This filing consists of 98 pages.
The Exhibit Index is on Page 51.
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, 1997 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 9, 1997, 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 $ 39,540,270
(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 9, 1997. Includes shares held by certain depository
organizations.)
As of June 9, 1997, the Registrant had 11,609,005 shares of
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR THE 1997
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 7
3. Legal Proceedings 7
4. Submission of Matters to a Vote of Security
Holders 7
PART II
5. Market for the Registrant's Common Stock and
Related Stockholder Matters 8
6. Selected Financial Data 9
7. Management's Discussion and Analysis of
Financial Conditions and Results of Operations 10
8. Financial Statements and Supplementary Data 19
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 19
PART III
10. Directors and Executive Officers of the
Registrant 48
11. Executive Compensation 48
12. Security Ownership of Certain Beneficial Owners 48
and Management
13. Certain Relationships and Related Transactions 48
PART IV
14. Exhibits, Financial Statement Schedules and 49
Reports on Form 8-K
PART I
ITEM 1. BUSINESS
GENERAL
The Company's primary business is the
distribution of video cassettes to home video
specialty stores using its Pay Per Transaction
system.
In addition, prior to November, 1996, the
Company operated a number of "store within a store"
retail video outlets which rented and sold video
cassettes in Wal-Mart and K-Mart stores through its
BlowOut Entertainment Inc., ("BlowOut") subsidiary.
The Company also operated a number of retail stores
which sold professional and collegiate licensed
sports apparel merchandise through its Pro Image
Inc., (Pro Image) subsidiary, which were either
closed or disposed of during the fiscal year.
At March 31, 1996, the Company accounted for
the operations of Pro Image and BlowOut as
discontinued operations. Disposition of Pro Image
and BlowOut occurred during the fiscal year ended
March 31, 1997. [See Note 14 of the Notes to The
Consolidated Financial Statements and See
"Business/License Sports Apparel" and
"Business/Video Retail".]
PAY-PER-TRANSACTION
The Company distributes pre-recorded video
cassettes ("Cassettes") principally to home video
specialty stores through its Pay Per Transaction
revenue sharing system (the "PPT System"). The PPT
System enables home video specialty stores and other
retailers, including grocery stores and convenience
stores, who rent Cassettes to consumers
("Retailers") to obtain Cassettes at a significantly
lower initial cost than if they purchased the
Cassettes from traditional video distributors. Under
traditional distribution, a Program Supplier sells
the Cassette to a distributor for an average price
of approximately $64. The distributor then sells
the Cassette to a Retailer for an average price of
approximately $70. The Retailer then rents the
Cassette 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 retailers from rentals to
consumers (the "Transaction Fee"). The Company
retains a portion of each Order Processing and
Transaction Fee and remits the remainder to the
appropriate owner of the Cassette's distribution
rights, usually motion picture producers, licensees
or distributors ("Program Suppliers"). 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 service
throughout the United States and Canada. The
Company also owns a ten percent interest in K.K.
Rentrak Japan ("Rentrak Japan"), a Japanese
corporation which markets a similar service to video
retailers in Japan.
The Company currently offers substantially all
of the titles of a number of companies, including
Twentieth Century Fox Home Entertainment (formerly
Fox Video), a subsidiary of Twentieth Century Fox
Film Corporation, and Buena Vista Pictures
Distribution, Inc., a subsidiary of The Walt Disney
Company. The Company's arrangements with Program
Suppliers have been 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 suppliers may be terminated upon relatively
short notice. There can be no assurance that any of
the Program Suppliers will continue to distribute
through the Company's 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 deficiency in its ability
to acquire cassettes which are suitable for the
Company's markets on acceptable terms and conditions
from Program Suppliers who have agreed to provide
the same to the Company. The Company has one Program
Supplier that supplied product that generated 43
percent, a second that generated 23 percent, and a
third that generated 15 percent of Rentrak revenues
for the year ended March 31, 1997. There were no
other program suppliers who provided product
accounting for more than 10 percent of sales for the
year ended March 31, 1997.
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 participation 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, Hollywood Entertainment
Corporation, accounted for 13 percent of the
Company's revenues in 1997.
Distribution of Cassettes
The Company's proprietary Rentrak Profit Maker
Software (the "RPM Software") allows the Retailer to
order Cassettes through their Point of Sale (POS)
system and provides the Retailer with substantial
information regarding all offered titles. Ordering
occurs via a networked computer interface. To
further assist the Retailer 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 have approved computer software and
hardware to process all of their rental and sale
transactions. 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.
Retailer Auditing
The Company audits Participating Retailers in
order to verify that they are reporting all rentals
and sales 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 who 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 refusal to
allow such an audit is cause for immediate
termination from the PPT System. If audit
violations are found, the Participating Retailer is
subject to fines, audit penalties, 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 which 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 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
(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 retailer's revenues.
Notwithstanding the long term nature of such
agreements, both the Company and the retailer may,
in some cases, retain the right to terminate such
agreement upon 30-90 days prior written notice.
These financings are highly speculative in nature
and involve a high degree of risk and no assurance
of a satisfactory return on investment can be given.
The 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 May 1997, the Company has
invested or loaned approximately $13,100,000 in
various video retailers. [See Note 4 of the Notes to
the Consolidated Financial Statements.]
As of March 31, 1997, the Company had
approximately $13,100,000 in loans and investments
outstanding under the program and reserves of
approximately $10,300,000 of the total original loan
or investment amount. At March 31, 1996, the
Company had invested or loaned approximately
$7,300,000 under the program and had provided
reserves of approximately $6,000,000.
Competition
The home video industry is highly competitive.
The Company has one direct competitor presently
distributing cassettes on a revenue sharing basis.
The company, SuperComm, Inc., is a wholly-owned
subsidiary of The Walt Disney Co. and has thus far
concentrated its efforts in the supermarket
industry. In addition, the Company faces
substantial competition from traditional
distributors. The Company's competitors include
organizations which have existing distribution
networks, long-standing relationships with Program
Suppliers and Retailers, and/or significantly
greater financial resources than the Company.
In addition to the direct competition described
above, the Company faces indirect competition from
alternative delivery technologies which are intended
to provide video entertainment directly to the
consumer. These technologies include: 1) direct
broadcast satellite transmission systems, which
broadcast movies in digital format direct from
satellites to small antennas in the home; 2) cable
systems which may transmit digital format movies to
the home over cable systems employing fiber-optic
technology and 3) pay cable television systems. All
of these may employ digital data compression
techniques to increase the number of channels
available and hence the number of movies which can
be transmitted. Another source of indirect
competition comes from Program Suppliers releasing
titles intended for "sell-through" rather than
rental to consumers at approximately $20 to $30. To
date, such "sell-through" pricing has generally been
limited to certain newly released hit titles with
wide general family appeal. As the Company's
business is dependent upon the existence of a home
video rental market, a substantial shift in the
video business to alternative technologies or "sell-
through" policies 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 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 one time royalty of $2,000,000 payable
$1,000,000 by July 31, 1994, which the Company
received, and $1,000,000 no later than March 31,
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 a Japanese corporation 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.
Trademarks, Copyrights, and Proprietary Rights
The Company has registered its "RENTRAK",
"PPT", "Pay Per Transaction", "Ontrak",
"BudgetMaker", "DataTrak", "Prize Find" , "BlowOut
Video", "GameTrak", 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, 1997, including all
subsidiaries, the Company employs 162 full-time
employees. The Company considers its relations with
its employees to be good.
LICENSED SPORTS APPAREL
During fiscal year 1997, the Company disposed
of substantially all the net assets of Pro Image
Inc. (Pro Image) through either sale or closure of
the stores. [See Note 14 of the Notes to the
Consolidated Financial Statements.]
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 pursuant to a Reorganization and
Distribution Agreement (Distribution Agreement)
dated as of November 11, 1996, between the Company
and BlowOut. Pursuant to the Distribution, each
holder of common stock of the Company received one
share of BlowOut Common Stock for every 8.34 shares
of the Company common stock owned of record held by
such holder on November 18, 1996. The distributed
shares of BlowOut Common Stock represented
approximately 60% of the outstanding shares of
BlowOut Common Stock. Following the distribution
the Company continues to own 9.9 percent of the
outstanding BlowOut Common Stock. [See Note 14 of
the Notes to the Consolidated Financial Statements.]
Financial Information About Industry Segments
See Note 13 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 7, 2002.
Management believes its office and warehouse space
is adequate and suitable for its current and
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is 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 should not 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 and prices are
quoted on the Nasdaq National Market under the
symbol "RENT". Prior to the Company's public
offering on November 14, 1986, there was no public
market for the common stock. As of June 9, 1997
there were approximately 376 holders of record of
the Company's common stock. On June 9, 1997, the
closing sales price of the common stock as quoted on
the Nasdaq National Market was $4.125.
The following table sets forth the reported
high and low sales prices of the 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, 1995 $7.000 $4.575
SEPTEMBER 30, 1995 $6.625 $5.375
DECEMBER 31, 1995 $6.625 $4.625
MARCH 31, 1996 $5.875 $4.250
JUNE 30, 1996 $5.625 $4.250
SEPTEMBER 30, 1996 $4.875 $3.844
DECEMBER 31, 1996 $4.375 $3.125
MARCH 31, 1997 $3.500 $2.625
DIVIDENDS:
Holders of 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
does not intend to pay cash dividends in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts)
Year Ended March 31,
1997 1996 1995 1994 1993
Statement of Operations Data
Net revenues:
Application fees $ 354 $ 551 $ 1,114 $ 1,662 $ 2,299
Order processing fees 22,720 25,716 18,052 13,712 12,170
Transaction fees 70,467 70,187 49,904 40,967 33,399
Sell-through 11,101 10,601 8,923 5,665 4,980
Other 11,634 6,211 6,555 1,955 1,237
International operations 0 0 0 116 200
Total net revenues 116,276 113,266 84,548 64,077 54,285
Cost of sales 90,882 95,168 66,375 49,697 41,297
Gross profit 25,394 18,098 18,173 14,380 12,988
Selling and administrative expense 16,160 20,860 15,527 14,008 14,742
Suspension of European operations 0 0 0 901 0
Other income 999 681 3,522 538 521
Income (loss) from continuing operations before
benefit (provision) for income taxes, minority
partner interests and extraordinary item 10,233 (2,081) 6,168 9 (1,233)
Income tax benefit (provision) (3,950) 595 (768) 764 (305)
Income (loss) from continuing operations before
minority partner interests, discontinued
operations, and extraordinary item 6,283 (1,486) 5,400 773 (1,538)
Losses attributable to minority partner
interests 0 0 0 131 649
Income (loss) from continuing operations before
discontinued operations and extraordinary item 6,283 (1,486) 5,400 904 (889)
Discontinued Operations: (1)
Loss from operations of discontinued
subsidiaries
less applicable income tax provision
(benefit) 0 (18,700) (287) (91) (286)
Loss on disposal of subsidiaries 0 (12,100) 0 0 0
Extraordinary item, income tax benefit from
carryforward of net operating losses 0 0 0 0 280
Net income (loss) $ 6,283 $ (32,286) $ 5,113 $ 813 $ (895)
Net income (loss) per share - assuming
issuance of all dilutive contingent shares
Continuing operations $ 0.45 $ (0.12) $ 0.42 $ 0.09 $ (0.07)
Discontinued operations 0.00 (2.56) (0.02) (0.01) (0.03)
Net income (loss) $ 0.45 $ (2.68) $ 0.40 $ 0.08 $ (0.10)
Common shares and common share equivalents
outstanding 16,242 12,019 14,317 10,162 9,306
1997 1996 1995 1994 1993
Balance Sheet Data (2)
Working Capital $ 1,488 $(12,579) $12,897 $16,155 $17,116
Total Assets 43,048 56,252 64,818 44,620 34,824
Long-term Debt 0 0 0 0 0
Stockholders' Equity 11,272 14,404 40,292 29,523 22,722
(1) Discontinued Operations includes the operations of Pro Image and BlowOut. Results of operations in 1993 reflect only
those of BlowOut as Pro Image was acquired during fiscal year 1994. Additional acquisitions were made by Pro Image
and BlowOut during 1995 and 1996, therefore comparisons between years are not meaningful. See acquisitions Note 8
and discontinued operations Note 14 of the Notes to the Consolidated Financial Statements.
