================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
Amendment No. 1
--------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: March 31, 2004
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 (I.R.S. Employer
incorporation Identification No.)
or organization)
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, $0.001 par value
--------------------
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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [ X ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates, computed by reference to the last sales price ($6.99) as
reported by the Nasdaq National Market System, as of the last business day of
the Registrant's most recently completed second fiscal quarter (September 30,
2003), was $64,623,214.
The number of shares outstanding of the Registrant's Common Stock as of June 25,
2004 was 9,802,655 shares.
Documents Incorporated by Reference
The Registrant has incorporated into Part III of Form 10-K, by reference,
portions of its Proxy Statement for its 2004 Annual Meeting of Shareholders.
================================================================================
Explanation of Amendment
We are filing this Amendment No. 1 on Form 10-K/A (the "Form 10-K/A"),
amending our Annual Report on Form 10-K for the fiscal year ended March 31,
2004, as originally filed on July 14, 2004 (the "Original 10-K"), primarily to:
o Clarify and expand the explanation in Items 1, 6, 7 and 8 regarding
the reasons for and the periods affected by the restatement of our
consolidated financial statements for the fiscal years ended March
31, 2002 and 2003 and the first, second and third quarters of fiscal
2004. For further discussion see "Restatements" in Item 7, as well
as Note 4 to our consolidated financial statements and "Quarterly
Financial Data" in Item 8, of the Form 10-K/A.
o Provide additional disclosure regarding our direct advertising
expenses and amounts reimbursed by our program suppliers. For
further discussion, see "Advertising Expense" in Note 8 to our
consolidated financial statements in Item 8 of the Form 10-K/A.
o Clarify in Item 9A "Controls and Procedures" management's conclusion
that our disclosure controls and procedures were ineffective at
March 31, 2004 for the reasons described in that item.
Other than the changes to the notes to our audited consolidated financial
statements described above, the financial statements in the Form 10-K/A have not
changed from those contained in the Original 10-K. Also, none of the amounts
discussed in Item 7 "Management's Discussion and Analysis of Results of
Operations and Financial Condition" have changed from those included in the
Original 10-K.
We are concurrently filing Amendment No. 1 to our Quarterly Report on Form
10-Q for the quarter ended June 30, 2004, originally filed on August 16, 2004,
to provide expanded disclosure comparable to that included in this Form 10-K/A.
The following sections of this Form 10-K/A have been revised from the
Original 10-K:
o Item 1 - Business
o Item 6 - Selected Financial Data
o Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
o Item 8 - Financial Statements and Supplementary Data
o Item 9A - Controls and Procedures
o Item 15 - Exhibits, Financial Statement Schedules
o Exhibit Index
Except as set forth above, this Form 10-K/A continues to speak as of the date of
the filing of the Original 10-K, July 14, 2004, and we have not updated the
disclosures contained herein to reflect any events that have occurred since that
date. For a discussion of more recent events and developments, please see our
reports filed with the SEC since July 14, 2004.
1
RENTRAK CORPORATION
2004 FORM 10-K/A ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties *
Item 3. Legal Proceedings *
Item 4. Submission of Matters to a Vote of Security Holders *
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity *
Securities
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market *
Risk
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure *
Item 9A. Controls and Procedures 48
PART III
Item 10. Directors and Executive Officers of the Registrant *
Item 11. Executive Compensation *
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters *
Item 13. Certain Relationships and Related Transactions *
Item 14. Principal Accountant Fees and Services *
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on 51
Form 8-K
Signatures 52
* Not included in Form 10-K/A
2
PART I
ITEM 1. BUSINESS
Where You Can Find More Information
We file annual, quarterly and other reports, proxy statements and other
information with the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934 as amended ("Exchange Act"). You can inspect and
copy our reports, proxy statements, and other information filed with the SEC at
the offices of the SEC's Public Reference Room located at 450 Fifth St., NW,
Room 1024, Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the Public Reference Rooms. The SEC also maintains an
Internet website at http://www.sec.gov/ where you can obtain most of our SEC
filings. We also make available, free of charge on our website at
www.rentrak.com, our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after they are filed electronically with the SEC. You can also
obtain copies of these reports by contacting Investor Relations at (503)
284-7581.
Overview
Our primary business continues to be the collection, processing, analysis and
presentation of rental and sales information regarding videocassettes
("Cassettes"), digital videodiscs ("DVDs"), and Video Games (collectively
"Units") leased/licensed to home video specialty stores and other retailers by
way of our Pay Per Transaction system (the "PPT System"). Under our PPT System,
home video specialty stores and other retailers that rent Units to consumers
("Retailers"), including grocery stores and convenience stores, lease Units and
other media from Rentrak for a low initial fee and share a portion of each
retail rental transaction with us. We included Video Games as part of the PPT
system in fiscal 2003. Our PPT System generated 84%, 78% and 73% of total
revenues in fiscal years 2004, 2003 and 2002, respectively.
We also provide direct revenue sharing ("DRS") services to various suppliers.
The DRS services collect, track, audit and report the results to our suppliers
under established agreements on a fee for service basis. In addition, our
Essentials(TM) software and services, which we began offering in the fourth
quarter of fiscal 2003, provide unique data collection, management, analysis and
reporting functions, resulting in business intelligence information valuable to
our clients.
During the fourth quarter of fiscal 2003, we decided to pursue a plan to sell or
dispose of substantially all the assets of our subsidiary 3PF.COM, Inc. ("3PF"),
which provided order processing, inventory management and fulfillment services
to Rentrak and third parties. We sold substantially all the assets of 3PF's
Wilmington, Ohio operations in July 2003. See Note 5 of Notes to Consolidated
Financial Statements.
Restatement
Our fiscal 2003, 2002, 2001 and 2000 financial statements have been restated as
discussed further in Note 4 of Notes to Consolidated Financial Statements
included in Item 8 and in Item 7.
Pay-Per-Transaction System
We distribute Units principally to home video specialty stores ("Retailers")
through our 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.
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"). We retain a portion of each Order Processing Fee and
Transaction Fee and remit the remainder to the appropriate motion picture
studios or other licensee or owner of the rights to certain video programming,
or video game publishers, ("Program Suppliers") that
3
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").
Direct Revenue Sharing
Our DRS services consist of data collection, tracking, auditing and reporting of
revenue sharing rental and sales transactions of large retail chain video store
customers that rent Units and engage in revenue sharing arrangements directly
with the Program Suppliers. The DRS services are offered to Program Suppliers
who participate in our PPT System. We utilize our internally developed computer
software and are compensated on a fee for service basis.
Business Intelligence Services
In the fourth quarter of fiscal 2003, we began offering business intelligence
("BI") services, by taking advantage of the capabilities we built through our
PPT System in the entertainment industry. Our suite of BI software and services
consist of Box Office Essentials(TM), VideoGame Essentials(TM), Retail
Essentials(TM), VOD Essentials(TM), Business Intelligence Essentials(TM) and
Supply Chain Essentials(TM) (collectively, the "Essentials software and
services") for the entertainment industry and beyond. The Essentials software
and services provides custom data collection, management, analysis and
reporting, resulting in business intelligence information valuable to our
customers.
Marketing and Relationships with Program Suppliers
We currently market our PPT System throughout the United States and Canada. We
offer substantially all of the titles of a number of non-Video Game 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, Warner Brothers, including
Warner Home Video, HBO Video, New Line Home Entertainment, TNT, and Lightyear
Entertainment and MGM Home Entertainment, a subsidiary of Metro Goldman Mayer,
Inc. Our arrangements with all of our Program Suppliers are of varying duration,
scope and formality. In some cases, we have 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 us for the PPT System.
Many of our 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
we can distribute on a profitable basis, or continue to remain in business. Even
if titles are otherwise available from Program Suppliers, there is no assurance
that they will be made available on terms acceptable to us. During the last
three years, we have not experienced any material difficulty acquiring suitable
Units for our markets on acceptable terms and conditions from Program Suppliers.
We have one Program Supplier that supplied product that generated 22%, one that
generated 15%, one that generated 13% and one that generated 12% of our revenues
for the year ended March 31, 2004. During fiscal 2003, we had one Program
Supplier that supplied product that generated 16% of our total revenues, two
that generated 15% and a fourth that generated 11%. There were no other Program
Suppliers who provided product that generated 10% or more of our total revenues
for the year ended March 31, 2004. Although we do not believe that our
relationships with these significant Program Suppliers will be terminated in the
near term, a loss of any of these Program Suppliers could have a material
adverse effect on our results of operations.
Certain Program Suppliers have requested, and we have provided, financial or
performance commitments, including advances or guarantees, as a condition of
obtaining certain titles. We determine whether to provide such commitments on a
case-by-case basis, depending upon the Program Supplier's success with
4
such titles prior to home video distribution and our assessment of expected
success in home rental distribution. We currently have such commitments with
three Program Suppliers for movies and three Program Suppliers for Video Games.
Significant Customers
We had one PPT customer that accounted for 17% of our total revenue in fiscal
2004. The agreement with this PPT customer expires in September 2004. One
fulfillment customer accounted for 14% and 11%, respectively, of our total
revenue in fiscal 2003 and 2002. The agreement with this fulfillment customer
expired July 31, 2003. There were no other customers that accounted for 10% or
more of our total revenue in fiscal 2004, 2003 and 2002.
Distribution of Cassettes, DVDs, and Video Games
Our 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,
we also produce a monthly product catalog called "Ontrak."
To be competitive, Participating Retailers must be able to rent their Units on
the "street date" announced by the Program Supplier for the title. Effective
April 1, 2004, we have contracted with a third party fulfillment provider to
distribute our Units via overnight air courier to assure delivery to
Participating Retailers on the street date. The handling and freight costs of
such distribution comprise a portion of our cost of sales.
Computer Operations
To participate in our PPT System, Participating Retailers must install
Rentrak-approved computer software and hardware to process all of their rental
and sale transactions. Our RPM Software resides on the Participating Retailer's
POS computer system and transmits a record of PPT transactions to us over a
telecommunications network. The RPM Software also assists the Participating
Retailer in ordering newly released titles and in managing its inventory of
Units.
Our 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. Our information
system also transmits information on new titles and confirms orders made to the
RPM Software at the Participating Retailer location.
Auditing of Participating Retailers
From time to time, we audit 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 whose PPT
business activity varies from our statistical norms. Depending upon the results
of our analysis of the reports, we 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
We believe that the home video industry is highly seasonal because Program
Suppliers tend to introduce hit titles for movies at two periods of the year,
early summer and Christmas. Since the release of movies to home video usually
follows the theatrical release by approximately six months (although significant
variations occur on certain titles), the seasonal peaks of movies for home video
also generally occur in early summer and at Christmas. We believe our volume of
rental transactions and resulting revenues and
5
earnings reflect, in part, this seasonal pattern. However, changes in Program
Suppliers' titles available to Participating Retailers and us may obscure any
seasonal effect.
Competition
The Cassette, DVD, and Video Game distribution business is a highly competitive
industry that is rapidly changing. The traditional method of distributing 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"),
our PPT System offers Participating Retailers an alternative method of obtaining
Units. Accordingly, we face intense competition from all of the traditional
distributors, including Ingram Entertainment, Inc., Video Product Distributors,
Inc., and Video One Canada, Ltd. These and other traditional distributors have
extensive distribution networks, long-standing relationships with Program
Suppliers and Retailers, and, in some cases, significantly greater financial
resources than us.
In the past, certain traditional distributors offered Units to Retailers on a
revenue sharing basis. To our knowledge, only one does so today on a very
limited basis. This distributor executed a licensing agreement with Supercomm,
Inc. ("Supercomm"), now a wholly-owned subsidiary of Columbia TriStar Home
Entertainment ("Columbia"), to market product on revenue sharing terms.
Domestically, Supercomm also processes data for Columbia's direct relationships
with Blockbuster Video and several other Retailers.
We also face direct competition from the Program Suppliers. Several major
Program Suppliers offer Retailers discounted pricing if the Retailers
substantially increase the quantity of Units purchased. Also, some major Program
Suppliers have offered Units to Retailers on a lease basis. In addition, all
major Program Suppliers sell Units directly to major Retailers including
Blockbuster, the world's largest chain of home video specialty stores. We
believe most of the major Program Suppliers have direct revenue sharing
arrangements with Blockbuster and Hollywood Entertainment, the world's second
largest chain of home video specialty stores. We also believe that certain
Program Suppliers have executed direct revenue sharing agreements with several
other large Retailers. We do not believe that the Program Suppliers have
executed direct revenue sharing agreements with other smaller Retailers, but
there can be no assurance that they will not do so in the future.
The Program Suppliers also compete with us by releasing certain Unit titles on a
"sell-through" basis; they bypass the traditional rental period by selling the
Units directly to consumers at a price of approximately $9.95 to $19.95 per
Unit. To date, such "sell-through" distribution has generally been limited to
certain newly released hit titles with wide general family appeal. However,
because our 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 our results
of operations and financial condition.
We also compete 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 our results of operations and financial condition.
6
Formovies.com
Formovies.com is a website designed by us and dedicated to assist consumers in
finding a local video store where they can rent and/or purchase the video
products they want. Consumers can find a particular movie of their choice by
searching on various attributes of that title. Once found they can then
determine the closest video store that carries that product.
Trademarks, Copyrights, and Proprietary Rights
We have registered our "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. We have applied and
obtained registered status in several foreign countries for many of our
trademarks. We have filed applications to register our various "Essentials"
trademarks, some of which are completed and the others pending. We have filed
patent applications for our Box Office Essentials and VOD Essentials software.
We claim a copyright on our RPM Software and consider it to be proprietary. We
have also filed notice and claim a copyright on our Essentials software. We
believe that our intellectual property is important to our marketing efforts and
the competitive value of our services and we intend to take appropriate action
to halt any infringement or protect against improper usage.
Employees
As of March 31, 2004, including all subsidiaries, we employed 162 full-time
employees and 30 part-time employees. We consider our relations with our
employees to be good.
Financial Information About Industry Segments
See Note 18 of Notes to the Consolidated Financial Statements for information
regarding our business segments.
7
PART II
ITEM 6. SELECTED FINANCIAL DATA
(In Thousands Except Per Share Amounts)
Year Ended March 31,
---------------------------------------------------------
2004 2003 2002 2001 2000
------- ------- -------- ------- --------
Statement of Operations Data (1) (restated) (restated) (restated) (restated)
Revenues:
Order processing fees $ 7,741 $14,745 $ 16,893 $18,533 $ 22,331
Transaction fees 46,398 42,258 44,102 55,752 61,476
Sell-through fees 10,309 8,558 7,324 8,431 9,826
Communication fees 1,127 1,185 1,136 1,509 2,099
Fulfillment(2) 4,624 15,266 15,342 20,137 8,337
Other 7,933 3,872 11,224 3,668 3,624
------- ------- -------- ------- --------
Total revenues 78,132 85,884 96,021 108,030 107,693
------- ------- -------- ------- --------
Operating expenses:
Cost of sales 60,090 71,347 71,913 85,993 87,157
Selling and administrative
expense 16,357 14,434 17,266 31,002 25,360
Net gain from litigation
settlements -- (362) (1,563) (225) (7,792)
Asset impairment -- 844 424 -- --
------- ------- -------- ------- --------
Total operating expenses 76,447 86,263 88,040 116,770 104,725
------- ------- -------- ------- --------
Income (loss) from
continuing operations 1,685 (379) 7,981 (8,740) 2,968
Other income (expense) 233 179 7,913 (2,149) (1,389)
------- ------- -------- ------- --------
Income (loss) from continuing
operations before income tax
(provision) benefit and loss
from discontinued operations 1,918 (200) 15,894 (10,889) 1,579
Income tax provision (benefit) 479 (56) 6,040 (4,057) 450
------- ------- -------- ------- --------
Income (loss) from continuing 1,439 (144) 9,854 (6,832) 1,129
operations
Income (loss) from discontinued
operations (129) (583) (792) (259) 2,581
------- ------- -------- ------- --------
Net income (loss) $ 1,310 $ (727) $ 9,062 $(7,091) $ 3,710
------- ------- -------- ------- --------
Earnings (loss) per share:
Basic:
Continuing operations $ 0.15 $ (0.02) $ 0.95 $ (0.57) $ 11
Discontinued operations (0.01) (0.06) (0.08) (0.02) 0.24
------- ------- -------- ------- --------
Net income (loss) $ 0.14 $ (0.08) $ 0.87 $ (0.59) $ 0.35
======= ======= ======== ======= ========
Diluted:
Continuing operations $ 0.14 $ (0.02) $ 0.93 $ (0.57) $ 0.10
Discontinued operations (0.01) (0.06) (0.07) (0.02) 0.24
------- ------- -------- ------- --------
Net income (loss) $ 0.13 $ (0.08) $ 0.85 $ (0.59) $ 0.34
======= ======= ======== ======= ========
Shares used to compute
diluted EPS 10,119 9,641 10,613 11,985 10,759
2004 2003 2002 2001 2000
------- ------- -------- ------- --------
Balance Sheet Data (1) (restated) (restated) (restated) (restated)
Working capital $14,633 $11,485 $ 12,515 $ 4,637 $ 9,645
Total assets 36,363 31,488 40,094 38,623 50,299
Long-term liabilities 235 668 496 1,175 --
Stockholders' equity 18,796 16,047 18,116 12,158 18,365
8
(1) Fiscal years 2000, 2001, 2002 and 2003 have been restated for correction of
certain errors. In addition, certain expenses in fiscal 2003 and 2002 have
been reclassified. In May and June 2004, we discovered that we had
misinterpreted and misapplied certain terms of some of our Program Supplier
revenue sharing agreements. These misinterpretations and misapplications
resulted in the miscalculation of Program Supplier liabilities and related
cost of sales and, therefore, net income (loss). There were two general
types of misinterpretations or misapplications: (i) over reporting cost of
sales and overstating assets and understating liabilities due to the
misapplication of certain terms in our Program Supplier revenue sharing
agreements; and (ii) under reporting cost of sales and related liabilities
due to the misuse of contract information in recognizing our guarantees to
one Program Supplier. These restatements affected cost of sales as follows
(in thousands):
Year Ended March 31,
----------------------------------
Increase (decrease) to cost of sales due to:
--------------------------------------------- 2003 2002 2001 2000
------ ------ ------- ------
Misapplication of certain terms of Program
Supplier revenue sharing agreements $ (724) $ (840) $ (792) $ (460)
Misuse of contract information in recognizing
our guarantees to one Program Supplier 963 737 -- --
------ ------ ------- ------
Net increase (decrease) to income
(loss) from operations $ (239) $ 103 $ 792 $ 460
====== ====== ======= ======
Also in June 2004, we discovered that we were not accounting for certain order
processing fees received from our customers upon "street date," which is the
date that they are able to rent the title pursuant to SOP 00-2. Our previous
method had been to recognize revenue on the shipment date. This resulted in a
restatement of revenue between periods as follows (in thousands):
Year Ended March 31,
----------------------------------
2003 2002 2001 2000
------ ------ ------ ------
Increase (decrease) to revenue $ (274) $ 27 $ (30) $ --
Increase (decrease) to cost of sales (206) (21) (23) --
------ ------- -------- -------
Net increase (decrease) to income $ (68) $ 6 $ (7) $ --
(loss) from operations ====== ======= ======== =======
In addition, in connection with the embezzlement of funds by an employee, as
discussed in more detail in Note 16 of Notes to Consolidated Financial
Statements included in Item 8, we underreported our sales tax liability in
fiscal 2003 by $62,000. We record our sales tax liabilities as an offset to
revenue.
