SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For Quarter Ended: September 30, 2003.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Transition Period from to
Commission file number: 0-15159
RENTRAK CORPORATION
(Exact name of registrant as specified in its charter)
OREGON 93-0780536
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification no.)
7700 NE Ambassador Place, Portland, Oregon 97220
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 284-7581
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (x) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes ( ) No ( X )
As of October 31, 2003, the Registrant had 9,617,213 shares of Common Stock
outstanding.
1
PART I - FINANCIAL INFORMATION Page
Number
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2003 and March 31, 2003 (unaudited) 3
Condensed Consolidated Statements of Operations for the
three-month periods ended September 30, 2003 and
September 30, 2002 (unaudited) 5
Condensed Consolidated Statements of Operations for the
six-month periods ended September 30, 2003 and September 30,
2002(unaudited) 6
Condensed Consolidated Statements of Cash Flows for the
six-month periods ended September 30, 2003 and
September 30, 2002 (unaudited) 7
Notes to Condensed Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial
Condition and Result of Operations 18
Item 3 Quantitative and Qualitative Disclosures About Market Risk 25
Item 4 Controls and Procedures 26
Part II - OTHER INFORMATION
Item 1 Legal Proceedings 26
Item 4 Submission of Matters to a Vote of Security Holders 27
Item 6 Exhibits and Reports on Form 8-K 27
Signature 28
Exhibit Index 29
2
RENTRAK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
September 30, March 31,
2003 2003(1)
-------------------------- -------------------
CURRENT ASSETS:
Cash and cash equivalents $ 9,818,471 $ 10,063,541
Accounts receivable, net of allowance for doubtful
accounts of $737,937 and $748,139 6,514,227 9,910,532
Advances to program suppliers 1,315,648 418,101
Income tax receivable 141,495 81,085
Deferred tax asset 3,681,323 2,796,908
Other current assets 1,298,307 2,226,287
--------------------------- ------------------
Total current assets 22,769,471 25,496,454
--------------------------- ------------------
PROPERTY AND EQUIPMENT, net 2,292,534 2,404,763
DEFERRED TAX ASSET 919,392 894,083
OTHER ASSETS 1,354,862 1,931,133
--------------------------- ------------------
TOTAL ASSETS $27,336,259 $ 30,726,433
========================== ===================
(1) Derived from Rentrak's audited consolidated financial statement as of March 31, 2003.
The accompanying notes are an integral part
of these consolidated balance sheets.
3
RENTRAK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
September 30, March 31,
2003 2003(1)
------------------------------------------
CURRENT LIABILITIES:
Accounts payable $10,061,911 $ 12,710,999
Accrued liabilities 1,322,474 1,143,785
Accrued compensation 461,247 610,022
Deferred revenue 141,054 156,692
------------------------- -----------------
Total current liabilities 11,986,686 14,621,498
------------------------- -----------------
LONG-TERM LIABILITIES:
Lease obligations, deferred gain and
customer deposits 548,778 668,039
------------------------- -----------------
Total long-term liabilities 548,778 668,039
------------------------- -----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value;
Authorized: 10,000,000 shares, none issued - -
Common stock, $.001 par value;
Authorized: 30,000,000 shares
Issued and outstanding: 9,600,590 shares
at September 30, 2003 and 9,471,612 shares at
March 31, 2003 9,601 9,472
Capital in excess of par value 40,285,908 39,655,212
Accumulated other comprehensive income 180,879 180,879
Accumulated deficit (25,675,593) (24,408,667)
------------------------ ------------------
14,800,795 15,436,896
------------------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $27,336,259 $ 30,726,433
========================= =================
(1) Derived from Rentrak's audited consolidated financial statement as of March 31, 2003.
The accompanying notes are an integral part
of these consolidated balance sheets.
4
RENTRAK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months ended September 30,
2003 2002
--------------------- ------------------------
REVENUES:
PPT $ 12,184,103 $ 17,976,338
Other 2,076,780 2,798,144
--------------------- ------------------------
14,260,883 20,774,482
--------------------- ------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales (Note E) 12,182,187 17,010,953
Selling, general, and administrative 4,283,319 3,555,807
--------------------- ------------------------
16,465,506 20,566,760
--------------------- ------------------------
INCOME (LOSS) FROM OPERATIONS (2,204,623) 207,722
--------------------- ------------------------
OTHER INCOME (EXPENSE):
Interest income 67,428 71,500
Interest expense (1,776) -
--------------------- ------------------------
65,652 71,500
--------------------- ------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAX
PROVISION (BENEFIT) (2,138,971) 279,222
INCOME TAX PROVISION (BENEFIT) (812,369) 106,107
--------------------- ------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS (1,326,602) 173,115
LOSS FROM DISCONTINUED
OPERATIONS, NET OF TAX BENEFIT
OF $0 AND $169,293 - (276,216)
--------------------- ------------------------
NET LOSS $ (1,326,602) $ (103,101)
===================== ========================
NET INCOME (LOSS) PER SHARE:
Basic:
Continuing operations $ (0.14) $ 0.02
Discontinued operations - (0.03)
--------------------- ------------------------
Total $ (0.14) $ (0.01)
===================== ========================
Diluted:
Continuing operations $ (0.14) $ 0.02
Discontinued operations - (0.03)
--------------------- ------------------------
Total $ (0.14) $ (0.01)
===================== ========================
The accompanying notes are an integral part of
these consolidated statements.
5
RENTRAK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended September 30,
2003 2002
------------------------- ----------------------
REVENUES:
PPT $ 25,236,794 $ 35,842,448
Other 7,722,513 7,359,475
------------------------- ----------------------
32,959,307 43,201,923
------------------------- ----------------------
OPERATING COSTS AND EXPENSES:
Cost of sales (Note E) 26,363,100 35,300,572
Selling, general, and administrative 8,753,968 7,556,255
Net gain from litigation settlement - (361,847)
------------------------- ----------------------
35,117,068 42,494,980
------------------------- ---------------------
INCOME (LOSS) FROM OPERATIONS (2,157,761) 706,943
------------------------- ----------------------
OTHER INCOME (EXPENSE):
Interest income 122,867 71,500
Interest expense (7,825) -
------------------------- ----------------------
115,042 71,500
------------------------- ----------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAX
PROVISION (BENEFIT) (2,042,719) 778,443
INCOME TAX PROVISION (BENEFIT) (775,793) 295,811
------------------------- ----------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS (1,266,926) 482,632
LOSS FROM DISCONTINUED
OPERATIONS, NET OF TAX BENEFIT
OF $0 AND $258,174 - (421,230)
------------------------- ----------------------
NET INCOME (LOSS) $ (1,266,926) $ 61,402
========================= ======================
NET INCOME (LOSS) PER SHARE:
Basic:
Continuing operations $ (0.13) $ 0.05
Discontinued operations - (0.04)
------------------------- ----------------------
Total $ (0.13) $ 0.01
========================= ======================
Diluted:
Continuing operations $ (0.13) $ 0.05
Discontinued operations - (0.04)
------------------------- ----------------------
Total $ (0.13) $ 0.01
========================= ======================
The accompanying notes are an integral part
of these consolidated statements.
