10-K405 1 0001.txt This filing consists of 139 pages. The Exhibit Index is on Page 52. 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, 2000 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 [ X ] As of June 20, 2000, 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 $34,042,760. (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 20, 2000. Includes shares held by certain depository organizations.) As of June 20, 2000, the Registrant had 12,289,883 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR THE 2000 ANNUAL MEETING OF THE SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K TABLE OF CONTENTS PART I Item Page 1. Business 3 2. Properties 9 3. Legal Proceedings 9 4. Submission of Matters to a Vote of Security 11 Holders PART II 5. Market for the Registrant's Common Stock and 12 Related Stockholder Matters 6. Selected Financial Data 13 7. Management's Discussion and Analysis of 14 Financial Conditions and Results of Operations 7A. Quantitative and Qualitative Disclosures About 21 Market Risk 8. Financial Statements and Supplementary Data 22 9. Changes in and Disagreements with Accountants 22 on Accounting and Financial Disclosure PART III 10. Directors and Executive Officers of the 49 Registrant 11. Executive Compensation 49 12. Security Ownership of Certain Beneficial 49 Owners and Management 13. Certain Relationships and Related Transactions 49 PART IV 14. Exhibits, Financial Statement Schedules and 50 Reports on Form 8-K PART I ITEM 1. BUSINESS GENERAL The Company's primary business is the distribution of videocassettes to home video specialty stores and other retailers using its Pay Per Transaction system (the "PPT System"). Under the Company's PPT system, home video specialty stores and other retailers that rent videocassettes to consumers ("Retailers"), including grocery stores and convenience stores, lease videocassettes and other media ("Cassettes") from Rentrak for a low up-front fee and share a portion of each retail rental transaction with the Company. The Company's PPT System generated 79 percent, 85 percent and 91 percent of total revenues in fiscal years 2000, 1999 and 1998, respectively. The Company engages in several additional lines of business through the following wholly- owned subsidiaries: 3PF.COM (formerly ComAlliance), provides order processing, inventory management, and fulfillment services to Internet retailers and wholesalers and to other businesses requiring just-in-time fulfillment. 3PF.COM's Web-site can be accessed at www.3PF.COM. formovies.com, Inc., provides Web-site services to Retailers and a video locator service for consumers through its innovative Web-site www.formovies.com. BlowOut Video, Inc., sells videocassettes and digital videodiscs through its Web- site www.blowoutvideo.com, and through seven retail outlets. PAY-PER-TRANSACTION The Company distributes Cassettes principally to home video specialty stores through its PPT System. The PPT System enables Retailers to obtain Cassettes at a significantly lower initial cost than if they purchased the Cassettes from traditional video distributors. Under traditional distribution, a motion picture studio, licensee, or other owner of the rights to certain video programming ("Program Suppliers") sells Cassettes to a distributor for an average price of approximately $64. The distributor then sells Cassettes to a Retailer for an average price of approximately $70. The Retailer then rents Cassettes to the consumer at an average price of $2.50 and retains all of the rental revenue. Under the PPT System, after the Retailer is approved for participation in the PPT System, Cassettes are leased to the Retailer for a low initial fee (the "Order Processing Fee") plus a percentage of revenues generated by the Retailers from rentals to consumers (the "Transaction Fee"). The Company retains a portion of each Order Processing Fee and Transaction Fee and remits the remainder to the appropriate Program Suppliers that hold the distribution rights to the Cassettes. Due to the lower costs of "bringing Cassettes in the door", Retailers generally obtain a higher number of Cassettes under the PPT System than the traditional distribution method. The expected benefit to the Retailer is a higher volume of rental transactions, as well as a reduction in capital cost and risk. The expected benefit to the Program Supplier is an increase in the total number of Cassettes shipped, resulting in increased revenues and opportunity for profit. The expected benefit to the consumer is the potential of finding more copies of certain newly released hit titles and a greater selection of other titles at Retailers participating in the PPT System ("Participating Retailers"). The Company markets its PPT System throughout the United States, Canada and the United Kingdom. The Company also owns a nine percent interest in Rentrak Japan, K.K. ("Rentrak Japan"), a Japanese corporation which markets a similar service to video retailers in Japan. In February 1998, the Company entered into a Shareholders Agreement and a PPT License Agreement with Columbus Holdings Limited and Rentrak UK Limited to develop the Company's PPT distribution and information processing business in the United Kingdom through Rentrak UK. The Company originally owned 25 percent of Rentrak UK. On March 31, 1999, the Company acquired an additional 67 percent interest, and now owns 84 percent of Rentrak UK. As of March 31, 2000, Rentrak UK is not generating income or positive cash flow. Accordingly, the Company wrote-off its investments of $222,000. Management of the Company is evaluating Rentrak UK's operations and is exploring options including selling or closing down the operations. Management intends to make a decision in the second quarter of fiscal 2001. The Company currently offers substantially all of the titles of a number of Program Suppliers, including Buena Vista Pictures Distribution, Inc., a subsidiary of The Walt Disney Company, Paramount Home Video, Inc., and Twentieth Century Fox Home Entertainment (formerly Fox Video), a subsidiary of Twentieth Century Fox Film Corporation. The Company's arrangements with Program Suppliers are of varying duration, scope and formality. In some cases, the Company has obtained Cassettes pursuant to contracts or arrangements with Program Suppliers on a title-by-title basis and in other cases the contracts or arrangements provide that all titles released for distribution by such Program Supplier will be provided to the Company for the PPT System. Many of the Company's agreements with Program Suppliers, including all major Program Suppliers, may be terminated upon relatively short notice. Therefore, there can be no assurance that any of the Program Suppliers will continue to distribute Cassettes through the PPT System, continue to have available for distribution titles which the Company can distribute on a profitable basis, or continue to remain in business. Even if titles are otherwise available from Program Suppliers to the Company, there can be no assurance that they will be made available on terms acceptable to the Company. During the last three years, the Company has not experienced any material difficulty acquiring suitable Cassettes for the Company's markets on acceptable terms and conditions from Program Suppliers that have agreed to provide the same to the Company. The Company has one Program Supplier that supplied product that generated 25 percent; a second that generated 19 percent, and a third that generated 13 percent of Rentrak revenues for the year ended March 31, 2000. There were no other Program Suppliers who provided product that generated more than 10 percent of revenues for the year ended March 31, 2000. The Company currently receives a significant amount of product from three Program Suppliers. Although management does not believe that these relationships will be terminated in the near term, a loss of any of these suppliers could have an adverse affect on operating results. Certain Program Suppliers have requested, and the Company has provided, financial or performance commitments from the Company, including advances, warrants, or guarantees, as a condition of obtaining certain titles. 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. Distribution of Cassettes The Company's proprietary Rentrak Profit Maker Software (the "RPM Software") allows Participating Retailers to order Cassettes through their Point of Sale ("POS") system software and provides the Participating Retailers with substantial information regarding all offered titles. Ordering occurs via a networked computer interface. To further assist the Participating Retailers in ordering, the Company also produces a monthly product catalogue called "Ontrak." To be competitive, Retailers must be able to rent their Cassettes on the "street date" announced by the Program Supplier for the title. Rentrak has contracted with 3PF.COM to distribute Rentrak's Cassettes via overnight air courier to assure delivery to Participating Retailers on the street date. The freight costs of such distribution comprise a portion of the Company's cost of sales. Computer Operations To participate in the Company's PPT System, Retailers must install Rentrak approved computer software and hardware to process all of their rental and sale transactions. Participating Retailers are required to use one of the POS software vendors approved by the Company as conforming to the Company's specifications. The Company's RPM Software resides on the Retailer's POS computer system and transmits a record of PPT transactions to the Company over a telecommunications network. The RPM Software also assists the Retailer in ordering newly released titles and in managing the inventory of Cassettes. The Company's computer processes these transactions and prepares reports for Program Suppliers and Retailers. In addition, it determines variations from statistical norms for potential audit action. The Company's computer also transmits information on new titles and confirms orders made to the RPM Software at the Retailer location. Year 2000 Many computer software programs, as well as hardware with embedded software, use a two-digit date field to track and refer to any given year. There was concern that in 2000, these software and hardware systems would interpret the year "00" as "1900," which would cause them to perform faulty calculations or shut down altogether (the "Year 2000 Problem"). Accordingly, the Company assessed the scope of the Year 2000 problem both internally and among its suppliers and customers in March 1997, and implemented remedial measures soon thereafter. The total cost of the company's assessments, corrective measures, and testing was less than $250,000. The Company has not and does not anticipate experiencing any significant problems related to the Year 2000 issue that would be material to the Company. Retailer Auditing From time to time, the Company audits Participating Retailers in order to verify that they are reporting all rentals and sales of Cassettes on a consistent, accurate and timely basis. Several different types of exception reports are produced weekly. These reports are designed to identify any Participating Retailers that vary from the Company's statistical norms. Depending upon the results of the Company's analysis of the reports, the Company may conduct an in-store audit. Audits are conducted with and without notice and any refusal to allow such an audit can be cause for immediate termination from the PPT System. If audit violations are found, the Participating Retailer is subject to fines, audit fees, immediate removal from the PPT System and/or repossession of all leased Cassettes. Seasonality The Company believes that the home video industry is seasonal because Program Suppliers tend to introduce hit titles at two periods of the year, early summer and Christmas. Since the release to home video usually follows the theatrical release by approximately six months (although significant variations 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 In 1992, the Company established a Retailer Financing Program whereby, on a selective basis, it provided financing to Participating Retailers that the Company believed had potential for substantial growth in the industry. In connection with these financings, the Company typically made a loan and/or an equity investment in the Participating Retailer. In some cases, the Company obtained a warrant to purchase stock in the Participating Retailer. As part of such financing, the Participating Retailer typically agreed 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, Participating Retailers were typically required to obtain all of their requirements of Cassettes offered under the PPT System or obtain a minimum amount of Cassettes based on a percentage of the Participating Retailer's revenues. Notwithstanding the long term nature of such agreements, both the Company and the Participating Retailer may, in some cases, retain the right to terminate such agreement upon 30-90 days prior written notice. These financings are speculative in nature and involve a high degree of risk and no assurance of a satisfactory return on investment can be given. The Rentrak Video Retailer Loan Program was adopted in 1992 at a time when the video industry was experiencing rapid growth. The underlying rationale for this program was the belief that the Company could expand its business and at the same time participate in the rapid growth experienced by the video retailers in which it invested. Now that the video industry is entering a phase of maturation, the Company does not expect to utilize this program in any material respect for any new participants. However, the Company may make follow on loans or investments in existing Video Retailer Loan Participants. As of March 31, 2000, the Company had approximately $6,900,000 in loans and investments outstanding under the program and reserves of approximately $5,700,000 of the total original loan or investment amount. As of March 31, 1999, the Company had approximately $14,000,000 in loans and investments outstanding under the Retailer Financing Program and had provided reserves of approximately $9,600,000. Competition The Cassette distribution business is a highly competitive industry that is rapidly changing. The traditional, and still dominant, method of distributing Cassettes to Retailers is through purchase transactions; i.e., a Retailer purchases Cassettes from a distributor and then offers the Cassettes for rental or sale to the general public. As described in greater detail above (see "Pay-Per-Transaction"), the Company's PPT System offers Retailers an alternative method of obtaining Cassettes. Accordingly, the Company faces intense competition from all of the traditional distributors, including Ingram Entertainment, Inc., Major Video Concepts, Inc., Baker and Taylor, Inc., and Video One Canada, Ltd. These and other traditional distributors have extensive distribution networks, long- standing relationships with Program Suppliers and Retailers, and, in some cases, significantly greater financial resources than the Company. In the last two years certain traditional distributors have taken steps to offer Cassettes to Retailers on a revenue sharing basis. For example, several traditional distributors have executed licensing agreements with Supercomm, Inc. ("Supercomm"), a wholly-owned subsidiary of The Walt Disney Company, to market product on revenue sharing terms. Several traditional distributors have also executed revenue sharing agreements with motion picture studios ("Studios"). Several traditional distributors have also entered into licensing agreements with the Company to distribute Cassettes to Retailers using the PPT System. The Company also competes with Supercomm on two levels: (1) domestically - for processing data for certain Studios' direct relationships with Blockbuster and other Retailers; and (2) internationally in certain markets. Supercomm also processes data for traditional distributors such as Ingram who then competes with the Company for revenue sharing cassettes as well as traditional cassettes. The Company also faces direct competition from the Studios. Beginning in 1997, several major Studios offered Retailers discounted pricing if such Retailers substantially increased the quantity of cassettes purchased. Also, some major Studios have offered Cassettes to Retailers on a lease basis. In addition, all major Studios sell Cassettes directly to major Retailers including Blockbuster, the world's largest chain of home video specialty stores. The Company believes all of the major Studios have executed direct revenue sharing agreements with Blockbuster and Hollywood Entertainment, the world's second largest chain of home video specialty stores. The Company also believes that certain Studios have executed direct revenue sharing agreements with several other large Retailers. The Company does not believe that the Studios have executed direct revenue sharing agreements with other smaller Retailers, but there can be no assurance that they will not do so in the future. The Studios also compete with the Company by releasing certain Cassette titles on a "sell-through" basis; i.e., they bypass the traditional rental period by selling the Cassettes directly to consumers at a price of approximately $14.95 to $29.95. To date, such "sell-through" distribution has generally been limited to certain newly released hit titles with wide general family appeal. However, because the Company's PPT business is partially dependent upon the existence of a rental period, a shift toward such "sell-through" distribution, particularly with respect to popular titles, could have a material adverse effect on the Company's business. The Company also competes with businesses that use alternative distribution methods to provide video entertainment directly to consumers, such as the following: (1) direct broadcast satellite transmission systems; (2) traditional cable television systems; (3) pay-per-view cable television systems; and (4) delivery of programming via the Internet. Each of these distribution methods employs digital compression techniques to increase the number of channels available to consumers and, therefore, the number of movies that may be transmitted. Technological improvements in this distribution method, particularly "video-on-demand," may make this option more attractive to consumers and thereby materially diminish the demand for Cassette rentals. Such a consequence could have a material adverse effect on the Company's business. Foreign Operations On December 20, 1989, the Company entered into an agreement with Culture Convenience Club, Co., Ltd. ("CCC"), a Japanese corporation, which is Japan's largest video specialty retailer. Pursuant to the agreement, the parties formed Rentrak Japan, a Japanese corporation, which is presently owned 9 percent by the Company and 90 percent by CCC's largest shareholder, Tsutaya Shoten Co., Ltd. Rentrak Japan was formed to implement the PPT System in Japan. 