UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

o                                  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission file number: 0-15159

 

RENTRAK CORPORATION
(Exact name of registrant as specified in its charter)

 

 

 

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

 

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act:

Large accelerated filer  o    Accelerated filer x    Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o    No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

RENTRAK CORPORATION
FORM 10-Q
INDEX

PART I - FINANCIAL INFORMATION
Item 1.		Financial Statements
		Condensed Consolidated Balance Sheets — September 30, 2006 and March 31, 2006 (unaudited)
		Condensed Consolidated Income Statements - Three and Six Months Ended September 30, 2006 and 2005 (unaudited)
		Condensed Consolidated Statements of Cash Flows - Six Months Ended September 30, 2006 and 2005 (unaudited)
		Condensed Consolidated Statements of Stockholders’ Equity — Years Ended March 31, 2005 and 2006 and Six Months Ended September 30, 2006 (unaudited)
		Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosures About Market Risk
Item 4.		Controls and Procedures
PART II - OTHER INFORMATION
Item 1A.		Risk Factors
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds
Item 4.		Submission of Matters to a Vote of Security Holders
Item 6.		Exhibits
Signatures

 

 

Rentrak Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except per share amounts)

		September 30,			March 31,
		2006			2006 (1)
Assets
Current Assets:
Cash and cash equivalents		$	7,714		$	15,666
Marketable securities		22,089			14,832
Accounts receivable, net of allowances for doubtful accounts of $447 and $461		14,720			18,314
Note receivable		451			—
Advances to program suppliers, net of program supplier reserves of $18 and $32		87			225
Income tax receivable and prepaid taxes		48			—
Deferred income tax assets		107			110
Landlord receivable		415			—
Other current assets		689			607
Total Current Assets		46,320			49,754
Property and Equipment, net of accumulated depreciation of $5,443 and $5,876		5,126			3,623
Deferred Income Tax Assets		417			312
Other Assets		622			639
Total Assets		$	52,485		$	54,328
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable		$	10,395		$	15,493
Taxes payable		903			972
Accrued liabilities		548			532
Deferred rent, current portion		20			—
Accrued compensation		885			1,366
Deferred revenue		502			484
Total Current Liabilities		13,253			18,847
Deferred rent, long-term portion		791			—
Notes payable		598			—
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: 10,558 and 10,697		11			11
Capital in excess of par value		46,912			48,069
Accumulated other comprehensive income		181			181
Accumulated deficit		(9,261		)	(12,780		)
Total Stockholders’ Equity		37,843			35,481
Total Liabilities and Stockholders’ Equity		$	52,485		$	54,328

(1)             Derived from our March 31, 2006 audited consolidated financial statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

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Rentrak Corporation and Subsidiaries
Condensed Consolidated Income Statements
(Unaudited)
(In thousands, except per share amounts)

		For the Three Months Ended September 30,						For the Six Months Ended September 30,
		2006			2005			2006			2005
Revenue		$	24,083		$	20,164		$	50,984		$	41,046
Operating expenses:
Cost of sales		15,561			13,518			34,147			28,350
Selling and administrative		5,833			5,161			11,789			10,333
		21,394			18,679			45,936			38,683
Income from operations		2,689			1,485			5,048			2,363
Other income (expense):
Interest income		341			254			695			410
Interest expense		(1		)	(1		)	(2		)	(2		)
		340			253			693			408
Income before income taxes		3,029			1,738			5,741			2,771
Provision for income taxes		1,098			634			2,222			1,011
Net income		$	1,931		$	1,104		$	3,519		$	1,760
Basic net income per share		$	0.18		$	0.10		$	0.33		$	0.17
Diluted net income per share		$	0.17		$	0.10		$	0.32		$	0.16
Shares used in per share calculations:
Basic		10,553			10,551			10,617			10,550
Diluted		11,102			11,061			11,129			11,080

 

See accompanying Notes to Condensed Consolidated Financial Statements.

