10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended: December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to Commission file number: 0-15159 RENTRAK CORPORATION (Exact name of registrant as specified in its charter) OREGON 93-0780536 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification no.) 7700 NE Ambassador Place, Portland, Oregon 97220 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (503)284- 7581 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (x) No ( ) As of January 31, 2001, the Registrant had 12,228,553 shares of Common Stock outstanding. PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of December 31, 2000 and March 31, 2000 Consolidated Statements of Operations for the three month periods ended December 31, 2000 and December 31, 1999 Consolidated Statements of Operations for the nine month periods ended December 31, 2000 and December 31, 1999 Consolidated Statements of Cash Flows for the nine month periods ended December 31, 2000 and December 31, 1999 Notes to Consolidated Financial Statements RENTRAK CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS
(UNAUDITED) December 31, March 31, 2000 2000 -------------- ------------- CURRENT ASSETS: Cash and cash equivalents $ 3,041,693 $ 4,028,271 Accounts receivable, net of allowance for doubtful accounts of $2,050,334 and $836,945 17,537,412 21,820,168 Advances to program suppliers 3,178,975 2,982,766 Inventory 4,015,432 3,889,603 Income tax receivable 660,383 169,300 Deferred tax asset 2,103,196 1,878,113 Notes receivable - 4,061,618 Other current assets 2,056,023 1,757,081 -------------- -------------- Total current assets 32,593,114 40,586,920 -------------- -------------- PROPERTY AND EQUIPMENT, net 3,705,984 2,642,700 OTHER INVESTMENTS, net - 302,481 DEFERRED TAX ASSET 9,363,976 3,346,212 OTHER ASSETS 1,889,778 3,595,041 -------------- -------------- TOTAL ASSETS $47,552,852 $50,473,354 ============= ============= The accompanying notes are an integral part of these consolidated balance sheets.
RENTRAK CORPORATION CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED) December 31, March 31, 2000 2000 ------------- ------------- CURRENT LIABILITIES: Line of credit $ 3,999,114 $ - Accounts payable 24,214,473 24,162,040 Accrued liabilities 4,275,426 2,645,567 Accrued compensation 384,232 1,476,703 Current portion of deferred revenue 1,503,806 1,500,262 Notes payable - 500,000 Net current liabilities of discontinued operations 176,991 430,923 ------------- ------------- Total current liabilities 34,554,042 30,715,495 ------------- ------------- LONG-TERM DEFERRED REVENUE 3,142,557 1,677,272 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value; Authorized: 10,000,000 shares - - Common stock, $.001 par value; Authorized: 30,000,000 shares Issued and outstanding: 12,228,553 shares at December 31, 2000 and 10,514,561 at March 31, 2000 12,229 10,515 Capital in excess of par value 52,486,224 44,445,199 Notes receivable (7,728,189) - Cumulative other comprehensive income (loss) (67,580) (264,684) Accumulated deficit (34,416,432) (25,326,951) Less - Deferred charge - warrants (429,999) (783,492) ------------- ------------- 9,856,253 18,080,587 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $47,552,852 $50,473,354 ============= ============= The accompanying notes are an integral part of these consolidated balance sheets.
RENTRAK CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) Three Months Ended December 31, 2000 1999 -------------- -------------- REVENUES: PPT $22,006,428 $19,965,669 Other 10,409,379 5,819,395 32,415,807 25,785,064 -------------- -------------- OPERATING COSTS AND EXPENSES: Cost of sales 26,153,235 21,129,291 Selling, general, and administrative 5,743,343 5,601,151 Net expense from litigation settlement - 415,794 -------------- -------------- 31,896,578 27,146,236 -------------- -------------- INCOME (LOSS) FROM OPERATIONS 519,229 (1,361,172) -------------- -------------- OTHER INCOME (EXPENSE): Interest income 16,939 61,993 Interest expense (191,752) (233,422) -------------- -------------- (174,813) (171,429) INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT) 344,416 (1,532,601) INCOME TAX PROVISION (BENEFIT) 114,906 (546,162) -------------- -------------- NET INCOME (LOSS) $ 229,510 $ (986,439) ============= ============= EARNINGS (LOSS) PER SHARE: -------------- -------------- Basic: $ 0.02 $ (0.09) -------------- -------------- Diluted: $ 0.02 $ (0.09) ============= ============= The accompanying notes are an integral part of these consolidated statements.
