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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 - K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for fiscal year ended March 31, 2003 or
____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-15159
RENTRAK CORPORATION
(exact name of registrant as specified in its charter)
Oregon 93-0780536
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
7700 NE Ambassador Place, Portland, Oregon 97220
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (503) 284-7581
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common stock $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes____ No X
As of September 30, 2002, the aggregate market value of the registrant's common
stock held by non-affiliates of the registrant, based on the last sales price as
reported by NASDAQ, was $36,074,493.
As of June 23, 2003, the Registrant had 64,702,942 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR THE 2003 ANNUAL MEETING OF THE
SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART II and III OF THIS FORM
10-K
1
TABLE OF CONTENTS
Item PART I Page
1. Business 3
2. Properties 9
3. Legal Proceedings 9
4. Submission of Matters to a Vote of Security Holders 9
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
6. Selected Financial Data 11
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
7A. Quantitative and Qualitative Disclosures About
Market Risk 25
8. Financial Statements and Supplementary Data 26
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 58
Disclosure
PART III
10. Directors and Executive Officers of the Registrant 58
11. Executive Compensation 58
12. Security Ownership of Certain Beneficial Owners 58
and Management and Related Stockholder Matters
13. Certain Relationships and Related Transactions 58
14. Controls and Procedures 58
PART IV
15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 60
2
PART I
ITEM 1. BUSINESS
GENERAL
- -------
The Company's primary business continues to be the collection, processing,
analysis and presentation of rental and sales information regarding
videocassettes ("Cassettes"), digital videodiscs ("DVD's"), and Video Games
(collectively "Units") leased to home video specialty stores and other retailers
by way of its Pay Per Transaction system (the "PPT System"). Under the Company's
PPT System, home video specialty stores and other retailers that rent (Units) to
consumers ("Retailers"), including grocery stores and convenience stores, lease
Units, and other media from Rentrak for a low initial fee and share a portion of
each retail rental transaction with the Company. The Company included Video
Games as part of the PPT system in fiscal 2003. The Company's PPT System
generated 78 percent, 73 percent and 80 percent of total revenues in fiscal
years 2003, 2002 and 2001, respectively.
The Company has engaged in additional lines of business through the following
subsidiaries:
3PF.COM, Inc. ("3PF") provides order processing, inventory management, and
fulfillment services to retailers and wholesalers and to other businesses
requiring just-in-time fulfillment. In June 2003, the Company agreed to sell
3PF's operating assets at its Wilmington, Ohio, facility. (See Note 3 of the
Notes to the Consolidated Financial Statements.)
BlowOut Video, Inc., sold cassettes and DVD's through its Website
www.blowoutvideo.com, and through three retail outlets. Operations of BlowOut
Video, Inc., were fully discontinued in fiscal year 2003. (See Note 2 of the
Notes to the Consolidated Financial Statements.)
PAY-PER-TRANSACTION SYSTEM
- --------------------------
The Company distributes Units principally to home video specialty stores through
its PPT System. The PPT System enables Retailers to obtain Units at a
significantly lower initial cost than if they purchased the Units from
traditional video distributors.
After the Retailer is approved for participation in the PPT System, Units are
leased to the Retailer for a low initial fee (the "Order Processing Fee") plus a
percentage of revenues generated by the Retailer from rentals to consumers (the
"Transaction Fee"). The Company retains a portion of each Order Processing Fee
and Transaction Fee and remits the remainder to the appropriate motion picture
studios or other licensee or owner of the rights to certain video programming,
or video game publishers, ("Program Suppliers") that hold the distribution
rights to the Units. Due to the lower cost of "bringing Units in the door",
Retailers generally obtain a greater number of Units under the PPT System than
the traditional distribution method. The intended benefit to the Retailer is a
higher volume of rental transactions, as well as a reduction in capital cost and
risk. The intended benefit to the Program Supplier is an increase in the total
number of Units shipped, resulting in increased revenues and opportunity for
profit. The intended benefit to the consumer is the potential of finding more
copies of certain newly released hit titles and a greater selection of other
titles at Retailers participating in the PPT System ("Participating Retailers").
The Company markets its PPT System throughout the United States and Canada, as
well as in the United Kingdom through a subsidiary. Following the sale of a 5.6
percent interest in Rentrak Japan Co., Ltd. ("Rentrak Japan"), a Japanese
corporation which markets a similar service to
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video retailers in Japan, in October 2001, the Company no longer received
revenues from the Asian markets.
In February 1998, the Company entered into a Shareholders Agreement and a PPT
License Agreement with Columbus Holdings Limited and Rentrak UK Limited (Rentrak
UK) to develop the Company's PPT distribution and information processing
business in the United Kingdom through Rentrak UK. The PPT Agreement remains in
force in perpetuity, unless terminated due to material breach of contract,
liquidation of Rentrak UK, or nondelivery, by the Company to Rentrak UK, of all
retailer and studio software, including all updates. Pursuant to the PPT
Agreement, during the term of the PPT Agreement, the Company will receive a
royalty of 1.67% of Rentrak UK's gross revenues from any and all sources.
Rentrak currently owns 92% of Rentrak UK while Rentrak Japan holds 8%. From
inception, Rentrak UK did not generate income or positive cash flow and, as a
result, the Company wrote down substantially all long-lived assets including
goodwill and certain fixed assets totaling $222,000 in fiscal 2000. Through
March 2003, Rentrak UK improved its performance producing minimal income and
cash flow. Management of the Company has made changes to decrease the cost of
operations, including space and staffing costs, and it is continuing to closely
evaluate the financial performance of operations. Management is currently
considering various alternatives including selling or closing down Rentrak UK's
operations.
The Company currently offers substantially all of the titles of a number of
non-Video Game Program Suppliers, including Buena Vista Pictures Distribution,
Inc., a subsidiary of The Walt Disney Company, Paramount Home Video, Inc.,
Universal Studios Home Video, Inc., Twentieth Century Fox Home Entertainment
(formerly Fox Video), a subsidiary of Twentieth Century Fox Film Corporation and
MGM Home Entertainment, a subsidiary of the Metro Goldman Meyer Company. The
Company's arrangements with all of its Program Suppliers are of varying
duration, scope and formality. In some cases, the Company has obtained Units
pursuant to contracts or arrangements with Program Suppliers on a title-by-title
basis and in other cases the contracts or arrangements provide that all titles
released for distribution by such Program Supplier will be provided to the
Company for the PPT System. Many of the Company's agreements with Program
Suppliers, including all major Program Suppliers, may be terminated upon
relatively short notice. Therefore, there is no assurance that any of the
Program Suppliers will continue to distribute Units through the PPT System,
continue to have available for distribution titles which the Company can
distribute on a profitable basis, or continue to remain in business. Even if
titles are otherwise available from Program Suppliers to the Company, there is
no assurance that they will be made available on terms acceptable to the
Company. During the last three years, the Company has not experienced any
material difficulty acquiring suitable Units for the Company's markets on
acceptable terms and conditions from Program Suppliers that have agreed to
provide the same to the Company. The Company has one Program Supplier that
supplied product that generated 16 percent, two that generated 15 percent, and a
fourth that generated 11 percent of Rentrak revenues for the year ended March
31, 2003. There were no other Program Suppliers who provided product that
generated more than 10 percent of revenues for the year ended March 31, 2003.
The Company currently receives a significant amount of product from four Program
Suppliers. Although management does not believe that these relationships will be
terminated in the near term, a loss of any of these suppliers could have an
adverse effect on the Company's operating results.
4
Certain Program Suppliers have requested, and the Company has provided,
financial or performance commitments from the Company, including advances,
warrants, or guarantees, as a condition of obtaining certain titles. The Company
determines whether to provide such commitments on a case-by-case basis,
depending upon the Program Supplier's success with such titles prior to home
video distribution and the Company's assessment of expected success in home
rental distribution. The Company currently continues this practice with one
Program Supplier for movies and three Program Suppliers for Video Games.
Distribution of Cassettes, DVD's, and Video Games ("Units")
- -----------------------------------------------------------
The Company's proprietary Rentrak Profit Maker Software (the "RPM Software")
allows Participating Retailers to order Units through their Point of Sale
("POS") system software and provides the Participating Retailers with
substantial information regarding all offered titles. Ordering occurs via a
networked computer interface. To further assist the Participating Retailers in
ordering, the Company also produces a monthly product catalog called "Ontrak."
To be competitive, Participating Retailers must be able to rent their Units on
the "street date" announced by the Program Supplier for the title. Rentrak has
contracted with 3PF to distribute Rentrak's Units via overnight air courier to
assure delivery to Participating Retailers on the street date. The freight costs
of such distribution comprise a portion of the Company's consolidated cost of
sales.
Computer Operations
- -------------------
To participate in the Company's PPT System, Participating Retailers must install
Rentrak approved computer software and hardware to process all of their rental
and sale transactions. Participating Retailers are required to use one of the
POS software vendors approved by the Company as conforming to the Company's
specifications. The Company's RPM Software resides on the Participating
Retailer's POS computer system and transmits a record of PPT transactions to the
Company over a telecommunications network. The RPM Software also assists the
Participating Retailer in ordering newly released titles and in managing the
inventory of Units.
The Company's information system processes these transactions and prepares
reports for Program Suppliers and Participating Retailers. In addition, it
determines variations from statistical norms for potential audit action. The
Company's information system also transmits information on new titles and
confirms orders made to the RPM Software at the Participating Retailer location.
