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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,
1998 or
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number D-15159
RENTRAK CORPORATION
(exact name of registrant as specified in its charter)
Oregon 93-0780536
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number.)
7700 NE Ambassador Place, Portland, Oregon 97220
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:(503)284-7581
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common stock $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K, or any amendment to this Form 10-K [ ]
As of June 1, 1998, the aggregate market value of the voting stock
held by non-affiliates of the registrant, based on the last sales
price as reported by NASDAQ was $43,577,022.
(Excludes value of shares of Common Stock held of record by
directors and officers and by shareholders whose record ownership
exceeded five percent of the shares outstanding at June 1, 1997.
Includes shares held by certain depository organizations.)
As of June 1, 1997, the Registrant had 11,006,224 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR THE 1998 ANNUAL
MEETING OF THE SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART
III OF THIS FORM 10-K
TABLE OF CONTENTS
PART I
Item Page
1. Business 3
2. Properties 9
3. Legal Proceedings 9
4. Submission of Matters to a Vote of
Security Holders 10
PART II
5. Market for the Registrant's Common Stock and
Related 11
Stockholder Matters
6. Selected Financial Data 12
7. Management's Discussion and Analysis of Financial 13
Conditions and Results of Operations
8. Financial Statements and Supplementary Data 22
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 22
PART III
10. Directors and Executive Officers
of the Registrant 53
11. Executive Compensation 53
12. Security Ownership of Certain Beneficial Owners 53
and Management
13. Certain Relationships and Related Transactions 53
PART IV
14. Exhibits, Financial Statement Schedules and 54
Reports on Form 8-K
PART I
ITEM 1. BUSINESS
GENERAL
The Company's primary business is the distribution
of videocassettes to home video specialty stores and
other retailers using its Pay Per Transaction system.
In addition, prior to November 1996, the Company
operated a number of "store within a store" retail video
outlets which rented and sold videocassettes in Wal-Mart
and K-Mart stores through its BlowOut Entertainment
Inc., ("BlowOut") subsidiary. The Company also operated
a number of retail stores which sold professional and
collegiate licensed sports apparel merchandise through
its Pro Image Inc., ("Pro Image") subsidiary, which were
either closed or disposed of during the 1997 fiscal
year.
At March 31, 1996, the Company accounted for the
operations of Pro Image and BlowOut as discontinued
operations. Disposition of Pro Image and BlowOut
occurred during the fiscal year ended March 31, 1997.
[See Note 14 of the Notes to The Consolidated Financial
Statements and See "Business/License Sports Apparel" and
"Business/Video Retail".]
PAY-PER-TRANSACTION
The Company distributes pre-recorded videocassettes
and other media ("Cassettes") principally to home video
specialty stores through its Pay Per Transaction revenue
sharing system (the "PPT System"). The PPT System
enables home video specialty stores and other retailers,
including grocery stores and convenience stores, that
rent Cassettes to consumers ("Retailers") to obtain
Cassettes at a significantly lower initial cost than if
they purchased the Cassettes from traditional video
distributors.
Under traditional distribution, a motion picture
studio, licensee, or other owner of the rights to
certain video programming ("Program Suppliers") sells
Cassettes to a distributor for an average price of
approximately $64. The distributor then sells Cassettes
to a Retailer for an average price of approximately $70.
The Retailer then rents Cassettes to the consumer at an
average price of $2.50 and retains all of the rental
revenue. Under the PPT System, after the Retailer pays
an application fee (the "Application Fee") to the
Company and is approved for participation in the PPT
System, Cassettes are leased to the Retailer for an
initial fee (the "Order Processing Fee" formerly
referred to as the "Handling Fee") plus a percentage of
revenues generated by the Retailers 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 Program
Suppliers that hold the distribution rights to the
Cassettes. The expected benefit to the Retailer is a
higher volume of rental transactions, as well as a
reduction in capital cost and risk. The expected
benefit to the Program Supplier is an increase in the
total number of Cassettes shipped, resulting in
increased revenues and opportunity for profit. The
expected 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. The Company also owns a ten
percent interest in Rentrak Japan, K.K. ("Rentrak
Japan"), a Japanese corporation which markets a similar
service to video retailers in Japan.
In February 1998, the Company entered into a
shareholders agreement and a PPT agreement with Columbus
Holdings Limited and Rentrak UK Limited to develop the
Company's PPT distribution and information processing
business in the United Kingdom through Rentrak UK. The
Company owns 25 percent of Rentrak UK. Rentrak UK did
not commence distribution prior to the end of the 1998
fiscal year.
The Company currently offers substantially all of
the titles of a number of Program Suppliers, including
Twentieth Century Fox Home Entertainment (formerly Fox
Video), a subsidiary of Twentieth Century Fox Film
Corporation, and Buena Vista Pictures Distribution,
Inc., a subsidiary of The Walt Disney Company. The
Company's arrangements with Program Suppliers are of
varying duration, scope and formality. In some cases,
the Company has obtained Cassettes 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. There can be no assurance that
any of the Program Suppliers will continue to distribute
Cassettes 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 can be 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 Cassettes 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 48
percent, a second that generated 17 percent, and a third
that generated 15 percent of Rentrak revenues for the
year ended March 31, 1998. There were no other Program
Suppliers who provided product that generated more than
10 percent of revenues for the year ended March 31,
1998.
Certain Program Suppliers have requested, and the
Company has provided, financial or performance
commitments from the Company, including advances,
warrants, letters of credit or guarantees, as a
condition of obtaining certain titles. The Company has
provided such commitments primarily to induce Program
Suppliers to begin participating in the PPT System and
to demonstrate its financial benefits. The Company
determines whether to provide such commitments on a case-
by-case basis, depending upon the Program Supplier's
success with such titles prior to home video
distribution and the Company's assessment of expected
success in home rental distribution. The Company
intends to continue this practice of providing such
commitments and there can be no assurance that this
practice will not in the future result in losses which
may be material.
One customer, Hollywood Entertainment Corporation,
accounted for 11 percent of the Company's revenues in
1998. [See "Legal Proceedings"]
Distribution of Cassettes
The Company's proprietary Rentrak Profit Maker
Software (the "RPM Software") allows Participating
Retailers to order Cassettes through their Point of Sale
("POS") system software and provides the Participating
Retailers with substantial information regarding all
offered titles. Ordering occurs via a networked
computer interface. To further assist the Participating
Retailers in ordering, the Company also produces a
monthly product catalogue called "Ontrak."
To be competitive, Retailers must be able to rent
their Cassettes on the "street date" announced by the
Program Supplier for the title. The Company distributes
its Cassettes via overnight air courier to assure
delivery to Participating Retailers on the street date.
The freight costs of such distribution comprise a
portion of the Company's cost of sales.
Computer Operations
To participate in the Company's PPT System,
Retailers must install Rentrak approved computer
software and hardware to process all of their rental
and sale transactions. Participating Retailers are
required to use one of the POS software vendors approved
by the Company as conforming to the Company's
specifications. The Company's RPM Software resides on
the Retailer's POS computer system and transmits a
record of PPT transactions to the Company over a
telecommunications network. The RPM Software also
assists the Retailer in ordering newly released titles
and in managing the inventory of Cassettes.
The Company's computer processes these transactions
and prepares reports for Program Suppliers and
Retailers. In addition, it determines variations from
statistical norms for potential audit action. The
Company's computer also transmits information on new
titles and confirms orders made to the RPM Software at
the Retailer location.
Year 2000
Many computer software programs, as well as hardware
with embedded software, use a two-digit date field to track
and refer to any given year. After, and in some cases prior
to, January 1, 2000, these software and hardware systems may
interpret the year "00" as "1900," which will cause them to
perform faulty calculations or shut down altogether. To the
extent that this "Year 2000" problem is present in the
Company's internal software and hardware systems, or those
of its suppliers or customers, there could be material
disruptions in such important functions as the ordering and
delivery of Cassettes, the reporting and tracking of
Cassette rental and sale transactions, and billing and
payment systems. Such difficulties could result in a number
of adverse consequences, including but not limited to
delayed or lost revenue, diversion of resources, damages to
the Company's reputation, increased administrative and
processing costs, and liability to suppliers or customers.
Any one or a combination of such consequences could have a
material adverse effect on the Company's business, operating
results, and financial condition.
