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: December
31, 1998
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 January 31, 1999, the Registrant had 10,435,884 shares of
Common Stock outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and
March 31, 1998
Consolidated Statements of Operations for the three month
periods ended December 31, 1998 and December 31, 1997
Consolidated Statements of Income for the nine month
periods ended December 31, 1998 and December 31, 1997
Consolidated Statements of Cash Flows for the nine month
periods ended December 31, 1998 and December 31, 1997
Notes to Consolidated Financial Statements
<TABLE>
RENTRAK CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
UNAUDITED
December 31, March 31,
1998 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,480,099 $6,361,680
Accounts receivable, net of allowance for doubtful
accounts of $235,016 and $586,641 22,099,345 24,395,143
Advances to program suppliers 3,792,334 431,975
Inventory 2,956,447 2,427,176
Deferred tax asset 807,017 1,217,950
Other current assets 7,041,385 4,582,337
Total current assets 38,176,627 39,416,261
PROPERTY AND EQUIPMENT, net 1,791,159 1,910,317
OTHER INVESTMENTS, net 574,601 887,884
DEFERRED TAX ASSET 3,483,774 4,087,292
OTHER ASSETS 8,364,430 5,306,943
TOTAL ASSETS $52,390,591 $51,608,697
The accompanying notes are an integral
part of these consolidated balance sheets.
</TABLE>
<TABLE>
RENTRAK CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
UNAUDITED
December 31, March 31,
1998 1998
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $10,029,289 $6,000,000
Accounts payable 20,238,475 23,333,656
Accrued liabilities 2,998,548 2,532,832
Accrued compensation 713,285 1,072,848
Deferred revenue 51,317 829,863
Net current liabilities of discontinued operations 4,388,064 4,585,373
Total current liabilities $38,418,978 $38,354,572
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: 10,503,368 shares
at December 31, 1998 and 10,986,455 at
March 31, 1998 10,504 10,987
Capital in excess of par value 43,716,521 45,365,298
Net unrealized gain on investment securities 866,196 54,645
Accumulated deficit (29,775,824) (30,794,263)
Less - Deferred charge - warrants (845,784) (1,382,542)
13,971,613 13,254,125
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $52,390,591 $51,608,697
The accompanying notes are an integral
part of these consolidated balance sheets.
</TABLE>
<TABLE>
RENTRAK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(UNAUDITED)
Three Months Ended December 31,
1998 1997
<S> <C> <C>
REVENUES:
PPT $21,568,044 $25,128,174
Other 5,438,936 3,132,227
27,006,980 28,260,401
OPERATING COSTS AND EXPENSES:
Cost of sales 22,638,057 22,924,964
Selling, general, and administrative 4,816,402 4,073,497
27,454,459 26,998,461
INCOME (LOSS) FROM OPERATIONS (447,479) 1,261,940
OTHER INCOME (EXPENSE):
Interest income 144,094 307,455
Interest expense (149,207) (66,694)
Other (157,944) 0
(163,057) 240,761
INCOME (LOSS) BEFORE INCOME TAX PROVISION (610,536) 1,502,701
INCOME TAX BENEFIT (PROVISION) 272,172 (621,614)
NET INCOME (LOSS) ($338,364) $881,087
EARNINGS (LOSS) PER SHARE:
Basic ($0.03) $0.08
Diluted ($0.03) $0.08
The accompanying notes are an integral
part of these consolidated statements.
