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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 - K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for fiscal year ended March 31, 2002 or Transition report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number 0-15159
RENTRAK CORPORATION
(exact name of registrant as specified in its charter)
Oregon 93-0780536
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
7700 NE Ambassador Place, Portland, Oregon 97220
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (503) 284-7581
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common stock $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K [ ]
As of June 24, 2002, the aggregate market value of the registrant's common stock
held by non-affiliates of the registrant, based on the last sales price as
reported by NASDAQ, was $50,412,605.
As of June 24, 2002, the Registrant had 9,827,231 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR THE 2002 ANNUAL MEETING OF THE
SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART II and III OF THIS FORM
10-K
1
TABLE OF CONTENTS
Item PART I Page
1. Business 3
2. Properties 8
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 9
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 9
6. Selected Financial Data 11
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
7A. Quantitative and Qualitative Disclosures About Market Risk 22
8. Financial Statements and Supplementary Data 23
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 53
PART III
10. Directors and Executive Officers of the Registrant 53
11. Executive Compensation 53
12. Security Ownership of Certain Beneficial Owners 54
and Management
13. Certain Relationships and Related Transactions 54
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 55
2
PART I
ITEM 1. BUSINESS
GENERAL
The Company's primary business is the collection, processing, analysis and
presentation of rental and sales information regarding videocassettes and
digital videodiscs ("DVD's") leased to home video specialty stores and other
retailers by way of its Pay Per Transaction system (the "PPT System"). Under the
Company's PPT System, home video specialty stores and other retailers that rent
videocassettes and DVD's ("Units") to consumers ("Retailers"), including grocery
stores and convenience stores, lease Units, and other media from Rentrak for a
low up-front fee and share a portion of each retail rental transaction with the
Company. The Company's PPT System generated 71 percent, 71 percent and 83
percent of total revenues in fiscal years 2002, 2001 and 2000, respectively.
The Company engages in additional lines of business through the following
subsidiaries:
3PF.COM, Inc. (formerly ComAlliance), provides order processing, inventory
management, and fulfillment services to Internet retailers and wholesalers and
to other businesses requiring just-in-time fulfillment. 3PF.COM, Inc.'s Web-site
can be accessed at www.3PF.COM.
BlowOut Video, Inc., sells videocassettes and DVD's ("Units") through its
Website www.blowoutvideo.com, and through three retail outlets.
PAY-PER-TRANSACTION SYSTEM
The Company distributes Units principally to home video specialty stores through
its PPT System. The PPT System enables Retailers to obtain Units at a
significantly lower initial cost than if they purchased the Units from
traditional video distributors.
Under the PPT System, after the Retailer is approved for participation in the
PPT System, Units are leased to the Retailer for a low initial fee (the "Order
Processing Fee") plus a percentage of revenues generated by the Retailer from
rentals to consumers (the "Transaction Fee"). The Company retains a portion of
each Order Processing Fee and Transaction Fee and remits the remainder to the
appropriate motion picture studios or other licensee or owner of the rights to
certain video programming ("Program Suppliers") that hold the distribution
rights to the Units. Due to the lower cost of "bringing Units in the door",
Retailers generally obtain a greater number of Units under the PPT System than
the traditional distribution method. The intended benefit to the Retailer is a
higher volume of rental transactions, as well as a reduction in capital cost and
risk. The intended benefit to the Program Supplier is an increase in the total
number of Units shipped, resulting in increased revenues and opportunity for
profit. The intended benefit to the consumer is the potential of finding more
copies of certain newly released hit titles and a greater selection of other
titles at Retailers participating in the PPT System ("Participating Retailers").
The Company markets its PPT System throughout the United States and Canada.
Following the sale of a 5.6 percent interest in Rentrak Japan Co., Ltd.
("Rentrak Japan"), a Japanese corporation which markets a similar service to
video retailers in Japan, in October 2001, the Company no longer received
revenues from the Asian markets.
In February 1998, the Company entered into a Shareholders Agreement and a PPT
License
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Agreement with Columbus Holdings Limited and Rentrak UK Limited to develop the
Company's PPT distribution and information processing business in the United
Kingdom through Rentrak UK. The Company presently owns a 92 percent equity
interest in Rentrak UK. As of March 31, 2000, Rentrak UK was not generating
income or positive cash flow and the Company's investment of $222,000 was
written off. During the year ended March 31, 2001, Rentrak UK continued to
generate no income or cash flow. During the year ended March 31, 2002, Rentrak
UK improved its performance producing minimal income and cash flow. Management
of the Company has made changes to decrease the cost of operations, including
space and staffing costs, and it is continuing to closely evaluate the financial
performance of operations. Management is considering various alternatives
including selling or closing down Rentrak UK's operations.
The Company currently offers substantially all of the titles of a number of
Program Suppliers, including Buena Vista Pictures Distribution, Inc., a
subsidiary of The Walt Disney Company, Paramount Home Video, Inc., Universal
Studios Home Video, Inc., Twentieth Century Fox Home Entertainment (formerly Fox
Video), a subsidiary of Twentieth Century Fox Film Corporation and MGM Home
Entertainment, a subsidiary of the Metro Goldman Meyer Company. The Company's
arrangements with Program Suppliers are of varying duration, scope and
formality. In some cases, the Company has obtained Units pursuant to contracts
or arrangements with Program Suppliers on a title-by-title basis and in other
cases the contracts or arrangements provide that all titles released for
distribution by such Program Supplier will be provided to the Company for the
PPT System. Many of the Company's agreements with Program Suppliers, including
all major Program Suppliers, may be terminated upon relatively short notice.
Therefore, there is no assurance that any of the Program Suppliers will continue
to distribute Units through the PPT System, continue to have available for
distribution titles which the Company can distribute on a profitable basis, or
continue to remain in business. Even if titles are otherwise available from
Program Suppliers to the Company, there is no assurance that they will be made
available on terms acceptable to the Company. During the last three years, the
Company has not experienced any material difficulty acquiring suitable Units for
the Company's markets on acceptable terms and conditions from Program Suppliers
that have agreed to provide the same to the Company. The Company has one Program
Supplier that supplied product that generated 17 percent, a second that
generated 15 percent, and a third that generated 13 percent of Rentrak revenues
for the year ended March 31, 2002. There were no other Program Suppliers who
provided product that generated more than 10 percent of revenues for the year
ended March 31, 2002.
The Company currently receives a significant amount of product from three
Program Suppliers. Although management does not believe that these relationships
will be terminated in the near term, a loss of any of these suppliers could have
an adverse effect on the Company's operating results.
Certain Program Suppliers have requested, and the Company has provided,
financial or performance commitments from the Company, including advances,
warrants, or guarantees, as a condition of obtaining certain titles. The Company
determines whether to provide such commitments on a case-by-case basis,
depending upon the Program Supplier's success with such titles prior to home
video distribution and the Company's assessment of expected success in home
rental distribution. The Company intends to continue this practice of providing
such commitments and there is no assurance that this practice will not in the
future result in losses which may be material.
4
DISTRIBUTION OF CASSETTES AND DVD'S ("UNITS")
The Company's proprietary Rentrak Profit Maker Software (the "RPM Software")
allows Participating Retailers to order Units through their Point of Sale
("POS") system software and provides the Participating Retailers with
substantial information regarding all offered titles. Ordering occurs via a
networked computer interface. To further assist the Participating Retailers in
ordering, the Company also produces a monthly product catalogue called "Ontrak."
To be competitive, Retailers must be able to rent their Units on the "street
date" announced by the Program Supplier for the title. Rentrak has contracted
with its subsidiary 3PF.COM to distribute Rentrak's Units via overnight air
courier to assure delivery to Participating Retailers on the street date. The
freight costs of such distribution comprise a portion of the Company's cost of
sales.
COMPUTER OPERATIONS
To participate in the Company's PPT System, Retailers must install Rentrak
approved computer software and hardware to process all of their rental and sale
transactions. Participating Retailers are required to use one of the POS
software vendors approved by the Company as conforming to the Company's
specifications. The Company's RPM Software resides on the Retailer's POS
computer system and transmits a record of PPT transactions to the Company over a
telecommunications network. The RPM Software also assists the Retailer in
ordering newly released titles and in managing the inventory of Units.
The Company's information system processes these transactions and prepares
reports for Program Suppliers and Participating Retailers. In addition, it
determines variations from statistical norms for potential audit action. The
Company's information system also transmits information on new titles and
confirms orders made to the RPM Software at the Retailer location.
RETAILER AUDITING
From time to time, the Company audits Participating Retailers in order to verify
that they are reporting all rentals and sales of Units on a consistent, accurate
and timely basis. Several different types of exception reports are produced
weekly. These reports are designed to identify any Participating Retailers who
vary from the Company's statistical norms. Depending upon the results of the
Company's analysis of the reports, the Company may conduct an in-store audit.
Audits may be performed with or without notice and any refusal to allow such an
audit can be cause for immediate termination from the PPT System. If audit
violations are found, the Participating Retailer is subject to fines, audit
fees, immediate removal from the PPT System and/or repossession of all leased
Units.
