RENT-2012.03.31-10K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_______________________________________
FORM 10-K
[X]
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the Fiscal Year Ended: March 31, 2012
OR
[ ]
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000‑15159
________________________________________
RENTRAK CORPORATION
(Exact name of registrant as specified 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:
 
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.001 par value per share
 
The NASDAQ Stock Market LLC (NASDAQ Global Market)
 
Securities registered pursuant to Section 12(g) of the Act:
 
None
______________________________________________
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes ¨ No ý            

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes ¨ No ý

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
    
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. ¨
    
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
 
Accelerated filer
ý
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
 
Smaller reporting company
¨
            
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the last sales price ($12.59) as reported by the NASDAQ Global Market, as of the last business day of the Registrant’s most recently completed second fiscal quarter (September 30, 2011), was $129,594,976.

The number of shares outstanding of the Registrant’s Common Stock as of June 4, 2012 was 11,081,917 shares.
_____________________________________________
Documents Incorporated by Reference
The Registrant has incorporated into Part III of Form 10‑K, by reference, portions of its Proxy Statement for its 2012 Annual Meeting of Shareholders.


Table of Contents

RENTRAK CORPORATION
2012 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
 
 
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Item 1A.
 
 
 
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Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
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Item 9A.
 
 
 
Item 9B.
 
 
 
 
 
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
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Item 15.
 
 
 
 

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Forward-Looking Statements

Certain information included in this Annual Report on Form 10-K (including Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding revenue growth, gross profit margin and liquidity) constitute forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements may be identified by the use of forward-looking words such as “could,” “should,” “plan,” “depends on,” “predict,” “believe,” “potential,” “may,” “will,” “expects,” “intends,” “anticipates,” “estimates” or “continues” or the negative thereof or variations thereon or comparable terminology. Forward-looking statements in this Annual Report on Form 10-K include, in particular, statements regarding:

our future results of operations and financial condition and future revenue and expenses, including declines in Home Entertainment (“HE”) Division revenue and increases in our Entertainment Essentials™ revenue as a result of further investments, development and expansion of new and existing services, both domestically and internationally;
the future growth prospects for our business as a whole and individual business lines in particular, including adding new clients, adjusting rates and increasing business activity;
investing significant resources in the continued development and expansion of a comprehensive service that will provide business insights, research and analytics across multiple media platforms and allow users to comprehend how content is being consumed by end users, interpret the effect such consumption has on other media platforms, understand consumer adoption of new platforms and visualize cross-platform consumption;
building our analytic capabilities to move our products from data- to knowledge-based products and services and our ability to leverage these investments and generate revenue and earnings streams that contribute to our overall success;
increases in our costs over the next twelve months;
continued contraction in the major “brick and mortar” retailers' share of the home video rental market;
opportunities that could potentially benefit our customer base of retailers (“Participating Retailers”) participating in the Pay-Per-Transaction system (the “PPT System”);
the negative impact on our PPT business for Fiscal 2013 as a result of Warner Brothers' decision to release its video content in the retail channel before offering it to the rental market;
expanding our product and service capabilities, including the capability of our OnDemand service to provide cross platform reporting for on demand content viewed beyond the television set;
advances in advertising technology;
improved results from our foreign operations as a result of a change in our internal management report structure;
future acquisitions or investments;
our relationships with our customers and suppliers;
our ability to attract new customers;
market response to our products and services;
the impact of changes in the timing of movie releases and the relation between the timing of the release of movies to home video to their theatrical release;
the impact of fluctuations in foreign exchange rates or yields on the tax-exempt bond funds in which we invest;
increased spending on property and equipment in Fiscal 2013 for the capitalization of internally developed software, computer equipment, renovations to our corporate offices and other purposes;
the sufficiency of our available sources of liquidity to fund our current operations, the continued current development of our business information services and other cash requirements through at least March 31, 2013; and
the impact of our recent business acquisitions.

These forward-looking statements involve known and unknown risks and uncertainties that may cause our results to be materially different from results implied by such forward-looking statements. These risks and uncertainties include, in no particular order, whether we will be able to:

successfully develop, expand and/or market new services to new and existing customers, including our media measurement services, in order to increase revenue and/or create new revenue streams;
timely acquire and integrate into our systems various third party databases;
compete with companies that may have financial, marketing, sales, technical or other advantages over us;
successfully deal with our data providers, who are much larger than us and have significant financial leverage over us;
successfully manage the impact on our business of the economic environment generally, both domestic and international, and in the markets in which we operate, including the financial condition of any of our suppliers or

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customers or the impact of the economic environment on our suppliers’ or customers’ ability to continue their services with us and/or fulfill their payment obligations to us;
effectively respond to rapidly changing technology and consumer demand for entertainment content in various media formats;
retain and grow our Participating Retailers;
continue to obtain home entertainment content products (DVDs, Blu-ray Discs, etc.) (collectively “Units”) leased/licensed to home video specialty stores and other retailers from content providers, generally motion picture studios and other licensors or owners of the rights to certain video programming content (“Program Suppliers”);
retain our relationships with our significant Program Suppliers and Participating Retailers;
manage and/or offset any cost increases;
add new clients or adjust rates for our services;
adapt to government restrictions;
leverage our investments in our systems and generate revenue and earnings streams that contribute to our overall success;
enhance and expand the services we provide in our foreign locations and enter into additional foreign locations; and
successfully integrate business acquisitions or other investments in other companies, products or technologies into our operations and use those acquisitions or investments to enhance our technical capabilities, expand our operations into new markets or otherwise grow our business.

Please refer to Item 1A. Risk Factors in this Annual Report on Form 10-K for a discussion of reasons why our actual results may differ materially from our forward-looking statements. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our expectations change.

PART I
ITEM 1.
BUSINESS

Overview

We are a global digital media measurement, research and distribution company, serving the entertainment, television and advertising industries. Our web-based products measure and report consumer media consumption across multiple platforms, devices and distribution channels. We process and aggregate data from hundreds of billions of transactions from multiple screens in which entertainment content is viewed, whether at the box office, from a television screen, over the internet, on a smart phone or most other devices, whether purchased, rented, recorded, downloaded or streamed from multiple channels. These massive content databases report comprehensive results across most viewing platforms and are fused with third-party consumer segmentation and purchase databases. Our systems and services help our clients better understand and analyze how audiences view and respond to content, which enables content producers, advertisers and advertising agencies to make better programming decisions and directly target consumers, which helps them plan, buy and sell advertising across most of the entertainment screens.

Rentrak Corporation is an Oregon corporation and was incorporated in 1977. We are headquartered in Portland, Oregon, with additional United States and international offices.

We have two operating divisions within our corporate structure and, accordingly, we report certain financial information by individual segment under this structure. Our Advanced Media and Information (“AMI”) operating division includes our media measurement services. Our HE operating division includes our distribution services as well as services that measure, aggregate and report consumer rental activity on film and video game product from traditional “brick and mortar,” online and kiosk retailers. During the fourth quarter of Fiscal 2012, management moved Digital Download Essentials and Home Entertainment Essentials from the HE Division to the AMI Division effective April 1, 2011 as a result of a change in our internal management reporting structure. As a result, all prior periods have been restated to reflect this change.

Our AMI Division encompasses media measurement services across multiple screens and platforms and is delivered via web-based products within our Entertainment Essentials™ lines of business. These services, offered primarily on a recurring subscription basis, capture consumer viewing data, which is integrated with consumer segmentation and purchase behavior databases. We provide film studios, television networks and stations, cable, satellite and telecommunications company (“telco”) operators, advertisers and advertising agencies insights into consumer viewing and purchasing patterns through our thorough and expansive databases of box office results and local, national and on demand television performance.

Our HE Division services incorporate a unique set of applications designed to help clients maintain and direct their business practices relating to home video products. Entertainment content is distributed to various retailers primarily on behalf of motion

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picture studios. We track and report performance of home entertainment products leased directly to video retailers or through our PPT System. Within this system, video retailers are given access to a wide selection of box office hits, independent releases and foreign films from the industry’s leading suppliers on a revenue sharing basis. By providing second- and third-tier retailers the opportunity to acquire new inventory in the same manner as major national chains, our PPT System enables retailers, regardless of size, to increase both the depth and breadth of their inventory, better satisfy consumer demand and more effectively compete in the marketplace. We lease product from our Program Suppliers; Participating Retailers sublease that product from us and rent it to consumers. Participating Retailers then share a portion of the revenue from each retail rental transaction with us and we share a portion of the revenue with the Program Suppliers. Our PPT System supplies both content providers and retailers with the intelligence and infrastructure necessary to make revenue sharing a viable and productive option.

Our HE Division also includes our rental Studio Direct Revenue Sharing (“DRS”) services, which grant content providers constant, clear feedback and data, plus valuable checks and balances on how both their video products and retailers are performing. Data relating to rented entertainment content is received on physical product under established agreements on a fee for service basis.

AMI Division

Our media measurement services, offered primarily on a recurring subscription basis, are distributed to clients through patent pending software systems and business processes, and capture data and other intelligence viewed on multiple screens across every platform within the entertainment industry.

Our current spending, investments and long-term strategic planning are heavily focused on the development, growth and expansion of our AMI Division, both domestically and internationally. As such, we continue to allocate significant resources to our Entertainment Essentials™ services and product lines. Our AMI Division revenue increased $6.8 million, or 19.8%, in the fiscal year ended March 31, 2012 ("Fiscal 2012") compared to the fiscal year ended March 31, 2011 ("Fiscal 2011").

The AMI Division's most significant lines of business are:

Box Office Essentials™;
OnDemand Essentials™, and related OnDemand Everywhere products; and
TV Essentials™, which includes StationView Essentials.

Typical clients subscribing to our services include motion picture studios, television networks and stations, cable and telco operators, advertisers and advertising agencies.

Theatrical Box Office content:

Box Office Essentials reports domestic and international theatrical gross receipts and attendance data to motion picture studios and movie theater owners. Rentrak is the only provider of this key information to the motion picture industry. We provide studios with access to box office performance data pertaining to specific motion pictures and movie theater circuits, both real-time and historical. Data is obtained via electronic connectivity, phone or fax to theater box offices and is collected for the majority of all movie theaters in the United States, Canada, Guam, Puerto Rico, Russia, Hong Kong, the United Kingdom, Ireland, Italy, Australia, New Zealand, Japan, South Korea, Taiwan, Germany, Austria, the Netherlands, France, Mexico, Colombia, Venezuela, Argentina, Brazil, Portugal, Chile and Spain. Box Office Essentials™ delivers box office results from more than 80,000 movie screens in 24 countries throughout the world.

Box Office Essentials™ data is published in the Hollywood Reporter, Daily Variety, USA Today, Yahoo and the LA Times and is the source for most box office reporting globally.

We have long-term relationships with each of the six major Hollywood studios (“Global Clients”) in the United States and abroad. Currently, there are no other competitors who provide this service, and we believe that the barriers to entry are quite high because the Global Clients prefer a single provider with world-wide reporting capabilities. In particular, our service provides these Global Clients with access to information relating to all other market participants.

Television, Broadband Video and Mobile Device Content
We provide our customers with second-by-second performance metrics that demonstrate real consumer viewing behavior for scheduled, interactive, video on demand (“VOD”) and digital video recorder ("DVR") television content. We aggregate transaction-level data from large sample sizes, which in many cases is full census tracking, providing users with the competitive advantage

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of more informed decision-making. These web-based reporting systems provide clients with instant access to the tools needed to track content and consumer behavior across multiple platforms. Our systems provide insights relating to how audiences respond to programming content and advertising. The current commercially launched component products of these systems include TV Essentials™, which includes StationView Essentials and OnDemand Everywhere products, which include OnDemand Essentials, OnDemand AdEssentials™, Internet TV Essentials, Digital Download Essentials and Mobile TV Essentials™. These products are described below.

Linear Television content:

TV Essentials™ is a comprehensive suite of research tools that calculates anonymous second-by-second audience viewing patterns in all facets of television programming and advertising including linear, DVR and interactive television viewing. By providing transaction-level performance metrics from millions of televisions, TV Essentials™ provides insight into programming effectiveness, enabling networks and network operators to optimize their TV advertising inventory. Developed with the potential capacity to handle data from the nation’s 115 million television households, the system can isolate individual market, network, series or telecast performances, administer national and local estimates and provide an evaluation of influencing factors such as psychographics (attributes relating to personality, values, attitudes, interests or lifestyles), purchase behaviors and advanced demographics for competitive, in-depth intelligence. Today, based on data from our current operator partners across multiple platforms, including cable, satellite and telco providers, we are translating viewing patterns from approximately 20 million digital televisions into insights for our clients. Additionally, one of the biggest advantages of TV Essentials™ is that it combines the stability and granularity of TV viewing data with marketing segmentation and advertiser databases, resulting in robust targeted TV viewership intelligence data. The TV Essentials™ service provides advertisers, advertising agencies and networks with advanced television targeting, which enables our customers to spend their advertising dollars more efficiently. For example, advertisers are able to target consumers who typically purchase their products.

