FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended: June 30, 1996
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 (I.R.S. Employer
incorporation or organization) Identification no.)
7227 N.E. 55th Avenue, Portland, Oregon 97218
(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 ( )
As of July 31, 1996, the Registrant had 12,142,189 shares of Common
Stock outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the three month periods
ended June 30, 1996 and June 30, 1995
Consolidated Balance Sheets as of June 30, 1996 and March 31, 1996
Consolidated Statements of Cash Flows for the three month periods
ended June 30, 1996 and June 30, 1995
Notes to Consolidated Financial Statements
<TABLE>
RENTRAK CORPORATION
STATEMENTS OF OPERATIONS
<CAPTION>
(Unaudited)
Three Months Ended June 30,
1996 1995
<S> <C> <C>
REVENUES:
PPT $ 22,648,696 $ 22,024,957
Other 1,114,414 1,331,533
23,763,110 23,356,490
OPERATING COSTS AND EXPENSES:
Cost of sales 19,454,334 18,888,412
Selling and administrative 3,622,828 4,111,216
23,077,162 22,999,628
INCOME FROM OPERATIONS 685,948 356,862
OTHER INCOME (EXPENSE):
Interest income 173,621 269,285
Interest expense (119,915) (8,612)
Other 208,875 -
262,581 260,673
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAX PROVISION 948,529 617,535
INCOME TAX PROVISION 372,233 179,085
INCOME FROM CONTINUING OPERATIONS 576,296 438,450
LOSS FROM OPERATIONS OF DISCONTINUED
SUBSIDIARIES (LESS APPLICABLE INCOME
TAX BENEFIT OF $519,314 in 1995) - (774,567)
NET INCOME (LOSS) $ 576,296 $ (336,117)
EARNINGS (LOSS) PER COMMON SHARE AND COMMON
EQUIVALENT SHARE
Continuing operations $ 0.05 $ 0.04 <PAGE>
Discontinued operations - (0.07)
NET INCOME (LOSS) $ 0.05 $ (0.03)
SHARES USED IN PER SHARE CALCULATION 12,243,069 11,523,846
The accompanying notes are an integral
part of these statements.
RENTRAK CORPORATION
BALANCE SHEETS
ASSETS
<CAPTION>
(Unaudited)
June 30, March 31,
1996 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,714,998 $ 2,683,128
Investment securities available for sale - 344,500
Accounts receivable, net of
allowance for doubtful accounts
of $604,645 and $627,895 17,343,763 15,116,203
Accounts receivable - affiliates 3,028,924 3,227,006
Advances to program suppliers 1,979,948 1,462,875
Inventory 1,257,952 1,737,695
Deferred tax asset 1,315,534 1,353,226
Other current assets 2,595,840 3,343,389
Total current assets 29,236,959 29,268,022
PROPERTY AND EQUIPMENT, net 1,206,894 1,466,177
INTANGIBLES, net 333,407 347,137
NOTES RECEIVABLE - AFFILIATE 2,800,000 2,800,000
OTHER INVESTMENTS, net 2,068,856 3,477,105
DEFERRED TAX ASSET 3,002,538 2,918,838
OTHER ASSETS 1,168,259 1,225,331<PAGE>
NET NONCURRENT ASSETS OF
DISCONTINUED OPERATIONS 14,749,248 14,749,248
$ 54,566,161 $ 56,251,858
The accompanying notes are an integral
part of these balance sheets.
RENTRAK CORPORATION
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
(Unaudited)
June 30, March 31,
1996 1996
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $ 5,700,000 $ 2,700,000
Accounts payable 14,527,166 21,795,843
Accrued liabilities 2,976,326 2,163,325
Accrued compensation 1,129,931 1,240,543
Deferred revenue 3,611,191 2,004,865
Net current liabilities of
discontinued operations 11,942,858 11,942,858
Total current liabilities 39,887,472 41,847,434
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock $.001 par value;
Authorized: 10,000,000 shares - -
Common stock, $.001 par value;
Authorized: 30,000,000 shares
Issued and outstanding: 12,138,641 shares
at June 30, 1996 and 12,138,216 shares at
March 31, 1996 12,139 12,138
Capital in excess of par value 49,085,445 49,583,514
Net unrealized gain on investment
securities 229,223 567,508
Accumulated deficit (32,789,866) (33,366,162)
Less- Deferred charge - warrants (1,858,252) (2,392,574)
14,678,689 14,404,424
$ 54,566,161 $ 56,251,858
The accompanying notes are an integral
part of these balance sheets.
