<PAGE>
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: September 30, 1999
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 ( )
As of October 31, 1999, the Registrant had 10,482,224 shares of Common Stock
outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999 and March 31, 1999
Consolidated Statements of Income for the three month periods ended
September 30, 1999 and September 30, 1998
Consolidated Statements of Income for the six month periods ended
September 30, 1999 and September 30, 1998
Consolidated Statements of Cash Flows for the six month periods ended
September 30, 1999 and September 30, 1998
Notes to Consolidated Financial Statements
<PAGE>
RENTRAK CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
September 30, March 31,
1999 1999
---------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,203,127 $ 2,145,963
Accounts receivable, net of allowance for doubtful
accounts of $365,675 and $355,241 26,405,447 23,906,398
Advances to program suppliers 2,705,402 2,840,262
Inventory 2,611,455 2,804,983
Deferred tax asset 1,579,637 1,579,637
Income tax receivable 2,639,286 3,006,502
Other current assets 3,376,462 3,467,473
---------------- ---------------
Total current assets 42,520,816 39,751,218
---------------- ---------------
PROPERTY AND EQUIPMENT, net 1,735,020 1,723,448
OTHER INVESTMENTS, net 2,197,632 2,014,701
DEFERRED TAX ASSET 2,667,404 2,497,762
OTHER ASSETS 2,688,112 3,469,660
---------------- ---------------
TOTAL ASSETS $ 51,808,984 $ 49,456,789
================ ===============
</TABLE>
The accompanying notes are an integral
part of these consolidated balance sheets.
<PAGE>
RENTRAK CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
September 30, March 31,
1999 1999
---------------- ---------------
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $8,783,000 $7,925,000
Accounts payable 15,387,901 16,628,294
Accrued liabilities 7,692,634 5,822,574
Accrued compensation 799,759 941,836
Deferred revenue 142,296 100,415
Net current liabilities of discontinued operations 370,260 3,746,766
---------------- ---------------
Total current liabilities 33,175,850 35,164,885
---------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock $.001 par value;
Authorized: 10,000,000 shares - -
Common stock, $.001 par value;
Authorized: 30,000,000 shares
Issued and outstanding: 10,481,019 shares
at September 30, 1999 and 10,439,948 at
March 31, 1999 10,481 10,440
Capital in excess of par value 44,081,287 43,644,479
Cumulative other comprehensive income (loss) (139,039) 137,747
Accumulated deficit (24,533,661) (28,751,757)
Less - Deferred charge - warrants (785,934) (749,005)
---------------- ---------------
18,633,134 14,291,904
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $51,808,984 $49,456,789
================ ===============
</TABLE>
The accompanying notes are an integral
part of these consolidated balance sheets.
<PAGE>
RENTRAK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended September 30,
1999 1998
---------------- ---------------
REVENUES:
PPT $ 22,967,631 $ 27,907,650
Other 4,129,937 4,421,367
---------------- ---------------
27,097,568 32,329,017
---------------- ---------------
OPERATING COSTS AND EXPENSES:
Cost of sales 21,456,832 27,586,733
Selling, general, and administrative 4,524,619 4,669,171
---------------- ---------------
25,981,451 32,255,904
---------------- ---------------
INCOME FROM OPERATIONS 1,116,117 73,113
OTHER INCOME (EXPENSE):
Interest income 35,761 109,803
Interest expense (161,836) (75,767)
---------------- ---------------
(126,075) 34,036
---------------- ---------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX PROVISION 990,042 107,149
INCOME TAX PROVISION 384,934 40,190
---------------- ---------------
NET INCOME $ 605,108 $ 66,959
================ ===============
EARNINGS PER SHARE:
Basic: $ 0.06 $ 0.01
Diluted: $ 0.06 $ 0.01
The accompanying notes are an integral
part of these consolidated statements.