SEASONALITY
The Company believes that the home video industry is seasonal because Program
Suppliers tend to introduce hit titles at two periods of the year, early summer
and Christmas. Since the release to home video usually follows the theatrical
release by approximately six months (although significant variations occur on
certain titles), the seasonal peaks for home video also generally occur in early
summer and at Christmas. The Company believes its volume of rental transactions
reflects, in part, this seasonal pattern, although the growth of Program
Suppliers, titles available to the Company, and Participating Retailers may tend
to obscure any seasonal effect. The Company believes such seasonal variations
may be reflected in future quarterly patterns of its revenues and
5
earnings.
RETAILER FINANCING PROGRAM
In 1992, the Company established a Retailer Loan Program whereby, on a selective
basis, it provided financing to Participating Retailers that the Company
believed had the potential for substantial growth in the industry. The
underlying rationale for this program was the belief that the Company could
expand its business and at the same time participate in the rapid growth
experienced by the video retailers in which it invested. During fiscal 2001, the
Company discontinued new financings under this program and provided reserves of
$6.6 million representing the entire outstanding balance of the program loans.
The Company continues to seek enforcement of agreements entered into in
connection with this program in accordance with their terms to the extent
practicable.
COMPETITION
The Cassette and DVD distribution business is a highly competitive industry that
is rapidly changing. The traditional method of distributing these Cassettes and
DVD's ("Units") to Retailers is through purchase transactions; i.e., a Retailer
purchases Units from a distributor and then offers the Units for rental or sale
to the general public. As described in greater detail above (see
"Pay-Per-Transaction System"), the Company's PPT System offers Retailers an
alternative method of obtaining Units. Accordingly, the Company faces intense
competition from all of the traditional distributors, including Ingram
Entertainment, Inc., VPD, and Video One Canada, Ltd. These and other traditional
distributors have extensive distribution networks, long-standing relationships
with Program Suppliers and Retailers, and, in some cases, significantly greater
financial resources than the Company.
In the last two years certain traditional distributors have taken steps to offer
Units to Retailers on a revenue sharing basis. For example, several traditional
distributors have executed licensing agreements with Supercomm, Inc.
("Supercomm"), a wholly-owned subsidiary of The Walt Disney Company, to market
product on revenue sharing terms. Several traditional distributors have also
executed revenue sharing agreements with motion picture studios ("Studios").
The Company also competes with Supercomm on two levels: (1) domestically - for
processing data for certain Studios' direct relationships with Blockbuster Video
and other Retailers; and (2) internationally in certain markets. Supercomm also
processes data for traditional distributors such as Ingram who then compete with
the Company for revenue sharing Units as well as traditional Units.
The Company also faces direct competition from the Studios. Beginning in 1997,
several major Studios offered Retailers discounted pricing if such Retailers
substantially increased the quantity of Units purchased. Also, some major
Studios have offered Units to Retailers on a lease basis. In addition, all major
Studios sell Units directly to major Retailers including Blockbuster, the
world's largest chain of home video specialty stores. The Company believes all
of the major Studios have executed direct revenue sharing agreements with
Blockbuster and Hollywood Entertainment, the world's second largest chain of
home video specialty stores. The Company also believes that certain Studios have
executed direct revenue sharing agreements with several other large Retailers.
The Company does not believe that the Studios have executed direct revenue
sharing agreements with other smaller Retailers, but there can be no assurance
that they will not do so in the future.
6
The Studios also compete with the Company by releasing certain Unit titles on a
"sell-through" basis; i.e., they bypass the traditional rental period by selling
the Units directly to consumers at a price of approximately $9.95 -- $19.95. To
date, such "sell-through" distribution has generally been limited to certain
newly released hit titles with wide general family appeal. However, because the
Company's PPT business is partially dependent upon the existence of a rental
period, a shift toward such "sell-through" distribution, particularly with
respect to popular titles, could have a material adverse effect on the Company's
business.
The Company also competes with businesses that use alternative distribution
methods to provide video entertainment directly to consumers, such as the
following: (1) direct broadcast satellite transmission systems; (2) traditional
cable television systems; (3) pay-per-view cable television systems; and (4)
delivery of programming via the Internet. Each of these distribution methods
employs digital compression techniques to increase the number of channels
available to consumers and, therefore, the number of movies that may be
transmitted. Technological improvements in this distribution method,
particularly "video-on-demand," may make this option more attractive to
consumers and thereby materially diminish the demand for Unit rentals. Such a
consequence could have a material adverse effect on the Company's business.
FOREIGN OPERATIONS
On December 20, 1989, the Company entered into an agreement with Culture
Convenience Club, Co., Ltd. ("CCC"), a Japanese corporation, which is Japan's
largest video specialty retailer. Pursuant to the agreement, the parties formed
Rentrak Japan, a Japanese corporation. Rentrak Japan was formed to implement the
PPT System in Japan. The Company provided its PPT technology and the use of
certain trademarks and service marks to Rentrak Japan, and CCC provided
management personnel, operating capital, and adaptation of the PPT technology to
meet Japanese requirements.
Beginning in 1994, the Company became entitled to a royalty of 1.67% for all
sales of up to $47,905,000 plus one-half of one percent of sales greater than
$47,905,000 in each royalty year (June 1 - May 31). Additionally, the Company
received one-time royalty payments of $1,000,000 in fiscal year 1995 and
$1,000,000 in fiscal year 1999. In December 1999, the Company received a
prepayment of $2,500,000 in exchange for $4,000,000 of credit related to the
annual royalty, which was recognized in revenues as royalties were earned under
the terms of the contract.
Effective April 2, 2001 the Company and Rentrak Japan entered into a
restructuring agreement of their relationship. The Company transferred exclusive
rights to implement its PPT System within specified countries in the Far East,
including related trademark and other intellectual property rights, to Rentrak
Japan. In exchange for the transfer, Rentrak Japan made a lump sum payment of
$5.7 million to the Company and released certain of the Company's payment
obligations totaling $1.3 million. As part of the transaction, Rentrak Japan's
obligation to pay annual royalties to the Company in connection with use of its
PPT System was terminated. (See Note 1(b) of the Notes to the Consolidated
Financial Statements.)
TRADEMARKS, COPYRIGHTS, AND PROPRIETARY RIGHTS
The Company has registered its "RENTRAK", "PPT", "Pay Per Transaction",
"Ontrak", "BudgetMaker", "DataTrak", "Prize Find" , "Blowout Video", "Fastrak",
"GameTrak", "RPM", "Videolink+", "Unless You're Rich Enough Already",
"Sportrak", "Movies For The Hungry Mind", "VidAlert", "Active Home Video",
"Movie Wizard", and "Gotta Have It Guarantee" marks under federal trademark
laws. The Company has applied and obtained registered status in several
7
foreign countries for many of its trademarks. The Company claims a copyright in
its RPM Software and considers it to be proprietary.
EMPLOYEES
As of March 31, 2002, including all subsidiaries, the Company employed 284
active employees. The Company considers its relations with its employees to be
good.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See Note 12 of the Notes to the Consolidated Financial Statements for
information regarding the Company's business segments.
ITEM 2. PROPERTIES
The Company currently maintains its headquarter offices in Portland, Oregon
where it leases 48,807 square feet of office space. The lease began on January
1, 1997 and expires on December 31, 2006. The Company's subsidiary, 3PF.COM,
Inc., maintains two distribution facilities in Wilmington, Ohio and one in
Columbus, Ohio where it leases 102,400, 121,600 and 388,264 square feet,
respectively. These distribution facilities also include administrative office
space. These three distribution facility leases expire on June 30, 2002,
December 31, 2010 and February 28, 2008, respectively. Management believes its
office space and distribution facility space is adequate and suitable for its
current operations. However, management does recognize that the Company
currently has excess distribution facility capacity which it is addressing by
attracting new clients and tenants. Management does not anticipate a problem in
obtaining additional suitable space to meet its needs as necessary.
ITEM 3. LEGAL PROCEEDINGS
On November 15, 2000, 3PF.COM, Inc., a subsidiary of the Company, filed a
proceeding with the American Arbitration Association against Reel.com, Inc., a
division of Hollywood Entertainment Corporation ("Hollywood"), for breach of a
servicing, warehousing, and distribution agreement, and against Hollywood in
connection with its guarantee of the obligations of Reel.com, Inc., under the
agreement. 3PF.COM, Inc., sought damages in excess of $3.3 million, together
with prejudgment interest and attorney fees. On August 6, 2001, Hollywood filed
a proceeding with the American Arbitration Association against the Company for
the alleged breach of a settlement agreement among the Company, Hollywood, and
two individuals dated January 23, 2000, relating to the Company's obligation to
provide Hollywood with documents and data with regard to Hollywood's obligation
to indemnify the Company against claims by a movie studio. Hollywood sought
damages in the amount of $2.0 million. Both proceedings were settled in April
2002 by a confidential settlement agreement pursuant to which Hollywood agreed
to pay the Company $1.925 million.
On February 20, 2001, the Company filed a complaint against Ron Berger, Chairman
and Chief Executive Officer and a director of Rentrak until September 2000, in
the Circuit Court of the State of Oregon for the County of Multnomah (No.