Following is a reconciliation, giving effect to all of the restatements, of our
revenue, income from operations and net income (in thousands):
Year Ended March 31,
-------------------------------------
2003 2002 2001 2000
------- ------- -------- --------
Revenue as previously reported $86,220 $95,994 $108,060 $107,693
Net effect of restatements (336) 27 (30) --
------- ------- -------- --------
Revenue as restated $85,884 $96,021 $108,030 $107,693
======= ======= ======== ========
Income (loss) from operations as previously reported $ (10) $ 7,872 $ (9,525) $ 2,508
Net effect of restatements (369) 109 785 460
------- ------ -------- -------
Income (loss) from operations as restated $ (379) $ 7,981 $ (8,740) $ 2,968
======= ======= ======== ========
Net income (loss) as previously reported $ (498) $ 8,994 $ (7,577) $ 3,425
Net effect of restatements (229) 68 486 285
------- ------- -------- --------
Net income (loss) as restated $ (727) $ 9,062 $ (7,091) $ 3,710
------- ------- -------- --------
Basic net income (loss) per share as previously reported $ (0.05) $ 0.86 $ (0.63) $ 0.33
------- ------- -------- --------
Diluted net income (loss) per share as previously reported $ (0.05) $ 0.85 $ (0.63) $ 0.32
------- ------- -------- --------
Basic net income (loss) per share as restated $ (0.08) $ 0.87 $ (0.59) $ 0.35
------- ------- -------- --------
Diluted net income (loss) per share as restated $ (0.08) $ 0.85 $ (0.59) $ 0.34
======= ======= ======== ========
9
The restatements did not affect cash flows from operations, investing activities
or financing activities in any fiscal year. For details on the restatements of
our first, second and third quarters of fiscal 2004, see "Quarterly Financial
Data." See also Note 4 of Notes to Consolidated Financial Statements included in
Item 8 for more detail on the restatements in fiscal 2003 and 2002.
(2) We sold our fulfillment business effective July 2003. See Note 5 of Notes
to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
Certain information included in this 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: our ability to retain and grow our Participating Retailer customer
base and customers for our business intelligence software and services, the
financial stability of the Participating Retailers and their performance of
their obligations under the PPT System, non-renewal of our 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
Units from Program Suppliers. This Annual Report on Form 10-K further describes
some of these factors. (References to Notes are to Notes to Consolidated
Financial Statements included in Item 8 of this report.)
Business Trends
Our financial results for fiscal 2004 have been, and we expect them to continue
to be for fiscal 2005, affected by the changing dynamics in the home video and
game rental market, as they impact our PPT business. We continue to experience
the impact of the migration from higher historical rentals of Cassettes to
greater rentals of DVDs by our Participating Retailers. We have successfully
implemented new agreements with Program Suppliers to incorporate the
availability of DVDs, and we continue our efforts in fiscal 2005 to secure more
DVD agreements to address this impact. In addition, our PPT business continues
to be affected by a shift to "output programs" under which the Program Supplier
and we agree to a lower order processing and transaction fee in exchange for the
Participating Retailers' commitment to order an increased number of Units of all
the Program Supplier's titles. The result is an increased number of Units leased
by the Participating Retailers, but a reduced amount of fees per Unit earned by
the Program Supplier and us. These output programs are an economic response to
the changing dynamics of the home video rental market, as a result of the
migration from Cassette format to the DVD format. We expect the growth of these
output programs to continue, and believe that they will be financially
beneficial for the Participating Retailers, Program Suppliers and us.
Our base of Participating Retailers continues to be strong. We have one
Participating Retailer that accounted for 17% of the PPT revenues in fiscal
2004. The agreement with this Participating Retailer is scheduled to expire in
September 2004, with associated PPT revenues from that Participating Retailer's
rentals expected to continue on a declining basis through the end of fiscal
2005. We are currently discussing with that Participating Retailer their
interest in entering into a new agreement with us. We are also implementing
other strategies for obtaining other new Participating Retailers and Program
Suppliers in an effort to further stabilize and grow our overall PPT revenue and
earnings streams.
We continue to be in good standing with all of our Program Suppliers and we make
on-going efforts to enhance those business relationships through improvement of
current services offered and the development of new service offerings. We are
also continually seeking to develop business relationships with new Program
Suppliers.
We are also allocating significant efforts towards our business intelligence
service offerings, both those services that are currently operational as well as
those that are in various stages of development. Our suite of business
intelligence software has been well received in the various targeted markets to
date, as our offerings fit well with the needs identified by those market
participants. We intend to continue to make the necessary increased investments
in these new business intelligence services in the short-term, affecting our
current earnings. We believe they will provide significant future revenue and
earnings streams
10
and ultimately be the cornerstone of our long-term success.
Sources of Revenue
Our sources of revenue include the following PPT revenue sharing fees in the
Entertainment business segment: order processing fees generated when Cassettes,
DVDs and video games ("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 our information system; and
buy out fees generated when retailers purchase Units at the end of the lease
term. Entertainment business segment revenues also include direct revenue
sharing fees from data tracking and reporting services provided to program
suppliers ("DRS"), revenues from Box Office Essentials(TM), Supply Chain
Essentials(TM), Business Intelligence Essentials(TM), and Home Video
Essentials(TM), all part of our Essential(TM) business intelligence service
offerings, as well as charges for Internet services provided by our subsidiary,
formovies.com, Inc.
In addition, through July 31, 2003, revenue included the Fulfillment business
segment representing charges to customers of our subsidiary 3PF.COM, Inc.
("3PF"), which provided order processing, fulfillment and inventory management
services to Internet retailers and wholesalers and other businesses requiring
just-in-time fulfillment. Effective July 1, 2003, we sold 3PF's operating assets
at its Wilmington, Ohio facility to a third party.
Restatements
In May and June 2004, we discovered that we had misinterpreted and misapplied
certain terms of some of our Program Supplier revenue sharing agreements. These
misinterpretations and misapplications resulted in the miscalculation of Program
Supplier liabilities and related cost of sales and, therefore, net income
(loss). There were two general types of misinterpretations or misapplications:
(i) over reporting cost of sales and overstating assets and understating
liabilities due to the misapplication of certain terms in our Program Supplier
revenue sharing agreements in the amounts of $0.7 million and $0.8 million,
respectively, in fiscal 2003 and 2002; and (ii) under reporting cost of sales
and related liabilities due to the misuse of contract information in recognizing
our guarantees to one Program Supplier in the amounts of $0.9 million and $0.7
million, respectively, in fiscal 2003 and 2002. However, there was no effect on
the accuracy of amounts we have periodically remitted to our Program Suppliers
under the terms of the revenue sharing agreements or on our reported cash
balances. Accordingly, correction of these errors did not result in any
additional payments to any of these suppliers.
The misstatement that resulted in over reporting our cost of sales and related
liabilities was due to a misapplication of terms in one of our Program Supplier
revenue sharing agreements. Our accounting methodology for recognizing revenues
and associated expenses is based on the establishment of certain contractual
terms and algorithms when a revenue sharing agreement is executed with a Program
Supplier. These contractual terms are used in calculations on a
transaction-by-transaction basis. In the course of our fiscal year 2004 audit,
we discovered that some of these contractual terms were not established
appropriately in our accounting system in accordance with the terms of the
contract with this Program Supplier. Our accounting system had been inaccurately
programmed with an algorithm that calculated the cost of sales and corresponding
liability. This calculation misapplied a contractual term to certain items
relating to that Program Supplier's product, which resulted in an overstatement
of the liability to that Program Supplier. We have since modified our accounting
system to establish the appropriate contractual terms for this Program Supplier.
In addition, we have reviewed all key algorithms within our accounting system to
ensure they are aligned with Program Supplier contractual terms.
The misstatement that resulted in under reporting of cost of sales and
overstating assets and understating liabilities was due to the misinterpretation
of contractual information in a revenue sharing agreement with one of our
Program Suppliers. We believed we could offset prior guarantee shortages with
future guarantee overages, based upon the contractual provisions. In reviewing
the contractual agreement with members of operating personnel, the Accounting
Department realized we had been misinterpreting those contractual provisions and
that we are not permitted to offset prior guarantee shortages with future
guarantee overages. We have since modified our accounting processes for this
Program Supplier to
11
include the appropriate guarantee liability calculation. Please note that our
Critical Accounting Policies and Estimates disclosure as it relates to Program
Supplier Reserves for contractual guarantees was accurately stated and was not
affected by this restatement or process change. Also in June 2004, we discovered
that we were not accounting for certain order processing fees received from our
customers upon "street date," which is the date that they are able to rent the
title pursuant to SOP 00-2. Our previous method had been to recognize revenue on
the shipment date. This resulted in a restatement of revenue between periods.
In addition, in connection with the embezzlement of funds by an employee, as
discussed in more detail below, we underreported our sales tax liability in
fiscal 2003. We record our sales tax liabilities as an offset to revenue.
See Item 9A "Controls and Procedures" for a discussion of changes made to our
internal controls and to our processes and procedures to help ensure against
such restatements in the future.
The restatements did not affect cash flows from operations, investing activities
or financing activities in any fiscal year. We also reclassified certain
operating expense amounts to conform to the current fiscal year presentation.
For details on the restatement of our first, second and third quarters of fiscal
2004, see "Quarterly Financial Data" in Item 8.
We have restated our fiscal years ended March 31, 2003 and 2002 and the related
balance sheet accounts at March 31, 2003 as follows:
Year Ended March 31, 2003
------------------------------------------------------------------------------
Income
Income (loss)
Cost Total tax from
(In thousands) of operating expense continuing Net
Revenue sales expenses (benefit) operations loss
-------- -------- -------- ------ ------- ------
As previously $ 86,220 $ 71,315 $ 86,231 $ 85 $ 84 $ (498)
reported
Adjustment for
misinterpretation
and misapplication -- 239 239 (91) (148) (148)
of contract terms
SOP 00-2 revenue
recognition (274) (206) (206) (25) (43) (43)
adjustment
Underreporting
of sales tax (62) -- -- (24) (38) (38)
Rounding -- (1) -- (1) 1 --
-------- -------- -------- ------ ------- ------
As restated $ 85,884 $ 71,347 $ 86,264 $ (56) $ (144) $ (727)
======== ======== ======== ====== ======= ======
After the above adjustments, our basic and diluted net loss per share for fiscal
2003 increased to $(0.08) per share compared to the previously reported basic
and diluted net loss per share of $(0.05) as previously reported.
March 31, 2003
-------------------------------------------------------------------------
Advances Current
to deferred Total
(In thousands) Accounts Program tax current Total
receivable Suppliers assets assets assets
-------------------- ---------- --------- ------- -------- --------
As previously $ 9,706 $ 418 $ 2,797 $ 25,496 $ 30,726
reported
Adjustment for
misinterpretation
and misapplication
of contract terms
Current period -- (586) 91 (495) (495)
Prior periods -- 1,999 (514) 1,485 1,485
SOP 00-2 revenue
recognition
adjustment
Current period (274) -- 25 (249) (249)
Prior periods (3) -- -- (3) (3)
Underreporting of
sales tax, current -- -- 24 24 24
period ------- -------- ------- -------- --------
As restated $ 9,429 $ 1,831 $ 2,423 $ 26,258 $ 31,488
======= ======== ======= ======== ========
12
Total
Total liabilities
Total Accumu- stock- and stock-
Accounts Accrued current lated holders holders'
(In thousands) payable liabilities liabilities deficit equity equity
----------------- -------- -------- -------- --------- -------- --------
As previously $ 12,711 $ 1,144 $ 14,621 $ (24,409) $ 15,437 $ 30,726
reported
Adjustment for
misinterpretation
and misapplication
of contract terms:
Current period (347) -- (347) (148) (148) (495)
Prior periods 645 -- 645 840 840 1,485
SOP 00-2 revenue
recognition
adjustment:
Current period (206) -- (206) (43) (43) (249)
Prior periods (2) -- (2) (1) (1) (3)
Underreporting of
of sales tax,
current period -- 62 62 (38) (38) 24
-------- ------- -------- --------- -------- --------
As restated $ 12,801 $ 1,206 $ 14,773 $ (23,799) $ 16,047 $ 31,488
======== ======= ======== ========= ======== ========
Year Ended March 31, 2002
--------------------------------------------------------------------------------
Income
Cost Total Income from
of operating tax continuing Net
(In thousands) Revenue sales expenses expense operations income
-------- -------- --------- ------- ---------- --------
As previously $ 95,994 $ 71,994 $ 88,122 $ 5,998 $ 9,787 $ 8,994
reported
Adjustment for
misinterpretation
and misaaplication
of contract terms -- (102) (102) 39 63 63
SOP 00-2
revenue
recognition 27 21 21 2 4 4
adjustment
Rounding -- -- (1) 1 -- 1
-------- -------- -------- ------- -------- --------
As restated $ 96,021 $ 71,913 $ 88,040 $ 6,040 $ 9,85 $ 9,062
======== ======== ======== ======= ======== ========
After the above adjustments, our basic net income per share for fiscal 2002
increased to $0.87 per share compared to the $0.86 per share previously reported
and our diluted net income per share remained unchanged at $0.85 per share.
Please refer to footnote (1) of the Selected Financial Data in Item 6 for more
detailed information regarding the impact of the matters noted above to the
restatement of our financial statements for fiscal years 2001 and 2000.
Sale of 3PF.COM
In June 2003, we signed a definitive agreement to sell substantially all of the
assets of 3PF at the Wilmington, Ohio operation for $800,000. The agreement
covered all equipment and leasehold improvements at 3PF's leased distribution
facility in Wilmington, Ohio, as well as a portion of its working capital. As
part of the agreement, 3PF, as lessee, and Rentrak, as guarantor, were released
from the lease. The cash purchase price of $800,000 is approximately equal to
the net book value of the assets sold. We completed this asset sale transaction
effective July 1, 2003, and received the cash purchase price in full. The
operations of 3PF have not been reported as discontinued operations in
accordance with FASB Statement No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," because cash flows related to our fulfillment
activities have not been completely eliminated.
During the sale negotiations, we received notification from 3PF's largest
customer, serviced exclusively from the leased distribution facility in
Columbus, Ohio, that it did not intend to renew its fulfillment service contract
upon the scheduled expiration at July 31, 2003. The Columbus, Ohio distribution
facility was used exclusively to service this customer. Due to the timing of the
notification, we were not able to include the Columbus, Ohio distribution
facility lease in the asset sale transaction. We completed the termination of
the lease obligation for the Columbus, Ohio distribution facility, effective
December 1, 2003, for a cost of $650,000, which is included as a component of
cost of sales in our statement of operations. This lease termination included
the assignment of the sublease 3PF had in place with its former largest customer
for approximately 194,000 square feet of this facility.
13
Investigation and Recovery Efforts Regarding Misappropriated Funds
In March 2004, we learned that an employee may have engaged in fraudulent
activity and we hired an outside firm to investigate the matter. The employee
admitted to embezzling funds from us. It was determined that the employee had
been embezzling funds from us since 1998 through 2003, in an amount totaling
approximately $570,000. The investigation of this matter is complete. Other than
$62,000 in underreported sales taxes as discussed above, the embezzlement funds
were materially expensed in the year such funds were embezzled and, therefore,
had no other effect on the restatement of any financial results in fiscal 2004
or prior years. We are in the process of securing certain assets belonging to
this employee, which, in conjunction with insurance proceeds, should provide us
with recoveries of approximately $300,000, which will be recorded as recoveries
in future periods when they are received. We have incurred a total of
approximately $120,000 to $150,000 of legal and other professional fees related
to this matter through June 2004, and expect to incur an additional amount of
approximately $5,000 to $10,000 before the matter is resolved. We have updated
our system of internal controls, as described more fully in Item 9A, in order to
prevent such occurrences in the future.
