**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D. C.  20549**

 

**FORM 10-K**

 

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| **ý**                                          | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |   |
|-----------------------------------------------------|----------------------------------------------------------------------------------------------------|--------|
|                                                |                                                                                               |   |
| **For the  Fiscal Year Ended: March 31, 2005** |
|                                                |                                                                                               |   |
| **OR**                                              |
|                                                |                                                                                               |   |
| o                                                   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |   |
|                                                     |                                                                                                    |        |  |

 

**CommissionFile Number: 0-15159**

 

**RENTRAK CORPORATION**

(Exact name of registrant asspecified in its charter)

 
| **Oregon**                                                       | ** ** | **93-0780536**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or  other jurisdiction of incorporation  or organization) |       | (I.R.S.  Employer Identification No.) |
|                                                             |       |                                  |
| **7700 NE  Ambassador Place, Portland, Oregon**                  | ** ** | **97220**                             |
| (Address of  principal executive offices)                        |       | (Zip Code)                            |

 

Registrant’s telephone number,including area code:  **503-284-7581**

 

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**

 

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Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý    No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K, or any amendment tothis Form 10-K. o

 

Indicateby check mark whether the Registrant is an accelerated filer (as defined inRule 12b-2 of the Act).  Yes ý    No o

 

Theaggregate market value of the voting and non-voting common equity held bynon-affiliates, computed by reference to the last sales price ($8.73) asreported by the Nasdaq National Market System, as of the last business day ofthe Registrant’s most recently completed second fiscal quarter (September 30,2004), was $82,606,158.

 

Thenumber of shares outstanding of the Registrant’s Common Stock as of June 1,2005 was 10,550,395 shares.

 

**Documents Incorporated byReference**

TheRegistrant has incorporated into Part III of Form 10-K, by reference, portionsof its Proxy Statement for its 2005 Annual Meeting of Shareholders.

 

 

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**RENTRAKCORPORATION**

**2005 FORM10-K ANNUAL REPORT**

**TABLE OFCONTENTS**

 
| **PART I**  | ** **                                                                                                         |
|-------------|--------------------------------------------------------------------------------------------------------------------|
|        |                                                                                                               |   |
| Item 1.     | Business                                                                                                           |   |
|        |                                                                                                               |   |
| 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                                                                                            |   |
|        |                                                                                                               |   |
| Item 7.     | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                        |   |
|        |                                                                                                               |   |
| Item 7A.    | Quantitative and Qualitative Disclosures  About Market Risk                                                        |   |
|        |                                                                                                               |   |
| Item 8.     | Financial Statements and Supplementary Data                                                                        |   |
|        |                                                                                                               |   |
| Item 9.     | Changes in and Disagreements With  Accountants on Accounting and Financial Disclosure                              |   |
|        |                                                                                                               |   |
| Item 9A.    | Controls and Procedures                                                                                            |   |
|        |                                                                                                               |   |
| Item 9B.    | Other Information                                                                                                  |   |
|        |                                                                                                               |   |
|        | **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 and Financial Statement Schedules                                                                         |   |
|        |                                                                                                               |   |
| Signatures  |                                                                                                               |   |

 

1

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**PART I**

 

**ITEM 1. BUSINESS**

 

**Where You Can Find More Information**

 

We file annual, quarterly and other reports, proxy statements and otherinformation with the Securities and Exchange Commission (“SEC”) under theSecurities Exchange Act of 1934 as amended (“Exchange Act”).  We also make available, free ofcharge 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 tothose reports filed or furnished pursuant to Section 13(a) or 15(d) of theExchange Act as soon as reasonably practicable after they are filedelectronically with the SEC.  You can also obtain paper copies of thesereports, without charge, by contacting Investor Relations at (503) 284-7581.

 

**Overview**

 

Our primary business relates to thecollection, processing, analysis and presentation of rental and salesinformation regarding digital videodiscs (“DVDs”), videocassettes (“Cassettes”)and video games (collectively “Units”) leased/licensed to home video specialtystores and other retailers by way of our Pay Per Transaction system (the “PPTSystem”). We lease product from various suppliers. Under our PPT System, homevideo specialty stores and other retailers that rent Units to consumers (“Retailers”),including grocery stores and convenience stores, sub-lease Units and othermedia from Rentrak for a zero to low initial fee and share a portion of eachretail rental transaction with us.  Weincluded video games as part of the PPT system beginning in fiscal 2003.  Our PPT System generated 88%, 84% and 78% oftotal revenues in fiscal years 2005, 2004 and 2003, respectively.

 

We also provide direct revenue sharing (“DRS”)services to various suppliers.  The DRSservices collect, track, audit and report the results to oursuppliers under established agreements on a fee for service basis.  In addition, our EssentialsTM software andservices, which we began offering in the fourth quarter of fiscal 2003, provideunique data collection, management, analysis and reporting functions, resultingin business intelligence information valuable to our clients.

 

During the fourth quarter of fiscal 2003, wedecided to pursue a plan to sell or dispose of substantially all the assets ofour subsidiary 3PF.COM, Inc. (“3PF”), which provided order processing,inventory management and fulfillment services to Rentrak and third parties. Wesold substantially all the assets of 3PF’s Wilmington, Ohio operations in July 2003.  See Note 5 of Notes to Consolidated FinancialStatements.

 

**Reorganization**

 

Effective April 1, 2005, we implemented a new corporate structure,which includes separate Pay-Per-Transaction (“PPT”) and Information Servicesoperating divisions.  We will report ourresults of operations according to this new structure in future periods. As of March 31,2005, we operated in one segment, Entertainment, and, accordingly, we have notreported segment data for the fiscal year ended March 31, 2005.

 

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**PPT Division**

 

The PPT Division focuses on business operations that facilitate thedelivery of home entertainment products and related rental and salesinformation to retailers on a revenue sharing basis.

 

***Pay-Per-Transaction System***

We distribute Units principally to Retailersthrough our PPT System. The PPT System has various programs, which enableRetailers to obtain Units at a significantly lower overall cost than if theypurchased the Units from traditional video distributors.

 

After the Retailer is approved forparticipation in the PPT System, Units are leased to the Retailer for a lowand, at times, no initial fee (the “Order Processing Fee”) plus a percentage ofrevenues generated by the Retailer from rentals to consumers (the “TransactionFee”).  We retain a portion of most OrderProcessing Fees and Transaction Fees and remit the remainder to the appropriatemotion picture studios or other licensee or owner of the rights to certainvideo programming or video game publishers (“Program Suppliers”) that hold thedistribution rights to the Units.  Due tothe lower cost of “bringing Units in the door,” Retailers generally obtain a greaternumber 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 Supplieris an increase in the total number of Units shipped, resulting in increasedrevenues and opportunity for profit. The intended benefit to the consumer isthe potential of finding more copies of certain newly released hit titles and agreater selection of other titles at Retailers participating in the PPT System(“Participating Retailers”).

 

**Information Services Division**

 

The Information Services Division concentrates on expanding thecustomer base of our Essentials SuiteTM of business intelligence servicesoffered on a recurring subscription basis, as well as operating our DRSservices.

 

***Essentials SuiteTM***

The Essentials SuiteTM currently includes the following:

•      BoxOffice EssentialsTM  for  reporting domestic and internationaltheatrical ticket sales;

•      HomeVideo EssentialsTM for reporting VHS, DVD and game rentals across the U.S. andCanada;

•      AllocationEssentialsTM for use by studios, game publishers, media suppliers and retailersto plan and manage entertainment media purchases and inventory;

•      BusinessIntelligence EssentialsTM for use by retailers to plan promotions to coincidewith key  national and local events,school schedules, weather and holidays;

•      OnDemandEssentialsTM that measures viewership of on demand content in the cable andbroadband industries;

•      RetailEssentialsTM for use by studios, game publishers and retailers for reportingDVD, VHS and video game sales across North America;

•      SupplyChain EssentialsTM for use by Retailers for supply chain management. It providesreal-time, Web-based access to inventory, order entry, supplier communications,and shipment and tracking activity;

•      Syndication,which involves packaging summarized subsets of information gleaned from each ofthe other Essentials services for sale to secondary and tertiary markets.

 

***Direct Revenue Sharing***

Our DRS servicesconsist of data collection, tracking, auditing and reporting of revenue sharingrental and sales transactions of large retail chain video store customers thatrent Units and engage in revenue sharing arrangements directly with the ProgramSuppliers. The DRS services are offered to Program Suppliers who participate inour PPT System.  We utilize ourinternally developed computer software and are compensated on a fee for servicebasis.

 

3

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**Marketing and Relationships with ProgramSuppliers**

 

We currently market our PPT System throughout the United States andCanada. We offer  titles from a number ofProgram Suppliers, including Buena Vista Pictures Distribution, Inc., asubsidiary of The Walt Disney Company, Paramount Home Video, Inc., UniversalStudios Home Video, Inc., Twentieth Century Fox Home Entertainment (formerlyFox Video), a subsidiary of Twentieth Century Fox Film Corporation, WarnerBrothers, including Warner Home Video, HBO Video, New Line Home Entertainment,TNT, and Lightyear Entertainment and MGM Home Entertainment, a subsidiaryof  Metro Goldman Mayer, Inc.  Our arrangements with all of our ProgramSuppliers are of varying duration, scope and formality. In some cases, we haveobtained Units pursuant to contracts or arrangements with Program Suppliers ona title-by-title basis and in other cases the contracts or arrangements providethat all titles released for distribution by such Program Supplier will beprovided to us for the PPT System.  Manyof our agreements with Program Suppliers, including all major ProgramSuppliers, may be terminated upon relatively short notice.  Therefore, there is no assurance that any ofthe Program Suppliers will continue to distribute Units through the PPT System,continue to have available for distribution titles which we can distribute on aprofitable basis, or continue to remain in business.  Even if titles are otherwise available fromProgram Suppliers, there is no assurance that they will be made available onterms acceptable to us. During the last three years, we have not experiencedany material difficulty acquiring suitable Units for our markets on acceptableterms and conditions from Program Suppliers.

 

During fiscal 2005, 2004and 2003, we had several Program Suppliers that supplied product in excess of10% of our total revenues as follows:

 

| ** **          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------|------------|----------|------------|----------|------------|----------|------------|
| Program  Supplier 1 |       | 37       | %          | 22       | %          | 16       | %          |
| Program  Supplier 2 |       | 16       | %          | 15       | %          | 15       | %          |
| Program  Supplier 3 |       | n/a      |       | 13       | %          | 15       | %          |
| Program  Supplier 4 |       | n/a      |       | 12       | %          | 11       | %          |

 

There were no otherProgram Suppliers who provided product that generated 10% or more of our totalrevenues for the years ended March 31, 2005, 2004 or 2003.  Although management does not believe that ourrelationships with significant Program Suppliers will be terminated in the nearterm, a loss of any of these suppliers could have a material adverse effect onour financial condition, results of operations and liquidity.

 

Certain Program Suppliers have requested, and we have provided, financialor performance commitments, including advances or guarantees, as a condition ofobtaining certain titles. We determine whether to provide such commitments on acase-by-case basis, depending upon the Program Supplier’s success with suchtitles prior to home video distribution and our assessment of expected successin home rental distribution.  Wecurrently have such commitments with four Program Suppliers of approximately$1.3 million for fiscal 2006.

 

**Significant Customers**

 

We had one PPT customerthat accounted for 20% and 17% of our total revenue in fiscal 2005 and 2004,respectively. The agreement with this PPT customer expired in September 2004.One fulfillment customer accounted for 14% of our total revenue in fiscal 2003.The agreement with this fulfillment customer expired July 31, 2003.  There were no other customers that accountedfor 10% or more of our total revenue in fiscal 2005, 2004 or 2003.

 

**Distribution of Cassettes, DVDs, and VideoGames**

 

Our proprietary Rentrak Profit Maker Software (the “RPM Software”) andVideo Retailer Essentials Software (the “VRE Software”) allows ParticipatingRetailers to order Units through their Point of Sale (“POS”) system andprovides the Participating Retailers with substantial information regarding alloffered titles.  Ordering occurs via anetworked computer interface (RPM Software) or over the Internet (VRE

 

4

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Software).  To further assist theParticipating Retailers in ordering, we also produce a monthly product catalog(“Ontrak”).

 

To be competitive, Participating Retailers must be able to rent theirUnits on the “street date” announced by the Program Supplier for thetitle.  Effective April 1, 2004,we  contracted with a new third-partyfulfillment provider to distribute our Units via both ground and overnight aircourier to assure continued delivery to Participating Retailers on or prior tothe street date.  The handling andfreight costs of such distribution are approximately 4.7% of our cost of sales.

 

**Computer Operations**

 

To participate in our PPT System,Participating Retailers must install Rentrak-approved computer software andhardware to process all of their rental and sale transactions.  Our RPM Software resides on the ParticipatingRetailer’s POS computer system and transmits a record of PPT transactions to usover a telecommunications network.  TheRPM Software also assists the Participating Retailer in ordering newly releasedtitles and in managing its inventory of Units.

 

Our information system processes thesetransactions and prepares reports for Program Suppliers and ParticipatingRetailers.  In addition, it determinesvariations from statistical norms for potential audit action.  Our information system also transmits informationon new titles and confirms orders made to the RPM Software at the ParticipatingRetailer location.    

 

**Auditing of Participating Retailers**

 

From time to time, we audit ParticipatingRetailers in order to verify that they are reporting all rentals and sales ofUnits on a consistent, accurate and timely basis.  Several different types of exception reportsare produced weekly.  These reports aredesigned to identify any Participating Retailers whose PPT business activityvaries from our statistical norms. Depending upon the results of our analysis of the reports, we mayconduct an in-store audit.  Audits may beperformed with or without notice and any refusal to allow such an audit can because for immediate termination from the PPT System.  If audit violations are found, theParticipating Retailer is subject to fines, audit fees, immediate removal fromthe PPT System and/or repossession of all leased Units.

 

**Seasonality**

 

We believe that the home video industry ishighly seasonal because Program Suppliers tend to introduce hit titles formovies at two periods of the year, early summer and Christmas.  Since the release of movies to home videousually follows the theatrical release by approximately six months (althoughsignificant variations occur on certain titles), the seasonal peaks of moviesfor home video also generally occur in early summer and at Christmas.  We believe our volume of rental transactionsand resulting revenues and earnings reflect, in part, this seasonal pattern.However, changes in Program Suppliers’ titles available to ParticipatingRetailers and us may obscure any seasonal effect.

 

**Competition**

 

The DVD, video game and cassette distribution business is a highlycompetitive industry that is rapidly changing. The traditional method of distributing Units to Retailers is throughpurchase transactions; i.e., a Retailer purchases Units from a distributor andthen offers the Units for rental or sale to the general public. As described ingreater detail above (see “Pay-Per-Transaction System”), our PPT System offersParticipating Retailers an alternative method of obtaining Units. Accordingly,we face intense competition from all of the traditional distributors, includingIngram Entertainment, Inc., Video Product Distributors, Inc., and Video OneCanada, Ltd.  These and other traditionaldistributors have extensive distribution networks, long-standing relationshipswith Program Suppliers and Retailers, and, in some cases, significantly greaterfinancial resources than us.

 

5

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In the past, certain traditional distributors offered Units toRetailers on a revenue sharing basis. To our knowledge, only one does so todayon a very limited basis. This distributor executed a licensing agreement withSupercomm, Inc. (“Supercomm”), now a wholly-owned subsidiary of Sony PicturesHome Entertainment (“Sony”), to market product on revenue sharing terms.Domestically, Supercomm also processes data for Sony’s direct relationshipswith Blockbuster Video and several other Retailers.

 

We also face direct competition from the Program Suppliers.  All major Program Suppliers sell Unitsdirectly to major Retailers including Blockbuster, the world’s largest chain ofhome video specialty stores. We believe many of the major Program Suppliershave direct revenue sharing arrangements with Blockbuster and HollywoodEntertainment, the world’s second largest chain of home video specialty stores,which was acquired by Movie Gallery in April 2005.  We also believe that certain ProgramSuppliers have executed direct revenue sharing agreements with several otherlarge Retailers. We do not believe that the Program Suppliers have executeddirect revenue sharing agreements with other smaller Retailers, but there canbe no assurance that they will not do so in the future.

 

We also compete with businesses that use alternative distributionmethods to provide video entertainment directly to consumers, such as thefollowing: (1) direct broadcast satellite transmission systems; (2) traditionalcable television systems; (3) pay-per-view cable television systems; and (4)delivery of programming via the Internet. Each of these distribution methodsemploys digital compression techniques to increase the number of channelsavailable to consumers and, therefore, the number of movies that may betransmitted. Technological improvements in this distribution method,particularly “video-on-demand,” may make this option more attractive toconsumers and thereby materially diminish the demand for Unit rentals. Such aconsequence could have a material adverse effect on our results of operationsand financial condition.

 

**Formovies.com**

 

Formovies.com is awebsite designed by us and dedicated to assist consumers in finding a localvideo store where they can rent and/or purchase the video products theywant.  Consumers can find a particularmovie of their choice by searching on various attributes of that title.  Once found, they can then determine theclosest video store that carries that product.

 

**Trademarks, Copyrights and Proprietary Rights**

 

We have registered our “RENTRAK,” “PPT,” “Pay Per Transaction,” “EntertainmentEssentials,” “Box Office Essentials,” “Home Video Essentials,” “ForMovies,” “ForMovies.com,”“DigiTrak,” “Ontrak,” “Fastrak,” “RPM,” “Videolink+,” “Active Home Video,” “MovieWizard,” “Gotta Have It Guarantee” and other marks under federal trademarklaws. We have applied and obtained registered status in several foreigncountries for many of our trademarks. We have filed applications to registeradditional marks in the “Essentials” trademark family. Our trademarkregistrations will remain valid for an unlimited period, as long as we continueusing the trademarks in commerce or as long as we intend to resume use of themark during any period of non-use. We claim a copyright on our RPM Software andconsider it to be proprietary. We have also filed notice and claim a copyrighton our Essentials software. Our copyright in our software will last for atleast 95 years from the first sale or licensing of the software. Ourtrademarks, copyrights, and other proprietary rights give us the power toprevent competitors from competing with us unfairly. We believe that ourintellectual property is important to our marketing efforts and the competitivevalue of our services and we intend to take appropriate action to halt anyinfringement and protect against improper usage.

 

**Employees**

 

As of March 31, 2005, including allsubsidiaries, we employed 168 full-time employees and 28 part-timeemployees.  We consider our relationswith our employees to be good. 

 

6

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**Financial Information About Industry Segments**

 

See Note 17 of Notes to the ConsolidatedFinancial Statements for information regarding our business segments.  See also “Results of Operations” under Item 7of this report for information regarding revenues contributed in each of thelast three fiscal years by our principal products and services.

 

**ITEM 2. PROPERTIES**

 

We maintainour headquarter offices in Portland, Oregon where we lease 48,800 square feetof office space. The lease began on January 1, 1997 and expires on December 31,2006.  We also maintain an office in LosAngeles, California where we lease 4,000 square feet of space utilized for ourBox Office Essentials business.  Thelease began in July 2003 and expires in June 2006.  We anticipate that these spaces will beadequate for our business needs for the foreseeable future.

 

**ITEM 3. LEGAL PROCEEDINGS**

 

We may from time to time be a party to legalproceedings and claims that arise in the ordinary course of our business.  In the opinion of management, the amount ofany ultimate liability with respect to these potential actions is not expectedto materially affect our financial condition or results of operations.  Other than as discussed below, we currentlyhave no material outstanding litigation.

 

***Vendor Dispute***

In June 2003,we signed a definitive agreement to sell substantially all of the assets of3PF.Com, Inc. at the Wilmington, Ohio operation, effective July 1, 2003.  In conjunction with the effective date ofthat asset sale agreement, we entered into a Fulfillment Agreement (the “Agreement”)with this purchaser (the “Fulfillment Provider”) for a nine-month term toprovide us with fulfillment services previously provided by 3PF during theperiod we owned and operated it.  Afterits inception, disagreement between the parties arose regarding the contractualprovisions of the Agreement.  As aresult, we disputed certain charges for services and withheld payments accordingly.Additionally, the Fulfillment Provider has alleged that we violated theexclusivity provisions in the Agreement. The Fulfillment Provider submitted,under the provisions of the Agreement, a demand for arbitration against usseeking damages of approximately $0.9 million. The dispute has been arbitrated and the Fulfillment Provider wasawarded, in full settlement of all its claims, the sum of $0.1 million,consisting of damages from those claims plus interest thereon, effective March 25,2005.  Accordingly, both parties haveentered into an agreement for the full settlement of all the claims and thecomplete mutual release from any further obligations to each other with respectto any claim made or that could have been made in the arbitration of thisdispute.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

No matter was submitted to a vote of oursecurity holders during the fourth quarter of the fiscal year covered by thisreport.