Currently, we obtain data from four cable, internet, and telco data partners with whom we have multi-year contracts. These agreements allow us to commercially integrate viewing data into TV Essentials™. We also have developed the capability to integrate segmentation and consumer purchase databases to help our clients clearly define their advertising messages to consumers, and we continue to build our analytic capabilities to move our products from data- to knowledge-based products and services that interpret this data.

StationView Essentials is a television measurement and analytical service specifically designed to meet the unique needs of local television station markets. This service provides users with second-by-second viewing detail at the station level, enhancing their ability to understand viewer involvement and habits in local markets. By providing access to the linear television viewing patterns of millions, StationView Essentials ultimately allows television station management to better understand their audience viewing patterns and view competitive data from other local stations in their market. It also permits them to monitor daily program performance, improve audience retention by appropriately adjusting programming and selling their advertising more effectively thus eliminating costly make good advertisements due to the stability of our large database. The StationView Essentials database has been integrated with brand ratings and television household demographic ratings to provide stations with the tools they need to develop new advertising revenue streams.

VOD content:

OnDemand Essentials™ (“ODE”) provides multi-channel operators, content providers (including broadcast/cable networks and studios) with a transactional tracking and reporting system to view and analyze the performance of on demand content. This web-based system provides clients throughout the United States and Canada with access to the tools needed to track on demand content, trends and consumer behavior and represents information from over 105 million televisions from every major operator that offers VOD programming. Our system includes daily, census-level data of current and historical market- and title-level content performance from 38 multi-channel operators. We are expanding the capability of our OnDemand service to provide cross platform reporting for on demand content viewed beyond the television set (for example, Internet streaming, portable and mobile devices). We continue to work to obtain and/or incorporate data from new and existing providers relating to online, mobile and “Over the Top” content. We are well positioned to continue to grow this business by adding new clients and adjusting rates as business activity increases and as advanced advertising technology is rolled out by the industry.

OnDemand AdEssentials™ measures advertising within on demand content. This analysis includes reporting of ad campaigns across impressions, reach and frequency. With OnDemand Essentials and AdEssentials™, programmers and agencies have a robust set of tools needed to maximize on demand advertising revenue.


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Broadband Video and Mobile Device content:

Digital Download Essentials is a reporting and auditing service providing performance intelligence on purchased and rented movie and television content downloaded or streamed via the Internet. It is tailored for clients who offer the majority of their online video products on a pay-per-transaction basis. The system provides a single integrated solution to report all Internet-based sales and rental transactions, including royalty calculations, on a global basis. Data is collected from iTunes, Xbox, Hulu, PlayStation and Amazon.

Internet TV Essentials processes online usage data to help clients manage their ad-supported online content. The service filters massive amounts of raw, disparate usage data and presents it to our clients in a uniform, easy-to-use format. Data is collected from iTunes and Hulu. Internet TV Essentials provides multi-platform content providers, online video aggregators and web-only portals the tools necessary to analyze trends and track online video usage data for their decision-making.

Mobile TV Essentials™ service can be customized to fit the specific needs of our clients, with applications for both on demand and live content accessed via any mobile device. It uses functionality from ODE and TV Essentials™, and gives users access to the data needed to monitor that content, which content includes video clips, games, mobile web apps, small message servicing (“SMS”) data (also known as text messaging), ring tones, wallpaper and music downloads. Data is collected from iTunes and Hulu. The Mobile TV Essentials™ service enables users to perform in-depth analysis of their mobile content and its viewers, including near real-time viewership, demographics analysis, geographic analysis and audience sharing and audience overlap, which provide clients with insights relating to viewers that simultaneously watch more than one channel.

Multiple Platform and Enhancements to Existing Services
We are investing significant resources in the continued development and expansion of a comprehensive service that will provide business insights, research and analytics across multiple media platforms including TV, DVR, Internet TV, mobile, digital purchases, on demand, home video, theatrical and retail. This system will be designed to compile usage data, using a common metric, to illustrate each platform’s individual contribution and compare it against other media platforms. With the ability to track records across various media, this new multiscreen service will be designed to allow users to comprehend how content is being consumed by end users, interpret the effect such consumption has on other media platforms, understand consumer adoption of new platforms, visualize cross-platform consumption and support more complex advertising models.

We are also making significant investments in our systems which support our existing service lines. We continue to integrate various third-party segmentation databases with our data, which we believe will help advertisers get the right message at the right time to the right consumer group. We continue to build our analytic capabilities, which enable us to move our products from data-based to more comprehensive and applicable knowledge-based products and services. These expenditures will likely increase our costs over the next twelve months. Longer-term, we believe we will be able to leverage these investments and generate revenue and earnings streams that contribute to our overall success.

Competition
Our primary competitors in these markets are Nielsen, Kantar (a subsidiary of WPP Group) and TiVo, which are companies with significantly greater resources than Rentrak. Nielsen’s services are based on a sampling methodology used to measure television viewing data, and are currently the television industry’s standard measurement of consumer viewing behavior for advertising purposes. Kantar and TiVo also use various sampling methodologies.

Our services and systems differ in that we use a large database approach, which is more far-reaching compared to the smaller sampling approach used by most of our competitors. We refer to our approach as “the database currency” and project the results to a national level across multiple platforms. This method results in granular levels of processing from millions of transactions and establishes us as one of the only companies that provide a television ratings database currency. We believe this positions us to offer a comprehensive, more targeted, user-friendly system that networks, agencies and advertisers are demanding and, consequently, that the market will accept our measurement product as an alternative to competitors’ products.

HE Division

For the many regional chains and independent retailers who rent Units to consumers, it is more effective to acquire “new release” rental inventory on a lease basis instead of purchasing the inventory. Our PPT System provides Participating Retailers the opportunity to increase both the depth and breadth of their inventory, better satisfy consumer demand and more effectively compete in the marketplace.


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Under the PPT System, Participating Retailers have Units delivered to their store for a low, one-time upfront fee (ranging from $0 to $2 per Unit; most product is $1.50 or less). Leased movie rental revenue is then shared between the lessee (Participating Retailer), Rentrak and the Program Supplier. After 28 to 31 days, Participating Retailers can begin selling leased Units as “previously viewed” inventory and the "sell-through" revenue is generally shared between the Participating Retailer, Rentrak and the Program Supplier. Most of our programs have a six-month lease term and once this period has concluded, Participating Retailers can either return the remaining Units or buy them at a fraction of the retail cost (typically $0 to $1.75 per Unit). Under the PPT System, Participating Retailers can rent Units on the day of release and the average cost per Unit over the leasing term typically ranges between $8 to $12 per Unit, which is a fraction of the cost of using a wholesale distributor where Units generally cost between $18 and $20 per Unit.

Many of our arrangements are structured so that the Participating Retailers pay reduced upfront fees and lower per transaction fees in exchange for ordering Units of all titles offered by a particular Program Supplier (referred to as “output” programs).

Marketing and Relationships with Program Suppliers

We currently market our PPT System throughout the United States and Canada. This system greatly simplifies the landscape for each Program Supplier by consolidating the thousands of individual independent retailers participating in our PPT System into one business partner. Program Suppliers negotiate one lease/service arrangement with Rentrak, and our PPT System manages the rest, including marketing and sales of content to Participating Retailers, order fulfillment, collection of point-of-sale ("POS") data, analytics, audit, billing of revenue sharing fees and collection of payments.

During Fiscal 2012, we offered titles from a number of Program Suppliers including: Alliance Films Inc.; Anchor Bay Entertainment, LLC; Lionsgate Films, Inc.; Millennium Media Services; Paramount Home Entertainment, Inc.; Sony Pictures Home Entertainment, Inc.; Summit Distribution, LLC; Twentieth Century Fox Home Entertainment, Inc.; Universal Studios Home Entertainment LLC; Vivendi Entertainment; and Warner Home Video, a division of Warner Bros. Home Entertainment Inc. Our arrangements with our Program Suppliers are of varying duration, scope and formality. In some cases, we have obtained Units pursuant to contracts or arrangements with Program Suppliers on a title-by-title basis and, in other cases, the contracts or arrangements provide that all titles released for distribution by the Program Supplier will be provided to us for the PPT System. Many of our agreements with Program Suppliers may be terminated upon relatively short notice. Therefore, there is no assurance that any of the Program Suppliers will continue to distribute Units through the PPT System. Even if titles are otherwise available from Program Suppliers, there is no assurance that they will be made available on terms acceptable to us or the Participating Retailers. A loss of any one of our significant Program Suppliers could have an adverse effect on our financial condition and results of operations.

During Fiscal 2012, 2011 and 2010, we had several Program Suppliers that supplied product in excess of 10% of our total revenue as follows:
 
2012
 
2011
 
2010
Program Supplier 1
10%
 
9%
 
11%
Program Supplier 2
9%
 
10%
 
11%
Program Supplier 3
7%
 
10%
 
12%
Program Supplier 4
6%
 
6%
 
10%

Certain Program Suppliers have requested, and we have provided, financial or performance commitments, including advances or guarantees, as a condition of obtaining certain titles. We determine whether to provide such commitments on a case-by-case basis, depending upon the Program Supplier’s success with such titles prior to home video distribution and our assessment of expected success in the home video rental market. At March 31, 2012, we had such guarantees with 24 Program Suppliers in amounts totaling approximately $1.0 million. We expect to make these payments during the first quarter of Fiscal 2013. Most of these amounts were included in cost of sales during Fiscal 2012, since we typically recognize these costs on each title’s release date.

Relationships with Participating Retailers

During Fiscal 2012, we had one customer within our HE Division that provided revenue in excess of 10% of our total revenues. This customer has been a customer for several years and represented 11% of our revenue in Fiscal 2012. We believe our relationships with our existing Participating Retailers remain strong.

The number of active Participating Retailers has declined during the past year as a result of store closures, which are, in part, due to the economic climate, as well as an increase in use by consumers of kiosks and other forms of content delivery, which is more

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fully described in the “Competition” section below. We currently anticipate that this trend will continue as other entertainment content delivery channels gain a larger share of the market.

The popularity of the other choices from which a consumer can obtain entertainment content has been growing, and our Participating Retailers’ market share has been negatively affected. Thus, for the foreseeable future, we expect revenue from our HE Division to continue to decline.

The landscape of the home video rental market for “brick and mortar” retailers has seen significant changes. In the first half of calendar year 2010, a major retailer, Movie Gallery, closed all of its 2,000 stores and exited the market. Also in 2010, Blockbuster Entertainment (“Blockbuster”) closed approximately 1,300 retail locations. In April 2011, Blockbuster’s assets were acquired by DISH Network Corporation (“DISH”). While DISH continues to operate approximately 1,000 locations, it continues to assess the financial performance of those stores and may close more in the future. Although Movie Gallery and Blockbuster were not direct customers of ours, as a result of these closures, we believe the major “brick and mortar” retailers’ share of the overall industry is contracting. It is difficult to predict what effect, if any, this will have on our Program Suppliers and/or the performance of our Participating Retailers.

Ordering and Distribution of Units

Our proprietary Rentrak Profit Maker Software (the “RPM Software”) and Video Retailer Essentials Software (the “VRE Software”) allow Participating Retailers to order Units through these systems and provide the Participating Retailers with substantial analytical information regarding all offered titles. Ordering occurs via a networked computer interface (for RPM Software) or over the Internet (for VRE Software). To further assist the Participating Retailers in ordering, we also produce a monthly product catalog (“Ontrak™”) both in print and electronic media format.

To be competitive, Participating Retailers must be able to rent their Units on the “street date” announced by the Program Supplier for the title. We contract with third-party fulfillment providers to distribute the Units via both ground, which is our primary method, and overnight air courier to assure delivery to Participating Retailers on or prior to the street date. The handling and freight costs of such distribution for those Units were 3.0%, 3.1% and 3.3% of our consolidated cost of sales in Fiscal 2012, 2011 and 2010, respectively.

Computer Operations

To participate in our PPT System, Participating Retailers must have Rentrak-approved computer software and hardware to process all of their rental and sale transactions. Our RPM Software resides on the Participating Retailer’s POS computer system and transmits a record of PPT transactions to us over a telecommunications network. The RPM Software or web-based VRE Software also assists the Participating Retailer in ordering newly released titles and in managing its inventory of Units.

Our PPT information system processes these transactions and prepares reports for Program Suppliers and Participating Retailers. In addition, it identifies variations from statistical norms for potential audit action. This information system also transmits information on new titles available and analytic information on active leased Units and sends confirmation of orders made via the RPM Software or VRE system.

Auditing of Participating Retailers

From time to time, we audit Participating Retailers in order to verify that they are reporting all rentals and sales of Units in a consistent, accurate and timely manner. Several different types of exception reports are produced weekly. These reports are designed to identify any Participating Retailers whose PPT business activity varies from our statistical norms. Depending upon the results of our analysis of these reports, we may conduct an in-store audit. Audits may be performed with or without notice and any refusal to allow an audit can be cause for immediate termination from the PPT System. If audit violations are found, the Participating Retailer is subject to penalties, audit fees, immediate removal from the PPT System and/or repossession of all leased Units.

