SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 fiscal year ended March 31, 2001 or
Transition report pursuant to Section 13 or 15(d) of the Securities
---- Exchange Act of 1934
Commission file number 0-15159
RENTRAK CORPORATION
(exact name of registrant as specified in its charter)
Oregon 93-0780536
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
7700 NE Ambassador Place, Portland, Oregon 97220
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (503) 284-7581
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common stock $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K [ ]
As of June 20, 2001, the aggregate market value of the registrant's common stock
held by non-affiliates of the registrant, based on the last sales price as
reported by NASDAQ, was $33,400,766.
As of June 20, 2001, the Registrant had 11,167,605 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR THE 2001 ANNUAL MEETING OF THE
SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K
EXPLANATORY NOTE
Rentrak Corporation (the "Company") is filing this Amendment No. 1
on Form 10-K/A as an amendment to its Annual Report on Form 10-K for the fiscal
year ended March 31, 2001 (the "Form 10-K"). The purposes of this Amendment are
to (a) correct the cover page of the Form 10-K; (b) amend and restate in its
entirety Item 8 of the Form 10-K; (c) correct Exhibits 10.17, 10.18 and 10.19 in
the Exhibit Index; and (d) file Exhibits 10.14 and 10.15 as Exhibits to the Form
10-K.
PART II
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Item Page
---- ----
Report of Independent Public 25
Accountants
Consolidated Balance Sheets as of March 31, 2001 26
and 2000
Consolidated Statements of Operations for the Years 28
Ended March 31, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity 29
for the Years Ended March 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years 30
Ended March 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements 32
Financial Statement Schedules -- 51
Schedule II
Quarterly Financial Data 52
Schedules not included have been omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
-24-
Report of Independent Public Accountants
To Rentrak Corporation:
We have audited the accompanying consolidated balance sheets of Rentrak
Corporation (an Oregon corporation) and subsidiaries as of March 31, 2001 and
2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
2001. These consolidated financial statements and the schedule referred to below
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and schedule based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rentrak Corporation and
subsidiaries as of March 31, 2001 and 2000 and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2001 in conformity with accounting principles generally accepted in the United
States.
Our audits were made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial statements
and, in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
/s/ Arthur Andersen LLP
Portland, Oregon
May 23, 2001
-25-
Rentrak Corporation and Subsidiaries
Consolidated Balance Sheets
As of March 31, 2001 and 2000
ASSETS
2001 2000
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $3,322,917 $4,028,271
Accounts receivable, net of allowance for doubtful accounts
of $2,090,075 and $836,945 11,151,817 21,820,168
Advances to program suppliers 1,328,165 2,982,766
Inventory 3,514,354 3,889,603
Income tax receivable 279,160 169,300
Deferred income taxes 7,319,266 1,878,113
Notes receivable - 4,061,618
Other current assets 3,291,915 1,757,081
---------- ----------
Total current assets 30,207,594 40,586,920
---------- ----------
PROPERTY AND EQUIPMENT, net 4,439,773 2,642,700
OTHER INVESTMENTS, net - 302,481
DEFERRED INCOME TAXES 2,419,634 3,346,212
OTHER ASSETS 2,059,247 3,595,041
---------- ---------
Total assets $39,126,248 $50,473,354
========== ==========
(Continued)
-26-
Rentrak Corporation and Subsidiaries
Consolidated Balance Sheets (Continued)
As of March 31, 2001 and 2000
LIABILITIES AND STOCKHOLDERS' EQUITY
2001 2000
--------- ----------
CURRENT LIABILITIES:
Line of credit $ 1,917,705 $ -
Accounts payable 18,699,289 24,162,040
Accrued liabilities 3,418,043 2,645,567
Accrued compensation 1,127,785 1,476,703
Deferred revenue 1,245,643 1,500,262
Note payable - 500,000
Net current liabilities of discontinued operations 156,046 430,923
---------- ----------
Total current liabilities 26,564,511 30,715,495
---------- ----------
LONG-TERM LIABILITIES:
Deferred revenue 379,104 1,677,272
Other 795,875 -
---------- ----------
1,174,979 1,677,272
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; authorized: 10,000,000
shares - -
Common stock, $.001 par value; authorized: 30,000,000
shares; issued and outstanding: 12,235,621 shares in 2001
and 10,514,561 shares in 2000 12,236 10,515
Capital in excess of par value 52,471,599 44,445,199
Notes receivable (7,728,186) -
Cumulative other comprehensive loss (49,572) (264,684)
Accumulated deficit (32,904,319) (25,326,951)
Deferred charge - warrants (415,000) (783,492)
---------- ----------
Total stockholders' equity 11,386,758 18,080,587
---------- ----------
Total liabilities and stockholders' equity $39,126,248 $50,473,354
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
-27-
Rentrak Corporation And Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Years Ended March 31, 2001, 2000 and 1999
Common Stock Cumulative
---------------------- Capital In Other
Number of Excess of Notes Comprehensive Accumlated
Shares Amount Par Value Receivable Income (Loss) Deficit
------------ ------- ---------- ---------- ------------- ----------
BALANCE AT MARCH 31, 1998 10,986,455 $10,987 $45,365,298 - $54,645 $(30,794,263)
Repurchase of common stock (592,484) (593) (1,964,622) - - -
Issuance of common stock under
employee stock option plans 45,977 46 118,375 - - -
Net income - - - - - 2,042,506
Change in unrealized gain
(loss) on investment
securities, net of tax - - - - 83,102 -
Total comprehensive income
Income tax benefit from stock
option exercise - - 41,428 - - -
Issuance of warrants - - 84,000 - - -
Amortization of warrants - - - - - -
---------- -------- ---------- ---------- ------------- ----------
BALANCE AT MARCH 31, 1999 10,439,948 10,440 43,644,479 - 137,747 (28,751,757)
Issuance of common stock under
employee stock option plans 74,613 75 228,882 - - -
Net income - - - - - 3,424,806
Change in unrealized gain
(loss) on investment
securities, net of tax - - - - (402,431) -
Total comprehensive income
Income tax benefit from stock
option exercise - - 27,699 - - -
Issuance of warrants - - 544,139 - - -
Amortization of warrants - - - - - -
---------- -------- ---------- ---------- ------------- ----------
BALANCE AT MARCH 31, 2000 10,514,561 10,515 44,445,199 - (264,684) (25,326,951)
Issuance of common stock under
employee stock option plans 1,721,060 1,721 8,026,400 (7,728,186) - -
Net loss - - - - - (7,577,368)
Change in unrealized gain
(loss) on investment
securities, net of tax - - - - 215,112 -
Total comprehensive income
Amortization of warrants - - - - - -
---------- -------- ---------- ---------- ------------- ----------
BALANCE AT MARCH 31, 2001 12,235,621 $12,236 $52,471,599 $(7,728,186) $(49,572) $(32,904,319)
========== ======== ========== ========== ============= ==========
Deferred
Charge Comprehensive
Warrants Total Income (Loss)
---------- ----- -------------
BALANCE AT MARCH 31, 1998 $(1,382,542) $13,254,125
Repurchase of common stock - (1,965,215)
Issuance of common stock under
employee stock option plans - 118,421
Net income - 2,042,506 $2,042,506
Change in unrealized gain
(loss) on investment
securities, net of tax - 83,102 83,102
---------
Total comprehensive income $2,125,608
=========
Income tax benefit from stock
option exercise - 41,428
Issuance of warrants (84,000) -
Amortization of warrants 717,537 717,537
---------- ---------
BALANCE AT MARCH 31, 1999 (749,005) 14,291,904
Issuance of common stock under
employee stock option plans - 228,957
Net income - 3,424,806 $3,424,806
Change in unrealized gain
(loss) on investment
securities, net of tax - (402,431) (402,431)
----------
Total comprehensive income $3,022,375
==========
Income tax benefit from stock
option exercise - 27,699
Issuance of warrants (544,139) -
Amortization of warrants 509,652 509,652
---------- ----------
BALANCE AT MARCH 31, 2000 (783,492) 18,080,587
Issuance of common stock under
employee stock option plans - 299,935
Net loss - (7,577,368 $(7,577,368)
Change in unrealized gain
(loss) on investment
securities, net of tax - 215,112 215,112
----------
Total comprehensive income $(7,362,256)
==========
Amortization of warrants 368,492 368,492
---------- ----------
BALANCE AT MARCH 31, 2001 $(415,000) $11,386,758
========== ==========
The accompanying notes are an integral part of these consolidated
statements
-28-
Rentrak Corporation and Subsidiaries
Consolidated Statements of Operations
For the Years Ended March 31, 2001, 2000 and 1999
2001 2000 1999
----------- ----------- -----------
REVENUES:
PPT $82,773,886 $93,393,869 $106,406,342
Other 33,625,162 19,990,351 17,381,048
----------- ----------- -----------
116,399,048 113,384,220 123,787,390
----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of sales 93,600,177 91,706,290 103,942,898
Selling and administrative 32,967,141 26,448,569 15,995,941
Net (gain) expense from litigation settlement