</TABLE>
<TABLE>
RENTRAK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
(UNAUDITED)
Nine Months Ended December 31,
1998 1997
<S> <C> <C>
REVENUES:
PPT $79,917,052 $80,620,342
Other 12,878,387 7,103,121
92,795,439 87,723,463
OPERATING COSTS AND EXPENSES:
Cost of sales 77,240,906 71,765,897
Selling, general, and administrative 13,779,267 10,649,419
91,020,173 82,415,316
INCOME FROM OPERATIONS 1,775,266 5,308,147
OTHER INCOME (EXPENSE):
Interest income 375,759 558,631
Interest expense (243,199) (71,694)
Other (275,712) 0
(143,152) 486,937
INCOME BEFORE INCOME TAX PROVISION 1,632,114 5,795,084
INCOME TAX PROVISION 613,675 2,398,977
NET INCOME $1,018,439 $3,396,107
EARNINGS PER SHARE:
Basic $0.09 $0.30
Diluted $0.09 $0.30
The accompanying notes are an integral
part of these consolidated statements.
</TABLE>
<TABLE>
RENTRAK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(Unaudited)
Nine Months Ended December 31,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $1,018,439 $3,396,107
Adjustments to reconcile income to
net cash provided (used) in operations
Loss on investment / asset sales 275,712 0
Depreciation and Amortization 807,425 609,373
Amortization of warrants 536,758 455,094
Provision for doubtful accounts 72,235 (314,103)
Retailer financing reserves 0 (300,000)
Studio advance reserves 9,121 (17,852)
Deferred income taxes 517,048 534,768
Change in specific accounts:
Accounts receivable 2,266,232 (4,725,314)
Advances to program suppliers (3,369,480) (1,427,333)
Inventory (529,271) (852,888)
Other current assets (2,459,048) (45,586)
Accounts payable (3,095,181) 1,509,216
Accrued liabilities & compensation 106,153 (882,736)
Deferred revenue (778,546) (1,484,284)
Net current liabilities of discontinued operations (197,309) (47,741)
Net cash used by operations (4,819,712) (3,593,279)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (398,407) (397,387)
Investments in retailer financing program (947,759) (750,000)
Proceeds from sale of investments 469,339 0
Purchase of other assets & intangibles (1,565,071) (1,913,118)
Net cash used by investing activities (2,441,898) (3,060,505)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit, net 4,029,289 4,500,000
Repurchase of common stock (1,759,057) (4,179,868)
Repurchase of Warrants 0 (250,000)
Issuance of common stock 109,797 48,081
Net cash used by financing activities 2,380,029 118,213
NET DECREASE IN CASH AND
CASH EQUIVALENTS (4,881,581) (6,535,571)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THIS PERIOD 6,361,680 10,167,169
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,480,099 $3,631,598
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for -
Interest $243,199 $5,000
Income taxes, net of refunds 427,155 1,337,366
NON-CASH TRANSACTIONS
Increase in net unrealized gain on
investment securities 811,551 (190,086)
Retailer Loan Program Investment through
conversion of accounts receivable 42,669 1,196,856
The accompanying notes are an integral
part of these consolidated statements.
</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 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 nine month periods ended December 31, 1998
are not necessarily indicative of the results to be expected
for the entire fiscal year ending March 31, 1999. The
Condensed Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and
footnotes thereto included in the Company's 1998 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.
NOTE B: Net Income (Loss) Per Share
Basic earnings (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 earnings
(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.
<TABLE>
<CAPTION>
Note B: Net Income Per Share
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3-Months Ended 9-Months Ended 3-Months Ended 9-Months Ended
December 31, 1998 December 31, 1998 December 31, 1997 December 31, 1997
Basic Diluted Basic Diluted Basic Diluted Basic Diluted
Weighted average
number of shares
of common stock
outstanding 10,654,847 10,654,847 10,882,549 10,882,549 10,994,478 10,994,478 11,353,828 11,353,828
Dilutive effect of
exercise of
stock options - - - 375,974 - 177,718 - 115,651
Weighted average
number of shares of
common stock and
common stock
equivalents 10,654,847 10,654,847 10,882,549 11,258,523 10,994,478 11,172,196 11,353,828 11,469,479
Net Income (loss) ($338,364) ($338,364)$1,018,439 $1,018,439 $881,087 $881,087 $3,396,107 $3,396,107
Net Income (loss)
per Share ($0.03) ($0.03) $0.09 $0.09 $0.08 $0.08 $0.30 $0.30
Options and warrants to purchase approximately 6,300,000, 3,700,000,
3,000,000 and 4,800,000 shares of common stock were outstanding
for the three month period ended December 31, 1998 and 1997, and for
the nine month period ended December 31, 1998 and 1997, respectively,
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. The options and warrants, which
expire during fiscal years 2000 through 2008, remain outstanding at
December 31, 1998.