Seasonality

We believe that the home video industry is somewhat seasonal because Program Suppliers tend to theatrically release their most promising movies during two periods of the year: early summer and during the holidays in the fourth calendar quarter. Since the release of movies to home video usually follows the theatrical release by approximately three to five months (although significant variations occur on certain titles), the seasonal peaks of movies for home video generally occur just prior to and/or during the fourth calendar quarter holidays and in late winter/early spring. We believe our volume of rental transactions and resulting revenue and earnings reflect, in part, this seasonal pattern. However, changes in the release of Units available to us for Participating Retailers

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and Units offered with minimum guarantees may obscure any seasonal effect. See also Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Formovies.com

Formovies.com™ is a website designed and hosted by us, dedicated to providing our Participating Retailers with an effective online marketing tool. The site is filled with entertainment content such as top rentals, upcoming releases, DVD of the week, theatrical show times, movie trivia and more. Each site is individually branded to contain the store name of a Participating Retailer, allowing it to promote its store with coupons or special promotions it enters and controls on its custom site. Participating Retailers collect e-mail addresses from their customers, and the site sends a weekly newsletter announcing new releases and promotions.

Competition

The HE Division continues to be affected by the changing dynamics in the home video rental market. This market is highly competitive, constantly changing and influenced greatly by consumer spending patterns, behaviors and technological advancements. The end consumer has a wide variety of choices from which to select his or her entertainment content and can easily shift from one provider to another. Some examples include renting Units from our Participating Retailers or any retailer, ordering product via online subscriptions and/or online distributors (mail delivery), renting or purchasing product from kiosk locations, subscribing to at-home movie channels, downloading or streaming content via the Internet, purchasing and owning the Unit directly or selecting an at-home “pay-per-view” or “on demand” option from a satellite, telco or cable provider. Our PPT System focuses on the traditional “brick and mortar” retailer serviced by a distributor on a wholesale basis. Accordingly, we face competition from all of the wholesale distributors, including Ingram Entertainment, Inc., Video Product Distributors, Inc. and Entertainment One. These and other wholesale distributors have extensive distribution networks, long-standing relationships with Program Suppliers and retailers, and, in some cases, significantly greater financial resources. These wholesale distributors do not offer retailers content on a revenue sharing basis.

During the past two years, our Participating Retailers have experienced intense competition from kiosks operated by Redbox that offer significantly lower prices on "1 day only" rental Units. We have seen a dramatic increase in consumer use of this alternate delivery method. Currently, we believe that the timing, depth and breadth of Units available via kiosks are not as favorable as those available through our systems. Also, as Redbox formalizes revenue sharing agreements with certain studios, our DRS services, which are described below, benefit from this shift since we process that activity on behalf of these studios.

We also face direct competition from the Program Suppliers. All major Program Suppliers work directly with major retailers, including Blockbuster and Netflix, which is an online mail delivery subscription retailer. Many of the major Program Suppliers have direct revenue sharing arrangements with these retailers and a few mid-size retailers. We do not believe that the Program Suppliers have executed direct revenue sharing agreements with smaller retailers, but there is no assurance that they will not do so in the future.

Growth in kiosks and by-mail subscription activity has shifted consumer behavior from purchase to rental, causing studios to emphasize retail sales and VOD activity, both of which provide them with greater earnings per transaction than the rental methods. Approximately two years ago, three Program Suppliers (Warner, Fox and Universal) created a 28-day retail window that delays the availability of their product in kiosks and by-mail subscription offerings. This delay creates an opportunity for our “brick and mortar” retailers to maximize rental and sales activity prior to competing with the lower cost rental alternatives. To compensate Redbox and Netflix for agreeing to receive product nearly a month after “brick and mortar” retailers, product costs for Redbox and Netflix were reduced. Netflix was also given improved access to digital streaming content. During the past six months, Warner has decided not to release product to Redbox or Netflix for the first 56 days after the initial release and to any of its rental distributors for the first 28 days after the initial release in an effort to stimulate retail sales. Other studios may decide to implement similar “windows” in the future. A decrease or increase in the length of delay of product for any of these rental distributors could have a positive or negative impact on our Participating Retailers.

We also compete with businesses that use alternative distribution methods to provide video entertainment directly to consumers, such as the following: (1) online movie rental subscription services, such as Netflix; (2) direct broadcast satellite providers, such as DIRECTV and DISH Network Corporation; (3) cable providers, such as Time Warner and Comcast, which offer “pay-per-view” and VOD content; (4) telecommunication providers, such as AT&T and Verizon; and (5) delivery of programming via the Internet, such as Apple’s iTunes, Hulu.com and Google’s YouTube. Technological improvements in any of these distribution methods, perceived greater convenience by customers, as well as potential lower pricing models, may make these options more attractive to consumers and thereby materially diminish the demand for Unit rentals in “brick and mortar” locations. Such a reduction could have an adverse effect on our results of operations and financial condition.


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Studio Direct Revenue Sharing (DRS)

Our DRS services include entertainment content relating to physical Units rented and/or purchased by large “brick and mortar” retailers, online retailers and kiosks, such as Blockbuster Entertainment, Netflix and Redbox ("DRS Retailers"). Our services are tailored to meet the needs of content providers, which include major studios and independent program suppliers, such as Twentieth Century Fox Home Entertainment, Universal Studios Home Entertainment LLC and Sony Pictures Home Entertainment. For each DRS client we collect, process, audit, summarize and report the number of transactions and corresponding revenue generated on each title distributed to each DRS retailer on a revenue sharing basis. We also provide in-depth inventory tracking by title, retailer and location. Additionally, we conduct numerous periodic physical audits of DRS retailers, combined with actual testing of transactions processed through their POS systems, and electronic auditing, using multiple methods of validation and recovery, to ensure all DRS inventory is utilized in a manner consistent with the terms of its revenue sharing arrangement with our DRS clients.

A number of risks may adversely affect the size and profitability of our DRS services. For example, if the overall size of the home entertainment rental market contracts significantly, and/or the large “brick and mortar,” kiosks and online retailers’ share of the overall rental market declines significantly, a major content provider discontinues the use of our services, the amount of data we process and audit on behalf of our DRS clients would also be reduced, resulting in a corresponding decrease in our DRS revenue.

Trademarks, Copyrights, Proprietary Rights and Patents

We have registered our RENTRAK™, PPT™, Pay Per Transaction™, Box Office Essentials™, Home Video Essentials™, OnDemand Essentials™, Video Game Essentials™, Retail Essentials™, AdEssentials™, Business Intelligence Essentials™, TV Essentials™, Mobile TV Essentials™, ForMovies™, Ontrak™ and RPM™ trademarks and applied to register other marks under federal trademark laws. We have applied to register and obtained registered status in several foreign countries for many of our trademarks. We believe our Entertainment Essentials™ software is entitled to copyright protection. We believe that our intellectual property is important to our marketing efforts and the competitive value of our services, and we intend to take appropriate action to halt infringement and protect against improper usage.

We have applied for patents related to certain of our proprietary technologies, primarily for our Entertainment Essentials™ Suite of products. We believe our proprietary technologies, in combination with our ability to innovate and our personnel, provide us with advantages over our competitors’ technologies. There is no assurance, however, that we will be able to obtain patents covering such proprietary technologies.

Employees

As of March 31, 2012, we employed 327 full-time associates and 121 part-time associates. We consider our relations with our associates to be good.

Financial Information About Industry Segments, Enterprise-Wide Data and Geographic Information

See Note 17 of Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Available Information

We file annual, quarterly and other reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended (“Exchange Act”). We also make available, free of charge on our website at www.rentrak.com, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed electronically with the SEC. You can inspect and copy our reports, proxy statements and other information filed with the SEC at the offices of the SEC’s Public Reference Room located at 100 F Street, NE, Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of Public Reference Rooms. The SEC also maintains an Internet website at http://www.sec.gov/ where you can obtain most of our SEC filings. You can also obtain paper copies of these reports, without charge, by contacting Investor Relations at (503) 284-7581.







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ITEM 1A.
RISK FACTORS

Our HE Division is challenged by the combined effects of technological advancements, changing consumer behaviors and demand, and fundamental changes affecting the industries in which the division operates.

The markets in which our HE Division operates are highly competitive, rapidly changing and influenced greatly by consumer spending patterns and behaviors. The end consumer has a wide variety of choices in entertainment generally and video entertainment content in particular, and can easily shift from one provider to another and from one technology to another. Some examples of options available to consumers include renting product from our Participating Retailers or other retailers, ordering product directly via online subscriptions or distributors (mail delivery), renting or purchasing product from kiosk locations, subscribing to at-home movie channels, downloading or streaming content via the Internet, purchasing product directly, selecting an at-home “pay-per-view” or “video-on-demand” option, or relying on cable or satellite programming exclusively. Our systems primarily rely on the end consumer choosing to rent Units from traditional “brick and mortar” retailers, a practice that is decreasing in popularity. Technological advancements, changes in distribution methods and pricing reductions have made other options more attractive to consumers in recent years and materially diminished the demand for obtaining Units via traditional retailers. This trend is likely to continue and is expected to result in lower revenue from our HE Division, which could have a material adverse effect on our results of operations, financial condition and cash flows.

Certain Entertainment Essentials™ services face various obstacles to widespread market adoption, including competition from companies with significantly greater resources than ours.

Our Entertainment Essentials services are dependent on several factors for long-term success, including our ability to compete with larger and more seasoned competitors in this market. Our primary competitors currently are Nielsen, Kantar and TiVo. Each of these competitors has significantly greater resources than we do, which could allow them to become more formidable competitors with enhanced technology service solutions. Additionally, we face other obstacles. For instance, data providers may be reluctant or ultimately decide not to grant us adequate access to their digital transaction data, which is a key component of our systems. The owners of the data may also impose greater restrictions on the use and reporting of data, which may make it difficult to realize fully the opportunities we anticipate for our products and related services. Further, the marketplace (such as advertisers, advertising agencies and television networks) may be reluctant to adopt a new standard of viewership measurement. These factors could have an adverse effect on our ability to grow these services, which could lead to a material adverse effect on our results of operations, financial condition and cash flows.

We may be unable to obtain requisite data and other content to source our systems which provide our Entertainment Essentialsservices.

Our Entertainment Essentialsservices rely on data collected from a wide variety of sources. Once received, the data must be reviewed, processed, integrated and, at times, converted to our required file format. If we are unable to obtain quality data feeds and process that data in a timely manner, we may not be able to meet the needs of our clients, and we could lose clients. The loss of a significant number of Entertainment Essentials clients would have an adverse impact on our ability to grow our Entertainment Essentialslines of business, which could result in a material adverse effect on our results of operations, financial condition and cash flows.

Our business model continues to shift from the HE Division to the AMI Division, which has a limited history and may not be able to grow as quickly as we expect.

Our business has historically focused on the HE Division, which represented 54.5% of our total revenue for Fiscal 2012. Revenue has been steadily declining in this division, and, while we are attempting to slow that revenue decline, our future success depends upon the growth and success of the AMI Division, which has a limited history. An inability to grow revenue in the AMI Division and/or achieve our expected operating results could have a material adverse effect on our results of operations, financial condition and cash flows.

We have operations outside of the United States that subject us to legal, business, political, cultural and other risks of international operations.

We operate globally, which subjects us to a number of risks and burdens, including:

staffing and managing international operations across different geographic areas;
multiple, conflicting and changing governmental laws and regulations;

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the possibility of protectionist laws and business practices that favor local companies;
price and currency exchange rates and controls;
taxes and tariffs;
different business practices and legal standards, particularly with respect to intellectual property;
difficulties in collecting accounts receivable, including longer payment cycles;
political, social, and economic instability;
designing and maintaining effective operating and financial controls;
the possibility of failure of internal controls, including any failure to detect unauthorized transactions; and
increased costs relating to personnel management as a result of government and other regulations.

In addition, economic conditions in our overseas markets may negatively impact the demand for our products abroad and benefits we receive from those operations.

We may acquire or invest in other companies, products or technologies, which may be costly, dilutive to shareholders and, in the event we experience difficulties in assimilating and integrating the personnel, technologies, operating systems and products and services of acquired businesses, less beneficial than we anticipate.

As part of our business strategy, we may acquire or invest in other companies, products or technologies that complement our current product offerings, enhance our technical capabilities, expand our operations into new markets or offer other growth opportunities. Such acquisitions may be costly and potentially dilutive to existing shareholders in the event we offer capital stock as consideration in an acquisition. Acquisitions could also pose risks to our operations and operating results, including the possibilities of:

increased costs relating to the integration of acquired businesses or technologies;
difficulties assimilating the acquired operations, personnel, technologies or products into our company;
loss of key personnel at an acquired business who decide not to work for us;
diversion of management’s attention from our existing operations;
adverse effects on relationships with our existing suppliers, customers or partners;
a need for additional capital or debt financing to complete acquisitions; and
the impairment of intangible assets acquired.

The described risks would be magnified as the size of an acquisition increases or if the acquisitions are in geographic or business markets in which we have little or no prior experience. As a result of these and other challenges, we may not realize any anticipated benefits from acquisitions even if we can find suitable acquisition opportunities at what we believe to be attractive valuations, which cannot be assured.