RENTRAK CORPORATION
STATEMENT OF CASH FLOWS
<CAPTION>
(Unaudited)
Three Months Ended June 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 576,296 $ (336,117)
Adjustments to reconcile
income (loss) to net
cash provided (used) in operations
Gain on investment/asset sales (208,875) (558,286)
Depreciation 265,593 510,712
Amortization of intangibles 42,436 336,079 <PAGE>
Amortization of warrants 37,409 168,572
Provision for doubtful accounts (23,250) (277,678)
Retailer financing program reserves 45,000 (69,528)
Studio advance reserves (67,478) 350,000
Deferred income taxes 161,331 -
Change in specific accounts, net of
effects in 1995 of purchase of business:
Accounts receivable (2,204,310) 1,367,397
Advance to program suppliers (449,595) (1,056,071)
Inventory 479,743 396,462
Other current assets 945,631 764,222
Accounts payable (7,268,677) (4,582,458)
Accrued liabilities and compensation 702,389 1,561,978
Deferred revenue 1,606,326 (402,458)
Net cash provided (used) by
operations (5,360,031) (1,827,174)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (25,174) (1,452,760)
Payment for purchase of business,
net of cash acquired - (377,848)
Purchases of other assets
and intangibles 28,366 801,089
(Investment)/reduction in retailer
financing program 955,000 (1,019,167)
Proceeds from sale of investments/assets 434,864 1,100,000
Net cash provided (used) by
investing activities 1,393,056 (948,686)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) under line of credit 3,000,000 (23,290)
Net Redemptions of Common Stock (1,155) (333,775)
Net cash provided (used)
by financing activities 2,998,845 (357,065)
NET DECREASE IN CASH AND CASH
EQUIVALENTS (968,130) (3,132,925)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THIS PERIOD 2,683,128 10,709,405
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 1,714,998 $ 7,576,480
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for -
Interest $ 94,833 $ 1,636
Income taxes $ 116,016 $ 7,952
NON-CASH ACTIVITIES:
Decrease in Net Unrealized
Gain on Investment Securities $ 338,285 $ -
Reduction of Warrants $ 496,913 $ -
</TABLE>
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 dis-
closures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The
results of operations for the three month period ended June 30, 1996
are not necessarily indicative of the results to be expected for the
entire fiscal year ended March 31, 1997. The Condensed Consolidated
Financial Statements should be read in conjunction with the
Consolidated Financial Statements and footnotes thereto included in
the Company's 1996 Annual Report to Shareholders.
The financial statements reflect, in the opinion of management, all
material adjustments (which include only normal and recurring
adjustments) necessary to present fairly the Company's financial
position and results of operations.
The Consolidated Financial Statements include the accounts of the
Company, its majority owned subsidiaries, and those subsidiaries in
which the Company has a controlling interest after elimination of all
intercompany accounts and transactions. Investments in affiliated
companies owned 20 to 50 percent are accounted for by the equity
method.
Pro Image Inc's., ("Pro Image") year-end is February 28. As there
are no intervening events which materially affect the financial
position or results of operations, the consolidated statements
include Pro Image's balance sheet as of May 31, 1996 and February 29,
1996 and the statement of operations and cash flows for the three
month period ended May 31, 1995.
BlowOut Entertainment, Inc's ("BlowOut") balance sheet as of June 30,
1996 and March 31, 1996 and the statements of operations and cash
flows for the three months ended June 30, 1995 are included in the
Consolidated Financial Statements as discontinued operations.
Subsequent to March 31, 1996, the Company approved plans to
discontinue the operations of Pro Image and BlowOut (see Note B and
Note 15 to the Notes to the March 31, 1996 Consolidated Financial
Statements included in the 1996 Annual Report to Shareholders filed
on Form 10-K). Accordingly, the financial results of these entities
are reflected as discontinued operations in the March 31, 1996 and
June 30, 1996 financial statements, and the previous year statement
of operations has been restated to reflect these entities as
discontinued. The 1995 cash flow statement has not been restated.
