This filing consists of 54
pages. The Exhibit Index is
on Page 49.
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 - K
X Annual Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for fiscal year ended
March 31, 1999 or
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number D-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 Number.)
7700 NE Ambassador Place, Portland, Oregon 97220
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:(503) 284-7581
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common stock $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K, or any amendment to this Form 10-K [ ]
As of June 1, 1999, the aggregate market value of the voting stock
held by non-affiliates of the registrant, based on the last sales
price as reported by NASDAQ was $27,627,984.
(Excludes value of shares of Common Stock held of record by
directors and officers and by shareholders whose record ownership
exceeded five percent of the shares outstanding at June 1, 1999.
Includes shares held by certain depository organizations.)
As of June 1, 1999, the Registrant had 10,440,517 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR THE 1999 ANNUAL
MEETING OF THE SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART
III OF THIS FORM 10-K
TABLE OF CONTENTS
PART I
Item Page
1. Business 3
2. Properties 9
3. Legal Proceedings 9
4. Submission of Matters to a Vote of Security
Holders 11
PART II
5. Market for the Registrant's Common Stock and
Related 12
Stockholder Matters
6. Selected Financial Data 13
7. Management's Discussion and Analysis of Financial 14
Conditions and Results of Operations
7A. Quantitative and Qualitative Disclosures About
Market Risk 19
8. Financial Statements and Supplementary Data 20
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 20
PART III
10. Directors and Executive Officers of the
Registrant 46
11. Executive Compensation 46
12. Security Ownership of Certain Beneficial Owners 46
and Management
13. Certain Relationships and Related Transactions 46
PART IV
14. Exhibits, Financial Statement Schedules and 47
Reports on Form 8-K
PART I
ITEM 1. BUSINESS
GENERAL
The Company's primary business is the
distribution of videocassettes to home video specialty
stores and other retailers using its Pay Per
Transaction system (the "PPT System"). Under the
Company's PPT system, home video specialty stores and
other retailers that rent videocassettes to consumers
("Retailers"), including grocery stores and
convenience stores, lease videocassettes and other
media ("Cassettes") from Rentrak for a low up-front
fee and share a portion of each retail rental
transaction with the Company. The Company's PPT
System generated 85 percent, 91 percent and 91 percent
of total revenues in fiscal years 1999, 1998 and 1997,
respectively.
Rentrak also provides through its subsidiary
formovies.com, inc., Web-site services for video
retailers and a video locator service for consumers of
videocassette through its innovative Web site
http://www.formovies.com. A Rentrak subsidiary,
Blowout Video, Inc., sells videocassettes and discs
through its Web site, http://www.blowoutvideo.com, and
through five retail outlets. A division of the
Company, ComAlliance, provides order processing,
inventory management, and fulfillment services to
Internet retailers and wholesalers and to other
businesses requiring just-in-time fulfillment. It can
be accessed at http://www.comalliance.com. Rentrak's
corporate Web site is http://www.Rentrak.com.
PAY-PER-TRANSACTION
The Company distributes Cassettes principally to
home video specialty stores through its PPT System.
The PPT System enables Retailers to obtain Cassettes
at a significantly lower initial cost than if they
purchased the Cassettes from traditional video
distributors.
Under traditional distribution, a motion picture
studio, licensee, or other owner of the rights to
certain video programming ("Program Suppliers") sells
Cassettes to a distributor for an average price of
approximately $64. The distributor then sells
Cassettes to a Retailer for an average price of
approximately $70. The Retailer then rents Cassettes
to the consumer at an average price of $2.50 and
retains all of the rental revenue. Under the PPT
System, after the Retailer pays an application fee
(the "Application Fee") to the Company and is approved
for participation in the PPT System, Cassettes are
leased to the Retailer for an initial fee (the "Order
Processing Fee" formerly referred to as the "Handling
Fee") plus a percentage of revenues generated by the
Retailers from rentals to consumers (the "Transaction
Fee"). The Company retains a portion of each Order
Processing Fee and Transaction Fee and remits the
remainder to the appropriate Program Suppliers that
hold the distribution rights to the Cassettes. The
expected benefit to the Retailer is a higher volume of
rental transactions, as well as a reduction in capital
cost and risk. The expected benefit to the Program
Supplier is an increase in the total number of
Cassettes shipped, resulting in increased revenues and
opportunity for profit. The expected benefit to the
consumer is the potential of finding more copies of
certain newly released hit titles and a greater
selection of other titles at Retailers participating
in the PPT System ("Participating Retailers").
The Company markets its PPT System throughout the
United States, Canada and the United Kingdom. The
Company also owns a ten percent interest in Rentrak
Japan, K.K. ("Rentrak Japan"), a Japanese corporation
which markets a similar service to video retailers in
Japan.
In February 1998, the Company entered into a
Shareholders Agreement and a PPT License Agreement
with Columbus Holdings Limited and Rentrak UK Limited
to develop the Company's PPT distribution and
information processing business in the United Kingdom
through Rentrak UK. The Company originally owned 25
percent of Rentrak UK. On March 31, 1999, the Company
acquired an additional 67 percent interest, and now
owns 92 percent of Rentrak UK.
The Company currently offers substantially all of
the titles of a number of Program Suppliers,
including Twentieth Century Fox Home Entertainment
(formerly Fox Video), a subsidiary of Twentieth
Century Fox Film Corporation, Paramount Home Video,
Inc., and Buena Vista Pictures Distribution, Inc., a
subsidiary of The Walt Disney Company. The Company's
arrangements with Program Suppliers are of varying
duration, scope and formality. In some cases, the
Company has obtained Cassettes pursuant to contracts
or arrangements with Program Suppliers on a title-by-
title basis and in other cases the contracts or
arrangements provide that all titles released for
distribution by such Program Supplier will be provided
to the Company for the PPT System. Many of the
Company's agreements with Program Suppliers, including
all major Program Suppliers, may be terminated upon
relatively short notice. Therefore, there can be no
assurance that any of the Program Suppliers will
continue to distribute Cassettes through the PPT
System, continue to have available for distribution
titles which the Company can distribute on a
profitable basis, or continue to remain in business.
Even if titles are otherwise available from Program
Suppliers to the Company, there can be no assurance
that they will be made available on terms acceptable
to the Company. During the last three years, the
Company has not experienced any material difficulty
acquiring suitable Cassettes for the Company's markets
on acceptable terms and conditions from Program
Suppliers that have agreed to provide the same to the
Company. The Company has one Program Supplier that
supplied product that generated 28 percent, a second
that generated 26 percent, and a third that generated
15 percent of Rentrak revenues for the year ended
March 31, 1999. There were no other Program Suppliers
who provided product that generated more than 10
percent of revenues for the year ended March 31, 1999.
The Company currently receives a significant
amount of product from one program supplier. Although
management does not believe that this relationship
will be terminated in the near term, a loss of this
supplier could have an adverse affect on operating
results.
Certain Program Suppliers have requested, and the
Company has provided, financial or performance
commitments from the Company, including advances,
warrants, letters of credit or guarantees, as a
condition of obtaining certain titles. The Company
has provided such commitments primarily to induce
Program Suppliers to begin participating in the PPT
System and to demonstrate its financial benefits. The
Company determines whether to provide such commitments
on a case-by-case basis, depending upon the Program
Supplier's success with such titles prior to home
video distribution and the Company's assessment of
expected success in home rental distribution. The
Company intends to continue this practice of providing
such commitments and there can be no assurance that
this practice will not in the future result in losses
which may be material.
One customer, Blockbuster Entertainment Corp.,
("Blockbuster") accounted for 13 percent of the
Company's revenues in fiscal 1999.
Distribution of Cassettes
The Company's proprietary Rentrak Profit Maker
Software (the "RPM Software") allows Participating
Retailers to order Cassettes through their Point of
Sale ("POS") system software and provides the
Participating Retailers with substantial information
regarding all offered titles. Ordering occurs via a
networked computer interface. To further assist the
Participating Retailers in ordering, the Company also
produces a monthly product catalogue called "Ontrak."
To be competitive, Retailers must be able to rent
their Cassettes on the "street date" announced by the
Program Supplier for the title. The Company
distributes its Cassettes via overnight air courier to
assure delivery to Participating Retailers on the
street date. The freight costs of such distribution
comprise a portion of the Company's cost of sales.
Computer Operations
To participate in the Company's PPT System,
Retailers must install Rentrak approved computer
software and hardware to process all of their rental
and sale transactions. Participating Retailers are
required to use one of the POS software vendors
approved by the Company as conforming to the Company's
specifications. The Company's RPM Software resides on
the Retailer's POS computer system and transmits a
record of PPT transactions to the Company over a
telecommunications network. The RPM Software also
assists the Retailer in ordering newly released titles
and in managing the inventory of Cassettes.
The Company's computer processes these
transactions and prepares reports for Program
Suppliers and Retailers. In addition, it determines
variations from statistical norms for potential audit
action. The Company's computer also transmits
information on new titles and confirms orders made to
the RPM Software at the Retailer location.
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 in March 1997, and began
implementing remedial measures soon thereafter. The
Company conducted extensive tests of all software and
hardware systems used internally in the Company's business
to determine whether they were Year 2000 compliant. The
Company's internal assessment, testing, and remediation is
essentially completed. Some testing will continue until
December 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
evaluate and test the software of its POS vendors. The
Company has determined that the majority of the POS
vendors already have a Year 2000 compliant software. The
Company is currently testing the software and hardware of
its Retailers to determine which are in fact Year 2000
compliant. The Company does not expect the cost of its
assessments, corrective measures, and testing to be
material. 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 $ 500,000 of which approximately $250,000 has already
been incurred. The majority of the costs estimated to be
incurred between March 31, 1999 and December 31, 1999
relate to the Company's contingency plans to ensure
Retailers become Year 2000 compliant.
Retailer Auditing
From time to time, the Company audits
Participating Retailers in order to verify that they
are reporting all rentals and sales of Cassettes on a
consistent, accurate and timely basis. Several
different types of exception reports are produced
weekly. These reports are designed to identify any
Participating Retailers that vary from the Company's
statistical norms. Depending upon the results of the
Company's analysis of the reports, the Company may
conduct an in-store audit. Audits are conducted with
and without notice and any refusal to allow such an
audit can be cause for immediate termination from the
PPT System. If audit violations are found, the
Participating Retailer is subject to fines, audit
fees, immediate removal from the PPT System and/or
repossession of all leased Cassettes.
Seasonality
The Company believes that the home video industry
is seasonal because Program Suppliers tend to
introduce hit titles at two periods of the year, early
summer and Christmas. Since the release to home video
usually follows the theatrical release by
approximately six months (although significant
variations do occur on certain titles), the seasonal
peaks for home video also generally occur in early
summer and at Christmas. The Company believes its
volume of rental transactions reflects, in part, this
seasonal pattern, although the growth of Program
Suppliers, titles available to the Company, and
Participating Retailers may tend to obscure any
seasonal effect. The Company believes such seasonal
variations may be reflected in future quarterly
patterns of its revenues and earnings.
Retailer Financing Program
The Company has established a Retailer Financing
Program whereby, on a selective basis, the Company
will provide financing to Participating Retailers that
the Company believes have the potential for
substantial growth in the industry. In connection
with these financings, the Company typically makes a
loan and/or equity investment in the Participating
Retailer. In some cases, a warrant to purchase stock
may be obtained. As part of such financing, the
Participating 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 (usually 5 - 20 years). Under these
agreements, Retailers are typically required to obtain
all of their requirements of Cassettes offered under
the PPT System or obtain a minimum amount of Cassettes
based on a percentage of the Participating 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 speculative in nature and involve a
high degree of risk and no assurance of a satisfactory
return on investment can be given. The Board of
Directors has authorized the Company to make loans and
or investments such that the total amount of
outstanding loans and investments is $18,000,000 or
less.
As of March 31, 1999, the Company had
approximately $14,000,000 in loans and investments
outstanding under the program and reserves of
approximately $9,600,000 of the total original loan or
investment amount. As of March 31, 1998, the Company
had invested or loaned approximately $14,200,000 under
the Retailer Financing Program and had provided
reserves of approximately $9,400,000.
Competition
The Cassette distribution business is a highly
competitive industry that is rapidly changing. The
traditional, and still dominant, method of distributing
Cassettes to Retailers is through purchase transactions;
i.e., a Retailer purchases Cassettes from a distributor
and then offers the Cassettes for rental or sale to the
general public. As described in greater detail above (see
"Pay-Per-Transaction"), the Company's PPT System offers
Retailers an alternative method of obtaining Cassettes.