0102-01814), seeking cancellation of shares of Rentrak common stock acquired by
Mr. Berger through an option loan program offered to the Company's officers in
June 2000 and damages for the conversion of an automobile and computer equipment
plus an over-advance payment of business expenses less setoffs. On or about
March 29, 2001, Mr. Berger filed a counterclaim seeking damages of approximately
8
$1.76 million plus attorney fees from Rentrak for conversion of Mr. Berger's
director's fees and dividends from Rentrak Japan, breach of an agreement to
compensate Mr. Berger for cancellation of options to purchase Rentrak stock,
failure to pay accumulated wages and compensation, breach of an agreement to
provide options to purchase stock in Rentrak's subsidiary 3PF.COM, Inc., and
failure to provide certain insurance benefits. On June 15, 2001, the Company
filed an amended complaint alleging tort claims arising out of Mr. Berger's
activities as an officer and director of the Company involving Video City, Inc.,
and seeking damages of not less than $6.0 million. Effective May 6, 2002, the
parties resolved the litigation pursuant to a confidential settlement agreement
pursuant to which the parties agreed to dismiss their respective lawsuits and to
seek nothing further from the other in litigation.
The Company may from time to time also be a party to legal proceedings and
claims that arise in the ordinary course of its business. In the opinion of
management, the amount of any ultimate liability with respect to these potential
actions is not expected to materially affect the financial position or results
of operations of the Company as a whole. The Company currently has no
outstanding litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock, $.001 par value, is traded on the Nasdaq National
Market, where its prices are quoted under the symbol "RENT". As of May 31, 2002
there were approximately 314 holders of record of the Company's common stock. On
May 31, 2002, the closing sales price of the Company's common stock as quoted on
the Nasdaq National Market was $5.90.
EQUITY COMPENSATION PLAN INFORMATION
The information under the heading "Equity Compensation Plan Information" in the
Company's Definitive Proxy Statement for its 2002 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended, is incorporated
herein by reference.
9
The following table sets forth the reported high and low sales prices of the
Company's common stock for the periods indicated as regularly quoted on the
Nasdaq National Market.
QUARTER ENDED HIGH LOW
- --------------------- ------- -------
JUNE 30, 2000 $5.88 $3.12
- --------------------- ------- -------
SEPTEMBER 30, 2000 $4.16 $3.00
- --------------------- ------- -------
DECEMBER 31, 2000 $3.69 $1.50
- --------------------- ------- -------
MARCH 31, 2001 $4.09 $2.03
- --------------------- ------- -------
JUNE 30, 2001 $4.90 $2.99
- --------------------- ------- -------
SEPTEMBER 30, 2001 $3.74 $2.86
- --------------------- ------- -------
DECEMBER 31, 2001 $5.93 $3.00
- --------------------- ------- -------
MARCH 31, 2002 $8.00 $5.50
- --------------------- ------- -------
The Company issued a total of 45,000 shares of its common stock in March 2002 to
a former financial advisor pursuant to a cashless exercise and in full
satisfaction of common stock purchase warrants related to a total of 200,000
shares of common stock issued in connection with financial advisory engagement s
in 1997 and 1999. The Company relied on the exemption from registration provided
by Section 4(2) of the Securities Act of 1933 with respect to the issuance of
shares.
DIVIDENDS
Holders of the Company's common stock are entitled to receive dividends if, as,
and when declared by the Board of Directors out of funds legally available
therefore, subject to the dividend and liquidation rights of any preferred stock
that may be issued.
No cash dividends have been paid or declared during the last five fiscal years.
The present policy of the Board of Directors is to retain earnings to provide
funds for operation and expansion of the Company's business. The Company does
not intend to pay cash dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------------
(In Thousands Except Per Share Amounts)
Year Ended March 31,
2002 2001 2000 1999 1998
---------------------------------------------------------------------------------
Statement of Operations Data
Net revenues:
Order processing fees $ 16,648 $ 18,563 $ 23,086 $ 22,420 $ 25,313
Transaction fees 44,114 55,752 61,487 72,835 78,671
Sell-through fees 6,645 6,578 7,811 11,347 9,383
Other (2) 35,207 36,974 22,788 19,043 11,060
---------------------------------------------------------------------------------
Total net revenues 102,614 117,887 115,172 125,645 124,427
Cost of sales 76,812 93,600 91,706 103,943 100,974
---------------------------------------------------------------------------------
Gross profit
25,802 24,287 23,466 21,702 23,453
Selling and administrative 20,754 34,455 28,237 17,853 16,248
expense
Net (gain) loss on litigation (1,563) (225) (7,792) 1,099 -
settlements
Other income (expense) (2) 7,895 (2,149) (1,519) 597 652
---------------------------------------------------------------------------------
Income (loss) from continuing operations before
discontinued operations and (provision) benefit
for income taxes 14,506 (12,092) 1,502 3,347 7,857
Income tax (provision) benefit (5,512) 4,515 (451) (1,304) (3,199)
---------------------------------------------------------------------------------
Income (loss) from continuing operations before
discontinued operations 8,994 (7,577) 1,051 2,043 4,658
Discontinued Operations: (1)
Gain on disposal of subsidiaries - - 2,374 - -
---------------------------------------------------------------------------------
Net income (loss) $ 8,994 $ (7,577) $ 3,425 $ 2,043 $ 4,658
---------------------------------------------------------------------------------
Earnings (loss) per share
Diluted
Continuing operations $ 0.85 $ (0.63) $ 0.10 $ 0.18 $ 0.41
Discontinued operations 0.22
---------------------------------------------------------------------------------
Earnings (loss) per common share $ 0.85 $ (0.63) $ 0.32 $ 0.18 $ 0.41
=================================================================================
Common shares and common share equivalents
used to compute diluted EPS 10,613 11,985 10,759 11,066 11,445
---------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------------------------------
Balance Sheet Data
Working Capital $ 11,636 $ 3,643 $ 9,871 $ 4,586 $ 1,062
Total Assets 38,612 39,126 50,473 49,457 51,609
Long-term Liabilities 496 1,175 1,677 - -
Stockholders' Equity 17,278 11,387 18,081 14,292 13,254
(1) See Note 13 of the Notes to the Consolidated Financial Statements.
(2) See Note 1(b) of the Notes to the Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain information included in the Annual Report on Form 10-K (including
Management's Discussion and Analysis of Financial Condition and Results of
Operations regarding revenue growth, gross profit margin and liquidity)
constitute forward-looking statements that involve a number of risks and
uncertainties. Forward looking statements may be identified by the use of
forward-looking words such as "may", "will", "expects", "intends",
"anticipates", "estimates", or "continues" or the negative thereof or variations
thereon or comparable terminology. The following factors are among the factors
that could cause actual results to differ materially from the forward-looking
statements: the Company's ability to continue to market the PPT System
successfully, the financial stability of the Participating Retailers and their
performance of their obligations under the PPT System, non-renewal of the
Company's line of credit, business conditions and growth in the video industry
and general economic conditions, both domestic and international; competitive
factors, including increased competition, expansion of revenue sharing programs
other than the PPT System by Program Suppliers, new technology, and the
continued availability of Cassettes from Program Suppliers. This Annual Report
on Form 10-K further describes some of these factors.
RESULTS OF OPERATIONS
RENTRAK CORPORATION
STATEMENTS OF OPERATIONS
For The Years Ended March 31, 2002, 2001, and 2000
2002 2001 2000
-------------------------------------------------------------
REVENUES $ 102,614,147 $ 117,886,955 $ 115,172,414
OPERATING COSTS AND EXPENSES
Cost of sales 76,812,474 93,600,177 91,706,290
Selling, general, and administrative 20,753,587 34,455,048 28,236,763
Net gain from litigation settlements (1,563,153) (225,000) (7,791,880)
-------------------------------------------------------------
96,002,908 127,830,225 112,151,173
-------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 6,611,239 (9,943,270) 3,021,241
Other income (expense) 7,895,263 (2,148,673) (1,519,378)
-------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX (PROVISION) BENEFIT
AND GAIN FROM DISPOSAL OF DISCONTINUED
OPERATIONS 14,506,502 (12,091,943) 1,501,863
Income tax (provision) benefit (5,512,471) 4,514,575 (450,559)
-------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 8,994,031 (7,577,368) 1,051,304
Gain from disposal of discontinued operations
including income tax benefit of $483,502 - - 2,373,502
-------------------------------------------------------------
NET INCOME (LOSS) $ 8,994,031 $ (7,577,368) $ 3,424,806
=============================================================
12
FISCAL 2002 COMPARED TO FISCAL 2001
PPT OPERATIONS AND OTHER CONTINUING SUBSIDIARIES
For the year ended March 31, 2002, the Company's total consolidated revenue
decreased $15.3 million to $102.6 million from $117.9 million in the prior
fiscal year. Total consolidated revenue includes the following PPT System fees
in the PPT business segment: order processing fees generated when Cassettes 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 when Retailers purchase Units at the end of the lease term. PPT
business segment revenues also include direct revenue sharing fees from data
tracking and reporting services provided by the Company to Studios, as well as
charges for internet services provided by the Company's subsidiary
formovies.Com, Inc. In addition, total consolidated revenue includes charges to
customers of the Company's subsidiary 3PF.COM, Inc. ("3PF"), which provides
e-commerce order processing, fulfillment and inventory management services, and
other revenues which include sales of Units through the Company's retail
subsidiary BlowOut Video, Inc., and both royalty payments from Rentrak Japan and
from the business restructuring with Rentrak Japan.