6
RENTRAK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended September 30,
----------------------------------------------
2003 2002
------------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,266,926) $ 61,402
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss on disposal of discontinued operations - 421,230
Compensation expense related to stock repurchase - 342,625
Gain on sale of assets (97,298) -
Tax benefit from NQ stock option (133,933) -
Loss on write-down of occupancy deposit 400,000 -
Depreciation and amortization 376,190 562,253
Amortization of warrants - 30,000
Recovery of doubtful accounts (152,545) (570,000)
Reserves on advances to program suppliers - 697,007
Deferred income taxes (641,858) 94,097
Change in specific accounts:
Accounts receivable 3,548,850 2,058,421
Advances to program suppliers (897,547) (1,592,809)
Income tax receivable (60,410) (46,428)
Other assets 999,667 1,896,063
Accounts payable (2,649,088) (2,476,370)
Accrued liabilities & compensation 29,914 (723,101)
Deferred revenue and other liabilities (101,630) (48,208)
------------------------- -------------------
Net cash provided by (used in) operating activities (646,614) 706,182
------------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (952,339) (402,842)
Proceeds from sale of 3PF assets 800,000 -
Repayment of note receivable 147,769 -
Disposition of other assets (57,509) (196,906)
-------------------------- ------------------
Net cash used in investing activities (62,079) (599,748)
-------------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations (33,269) (30,492)
Repurchases of common stock - (1,799,970)
Issuance of common stock 496,892 248,406
-------------------------- ------------------
Net cash provided by (used in) financing activities 463,623 (1,582,056)
-------------------------- ------------------
NET CASH USED BY CONTINUING OPERATIONS (245,070) (1,475,622)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS - 562,148
DECREASE IN CASH AND CASH EQUIVALENTS (245,070) (913,474)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 10,063,541 12,028,684
-------------------------- ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,818,471 $ 11,115,210
========================== ==================
7
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for -
Income taxes paid, net of refunds received $ 60,410 $ 61,059
NON-CASH TRANSACTIONS
Forgiveness of note receivable in exchange for stock - (377,565)
Disposal of property and equipment through finance lease - 900,000
The accompanying notes are an integral
part of these consolidated statements.
8
RENTRAK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of
RENTRAK CORPORATION (the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations. The
results of operations for the three-month and six-month periods ended September
30, 2003 are not necessarily indicative of the results to be expected for the
entire fiscal year ending March 31, 2004. The Consolidated Financial Statements
should be read in conjunction with the Consolidated Financial Statements and
footnotes thereto included in the Company's 2003 Annual Report to Shareholders.
The Condensed Consolidated Financial Statements reflect, in the opinion of
management, all material adjustments (which include only normal recurring
adjustments) necessary to present fairly the Company's financial position and
results of operations and cash flows.
The Condensed Consolidated Financial Statements include the accounts of the
Company, its majority owned subsidiaries, and those subsidiaries in which the
Company has a controlling interest after elimination of all inter-company
accounts and transactions. Investments in affiliated companies owned 20 to 50
percent are accounted for on the equity method.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities: an Interpretation of ARB No. 15" (FIN 46). FIN 46
addresses consolidation by business enterprises of entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. Variable
interest entities are required to be consolidated by their primary beneficiaries
if they do not effectively disperse risks among parties involved. The primary
beneficiary of a variable interest entity is the party that absorbs a majority
of the entity's expected losses or receives a majority of its expected residual
returns. The consolidation requirements of FIN 46 apply immediately to variable
interest entities created after January 31, 2003 and apply to existing entities
in the first fiscal year or interim period ending after December 15, 2003.
Certain new disclosure requirements apply to all financial statements issued
after January 31, 2003. The Company does not believe that these provisions will
have a material impact on its consolidated financial statements.
9
NOTE B: Net Income (Loss) Per Share
Basic net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the periods. Diluted net income (loss) per common share is computed on
the basis of the weighted average shares of common stock outstanding plus common
equivalent shares arising from dilutive stock options and warrants.