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Rentrak Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

		For the Six Months Ended September 30,
		2006			2005
Cash flows from operating activities:
Net income		$	3,519		$	1,760
Adjustments to reconcile net income to net cash flows provided by operating activities:
Tax benefit from stock option exercises		154			43
Depreciation and amortization		822			815
Loss on disposal of fixed assets		33			—
Adjustment to allowance for doubtful accounts		(14		)	(133		)
Stock-based compensation		458			—
Deferred income taxes		(102		)	968
(Increase) decrease in:
Accounts receivable		3,608			1,858
Notes receivable issued to customers		(451		)	—
Advances to program suppliers		138			993
Landlord receivable		(415		)	—
Income taxes receivable and prepaid taxes		(48		)	124
Other assets		(258		)	6
Increase (decrease) in:
Accounts payable		(5,098		)	(3,246		)
Accrued liabilities and compensation		(534		)	(209		)
Deferred rent		811			—
Deferred revenue and other liabilities		18			88
Net cash provided by operating activities		2,641			3,067
Cash flows from investing activities:
Purchase of marketable securities		(7,257		)	(14,813		)
Purchase of property and equipment		(2,348		)	(1,001		)
Note receivable payments received		183			252
Net cash used in investing activities		(9,422		)	(15,562		)
Cash flows from financing activities:
Payments on capital lease obligations		—			(24		)
Proceeds from notes payable		598			—
Issuance of common stock		179			75
Repurchase of common stock		(1,948		)	—
Note receivable, related party		—			753
Net cash provided by (used in) financing activities		(1,171		)	804
Decrease in cash and cash equivalents		(7,952		)	(11,691		)
Cash and cash equivalents:
Beginning of year		15,666			21,983
End of period		$	7,714		$	10,292
Supplemental cash flow information:
Cash paid during the period for interest		$	—		$	2
Cash paid during the period for income taxes, net		2,285			110
Supplemental non-cash information
Common stock withheld in payment of exercise price for stock options		$	238		$	—

 

See accompanying Notes to Condensed Consolidated Financial Statements.

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Rentrak Corporation and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands, except share amounts)

										Cumulative
							Capital			Other						Total
		Common Stock					In Excess			Comprehensive			Accumulated			Stockholders’
		Shares		Amount			of Par Value			Income			Deficit			Equity
Balance at March 31, 2004		9,739,537		$	9		$	41,094		$	181		$	(22,489	)	$	18,795
Net income		—		—			—			—			5,243			5,243
Common stock issued pursuant to stock plans		522,557		1			2,394			—			—			2,395
Common stock used to pay for option exercises		(25,381	)	—			(270		)	—			—			(270		)
Issuance of common stock		308,200		—			2,774			—			—			2,774
Income tax benefit from stock option exercises		—		—			996			—			—			996
Balance at March 31, 2005		10,544,913		10			46,988			181			(17,246		)	29,933
Net income		—		—			—			—			4,466			4,466
Common stock issued pursuant to stock plans		152,423		1			707			—			—			708
Fair value of options granted to non-employee		—		—			219			—			—			219
Income tax benefit from stock option exercises		—		—			155			—			—			155
Balance at March 31, 2006		10,697,336		11			48,069			181			(12,780		)	35,481
Net income		—		—			—			—			3,519			3,519
Common stock issued pursuant to stock plans		54,189		—			179			—			—			179
Deferred stock units granted to Board of Directors		—		—			132			—			—			132
Stock-based compensation expense		—		—			326			—			—			326
Common stock repurchased		(193,500	)	—			(1,948		)	—			—			(1,948		)
Income tax benefit from stock option exercises		—		—			154			—			—			154
Balance at September 30, 2006		10,558,025		$	11		$	46,912		$	181		$	(9,261	)	$	37,843

 

See accompanying Notes to Condensed Consolidated Financial Statements.

5

RENTRAK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.  Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of Rentrak Corporation have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with the accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three and six-month periods ended September 30, 2006 are not necessarily indicative of the results to be expected for the entire fiscal year ending March 31, 2007. The Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and footnotes thereto included in our 2006 Annual Report to Shareholders.