NOTE B: Planned Divestitures
During the quarter ended March 31, 1996, the Company assessed its
overall business strategy and decided to divest two subsidiary units
-- Pro Image and BlowOut. The Company's Board of Directors has
approved in principle the spin-off of Pro Image and BlowOut. Thus,
the operations of Pro Image and BlowOut are reflected as discontinued
operations in the accompanying statements of operations. Refer to
Note 15 of the Notes to the March 31, 1996 Consolidated Financial
Statements included in the 1996 Annual Report to Shareholders filed
on Form 10-K for a discussion of the Company's divestiture plans,
reserves established by the Company related to the discontinued
operations, and the nature of management's estimates used in
determining the reserves. At June 30, 1996 there have been no
changes in the total reserves which were recorded at March 31, 1996
related to discontinued operations.
Both Pro Image and BlowOut have experienced significant losses from
operations and have used significant amounts of cash to fund
operations during their most recent fiscal year and for the quarter
ended June 30, 1996.
BlowOut is essentially a start-up company and is experiencing rapid
growth requiring additional financing if it is to continue its
expansion and to support operations of recently opened stores.
Subsequent to June 30, 1996, BlowOut received a commitment for a
$1,000,000 secured loan at an annual interest rate of approximately
14.0%. The loan would have a term of five years and be secured by
certain assets at each BlowOut store location. The loan would be
guaranteed by the Company until the lender is satisfied that
BlowOut's financial condition is sufficient to justify the release of
the Company's guarantee. Each quarter the lender has agreed to
consider increasing its commitment. BlowOut is currently pursuing
financing from several other sources and the Company has agreed to
guarantee up to $7 million of outside financing to BlowOut.
The Company's exposure related to adverse financial and operational
developments at Pro Image and BlowOut is limited to its receivables
from and investment in BlowOut which will be retained after the
planned spin-off (see Note 15 of the Notes to the March 31, 1996
Consolidated Financial Statements), certain guarantees previously
made to BlowOut (see Note 9 of the Notes to the March 31, 1996
Consolidated Financial Statements) and any funding covered by the
financing guarantee discussed above. The Company believes it has the
wherewithal to fulfill these obligations and does not believe that
the issues faced by Pro Image and BlowOut will have a material
adverse effect on the Company.
NOTE C: Net Income/Loss Per Share
At June 30, 1996 and 1995, primary earnings per share are based on
the weighted average number of shares outstanding and the assumed
exercise of common stock equivalent options and warrants. For the
June 30, 1996 primary earnings per share calculation, 12,243,069
common shares and common share equivalents are assumed outstanding.
For the June 30, 1995 primary earnings per share calculation,
11,523,846 common shares and common share equivalents are assumed
outstanding.
NOTE D: Interest in Foreign Corporation
In December 1989, the Company entered into an agreement with a
Japanese Corporation and formed a jointly-owned Japanese corporation,
Rentrak Japan. Rentrak Japan's purpose is to market PPT in the
Pacific Rim. The Company has provided its PPT technology and certain
trademarks and service marks. The Japanese owner has provided
substantially all operating capital. The Company has a one-fourth
interest in Rentrak Japan. The Company accounts for its interest in
Rentrak Japan using the equity method. As of March 31, 1993, the
Company's investment in Rentrak Japan was written down to zero. The
Company has provided no guarantees or other financial commitments for
the investee which would require the recognition of additional losses
under the equity method. For the three month period ended June 30,
1996, the joint venture realized a loss.