(2) The 1995 and prior balance sheets have not been restated for discontinued operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward Looking Statements
Information included in Management's Discussion and
Analysis of Financial Conditions and Results of
Operations regarding revenue growth, gross profit
margin and liquidity constitute forward-looking
statements that involve a number of risks and
uncertainties. The following factors are among the
factors that could cause actual results to differ
materially from the forward-looking statements: 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, new technology, and
the continued availability of Cassettes from Program
Suppliers. Section 1 (Business) of this Annual
Report on Form 10-K further describes certain of
these factors.
Results of Operations
As discussed in the Notes to the Consolidated
Financial Statements, the Company discontinued the
operations of Pro Image and BlowOut. Accordingly
the financial results of these entities are
reflected as discontinued operations in the March
31, 1996 financial statements, and the previous
years' statements of operations have been restated
to reflect these entities as discontinued.
For a more meaningful analysis, results are
presented for three groups of operations: Continuing
Operations which is comprised primarily of Domestic
PPT Operations, including Canada PPT Operations;
Discontinued Operations of Pro Image; and
Discontinued Operations of BlowOut. The following
table(s) breaks out these groups for the years ended
March 31, 1997, 1996 and 1995. All significant
inter-company transactions have been eliminated
except for those transactions between continuing and
discontinued operations which are expected to
continue in the future after disposition of the
entities. This analysis is to be read in
conjunction with the Company's Consolidated
Financial Statements.
RENTRAK CORPORATION
STATEMENTS OF OPERATIONS
For The Years Ended March 31, 1997, 1996 and 1995
1997 1996 1995
REVENUES $ 116,275,503 $ 113,266,320 $ 84,547,899
OPERATING COSTS AND EXPENSES
Cost of sales 90,881,674 95,167,529 66,374,471
Selling and administrative 16,159,729 20,859,923 15,526,912
107,041,403 116,027,452 81,901,383
INCOME (LOSS) FROM OPERATIONS 9,234,100 (2,761,132) 2,646,516
Other income 999,068 680,671 3,522,039
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 10,233,168 (2,080,461) 6,168,555
Income tax benefit (provision) (3,950,003) 594,729 (768,045)
INCOME (LOSS) FROM CONTINUING
OPERATIONS 6,283,165 (1,485,669) 5,400,510
DISCONTINUED OPERATIONS
Income (loss) from operations of
discontinued subsidiaries, net of income taxes - (18,700,000) (286,987)
Loss on disposal of discontinued subsidiaries - (12,100,000) -
NET INCOME (LOSS) $ 6,283,165 $ (32,285,669) $ 5,113,523
RENTRAK CORPORATION
STATEMENTS OF OPERATIONS
For The Years Ended March 31, 1997, 1996 And 1995
1997 1996 1995
DISCONTINUED OPERATIONS - PRO IMAGE
REVENUES $ $ 39,131,760 $ 26,363,211
OPERATING COSTS AND EXPENSES
Cost of sales 24,325,523 16,840,331
Selling and administrative 19,383,052 9,252,704
Other expense - write-off of intangible assets 9,179,239
INCOME (LOSS) FROM OPERATIONS (13,756,054) 270,176
Other expense (242,299) (130,754)
INCOME (LOSS) BEFORE INCOME TAXES $ $ (13,998,353) $ 139,422
DISCONTINUED OPERATIONS - BLOWOUT ENTERTAINMENT
REVENUES $ $ 17,466,804 $ 1,255,121
OPERATING COSTS AND EXPENSES
Cost of sales 13,961,420 318,526
Selling and administrative 10,074,040 1,403,818
LOSS FROM OPERATIONS (6,568,656) (467,223)
Other expense (689,103)
LOSS BEFORE INCOME TAXES $ $ (7,257,759) $ (467,223)
DISCONTINUED OPERATIONS - COMBINED
PRO IMAGE & BLOWOUT ENTERTAINMENT
REVENUES $ $ 56,598,564 $ 27,618,332
OPERATING COSTS AND EXPENSES
Cost of sales 38,286,943 17,158,857
Selling and administrative 29,457,092 10,656,522
Other expense - write-off of Intangible assets 9,179,239
LOSS FROM OPERATIONS (20,324,710) (197,047)
Other expense (931,402) (130,754)
LOSS BEFORE INCOME TAXES (21,256,112) (327,801)
INCOME TAX BENEFIT 2,556,112 40,814
NET LOSS $ $ (18,700,000) $ (286,987)
Fiscal 1997 Compared to Fiscal 1996
Continuing Operations - Domestic PPT Operations and
Other Continuing Subsidiaries
For the year ended March 31, 1997, total revenue
increased $3.0 million, or 3 percent, rising to
$116.3 million from $113.3 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 video cassettes.
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 (the "Participating Retailers");
and (ii) the number of titles released to the
system. In addition, the Company received a one-
time royalty payment from Rentrak Japan and
experienced a decrease in the total number of
Cassettes shipped under the PPT system.
In fiscal 1997, application-fee revenue decreased
to $0.4 million from $0.6 million in fiscal 1996, a
decline of $0.2 million, or 36 percent. The
decrease was due to a reduction in the amount of
application fees charged. During the year, order
processing-fee revenue fell to $22.7 million from
$25.7 million in fiscal 1996, a decrease of $3.0
million, or 12 percent. Transaction-fee revenue
totaled $70.5 million, an increase of $0.3 million,
or less than 1 percent, from $70.2 million the
previous year. Sell-through revenue was $11.1
million in fiscal 1997 as compared to $10.6 million
in fiscal 1996, an increase of $0.5 million, or 5
percent.
Royalty revenue from Rentrak Japan increased to
$5.5 million during fiscal 1997 from $1.2 million
the previous year. This increase was due to a one-
time royalty payment from Rentrak Japan of $4.4
million in August 1996.
Cost of sales in fiscal 1997 decreased to $90.9
million from $95.2 million the prior year, a
decrease of $4.3 million, or 5 percent. The
decrease is primarily due to the decrease in order
processing revenue noted above. In addition, fiscal
1996 includes a charge of $2.2 million to increase
reserves against advances made to program suppliers.
In fiscal 1997, the gross profit margin increased to
22 percent from 16 percent the previous year. The
gross profit margin in fiscal 1997, excluding the
one-time royalty payment from Rentrak Japan, was 19
percent.
Selling, general and administrative expenses were
$16.2 million in fiscal 1997 compared to $20.9
million in fiscal 1996. This decrease of $4.7
million, or 23 percent, was primarily due to the
following one time charges in fiscal 1996: An
increase of approximately 1.4 million in other
reserves against assets; and $1.5 million in
advertising co-op allowances in excess of amounts
received from program suppliers. Also, the reserves
against loans and investments in retailers were
approximately $2.3 million higher in fiscal 1996. As
a percentage of total revenue, selling, general and
administrative expenses was 14 percent in fiscal
1997 as compared to 18 percent the previous year.
Other income increased from $0.7 million in
fiscal 1996 to $1.0 million for fiscal 1997, an
increase of $0.3 million.
For the year ended March 31, 1997, Domestic PPT
Operations recorded a pre-tax profit of $10.2
million, or 9 percent of total revenue, compared to
a pre-tax loss of $2.1 million, or 2 percent of
total revenue, in fiscal 1996. This increase is
primarily due to the one-time royalty payment from
Rentrak Japan in fiscal 1997 and the one time
charges in fiscal 1996 noted above.
Included in the amounts above are the results
from Other Subsidiaries which are primarily
comprised of a software development company and
other video retail operations. The operations of
the software development company, which were
immaterial, were curtailed in fiscal 1996. Total
revenue from Other Subsidiaries decreased to $5.0
million in fiscal 1997 from $5.2 million in fiscal
1996, a decrease of $0.2 million, or 8 percent.
Cost of sales was $3.1 million, an increase of $0.2
million over the $2.9 million recorded in fiscal
1996. Selling, general and administrative expenses
decreased to $1.8 million in fiscal 1997 from $2.6
million in fiscal 1996, a decrease of $0.8 million,
or 31 percent. As a percentage of total revenue,
selling, general and administrative expenses
decreased to 36 percent at year-end from 49 percent
a year earlier.
For the year ended March 31, 1997, Other
Subsidiaries recorded a pre-tax profit of $0.2
million, or 3 percent of total revenue. This
compares with a pre-tax loss of $0.4 million, or 7
percent of total revenue, in fiscal 1996.
Discontinued Operations - Pro Image
During fiscal year 1997, the Company disposed of
substantially all of the net assets of Pro Image
through either sale or closure of the stores.
Pro Image is accounted for as discontinued
operations and, accordingly, its operations are
segregated in the consolidated financial statements.
Pro Image incurred losses from operations, net of
income tax benefit, of approximately $1,926,0000 and
$12,720,000 for the years ended February 28, 1997
and February 29, 1996, respectively. These amounts
were included in loss from operations and loss on
disposal of discontinued subsidiaries in the March
31, 1996 consolidated financial statements.
Discontinued Operations - BlowOut
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. Pursuant to the Distribution
Agreement, each holder of common stock of the
Company received one share of BlowOut Common Stock
for every 8.34 shares of the Company's common stock
owned of record by such holder on November 18, 1996.
The distributed shares of BlowOut Common Stock
represented approximately 60% of the outstanding
shares of BlowOut Common Stock. As a result of the
distribution, the March 31, 1997 consolidated
financial statement reflect the elimination of the
net assets and liabilities related to BlowOut and
the reduction of the Company's ownership in BlowOut
to approximately 9.9% of the outstanding BlowOut
Shares.