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 the PPT System 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. 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 (June 1 - May 31). Pursuant to the amendment, the Company received royalty payments of $1,000,000 in fiscal year 1995 and $1,000,000 in fiscal year 1999. The term of the agreement was extended from 2001 to 2039. The Company currently owns approximately 9% of Rentrak Japan. In December 1999, the Company received a prepayment of $2,500,000 in exchange for $4,000,000 of credit related to the annual royalty described above, which is being recognized in revenues as royalties are earned under the terms of the contract. As of March 31, 2000, approximately $1,640,000 has been recorded as deferred revenue on the accompanying consolidated balance sheet to be recognized in future periods. In February 1998, the Company entered into a Shareholders Agreement and a PPT License Agreement with Columbus Holdings Limited, and Rentrak UK Limited to develop the Company's PPT distribution and information processing business in the United Kingdom through Rentrak UK. Rentrak UK was originally structured as a joint venture between the Company, which owned 25 percent, Columbus Holdings Limited, which owned 66.7 percent and Rentrak Japan, which owned 8.3 percent. On March 31, 1999, the Company acquired Columbus Holdings Limited's 67 percent interest, and now owns 84 percent of Rentrak UK. The PPT Agreement remains in force in perpetuity, unless terminated due to material breach of contract, liquidation of Rentrak UK or non-delivery by the Company to Rentrak UK, of all retailer and studio software, including all updates. Pursuant to the PPT Agreement, during the term of the PPT Agreement, the Company will receive a royalty of 1.67 percent of Rentrak UK's gross revenues from any and all sources. Trademarks, Copyrights, and Proprietary Rights The Company has registered its "RENTRAK", "PPT", "Pay Per Transaction", "Ontrak", "BudgetMaker", "DataTrak", "Prize Find" , "Blowout Video", "Fastrak", "GameTrak", "RPM", "Videolink+", "Unless You're Rich Enough Already", "Sportrak", "Movies For The Hungry Mind", "VidAlert", "Active Home Video", "Movie Wizard", and "Gotta Have It Guarantee" 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, 2000, including all subsidiaries, the Company employs 277 full-time employees. The Company considers its relations with its employees to be good. Financial Information About Industry Segments See Note 12 of the Notes to the Consolidated Financial Statements. ITEM 2. PROPERTIES The Company currently maintains its executive offices in Portland, Oregon where it leases 53,566 square feet of office space. The lease began on January 1, 1997 and expires on December 31, 2006. 3PF.COM, Inc., Inc. maintains its distribution facilities in Wilmington, and Columbus Ohio where it leases 321,083 square feet. The Company's warehouse leases expire on June 30, 2002 and March 31, 2001, respectively. Management believes its office space is adequate and suitable for current operations. Management is in the process of obtaining additional warehouse space for 3PF.COM, Inc., in order to grow its business. Management does not anticipate a problem in obtaining additional suitable warehouse space to meet its needs. ITEM 3. LEGAL PROCEEDINGS In June 1998, Video Update, Inc. ("Video Update") filed a complaint (the "Video Update Complaint") against the Company entitled Video Update, Inc. v. Rentrak Corp., Civil Action No. 98-286, in the United States District Court for the District of Delaware. The Video Update Complaint alleges various violations of the antitrust laws, including that the Company has attempted to monopolize the market for videocassettes leased to retail video stores in violation of Section 2 of the Sherman Act. Video Update further alleges that the Company's negotiation and execution of an exclusive, long-term revenue-sharing agreement with Video Update violates Section 1 of the Sherman Act and Section 3 of the Clayton Act. Video Update is seeking unspecified monetary relief, including treble damages and attorneys' fees, and equitable relief, including an injunction prohibiting the Company from enforcing its agreement with Video Update or any exclusivity provision against videocassette suppliers and video retailers. In August 1998, the Court granted the Company's motion to dismiss the Video Update Complaint pursuant to Federal Rules of Civil Procedure Rule 12(b)(3) on the basis of improper venue. In August 1998, Video Update filed a new complaint against the Company in the United States District Court for the District of Oregon (the "Re-Filed Complaint"), Case No. 98-1013HA. The Re-Filed Complaint is substantially the same as the previous complaint. The Company believes the Re-Filed Complaint lacks merit and intends to vigorously defend against the allegations in the Complaint. The Company answered the Re-Filed Complaint denying its material allegations and asserting several affirmative defenses. The Company also has counterclaimed against Video Update alleging, among other things, breach of contract, breach of the covenant of good faith and fair dealing, promissory fraud, breach of fiduciary duty, breach of trust, constructive fraud, negligent misrepresentation and intentional interference with business advantage, and seeks damages and equitable relief. In October 1998, the Company filed a motion for summary judgment seeking to dismiss Video Update's claims against Rentrak. In January 1999, the Company filed a separate motion for partial summary judgment on its breach of contract counterclaim seeking to recover more than $4.4 million in fees and interest which the Company claims Video Update owes to it. In response to the Company's motions, Video Update asked the court for additional time to take discovery before having to file oppositions. The court has given the parties until June 30, 2000 to complete discovery. The court denied Rentrak's motions without reaching the merits and without prejudice to re-filing the motions after discovery has been conducted. Rentrak expects to re- file its motions after discovery has taken place. On October 21, 1999, the Company amended its counterclaims to add additional breach of contract claims, a claim for trade secret misappropriation and a claim for recovery of personal property. In August 1998, the Company filed a complaint (the "Movie Buffs Complaint") against Susan Janae Kingston d/b/a Movie Buffs ("Movie Buffs"), entitled Rentrak Corporation v. Susan Janae Kingston, an individual, d/b/a Movie Buffs, Case No. CV 98-1004 HA, in the United States District Court for the District of Oregon. The Movie Buffs complaint alleges breach of contract and conversion claims and seeks damages in the amount of at least $3.3 million and punitive damages of $500,000. In September 1998, Movie Buffs filed counterclaims against the Company and Third Party Claims against Hollywood Entertainment Corp. (the "Movie Buffs Counterclaims"). The Movie Buffs Counterclaims allege that the Company violated the antitrust laws, including the Sherman, Clayton and Robinson-Patman Acts. The Counterclaim also seeks declaratory relief, an accounting and alleges fraud and conspiracy to defraud, breach of contract, breach of the implied covenant of good faith, and unfair trade practices. Movie Buffs seeks an unspecified amount of damages (at least $10 million), treble damages, general and consequential damages, punitive damages, attorneys' fees and court costs. In September 1998, Roadrunner Video ("Roadrunner Video") filed a third-party complaint in intervention against the Company and Hollywood Entertainment Corp. (the "Roadrunner Complaint"). The Roadrunner Complaint alleges the same claims as the Movie Buffs Counterclaims. The Company filed a motion to dismiss the Robinson-Patman Act claims pursuant to Federal Rules of Civil Procedure Rule 12(b)(6), which motion was granted. The court also granted Roadrunner and Movie Buff's request to dismiss their claims against Hollywood without prejudice. The Company believes the Movie Buffs Counterclaims and the Roadrunner Complaint lack merit and the Company intends to vigorously defend against all of the allegations therein. On March 5, 1999 the Court granted the Company's motion to dismiss the Robinson-Patman Act claims brought by Roadrunner and Movie Buffs. On April 12, 1999, Roadrunner and Movie Buffs filed amended claims against Rentrak that added a new claim for fraud. The Company continues to believe that the remaining Roadrunner and Movie Buffs claims are without merit and intends to continue to vigorously defend itself. On February 10, 2000, the Company filed a complaint (the "Action Video Complaint") against David D. Passerallo, and Action Video, Inc. entitled Rentrak Corporation v. David D. Passerallo, an individual and Action Video, a North Carolina corporation, Case No. CV 00-214-HA, in the United District Court for the District of Oregon. The Action Video Complaint alleges claims for conversion, and breach of contract, payment on advance agreement and personal guarantee. On April 10, 2000, Action Video filed counterclaims against the Company. Action Video's counterclaims allege that the Company violated antitrust laws, including the Sherman and Clayton Acts, based on the Company's alleged efforts to favor certain customers (such as Hollywood) over others and thereby restrain competition. The Action Video Counterclaims also include the following: (1) a demand for a declaratory ruling that the contract between the Company and Action Video is unenforceable as unconscionable and a contract of adhesion, (2) fraud and conspiracy to defraud, based on allegedly false representations intended to induce Action Video to act; (3) breach of contract based on the Company's allegedly wrongful termination of its contract with Action Video, allegedly wrongful computation of revenue entitlement, and certain other alleged actions; (4) breach of an implied covenant of good faith, based on the Company's allegedly wrongful termination of its contract with Action Video; (5) unfair trade practices based on the Company's alleged conduct during its dealings with Action Video, including termination of the Company's contract with Action Video; and (6) a demand for an accounting of the nature and amount of the parties' respective obligations under the contract. Action Video seeks unspecified monetary damages in excess of $7 million, treble damages, general and consequential damages, punitive damages in the minimum amount of $30 million, attorneys' fees and court costs. The Company has taken action to dismiss a number of Action Video's counterclaims. Action Video has agreed to dismiss certain of these counterclaims and has agreed to replead its remaining counterclaims. The Company believes that the Action Video Counterclaims are without merit and intends to vigorously defend against this litigation. In the event of an unanticipated adverse final determination in respect of certain matters discussed above, the Company's consolidated net income and financial position for the period in which such determination occurs could be materially affected. The Company is also subject to certain legal proceedings and claims that arise in the ordinary course of its business. In the opinion of management, the amount of any ultimate liability with respect to these actions will not materially affect the financial position or results of operation of the Company. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders of the Company through the solicitation of proxies or otherwise during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock, $.001 par value, is traded on the Nasdaq National Market, where its prices are quoted under the symbol "RENT". As of May 31, 2000 there were approximately 328 holders of record of the Company's common stock. On May 31, 2000, the closing sales price of the Company's common stock as quoted on the Nasdaq National Market was $3.63. The following table sets forth the reported high and low sales prices of the Company's common stock for the period indicated as regularly quoted on the Nasdaq National Market. The over-the- counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. QUARTER ENDED HIGH LOW JUNE 30, 1998 $10.06 $5.59 SEPTEMBER 30, 1998 $6.31 $3.28 DECEMBER 31, 1998 $3.94 $2.00 MARCH 31, 1999 $4.22 $2.50 JUNE 30, 1999 $5.25 $2.66 SEPTEMBER 30, 1999 $6.00 $3.50 DECEMBER 31, 1999 $7.41 $3.25 MARCH 31, 2000 $7.25 $5.13 DIVIDENDS: Holders of the Company's common stock are entitled to receive dividends if, as, and when declared by the Board of Directors out of funds legally available therefor, subject to the dividend and liquidation rights of any preferred stock that may be issued and subject to the dividend restrictions in the Company's bank credit agreement described in Note 5 of the Notes to the Consolidated Financial Statements. No cash dividends have been paid or declared during the last five fiscal years. The present policy of the Board of Directors is to retain earnings to provide funds for operation and expansion of the Company's business. The Company's bank credit agreement limits the payment of dividends in the Company's stock. The Company does not intend to pay cash dividends in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts) Year Ended March 31, 2000 1999 1998 Statement of Operations Data Net revenues: Application fees $ 311 $ 371 $ 383 Order processing fees 23,086 22,420 25,313 Transaction fees 62,440 72,835 78,671 Sell-through fees 7,811 11,347 9,383 Other 19,736 16,814 9,001 Total net revenues 113,384 123,787 122,751 Cost of sales 91,706 103,943 102,484 Gross profit 21,678 19,844 20,267 Selling and administrative expense 26,449 15,996 13,062 Net (gain) expense on litigation settlement (7,792) 1,099 0 Other income (expense) (1,519) 597 652 Income (loss) from continuing operations before discontinued operations and benefit (provision) for income taxes 1,502 3,347 7,857 Income tax benefit (provision) (451) (1,304) (3,199) Income (loss) from continuing operations before discontinued operations 1,051 2,043 4,658 Discontinued Operations: (1) Loss from operations of discontinued subsidiaries less applicable income tax benefit 0 0 0 Gain (loss) on disposal of discontinued subsidiaries 2,374 0 0 Net income (loss) $ 3,425 $ 2,043 $ 4,658 Diluted income (loss) per share Continuing operations $ 0.10 $ 0.18 $ 0.41 Discontinued operations 0.22 0.00 0.00 Net income (loss) $ 0.32 $ 0.18 $ 0.41 Common shares and common share equivalents outstanding 10,759 11,066 11,445 2000 1999 1998 Balance Sheet Data Working Capital $ 9,871 $ 4,586 $ 1,062 Total Assets 50,473 49,457 51,609 Long-term Deferred Revenue 1,677 0 0 Stockholders' Equity 18,081 14,292 13,254 (1) Discontinued Operations includes the operations of Pro Image and BlowOut Acquisitions were made by Pro Image and BlowOut during 1996, therefore comparisons between years are not meaningful. See discontinued operations Note 13 of the Notes to the Consolidated Financial Statements.