Summarized financial data for the joint venture, after translation to
U.S. currency, at June 30, 1996, and for the three month period then
ended is as follows:
<TABLE>
<S> <C>
Current assets $33,100,996
Noncurrent assets $10,545,655
Current liabilities $37,166,058
Noncurrent liabilities $ 6,560,218
Shareholders' deficit $ 79,625
For The Three Months Ended
June 30, 1996:
Net sales $30,642,659
Cost of sales $24,586,076
Net Loss $ 223,180
</TABLE>
Subsequent to June 30, 1996, the Company entered into an agreement
with a Japanese Corporation pursuant to which the Company would sell
60 shares of Rentrak Japan stock for $4.5 million cash payable on
August 30, 1996. This will reduce the Company's interest in Rentrak
Japan from 25 percent to 10 percent. In connection with this
agreement, the Japanese Corporation also has agreed to lend the
Company $3.0 million on or before August 30, 1996. The note, which
will bear interest at 12 percent will be subordinated to all other
debt and will be due on August 30, 1998. Pursuant to this agreement,
Rentrak may, at its sole discretion, use a portion or all of the loan
proceeds to purchase up to 15 percent of the equity of BlowOut and
deliver such equity to the Japanese Corporation in repayment of a
portion or all of the note.
NOTE E: Major Suppliers
For the quarter ended June 30, 1996, the Company had one program
supplier whose product generated 40 percent, a second that generated
28 percent, and a third that generated an additional 12 percent of
Rentrak revenues. No other program suppliers provided product which
generated more than 10 percent of revenue for the three month period
ended June 30, 1996.
For the quarter ended June 30, 1995, the Company had one program
supplier whose product generated 36 percent and a second that
generated an additional 26 percent of Rentrak revenues. No other
program suppliers provided product which generated more than 10
percent of revenue for the three month period ended June 30, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
Information included in Management's Discussion and Analysis of
Financial Conditions and Results of Operations regarding revenue
growth, gross profit margin and liquidity constitute forward-looking
statements that involve a number of risks and uncertainties. The
following factors are among the factors that could cause actual
results to differ materially from the forward-looking statements:
non-renewal of line of credit, business conditions and growth in the
video industry and general economics, both domestic and
international; competitive factors, including increased competition,
new technology, and the continued availability of cassettes from
Program Suppliers. Such factors are discussed in more detail in the
Company's 1996 Annual Report to Shareholders.
Results of Operations
As discussed in the Notes to the March 31, 1996 Consolidated
Financial Statements, the Company approved plans to discontinue the
operations of Pro Image and BlowOut. Accordingly the financial
results of these entities are reflected as discontinued operations in
the June 30, 1996 and the March 31, 1996 financial statements, and
the previous year statement of operations has been restated to
reflect these entities as discontinued.
For a more meaningful analysis, results are presented for three
groups of operations: Continuing Operations which is comprised
primarily of Domestic PPT Operations, including Canada PPT
Operations; Discontinued Operations of Pro Image; and Discontinued
Operations of BlowOut. All significant intercompany transactions
have been eliminated except for those transactions between continuing
and discontinued operations which are expected to continue in the
future after disposition of the entities.
Continuing Operations - Domestic PPT Operations and Other Continuing
Subsidiaries
For the quarter ended June 30, 1996, total revenue increased $0.4
million, or 1.7 percent, rising to $23.8 million from $23.4 million
in the quarter ended June 30, 1995. Total revenue includes the
following fees: processing fees generated when retailers are approved
for participation in the PPT system; handling fees generated when
prerecorded videocassettes ("Cassettes") are distributed to
retailers; transaction fees generated when retailers rent Cassettes
to consumers; sell-through fees generated when retailers sell
Cassettes to consumers; royalty payments from Rentrak Japan; and sale
of video cassettes.
The increase in total revenue and the increases described in the
following paragraph were primarily due to the growth in (i) the
number of retailers approved to lease Cassettes under the PPT system
from the Company (the "Participating Retailers"); (ii) the number of
titles released to the PPT system; and (iii) the total number of
Cassettes leased under the PPT system. By quarter end, the number of
Participating Retailers had grown 25 percent to 4,795 from 3,823 a
year earlier.
Cost of sales for the quarter ended June 30, 1996 rose to $19.5
million from $18.9 million the prior year, an increase of $0.6
million, or 3 percent. The increase is primarily due to the increase
in revenue noted above. In fiscal 1996, the gross profit margin
decreased to 18 percent from 19 percent the previous year. The
decrease reflects an increase in major motion picture studio product,
which traditionally has a lower gross margin and the curtailment of
the operations of the software development company which historically
has generated higher margins.