The weighted average number of shares of common stock equivalents and net income
used to compute basic and diluted net income (loss) per share for the
three-month and six-month periods ended September 30, 2003 and 2002 were as
follows:
10
Note B: Net Income (Loss) Per Share
3-Months Ended 6-Months Ended
September 30, 2003 September 30, 2003
----------------------------------- -----------------------------------
Basic Diluted Basic Diluted
Weighted average number of shares of
common stock outstanding used to compute
basic net income (loss) per common share 9,577,165 9,577,165 9,529,776 9,529,776
Effect of dilutive stock
options and warrants - - - -
----------------- ----------------- ----------------- -----------------
Weighted average number of shares of
common stock used to compute diluted net
income (loss) per common share outstanding
and common stock equivalents 9,577,165 9,577,165 9,529,776 9,529,776
================= ================= ================= =================
Net income (loss) used in basic and diluted
net income (loss) per common share:
Continuing operations $ (1,326,602) $ (1,326,602) $ (1,266,926) $ (1,266,926)
Discontinued operations 0 0 0 0
----------------- ----------------- ----------------- -----------------
Net income (loss) $ (1,326,602) $ (1,326,602) $ (1,266,926 $ (1,266,926)
================= ================= ================= =================
Net income (loss) per common share:
Continuing operations $ (0.14) $ (0.14) $ (0.13) $ (0.13)
Discontinued operations $ 0.00 $ 0.00 $ 0.00 $ 0.00
----------------- ----------------- ----------------- -----------------
Net income (loss) per common share $ (0.14) $ (0.14) $ (0.13) $ (0.13)
================= ================= ================= =================
3-Months Ended 6-Months Ended
September 30, 2002 September 30, 2002
---------------------------------------- -------------------------------------
Basic Diluted Basic Diluted
Weighted average number of shares of common
stock outstanding used to compute basic
net income (loss) per common share 9,646,711 9,646,711 9,766,764 9,766,764
Effect of dilutive stock
options and warrants - - - 275,788
--------------------- ------------------ ------------------ ------------------
Weighted average number of shares of common
stock used to compute diluted net income
(loss) per common share outstanding and
common stock equivalents 9,646,711 9,646,711 9,766,764 10,042,552
===================== ================== ================== ==================
Net income (loss) used in basic and diluted
net income (loss) per common share:
Continuing operations $ 173,115 $ 173,115 $ 482,632 $ 482,632
Discontinued operations (276,216) (276,216) (421,230) (421,230)
--------------------- ------------------ ------------------ ------------------
Net income (loss) $ (103,101) $ (103,101) $ 61,402 $ 61,402
===================== ================== ================== ==================
Net income (loss) per common share:
Continuing operations $ 0.02 $ 0.02 $ 0.05 $ 0.05
Discontinued operations $ (0.03) $ (0.03) $ (0.04) $ (0.04)
--------------------- ------------------ ------------------ ------------------
Net income (loss) per common share $ (0.01) $ (0.01) $ 0.01 $ 0.01
===================== ================== ================== ==================
Options and warrants to purchase approximately 170,000 and 1,900,000 shares of
common stock for the three month periods ended September 30, 2003 and 2002,
respectively, and approximately 270,000 shares of common stock for the six month
period ended September 30, 2003, were not included in the computation of diluted
EPS because their effect would be antidilutive due to a loss for the periods.
Options and warrants to purchase approximately 1,140,000 shares of common stock
for the six month period ended September 30, 2002, were outstanding, but were
not included in the computation of diluted EPS because the exercise prices of
the options and warrants were greater than the average market price of the
common shares and as such would be antidilutive.
11
NOTE C: Business Segments, Significant Suppliers and Major Customers
The Company classifies its services in three business segments, PPT, 3PF.COM,
Inc. ("3PF") and Other. The PPT business segment includes the following business
activities: the PPT System whereby under its Pay-Per-Transaction (PPT) revenue
sharing program, the Company enters into contracts to lease videocassettes,
digital videodiscs ("DVD's"'), and video games, (collectively "Units"), from
Program Suppliers (producers of motion pictures and licensees and distributors
of home videocassettes and DVD's, and video game publishers) which are then
leased to Participating Retailers for a percentage of the rentals charged by the
Participating Retailers to their customers; data tracking and reporting services
provided by the Company to motion picture studios; Essential(TM) business
intelligence services, Box Office Essentials(TM) and Supply Chain
Essentials(TM), recently developed and currently being provided to customers;
and internet services provided by formovies.com, Inc., a subsidiary. 3PF is a
subsidiary of the Company that provided order processing, fulfillment and
inventory management services to retailers and wholesalers and to other
businesses requiring just-in-time fulfillment. Effective July 1, 2003, the
Company completed the sale of 3PF's operating assets at its Wilmington, Ohio,
facility. 3PF ceased all of its remaining operations at its Columbus, Ohio,
facility on July 31, 2003. (See Note E). The Other business segment formerly
included BlowOut Video, Inc. (BlowOut Video), a video retailer, which the
Company discontinued during the three-month period ended June 30, 2002 (See Note
D).
12
Business Segments
Following are the revenues, income (loss) from continuing operations, and
identifiable assets of the Company's continuing business segments for the
periods indicated (unaudited):
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002
------------------------ ------------------------ ------------------------- ------------------------
Revenues before
Intersegment Eliminations
PPT $ 13,756,267 $ 18,896,125 $ 28,335,008 $ 37,816,705
3PF 504,616 2,401,318 5,154,443 6,471,228
------------------------ ------------------------- ------------------------ ------------------------
$ 14,260,883 $ 21,297,443 $ 33,489,451 $ 44,287,933
------------------------ ------------------------- ------------------------ ------------------------
Intersegment Revenue
Eliminations
PPT $ - $ - $ - $ -
3PF - (522,961) (530,144) (1,086,010)
------------------------ ------------------------- ------------------------ ------------------------
$ - $ (522,961) $ (530,144) $ (1,086,010)
------------------------ ------------------------- ------------------------ ------------------------
Revenues from External
Customers
PPT $ 13,756,267 $ 18,896,125 $ 28,335,008 $ 37,816,705
3PF 504,616 1,878,357 4,624,299 5,385,218
------------------------ ------------------------- ------------------------ ------------------------
$ 14,260,883 $ 20,774,482 $ 32,959,307 $ 43,201,923
------------------------ ------------------------- ------------------------ ------------------------
Income (Loss) from
operations:
PPT $ (417,360) $ 1,319,986 $ (318,576) $ 2,614,608
3PF (1,787,263) (1,112,264) (1,839,185) (1,907,665)
------------------------ ------------------------- ------------------------ ------------------------
$ (2,204,623) $ 207,722 $ (2,157,761) $ 706,943
------------------------ ------------------------- ----------------------- ------------------------
September 30, 2003 March 31, 2003
------------------------ ------------------------
Identifiable Assets
PPT $ 25,519,547 $ 25,801,989
3PF 1,726,712 4,924,444
------------------------ ------------------------
$ 27,246,259 $ 30,726,433
======================== ========================
13
The Company currently offers substantially all of the titles of a number of
Program Suppliers, including Buena Vista Pictures Distribution, Inc., a
subsidiary of The Walt Disney Company, MGM Home Entertainment, a subsidiary of
Metro Goldwyn Mayer, Inc., Paramount Home Video, Inc., Twentieth Century Fox
Home Entertainment (formerly Fox Video), a subsidiary of Twentieth Century Fox
Film Corporation, Universal Studios Home Video, Inc., and Warner Home Video. For
the three-month period ended September 30, 2003, the Company had one program
supplier whose product generated 19 percent and a second that generated 14
percent of Rentrak revenue. No other program supplier provided product which
generated more than 10 percent of Rentrak revenue for the three-month period
ended September 30, 2003. No customer accounted for more than 10 percent of the
Company's revenue in the three-month period ended September 30, 2003. For the
six-month period ended September 30, 2003, the Company had one program supplier
whose product generated 22 percent and a second that generated 13 percent of
Rentrak revenue. No other program supplier provided product which generated more
than 10 percent of Rentrak revenue for the six-month period ended September 30,
2003. One customer accounted for 11 percent of the Company's revenue in the
six-month period ended September 30, 2003. The agreement with this fulfillment
customer expired July 31, 2003.