Accordingly, the Company began assessing the scope of
the Year 2000 problem both internally and among its
suppliers and customers as far back as March 1997, and began
implementing remedial measures soon thereafter. The Company
is conducting extensive tests of all software and hardware
systems used internally in the Company's business to
determine whether they are Year 2000 compliant. The Company
has and will continue to modify or replace those systems as
necessary, and the cost of such remedial measures is not
expected to be material. The Company's internal assessment,
testing, and remediation program is expected to be completed
by December 31, 1998. Although the Company believes that
these corrective measures will adequately address the Year
2000 problem, there can be no assurance that every Year 2000
problem will be discovered and addressed, or that every
remedial measure will be effective. To the extent that Year
2000 problems persist, the Company could experience the
adverse consequences described above, some or all of which
could be material.
The Company has initiated formal communications with
its POS system software vendors, and certain of the
Company's larger individual customers that have developed
their own POS system software, to determine the extent to
which their software and hardware systems are Year 2000
compliant. In addition, the Company has completed the
required programming of the Company's proprietary Rentrak
Profit Maker ("RPM") software and is taking steps to have
this upgrade installed on its customers' computer systems.
The Company has also initiated formal contact with the
vendors involved in the Cassette distribution process to
determine whether the Year 2000 problem may adversely affect
the Company's ability to timely deliver Cassettes to its
customers. The Company has and will continue to work with
all of its vendors, suppliers, and customers to resolve any
potential Year 2000 problems. As a follow-up measure, the
Company plans to evaluate and test the software of its POS
vendors and test communications with its customers by March
31, 1999, to determine which are in fact Year 2000
compliant. The Company does not expect the cost of its
assessments, corrective measures, and testing to be
material. However, the Company has no direct control over
these third parties and cannot provide any assurance that
such third party software and hardware systems will be
timely converted. The failure of certain individual
vendors, suppliers, and customers, or a combination of
vendors, suppliers, and customers, to make their systems
Year 2000 compliant could have a material adverse effect on
the Company's performance.
Retailer Auditing
From time to time, the Company audits Participating
Retailers in order to verify that they are reporting all
rentals and sales of Cassettes 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 that vary from
the Company's statistical norms. Depending upon the
results of the Company's analysis of the reports, the
Company may conduct an in-store audit. Audits are
conducted with and without notice and any refusal to
allow such an audit is cause for immediate termination
from the PPT System. If audit violations are found, the
Participating Retailer is subject to fines, audit
penalties, immediate removal from the PPT System and/or
repossession of all leased Cassettes.
Seasonality
The Company believes that the home video industry
is seasonal because Program Suppliers tend to introduce
hit titles at two periods of the year, early summer and
Christmas. Since the release to home video usually
follows the theatrical release by approximately six
months (although significant variations do occur on
certain titles), the seasonal peaks for home video also
generally occur in early summer and at Christmas. The
Company believes its volume of rental transactions
reflects, in part, this seasonal pattern, although the
growth of Program Suppliers, titles available to the
Company, and Participating Retailers may tend to obscure
any seasonal effect. The Company believes such seasonal
variations may be reflected in future quarterly patterns
of its revenues and earnings.
Retailer Financing Program
The Company has established a Retailer financing
program whereby, on a selective basis, the Company will
provide financing to Participating Retailers that the
Company believes have the potential for substantial
growth in the industry. In connection with these
financings, the Company typically makes a loan and/or
equity investment in the Participating Retailer. In
some cases, a warrant to purchase stock may be obtained.
As part of such financing, the Participating Retailer
typically agrees to cause all of its current and future
retail locations to participate in the PPT System for a
designated period of time (usually 5 - 20 years). Under
these agreements, Retailers are typically required to
obtain all of their requirements of Cassettes offered
under the PPT System or obtain a minimum amount of
Cassettes based on a percentage of the Participating
Retailer's revenues. Notwithstanding the long term
nature of such agreements, both the Company and the
Retailer may, in some cases, retain the right to
terminate such agreement upon 30-90 days prior written
notice. These financings are highly speculative in
nature and involve a high degree of risk and no
assurance of a satisfactory return on investment can be
given. The Board of Directors has authorized the Company
to make loans and or investments such that the total
amount of outstanding loans and investments is
$18,000,000 or less. As of May 1998, the Company has
invested or loaned approximately $14,200,000 in various
video Retailers. [See Note 4 of the Notes to the
Consolidated Financial Statements.]
As of March 31, 1998, the Company had approximately
$14,200,000 in loans and investments outstanding under
the program and reserves of approximately $9,400,000 of
the total original loan or investment amount. As of
March 31, 1997, the Company had invested or loaned
approximately $13,100,000 under the program and had
provided reserves of approximately $10,300,000.
Competition
The Cassette distribution business is a highly
competitive industry that is rapidly changing. The
traditional, and still dominant, method of distributing
Cassettes to Retailers is through purchase transactions;
i.e., a Retailer purchases Cassettes from a distributor and
then offers the Cassettes for rental or sale to the general
public. As described in greater detail above (see "Pay-Per-
Transaction"), the Company's PPT System offers Retailers an
alternative method of obtaining Cassettes. Accordingly, the
Company has long faced intense competition from all of the
traditional distributors, including Ingram Entertainment,
Inc. ("Ingram"), Major Video Concepts, Inc. ("Major Video"),
Baker and Taylor, Inc. ("Baker and Taylor"), and Video One
Canada, Ltd. ("Video One"). 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 recent months, there have been indications of a
shift in the industry towards a revenue sharing model, as
certain traditional distributors have taken steps to offer
Cassettes to Retailers on a revenue sharing basis. For
example, several traditional distributors have executed
licensing agreements with Supercomm, Inc. ("Supercomm"), a
wholly-owned subsidiary of The Walt Disney Company, to
market and distribute Supercomm's revenue sharing software.
Several traditional distributors have also executed revenue
sharing agreements with motion picture studios ("Studios").
Two such Studios, citing the Company's exclusive agreements
with certain Retailers, have announced their intention to
offer their product on a revenue sharing basis only through
traditional distributors. Several traditional distributors
have also entered into licensing agreements with the Company
to distribute Cassettes to Retailers through the PPT System.
The Company also competes with Supercomm, which
distributes Cassettes through a revenue sharing system
similar in concept to the Company's PPT System.
Historically, the competition between Supercomm and the
Company has centered on the distribution of Cassettes to
supermarkets and similar retail businesses. However,
Supercomm's new business relationship with several
traditional distributors suggests that Supercomm intends to
expand its business beyond the supermarket industry.
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 cassettes purchased. Some major
Studios have offered Cassettes to retailers on a lease
basis. In addition, all major Studios sell Cassettes
directly to major retailers including Blockbuster
Entertainment, Inc. ("Blockbuster"), the world's largest
chain of home video specialty stores. It appears that five
major Studios have executed direct revenue sharing
agreements with Blockbuster and that several Studios have
executed direct revenue sharing agreements with Hollywood
Entertainment, Inc. ("Hollywood"), the world's second
largest chain of home video specialty stores. It is not yet
clear whether the Studios will execute direct revenue
sharing agreements with other Retailers.
The Studios also compete with the Company by releasing
certain Cassette titles on a "sell-through" basis; i.e.,
they bypass the traditional rental period by selling the
Cassettes directly to consumers at a price of approximately
$20 to $30. 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 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; and (3) pay-per-view
cable television systems. 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 Cassette 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. CCC believes it
represents over ten (10%) percent of the retail video
rental market in Japan. Pursuant to the agreement, the
parties formed Rentrak Japan, a corporation, which is
presently owned 10 percent by the Company and 90 percent
by CCC's shareholder, Tsutaya Shoten Co., Ltd. Rentrak
Japan was formed to implement the Company's PPT Program
in Japan, with future expansion to The Philippines,
Singapore, Taiwan, Hong Kong, South Korea, North Korea,
China, Thailand, Indonesia, Malaysia and Vietnam. 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. On August 6, 1992, the Company
entered into an expanded definitive agreement with CCC
to develop Rentrak's PPT Program in certain markets
throughout the world.
Prior to June 16, 1994 the Company owned a thirty
three and one-third percent interest in Rentrak Japan.
On June 16, 1994, the Company and CCC entered into an
amendment to the definitive agreement (the "agreement").
Pursuant to this agreement, the Company will receive 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 which is June 1 - May
31. The amendment provides for payment to the Company
of a one time royalty of $2,000,000 payable $1,000,000
by July 31, 1994, which the Company received, and
$1,000,000 no later than March 31, 1999. As part of
this transaction, the Company also sold to CCC 34 shares
of Rentrak Japan reducing the Company's ownership in
Rentrak Japan to twenty-five percent from thirty three
and one-third percent. The term of the agreement was
extended from the year 2001 to the year 2039.
In August 1996, the Company sold 60 shares of
Rentrak Japan stock to a Japanese corporation for
$110,000. This reduced the Company's interest in
Rentrak Japan from 25 percent to 10 percent. In
addition, as part of this transaction, the Company
received a one-time royalty payment from Rentrak Japan
of $4,390,000 in August, 1996. This one-time royalty
payment is included in other revenue in the Company's
Consolidated Financial Statements.
