-----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, MJw5kSlUcNHQcH6U8ozJSoOwkZJ01Bl7+csrYJ9OEkvwH3HomLtfykWLV9vUDcvJ P2VsWhJoUdcLr4M5hNtJzQ== 0000912057-96-013741.txt : 19960705 0000912057-96-013741.hdr.sgml : 19960705 ACCESSION NUMBER: 0000912057-96-013741 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960702 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RENTRAK CORP CENTRAL INDEX KEY: 0000800458 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 930780536 STATE OF INCORPORATION: OR FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-15159 FILM NUMBER: 96590445 BUSINESS ADDRESS: STREET 1: 7227 NE 55TH AVENUE CITY: PORTLAND STATE: OR ZIP: 97218 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/A 1 10-K/A This filing consists of 95 pages. The Exhibit Index is on Page 56. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 - K/A X Annual Report Pursuant to Section 13 or 15 (d) of the Securities - ----- Exchange Act of 1934 for fiscal year ended March 31, 1996 or Transition report pursuant to Section 13 or 15(d) of the Securities - ----- Exchange Act of 1934 COMMISSION FILE NUMBER D-15159 RENTRAK CORPORATION (exact name of registrant as specified in its charter) OREGON 93-0780536 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number.) 7227 N.E. 55TH AVENUE, PORTLAND, OREGON 97218 (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 25, 1996, the aggregate market value of the voting stock held by non-affiliates of the registrant, based on the last sales price as reported by NASDAQ was $4.3125. (Excludes value of shares of Common Stock held of record by directors and officers and by shareholders whose record ownership exceeded five percent of the shares outstanding at June 25, 1996. Includes shares held by certain depository organizations.) As of June 25, 1996, the Registrant had 12,139,639 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR THE 1996 ANNUAL MEETING OF THE SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K ITEM 6. SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts) Year Ended March 31, ------------------------------------------------------------------- 1992 1993 1994 1995 1996 ------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA Net revenues: Processing fees $ 2,260 $ 2,299 $ 1,662 $ 1,114 $ 551 Handling fees 11,063 12,170 13,712 18,052 25,716 Transaction fees 27,738 33,399 40,967 49,904 70,187 Sell-through 5,196 4,980 5,665 8,923 10,601 Other 1,165 1,237 1,955 6,555 6,211 International operations 0 200 116 0 0 ------------------------------------------------------------------- Total net revenues 47,422 54,285 64,077 84,548 113,266 Cost of sales 37,759 41,297 49,697 66,375 95,168 ------------------------------------------------------------------- Gross profit 9,663 12,988 14,380 18,173 18,098 Selling and administrative expense 10,138 14,742 14,008 15,527 20,860 Suspension of European operations 0 0 901 0 0 Other income (expense) 242 521 538 3,522 681 ------------------------------------------------------------------- Income (loss) from continued operations before benefit (provision) for income taxes, minority partner interests and extraordinary item (233) (1,233) 9 6,168 (2,081) Income tax benefit (provision) 0 (305) 764 (768) 595 ------------------------------------------------------------------- Income (loss) from continued operations before minority partner interests and extraordinary item (233) (1,538) 773 5,400 (1,486) Losses attributable to minority partner interests 0 649 131 0 0 ------------------------------------------------------------------- Income (loss) from continued operations before extraordinary item (233) (889) 904 5,400 (1,486) Discontinued Operations: (1) Loss from operations of discontinued subsidiaries less applicable income tax provision (benefit) (286) (91) (287) (18,700) Loss on disposal of subsidiaries (12,100) Extraordinary item, income tax benefit from carryforward of net operating losses 0 280 0 0 0 ------------------------------------------------------------------- Net income (loss) $ (233) $ (895) $ 813 $ 5,113 $(32,286) ------------------------------------------------------------------- ------------------------------------------------------------------- Net income (loss) per share - assuming issuance of all dilutive contingent shares Continuing operations $ (0.03) $ (0.07) $ 0.09 $ 0.42 $ (0.12) Discontinued operations 0.00 (0.03) (0.01) (0.02) (2.56) ------------------------------------------------------------------- Net income (loss) $ (0.03) $ (0.10) $ 0.08 $ 0.40 $ (2.68) ------------------------------------------------------------------- ------------------------------------------------------------------- Common shares and common share equivalents outstanding 8,552 9,306 10,162 14,317 12,019
March 31, ------------------------------------------------------------------- 1992 1993 1994 1995 1996 ------------------------------------------------------------------- BALANCE SHEET DATA (2) Working Capital $ 18,875 $ 17,116 $ 16,155 $ 12,897 $(12,579) Total Assets 27,582 34,824 44,620 64,818 56,252 Long-term Debt 5 0 0 0 0 Stockholders' Equity 21,398 22,722 29,523 40,292 14,404
(1) Discontinued Operations includes the operations of TPI and BlowOut. Results of operations in 1993 reflect only those of BlowOut as TPI was acquired during fiscal year 1994. Additional acquisitions were made by TPI and BlowOut during 1995 and 1996, therefore comparisons between years are not meaningful. See acquisitions footnote 8 and discontinued operations footnote 15 in the consolidated financial statements. (2) The 1995 and prior balance sheets have not been restated for discontinued operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Item Page ---- ---- Report of Independent Public 24 Accountants Consolidated Balance Sheets as of March 31, 1996 25 and 1995 Consolidated Statements of Operations for Years 26 Ended March 31, 1996, 1995 and 1994 Consolidated Statements of Stockholders' Equity 28 for Years Ended March 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for Years 29 Ended March 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements 30 Financial Statement Schedules Schedule II 52 Schedules not included have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Rentrak Corporation: We have audited the accompanying consolidated balance sheets of Rentrak Corporation and subsidiaries, as of March 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended March 31, 1996. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Rentrak Corporation and subsidiaries as of March 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 1996 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The schedule listed in the index to financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Portland, Oregon, June 3, 1996 RENTRAK CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1996 AND 1995 ASSETS 1996 1995 ------------ ----------- CURRENT ASSETS: Cash and cash equivalents $2,683,128 $10,709,405 Investment securities available for sale 344,500 - Accounts receivable, net of allowance for doubtful accounts of $627,895 and $642,580 15,116,203 14,711,439 Accounts receivable - affiliate 3,227,006 - Advances to program suppliers 1,462,875 2,683,710 Inventory 1,737,695 6,291,032 Deferred tax asset 1,353,226 915,404 Other current assets 3,343,389 2,112,021 ------------ ----------- Total current assets 29,268,022 37,423,011 ------------ ----------- PROPERTY AND EQUIPMENT, net 1,466,177 4,924,122 INTANGIBLES, net of accumulated amortization of $3,399,678 and $3,472,783 347,137 11,011,121 NOTES RECEIVABLE, net - 3,035,787 NOTE RECEIVABLE, affiliate 2,800,000 - OTHER INVESTMENTS, net 3,477,105 2,919,919 DEFERRED TAX ASSET 2,918,838 1,926,673 OTHER ASSETS 1,225,331 3,577,035 NET NONCURRENT ASSETS OF DISCONTINUED OPERATIONS 14,749,248 - ------------ ----------- $ 56,251,858 $64,817,668 ------------ ----------- ------------ ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit $ 2,700,000 $ - Accounts payable 21,795,843 17,799,146 Accrued liabilities 2,163,325 3,301,513 Accrued compensation 1,240,543 2,016,820 Deferred revenue 2,004,865 1,408,076 Net current liabilities of discontinued operations 11,942,858 - ------------ ----------- Total current liabilities 41,847,434 24,525,555 ------------ ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value; authorized: 10,000,000 shares - - Common stock, $.001 par value; authorized: 30,000,000 shares; issued and outstanding: 12,138,216 shares in 1996 and 11,277,246 shares in 1995 12,138 11,277 Capital in excess of par value 49,583,514 44,598,939 Net unrealized gain (loss) on investment securities 567,508 (170,747) Accumulated deficit (33,366,162) (1,080,493) Less- Deferred charge - warrants (2,392,574) (3,066,863) ------------ ----------- 14,404,424 40,292,113 ------------ ----------- $ 56,251,858 $64,817,668 ------------ ----------- ------------ ----------- The accompanying notes are an integral part of these balance sheets. RENTRAK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994 1996 1995 1994 ------ ------ ------ REVENUES: PPT $108,073,429 $79,793,584 $62,005,968 Other 5,192,891 4,754,315 2,070,544 ------------ ----------- ----------- 113,266,320 84,547,899 64,076,512 ------------ ----------- ----------- OPERATING COSTS AND EXPENSES: Cost of sales 95,167,529 66,374,471 49,697,063 Selling and administrative 20,859,923 15,526,912 14,007,731 Suspension of European operations - - 900,563 ------------ ----------- ----------- 116,027,452 81,901,383 64,605,357 ------------ ----------- ----------- Income (loss) from operations (2,761,132) 2,646,516 (528,845) ------------ ----------- ----------- OTHER INCOME (EXPENSE): Interest income 1,078,798 695,190 566,301 Interest expense (208,307) - (28,257) Gain on sale of investments 62,091 2,826,849 - Other (251,911) - - ------------ ----------- ----------- ------------ ----------- ----------- 680,671 3,522,039 538,044 ------------ ----------- ----------- Income (loss) from continuing operations before income tax provision (benefit) and minority partner interests (2,080,461) 6,168,555 9,199 INCOME TAX (PROVISION) BENEFIT 594,792 (768,045) 763,919 ------------ ----------- ----------- Income (loss) from continuing operations before minority partner interests (1,485,669) 5,400,510 773,118 LOSSES ATTRIBUTABLE TO MINORITY PARTNER INTERESTS - - 130,918 ------------ ----------- ----------- Income (loss) from continuing operations (1,485,669) 5,400,510 904,036 (continued) RENTRAK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994 1996 1995 1994 ------------ ----------- ----------- DISCONTINUED OPERATIONS: Loss from operations of discontinued subsidiaries (less applicable income tax provision (benefit) of $(2,500,000), $(40,814) and $0 for 1996, 1995 and 1994, respectively) $(18,700,000) $ (286,987) $ (90,971) Loss on disposal of subsidiaries including provision of $4,800,000 for operating losses during phaseout periods (less applicable income tax benefit of $0) (12,100,000) - - ------------ ----------- ----------- Net income (loss) $(32,285,669) $ 5,113,523 $ 813,065 ------------ ----------- ----------- ------------ ----------- ----------- NET INCOME (LOSS) PER SHARE EARNINGS (LOSS) PER COMMON SHARE AND COMMON EQUIVALENT SHARE: Continuing operations $ (.12) $ .43 $ .09 Discontinued operations (2.56) (.02) (.01) ------------ ----------- ----------- Net income (loss) $(2.68) $ .41 $ .08 ------------ ----------- ----------- ------------ ----------- ----------- EARNINGS (LOSS) PER COMMON SHARE AND COMMON EQUIVALENT SHARE - assuming issuance of all dilutive contingent shares: Continuing operations $ (.12) $ .42 $ .09 Discontinued operations (2.56) (.02) (.01) ------------ ----------- ----------- Net income (loss) $(2.68) $ .40 $ .08 ------------ ----------- ----------- ------------ ----------- ----------- The accopanying notes are an integral part of these statements. RENTRAK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
Common Stock (Accumulated Net Unrealized -------------- Capital in Deficit) Cumulative Gains (Losses) Number of Excess of Retained Translation on Investment Shares Amount Warrants Per Value Earnings Adjustment Securities Total ----------- -------- ---------- ------------ ----------- ----------- -------------- ------- BALANCE AT MARCH 31, 1993 9,474,894 $9,475 $ - $29,635,765 $(7,007,081) $ 83,866 $ - $22,722,025 Repurchase of common stock (83,963) (84) - (444,544) - - - (444,628) Issuance of common stock for acquisition 776,200 776 - 4,957,828 - - - 4,958,604 Issuance of common stock under employee stock option plan 56,846 57 - 123,214 - - - 123,271 Net income - - - - 813,065 - - 813,065 Cumulative translation adjustment - - - - - (63,866) - (63,866) Net unrelized gain on investment securities - - - - - - 1,434,182 1,434,182 ----------- -------- ---------- ------------ ----------- ----------- -------------- ----------- BALANCE AT MARCH 31, 1994 10,224,057 10,224 - 34,272,263 (6,194,016) - 1,434,182 29,522,653 Repurchase of common stock (38,300) (38) - (189,512) - - - (189,550) Issuance of common stock 364,445 364 - 1,549,257 - - - 1,549,621 Issuance of common stock for acquistions 639,561 640 - 5,110,526 - - - 5,111,166 Issuance of common stock under employee stock option plan 87,483 87 - 322,428 - - - 322,515 Net income - - - - 5,113,523 - - 5,113,523 Change in net unrealized gains (losses) on investment securities - - - - - - (1,604,929) (1,604,929) Issuance of warrants - - (3,533,977) 3,533,977 - - - - Amortization of warrants - - 467,114 - - - - 467,114 ----------- -------- ---------- ------------ ----------- ----------- -------------- ----------- BALANCE AT MARCH 31, 1995 11,277,246 11,277 (3,066,863) 44,598,939 (1,080,493) - (170,747) 40,292,113 Repurchase of common stock (69,300) (69) - (341,631) - - - (341,700) Issuance of common stock 883,000 883 - 5,230,577 - - - 5,231,460 Issuance of common stock under employee stock option plan 47,270 47 - 95,629 - - - 95,676 Net loss - - - - (32,285,669) - - (32,285,669) Change in net unrealized gains (losses) on investment securities - - - - - - 738,255 738,255 Amortization of warrants - - 674,289 - - - - 674,289 ----------- -------- ---------- ------------ ----------- ----------- -------------- ----------- BALANCE AT MARCH 31, 1996 12,138,216 $12,138 $(2,392,574) $49,583,514 $(33,366,162) $ - $ 567,508 $ 14,404,424 ----------- -------- ---------- ------------ ----------- ----------- -------------- ----------- ----------- -------- ---------- ------------ ----------- ----------- -------------- -----------
The accompanying notes are an integral part of these statements. RENTRAK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994 1996 1995 1994 ------ ------ ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(32,285,669) $5,113,523 $813,065 Adjustments to reconcile net income (loss) to net cash provided (used) by operations- Loss on disposal of discontinued operations 12,100,000 - - Loss (gain) on asset and investment sales 426,827 (2,826,849) 893,116 Depreciation 5,034,493 1,441,872 769,748 Amortization and write-off of intangibles 11,545,750 1,242,564 678,588 Amortization of warrants 674,289 467,114 - Provision for doubtful accounts 523,315 (582,386) (43,160) Retailer financing program reserves 2,789,701 2,974,912 - Reserves on advances to program suppliers 1,345,406 572,300 - Losses attributable to minority partner interests - - (130,918) Deferred income taxes (4,966,997) (2,737,426) - Cumulative translation adjustments - - (83,866) Change in specific accounts, net of effects in 1996, 1995 and 1994 from purchase of businesses: Accounts receivable (2,138,592) (4,726,871) 796,241 Inventories (5,638,802) (1,490,480) - Advances to program suppliers 1,025,835 659,348 (1,278,411) Other current assets (1,641,277) (1,244,614) (958,020) Accounts payable 7,156,983 4,746,922 (641,559) Accrued liabilities and compensation 2,403,732 1,420,639 1,117,287 Deferred revenue 1,073,929 1,408,076 - ----------- ----------- ----------- Net cash provided (used) by operating activities (571,077) 6,438,644 1,932,111 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, equipment and inventory (10,143,322) (1,273,080) (1,758,893) Investments in retailer financing program (2,183,000) (8,930,618) - Cash paid for purchases of businesses, net of cash acquired (377,848) - (1,342,352) Purchases of other assets - 309,849 (1,198,989) Purchases of investments (344,500) (4,400,253) (8,271,811) Maturities of investments - 4,400,253 19,596,118 Proceeds from sale of investment 951,394 3,027,540 134,982 Purchase of other assets and intangibles (242,176) (973,319) (364,979) Proceeds from retailer financing program 1,199,005 - - Proceeds from sale of assets 1,100,000 - - ----------- ----------- ----------- Net cash provided (used) by investing activities (10,040,447) (7,839,620) 6,794,076 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings (payments) of long-term debt 2,537,844 (3,259,724) - Borrowing on notes payable 3,501,971 - - Cash received from minority partner - - 50,000 Repurchase of common stock (341,700) (189,550) (444,628) Issuance of common stock 114,011 1,743,937 123,271 ----------- ----------- ----------- Net cash provided (used) by financing activities 5,812,126 (1,705,337) (271,357) ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,799,398) (3,106,313) 8,454,830 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,709,405 13,815,718 5,360,888 CASH AND CASH EQUIVALENTS INCLUDED IN NET CURRENT LIABILITIES OF DISCONTINUED OPERATIONS 3,226,879 - - ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $2,683,128 $10,709,405 $13,815,718 ----------- ----------- ----------- ----------- ----------- ----------- The accompanying notes are an integral part of these statements. RENTRAK CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996, 1995 AND 1994 1. BUSINESS OF THE COMPANIES, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER ITEMS: INTRODUCTION Rentrak Corporation (the Company) (an Oregon corporation) is principally engaged in the distribution of prerecorded video cassettes to the home video market throughout the United States and Canada using its Pay-Per-Transaction (PPT) revenue sharing program. Under its PPT program, which is the Company's primary continuing operation, the Company enters into contracts with program suppliers to distribute video cassettes which are then leased to retailers (producers of motion pictures and licensees and distributors of home video cassettes), for a percentage of the rentals charged by the retailers. PLANNED DIVESTITURES During the quarter ended March 31, 1996, the