For the three-month period ended September 30, 2002, the Company had two program
suppliers whose product generated 19 percent, a third that generated 16 percent,
and a fourth that generated 13 percent of Rentrak revenue. No other program
supplier provided product which generated more than 10 percent of revenue for
the three-month period ended September 30, 2002. No customer accounted for more
than 10 percent of the Company's revenue in the three-month period ended
September 30, 2002. For the six-month period ended September 30, 2002, the
Company had two program suppliers whose product generated 18 percent, a third
that generated 15 percent, and a fourth that generated 12 percent of Rentrak
revenue. No other program supplier provided product which generated more than 10
percent of Rentrak revenue for the six-month period ended September 30, 2002. No
customer accounted for more than 10 percent of the Company's revenue in the
six-month period ended September 30, 2002.
NOTE D: Discontinued Operations
Due to the significant increase in sell through activity throughout the
industry, the operations of BlowOut Video did not meet the expectations of
management. As a result, during the three-month period ended June 30, 2002,
management initiated a plan to discontinue the retail store operations of
BlowOut Video. The plan called for an exit from the stores by the end of fiscal
2003, either through cancellation of the lease commitments and liquidation of
assets, or through sale of the stores to a third party. As of March 31, 2003,
all operations had ceased. Rentrak is continuing to sell its contractually
available end-of-term PPT revenue sharing product through broker channels. Prior
year amounts have been restated to classify results of BlowOut Video operations
as discontinued.
14
BlowOut Video generated revenues of $0.9 million and a net loss of $276,216, or
$0.03 per share, in the three-month period ended September 30, 2002. BlowOut
Video generated revenues of $1.9 million and a net loss of $421,230, or $0.04
per share, in the six-month period ended September 30, 2002.
Note E: 3PF Transactions
In June 2002, 3PF entered into an agreement to sublease approximately 194,000
square feet of its distribution facility in Columbus, Ohio to its largest
customer. The term of the lease expires July 31, 2006. The sublease requires
monthly rent payments to 3PF under amounts, terms and conditions similar to
3PF's master lease for this facility. Additionally in June 2002 in conjunction
with the facility sublease, 3PF entered into a financing lease with this
customer for the existing equipment within this distribution facility and the
associated costs for additional equipment to configure the layout to the
customer's specifications. This lease, upon expiration, contains a $1.00
purchase option. The lease for the equipment resulted in a note receivable in
the amount of $1,838,062 payable to 3PF in monthly installments. The current and
long-term portions of this note receivable at September 30, 2003, are $482,842
and $928,626, respectively. The transaction resulted in a deferred gain in the
amount of $509,044 that is being recognized as interest income by 3PF ratably
throughout the life of the lease.
In fiscal 2003, management determined that it was unlikely that 3PF would
achieve its business plans and initiated a plan to sell the assets of 3PF. Prior
to March 31, 2003, it was determined that, more likely than not, substantially
all of 3PF's assets would be sold or otherwise disposed of. As a result of this
determination, management assessed during the quarter ended March 31, 2003, the
current and historical operating and cash flow losses, prospects for growth in
revenues and other alternatives for improving the operating results of 3PF.
Accordingly, management performed an assessment of the fair value of the 3PF
assets under the guidelines of SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This assessment resulted in 3PF recognizing an
asset impairment expense during the three-month period ended March 31, 2003 in
the amount of $844,041 for the write down of its assets to estimated fair market
value of approximately $800,000.
In June 2003, the Company signed a definitive agreement to sell substantially
all of the assets of 3PF at the Wilmington, Ohio, operation for $800,000. The
agreement covered all equipment and leasehold improvements at 3PF's leased
distribution facility in Wilmington, Ohio, as well as a portion of its working
capital. As part of the agreement, 3PF as lessee and Rentrak as guarantor have
been released from the lease. The cash purchase price of $800,000 is
approximately equal to the net book value of the assets sold at March 31, 2003.
The Company announced it had completed this asset sale transaction, effective
July 1, 2003, and received the cash purchase price in full. At June 30, 2003,
the Company classified and reported the value of these assets held for sale on
the consolidated balance sheet. The operations of 3PF have not been reported as
discontinued operations as the continuing involvement criteria outlined in FASB
Statement No.
15
144, Accounting for the Impairment or Disposal of Long-Lived Assets have not
been met.
During the sale negotiations, the Company received notification from 3PF's
largest customer, serviced exclusively from the leased distribution facility in
Columbus, Ohio, that it did not intend to renew its fulfillment service contract
upon the scheduled expiration at July 31, 2003. As a result, the Columbus, Ohio
distribution facility lease was not included in the asset sale transaction. The
Columbus, Ohio distribution facility was used exclusively to service this
customer and as of August 1, 2003 is not in use. The Company is currently in the
process of negotiating the termination of this lease obligation. In accordance
with FASB Statement No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, the Company recorded a pre-tax charge to cost of sales in
the amount of $1.3 million during the three-month period ended September 30,
2003, representing an estimate of the cost to terminate this lease.
Note F: Debt Compliance
In May 2002, the Company entered into an agreement for a new secured revolving
line of credit. The line of credit carried a maximum limit of $4,500,000 and was
to expire July 1, 2003. Effective June 16, 2003, the bank extended the line of
credit to the Company through October 1, 2003, under the same general terms and
conditions while the Company and the bank finalized a new line of credit.
Effective September 15, 2003, the bank amended and extended the current line of
credit with the Company through September 1, 2004. The maximum amount available
under the line was reduced to $2,000,000. The Company has the choice of either
the bank's prime interest rate minus 0.5 percent or LIBOR plus 2 percent. The
credit line is secured by substantially all of the Company's assets. The terms
of the credit agreement include certain financial covenants requiring: (1) a
consolidated net loss for the fiscal quarter ended September 30, 2003, not to
exceed $2,000,000; (2) a consolidated net profit to be achieved each fiscal
quarter beginning with the quarter ending December 31, 2003 of a minimum of
$1.00, and consolidated net profit not less than $1.00 on an annual basis,
determined at fiscal year end March 31, 2004; and (3) achievement of specified
current and leverage financial ratios. Based upon the financial results reported
as of September 30, 2003 and for the three-month period then ended, the Company
has determined it is in compliance with the financial covenants. At September
30, 2003 and November 12, 2003, the Company had no outstanding borrowings under
this agreement.