Results of Operations
Year Ended March 31, (1)
------------------------------------------------------
2004 2003 (restated) 2002 (restated)
(2) (2)
-------------- ---------------- ---------------
% of % of % of
(Dollars in thousands) Dollars revenues Dollars revenues Dollars revenues
------- ----- ------- ----- ------- -----
Revenues:
Order processing fees $ 7,741 9.9% $14,745 17.2% $16,893 17.6%
Transaction fees 46,398 59.4 42,258 49.2 44,102 45.9
Sell-through fees 10,309 13.2 8,558 10.0 7,324 7.6
Communication fees 1,127 1.4 1,185 1.4 1,136 1.2
Fulfillment 4,624 5.9 15,266 17.8 15,342 16.0
Other 7,933 10.2 3,872 4.5 11,224 11.7
------- ----- ------- ----- ------- -----
78,132 100.0 85,884 100.0 96,021 100.0
Operating expenses:
Cost of sales 60,090 76.9 71,347 83.1 71,913 74.9
Selling and
administrative 16,357 20.9 14,434 16.8 17,266 18.0
Net gain on
litigation settlement -- -- (362) (0.4) (1,563) (1.6)
Asset impairment -- -- 844 1.0 424 0.4
------- ----- ------- ----- ------- -----
76,447 97.8 86,263 100.4 88,040 91.7
------- ----- ------- ----- ------- -----
Income (loss)from 1,685 2.2 (379) (0.4) 7,981 8.3
operations
Other income (expense):
Interest income 244 0.3 204 0.2 195 0.2
Interest expense (11) -- (25) -- (18) --
Loss on investments -- -- -- -- (231) (0.2)
Gain on Rentrak
Japan transaction -- -- -- -- 7,967 8.3
------- ----- ------- ----- ------- -----
233 0.3 179 0.2 7,913 8.2
------- ----- ------- ----- ------- -----
Income (loss) from
continuing operations
before income tax
provision (benefit) 1,918 2.5 (200) (0.2) 15,894 16.6
and loss from
discontinued
operations
Income tax provision 479 0.6 (56) -- 6,040 6.3
(benefit)
------- ----- ------- ----- ------- -----
Income (loss) from
continuing operations
before loss from 1,439 1.8 (144) (0.2) 9,854 10.3
discontinued
operations
Loss from discontinued
operations, net of tax (129) (0.2) (583) (0.7) (792) (0.8)
------- ----- ------- ----- ------- -----
Net income (loss) $ 1,310 1.7% $ (727) (0.9)% $ 9,062 9.4%
======= ===== ======= ===== ======= =====
(1) Percentages may not add due to rounding.
(2) Fiscal 2003 and 2002 have been restated for certain errors. See Note 4 of
Notes to Consolidated Financial Statements. In addition, certain expenses
were reclassified from selling and administrative to cost of sales in fiscal
2003 and 2002.
14
Revenue
Revenue decreased $7.8 million, or 9.1%, to $78.1 million in fiscal 2004
compared to $85.9 million in fiscal 2003, and decreased $10.1 million, or 10.5%,
in fiscal 2003 compared to $96.0 million in fiscal 2002. The decrease in revenue
in fiscal 2004 compared to fiscal 2003 is primarily due to a decrease in
fulfillment (3PF) revenue and order processing fees. These decreases were
partially offset by an increase in revenues from transaction fees and from DRS
and our Essential(TM) business service offerings, which are a component of other
revenue. The decrease in fiscal 2003 compared to fiscal 2002 is primarily due to
the fact that, in fiscal 2002, we earned royalties and other revenues from
Rentrak Japan totaling $6.4 million, which are included as a component of other
revenue. Our arrangement with Rentrak Japan ended in fiscal 2002.
Order processing fees decreased $7.0 million in fiscal 2004 compared to fiscal
2003 due to PPT "output programs" and other PPT programs under which we agreed
with the program supplier to charge a lower order processing and transaction fee
in exchange for the Participating Retailers' commitment to order an increased
total number of Units of all the Program Suppliers' titles. These programs began
in August 1998 and were a response to the shift from the VHS cassette format to
the DVD format. These output programs, along with a new combined VHS/DVD revenue
sharing program with a new major supplier, contributed to an 89% increase in
total Units shipped during fiscal 2004 compared to fiscal 2003.
The decrease in order processing fees was offset in part by a $4.1 million, or
9.8%, increase in transaction fees and a $1.8 million, or 20.5%, increase in
sell-through fees. The increase in transaction fees is primarily due to the
increased number of Units ordered by our Participating Retailers from our output
programs that were rented to their customers. The increase in sell-through fees
is primarily due to the new combined VHS/DVD revenue sharing program noted
above. We expect our sell-through revenue increases to continue as the result of
changed terms and conditions in our new product programs.
Fulfillment revenues decreased $10.6 million, or 69.7%, to $4.6 million during
fiscal 2004 compared to $15.3 million during fiscal 2003, due to ceasing 3PF
operations as of July 31, 2003 as discussed above.
Increases in other revenue in fiscal 2004 compared to fiscal 2003 included an
increase of approximately $1.3 million in DRS revenues to $4.3 million in fiscal
2004 and an increase of $2.9 million in revenues from our Essential(TM) business
intelligence services offerings to $3.2 million in fiscal 2004. In fiscal 2003,
there were minimal revenues generated from our Essential(TM) business
intelligence services as they began in the fourth quarter of fiscal 2003. The
$7.4 million decrease in fiscal 2003 compared to fiscal 2002, primarily relates
to $6.4 million of royalties received related to Rentrak Japan in fiscal 2002 in
connection with its sale, compared to none in fiscal 2003, and a $0.8 million
decrease in DRS revenues.
Order processing-fee revenue decreased to $14.7 million, a decrease of $2.1
million, or 12.4%, in fiscal 2003 from $16.9 million in fiscal 2002 and
transaction-fee revenue decreased to $42.3 million, a decrease of $1.8 million,
or 4.2%, from $44.1 million in the same periods. These decreases resulted
primarily from the output and other PPT programs discussed above. These
decreases were partially offset by an increase in sell-through revenue to $8.6
million in fiscal 2003 compared to $7.3 million in fiscal 2002, an increase of
$1.2 million, or 16.8%.
Cost of Sales
Cost of sales consists of order processing costs, transaction costs,
sell-through costs and handling and freight costs, and represents the direct
costs to produce revenues. Order processing costs, transaction costs and sell
through costs represent the amounts due the Program Suppliers that hold the
distribution rights to the Units. Freight costs represent the cost to pick, pack
and ship orders of Units to the Participating Retailers.
Cost of sales decreased $11.3 million, or 15.8%, to $60.1 million in fiscal 2004
compared to $71.3 million in fiscal 2003 and decreased $0.6 million, or 0.8%, in
fiscal 2003 compared to $71.9 million in fiscal 2002. Cost of sales as a
percentage of revenue was 76.9% in fiscal 2004 compared to 83.1% in fiscal 2003
and 74.9% in fiscal 2002.
15
A majority of the decrease in cost of sales in fiscal 2004 compared to fiscal
2003 was due to ceasing operations of 3PF in July 2003. In addition,
approximately $0.9 million of the total cost of sales decrease is attributable
to the overall $1.2 million decrease in PPT revenues. Cost of sales in fiscal
2004 includes a $650,000 charge related to costs of terminating 3PF's Columbus,
Ohio, facility lease.
The decrease in cost of sales as a percentage of revenue in fiscal 2004 compared
to fiscal 2003 is due to approximately $3.2 million in revenues from our
Essential(TM) business service offerings in fiscal 2004, with $0.8 million of
related cost of sales, compared to $0.3 million of revenue and $0.3 million of
costs from these offerings in fiscal 2003. In addition, the decrease is due to
the receipt of $0.8 million of discretionary rebates from one of our Program
Suppliers during fiscal 2004, related to guarantee shortages resulting from
under-performance of certain titles. We received $0.2 million of such rebates
during fiscal 2003. These decreases were partially offset by the $650,000 charge
related to 3PF discussed above.
The decrease in cost of sales in fiscal 2003 compared to fiscal 2002 is
primarily due to the decrease in revenue as discussed above. The increase in
cost of sales as a percentage of revenue in fiscal 2003 compared to fiscal 2002
is primarily due to the lack of royalty fees related to Rentrak Japan in fiscal
2003, compared to $6.4 million of such royalties in fiscal 2002, and a $295,000
increase in warrant amortization. We expensed the remaining unamortized value of
warrants previously issued to a customer in conjunction with a service agreement
as of March 31, 2003 based on the expectation that the customer would not be
utilizing our services in future periods.
Selling and Administrative
Selling and administrative expenses consist primarily of compensation and
benefits, development, marketing and advertising costs, legal and professional
fees, communications costs, depreciation and amortization of tangible fixed
assets and software, real and personal property leases, as well as other general
corporate expenses.
Selling and administrative expenses increased $1.9 million, or 13.3%, to $16.4
million in fiscal 2004 compared to $14.4 million in fiscal 2003, and decreased
$2.8 million, or 16.4%, in fiscal 2003 compared to $17.3 million in fiscal 2002.
The increase in selling and administrative expenses in fiscal 2004 compared to
fiscal 2003 is primarily due to an increase of approximately $1.4 million
related to the continued investment toward the development and operating growth
in our Essential(TM) business service offerings noted above. In addition, we had
a $1.0 million decrease in advertising credits received from our Program
Suppliers in fiscal 2004 compared to fiscal 2003 and our bad debt expense
increased $0.7 million in the same period due to fewer charge-backs to our
Program Suppliers under our current contractual arrangements. These increases
were partially offset by an approximately $1.5 million decrease attributable to
ceasing 3PF's operations July 31, 2003.
The decrease in fiscal 2003 compared to fiscal 2002 was primarily attributable
to a $1.7 million decrease in compensation, advertising, and travel and
entertainment expenses related to our 3PF business, as we continued to adjust
our overhead infrastructure to better match the related revenues. In addition,
in fiscal 2003 compared to fiscal 2002, we had a $0.5 million increase in
advertising credits, a $0.2 million increase in bad debt charge-backs to our
Program Suppliers and a $0.4 million decrease in other miscellaneous costs.
Net Gain on Litigation Settlement
The net gain on litigation settlement of $362,000 in fiscal 2003 relates to an
amount that Hollywood Entertainment, a former customer, agreed to pay us in
order to resolve all outstanding issues. The net gain on litigation settlement
of $1.6 million in fiscal 2002 relates to a settlement with Hollywood
Entertainment for breach of a fulfillment contract.
Asset Impairment
In 2003, we determined that it was unlikely that 3PF would achieve its business
plans and we initiated a plan to sell the assets of 3PF. Prior to March 31,
2003, it was determined that, more likely than not, substantially all of 3PF's
assets would be sold or otherwise disposed of. As a result of this
determination, during the quarter ended March 31, 2003, we assessed the current
and historical
16
operating and cash flow losses, prospects for growth in revenues and other
alternatives for improving the operating results of 3PF.
We then performed an assessment of the fair value of the 3PF assets under the
guidelines of SFAS 144, "Accounting for the Impairment of Long-Lived Assets."
This assessment resulted in 3PF recognizing an asset impairment charge during
the three-month period ended March 31, 2003 in the amount of $844,041 for the
write down of its assets to estimated fair market value of approximately
$800,000.
Other Income (Expense)
Interest income of $244,000 and $204,000 in fiscal 2004 and 2003, respectively,
includes $156,000 and $57,000 of interest earned on the note receivable due from
one of 3PF's clients, which was issued in June 2002. See Note 5 of Notes to
Consolidated Financial Statements.
The $231,000 loss on investments in fiscal 2002 includes a $250,000 loss related
to the write-off of an unrealizable investment made by our 3PF business in a
former customer.
The $8.0 million gain on Rentrak Japan transactions includes $1.0 million
related to the sale of 3PF stock to Rentrak Japan, $6.4 million related to the
sale of our entire interest in Rentrak Japan stock and $567,000 related to
forgiveness of liabilities.
Income Taxes
Our effective tax rate was 25.0%, (27.8)% and 38.0%, respectively, in fiscal
2004, 2003 and 2002. The tax rate in fiscal 2004 was positively affected
primarily by the benefit of tax intangible amortization. In addition, our
effective tax rate differs from the federal statutory tax rate due to state
income taxes.
Discontinued Operations
Discontinued operations include the operations of BlowOut Video, which consisted
of retail store operations for the sale of used Units. Due to the significant
increase in sell-through activity throughout the industry, the operations of
BlowOut Video did not meet our expectations, and, as a result, during fiscal
2003, we initiated and completed a plan to discontinue the retail store
operations of BlowOut Video. The plan called for an exit from the stores by the
end of fiscal 2003, either through cancellation of the lease commitments and
liquidation of assets, or through sale of the stores to a third party. As of
March 31, 2003, all operations had ceased. In January 2004, we were notified by
the purchaser of a portion of BlowOut Video's operations of their intent to
default on a note receivable due to us. As such, we provided an approximate $0.2
million reserve for the remaining balance of this note receivable in the
three-month period ended December 31, 2003. This reserve resulted in a reported
loss, net of tax benefit, from these discontinued operations of $128,649, or
$0.01 per share in fiscal 2004. We are continuing to sell our contractually
available end-of-term PPT revenue-sharing product through broker channels.
Current and prior year amounts have been restated to classify the results of
BlowOut Video operations, net of related tax effects, as discontinued.
The results of operations related to BlowOut Video were as follows:
Year Ended March 31,
-------------------------------------
2004 2003 2002
----------- ----------- ----------
Revenue $ -- $ 2,575,733 $ 6,620,165
Net loss $ (128,649) $ (582,627) $ (792,757)
Net loss per share $ (0.01) $ (0.06) $ (0.07)
The decrease in revenue in fiscal 2003 compared to fiscal 2002 is due to
operating only three stores during fiscal 2003 compared to seven stores in
fiscal 2002.
Inflation
We believe that the impact of inflation was minimal on our business in fiscal
2004, 2003 and 2002.
17
Liquidity and Capital Resources
Our sources of liquidity include our cash balance, cash generated from
operations and our $2.0 million line of credit. Based on our current budget and
projected cash needs, we believe that our available sources of liquidity will be
sufficient to fund our current operations, the continued development of our
business intelligence services and other cash requirements to at least March 31,
2005.
Cash and cash equivalents decreased $1.3 million to $8.7 million at March 31,
2004, compared to $10.1 million at March 31, 2003. This decrease resulted
primarily from $2.1 million used in operations and $1.6 million used for the
purchase of property and equipment, partially offset by $0.8 million of proceeds
from the sale of 3PF, $0.5 million of payments received on a note receivable
from 3PF's former largest customer, and $1.0 million of proceeds related to the
issuance of stock pursuant to our stock plans. Our current ratio was 1.85:1.0 at
March 31, 2004 compared to 1.77:1.0 at March 31, 2003.
Accounts receivable increased $5.6 million to $15.0 million at March 31, 2004
compared to $9.4 million at March 31, 2003. This increase is primarily due to
changes in the terms of various combined VHS/DVD revenue-sharing agreements,
together with an increase in the number of Units rented.
Advances to Program Suppliers increased $2.4 million to $4.2 million at March
31, 2004 compared to $1.8 million at March 31, 2003 primarily due to the timing
of release dates for certain titles and the addition of a new Program Supplier.
These amounts represent the unearned portion of guarantees with certain Program
Suppliers.
Deferred tax assets, short and long-term, were $3.4 million at March 31, 2004
compared to $3.1 million at March 31, 2003. The deferred tax asset balance
primarily relates to net operating loss carryforwards and various reserves not
currently deductible for tax purposes.
Other current assets decreased $0.9 million to $1.5 million at March 31, 2004
compared to $2.4 million at March 31, 2003 primarily due to a decline in
pre-paid expenses and decreased deferred costs due to a lower average order
processing fee per Unit.
During fiscal 2004, we spent $1.6 million on property and equipment, including
$1.0 million for the capitalization of internally developed software for our
business intelligence service offerings. These additions were offset by the sale
of approximately $800,000 book value of assets related to 3PF. We anticipate
spending approximately $2.0 million on property and equipment in fiscal 2005,
including $0.7 million for the capitalization of internally developed software
for our business intelligence service offerings.
Other long-term assets decreased $1.1 million to $0.8 million at March 31, 2004
compared to $1.9 million at March 31, 2003 primarily due to a $400,000 write-off
of a security deposit related to 3PF's Columbus facility, $0.5 million
associated with principal payments received on a note receivable from a former
customer of 3PF and the establishment of a $200,000 reserve for the remaining
balance of a note receivable related to the Blowout Video store sale.
Accounts payable increased $2.6 million to $15.4 million at March 31, 2004
compared to $12.8 million at March 31, 2003 primarily due to the timing of
Program Supplier and other vendor payments.
Accrued liabilities decreased $317,000 to $0.9 million at March 31, 2004
compared to $1.2 million at March 31, 2003 primarily due to a $92,000 reduction
in directors' and officers' insurance premiums and a $225,000 credit at March
31, 2003 due a participating retailer that was fully earned in fiscal 2004.
We currently have a secured revolving line of credit for $2.0 million, which
expires September 1, 2004. We expect to renew this line prior to its expiration
under similar terms. Interest on the line of credit is at our choice of either
the bank's prime interest rate minus 0.5 percent or LIBOR plus 2 percent. The
credit line is secured by substantially all of our assets. The terms of the
credit agreement include certain financial covenants requiring: (1) a
consolidated net loss for the fiscal quarter ended September 30, 2003, not to
exceed $2.0 million; (2) a consolidated net profit to be achieved each fiscal
quarter
18
beginning with the quarter ended December 31, 2003 of a minimum of $1.00, and
consolidated net profit not less than $1.00 on an annual basis, determined at
fiscal year end; and (3) achievement of specified current and leverage financial
ratios. Based upon the financial results reported as of and for the fiscal year
ended March 31, 2004, we determined that we were in compliance with the
financial covenants as of March 31, 2004. At March 31, 2004, we had no
outstanding borrowings under this agreement.
Contractual Payment Obligations
A summary of our contractual commitments and obligations as of March 31, 2004 is
as follows:
Payments Due By Fiscal Period
---------------------------------------------------------
2006 and 2008 and 2010 and
Contractual Obligation Total 2005 2007 2009 beyond
---------------------- ----------- ---------- ---------- --------- ---------
Capital leases $ 91,740 $ 50,040 $ 41,700 $ -- $ --
Operating leases 2,099,217 806,417 1,292,800 -- --
Program Supplier
guarantees 4,621,203 4,621,203 -- -- --
Executive compensation 3,560,349 1,811,750 1,748,599 -- --
----------- ---------- ---------- --------- ---------
$10,372,509 $7,289,410 $3,083,099 $ -- $ --
=========== ========== ========== ========= =========
Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. Our estimates are based on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Following is a discussion of our critical accounting estimates. See Note 2 of
Notes to Consolidated Financial Statements, Significant Accounting Policies, for
additional information.