 

7

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**PART II**

 

**ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

**Stock Price and Dividends**

 

Our common stock, $.001 par value, is tradedon the Nasdaq National Market, where its prices are quoted under the symbol “RENT.”   As of June 1, 2005 there wereapproximately 255 holders of record of our common stock.

 

The following table sets forth the reportedhigh and low sales prices of our common stock for each of the quarters in thelast two fiscal years as regularly quoted on the Nasdaq National Market System:

 
| **Fiscal 2004** | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------|------------|----------|------------|---------|------------|
| Quarter 1       |       | $        | 7.49       |    | $          | 4.80 |   |
| Quarter 2       |       | 7.25     |       | 6.30    |       |
| Quarter 3       |       | 9.87     |       | 6.98    |       |
| Quarter 4       |       | 10.25    |       | 8.76    |       |
|                 |            |          |            |         |            |  |  |

 
| **Fiscal 2005** | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------|------------|----------|------------|---------|------------|
| Quarter 1       |       | $        | 10.18      |    | $          | 8.10 |   |
| Quarter 2       |       | 9.80     |       | 8.38    |       |
| Quarter 3       |       | 13.24    |       | 8.75    |       |
| Quarter 4       |       | 12.64    |       | 9.86    |       |
|                 |            |          |            |         |            |  |  |

 

Holders of our common stock are entitled toreceive dividends if, as, and when declared by the Board of Directors out offunds legally available therefor, subject to the dividend and liquidationrights of any preferred stock that may be issued.

 

No cash dividends have been paid or declaredduring the last six fiscal years.  Thepresent policy of the Board of Directors is to retain earnings to provide fundsfor operation and expansion of our business. We do not intend to pay cashdividends in the foreseeable future.

 

Informationregarding securities authorized for issuance under equity compensation plans isincluded in Item 12.

 

**Issuer Purchases of Equity Securities**

 

We repurchased the following shares of our common stock during thefourth quarter of fiscal 2005:

 
| ** **                           | ** ** | **Total number  of shares  purchased****(1)** | ** ** | **Average  price paid  per  share****(1)** | ** ** | **Total number of  shares purchased  as part of publicly  announced plan** | ** ** | **Maximum number  of shares that may  yet be purchased  under the plan** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| January 1  to January 31   |       | —                                        |       | —                                     |       | —                                                                     |       | —                                                                   |       |
| February 1  to February 28 |       | —                                        |       | —                                     |       | —                                                                     |       | —                                                                   |       |
| March 1  to March 31       |       | 25,381                                        |       | $                                          | 10.64      |                                                                       | —     |                                                                     | —     |   |
| Total                                |       | 25,381                                        |       | $                                          | 10.64      |                                                                       | —     |                                                                     | —     |   |

 

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(1) Shares purchased duringthe quarter represent shares delivered by a former officer to pay the exerciseprice and withholding taxes relating to the exercise of employee stock options.

 

8

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**ITEM 6.   SELECTED FINANCIAL DATA**

 
| ** **                                                                                                             | ** ** | **Year Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| **(In Thousands Except Per Share Amounts)**                                                                            | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Statement  of Operations Data**                                                                                      | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues:**                                                                                                          |       |                          |       |   |   |   |   |   |   |   |   |
| Order  processing fees                                                                                                 |       | $                             | 5,015      |   | $ | 7,741 |   | $ | 14,745 |   | $ | 16,893 |   | $ | 18,533 |   |
| Transaction  fees                                                                                                      |       | 64,372                        |       | 46,398 |   | 42,258 |   | 44,102 |   | 55,752 |   |
| Sell-through  fees                                                                                                     |       | 16,286                        |       | 10,309 |   | 8,558 |   | 7,324 |   | 8,431 |   |
| Communication  fees                                                                                                    |       | 977                           |       | 1,127 |   | 1,185 |   | 1,136 |   | 1,509 |   |
| Fulfillment(1)                                                                                                         |       | —                        |       | 4,624 |   | 15,266 |   | 15,342 |   | 20,137 |   |
| Other                                                                                                                  |       | 11,888                        |       | 7,933 |   | 3,872 |   | 11,224 |   | 3,668 |   |
| Total  revenues                                                                                                        |       | 98,538                        |       | 78,132 |   | 85,884 |   | 96,021 |   | 108,030 |   |
| **Operating  expenses:**                                                                                               |       |                          |       |   |   |   |   |   |   |   |   |
| Cost of  sales                                                                                                         |       | 70,054                        |       | 60,090 |   | 71,347 |   | 71,913 |   | 85,993 |   |
| Selling and  administrative expense                                                                                    |       | 19,874                        |       | 16,357 |   | 14,434 |   | 17,266 |   | 31,002 |   |
| Net loss  (gain) from litigation settlements                                                                           |       | 225                           |       | — |   | (362 | ) | (1,563 | ) | (225 | ) |
| Asset  impairment                                                                                                      |       | 27                            |       | — |   | 844 |   | 424 |   | — |   |
| Total  operating expenses                                                                                              |       | 90,180                        |       | 76,447 |   | 86,263 |   | 88,040 |   | 116,770 |   |
| Income  (loss) from continuing operations                                                                              |       | 8,358                         |       | 1,685 |   | (379 | ) | 7,981 |   | (8,740 | ) |
| Other income  (expense)                                                                                                |       | 322                           |       | 233 |   | 179 |   | 7,913 |   | (2,149 | ) |
| Income  (loss) from continuing operations before income tax (provision) benefit and  loss from discontinued operations |       | 8,680                         |       | 1,918 |   | (200 | ) | 15,894 |   | (10,889 | ) |
| Income tax  provision (benefit)                                                                                        |       | 3,438                         |       | 479 |   | (56 | ) | 6,040 |   | (4,057 | ) |
| Income  (loss) from continuing operations                                                                              |       | 5,242                         |       | 1,439 |   | (144 | ) | 9,854 |   | (6,832 | ) |
| Income  (loss) from discontinued operations                                                                            |       | —                        |       | (129 | ) | (583 | ) | (792 | ) | (259 | ) |
| Net income  (loss)                                                                                                     |       | $                             | 5,242      |   | $ | 1,310 |   | $ | (727 | ) | $ | 9,062 |   | $ | (7,091 | ) |
| **Earnings  (loss) per share:**                                                                                        |       |                          |       |   |   |   |   |   |   |   |   |
| Basic:                                                                                                                 |       |                          |       |   |   |   |   |   |   |   |   |
| Continuing  operations                                                                                                 |       | $                             | 0.52       |   | $ | 0.15 |   | $ | (0.02 | ) | $ | 0.95 |   | $ | (0.57 | ) |
| Discontinued  operations                                                                                               |       | —                        |       | (0.01 | ) | (0.06 | ) | (0.08 | ) | (0.02 | ) |
| Net income  (loss)                                                                                                     |       | $                             | 0.52       |   | $ | 0.14 |   | $ | (0.08 | ) | $ | 0.87 |   | $ | (0.59 | ) |
| Diluted:                                                                                                               |       |                          |       |   |   |   |   |   |   |   |   |
| Continuing  operations                                                                                                 |       | $                             | 0.49       |   | $ | 0.14 |   | $ | (0.02 | ) | $ | 0.93 |   | $ | (0.57 | ) |
| Discontinued  operations                                                                                               |       | —                        |       | (0.01 | ) | (0.06 | ) | (0.07 | ) | (0.02 | ) |
| Net income  (loss)                                                                                                     |       | $                             | 0.49       |   | $ | 0.13 |   | $ | (0.08 | ) | $ | 0.85 |   | $ | (0.59 | ) |
| Shares used  to compute diluted EPS                                                                                    |       | 10,592                        |       | 10,119 |   | 9,641 |   | 10,613 |   | 11,985 |   |

 
| ** **                 | ** ** | **March 31,** | ** ** |
|----------------------------|------------|--------------------|------------|
| ** **                 | ** ** | **2005**           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Balance  Sheet Data**    | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Working  capital           |       | $                  | 25,802     |   | $ | 14,633 |   | $ | 11,485 |   | $ | 12,515 |   | $ | 4,637 |   |
| Total assets               |       | 45,083             |       | 36,203 |   | 31,488 |   | 40,094 |   | 38,623 |   |
| Long-term  liabilities     |       | 52                 |       | 235 |   | 668 |   | 496 |   | 1,175 |   |
| Stockholders’  equity |       | 29,933             |       | 18,796 |   | 16,047 |   | 18,116 |   | 12,158 |   |
|                            |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)  We sold our fulfillment business effective July 2003.  See Note 5 of Notes to Consolidated FinancialStatements.

 

9

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**ITEM 7.****       MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Forward Looking Statements**

 

Certain information included in this AnnualReport on Form 10-K (including Management’s Discussion and Analysis ofFinancial Condition and Results of Operations regarding revenue growth, grossprofit margin and liquidity) constitute forward looking statements that involvea number of risks and uncertainties. Forward looking statements may be identified by the use of forwardlooking words such as “may,” “will,” “expects,” “intends,” “anticipates,” “estimates”or “continues” or the negative thereof or variations thereon or comparableterminology.  The following factors areamong the factors that could cause actual results to differ materially from theforward looking statements: our ability to retain and grow our customer base ofretailers participating in the PPT System (“Participating Retailers”) andcustomers for our business intelligence software and services; the financialstability of the Participating Retailers and their performance of theirobligations under our Pay Per Transaction system (the “PPT System”); businessconditions and growth in the video industry and general economic conditions,both domestic and international; customer demand for movies in various mediaformats subject to company guarantees; competitive factors, including increasedcompetition, expansion of revenue sharing programs other than the PPT System bymotion picture studios or other licensees or owners of the rights to certainvideo programming or video game publishers (“Program Suppliers”) and newtechnology;  the continued availabilityof videocassettes (“Cassettes”), digital videodiscs (“DVDs”), and video games(collectively “Units”) leased/licensed to home video specialty stores and otherretailers from Program Suppliers; the loss of significant Program Suppliers;our ability to successfully develop and market new services, including ourbusiness intelligence services, to create new revenue streams; and non-renewalof our line of credit. This Annual Report on Form 10-K further describes someof these factors.  (References to Notesare to Notes to Consolidated Financial Statements included in Item 8 of thisreport.)

 

**Business Trends**

 

Our financial results continue to be affectedby the changing dynamics in the home video and game rental market, as theyimpact our PPT business.  We continue toexperience the impact of the migration from higher historical rentals ofCassettes to greater rentals of DVDs by our Participating Retailers.  We have successfully implemented newagreements with Program Suppliers to incorporate the availability of DVDs, andwe are continuing our efforts in fiscal 2006 to secure more DVD arrangements toaddress this impact.  In addition, ourPPT business continues to be affected by a shift to “output programs” underwhich we agree with a Program Supplier to a lower order processing andtransaction fee in exchange for the Participating Retailers’ commitment toorder a greater number of Units of all the Program Supplier’s titles.  The result is an increased number of Unitsleased by the Participating Retailers, but a reduced amount of fees per Unitearned by the Program Supplier and us. These output programs are, in part, an economic response to the changingdynamics of the home video rental market, and have become more prevalent sincethe migration from Cassette format to the DVD format.  We expect the growth of these output programsto continue, and believe that they will be financially beneficial for theParticipating Retailers, Program Suppliers and us.

 

Our base of Participating Retailers continuesto be strong. We have one Participating Retailer that accounted for 20% and 17%of PPT revenues in the fiscal years ended March 31, 2005 and 2004,respectively.  Our agreement with thisParticipating Retailer expired in September 2004.  The associated PPT revenue from thisParticipating Retailer’s rentals was $19.7 million in fiscal 2005 and $11.4million in fiscal 2004.  We don’t expectany appreciable revenue from this Participating Retailer in fiscal 2006. We areimplementing strategies to obtain new Participating Retailers and ProgramSuppliers in an effort to further stabilize and grow our overall PPT revenueand earnings streams.

 

We continue to be in good standing with allof our Program Suppliers and we make on-going efforts to enhance those businessrelationships through improvement of current services offered and thedevelopment of new service offerings. We are also continually seeking todevelop business relationships with new Program Suppliers. In September 2003,we entered into a combined VHS/DVD revenue sharing program with one of theworld’s largest studios that has resulted in their becoming our largest ProgramSupplier in fiscal 2005, representing 37% of our total revenues for the period.Additionally, a second Program Supplier

 

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represented 16% and a third represented 7% ofour total revenues in fiscal 2005.  As istypical of our agreements with Program Suppliers, our relationship with theseProgram Suppliers may be terminated without cause upon thirty days’ writtennotice by either party.

 

We are also allocating significant resourcestowards our business intelligence service offerings, both those services thatare currently operational as well as those that are in various stages ofdevelopment.  Our suite of businessintelligence software has been well received in the various targeted markets todate, as our offerings fit well with the needs identified by those marketparticipants.  We intend to continue tomake the necessary increased investments in these new business intelligenceservices in the near-term, lowering our earnings. We believe these serviceswill provide significant future revenue and earnings streams and ultimately bethe cornerstone of our long-term success.

 

In March 2004, we announced an agreement with Comcast Cable, adivision of Comcast Corporation, the country’s leading cable and broadbandcommunications provider, to conduct a 12 month pilot trial of OnDemandEssentials, a system created for measuring and reporting anonymous video ondemand (“VOD”) usage data.  The trialbegan in May 2004 and has expanded to include all Comcast markets across theUnited States. The trial has been extended as the companies work through alonger-term agreement.  In July 2004,we announced a similar agreement with Insight Communications and have sinceannounced agreements with Cablevision Systems Corporation (February 2005)and Charter Communications (March 2005). We have processed over 500 million VOD transactions to date.  In July 2004, we announced our firstcontent provider deal with Music Choice and are working with them to developanonymous profiling reports from their set top box application, My MusicChoice, which allows the consumer to program their own VOD channel. Wecurrently have several additional content providers serving as beta users forour content provider version of OnDemand Essentials, which we expect to launchin July 2005.

 

**Sources of Revenue**

 

Our sources of revenue include the following:

•      orderprocessing fees generated when DVDs, video games and Cassettes (“Units”) areordered by and distributed to retailers;

•      transactionfees generated when retailers rent Units to consumers;

•      sell-throughfees generated when retailers sell Units to consumers;

•      buy-out feesgenerated when retailers purchase Units at the end of the lease term;

•      communicationfees when retailers’ point-of-sale systems are connected to our informationsystem;

•      fulfillmentrevenue in fiscal 2004 and 2003 (ceased operations July 31, 2003); and

•      other, whichincludes direct revenue sharing fees from data tracking and reporting servicesprovided to program suppliers (“DRS”); revenues from Box Office Essentialsä,Supply Chain Essentialsä, BusinessIntelligence Essentialsä and Home VideoEssentialsä, all part of our Essentialsäbusiness intelligence service offerings; and charges for Internet servicesprovided by our subsidiary, Formovies.com, Inc.

 

**Sale of3PF.COM**

 

In June 2003, we signed a definitive agreement to sellsubstantially all of the assets of 3PF at the Wilmington, Ohio operation for$0.8 million. The agreement covered all equipment and leasehold improvements at3PF’s leased distribution facility in Wilmington, Ohio, as well as a portion ofits working capital.  As part of theagreement, 3PF, as lessee, and Rentrak, as guarantor, were released from thelease.  The cash purchase price of $0.8million is approximately equal to the net book value of the assets sold.  We completed this asset sale transactioneffective July 1, 2003, and received the cash purchase price in full.  The operations of 3PF have not been reportedas discontinued operations in accordance with FASB Statement No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” because cash flowsrelated to our fulfillment activities have not been completely eliminated.

 

During the sale negotiations, we received notification from 3PF’slargest customer, serviced exclusively from the leased distribution facility inColumbus, Ohio, that it did not intend to renew its fulfillment service

 

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contract upon the scheduled expiration at July 31, 2003.  The Columbus, Ohio distribution facility wasused exclusively to service this customer. Due to the timing of the notification, we were not able to include theColumbus, Ohio distribution facility lease in the asset sale transaction.  We completed the termination of the leaseobligation 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 salesin our statement of operations.  Thislease termination included the assignment of the sublease 3PF had in place withits former largest customer for approximately 194,000 square feet of thisfacility.  

 

**Investigationand Recovery Efforts Regarding Misappropriated Funds**

 

In March 2004, we learned that an employee may have engaged infraudulent activity and we hired an outside firm to investigate the matter. Theemployee admitted to embezzling funds from us. It was determined that theemployee had been embezzling funds from 1998 through 2003, in amounts totalingapproximately $0.6 million. The investigation of this matter is complete. Otherthan $62,000 in underreported sales taxes, the embezzlement funds werematerially expensed in the year such funds were embezzled and, therefore, hadno other effect on the restatement of any financial results in fiscal 2004 orprior years.  We have secured certainassets belonging to this employee, which, in conjunction with insuranceproceeds, provided us with recoveries of approximately $0.4 million in fiscal2005, and were recorded as a reduction of selling and administrativeexpense.  We have incurred a total ofapproximately $0.2 million of legal and other professional fees related to thismatter through March 31, 2005, and do not expect to incur any additionalfees before the matter is resolved.

 

**Results of Operations**

 
| ** **                                                                                                             | ** ** | **Year Ended March 31, (1)** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                             | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| **(Dollars in thousands)**                                                                                             | ** ** | **Dollars**                       | ** ** | **% of  revenues** | ** ** | **Dollars** | ** ** | **% of  revenues** | ** ** | **Dollars** | ** ** | **% of  revenues** | ** ** |
| Revenues:                                                                                                              |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Order  processing fees                                                                                                 |       | $                                 | 5,015      |   | 5.1 | % | $ | 7,741 |   | 9.9 | % | $ | 14,745 |   | 17.2 | % |
| Transaction  fees                                                                                                      |       | 64,372                            |       | 65.3 |   | 46,398 |   | 59.4 |   | 42,258 |   | 49.2 |   |
| Sell-through  fees                                                                                                     |       | 16,286                            |       | 16.5 |   | 10,309 |   | 13.2 |   | 8,558 |   | 10.0 |   |
| Communication  fees                                                                                                    |       | 977                               |       | 1.0 |   | 1,127 |   | 1.4 |   | 1,185 |   | 1.4 |   |
| Fulfillment                                                                                                            |       | —                            |       | — |   | 4,624 |   | 5.9 |   | 15,266 |   | 17.8 |   |
| Other                                                                                                                  |       | 11,888                            |       | 12.1 |   | 7,933 |   | 10.2 |   | 3,872 |   | 4.5 |   |
|                                                                                                                   |       | 98,538                            |       | 100.0 |   | 78,132 |   | 100.0 |   | 85,884 |   | 100.0 |   |
| Operating  expenses:                                                                                                   |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Cost of  sales                                                                                                         |       | 70,054                            |       | 71.1 |   | 60,090 |   | 76.9 |   | 71,347 |   | 83.1 |   |
| Selling and  administrative                                                                                            |       | 19,874                            |       | 20.2 |   | 16,357 |   | 20.9 |   | 14,434 |   | 16.8 |   |
| Net loss  (gain) on litigation settlement                                                                              |       | 225                               |       | 0.2 |   | — |   | — |   | (362 | ) | (0.4 | ) |
| Asset  impairment                                                                                                      |       | 27                                |       | — |   | — |   | — |   | 844 |   | 1.0 |   |
|                                                                                                                   |       | 90,180                            |       | 91.5 |   | 76,447 |   | 97.8 |   | 86,263 |   | 100.4 |   |
| Income  (loss) from operations                                                                                         |       | 8,358                             |       | 8.5 |   | 1,685 |   | 2.2 |   | (379 | ) | (0.4 | ) |
| Other income  (expense):                                                                                               |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Interest  income                                                                                                       |       | 333                               |       | 0.3 |   | 244 |   | 0.3 |   | 204 |   | 0.2 |   |
| Interest  expense                                                                                                      |       | (11                               | )          | — |   | (11 | ) | — |   | (25 | ) | — |   |
|                                                                                                                   |       | 322                               |       | 0.3 |   | 233 |   | 0.3 |   | 179 |   | 0.2 |   |
| Income  (loss) from continuing operations before income tax provision (benefit) and  loss from discontinued operations |       | 8,680                             |       | 8.8 |   | 1,918 |   | 2.5 |   | (200 | ) | (0.2 | ) |
| Income tax  provision (benefit)                                                                                        |       | 3,438                             |       | 3.5 |   | 479 |   | 0.6 |   | (56 | ) | — |   |
| Income  (loss) from continuing operations before loss from discontinued operations                                     |       | 5,242                             |       | 5.3 |   | 1,439 |   | 1.8 |   | (144 | ) | (0.2 | ) |
| Loss from  discontinued operations, net of tax                                                                         |       | —                            |       | — |   | (129 | ) | (0.2 | ) | (583 | ) | (0.7 | ) |
| Net income  (loss)                                                                                                     |       | $                                 | 5,242      |   | 5.3 | % | $ | 1,310 |   | 1.7 | % | $ | (727 | ) | (0.9 | )% |

 

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(1) Percentages may not adddue to rounding.