</TABLE>
NOTE C: Major Suppliers
For the quarter ended December 31, 1998, the Company had one
program supplier whose product generated 25 percent, a
second that generated 21 percent, and a third that generated
an additional 15 percent of Rentrak revenues. For the nine
month period ended December 31, 1998, the Company had one
program supplier whose product generated 30 percent, a
second that generated 26 percent, and a third that generated
an additional 16 percent of Rentrak revenues. No other
program supplier provided product which generated more than
10 percent of revenue for the three or nine month periods
ended December 31, 1998.
For the quarter ended December 31, 1997, the Company had one
program supplier whose product generated 44 percent and a
second that generated 24 percent of Rentrak revenues. For
the nine month period ended December 31, 1997, the Company
had one program supplier whose product generated 49 percent,
a second that generated 21 percent, and a third that
generated an additional 12 percent of Rentrak revenue. No
other program supplier provided product which generated more
than 10 percent of revenue for the three or nine month
periods ended December 31, 1997.
NOTE D: Adoption of New Pronouncements
In June 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS 130). The
Company has adopted SFAS 130. The statement establishes
presentation and disclosure requirements for reporting
comprehensive income. Comprehensive income includes charges
or credits to equity that are not the result of transactions
with shareholders. Components of the Company's
comprehensive income consist of unrealized gains/losses of
investment securities. Total comprehensive income for the
three months ended December 31, 1998 and for the nine month
period ending December 31, 1998 were $565,912 and
$1,829,990, respectively. Differences between total
comprehensive income and net income during the same periods
in 1997 were immaterial to the Company's results of
operations.
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 regarding
liquidity and capital resources 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, and the continued availability
of prerecorded videocassettes ("Cassettes") from Program
Suppliers. Such factors are discussed in more detail in the
Company's 1998 Annual Report to Shareholders.
Results of Operations
For the quarter ended December 31, 1998, total revenue
decreased $1.3 million, or 4.6 percent, to $27.0 million
from $28.3 million in the quarter ended December 31, 1997.
For the nine month period ended December 31, 1998, total
revenue increased $5.1 million, or 5.8 percent, to $92.8
million from $87.7 million in the nine month period ended
December 31, 1997. 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 generated when
retailers sell Cassettes to consumers; buy out fees when
retailers purchase Cassettes at the end of the lease term;
royalty payments from Rentrak Japan; sale of Cassettes; and
revenue related to the Company's order processing and
fulfillment services.
The decrease in total revenue for the three month period
ended December 31, 1998 is primarily due to the reduction in
(i) the total number of Cassettes leased under the PPT
System due in part to program suppliers offering more titles
on a sell through basis than historical levels; and (ii) an
increase in incentives offered by the Company to entice
retailers to order more product. These reductions in
revenue were partially offset by an increase in revenue
related to the Company's order processing and fulfillment
services.
The increase in total revenue for the nine month period
ended December 31, 1998 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) a one-time royalty of $1 million from
Rentrak Japan which was recorded in September, 1998; and
(iii) the revenue related to the Company's order processing
and fulfillment services.
These increases in total revenue for the nine month period
ended December 31, 1998 were offset in part by weaker than
expected rental turns on certain popular titles, which in
turn led to the Company recording additional costs related
to guarantee minimum payments to program suppliers for those
titles.