(Note 10) (225,000) (7,791,880) 1,099,154
----------- ----------- -----------
126,342,318 110,362,979 121,037,993
----------- ----------- -----------
Income (loss) from operations (9,943,270) 3,021,241 2,749,397
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 307,240 743,464 429,830
Interest expense (768,599) (669,373) (381,825)
Gain (loss) on investments (1,687,314) (1,207,483) 549,103
Other - (385,986) -
----------- ----------- -----------
(2,148,673) (1,519,378) 597,108
----------- ----------- -----------
Income (loss) from continuing operations
before income tax benefit (provision)
and gain from disposal of discontinued
operations (12,091,943) 1,501,863 3,346,505
INCOME TAX BENEFIT (PROVISION) 4,514,575 (450,559) (1,303,999)
----------- ----------- -----------
Net income (loss) from continuing
operations (7,577,368) 1,051,304 2,042,506
GAIN FROM DISPOSAL OF DISCONTINUED OPERATIONS,
INCLUDING INCOME TAX BENEFIT OF $483,502 - 2,373,502 -
----------- ----------- -----------
Net income (loss) $ (7,577,368) $ 3,424,806 $ 2,042,506
=========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE:
Basic-
Continuing operations $ (.63) $ .10 $ .19
Discontinued operations - .23 -
----------- ----------- -----------
Net income (loss) per common share $ (.63) $ .33 $ .19
=========== =========== ===========
Diluted-
Continuing operations $ (.63) $ .10 $ .18
Discontinued operations - .22 -
----------- ----------- -----------
Net income (loss) per common share $ (.63) $ .32 $ .18
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
-29-
Rentrak Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended March 31, 2001, 2000 and 1999
2001 2000 1999
---------- ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(7,577,368) $3,424,806 $2,042,506
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Gain on disposal of discontinued operations - (2,373,502) -
(Gain) loss on investments 597,124 1,207,483 (549,103)
Gain on litigation settlement - (7,791,880) -
Depreciation and amortization 1,266,515 1,780,966 1,286,515
Write-off of intangibles - 421,675 -
Amortization of warrants 368,492 509,652 717,537
Provision (credit) for doubtful accounts 7,758,211 6,341,032 (125,000)
Retailer financing program reserves 1,333,191 (373,394) 141,698
Reserves on advances to program suppliers 106,781 110,918 17,596
Deferred income taxes (4,646,420) (900,272) 1,176,909
Net proceeds from litigation settlement - 1,847,505 -
Change in assets and liabilities:
Accounts receivable 4,184,677 (3,231,008) 778,471
Advances to program suppliers 1,547,820 (253,422) (2,425,883)
Inventory 162,449 (1,084,620) (377,807)
Income tax receivable (109,860) 2,864,901 (1,014,739)
Notes receivable and other current assets 2,106,259 1,227,099 (537,802)
Accounts payable (6,778,293) 7,233,746 (4,561,190)
Accrued liabilities and compensation 423,558 357,860 158,730
Deferred revenue (1,552,787) 3,077,119 (729,448)
Other liabilities 795,875 - -
----------- ----------- ----------
Net cash provided by (used in)
operating activities (13,776) 14,396,664 (4,001,010)
----------- ----------- ----------
(Continued)
-30-
Rentrak Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
For the Years Ended March 31, 2001, 2000 and 1999
2001 2000 1999
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment $(2,947,219) $(1,790,501) $ (503,030)
Investments in retailer financing program - (384,500) (1,329,778)
Proceeds from retailer financing program - 228,539 -
Purchases of investments - (398,122) (570,512)
Proceeds from sale of investments 1,605,555 975,305 1,525,538
Additions of other assets and intangibles (792,677) (6,693) (1,238,601)
----------- ----------- ---------
Net cash used in investing activities (2,134,341) (1,375,972) (2,116,383)
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on line of credit 1,917,705 (7,925,000) 1,925,000
Net borrowing (payments) on notes payable (500,000) (2,500,000) 3,000,000
Repurchase of common stock - - (1,965,215)
Issuance of common stock 299,935 228,957 118,421
----------- ----------- ---------
Net cash provided by (used in)
financing activities 1,717,640 (10,196,043) 3,078,206
----------- ----------- ---------
NET CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS (430,477) 2,824,649 (3,039,187)
NET CASH USED IN DISCONTINUED OPERATIONS (274,877) (942,341) (1,176,530)
----------- ----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (705,354) 1,882,308 (4,215,717)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,028,271 2,145,963 6,361,680
----------- ----------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $3,322,917 $4,028,271 $2,145,963
=========== =========== =========
The accompanying notes are an integral part of these consolidated statements.
-31-
Rentrak Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2001, 2000 and 1999
1. Business of the Companies, Summary of Significant Accounting Policies
and Other Items
Introduction
Rentrak Corporation (the Company) (an Oregon corporation) is principally engaged
in the processing of information regarding the rental and sale of video
cassettes and the distribution of prerecorded video cassettes to the home video
market throughout the United States and Canada using its Pay-Per-Transaction
(PPT) revenue sharing program.
Under its PPT program, the Company enters into contracts to lease video
cassettes from program suppliers (producers of motion pictures and licensees and
distributors of home video cassettes) which are then leased to retailers for a
percentage of the rentals charged by the retailers.
The Company's wholly owned subsidiary, 3PF.COM,Inc. (3PF), provides
e-fulfillment order processing and inventory management services to e-tailers,
wholesalers and businesses requiring just-in-time fulfillment.
The Company's wholly owned subsidiary BlowOut Video, Inc. sells video cassettes
and DVDs through its seven retail video stores that operate under the name of
BlowOut Video.
Rentrak Japan
In December 1989, the Company entered into a definitive agreement with Culture
Convenience Club Co., Ltd. (CCC), Rentrak's joint venture partner in Rentrak
Japan, to develop the Company's PPT distribution and information processing
business in certain markets throughout the world.
On June 16, 1994, the Company and CCC amended the agreement. Pursuant to this
amendment, the Company receives a royalty of 1.67 percent for all sales of up to
$47,905,000, plus one-half of one percent (0.5 percent) of sales greater than
$47,905,000 in each fiscal year. In addition, the Company received a one-time
royalty of $2 million, of which $1 million was paid in fiscal 1995 and $1
million was paid in fiscal 1999. The term of the Agreement was extended from the
year 2001 to the year 2039. As of March 31, 2001, the Company owned
approximately 9 percent of Rentrak Japan. In April 2001, the Company sold or
agreed to sell all of its interest in Rentrak Japan (Note 14).
In December 1999, the Company received a prepayment of $2,500,000 in exchange
for $4,000,000 of credit related to the annual royalty described above. This
credit is being recognized in revenues as royalties are earned under the terms
of the contract. As of March 31, 2001, $745,754 had been recorded as current
deferred revenue on the accompanying consolidated balance sheet. As discussed in
Note 14, in April 2001, this contract was effectively terminated with Rentrak
Japan forfeiting its rights to the prepayment.
Rentrak UK Limited
In February 1998, the Company entered into a Shareholders Agreement and a PPT
License Agreement with Columbus Holdings Limited and Rentrak UK Limited (Rentrak
UK) to develop the Company's PPT distribution and information processing
business in the United Kingdom through Rentrak UK. The PPT Agreement remains in
force in perpetuity, unless terminated due to material breach of contract,
liquidation of Rentrak UK or nondelivery, by the Company to Rentrak UK of all
retailer and studio software, including
-32-
all updates. Pursuant to the PPT Agreement, during the term of the PPT
Agreement, the Company will receive a royalty of 1.67 percent of Rentrak UK's
gross revenues from any and all sources. Rentrak UK was originally structured as
a joint venture between the Company, which owned 25 percent, Columbus Holdings
Limited, which owned 67 percent of the venture and Rentrak Japan, which owns 8
percent. On March 31, 1999, the Company acquired Columbus Holdings Limited's 67
percent interest, and now owns 92 percent of Rentrak UK. The acquisition, which
was not material to the operations of the Company, was accounted for as a
purchase. During fiscal 2000, Rentrak UK did not generate income or positive
cash flow and, as a result, the Company wrote off its investment of $222,000 in
that year. As of March 31, 2001, Rentrak UK continues to not generate income or
positive cash flow. Management of the Company is evaluating Rentrak UK's
operations and is exploring its options, including selling or closing down the
operations. Management intends to make a decision in the second quarter of
fiscal 2002.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company, its
majority owned subsidiaries, and those subsidiaries in which the Company has a
controlling interest after elimination of all intercompany accounts and
transactions. Investments in affiliated companies owned 20 percent to 50 percent
are accounted for by the equity method.