RENTRAK CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) Nine Months Ended December 31, 2000 1999 -------------- -------------- REVENUES: PPT $61,877,737 $69,374,611 Other 24,050,697 14,503,091 -------------- -------------- 85,928,434 83,877,702 -------------- -------------- OPERATING COSTS AND EXPENSES: Cost of sales 71,970,164 67,023,807 Selling, general, and administrative 28,505,004 13,678,105 Net (gain) expense from litigation settlement (225,000) 1,362,612 -------------- -------------- 100,250,168 82,064,524 -------------- -------------- INCOME (LOSS) FROM OPERATIONS (14,321,734) 1,813,178 -------------- -------------- OTHER INCOME (EXPENSE): Interest income 273,145 135,937 Interest expense (541,273) (560,683) -------------- -------------- (268,128) (424,746) -------------- -------------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX PROVISION (BENEFIT) (14,589,862) 1,388,432 INCOME TAX PROVISION (BENEFIT) (5,500,378) 530,277 -------------- -------------- INCOME (LOSS) FROM CONTINUING OPERATIONS (9,089,484) 858,155 GAIN FROM DISPOSAL OF DISCONTINUED SUBSIDIARIES (PLUS INCOME TAX BENEFIT OF $483,502) - 2,373,502 -------------- -------------- NET INCOME (LOSS) $(9,089,484) $ 3,231,657 ============= ============= EARNINGS (LOSS) PER SHARE: Basic: Continuing operations $ (0.76) $ 0.08 Discontinued operations $ - $ 0.23 -------------- -------------- $ (0.76) $ 0.31 ============= ============= Diluted: Continuing operations $ (0.76) $ 0.08 Discontinued operations $ - $ 0.22 -------------- -------------- $ (0.76) $ 0.30 ============= ============= The accompanying notes are an integral part of these consolidated statements.
RENTRAK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (UNAUDITED) Nine Months Ended December 31, 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (loss) ($9,089,484) $3,231,657 Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities Gain on disposal of discontinued operations - (2,373,502) Loss on asset and investment / asset sales 597,124 17,607 Depreciation and amortization 946,238 1,039,530 Amortization of warrants 353,493 389,280 Provision for doubtful accounts and other assets 8,710,275 109,655 Deferred income taxes (6,363,658) - Change in specific accounts: Accounts receivable (1,713,010) (4,389,966) Advances to program suppliers (302,990) 8,928 Inventory (338,629) (673,301) Income tax receivable (491,083) 2,568,168 Notes receivable 4,061,618 - Other current assets (719,467) 1,376,246 Accounts payable (1,263,109) 2,914,932 Accrued liabilities & compensation 537,388 1,582,027 Deferred revenue 1,468,829 3,649,536 Net current liabilities of discontinued operations (253,932) (1,260,451) Net cash provided by (used in) operations (4,360,397) 8,190,346 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, equipment, and inventory (1,924,917) (1,140,454) Proceeds from sale of investments 1,594,812 361,894 Disposal (purchase) of other assets & intangibles (609,740) 112,573 Net cash used in investing activities (939,845) (665,987) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (payments) under line of credit 3,999,114 (2,965,000) Notes payable (500,000) - Issuance of common stock 314,550 186,242 Net cash provided by (used in) financing activiti 4,313,664 (2,778,758) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (986,578) 4,745,601 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,028,271 2,145,963 CASH AND CASH EQUIVALENTS AT END OF PERIOD $3,041,693 $6,891,564 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for - Interest $111,829 $286,017 Income taxes paid, net of refunds received 769,084 (2,428,003) NON-CASH TRANSACTIONS Retailer Financing Program investment through conversion of accounts receivable 74,234 Change in unrealized gain (loss) on investment securities, net of tax (197,105) (777,624) Notes issued, net of cancellation for common sto 7,728,189 - The accompanying notes are an integral part of these consolidated statements.
RENTRAK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE A: Basis of Presentation The accompanying unaudited Condensed Consolidated Financial Statements of RENTRAK CORPORATION (the "Company"), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three month and nine month periods ended December 31, 2000 are not necessarily indicative of the results to be expected for the entire fiscal year ending March 31, 2001. The Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and footnotes thereto included in the Company's 2000 Annual Report to Shareholders. The Condensed Consolidated Financial Statements reflect, in the opinion of management, all material adjustments (which include, except as disclosed, only normal and recurring adjustments) necessary to present fairly the Company's financial position and results of operations. The Condensed Consolidated Financial Statements include the accounts of the Company, its majority owned subsidiaries, and those subsidiaries in which the Company has a controlling interest after elimination of all inter-company accounts and transactions. Investments in affiliated companies owned 20 to 50 percent are accounted for by the equity method. NOTE B: Net Income 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 periods. Diluted earnings per common share is computed on the basis of the weighted average shares of common stock outstanding plus common equivalent shares arising from dilutive stock options and warrants. The weighted average number of shares of common stock equivalents and net income used to compute basic and diluted earnings per share for the three and nine month periods ended December 31, 2000 and 1999 were as follows:
Note B: Net Income (Loss) Per Share 3-Months Ended 9-Months Ended December 31, 2000 December 31, 2000 ----------- ----------- ----------- ----------- Basic Diluted Basic Diluted Weighted average number of shares of common stock outstanding 12,519,199 12,519,199 11,903,240 11,903,240 Dilutive effect of exercise of stock options - - - - ----------- ----------- ----------- ----------- Weighted average number of shares of common stock outstanding and common stock equivalents 12,519,199 12,519,199 11,903,240 11,903,240 ============ ============ ============ ============ Net Income: Continuing operations $ 229,510 $ 229,510 $(9,089,484) $(9,089,484) Discontinued operatio - - - - ----------- ----------- ----------- ----------- Net income $ 229,510 $ 229,510 $(9,089,484) $(9,089,484) ============ ============ ============ ============ Earnings per share: Continuing operations $0.02 $0.02 ($0.76) ($0.76) Discontinued operatio - - - - ----------- ----------- ----------- ----------- Earnings per share $0.02 $0.02 ($0.76) ($0.76) ============ ============ ============ ============
