-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BfO5bkCJT59uU5ycAMk9VmVQH/+65j+HJv+krJs4OWLf6SmBOdZBmTY+rgruCG+8 2IDIOJR2eoAc37RjzAQDbQ== 0000800458-02-000004.txt : 20020628 0000800458-02-000004.hdr.sgml : 20020628 20020627185419 ACCESSION NUMBER: 0000800458-02-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RENTRAK CORP CENTRAL INDEX KEY: 0000800458 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE DISTRIBUTION [7822] IRS NUMBER: 930780536 STATE OF INCORPORATION: OR FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15159 FILM NUMBER: 02689904 BUSINESS ADDRESS: STREET 1: ONE AIRPORT CTR STREET 2: 7700 N E AMBASSADOR PL CITY: PORTLAND STATE: OR ZIP: 97220 BUSINESS PHONE: 5032847581 MAIL ADDRESS: STREET 1: 7227 NE 55TH AVENUE CITY: PORTLAND STATE: OR ZIP: 97218 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL VIDEO INC DATE OF NAME CHANGE: 19881004 10-K 1 rc10k.txt ANNUAL REPORT 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, 2002 or Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 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 Number) 7700 NE Ambassador Place, Portland, Oregon 97220 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (503) 284-7581 Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common stock $.001 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K [ ] As of June 24, 2002, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant, based on the last sales price as reported by NASDAQ, was $50,412,605. As of June 24, 2002, the Registrant had 9,827,231 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR THE 2002 ANNUAL MEETING OF THE SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART II and III OF THIS FORM 10-K 1 TABLE OF CONTENTS Item PART I Page 1. Business 3 2. Properties 8 3. Legal Proceedings 8 4. Submission of Matters to a Vote of Security Holders 9 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters 9 6. Selected Financial Data 11 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 7A. Quantitative and Qualitative Disclosures About Market Risk 22 8. Financial Statements and Supplementary Data 23 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 53 PART III 10. Directors and Executive Officers of the Registrant 53 11. Executive Compensation 53 12. Security Ownership of Certain Beneficial Owners 54 and Management 13. Certain Relationships and Related Transactions 54 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 55 2 PART I ITEM 1. BUSINESS GENERAL The Company's primary business is the collection, processing, analysis and presentation of rental and sales information regarding videocassettes and digital videodiscs ("DVD's") leased to home video specialty stores and other retailers by way of its Pay Per Transaction system (the "PPT System"). Under the Company's PPT System, home video specialty stores and other retailers that rent videocassettes and DVD's ("Units") to consumers ("Retailers"), including grocery stores and convenience stores, lease Units, and other media 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 71 percent, 71 percent and 83 percent of total revenues in fiscal years 2002, 2001 and 2000, respectively. The Company engages in additional lines of business through the following subsidiaries: 3PF.COM, Inc. (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, Inc.'s Web-site can be accessed at www.3PF.COM. BlowOut Video, Inc., sells videocassettes and DVD's ("Units") through its Website www.blowoutvideo.com, and through three retail outlets. PAY-PER-TRANSACTION SYSTEM The Company distributes Units principally to home video specialty stores through its PPT System. The PPT System enables Retailers to obtain Units at a significantly lower initial cost than if they purchased the Units from traditional video distributors. Under the PPT System, after the Retailer is approved for participation in the PPT System, Units are leased to the Retailer for a low initial fee (the "Order Processing Fee") plus a percentage of revenues generated by the Retailer 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 motion picture studios or other licensee or owner of the rights to certain video programming ("Program Suppliers") that hold the distribution rights to the Units. Due to the lower cost of "bringing Units in the door", Retailers generally obtain a greater number of Units under the PPT System than the traditional distribution method. The intended benefit to the Retailer is a higher volume of rental transactions, as well as a reduction in capital cost and risk. The intended benefit to the Program Supplier is an increase in the total number of Units shipped, resulting in increased revenues and opportunity for profit. The intended 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 and Canada. Following the sale of a 5.6 percent interest in Rentrak Japan Co., Ltd. ("Rentrak Japan"), a Japanese corporation which markets a similar service to video retailers in Japan, in October 2001, the Company no longer received revenues from the Asian markets. In February 1998, the Company entered into a Shareholders Agreement and a PPT License 3 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 presently owns a 92 percent equity interest in Rentrak UK. As of March 31, 2000, Rentrak UK was not generating income or positive cash flow and the Company's investment of $222,000 was written off. During the year ended March 31, 2001, Rentrak UK continued to generate no income or cash flow. During the year ended March 31, 2002, Rentrak UK improved its performance producing minimal income and cash flow. Management of the Company has made changes to decrease the cost of operations, including space and staffing costs, and it is continuing to closely evaluate the financial performance of operations. Management is considering various alternatives including selling or closing down Rentrak UK's operations. 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., Universal Studios Home Video, Inc., Twentieth Century Fox Home Entertainment (formerly Fox Video), a subsidiary of Twentieth Century Fox Film Corporation and MGM Home Entertainment, a subsidiary of the Metro Goldman Meyer Company. The Company's arrangements with Program Suppliers are of varying duration, scope and formality. In some cases, the Company has obtained Units 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 is no assurance that any of the Program Suppliers will continue to distribute Units 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 is 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 Units 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 17 percent, a second that generated 15 percent, and a third that generated 13 percent of Rentrak revenues for the year ended March 31, 2002. There were no other Program Suppliers who provided product that generated more than 10 percent of revenues for the year ended March 31, 2002. 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 effect on the Company's 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 is no assurance that this practice will not in the future result in losses which may be material. 4 DISTRIBUTION OF CASSETTES AND DVD'S ("UNITS") The Company's proprietary Rentrak Profit Maker Software (the "RPM Software") allows Participating Retailers to order Units 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 Units on the "street date" announced by the Program Supplier for the title. Rentrak has contracted with its subsidiary 3PF.COM to distribute Rentrak's Units 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 Units. The Company's information system processes these transactions and prepares reports for Program Suppliers and Participating Retailers. In addition, it determines variations from statistical norms for potential audit action. The Company's information system also transmits information on new titles and confirms orders made to the RPM Software at the Retailer location. RETAILER AUDITING From time to time, the Company audits Participating Retailers in order to verify that they are reporting all rentals and sales of Units on a consistent, accurate and timely basis. Several different types of exception reports are produced weekly. These reports are designed to identify any Participating Retailers who vary from the Company's statistical norms. Depending upon the results of the Company's analysis of the reports, the Company may conduct an in-store audit. Audits may be performed with or 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 Units. 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 5 earnings. RETAILER FINANCING PROGRAM In 1992, the Company established a Retailer Loan Program whereby, on a selective basis, it provided financing to Participating Retailers that the Company believed had the potential for substantial growth in the industry. 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 fiscal 2001, the Company discontinued new financings under this program and provided reserves of $6.6 million representing the entire outstanding balance of the program loans. The Company continues to seek enforcement of agreements entered into in connection with this program in accordance with their terms to the extent practicable. COMPETITION The Cassette and DVD distribution business is a highly competitive industry that is rapidly changing. The traditional method of distributing these Cassettes and DVD's ("Units") to Retailers is through purchase transactions; i.e., a Retailer purchases Units from a distributor and then offers the Units for rental or sale to the general public. As described in greater detail above (see "Pay-Per-Transaction System"), the Company's PPT System offers Retailers an alternative method of obtaining Units. Accordingly, the Company faces intense competition from all of the traditional distributors, including Ingram Entertainment, Inc., VPD, 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 Units 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"). The Company also competes with Supercomm on two levels: (1) domestically - for processing data for certain Studios' direct relationships with Blockbuster Video and other Retailers; and (2) internationally in certain markets. Supercomm also processes data for traditional distributors such as Ingram who then compete with the Company for revenue sharing Units as well as traditional Units. 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 Units purchased. Also, some major Studios have offered Units to Retailers on a lease basis. In addition, all major Studios sell Units 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. 6 The Studios also compete with the Company by releasing certain Unit titles on a "sell-through" basis; i.e., they bypass the traditional rental period by selling the Units directly to consumers at a price of approximately $9.95 -- $19.95. 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 Unit 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. 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. Beginning in 1994, the Company became entitled to 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). Additionally, the Company received one-time royalty payments of $1,000,000 in fiscal year 1995 and $1,000,000 in fiscal year 1999. 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, which was recognized in revenues as royalties were earned under the terms of the contract. Effective April 2, 2001 the Company and Rentrak Japan entered into a restructuring agreement of their relationship. The Company transferred exclusive rights to implement its PPT System within specified countries in the Far East, including related trademark and other intellectual property rights, to Rentrak Japan. In exchange for the transfer, Rentrak Japan made a lump sum payment of $5.7 million to the Company and released certain of the Company's payment obligations totaling $1.3 million. As part of the transaction, Rentrak Japan's obligation to pay annual royalties to the Company in connection with use of its PPT System was terminated. (See Note 1(b) of the Notes to the Consolidated Financial Statements.) TRADEMARKS, COPYRIGHTS, AND PROPRIETARY RIGHTS The Company has registered its "RENTRAK", "PPT", "Pay Per Transaction", "Ontrak", "BudgetMaker", "DataTrak", "Prize Find" , "Blowout Video", "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 7 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, 2002, including all subsidiaries, the Company employed 284 active 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 for information regarding the Company's business segments. ITEM 2. PROPERTIES The Company currently maintains its headquarter offices in Portland, Oregon where it leases 48,807 square feet of office space. The lease began on January 1, 1997 and expires on December 31, 2006. The Company's subsidiary, 3PF.COM, Inc., maintains two distribution facilities in Wilmington, Ohio and one in Columbus, Ohio where it leases 102,400, 121,600 and 388,264 square feet, respectively. These distribution facilities also include administrative office space. These three distribution facility leases expire on June 30, 2002, December 31, 2010 and February 28, 2008, respectively. Management believes its office space and distribution facility space is adequate and suitable for its current operations. However, management does recognize that the Company currently has excess distribution facility capacity which it is addressing by attracting new clients and tenants. Management does not anticipate a problem in obtaining additional suitable space to meet its needs as necessary. ITEM 3. LEGAL PROCEEDINGS 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 division 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., sought damages in excess of $3.3 million, together with prejudgment interest and attorney fees. On August 6, 2001, Hollywood filed a proceeding with the American Arbitration Association against the Company for the alleged breach of a settlement agreement among the Company, Hollywood, and two individuals dated January 23, 2000, relating to the Company's obligation to provide Hollywood with documents and data with regard to Hollywood's obligation to indemnify the Company against claims by a movie studio. Hollywood sought damages in the amount of $2.0 million. Both proceedings were settled in April 2002 by a confidential settlement agreement pursuant to which Hollywood agreed to pay the Company $1.925 million. On February 20, 2001, the Company filed a complaint against Ron Berger, Chairman and Chief Executive Officer and a director of Rentrak until September 2000, in the Circuit Court of the State of Oregon for the County of Multnomah (No. 0102-01814), seeking cancellation of shares of Rentrak common stock acquired by Mr. Berger through an option loan program offered to the Company's officers in June 2000 and damages for the conversion of an automobile and computer equipment plus an over-advance payment of business expenses less setoffs. On or about March 29, 2001, Mr. Berger filed a counterclaim seeking damages of approximately 8 $1.76 million plus attorney fees from Rentrak for conversion of Mr. Berger's director's fees and dividends from Rentrak Japan, breach of an agreement to compensate Mr. Berger for cancellation of options to purchase Rentrak stock, failure to pay accumulated wages and compensation, breach of an agreement to provide options to purchase stock in Rentrak's subsidiary 3PF.COM, Inc., and failure to provide certain insurance benefits. On June 15, 2001, the Company filed an amended complaint alleging tort claims arising out of Mr. Berger's activities as an officer and director of the Company involving Video City, Inc., and seeking damages of not less than $6.0 million. Effective May 6, 2002, the parties resolved the litigation pursuant to a confidential settlement agreement pursuant to which the parties agreed to dismiss their respective lawsuits and to seek nothing further from the other in litigation. The Company may from time to time also be a party 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 potential actions is not expected to materially affect the financial position or results of operations of the Company as a whole. The Company currently has no outstanding litigation. ITEM 4. SUBMISSION OF MATTERS TO A 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 EQUITY 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, 2002 there were approximately 314 holders of record of the Company's common stock. On May 31, 2002, the closing sales price of the Company's common stock as quoted on the Nasdaq National Market was $5.90. EQUITY COMPENSATION PLAN INFORMATION The information under the heading "Equity Compensation Plan Information" in the Company's Definitive Proxy Statement for its 2002 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, is incorporated herein by reference. 9 The following table sets forth the reported high and low sales prices of the Company's common stock for the periods indicated as regularly quoted on the Nasdaq National Market. QUARTER ENDED HIGH LOW - --------------------- ------- ------- JUNE 30, 2000 $5.88 $3.12 - --------------------- ------- ------- SEPTEMBER 30, 2000 $4.16 $3.00 - --------------------- ------- ------- DECEMBER 31, 2000 $3.69 $1.50 - --------------------- ------- ------- MARCH 31, 2001 $4.09 $2.03 - --------------------- ------- ------- JUNE 30, 2001 $4.90 $2.99 - --------------------- ------- ------- SEPTEMBER 30, 2001 $3.74 $2.86 - --------------------- ------- ------- DECEMBER 31, 2001 $5.93 $3.00 - --------------------- ------- ------- MARCH 31, 2002 $8.00 $5.50 - --------------------- ------- ------- The Company issued a total of 45,000 shares of its common stock in March 2002 to a former financial advisor pursuant to a cashless exercise and in full satisfaction of common stock purchase warrants related to a total of 200,000 shares of common stock issued in connection with financial advisory engagement s in 1997 and 1999. 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 shares. 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 therefore, subject to the dividend and liquidation rights of any preferred stock that may be issued. No cash dividends have been paid or declared during the last five fiscal years. The present policy of the Board of Directors is to retain earnings to provide funds for operation and expansion of the Company's business. The Company does not intend to pay cash dividends in the foreseeable future. 10
ITEM 6. SELECTED FINANCIAL DATA - ------------------------------------------------------------------------------------------------------------------------------------ (In Thousands Except Per Share Amounts) Year Ended March 31, 2002 2001 2000 1999 1998 --------------------------------------------------------------------------------- Statement of Operations Data Net revenues: Order processing fees $ 16,648 $ 18,563 $ 23,086 $ 22,420 $ 25,313 Transaction fees 44,114 55,752 61,487 72,835 78,671 Sell-through fees 6,645 6,578 7,811 11,347 9,383 Other (2) 35,207 36,974 22,788 19,043 11,060 --------------------------------------------------------------------------------- Total net revenues 102,614 117,887 115,172 125,645 124,427 Cost of sales 76,812 93,600 91,706 103,943 100,974 --------------------------------------------------------------------------------- Gross profit 25,802 24,287 23,466 21,702 23,453 Selling and administrative 20,754 34,455 28,237 17,853 16,248 expense Net (gain) loss on litigation (1,563) (225) (7,792) 1,099 - settlements Other income (expense) (2) 7,895 (2,149) (1,519) 597 652 --------------------------------------------------------------------------------- Income (loss) from continuing operations before discontinued operations and (provision) benefit for income taxes 14,506 (12,092) 1,502 3,347 7,857 Income tax (provision) benefit (5,512) 4,515 (451) (1,304) (3,199) --------------------------------------------------------------------------------- Income (loss) from continuing operations before discontinued operations 8,994 (7,577) 1,051 2,043 4,658 Discontinued Operations: (1) Gain on disposal of subsidiaries - - 2,374 - - --------------------------------------------------------------------------------- Net income (loss) $ 8,994 $ (7,577) $ 3,425 $ 2,043 $ 4,658 --------------------------------------------------------------------------------- Earnings (loss) per share Diluted Continuing operations $ 0.85 $ (0.63) $ 0.10 $ 0.18 $ 0.41 Discontinued operations 0.22 --------------------------------------------------------------------------------- Earnings (loss) per common share $ 0.85 $ (0.63) $ 0.32 $ 0.18 $ 0.41 ================================================================================= Common shares and common share equivalents used to compute diluted EPS 10,613 11,985 10,759 11,066 11,445 --------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 --------------------------------------------------------------------------------- Balance Sheet Data Working Capital $ 11,636 $ 3,643 $ 9,871 $ 4,586 $ 1,062 Total Assets 38,612 39,126 50,473 49,457 51,609 Long-term Liabilities 496 1,175 1,677 - - Stockholders' Equity 17,278 11,387 18,081 14,292 13,254
(1) See Note 13 of the Notes to the Consolidated Financial Statements. (2) See Note 1(b) of the Notes to the Consolidated Financial Statements. 11 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 Condition 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 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 PPT System successfully, the financial stability of the Participating Retailers and their performance of their obligations under the PPT System, non-renewal of the Company's line of credit, business conditions and growth in the video industry and general 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 Cassettes from Program Suppliers. This Annual Report on Form 10-K further describes some of these factors. RESULTS OF OPERATIONS RENTRAK CORPORATION STATEMENTS OF OPERATIONS For The Years Ended March 31, 2002, 2001, and 2000
2002 2001 2000 ------------------------------------------------------------- REVENUES $ 102,614,147 $ 117,886,955 $ 115,172,414 OPERATING COSTS AND EXPENSES Cost of sales 76,812,474 93,600,177 91,706,290 Selling, general, and administrative 20,753,587 34,455,048 28,236,763 Net gain from litigation settlements (1,563,153) (225,000) (7,791,880) ------------------------------------------------------------- 96,002,908 127,830,225 112,151,173 ------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS 6,611,239 (9,943,270) 3,021,241 Other income (expense) 7,895,263 (2,148,673) (1,519,378) ------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX (PROVISION) BENEFIT AND GAIN FROM DISPOSAL OF DISCONTINUED OPERATIONS 14,506,502 (12,091,943) 1,501,863 Income tax (provision) benefit (5,512,471) 4,514,575 (450,559) ------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 8,994,031 (7,577,368) 1,051,304 Gain from disposal of discontinued operations including income tax benefit of $483,502 - - 2,373,502 ------------------------------------------------------------- NET INCOME (LOSS) $ 8,994,031 $ (7,577,368) $ 3,424,806 =============================================================