Management Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. These estimates include, among others, reserves on financings
under the retailer financing program investments (Note 4). Actual results could
differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of
three months or less at acquisition to be cash equivalents. Included in cash and
cash equivalents is $1,000,000 of restricted cash, as required by its bank,
which is held in highly liquid investments. The classification of this cash is
determined based on the expected term of the collateral requirement of the
operating cash account.
Investment Securities
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115), requires the Company to
classify and account for its security investments as trading securities,
securities available for sale or securities held to maturity depending on the
Company's intent and ability to hold or trade the securities at time of
purchase. Securities available for sale are stated on the balance sheet at their
fair market value with an adjustment to stockholders' equity reflected in other
comprehensive income (loss) as change in net unrealized gains and losses, net of
tax. Securities held to maturity are stated at amortized cost.
-33-
Details of the proceeds from the sales of available for sale securities and
realized gains and losses on sales of equity securities for the years ended
March 31 are as follows:
Gross Gross
Proceeds Gains Losses
-------- ------- -------
2001 $1,605,555 $ 9,570 $(606,694)
2000 975,305 554,971 (121,105)
1999 1,525,538 843,749 (294,646)
When, in management's opinion, available for sale securities have experienced an
other than temporary decline, the amount of the decline in market value below
cost is recorded in the statement of operations as a loss on investments.
In fiscal year 2000, management determined that certain investments had incurred
unrealized losses resulting from other than temporary declines in market value
below the cost of the investments. Unrealized losses from other than temporary
decline in market value of $1,245,157 were recorded in gain (loss) on
investments in the March 31, 2000 consolidated statement of operations. There
were no unrealized losses from other than temporary declines in market value
recognized in the March 31, 2001 and 1999 consolidated statements of operations.
Financial Instruments
A financial instrument is cash or a contract that imposes or conveys a
contractual obligation or right, to deliver or receive, cash or another
financial instrument. The estimated fair value of all material financial
instruments, including retailer financing program notes receivable, approximated
their carrying values at March 31, 2001 and 2000.
Inventory
Inventory consists of videocassettes, digital video discs (DVDs), and other home
entertainment products held for sale and is carried at the lower of cost
(first-in, first-out method) or market value.
Property and Equipment
Depreciation of property and equipment is computed on the straight-line method
over estimated useful lives of three to five years. Leasehold improvements are
amortized over the lives of the underlying leases or the service lives of the
improvements, whichever is shorter.
Intangibles and Other Long-Lived Assets
The Company reviews its intangible and other long-lived assets for asset
impairment at the end of each quarter, or more frequently when events or changes
in circumstances indicate that the carrying amount of intangible and other
long-lived assets may not be recoverable. The Company estimates the sum of
expected future undiscounted preinterest expense net cash flows from operating
activities. If the estimated net cash flows are less than the carrying amount of
intangible and other long-lived assets, the Company will recognize an impairment
loss in an amount necessary to write down intangible and other long-lived assets
to a fair value as determined from expected discounted future cash flows.
-34-
Revenue Recognition
The PPT agreements generally provide for a one-time initial order processing fee
and continuing transaction fees based on a percentage of rental revenues earned
by the retailer upon renting the video cassettes to their customers. The Company
recognizes order-processing fees as revenue when the video cassettes are shipped
to the retailers and recognizes transaction fees when the video cassettes are
rented to consumers.
When the Company's total revenue is fixed, determinable and billable at time of
shipment of video cassettes to the retailers, deferred revenue is recorded and
recognized as revenue in the statements of operations when the video cassettes
are rented to consumers. The corresponding obligation for their share of the
fees due to program suppliers is recorded as cost of sales when the revenue is
recognized with a corresponding liability recorded as accounts payable. The
Company also may charge retailers an application fee upon admission to the PPT
program. This fee is recognized as PPT revenue when the application to
participate in the PPT program is approved.
Revenues derived from fulfillment activities are recognized when products are
shipped and/or services are provided.
During fiscal 2000, the Company received a $2,500,000 prepayment from a customer
in exchange for $4,000,000 in credit related to a long-term agreement. This
prepayment related to periods subsequent to March 31, 2000 and has therefore
been recorded as deferred revenue on the accompanying consolidated balance
sheet. Deferred revenue will be recognized in future periods as revenues are
earned under the terms of the contract. Stockholders and directors, or their
families owned interests in several stores participating in the PPT program
through fiscal 2000. The Company realized revenues from these stores of
approximately $47,000 and $99,000 during fiscal 2000 and 1999, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under
the liability method specified by SFAS 109, deferred tax assets and liabilities
are determined based on the temporary differences between the financial
statement basis and tax basis of assets and liabilities as measured by the
enacted tax rates for the years in which the taxes are expected to be paid.
Earnings Per Share
Basic earnings per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per common share is computed on the basis of the weighted
average shares of common stock outstanding plus common equivalent shares arising
from dilutive stock options.
The weighted average number of shares of common stock and common stock
equivalents and net income (loss) used to compute basic and diluted earnings
(loss) per share for the years ended March 31 were calculated as follows:
-35-
2001 2000 1999
---------------- ----------------- -----------------
Basic Diluted Basic Diluted Basic Diluted
------ -------- ------ -------- ------ --------
Weighted average number of
shares of common stock
outstanding used to
compute basic earnings
(loss) per common share 11,985,023 11,985,023 10,477,334 10,477,334 10,775,126 10,775,126
Dilutive effect of
exercise of stock options - - - 281,787 - 291,017
---------- ---------- ---------- ---------- ---------- ----------
Weighted average number of
shares of common stock used
to compute diluted earnings
(loss) per common share outstanding
and common stock equivalents 11,985,023 11,985,023 10,477,334 10,759,121 10,775,126 11,066,143
========== ========== ========== ========== ========== ==========
Net income (loss) used in basic
and diluted earnings (loss) per
common share:
Continuing operations $(7,577,368)(7,577,368) $1,051,304 $1,051,304 $2,042,506 $2,042,506
Discontinued operations - - 2,373,502 2,373,502 - -
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) $(7,577,368)(7,577,368) $3,424,806 $3,424,806 $2,042,506 $2,042,506
========== ========== ========== ========== ========== ==========
Earnings (loss) per common share:
Continuing operations $ (0.63) (0.63) $ 0.10 $ 0.10 $ 0.19 $ 0.18
Discontinued operations - - 0.23 0.22 - -
---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) per
common share $ (0.63)$ (0.63) $ 0.33 $ 0.32 $ 0.19 $ 0.18
========== ========== ========== ========== ========== ==========
Options and warrants to purchase approximately 3,200,000, 4,400,000 and
4,400,000 shares of common stock were outstanding during the years ended March
31, 2001, 2000 and 1999, respectively, but were not included in the computation
of diluted EPS because the exercise price of the options and warrants were
greater than the average market price of the common shares.
Advertising Expense
Advertising expense, net of advertising reimbursements, totaled approximately
$492,000, $952,000 and $641,000 for the years ended March 31, 2001, 2000 and
1999, respectively.
-36-
Statements of Cash Flows
The Company had the following transactions for the years ended March 31:
2001 2000 1999
----------- ---------- ---------
CASH PAID (RECEIVED) FOR:
Interest $ 253,211 $ 656,723 $ 328,802
Income taxes, net of refunds 111,701 (1,645,085) (493,645)
NONCASH FINANCING AND INVESTING ACTIVITIES:
Reclassification of accounts receivable to other
assets and other investments - 1,023,794 269,775
Issuance of warrants - (544,139) (84,000)
Tax benefit from stock option exercises - (27,699) (41,428)
Receipt of note receivable in litigation settlement - 4,000,000 -
Receipt of common stock in litigation settlement - 1,944,375 -
Change in unrealized gain (loss) on investment securities,
net of tax 215,112 (402,431) 83,102
Notes issued, net of cancellations for common stock 7,728,186 - -
Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). The Company has adopted SFAS 130. The statement establishes
presentation and disclosure requirements for reporting comprehensive income.