<PAGE>
RENTRAK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Six Months Ended September 30,
1999 1998
--------------- --------------
REVENUES:
PPT $ 49,408,942 $ 58,349,008
Other 8,683,696 7,439,451
--------------- --------------
58,092,638 65,788,459
--------------- --------------
OPERATING COSTS AND EXPENSES:
Cost of sales 45,894,516 55,659,140
Selling, general, and administrative 9,023,772 7,906,574
--------------- --------------
54,918,288 63,565,714
--------------- --------------
INCOME FROM OPERATIONS 3,174,350 2,222,745
--------------- --------------
OTHER INCOME (EXPENSE):
Interest income 73,944 231,665
Interest expense (327,261) (93,992)
Other - (117,768)
--------------- --------------
(253,317) 19,905
--------------- --------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX PROVISION 2,921,033 2,242,650
INCOME TAX PROVISION 1,076,439 885,847
--------------- --------------
INCOME FROM CONTINUING OPERATIONS 1,844,594 1,356,803
GAIN FROM DISPOSAL OF DISCONTINUED
SUBSIDIARIES (PLUS INCOME TAX
BENEFIT OF $483,502) 2,373,502 -
--------------- --------------
NET INCOME $ 4,218,096 $ 1,356,803
=============== ==============
EARNINGS PER SHARE:
Basic:
Continuing operations $ 0.18 $ 0.12
Discontinued operations $ 0.23 -
--------------- --------------
$ 0.41 $ 0.12
=============== ==============
Diluted:
Continuing operations $ 0.17 $ 0.12
Discontinued operations $ 0.23 -
--------------- --------------
$ 0.40 $ 0.12
=============== ==============
The accompanying notes are an integral
part of these consolidated statements.
<PAGE>
RENTRAK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended September 30,
------------------- ------------------
1999 1998
------------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $4,218,096 $1,356,803
Adjustments to reconcile income to
net cash provided by (used in) in operations -
Gain on disposal of discontinued operations (2,373,502)
Loss on asset and investment / asset sales 17,697 220,607
Depreciation and Amortization 668,775 501,449
Amortization of warrants 261,908 359,561
Studio advance reserves 1,158 9,121
Deferred income taxes - 274,382
Change in specific accounts:
Accounts receivable (2,540,018) 1,483,210
Advances to program suppliers 133,702 (3,282,853)
Inventory 193,528 (31,051)
Income tax receivable 367,216 -
Other current assets 91,011 (1,929,202)
Accounts payable (1,540,393) 1,757,299
Accrued liabilities & compensation 1,727,983 (229,605)
Deferred revenue 41,881 (710,828)
Net current liabilities of discontinued operations (1,003,004) -
------------------- ------------------
Net cash provided by (used in) operations 266,038 (221,107)
------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment, and inventory (387,723) (285,475)
Investments in retailer financing program - (929,320)
Proceeds from sale investments 361,894 234,368
Purchase of other assets & intangibles (179,057) (1,435,405)
------------------- ------------------
Net cash used in investing activities (204,886) (2,415,832)
------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under line of credit 858,000 (885,000)
Repurchase of common stock - (388,547)
Issuance of common stock 138,012 82,580
------------------- ------------------
Net cash provided by (used in) financing activities 996,012 (1,190,967)
------------------- ------------------
NET (INCREASE) IN CASH AND
CASH EQUIVALENTS 1,057,164 (3,827,906)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THIS PERIOD 2,145,963 6,361,680
------------------- ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $3,203,127 $2,533,774
=================== ==================
</TABLE>
<PAGE>
RENTRAK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended September 30,
------------------- ------------------
1999 1998
------------------- ------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for -
Interest $284,526 $93,992
Income taxes paid, net of refunds received 76,085 427,155
NON-CASH TRANSACTIONS
Decrease in net unrealized gain on
investments securities 276,786 (92,725)
Retailer Financing Program Investment through
conversion of accounts receivable 41,149 42,669
</TABLE>
The accompanying notes are an integral
part of these consolidated statements.
<PAGE>
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 generally accepted accounting principles 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, 1999
are not necessarily indicative of the results to be expected for the entire
fiscal year ending March 31, 2000. The Condensed Consolidated Financial
Statements should be read in conjunction with the Consolidated Financial
Statements and footnotes thereto included in the Company's 1999 Annual Report to
Shareholders.
The Condensed Consolidated 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 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 by the equity method. Certain amounts in the prior
period's Condensed Consolidated Financial Statements have been reclassified to
conform to the current period's presentation.