Accordingly, the Company has long faced intense
competition from all of the traditional distributors,
including Ingram Entertainment, Inc., Major Video
Concepts, Inc., Baker and Taylor, Inc., and Video One
Canada, Ltd. These and other traditional distributors
have extensive distribution networks, long-standing
relationships with Program Suppliers and Retailers, and,
in some cases, significantly greater financial resources
than the Company.
In the last two years there have been indications of
a greater acceptance of revenue sharing in the industry as
certain traditional distributors have taken steps to offer
Cassettes to Retailers on a revenue sharing basis. For
example, several traditional distributors have executed
licensing agreements with Supercomm, Inc. ("Supercomm"), a
wholly-owned subsidiary of The Walt Disney Company, to
market product on revenue sharing terms while utilizing
Supercomm's revenue sharing system. Several traditional
distributors have also executed revenue sharing agreements
with motion picture studios ("Studios"). Several
traditional distributors have also entered into licensing
agreements with the Company to distribute Cassettes to
Retailers utilizing the PPT System.
The Company also competes with Supercomm, which
distributes Cassettes through a revenue sharing system
similar in concept to the Company's PPT System.
Historically, the competition between Supercomm and the
Company had centered on the distribution of Cassettes to
supermarkets and similar retail businesses. However,
Supercomm exited the direct supermarket business in 1998
and now competes with the Company on only two levels: (1)
domestically - for processing data for certain Studios'
direct relationships with Blockbuster and other Retailers;
and (2) internationally in certain markets.
The Company also faces direct competition from the
Studios. Beginning in 1997, several major Studios offered
retailers discounted pricing if such retailers
substantially increased the quantity of cassettes
purchased. Also, some major Studios have offered
Cassettes to Retailers on a lease basis. In addition, all
major Studios sell Cassettes directly to major Retailers
including Blockbuster, the world's largest chain of home
video specialty stores. The Company believes all of the
major Studios have executed direct revenue sharing
agreements with Blockbuster and Hollywood, the world's
second largest chain of home video specialty stores. The
Company also believes that certain Studios have executed
direct revenue sharing agreements with several other large
Retailers. It is not yet clear whether the Studios will
execute direct revenue sharing agreements with other
smaller Retailers.
The Studios also compete with the Company by
releasing certain Cassette titles on a "sell-through"
basis; i.e., they bypass the traditional rental period by
selling the Cassettes directly to consumers at a price of
approximately $14.95 to $29.95. To date, such "sell-
through" distribution has generally been limited to
certain newly released hit titles with wide general family
appeal. However, because the Company's business is
partially dependent upon the existence of a rental period,
a shift toward such "sell-through" distribution,
particularly with respect to popular titles, could have a
material adverse effect on the Company's business.
The Company also competes with businesses that use
alternative distribution methods to provide video
entertainment directly to consumers, such as the
following: (1) direct broadcast satellite transmission
systems; (2) traditional cable television systems; (3) pay-
per-view cable television systems; and (4) delivery of
programming via the Internet. Each of these distribution
methods employs digital compression techniques to increase
the number of channels available to consumers and,
therefore, the number of movies that may be transmitted.
Technological improvements in this distribution method,
particularly "video-on-demand," may make this option more
attractive to consumers and thereby materially diminish
the demand for Cassette rentals. Such a consequence could
have a material adverse effect on the Company's business.
Foreign Operations
On December 20, 1989, the Company entered into an
agreement with Culture Convenience Club, Co., Ltd.
("CCC"), a Japanese corporation, which is Japan's
largest video specialty retailer. CCC believes it
represents over ten (10%) percent of the retail video
rental market in Japan. Pursuant to the agreement,
the parties formed Rentrak Japan, a corporation, which
is presently owned 10 percent by the Company and 90
percent by CCC's largest shareholder, Tsutaya Shoten
Co., Ltd. Rentrak Japan was formed to implement the
Company's PPT Program in Japan, with future expansion
to The Philippines, Singapore, Taiwan, Hong Kong,
South Korea, North Korea, China, Thailand, Indonesia,
Malaysia and Vietnam. The Company provided its PPT
technology and the use of certain trademarks and
service marks to Rentrak Japan, and CCC provided
management personnel, operating capital, and
adaptation of the PPT technology to meet Japanese
requirements. On August 6, 1992, the Company entered
into an expanded definitive agreement with CCC to
develop Rentrak's PPT Program in certain markets
throughout the world.
Prior to June 16, 1994 the Company owned a thirty
three and one-third percent interest in Rentrak Japan.
On June 16, 1994, the Company and CCC entered into an
amendment to the definitive agreement (the
"agreement"). Pursuant to this agreement, the Company
will receive a royalty of 1.67% for all sales of up to
$47,905,000 plus one-half of one percent of sales
greater than $47,905,000 in each royalty year which is
June 1 - May 31. The amendment provides for payment
to the Company of a royalty of $2,000,000. The
Company received and recorded as revenue $1,000,000 in
fiscal year 1995 and $1,000,000 was received and
recorded as revenue in fiscal year 1999. As part of
this transaction, the Company also sold to CCC 34
shares of Rentrak Japan reducing the Company's
ownership in Rentrak Japan to twenty-five percent from
thirty three and one-third percent. The term of the
agreement was extended from the year 2001 to the year
2039.
In August 1996, the Company sold 60 shares of
Rentrak Japan stock to Tsutaya Shoten Co., Ltd. for
$110,000. This reduced the Company's interest in
Rentrak Japan from 25 percent to 10 percent. In
addition, as part of this transaction, the Company
received a one-time royalty payment from Rentrak Japan
of $4,390,000 in August, 1996. This one-time royalty
payment is included in other revenue in the Company's
Consolidated Financial Statements.
In February 1998, the Company entered into a
Shareholders Agreement and a PPT License Agreement
with Columbus Holdings Limited, and Rentrak UK Limited
(Rentrak UK) to develop the Company's PPT distribution
and information processing business in the United
Kingdom through Rentrak UK. Rentrak UK was originally
structured as a joint venture between the Company,
which owned 25 percent, Columbus Holdings Limited,
which owned 66.7 percent of the venture and Rentrak
Japan, which owns 8.3 percent. On March 31, 1999, the
Company acquired Columbus Holdings Limited's 67
percent interest, and now owns 92 percent of Rentrak
UK. The PPT Agreement remains in force in perpetuity,
unless terminated due to material breach of contract,
liquidation of Rentrak UK or non-delivery by the
Company to Rentrak UK, of all retailer and studio
software, including all updates. Pursuant to the PPT
Agreement, during the term of the PPT Agreement, the
Company will receive a royalty of 1.67 percent of
Rentrak UK's gross revenues from any and all sources.
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 Your 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 many of its
trademarks. The Company claims a copyright in its RPM
Software and considers it to be proprietary.
Employees
As of March 31, 1999, including all subsidiaries,
the Company employs 275 full-time employees. The
Company considers its relations with its employees to
be good.
VIDEO RETAIL
On November 26, 1996, the Company made a
distribution to its shareholders of 1,457,343 shares
of common stock (the "BlowOut Common Stock") of
BlowOut Entertainment, Inc. ("BlowOut") pursuant to a
Reorganization and Distribution Agreement
("Distribution Agreement") dated as of November 11,
1996, between the Company and BlowOut. Following the
distribution the Company continues to own 9.9 percent
of the outstanding BlowOut Common Stock. BlowOut filed
for Chapter 11 of the Federal Bankruptcy Code in the
United States Bankruptcy Court for the District of
Delaware on March 22, 1999. [See Note 13 of the Notes
to the Consolidated Financial Statements.] BlowOut is
not related to the Company's wholly owned subsidiary
Blowout Video, Inc.
Financial Information About Industry Segments
See Note 12 of the Notes to the Consolidated
Financial Statements.
ITEM 2. PROPERTIES
The Company currently maintains its executive
offices in Portland, Oregon where it leases 53,566
square feet of office space. The lease began on
January 1, 1997 and expires on December 31, 2006. The
Company maintains its distribution facilities in
Wilmington, Ohio where it leases 102,400 square feet.
The Company's lease expires on June 30, 2002.
Management believes its office and warehouse space is
adequate and suitable for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
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 failed 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. Plaintiff alleges breach of contract,
fraud, misrepresentation, and violations of the
Racketeer Influenced and Corrupt Organizations Act of
1970 ("RICO"), and also asserts claims based on a
promissory estoppel theory. 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 RICO Act, 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. Discovery is now
proceeding with respect to the remaining claims. The
Company believes that all of the Plaintiff's remaining
claims are without merit and intends to continue to
vigorously defend itself and its officers against the
remaining claims.
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, 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 is
seeking 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 adds 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 not
seeking damages of not less than $220 million, plus
attorney fees and costs. 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 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 December 31, 1999 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.
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 (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.
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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY
HOLDERS
No matter was submitted to a vote of security
holders of the Company through the solicitation of
proxies or otherwise during the fourth quarter of the
fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $.001 par value, is
traded on the Nasdaq National Market, where its prices
are quoted under the symbol "RENT". As of June 1,
1999 there were approximately 350 holders of record of
the Company's common stock. On June 1, 1999, the
closing sales price of the Company's common stock as
quoted on the Nasdaq National Market was $3.688.
The following table sets forth the reported high
and low sales prices of the Company's common stock for
the period indicated as regularly quoted on the Nasdaq
National Market. The over-the-counter market
quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not
necessarily represent actual transactions.
QUARTER ENDED HIGH LOW
JUNE 30, 1997 $4.31 $2.44
SEPTEMBER 30, 1997 $4.75 $3.56
DECEMBER 31, 1997 $5.94 $3.28
MARCH 31, 1998 $10.38 $4.25
JUNE 30, 1998 $10.06 $5.59
SEPTEMBER 30, 1998 $6.31 $3.28
DECEMBER 31, 1998 $3.94 $2.00
MARCH 31, 1999 $4.22 $2.50
DIVIDENDS:
Holders of the Company's common stock are entitled
to receive dividends if, as, and when declared by the
Board of Directors out of funds legally available
therefor, subject to the dividend and liquidation
rights of any preferred stock that may be issued and
subject to the dividend restrictions in the Company's
bank credit agreement described in Note 5 of the Notes
to the Consolidated Financial Statements.
No cash dividends have been paid or declared during the
last five fiscal years. The present policy of the Board of
Directors is to retain earnings to provide funds for operation
and expansion of the Company's business. The Company's bank
credit agreement limits the payment of dividends in the
Company's stock. The Company does not intend to pay cash
dividends in the foreseeable future.
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts)
Year Ended March 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Net revenues:
Application fees $ 371 $ 383 $ 354 $ 551 $ 1,114
Order processing fees 22,420 25,313 22,720 25,716 18,052
Transaction fees 72,835 78,671 70,467 70,187 49,904
Sell-through fees 11,347 9,383 11,101 10,601 8,923
Other 16,814 9,001 11,634 6,211 6,555
Total net revenues 123,787 122,751 116,276 113,266 84,548
Cost of sales 101,522 100,974 90,882 95,168 66,375
Gross profit 22,265 21,777 25,394 18,098 18,173
Selling and administrative expense 19,515 14,572 16,160 20,860 15,527
Other income 597 652 999 681 3,522
Income (loss) from continuing operations before
discontinued operations and benefit (provision)
for income taxes 3,347 7,857 10,233 (2,081) 6,168
Income tax benefit (provision) (1,304) (3,199) (3,950) 595 (768)
Income (loss) from continuing operations before
discontinued operations 2,043 4,658 6,283 (1,486) 5,400
Discontinued Operations: (1)
Loss from operations of discontinued subsidiaries
less applicable income tax benefit 0 0 0 (18,700) (287)
Loss on disposal of subsidiaries 0 0 0 (12,100) 0
Net income (loss) $ 2,043 $ 4,658 $ 6,283 $ (32,286) $ 5,113
Diluted income (loss) per share
Continuing operations $ 0.18 $ 0.41 $ 0.52 $ (0.13) $ 0.47
Discontinued operations 0.00 0.00 0.00 (2.62) (0.03)
Net income (loss) $ 0.18 $ 0.41 $ 0.52 $ (2.75) $ 0.44
Common shares and common share equivalents
outstanding 11,066 11,445 12,159 11,755 11,548
1999 1998 1997 1996 1995
Balance Sheet Data (2)
Working Capital $ 4,586 $ 1,062 $ 1,488 $ (12,579) $ 12,897
Total Assets 49,457 51,609 43,048 56,252 64,818
Long-term Debt 0 0 0 0 0
Stockholders' Equity 14,292 13,254 11,272 14,404 40,292
(1) Discontinued Operations includes the operations of Pro Image
and BlowOut. Acquisitions were made by Pro Image and BlowOut
during 1995 and 1996, therefore comparisons between years are not
meaningful. See discontinued operations Note 13 of the Notes to the
Consolidated Financial Statements.
