation,
collection matters with respect to customers. In the opinion of management, the
amount of any ultimate liability with respect to these types of actions is not
expected to materially affect the financial position, results of operations or
cash flows of the Company as a whole.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See the Exhibit Index on page 30 hereof.
(b) Reports on Form 8-K . No reports on Form 8-K were filed during the quarter
ended December 31, 2003.
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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 of February, 2004.
RENTRAK CORPORATION
By:
----------------------------------
Mark L. Thoenes
Chief Financial Officer
Signing on behalf of the registrant
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EXHIBIT INDEX
The following exhibits are filed herewith:
Exhibit
Number Exhibit
- ------ ------
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a).
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a).
32.1 Certifications pursuant to 18 U.S.C. Section 1350.
30