Allowance for Doubtful Accounts
Credit limits are established through a process of reviewing the financial
history and stability of each customer. We regularly evaluate 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 we expect to recover. An additional general
reserve is provided based on aging of accounts receivable and our historical
collection experience. If circumstances change related to specific customers,
overall aging of accounts receivable or collection experience, our estimate of
the recoverability of accounts receivable could materially change. Our allowance
for doubtful accounts totaled $839,122 and $748,139, respectively, at March 31,
2004 and 2003.
Program Supplier Reserves
We have entered into guarantee contracts with certain program suppliers
providing titles for distribution under our PPT system. These contracts
guarantee the Program Suppliers minimum payments that are recoupable based on
revenue-sharing activity. In some cases, these guarantees are paid in advance.
For amounts not paid in advance, we record a liability for the gross amount of
the guarantee due to the Program Supplier on the street date in accordance with
SOP 00-2. The unearned portion of the guarantees is included as Advances to
Program Suppliers on our consolidated balance sheets. Using historical
experience and year to date rental experience for each title, we estimate the
projected revenue to be generated under each guarantee. We have historically
been able to reasonably estimate shortages after 30 to 60 days of rental
activity. We then establish a Program Supplier reserve for titles that are
projected to experience a shortage under the provisions of the guarantee. The
program supplier reserve is netted against Advances to Program Suppliers on our
consolidated balance sheets. We continually review these factors and make
adjustments to the reserves as needed. Actual results could differ from these
estimates and could have a material effect on the recorded Program Supplier
reserves. The balance in this reserve totaled $4.5 million and $3.7 million,
respectively, at March 31, 2004 and 2003.
19
Deferred Taxes
We account for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes." In accordance with SFAS No. 109, deferred tax assets arise from
the tax benefit of amounts expensed for financial reporting purposes but not yet
deducted for tax purposes and from unutilized tax credits and NOL carry
forwards. We evaluate our deferred tax assets on a regular basis to determine if
a valuation allowance is required. To the extent it is determined the
recoverability of the deferred tax assets is unlikely, we will record a
valuation allowance against deferred tax assets. As of March 31, 2004 and 2003,
we had a valuation allowance of $0.3 million and $0.4 million, respectively,
recorded against our Canadian net operating loss carryforwards. Net deferred tax
assets totaled $3.4 million and $3.3 million, respectively, as of March 31, 2004
and 2003.
New Accounting Pronouncements
See Note 3 of Notes to Consolidated Financial Statements for a discussion of the
impact of new accounting pronouncements.
Off-Balance Sheet Arrangements
Other than disclosed above under Contractual Payment Obligations, we do not have
any off-balance sheet arrangements that have or are reasonably likely to have a
material current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors
Rentrak Corporation:
We have audited the accompanying consolidated balance sheets of Rentrak
Corporation and subsidiaries as of March 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended March 31, 2004. In connection
with our audits of the consolidated financial statements, we also have audited
the supplementary information included in Schedule II. These consolidated
financial statements and the consolidated financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the consolidated
financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Rentrak Corporation
and subsidiaries as of March 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 2004 in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 4 to the accompanying consolidated financial statements,
the Company has restated its consolidated balance sheet as of March 31, 2003,
and the related consolidated statements of operations, stockholders' equity, and
cash flows and the consolidated financial statement schedule for each of the
years in the two-year period ended March 31, 2003.
KPMG LLP
Portland, Oregon
July 9, 2004
21
Rentrak Corporation and Subsidiaries
Consolidated Balance Sheets
March 31,
------------------------------------------
2004 2003
------------------- -------------------
(restated)
Assets
Current Assets:
Cash and cash equivalents $ 8,735,683 $ 10,063,541
Accounts receivable, net of allowances for
doubtful accounts of $839,122 and $748,139 15,016,924 9,429,283
Advances to program suppliers 4,188,222 1,831,018
Income tax receivable 68,384 81,085
Deferred income tax assets 2,262,186 2,423,038
Other current assets 1,533,895 2,430,334
------------------- -------------------
Total Current Assets 31,805,294 26,258,299
Property and equipment, net 2,466,668 2,404,763
Deferred income tax assets 1,099,660 894,083
Other assets 831,617 1,931,133
------------------ ------------------
Total Assets $ 36,203,239 $ 31,488,278
=================== ==================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 15,446,818 $ 12,800,736
Accrued liabilities 889,377 1,205,893
Accrued compensation 598,875 610,022
Deferred revenue 237,575 156,692
------------------- ------------------
Total Current Liabilities 17,172,645 14,773,343
Long-Term Obligations:
Lease obligations, deferred gain and
customer deposits 234,922 668,039
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $0.001 par value; 10,000,000
shares authorized; none issued -- --
Common stock, $0.001 par value; 30,000,000
shares authorized; shares issued and outstanding:
9,739,537 and 9,471,612 9,740 9,472
Capital in excess of par value 41,093,976 39,655,212
Cumulative other comprehensive income 180,879 180,879
Accumulated deficit (22,488,923) (23,798,667)
------------------- -------------------
Total Stockholders' Equity 18,795,672 16,046,896
------------------- -------------------
Total Liabilities and Stockholders' Equity $ 36,203,239 $ 31,488,278
=================== ===================
22
Rentrak and Subsidiaries
Consolidated Statements of Operations
For the Year Ended March 31,
------------------------------------------------------------
2004 2003 2002
----------------- ----------------- ------------------
(restated) (restated)
Revenue $ 78,132,413 $ 85,884,262 $ 96,021,254
Operating expenses:
Cost of sales 60,090,493 71,347,003 71,912,971
Selling and administrative 16,357,299 14,434,343 17,266,350
Net gain from litigation settlements -- (361,847) (1,563,153)
Asset impairment -- 844,041 424,177
----------------- ----------------- ------------------
76,447,792 86,263,540 88,040,345
----------------- ----------------- ------------------
Income (loss) from operations 1,684,621 (379,278) 7,980,909
Other income (expense):
Interest income 244,252 204,283 195,628
Interest expense (11,584) (25,009) (17,598)
Loss on investments -- -- (231,820)
Gain on Rentrak Japan transaction -- -- 7,967,233
----------------- ----------------- ------------------
232,668 179,274 7,913,443
----------------- ----------------- ------------------
Income (loss) from continuing operations
before income taxes 1,917,289 (200,004) 15,894,352
Provision (benefit) for income taxes 478,896 (55,528) 6,039,854
----------------- ----------------- ------------------
Net income (loss) from continuing operations 1,438,393 (144,476) 9,854,498
Loss from discontinued operations, net of tax
benefit of $78,850, $357,094 and $485,884 (128,649) (582,627) (792,757)
----------------- ----------------- ------------------
Net income (loss) $ 1,309,744 $ (727,103) $ 9,061,741
================= ================= ==================
Basic net income (loss) per share from
continuing operations $ 0.15 $ (0.02) $ 0.95
Basic loss per share from discontinued
operations (0.01) (0.06) (0.08)
----------------- ----------------- ------------------
Basic net income (loss) per share $ 0.14 $ (0.08) $ 0.87
================= ================= ==================
Diluted net income (loss) per share from
continuing operations $ 0.14 $ (0.02) $ 0.93
Diluted loss per share from discontinued
operations (0.01) (0.06) (0.07)
----------------- ----------------- ------------------
Diluted net income (loss) per share $ 0.13 $ (0.08) $ 0.85
================= ================= ==================
Shares used in per share calculations:
Basic 9,600,243 9,641,378 10,415,314
================= ================= ==================
Diluted 10,118,679 9,641,378 10,612,773
================= ================= ==================
23
Rentrak Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
For The Years Ended March 31, 2004, 2003 and 2002
Cumulative
Other
Common Stock Capital Comprehensive Deferred Total
--------------------- In Excess Notes Income Accumulated Warrant Stockholders'
Shares Amount of Par Value Receivable (Loss) Deficit Charge Equity
----------- -------- ------------ ------------ -------- ------------ --------- ------------
Balance previously reported at
March 31, 2001 $12,235,621 $ 12,236 $ 52,471,599 $ (7,728,186) $(49,572) $(32,904,319) $(415,000) $11,386,758
Restatements -- -- -- -- -- 771,014 -- 771,014
----------- -------- ------------ ------------ -------- ------------ --------- -----------
Balance at March 31, 2001
(restated) 12,235,621 12,236 52,471,599 (7,728,186) (49,572) (32,133,305) (415,000) 12,157,772
Comprehensive income (loss):
Net income -- -- -- -- -- 9,061,741 -- 9,061,741
Change in net unrealized gain
(loss) on investment securities,
net of tax -- -- -- -- 49,572 -- -- 49,572
Cumulative translation adjustment
-- -- -- -- 180,453 -- -- 180,453
----------
9,291,766
Repurchase of common stock (1,188,400) (1,188) (4,523,061) -- -- -- -- (4,524,249)
Issuance of common stock under
employee stock option plans 227,812 227 732,511 -- -- -- -- 732,738
Issuance of common stock 87,000 87 136,473 -- -- -- -- 136,560
Repurchase of common stock for
cancellation of notes
receivable (1,495,750) (1,496) (7,349,125) -- -- -- -- (7,350,621)
Cancellation of notes receivable -- -- -- 7,350,621 -- -- -- 7,350,621
Income tax benefit from stock
option exercises -- -- 261,819 -- -- -- -- 261,819
Amortization of warrants -- -- -- -- -- -- 60,000 60,000
----------- -------- ------------ ------------ -------- ------------ --------- -----------
Balance at March 31, 2002
(restated) 9,866,283 9,866 41,730,216 (377,565) 180,453 (23,071,564) (355,000) 18,116,406
Comprehensive income (loss):
Net loss -- -- -- -- -- (727,103) -- (727,103)
Cumulative translation adjustment -- -- -- -- 426 -- -- 426
----------
(726,677)
Common stock issued pursuant to
stock plans 112,043 112 475,981 -- -- -- -- 476,093
Common stock used to pay for
option exercises (20,914) (21) (127,557) -- -- -- -- (127,578)
Repurchase of common stock (386,800) (386) (1,821,066) -- -- -- -- (1,821,452)
Repurchase of common stock for
cancellation of notes receivable (99,000) (99) (377,466) -- -- -- -- (377,565)
Cancellation of notes receivable -- -- -- 377,565 -- -- -- 377,565
Income tax benefit from stock
option exercises -- -- 75,104 -- -- -- -- 75,104
Retirement of warrants -- -- (300,000) -- -- -- -- (300,000)
Amortization of warrants -- -- -- -- -- -- 355,000 355,000
----------- -------- ------------ ------------ -------- ------------ --------- -----------
Balance at March 31, 2003
(restated) 9,471,612 9,472 39,655,212 -- 180,879 (23,798,667) -- 16,046,896
Net income -- -- -- -- -- 1,309,744 -- 1,309,744
Common stock issued pursuant to
stock plans 285,519 286 1,161,399 -- -- -- -- 1,161,685
Common stock used to pay for
option exercises (17,594) (18) (112,960) -- -- -- -- (112,978)
Income tax benefit from stock
option exercises -- -- 390,325 -- -- -- -- 390,325
----------- -------- ------------ ------------ -------- ------------ --------- -----------
Balance at March 31, 2004 9,739,537 $ 9,740 $41,093,976 $ -- $180,879 $(22,488,923 $ -- $18,795,672
=========== ======== =========== ============ ======== ============ ========= ===========
24
Rentrak Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Year Ended March 31,
--------------------------------------------------
2004 2003 2002
------------- -------------- -------------
(restated) (restated)
Cash flows from operating activities:
Net income (loss) $ 1,309,744 $ (727,103) $ 9,061,741
Adjustments to reconcile net income (loss) to net
cash flows provided by operating activities:
Loss on disposal of discontinued operations 128,649 582,627 792,757
Loss (gain) on disposition of assets (94,951) (3,654) 414,486
Gain on Rentrak Japan transactions -- -- (7,967,233)
Tax benefit from stock option exercises 390,325 75,104 261,819
Loss of occupancy deposit on lease termination 400,000 -- --
Loss on write-down of property and equipment -- 844,041 424,177
Depreciation and amortization 875,488 1,356,022 1,438,449
Amortization of warrants -- 355,000 60,000
Adjustment to allowance for doubtful accounts (319,676) (1,142,138) (1,546,301)
Retailer financing program reserves -- -- 50,000
Deferred income taxes (44,725) (532,727) 4,951,566
(Increase) decrease in:
Accounts receivable (5,267,965) 2,947,040 1,334,662
Advances to program suppliers (2,357,204) 1,210,641 (1,763,494)
Income taxes receivable 12,701 (11,085) 209,160
Notes receivable and other current assets 760,627 1,528,395 (117,663)
Increase (decrease) in:
Accounts payable 2,646,082 (6,034,795) 1,723,513
Accrued liabilities and compensation (248,813) (72,110) (387,563)
Deferred revenue and other liabilities (284,213) 12,807 (1,308,341)
------------- -------------- -------------
Net cash provided by (used in)
operating activities (2,093,931) 388,065 7,631,735
Cash flows from investing activities:
Payments for purchase of property and equipment (1,597,403) (1,607,421) (1,379,111)
Proceeds from sale of investments -- -- 161,513
Net proceeds from sale of investment in Rentrak Japan -- -- 2,509,500
Proceeds from the sale of 3PF assets 800,000 -- 1,000,000
Payments received on note receivable 451,169 -- --
Other assets, net 131,621 (128,943) 385,515
------------- -------------- -------------
Net cash provided by (used in) investing activities (214,613) (1,736,364) 2,677,417
Cash flows from financing activities:
Net borrowings (payments) on line of credit -- -- (1,917,705)
Payments on capital lease obligation (68,021) (62,342) (57,136)
Repurchase of common stock and warrants -- (2,121,452) (633,749)
Issuance of common stock 1,048,707 348,515 732,738
Issuance of common stock to non-employees -- -- 136,560
------------- -------------- -------------
Net cash provided by (used in) financing activities 980,686 (1,835,279) (1,739,292)
------------- -------------- -------------
Increase (decrease) in cash and cash equivalents (1,327,858) (3,183,578) 8,569,860
Net cash provided by discontinued operations -- 1,218,435 135,907
Cash and cash equivalents:
Beginning of year 10,063,541 12,028,684 3,322,917
------------- -------------- -------------
End of year $ 8,735,683 $ 10,063,541 $ 12,028,684
============= ============== =============
Supplemental Cash Flow Information:
Cash paid during the period for interest $ 10,830 $ 27,846 $ 27,329
Cash paid during the period for income taxes, net of
refunds received 15,561 45,566 125,380
Supplemental Disclosure of Non-Cash Activity:
Change in unrealized gain on investmnet securities,
net of tax $ -- $ -- $ 49,572
Forgiveness of note receivable for issuance
of common stock -- (377,565) (7,350,621)
Forgiveness of debt from Rentrak Japan -- -- 567,233
25
Rentrak Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Overview
Rentrak Corporation (an Oregon corporation) is principally engaged in the
processing of information regarding the rental and sale of video cassettes, DVDs
and video games (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 the PPT program, we enter into contracts to lease/license Units from
producers of motion pictures and licensees and distributors of home video
cassettes, DVDs and video games ("Program Suppliers"), which are then
leased/licensed to retailers for a percentage of the rentals charged by the
retailers.
Fiscal 2003 and 2002 have been restated as described further in Note 4.
During fiscal 2004, we sold our subsidiary, 3PF.COM, Inc. ("3PF"), which
provided order processing and inventory management services to e-tailers,
wholesalers and other businesses requiring just-in-time fulfillment. See Note 5.
During fiscal 2003, we discontinued the operations of our subsidiary, BlowOut
Video, Inc., which sold video cassettes and DVDs through its three retail video
stores operating under the name of BlowOut Video. See Note 8.
In fiscal 2002, we sold our entire 5.6% interest in Rentrak Japan, which was to
develop distribution of our PPT system in certain Japanese and other Asian
markets. See Note 6.
Note 2. Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of Rentrak
Corporation, its majority owned subsidiaries, and those subsidiaries in which we
have a controlling interest after elimination of all intercompany accounts and
transactions. Investments in affiliated companies owned 20% to 50% are accounted
for by the equity method.
Management Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
We consider our most critical accounting policies to be those that require the
use of estimates and assumptions, specifically, accounts receivable reserves,
Program Supplier guarantee reserves and judgments regarding realization of
deferred tax assets.
Revenue Recognition
We follow SOP 00-2, "Accounting by Producers or Distributors of Films," and
recognize revenue when all of the following conditions are met:
o Persuasive evidence of an arrangement exists;
o The products have been delivered;
o The license period has begun (which is referred to as the "street
date" for a product);
o The arrangement fee is fixed or determinable; and
o Collection of the arrangement fee is reasonably assured.
26
PPT agreements generally provide for an initial order processing fee and
continuing transaction fees based on a percentage of rental revenues earned by
the retailers upon renting the Units to their customers. Initial order
processing fees cover the direct costs of accessing Units from Program Suppliers
and handling, packaging and shipping of the Units to the retailer. Once the
Units are shipped, we have no further obligation to provide services to the
retailer.
We recognize order processing fees as revenue on the street date and recognize
transaction fees when the Units are rented to the consumers, provided all other
revenue recognition criteria have been met. In limited circumstances, certain
arrangements include guaranteed minimum revenues from our customers. In these
arrangements, we recognize the guaranteed minimum revenue on the street date,
provided all other revenue recognition criteria are met.
We recognize other services revenue, including direct revenue sharing and
business intelligence services revenue, ratably over the period of service.
Revenues derived from our 3PF fulfillment activities were recognized when
products were shipped and/or services were provided.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with a maturity of three
months or less at acquisition to be cash equivalents. We have funds deposited in
various financial institutions in excess of the federal funds deposit insurance
limits. We did not have any cash equivalents at March 31, 2004 or 2003.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is our best estimate of the amount
of probable credit losses in our existing accounts receivable.