(2) The 1995 balance sheet has not been restated for discontinued
operations.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
Certain Information included in the Annual Report on
Form 10-K (including 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. Forward looking statements may 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 PPT System successfully, the
financial stability of the Participating Retailers and
their performance of their obligations under the PPT
System, 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,
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 Cassettes from Program
Suppliers. This Annual Report on Form 10-K further
describes certain of these factors.
Results of Operations
<TABLE>
<CAPTION>
RENTRAK CORPORATION
STATEMENTS OF OPERATIONS
For The Years Ended March 31, 1999, 1998 and 1997
1999 1998 1997
<S> <C> <C> <C>
REVENUES $ 123,787,390 $ 122,751,046 $ 116,275,503
OPERATING COSTS AND EXPENSES
Cost of sales 101,522,360 100,974,140 90,881,674
Selling and administrative 19,515,633 14,571,789 16,159,729
121,037,993 115,545,929 107,041,403
INCOME FROM OPERATIONS 2,749,397 7,205,117 9,234,100
Other income 597,108 652,381 999,068
INCOME BEFORE INCOME TAX PROVISION 3,346,505 7,857,498 10,233,168
Income tax provision (1,303,999) (3,199,032) (3,950,003)
NET INCOME $ 2,042,506 $ 4,658,466 $ 6,283,165
</TABLE>
Fiscal 1999 Compared to Fiscal 1998
Continuing Operations - Domestic PPT Operations and
Other Continuing Subsidiaries
For the year ended March 31, 1999, total revenue
increased $1.0 million to $123.8 million from $122.8
million in the prior year. 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 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; revenue related to the Company's fulfillment,
order processing, and inventory management services to
e-commerce and other companies, and sale of
videocassettes.
The increase in total revenue was primarily due to
the growth in the Company's fulfillment and order
processing services business. This growth in revenues
was partially offset by the decrease in revenues in
the core videocassette distribution business ("PPT
revenue"). The decrease in PPT revenue resulted
primarily from the following: (i) a reduction in 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; (ii)
an increase in incentives offered by the Company to
entice retailers to order more product; (iii) an
increase in various "copy depth" programs offered by
studios intended to increase the number of Cassettes
in distribution (so-called "copy depth" programs)
that lowered the cost of rental videocassettes to
video retailers; (iv) an increase in studio direct
revenue-sharing arrangements with the larger video
store chains; and (v) the loss of some customers due
to continuing industry consolidation.
In fiscal 1999, application-fee revenue remained
unchanged from the prior year at $0.4 million. During
the year, order processing-fee revenue decreased to
$22.4 million from $25.3 million in fiscal 1998, a
decrease of $2.9 million, or 11.5 percent.
Transaction-fee revenue totaled $72.8 million, a
decrease of $5.9 million, or 7.5 percent, from $78.7
million the previous year. Sell-through revenue was
$11.3 million in fiscal 1999 as compared to $9.4
million in fiscal 1998, an increase of $1.9 million,
or 20 percent.
Royalty revenue from Rentrak Japan increased to
$2.2 million during fiscal 1999 from $1.1 million the
previous year. This increase was due to a royalty
payment from Rentrak Japan of $1.0 million in January
1999.
Cost of sales in fiscal 1999 increased to $101.5
million from $101 million the prior year, an increase
of $0.5 million. The change is primarily due to the
changes in revenue noted above and additional costs
which were recorded during the year related to
guaranteed minimum payments due to program suppliers
on certain movie titles. In fiscal 1999, the
Company's gross profit margin decreased to 17 percent
from 18 percent the previous year, excluding the $1.0
million royalty payment from Rentrak Japan.
Selling, general and administrative expenses were
$19.5 million in fiscal 1999 compared to $14.6 million
in fiscal 1998. This increase of $4.9 million, or 34
percent, was primarily due to (i) increased legal
expenses to $1.9 million compared to $.7 million in
the prior year; (ii) increased compensation costs
associated with the growing fulfillment and order
processing business; and (iii) increased advertising
expenditures. Also, fiscal 1998 included collection
of amounts which were previously reserved at March 31,
1997.
Other income decreased from $.7 million in fiscal
1998 to $0.6 million for fiscal 1999, a decrease of
$0.1 million.
For the year ended March 31, 1999, the Company
recorded pre-tax income of $3.3 million, or 2.7
percent of total revenue, compared to $7.9 million, or
6.4 percent of total revenue in the prior fiscal year.
This decrease is due primarily to the increase in
selling, general and administrative expenses as noted
above.
The Cassette distribution business is a highly
competitive industry that is rapidly changing. The
effect of these changes could have a material impact
on the Company's operations. Item 1 (Business)
Competition section of this Annual Report on Form 10-K
further describes certain of these factors.
Included in the amounts above are the results from
Other Subsidiaries which are primarily comprised of
certain retail operations. Total revenue from Other
Subsidiaries increased to $8.5 million in fiscal 1999
from $6.5 million in fiscal 1998, an increase of $2
million, or 30 percent. Cost of sales was $5.2
million, an increase of $1.9 million over the $3.3
million recorded in fiscal 1998. Selling, general and
administrative expenses increased to $2.4 million in
fiscal 1999 from $1.9 million in fiscal 1998, an
increase of $0.5 million. As a percentage of total
revenue, selling, general and administrative expenses
decreased to 28 percent at year-end from 29 percent a
year earlier.
For the year ended March 31, 1999, Other
Subsidiaries recorded pre-tax income of $0.8 million,
or 9 percent of total revenue. This compares with pre-
tax income of $0.7 million, or 10 percent of total
revenue, in fiscal 1998.
Consolidated Balance Sheet
At March 31, 1999, total assets were $49.5 million,
a decrease of $2.1 million from the $51.6 million a
year earlier. A substantial portion of the decrease
resulted from the Company's use of cash to repurchase
the Company's Common Stock, as noted below, and to
reduce accounts payable.
Net current liabilities relating to BlowOut at
March 31, 1999 and 1998 of approximately $3.7 million
and $4.6 million, respectively represent amounts
reserved for contingencies not yet settled as of March
31, 1999.
Fiscal 1998 Compared to Fiscal 1997
Continuing Operations - Domestic PPT Operations and
Other Continuing Subsidiaries
For the year ended March 31, 1998, total revenue
increased $6.5 million, or 6 percent, rising to $122.8
million from $116.3 million in the prior year. Total
revenue includes the following fees: application fees
generated when retailers are approved for
participation in the PPT System; order processing 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
videocassettes.
The increase in total revenue and the changes
described in the following paragraphs were primarily
due to the growth in (i) the number of retailers
approved to lease Cassettes under the PPT System from
the Company ; (ii) the number of titles released to
the PPT System and (iii) the total number of Cassettes
shipped under the PPT System.
In fiscal 1998, application-fee revenue remained
unchanged from the prior year at $0.4 million. During
the year, order processing-fee revenue increased to
$25.3 million from $22.7 million in fiscal 1997, an
increase of $2.6 million, or 11 percent. Transaction-
fee revenue totaled $78.7 million, an increase of $8.2
million, or 12 percent, from $70.5 million the
previous year. Sell-through revenue was $9.4 million
in fiscal 1998 as compared to $11.1 million in fiscal
1997, a decrease of $1.7 million, or 15 percent.
Royalty revenue from Rentrak Japan decreased to
$1.1 million during fiscal 1998 from $5.5 million the
previous year. This decrease was due to a one-time
royalty payment from Rentrak Japan of $4.4 million in
August 1996.
Cost of sales in fiscal 1998 increased to $101
million from $90.9 million the prior year, an increase
of $10.1 million, or 11 percent. The increase is
primarily due to the increase in revenue noted above.
In fiscal 1998, the gross profit margin decreased to
18 percent from 19 percent the previous year,
excluding the one-time royalty payment from Rentrak
Japan. The gross profit margin in fiscal 1997,
including the one-time royalty payment from Rentrak
Japan, was 22 percent.
Selling, general and administrative expenses were
$14.6 million in fiscal 1998 compared to $16.2 million
in fiscal 1997. This decrease of $1.6 million, or 10
percent, was primarily due to collection of amounts in
1998 which were previously reserved at March 31, 1997.
As a percentage of total revenue, selling, general and
administrative expenses was 12 percent in fiscal 1998
as compared to 14 percent the previous year.
Other income decreased from $1.0 million in fiscal
1997 to $0.7 million for fiscal 1998, a decrease of
$0.3 million.
For the year ended March 31, 1998, the Company
recorded pre-tax income of $7.9 million, or 6 percent
of total revenue, compared to $5.7 million, or 5
percent of total revenue excluding the one-time
royalty from Rentrak Japan in fiscal 1997. This
increase is due to the increase in margin dollars due
to increased revenue and the decrease in selling,
general and administrative expenses as noted above.
Pre tax income, including the one-time royalty payment
from Rentrak Japan, was $10.2 million or 9 percent of
total revenue in 1997.
Included in the amounts above are the results from
Other Subsidiaries which are primarily comprised of
certain retail operations. Total revenue from Other
Subsidiaries increased to $6.5 million in fiscal 1998
from $5.0 million in fiscal 1997, an increase of $1.5
million, or 30 percent. Cost of sales was $3.3
million, an increase of $0.2 million over the $3.1
million recorded in fiscal 1997. Selling, general and
administrative expenses increased to $1.9 million in
fiscal 1998 from $1.8 million in fiscal 1997, an
increase of $0.1 million. As a percentage of total
revenue, selling, general and administrative expenses
decreased to 29 percent at year-end from 36 percent a
year earlier.
For the year ended March 31, 1998, Other
Subsidiaries recorded pre-tax income of $0.7 million,
or 10 percent of total revenue. This compares with
pre-tax income of $0.2 million, or 3 percent of total
revenue, in fiscal 1997.
Consolidated Balance Sheet
At March 31, 1998, total assets were $51.6 million,
an increase of $8.6 million from the $43.0 million of
a year earlier. A substantial portion of the increase
was due to the $7.9 million increase in accounts
receivable. This increase is primarily due to the
increase in the number of retailers participating on
the PPT System.
Net current liabilities relating to BlowOut at
March 31, 1998 and 1997 of approximately $4.6 million
and $4.4 million, respectively represent amounts
reserved for contingencies not yet settled as of March
31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had cash and other
liquid investments of $2.1 million, compared to $6.4
million at March 31, 1998. At year-end, the Company's
current ratio (current assets/current liabilities) was
1.13 compared to 1.03 a year earlier.
The Company has an agreement for a line of credit
with a financial institution in an amount not to
exceed the lesser of $12.5 million or 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 (7.75 percent
at March 31, 1999). 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. The Company is
in compliance with these covenants or has obtained
waivers for noncompliance as of March 31, 1999. At
March 31, 1999, the Company had $7.9 million
outstanding borrowings under this agreement.
The Company has established a retailer financing
program whereby the Company will provide, on a
selective basis, financing to video retailers that 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 all of
their requirements of Cassettes 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 speculative in nature and involve a
high degree of risk, and no assurance of a
satisfactory return on investment can be given.
The Board of Directors has authorized up to $18
million to be used in connection with the Company's
retailer financing program. The investments
individually range from $35,000 to $4.5 million.
Included in the total $14.0 million investment balance
at March 31, 1999, are gross notes receivable of $9.1
million which are due as follows: $0.5 million -
1999; $3.2 million - 2000; $2.6 million - 2001; $2.3
million - 2005; and $0.5 million - 2008. Interest
rates on the various loans range from 5 to 10 percent
per annum. 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. The amounts the Company
could ultimately receive could differ materially in
the near term from the amounts assumed in establishing
reserves.
As of March 31, 1999, the Company has invested or
loaned approximately $14.0 million under the program
and has reserves of approximately $9.6 million.
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"). 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"). The
obligations under this Guarantee were comprised of the
following:
a. BlowOut had a revolving line of credit ("Line of Credit")
in a maximum principal amount at one time outstanding of $5
million. The outstanding balance of approximately $2.1 million
was paid in full at the closing. Therefore, the Company's
obligation under the line of credit guarantee was discharged.
b. BlowOut also 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 satisfied, in its sole discretion, that
BlowOut's financial condition is sufficient to justify the
release of the Guarantee. As of March 31, 1999, BlowOut had
borrowed approximately $1.2 million under the Credit Facility.
As 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 the
obligation. The payment plan consists of a $300,000 payment in
May 1999, and monthly payments of approximately $36,000. 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.