Selling, general and administrative expenses were $3.6 million in
fiscal 1996 compared to $4.1 million in fiscal 1995. This decrease
of $0.5 million, or 12 percent, was primarily due to the reduction in
advertising co-op allowances in excess of amounts retained from
program suppliers. As a percentage of total revenue, selling,
general and administrative expenses decreased from 18 percent for the
quarter ended June 30, 1995 to 15 percent for the quarter ended June
30, 1996.
Other income was $0.3 million for the quarter ended June 30, 1995 and
June 30, 1996. In 1996, other income includes a gain of $0.2 million
on the sale of corporate securities.
For the quarter ended June 30, 1996, Domestic PPT Operations recorded
a pre-tax profit of $0.9 million, or 4 percent of total revenue,
compared to a pre-tax profit of $0.6 million, or 3 percent of total
revenue in the quarter ended June 30, 1995.
Included in the amounts above are the results from Other Subsidiaries
which are primarily comprised of a software development company and
other video retail and other operations. For the quarter ended June
30, 1996, Other Subsidiaries recorded pre-tax income of $13,000
compared to $22,000 for the quarter ended June 30, 1995.
Discontinued Operations - Pro Image
In March 1996, The Board of Directors approved in principle the spin-
off of Pro Image into a separate public company pursuant to which
Rentrak would dividend to its shareholders shares of Pro Image
representing 100% ownership of Pro Image. Since then, the Company
has been approached by parties interested in acquiring Pro Image.
The Company is evaluating the proposals and if no acceptable offer is
received, a dividend distribution to the Company's Shareholders will
be completed. This divestiture is expected to be completed by fiscal
year end. The proposed divestiture through stock dividend is subject
to a number of conditions, including formal declaration of a dividend
by the Board of Directors. For the quarter ended May 31, 1996, Pro
Image had revenues of $7.1 million and a loss of $1.6 million. The
loss related to the quarter ended May 31, 1996 was accrued at March
31, 1996 and is therefore not reflected in the June 30, 1996
statement of operations. For the quarter ended May 31, 1995, Pro
Image recorded revenues of $5.9 million and a net loss of $.7
million.
Discontinued Operations - BlowOut
In June 1996, the Board of Directors of the Company approved in
principle the spin-off of BlowOut into a public company pursuant to
which Rentrak would dividend to its shareholders shares of BlowOut
representing 73.1 percent ownership of BlowOut. Rentrak would retain
19.9 percent and certain minority shareholders would retain 7
percent. Final disposition of BlowOut is expected to be completed by
fiscal year end. The proposed divestiture through a stock dividend
is subject to a number of conditions, including formal declaration of
a dividend by the Board of Directors. For the quarter ended June 30,
1996, BlowOut had revenue of $7.3 million and a loss of $1.0 million.
The loss related to the quarter ended June 30, 1996 was accrued at
March 31, 1996 and is therefore not reflected in the June 30, 1996
statement of operations. For the quarter ended June 30, 1995,
BlowOut had revenue of $.9 million and recorded a net loss of
$68,000. Comparisons to the quarter ended June 30, 1995, are not
meaningful because of the acquisitions of two entities which occurred
in June and September 1995. (See Note 8 of the Notes to the
Consolidated Financial Statements included in the 1996 Annual Report
to Shareholders filed on form 10-K.)
Consolidated Balance Sheet
At June 30, 1996, total assets were $54.6 million, a decrease of $1.7
million from the $56.3 million at March 31, 1996. As of June 30,
1996, Accounts Receivable had increased $2.2 million to $17.3 million
from $15.1 million at March 31, 1996. The increase is due to the
accrual of $4.5 million in receivables due to a large order which was
received by the Company in June, 1996. Offsetting this accrual was a
reduction in accounts receivable due to the seasonal decline in
revenue activity. As of June 30, 1996, Other Investments decreased
$1.4 million to $2.1 million from $3.5 million at March 31, 1996. A
majority of the decline was due to the repayment of a $1.0 million
investment. The remaining portion was due to a decrease in the
market value of investments held at quarter end.
As noted earlier, the Company approved plans to discontinue the
operations of Pro Image and BlowOut. At June 30, 1996 and March 31,
1996, the net assets of Pro Image and BlowOut have been segregated in
the Consolidated Financial Statements.