NOTE G: Stock-Based Compensation
At September 30, 2003, the Company has various stock-based compensation plans,
including stock option plans. Rentrak accounts for stock-based compensation
utilizing the intrinsic value method in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued To
Employees." Accordingly, no compensation expense is recognized for fixed option
plans because the exercise prices of employee stock options equal or exceed the
market prices of the underlying stock on the measurement dates. The following
table illustrates the effect on net income (loss) and net income (loss) per
16
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation.
Three Months Ended Six Months Ended
-------------------------------------------- -----------------------------------------
September 30, September 30,
2003 2002 2003 2002
---------------------- ------------------- ---------------------- -----------------
Net income (loss), as reported $ (1,326,602) $ (103,101) $ (1,266,926) $ 61,402
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (203,114) (279,953) (385,458) (559,906)
---------------------- ------------------- ---------------------- -----------------
Pro forma net income (loss) $ (1,529,716) $ (383,054) $ (1,652,384) $ (498,504)
====================== =================== ====================== =================
Net income (loss) per share:
Basic - as reported $ (0.14) $ (0.01) $ (0.13) $ 0.01
Diluted - as reported $ (0.14) $ (0.01) $ (0.13) $ 0.01
Basic - pro forma $ (0.16) $ (0.04) $ (0.17) $ (0.05)
Diluted - pro forma $ (0.16) $ (0.04) $ (0.17) $ (0.05)
The effects of applying SFAS 123 for providing proforma disclosures for the
period presented above are not likely to be representative of the effects on
reported net income (loss) for future periods because options often vest over
several years and additional options generally are granted each year.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
Certain information included in Management's Discussion and Analysis of
Financial Condition and Results of Operations constitute forward-looking
statements that involve a number of risks and uncertainties. Forward looking
statements may be identified by the use of forward-looking words such as "may",
"will", "expects", "intends", "anticipates", "estimates", or "continues" or the
negative thereof or variations thereon or comparable terminology. The following
factors are among the factors that could cause actual results to differ
materially from the forward-looking statements: the Company's ability to
continue to market the Pay Per Transaction ("PPT") System successfully, the
financial stability of participating retailers and their performance of their
obligations under the PPT System, non-renewal of the Company's line of credit,
business conditions in the video industry and general economic conditions, both
domestic and international, competitive factors, including increased
competition, expansion of revenue sharing programs other than the PPT System by
program suppliers, new technology, the continued availability of prerecorded
videocassettes ("Cassettes") and digital videodiscs ("DVD's") from program
suppliers and market acceptance of the Company's Essential(TM) business
intelligence products. Such factors are discussed in more detail in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2003.
Results of Operations
Continuing Operations - Domestic PPT Operations and Other Continuing
--------------------------------------------------------------------------------
Subsidiaries
------------
For the three-month period ended September 30, 2003, total revenue decreased
$6.5 million, or 31 percent, to $14.3 million from $20.8 million for the
three-month period ended September 30, 2002. For the six-month period ended
September 30, 2003, total revenue decreased $10.2 million, or 24 percent, to
$33.0 million from $43.2 million for the six-month period ended September 30,
2002. Total revenue includes the following PPT System fees in the PPT business
segment: order processing fees generated when Cassettes and DVD's ("Units") are
ordered by and distributed to retailers; transaction fees generated when
retailers rent Units to consumers; sell-through fees generated when retailers
sell Units to consumers; communication fees when retailers' point-of-sale
systems are connected to the Company's information system; and buy out fees
generated when retailers purchase Units at the end of the lease term. PPT
business segment revenues also include direct revenue sharing fees from data
tracking and reporting services provided by the Company to studios ("DRS"),
revenues from Box Office Essentials(TM) and Supply Chain Essentials(TM), part of
the Company's Essential(TM) business service offerings, as well as charges for
Internet services provided by the Company's subsidiary formovies.com, Inc. In
addition, total revenue includes
18
charges to customers of the Company's subsidiary 3PF.COM, Inc. ("3PF"), which
provided order processing, fulfillment and inventory management services to
Internet retailers and wholesalers and other businesses requiring just-in-time
fulfillment until July 31, 2003. In June 2003, the Company agreed to sell 3PF's
operating assets at its Wilmington, Ohio facility (See Note E). The Other
business segment formerly included revenues from BlowOut Video, Inc. (BlowOut
Video), a video retailer, which the Company elected to discontinue during the
three month period ended June 30, 2002 (See Note D).
The $6.5 million decrease in total revenues for the three-month period ended
September 30, 2003 is primarily due to the decrease in PPT System order
processing fees and transaction fees. PPT business segment revenues decreased
despite the fact that PPT Units shipped increased 15 percent during the
three-month period ended September 30, 2003 compared to the three-month period
ended September 30, 2002. Total order processing and transaction fees decreased
a combined $5.6 million during the three-month period ended September 30, 2003
compared to the three-month period ended September 30, 2002. This decrease in
consolidated revenue was due to (1) a decline in the number of rental turns of
the Units in the stores; and (ii) PPT "output programs" and other PPT programs
under which the program supplier and the Company agreed to charge a lower order
processing and transaction fee in exchange for Retailers committing to take an
increased total number of Units. These programs were a response to the shift
from the VHS cassette format to the DVD format and resulted in an increased
total number of Units leased but a reduced amount of fees per Unit. The Company
expects this trend to continue. These decreases in order processing and
transaction fees were partially offset by an approximate $0.2 million net
increase in sell-through and other revenues from the PPT business segment. 3PF
revenues, excluding intercompany activity, decreased approximately $1.4 million
during the same three-month period from $1.9 million to $0.5 million due to
ceasing operations July 31, 2003 (See Note E).