 

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***Revenue***

Revenue increased $20.4 million, or 26.1%, to $98.5 million in fiscal2005 compared to $78.1 million in fiscal 2004, and decreased $7.8 million, or9.1%, in fiscal 2004 compared to $85.9 million in fiscal 2003.

 

Increases in transaction processing fees and sell-through fees, as wellas increases in our EssentialsTM and DRS service offerings, which are componentsof other revenue, contributed to the increase in revenue in fiscal 2005compared to fiscal 2004.  The increasesin transaction processing and sell-through fees were due in large part to arelationship with a major Program Supplier beginning in September 2003.The increases were offset in part by decreases in order processing fees, whichresulted from changes to our output programs as discussed below. In addition,fiscal 2005 was affected by a $4.6 million decrease in revenue related to ourfulfillment business, which ceased operations as of July 31, 2003.

 

The decrease in revenue in fiscal 2004 compared to fiscal 2003 wasprimarily due to a decrease in fulfillment (3PF) revenue and order processingfees. These decreases were partially offset by an increase in revenues fromtransaction fees and from DRS and our Essentialsäbusiness service offerings.

 

Order processing fees decreased $2.7 million, or 35.2%, in fiscal 2005compared to fiscal 2004 due to PPT “outputprograms” and other PPT programs under which we agreed with the ProgramSupplier to charge a lower, or no, order processing fee in exchange for the ParticipatingRetailers’ commitment to order an increased total number of Units of all theProgram Suppliers’ titles.  Theseoutput programs, along with a new combined VHS/DVD revenue sharing program witha major Program Supplier, contributed to a 33% increase in total Units shippedduring fiscal 2005 compared to fiscal 2004. Total units shipped were negatively affected in fiscal 2005 due to theexpiration of a contract with one of our Participating Retailers as discussedabove.  The effect on transaction feerevenue related to the increase in volume was minimally offset by a decrease inthe per unit fee charged for order processing.

 

Order processing fees decreased $7.0 million in fiscal 2004 compared tofiscal 2003 due to PPT “output programs”and other PPT programs discussed above. These output programs, alongwith a new combined VHS/DVD revenue sharing program with a new major ProgramSupplier, contributed to an 89% increase in total Units shipped during fiscal2004 compared to fiscal 2003.

 

Transaction fees increased $18.0 million, or38.7%, in fiscal 2005 compared to fiscal 2004.  Theincrease was primarily due to the increased number of rental transactions atour Participating Retailers from our output programs. This increase waspartially offset by the expiration of a contract with one of our ParticipatingRetailers.

 

Transaction fees increased $4.1 million, or9.8%, in fiscal 2004 compared to fiscal 2003 primarily due to the increasednumber of Units ordered by our Participating Retailers from our output programsand rented to their customers.

 

Sell-through fees increased $6.0 million, or58.0%, in fiscal 2005 compared to fiscal 2004 primarily due to the overallincrease in Units shipped.

 

Sell-through fees increased $1.8 million, or20.5%, in fiscal 2004 compared to 2003 primarily due to the new combinedVHS/DVD revenue sharing program noted above.

 

Fulfillment revenues decreased due to ceasing 3PF operations as of July 31,2003 as discussed above.

 

Other revenue primarily includes revenue related to our DRS servicesand our EssentialsTM business intelligence services offerings. Increases inother revenue in fiscal 2005 compared to fiscal 2004 included an increase ofapproximately $2.6 million, or 59.1%, in DRS revenues and an increase ofapproximately $1.2 million, or 25.8%, in revenues from our EssentialsTM businessintelligence services offerings. Revenues related to our Essentialsä business intelligence service offerings haveincreased primarily due to our continued investment in, and marketing of, theseofferings. Our DRS revenue has increased due to an increase in transactionsduring fiscal 2005 for certain studios under existing contracts compared tofiscal 2004, as well as new studio contracts.

 

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Increases in other revenue in fiscal 2004 compared to fiscal 2003included an increase of approximately $1.3 million in DRS revenues and anincrease of $2.9 million in revenues from our EssentialsTM business intelligenceservices offerings. In fiscal 2003,there were minimal revenues generated from our EssentialsTM business intelligence services as they beganin the fourth quarter of fiscal 2003.

 

***Cost of Sales***

Cost of sales consists of order processing costs, transaction costs,sell-through costs, handling and freight costs, and costs associated withcertain Essentialsä business intelligence service offerings. Theseexpenditures represent the direct costs to produce revenues.  Order processing costs, transaction costs andsell through costs represent the amounts due the Program Suppliers that holdthe distribution rights to the Units. Freight costs represent the cost to pick,pack and ship orders of Units to the Participating Retailers. A portion of theEssentialsäbusiness intelligence service offerings costs represent costs associated withthe operation of a call center.

 

Cost of sales increased $10.0 million, or16.6%, to $70.1 million in fiscal 2005 compared to $60.1 million in fiscal 2004and decreased $11.3 million, or 15.8%, in fiscal 2004 compared to $71.3 millionin fiscal 2003. Cost of sales as a percentage of revenue was 71.1% in fiscal2005 compared to 76.9% in fiscal 2004 and 83.1% in fiscal 2003.

 

The increase in cost of sales in 2005 comparedto 2004 was primarily due to the increase in revenues discussed above. Thedecrease in cost of sales as a percentage of revenue was primarily due toceasing fulfillment operations in July 2003, which had lower margins, aswell as to revenue from our higher-margin Essentialsä businessservice offerings increasing as a percentage of our total revenue. In addition,cost of sales in fiscal 2004 included a $650,000 charge related to costs ofterminating 3PF’s Columbus, Ohio, facility lease.

 

A majority of the decrease in cost of salesin fiscal 2004 compared to fiscal 2003 was due to ceasing operations of 3PF in July 2003.  In addition, approximately $0.9 million ofthe total cost of sales decrease is attributable to the overall $1.2 milliondecrease in PPT revenues.  Offsettingthese decreases in fiscal 2004 was a $650,000 charge related to costs ofterminating 3PF’s Columbus, Ohio, facility lease.  The decrease in cost of sales as a percentageof revenue in fiscal 2004 compared to fiscal 2003 was due to approximately $3.2million in revenues from our Essentialsä businessservice 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 theseofferings in fiscal 2003.  In addition,the decrease is due to the receipt of $0.8 million of discretionary rebatesfrom one of our Program Suppliers during fiscal 2004 related to guaranteeshortages resulting from under-performance of certain titles, compared to $0.2million of such rebates during fiscal 2003.

 

***Selling and Administrative***

Selling and administrative expenses consist primarily of compensationand benefits, development, marketing and advertising costs, legal andprofessional fees, communications costs, depreciation and amortization oftangible fixed assets and software, real and personal property leases, as wellas other general corporate expenses.

 

Selling and administrative expenses increased$3.5 million, or 21.5%, to $19.9 million in fiscal 2005 compared to $16.4million in fiscal 2004 and increased $1.9 million, or 13.3%, in fiscal 2004compared to $14.4 million in fiscal 2003.

 

Increases in selling and administrativeexpenses in fiscal 2005 compared to fiscal 2004 were primarily due to anincrease of approximately $0.7 million related to our continued investment inthe development and marketing of our Essentialsä businessservice offerings noted above, the accrual of $0.3 million in fiscal 2005 forestimated bonuses and an increase of approximately $2.1 million in corporateprofessional services related to legal fees, our corporate reorganization andSarbanes-Oxley Act Section 404 compliance services.  In addition, our bad debt expense increased$0.5 million in 2005 compared to 2004 due to lower reimbursement by our ProgramSuppliers under our current contractual arrangements. These increases wereoffset by a corresponding reduction in expenses associated with our fulfillmentsegment, which ceased

 

14

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operations in July 2003, and $0.4million of recoveries from the embezzlement matter.

 

The increase in selling and administrativeexpenses in fiscal 2004 compared to fiscal 2003 was primarily due to anincrease of approximately $1.4 million related to the continued investmenttoward the development of our Essentialsä businessservice offerings noted above.  Inaddition, we had a $1.0 million decrease in advertising credits received fromour Program Suppliers in fiscal 2004 compared to fiscal 2003 and our bad debtexpense increased $0.7 million in the same period due to lower reimbursementsby our Program Suppliers under our current contractual arrangements.  These increases were partially offset by anapproximately $1.5 million decrease attributable to ceasing 3PF’s operations July 31,2003.

 

***Net Loss (Gain) on LitigationSettlement***

The net loss on litigation settlement of $0.2million in fiscal 2005 relates to the settlement of a disagreement with afulfillment provider which arose in connection with the sale of our 3PF.Comassets.  The $0.2 million includes $0.1million in damages and related interest for full settlement ofall the claims and the complete mutual release from any further obligations ofeither party and $0.1 million of legalfees.

 

The net gain on litigation settlement of $0.4million in fiscal 2003 relates to an amount that Hollywood Entertainment, aformer customer, agreed to pay us in order to resolve all outstanding issues.

 

***AssetImpairment***

Asset impairmentof $27,000 in fiscal 2005 relates to the write-off of capitalized softwaredevelopment costs for two projects which management has determined will not becompleted and placed in service.

 

In fiscal 2003, wedetermined that it was unlikely that 3PF would achieve its business plans andwe initiated a plan to sell the assets of 3PF. Prior to March 31, 2003, it was determined that, more likely thannot, substantially all of 3PF’s assets would be sold or otherwise disposedof.  As a result of this determination,during the quarter ended March 31, 2003, we assessed the current andhistorical operating and cash flow losses, prospects for growth in revenues andother alternatives for improving the operating results of 3PF.

 

We then performed an assessment of the fair value of the 3PF assetsunder the guidelines of SFAS 144, “Accounting for the Impairment of Long-LivedAssets.”  This assessment resulted in 3PFrecognizing an asset impairment charge during the three-month period ended March 31,2003 in the amount of $0.8 million for the write down of its assets toestimated fair market value of approximately $0.8 million.

 

***Other Income (Expense)***

Interest income in fiscal 2005, 2004 and 2003includes $173,000, $156,000 and $57,000 of interest earned on a note receivabledue from one of 3PF’s clients, which was issued in June 2002.  See Note 5 of Notes toConsolidated Financial Statements.

 

***Income Taxes***

Oureffective tax rate was 39.6%, 25.0% and (27.8)%, respectively, in fiscal 2005,2004 and 2003.  The tax rate in fiscal2004 was positively affected primarily by the benefit of tax intangibleamortization.  In addition, our effectivetax rate differs from the federal statutory tax rate primarily due to stateincome taxes.

 

***Discontinued Operations***

Discontinuedoperations include the operations of BlowOut Video, which consisted of retailstore operations for the sale of used Units. Due to the significant increase in sell-throughactivity throughout the industry, the operations of BlowOut Video did not meetour expectations, and, as a result, during fiscal 2003, we initiated andcompleted 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, eitherthrough cancellation of the lease commitments and liquidation of assets, orthrough sale of the stores to a third party. As of March 31, 2003, all operations had ceased.  In January 2004, we were notifiedby the purchaser of a portion of BlowOut Video’s operations of their intent todefault on a note receivable due to us. As such, we provided an approximate $0.2 million reserve for theremaining balance of this note receivable in the three-month period ended December 31,2003.  This reserve resulted in areported loss, net of tax benefit, from these discontinued operations of

 

15

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$0.1 million,or $0.01 per share in fiscal 2004.  Weare continuing to sell our contractually available end-of-term PPTrevenue-sharing product through broker channels.  Current and prior year amounts have beenrestated to classify the results of BlowOut Video operations, net of relatedtax effects, as discontinued.

 

Theresults of operations related to BlowOut Video were as follows:

 
| ** **                  | ** ** | **Year Ended March 31,** | ** ** |
|-----------------------------|------------|-------------------------------|------------|
| ** **                  | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| Revenue                     |       | $                             | —     |   | $ | 2,575,733 |   |
| Net loss                    |       | $                             | (128,649   | ) | $ | (582,627 | ) |
| Net loss per  diluted share |       | $                             | (0.01      | ) | $ | (0.06 | ) |

 

***Inflation***

We believe that the impact of inflation was minimal on our business infiscal 2005, 2004 and 2003.

 

**Liquidity and Capital Resources**

 

Our sources of liquidity include our cashbalance, cash generated from operations and our $6.0 million line ofcredit.  Based on our current financialprojections and projected cash needs, we believe that our available sources ofliquidity will be sufficient to fund our current operations, the continueddevelopment of our business intelligence services and other cash requirementsthrough at least March 31, 2006.

 

Cash and cash equivalents increased $13.3million to $22.0 million at March 31, 2005 compared to $8.7 million at March 31,2004.  This increase resulted primarilyfrom $10.3 million provided by operations as detailed below, $2.8 million ofproceeds related to the issuance of stock to an unrelated party as discussed inNote 13 of Notes to Consolidated Financial Statements, $2.1 million of proceedsrelated to the issuance of stock pursuant to our stock plans, and $0.4 millionreceived on a note receivable, which were partially offset by $1.8 million usedfor the purchase of property and equipment and internallydeveloped software and $0.5 millionused for an equity investment. Our current ratio was 2.7:1.0 at March 31,2005 compared to 1.85:1.0 at March 31, 2004.

 

Advances to Program Suppliers decreased $3.0million to $1.2 million at March 31, 2005 compared to $4.2 million at March 31,2004.  These amounts represent theunearned portion of guarantees with certain Program Suppliers, offset byreserves for estimated shortages under the guarantees.  These advances to Program Suppliers increaseand decrease over time based on the changes in business volume, as well astiming of payments.

 

Deferred tax assets, short and long-term,were $1.1 million at March 31, 2005 compared to $3.4 million at March 31,2004.  The reduction of $2.3 millionprimarily relates to utilizing net operating loss carryforwards (“NOLs”) at March 31,2005 to reduce taxes payable in fiscal 2005. The remaining deferred tax asset balance primarily relates to netoperating loss carryforwards and various reserves not currently deductible fortax purposes.

 

Note receivable from related party of $0.8 millionat March 31, 2005 represents a note receivable from our former presidentplus accrued interest pursuant to his January 2005 separationagreement.  This amount was paid in fullon May 4, 2005.

 

During fiscal 2005, we spent $1.8 million on property and equipment,including $1.3 million for the capitalization of internally developed softwarefor our business intelligence service offerings. We anticipate spending a totalof approximately $2.7 million on property and equipment in fiscal 2006,including approximately $1.6 million for the capitalization of internallydeveloped software for our business intelligence service offerings.

 

Other assets of $0.9 million at March 31, 2005 include $0.5million related to our equity investment in a privately held company thatdevelops and provides information technology solutions for clients in variousentertainment industry market segments, as well as $222,000 which representsthe long-term portion of a

 

16

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note receivable from the sale of our 3PF assets.  The total amount due on this note was $0.7million as of March 31, 2005. During fiscal 2005, we received $0.4 millionon this note receivable and there were no past due amounts as of March 31,2005.

 

Accounts payable decreased $3.0 million to $12.5 million at March 31,2005 compared to $15.4 million at March 31, 2004 primarily due to the timing of Program Supplier and other vendorpayments.

 

Accrued liabilities decreased $0.2 million to $0.7 million at March 31,2005 compared to $0.9 million at March 31, 2004. The decrease representspayments made on our insurance policies and other miscellaneous expenditures.

 

Accrued compensation increased $0.9 million to $1.5 million at March 31,2005 compared to $0.6 million at March 31, 2004.  The increase represents an increase inaccrued bonuses based on fiscal 2005 financial results.  Bonuses totaling approximately $0.3 millionwere paid in April 2005.

 

We currently have a secured revolving line of credit for $6.0 million,with a maturity of December 1, 2005. Interest on the line of credit is at our choice of either the bank’sprime interest rate minus 0.5 percent or LIBOR plus 2 percent. The credit lineis secured by substantially all of our assets. The line of credit includes certainfinancial covenants requiring: (1) a consolidated pre-tax income to be achievedeach fiscal quarter beginning with the quarter ending March 31, 2005 of aminimum of $1.00, and consolidated after-tax income not less than $1.00 on anannual basis, determined at fiscal year end; (2) a minimum current ratio of1.5:1.0, measured quarterly; and (3) a maximum debt-to-tangible net worth ratioof 1.5:1.0, measured quarterly.  Basedupon the financial results reported as of, and for the fiscal year ended March 31,2005, we determined that we were in compliance with the financial covenants asof March 31, 2005.   At March 31,2005, we had no outstanding borrowings under this agreement.

 

**Contractual Payment Obligations**

 

A summary ofour contractual commitments and obligations as of March 31, 2005 is asfollows:

 
| ** **                  | ** ** | **Payments  Due By Fiscal Period** | ** ** |
|-----------------------------|------------|------------------------------------|------------|
| **Contractual Obligation**  | ** ** | **Total**                          | ** ** | **2006** | ** ** | **2007 and  2008** | ** ** | **2009 and  20010** | ** ** | **2011 and  beyond** | ** ** |
| Capital leases              |       | $                                  | 61,296     |   | $ | 61,296 |   | $ | — |   | $ | — |   | $ | — |   |
| Operating leases            |       | 1,295,565                          |       | 794,592 |   | 500,973 |   | — |   | — |   |
| Program Supplier guarantees |       | 1,327,582                          |       | 1,327,582 |   | — |   | — |   | — |   |
| Executive compensation      |       | 2,170,266                          |       | 1,426,599 |   | 683,667 |   | 60,000 |   | — |   |
|                        |       | $                                  | 4,854,709  |   | $ | 3,610,069 |   | $ | 1,184,640 |   | $ | 60,000 |   | $ | — |   |

 

**Critical Accounting Policies and Estimates**

 

The preparation of our financial statements requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses. Our estimates are based on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Following is a discussion of our criticalaccounting estimates.  See Note 2 ofNotes to Consolidated Financial Statements, *Significant AccountingPolicies*, for additional information.

 

17

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***Allowance for Doubtful Accounts***

Credit limits are established through a process of reviewing thefinancial history and stability of each customer. We regularly evaluate thecollectibility of accounts receivable by monitoring past due balances. If it isdetermined that a customer may be unable to meet its financial obligations, aspecific reserve is established based on the amount we expect to recover.  An additional general reserve is providedbased on aging of accounts receivable and our historical collection experience.If circumstances change related to specific customers, overall aging ofaccounts receivable or collection experience, our estimate of therecoverability of accounts receivable could materially change. Our allowancefor doubtful accounts totaled $654,039 and $839,122, respectively, at March 31,2005 and 2004.

 

***Program Supplier Reserves***

We have entered into guarantee contracts with certain program suppliersproviding titles for distribution under our PPT system. These contractsguarantee the Program Suppliers minimum payments that are recoupable based onrevenue-sharing activity.  In some cases,these guarantees are paid in advance. For amounts not paid in advance, werecord a liability for the gross amount of the guarantee due to the ProgramSupplier on the street date in accordance with Statement of Position 00-2, “Accountingby Producers or Distributors of Films” (“SOP 00-2”). The unearned portion ofthe guarantees is included as Advances to Program Suppliers on our consolidatedbalance sheets.  Using historicalexperience and year to date rental experience for each title, we estimate theprojected revenue to be generated under each guarantee.  We have historically been able to reasonablyestimate shortages after 30 to 60 days of rental activity. We then establish aProgram Supplier reserve for titles that are projected to experience a shortageunder the provisions of the guarantee. The program supplier reserve is netted against Advances to ProgramSuppliers on our consolidated balance sheets. We continually review these factors and make adjustments to the reservesas needed.  Actual results could differfrom these estimates and could have a material effect on the recorded ProgramSupplier reserves. The balance in this reserve totaled $3.2 million and $4.5million, respectively, at March 31, 2005 and 2004.

 

***Deferred Taxes***

We account for income taxes in accordance with SFAS No. 109, “Accountingfor Income Taxes.”  In accordance withSFAS No. 109, deferred tax assets arise from the tax benefit of amountsexpensed for financial reporting purposes but not yet deducted for tax purposesand from unutilized tax credits and NOL carry forwards. We evaluate ourdeferred tax assets on a regular basis to determine if a valuation allowance isrequired. To the extent it is determined the recoverability of the deferred taxassets is unlikely, we will record a valuation allowance against deferred taxassets.  As of March 31, 2005 and2004, we had a valuation allowance of $0.4 million and $0.3 million,respectively, recorded against our Canadian net operating loss carryforwards.Net deferred tax assets totaled $1.1 million and $3.4 million, respectively, asof March 31, 2005 and 2004.