Company assessed its overall business strategy and decided to divest two subsidiary units -- The Pro Image, Inc. (TPI) and BlowOut Entertainment, Inc. (BlowOut). The Company's Board of Directors has approved the spin-off of TPI and BlowOut. Thus, the operations of TPI and BlowOut are reflected as discontinued operations in the accompanying statements of operations. Refer to Note 15 for discussion of divestiture plans, reserves established by the Company related to the discontinued operations, and the nature of management's estimates used in determining the reserves. TPI, a wholly owned subsidiary of the Company, franchises retail outlets and operates Company-owned retail stores. TPI also operates a wholly owned subsidiary, Team Spirit, Inc. (Team Spirit), which was acquired during the year ended March 31, 1995 (see Note 8). TPI and Team Spirit Stores sell sports-oriented products and apparel featuring products licensed by college and professional sports teams. As of March 31, 1996, TPI franchised approximately 167 retail outlets in 43 states, Canada, Germany, Mexico, Japan, Korea and Indonesia. Including Team Spirit, TPI operates 66 Company-owned retail stores in 28 states throughout the country. BlowOut, a 93 percent owned subsidiary of the Company, is engaged in the business of operating "store within a store" retail video outlets which rent and sell motion picture videocassettes, video games, computer games and programs on CD-ROMs in Wal-Mart Super Centers, Super Kmart Centers and Ralph's grocery stores. BlowOut was formed by the merger of an existing subsidiary with two entities which were acquired during the year (see Note 8). As of March 31, 1996, the Company operated 187 stores. EFFECT OF DIVESTITURES ON THE COMPANY Both TPI and BlowOut have experienced significant losses from operations and have used significant amounts of cash to fund operations during their most recent fiscal year. TPI is currently operating with minimal cash and has developed a new business plan which incorporates certain store closures, staff reductions, and other measures. BlowOut is essentially a start-up company and is experiencing rapid growth requiring additional financing if it is to continue its expansion and to support operations of recently opened stores. BlowOut is currently pursuing financing from several sources and the Company has agreed to guarantee up to $7 million of outside financing to BlowOut. The Company's exposure related to adverse financial and operational developments at TPI and BlowOut is limited to its receivables from and investment in BlowOut which will be retained after the planned spin-off (see Note 15), certain guarantees previously made to BlowOut (see Note 9) and any funding covered by the financing guarantee discussed above. The Company believes it has the wherewithal to fulfill these obligations and does not believe that the issues faced by TPI and BlowOut will have a material adverse effect on the Company. 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 Rentrak's PPT distribution and information processing business in certain markets throughout the world. On June 16, 1994, the Company and CCC amended the agreement. Pursuant to this amendment, the Company will receive a royalty of 1.67 percent for all sales of up to $47,905,000, plus one-half of 1 percent (0.5%) of sales greater than $47,905,000 in each fiscal year. In addition, the Company received a one-time royalty of $2 million payable $1 million in fiscal 1995, which has been received; and $1 million no later than March 31, 1999. The payment of $1 million due on March 31, 1999 has not been recognized as revenue by the Company due to uncertainty of collection. Rentrak Japan will receive additional territories to market PPT. In addition, the Company sold 34 shares of Rentrak Japan to CCC for 6,800,000 Yen ($68,068), reducing the Company's ownership in Rentrak Japan from 33-1/3 percent to 25 percent. The term of the Agreement was extended from the year 2001 to the year 2039. Minority interest represents the minority shareholders' proportionate share of the equity of certain ventures. The minority shareholders' proportionate share of losses in excess of their equity in the entities is recorded in the Company's accompanying statement of operations. 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 percent are accounted for by the equity method. TPI and Team Spirit's year-ends are the last day of February. As there are no intervening events which materially affect the financial position or results of operations, the consolidated financial statements include TPI's balance sheet as of February 29, 1996 and February 28, 1995 and the statements of operations, stockholders' equity and cash flows for the 12-month periods ending February 29, 1996 and February 28, 1995 and the 4-1/2 month period ending February 28, 1994. Team Spirit's balance sheet as of February 29, 1996 and February 28, 1995 and the statements of operations, stockholder's equity and cash flows for the 12-month period ending February 29, 1996 and the 6-month period ending February 28, 1995 are included in the consolidated financial statements. These periods are based on the acquisition dates of the respective entities. BlowOut's balance sheet as of March 31, 1996 and 1995 and the statements of operations, stockholders' equity and cash flows for the years ended March 31, 1996, 1995 and 1994 are included in the consolidated financial statements. Subsequent to March 31, 1996, the Company approved plans to discontinue the operations of TPI and BlowOut (see Note 15). Accordingly, the financial results of these entities are reflected as discontinued operations in the March 31, 1996 financial statements, and the previous years' statements of operations have been restated to reflect these entities as discontinued. The 1995 balance sheet and all cash flow periods have not been restated. MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates include reserves on retailer financing program investments (see Note 4) and estimated losses on disposal of discontinued operations (see Note 15). Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. INVESTMENT SECURITIES Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities (SFAS 115)" requires the Company to classify and account for its security investments as trading securities, securities available for sale or securities held to maturity depending on the Company's intent and ability to hold or trade the securities at time of purchase. Securities available for sale are stated on the balance sheet at their fair market value with an adjustment to stockholders' equity to reflect net unrealized gains and losses, net of tax. Securities held to maturity are stated at amortized cost. Detail of the proceeds from the sales of available for sale securities and realized gains and losses on sales of equity securities are as follows: Proceeds Gross Gains Gross Losses ---------- ------------- -------------- 1994 $ 134,982 $ 84,982 $ - 1995 3,027,548 2,856,716 (25,767) 1996 951,394 150,288 (88,197) FINANCIAL INSTRUMENTS A financial instrument is cash or a contract that imposes or conveys, a contractual obligation or right, to deliver, or receive, cash or another financial instrument. The estimated fair value of all material financial instruments, including retail financing program notes receivable, approximated their carrying values at March 31, 1996 and 1995. INVENTORY Inventory consists of videocassettes held for sale and is carried at the lower of cost (first-in, first-out method) or market value. PROPERTY AND EQUIPMENT Depreciation of fixed assets is computed on the straight-line method over estimated useful lives of three to five years. Leasehold improvements are amortized over the lives of the underlying leases or the service lives of the improvements, whichever is shorter. INTANGIBLES The Company reviews its intangible assets for asset impairment at the end of each quarter, or more frequently when events or changes in circumstances indicate that the carrying amount of intangibles may not be recoverable. To perform that review, the Company estimates the sum of expected future undiscounted preinterest expense net cash flows from the operating activities. If the estimated net cash flows are less than the carrying amount of intangibles, the Company will recognize an impairment loss in an amount necessary to write down intangibles to a fair value as determined from expected discounted future cash flows. During fiscal years 1996, 1995 and 1994, the Company paid cash and issued stock for approximately $21,000, $11,000 and $206,000, respectively, for licensing agreements with product and service suppliers. These agreements are being amortized on the straight-line method over one to ten years. In connection with the acquisition of TPI in 1994, the Company purchased certain intangible assets totaling $6,269,050. These assets include customer and dealer lists, a covenant not to compete, franchise agreements and goodwill. In connection with the acquisitions of Team Spirit and then Image Makers, Inc. and Barenz-Runia, Inc., the Company purchased goodwill totaling approximately $4.1 million and $557,000, respectively. Prior to March 31, 1996, these assets were being amortized on the straight-line method over