Retailer Auditing
- -----------------
From time to time, the Company audits Participating Retailers in order to verify
that they are reporting all rentals and sales of Units on a consistent, accurate
and timely basis. Several different types of exception reports are produced
weekly. These reports are designed to identify any Participating Retailers whose
PPT business activity varies from the Company's statistical norms. Depending
upon the results of the Company's analysis of the reports, the Company may
conduct an in-store audit. Audits may be performed with or without notice and
any refusal to allow such an audit can be cause for immediate termination from
the PPT System. If audit violations are found, the Participating Retailer is
subject to fines, audit fees, immediate removal from the PPT System and/or
repossession of all leased Units.
5
Seasonality
- -----------
The Company believes that the home video industry is highly seasonal because
Program Suppliers tend to introduce hit titles for movies at two periods of the
year, early summer and Christmas. Since the release of movies to home video
usually follows the theatrical release by approximately six months (although
significant variations occur on certain titles), the seasonal peaks of movies
for home video also generally occur in early summer and at Christmas. The
Company believes its volume of rental transactions reflects, in part, this
seasonal pattern, although changes in Program Suppliers' titles available to the
Company, and Participating Retailers may tend to obscure any seasonal effect.
The Company believes such seasonal variations may be reflected in future
quarterly patterns of its revenues and earnings.
Retailer Financing Program
- --------------------------
In 1992, the Company established a Retailer Loan Program whereby, on a selective
basis, it provided financing to Participating Retailers that the Company
believed had the potential for substantial growth in the industry. The
underlying rationale for this program was the belief that the Company could
expand its business and at the same time participate in the rapid growth
experienced by the video retailers in which it invested. During fiscal 2001, the
Company discontinued new financings under this program and provided reserves of
$6.6 million representing the entire outstanding balance of the program loans.
The Company continues to seek enforcement of agreements entered into in
connection with this program in accordance with their terms to the extent
practicable.
Competition
- -----------
The Cassette, DVD, and Video Game distribution business is a highly competitive
industry that is rapidly changing. The traditional method of distributing these
Cassettes, DVD's, and Video Games ("Units") to Retailers is through purchase
transactions; i.e., a Retailer purchases Units from a distributor and then
offers the Units for rental or sale to the general public. As described in
greater detail above (see "Pay-Per-Transaction System"), the Company's PPT
System offers Participating Retailers an alternative method of obtaining Units.
Accordingly, the Company faces intense competition from all of the traditional
distributors, including Ingram Entertainment, Inc., VPD, and Video One Canada,
Ltd. These and other traditional distributors have extensive distribution
networks, long-standing relationships with Program Suppliers and Retailers, and,
in some cases, significantly greater financial resources than the Company.
In the last two years certain traditional distributors have taken steps to offer
Units to Retailers on a revenue sharing basis. For example, several traditional
distributors have executed licensing agreements with Supercomm, Inc.
("Supercomm"), now a wholly-owned subsidiary of Columbia TriStar Home
Entertainment, to market product on revenue sharing terms. Several traditional
distributors have also executed revenue sharing agreements with motion picture
studios ("Studios").
The Company also competes with Supercomm in two additional areas: (1)
domestically - for processing data for certain Studios' direct relationships
with Blockbuster Video and other Retailers; and (2) internationally in certain
markets. Supercomm also processes data for traditional distributors such as
Ingram who then compete with the Company for revenue sharing Units as well as
traditional Units.
6
The Company also faces direct competition from the Studios. Beginning in 1997,
several major Studios offered Retailers discounted pricing if such Retailers
substantially increased the quantity of Units purchased. Also, some major
Studios have offered Units to Retailers on a lease basis. In addition, all major
Studios sell Units directly to major Retailers including Blockbuster, the
world's largest chain of home video specialty stores. The Company believes most
of the major Studios have executed direct revenue sharing agreements with
Blockbuster and Hollywood Entertainment, the world's second largest chain of
home video specialty stores. The Company also believes that certain Studios have
executed direct revenue sharing agreements with several other large Retailers.
The Company does not believe that the Studios have executed direct revenue
sharing agreements with other smaller Retailers, but there can be no assurance
that they will not do so in the future.
The Studios also compete with the Company by releasing certain Unit titles on a
"sell-through" basis; i.e., they bypass the traditional rental period by selling
the Units directly to consumers at a price of approximately $9.95 -- $19.95. To
date, such "sell-through" distribution has generally been limited to certain
newly released hit titles with wide general family appeal. However, because the
Company's PPT business is partially dependent upon the existence of a rental
period, a shift toward such "sell-through" distribution, particularly with
respect to popular titles, could have a material adverse effect on the Company's
business.
The Company also competes with businesses that use alternative distribution
methods to provide video entertainment directly to consumers, such as the
following: (1) direct broadcast satellite transmission systems; (2) traditional
cable television systems; (3) pay-per-view cable television systems; and (4)
delivery of programming via the Internet. Each of these distribution methods
employs digital compression techniques to increase the number of channels
available to consumers and, therefore, the number of movies that may be
transmitted. Technological improvements in this distribution method,
particularly "video-on-demand," may make this option more attractive to
consumers and thereby materially diminish the demand for Unit rentals. Such a
consequence could have a material adverse effect on the Company's business.
Foreign Operations
- ------------------
On December 20, 1989, the Company entered into an agreement with Culture
Convenience Club, Co., Ltd. ("CCC"), a Japanese corporation, which is Japan's
largest video specialty retailer. Pursuant to the agreement, the parties formed
Rentrak Japan, a Japanese corporation. Rentrak Japan was formed to implement the
PPT System in Japan. The Company provided its PPT technology and the use of
certain trademarks and service marks to Rentrak Japan, and CCC provided
management personnel, operating capital, and adaptation of the PPT technology to
meet Japanese requirements.
Beginning in 1994, the Company became entitled to a royalty of 1.67% for all
sales of up to $47,905,000 plus one-half of one percent of sales greater than
$47,905,000 in each royalty year (June 1 - May 31). Additionally, the Company
received one-time royalty payments of $1,000,000 in fiscal year 1995 and
$1,000,000 in fiscal year 1999. In December 1999, the Company received a
prepayment of $2,500,000 in exchange for $4,000,000 of credit related to the
annual royalty, which was recognized in revenues as royalties were earned under
the terms of the contract.
Effective April 2, 2001 the Company and Rentrak Japan entered into a
restructuring agreement of their relationship. The Company transferred exclusive
rights to implement its PPT System within specified countries in the Far East,
including related trademark and other intellectual property rights, to Rentrak
Japan. In exchange for the transfer, Rentrak Japan made a lump sum payment
7
of $5.7 million to the Company and released certain of the Company's payment
obligations totaling approximately $1.3 million. As part of the transaction,
Rentrak Japan's obligation to pay annual royalties to the Company in connection
with use of its PPT System was terminated. (See Note 1(b) of the Notes to the
Consolidated Financial Statements.)
DIRECT REVENUE SHARING
- ----------------------
The Company provides direct revenue sharing ("DRS") services to various
Suppliers that also participate in the PPT System. The DRS services consist of
data collection, tracking, auditing and reporting of revenue sharing rental and
sales transactions for the Suppliers, of large retail chain video store
customers that rent Cassettes, DVD's and Video Games and engage in revenue
sharing arrangements directly with these Suppliers. The Company utilizes its
computer software it developed to collect, track, audit and report the results
to the Suppliers under established agreements on a fee for service basis.
BUSINESS INTELLIGENCE SERVICES
- ------------------------------
The Company has begun to transform itself into a leading provider of business
intelligence ("BI") services, by taking advantage of the capabilities it built
through its PPT System services in the entertainment industry. During fiscal
2003 the Company invested over $4 million in the continued research and
development of its suite of software and services consisting of Box Office
Essentials, VideoGame Essentials, Retail Essentials, VOD Essentials, Calendar
Essentials and Supply Chain Essentials for the entertainment industry and
beyond. The Essentials software and services provides unique data collection,
management, analysis and reporting resulting in business intelligence
information valuable to the Company's clients who use these services. The
Company began providing Box Office Essentials services to clients beginning in
the fourth quarter of fiscal 2003. The Company believes that the investments it
made in fiscal 2003 and those it intends to make in fiscal 2004 should begin to
generate additional revenues and contributions to profits of the Company over
the next 12 to 24 months.
FORMOVIES.COM
- -------------
Formovies.com is a website designed by the Company and dedicated to assist
consumers in finding a local video store where they can rent and/or purchase
video products they are specifically seeking. Consumers can find a particular
movie of their choice by searching on various attributes of that title. Once
found they can then determine the closest video store that carries that product.
Trademarks, Copyrights, and Proprietary Rights
- ----------------------------------------------
The Company has registered its "RENTRAK", "PPT", "Pay Per Transaction",
"Ontrak", "BudgetMaker", "DataTrak", "Prize Find" , "BlowOut Video", "Fastrak",
"GameTrak", "RPM", "Videolink+", "Unless You're Rich Enough Already",
"Sportrak", "Movies For The Hungry Mind", "VidAlert", "Active Home Video",
"Movie Wizard", and "Gotta Have It Guarantee" marks under federal trademark
laws. The Company has applied and obtained registered status in several foreign
countries for many of its trademarks. The Company has filed an application to
register its "Essentials" trademark. The Company claims a copyright in its RPM
Software and considers it to be proprietary. The Company has also filed notice
and claims a copyright on its Essentials software.