Economic conditions could negatively impact our business.

We primarily operate within the entertainment industry. Our overall success depends on the success of national networks and local stations, studios, cable operators, data providers, advertisers, advertising agencies and others within our AMI Division and our Participating Retailers and Program Suppliers within our HE Division. The success of these businesses is dependent on consumer economic activity. For example, our Participating Retailers rely on their customers to rent Units, which is a discretionary activity for most consumers. Also, our Box Office Essentials™ clients depend on consumers being interested in, and financially able to attend, movies in theaters. Changes in the economic climate and consumer spending could impact the financial condition of our Participating Retailers, Program Suppliers, customers, studios and others. Such changes that affect our customers could, in turn, decrease the demand for our products, which could have a material adverse effect on our results of operations, financial condition and cash flows.

Additionally, if customers of our Entertainment Essentials™ services and our Participating Retailers experience financial difficulties, they may be unable to continue to purchase our services or pay for services in a timely manner, if at all. This could have a material adverse affect on our results of operations, financial condition and cash flows.

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We face intense competition in the markets in which we operate and those in which we are currently developing new service offerings.

Some of our competitors have extensive distribution networks, long-standing relationships with our suppliers and customers, stronger brand name recognition and significantly greater financial resources than us. These factors may enable our competition to have increased bargaining and purchasing power relating to resources that could enable them to operate in a more cost effective manner and/or to surpass our technological advancements. This could have a material adverse effect on our ability to grow our lines of business.

Our Participating Retailers may lose a competitive advantage if Program Suppliers change the timing of the release of movies to the various distribution channels.

Historically, after the initial release of a movie to theaters, studios would then exclusively distribute the movie to the home video retail market (typically three to five months after the theatrical release) prior to distributing it in other forms throughout the industry, such as video-on-demand. This created a competitive advantage for our Participating Retailers due to the early distribution window. Some studios have started testing the simultaneous release of their movies to the home video market and through cable, satellite and Internet video-on-demand channels. Approximately two years ago, three Program Suppliers (Warner, Fox and Universal) created a 28-day retail window that delays the availability of their product in kiosks and by-mail subscription offerings. During the past six months, Warner has decided not to release product to Redbox or Netflix for the first 56 days after the initial release and to any of its rental distributors for the first 28 days after the initial release in an effort to stimulate retail sales. Should studios change the timing of their release windows, or eliminate the exclusive distribution window for the home video retail market, our Participating Retailers may experience reduced revenue as consumers would have simultaneous access to movies via additional distribution channels. Since we share in our Participating Retailers' revenue, this would negatively affect our results of operation, financial condition and cash flows.

If we lose a significant Program Supplier or large number of smaller Program Suppliers, our Program Suppliers fail to maintain the quality and volumes of content, or there are adverse changes in the terms of our revenue sharing agreements with Program Suppliers, our revenue may decline.

We rely on our Program Suppliers for Units we sublease to Participating Retailers. A decrease in the number of Program Suppliers participating in our system, a decline in the financial stability of our Program Suppliers, or a decline in the quality (rental appeal) and quantity (number of theatrical titles) of content they produce, would result in a reduction in overall Units available to Participating Retailers, which could decrease our revenue. Additionally, many of our agreements with Program Suppliers may be terminated upon relatively short notice. Therefore, there is no assurance that any of the Program Suppliers will continue to distribute Units through the PPT System, continue to have titles available which we can distribute on a profitable basis, or continue to remain in business. Even if titles are otherwise available from Program Suppliers, there is no assurance that they will be made available on terms acceptable to us. A loss of any of our significant Program Suppliers or a change in any one of the above conditions could have a material adverse effect on our results of operations, financial condition, and cash flows.

Our Participating Retailers could establish relationships with Program Suppliers and enter into direct revenue sharing agreements.

If our Participating Retailers formed direct revenue sharing relationships with Program Suppliers, the need for our PPT System would be greatly reduced, which could have an adverse impact on our business, financial condition and cash flows.

Our DRS business is dependent on the studios maintaining direct revenue sharing relationships with “brick-and-mortar,” kiosks and online retailers.

We currently collect, process, audit, summarize and report transactional data relating to rental and sales activity of Units at very large traditional and online retailers and kiosk locations that have revenue sharing agreements directly with major studios. There are a number of risks that may adversely affect the size and profitability of this DRS business. First and foremost, our business is dependent on the DRS clients maintaining DRS relationships with the DRS retailers. Should these clients end those relationships, they would have no need for our services. Second, our clients could decide to invest the resources necessary to provide these services internally. Lastly, if the overall size of the home entertainment rental market contracts significantly, or the large “brick-and-mortar” and online retailers’ share of the overall rental market declines substantially, the amount of data we process and audit on behalf of our clients would also be reduced, resulting in a corresponding decrease in our revenue. These and other factors could potentially reduce the demand for our services and the quantity of data we process, which would negatively affect our results of operations, financial condition and cash flows.

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If our efforts to attract and retain our base of Participating Retailers are not successful, our operations may be adversely affected.

The success of our HE Division business primarily depends on traditional “brick and mortar” retailers actively participating in our PPT System. Declines in the numbers of Participating Retailers and the volumes of Units leased from us by Participating Retailers could ultimately lead to reductions in revenue and have an adverse impact on our results of operations, financial condition and cash flows.

The future success of our company is highly dependent on our ability to maintain and grow our base of clients who subscribe to our Entertainment Essentials suite of services.

The success of our AMI Division depends on effective software solutions, marketing, sales and customer relations for our current services, as well as acceptance of future enhancements and new services by our existing and prospective clients. If we are unable to both retain existing clients and secure new clients for our Entertainment Essentials services, our results of operations, financial condition and cash flows will be adversely affected.

Our Entertainment Essentials™ services are highly dependent on employees who are skilled and experienced in information technologies.

If we are unable to attract, hire and retain high quality information technology personnel at a reasonable cost, we may not be able to meet the needs of existing clients, enhance existing services, or develop new lines of business. This could have a material adverse effect on our results of operations, financial condition and cash flows.

The market for on demand advertising has been slow to develop and may grow slowly or not at all.

We have made significant investments in developing our tracking module for advertisements in on demand programming. The success of our on demand ad tracking module is dependent on several uncertain factors, including market adoption of on demand advertising, rollout of dynamic ad insertion technologies, and the automation of files regarding the location of advertising in on demand content. If the market does not develop, we may be unable to recoup our investments.

Measurement services are receiving a high level of consumer group and government scrutiny relating to the privacy issues around the methodologies used in targeted advertising.

Although we are confident that our anonymous data aggregation methodologies are compliant with all current privacy laws, it is possible that privacy trends and market perceptions of the transparency of data could result in additional government restrictions or limitations on the use of that data, which would adversely affect many of our products. We believe it is unlikely that we will be required to change or limit our products. Nonetheless, if additional government restrictions are imposed, such restrictions could slow our ability to realize a return on our investments in new data-driven products or result in additional costs not currently anticipated.

Our services are highly dependent on the effective and efficient use of technology and our overall information management infrastructure.

If we are unable to acquire, establish and maintain our information management systems to ensure accurate, reliable and timely data processed in an efficient and cost effective manner, we may not be able to meet the needs of existing clients and may not be able to enhance existing services or develop new lines of business. This inability could have an adverse effect on our business and long-term growth prospects.

Interruption or failure of our information technology and communications systems could hurt our ability to effectively provide our products and services, which could damage our reputation and harm our operating results.

The availability of our products and services depends on the continuing operation of our information technology and communications systems. Our systems are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures, computer viruses, computer denial of service attacks, terrorist attacks, or other attempts to harm our systems. Our data centers are located in areas with potential risk of earthquakes. Our data centers are also subject to break-ins, sabotage, and intentional acts of vandalism, and to potential disruptions if the operators of these facilities have financial difficulties. Some of our systems are not fully redundant, and our disaster recovery planning cannot account for all eventualities. The occurrence of a natural disaster, a decision to close a facility we are using without adequate notice for financial reasons, or other unanticipated

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problems at our data centers could result in lengthy interruptions in our service. In addition, our products and services are highly technical and complex and may contain errors or vulnerabilities. Any errors or vulnerabilities in our products and services, or damage to or failure of our systems, could result in interruptions in our services, which could reduce our revenues and results of operations.

The loss of our executive officers and key employees could have an adverse impact on our business and development initiatives.

We believe that the development of our business has been, and will continue to be, dependent on certain key executives and employees of Rentrak. The loss of any of these individuals could have a material adverse effect upon our business and development, and there is no assurance that adequate replacements could be found in the event of their unavailability.

Our stock is subject to price and volume fluctuations due to a number of factors, many of which are beyond our control and may prevent our shareholders from reselling our common stock at a profit.

The trading price of our common stock has, at times, experienced substantial price volatility and may continue to be volatile. For example, our common stock price has fluctuated from a high of $27.00 to a low of $11.52 for the 52 weeks ended March 31, 2012. This market volatility, as well as general economic, market or political conditions, could reduce the market price of our common stock. The trading price of our common stock may fluctuate widely in response to various factors, some of which are beyond our control. These factors include:

quarterly variations in our results of operations or those of our competitors;
announcements by us or our competitors of acquisitions, new products, significant contracts, commercial relationships, or capital commitments;
recommendations by securities analysts or changes in earnings estimates;
announcements about our earnings that are not in line with analyst expectations;
announcements by our competitors of their earnings that are not in line with analyst expectations;
the volume of shares of our common stock available for public sale;
sales of stock by us or by our shareholders (including sales by our directors, executive officers and other employees); and
short sales, hedging and other derivative transactions on shares of our common stock.

Oregon law and our shareholder rights plan may have anti-takeover effects.

The Oregon Control Share Act and the Business Combination Act limit the ability of parties who acquire a significant amount of voting stock to exercise control over us. These provisions may have the effect of lengthening the time required to acquire control of us through a proxy contest or the election of a majority of the Board of Directors. In May 2005, we adopted a shareholder rights plan, which has the effect of making it more difficult for a person to acquire control of us in a transaction not approved by our Board of Directors. The provisions of the Oregon Control Share Act and the Business Combination Act and our shareholder rights plan could have the effect of delaying, deferring or preventing a change of control of us, could discourage bids for our common stock at a premium over the market price of our common stock and could materially adversely impact the market price of, and the voting and other rights of the holders of, our common stock.

ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.











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ITEM 2.
PROPERTIES

Our most significant locations, all of which are leased under operating leases, include the following:

Location
 
Use
Portland, Oregon
 
Corporate headquarters
Los Angeles, California
 
AMI Division
New York, New York
 
AMI Division
Fort Lauderdale, Florida
 
AMI Division
Munich, Germany
 
Box Office Essentials™
Madrid, Spain
 
Box Office Essentials™
London, England
 
Box Office Essentials™
Paris, France
 
Box Office Essentials™
Sydney, Australia
 
Box Office Essentials™
Mexico City, Mexico
 
Box Office Essentials™
Buenos Aires, Argentina
 
Box Office Essentials™
Rio de Janeiro, Brazil
 
Box Office Essentials™

See Note 14 of Notes to Consolidated Financial Statements for additional information.

ITEM 3.
LEGAL PROCEEDINGS

We currently have no material outstanding litigation.

ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.


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PART II

ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Stock Price and Dividends

Our common stock, $0.001 par value, is traded on the NASDAQ Global Market, where its prices are quoted under the symbol “RENT.” The closing price of our common stock on the NASDAQ Global Market on June 4, 2012 was $16.09. As of June 4, 2012 there were 192 holders of record of our common stock.
 
The following table sets forth the reported high and low closing sales prices of our common stock for each of the quarters in the last two fiscal years as regularly quoted on the NASDAQ Global Market:

Fiscal 2012
 
High
 
Low
Quarter 1
 
$
27.00

 
$
16.56

Quarter 2
 
19.29

 
11.52

Quarter 3
 
14.78

 
11.57

Quarter 4
 
23.03

 
14.15

Fiscal 2011
 
High
 
Low
Quarter 1
 
$
25.64

 
$
20.28

Quarter 2
 
27.33

 
21.81

Quarter 3
 
30.16

 
24.83

Quarter 4
 
30.89

 
22.63



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

No cash dividends have been paid or declared during the last 13 fiscal years. The present policy of the Board of Directors is to retain earnings to provide funds for operation and expansion of our business. We do not intend to pay cash dividends in the foreseeable future.

Securities Authorized for Issuance

Information regarding securities authorized for issuance under equity compensation plans is included in Item 12 of this Annual Report on Form 10-K.




















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Stock Performance Graph

This chart compares the five-year cumulative total return on our common stock with that of the NASDAQ Composite index and a custom peer group, which was selected by us. The chart assumes $100 was invested on March 31, 2007, in our common stock, the NASDAQ Composite index and the peer group, and that any dividends were reinvested. The Peer Group is composed of: Acxiom Corp., Arbitron Inc., ComScore Inc., Harris Interactive Inc., Hastings Entertainment Inc. and Nielsen Holdings NV. The peer group index utilizes the same method of presentation and assumptions for the total return calculation as does Rentrak and the NASDAQ Composite index. All companies in the peer group index are weighted in accordance with their market capitalizations.