Cost of sales for the quarter ended December 31, 1998
decreased to $22.6 million from $22.9 million in the quarter
ended December 31, 1997, a decrease of $0.3 million, or 1.3
percent. Cost of sales for the nine month period ended
December 31, 1998 rose to $77.2 million from $71.8 million
the prior year, an increase of $5.4 million or 7.5 percent.
The decrease for the three month period ended December 31,
1998 is due to the reduction in revenue as noted above
offset by an increase in cost of sales as a percentage of
revenue due to an increase in incentives offered by the
Company to entice retailers to order more product. This
resulted in Cassettes generating a lower gross margin than
historical levels.
The increase for the nine month period ended December 31,
1998 is due to the increase in revenue noted above and
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 .
The gross profit margin decreased to 16.2 percent in the
quarter ended December 31, 1998 from 18.9 percent the
previous year. The gross profit margin decreased to 16.8
percent in the nine month period ended December 31, 1998
from 18.8 percent in the nine month period ended December
31, 1997. These decreases are primarily due to the changes
in cost of sales as noted above partially offset by the
increase in royalty revenue.
Selling, general and administrative expenses were $4.8
million for the quarter ended December 31, 1998 compared to
$4.1 million in the quarter ended December 31, 1997, an
increase of $0.7 million, or 17.1 percent. Selling general
and administrative expenses were $13.8 million in the nine
month period ended December 31, 1998 compared to $10.6
million in the nine month period ended December 31, 1997, an
increase of $3.2 million or 30.2 percent. The increase in
selling, general and administrative expenses is primarily
due to increased legal fees, marketing expenses and
compensation related to the Company's order processing and
fulfillment services. Also, in the quarter ended December
31, 1997 the Company recognized a reduction in selling,
general and administrative expenses due to the recovery of
amounts which were loaned under the retailer loan program
and which had been previously reserved.
For the quarter ended December 31, 1998, the Company
recorded a net loss of $.3 million compared to net income of
$.9 million in the quarter ended December 31, 1997. For the
nine month period ended December 31, 1998, the Company
recorded net income of $1.0 million , compared to net
income of $3.4 million in the nine month period ended
December 31, 1997. These decreases in profits are primarily
due to the increases in selling, general and administrative
expenses as noted above and for the quarter ended December
31, 1998 a decrease in gross margin dollars as noted above.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, total assets were $52.4 million, an
increase of $.8 million from the $51.6 million at March 31,
1998. As of December 31, 1998, cash decreased $4.9 million
to $1.5 million from $6.4 million at March 31, 1998. The
decrease is primarily due to the increase in other assets
such as advances to program suppliers and advances to
retailers under the retailer loan program and the repurchase
of the Company's stock as described below.
At December 31, 1998, the Company's current ratio (current
assets/current liabilities) was .99 compared to 1.03 at
March 31, 1998.
The Company has 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. The line of credit expires on December 18, 1999.
Interest is payable monthly at the bank's prime rate (7.55
percent at December 31, 1998). The line is secured by
substantially all of the Company's assets. The terms of the
agreement require, among other things, a minimum amount of
tangible net worth, minimum current ratio and minimum total
liabilities to tangible net worth. The agreement also
restricts the amount of net losses, loans and indebtedness
and limits the payment of dividends on the Company's stock.
As of December 31, 1998, the Company was in compliance with
these covenants. The Company had $10 million outstanding
under this line at December 31, 1998.
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 December 31, 1998, the Company had invested
or loaned approximately $15.1 million in various retailers.
The investments individually range from $0.1 million to $4.7
million. Interest rates per annum on the various loans
range from 5 percent to the prime rate plus 2 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 December 31, 1998, the Company
reserved approximately $9.1 million.