Note B: Net Income Per Share 3-Months Ended 9-Months Ended December 31, 1999 December 31, 1999 ----------- ----------- ----------- ----------- Basic Diluted Basic Diluted Weighted average number of shares of common stock outstanding 10,489,273 10,489,273 10,467,632 10,467,632 Dilutive effect of exercise of stock options - - - 142,715 ----------- ----------- ----------- ----------- Weighted average number of shares of common stock outstanding and common stock equivalents 10,489,273 10,489,273 10,467,632 10,610,347 ============ ============ ============ ============ Net Income: Continuing operations $(986,439) $(986,439) $ 858,155 $ 858,155 Discontinued operatio - - 2,373,502 2,373,502 ----------- ----------- ----------- ----------- Net income $(986,439) $(986,439) $3,231,657 $3,231,657 ============ ============ ============ ============ Earnings per share: Continuing operations ($0.09) ($0.09) $0.08 $0.08 Discontinued operatio - - $0.23 $0.22 ----------- ----------- ----------- ----------- Earnings per share ($0.09) ($0.09) $0.31 $0.30 ============ ============ ============ ============ Options and warrants to purchase approximately 3.4 million and 6.7 million shares of common stock for the quarter ended December 31, 2000 and 1999 respectively, and 3.2 million and 5.3 million for the nine month period ended December, 2000 and 1999 respectively, were outstanding but were not included in the computation of diluted EPS because their effect would be antidilutive during the periods. The options and warrants, which expire during fiscal years 2001 through 2009, remain outstanding at December 31, 2000.
NOTE C: Business Segments, Significant Suppliers and Major Customers The Company classifies its services in three segments, PPT, 3PF.COM, Inc. and Other. Under its Pay-Per-Transaction (PPT) revenue sharing program, the Company enters into contracts to lease videocassettes 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. 3PF.COM, Inc. is a wholly owned subsidiary, which provides order processing, fulfillment and inventory management services. Other includes the operations of BlowOut Video, a video retail subsidiary, formovies. Com, an internet service, and amounts received pursuant to royalty agreements, primarily from Rentrak Japan. Business Segments The following are the revenues and income (loss) from operations of the company's business segments for the periods indicated (unaudited):
Nine Months Nine Months Three Months Three Months Ended Ended Ended Ended December 31, 2000 December 31, 1999 December 31, 2000 December 31, 1999 -------------- -------------- -------------- -------------- REVENUES: (1) PPT $62,431,467 $69,998,227 $22,147,747 $20,190,078 3PF.COM, Inc. (2) 16,474,335 8,089,784 7,510,716 2,829,755 OTHER 10,132,158 8,818,091 4,205,278 3,760,292 -------------- -------------- -------------- -------------- $89,037,960 $86,906,102 $33,863,741 $26,780,125 ============== ============== ============== ============== INCOME (LOSS) FROM OPERATIONS: (1) PPT ($11,136,519) $551,796 $701,663 ($1,499,546) 3PF.COM, Inc. (3,351,127) (582,784) (911,298) (484,188) OTHER 165,912 1,844,166 728,864 622,562 -------------- -------------- -------------- -------------- ($14,321,734) $1,813,178 $519,229 ($1,361,172) ============== ============== ============== ==============
(1) Total amounts differ from those reported on the consolidated financial statements, as intercompany transactions are not eliminated for segment reporting purposes. (2) 3PF.COM, Inc.'s revenues and PPT's costs related to the shipment of cassettes to PPT customers were $941,597 and $770,652 for the three month periods ended December 31, 2000 and December 31, 1999, respectively, and $2,555,796 and $2,404,782 for the nine month periods ended December 31, 2000 and December 31, 1999, respectively. For the three month period ended December 31, 2000, the Company had one program supplier whose product generated 20 percent, a second that generated 16 percent, and a third that generated 12 percent of Rentrak revenue. For the nine month period ended December 31, 2000, the Company had one program supplier whose product generated 18 percent, a second that generated 17 percent, and a third that generated an additional 15 percent of Rentrak revenue. No other program supplier provided product which generated more than 10 percent of revenue for the three or nine-month periods ended December 31, 2000. No customer accounted for more than 10 percent of the Company's revenue in the three and nine month periods ended December 31, 2000. For the three month period ended December 31, 1999, the Company had one program supplier whose product generated 23 percent, a second that generated 14 percent, and a third that generated an additional 11 percent of Rentrak revenue. For the nine month period ended December 31, 1999, the Company had one program supplier whose product generated 23 percent, a second that generated 21 percent, and a third that generated an additional 14 percent of Rentrak revenue. No other program supplier provided product which generated more than 10 percent of revenue for the three or nine month periods ended December 31, 1999. No customer accounted for more than 10 percent of the Company's revenue in the three and nine month periods ended December 31, 1999. NOTE D: Discontinued Operations On November 26, 1996, the Company made a distribution to its shareholders of 1,457,343 shares of common stock of BlowOut Entertainment, Inc. ("BlowOut"). The operations of BlowOut were reflected as discontinued operations in the March 31, 1996 consolidated financial statements. On March 22, 1999, BlowOut filed for Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. At that same time BlowOut filed a motion to sell substantially all the assets of BlowOut. The sale to a third party video retailer was approved by the Bankruptcy Court on May 10, 1999, and closed on May 