8
Employees
- ---------
As of March 31, 2003, including all subsidiaries, the Company employed 293
active employees. The Company considers its relations with its employees to be
good.
Financial Information About Industry Segments
- ---------------------------------------------
See Note 13 of the Notes to the Consolidated Financial Statements for
information regarding the Company's business segments.
Website
- -------
The Company maintains its website at www.rentrak.com. The Company makes its
periodic and current reports available, free of charge, on its website as soon
as reasonably practicable after such material is electronically filed with, or
furnished to, the SEC.
ITEM 2. PROPERTIES
The Company currently maintains its headquarter offices in Portland, Oregon
where it leases 48,800 square feet of office space. The lease began on January
1, 1997 and expires on December 31, 2006. The Company's subsidiary, 3PF,
maintains one distribution facility in Wilmington, Ohio and one in Columbus,
Ohio where it leases 121,600 and 388,264 square feet, respectively. These
distribution facilities also include administrative office space. These two
distribution facility leases expire on December 31, 2010 and February 28, 2008,
respectively. (See Note 3 of the Notes to the Consolidated Financial Statements
regarding the sale of 3PF's assets and the impact to the leases of these two
distribution facilities.)
ITEM 3. LEGAL PROCEEDINGS
The Company may from time to time be a party to legal proceedings and claims
that arise in the ordinary course of its business. In the opinion of management,
the amount of any ultimate liability with respect to these potential actions is
not expected to materially affect the financial position or results of
operations of the Company as a whole. The Company currently has no material
outstanding litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock, $.001 par value, is traded on the Nasdaq National
Market, where its prices are quoted under the symbol "RENT". As of June 2, 2003
there were approximately 300 holders of record of the Company's common stock. On
June 2, 2003, the closing sales price of the Company's common stock as quoted on
the Nasdaq National Market was $5.99.
The following table sets forth the reported high and low sales prices of the
Company's common stock for the periods indicated as regularly quoted on the
Nasdaq National Market.
-------------------------------------------------------------
QUARTER ENDED HIGH LOW
-------------------------------------------------------------
JUNE 30, 2001 $4.90 $2.99
-------------------------------------------------------------
SEPTEMBER 30, 2001 $3.74 $2.86
-------------------------------------------------------------
DECEMBER 31, 2001 $5.93 $3.00
-------------------------------------------------------------
MARCH 31, 2002 $8.00 $5.50
-------------------------------------------------------------
June 30, 2002 $7.20 $4.58
-------------------------------------------------------------
September 30, 2002 $5.03 $3.27
-------------------------------------------------------------
December 31, 2002 $5.79 $3.76
-------------------------------------------------------------
March 31, 2003 $6.00 $4.31
-------------------------------------------------------------
DIVIDENDS
- ---------
Holders of the Company's common stock are entitled to receive dividends if, as,
and when declared by the Board of Directors out of funds legally available
therefore, subject to the dividend and liquidation rights of any preferred stock
that may be issued.
No cash dividends have been paid or declared during the last five fiscal years.
The present policy of the Board of Directors is to retain earnings to provide
funds for operation and expansion of the Company's business. The Company does
not intend to pay cash dividends in the foreseeable future.
10
ITEM 6. SELECTED FINANCIAL DATA
(In Thousands Except Per Share Amounts)
Year Ended March 31,
2003 2002 2001 2000 1999
-----------------------------------------------------------------------
Statement of Operations Data
Revenues:
Order processing fees $ 15,081 $ 16,866 $ 18,563 $ 22,331 $ 21,854
Transaction fees 42,258 44,102 55,752 61,476 72,240
Sell-through fees 8,558 7,324 8,431 9,826 12,280
Communication fees 1,185 1,136 1,509 2,099 2,228
Fulfillment 15,266 15,342 20,137 8,337 6,395
Other 3,872 11,224 3,668 3,624 3,227
-----------------------------------------------------------------------
Total revenues 86,220 95,994 108,060 107,693 118,224
-----------------------------------------------------------------------
Operating costs and expenses:
Cost of sales 70,962 71,979 86,808 87,617 99,807
Selling and administrative expense 14,786 17,282 31,002 25,360 15,555
Net (gain) loss on litigation settlements (362) (1,563) (225) (7,792) 1,099
Asset impairment 844 424 - - -
-----------------------------------------------------------------------
Total operating cost and expenses 86,230 88,122 117,585 105,185 116,461
Income (loss) from continuing operations (10) 7,872 (9,525) 2,508 1,763
Other income (expense) 179 7,913 (2,149) (1,389) 597
-----------------------------------------------------------------------
Income (loss) from continuing operations before
income tax (provision) benefit and loss from
discontinued operations 169 15,785 (11,674) 1,119 2,360
Income tax (provision) benefit (85) (5,998) 4,356 (275) (919)
-----------------------------------------------------------------------
Income (loss) from continuing operations 84 9,787 (7,318) 844 1,441
Income (loss) from discontinued operations (1) (582) (793) (259) 2,581 602
-----------------------------------------------------------------------
Net income (loss) $ (498) $ 8,994 $ (7,577) $ 3,425 $ 2,043
-----------------------------------------------------------------------
Earnings (loss) per share:
Basic:
Continuing operations $ 0.01 $ 0.94 $ (0.61) $ 0.08 $ 0.13
Discontinued operations (0.06) (0.08) (0.02) 0.25 0.06
-----------------------------------------------------------------------
Net income (loss) $ (0.05) $ 0.86 $ (0.63) $ 0.33 $ 0.19
=======================================================================
Diluted:
Continuing operations $ 0.01 $ 0.92 $ (0.61) $ 0.08 $ 0.13
Discontinued operations (0.06) (0.07) (0.02) 0.24 0.05
-----------------------------------------------------------------------
Net income (loss) $ (0.05) $ 0.85 $ (0.63) $ 0.32 $ 0.18
=======================================================================
Common shares and common share equivalents
used to compute diluted EPS 9,779 10,613 11,985 10,759 11,057
2003 2002 2001 2000 1999
-----------------------------------------------------------------------
Balance Sheet Data
Working Capital $ 0,875 $11,676 $ 3,866 $ 9,360 $ (293)
Total Assets 30,726 38,612 39,126 50,473 46,262
Long-term Liabilities 668 496 1,175 - -
Stockholders' Equity 15,437 17,278 11,387 18,081 12,274
(1) See Note 2 of the Notes to the Consolidated Financial Statements. Fiscal
years 1999 and 2000 include the discontinued operations of BlowOut
Entertainment.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements
- --------------------------
Certain information included in the Annual Report on Form 10-K (including
Management's Discussion and Analysis of Financial Condition and Results of
Operations regarding revenue growth, gross profit margin and liquidity)
constitute forward-looking statements that involve a number of risks and
uncertainties. Forward looking statements may be identified by the use of
forward-looking words such as "may", "will", "expects", "intends",
"anticipates", "estimates", or "continues" or the negative thereof or variations
thereon or comparable terminology. The following factors are among the factors
that could cause actual results to differ materially from the forward-looking
statements: the Company's ability to continue to market the PPT System
successfully, the financial stability of the Participating Retailers and their
performance of their obligations under the PPT System, the closure of subsidiary
operations, non-renewal of the Company's line of credit, business conditions and
growth in the video industry and general economic conditions, both domestic and
international; competitive factors, including increased competition, expansion
of revenue sharing programs other than the PPT System by Program Suppliers, new
technology, and the continued availability of Units from Program Suppliers. This
Annual Report on Form 10-K further describes some of these factors. (References
to Notes are to Notes to the Consolidated Financial Statements included in Item
8 of this report.)
Results of Operations
- ---------------------
Fiscal 2003 Compared to Fiscal 2002
PPT Operations and Other Continuing Subsidiaries
- ------------------------------------------------
For the fiscal year ended March 31, 2003, the Company's total consolidated
revenue decreased $9.8 million to $86.2 million from $96.0 million in the prior
fiscal year. Total consolidated revenue includes the following PPT System fees
in the PPT business segment: order processing fees generated when Cassettes,
DVD's and Video Games ("Units") are ordered by and distributed to Participating
Retailers; transaction fees generated when Participating Retailers rent Units to
consumers; sell-through fees generated when Participating Retailers sell Units
to consumers; communication fees when Participating Retailers' point-of-sale
systems are connected to the Company's information system; and sell-through fees
when Participating Retailers purchase Units at the end of the lease term. PPT
business segment revenues also include direct revenue sharing fees from data
tracking and reporting services provided by the Company to Studios, as well as
charges for internet services provided by the Company's subsidiary
formovies.Com, Inc. In addition, other revenue includes charges to customers of
the Company's subsidiary 3PF which provides e-commerce order processing,
fulfillment and inventory management services, and royalty payments from Rentrak
Japan through 2002.
The decrease in total consolidated revenue in fiscal 2003 was primarily due to
the fact that in 2002 the Company earned royalties and other revenues from
Rentrak Japan totaling $6.4 million. The Company's arrangement with Rentrak
Japan ended in fiscal 2002. In fiscal 2003 the Company earned $0 revenue from
Rentrak Japan (See Note 1b). The
12
decrease in consolidated revenue was additionally due to (1) a decline in the
number of rental turns of the Units in the stores; and (ii) PPT "output
programs" and other PPT programs under which the program supplier and the
Company agreed to charge a lower order processing and transaction fee in
exchange for Retailers committing to take an increased total number of Units.