In fiscal 1997, BlowOut executed a $3.0 million note in
favor of the Company which accrues interest at 9% per
annum. The Company has 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 its guarantees. At March 31, 1999, the
total outstanding balance of the debt under such note,
including accrued interest, was $2.8 million. This amount
was fully reserved at March 31, 1999.
On November 26, 1996, the Board authorized the re-
purchase of up to two million shares of the Company's
Common Stock in open market and negotiated purchases.
The Company completed the purchase of the two million
shares during the fiscal year ended March 31, 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 resources. These sources are
expected to be sufficient to fund the Company's
operations for the year ending March 31, 2000.
RECENT ACCOUNTING 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.
In June 1998, the FASB issued Statement of
Financial Accounting Standard No. 133 "Accounting for
Derivative Instruments and Hedging Activities" (SFAS
133). SFAS 133 is effective for the Company's fiscal
year beginning April 1, 2001. (See Note 1 of the
Notes to the Consolidated Financial Statements.)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company considered the provision of Financial
Reporting Release No. 48 "Disclosure of Accounting
Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of
Quantitative and Qualitative Information about Market
Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity
Instruments." The Company had no holdings of
derivative financial or commodity instruments at March
31, 1999. A review of the Company's other financial
instruments and risk exposures at that date revealed
that the Company had exposure to interest rate risk.
The Company utilized sensitivity analyses to assess
the potential effect of this risk and concluded that
near-term changes in interest rates should not
materially adversely affect the Company's financial
position , results of operations or cash flows.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Item Page
Report of Independent Public 21
Accountants
Consolidated Balance Sheets as of March 31,1999 22
and 1998
Consolidated Statements of Income for Years 23
Ended March 31, 1999, 1998 and
1997
Consolidated Statements of Stockholders' Equity 24
for Years Ended March 31, 1999,
1998 and 1997
Consolidated Statements of Cash Flows for Years 25
Ended March 31, 1999, 1998 and
1997
Notes to Consolidated Financial Statements 27
Financial Statement Schedules 45
Schedule II
Schedules not included have been omitted
because they are not applicable or the
required information is shown in the
financial statements or notes thereto.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rentrak Corporation:
We have audited the accompanying consolidated balance sheets of
Rentrak Corporation and subsidiaries as of March 31, 1999 and 1998,
and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended
March 31, 1999. These consolidated financial statements and the
schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Rentrak
Corporation and subsidiaries as of March 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three
years in the period ended March 31, 1999 in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The schedule
listed in the index to financial statements is presented for purposes
of complying with the Securities and Exchange Commission's rules and
is not part of the basic consolidated financial statements. This
schedule has been subjected to the auditing procedures applied in our
audits of the consolidated financial statements and, in our opinion,
is fairly stated in all material respects in relation to the
consolidated financial statements taken as a whole.
Arthur Andersen LLP
Portland, Oregon,
May 21, 1999
<TABLE>
<CAPTION>
RENTRAK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND 1998
ASSETS
1999 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,145,963 $ 6,361,680
Accounts receivable, net of allowance for
doubtful accounts of $355,241 and
$586,641 23,906,398 24,395,143
Advances to program suppliers 2,840,262 431,975
Inventory 2,804,983 2,427,176
Income tax receivable 3,006,502 1,991,763
Deferred tax asset 1,579,637 1,217,950
Other current assets 3,467,473 2,590,574
------------ ------------
Total current assets 39,751,218 39,416,261
------------ ------------
PROPERTY AND EQUIPMENT, net 1,723,448 1,910,317
OTHER INVESTMENTS, net 2,014,701 887,884
DEFERRED TAX ASSET 2,497,762 4,087,292
OTHER ASSETS 3,469,660 5,306,943
------------ ------------
Total assets $ 49,456,789 $ 51,608,697
============ ============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $ 7,925,000 $ 6,000,000
Accounts payable 16,628,294 23,333,656
Accrued liabilities 2,822,574 2,532,832
Accrued compensation 941,836 1,072,848
Deferred revenue 100,415 829,863
Note payable 3,000,000 -
Net current liabilities of discontinued
operations 3,746,766 4,585,373
------------ ------------
Total current liabilities 35,164,885 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: 10,439,948 shares in
1999 and 10,986,455 shares in 1998 10,440 10,987
Capital in excess of par value 43,644,479 45,365,298
Cumulative other comprehensive income 137,747 54,645
Accumulated deficit (28,751,757) (30,794,263)
Less- Deferred charge - warrants (749,005) (1,382,542)
------------ ------------
Total stockholders' equity 14,291,904 13,254,125
------------ ------------
Total liabilities and
stockholders' equity $ 49,456,789 $ 51,608,697
============ ============
The accompanying notes are an integral part of these consolidated
balance sheets.
</TABLE>
<TABLE>
<CAPTION>
RENTRAK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
1999 1998 1997
<S> <C> <C> <C>
REVENUES:
PPT $106,406,342 $113,181,910 $105,787,973
Other 17,381,048 9,569,136 10,487,530
------------ ------------ ------------
123,787,390 122,751,046 116,275,503
------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of sales 101,522,360 100,974,140 90,881,674
Selling and
administrative 19,515,633 14,571,789 16,159,729
------------ ------------ ------------
121,037,993 115,545,929 107,041,403
------------ ------------ ------------
Income from operations 2,749,397 7,205,117 9,234,100
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 429,830 1,135,823 862,143
Interest expense (381,825) (158,708) (181,950)
Gain (loss) on sale of
investments 549,103 (94,062) 318,875
Other - (230,672) -
------------ ------------ ------------
597,108 652,381 999,068
------------ ------------ ------------
Income before income
tax provision 3,346,505 7,857,498 10,233,168
INCOME TAX PROVISION (1,303,999) (3,199,032) (3,950,003)
------------ ------------ ------------
Net income $ 2,042,506 $ 4,658,466 $ 6,283,165
============ ============ ============
EARNINGS PER COMMON SHARE:
Basic $.19 $.42 $.52
==== ==== ====
Diluted $.18 $.41 $.52
==== ==== ====
The accompanying notes are an integral part of
these consolidated statements.
</TABLE>
<TABLE>
<CAPTION>
RENTRAK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
Common Stock Cumulative
------------------- Capital in Other
Number of Excess of Comprehensive
Shares Amount Par Value Income
<S> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1996 12,138,216 $12,138 $49,583,514 $ 567,508
Repurchase of common stock (325,800) (326) (1,204,449) -
Issuance of common stock under employee stock
option plans 35,025 35 49,013 -
Net income - - - -
Change in unrealized gain (loss) on investment
securities, net of tax - - - (382,576)
Total comprehensive income
Distribution of common stock in BlowOut - - - -
Amortization of warrants - - (496,913) -
---------- ------- ----------- ---------
BALANCE AT MARCH 31, 1997 11,847,441 11,847 47,931,165 184,932
Repurchase of common stock (1,082,900) (1,082) (4,124,329) -
Issuance of common stock under employee
stock option plans 221,914 222 888,007 -
Net income - - - -
Change in unrealized gain (loss) on investment
securities, net of tax - - - (130,287)
Total comprehensive income
Income tax benefit from stock option exercise - - 320,455 -
Retirements of warrants - - (250,000) -
Issuance of warrants - - 600,000 -
Amortization of warrants - - - -
---------- ------- ----------- ---------
Common Stock Cumulative
------------------- Capital in Other
Number of Excess of Comprehensive
Shares Amount Par Value Income
BALANCE AT MARCH 31, 1998 10,986,455 $10,987 $45,365,298 $ 54,645
Repurchase of common stock (592,484) (593) (1,964,622) -
Issuance of common stock under employee stock
option plans 45,977 46 118,375 -
Net income - - - -
Change in unrealized gain (loss) on investment
securities, net of tax - - - 83,102
Total comprehensive income
Income tax benefit from stock option exercise
- - 41,428 -
Issuance of warrants - - 84,000 -
Amortization of warrants - - - -
---------- ------- ----------- ---------
BALANCE AT MARCH 31, 1999 10,439,948 $10,440 $43,644,479 $ 137,747
========== ======= =========== =========
</TABLE>
<TABLE>
<CAPTION>
RENTRAK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
Deferred Compre-
Accumulated Charge hensive
Deficit Warrants Total Income
<S> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1996 $(33,366,162) $(2,392,574) $14,404,424
Repurchase of common stock - - (1,204,775)
Issuance of common stock under employee
stock option plans - - 49,048
Net income 6,283,165 - 6,283,165 $6,283,165
Change in unrealized gain (loss) on
investment securities, net of tax - - (382,576) (382,576)
----------
Total comprehensive income $5,900,589
Distribution of common stock in BlowOut (8,369,732) - (8,369,732) ==========
Amortization of warrants - 989,416 492,503
------------ ----------- -----------
BALANCE AT MARCH 31, 1997 (35,452,729) (1,403,158) 11,272,057
Repurchase of common stock - - (4,125,411)
Issuance of common stock under employee
stock option plans - - 888,229
Net income 4,658,466 - 4,658,466 $4,658,466
Change in unrealized gain (loss) on
investment securities, net of tax - - (130,287) (130,287)
----------
Total comprehensive income $4,528,179
==========
Deferred Compre-
Accumulated Charge hensive
Deficit Warrants Total Income
Income tax benefit from stock option
exercise $ - $ - $ 320,455
Retirements of warrants - - (250,000)
Issuance of warrants - (600,000) -
Amortization of warrants - 620,616 620,616
------------ ----------- -----------
BALANCE AT MARCH 31, 1998 (30,794,263) (1,382,542) 13,254,125
Repurchase of common stock - - (1,965,215)
Issuance of common stock under employee
stock option plans - - 118,421
Net income 2,042,506 - 2,042,506 $2,042,506
Change in unrealized gain (loss) on
investment securities, net of tax - - 83,102 83,102
----------
Total comprehensive income $2,125,608
Income tax benefit from stock option ==========
exercise - - 41,428
Issuance of warrants - (84,000) -
Amortization of warrants - 717,537 717,537
------------ ----------- -----------
BALANCE AT MARCH 31, 1999 $(28,751,757) $ (749,005) $14,291,904
============ =========== ===========
The accompanying notes are an integral part of these consolidated
statements.
</TABLE>
<TABLE>
<CAPTION>
RENTRAK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 2,042,506 $ 4,658,466 $ 6,283,165
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities-
(Gain) loss on asset
and investment sales (549,103) 94,062 (309,852)
Depreciation and
amortization 1,286,515 696,883 891,857
Amortization and write-
off of intangibles - - 272,433
Amortization of
warrants 717,537 620,616 492,503
Provision for doubtful
accounts (125,000) (300,000) 656,147
Retailer financing
program reserves 141,698 (518,450) (401,891)
Reserves on advances to
program suppliers 17,596 150,977 (147,451)
Deferred income taxes 1,176,909 1,277,239 161,331
Change in specific
accounts-
Accounts receivable 778,471 (9,139,446) (2,921,826)
Advances to program
suppliers (2,425,883) (658,014) 1,099,101
Inventory (377,807) (524,558) (164,923)
Income tax receivable (1,014,739) (802,511) (477,011)
Other current assets (537,802) (557,407) 4,585,968
Accounts payable (4,561,190) 6,173,164 (4,635,351)
Accrued liabilities and
compensation 158,730 (203,803) 1,495,462
Deferred revenue (729,448) (1,842,986) 667,984
Net current liabilities
of discontinued
operations (1,176,530) (47,741) 362,545
----------- ----------- -----------
Net cash provided by (used
in) operating activities (5,177,540) (923,509) 7,910,191
----------- ----------- -----------
(Continued)
</TABLE>
<TABLE>
<CAPTION>
RENTRAK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment $ (503,030) $ (508,398) $(1,454,391)
Investments in retailer
financing program (1,329,778) (550,000) (3,178,020)
Proceeds from retailer
financing program - 518,450 2,029,911
Purchases of investments (570,512) (1,076,299) -
Proceeds from sale of
investments 1,525,538 519,688 526,000
Reduction (additions) of
other assets and
intangibles (1,238,601) 701,761 495,667
Proceeds from sale of
assets - - 10,410
----------- ----------- -----------
Net cash used in investing
activities (2,116,383) (394,798) (1,570,423)
----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings on line of
credit 1,925,000 1,000,000 2,300,000
Borrowing on notes payable 3,000,000 - -
Retirement of warrants - (250,000) -
Repurchase of common stock (1,965,215) (4,125,411) (1,204,775)
Issuance of common stock 118,421 888,229 49,048
----------- ----------- -----------
Net cash provided by (used
in) financing activities 3,078,206 (2,487,182) 1,144,273
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (4,215,717) (3,805,489) 7,484,041
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 6,361,680 10,167,169 2,683,128
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 2,145,963 $ 6,361,680 $10,167,169
=========== =========== ===========
The accompanying notes are an integral part of
these consolidated statements.