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. Rentrak UK is a joint
venture between the Company, which owns 25 percent,
Columbus Holdings Limited, which owns two-thirds of the
venture and Rentrak Japan, which owns 8.3 percent. The
PPT Agreement remains in force in perpetuity, unless
terminated due to material breach of contract,
liquidation of Rentrak UK or non-delivery 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 percent of Rentrak UK's gross
revenues from any and all sources.
Trademarks, Copyrights, and Proprietary Rights
The Company has registered its "RENTRAK", "PPT",
"Pay Per Transaction", "Ontrak", "BudgetMaker",
"DataTrak", "Prize Find" , "BlowOut Video", "GameTrak",
and "VidAlert" marks under federal trademark laws. The
Company has applied and obtained registered status in
several foreign countries for many of its trademarks.
The Company claims a copyright in its RPM Software and
considers it to be proprietary.
Employees
As of March 31, 1998, including all subsidiaries,
the Company employs 199 full-time employees. The
Company considers its relations with its employees to be
good.
LICENSED SPORTS APPAREL
During fiscal year 1997, the Company disposed of
substantially all the net assets of Pro Image Inc. (Pro
Image) through either sale or closure of the stores.
[See Note 14 of the Notes to the Consolidated Financial
Statements.]
VIDEO RETAIL
On November 26, 1996, the Company made a
distribution to its shareholders of 1,457,343 shares of
common stock (the "BlowOut Common Stock") of BlowOut
pursuant to a Reorganization and Distribution Agreement
("Distribution Agreement") dated as of November 11,
1996, between the Company and BlowOut. Pursuant to the
Distribution Agreement, each holder of common stock of
the Company received one share of BlowOut Common Stock
for every 8.34 shares of the Company common stock owned
of record held by such holder on November 18, 1996. The
distributed shares of BlowOut Common Stock represented
approximately 60% of the outstanding shares of BlowOut
Common Stock. Following the distribution the Company
continues to own 9.9 percent of the outstanding BlowOut
Common Stock. [See Note 14 of the Notes to the
Consolidated Financial Statements.]
Financial Information About Industry Segments
See Note 13 of the Notes to the Consolidated
Financial Statements.
ITEM 2. PROPERTIES
The Company currently maintains its executive
offices in Portland, Oregon where it leases 53,566
square feet of office space. The lease began on January
1, 1997 and expires on December 31, 2006. The Company
maintains its distribution facilities in Wilmington,
Ohio where it leases 102,400 square feet. The Company's
lease expires on June 7, 2002. Management believes its
office and warehouse space is adequate and suitable for
its current and foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On November 21, 1997, Merle Harmon, individually
and as assignee for Merle Harmon Enterprises and Fan
Fair Corporation, sued the Company and two of its
officers in relation to the Company's failed attempt to
negotiate the purchase of Merle Harmon Enterprises and
Fan Fair Corporation. The case is pending in the U.S.
District Court for the Eastern District of Wisconsin.
Plaintiff alleges breach of contract, fraud,
misrepresentation, and violations of RICO (the Racketeer
Influenced and Corrupt Organizations Act of 1970), and
also asserts claims based on a promissory estoppel
theory. The Company believes that all of the
Plaintiff's claims are without merit and has recently
filed a motion to dismiss all claims. The Company
intends to continue to vigorously defend itself and its
officers against the suit.
In April 1998, the Company filed a complaint (the
"Hollywood Complaint") against Hollywood Entertainment,
Inc. ("Hollywood"), entitled Rentrak Corporation v.
Hollywood Entertainment et al., case no. 98-04-02811, in
the Circuit Court of the State of Oregon for the County
of Multnomah, Portland, Oregon. In the Hollywood
Complaint, the Company alleges that Hollywood breached
and is continuing to breach its contractual obligation
to acquire all of its leased videocassettes exclusively
from the Company. The Company also alleges that
Hollywood committed certain audit violations including
breaching its contractual obligation to fully and
accurately report all sales of the Company's
videocassettes and to pay the appropriate fees to the
Company in connection with such sales. The Company is
seeking monetary damages in the amount of $180,264,576
and injunctive relief for Hollywood's alleged violations
of the exclusivity obligation. On June 16, 1998,
Hollywood responded to the Hollywood Complaint denying
Rentrak's allegations and asserting a claim for
attorney's fees. The Company has suspended the ordering
privilege of Hollywood on account of its breach of the
PPT Agreement and Hollywood has served Rentrak notice
attempting to terminate its PPT Agreement with Rentrak.
In June 1998, Video Update, Inc. ("Video Update")
filed a complaint (the "Video Update Complaint") against
the Company entitled Video Update, Inc. v. Rentrak
Corp., Civil Action No. 98-286, in the United States
District Court for the District of Delaware. The Video
Update Complaint alleges various violations of the
antitrust laws. Specifically, Video Update alleges that
the Company has attempted to monopolize the market for
videocassettes leased to retail video stores in
violation of Section 2 of the Sherman Act. Video Update
further alleges that the Company's negotiation and
execution of an exclusive, long-term revenue sharing
agreement with Video Update violates Section 1 of the
Sherman Act and Section 3 of the Clayton Act. Video
Update is seeking unspecified monetary relief, including
treble damages and attorneys' fees, and equitable
relief, including an injunction prohibiting the Company
from enforcing its agreement with Video Update or any
exclusivity provision against videocassette suppliers
and video retailers. The Company believes the Complaint
filed by Video Update lacks merit and intends to
vigorously defend against the allegations in the
Complaint. The Company has filed a motion to dismiss or
transfer pursuant to the Federal Rule of Civil Procedure
12(B)(3) or alternatively to transfer pursuant to 28
U.S.C. Section 14.04.
The Company is also subject to legal proceedings
and claims which arise in the ordinary course of its
business. In the opinion of management, the amount of
any ultimate liability with respect to these actions is
not expected to materially affect the financial position
or results of operations of the Company as a whole.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY
HOLDERS
No matter was submitted to a vote of security
holders of the Company through the solicitation of
proxies or otherwise during the fourth quarter of the
fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK 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 1, 1998
there were approximately 375 holders of record of the
Company's common stock. On June 1, 1998, the closing
sales price of the Company's common stock as quoted on
the Nasdaq National Market was $5.438.
The following table sets forth the reported high
and low sales prices of the Company's common stock for
the period indicated as regularly quoted on the Nasdaq
National Market. The over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not necessarily
represent actual transactions.
QUARTER ENDED HIGH LOW
JUNE 30, 1996 $5.625 $4.250
SEPTEMBER 30, 1996 $4.875 $3.844
DECEMBER 31, 1996 $4.375 $3.125
MARCH 31, 1997 $3.500 $2.625
JUNE 30, 1997 $3.938 $3.875
SEPTEMBER 30, 1997 $4.406 $4.375
DECEMBER 31, 1997 $4.500 $4.000
MARCH 31, 1998 $10.063 $9.500
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 therefor,
subject to the dividend and liquidation rights of any
preferred stock that may be issued and subject to the
dividend restrictions in the Company's bank credit
agreement described in Note 5 of the Notes to the
Consolidated Financial Statements.
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's bank credit agreement limits
the payment of dividends in the Company's stock. The
Company does not intend to pay cash dividends in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts)
Year Ended March 31,
1998 1997 1996 1995 1994
Statement of Operations Data
Net revenues:
Application fees $383 $354 $551 $1,114 $1,662
Order processing fees 25,313 22,720 25,716 18,052 13,712
Transaction fees 78,671 70,467 70,187 49,904 40,967
Sell-through 9,383 11,101 10,601 8,923 5,665
Other 9,001 11,634 6,211 6,555 1,955
International operations 0 0 0 0 116
Total net revenues 122,751 116,276 113,266 84,548 64,077
Cost of sales 100,974 90,882 95,168 66,375 49,697
Gross profit 21,777 25,394 18,098 18,173 14,380
Selling and administrative expense 14,572 16,160 20,860 15,527 14,008
Suspension of European operations 0 0 0 0 901
Other income 652 999 681 3,522 538
Income (loss) from continuing operations before
benefit (provision) for income taxes and
minority partner interests 7,857 10,233 (2,081) 6,168 9
Income tax benefit (provision) (3,199) (3,950) 595 (768) 764
Income (loss) from continuing operations before
minority partner interests and discontinued
operations 4,658 6,283 (1,486) 5,400 773
Losses attributable to minority partner
interests 0 0 0 0 131
Income (loss) from continuing operations before
discontinued operations 4,658 6,283 (1,486) 5,400 904
Discontinued Operations: (1)
Loss from operations of discontinued subsidiaries
less applicable income tax provision 0 0 (18,700) (287) (91)
Loss on disposal of subsidiaries 0 0 (12,100) 0 0
Net income (loss) $4,658 $6,283 ($32,286) $5,113 $813
Diluted income (loss) per share
Continuing operations $0.41 $0.52 ($0.13) $0.47 $0.08
Discontinued operations 0.00 0.00 (2.62) (0.03) 0.00
Net income (loss) $0.41 $0.52 ($2.75) $0.44 $0.08
Common shares and common share equivalents
outstanding 11,445 12,076 11,755 11,548 10,133
1998 1997 1996 1995 1994
Balance Sheet Data (2)
Working Capital $1,062 $1,488 ($12,579) $12,897 $16,155
Total Assets 51,609 43,048 56,252 64,818 44,620
Long-term Debt 0 0 0 0 0
Stockholders' Equity 13,254 11,272 14,404 40,292 29,523
(1) Discontinued Operations includes the operations of Pro Image and
BlowOut. Acquisitions were made by ProImage and BlowOut during
1995 and 1996, therefore comparisons between years are not
meaningful. See acquisitions Note 8 and discontinued operations
Note 14 of the Notes to the Consolidated Financial Statements.