These programs were a response to the shift from the VHS cassette format to the
DVD format and resulted in an increased total number of Units leased but a
reduced amount of fees per Unit.
In fiscal 2003, the PPT business segment revenues were $71.0 million, a decrease
of $3.3 million, or 4 percent, from $74.3 million in fiscal 2002. The decrease
consisted of the following items. Order processing-fee revenue decreased to
$15.1 million from $16.9 million in fiscal 2002, a decrease of $1.8 million, or
11 percent. Transaction-fee revenue totaled $42.3 million, a decrease of $1.8
million, or 4 percent, from $44.1 million the previous fiscal year. Sell-through
revenue was $8.6 million in fiscal 2003 as compared to $7.3 million in fiscal
2002, an increase of $1.3 million or 18 percent. Communication fee revenue was
$1.2 million in fiscal 2003 as compared to $1.1 million in fiscal 2002, an
increase of $0.1 million, or 9 percent.
Also included in the PPT business segment are the following other revenues: (i)
direct revenue sharing fees totaling $3.1 million in fiscal 2003, a decrease of
$0.8 million, or 21 percent, from $3.9 million in fiscal 2002; and (iii) royalty
and other revenues totaling $0.7 million in fiscal 2003 and $0.8 million in
fiscal 2002. The direct revenue sharing fee decrease was substantially due to
the termination of an agreement between one of the Company's major studio
customers and a major retailer. The Company believes that that agreement will
soon be renewed.
Cost of sales in the PPT business segment consists of order processing costs,
transaction costs, sell through costs and freight costs, and represents the
direct costs to produce the PPT revenues. Order processing costs, transaction
costs and sell through costs represent the amounts due the Program Suppliers
that hold the distribution rights to the cassettes, DVD's and Video Games
("Units") under agreement with the Company. Freight costs represent the cost to
pick, pack and ship orders of Units to the Participating Retailers.
Cost of sales for the PPT business segment in fiscal 2003 decreased to $55.7
million from $57.3 million the prior fiscal year, a decrease of $1.6 million, or
3 percent. The change is primarily due to the factors that led to changes in
revenue as noted above. In fiscal 2003 the Company's PPT business segment gross
profit margin decreased to 22 percent from 23 percent the previous year. The
decrease in gross margin is partially due to an increase in warrant
amortization. Management elected to fully amortize the remaining unamortized
value of warrants as of March 31, 2003 previously issued to a customer in
conjunction with a service agreement based on the expectation that the customer
would not be utilizing the services of the Company in future periods. (See Note
9)
Selling, General & Administrative expenses in the PPT business segment consist
of the indirect costs to sell, administer and manage the PPT business. These
expenses consist primarily of compensation and benefits, development, marketing
and advertising costs, legal and professional fees, communications costs,
depreciation and amortization of tangible fixed assets and software, real and
personal property leases, as well as other general corporate expenses.
13
PPT business segment selling and administrative expenses were $12.4 million in
fiscal 2003 compared to $12.3 million in fiscal 2002. This increase of $0.1
million, or 1 percent, was primarily attributable to costs associated with the
development of new software and services including Box Office Essentials, the
Company's recently developed software and service that collects and reports
information on theatrical releases of movie titles for the studios. Item 1.
Business - Business Intelligence Services of this report further describes
certain of these factors.
The net gain from the litigation settlement with a prior customer of the
Company, Hollywood Entertainment, was $1,563,000 for fiscal 2002 and $362,000
for fiscal 2003. The $1,563,000 of proceeds from the claim settled in fiscal
2002 was received in May 2002 from Hollywood Entertainment and related to a
breach of a fulfillment contract. In April 2002, in a confidential settlement
agreement, Hollywood agreed to pay an additional $362,000 to the Company to
resolve all outstanding issues between the two parties.
PPT other income (expense) was an expense of $0.1 million in fiscal 2003
compared to income of $8.1 million for fiscal 2002, a decrease of $8.2 million.
This decrease is primarily due to an $8.0 million recognition of other income
related to the business restructuring with Rentrak Japan in fiscal 2002 (See
Note 1b).
As a result of the above, for the fiscal year ended March 31, 2003, the Company
recorded pre-tax income of $3.4 million, or 5 percent of total revenue, from its
PPT business, compared to pre-tax income of $19.9 million, or 25 percent of
total revenue, in the prior fiscal year including royalty revenue and other
income from the Rentrak Japan business restructuring (See Note 1b),
The Cassette, DVD, and Video Game distribution business is a highly competitive
industry that is rapidly changing. The effect of these changes could have a
material impact on the Company's operations. Item 1. Business--Competition of
this report further describes certain of these factors.
Included in other consolidated revenue are the results from other subsidiaries,
primarily the operations of 3PF.
Revenues in the 3PF business segment generally consist of storage fees,
receiving fees, handling fees, special service fees, freight charges and other
fees. These fees represent the continuum of services provided by 3PF from: (i)
receipt of client product(s) into the distribution facility; (ii) storage of the
client product(s); (iii) the picking and packing services (handling) and other
special services for client product(s) to prepare for shipment , and: (iv)
freight charges for the administration of the client shipping and the charges by
various carriers to ship the clients' product to their customers.
Cost of sales in the 3PF business segment consist of freight, compensation,
agency employees, supplies, occupancy, equipment leases and depreciation, and
represent the direct costs to produce the fulfillment revenues. Freight
represents the charges by various carriers to 3PF to ship its clients' products
to their customers. Compensation and agency employees represent the costs of
management and staff cost directly involved in the daily fulfillment operations.
Occupancy represents the facility costs of the real property to conduct the
fulfillment operations. Equipment leases and depreciation represent the cost of
equipment and other assets used in the fulfillment operations.
14
Selling, General & Administrative expenses in the 3PF business segment consist
of the indirect costs to sell, administer and manage the fulfillment business.
These expenses consist primarily of compensation and benefits, development,
marketing and advertising costs, legal and professional fees, communications
costs, depreciation and amortization of tangible fixed assets and software,
personal property leases, as well as other general corporate expenses.
Total revenues from 3PF were $15.3 million for fiscal 2003 and $15.3 million for
fiscal 2002. Cost of sales was $15.3 million, an increase of $0.6 million from
the $14.7 million recorded in fiscal 2002. This increase is primarily due to the
on-going carrying cost of unutilized distribution facility capacity. As a
percentage of total 3PF revenue, total cost of sales was 100 percent and 93
percent for fiscal 2003 and 2002, respectively. Selling and administrative
expenses decreased to $2.4 million in fiscal 2003 from $4.1 million in fiscal
2002, a decrease of $1.7 million. As a percentage of total revenue, selling and
administrative expenses decreased to 16 percent for fiscal 2003 from 27 percent
for the prior fiscal year. The $1.7 million decrease was primarily due to
decreased compensation, advertising, travel and entertainment expenses and other
costs as the Company continued to adjust its overhead infrastructure to better
fit the operating size of its business.
In June 2002, 3PF entered into an agreement to sublease approximately 194,000
square feet of its distribution facility in Columbus, Ohio to its largest
customer. The term of the lease expires July 31, 2006. The sublease requires
monthly rent payments to 3PF under amounts, terms and conditions similar to
3PF's master lease for this facility. Additionally in June 2002 in conjunction
with the facility sublease, 3PF entered into a financing lease with this
customer for the existing equipment within this distribution facility and the
associated costs for additional equipment to configure the layout to the
customer's specifications. This lease, upon expiration, contains a $1.00
purchase option. The financing lease for the equipment was recorded as a note
receivable in the amount of $1,838,062 payable to 3PF in monthly installments.
The current and long-term portions of this note receivable were $496,947 and
$1,076,395 respectively. The transaction resulted in a deferred gain in the
amount of $509,044 which is being recognized as interest income by 3PF ratably
throughout the life of the lease.
In 2003, management determined that it is unlikely that 3PF would achieve its
business plans and initiated a plan to sell the assets of 3PF. Prior to March
31, 2003, it was determined that, more likely than not, substantially all of
3PF's assets would be sold or otherwise disposed of. As a result of this
determination, management assessed during the quarter ended March 31, 2003, the
current and historical operating and cash flow losses, prospects for growth in
revenues and other alternatives for improving the operating results of 3PF
Accordingly, management performed an assessment of the fair value of the 3PF
assets under the guidelines of SFAS 144, Accounting for the Impairment of
Long-Lived Assets. This assessment resulted in 3PF recognizing an asset
impairment expense during the three-month period ended March 31, 2003 in the
amount of $844,041 for the write down of its assets to estimated fair market
value of approximately $800,000.
On June 17, 2003 the Company announced it signed a definitive agreement to sell
substantially all of the assets of 3PF at the Wilmington, Ohio, operation. The
agreement covers all equipment and leasehold improvements at 3PF's leased
distribution facility in Wilmington, Ohio, as well as a portion of its working
capital. As part of the agreement,
15
3PF as lessee and Rentrak as guarantor have been released from the lease. The
cash purchase price of $800,000 is approximately equal to the net book value of
the assets sold at March 31, 2003. During the sale negotiations, the Company
received notification from 3PF's largest customer, serviced exclusively from the
leased distribution facility in Columbus, Ohio, that it does not intend to renew
its fulfillment service contract upon the scheduled expiration at July 31, 2003.
As a result, the Columbus, Ohio distribution facility lease is not included in
the asset sale transaction. The Columbus, Ohio distribution facility has been
used exclusively to service this customer and as of August 1, 2003 will not be
in use. The Company plans to begin the settlement of this lease obligation
immediately upon the closing of the asset sale transaction which is expected to
occur in the 2003 second fiscal quarter.