NOTE B: Net Income Per Share
Basic earnings per common shares is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
periods. Diluted earnings 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 earnings per share for the three month and six
month periods ended September 30, 1999 and 1998 were as follows:
<PAGE>
Note B: Net Income Per Share
--------------------
<TABLE>
<CAPTION>
3-Months Ended 6-Months Ended 3-Months Ended 6-Months Ended
September 30, 1999 September 30, 1999 September 30, 1998 September 30, 1998
-------------------------- ------------------------ ----------------------- -------------------------
Basic Diluted Basic Diluted Basic Diluted Basic Diluted
----- ------- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted average
number of shares
of common stock
outstanding 10,473,010 10,473,010 10,456,812 10,456,812 10,988,466 10,988,466 10,996,400 10,996,400
Dilutive effect of
exercise of
stock options - 327,073 - 214,072 - 158,436 - 544,871
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Weighted average
number of shares of
common stock
outstanding and
common stock
equivalents 10,473,010 10,800,083 10,456,812 10,670,884 10,988,466 11,146,902 10,996,400 11,541,270
========== ========== ========== ========== ========== ========== ========== ==========
Net Income:
Continuing operations $605,108 $605,108 $1,844,594 $1,844,594 $66,959 $66,959 $1,356,803 $1,356,803
Discontinued operations 0 0 2,373,502 2,373,502 0 0 0 0
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income $605,108 $605,108 $ 4,218,096 $ 4,218,096 $ 66,959 $ 66,959 $ 1,356,803 $ 1,356,803
========== ========== ========== ========== ========== ========== ========== ==========
Earnings per share:
Continuing operations $0.06 $0.06 $0.18 $0.17 $0.01 $0.01 $0.12 $0.12
Discontinued operations $0.00 $0.00 $0.23 $0.23 $0.00 $0.00 $0.00 $0.00
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings per share $0.06 $0.06 $0.41 $0.40 $0.01 $0.01 $0.12 $0.12
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
Options and warrants to purchase approximately 3.4 million and 5.1 million
shares of common stock for the quarter ended September 30, 1999 and 1998
respectively, and 4.6 million and 2.7 million for the six month period ended
September 30, 1999 and 1998 respectively, were outstanding but were not included
in the computation of diluted EPS because the warrants' and options' exercise
prices were greater than the average market price of the common shares during
the periods. The options and warrants, which expire during fiscal years 2000
through 2009 remain outstanding at September 30, 1999.
<PAGE>
NOTE C: Major Suppliers
For the quarter ended September 30, 1999, the Company had one program supplier
whose product generated 29 percent, a second that generated 27 percent, and a
third that generated an additional 12 percent of Rentrak revenues. For the six
month period ended September 30, 1999, the Company had one program supplier
whose product generated 24 percent, a second that generated 23 percent, and a
third that generated an additional 15 percent of Rentrak revenues. No other
program supplier provided product which generated more than 10 percent of
revenue for the three or six month periods ended September 30, 1999.
For the quarter ended September 30, 1998, the Company had one program supplier
whose product generated 34 percent, a second that generated 23 percent, and a
third that generated an additional 17 percent of Rentrak revenues. For the six
month period ended September 30, 1998, the Company had one program supplier
whose product generated 32 percent, a second that generated 28 percent, and a
third that generated an additional 17 percent of Rentrak revenue. No other
program supplier provided product which generated more than 10 percent of
revenue for the three or six month periods ended September 30, 1998.
NOTE D: Discontinued Operations
-----------------------
On November 26, 1996, the Company made a distribution to its shareholders of
1,457,343 shares of common stock of BlowOut Entertainment, Inc. ("BlowOut").
The operations of BlowOut were reflected as discontinued operations in the March
31, 1996 consolidated financial statements.
On March 22, 1999, BlowOut filed for Chapter 11 of the Federal Bankruptcy Code
in the United States Bankruptcy Court for the District of Delaware. At that
same time BlowOut filed a motion to sell substantially all the assets of
BlowOut. The sale to a third party video retailer was approved by the
Bankruptcy Court on May 10, 1999, and closed on May 17, 1999. The Company was
the principal creditor of BlowOut. In 1996, the Company had agreed to guarantee
up to $7 million of indebtedness of BlowOut ("Guarantee"). Pursuant to the
terms of the Guarantee, the Company agreed to guarantee any amounts outstanding
under BlowOut's credit facility. As the proceeds from the sale of the BlowOut
assets were not sufficient to cover the amounts due under this facility, the
Company, pursuant to the Guarantee, has agreed to a payment plan to fulfill
BlowOut's obligation under its credit facility. The amount outstanding at
September 30, 1999 is approximately $729,000. The funds remaining, if any,
after payment of administrative and cost claims after dismissal of the case may
further reduce the amount due under the credit facility.