(2) The 1995 and prior balance sheets have not been restated for
discontinued operations.
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 Conditions 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 uses
of forward-looking words such as "may", "will",
"expects", "intends", "anticipates", "estimates", or
"continues" or the negative thereof or variations
thereon or comparable terminology. The following
factors are among the factors that could cause actual
results to differ materially from the forward-looking
statements: the Company's ability to continue to market
the PPT System successfully, the financial stability of
the Participating Retailers and their performance of
their obligations under the PPT System, non-renewal of
line of credit, business conditions and growth in the
video industry and general economics, both domestic and
international; competitive factors, including increased
competition, expansion of revenue sharing programs other
than the PPT System by Program Suppliers, new
technology, the ability of the Company and its suppliers
and customers to address potential Year 2000 problems,
and the continued availability of Cassettes from Program
Suppliers. Section 1 (Business) of this Annual Report
on Form 10-K further describes certain of these factors.
Results of Operations
As discussed in the Notes to the Consolidated Financial
Statements, the Company discontinued the operations of
Pro Image and BlowOut in the fiscal year ended March 31,
1998. Accordingly the previous years' statements of
operations have been restated to reflect these entities
as discontinued.
For a more meaningful analysis, results are presented for three
groups of operations: Continuing Operations which is comprised
primarily of Domestic PPT Operations, including Canada PPT
Operations; Discontinued Operations of Pro Image; and
Discontinued Operations of BlowOut. The following table(s)
breaks out these groups for the years ended March 31, 1998, 1997
and 1996. All significant inter-company transactions have been
eliminated except for those transactions between continuing and
discontinued operations which are expected to continue in the
future after disposition of the entities. This analysis is to be
read in conjunction with the Company's Consolidated Financial
Statements.
RENTRAK CORPORATION
STATEMENTS OF OPERATIONS
For The Years Ended March 31, 1998, 1997 and 1996
1998 1997 1996
REVENUES $122,751,046 $116,275,503 $113,266,320
OPERATING COSTS AND EXPENSES
Cost of sales 100,974,140 90,881,674 95,167,529
Selling and administrative 14,571,789 16,159,729 20,859,923
115,545,929 107,041,403 116,027,452
INCOME (LOSS) FROM OPERATIONS 7,205,117 9,234,100 (2,761,132)
Other income 652,381 999,068 680,671
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 7,857,498 10,233,168 (2,080,461)
Income tax (provision) benefit (3,199,032) (3,950,003) 594,792
INCOME (LOSS) FROM CONTINUING
OPERATIONS 4,658,466 6,283,165 (1,485,669)
DISCONTINUED OPERATIONS
Income (loss) from operations of
discontinued subsidiaries, net of income- - (18,700,000)
Loss on disposal of discontinued subsidiar- - (12,100,000)
NET INCOME (LOSS) $4,658,466 $6,283,165 ($32,285,669)
RENTRAK CORPORATION
STATEMENTS OF OPERATIONS
For The Years Ended March 31, 1998, 1997 And 1996
1998 1997 1996
DISCONTINUED OPERATIONS - PRO IMAGE
REVENUES $0 $0 $39,131,760
OPERATING COSTS AND EXPENSES
Cost of sales $0 $0 $24,325,523
Selling and administrative $0 $0 $19,383,052
Other expense - write-off of intangible ass $0 $0 $9,179,239
LOSS FROM OPERATIONS $0 $0 ($13,756,054)
Other expense $0 $0 ($242,299)
LOSS BEFORE INCOME TAXES $0 $0 ($13,998,353)
DISCONTINUED OPERATIONS - BLOWOUT ENTERTAINMENT
REVENUES $0 $0 $17,466,804
OPERATING COSTS AND EXPENSES
Cost of sales $0 $0 $13,961,420
Selling and administrative $0 $0 $10,074,040
LOSS FROM OPERATIONS $0 $0 ($96,568,656)
Other expense $0 $0 ($689,103)
LOSS BEFORE INCOME TAXES $0 $0 ($7,257,759)
DISCONTINUED OPERATIONS - COMBINED
PRO IMAGE & BLOWOUT ENTERTAINMENT
REVENUES $0 $0 $56,598,564
OPERATING COSTS AND EXPENSES
Cost of sales $0 $0 $38,286,943
Selling and administrative $0 $0 $29,457,092
Other expense - write-off of Intangible ass $0 $0 $9,179,239
LOSS FROM OPERATIONS $0 $0 ($20,324,710)
Other expense $0 $0 ($931,402)
LOSS BEFORE INCOME TAXES $0 $0 ($21,256,112)
INCOME TAX BENEFIT $0 $0 $2,556,112
NET LOSS $0 $0 ($18,700,000)
Fiscal 1998 Compared to Fiscal 1997
Continuing Operations - Domestic PPT Operations and Other
Continuing Subsidiaries
For the year ended March 31, 1998, total revenue
increased $6.5 million, or 6 percent, rising to $122.8
million from $116.3 million in the prior year. Total
revenue includes the following fees: application fees
generated when retailers are approved for participation in
the PPT System; order processing fees generated when
prerecorded videocassettes ("Cassettes") are distributed to
retailers; transaction fees generated when retailers rent
Cassettes to consumers; sell-through fees generated when
retailers sell Cassettes to consumers; royalty payments
from Rentrak Japan; and sale of videocassettes.
The increase in total revenue and the changes described
in the following paragraphs were primarily due to the
growth in (i) the number of retailers approved to lease
Cassettes under the PPT System from the Company (the
"Participating Retailers"); (ii) the number of titles
released to the PPT System and (iii) the total number of
Cassettes shipped under the PPT System.
In fiscal 1998, application-fee revenue remained
unchanged from the prior year at $0.4 million. During the
year, order processing-fee revenue increased to $25.3
million from $22.7 million in fiscal 1997, an increase of
$2.6 million, or 11 percent. Transaction-fee revenue
totaled $78.7 million, an increase of $8.2 million, or 12
percent, from $70.5 million the previous year. Sell-
through revenue was $9.4 million in fiscal 1998 as compared
to $11.1 million in fiscal 1997, a decrease of $1.7
million, or 15 percent.
Royalty revenue from Rentrak Japan decreased to $1.1
million during fiscal 1998 from $5.5 million the previous
year. This decrease was due to a one-time royalty payment
from Rentrak Japan of $4.4 million in August 1996.
Cost of sales in fiscal 1998 increased to $101 million
from $90.9 million the prior year, an increase of $10.1
million, or 11 percent. The increase is primarily due to
the increase in revenue noted above. In fiscal 1998, the
gross profit margin decreased to 18 percent from 19 percent
the previous year, excluding the one-time royalty payment
from Rentrak Japan. The gross profit margin in fiscal
1997, including the one-time royalty payment from Rentrak
Japan, was 22 percent.
Selling, general and administrative expenses were $14.6
million in fiscal 1998 compared to $16.2 million in fiscal
1997. This decrease of $1.6 million, or 10 percent, was
primarily due to collection of amounts in 1998 which were
previously reserved at March 31, 1997. As a percentage of
total revenue, selling, general and administrative expenses
was 12 percent in fiscal 1998 as compared to 14 percent the
previous year.
Other income decreased from $1.0 million in fiscal 1997
to $0.7 million for fiscal 1998, a decrease of $0.3
million.
