UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2006

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from                     to

 

Commission file number: 0-15159

RENTRAK CORPORATION

(Exact name of registrant as specified in its charter)

 

Registrant’s telephone number, including area code:  503-284-7581

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act: Large accelerated filer o   Accelerated filer x   Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o     No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

RENTRAK CORPORATION

FORM 10-Q

INDEX

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets – December 31, 2006 and March 31, 2006 (unaudited)
	Condensed Consolidated  Income Statements - Three and Nine Months Ended December 31, 2006 and 2005 (unaudited)
	Condensed Consolidated Statements of Cash Flows - Nine Months Ended December 31, 2006 and 2005 (unaudited)
	Condensed Consolidated Statements of Stockholders’ Equity – Years Ended March 31, 2005 and 2006 and Nine Months Ended December 31, 2006 (unaudited)
	Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II - OTHER INFORMATION
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.	Exhibits
Signatures

1

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Rentrak Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)

		December 31,			March 31,
		2006			2006 (1)
		(Unaudited)
Assets
Current Assets:
Cash and cash equivalents		$	7,687		$	15,666
Marketable securities		22,102			14,832
Accounts receivable, net of allowances for doubtful accounts of $579 and $461		18,924			18,314
Note receivable		380			—
Advances to program suppliers, net of program supplier reserves of $51 and $32		339			225
Deferred income tax assets		107			110
Other current assets		665			607
Total Current Assets		50,204			49,754
Property and Equipment, net of accumulated depreciation of $5,864 and $5,876		5,200			3,623
Deferred Income Tax Assets		411			312
Other Assets		612			639
Total Assets		$	56,427		$	54,328
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable		$	12,812		$	15,493
Taxes payable		198			972
Accrued liabilities		780			532
Deferred rent, current portion		90			—
Accrued compensation		1,172			1,366
Deferred revenue		525			484
Total Current Liabilities		15,577			18,847
Deferred rent, long-term portion		807			—
Notes payable		914			—
Total Liabilities		17,298			18,847
Commitments and Contingencies		—			—
Stockholders’ Equity:
Preferred stock, $0.001 par value; 10,000 shares authorized; none issued		—			—
Common stock, $0.001 par value; 30,000 shares authorized; shares issued and outstanding: 10,646 and 10,697		11			11
Capital in excess of par value		47,407			48,069
Accumulated other comprehensive income		103			181
Accumulated deficit		(8,392		)	(12,780		)
Total Stockholders’ Equity		39,129			35,481
Total Liabilities and Stockholders’ Equity		$	56,427		$	54,328

 

(1) Derived from our March 31, 2006 audited consolidated financial statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

2

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Rentrak Corporation and Subsidiaries

Condensed Consolidated Income Statements

(Unaudited)

(In thousands, except per share amounts)

		For the Three Months Ended December 31,						For the Nine Months Ended December 31,
		2006			2005			2006			2005
Revenue		$	26,757		$	23,957		$	77,741		$	65,003
Operating expenses:
Cost of sales		19,394			17,014			53,541			45,364
Selling and administrative		6,268			5,454			18,057			15,787
		25,662			22,468			71,598			61,151
Income from operations		1,095			1,489			6,143			3,852
Other income (expense):
Interest income		420			283			1,115			693
Interest expense		(3		)	—			(5		)	(2		)
		417			283			1,110			691
Income before income taxes		1,512			1,772			7,253			4,543
Provision for income taxes		643			646			2,865			1,657
Net income		$	869		$	1,126		$	4,388		$	2,886
Basic net income per share		$	0.08		$	0.11		$	0.41		$	0.27
Diluted net income per share		$	0.08		$	0.10		$	0.39		$	0.26
Shares used in per share calculations:
Basic		10,666			10,567			10,639			10,556
Diluted		11,249			11,054			11,179			11,071

 

See accompanying Notes to Condensed Consolidated Financial Statements.