The Condensed Consolidated Financial Statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to present fairly our financial position, results of operations and cash flows.

Note 2.  Net Income Per Share

Basic net income per share (“EPS”) and diluted EPS are computed using the methods prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share.” Following is a reconciliation of the shares used for the basic EPS and diluted EPS calculations (in thousands):

		Three Months Ended Sept. 30,				Six Months Ended Sept. 30,
		2006		2005		2006		2005
Basic EPS:
Weighted average number of shares of common stock outstanding		10,553		10,551		10,617		10,550
Diluted EPS:
Effect of dilutive deferred stock units, stock options and warrants		549		510		512		530
		11,102		11,061		11,129		11,080
Options not included in diluted EPS because the exercise price of the options was greater than the average market price of the common shares for the period		25		227		25		217

 

Note 3.  Business Segments, Significant Suppliers and Major Customers

We operate in two business segments, our Pay-Per-Transaction (“PPT”) and Advanced Media and Information (“AMI”) operating divisions, and, accordingly, we report certain financial information by individual segment under this structure. The PPT Division focuses on managing our business operations that facilitate the delivery of home entertainment content products and related rental and sales information for that content to our Participating Retailers on a revenue sharing basis. The AMI Division concentrates on the management and growth of our Essentials Suite™ of business intelligence services, primarily offered on a recurring subscription basis, which are no longer in the early stages, as well as operating our direct revenue sharing (“DRS”) services.

We did not have any revenues from our Other Division in the first two quarters of fiscal 2007 as Supply Chain Essentialsä, OnDemand Essentialsä and Retail Essentialsä moved from the Other Division to the AMI Division during the first quarter of fiscal 2007. Accordingly, revenue related to these products in the first two quarters of fiscal 2006 was reclassified to the AMI Division for comparison purposes.

Assets are not specifically identified by segment as the information is not used by the chief operating decision maker to measure the segments’ performance.

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Certain information by segment was as follows (in thousands):

		PPT			AMI			Other(1)			Total
Three Months Ended September 30, 2006
Sales to external customers		$	20,172		$	3,911		$	-		$	24,083
Depreciation and amortization		11			334			71			416
Income (loss) from operations		3,804			1,651			(2,766		)	2,689
Three Months Ended September 30, 2005
Sales to external customers		$	17,442		$	2,722		$	-		$	20,164
Depreciation and amortization		5			413			85			503
Income (loss) from operations		3,125			680			(2,320		)	1,485
Six Months Ended September 30, 2006
Sales to external customers		$	43,675		$	7,309		$	-		$	50,984
Depreciation and amortization		23			652			147			822
Income (loss) from operations		7,703			2,915			(5,570		)	5,048
Six Months Ended September 30, 2005
Sales to external customers		$	35,641		$	5,405		$	-		$	41,046
Depreciation and amortization		20			622			173			815
Income (loss) from operations		5,602			1,637			(4,876		)	2,363

 

(1)          Includes revenue and expenses relating to products and/or services which are still in early stages, as well as corporate expenses and other expenses which are not allocated to a specific segment.

Additional results of operations information by segment was as follows:

		Three Months Ended September 30, (1)
		2006					2005
					% of					% of
(Dollars in thousands)		Dollars			revenues		Dollars			revenues
PPT Division
Revenues		$	20,172		100.0	%	$	17,442		100.0	%
Cost of sales		14,974			74.2		13,037			74.7
Gross margin		$	5,198		25.8	%	$	4,405		25.3	%
AMI Division
Revenues		$	3,911		100.0	%	$	2,722		100.0	%
Cost of sales		587			15.0		481			17.7
Gross margin		$	3,324		85.0	%	$	2,241		82.3	%

 

		Six Months Ended September 30, (1)
		2006					2005
					% of					% of
(Dollars in thousands)		Dollars			revenues		Dollars			revenues
PPT Division
Revenues		$	43,675		100.0	%	$	35,641		100.0	%
Cost of sales		33,068			75.7		27,557			77.3
Gross margin		$	10,607		24.3	%	$	8,084		22.7	%
AMI Division
Revenues		$	7,309		100.0	%	$	5,405		100.0	%
Cost of sales		1,079			14.8		793			14.7
Gross margin		$	6,230		85.2	%	$	4,612		85.3	%

 

(1) Percentages may not add due to rounding.