Credit limits are established through a process of reviewing the financial
history and stability of each customer. We regularly evaluate 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 we expect to recover. An additional general
reserve is provided based on aging of accounts receivable and our historical
collection experience. If circumstances change related to specific customers,
overall aging of accounts receivable or collection experience, our estimate of
the recoverability of accounts receivable could materially change. We are able
to recover certain bad debts from our Program Suppliers. Such recoveries are
recorded when they are fixed and determinable pursuant to the Program Supplier
contract.
As of March 31, 2004, one customer represented 34% of our total gross accounts
receivable. No other customer accounted for 10% or more of our accounts
receivable balance as of March 31, 2004 or 2003. We do not have any
off-balance-sheet credit exposure related to our customers.
Fair Value of Financial Assets and Liabilities
We estimate the fair value of our monetary assets and liabilities based upon
comparison of such assets and liabilities to the current market values for
instruments of a similar nature and degree of risk. Our monetary assets and
liabilities include cash, accounts receivable and accounts payable. We estimate
that the recorded value of all our monetary assets and liabilities approximates
fair value as of March 31, 2004 and 2003.
Impairment of Long-Lived Assets
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," long-lived
assets, such as property, plant and equipment, and purchased intangibles subject
to amortization, are required to be 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
27
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. As discussed in Note 5, in fiscal 2003, we recognized
an impairment charge related to our 3PF assets totaling $844,000.
Property and Equipment
Depreciation of property and equipment is computed on the straight-line method
over estimated useful lives of three to seven years for furniture and fixtures,
three to ten years for machinery and equipment and three years for capitalized
software. Leasehold improvements are amortized over the lives of the underlying
leases or the service lives of the improvements, whichever is shorter. Property
and equipment is reviewed for impairment in accordance with SFAS No. 144 as
discussed above.
Capitalized Software
Capitalized software, included in Property and Equipment, net, consists of costs
to purchase and develop internal-use software. This also includes costs to
develop software for customer use in various services, including theatrical data
recovery and fulfillment. Amortization of capitalized software is computed on a
straight-line basis over 3 to 5 years, depending on the estimated useful life of
the software. Capitalized software is reviewed for impairment in accordance with
SFAS No. 144 as discussed above. See Note 9.
Income Taxes
We account for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes." Under the asset and liability method specified by SFAS No. 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. We evaluate our deferred tax assets on a regular
basis to determine if a valuation allowance is required. To the extent it is
determined the recoverability of the deferred tax assets is unlikely, we would
record a valuation allowance against deferred tax assets. As of March 31, 2004
and 2003, we had a valuation allowance of $0.3 million and $0.4 million,
respectively, recorded against our Canadian net operating loss carryforwards.
Program Supplier Reserves
We have entered into guarantee contracts with certain program suppliers
providing titles for distribution under our PPT system. These contracts
guarantee the Program Suppliers minimum payments that are recoupable based on
revenue-sharing activity. In some cases, these guarantees are paid in advance.
For amounts not paid in advance, we record a liability for the gross amount of
the guarantee due to the Program Supplier on the street date in accordance with
SOP 00-2. The unearned portion of the guarantees is included as Advances to
Program Suppliers on our consolidated balance sheets. Using historical
experience and year to date rental experience for each title, we estimate the
projected revenue to be generated under each guarantee. We have historically
been able to reasonably estimate shortages after 30 to 60 days of rental
activity. We then establish a Program Supplier reserve for titles that are
projected to experience a shortage under the provisions of the guarantee. The
program supplier reserve is netted against Advances to Program Suppliers on our
consolidated balance sheets. We continually review these factors and make
adjustments to the reserves as needed. Actual results could differ from these
estimates and could have a material effect on the recorded Program Supplier
reserves. The balance in this reserve totaled $4.5 million and $3.7 million,
respectively, at March 31, 2004 and 2003.
Foreign Currency Translation
Adjustments from translating foreign functional currency financial statements
into U.S. dollars are included in cumulative other comprehensive income 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 as a component of selling
and administrative expenses in our consolidated statements of operations.
Earnings (Loss) Per Share
Basic net income (loss) per share (EPS) and diluted EPS are computed using the
methods prescribed by
28
SFAS No. 128, "Earnings per Share." Following is a reconciliation of the shares
used for the basic EPS and diluted EPS calculations for fiscal 2004, 2003 and
2002:
Year Ended March 31,
-------------------------------------
2004 2003 2002
---------- ----------- -----------
Basic EPS:
Weighted average
number of shares of
common stock
outstanding $ 9,600,243 $ 9,641,378 $10,415,314
Diluted EPS:
Effect of dilutive 518,436 - 197,459
stock options
----------- ----------- -----------
$10,118,679 $ 9,641,378 $10,612,773
=========== =========== ===========
Options and warrants to purchase approximately 0.2 million, 2.0 million and 2.3
million shares of our common stock were outstanding at March 31, 2004, 2003 and
2002, respectively, but were not included in the computation of diluted EPS
because the exercise price of the options and warrants was greater than the
average market price of the common shares for the period.
Stock-Based Compensation
We account for stock-based compensation utilizing the intrinsic value method in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," as interpreted by FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation." Pursuant to SFAS No. 148 "Accounting for Stock-Based Compensation
- Transition and Disclosure," we have computed, for pro forma disclosure
purposes, the impact on net income (loss) and net income (loss) per share as if
we had accounted for our stock-based compensation plans in accordance with the
fair value method prescribed by SFAS No. 123 "Accounting for Stock-Based
Compensation" as follows:
Year Ended March 31, 2004 2003 2002
--------------------------------------- ----------- ----------- -----------
(restated) (restated)
Net income (loss), as reported $ 1,309,744 $ (727,103) $ 9,061,741
Deduct - total stock-based employee
compensation expense determined
under the fair value based method (871,918) (1,119,812) (1,205,121)
for all awards, net of related tax
effects ----------- --------- -----------
Net income (loss), pro forma $ 437,826 $(1,846,915) $ 7,856,620
=========== =========== ===========
Net income (loss) per share - basic, $ 0.14 $ (0.08) $ 0.87
as reported =========== =========== ===========
Net income (loss) per share - basic, $ 0.05 $ (0.19) $ 0.75
pro forma =========== =========== ===========
Net income (loss) per share - $ 0.13 $ (0.08) $ 0.85
diluted, as reported =========== =========== ===========
Net income (loss) per share - $ 0.04 $ (0.19) $ 0.74
diluted, pro forma =========== =========== ===========
To determine the fair value of stock-based awards granted, we used the
Black-Scholes option pricing model and the following weighted average
assumptions:
Year Ended March 31, 2004 2003 2002
------------------------ ------------ ------------ ------------
Risk-free interest rate 3.09-4.62% 3.57-5.45% 4.08-5.47%
Expected dividend yield 0% 0% 0%
Expected lives 5-10 years 5-10 years 5-10 years
Expected volatility 75.54% 77.69% 81.28%
29
Using the Black-Scholes methodology, the total value of stock awards and options
granted during fiscal 2004, 2003 and 2002 was approximately $1.4 million, $2.4
million and $1.0 million, respectively, which would be amortized on a pro forma
basis over the vesting period of the options, typically one to four years. The
weighted average fair value of stock awards and options granted during fiscal
2004, 2003 and 2002 was $5.43 per share, $3.89 per share and $2.41 per share,
respectively. The pro forma effects of applying SFAS No. 123 may not be
indicative of the future.
Advertising Expense
Advertising costs are expensed as incurred. Direct expenses incurred totaled
approximately $0.6 million, $1.1 million and $2.3 million, respectively, in
fiscal 2004, 2003 and 2002. Reimbursements received for direct and indirect
expenses totaled approximately $1.5 million, $3.0 million and $2.1 million,
respectively, in fiscal 2004, 2003 and 2002.
The advertising reimbursements from Program Suppliers are contractually provided
to the company to offset expenses incurred in maintaining ongoing marketing
programs utilized by our Participating Retailers. A significant amount of these
reimbursements are passed through to our Participating Retailers as the Company
reimburses them for their direct expense of local advertising, such as newspaper
or radio ads. In addition, the reimbursements offset expenses paid by us to
third-party vendors in maintaining programs that indirectly assist Participating
Retailers in these marketing efforts.
These reimbursements are based on contractual agreements. Contractual terms
fluctuate by Program Supplier and the amount of reimbursement tends to be based
on the performance of individual movie titles.
Reimbursements provided by a Program Supplier can be "accountable" or
"unaccountable". The Program Supplier provides accountable amounts only to the
extent that we provide documentary evidence of the funds paid either to our
Participating Retailers directly or paid to third parties. Accountable
reimbursements are recorded as a reduction of the same income statement line
item, SG&A, in which the cost are recorded which typically occurs in the same
accounting period. Unaccountable reimbursements are normally calculated and
awarded on a fixed amount per unit of product shipped and do not require
substantiation that any payments were made to promote marketing efforts.
Unaccountable reimbursements are recognized when units of their associated
product are shipped, which is when a majority of the direct or indirect
marketing effort, and the corresponding expense is incurred, which typically
occurs within the same reporting period. Unaccountable reimbursements under
contracts that were entered into prior to December 31, 2002 are classified as
reductions to SG&A on the income statement, while unaccountable reimbursements
under contracts entered into or modified subsequent to December 31, 2002 were
classified as reductions to cost of sales on the income statement in accordance
with EITF 02-16.
Comprehensive Income (Loss)
Comprehensive income (loss) includes charges or credits to equity that are not
the result of transactions with shareholders. Components of our comprehensive
income (loss) consist of the change in unrealized gain (loss) on investment
securities, net of tax, and changes to our cumulative translation adjustment.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
Note 3. New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46,
30
"Consolidation of Variable Interest Entities: an Interpretation of ARB No. 51"
(FIN 46). FIN 46 addresses consolidation by business enterprises of entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. Variable interest entities are required to be consolidated by
their primary beneficiaries if they do not effectively disperse risks among
parties involved. The primary beneficiary of a variable interest entity is the
party that absorbs a majority of the entity's expected losses or receives a
majority of its expected residual returns. The consolidation requirements of FIN
46 apply immediately to variable interest entities created after January 31,
2003 and apply to existing entities in the first fiscal year or interim period
beginning after June 15, 2003. Certain new disclosure requirements apply to all
financial statements issued after January 31, 2003. The application of the
provisions of FIN 46 did not have a material effect on our consolidated
financial statements.
In November 2002, the FASB Emerging Issues Task Force issued its consensus
concerning Revenue Arrangements with Multiple Deliverables ("EITF 00-21"). EITF
00-21 addresses how to determine whether a revenue arrangement involving
multiple deliverables should be divided into separate units of accounting, and,
if separation is appropriate, how the arrangement consideration should be
measured and allocated to the identified accounting units. The guidance in EITF
00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of EITF 00-21 did not have any
effect on our consolidated financial statements.
Note 4. Restatement
In May and June 2004, we discovered that we had misinterpreted and misapplied
certain terms of some of our Program Supplier revenue sharing agreements. These
misinterpretations and misapplications resulted in the miscalculation of Program
Supplier liabilities and related cost of sales and, therefore, net income
(loss). There were two general types of misinterpretations or misapplications:
(i) over reporting cost of sales and overstating assets and understating
liabilities due to the misapplication of certain terms in our Program Supplier
revenue sharing agreements in the amounts of $0.7 million and $0.8 million,
respectively, in fiscal 2003 and 2002; and (ii) under reporting cost of sales
and related liabilities due to the misuse of contract information in recognizing
our guarantees to one Program Supplier in the amounts of $0.9 million and $0.7
million, respectively, in fiscal 2003 and 2002.
The misstatement that resulted in over reporting our cost of sales and related
liabilities was due to a misapplication of terms in one of our Program Supplier
revenue sharing agreements. Our accounting methodology for recognizing revenues
and associated expenses is based on the establishment of certain contractual
terms and algorithms when a revenue sharing agreement is executed with a Program
Supplier. These contractual terms are used in calculations on a
transaction-by-transaction basis. In the course of our fiscal year 2004 audit,
we discovered that some of these contractual terms were not established
appropriately in our accounting system in accordance with the terms of the
contract with this Program Supplier. Our accounting system had been inaccurately
programmed with an algorithm that calculated the cost of sales and corresponding
liability. This calculation misapplied a contractual term to certain items
relating to that Program Supplier's product, which resulted in an overstatement
of the liability to that Program Supplier. We have since modified our accounting
system to establish the appropriate contractual terms for this Program Supplier.
In addition, we have reviewed all key algorithms within our accounting system to
ensure they are aligned with Program Supplier contractual terms.
The misstatement that resulted in under reporting of cost of sales and
overstating assets and understating liabilities was due to the misinterpretation
of contractual information in a revenue sharing agreement with one of our
Program Suppliers. We believed we could offset prior guarantee shortages with
future guarantee overages, based upon the contractual provisions. In reviewing
the contractual agreement with members of operating personnel, the Accounting
Department realized we had been misinterpreting those contractual provisions and
that we are not permitted to offset prior guarantee shortages with future
guarantee overages. We have since modified our accounting processes for this
Program Supplier to include the appropriate guarantee liability calculation.
Please note that our Critical Accounting Policies and Estimates disclosure as it
relates to Program Supplier Reserves for contractual guarantees was
31
accurately stated and was not affected by this restatement or process change.
Also in June 2004, we discovered that we were not accounting for certain order
processing fees received from our customers upon "street date," which is the
date that they are able to rent the title pursuant to SOP 00-2. Our previous
method had been to recognize revenue on the shipment date. This resulted in a
restatement of revenue between periods.
In addition, in connection with the embezzlement of funds by an employee, as
discussed in more detail in Note 16 below, we underreported our sales tax
liability in fiscal 2003. We record our sales tax liabilities as an offset to
revenue.
The restatements did not affect cash flows from operations, investing activities
or financing activities in any fiscal year. For details on the restatement of
our first, second and third quarters of fiscal 2004, see "Quarterly Financial
Data." We have restated our fiscal years ended March 31, 2003 and 2002 and the
related balance sheet accounts at March 31, 2003 as follows:
Year Ended March 31, 2003
-------------------------------------------------------------------------------------
Income Income
Cost Total tax (loss) from
(In thousands) of operating expense continuing
Revenue sales expenses (benefit) operations Net loss
-------- -------- -------- --------- -------- ------
As previously reported $ 86,220 $ 71,315 $ 86,231 $ 85 $ 84 $ (498)
Adjustment for
misinterpretation and
misapplication of -- 239 239 (91) (148) (148)
contract
terms
SOP 00-2 revenue
recognition (274) (206) (206) (25) (43) (43)
adjustment
Underreporting of sales
tax (62) -- -- (24) (38) (38)
Rounding -- (1) -- (1) 1 -
-------- -------- -------- --------- -------- ------
As restated $ 85,884 $ 71,347 $ 86,264 $ (56) $ (144) $(727)
======== ======== ======== ========= ======== =====
After the above adjustments, our basic and diluted net loss per share for fiscal
2003 increased to $(0.08) per share compared to the previously reported basic
and diluted net loss per share of $(0.05) as previously reported.
32
March 31, 2003
---------------------------------------------------------------------------
Current
Accounts Advances deferred Total
(In thousands) receiv- to Program tax current Total
able Suppliers assets assets assets
-------------------- -------- -------- -------- -------- --------
As previously reported $ 9,706 $ 418 $ 2,797 $ 25,496 $ 30,726
Adjustment for
misinterpretation
and misapplication
of contract terms
Current period -- (586) 91 (495) (495)
Prior periods -- 1,999 (514) 1,485 1,485
SOP 00-2 revenue
recognition adjustment
Current period (274) -- 25 (249) (249)
Prior periods (3) -- -- (3) (3)
Underreporting of sales
tax, current period -- -- 24 24 24
-------- -------- -------- -------- --------
As restated $ 9,429 $ 1,831 $ 2,423 $ 26,258 $ 31,488
======== ======== ======== ======== ========
Total
Total liabilities
Total Accumu- stock- and stock-
Accounts Accrued current lated holders' holders'
(In thousands) payable liabilities liabilities deficit equity equity
----------------- -------- ------- -------- --------- -------- --------
As previously reported $ 12,711 $ 1,144 $ 14,621 $ (24,409) $ 15,437 $ 30,726
Adjustment for
misinterpretation and
misapplication of
contract terms:
Current period (347) -- (347) (148) (148) (495)
Prior periods 645 -- 645 840 840 1,485
SOP 00-2 revenue
recognition adjustment:
Current period (206) -- (206) (43) (43) (249)
Prior periods (2) -- (2) (1) (1) (3)
Underreporting of sales
tax, current period -- 62 62 (38) (38) 24
-------- ------- -------- --------- -------- --------
As restated $ 12,801 $ 1,206 $ 14,773 $ (23,799) $ 16,047 $ 31,488
======== ======= ======== ========= ======== ========
Year Ended March 31, 2002
------------------------------------------------------------------------------------------------
Income
Cost Total Income from
of operating tax continuing Net
(In thousands) Revenue sales expenses expense operations income
-------- ------- -------- --------- -------- --------
As previously reported $ 95,994 $71,994 $ 88,122 $ 5,998 $ 9,787 $ 8,994
Adjustment for
misinterpretation
and misapplication of
contract terms -- (102) (102) 39 63 63
SOP 00-2 revenue
recognition 27 21 21 2 4 4
adjustment
Rounding -- -- (1) 1 -- 1
-------- ------- -------- --------- -------- --------
As restated $ 96,021 $71,913 $ 88,040 $ 6,040 $ 9,854 $ 9,062
======== ======= ======== ========= ======== ========
After the above adjustments, our basic net income per share for fiscal 2002
increased to $0.87 per share compared to the $0.86 per share previously reported
and our diluted net income per share remained unchanged at $0.85 per share.
33
Note 5. 3PF
In June 2002, 3PF entered into an agreement to sublease approximately 194,000
square feet of its distribution facility in Columbus, Ohio to its largest
customer. The sublease required monthly rent payments to 3PF under amounts,
terms and conditions similar to 3PF's master lease for this facility.