(In Thousands, Except Per Share Amounts) Year Ended March 31, 1997 1996 Statement of Operations Data Net revenues: Application fees $ 354 $ 551 Order processing fees 22,720 25,716 Transaction fees 70,467 70,187 Sell-through fees 11,101 10,601 Other 11,634 6,211 Total net revenues 116,276 113,266 Cost of sales 92,416 96,585 Gross profit 23,860 16,681 Selling and administrative expense 14,626 19,443 Net (gain) expense on litigation settlement 0 0 Other income (expense) 999 681 Income (loss) from continuing operations before discontinued operations and benefit (provision) for income taxes 10,233 (2,081) Income tax benefit (provision) (3,950) 595 Income (loss) from continuing operations before discontinued operations 6,283 (1,486) Discontinued Operations: (1) Loss from operations of discontinued subsidiaries less applicable income tax benefit 0 (18,700) Gain (loss) on disposal of discontinued subsidiaries 0 (12,100) Net income (loss) $ 6,283 $(32,286) Diluted income (loss) per share Continuing operations $ 0.52 $ (0.13) Discontinued operations 0.00 (2.62) Net income (loss) $ 0.52 $ (2.75) Common shares and common share equivalents outstanding 12,159 11,755 1997 1996 Balance Sheet Data Working Capital $ 1,488 $(12,579) Total Assets 43,048 56,252 Long-term Deferred Revenue 0 0 Stockholders' Equity 11,272 14,404 (1) Discontinued Operations includes the operations of Pro Image and BlowOut Acquisitions were made by Pro Image and BlowOut during 1996, therefore comparisons between years are not meaningful. See discontinued operations Note 13 of the Notes to the Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements Certain Information included in the Annual Report on Form 10-K (including Management's Discussion and Analysis of Financial Conditions and Results of Operations regarding revenue growth, gross profit margin and liquidity) constitute forward-looking statements that involve a number of risks and uncertainties. Forward looking statements may be identified by the uses of forward-looking words such as "may", "will", "expects", "intends", "anticipates", "estimates", or "continues" or the negative thereof or variations thereon or comparable terminology. The following factors are among the factors that could cause actual results to differ materially from the forward-looking statements: the Company's ability to continue to market the PPT System successfully, the financial stability of the Participating Retailers and their performance of their obligations under the PPT System, non-renewal of line of credit, business conditions and growth in the video industry and general economics, both domestic and international; competitive factors, including increased competition, expansion of revenue sharing programs other than the PPT System by Program Suppliers, new technology, and the continued availability of Cassettes from Program Suppliers. This Annual Report on Form 10-K further describes certain of these factors. Results of Operations
RENTRAK CORPORATION STATEMENTS OF OPERATIONS For The Years Ended March 31, 2000, 1999, and 1998 2000 1999 1998 REVENUES $113,384,220 $123,787,390 $122,751,046 OPERATING COSTS AND EXPENSES Cost of sales 91,706,290 103,942,898 102,483,865 Selling and administrative 26,448,569 15,995,941 13,062,064 Net (gain) expense on litigation settlement (7,791,880) 1,099,154 - 110,362,979 121,037,993 115,545,929 INCOME FROM OPERATIONS 3,021,241 2,749,397 7,205,117 Other income (expense) (1,519,378) 597,108 652,381 INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX PROVISION AND GAIN FROM DISPOSAL FROM DISCONTINUED OPERATIONS 1,501,863 3,346,505 7,857,498 Income tax provision (450,559) (1,303,999) (3,199,032) INCOME FROM CONTINUING OPERATIONS 1,051,304 2,042,506 4,658,466 Gain from disposal from discontinued operations plus income tax benefit of $483,502 2,373,502 - - NET INCOME $ 3,424,806 $ 2,042,506 $ 4,658,466
Fiscal 2000 Compared to Fiscal 1999 Continuing Operations - Domestic PPT Operations and Other Continuing Subsidiaries For the year ended March 31, 2000, total revenue decreased $10.4 million to $113.4 million from $123.8 million in the prior year. Total revenue includes the following fees: application fees generated when retailers are approved for participation in the PPT System; order processing fees generated when Cassettes are distributed to retailers; transaction fees generated when retailers rent Cassettes to consumers; sell-through fees generated when retailers sell Cassettes to consumers; royalty payments from Rentrak Japan; revenue related to the Company's fulfillment, order processing, and inventory management services to e- commerce and other companies; and sales of videocassettes. The decrease in total revenue was primarily due to lower revenues from the Company's core PPT business. The decrease in PPT revenue resulted primarily from the following: (i) a reduction in the total number of Cassettes leased under the PPT System, (ii) an increase in incentives offered by the Company to entice retailers to order more product; (iii) an increase in various "copy depth" programs offered by studios intended to increase the number of Cassettes in distribution (so-called "copy depth" programs) that lowered the cost of rental videocassettes to video retailers; (iv) an increase in studio direct revenue-sharing arrangements with the larger video store chains; and (v) the loss of some customers due to continuing industry consolidation. In fiscal 2000, application-fee revenue was $0.3 million compared to $0.4 million in the prior year. During the year, order processing-fee revenue increased to $23.1 million from $22.4 million in fiscal 1999, an increase of $0.7 million, or 3 percent. Transaction-fee revenue totaled $62.4 million, a decrease of $10.4 million, or 14 percent, from $72.8 million the previous year. Sell-through revenue was $7.8 million in fiscal 2000 as compared to $11.3 million in fiscal 1999, a decrease of $3.5 million, 31 percent. Royalty revenue from Rentrak Japan decreased to $1.8 million during fiscal 2000 from $2.2 million the previous year. This decrease was due to a one time royalty payment from Rentrak Japan of $1.0 million in January 1999, which was partially offset by an increase in the current year royalty due to increased revenues generated by Rentrak Japan. Cost of sales in fiscal 2000 decreased to $91.7 million from $103.9 million the prior year, a decrease of $12.2 million. The change is primarily due to the factors that led to changes in revenue noted above. In fiscal 2000, the Company's gross profit margin increased to 19 percent from 15 percent the previous year, excluding the $1.0 million royalty payment from Rentrak Japan. Selling, general and administrative expenses were $26.4 million in fiscal 2000 compared to $16.0 million in fiscal 1999. This increase of $10.4 million, or 65 percent, was primarily due to (i) increased reserves related to an outstanding receivable account and write offs of other assets for a total of approximately $9.0 million in the fourth quarter of fiscal 2000; (ii) increased compensation and occupancy costs associated with the expanding fulfillment and order processing business; and (iii) increased advertising expenditures. In January 2000, the Company recorded a gain of approximately $7.8 million as a result of settling litigation with Hollywood Entertainment. See footnote 10 of the notes to the consolidated financial statements. Other income decreased from $0.6 million in fiscal 1999 to an expense of $(1.5) million for fiscal 2000, a decrease of $2.1 million. This decrease is primarily due to the loss on sale of investments recognized in fiscal 2000 of approximately $1.2 million compared to a gain on sale of investments in fiscal 1999 of approximately $0.5 million. For the year ended March 31, 2000, the Company recorded pre-tax income of $1.5 million, or 1 percent of total revenue, compared to $3.3 million, or 3 percent of total revenue in the prior fiscal year. This decrease is due primarily to the increase in selling, general and administrative expenses as noted above offset by the net gain on litigation settlement. The Cassette distribution business is a highly competitive industry that is rapidly changing. The effect of these changes could have a material impact on the Company's operations. Item 1 (Business) Competition section of this Annual Report on Form 10-K further describes certain of these factors. Included in the amounts above are the results from Other Subsidiaries which are primarily comprised of operations of 3PF.COM, Inc., and Blowout Video, Inc. Total revenues from 3PF.COM, Inc. increased to 11.6 million at March 31, 2000 compared to $10.5 million at March 31, 1999 an increase of $1.1 million. This increase was primarily due to increased volume from existing customers. Cost of sales was $10.1 million, an increase of $1.7 million over the $8.4 million recorded in fiscal 1999. This increase is due to the increase in freight and warehouse labor due primarily to the increase in revenue as noted above. Selling, general and administrative expenses increased to $2.6 million in fiscal 2000 from $1.2 million in fiscal 1999, an increase of $1.4 million. As a percentage of total revenue, selling, general and administrative expenses increased to 22 percent for fiscal 2000 from 11 percent for the prior year. This increase was due to increased compensation, advertising and travel and entertainment expenses. These costs have increased primarily due to expanded sales and marketing efforts. The Company anticipates that these costs will continue to grow substantially in the near future. As a result of the foregoing factors, for the year ended March 31, 2000, 3PF.COM, Inc. recorded pre-tax loss of $1.0 million, or 9 percent of total revenue. This compares with pre-tax income of $0.6 million, or 6 percent of total revenue, in fiscal 1999. Total revenues from Blowout Video, Inc. increased to $9.5 million in fiscal 2000 from $8.4 million in fiscal 1999, an increase of $1.1 million, or 13 percent. Cost of sales was $6.0 million, an increase of $0.8 million over the $5.2 million recorded in fiscal 1999. Selling, general and administrative expenses increased to $3.0 million in fiscal 2000 from $2.4 million in fiscal 1999, an increase of $0.6 million. As a percentage of total revenue, selling, general and administrative expenses increased to 32 percent for fiscal 2000 from 29 percent for the prior year. These increases were primarily the result of opening 3 new stores during fiscal 2000. For the year ended March 31, 2000, BlowOut Video, Inc. recorded pre-tax income of $0.2 million, or 2 percent of total revenue. This compares with pre-tax income of $0.7 million, or 8 percent of total revenue, in fiscal 1999. 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. BlowOut is not related to the Company's wholly owned subsidiary BlowOut Video, Inc. The operations of BlowOut were reflected as discontinued operations in the March 31, 1996 consolidated financial statements. During the year ended March 31, 2000, the Company recorded a gain on the disposal of discontinued operations of $1.9 million related to BlowOut, as the liability related to BlowOut contingencies was less than estimated. The Company also reduced the valuation allowance that was recorded against the deferred tax asset related to liabilities of discontinued operations. This reduction of approximately $.5 million in the valuation allowance was recorded as an income tax benefit from discontinued operations in the accompanying consolidated income statement. Consolidated Balance Sheet At March 31, 2000, total assets were $50.5 million, an increase of $1.1 million from the $49.5 million a year earlier. Net current liabilities relating to BlowOut at March 31, 2000 and 1999 of approximately $0.4 million and $3.7 million, respectively, represent amounts reserved for contingencies not yet settled as of year end. Fiscal 1999 Compared to Fiscal 1998 Continuing Operations - Domestic PPT Operations and Other Continuing Subsidiaries For the year ended March 31, 1999, total revenue increased $1.0 million to $123.8 million from $122.8 million in the prior year. Total revenue includes the following fees: application fees generated when retailers are approved for participation in the PPT System; order processing fees generated when Cassettes are distributed to retailers; transaction fees generated when retailers rent Cassettes to consumers; sell-through fees generated when retailers sell Cassettes to consumers; royalty payments from Rentrak Japan; revenue related to the Company's fulfillment, order processing, and inventory management services to e- commerce and other companies, and sale of videocassettes. The increase in total revenue was primarily due to the growth in the Company's fulfillment and order processing services business. This growth in revenues was partially offset by the decrease in revenues in the core videocassette distribution business ("PPT revenue"). The decrease in PPT revenue resulted primarily from the following: (i) a reduction in the total number of Cassettes leased under the PPT System, due in part to program suppliers offering more titles on a sell through basis than historical levels; (ii) an increase in incentives offered by the Company to entice retailers to order more product; (iii) an increase in various "copy depth" programs offered by studios intended to increase the number of Cassettes in distribution (so-called "copy depth" programs) that lowered the cost of rental videocassettes to video retailers; (iv) an increase in studio direct revenue-sharing arrangements with the larger video store chains; and (v) the loss of some customers due to continuing industry consolidation. In fiscal 1999, application-fee revenue remained unchanged from the prior year at $0.4 million. During the year, order processing-fee revenue decreased to $22.4 million from $25.3 million in fiscal 1998, a decrease of $2.9 million, or 11 percent. Transaction-fee revenue totaled $72.8 million, a decrease of $5.9 million, or 7 percent, from $78.7 million the previous year. Sell-through revenue was $11.3 million in fiscal 1999 as compared to $9.4 million in fiscal 1998, an increase of $1.9 million, or 20 percent. Royalty revenue from Rentrak Japan increased to $2.2 million during fiscal 1999 from $1.1 million the previous year. This increase was due to a royalty payment from Rentrak Japan of $1.0 million in January 1999. Cost of sales in fiscal 1999 increased to $103.9 million from $102.5 million the prior year, an increase of $1.4 million. The change is primarily due to factors that led to the changes in revenue noted above. In fiscal 1999, the Company's gross profit margin decreased to 15 percent from 17 percent the previous year, excluding the $1.0 million royalty payment from Rentrak Japan. Selling, general and administrative expenses were $16.0 million in fiscal 1999 compared to $13.1 million in fiscal 1998. This increase of $2.9 million, or 22 percent, was primarily due to (i) increased compensation costs associated with the growing fulfillment and order processing business; and (iii) increased advertising expenditures. Also, fiscal 1998 included collection of amounts that were previously reserved at March 31, 1997. Other income decreased from $0.7 million in fiscal 1998 to $0.6 million for fiscal 1999, a decrease of $0.1 million. For the year