17, 1999. The Company was the principal creditor of BlowOut. In 1996, the Company had agreed to guarantee up to $7 million of indebtedness of BlowOut ("Guarantee"). Pursuant to the terms of the Guarantee, the Company agreed to guarantee any amounts outstanding under BlowOut's credit facility. As the proceeds from the sale of the BlowOut assets were not sufficient to cover the amounts due under this facility, the Company, pursuant to the Guarantee, agreed to a payment plan to fulfill BlowOut's obligation under its credit facility. The amount outstanding at December 31, 2000 was approximately $320,000. The funds remaining, if any, after payment of administrative and cost claims after dismissal of the case may further reduce the amount due under the credit facility. During the three month period ended June 30, 1999, the Company recorded a gain on the disposal of discontinued operations of $1.9 million related to BlowOut, as the liability related to BlowOut contingencies was less than estimated. The Company also reduced the valuation allowance, which was recorded against the deferred tax asset related to liabilities of discontinued operations. This reduction of approximately $0.5 million 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 December 31, 2000, relate to amounts to be paid pursuant to the Guarantee, net of tax benefit. NOTE: E Agreement In June 2000, the Company entered into an agreement with one of its customers to modify an existing contract. Under terms of the agreement, the customer made a payment to the Company in the amount of $2.5 million and also increased its obligation to purchase PPT product. The entire payment is recorded as long-term deferred revenue in the Company's balance sheet at December 31, 2000. As part of this agreement, the customer agreed to enter into certain additional agreements to be agreed upon by the parties. One- half of the payment relates to the modification of certain contractual obligations, still to be negotiated by the Company and the customer. This $1.25 million has been recorded as long-term deferred revenue until the contract is complete. The additional $1.25 million was paid to the Company as a prepayment toward services to be provided by the Company's subsidiary, 3PF.COM, Inc., through June 30, 2006, pursuant to an agreement under negotiation. As services are provided by 3PF.COM, Inc., it is contemplated that the customer can apply the prepaid $1.25 million as payment for certain of these services. Accordingly, this $1.25 million has been recorded as long-term deferred revenue. The customer has taken the position that it is entitled to a refund of the $2.5 million payment upon its request if the additional agreements were not finalized by July 14, 2000. While the customer has made such a request for refund, the parties are continuing to negotiate the additional agreements. At December 31, 2000, the customer had an outstanding trade account receivable balance due the Company in the amount of approximately $2.8 million for purchases of PPT product. NOTE F: Related Party Transactions On June 16, 2000, the Company loaned a total of $8,097,636 to two of its officers to purchase 1,663,526 shares of stock upon exercise of their employee stock options. During the three month period ended December 31, 2000, the Company and one of these officers terminated his stock exercise agreement for 301,518 shares of stock and corresponding loan in the amount of $1,468,250. At various times during the three month period ended September 30, 2000, the Company additionally loaned $1,343,743 to some of its officers to purchase 283,277 shares of stock upon exercise of their employee stock options. During the three month period ended December 31, 2000, the Company and one of these officers terminated his stock exercise agreement for 50,535 shares of stock and corresponding loan in the amount of $244,940. The loans bear interest at the federal funds rate in effect on the date of the loan (6.5%) and interest is payable annually. The Company is not accruing interest on these loans. The principal amount of the loans is due on the earliest to occur of: (1) one year prior to the expiration of the term of the borrower's current employment agreement with Rentrak, (2) one year after the borrower leaves Rentrak's employment unless such departure follows a "change of control" (as defined in the loan agreements), (3) five years from the date of the loan, or (4) one year from the date of the borrower's death. The loans are secured by the stock purchased. The loans are without recourse (except as to the stock securing the loans) as to principal and are with full recourse against the borrower as to interest. In accordance with SEC regulations, the notes receivable arising from these transactions are presented as deductions from stockholders' equity. Note G: Line of Credit In May 2000 the Company obtained a replacement line of credit with a lender in an amount not to exceed the lesser of (a) $12 million or (b) the sum of 85% of the net amount of eligible accounts receivable. Interest under the new line is payable monthly at the bank's prime rate plus 1/4 percent (9.75 percent at December 31, 2000). The line is secured by substantially all of the Company's assets. The terms of the credit agreement include financial covenants requiring: (1) $15 million of tangible net worth to be maintained at all times; (2) a consolidated net profit to be achieved each fiscal year equal to or exceeding $1.00 and (3) $5 million of working capital to be maintained at all times. The agreement also restricts the amount of loans and indebtedness and limits the payment of dividends on the Company's stock, among other requirements. This agreement expires in May 2005. Based upon the financial results reported as of December 31, 2000 and for the three month and nine month periods then ended, the Company has determined it is out of compliance with the three financial covenants as of December 31, 2000. The Company has obtained waivers of compliance for the three financial covenants as of December 31, 2000 and for the three and nine month periods then ended. The Company also obtained waivers of compliance for these three financial covenants as of September 30, 2000 and for the three and six month periods then ended. The Company