The decrease in total consolidated revenue in fiscal 2002 was primarily due to a
decrease in the PPT System revenues in the PPT business segment as the result
of: (i) a decline in the number of total titles released to the PPT System, as
well as the number of theatrical titles released and the box office performance
of those titles; and (ii) PPT "output programs" and other PPT programs that
result in an increased total number of Units leased for a reduced amount of fees
per Unit. In addition, PPT System revenue was also affected by the willingness
of program suppliers to engage in direct revenue sharing arrangements with the
largest retailer chains. These changes caused decreases in the Company's PPT
System order processing-fee revenue as well as its transaction-fee revenue. The
PPT business segment revenue decline was partially offset by an increase in
direct revenue sharing fees as the result of increased business activity from
these Studio agreements. The decrease in total consolidated revenue was
additionally due to: (i) decreased revenue from 3PF's services resulting
primarily from the loss of customers; and (ii) a decline in revenue from Blowout
Video, Inc. due to reductions in business activity and the closure of four of
its retail stores during the fiscal year. These revenue decreases were partially
offset by the royalty revenue as the result of a business restructuring with
Rentrak Japan in fiscal 2002.
In fiscal 2002, PPT business segment revenues were 73.7 million, a decrease of
$12.0 million, or 14 percent, from $85.7 million in fiscal 2001. During the
year, order processing-fee revenue decreased to $16.9 million from $19.4 million
in fiscal 2001, a decrease of $2.5 million, or 13 percent. Transaction-fee
revenue totaled $44.1 million, a decrease of $11.6 million, or 21 percent, from
$55.7 million the previous fiscal year. Sell-through revenue was $6.6 million in
fiscal 2002 as compared to $6.6 million in fiscal 2001. Communication fee
revenue was $1.3 million in fiscal 2002 as compared to $1.5 million in fiscal
2001, a decrease of $0.2 million, or 13 percent.
Also included in the PPT business segment are the following revenues: (i) direct
revenue sharing fees totaling $4.2 million in fiscal 2002, an increase of $2.3
million, or 121 percent, from the $1.9 million in fiscal 2001; and (iii) $0.6
million in other royalty and other revenues
13
earned in fiscal 2002.
Royalty and other revenue from Rentrak Japan totaled $6.4 million during fiscal
2002, as a result of the business restructuring with Rentrak Japan, compared to
$1.1 million in Rentrak Japan royalty revenue in the previous fiscal year.
Cost of sales for the PPT business segment in fiscal 2002 decreased to $56.8
million from $67.3 million the prior fiscal year, a decrease of $10.5 million,
or 16 percent. The change is primarily due to the factors that led to changes in
revenue as noted above. In fiscal 2002 the Company's PPT business segment gross
profit margin, excluding the royalty revenue from Rentrak Japan, increased to 23
percent from 21 percent the previous year.
PPT business segment selling and administrative expenses were $11.6 million in
fiscal 2002 compared to $25.1 million in fiscal 2001. This decrease of $13.5
million, or 53 percent, was primarily attributable to the following items all
reported in the quarter ended September 30, 2000: (i) a $1.3 million severance
payment to the Company's former chairman and chief executive officer; (ii) $0.6
million in legal costs and proxy solicitation costs incurred by the Company
related to the proxy contest at the 2000 annual shareholders meeting; (iii) $0.4
million in costs to reimburse the dissident shareholder group for their legal
and other costs associated with the proxy contest; (iv) $6.1 million of costs
associated with the reserve or write-off of investments related to the Company's
Retailer Financing Program; (v) $1.0 million in write-offs of investments and
other assets deemed by the Company to be non-realizable; (vi) $1.4 million in
write-offs of accounts receivable based on the Company's assessment of the
collectibility of those accounts due to changes in the financial condition and
payment ability of those customers and (vii) a $0.5 million loss realized on the
sale of stock received previously by the Company pursuant to the settlement of a
claim with a prior customer. Additionally, the Company's legal costs in fiscal
2002, related to the PPT business, decreased by an approximate $1.6 million from
the prior fiscal year.
The net gain from the litigation settlement with a prior customer of the
Company, Hollywood Entertainment, was $1,563,000 for fiscal 2002 compared to
$225,000 for fiscal 2001, an increase of approximately $1.4 million. While the
settlements in both fiscal years were related to the same prior customer, they
related to separate claims. The $1,563,000 of proceeds from the claim settled in
fiscal 2002 was received in May 2002 from Hollywood Entertainment and related to
a breach of a fulfillment contract while most of the proceeds from the
settlement relating to the $225,000 recognized in fiscal 2001 were received in
fiscal 2000 when the claim was finalized; the $225,000 represents the receipt of
an insurance settlement in fiscal 2001 relating to this claim.
PPT other income (expense) was an expense of $2.1 million in fiscal 2001
compared to income of $7.9 million for fiscal 2002, an increase of $10.0
million. This increase is primarily due to: (i) a $0.1 million decrease in
interest income; (ii) a $0.8 million decrease in interest expense due to the
payoff of the line of credit at the beginning of fiscal 2002; (iii) a decrease
in loss on the sale of investment securities, a loss realized on the sale of
stock received previously by the Company pursuant to the settlement of a claim
with a customer and the write-off of assets, or write-down of various assets to
their net realizable value, totaling $1.7 million in fiscal 2001 compared to $0
in fiscal 2002; and (iv) a $8.0 million recognition of other income related to
the business restructuring with Rentrak Japan in fiscal 2002.
14
As a result of the above, for the fiscal year ended March 31, 2002, the Company
recorded pre-tax income of $19.9 million, or 25 percent of total revenue, from
its PPT business, segment, including royalty revenue and other income from the
Rentrak Japan business restructuring, compared to a pre-tax loss of $7.6
million, or 9 percent of total revenue, in the prior fiscal year.
The Cassette and DVD distribution business is a highly competitive industry that
is rapidly changing. The effect of these changes could have a material impact on
the Company's operations. Item 1. Business--Competition of this report further
describes certain of these factors.
Included in other consolidated revenue are the results from other subsidiaries,
primarily the operations of 3PF.COM, Inc. ("3PF") and Blowout Video, Inc.
Total revenues from 3PF decreased to $17.5 million for fiscal 2002 compared to
$23.4 million for fiscal 2001, a decrease of $5.9 million, or 25 percent. This
decrease was primarily due to the loss of two key customers, one at the end of
fiscal 2001 and the other early in 2002, whose fiscal 2001 revenues totaled
approximately $9.7 million, offset partially by significant fiscal 2002 growth
of 3PF's largest customer and modest revenues from the addition of new customers
in fiscal 2002. Cost of sales was $16.9 million, a decrease of $4.8 million from
the $21.7 million recorded in fiscal 2001. This decrease is primarily due to the
corresponding decrease in revenue noted above, offset by the on-going carrying
cost of the unoccupied and unutilized distribution facility capacity. As a
percentage of total 3PF revenue, total cost of sales was 97 percent and 93
percent for fiscal 2002 and 2001, respectively. Selling and administrative
expenses decreased to $4.5 million in fiscal 2002 from $5.5 million in fiscal
2001, a decrease of $1.0 million. As a percentage of total revenue, selling and
administrative expenses increased to 26 percent for fiscal 2002 from 24 percent
for the prior fiscal year. The $1.0 million decrease was primarily due to a $0.7
million recovery of an amount reserved in fiscal 2001 for the anticipated
non-collection of one of 3PF's trade accounts due the Company as the result of a
bankruptcy filing by the customer. This decrease was also the result of
decreased compensation, advertising, travel and entertainment expenses and other
costs as the Company adjusted its overhead infrastructure to better fit the
operating size of its business. The Company expects to continually evaluate its
selling and administrative expenses and appropriately align them in conjunction
with the overall size of business it is operating.
3PF other income (expense) was an expense of $250,000 in fiscal 2002 compared to
$0 in fiscal 2001. This expense was due to a reserve for the expected
non-realization of an investment previously made in a former customer.
As a result of the foregoing factors, for the fiscal year ended March 31, 2002,
3PF recorded a pre-tax loss of $4.1 million, or 23 percent of total revenue.
This compares with pre-tax loss of $3.8 million, or 16 percent of total revenue,
in fiscal 2001.
Total revenue from BlowOut Video, Inc. decreased to $7.3 million in fiscal 2002
from $11.7 million in fiscal 2001, a decrease of $4.4 million, or 38 percent,
primarily due to the decline in overall business activity and the closure of
four of its stores during fiscal 2002. Cost of sales was $5.5 million, a
decrease of $3.2 million from the $8.7 million recorded in fiscal 2001. Total
cost of sales as a percentage of total revenue was 75 percent and 74 percent for
fiscal 2002 and 2001, respectively. As a result, the gross margin decreased to
$1.8
15
million in fiscal 2002 from $3.0 million in fiscal 2002. Selling and
administrative expenses decreased to $3.1 million in fiscal 2002 from $3.6
million in fiscal 2001, a decrease of $0.5 million, as management made
adjustments to better align the overhead structure with the decline in business
activity and operating size. As a percentage of total revenue for BlowOut Video,
Inc., selling and administrative expenses increased to 42 percent for fiscal
2002 from 31 percent for the prior fiscal year.
For the fiscal year ended March 31, 2002, BlowOut Video, Inc. recorded a pre-tax
loss of $1.3 million, or 18 percent of total revenue. This compares with a
pre-tax loss of $0.7 million, or 6 percent of total revenue, in fiscal 2001.