The $10.2 million decrease in total revenues for the six-month period ended
September 30, 2003 is primarily due to the decrease in PPT System order
processing fees and transaction fees. PPT business segment revenues decreased
despite the fact that PPT Units shipped increased 5 percent during the six-month
period ended September 30, 2003 compared to the six-month period ended September
30, 2002. Total order processing and transaction fees decreased a combined $10.4
million during the six-month period ended September 30, 2003 compared to the
six-month period ended September 30, 2002. This decrease in consolidated revenue
was due to (1) a decline in the number of rental turns of the Units in the
stores; and (ii) PPT "output programs" and other PPT programs under which the
program supplier and the Company agreed to charge a lower order processing and
transaction fee in exchange for Retailers committing to take an increased total
number of Units. These programs were a response to the shift from the VHS
cassette format to the DVD format and resulted in an increased total number of
Units leased but a reduced amount of fees per Unit. The Company expects this
trend to continue. These decreases in order processing and transaction fees were
partially offset by an approximate $1.1 million net increase in sell-through and
other revenues from the PPT business segment. 3PF
19
revenues, excluding intercompany activity, decreased approximately $0.8 million
during this same six-month period from $5.4 million to $4.6 million, due to
ceasing operations July 31, 2003 (See Note E).
Cost of Sales in the PPT business segment consist of order processing costs,
transaction costs, sell through costs and freight costs, and represent the
direct costs to produce the PPT revenues. Cost of Sales in the 3PF business
segment generally consist of storage fees, receiving fees, handling fees,
special service fees, freight charges and other fees, and represent the direct
costs to produce 3PF revenues. Total cost of sales for the three-month period
ended September 30, 2003 decreased to $12.2 million from $17.0 million for the
three-month period ended September 30, 2002, a decrease of $4.8 million, or 28
percent. Approximately $4.4 million of this decrease in cost of sales is
primarily attributable to the $5.1 million net decrease in PPT business segment
revenues noted above. Cost of sales as a percent of total revenues was 74
percent for the three-month period ended September 30, 2003 compared to 77
percent for the three-month period ended September 30, 2002 for the PPT business
segment. Offsetting the $4.8 million decrease in total cost of sales is a $1.3
million charge related to 3PF's Columbus, Ohio, facility lease in the
three-month period ended September 30, 2003 (See Note E). Excluding this
charge, total cost of sales would have decreased approximately $6.1 million
between the two periods and as a percent of total revenues would have been 76
percent for the three-month period ended September 30, 2003, compared to 82
percent for the three-month period ended September 30, 2002. Excluding the $1.3
million charge, 3PF's cost of sales would have decrease approximately $2.2
million between the two periods, which decrease is primarily due to less 3PF
revenue based during the three-month period ended September 30, 2003 based on
the cessation of 3PF operations July 31, 2003. 3PF operated on a negative margin
basis for both periods.
Total cost of sales for the six-month period ended September 30, 2003 decreased
to $26.4 million from $35.3 million for the six-month period ended September 30,
2002, a decrease of $8.9 million, or 25 percent. Approximately $8.7 million of
this decrease is primarily attributable to the overall decrease in PPT business
segment revenues as noted above. Cost of sales as a percent of total revenues
was 73 percent for the six-month period ended September 30, 2003 compared to 78
percent for the six-month period ended September 30, 2002 for the PPT business
segment. The decrease in PPT business segment cost of sales as a percent of
total revenues is primarily due to the six-month period ended September 30,
2003, in which the Company generated approximately $1.2 million in revenues from
the Company's Essential(TM) business service offerings, with no related cost of
sales, compared to no revenue from these business offerings in the six-month
period ended September 30, 2002. In addition, the decrease is due to the receipt
of a $0.5 million credit from a studio during the three-month period ended June
30, 2003. These cost of sales decreases are partially offset by the inclusion of
a $1.3 million charge related to 3PF's Columbus, Ohio, facility lease in the
six-month period ended September 30, 2003 (See Note E). Excluding the increase
in Essential's revenues, the studio credit, and the 3PF charge, total cost of
sales as a percent of total revenues would have been 80 percent for the
six-month period ended September 30, 2003. The remaining net decrease in total
20
cost of sales as a percent of total revenue is primarily attributable to
improved margins from 3PF operations due to the agreements made in June 2002
with its largest customer related to a sublease of the Columbus, Ohio, facility
and the financing lease for equipment.
Selling, general and administrative expenses in the PPT business segment consist
of the indirect costs to sell, administer and manage the PPT business,
consisting primarily of, but not limited to, compensation and benefits,
development, marketing and advertising costs, legal and professional fees,
communication costs, depreciation and amortization of tangible fixed assets and
software, as well real and personal property leases. Selling general and
administrative expenses in the 3PF business segment consist of the indirect
costs to sell, administer and manage the fulfillment business, consisting
primarily of, but not limited to, compensation and benefits, development,
marketing and advertising costs, legal and professional fees, communications
costs, depreciation and amortization of fixed assets and software, as well as
real and personal property leases. Total selling, general and administrative
expenses were $4.3 million for the three-month period ended September 30, 2003,
compared to $3.6 million for the three-month period ended September 30, 2002, an
increase of $0.7 million, or 21 percent. The increase in selling, general and
administrative expenses for the three-month period is primarily the result of:
(1) an increase in the PPT business segment's overall overhead costs of
approximately $1.0 million during the period, primarily attributable to costs
associated with the provision of the Company's Essential(TM) business service
offerings including Box Office Essentials, the Company's recently developed
software and service that collects and reports information on theatrical
releases of movie titles for the studios, as well as Calendar Essentials and
Supply Chain Essentials; and (2) an approximate $0.3 million decrease in 3PF's
overall fulfillment overhead costs during the three-month period ended September
30, 2003 due to ceasing operations July 31, 2003. This decrease is partially
offset by 3PF recognizing $260 thousand in bad debt expense relating to a 3PF
account that the Company has deemed uncollectible.
Total selling, general and administrative expenses were $8.8 million for the
six-month period ended September 30, 2003, compared to $7.6 million for the
six-month period ended September 30, 2002, an increase of $1.2 million, or 16
percent. The increase in selling, general and administrative expenses for the
six-month period is primarily the result of: (1) an increase in the PPT business
segment's overall overhead costs of approximately $1.8 million during the
period, primarily attributable to costs associated with the provision the of the
Company's Essential(TM) business service offerings including Box Office
Essentials, the Company's recently developed software and service that collects
and reports information on theatrical releases of movie titles for the studios,
as well as Calendar Essentials and Supply Chain Essentials; and (2) an
approximate $0.6 million decrease in 3PF's overall fulfillment overhead costs
during the three-month period ended June 30, 2003 due to improved cost controls.