12 FISCAL 2002 COMPARED TO FISCAL 2001 PPT OPERATIONS AND OTHER CONTINUING SUBSIDIARIES For the year ended March 31, 2002, the Company's total consolidated revenue decreased $15.3 million to $102.6 million from $117.9 million in the prior fiscal year. Total consolidated revenue includes the following PPT System fees in the PPT business segment: order processing fees generated when Cassettes and DVD's ("Units") are ordered by and distributed to Retailers; transaction fees generated when Retailers rent Units to consumers; sell-through fees generated when Retailers sell Units to consumers; communication fees when Retailers' point-of-sale systems are connected to the Company's information system; and buy out fees when Retailers purchase Units at the end of the lease term. PPT business segment revenues also include direct revenue sharing fees from data tracking and reporting services provided by the Company to Studios, as well as charges for internet services provided by the Company's subsidiary formovies.Com, Inc. In addition, total consolidated revenue includes charges to customers of the Company's subsidiary 3PF.COM, Inc. ("3PF"), which provides e-commerce order processing, fulfillment and inventory management services, and other revenues which include sales of Units through the Company's retail subsidiary BlowOut Video, Inc., and both royalty payments from Rentrak Japan and from the business restructuring with Rentrak Japan. The decrease in total consolidated revenue in fiscal 2002 was primarily due to a decrease in the PPT System revenues in the PPT business segment as the result of: (i) a decline in the number of total titles released to the PPT System, as well as the number of theatrical titles released and the box office performance of those titles; and (ii) PPT "output programs" and other PPT programs that result in an increased total number of Units leased for a reduced amount of fees per Unit. In addition, PPT System revenue was also affected by the willingness of program suppliers to engage in direct revenue sharing arrangements with the largest retailer chains. These changes caused decreases in the Company's PPT System order processing-fee revenue as well as its transaction-fee revenue. The PPT business segment revenue decline was partially offset by an increase in direct revenue sharing fees as the result of increased business activity from these Studio agreements. The decrease in total consolidated revenue was additionally due to: (i) decreased revenue from 3PF's services resulting primarily from the loss of customers; and (ii) a decline in revenue from Blowout Video, Inc. due to reductions in business activity and the closure of four of its retail stores during the fiscal year. These revenue decreases were partially offset by the royalty revenue as the result of a business restructuring with Rentrak Japan in fiscal 2002. In fiscal 2002, PPT business segment revenues were 73.7 million, a decrease of $12.0 million, or 14 percent, from $85.7 million in fiscal 2001. During the year, order processing-fee revenue decreased to $16.9 million from $19.4 million in fiscal 2001, a decrease of $2.5 million, or 13 percent. Transaction-fee revenue totaled $44.1 million, a decrease of $11.6 million, or 21 percent, from $55.7 million the previous fiscal year. Sell-through revenue was $6.6 million in fiscal 2002 as compared to $6.6 million in fiscal 2001. Communication fee revenue was $1.3 million in fiscal 2002 as compared to $1.5 million in fiscal 2001, a decrease of $0.2 million, or 13 percent. Also included in the PPT business segment are the following revenues: (i) direct revenue sharing fees totaling $4.2 million in fiscal 2002, an increase of $2.3 million, or 121 percent, from the $1.9 million in fiscal 2001; and (iii) $0.6 million in other royalty and other revenues 13 earned in fiscal 2002. Royalty and other revenue from Rentrak Japan totaled $6.4 million during fiscal 2002, as a result of the business restructuring with Rentrak Japan, compared to $1.1 million in Rentrak Japan royalty revenue in the previous fiscal year. Cost of sales for the PPT business segment in fiscal 2002 decreased to $56.8 million from $67.3 million the prior fiscal year, a decrease of $10.5 million, or 16 percent. The change is primarily due to the factors that led to changes in revenue as noted above. In fiscal 2002 the Company's PPT business segment gross profit margin, excluding the royalty revenue from Rentrak Japan, increased to 23 percent from 21 percent the previous year. PPT business segment selling and administrative expenses were $11.6 million in fiscal 2002 compared to $25.1 million in fiscal 2001. This decrease of $13.5 million, or 53 percent, was primarily attributable to the following items all reported in the quarter ended September 30, 2000: (i) a $1.3 million severance payment to the Company's former chairman and chief executive officer; (ii) $0.6 million in legal costs and proxy solicitation costs incurred by the Company related to the proxy contest at the 2000 annual shareholders meeting; (iii) $0.4 million in costs to reimburse the dissident shareholder group for their legal and other costs associated with the proxy contest; (iv) $6.1 million of costs associated with the reserve or write-off of investments related to the Company's Retailer Financing Program; (v) $1.0 million in write-offs of investments and other assets deemed by the Company to be non-realizable; (vi) $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 (vii) 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. Additionally, the Company's legal costs in fiscal 2002, related to the PPT business, decreased by an approximate $1.6 million from the prior fiscal year. The net gain from the litigation settlement with a prior customer of the Company, Hollywood Entertainment, was $1,563,000 for fiscal 2002 compared to $225,000 for fiscal 2001, an increase of approximately $1.4 million. While the settlements in both fiscal years were related to the same prior customer, they related to separate claims. The $1,563,000 of proceeds from the claim settled in fiscal 2002 was received in May 2002 from Hollywood Entertainment and related to a breach of a fulfillment contract while most of the proceeds from the settlement relating to the $225,000 recognized in fiscal 2001 were received in fiscal 2000 when the claim was finalized; the $225,000 represents the receipt of an insurance settlement in fiscal 2001 relating to this claim. PPT other income (expense) was an expense of $2.1 million in fiscal 2001 compared to income of $7.9 million for fiscal 2002, an increase of $10.0 million. This increase is primarily due to: (i) a $0.1 million decrease in interest income; (ii) a $0.8 million decrease in interest expense due to the payoff of the line of credit at the beginning of fiscal 2002; (iii) a decrease in loss on the sale of investment securities, a loss realized on the sale of stock received previously by the Company pursuant to the settlement of a claim with a customer and the write-off of assets, or write-down of various assets to their net realizable value, totaling $1.7 million in fiscal 2001 compared to $0 in fiscal 2002; and (iv) a $8.0 million recognition of other income related to the business restructuring with Rentrak Japan in fiscal 2002. 14 As a result of the above, for the fiscal year ended March 31, 2002, the Company recorded pre-tax income of $19.9 million, or 25 percent of total revenue, from its PPT business, segment, including royalty revenue and other income from the Rentrak Japan business restructuring, compared to a pre-tax loss of $7.6 million, or 9 percent of total revenue, in the prior fiscal year. The Cassette and DVD 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 of this report further describes certain of these factors. Included in other consolidated revenue are the results from other subsidiaries, primarily the operations of 3PF.COM, Inc. ("3PF") and Blowout Video, Inc. Total revenues from 3PF decreased to $17.5 million for fiscal 2002 compared to $23.4 million for fiscal 2001, a decrease of $5.9 million, or 25 percent. This decrease was primarily due to the loss of two key customers, one at the end of fiscal 2001 and the other early in 2002, whose fiscal 2001 revenues totaled approximately $9.7 million, offset partially by significant fiscal 2002 growth of 3PF's largest customer and modest revenues from the addition of new customers in fiscal 2002. Cost of sales was $16.9 million, a decrease of $4.8 million from the $21.7 million recorded in fiscal 2001. This decrease is primarily due to the corresponding decrease in revenue noted above, offset by the on-going carrying cost of the unoccupied and unutilized distribution facility capacity. As a percentage of total 3PF revenue, total cost of sales was 97 percent and 93 percent for fiscal 2002 and 2001, respectively. Selling and administrative expenses decreased to $4.5 million in fiscal 2002 from $5.5 million in fiscal 2001, a decrease of $1.0 million. As a percentage of total revenue, selling and administrative expenses increased to 26 percent for fiscal 2002 from 24 percent for the prior fiscal year. The $1.0 million decrease was primarily due to a $0.7 million recovery of an amount reserved in fiscal 2001 for the anticipated non-collection of one of 3PF's trade accounts due the Company as the result of a bankruptcy filing by the customer. This decrease was also the result of decreased compensation, advertising, travel and entertainment expenses and other costs as the Company adjusted its overhead infrastructure to better fit the operating size of its business. The Company expects to continually evaluate its selling and administrative expenses and appropriately align them in conjunction with the overall size of business it is operating. 3PF other income (expense) was an expense of $250,000 in fiscal 2002 compared to $0 in fiscal 2001. This expense was due to a reserve for the expected non-realization of an investment previously made in a former customer. As a result of the foregoing factors, for the fiscal year ended March 31, 2002, 3PF recorded a pre-tax loss of $4.1 million, or 23 percent of total revenue. This compares with pre-tax loss of $3.8 million, or 16 percent of total revenue, in fiscal 2001. Total revenue from BlowOut Video, Inc. decreased to $7.3 million in fiscal 2002 from $11.7 million in fiscal 2001, a decrease of $4.4 million, or 38 percent, primarily due to the decline in overall business activity and the closure of four of its stores during fiscal 2002. Cost of sales was $5.5 million, a decrease of $3.2 million from the $8.7 million recorded in fiscal 2001. Total cost of sales as a percentage of total revenue was 75 percent and 74 percent for fiscal 2002 and 2001, respectively. As a result, the gross margin decreased to $1.8 15 million in fiscal 2002 from $3.0 million in fiscal 2002. Selling and administrative expenses decreased to $3.1 million in fiscal 2002 from $3.6 million in fiscal 2001, a decrease of $0.5 million, as management made adjustments to better align the overhead structure with the decline in business activity and operating size. As a percentage of total revenue for BlowOut Video, Inc., selling and administrative expenses increased to 42 percent for fiscal 2002 from 31 percent for the prior fiscal year. For the fiscal year ended March 31, 2002, BlowOut Video, Inc. recorded a pre-tax loss of $1.3 million, or 18 percent of total revenue. This compares with a pre-tax loss of $0.7 million, or 6 percent of total revenue, in fiscal 2001. As a result of the above, for the fiscal year ended March 31, 2002, the Company recorded consolidated pre-tax income from continuing operations of $14.5 million, or 14 percent of total consolidated revenue, compared to a consolidated pre-tax loss from continuing operations of $12.1 million, or 10 percent of total consolidated revenue, in the prior fiscal year. The consolidated effective tax rate providing the tax provision for continuing operations for fiscal 2002 was 38.0 percent, compared to a consolidated effective tax rate of 37.3 percent providing the tax benefit for fiscal 2001. The Company expects to realize the remaining tax benefit at March 31, 2002, created in fiscal 2001 by net operating loss carryforwards, in future periods. FISCAL 2001 COMPARED TO FISCAL 2000 CONTINUING OPERATIONS - PPT OPERATIONS AND OTHER CONTINUING SUBSIDIARIES For the year ended March 31, 2001, the Company's total consolidated revenue increased $2.7 million to $117.9 million from $115.2 million in the prior fiscal year. Total consolidated revenue includes the following PPT System fees in the PPT business segment: order processing fees generated when Cassettes and DVD's ("Units") are ordered by and distributed to Retailers; transaction fees generated when Retailers rent Units to consumers; sell-through fees generated when Retailers sell Units to consumers; communication fees when Retailers' point-of-sale systems are connected to the Company's information system and buy out fees when Retailers purchase Units at the end of the lease term. PPT business segment revenues also include direct revenue sharing fees from data tracking and reporting services provided by the Company to Studios, as well as charges for internet services provided by the Company's subsidiary formovies.Com, Inc. In addition, total consolidated revenue includes charges to customers of the Company's subsidiary 3PF.COM, Inc., which provides e-commerce order processing, fulfillment and inventory management services, and other revenues which include sales of Units through the Company's retail subsidiary BlowOut Video, Inc. and royalty payments from Rentrak Japan. The increase in total consolidated revenue was primarily due to: (i) increased revenue from services provided by 3PF.COM, Inc.; and partially offset by (ii) the number of total titles released to the PPT System, as well as the number of theatrical titles released and the box office performance of those titles. In addition, PPT revenue was also affected by a reduction in the total number of Cassettes leased under the PPT System, due in part to Studios offering more titles under various "copy depth" programs, intended to increase the number of Units in distribution by lowering the cost of rental Units to Retailers, than they have in the past and to the willingness of program suppliers to engage in direct revenue 16 sharing arrangements with the largest retailer chains. These changes caused decreases in order processing and transaction revenue. In fiscal 2001, PPT business segment revenues were $85.7 million, a decrease of $10.7 million, or 11 percent, from $96.4 million in fiscal 2000. During the year, order processing-fee revenue decreased to $19.4 million from $23.4 million in fiscal 2000, a decrease of $4.0 million, or 17 percent. Transaction-fee revenue totaled $55.7 million, a decrease of $5.7 million, or 9 percent, from $61.4 million the previous fiscal year. Sell-through revenue was $6.6 million in fiscal 2001 as compared to $7.8 million in fiscal 2000, a decrease of $1.2 million, or 15 percent. Communication fee revenue was $1.5 million in fiscal 2001 as compared to $1.8 million in fiscal 2000, a decrease of $0.3 million or 17 percent. Also included in the PPT business segment are the following revenues: (i) direct revenue sharing fees totaling $1.9 million in fiscal 2001, an increase of $0.4 million, or 27 percent, from the $1.5 million in fiscal 2000; and (ii) $0.6 million in other royalty and other revenues earned in fiscal 2001, an increase of $0.1 million, or 20 percent from the $0.5 million in fiscal 2000. Royalty revenue from Rentrak Japan totaled $1.1 million during fiscal 2001, a decrease of $0.7 million or 39 percent from $1.8 million the previous year. Cost of sales for the PPT business segment in fiscal 2001 decreased to $67.3 million from $79.6 million the prior year, a decrease of $12.3 million or 15 percent. The change is primarily due to the factors that led to changes in revenue as noted above. In fiscal 2001, the Company's PPT business segment gross profit margin increased to 21 percent from 17 percent the previous fiscal year. PPT business segment selling and administrative expenses were $25.1 million in fiscal 2001 compared to $22.5 million in fiscal 2000. This increase of $2.6 million, or 12 percent, was primarily attributable to the following items all reported in the quarter ended September 30, 2000: (i) a $1.3 million severance payment to the Company's former chairman and chief executive officer; (ii) $0.6 million in legal costs and proxy solicitation costs incurred by the Company related to the proxy contest at the 2000 annual shareholders meeting and (iii) $0.4 million in costs to reimburse the dissident shareholder group for their legal and other costs associated with the proxy contest. While the Company wrote off or reserved approximately $8.5 million in assets related to the Retailer Financing Program, investments and accounts receivable during the quarter ended September 30, 2000, it also increased reserves and wrote off other assets totaling approximately $9.0 million during the fourth quarter of fiscal 2000. The net gain from the litigation settlement with a prior customer of the Company, Hollywood Entertainment, was $225,000 for fiscal 2001 compared to $7.8 million for fiscal 2000, a decrease of approximately $7.6 million. Most of the proceeds from this settlement were received in fiscal 2000 when the claim was finalized; the $225,000 represents the receipt of an insurance settlement in fiscal 2001 relating to this claim. PPT other income (expense) increased from an expense of $1.4 million in fiscal 2000 to an expense of $2.1 million for fiscal 2001, an increase of $0.7 million. This increase is primarily due to: (i) a decrease in interest income; (ii) an increase in interest expense due to an increased use of the line of credit in fiscal 2001; (iii) an increase in loss on the sale of investment securities; (iv) a $0.5 million loss realized on the sale of stock received 17 previously by the Company pursuant to the settlement of a claim with a customer and (v) the write-off of assets or write-down of various assets to their net realizable value. As a result of the above, for the fiscal year ended March 31, 2001, the Company recorded a pre-tax loss of $7.4 million, or 9 percent of total revenue, from its PPT business segment, including royalty revenue from Rentrak Japan, compared to pre-tax income of $2.9 million, or 3 percent of total revenue, in the prior fiscal year. The Cassette and DVD 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 of this report further describes certain of these factors. Included in total consolidated revenue are the results from other subsidiaries, primarily the operations of 3PF.COM, Inc. ("3PF") and Blowout Video, Inc. Total revenues from 3PF increased to $23.4 million for fiscal 2001 compared to $11.6 million for fiscal 2000, an increase of $11.8 million, or 102 percent. This increase was primarily due to increased volume from existing customers. Cost of sales was $21.7 million, an increase of $11.6 million over the $10.1 million recorded in fiscal 2000. This increase is due to: (1) a $1.1 million increase in occupancy cost as 3PF expanded its operations into a new facility late in fiscal 2000 to provide additional operating capacity for business growth; (2) a $4.5 million increase in freight cost in conjunction with the overall increase in business growth and revenue; and (3) a $4.3 million increase in warehouse labor cost in conjunction with the overall increase in business growth and revenue. As a percentage of total 3PF revenue, total cost of sales was 93 percent and 87 percent for fiscal 2001 and 2000, respectively. Selling and administrative expenses increased to $5.5 million in fiscal 2001 from $2.6 million in fiscal 2000, an increase of $2.9 million. As a percentage of total revenue, selling and administrative expenses increased to 24 percent for fiscal 2001 from 22 percent for the prior year. This $2.9 million increase was due to increased compensation, advertising, travel and entertainment expenses, depreciation and other costs as the Company invested in the overhead infrastructure to support growth in its business. Additionally, the Company recognized $0.9 million in bad debt expense during fiscal 2001 primarily relating to a customer that filed for bankruptcy. The Company anticipates its selling and administrative expenses to moderate or lessen in the future in conjunction with the overall size of business it is operating. As a result of the foregoing factors, for the fiscal year ended March 31, 2001, 3PF recorded a pre-tax loss of $3.8 million, or 16 percent of total revenue. This compares with pre-tax loss of $1.1 million, or 9 percent of total revenue, in fiscal 2000. Total revenue from BlowOut Video, Inc. increased to $11.7 million in fiscal 2001 from $9.5 million in fiscal 2000, an increase of $2.2 million, or 23 percent. Cost of sales was $8.7 million, an increase of $2.7 million over the $6.0 million recorded in fiscal 2000. Total cost of sales as a percentage of total revenue was 74 percent and 63 percent for fiscal 2001 and 2000, respectively. As a result, the gross margin decreased to $3.0 million in fiscal 2001 from $3.5 million in fiscal 2000. Selling and administrative expenses increased to $3.6 million in fiscal 2001 from $3.0 million in fiscal 2000, an increase of $0.6 million. As a percentage of total revenue for BlowOut Video, Inc., selling and administrative expenses decreased to 31 percent for fiscal 2001 from 32 percent for the prior year. 18 For the fiscal year ended March 31, 2001, BlowOut Video, Inc. recorded a pre-tax loss of $0.7 million, or 6 percent of total revenue. This compares with pre-tax income of $0.3 million, or 3 percent of total revenue, in fiscal 2000. As a result of the above, for the fiscal year ended March 31, 2001, the Company recorded a consolidated pre-tax loss from continuing operations of $12.1 million, or 10 percent of total consolidated revenue, compared to consolidated pre-tax income from continuing operations of $1.5 million, or 1 percent of total consolidated revenue, in the prior fiscal year. The consolidated effective tax rate providing the tax benefit for continuing operations for fiscal 2001 was 37.3 percent, compared to a consolidated effective tax rate of 30.0 percent providing the tax provision for continuing operations for fiscal 2000 (see Discontinued Operations below). DISCONTINUED OPERATIONS On November 26, 1996, the Company made a distribution to its shareholders of 1,457,343 shares of common stock of its then subsidiary BlowOut Entertainment, Inc. ("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 fiscal 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 $0.5 million in the valuation