During the quarter ended June 30, 1999, the Company recorded a gain on the
disposal of discontinued operations of $1.9 million related to BlowOut , as the
liability related to
<PAGE>
BlowOut contingencies was less than estimated. The Company also reduced the
valuation allowance which was recorded against the deferred tax asset related to
liabilities of discontinued operations. This reduction of approximately $500,000
in the valuation allowance was recorded as an income tax benefit from
discontinued operations in the accompanying consolidated income statement.
Net current liabilities of discontinued operations at September 30, 1999, relate
to amounts to be paid pursuant to the Guarantee, net of tax benefit.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Forward Looking Statements
Information included in Management's Discussion and Analysis of Financial
Conditions and Results of Operations constitute forward-looking statements that
involve a number of risks and uncertainties. Forward looking statements can be
identified by the uses of forward-looking words such as "may", "will",
"expects", "intends", "anticipates", "estimates", or "continues" or the negative
thereof or variations thereon or comparable terminology. The following factors
are among the factors that could cause actual results to differ materially from
the forward-looking statements: the Company's ability to continue to market the
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 and
growth in the video industry and general economics, both domestic and
international, competitive factors, including increased competition, expansion
of revenue sharing programs other than the PPT System by program suppliers, new
technology, the ability of the Company and its suppliers and customers to
address potential Year 2000 problems, the continued availability of prerecorded
videocassettes ("Cassettes") from program suppliers and the cost associated with
certain litigation involving the Company as well as the outcome of that
litigation. Such factors are discussed in more detail in the Company's 1999
Annual Report to Shareholders.
Results of Operations
For the quarter ended September 30, 1999, total revenue decreased $5.2 million,
or 16.1 percent, to $27.1 million from $32.3 million in the quarter ended
September 30, 1998. For the six month period ended September 30, 1999, total
revenue decreased $7.7 million, or 11.7 percent, to $58.1 million from $65.8
million in the six month period ended September 30, 1998. Total revenue
includes the following fees: application fees generated when retailers are
approved for participation in the PPT System; order processing fees generated
when Cassettes are ordered by and distributed to retailers; transaction fees
generated when retailers rent Cassettes to consumers; sell-through fees
<PAGE>
generated when retailers sell Cassettes to consumers; and buy out fees when
retailers purchase Cassettes at the end of the lease term. In addition, total
revenue includes royalty payments from Rentrak Japan, charges to customers of
the Company's fulfillment business known as ComAlliance and sale of Cassettes.
The decrease in total revenue and the decreases described in the following
paragraph were primarily due to the reduction in (i) the total number of
Cassettes leased under the PPT System; (ii) the number of titles released to the
PPT System; and (iii) a one-time royalty of $1 million from Rentrak Japan which
was recorded in September, 1998.
Cost of sales for the quarter ended September 30, 1999 decreased to $21.5
million from $27.6 million in the quarter ended September 30, 1998, a decrease
of $6.1 million, or 22.1 percent. Cost of sales for the six month period ended
September 30, 1999 decreased to $45.9 million from $55.7 million the prior year,
a decrease of $9.8 million or 17.6 percent. These decreases are due to the
decreases in revenue noted above; additional costs which were recorded in the
quarter ended September 30, 1998 related to the guarantee minimum payments due
to program suppliers on certain movie titles; and a reduction in incentives
offered to certain large customers in the quarter ended September 30, 1999.
The gross profit margin increased to 20.8 percent in the quarter ended September
30, 1999 from 14.7 percent the previous year. The gross profit margin increased
to 21.0 percent in the six month period ended September 30, 1999 from 15.4
percent in the six month period ended September 30, 1998. These increases are
primarily due to the decreases in cost of sales as noted above.