 
 
Base
 
Indexed Returns
 
 
Period
 
Year Ended
Company/Index
 
3/31/2007
 
3/31/2008
 
3/31/2009
 
3/31/2010
 
3/31/2011
 
3/31/2012
Rentrak Corporation
 
$
100.00

 
$
77.42

 
$
57.58

 
$
137.88

 
$
172.23

 
$
145.23

NASDAQ Composite
 
100.00

 
89.92

 
64.23

 
99.43

 
118.58

 
128.96

Peer Group
 
100.00

 
71.00

 
33.67

 
66.95

 
78.43

 
82.71



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ITEM 6.
SELECTED FINANCIAL DATA

(In thousands, except per share amounts)
Year Ended March 31, (1)
Statement of Operations Data
2012
 
2011
 
2010
 
2009
 
2008
Revenue:
 
 
 
 
 
 
 
 
 
AMI Division
$
41,415

 
$
34,584

 
$
19,979

 
$
12,656

 
$
10,383

HE Division
49,656

 
62,504

 
71,097

 
82,310

 
82,805

Total revenue
91,071

 
97,088

 
91,076

 
94,966

 
93,188

Cost of sales
48,125

 
54,853

 
58,277

 
62,575

 
61,814

Gross margin
42,946

 
42,235

 
32,799

 
32,391

 
31,374

Operating expenses:
 
 
 
 
 
 
 
 
 
Selling and administrative expense
48,854

 
44,838

 
33,723

 
27,145

 
25,768

Income (loss) from operations
(5,908
)
 
(2,603
)
 
(924
)
 
5,246

 
5,606

Interest income, net
477

 
470

 
1,151

 
1,108

 
1,651

 Other, net

 
125

 

 

 

Income (loss) before income taxes
(5,431
)
 
(2,008
)
 
227

 
6,354

 
7,257

Income tax provision (benefit)
995

 
(1,241
)
 
(349
)
 
991

 
2,663

Net income (loss)
$
(6,426
)
 
$
(767
)
 
$
576

 
$
5,363

 
$
4,594

Basic net income (loss) per share
$
(0.57
)
 
$
(0.07
)
 
$
0.05

 
$
0.51

 
$
0.43

Diluted net income (loss) per share
$
(0.57
)
 
$
(0.07
)
 
$
0.05

 
$
0.49

 
$
0.41

Shares used in per share calculations:
 
 
 
 
 
 
 
 
 
Basic
11,197

 
10,962

 
10,527

 
10,561

 
10,728

Diluted
11,197

 
10,962

 
11,013

 
11,047

 
11,227


(1) Prior period amounts are reclassified to reflect the move of Digital Download Essentials from Home Entertainment into the AMI division.

 
March 31,
 
2012
 
2011
 
2010
 
2009
 
2008
Balance Sheet Data
 
 
 
 
 
 
 
 
 
Cash and marketable securities
$
27,753

 
$
26,377

 
$
19,925

 
$
34,475

 
$
31,848

Working capital
23,844

 
28,460

 
30,627

 
43,244

 
41,043

Total assets
72,881

 
76,175

 
64,806

 
59,878

 
57,149

Long-term liabilities
3,154

 
2,203

 
2,267

 
2,938

 
4,145

Stockholders’ equity
50,525

 
56,373

 
51,228

 
46,977

 
43,672



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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

We have two operating divisions within our corporate structure and, accordingly, we report certain financial information by individual segment under this structure. Our Advanced Media and Information (“AMI”) operating division includes our media measurement services. Our Home Entertainment (“HE”) operating division includes our distribution services as well as services that measure, aggregate and report consumer rental activity on film and video game product from traditional “brick and mortar,” online and kiosk retailers.

Our AMI Division encompasses media measurement services across multiple screens and platforms and is delivered via web-based products within our Entertainment Essentials™ lines of business. These services, offered primarily on a recurring subscription basis, capture consumer viewing data, which is integrated with consumer segmentation and purchase behavior databases. We provide film studios, television networks and stations, cable, satellite and telecommunications company (“telco”) operators, advertisers and advertising agencies insights into consumer viewing and purchasing patterns through our thorough and expansive databases of box office results and local, national and on demand television performance.

Our HE Division services incorporate a unique set of applications designed to help clients maintain and direct their business practices relating to home video products. Entertainment content is distributed to various retailers primarily on behalf of motion picture studios. We track and report performance of home entertainment products leased directly to video retailers or through our Pay-Per-Transaction ("PPT") System. Within this system, video retailers ("Participating Retailers") are given access to a wide selection of box office hits, independent releases and foreign films from the industry’s leading suppliers ("Program Suppliers") on a revenue sharing basis. By providing second- and third-tier retailers the opportunity to acquire new inventory in the same manner as major national chains, our PPT System enables retailers everywhere, regardless of size, to increase both the depth and breadth of their inventory, better satisfy consumer demand and more effectively compete in the marketplace. We lease product from our Program Suppliers; Participating Retailers sublease that product from us and rent it to consumers. Participating Retailers then share a portion of the revenue from each retail rental transaction with us and we share a portion of the revenue with the Program Suppliers. Our PPT System supplies both content providers and retailers with the intelligence and infrastructure necessary to make revenue sharing a viable and productive option.

Our HE Division also includes our rental Studio Direct Revenue Sharing (“DRS”) services, which grants content providers constant, clear feedback and data, plus valuable checks and balances on how both their video products and retailers are performing. Data relating to rented entertainment content is received on physical product under established agreements on a fee for service basis.

During the fourth quarter of Fiscal 2012, Digital Download Essentials and Home Entertainment Essentials was moved from the HE Division to the AMI Division effective April 1, 2011 as a result of a change in our internal management reporting structure. As a result, all prior periods have been restated to reflect this change. Also during the fourth quarter of Fiscal 2012, we reorganized our international offices and incurred costs of $1.1 million, which are included in selling and administrative costs on our Consolidated Statements of Operations. As a result of this reorganization, we expect improved results from our foreign operations.

See “Forward-Looking Statements” on page 2.

AMI Division

Our media measurement services, offered primarily on a recurring subscription basis, are distributed to clients through patent pending software systems and business processes, and capture data and other intelligence viewed on multiple screens across various platforms within the entertainment, television and advertising industries.

Our current spending, investments and long-term strategic planning are heavily focused on the development, growth and expansion of our AMI Division, both domestically and internationally. As such, we continue to allocate significant resources to our Entertainment Essentials™ services and product lines. Our AMI Division revenue increased $6.8 million, or 19.8%, in Fiscal 2012 compared to Fiscal 2011.





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The AMI Division lines of business are:

Box Office Essentials™;
OnDemand Essentials™, and related OnDemand Everywhere products; and
TV Essentials™, which includes StationView Essentials.

Typical clients subscribing to our services include motion picture studios, television networks and stations, cable and telco operators, advertisers and advertising agencies.

HE Division

The financial results from the HE Division continue to be affected by the changing dynamics in the home video rental market as well as overall economic trends and conditions. This market is highly competitive and influenced greatly by consumer spending patterns and behaviors. The end consumer has a wide variety of choices from which to select entertainment content and can easily shift from one provider to another. Some examples include renting product from our Participating Retailers or other retailers, purchasing previously viewed Units from our Participating Retailers or other retailers, renting or purchasing product from kiosk locations, ordering product via online subscriptions and/or online distributors (mail delivery), subscribing to at-home movie channels, downloading or streaming content via the Internet, purchasing and owning the Unit directly, or selecting an at-home “pay-per-view” or “on demand” option from a satellite or cable provider. Our PPT System focuses primarily on the traditional “brick and mortar” retailer.

End consumers' usage of other options for obtaining entertainment content, such as kiosks, continues to increase and our Participating Retailers’ market share has been negatively affected. Thus, for the foreseeable future, we expect revenue from our HE Division to continue to decline.

The landscape of the home video rental market for “brick and mortar” retailers has seen significant changes. In the first half of calendar year 2010, a major retailer, Movie Gallery, closed all of its 2,000 stores. Also, Blockbuster Entertainment (“Blockbuster”) closed approximately 1,300 retail locations. In April 2011, Blockbuster’s assets were acquired by DISH Network Corporation (“DISH”). While DISH continues to operate the remaining locations, in February 2012 it announced that it will close additional stores. Although Movie Gallery and Blockbuster were not direct customers of ours, as a result of these closures, we believe the major “brick and mortar” retailers’ share of the overall industry is contracting. It is difficult to predict what effect, if any, this will have on our Program Suppliers and/or the performance of our Participating Retailers.

For the many regional chains and independent retailers who rent home entertainment products (DVD, Blu-ray and video games) (“Units”) to consumers, it is more effective to acquire “new release” rental inventory on a lease basis instead of purchasing the inventory. Our PPT System provides Participating Retailers the opportunity to increase both the depth and breadth of their inventory, better satisfy consumer demand and more effectively compete in the marketplace. Also, many of our arrangements are structured so that the Participating Retailers pay reduced upfront fees and lower per transaction fees in exchange for ordering Units of all titles offered by a particular Program Supplier (referred to as “output” programs).

In general, we continue to be in good standing with our Program Suppliers, and we make ongoing efforts to strengthen those business relationships through enhancements to our current service offerings and the development of new service offerings. We are also continually seeking to develop business relationships with new Program Suppliers. Our relationships with Program Suppliers typically may be terminated without cause upon thirty days’ written notice by either party.

Sources of Revenue

Revenue by segment includes the following:

AMI Division

Subscription fee and other revenue, primarily relating to custom reports, from:

Box Office Essentials™;
OnDemand Essentials™, and related OnDemand Everywhere products, and

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TV Essentials™, which includes StationView Essentials.

HE Division

Transaction fees, which are generated when Participating Retailers rent Units to consumers. Additionally, certain arrangements include guaranteed minimum revenue from our customers, which are recognized on the street (release) date, provided all other revenue recognition criteria are met;
Sell-through fees, which are generated when Participating Retailers sell previously-viewed rental Units to consumers and/or buy-out fees generated when Participating Retailers purchase Units at the end of the lease term;
DRS fees, which are generated from data tracking and reporting services provided to Program Suppliers; and
Other fees, which primarily include order processing fees, which are generated when Units are ordered by, and distributed to, Participating Retailers.

Results of Operations

 
Year Ended March 31, (1)
 
2012
 
2011
 
2010

(Dollars in thousands)

Dollars
 
% of revenue
 

Dollars
 
% of revenue
 

Dollars
 
% of revenue
Revenue:
 
 
 
 
 
 
 
 
 
 
 
AMI Division
$
41,415

 
45.5
 %
 
$
34,584

 
35.6
 %
$
$
19,979

 
21.9
 %
HE Division
49,656

 
54.5

 
62,504

 
64.4

 
71,097

 
78.1

 
91,071

 
100.0

 
97,088

 
100.0

 
91,076

 
100.0

Cost of sales
48,125

 
52.8

 
54,853

 
56.5

 
58,277

 
64.0

Gross margin
42,946

 
47.2

 
42,235

 
43.5

 
32,799

 
36.0

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling and administrative
48,854

 
53.6

 
44,838

 
46.2

 
33,723

 
37.0

Loss from operations
(5,908
)
 
(6.5
)
 
(2,603
)
 
(2.7
)
 
(924
)
 
(1.0
)
Other income:
 
 
 
 
 
 
 
 
 
 
 
Interest income, net
477

 
0.5

 
470

 
0.5

 
1,151

 
1.3

Other, net

 

 
125

 
0.1

 

 

Income (loss) before income taxes
(5,431
)
 
(6.0
)
 
(2,008
)
 
(2.1
)
 
227

 
0.2

Income tax provision (benefit)
995

 
1.1

 
(1,241
)
 
(1.3
)
 
(349
)
 
(0.4
)
Net income (loss)
$
(6,426
)
 
(7.1
)%
 
$
(767
)
 
(0.8
)%
$
$
576

 
0.6
 %

(1) 
Percentages may not add due to rounding.

Revenue

Revenue decreased $6.0 million, or 6.2%, to $91.1 million in Fiscal 2012 compared to $97.1 million in Fiscal 2011. The decrease in revenue was primarily due to a decline in revenue from our HE Division, partially offset by an increase in AMI revenue primarily related to growth in our existing lines of business. These fluctuations are described in more detail below.

Revenue increased $6.0 million, or 6.6%, to $97.1 million in Fiscal 2011 compared to $91.1 million in Fiscal 2010. The increase in revenue was due to an increase in AMI revenue related to our acquisition of Nielsen EDI Limited and certain assets of The Nielsen Company (United States), LLC (the "EDI Business") in the fourth quarter of Fiscal 2010, as well as growth in other AMI lines of business, partially offset by declines in revenue from the HE Division as described in more detail below.

AMI Division

Revenue related to our Entertainment Essentials™ business information service offerings increased in both comparable periods

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primarily due to our continued investment in and successful marketing of these offerings. We expect continued future increases in our Entertainment Essentials™ revenue as a result of further investments, development and expansion of new and existing services, both domestically and internationally.