Net noncurrent assets of Pro Image which are included in net
noncurrent assets of discontinued operations in the accompanying
Consolidated Financial Statements at June 30, 1996 and March 31, 1996
are comprised primarily of property and equipment and long-term debt.
Net current liabilities of Pro Image which are included in net
current liabilities of discontinued operations in the accompanying
Consolidated Financial Statements at June 30, 1996 and March 31, 1996
are comprised primarily of inventory, receivables, accounts payable,
accrued liabilities, estimated operating losses to be incurred by Pro
Image through the expected disposal date and other costs associated
with the disposition.
Net noncurrent assets of BlowOut which are included in net non
current assets of discontinued operations in the accompanying
Consolidated Financial Statements at June 30, 1996 and March 31, 1996
are comprised primarily of rental inventory, property and equipment,
intangibles, and long-term debt. Net current liabilities of BlowOut
which are included in net current liabilities of discontinued
operations in the accompanying Consolidated Financial Statements at
June 30, 1996 and March 31, 1996 are comprised primarily of cash,
inventory, accounts payable, accrued liabilities, estimated operating
losses to be incurred by BlowOut through the expected disposal date
and other costs associated with the disposition.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had cash and other liquid investments
of $1.7 million, compared to $3.0 million at March 31, 1996. At June
30, 1996, the Company's current ratio (current assets/current
liabilities) increased to .73 from .70 at March 31, 1996.
The Company has an agreement for a line of credit in an amount not to
exceed the lesser of $10 million or the sum of (a) 70 percent of the
net amount of eligible accounts receivable as defined in the
agreement plus (b) certain certificates of deposits and treasury
bills as defined in the agreement. The line of credit expires on
October 27, 1996. Interest is payable monthly at the bank's prime
rate plus 1.5 percent (9.75 percent at June 30, 1996). The lender
has been granted an option to purchase 10,000 unregistered shares of
common stock of the Company at $7 per share, which exceeded market
value at the date of grant. The line is secured by substantially all
of the Company's assets (excluding Pro Image assets). The terms of
the agreement require, among other things, a minimum amount of
tangible net worth, minimum current ratio and minimum total
liabilities to tangible net worth. The agreement also restricts the
amount of net losses, loans and indebtedness and limits the payment
of dividends on the Company's stock. The Company was in compliance
with these covenants as of June 30, 1996. At June 30, 1996, the
Company had $5.7 million outstanding borrowings under this agreement.
As of August 1, 1996, $4.0 million was repaid on the line resulting
in a balance outstanding of $1.7 million.
The Company is currently either negotiating extensions of its
existing credit facilities or negotiating new credit facilities with
its existing financial institution. If not obtained or extended, the
Company would seek alternative financing. If alternative financing
is not obtained, this could have a material adverse impact on the
business. While no absolute assurance can be given that the credit
facilities will be extended or new ones obtained, it is management's
belief that adequate financing will be obtained.
Pro Image has a line of credit arrangement with a financial
institution for the lesser of $5.0 million or the amount of the
borrowing base as defined in the agreement. Pro Image may borrow an
additional $1.0 million under the line of credit agreement, subject
to a dollar for dollar cash infusion from Rentrak. Interest under
the revised agreement is accrued at the financial institution's prime
rate (8.25 percent at May 31, 1996) plus .25 percent. The credit
agreement expires on July 31, 1997. As of May 31, 1996, Pro Image
was not in compliance with their debt covenants. Accordingly, the
line of credit has been classified as current and is included in net
current liabilities of discontinued operations in the accompanying
Consolidated Financial Statements.
The Company has established a retailer financing program whereby the
Company will provide, on a selective basis, financing to video
retailers who the Company believes have the potential for substantial
growth in the industry. In connection with these financings, the
Company typically makes a loan to and/or an equity investment in the
retailer. In some cases, a warrant to purchase stock may be
obtained. As part of such financing, the retailer typically agrees
to cause all of its current and future retail locations to
participate in the PPT system for a designated period of time. Under
these agreements, retailers are typically required to obtain some or
all of their requirements of cassettes offered under the PPT system.