Revenue by service activity was as follows (in thousands):

 

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During the three and six-month periods ended September 30, 2006 and 2005, we had Program Suppliers that supplied product which generated in excess of 10% of our total revenues as follows:

 

There were no other Program Suppliers who provided product that accounted for 10% or more of our total revenues for the three and six-month periods ended September 30, 2006 or 2005. Although management does not believe that the relationships with the significant Program Suppliers will be terminated in the near term, a loss of any one of these suppliers could have an adverse effect on our financial condition and results of operations.

There were no customers that accounted for 10% or more of our total revenue in the three and six-month periods ended September 30, 2006 or 2005.

Note 4.  Stock-Based Compensation

Adoption of SFAS No. 123R

Effective April 1, 2006, we adopted SFAS No. 123R, “Share-Based Payment.” We elected to use the modified prospective transition method as provided by SFAS No. 123R and, accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of expensing stock-based compensation. Under this method, the provisions of SFAS No. 123R apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption is recognized in net income in the periods after the date of adoption using the Black-Scholes valuation method over the remainder of the requisite service period. Prior to April 1, 2006, we accounted for stock options using the intrinsic value method as prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” See also “Critical Accounting Policies and Estimates” in Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

We provided disclosures of net income and earnings per share as if the method prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation,” had been applied in measuring compensation expense in prior periods as follows (in thousands, except per share amounts):

 

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Certain information regarding our stock-based compensation was as follows (in thousands, except per share amounts):

		Three Months Ended Sept. 30,						Six Months Ended Sept. 30,
		2006			2005			2006			2005
Weighted average grant-date per share fair value of share options granted		$	-		$	-		$	-		$	7.26
Total intrinsic value of share options exercised		300			82			424			116
Stock-based compensation recognized in results of operations as a component of selling and administrative expense		148			-			326			-
Tax benefit recognized in statement of operations		28			-			52			-
Cash received from options exercised and shares purchased under all share-based arrangements		30			14			179			24
Tax deduction realized related to stock options exercised		108			30			154			43

 

No stock-based compensation was capitalized as a part of an asset during the three or six months ended September 30, 2006.

To determine the fair value of stock options granted, we used the Black-Scholes option pricing model and the following weighted average assumptions:

 

There were no options granted in the three or six-month periods ended September 30, 2006.

The risk-free rate used is based on the U.S. Treasury yield over the estimated term of the options granted. Prior to the adoption of SFAS No. 123R, the expected term was estimated based on historical experience. Under SFAS No. 123R, our option pricing model will utilize the simplified method accepted under Staff Accounting Bulletin No. 107 to estimate the expected term. The expected volatility for options granted is calculated based on our historical volatility over the prior seven year period. We have not paid dividends in the past and we do not expect to pay dividends in the future and, therefore, the expected dividend rate is 0%.

Effective June 15, 2006, our Board of Directors (the “Board”), upon recommendation of the Compensation Committee of the Board, approved the grant of 9,000 deferred stock units (“DSUs”) to each of our five non-employee directors in lieu of the annual grants of stock options that had been in place under the 1997 Equity Participation Plan. The DSUs represent the right to receive an equal number of shares of our Common Stock pursuant to the terms and conditions of our 2005 Stock Incentive Plan on a deferred basis in compliance with the terms of Section 409A of the Internal Revenue Code, as amended. The awards of DSUs will vest in full on June 15, 2007, provided that the recipient continues to be a non-employee director on that date, and provided further that the DSUs will fully vest upon termination of the recipient’s service on the Board due to death or disability or a change in control of Rentrak Corporation before that date. The awards of DSUs will be payable following the recipient’s ceasing to be a director.