allowance was recorded as an income tax benefit from discontinued operations in the accompanying consolidated statement of operations. There was no remaining liability related to the discontinued operations at March 31, 2002. FINANCIAL CONDITION At March 31, 2002, total assets were $38.6 million, a decrease of $0.5 million from $39.1 million a year earlier. The Company had $12.0 million of cash on hand at March 31, 2002, including $1.0 million of restricted cash, compared to $3.3 million at March 31, 2001, an increase of $8.7 million (see the Consolidated Statement of Cash Flows in the accompanying Consolidated Financial Statements). Net accounts receivable decreased $0.6 million from $11.9 million at March 31, 2001 to $11.3 million at March 31, 2002, including a $1.0 million reduction in the allowance for doubtful accounts, primarily due to the recovery of a specific reserve established in fiscal 2001 for the anticipated non-collection of one of 3PF's trade accounts as the result of a bankruptcy filing by the customer. Inventory decreased $1.0 million from $3.5 million at March 31, 2001 to $2.5 million at March 31, 2002 primarily due to the reduction of business activity and closure of four retail stores at BlowOut Video, Inc. during fiscal 2002. Property and equipment decreased $0.5 million from $4.4 million at March 31, 2001 to $3.9 million at March 31, 2002, primarily due to the write-down of 3PF equipment value. Total deferred tax assets decreased $6.4 million from $9.7 million at March 31, 2001 to $3.3 million at March 31, 2002, primarily due to the utilization of a tax loss carry forward created from the loss from continuing operations during fiscal 2001. The Company believes it will realize the deferred tax asset as of March 19 31, 2002 in future periods. Other assets decreased $0.3 million from $4.8 million at March 31, 2001 to $4.4 million at March 31, 2002. . At March 31, 2002, total liabilities were $21.3 million, a decrease of $6.4 million from $27.7 million at March 31, 2001. The line of credit decreased to $0 at March 31, 2002 from $1.9 million at March 31, 2001 due to the payoff of the line balance at the beginning of fiscal 2002 primarily from working capital available from the business restructuring with Rentrak Japan and trade receivable collections. Accounts payable decreased $0.4 million from $18.7 million at March 31, 2001 to $18.3 million at March 31, 2002. Accrued liabilities decreased $2.7 million from $3.4 million at March 31, 2001 to $0.7 million at March 31, 2002 primarily due to the change in estimate for accrued tax liability totaling $1.5 million and the elimination of liabilities associated with the business restructuring with Rentrak Japan totaling $0.6 million. Total deferred revenue decreased approximately $1.2 million from $1.6 million at March 31, 2001 to $0.4 million at March 31, 2002, primarily due to the forgiveness of the remaining unearned prepaid royalty income credit by Rentrak Japan in the business restructuring. Accordingly, at March 31, 2002, stockholders' equity was $17.3 million, an increase of $5.9 million from $11.4 million at March 31, 2001. Most of this increase in stockholders' equity is attributable to: (i) the reduction in common stock and capital in excess of par value as the result of the repurchase of stock from Rentrak Japan in the business restructuring and the repurchase of additional stock under the Company's stock repurchase program; and (ii) the reduction in the accumulated deficit due to the consolidated net income of $9.0 million for fiscal 2002, . LIQUIDITY AND CAPITAL RESOURCES At March 31, 2002, the Company had cash and other liquid investments of $12.0 million, including $1.0 million of restricted cash, compared to $3.3 million at March 31, 2001. At March 31, 2002 the Company's current ratio (current assets/current liabilities) was 1.56 compared to 1.14 a year earlier. In May 2000 the Company obtained a 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 credit line was payable monthly at the bank's prime rate plus 1/4 percent (5.0 percent at March 31, 2002). The line was secured by substantially all of the Company's assets. The terms of the credit agreement included 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 restricted the amount of loans and indebtedness and limits the payment of dividends on the Company's stock, among other requirements. The Company was in compliance with the three financial covenants as of March 31, 2002. At March 31, 2002, the Company had $0 of outstanding borrowings under this agreement. In May 2002 the Company obtained a replacement line of credit with a new lender for the previous line of credit noted above, which was terminated at that time. The replacement line of credit is in the amount of $4.5 million. Interest under this credit line is variable based on the London Interbank Offering Rate (LIBOR) plus 2 percent. The line is secured by a first priority blanket lien on all of the Company's assets. The terms of the credit agreement include financial covenants requiring: (1) a minimum current ratio of 1.10:1.0, measured 20 quarterly; (2) a consolidated quarterly and year-to-date net income equal to or exceeding $1.00; (3) a leverage ratio of 1.50:1.0, measured quarterly and (4) $16 million of tangible net worth, measured quarterly. The agreement expires July 1, 2003. The Company anticipates that it will be in compliance with these covenants throughout the term of the agreement. In 1992, the Company established a Retailer Loan Program whereby, on a selective basis, it provided financing to Participating Retailers that the Company believed had the potential for substantial growth in the industry. 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 fiscal 2001, the Company discontinued new financings under this program and provided reserves of $6.6 million representing the entire outstanding balance of the program loans. The Company continues to seek enforcement of agreements entered into in connection with this program in accordance with their terms to the extent practicable. On March 22, 1999, BlowOut Entertainment, Inc. ("BlowOut"), a former subsidiary of the Company, filed a petition under Chapter 11 of the Federal Bankruptcy Code. In 1996, the Company agreed to guarantee any amounts outstanding under BlowOut's credit facility. As of March 31, 2002, the balance remaining payable under this obligation was paid in full. The Company's sources of liquidity include its cash balance, cash generated from operations and its available credit resources. Based on the Company's current budget and projected cash needs, the Company believes these available sources of liquidity will be sufficient to fund the Company's operations and capital requirements for the fiscal year ending March 31, 2003. CRITICAL ACCOUNTING POLICIES The Company considers as its most critical accounting policies those that require the use of estimates and assumptions, specifically, accounts receivable reserves and studio guarantee reserves. In developing these estimates and assumptions, the Company takes into consideration historical experience, current and expected economic conditions and other relevant data. Please refer to the Notes to the Consolidated Financial Statements for a full discussion of the Company's accounting policies. ALLOWANCE FOR DOUBTFUL ACCOUNTS Credit limits are established through a process of reviewing the financial history and stability of each customer. The Company regularly evaluates the collectibility of accounts receivable by monitoring past due balances. If it is determined that a customer may be unable to meet its financial obligations, a specific reserve is established based on the amount the Company expects to recover. An additional general reserve is provided based on aging of accounts receivable and the Company's historical collection experience. If circumstances change related to specific customers, overall aging of accounts receivable or collection experience, the Company's estimate of the recoverability of accounts receivable could materially change. STUDIO RESERVES The Company has entered into guarantee contracts with certain program suppliers 21 providing titles for distribution under the PPT system. These contracts guarantee the suppliers minimum payments. The Company, using historical experience and year to date rental experience for each title, estimates the projected revenue to be generated under each guarantee. The Company establishes reserves for titles that are projected to experience a shortage under the provisions of the guarantee. The Company continually reviews these factors and makes adjustments to the reserves as needed. Actual results could differ from these estimates and could have a material effect on the recorded studio reserves. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has considered the provisions 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, 2002. 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. 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Item Page Independent Auditor's Report 24 Report of Independent Public Accountants Report of Independent Public Accountants 25 Consolidated Balance Sheets as of March 31, 2002 26 and 2001 Consolidated Statements of Operations for the Years 27 Ended March 31, 2002, 2001 and 2000 Consolidated Statements of Stockholders' Equity 28 for the Years Ended March 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows for the Years 29 Ended March 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements 30 Financial Statement Schedules -- 52 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. 23 INDEPENDENT AUDITOR'S LETTER The Board of Directors Rentrak Corporation: We have audited the accompanying consolidated balance sheet of Rentrak Corporation and subsidiaries as of March 31, 2002, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rentrak Corporation and subsidiaries as of March 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary consolidated information for the year ended March 31, 2002 included in Schedule II required by the Securities and Exchange Commission is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ KPMG LLP - ------------ Portland, Oregon May 24, 2002 (except as to the second paragraph of Note 5, which is as of May 30, 2002) 24 Report of Independent Public Accountants To Rentrak Corporation: We have audited the accompanying consolidated balance sheets of Rentrak Corporation (an Oregon corporation) and subsidiaries as of March 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended March 31,2001. 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, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2001 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 of 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 the audits of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen LLP Portland, Oregon May 23, 2001 * This report is a copy of a previously issued Arthur Andersen LLP report and this report has not been reissued by Arthur Andersen LLP. 25 RENTRAK CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets March 31, 2002 and 2001
Assets 2002 2001 ---------------- ----------------- Current assets: Cash and cash equivalents $ 12,028,684 3,322,917 Accounts receivable, net of allowance for doubtful accounts of $1,086,143 and $2,090,075 11,328,794 11,854,642 Advances to program suppliers 1,101,514 1,328,165 Inventory 2,515,778 3,514,354 Income tax receivable 70,000 279,160 Deferred tax asset 2,295,567 7,319,266 Other current assets 3,134,665 2,589,090 ---------------- ----------------- Total current assets 32,475,002 30,207,594 ---------------- ----------------- Property and equipment, net 3,907,631 4,439,773 Deferred tax asset 1,002,882 2,419,634 Other assets 1,226,812 2,059,247 ---------------- ----------------- Total assets $ 38,612,327 39,126,248 ================ ================= Liabilities and Stockholders' Equity Current liabilities: Line of credit $ -- 1,917,705 Accounts payable 18,339,610 18,699,289 Accrued liabilities 749,279 3,418,043 Accrued compensation 1,371,064 1,127,785 Deferred revenue 379,106 1,245,643 Net current liabilities of discontinued operations -- 156,046 ---------------- ----------------- Total current liabilities 20,839,059 26,564,511 ---------------- ----------------- Long-term liabilities: Deferred revenue -- 379,104 Other 495,586 795,875 ---------------- ----------------- Total Liabilities 495,586 1,174,979 ---------------- ----------------- Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value. Authorized 10,000,000 shares -- -- Common stock, $0.001 par value. Authorized 30,000,000 shares; issued and outstanding 9,866,283 shares in 2002 and 12,235,621 shares in 2001 9,866 12,236 Capital in excess of par value 41,730,216 52,471,599 Notes receivable (377,565) (7,728,186) Cumulative other comprehensive income (loss) 180,453 (49,572) Accumulated deficit (23,910,288) (32,904,319) Deferred charge - warrants (355,000) (415,000) ---------------- ----------------- Total stockholders' equity 17,277,682 11,386,758 ---------------- ----------------- Total liabilities and stockholders' equity $ 38,612,327 39,126,248 ================ ================= See accompanying notes to consolidated financial statements.
26 RENTRAK CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations Years ended March 31, 2002, 2001, and 2000
2002 2001 2000 ------------------ ------------------ ------------------ Revenues: PPT $ 72,843,847 84,261,793 95,182,063 Other 29,770,300 33,625,162 19,990,351 ------------------ ------------------ ------------------ 102,614,147 117,886,955 115,172,414 ------------------ ------------------ ------------------ Operating costs and expenses: Cost of sales 76,812,474 93,600,177 91,706,290 Selling and administrative 20,753,587 34,455,048 28,236,763 Net gain from litigation settlements (note 10) (1,563,153) (225,000) (7,791,880) ------------------ ------------------ ------------------ 96,002,908 127,830,225 112,151,173 ------------------ ------------------ ------------------ Income (loss) from operations 6,611,239 (9,943,270) 3,021,241 ------------------ ------------------ ------------------ Other income (expense): Interest income 195,628 307,240 743,464 Interest expense (17,598) (768,599) (669,373) Gain (loss) on investments -- (1,687,314) (1,207,483) Other 7,717,233 -- (385,986) ------------------ ------------------ ------------------ 7,895,263 (2,148,673) (1,519,378) ------------------ ------------------ ------------------ Income from continuing operations before income tax (benefit) provision and gain from disposal of discontinued operations 14,506,502 (12,091,943) 1,501,863 Income tax benefit (provision) (5,512,471) 4,514,575 (450,559) ------------------ ------------------ ------------------ Net income (loss) from continuing operations 8,994,031 (7,577,368) 1,051,304 Gain from disposal of discontinued operations including income tax benefit of $483,502 -- -- 2,373,502 ------------------ ------------------ ------------------ Net income (loss) $ 8,994,031 (7,577,368) 3,424,806 ================== ================== ================== Earnings (loss) per common share: Basic: Continuing operations $ 0.86 (0.63) 0.10 Discontinued operations -- -- 0.23 ------------------ ------------------ ------------------ Net income (loss) $ 0.86 (0.63) 0.33 ================== ================== ================== Diluted Continuing operations $ 0.85 (0.63) 0.10 Discontinued operations -- -- 0.22 ------------------ ------------------ ------------------ Net income (loss) $ 0.85 (0.63) 0.32 ================== ================== ================== See accompanying notes to consolidated financial statements.
27
RENTRAK CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended March 31, 2002, 2001, and 2000 Common stock -------------------------------------- Capital in Number of excess of Notes shares Amount par value Receivable -------------------- -------------- -------------- --------------- Balance at March 31, 1999 10,439,948 $ 10,440 43,644,479 -- Issuance of common stock under employee stock option plans 74,613 75 228,882 -- Net income -- -- -- -- Change in unrealized gain (loss) on 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 -- Issuance of common stock under employee stock option plans 1,721,060 1,721 8,026,400 -- Net income -- -- -- -- Change in unrealized gain (loss) on investment securities, net of tax -- -- -- -- Total comprehensive income Issuance of notes receivable -- -- -- (7,728,186) Amortization of warrants -- -- -- -- -------------------- -------------- ---------------- --------------- Balance at March 31, 2001 12,235,621 12,236 52,471,599 (7,728,186) Repurchase of common stock (1,188,400) (1,188) (4,523,061) -- Issuance of common stock under employee stock option plans 227,812 227 732,511 -- Issuance of common stock 87,000 87 136,473 Repurchase of common stock for cancellation of notes receivable (1,495,750) (1,496) (7,349,125) Net income -- -- -- -- Change in unrealized gain (loss) on investment securities, net of tax -- -- -- -- Cumulative Translation Adjustments Total comprehensive income Income tax benefit from stock option exercise -- -- 261,819 -- Cancellation of notes receivable -- -- -- 7,350,621 Amortization of warrants -- -- -- -- -------------------- -------------- ---------------- --------------- Balance at March 31, 2002 9,866,283 $ 9,866 41,730,216 (377,565) ==================== ============== ================ ===============
See accompanying notes to consolidated financial statements.
Cumulative other Deferred Comprehensive Accumulated charge Comprehensive Income deficit warrants Total income (loss) ------------ -------------- ------------- ---------- ------------ Balance at March 31, 1999 137,747 (28,751,757) (749,005) 14,291,904 Issuance of common stock under employee stock option plans -- -- -- 228,957 Net income -- 3,424,806 -- 3,424,806 3,424,806 Change in unrealized gain (loss) on investment securities, net of tax (402,431) -- -- (402,431) (402,431) ------------ Total comprehensive income $ 3,022,375 ============ Income tax benefit from stock option exercise -- -- -- 27,699 Issuance of warrants -- -- (544,139) -- Amortization of warrants -- -- 509,652 509,652 ------------ ---------------- -------------- ---------- Balance at March 31, 2000 (264,684) (25,326,951) (783,492) 18,080,587 Issuance of common stock under employee stock option plans -- -- -- 8,028,121 Net income -- (7,577,368) -- (7,577,368) (7,577,368) Change in unrealized gain (loss) on investment securities, net of tax 215,112 -- -- 215,112 215,112 ------------ Total comprehensive income $(7,362,256) ============ Issuance of notes receivable -- -- -- (7,728,186) Amortization of warrants -- -- 368,492 368,492 ------------ ---------------- -------------- ---------- Balance at March 31, 2001 (49,572) (32,904,319) (415,000) 11,386,758 Repurchase of common stock -- -- -- (4,524,249) Issuance of common stock under employee stock option plans -- -- -- 732,738 Issuance of common stock 136,560 Repurchase of common stock for cancellation of notes receivable (7,350,621) Net income -- 8,994,031 -- 8,994,031 8,994,031 Change in unrealized gain (loss) on investment securities, net of tax 49,572 -- -- 49,572 49,572 Cumulative Translation Adjustments 180,453 180,453 180,453 ----------- Total comprehensive income $9,224,056 =========== Income tax benefit from stock option exercise -- -- -- 261,819 Cancellation of notes receivable -- -- -- 7,350,621 Amortization of warrants -- -- 60,000 60,000 ------------ ---------------- -------------- ---------- Balance at March 31, 2002 180,453 (23,910,288) (355,000) 17,277,682 ============ ================ ============== ========== See accompanying notes to consolidated financial statements.
28 RENTRAK CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended March 31, 2002, 2001, and 2000
2002 2001 2000 ---------------- ---------------- ---------------- Cash flows from operating activities: Net income (loss) $ 8,994,031 (7,577,368) 3,424,806 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Gain on disposal of discontinued operations -- -- (2,373,502) (Gain) loss on disposition of assets (7,802,747) 597,124 1,207,483 Loss on write-down of property and equipment 425,000 -- -- Gain on litigation settlement -- -- (7,791,880) Depreciation and amortization 1,438,449 1,266,515 1,780,966 Write-off of intangibles -- -- 421,675 Amortization of warrants 60,000 368,492 509,652 Provision (credit) for doubtful accounts (1,546,301) 7,758,211 6,341,032 Retailer financing program reserves -- 1,333,191 (373,394) Reserves on advances to program suppliers 1,629,105 106,781 110,918 Deferred income taxes 5,171,886 (4,646,420) (900,272) Net proceeds from litigation settlement -- -- 1,847,505 Change in specific accounts: Accounts receivable 2,072,149 4,184,677 (3,231,008) Advances to program suppliers (1,402,454) 1,547,820 (253,422) Inventory 998,576 162,449 (1,084,620) Income tax receivable 209,160 (109,860) 2,864,901 Notes receivable and other current assets (545,575) 2,106,259 1,227,099 Accounts payable (359,679) (6,778,293) 7,233,746 Accrued liabilities and compensation (925,485) 423,558 357,860 Deferred revenue and other liabilities (1,365,477) (756,912) 3,077,119 Net current liabilities of discontinued operations (156,046) (274,877) (942,341) ---------------- ---------------- ---------------- Net cash provided by (used in) operating activities 6,894,592 (288,653) 13,454,323 ---------------- ---------------- ---------------- Cash flows from investing activities: Purchases of property and equipment (1,379,934) (2,947,221) (1,790,501) Investments in retailer financing program -- -- (384,500) Proceeds from retailer financing program -- -- 228,539 Purchases of investments -- -- (398,122) Proceeds from sale of investments -- 1,605,555 975,305 Proceeds from sale of investment in Rentrak Japan 4,076,237 -- -- Reductions (additions) of other assets and intangibles 797,028 (792,672) (6,693) ---------------- ---------------- ---------------- Net cash used in investing activities 3,493,331 (2,134,338) (1,375,972) ---------------- ---------------- ---------------- Cash flows from financing activities: Net borrowings (payments) on line of credit (1,917,705) 1,917,705 (7,925,000) Net borrowing (payments) on notes payable -- (500,000) (2,500,000) Repurchase of common stock (633,749) -- -- Issuance of common stock 732,738 299,932 228,957 Issuance of common stock to non-employees 136,560 -- -- ---------------- ---------------- ---------------- Net cash provided by (used in) financing activities (1,682,156) 1,717,637 (10,196,043) ---------------- ---------------- ---------------- Net increase (decrease) in cash and cash equivalents 8,705,767 (705,354) 1,882,308 Cash and cash equivalents at beginning of year 3,322,917 4,028,271 2,145,963 ---------------- ---------------- ---------------- Cash and cash equivalents at end of year $ 12,028,684 3,322,917 4,028,271 ================ ================ ================ See accompanying notes to consolidated financial statements.