Revenue information related to our AMI Division was as follows (dollars in thousands):

 
Year Ended March 31,
 
Dollar
 
 
 
2012
 
2011
 
Change
 
% Change
Box Office Essentials™
$
21,046

 
$
18,255

 
$
2,791

 
15.3%
OnDemand Essentials™
11,143

 
10,537

 
606

 
5.8%
TV Essentials™
9,226

 
5,792

 
3,434

 
59.3%
 
$
41,415

 
$
34,584

 
$
6,831

 
19.8%

 
Year Ended March 31,
 
Dollar
 
 
 
2011
 
2010
 
Change
 
% Change
Box Office Essentials™
$
18,255

 
$
8,139

 
$
10,116

 
124.3%
OnDemand Essentials™
10,537

 
8,400

 
2,137

 
25.4%
TV Essentials™
5,792

 
3,215

 
2,577

 
80.2%
All Other

 
225

 
(225
)
 
(100.0)%
 
$
34,584

 
$
19,979

 
$
14,605

 
73.1%

The increase in Box Office Essentials™ revenue in Fiscal 2012 compared to Fiscal 2011 was primarily due to the addition of new clients and rate increases for existing clients, as well as our acquisition of Ciné Chiffres in the third quarter of Fiscal 2011, which contributed $0.1 million to the increase.

The increase in Box Office Essentials™ revenue in Fiscal 2011 compared to Fiscal 2010 was primarily due to our acquisition of the EDI Business in the fourth quarter of Fiscal 2010, which contributed $11.5 million and $1.8 million in Fiscal 2011 and Fiscal 2010, respectively. Our acquisition of Ciné Chiffres in the third quarter of Fiscal 2011 contributed $0.1 million to the increase. Subscription fees revenue also increased as a result of rate increases for existing accounts.

The increase in OnDemand Essentials™ revenue in Fiscal 2012 compared to Fiscal 2011 was due primarily to rate increases for existing clients, as well as the addition of new clients. These factors were partially offset by a large non-recurring custom project in Fiscal 2011.

The increase in OnDemand Essentials™ revenue in Fiscal 2011 compared to Fiscal 2010 was due to a combination of adding new clients, providing custom reports and securing rate increases for existing clients.

The increase in TV Essentials™ revenue in Fiscal 2012 compared to Fiscal 2011 was primarily due to the addition of new clients, including local stations, networks and advertising agencies.

The increase in TV Essentials™ revenue in Fiscal 2011 compared to Fiscal 2010 was primarily due to the addition of clients who subscribe to our systems and other fees relating to periodic custom work.

HE Division

Revenue information related to our HE Division was as follows (dollars in thousands):

 
Year Ended March 31,
 
Dollar
 
 
 
2012
 
2011
 
Change
 
% Change
Transaction fees
$
30,633

 
$
40,175

 
$
(9,542
)
 
(23.8)%
Sell-through fees
7,937

 
9,993

 
(2,056
)
 
(20.6)%
DRS
5,629

 
5,799

 
(170
)
 
(2.9)%
Other
5,457

 
6,537

 
(1,080
)
 
(16.5)%
 
$
49,656

 
$
62,504

 
$
(12,848
)
 
(20.6)%

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Year Ended March 31,
 
Dollar
 
 
 
2011
 
2010
 
Change
 
% Change
Transaction fees
$
40,175

 
$
46,824

 
$
(6,649
)
 
(14.2)%
Sell-through fees
9,993

 
11,255

 
(1,262
)
 
(11.2)%
DRS
5,799

 
5,081

 
718

 
14.1%
Other
6,537

 
7,937

 
(1,400
)
 
(17.6)%
 
$
62,504

 
$
71,097

 
$
(8,593
)
 
(12.1)%
 
The decrease in transaction fees in Fiscal 2012 compared to Fiscal 2011 was primarily due to fewer rental transactions at our Participating Retailers, which decreased by 22.4%. Units with minimum guarantees also declined, resulting in a decrease in revenues of $0.6 million, primarily due to the timing and number of major motion picture releases. The decrease in rental transactions was due to fewer Participating Retailers, fewer available Units and lower box office performance from theatrical titles in Fiscal 2012 compared to Fiscal 2011, as well as continued changing market conditions. Also, Warner Brothers decided to release its video content in the retail channel before offering it to the rental market, which had a negative impact on the number of Units available to us and represented 5.5% of the decline in revenue. We expect this decision to continue to negatively impact our PPT business for Fiscal 2013.

The decrease in transaction fees in Fiscal 2011 compared to Fiscal 2010 was primarily due to fewer rental transactions at our Participating Retailers, which decreased by 16.3%, partially offset by a 3.6% increase in the rate per transaction, which excludes the impact of minimum guarantees. Minimum guarantees increased $0.3 million in Fiscal 2011 compared to Fiscal 2010 due to the timing and number of major motion picture releases. The decrease in rental transactions was due to fewer Participating Retailers, as well as continued changing market conditions.

The decrease in sell-through fees in Fiscal 2012 compared to Fiscal 2011 was due to a 22.5% decrease in sell-through volume, as well as a 19.4% decrease in the number of Units purchased at end-of-term, both as a result of overall declines in Units available for sale. In addition, we experienced a 1.7% decrease in the average rate per transaction in Fiscal 2012 compared to Fiscal 2011, primarily due to a shift in the mix of available Units from our Program Suppliers.

The decrease in sell-through fees in Fiscal 2011 compared to Fiscal 2010 was primarily due to a decrease in sell-through volume and the overall rate per transaction. The decrease in sell-through volume was primarily due to an overall decline in Units available for sale. The number of transactions decreased 10.8% in Fiscal 2011 compared to Fiscal 2010, and the rate per transaction decreased 3.3%.

The decrease in DRS revenue in Fiscal 2012 compared to Fiscal 2011 was due to fewer transactions, primarily as a result of a decline in transactions from Blockbuster, offset by an increase in revenue of $0.8 million as a result of our acquisition of Media Salvation during the fourth quarter of Fiscal 2011.

The increase in DRS revenue in Fiscal 2011 compared to Fiscal 2010 was primarily due to higher volumes of transactions from online retailers and the addition of kiosk transactions in Fiscal 2011, partially offset by fewer transactions as a result of Movie Gallery’s store closures. The increase also reflects our acquisition of Media Salvation, which contributed $0.3 million to the increase.

The decrease in other revenue in Fiscal 2012 compared to Fiscal 2011 and in Fiscal 2011 compared to Fiscal 2010 related primarily to reduced order processing fees as a result of the overall reduction in available Units.

Cost of Sales and Gross Margins

Cost of sales represents the direct costs to produce revenue.

In the AMI Division, cost of sales includes costs associated with certain Entertainment Essentials™ business information offerings, and consists of costs associated with the operation of a call center for our Box Office Essentials™ services, as well as costs associated with amortizing capitalized internally developed software used to provide the corresponding services and direct costs incurred to obtain, cleanse, process and integrate data as well as maintain our systems.

In the HE Division, cost of sales includes Unit costs, transaction costs, sell-through costs and freight costs. Sell-through costs represent the amounts due to the Program Suppliers that hold the distribution rights to the Units. Freight costs represent the cost

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to pick, pack and ship orders of Units to the Participating Retailers. Our cost of sales can also be affected by the release dates of Units with guarantees. We recognize the guaranteed minimum costs on the release date. The terms of some of our agreements result in 100% cost of sales on titles in the first month in which the Unit is released, which results in lower margins during the initial portion of the revenue sharing period. Once the Unit’s rental activity exceeds the required amount for these guaranteed minimums, margins generally expand during the second and third months of the Unit’s revenue sharing period. However, since these factors are highly dependent upon the quality, timing and release dates of all new products, margins may not expand to any significant degree during any reporting period. As a result, it is difficult to predict the impact these Program Supplier revenue sharing programs with guaranteed minimums will have on future results of operations in any reporting period.

Cost of sales decreased $6.7 million, or 12.3%, in Fiscal 2012 compared to Fiscal 2011 and decreased $3.4 million, or 5.9%, in Fiscal 2011 compared to Fiscal 2010.

Cost of sales information related to our AMI Division follows (dollars in thousands):

 
Year Ended March 31,
 
Dollar
 
 
 
2012
 
2011
 
Change
 
% Change
Costs related to:
 
 
 
 
 
 
 
Amortization of internally developed software
$
2,162

 
$
1,746

 
$
416

 
23.8%
Call center operation
4,793

 
4,506

 
287

 
6.4%
Obtaining, cleansing and processing data
7,814

 
5,018

 
2,796

 
55.7%
 
$
14,769

 
$
11,270

 
$
3,499

 
31.0%

 
Year Ended March 31,
 
Dollar
 
 
 
2011
 
2010
 
Change
 
% Change
Costs related to:
 
 
 
 
 
 
 
Amortization of internally developed software
$
1,746

 
$
1,309

 
$
437

 
33.4%
Call center operation
4,506

 
2,668

 
1,838

 
68.9%
Obtaining, cleansing and processing data
5,018

 
2,869

 
2,149

 
74.9%
 
$
11,270

 
$
6,846

 
$
4,424

 
64.6%

The increase in costs of sales within the AMI Division in Fiscal 2012 compared to Fiscal 2011 resulted primarily from arrangements with some of our data suppliers that provide for cost increases as our revenue increases, the conversion of a data supplier agreement from a variable arrangement to a fixed-fee arrangement in December 2010, and increases in costs related to obtaining, cleansing and processing data due to arrangements in place with data providers.

The increase in costs of sales within the AMI Division in Fiscal 2011 compared to Fiscal 2010 resulted primarily from increased costs related to our call center operations and obtaining, cleansing and processing data. The increased costs in our call center operation were primarily due to the addition of the EDI Business, which operates call centers in numerous foreign locations. The increase in costs related to obtaining, cleansing and processing data was primarily due to growth in our service offerings and revenue sharing arrangements in place with data providers.

Cost of sales information related to our HE Division follows (dollars in thousands):

 
Year Ended March 31,
 
Dollar
 
 
 
2012
 
2011
 
Change
 
% Change
Costs related to:
 
 
 
 
 
 
 
Transaction fees
$
22,904

 
$
30,472

 
$
(7,568
)
 
(24.8)%
Sell-through fees
5,976

 
7,806

 
(1,830
)
 
(23.4)%
Other
4,476

 
5,305

 
(829
)
 
(15.6)%
 
$
33,356

 
$
43,583

 
$
(10,227
)
 
(23.5)%


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Table of Contents

 
Year Ended March 31,
 
Dollar
 
 
 
2011
 
2010
 
Change
 
% Change
Costs related to:
 
 
 
 
 
 
 
Transaction fees
$
30,472

 
$
35,603

 
$
(5,131
)
 
(14.4)%
Sell-through fees
7,806

 
9,140

 
(1,334
)
 
(14.6)%
Other
5,305

 
6,688

 
(1,383
)
 
(20.7)%
 
$
43,583

 
$
51,431

 
$
(7,848
)
 
(15.3)%

The decreases in cost of sales within the HE Division in Fiscal 2012 and Fiscal 2011 were primarily related to the decreases in revenue discussed above.

Gross margins as a percentage of divisional revenues were as follows:
 
Year Ended March 31,
 
2012
 
2011
 
2010
AMI Division
64.3%
 
67.4%
 
65.7%
HE Division
32.8%
 
30.3%
 
27.7%

The decrease in gross margin in the AMI Division in Fiscal 2012 compared to Fiscal 2011 was primarily due to increased costs associated with one of our data provider agreements, which converted to a fixed fee agreement in the third quarter of Fiscal 2011, and higher costs associated with amortization of our internally developed systems.

The increase in gross margin in the AMI Division in Fiscal 2011 compared to Fiscal 2010 was primarily due to the increase in revenue, partially offset by a $0.7 million charge in the third quarter of Fiscal 2011 related to an amendment to an agreement with one of our data providers. This amendment allows us to provide more robust information reporting to our clients and furthers our efforts toward moving our products from data- to knowledge-based products and services that interpret this data. Additionally, the agreement was converted from a variable agreement based on revenue to a fixed-fee arrangement.

The increase in gross margin in the HE Division in Fiscal 2012 compared to Fiscal 2011 was primarily due to fewer total available and rented Units including minimum guarantees. As noted previously, guarantee Units can result in 100% cost of sales on the titles in the first month in which they are released.

The increase in gross margins in the HE Division in Fiscal 2011 compared to Fiscal 2010 was primarily due to the increase in DRS revenue, which has higher margins.

Selling and Administrative

Selling and administrative expenses consist primarily of compensation and benefits, development, marketing and advertising costs, legal and professional fees, communications costs, depreciation and amortization of tangible fixed assets and software, real and personal property leases, and other general corporate expenses.