Operating loss from continuing operations for the three-month period ended
September 30, 2003 was $2.2 million compared to operating income from
21
continuing operations of $0.2 million for the three-month period ended September
30, 2002. The decline for the 2003 three-month period was primarily due to the
decrease in PPT business segment revenues, associated gross margin and the 3PF
closing costs of approximately $1.3 million noted above. Operating loss from
continuing operations for the six-month period ended September 30, 2003 was $2.2
million. This compares to operating income of $0.7 million for the six-month
period ended September 30, 2002. The decline for the 2003 six-month period was
primarily due to the decrease in PPT revenues and associated gross margin and
the 3PF closing costs noted above.
Other income (expense) decreased from income of $72 thousand for the three-month
period ended September 30, 2002 to $66 thousand for the three-month period ended
September 30, 2003, primarily due to the reduction in interest income earned.
Other income (expense) increased from income of $72 thousand for the six-month
period ended September 30, 2002 to $115 thousand for the six-month period ended
September 30, 2003, primarily due to interest earned on the note receivable due
from one of 3PF's clients (See Note E).
The effective tax rate during the three and six-month periods ended September
30, 2003 and 2002 was 38 percent.
As a result, for the three-month period ended September 30, 2003, the Company
recorded net loss from continuing operations of $1.3 million, or 9 percent of
total revenue, compared to net loss from continuing operations of $0.1 million,
or less than 1 percent of total revenue, in the three-month period ended
September 30, 2002. The decrease in net income from continuing operations is
primarily attributable to the decrease in revenues and associated gross margin
from the PPT business segment and the costs associated with closing 3PF
operations as noted above. For the six-month period ended September 30, 2003,
the Company recorded net loss from continuing operations of $1.3 million, or 4
percent of total revenue, compared to income from continuing operations of $0.5
million, or 1 percent of total revenue, in the six-month period ended September
30, 2002. The decrease in net income from continuing operations is primarily
attributable to the decrease in revenues and associated gross margin from the
PPT business segment as noted above and the costs associated with closing 3PF
operations.
Discontinued Operations
-----------------------
As discussed in Note D., during the three-month period ended June 30, 2002, the
Company elected to discontinue store operations of its retail subsidiary BlowOut
Video, Inc. BlowOut Video generated revenues of $1.0 million and a net loss of
$276,216, or $0.03 per share, in the three-month period ended September 30,
2002. BlowOut Video generated revenues of $1.9 million and a net loss of
$421,230 or $0.04 per share in the six-month period ended September 30, 2002.
Financial Condition
-------------------
At September 30, 2003, total assets were $27.3 million, a decrease of $3.4
million from $30.7 million at March 31, 2003. As of September 30, 2003, cash
decreased
22
$0.3 million to $9.8 million from $10.1 million at March 31, 2003 (see the
Consolidated Statements of Cash Flows in the accompanying Consolidated Financial
Statements). Net accounts receivable decreased $3.4 million from $9.9 million at
March 31, 2003 to $6.5 million at September 30, 2003, primarily due to a
reduction in PPT revenues. In addition, 3PF net receivables declined due to only
operating one facility for one month before ceasing operations July 31, 2003 and
increasing the reserve account by $260 thousand for an account that was deemed
uncollectible. At September 30, 2003, advances to program suppliers were $1.3
million, an increase of $0.9 million from $0.4 million, primarily due to the
timing of release dates for certain titles and the addition of a new program
supplier. At September 30, 2003, other current assets were $1.3 million, a
decrease of $0.9 million from $2.2 million at March 31, 2003. The decrease in
other current assets is due to a decline in pre-paid expenses, other receivables
due to payments received, and deferred costs due to a lower average order
processing fee per unit. Other assets decreased approximately $0.5 million from
$1.9 million at March 31, 2003 to $1.4 million at September 30, 2003. The
decrease in other assets is associated with the reserve established for the
potential loss of the deposit on 3PF's Columbus facility related to the lease
termination (See Note E).
At September 30, 2003, total liabilities were $12.5 million, a decrease of $2.8
million from $15.3 million at March 31, 2003. Accounts payable decreased $2.6
million from $12.7 million at March 31, 2003 to $10.1 million at September 30,
2003, primarily due to the timing of studio and other vendor payments, and as
the result of lower revenues and associated cost of sales. Accrued liabilities
increased $0.2 million from $1.1 million at March 31, 2003, to $1.3 million at
September 30, 2003, primarily due to the reserve for all remaining costs
associated with closing 3PF's operations. Accrued compensation decreased $0.1
million from $0.6 million at March 31, 2003, to $0.5 million at September 30,
2003, in part due to 3PF's ceasing operations as of July 31, 2003.
Accordingly, at September 30, 2003, total stockholders' equity was $14.8
million, a decrease of $0.6 million from the $15.4 million at March 31, 2003.
Common stock and capital in excess of par value increased, on a combined basis,
$0.6 million from $39.7 million at March 31, 2003 to $40.3 million at September
30, 2003, primarily due to the repurchase of stock under the Company's stock
repurchase program. Accumulated deficit increased $1.3 million from $24.4
million at March 31, 2003 to $25.7 million at September 30, 2003 due to net loss
from the six-month period.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, the Company had cash of $9.8 million compared to $10.1
million at March 31, 2003. The Company's current ratio (current assets/current
liabilities) was 1.90 at September 30, 2003 compared to 1.74 at March 31, 2003.
In May 2002, the Company entered into an agreement for a new secured revolving
line of credit. The line of credit carried a maximum limit of $4,500,000 and was
to expire July 1, 2003. Effective June 16, 2003, the bank extended the line of
credit to the Company through October 1, 2003, under the same general
23
terms and conditions while the Company and the bank finalized a new line of
credit. Effective September 15, 2003, the bank amended and extended the current
line of credit with the Company through September 1, 2004. The maximum amount
available under the line was reduced to $2,000,000. The Company has the choice
of either the bank's prime interest rate minus 0.5 percent or LIBOR plus 2
percent. The credit line is secured by substantially all of the Company's
assets. The terms of the credit agreement include certain financial covenants
requiring: (1) a consolidated net loss for the fiscal quarter ended September
30, 2003, not to exceed $2,000,000; (2) a consolidated net profit to be achieved
each fiscal quarter beginning with the quarter ending December 31, 2003 of a
minimum of $1.00, and consolidated net profit not less than $1.00 on an annual
basis, determined at fiscal year end March 31, 2004; and (3) achievement of
specified current and leverage financial ratios. Based upon the financial
results reported as of September 30, 2003 and for the three-month period then
ended, the Company has determined it is in compliance with the financial
covenants. At September 30, 2003 and November 12, 2003, the Company had no
outstanding borrowings under this agreement.