3

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Rentrak Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

		For the Nine Months Ended December 31,
		2006			2005
Cash flows from operating activities:
Net income		$	4,388		$	2,886
Adjustments to reconcile net income to net cash flows provided by operating activities:
Tax benefit from stock option exercises		393			55
Depreciation and amortization		1,244			1,222
Loss on disposal of fixed assets		37			—
Adjustment to allowance for doubtful accounts		118			(224		)
Stock based compensation		668			—
Excess tax benefits from stock-based compensation		(151		)	—
Deferred income taxes		(96		)	813
(Increase) decrease in:
Accounts receivable		(728		)	(1,869		)
Notes receivable issued to customers		(380		)	—
Advances to program suppliers		(114		)	916
Income taxes receivable and prepaid taxes		—			513
Other current assets		(258		)	(67		)
Increase (decrease) in:
Accounts payable		(2,681		)	1,715
Accrued liabilities and compensation		(720		)	(206		)
Deferred rent		897			—
Deferred revenue and other liabilities		(37		)	45
Net cash provided by operating activities		2,580			5,799
Cash flows from investing activities:
Purchases of marketable securities		(7,270		)	(14,848		)
Purchase of property and equipment		(2,846		)	(1,447		)
Note receivable payments received		215			372
Net cash used in investing activities		(9,901		)	(15,923		)
Cash flows from financing activities:
Payments on capital lease obligation		—			(36		)
Proceeds from note payable		914			—
Issuance of common stock		225			105
Excess tax benefits from stock-based compensation		151			—
Repurchase of common stock		(1,948		)	—
Note receivable, related party		—			753
Net cash (used in) provided by financing activities		(658		)	822
Increase (decrease) in cash and cash equivalents		(7,979		)	(9,302		)
Cash and cash equivalents:
Beginning of period		15,666			21,983
End of period		$	7,687		$	12,681
Supplemental cash flow information:
Cash paid during the period for interest		$	—		$	3
Cash paid (refunds received) during the period for income taxes, net		3,340			(37		)
Supplemental non-cash information
Common stock withheld in payment of exercise price for stock options and warrants		$	922		$	—

 

See accompanying Notes to Condensed Consolidated Financial Statements.

4

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Rentrak Corporation and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except share amounts)

										Cumulative
							Capital			Other						Total
		Common Stock					In Excess			Comprehensive			Accumulated			Stockholders’
		Shares		Amount			of Par Value			Income			Deficit			Equity
Balance at March 31, 2004		9,739,537		$	9		$	41,094		$	181		$	(22,489	)	$	18,795
Net income		—		—			—			—			5,243			5,243
Common stock issued pursuant to stock plans		522,557		1			2,394			—			—			2,395
Common stock used to pay for option exercises		(25,381	)	—			(270		)	—			—			(270		)
Issuance of common stock		308,200		—			2,774			—			—			2,774
Income tax benefit from stock option exercises		—		—			996			—			—			996
Balance at March 31, 2005		10,544,913		10			46,988			181			(17,246		)	29,933
Net income		—		—			—			—			4,466			4,466
Common stock issued pursuant to stock plans		152,423		1			707			—			—			708
Fair value of options granted to non-employee		—		—			219			—			—			219
Income tax benefit from stock option exercises		—		—			155			—			—			155
Balance at March 31, 2006		10,697,336		11			48,069			181			(12,780		)	35,481
Net income		—		—			—			—			4,388			4,388
Common stock issued pursuant to stock plans		129,203		—			225			—			—			225
Common stock issued pursuant to warrant exercise		12,705		—			—			—			—			—
Deferred stock units granted to Board of Directors		—		—			245			—			—			245
Stock-based compensation expense		—		—			423			—			—			423
Common stock repurchased		(193,500	)	—			(1,948		)	—			—			(1,948		)
Unrealized loss on foreign currency translation		—		—			—			(78		)	—			(78		)
Income tax benefit from stock option exercises		—		—			393			—			—			393
Balance at December 31, 2006		10,645,744		$	11		$	47,407		$	103		$	(8,392	)	$	39,129

 

See accompanying Notes to Condensed Consolidated Financial Statements.