Additionally in June 2002, in conjunction with the facility sublease, 3PF
entered into a financing lease with this customer for the existing equipment
within this distribution facility and the associated costs for additional
equipment to configure the layout to the customer's specifications. The lease
for the equipment resulted in a note receivable in the amount of $1.8 million,
payable to 3PF in monthly installments. All payments on this note receivable
have been received as scheduled and, as of March 31, 2004, there was $1.0
million outstanding on this note receivable, $0.4 million of which is included
with other current assets on our consolidated balance sheet and $0.6 million of
which is included with other assets.
In the fourth quarter of fiscal 2003, management determined that it was unlikely
that 3PF would achieve its business plans and initiated a plan to sell the
assets of 3PF. Prior to March 31, 2003, it was determined that, more likely than
not, substantially all of 3PF's assets would be sold or otherwise disposed of.
As a result of this determination, management assessed during the quarter ended
March 31, 2003, the current and historical operating and cash flow losses,
prospects for growth in revenues and other alternatives for improving the
operating results of 3PF.
Accordingly, management performed an assessment of the fair value of the 3PF
assets under the guidelines of SFAS No. 144. This assessment resulted in 3PF
recognizing an asset impairment charge during the three-month period ended March
31, 2003 in the amount of $844,000 for the write down of its assets to estimated
fair market value of approximately $800,000.
In June 2003, we announced we had signed a definitive agreement to sell
substantially all of the assets of 3PF at the Wilmington, Ohio operation,
effective July 1, 2003. The operations of 3PF have not been reported as
discontinued operations in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," because cash flows related to our
fulfillment activities have not been completely eliminated. The agreement
covered all equipment and leasehold improvements at 3PF's leased distribution
facility in Wilmington, Ohio, as well as a portion of its working capital. As
part of the agreement, 3PF as lessee and Rentrak as guarantor have been released
from the lease. The cash purchase price of $800,000, approximately equal to the
net book value of the assets sold at March 31, 2003, was received in full.
During the sale negotiations, we received notification from 3PF's largest
customer, serviced exclusively from the leased distribution facility in
Columbus, Ohio, that it did not intend to renew its fulfillment service contract
upon the scheduled expiration at July 31, 2003. The Columbus, Ohio distribution
facility was used exclusively to service this customer. Due to the timing of
this notification, we were not able to include the Columbus, Ohio distribution
facility lease in the asset sale transaction. We completed the termination of
the lease obligation for the Columbus, Ohio distribution facility, effective
December 1, 2003, for a cost of $650,000, which is included as a component of
cost of sales in our consolidated statement of operations. This lease
termination included the assignment of the sublease 3PF had in place with its
former largest customer for approximately 194,000 square feet of this facility.
Note 6. Rentrak Japan
In December 1989, we entered into an agreement with Culture Convenience Club
Co., Ltd. (CCC), to create Rentrak Japan, which was to develop our PPT
distribution and information processing business in certain overseas markets.
On June 16, 1994, the agreement was amended to state that we would receive a
royalty of 1.67% for all sales of up to $47,905,000, plus one-half of 1% (0.5%)
of sales greater than $47,905,000 in each fiscal year. In addition, we received
a one-time royalty of $2 million, of which $1 million was paid in fiscal 1995
34
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, we received a prepayment of $2.5 million in exchange for $4.0
million 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, this contract was terminated in fiscal 2002, with
Rentrak Japan forfeiting its rights to the remaining $700,000 prepayment.
During fiscal 2002, the royalty agreement was terminated and all intellectual
property rights and trademarks of the PPT system were agreed to be usable by
Rentrak Japan in perpetuity. Consideration for these changes included a cash
payment from Rentrak Japan to us of approximately $5.7 million for royalties,
forfeiture by Rentrak Japan of any right of return of the 1999 prepaid royalty
of $700,000, and forgiveness by Rentrak Japan of approximately $567,233 of
receivables due to Rentrak Japan from us. Of these amounts, $6.4 million was
recorded in other revenue as royalty revenue consistent with the historical
treatment of royalty payments. The remaining $567,233 was recorded as a gain and
is included in other income in the accompanying consolidated statement of
operations.
In April and October 2001, we sold all of our 5.6% interest in Rentrak Japan's
stock for approximately $6.4 million. In return, Rentrak Japan sold 1,004,000
shares of our common stock back to us on April 2, 2001 for approximately $3.9
million. The $3.9 million purchase price for this common stock transaction was
determined based upon the approximate market price at which our stock was being
traded at that time. The sale of the Rentrak Japan stock resulted in a gain of
$6.4 million as we had written this investment down to zero due to recurring
losses during the initial years of Rentrak Japan's operations. The value of
Rentrak Japan stock was determined in the negotiations of the agreement. This
gain is included in other income in the accompanying consolidated statement of
operations.
Finally, Rentrak Japan purchased 17,000 shares of 3PF common stock from us on
April 27, 2001 for $1.0 million. The purchase price of the stock was based on a
valuation of 3PF made at that time. No minority interest was recorded as 3PF had
negative shareholders' equity and 3PF was solely dependent on Rentrak for
support.
In summary, total net cash proceeds from the above transactions was $3.5
million, which was comprised of the $1.0 million from our sale of 3PF stock and
$2.5 million from the net proceeds of the sales of Rentrak Japan stock and
Rentrak stock.
The total gain included in other income was $8.0 million, which was comprised of
the $1.0 million from the sale of 3PF stock, $6.4 million from the sale of
Rentrak Japan stock, and $567,263 resulting from the forgiveness of liabilities
due to Rentrak Japan.
Based upon the results of the transactions noted above occurring in the fiscal
year ended March 31, 2002, we had no further contractual obligations to, or
ownership in, Rentrak Japan as of March 31, 2002.
Note 7. Rentrak UK Limited
In February 1998, we entered into a Shareholders Agreement and a PPT License
Agreement with Columbus Holdings Limited and Rentrak UK Limited (Rentrak UK) to
develop our PPT distribution and information processing business in the United
Kingdom through Rentrak UK. The PPT Agreement remains in force in perpetuity,
unless terminated due to material breach of contract, liquidation of Rentrak UK,
or non-delivery, by us to Rentrak UK, of all retailer and studio software,
including all updates. Pursuant to the PPT Agreement, during the term of the PPT
Agreement, we will receive a royalty of 1.67% of Rentrak UK's gross revenues
from any and all sources. No amounts were earned under this royalty agreement in
fiscal 2004, 2003 or 2002.
35
Note 8. Discontinued Operations
Due to the significant increase in sell through activity throughout the
industry, the operations of BlowOut Video did not meet our expectations. As a
result, during fiscal 2003, we initiated and completed a plan to discontinue the
retail store operations of BlowOut Video. The plan called for an exit from the
stores by the end of fiscal 2003, either through cancellation of the lease
commitments and liquidation of assets, or through sale of the stores to a third
party. As of March 31, 2003, all operations had ceased.
In January 2004, we were notified by the purchaser of a portion of BlowOut
Video's operations of their intent to default on a note receivable due to us. As
such, we provided an approximate $0.2 million reserve for the remaining balance
of this note receivable in the three-month period ended December 31, 2003. This
reserve resulted in a reported loss, net of tax benefit, from these discontinued
operations of $128,649, or $0.01 per share, in fiscal 2004. Current and prior
year amounts have been restated to classify the results of BlowOut Video
operations, net of related tax effects, as discontinued.
The results of operations related to BlowOut Video were as follows:
Year Ended March 31,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
Revenue $ -- $2,575,733 $6,620,165
Net loss $ (128,649) $ (582,627) $ (792,757)
Net loss per
diluted share $ (0.01) $ (0.06) $ (0.07)
Note 9. Property and Equipment
Property and equipment consists of:
March 31,
------------------------
2004 2003
---------- ----------
Furniture, fixtures and computer $3,295,970 $3,522,614
equipment
Machinery and equipment -- 1,235,533
Leasehold improvements 594,527 1,063,752
Capitalized software 1,910,499 1,198,032
---------- ----------
5,800,996 7,019,931
Less accumulated depreciation and (3,334,328) (4,615,168)
amortization ---------- ----------
$2,466,668 $2,404,763
========== ==========
Amortization expense related to capitalized software was $332,602, $212,794 and
$108,807, respectively, for the years ended March 31, 2004, 2003, and 2002,
respectively. Accumulated amortization related to capitalized software was
$436,589 and $321,602, respectively, at March 31, 2004 and 2003. Amortization
expense related to capitalized software over the next five fiscal years as of
March 31, 2004 is as follows:
2005 $ 502,822
2006 545,042
2007 304,229
2008 121,817
2009 --
---------
$ 1,473,910
=========
36
Note 10. Retailer Financing Program
In 1992, we established a retailer financing program whereby, on a selective
basis, we provided financing to Participating Retailers that we believed had
potential for substantial growth in the industry. In connection with these
financings, we typically made a loan and/or equity investment in the
Participating Retailer. In some cases, we 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 were speculative in nature and involved a
high degree of risk.
The loans are reviewed for impairment in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." A valuation allowance has
been established for the amount by which the recorded investment in the loans
exceeds the measure of the impaired loan. Periodically throughout the terms of
the agreements, we assessed the recoverability of the amounts based on the
financial position of each retailer.
We discontinued this program in fiscal 2001. As of March 31, 2004 and 2003, we
had invested or loaned a total of $6.6 million under the program and had
provided reserves for the entire amount. These balances are included in other
assets. The activity in the reserve account for the retailer financing program
is as follows:
Year Ended March 31,
---------------------------------------
2004 2003 2002
----------- ----------- -----------
Beginning balance $ 6,530,754 $ 6,575,754 $ 6,598,514
Additions to reserve -- -- 50,000
Write-offs -- -- --
Recoveries (31,422) (45,000) (72,760)
----------- ----------- -----------
Ending balance $ 6,499,332 $ 6,530,754 $ 6,575,754
=========== =========== ===========
Note 11. Line of Credit
We currently have a secured revolving line of credit for $2.0 million, which
expires September 1, 2004. We expect to renew this line prior to its expiration
under similar terms. Interest on the line of credit is at our choice of either
the bank's prime interest rate minus 0.5 percent or LIBOR plus 2 percent. The
credit line is secured by substantially all of our assets. The terms of the
credit agreement include certain financial covenants requiring: (1) a
consolidated net loss for the fiscal quarter ended September 30, 2003, not to
exceed $2.0 million; (2) a consolidated net profit to be achieved each fiscal
quarter beginning with the quarter ended December 31, 2003 of a minimum of
$1.00, and consolidated net profit not less than $1.00 on an annual basis,
determined at fiscal year end; and (3) achievement of specified current and
leverage financial ratios. At March 31, 2004, we had no outstanding borrowings
under this agreement.
Note 12. Related Party Transactions
Dr. Joon S. Moon, a Rentrak Director, received a fee totaling $241,500 for his
services in negotiating the business restructuring transaction with Rentrak
Japan in fiscal 2002. Dr. Moon also received a fee in the amount of
approximately $48,000 as compensation for his services in fiscal 2002 in
connection with the sale of our remaining 180,000 shares of Rentrak Japan stock.
See Note 6.
One of our officers held the position of President of a corporation that had one
store participating in the PPT program. We recognized revenues from this store
of $30,830 in fiscal 2004, $29,195 in fiscal 2003 and $14,294 in fiscal 2002.
37
Note 13. Income Taxes
Income (loss) from continuing operations before income taxes consisted of the
following:
Year Ended March 31,
-------------------------------------
2004 2003 2002
----------- ---------- ------------
(restated) (restated)
U.S. $ 1,685,034 $ (497,059) $ 15,852,426
Non-U.S. 232,255 297,055 41,926
----------- ---------- ------------
$ 1,917,289 $ (200,004) $ 15,894,352
=========== ========== ============
The provision (benefit) for income taxes from continuing operations is as
follows:
Year Ended March 31,
-------------------------------------
2004 2003 2002
----------- ---------- ------------
(restated) (restated)
Current tax provision (benefit): $ $ $
Federal -- 45,001 309,585
State 40,338 -- 31,000
----------- ---------- ------------
40,338 45,001 340,585
Deferred tax provision (benefit) 438,558 (100,529) 5,699,269
----------- ---------- ------------
$ 478,896 $ (55,528) $ 6,039,854
=========== ========== ============
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:
Year Ended March 31,
-------------------------------------
2004 2003 2002
----------- ---------- ------------
(restated) (restated)
Provision (benefit) computed at $ 651,878 $ (68,001) $ 5,404,080
statutory rates
State taxes, net of federal 76,692 (8,000) 635,775
benefit
Amortization of warrants -- 120,700 22,800
Amortization of intangibles (121,522) (121,522) (121,522)
Change in valuation allowance (78,968) -- --
Other (49,184) 21,295 98,721
----------- ---------- ------------
$ 478,896 $ (55,528) $ 6,039,854
=========== ========== ============
Deferred tax assets from continuing operations are comprised of the following
components:
March 31,
-----------------------
2004 2003
----------- ----------
(restated)
Current deferred taxes:
Allowance for doubtful accounts $ 189,205 $ 241,643
Program supplier reserves 487,773 501,120
Foreign tax credit -- 49,246
Net operating loss carryforwards 1,167,124 779,432
Unrealized loss on investments 118,785 118,785
Deferred revenue 90,279 145,043
Deferred gain 22,917 --
Other 186,103 587,769
----------- ----------
Total current deferred taxes 2,262,186 2,423,038
Non-current deferred taxes:
Depreciation 32,207 53,479
Retailer financing program 659,748 360,089
reserve
Deferred gain 40,991 127,995
Net operating loss carryforwards 298,821 377,789
Other 366,714 352,520
Valuation allowance (298,821) (377,789)
----------- ----------
Total non-current deferred 1,099,660 894,083
taxes
----------- ----------
Total deferred taxes $ 3,361,846 $3,317,121
=========== ==========
38
As of March 31, 2004, we had estimated net operating loss carryforwards for
federal income tax return purposes of approximately $3.4 million, which expire
through 2024. In addition, we have net operating loss carryforwards in Canada
totaling $0.9 million, the tax benefit of which has been fully reserved, which
expire through 2008.
In assessing the realizability of deferred tax assets, we consider whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. We consider the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. Based on these assessments and
considerations, we have provided a valuation allowance against our Canadian net
operating loss carryforwards due to expected revenue and income levels from our
Canadian operations in the near term. We anticipate that all other deferred tax
assets will be realized based on future estimated taxable income and have,
therefore, not recorded a valuation allowance against them.
Note 14. Stockholders' Equity
Stock Options
We have options outstanding under our 1986 Stock Option Plan, our 1997
Non-Officer Employee Stock Option Plan and our 1997 Equity Participation Plan.
The aggregate number of shares of our common stock issuable upon exercise of
options under the 1997 Non-Officer Employee Stock Option Plan may not exceed
800,000. The aggregate number of shares of our common stock issuable upon
exercise of options under the 1997 Equity Participation Plan, as amended, may
not exceed 2,075,000. As of March 31, 2004, options covering 350,847 and 304,988
shares of our common stock remained available for grant under our 1997
Non-Officer Employee Stock Option Plan and our 1997 Equity Participation Plan,
respectively.
Our option plans are administered by the Compensation Committee of our Board,
which determines the terms and conditions of options issued under the plans.
Options granted under the plans vest over periods of one to five years and
expire ten years after the date of grant.
The table below summarizes the plans' activity:
Options Outstanding
--------------------------
Weighted
Number of Average
Shares Exercise Price
--------- -------------
Balance at March 31, 2001 1,664,689 $ 4.07
Granted - option price = fair 403,000 3.29
market value
Exercised (227,812) 3.22
Canceled (210,453) 4.84
--------- -------------
Balance at March 31, 2002 1,629,424 3.97
Granted - option price = fair 519,350 5.50
market value
Granted - option price > fair 100,000 5.00
market value
Exercised (112,043) 4.18
Canceled (153,312) 4.02
--------- -------------
Balance at March 31, 2003 1,983,419 4.35
Granted - option price = fair 178,100 7.62
market value
Granted - option price > fair 80,000 6.89
market value
Exercised (285,519) 4.07
Canceled (40,218) 4.31
--------- -------------
Balance at March 31, 2004 1,915,782 $ 4.86
========= =============
39
The following table summarizes information about stock options outstanding at
March 31, 2004:
Options Outstanding Options Exercisable
--------------------------------------------------- -----------------------
Weighted
Average Weighted Number of Weighted
Range of Number Remaining Average Shares Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 03/31/04 Life (years) Price at 03/31/04 Price
-------------- ---------- ---------- --------- ---------- -----------
$1.00 - $2.59 27,000 6.8 $2.188 12,000 $2.188
$2.60 - $6.49 1,636,282 4.9 $4.434 1,203,201 $4.214
$6.50 - $9.78 252,500 9.2 $7.903 55,000 $7.332
--------- ---------
$1.00 - $9.78 1,915,782 5.5 $4.860 1,270,201 $4.330
========= =========
Options to purchase 1,186,440 and 978,380 shares of common stock were
exercisable at March 31, 2003 and 2002, respectively, at weighted average
exercise prices of $4.06 and $4.31, respectively.
Employee Stock Purchase Plan
During fiscal 2004 we terminated our Employee Stock Purchase Plan (the Plan),
which allowed for the purchase of up to 200,000 shares of our common stock.
Prior to its termination, all employees meeting certain eligibility criteria
were granted the opportunity to purchase common stock, under certain
limitations, at 85% of market value. Payment was made through payroll
deductions. All shares purchased by employees under the Plan in fiscal 2004,
2003 and 2002 were purchased by us on the open market. The following shares were
purchased by employees under the Plan:
Number of Aggregate
Shares Purchase
Purchased Price
---------- ----------
Fiscal 2002 3,079 $ 11,005
Fiscal 2003 1,213 5,740
Fiscal 2004 467 3,631
Warrants
We issued two separate warrants in 1995 and 1998, which were valued by an
outside valuation firm using standard warrant valuation models.