ended March 31, 1999, the Company recorded pre-tax income of $3.3 million, or 3 percent of total revenue, compared to $7.9 million, or 6 percent of total revenue in the prior fiscal year. This decrease is due primarily to the increase in selling, general and administrative expenses as noted above. Included in the amounts above are the results from Other Subsidiaries which are primarily comprised of operations of 3PF.COM, Inc., and Blowout Video, Inc. Total revenues from 3PF.COM, Inc. increased to $10.5 million at March 31, 1999 compared to $6.1 million at March 31, 1998 an increase of $4.4 million. This increase was primarily due to increased volume from existing customers. Cost of sales was $8.4 million, an increase of $3.7 million over the $4.7 million recorded in fiscal 1998. This increase is due to the increase in freight and warehouse labor due primarily to the increase in revenue as noted above. Selling, general and administrative expenses increased to $1.2 million in fiscal 1999 from $0.8 million in fiscal 1998, an increase of $0.4 million. This increase was primarily due to an increase in property taxes paid in fiscal 1999. As a percentage of total revenue, selling, general and administrative expenses decreased to 11 percent for fiscal 1999 from 13 percent for the prior year. As a result of the foregoing factors, for the year ended March 31, 1999, 3PF.COM, Inc. recorded pre-tax income of $0.6 million, or 6 percent of total revenue. This compares with pre-tax income of $0.4 million, or 7 percent of total revenue, in fiscal 1998. Total revenues from Blowout Video, Inc. increased to $8.4 million in fiscal 1999 from $6.4 million in fiscal 1998, an increase of $2.0 million, or 31 percent. Cost of sales was $5.2 million, an increase of $1.3 million over the $3.9 million recorded in fiscal 1998. Selling, general and administrative expenses increased to $2.4 million in fiscal 1999 from $1.8 million in fiscal 1998, an increase of $0.6 million. As a percentage of total revenue, selling, general and administrative expenses increased to 29 percent for fiscal 1999 from 28 percent for the prior year. For the year ended March 31, 1999, BlowOut Video, Inc. recorded pre-tax income of $0.7 million, or 8 percent of total revenue. This compares with pre-tax income of $0.7 million, or 11 percent of total revenue, in fiscal 1998. Consolidated Balance Sheet At March 31, 1999, total assets were $49.5 million, a decrease of $2.1 million from the $51.6 million a year earlier. A substantial portion of the decrease resulted from the Company's use of cash to repurchase the Company's Common Stock, as noted below, and to reduce accounts payable. Net current liabilities relating to BlowOut at March 31, 1999 and 1998 of approximately $3.7 million and $4.6 million, respectively represent amounts reserved for contingencies not yet settled as of year end. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2000, the Company had cash and other liquid investments of $4.0 million, compared to $2.1 million at March 31, 1999. At year-end, the Company's current ratio (current assets/current liabilities) was 1.32 compared to 1.13 a year earlier. This improvement is primarily due to the Company retiring approximately $10.5 million in debt with the proceeds from the settlement of the litigation with Hollywood Entertainment. The Company had an agreement for a line of credit with a financial institution in an amount not to exceed the lesser of $7,500,000 or the sum of 80% of the net amount of eligible accounts receivable as defined in the agreement. Interest was payable monthly at the bank's prime rate plus 1 percent (9% at March 31, 2000). The line was secured by substantially all of the Company's assets. The terms of the agreement required, among other things, a minimum amount of tangible net worth, minimum current ratio and minimum total liabilities to tangible net worth. The agreement also restricted the amount of net losses, loans and indebtedness and limited the payment of dividends on the Company's stock. The Company was in compliance with these covenants as of March 31, 2000. At March 31, 2000, the Company had no amounts outstanding under this agreement. In May 2000 this line of credit was replaced with a $12,000,000 line of credit with a different lender. Interest under this line is payable monthly at the bank's prime rate plus 1/4 percent. The new 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 and working capital. The agreement also restricts the amount of loans and indebtedness and limits the payment of dividends on the Company's stock. The agreement expires in May 2005. In 1992, the Company established a retailer financing program whereby the Company provided, on a selective basis, financing to video retailers that the Company believed have the potential for substantial growth in the industry. In connection with these financings, the Company typically made a loan to and/or an equity investment in the retailer. In some cases, a warrant to purchase stock of the retailer was obtained. As part of such financing, the retailer typically agreed to cause all of its current and future retail locations to participate in the PPT System for a designated period of time. Under these agreements, retailers are typically required to obtain all of their requirements of Cassettes offered under the PPT System or obtain a minimum amount of Cassettes based on a percentage of the retailer's revenues. Notwithstanding the long term nature of such agreements, both the Company and the retailer may, in some cases, retain the right to terminate such agreement upon 30-90 days prior written notice. These financings are speculative in nature and involve a high degree of risk, and no assurance of a satisfactory return on investment can be given. The investments individually range from $50,000 to $4.7 million. As of March 31, 2000, the Company has invested or loaned approximately $6.9 million under the program and has reserves of approximately $5.7 million. Included in the $6.9 million investment balance at March 31, 2000, are gross notes receivable of $2.7 million which are due as follows: $1.4 million - 2000; $0.1 million - 2001; $0.3 million - 2002; $0.4 million - 2003; and $0.5 million - 2008. Interest rates on the various loans range from 5 percent to prime plus 1.5 percent (10.5 percent at March 31, 2000) per annum. As the financings are made, and periodically throughout the terms of the agreements, the Company assesses the likelihood of recoverability of the amounts invested or loaned based on the financial position of each retailer. This assessment includes reviewing available financial statements and cash flow projections of the retailer and discussions with retailers' management. The amounts the Company could ultimately receive could differ materially in the near term from the amounts assumed in establishing reserves. On March 22, 1999, BlowOut Entertainment, Inc. (BlowOut) filed for Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. At that same time BlowOut filed a motion to sell substantially all of its assets. BlowOut is not related to the Company's wholly owned subsidiary BlowOut Video, Inc. The sale, to a third party video retailer, was approved on May 10, 1999 and closed on May 17, 1999. The Company was the principal creditor of BlowOut. In 1996, the Company had agreed to guarantee up to $7 million of indebtedness of BlowOut (Guarantee). Pursuant to the terms of the Guarantee, the Company agreed to guarantee any amounts outstanding under BlowOut's credit facility. As the proceeds from the sale of the BlowOut assets were not sufficient to cover the amounts due under this facility, the Company, pursuant to the Guarantee, agreed to a payment plan to fulfill BlowOut's obligation under its credit facility. The amount outstanding at March 31, 2000 is approximately $590,000. The payments, as made, will be recorded as a reduction of "net current liabilities of discontinued operations" on the accompanying balance sheet. The Company's sources of liquidity include its cash balance, cash generated from operations and its available credit resources. These sources are expected to be sufficient to fund the Company's operations for the year ending March 31, 2001. RECENT ACCOUNTING PRONOUNCEMENTS In June 1999, the FASB issued Statement of Financial Accounting Standard No. 137 "Accounting for Derivative Instruments and Hedging Activities" (SFAS 137). SFAS 137 is an amendment to Statement of Financial Accounting Standards No. 133, "Accounting for Derivative and Hedging Activities." SFAS 137 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 137 also requires that changes in the derivative instrument's fair value be recognized currently in results of operations unless specific hedge accounting criteria are met. SFAS 137 is effective for the Company's fiscal year beginning April 1, 2001. The Company expects that adoption of SFAS 137 will not have a material impact on the Company's financial condition or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101) on revenue recognition. SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB 101 is effective for the Company beginning July 1, 2000. The Company does not expect the adoption of SAB 101 to have an impact on its results of operations or financial position. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company considered the provision of Financial Reporting Release No. 48 "Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments." The Company had no holdings of derivative financial or commodity instruments at March 31, 2000. A review of the Company's other financial instruments and risk exposures at that date revealed that the Company had exposure to interest rate risk. The Company utilized sensitivity analyses to assess the potential effect of this risk and concluded that near-term changes in interest rates should not materially adversely affect the Company's financial position , results of operations or cash flows. ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Item Page Report of Independent Public 23 Accountants Consolidated Balance Sheets as 24 of March 31, 2000 and 1999 Consolidated Statements of Income 25 for Years Ended March 31, 2000, 1999and 1998 Consolidated Statements of 26 Stockholders' Equity for Years Ended March 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows 27 for Years Ended March 31, 2000, 1999 and 1998 Notes to Consolidated Financial 29 Statements Financial Statement Schedules 48 Schedule II Schedules not included have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None Report of Independent Public Accountants To Rentrak Corporation: We have audited the accompanying consolidated balance sheets of Rentrak Corporation and subsidiaries as of March 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended March 31, 2000. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rentrak Corporation and subsidiaries as of March 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2000 in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The schedule listed in the index to financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Portland, Oregon May 19, 2000
RENTRAK CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2000 AND 1999 ASSETS 2000 1999 CURRENT ASSETS: Cash and cash equivalents $ 4,028,271 $ 2,145,963 Accounts receivable, net of allowance 21,820,168 23,906,398 for doubtful accounts of $836,945 and $355,241 Advances to program suppliers 2,982,766 2,840,262 Inventory 3,889,603 2,804,983 Income tax receivable 169,300 3,006,502 Deferred tax asset 1,878,113 1,579,637 Notes receivable 4,523,143 2,512,177 Other current assets 1,295,556 955,296 ------------ ------------ Total current assets 40,586,920 39,751,218 ------------ ------------ PROPERTY AND EQUIPMENT, net 2,642,700 1,723,448 OTHER INVESTMENTS, net 302,481 2,014,701 DEFERRED TAX ASSET 3,346,212 2,497,762 OTHER ASSETS 3,595,041 3,469,660 ------------ ------------ Total assets $ 50,473,354 $ 49,456,789 ============ ============
(Continued)
RENTRAK CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) AS OF MARCH 31, 2000 AND 1999 LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999 CURRENT LIABILITIES: Line of credit $ - $ 7,925,000 Accounts payable 24,162,040 16,628,294 Accrued liabilities 2,645,567 2,822,574 Accrued compensation 1,476,703 941,836 Deferred revenue 1,500,262 100,415 Note payable 500,000 3,000,000 Net current liabilities of 430,923 3,746,766 discontinued operations ------------ ------------ Total current liabilities 30,715,495 35,164,885 ------------ ------------ LONG-TERM DEFERRED REVENUE 1,677,272 - COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value; - - authorized: 10,000,000 shares Common stock, $.001 par value; 10,515 10,440 authorized: 30,000,000 shares; issued and outstanding: 10,514,561 shares in 2000 and 10,439,948 shares in 1999 Capital in excess of par value 44,445,199 43,644,479 Cumulative other comprehensive income (264,684) 137,747 Accumulated deficit (25,326,951) (28,751,757) Less- Deferred charge - warrants (783,492) (749,005) ------------ ------------ Total stockholders' equity 18,080,587 14,291,904 ------------ ------------ Total liabilities and $ 50,473,354 $ 49,456,789 stockholders' equity ============ ============ The accompanying notes are an integral part of these consolidated balance sheets.
RENTRAK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 2000 1999 1998 REVENUES: PPT $ 93,393,869 $106,406,342 $113,181,910 Other 19,990,351 17,381,048 9,569,136 ------------ ------------ ------------ 113,384,220 123,787,390 122,751,046 ------------ ------------ ------------ OPERATING COSTS AND EXPENSES: Cost of sales 91,706,290 103,942,898 102,483,865 Selling and 26,448,569 15,995,941 13,062,064 administrative Net (gain) expense (7,791,880) 1,099,154 - from litigation settlement (Note 10) ------------ ------------ ------------ 110,362,979 121,037,993 115,545,929 ------------ ------------ ------------ Income from 3,021,241 2,749,397 7,205,117 operations ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest income 743,464 429,830 1,135,823 Interest expense (669,373) (381,825) (158,708) Gain (loss) on (1,207,483) 549,103 (324,734) investments Other (385,986) - - ------------ ------------ ------------ (1,519,378) 597,108 652,381 ------------ ------------ ------------ (Continued)
RENTRAK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (CONTINUED) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 2000 1999 1998 Income from continuing $ 1,501,863 $ 3,346,505 $ 7,857,498 operations before income tax provision and gain from disposal from discontinued operations INCOME TAX PROVISION (450,559) (1,303,999) (3,199,032) ------------ ------------ ------------ Net income from continuing 1,051,304 2,042,506 4,658,466 operations GAIN FROM DISPOSAL FROM 2,373,502 - - DISCONTINUED OPERATIONS, INCLUDING INCOME TAX BENEFIT OF $483,502 ------------ ------------ ------------ Net income $ 3,424,806 $ 2,042,506 $ 4,658,466 ============ ============ ============ EARNINGS PER COMMON SHARE: Basic: Continuing Operations $.10 $.19 $.42 Discontinued operations .23 - - ---- ---- ----- Total $.33 $.19 $.42 ==== ==== ==== Diluted: Continuing operations $.10 $.18 $.41 Discontinued operations .22 - - ---- ---- ---- Total $.32 $.18 $.41 ==== ==== ==== The accompanying notes are an integral part of these consolidated statements.