For the year ended March 31, 1998, the Company recorded
pre-tax income of $7.9 million, or 6 percent of total
revenue, compared to $5.7 million, or 5 percent of total
revenue excluding the one-time royalty from Rentrak Japan
in fiscal 1997. This increase is due to the increase in
margin dollars due to increased revenue and the decrease in
selling, general and administrative expenses as noted
above. Pre tax income, including the one-time royalty
payment from Rentrak Japan, was $10.2 million or 9 percent
of total revenue in 1997.
Included in the amounts above are the results from Other
Subsidiaries which are primarily comprised of certain
retail operations. Total revenue from Other Subsidiaries
increased to $6.5 million in fiscal 1998 from $5.0 million
in fiscal 1997, an increase of $1.5 million, or 30 percent.
Cost of sales was $3.3 million, an increase of $0.2 million
over the $3.1 million recorded in fiscal 1997. Selling,
general and administrative expenses increased to $1.9
million in fiscal 1998 from $1.8 million in fiscal 1997, an
increase of $0.1 million. As a percentage of total
revenue, selling, general and administrative expenses
decreased to 29 percent at year-end from 36 percent a year
earlier.
For the year ended March 31, 1998, Other Subsidiaries
recorded pre-tax income of $0.7 million, or 10 percent of
total revenue. This compares with pre-tax income of $0.2
million, or 3 percent of total revenue, in fiscal 1997.
Consolidated Balance Sheet
At March 31, 1998, total assets were $51.6 million, an
increase of $8.6 million from the $43.0 million of a year
earlier. A substantial portion of the increase was due to
the $7.9 million increase in accounts receivable. This
increase is primarily due to the increase in the number of
retailers participating on the PPT System.
Net current liabilities of BlowOut at March 31, 1998 and
1997 of approximately $4.6 million and $4.4 million,
respectively represent amounts reserved for contingencies
not yet settled as of March 31, 1998.
Fiscal 1997 Compared to Fiscal 1996
Continuing Operations - Domestic PPT Operations and Other
Continuing Subsidiaries
For the year ended March 31, 1997, total revenue
increased $3.0 million, or 3 percent, rising to $116.3
million from $113.3 million in the prior year. The
increase in total revenue and the changes described in the
following paragraphs were primarily due to the growth in
(i) the number of retailers approved to lease Cassettes
under the PPT System from the Company (the "Participating
Retailers"); and (ii) the number of titles released to the
system. In addition, the Company received a one-time
royalty payment from Rentrak Japan and experienced a
decrease in the total number of Cassettes shipped under the
PPT System.
In fiscal 1997, application-fee revenue decreased to
$0.4 million from $0.6 million in fiscal 1996, a decline of
$0.2 million, or 33 percent. The decrease was due to a
reduction in the amount of application fees charged.
During the year, order processing-fee revenue fell to $22.7
million from $25.7 million in fiscal 1996, a decrease of
$3.0 million, or 12 percent. Transaction-fee revenue
totaled $70.5 million, an increase of $0.3 million, or less
than 1 percent, from $70.2 million the previous year. Sell-
through revenue was $11.1 million in fiscal 1997 as
compared to $10.6 million in fiscal 1996, an increase of
$0.5 million, or 5 percent.
Royalty revenue from Rentrak Japan increased to $5.5
million during fiscal 1997 from $1.1 million the previous
year. This increase was due to a one-time royalty payment
from Rentrak Japan of $4.4 million in August 1996.
Cost of sales in fiscal 1997 decreased to $90.9 million
from $95.2 million the prior year, a decrease of $4.3
million, or 5 percent. The decrease is primarily due to
the decrease in order processing revenue noted above. In
addition, fiscal 1996 includes a charge of $2.2 million to
increase reserves against advances made to Program
Suppliers. In fiscal 1997, the gross profit margin
increased to 22 percent from 16 percent the previous year.
The gross profit margin in fiscal 1997, excluding the one-
time royalty payment from Rentrak Japan, was 19 percent.
Selling, general and administrative expenses were $16.2
million in fiscal 1997 compared to $20.9 million in fiscal
1996. This decrease of $4.7 million, or 23 percent, was
primarily due to the following one time charges in fiscal
1996: An increase of approximately $1.4 million in other
reserves against assets; and $1.5 million in advertising co-
op allowances in excess of amounts received from Program
Suppliers. Also, the reserves against loans and
investments in retailers were approximately $2.3 million
higher in fiscal 1996. As a percentage of total revenue,
selling, general and administrative expenses was 14 percent
in fiscal 1997 as compared to 18 percent the previous year.
Other income increased from $0.7 million in fiscal 1996
to $1.0 million for fiscal 1997, an increase of $0.3
million.
For the year ended March 31, 1997, Domestic PPT
Operations recorded a pre-tax profit of $10.2 million, or 9
percent of total revenue, compared to a pre-tax loss of
$2.1 million, or 2 percent of total revenue, in fiscal
1996. This increase is primarily due to the one-time
royalty payment from Rentrak Japan in fiscal 1997 and the
one time charges in fiscal 1996 noted above.
Included in the amounts above are the results from Other
Subsidiaries which are primarily comprised of a software
development company and other video retail operations. The
operations of the software development company, which were
immaterial, were curtailed in fiscal 1996. Total revenue
from Other Subsidiaries decreased to $5.0 million in fiscal
1997 from $5.2 million in fiscal 1996, a decrease of $0.2
million, or 4 percent. Cost of sales was $3.1 million, an
increase of $0.2 million over the $2.9 million recorded in
fiscal 1996. Selling, general and administrative expenses
decreased to $1.8 million in fiscal 1997 from $2.6 million
in fiscal 1996, a decrease of $0.8 million, or 31 percent.
As a percentage of total revenue, selling, general and
administrative expenses decreased to 36 percent at year-end
from 49 percent a year earlier.
For the year ended March 31, 1997, Other Subsidiaries
recorded a pre-tax profit of $0.2 million, or 4 percent of
total revenue. This compares with a pre-tax loss of $0.4
million, or 8 percent of total revenue, in fiscal 1996.
Discontinued Operations - Pro Image
During fiscal year 1997, the Company disposed of
substantially all of the net assets of Pro Image through
either sale or closure of the stores.
Pro Image is accounted for as discontinued operations
and, accordingly, its operations are segregated in the
Consolidated Financial Statements. Pro Image incurred
losses from operations, net of income tax benefit, of
approximately $1.9 million and $12.7 million for the years
ended February 28, 1997 and February 29, 1996,
respectively. These amounts were included in loss from
operations and loss on disposal of discontinued
subsidiaries in the March 31, 1996 Consolidated Financial
Statements.
Discontinued Operations - BlowOut
On November 26, 1996, the Company made a distribution to
its shareholders of 1,457,343 shares of common stock (the
BlowOut Common Stock) of BlowOut pursuant to a
Reorganization and Distribution Agreement (Distribution
Agreement) dated as of November 11, 1996, between the
Company and BlowOut. Pursuant to the Distribution
Agreement, each holder of common stock of the Company
received one share of BlowOut Common Stock for every 8.34
shares of the Company's common stock owned of record by
such holder on November 18, 1996. The distributed shares
of BlowOut Common Stock represented approximately 60% of
the outstanding shares of BlowOut Common Stock. As a result
of the distribution, the March 31, 1997 consolidated
financial statement reflect the elimination of the net
assets and liabilities related to BlowOut and the reduction
of the Company's ownership in BlowOut to approximately 9.9%
of the outstanding BlowOut Shares.
BlowOut is accounted for as discontinued operations and,
accordingly, its operations are segregated in the March 31,
1996 Consolidated Financial Statements. BlowOut incurred
losses from operations, net of income tax benefit, of
approximately $4 million and $6 million for the period
ended November 26, 1996 and for the year ended March 31,
1996, respectively. These amounts are included in loss
from operations and loss on disposal of discontinued
subsidiaries in the March 31, 1996, Consolidated Financial
Statements.
Consolidated Balance Sheet
Net current liabilities of Pro Image at March 31, 1997
of approximately $.2 million represent accrued liabilities
remaining to be paid. Net current liabilities of BlowOut
at March 31, 1997 of approximately $4.4 million represent
amounts reserved for contingencies not yet settled as of
March 31, 1998.
Net current liabilities of Pro Image at March 31, 1997
of approximately $.2 million represent accrued liabilities
remaining to be paid. Net noncurrent assets of Pro Image
which are included in net noncurrent assets of discontinued
operations in the consolidated balance sheet at March 31,
1996, are comprised primarily of property and equipment and
long-term debt. Net current liabilities of Pro Image which
are included in net current liabilities of discontinued
operations in the Consolidated Financial Statements at
March 31, 1996, are comprised primarily of inventory,
receivables, accounts payable, accrued liabilities,
estimated operating losses to be incurred by Pro Image
through the disposal date and other costs associated with
the disposition.