See Note 3 of the Consolidated Financial Statements regarding other aspects of
3PF.
3PF other income (expense) was an expense of $250,000 in fiscal 2002 compared to
$0 in fiscal 2003. This expense was due to the write-off of an unrealizable
investment previously made in a former customer.
As a result of the foregoing factors, for the fiscal year ended March 31, 2003,
3PF recorded a pre-tax loss of $3.2 million, or 21 percent of total revenue.
This compares with pre-tax loss of $4.1 million, or 27 percent of total revenue,
in fiscal 2002. As a result of this aforementioned asset sale, the Company
expects its consolidated revenues and costs, as a result of the revenues and
costs that were historically associated with the discontinuance of the 3PF
operations, to decrease in fiscal year 2004 as a result.
As a result of the above, for the fiscal year ended March 31, 2003, the Company
recorded consolidated pre-tax income from continuing operations of $168,905, or
less than 1 percent of total consolidated revenue, compared to consolidated
pre-tax income from continuing operations of $15.8 million, or 16 percent of
total consolidated revenue, in the prior fiscal year.
The consolidated effective tax rate for continuing operations for fiscal 2003
and fiscal 2002 was 50 percent and 38 percent, respectively.
Discontinued Operations
- -----------------------
Due to the significant increase in sell through activity throughout the
industry, the operations of BlowOut Video did not meet the expectations of
management. As a result, during the three-month period ended June 30, 2002,
management initiated a plan to discontinue the retail store operations of
BlowOut Video. The plan called for an exit from the stores by the end of fiscal
2003, either through cancellation of the lease commitments and liquidation of
assets, or through sale of the stores to a third party. As of March 31, 2003,
all operations had ceased. Rentrak plans to continue selling its contractually
available end-of-term PPT revenue sharing product through broker channels after
the store operations are fully discontinued.
BlowOut Video generated revenues of $2.6 million and a net loss of $0.6 million,
or $0.06 per share, operating three stores in the year ended March 31, 2003,
compared with revenues of $6.6 million and a net loss of $0.8 million or $0.07
per diluted share, during the year ended March 31, 2002, during which it
operated seven stores.
16
Fiscal 2002 Compared to Fiscal 2001
PPT Operations and Other Continuing Subsidiaries
- ------------------------------------------------
For the year ended March 31, 2002, the Company's total consolidated revenue
decreased $12.0 million to $96.0 million from $108.0 million in the prior fiscal
year. Total consolidated revenue includes the following PPT System fees in the
PPT business segment: order processing fees generated when Cassettes, DVD's, and
Video Games ("Units") are ordered by and distributed to Participating Retailers;
transaction fees generated when Retailers rent Units to consumers; sell-through
fees generated when Participating Retailers sell Units to consumers;
communication fees when Participating Retailers' point-of-sale systems are
connected to the Company's information system; and buy out fees when
Participating Retailers purchase Units at the end of the lease term. PPT
business segment revenues also include direct revenue sharing fees from data
tracking and reporting services provided by the Company to Studios, as well as
charges for internet services provided by the Company's subsidiary
formovies.Com, Inc. In addition, total consolidated revenue includes charges to
customers of the Company's subsidiary 3PF which provides e-commerce order
processing, fulfillment and inventory management services (See Note 3), and
royalty payments from Rentrak Japan. The other segment formerly included BlowOut
Video, Inc., a video retailer, which the Company elected to discontinue during
the three month period ended June 30, 2002 (See Note 2).
The decrease in total consolidated revenue in fiscal 2002 was primarily due to a
decrease in the PPT System revenues in the PPT business segment as the result
of: (i) a decline in the number of total titles released to the PPT System, as
well as the number of theatrical titles released and the box office performance
of those titles; and (ii) PPT "output programs" and other PPT programs that
result in an increased total number of Units leased for a reduced amount of fees
per Unit whose rental volume produced a decline in revenue. In addition, PPT
System revenue was also affected by the willingness of program suppliers to
engage in direct revenue sharing arrangements with the largest retailer chains.
These changes caused decreases in the Company's PPT System order processing-fee
revenue as well as its transaction-fee revenue. The PPT business segment revenue
decline was partially offset by an increase in direct revenue sharing fees as
the result of increased business activity from these Studio agreements. The
decrease in total consolidated revenue was additionally due to decreased revenue
from 3PF's services resulting primarily from the loss of customers. These
revenue decreases were partially offset by the royalty revenue as the result of
a business restructuring with Rentrak Japan in fiscal 2002 (See Note 1).
In fiscal 2002, PPT business segment revenues were $74.3 million, a decrease of
$12.5 million, or 14 percent, from $86.8 million in fiscal 2001. During the
year, order processing-fee revenue decreased to $16.9 million from $18.6 million
in fiscal 2001, a decrease of $1.7 million, or 9 percent. Transaction-fee
revenue totaled $44.1 million, a decrease of $11.7 million, or 21 percent, from
$55.8 million the previous fiscal year. Sell-through revenue was $7.3 million in
fiscal 2002 as compared to $8.4 million in fiscal 2001. Communication fee
revenue was $1.1 million in fiscal 2002 as compared to $1.5 million in fiscal
2001, a decrease of $0.4 million, or 27 percent.
Also included in the PPT business segment are the following other revenues: (i)
direct revenue sharing fees totaling $3.9 million in fiscal 2002, an increase of
$2.0 million, or 105
17
percent, from the $1.9 million in fiscal 2001; and (ii) royalty and other
revenues totaling $0.8 million in fiscal 2002 and $0.6 million in fiscal 2001.
Royalty and other revenue from Rentrak Japan totaled $6.4 million during fiscal
2002, as a result of the business restructuring with Rentrak Japan, compared to
$1.1 million in Rentrak Japan royalty revenue in the previous fiscal year.
Cost of sales in the PPT business segment consist of order processing costs,
transaction costs, sell through costs and freight costs, and represent the
direct costs to produce the PPT revenues. Order processing costs, transaction
costs and sell through costs represent the amounts due the motion picture
studios, video game publishers or other licensee or owner of the rights to
certain video programming ("Program Suppliers") that hold the distribution
rights to the videocassettes, DVD's and video games ("Units") under agreement
with the Company. Freight costs represent the cost to pick, pack and ship orders
of Units to the Participating Retailers.
Cost of sales for the PPT business segment in fiscal 2002 decreased to $57.3
million from $68.4 million the prior fiscal year, a decrease of $11.1 million,
or 16 percent. The change is primarily due to the factors that led to changes in
revenue as noted above. In fiscal 2002 the Company's PPT business segment gross
profit margin, excluding the royalty revenue from Rentrak Japan, increased to 23
percent from 21 percent the previous year.
Selling, General & Administrative expenses in the 3PF business segment consist
of the indirect costs to sell, administer and manage the fulfillment business.
These expenses consist primarily of compensation and benefits, development,
marketing and advertising costs, legal and professional fees, communications
costs, depreciation and amortization of tangible fixed assets and software,
personal property leases, as well as other general corporate expenses.
PPT business segment selling and administrative expenses were $12.3 million in
fiscal 2002 compared to $25.5 million in fiscal 2001. This decrease of $13.2
million, or 52 percent, was primarily attributable to the following items all
reported in the quarter ended September 30, 2000: (i) a $1.3 million severance
payment to the Company's former chairman and chief executive officer; (ii) $0.6
million in legal costs and proxy solicitation costs incurred by the Company
related to the proxy contest at the 2000 annual shareholders meeting; (iii) $0.4
million in costs to reimburse the dissident shareholder group for their legal
and other costs associated with the proxy contest; (iv) $6.1 million of costs
associated with the reserve or write-off of investments related to customers
participating in the Company's Retailer Financing Program; (v) $1.0 million in
write-offs of investments and other assets deemed by the Company to be
non-realizable; (vi) $1.4 million in write-offs of accounts receivable based on
the Company's assessment of the collectibility of those accounts due to changes
in the financial condition and payment ability of those customers and (vii) a
$0.5 million loss realized on the sale of stock received previously by the
Company pursuant to the settlement of a claim with a prior customer. The $6.1
million of costs associated with the accounts receivable reserve and write off
of investments related to the Company's retailer financing program. This program
consisted of $5.1 million trade accounts receivable due from two customers as a
result of PPT revenue transactions and a $925,216 equity investment in one of
the companies. Both these customers declared bankruptcy in the quarter ended
September 30, 2000, giving rise to this charge. Additionally, the Company's
legal costs in fiscal 2002, related to the PPT business, decreased by
approximately $1.6 million from the prior fiscal year.
18
The net gain from the litigation settlement with a prior customer of the
Company, Hollywood Entertainment, was $1,563,000 for fiscal 2002 compared to
$225,000 for fiscal 2001, an increase of approximately $1.4 million. While the
settlements in both fiscal years were related to the same prior customer, they
related to separate claims. The $1,563,000 of proceeds from the claim settled in
fiscal 2002 was received in May 2002 from Hollywood Entertainment and related to
a breach of a fulfillment contract while most of the proceeds from the
settlement relating to the $225,000 recognized in fiscal 2001 were received in
fiscal 2000 when the claim was finalized; the $225,000 represents the receipt of
an insurance settlement in fiscal 2001 relating to this claim.