Selling and administrative expense information is as follows (dollars in thousands):

 
 
Year Ended March 31,
 
Dollar
 
 
Selling and administrative
 
2012
 
2011
 
Change
 
% Change
AMI
 
$
25,918

 
$
21,310

 
$
4,608

 
21.6%
HE
 
6,705

 
7,497

 
(792
)
 
(10.6)%
Corporate
 
16,231

 
16,031

 
200

 
1.2%
 
 
$
48,854

 
$
44,838

 
$
4,016

 
9.0%


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Table of Contents

 
 
Year Ended March 31,
 
Dollar
 
 
Selling and administrative
 
2011
 
2010
 
Change
 
% Change
AMI
 
$
21,310

 
$
11,903

 
$
9,407

 
79.0%
HE
 
7,497

 
7,353

 
144

 
2.0%
Corporate
 
16,031

 
14,467

 
1,564

 
10.8%
 
 
$
44,838

 
$
33,723

 
$
11,115

 
33.0%

AMI Division

The increase in selling and administrative expenses in the AMI Division in Fiscal 2012 compared to Fiscal 2011 was primarily due to an increase in the number of employees and other costs associated with the expansion of our AMI Division of $5.3 million, and reorganization costs of $1.1 million related to our international operations, offset by a reduction of $1.9 million of expense related to the value of a stock award granted to a non-employee that is valued at the end of each reporting period. Our long-term strategic plan is heavily focused on the development, growth and expansion of our AMI Division, both domestically and internationally and we consider these expenses to be investments which will leverage this business.

The increase in selling and administrative expenses in the AMI Division in Fiscal 2011 compared to Fiscal 2010 was primarily due to a $5.6 million increase related to costs associated with the EDI Business and a $2.4 million charge in Fiscal 2011 related to the increase in the value of a stock award granted to a non-employee that is valued at the end of each reporting period, compared to a $0.2 million charge in Fiscal 2010 related to this award. Increased costs associated with expansion of our AMI Division and our acquisition of Ciné Chiffres also contributed to the overall increase.
  
HE Division

The decrease in selling and administrative expenses in the HE Division in Fiscal 2012 compared to Fiscal 2011 was primarily due to a reduction in overall headcount for the year.

The increase in selling and administrative expenses in the HE Division in Fiscal 2011 compared to Fiscal 2010 was primarily due to our Media Salvation acquisition.

Corporate

The increase in Corporate selling and administrative expenses in Fiscal 2012 compared to Fiscal 2011 was primarily due to higher maintenance, occupancy and general operating costs, offset by lower stock-based compensation expense, lower costs for fringe benefits and increases in capitalized software development costs.

The increase in Corporate selling and administrative expenses in Fiscal 2011 compared to Fiscal 2010 was primarily due to increases in stock-based compensation as a result of the full-year impact of awards made to the CEO and CFO, offset by lower base compensation.

Income (Loss) from Operations (dollars in thousands):

 
 
Year Ended March 31,
 
Dollar
 
 
Income (loss) from operations
 
2012
 
2011
 
Change
 
% Change
AMI
 
$
728

 
$
2,004

 
$
(1,276
)
 
(63.7)%
HE
 
9,595

 
11,424

 
(1,829
)
 
(16.0)%
Corporate
 
(16,231
)
 
(16,031
)
 
(200
)
 
1.2%
 
 
$
(5,908
)
 
$
(2,603
)
 
$
(3,305
)
 
127.0%

 
 
Year Ended March 31,
 
Dollar
 
 
Income (loss) from operations
 
2011
 
2010
 
Change
 
% Change
AMI
 
$
2,004

 
$
1,230

 
$
774

 
62.9%
HE
 
11,424

 
12,313

 
(889
)
 
(7.2)%
Corporate
 
(16,031
)
 
(14,467
)
 
(1,564
)
 
10.8%
 
 
$
(2,603
)
 
$
(924
)
 
$
(1,679
)
 
181.7%

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Table of Contents


Other Income

Other income of $0.1 million in Fiscal 2011 represented a gain on the liquidation of a long-term, cost-based investment.

Income Taxes

Our effective tax rate was an expense of 18.3% in Fiscal 2012. The rate was negatively affected by the recording of a $4.0 million valuation allowance to fully reserve against our deferred tax assets.

Primarily due to our investments in acquisitions, as well as expansion of our AMI Division and our equity compensation structure, we have accumulated operating losses over the past three fiscal years. As a result, we evaluated various factors relating to these assets and determined that it was not more likely than not that all of our deferred tax assets would be realized. In the future, if we generate taxable income, we expect to be able to utilize these deferred tax assets, which should reduce future tax expense.

Our effective tax rate was a benefit of 61.8% in Fiscal 2011. The rate was positively impacted by federal and state research and experimentation credits of $0.8 million, earnings on marketable securities that are exempt from federal income taxes of $0.2 million and the tax impact of income in foreign locations of $0.1 million, offset by increases in reserves on tax positions of $0.3 million.

Our effective tax rate was a benefit of 153.7% in Fiscal 2010. The rate was positively impacted by federal and state research and experimentation credits of $0.2 million, earnings on marketable securities that are exempt from federal income taxation of $0.2 million, lower tax rates in foreign jurisdictions of $0.1 million and tax benefits relating to net reductions in our tax contingencies of $0.3 million due to a lapse of the applicable statute of limitations on tax positions taken in prior fiscal years.

Inflation

We believe that the impact of inflation was minimal on our business in Fiscal 2012, 2011 and 2010.

Liquidity and Capital Resources

Our sources of liquidity include our cash and cash equivalents, marketable securities, cash expected to be generated from future operations and investments and our $15.0 million line of credit. Based on our current financial projections and projected cash needs, we believe that our available sources of liquidity will be sufficient to fund our current operations, the continued current development of our business information services and other cash requirements through at least March 31, 2013.

Cash and cash equivalents and marketable securities increased $1.4 million to $27.8 million at March 31, 2012 from March 31, 2011. This increase resulted primarily from $10.2 million provided by operating activities and $0.5 million of proceeds received from a loan from the State of Oregon. These factors were offset by $5.1 million used for the purchase of equipment and capitalization of internally developed software for our business information service offerings and $4.3 million used for the repurchase of common stock. Portions of our cash and cash equivalents are held in our foreign subsidiaries. We may not be able to repatriate these funds without significant tax implications. As of March 31, 2012, we had $1.7 million in foreign bank accounts, which we plan to use to fund our international expansion and growth.

We had $22.2 million invested in a tax-exempt bond fund as of March 31, 2012. Bond fund values fluctuate in response to the financial condition of individual issues, general market and economic conditions and changes in interest rates. In general, when interest rates rise, bond fund values fall and investors may lose principal value. While we currently have no plans or requirements to sell the securities in the foreseeable future, we are exposed to market risks and cannot predict what impact fluctuations in the market may have on the value of these funds.

Accounts and notes receivable, net of allowances, decreased $2.5 million to $14.3 million at March 31, 2012 from March 31, 2011, primarily due to lower revenues in the HE Division in the fourth quarter of Fiscal 2012 compared to the fourth quarter of Fiscal 2011.

During Fiscal 2012, we spent $5.1 million on property and equipment, including $3.3 million for the capitalization of internally developed software for our business information service offerings. We anticipate spending a total of approximately $5.8 million on property and equipment in Fiscal 2013, including approximately $3.7 million for the capitalization of internally developed software, primarily for the development of systems for our Entertainment Essentials™ lines of business. Our total spending also includes amounts for computer equipment and renovations to our corporate offices. As of March 31, 2012, we have been reimbursed

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$0.6 million from the landlord for a portion of the costs associated with these renovations. This amount is treated as a lease incentive, the value of which will reduce rent expense over the remaining lease term.

Accounts payable decreased $1.9 million to $5.3 million at March 31, 2012 from March 31, 2011, primarily due to the timing of payments to our Program Suppliers.

Accrued compensation increased $2.6 million to $8.8 million at March 31, 2012 from March 31, 2011, primarily due to $1.1 million of severance related accruals associated with our international reorganization, increases in bonus accruals of $0.9 million and a $0.5 million increase in accrued stock-based compensation that will be settled in cash and relates to an agreement with a non-employee, which fluctuated with our stock price during Fiscal 2012.

Deferred revenue increased $0.7 million to $1.9 million at March 31, 2012 from March 31, 2011 primarily due to increases in quarterly and annual subscriptions for our services.

Deferred rent, current and long-term, of $1.9 million at March 31, 2012 represents amounts received for qualified renovations on our corporate headquarters and free rent during the lease term. The deferred rent related to qualified renovations is being amortized against rent expense over the remaining lease term, which is expected to end December 31, 2021, at the rate of approximately $28,000 per quarter. The deferred rent related to free rent will also be amortized against rent expense over the remaining lease term and is expected to be approximately $13,000 per quarter for Fiscal 2013.

In January 2006, our Board of Directors authorized the repurchase of up to 1.0 million shares of our common stock. As of March 31, 2012, 276,633 shares remained available for repurchase under this plan at a per share price not to exceed $12.75. This plan does not have an expiration date. In addition, in May 2011, our Board of Directors authorized a one-year share repurchase program for up to $5.0 million of our outstanding common stock. Common stock repurchases may be made from time to time in the open market at prevailing market prices or through privately negotiated transactions. The amount and timing of all repurchase transactions are contingent upon market conditions, regulatory requirements and alternative investment opportunities. We did not repurchase any shares during the three months ended March 31, 2012. During all of Fiscal 2012, we repurchased 304,922 shares pursuant to this program at a weighted average price of $14.24 per share for a total of $4.3 million. As of March 31, 2012, $0.7 million remained available for repurchases pursuant to this program. However, no additional shares were repurchased pursuant to this program before it expired in May 2012.

We currently have a revolving line of credit for $15.0 million that matures December 1, 2013. Interest accrues on outstanding balances under the line of credit at a rate equal to LIBOR plus 1.5 percent. The credit line is secured by substantially all of our assets and includes certain financial covenants. In December, 2011, the agreement was amended to include a requirement that we maintain cash liquidity of three times the amount of all cumulative quarterly losses. One of the financial covenants relates to reporting after-tax income of not less than $1.00 on an annual basis. Wells Fargo Bank N.A. waived the income and cash liquidity requirements for the year ended March 31, 2012. On May 31, 2012, the credit line was amended to add a requirement that we maintain at least $10.0 million in cash liquidity. At March 31, 2012, we had no outstanding borrowings under this agreement and are in compliance with the remaining covenants.

In the first quarter of Fiscal 2012, we received a loan from the State of Oregon for $0.5 million for the purpose of facility renovations. The loan bears interest at 5% per annum and contains provisions relating to forgiveness if we meet certain requirements. As of March 31, 2012, we are on schedule towards meeting those requirements. The loan is due on January 31, 2014 if it is not forgiven.

Contractual Payment Obligations

A summary of our contractual commitments and obligations as of March 31, 2012 follows (in thousands):

 
 
Payments Due By Fiscal Period

Contractual Obligations
 

Total
 

2013
 
2014 and 2015
 
2016 and 2017
 
2018 and beyond
Operating lease obligations
 
$15,509
 
$2,641
 
$3,734
 
$3,000
 
$6,134
Total Contractual Obligations
 
$15,509
 
$2,641
 
$3,734
 
$3,000
 
$6,134




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Critical Accounting Policies and Estimates

The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Following is a discussion of our critical accounting policies and estimates.

Revenue Recognition

We recognize revenue when all of the following conditions are met:

Persuasive evidence of an arrangement exists;
The products or services have been delivered; for Units released within our HE Division, we believe this condition is met when the film is complete and, in accordance with the terms of the arrangement, has been delivered or is available for immediate and unconditional delivery;
The license period has begun (which is referred to as the “street date” for a HE product);
The arrangement fee is fixed or determinable; and
Collection of the arrangement fee is reasonably assured based on our collection history.

Within our HE Division, our agreements generally provide for an initial order processing fee and continuing transaction fees based on a percentage of rental revenue earned by the retailers upon renting the Units to their customers. Initial order processing fees cover the direct costs of accessing Units from Program Suppliers and handling, packaging and shipping of the Units to the retailer. Once the Units are shipped, we have no further obligation to provide services to the retailer.

We recognize order processing fees as revenue on the street date and recognize transaction fees when the Units are rented to the consumers, provided all other revenue recognition criteria have been met. Certain arrangements include guaranteed minimum revenue from our customers as well as our suppliers, which vary by studio and relate to single films, typically major motion picture releases. These guarantees, which totaled $13.0 million, $15.8 million and $19.2 million, respectively, in Fiscal 2012, 2011 and 2010, are contractually fixed on the street date and are nonrefundable. We follow Accounting Standards Codification 926-605-25-19, which applies to the Entertainment-Films industry, and requires that the entire amount of these minimum guarantees be recognized as revenue, along with the corresponding cost, on the street date, provided all other revenue recognition criteria are met.

During the fourth quarter of Fiscal 2008, we entered into a long-term agreement with a customer/supplier relating to our Entertainment Essentials™ line of business, in which we developed reporting tools specifically relating to its unique business requirements. We recognized revenue in accordance with the completed-contract method and, accordingly, we recognized the revenue and related costs when the development project was completed during the second quarter of Fiscal 2010.

We recognize our business information services revenue ratably over the period of service. Revenue related to custom work projects is recognized upon delivery and acceptance by the customer.