Net current liabilities of BlowOut at March 31, 1997 of
approximately $4.4 million represent amounts reserved for
contingencies not yet settled as of March 31, 1997. Net
noncurrent assets of BlowOut included in net noncurrent
assets of discontinued operations in the consolidated
balance sheet at March 31, 1996, are comprised primarily of
rental inventory, property and equipment, intangibles, and
long-term debt. Net current liabilities of BlowOut which
are included in net current liabilities of discontinued
operations in the consolidated balance sheet at March 31,
1996, are comprised primarily of cash, inventory, accounts
payable, accrued liabilities, estimated operating loses to
be incurred by BlowOut through the disposal date and other
costs associated with the disposition.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash and other liquid
investments of $6.4 million, compared to $10.2 million at
March 31, 1997. At year-end, the Company's current ratio
(current assets/current liabilities) was 1.03 compared to
1.05 a year earlier.
The Company has an agreement for a line of credit with a
financial institution in an amount not to exceed the lesser
of $12.5 million or the sum of (a) 80 percent of the net
amount of eligible accounts receivable as defined in the
agreement. The line of credit expires on December 18, 1999.
Interest is payable monthly at the bank's prime rate (8.5
percent at March 31, 1998). The line is secured by
substantially all of the Company's assets. The terms of
the agreement require, among other things, a minimum amount
of tangible net worth, minimum current ratio and minimum
total liabilities to tangible net worth. The agreement
also restricts the amount of net losses, loans and
indebtedness and limits the payment of dividends on the
Company's stock. The Company is in compliance with these
covenants as of March 31, 1998. At March 31, 1998, the
Company had $6.0 million outstanding borrowings under this
agreement. The Company repaid the $6.0 million in April,
1998. As of May 31, 1998, available borrowing capacity
totaled $12.5 million.
The Company has established a retailer financing program
whereby the Company will provide, on a selective basis,
financing to video retailers that the Company believes have
the potential for substantial growth in the industry. In
connection with these financings, the Company typically
makes a loan to and/or an equity investment in the
retailer. In some cases, a warrant to purchase stock may
be obtained. As part of such financing, the retailer
typically agrees to cause all of its current and future
retail locations to participate in the PPT System for a
designated period of time. Under these agreements,
retailers are typically required to obtain all of their
requirements of Cassettes offered under the PPT System or
obtain a minimum amount of Cassettes based on a percentage
of the retailer's revenues. Notwithstanding the long term
nature of such agreements, both the Company and the
retailer may, in some cases, retain the right to terminate
such agreement upon 30-90 days prior written notice. These
financings are highly speculative in nature and involve a
high degree of risk, and no assurance of a satisfactory
return on investment can be given. The amounts the Company
could ultimately receive could differ materially in the
near term from the amounts assumed in establishing
reserves.
The Board of Directors has authorized up to $18 million
to be used in connection with the Company's retailer
financing program. As of May 1998, the Company has
invested or loaned approximately $14.2 million in various
retailers. The investments individually range from $0.2
million to $4.9 million. Included in the total $14.2
million investment balance at March 31, 1998, are gross
notes receivable of $10.6 million which are due as follows:
$1.1 million - 1999; $3.2 million - 2000; $1.8 million -
2001; $4.0 million - 2005; and $0.5 million - 2007.
Interest rates on the various loans range from 5 -12
percent per annum. As the financings are made, and
periodically throughout the terms of the agreements, the
Company assesses the likelihood of recoverability of the
amounts invested or loaned based on the financial position
of each retailer. This assessment includes reviewing
available financial statements and cash flow projections of
the retailer and discussions with retailers' management.
As of March 31, 1998, the Company has invested or loaned
approximately $14.2 million under the program and has
reserves of approximately $9.4 million.
BlowOut is an early stage company requiring additional
financing if it is to continue its expansion and support
its operations. The Company is the principal creditor to
BlowOut. Pursuant to a Financing Agreement, the Company
agreed to provide guarantees for up to $7 million of
indebtedness of BlowOut (the "Guarantee").
The obligations under the Guarantee are comprised of the
following:
(a) BlowOut has a credit facility (the Credit
Facility) in an aggregate principal amount of $2 million for
a five-year term. Amounts outstanding under the Credit
Facility bear interest at a fixed rate per annum equal to
14.525 percent. Pursuant to the terms of the Guarantee, the
Company agreed to guarantee any amounts outstanding under
the Credit Facility until the lender is satisfied, in its
sole discretion, that BlowOut's financial condition is
sufficient to justify the release of the Company's
guarantee. As of March 31, 1998, BlowOut had borrowed
approximately $1.6 million under the Credit Facility.
(b) BlowOut also has a revolving line of credit (Line
of Credit) in a maximum principal amount at one time
outstanding of $5 million. Under the Line of Credit,
BlowOut may only draw up to 80 percent of the Orderly
Liquidation Valued (as defined in the Line of Credit) of
eligible new and used Cassette inventory. Advances under
the Line of Credit bear interest at a floating rate per
annum equal to the Bank of America Reference Rate plus 2.75
percent (11.25 percent as of March 31, 1998). The term of
the Line of Credit is three years. The Company has agreed,
pursuant to an Unconditional Repurchase Agreement, to
purchase under certain circumstances in the event of default
under the Line of Credit, BlowOut's Cassette inventory at
specified amounts up to a principal amount of $5 million.
In February 1998, the Company entered into an agreement with
BlowOut and CCC (the "Tri-Party Agreement") under which
BlowOut has agreed not to draw down in excess of $4.0
million under the Line of Credit. As of March 31, 1998,
BlowOut had borrowed approximately $3.2 million under the
Line of Credit.
There can be no assurance that the Company will not have
to pay out under these guarantees or provide other
accommodations. During the term of the Guarantee, BlowOut
has agreed to pay the Company a weekly fee at a rate equal
to .02 percent per week of then-currently outstanding
indebtedness subject to the Guarantee.
In fiscal year 1997, BlowOut executed a $3.0 million
note in favor of the Company which accrues interest at 9
percent per annum. As part of the Tri-Party Agreement, the
Company agreed to defer principal and interest payments on
this note by BlowOut until December 31, 2004 during which
deferment period no interest accrues. The Company also
agreed to the forgiveness of all or a portion of the $3.0
million note as BlowOut is able to lower the Company's
contingent obligations under its guarantees. At March 31,
1998, the total outstanding balance of the debt under such
note, including accrued interest, was $2.8 million.
The Company's exposure related to adverse financial and
operational developments at BlowOut is limited to its
receivables from BlowOut [See Note 4 of the Notes to the
Consolidated Financial Statements] and the obligations
under the Guarantee [See Note 9 of the Notes to the
Consolidated Financial Statements].
On November 26, 1996, the Board authorized the re-
purchase of up to two million shares of Common Stock in
open market and negotiated purchases. As of March 31,
1998, the Company had acquired 1,082,900 shares for an
aggregate amount of $4.1 million. These purchases were
funded through cash flows from operations.