 

**New Accounting Pronouncements**

 

See Note 3 of Notes to Consolidated Financial Statements for adiscussion of the impact of new accounting pronouncements.

 

**Off-Balance Sheet Arrangements**

 

Other than disclosed above under Contractual Payment Obligations, we donot have any off-balance sheet arrangements that have or are reasonably likelyto have a current or future effect on our financial condition, changes infinancial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources that is material to investors.

 

18

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**ITEM 7A.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We have considered the provisions ofFinancial Reporting Release No. 48 “Disclosure of Accounting Policies forDerivative Financial Instruments and Derivative Commodity Instruments, andDisclosure of Quantitative and Qualitative Information about Market RiskInherent in Derivative Financial Instruments, Other Financial Instruments andDerivative Commodity Instruments.”  Wehad no holdings of derivative financial or commodity instruments at March 31,2005.  A review of our other financialinstruments and risk exposures at that date revealed that we had exposure tointerest rate risk related to our cash deposits.  We utilized sensitivity analyses to assessthe potential effect of this risk and concluded that near-term changes ininterest rates should not materially adversely affect our financial position,results of operations or cash flows.

 

19

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**ITEM 8.****  FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

**REPORT OF****INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Board of Directors and Shareholders

Rentrak Corporation

 

We have audited the accompanying consolidated balance sheet of RentrakCorporation as of March 31, 2005, and the related consolidated statementsof operations, stockholders’ equity, and cash flows for the year thenended.  These financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audit.

 

We conducted our auditin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Rentrak Corporation as of March 31,2005, and the results of their operations and their cash flows for the yearthen ended in conformity with accounting principles generally accepted in theUnited States of America.

 

Our audit was conducted for the purpose of forming an opinion on thebasic financial statements taken as a whole. The financial statement schedule listed in the index at Item 15 ispresented for purposes of additional analysis and is not a required part of thebasic financial statements.  This schedule hasbeen subjected to the auditing procedures applied in the audit of the basicfinancial statements and, in our opinion, is fairly stated in all materialrespects in relation to the basic financial statements taken as a whole.

 

We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theeffectiveness of Rentrak Corporation’s internal control over financialreporting as of March 31, 2005, based on criteria established in InternalControl — Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated May 20, 2005expressed an unqualified opinion on management’s assessment, and an adverseopinion on the effective operation, of internal control over financialreporting.

 
| /s/ Grant  Thornton LLP |   |
|-------------------------|--------|
| Portland, Oregon        |
| May 20, 2005            |

 

20

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**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board of Directors

Rentrak Corporation:

 

We have audited theaccompanying consolidated balance sheet of Rentrak Corporation and subsidiariesas of March 31, 2004, and the related consolidated statements ofoperations, stockholders’ equity, and cash flows for each of the years in thetwo-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 statementschedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements and the consolidated financialstatement schedule based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether 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. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Rentrak Corporation andsubsidiaries as of March 31, 2004, and the results of their operations andtheir cash flows for each of the years in the two-year period ended March 31,2004 in conformity with U.S. generally accepted accounting principles. Also inour opinion, the related consolidated financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken asa whole, presents fairly, in all material respects, the information set forththerein.

 

As discussed in Note 4to the accompanying consolidated financial statements, the Company has restatedits consolidated statements of operations, stockholders’ equity, and cash flowsand the consolidated financial statement schedule for the period ended March 31,2003.

 

KPMG LLP

 

Portland, Oregon

July 9, 2004

 

21

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**RentrakCorporation and Subsidiaries**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                              | ** ** | **March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                                              | ** ** | **2005**           | ** ** | **2004** | ** ** |
|                                                                                                                    |       |               |       |   |   |
| **Assets**                                                                                                              | ** ** | ** **         | ** ** | ** ** | ** ** |
| Current  Assets:                                                                                                        |       |               |       |   |   |
| Cash and  cash equivalents                                                                                              |       | $                  | 21,983,133 |   | $ | 8,735,683 |   |
| Accounts  receivable, net of allowances for doubtful accounts of $654,039 and $839,122                                  |       | 14,427,356         |       | 15,389,867 |   |
| Advances to  program suppliers, net of program supplier reserves of $3,245,877 and  $4,520,759                          |       | 1,184,839          |       | 4,188,222 |   |
| Income tax  receivable                                                                                                  |       | 580,010            |       | 68,384 |   |
| Deferred  income tax assets                                                                                             |       | 944,038            |       | 2,262,186 |   |
| Notes  receivable - related party                                                                                       |       | 753,301            |       | — |   |
| Other  current assets                                                                                                   |       | 1,028,129          |       | 1,160,952 |   |
| Total  Current Assets                                                                                                   |       | 40,900,806         |       | 31,805,294 |   |
|                                                                                                                    |       |               |       |   |   |
| Property and  Equipment, net                                                                                            |       | 3,216,025          |       | 2,466,668 |   |
| Deferred  Income Tax Assets                                                                                             |       | 114,998            |       | 1,099,660 |   |
| Other Assets                                                                                                            |       | 851,340            |       | 831,617 |   |
| Total Assets                                                                                                            |       | $                  | 45,083,169 |   | $ | 36,203,239 |   |
|                                                                                                                    |       |               |       |   |   |
| **Liabilities  and Stockholders’ Equity**                                                                          | ** ** | ** **         | ** ** | ** ** | ** ** |
| Current Liabilities:                                                                                                    |       |               |       |   |   |
| Accounts  payable                                                                                                       |       | $                  | 12,469,758 |   | $ | 15,446,818 |   |
| Accrued  liabilities                                                                                                    |       | 711,385            |       | 889,377 |   |
| Accrued  compensation                                                                                                   |       | 1,538,794          |       | 598,875 |   |
| Deferred  revenue                                                                                                       |       | 378,719            |       | 237,575 |   |
| Total  Current Liabilities                                                                                              |       | 15,098,656         |       | 17,172,645 |   |
|                                                                                                                    |       |               |       |   |   |
| Long-Term  Obligations:                                                                                                 |       |               |       |   |   |
| Lease  obligations and deferred gain                                                                                    |       | 51,581             |       | 234,922 |   |
|                                                                                                                    |       |               |       |   |   |
| 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: 10,544,913 and 9,739,537 |       | 10,545             |       | 9,740 |   |
| Capital in  excess of par value                                                                                         |       | 46,987,982         |       | 41,093,976 |   |
| Accumulated  other comprehensive income                                                                                 |       | 180,879            |       | 180,879 |   |
| Accumulated  deficit                                                                                                    |       | (17,246,474        | )          | (22,488,923 | ) |
| Total  Stockholders’ Equity                                                                                        |       | 29,932,932         |       | 18,795,672 |   |
| Total  Liabilities and Stockholders’ Equity                                                                        |       | $                  | 45,083,169 |   | $ | 36,203,239 |   |

 

See accompanying Notes toConsolidated Financial Statements.

 

22

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**RentrakCorporation and Subsidiaries**

**ConsolidatedStatements of Operations**

 
| ** **                                                                         | ** ** | **For the Year Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                               |       |                                  |       |   |   |   |   |
| Revenue                                                                            |       | $                                     | 98,537,575 |   | $ | 78,132,413 |   | $ | 85,884,262 |   |
|                                                                               |       |                                  |       |   |   |   |   |
| Operating  expenses:                                                               |       |                                  |       |   |   |   |   |
| Cost of  sales                                                                     |       | 70,053,996                            |       | 60,090,493 |   | 71,347,003 |   |
| Selling and  administrative                                                        |       | 19,873,824                            |       | 16,357,299 |   | 14,434,343 |   |
| Net loss  (gain) from litigation settlements                                       |       | 225,493                               |       | — |   | (361,847 | ) |
| Asset  impairment                                                                  |       | 26,627                                |       | — |   | 844,041 |   |
|                                                                               |       | 90,179,940                            |       | 76,447,792 |   | 86,263,540 |   |
| Income  (loss) from operations                                                     |       | 8,357,635                             |       | 1,684,621 |   | (379,278 | ) |
|                                                                               |       |                                  |       |   |   |   |   |
| Other income  (expense):                                                           |       |                                  |       |   |   |   |   |
| Interest  income                                                                   |       | 332,688                               |       | 244,252 |   | 204,283 |   |
| Interest  expense                                                                  |       | (10,535                               | )          | (11,584 | ) | (25,009 | ) |
|                                                                               |       | 322,153                               |       | 232,668 |   | 179,274 |   |
| Income  (loss) from continuing operations before income taxes                      |       | 8,679,788                             |       | 1,917,289 |   | (200,004 | ) |
| Provision  (benefit) for income taxes                                              |       | 3,437,339                             |       | 478,896 |   | (55,528 | ) |
| Net income  (loss) from continuing operations                                      |       | 5,242,449                             |       | 1,438,393 |   | (144,476 | ) |
| Loss from  discontinued operations, net of tax benefit of $0, $78,850 and $357,094 |       | —                                |       | (128,649 | ) | (582,627 | ) |
| Net income  (loss)                                                                 |       | $                                     | 5,242,449  |   | $ | 1,309,744 |   | $ | (727,103 | ) |
|                                                                               |       |                                  |       |   |   |   |   |
| Basic net  income (loss) per share from continuing operations                      |       | $                                     | 0.52       |   | $ | 0.15 |   | $ | (0.02 | ) |
| Basic loss  per share from discontinued operations                                 |       | —                                |       | (0.01 | ) | (0.06 | ) |
| Basic net  income (loss) per share                                                 |       | $                                     | 0.52       |   | $ | 0.14 |   | $ | (0.08 | ) |
|                                                                               |       |                                  |       |   |   |   |   |
| Diluted net  income (loss) per share from continuing operations                    |       | $                                     | 0.49       |   | $ | 0.14 |   | $ | (0.02 | ) |
| Diluted loss  per share from discontinued operations                               |       | —                                |       | (0.01 | ) | (0.06 | ) |
| Diluted net  income (loss) per share                                               |       | $                                     | 0.49       |   | $ | 0.13 |   | $ | (0.08 | ) |
|                                                                               |       |                                  |       |   |   |   |   |
| Shares used  in per share calculations:                                            |       |                                  |       |   |   |   |   |
| Basic                                                                              |       | 10,080,961                            |       | 9,600,243 |   | 9,641,378 |   |
| Diluted                                                                            |       | 10,592,028                            |       | 10,118,679 |   | 9,641,378 |   |

 

See accompanying Notes toConsolidated Financial Statements.

 

23

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**RentrakCorporation and Subsidiaries**

**ConsolidatedStatements of Stockholders’ Equity**

**For TheYears Ended March 31, 2005, 2004 and 2003**

 
| ** **                                                       | ** ** | ** **       | ** ** | ** **    | ** ** | ** **       | ** ** | ** **     | ** ** | **Cumulative**    | ** ** | ** **  | ** ** | ** **             | ** ** | ** ** | ** **  |
|------------------------------------------------------------------|------------|------------------|------------|---------------|------------|------------------|------------|----------------|------------|-------------------|------------|-------------|------------|------------------------|------------|------------|-------------|
| ** **                                                       | ** ** | ** **       | ** ** | ** **    | ** ** | ** **       | ** ** | ** **     | ** ** | **Other**         | ** ** | ** **  | ** ** | ** **             | ** ** | ** ** | ** **  |
| ** **                                                       | ** ** | ** **       | ** ** | ** **    | ** ** | **Capital**      | ** ** | ** **     | ** ** | **Comprehensive** | ** ** | ** **  | ** ** | **Deferred**           | ** ** | **Total**  | ** **  |
| ** **                                                       | ** ** | **Common Stock** | ** ** | **In Excess** | ** ** | **Notes**        | ** ** | **Income**     | ** ** | **Accumulated**   | ** ** | **Warrant** | ** ** | **Stockholders’** | ** ** |
| ** **                                                       | ** ** | **Shares**       | ** ** | **Amount**    | ** ** | **of Par Value** | ** ** | **Receivable** | ** ** | **(Loss)**        | ** ** | **Deficit** | ** ** | **Charge**             | ** ** | **Equity** | ** **  |
| **Balance at March 31, 2002**                               |       | 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**                               |       | 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 |        |
|                                                             |       |             |       |          |       |             |       |           |       |              |       |        |       |                   |       |       |        |
| Net income                                                       |       | —           |       | —        |       | —           |       | —         |       | —            |       | 5,242,449   |       | —                 |       | 5,242,449  |        |
| Common stock issued pursuant to stock plans                      |       | 522,557          |       | 522           |       | 2,394,306        |       | —         |       | —            |       | —      |       | —                 |       | 2,394,828  |        |
| Common stock used to pay for option exercises                    |       | (25,381          | )          | (25           | )          | (270,112         | )          | —         |       | —            |       | —      |       | —                 |       | (270,137   | )           |
| Issuance of common stock                                         |       | 308,200          |       | 308           |       | 2,773,492        |       | —         |       | —            |       | —      |       | —                 |       | 2,773,800  |        |
| Income tax benefit from stock option exercises                   |       | —           |       | —        |       | 996,320          |       | —         |       | —            |       | —      |       | —                 |       | 996,320    |        |
| **Balance at March 31, 2005**                               |       | 10,544,913       |       | $             | 10,545     |             | $          | 46,987,982     |       | $                 | —     |        | $          | 180,879                |       | $          | (17,246,474 | ) | $ | — |   | $ | 29,932,932 |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

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**RentrakCorporation and Subsidiaries**

**ConsolidatedStatements of Cash Flows**

 
| ** **                                                                                                 | ** ** | **For the Year Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Cash  flows from operating activities:**                                                                 |       |                                  |       |   |   |   |   |
| Net income  (loss)                                                                                         |       | $                                     | 5,242,449  |   | $ | 1,309,744 |   | $ | (727,103 | ) |
| Adjustments  to reconcile net income (loss) to net cash flows provided by (used in)  operating activities: |       |                                  |       |   |   |   |   |
| Loss on  disposal of discontinued operations                                                               |       | —                                |       | 128,649 |   | 582,627 |   |
| Gain on  disposition of assets                                                                             |       | (1,400                                | )          | (94,951 | ) | (3,654 | ) |
| Tax benefit  from stock option exercises                                                                   |       | 996,320                               |       | 390,325 |   | 75,104 |   |
| Loss of  occupancy deposit on lease termination                                                            |       | —                                |       | 400,000 |   | — |   |
| Loss on  write-down of property and equipment                                                              |       | —                                |       | — |   | 844,041 |   |
| Depreciation  and amortization                                                                             |       | 1,078,149                             |       | 875,488 |   | 1,356,022 |   |
| Amortization  of warrants                                                                                  |       | —                                |       | — |   | 355,000 |   |
| Abandonment  of capitalized software projects                                                              |       | 26,627                                |       | — |   | — |   |
| Adjustment  to allowance for doubtful accounts                                                             |       | 28,328                                |       | (319,676 | ) | (1,142,138 | ) |
| Deferred  income taxes                                                                                     |       | 2,302,810                             |       | (44,725 | ) | (532,727 | ) |
| (Increase)  decrease in:                                                                                   |       |                                  |       |   |   |   |   |
| Accounts  receivable                                                                                       |       | 934,183                               |       | (5,267,965 | ) | 2,947,040 |   |
| Advances to  program suppliers                                                                             |       | 3,003,383                             |       | (2,357,204 | ) | 1,210,641 |   |
| Income taxes  receivable                                                                                   |       | (511,626                              | )          | 12,701 |   | (11,085 | ) |
| Notes  receivable and other current assets                                                                 |       | (624,572                              | )          | 760,627 |   | 1,528,395 |   |
| Increase  (decrease) in:                                                                                   |       |                                  |       |   |   |   |   |
| Accounts  payable                                                                                          |       | (2,977,060                            | )          | 2,646,082 |   | (6,034,795 | ) |
| Accrued  liabilities and compensation                                                                      |       | 761,926                               |       | (248,813 | ) | (72,110 | ) |
| Deferred  revenue and other liabilities                                                                    |       | (5,894                                | )          | (284,213 | ) | 12,807 |   |
| Net cash  provided by (used in) operating activities                                                       |       | 10,253,623                            |       | (2,093,931 | ) | 388,065 |   |
|                                                                                                       |       |                                  |       |   |   |   |   |
| **Cash  flows from investing activities:**                                                                 |       |                                  |       |   |   |   |   |
| Purchase of  property and equipment                                                                        |       | (1,806,438                            | )          | (1,597,403 | ) | (1,607,421 | ) |
| Proceeds  from sale of assets                                                                              |       | 1,400                                 |       | — |   | — |   |
| Purchase of  equity investment                                                                             |       | (475,000                              | )          | — |   | — |   |
| Proceeds  from the sale of 3PF assets                                                                      |       | —                                |       | 800,000 |   | — |   |
| Payments  received on note receivable                                                                      |       | 411,676                               |       | 451,169 |   | — |   |
| Other  assets, net                                                                                         |       | —                                |       | 131,621 |   | (128,943 | ) |
| Net cash  used in investing activities                                                                     |       | (1,868,362                            | )          | (214,613 | ) | (1,736,364 | ) |
|                                                                                                       |       |                                  |       |   |   |   |   |
| **Cash  flows from financing activities:**                                                                 |       |                                  |       |   |   |   |   |
| Payments on  capital lease obligation                                                                      |       | (36,302                               | )          | (68,021 | ) | (62,342 | ) |
| Repurchase  of common stock and warrants                                                                   |       | —                                |       | — |   | (2,121,452 | ) |
| Issuance of  common stock                                                                                  |       | 2,124,691                             |       | 1,048,707 |   | 348,515 |   |
| Issuance of  common stock to non-employees                                                                 |       | 2,773,800                             |       | — |   | — |   |
| Net cash  provided by (used in) financing activities                                                       |       | 4,862,189                             |       | 980,686 |   | (1,835,279 | ) |
|                                                                                                       |       |                                  |       |   |   |   |   |
| Increase  (decrease) in cash and cash equivalents                                                          |       | 13,247,450                            |       | (1,327,858 | ) | (3,183,578 | ) |
| Net cash  provided by discontinued operations                                                              |       | —                                |       | — |   | 1,218,435 |   |
|                                                                                                       |       |                                  |       |   |   |   |   |
| **Cash and  cash equivalents:**                                                                            |       |                                  |       |   |   |   |   |
| Beginning of  year                                                                                         |       | 8,735,683                             |       | 10,063,541 |   | 12,028,684 |   |
| End of year                                                                                                |       | $                                     | 21,983,133 |   | $ | 8,735,683 |   | $ | 10,063,541 |   |
|                                                                                                       |       |                                  |       |   |   |   |   |
| **Supplemental  cash flow information:**                                                                   |       |                                  |       |   |   |   |   |
| Cash paid  during the period for interest                                                                  |       | $                                     | 10,535     |   | $ | 10,830 |   | $ | 27,846 |   |
| Cash paid  during the period for income taxes, net of refunds received                                     |       | 517,593                               |       | 15,561 |   | 45,566 |   |
|                                                                                                       |       |                                  |       |   |   |   |   |
| **Supplemental  disclosure of non-cash activity:**                                                         |       |                                  |       |   |   |   |   |
| Forgiveness  of note receivable in exchange for stock                                                      |       | $                                     | —     |   | $ | — |   | $ | (377,565 | ) |

 

See accompanying Notes toConsolidated Financial Statements.

 

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**Rentrak Corporation andSubsidiaries**

**Notes to** Consolidated Financial Statements

 

**Note 1. Overview**

 

Rentrak Corporation (anOregon corporation) is principally engaged in the processing of informationregarding the rental and sale of DVDs, video games and video cassettes (Units)and the distribution of prerecorded Units to the home video market throughoutthe United States and Canada using its Pay-Per-Transaction (PPT) revenuesharing program.

 

Under the PPT program, weenter into contracts to lease/license Units from producers of motion picturesand licensees and distributors of home video cassettes, DVDs and video games (“ProgramSuppliers”), which are then leased/licensed to retailers for a percentage ofthe rentals charged by the retailers.

 

During fiscal 2004, wesold our subsidiary, 3PF.COM, Inc. (“3PF”), which provided order processing andinventory management services to e-tailers, wholesalers and other businessesrequiring just-in-time fulfillment.  SeeNote 5.

 

During fiscal 2003, wediscontinued the operations of our subsidiary, BlowOut Video, Inc., which soldvideo cassettes and DVDs through its three retail video stores operating underthe name of BlowOut Video.  See Note 6.

 

**Note 2.  Significant Accounting Policies**

 

***Basis ofConsolidation***

The consolidatedfinancial statements include the accounts of Rentrak Corporation, its majorityowned subsidiaries, and those subsidiaries in which we have a controllinginterest after elimination of all intercompany accounts and transactions.Investments in affiliated companies owned 20% to 50% are accounted for bythe equity method.