a 12-year period based on the factors influencing the acquisition decision. The Company believed the above useful lives were appropriate based on the factors influencing acquisition decisions. These factors included store location, profitability and general industry outlook. The Company analyzes the realizability of all costs in excess of the fair values of net assets acquired related to acquisitions to determine if any write-down is necessary. Prior to the fourth quarter of 1996, the Company's analysis determined that no write-down was necessary. Due to events which occurred during the fourth quarter such as continuation of operating losses and the decision to dispose of TPI (including subsidiaries) the Company's analysis determined that intangible assets of approximately $9,300,000 were not recoverable. Thus, the assets were written off to their estimated fair value of $0. These write-offs are reflected in losses from discontinued operations. REVENUE RECOGNITION The PPT agreements provide for a one-time initial handling fee and continuing transaction fees based on a percentage of rental revenues earned by the retailer upon renting the video cassettes to their customers. The Company recognizes handling fees as revenue when the video cassettes are shipped to the retailers and recognizes transaction fees when the video cassettes are rented to the consumers. When the Company's revenue is fixed and determinable at time of shipment of video cassettes to the retailers, deferred revenue is recorded and recognized as revenue in the statement of operations when the video cassettes are rented to the consumers. The corresponding liability to video program suppliers for their share of the fees is recorded to cost of sales when the revenue is recognized with a corresponding amount to accounts payable. The Company also charges retailers a processing fee upon admission to the PPT program. This fee is recognized as PPT revenue when the application to participate in the PPT program is approved. Stockholders and directors, or their families, own interests in several stores participating in the PPT program. The Company realized revenues from these stores of $255,568, $426,102 and $422,053 during 1996, 1995 and 1994, respectively. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under the liability method specified by SFAS 109, deferred tax assets and liabilities are determined based on the temporary differences between the financial statement basis and tax basis of assets and liabilities as measured by the enacted tax rates for the years in which the taxes are expected to be paid. NET INCOME (LOSS) PER SHARE Loss per common share and common equivalent share for 1996 was computed based on the weighted average number of shares of common stock and common equivalent shares outstanding, which was 12,019,273. At March 31, 1995, primary earnings per share are based on the weighted average number of shares outstanding and the assumed exercise of common stock equivalent options and warrants regardless of whether the market price of the common stock exceeded the exercise price of the options and warrants. The number of treasury shares assumed to be purchased with the proceeds from the exercise of the options and warrants was limited to 20 percent of the outstanding shares at period-end. Those purchases were assumed to have been made at the average market price of the Company's common stock during the year. Proceeds from exercise of the options and warrants in excess of those used to purchase treasury shares were assumed to have been invested in government securities with the resultant interest income, adjusted for appropriate tax effects, added to net income for purposes of calculating earnings per share. For the 1995 primary earnings per share calculation, 13,397,951 common shares and common share equivalents were assumed outstanding and $394,249 of assumed interest income, net of tax, was added to the Company's net income for purposes of computing earnings per share. Fully diluted earnings per share at March 31, 1995 are based on the weighted average number of shares outstanding and the assumed exercise of common stock equivalent options and warrants regardless of whether the market price of the common stock exceeded the exercise price of the options and warrants. In addition, contingent warrants were assumed to have been exercised. The number of treasury shares assumed to be purchased with the proceeds from the exercise of the options and warrants was limited to 20 percent of the outstanding shares at period-end. Those purchases were assumed to have been made at the greater of the average or ending market price of the Company's common stock during the year. Proceeds from exercise of the options and warrants in excess of those used to purchase treasury shares were assumed to have been invested in government securities with the resultant interest income, adjusted for appropriate tax effects, to be added to net income for purposes of calculating earnings per share. For the 1995 fully diluted earnings per share calculation, 14,317,380 common shares and common share equivalents were assumed outstanding and $582,494 of assumed interest income, net of tax, was added to the Company's net income for purposes of computing earnings per share. Earnings per common share and common equivalent share for 1994 were computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the year. The number of common shares was increased by the number of shares issuable on the exercise of options and warrants when the market price of the common stock exceeded the exercise price of the options and warrants. This increase in the number of common shares was reduced by the number of common shares that are assumed to have been repurchased with the proceeds from the exercise of the options and warrants. Those repurchases were assumed to have been made at the average price of the common stock during the year. Weighted average shares outstanding used in both the primary and fully diluted earnings per share calculation are 10,162,461. FOREIGN OPERATIONS Foreign currency assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Results of operations are translated at average exchange rates during the period for revenue and expenses. Translation gains and losses resulting from fluctuations in the exchange rates are accumulated as a separate component of stockholders' equity. Translation gains or losses were not material for any period presented. ADVERTISING EXPENSE Advertising expense, net of cooperative advertising reimbursements, totaled $1,472,702, $(95) and $290,603 for the years ended March 31, 1996, 1995 and 1994, respectively. Statement of Cash Flows The Company made the following cash payments for the years ended March 31: 1996 1995 1994 ------ -------- ------- INTEREST $ 326,870 $ 35,979 $ 3,905 INCOME TAXES 236,545 3,288,189 62,127 NONCASH FINANCING AND INVESTING ACTIVITIES: Issuance of warrants - 3,533,977 - Addition to other assets through issuance of common stock - 128,199 - Acquisition of businesses through issuance of stock 5,213,125 5,111,166 5,542,639 Changes in net unrealized gains (losses) on investment securities through adjustments to stockholders' equity 738,255 (1,604,929) 1,434,182 RECENT PRONOUNCEMENTS During May 1993, the Financial Accounting Standards Board issued Statement No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan," which requires the Company to evaluate the collectibility of both contractual interest and contractual principal of all receivables when assessing the need for a loss accrual. The Company has adopted the provisions of SFAS 114 (see Note 4). During March 1995, the Financial Accounting Standards Board issued Statement No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which requires the Company to review for impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. In certain situations, an impairment loss would be recognized. The Company has adopted the provisions of SFAS 121 which did not have a material effect on the Company's financial statements. During October 1995, the Financial Accounting Standards Board issued Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which establishes a fair value-based method of accounting for stock-based compensation plans and requires additional disclosures for those companies that elect not to adopt the new method of accounting. The Company will continue to account for employee purchase rights and stock options under APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123 disclosures will be effective for fiscal years beginning after March 31, 1996. 