29 (1) Business of Companies, Summary of Significant Accounting Policies, and Other Items (a) 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 DVD's ("Units") and the distribution of prerecorded Units 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 Units from program suppliers (producers of motion pictures and licensees and distributors of home video cassettes and DVD's ) 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 three retail video stores that operate under the name of BlowOut Video. (b) Rentrak Japan In December 1989, the Company entered into a definitive agreement with Culture Convenience Club Co., Ltd. (CCC), Rentrak's joint venture partner in Rentrak Japan, to develop 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 received a royalty of 1.67% for all sales of up to $47,905,000, plus one-half of 1% (0.5%) of sales greater than $47,905,000 in each fiscal year. In addition, the Company received a one-time royalty of $2 million, 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 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 was being recognized as revenue as royalties were earned under the terms of the contract. As discussed below in April 2001, this contract was effectively terminated with Rentrak Japan forfeiting their rights to the remaining $700,000 prepayment. Effective April 2, 2001, the Company entered into an agreement with Rentrak Japan amending the former agreement. As a result of the amended agreement, the Company granted Rentrak Japan PPT operating rights in Japan, the Philippines, Singapore, Taiwan, Hong Kong, the Republic of Korea, the Democratic People's Republic of Korea, the People's Republic of China, Thailand, Indonesia, Malaysia, and Vietnam. In addition, the royalty agreement was terminated. Finally, all intellectual property rights and trademarks of the PPT system were agreed to be usable by Rentrak Japan. Consideration for the above items included a cash payment from Rentrak Japan to the Company of approximately $5,700,000, forfeiture by Rentrak Japan of any right of return of 30 the 1999 prepaid royalty of $700,000, and forgiveness by Rentrak Japan of approximately $600,000 of liabilities due to Rentrak Japan from the Company. Of these amounts, $6,400,000 was recorded as revenue consistent with the historical treatment of royalty payments. The remaining $600,000 was recorded as a gain and is included in other income in the accompanying consolidated statement of operations. In April and October 2001, the Company sold all of its 5.6 percent interest in Rentrak Japan. In conjunction with the above agreements, the Company and Rentrak Japan entered into stock purchase commitments to purchase stock as described below. The Company sold 300,000 shares of Rentrak Japan stock to a sister company of Rentrak Japan on April 2, 2001, and its remaining 180,000 shares of Rentrak Japan stock on October 2, 2001 to the sister company. Total proceeds from the stock sales approximated $6,400,000. The resulting gain of $6,400,000 related to the sale of this stock is included in other income in the accompanying consolidated statement of operations. Finally, Rentrak Japan purchased 17,000 shares of 3PF common stock on April 27, 2001 for $1,000,000. In return, Rentrak Japan sold 1,004,000 shares of the Company's common stock back to the Company on April 2, 2001 for approximately $3,890,500. Based upon the results of the transactions noted above occurring in the year ended March 31, 2002, the Company had no further obligations to, or ownership in, Rentrak Japan. (c) 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 nondelivery, 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 currently owns 92% of Rentrak UK while Rentrak Japan holds 8%. During the fiscal 2000 year, Rentrak UK did not generate income or positive cash flow and, as a result, the Company wrote down assets of $222,000 in that year that were not expected to generate positive cash flow. During the year ended March 31, 2001, Rentrak UK continued to generate no income or cash flow. During the year ended March 31, 2002, Rentrak UK improved its performance producing minimal income and cash flow. Management of the Company has made changes to decrease the cost of operations, including space and staffing costs, and it is continuing to closely evaluate the financial performance of operations. Management is considering various alternatives including selling or closing down Rentrak UK's operations. (d) 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. 31 (e) 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. Actual results could differ from those estimates. (f) Revenue Recognition The PPT agreements generally provide for an initial order processing fee and continuing transaction fees based on a percentage of rental revenues earned by the retailer upon renting the Units to their customers. The Company recognizes order-processing fees as revenue when the Units are shipped to the retailers and recognizes transaction fees when the Units are rented to the consumers. Initial order processing fees cover the direct costs of accessing Units from program suppliers, handling, packaging and shipping of the Units to the retailer. Once the Units are shipped, the Company has no further obligation to provide services to the retailer. Revenues derived from fulfillment activities are recognized when products are shipped and/or services are provided. 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 of $379,106 recorded March 31, 2002, will be recognized in future periods as revenues are earned under the terms of the contract. Stockholders and former directors, or their families, owned interests in several stores participating in the PPT program through fiscal 2000. The Company realized revenues from these stores of approximately $47,000 during fiscal 2000. No revenues were recognized from these parties in fiscal 2001 or 2002. (g) 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. Included in cash and cash equivalents is $1,000,000 of restricted cash used as security for the Company's operating cash accounts which is held in highly liquid investments. The classification of this cash is determined based on the expected term of the collateral requirement of the operating cash account. This restriction was relieved subsequent to March 31, 2002 as part of the financing arrangement described in note 5. (h) 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 32 comprehensive income (loss) 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 ------------------- -------------------- -------------------- 2002 $ 161,513 33,150 (14,970) 2001 1,605,555 9,570 (606,694) 2000 975,305 554,971 (121,105)
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 statement of operations as a loss on investments. In fiscal 2000, 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 declines in market value of $1,245,157 were recorded in gain (loss) on investments in the March 31, 2000 consolidated statement of operations. There were no unrealized losses from other than temporary declines in market value recognized in the March 31, 2002 and 2001 consolidated statements of operations. (i) Allowance for Doubtful Accounts Credit limits are established through a process of reviewing the financial history and stability of each customer. The Company regularly evaluates the collectibility of accounts receivable by monitoring past due balances. If it is determined that a customer may be unable to meet its financial obligations, a specific reserve is established based on the amount the Company expects to recover. An additional general reserve is provided based on aging of accounts receivable and the Company's historical collection experience. If circumstances change related to specific customers, overall aging of accounts receivable or collection experience, the Company's estimate of the recoverability of accounts receivable could materially change. (j) 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 approximated their carrying values at March 31, 2002 and 2001. (k) Inventory Inventory consists of videocassettes, digital videodiscs (DVDs), and other home entertainment products held for sale and is carried at the lower of cost (first-in, first-out method) or market value. (l) 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 33 the lives of the underlying leases or the service lives of the improvements, whichever is shorter. (m) 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. (n) Studio Reserves The Company has entered into guarantee contracts with certain program suppliers providing titles for distribution under the PPT system. These contracts guarantee the suppliers minimum payments. The Company, using historical experience and year to date rental experience for each title, estimates the projected revenue to be generated under each guarantee. The Company establishes reserves for titles that are projected to experience a shortage under the provisions of the guarantee. The Company continually reviews these factors and makes adjustments to the reserves as needed. (o) Foreign Currency Translation Adjustments from translating foreign functional currency financial statements into U.S. dollars are included in the Foreign Currency Translation Adjustment in the consolidated statement of stockholders' equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the local currency are included in results of operations. (p) 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 (loss) used to compute basic and diluted earnings (loss) per share for the years ended March 31 were calculated as follows: 34
2002 2001 2000 --------------------------- --------------------------- --------------------------- Basic Diluted Basic Diluted Basic Diluted ------------- ------------ ------------ ------------- ------------ ------------ Weighted average number of shares of common stock outstanding 10,415,314 10,415,314 11,985,023 11,985,023 10,477,334 10,477,334 Dilutive effect of stock options -- 197,459 -- -- -- 281,787 ------------- ------------ ------------ ------------- ------------ ------------ Weighted average number of shares of common stock outstanding and common stock equivalents 10,415,314 10,612,773 11,985,023 11,985,023 10,477,334 10,759 ,121 ============= ============ ============ ============= ============ ============ Net income (loss): Continuing operations $ 8,994,031 8,994,031 (7,577,368) (7,577,368) 1,051,304 1,051,304 Discontinued operations -- -- -- -- 2,373,502 2,373,502 ------------- ------------ ------------ ------------- ------------ ------------ Net income (loss) $ 8,994,031 8,994,031 (7,577,368) (7,577,368) 3,424,806 3,424,806 ============= ============ ============ ============= ============ ============ Earnings (loss) per share: Continuing operations $ 0.86 0.85 (0.63) (0.63) 0.10 0.10 Discontinued operations -- -- -- -- 0.23 0.22 ------------- ------------ ------------ ------------- ------------ ------------ Earnings (loss) per common share $ 0.86 0.85 (0.63) (0.63) 0.33 0.32 ============= ============ ============ ============= ============ ============
Options and warrants to purchase approximately 2,300,000 and 4,400,000 shares of common stock were outstanding during the fiscal years ended March 31, 2002 and 2000, 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. Options and warrants to purchase 3,200,000 shares for the year ended March 31, 2001, were outstanding but were not included in the computation of diluted EPS because their effect would be antidilutive due to a loss for the period. (q) Advertising Expense Advertising expense, net of advertising reimbursements, totaled approximately $216,683, $627,662 and $952,000 for the fiscal years ended March 31, 2002, 2001, and 2000, respectively. 35 (r) Statements of Cash Flows The Company had the following non-cash transactions for the fiscal years ended March 31:
2002 2001 2000 ------------------- -------------------- -------------------- Cash paid (received) for: Interest $ 27,329 253,211 656,723 Income taxes, net of refunds 125,380 111,701 (1,645,085) Noncash financing and investing activities: Reclassification of accounts receivable to other assets and other investments -- -- 1,023,794 Issuance of warrants -- -- (544,139) Tax benefit from stock option exercises (261,819) -- (27,699) Receipt of note receivable in litigation settlement (note 10) -- -- 4,000,000 Receipt of common stock in litigation settlement (note 10) -- -- 1,944,375 Change in unrealized gain (loss) on investment securities, net of tax 49,572 215,112 (402,431) Receipt (forgiveness) of note receivable in exchange for stock (7,350,621) 7,728,186 -- Exchange of investment in Rentrak Japan for Rentrak common stock 3,890,500
(s) 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 statement establishes presentation and disclosure requirements for reporting comprehensive income. Comprehensive income includes charges or credits to equity that are not the result of transactions with shareholders. Components of the Company's comprehensive income (loss) which 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 (loss), and foreign currency translation adjustments as of March 31 are as follows: 36
2002 2001 2000 ------------------- -------------------- -------------------- Foreign currency translation adjustments $ 180,453 -- -- Unrealized gains (losses) on securities: Holding gains (losses) arising during the period, net of tax 60,844 (12,470) (534,988) Less reclassification adjustment for gains (losses) included in net income, net of tax 11,272 (227,582) (132,557) ------------------- -------------------- -------------------- Change in unrealized gain (loss) on investment securities, net of tax 49,572 215,112 (402,431) ------------------- -------------------- -------------------- Other Comprehensive Income (Loss) $ 230,025 215,112 (402,431) =================== ==================== ====================
(t) Impairment of Long-Lived Assets Long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell, and depreciation ceases. (u) New Accounting Standards In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141, "Business Combinations," effective July 1, 2001, and SFAS 141 requires use of the purchase method of accounting for acquisitions. To date, the adoption of SFAS 141 has not had a material impact on the Company's financial condition or results of operations. In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets," effective for the Company on April 1, 2002. SFAS 142 specifies that goodwill and some intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. The Company expects that adoption of SFAS 142 will not have a material impact on the Company's financial condition or results of operations. In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations," which will be effective for the Company on April 1, 2002. SFAS 143 addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company expects that 37 adoption of SFAS 143 will not have a material impact on the Company's financial condition or results of operations. In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS 144 also supersedes the accounting and reporting provisions of APB No. 30, Reporting the Effects of Disposal of a Segment of a Business, for the disposal of a segment of a business. The effective date for implementation of SFAS 144 is for fiscal years beginning after December 15, 2001; however, early adoption is permitted. SFAS 144 retains many of the fundamental provisions of SFAS 121, but resolves certain implementation issues. The Company expects that the adoption of SFAS 144 will not have a material impact on the Company's financial condition or results of operations. In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," effective for the Company on April 1, 2003. SFAS 145 rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt", and an amendment of that Statement, SFAS 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS 145 also rescinds SFAS 44, "Accounting for Intangible Assets of Motor Carriers." SFAS 145 amends SFAS 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company expects that the adoption of SFAS 145 will not have a material impact on the Company's financial condition or results of operations. (v) 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 value Unrealized Unrealized Fair value gross gain gross loss ----------------- ----------------- ----------------- ------------------ 2002: Available for sale - noncurrent: Corporate securities $ -- -- -- -- 2001: Available for sale - noncurrent: Corporate securities 143,333 13 (79,969) 63,353
38 (3) Property and Equipment Property and equipment, at cost, consists of:
March 31 ------------------------------------------- 2002 2001 -------------------- -------------------- Furniture and fixtures $ 8,670,052 8,532,210 Machinery and equipment 2,183,128 1,875,159 Leasehold improvements 1,914,045 2,092,844 -------------------- -------------------- 12,767,343 12,500,213 Less accumulated depreciation (8,859,594) (8,060,440) -------------------- -------------------- $ 3,907,631 4,439,773 ==================== ====================
During 2001, management assessed the operations of 3PF and made the decision to forgo the renewal of a lease of one of its three warehouses. In conjunction with this decision, the assets associated with this building including racking and storage equipment were written down to fair market value, as determined by a third party. The total loss on the write-down of these assets approximated $425,000. This amount is included in cost of sales in the accompanying statement of operations. (4) 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 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 financings, 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). 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. During fiscal 2001, the Company discontinued new financings under this retailer financing program. Write-offs of assets associated with this program during fiscal 2001 were $6,100,000, including $4,400,000 due to the Company from Video Update, Inc. The Company seeks to enforce agreements entered into in connection with this program in accordance with their terms to the extent practicable. 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. 39 As of March 31, 2002 and 2001 the Company had invested or loaned approximately $6,600,000 under the program and had provided reserves of approximately $6,600,000. These balances are included in other assets. The activity in the total reserves for the retailer financing program is as follows for the fiscal years ended March 31:
2002 2001 -------------------- -------------------- Beginning balance $ 6,598,514 5,684,183 Additions to reserve 50,000 925,216 Write-offs -- -- Recoveries (72,760) (10,885) -------------------- -------------------- Ending balance $ 6,575,754 6,598,514 ==================== ====================
(5) Line of Credit In May 2000 the Company obtained a 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 line is payable monthly at the bank's prime rate plus 1/4 percent (5.0 percent at March 31, 2002). 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 restrictions. Based upon the financial results reported as of March 31, 2002 and the twelve month period then ended, the Company was in compliance with the three financial covenants at March 31, 2002. At March 31, 2002, the Company had no outstanding borrowings under this agreement. On May 26, 2002, the Company cancelled its line of credit described above. On May 30, 2002, the Company entered into an agreement for a new secured revolving line of credit. The line of credit carries a maximum limit of $4,500,000 and expires in May 2003. The Company has the choice of either the bank's prime interest rate or LIBOR +2%. The line is secured by substantially all of the Company's assets. The terms of the credit agreement include financial covenants requiring: (1) $16 million of tangible net worth to be maintained at all times; (2) a consolidated net profit to be achieved each fiscal quarter beginning with the quarter ending September 30, 2002 of a minimum of $1.00; (3) minimum year to date profit of $1.00 (excluding certain exempted expenses) beginning with the quarter ending September 30, 2002; and (4) achievement of specific current and leverage financial ratios. The Company anticipates that it will be in compliance with these covenants throughout the term of the agreement. (6) Related Party Note Payable During fiscal 2000, the Company's subsidiary, Blowout Video Holding Company, entered into a $3,000,000 line of credit with a former director of the Company. The line was to expire in August 2002 and accrued interest at prime plus 1 1/2%. The line was secured by substantially all the assets of BlowOut Video Holding Company. This agreement was cancelled by the Company in fiscal 2001. 40 (7) Income Taxes The provision (benefit) for income taxes is as follows for the fiscal years ended March 31:
2002 2001 2000 ------------------- -------------------- -------------------- Current tax (benefit) provision: Federal $ 309,585 -- -- State 31,000 -- 125,192 ------------------- -------------------- -------------------- 340,585 -- 125,192 Deferred tax provision (benefit) 5,171,886 (4,514,575) 325,367 ------------------- -------------------- -------------------- Income tax provision (benefit) $ 5,512,471 (4,514,575) 450,559 =================== ==================== ====================
The reported provision (benefit) 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 (benefit) for income taxes as follows for the fiscal years ended March 31:
2002 2001 2000 ------------------- -------------------- -------------------- Provision (benefit) computed at statutory rates $ 4,932,211 (4,111,261) 510,633 State taxes, net of federal benefit 580,261 (468,098) 59,474 Amortization of warrants 22,800 140,027 193,667 Recognition of net operating loss carryforward -- -- (131,507) Other (22,801) (75,243) (181,708) ------------------- -------------------- -------------------- $ 5,512,471 (4,514,575) 450,559 =================== ==================== ====================
41 Deferred tax assets and (liabilities) from continuing operations are comprised of the following components at March 31, 2002 and 2001:
2002 2001 -------------------- -------------------- Deferred tax assets: Current: Allowance for doubtful accounts $ 222,643 449,138 Program supplier reserves 510,842 520,614 Foreign tax credit -- 500,000 Net operating loss carryforward 960,244 4,616,162 Unrealized loss on investments 119,015 119,015 Capital loss carry forward -- 279,407 Deferred revenue 144,060 473,453 Other 338,763 361,477 -------------------- -------------------- Total current deferred tax assets 2,295,567 7,319,266 -------------------- -------------------- Noncurrent: Depreciation 204,996 445,631 Retailer financing program reserve 663,040 671,689 Foreign tax credit -- 1,000,000 Deferred revenue -- 144,060 Other 134,846 158,254 -------------------- -------------------- Total noncurrent deferred tax assets 1,002,882 2,419,634 -------------------- -------------------- Total deferred tax assets $ 3,298,449 9,738,900 ==================== ====================
As of March 31, 2002, the Company has estimated NOL carryforwards for federal income tax return purposes of approximately $2,500,000, which expire in 2021. Although realization of the deferred tax assets is not assured, management believes it is more likely than not that the Company will ultimately realize all of its deferred tax assets. (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 may not exceed 800,000. 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 2,075,000, including an increase of 475,000 shares approved by the Board in May 2002, subject to shareholder approval. The plans are administered by the Compensation 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 one to five years and expire ten years after date of grant. As of March 31, 2002, the Company had 457,092 and 440,938 options available to be granted under the 1997 Non-Officer Employee Stock Option Plan and 1997 Equity Participation Plan, respectively. 42 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 2002, 2001, and 2000, using the Black-Scholes option pricing model as prescribed by SFAS 123 and the following assumptions:
2002 2001 2000 ------------------- -------------------- -------------------- Risk-free interest rate 4.08- 5.47% 4.77 - 6.82% 5.37 - 6.91% Expected dividend yield 0% 0% 0% Expected lives 5 - 10 years 5 - 10 years 5 - 10 years Expected volatility 81.28% 78.21% 72.20%
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 (loss) and earnings (loss) per common share reflected on the March 31, 2002, 2001, and 2000 consolidated statements of operations would have been the following unaudited pro forma amounts:
2002 2001 2000 ------------------- -------------------- -------------------- Net income (loss): As reported $ 8,994,031 (7,577,368) 3,424,806 Pro forma 8,432,485 (8,156,972) 2,293,758 Basic earnings (loss) per share: As reported 0.86 (0.63) 0.33 Pro forma 0.81 (0.68) 0.22 Diluted earnings (loss) per share: As reported 0.85 (0.63) 0.32 Pro forma 0.79 (0.68) 0.21
43 The table below summarizes the plans' activity:
Options outstanding ------------------------------------------- Number of shares Weighted average exercise price -------------------- -------------------- 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 Granted: Option price = fair market value 393,575 3.80 Option price > fair market value 5,420 4.61 Issued (1,721,060) 4.67 Canceled (872,948) 5.12 -------------------- -------------------- Balance at March 31, 2001 1,664,689 4.07 Granted: Option price = fair market value 400,500 3.29 Issued (227,812) 3.22 Canceled (211,918) 4.84 -------------------- -------------------- Balance at March 31, 2002 1,625,459 $ 3.97 ==================== ====================
Using the Black Scholes methodology, the total value of options granted during fiscal years 2002, 2001, and 2000 was approximately $965,000, $1,524,000, and $2,560,000, respectively, 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, 2002, 2001, and 2000 was $3.29, $3.82, and $4.03, respectively. Options to purchase 978,380, 1,026,899, and 2,494,190 shares of common stock were exercisable at March 31, 2002, 2001, and 2000, respectively. These exercisable options had weighted average exercise prices of $4.31, $4.39, and $4.70 at March 31, 2002, 2001, and 2000, respectively. 44 The following table summarizes information about stock options outstanding at March 31, 2002:
Options outstanding Options exercisable ------------------------------------------------------- ------------------------------------ Weighted average Outstanding as remaining Weighted Exercisable as Weighted Range of of March 31, contractual average of March 31, average exercise prices 2002 life exercise price 2002 exercise price ---------------- ---------------- ---------------- --------------- ---------------- ---------------- $ 1.00 - 2.59 40,000 8.8 $ 2.188 5,000 $ 2.189 2.60 - 6.49 1,575,459 6.0 3.979 963,380 4.335 6.50 - 9.50 10,000 7.3 9.500 10,000 9.50 ---------------- ---------------- 1,625,459 978,380 ================ ================
The Company issued warrants in 1995 and 1998 which 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 2002, 2001, and 2000, expense associated with these warrants was approximately $60,000, $368,000, and $510,000, respectively. As of March 31, 2002, warrants to purchase 1,234,562 shares of common stock were outstanding related to the above issuances. 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. EXECUTIVE LOAN PROGRAM In June 2000, the board of directors approved an offer to make loans available to those officers of the Company who were under an employment contract for the purpose of allowing them to exercise their vested, unexercised "out of the money" employee stock options. The purpose of this program was to enable executives to exercise certain of their options and thereby hold shares resulting from the exercise of such options in advance of a possible spin-off or split-up of 3PF, and to enhance the Company's efforts to retain its key employees. The loans under this program bear interest at the federal funds rate in effect on the date of the loan and interest is payable annually. The principal amount of the loan 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 the Company, (2) one year after the borrower leaves the Company'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 upon the exercise of the options. The loans are without recourse (except as to the stock securing the loans) as to principal and are with full recourse 45 against the borrower as to interest. The offer to make these loans expired September 30, 2000. Prior to September 30, 2000, several employees accepted this offer and obtained loans from the Company. Because the loan proceeds were immediately used to pay the exercise price of the options to the Company, there was no net outflow of cash from the Company in connection with these loans. During 2001, a former officer of the Company, who was loaned, on June 16, 2000, $6,629,386 to purchase 1,362,008 shares of stock upon exercise of his employee stock options and, during the quarter ended September 30, 2000, was loaned $721,235 to purchase 133,742 shares of stock upon exercise of his employee stock options, terminated his agreements with the Company. Accordingly, the common stock and related notes receivable totaling $7,350,621 were reversed in a non-cash transaction. (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: 2003 $ 3,341,280 2004 3,241,871 2005 3,274,738 2006 3,109,122 2007 2,915,415 2008 and thereafter 4,164,892 ------------------- $ 20,047,318 =================== 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 $3,581,000, $2,954,000, and $2,335,000 for the fiscal years ended March 31, 2002, 2001, and 2000, 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 are paid in advance. Any advance payments made by the Company that 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 payments 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, 2002 and 2001, the Company has 46 reserved approximately $2,200,000 and $2,400,000, respectively, for potential payments 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 payments, as made, were recorded as a reduction of "net current liabilities of discontinued operations" on the accompanying balance sheet. As of March 31, 2002, all amounts related to this obligation had been paid. OTHER 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 $2,500,000 and also increased its obligation to purchase PPT product. Subsequent to the signing of the agreement, the customer took the position that it was entitled to a refund of the payment, as additional agreements were not finalized as expected. On March 31, 2001, the Company entered into a settlement agreement with the customer whereby $1,600,000 of the $2,500,000 payment was determined to be consideration for modification of the aforementioned existing contract, while the remaining $900,000 was held by the Company as credit to be applied to future receivables generated by the customer. The $900,000 credit is to be allocated towards future receivables at the rate of $75,000 per quarter, beginning with the quarter ended March 31, 2001. The long-term portion of this credit has been included in other long-term liabilities on the accompanying balance sheet. (10) CONTINGENCIES On November 15, 2000, 3PF filed a proceeding with the American Arbitration Association against Reel.com, Inc., a division 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 sought damages in excess of $3,300,000, together with prejudgment interest and attorney fees. On August 6, 2001, Hollywood filed a proceeding with the American Arbitration Association against the Company for the alleged breach of a settlement agreement among the Company, Hollywood, and two individuals dated January 23, 2000, relating to the Company's obligation to provide Hollywood with documents and data with regard to Hollywood's obligation to indemnify the Company against claims by a movie studio. Hollywood sought damages in the amount of $2,000,000. On March 13, 2002, an arbitrator awarded damages to the Company of $1,600,000 related to the November 15, 2000 claim. This amount is reflected as a gain and is included in other income in the accompanying consolidated statement of operations. In April 2002, in a confidential settlement agreement, Hollywood agreed to pay an additional $325,000 to the Company to resolve all outstanding issues between the two parties. On February 20, 2001, the Company filed a complaint against Ron Berger, Chairman and Chief Executive Officer and a director of Rentrak until September 2000, in the Circuit Court of the 47 State of Oregon for the County of Multnomah (No. 0102-01814), seeking cancellation of shares of Rentrak common stock acquired by Mr. Berger through an option loan program offered to the Company's officers in June 2000 and damages for the conversion of an automobile and computer equipment plus an over-advance payment of business expenses less setoffs. On or about March 29, 2001, Mr. Berger filed a counterclaim seeking damages of approximately $1.76 million plus attorney fees from the Company for conversion of Mr. Berger's director's fees and dividends from Rentrak Japan, breach of an agreement to compensate Mr. Berger for cancellation of options to purchase Company stock, failure to pay accumulated wages and compensation, breach of an agreement to provide options to purchase stock in 3PF, and failure to provide certain insurance benefits. On June 15, 2001, the Company filed an amended complaint alleging tort claims arising out of Mr. Berger's activities as an officer and director of the Company involving Video City, Inc., and seeking damages of not less than $6,000,000. Effective May 6, 2002, the parties resolved the litigation pursuant to a confidential settlement agreement pursuant to which the parties agreed to dismiss their respective lawsuits and to seek nothing further from the other in litigation. The Company is also a party 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. (11) EMPLOYEE BENEFIT PLANS On 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 total amount of the Company's contribution is at the discretion of the board of directors. Contributions under the 401(k) Plan for the years ended March 31, 2001 and 2000 were approximately $82,000 and $77,000, respectively. As of March 31, 2002, the board of directors had not made a decision regarding contributions for the year ended March 31, 2002. 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 3,079 shares for aggregate proceeds of $11,005, 4,000 shares for aggregate proceeds of $13,561, and 3,257 shares for aggregate proceeds of $14,370, in fiscal 2002, 2001, and 2000, respectively. 48 (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
2002 2001 2000 ------------------- -------------------- -------------------- Net sales (1): PPT $ 73,715,459 85,735,385 96,390,304 3PF.COM (2) 17,521,877 23,389,443 11,648,725 Other 13,775,151 11,390,382 9,412,898 ------------------- -------------------- -------------------- $ 105,012,487 120,515,210 117,451,927 =================== ==================== ==================== Income (loss) from operations: PPT $ 6,225,420 (6,694,623) 1,892,205 3PF.COM (2) (3,858,411) (3,788,576) (1,131,354) Other 4,244,230 539,929 2,260,390 ------------------- -------------------- -------------------- $ 6,611,239 (9,943,270) 3,021,241 =================== ==================== ==================== Identifiable assets (1): PPT $ 42,186,157 38,202,038 44,571,673 3PF.COM 5,831,188 8,425,876 2,703,360 Other 3,909,735 5,566,431 6,195,923 ------------------- -------------------- -------------------- $ 51,927,080 52,194,345 53,470,956 =================== ==================== ====================
(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 $2,200,000, $3,300,000, and $3,300,000 for the years ended March 31, 2002, 2001, and 2000, respectively. The Company has one program supplier that supplied product that generated 17%, a second that generated 15%, and a third that generated 13% of the Company's revenues for the year ended March 31, 2002. The Company has one program supplier that supplied product that generated 18%, a second that generated 15%, and a third that generated 13% of the Company's revenues for the year ended March 31, 2001. 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. There were no other program suppliers who provided product accounting for more than 10% of sales for the years ended March 31, 2002, 2001, and 2000. 49 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. No customer accounted for more than 10% of the Company's revenue in fiscal 2002, 2001, or 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 statement of operations. There was no remaining liability related to discontinued operations at March 31, 2002. 50 (14) RENTRAK CORPORATION QUARTERLY FINANCIAL DATA FOR THE QUARTERS ENDED JUNE 30, 2000 TO MARCH 31, 2002
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, QUARTER ENDED: 2001 (1) 2001 2001 (2) 2002 (3) ------------------------------------------------------------------------------------------ REVENUE $28,973,887 $23,736,933 $26,432,286 $23,471,041 INCOME FROM OPERATIONS 2,277,726 598,251 1,232,201 2,503,061 NET INCOME 4,694,913 433,785 2,238,688 1,626,645 EARNINGS PER SHARE: BASIC $0.42 $0.04 $0.23 $0.17 DILUTED $0.42 $0.04 $0.23 $0.16 - ------------------------------------------------------------------------------------------------------------------------------------ JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, QUARTER ENDED: 2000 2000 (4) 2000 (5) 2001 (6) ------------------------------------------------------------------------------------------ REVENUE $29,479,624 $24,890,555 $32,784,629 $30,732,147 INCOME (LOSS) FROM OPERATIONS 407,795 (15,248,758) 519,229 4,378,464 NET INCOME (LOSS) 249,999 (9,568,993) 229,510 1,512,116 EARNINGS PER SHARE: BASIC AND DILUTED $0.02 ($0.77) $0.02 $0.12
(1) The June 30, 2001 quarter included results from the Rentrak Japan restructuring agreement. The agreement resulted in the recognition of $6.4 million in royalty revenue and a $5.6 million gain in other income during the quarter. (2) The December 31, 2001 quarter included recovery of a specific allowance in the amount of $0.9 million, established in the June 30, 2001 quarter, for doubtful accounts related to a customer of the Company's subsidiary 3PF.Com, Inc. The quarter also included other income of $2.4 million related to the Rentrak Japan restructuring. (3) The March 31, 2002 quarter included recognition of a $1.6 million gain from a litigation settlement with a prior customer, as well as recovery in the amount of $0.7 million of a specific allowance, established in the December 31, 2000 quarter, for doubtful accounts related to a customer of the Company's subsidiary 3PF.Com, Inc. (4) The September 30, 2000 quarter included significant charges primarily related to accounts receivable write-offs, write-off of investments, costs associated with a proxy contest, and a severance payment to the Company's former chairman and chief executive officer. (5) The December 31, 2000 quarter included a specific allowance for doubtful accounts in the amount of $0.9 million related to a customer of the Company's subsidiary 3PF.Com, Inc. (6) The March 31, 2001 quarter included recognition of $1.6 million in revenue from a customer in exchange for cancellation of certain of the Company's rights. 51 RENTRAK CORPORATION Valuation and Qualifying Accounts Schedule II
Balance at Charged to Balance at Beginning of Write Off and Other Recoveries End of Year Ended: Period Expenses Accounts (Deductions) Period - ------------------------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts March 31, 2000 $ 355,241 6,341,030 - (5,859,326) 836,945 March 31, 2001 836,945 7,758,211 - (6,505,081) 2,090,075 March 31, 2002 2,090,075 (1,546,300) - 542,368 1,086,143 Advances to program suppliers reserve March 31, 2000 $ 1,165,160 110,918 - - 1,276,078 March 31, 2001 1,276,078 93,959 - - 1,370,037 March 31, 2002 1,370,037 - - (25,717) 1,344,320 Other Current Assets- Retailer Financing Program reserve (500,000) March 31, 2000 $ 994,935 - 1 - 494,935 March 31, 2001 494,935 343,500 - - 838,435 March 31, 2002 838,435 - - - 838,435 Other Assets- Retailer Financing Program reserve (4,615,665) March 31, 2000 $ 8,580,753 1,245,157 2 (20,997) 5,189,248 March 31, 2001 5,189,248 581,715 - (10,884) 5,760,079 March 31, 2002 5,760,079 50,000 - (72,760) 5,737,319 1 - Reclassified from Other Current Assets to Other Assets. 2 - Eliminated against Other Assets.
52 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On May 9, 2002, the Audit Committee of our Board of Directors approved the dismissal of our independent public accountants, Arthur Andersen LLP. Arthur Andersen LLP's reports on our financial statements for the fiscal years ended March 31, 2001 and 2000 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. During fiscal years ended March 31, 2001 and 2000, and during the subsequent interim periods through the date of dismissal, May 9, 2002, there have not been any disagreements between us and Arthur Andersen LLP on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, or any reportable events as defined under Item 304(a)(1)(v) of Regulation S-K promulgated by the Securities and Exchange Commission. Also, on May 9, 2002, based on the recommendation of the Audit Committee of our Board of Directors, we engage the firm of KPMG LLP to be our independent public accountants. We did not consult KPMG LLP at any time prior to May 9, 2002, with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, or concerning any disagreement or reportable event with Arthur Andersen LLP. We have been unable to obtain the consent of Arthur Andersen LLP, our former independent public accountants, as to the incorporation by reference of their report for our fiscal years ended March 31, 2001 and March 31, 2000, into our previously filed registration statements under the Securities Act of 1933, and we have not filed that consent with the Annual Report on Form 10-K in reliance upon Rule 437a of the Securities Act of 1933. Because we have not been able to obtain Arthur Andersen LLP's consent, you may not be able to recover against Arthur Andersen LLP under Section 11 of the Securities Act for any untrue statements of a material fact contained in our financial statements audited by Arthur Andersen LLP or any omission to state a material fact required to be stated therein. 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 2002 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", "Executive Officers" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934." 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 2002 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." 53 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 2002 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 Management". 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 2002 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". 54 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT 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 as follows: Independent Auditor's Report Report of Independent Public Accountants Consolidated Balance Sheets as of March 31, 2002 and 2001 Consolidated Statements of Operations for the Years Ended March 31, 2002, 2001 and 2000 Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows for the Years Ended March 31, 2002, 2001 and 2000 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 2002, the Company filed no reports on Form 8-K. 55 (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. 56 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 28, 2002 -------------------------------------- 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 and Director: By /S/ Paul A. Rosenbaum June 28, 2002 ------------------------ Paul A. Rosenbaum, Chairman and Chief Executive Officer and Director Principal Financial Officer: By /S/ Mark L. Thoenes June 28, 2002 -------------------------- Mark L. Thoenes, Chief Financial Officer Majority of Directors: *By /S/ Cecil D. Andrus June 28, 2002 --------------------------- Cecil D. Andrus, Director *By /S/ George H. Kuper June 28, 2002 ------------------------ George H. Kuper, Director *By /S/ Joon S. Moon June 28, 2002 -------------------------- Joon S. Moon, Director *By /S/ James G. Petcoff June 28, 2002 ------------------------ James G. Petcoff, Director *By /S/ Stanford Stoddard June 28, 2002 ------------------------ Stanford Stoddard, Director *By /S/ Mark L. Thoenes June 28, 2002 ------------------------ Mark L. Thoenes, Attorney-in-Fact 57 EXHIBIT INDEX The following exhibits are filed herewith or, if followed by a number in parentheses, are incorporated herein by reference from the corresponding exhibit filed in the report or registration statement identified in the footnotes following this index: Exhibit Number Exhibit 2 Agreement Concerning Changes to Business Cooperation Agreement (Framework) between Rentrak Japan Co., Ltd. and Rentrak Corporation. (1) 3.1 Amended and Restated Articles of Incorporation and amendments thereto. (2) 3.2 1995 Restated Bylaws, as amended to date. (3) 10.1* 1986 Second Amended and Restated Stock Option Plan and Forms of Stock Option Agreements. (4) 10.2* Amendment to 1986 Second Amended and Restated Stock Option Plan dated May 19, 2000. (5) 10.3 Guarantee Agreement dated as of June 26, 1996, between Rentrak Corporation and BlowOut Entertainment, Inc. (6) 10.4* Amended and Restated Employment Agreement with Marty Graham dated May 17, 1997. (7) 10.5* Addendum to Employment Agreement with Marty Graham dated June 8, 2000. (8) 10.6* Amendment to Employment Agreement with Marty Graham dated September 1, 2000. (9) 10.7* Employment Agreement with Michael Lightbourne dated July 10, 1997. (10) 10.8* Employment Agreement with Christopher Roberts dated October 27, 1997. (11) 10.9* Addendum to Employment Agreement with Christopher Roberts dated June 8, 2000. (12) 10.10* The 1997 Equity Participation Plan of Rentrak Corporation, as amended. 10.11* Form of Non-Qualified Stock Option Agreement under 1997 Equity Participation Plan. (13) 10.12* Form of Incentive Stock Option Agreement under 1997 Equity Participation Plan. (14) 10.13* Employment Agreement with F. Kim Cox dated April 1, 1998. (15) 58 10.14* Promissory Note of Michael Lightbourne dated August 30, 2000. (16) 10.15* Loan Agreement with Michael Lightbourne dated August 30, 2000. (17) 10.16* Stock Pledge Agreement with Michael Lightbourne dated August 30, 2000. (18) 10.17 Loan and Security Agreement with Guaranty Business Credit Corporation dated May 26, 2000. (19) 10.18 General Continuing Guarantee with Guaranty Business Credit Corporation dated May 26, 2000. (20) 10.19* Employment Agreement with Mark L. Thoenes dated January 1, 2001. (21) 10.20* Employment Agreement with Timothy J. Erwin dated January 1, 2001. (22) 10.21* Employment Agreement with Richard A. Nida dated August 14, 1998, with Addendum dated June 8, 2000. (23) 10.22 Rights Agreement dated as of May 18, 1995, between Rentrak Corporation and U.S. Stock Transfer Corporation. (24) 10.23* Letter Agreement between Rentrak Corporation and Joon S. Moon entered into as of March 15, 2001. (25) 10.24* Incentive Stock Option Agreement with Paul A. Rosenbaum dated March 30, 2001. (26) 10.25* Non-Qualified Stock Option Agreement with Paul A. Rosenbaum dated March 30, 2001. (27) 10.26* Employment Agreement with Amir Yazdani dated July 1, 2001. (28) 10.27* Employment Agreement with Paul A. Rosenbaum dated October 1, 2001. (29) 10.28* Consulting Agreement with George H. Kuper dated April 24, 2001. 10.29* The 1997 Non-Officer Employee Stock Option Plan of Rentrak Corporation. (30) 10.30* Amendment to the 1997 Non-Officer Employee Stock Option Plan of Rentrak Corporation. (31) 10.31 Second Amendment to the 1997 Non-Officer Employee Stock Option Plan of Rentrak Corporation. 21 List of Subsidiaries of Registrant. 59 23 Consent of KPMG LLP. 99 Description of Capital Stock of Rentrak Corporation. (30) 60 *Management Contract or Compensatory Plan or Arrangement. 1. Filed as Exhibit 2 to Form 8-K filed on April 17, 2001. 2. Filed in Form S-3 Registration Statement, File No. 33-8511, filed on November 21, 1994. 3. Filed as Exhibit 3.1 to Form 10-Q filed on February 14, 2001. 4. Filed as Exhibit 10.1 to 1993 Form 10-K filed on June 28, 1993 (File No. 0-15159). 5. Filed as Exhibit 10.30 to 2000 Form 10-K filed on June 29, 2000. 6. Filed as Exhibit 2 to Form 8-K filed on December 9, 1996. 7. Filed as Exhibit 10.1 to Form 10-Q filed on November 3, 1997. 8. Filed as Exhibit 10.23 to 2000 Form 10-K filed on June 29, 2000. 9. Filed as Exhibit 10.13 to 2001 Form 10-K filed on June 29, 2001. 10. Filed as Exhibit 10.2 to Form 10-Q filed on November 3, 1997. 11. Filed as Exhibit 10.3 to Form 10-Q filed on November 3, 1997. 12. Filed as Exhibit 10.24 to 2000 Form 10-K filed on June 29, 2000. 13. Filed as Exhibit 10.14 to Amendment No. 1 to 2001 Form 10-K filed on August 14, 2001. 14. Filed as Exhibit 10.15 to Amendment No. 1 to 2001 Form 10-K filed on August 14, 2001. 15. Filed as Exhibit 10.2 to Form 10-Q filed on November 6, 1998. 16. Filed as Exhibit 10.17 to 2001 Form 10-K filed on June 29, 2001. 17. Filed as Exhibit 10.18 to 2001 Form 10-K filed on June 29, 2001. 18. Filed as Exhibit 10.19 to 2001 Form 10-K filed on June 29, 2001. 19. Filed as Exhibit 10.27 to 2000 Form 10-K filed on June 29, 2000. 20. Filed as Exhibit 10.28 to 2000 Form 10-K filed on June 29, 2000. 21. Filed as Exhibit 10.25 to 2001 Form 10-K filed on June 29, 2001. 22. Filed as Exhibit 10.26 to 2001 Form 10-K filed on June 29, 2001. 23. Filed as Exhibit 10.27 to 2001 Form 10-K filed on June 29, 2001. 61 24. Filed as Exhibit 4 to Form 8-K filed on June 5, 1995. 25. Filed as Exhibit 10.29 to 2001 Form 10-K filed on June 29, 2001. 26. Filed as Exhibit 10.30 to 2001 Form 10-K filed on June 29, 2001. 27. Filed as Exhibit 10.31 to 2001 Form 10-K filed on June 29, 2001. 28. Filed as Exhibit 10.1 to Form 10-Q filed on November 13, 2001. 29. Filed as Exhibit 10.1 to Form 10-Q filed on February 14, 2002. 30. Filed as Exhibit 4.1 to Form S-8 filed on June 5, 1997. 31. Filed as Exhibit 4.1 to Form S-8 filed on October 29, 1997. 32. Filed as Exhibit 99 to 2001 Form 10-K filed on June 29, 2001. 62 EX-10 3 rcex10-10.txt THE 1997 EQUITY PARTICIPATION PLAN OF RENTRAK CORPORATION Rentrak Corporation, an Oregon corporation, has adopted The 1997 Equity Participation Plan of Rentrak Corporation (the "Plan"), effective February 27, 1997, for the benefit of its eligible employees, consultants and directors. The Plan consists of two plans, one for the benefit of Employees (as such term is defined below) and consultants and one for the benefit of Independent Directors (as such term is defined below). The purposes of this Plan are as follows: (1) To provide an additional incentive for directors, Employees and consultants to further the growth, development and financial success of the Company by personally benefiting through the ownership of Company stock and/or rights which recognize such growth, development and financial success. (2) To enable the Company to obtain and retain the services of directors, Employees and consultants considered essential to the long range success of the Company by offering them an opportunity to own stock in the Company and/or rights which will reflect the growth, development and financial success of the Company. ARTICLE I. DEFINITIONS 1.1 GENERAL. Wherever the following terms are used in this Plan they shall have the meanings specified below, unless the context clearly indicates otherwise. 1.2 AWARD LIMIT. "Award Limit" shall mean 400,000 shares of Common Stock. 1.3 BOARD. "Board" shall mean the Board of Directors of the Company. 1.4 CHANGE IN CONTROL. "Change in Control" shall mean a change in ownership or control of the Company effected through either of the following transactions: (a) Any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of securities possessing more than 50 percent of the total combined voting power of the Company's outstanding securities pursuant to a tender or exchange offer made directly to the Company's stockholders which the Board does not recommend such stockholders to accept; or 1 (b) There is a change in the composition of the Board over a period of thirty-six (36) consecutive months (or less) such that a majority of the Board members (rounded up to the nearest whole number) ceases, by reason of one or more proxy contests for the election of Board members, to be comprised of individuals who either (i) have been Board members continuously since the beginning of such period or (ii) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (i) who were still in office at the time such election or nomination was approved by the Board. 