Selling, general and administrative expenses were $4.5 million for the quarter
ended September 30, 1999 compared to $4.7 million in the quarter ended
September 30, 1998, a decrease of $.2 million, or 4.3 percent. Selling, general
and administrative expenses were $9.0 million in the six month period ended
September 30, 1999 compared to $7.9 million in the six month period ended
September 30, 1998, an increase of $1.1 million or 13.9 percent. The increase
in selling, general and administrative expenses for the six month period ended
September 30, 1999 is primarily due to increased marketing expenses; the added
expenses of starting Rentrak International; expenses incurred as a result of
Rentrak becoming the operator of Rentrak UK; and legal fees.
For the quarter ended September 30, 1999, the Company recorded income from
continuing operations of $.6 million, compared to income from continuing
operations of $.1 million in the quarter ended September 30, 1998. For the six
month period ended September 30, 1999, the Company recorded income from
continuing operations of $1.8 million, compared to $1.4 million in the six month
period ended September 30, 1998. These increases in profits are primarily due
to the decreases in cost of sales noted above.
<PAGE>
Discontinued Operations
- -----------------------
On March 22, 1999, BlowOut filed for Chapter 11 of the Federal Bankruptcy Code
in the United States Bankruptcy Court for the District of Delaware. At that
same time BlowOut filed a motion to sell substantially all the assets of
BlowOut. BlowOut is not related to the Company's wholly owned subsidiary
BlowOut Video, Inc. The sale to a third party video retailer was approved on
May 10, 1999 and closed on May 17, 1999 (the "closing").
During the quarter ended June 30, 1999, the Company recorded a gain on the
disposal of discontinued operations of $1.9 million related to BlowOut as the
liability related to BlowOut contingencies was less than anticipated. The
Company also reduced the valuation allowance which was recorded against the
deferred tax asset related to liabilities of discontinued operations. This
reduction of $0.5 million in the valuation allowance was recorded as an income
tax benefit from discontinued operations in the accompanying consolidated income
statement.
Consolidated Balance Sheet
- --------------------------
At September 30, 1999, total assets were $51.8 million, an increase of $2.3
million from the $49.5 million at March 31, 1999. As of September 30, 1999,
cash increased $1.1 million to $3.2 million from $2.1 million at March 31, 1999.
Accounts receivable increased $2.5 million from $23.9 million at March 31, 1999
to $26.4 million at September 30, 1999. These increases were offset by a
decrease in other assets of $.8 million from $3.5 million at March 31, 1999 to
$2.7 million at September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash of $3.2 million compared to $2.1
million at March 31, 1999. At September 30, 1999, the Company's current ratio
(current assets/current liabilities) increased to 1.28 from 1.13 at March 31,
1999.
At September 30, 1999, the Company had an agreement for a line of credit with a
financial institution in an amount not to exceed the lesser of (a) $12.5 million
or (b) the sum of 80 percent of the net amount of eligible accounts receivable
as defined in the agreement. Interest was payable monthly at the bank's prime
rate (8.25 percent at September 30, 1999). The line was secured by
substantially all of the Company's assets. The terms of the agreement required,
among other things, a minimum amount of tangible net worth, minimum current
ratio and minimum total liabilities to tangible net worth. The agreement also
restricted the amount of net losses, loans and indebtedness and limits the
payment of dividends on the Company's stock. As of September 30, 1999, the
<PAGE>
Company was in compliance with these covenants. The Company had $4.0 million
outstanding under this line at October 26, 1999.
Subsequent to September 30, 1999, the line which originally would have expired
on December 18, 1999, was renewed under new terms and will now expire on June
30, 2000. The amount of the line may not exceed the lesser of (a) $10.00
million through January 15, 2000 and $7.5 million through June 30, 2000 or (b)
the sum of 80 percent of the net amount of eligible accounts receivable as
defined in the agreement. Interest is payable at the bank's prime rate plus 1
percent. The security interest and other terms of the agreement did not change
from those as noted above.
The Company has established a retailer financing program whereby the Company
will provide, on a selective basis, financing to video retailers which 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
from those offered under the PPT System or obtain a minimum amount of Cassettes
based on a percentage of the retailer's revenues. Notwithstanding the long term
nature of such agreements, both the Company and the retailer may, in some cases,
retain the right to terminate such agreement upon 30-90 days prior written
notice. These financings are highly speculative in nature and involve a high
degree of risk, and no assurance of a satisfactory return on investment can be
given. The amounts the Company could ultimately receive could differ materially
in the near term from the amounts assumed in establishing reserves.