As a result of the above, for the fiscal year ended March 31, 2002, the Company
recorded consolidated pre-tax income from continuing operations of $14.5
million, or 14 percent of total consolidated revenue, compared to a consolidated
pre-tax loss from continuing operations of $12.1 million, or 10 percent of total
consolidated revenue, in the prior fiscal year.
The consolidated effective tax rate providing the tax provision for continuing
operations for fiscal 2002 was 38.0 percent, compared to a consolidated
effective tax rate of 37.3 percent providing the tax benefit for fiscal 2001.
The Company expects to realize the remaining tax benefit at March 31, 2002,
created in fiscal 2001 by net operating loss carryforwards, in future periods.
FISCAL 2001 COMPARED TO FISCAL 2000
CONTINUING OPERATIONS - PPT OPERATIONS AND OTHER CONTINUING SUBSIDIARIES
For the year ended March 31, 2001, the Company's total consolidated revenue
increased $2.7 million to $117.9 million from $115.2 million in the prior fiscal
year. Total consolidated revenue includes the following PPT System fees in the
PPT business segment: order processing fees generated when Cassettes 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 when Retailers purchase Units at the end of the lease term. PPT
business segment revenues also include direct revenue sharing fees from data
tracking and reporting services provided by the Company to Studios, as well as
charges for internet services provided by the Company's subsidiary
formovies.Com, Inc. In addition, total consolidated revenue includes charges to
customers of the Company's subsidiary 3PF.COM, Inc., which provides e-commerce
order processing, fulfillment and inventory management services, and other
revenues which include sales of Units through the Company's retail subsidiary
BlowOut Video, Inc. and royalty payments from Rentrak Japan.
The increase in total consolidated revenue was primarily due to: (i) increased
revenue from services provided by 3PF.COM, Inc.; and partially offset by (ii)
the number of total titles released to the PPT System, as well as the number of
theatrical titles released and the box office performance of those titles. In
addition, PPT revenue was also affected by a reduction in the total number of
Cassettes leased under the PPT System, due in part to Studios offering more
titles under various "copy depth" programs, intended to increase the number of
Units in distribution by lowering the cost of rental Units to Retailers, than
they have in the past and to the willingness of program suppliers to engage in
direct revenue
16
sharing arrangements with the largest retailer chains. These changes caused
decreases in order processing and transaction revenue.
In fiscal 2001, PPT business segment revenues were $85.7 million, a decrease of
$10.7 million, or 11 percent, from $96.4 million in fiscal 2000. During the
year, order processing-fee revenue decreased to $19.4 million from $23.4 million
in fiscal 2000, a decrease of $4.0 million, or 17 percent. Transaction-fee
revenue totaled $55.7 million, a decrease of $5.7 million, or 9 percent, from
$61.4 million the previous fiscal year. Sell-through revenue was $6.6 million in
fiscal 2001 as compared to $7.8 million in fiscal 2000, a decrease of $1.2
million, or 15 percent. Communication fee revenue was $1.5 million in fiscal
2001 as compared to $1.8 million in fiscal 2000, a decrease of $0.3 million or
17 percent.
Also included in the PPT business segment are the following revenues: (i) direct
revenue sharing fees totaling $1.9 million in fiscal 2001, an increase of $0.4
million, or 27 percent, from the $1.5 million in fiscal 2000; and (ii) $0.6
million in other royalty and other revenues earned in fiscal 2001, an increase
of $0.1 million, or 20 percent from the $0.5 million in fiscal 2000.
Royalty revenue from Rentrak Japan totaled $1.1 million during fiscal 2001, a
decrease of $0.7 million or 39 percent from $1.8 million the previous year.
Cost of sales for the PPT business segment in fiscal 2001 decreased to $67.3
million from $79.6 million the prior year, a decrease of $12.3 million or 15
percent. The change is primarily due to the factors that led to changes in
revenue as noted above. In fiscal 2001, the Company's PPT business segment gross
profit margin increased to 21 percent from 17 percent the previous fiscal year.
PPT business segment selling and administrative expenses were $25.1 million in
fiscal 2001 compared to $22.5 million in fiscal 2000. This increase of $2.6
million, or 12 percent, was primarily attributable to the following items all
reported in the quarter ended September 30, 2000: (i) a $1.3 million severance
payment to the Company's former chairman and chief executive officer; (ii) $0.6
million in legal costs and proxy solicitation costs incurred by the Company
related to the proxy contest at the 2000 annual shareholders meeting and (iii)
$0.4 million in costs to reimburse the dissident shareholder group for their
legal and other costs associated with the proxy contest. While the Company wrote
off or reserved approximately $8.5 million in assets related to the Retailer
Financing Program, investments and accounts receivable during the quarter ended
September 30, 2000, it also increased reserves and wrote off other assets
totaling approximately $9.0 million during the fourth quarter of fiscal 2000.
The net gain from the litigation settlement with a prior customer of the
Company, Hollywood Entertainment, was $225,000 for fiscal 2001 compared to $7.8
million for fiscal 2000, a decrease of approximately $7.6 million. Most of the
proceeds from this settlement were received in fiscal 2000 when the claim was
finalized; the $225,000 represents the receipt of an insurance settlement in
fiscal 2001 relating to this claim.
PPT other income (expense) increased from an expense of $1.4 million in fiscal
2000 to an expense of $2.1 million for fiscal 2001, an increase of $0.7 million.
This increase is primarily due to: (i) a decrease in interest income; (ii) an
increase in interest expense due to an increased use of the line of credit in
fiscal 2001; (iii) an increase in loss on the sale of investment securities;
(iv) a $0.5 million loss realized on the sale of stock received
17
previously by the Company pursuant to the settlement of a claim with a customer
and (v) the write-off of assets or write-down of various assets to their net
realizable value.
As a result of the above, for the fiscal year ended March 31, 2001, the Company
recorded a pre-tax loss of $7.4 million, or 9 percent of total revenue, from its
PPT business segment, including royalty revenue from Rentrak Japan, compared to
pre-tax income of $2.9 million, or 3 percent of total revenue, in the prior
fiscal year.
The Cassette and DVD distribution business is a highly competitive industry that
is rapidly changing. The effect of these changes could have a material impact on
the Company's operations. Item 1. Business--Competition of this report further
describes certain of these factors.
Included in total consolidated revenue are the results from other subsidiaries,
primarily the operations of 3PF.COM, Inc. ("3PF") and Blowout Video, Inc.
Total revenues from 3PF increased to $23.4 million for fiscal 2001 compared to
$11.6 million for fiscal 2000, an increase of $11.8 million, or 102 percent.
This increase was primarily due to increased volume from existing customers.
Cost of sales was $21.7 million, an increase of $11.6 million over the $10.1
million recorded in fiscal 2000. This increase is due to: (1) a $1.1 million
increase in occupancy cost as 3PF expanded its operations into a new facility
late in fiscal 2000 to provide additional operating capacity for business
growth; (2) a $4.5 million increase in freight cost in conjunction with the
overall increase in business growth and revenue; and (3) a $4.3 million increase
in warehouse labor cost in conjunction with the overall increase in business
growth and revenue. As a percentage of total 3PF revenue, total cost of sales
was 93 percent and 87 percent for fiscal 2001 and 2000, respectively. Selling
and administrative expenses increased to $5.5 million in fiscal 2001 from $2.6
million in fiscal 2000, an increase of $2.9 million. As a percentage of total
revenue, selling and administrative expenses increased to 24 percent for fiscal
2001 from 22 percent for the prior year. This $2.9 million increase was due to
increased compensation, advertising, travel and entertainment expenses,
depreciation and other costs as the Company invested in the overhead
infrastructure to support growth in its business. Additionally, the Company
recognized $0.9 million in bad debt expense during fiscal 2001 primarily
relating to a customer that filed for bankruptcy. The Company anticipates its
selling and administrative expenses to moderate or lessen in the future in
conjunction with the overall size of business it is operating.
As a result of the foregoing factors, for the fiscal year ended March 31, 2001,
3PF recorded a pre-tax loss of $3.8 million, or 16 percent of total revenue.
This compares with pre-tax loss of $1.1 million, or 9 percent of total revenue,
in fiscal 2000.
Total revenue from BlowOut Video, Inc. increased to $11.7 million in fiscal 2001
from $9.5 million in fiscal 2000, an increase of $2.2 million, or 23 percent.
Cost of sales was $8.7 million, an increase of $2.7 million over the $6.0
million recorded in fiscal 2000. Total cost of sales as a percentage of total
revenue was 74 percent and 63 percent for fiscal 2001 and 2000, respectively. As
a result, the gross margin decreased to $3.0 million in fiscal 2001 from $3.5
million in fiscal 2000. Selling and administrative expenses increased to $3.6
million in fiscal 2001 from $3.0 million in fiscal 2000, an increase of $0.6
million. As a percentage of total revenue for BlowOut Video, Inc., selling and
administrative expenses decreased to 31 percent for fiscal 2001 from 32 percent
for the prior year.
18
For the fiscal year ended March 31, 2001, BlowOut Video, Inc. recorded a pre-tax
loss of $0.7 million, or 6 percent of total revenue. This compares with pre-tax
income of $0.3 million, or 3 percent of total revenue, in fiscal 2000.