1.5 CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.6 COMMITTEE. "Committee" shall mean the Stock Option Committee of the Board, or another committee of the Board, appointed as provided in Section 8.1. 1.7 COMMON STOCK. "Common Stock" shall mean the common stock of the Company, par value $.001 per share, and any equity security of the Company issued or authorized to be issued in the future, but excluding any preferred stock and any warrants, options or other rights to purchase Common Stock. Debt securities of the Company convertible into Common Stock shall be deemed equity securities of the Company. 1.8 COMPANY. "Company" shall mean Rentrak Corporation, an Oregon corporation. 1.9 CORPORATE TRANSACTION. "Corporate Transaction" shall mean any of the following stockholder-approved transactions to which the Company is a party: (a) A merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the State in which the Company is incorporated, form a holding company or effect a similar reorganization as to form whereupon this Plan and all Options are assumed by the successor entity; (b) The sale, transfer, exchange or other disposition of all or substantially all of the assets of the Company, in complete liquidation or dissolution of the Company in a transaction not covered by the exceptions to clause (a), above; or (c) Any reverse merger in which the Company is the surviving entity but in which securities possessing more than 50 percent of the total combined voting power of the Company's outstanding securities are transferred or issued to a person or persons different from those who held such securities immediately prior to such merger. 1.10 DEFERRED STOCK. "Deferred Stock" shall mean Common Stock awarded under Article VII of this Plan. 1.11 DIRECTOR. "Director" shall mean a member of the Board. 2 1.12 DIVIDEND EQUIVALENT. "Dividend Equivalent" shall mean a right to receive the equivalent value (in cash or Common Stock) of dividends paid on Common Stock, awarded under Article VII of this Plan. 1.13 EMPLOYEE. "Employee" shall mean any officer or other employee (as defined in accordance with Section 3401(c) of the Code) of the Company, or of any corporation which is a Subsidiary. 1.14 EXCHANGE ACT. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 1.15 FAIR MARKET VALUE. "Fair Market Value" as of a given date means the value of a share of Common Stock which is equal to (i) the last sale price of the Common Stock as reported on such date, or if no sales are reported on that date, then the last preceding date on which a sale was reported, if the Common Stock is listed on a national securities exchange or quoted on the Nasdaq Stock Market ("Nasdaq"); (ii) the average of the closing representative bid and asked prices of the Common Stock reported on such date, or if no prices are reported on such date, then the last preceding date on which prices are reported, if the Common Stock is not listed on any national securities exchange or quoted on Nasdaq but is traded in the over-the-counter market; or (iii) the fair market value of a share of Common Stock as determined by the Committee (or the Board, in the case of Options granted to Independent Directors) acting in good faith, if the Common Stock is not listed on a national securities exchange, quoted on Nasdaq, or traded in the over-the-counter market. 1.16 GRANTEE. "Grantee" shall mean an Employee or consultant granted a Performance Award, Dividend Equivalent, Stock Payment, or an award of Deferred Stock, under this Plan. 1.17 INCENTIVE STOCK OPTION. "Incentive Stock Option" shall mean an option which conforms to the applicable provisions of Section 422 of the Code and which is designated as an Incentive Stock Option by the Committee. 1.18 INDEPENDENT DIRECTOR. "Independent Director" shall mean a member of the Board who is not an Employee of the Company. 1.19 NON-QUALIFIED STOCK OPTION. "Non-Qualified Stock Option" shall mean an Option which is not designated as an Incentive Stock Option by the Committee. 1.20 OPTION. "Option" shall mean a stock option granted under Article III of this Plan. An Option granted under this Plan shall, as determined by the Committee, be either a Non-Qualified Stock Option or an Incentive Stock Option; PROVIDED, HOWEVER, that Options granted to Independent Directors and consultants shall be Non-Qualified Stock Options. 1.21 OPTIONEE. "Optionee" shall mean an Employee, consultant or Independent Director granted an Option under this Plan. 3 1.22 PERFORMANCE AWARD. "Performance Award" shall mean a cash bonus, stock bonus or other performance or incentive award that is paid in cash, Common Stock or a combination of both, awarded under Article VII of this Plan. 1.23 PLAN. "Plan" shall mean The 1997 Equity Participation Plan of Rentrak Corporation. 1.24 QDRO. "QDRO" shall mean a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. 1.25 RESTRICTED STOCK. "Restricted Stock" shall mean Common Stock awarded under Article VI of this Plan. 1.26 RESTRICTED STOCKHOLDER. "Restricted Stockholder" shall mean an Employee or consultant granted an award of Restricted Stock under Article VI of this Plan. 1.27 RULE 16B-3. "Rule 16b-3" shall mean that certain Rule 16b-3 under the Exchange Act, as such Rule may be amended from time to time. 1.28 SECTION 162(M) PARTICIPANT. "Section 162(m) Participant" shall mean any Employee designated by the Committee as an Employee whose compensation for the fiscal year in which the Employee is so designated or a future fiscal year may be subject to the limit on deductible compensation imposed by Section 162(m) of the Code. 1.29 STOCK PAYMENT. "Stock Payment" shall mean (i) a payment in the form of shares of Common Stock, or (ii) an option or other right to purchase shares of Common Stock, as part of a deferred compensation arrangement, made in lieu of all or any portion of the compensation, including without limitation, salary, bonuses and commissions, that would otherwise become payable to an Employee or consultant in cash, awarded under Article VII of this Plan. 1.30 SUBSIDIARY. "Subsidiary" shall mean any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 1.31 TERMINATION OF CONSULTANCY. "Termination of Consultancy" shall mean the time when the engagement of an Optionee, Grantee or Restricted Stockholder as a consultant to the Company or a Subsidiary is terminated for any reason, with or without cause, including, but not by way of limitation, by resignation, discharge, death or retirement; but excluding terminations where there is a simultaneous commencement of employment with the Company or any Subsidiary. The Committee, in its absolute discretion, shall determine the effect of all matters and questions relating to Termination of Consultancy, including, but not by way of limitation, the question of whether a Termination of Consultancy resulted from a discharge for good cause, and all questions of whether particular leaves of absence constitute Terminations of Consultancy. Notwithstanding any other provision of this Plan, the Company or any Subsidiary has an absolute and unrestricted right to terminate a consultant's service at any time for any 4 reason whatsoever, with or without cause, except to the extent expressly provided otherwise in writing. 1.32 TERMINATION OF DIRECTORSHIP. "Termination of Directorship" shall mean the time when an Optionee who is an Independent Director ceases to be a Director for any reason, including, but not by way of limitation, a termination by resignation, failure to be elected, death or retirement. The Board, in its sole and absolute discretion, shall determine the effect of all matters and questions relating to Termination of Directorship with respect to Independent Directors. 1.33 TERMINATION OF EMPLOYMENT. "Termination of Employment" shall mean the time when the employee-employer relationship between an Optionee, Grantee or Restricted Stockholder and the Company or any Subsidiary is terminated for any reason, with or without cause, including, but not by way of limitation, a termination by resignation, discharge, death, disability or retirement; but excluding (i) terminations where there is a simultaneous reemployment or continuing employment of an Optionee, Grantee or Restricted Stockholder by the Company or any Subsidiary, (ii) at the discretion of the Committee, terminations which result in a temporary severance of the employee-employer relationship, and (iii) at the discretion of the Committee, terminations which are followed by the simultaneous establishment of a consulting relationship by the Company or a Subsidiary with the former employee. The Committee, in its absolute discretion, shall determine the effect of all matters and questions relating to Termination of Employment, including, but not by way of limitation, the question of whether a Termination of Employment resulted from a discharge for good cause, and all questions of whether particular leaves of absence constitute Terminations of Employment; PROVIDED, HOWEVER, that, unless otherwise determined by the Committee in its discretion, a leave of absence, change in status from an employee to an independent contractor or other change in the employee-employer relationship shall constitute a Termination of Employment if, and to the extent that, such leave of absence, change in status or other change interrupts employment for the purposes of Section 422(a)(2) of the Code and the then applicable regulations and revenue rulings under said Section. Notwithstanding any other provision of this Plan, the Company or any Subsidiary has an absolute and unrestricted right to terminate an Employee's employment at any time for any reason whatsoever, with or without cause, except to the extent expressly provided otherwise in writing. ARTICLE II. SHARES SUBJECT TO PLAN 2.1 SHARES SUBJECT TO PLAN. (a) The shares of stock subject to Options, awards of Restricted Stock, Performance Awards, Dividend Equivalents, awards of Deferred Stock or Stock Payments shall be Common Stock, initially shares of the Company's Common Stock, par value $.001 per share. The aggregate number of such shares which may be issued upon exercise of such options or rights or upon any such awards under the Plan shall not exceed two million seventy-five thousand (2,075,000). The shares of Common Stock issuable upon exercise of such options or rights or upon any such awards may be either previously authorized but unissued shares or treasury shares. 5 (b) The maximum number of shares which may be subject to Options granted under the Plan to any individual in any fiscal year shall not exceed the Award Limit. To the extent required by Section 162(m) of the Code, shares subject to Options which are canceled continue to be counted against the Award Limit and if, after grant of an Option, the price of shares subject to such Option is reduced, the transaction is treated as a cancellation of the Option and a grant of a new Option and both the Option deemed to be canceled and the Option deemed to be granted are counted against the Award Limit. 2.2 ADD-BACK OF OPTIONS AND OTHER RIGHTS. If any Option, or other right to acquire shares of Common Stock under any other award under this Plan, expires or is canceled without having been fully exercised, or is exercised in whole or in part for cash as permitted by this Plan, the number of shares subject to such Option or other right but as to which such Option or other right was not exercised prior to its expiration, cancellation or exercise may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. Furthermore, any shares subject to Options or other awards which are adjusted pursuant to Section 9.3 and become exercisable with respect to shares of stock of another corporation shall be considered canceled and may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. Shares of Common Stock which are delivered by the Optionee or Grantee or withheld by the Company upon the exercise of any Option or other award under this Plan, in payment of the exercise price thereof, may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. If any share of Restricted Stock is forfeited by the Grantee or repurchased by the Company pursuant to Section 6.6 hereof, such share may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. Notwithstanding the provisions of this Section 2.2, no shares of Common Stock may again be optioned, granted or awarded if such action would cause an Incentive Stock Option to fail to qualify as an incentive stock option under Section 422 of the Code. ARTICLE III. GRANTING OF OPTIONS 3.1 ELIGIBILITY. Any Employee or consultant selected by the Committee pursuant to Section 3.4(a)(i) shall be eligible to be granted an Option. Each Independent Director of the Company shall be eligible to be granted Options at the times and in the manner set forth in Section 3.4(d). 3.2 DISQUALIFICATION FOR STOCK OWNERSHIP. No person may be granted an Incentive Stock Option under this Plan if such person, at the time the Incentive Stock Option is granted, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any then existing Subsidiary or parent corporation (within the meaning of Section 422 of the Code) unless such Incentive Stock Option conforms to the applicable provisions of Section 422 of the Code. 3.3 QUALIFICATION OF INCENTIVE STOCK OPTIONS. No Incentive Stock Option shall be granted to any person who is not an Employee. 3.4 GRANTING OF OPTIONS 6 (a) The Committee shall from time to time, in its absolute discretion, and subject to applicable limitations of this Plan: (i) Select from among the Employees or consultants (including Employees or consultants who have previously received Options or other awards under this Plan) such of them as in its opinion should be granted Options; (ii) Subject to the Award Limit, determine the number of shares to be subject to such Options granted to the selected Employees or consultants; (iii) Subject to Section 3.3, determine whether such Options are to be Incentive Stock Options or Non-Qualified Stock Options and whether such Options are to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code; and (iv) Determine the terms and conditions of such Options, consistent with this Plan; PROVIDED, HOWEVER, that the terms and conditions of Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall include, but not be limited to, such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code. (b) Upon the selection of an Employee or consultant to be granted an Option, the Committee shall instruct the Secretary of the Company to issue the Option and may impose such conditions on the grant of the Option as it deems appropriate. Without limiting the generality of the preceding sentence, the Committee may, in its discretion and on such terms as it deems appropriate, require as a condition on the grant of an Option to an Employee or consultant that the Employee or consultant surrender for cancellation some or all of the unexercised Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Dividend Equivalents or Stock Payments or other rights which have been previously granted to him under this Plan or otherwise. An Option, the grant of which is conditioned upon such surrender, may have an option price lower (or higher) than the exercise price of such surrendered Option or other award, may cover the same (or a lesser or greater) number of shares as such surrendered Option or other award, may contain such other terms as the Committee deems appropriate, and shall be exercisable in accordance with its terms, without regard to the number of shares, price, exercise period or any other term or condition of such surrendered Option or other award. (c) Any Incentive Stock Option granted under this Plan may be modified by the Committee to disqualify such option from treatment as an "incentive stock option" under Section 422 of the Code. (d) (i) During the term of the Plan, each person who is an Independent Director shall automatically be granted an Option to purchase ten thousand (10,000) shares of Common Stock (subject to adjustment as provided in Section 9.3) on April 1st of each year; PROVIDED, HOWEVER, that each such person who is Chairman of the Board or of any Board committee shall automatically be granted an Option to purchase an 7 additional two thousand five hundred (2,500) shares of Common Stock (subject to adjustment as provided in Section 9.3) on April 1st of each year. All the foregoing Option grants authorized by this Section 3.4(d)(i) are subject to stockholder approval of the Plan. (ii) The Board may from time to time, in its absolute discretion, and subject to applicable limitations of this Plan: (1) Determine whether, in its opinion, the Independent Directors (or any of them) should be granted Non-Qualified Stock Options in addition to the Options granted pursuant to Section 3.4(d)(i); (2) Subject to the Award Limit, determine the number of shares to be subject to such Non-Qualified Stock Options granted to selected Independent Directors; and (3) Determine the terms and conditions of such Non-Qualified Stock Options, consistent with this Plan. ARTICLE IV. TERMS OF OPTIONS 4.1 OPTION AGREEMENT. Each Option shall be evidenced by a written Stock Option Agreement, which shall be executed by the Optionee and an authorized officer of the Company and which shall contain such terms and conditions as the Committee (or the Board, in the case of Options granted to Independent Directors) shall determine, consistent with this Plan. Stock Option Agreements evidencing Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code. Stock Option Agreements evidencing Incentive Stock Options shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 422 of the Code. 4.2 OPTION PRICE. The price per share of the shares subject to each Option shall be set by the Committee; PROVIDED, HOWEVER, that such price shall be no less than the par value of a share of Common Stock, unless otherwise permitted by applicable state law, and (i) in the case of Incentive Stock Options and Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code, such price shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date the Option is granted; (ii) in the case of Incentive Stock Options granted to an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary or parent corporation thereof (within the meaning of Section 422 of the Code) such price shall not be less than 110% of the Fair Market Value of a share of Common Stock on the date the Option is granted; and (iii) in the case of Options granted to Independent Directors pursuant to Section 3.4(d)(i), such price shall equal 100% of the Fair Market Value of a share of Common Stock on the date the Option is granted. 4.3 OPTION TERM. The term of an Option shall be set by the Committee in its discretion; provided, however, that, (i) in the case of Options granted to Independent Directors pursuant to Section 3.4(d)(i), the term shall be ten (10) years from the date the Option is granted, 8 without variation or acceleration hereunder, but subject to Section 5.6, and (ii) in the case of Incentive Stock Options, the term shall not be more then ten (10) years from the date the Incentive Stock Option is granted, or five (5) years from such date if the Incentive Stock Option is granted to an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary or parent corporation thereof (within the meaning of Section 422 of the Code). Except as limited by requirements of Section 422 of the Code and regulations and rulings thereunder applicable to Incentive Stock Options, the Committee may extend the term of any outstanding Option in connection with any Termination of Employment or Termination of Consultancy of the Optionee, or amend any other term or condition of such Option relating to such a termination. 4.4 OPTION VESTING. -------------- (a) The period during which the right to exercise an Option in whole or in part vests in the Optionee shall be set by the Committee (or the Board, in the case of Options granted to Independent Directors) and the Committee (or the Board, in the case of Options granted to Independent Directors) may determine that an Option may not be exercised in whole or in part for a specified period after it is granted; PROVIDED, ---------- HOWEVER, that, unless the Committee (or the Board, in the case of Options granted to Independent ------- Directors) otherwise provides in the terms of the Option or otherwise, no Option shall be exercisable by any Optionee who is then subject to Section 16 of the Exchange Act within the period ending six months and one day after the date the Option is granted. At any time after grant of an Option, the Committee (or the Board, in the case of Options granted to Independent Directors) may, in its sole and absolute discretion and subject to whatever terms and conditions it selects, accelerate the period during which an Option vests. (b) No portion of an Option which is unexercisable at Termination of Employment, Termination of Directorship or Termination of Consultancy, as applicable, shall thereafter become exercisable, except as may be otherwise provided by the Committee in the case of Options granted to Employees or consultants either in the Stock Option Agreement or by action of the Committee following the grant of the Option. (c) To the extent that the aggregate Fair Market Value of stock with respect to which "incentive stock options" (within the meaning of Section 422 of the Code, but without regard to Section 422(d) of the Code) are exercisable for the first time by an Optionee during any calendar year (under the Plan and all other incentive stock option plans of the Company and any Subsidiary) exceeds $100,000, such Options shall be treated as Non-Qualified Stock Options to the extent required by Section 422 of the Code. The rule set forth in the preceding sentence shall be applied by taking Options into account in the order in which they were granted. For purposes of this Section 4.4(c), the Fair Market Value of stock shall be determined as of the time the Option with respect to such stock is granted. 4.5 CONSIDERATION. In consideration of the granting of an Option, the Optionee shall agree, in the written Stock Option Agreement, to remain in the employ of (or to consult for 9 or to serve as an Independent Director of, as applicable) the Company or any Subsidiary for a period of at least one year (or such shorter period as may be fixed in the Stock Option Agreement or by action of the Committee following grant of the Option) after the Option is granted (or, in the case of an Independent Director, until the next annual meeting of stockholders of the Company). Nothing in this Plan or in any Stock Option Agreement hereunder shall confer upon any Optionee any right to continue in the employ of, or as a consultant for, the Company or any Subsidiary, or as a director of the Company, or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Optionee at any time for any reason whatsoever, with or without good cause. ARTICLE V. EXERCISE OF OPTIONS 5.1 PARTIAL EXERCISE. An exercisable Option may be exercised in whole or in part. However, an Option shall not be exercisable with respect to fractional shares and the Committee (or the Board, in the case of Options granted to Independent Directors) may require that, by the terms of the Option, a partial exercise be with respect to a minimum number of shares. 5.2 MANNER OF EXERCISE. All or a portion of an exercisable Option shall be deemed exercised upon delivery of all of the following to the Secretary of the Company or his office: (a) A written notice complying with the applicable rules established by the Committee (or the Board, in the case of Options granted to Independent Directors) stating that the Option, or a portion thereof, is exercised. The notice shall be signed by the Optionee or other person then entitled to exercise the Option or such portion; (b) Such representations and documents as the Committee (or the Board, in the case of Options granted to Independent Directors), in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act of 1933, as amended, and any other federal or state securities laws or regulations. The Committee or Board may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer notices to agents and registrars; (c) In the event that the Option shall be exercised pursuant to Section 9.1 by any person or persons other than the Optionee, appropriate proof of the right of such person or persons to exercise the Option; and (d) Full cash payment to the Secretary of the Company for the shares with respect to which the Option, or portion thereof, is exercised. However, the Committee (or the Board, in the case of Options granted to Independent Directors), may in its discretion (i) allow a delay in payment up to 30 days from the date the Option, or portion thereof, is exercised; (ii) allow payment, in whole or in part, through the delivery of shares of Common Stock owned by the Optionee, duly endorsed for transfer to the 10 Company with a Fair Market Value on the date of delivery equal to the aggregate exercise price of the Option or exercised portion thereof; (iii) allow payment, in whole or in part, through the surrender of shares of Common Stock then issuable upon exercise of the Option having a Fair Market Value on the date of Option exercise equal to the aggregate exercise price of the Option or exercised portion thereof; (iv) allow payment, in whole or in part, through the delivery of property of any kind which constitutes good and valuable consideration; (v) allow payment, in whole or in part, through the delivery of a promissory note (which may be without recourse or of limited recourse as determined by the Committee or the Board) bearing interest (at no less than such rate as shall then preclude the imputation of interest under the Code) and payable upon such terms as may be prescribed by the Committee or the Board; (vi) allow payment, in whole or in part, through the delivery of a notice that the Optionee has placed a market sell order with a broker with respect to shares of Common Stock then issuable upon exercise of the Option, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the Option exercise price; or (vii) allow payment through any combination of the consideration provided in the foregoing subparagraphs (ii), (iii), (iv), (v), and (vi). In the case of a promissory note, the Committee (or the Board, in the case of Options granted to Independent Directors) may also prescribe the form of such note and the security to be given for such note. The Option may not be exercised, however, by delivery of a promissory note or by a loan from the Company when or where such loan or other extension of credit is prohibited by law. 5.3 CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of any Option or portion thereof prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges on which such class of stock is then listed; (b) The completion of any registration or other qualification of such shares under any state or federal law, or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body which the Committee or Board shall, in its absolute discretion, deem necessary or advisable; (c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee (or Board, in the case of Options granted to Independent Directors) shall, in its absolute discretion, determine to be necessary or advisable; (d) The lapse of such reasonable period of time following the exercise of the Option as the Committee (or Board, in the case of Options granted to Independent Directors) may establish from time to time for reasons of administrative convenience; and (e) The receipt by the Company of full payment for such shares, including payment of any applicable withholding tax. 11 5.4 RIGHTS AS STOCKHOLDERS. The holders of Options shall not be, nor have any of the rights or privileges of, stockholders of the Company in respect of any shares purchasable upon the exercise of any part of an Option unless and until certificates representing such shares have been issued by the Company to such holders. 