BlowOut is accounted for as discontinued
operations and, accordingly, its operations are
segregated in the March 31, 1996 consolidated
financial statements. BlowOut incurred losses from
operations, net of income tax benefit, of
approximately $4,000,000 and $5,980,000 for the
period ended November 26, 1996 and for the year
ended March 31, 1996, respectively. These amounts
are included in loss from operations and loss on
disposal of discontinued subsidiaries in the March
31, 1996, consolidated financial statements.
Consolidated Balance Sheet
Net current liabilities of Pro Image at March 31,
1997 of approximately $200,000 represent accrued
liabilities remaining to be paid. Net noncurrent
assets of Pro Image which are included in net
noncurrent assets of discontinued operations in the
consolidated balance sheet at March 31, 1996, are
comprised primarily of property and equipment and
long-term debt. Net current liabilities of Pro
Image which are included in net current liabilities
of discontinued operations in the Consolidated
Financial Statements at March 31, 1996, are
comprised primarily of inventory, receivables,
accounts payable, accrued liabilities, estimated
operating losses to be incurred by Pro Image through
the disposal date and other costs associated with
the disposition.
Net current liabilities of BlowOut at March 31,
1997 of approximately $4,400,000 represent amounts
reserved for contingencies not yet settled as of
March 31, 1997. Net noncurrent assets of BlowOut
included in net noncurrent assets of discontinued
operations in the consolidated balance sheet at
March 31, 1996, are comprised primarily of rental
inventory, property and equipment, intangibles, and
long-term debt. Net current liabilities of BlowOut
which are included in net current liabilities of
discontinued operations in the consolidated balance
sheet at March 31, 1996, are comprised primarily of
cash, inventory, accounts payable, accrued
liabilities, estimated operating loses to be
incurred by BlowOut through the disposal date and
other costs associated with the disposition.
Fiscal 1996 Compared to Fiscal 1995
Continuing Operations - Domestic PPT Operations and
Other Continuing Subsidiaries
For the year ended March 31, 1996, total revenue
increased $28.8 million, or 34 percent, rising to
$113.3 million from $84.5 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 video cassettes.
The increase in total revenue and the increases
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 (the "Participating Retailers");
(ii) the number of participating program suppliers
("Program Suppliers"), primarily Buena Vista; (iii)
the number of titles released to the PPT system; and
(iv) the total number of Cassettes leased under the
PPT system.
In fiscal 1996, application-fee revenue decreased
to $0.6 million from $1.1 million in fiscal 1995, a
decline of $0.5 million, or 45 percent. The
decrease was due to a reduction in the amount of
processing fees charged. During the year, Order
Processing-fee revenue rose to $25.7 million from
$18.1 million in fiscal 1995, an increase of $7.6
million, or 42 percent. Transaction-fee revenue
totaled $70.0 million, an increase of $20.1 million,
or 40 percent, from $49.9 million the previous year.
Sell-through revenue was $10.6 million in fiscal
1996 as compared to $8.9 million in fiscal 1995, an
increase of $1.7 million, or 19 percent.
Royalty revenue from Rentrak Japan decreased to
$1.2 million during fiscal 1996 from $1.8 million
the previous year. Included in fiscal 1995's
royalty revenue was a non-recurring payment of $1.0
million.
Cost of sales in fiscal 1996 rose to $95.2
million from $66.4 million the prior year, an
increase of $28.8 million, or 43 percent. The
increase is primarily due to the increase in
revenues noted above. In addition, fiscal 1996
includes a charge of $2.2 million to increase
reserves against advances made to program suppliers.
In fiscal 1996, the gross profit margin decreased to
16 percent from 21 percent the previous year. In
addition to the one-time charge noted above, the
decrease reflects an increase in major motion
picture studio product, which traditionally has a
lower gross margin.
Selling, general and administrative expenses were
$20.9 million in fiscal 1996 compared to $15.5
million in fiscal 1995. This increase of $5.4
million, or 34 percent, was primarily due to the
following one time charges: An increase of
approximately $3.0 million in the reserves against
loans and investments in retailers; other reserves
against assets of $1.4 million; and $1.5 million in
advertising co-op allowances in excess of amounts
retained from program suppliers. As a percentage of
total revenue, selling, general and administrative
expenses was 18 percent in both years.
Other income decreased from $3.5 million in
fiscal 1995 to $0.7 million for fiscal 1996, a
decrease of $2.8 million. In 1995, other income
included a gain of $2.8 million on the sale of
certain investment securities held for sale.
For the year ended March 31, 1996, Domestic PPT
Operations recorded a pre-tax loss of $2.1 million,
or 2 percent of total revenue, compared to a pre-tax
profit of $6.2 million, or 7 percent of total
revenue, in fiscal 1995. This decrease is due to
the one time charges noted above.
Included in the amounts above are the results
from Other Subsidiaries which are primarily
comprised of a software development company and
other video retail and wholesale operations. The
operations of the software development company,
which were immaterial, were curtailed in fiscal
1996. Total revenue from Other Subsidiaries
increased to $5.2 million in fiscal 1996 from $4.8
million in fiscal 1995, an increase of $0.4 million,
or 8 percent. Cost of sales was $2.5 million, an
increase of $0.6 million over the $1.9 million
recorded in fiscal 1995. Selling, general and
administrative expenses decreased to $2.6 million in
fiscal 1996 from $3.1 million in fiscal 1995, a
decrease of $0.5 million, or 14 percent. As a
percentage of total revenue, selling, general and
administrative expenses decreased to 50 percent at
year-end from 65 percent a year earlier.
For the year ended March 31, 1996, Other
Subsidiaries recorded a pre-tax loss of $0.4
million, or 7 percent of total revenue. This
compares with a pre-tax loss of $0.2 million, or 5
percent of total revenue, in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had cash and other
liquid investments of $10.2 million, compared to
$3.0 million at March 31, 1996. At year-end, the
Company's current ratio (current assets/current
liabilities) improved to 1.05 from .70 a year
earlier. This increase was primarily due to the one-
time royalty payment from Rentrak Japan of $4.4
million.
The Company has an agreement for a line of credit
with a financial institution in an amount not to
exceed the lesser of $10 million or the sum of (a)
80 percent of the net amount of eligible accounts
receivable as defined in the agreement. The line of
credit expires on December 18, 1997. Interest is
payable monthly at the bank's prime rate plus .5
percent (9.0 percent at March 31, 1997). The lender
has been granted an option to purchase 30,000
unregistered shares of common stock of the Company
at $7 per share, which exceeded market value at the
date of grant. The line is secured by substantially
all of the Company's assets. 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 of noncompliance as of March 31,
1997. At March 31, 1997, the Company had $5.0
million outstanding borrowings under this agreement.
The Company repaid the $5.0 million in April, 1997.
As of May 31, 1997, available borrowing capacity
totaled $10 million.
In December 1989, the Company entered into a
definitive agreement with Culture Convenience Club
Co., Ltd. (CCC)-Rentrak's joint-venture partner in
Rentrak Japan-to develop Rentrak's PPT distribution
and information processing business in certain
markets throughout the world. 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 percent for all sales up to $47.9 million
plus 0.5 percent of sales greater than $47.9 million
in each royalty year which is June 1 - May 31. In
addition, the Company will receive a onetime royalty
of $2.0 million payable $1.0 million in fiscal 1995
and $1.0 million no later than March 31, 1999. The
payment for fiscal 1995 has been received. Rentrak
Japan received additional territories in which to
market PPT. In addition, the Company sold 34 shares
of Rentrak Japan to CCC for approximately $68,000
reducing the Company's ownership in Rentrak Japan
from 33-1/3 percent to 25 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 a Japanese corporation for
$110,000. This reduced the company's interest in
Rentrak Japan from 25 percent to 10 percent. In
addition, the Company received a one-time royalty
payment from Rentrak Japan of $4,390,000 in August,
1996.
The Company has established a retailer financing
program whereby the Company will provide, on a
selective basis, financing to video retailers who
the Company believes have the potential for
substantial growth in the industry. In connection
with these financings, the Company typically makes a
loan to and/or an equity investment in the retailer.
In some cases, a warrant to purchase stock may be
obtained. As part of such financing, the retailer
typically agrees to cause all of its current and
future retail locations to participate in the PPT
system for a designated period of time. Under these
agreements, retailers are typically required to
obtain 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 highly
speculative in nature and involve a high degree of
risk, and no assurance of a satisfactory return on
investment can be given. The amounts the Company
could ultimately receive could differ materially in
the near term from the amounts assumed in
establishing reserves.
The Board of Directors has authorized up to $18
million to be used in connection with the Company's
retailer financing program. As of May 1997, the
Company has invested or loaned approximately $13.1
million in various retailers. The investments
individually range from $0.2 million to $5.1
million. Included in the total $13.1 million
investment balance at March 31, 1997, are gross
notes receivable of $8,700,000 which are due as
follows: $800,000 - 1998; $3,000,000 - 1999;
$4,700,000 - 2000; $200,000 - 2001. Interest rates
on the various loans range from the prime rate plus
1 percent to the prime rate plus 2 percent. As the
financings are made, and periodically throughout the
terms of the agreements, the Company assesses the
likelihood of recoverability of the amounts invested
or loaned based on the financial position of each
retailer. This assessment includes reviewing
available financial statements and cash flow
projections of the retailer and discussions with
retailers' management.
As of March 31, 1997, the Company has invested or
loaned approximately $13.1 million under the program
and has reserves of approximately $10.3 million.
BlowOut is essentially a start-up company and is
experiencing rapid growth requiring additional
financing if it is to continue its expansion and to
support operations of recently opened stores. The
Company is the principal creditor to BlowOut. The
Company has agreed to guarantee up to $7 million of
indebtedness of BlowOut (Guarantee). The Guarantee
expires for future borrowings on the earlier of (i)
December 31, 1997 or (ii) such time as the total
indebtedness of BlowOut subject to the Rentrak
Guarantee is equal to $7 million. During the term
of the term of Rentrak Guarantee, and/or so long as
any guarantee is thereunder outstanding, BlowOut has
agreed to pay the Company a weekly fee at a rate
equal to .02 percent per week of then-currently
outstanding indebtedness subject to the Rentrak
Guarantee. BlowOut has executed a $3 million note
in favor of the Company which accrues interest at 9%
per annum and is due in April 1999. At March 31,
1997, the total outstanding balance of the debt
under such note, including accrued interest, was
$3.3 million.
In July 1996, BlowOut obtained 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 13.98 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, 1997,
BlowOut had borrowed approximately $1.4 million
under the Credit Facility.
In August 1996, BlowOut obtained a revolving line
of credit (Line of Credit) in a maximum principal
amount at one time outstanding of $5 million. Under
the Line of Credit, BlowOut may only draw up to 80%
of the Orderly Liquidation Value (as defined in the
Line of Credit) of eligible new and used Cassette
inventory. Advances under the Line of Credit bear
interest at a floating rate per annum equal to the
Bank of America Reference Rate plus 2.75% percent
(11.25 percent as of March 31, 1997). The term of
the Line of Credit is three years. The Company has
agreed, under certain circumstances in the event of
default under the Line of Credit, to repurchase
BlowOut's Cassette inventory at specified amounts.