 

***ManagementEstimates***

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ materially from thoseestimates.  We consider our most criticalaccounting policies to be those that require the use of estimates andassumptions, specifically, accounts receivable reserves, Program Supplierguarantee reserves and judgments regarding realization of deferred tax assets.

 

***RevenueRecognition***

We follow SOP 00-2, “Accountingby Producers or Distributors of Films,” and recognize revenue when all of thefollowing conditions are met:

 

•                  Persuasive evidence of an arrangement exists;

•                  The products or services have been delivered;

•                  The license period has begun (which is referred to asthe “street date” for a product);

•                  The arrangement fee is fixed or determinable; and

•                  Collection of the arrangement fee is reasonably assured.

 

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PPT agreements generallyprovide for an initial order processing fee and continuing transaction feesbased on a percentage of rental revenues earned by the retailers upon rentingthe Units to their customers. Initial order processing fees cover the directcosts of accessing Units from Program Suppliers and handling, packaging andshipping of the Units to the retailer.  Once the Units are shipped, we have no further obligation to provideservices to the retailer.

 

We recognize orderprocessing fees as revenue on the street date and recognize transaction feeswhen the Units are rented to the consumers, provided all other revenuerecognition criteria have been met.  Inlimited circumstances, certain arrangements include guaranteed minimum revenuesfrom our customers. In these arrangements, we recognize the guaranteed minimumrevenue on the street date, provided all other revenue recognition criteria aremet.

 

We recognize otherservices revenue, including direct revenue sharing and business intelligenceservices revenue, ratably over the period of service.

 

Revenues derived from our3PF fulfillment activities were recognized when products were shipped and/orservices were provided.

 

***Cash and Cash Equivalents***

We consider all highlyliquid investments purchased with a maturity of three months or less atacquisition to be cash equivalents.  Wehave funds deposited in various financial institutions in excess of the federalfunds deposit insurance limits.  We didnot have any cash equivalents at March 31, 2005 or 2004.

 

***AccountsReceivable and Allowance for Doubtful Accounts***

Trade accounts receivableare recorded at the invoiced amount and do not bear interest. The allowance fordoubtful accounts is our best estimate of the amount of probable credit lossesin our existing accounts receivable.

 

***Credit limits are established through a process of reviewingthe financial history and stability of each customer.  We regularly evaluate the collectibility ofaccounts receivable by monitoring past due balances. If it is determined that acustomer may be unable to meet its financial obligations, a specific reserve isestablished based on the amount we expect to recover.  An additional general reserve is providedbased on aging of accounts receivable and our historical collectionexperience.  If circumstances changerelated to specific customers, overall aging of accounts receivable orcollection experience, our estimate of the recoverability of accountsreceivable could materially change.  Weare able to recover certain bad debts from our Program Suppliers. Suchrecoveries are recorded as reductions to expense when they are fixed anddeterminable pursuant to the Program Supplier contract.***

 

***As of March 31, 2004, one customer represented 34% ofour total gross accounts receivable. No other customer accounted for 10% ormore of our accounts receivable balance as of March 31, 2005 or 2004.***We do not haveany off-balance sheet credit exposure related to our customers.

 

***Fair Value of Financial Assetsand Liabilities***

Weestimate the fair value of our monetary assets and liabilities based uponcomparison of such assets and liabilities to the current market values forinstruments of a similar nature and degree of risk. Our monetary assets andliabilities include cash, accounts and notes receivable, and accountspayable.  Based on the short-term natureof these instruments, we estimate that the recorded value of all our monetaryassets and liabilities approximates fair value as of March 31, 2005 and2004.

 

***Impairment ofLong-Lived Assets***

Pursuant toStatement of Financial Accounting Standards (SFAS) No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” long-lived assets, such asproperty, plant and equipment, and purchased intangibles subject toamortization, are required to be reviewed for impairment annually or wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be

 

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recoverable.Recoverability of assets to be held and used is measured by a comparison of thecarrying amount of an asset to estimated undiscounted future cash flowsexpected to be generated by the asset. If the carrying amount of an assetexceeds its estimated future cash flows, an impairment charge is recognized bythe amount by which the carrying amount of the asset exceeds the fair value ofthe asset. Assets to be disposed of are reported at the lower of the carryingamount or fair value less costs to sell, and depreciation ceases.  In fiscal 2005, we recorded an impairmentcharge of $27,000 related to the write-off of capitalized software developmentcosts for two projects which management has determined will not be completedand placed in service.  As discussed inNote 5, in fiscal 2003, we recognized an impairment charge related to our 3PFassets totaling $0.8 million.

 

***Property andEquipment***

Depreciation of propertyand equipment is computed on the straight-line method over estimated usefullives of three to seven years for furniture and fixtures, three to ten yearsfor machinery and equipment and three years for capitalized software. Leaseholdimprovements are amortized over the lives of the underlying leases or theservice lives of the improvements, whichever is shorter.  Property and equipment is reviewed forimpairment in accordance with SFAS No.144 as discussed above.

 

***Capitalized Software***

Capitalized software,included in Property and Equipment, net, consists of costs to purchase anddevelop internal-use software. This also includes costs to develop software forcustomer use in various services, including theatrical data recovery andfulfillment.  Amortization of capitalizedsoftware is computed on a straight-line basis over 3 years. Capitalized softwareis reviewed for impairment in accordance with SFAS No. 144 as discussedabove.  See Note 7.

 

***Income Taxes***

We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.”  Under the asset and liability methodspecified by SFAS No. 109, deferred tax assets and liabilities aredetermined based on the temporary differences between the financial statementbasis and tax basis of assets and liabilities as measured by the enacted taxrates for the years in which the taxes are expected to be paid.  We evaluate our deferred tax assets on aregular basis to determine if a valuation allowance is required.  To the extent it is determined therecoverability of the deferred tax assets is unlikely, we record a valuationallowance against deferred tax assets. As of March 31, 2005 and 2004, wehad a valuation allowance of $0.4 million and $0.3 million, respectively,recorded against our Canadian net operating loss carryforwards.

 

***Program Supplier Reserves***

We have entered into guarantee contracts with certain program suppliersproviding titles for distribution under our PPT system. These contractsguarantee the Program Suppliers minimum payments that are recoupable based onrevenue-sharing activity.  In some cases,these guarantees are paid in advance. For amounts not paid in advance, werecord a liability for the gross amount of the guarantee due to the ProgramSupplier on the street date in accordance with SOP 00-2. The unearned portionof the guarantees is included as Advances to Program Suppliers on ourconsolidated balance sheets.  Usinghistorical experience and year to date rental experience for each title, weestimate the projected revenue to be generated under each guarantee.  We have historically been able to reasonablyestimate shortages after 30 to 60 days of rental activity. We then establish aProgram Supplier reserve for titles that are projected to experience a shortageunder the provisions of the guarantee. The Program Supplier reserve is nettedagainst Advances to Program Suppliers on our consolidated balance sheets.  We continually review these factors and makeadjustments to the reserves as needed. Actual results could differ from these estimates and could have amaterial effect on the recorded Program Supplier reserves. The balance in thisreserve totaled $3.2 million and $4.5 million, respectively, at March 31,2005 and 2004.

 

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***Foreign CurrencyTranslation***

Adjustments fromtranslating foreign functional currency financial statements into U.S. dollarsare included in cumulative other comprehensive income in the consolidatedstatement of stockholders’ equity. Transaction gains and losses that arise fromexchange rate fluctuations on transactions denominated in a currency other thanthe local currency are included as a component of selling and administrativeexpenses in our consolidated statements of operations.

 

***Earnings (Loss)Per Share***

Basic net income (loss) per share (EPS) and diluted EPS are computedusing the methods prescribed by SFAS No. 128, “Earnings per Share.”  Following is a reconciliation of the sharesused for the basic EPS and diluted EPS calculations for fiscal 2005, 2004 and2003:

 
| ** **                                                     | ** ** | **Year Ended March 31,** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                     | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Basic  EPS:**                                                |       |                          |       |   |   |   |   |
| Weighted  average number of shares of common stock outstanding |       | 10,080,961                    |       | 9,600,243 |   | 9,641,378 |   |
| **Diluted  EPS:**                                              |       |                          |       |   |   |   |   |
| Effect of  dilutive stock options                              |       | 511,067                       |       | 518,436 |   | — |   |
|                                                           |       | 10,592,028                    |       | 10,118,679 |   | 9,641,378 |   |

 

Options and warrants topurchase approximately 0.2 million, 0.2 million and 2.0 million shares of ourcommon stock were outstanding at March 31, 2005, 2004 and 2003,respectively, but were not included in the computation of diluted EPS becausethe exercise price of the options and warrants was greater than the averagemarket price of the common shares for the period. Additionally, no options wereincluded in fiscal 2003 because it was a loss period and inclusion would beantidilutive.

 

***Stock-Based Compensation***

We account for stock-based compensation utilizing the intrinsic valuemethod in accordance with the provisions of Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees,” as interpreted by FASBInterpretation No. 44, “Accounting for Certain Transactions Involving StockCompensation.”  Pursuant to SFAS No. 148 “Accountingfor Stock-Based Compensation – Transition and Disclosure,” we have computed,for pro forma disclosure purposes, the impact on net income (loss) and netincome (loss) per share as if we had accounted for our stock-based compensationplans in accordance with the fair value method prescribed by SFAS No. 123 “Accountingfor Stock-Based Compensation” as follows:

 
| **Year Ended March 31,**                                                                                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Net income  (loss), as reported                                                                                                                         |       | $        | 5,242,449  |     | $          | 1,309,744  |       | $ | (727,103 | ) |
| Deduct –  total stock-based employee compensation expense determined under the fair  value based method for all awards, net of related tax effects |       | (859,694 | )          | (871,918 | )          | (1,119,812 | )          |
| Net income  (loss), pro forma                                                                                                                           |       | $        | 4,382,755  |     | $          | 437,826    |       | $ | (1,846,915 | ) |
|                                                                                                                                                    |       |     |       |     |       |       |       |
| Net income  (loss) per share – basic, as reported                                                                                                  |       | $        | 0.52       |     | $          | 0.14       |       | $ | (0.08 | ) |
|                                                                                                                                                    |       |     |       |     |       |       |       |
| Net income  (loss) per share – basic, pro forma                                                                                                    |       | $        | 0.43       |     | $          | 0.05       |       | $ | (0.19 | ) |
|                                                                                                                                                    |       |     |       |     |       |       |       |
| Net income  (loss) per share – diluted, as reported                                                                                                |       | $        | 0.49       |     | $          | 0.13       |       | $ | (0.08 | ) |
|                                                                                                                                                    |       |     |       |     |       |       |       |
| Net income  (loss) per share – diluted, pro forma                                                                                                  |       | $        | 0.41       |     | $          | 0.04       |       | $ | (0.19 | ) |

 

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To determine the fair value of stock-based awards granted, we used theBlack-Scholes option pricing model and the following weighted averageassumptions:

 
| **Year Ended March 31,** | ** ** | **2005**          | ** ** | **2004**          | ** ** | **2003**          | ** ** |
|-------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| Risk-free  interest rate      |       | 4.17 – 4.58  | %          | 3.09 – 4.62  | %          | 3.57 – 5.45  | %          |
| Expected  dividend yield      |       | 0                 | %          | 0                 | %          | 0                 | %          |
| Expected  lives               |       | 5 – 10 years |       | 5 – 10 years |       | 5 – 10 years |       |
| Expected  volatility          |       | 73.09             | %          | 75.54             | %          | 77.69             | %          |

 

Using the Black-Scholes methodology, the total value of stock awardsand options granted during fiscal 2005, 2004 and 2003 was approximately $1.2million, $1.4 million and $2.4 million, respectively, which are amortized on apro forma basis over the vesting period of the options, typically one to fouryears. The weighted average fair value of stock awards and options grantedduring fiscal 2005, 2004 and 2003 was $6.75 per share, $5.33 per share and$3.82 per share, respectively. The pro forma effects of applying SFAS No. 123 maynot be indicative of the future.

 

See Note 3 for a discussion of SFAS No. 123R, “Share-Based Payment,”which requires companies to recognize in their statement of operations thegrant-date fair value of stock options and other equity-based compensationissued to employees.

 

***AdvertisingExpense***

Advertising costs are expensed as incurred.  Expenses incurred totaled approximately $1.4 million, $1.5 million and $2.0 million, respectively, in fiscal 2005, 2004 and 2003.  Reimbursements received for direct and indirect expenses totaled approximately $1.3 million, $1.5 million and $3.0 million, respectively, in fiscal 2005, 2004 and 2003.

 

The advertising reimbursements from Program Suppliers are contractually provided to us 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 we reimburse 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, selling and administrative expenses, in which the costs 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 selling and administrative expenses on the statement of operations, while unaccountable reimbursements under contracts entered into or modified subsequent to December 31, 2002 were classified as reductions to cost of sales on the statement of operations in accordance with Emerging Issues Task Force 02-16, “Accounting by a Reseller for Cash Consideration Received from a Vendor.”

 

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***Comprehensive Income (Loss)***

Comprehensive income(loss) includes charges or credits to equity that are not the result oftransactions with shareholders. Components of our comprehensive income (loss)consist of the change in unrealized gain (loss) on investment securities, netof tax, and changes to our cumulative translation adjustment.

 

***Reclassifications***

Certain reclassificationshave been made to prior year amounts to conform to the current yearpresentation.

 

***Note 3.  New Accounting Pronouncements***

 

***SFAS No. 123R***

In December 2004, the FASB issued SFAS No. 123R, “Share-BasedPayment,” which requires companies to recognize in their statement ofoperations the grant-date fair value of stock options and other equity-basedcompensation issued to employees.  SFASNo. 123R is effective for annual periods beginning after June 15,2005.  Accordingly, we will adopt SFASNo. 123R in the first quarter of fiscal 2007. We are in the process of evaluating how the adoption of SFAS 123R willaffect our results of operations, financial position and cash flows.

 

***SFAS No. 153***

InDecember 2004, the FASB issued SFAS No. 153, “Exchanges of Non-MonetaryAssets,” which amends a portion of the guidance in Accounting Principles BoardOpinion (APB) No. 29, “Accounting for Non-Monetary Transactions.” Both SFAS no.153 and APB No. 29 require that exchanges of non-monetary assets should bemeasured based on fair value of the assets exchanged.  APB No. 29, however, allowed for non-monetaryexchanges of similar productive assets. SFAS No. 153 eliminates that exception and replaces it with a generalexception for exchanges of non-monetary assets that do not have commercialsubstance. A non-monetary exchange has commercial substance if the future cashflows of the entity are expected to change significantly as a result of theexchange.

 

SFAS No. 153 is effective for non-monetary asset exchanges occurring infiscal periods beginning after June 15, 2005.  Any non-monetary asset exchanges will beaccounted for under SFAS No. 153, however we do not expect SFAS No. 153 to havea material impact on our financial position, results of operations or cashflows.

 

**Note 4.  Restatement**

 

In May and June 2004, we discovered that we had misinterpreted andmisapplied certain terms of some of our Program Supplier revenue sharingagreements.  These misinterpretations andmisapplications resulted in the miscalculation of Program Supplier liabilitiesand related cost of sales and, therefore, net income (loss). There were twogeneral types of misinterpretations or misapplications: (i) over  reporting cost of  sales  and overstating  assets  and understating liabilities due to the misapplication  of certain termsin our Program Supplier revenue sharing  agreements in the amountof $0.7 million in fiscal 2003; and (ii) under reporting cost of sales andrelated liabilities due to the misuse of contract information in recognizingour  guarantees to one Program Supplierin the amount of $0.9 million in fiscal 2003.

 

The misstatement that resulted in over reporting our cost of sales andrelated liabilities was due to a misapplication of terms in one of our ProgramSupplier revenue sharing agreements.  Ouraccounting methodology for recognizing revenues and associated expenses isbased on the establishment of certain contractual terms and algorithms when arevenue sharing agreement is executed with a Program Supplier.   These contractual terms are used incalculations 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 establishedappropriately in our accounting system in accordance with the terms of thecontract with this Program Supplier. Our accounting system had beeninaccurately programmed with an algorithm that calculated the cost of sales and

 

31

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corresponding liability. This calculation misapplied a contractual termto certain items relating to that Program Supplier’s product, which resulted inan overstatement of the liability to that Program Supplier. We have sincemodified our accounting system to establish the appropriate contractual termsfor this Program Supplier. In addition, we have reviewed all key algorithmswithin our accounting system to ensure they are aligned with Program Suppliercontractual terms.

 

The misstatement that resulted in under reporting of cost of sales andoverstating assets and understating liabilities was due to themisinterpretation of contractual information in a revenue sharing agreementwith one of our Program Suppliers. We believed we could offset prior guaranteeshortages with future guarantee overages, based upon the contractualprovisions.  In reviewing the contractualagreement with members of operating personnel, the Accounting Departmentrealized we had been misinterpreting those contractual provisions and that weare not permitted to offset prior guarantee shortages with futureguarantee  overages. We have sincemodified our accounting processes for this Program Supplier to include theappropriate guarantee liability calculation. Please note that our CriticalAccounting Policies and Estimates disclosure as it relates to Program SupplierReserves for contractual guarantees was accurately stated and was not affectedby this restatement or process change.

 

Also in June 2004, we discovered that we were not accounting forcertain 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 methodhad been to recognize revenue on the shipment date.  This resulted in a restatement of revenuebetween periods.

 

In addition, in connection with the embezzlement of funds by anemployee, as discussed in more detail in Note 15 below, we underreported oursales tax liability in fiscal 2003.  Werecord our sales tax liabilities as an offset to revenue.

 

The restatements did not affect cash flows from operations, investingactivities or financing activities in any fiscal year.  We have restated our fiscal year ended March 31,2003 as follows:

 
| **Year Ended March 31, 2003**                                     | ** ** |
|------------------------------------------------------------------------|------------|
| **(In thousands)**                                                     | ** ** | **Revenue** | ** ** | **Cost of  sales** | ** ** | **Total  operating  expenses** | ** ** | **Income  tax  expense  (benefit)** | ** ** | **Income  (loss) from  continuing  operations** | ** ** | **Net loss** | ** ** |
| As  previously reported                                                |       | $ | 86,220 |   | $ | 71,315 |   | $ | 86,231 |   | $ | 85 |   | $ | 84 |   | $ | (498 | ) |
| Adjustment  for misinterpretation and misapplication of contract terms |       | — |   | 239 |   | 239 |   | (91 | ) | (148 | ) | (148 | ) |
| SOP 00-2  revenue recognition adjustment                               |       | (274 | ) | (206 | ) | (206 | ) | (25 | ) | (43 | ) | (43 | ) |
| 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 sharefor fiscal 2003 increased to $(0.08) per share compared to the previouslyreported basic and diluted net loss per share of $(0.05).

 

**Note 5. 3PF**

 

InJune 2002, 3PF entered into an agreement to sublease approximately 194,000square feet of its distribution facility in Columbus, Ohio to its largestcustomer. 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, inconjunction with the facility sublease, 3PF entered into a financing lease withthis customer for the existing equipment within this distribution facility andthe associated costs for additional equipment to configure the layout to thecustomer’s specifications.  The lease forthe equipment resulted in a note receivable in the amount of $1.8 million,payable to 3PF in monthly installments. Most of the payments on this notereceivable have been received as scheduled. As of March 31, 2005, there was

 

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$0.7million outstanding on this note receivable, $0.5 million of which is includedwith other current assets on our consolidated balance sheet and $0.2 million ofwhich is included with other assets.

 

In the fourth quarter of fiscal 2003, management determined that it wasunlikely that 3PF would achieve its business plans and initiated a plan to sellthe assets of 3PF.  Prior to March 31,2003, it was determined that, more likely than not, substantially all of 3PF’sassets would be sold or otherwise disposed of. As a result of this determination, management assessed during thequarter ended March 31, 2003, the current and historical operating andcash flow losses, prospects for growth in revenues and other alternatives forimproving the operating results of 3PF.

 

Accordingly, management performed an assessment of the fair value ofthe 3PF assets under the guidelines of SFAS No. 144. This assessment resultedin 3PF recognizing an asset impairment charge during the three-month periodended March 31, 2003 in the amount of $0.8 million for the write down ofits assets to estimated fair market value of approximately $0.8 million.

 

In June 2003, we announced we had signed a definitive agreement tosell substantially all of the assets of 3PF at the Wilmington, Ohio operation,effective July 1, 2003.  Theoperations of 3PF have not been reported as discontinued operations inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” because cash flows related to our fulfillment activitieshave not been completely eliminated. The agreement covered all equipment andleasehold 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 andRentrak as guarantor have been released from the lease. The cash purchase priceof $0.8 million, approximately equal to the net book value of the assets soldat March 31, 2003, was received in full.