Warrants to purchase 1,423,750 shares of our common stock were issued in fiscal
1995 in connection with a supply agreement with a program vendor. The warrants
had an initial exercise price of $7.13 with 284,750 warrants vesting immediately
and 284,750 vesting over the following 4 years, subject to the supplier
providing a minimum of one theatrical title each year of the vesting period. The
warrants, which had expiration dates through 2005, were valued at $2.3 million
and were expensed over the initial 5 years of the agreement. In November 1996,
we adjusted the number of shares of common stock under which the warrant could
be exercised to 1,543,203 shares and decreased the price to $6.578 per share.
This adjustment was done in connection with the distribution of common stock of
BlowOut Entertainment, Inc. The adjustment was done pursuant to the supplier's
agreement that required us to adjust the warrant if a distribution of our assets
occurred. During fiscal 2002, 308,641 warrants expired, leaving a balance of
1,234,562. During the quarter ended September 30, 2002, 309,041 warrants expired
leaving a balance of 925,521. In November 2002, we entered into a cancellation
agreement to cancel the remaining 925,521 outstanding warrants.
Under the cancellation agreement, we paid the program supplier $300,000 in cash
in consideration for the cancellation of the warrants. The $300,000 cash payment
was charged to paid-in-capital as a settlement of an equity interest. In
addition, we agreed to pay the program supplier supplemental consideration in
the event of a change of control (generally a greater than 50% change in
ownership of our outstanding common stock by another company or group seeking
control) within three years following execution of the agreement. The amount of
consideration to be paid in the event of a change of control is based on the
value per common share paid by the purchaser. The amount of consideration
payable also decreases over time. The potential supplemental consideration
currently ranges from $300,000 to $1.0 million
40
depending on the price and timing of the purchase. We have not accrued any
amount as of March 31, 2004 due to the contingent nature of this supplemental
consideration.
The value of the warrants issued in July 1998 was recorded as a deferred charge
in equity of $600,000. These warrants related to a 10-year supply agreement
entered into with a major customer. The value of the warrants was to be
amortized to expense as services were provided. However, we expensed the
remaining unamortized value of these warrants as of March 31, 2003, based on the
expectation that the customer would not be utilizing our services in future
periods. The warrants expired without being exercised in 2000.
In fiscal 2004, 2003 and 2002, expense associated with the above warrants was
approximately $0, $355,000 and $60,000, respectively. None of the above warrants
are currently outstanding and all associated expense had been amortized as of
March 31, 2003.
As of March 31, 2004, we had outstanding warrants to purchase 30,000 shares of
our common stock with a purchase price of $7.50 per share and an expiration date
of May 16, 2009, which were issued to an investment banking firm as partial
consideration for financial advisory services in connection with strategic
opportunities or financing transactions of potential interest to us.
Shareholders' Rights Plan
In May 1995, our Board of Directors approved a shareholders' rights plan
designed to ensure that all of our shareholders receive fair and equal treatment
in the event of certain proposals to acquire control of us. Under the rights
plan, each shareholder received a dividend of one right for each share of our
outstanding common stock, entitling the holders to purchase one additional share
of our common stock. The rights become exercisable after any person or group
acquires 15% or more of our outstanding common stock, or announces a tender
offer, which would result in the offeror becoming the beneficial owners of 15%
or more of our outstanding common stock. Prior to the time that a person or
group acquires beneficial ownership of 15% or more of our outstanding common
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, our Board of Directors approved an offer to make loans available
to those officers 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 our efforts to retain our key employees.
The loans under this program accrued interest at the federal funds rate in
effect on the date of the loan and interest was payable annually. The principal
amount of each loan was due on the earliest to occur of: (i) one year prior to
the expiration of the term of the borrower's employment agreement in effect at
the time of the loan; (ii) one year after the borrower ceases employment, unless
such departure follows a "change of control" (as defined in the loan
agreements); (iii) five years from the date of the loan; or (iv) one year from
the date of the borrower's death. The loans were secured by the stock purchased
upon the exercise of the options. The loans were without recourse (except as to
the stock securing the loans) as to principal and were with full recourse
against the borrower as to interest. The offer to make these loans expired
September 30, 2000. Prior to September 30, 2000, several officers accepted this
offer and obtained loans from us. Because the loan proceeds were immediately
used to pay the exercise price of the options, we had no net outflow of cash in
connection with these loans.
During fiscal 2002, a former officer, who was loaned $6.6 million on June 16,
2000 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 $0.7
million to purchase 133,742 shares of stock upon exercise of additional employee
stock options, terminated his employment agreement. Accordingly, the common
stock and related notes receivable totaling $7.3 million were reversed in a
non-cash transaction.
41
During fiscal 2003, another officer exercised his right to have us purchase from
him his shares of stock associated with his loan, totaling $0.4 million. The
proceeds from the purchase of his stock were partially used to pay the remaining
balance of his loan associated with these shares. Also during fiscal 2003, the
other remaining officer with a loan outstanding under this program allowed his
right to have us purchase his shares of stock associated with his loan to
expire. The shares associated with both of these officers' loans have been
cancelled and the related notes have been terminated. As a result, all common
stock and related notes receivable covered by all agreements associated with
this officer loan program noted above have been cancelled or terminated.
Note 15. Commitments
Leases
We lease certain facilities and equipment under capital and operating leases
expiring at various dates through 2007. Minimum lease payments over the term of
the leases exceeding one year are as follows:
Year Ending March 31, Capital Operating
Leases Leases
------------------------------- ---------- ------------
2005 $ 50,040 $ 806,417
2006 41,700 791,828
2007 -- 500,972
2008 -- --
2009 -- --
Thereafter -- --
--------- -----------
Total minimum lease payments 91,740 $ 2,099,217
===========
Less amount representing interest 7,264
---------
Net obligation under capital leases 84,476
Less current portion 48,278
---------
Non-current portion $ 36,198
=========
The leases require us to pay for taxes, insurance and maintenance. We also rent
vehicles and equipment on a short-term basis. Rent expense under operating
leases was approximately $1.9 million, $3.2 million, and $3.6 million for the
fiscal years ended March 31, 2004, 2003, and 2002, respectively.
Note 16. Contingencies
Vendor Dispute
In June 2003, we signed a definitive agreement to sell substantially all of the
assets of 3PF at the Wilmington, Ohio operation, effective July 1, 2003. See
Note 5. In conjunction with the effective date of that asset sale agreement, we
entered into a Fulfillment Agreement (the "Agreement") with this purchaser (the
"Fulfillment Provider") for a nine-month term to provide us with fulfillment
services previously provided by 3PF during the period we owned and operated it.
After its inception, disagreement between the parties arose regarding the
contractual provisions of the Agreement. As a result, we disputed certain
charges for services and withheld payments accordingly. Additionally, the
Fulfillment Provider alleged that we violated the exclusivity provisions in the
Agreement. The Fulfillment Provider has submitted, under the provisions of the
Agreement, a demand for arbitration against us seeking damages of approximately
$877,000. We have reviewed the Fulfillment Provider's demand for arbitration and
believe there is no basis in fact, under the terms and conditions of the
Agreement, for any of the claims made against us. We have retained legal counsel
to vigorously defend us in this matter. In the opinion of management, the amount
of any ultimate liability with respect to this action is not expected to
materially affect our financial condition or results of operations.
42
Investigation and Recovery Efforts Regarding Misappropriated Funds
In March 2004, we learned that an employee may have engaged in fraudulent
activity and we hired an outside firm to investigate the matter. The employee
admitted to embezzling funds from us. It was determined that the employee had
been embezzling funds from us since 1998 through 2003, in amounts totaling
approximately $570,000. The investigation of this matter is complete. Other than
$62,000 in underreported sales taxes, the embezzlement funds were materially
expensed in the year such funds were embezzled and, therefore, had no other
effect on the restatement of any financial results in fiscal 2004 or prior
years. We are in the process of securing certain assets belonging to this
employee, which, in conjunction with insurance proceeds, should provide us with
recoveries of approximately $300,000, which will be recorded as recoveries in
future periods when they are received. We have incurred a total of approximately
$120,000 to $150,000 of legal and other professional fees related to this matter
through June 2004, and expect to incur an additional amount of approximately
$5,000 to $10,000 before the matter is resolved. We have updated our system of
internal controls, as described more fully in Item 9A below, in order to prevent
such occurrences in the future.
Reel.com
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. On March 13, 2002, an
arbitrator awarded damages to us of approximately $1.6 million related to this
claim. In April 2002, in a confidential settlement agreement, Hollywood agreed
to pay an additional $362,000 to us to resolve all outstanding issues between
the two parties. These amounts are reflected as net gain from litigation
settlements in the accompanying consolidated statements of operations.
General
We may, from time to time, be a party to legal proceedings and claims that arise
in the ordinary course of our business. In the opinion of management, the amount
of any ultimate liability with respect to these actions is not expected to
materially affect our financial condition or results of operations. Other than
the vendor dispute previously mentioned, we currently have no material
outstanding litigation.
Note 17. 401(k) Plan
We have an employee benefit plan pursuant to Section 401(k) of the Internal
Revenue Code (the "401(k) Plan") for certain qualified employees. Contributions
made to the 401(k) Plan are based on percentages of employees' salaries. The
total amount of our contribution is at the discretion of our Board of Directors.
Contributions under the 401(k) Plan for the years ended March 31, 2003 and 2002
were approximately $90,000 and $86,000, respectively. As of March 31, 2004, we
have accrued $93,000 for anticipated contributions related to fiscal 2004.
Note 18. Business Segments, Significant Suppliers, Product Lines and Major
Customer
Previously, we classified our services in three segments: PPT (Entertainment),
3PF (Fulfillment) and Other. Other services included amounts received pursuant
to previous royalty agreements, primarily from Rentrak Japan. As of March 31,
2004, we operate in one business segment, Entertainment (previously referred to
as our PPT segment).
43
Certain financial data by segment is as follows:
Entertain-
ment Fulfillment Other Total
------------ ------------ ----------- ------------
2004
-----------------------------
Sales to external customers $ 73,508,114 $ 4,624,299 $ -- $ 78,132,413
Inter-segment sales -- 530,144 -- 530,144
------------ ------------ ----------- ------------
Total sales 73,508,114 5,154,443 -- 78,662,557
Depreciation and amortization 875,488 -- -- 875,488
Operating income (loss) 3,059,159 (1,374,538) -- 1,684,621
Total assets 35,099,308 1,263,931 -- 36,363,239
2003 (restated)
---------------------
Sales to external customers $ 70,618,422 $ 15,265,840 $ -- $ 85,884,262
Inter-segment sales -- 2,114,704 -- 2,114,704
------------ ------------ ----------- ------------
Total sales 70,618,422 17,380,544 -- 87,998,966
Depreciation and amortization 668,029 687,993 -- 1,356,022
Operating income (loss) 2,895,526 (3,274,804) -- (379,278)
Total assets 26,563,834 4,924,444 -- 31,488,278
2002 (restated)
---------------------
Sales to external customers $ 74,283,760 $ 15,341,740 $ 6,395,754 $ 96,021,254
Inter-segment sales 218,204 2,180,137 -- 2,398,341
------------ ------------ ----------- ------------
Total sales 74,501,964 17,521,877 6,395,754 98,419,595
Depreciation and amortization 497,673 940,776 -- 1,438,449
Operating income (loss) 6,378,921 (3,858,411) 5,460,399 7,980,909
Total assets 30,626,684 5,831,188 3,636,080 40,093,952
Revenue by service activity was as follows:
Year Ended March 31,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
(restated) (restated)
Order processing $ 7,741,213 $14,745,470 $16,893,087
fees
Transaction fees 46,398,031 42,257,672 44,102,210
Sell-through fees 10,308,689 8,558,014 7,324,157
Communication fees 1,126,862 1,185,188 1,136,023
Fulfillment 4,624,299 15,265,840 15,341,740
Other 7,933,319 3,872,078 11,224,037
----------- ----------- -----------
$78,132,413 $85,884,262 $96,021,254
=========== =========== ===========
During fiscal 2004, we had one Program Supplier that supplied product that
generated 22% of our total revenues, one that generated 15%, one that generated
13% and one that generated 12%.
During fiscal 2003, we had one Program Supplier that supplied product that
generated 16% of our total revenues, two that generated 15% and a fourth that
generated 11%.
During fiscal 2002, we had one Program Supplier that supplied product that
generated 18% of our total revenues, a second that generated 17% and a third
that generated 14%.
There were no other Program Suppliers who provided product that accounted for
10% or more of our total revenues for the years ended March 31, 2004, 2003 and
2002. Although management does not believe that the relationships with the
significant program suppliers will be terminated in the near term, a loss of any
one of these suppliers could have an adverse effect on our financial condition
and results of operations.
We had one PPT customer that accounted for 17% of our total revenue in fiscal
2004. The agreement with this PPT customer expires in September 2004. One
fulfillment customer accounted for 14% and 11%, respectively, of our total
revenue in fiscal 2003 and 2002. The agreement with this fulfillment customer
expired July 31, 2003. There were no other customers that accounted for 10% or
more of our total revenue in fiscal 2004, 2003 and 2002.
44
QUARTERLY FINANCIAL DATA
Unaudited quarterly financial data, as restated, for each of the eight quarters
in the two-year period ended March 31, 2004 is as follows:
1st Quarter 2nd Quarter(2) 3rd Quarter(2) 4th Quarter
------------ ------------ ------------ ------------
2004 (restated)
--------------
Revenue, as reported $ 18,698,424 $ 14,260,883 $ 19,402,730 $ 24,230,449
Adjustment for restatements(1) 215,948 342,849 981,130 --
------------ ------------ ------------ ------------
Revenue, as restated 18,914,372 14,603,732 20,383,860 24,230,449
Income (loss) from operations, as reported 46,862 (2,204,623) 1,446,444 2,657,969
Adjustment for restatements(1) 77,873 202,240 (542,144) --
------------ ------------ ------------ ------------
Income (loss) from operations, as restated 124,735 (2,002,383) 904,300 2,657,969
Net income (loss):
Continuing operations, as reported 59,676 (1,326,602) 921,174 2,053,164
Adjustment for restatements(1) 70,918 (125,946) (213,991) --
------------ ------------ ------------ ------------
Continuing operations, as restated 130,594 (1,452,548) 707,183 2,053,164
Discontinued operations -- -- (128,649) --
------------ ------------ ------------ ------------
$ 130,594 $ (1,452,548) $ 578,534 $ 2,053,164
============ ============ ============ ============
Earnings (loss) per common share:
Basic:
Continuing operations, as reported $ 0.01 $ (0.14) $ 0.09 $ 0.21
Adjustment for restatements(1) -- (0.01) (0.02) --
------------ ------------ ------------ ------------
Continuing operations, as restated 0.01 (0.15) 0.07 0.21
Discontinued operations -- -- (0.01) --
------------ ------------ ------------ ------------
Net income (loss), as restated $ 0.01 $ (0.15) $ 0.06 $ 0.21
============ ============ ============ ============
Diluted:
Continuing operations, as reported $ 0.01 $ (0.14) $ 0.09 $ 0.20
Adjustment for restatements(1) -- (0.01) (0.02) --
------------ ------------ ------------ ------------
Continuing operations, as restated 0.01 (0.15) 0.07 0.20
Discontinued operations -- -- (0.01) --
------------ ------------ ------------ ------------
Net income (loss) $ 0.01 $ (0.15) $ 0.06 $ 0.20
============ ============ ============ ============
2003 (restated)
Revenue, as reported $ 22,427,441 $ 20,774,482 $ 21,279,830 $ 21,738,608
Adjustment for restatements(1) (217,976) 102,118 (63,686) (156,555)
------------ ------------ ------------ ------------
Revenue, as restated 22,209,465 20,876,600 21,216,144 21,582,053
Income (loss) from operations, as reported 499,221 207,722 (493,931) (223,381)
Adjustment for restatements(1) (212,457) 116,828 240,674 (513,954)
------------ ------------ ------------ ------------
Income (loss) from operations, as restated 286,764 324,550 (253,257) (737,335)
Net income (loss):
Continuing operations, as reported 309,517 173,115 (299,195) (99,189)
Adjustment for restatements(1) (131,723) 72,433 149,218 (318,652)
------------ ------------ ------------ ------------
Continuing operations, as restated 177,794 245,548 (149,977) (417,841)
Discontinued operations (145,014) (276,216) (75,369) (86,028)
------------ ------------ ------------ ------------
$ 32,780 $ (30,668) $ (225,346) $ (503,869)
============ ============ ============ ============
Earnings (loss) per common share:
Basic:
Continuing operations, as reported $ 0.03 $ 0.02 $ (0.03) $ (0.01)
Adjustment for restatements(1) (0.01) 0.01 0.02 (0.03)
------------ ------------ ------------ ------------
Continuing operations, as restated 0.02 0.03 (0.01) (0.04)
Discontinued operations (0.02) (0.03) (0.01) (0.01)
------------ ------------ ------------ ------------
Net income (loss) $ 0.00 $ 0.00 $ (0.02) $ (0.05)
============ ============ ============ ============
Diluted:
Continuing operations, as reported $ 0.03 $ 0.02 $ (0.03) $ (0.01)
Adjustment for restatements(1) (0.01) 0.01 0.02 (0.03)
------------ ------------ ------------ ------------
Continuing operations, as restated 0.02 0.03 (0.01) (0.04)
Discontinued operations (0.02) (0.03) (0.01) (0.01)
------------ ------------ ------------ ------------
Net income (loss) $ 0.00 $ 0.00 $ (0.02) $ (0.05)
============ ============ ============ ============
45
1. See Note 4 of Notes to Consolidated Financial Statements for a detailed
description of the restatements. In addition, to the restatements discussed
in Note 4, we also restated the second and third quarters of fiscal 2004 to
reflect the recognition of guarantees from a customer at street-date, in
accordance with SOP 00-2, which were previously recognized over the rental
period. This resulted in earlier recognition of revenue and related cost of
sales. The adjustment for restatements is made up of the following:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------ ------------ ------------ ------------
2004
Revenue adjustment
SOP 00-2 revenue $ 215,948 $ (54,799) $ 23,595 $ --
recognition adjustment
SOP 00-2 accounting for
guarantees adjustment -- 397,648 957,535 --
------------ ------------ ------------ ------------
$ 215,948 $ 342,849 $ 981,130 $ --
============ ============ ============ ============
Operating income (loss) adjustment
Adjustment for
misinterpretation and $ 9,370 $ 152,312 $ (737,490) $ --
misapplication of contract
terms
SOP 00-2 revenue 68,503 (32,090) 97 --
recognition adjustment
SOP 00-2 accounting for
guarantees adjustment -- 82,018 195,249 --
------------ ------------ ------------ ------------
$ 77,873 $ 202,240 $ (542,144) $ --
============ ============ ============ ============
Net income adjustment
Adjustment for
misinterpretation and $ 9,370 $ 152,312 $ (737,490) $ --
misapplication of contract
terms
SOP 00-2 revenue 68,503 (32,090) 97 --
recognition adjustment
SOP 00-2 accounting for
guarantees adjustment -- 82,018 195,249 --
Tax effect of adjustments (6,955) (328,186) 328,153
------------ ------------ ------------ ------------
$ 70,918 $ (125,946) $ (213,991) $ --
============ ============ ============ ============
2003
Revenue adjustment
SOP 00-2 revenue $ (217,976) $ 164,226 $ (63,686) $ (156,555)
recognition adjustment
Underreporting of sales tax -- (62,108) -- --
------------ ------------ ------------ ------------
$ (217,976) $ 102,118 $ (63,686) $ (156,555)
============ ============ ============ ============
Operating income (loss)
adjustment
Adjustment for
misinterpretation and $ (133,771) $ 116,422 $ 258,350 $ (479,775)
misapplication of contract
terms
SOP 00-2 revenue (78,686) 62,514 (17,676) (34,180)
recognition adjustment
Underreporting of sales tax -- (62,108) -- --
------------ ------------ ------------ ------------
$ (212,457) $ 116,828 $ 240,674 $ (513,955)
============ ============ ============ ============
Net income adjustment
Adjustment for
misinterpretation and $ (133,771) $ 116,422 $ 258,350 $ (479,775)
misapplication of contract
terms
SOP 00-2 revenue (78,686) 62,514 (17,676) (34,180)
recognition adjustment
Underreporting of sales tax -- (62,108) -- --
Tax effect of adjustments 80,734 (44,395) (91,456) 195,303
------------ ------------ ------------ ------------
$ (131,723) $ 72,433 $ 149,218 $ (318,652)
============ ============ ============ ============
2. Income from operations and net income in the second quarter of fiscal 2004
include a $1.3 million charge for the estimated cost for early termination
of a lease related to our 3PF business. Income from operations and net
income in the third quarter of fiscal 2004 include a $650,000 credit related
to the reversal of a portion of the $1.3 million charge as the final early
termination charge was $650,000.