Comprehensive income includes charges or credits to equity that are not the
result of transactions with shareholders. Components of the Company's
comprehensive income (loss) consist of the change in unrealized gain (loss) on
investment securities (net of tax), net of the reclassification adjustment for
gains (losses) included in net income (loss) as of March 31 is as follows:
2001 2000 1999
--------- ---------- ---------
Holding gains (losses) arising during the period, net of tax $(12,470) $(534,988) $291,761
Less- Reclassification adjustment for gains (losses)
included in net income (loss), net of tax (227,582) (132,557) 208,659
-------- -------- -------
Change in unrealized gain (loss) on investment securities,
net of tax $215,112 $(402,431) $ 83,102
======== ======== =======
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
-37-
2. Investment Securities
The carrying value and estimated fair value of marketable securities at March 31
were as follows:
Carrying Unrealized Unrealized
Value Gross Gain Gross Loss Fair Value
-------- ---------- ----------- ----------
As of March 31, 2001:
Available for sale-
Noncurrent:
Corporate securities $ 143,309 $ 13 $ (79,969) $ 63,353
======== ======== ======== ========
As of March 31, 2000:
Available for sale-
Noncurrent:
Corporate securities $2,335,290 $ 30,319 $(457,233) $1,908,376
========= ======== ======== =========
Investment securities that have limited marketability are classified as
noncurrent as it is management's intent not to dispose of the securities within
one year.
3. Property and Equipment
Property and equipment, at cost, consists of:
March 31,
------------------------
2001 2000
----------- -----------
Furniture and fixtures $8,532,210 $7,054,568
Machinery and equipment 1,875,159 438,312
Leasehold improvements 2,092,844 2,060,114
----------- -----------
12,500,213 9,552,994
Less- Accumulated depreciation (8,060,440) (6,910,294)
----------- -----------
$4,439,773 $2,642,700
=========== ===========
4. Retailer Financing Program
In 1992, the Company established a retailer financing program whereby, on a
selective basis, it provided financing to Participating Retailers that the
Company believed had potential for substantial growth in the industry. In
connection with these financings, the Company typically made a loan and/or
equity investment in the Participating Retailer. In some cases, the Company
obtained a warrant to purchase stock in the Participating Retailer. As part of
such financings, the Participating Retailer typically agreed to cause all of its
current and future retail locations to participate in the PPT System for a
designated period of time (usually 5-20 years). These financings are speculative
in nature and involve a high degree of risk and no assurance of a satisfactory
return on investment can be given.
The loans are reviewed for impairment in accordance with FASB Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" (SFAS 114). A valuation allowance has been established for the amount
by which the recorded investment in the loan exceeds the
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measure of the impaired loan. As the financings are made, and periodically
throughout the terms of the agreements, the Company assesses the recoverability
of the amounts based on the financial position of each retailer. The amounts the
Company could ultimately receive could differ materially in the near-term from
the amounts assumed in establishing the reserves. During the fiscal year 2001,
the Company discontinued new financings under this retailer financing program.
Write-offs of assets associated with this program during the fiscal year 2001
were $6.1 million, including $4.4 million of related accounts receivable due to
the Company from Video Update, Inc. The Company seeks to enforce agreements
entered into in connection with this program in accordance with their terms to
the extent practicable.
At March 31, 2001 the Company had invested or loaned approximately $6,600,000
under the program and had provided reserves of approximately $6,600,000. At
March 31, 2000 the Company had invested or loaned approximately $6,600,000 under
the program and had provided reserves of approximately $5,700,000. These
balances are included in other assets.
The activity in the total reserves for the retailer financing program is as
follows for the fiscal years ended March 31:
2001 2000
----------- -----------
Beginning balance $5,684,183 $9,575,688
Additions to reserve 925,216 1,245,157
Write-offs - (5,115,665)
Recoveries (10,885) (20,997)
--------- ---------
Ending balance $6,598,514 $5,684,183
========= =========
A substantial portion of the write-offs in fiscal 2000 related to assets which
were fully reserved in prior years.
5. Line of Credit
In May 2000 the Company obtained a replacement line of credit with a lender in
an amount not to exceed the lesser of (a) $12 million or (b) the sum of 85
percent of the net amount of eligible accounts receivable. Interest under the
line is payable monthly at the bank's prime rate plus 1/4 percent (8.25 percent
at March 31, 2001). The line is secured by substantially all of the Company's
assets. The terms of the credit agreement include financial covenants requiring:
(1) $15 million of tangible net worth to be maintained at all times; (2) a
consolidated net profit to be achieved each fiscal year equal to or exceeding
$1.00 and (3) $5 million of working capital to be maintained at all times. The
agreement also restricts the amount of loans and indebtedness and limits the
payment of dividends on the Company's stock, among other restrictions. This
agreement expires in May 2005. Based upon the financial results reported as of
March 31, 2001 and the year then ended, the Company has determined it is out of
compliance with the three financial covenants at March 31, 2001. The Company has
obtained waivers of compliance for these three financial covenants as of March
31, 2001 and for the year then ended. The Company has initiated discussions of
these covenants with its lender and is seeking covenant modifications, if
necessary. Based upon discussions between the Company and its lender, the
Company believes it will successfully receive future waivers and/or
modifications, if necessary, and will have sufficient cash resources to repay
all outstanding borrowings as due. At March 31, 2001, the Company had $1,917,705
outstanding borrowings under this agreement.
-39-
6. Related Party Note Payable
On January 29, 1998, the Company entered into a $3,000,000 unsecured note
payable with a director of the Company. The 10 percent interest-bearing note was
repaid in full in January 2000. During fiscal 2000, the Company's subsidiary,
Blowout Video Holding Company, entered into a $3,000,000 line of credit with the
same director of the Company. The line expires in August 2002 and bears interest
at prime plus 1 1/2 percent (9.5 percent at March 31, 2001). The line is secured
by substantially all the assets of BlowOut Video Holding Company. At March 31,
2001 and 2000, the Company had $0 and $500,000 outstanding under this agreement,
respectively.
7. Income Taxes
The provision (benefit) for income taxes is as follows for the years ended March
31:
2001 2000 1999
---------- -------- --------
Current tax provision:
Federal $ - $ - $ -
State - 125,192 -
---------- -------- --------
- 125,192 -
Deferred tax (benefit) provision (4,514,575) 325,367 1,303,999
---------- -------- ---------
Income tax (benefit) provision $(4,514,575) $450,559 $1,303,999
========= ======== =========
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 percent to income before provision (benefit) for income taxes as
follows for the fiscal years ended March 31:
2001 2000 1999
---------- -------- --------
Provision (benefit) computed at
statutory rates $(4,111,261) $ 510,633 $1,137,812
State taxes, net of federal benefit (468,098) 59,474 133,860
Amortization of warrants 140,027 193,667 272,664
Recognition of net operating loss
carryforward - (131,507) -
Other (75,243) (181,708) (240,337)
---------- -------- ---------
$(4,514,575) $ 450,559 $1,303,999
========== ======== =========
-40-
Deferred tax assets and (liabilities) from continuing operations are comprised
of the following components at March 31, 2001 and 2000:
2001 2000
---------- ---------
Deferred tax assets:
Current-
Allowance for doubtful accounts $ 449,138 $ 78,113
Program supplier reserves 520,614 -
Foreign tax credit 500,000 823,559
Net operating loss carryforward 4,616,162 -
Unrealized loss on investments 119,015 -
Capital loss carry forward 279,407 327,749
Deferred revenue 473,453 570,100
Other 361,477 78,592
--------- ---------
Total current deferred tax assets 7,319,266 1,878,113
--------- ---------
Noncurrent-
Depreciation 445,631 423,846
Retailer financing program reserve 671,689 320,107
Program supplier reserves - 484,910
Unrealized loss on investments 30,384 299,296
Foreign tax credit 1,000,000 1,000,000
Deferred revenue 144,060 637,361
Other 127,870 180,692
--------- ---------
Total noncurrent deferred tax assets 2,419,634 3,346,212
--------- ---------
Total deferred tax assets $9,738,900 $5,224,325
========= =========
As of March 31, 2001, the Company has estimated NOL carryforwards for federal
income tax return purposes of approximately $12,100,000, which expire in 2021.
Although realization of the deferred tax assets is not assured, management
believes it is more likely than not that the Company will ultimately realize all
of its deferred tax assets.