 

During the sale negotiations, we received notification from 3PF’slargest customer, serviced exclusively from the leased distribution facility inColumbus, Ohio, that it did not intend to renew its fulfillment servicecontract upon the scheduled expiration at July 31, 2003.  The Columbus, Ohio distribution facility wasused exclusively to service this customer. Due to the timing of this notification, we were not able to include theColumbus, Ohio distribution facility lease in the asset sale transaction.  We completed the termination of the leaseobligation 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 salesin our consolidated statement of operations. This lease termination includedthe assignment of the sublease 3PF had in place with its former largestcustomer for approximately 194,000 square feet of this facility.

 

**Note 6. Discontinued Operations**

** **

Dueto 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 initiatedand completed a plan to discontinue the retail store operations of BlowOutVideo. 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.

 

InJanuary 2004, we were notified by the purchaser of a portion of BlowOutVideo’s operations of their intent to default on a note receivable due tous.  As such, we provided an approximate$0.2 million reserve for the remaining balance of this note receivable in thethree-month period ended December 31, 2003.  This reserve resulted in a reported loss, netof tax benefit, from these discontinued operations of $0.1 million, or $0.01per share, in fiscal 2004.  Current andprior year amounts have been restated to classify the results of BlowOut Videooperations, net of related tax effects, as discontinued.

 

33

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Theresults of operations related to BlowOut Video were as follows:

 
| ** **                  | ** ** | **Year Ended March 31,** | ** ** |
|-----------------------------|------------|-------------------------------|------------|
| ** **                  | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| Revenue                     |       | $                             | —     |   | $ | 2,575,733 |   |
| Net loss                    |       | $                             | (128,649   | ) | $ | (582,627 | ) |
| Net loss per  diluted share |       | $                             | (0.01      | ) | $ | (0.06 | ) |

 

**Note 7. Property and Equipment**

 

Property andequipment consists of:

 
| ** **                                      | ** ** | **March 31,** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|
| ** **                                      | ** ** | **2005**           | ** ** | **2004** | ** ** |
| Furniture,  fixtures and computer equipment     |       | $                  | 3,643,562  |   | $ | 3,295,970 |   |
| Leasehold  improvements                         |       | 606,178            |       | 594,527 |   |
| Capitalized  software(1)                        |       | 3,283,344          |       | 1,910,499 |   |
|                                            |       | 7,533,084          |       | 5,800,996 |   |
| Less  accumulated depreciation and amortization |       | (4,317,059         | )          | (3,334,328 | ) |
|                                            |       | $                  | 3,216,025  |   | $ | 2,466,668 |   |

 

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(1)          Includes $1.7 million ofcapitalized costs associated with software projects which are still in theapplication development stage as of March 31, 2005 and, as such, are notbeing amortized.

 

As discussed in Note 2,in fiscal 2005, we recorded an impairment charge of $27,000 related to thewrite-off of capitalized software development costs for two projects whichmanagement has determined will not be completed and placed in service.

 

Amortization expenserelated to capitalized software was $0.5 million, $0.3 million and $0.2 millionfor the years ended March 31, 2005, 2004, and 2003, respectively.Accumulated amortization related to capitalized software was $0.9 million and$0.4 million, respectively, at March 31, 2005 and 2004.  Amortization expense related to capitalizedsoftware over the next five fiscal years as of March 31, 2005 is asfollows:

 
| 2006   |   | $       | 429,059 |   |
|--------|--------|---------|---------|--------|
| 2007   |   | 188,246 |    |
| 2008   |   | 4,084   |    |
| 2009   |   | —  |    |
| 2010   |   | —  |    |
|   |   | $       | 621,389 |   |

 

**Note 8. Securities Purchase Agreement**

 

In November 2004, we entered into a securities purchase agreementto purchase common stock of, and a professional services agreement to receivesoftware development and support services from, a privately held company thatdevelops and provides information technology solutions for clients in variousentertainment industry market segments. We have paid $25,000 under theprofessional services agreement and may incur an additional $25,000 expenditurein the future.

 

The purchase of the securities for $0.5 million was comprised of twoelements.  The first element, whichtotaled $0.4 million, was paid upon execution of the agreement in November 2004.  The remaining $0.1 million was placed in anescrow account pending completion by the investee of additional softwaredevelopment. The additional software development was completed in March 2005and the remaining $0.1 million was released from escrow at that time,finalizing our investment. Our purchase of the common stock represents 4% ofthe outstanding stock of this company. This investment is carried at historical cost as a component of otherassets on our consolidated balance sheet and will be evaluated quarterly forimpairment.  No impairment has beenrecorded as of March 31, 2005.

 

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**Note 9. Retailer Financing Program**

 

In 1992, we established aretailer financing program whereby, on a selective basis, we provided financingto Participating Retailers that we believed had potential for substantialgrowth in the industry. In connection with these financings, we typically madea loan and/or equity investment in the Participating Retailer. In some cases,we obtained a warrant to purchase stock in the Participating Retailer. As partof such financings, the Participating Retailer typically agreed to cause all ofits current and future retail locations to participate in the PPT System for adesignated period of time (usually 5-20 years). These financings werespeculative in nature and involved a high degree of risk.

 

The loans are reviewedfor impairment in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.”  A valuation allowance has been established forthe amount by which the recorded investment in the loans exceeds the measure ofthe impaired loan. Periodically throughout the terms of the agreements, weassessed the recoverability of the amounts based on the financial position ofeach retailer.

 

We discontinued thisprogram in fiscal 2001 and, during fiscal 2005, we wrote off the remainingbalances and related reserves. Since the loans were fully reserved, thiswrite-off had no effect on our results of operations during fiscal 2005. The$6.5 million balance at March 31, 2004 had been fully reserved and wasincluded in other assets. The activity in the reserve account for the retailerfinancing program is as follows:

 
| ** **         | ** ** | **Year Ended March 31,** | ** ** |
|--------------------|------------|-------------------------------|------------|
| ** **         | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Beginning  balance |       | $                             | 6,499,332  |   | $ | 6,530,754 |   | $ | 6,575,754 |   |
| Recoveries         |       | (18,578                       | )          | (31,422 | ) | (45,000 | ) |
| Write-offs         |       | (6,480,754                    | )          | — |   | — |   |
| Ending  balance    |       | $                             | —     |   | $ | 6,499,332 |   | $ | 6,530,754 |   |

 

**Note 10.  Lineof Credit**

 

We currently have a secured revolving line of credit for $6.0 million,with a maturity of December 1, 2005. Interest on the line of credit is at our choice of either the bank’sprime interest rate minus 0.5 percent or LIBOR plus 2 percent. The credit lineis secured by substantially all of our assets. The line of credit includescertain financial covenants requiring: (1) a consolidated pre-tax income to beachieved each fiscal quarter beginning with the quarter ending March 31,2005 of a minimum of $1.00, and consolidated after-tax income not less than$1.00 on an annual basis, determined at fiscal year end; (2) a minimum currentratio of 1.5:1.0, measured quarterly; and (3) a maximum debt-to-tangible networth ratio of 1.5:1.0, measured quarterly. Based upon the financial results reported as of, and for the fiscal yearended March 31, 2005, we determined that we were in compliance with thefinancial covenants as of March 31, 2005. At March 31, 2005, we had no outstanding borrowings under thisagreement.

 

**Note 11. Related Party Transaction**

 

In February 2005,pursuant to his separation agreement, we loaned Mr. F. Kim Cox, our formerPresident and Secretary, $0.8 million to assist him with exercising a portionof his vested options to purchase shares of our common stock.  The loan bore interest at 2.78% per annum andwas repaid in full, including accrued interest, in May 2005.

 

In addition, we enteredinto a consulting agreement with Mr. Cox on January 25, 2005 whereby he isassisting us with strategic planning and product development issues.  Pursuant to the agreement, we will pay Mr.Cox $25,000 per month from February 2005 through March 2007.  We paid Mr. Cox a total of $62,000 pursuantto this agreement in fiscal 2005.

 

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**Note 12.  IncomeTaxes**

 

Income (loss) fromcontinuing operations before income taxes consisted of the following:

 
| ** ** | ** ** | **Year Ended March 31,** | ** ** |
|------------|------------|-------------------------------|------------|
| ** ** | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| U.S.       |       | $                             | 8,458,616  |   | $ | 1,685,034 |   | $ | (497,059 | ) |
| Non-U.S.   |       | 221,172                       |       | 232,255 |   | 297,055 |   |
|       |       | $                             | 8,679,788  |   | $ | 1,917,289 |   | $ | (200,004 | ) |

 

The provision(benefit) for income taxes from continuing operations was as follows:

 
| ** **                        | ** ** | **Year Ended March 31,** | ** ** |
|-----------------------------------|------------|-------------------------------|------------|
| ** **                        | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current tax  provision (benefit): |       |                          |       |   |   |   |   |
| Federal                           |       | $                             | 58,933     |   | $ | — |   | $ | 45,001 |   |
| State                             |       | 210,439                       |       | 40,338 |   | — |   |
|                              |       | 269,372                       |       | 40,338 |   | 45,001 |   |
| Deferred tax  provision (benefit) |       | 3,167,967                     |       | 438,558 |   | (100,529 | ) |
|                              |       | $                             | 3,437,339  |   | $ | 478,896 |   | $ | (55,528 | ) |

 

The reportedprovision (benefit) for income taxes from continuing operations differs fromthe amount computed by applying the statutory federal income tax rateof 34% to income before provision (benefit) for income taxes as follows:

 
| ** **                                       | ** ** | **Year Ended March 31,** | ** ** |
|--------------------------------------------------|------------|-------------------------------|------------|
| ** **                                       | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Provision  (benefit) computed at statutory rates |       | $                             | 2,951,128  |   | $ | 651,878 |   | $ | (68,001 | ) |
| State taxes,  net of federal benefit             |       | 561,409                       |       | 76,692 |   | (8,000 | ) |
| Amortization  of warrants                        |       | —                        |       | — |   | 120,700 |   |
| Amortization  of intangibles                     |       | (121,522                      | )          | (121,522 | ) | (121,522 | ) |
| Change in  valuation allowance                   |       | 103,776                       |       | (78,968 | ) | — |   |
| Other                                            |       | (57,452                       | )          | (49,184 | ) | 21,295 |   |
|                                             |       | $                             | 3,437,339  |   | $ | 478,896 |   | $ | (55,528 | ) |

 

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Deferred taxassets are comprised of the following components:

 
| ** **                          | ** ** | **March 31,** | ** ** |
|-------------------------------------|------------|--------------------|------------|
| ** **                          | ** ** | **2005**           | ** ** | **2004** | ** ** |
| Current  deferred taxes:            |       |               |       |   |   |
| Allowance  for doubtful accounts    |       | $                  | —     |   | $ | 189,205 |   |
| Program  supplier reserves          |       | —             |       | 487,773 |   |
| Net  operating loss carryforwards   |       | 865,157            |       | 1,167,124 |   |
| Unrealized  loss on investments     |       | —             |       | 118,785 |   |
| Deferred  revenue                   |       | 95,325             |       | 90,279 |   |
| Deferred  gain                      |       | 30,122             |       | 22,917 |   |
| Alternative  minimum tax credits    |       | 58,933             |       | — |   |
| Other                               |       | (105,499           | )          | 186,103 |   |
| Total  current deferred taxes       |       | 944,038            |       | 2,262,186 |   |
|                                |       |               |       |   |   |
| Non-current  deferred taxes:        |       |               |       |   |   |
| Depreciation                        |       | 24,099             |       | 32,207 |   |
| Retailer  financing program reserve |       | —             |       | 659,748 |   |
| Deferred  gain                      |       | 13,759             |       | 40,991 |   |
| Net  operating loss carryforwards   |       | 402,597            |       | 298,821 |   |
| Other                               |       | 77,140             |       | 366,714 |   |
| Valuation  allowance                |       | (402,597           | )          | (298,821 | ) |
| Total  non-current deferred taxes   |       | 114,998            |       | 1,099,660 |   |
| Total  deferred taxes               |       | $                  | 1,059,036  |   | $ | 3,361,846 |   |

 

Total deferred tax assetswere $1.2 million and $3.4 million, respectively, at March 31, 2005 and2004 and total deferred tax liabilities were $0.1 million and $0,respectively.  The increase (decrease) toour valuation allowance was $0.1 million, $(0.1) million and $0, respectively,in fiscal 2005, 2004 and 2003.

 

As of March 31,2005, we had estimated net operating loss carryforwards for federal income taxreturn purposes of approximately $2.4 million, which expire through 2025.  In addition, we have net operating losscarryforwards in Canada totaling $1.2 million, the tax benefit of which hasbeen fully reserved, which expire through 2008.

 

In assessing therealizability of deferred tax assets, we consider whether it is more likelythan 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 thegeneration of future taxable income during the periods in which those temporarydifferences become deductible. We consider the scheduled reversal of deferredtax liabilities, projected future taxable income and tax planning strategies inmaking this assessment. Based on these assessments and considerations, we haveprovided a valuation allowance against our Canadian net operating losscarryforwards due to expected revenue and income levels from our Canadianoperations in the near term.  Weanticipate that all other deferred tax assets will be realized based on futureestimated taxable income and have, therefore, not recorded a valuation allowanceagainst them.

 

**Note 13. Stockholders’ Equity**

 

***Common Stock***

On December 21,2004, we sold 308,200 shares of our common stock to Mr. Mark Cuban in aprivately-negotiated, arms-length transaction for $9.00 per share.  Total proceeds totaled $2.8 million and willbe used for general working capital requirements, including development of ourbusiness intelligence services.  Inaddition to the 308,200 shares purchased from us, Mr. Cuban purchased anadditional 191,800 shares of our common stock at $9.00 per share from eight ofour executive officers.  All 500,000shares purchased by Mr. Cuban are restricted securities and subject to aone-year holding period pursuant to Rule 144 under the Securities Act of1933.  Mr. Cuban has demand registrationrights after the one-year holding period in the event that he is not able tosell them pursuant to Rule 144 at that time.

 

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***Stock Options***

We have optionsoutstanding under our 1986 Stock Option Plan, our 1997 Non-OfficerEmployee Stock Option Plan and our 1997 Equity Participation Plan. Theaggregate number of shares of our common stock issuable upon exercise ofoptions under the 1997 Non-Officer Employee Stock Option Plan may not exceed800,000.  The aggregate number of sharesof our common stock issuable upon exercise of options under the 1997 EquityParticipation Plan, as amended, may not exceed 2,075,000. As of March 31,2005, options covering 355,579 and 122,488 shares of our common stock remainedavailable for grant under our 1997 Non-Officer Employee Stock Option Plan andour 1997 Equity Participation Plan, respectively.

 

Our option plans areadministered by the Compensation Committee of our Board, which determines theterms and conditions of options issued under the plans. Generally, optionsgranted under the plans vest over periods of one to five years and expire tenyears after the date of grant.

 

The table belowsummarizes the plans’ activity:

 
| ** **                                          | ** ** | **Options Outstanding** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|
| ** **                                          | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| **Balance  at March 31, 2002**                 |       | 1,629,424               |       | $ | 3.97 |   |
| Granted –  option price = fair market value    |       | 519,350                 |       | 5.50 |   |
| Granted –  option price > fair market value |       | 100,000                 |       | 5.00 |   |
| Exercised                                           |       | (112,043                | )          | 4.18 |   |
| Canceled                                            |       | (153,312                | )          | 4.02 |   |
| **Balance  at March 31, 2003**                 |       | 1,983,419               |       | 4.35 |   |
| Granted –  option price = fair market value    |       | 178,100                 |       | 7.62 |   |
| Granted –  option price > fair market value |       | 80,000                  |       | 6.89 |   |
| Exercised                                           |       | (285,519                | )          | 4.07 |   |
| Canceled                                            |       | (40,218                 | )          | 4.31 |   |
| **Balance  at March 31, 2004**                 |       | 1,915,782               |       | 4.86 |   |
| Granted –  option price = fair market value    |       | 182,500                 |       | 10.15 |   |
| Exercised                                           |       | (522,557                | )          | 4.58 |   |
| Canceled                                            |       | (4,732                  | )          | 3.98 |   |
| **Balance  at March 31, 2005**                 |       | 1,570,993               |       | $ | 5.58 |   |

 

The followingtable summarizes information about stock options outstanding at March 31,2005:

 
| **Options Outstanding**        | ** ** | **Options Exercisable**              | ** ** |
|--------------------------------|------------|--------------------------------------|------------|
| **Range of  Exercise  Prices** | ** ** | **Number  Outstanding  at 03/31/05** | ** ** | **Weighted  Average  Remaining  Contractual  Life (years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Shares  Exercisable  at 03/31/05** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $0.00 – $3.25             |       | 258,616                              |       | 5.9 |   | $ | 3.05 |   | 252,991 |   | $ | 3.07 |   |
| $3.25 – $4.00             |       | 298,017                              |       | 6.1 |   | $ | 3.58 |   | 265,091 |   | $ | 3.54 |   |
| $4.01 – $5.25             |       | 319,370                              |       | 5.4 |   | $ | 4.99 |   | 281,870 |   | $ | 4.99 |   |
| $5.26 - $6.00                  |       | 284,365                              |       | 2.9 |   | $ | 5.78 |   | 151,865 |   | $ | 5.77 |   |
| $6.01 - $7.50                  |       | 102,500                              |       | 8.1 |   | $ | 6.88 |   | 80,000 |   | $ | 6.88 |   |
| $7.51 - $9.00                  |       | 85,625                               |       | 8.9 |   | $ | 8.45 |   | 8,000 |   | $ | 7.97 |   |
| $9.01 – $11.00            |       | 222,500                              |       | 7.5 |   | $ | 10.11 |   | 80,000 |   | $ | 9.46 |   |
| $0.00 – $11.00            |       | 1,570,993                            |       | 5.8 |   | $ | 5.58 |   | 1,119,817 |   | $ | 4.79 |   |

 

Options to purchase1,270,201 and 1,186,440 shares of common stock were exercisable at March 31,2004 and 2003, respectively, at weighted average exercise prices of $4.33 and$4.06, respectively.

 

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***EmployeeStock Purchase Plan***

During fiscal 2004 we terminatedour Employee Stock Purchase Plan (the Plan), which allowed for the purchase ofup to 200,000 shares of our common stock.  Prior to its termination, all employees meeting certain eligibilitycriteria were granted the opportunity to purchase common stock, under certainlimitations, at 85% of market value. Payment was made through payrolldeductions. All shares purchased by employees under the Plan in fiscal 2004 and2003 were purchased by us on the open market. The following shares were purchasedby employees under the Plan:

 
| ** **  | ** ** | **Number of  Shares  Purchased** | ** ** | **Aggregate  Purchase  Price** | ** ** |
|-------------|------------|----------------------------------|------------|--------------------------------|------------|
| Fiscal 2003 |       | 1,213                            |       | $                              | 5,740      |   |
| Fiscal 2004 |       | 467                              |       | 3,631                          |       |
|             |            |                                  |            |                                |            |  |

 

***Warrants***

We issued three separate warrants in 1995, 1998 and 2002, which werevalued by an outside valuation firm using standard warrant valuation models.

 

Warrants to purchase 1,423,750 shares of our common stock were issuedin fiscal 1995 in connection with a supply agreement with a programvendor.  The warrants had an initialexercise price of $7.13 with 284,750 warrants vesting immediately and 284,750vesting over the following 4 years, subject to the supplier providing a minimumof one theatrical title each year of the vesting period.  The warrants, which had expiration datesthrough 2005, were valued at $2.3 million and were expensed over the initial 5years of the agreement.  In November 1996,we adjusted the number of shares of common stock under which the warrant couldbe exercised to 1,543,203 shares and decreased the price to $6.578 pershare.  This adjustment was done inconnection with the distribution of common stock of BlowOut Entertainment,Inc.  The adjustment was done pursuant tothe supplier’s agreement that required us to adjust the warrant if adistribution of our assets occurred. During fiscal 2002, 308,641 warrants expired, leaving a balance of1,234,562.  During the quarter ended September 30,2002, 309,041 warrants expired leaving a balance of 925,521.  In November 2002, we entered into acancellation agreement to cancel the remaining 925,521 outstanding warrants.

 

Under the cancellation agreement, we paid the Program Supplier $0.3million in cash in consideration for the cancellation of the warrants. The $0.3million cash payment was charged to paid-in-capital as a settlement of anequity interest. In addition, we agreed to pay the Program Suppliersupplemental consideration in the event of a change of control (generally agreater than 50% change in ownership of our outstanding common stock by anothercompany or group seeking control) within three years following execution of theagreement.  The amount of considerationto be paid in the event of a change of control is based on the value per commonshare paid by the purchaser.  The amountof consideration payable also decreases over time. The potential supplementalconsideration currently ranges from $0.3 million to $0.5 million depending onthe price and timing of the purchase.  Wehave not accrued any amount as of March 31, 2005 due to the contingentnature of this supplemental consideration.