</TABLE>
RENTRAK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
1. BUSINESS OF THE COMPANIES, SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES AND OTHER ITEMS:
Introduction
Rentrak Corporation (the Company) (an Oregon corporation) is principally
engaged in the processing of information regarding the rental and sale of
video cassettes and the distribution of prerecorded video cassettes to the
home video market throughout the United States and Canada using its Pay-
Per-Transaction (PPT) revenue sharing program.
Under its PPT program, the Company enters into contracts to lease video
cassettes from program suppliers (producers of motion pictures and
licensees and distributors of home video cassettes) to distribute video
cassettes which are then leased to retailers for a percentage of the
rentals charged by the retailers.
Rentrak Japan
In December 1989, the Company entered into a definitive agreement with
Culture Convenience Club Co., Ltd. (CCC) to develop the Company's PPT
distribution and information processing business in certain markets
throughout the world.
On June 16, 1994, the Company and CCC amended the agreement. Pursuant to
this amendment, the Company receives a royalty of 1.67% for all sales of
up to $47,905,000, plus one-half of one percent (0.5%) of sales greater
than $47,905,000 in each fiscal year. In addition, the Company received a
one-time royalty of $2 million, of which $1 million was paid in fiscal
1995 and $1 million was paid and recorded as revenue in fiscal 1999.
Rentrak Japan will receive additional territories to market PPT. In
addition, the Company sold 34 shares of Rentrak Japan to CCC for 6,800,000
Yen ($68,068), reducing the Company's ownership in Rentrak Japan from 33-
1/3% to 25%. The term of the Agreement was extended from the year 2001 to
the year 2039.
In August 1996, the Company sold 60 shares of Rentrak Japan stock to a
Japanese corporation for $110,000. This reduced the Company's interest in
Rentrak Japan from 25% to 10%. In addition, the Company received a one-
time royalty payment from Rentrak Japan of $4,390,000 in August 1996.
Rentrak UK Limited
In February 1998, the Company entered into a Shareholders Agreement and a
PPT License Agreement with Columbus Holdings Limited, and Rentrak UK
Limited (Rentrak UK) to develop the Company's PPT distribution and
information processing business in the United Kingdom through Rentrak UK.
The PPT Agreement remains in force in perpetuity, unless terminated due to
material breach of contract, liquidation of Rentrak UK or non-delivery, by
the Company to Rentrak UK, of all retailer and studio software, including
all updates. Pursuant to the PPT Agreement, during the term of the PPT
Agreement, the Company will receive a royalty of 1.67% of Rentrak UK's
gross revenues from any and all sources.
Rentrak UK was originally structured as a joint venture between the
Company, which owned 25%, Columbus Holdings Limited, which owned 67% of
the venture and Rentrak Japan, which owns 8%. On March 31, 1999, the
Company acquired Columbus Holdings Limited's 67% interest, and now owns
92% of Rentrak UK. The acquisition, which was not material to the
operations of the Company, was accounted for as a purchase.
Basis of Consolidation
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% are accounted for by the equity method.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates include, among others,
reserves on retailer financing program investments (Note 4) and estimated
losses on disposal of discontinued operations (Note 12). Actual results
could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less at acquisition to be cash equivalents.
Investment Securities
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115), requires
the Company to classify and account for its security investments as
trading securities, securities available for sale or securities held to
maturity depending on the Company's intent and ability to hold or trade
the securities at time of purchase. Securities available for sale are
stated on the balance sheet at their fair market value with an adjustment
to stockholders' equity to reflect net unrealized gains and losses, net of
tax. Securities held to maturity are stated at amortized cost.
Detail of the proceeds from the sales of available for sale securities and
realized gains and losses on sales of equity securities are as follows:
<TABLE>
<CAPTION>
Proceeds Gross Gains Gross Losses
<C> <C> <C> <C>
1999 $1,525,538 $843,749 $(294,646)
1998 519,688 24,375 (118,437)
1997 526,000 318,875 -
</TABLE>
When, in management's opinion, available for sales securities have
experienced an other than temporary decline, the amount of the decline in
value is charged to other income.
Unrealized losses of $230,672 were recorded in other income in the
March 31, 1998 statement of operations. There were no unrealized gains or
losses recognized in the March 31, 1999 and 1997 statements of operations.
Financial Instruments
A financial instrument is cash or a contract that imposes or conveys a
contractual obligation or right, to deliver or receive, cash or another
financial instrument. The estimated fair value of all material financial
instruments, including retail financing program notes receivable,
approximated their carrying values at March 31, 1999 and 1998.
Inventory
Inventory consists of videocassettes held for sale and is carried at the
lower of cost (first-in, first-out method) or market value.
Property and Equipment
Depreciation of property and equipment is computed on the straight-line
method over estimated useful lives of three to five years. Leasehold
improvements are amortized over the lives of the underlying leases or the
service lives of the improvements, whichever is shorter.
Intangibles
The Company reviews its intangible assets for asset impairment at the end
of each quarter, or more frequently when events or changes in
circumstances indicate that the carrying amount of intangibles may not be
recoverable. The Company estimates the sum of expected future
undiscounted preinterest expense net cash flows from operating activities.
If the estimated net cash flows are less than the carrying amount of
intangibles, the Company will recognize an impairment loss in an amount
necessary to write down intangibles to a fair value as determined from
expected discounted future cash flows.
Revenue Recognition
The PPT agreements generally provide for a one-time initial order
processing fee and continuing transaction fees based on a percentage of
rental revenues earned by the retailer upon renting the video cassettes to
their customers. The Company recognizes order-processing fees as revenue
when the video cassettes are shipped to the retailers and recognizes
transaction fees when the video cassettes are rented to the consumers.
When the Company's revenue is fixed and determinable at time of shipment
of video cassettes to the retailers, deferred revenue is recorded and
recognized as revenue in the statement of income when the video cassettes
are rented to the consumers. The corresponding liability to video program
suppliers for their share of the fees is recorded to cost of sales when
the revenue is recognized with a corresponding amount to accounts payable.
The Company also may charge retailers an application fee upon admission to
the PPT program. This fee is recognized as PPT revenue when the
application to participate in the PPT program is approved.
Stockholders and directors, or their families, own interests in several
stores participating in the PPT program. The Company realized revenues
from these stores of approximately $99,000, $323,000 and $254,000 during
1999, 1998 and 1997, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS 109). Under the liability method specified by SFAS 109, deferred
tax assets and liabilities are determined based on the temporary
differences between the financial statement basis and tax basis of assets
and liabilities as measured by the enacted tax rates for the years in
which the taxes are expected to be paid.
Earnings Per Share
Basic earnings per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
period. 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.
The weighted average number of shares of common stock and common stock
equivalents and net income used to compute basic and diluted earnings per
share at March 31 were calculated as follows:
<TABLE>
<CAPTION>
Fiscal Year 1999 Fiscal Year 1998 Fiscal Year 1997
--------------------- --------------------- -------------------
Basic Diluted Basic Diluted Basic Diluted
<S> <C> <C> <C> <C> <C> <C>
Weighted
average
number of
shares of
common stock
outstanding 10,775,126 10,775,126 11,222,443 11,222,443 12,076,031 12,076,031
Dilutive
effect of
exercise of
stock
options - 291,017 - 222,378 - 83,406
Weighted
average
number of
shares of
common stock
outstanding
and common
stock
equivalents 10,775,126 11,066,143 11,222,443 11,444,821 12,076,031 12,159,437
Net income $2,042,506 $2,042,506 $4,658,466 $4,658,466 $6,283,165 $6,283,165
Earnings per
share $0.19 $0.18 $0.42 $0.41 $0.52 $0.52
</TABLE>
Options and warrants to purchase approximately 3,700,000, 4,300,000 and
6,400,000 shares of common stock were outstanding during the years ended
March 31, 1999, 1998 and 1997, respectively, but were not included in the
computation of diluted EPS because the exercise price of the options and
warrants were greater than the average market price of the common shares.
Foreign Operations
Foreign currency assets and liabilities are translated into U.S. dollars
at the exchange rates in effect at the balance sheet date. Results of
operations are translated at average exchange rates during the period for
revenue and expenses. Translation gains and losses resulting from
fluctuations in the exchange rates are accumulated as a separate component
of stockholders' equity. Translation gains or losses were not material
for any period presented.
Advertising Expense
Advertising expense, net of advertising reimbursements, totaled $641,221,
$71,355 and $148,004 for the years ended March 31, 1999, 1998 and 1997,
respectively.
Statement of Cash Flows
The Company had the following transactions for the years ended March 31:
1999 1998 1997
CASH PAID FOR:
Interest $328,802 $ 153,398 $ 197,642
Income taxes, net of refunds 493,645 2,790,158 (156,284)
NONCASH FINANCING AND INVESTING
ACTIVITIES:
Decrease in equity as a result of
decrease in net noncurrent assets
of discontinued operations through
reduction in equity
- - 11,122,512
Increase in equity as a result of
decrease in net current liabilities
of discontinued operations through
increase in equity
- - (3,063,649)
Reclassification of notes receivable-
affiliate to other assets
- - 2,800,000
Reclassification of accounts
receivable to other assets and
other investments 269,775 1,478,869 -
Reduction of warrants - - 496,913
Issuance of warrants (84,000) (600,000) -
Tax benefit from stock option
exercises (41,428) (320,455) -
Change in unrealized gain (loss) on
investment securities, net of tax
83,102 (130,287) (382,576)
Impact of Recent Accounting 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 is not the result of transactions with
shareholders. Components of the Company's comprehensive income consist of
the change in unrealized gain (loss) on investment securities (net of
tax), net of the reclassification adjustment for gains (losses) included
in net income as follows:
1999 1998 1997
Holding gain arising during the
period, net of tax $291,761 $(166,031) $(261,403)
Less- Reclassification adjustment
for gains (losses) included in net
income, net of tax 208,659 (35,744) 121,173
-------- --------- ----------
Change in unrealized gain (loss) on
investment securities, net of tax $ 83,102 $(130,287) $(382,576)
======== ========= ==========
In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133 "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133). This statement establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value.
SFAS 133 also requires that changes in the derivative instrument's fair
value be recognized currently in results of operations unless specific
hedge accounting criteria are met. SFAS 133 is effective for the
Company's fiscal year beginning April 1, 2001. The Company expects that
adoption of SFAS 133 will not have a material impact on the Company's
financial condition or results of operations.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
2. INVESTMENT SECURITIES:
The carrying value and estimated fair value of marketable securities at
March 31 were as follows:
Carrying Unrealized Unrealized
Value Gross Gain Gross Loss Fair Value
As of March 31, 1999:
Available for sale-
Noncurrent:
Corporate
securities $ 35,108 $222,249 $ (77) $257,280
======== ======== ========= ========
As of March 31, 1998:
Available for sale-
Noncurrent:
Corporate
securities $412,687 $113,934 $(25,797) $500,824
======== ======== ========= ========
Investment securities which have limited marketability are classified as
noncurrent as management does not believe that they will be sold within
one year.
3. PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consists of:
March 31,
------------------------
1999 1998
Furniture and fixtures $ 5,861,824 $ 5,525,374
Machinery and equipment 213,412 145,334
Leasehold improvements 1,687,257 1,569,436
----------- -----------
7,762,493 7,240,144
Less- Accumulated depreciation (6,039,045) (5,329,827)
----------- -----------
$ 1,723,448 $ 1,910,317
=========== ===========
4. RETAILER FINANCING PROGRAM:
The Company has established a retailer financing program whereby on a
selective basis the Company will provide financing to video retailers that
the Company believes have the potential for substantial growth. In
connection with these financings, the Company typically makes a loan
and/or equity investment in the retailer. In some cases, a warrant to
purchase stock may be obtained. As part of such financings, 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. These
financings are speculative in nature and involve a high degree of risk and
no assurance of a satisfactory return on investment can be given.
The Board of Directors has authorized the Company to make retailer loans
and or investments such that the total amount of outstanding loans and
investments is $18,000,000 or less. As of March 31, 1999, the Company has
invested or made oral or written commitments to loan to or invest
approximately $14,000,000 in various video retailers. The amounts
outstanding under this program individually range from $35,000 to
$6,000,000. The investments are stated on the balance sheet at their fair
market value in accordance with SFAS 115. The notes, which have payment
terms that vary according to the individual loan agreements, are due from
2000 through 2007. Interest rates on the various loans range from 5% to
prime plus 2% (9.75 at March 31, 1999). Due to the nature of these loans,
interest income is not recognized until received.