The Board of Directors has authorized up to $18 million to be used in connection
with the Company's retailer financing program. As of September 30, 1999, the
Company had invested or loaned approximately $9.7 million in various retailers.
The investments individually range from $23,000 to $4.7 million. Interest rates
per annum on the various loans range from 5 percent to 10 percent. As each
financing is made, and periodically throughout the term of the agreement, the
Company assesses the likelihood of recoverability of the amount 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 September 30,
1999, the Company reserved approximately $6.3 million.
The Company was the principal creditor of BlowOut. In 1996, the Company had
agreed to guarantee up to $7 million of indebtedness of BlowOut ("Guarantee").
BlowOut had a credit facility (the "Credit Facility") in an aggregate principal
amount of $2 million for a five-year term. Amounts outstanding under the Credit
Facility bear interest at a fixed rate per annum equal to 14.525 percent.
Pursuant to the terms of the Guarantee, the Company agreed to guarantee any
amounts outstanding under the Credit Facility until the lender is
<PAGE>
satisfied, in its sole discretion, that BlowOut's financial condition is
sufficient to justify the release of the Guarantee. As the proceeds from the
sale of the BlowOut assets were not sufficient to cover the amounts due under
this facility, the Company, pursuant to the Guarantee, has agreed to a payment
plan to fulfill BlowOut's obligation under the Credit Facility. The funds
remaining, if any, after payment of administrative and cost claims after
dismissal of the case may further reduce the amount due under the Credit
Facility. As of September 30, 1999, the balance owing under this obligation is
approximately $729,000.
The Company's sources of liquidity include its cash balance, cash generated from
operations and its available credit facility. As noted above, in October, 1999,
the bank extended the Company's line until June 30, 2000. At the time of
extension, the bank indicated that they wanted to reduce large lines to
companies which are not in the banks core technology niches, and therefore,
there can be no assurance that the line of credit with the Company's primary
lender will be renewed or continue after June 30, 2000. The Company is
exploring other financing alternatives. Based on the Company's current budgets
and projected cash needs, the Company believes that the Company's sources of
liquidity are expected to be sufficient to fund the Company's operations for the
year ending March 31, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On November 21, 1997, Merle Harmon, individually and as assignee for Merle
Harmon Enterprises and Fan Fair Corporation, filed suit against the Company and
two of its officers in the U.S. District Court for the Eastern District of
Wisconsin. The lawsuit related to the Company's failed attempt to negotiate the
purchase of Merle Harmon Enterprises and Fan Fair Corporation. In October 1999,
the parties agreed to settle the case, and the Court dismissed the lawsuit.
Under the settlement agreement, the Company will pay Harmon an amount of cash
that is immaterial to the Company's results of operations. The Company's
insurer will fund most of the settlement.
In April 1998, the Company filed a complaint (the "Hollywood Complaint") against
Hollywood, entitled Rentrak Corporation v. Hollywood Entertainment et al., case
no. 98-04-02811, in the Circuit Court of the State of Oregon for the County of
Multnomah,
<PAGE>
Portland, Oregon. In the Hollywood Complaint, the Company alleges that Hollywood
breached and is continuing to breach its contractual obligation to acquire all
of its leased videocassettes exclusively from the Company. The Company also
alleges that Hollywood committed certain audit violations including breaching
its contractual obligation to fully and accurately report all sales of the
Company's videocassettes and to pay the appropriate fees to the Company in
connection with such transactions. The Company initially sought monetary damages
in the amount of $180,264,576 and injunctive relief for Hollywood's alleged
violations of the exclusivity obligation, and monetary relief for Hollywood's
alleged reporting and payment violations. The Company has suspended the ordering
privilege of Hollywood on account of its breach of the PPT Agreement with the
Company.
On April 28, 1999 Hollywood filed an Amended Answer, Affirmative Defenses and
Counterclaims which added counterclaims that sought an unspecified amount of
damages in excess of $10 million. The new counterclaims were for intentional
interference with business relations, breach of contract, defamation, fraud,
rescission, equitable accounting, offset, overpayment, recoupment, spoliation,
Oregon Antitrust statute, Oregon Unlawful Trade Practices Act and injunctive
relief. The Company believes that Hollywood's counterclaims are without merit
and intends to vigorously defend itself.