PPT other income (expense) was an expense of $2.1 million in fiscal 2001
compared to income of $8.1 million for fiscal 2002, an increase of $10.3
million. This increase is primarily due to: (i) a $0.1 million decrease in
interest income; (ii) a $0.8 million decrease in interest expense due to the
payoff of the line of credit at the beginning of fiscal 2002; (iii) a decrease
in loss on the sale of investment securities, a loss realized on the sale of
stock received previously by the Company pursuant to the settlement of a claim
with a customer and the write-off of assets, or write-down of various assets to
their net realizable value, totaling $1.7 million in fiscal 2001 compared to $0
in fiscal 2002; and (iv) a $8.0 million recognition of other income related to
the business restructuring with Rentrak Japan in fiscal 2002.
As a result of the above, for the fiscal year ended March 31, 2002, the Company
recorded pre-tax income of $19.9 million, or 25 percent of total revenue, from
its PPT business, including royalty revenue and other income from the Rentrak
Japan business restructuring, compared to a pre-tax loss of $7.9 million, or 9
percent of total revenue, in the prior fiscal year.
The Cassette and DVD distribution business is a highly competitive industry that
is rapidly changing. The effect of these changes could have a material impact on
the Company's operations. Item 1. Business--Competition of this report further
describes certain of these factors.
Included in other consolidated revenue are the results from other subsidiaries,
primarily the operations of 3PF.
Revenues in the 3PF business segment generally consist of storage fees,
receiving fees, handling fees, special service fees, freight charges and other
fees. These fees represent the continuum of services provided by 3PF from: (i)
receipt of client product(s) into the distribution facility; (ii) storage of the
client product(s); (iii) the picking and packing services (handling) and other
special services for client product(s) to prepare for shipment , and: (iv)
freight charges for the administration of the client shipping and the charges by
various carriers to ship the clients' product to their customers.
Cost of sales in the 3PF business segment consist of freight, compensation,
agency employees, supplies, occupancy, equipment leases and depreciation, and
represent the direct costs to produce the fulfillment revenues. Freight
represents the charges by various carriers to 3PF to ship its clients ` products
to their customers. Compensation and agency employees represent the costs of
management and staff cost directly involved in the daily fulfillment operations.
Occupancy represents the facility costs of the
19
real property to conduct the fulfillment operations. Equipment leases and
depreciation represent the cost of equipment and other assets used in the
fulfillment operations.
Selling, General & Administrative expenses in the 3PF business segment consist
of the indirect costs to sell, administer and manage the fulfillment business.
These expenses consist primarily of compensation and benefits, development,
marketing and advertising costs, legal and professional fees, communications
costs, depreciation and amortization of tangible fixed assets and software,
personal property leases, as well as other general corporate expenses.
Total revenues from 3PF decreased to $15.3 million for fiscal 2002 compared to
$20.1 million for fiscal 2001, a decrease of $4.8 million, or 23 percent. This
decrease was primarily due to the loss of two key customers, one at the end of
fiscal 2001 and the other early in 2002, whose fiscal 2001 revenues totaled
approximately $9.7 million, offset partially by significant fiscal 2002 growth
of revenues from 3PF's largest customer and modest revenues from the addition of
new customers in fiscal 2002. Cost of sales was $14.7 million, a decrease of
$3.7 million from the $18.4 million recorded in fiscal 2001. This decrease is
primarily due to the corresponding decrease in revenue noted above, offset by
the on-going carrying cost of unutilized distribution facility capacity. As a
percentage of total 3PF revenue, total cost of sales was 96 percent and 92
percent for fiscal 2002 and 2001, respectively. Selling and administrative
expenses decreased to $4.1 million in fiscal 2002 from $5.5 million in fiscal
2001, a decrease of $1.4 million. As a percentage of total revenue, selling and
administrative expenses increased to 27 percent for fiscal 2002 from 24 percent
for the prior fiscal year. The $1.4 million decrease was primarily due to a $0.7
million recovery of an amount reserved in fiscal 2001 for the anticipated
non-collection of one of 3PF's trade accounts due the Company as the result of a
bankruptcy filing by the customer. This decrease was also the result of
decreased compensation, advertising, travel and entertainment expenses and other
costs as the Company adjusted its overhead infrastructure to better fit the
operating size of its business. The Company expects to continually evaluate its
selling and administrative expenses and appropriately align them in conjunction
with the overall size of business it is operating.
3PF's other income (expense) was an expense of $250,000 in fiscal 2002 compared
to $0 in fiscal 2001. This expense was due to the write-off of an unrealizable
investment previously made in a former customer.
As a result of the foregoing factors, for the fiscal year ended March 31, 2002,
3PF recorded a pre-tax loss of $4.1 million, or 27 percent of total revenue.
This compares with pre-tax loss of $3.8 million, or 19 percent of total revenue,
in fiscal 2001.
As a result of the above, for the fiscal year ended March 31, 2002, the Company
recorded consolidated pre-tax income from continuing operations of $15.8
million, or 16 percent of total consolidated revenue, compared to a consolidated
pre-tax loss from continuing operations of $11.7 million, or 11 percent of total
consolidated revenue, in the prior fiscal year.
The consolidated effective tax rate providing the tax provision for continuing
operations for fiscal 2002 was 38.0 percent, compared to a consolidated
effective tax rate of 37.3 percent providing the tax benefit for fiscal 2001.
20
Discontinued Operations
- -----------------------
Due to the significant increase in sell through activity throughout the
industry, the operations of BlowOut Video have not continued to meet the
expectations of management. As a result, during the three-month period ended
June 30, 2002, management initiated a plan to discontinue the retail store
operations of BlowOut Video. The plan called for an exit from the stores by the
end of fiscal 2003, either through cancellation of the lease commitments and
liquidation of assets, or through sale of the stores to a third party. As of
March 31, 2003, all operations had ceased. Rentrak plans to continue selling its
contractually available end-of-term PPT revenue sharing product through broker
channels after the store operations are fully discontinued.
BlowOut Video, whose operations were completely discontinued during fiscal 2003
as described above, generated revenues of $6.6 million and a net loss of $0.8
million, or $0.07 per diluted share, in the year ended March 31, 2002, compared
with revenues of $9.8 million and a net loss of $0.3 million or $0.02 per share,
during the year ended March 31, 2001.
FINANCIAL CONDITION
At March 31, 2003, total assets were $30.7 million, a decrease of $7.9 million
from $38.6 million a year earlier. The Company had $10.1 million of cash on hand
at March 31, 2003 compared to $12.0 million at March 31, 2002, a decrease of
$1.9 million (see the Consolidated Statement of Cash Flows in the accompanying
Consolidated Financial Statements). Net accounts receivable decreased $1.5
million from $11.2 million at March 31, 2002 to $9.7 million at March 31, 2003,
primarily due to a reduction in revenue. Other current assets decreased $1.3
million from $3.7 million at March 31, 2002, to $2.4 million at March 31, 2003.
Current assets of discontinued operations decreased to $0 at March 31, 2003 from
$2.2 million at March 31, 2002 as the BlowOut Video operations had ceased.
Property and equipment decreased $1.5 million from $3.9 million at March 31,
2002 to $2.4 million at March 31, 2003, primarily due to the impairment of 3PF
equipment and the sale of equipment to one of 3PF's customers (See Note 3).
Other assets increased $0.7 million from $1.2 million at March 31, 2002 to $1.9
million at March 31, 2003 due to a financing lease with one of 3PF's customers.
At March 31, 2003, total liabilities were $15.3 million, a decrease of $6.0
million from $21.3 million at March 31, 2002. Accrued liabilities increased $0.6
million from $0.5 million at March 31, 2002 to $1.1 million at March 31, 2003.
Accounts payable decreased $5.5 million from $18.2 million at March 31, 2002 to
$12.7 million at March 31, 2003, primarily due to the timing of studio and other
vendor payments, and as a result of lower revenues and associated cost of sales.
Net current liabilities of discontinued operations decreased to $0 at March 31,
2003 from $0.4 million at March 31, 2002 as the BlowOut Video operations had
ceased. Total deferred revenue decreased approximately $0.2 million from $0.4
million at March 31, 2002 to $0.2 million at March 31, 2003.
At March 31, 2003, stockholders' equity was $15.4 million, a decrease of $1.9
million from $17.3 million at March 31, 2002. Most of this decrease in
stockholders' equity is attributable to: (i) the reduction in common stock and
capital in excess of par value as the
21
result of the repurchase of 386,800 shares during fiscal 2003 under the
Company's stock repurchase program; and (ii) the increase in the accumulated
deficit due to the consolidated net loss of $0.5 million for fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, the Company had cash and other liquid investments of $10.1
million, compared to $12.0 million at March 31, 2002. At March 31, 2003 the
Company's current ratio (current assets/current liabilities) was 1.74 compared
to 1.56 a year earlier.
In May 2000 the Company obtained a line of credit with a lender in an amount not
to exceed the lesser of (a) $12 million or (b) the sum of 85% of the net amount
of eligible accounts receivable. Interest under the line was payable monthly at
the bank's prime rate plus 1/4% (5.0% at March 31, 2002). The line was secured
by substantially all of the Company's assets. The terms of the credit agreement
include financial covenants requiring: (1) $15 million of tangible net worth to
be maintained at all times; (2) a consolidated net profit to be achieved each
fiscal year equal to or exceeding $1.00, and (3) $5 million of working capital
to be maintained at all times. The agreement also restricted the amount of loans
and indebtedness and limited the payment of dividends on the Company's stock,
among other restrictions. Based upon the financial results reported as of March
31, 2002 and the twelve month period then ended, the Company was in compliance
with the three financial covenants at March 31, 2002. At March 31, 2002, the
Company had no outstanding borrowings under this agreement.