has initiated discussions of these covenants with its lender and is seeking covenant modifications. Based upon discussions between the Company and its lender, the Company believes it will successfully receive future waivers and/or covenant modifications and will have sufficient cash resources to repay all outstanding borrowings as due. At December 31, 2000 and February 12, 2001, the Company had $2.1 million and $3.6 million outstanding borrowings, respectively, under this agreement. Note H: Proxy Contest During the three month period ended September 30, 2000, the Company was involved in a proxy contest that resulted in the election of an entirely new board of directors. In anticipation of a potential change of control resulting from the proxy contest, the Company developed a severance program for employees. That severance program provided for each employee to receive a designated severance payment, upon receipt of his or her resignation by the Company within sixty days of the change of control (September 19, 2000). The total amount of potential severance payments designated for these employees was approximately $1.7 million. As of the expiration of this severance program, two employees tendered their resignations and received severance payments from the Company. The amounts expensed and paid to these employees are not material. At December 31, 2000 the Company had a potential payment obligation under this severance program to one additional employee. This potential expense and payment is also not material. Note I: Fixed Asset Depreciation The Company depreciates property and equipment over their estimated useful lives using the straight-line method. The Company evaluated the lives of certain of its classes of property and equipment and determined that extending those lives from 3 years, to 5 to 10 years, would more appropriately reflect the economic life of these assets. In the quarter ended December 31, 2000, the effect of applying these new useful lives increased net income by approximately $83,000. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements Certain information included in Management's Discussion and Analysis of Financial Condition and Results of Operations constitutes forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements are identified by the use of forward-looking words such as "may", "will", "expects", "intends", "anticipates", "estimates", or "continues" or the negative thereof or variations thereon or comparable terminology. The following factors are among the factors that could cause actual results to differ materially from the forward-looking statements: the Company's ability to continue to market the Pay Per Transaction ("PPT") System successfully, the financial stability of participating retailers and their performance of their obligations under the PPT System, non- renewal or early termination of the Company's line of credit, business conditions and growth in the video industry and general economic conditions, 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 prerecorded videocassettes ("Cassettes") from program suppliers. Such factors are discussed in more detail in the Company's 2000 Annual Report to Shareholders. Results of Operations Continuing Operations For the three month period ended December 31, 2000, total revenue increased $6.6 million, or 25.7 percent, to $32.4 million from $25.8 million for the three month period ended December 31, 1999. For the nine month period ended December 31, 2000, total revenue increased $2.1 million, or 2.4 percent, to $86.0 million from $83.9 million for the nine month period ended December 31, 1999. Total revenue includes the following PPT Program fees: application fees generated when retailers are approved for participation in the PPT System; order processing fees generated when Cassettes are ordered by and distributed to retailers; transaction fees generated when retailers rent Cassettes to consumers; sell-through fees generated when retailers sell Cassettes to consumers; and buy out fees generated when retailers purchase Cassettes at the end of the lease term. In addition, total revenue includes charges to customers of the Company's wholly owned subsidiary 3PF.COM, Inc., which provides e-commerce order processing, fulfillment and inventory management services, sales of Cassettes through the Company's retail subsidiary BlowOut Video, charges for internet services provided by the Company's subsidiary formovies.Com, and royalty payments primarily from Rentrak Japan. The increase in total revenues for the three month period ended December 31, 2000, compared to the same period in the prior year, is primarily due to changes in (i) the number of titles released to the PPT System; (ii) the number of theatrical titles released to the PPT System and the box office performance of those titles; and (iii) increased revenue from services provided by 3PF.COM, Inc. In addition, the changes in PPT revenues was also affected by changes in the total number of Cassettes leased under the PPT System, due in part to program suppliers offering more titles under copy depth programs than they have in the past and the willingness of program suppliers to engage in direct revenue sharing arrangements with the larger retailer chains. While PPT revenues increased for the three month period ended December 31, 2000, compared to the same period in the prior year, PPT revenues decreased for the nine month period ended December 31, 2000 compared to the same period in the prior year generally for the reasons noted above in items (i) and (ii) that had an opposite impact on changes in revenues. The reduction in PPT revenue for the nine months ended December 31, 2000, compared to the nine months ended December 31, 1999, was offset by an increase in revenue related to 3PF.COM, Inc.'s services for the 2000 period. Cost of sales for the three month period ended December 31, 2000 increased to $26.2 million from $21.1 million for the three month period ended December 31, 1999, an increase of $5.1 million, or 23.8 percent. The percentage increase as compared to the revenue percentage increase is primarily due to: (1) additional costs which were recorded in the quarter ended December 31, 2000 related to the guaranteed minimum payments due to program suppliers on certain