As noted in the Company's 1998 Annual Report to
Shareholders, the Company distributed to its Shareholders
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. Net current liabilities of
discontinued operations include management's best estimates
of the anticipated losses from discontinued operations
through the final resolution of all contingencies related to
the disposition of BlowOut. The estimates are based on an
analysis of the costs which may be incurred to dispose of
the entity. The amounts the Company will ultimately incur
could differ materially in the near term from the amounts
assumed in arriving at the loss on disposal of the
discontinued operations.
BlowOut is an early stage company requiring additional
financing if it is to continue its expansion and support its
operations. The Company is the principal creditor to
BlowOut. Pursuant to a Financing Agreement, the Company
agreed to provide guarantees for up to $7 million of
indebtedness of BlowOut (the "Guarantee").
The obligations under the Guarantee are comprised
of the following:
(a) BlowOut has a credit facility (the Credit
Facility) in an aggregate principal amount of $2 million for
a five-year term. Amounts outstanding under the Credit
Facility bear interest at a fixed rate per annum equal to
14.525 percent. Pursuant to the terms of the Guarantee, the
Company agreed to guarantee any amounts outstanding under
the Credit Facility until the lender is satisfied, in its
sole discretion, that BlowOut's financial condition is
sufficient to justify the release of the Company's
guarantee. As of December 31, 1998, BlowOut had borrowed
approximately $1.3 million under the Credit Facility. As
stated in the Company's September 30, 1998 Form 10Q, BlowOut
was delinquent with respect to the principal and interest
payment due on October 1, 1998, under the Credit Facility in
the amount of $46,379. In November, 1998 the Company paid
this amount and has also made the November, 1998 through
February, 1999 monthly payments due by BlowOut for a total
of $185,515. These payments have been recorded as a
reduction in net current liabilities of discontinued
operations on the accompanying balance sheet.
(b) BlowOut also has a revolving line of credit
(Line of Credit) in a maximum principal amount at one time
outstanding of $5 million. Under the Line of Credit,
BlowOut may only draw up to 80 percent of the Orderly
Liquidation Value (as defined in the Line of Credit) of
eligible new and used Cassette inventory. Advances under
the Line of Credit bear interest at a floating rate per
annum equal to the Bank of America Reference Rate plus 2.75
percent (10.5 percent as of December 31, 1998). The Line of
Credit expires in September, 1999. The Company has agreed,
pursuant to an Unconditional Repurchase Agreement, to
purchase under certain circumstances in the event of default
under the Line of Credit, BlowOut's Cassette inventory at
specified amounts up to a principal amount of $5 million.
In February 1998, the Company entered into an agreement with
BlowOut and Culture Convenience Club ("CCC") (the "Tri-Party
Agreement") under which BlowOut has agreed not to draw down
in excess of $4.0 million under the Line of Credit. As of
December 31, 1998, BlowOut had borrowed approximately $3.5
million under the Line of Credit.
It is likely that the Company will have to continue to pay
out under the guarantee or provide other accommodations so
long as BlowOut's financial condition does not improve.
In fiscal year 1997, BlowOut executed a $3.0 million note in
favor of the Company which accrues interest at 9 percent per
annum. As part of the Tri-Party Agreement, the Company
agreed to defer principal and interest payments on this note
by BlowOut until December 31, 2004 during which deferment
period no interest accrues. The Company also agreed to the
forgiveness of all or a portion of the $3.0 million note as
BlowOut is able to lower the Company's contingent
obligations under the guarantee. At December 31, 1998, the
total outstanding balance of the debt under such note,
including accrued interest, was $2.8 million.
BlowOut has stated that it is encountering severe financial
difficulties because of a decline in revenue, limited cash
resources, recent inability to obtain videocassettes for
rental on terms favorable to BlowOut and high fixed costs in
relation to its revenue, all of which may affect BlowOut's
continuing financial viability. BlowOut also stated that
unless it is able to obtain new equity and/or debt capital
or is able to refinance its existing debt (including trade
payables) to generate additional cash flows, BlowOut
management believes that BlowOut's existing sources of cash
will not be sufficient to meet BlowOut's operating needs.