RENTRAK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 Common Stock Cumulative ------------------- Capital in Other Number of Excess of Comprehensive Shares Amount Par Value Income BALANCE AT MARCH 31, 1997 11,847,441 $11,847 $47,931,165 $ 184,932 Repurchase of common stock (1,082,900) (1,082) (4,124,329) - Issuance of common stock under employee 221,914 222 888,007 - stock option plans Net income - - - - Change in unrealized gain (loss) on - - - (130,287) investment securities, net of tax Total comprehensive income Income tax benefit from stock option exercise - - 320,455 - Retirements of warrants - - (250,000) - Issuance of warrants - - 600,000 - Amortization of warrants - - - - ---------- ------- ----------- --------- BALANCE AT MARCH 31, 1998 10,986,455 10,987 45,365,298 54,645 Repurchase of common stock (592,484) (593) (1,964,622) - Issuance of common stock under employee stock 45,977 46 118,375 - option plans Net income - - - - Change in unrealized gain (loss) on - - - 83,102 investment securities, net of tax Total comprehensive income Income tax benefit from stock option exercise - - 41,428 -
RENTRAK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 Common Stock Capital in Cumulative ------------------- Other Number of Excess of Comprehensive Shares Amount Par Value Income Issuance of warrants - $ - $ 84,000 $ - Amortization of warrans - - - - ---------- ------- ----------- --------- BALANCE AT MARCH 31, 1999 10,439,948 10,440 43,644,479 137,747 Issuance of common stock under employee stock 74,613 75 228,882 - option plans Net income - - - - Change in unrealized gain (loss) on - - - (402,431) investment securities, net of tax Total comprehensive income Income tax benefit from stock option exercise - - 27,699 - Issuance of warrants - - 544,139 - Amortization of warrants - - - - ---------- ------- ----------- --------- BALANCE AT MARCH 31, 2000 10,514,561 $10,515 $44,445,199 $(264,684) ========== ======= =========== =========
RENTRAK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 Deferred Accumulated Charge Total Comprehensive Deficit Warrants Income BALANCE AT MARCH 31, 1997 $(35,452,729) $(1,403,158) $11,272,057 Repurchase of common stock - - (4,125,411) Issuance of common stock under - - 888,229 employee stock option plans Net income 4,658,466 - 4,658,466 $4,658,466 Change in unrealized gain (loss) on - - (130,287) (130,287) investment securities, net of tax ---------- Total comprehensive income $4,528,179 Income tax benefit from stock option - - 320,455 ========== exercise Retirements of warrants - - (250,000) Issuance of warrants - (600,000) - Amortization of warrants - 620,616 620,616 ------------ ----------- ----------- BALANCE AT MARCH 31, 1998 (30,794,263) (1,382,542) 13,254,125 Repurchase of common stock - - (1,965,215) Issuance of common stock under - - 118,421 employee stock option plans Net income 2,042,506 - 2,042,506 $2,042,506 Change in unrealized gain (loss) on - - 83,102 83,102 investment securities, net of tax ---------- Total comprehensive income $2,125,608 Income tax benefit from stock - - 41,428 ========== option exercise
RENTRAK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998 Deferred Accumulated Charge Total Comprehensive Deficit Warrants Income Issuance of warrants $ - $ (84,000) $ - Amortization of warrants - 717,537 717,537 ------------ ----------- ----------- BALANCE AT MARCH 31, 1999 (28,751,757) (749,005) 14,291,904 Issuance of common stock under - - 228,957 employee stock option plans Net income 3,424,806 - 3,424,806 $3,424,806 Change in unrealized gain (loss) on - - (402,431) (402,431) investment securities, net of tax ---------- Total comprehensive income $3,022,375 Income tax benefit from stock option - - 27,699 ========== exercise Issuance of warrants - (544,139) - Amortization of warrants - 509,652 509,652 ------------ ----------- ----------- BALANCE AT MARCH 31, 2000 $(25,326,951) $ (783,492) $18,080,587 ============ =========== =========== 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, 2000, 1999 AND 1998 2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,424,806 $ 2,042,506 $ 4,658,466 Adjustments to reconcile net income to net cash provided by (used in) operating activities- Gain on disposal of discontinued operation (2,373,502) - - (Gain) loss on 1,207,483 (549,103) 324,734 investments Gain on (7,791,880) - - litigation settlement Depreciation and 1,780,966 1,286,515 696,883 amortization Write-off of 421,675 - - intangibles Amortization of 509,652 717,537 620,616 warrants Provision (credit)for 6,341,032 (125,000) (300,000) doubtful accounts Retailer (373,394) 141,698 (518,450) financing program reserves Reserves on 110,918 17,596 150,977 advances to program suppliers Deferred income (900,272) 1,176,909 1,277,239 taxes Net proceeds from 1,847,505 - - litigation settlement Change in specific accounts: Accounts (3,231,008) 778,471 (9,139,446) receivable Advances to (253,422) (2,425,883) (658,014) program suppliers Inventory (1,084,620) (377,807) (524,558) Income tax 2,864,901 (1,014,739) (802,511) receivable Notes 1,227,099 (537,802) (557,407) receivable and other current assets Accounts 7,233,746 (4,561,190) 6,173,164 payable Accrued 357,860 158,730 (203,803) liabilities and compen- sation Deferred 3,077,119 (729,448) (1,842,986) revenue Net current (942,341) (1,176,530) (47,741) liabilities of dis- continued operations ----------- ----------- ----------- Net cash 13,454,323 (5,177,540) (692,837) provided by (used in) operating activities ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property (1,790,501) (503,030) (508,398) and equipment Investments in (384,500) (1,329,778) (550,000) retailer financing program Proceeds from 228,539 - 518,450 retailer financing program Purchases of (398,122) (570,512) (1,076,299) investments Proceeds from sale of 975,305 1,525,538 289,016 investments Reduction (additions) (6,693) (1,238,601) 701,761 of other assets and intangibles ------------ ----------- ----------- Net cash used (1,375,972) (2,116,383) (625,470) in investing activities ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (7,925,000) 1,925,000 1,000,000 (payments) on line of credit Net borrowing (2,500,000) 3,000,000 - (payments) on notes payable Retirement of - - (250,000) warrants Repurchase of common - (1,965,215) (4,125,411) stock Issuance of common 228,957 118,421 888,229 stock ------------ ----------- ----------- Net cash (10,196,043) 3,078,206 (2,487,182) provided by(used in) financing activities ------------ ----------- ----------- NET INCREASE (DECREASE) 1,882,308 (4,215,717) (3,805,489) IN CASH AND CASH EQUIVALENTS CASH AND CASH 2,145,963 6,361,680 10,167,169 EQUIVALENTS AT BEGINNING OF YEAR ------------ ----------- ----------- CASH AND CASH $ 4,028,271 $ 2,145,963 $ 6,361,680 EQUIVALENTS 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, 2000, 1999 AND 1998 1. BUSINESS OF THE COMPANIES, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER ITEMS: Introduction Rentrak Corporation (the Company) (an Oregon corporation) is principally engaged in the processing of information regarding the rental and sale of video cassettes and the distribution of prerecorded video cassettes to the home video market throughout the United States and Canada using its Pay-Per-Transaction (PPT) revenue sharing program. Under its PPT program, the Company enters into contracts to lease video cassettes from program suppliers (producers of motion pictures and licensees and distributors of home video cassettes) which are then leased to retailers for a percentage of the rentals charged by the retailers. The Company's wholly owned subsidiary, 3PF.COM,Inc. (3PF), provides e-fulfillment order processing and inventory management services to e-tailers, wholesalers and businesses requiring just- in-time fulfillment. The Company's wholly owned subsidiary BlowOut Video, Inc. sells video cassettes and DVDs through its 7 retail video stores that operate under the name of BlowOut Video. Rentrak Japan In December 1989, the Company entered into a definitive agreement with Culture Convenience Club Co., Ltd. (CCC) to develop the Company's PPT distribution and information processing business in certain markets throughout the world. On June 16, 1994, the Company and CCC amended the agreement. Pursuant to this amendment, the Company receives a royalty of 1.67% for all sales of up to $47,905,000, plus one-half of one percent (0.5%) of sales greater than $47,905,000 in each fiscal year. In addition, the Company received a one-time royalty of $2 million, of which $1 million was paid in fiscal 1995 and $1 million was paid in fiscal 1999. The term of the Agreement was extended from the year 2001 to the year 2039. The Company currently owns approximately 9% of Rentrak Japan. In December 1999, the Company received a prepayment of $2,500,000 in exchange for $4,000,000 of credit related to the annual royalty described above. This credit is being recognized in revenues as royalties are earned under the terms of the contract. As of March 31, 2000, $1,638,363 has been recorded as deferred revenue on the accompanying consolidated balance sheet to be recognized in future periods. Rentrak UK Limited In February 1998, the Company entered into a Shareholders Agreement and a PPT License Agreement with Columbus Holdings Limited and Rentrak UK Limited (Rentrak UK) to develop the Company's PPT distribution and information processing business in the United Kingdom through Rentrak UK. The PPT Agreement remains in force in perpetuity, unless terminated due to material breach of contract, liquidation of Rentrak UK or non-delivery, by the Company to Rentrak UK, of all retailer and studio software, including all updates. Pursuant to the PPT Agreement, during the term of the PPT Agreement, the Company will receive a royalty of 1.67% of Rentrak UK's gross revenues from any and all sources. Rentrak UK was originally structured as a joint venture between the Company, which owned 25%, Columbus Holdings Limited, which owned 67% of the venture and Rentrak Japan, which owns 8%. On March 31, 1999, the Company acquired Columbus Holdings Limited's 67% interest, and now owns 84% of Rentrak UK. The acquisition, which was not material to the operations of the Company, was accounted for as a purchase. As of March 31, 2000, Rentrak UK is not generating income or positive cash flow. Accordingly, the Company wrote-off its investment of $222,000. Management of the Company is evaluating Rentrak UK's operations and is exploring options including selling or closing down the operations. Management intends to make a decision in the second quarter of 2001. Basis of Consolidation The consolidated financial statements include the accounts of the Company, its majority owned subsidiaries, and those subsidiaries in which the Company has a controlling interest after elimination of all intercompany accounts and transactions. Investments in affiliated companies owned 20% to 50% are accounted for by the equity method. Management Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates include, among others, reserves on retailer financing program investments (Note 4). Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less at acquisition to be cash equivalents. Investment Securities Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115), requires the Company to classify and account for its security investments as trading securities, securities available for sale or securities held to maturity depending on the Company's intent and ability to hold or trade the securities at time of purchase. Securities available for sale are stated on the balance sheet at their fair market value with an adjustment to stockholders' equity reflected in other comprehensive income as change in 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 for the years ended March 31 are as follows:
Proceeds Gross Gains Gross Losses 2000 $ 975,305 $554,971 $(121,105) 1999 1,525,538 843,749 (294,646) 1998 519,688 24,375 (118,437)
When, in management's opinion, available for sale securities have experienced an other than temporary decline, the amount of the decline in market value below cost is recorded in the income statement as a loss on investments. In fiscal years 2000 and 1998, management determined that certain investments had incurred unrealized losses resulting from other than temporary declines in market value below the cost of the investments. Unrealized losses from other than temporary decline in market value of $1,245,157 and $230,672 were recorded in gain (loss) on investments in the March 31, 2000 and 1998 consolidated statement of income, respectively. There were no unrealized losses recognized in the March 31, 1999 consolidated statement of income. 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, 2000 and 1999. Inventory Inventory consists of videocassettes held for sale and is carried at the lower of cost (first-in, first-out method) or market value. Property and Equipment Depreciation of property and equipment is computed on the straight-line method over estimated useful lives of three to five years. Leasehold improvements are amortized over the lives of the underlying leases or the service lives of the improvements, whichever is shorter. Intangibles The Company reviews its intangible assets for asset impairment at the end of each quarter, or more frequently when events or changes in circumstances indicate that the carrying amount of intangibles may not be recoverable. The Company estimates the sum of expected future undiscounted preinterest expense net cash flows from operating activities. If the estimated net cash flows are less than the carrying amount of intangibles, the Company will recognize an impairment loss in an amount necessary to write down intangibles to a fair value as determined from expected discounted future cash flows. Revenue Recognition The PPT agreements generally provide for a one-time initial order processing fee and continuing transaction fees based on a percentage of rental revenues earned by the retailer upon renting the video cassettes to their customers. The Company recognizes order-processing fees as revenue when the video cassettes are shipped to the retailers and recognizes transaction fees when the video cassettes are rented to the consumers. When the Company's revenue is fixed and determinable at time of shipment of video cassettes to the retailers, deferred revenue is recorded and recognized as revenue in the statement of income when the video cassettes are rented to the consumers. The corresponding liability to video program suppliers for their share of the fees is recorded to cost of sales when the revenue is recognized with a corresponding amount to accounts payable. The Company also may charge retailers an application fee upon admission to the PPT program. This fee is recognized as PPT revenue when the application to participate in the PPT program is approved. Revenues derived from fulfillment services are recognized when products are shipped. During fiscal 2000, the company received a $2,500,000 prepayment from a customer in exchange for $4,000,000 in credit related to a long-term agreement. This prepayment related to periods subsequent to March 31, 2000 and has therefore been recorded as deferred revenue on the accompanying consolidated balance sheet. Deferred revenue will be recognized in future periods as revenues are earned under the terms of the contract. Stockholders and directors, or their families own interests in several stores participating in the PPT program. The Company realized revenues from these stores of approximately $47,000, $99,000 and $323,000 during fiscal 2000, 1999 and 1998, respectively. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under the liability method specified by SFAS 109, deferred tax assets and liabilities are determined based on the temporary differences between the financial statement basis and tax basis of assets and liabilities as measured by the enacted tax rates for the years in which the taxes are expected to be paid. Earnings Per Share Basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed on the basis of the weighted average shares of common stock outstanding plus common equivalent shares arising from dilutive stock options.