5

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RENTRAK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of Rentrak Corporation have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with the accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three and nine-month periods ended December 31, 2006 are not necessarily indicative of the results to be expected for the entire fiscal year ending March 31, 2007. The Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and footnotes thereto included in our 2006 Annual Report to Shareholders.

The Condensed Consolidated Financial Statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to present fairly our financial position, results of operations and cash flows.

Note 2.  Net Income Per Share

Basic net income per share (“EPS”) and diluted EPS are computed using the methods prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share.” Following is a reconciliation of the shares used for the basic EPS and diluted EPS calculations (in thousands):

		Three Months Ended Dec. 31,				Nine Months Ended Dec. 31,
		2006		2005		2006		2005
Basic EPS:
Weighted average number of shares of common stock outstanding		10,666		10,567		10,639		10,556
Diluted EPS:
Effect of dilutive deferred stock units, stock options and warrants		583		487		540		515
		11,249		11,054		11,179		11,071
Options not included in diluted EPS because the exercise price of the options was greater than the average market price of the common shares for the period		—		400		—		302

 

Note 3.  Business Segments, Significant Suppliers and Major Customers

We operate in two business segments, our Pay-Per-Transaction (“PPT”) and Advanced Media and Information (“AMI”) operating divisions, and, accordingly, we report certain financial information by individual segment under this structure. The PPT Division focuses on managing our business operations that facilitate the delivery of home entertainment content products and related rental and sales information for that content to our Participating Retailers on a revenue sharing basis. The AMI Division concentrates on the management and growth of our Essentials Suite™ of business intelligence services, primarily offered on a recurring subscription basis, which are no longer in the early stages, as well as operating our direct revenue sharing (“DRS”) services.

We did not have any revenues from our Other Division in the first three quarters of fiscal 2007 as Supply Chain Essentialsä, OnDemand Essentialsä and Retail Essentialsä moved from the Other Division to the AMI Division during the first quarter of fiscal 2007. Accordingly, revenue related to these products in the first three quarters of fiscal 2006 was reclassified to the AMI Division for comparison purposes.

Assets are not specifically identified by segment as the information is not used by the chief operating decision maker to measure the segments’ performance.

6

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Certain information by segment was as follows (in thousands):

 

		PPT			AMI			Other(1)			Total
Three months ended December 31, 2006
Sales to external customers		$	23,081		$	3,676		$	—		$	26,757
Depreciation and amortization		13			309			100			422
Income (loss) from operations		2,832			1,324			(3,061		)	1,095
Three months ended December 31, 2005
Sales to external customers		$	20,851		$	3,106		$	—		$	23,957
Depreciation and amortization		8			318			81			407
Income (loss) from operations		2,819			1,092			(2,422		)	1,489
Nine months ended December 31, 2006
Sales to external customers		$	66,756		$	10,985		$	—		$	77,741
Depreciation and amortization		36			961			247			1,244
Income (loss) from operations		10,535			4,239			(8,631		)	6,143
Nine months ended December 31, 2005
Sales to external customers		$	56,492		$	8,511		$	—		$	65,003
Depreciation and amortization		28			940			254			1,222
Income (loss) from operations		8,421			2,728			(7,297		)	3,852

 

(1)          Includes revenue and expenses relating to products and/or services which are still in early stages, as well as corporate expenses and other expenses which are not allocated to a specific segment.