The Company's sources of liquidity include its cash
balance, cash generated from operations and its available
credit facility. These sources are expected to be
sufficient to fund the Company's operations for the year
ending March 31, 1999.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Item Page
Report of Independent Public 23
Accountants
Consolidated Balance Sheets as of
March 31, 1998 and 1997 24
Consolidated Statements of Operations for Years 25
Ended March 31, 1998, 1997 and
1996
Consolidated Statements of Stockholders' Equity 26
for Years Ended March 31, 1998,
1997 and 1996
Consolidated Statements of Cash Flows for Years 27
Ended March 31, 1998, 1997 and
1996
Notes to Consolidated Financial Statements 29
Financial Statement Schedules 52
Schedule II
Schedules not included have been omitted because
they are not applicable or the required
information is shown in the financial statements
or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rentrak Corporation:
We have audited the accompanying consolidated balance sheets of
Rentrak Corporation and subsidiaries as of March 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended
March 31, 1998. These consolidated financial statements and the
schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated
financial position of Rentrak Corporation and subsidiaries as of
March 31, 1998 and 1997, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended March 31, 1998 in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The schedule
listed in the index to financial statements is presented for purposes
of complying with the Securities and Exchange Commission's rules and
is not part of the basic consolidated financial statements. This
schedule has been subjected to the auditing procedures applied in our
audits of the consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data required to
be set forth therein in relation to the consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Portland, Oregon,
May 20, 1998 (except with respect to
the matter discussed in Note 10, as
to which the date is June 4, 1998)
RENTRAK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND 1997
ASSETS
1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 6,361,680 $ 10,167,169
Accounts receivable, net of allowance for doubtful
accounts of $586,641 and $409,313 24,395,143 16,434,566
Advances to program suppliers 431,975 492,844
Inventory 2,427,176 1,902,618
Deferred tax asset 1,217,950 1,365,064
Other current assets 4,582,337 2,901,964
Total current assets ------------ ------------
39,416,261 33,264,225
------------ ------------
PROPERTY AND EQUIPMENT, net 1,910,317 2,006,556
OTHER INVESTMENTS, net 887,884 778,950
DEFERRED TAX ASSET 4,087,292 3,637,563
OTHER ASSETS 5,306,943 3,360,701
------------ ------------
Total assets $ 51,608,697 $ 43,047,995
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 6,000,000 $ 5,000,000
Accounts payable 23,333,656 17,160,492
Accrued liabilities 2,532,832 613,669
Accrued compensation 1,072,848 1,695,814
Deferred revenue 829,863 2,672,849
Net current liabilities of discontinued operations 4,585,373 4,633,114
------------ ------------
Total current liabilities 38,354,572 31,775,938
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; authorized: - -
10,000,000 shares
Common stock, $.001 par value; authorized:
30,000,000 shares; issued and outstanding: 10,987 11,847
10,986,455 shares in 1998 and 11,847,441 shares in
1997
Capital in excess of par value 45,365,298 47,931,165
Net unrealized gain on investment securities 54,645 184,932
Accumulated deficit (30,794,263) (35,452,729)
Less- Deferred charge - warrants (1,382,542) (1,403,158)
------------ ------------
Total stockholders' equity 13,254,125 11,272,057
------------ ------------
Total liabilities and stockholders' equity $ 51,608,697 $ 43,047,995
============ ============
The accompanying notes are an integral part of these consolidated balance
sheets.
RENTRAK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
1998 1997 1996
REVENUES:
PPT $113,181,910 $105,787,973 $108,073,429
Other 9,569,136 10,487,530 5,192,891
------------ ------------ ------------
122,751,046 116,275,503 113,266,320
------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of sales 100,974,140 90,881,674 95,167,529
Selling and administrative 14,571,789 16,159,729 20,859,923
------------ ------------ ------------
115,545,929 107,041,403 116,027,452
------------ ------------ ------------
Income (loss) from operations 7,205,117 9,234,100 (2,761,132)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 1,135,823 862,143 1,078,798
Interest expense (158,708) (181,950) (208,307)
Gain (loss) on sale of investments (94,062) 318,875 62,091
Other (230,672) - (251,911)
------------ ------------ ------------
652,381 999,068 680,671
------------ ------------ ------------
Income (loss) from continuing
operations before 7,857,498 10,233,168 (2,080,461)
income tax (provision) benefit
INCOME TAX (PROVISION) BENEFIT (3,199,032) (3,950,003) 594,792
------------ ------------ ------------
Income (loss) from continuing 4,658,466 6,283,165 (1,485,669)
operations
DISCONTINUED OPERATIONS:
Loss from operations of discontinued
subsidiaries (less - - (18,700,000)
applicable income tax benefit of
$(2,500,000) for 1996
Loss on disposal of subsidiaries
including provision of
4,800,000 for operating losses - - (12,100,000)
during phaseout periods
(less applicable income tax benefit
of $0)
------------ ------------ ------------
Net income (loss) $ 4,658,466 $ 6,283,165 $(32,285,669)
============ ============ ============
NET INCOME (LOSS) PER SHARE
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations $ .42 $ .52 $ (.13)
Discontinued operations - - (2.62)
------ ------ ------
Net income (loss) $ .42 $ .52 $(2.75)
====== ====== ======
DILUTED EARNINGS (LOSS) PER COMMON SHARE
AND COMMON
EQUIVALENT SHARE:
Continuing operations $ .41 $ .52 $ (.13)
Discontinued operations - - (2.62)
------ ------ ------
Net income (loss) $ .41 $ .52 $(2.75)
====== ====== ======
The accompanying notes are an integral part of these consolidated statements.
RENTRAK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
Common Stock Net
------------------- Capital in Unrealized Deferred
Gain(Loss)
Number of Excess of on Accumulated Charge
Shares Amount Par Value Investment Deficit Warrants Total
Securities
BALANCE AT
MARCH 31,
1995 11,277,246 $11,277 $44,598,939 $(170,747) $(1,080,493) $(3,066,863) $ 40,292,113
Repurchase
of common
stock (69,300) (69) (341,631) - - - (341,700)
Issuance
of common
stock 883,000 883 5,230,577 - - - 5,231,460
Issuance
of common
stock
under
employee
stock 47,270 47 95,629 - - - 95,676
option
plans
Net loss - - - - (32,285,669) - (32,285,669)
Change in
net
unrealized
gain
(loss) on
investment
securities - - - 738,255 - - 738,255
Amortizati
on of - - - - - 674,289 674,289
warrants
---------- ------- ----------- --------- ------------ ----------- ------------
BALANCE AT
MARCH 31,
1996 12,138,216 12,138 49,583,514 567,508 (33,366,162) (2,392,574) 14,404,424
Repurchase
of common
stock (325,800) (326) (1,204,449) - - - (1,204,775)
Issuance
of common
stock
under
employee
stock
option
plans 35,025 35 49,013 - - - 49,048
Net
income - - - - 6,283,165 - 6,283,165
Distributi
on of
common
stock in
BlowOut - - - - (8,369,732) - (8,369,732)
Change in
net
unrealized
gain
(loss) on
investment
securities - - - (382,576) - - (382,576)
Amortiza-
tion of
warrants
- - (496,913) - - 989,416 492,503
---------- ------- ----------- --------- ------------ ----------- ------------
BALANCE AT
MARCH 31,
1997 11,847,441 11,847 47,931,165 184,932 (35,452,729) (1,403,158) 11,272,057
Repurchase
of common
stock (1,082,900) (1,082) (4,124,329) - - - (4,125,411)
Issuance
of common
stock
under
employee
stock
option
plans 221,914 222 888,007 - - - 888,229
Net income - - - - 4,658,466 - 4,658,466
Change in
net
unrealized
gain
(loss) on
investment
securities - - - (130,287) - - (130,287)
Income tax
benefit
from stock
option - - 320,455 - - - 320,455
exercise
Retirement
s of - - (250,000) - - - (250,000)
warrants
Issuance
of - - 600,000 - - (600,000) -
warrants
Amortizati
on of - - - - - 620,616 620,616
warrants
---------- ------- ----------- --------- ------------ ----------- ------------
BALANCE AT
MARCH 31,
1998 10,986,455 $10,987 $45,365,298 $ 54,645 $(30,794,263) $(1,382,542) $ 13,254,125
========== ======= =========== ========= ============ =========== ============
The accompanying notes are an integral part of these consolidated statements.
RENTRAK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,658,466 $ 6,283,165 $(32,285,669)
Adjustments to reconcile net income
loss) to net cash provided (used)
by operating activities-
Loss on disposal of
discontinued operations - - 12,100,000
(Gain) loss on asset and
investment sales 94,062 (309,852) 426,827
Depreciation 696,883 891,857 5,034,493
Amortization and write-off of
intangibles - 272,433 11,545,750
Amortization of warrants 620,616 492,503 674,289
Provision for doubtful accounts (300,000) 656,147 523,315
Retailer financing program (518,450) (401,891) 2,789,701
reserves
Reserves on advances to program
suppliers 150,977 (147,451) 1,345,406
Deferred income taxes 1,277,239 161,331 (4,966,997)
Change in specific accounts,
net of effects in 1996 from
purchase of businesses:
Accounts receivable (9,139,446) (2,921,826) (2,138,592)
Advances to program (658,014) 1,099,101 1,025,835
suppliers
Inventory (524,558) (164,923) (5,638,802)
Other current assets (1,359,918) 4,108,957 (1,641,277)
Accounts payable 6,173,164 (4,635,351) 7,156,983
Accrued liabilities and
compensation (203,803) 1,495,462 2,403,732
Deferred revenue (1,842,986) 667,984 1,073,929
Net current liabilities
of discontinued operations (47,741) 362,545 -
----------- ----------- ------------
Net cash provided (used)
by operating activities (923,509) 7,910,191 (571,077)
----------- ----------- ------------
(continued)
RENTRAK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996
1998 1997 1996
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property, equipment
and inventory $ (508,398) $(1,454,391) $(10,143,322)
Investments in retailer
financing program (550,000) (3,178,020) (2,183,000)
Proceeds from retailer financing
program 518,450 2,029,911 1,199,005
Cash paid for purchases of
businesses,net of cash acquired - - (377,848)
Purchases of investments (1,076,299) - (344,500)
Proceeds from sale of
investments 519,688 526,000 951,394
Reduction (purchases) of other
assets and intangibles 701,761 495,667 (242,176)
Proceeds from sale of assets - 10,410 1,100,000
----------- ----------- ------------
Net cash used by
investing activities (394,798) (1,570,423) (10,040,447)
----------- ----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings on line of credit 1,000,000 2,300,000 2,537,844
Borrowing on notes payable - - 3,501,971
Retirement of warrants (250,000) - -
Repurchase of common stock (4,125,411) (1,204,775) (341,700)
Issuance of common stock 888,229 49,048 114,011
----------- ----------- ------------
Net cash provided (used)
by financing activities (2,487,182) 1,144,273 5,812,126
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (3,805,489) 7,484,041 (4,799,398)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 10,167,169 2,683,128 10,709,405
CASH AND CASH EQUIVALENTS INCLUDED
IN NET CURRENT LIABILITIES OF
DISCONTINUED OPERATIONS - - 3,226,879
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END $ 6,361,680 $10,167,169 $ 2,683,128
OF YEAR
=========== =========== ============
The accompanying notes are an integral part of these consolidated statements.