The weighted average number of shares of common stock and common stock equivalents and net income used to compute basic and diluted earnings per share for the years ended March 31 were calculated as follows: 2000 1999 1998 --------------------- --------------------- --------------------- Basic Diluted Basic Diluted Basic Diluted Weighted average number 10,477,334 10,477,334 10,775,126 10,775,126 11,222,443 11,222,443 of shares of common stock outstanding Dilutive effect of exercise of stock - 281,787 - 291,017 - 222,378 options ---------- ---------- ---------- ---------- ---------- ---------- Weighted average number 10,477,334 10,759,121 10,775,126 11,066,143 11,222,443 11,444,821 of shares of common stock outstanding and common stock equivalents ========== ========== ========== ========== ========== ========== Net income: Continuing operations $1,051,304 $1,051,304 $2,042,506 $2,042,506 $4,658,466 $4,658,466 Discontinued 2,373,502 2,373,502 - - - - operations ---------- ---------- ---------- ---------- ---------- ---------- Net income $3,424,806 $3,424,806 $2,042,506 $2,042,506 $4,658,466 $4,658,466 ========== ========== ========== ========== ========== ========== Earnings per share: Continuing operations $0.10 $0.10 $0.19 $0.18 $0.42 $0.41 Discontinued 0.23 0.22 - - - - operations ----- ----- ----- ----- ----- ----- Earnings per share $0.33 $0.32 $0.19 $0.18 $0.42 $0.41 ===== ===== ===== ===== ===== =====
Options and warrants to purchase approximately 4,400,000, 4,400,000 and 4,300,000 shares of common stock were outstanding during the years ended March 31, 2000, 1999 and 1998, respectively, but were not included in the computation of diluted EPS because the exercise price of the options and warrants were greater than the average market price of the common shares. Advertising Expense Advertising expense, net of advertising reimbursements, totaled approximately $952,000, $641,000 and $71,000 for the years ended March 31, 2000, 1999 and 1998, respectively. Statements of Cash Flows The Company had the following transactions for the years ended March 31:
2000 1999 1998 CASH PAID (RECEIVED) FOR: Interest $ 656,723 $ 328,802 $ 153,398 Income taxes, net of refunds (1,645,085) (493,645) 2,790,158 NONCASH FINANCING AND INVESTING ACTIVITIES: Reclassification of accounts 1,023,794 269,775 1,478,869 receivable to other assets and other investments Issuance of warrants (544,139) (84,000) (600,000) Tax benefit from stock option (27,699) (41,428) (320,455) exercises Receipt of note receivable in 4,000,000 - - litigation settlement (Note 10) Receipt of common stock in 1,944,375 - - litigation settlement (Note 10) Change in unrealized gain (402,431) 83,102 (130,287) (loss) on investment securities, net of tax
Comprehensive Income In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). The Company has adopted SFAS 130. The statement establishes presentation and disclosure requirements for reporting comprehensive income. Comprehensive income includes charges or credits to equity that is not the result of transactions with shareholders. Components of the Company's comprehensive income consist of the change in unrealized gain (loss) on investment securities (net of tax), net of the reclassification adjustment for gains (losses) included in net income as of March 31 is as follows:
2000 1999 1998 Holding gains (losses) arising $(534,988) $291,761 $(166,031) during the period, net of tax Less- Reclassification 132,557 208,659 (35,744) adjustment for gains (losses) included in net income, net of tax --------- -------- --------- Change in unrealized gains $(402,431) $ 83,102 $(130,287) (losses) on investment securities, net of tax ========= ======== =========
Impact of Recent Accounting Pronouncements In June 1999, the FASB issued Statement of Financial Accounting Standard No. 137 "Accounting for Derivative Instruments and Hedging Activities" (SFAS 137). SFAS 137 is an amendment to Statement of Financial Accounting Standards No. 133, "Accounting for Derivative and Hedging Activities." SFAS 137 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 137 also requires that changes in the derivative instrument's fair value be recognized currently in results of operations unless specific hedge accounting criteria are met. SFAS 137 is effective for the Company's fiscal year beginning April 1, 2000. The Company expects that adoption of SFAS 137 will not have a material impact on the Company's financial condition or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101) on revenue recognition. SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB 101 is effective for the Company beginning July 1, 2000. The Company does not expect the adoption of SAB 101 to have a material impact on its results of operations or financial position. Reclassifications Certain reclassifications have been made to prior year amounts to conform to the current year presentation. 2. INVESTMENT SECURITIES: The carrying value and estimated fair value of marketable securities at March 31 were as follows:
Carrying Unrealized Unrealized Value Gross Gain Gross Loss Fair Value As of March 31, 2000: Available for sale- Noncurrent: Corporate $2,335,290 $ 30,319 $(457,233) $1,908,376 securities ========== ======== ========= ========== As of March 31, 1999: Available for sale- Noncurrent: Corporate $ 35,108 $222,249 $ (77) $ 257,280 securities ========== ======== ========= ==========
Investment securities that have limited marketability are classified as noncurrent as it is management's intent not to dispose of the securities within one year. 3. PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consists of: March 31, ----------------------- 2000 1999 Furniture and fixtures $ 7,054,568 $ 5,861,824 Machinery and equipment 438,312 213,412 Leasehold improvements 2,060,114 1,687,257 ----------- ----------- 9,552,994 7,762,493 Less- Accumulated depreciation (6,910,294) (6,039,045) ----------- ----------- $ 2,642,700 $ 1,723,448 =========== ===========
4. RETAILER FINANCING PROGRAM: In 1992, the Company established a retailer financing program whereby on a selective basis it provided financing to video retailers that the Company believed had potential for substantial growth. In connection with these financings, the Company typically made a loan and/or equity investment in the retailer. In some cases, a warrant to purchase stock was obtained. As part of such financings, the retailer typically agreed 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. As of March 31, 2000, the Company has invested or made oral or written commitments to loan to or invest approximately $6,900,000 in various video retailers. The amounts outstanding under this program individually range from $50,000 to $4,700,000. The notes, which have payment terms that vary according to the individual loan agreements, are due from 2000 through 2007. Interest rates on the various loans range from 5% to prime plus 1.5% (10.5% at March 31, 2000). Due to the nature of these loans, interest income is not recognized until received. The loans are reviewed for impairment in accordance with FASB Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114). A valuation allowance has been established for the amount by which the recorded investment in the loan exceeds the measure of the impaired loan. As the financings are made, and periodically throughout the terms of the agreements, the Company assesses the recoverability of the amounts based on the financial position of each retailer. The amounts the Company could ultimately receive could differ materially in the near-term from the amounts assumed in establishing the reserves. At March 31, 2000 the Company had invested or loaned approximately $6,900,000 under the program and had provided reserves of approximately $5,700,000. At March 31,1999 the Company had invested or loaned approximately $14,000,000 under the program and had provided reserves of approximately $9,600,000. These balances are included in other assets. The activity in the total reserves for the retailer-financing program is as follows for the years ended March 31:
2000 1999 Beginning balance $ 9,575,688 $9,353,995 Additions to reserve 1,245,157 240,614 Write offs (5,115,665) - Recoveries (20,997) (18,921) ----------- ---------- Ending balance $ 5,684,183 $9,575,688 =========== ==========
A substantial portion of the write-offs in fiscal 2000 related to assets which were fully reserved in prior years. 5. LINE OF CREDIT: The Company had an agreement for a line of credit with a financial institution in an amount not to exceed the lesser of $7,500,000 or the sum of 80% of the net amount of eligible accounts receivable as defined in the agreement. Interest was payable monthly at the bank's prime rate plus 1 percent (9% at March 31, 2000). The line was secured by substantially all of the Company's assets. The terms of the agreement required, among other things, a minimum amount of tangible net worth, minimum current ratio and minimum total liabilities to tangible net worth. The agreement also restricted the amount of net losses, loans and indebtedness and limited the payment of dividends on the Company's stock. The Company was in compliance with these covenants as of March 31, 2000. At March 31, 2000 and 1999, the Company had $0 and $7,925,000, respectively, outstanding under this agreement. In May 2000 this line of credit was replaced with a $12,000,000 line of credit with a different lender. Interest under this line is payable monthly at the bank's prime rate plus 1/4 percent. The new 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 and working capital. The agreement also restricts the amount of loans and indebtedness and limits the payment of dividends on the Company's stock. The agreement expires in May 2005. 6. RELATED PARTY NOTE PAYABLE: On January 29, 1998, the Company entered into a $3,000,000 unsecured note payable with a director of the Company. The 10% interest-bearing note was repaid in full in January 2000. During fiscal 2000, the Company's subsidiary, Blowout Video Holding Company, entered into a $3,000,000 line of credit with a director of the Company. The line expires in August 2002 and bears interest at prime plus 1.5 percent (10.5% at March 31, 2000). The line is secured by substantially all the assets of BlowOut Video Holding Company. At March 31, 2000, the Company had $500,000 outstanding under this agreement which is recorded in accrued liabilities in the accompanying consolidated balance sheet. 7. INCOME TAXES:
The provision (benefit) for income taxes is as follows for the years ended March 31: 2000 1999 1998 Current tax provision: Federal $ - $ - $1,689,658 Foreign - - 1,500,000 State 125,192 - 232,133 -------- ---------- ---------- 125,192 - 3,421,791 Deferred tax provision 325,367 1,303,999 (222,759) (benefit) -------- ---------- ---------- Income tax provision $450,559 $1,303,999 $3,199,032 ======== ========== ==========
The reported provision for income taxes from continuing operations differs from the amount computed by applying the statutory federal income tax rate of 34% to income before provision for income taxes as follows for the years ended March 31:
2000 1999 1998 Provision computed at $ 510,633 $1,137,812 $2,688,549 statutory rates State taxes, net of federal 59,474 133,860 117,464 benefit Amortization of warrants 193,667 272,664 235,834 Recognition of net operating (131,507) - - loss carryforward Other (181,708) (240,337) 157,185 --------- ---------- ---------- $ 450,559 $1,303,999 $3,199,032 ========= ========== ==========
Deferred tax assets and (liabilities) from continuing operations are comprised of the following components at March 31, 2000 and 1999: 2000 1999 Deferred tax assets: Current- Allowance for doubtful accounts $ 78,113 $ 78,113 Retailer-related accruals - 140,703 Foreign tax credit 823,559 713,497 Net operating loss carryforward - 539,108 Capital loss carryforward 327,749 195,543 Deferred revenue 570,100 - Other 78,592 (87,327) ---------- ---------- Total current deferred tax assets 1,878,113 1,579,637 ---------- ---------- Noncurrent- Depreciation 423,846 433,691 Retailer financing program 320,107 552,775 reserve Program supplier reserves 484,910 442,761 Unrealized loss on investments 299,296 143,675 Foreign tax credit 1,000,000 1,000,000 Deferred revenue 637,361 - Intangibles amortization - (160,237) Other 180,692 85,097 ---------- ---------- Total noncurrent deferred tax assets 3,346,212 2,497,762 ---------- ---------- Total deferred tax assets $5,224,325 $4,077,399 ========== ==========
8. STOCKHOLDERS' EQUITY: Stock Options and Warrants Effective March 31, 1997, the Company adopted the 1997 Non- Officer Employee Stock Option Plan. The aggregate number of shares which may be issued upon exercise of options under the plan shall not exceed 750,000. In August 1997, the Company adopted the 1997 Equity Participation Plan. The aggregate number of shares which may be issued upon exercise of options under the plan shall not exceed 1,600,000. The plans are administered by the Stock Option Committee of the Board which determines the terms and conditions of options issued under the plans. Options granted to date under the plans are exercisable over four to five years and expire ten years after date of grant. As of March 31, 2000, the Company has 387,170 and 168,934 options available to be granted under the 1997 Non-Officer Employee Stock Option Plan and 1997 Equity Participation Plan, respectively. The Company has elected to account for its stock-based compensation plans in accordance with APB 25, under which no compensation expense has been recognized. The Company has computed for pro forma disclosure purposes the value of all options granted during fiscal years 2000, 1999 and 1998, using the Black-Scholes option pricing model as prescribed by SFAS 123 and the following assumptions:
2000 1999 1998 Risk-free interest rate 5.37 - 6.91% 4.46 - 6.03% 5.56 - 7.17% Expected dividend yield 0% 0% 0% Expected lives 5 - 10 years 5 - 10 years 5 - 10 years Expected volatility 72.20% 68.94% 48.53%
Adjustments were made for options forfeited prior to vesting. Had compensation expense for these plans been determined in accordance with SFAS 123, the Company's net income and earnings per share reflected on the March 31, 2000, 1999 and 1998 statements of income would have been the following unaudited pro forma amounts:
2000 1999 1998 Net income As reported $3,424,806 $2,042,506 $4,658,466 Pro forma 2,293,758 95,767 3,873,988 Basic earnings per share As reported $.33 $.19 $.42 Pro forma .22 .01 .35 Diluted earnings per share As reported $.32 $.18 $.41 Pro forma .21 .01 .34
The table below summarizes the plans' activity:
Options Outstanding ------------------------- Weighted Number of Average Shares Exercise Price Balance at March 31, 1997 2,956,123 $4.72 Granted- Option price = fair market value 549,174 4.11 Option price > fair market value 45,714 4.98 Option price < fair market value 10,000 2.94 Issued (221,914) 4.14 Canceled (513,772) 4.89 --------- ----- Balance at March 31, 1998 2,825,325 4.60 Granted- Option price = fair market value 919,216 5.04 Issued (45,977) 2.77 Canceled (252,458) 4.77 --------- ----- Balance at March 31, 1999 3,446,106 4.73 Granted- Option price = fair market value 607,837 3.97 Option price > fair market value 15,000 7.38 Option price < fair market value 12,500 2.81 Issued (74,613) 3.08 Canceled (147,128) 5.75 --------- ----- Balance at March 31, 2000 3,859,702 $4.60 ========= =====
Using the Black Scholes methodology, the total value of options granted during fiscal years 2000, 1999 and 1998 was approximately $2,560,000, $4,633,000 and $2,510,000, which would be amortized on a pro forma basis over the vesting period of the option. The weighted average fair value of options granted during the years ended March 31, 2000, 1999 and 1998 was $4.03, $5.04 and $4.15, respectively. Options to purchase 2,494,190, 2,006,932 and 1,560,482 shares of common stock were exercisable at March 31, 2000, 1999 and 1998, respectively. These exercisable options had weighted average exercise prices of $4.70, $4.57 and $4.62 at March 31, 2000, 1999 and 1998, respectively. The following table summarizes information about stock options outstanding at March 31, 2000:
Options Outstanding Options Exercisable ------------------------------ -------------------- Weighted Outstand- Average Weighted Exercisable Weighted Range of ing as of Remaining Average as of Average Exercise March 31, Contract- Exercise March 31, Exercise Prices 2000 ual Life Price 2000 Price $1.00-$2.59 37,922 0.0 $ 1.28 37,922 $ 1.28 2.60-6.49 3,745,251 5.9 4.54 2,389,739 4.63 6.50-9.78 76,529 7.8 9.38 66,529 9.36 --------- --------- 1.00-9.78 3,859,702 5.9 4.60 2,494,190 4.70 ========= =========
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 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 13). In September 1992, the Company agreed to issue warrants to buy up to 1,000,000 shares of the Company's common stock at an exercise price of $7.14 per share, which approximated market value at date of grant. The warrants were issued in connection with entering into a long-term licensing agreement with a program supplier. At March 31, 1997, all warrants had been issued. In November 1996, the Company adjusted the number of shares of common stock under the warrant to 1,083,900 and decreased the price to $6.578. This adjustment was done in connection with the distribution of the common stock of BlowOut Entertainment, Inc. (BlowOut) in November 1996 (Note 13). The adjustment was done pursuant to the supplier's agreement that requires the Company to adjust the warrant if a distribution of the Company's assets occurs. During fiscal year 1998, the warrants were canceled. The consideration of $250,000 which was paid by the Company for the cancellation of these warrants and the warrant for 459,303 shares of the Company's common stock as noted below was charged to stockholders' equity. As a result of the stock adjustment which was done in connection with the distribution of the common stock of BlowOut, 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 13). The adjustment was done pursuant to the supplier's agreement that requires the Company to adjust the warrant if a distribution of the Company's assets occurs. During fiscal year 1998, the warrants were canceled. In March 1998, the Company agreed to issue warrants to buy up to 1,000,000 shares of the Company's common stock at an exercise price of $6.59 per share, which exceeded market value at date of grant. The warrants were issued in connection with entering into a long-term agreement with a customer. These warrants expired unexcercised in March 2000. All warrants which the Company agreed to issue in 1995 and 1998 were valued by an outside valuation firm using standard warrant valuation models. The value of the warrants of $4,133,977 was recorded in the equity section and is being amortized over the associated periods to be benefited by each warrant. In fiscal 2000, 1999 and 1998, expense associated with the warrants was approximately $510,000 $718,000 and $621,000, 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 certain proposals to acquire control of the Company. Under the rights plan, each shareholder received 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. Prior to the time that a person or group acquires beneficial ownership of 15% or more of the Company's outstanding stock, the Board of Directors, at their discretion, may waive this provision with respect to any transaction or may terminate the rights plan. 9. COMMITMENTS: Leases The Company leases certain facilities and equipment under operating leases expiring at various dates through 2009. Approximate rental payments over the term of the leases exceeding one year are as follows: Year Ending March 31, 2001 $ 2,685,000 2002 2,231,000 2003 1,820,000 2004 1,655,000 2005 1,649,000 2006 and thereafter 3,411,000 ----------- $13,451,000 =========== 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 approximately $2,335,000, $1,926,000 and $2,111,000 for the years ended March 31, 2000, 1999 and 1998, 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, 2000, the Company has reserved approximately $2,000,000 for potential losses under such guarantee arrangements. On March 22, 1999, BlowOut filed for Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. At that same time BlowOut filed a motion to sell substantially all the assets of BlowOut. BlowOut is not related to the Company's wholly owned subsidiary BlowOut Video, Inc. The sale, to a third party video retailer, was approved on May 10, 1999 and closed on May 17, 1999. The Company was the principal creditor of BlowOut. In 1996, the Company had agreed to guarantee up to $7 million of indebtedness of BlowOut (Guarantee). Pursuant to the terms of the Guarantee, the Company agreed to guarantee any amounts outstanding under BlowOut's credit facility. As the sale of the BlowOut assets were not sufficient to cover the amounts due under this facility, the Company, pursuant to the guarantee, has agreed to a payment plan to fulfill BlowOut's obligation under its credit facility. The amount outstanding at March 31, 2000 is approximately $590,000. The payments, as made, will be recorded as a reduction of "net current liabilities of discontinued operations" on the accompanying balance sheet. 10. CONTINGENCIES: In April 1998, the Company filed a complaint (the Hollywood Complaint) against Hollywood Entertainment, Inc. (Hollywood), entitled Rentrak Corporation v. Hollywood Entertainment et al., case No. 98-04-02811, in the Circuit Court of the State of Oregon for the County of Multnomah, Portland, Oregon. In January 2000, the Company and Hollywood settled the case. Pursuant to the settlement, Hollywood paid the Company $14,000,000, $10,000,000 of which was paid in cash and $4,000,000 of which was paid by promissory note due within six months of the settlement. In addition, Hollywood issued to the Company 200,000 shares of Hollywood common stock. After considering legal costs and accounts receivable due from Hollywood, the Company recorded a gain of $7,791,880. In June 1998, Video Update, Inc. (Video Update) filed a complaint (the Video Update Complaint) against the Company entitled Video Update, Inc. v. Rentrak Corp., Civil Action No. 98-286, in the United States District Court for the District of Delaware. The Video Update Complaint alleges various violations of the antitrust laws, including that the Company has attempted to monopolize the market for videocassettes leased to retail video stores in violation of Section 2 of the Sherman Act. Video Update further alleges that the Company's negotiation and execution of an exclusive, long-term revenue-sharing agreement with Video Update violates Section 1 of the Sherman Act and Section 3 of the Clayton Act. Video Update is seeking unspecified monetary relief, including treble damages and attorneys' fees, and equitable relief, including an injunction prohibiting the Company from enforcing its agreement with Video Update or any exclusivity provision against videocassette suppliers and video retailers. In August 1998, the Court granted the Company's motion to dismiss the Video Update Complaint pursuant to Federal Rules of Civil Procedure Rule 12(b)(3) on the basis of improper venue. In August 1998, Video Update filed a new complaint against the Company in the United States District Court for the District of Oregon (the Re-Filed Complaint), Case No. 98-1013HA. The Re- Filed Complaint is substantially the same as the previous complaint. The Company believes the Re-Filed Complaint lacks merit and intends to vigorously defend against the allegations in the Complaint. The Company has answered the Re-Filed Complaint denying its material allegations and asserting several affirmative defenses. The Company also has counterclaimed against Video Update alleging, among other things, breach of contract, breach of the covenant of good faith and fair dealing, promissory fraud, breach of fiduciary duty, breach of trust, constructive fraud, negligent misrepresentation and intentional interference with business advantage, and seeks damages and equitable relief. In October 1998, the Company filed a motion for summary judgment seeking to dismiss the lawsuit filed against it by Video Update. In January of 1999, the Company filed a separate motion for partial summary judgment on its breach of contract counterclaim seeking to recover more than $4.4 million in fees and interest which the Company claims Video Update owes to it. In response to the Company's motions, Video Update asked the court for time to take discovery before having to file oppositions. The court has given the parties until June 30, 2000 to conduct discovery. The court denied Rentrak's motions without reaching the merits and without prejudice to re-filing the motions after discovery has been conducted. Rentrak expects to re-file its motions after discovery has taken place. On October 21, 1999, the Company amended its counterclaims to add additional breach of contract claims, a claim for trade secret misappropriation and a claim for recovery of personal property. The amended countercomplaint also added Video Update's chairman, Daniel Potter as a defendant to the fraud and negligent misrepresentation claims. As of March 31, 2000, the Company has approximately $4,600,000 in accounts receivable relating to PPT transactions from Video Update which the Company believes are recoverable. Management intends to monitor the situation quarterly and when management becomes aware of information that indicates that the asset will not be recovered, an appropriate reserve will be recorded. In August 1998, the Company filed a complaint (the Movie Buffs Complaint) against Susan Janae Kingston d/b/a Movie Buffs (Movie Buffs), entitled Rentrak Corporation v. Susan Janae Kingston, an individual, d/b/a Movie Buffs, Case No. CV 98-1004 HA, in the United States District Court for the District of Oregon. The Movie Buffs complaint alleges breach of contract and conversion claims and seeks damages in the amount of at least $3.3 million and punitive damages of $500,000. In September 1998, Movie Buffs filed counterclaims against the Company and Third Party Claims against Hollywood Entertainment Corp. (the Movie Buffs Counterclaims). The Movie Buffs Counterclaims allege that the Company violated the antitrust laws, including the Sherman, Clayton and Robinson-Patman Acts. The Counterclaim also seeks declaratory relief, an accounting and alleges fraud and conspiracy to defraud, breach of contract, breach of the implied covenant of good faith, and unfair trade practices. Movie Buffs seeks an unspecified amount of damages (at least $10 million), treble damages, general and consequential damages, punitive damages, Attorneys' fees and court costs. In September 1998, Roadrunner Video (Roadrunner Video) filed a third-party complaint in intervention against the Company and Hollywood Entertainment Corp. (the Roadrunner Complaint). The Roadrunner Complaint alleges the same claims as the Movie Buffs Counterclaims. The Company filed a motion to dismiss the Robinson-Patman Act claims pursuant to Federal Rules of Civil Procedure 12(b)(6), which motion was granted on March 5,1999. The court also granted Roadrunner and Movie Buff's request to dismiss their claims against Hollywood without prejudice. The Company believes the Movie Buffs Counterclaims and the Roadrunner Complaint lack merit and the Company intends to vigorously defend against all of the allegations therein. On April 12, 1999, Roadrunner and Movie Buffs filed amended claims against Rentrak that added a new claim for fraud. The Company continues to believe that the remaining Roadrunner and Movie Buffs claims are without merit and intends to continue to vigorously defend itself. On February 10, 2000, the Company filed a complaint (the "Action Video Complaint") against David D. Passerallo, and Action Video, Inc. entitled Rentrak Corporation v. David D. Passerallo, an individual and Action Video, a North Carolina corporation, Case No. CV 00-214-HA, in the United District Court for the District of Oregon. The Action Video Complaint alleges claims for conversion, and breach of contract, payment on advance agreement and personal guarantee. On April 10, 2000, Action Video filed counterclaims against the Company. Action Video's counterclaims allege that the Company violated antitrust laws, including the Sherman and Clayton Acts, based on the Company's alleged efforts to favor certain customers (such as Hollywood) over others and thereby restrain competition. The Action Video Counterclaims also include the following: (1) a demand for a declaratory ruling that the contract between the Company and Action Video is unenforceable as unconscionable and a contract of adhesion, (2) fraud and conspiracy to defraud, based on allegedly false representations intended to induce Action Video to act; (3) breach of contract based on the Company's allegedly wrongful termination of its contract with Action Video, allegedly wrongful computation of revenue entitlement, and certain other alleged actions; (4) breach of an implied covenant of good faith, based on the Company's allegedly wrongful termination of its contract with Action Video; (5) unfair trade practices based on the Company's alleged conduct during its dealings with Action Video, including termination of the Company's contract with Action Video; and (6) a demand for an accounting of the nature and amount of the parties' respective obligations under the contract. Action Video seeks unspecified monetary damages in excess of $7 million, treble damages, general and consequential damages, punitive damages in the minimum amount of $30 million, attorneys' fees and court costs. The Company has sought to dismiss a number of Action Video's counterclaims. Action Video has agreed to dismiss certain of these counterclaims and has agreed to replead its remaining counterclaims. The Company believes that the Action Video Counterclaims are without merit and intends to vigorously defend against this litigation. In the event of an unanticipated adverse final determination in respect of certain matters discussed above, the Company's consolidated net income for the period in which such determination occurs could be materially affected. The Company is also subject to certain legal proceedings and claims that arise in the ordinary course of its business. In the opinion of management, the amount of any ultimate liability with respect to these actions will not materially affect the financial position or results of operation of the Company. 11. EMPLOYEE BENEFIT PLANS: At January 1, 1991, the Company established an employee benefit plan (the 401(k) Plan) pursuant to Section 401(k) of the Internal Revenue Code for certain qualified employees. Contributions made to the 401(k) Plan are based on percentages of employees' salaries. The amount of the Company's contribution is at the discretion of Board of Directors. Contributions under the 401(k) Plan for the years ended March 31, 2000, 1999 and 1998 were approximately $77,000, $76,000 and $68,000, 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 143,773 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 3,257 shares for aggregate proceeds of $14,370, 4,245 shares for aggregate proceeds of $20,214 and 5,351 shares for aggregate proceeds of $20,993, in 2000, 1999 and 1998, respectively. 12. BUSINESS SEGMENTS, SIGNIFICANT SUPPLIERS AND MAJOR CUSTOMER: In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," (SFAS 131). SFAS 131 requires the Company to report certain information about operating segments. The Company classifies its services in three segments, PPT, 3PF.COM and Other. Other services include operations of BlowOut Video, a video retailer, website services and amounts received pursuant to royalty agreements.