As of March 31, 1997, BlowOut had borrowed
approximately $3 million under the Line of Credit.
The Company's exposure related to adverse
financial and operational developments at BlowOut is
limited to its receivables from BlowOut [See Note 4
of the Notes to the Consolidated Financial
Statements] and the obligations under the Guarantee
[See Note 9 of the Notes to the Consolidated
Financial Statements].
On November 26, 1996, the Board authorized the re-
purchase of up to two million shares of Common Stock
in open market and negotiated purchases. As of
March 31, 1997, the Company had acquired 325,800
shares for an aggregate amount of $1,204,775. These
purchases were funded through cash flows from
operations.
The Company's sources of liquidity include its
cash balance, cash generated from operations and its
available credit facility. These sources are
expected to be sufficient to fund the Company's
operations for the year ending March 31, 1998.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Item Page
Report of Independent Public 20
Accountants
Consolidated Balance Sheets as of
March 31, 1997 and 1996 21
Consolidated Statements of Operations for 22
Years Ended March 31, 1997, 1996 and
1995
Consolidated Statements of Stockholders' 23
Equity for Years Ended March 31, 1997,
1996 and 1995
Consolidated Statements of Cash Flows for 24
Years Ended March 31, 1997, 1996 and
1995
Notes to Consolidated Financial Statements 26
Financial Statement Schedules
Schedule II 47
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
[Arthur Andersen LLP Letterhead]
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, 1997 and 1996,
and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended
March 31, 1997. 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 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Rentrak Corporation and subsidiaries as of
March 31, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended March 31, 1997 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,
fairly states in all material respects the financial data required to
be set forth therein in relation to the consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Portland, Oregon,
May 16, 1997
RENTRAK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1997 AND 1996
ASSETS
1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 10,167,169 $ 2,683,128
Investment securities available for sale - 344,500
Accounts receivable, net of allowance for
doubtful accounts of $409,313 and $627,895 16,434,566 15,116,203
Accounts receivable - affiliate - 3,227,006
Advances to program suppliers 492,844 1,462,875
Inventory 1,902,618 1,737,695
Deferred tax asset 1,365,064 1,353,226
Other current assets 2,901,964 3,343,389
------------ ------------
Total current assets 33,264,225 29,268,022
------------ ------------
PROPERTY AND EQUIPMENT, net 2,006,556 1,466,177
INTANGIBLES, net of accumulated amortization 171,509 347,137
of $3,969,938 and $3,694,370
NOTE RECEIVABLE, affiliate - 2,800,000
OTHER INVESTMENTS, net 778,950 3,477,105
DEFERRED TAX ASSET 3,637,563 2,918,838
OTHER ASSETS 3,189,192 1,225,331
NET NONCURRENT ASSETS OF DISCONTINUED - 14,749,248
OPERATIONS
------------ ------------
Total assets $ 43,047,995 $ 56,251,858
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 5,000,000 $ 2,700,000
Accounts payable 17,160,492 21,795,843
Accrued liabilities 613,669 2,163,325
Accrued compensation 1,695,814 1,240,543
Deferred revenue 2,672,849 2,004,865
Net current liabilities of discontinued 4,633,114 11,942,858
operations
------------ ------------
Total current liabilities 31,775,938 41,847,434
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; - -
authorized: 10,000,000 shares
Common stock, $.001 par value; authorized:
30,000,000 shares; issued and outstanding: 11,847 12,138
11,847,441 shares in 1997 and 12,138,216
shares in 1996
Capital in excess of par value 47,931,165 49,583,514
Net unrealized gain on investment securities 184,932 567,508
Accumulated deficit (35,452,729) (33,366,162)
Less- Deferred charge - warrants (1,403,158) (2,392,574)
------------ ------------
Total stockholders' equity 11,272,057 14,404,424
------------ ------------
Total liabilities and stockholders'
equity $ 43,047,995 $ 56,251,858
============ ============
The accompanying notes are an integral part of these consolidated
balance sheets.
RENTRAK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
1997 1996 1995
REVENUES:
PPT $105,787,973 $108,073,429 $79,793,584
Other 10,487,530 5,192,891 4,754,315
------------ ------------ -----------
116,275,503 113,266,320 84,547,899
------------ ------------ -----------
OPERATING COSTS AND EXPENSES:
Cost of sales 90,881,674 95,167,529 66,374,471
Selling and administrative 16,159,729 20,859,923 15,526,912
------------ ------------ -----------
107,041,403 116,027,452 81,901,383
------------ ------------ -----------
Income (loss) from operations 9,234,100 (2,761,132) 2,646,516
------------ ------------ -----------
OTHER INCOME (EXPENSE):
Interest income 862,143 1,078,798 695,190
Interest expense (181,950) (208,307) -
Gain on sale of investments 318,875 62,091 2,826,849
Other - (251,911) -
------------ ------------ -----------
999,068 680,671 3,522,039
------------ ------------ -----------
Income (loss) from continuing
operations before income tax 10,233,168 (2,080,461) 6,168,555
(provision) benefit
INCOME TAX (PROVISION) BENEFIT (3,950,003) 594,792 (768,045)
------------ ------------ -----------
Income (loss) from 6,283,165 (1,485,669) 5,400,510
continuing operations
DISCONTINUED OPERATIONS:
Loss from operations of
discontinued subsidiaries
(less applicable income tax
benefit of $(2,500,000) and
$(40,814) for 1996 and 1995
respectively - (18,700,000) (286,987)
Loss on disposal of
subsidiaries including
provision of
4,800,000 for operating
losses during phaseout periods
(less applicable income tax
benefit of $0) - (12,100,000) -
------------ ------------ -----------
Net income (loss) $ 6,283,165 $(32,285,669 $ 5,113,523
============ ============ ===========
NET INCOME (LOSS) PER SHARE
EARNINGS (LOSS) PER COMMON SHARE
AND COMMON EQUIVALENT SHARE:
Continuing operations $ .48 $ (.12) $ .43
Discontinued operations - (2.56) (.02)
------ ------ ------
Net income (loss) $ .48 $ (2.68) $ .41
====== ====== ======
EARNINGS (LOSS) PER COMMON SHARE
AND COMMON EQUIVALENT SHARE -
assuming issuance of all
dilutive contingent shares:
Continuing operations $ .45 $ (.12) $ .42
Discontinued operations - (2.56) (.02)
------ ------ ------
Net income (loss) $ .45 $ (2.68) $ .40
====== ====== ======
The accompanying notes are an integral part of these consolidated
statements.
RENTRAK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
1997 1996 1995
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 6,283,165 $(32,285,669) $ 5,113,523
Adjustments to reconcile net
income (loss) to net cash
provided (used)
by operating activities-
Loss on disposal of
discontinued operations - 12,100,000 -
(Gain) loss on asset and
investment sales (309,852) 426,827 (2,826,849)
Depreciation 891,857 5,034,493 1,441,872
Amortization and write-off
ofintangibles 272,433 11,545,750 1,242,564
Amortization of warrants 492,503 674,289 467,114
Provision for doubtful
accounts 655,147 523,315 (582,386)
Retailer financing program
reserves (401,891) 2,789,701 2,974,912
Reserves on advances to
program suppliers (147,451) 1,345,406 572,300
Deferred income taxes 161,331 (4,966,997) (2,737,426)
Change in specific
accounts, net of
effects in 1996 and 1995
from purchase of businesses:
Accounts receivable (2,921,826) (2,138,592) (4,726,871)
Advances to program
suppliers 1,099,101 1,025,835 659,348
Inventory (164,923) (5,638,802) (1,490,480)
Other current assets 4,108,957 (1,641,277) (1,244,614)
Accounts payable (4,635,351) 7,156,983 4,746,922
Accrued liabilities and
compensation 1,495,462 2,403,732 1,420,639
Deferred revenue 667,984 1,073,929 1,408,076
Net current liabilities
of discontinued operations 362,545 - -
----------- ------------ -----------
Net cash provided
(used) by operatings
activities 7,910,191 (571,077) 6,438,644
----------- ------------ -----------
(continued)
RENTRAK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
1997 1996 1995
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property,
equipment and $(1,454,391) $(10,143,322) $(1,273,080)
inventory
Investments in retailer
financing (3,178,020) (2,183,000) (8,930,618)
program
Proceeds from retailer
financing 2,029,911 1,199,005 -
program
Cash paid for purchases of
businesses, - (377,848) -
net of cash acquired
Purchases of investments - (344,500) (4,400,253)
Maturities of investments - - 4,400,253
Proceeds from sale of 526,000 951,394 3,027,548
investments
Reduction (purchases) of
other assets 495,667 (242,176) (663,470)
and intangibles
Proceeds from sale of 10,410 1,100,000 -
assets
----------- ------------ -----------
Net cash used by
investing activities (1,570,423) (10,040,447) (7,839,620)
----------- ------------ -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings (payments)
on line of 2,300,000 2,537,844 (3,259,724)
credit
Borrowing on notes payable - 3,501,971 -
Repurchase of common stock (1,204,775) (341,700) (189,550)
Issuance of common stock 49,048 114,011 1,743,937
----------- ------------ -----------
Net cash provided
(used) by financing 1,144,273 5,812,126 (1,705,337)
financing activities ----------- ------------ -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 7,484,041 (4,799,398) (3,106,313)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 2,683,128 10,709,405 13,815,718
CASH AND CASH EQUIVALENTS
INCLUDED IN NET CURRENT
LIABILITIES OF - 3,226,879 -
DISCONTINUED OPERATIONS
----------- ------------ -----------
CASH AND CASH EQUIVALENTS $10,167,169 $ 2,683,128 $10,709,405
AT END OF YEAR =========== ============ ===========
The accompanying notes are an integral part of these consolidated
statements.
RENTRAK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
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, which is the Company's primary continuing
operation, 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.
Divestitures
During the quarter ended March 31, 1996, the Company assessed its
overall business strategy and decided to divest two subsidiary units -
- - The Pro Image, Inc. (Pro Image) and BlowOut Entertainment, Inc.
(BlowOut). Thus, the operations of Pro Image and BlowOut are reflected
as discontinued operations in the accompanying March 31, 1996 and 1995
statements of operations. During fiscal year 1997, shares of BlowOut
common stock were distributed to the Company's shareholders in a "spin-
off" and Pro Image was liquidated. Refer to Note 14 for discussion of
divestitures, reserves established by the Company related to the
discontinued operations, and the nature of management's estimates used
in determining the reserves.
Rentrak Japan
In December 1989, the Company entered into a definitive agreement with
Culture Convenience Club Co., Ltd. (CCC), the Company's joint venture
partner in Rentrak Japan, 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 will receive a royalty of 1.67% for all
sales of up to $47,905,000, plus one-half of 1% (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 payable $1 million
in fiscal 1995, which has been received; and $1 million no later than
March 31, 1999. The payment of $1 million due no later than March 31,
1999 has not been recognized as revenue by the Company due to
uncertainty of collection. 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.