As a result of the above, for the fiscal year ended March 31, 2001, the Company
recorded a consolidated pre-tax loss from continuing operations of $12.1
million, or 10 percent of total consolidated revenue, compared to consolidated
pre-tax income from continuing operations of $1.5 million, or 1 percent of total
consolidated revenue, in the prior fiscal year. The consolidated effective tax
rate providing the tax benefit for continuing operations for fiscal 2001 was
37.3 percent, compared to a consolidated effective tax rate of 30.0 percent
providing the tax provision for continuing operations for fiscal 2000 (see
Discontinued Operations below).
DISCONTINUED OPERATIONS
On November 26, 1996, the Company made a distribution to its shareholders of
1,457,343 shares of common stock of its then subsidiary BlowOut Entertainment,
Inc. ("BlowOut"). BlowOut is not related to the Company's wholly owned
subsidiary BlowOut Video, Inc. The operations of BlowOut were reflected as
discontinued operations in the March 31, 1996 consolidated financial statements.
During the fiscal year ended March 31, 2000, the Company recorded a gain on the
disposal of discontinued operations of $1.9 million related to BlowOut, as the
liability related to BlowOut contingencies was less than estimated. The Company
also reduced the valuation allowance that was recorded against the deferred tax
asset related to liabilities of discontinued operations. This reduction of
approximately $0.5 million in the valuation allowance was recorded as an income
tax benefit from discontinued operations in the accompanying consolidated
statement of operations. There was no remaining liability related to the
discontinued operations at March 31, 2002.
FINANCIAL CONDITION
At March 31, 2002, total assets were $38.6 million, a decrease of $0.5 million
from $39.1 million a year earlier. The Company had $12.0 million of cash on hand
at March 31, 2002, including $1.0 million of restricted cash, compared to $3.3
million at March 31, 2001, an increase of $8.7 million (see the Consolidated
Statement of Cash Flows in the accompanying Consolidated Financial Statements).
Net accounts receivable decreased $0.6 million from $11.9 million at March 31,
2001 to $11.3 million at March 31, 2002, including a $1.0 million reduction in
the allowance for doubtful accounts, primarily due to the recovery of a specific
reserve established in fiscal 2001 for the anticipated non-collection of one of
3PF's trade accounts as the result of a bankruptcy filing by the customer.
Inventory decreased $1.0 million from $3.5 million at March 31, 2001 to $2.5
million at March 31, 2002 primarily due to the reduction of business activity
and closure of four retail stores at BlowOut Video, Inc. during fiscal 2002.
Property and equipment decreased $0.5 million from $4.4 million at March 31,
2001 to $3.9 million at March 31, 2002, primarily due to the write-down of 3PF
equipment value. Total deferred tax assets decreased $6.4 million from $9.7
million at March 31, 2001 to $3.3 million at March 31, 2002, primarily due to
the utilization of a tax loss carry forward created from the loss from
continuing operations during fiscal 2001. The Company believes it will realize
the deferred tax asset as of March
19
31, 2002 in future periods. Other assets decreased $0.3 million from $4.8
million at March 31, 2001 to $4.4 million at March 31, 2002. .
At March 31, 2002, total liabilities were $21.3 million, a decrease of $6.4
million from $27.7 million at March 31, 2001. The line of credit decreased to $0
at March 31, 2002 from $1.9 million at March 31, 2001 due to the payoff of the
line balance at the beginning of fiscal 2002 primarily from working capital
available from the business restructuring with Rentrak Japan and trade
receivable collections. Accounts payable decreased $0.4 million from $18.7
million at March 31, 2001 to $18.3 million at March 31, 2002. Accrued
liabilities decreased $2.7 million from $3.4 million at March 31, 2001 to $0.7
million at March 31, 2002 primarily due to the change in estimate for accrued
tax liability totaling $1.5 million and the elimination of liabilities
associated with the business restructuring with Rentrak Japan totaling $0.6
million. Total deferred revenue decreased approximately $1.2 million from $1.6
million at March 31, 2001 to $0.4 million at March 31, 2002, primarily due to
the forgiveness of the remaining unearned prepaid royalty income credit by
Rentrak Japan in the business restructuring.
Accordingly, at March 31, 2002, stockholders' equity was $17.3 million, an
increase of $5.9 million from $11.4 million at March 31, 2001. Most of this
increase in stockholders' equity is attributable to: (i) the reduction in common
stock and capital in excess of par value as the result of the repurchase of
stock from Rentrak Japan in the business restructuring and the repurchase of
additional stock under the Company's stock repurchase program; and (ii) the
reduction in the accumulated deficit due to the consolidated net income of $9.0
million for fiscal 2002, .
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, the Company had cash and other liquid investments of $12.0
million, including $1.0 million of restricted cash, compared to $3.3 million at
March 31, 2001. At March 31, 2002 the Company's current ratio (current
assets/current liabilities) was 1.56 compared to 1.14 a year earlier.
In May 2000 the Company obtained a line of credit with a lender in an amount not
to exceed the lesser of (a) $12 million or (b) the sum of 85% of the net amount
of eligible accounts receivable. Interest under the credit line was payable
monthly at the bank's prime rate plus 1/4 percent (5.0 percent at March 31,
2002). The line was secured by substantially all of the Company's assets. The
terms of the credit agreement included financial covenants requiring: (1) $15
million of tangible net worth to be maintained at all times; (2) a consolidated
net profit to be achieved each fiscal year equal to or exceeding $1.00; and (3)
$5 million of working capital to be maintained at all times. The agreement also
restricted the amount of loans and indebtedness and limits the payment of
dividends on the Company's stock, among other requirements. The Company was in
compliance with the three financial covenants as of March 31, 2002. At March 31,
2002, the Company had $0 of outstanding borrowings under this agreement.
In May 2002 the Company obtained a replacement line of credit with a new lender
for the previous line of credit noted above, which was terminated at that time.
The replacement line of credit is in the amount of $4.5 million. Interest under
this credit line is variable based on the London Interbank Offering Rate (LIBOR)
plus 2 percent. The line is secured by a first priority blanket lien on all of
the Company's assets. The terms of the credit agreement include financial
covenants requiring: (1) a minimum current ratio of 1.10:1.0, measured
20
quarterly; (2) a consolidated quarterly and year-to-date net income equal to or
exceeding $1.00; (3) a leverage ratio of 1.50:1.0, measured quarterly and (4)
$16 million of tangible net worth, measured quarterly. The agreement expires
July 1, 2003. The Company anticipates that it will be in compliance with these
covenants throughout the term of the agreement.
In 1992, the Company established a Retailer Loan Program whereby, on a selective
basis, it provided financing to Participating Retailers that the Company
believed had the potential for substantial growth in the industry. The
underlying rationale for this program was the belief that the Company could
expand its business and at the same time participate in the rapid growth
experienced by the video retailers in which it invested. During fiscal 2001, the
Company discontinued new financings under this program and provided reserves of
$6.6 million representing the entire outstanding balance of the program loans.
The Company continues to seek enforcement of agreements entered into in
connection with this program in accordance with their terms to the extent
practicable.
On March 22, 1999, BlowOut Entertainment, Inc. ("BlowOut"), a former subsidiary
of the Company, filed a petition under Chapter 11 of the Federal Bankruptcy
Code. In 1996, the Company agreed to guarantee any amounts outstanding under
BlowOut's credit facility. As of March 31, 2002, the balance remaining payable
under this obligation was paid in full.
The Company's sources of liquidity include its cash balance, cash generated from
operations and its available credit resources. Based on the Company's current
budget and projected cash needs, the Company believes these available sources of
liquidity will be sufficient to fund the Company's operations and capital
requirements for the fiscal year ending March 31, 2003.
CRITICAL ACCOUNTING POLICIES
The Company considers as its most critical accounting policies those that
require the use of estimates and assumptions, specifically, accounts receivable
reserves and studio guarantee reserves. In developing these estimates and
assumptions, the Company takes into consideration historical experience, current
and expected economic conditions and other relevant data. Please refer to the
Notes to the Consolidated Financial Statements for a full discussion of the
Company's accounting policies.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Credit limits are established through a process of reviewing the financial
history and stability of each customer. The Company regularly evaluates the
collectibility of accounts receivable by monitoring past due balances. If it is
determined that a customer may be unable to meet its financial obligations, a
specific reserve is established based on the amount the Company expects to
recover. An additional general reserve is provided based on aging of accounts
receivable and the Company's historical collection experience. If circumstances
change related to specific customers, overall aging of accounts receivable or
collection experience, the Company's estimate of the recoverability of accounts
receivable could materially change.