2. INVESTMENT SECURITIES: The carrying value and estimated fair value of marketable securities at March 31 were as follows: Unrealized Unrealized Cost Gross Gain Gross Loss Fair Value ------- ---------- ---------- ---------- As of March 31, 1996: Available for sale- Current: Corporate securities $207,125 $ 137,375 $ - $ 344,500 ------- ---------- ---------- ---------- ------- ---------- ---------- ---------- Noncurrent: Corporate securities $680,672 $1,118,462 $(340,499) $1,458,635 ------- ---------- ---------- ---------- ------- ---------- ---------- ---------- As of March 31, 1995: Available for sale- Noncurrent: Corporate securities $389,065 $ - $(275,398) $ 113,667 ------- ---------- ---------- ---------- ------- ---------- ---------- ---------- Investment securities which have limited marketability are classified as noncurrent as management does not believe that they will be sold within one year. 3. PROPERTY AND EQUIPMENT: Property and equipment, at cost, consists of: March 31, ------------------------- 1996 1995 ----------- ----------- Furniture and fixtures $4,101,822 $5,932,263 Machinery and equipment 399,897 1,247,352 Leasehold improvements 849,534 3,666,333 ----------- ----------- 5,351,253 10,845,948 Less accumulated depreciation (3,885,076) (5,921,826) ----------- ----------- $1,466,177 $4,924,122 ----------- ----------- ----------- ----------- 4. RETAILER FINANCING PROGRAM: The Company has established a retailer financing program whereby on a selective basis the Company will provide financing to video retailers which the Company believes have the potential for substantial growth in the industry. In connection with these financings, the Company typically makes a loan and/or equity investment in the retailer. In some cases, a warrant to purchase stock may be obtained. As part of such financings, the retailer typically agrees to cause all of its current and future retail locations to participate in the PPT System for a designated period of time. These financings are speculative in nature and involve a high degree of risk and no assurance of a satisfactory return on investment can be given. The amounts the Company could ultimately receive could differ materially in the near-term from the amounts assumed in establishing the reserves. The Board of Directors has authorized up to $14 million to be used in connection with the Company's retailer financing program. As of May 1996, the Company has invested or made oral or written commitments to loan to or invest substantially all of the $14 million authorized in various video retailers. The loans, investments or commitments are to various retailers and individually range from $200,000 to $1,600,000. The investments are stated on the balance sheet at their fair market value in accordance with SFAS 115. The notes, which have payment terms that vary according to the individual loan agreements, are due 1997 through 2001. Interest rates on the various loans range from the prime rate plus 1 percent to the prime rate plus 2 percent. Due to the speculative nature of these loans, interest income is not recognized until received. The loans are reviewed for impairment in accordance with 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. As of March 31, 1996, the Company has approximately $7,300,000 in loans and investments outstanding under the program. Because of the financial condition of a number of these retailers, which became apparent during the year ended March 31, 1996, the Company significantly increased its reserves to approximately $6,000,000 of the total original loan or investment amount. At March 31, 1995, the Company had invested or loaned approximately $9,200,000 under the program and had provided reserves of approximately $3,200,000. The activity in the total reserves for the retailer financing program are as follows for the years ended March 31: 1996 1995 ---------- ----------- Beginning balance $3,242,850 $ - Provision 2,789,701 3,242,850 ---------- ----------- Ending balance $6,032,551 $3,242,850 ---------- ----------- ---------- ----------- 5. LINE OF CREDIT: The Company has an agreement for a line of credit in an amount not to exceed the lesser of $10,000,000 or the sum of (a) 70 percent of the net amount of eligible accounts receivable as defined in the agreement plus (b) certain certificates of deposits and treasury bills as defined in the agreement. The line of credit expires on October 27, 1996. Interest is payable monthly at the bank's prime rate plus 1.5 percent (8.75 percent at March 31, 1996). The lender has been granted the option to purchase 10,000 unregistered shares of common stock of the Company at $7 per share, which exceeded market value at the date of grant. The line is secured by substantially all of the Company's assets (excluding TPI and BlowOut assets). The terms of the agreement require, among other things, a minimum amount of tangible net worth, minimum current ratio and minimum total liabilities to tangible net worth. The agreement also restricts the amount of net losses, loans and indebtedness and limits the payment of dividends on the Company's stock. The Company is in compliance with these covenants or has obtained waivers of noncompliance as of March 31, 1996. At March 31, 1996, the Company had $2,700,000 outstanding under this agreement. 6. INCOME TAXES: The provision (benefit) for income taxes from continuing operations is as follows for the years ended March 31: 1996 1995 1994 -------- -------- -------- Current tax provision Federal $1,663,070 $1,887,414 $ 21,949 State 324,606 338,067 91,081 ---------- ---------- --------- 1,987,676 2,225,481 113,030 Deferred tax benefit (2,582,468) (1,457,436) (876,949) ---------- ---------- --------- Income tax provision (benefit) $ (594,792) 768,045 $(763,919) ---------- ---------- --------- ---------- ---------- --------- The reported provision (benefit) for income taxes differs from the amount computed by applying the statutory federal income tax rate of 34 percent to income before provision (benefit) for income taxes as follows for the years ended March 31: 1996 1995 1994 -------- -------- -------- Provision (benefit) computed at statutory rates $(707,357) $ 2,097,309 $ 3,128 State taxes, net of federal benefit (214,240) 256,331 91,081 Utilization of foreign loss carryforwards - (1,143,876) - Change in valuation allowance - (953,470) - Alternative minimum tax - - 18,821 Benefit of recognition of deferred tax assets - - (876,949) Amortization of warrants 236,058 - - Utilization of foreign tax credit (100,000) - - Other 190,747 511,751 - -------- -------- -------- $(594,792) $ 768,045 $(763,919) -------- -------- -------- -------- -------- -------- - 11 - Prior to 1995, the Company was uncertain as to whether the foreign loss carryforwards could be utilized and therefore no deferred tax asset was established. In fiscal year 1995, it was determined that the losses could be utilized and therefore the Company appropriately reduced 1995 taxable income. The total reduction in the valuation allowance during the year ended March 31, 1996 and 1995, was $0 and $953,470, respectively. The valuation allowance as of March 31, 1994, was recorded against the portion of the NOL deferred tax asset which did not satisfy the recognition criteria set forth in SFAS 109. Deferred tax assets and liabilities from continuing operations are comprised of the following components at March 31, 1996 and 1995:
1996 1995 ---------- ---------- Deferred tax assets: Current- Vacation accrual $ 104,948 $ 132,060 Allowance for doubtful accounts 238,600 147,502 Retailer-related accruals 1,081,039 203,403 Retailer financing program reserve - 122,099 Legal settlement accrual 76,000 171,686 Unrealized gain on investment securities (52,203) - Other (95,158) 138,654 ---------- ---------- Total current deferred tax assets 1,353,226 915,404 ---------- ---------- Noncurrent- Depreciation 128,077 138,969 Retailer financing program reserve 2,384,798 1,351,706 Warrant amortization - 177,504 Program supplier reserves 598,800 - Unrealized (gain) loss on investments (221,527) 104,651 Other 28,690 153,843 ---------- ---------- Total noncurrent deferred tax assets $2,918,838 $1,926,673 ========== ========== Total deferred tax assets $4,272,064 $2,842,077 ========== ==========
7. STOCKHOLDERS' EQUITY: STOCK OPTIONS AND WARRANTS Options are granted under the 1986 Stock Option and the Directors' Stock Option Plans, which are administered by the Board of Directors, at an exercise price equal to fair market value as of the date of grant. Options under the 1986 Stock Option Plan are generally exercisable over four to ten years and expire ten years after date of grant. Options under the Directors' Stock Option Plan are generally exercisable over one to five years and expire five years after date of grant. As of March 31, 1996, the Company has 624,853 options available to be granted and 3,873,500 shares of common stock reserved for issuance under these plans. - 12 - The table below summarizes the plan's activity: Options Outstanding ------------------------------------- Number Price of Per Aggregate Shares Share Price ---------- ----------- ----------- Balance at March 31, 1993 836,956 $1.13 - 9.53 $ 3,583,680 Granted 364,672 4.44 - 6.50 1,839,177 Issued (56,846) 1.13 - 6.25 (123,271) Canceled (162,389) 1.13 - 6.38 (887,287) --------- ------------ ----------- Balance at March 31, 1994 982,393 1.13 - 9.53 4,412,299 Granted 1,709,900 4.94 - 8.50 9,883,418 Issued (87,483) 1.13 - 6.75 (210,065) Canceled (37,467) 1.38 - 6.75 (213,209) --------- ------------ ----------- Balance at March 31, 1995 2,567,343 1.13 - 9.53 13,872,443 Granted 548,807 4.78 - 6.31 2,867,980 Issued (47,270) 1.13 - 5.62 (95,677) Canceled (301,394) 4.88 - 7.88 (2,132,971) --------- ------------ ----------- Balance at March 31, 1996 2,767,486 $1.13 - 9.53 $14,511,775 ========= ============ =========== As of March 31, 1996, 1,261,485 options to purchase stock were exercisable. The remaining 