On May 26, 2002, the Company canceled its line of credit described above. On May
30, 2002, the Company entered into an agreement for a new secured revolving line
of credit. The line of credit carries a maximum limit of $4,500,000 and expires
on July 1, 2003. The Company has the choice of either the bank's prime interest
rate or LIBOR +2%. The line is secured by substantially all of the Company's
assets. The terms of the credit agreement include financial covenants requiring:
(1) $16 million of tangible net worth to be maintained at all times; (2) a
consolidated net profit to be achieved each fiscal quarter beginning with the
quarter ending September 30, 2002 of a minimum of $1.00; (3) minimum year to
date profit of $1.00 (excluding certain exempted expenses) beginning with the
quarter ending September 30, 2002; and (4) achievement of specific current and
leverage financial ratios. Based upon the financial results reported as of March
31, 2003, and for the three and twelve month periods then ended, the Company has
determined it is not in compliance with the tangible net worth covenant at March
31, 2003, and net profit financial covenants for the periods ended March 31,
2003. The Company has obtained a waiver of non-compliance with these financial
covenants at March 31, 2003 and for the three and twelve month periods ended
March 31, 2003. At March 31, 2003 and June 24, 2003, the Company had no
outstanding borrowings under this agreement.
Effective June 16, 2003, the bank extended the current line of credit to the
Company through October 1, 2003, under the same general terms and conditions
while the Company and the bank finalize a new line of credit. The Company
believes the new line of credit will be finalized not later than October 1,
2003.
In 1992, the Company established a Retailer Loan Program whereby, on a selective
basis, it provided financing to Participating Retailers that the Company
believed had the potential for substantial growth in the industry. The
underlying rationale for this program was the
22
belief that the Company could expand its business and at the same time
participate in the rapid growth experienced by the video retailers in which it
invested. During fiscal 2001, the Company discontinued new financings under this
program and provided reserves of $6.6 million representing the entire
outstanding balance of the program loans. The Company continues to seek
enforcement of agreements entered into in connection with this program in
accordance with their terms to the extent practicable.
The Company's sources of liquidity include its cash balance, cash generated from
operations and its available credit resources. Based on the Company's current
budget and projected cash needs, the Company believes these available sources of
liquidity will be sufficient to fund the Company's operations and capital
requirements for the fiscal year ending March 31, 2004.
23
Rentrak Corporation
Table of Contractual Obligations
As of March 31, 2003
- ------------------------------------------------------------------------------------------------------------------
Contractual Obligations Payments due by period
- ------------------------------------------------------------------------------------------------------------------
Total Less than 1 1-3 years 3-5 years More than 5
year years
- ------------------------------------------------------------------------------------------------------------------
Capital Lease Obligations $309,416 $110,508 $198,908 - -
- ------------------------------------------------------------------------------------------------------------------
Operating Lease Obligations 13,689,501 2,634,692 5,289,028 $4,204,122 $1,561,659
- ------------------------------------------------------------------------------------------------------------------
Purchase Obligations 475,871 475,871 - - -
- ------------------------------------------------------------------------------------------------------------------
Executive Compensation 3,540,049 1,859,562 1,625,987 54,500 -
- ------------------------------------------------------------------------------------------------------------------
Total 18,014,837 5,080,633 7,113,923 4,258,622 1,561,659
- ------------------------------------------------------------------------------------------------------------------
Critical Accounting Policies
- ----------------------------
The Company considers as its most critical accounting policies those that
require the use of estimates and assumptions, specifically, accounts receivable
reserves and studio guarantee reserves. In developing these estimates and
assumptions, the Company takes into consideration historical experience, current
and expected economic conditions and other relevant data. Please refer to the
Notes to the Consolidated Financial Statements for a full discussion of the
Company's accounting policies.
Allowance for Doubtful Accounts
- -------------------------------
Credit limits are established through a process of reviewing the financial
history and stability of each customer. The Company regularly evaluates the
collectibility of accounts receivable by monitoring past due balances. If it is
determined that a customer may be unable to meet its financial obligations, a
specific reserve is established based on the amount the Company expects to
recover. An additional general reserve is provided based on aging of accounts
receivable and the Company's historical collection experience. If circumstances
change related to specific customers, overall aging of accounts receivable or
collection experience, the Company's estimate of the recoverability of accounts
receivable could materially change.
Studio Reserves
- ---------------
The Company has entered into guarantee contracts with certain program suppliers
providing titles for distribution under the PPT system. These contracts
guarantee the suppliers minimum payments. The Company, using historical
experience and year to date rental experience for each title, estimates the
projected revenue to be generated under each guarantee. The Company establishes
reserves for titles that are projected to experience a shortage under the
provisions of the guarantee. The Company continually reviews these factors and
makes adjustments to the reserves as needed. Actual results could differ from
these estimates and could have a material effect on the recorded studio
reserves.
24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has considered the provisions of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments." The Company
had no holdings of derivative financial or commodity instruments at March 31,
2003. A review of the Company's other financial instruments and risk exposures
at that date revealed that the Company had exposure to interest rate risk. The
Company utilized sensitivity analyses to assess the potential effect of this
risk and concluded that near-term changes in interest rates should not
materially adversely affect the Company's financial position, results of
operations or cash flows.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Item Page
Independent Auditors Report 27
Consolidated Balance Sheets as of March 31, 2003 28
and 2002
Consolidated Statements of Operations for the Years 29
Ended March 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity 30
for the Years Ended March 31, 2003,
2002 and 2001
Consolidated Statements of Cash Flows for the Years 31
Ended March 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements 32
Financial Statement Schedules -- 57
Schedule II
Schedules not included have been omitted because they are not applicable
or the required information is shown in the financial statements or
notes thereto.
26
Independent Auditors' Report
The Board of Directors
Rentrak Corporation:
We have audited the accompanying consolidated balance sheets of Rentrak
Corporation and subsidiaries as of March 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended March 31, 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Rentrak Corporation
and subsidiaries as of March 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 2003 in conformity with accounting principles generally accepted
in the United States of America.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplementary
information included in Schedule II required by the Securities and Exchange
Commission is presented for purposes of additional analysis and is not a
required part of the basic consolidated financial statements. Such information
has been subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic consolidated financial statements
taken as a whole.
KPMG LLP
Portland, Oregon
June 9, 2003
27
RENTRAK CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2003 and 2002
Assets 2003 2002
------------------- -------------------
Current assets:
Cash and cash equivalents $ 10,063,541 12,028,684
Accounts receivable, net of allowance for doubtful accounts
of $748,139 and $1,086,143 9,706,485 11,237,396
Advances to program suppliers 418,101 1,042,768
Income tax receivable 81,085 70,000
Deferred tax assets 2,796,908 2,295,567
Other current assets 2,430,334 3,660,457
Current assets of discontinued operations -- 2,180,360
------------------- -------------------
Total current assets 25,496,454 32,515,232
Property and equipment, net 2,404,763 3,879,819
Deferred tax assets 894,083 1,002,882
Other assets 1,931,133 1,214,394
------------------- -------------------
Total assets $ 30,726,433 38,612,327
=================== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 12,710,999 18,192,630
Accrued liabilities 1,143,785 549,277
Accrued compensation 610,022 1,338,748
Deferred revenue 156,692 379,106
Current liabilities of discontinued operations -- 379,298
------------------- -------------------
Total current liabilities 14,621,498 20,839,059
------------------- -------------------
Long-Term Liabilities:
Lease obligations, deferred gain and customer deposits 668,039 495,586
------------------- -------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value. Authorized 10,000,000 shares, none issued -- --
Common stock, $0.001 par value. Authorized 30,000,000 shares;
issued and outstanding 9,471,612 shares in 2003 and
9,866,283 shares in 2002 9,472 9,866
Capital in excess of par value 39,655,212 41,730,216
Notes receivable -- (377,565)
Cumulative other comprehensive income 180,879 180,453
Accumulated deficit (24,408,667) (23,910,288)
Less deferred charge - warrants -- (355,000)
------------------- -------------------
Total stockholders' equity 15,436,896 17,277,682
------------------- -------------------
Total liabilities and stockholders' equity $ 30,726,433 38,612,327
=================== ===================
See accompanying notes to consolidated financial statements.