movie titles and (2) increased costs of sales of 3PF.COM, Inc. as the result of increased business during the quarter, the addition of more labor intensive customers, the cost of new warehousing with no associated revenues, and lease cost adjustments and increases. Cost of sales for the nine month period ended December 31, 2000 increased to $72.0 million from $67.0 million for the nine month period ended December 31, 1999, an increase of $5.0 million, or 7.4 percent. As a result, the gross profit margin increased to 19.3 percent in the three month period ended December, 2000 from 18.1 percent in the three month period ended December 31, 1999 and the gross profit margin decreased to 16.2 percent in the nine month period ended December 31, 2000 from 20.1 percent in the nine month period ended December 31, 1999. Selling, general and administrative expenses were $5.7 million for the three month period ended December 31, 2000 compared to $5.6 million for the three month period ended December 31, 1999, an increase of $0.1 million. For the three month period ended December 31, 2000, selling, general and administrative expenses included the provision of a specific allowance in the amount of approximately $0.7 million for the anticipated non-collection of one of 3PF.COM, Inc's trade accounts due the Company as the result of a bankruptcy filing by a customer during the period. Selling, general and administrative expenses were $28.3 million for the nine month period ended December 31, 2000 compared to $15.0 million for the nine month period ended December 31, 1999, an increase of $13.3 million. The increase is primarily attributable to the following items all reported in the quarter ended September 30, 2000: (1) a $1.3 million severance payment to the Company's former chairman and chief executive officer; (2) $0.6 million in legal costs and proxy solicitation costs incurred by the Company related to the proxy contest; (3) $0.4 million in costs to reimburse the dissident shareholder group for their legal and other costs associated with the proxy contest; (4) $6.1 million of costs associated with the reserve or write-off of assets related to the Company's Retailer Financing Program; (5) $1.0 million in write-offs of investments and other assets deemed by the Company to be non- realizable; (6) $1.4 million in write-offs of accounts receivable based on the Company's assessment of the collectibility of those accounts due to changes in the financial condition and payment ability of those customers; and (7) a $0.5 million loss realized on the sale of stock received previously by the Company pursuant to the settlement of a claim with a prior customer. The effective tax rate during the three month period ended December 31, 2000 was 33.4 % compared to 35.6 % during the three month period ended December 31, 1999. The effective tax rate during the nine month period ended December 31, 2000 was 37.7 % compared to 38.2% during the nine month period ended December 31, 1999. As a result, for the three month period ended December 31, 2000, the Company recorded income from continuing operations of $0.2 million, or 0.7 percent of total revenue, compared to a loss from continuing operations of $1.0 million, or 3.8 percent of total revenue, in the three month period ended December 31, 1999. For the nine month period ended December 31, 2000, the Company recorded a loss from continuing operations of $9.1 million, or 10.6 percent of total revenue, compared to income from continuing operations of $0.9 million, or 1.0 percent of total revenue, in the nine month period ended December 31, 1999. Discontinued Operations On March 22, 1999, BlowOut Entertainment, Inc. ("BlowOut") filed for Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. At that same time, BlowOut filed a motion to sell substantially all the assets of BlowOut. BlowOut is not related to the Company's wholly owned subsidiary BlowOut Video, Inc. The sale to a third party video retailer was approved on May 10, 1999 and closed on May 17, 1999. During the three month period ended June 30, 1999, the Company recorded a gain on the disposal of discontinued operations of $1.9 million related to BlowOut as the liability related to BlowOut contingencies was less than anticipated. The Company also reduced the valuation allowance, which was recorded against the deferred tax asset related to liabilities of discontinued operations. This reduction of $0.5 million in the valuation allowance was recorded as an income tax benefit from discontinued operations in the accompanying consolidated income statement. Consolidated Balance Sheet At December 31, 2000, total assets were $47.6 million, a decrease of $2.9 million from the $50.5 million at March 31, 2000. As of December 31, 2000, cash decreased $1.0 million to $3.0 million from $4.0 million at March 31, 2000, primarily due to the Company's working capital requirements. Accounts receivable decreased $4.3 million from $21.8 million at March 31, 2000 to $17.5 million at December 31, 2000, primarily due to: (1) the write off of amounts owing from two customers in the Retailer Financing Program totaling approximately $5.2 million and various other customer account write-offs during the three month period ended September 30, 2000; (2) the provision of a specific customer allowance in the amount of approximately $0.7 million for the anticipated non-collection of one of 3PF.COM, Inc.'s trade accounts due the Company as the result of a bankruptcy filing by a customer during the three month period ended December 31, 2000; and (3) the recording of a provision for an allowance totaling approximately $0.3 million for the three month period ended December 31, 2000 for the anticipated non-collection of other customer accounts, based on the Company's assessment of the collectibility of those accounts due to changes in the financial condition and payment ability of those customers. These reductions in the Company's accounts receivable were offset by an increase in revenues and a continual improvement in collections during the three month period ended December 31, 2000. Notes receivable decreased to $0 at December 31, 2000 due to a payment of $4.16 million, including interest, received by the Company in July 2000 from a customer pursuant to the settlement of a