The Company's sources of liquidity include its cash balance, cash generated from
operations and its available credit resources. Based on the Company's current
budget and projected cash needs, the Company believes that its available sources
of liquidity will be sufficient to fund the Company's operations and other cash
requirements for the fiscal year ending March 31, 2004.
Rentrak Corporation
Table of Contractual Obligations
As of March 31, 2003
--------------------------------------------------------------------------------------------------------------------------
Contractual Obligations Payments due by period
--------------------------------------------------------------------------------------------------------------------------
Total Less than 1 1-3 years 3-5 years More than 5
year years
----------------------------------------------------------- --------------------------------------------------------------
Capital Lease Obligations $ 254,162 $ 110,508 $ 143,654 $ - $ -
--------------------------------------------------------------------------------------------------------------------------
Operating Lease Obligations 8,232,978 2,074,487 4,102,227 2,056,264 -
--------------------------------------------------------------------------------------------------------------------------
Purchase Obligations 823,369 823,369 - - -
--------------------------------------------------------------------------------------------------------------------------
Executive Compensation 2,805,459 1,588,588 1,216,871 - -
--------------------------------------------------------------------------------------------------------------------------
Total $12,115,968 $4,596,952 $ 5,462,752 $ 2,056,264 $ -
--------------------------------------------------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES
The Company considers as its most critical accounting policies those that
require the use of estimates and assumptions, specifically, accounts receivable
reserves and studio guarantee reserves. In developing these estimates and
assumptions, the Company takes into consideration historical experience, current
and expected economic conditions and other relevant data. Please refer to the
Notes to the 2003 Consolidated Financial Statements in the Company's 2003 Annual
Report on Form 10-K for a full discussion of the Company's accounting policies.
24
Allowance for Doubtful Accounts
-------------------------------
Credit limits are established through a process of reviewing the financial
history and stability of each customer. The Company regularly evaluates the
collectibility of accounts receivable by monitoring past due balances. If it is
determined that a customer may be unable to meet its financial obligations, a
specific reserve is established based on the amount the Company expects to
recover. An additional general reserve is provided based on aging of accounts
receivable and the Company's historical collection experience. If circumstances
change related to specific customers, overall aging of accounts receivable or
collection experience, the Company's estimate of the recoverability of accounts
receivable could materially change.
Studio Reserves
---------------
The Company has entered into guarantee contracts with certain program suppliers
providing titles for distribution under the PPT system. These contracts
guarantee the suppliers minimum payments. The Company, using historical
experience and year to date rental experience for each title, estimates the
projected revenue to be generated under each guarantee. The Company establishes
reserves for titles that are projected to experience a shortage under the
provisions of the guarantee. The Company continually reviews these factors and
makes adjustments to the reserves as needed. Actual results could materially
differ from these estimates and could have a material effect on the recorded
studio reserves.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company has considered the provisions of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments." The Company
had no holdings of derivative financial or commodity instruments at September
30, 2003. A review of the Company's other financial instruments and risk
exposures at that date revealed that the Company had exposure to interest rate
risk. The Company utilized sensitivity analyses to assess the potential effect
of this risk and concluded that near-term changes in interest rates should not
materially adversely affect the Company's financial position, results of
operations or cash flows.
25
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures An evaluation of the Company's
disclosure controls and procedures (as defined in Rule 13(a) - 15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) was
carried out under the supervision and with the participation of the Company's
Chief Executive Officer and Chief Financial Officer as of the end of the period
covered by this report (the "Evaluation Date"). Based upon this evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures as of the Evaluation Date
were effective to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is (i)
accumulated and communicated to the Company's management (including the Chief
Executive Officer and Chief Financial Officer) as appropriate to allow timely
decisions regarding required disclosure and (ii) recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms.
Changes in Internal Controls over Financial Reporting
-------------------------------------------------------
The Company maintains a system of internal control over financial reporting
designed to provide reasonable assurance that transactions are properly recorded
and summarized so that reliable financial records and reports can be prepared
and assets safeguarded. There are inherent limitations in the effectiveness of
any system of internal controls including the possibility of human error and the
circumvention or overriding of controls. Additionally, the cost of a particular
accounting control should not exceed the benefit expected to be derived.
In the three months ended September 30, 2003, there has been no change in the
Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, its internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time a party to legal proceedings and claims that
arise in the ordinary course of its business, including, without limitation,
collection matters with respect to customers. In the opinion of management, the
amount of any ultimate liability with respect to these types of actions is not
expected to materially affect the financial position, results of operations or
cash flows of the Company as a whole.
26
Item 4. Submissions of Matters to a Vote of Security Holders
On August 21, 2003, the Company held its Annual Meeting of Shareholders. The
only matter submitted to a vote at the meeting was the election of directors.
All of management's nominees as listed in the proxy statement were elected as
follows.
-------------------------------------- ------------------------------------ -----------------------------------
NOMINEE VOTES FOR VOTES WITHHELD
------- --------- --------------
-------------------------------------- ------------------------------------ -----------------------------------
Cecil D. Andrus 8,778,633 258,914
-------------------------------------- ------------------------------------ -----------------------------------
George H. Kuper 8,853,231 184,316
-------------------------------------- ------------------------------------ -----------------------------------
Joon S. Moon 8,346,286 691,261
-------------------------------------- ------------------------------------ -----------------------------------
James G. Petcoff 8,854,633 182,914
-------------------------------------- ------------------------------------ -----------------------------------
Paul A. Rosenbaum 8,858,140 179,407
--------------------------------------- ------------------------------------ -----------------------------------
Stanford C. Stoddard 8,857,940 179,607
-------------------------------------- ------------------------------------ -----------------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See the Exhibit Index on page 29 hereof.
(b) Reports on Form 8-K . No reports on Form 8-K were filed during the quarter
ended September 30, 2003.
27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated this 14th day of November, 2003
RENTRAK CORPORATION
By: /s/ Mark L Thoenes
----------------------
Mark L. Thoenes
Chief Financial Officer
Signing on behalf of the registrant
28
EXHIBIT INDEX
The following exhibits are filed herewith:
Exhibit
Number Exhibit
------- -------
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
29