Compensation expense related to DSUs, which totaled $452,000, was calculated based on the fair value on the date of grant as if the stock was vested. We recorded an expense of $113,000 and $132,000, respectively, during the three and six-month periods ended September 30, 2006, with the remaining $320,000 of related compensation to be recognized over the remaining vesting period for these awards at the rate of approximately $113,000 per quarter through June 15, 2007.

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We amortize stock-based compensation on a straight-line basis over the vesting period of the individual award, which is the requisite service period. We have not reduced the stock-based compensation for estimated forfeitures as there is no basis for estimating future forfeitures as most unvested options are held by members of senior management and the non-employee Directors.

Shares to be issued under stock-based awards will come from authorized but unissued shares.

The following reconciles what certain operating results would have been without the effects of applying SFAS No. 123R in the three and six-month periods ended September 30, 2006 (in thousands, except per share amounts):

		Three Months Ended September 30, 2006						Six Months Ended September 30, 2006
		As reported			If reported following APB 25			As reported			If reported following APB 25
Income before income taxes		$	3,029		$	3,177		$	5,741		$	6,067
Net income		1,931			2,033			3,519			3,778
Cash flow from operating activities		1,816			1,816			2,641			2,641
Cash flow from financing activities		214			214			(1,171		)	(1,171		)
Basic earnings per share		0.18			0.19			0.33			0.36
Diluted earnings per share		0.17			0.18			0.32			0.34

 

Stock Incentive Plan

The Rentrak Corporation 2005 Stock Incentive Plan (the “2005 Plan”) replaced the 1997 Non-Officer Employee Stock Option Plan and the 1997 Equity Participation Plan (the “Prior Plans”).

Under the 2005 Plan, we may grant incentive or nonqualified stock options, stock appreciation rights, restricted stock or units with time-based vesting, performance shares with vesting tied to performance goals and other equity-based awards to eligible participants, including our officers, other key employees, our non-employee directors and certain consultants. Up to a total of 1.0 million shares of our common stock may be issued pursuant to awards granted under the 2005 Plan, subject to adjustment for changes in capitalization. In addition, shares covered by outstanding stock options under the Prior Plans that are cancelled, terminate or otherwise expire without being exercised become available for grants of new awards under the 2005 Plan.

Our option plans are administered by the Compensation Committee of our Board, which determines the terms and conditions of options issued under the plans. Generally, options granted under the plans vest over periods of one to four years and expire ten years after the date of grant.

As of September 30, 2006, awards covering 848,500 shares of our common stock remained available for grant under our 2005 Plan and 2,347,866 shares of our common stock were reserved for issuance pursuant to the 2005 Plan and the Prior Plans combined.

Stock option activity for the six-month period ended September 30, 2006 was as follows:

 

During the six months ended September 30, 2006, 20,743 shares of common stock with a market value of approximately $238,000 were withheld in payment of the exercise price for stock options.

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Certain information regarding options outstanding as of September 30, 2006 was as follows:

 

Deferred stock unit activity for the six-month period ended September 30, 2006 was as follows:

		Units Outstanding		Weighted Average Grant Date Fair Value
Outstanding at March 31, 2006		-		-
Granted		45,000		$	10.04
Vested		-		-
Forfeited		-		-
Outstanding at September 30, 2006		45,000		10.04

 

As of September 30, 2006, unrecognized stock-based compensation related to outstanding, but unvested options and DSUs was $1.4 million, which will be recognized over the weighted average remaining vesting period of 3.25 years.

Note 5.  Related Party Transactions

On January 25, 2005, we entered into a consulting agreement with F. Kim Cox, our former President and Secretary, whereby he is assisting us with strategic planning and product development issues.  Pursuant to the agreement, we pay Mr. Cox $25,000 per month from February 2005 through March 2007.  We paid Mr. Cox a total of $75,000 and $150,000, respectively, pursuant to this agreement in the three and six-month periods ended September 30, 2006 and 2005.