 

The value of the warrants issued in July 1998 was recorded as adeferred charge in equity of $0.6 million. These warrants related to a 10-yearsupply agreement entered into with a major customer.  The value of the warrants was to be amortizedto expense as services were provided. However, we expensed the remaining unamortized value of these warrants,totaling approximately $0.4 million, during fiscal 2003, based on theexpectation that the customer would not be utilizing our services in futureperiods. The warrants expired without being exercised in 2000.

 

As of March 31,2005, we had outstanding warrants to purchase 30,000 shares of our common stockwith a purchase price of $7.50 per share and an expiration date of May 16,2009, which were issued to an investment banking firm in May 2002 as partialconsideration for financial advisory services in connection with strategicopportunities or financing transactions of potential interest to us.

 

39

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***Shareholders’Rights Plan***

In May 1995, ourBoard of Directors approved a shareholders’ rights plan designed to ensure thatall of our shareholders receive fair and equal treatment in the event ofcertain proposals to acquire control of us. Under the rights plan, each shareholderreceived a dividend of one right for each share of our outstanding commonstock, entitling the holders to purchase common stock having a market valueequal to twice the exercise price. The rights become exercisable after anyperson or group acquires 15% or more of our outstanding common stock, orannounces a tender offer which would result in the offeror becoming thebeneficial owner of 15% or more of our outstanding common stock. Prior tothe time that a person or group acquires beneficial ownership of 15% ormore of our outstanding common stock, the Board of Directors, at theirdiscretion, may waive this provision with respect to any transaction or mayterminate the rights plan.  This planexpired in May 2005.  See also Note 18.

 

***Executive Loan Program***

In June 2000, ourBoard of Directors approved an offer to make loans available to those officerswho were under an employment contract for the purpose of allowing them toexercise their vested, unexercised “out of the money” employee stock options.The purpose of this program was to enable executives to exercise certain oftheir options and thereby hold shares resulting from the exercise of suchoptions in advance of a possible spin-off or split-up of 3PF, and toenhance our efforts to retain our key employees.

 

The loans under thisprogram accrued interest at the federal funds rate in effect on the date of theloan and interest was payable annually. The principal amount of each loan wasdue on the earliest to occur of: (i) one year prior to the expiration ofthe term of the borrower’s employment agreement in effect at the time of theloan; (ii) one year after the borrower ceases employment, unless suchdeparture 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 thedate of the borrower’s death. The loans were secured by the stock purchasedupon the exercise of the options. The loans were without recourse (except as tothe stock securing the loans) as to principal and were with full recourseagainst the borrower as to interest. The offer to make these loans expired September 30,2000. Prior to September 30, 2000, several officers accepted this offerand obtained loans from us. Because the loan proceeds were immediately used topay the exercise price of the options, we had no net outflow of cash inconnection with these loans.

 

During fiscal 2003, anofficer exercised his right to have us purchase his shares of stock associatedwith his loan, totaling $0.4 million. The proceeds from the purchase of his stock were partially used to paythe remaining balance of his loan associated with these shares.  Also during fiscal 2003, the other remainingofficer with a loan outstanding under this program allowed his right to have uspurchase his shares of stock associated with his loan to expire.  The shares associated with both of theseofficers’ loans have been cancelled and the related notes have beenterminated.  As a result, all commonstock and related notes receivable covered by all agreements associated withthis officer loan program noted above have been cancelled or terminated.

 

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**Note 14. Commitments**

 

***Leases***

***Welease certain facilities and equipment under capital and operating leasesexpiring at various dates through 2006. Minimum lease payments over the term ofthe leases exceeding one year are as follows:***

 
| **Year Ending March 31,**       | ** ** | **Capital  Leases** | ** ** | **Operating  Leases** | ** ** |
|--------------------------------------|------------|---------------------|------------|-----------------------|------------|
| 2006                                 |       | $                   | 61,296     |                  | $          | 794,592 |   |
| 2007                                 |       | —              |       | 500,973               |       |
| 2008                                 |       | —              |       | —                |       |
| 2009                                 |       | —              |       | —                |       |
| 2010                                 |       | —              |       | —                |       |
| Thereafter                           |       | —              |       | —                |       |
| Total  minimum lease payments        |       | 61,296              |       | $                     | 1,295,565  |   |
| Less amount  representing interest   |       | (1,945              | )          |                  |       |
| Net  obligation under capital leases |       | 59,351              |       |                  |       |
| Less current  portion                |       | 59,351              |       |                  |       |
| Non-current  portion                 |       | $                   | —     |                  |       |   |

 

The leases require us topay for taxes, insurance and maintenance. We also rent vehicles and equipment on a short-term basis. Rent expenseunder operating leases was approximately $1.0 million, $1.9 million, and $3.2million for the fiscal years ended March 31, 2005, 2004, and 2003,respectively.

 

**Note 15. Contingencies**

 

***Vendor Dispute***

In June 2003,we signed a definitive agreement to sell substantially all of the assets of3PF.Com, Inc. at the Wilmington, Ohio operation, effective July 1, 2003.  In conjunction with the effective date ofthat asset sale agreement, we entered into a Fulfillment Agreement (the “Agreement”)with this purchaser (the “Fulfillment Provider”) for a nine-month term toprovide us with fulfillment services previously provided by 3PF during theperiod we owned and operated it.  Afterits inception, disagreement between the parties arose regarding the contractualprovisions of the Agreement.  As aresult, we disputed certain charges for services and withheld payments accordingly.Additionally, the Fulfillment Provider alleged that we violated the exclusivityprovisions in the Agreement and submitted, under the provisions of theAgreement, a demand for arbitration against us seeking damages of approximately$0.9 million. The dispute has been arbitrated and the Fulfillment Provider wasawarded, in full settlement of all its claims, the sum of $0.1 million fordamages from those claims plus interest thereon, effective March 25,2005.  Accordingly, both parties haveentered into an agreement for the full settlement of all the claims and thecomplete mutual release from any further obligations to each other with respectto any claim made or that could have been made in the arbitration of thisdispute.

 

***Investigation and Recovery EffortsRegarding Misappropriated Funds***

In March 2004, we learned that an employee may have engaged infraudulent activity and we hired an outside firm to investigate the matter. Theemployee admitted to embezzling funds from us. It was determined that theemployee had been embezzling funds from 1998 through 2003, in amounts totalingapproximately $570,000. The investigation of this matter is complete. Otherthan $62,000 in underreported sales taxes, the embezzlement funds werematerially expensed in the year such funds were embezzled and, therefore, hadno other effect on the restatement of any financial results in fiscal 2004 orprior years.  We have secured certainassets belonging to this employee, which, in conjunction with insuranceproceeds, provided us with recoveries of approximately $0.4 million in fiscal2005, and were recorded as a reduction of selling and administrativeexpense.  We have incurred a total ofapproximately $0.2 million of legal and other professional fees related to thismatter through March 31, 2005, and do not expect to incur any additionalfees before the matter is resolved.

 

41

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***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 breachof a servicing, warehousing and distribution agreement, and against Hollywoodin connection with its guarantee of the obligations of Reel.com, Inc., underthe agreement.  On March 13, 2002,an arbitrator awarded damages to us of approximately $1.6 million related tothis claim. In April 2002, in a confidential settlement agreement,Hollywood agreed to pay an additional $0.4 million to us to resolve alloutstanding issues between the two parties. These amounts were reflected as netgain from litigation settlements in our consolidated statements of operations.

 

***General***

We may, from time totime, be a party to legal proceedings and claims that arise in the ordinarycourse of our business. In the opinion of management, the amount of anyultimate liability with respect to these actions is not expected to materiallyaffect our financial condition or results of operations.  We currently have no material outstandinglitigation.

 

**Note 16.  401(k)Plan**

 

We have an employeebenefit 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 ourcontribution is at the discretion of our Board of Directors. Contributionsunder the 401(k) Plan for the years ended March 31, 2004 and 2003were approximately $74,000 and $90,000, respectively.  Our plan year ends on December 31. As ofMarch 31, 2005, we have accrued $74,000 for anticipated contributionsrelated to the plan year ended December 31, 2004 and $19,000 relating tothe plan year ending December 31, 2005.

 

**Note 17. Business Segments, Significant Suppliers,Product Lines and Major Customer**

 

Prior to fiscal 2005, we classified our services in three segments: PPT(Entertainment), 3PF (Fulfillment) and Other. Other services included amountsreceived pursuant to previous royalty agreements, primarily from Rentrak Japan.  During fiscal 2005, we operated in onebusiness segment, Entertainment (previously referred to as our PPTsegment).  Effective April 1, 2005,we implemented a new corporate structure, which includes separatePay-Per-Transaction (“PPT”) and Information Services operating divisions andwill begin reporting under this new structure in future periods.

 

Certain financial data bysegment is as follows:

 
| ** **                     | ** ** | **Entertainment** | ** ** | **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**                       |       |              |       |            |       |       |       |       |       |
| 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 |       |

 

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Revenue by serviceactivity was as follows:

 
| ** **             | ** ** | **Year Ended March 31,** | ** ** |
|------------------------|------------|-------------------------------|------------|
| ** **             | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Order  processing fees |       | $                             | 5,015,054  |   | $ | 7,741,213 |   | $ | 14,745,470 |   |
| Transaction  fees      |       | 64,372,214                    |       | 46,398,031 |   | 42,257,672 |   |
| Sell-through  fees     |       | 16,286,211                    |       | 10,308,689 |   | 8,558,014 |   |
| Communication  fees    |       | 976,668                       |       | 1,126,862 |   | 1,185,188 |   |
| Fulfillment            |       | —                        |       | 4,624,299 |   | 15,265,840 |   |
| Other                  |       | 11,887,428                    |       | 7,933,319 |   | 3,872,078 |   |
|                   |       | $                             | 98,537,575 |   | $ | 78,132,413 |   | $ | 85,884,262 |   |

 

During fiscal 2005, 2004and 2003, we had several Program Suppliers that supplied product in excess of10% of our total revenues as follows:

 
| ** **          | ** ** | **Year Ended March 31,** | ** ** |
|---------------------|------------|-------------------------------|------------|
| ** **          | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Program  Supplier 1 |       | 37                            | %          | 22 | % | 16 | % |
| Program  Supplier 2 |       | 16                            | %          | 15 | % | 15 | % |
| Program  Supplier 3 |       | n/a                           |       | 13 | % | 15 | % |
| Program  Supplier 4 |       | n/a                           |       | 12 | % | 11 | % |

 

There were no otherProgram Suppliers who provided product that accounted for 10% or more of ourtotal revenues for the years ended March 31, 2005, 2004 and 2003.  Although management does not believe that therelationships with the significant program suppliers will be terminated in thenear term, a loss of any one of these suppliers could have an adverse effect onour financial condition and results of operations.

 

We had one PPT customerthat accounted for 20% and 17% of our total revenue in fiscal 2005 and fiscal2004, respectively. The agreement with this PPT customer expired in September 2004.  One fulfillment customer accounted for 14% ofour total revenue in fiscal 2003. The agreement with this fulfillment customerexpired July 31, 2003. There were no other customers that accounted for10% or more of our total revenue in fiscal 2005, 2004 and 2003.

 

**Note 18. Subsequent Events**

 

***RelatedParty Note Receivable***

**In May2005, Mr. Cox repaid the full principal and accrued interest, totaling $0.8million, due on his note payable to us. See also Note 11.**

** **

***ShareholderRights Plan***

In May 2005, we enteredinto a new rights plan to replace our previously existing rights plan, whichexpired on May 18, 2005.  The terms of thenew rights plan are similar to those of the previous rights plan.  The new rights plan expires May 18,2015.  See also Note 13.

 

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**QUARTERLY FINANCIAL DATA**

 

Unaudited quarterly financial data**for each of theeight quarters in the two-year period ended March 31, 2005 is as follows:

 
| ** **                        | ** ** | **1st Quarter** | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** |
|-----------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| **2005**                          | ** ** | ** **      | ** ** | ** **      | ** ** | ** **      | ** ** | ** **      | ** ** |
| Revenue                           |       | $               | 25,333,002 |            | $          | 26,997,784      |       | $               | 22,821,083 |   | $ | 23,385,706 |   |
| Income  (loss) from operations(1) |       | 2,124,762       |       | 2,799,321       |       | 2,188,001       |       | 1,245,551       |       |
| Net  income(1)                    |       | 1,385,239       |       | 1,810,363       |       | 1,287,085       |       | 759,762         |       |
| Basic net  income per share       |       | 0.14            |       | 0.18            |       | 0.13            |       | 0.07            |       |
| Diluted net  income per share     |       | 0.13            |       | 0.17            |       | 0.12            |       | 0.07            |       |
|                              |       |            |       |            |       |            |       |            |       |
| **2004**                          |       |            |       |            |       |            |       |            |       |
| Revenue                           |       | $               | 18,914,372 |            | $          | 14,603,732      |       | $               | 20,383,860 |   | $ | 24,230,449 |   |
| Income  (loss) from operations(2) |       | 124,735         |       | (2,002,383      | )          | 904,300         |       | 2,657,969       |       |
| Net income  (loss)  (2):     |       |            |       |            |       |            |       |            |       |
| Continuing  operations            |       | 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 share:       |       |            |       |            |       |            |       |            |       |
| Basic:                            |       |            |       |            |       |            |       |            |       |
| Continuing  operations            |       | $               | 0.01       |            | $          | (0.15           | )          | $               | 0.07       |   | $ | 0.21 |   |
| Discontinued  operations          |       | —          |       | —          |       | (0.01           | )          | —          |       |
| Net income  (loss)                |       | $               | 0.01       |            | $          | (0.15           | )          | $               | 0.06       |   | $ | 0.21 |   |
|                              |       |            |       |            |       |            |       |            |       |
| Diluted:                          |       |            |       |            |       |            |       |            |       |
| Continuing  operations            |       | $               | 0.01       |            | $          | (0.15           | )          | $               | 0.07       |   | $ | 0.20 |   |
| Discontinued  operations          |       | —          |       | —          |       | (0.01           | )          | —          |       |
| Net income  (loss)                |       | $               | 0.01       |            | $          | (0.15           | )          | $               | 0.06       |   | $ | 0.20 |   |

 

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(1)               Income from operations and net income in the fourthquarter of fiscal 2005 are lower than the first three quarters of 2005 dueprimarily to costs related to Sarbanes-Oxley compliance and our reorganizationefforts. In addition, the fourth quarter of 2005 includes a $0.2 million lossrelated to a litigation settlement.

(2)               Loss from operations and net loss in the secondquarter of fiscal 2004 include a $1.3 million charge for the estimated cost forearly termination of a lease related to our 3PF business.  Income from operations and net income in thethird quarter of fiscal 2004 include a $650,000 credit related to the reversalof a portion of the $1.3 million charge as the final early termination chargewas $650,000.

 

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**Rentrak Corporation**

**Valuation and****Qualifying Accounts**

**Schedule II**

 
| ** **                                                          | ** ** | **Balance at  Beginning  of Period** | ** ** | **Additions  (Reductions)  to Reserve** | ** ** | **Write-Offs  Charged  Against  Reserves** | ** ** | **Recoveries** | ** ** | **Balance  at End of  Period** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------|------------|----------------|------------|--------------------------------|------------|
| **Allowance  for doubtful accounts**                                |       |                                 |       |                                    |       |                                       |       |           |       |                           |       |
| 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                        |       |
| Fiscal 2005                                                         |       | 839,122                              |       | 28,328                                  |       | (603,742                                   | )          | 390,331        |       | 654,039                        |       |
|                                                                |       |                                 |       |                                    |       |                                       |       |           |       |                           |       |
| **Program  Suppliers reserve**                                      |       |                                 |       |                                    |       |                                       |       |           |       |                           |       |
| 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                      |       |
| Fiscal 2005                                                         |       | 4,520,759                            |       | 592,722                                 |       | (1,828,234                                 | )          | (39,370        | )          | 3,245,877                      |       |
|                                                                |       |                                 |       |                                    |       |                                       |       |           |       |                           |       |
| **Other  current assets – retailer financing program reserve** |       |                                 |       |                                    |       |                                       |       |           |       |                           |       |
| Fiscal 2003                                                         |       | $                                    | 838,435    |                                    | $          | —                                     |       | $              | —     |                           | $          | — |   | $ | 838,435 |   |
| Fiscal 2004                                                         |       | 838,435                              |       | —                                  |       | —                                     |       | —         |       | 838,435                        |       |
| Fiscal 2005                                                         |       | 838,435                              |       | —                                  |       | (838,435                                   | )          | —         |       | —                         |       |
|                                                                |       |                                 |       |                                    |       |                                       |       |           |       |                           |       |
| **Other  assets – retailer financing program reserve**         |       |                                 |       |                                    |       |                                       |       |           |       |                           |       |
| Fiscal 2003                                                         |       | $                                    | 5,737,319  |                                    | $          | —                                     |       | $              | (45,000    | )                              | $          | — |   | $ | 5,692,319 |   |
| Fiscal 2004                                                         |       | 5,692,319                            |       | —                                  |       | (31,422                                    | )          | —         |       | 5,660,897                      |       |
| Fiscal 2005                                                         |       | 5,660,897                            |       | —                                  |       | (5,642,319                                 | )          | (18,578        | )          | —                         |       |

 

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**ITEM 9.****       CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND   FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A.  CONTROLS AND PROCEDURES**

 

**DisclosureControls and Procedures**

 

Our management has evaluated, under the supervision and with theparticipation of our Chief Executive Officer and Chief Financial Officer, theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this report pursuant to Rule 13a-15(b) under the SecuritiesExchange Act of 1934, as amended (Exchange Act). Based on that evaluation ourChief Executive Officer and our Chief Financial Officer have concluded that, asof the end of the period covered by this report, our disclosure controls andprocedures were effective in ensuring that information required to be disclosedin our Exchange Act reports is (1) recorded, processed, summarized and reportedin a timely manner, and (2) accumulated and communicated to our management,including our Chief Executive Officer and our Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure.

 

**Management’sReport on Internal Control Over Financial Reporting**

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting.  Our internal control system is designed to providereasonable assurance to our management and the board of directors regarding thepreparation and fair presentation of published financial statements. Nonetheless, all internal control systems, no matter how well designed, haveinherent limitations.  Even systems determined to be effective as of aparticular date can provide only reasonable assurance with respect to financialstatement preparation and presentation.

 

Our managementassessed the effectiveness of our internal control over financial reporting asof March 31, 2005.  In making this assessment, management used thecriteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission(“COSO”) in *Internal Control—IntegratedFramework*.  Based on our assessment, we believe that, as of March 31,2005, our internal control over financial reporting was ineffective based onthose criteria, solely in consideration of an error discovered during the auditof our financial statements for the fiscal year ended March 31, 2005.

 

During the audit ofour financial statements for our fiscal year ended March 31, 2005, ourindependent registered public accounting firm, Grant Thornton LLP, discovered adata error in a program supplier spreadsheet that resulted in an overstatementof our cost of sales for this fiscal period. We determined that this data errorconstitutes a material weakness in the operation of the control that was designedto detect such type of error, as discussed in more detail below.

 

This error resultedfrom a single failure in one of the manual detective controls that are appliedto the financial data for program supplier contracts input into thespreadsheets that calculate cost of sales. A material weakness in internal control over financial reporting is acontrol deficiency (within the meaning of the Public Company AccountingOversight Board Auditing Standards No. 2), or a combination of controldeficiencies, that result in there being more than a remote likelihood that amaterial misstatement in the annual or interim financial statements will not beprevented or detected.  Upon detection ofthis error, our management reviewed and re-assessed the design of this controland the nature of the control’s operational failure.  In our re-assessment of this control, were-performed the control and retested a large population of financial datamonitored by this control.  We discoveredno further errors in this data, indicating the lack of a strong likelihood of arecurrence of errors to our program supplier accounts from the performance ofthis detective control. Our management has determined however, that while itbelieves the design of this control is effective, the control’s operationaleffectiveness will be enhanced by implementing an additional independentperformance of this control by our Chief Financial Officer and Controller inevery instance this control is designed to be performed by the responsibleemployee.  We will implement this controlas modified with

 

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the next performanceof the control, determined by the timing of a new or modified program suppliercontract. Based upon our review and re-assessment of this control’s design andoperation, combined with our implementation of the enhanced performance of thiscontrol, we believe this control should provide reasonable assurance that ourdata monitored by this control will be properly processed, recorded, andreported in a timely manner in our future financial reports.