If BlowOut's financial condition deteriorates further and/or
if BlowOut seeks bankruptcy protection, the Company may be
obligated to make payments under the Guarantee (including
pursuant to the Repurchase Agreement), the Company may not
be able to collect its outstanding receivables owed by
BlowOut, the Company could be subject to other claims and
the Company's claims could be subject to defenses arising
under applicable bankruptcy law.
On November 26, 1996, the Board authorized the re-purchase
of up to two million shares of Common Stock in open market
and negotiated purchases. The Company completed the
purchase of the two million shares by purchasing 430,700
shares for an aggregate amount of approximately $1,370,500
during the three month period ended December 31, 1998 and
approximately 69,000 shares in January, 1999. The total
cost for the two million shares was approximately $7.3
million. These purchases were funded through cash flows
from operations.
The Company's sources of liquidity include its cash balance,
cash generated from operations and its available credit
facility. These sources are expected to be sufficient to
fund the Company's operations for the year ending March 31,
1999.
Year 2000
Many computer software programs, as well as hardware with
embedded software, use a two-digit date field to track and
refer to any given year. After, and in some cases prior to,
January 1, 2000, these software and hardware systems may
interpret the year "00" as "1900," which will cause them to
perform faulty calculations or shut down altogether. To the
extent that this "Year 2000" problem is present in the
Company's internal software and hardware systems, or those
of its suppliers or customers, there could be material
disruptions in such important functions as the ordering and
delivery of Cassettes, the reporting and tracking of
Cassette rental and sale transactions, and billing and
payment systems. Such difficulties could result in a number
of adverse consequences, including but not limited to
delayed or lost revenue, diversion of resources, damages to
the Company's reputation, increased administrative and
processing costs, and liability to suppliers or customers.
Any one or a combination of such consequences could have a
material adverse effect on the Company's business, operating
results, and financial condition.
Accordingly, the Company began assessing the scope of the
Year 2000 problem both internally and among its suppliers
and customers as far back as March 1997, and began
implementing remedial measures soon thereafter. The Company
is conducting extensive tests of all software and hardware
systems used internally in the Company's business to
determine whether they are Year 2000 compliant. The
Company's internal assessment, testing, and remediation
program is expected to be completed by March 31, 1999.
Although the Company believes that these corrective measures
will adequately address the Year 2000 problem, there can be
no assurance that every Year 2000 problem will be discovered
and addressed, or that every remedial measure will be
effective. To the extent that Year 2000 problems persist,
the Company could experience the adverse consequences
described above, some or all of which could be material.
The Company has initiated formal communications with its POS
system software vendors, and certain of the Company's larger
individual customers that have developed their own POS
system software, to determine the extent to which their
software and hardware systems are Year 2000 compliant. In
addition, the Company has completed the required programming
of the Company's proprietary Rentrak Profit Maker ("RPM")
software and is taking steps to have this upgrade installed
on its customers' computer systems. The Company has also
initiated formal contact with the vendors involved in the
Cassette distribution process to determine whether the Year
2000 problem may adversely affect the Company's ability to
timely deliver Cassettes to its customers. The Company has
and will continue to work with all of its vendors,
suppliers, and customers to resolve any potential Year 2000
problems. As a follow-up measure, the Company plans to
evaluate and test the software of its POS vendors and test
communications with its customers by March 31, 1999, to
determine which are in fact Year 2000 compliant. However,
the Company has no direct control over these third parties
and cannot provide any assurance that such third party
software and hardware systems will be timely converted. The
failure of certain individual vendors, suppliers, and
customers, or a combination of vendors, suppliers, and
customers, to make their systems Year 2000 compliant could
have a material adverse effect on the Company's performance.
The Company expects the total cost of its assessments,
corrective measures, and testing to be less than $250,000 of
which approximately $200,000 has already been incurred.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
None.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In April 1998, the Company filed a complaint (the "Hollywood
Complaint") against Hollywood Entertainment, Inc.