8. Stockholders' Equity
Stock Options and Warrants
Effective March 31, 1997, the Company adopted the 1997 Non-Officer Employee
Stock Option Plan. The aggregate number of shares which may be issued upon
exercise of options under the plan shall not exceed 750,000. In August 1997, the
Company adopted the 1997 Equity Participation Plan. The aggregate number of
shares which may be issued upon exercise of options under the plan shall not
exceed 1,600,000. The plans are administered by the Stock Option Committee of
the Board which determines the terms and conditions of options issued under the
plans. Options granted to date under the plans become exercisable over four to
five years and expire ten years after date of grant. As of March 31, 2001, the
Company had 360,163 and 533,116 options available to be granted under the 1997
Non-Officer Employee Stock Option Plan and 1997 Equity Participation Plan,
respectively.
The Company has elected to account for its stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," under which no compensation expense has been
recognized because the option price equals the market price of the
-41-
Company's stock at the grant date of the options. The Company has computed for
pro forma disclosure purposes the value of all options granted during fiscal
years 2001, 2000 and 1999, using the Black-Scholes option pricing model as
prescribed by SFAS 123, "Accounting for Stock-Based Compensation," and the
following assumptions:
2001 2000 1999
-------- -------- -------
Risk-free interest rate 4.77 - 6.82 % 5.37 - 6.91% 4.46 - 6.03%
Expected dividend yield 0% 0% 0%
Expected lives 5 - 10 years 5 - 10 years 5 - 10 years
Expected volatility 78.21% 72.20% 68.94%
Using the Black Scholes methodology, the total value of options granted during
fiscal years 2001, 2000 and 1999 was approximately $1,524,000, $2,560,000 and
$4,633,000, respectively, which would be amortized on a pro forma basis over the
vesting period of the option. The weighted average fair value of options granted
during the years ended March 31, 2001, 2000 and 1999 was $3.82, $4.03 and $5.04,
respectively. Options to purchase 1,026,899, 2,494,190 and 2,006,932 shares of
common stock were exercisable at March 31, 2001, 2000 and 1999, respectively.
These exercisable options had weighted average exercise prices of $4.39, $4.70
and $4.57 at March 31, 2001, 2000 and 1999, respectively.
Adjustments were made for options forfeited prior to vesting. Had compensation
expense for these plans been determined in accordance with SFAS 123, the
Company's net income (loss) and basic and diluted earnings (loss) per common
share reflected on the March 31, 2001, 2000 and 1999 statements of operations
would have been the following unaudited pro forma amounts:
2001 2000 1999
----------- ----------- ----------
Net income (loss)
As reported $(7,577,368) $3,424,806 $2,042,506
Pro forma (8,156,972) 2,293,758 95,767
Basic earnings (loss) per share
As reported $ (.63) $ .33 $ .19
Pro forma (.68) .22 .01
Diluted earnings (loss) per share
As reported $ (.63) $ .32 $ .18
Pro forma (.68) .21 .01
-42-
The table below summarizes the plans' activity:
Options Outstanding
--------------------------------
Weighted
Number of Average
Shares Exercise Price
------------- -----------------
Balance at March 31, 1998 2,825,325 $4.60
Granted-
Option price = fair market value 919,216 5.04
Exercised (45,977) 2.77
Canceled (252,458) 4.77
----------- -----
Balance at March 31, 1999 3,446,106 4.73
Granted-
Option price = fair market value 607,837 3.97
Option price > fair market value 15,000 7.38
Option price < fair market value 12,500 2.81
Exercised (74,613) 3.08
Canceled (147,128) 5.75
----------- -----
Balance at March 31, 2000 3,859,702 4.60
Granted-
Option price = fair market value 393,575 3.80
Option price > fair market value 5,420 4.61
Exercised (1,721,060) 4.67
Canceled (872,948) 5.12
----------- -----
Balance at March 31, 2001 1,664,689 $4.07
=========== =====
The following table summarizes information about stock options outstanding at
March 31, 2001:
Options Outstanding Options Exercisable
------------------------------------------------------- -------------------------
Outstanding Weighted Exercisable Weighted
Range of as of Weighted Average Average As of Average
Exercise March 31, Remaining Exercise March 31, Exercise
Prices 2001 Contractual Life Price 2001 Price
--------------- ----------------- --------------------- ------------- ------------- ---------
$1.00 - $2.59 45,000 9.8 $2.19 - $0.00
2.60 - 6.49 1,609,689 5.2 4.09 1,016,899 4.34
6.50 - 9.78 10,000 8.3 9.50 10,000 9.50
-------------- -------------
1.00 - 9.78 1,664,689 5.4 4.07 1,026,899 4.39
============== =============
In November 1996, the Company adjusted the number of shares of common stock
issued and outstanding to employees under the 1986 stock option plan. The
adjustment, which increased the number of shares outstanding by 222,408 shares,
also included reduction in the exercise price. This adjustment was done
-43-
to equalize the options' values before and after the distribution of the common
stock of BlowOut in November 1996 (Note 13).
In March 1998, the Company agreed to issue warrants to buy up to 1,000,000
shares of the Company's common stock at an exercise price of $6.59 per share,
which exceeded market value at date of grant. The warrants were issued in
connection with entering into a long-term agreement with a customer. These
warrants expired unexercised in March 2000.
All warrants which the Company agreed to issue in 1995 and 1998 were valued by
an outside valuation firm using standard warrant valuation models. All warrants
issued in 1999 and 2000 were valued based on an internal valuation model using
the Black Scholes methodology. The value of the warrants of $4,762,116 was
recorded in the equity section and is being amortized over the associated
periods to be benefited by each warrant. In fiscal 2001, 2000 and 1999, expense
associated with the warrants was approximately $368,000, $510,000 and $718,000,
respectively.
In May 1995, the Board of Directors approved a shareholders' rights plan
designed to ensure that all of the Company's shareholders receive fair and equal
treatment in the event of certain proposals to acquire control of the Company.
Under the rights plan, each shareholder received a dividend of one right for
each share of the Company's outstanding common stock, entitling the holders to
purchase one additional share of the Company's common stock. The rights become
exercisable after any person or group acquires 15 percent or more of the
Company's outstanding common stock, or announces a tender offer which would
result in the offeror becoming the beneficial owners of 15 percent or more of
the Company's outstanding stock. Prior to the time that a person or group
acquires beneficial ownership of 15 percent or more of the Company's outstanding
stock, the Board of Directors, at their discretion, may waive this provision
with respect to any transaction or may terminate the rights plan.
Executive Option Loan Program
In June 2000, the board of directors approved a program to make loans available
to those officers of the Company who had an employment agreement for the purpose
of allowing them to exercise their vested, unexercised "out of the money"
employee stock options. The loans under this program bear interest at the
federal funds rate in effect on the date of the loan and interest is payable
annually. The principal amount of the loan is due on the earliest to occur of:
(1) one year prior to the expiration of the term of the borrower's current
employment agreement with the Company, (2) one year after the borrower leaves
the Company's employment unless such departure follows a "change of control" (as
defined in the loan agreements), (3) five years from the date of the loan, or
(4) one year from the date of the borrower's death. The loans are secured by the
stock purchased upon the exercise of the options. The loans are without recourse
(except as to the stock securing the loans) as to principal and are with full
recourse against the borrower as to interest. The offer to make these loans
expired September 30, 2000. Prior to September 30, 2000, several employees
accepted this offer and obtained loans from the Company. Because the loan
proceeds were immediately used to pay the exercise price of the options to the
Company, there was no net outflow of cash from the Company in connection with
these loans. The Company accounted for the options related to these loans using
variable accounting as prescribed by APB 25. As the exercise price of the
options was greater than the fair market value of the Company's stock through
March 31, 2001, no compensation expense was recorded. The balance remaining due
on these loans is reflected as an offset to equity in the accompanying
consolidated balance sheet and consolidated statement of shareholders' equity.
-44-
9. Commitments
Leases
The Company leases certain facilities and equipment under operating leases
expiring at various dates through 2009. Approximate rental payments over the
term of the leases exceeding one year are as follows:
Year Ending March 31,
----------------------
2002 $3,223,947
2003 3,449,400
2004 3,413,055
2005 3,404,573
2006 3,198,259
2007 and thereafter 7,139,731
----------
$23,828,965
==========
The leases provide for payment of taxes, insurance and maintenance by the
Company. The Company also rents vehicles and equipment on a short-term basis.
Rent expense under operating leases was approximately $2,953,840, $2,335,000 and
$1,926,000 for the fiscal years ended March 31, 2001, 2000 and 1999,
respectively.
Guarantees and Advances
The Company has entered into several guarantee contracts with program suppliers
providing titles for distribution under the PPT system. In general, these
contracts guarantee the suppliers minimum payments. In some cases these
guarantees were paid in advance. Any advance payments that the Company has made
and will be realized within the current year are included in advances to program
suppliers. The long-term portion is included in other assets. Both the current
and long-term portion are amortized to cost of sales as revenues are generated
from the related cassettes.