Additional results of operations information by segment was as follows:

		Three Months Ended December 31, (1)
		2006					2005
(Dollars in thousands)		Dollars			% of  revenues		Dollars			% of  revenues
PPT Division
Revenues		$	23,081		100.0	%	$	20,851		100.0	%
Cost of sales		18,839			81.6		16,601			79.6
Gross margin		$	4,242		18.4	%	$	4,250		20.4	%
AMI Division
Revenues		$	3,676		100.0	%	$	3,106		100.0	%
Cost of sales		555			15.1		413			13.3
Gross margin		$	3,121		84.9	%	$	2,693		86.7	%

 

		Nine Months Ended December 31, (1)
		2006					2005
(Dollars in thousands)		Dollars			% of  revenues		Dollars			% of  revenues
PPT Division
Revenues		$	66,756		100.0	%	$	56,492		100.0	%
Cost of sales		51,907			77.8		44,158			78.2
Gross margin		$	14,849		22.2	%	$	12,334		21.8	%
AMI Division
Revenues		$	10,985		100.0	%	$	8,511		100.0	%
Cost of sales		1,634			14.9		1,206			14.2
Gross margin		$	9,351		85.1	%	$	7,305		85.8	%

 

(1) Percentages may not add due to rounding.

Revenue by service activity was as follows (in thousands): 

		Three Months Ended Dec. 31,						Nine Months Ended Dec. 31,
		2006			2005			2006			2005
Order processing fees		$	2,590		$	2,098		$	6,823		$	5,064
Transaction fees		16,559			15,304			47,680			40,966
Sell-through fees		3,715			3,206			11,599			9,728
Other		3,893			3,349			11,639			9,245
		$	26,757		$	23,957		$	77,741		$	65,003

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During the three and nine-month periods ended December 31, 2006 and 2005, we had Program Suppliers that supplied product which generated in excess of 10% of our total revenues as follows:

		Three Months Ended Dec. 31,				Nine Months Ended Dec. 31,
		2006		2005		2006		2005
Program Supplier 1		21	%	—		18	%	—
Program Supplier 2		17	%	16	%	16	%	15	%
Program Supplier 3		17	%	15	%	14	%	17	%
Program Supplier 4		16	%	25	%	17	%	26	%
Program Supplier 5		8	%	—		10	%	—

 

There were no other Program Suppliers who provided product that accounted for 10% or more of our total revenues for the three and nine-month periods ended December 31, 2006 or 2005. Although management does not believe that the relationships with the significant Program Suppliers will be terminated in the near term, a loss of any one of these suppliers could have an adverse effect on our financial condition and results of operations.

There were no customers that accounted for 10% or more of our total revenue in the three and nine-month periods ended December 31, 2006 or 2005.

Note 4.  Stock-Based Compensation

Adoption of SFAS No. 123R

Effective April 1, 2006, we adopted SFAS No. 123R, “Share-Based Payment.” We elected to use the modified prospective transition method as provided by SFAS No. 123R and, accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of expensing stock-based compensation. Under this method, the provisions of SFAS No. 123R apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption is recognized in net income in the periods after the date of adoption using the Black-Scholes valuation method over the remainder of the requisite service period. Prior to April 1, 2006, we accounted for stock options using the intrinsic value method as prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” See also “Critical Accounting Policies and Estimates” in Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

We provided disclosures of net income and earnings per share as if the method prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation,” had been applied in measuring compensation expense in prior periods as follows (in thousands, except per share amounts):

		Three Months  Ended Dec. 31,			Nine Months  Ended Dec. 31,
		2005			2005
Net income, as reported		$	1,126		$	2,886
Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects
		(215		)	(611		)
Net income, pro forma		$	911		$	2,275
Net income per share – basic, as reported		$	0.11		$	0.27
Net income per share – basic, pro forma		$	0.09		$	0.22
Net income per share – diluted, as reported		$	0.10		$	0.26
Net income per share – diluted, pro forma		$	0.08		$	0.21

 

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Certain information regarding our stock-based compensation was as follows (in thousands, except per share amounts):

		Three Months Ended Dec. 31,						Nine Months Ended Dec. 31,
		2006			2005			2006			2005
Weighted average grant-date per share fair value of share options granted		$	—		$	6.86		$	—		$	7.03
Total intrinsic value of share options exercised		941			34			1,365			150
Stock-based compensation recognized in results of operations as a component of selling and administrative expense		210			—			668			—
Tax benefit recognized in statement of operations		6			—			58			—
Cash received from options exercised and shares purchased under all share-based arrangements		38			4			229			27
Tax deduction realized related to stock options exercised		238			12			393			55

 

No stock-based compensation was capitalized as a part of an asset during the three or nine months ended December 31, 2006 or 2005.