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.
Pro Image and Team Spirit's (a 100% owned subsidiary of Pro Image)
year-ends are the last day of February. As there are no intervening
events which materially affect the financial position or results of
operations, the consolidated financial statements include Pro Image's
balance sheet as of February 28, 1997 and February 29, 1996 and the
statements of operations and cash flows for the years ended February
28, 1996 and 1995. Team Spirit's balance sheet as of February 28,
1997 and February 29, 1996 and the statements of operations and cash
flows for the year ending February 29, 1996 and the six-month period
ending February 28, 1995 are included in the consolidated financial
statements. These periods are based on the acquisition dates of the
respective entities.
BlowOut's balance sheet as of March 31, 1996 and the statements of
operations and cash flows for the years ended March 31, 1996 and 1995
are included in the consolidated financial statements.
Subsequent to March 31, 1996, the Company approved plans to
discontinue the operations of Pro Image and BlowOut (Note 14). At
March 31, 1997 and 1996, the assets and liabilities of Pro Image have
been segregated in the consolidated financial statements. The net
assets of BlowOut have been segregated in the consolidated financial
statements at March 31, 1996 and are not reflected in the consolidated
financial statements at March 31, 1997 because the distribution of
BlowOut common stock described in Note 14 occurred in November 1996.
The statements of operations for the years ended March 31, 1997, 1996
and 1995 in the consolidated financial statements reflect these
entities as discontinued. The 1995 cash flow statement has not been
restated to reflect discontinued operations.
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
reserves on retailer financing program investments (Note 4) and
estimated losses on disposal of discontinued operations (Note 14).
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less 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:
Proceeds Gross Gross
Gains Losses
1997 $ 526,000 $ 318,875 $ -
1996 951,394 150,288 (88,197)
1995 3,027,548 2,856,716 (25,767)
Unrealized losses of $147,421 were recorded in other income in the
March 31, 1996 Statement of Operations. There were no unrealized
gains or losses recognized in the March 31, 1997 and 1995 Statement 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, 1997
and 1996.
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 fixed assets 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. To perform that review, the Company estimates the sum
of expected future undiscounted preinterest expense net cash flows
from the 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.
In connection with the acquisition of Pro Image in 1994, the Company
purchased certain intangible assets totaling $6,269,050. These assets
include customer and dealer lists, a covenant not to compete,
franchise agreements and goodwill. In connection with the
acquisitions of Team Spirit and then Image Makers, Inc. and Barenz-
Runia, Inc., the Company purchased goodwill totaling approximately
$4.1 million and $557,000, respectively. Prior to March 31, 1996,
these assets were being amortized on the straight-line method over a
12-year period based on the factors influencing the acquisition
decision. The Company believed the above useful lives were
appropriate based on the factors influencing acquisition decisions.
These factors included store location, profitability and general
industry outlook. The Company analyzes the realizability of all costs
in excess of the fair values of net assets acquired related to
acquisitions to determine if any write-down is necessary. Due to
events which occurred during fiscal year 1996 such as continuation of
operating losses and the decision to dispose of Pro Image (including
subsidiaries), the Company's analysis determined that intangible
assets of approximately $9,300,000 were not recoverable. Thus, the
assets were written off to their estimated fair value of $0. These
write-offs are reflected in losses from discontinued operations during
the fiscal year ended March 31, 1996.
Revenue Recognition
The PPT agreements 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 operations 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 charges
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 $254,460, $255,568 and $426,102 during
1997, 1996 and 1995, 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.
Net Income (Loss) Per Share
At March 31, 1997 and 1995 primary earnings per share are based on the
weighted average number of shares outstanding and the assumed exercise
of common stock equivalent options and warrants regardless of whether
the market price of the common stock exceeded the exercise price of
the options and warrants. The number of treasury shares assumed to be
purchased with the proceeds from the exercise of the options and
warrants was limited to 20% of the outstanding shares at period-end.
Those purchases were assumed to have been made at the average market
price of the Company's common stock during the year. Proceeds from
exercise of the options and warrants in excess of those used to
purchase treasury shares were assumed to have been invested in
government securities with the resultant interest income, adjusted for
appropriate tax effects, added to net income for purposes of
calculating earnings per share. For the 1997 primary earnings per
share calculation, 14,538,787 common shares and common share
equivalents were assumed outstanding and $647,155 of assumed interest
income, net of tax, was added to the Company's net income for purposes
of computing earnings per share. For the 1995 primary earnings per
share calculation, 13,397,951 common shares and common share
equivalents were assumed outstanding and $394,249 of assumed interest
income, net of tax, was added to the Company's net income for purposes
of computing earnings per share.
Fully diluted earnings per share at March 31, 1997 and 1995 are based
on the weighted average number of shares outstanding and the assumed
exercise of common stock equivalent options and warrants regardless of
whether the market price of the common stock exceeded the exercise
price of the options and warrants. In addition, contingent warrants
were assumed to have been exercised. The number of treasury shares
assumed to be purchased with the proceeds from the exercise of the
options and warrants was limited to 20% of the outstanding shares at
period-end. Those purchases were assumed to have been made at the
greater of the average or ending market price of the Company's common
stock during the year. Proceeds from exercise of the options and
warrants in excess of those used to purchase treasury shares were
assumed to have been invested in government securities with the
resultant interest income, adjusted for appropriate tax effects, to be
added to net income for purposes of calculating earnings per share.
For the 1997 fully diluted earnings per share calculation, 16,242,400
common shares and common share equivalents were assumed outstanding
and $1,007,489 of assumed interest income, net of tax, was added to
the Company's net income for purposes of computing earnings per share.
For the 1995 fully diluted earnings per share calculation, 14,317,380
common shares and common share equivalents were assumed outstanding
and $582,494 of assumed interest income, net of tax, was added to the
Company's net income for purposes of computing earnings per share.
Loss per common share and common equivalent share for 1996 was
computed based on the weighted average number of shares of common
stock and common equivalent shares outstanding, which was 12,019,273.
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 cooperative advertising reimbursements,
totaled $(627,371), $1,472,702 and $(95) for the years ended March 31,
1997, 1996 and 1995, respectively.
Statement of Cash Flows
The Company made the following cash payments for the years ended
March 31:
1997 1996 1995
INTEREST $ 197,642 $ 326,870 $ 35,979
INCOME TAXES, NET OF REFUNDS (156,284) 236,545 3,288,189
NONCASH FINANCING AND INVESTING
ACTIVITIES:
Decrease in equity as a result of
decrease in net noncurrent assets of
discontinued operations through 11,122,512 - -
reduction in equity
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 - -
Reduction of warrants 496,913 - -
Issuance of warrants - 3,533,977
Addition to other assets through
issuance of common stock - - 128,199
Acquisition of businesses through
issuance of stock - 5,213,125 5,111,166
Changes in net unrealized gains (losses)
on investment securities through
adjustments to stockholders' equity (382,576) 738,255 (1,604,929)
Recent Pronouncements
During March 1995, the Financial Accounting Standards Board issued
Statement No. 121 (SFAS 121), "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of," which
requires the Company to review for impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets
whenever events or changes in circumstances indicate that the carrying
amount of an asset might not be recoverable. In certain situations,
an impairment loss would be recognized. The Company has adopted the
provisions of SFAS 121 which did not have a material effect on the
Company's financial statements.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," which establishes a fair value-based method of
accounting for stock-based compensation plans and requires additional
disclosures for those companies that elect not to adopt the new method
of accounting. The Company has continued to account for employee
purchase rights and stock options under APB Opinion No. 25,
"Accounting for Stock Issued to Employees." See Note 7 for SFAS 123
disclosures.
In February 1997, the FASB issued Statement No. 128 (SFAS 128),
"Earnings Per Share," which establishes new standards for computing
and presenting earnings per share. SFAS 128 is effective for
financial statements issued for periods ending after December 15,
1997, including interim periods. Management has not yet determined
whether the implementation of SFAS 128 will have any impact on the
Company's earnings per share amounts.
Reclassifications
Certain amounts in the prior year's consolidated financial statements
have been reclassified to conform to the current year's presentation.
2. INVESTMENT SECURITIES:
The carrying value and estimated fair value of marketable securities
at March 31 were as follows:
Unrealized Unrealized
Cost Gross Gain Gross Loss Fair Value
As of March 31, 1997:
Available for sale-
Noncurrent:
corporate securities $480,672 $ 524,934 $ (226,656) $ 788,950
======= ======== ======== ========
As of March 31, 1996:
Available for sale-
Current:
Corporate securities $207,125 $ 137,375 $ - $ 344,500
======= ======== ======== ========
Noncurrent:
Corporate securities $680,672 $1,118,462 $ (340,499) $1,458,635
======= ======== ======== ========
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,
1997 1996
Furniture and fixtures $ 4,782,463 $ 4,101,822
Machinery and equipment 403,177 399,897
Leasehold improvements 1,546,104 849,534
--------- ---------
6,731,744 5,351,253
Less accumulated
depreciation (4,725,188) (3,885,076)
--------- ---------
$ 2,006,556 $ 1,466,177
========= =========
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
which 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 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 amounts the
Company could ultimately receive could differ materially in the near-
term from the amounts assumed in establishing the reserves.
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 May 1997, the
Company has invested or made oral or written commitments to loan to or
invest approximately $13,100,000 in various video retailers. The
amounts outstanding under this program individually range from
$200,000 to $5,1000,000. 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 1997 through 2001. Interest rates on the
various loans range from the prime rate plus 1% to the prime rate plus
2%. 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 No. 114 (SFAS 114), "Accounting by Creditor's for Impairment
of a Loan." 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.
As of March 31, 1997, the Company has approximately $13,100,000 in
loans and investments outstanding under the program and reserves of
approximately $10,300,000. At March 31, 1996, the Company had
invested or loaned approximately $7,300,000 under the program and had
provided reserves of approximately $6,000,000.
The activity in the total reserves for the retailer financing program
are as follows for the years ended March 31:
1997 1996
Beginning balance $ 6,032,551 $ 3,242,850
Additions to reserve 4,307,824 2,789,701
---------- -----------
Ending balance $10,340,375 $ 6,032,551
=========== ===========
A substantial portion of the additions to reserve in fiscal 1997 were
established by reclassification of other reserves included in the
Company's balance sheet as of March 31, 1996.
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 $10,000,000 or
the sum of (a) 80% of the net amount of eligible accounts receivable
as defined in the agreement. The line of credit expires on December
18, 1997.
Interest is payable monthly at the bank's prime rate plus .5% (9.0% at
March 31, 1997). The lender has been granted the option to purchase
30,000 unregistered shares of common stock of the Company at $7 per
share, which exceeded market value at the date of grant. The line is
secured by substantially all of the Company's assets. 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 of noncompliance as of
March 31, 1997. At March 31, 1997 and 1996, the Company had
$5,000,000 and $2,700,000 respectively, outstanding under this
agreement.