STUDIO RESERVES
The Company has entered into guarantee contracts with certain program suppliers
21
providing titles for distribution under the PPT system. These contracts
guarantee the suppliers minimum payments. The Company, using historical
experience and year to date rental experience for each title, estimates the
projected revenue to be generated under each guarantee. The Company establishes
reserves for titles that are projected to experience a shortage under the
provisions of the guarantee. The Company continually reviews these factors and
makes adjustments to the reserves as needed. Actual results could differ from
these estimates and could have a material effect on the recorded studio
reserves.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has considered the provisions of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments." The Company
had no holdings of derivative financial or commodity instruments at March 31,
2002. A review of the Company's other financial instruments and risk exposures
at that date revealed that the Company had exposure to interest rate risk. The
Company utilized sensitivity analyses to assess the potential effect of this
risk and concluded that near-term changes in interest rates should not
materially adversely affect the Company's financial position, results of
operations or cash flows.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Item Page
Independent Auditor's Report 24
Report of Independent Public Accountants
Report of Independent Public Accountants 25
Consolidated Balance Sheets as of March 31, 2002 26
and 2001
Consolidated Statements of Operations for the Years 27
Ended March 31, 2002, 2001 and
2000
Consolidated Statements of Stockholders' Equity 28
for the Years Ended March 31, 2002,
2001 and 2000
Consolidated Statements of Cash Flows for the Years 29
Ended March 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements 30
Financial Statement Schedules -- 52
Schedule II
Schedules not included have been omitted because they are not applicable
or the required information is shown in the financial statements or
notes thereto.
23
INDEPENDENT AUDITOR'S LETTER
The Board of Directors
Rentrak Corporation:
We have audited the accompanying consolidated balance sheet of Rentrak
Corporation and subsidiaries as of March 31, 2002, and the related consolidated
statements of operations, stockholders' equity and comprehensive income, and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rentrak
Corporation and subsidiaries as of March 31, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary consolidated
information for the year ended March 31, 2002 included in Schedule II required
by the Securities and Exchange Commission is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. Such information has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
/s/ KPMG LLP
- ------------
Portland, Oregon
May 24, 2002 (except as to the second paragraph of
Note 5, which is as of May 30, 2002)
24
Report of Independent Public Accountants
To Rentrak Corporation:
We have audited the accompanying consolidated balance sheets of Rentrak
Corporation (an Oregon corporation) and subsidiaries as of March 31, 2001 and
2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended March
31,2001. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and schedule
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rentrak Corporation and
subsidiaries as of March 31, 2001 and 2000 and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2001 in conformity with accounting principles generally accepted in the United
States.
Our audits were made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial statements
and, in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
Arthur Andersen LLP
Portland, Oregon
May 23, 2001
* This report is a copy of a previously issued Arthur Andersen LLP report and
this report has not been reissued by Arthur Andersen LLP.
25
RENTRAK CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2002 and 2001
Assets 2002 2001
---------------- -----------------
Current assets:
Cash and cash equivalents $ 12,028,684 3,322,917
Accounts receivable, net of allowance for doubtful accounts
of $1,086,143 and $2,090,075 11,328,794 11,854,642
Advances to program suppliers 1,101,514 1,328,165
Inventory 2,515,778 3,514,354
Income tax receivable 70,000 279,160
Deferred tax asset 2,295,567 7,319,266
Other current assets 3,134,665 2,589,090
---------------- -----------------
Total current assets 32,475,002 30,207,594
---------------- -----------------
Property and equipment, net 3,907,631 4,439,773
Deferred tax asset 1,002,882 2,419,634
Other assets 1,226,812 2,059,247
---------------- -----------------
Total assets $ 38,612,327 39,126,248
================ =================
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit $ -- 1,917,705
Accounts payable 18,339,610 18,699,289
Accrued liabilities 749,279 3,418,043
Accrued compensation 1,371,064 1,127,785
Deferred revenue 379,106 1,245,643
Net current liabilities of discontinued operations -- 156,046
---------------- -----------------
Total current liabilities 20,839,059 26,564,511
---------------- -----------------
Long-term liabilities:
Deferred revenue -- 379,104
Other 495,586 795,875
---------------- -----------------
Total Liabilities 495,586 1,174,979
---------------- -----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value. Authorized 10,000,000 shares -- --
Common stock, $0.001 par value. Authorized 30,000,000 shares;
issued and outstanding 9,866,283 shares in 2002 and
12,235,621 shares in 2001 9,866 12,236
Capital in excess of par value 41,730,216 52,471,599
Notes receivable (377,565) (7,728,186)
Cumulative other comprehensive income (loss) 180,453 (49,572)
Accumulated deficit (23,910,288) (32,904,319)
Deferred charge - warrants (355,000) (415,000)
---------------- -----------------
Total stockholders' equity 17,277,682 11,386,758
---------------- -----------------
Total liabilities and stockholders' equity $ 38,612,327 39,126,248
================ =================
See accompanying notes to consolidated financial statements.
26
RENTRAK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended March 31, 2002, 2001, and 2000
2002 2001 2000
------------------ ------------------ ------------------
Revenues:
PPT $ 72,843,847 84,261,793 95,182,063
Other 29,770,300 33,625,162 19,990,351
------------------ ------------------ ------------------
102,614,147 117,886,955 115,172,414
------------------ ------------------ ------------------
Operating costs and expenses:
Cost of sales 76,812,474 93,600,177 91,706,290
Selling and administrative 20,753,587 34,455,048 28,236,763
Net gain from litigation settlements (note 10) (1,563,153) (225,000) (7,791,880)
------------------ ------------------ ------------------
96,002,908 127,830,225 112,151,173
------------------ ------------------ ------------------
Income (loss) from operations 6,611,239 (9,943,270) 3,021,241
------------------ ------------------ ------------------
Other income (expense):
Interest income 195,628 307,240 743,464
Interest expense (17,598) (768,599) (669,373)
Gain (loss) on investments -- (1,687,314) (1,207,483)
Other 7,717,233 -- (385,986)
------------------ ------------------ ------------------
7,895,263 (2,148,673) (1,519,378)
------------------ ------------------ ------------------
Income from continuing operations
before income tax (benefit)
provision and gain from disposal
of discontinued operations 14,506,502 (12,091,943) 1,501,863
Income tax benefit (provision) (5,512,471) 4,514,575 (450,559)
------------------ ------------------ ------------------
Net income (loss) from continuing
operations 8,994,031 (7,577,368) 1,051,304
Gain from disposal of discontinued operations
including income tax benefit of $483,502 -- -- 2,373,502
------------------ ------------------ ------------------
Net income (loss) $ 8,994,031 (7,577,368) 3,424,806
================== ================== ==================
Earnings (loss) per common share:
Basic:
Continuing operations $ 0.86 (0.63) 0.10
Discontinued operations -- -- 0.23
------------------ ------------------ ------------------
Net income (loss) $ 0.86 (0.63) 0.33
================== ================== ==================
Diluted
Continuing operations $ 0.85 (0.63) 0.10
Discontinued operations -- -- 0.22
------------------ ------------------ ------------------
Net income (loss) $ 0.85 (0.63) 0.32
================== ================== ==================
See accompanying notes to consolidated financial statements.
27
RENTRAK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended March 31, 2002, 2001, and 2000
Common stock
-------------------------------------- Capital in
Number of excess of Notes
shares Amount par value Receivable
-------------------- -------------- -------------- ---------------
Balance at March 31, 1999 10,439,948 $ 10,440 43,644,479 --
Issuance of common stock under employee
stock option plans 74,613 75 228,882 --
Net income -- -- -- --
Change in unrealized gain (loss) on investment
securities, net of tax -- -- -- --
Total comprehensive income
Income tax benefit from stock option exercise -- -- 27,699 --
Issuance of warrants -- -- 544,139 --
Amortization of warrants -- -- -- --
-------------------- -------------- ---------------- ---------------
Balance at March 31, 2000 10,514,561 10,515 44,445,199 --
Issuance of common stock under employee
stock option plans 1,721,060 1,721 8,026,400 --
Net income -- -- -- --
Change in unrealized gain (loss) on investment
securities, net of tax -- -- -- --
Total comprehensive income
Issuance of notes receivable -- -- -- (7,728,186)
Amortization of warrants -- -- -- --
-------------------- -------------- ---------------- ---------------
Balance at March 31, 2001 12,235,621 12,236 52,471,599 (7,728,186)
Repurchase of common stock (1,188,400) (1,188) (4,523,061) --
Issuance of common stock under employee
stock option plans 227,812 227 732,511 --
Issuance of common stock 87,000 87 136,473
Repurchase of common stock for cancellation
of notes receivable (1,495,750) (1,496) (7,349,125)
Net income -- -- -- --
Change in unrealized gain (loss) on investment
securities, net of tax -- -- -- --
Cumulative Translation Adjustments
Total comprehensive income
Income tax benefit from stock option exercise -- -- 261,819 --
Cancellation of notes receivable -- -- -- 7,350,621
Amortization of warrants -- -- -- --
-------------------- -------------- ---------------- ---------------
Balance at March 31, 2002 9,866,283 $ 9,866 41,730,216 (377,565)
==================== ============== ================ ===============
See accompanying notes to consolidated financial statements.