("Hollywood"), entitled Rentrak Corporation v. Hollywood
Entertainment et al., case no. 98-04-02811, in the Circuit
Court of the State of Oregon for the County of Multnomah,
Portland, Oregon. There have been no material changes in
this litigation since it was reported in the Company's 10-Q
for quarter ended June 30, 1998.
On November 21, 1997, Merle Harmon, individually and as
assignee for Merle Harmon Enterprises and Fan Fair
Corporation, sued the Company and two of its officers in
relation to the Company's attempt to negotiate the purchase
of Merle Harmon Enterprises and Fan Fair Corporation. The
case is pending in the U.S. District Court for the Eastern
District of Wisconsin. On November 12, 1998, the court
granted in part and denied in part the Company's motion to
dismiss the complaint. The court dismissed Harmon's claims
of breach of contract, negligent misrepresentation and
strict responsibility misrepresentation. The court also
dismissed Harmon's claim that the Company had violated the
Organized Crime Control Act of 1970, Racketeer Influenced
and Corrupt Organizations ("RICO") and as well as his claim
that the Company participated in a RICO conspiracy. The
court denied the Company's motion to dismiss with regard to
Harmon's claims for fraud and promissory estoppel. It is
expected that discovery will proceed with respect to the
remaining claims. The Company continues to believe that the
plaintiff's remaining claims are without merit and intends
to continue to vigorously defend itself and its officers
against the remaining claims.
As previously reported in the Company's 1998 Annual Report
and in its Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, in June 1998, Video Update, Inc.
("Video Update") filed a complaint (the "Video Update
Complaint") against the Company entitled Video Update, Inc.
v. Rentrak Corp., Civil Action No. 98-286, in the United
States District Court for the District of Delaware. The
Video Update Complaint alleges various violations of the
antitrust laws, including that the Company has attempted to
monopolize the market for videocassettes leased to retail
video stores in violation of Section 2 of the Sherman Act.
Video Update further alleges that the Company's negotiation
and execution of an exclusive, long-term revenue sharing
agreement with Video Update violates Section 1 of the
Sherman Act and Section 3 of the Clayton Act. Video Update
is seeking unspecified monetary relief, including treble
damages and attorney's 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-
1013 HA. 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 seeks
damages and equitable relief.
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 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 Entertainment Corp. (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 Entertainment
Corp. ("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. The Company has filed a motion to
dismiss the Robinson-Patman Act claims pursuant to Federal
Rule of Civil Procedure 12(b)(6).
The following are registered trademarks of Rentrak
Corporation:
Rentrak, Pay Per Transaction, PPT, Rentrak Profit Maker
and RPM
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 - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(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 8th day of February, 1999
RENTRAK CORPORATION:
/s/ Carolyn A. Pihl
Carolyn A. Pihl
Vice President Finance
Signing on behalf of the registrant
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 1,480,099
<SECURITIES> 0
<RECEIVABLES> 22,334,361
<ALLOWANCES> 235,016
<INVENTORY> 2,956,447
<CURRENT-ASSETS> 38,176,627
<PP&E> 7,638,549
<DEPRECIATION> 5,847,390
<TOTAL-ASSETS> 52,390,591
<CURRENT-LIABILITIES> 38,418,978
<BONDS> 0
0
0
<COMMON> 10,504
<OTHER-SE> 13,961,109
<TOTAL-LIABILITY-AND-EQUITY> 52,390,591
<SALES> 92,795,439
<TOTAL-REVENUES> 92,795,439
<CGS> 77,240,906
<TOTAL-COSTS> 91,020,173
<OTHER-EXPENSES> 143,152
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 243,199
<INCOME-PRETAX> 1,632,114
<INCOME-TAX> 613,675
<INCOME-CONTINUING> 1,018,439
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,018,439
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