6. INCOME TAXES:
The provision (benefit) for income taxes from continuing operations is
as follows for the years ended March 31:
1997 1996 1995
Current tax provision:
Federal $3,113,822 $1,663,070 $1,887,414
State 633,637 324,606 338,067
---------- ---------- ----------
3,747,459 1,987,676 2,225,481
Deferred tax provision
(benefit) 202,544 (2,582,468) (1,457,436)
---------- ---------- ----------
Income tax provision
(benefit) $3,950,003 $ (594,792) $ 768,045
========== =========== ==========
The reported provision (benefit) for income taxes differs from the
amount computed by applying the statutory federal income tax rate of
34% to income before provision (benefit) for income taxes as follows
for the years ended March 31:
1997 1996 1995
Provision (benefit) computed at
statutory rates $3,479,277 $(707,357) $2,097,309
State taxes, net of federal benefit 418,200 (214,240) 256,331
Utilization of foreign loss
carryforwards - - (1,143,876)
Change in valuation allowance - - (953,470)
Amortization of warrants 167,450 236,058 -
Utilization of foreign tax credit (540,000) (100,000) -
Other 425,076 190,747 511,751
-------- -------- ---------
$3,950,003 $(594,792) $ 768,045
========= ========= =========
Prior to 1995, the Company was uncertain as to whether the foreign
loss carryforwards could be utilized and therefore no deferred tax
asset was established. In fiscal year 1995, it was determined that
the losses could be utilized and therefore the Company appropriately
reduced 1995 taxable income.
The total reduction in the valuation allowance during the years ended
March 31, 1997, 1996 and 1995, was $0, $0 and $953,470, respectively.
Deferred tax assets and liabilities from continuing operations are
comprised of the following components at March 31, 1997 and 1996:
1997 1996
Deferred tax assets:
Current-
Vacation accrual $ - $ 104,948
Allowance for doubtful accounts 155,539 238,600
Retailer-related accruals 1,147,610 1,081,039
Legal settlement accrual - 76,000
Unrealized gain on investment
securities - (52,203)
Other 61,915 (95,158)
---------- -----------
Total current deferred tax assets 1,365,064 1,353,226
---------- ---------
Noncurrent-
Depreciation 389,670 128,077
Retailer financing program reserve 2,595,126 2,384,798
Program supplier reserves 665,252 598,800
Unrealized (gain) loss on investments (57,326) (221,527)
Other 44,841 28,690
---------- ---------
Total noncurrent deferred tax assets 3,637,563 2,918,838
---------- ---------
Total deferred tax assets $5,002,627 $4,272,064
========== ==========
7. STOCKHOLDERS' EQUITY:
Stock Options and Warrants
Options are granted under the 1986 Stock Option and the Directors'
Stock Option Plans, which are administered by the Board of Directors,
at an exercise price equal to fair market value as of the date of
grant. Options under the 1986 Stock Option Plan are generally
exercisable over four to ten years and expire ten years after date of
grant. Options under the Directors' Stock Option Plan are generally
exercisable over one to five years and expire five years after date of
grant. As of March 31, 1997, the Company has 66,600 options available
to be granted under the Directors' Stock Option Plan. Thre are no
options available under the 1986 Stock Option Plan as the Plan expired
during fiscal year 1997.
The Company has elected to account for its stock-based compensation
plans in accordance with APB No. 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 1997 and 1996, using the Black-Scholes option pricing model as
prescribed by SFAS No. 123 and the following assumptions:
1997 1996
Risk-free interest rate 5.12 - 5.29% 5.02 - 5.86%
Expected dividend yield 0% 0%
Expected lives 4.6 - 10 years 5 - 10 years
Expected volatility 58.90% 58.86%
Adjustments were made for options forfeited prior to vesting. Had
compensation expense for these plans been determined in accordance
with SFAS No. 123, the Company's net income (loss) and earnings (loss)
per share reflected on the March 31, 1997 and 1996 statement of
operations would have been the following unaudited pro forma amounts:
1997 1996
Net income (loss)
As reported $6,283,165 $(32,285,669)
Pro forma 5,784,529 (32,645,669)
Earnings (loss) per
share
As reported $ .45 $ (2.68)
Pro forma .42 (2.72)
Because the FASB Statement No. 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
-------------------------
Number Weighted
of Average
Shares Exercise Price
Balance at March 31, 1994 1,158,806 $4.65
Granted:
Option price > fair market 210,478 6.85
value
Option price < fair market 1,479,628 5.64
value
Issued (87,683) 2.40
Canceled (38,061) 5.36
--------- -----
Balance at March 31, 1995 2,723,168 5.41
Granted:
Option price = fair market 55,000 6.06
value
Option price > fair market 358,580 5.28
value
Option price < fair market 462,677 4.92
value
Issued (47,270) 2.02
Canceled (459,547) 6.67
--------- -----
Balance at March 31, 1996 3,092,608 5.20
Granted:
Option price = fair market 25,000 5.00
value
Option price > fair market 78,204 5.10
value
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
========= =====
The weighted average fair value of options granted during the years
ended March 31, 1997, 1996 and 1995 was $3.42, $3.32 and $3.36,
respectively.
The following table summarizes information about stock options
outstanding at March 31, 1997:
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 1997 Life Price 1997 Price
$1.00-$2.59 121,669 2.5 $1.359 121,669 $1.36
2.60- 6.49 2,816,859 6.8 4.84 1,315,470 4.92
6.50- 9.00 17,595 3.6 7.71 17,595 7.71
--------- ---------
$1.00- 9.00 2,956,123 6.6 4.72 1,454,734 4.65
========= =========
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 14).
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
200,000. The plan is administered by the Stock Option Committee of
the Board who determines the terms and conditions of options issued
under the plan. On April 1, 1997, 81,700 options were issued to
employees at an exercise price of $2.875.
In September 1994, a program supplier exercised warrants to acquire
250,000 shares of the Company's common stock for $5.19 per share. The
warrants were granted in 1991.
In connection with the secondary offering in May 1991, the Company
issued to its investment banker a warrant to purchase 147,500 shares
of the Company's common stock. The exercise price per share of $8.90
equaled market value at the date of grant. The warrants expired
unexercised on May 22, 1997.
In August 1992, the Company entered into an agreement with a service
supplier to use and sublease certain software on the PPT system. As
part of the agreement, the Company paid a licensing fee of $188,000,
sold 251,889 shares of common stock for $7.00 per share ($1,763,223),
which approximated market value at date of transaction, and granted a
warrant to purchase 251,889 shares of common stock at an exercise
price of $9.50 per share, which exceeded market value at the date of
grant, through August 1997. In November, 1996, the Company adjusted
the number of shares of common stock under the warrant to 273,022 and
decreased the price to $8.765. This adjustment was done in connection
with the distribution of the common stock of BlowOut in November 1996
(Note 14). The adjustment was done pursuant to the
supplier's agreement which requires the Company to adjust the warrant
if a distribution of the Company's assets occurs. The licensing fee
was capitalized in other assets and was being amortized over five
years, the life of the licensing agreement. In fiscal year 1995, the
asset was written down to zero as the agreement was terminated.
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. Certain contractual
arrangements must be performed by the program supplier, however,
before any warrants are issued. 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 14). The adjustment was done pursuant to the supplier's
agreement which requires the Company to adjust the warrant if a
distribution of the Company's assets occurs.
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. 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. 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 14). The
adjustment was done pursuant to the supplier's agreement which
requires the Company to adjust the warrant if a distribution of the
Company's assets occurs.
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 14). The adjustment was done pursuant to the supplier's
agreement which requires the Company to adjust the warrant if a
distribution of the Company's assets occurs.
All warrants which the Company agreed to issue in 1995 have been
valued by an outside valuation firm using standard warrant valuation
models. The value of the warrants of $3,533,977 has been recorded in
the equity section and will be amortized over the associated periods
to be benefited by each group of warrants. For 1997, 1996 and 1995,
expense associated with the warrants was $492,503, $674,289, and
$467,114, 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.
8. ACQUISITIONS:
Entertainment One, Inc. Acquisition
On August 31, 1994, the Company acquired 169,230 newly issued shares
of common stock of Entertainment One, Inc. (E-1) valued at $338,460 in
lieu of a financing fee associated with $1,700,000 of financing
provided by the Company to E-1. On December 1, 1994, the Company
acquired 500,000 newly issued shares of common stock in E-1 at $2.00
per share. Following the acquisition, the Company owned approximately
9.6% of the outstanding shares of E-1. On May 26, 1995, the Company
purchased 3,200,000 shares of common stock of E-1 from an E-1
stockholder at $.004 per share. Following the acquisition, the
Company owned approximately 57% of the outstanding shares of E-1.
In connection with this acquisition, the five "stand-alone" video
stores owned by E-1 were sold in June 1995 for approximately
$1,100,000. These assets were valued at their net realizable value
when allocating the purchase price to the assets acquired and
liabilities assumed.
On October 20, 1995, the Company purchased from E-1 $985,591 principal
amount of convertible debentures, all of which were converted into
13,798,275 shares of common stock of E-1 on December 15, 1995. Also
on December 15, 1995, the Company converted a $2,000,000 line of
credit that it had provided to E-1 into 28,000,000 shares of common
stock of E-1. Following these transactions, the Company owned 93% of
the outstanding shares of E-1.
The results of operations of the acquired stores for the ten-month
period ended March 31, 1996, have been included in the results of
discontinued operations of the Company.
Supercenter Entertainment Corporation Acquisition
On August 31, 1995, the Company acquired certain assets and assumed
certain liabilities of Supercenter Entertainment Corporation (SEC),
which constituted the Wal-Mart and Kmart "store within a store" video
retail operations of SEC.
The total cost of the SEC acquisition of $5,200,000 was provided by
issuing 878,000 shares of common stock with an aggregate market value
of approximately $5,200,000.
The results of operations of the acquired stores for the seven-month
period ended March 31, 1996, are included in the results of
discontinued operations of the Company.
The purchase method of accounting was used to record both the E-1 and
SEC acquisitions. As a result of the SEC and E-1 acquisitions, costs
in excess of underlying net asset values of approximately $5,200,000
were recorded to intangible assets, consisting of goodwill and
favorable lease contracts.
If the E-1 acquisition and the SEC acquisition had occurred at the
beginning of the year ended March 31, 1996, revenues, net loss from
continuing operations and net loss per common share and common share
equivalent from continuing operations would not be impacted as the E-1
and SEC operations were discontinued in the year ended March 31, 1996,
and the results of the related business segment (video retail) are not
included in revenues, net loss from continuing operations, and net
loss per common share and common share equivalent from continuing
operations in any periods presented in the consolidated statements of
operations (Note 14).
The following table presents the unaudited pro forma results of
discontinued operations for the years ended March 31, 1996 and 1995 as
if the E-1 acquisition and the SEC acquisition had been consummated at
the beginning of the period. These pro forma results have been
prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had the acquisitions been
consummated at the beginning of the period.