On June 8, 1999, Rentrak filed its second amended complaint in its suit against
Hollywood. The amended complaint added as individual defendants Hollywood
Senior Vice President Bruce Giesbrecht and former Hollywood Senior Vice
President Douglas Gordon. Rentrak also added claims of conspiracy, intentional
interference with business relations, breach of fiduciary duty, negligent
misrepresentation, tortious breach of contract, fraud, breach of implied duty of
good faith and fair dealing, defamation, disparagement, spoliation, negligent
supervision, negligent delegation, failure to pay all amounts due, unjust
enrichment, and conversion. Rentrak is now seeking damages of not less than
$220 million, plus attorney fees and costs.
On July 9, 1999, the court granted Rentrak's motion to dismiss Hollywood's
Unlawful Trade Practices Act claim. On August 5, 1999, the court denied
Hollywood's motion for partial summary judgement and denied Hollywood's motion
to dismiss. The court also granted Rentrak's motion to add claims against
Gordon, Giesbrecht and Hollywood that seek punitive damages.
Gordon and Giesbrecht have denied Rentrak's claims and assert one counterclaim
that alleges spoliation. Hollywood has also denied Rentrak's claims and asserts
counterclaims against Rentrak alleging intentional interference with business
relations, breach of contract, defamation, fraud, recission, equitable
accounting, offset, overpayment, recoupment, spoliation, Oregon antitrust
statute and injunctive relief. Discovery has been completed. Trial is set for
January 10, 2000 in Portland, Oregon.
In June 1998, Video Update, Inc. ("Video Update") filed a complaint (the "Video
Update Complaint") against the Company entitled Video Update, Inc. v. Rentrak
Corp., Civil
<PAGE>
Action No. 98-286, in the United States District Court for the District of
Delaware. The Video Update Complaint alleges various violations of the antitrust
laws, including that the Company has monopolized or attempted to monopolize a
market for videocassettes leased to retail video stores in violation of Section
2 of the Sherman Act. Video Update further alleges that the Company's
negotiation and execution of an exclusive, long-term revenue sharing agreement
with Video Update violates Section 1 of the Sherman Act and Section 3 of the
Clayton Act. Video Update is seeking unspecified monetary relief, including
treble damages and attorneys' fees, and equitable relief, including an
injunction prohibiting the Company from enforcing its agreement with Video
Update or any exclusivity provision against videocassette suppliers and video
retailers. In August 1998, the Court granted the Company's motion to dismiss the
Video Update Complaint pursuant to Federal Rules of Civil Procedure Rule
12(b)(3) on the basis of improper venue.
In August 1998, Video Update filed a new complaint against the Company in the
United States District Court for the District of Oregon (the "Re-Filed
Complaint"), Case No. 98-1013HA. The Re-Filed Complaint is substantially the
same as the previous complaint. The Company believes the Re-Filed Complaint
lacks merit and intends to vigorously defend against the allegations in the
Complaint. The Company has answered the Re-Filed Complaint denying its material
allegations and asserting several affirmative defenses. The Company also has
counterclaimed against Video Update alleging, among other things, breach of
contract, breach of the covenant of good faith and fair dealing, promissory
fraud, breach of fiduciary duty, breach of trust, constructive fraud, negligent
misrepresentation and intentional interference with business advantage, and
seeking damages and equitable relief.
In October 1998, the Company filed a motion for summary judgment seeking to
dismiss the lawsuit filed against it by Video Update. In January of 1999, the
Company filed a separate motion for partial summary judgment on its breach of
contract counterclaim seeking to recover more than $4.4 million in fees and
interest which the Company claims Video Update owes to it. In response to the
Company's motions, Video Update asked the court for time to take discovery
before having to file oppositions. The court has given the parties until June
30, 2000 to conduct discovery. The court denied Rentrak's motions without
reaching the merits and without prejudice to re-filing the motions after
discovery has been conducted. Rentrak expects to re-file its motions after
discovery has taken place. On October 21, 1999, the Company amended its
counterclaims to add additional breach of contract claims, a claim for trade
secret misappropriation and a claim for recovery of personal property. The
amended countercomplaint also added Video Update's chairman, Daniel Potter as a
defendant to the fraud and negligent misrepresentation claims.