5.5 OWNERSHIP AND TRANSFER RESTRICTIONS. The Committee (or Board, in the case of Options granted to Independent Directors), in its absolute discretion, may impose such restrictions on the ownership and transferability of the shares purchasable upon the exercise of an Option as it deems appropriate. Any such restriction shall be set forth in the respective Stock Option Agreement and may be referred to on the certificates evidencing such shares. The Committee may require the Employee to give the Company prompt notice of any disposition of shares of Common Stock acquired by exercise of an Incentive Stock Option within (i) two years from the date of granting such Option to such Employee or (ii) one year after the transfer of such shares to such Employee. The Committee may direct that the certificates evidencing shares acquired by exercise of an Option refer to such requirement to give prompt notice of disposition. 5.6 LIMITATIONS ON EXERCISE OF OPTIONS GRANTED TO INDEPENDENT DIRECTORS. Unless earlier terminated pursuant to Section 9.3(c)(ii) or 9.3(c)(viii), no Option granted to an Independent Director pursuant to Section 3.4(d)(i) may be exercised to any extent by anyone after the first to occur of the following events: (a) The expiration of twelve (12) months from the date of the Optionee's death; (b) The expiration of twelve (12) months from the date of the Optionee's Termination of Directorship by reason of his permanent and total disability (within the meaning of Section 22(e)(3) of the Code); (c) The expiration of three (3) months from the date of the Optionee's Termination of Directorship for any reason other than such Optionee's death or his permanent and total disability, unless the Optionee dies within said three-month period; or (d) The expiration of ten years from the date the Option was granted. ARTICLE VI. AWARD OF RESTRICTED STOCK 6.1 AWARD OF RESTRICTED STOCK (a) The Committee may from time to time, in its absolute discretion: (i) Select from among the Employees or consultants (including Employees or consultants who have previously received other awards under this Plan) such of them as in its opinion should be awarded Restricted Stock; and (ii) Determine the purchase price, if any, and other terms and conditions applicable to such Restricted Stock, consistent with this Plan. 12 (b) The Committee shall establish the purchase price, if any, and form of payment for Restricted Stock; PROVIDED, HOWEVER, that such purchase price shall be no less than the par value of the Common Stock to be purchased, unless otherwise permitted by applicable state law. In all cases, legal consideration shall be required for each issuance of Restricted Stock. (c) Upon the selection of an Employee or consultant to be awarded Restricted Stock, the Committee shall instruct the Secretary of the Company to issue such Restricted Stock and may impose such conditions on the issuance of such Restricted Stock as it deems appropriate. 6.2 RESTRICTED STOCK AGREEMENT. Restricted Stock shall be issued only pursuant to a written Restricted Stock Agreement, which shall be executed by the selected Employee or consultant and an authorized officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. 6.3 CONSIDERATION. As consideration for the issuance of Restricted Stock, in addition to payment of any purchase price, the Restricted Stockholder shall agree, in the written Restricted Stock Agreement, to remain in the employ of, or to consult for, the Company or any Subsidiary for a period of at least one year after the Restricted Stock is issued (or such shorter period as may be fixed in the Restricted Stock Agreement or by action of the Committee following grant of the Restricted Stock). Nothing in this Plan or in any Restricted Stock Agreement hereunder shall confer on any Restricted Stockholder any right to continue in the employ of, or as a consultant for, the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Restricted Stockholder at any time for any reason whatsoever, with or without good cause. 6.4 RIGHTS AS STOCKHOLDERS. Upon delivery of the shares of Restricted Stock to the escrow holder pursuant to Section 6.7, the Restricted Stockholder shall have, unless otherwise provided by the Committee, all the rights of a stockholder with respect to said shares, subject to the restrictions in his Restricted Stock Agreement, including the right to receive all dividends and other distributions paid or made with respect to the shares; PROVIDED, HOWEVER, that in the discretion of the Committee, any extraordinary distributions with respect to the Common Stock shall be subject to the restrictions set forth in Section 6.5. 6.5 RESTRICTION. All shares of Restricted Stock issued under this Plan (including any shares received by holders thereof with respect to shares of Restricted Stock as a result of stock dividends, stock splits or any other form of recapitalization) shall, in the terms of each individual Restricted Stock Agreement, be subject to such restrictions as the Committee shall provide, which restrictions may include, without limitation, restrictions concerning voting rights and transferability and restrictions based on duration of employment with the Company, Company performance and individual performance; provided, however, that, unless the Committee otherwise provides in the terms of the Restricted Stock Agreement or otherwise, no share of Restricted Stock granted to a person subject to Section 16 of the Exchange Act shall be sold, assigned or otherwise transferred until at least six months and one day have elapsed from the date on which the Restricted Stock was issued, and provided, further, that by action taken 13 after the Restricted Stock is issued, the Committee may, on such terms and conditions as it may determine to be appropriate, remove any or all of the restrictions imposed by the terms of the Restricted Stock Agreement. Restricted Stock may not be sold or encumbered until all restrictions are terminated or expire. Unless provided otherwise by the Committee, if no consideration was paid by the Restricted Stockholder upon issuance, a Restricted Stockholder's rights in unvested Restricted Stock shall lapse upon Termination of Employment or, if applicable, upon Termination of Consultancy with the Company. 6.6 REPURCHASE OF RESTRICTED STOCK. The Committee shall provide in the terms of each individual Restricted Stock Agreement that the Company shall have the right to repurchase from the Restricted Stockholder the Restricted Stock then subject to restrictions under the Restricted Stock Agreement immediately upon a Termination of Employment or, if applicable, upon a Termination of Consultancy between the Restricted Stockholder and the Company, at a cash price per share equal to the price paid by the Restricted Stockholder for such Restricted Stock; PROVIDED, HOWEVER, that provision may be made that no such right of repurchase shall exist in the event of a Termination of Employment or Termination of Consultancy without cause, or following a change in control of the Company or because of the Restricted Stockholder's retirement, death or disability, or otherwise. 6.7 ESCROW. The Secretary of the Company or such other escrow holder as the Committee may appoint shall retain physical custody of each certificate representing Restricted Stock until all of the restrictions imposed under the Restricted Stock Agreement with respect to the shares evidenced by such certificate expire or shall have been removed. 6.8 LEGEND. In order to enforce the restrictions imposed upon shares of Restricted Stock hereunder, the Committee shall cause a legend or legends to be placed on certificates representing all shares of Restricted Stock that are still subject to restrictions under Restricted Stock Agreements, which legend or legends shall make appropriate reference to the conditions imposed thereby. 6.9 PROVISIONS APPLICABLE TO SECTION 162(M) PARTICIPANTS. (a) Notwithstanding anything in the Plan to the contrary, the Committee may grant Restricted Stock awards to a Section 162(m) Participant that vest upon the attainment of performance targets for the Company which are related to one or more of the following performance goals: (i) pre-tax income, (ii) operating income, (iii) cash flow, (iv) earnings per share, (v) return on equity, (vi) return on invested capital or assets, and (vii) cost reductions or savings. (b) To the extent necessary to comply with the performance-based compensation requirements of Section 162(m)(4)(c) of the Code, with respect to Restricted Stock which may be granted to one or more Section 162(m) Participants, no later than 90 days following the commencement of any fiscal year in question or any other designated fiscal period (or such other time as may be required or permitted by Section 162(m) of the Code), the Committee shall, in writing, (i) designate one or more Section 162(m) Participants, (ii) select the performance goal or goals applicable to the fiscal year or other designated fiscal period, (iii) establish the various targets and bonus 14 amounts which may be earned for such fiscal year or other designated fiscal period and (iv) specify the relationship between performance goals and targets and the amounts to be earned by each Section 162(m) Participant for such fiscal year or other designated fiscal period. Following the completion of each fiscal year or other designated fiscal period, the Committee shall certify in writing whether the applicable performance targets have been achieved for such fiscal year or other designated fiscal period. In determining the amount earned by a Section 162(m) Participant, the Committee shall have the right to reduce (but not to increase) the amount payable at a given level of performance to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the fiscal year or other designated fiscal period. 6.10 MAXIMUM AWARD PER FISCAL YEAR. The maximum number of shares of Restricted Stock that may be awarded under the Plan to any individual during any fiscal year shall not exceed the Award Limit.(i) ARTICLE VII. PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS, DEFERRED STOCK, STOCK PAYMENTS 7.1 PERFORMANCE AWARDS. Any Employee or consultant selected by the Committee may be granted one or more Performance Awards. The value of such Performance Awards may be linked to the market value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria determined appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee, or may be based upon the appreciation in the market value, book value, net profits or other measure of the value of a specified number of shares of Common Stock over a fixed period or periods determined by the Committee. In making such determinations, the Committee shall consider (among such other factors as it deems relevant in light of the specific type of award) the contributions, responsibilities and other compensation of the particular Employee or consultant. 7.2 DIVIDEND EQUIVALENTS. Any Employee or consultant selected by the Committee may be granted Dividend Equivalents based on the dividends declared on Common Stock, to be credited as of dividend payment dates, during the period between the date an Option, Deferred Stock or Performance Award is granted, and the date such Option, Deferred Stock or Performance Award is exercised, vests or expires, as determined by the Committee. Such Dividend Equivalents shall be converted to cash or additional shares of Common Stock by such formula and at such time and subject to such limitations as may be determined by the Committee. With respect to Dividend Equivalents granted with respect to Options intended to be qualified performance-based compensation for purposes of Section 162(m) of the Code, such Dividend Equivalents shall be payable regardless of whether such Option is exercised. 7.3 STOCK PAYMENTS. Any Employee or consultant selected by the Committee may receive Stock Payments in the manner determined from time to time by the Committee. The number of shares shall be determined by the Committee and may be based upon the Fair Market Value, book value, net profits or other measure of the value of Common Stock or other 15 specific performance criteria determined appropriate by the Committee, determined on the date such Stock Payment is made or on any date thereafter. 7.4 DEFERRED STOCK. Any Employee or consultant selected by the Committee may be granted an award of Deferred Stock in the manner determined from time to time by the Committee. The number of shares of Deferred Stock shall be determined by the Committee and may be linked to the market value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria determined to be appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee. Common Stock underlying a Deferred Stock award will not be issued until the Deferred Stock award has vested, pursuant to a vesting schedule or performance criteria set by the Committee. Unless otherwise provided by the Committee, a Grantee of Deferred Stock shall have no rights as a Company stockholder with respect to such Deferred Stock until such time as the award has vested and the Common Stock underlying the award has been issued. 7.5 PERFORMANCE AWARD AGREEMENT, DIVIDEND EQUIVALENT AGREEMENT, DEFERRED STOCK AGREEMENT, STOCK PAYMENT AGREEMENT. Each Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment shall be evidenced by a written agreement, which shall be executed by the Grantee and an authorized Officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. 7.6 TERM. The term of a Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment shall be set by the Committee in its discretion. 7.7 EXERCISE UPON TERMINATION OF EMPLOYMENT. A Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment is exercisable or payable only while the Grantee is an Employee or consultant; provided that the Committee may determine that the Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment may be exercised or paid subsequent to Termination of Employment or Termination of Consultancy without cause, or following a change in control of the Company, or because of the Grantee's retirement, death or disability, or otherwise. 7.8 PAYMENT ON EXERCISE. Payment of the amount determined under Section 7.1 or 7.2 above shall be in cash, in Common Stock or a combination of both, as determined by the Committee. To the extent any payment under this Article VII is effected in Common Stock, it shall be made subject to satisfaction of all provisions of Section 5.3. 7.9 CONSIDERATION. In consideration of the granting of a Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment, the Grantee shall agree, in a written agreement, to remain in the employ of, or to consult for, the Company or any Subsidiary for a period of at least one year after such Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment is granted (or such shorter period as may be fixed in such agreement or by action of the Committee following such grant). Nothing in this Plan or in any agreement hereunder shall confer on any Grantee any right to continue in the employ of, or as a consultant for, the Company or any Subsidiary or shall interfere with or restrict in any 16 way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any time for any reason whatsoever, with or without good cause. 7.10 PROVISIONS APPLICABLE TO SECTION 162(M) PARTICIPANTS. (a) Notwithstanding anything in the Plan to the contrary, the Committee may grant any performance or incentive awards described in Article VII to a Section 162(m) Participant that vest or become exercisable upon the attainment of performance targets for the Company which are related to one or more of the following performance goals: (i) pre-tax income, (ii) operating income, (iii) cash flow, (iv) earnings per share, (v) return on equity, (vi) return on invested capital or assets, and (vii) cost reductions or savings. (b) To the extent necessary to comply with the performance-based compensation requirements of Section 162(m)(4)(C) of the Code, with respect to performance or incentive awards described in Article VII which may be granted to one or more Section 162(m) Participants, no later than ninety (90) days following the commencement of any fiscal year in question or any other designated fiscal period (or such other time as may be required or permitted by Section 162(m) of the Code), the Committee shall, in writing, (i) designate one or more Section 162(m) Participants, (ii) select the performance goal or goals applicable to the fiscal year or other designated fiscal period, (iii) establish the various targets and bonus amounts which may be earned for such fiscal year or other designated fiscal period and (iv) specify the relationship between performance goals and targets and the amounts to be earned by each Section 162(m) Participant for such fiscal year or other designated fiscal period. Following the completion of each fiscal year or other designated fiscal period, the Committee shall certify in writing whether the applicable performance targets have been achieved for such fiscal year or other designated fiscal period. In determining the amount earned by a Section 162(m) Participant, the Committee shall have the right to reduce (but not to increase) the amount payable at a given level of performance to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the fiscal year or other designated fiscal period. 7.11 MAXIMUM AWARD PER FISCAL YEAR. The value of Performance Awards that may be awarded under the Plan to any individual during any fiscal year shall not exceed the Award Limit to the extent that the awards are based on the value of a specified number of shares of Common Stock. The maximum number of shares of Deferred Stock that may be awarded to any individual during any fiscal year shall not exceed the Award Limit. ARTICLE VIII. ADMINISTRATION 8.1 STOCK OPTION COMMITTEE. The Stock Option Committee (or another committee or a subcommittee of the Board assuming the functions of the Committee under this Plan) shall consist solely of two or more Independent Directors appointed by and holding office at the pleasure of the Board, each of whom is both a "non-employee director" as defined by Rule 16b-3 and an "outside director" for purposes of Section 162(m) of the Code. Appointment 17 of Committee members shall be effective upon acceptance of appointment. Committee members may resign at any time by delivering written notice to the Board. Vacancies in the Committee may be filled by the Board. 8.2 DUTIES AND POWERS OF COMMITTEE. It shall be the duty of the Committee to conduct the general administration of this Plan in accordance with its provisions. The Committee shall have the power to interpret this Plan and the agreements pursuant to which Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Dividend Equivalents or Stock Payments are granted or awarded, and to adopt such rules for the administration, interpretation, and application of this Plan as are consistent therewith and to interpret, amend, or revoke any such rules. Notwithstanding the foregoing, the full Board, acting by a majority of its members in office, shall conduct the general administration of the Plan with respect to Options granted to Independent Directors. Any such grant or award under this Plan need not be the same with respect to each Optionee, Grantee or Restricted Stockholder. Any such interpretations and rules with respect to Incentive Stock Options shall be consistent with the provisions of Section 422 of the Code. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under this Plan except with respect to matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations or rules issued thereunder, are required to be determined in the sole discretion of the Committee. 8.3 MAJORITY RULE; UNANIMOUS WRITTEN CONSENT. In administering the Plan, the Committee shall act by a majority of its members in attendance at a meeting at which a quorum is present or by a memorandum or other written instrument signed by all members of the Committee. 8.4 COMPENSATION; PROFESSIONAL ASSISTANCE; GOOD FAITH ACTIONS. Members of the Committee shall receive such compensation for their services as members as may be determined by the Board. All expenses and liabilities which members of the Committee incur in connection with the administration of this Plan shall be borne by the Company. The Committee may, with the approval of the Board, employ attorneys, consultants, accountants, appraisers, brokers, or other persons. The Committee, the Company and the Company's officers and Directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee or the Board in good faith shall be final and binding upon all Optionees, Grantees, Restricted Stockholders, the Company and all other interested persons. No members of the Committee or Board shall be personally liable for any action, determination or interpretation made in good faith with respect to this Plan, Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Dividend Equivalents or Stock Payments, and all members of the Committee and the Board shall be fully protected by the Company in respect of any such action, determination or interpretation. ARTICLE IX. MISCELLANEOUS PROVISIONS 9.1 NOT TRANSFERABLE. Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Dividend Equivalents or Stock Payments under this Plan may not be sold, pledged, assigned, or transferred in any manner other than by will or the laws of descent 18 and distribution or pursuant to a QDRO, unless and until such rights or awards have been exercised, or the shares underlying such rights or awards have been issued, and all restrictions applicable to such shares have lapsed. No Option, Restricted Stock award, Deferred Stock award, Performance Award, Dividend Equivalent or Stock Payment or interest or right therein shall be liable for the debts, contracts or engagements of the Optionee, Grantee or Restricted Stockholder or his successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect, except to the extent that such disposition is permitted by the preceding sentence. During the lifetime of the Optionee or Grantee, only he may exercise an Option or other right or award (or any portion thereof) granted to him under the Plan, unless it has been disposed of pursuant to a QDRO. After the death of the Optionee or Grantee, any exercisable portion of an Option or other right or award may, prior to the time when such portion becomes unexercisable under the Plan or the applicable Stock Option Agreement or other agreement, be exercised by his personal representative or by any person empowered to do so under the deceased Optionee's or Grantee's will or under the then applicable laws of descent and distribution. 9.2 AMENDMENT, SUSPENSION OR TERMINATION OF THIS PLAN. Except as otherwise provided in this Section 9.2, this Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board or the Committee. However, without approval of the Company's stockholders given within 12 months before or after the action by the Board or the Committee, no action of the Board or the Committee may, except as provided in Section 9.3, increase the limits imposed in Section 2.1 on the maximum number of shares which may be issued under this Plan or modify the Award Limit, and no action of the Board or the Committee may be taken that would otherwise require stockholder approval as a matter of applicable law, regulation or rule. No amendment, suspension or termination of this Plan shall, without the consent of the holder of Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Dividend Equivalents or Stock Payments, alter or impair any rights or obligations under any Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Dividend Equivalents or Stock Payments theretofore granted or awarded, unless the award itself otherwise expressly so provides. No Options, Restricted Stock, Deferred Stock, Performance Awards, Dividend Equivalents or Stock Payments may be granted or awarded during any period of suspension or after termination of this Plan, and in no event may any Incentive Stock Option be granted under this Plan after the first to occur of the following events: (a) The expiration of ten years from the date the Plan is adopted by the Board; or (b) The expiration of ten years from the date the Plan is approved by the Company's stockholders under Section 9.4. 