The loans are reviewed for impairment in accordance with FASB Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" (SFAS 114). A valuation allowance has been
established for the amount by which the recorded investment in the loan
exceeds the measure of the impaired loan. As the financings are made, and
periodically throughout the terms of the agreements, the Company assesses
the recoverability of the amounts based on the financial position of each
retailer. The amounts the Company could ultimately receive could differ
materially in the near-term from the amounts assumed in establishing the
reserves.
As of March 31, 1999, the Company has approximately $14,000,000 in loans
and investments outstanding under the program and reserves of
approximately $9,600,000. At March 31, 1998, the Company had invested or
loaned approximately $14,200,000 under the program and had provided
reserves of approximately $9,400,000.
The activity in the total reserves for the retailer financing program are
as follows for the years ended March 31:
1999 1998
Beginning balance $9,353,995 $10,340,375
Additions to reserve 240,614 1,982,591
Write-offs - (2,450,521)
Recoveries (18,921) (518,450)
---------- -----------
Ending balance $9,575,688 $ 9,353,995
========== ===========
5. LINE OF CREDIT:
The Company has an agreement for a line of credit with a financial
institution in an amount not to exceed the lesser of $12,500,000 or the
sum of 80% 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 (7.75% at March 31,
1999). 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. The Company is in compliance with these covenants or has
obtained waivers for noncompliance as of March 31, 1999. At March 31,
1999 and 1998, the Company had $7,925,000 and $6,000,000, respectively,
outstanding under this agreement.
6. RELATED PARTY NOTE PAYABLE:
On January 29, 1998, the Company entered into a $3,000,000 unsecured note
payable with a director of the Company. The note bears interest at 10%,
payable monthly and is due in full on July 31, 1999.
7. INCOME TAXES:
The provision (benefit) for income taxes is as follows for the years ended
March 31:
1999 1998 1997
Current tax provision:
Federal $ - $1,689,658 $3,113,822
Foreign - 1,500,000 -
State - 232,133 633,637
---------- ---------- ----------
- 3,421,791 3,747,459
Deferred tax provision
(benefit) 1,303,999 (222,759) 202,544
---------- ---------- ----------
Income tax provision $1,303,999 $3,199,032 $3,950,003
========== ========== ==========
The reported provision for income taxes differs from the amount computed
by applying the statutory federal income tax rate of 34% to income before
provision for income taxes as follows for the years ended March 31:
1999 1998 1997
Provision computed at statutory
rates $1,137,812 $2,688,549 $3,479,277
State taxes, net of federal
benefit 133,860 117,464 418,200
Amortization of warrants 272,664 235,834 167,450
Other (240,337) 157,185 (114,924)
---------- ---------- ----------
$1,303,999 $3,199,032 $3,950,003
========== ========== ==========
Deferred tax assets and (liabilities) from continuing operations are
comprised of the following components at March 31, 1999 and 1998:
1999 1998
Deferred tax assets:
Current-
Allowance for doubtful accounts $ 78,113 $ 222,924
Retailer-related accruals 140,703 419,026
Foreign tax credit 713,497 500,000
Net operating loss carryforward 539,108 -
Capital loss carryforward 195,543 -
Other (87,327) 76,000
---------- ----------
Total current deferred tax assets 1,579,637 1,217,950
---------- ----------
Noncurrent-
Depreciation 433,691 431,385
Retailer financing program reserve 552,775 1,689,421
Program supplier reserves 442,761 714,056
Unrealized loss on investments 143,675 110,184
Foreign tax credit 1,000,000 1,000,000
Intangibles amortization (160,237) -
Other 85,097 142,246
---------- ----------
Total noncurrent deferred tax assets 2,497,762 4,087,292
---------- ----------
Total deferred tax assets $4,077,399 $5,305,242
========== ==========
8. STOCKHOLDERS' EQUITY:
Stock Options and Warrants
Effective March 31, 1997, the Company adopted the 1997 Non-Officer
Employee Stock Option Plan. The aggregate number of shares which may be
issued upon exercise of options under the plan shall not exceed 500,000.
In August 1997, the Company adopted the 1997 Equity Participation Plan.
The aggregate number of shares which may be issued upon exercise of
options under the plan shall not exceed 1,100,000. The plans are
administered by the Stock Option Committee of the Board who determines the
terms and conditions of options issued under the plans. Options granted
to date under the plans are exercisable over four to five years and expire
ten years after date of grant. As of March 31, 1999, the Company has
181,330 and 140,000 options available to be granted under the 1997 Non-
Officer Employee Stock Option Plan and 1997 Equity Participation Plan,
respectively.
The Company has elected to account for its stock-based compensation plans
in accordance with APB 25, under which no compensation expense has been
recognized. The Company has computed for pro forma disclosure purposes
the value of all options granted during fiscal years 1999, 1998 and 1997,
using the Black-Scholes option pricing model as prescribed by SFAS 123 and
the following assumptions:
1999 1998 1997
Risk-free interest rate 4.46 - 6.03% 5.56 - 7.17% 5.12 - 5.29%
Expected dividend yield 0% 0% 0%
Expected lives 5 - 10 years 5 - 10 years 4.6 - 10 years
Expected volatility 68.94% 48.53% 58.90%
Adjustments were made for options forfeited prior to vesting. Had
compensation expense for these plans been determined in accordance with
SFAS 123, the Company's net income and earnings per share reflected on the
March 31, 1999, 1998 and 1997 statements of income would have been the
following unaudited pro forma amounts:
1999 1998 1997
Net income
As reported $2,042,506 $4,658,466 $6,283,165
Pro forma 95,767 3,873,988 5,784,529
Basic earnings per share
As reported $.19 $.42 $.52
Pro forma .01 .35 .48
Diluted earnings per share
As reported $.18 $.41 $.52
Pro forma .01 .34 .48
Because the SFAS 123 method of accounting has not been applied to options
granted prior to March 31, 1995, the resulting pro forma compensation
expense may not be representative of that to be expected in future years.
The table below summarizes the plans' activity:
Options Outstanding
-------------------------
Weighted
Number of Average
Shares Exercise Price
Balance at March 31, 1996 3,092,608 $5.20
Granted-
Option price = fair market value 25,000 $5.00
Option price > fair market value 78,204 5.10
Issued (35,025) 1.56
Adjustment for spin-off 222,408
Canceled (427,072) 6.04
--------- -----
Balance at March 31, 1997 2,956,123 4.72
Granted-
Option price = fair market value 549,174 4.11
Option price > fair market value 45,714 4.98
Option price < fair market value 10,000 2.94
Issued (221,914) 4.14
Canceled (513,772) 4.89
--------- -----
Balance at March 31, 1998 2,825,325 4.60
Granted-
Option price = fair market value 919,216 5.04
Issued (45,977) 2.77
Canceled (252,458) 4.77
--------- -----
Balance at March 31, 1999 3,446,106 $4.73
========= =====
The weighted average fair value of options granted during the years ended
March 31, 1999, 1998 and 1997 was $5.04, $4.15 and $3.42, respectively.
Options to purchase 2,006,932, 1,560,482 and 1,454,734 shares of common
stock were exercisable at March 31, 1999, 1998 and 1997, respectively.
These exercisable options had weighted average exercise prices of $4.575,
$4.625 and $4.65 at March 31, 1999, 1998 and 1997, respectively.
The following table summarizes information about stock options outstanding
at March 31, 1999:
Options Outstanding Options Exercisable
--------------------------------- --------------------
Weighted
Outstanding Average Weighted Exercisable Weighted
Range of as of Remaining Average as of Average
Exercise March 31, Contractual Exercise March 31, Exercise
Prices 1999 Life Price 1999 Price
$1.00 - $2.59 53,520 0.8 $ 1.317 53,520 $ 1.317
2.60 - 6.49 3,285,411 6.2 4.642 1,938,737 4.642
6.50 - 9.78 107,175 8.1 9.268 14,675 7.664
--------- ---------
1.00 - 9.78 3,446,106 6.2 4.735 2,006,932 4.575
========= =========
In November 1996, the Company adjusted the number of shares of common
stock issued and outstanding to employees under the 1986 stock option
plan. The adjustment, which increased the number of shares outstanding by
222,408 shares, also included a reduction in the exercise price. This
adjustment was done to equalize the options' values before and after the
distribution of the common stock of BlowOut in November 1996 (Note 12).
In September 1992, the Company agreed to issue warrants to buy up to
1,000,000 shares of the Company's common stock at an exercise price of
$7.14 per share, which approximated market value at date of grant. The
warrants were issued in connection with entering into a long-term
licensing agreement with a program supplier. At March 31, 1997, all
warrants had been issued. In November 1996, the Company adjusted the
number of shares of common stock under the warrant to 1,083,900 and
decreased the price to $6.587. This adjustment was done in connection
with the distribution of the common stock of BlowOut in November 1996
(Note 12). The adjustment was done pursuant to the supplier's agreement
that requires the Company to adjust the warrant if a distribution of the
Company's assets occurs. During fiscal year 1998, the warrants were
canceled. The consideration of $250,000 which was paid by the Company for
the cancellation of these warrants and the warrant for 459,303 shares of
the Company's common stock as noted below was charged to stockholders'
equity.
In July 1994, the Company agreed to issue warrants to buy up to 2,673,750
shares of the Company's common stock at an exercise price of $7.13 per
share, which approximated market value at date of grant. The warrants
were issued in connection with entering into a long-term licensing
agreement with a program supplier. In November 1996, the Company adjusted
the number of shares of common stock under the warrant to 1,543,203 and
decreased the price to $6.578. This adjustment was done in connection
with the distribution of the common stock of BlowOut in November 1996
(Note 12). The adjustment was done pursuant to the supplier's agreement
that requires the Company to adjust the warrant if a distribution of the
Company's assets occurs. During fiscal 1997, 1,250,000 shares were
canceled and therefore the unamortized value of $496,913 was adjusted
through the Company's statement of stockholders' equity.
As a result of the July 1994 agreement discussed above, the Company issued
warrants to acquire 423,750 shares of the Company's common stock to
another program supplier under a "favored nations" clause in the contract
with that program supplier. These warrants were also issued at an
exercise price of $7.13 per share, which approximated market value at date
of grant. In November 1996, the Company adjusted the number of shares of
common stock under the warrant to 459,303 and decreased the price to
$6.578. This adjustment was done in connection with the distribution of
the common stock of BlowOut in November 1996 (Note 12). The adjustment
was done pursuant to the supplier's agreement that requires the Company to
adjust the warrant if a distribution of the Company's assets occurs.
During fiscal year 1998, the warrants were canceled.
In March 1998, the Company agreed to issue warrants to buy up to 1,000,000
shares of the Company's common stock at an exercise price of $6.59 per
share, which exceeded market value at date of grant. The warrants were
issued in connection with entering into a long-term agreement with a
customer.
All warrants which the Company agreed to issue in 1995 and 1998 have been
valued by an outside valuation firm using standard warrant valuation
models. The value of the warrants of $4,133,977 has been recorded in the
equity section and will be amortized over the associated periods to be
benefited by each group of warrants. For 1999, 1998 and 1997, expense
associated with the warrants was $717,537, $620,616 and $492,503,
respectively.
In May 1995, the Board of Directors approved a shareholders' rights plan
designed to ensure that all of the Company's shareholders receive fair and
equal treatment in the event of any proposal to acquire control of the
Company. Under the rights plan, each shareholder will receive a dividend
of one right for each share of the Company's outstanding common stock,
entitling the holders to purchase one additional share of the Company's
common stock. The rights become exercisable after any person or group
acquires 15% or more of the Company's outstanding common stock, or
announces a tender offer which would result in the offeror becoming the
beneficial owners of 15% or more of the Company's outstanding stock.
Provided, however, that the Board of Directors, at their discretion may
waive this provision with respect to any transaction or may terminate the
rights plan in its entirety.
9. COMMITMENTS:
Leases
The Company leases certain facilities and equipment under operating leases
expiring at various dates through 2009. Rental payments over the term of
the leases exceeding one year are as follows:
Year Ending March 31,
2000 $ 1,901,037
2001 1,870,275
2002 1,913,568
2003 1,966,674
2004 1,933,609
2005 and thereafter 4,557,121
-----------
$14,142,284
===========
The leases provide for payment of taxes, insurance and maintenance by the
Company. The Company also rents vehicles and equipment on a short-term
basis. Rent expense under operating leases was $1,926,455, $2,111,482 and
$1,477,651 for the years ended March 31, 1999, 1998 and 1997,
respectively.