Notwithstanding the long term nature of such agreements, both the
Company and the retailer may, in some cases, retain the right to
terminate such agreement upon 30-90 days prior written notice. These
financings are highly speculative in nature and involve a high degree
of risk, and no assurance of a satisfactory return on investment can
be given. The amounts the Company could ultimately receive could
differ materially in the near term from the amounts assumed in
establishing reserves.
The Board of Directors has authorized up to $14 million to be used in
connection with the Company's retailer financing program. As of July
1996, the Company has invested in, or made commitments to loan to or
invest in, various video retailers in amounts representing
substantially all of the $14 million authorized. The loans,
investments or commitments made to various retailers individually
range from $0.2 million to $1.6 million. Interest rates on the
various loans range from the prime rate plus 1 percent to the prime
rate plus 2 percent. As the financings are made, and periodically
throughout the terms of the agreements, the Company assesses the
likelihood of recoverability of the amounts invested or loaned based
on the financial position of each retailer. This assessment includes
reviewing available financial statements and cash flow projections of
the retailer and discussions with retailers' management.
As of June 30, 1996, the Company has invested or loaned approximately
$6.3 million under the program. Because of the financial condition
of a number of these retailers, the Company has reserved
approximately $6.1 million of the original loan or investment amount.
Subsequent to June 30, 1996, the Company entered into an agreement
with a Japanese Corporation pursuant to which the Company would sell
60 shares of Rentrak Japan stock for $4.5 million cash payable on
August 30, 1996. This will reduce the Company's interest in Rentrak
Japan from 25 percent to 10 percent. In connection with this
agreement, the Japanese Corporation also has agreed to lend the
Company $3.0 million on or before August 30, 1996. The note, which
will bear interest at 12 percent will be subordinated to all other
debt and will be due on August 30, 1998. Pursuant to this agreement,
Rentrak may, at its sole discretion, use a portion or all of the loan
proceeds to purchase up to 15 percent of the equity of BlowOut and
deliver such equity to the Japanese Corporation in repayment of a
portion or all of the note.
Both Pro Image and BlowOut have experienced significant losses from
operations and have used significant amounts of cash to fund
operations during their most recent fiscal year and for the quarter
ended June 30, 1996.
BlowOut is essentially a start-up company and is experiencing rapid
growth requiring additional financing if it is to continue its
expansion and to support operations of recently opened stores.
Subsequent to June 30, 1996, BlowOut received a commitment for a
$1,000,000 secured loan at an annual interest rate of approximately
14.0%. The loan would have a term of five years and be secured by
certain assets at each BlowOut store location. The loan would be
guaranteed by the Company until the lender is satisfied that
BlowOut's financial condition is sufficient to justify the release of
the Company's guarantee. Each quarter the lender has agreed to
consider increasing its commitment. BlowOut is currently pursuing
financing from several other sources and the Company has agreed to
guarantee certain supplier debt and up to $7 million of outside
financing to BlowOut.
The Company's exposure related to adverse financial and operational
developments at Pro Image and BlowOut is limited to its receivables
from an investment in BlowOut which will be retained after the
planned disposition [See Note 15 of the Notes to the March 31, 1996
Consolidated Financial Statements], certain guarantees previously
made to BlowOut [See Note 9 of the Notes to the March 31, 1996
Consolidated Financial Statements] and any funding covered by the
financing guarantee discussed above. The Company believes it will be
able to fulfill these obligations and does not believe that the
issues faced by Pro Image and BlowOut will have a material adverse
effect on the Company.
The Company's sources of liquidity include its cash balance, cash
generated from operations and its available credit facilities
(assuming such facilities are extended or new ones obtained).
Although its operations generated negative cash flow during fiscal
1996 and substantial losses from discontinued operations, the sources
of liquidity referred to above, along with the flexibility that the
Company has in adjusting operating levels, are expected to be
sufficient to fund the Company's operations for the fiscal year
ending March 31, 1997.
PART II
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of matters to a Vote of Security Holders
None
Item 5. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
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 12th day of August, 1996
RENTRAK CORPORATION:
/s/ Carolyn A. Pihl
Carolyn A. Pihl
Chief Accounting Officer
Signing on behalf of the registrant
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