To determine the fair value of stock options granted, we used the Black-Scholes option pricing model and the following weighted average assumptions:

		Three and Nine  Months Ended  December 31,  2005
Risk-free interest rate		4.16% - 4.49%
Expected dividend yield		—
Expected lives		6.39 - 8.58 years
Expected volatility		64.87% - 70.08%

 

There were no options granted in the three or nine-month periods ended December 31, 2006.

The risk-free rate used is based on the U.S. Treasury yield over the estimated term of the options granted. Prior to the adoption of SFAS No. 123R, the expected term was estimated based on historical experience. Under SFAS No. 123R, our option pricing model will utilize the simplified method accepted under Staff Accounting Bulletin No. 107 to estimate the expected term for all option grants issued prior to December 31, 2007. We are currently in the process of evaluating historical experience and other information in order to refine our methods to estimate the expected term for all options granted after December 31, 2007. The expected volatility for options granted is calculated based on our historical volatility over the prior seven year period. We have not paid dividends in the past and we do not expect to pay dividends in the future and, therefore, the expected dividend rate is 0%.

Effective June 15, 2006, our Board of Directors (the “Board”), upon recommendation of the Compensation Committee of the Board, approved the grant of 9,000 deferred stock units (“DSUs”) to each of our five non-employee directors in lieu of the annual grants of stock options that had been in place under the 1997 Equity Participation Plan. The DSUs represent the right to receive an equal number of shares of our Common Stock pursuant to the terms and conditions of our 2005 Stock Incentive Plan on a deferred basis in compliance with the terms of Section 409A of the Internal Revenue Code, as amended. The awards of DSUs will vest in full on June 15, 2007, provided that the recipient continues to be a non-employee director on that date, and provided further that the DSUs will fully vest upon termination of the recipient’s service on the Board due to death or disability or a change in control of Rentrak Corporation before that date. The awards of DSUs will be payable following the recipient’s ceasing to be a director.

Total compensation expense related to DSUs of $452,000, was calculated based on the fair value on the date of grant as if the stock was vested. We recorded an expense of $113,000 and $245,000, respectively, during the three and nine-month periods ended December 31, 2006, with the remaining $207,000 of related compensation to be recognized over the remaining vesting period for these awards at the rate of approximately $113,000 per quarter through June 15, 2007.

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We amortize stock-based compensation on a straight-line basis over the vesting period of the individual award, which is the requisite service period. We have not reduced the stock-based compensation for estimated forfeitures as there is no basis for estimating future forfeitures as most unvested options are held by members of senior management and the non-employee Directors.

Shares to be issued under stock-based awards will come from authorized but unissued shares.

The following reconciles what certain operating results would have been without the effects of applying SFAS No. 123R in the three and nine-month periods ended December 31, 2006 (in thousands, except per share amounts):

		Three Months Ended December 31, 2006						Nine Months Ended December 31, 2006
		As reported			If reported following APB 25			As  reported			If reported following APB 25
Income before income taxes		$	1,512		$	1,609		$	7,253		$	7,676
Net income		869			1,006			4,388			4,784
Cash flow from operating activities		(16		)	89			2,580			2,731
Cash flow from financing activities		468			362			(658		)	(809		)
Basic earnings per share		0.08			0.09			0.41			0.45
Diluted earnings per share		0.08			0.09			0.39			0.43

 

Stock Incentive Plan

The Rentrak Corporation 2005 Stock Incentive Plan (the “2005 Plan”) replaced the 1997 Non-Officer Employee Stock Option Plan and the 1997 Equity Participation Plan (the “Prior Plans”).