28
RENTRAK CORPORATION AND SUBSIDIARIES
Consolidated Statement of Operations
Years ended March 31, 2003, 2002 and 2001
2003 2002 2001
------------------- ------------------- -------------------
Revenues:
PPT $ 67,081,943 69,646,207 86,114,522
Other 19,138,418 26,347,775 21,945,527
------------------- ------------------- -------------------
86,220,361 95,993,982 108,060,049
------------------- ------------------- -------------------
Operating costs and expenses:
Cost of sales 70,961,730 71,979,415 86,808,205
Selling and administrative 14,786,806 17,281,843 31,001,766
Net gain from litigation settlements (Note 11) (361,847) (1,563,153) (225,000)
Asset Impairment 844,041 424,177 --
------------------- ------------------- -------------------
86,230,730 88,122,282 117,584,971
------------------- ------------------- -------------------
Income (loss) from operations (10,369) 7,871,700 (9,524,922)
------------------- ------------------- -------------------
Other income (expense):
Interest income 204,283 195,628 307,240
Interest expense (25,009) (17,598) (768,599)
Gain (loss) on investments -- (231,820) (597,124)
Gain on Rentrak Japan transaction (Note 1) -- 7,967,233 --
Other -- -- (1,090,190)
------------------- ------------------- -------------------
179,274 7,913,443 (2,148,673)
------------------- ------------------- -------------------
Income (loss) from continuing operations
before income taxes 168,905 15,785,143 (11,673,595)
Income tax (provision) benefit (84,657) (5,998,355) 4,355,603
------------------- ------------------- -------------------
Net income (loss) from continuing
operations 84,248 9,786,788 (7,317,992)
Loss from discontinued operations, net of
tax benefit of $357,094, $485,884, and $158,972 (582,627) (792,757) (259,376)
------------------- ------------------- -------------------
Net income (loss) $ (498,379) 8,994,031 (7,577,368)
=================== =================== ===================
Earnings (loss) per common share:
Basic:
Continuing operations $ 0.01 0.94 (0.61)
Discontinued operations (0.06) (0.08) (0.02)
------------------- ------------------- -------------------
Net income (loss) $ (0.05) 0.86 (0.63)
=================== =================== ===================
Diluted:
Continuing operations $ 0.01 0.92 (0.61)
Discontinued operations (0.06) (0.07) (0.02)
------------------- ------------------- -------------------
Net income (loss) $ (0.05) 0.85 (0.63)
=================== =================== ===================
See accompanying notes to consolidated financial statements.
29
Rentrak Corporation and Subsidiaries
Consolidate Statements of Stockholders' Equity
For The Years Ended March 31, 2001, 2002, and 2003
COMMON STOCK Capital in
Number of excess of Notes
shares Amount par value receivable
------ ------ --------- ----------
Balance At March 31, 2000 10,514,561 $10,515 44,445,199
Issuance of common stock under employee
stock option plans 1,721,060 1,721 8,026,400 -
Net loss - - - -
Change in net unrealized gain (loss) on
investment securities, net of tax - - - -
Total comprehensive loss
Issuance of notes receivable (7,728,186)
Amortization of warrants - - - -
--------------------------------------------------------
Balance At March 31, 2001 12,235,621 12,236 52,471,599 (7,728,186)
Repurchase of common stock (1,188,400) (1,188) (4,523,061) -
Issuance of common stock under employee
stock option plans 227,812 227 732,511 -
Issuance of common stock 87,000 87 136,473 -
Repurchase of common stock for
Cancellation of notes receivable (1,495,750) (1,496) (7,349,125) -
Net income - - - -
Change in net unrealized gain (loss) on
investment securities, net of tax - - - -
Cumulative Translation Adjustments - - - -
Total comprehensive income
Income tax benefit from stock option exercise - - 261,819 -
Cancellation of notes receivable - - 7,350,621
Amortization of warrants - - - -
--------------------------------------------------------
Balance At March 31, 2002 9,866,283 9,866 41,730,216 (377,565)
Repurchase of common stock (386,800) (386) (1,821,066) -
Issuance of common stock under employee
stock option plans 91,129 91 348,424 -
Repurchase of common stock for cancellation
of notes receivable (99,000) (99) (377,466) -
Net loss - - - -
Cumulative Translation Adjustments - - - -
Total comprehensive loss
Retirements of warrants - - (300,000) -
Income tax benefit from stock option exercise - - 75,104 -
Cancellation of notes receivable - - 377,565
Amortization of warrants - - - -
--------------------------------------------------------
Balance At March 31, 2003 9,471,612 $ 9.472 39,655,212 -
========================================================
Cumulative
other Deferred
comprehensive Accumulated charge Comprehensive
income deficit warrants Total income (loss)
------ ------- -------- ----- -------------
Balance At March 31, 2000 (264,684) (25,326,951) (783,492) 18,080,587
Issuance of common stock under employee
stock option plans - - - 8,028,121
Net loss - (7,577,368) - (7,577,368) (7,577,368)
Change in net unrealized gain (loss)
on investment securities, net of tax 215,112 - - 215,112 215,112
----------------
Total comprehensive loss $(7,362,256)
================
Issuance of notes receivable - (7,728,186)
Amortization of warrants - - 368,492 368,492
------------------------------------------------------------------------------
Balance At March 31, 2001 (49,572) (32,904,319) (415,000) 11,386,758
Repurchase of common stock - - - (4,524,249)
Issuance of common stock under employee
stock option plans - - - 732,738
Issuance of common stock - - - 136,560
Repurchase of common stock for cancellation
of notes receivable - - - (7,350,621)
Net income - 8,994,031 - 8,994,031 8,994,031
Change in net unrealized gain (loss) on
investment securities, net of tax 49,572 - - 49,572 49,572
Cumulative Translation Adjustments 180,453 - - 180,453 180,453
---------------
Total comprehensive income $ 9,224,056
===============
Income tax benefit from stock option - - - 261,819
exercise
Cancellation of notes receivable - - - 7,350,621
Amortization of warrants - - 60,000 60,000
------------------------------------------------------------------------------
Balance At March 31, 2002 180,453 (23,910,288) (355,000) 17,277,682
Repurchase of common stock - - - (1,821,452)
Issuance of common stock under employee
stock option plans - - 348,515
Repurchase of common stock for cancellation
of notes receivable - - - (377,565)
Net loss - (498,379) - (498,379) (498,379)
Cumulative Translation Adjustments 426 - - 426 426
---------------
Total comprehensive loss ($497,953)
===============
Retirements of warrants - - - (300,000)
Income tax benefit from stock option
exercise - - - 75,104
Cancellation of notes receivable -
- - 377,565
Amortization of warrants - - 355,000 355,000
------------------------------------------------------------------------------
Balance At March 31, 2003 180,879 (24,408,667) - 15,436,896
==============================================================================
30
RENTRAK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 2003, 2002, and 2001
2003 2002 2001
-------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (498,379) 8,994,031 (7,577,368)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss on disposal of discontinued operations 582,627 792,757 259,376
Loss (gain) on and write-off of disposition of
assets (3,654) 414,486 1,687,314
Gain on Rentrak Japan transactions -- (7,967,233) --
Tax Benefit from stock option exercise (75,104) (261,819) --
Loss on write-down of property and equipment 844,041 424,177 --
Depreciation and amortization 1,356,022 1,438,449 1,266,515
Amortization of warrants 355,000 60,000 368,492
Provision (credit) for doubtful accounts (1,142,138) (1,546,301) 7,455,734
Retailer financing program reserves -- 50,000 545,478
Reserves on advances to program suppliers -- -- 95,959
Deferred income taxes (242,334) 5,433,705 (4,646,420)
Change in specific accounts:
Accounts receivable 2,673,049 1,361,934 4,058,840
Advances to program suppliers 624,667 235,397 1,558,642
Income tax receivable (11,085) 209,160 (109,860)
Notes receivable and other current assets 1,528,395 (117,663) 2,011,420
Accounts payable (5,481,631) (193,441) (6,538,948)
Accrued liabilities and compensation (134,218) (387,563) 960,716
Deferred revenue and other liabilities (49,535) (1,365,477) (756,912)
-------------------------------------------------------------------
Net cash provided by
operating activities 325,723 7,574,599 638,978
-------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (1,607,421) (1,379,111) (2,947,221)
Proceeds from sale of investments -- 161,513 1,605,555
Net Proceeds from sale of investment in Rentrak Japan -- 2,509,500 --
Proceeds from the sale of 3PF stock -- 1,000,000 --
Additions (dispositions) of other assets and
intangibles (128,943) 385,515 (792,672)
-------------------------------------------------------------------
Net cash provided by (used in) investing activities (1,736,364) 2,677,417 (2,134,338)
-------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (payments) on line of credit -- (1,917,705) 1,917,705
Net payments on notes payable -- -- (500,000)
Repurchase of common stock and warrants (2,121,452) (633,749) --
Issuance of common stock 348,515 732,738 299,932
Issuance of common stock to non-employees -- 136,560 --
-------------------------------------------------------------------
Net cash provided by (used in)
financing activities (1,772,937) (1,682,156) 1,717,637
-------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (3,183,578) 8,569,860 222,277
Net cash provided (used) by discontinued operations 1,218,435 135,907 (927,631)
Cash and cash equivalents at beginning of year 12,028,684 3,322,917 4,028,271
-------------------------------------------------------------------
Cash and cash equivalents at end of year $ 10,063,541 12,028,684 3,322,917
===================================================================
See accompanying notes to consolidated financial statements.
31
(1) Business of the Companies, Summary of Significant Accounting Policies,
and Other Items
(a) Introduction
Rentrak Corporation (the Company) (an Oregon corporation)
classifies its services in three segments, PPT, 3PF, and Other.
The Company is principally engaged in the processing of
information regarding the rental and sale of video cassettes and
DVD's (Units) and the distribution of prerecorded Units to the
home video market throughout the United States and Canada using
its Pay-Per-Transaction (PPT) revenue sharing program.
Under its PPT program, the Company enters into contracts to lease
Units from program suppliers (producers of motion pictures and
licensees and distributors of home video cassettes and DVD's)
which are then leased to retailers for a percentage of the
rentals charged by the retailers.
The Company's consolidated subsidiary, 3PF, provides order
processing and inventory management services to e-tailers,
wholesalers, and businesses requiring just-in-time fulfillment.
The Company's wholly owned subsidiary BlowOut Video, Inc. sold
video cassettes and DVDs through its three retail video stores<