Note 6.   Repurchase of Shares

During the first six months of fiscal 2007, we repurchased a total of 193,500 shares of our common stock at an average price of $10.07 per share, which totaled $1.9 million. The stock repurchase plan, approved by our Board of Directors in January 2006, authorized the purchase of up to 1,000,000 shares of our common stock and does not have an expiration date. At September 30, 2006, 806,500 shares remained available for repurchase under this plan.

Note 7.  Renovation of Corporate Headquarter Office and State of Oregon and City of Portland Loans and Grant

In connection with our corporate headquarter office renovations, we will receive cash-based rent incentives of up to $0.9 million from the lessor based on our qualified expenditures. These amounts will be amortized against rental expense over the term of the lease, which begins January 1, 2007. Based on our expenditures to date less reimbursements previously received, we have recorded a landlord receivable of $415,000 as of September 30, 2006. See also “Critical Accounting Policies and Estimates” in Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In addition, in June 2006, we received commitments for conditional loans from the State of Oregon and the Portland Development Commission (“PDC”) for funding in the amounts of $200,000 and $690,000, respectively. The loans contain provisions relating to forgiveness if we meet certain requirements. Additionally, we received a commitment for a conditional grant from the PDC for $58,000. These funds are being used to pay for leasehold improvements associated with our corporate headquarters and were provided to us as an incentive to maintain our corporate headquarters in Portland, Oregon rather than relocating to another state. Through September 30, 2006, we received $598,000 from these agencies and have recorded this amount as Notes Payable on our balance sheet. We expect to receive the remaining

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funds associated with these arrangements over the next few months as portions of our renovations are completed.

Note 8. Disposal of Assets

During the second quarter of fiscal 2007, we retired and/or disposed of fixed assets which were being replaced by new assets associated with our renovations (see Note 7). The gross value of the assets was $1.3 million; however, since most of these assets were fully depreciated, the amount of the loss associated with the disposals was approximately $33,000 and was included as a component of selling and administrative expense.

Note 9.  New Accounting Pronouncements

SFAS No. 158

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” which requires employers to recognize on their balance sheets the funded status of pension and other postretirement benefit plans, effective December 31, 2006 for calendar year-end companies. In addition SFAS No. 158 requires fiscal year-end measurement of plan assets and benefit obligations, eliminating the use of earlier measurement dates currently permissible, effective for fiscal years ending after December 15, 2008. We do not have any defined benefit pension or other postretirement plans and, accordingly, the adoption of the provisions of SFAS No. 158 will not have any effect on our financial position or results of operations.

SFAS No. 157

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair-value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.  While we are still analyzing the effects of applying SFAS No. 157, we believe that the adoption of SFAS No. 157 will not have a material effect on our financial position or results of operations.

Staff Accounting Bulletin No. 108

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” which addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB No. 108 requires companies to quantify misstatements using both the balance sheet and income statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. We believe that the implementation of SAB No. 108 will not have any effect on our financial position or results of operations.

FASB Staff Position No. AUG AIR-1

In September 2006, the FASB issued Staff Position No. AUG AIR-1, “Accounting for Planned Major Maintenance Activities,” which prohibits accruing for the future cost of periodic major overhauls and planned maintenance of plant and equipment in annual and interim periods. This Staff Position is effective for fiscal years beginning after December 15, 2006 and must be retrospectively applied. We do not accrue for such costs in annual or interim periods and, accordingly, the adoption of this Staff Position will not have any effect on our financial position or results of operations.

FASB Interpretation No. 48

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” which defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. Interpretation No. 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes.” Interpretation No. 48 is effective for fiscal years beginning after December 15, 2006. Upon adoption, we will adjust our financial

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statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any adjustment will be recorded directly to our beginning retained earnings balance in the period of adoption and reported as a change in accounting principle. We are currently analyzing the effects of adopting Interpretation No. 48.