The Company, using empirical data, estimates the projected revenue stream to be
generated under these guarantee arrangements and accrues for projected losses or
reduces the carrying amount of advances to program suppliers for any guarantee
that it estimates will not be fully recovered through future revenues. As of
March 31, 2001 and 2000, the Company has reserved approximately $2,400,000 and
$2,000,000, respectively, for potential losses under such guarantee
arrangements.
On March 22, 1999, BlowOut filed for Chapter 11 of the Federal Bankruptcy Code
in the United States Bankruptcy Court for the District of Delaware. At that same
time BlowOut filed a motion to sell substantially all the assets of BlowOut.
BlowOut is not related to the Company's wholly owned subsidiary BlowOut Video,
Inc. The sale, to a third party video retailer, was approved on May 10, 1999 and
closed on May 17, 1999. The Company was the principal creditor of BlowOut. In
1996, the Company had agreed to guarantee up to $7 million of indebtedness of
BlowOut (Guarantee). Pursuant to the terms of the Guarantee, the Company agreed
to guarantee any amounts outstanding under BlowOut's credit facility. As the
sale of the BlowOut assets were not sufficient to cover the amounts due under
this facility, the Company, pursuant to the Guarantee, has agreed to a payment
plan to fulfill BlowOut's obligation under its credit facility. The amount
outstanding at March 31, 2001 is approximately $300,000. The payments, as made,
will be recorded as a reduction of "net current liabilities of discontinued
operations" on the accompanying balance sheet (see also Note 13).
-45-
Customer Agreement
In June 2000, the Company entered into an agreement with one of its customers to
modify an existing contract. Under terms of the agreement the customer made a
payment to the Company in the amount of $2,500,000. Subsequent to the signing of
the agreement, the customer took the position that it was entitled to a refund
of the payment, as additional agreements were not finalized as expected. On
March 31, 2001, the Company entered into a settlement agreement with the
customer whereby $1,600,000 of the $2,500,000 payment was determined to be
consideration for cancellation of certain rights of Rentrak under the existing
contract while the balance of $900,000 was held by the Company as a deposit to
be applied to future receivables generated by the customer. The $900,000 deposit
is to be allocated towards future receivables at the rate of $75,000 per
quarter, beginning with the quarter ended March 31, 2001. The long-term portion
of this credit has been included in other long-term liabilities on the
accompanying balance sheet.
10. Contingencies
In June 1998, Video Update, Inc. (Video Update) filed a complaint (the Video
Update Complaint) against the Company entitled Video Update, Inc. v. Rentrak
Corp., Civil Action No. 98-286, in the United States District Court for the
District of Delaware. The Video Update Complaint alleges various violations of
the antitrust laws, including that the Company has monopolized or attempted to
monopolize a market for videocassettes leased to retain video stores in
violation of Section 2 of the Sherman Act. Video Update further alleges that the
Company's negotiation and execution of an exclusive, long-term revenue sharing
agreement with Video Update violates Section 1 of the Sherman Act and Section 3
of the Clayton Act. Video Update is seeking unspecified monetary relief,
including treble damages and attorney fees, and equitable relief, including an
injunction prohibiting the Company from enforcing its agreement with Video
Update or any exclusivity provision against videocassette suppliers and video
retailers. In August 1998, the Court granted the Company's motion to dismiss the
Video Update Complaint pursuant to Federal Rules of Civil Procedure Rule
12(b)(3) on the basis of improper venue.
In August 1998, Video Update filed a new complaint against the Company in the
United States District Court for the District of Oregon (the Re-Filed
Complaint), Case No. 98-1013HA. The Re-Filed Complaint is substantially the same
as the previous complaint. The Company believes the Re-Filed Complaint lacks
merit and intends to vigorously defend against the allegations in the Complaint.
The Company has answered the Re-Filed Complaint denying its material allegations
and asserting several affirmative defenses. The Company also has counterclaimed
against Video Update alleging, among other things, breach of contract, breach of
the covenant of good faith and fair dealing, promissory fraud, breach of
fiduciary duty, breach of trust, constructive fraud, negligent misrepresentation
and intentional interference with business advantage, and is seeking damages and
equitable relief.
In October 1998, the Company filed a motion for summary judgment seeking to
dismiss the lawsuit filed against it by Video Update. In January 1999, the
Company filed a separate motion for partial summary judgment on its breach of
contract counterclaim seeking to recover more than $4.4 million in fees and
interest which the Company claims Video Update owes to it. The court denied
Rentrak's motions without reaching the merits and without prejudice to refiling
the motions after discovery had been conducted. On October 21, 1999, the Company
amended its counterclaims to add additional claims, including a claim for trade
secret misappropriation and a claim for recovery of personal property. The
amended countercomplaint also added Video Update's chairman, Daniel Potter, as a
defendant to the fraud and negligent misrepresentation claims. Mr. Potter filed
a motion to dismiss the Company's claims against him which motion was granted by
the Court on April 13, 2000. Video Update also moved to dismiss six of the
Company's claims. On April 13, 2000, the Court granted Video Update's motion in
part and dismissed the following claims: promissory fraud, breach of fiduciary
duty, breach of trust, constructive fraud, and negligent misrepresentation. On
July 31, 2000, the Company filed multiple motions for summary judgment including
a motion seeking to dismiss Video Update's antitrust claim and a motion seeking
a finding that Video Update breached its contract with Rentrak. On September 18,
2000, Video Update filed
-46-
a voluntary petition under Chapter 11 of the federal Bankruptcy Code. In light
of the bankruptcy case, the District Court dismissed the Re-Filed Complaint and
counterclaims on its own motion in January 2001, but that action could be
reinitiated by Video Update at any time. The Company has filed a proof of claim
in the bankruptcy case asserting the claims the Company asserted in its
counterclaim in the District Court action.
On November 15, 2000, 3PF.COM, Inc., a subsidiary of the Company, filed a
proceeding with the American Arbitration Association against Reel.com, Inc., a
subsidiary of Hollywood Entertainment Corporation (Hollywood), for breach of a
servicing, warehousing, and distribution agreement, and against Hollywood in
connection with its guarantee of the obligations of Reel.com, Inc., under the
agreement. 3PF.COM, Inc., is seeking damages in the amount of $4,776,237 plus an
amount to be determined as consequential damages, together with prejudgment
interest and attorney fees. Hollywood and Reel.com, Inc., have filed a
counterclaim for attorney fees.
On February 20, 2001, the Company filed a complaint against Ron Berger, Chairman
and Chief Executive Officer and a director of Rentrak until September 2000, in
the Circuit Court of the State of Oregon for the County of Multnomah (No.
0102-01814), seeking cancellation of shares of Rentrak common stock acquired by
Mr. Berger through an option loan program offered to the Company's officers in
June 2000 and damages for the conversion of an automobile and computer equipment
plus an over-advance payment of business expenses less setoffs. On or about
March 29, 2001, Mr. Berger filed a counterclaim seeking damages of approximately
$1.76 million plus attorney fees from Rentrak for conversion of Mr. Berger's
director's fees and dividends from Rentrak Japan, breach of an agreement to
compensate Mr. Berger for cancellation of options to purchase Rentrak stock,
failure to pay accumulated wages and compensation, breach of an agreement to
provide options to purchase stock in Rentrak's subsidiary 3PF.COM, Inc., and
failure to reimburse Mr. Berger for life insurance premiums and cancellation of
family health insurance. The claim for breach of an agreement to provide options
to purchase stock in the subsidiary is also asserted against counterclaim
defendant 3PF.COM, Inc. The Company has denied liability for the counterclaims.
On June 15, 2001, the Company filed an amended complaint alleging claims for
breach of duty of care and breach of fiduciary duty against Mr. Berger arising
out of his activities as an officer and director of the Company involving Video
City, Inc., and seeking damages with respect to those claims in an amount to be
proved at trial but not less than $6.0 million. The case is presently in the
discovery phase. The Company intends to contest the case vigorously.
The Company is also subject to legal proceedings and claims that arise in the
ordinary course of its business. In the opinion of management, the amount of any
ultimate liability with respect to these actions is not expected to materially
affect the financial position or results of operations of the Company as a
whole.
11. Employee Benefit Plans
On January 1, 1991, the Company established an employee benefit plan (the 401(k)
Plan) pursuant to Section 401(k) of the Internal Revenue Code for certain
qualified employees. Contributions made to the 401(k) Plan are based on
percentages of employees' salaries. The total amount of the Company's
contribution is at the discretion of the Board of Directors. Contributions under
the 401(k) Plan for the years ended March 31, 2000 and 1999 were approximately
$77,000 and $76,000, respectively. As of March 31, 2001, the Board of Directors
had not made a decision regarding contributions for the year ended March 31,
2001.