RENTRAK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997 AND 1996
1. BUSINESS OF THE COMPANIES, SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES AND OTHER ITEMS:
Introduction
Rentrak Corporation (the Company) (an Oregon corporation) is
principally engaged in the processing of information regarding the
rental and sale of video cassettes and the distribution of prerecorded
video cassettes to the home video market throughout the United States
and Canada using its Pay-Per-Transaction (PPT) revenue sharing
program.
Under its PPT program, which is the Company's primary operation, the
Company enters into contracts to lease video cassettes from program
suppliers (producers of motion pictures and licensees and distributors
of home video cassettes) to distribute video cassettes which are then
leased to retailers for a percentage of the rentals charged by the
retailers.
Divestitures
During the quarter ended March 31, 1996, the Company assessed its
overall business strategy and decided to divest two subsidiary units -
- - The Pro Image, Inc. and subsidiaries (Pro Image) and BlowOut
Entertainment, Inc. (BlowOut). Thus, the operations of Pro Image and
BlowOut are reflected as discontinued operations in the accompanying
March 31, 1996 statement of operations. During fiscal year 1997,
shares of BlowOut common stock were distributed to the Company's
shareholders in a "spin-off" and Pro Image was liquidated. Refer to
Note 14 for discussion of divestitures, reserves established by the
Company related to the discontinued operations, and the nature of
management's estimates used in determining the reserves.
Rentrak Japan
In December 1989, the Company entered into a definitive agreement with
Culture Convenience Club Co., Ltd. (CCC), the Company's joint venture
partner in Rentrak Japan, to develop the Company's PPT distribution
and information processing business in certain markets throughout the
world.
On June 16, 1994, the Company and CCC amended the agreement. Pursuant
to this amendment, the Company receives a royalty of 1.67% for all
sales of up to $47,905,000, plus one-half of 1% (0.5%) of sales
greater than $47,905,000 in each fiscal year. In addition, the
Company received a one-time royalty of $2 million payable $1 million
in fiscal 1995, which has been received; and $1 million no later than
March 31, 1999. The payment of $1 million due no later than March 31,
1999 will be recognized as revenue when received. Rentrak Japan will
receive additional territories to market PPT. In addition, the
Company sold 34 shares of Rentrak Japan to CCC for 6,800,000 Yen
($68,068), reducing the Company's ownership in Rentrak Japan from
33-1/3% to 25%. The term of the Agreement was extended from the year
2001 to the year 2039.
In August 1996, the Company sold 60 shares of Rentrak Japan stock to a
Japanese corporation for $110,000. This reduced the Company's
interest in Rentrak Japan from 25% to 10%. In addition, the Company
received a one-time royalty payment from Rentrak Japan of $4,390,000
in August 1996.
Rentrak UK Limited
In February 1998, the Company entered into a Shareholders Agreement
and a PPT License Agreement with Columbus Holdings Limited, and
Rentrak UK Limited (Rentrak UK)to develop the Company's PPT
distribution and information processing business in the United Kingdom
through Rentrak UK. Rentrak UK is a joint venture between the
Company, which owns 25%, Columbus Holdings Limited, which owns two-
thirds of the venture and Rentrak Japan, which owns 8.3%. The PPT
Agreement remains in force in perpetuity, unless terminated due to
material breach of contract, liquidation of Rentrak UK or non
delivery, 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.
Basis of Consolidation
The consolidated financial statements include the accounts of the
Company, its majority owned subsidiaries, and those subsidiaries in
which the Company has a controlling interest after elimination of all
intercompany accounts and transactions. Investments in affiliated
companies owned 20 to 50% are accounted for by the equity method.
Subsequent to March 31, 1996, the Company approved plans to
discontinue the operations of Pro Image and BlowOut (Note 14). At
March 31, 1997, the assets and liabilities of Pro Image have been
segregated in the consolidated financial statements. The statements of
operations for the years ended March 31, 1998, 1997 and 1996 reflect
these entities as discontinued.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. These estimates include,
among others, reserves on retailer financing program investments
(Note 4) and estimated losses on disposal of discontinued operations
(Note 14). Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Investment Securities
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities (SFAS 115),"
requires the Company to classify and account for its security
investments as trading securities, securities available for sale or
securities held to maturity depending on the Company's intent and
ability to hold or trade the securities at time of purchase.
Securities available for sale are stated on the balance sheet at their
fair market value with an adjustment to stockholders' equity to
reflect net unrealized gains and losses, net of tax. Securities held
to maturity are stated at amortized cost.
Detail of the proceeds from the sales of available for sale securities
and realized gains and losses on sales of equity securities are as
follows:
Proceeds Gross Gross
Gains Losses
1998 $519,688 $ 24,375 $(118,437)
1997 526,000 318,875 -
1996 951,394 150,288 (88,197)
When, in management's opinion, available for sales securities have
experienced an other than temporary decline, the amount of the decline
in value is charged to other income.
Unrealized losses of $230,672 and $147,421 were recorded in other
income in the March 31, 1998 and 1996 statement of operations,
respectively. There were no unrealized gains or losses recognized in
the March 31, 1997 statement of operations.
Financial Instruments
A financial instrument is cash or a contract that imposes or conveys,
a contractual obligation or right, to deliver, or receive, cash or
another financial instrument. The estimated fair value of all
material financial instruments, including retail financing program
notes receivable, approximated their carrying values at March 31, 1998
and 1997.
Inventory
Inventory consists of videocassettes held for sale and is carried at
the lower of cost (first-in, first-out method) or market value.
Property and Equipment
Depreciation of fixed assets is computed on the straight-line method
over estimated useful lives of three to five years. Leasehold
improvements are amortized over the lives of the underlying leases or
the service lives of the improvements, whichever is shorter.
Intangibles
The Company reviews its intangible assets for asset impairment at the
end of each quarter, or more frequently when events or changes in
circumstances indicate that the carrying amount of intangibles may not
be recoverable. To perform that review, the Company estimates the sum
of expected future undiscounted preinterest expense net cash flows
from the operating activities. If the estimated net cash flows are
less than the carrying amount of intangibles, the Company will
recognize an impairment loss in an amount necessary to write down
intangibles to a fair value as determined from expected discounted
future cash flows.
In connection with the acquisition of Pro Image in 1994, the Company
purchased certain intangible assets totaling $6,269,050. These assets
included customer and dealer lists, a covenant not to compete,
franchise agreements and goodwill. In connection with Pro Image's
acquisition of Team Spirit and then Image Makers, Inc. and Barenz-
Runia, Inc., the Company purchased goodwill totaling approximately
$4.1 million and $557,000, respectively. Prior to March 31, 1996,
these assets were being amortized on the straight-line method over a
12-year period based on the factors influencing the acquisition
decision. The Company believed the above useful lives were
appropriate based on the factors influencing acquisition decisions.
These factors included store location, profitability and general
industry outlook. The Company analyzes the realizability of all costs
in excess of the fair values of net assets acquired related to
acquisitions to determine if any write-down is necessary. Due to
events which occurred during fiscal year 1996, such as continuation of
operating losses and the decision to dispose of Pro Image (including
subsidiaries), the Company's analysis determined that intangible
assets of approximately $9,300,000 were not recoverable. Thus, the
assets were written off to their estimated fair value of $0. These
write-offs are reflected in losses from discontinued operations during
the fiscal year ended March 31, 1996.
Revenue Recognition
The PPT agreements gene