1,506,001 options are subject to restrictions which prohibit them from being exercised as of March 31, 1996. In September 1994, a program supplier exercised warrants to acquire 250,000 shares of the Company's common stock for $5.19 per share. The warrants were granted in 1991. In connection with the secondary offering in May 1991, the Company issued to its investment banker a warrant to purchase 147,500 shares of the Company's common stock. The exercise price per share of $8.90 equaled market value at the date of grant. The warrants would have expired on May 22, 1994. However, the Board of Directors extended the expiration date to May 22, 1997. In August 1992, the Company entered into an agreement with a service supplier to use and sublease certain software on the PPT system. As part of the agreement, the Company paid a licensing fee of $188,000, sold 251,889 shares of common stock for $7 per share ($1,763,223), which approximated market value at date of transaction, and granted a warrant to purchase 251,889 shares of common stock at an exercise price of $9.50 per share, which exceeded market value at the date of grant, through August 1997. The licensing fee was capitalized in other assets and was being amortized over five years, the life of the licensing agreement. In fiscal year 1995, the asset was written down to zero as the agreement was terminated. - 13 - In September 1992, the Company agreed to issue warrants to buy up to 1,000,000 shares of the Company's common stock in connection with entering into a long- term licensing agreement with a program supplier. Certain contractual arrangements must be performed by the program supplier, however, before any warrants are issued. At March 31, 1995, a warrant to purchase 600,000 shares of common stock had been issued at an exercise price of $7.14 per share which approximated market value at date of grant. In July 1994, the Company agreed to issue warrants to buy up to 2,673,750 shares of the Company's common stock in connection with entering into a long-term licensing agreement with a program supplier. Of the warrants, 1,423,750 are issuable based on the program supplier's continuing business with the Company. The remainder of the warrants are issuable upon the meeting of certain conditions by the program supplier, including the delivery of predetermined numbers of titles for inclusion in the Company's PPT program. The warrants were issued at an exercise price of $7.13 per share, which approximated market value at date of grant. As a result of the July 1994 agreement discussed above, the Company issued warrants to acquire 423,750 shares of the Company's common stock to another program supplier under a "favored nations" clause in the contract with that program supplier. This supplier had received a previous grant for 1,000,000 shares (see above). These warrants were also issued at an exercise price of $7.13 per share, which approximated market value at date of grant. In December 1994, the Company agreed to issue warrants to buy up to 250,000 shares of the Company's common stock to certain customers. The warrants are issuable if the customers meet certain purchasing commitments established by the Company. The warrants were issued at an exercise price of $7.00 per share, which approximated market value at date of grant. All warrants which the Company agreed to issue in 1995 have been valued by an outside valuation firm using standard warrant valuation models. The value of the warrants of $3,533,977 has been recorded in the equity section and will be amortized over the associated periods to be benefited by each group of warrants. For 1996 and 1995, expense associated with the warrants was $674,289 and $467,114, respectively. In May 1995, the Board of Directors approved a shareholders' rights plan designed to ensure that all of the Company's shareholders receive fair and equal treatment in the event of any proposal to acquire control of the Company. Under the rights plan, each shareholder will receive a dividend of one right for each share of the Company's outstanding common stock, entitling the holders to purchase one additional share of the Company's common stock. The rights become exercisable after any person or group acquires 15 percent 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 percent or more of the Company's outstanding stock. 8. ACQUISITIONS: As discussed in Note 1, Rentrak consolidated the businesses and operations of an existing subsidiary with two entities which were acquired during the year and were subsequently discontinued (see Note 15). The acquisitions of these two entities are described below. - 14 - ENTERTAINMENT ONE, INC. ACQUISITION On August 31, 1994, the Company acquired 169,230 newly issued shares of common stock of Entertainment One, Inc. (E-1) valued at $338,460 in lieu of a financing fee associated with $1,700,000 of financing provided by the Company to E-1. On December 1, 1994, the Company acquired 500,000 newly issued shares of common stock in E-1 at $2.00 per share. Following the acquisition, the Company owned approximately 9.6 percent of the outstanding shares of E-1. On May 26, 1995, the Company purchased 3,200,000 shares of common stock of E-1 from an E-1 stockholder at $.004 per share. Following the acquisition, the Company owned approximately 57 percent of the outstanding shares of E-1. In connection with this acquisition, the five "stand-alone" video stores owned by E-1 were sold in June 1995 for approximately $1,100,000. These assets were valued at their net realizable value when allocating the purchase price to the assets acquired and liabilities assumed. On October 20, 1995, the Company purchased from E-1 $985,591 principal amount of convertible debentures, all of which were converted into 13,798,275 shares of common stock of E-1 on December 15, 1995. Also on December 15, 1995, the Company converted a $2,000,000 line of credit that it had provided to E-1 into 28,000,000 shares of common stock of E-1. Following these transactions, the Company owned 93 percent of the outstanding shares of E-1. The results of operations of the acquired stores for the ten-month period ended March 31, 1996, have been included in the results of discontinued operations of the Company. SUPERCENTER ENTERTAINMENT CORPORATION ACQUISITION On August 31, 1995, the Company acquired certain assets and assumed certain liabilities of Supercenter Entertainment Corporation (SEC), which constituted the Wal-Mart and Kmart "store within a store" video retail operations of SEC. The total cost of the SEC acquisition of $5,200,000 was provided by issuing 878,000 shares of common stock with an aggregate market value of approximately $5,200,000. The results of operations of the acquired stores for the seven-month period ended March 31, 1996, are included in the results of discontinued operations of the Company. The purchase method of accounting was used to record both the E-1 and SEC acquisitions. As a result of the SEC and E-1 acquisitions, costs in excess of underlying net asset values of approximately $5,200,000 were recorded to intangible assets, consisting of goodwill and favorable lease contracts. If the E-1 acquisition and the SEC acquisition had occurred at the beginning of the years ended March 31, 1996 and 1995, revenues, net loss from continuing operations and net loss per common share and common share equivalent from continuing operations would not be impacted as the E-1 and SEC operations were discontinued in the year ended March 31, 1996, and the results of the related business segment (video retail) are not included in revenues, net loss from continuing operations, and net loss per common share and common share equivalent from continuing operations in any periods presented in the consolidated statements of operations (see Note 15). - 15 - The following table presents the unaudited pro forma results of discontinued operations for the years ended March 31, 1996 and 1995, as if the E-1 acquisition and the SEC acquisition had been consummated at the beginning of the respective periods. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been consummated at the beginning of the respective periods. Year Ended March 31, --------------------------- 1996 1995 ------------ ----------- (Unaudited) Revenue from discontinued operations $ 61,047,768 $36,519,143 Net loss from discontinued operations (18,984,378) (5,169,914) Net loss per share from discontinued operations (1.53) (0.30) TEAM SPIRIT ACQUISITION In August 1994, the Company acquired all of the outstanding stock of Team Spirit. The net purchase price was approximately $4.4 million and was paid via issuance of approximately 557,000 shares of common stock. If the Team Spirit acquisition had occurred at the beginning of the year ended March 31, 1995, revenues, net loss from continuing operations and net loss per common share and common share equivalent from continuing operations would not be impacted as the Team Spirit operations were discontinued in the year ended March 31, 1996, and the results of the related business segment (sports apparel) are not included in revenues, net loss from continuing operations and net loss per common share and common share equivalent from continuing operations in any periods presented in the consolidated statements of operations (see Note 15). The following table presents the unaudited pro forma results of discontinued operations for the year ended March 31, 1995, as if the Team Spirit acquisition had been consummated at the beginning of the year. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made at the beginning of the period. Year Ended March 31, 1995 --------------- (Unaudited) Revenue from discontinued operations $33,822,091 Net loss from discontinued operations (1,154,924) Net loss per share from discontinued operations (0.04) - 16 - 9. COMMITMENTS: LEASES The Company leases its facilities under operating leases expiring at various dates through 2008. Rental payments over the term of the leases exceeding one year are as follows: Year ending March 31, ---------------------- 1997 $ 1,205,994 1998 1,396,430 1999 1,592,980 2000 1,602,341 2001 1,623,410 2002 and thereafter 8,740,710 ----------- $16,161,865 =========== The leases provide for payment of taxes, insurance and maintenance by the Company. The Company also rents vehicles and equipment on a short-term basis. Rent expense under operating leases was $1,319,271, $1,030,640 and $574,124 for the years ended March 31, 1996, 1995 and 1994, respectively. GUARANTEES AND ADVANCES The Company has entered into several guarantee contracts with program suppliers providing titles for distribution under the PPT system. In general, these contracts guarantee the suppliers minimum payments. In some cases these guarantees were paid in advance. Any advance payments that the Company has made and will be realized within the current year are included in advances to program suppliers. The long-term portion is included in other assets. Both the current and long-term portion are amortized to cost of sales as revenues are generated from the related cassettes. The Company, using empirical data, estimates the projected revenue stream to be generated under these guarantee arrangements and accrues for projected losses or reduces the carrying amount of advances to program suppliers for any guarantee that it estimates will not be fully recovered through future revenues. As of March 31, 1996, the Company has recorded $1,918,000 for potential losses under such guarantee arrangements. The Company has guaranteed BlowOut's liabilities to certain vendors for video tape purchases and for equipment purchases at BlowOut stores. At March 31, 1996, the amount owed by BlowOut for these purchases was approximately $2,372,000. The Company has guaranteed $2,000,000 of notes payable of BlowOut. In the event the guarantee is required, payment may be made in Rentrak stock and/or cash. - 17 - 10. CONTINGENCIES: The Company is subject to certain legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of any ultimate liability with respect to these actions will not materially affect the financial position or results of operation of the Company. 11. RENTRAK JAPAN: As is discussed in Note 1, the Company owns a one-fourth interest in Rentrak Japan. Summarized financial data for the joint venture, after translation to U.S. currency, at March 31, 1996, 1995 and 1994, and for the years then ended is as follows: 1996 1995 1994 ----------- ---------- ----------- Current assets $ 34,123,179 $39,809,085 $14,773,880 Noncurrent assets 7,792,028 5,543,661 4,044,049 Current liabilities 37,440,434 44,460,125 18,585,255 Noncurrent liabilities 4,307,679 4,252,586 2,285,771 Shareholders' equity (deficit) 167,094 (3,359,965) (2,053,097) Net sales 115,912,094 88,382,895 56,082,841 Cost of sales 77,291,283 59,935,511 44,218,531 Net income (loss) 2,920,047 (760,946) (1,589,437) As of March 31, 1993, the Company's investment has been written down to zero. The Company has provided no guarantee or other financial commitments for the investee which would require the recognition of additional losses in 1994 and 1995 from the investee under the equity method. During 1996, no income was recognized by the Company as the Company's share of net income does not exceed the net losses not recognized during the period the equity method was suspended. 12. SUSPENSION OF EUROPEAN OPERATIONS: The write off of European assets, which was incurred in the quarter ended September 30, 1993, amounted to $789,155, composed of $56,042 in accounts receivable, $94,200 in other current assets, $549,008 in property and equipment, and $89,905 in other long-term assets. In addition to the $789,155 write down of assets in the quarter ended September 30, 1993, during the year ended March 31, 1994, the Company incurred $1.4 million in European operating costs as well as $111,408 in cash expenditures to finalize operations. During the year ended March 31, 1994, the equity method was suspended. 13. EMPLOYEE BENEFIT PLANS: At January 1, 1991, the Company established an employee benefit plan (the Rentrak Plan) pursuant to Section 401(k) of the Internal Revenue Code for certain qualified employees. Contributions made to the 401(k) plan are based on percentages of employees' salaries. The amount of the Company's contribution is at the discretion of Board of Directors. Contributions under the 401(k) plan for the years ended March 31, 1996, 1995 and 1994 were $40,436, $35,347 and $25,430, respectively. The Company has an Employee Stock Purchase Plan (the Plan). The Board of Directors has reserved 200,000 shares of the Company's common stock for issuance under the Plan, of which 165,311 shares remain authorized and available for sale to employees. - 18 - All employees meeting certain eligibility criteria may be granted the opportunity to purchase common stock, under certain limitations, at 85 percent of market value. Payment is made through payroll deductions. Under the Plan, employees purchased 5,059 shares for aggregate proceeds of $28,781, 11,062 shares for aggregate proceeds of $78,449 and 8,663 shares for aggregate proceeds of $51,694 in 1996, 1995 and 1994, respectively. 14. BUSINESS SEGMENTS, GEOGRAPHIC INFORMATION, SIGNIFICANT SUPPLIERS AND MAJOR CUSTOMER: BUSINESS SEGMENTS - CONTINUING OPERATIONS 1996 1995 1994 ------------ ------------ ----------- Net sales: PPT $108,073,429 $ 79,793,584 $62,005,968 Other 5,192,891 4,754,315 2,070,544 ------------ ------------ ----------- $113,266,320 $ 84,547,899 $64,076,512 =========== ============ =========== Income (loss) from operations: PPT $ (2,574,745) $ 2,886,841 $ 2,064,299 Other (186,387) (240,325) (2,593,144) ------------ ------------ ----------- $ (2,761,132) $ 2,646,516 $ (528,845) ============ ============ =========== Identifiable assets:(1) PPT $ 39,122,002 $ 39,132,490 $33,284,507 Sports apparel - 22,610,120 8,950,132 Retail video - 1,101,399 1,398,961 Other 2,380,608 1,973,659 986,845 ------------ ------------ ----------- $ 41,502,610 $ 64,817,668 $44,620,445 ============ ============ =========== Depreciation: PPT $ 806,416 `$ 698,979 $ 513,315 Other 208,421 160,925 65,251 ------------ ------------ ----------- $ 1,014,837 $ 859,904 $ 578,566 ============ ============ =========== Amortization: PPT $ 1,520,445 $ 847,620 $ 512,074 Other - 156,924 22,279 ------------ ------------ ----------- $ 1,520,445 $ 1,004,544 $ 534,353 ============ ============ =========== Capital Expenditures: PPT $ 640,821 $ 430,021 $ 969,454 Other 11,679 - 76,586 ------------ ------------ ----------- $ 652,500 $ 430,021 $ 1,046,040 ============ ============ ============ - 19 - BUSINESS SEGMENTS - DISCONTINUED OPERATIONS 1996 1995 1994 ------------ ------------ ----------- Net sales: Sports apparel $ 39,131,760 $ 26,363,211 $ 3,950,705 Retail video 17,466,804 1,255,121 869,270 ------------ ------------ ----------- $ 56,598,564 $ 27,618,332 $ 4,819,975 ============ ============ =========== Income (loss) from discontinued operations: Sports apparel $ (4,576,815) $ 270,176 $ 440,781 Retail video (6,568,656) (467,223) (470,474) ------------ ------------ ----------- $(11,145,471) $ (197,047) $ (29,693) ============ ============ =========== Depreciation: Sports apparel $ 968,180 $ 438,871 $ 92,452 Retail Video 3,051,476 143,097 98,730 ------------ ------------ ----------- $ 4,019,656 $ 581,968 $ 191,182 ============ ============ =========== Amortization: Sports apparel $ 10,195,094 $ 684,889 $ 129,542 Retail video 504,500 20,245 14,693 ------------ ------------ ----------- $ 10,699,594 $ 705,134 $ 144,235 ============ ============ =========== Capital Expenditures, net of acquisitions: Sports apparel $ 1,774,507 $ 832,621 $ 23,147 Retail video 7,716,315 10,438 689,706 ------------ ------------ ----------- $ 9,490,822 $ 843,059 $ 712,853 ============ ============ =========== GEOGRAPHIC INFORMATION - CONTINUING OPERATIONS 1996 1995 1994 ------------ ------------ ----------- Revenues from unaffiliated customers: United States $113,266,320 $ 84,547,899 $63,960,575 Foreign - - 115,937 ------------ ------------ ----------- $113,266,320 $ 84,547,899 $64,076,512 ============ ============ =========== Net income (loss): United States $ (1,485,669) $ 5,400,510 $ 3,183,046 Foreign - - (2,279,010) ------------ ------------ ----------- $ (1,485,669) $ 5,400,510 $ 904,036 ============ ============ =========== - 20 - 1996 1995 1994 ------------ ------------ ----------- Identifiable assets:(1) United States $ 41,502,610 $ 64,817,668 $44,620,445 Foreign - - - ------------ ------------ ----------- $ 41,502,610 $ 64,817,668 $44,620,445 ============ ============ =========== GEOGRAPHIC INFORMATION - DISCONTINUED OPERATIONS 1996 1995 1994 ------------ ------------ ----------- Revenues from unaffiliated customers: United States $ 56,598,564 $ 27,618,332 $ 4,819,975 Foreign - - - ------------ ------------ ----------- $ 56,598,564 $ 27,618,332 $ 4,819,975 ============ ============ =========== Loss from operations of discontinued subsidiaries United States $(18,700,000) $ (286,987) $ (90,971) Foreign - - - ------------ ------------ ----------- Loss on disposal of subsidiaries: United States (12,100,000) - - Foreign - - - ------------ ------------ ----------- Net loss $(30,800,000) $ (286,987) $ (90,971) ============ ============ =========== There were no sales or transfers between geographic areas in any of the years presented. (1) 1995 and 1994 identifiable assets have not been restated from discontinued operations. The Company has one program supplier that supplied product that generated 39 percent, a second that generated 21 percent, and a third that generated 15 percent of Rentrak revenues for the year ended March 31, 1996. The Company has one program supplier that supplied product that generated 26 percent, a second that generated 17 percent, and a third that generated 15 percent of Rentrak revenues for the year ended March 31, 1995. The Company had one program supplier that supplied product that generated 28 percent and a second program supplier that supplied product that generated 25 percent of Rentrak revenues for the year ended March 31, 1994. There were no other program suppliers who provided product accounting for more than 10 percent of sales for the years ended March 31, 1996, 1995 and 1994. The Company currently receives a significant amount of product from one program supplier. Although management does not believe that this relationship will be terminated in the near term, a loss of this supplier could affect operating results adversely. This disclosure is being provided pursuant to Statement of Position No. 94-6. "Disclosure of Certain Significant Risks and Uncertainties," which was required to be adopted by the Company in this fiscal year. - 21 - One customer accounted for 10 percent and 14 percent of the Company's revenues in 1996 and 1995, respectively. No customers accounted for 10 percent or more of the Company's revenue in 1994. 15. DISCONTINUED OPERATIONS: In March 1996, the Board approved the spin-off of TPI into a separate public company with Rentrak shareholders being issued new shares representing 100 percent ownership of TPI. Since then, the Company has been approached by parties interested in acquiring TPI and the Company recently signed a nonbinding letter of intent. The due diligence process is currently underway. Final disposition of TPI either through a sale or the spinoff is expected to be completed by year-end. TPI is accounted for as discontinued operations and, accordingly, its operations are segregated in the accompanying statement of operations. TPI incurred losses from operations, net of income tax benefit, of approximately $12,720,000 (including a write-off of intangible assets of $9,300,000 (see Note 1)) for the year ended February 29, 1996. This amount is included in loss from operations of discontinued subsidiaries in the accompanying statement of operations. The Company has also accrued at March 31, 1996, approximately $2,300,000 for the operating losses estimated to be incurred by TPI through the disposal date and other costs of approximately $6,700,000 associated with the disposition such as professional fees and a write-down of the assets to their estimated realizable value. A deferred tax asset related to these costs of approximately $3,380,000 was also recorded with a valuation allowance reserve against the entire asset. These operating losses and costs are included in loss on disposal of subsidiaries in the accompanying statement of operations. Net noncurrent assets of TPI which are included in net noncurrent assets of discontinued operations in the accompanying balance sheet at March 31, 1996 are comprised primarily of property and equipment and long-term debt. Net current liabilities of TPI which are included in net current liabilities of discontinued operations in the accompanying balance sheet at March 31, 1996 are comprised primarily of inventory, receivables, accounts payable, accrued liabilities, estimated operating losses to be incurred by TPI through the disposal date and other costs associated with the disposition. In June 1996, the Board also approved the spin-off of BlowOut into a public company with Rentrak shareholders being issued shares representing 73.1 percent ownership of BlowOut. Rentrak will retain 19.9 percent and certain minority shareholders will retain 7 percent. The 19.9 percent interest of the net assets of BlowOut at March 31, 1996 has been recorded in other investments in the accompanying balance sheet. Also, the Company has recorded accounts receivable from BlowOut totaling $3,227,006 and a note receivable of $2,800,000 bearing interest at 9 percent which is due March 1999. These balances represent amounts due on transactions (primarily PPT charges) which will continue in the future after BlowOut is spun off. Therefore, these amounts have not been eliminated in consolidation. Final disposition of BlowOut is expected to be completed by year-end. - 22 - BlowOut is accounted for as discontinued operations and, accordingly, its operations are segregated in the accompanying statement of operations. BlowOut incurred losses from operations, net of income tax benefit, of approximately $5,980,000 for the year ended March 31, 1996. This amount is included in loss from operations of discontinued subsidiaries in the accompanying statement of operations. The Company has also accrued at March 31, 1996, approximately $2,500,000 for the operating losses estimated to be incurred by BlowOut through the disposal date and professional fees of approximately $600,000 associated with the disposition. A deferred tax asset related to these costs of approximately $1,158,000 was also recorded with a valuation allowance reserve against the entire asset. These operating losses and costs are included in loss on disposal of subsidiaries in the accompanying statement of operations. Net noncurrent assets of BlowOut are included in net noncurrent assets of discontinued operations in the accompanying balance sheet at March 31, 1996 are comprised primarily of rental inventory, property and equipment, intangibles, and long-term debt. Net current liabilities of BlowOut which are included in net current liabilities of discontinued operations in the accompanying balance sheet at March 31, 1996 are comprised primarily of cash, inventory, accounts payable, accrued liabilities, estimated operating losses to be incurred by BlowOut through the disposal date and other costs associated with the disposition. Divestitures through stock dividend and spin-off are subject to a number of conditions, including formal declaration of a dividend by the Board of Directors. Revenues, operating costs and expenses, other income and expenses, and income taxes for fiscal years 1995 and 1994 have been reclassified for amounts associated with the discontinued operations. The 1995 balance sheet has not been restated. Revenues from such operations for the periods ended March 31, were as follows: 1996 1995 1994 ------------ ------------ ----------- TPI $39,131,760 $26,363,211 $3,950,705 BlowOut 17,466,804 1,255,121 869,270 Discontinued operations include management's best estimates of the anticipated losses from discontinued operations through the date of disposition as well as amounts expected to be realized on the spin-off and or sale of the two subsidiaries. The estimates are based on an analysis of the operations of the Companies, including costs which may be incurred to dispose of the entities. The amounts the Company will ultimately incur could differ materially in the near term from the amounts assumed in arriving at the loss on disposal of the discontinued operations. - 23 - Rentrak Corporation Valuation and Qualifying Accounts Schedule II
Balance at Charged to Charged Balance Beginning Cost and to Other Recoveries at End of of Periods Exepenses Accounts (Deductions) Period - ------------------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts March 31, 1994 1,268,126 (687,189) - 644,029 1,224,966 March 31, 1995 1,224,966 (2,984,899) - 2,402,513 642,580 March 31, 1996 642,580 (2,327,028) (332,692) (1) 2,645,035 627,895 Advances to program suppliers reserve March 31, 1995 0 572,300 - - 572,300 March 31, 1996 572,300 1,345,406 - - 1,917,706 Inventory reserve March 31, 1995 0 336,046 - - 336,046 March 31, 1996 336,046 (336,046) (1) - 0 Other Current Assets- Retailer Financing Program reserve March 31, 1995 0 267,938 - - 267,938 March 31, 1996 267,938 846,582 - - 1,114,520 Other Assets- Retailer Financing Program reserve March 31, 1995 0 2,974,912 - - 2,974,912 March 31, 1996 2,974,912 1,943,119 - - 4,918,031
(1) Transfered to discontinued operations 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 ----------------------------------- Executive Vice President/Chief Financial Officer Date July 2, 1996 --------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----