The Company has an Employee Stock Purchase Plan (the Plan). The Board of
Directors has reserved 200,000 shares of the Company's common stock for issuance
under the Plan, of which 139,773 shares remain authorized and available for sale
to employees. All employees meeting certain eligibility criteria may be granted
the opportunity to purchase common stock, under certain limitations, at 85
percent of market value. Payment is made through payroll deductions.
-47-
Under the Plan, employees purchased 4,000 shares for aggregate proceeds of
$13,561, 3,257 shares for aggregate proceeds of $14,370 and 4,245 shares for
aggregate proceeds of $20,214, in fiscal 2001, 2000 and 1999, respectively.
12. Business Segments, Significant Suppliers and Major Customer
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," (SFAS 131). SFAS 131 requires the Company
to report certain information about operating segments. The Company classifies
its services in three segments, PPT, 3PF.COM and Other. Other services include
operations of BlowOut Video, a video retailer, website services and amounts
received pursuant to royalty agreements.
Business Segments
2001 2000 1999
----------- ---------- ----------
Net sales (1):
PPT $ 83,637,704 $ 94,149,121 $106,972,685
3PF.COM (2) 23,389,443 11,648,725 10,501,958
Other 13,488,063 11,654,081 6,912,523
----------- ---------- -----------
$120,515,210 $117,451,927 $124,387,166
=========== =========== ===========
Income (loss) from operations
PPT $ (6,694,623) $ 1,892,505 $ (1,115,934)
3PF.COM (2) (3,788,576) (1,131,654) 862,257
Other 539,929 2,260,390 3,003,074
----------- ---------- -----------
$ (9,943,270) $ 3,021,241 $ 2,749,397
=========== ========== ===========
Identifiable assets (1):
PPT $ 38,202,038 $ 44,571,673 $ 45,743,988
3PF.COM 8,425,876 2,703,360 1,152,171
Other 5,566,431 6,195,923 4,177,146
----------- ---------- -----------
$ 52,194,345 $ 53,470,956 $ 51,073,305
=========== ========== ===========
(1) Total amounts differ from those reported on the consolidated financial
statements as intercompany transactions and balances are not
eliminated for segment reporting purposes.
(2) 3PF.COM's revenues related to the shipment of cassettes to Rentrak's
PPT customers was $3,300,000, $3,300,000 and $3,800,000 for the years
ended March 31, 2001, 2000 and 1999, respectively.
The Company has one program supplier that supplied product that generated 18
percent, a second that generated 15 percent, and a third that generated 13
percent of the Company's revenues for the year ended March 31, 2001. The Company
has one program supplier that supplied product that generated 25 percent, a
second that generated 19 percent, and a third that generated 13 percent of the
Company's revenues for the year ended March 31, 2000. The Company has one
program supplier that supplied product that generated 28 percent, a second that
generated 26 percent, and a third that generated 15 percent of the Company's
revenues for the year ended March 31, 1999. There were no other program
-48-
suppliers who provided product accounting for more than 10 percent of sales for
the years ended March 31, 2001, 2000 and 1999.
The Company currently receives a significant amount of product from three
program suppliers. Although management does not believe that these relationships
will be terminated in the near term, a loss of one of these suppliers could have
an adverse effect on operating results.
One customer accounted for 13 percent of the Company's revenues in 1999. No
customer accounted for more than 10 percent of the Company's revenues in fiscal
2001 and 2000.
13. Discontinued Operations
On November 26, 1996, the Company made a distribution to its shareholders of
1,457,343 shares of common stock (the BlowOut Common Stock) of BlowOut. BlowOut
is not related to the Company's wholly owned subsidiary BlowOut Video, Inc.
During the year ended March 31, 2000, the Company recorded a gain on the
disposal of discontinued operations of $1,900,000 related to BlowOut, as the
liability related to BlowOut contingencies was less than estimated. The Company
also reduced the valuation allowance that was recorded against the deferred tax
asset related to liabilities of discontinued operations. This reduction of
approximately $500,000 in the valuation allowance was recorded as an income tax
benefit from discontinued operations in the accompanying consolidated statement
of operations. Net current liabilities of discontinued operations at March 31,
2001 relate to amounts to be paid pursuant to the Guarantee, net of tax benefit.
14. Subsequent Events
Rentrak Japan
On April 2, 2001, the Company transferred exclusive rights to implement its PPT
system within specified countries in the Far East, including related trademark
and other intellectual property rights, to Rentrak Japan, which distributes
video cassettes, DVDs, and video games on a revenue-sharing basis throughout
Japan. In exchange for the transfer, Rentrak Japan made a lump sum cash payment
of $5.65 million and released certain payment obligations of the Company
totaling $2.1 million. As a part of the transaction, Rentrak Japan's obligation
to pay annual royalties to the Company in connection with use of its PPT system
was terminated.
The Company concurrently sold to So-Tsu Co., Ltd. (So-Tsu), an entity affiliated
with Rentrak Japan, 300,000 shares of Rentrak Japan stock, or approximately 5.6
percent of the outstanding Rentrak Japan shares, in exchange for a cash payment
of $4.0 million. The Company also repurchased from Rentrak Japan 614,000 shares
of the Company's common stock for a cash payment of $2.4 million, or $3.875 per
share. The Company repurchased an additional 390,000 shares of its common stock
for the same price per share, or a total of $1.5 million, from Culture
Convenience Club Co., Ltd., an entity affiliated with Rentrak Japan. The Company
also has the right to, and upon the occurrence of certain conditions will be
required to, sell its remaining 180,000 shares of Rentrak Japan stock,
representing approximately 3.4 percent of the outstanding Rentrak Japan shares,
for a minimum payment of 1,600 yen per share. Finally, the Company sold to
So-Tsu 1 percent of the Company's equity interest in its wholly owned subsidiary
3PF.Com, Inc., for a cash payment of $1 million.
The terms of the transactions between the Company and Rentrak Japan and its
affiliates were negotiated at arm's length. A director of the Company received a
fee totaling approximately $242,000 for his services in negotiating the
transaction.
-49-
3PF.COM
On April 24, 2001, 3PF.COM announced the closure of its administrative office in
Skokie, IL. Services performed at this facility will now be performed at the
Company's headquarters. As a result of this closure, 3PF.COM expects to incur
severance costs related to terminated employees in addition to continued
payments on its operating lease of the office which was to expire in March 2003.
The total estimated cost of the closure of $770,000 will be recognized in the
first quarter of fiscal 2002.
One of 3PF.COM's major clients filed for Chapter 11 bankruptcy during May 2001,
which may negatively impact 3PF.COM's financial results during fiscal 2002. As a
result, management is closely evaluating the net realizable value of its assets
with respect to this matter. The Company is currently seeking opportunities to
replace this client, as well as attract new clients to 3PF.COM's business.
-50-
RENTRAK CORPORATION
Valuation and Qualifying Accounts
Schedule II
Balance at Charged to Balance at
Beginning of Write Off and Other Recoveries The End of
Year Ended: Period Expenses Accounts (Deductions) Period
-------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts
March 31, 1999 586,641 (125,000) - (106,400) 355,241
March 31, 2000 355,241 6,341,030 - (5,859,326) 836,945
March 31, 2001 836,945 7,758,211 - (6,505,081) 2,090,075
Advances to program suppliers reserve
March 31, 1999 1,182,757 (17,597) - - 1,165,160
March 31, 2000 1,165,160 110,918 - - 1,276,078
March 31, 2001 1,276,078 93,959 - - 1,370,037
Other Current Assets-
Retailer Financing Program reserve
March 31, 1999 - - 994,935 1 - 994,935
March 31, 2000 994,935 - (500,000) 1 - 494,935
March 31, 2001 494,935 343,500 - - 838,435
Other Assets-
Retailer Financing Program reserve
March 31, 1999 9,353,995 (194,888) (559,433) 1 (18,921) 8,580,753
March 31, 2000 8,580,753 1,245,157 (4,615,665) 2 (20,997) 5,189,248
March 31, 2001 5,189,248 581,715 - (10,884) 5,760,079
1 - Reclassified from Other Current Assets to Other Assets.
2 - Eliminated against Other Assets.