19 9.3 CHANGES IN COMMON STOCK OR ASSETS OF THE COMPANY, ACQUISITION OR LIQUIDATION OF THE COMPANY AND OTHER CORPORATE EVENTS. (a) Subject to Section 9.3(d), in the event that the Committee (or the Board, in the case of Options granted to Independent Directors) determines that any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or other property), recapitalization, reclassification, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, liquidation, dissolution or sale, transfer, exchange or other disposition of all or substantially all of the assets of the Company (including, but not limited to, a Corporate Transaction), or exchange of Common Stock or other securities of the Company, issuance of warrants or other rights to purchase Common Stock or other securities of the Company, or other similar corporate transaction or event, in the Committee's sole discretion (or in the case of Options granted to Independent Directors, the Board's sole discretion), affects the Common Stock such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to an Option, Restricted Stock award, Performance Award, Dividend Equivalent, Deferred Stock award or Stock Payment, then the Committee (or the Board, in the case of Options granted to Independent Directors) shall, in such manner as it may deem equitable, adjust any or all of (i) The number and kind of shares of Common Stock (or other securities or property) with respect to which Options, Performance Awards, Dividend Equivalents or Stock Payments may be granted under the Plan, or which may be granted as Restricted Stock or Deferred Stock (including, but not limited to, adjustments of the limitations in Section 2.1 on the maximum number and kind of shares which may be issued and adjustments of the Award Limit), (ii) The number and kind of shares of Common Stock (or other securities or property) subject to outstanding Options, Performance Awards, Dividend Equivalents, or Stock Payments, and in the number and kind of shares of outstanding Restricted Stock or Deferred Stock, and (iii) The grant or exercise price with respect to any Option, Performance Award, Dividend Equivalent or Stock Payment. (b) Subject to Sections 9.3(b)(vii) and 9.3(d), in the event of any Corporate Transaction or other transaction or event described in Section 9.3(a) or any unusual or nonrecurring transactions or events affecting the Company, any affiliate of the Company, or the financial statements of the Company or any affiliate, or of changes in applicable laws, regulations, or accounting principles, the Committee (or the Board, in the case of Options granted to Independent Directors) in its discretion is hereby authorized to take any one or more of the following actions whenever the Committee (or the Board, in the case of Options granted to Independent Directors) determines that such action is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to any option, right 20 or other award under this Plan, to facilitate such transactions or events or to give effect to such changes in laws, regulations or principles: (i) In its sole and absolute discretion, and on such terms and conditions as it deems appropriate, the Committee (or the Board, in the case of Options granted to Independent Directors) may provide, either by the terms of the agreement or by action taken prior to the occurrence of such transaction or event and either automatically or upon the optionee's request, for either the purchase of any such Option, Performance Award, Dividend Equivalent, or Stock Payment, or any Restricted Stock or Deferred Stock for an amount of cash equal to the amount that could have been attained upon the exercise of such option, right or award or realization of the optionee's rights had such option, right or award been currently exercisable or payable or fully vested or the replacement of such option, right or award with other rights or property selected by the Committee (or the Board, in the case of Options granted to Independent Directors) in its sole discretion; (ii) In its sole and absolute discretion, the Committee (or the Board, in the case of Options granted to Independent Directors) may provide, either by the terms of such Option, Performance Award, Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock or by action taken prior to the occurrence of such transaction or event that it cannot be exercised after such event; (iii) In its sole and absolute discretion, and on such terms and conditions as it deems appropriate, the Committee (or the Board, in the case of Options granted to Independent Directors) may provide, either by the terms of such Option, Performance Award, Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock or by action taken prior to the occurrence of such transaction or event, that for a specified period of time prior to such transaction or event, such option, right or award shall be exercisable as to all shares covered thereby, notwithstanding anything to the contrary in (i) Section 4.4 or (ii) the provisions of such Option, Performance Award, Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock; (iv) In its sole and absolute discretion, and on such terms and conditions as it deems appropriate, the Committee (or the Board, in the case of Options granted to Independent Directors) may provide, either by the terms of such Option, Performance Award, Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock or by action taken prior to the occurrence of such transaction or event, that upon such event, such option, right or award be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; 21 (v) In its sole and absolute discretion, and on such terms and conditions as it deems appropriate, the Committee (or the Board, in the case of Options granted to Independent Directors) may make adjustments in the number and type of shares of Common Stock (or other securities or property) subject to outstanding Options, Performance Awards, Dividend Equivalents, or Stock Payments, and in the number and kind of outstanding Restricted Stock or Deferred Stock and/or in the terms and conditions of (including the grant or exercise price), and the criteria included in, outstanding options, rights and awards and options, rights and awards which may be granted in the future; (vi) In its sole and absolute discretion, and on such terms and conditions as it deems appropriate, the Committee may provide either by the terms of a Restricted Stock award or Deferred Stock award or by action taken prior to the occurrence of such event that, for a specified period of time prior to such event, the restrictions imposed under a Restricted Stock Agreement or a Deferred Stock Agreement upon some or all shares of Restricted Stock or Deferred Stock may be terminated, and, in the case of Restricted Stock, some or all shares of such Restricted Stock may cease to be subject to repurchase under Section 6.6 or forfeiture under Section 6.5 after such event; and (vii) None of the foregoing discretionary actions taken under this Section 9.3(b) shall be permitted with respect to Options granted under Section 3.4(d) to Independent Directors to the extent that such discretion would be inconsistent with the applicable exemptive conditions of Rule 16b-3. In the event of a Change in Control or a Corporate Transaction, to the extent that the Board does not have the ability under Rule 16b-3 to take or to refrain from taking the discretionary actions set forth in Section 9.3(b)(iii) above, each Option granted to an Independent Director shall be exercisable as to all shares covered thereby upon such Change in Control or during the five days immediately preceding the consummation of such Corporate Transaction and subject to such consummation, notwithstanding anything to the contrary in Section 4.4 or the vesting schedule of such Options. In the event of a Corporate Transaction, to the extent that the Board does not have the ability under Rule 16b-3 to take or to refrain from taking the discretionary actions set forth in Section 9.3(b)(ii) above, no Option granted to an Independent Director may be exercised following such Corporate Transaction unless such Option is, in connection with such Corporate Transaction, either assumed by the successor or survivor corporation (or parent or subsidiary thereof) or replaced with a comparable right with respect to shares of the capital stock of the successor or survivor corporation (or parent or subsidiary thereof). (c) Subject to Section 9.3(d) and 9.8, the Committee (or the Board, in the case of Options granted to Independent Directors) may, in its discretion, include such further provisions and limitations in any Option, Performance Award, Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock agreement or certificate, as it may deem equitable and in the best interests of the Company. 22 (d) With respect to Incentive Stock Options and Options intended to qualify as performance-based compensation under Section 162(m), no adjustment or action described in this Section 9.3 or in any other provision of the Plan shall be authorized to the extent that such adjustment or action would cause the Plan to violate Section 422(b)(1) of the Code or would cause such option or stock appreciation right to fail to so qualify under Section 162(m), as the case may be, or any successor provisions thereto. Furthermore, no such adjustment or action shall be authorized to the extent such adjustment or action would result in short-swing profits liability under Section 16 of the Exchange Act or violate the exemptive conditions of Rule 16b-3 unless the Committee (or the Board, in the case of Options granted to Independent Directors) determines that the option or other award is not to comply with such exemptive conditions. The number of shares of Common Stock subject to any option, right or award shall always be rounded to the next whole number. 9.4 APPROVAL OF PLAN BY STOCKHOLDERS. This Plan will be submitted for the approval of the Company's stockholders within 12 months after the date of the Board's initial adoption of this Plan. Options, Performance Awards, Dividend Equivalents or Stock Payments may be granted and Restricted Stock or Deferred Stock may be awarded prior to such stockholder approval, provided that such Options, Performance Awards, Dividend Equivalents or Stock Payments shall not be exercisable and such Restricted Stock or Deferred Stock shall not vest prior to the time when this Plan is approved by the stockholders, and provided further that if such approval has not been obtained at the end of said 12-month period, all Options, Performance Awards, Dividend Equivalents or Stock Payments previously granted and all Restricted Stock or Deferred Stock previously awarded under this Plan shall thereupon be canceled and become null and void. 9.5 TAX WITHHOLDING. The Company shall be entitled to require payment in cash or deduction from other compensation payable to each Optionee, Grantee or Restricted Stockholder of any sums required by federal, state or local tax law to be withheld with respect to the issuance, vesting or exercise of any Option, Restricted Stock, Deferred Stock, Performance Award, Dividend Equivalent or Stock Payment. The Committee (or the Board, in the case of Options granted to Independent Directors) may in its discretion and in satisfaction of the foregoing requirement allow such Optionee, Grantee or Restricted Stockholder to elect to have the Company withhold shares of Common Stock otherwise issuable under such Option or other award (or allow the return of shares of Common Stock) having a Fair Market Value equal to the sums required to be withheld. 9.6 LOANS. The Committee may, in its discretion, extend one or more loans to Employees in connection with the exercise or receipt of an Option, Performance Award, Dividend Equivalent or Stock Payment granted under this Plan, or the issuance of Restricted Stock or Deferred Stock awarded under this Plan. The terms and conditions of any such loan shall be set by the Committee. 9.7 FORFEITURE PROVISIONS. Pursuant to its general authority to determine the terms and conditions applicable to awards under the Plan, the Committee (or the Board, in the case of Options granted to Independent Directors) shall have the right (to the extent consistent with the applicable exemptive conditions of Rule 16b-3) to provide, in the terms of Options or 23 other awards made under the Plan, or to require the recipient to agree by separate written instrument, that (i) any proceeds, gains or other economic benefit actually or constructively received by the recipient upon any receipt or exercise of the award, or upon the receipt or resale of any Common Stock underlying such award, must be paid to the Company, and (ii) the award shall terminate and any unexercised portion of such award (whether or not vested) shall be forfeited, if (a) a Termination of Employment, Termination of Consultancy or Termination of Directorship occurs prior to a specified date, or within a specified time period following receipt or exercise of the award, or (b) the recipient at any time, or during a specified time period, engages in any activity in competition with the Company, or which is inimical, contrary or harmful to the interests of the Company, as further defined by the Committee (or the Board, as applicable). 9.8 LIMITATIONS APPLICABLE TO SECTION 16 PERSONS AND PERFORMANCE-BASED COMPENSATION. Notwithstanding any other provision of this Plan, this Plan, and any Option, Performance Award, Dividend Equivalent or Stock Payment granted, or Restricted Stock or Deferred Stock awarded, to any individual who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3) that are requirements for the application of such exemptive rule. To the extent permitted by applicable law, the Plan, Options, Performance Awards, Dividend Equivalents, Stock Payments, Restricted Stock and Deferred Stock granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such applicable exemptive rule. Furthermore, notwithstanding any other provision of this Plan, any Option, Restricted Stock or performance or incentive award described in Article VII intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall be subject to any additional limitations set forth in Section 162(m) of the Code (including any amendment to Section 162(m) of the Code) or any regulations or rulings issued thereunder that are requirements for qualification as performance-based compensation as described in Section 162(m)(4)(C) of the Code, and this Plan shall be deemed amended to the extent necessary to conform to such requirements. 9.9 EFFECT OF PLAN UPON OPTIONS AND COMPENSATION PLANS. The adoption of this Plan shall not affect any other compensation or incentive plans in effect for the Company or any Subsidiary. Nothing in this Plan shall be construed to limit the right of the Company (i) to establish any other forms of incentives or compensation for Employees, Directors or Consultants of the Company or any Subsidiary or (ii) to grant or assume options or other rights otherwise than under this Plan in connection with any proper corporate purpose including but not by way of limitation, the grant or assumption of options in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, partnership, limited liability company, firm or association. 9.10 COMPLIANCE WITH LAWS. This Plan, the granting and vesting of Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Dividend Equivalents or Stock Payments under this Plan and the issuance and delivery of shares of Common Stock and the payment of money under this Plan or under Options, Performance Awards, Dividend Equivalents or Stock Payments granted or Restricted Stock or Deferred Stock awarded hereunder are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities law and federal margin requirements) 24 and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Any securities delivered under this Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Company, provide such assurances and representations to the Company as the Company may deem necessary or desirable to assure compliance with all applicable legal requirements. To the extent permitted by applicable law, the Plan, Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Dividend Equivalents or Stock Payments granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such laws, rules and regulations. 9.11 TITLES. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Plan. 9.12 GOVERNING LAW. This Plan and any agreements hereunder shall be administered, interpreted and enforced under the internal laws of the State of Oregon without regard to conflicts of laws thereof. 25 EX-10 4 rcex10-28.txt CONSULTING AGREEMENT This Agreement ("Agreement") is entered into as of the 13th day of June 2001 by and between 3PF.com, Inc., a Delaware corporation (hereinafter "3PF") and George Kuper (hereinafter "Kuper"), and the parties therefore agree as follows. SECTION 1. POSITION AND DUTIES Kuper will be expected to perform such duties and responsibilities as are commensurate with the position of Chief Operating Officer of 3PF and for seeing that the directions and assignments of the Chief Executive Officer and the orders and resolutions of the Board of Directors are carried into effect, including to plan, develop, and help establish policies and objectives or business organization in accordance with those directions, orders, and resolutions. Kuper understands that his duties may require frequent travel as may be needed by 3PF from time to time. SECTION 2. TERM The Term of this Agreement shall commence on April 1, 2001, and end on December 31, 2001. At any time during the Term, the parties may negotiate in good faith for the possible extension of this Agreement or the revision of the terms of this Agreement. SECTION 3. CONSULTING FEE Throughout the Term of this Agreement, 3PF will pay Kuper a fee of $15,000.00 per month. Payment will be made pursuant to the monthly invoice submitted by Kuper. SECTION 4. BUSINESS EXPENSES During the Term of this Agreement, Kuper shall be entitled to receive reimbursement for reasonable expenses incurred by Kuper in the performance of his duties under this Agreement upon presentation of appropriate documentation of such expenditures and if those expenses meet the requirements of any policies issued by 3PF, including any modifications to those policies that may be made from time to time, with respect to the incurring, and reimbursement, of business expenses. SECTION 5 PROPRIETARY INFORMATION 5.01 CONFIDENTIALITY Kuper will be expected to forever hold in the strictest confidence and not disclose to any person, firm, corporation or other entity any of 3PF's Proprietary Information, as defined below, except as such disclosure may be required in connection with his work for 3PF or as expressly authorized by 3PF's policies in effect from time to time. Kuper understands and agrees that the obligations set forth in this Section 5 with respect to the confidentiality of 3PF's Proprietary Information survive this Agreement. 5.02 DEFINITION OF PROPRIETARY INFORMATION For the purposes of this Agreement, the term "Proprietary Information" shall mean patent applications, copyrights, industrial designs, service marks, trademarks, trade names, discoveries, inventions, processes, methods, formulae, trade secrets, technical data, drawings, packaging, information concerning prices, costs and customers, marketing techniques, inter company publications, unpublished works, plans, policies, computer and information systems and software and all other information and knowledge in any form or media, relating or pertaining to the products, services, sales or other business of 3PF, its parent company, successor, affiliates and customers in any way which is of a confidential or proprietary nature. Notwithstanding the foregoing, "Proprietary Information" shall not include information that has become generally known in or available to the public or industry in which 3PF conducts business and shall not include general skills and expertise that Kuper acquires or may have acquired during Kuper's work for 3PF or Kuper's work in the industry. SECTION 6. INDEMNIFICATION 3PF agrees to indemnify and hold Kuper harmless from and against any losses, claims, demands, damages or liabilities of any kind relating to or arising out of Kuper's duties and responsibilities under this Agreement. 3PF will not, however, be responsible for any such losses, claims, demands, damages, liabilities or expenses that have resulted from the gross negligence or willful misconduct of Kuper. 3PF also agrees that Kuper shall not have liability (whether direct or indirect, in contract, tort or otherwise) to 3PF or any of its security holders or creditors for or in connection with this agreement or Kuper's duties in connection therewith, except for any such liability for losses, claims, demands, damages, liabilities or expenses incurred by 3PF that have resulted from the gross negligence or willful misconduct of Kuper. SECTION 7. TERMINATION 7.01 BY EITHER PARTY WITH NOTICE Either party may terminate this agreement at any time for any reason or for no reason with seven days' advance written notice to the other party. 7.02 BY EITHER PARTY IMMEDIATELY 3PF may terminate this agreement immediately without further obligation to Kuper (other than 3PF's obligations to pay fees accrued through the date of termination under Section 3, to reimburse expenses incurred prior to the date of termination as provided in Section 4 and to indemnify as provided in Section 6) upon the occurrence of any of the following: (i) Gross misconduct; or (ii) Any breach of Section 5 of this agreement. Kuper may terminate this agreement without further obligation to 3PF upon a material breach by 3PF of Sections 3 or 6 of this agreement. SECTION 8. ARBITRATION Any controversy or claim arising out of or relating to this Agreement or the breach hereof shall be submitted to binding arbitration in accordance with the employment arbitration 2 Rules then in effect of the American Arbitration Association ("AAA"). The party seeking arbitration must provide written notice to the opposing party of the intent to arbitrate claims. Arbitration will take place at AAA's offices in Southfield, Michigan. The parties shall select an arbitrator from a list provided by the American Arbitration Association that is mutually satisfactory to them. If the parties are unable to agree on an arbitrator, they shall each choose an arbitrator through the rules applied by AAA for the selection of arbitrators. The arbitrator shall apply the law of the State of Michigan or the federal law of the United States of America, or both, as applicable to the claims asserted. The award of the arbitrator shall be binding and final on all parties. Judgment upon the award rendered may be entered in any court having jurisdiction thereof. The arbitrator's fee and costs shall be divided equally between the parties. SECTION 9. ENTIRE AGREEMENT This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof and supercedes any prior understandings, agreements or representations, written or oral, relating to the subject matter hereof. It is to be construed under the laws of the State of Michigan. SECTION 10. NO AMENDMENT No modification of amendment of this Agreement shall be binding unless executed in writing by each of the parties hereto. 3PF.COM, INC. GEORGE KUPER By: /s/ Paul Rosenbaum /s/ George Kuper ------------------------- --------------------------- Its: CEO Date: June 13, 2001 Date: June 13, 2001 ----------------------- --------------------- EX-10 5 rcex10-31.txt AMENDMENT TO THE 1997 NON-OFFICER EMPLOYEE STOCK OPTION PLAN OF RENTRAK CORPORATION THIS SECOND AMENDMENT to The 1997 Non-officer Employee Stock Option Plan of Rentrak Corporation (the "Plan") is hereby adopted by Rentrak Corporation, an Oregon corporation (the "Company"), effective November 16, 1998. 1. Incorporation; Definitions. The terms and provisions of this Amendment are incorporated by this reference in the Plan as though fully set forth therein. Terms not otherwise described herein shall have the meanings ascribed to them in the Plan. 2. Amendment. a. Shares Subject to Plan. Section 2.1 of the Plan is hereby amended to read in its entirety as follows: 2.1 Shares Subject to Plan. The shares of stock subject to Options shall be the Company's common stock, par value $.001 per share. The aggregate number of such shares which may be issued upon exercise of such Options under the Plan shall not exceed Eight hundred thousand (800,000). 3. No Other Change. Except as specifically modified in this Amendment, all other provisions and terms of the Plan shall remain unchanged and in full force and effect. EX-21 6 rcex-21.txt EXHIBIT 21 Subsidiaries of Registrant: Blowout Video, Inc., an Oregon corporation. Rentrak Canada, Inc., a foreign corporation. 3PF.Com, Inc., a Delaware corporation. EX-23 7 rcex23.txt INDEPENDENT AUDITORS' CONSENT The Board of Directors Rentrak Corporation: We consent to the incorporation by reference in the following registration statements: (1) Registration Statement File No. 33-40472 on Form S-8 of the 1986 Stock Option Plan, the 1985 Stock Incentive Plan, the 1985 Key Employee Incentive Stock Option Plan and the Individual Written Compensation Plan Dated May 10, 1991, (2) Registration Statement File No. 33-44864 on Form S-8 of the 1986 Restated and Amended Stock Option Plan and Directors' Stock Option Plan dated January 8, 1992, (3) Registration Statement on Form S-8 of the 1992 Employee Stock Purchase Plan dated June 16, 1992, (4) Registration Statement File No. 33-86548 on Form S-3 dated November 21, 1994, (5) Registration Statement File No. 33-65463 on Form S-3 dated December 28, 1995, as amended on Feburary 9, 1996, (6) Registration Statement File No. 333-28565 on Form S-8 of the 1997 Non-Officer Employee Stock Option Plan dated June 5, 1997, as amended on October 29, 1997, and (7) Registration Statement File No. 333-62523 on Form S-8 of the 1997 Equity Participation Plan dated August 31, 1998, on Form 10-K of Rentrak Corporation of our report dated May 24, 2002 (except as to the second paragraph of Note 5, which is as of May 30, 2002) with respect to the consolidated balance sheet of Rentrak Corporation and subsidiaries as of March 31, 2002 and the related consolidated statement of operations, stockholders' equity, and cash flows for the year ended March 31, 2002, and the related financial statement schedule, which report appears in the March 31, 2002, annual report on Form 10-K of Rentrak Corporation. /s/ KPMG LLP - ------------ Portland, Oregon June 28, 2002 -----END PRIVACY-ENHANCED MESSAGE-----