Accounts and Notes Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Credit limits are established through a process of reviewing the financial history and stability of each customer. We regularly evaluate the collectibility of accounts receivable by monitoring past due balances. If it is determined that a customer may be unable to meet its financial obligations, a specific reserve is established based on the amount we expect to recover. An additional general reserve is provided based on aging of accounts receivable and our historical collection experience. If circumstances change related to specific customers, overall aging of accounts receivable or collection experience, our estimate of the recoverability of accounts receivable could materially change. Our allowance for doubtful accounts totaled $0.6 million at both March 31, 2012 and 2011. See also Schedule II, Valuation and Qualifying Accounts included in Item 8 of this Annual Report on Form 10-K.

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Deferred Taxes

Deferred tax assets arise from the tax benefit of amounts expensed for financial reporting purposes but not yet deducted for tax purposes and from unutilized tax credits and net operating loss carry-forwards. We evaluate our deferred tax assets on a regular basis to determine if a valuation allowance is required. To the extent it is determined the recoverability of the deferred tax assets is not more likely than not, we will record a valuation allowance against deferred tax assets. As of March 31, 2012 and 2011, we had a valuation allowance of $4.1 million and $0.2 million, respectively, recorded against our federal net operating and capital loss carry-forwards, as well as those net operating and capital loss carry-forwards in various state and foreign jurisdictions. Net deferred tax liabilities totaled $31,000 as of March 31, 2012 and net deferred tax assets totaled $1.4 million as of March 31, 2011.

Accounting for Unrecognized Tax Benefits

We record a benefit for uncertain tax positions only when we determine that those tax positions are more-likely-than-not to be sustained on audit, based on the technical merits of the position. As of March 31, 2012 and 2011, the total amount of unrecognized tax benefits was $1.0 million and $1.3 million, respectively, including penalties and interest of $91,000 and $105,000, respectively. All unrecognized tax benefits at March 31, 2012 would affect the effective tax rate if recognized. See Note 11 of Notes to Consolidated Financial Statements.

Capitalized Software

Capitalized software, which is included in property and equipment, net, consists of costs to purchase and develop internal-use software, as well as costs to develop internal software, which is used by us to provide various services to clients. The internal and external costs to develop the internal software used to support these services are capitalized after the technological and business feasibility of the project is determined and the preliminary project stage is completed. We continue to develop our internal software systems in order to expand our service offerings. Once we begin to utilize this software in our products, these costs are amortized on a straight-line basis over the estimated economic life of the software, which is five years from the date of utilization. Capitalized software is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Based on these reviews, we recorded impairment charges of $8,000 and $199,000 in Fiscal 2011 and 2010, respectively. No impairment charges were recorded in Fiscal 2012. Changes in technology could affect our estimate of the useful life of those assets. Capitalized software costs, net of accumulated amortization, totaled $6.8 million and $6.2 million at March 31, 2012 and 2011, respectively. We also had $1.5 million and $1.2 million as of March 31, 2012 and 2011, respectively, of capitalized costs associated with software projects which are still in the application development stage.

Stock-Based Compensation

We are required to measure and recognize compensation expense for all stock-based awards granted to our employees and directors, including employee stock options, deferred stock units (“DSUs”), stock appreciation rights (“SARs”), stock-settled stock appreciation rights (“SSARs”) and restricted stock units (“RSUs”), based on the estimated fair value of the award on the grant date. We utilize the Black-Scholes options pricing model and Monte Carlo simulations for valuing our stock-based awards with a conversion or exercise price.

The use of the Black-Scholes and Monte Carlo valuation models to estimate the fair value of stock option awards requires us to make judgments on assumptions regarding the risk-free interest rate, expected dividend yield, expected term and expected volatility over the expected term of the award. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of expense could be materially different in the future.

Compensation expense is only recognized on awards that ultimately vest and market-based awards. However, we have not reduced the stock-based compensation expense for estimated forfeitures because there is no basis for estimating future forfeitures since most unvested awards are held by members of senior management.  We update for forfeitures as they occur and recognize any changes to accumulated compensation expense in the period of change. If actual forfeitures are significant, our results of operations could be materially affected.

Stock-Based Compensation Agreements with Non-Employees

We are required to recognize compensation expense for stock-based compensation agreements with non-employees based on the

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estimated fair value of the award on the grant date and at the end of each reporting period. We utilize the Black-Scholes valuation model to determine the end of period fair value of these awards and record the cumulative incremental change in value as compensation expense over the life of the award.
Marketable Securities

We classify our marketable securities as “available for sale” securities and, accordingly, they are marked to market on a quarterly basis, with unrealized gains and losses being excluded from earnings and reflected as a component of other comprehensive income (loss). Dividend and interest income is recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold.

Goodwill and Intangible Assets

Goodwill and certain intangible assets acquired which have indefinite lives are not subject to amortization. We test these assets for impairment annually, or more frequently if events or changes in circumstances indicate that they might be impaired, based on cash flows and other market valuation methods. We amortize intangible assets with definite lives over their estimated useful lives using the straight-line method and evaluate for impairment in accordance with our existing policy “Impairment of Long-Lived Assets,” which is included in Note 2 of Notes to Consolidated Financial Statements.

New Accounting Guidance

See Note 3 of Notes to Consolidated Financial Statements for a discussion of the impact of new accounting guidance.

Off-Balance Sheet Arrangements

Other than as disclosed above under “Contractual Payment Obligations,” we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We operate globally and have exposure to market risk from changes in foreign exchange rates. In most markets, we generate revenue and expenses in local currencies. Foreign currency translation risk is the risk that exchange rate gains or losses arise from translating foreign entities’ statements of operations and balance sheets from functional currency to our reporting currency (the United States Dollar) for consolidation purposes. Our most significant foreign currency risks relate to the Euro, the Argentine Peso and the Canadian Dollar. We have evaluated and assessed the potential effect of this risk and concluded that near-term changes in currency rates should not materially adversely affect our financial position, results of operations or cash flows. We performed a sensitivity analysis, assuming a 10% decrease in the value of foreign currencies in which we operate. Our analysis has determined that a 10% decrease in value would have resulted in a $0.3 million decrease to our operating loss for the year ended March 31, 2012.

We have exposure to interest rate risk related to our marketable securities and, to a lesser extent, our cash deposits. Our marketable securities are investments in a municipal tax exempt bond fund. We monitor this account regularly and have evaluated and assessed the potential effect of this risk and concluded that near-term changes in interest rates should not materially adversely affect our financial position, results of operations or cash flows. Unrealized gains and losses on these investments will fluctuate and, historically, have not been significant. Our unrealized gain on this investment as of March 31, 2012 was immaterial.


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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Rentrak Corporation

We have audited the accompanying consolidated balance sheets of Rentrak Corporation and subsidiaries (the “Company”) as of March 31, 2012 and 2011, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended March 31, 2012. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rentrak Corporation and subsidiaries as of
March 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2012 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of
March 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated June 8, 2012 expressed an unqualified opinion thereon.


/s/ GRANT THORNTON LLP

Portland, Oregon
June 8, 2012

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Rentrak Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share amounts)
 
March 31,
 
2012
 
2011
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
5,526

 
$
3,821

Marketable securities
22,227

 
22,556

Accounts and notes receivable, net of allowances for doubtful accounts of $649 and $645
14,260

 
16,713

Taxes receivable and prepaid taxes

 
1,726

Deferred tax assets, net
48

 
152

Other current assets
985

 
1,091

Total Current Assets
43,046

 
46,059

Property and equipment, net of accumulated depreciation of $17,032 and $13,750
10,846

 
8,834

Deferred tax assets, net

 
1,242

Goodwill
5,101

 
5,222

Other intangible assets, net of accumulated amortization of $1,579 and $724
13,165

 
14,122

Other assets
723

 
696

Total Assets
$
72,881

 
$
76,175

Liabilities and Stockholders' Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
5,291

 
$
7,223

Accrued liabilities
3,215

 
3,022

Accrued compensation
8,781

 
6,144

Deferred revenue
1,915

 
1,210

Total Current Liabilities
19,202

 
17,599

Deferred rent, long-term portion
1,819

 
942

Taxes payable, long-term
731

 
1,261

Deferred tax liability, long-term
79

 

Note payable and accrued interest
525

 

Total Liabilities
22,356

 
19,802

Commitments and Contingencies

 

Stockholders' Equity:
 
 
 
Preferred stock, $0.001 par value; 10,000 shares authorized; none issued

 

Common stock, $0.001 par value; 30,000 shares authorized; shares issued and outstanding: 11,078 and 11,243
11

 
11

Capital in excess of par value
55,125

 
54,358

Accumulated other comprehensive income
341

 
530

Retained earnings (accumulated deficit)
(4,952
)
 
1,474

Total Stockholders' Equity
50,525

 
56,373

Total Liabilities and Stockholders' Equity
$
72,881

 
$
76,175


See accompanying Notes to Consolidated Financial Statements.

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Rentrak Corporation and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
 
 For the Year Ended March 31,
 
2012
 
2011
 
2010
Revenue
$
91,071

 
$
97,088

 
$
91,076

Cost of sales
48,125

 
54,853

 
58,277

Gross margin
42,946

 
42,235

 
32,799

Operating expenses:
 
 
 
 
 
Selling and administrative
48,854

 
44,838

 
33,723

Loss from operations
(5,908
)
 
(2,603
)
 
(924
)
Other income:
 
 
 
 
 
Interest income, net
477

 
470

 
1,151

Other, net

 
125

 

Income (loss) before income taxes
(5,431
)
 
(2,008
)
 
227

Provision (benefit) for income taxes
995

 
(1,241
)
 
(349
)
Net income (loss)
$
(6,426
)
 
$
(767
)
 
$
576

Basic net income (loss) per share
$
(0.57
)
 
$
(0.07
)
 
$
0.05

Diluted net income (loss) per share
$
(0.57
)
 
$
(0.07
)
 
$
0.05

Shares used in per share calculations:
 
 
 
 
 
Basic
11,197

 
10,962

 
10,527

Diluted
11,197

 
10,962

 
11,013


See accompanying Notes to Consolidated Financial Statements.

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Rentrak Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)
For The Years Ended March 31, 2012, 2011 and 2010
(In thousands, except share amounts)
 
Common Stock
 
Capital In Excess of Par Value
 
Cumulative Other Comprehensive Income (Loss)
 
Retained Earnings (Accumulated Deficit)
 
Total Stockholders' Equity
 
Shares
 
Amount
 
 
 
 
Balance at March 31, 2009
10,420,937

 
$
11

 
$
45,504

 
$
(203
)
 
$
1,665

 
$
46,977

Net income

 

 

 

 
576

 
576

Unrealized gain on foreign currency translation

 

 

 
208

 

 
208

Unrealized gain on investments, net of tax

 

 

 
84

 

 
84

Comprehensive income

 

 

 

 

 
868

Common stock issued pursuant to stock plans
141,950

 

 
1,118

 

 

 
1,118

Common stock used to pay for option exercises and taxes
(3,590
)
 

 
(75
)
 

 

 
(75
)
Common stock issued in exchange for deferred stock units
66,000

 

 

 

 

 

Deferred stock units granted to Board of Directors

 

 
675

 

 

 
675

Stock-based compensation expense - options

 

 
559

 

 

 
559

Stock-based compensation expense - restricted stock units

 

 
947

 

 

 
947

Common stock repurchased
(29,850
)
 

 
(302
)
 

 

 
(302
)
Income tax effect from stock-based compensation

 

 
461

 

 

 
461

Balance at March 31, 2010
10,595,447

 
$
11

 
$
48,887

 
$
89

 
$
2,241

 
$
51,228

Net loss

 

 

 

 
(767
)
 
(767
)
Unrealized gain on foreign currency translation

 

 

 
474

 

 
474

Unrealized loss on investments, net of tax

 

 

 
(33
)
 

 
(33
)
Comprehensive loss

 

 

 

 

 
(326
)
Common stock issued pursuant to stock plans
801,787

 

 
3,009

 

 

 
3,009

Common stock used to pay for option exercises
(47,973
)
 

 
(1,173
)
 

 

 
(1,173
)
Common stock used to pay for taxes associated with option exercises
(89,222
)
 

 
(2,224
)
 

 

 
(2,224
)
Common stock issued in exchange for deferred stock units
66,750

 

 

 

 

 

Common stock used to pay for taxes associated with vested RSUs
(84,173
)
 

 
(2,152
)
 

 

 
(2,152
)
Deferred stock units granted to Board of Directors

 

 
1,201

 

 

 
1,201

Contingent equity consideration related to acquisition

 

 
2,000

 

 

 
2,000

Stock-based compensation expense - options

 

 
1,160

 

 

 
1,160

Stock-based compensation expense - restricted stock units

 

 
2,397

 

 

 
2,397

Income tax effect from stock-based compensation

 

 
1,253

 

 

 
1,253


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Rentrak Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)
For The Years Ended March 31, 2012, 2011 and 2010
(In thousands, except share amounts)—cont'd
 
Common Stock
 
Capital In Excess of Par Value
 
Cumulative Other Comprehensive Income (Loss)
 
Retained Earnings (Accumulated Deficit)
 
Total Stockholders' Equity
 
Shares
 
Amount