Year Ended March 31,
---------------------
1996 1995
(Unaudited)
Revenue from discontinued operations $ 61,047,768 $36,519,143
Net loss from discontinued operations (18,984,378) (5,169,918)
Net loss per share from discontinued
operations (1.53) (0.30)
9. COMMITMENTS:
Leases
The Company leases certain facilities and equipment under operating
leases expiring at various dates through 2008. Rental payments over
the term of the leases exceeding one year are as follows:
Year ending March 31,
1998 $ 1,722,469
1999 1,747,217
2000 1,707,892
2001 1,708,048
2002 1,738,301
2003 and thereafter 7,672,968
---------
$16,296,895
==========
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 $1,477,651,
$1,319,271 and $1,030,640 for the years ended March 31, 1997, 1996 and
1995, 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, 1997, the
Company has recorded approximately $1,769,000 for potential losses
under such guarantee arrangements.
The Company has guaranteed BlowOut's liabilities to certain vendors
for video tape purchases and for equipment purchases at BlowOut
stores. At March 31, 1997, the amount owed by BlowOut for these
purchases was approximately $553,000.
The Company is the principal creditor of BlowOut. The Company has
agreed to guarantee up to $7 million of indebtedness of BlowOut
(Guarantee). The Guarantee expires with respect to any future
borrowings on the earlier of (i) December 31, 1997 or (ii) such time
as the total indebtedness of BlowOut subject to the Rentrak Guarantee
is equal to $7 million. During the term of the Rentrak Guarantee,
and/or so long as any guarantee is thereunder outstanding, BlowOut has
agreed to pay the Company a weekly fee at a rate equal to .02% per
week of then-currently outstanding indebtedness subject to the Rentrak
Guarantee. BlowOut has executed a $3.0 million note in favor of the
Company which accrues interest at 9% per annum and is due in April
1999. At March 31, 1997, the total outstanding balance of the debt
under such note, including accrued interest, was $3.3 million.
In July 1996, BlowOut obtained 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 13.98%. Pursuant to the terms of the Rentrak
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, 1997,
BlowOut had borrowed approximately $1,376,000 under the Credit
Facility.
In August 1996, BlowOut obtained a revolving line of credit (Line of
Credit) in a maximum principal amount at one time outstanding of
$5 million. Under the Line of Credit, BlowOut may only draw up to 80%
of the Orderly Liquidation Value (as defined in the Line of Credit) of
eligible new and used cassette inventory. Advances under the Line of
Credit bear interest at a floating rate per annum equal to the Bank of
America Reference Rate plus 2.75% (11.25% as of March 31, 1997). The
term of the Line of Credit is three years. The Company has agreed,
under certain circumstances in the event of default under the Line of
Credit, to repurchase BlowOut's cassette inventory at specified
amounts. As of March 31, 1997, BlowOut had borrowed approximately
$3,012,000 under the Line of Credit.
10. CONTINGENCIES:
The Company is subject to certain 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 will not materially affect the financial position or results
of operation of the Company.
11. RENTRAK JAPAN:
As is discussed in Note 1, the Company reduced its one-fourth
interest in Rentrak Japan to 10% in August 1996. Summarized financial
data for the joint venture for the years in which the Company
accounted for the investment on the equity method, after translation
to U.S. currency, is as follows:
March 31,
1996 1995
Current assets $34,123,179 $39,809,085
Noncurrent assets 7,792,028 5,543,661
Current liabilities 37,440,434 44,460,125
Noncurrent liabilities 4,307,679 4,252,586
Shareholders' equity
(deficit) 167,094 (3,359,965)
Net sales 115,912,094 88,382,895
Cost of sales 77,291,283 59,935,511
Net income (loss) 2,920,047 (760,946)
As of March 31, 1993, the Company's investment has been written down
to zero. The Company has provided no guarantee or other financial
commitments for the investee which would require the recognition of
additional losses in 1995 and 1994 from the investee under the equity
method. During 1997 and 1996, no income was recognized by the Company
as the Company's share of net income does not exceed the net losses
not recognized during the period the equity method was suspended.
12. 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, 1997, 1996 and 1995 were $57,743, $40,436 and $35,347,
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 156,626 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 8,685 shares for aggregate
proceeds of $36,520, 5,059 shares for aggregate proceeds of $28,781
and 11,062 shares for aggregate proceeds of $78,449 in 1997, 1996 and
1995, respectively.
13. BUSINESS SEGMENTS, SIGNIFICANT SUPPLIERS AND MAJOR CUSTOMER:
Business Segments - Continuing Operations
1997 1996 1995
Net sales (1):
PPT $106,038,728 $108,279,012 $79,793,584
Other 10,536,922 5,396,884 4,754,315
$116,575,650 $113,675,896 $84,547,899
============ ============ ===========
Income (loss) from operations:
PPT $ 9,063,932 $ (2,574,745) $ 2,886,841
Other 170,168 (186,387) (240,325)
------------ ------------- -----------
$ 9,234,100 (2,761,132) 2,646,516
============ ============= ==========
Identifiable assets (1), (2):
PPT $ 42,163,519 $ 77,784,888 $60,757,741
Sports apparel - - 22,610,120
Retail video - - 1,101,399
Other 3,067,669 2,380,608 1,973,659
------------ ------------ -----------
$ 45,221,188 $ 80,165,496 $86,442,919
============ ============ ===========
Depreciation:
PPT $ 725,898 $ 806,416 $ 698,979
Other 165,959 208,421 160,925
------------ ------------ -----------
$ 891,857 $ 1,014,837 $ 859,904
============ ============ ===========
Amortization:
PPT $ 183,261 $ 1,520,445 $ 847,620
Other - - 156,924
------------ ------------ -----------
$ 183,261 $ 1,520,445 $ 1,004,544
============ ============ ===========
Capital Expenditures:
PPT $ 1,212,122 $ 640,821 $ 430,021
Other 242,269 11,679 -
------------ ------------ -----------
$ 1,454,391 $ 652,500 $ 430,021
============ ============ ===========
Business Segments - Discontinued Operations
1997 1996 1995
Net sales:
Sports apparel $ - $39,131,760 $26,363,211
Retail video - 17,466,804 1,255,121
---------- ----------- -----------
$ - $56,598,564 $27,618,332
========== =========== ============
Income (loss) from discontinued
operations:
Sports apparel $ - $(4,576,815) $ 270,176
Retail video - (6,568,656) (467,223)
---------- ------------- ----------
$ - $(11,145,471) $ (197,047)
========== ============= ============
Depreciation:
Sports apparel $ - $ 968,180 $ 438,871
Retail Video - 3,051,476 143,097
---------- ----------- ----------
$ - $ 4,019,656 $ 581,968
========== =========== ==========
Amortization:
Sports apparel $ - $ 10,195,094 $ 684,889
Retail video - 504,500 20,245
---------- ----------- ----------
$ - 10,699,594 705,134
========== =========== ==========
Capital Expenditures, net of
acquisitions:
Sports apparel $ - $ 1,774,507 $ 832,621
Retail video - 7,716,315 10,438
---------- ----------- ----------
$ - $ 9,490,822 $ 843,059
========== =========== ==========
(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.
(2)1995 identifiable assets have not been restated for discontinued
operations.
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. The
Company has one program supplier that supplied product that generated
39%, a second that generated 21%, and a third that generated 15% of
the Company's revenues for the year ended March 31, 1996. The Company
has one program supplier that supplied product that generated 26%, a
second that generated 17%, and a third that generated 15% of the
Company's revenues for the year ended March 31, 1995. There were no
other program suppliers who provided product accounting for more than
10% of sales for the years ended March 31, 1997, 1996 and 1995.
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%, 10% and 14% of the Company's revenues
in 1997, 1996 and 1995, respectively.
14. DISCONTINUED OPERATIONS:
During fiscal year 1997, the Company disposed of substantially all the
net assets of Pro Image through either sale or closure of the stores.
Pro Image is accounted for as discontinued operations and,
accordingly, its operations are segregated in the accompanying
statement of operations. Pro Image incurred losses from operations,
net of income tax benefit, of approximately $1,926,000 and $12,720,000
(including a write-off of intangible assets of $9,300,000 (Note 1))
for the years ended February 28, 1997 and February 29, 1996,
respectively. These amounts were included in loss on disposal and
loss from operations of discontinued subsidiaries in the March 31,
1996 accompanying statement of operations. The Company also accrued
at March 31, 1996 other costs of approximately $6,700,000 associated
with the disposition such as professional fees and a write-down of the
assets to their estimated realizable value. A deferred tax asset
related to these costs of approximately $3,380,000 was also recorded
with a valuation allowance reserve against the entire asset. These
other costs and write-down costs are included in loss on disposal of
subsidiaries in the accompanying statement of operations for the
fiscal year ended March 31, 1996.
Net current liabilities of Pro Image at March 31, 1997 of
approximately $200,000 represent accrued liabilities remaining to be
paid. Net noncurrent assets of Pro Image which are included in net
noncurrent assets of discontinued operations in the accompanying
balance sheet at March 31, 1996, are comprised primarily of property
and equipment and long-term debt. Net current liabilities of Pro
Image which are included in net current liabilities of discontinued
operations in the accompanying balance sheet at March 31, 1996, are
comprised primarily of inventory, receivables, accounts payable,
accrued liabilities, estimated operating losses to be incurred by Pro
Image through the disposal date and other costs associated with the
disposition.
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. Pursuant to the Distribution
Agreement, each holder of common stock of the Company received one
share of BlowOut Common Stock for every 8.34 shares of the Company's
common stock owned of record by such holder on November 18, 1996. The
distributed shares of BlowOut Common Stock represented approximately
60% of the outstanding shares of BlowOut Common Stock. As a result of
the distribution, the March 31, 1997 consolidated financial statement
reflect the elimination of the net assets and liabilities related to
BlowOut and the reduction of the Company's ownership in BlowOut to
approximately 9.9% of the outstanding BlowOut Shares. The operations
of BlowOut are reflected as discontinued operations in the March 31,
1996 consolidated financial statements.
BlowOut is accounted for as discontinued operations and, accordingly,
its operations are segregated in the March 31, 1996 accompanying
statement of operations. BlowOut incurred losses from operations, net
of income tax benefit, of approximately $4,000,000 and $5,980,000 for
the period ended November 26, 1996 and for the year ended March 31,
1996, respectively. These amounts are included in loss from
operations and loss on disposal of discontinued subsidiaries in the
March 31, 1996, accompanying statement of operations. The Company
also accrued at March 31, 1996, professional fees of approximately
$600,000 associated with the disposition. A deferred tax asset
related to these costs of approximately $1,158,000 was also recorded
with a valuation allowance reserve against the entire asset. These
fees and valuation allowances are included in loss on disposal of
subsidiaries in the accompanying statement of operations.