Cumulative
other Deferred
Comprehensive Accumulated charge Comprehensive
Income deficit warrants Total income (loss)
------------ -------------- ------------- ---------- ------------
Balance at March 31, 1999 137,747 (28,751,757) (749,005) 14,291,904
Issuance of common stock under employee
stock option plans -- -- -- 228,957
Net income -- 3,424,806 -- 3,424,806 3,424,806
Change in unrealized gain (loss) on investment
securities, net of tax (402,431) -- -- (402,431) (402,431)
------------
Total comprehensive income $ 3,022,375
============
Income tax benefit from stock option exercise -- -- -- 27,699
Issuance of warrants -- -- (544,139) --
Amortization of warrants -- -- 509,652 509,652
------------ ---------------- -------------- ----------
Balance at March 31, 2000 (264,684) (25,326,951) (783,492) 18,080,587
Issuance of common stock under employee
stock option plans -- -- -- 8,028,121
Net income -- (7,577,368) -- (7,577,368) (7,577,368)
Change in unrealized gain (loss) on investment
securities, net of tax 215,112 -- -- 215,112 215,112
------------
Total comprehensive income $(7,362,256)
============
Issuance of notes receivable -- -- -- (7,728,186)
Amortization of warrants -- -- 368,492 368,492
------------ ---------------- -------------- ----------
Balance at March 31, 2001 (49,572) (32,904,319) (415,000) 11,386,758
Repurchase of common stock -- -- -- (4,524,249)
Issuance of common stock under employee
stock option plans -- -- -- 732,738
Issuance of common stock 136,560
Repurchase of common stock for cancellation
of notes receivable (7,350,621)
Net income -- 8,994,031 -- 8,994,031 8,994,031
Change in unrealized gain (loss) on investment
securities, net of tax 49,572 -- -- 49,572 49,572
Cumulative Translation Adjustments 180,453 180,453 180,453
-----------
Total comprehensive income $9,224,056
===========
Income tax benefit from stock option exercise -- -- -- 261,819
Cancellation of notes receivable -- -- -- 7,350,621
Amortization of warrants -- -- 60,000 60,000
------------ ---------------- -------------- ----------
Balance at March 31, 2002 180,453 (23,910,288) (355,000) 17,277,682
============ ================ ============== ==========
See accompanying notes to consolidated financial statements.
28
RENTRAK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 2002, 2001, and 2000
2002 2001 2000
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income (loss) $ 8,994,031 (7,577,368) 3,424,806
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Gain on disposal of discontinued operations -- -- (2,373,502)
(Gain) loss on disposition of assets (7,802,747) 597,124 1,207,483
Loss on write-down of property and equipment 425,000 -- --
Gain on litigation settlement -- -- (7,791,880)
Depreciation and amortization 1,438,449 1,266,515 1,780,966
Write-off of intangibles -- -- 421,675
Amortization of warrants 60,000 368,492 509,652
Provision (credit) for doubtful accounts (1,546,301) 7,758,211 6,341,032
Retailer financing program reserves -- 1,333,191 (373,394)
Reserves on advances to program suppliers 1,629,105 106,781 110,918
Deferred income taxes 5,171,886 (4,646,420) (900,272)
Net proceeds from litigation settlement -- -- 1,847,505
Change in specific accounts:
Accounts receivable 2,072,149 4,184,677 (3,231,008)
Advances to program suppliers (1,402,454) 1,547,820 (253,422)
Inventory 998,576 162,449 (1,084,620)
Income tax receivable 209,160 (109,860) 2,864,901
Notes receivable and other current assets (545,575) 2,106,259 1,227,099
Accounts payable (359,679) (6,778,293) 7,233,746
Accrued liabilities and compensation (925,485) 423,558 357,860
Deferred revenue and other liabilities (1,365,477) (756,912) 3,077,119
Net current liabilities of discontinued operations (156,046) (274,877) (942,341)
---------------- ---------------- ----------------
Net cash provided by (used in)
operating activities 6,894,592 (288,653) 13,454,323
---------------- ---------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment (1,379,934) (2,947,221) (1,790,501)
Investments in retailer financing program -- -- (384,500)
Proceeds from retailer financing program -- -- 228,539
Purchases of investments -- -- (398,122)
Proceeds from sale of investments -- 1,605,555 975,305
Proceeds from sale of investment in Rentrak Japan 4,076,237 -- --
Reductions (additions) of other assets and intangibles 797,028 (792,672) (6,693)
---------------- ---------------- ----------------
Net cash used in investing activities 3,493,331 (2,134,338) (1,375,972)
---------------- ---------------- ----------------
Cash flows from financing activities:
Net borrowings (payments) on line of credit (1,917,705) 1,917,705 (7,925,000)
Net borrowing (payments) on notes payable -- (500,000) (2,500,000)
Repurchase of common stock (633,749) -- --
Issuance of common stock 732,738 299,932 228,957
Issuance of common stock to non-employees 136,560 -- --
---------------- ---------------- ----------------
Net cash provided by (used in)
financing activities (1,682,156) 1,717,637 (10,196,043)
---------------- ---------------- ----------------
Net increase (decrease) in cash
and cash equivalents 8,705,767 (705,354) 1,882,308
Cash and cash equivalents at beginning of year 3,322,917 4,028,271 2,145,963
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 12,028,684 3,322,917 4,028,271
================ ================ ================
See accompanying notes to consolidated financial statements.
29
(1) Business of Companies, Summary of Significant Accounting Policies,
and Other Items
(a) Introduction
Rentrak Corporation (the Company) (an Oregon corporation) is
principally engaged in the processing of information regarding the
rental and sale of video cassettes and DVD's ("Units") and the
distribution of prerecorded Units to the home video market
throughout the United States and Canada using its
Pay-Per-Transaction (PPT) revenue sharing program.
Under its PPT program, the Company enters into contracts to lease
Units from program suppliers (producers of motion pictures and
licensees and distributors of home video cassettes and DVD's )
which are then leased to retailers for a percentage of the rentals
charged by the retailers.
The Company's wholly owned subsidiary, 3PF.COM, Inc. (3PF),
provides e-fulfillment order processing and inventory management
services to e-tailers, wholesalers, and businesses requiring
just-in-time fulfillment.
The Company's wholly owned subsidiary BlowOut Video, Inc. sells
video cassettes and DVDs through its three retail video stores
that operate under the name of BlowOut Video.
(b) Rentrak Japan
In December 1989, the Company entered into a definitive agreement
with Culture Convenience Club Co., Ltd. (CCC), Rentrak's joint
venture partner in Rentrak Japan, to develop the Company's PPT
distribution and information processing business in certain
markets throughout the world.
On June 16, 1994, the Company and CCC amended the agreement.
Pursuant to this amendment, the Company received a royalty of
1.67% for all sales of up to $47,905,000, plus one-half of 1%
(0.5%) of sales greater than $47,905,000 in each fiscal year. In
addition, the Company received a one-time royalty of $2 million,
of which $1 million was paid in fiscal 1995 and $1 million was
paid in fiscal 1999. The term of the Agreement was extended from
the year 2001 to the year 2039
In December 1999, the Company received a prepayment of $2,500,000
in exchange for $4,000,000 of credit related to the annual royalty
described above. This credit was being recognized as revenue as
royalties were earned under the terms of the contract. As
discussed below in April 2001, this contract was effectively
terminated with Rentrak Japan forfeiting their rights to the
remaining $700,000 prepayment.
Effective April 2, 2001, the Company entered into an agreement
with Rentrak Japan amending the former agreement. As a result of
the amended agreement, the Company granted Rentrak Japan PPT
operating rights in Japan, the Philippines, Singapore, Taiwan,
Hong Kong, the Republic of Korea, the Democratic People's Republic
of Korea, the People's Republic of China, Thailand, Indonesia,
Malaysia, and Vietnam. In addition, the royalty agreement was
terminated. Finally, all intellectual property rights and
trademarks of the PPT system were agreed to be usable by Rentrak
Japan.
Consideration for the above items included a cash payment from
Rentrak Japan to the Company of approximately $5,700,000,
forfeiture by Rentrak Japan of any right of return of
30
the 1999 prepaid royalty of $700,000, and forgiveness by Rentrak
Japan of approximately $600,000 of liabilities due to Rentrak
Japan from the Company. Of these amounts, $6,400,000 was recorded
as revenue consistent with the historical treatment of royalty
payments. The remaining $600,000 was recorded as a gain and is
included in other income in the accompanying consolidated
statement of operations.
In April and October 2001, the Company sold all of its 5.6 percent
interest in Rentrak Japan. In conjunction with the above
agreements, the Company and Rentrak Japan entered into stock
purchase commitments to purchase stock as described below.
The Company sold 300,000 shares of Rentrak Japan stock to a sister
company of Rentrak Japan on April 2, 2001, and its remaining
180,000 shares of Rentrak Japan stock on October 2, 2001 to the
sister company. Total proceeds from the stock sales approximated
$6,400,000. The resulting gain of $6,400,000 related to the sale
of this stock is included in other income in the accompanying
consolidated statement of operations. Finally, Rentrak Japan
purchased 17,000 shares of 3PF common stock on April 27, 2001 for
$1,000,000.
In return, Rentrak Japan sold 1,004,000 shares of the Company's
common stock back to the Company on April 2, 2001 for
approximately $3,890,500.
Based upon the results of the transactions noted above occurring
in the year ended March 31, 2002, the Company had no further
obligations to, or ownership in, Rentrak Japan.
(c) Rentrak UK Limited
In February 1998, the Company entered into a Shareholders
Agreement and a PPT License Agreement with Columbus Holdings
Limited and Rentrak UK Limited (Rentrak UK) to develop the
Company's PPT distribution and information processing business in
the United Kingdom through Rentrak UK. The PPT Agreement remains
in force in perpetuity, unless terminated due to material breach
of contract, liquidation of Rentrak UK, or nondelivery, by the
Company to Rentrak UK, of all retailer and studio software,
including all updates. Pursuant to the PPT Agreement, during the