46
Rentrak Corporation
Valuation and Qualifying Accounts
Schedule II
Write-Offs
Balance at Additions Charged Balance
Beginning (Reductions) Against at End of
of Period to Reserve Reserves Recoveries Period
----------- ------------ ------------ ----------- -----------
Allowance for doubtful
accounts:
Fiscal 2002 $ 2,090,075 $ (1,546,301) $ (1,598,046) $ 2,140,415 $ 1,086,143
Fiscal 2003 1,086,143 (1,142,138) (447,732) 1,251,866 748,139
Fiscal 2004 748,139 (319,676) (9,825) 420,484 839,122
Advances to and
guarantees with
Program Suppliers
reserve (restated)
Fiscal 2002 $ 2,438,260 $ 2,427,928 $ (1,792,316) $ (26,654) $ 3,047,218
Fiscal 2003 3,047,218 2,749,841 (2,042,146) (41,060) 3,713,853
Fiscal 2004 3,713,853 2,059,159 (1,214,640) (37,613) 4,520,759
Other current assets -
retailer financing
program reserve
Fiscal 2002 $ 838,435 $ -- $ -- $ -- $ 838,435
Fiscal 2003 838,435 -- -- -- 838,435
Fiscal 2004 838,435 -- -- -- 838,435
Other assets -
retailer financing
program reserve
Fiscal 2002 $ 5,760,079 $ 50,000 $ (72,760) $ -- $ 5,737,319
Fiscal 2003 5,737,319 -- (45,000) -- 5,692,319
Fiscal 2004 5,692,319 -- (31,422) -- 5,660,897
47
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation
of our Chief Executive Officer and Chief Financial Officer, the effectiveness of
our disclosure controls and procedures as of the end of the period covered by
this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of
1934, as amended (Exchange Act). During the period covered by this report,
management identified internal control deficiencies, as described below, that
constitute material weaknesses as defined in Statement of Auditing Standards No.
60. Certain of these internal control weaknesses may also constitute
deficiencies in our disclosure controls and procedures. Based on that evaluation
and taking into consideration those identified deficiencies, our Chief Executive
Officer and our Chief Financial Officer have concluded that, as of the end of
the period covered by this report, our disclosure controls and procedures were
ineffective in ensuring that information required to be disclosed in our
Exchange Act reports is (1) recorded, processed, summarized and reported in a
timely manner, and (2) accumulated and communicated to our management, including
our Chief Executive Officer and our Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure.
Management's conclusion that our disclosure controls and procedures were
ineffective as of the end of the period covered by this report is based on our
discovery of deficiencies in certain of our internal controls necessary to
development of reliable financial statements. Some of these weaknesses related
to the discovery that one of our employees had embezzled funds from us over a
period of several years by exploiting weaknesses in our internal controls
related to the segregation of duties within the accounting function. Other
weaknesses related to the discovery of accounting errors as a result of the
misinterpretation and misapplication by our internal accounting staff of certain
terms in our revenue sharing agreements with program suppliers. Our outside
auditor also advised us of certain organizational and resource deficiencies
related to our processes for monitoring, analyzing and reporting on new
accounting and reporting pronouncements, including our process for summarizing
and externally reporting financial information. These deficiencies are discussed
in more detail below, together with a description of the changes in our internal
control over financial reporting which we began implementing during our last
fiscal quarter and that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
We have reviewed the procedures and internal controls surrounding the
deficiencies described above and have taken actions and commenced the
implementation of improvements as of the date of the filing of this report, as
described below, to provide reasonable assurance that those deficiencies will
not recur. Based on the actions we have taken, our Chief Executive Officer and
Chief Financial Officer have concluded that this report fully complies with the
requirements of Section 13(a) of the Exchange Act and that the information
contained in this report fairly presents, in all material respects, our
financial condition and results of operations.
Internal Control Over Financial Reporting
Investigation and Recovery Efforts Regarding Misappropriated Funds
In March 2004, we learned that an employee may have engaged in fraudulent
activity and we hired an outside firm to investigate the matter. The employee
admitted to embezzling funds from us. It was determined that the employee had
been embezzling funds from us since 1998 through 2003, in amounts totaling
approximately $570,000. The investigation of this matter is complete. Other than
$62,000 in underreported sales taxes, the embezzlement funds were materially
expensed in the year such funds were embezzled and, therefore, had no other
effect on the restatement of any financial results in fiscal 2004 or prior
years. We are in the process of securing certain assets belonging to this
employee, which, in conjunction with insurance proceeds, should provide us with
recoveries of approximately $300,000, which
48
will be recorded as recoveries in future periods when they are received. We have
incurred a total of approximately $120,000 to $150,000 of legal and other
professional fees related to this matter through June 2004, and expect to incur
an additional amount of approximately $5,000 to $10,000 before the matter is
resolved.
We have reviewed the internal controls, including the accounting, financial
reporting and disclosure controls surrounding this fraud and have made
improvements to such controls to help ensure against this type of activity in
the future. Management has recently hired a new controller who will lead our
efforts to improve our overall internal accounting controls. In particular, we
have implemented, or are in the process of implementing, the following
additional procedures and controls with respect to this embezzlement matter:
o All checks, upon receipt, are restrictively endorsed.
o No employee, beyond the person(s) assigned to open and distribute the
mail, is authorized to handle the mail in any manner.
o Only copies of checks are distributed for account coding.
o The income tax receivable account will be reconciled so that the
receivable and payable for each tax jurisdiction can be tracked.
o A miscellaneous cash receipts log has been established with copies of
supporting documentation. The cash receipt transactions are reconciled
to the bank statements during the bank reconciliation process by staff
independent of the cash receipts function.
o Segregation of duties within Finance and Accounting has been reviewed
and necessary adjustments have been made, given our staffing size and
composition.
o All bank statements will be given to the Chief Financial Officer or
Controller, who will independently review the information prior to its
use by appropriate accounting staff.
o All bank reconciliations will be reviewed monthly by the Chief
Financial Officer or Controller and evidenced in writing.
o All prepared journal entries will be reviewed by the Controller prior
to entry in the accounting system.
Misinterpretation and Misapplication of Certain Terms in Revenue Sharing
Agreements with Program Suppliers
In May and June 2004, we discovered errors in our accounting as a result of the
misinterpretation and misapplication of certain terms in some of our revenue
sharing agreements with Program Suppliers. These errors resulted in the
restatement of our previously issued financial statements for fiscal 2000
through fiscal 2003. See Note 4 of Notes to Consolidated Financial Statements
for a detailed description of the restatements.
We have implemented, or are in the process of implementing, the following
additional procedures and controls to date with respect to these restatement
matters: o All revenue-sharing agreement Program Supplier contract liability
accounts will be comprehensively analyzed and reconciled on a monthly basis. The
analyses and reconciliations will be reviewed and approved by the Controller
and/or Chief Financial Officer, and evidenced in writing. o All revenue-sharing
agreement Program Supplier guarantees will be comprehensively analyzed on a
monthly basis. The analyses will be reviewed and approved by the Controller
and/or Chief Financial Officer, and evidenced in writing.
Organizational Deficiencies Related to the External Financial Reporting Process
Certain organizational and resource deficiencies have been identified related to
our processes for monitoring, analyzing and reporting on new accounting and
reporting pronouncements. This includes our process for summarizing and external
reporting of financial information.
49
We have implemented, or are in the process of implementing, the following
procedures and controls with respect to this matter:
o We have hired a new controller with assigned responsibilities to
include: (i) the on-going research and identification of new
accounting and reporting pronouncements; and (ii) the on-going
research and identification of our external financial reporting
responsibilities to assure our compliance with all professional and
regulatory reporting and disclosure requirements.
o Once identified, we will assess and evaluate the application of all
new pronouncements in a timely manner and determine the correct
accounting and reporting treatment. We will also provide our
independent auditors the conclusions of our assessment and evaluation
of these pronouncements when complete.
o We are implementing a process to ensure that we research, identify and
apply all external reporting and disclosure requirements in our
external financial reporting.
Summary
Our independent auditors advised the audit committee of our board of directors
that these internal control deficiencies described above constitute material
weaknesses as defined in Statement of Auditing Standards No. 60. Certain of
these internal control weaknesses may constitute deficiencies in our disclosure
controls and procedures.
Other than as discussed in the preceding paragraphs, there have been no changes
in our internal control over financial reporting that occurred during our last
fiscal quarter that has materially affected or is reasonably likely to
materially affect our internal control over financial reporting.
50
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements and Schedules
The Consolidated Financial Statements, together with the report thereon of our
independent auditors, are included on the pages indicated below:
Page
----
Report of Independent Registered Public Accounting Firm 21
Consolidated Balance Sheets as of March 31, 2004 and 2003 22
Consolidated Statements of Operations for the years ended
March 31, 2004, 2003 and 2002 23
Consolidated Statements of Stockholders' Equity for the years
ended March 31, 2004, 2003 and 2002 24
Consolidated Statements of Cash Flows for the years ended
March 31, 2004, 2003 and 2002 25
Notes to Consolidated Financial Statements 26
The following schedule is filed herewith:
Page
----
Schedule II Valuation and Qualifying Accounts 47
Schedules not included have been omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
Exhibits
The exhibits required to be filed pursuant to Item 601 of Regulation S-K are
listed in the Exhibit Index, which immediately follows the signature page of
this report.
Reports on Form 8-K
None.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Amendment No. 1 to its annual
report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: December 15, 2004 RENTRAK CORPORATION
By:/S/ F. Kim Cox
----------------------------------------------
F. Kim Cox
President
By:/s/ Mark L. Thoenes
----------------------------------------------
Mark L. Thoenes
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
52
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 Description
3.1 Amended and Restated Articles of Incorporation and amendments
thereto. (1)
3.2 1995 Restated Bylaws, as amended to date. (2)
10.1* 1986 Second Amended and Restated Stock Option Plan and Forms of
Stock Option Agreements. (3)
10.2* Amendment to 1986 Second Amended and Restated Stock Option Plan
dated May 19, 2000. (4)
10.3* Employment Agreement with Christopher E. Roberts dated November
1, 2002. (8)**
10.4* The 1997 Equity Participation Plan of Rentrak Corporation, as
amended. (9)
10.5* Form of Non-Qualified Stock Option Agreement under 1997 Equity
Participation Plan. (10)
10.6* Form of Incentive Stock Option Agreement under 1997 Equity
Participation Plan. (11)
10.7 Revolving Line of Credit Agreement with Wells Fargo Bank dated
June 15, 2002. (12)
10.8 Amendment, dated June 16, 2003, to Revolving Line of Credit
Agreement with Wells Fargo Bank, dated June 15, 2002. (13)
10.9* Employment Agreement with Mark L. Thoenes dated January 1, 2001.
(14)
10.10* Employment Agreement with Timothy J. Erwin dated November 1,
2002. (15)**
10.11 Rights Agreement dated as of May 18, 1995, between Rentrak
Corporation and U.S. Stock Transfer Corporation. (16)
10.12* Incentive Stock Option Agreement with Paul A. Rosenbaum dated
March 30, 2001. (17)
10.13* Non-Qualified Stock Option Agreement with Paul A. Rosenbaum dated
March 30, 2001. (18)
10.14* Employment Agreement with Amir Yazdani dated July 1, 2001. (19)
10.15* Employment Agreement with Paul A. Rosenbaum dated October 1,
2001. (20)
10.16* The 1997 Non-Officer Employee Stock Option Plan of Rentrak
Corporation. (21)
10.17* Amendment to the 1997 Non-Officer Employee Stock Option Plan of
Rentrak Corporation. (22)
10.18* Second Amendment to the 1997 Non-Officer Employee Stock Option
Plan of Rentrak Corporation. (23)
10.19* Third Amendment to the 1997 Non-Officer Employee Stock Option
Plan of Rentrak Corporation. (24)
10.20* Letter Agreement between Rentrak Corporation and Disney
Enterprises, Inc., dated November 15, 2002. (25)
10.21* Employment Agreement with Ronald Giambra dated July 1, 2002. (26)
10.22* Amendment, dated June 1, 2003, to Employment Agreement dated July
1, 2002, between Ronald Giambra and Rentrak Corporation. (28)
10.23* Employment Agreement between F. Kim Cox and Rentrak Corporation
dated April 1, 2004. (29)
10.24* Employment Agreement between Kenneth M. Papagan and Rentrak
Corporation dated January 1, 2004. (30)
10.25* Employment Agreement between Cathy Hetzel and Rentrak Corporation
dated March 17, 2004. (31)
21 List of Subsidiaries of Registrant. (32)
23 Consent of KPMG LLP, independent registered public accounting
firm.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a).
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350.
99.1 Description of Capital Stock of Rentrak Corporation. (27)
* Management Contract or Compensatory Plan or Arrangement.
** Portions omitted pursuant to a request for confidentiality treatment filed
with the Securities and Exchange Commission.
1. Filed in Form S-3 Registration Statement, File No. 33-8511, filed on
November 21, 1994.
2. Filed as Exhibit 3.1 to Form 10-Q filed on February 14, 2001.
3. Filed as Exhibit 10.1 to 1993 Form 10-K filed on June 28, 1993
(File No. 0-15159).
4. Filed as Exhibit 10.30 to 2000 Form 10-K filed on June 29, 2000.
8. Filed as Exhibit 10.4 to Form 10-Q filed on February 14, 2003.
9. Filed as Exhibit 10.10 to 2002 Form 10-K filed on June 28, 2002.
10. Filed as Exhibit 10.8 to 2003 Form 10-K filed on June 26, 2003.
11. Filed as Exhibit 10.9 to 2003 Form 10-K filed on June 26, 2003.
12. Filed as Exhibit 10.1 to Form 10-Q filed on February 14, 2003.
13. Filed as Exhibit 10.2 to Form 10-Q filed on August 13, 2003.
14. Filed as Exhibit 10.25 to 2001 Form 10-K filed on June 29, 2001.
15. Filed as Exhibit 10.3 to Form 10-Q filed on February 14, 2003.
16. Filed as Exhibit 4 to Form 8-K filed on June 5, 1995.
17. Filed as Exhibit 10.30 to 2001 Form 10-K filed on June 29, 2001.
18. Filed as Exhibit 10.31 to 2001 Form 10-K filed on June 29, 2001.
19. Filed as Exhibit 10.1 to Form 10-Q filed on November 13, 2001.
20. Filed as Exhibit 10.1 to Form 10-Q filed on February 14, 2002.
21. Filed as Exhibit 4.1 to Form S-8 filed on June 5, 1997.
22. Filed as Exhibit 4.1 to Form S-8 filed on October 29, 1997.
23. Filed as Exhibit 10.31 to 2002 From 10-K filed on June 28, 2002.
24. Filed as Exhibit 10.1 to Form 10-Q filed on November 13, 2002.
25. Filed as Exhibit 99 to Form 8-K filed on November 18, 2002.
26. Filed as Exhibit 10.5 to Form 10-Q filed on February 14, 2003.
27. Filed as Exhibit 99 to 2001 Form 10-K filed on June 29, 2001.
28. Filed as Exhibit 10.26 to 2004 Form 10-K filed on July 14, 2004
29. Filed as Exhibit 10.27 to 2004 Form 10-K filed on July 14, 2004
30. Filed as Exhibit 10.28 to 2004 Form 10-K filed on July 14, 2004
31. Filed as Exhibit 10.29 to 2004 Form 10-K filed on July 14, 2004
32. Filed as Exhibit 21 to 2004 Form 10-K filed on July 14, 2004