Under the 2005 Plan, we may grant incentive or nonqualified stock options, stock appreciation rights, restricted stock or units with time-based vesting, performance shares with vesting tied to performance goals and other equity-based awards to eligible participants, including our officers, other key employees, our non-employee directors and certain consultants. Up to a total of 1.0 million shares of our common stock may be issued pursuant to awards granted under the 2005 Plan, subject to adjustment for changes in capitalization. In addition, shares covered by outstanding stock options under the Prior Plans that are cancelled, terminate or otherwise expire without being exercised become available for grants of new awards under the 2005 Plan.

Our equity-based plans are administered by the Compensation Committee of our Board, which determines the terms and conditions of awards made under the plans. Generally, options granted under the plans vest over periods of one to four years and expire ten years after the date of grant.

As of December 31, 2006, awards covering 904,750 shares of our common stock remained available for grant under our 2005 Plan and 2,278,152 shares of our common stock were reserved for issuance pursuant to the 2005 Plan and the Prior Plans combined.

Stock option activity for the nine-month period ended December 31, 2006 was as follows:

		Options  Outstanding		Weighted Average  Exercise Price
Outstanding at March 31, 2006		1,574,798		$	6.17
Granted		—		—
Exercised		(200,896	)	5.62
Forfeited		(56,750	)	9.50
Outstanding at December 31, 2006		1,317,152		6.13

 

During the nine months ended December 31, 2006, 71,963 shares of common stock with a market value of approximately $905,000 were withheld in payment of the exercise price for stock options.

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Certain information regarding options outstanding as of December 31, 2006 was as follows:

 

Deferred stock unit activity for the nine-month period ended December 31, 2006 was as follows:

		Units Outstanding		Weighted Average Grant Date Fair Value
Outstanding at March 31, 2006		—		—
Granted		45,000		$	10.04
Vested		—		—
Issued		—		—
Forfeited		—		—
Outstanding at December 31, 2006		45,000		10.04

 

As of December 31, 2006, unrecognized stock-based compensation related to outstanding, but unvested options and DSUs was $0.9 million, which will be recognized over the weighted average remaining vesting period of 3 years.

Note 5.  Related Party Transactions

On January 25, 2005, we entered into a consulting agreement with F. Kim Cox, our former President and Secretary, whereby he is assisting us with strategic planning and product development issues. Pursuant to the agreement, we pay Mr. Cox $25,000 per month from February 2005 through March 2007. We paid Mr. Cox a total of $75,000 and $225,000, respectively, pursuant to this agreement in the three and nine-month periods ended December 31, 2006 and 2005.

Note 6.   Repurchase of Shares

During the first nine months of fiscal 2007, we repurchased a total of 193,500 shares of our common stock at an average price of $10.07 per share, which totaled $1.9 million. The stock repurchase plan, approved by our Board of Directors in January 2006, authorized the purchase of up to 1,000,000 shares of our common stock and does not have an expiration date. At December 31, 2006, 806,500 shares remained available for repurchase under this plan.

Note 7.  Renovation of Corporate Headquarter Office and State of Oregon and City of Portland Loans and Grant

In connection with our corporate headquarter office renovations, we received cash-based rent incentives of $0.9 million from the lessor based on our qualified expenditures. These amounts will be amortized against rental expense over the term of the lease, which began January 1, 2007. See also “Critical Accounting Policies and Estimates” in Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In addition, in June 2006, we received commitments for conditional loans from the State of Oregon and the Portland Development Commission (“PDC”) for funding in the amounts of $0.2 million and $0.7 million, respectively. Additionally, we received a commitment for a conditional grant from the PDC for $58,000. The loan from the PDC of $0.7 million does not bear interest until it becomes due and contains provisions relating to forgiveness if we meet certain requirements. If the loan is not forgiven, it will accrue interest at the rate of 8.5% per annum beginning on the date that it becomes due. However, if the loan is forgiven, no interest will accrue. The loan from the State of Oregon of $0.2 million bears interest at the rate of 5% per annum and contains provisions relating to forgiveness if we meet certain requirements. These funds were used to pay for leasehold improvements associated with our corporate headquarters and were provided to

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