Net current liabilities of discontinued operations at March 31, 1997
include approximately $4,400,000 relating to BlowOut for amounts
reserved for contingencies not yet settled as of March 31, 1997. Net
noncurrent assets of BlowOut included in net noncurrent assets of
discontinued operations in the accompanying balance sheet at March 31,
1996, are comprised primarily of rental inventory, property and
equipment, intangibles, and long-term debt. Net current liabilities
of BlowOut which are included in net current liabilities of
discontinued operations in the accompanying balance sheet at March 31,
1996, are comprised primarily of cash, inventory, accounts payable,
accrued liabilities, estimated operating losses to be incurred by
BlowOut through the disposal date and other costs associated with the
disposition.
During the year ended March 31, 1997, the Company provided for
additional losses related to the spinoff of BlowOut, net of tax
benefit of $741,000 in the amount of approximately $7,500,000. A
deferred tax asset related to these costs of approximately $3,165,000
was also recorded with a valuation allowance reserve against the
entire asset. The additional losses relate to contingencies which are
not settled as of March 31, 1997. 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 $4,000,000, the Company recorded
a gain of approximately $7,500,000. Therefore, there was no net
impact on the March 31, 1997 statement of operations of these
adjustments to gain or loss on disposal of discontinued operations.
Revenues, operating costs and expenses, other income and expenses, and
income taxes for fiscal year 1995 have been reclassified for amounts
associated with the discontinued operations.
Revenues from such operations for the periods ended March 31, were as
follows:
1997 1996 1995
Pro Image $24,071,011 $39,131,760 $26,363,211
BlowOut 20,451,070 17,466,804 1,255,121
Net current liabilities of discontinued operations include
management's best estimates of the anticipated losses from
discontinued operations through the final resolution of all
contingencies related to the disposition of the two subsidiaries. The
estimates are based on an analysis of the costs which may be incurred
to dispose of the entities. The amounts the Company will ultimately
incur could differ materially in the near term from the amounts
assumed in arriving at the loss on disposal of the discontinued
operations.
RENTRAK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
Net Unrealized
Common Stock Capital in Gain (Loss)
Number of Excess of on Investment Accumulated
Shares Amount Par Value Securities Deficit Warrants Total
BALANCE AT MARCH 31, 1994 10,224,057 $10,224 $34,272,263 $1,434,182 $ (6,194,016) $ - $ 29,522,653
Repurchase of common stock (38,300) (38) (189,512) - - - (189,550)
Issuance of common stock 364,445 364 1,549,25 - - - 1,549,621
Issuance of common stock for
acquisitions 639,561 640 5,110,526 - - - 5,111,166
Issuance of common stock under
employee stock options plans 87,483 87 322,428 - - - 322,515
Net income - - - - 5,113,523 - 5,113,523
Change in net unrealized gain
(loss) on investment securities - - - (1,604,929) - - (1,604,929)
Issuance of warrants - - 3,533,977 - - (3,533,977) -
Amortization of warrants - - - - - 467,114 467,114
------- ----- -------- --------- -------- -------- --------
BALANCE AT MARCH 31, 1995 11,277,246 11,277 44,598,939 (170,747) (1,080,493) (3,066,863) 40,292,113
Repurchase of common stock (69,300) (69) (341,631) - - - (341,700)
Issuance of common stock 883,000 883 5,230,577 - - - 5,231,460
Issuance of common stock under
employee stock option plans 47,270 47 95,629 - - - 95,676
Net loss - - - - (32,285,669) - (32,285,669)
Change in net unrealized gain
(loss) on investment securites - - - 738,255 - - 738,255
Amortization of warrants - - - - - 674,289 674,289
------- ----- -------- --------- -------- -------- --------
BALANCE AT MARCH 31, 1996 12,138,216 12,138 49,583,514 567,508 (33,366,162) (2,392,574) 14,404,424
Repurchase of common stock (325,800) (326) (1,204,449) - - - (1,204,775)
Issuance of common stock under
employee stock option plans 35,025 35 49,013 - - - 49,048
Net income - - - - 6,283,165 - 6,283,165
Distribution of common stock
in BlowOut - - - - (8,369,732) - (8,369,732)
Change in net unrealized gain
(loss) on investment securities - - - (382,576) - - (382,576)
Amortization of warrants - - (496,913) - - 989,416 492,503
------- ----- -------- --------- -------- -------- --------
BALANCE AT MARCH 31, 1997 11,847,441 $11,847 $47,931,165 $ 184,932 $(35,452,729) $(1,403,158) $ 11,272,057
========== ======= =========== ========== ============= ============ ============
The accompanying notes are an integral part of these consolidated statements.
Rentrak Corporation
Valuation and Qualifying Accounts
Schedule II
Balance At Charged To Charged Balance At
Beginning Cost And To Other End Of
Year Ended: Of Periods Expenses Accounts Recoveries Periods
Allowance For Doubtful
Accounts
March 31, 1995 1,224,966 (2,984,899) - 2,402,513 642,580
March 31, 1996 642,580 (2,327,028) (332,692) (1) 2,645,035 627,895
March 31, 1997 627,895 (3,564,065) (95,000) 3,440,483 409,313
Advances To Program
Suppliers Reserves
March 31, 1995 0 572,300 - - 572,300
March 31, 1996 572,300 1,345,406 - - 1,917,706
March 31, 1997 1,917,706 (149,192) - - 1,768,514
Inventory Reserve
March 31, 1995 0 336,046 - - 336,046
March 31, 1996 336,046 - (336,046) (1) - 0
March 31, 1997 0 - - - 0
Other Current Assets -
Retailer Financing
Program Reserve
March 31, 1995 0 267,938 - - 267,938
March 31, 1996 267,938 846,582 - - 1,114,520
March 31, 1997 1,114,520 - (1,114,520) (2) - 0
Other Assets -
Retailer Financing
Program Reserve
March 31, 1995 0 2,974,912 - - 2,974,912
March 31, 1996 2,974,912 1,943,119 - - 4,918,031
March 31, 1997 4,918,031 (771,973) 5,164,396 (1)(2) 1,029,921 10,340,375
(1) Transferred from (to) Discontinued Operations.
(2) Reclassified from Other Current Assets to Other Assets.
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 1997 Annual Meeting of Shareholders 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 1997 Annual Meeting of Shareholders 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 1997 Annual Meeting of Shareholders 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 1997 Annual Meeting of Shareholders 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, 1997
and 1996
Consolidated Statements of Operations for Years
Ended March 31, 1997, 1996 and
1995
Consolidated Statements of Stockholders' Equity
for Years Ended March 31, 1997,
1996 and 1995
Consolidated Statements of Cash Flows for Years
Ended March 31, 1997, 1996, and 1995
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
1997, 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, 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 13, 1997
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 13, 1997
Ron Berger, President/CEO
Principal Financial Officer:
By /S/ F. Kim Cox June 13, 1997
F. Kim Cox, Executive Vice President/
Chief Financial Officer
Principal Accounting Officer:
By /S/ Carolyn Pihl June 13, 1997
Carolyn A. Pihl, Chief Accounting Officer
Majority of Board of Directors:
By /S/ Ron Berger June 13, 1997
Ron Berger, Chairman
By /S/ Peter Dal Bianco June 13, 1997
Peter Dal Bianco, Director
By /S/ Herbert M. Fischer June 13, 1997
Herbert M. Fischer, Director
By /S/ James P. Jimirro June 13, 1997
James P. Jimirro, Director
By /S/ Bill LeVine June 13, 1997
Bill LeVine, Director
By /S/ Muneaki Masuda June 13, 1997
Muneaki Masuda, Director
By /S/ Stephen Roberts June 13, 1997
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 (7)
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 (9)
10.4 Stock Option Agreement with Ron Berger,
dated April 18, 1990 (2)
10.5 Stock Option Agreement with Ron Berger,
dated December 20, 1994 (3)
10.7 Amended and Restated Employment
Agreement with Ron Berger dated
November 27, 1995 (17)
10.8 Employment Agreement with F. Kim Cox
dated April 20, 1995 (11)
10.9 Employment Agreement with Ed Barnick
dated January 1, 1996
10.10 Rentrak Corporation Amended and
Restated Directors Stock Option Plan
(4)
10.11 Rentrak's 401-K Plan (5)
10.13 Amended and Restated 1992 Employee
Stock Purchase Plan of Rentrak
Corporation (10)
10.17 Joint Development Agreement with CCC
dated August 6, 1993 (6)
10.18 Business Loan Agreement with Silicon
Valley Bank dated October 12, 1993 (8)
10.19 Business Loan Modification Agreement with
Silicon Valley Bank dated June 8, 1994 (8)
10.21 Second Amendment to Business Cooperation Agreement
between Rentrak Corporation, Culture Convenience Club Co.,
Ltd., and Rentrak Japan dated June 16, 1994 (8)
10.23 Business Loan Modification Agreement with Silicon Valley
Bank dated May 17, 1996 (12)
10.25 Employment Agreement with Carolyn Pihl dated May 6, 1996
10.26 Guarantee Agreement dated as of June 26, 1996 between
Rentrak Corporation and BlowOut Entertainment, Inc. (14)
10.27 Reorganization and Distribution Agreement between Rentrak
Corporation and BlowOut Entertainment, Inc., dated as of
November 11, 1996 (13)
10.28 Asset Purchase Agreement by and among Pro Image Inc., PI
Acquisition, L.C. and Rentrak Corporation dated December 6,
1996 (15)
10.29 Business Loan Modification Agreemetn with Silicon Valley Bank
dated December 27, 1996
10.30 The 1997 Non-Officer Employee Stock Option Plan of Rentrak
Corporation (16)
11 Statement of Computation of Per Share Earnings
22 List of Subsidiaries of Registrant
23 Consent of Arthur Andersen
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 10.5 to 1995 Form 10-K filed on June 29, 1995.
4. Filed as Exhibit B to 1994 Proxy Statement dated July 11, 1994.
5. Filed as Exhibit 10.1 to Form 10-K filed on June 28, 1993.
6. Filed as Exhibit 10.5 to Form 10-K filed on June 28, 1993.
7. Filed as Exhibit to Form 8-K filed on June 5, 1995.
8. Filed as Exhibit to 1994 Form 10-K filed on June 29, 1994.
9. Filed as Exhibit A to 1994 Proxy Statement dated July 11, 1994.
10. Filed as Exhibit 10.13 to Form 10-K filed on June 29, 1995.
11. Filed as Exhibit 10.8 to Form 10-K filed on July 1, 1996.
12. Filed as Exhibit 10.23 to Form 10-K filed on July 1, 1996.
13. Filed as Exhibit 1 to Form 8-K filed on Decmeber 9, 1996.
14. Filed as Exhibit 2 to Form 8-K filed on December 9, 1996.
15. Filed as Exhibit 1 to Form 8-K filed on December 31, 1996.
16. Filed as Exhibit 4.1 to Form S-8 filed on June 5, 1997.
17. Filed as Exhibit 10 to Form 10-Q filed on November 14, 1995.