claim. Property and equipment increased $1.1 million from $2.6 million at March 31, 2000 to $3.7 million at December 31, 2000, primarily due to acquisitions of equipment by the Company's subsidiary 3PF.COM, Inc. The long-term portion of the deferred tax asset increased $6.1 million from $3.3 million at March 31, 2000 to $9.4 million at December 31, 2000, primarily due to the tax loss carryforward created from the loss from continuing operations for the three month period ended September 30, 2000. The Company believes it will benefit from this deferred tax asset in future periods. Other assets decreased $1.7 million from $3.6 million at March 31, 2000 to $1.9 million at December 31, 2000 primarily due to the sale of some of the Company's investments. At December 31, 2000, total liabilities were $37.7 million, an increase of $5.3 million from $32.4 million at March 31, 2000. The line of credit increased to $4.0 million at December 31, 2000 primarily due to increased working capital needs. Accrued compensation decreased $1.1 million from $1.5 million at March 31, 2000 to $0.4 million at December 31, 2000 primarily due to the payment of annual employee bonuses during the three month period ended June 30, 2000, that were accrued as of March 31, 2000. Notes payable decreased to $0 at December 31, 2000 due to the payoff of a promissory note to a former director of the Company during the three month period ended September 30, 2000. Total deferred revenue increased $1.4 million from $3.2 million at March 31, 2000 to $4.6 million at December 31, 2000 primarily due to a $2.5 million dollar payment received from a customer in June 2000 (See Note E of the accompanying financial statements), offset by a decrease in deferred revenue from the recognition of earnings in accordance with agreements with related party organizations and customers. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, the Company had cash of $3.0 million compared to $4.0 million at March 31, 2000. At December 31, 2000, the Company's current ratio (current assets/current liabilities) decreased to 0.94 from 1.32 at March 31, 2000. As discussed in Note G of the accompanying financial statements, in May 2000 the Company obtained a replacement line of credit with a lender in an amount not to exceed the lesser of (a) $12 million or (b) the sum of 85% of the net amount of eligible accounts receivable. The terms of the credit agreement include financial covenants requiring: (1) $15 million of tangible net worth to be maintained at all times; (2) a consolidated net profit to be achieved each fiscal year equal to or exceeding $1.00 and (3) $5 million of working capital to be maintained at all times. The agreement also restricts the amount of loans and indebtedness and limits the payment of dividends on the Company's stock, among other requirements. This agreement expires in May 2005. Based upon the financial results reported as of December 31, 2000 and for the three month and nine month periods then ended, the Company has determined it is out of compliance with the three financial covenants as of December 31, 2000. The Company obtained waivers of compliance for the three financial covenants as of December 31, 2000 and for the three and nine month periods then ended. The Company also obtained waivers of compliance for these three financial covenants as of September 30, 2000 and for the three and six month periods ended. The Company has initiated discussions of these covenants with its lender and is seeking covenant modifications. Based upon discussions between the Company and its lender, the Company believes it will successfully receive future waivers and/or covenant modifications and will have sufficient cash resources to repay all outstanding borrowings as due. At December 31, 2000 and February 12, 2001, the Company had $4.0 million and $2.1 million outstanding borrowings, respectively, under this agreement. In 1992, the Company established a Video Retailer Loan 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 to 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 some or all of their requirements of Cassettes from those offered under the PPT System or obtain a minimum amount of Cassettes based on a percentage of the Participating Retailer's revenues. Notwithstanding the long term nature of such agreements, both the Company and the Participating Retailer, in some cases, retained the right to terminate such agreement upon 30-90 days prior written notice. These financings are highly speculative in nature and involve a high degree of risk, and no assurance of a satisfactory return on investment can be given. The 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. During the three month period ended September 30, 2000 the Company announced the discontinuance of new financings under this program. Write-offs of assets associated with this program during the three month period ended September 30, 2000 were $6.1 million, including $4.4 million due to the Company from Video Update, Inc. See Part II, Item 1, Legal Proceedings. The Company continues to seek to enforce agreements entered into in connection with this program in accordance with their terms to the extent practicable. The Company was the principal creditor of BlowOut Entertainment, Inc. ("BlowOut"), which filed a petition under Chapter 11 of the Federal Bankruptcy Code in March 1999. In 1996, the Company had agreed to guarantee up to $7 million of indebtedness of BlowOut ("Guarantee"). BlowOut had a credit facility (the "Credit Facility") in an aggregate principal amount of $2 million for a five-year term. Amounts outstanding under the Credit Facility bear interest at a fixed rate per annum equal to 14.525 percent. Pursuant to the terms of the Guarantee, the Company agreed to guarantee any amounts outstanding under the Credit Facility until the lender is satisfied, in its sole discretion, that BlowOut's financial condition is sufficient to justify the release of the Guarantee. As the proceeds from the sale of the BlowOut assets in May 1999 in the bankruptcy proceeding were not sufficient to cover the amounts due under this facility, the Company, pursuant to the Guarantee, has agreed to a payment plan to fulfill BlowOut's obligation under the Credit Facility. The funds remaining, if any, after payment of administrative and cost claims after dismissal of the case may further reduce the amount due under the Credit Facility. As of December 31, 2000, the balance owing under this obligation was approximately $320,000. Based on the Company's current budgets and projected cash needs, the Company believes that its available sources of liquidity will be sufficient to fund the Company's operations for the fiscal year ending March 31, 2001. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. None. PART II - OTHER INFORMATION Item 1. 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 monopolized or attempted to monopolize a market for videocassettes leased to retail video stores in violation of Section 2 of the Sherman Act. Video Update further alleges that the Company's negotiation and execution of an exclusive, long-term revenue sharing agreement with Video Update violates Section 1 of the Sherman Act and Section 3 of the Clayton Act. Video Update is seeking unspecified monetary relief, including treble damages and attorneys' fees, and equitable relief, including an injunction prohibiting the Company from enforcing its agreement with Video Update or any exclusivity provision against videocassette suppliers and video retailers. In August 1998, the Court granted the Company's motion to dismiss the Video Update Complaint pursuant to Federal Rules of Civil Procedure Rule 12(b)(3) on the basis of improper venue. In August 1998, Video Update filed a new complaint against the Company in the United States District Court for the District of Oregon (the "Re-Filed Complaint"), Case No. 98- 1013HA. The Re-Filed Complaint is substantially the same as the previous complaint. The Company believes the Re-Filed Complaint lacks merit and intends to vigorously defend against the allegations in the Complaint. The Company has answered the Re-Filed Complaint denying its material allegations and asserting several affirmative defenses. The Company also has counterclaimed against Video Update alleging, among other things, breach of contract, breach of the covenant of good faith and fair dealing, promissory fraud, breach of fiduciary duty, breach of trust, constructive fraud, negligent misrepresentation and intentional interference with business advantage, and is seeking damages and equitable relief. In October 1998, the Company filed a motion for summary judgment seeking to dismiss the lawsuit filed against it by Video Update. In January 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. The court denied Rentrak's motions without reaching the merits and without prejudice to re- filing the motions after discovery had been conducted. On October 21, 1999, the Company amended its counterclaims to add additional claims, including 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. Mr. Potter filed a motion to dismiss the Company's claims against him which motion was granted by the Court on April 13, 2000. Video Update also moved to dismiss six of the Company's claims. On April 13, 2000, the Court granted Video Update's motion in part and dismissed the following claims: promissory fraud, breach of fiduciary duty, breach of trust, constructive fraud, and negligent misrepresentation. On July 31, 2000, the Company filed multiple motions for summary judgment including a motion seeking to dismiss Video Update's antitrust claim and a motion seeking a finding that Video Update breached its contract with Rentrak. On September 18, 2000, Video Update filed a voluntary petition under Chapter 11 of the federal Bankruptcy Code. In light of the bankruptcy, the District Court dismissed the Re-Filed Complaint and counterclaims on its own motion in January 2001. The Company has filed a motion for relief from stay with respect to its claims against Video Update. A hearing on the motion is scheduled for March 2001. On November 15, 2000, 3PF.COM, Inc., a subsidiary of the Company, filed a proceeding with the American Arbitration Association against Reel.com, Inc., a subsidiary of Hollywood Entertainment Corporation ("Hollywood"), for breach of a servicing, warehousing, and distribution agreement, and against Hollywood in connection with its guarantee of the obligations of Reel.com, Inc., under the agreement. 3PF.COM, Inc., is seeking damages in the amount of $4,776,237 plus an amount to be determined as consequential damages, together with prejudgment interest and attorney fees. Hollywood and Reel.com, Inc. have filed a counterclaim for attorney fees. Reference is made to Part II, Item 1, Legal Proceedings in the Company's Report on Form 10-Q for the three month period ended September 30, 2000 for the descriptions of legal proceedings that have terminated. The Company is also subject to 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 is not expected to materially affect the financial position or results of operations of the Company as a whole. Item 2. Changes in Securities and Use of Proceeds - The Company issued a warrant dated December 1, 2000, to purchase 125,000 shares of the Company's common stock at a price of $5.00 per share to Donald J. Kundinger in consideration of services provided under a consulting agreement entered into between the Company and Mr. Kundinger, d.b.a. Jackson Hole Advisors, in September 1999. The warrant expires upon the earlier of September 1, 2001, or a sale or merger of the Company. The Company relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 with respect to the issuance of the warrant. Item 3. Defaults upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 3.1 - 1995 Restated Bylaws of Rentrak Corporation (as amended through November 17, 2000) (b) Reports on Form 8-K The Company filed the following reports on Form 8- K during the three month period ended December 31, 2000: A Form 8-K filed October 5, 2000, reporting under Item 1 the results of an election contest which resulted in the replacement of the incumbent directors with a new Board of five directors; and A Form 8-K filed December 1, 2000, reporting under Item 9 various corporate developments and forward- looking information about the Company. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated this 14th day of February, 2001 RENTRAK CORPORATION /s/ Mark L. Thoenes By: Mark L. Thoenes Chief Financial Officer Signing on behalf of the registrant