Business Segments 2000 1999 1998 Net sales (1): PPT $ 94,149,121 $106,972,685 $113,748,857 3PF.COM (2) 11,648,770 10,501,958 6,436,412 Other 13,345,044 8,102,348 4,175,449 ------------ ------------ ------------ $119,142,935 $125,576,991 $124,360,718 ============ ============ ============ Income (loss) from operations PPT $ 2,032,875 $ (1,086,669) $ 4,752,502 3PF.COM(2) (1,131,187) 862,257 664,672 Other 2,119,550 2,973,809 1,787,943 ------------ ------------ ------------ $ 3,021,238 $ 2,749,397 $ 7,205,117 ============ ============ ============ Identifiable assets(1): PPT $ 44,571,673 $ 45,618,408 $ 49,330,378 3PF.COM 2,703,360 1,152,171 549,439 Other 6,195,923 4,302,726 3,540,549 ------------ ------------ ------------ $ 53,470,956 $ 51,073,305 $ 53,420,366 ============ ============ ============ (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) 3PF.COM's revenues related to the shipment of cassettes to Rentrak's PPT Customers was $3,300,000, $3,800,000 and $4,500,000 for the years ended March 31, 2000, 1999 and 1998, respectively.
The Company has one program supplier that supplied product that generated 25%, a second that generated 19%, and a third that generated 13% of the Company's revenues for the year ended March 31, 2000. The Company has one program supplier that supplied product that generated 28%, a second that generated 26%, and a third that generated 15% of the Company's revenues for the year ended March 31, 1999. The Company has one program supplier that supplied product that generated 48%, a second that generated 17%, and a third that generated 15% of the Company's revenues for the year ended March 31, 1998. There were no other program suppliers who provided product accounting for more than 10% of sales for the years ended March 31, 2000, 1999 and 1998. The Company currently receives a significant amount of product from three program suppliers. Although management does not believe that these relationships will be terminated in the near term, a loss of one of these suppliers could have an adverse affect on operating results. One customer accounted for 13% of the Company's revenues in 1999. Another customer accounted for 11% of the Company's revenues in 1998. No customer accounted for more than 10% of the Company's revenue in fiscal 2000. 13. DISCONTINUED OPERATIONS: On November 26, 1996, the Company made a distribution to its shareholders of 1,457,343 shares of common stock (the BlowOut Common Stock) of BlowOut. BlowOut is not related to the Company's wholly owned subsidiary BlowOut Video, Inc. During the year ended March 31, 2000, the Company recorded a gain on the disposal of discontinued operations of $1,900,000 related to BlowOut, as the liability related to BlowOut contingencies was less than estimated. The Company also reduced the valuation allowance that was recorded against the deferred tax asset related to liabilities of discontinued operations. This reduction of approximately $500,000 in the valuation allowance was recorded as an income tax benefit from discontinued operations in the accompanying consolidated income statement. Net current liabilities of discontinued operations at March 31, 2000 relate to amounts to be paid pursuant to the Guarantee, net of tax benefit.
RENTRAK CORPORATION Valuation and Qualifying Accounts Schedule II Balance at Charged to Balance at Beginning of Write Off and Other Recoveries The End of Year Ended: Period Expenses Accounts (Deductions) Period Allowance for doubtful accounts March 31, 1998 409,313 (4,655,356) - 4,832,684 586,641 March 31, 1999 586,641 (7,865,333) - 7,633,933 355,241 March 31, 2000 355,241 (3,892,947) - 4,374,651 836,945 Advances to program suppliers reserve March 31, 1998 1,768,514 110,581 (696,338) - 1,182,757 March 31, 1999 1,182,757 (17,597) - - 1,165,160 March 31, 2000 1,165,160 110,918 - - 1,276,078 Other Current Assets- Retailer Financing Program reserve March 31, 1998 - - - - - March 31, 1999 - - 994,935 1 - 994,935 March 31, 2000 994,935 - (500,000) 1 - 494,935 Other Assets- Retailer Financing Program reserve March 31, 1998 10,340,375 - (467,930) 2 (518,450) 9,353,995 March 31, 1999 9,353,995 (194,888) (559,433) 1 (18,921) 8,580,753 March 31, 2000 8,580,753 1,245,157 (4,615,665) 2 (20,997) 5,189,248 1 - Reclassified from Other Current Assets to Other Assets. 2 - Eliminated against 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 2000 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. See "Election of Directors" and "Executive Officers". ITEM 11. EXECUTIVE COMPENSATION Pursuant to General Instruction G(3) to Form 10-K, the information called for by this item 11 is incorporated by reference from the Company's definitive Proxy Statement for its 2000 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. See "Executive Compensation. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Pursuant to General Instruction G(3) to Form 10-K, the information called for by this item 12 is incorporated by reference from the Company's definitive Proxy Statement for its 2000 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. See "Security Ownership of Certain Beneficial Owners and Directors". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to General Instruction G(3) to Form 10-K, the information called for by this item 13 is incorporated by reference from the Company's definitive Proxy Statement for its 2000 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. See "Compensation Committee Interlocks And Insider Participation" and "Certain Relationships And Transactions". PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements The following documents are filed as part of the Report: Consolidated Financial Statements: The Consolidated Financial Statements of the Company are included in Item 8 of this Report: Report of Independent Public Accountants Consolidated Balance Sheets as of March 31, 2000 and 1999 Consolidated Statements of Income for Years Ended March 31, 2000, 1999 and 1998 Consolidated Statements of Stockholders' Equity for Years Ended March 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for Years Ended March 31, 2000, 1999, and 1998 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 2000, 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 Rick Nida, Vice President Investor Relations, 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/ F. Kim Cox F. Kim Cox, President Date June 29, 2000 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 29, 2000 Ron Berger, CEO Principal Financial Officer: By /S/ Carolyn Pihl June 29, 2000 Carolyn A. Pihl, Chief Financial Officer Majority of Board of Directors: By /S/ Pradeep Batra June 29, 2000 Pradeep Batra, Director By /S/ Peter Balner June 29, 2000 Peter Balner, Director By /S/ Skipper Baumgarten June 29, 2000 Skipper Baumgarten, Director By /S/ Ron Berger June 29, 2000 Ron Berger, Chairman By /S/ Takaaki Kusaka June 29, 2000 Takaaki Kusaka, Director By /S/ James P. Jimirro June 29, 2000 James P. Jimirro, Director By /S/ Bill LeVine June 29, 2000 Bill LeVine, Director By /S/ Muneaki Masuda June 29, 2000 Muneaki Masuda, Director By /S/ Stephen Roberts June 29, 2000 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 Exhibit Page Number 3.1 Amended and Restated Articles of Incorporation and amendments thereto (1) 3.2 1995 Restated Bylaws, as amended to date (2) 3.3 Amendment No. 1 to the 1995 Restated Bylaws of Rentrak Corporation. (3) 3.4 Amendment No. 2 to the 1995 Restated Bylaws of Rentrak Corporation. (26) 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 (4) 10.2* Stock Option Agreement with Ron Berger, dated April 18, 1995 (5) 10.3* Rentrak Corporation Amended and Restated Directors Stock Option Plan (6) 10.4* Rentrak Corporation's 401-K Plan (7) 10.5* Amended and Restated 1992 Employee Stock Purchase Plan of Rentrak Corporation (8) 10.6 Joint Development Agreement with CCC dated August 6, 1993 (9) 10.7 Second Amendment to Business Cooperation Agreement between Rentrak Corporation, Culture Convenience Club Co., Ltd., and Rentrak Japan dated June 16, 1994 (10) 10.8* Employment Agreement with Carolyn Pihl dated May 6, 1996 (11) 10.9 Guarantee Agreement dated as of June 26, 1996 between Rentrak Corporation and BlowOut Entertainment, Inc. (12) 10.10* The 1997 Non-Officer Employee Stock Option Plan of Rentrak Corporation (13) 10.11* Employment Agreement with Marty Graham dated May 17, 1997 (14) 10.12* Employment Agreement with Michael Lightbourne dated July 10, 1997 (15) 10.13* Employment Agreement with Christopher Roberts dated October 27, 1997 (16) 10.14* Employment Agreement with Ron Berger dated April 21, 1998 (17) 10.15* The 1997 Equity Participation Plan of Rentrak Corporation (18) 10.16* Amendment to the 1997 Non-Officer Employee Stock Option Plan of Rentrak Corporation (19) 10.17* Form of Non-Qualified Stock Option Agreement (20) 10.18* Form of Incentive Stock Option Agreement (21) 10.19 Amendment to the 1997 Equity Participation Plan of Rentrak Corporation dated August 24, 1998. (22) 10.20 Amendment to the 1997 Equity Participation Plan of Rentrak Corporation (23) 10.21* Employment Agreement with F. Kim Cox dated April 1, 1998 (24) 10.22 Amendment to the 1997 Equity Participation Plan of Rentrak Corporation dated August 23, 1999. (25) 10.23* Addendum to Employment Agreement with 55 Marty Graham dated June 8, 2000 10.24* Addendum to Employment Agreement with 57 Christopher Roberts dated June 8, 2000 10.25* Promissory Note entered into with F. 59 Kim Cox dated June 16, 2000 10.26* Promissory Note entered into with Ron 63 Berger dated June 16, 2000 10.27 Loan and Security Agreement with 67 Guaranty Business Credit Corporation dated May 26, 2000 10.28 General Continuing Guarantee with 85 Guaranty Business Credit Corporation dated May 26, 2000 10.29 Amendment to Rentrak Corporation 98 Amended and Restated Directors Stock Option Plan dated May 19, 2000 10.30 Amendment to Rentrak Corporation 1986 99 Second Amended and Restated Stock Option Plan dated May 19, 2000 10.31 Warrant Agreement and Certificate To 100 Purchase Shares of Common Stock of 3PF.COM, Incorporated dated November 29, 1999 10.32 Loan and Security Agreement with Bill 115 LeVine dated August 1999 21 List of Subsidiaries of Registrant 138 23 Consent of Arthur Andersen LLP 139 27 Financial Data Schedule N/A * Management Contract 1. Filed in S-3 Registration Statement, File # 338511 as filed on November 21, 1994. 2. Filed as Exhibit B to 1994 Proxy Statement dated July 11, 1994 3. Filed as Exhibit 10.41 to 1998 Form 10-K filed on June 25, 1998 4. Filed as Exhibit 10.1 to Form 10-K filed on June 28, 1993 5. Files as Exhibit 10.5 to 1998 form 10-K filed on June 25, 1998 6. Filed as Exhibit B to 1994 Proxy Statement dated July 11, 1994 7. Filed as Exhibit 10.1 to Form 10-K filed on June 28, 1993 8. Filed as Exhibit 10.13 to Form 10-K filed on June 29, 1995 9. Filed as Exhibit 10.5 to Form 10-K filed on June 28, 1993 10. Filed as Exhibit to 1994 form 10-K filed on June 29, 1994 11. Filed as Exhibit 10.25 to Form 10-K filed on June 19, 1997 12. Filed as Exhibit 2 to Form 8-K filed on December 9, 1996 13. Filed as Exhibit 4.1 to Form S-8 filed on June 5, 1997 14. Filed as Exhibit 10.1 to Form 10-Q filed on November 3, 1997 15. Filed as Exhibit 10.2 to Form 10-Q filed on November 3, 1997 16. Filed as Exhibit 10.3 to Form 10-Q filed on November 3, 1997 17. Filed as Exhibit 10.35 to 1998 Form 10-K filed on June 25, 1998 18. Incorporated by reference to the Company's Proxy Statement dated June 25, 1997 for the Company's 1997 Annual Meeting of Shareholders 19. Filed as Exhibit 4.1 to Form S-8 filed on October 29, 1997 20. Filed as Exhibit 10.6 to Form 10-Q filed on November 3, 1997 21. Filed as Exhibit 10.1 to Form 10-Q filed on February 9, 1998 22. Filed as Exhibit 10.40 to 1998 Form 10-K filed on June 25, 1998 23. Filed as Exhibit 10.1 to Form 10-Q on November 6, 1998 24. Filed as Exhibit 10.2 to Form 10-Q filed on November 6, 1998 25. Filed as Exhibit 10.1 to Form 10-Q filed on November 9, 1999 26. Filed as Exhibit 3.4 to 1999 Form 10-K filed on June 25, 1999