In August 1998, the Company filed a complaint (the "Movie Buffs Complaint")
against Susan Janae Kingston d/b/a Movie Buffs ("Movie Buffs"), entitled Rentrak
Corporation v. Susan Janae Kingston, an individual, d/b/a Movie Buffs, Case No.
CV 98-1004 HA, in the United States District Court for the District of Oregon.
The Movie Buffs complaint
<PAGE>
alleges breach of contract and conversion claims and seeks damages in the amount
of at least $3.3 million and punitive damages of $500,000. In September 1998,
Movie Buffs filed counterclaims against the Company and Third Party Claims
against Hollywood (the "Movie Buffs Counterclaims"). The Movie Buffs
Counterclaims allege that the Company violated the antitrust laws, including the
Sherman, Clayton and Robinson-Patman Acts. The Counterclaim also seeks
declaratory relief, an accounting and alleges fraud and conspiracy to defraud,
breach of contract, breach of the implied covenant of good faith, and unfair
trade practices. Movie Buffs seeks an unspecified amount of damages (at least
$10 million), treble damages, general and consequential damages, punitive
damages, attorneys' fees and court costs. In September 1998, Roadrunner Video
("Roadrunner Video") filed a third-party complaint in intervention against the
Company and Hollywood (the "Roadrunner Complaint"). The Roadrunner Complaint
alleges the same claims as the Movie Buffs Counterclaims. The Company believes
the Movie Buffs Counterclaims and the Roadrunner Complaint lack merit and the
Company intends to vigorously defend against all of the allegations therein.
On March 5, 1999 the Court granted the Company's motion to dismiss the Robinson-
Patman Act claims. On April 12, 1999, Roadrunner and Movie Buffs filed amended
claims against Rentrak which added a new claim for fraud. The Company continues
to believe that the remaining Roadrunner and Movie Buffs claims are without
merit and intends to continue to vigorously defend itself. Trial is set for
April 25, 2000 in the United States District Court in Portland, Oregon.
In the event of an unanticipated adverse final determination in respect to one
or more of the cases discussed above, the Company's consolidated net income for
the period in which such determination occurs could be materially affected.
The Company is also subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
any ultimate liability with respect to these actions is not expected to
materially affect the financial position or results of operations of the Company
as a whole.
<PAGE>
Trademarks, Copyrights, and Proprietary Rights: The Company has registered its
"RENTRAK", "PPT", "Pay Per Transaction", "Ontrak", "BudgetMaker", "DataTrak",
"Prize Find" , "Blowout Video", "Fastrak", "GameTrak", "RPM", "Videolink+",
"Unless You're Rich Enough Already", "Sportrak", "Movies For The Hungry Mind",
and "VidAlert" marks under federal trademark laws. The Company has applied and
obtained registered status in several foreign countries for a number of its
trademarks. The Company claims a copyright in its RPM Software and considers it
to be proprietary.
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
On August 23, 1999, the Company conducted its Annual Meeting of Shareholders.
The matters voted on were as follows:
1. Voting for Directors was as follows:
Nominees For: Percentage:* Withheld: Percentage:
Skipper Baumgarten 7,064,960 72.13% 2,729,707 27.86%
Muneaki Masuda 7,065,260 72.13% 2,729,407 27.86%
Stephen Roberts 7,065,260 72.13% 2,729,407 27.86%
Takaaki Kusaka 7,065,160 72.13% 2,729,507 27.86%
* Percentage of votes cast at the meeting by Proxy
2. Proposal to Approve an Amendment to the 1997 Equity Participation Plan
of Rentrak Corporation to increase the aggregate number of common shares that
may be issued thereunder:
For: Against: Abstain: Broker Non-Votes:
6,074,215 3,695,792 24,660 0
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
(a) Exhibits:
Exhibit 10.1 - The Amendment to the 1997 Equity Participation Plan of
Rentrak Corporation. (1)
Exhibit 27 - Financial Data Schedule
(1) Incorporated by reference to the Company's Proxy Statement
dated June 30, 1999 for the Company's 1999 Annual Meeting of
Shareholders.
(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 9th day of November, 1999
RENTRAK CORPORATION:
/s/ Carolyn A. Pihl
Carolyn A. Pihl
Chief Financial Officer
Signing on behalf of the registrant
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