Guarantees and Advances
The Company has entered into several guarantee contracts with program
suppliers providing titles for distribution under the PPT system. In
general, these contracts guarantee the suppliers minimum payments. In
some cases these guarantees were paid in advance. Any advance payments
that the Company has made and will be realized within the current year are
included in advances to program suppliers. The long-term portion is
included in other assets. Both the current and long-term portion are
amortized to cost of sales as revenues are generated from the related
cassettes.
The Company, using empirical data, estimates the projected revenue stream
to be generated under these guarantee arrangements and accrues for
projected losses or reduces the carrying amount of advances to program
suppliers for any guarantee that it estimates will not be fully recovered
through future revenues. As of March 31, 1999, the Company has reserved
approximately $2,400,000 for potential losses under such guarantee
arrangements.
On March 22, 1999, BlowOut Entertainment, Inc. (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). 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). The obligations under
this Guarantee were comprised of the following:
a. BlowOut had a revolving line of credit (Line of Credit) in a maximum
principal amount at one time outstanding of $5 million. The outstanding
balance of approximately $2.1 million was paid in full at the closing.
Therefore, the Company's obligation under the line of credit guarantee was
discharged.
b. BlowOut also 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 satisfied, in its sole discretion, that
BlowOut's financial condition is sufficient to justify the release of the
Company's guarantee. As of March 31, 1999, BlowOut had borrowed
approximately $1.2 million under the Credit Facility. As 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 the obligation. The payment plan consists of an up front
$300,000 payment, which was paid in May 1999, and monthly payments of
approximately $36,000 until the balance is paid in full. 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. The payments, as made, will be recorded as a reduction of "net
current liabilities of discontinued operations" on the accompanying
balance sheet.
In fiscal year 1997, BlowOut executed a $3.0 million note in favor of the
Company which accrues interest at 9% per annum. The Company has 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 its guarantees. At March 31, 1999, the total
outstanding balance of the debt under such note, including accrued
interest, was $2.8 million. This amount was fully reserved at March 31,
1999.
10. CONTINGENCIES:
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. Plaintiff alleges breach of contract, fraud,
misrepresentation, and violations of the Racketeer Influenced and Corrupt
Organizations Act of 1970 (RICO), and also asserts claims based on a
promissory estoppel theory. 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 RICO Act,
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 believes
that the plaintiff's remaining claims are without merit and intends to
continue to vigorously defend itself and its officers against the
remaining claims.
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. 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 rentals and sales of the Company's videocassettes and to pay
the appropriate fees to the Company in connection with such transactions.
The Company is seeking 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 privileges 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 has not yet filed its
answer to Hollywood's new counterclaims. The Company believes that
Hollywood's counterclaims are without merit and intends to vigorously
defend itself.
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 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 seeks 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 December 31, 1999 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.
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.
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.
In the event of an unanticipated adverse final determination in respect of
certain matters 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 certain legal proceedings and claims that
arise in the ordinary course of its business. In the opinion of
management, the amount of any ultimate liability with respect to these
actions will not materially affect the financial position or results of
operation of the Company.
11. EMPLOYEE BENEFIT PLANS:
At January 1, 1991, the Company established an employee benefit plan (the
401(k) Plan) pursuant to Section 401(k) of the Internal Revenue Code for
certain qualified employees. Contributions made to the 401(k) Plan are
based on percentages of employees' salaries. The amount of the Company's
contribution is at the discretion of Board of Directors. Contributions
under the 401(k) Plan for the years ended March 31, 1999, 1998 and 1997
were $75,868, $68,120 and $57,743, respectively.
The Company has an Employee Stock Purchase Plan (the Plan). The Board of
Directors has reserved 200,000 shares of the Company's common stock for
issuance under the Plan, of which 147,030 shares remain authorized and
available for sale to employees.
All employees meeting certain eligibility criteria may be granted the
opportunity to purchase common stock, under certain limitations, at 85% of
market value. Payment is made through payroll deductions.
Under the Plan, employees purchased 4,245 shares for aggregate proceeds of
$20,214, 5,351 shares for aggregate proceeds of $20,993, and 8,685 shares
for aggregate proceeds of $36,520, in 1999, 1998 and 1997, respectively.
12. BUSINESS SEGMENTS, SIGNIFICANT SUPPLIERS AND MAJOR CUSTOMER:
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," (SFAS 131). SFAS 131
required the Company to report certain information about operating
segments. SFAS 131 became effective for the Company's year ended
March 31, 1999. The Company classifies its services in two segments, PPT
and Non-PPT. Non-PPT services include operations of BlowOut Video, a
video retailer, and Com Alliance, the Company's internet based fulfillment
service provider and amounts received pursuant to royalty agreements.
Business Segments
1999 1998 1997
Net sales (1):
PPT $106,972,685 $113,748,857 $106,038,728
Non-PPT 18,604,306 10,611,861 10,536,922
------------ ------------ ------------
$125,576,991 $124,360,718 $116,575,650
============ ============ ============
Income from operations (1):
PPT $ (224,412) $ 5,417,174 $ 3,573,932
Non-PPT 2,973,809 1,787,943 5,660,168
------------ ------------ ------------
$ 2,749,397 $ 7,205,117 $ 9,234,100
============ ============ ============
Identifiable assets (1):
PPT $ 46,770,579 $ 49,879,817 $ 42,163,519
Non-PPT 4,302,726 3,540,549 3,067,669
------------ ------------ ------------
$ 51,073,305 $ 53,420,366 $ 45,231,188
============ ============ ============
(1)Total amounts differ from those reported on the consolidated
financial statements as intercompany transactions and investments
in subsidiaries are not eliminated for segment reporting purposes.
The Company has one program supplier that supplied product that generated
28%, a second that generated 26%, and a third that generated 15% of the
Company's revenues for the year ended March 31, 1999. The Company has one
program supplier that supplied product that generated 48%, a second that
generated 17%, and a third that generated 15% of the Company's revenues
for the year ended March 31, 1998. The Company has one program supplier
that supplied product that generated 43%, a second that generated 23%, and
a third that generated 15% of the Company's revenues for the year ended
March 31, 1997. There were no other program suppliers who provided
product accounting for more than 10% of sales for the years ended
March 31, 1999, 1998 and 1997.
The Company currently receives a significant amount of product from one
program supplier. Although management does not believe that this
relationship will be terminated in the near term, a loss of this supplier
could have an adverse affect on operating results.
One customer accounted for 13% of the Company's revenues in 1999. Another
customer accounted for 11% and 13%, of the Company's revenues in 1998 and
1997, respectively.
13. DISCONTINUED OPERATIONS:
On November 26, 1996, the Company made a distribution to its shareholders
of 1,457,343 shares of common stock (the BlowOut Common Stock) of BlowOut
pursuant to a Reorganization and Distribution Agreement (Distribution
Agreement) dated as of November 11, 1996, between the Company and BlowOut.
BlowOut is not related to the Company's wholly owned subsidiary BlowOut
Video, Inc. The operations of BlowOut were reflected as discontinued
operations in the March 31, 1996 consolidated financial statements.
During the year ended March 31, 1997, the Company provided for additional
losses related to the spinoff of BlowOut, net of tax benefit of
$.7 million, in the amount of approximately $7.5 million. A deferred tax
asset related to these costs of approximately $3.2 million was also
recorded with a valuation allowance reserve against the entire asset. The
additional losses relate to contingencies which are not settled. These
additional losses were offset by an adjustment to the estimated loss on
disposal of Pro Image. Due to higher than anticipated sales proceeds from
the sale of the Pro Image stores and franchise and recognition of
previously reserved deferred tax assets of approximately $4.0 million, the
Company recorded a gain of approximately $7.5 million. Therefore, there
was no net impact on the March 31, 1997 statement of income of these
adjustments to gain or loss on disposal of discontinued operations.
Net current liabilities of discontinued operations at March 31, 1999
include approximately $3.7 million relating to BlowOut for amounts
reserved for contingencies not yet settled as of March 31, 1999. A
deferred tax asset related to these costs of approximately $1.1 million
was also recorded with a valuation allowance reserve against the entire
asset.
Net current liabilities of discontinued operations at March 31, 1999
include management's best estimate of the anticipated losses from
discontinued operations through the final resolution of all contingencies
related to the discontinued operations. As noted above in Note 9, 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.
The estimates are based on an analysis of the costs that may be incurred
to dispose of the entities. The amounts the Company will ultimately incur
could differ materially from the amounts assumed in arriving at the loss
on disposal of the discontinued operations. Net current liabilities of
discontinued operations at March 31, 1999 will be adjusted during fiscal
year 2000 as appropriate based on the final dismissal of the case.
<TABLE>
<CAPTION>
RENTRAK CORPORATION
Valuation and Qualifying Accounts
Schedule II
Balance at Charged to Balance at
Beginning of Write Off and Other Recoveries The End of
Year Ended: Period Expenses Accounts (Deductions) Period
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts
March 31, 1997 627,895 (3,564,065) (95,000) 3,440,483 409,313
March 31, 1998 409,313 (4,655,356) - 4,832,684 586,641
March 31, 1999 586,641 (7,865,333) - 7,633,933 355,241
Advances to program
suppliers reserve
March 31, 1997 1,917,706 (149,192) - - 1,768,514
March 31, 1998 1,768,514 110,581 (696,339) 3 - 1,182,757
March 31, 1999 1,182,757 (17,597) - - 1,165,160
Other Current Assets-
Retailer Financing
Program reserve
March 31, 1997 1,114,520 - (1,114,520) 2 - -
March 31, 1998 - - - - -
March 31, 1999 - - 994,935 2 - 994,935
Other Assets-
Retailer Financing
Program reserve
March 31, 1997 4,918,031 (771,973) 5,164,396 1,2 1,029,921 10,340,375
March 31, 1998 10,340,375 - (467,930) 3 (518,450) 9,353,995
March 31, 1999 9,353,995 (194,888) (559,433) 2 (18,921) 8,580,753
1 - Transferred from (to) discontinued operations.
2 - Reclassified from Other Current Assets to Other Assets.
3 - Eliminated against Other Assets.
</TABLE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
Pursuant to General Instruction G(3) to Form 10-K,
the information called for by this item 10 is
incorporated by reference from the Company's
definitive Proxy Statement for its 1999 Annual Meeting
of Shareholders to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended. See
"Election of Directors" and "Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3) to Form 10-
K, the information called for by this item 11 is
incorporated by reference from the Company's
definitive Proxy Statement for its 1999 Annual Meeting
of Shareholders to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended. See
"Executive Compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND
MANAGEMENT
Pursuant to General Instruction G(3) to Form 10-
K, the information called for by this item 12 is
incorporated by reference from the Company's
definitive Proxy Statement for its 1999 Annual Meeting
of Shareholders to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended. See
"Security Ownership of Certain Beneficial Owners and
Directors".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
Pursuant to General Instruction G(3) to Form 10-
K, the information called for by this item 13 is
incorporated by reference from the Company's
definitive Proxy Statement for its 1999 Annual Meeting
of Shareholders to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended. See
"Compensation Committee Interlocks And Insider
Participation" and Certain Relationships And
Transactions".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
AND REPORTS ON
FORM 8-K
(a)(1) Financial Statements
The following documents are filed as part of the
Report:
Consolidated Financial Statements: The
Consolidated Financial Statements of the
Company are included in Item 8 of this
Report:
Report of Independent Public
Accountants
Consolidated Balance Sheets as of March 31,1999
and 1998
Consolidated Statements of Income for Years
Ended March 31, 1999, 1998 and
1997
Consolidated Statements of Stockholders' Equity
for Years Ended March 31, 1999,
1998 and 1997
Consolidated Statements of Cash Flows for Years Ended
March 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
Consolidated Financial Statement
Schedules: The following consolidated
financial statement schedule has been
included in Item 8 of this Report:
Schedule II - Valuation and Qualifying Accounts
Schedules not included have been omitted because
they are not applicable or the required
information is shown in the financial statements
or notes thereto.
(a)(3) Exhibits: The exhibits required to be filed
pursuant to Item 601 of Regulation S-K are set
forth in the Exhibit Index.
(b) Form 8-K Reports. During the fourth quarter of
fiscal 1999, the Company filed no reports on Form
8-K.
(c) Exhibits (See Exhibit Index)
1. A shareholder may obtain a copy of any exhibit
included in this Report upon payment of a fee to cover
the reasonable expenses of furnishing such exhibits by
written request to F. Kim Cox, Executive Vice
President/Chief Financial Officer, or Carolyn Pihl,
Vice President Finance/Chief Accounting Officer,
Rentrak Corporation, PO Box 18888, Portland, Oregon
97218
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) 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.