-51-
RENTRAK CORPORATION
QUARTERLY FINANCIAL DATA
FOR THE QUARTERS ENDED JUNE 30, 1999 TO MARCH 31, 2001
QUARTER ENDED: JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
2000 2000 (1) 2000 (2) 2001 (3)
--------------------------------------------------------
REVENUE $29,034,947 $24,477,680 $32,415,807 $30,470,614
INCOME (LOSS) FROM OPERATIONS 407,795 (15,248,758) 519,229 4,378,464
NET INCOME (LOSS) 249,999 (9,568,993) 229,510 1,512,116
BASIC AND DILUTED
EARNINGS PER SHARE: $ 0.02 $ (0.77) $ 0.02 $ 0.12
--------------------------------------------------------------------------------------
QUARTER ENDED: JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1999 1999 1999 2000
--------------------------------------------------------
REVENUE $30,995,070 $27,097,568 $25,785,064 $29,506,518
INCOME (LOSS) FROM OPERATIONS 2,058,233 1,116,117 (1,361,172) 1,208,063
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS 1,239,486 605,108 (986,439) 193,149
GAIN FROM DISPOSAL OF
DISCONTINUED OPERATIONS
NET OF TAX 2,373,502 - - -
----------------------------------------------------
NET INCOME (LOSS) 3,612,988 605,108 (986,439) 193,149
----------------------------------------------------
BASIC AND DILUTED
EARNINGS PER SHARE:
CONTINUING OPERATIONS $ 0.12 $ 0.06 $ (0.09) $ 0.02
DISCONTINUED OPERATIONS 0.23 - - -
----------------------------------------------------
NET INCOME (LOSS) PER SHARE $ 0.35 $ 0.06 $ (0.09) $ 0.02
----------------------------------------------------
The data above should be read in conjunction with the Consolidated Financial
Statements and notes thereto included in the Company's 2000 and 2001 Annual
Reports to Shareholders and the respective Form 10-Q filings for certain of the
quarterly periods. The June 30, 2000 results have been restated as per Amendment
No. 1 to the Company's Form 10-Q/A filed November 13, 2000.
(1) The September 30, 2000 quarter included significant reserves primarily
related to accounts receivable, write-off of investments, costs associated with
a proxy contest, and a severance payment to the Company's former chairman and
chief executive officer.
(2) The December 31, 2000 quarter included a specific allowance for doubtful
accounts related to a customer of the Company's subsidiary 3PF.COM, Inc.
(3) The March 31, 2001 quarter included recognition of $1.6 milion in revenue
from a customer in exchange for cancellation of certain of the Company's rights.
-52-
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 report on Form 10-K/A to be signed on its behalf by the
undersigned, thereunto duly authorized.
RENTRAK CORPORATION
(Registrant)
August 13, 2001 By: /s/ Mark L. Thoenes
--------------- ----------------------------------
Date Mark L. Thoenes
Vice President and Chief Financial Officer
Signing on behalf of the registrant
EXHIBIT INDEX
The following exhibits are filed herewith or, if followed by a
number in parentheses, are incorporated herein by reference from the
corresponding exhibit filed in the report or registration statement identified
in the footnotes following this index:
Exhibit
Number Exhibit
2 Agreement Concerning Changes to Business Cooperation Agreement
(Framework) between Rentrak Japan Co., Ltd. and Rentrak
Corporation. (1)
3.1 Amended and Restated Articles of Incorporation and amendments
thereto. (2)
3.2 1995 Restated Bylaws, as amended to date. (3)
10.1* 1986 Second Amended and Restated Stock Option Plan and Forms of
Stock Option Agreements. (4)
10.2* Amendment to 1986 Second Amended and Restated Stock Option Plan
dated May 19, 2000. (5)
10.3 Guarantee Agreement dated as of June 26, 1996, between Rentrak
Corporation and BlowOut Entertainment, Inc. (6)
10.4* Amended and Restated Employment Agreement with Marty Graham dated
May 17, 1997. (7)
10.5* Addendum to Employment Agreement with Marty Graham dated June 8,
2000. (8)
10.6* Amendment to Employment Agreement with Marty Graham dated September
1, 2000. **
10.7* Employment Agreement with Michael Lightbourne dated July 10,
1997. (9)
10.8* Employment Agreement with Christopher Roberts dated October 27,
1997. (10)
10.9* Addendum to Employment Agreement with Christopher Roberts dated
June 8, 2000. (11)
10.10* Employment Agreement with Ron Berger dated April 21, 1998. (12)
10.11* Amendment to Employment Agreement with Ron Berger dated
August 28, 2000. (13)
10.12* Amendment to Employment Agreement with Ron Berger dated
September 11, 2000. (14)
10.13* The 1997 Equity Participation Plan of Rentrak Corporation, as
amended. **
10.14* Form of Non-Qualified Stock Option Agreement under 1997 Equity
Participation Plan.
10.15* Form of Incentive Stock Option Agreement under 1997 Equity
Participation Plan.
10.16* Employment Agreement with F. Kim Cox dated April 1, 1998. (15)
10.17* Promissory Note of Michael Lightbourne dated August 30, 2000. **
10.18* Loan Agreement with Michael Lightbourne dated August 30, 2000. **
10.19* Stock Pledge Agreement with Michael Lightbourne dated August 30,
2000. **
10.20* Promissory Note of Ron Berger dated June 16, 2000. (16)
10.21* Loan Agreement with Ron Berger dated June 16, 2000. (17)
10.22* Stock Pledge Agreement with Ron Berger, dated June 16, 2000. (18)
10.23 Loan and Security Agreement with Guaranty Business Credit
Corporation dated May 26, 2000. (19)
10.24 General Continuing Guarantee with Guaranty Business Credit
Corporation dated May 26, 2000. (20)
10.25* Employment Agreement with Mark L. Thoenes dated January 1, 2001. **
10.26* Employment Agreement with Timothy J. Erwin dated January 1, 2001. **
10.27* Employment Agreement with Richard A Nida dated August 14, 1998,
with Addendum dated June 8, 2000. **
10.28 Rights Agreement dated as of May 18, 1995, between Rentrak
Corporation and U.S. Stock Transfer Corporation. (21)
10.29* Letter Agreement between Rentrak Corporation and Joon S. Moon
entered into as of March 15, 2001. **
10.30* Incentive Stock Option Agreement with Paul A. Rosenbaum dated
March 30, 2001. **
10.31* Non-Qualified Stock Option Agreement with Paul A. Rosenbaum dated
March 30, 2001. **
21 List of Subsidiaries of Registrant. **
23 Consent of Arthur Andersen LLP. **
24 Power of Attorney of Certain Officers and Directors. **
99 Description of Capital Stock of Rentrak Corporation. **
------------------------------
*Management Contract or Compensatory Plan or Arrangement.
** Previously filed.
1. Filed as Exhibit 2 to Form 8-K filed on April 17, 2001.
2. Filed in Form S-3 Registration Statement, File No. 33-8511, filed on
November 21, 1994.
3. Filed as Exhibit 3.1 to Form 10-Q filed on February 14, 2001.
4. Filed as Exhibit 10.1 to 1993 Form 10-K filed on June 28, 1993 (File No.
0-15159).
5. Filed as Exhibit 10.30 to 2000 Form 10-K filed on June 29, 2000.
6. Filed as Exhibit 2 to Form 8-K filed on December 9, 1996.
7. Filed as Exhibit 10.1 to Form 10-Q filed on November 3, 1997.
8. Filed as Exhibit 10.23 to 2000 Form 10-K filed on June 29, 2000.
9. Filed as Exhibit 10.2 to Form 10-Q filed on November 3, 1997.
10. Filed as Exhibit 10.3 to Form 10-Q filed on November 3, 1997.
11. Filed as Exhibit 10.24 to 2000 Form 10-K filed on June 29, 2000.
12. Filed as Exhibit 10.35 to 1998 Form 10-K filed on June 25, 1998.
13. Filed as Exhibit 10.1 to Form 10-Q filed on November 14, 2000.
14. Filed as Exhibit 10.2 to Form 10-Q filed on November 14, 2000.
15. Filed as Exhibit 10.2 to Form 10-Q filed on November 6, 1998.
16. Filed as Exhibit 10.26 to 2000 Form 10-K filed on June 29, 2000.
17. Filed as Exhibit 10.35 to Amendment No. 1 on Form 10-K/A filed on
July 31, 2000.
18. Filed as Exhibit 10.33 to Amendment No. 1 on Form 10-K/A filed on
July 31, 2000.
19. Filed as Exhibit 10.27 to 2000 Form 10-K filed on June 29, 2000.
20. Filed as Exhibit 10.28 to 2000 Form 10-K filed on June 29, 2000.
21. Filed as Exhibit 4 to Form 8-K filed on June 5, 1995.