 

Our independentregistered public accounting firm, Grant Thornton LLP, has audited ourmanagement’s assessment of the effectiveness of our internal control overfinancial reporting as of March 31, 2005, as stated in their reportappearing below.

 

**Changes InInternal Control Over Financial Reporting**

 

Otherthan as discussed in the preceding paragraphs, there have been no changes inour internal control over financial reporting that occurred during our lastfiscal quarter that has materially affected or is reasonably likely tomaterially affect our internal control over financial reporting.

 

**Report ofIndependent Registered Public Accounting Firm**

 

We have audited management’s assessment,included in the accompanying Management’s Report on Internal Controls OverFinancial Reporting, that Rentrak Corporation did not maintain effectiveinternal control over financial reporting as of March 31, 2005, because ofthe effect of the material weakness identified in management’s assessment,based on criteria established in *Internal Control —Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Rentrak Corporation’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

A company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with accounting principles generallyaccepted in the United States of America. A company’s internal control overfinancial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with accounting principles generally accepted in the United Statesof America, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

A material weakness is a control deficiency,or combination of control deficiencies, that results in a more than remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The following material weaknesshas been identified and included in management’s assessment:

 

47

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During the audit ofthe financial statements for the fiscal year ended March 31, 2005, a dataerror was discovered in a spreadsheet used to determine amounts payable toprogram suppliers that resulted in a material adjustment to the Company’s netincome for the fiscal period.  This errorresulted from a failure in a manual detective control that is applied to thefinancial data for program supplier contracts input into the spreadsheets thatcalculate cost of sales.

 

This material weakness was considered indetermining the nature, timing, and extent of audit tests applied in our auditof the fiscal 2005 consolidated financial statements, and this report does notaffect our report dated May 20, 2005, on those consolidated financialstatements.

 

In our opinion, management’s assessment that Rentrak Corporation didnot maintain effective internal control over financial reporting as of March 31,2005, is fairly stated, in all material respects, based on criteria establishedin *Internal Control — Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission. Alsoin our opinion, because of the effect of the material weakness described aboveon the achievement of the objectives of the control criteria, RentrakCorporation has not maintained effective internal control over financialreporting as of March 31, 2005, based on criteria established in *Internal Control — Integrated Framework*issued by theCommittee of Sponsoring Organizations of the Treadway Commission.  We do not express an opinion or any form ofassurance on management’s statements in the fourth paragraph of “Management’sReport on Internal Controls Over Financial Reporting.”

 

We have also audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated balance sheet of Rentrak Corporation as of March 31, 2005,and the related consolidated statements of operations, stockholders’ equity,and cash flows for the year then ended and our report dated May 20, 2005expressed an unqualified opinion on those financial statements.

 
| /s/ Grant Thornton LLP |   |
|------------------------|--------|
| Portland, Oregon       |
| May 20, 2005           |

 

**ITEM 9B.  OTHER INFORMATION**

 

None.

 

48

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**PART III**

 

**ITEM 10.  DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT**

 

Pursuant to General Instruction G(3) to Form10-K, the information called for by this item is incorporated by reference fromour definitive Proxy Statement for our 2005 Annual Meeting of Shareholders tobe filed with the Securities and Exchange Commission pursuant to Regulation 14Aunder the Securities Exchange Act of 1934, as amended.  See “Election of Directors,” “Committees andMeetings of the Board – Audit Committee,” “Code of Ethics,” “Executive Officers” and “Section 16(a)Beneficial Ownership Reporting Compliance.”

 

**ITEM 11.  EXECUTIVE COMPENSATION**

 

Pursuant to General Instruction G(3) to Form10-K, the information called for by this item is incorporated by reference fromour definitive Proxy Statement for our 2005 Annual Meeting of Shareholders tobe filed with the Securities and Exchange Commission pursuant to Regulation 14Aunder the Securities Exchange Act of 1934, as amended.  See “Executive Compensation.”

 

**ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

Thefollowing table sets forth information, as of March 31, 2005, about sharesof our common stock that may be issued upon the exercise of options grantedunder our equity compensation plans and arrangements.

 

**Equity Compensation PlanInformation**

 
| **Plan Category(1)**                                       | ** ** | **Number of  securities to be  issued upon  exercise of  outstanding  options, warrants  and rights** | ** ** | **Weighted average  exercise price of  outstanding  options, warrants  and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  first column)** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | ** **                                                                                            | ** ** | ** **                                                                          | ** ** | ** **                                                                                                                                              | ** ** |
| Equity  compensation plans approved by shareholders(2)     |       | 1,456,435                                                                                             |       | $                                                                                   | 5.68       |                                                                                                                                                    | 122,488    |   |
|                                                       |       |                                                                                                  |       |                                                                                |       |                                                                                                                                                    |       |
| Equity  compensation plans not approved by shareholders(3) |       | 144,558                                                                                               |       | 5.07                                                                                |       | 355,579                                                                                                                                                 |       |
| Total                                                      |       | 1,600,993                                                                                             |       | $                                                                                   | 5.62       |                                                                                                                                                    | 478,067    |   |

 

----

(1)                                  SeeNote 13 of Notes to Consolidated Financial Statements for a description of thesignificant terms of the outstanding options.

(2)                                  Equitycompensation plans approved by shareholders include the 1986 Second Amended andRestated Stock Option Plan, as amended, and the 1997 Equity Participation Plan,as amended.

(3)                                  Equitycompensation plans or arrangements approved by our board of directors, but notsubmitted for shareholder approval include (i) the 1997 Non-Officer EmployeeStock Option Plan and (ii) warrants to purchase 30,000 shares of common stockwith a purchase price of $7.50 per share and an expiration date of May 16,2009, issued to an investment banking firm as partial consideration forfinancial advisory services in connection with strategic opportunities orfinancing transactions of potential interest to us.

 

49

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Pursuant to General Instruction G(3) to Form10-K, additional information called for by this item is incorporated byreference from our definitive Proxy Statement for our 2005 Annual Meeting ofShareholders to be filed with the Securities and Exchange Commission pursuantto Regulation 14A under the Securities Exchange Act of 1934, as amended.  See “Security Ownership of Certain BeneficialOwners and Management.”

 

**ITEM 13.  CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS**

 

Pursuant to General Instruction G(3) to Form10-K, the information called for by this item is incorporated by reference fromour definitive Proxy Statement for our 2005 Annual Meeting of Shareholders tobe filed with the Securities and Exchange Commission pursuant to Regulation 14Aunder the Securities Exchange Act of 1934, as amended.  See “Certain Relationships and RelatedTransactions.”

 

**ITEM 14.  PRINCIPAL ACCOUNTANTFEES AND SERVICES**

 

Pursuant to General Instruction G(3) to Form10-K, the information called for by this item is incorporated by reference fromour definitive Proxy Statement for our 2005 Annual Meeting of Shareholders tobe filed with the Securities and Exchange Commission pursuant to Regulation 14Aunder the Securities Exchange Act of 1934, as amended.  See “Matters Relating to Our IndependentRegistered Public Accounting Firm.”

 

**PART IV**

 

**ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 

**Financial Statements and Schedules**

 

The ConsolidatedFinancial Statements, together with the reports thereon of our independentregistered public accounting firms, are included on the pages indicated below:

 
| Report of Grant Thornton LLP, Independent  Registered Public Accounting Firm                                 |                               |
|--------------------------------------------------------------------------------------------------------------|------------------------------------|
|                                                                                                         |                               |
| Report  of KPMG LLP, Independent Registered Public Accounting Firm                                           |                               |
|                                                                                                         |                               |
| Consolidated Balance Sheets as of  March 31, 2005 and 2004                                              |                               |
|                                                                                                         |                               |
| Consolidated Statements of  Operations for the years ended March 31, 2005, 2004 and 2003                |                               |
|                                                                                                         |                               |
| Consolidated Statements of  Stockholders’ Equity for the years ended March 31, 2005, 2004 and 2003 |                               |
|                                                                                                         |                               |
| Consolidated Statements of Cash Flows for  the years ended March 31, 2005, 2004 and 2003                |                               |
|                                                                                                         |                               |
| Notes to Consolidated Financial Statements                                                                   |                               |
|                                                                                                         |                               |
| The following schedule is filed  herewith:                                                              |                               |
|                                                                                                         |                               |
| Schedule II                                                                                             | Valuation  and Qualifying Accounts |   |
|                                                                                                              |                                    |  |

 

Schedules not included have been omittedbecause they are not applicable or the required information is shown in thefinancial statements or notes thereto.

 

**Exhibits**

 

The exhibits required to be filed pursuant toItem 601 of Regulation S-K are listed in the Exhibit Index, which immediatelyfollows the signature page of this report.

 

50

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**SIGNATURES**

 

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| Date:  | June 13, 2005            | RENTRAK CORPORATION   |   |
|--------|-------------------------------|-----------------------|--------|
|   |                          |                  |
|   | By:                           | /S/ Paul A. Rosenbaum |   |
|   | Paul A. Rosenbaum             |                  |
|   | Chairman of the Board and     |                  |
|   | Chief Executive Officer       |                  |
|   | (Principal Executive Officer) |                  |
|        |                               |                       |        |  |  |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities indicatedon June 13, 2005.

 

Principal Financial and Accounting Officer:

 
| By:                         | /S/ Mark L. Thoenes            |   |   |
|-----------------------------|--------------------------------|--------|--------|
| Mark L. Thoenes             |                           |
| Senior Vice President       |                           |
| and Chief Financial Officer |                           |
|                        |                           |
| Majority of Directors:      |                           |
|                        |                           |
| By:                         | /S/ Judith G. Allen            |   |   |
|                        | Judith G. Allen, Director      |   |
|                        |                           |
| By:                         | /S/ Cecil D. Andrus            |   |   |
|                        | Cecil D. Andrus, Director      |   |
|                        |                           |
| By:                         | /S/ George H. Kuper            |   |   |
|                        | George H. Kuper, Director      |   |
|                        |                           |
| By:                         | /S/ Ralph R. Shaw              |   |   |
|                        | Ralph R. Shaw, Director        |   |
|                        |                           |
| By:                         | /S/ Stanford C. Stoddard       |   |   |
|                        | Stanford C. Stoddard, Director |   |
|                             |                                |        |        |  |  |  |

 

51

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**EXHIBIT INDEX**

 

The following exhibitsare filed herewith or, if followed by a number in parentheses, are incorporatedherein by reference from the corresponding exhibit filed in the report orregistration statement identified in the footnotes following this index:

 
| **Exhibit  Number** | ** **      | **Exhibit Description** | ** **                                                                                                                                           |
|---------------------|-----------------|-------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   3.1 |                    | Restated Articles of Incorporation of Rentrak  Corporation as filed on June 10, 2005.                                                           |   |
|                |   3.2 |                    | 1995 Restated Bylaws, as amended to date. (1)                                                                                                        |   |
|                | 10.1*           |                    | 1986 Second Amended and Restated Stock Option  Plan and Forms of Stock Option Agreements. (2)                                                        |   |
|                | 10.2*           |                    | Amendment to 1986 Second Amended and Restated  Stock Option Plan dated May 19, 2000. (3)                                                        |   |
|                | 10.3*           |                    | Employment Agreement with Christopher E.  Roberts dated November 1, 2002. (4)**                                                                 |   |
|                | 10.4*           |                    | The 1997 Equity Participation Plan of Rentrak  Corporation, as amended. (5)                                                                          |   |
|                | 10.5*           |                    | Form of Non-Qualified Stock Option Agreement  under 1997 Equity Participation Plan. (6)                                                              |   |
|                | 10.6*           |                    | Form of Incentive Stock Option Agreement under  1997 Equity Participation Plan. (7)                                                                  |   |
|                | 10.7            |                    | Credit Agreement with Wells Fargo Bank,  National Association (“Wells Fargo Bank”) dated July 15, 2002.                               |   |
|                | 10.8            |                    | First Amendment, dated July 1, 2003, to  Credit Agreement with Wells Fargo Bank, dated July 15, 2002.                                      |   |
|                | 10.9            |                    | Third Amendment, dated January 3, 2005,  to Credit Agreement with Wells Fargo Bank, dated July 15, 2002.                                   |   |
|                | 10.10           |                    | Revolving Line of Credit Note, dated January 3,  2005.                                                                                          |   |
|                | 10.11           |                    | Fourth Amendment, dated February 11, 2005,  to Credit Agreement with Wells Fargo Bank, dated July 15, 2002.                                |   |
|                | 10.12*          |                    | Employment Agreement with Mark L. Thoenes  dated January 1, 2001. (8)                                                                      |   |
|                | 10.13*          |                    | Employment Agreement with Timothy J. Erwin  dated November 1, 2002. (9)**                                                                       |   |
|                | 10.14           |                    | Rights Agreement dated as of May 18,  2005, between Rentrak Corporation and U.S. Stock Transfer Corporation. (10)                               |   |
|                | 10.15*          |                    | Incentive Stock Option Agreement with  Paul A. Rosenbaum dated March 30, 2001. (11)                                                        |   |
|                | 10.16*          |                    | Non-Qualified Stock Option Agreement with  Paul A. Rosenbaum dated March 30, 2001. (12)                                                    |   |
|                | 10.17*          |                    | Incentive Stock Option Agreement with  Paul A. Rosenbaum dated February 9, 2005.                                                           |   |
|                | 10.18*          |                    | Non-Qualified Stock Option Agreement with  Paul A. Rosenbaum dated February 9, 2005.                                                       |   |
|                | 10.19*          |                    | Employment Agreement with Amir Yazdani dated July 1,  2001. (13)                                                                                |   |
|                | 10.20*          |                    | Employment Agreement with Paul A.  Rosenbaum dated October 1, 2001. (14)                                                                   |   |
|                | 10.21*          |                    | The 1997 Non-Officer Employee Stock Option  Plan of Rentrak Corporation. (15)                                                                        |   |
|                | 10.22*          |                    | Amendment to the 1997 Non-Officer Employee  Stock Option Plan of Rentrak Corporation. (16)                                                           |   |
|                | 10.23*          |                    | Second Amendment to the 1997 Non-Officer  Employee Stock Option Plan of Rentrak Corporation. (17)                                                    |   |
|                | 10.24*          |                    | Third Amendment to the 1997 Non-Officer  Employee Stock Option Plan of Rentrak Corporation. (18)                                                     |   |
|                | 10.25*          |                    | Letter Agreement between Rentrak Corporation  and Disney Enterprises, Inc., dated November 15, 2002. (19)                                       |   |
|                | 10.26*          |                    | Employment Agreement with Ronald Giambra dated  July 1, 2002. (20)                                                                              |   |
|                | 10.27*          |                    | Amendment, dated June 1, 2003, to Employment  Agreement dated July 1, 2002, between Ronald Giambra and Rentrak  Corporation. (22)          |   |
|                | 10.28*          |                    | Amendment No. 2 dated February 10, 2005  to Employment Agreement dated July 1, 2002, between Ronald Giambra and  Rentrak Corporation. (28) |   |
|                | 10.29*          |                    | Separation Agreement and Mutual Release of  Claims between Rentrak Corporation and F. Kim Cox dated January 25,  2005. (26)                     |   |
|                | 10.30*          |                    | Consulting Agreement between Rentrak  Corporation and F. Kim Cox dated January 25, 2005. (27)                                                   |   |
|                | 10.31*          |                    | Employment Agreement between Kenneth M.  Papagan and Rentrak Corporation dated January 1, 2004. (23)                                            |   |

 

E-1

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| **Exhibit  Number** | ** ** | **Exhibit Description** | ** **                                                                                                                                                      |
|---------------------|------------|-------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                | 10.32*     |                    | Employment Agreement between Cathy Hetzel and  Rentrak Corporation dated March 17, 2004. (24)                                                              |   |
|                | 10.33      |                    | Stock Purchase Agreement, dated December 17,  2004, by and among Rentrak Corporation, Selling Shareholders and Mark Cuban.  (29)                           |   |
|                | 10.34*     |                    | Separation Agreement and Mutual Release  between Craig M. Berardi and Rentrak Corporation dated March 17, 2005.                                            |   |
|                | 10.35*     |                    | Summary of compensation arrangements for  non-employee directors of Rentrak Corporation.                                                                        |   |
|                | 16.1       |                    | Letter re change in certifying accountant.  (25)                                                                                                                |   |
|                | 21         |                    | List of Subsidiaries of Registrant. (30)                                                                                                                        |   |
|                | 23.1       |                    | Consent of GRANT THORNTON LLP, independent  registered public accounting firm.                                                                                  |   |
|                | 23.2       |                    | Consent of KPMG LLP, independent registered  public accounting firm.                                                                                            |   |
|                | 31.1       |                    | Certification of Chief Executive Officer  pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act  of 1934.                                 |   |
|                | 31.2       |                    | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or  Rule 15d-14(a) of the Securities Exchange Act of 1934.                                  |   |
|                | 32.1       |                    | Certification of Chief Executive Officer  pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act  of 1934 and 18 U.S.C. Section 1350. |   |
|                | 32.2       |                    | Certification of Chief Financial Officer  pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act  of 1934 and 18 U.S.C. Section 1350. |   |
|                | 99.1       |                    | Description of Capital Stock of Rentrak  Corporation. (21)                                                                                                      |   |

 

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*    Management Contract or Compensatory Plan orArrangement.

**  Portions omitted pursuant to a request forconfidentiality treatment filed with the Securities and Exchange Commission.

 
| (1)  |   | Filed as Exhibit 3.1 to Form 10-Q filed on February 14,  2001.                                     |
|------|--------|---------------------------------------------------------------------------------------------------------|
| (2)  |   | Filed as Exhibit 10.1 to 1993 Form 10-K filed on June 28,  1993 (File No. 0-15159). |
| (3)  |   | Filed as Exhibit 10.30 to 2000 Form 10-K filed on June 29, 2000.                                   |
| (4)  |   | Filed as Exhibit 10.4 to Form 10-Q filed on February 14, 2003.                                     |
| (5)  |   | 10.Filed as Exhibit 10.10 to 2002 Form 10-K filed on June 28,  2002.                               |
| (6)  |   | Filed as Exhibit 10.8 to 2003 Form 10-K filed on June 26, 2003.                                    |
| (7)  |   | Filed as Exhibit 10.9 to 2003 Form 10-K filed on June 26, 2003.                                    |
| (8)  |   | Filed as Exhibit 10.25 to 2001 Form 10-K filed  on June 29, 2001.                                  |
| (9)  |   | Filed as Exhibit 10.3 to Form 10-Q filed on February 14, 2003.                                     |
| (10) |   | Filed as Exhibit 4.1 to Form 8-K filed on May 18, 2005.                                                 |
| (11) |   | Filed as Exhibit 10.30 to 2001 Form 10-K filed on June 29, 2001.                                   |
| (12) |   | Filed as Exhibit 10.31 to 2001 Form 10-K filed on June 29, 2001.                                   |
| (13) |   | Filed as Exhibit 10.1 to Form 10-Q filed on November 13, 2001.                                     |
| (14) |   | Filed as Exhibit 10.1 to Form 10-Q filed on February 14,  2002.                                    |
| (15) |   | Filed as Exhibit 4.1 to Form S-8 filed on June 5, 1997.                                            |
| (16) |   | Filed as Exhibit 4.1 to Form S-8 filed on October 29,  1997.                                       |
| (17) |   | Filed as Exhibit 10.31 to 2002 From 10-K filed  on June 28, 2002.                                  |
| (18) |   | Filed as Exhibit 10.1 to Form 10-Q filed on November 13,  2002.                                    |
| (19) |   | Filed as Exhibit 99 to Form 8-K filed on November 18,  2002.                                       |
| (20) |   | Filed as Exhibit 10.5 to Form 10-Q filed on February 14,  2003.                                    |
| (21) |   | Filed as Exhibit 99.1 to Form 8-K filed on May 18, 2005.                                                |
| (22) |   | Filed as Exhibit 10.27 to Form 10-K filed on July 14, 2004.                                        |
| (23) |   | Filed as Exhibit 10.28 to Form 10-K filed on July 14, 2004.                                        |
| (24) |   | Filed as Exhibit 10.29 to Form 10-K filed on July 14, 2004.                                        |
| (25) |   | Filed as Exhibit 16.1 to Form 8-K filed on August 27, 2004.                                        |
| (26) |   | Filed as Exhibit 10.1 to Form 8-K filed on January 26, 2005.                                       |
| (27) |   | Filed as Exhibit 10.2 to Form 8-K filed on January 26, 2005.                                       |
| (28) |   | Filed as Exhibit 10.1 to Form 8-K filed on February 15, 2005.                                      |
| (29) |   | Filed as Exhibit 10.1 to Form 10-Q filed on February 14, 2005.                                     |
| (30) |   | Filed as Exhibit 21 to Form 10-K filed on July 14, 2004.                                           |

 

E-2

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