RENTRAK CORPORATION
By /S/ Ron Berger
Ron Berger, President
Date June 25, 1999
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the
Registrant and in the capacities and the dates
indicated.
Principal Executive Officer:
By /S/ Ron Berger June 25, 1999
Ron Berger, President/CEO
Principal Financial Officer:
By /S/ F. Kim Cox June 25, 1999
F. Kim Cox, Executive Vice President/
Chief Financial Officer
Principal Accounting Officer:
By /S/ Carolyn A. Pihl June 25, 1999
Carolyn A. Pihl, Chief Accounting Officer
Majority of Board of Directors:
By /S/ Pradeep Batra June 25, 1999
Pradeep Batra, Director
By /S/ Skipper Baumgarten June 25, 1999
Skipper Baumgarten, Director
By /S/ Ron Berger June 25, 1999
Ron Berger, Chairman
By /S/ Herbert M. Fischer June 25, 1999
Herbert M. Fischer, Director
By /S/ James P. Jimirro June 25, 1999
James P. Jimirro, Director
By /S/ Bill LeVine June 25, 1999
Bill LeVine, Director
By /S/ Muneaki Masuda June 25, 1999
Muneaki Masuda, Director
By /S/ Stephen Roberts June 25, 1999
Stephen Roberts, Director
EXHIBIT INDEX
The following exhibits are filed herewith or, if
followed by a number in parentheses, are incorporated
herein by reference from the corresponding exhibit
filed in the report or registration statement
identified in the footnotes following this index:
Exhibit Number Exhibit Page
3.1 Amended and Restated Articles of
Incorporation and amendments thereto
(1)
3.2 1995 Restated Bylaws, as amended to
date (6)
3.3 Amendment Number 1 to the 1995 Restated
Bylaws of Rentrak Corporation. (34)
3.4 Amendment Number 2 to the 1995 Restated 52
Bylaws of Rentrak Corporation.
4.1 Articles of Incorporation, as amended
to date (incorporated by reference to
Exhibit 3.1)
4.2 Articles II and V of the 1995 Restated
Bylaws (incorporated by reference to
Exhibit 3.2)
10.1* 1986 Second Amended and Restated Stock
Option Plan and Forms of Stock Options
Agreements (8)
10.4* Stock Option Agreement with Ron Berger,
dated April 18, 1990 (2)
10.5* Stock Option Agreement with Ron Berger,
dated April 18, 1995 (29)
10.6* Employment Agreement with Amir Yazdani
dated December 20, 1995 (30)
10.7* Amended and Restated Employment
Agreement with Ron Berger dated
November 27, 1995 (16)
10.9* Employment Agreement with Ed Barnick
dated January 1, 1996 (24)
10.10* Rentrak Corporation Amended and
Restated Directors Stock Option Plan
(3)
10.11* Rentrak's 401-K Plan (4)
10.13* Amended and Restated 1992 Employee
Stock Purchase Plan of Rentrak
Corporation (9)
10.17 Joint Development Agreement with CCC
dated August 6, 1993 (5)
10.18 Business Loan Agreement with Silicon
Valley Bank dated October 12, 1993 (7)
10.19 Business Loan Modification Agreement
with Silicon Valley Bank dated June 6,
1994 (7)
10.21 Second Amendment to Business
Cooperation Agreement between Rentrak
Corporation, Culture Convenience Club
Co., Ltd., and Rentrak Japan dated June
16, 1994 (7)
10.23 Business Loan Modification Agreement
with Silicon Valley Bank dated May 17,
1996 (11)
10.25* Employment Agreement with Carolyn Pihl
dated May 6, 1996 (25)
10.26 Guarantee Agreement dated as of June
26, 1996 between Rentrak Corporation
and BlowOut Entertainment, Inc. (13)
10.27 Reorganization and Distribution
Agreement between Rentrak Corporation
and BlowOut Entertainment, Inc., dated
as of November 11, 1996 (12)
10.28 Asset Purchase Agreement by and among
Pro Image Inc., PI Acquisition, L.C.
and Rentrak Corporation dated December
6, 1996 (14)
10.29 Business Loan Modification Agreement
with Silicon Valley Bank dated December
27, 1996 (26)
10.30 Business Loan Modification Agreement
with Silicon Valley Bank dated December
29, 1997 (31)
10.31* The 1997 Non-Officer Employee Stock
Option Plan of Rentrak Corporation (15)
10.32* Employment Agreement of Marty Graham
dated May 17, 1997 (17)
10.33* Employment Agreement of Michael
Lightbourne dated July 10, 1997 (18)
10.34* Employment Agreement of Christopher
Roberts dated October 27, 1997 (19)
10.35* Employment Agreement of Ron Berger
dated April 21, 1998 (32)
10.36* The 1997 Equity Participation Plan of
Rentrak Corporation (20)
10.37* The Amendment to the 1997 Non-Officer
Employee Stock Option Plan of Rentrak
Corporation (21)
10.38* Rentrak Corporation Non-Qualified Stock
Option Agreement (22)
10.39* Rentrak Corporation Incentive Stock
Option Agreement (23)
10.40 Amendment to the 1997 Equity
Participation Plan of Rentrak
Corporation. (33)
10.42 The Amendment to the 1997 Equity
Participation Plan of Rentrak
Corporation (27)
10.43* Employment Agreement with F. Kim Cox
dated April 1, 1998 (28)
21 List of Subsidiaries of Registrant 53
23 Consent of Arthur Andersen 54
27 Financial Data Schedule N/A
* Management Contract
1. Filed in S-3 Registration Statement, File # 338511 as filed
on November 21, 1994.
2. Filed as Exhibit 10.9 to 1991 Form 10-K filed on May 6, 1991.
3. Filed as Exhibit B to 1994 Proxy Statement dated July 11,1994.
4. Filed as Exhibit 10.1 to Form 10-K filed on June 28, 1993.
5. Filed as Exhibit 10.5 to Form 10-K filed on June 28, 1993.
6. Filed as Exhibit to Form 8-K filed on June 5, 1995.
7. Filed as Exhibit to 1994 Form 10-K filed on June 29, 1994.
8. Filed as Exhibit A to 1994 Proxy Statement dated July 11, 1994.
9. Filed as Exhibit 10.13 to Form 10-K filed on June 29, 1995.
10. Intentionally Omitted.
11. Filed as Exhibit 10.23 to Form 10-K filed on July 1,1996.
12. Filed as Exhibit 1 to Form 8-K filed on December 9, 1996.
13. Filed as Exhibit 2 to Form 8-K filed on December 9, 1996.
14. Filed as Exhibit 1 to Form 8-K filed on December 31, 1996.
15. Filed as Exhibit 4.1 to Form S-8 filed on June 5, 1997.
16. Filed as Exhibit 10 to Form 10-Q filed on November 14,1995.
17. Filed as Exhibit 10.1 to Form 10-Q filed on November 3,1997.
18. Filed as Exhibit 10.2 to Form 10-Q filed on November 3,1997.
19. Filed as Exhibit 10.3 to Form 10-Q filed on November 3,1997.
20. Incorporated by reference to the Company's Proxy Statement
dated June 25, 1997 for the Company's 1997 Annual Meeting of Shareholders.
21. Filed as Exhibit 4.1 to Form S-8 filed on October 29,1997.
22. Filed as Exhibit 10.6 to Form 10-Q filed on November 3,1997.
23. Filed as Exhibit 10.1 to Form 10-Q filed on February 9,1998.
24. Filed as Exhibit 10.9 to Form 10-K filed on June 19, 1997.
25. Filed as Exhibit 10.25 to Form 10-K filed on June 19, 1997.
26. Filed as Exhibit 10.29 to Form 10-K filed on June 19, 1997.
27. Filed as Exhibit 10.1 to Form 10Q filed on November 6,1998.
28. Filed as Exhibit 10.2 to Form 10Q filed on November 6,1998.
29. Filed as Exhibit 10.5 to 1998 Form 10-K filed on June 25,1998.
30. Filed as Exhibit 10.6 to 1998 Form 10-K filed on June 25,1998.
31. Filed as Exhibit 10.30 to 1998 Form 10-K filed on June 25,1998.
32. Filed as Exhibit 10.35 to 1998 Form 10-K filed on June 25,1998.
33. Filed as Exhibit 10.40 to 1998 Form 10-K filed on June 25,1998.
34. Filed as Exhibit 10.41 to 1998 Form 10-K filed on June 25,1998.
Exhibit 3.4
AMENDMENT NUMBER 2
TO THE
1995 RESTATED BYLAWS
OF
RENTRAK CORPORATION
WHEREAS, Section 3.2 of the 1995 Restated Bylaws of
Rentrak Corporation (the "Bylaws") provides that the
Company's Board of Directors (the "Board") shall be
comprised of between three and seven directors, with the
exact number of directors to be established by resolution of
the Board;
WHEREAS, Article 11 of the Bylaws authorizes the Board
to amend the Bylaws, and the Board believes that it is
desirable and in the Company's best interests to amend
Section 3.2 of the Bylaws to increase the maximum number of
directors from seven to nine; and
WHEREAS, on February 23, 1998, at a duly convened meeting
of the Board, the Board adopted a resolution amending
Section 3.2 as provided below.
NOW THEREFORE, the first sentence of Section 3.2 of
Article 3 of the Bylaws is hereby amended in its entirety
and shall read as follows:
The number of directors of the
corporation shall be not less than three
or more than nine, with the number of
directors to be established by
resolution of the Board of Directors.
The second paragraph of Section 3.2 of the Bylaws is
unchanged and shall remain in full force and effect.
Dated as of this 23rd day of February, 1998.
/s/ F. Kim Cox
F. Kim Cox, Executive Vice President,
Chief Financial Officer and Secretary
Exhibit 21
Subsidiaries of Registrant
Attitude 2 Travel, Inc. an Oregon corporation.
BlowOut Video Holding Company, an Oregon corporation.
formovies.com., an Oregon corporation.
LRC Inc., an Oregon corporation.
Mortco Inc., an Oregon corporation.
Orient Link Enterprises, a foreign corporation
PDF, Inc., an Oregon corporation.
Rentrak Canada, a foreign corporation.
Rentrak Europe BV, a foreign corporation.
Rentrak UK Limited, a foreign corporation.
RTK Kelly Limited a foreign corporation.
Streamlined Solutions, Inc., an Oregon corporation.
Transition Sports, Inc., a Utah Corporation.
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference of our reports included in this
Form 10-K, into the Company's previously filed Registration
Statements: (1) Registration Statement File No. 33-40472 on
Form S-8 of the 1986 Stock Option Plan, the 1985 Stock
Incentive Plan, the 1985 Key Employee Incentive Stock Option
Plan and the Individual Written Compensation Plan dated
May 10, 1991, (2) Registration Statement File No. 33-44864
on Form S-8 of the 1986 Restated and Amended Stock Option
Plan and Directors' Stock Option Plan dated January 8, 1992,
(3) Registration Statement on Form S-8 of the 1992 Employee
Stock Purchase Plan dated June 16, 1992, (4) Registration
Statement File No. 33-86548 on Form S-3 dated November 21,
1994, (5) Registration Statement File No. 33-65463 on
Form S-3 dated December 28, 1995, as amended on February 9,
1996, (6) Registration Statement File No. 333-28565 on
Form S-8 of the 1997 Non-Officer Employee Stock Option Plan
dated June 5, 1997, as amended on October 29, 1997, and
(7) Registration Statement File No. 333-62523 on Form S-8 of
the 1997 Equity Participation Plan dated August 31, 1998.
ARTHUR ANDERSEN LLP
Portland, Oregon,
June 21, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,145,963
<SECURITIES> 0
<RECEIVABLES> 24,261,639
<ALLOWANCES> 355,241
<INVENTORY> 2,804,983
<CURRENT-ASSETS> 39,751,218
<PP&E> 7,762,493
<DEPRECIATION> 6,039,045
<TOTAL-ASSETS> 49,456,789
<CURRENT-LIABILITIES> 35,164,885
<BONDS> 0
0
0
<COMMON> 10,440
<OTHER-SE> 14,281,464
<TOTAL-LIABILITY-AND-EQUITY> 49,456,789
<SALES> 123,787,390
<TOTAL-REVENUES> 123,787,390
<CGS> 101,522,360
<TOTAL-COSTS> 121,037,993
<OTHER-EXPENSES> 597,108
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 381,825
<INCOME-PRETAX> 3,346,505
<INCOME-TAX> 1,303,999
<INCOME-CONTINUING> 2,042,506
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,042,506
<EPS-BASIC> 0.19
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