ITEM 2.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

Certain information included in this Quarterly Report on Form 10-Q (including Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding revenue growth, gross profit margin and liquidity) constitute forward looking statements that involve a number of risks and uncertainties. Forward looking statements may be identified by the use of forward looking words such as “may,” “will,” “expects,” “intends,” “anticipates,” “estimates” or “continues” or the negative thereof or variations thereon or comparable terminology. The following factors are among the factors that could cause actual results to differ materially from the forward looking statements: our ability to retain and grow our customer base of retailers participating in the Pay-Per-Transaction system (the “PPT System”) (“Participating Retailers”) and customers for our business intelligence software and services; the financial stability of the Participating Retailers and their performance of their obligations under our PPT System; business conditions and growth in the video industry and general economic conditions, both domestic and international; customer demand for movies in various media formats subject to company guarantees; competitive factors, including increased competition, expansion of revenue sharing programs other than the PPT System by motion picture studios or other licensees or owners of the rights to certain video programming or video game publishers (“Program Suppliers”) and new technology; the continued availability of digital videodiscs (“DVDs”), video games and videocassettes (“Cassettes”) (collectively “Units”) leased/licensed to home video specialty stores and other retailers from Program Suppliers; the loss of significant Program Suppliers; our ability to successfully develop and market new services, including our business intelligence services, to create new revenue streams; and non-renewal of our line of credit. This Quarterly Report on Form 10-Q further describes some of these factors. In addition, some of the important factors that could cause actual results to differ from our expectations are discussed in Item 1A to our fiscal 2006 Form 10-K, which was filed with the Securities and Exchange Commission on June 12, 2006. These risk factors have not significantly changed since the filing of the fiscal 2006 Form 10-K.

Business Trends

Our corporate structure includes separate Pay-Per-Transaction (“PPT”) and Advanced Media and Information (“AMI”) operating divisions and, accordingly, we report certain financial information by individual segment under this structure.

Our PPT Division focuses on managing our business operations that facilitate the delivery of home entertainment content products (DVDs, cassettes, video games, etc.) and related rental and sales information for the content to home video specialty stores and other retailers, on a revenue sharing basis.  We lease product from various suppliers, typically motion picture studios. Under our PPT System, retailers sublease that product from us and rent it to consumers. Retailers then share a portion of each retail rental transaction with us and the studio. Since we collect, process and analyze rental and sales information at the title level, we report that information to both the studio and the respective retailers.

Our AMI Division concentrates on the management and growth of our Essentials Suite™ of business intelligence services which are no longer in the development stage, as well as operating our direct revenue sharing (“DRS”) services. Our Essentials Suite™ software and services, offered on a recurring subscription basis, provide unique data collection, management, analysis and reporting functions, resulting in business intelligence information valuable to our clients. Our DRS services collect, track, audit and report the results to our suppliers under established agreements on a fee for service basis.  During the first quarter of fiscal 2007, Supply Chain Essentialsä, OnDemand Essentialsä and Retail Essentialsä moved from the Other Division to the AMI Division as these lines were considered to be no longer in the development stage.

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The PPT Division

The financial results from the PPT Division continue to be affected by the changing dynamics in the home video and game rental market. 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 their entertainment content. Some examples include renting Units of product from our Participating Retailers, ordering product direct via online subscriptions and/or online distributors, subscribing to at-home movie channels, purchasing and owning the unit directly or selecting an at-home “pay-per-view” option. Our PPT system focuses on the traditional “brick and mortar” retailer. We believe that our system successfully addresses the many choices available to consumers and affords our Participating Retailers the opportunity to stock their stores with a wider selection of titles and a greater supply of popular box office releases.  Most of our arrangements are structured so that most Participating Retailers pay minimal upfront fees and lower per transaction fees in exchange for ordering all Units offered by a particular Program Supplier (referred to as “output” programs). Since these programs usually result in more overall Units rented, our Retailers’ revenue and the corresponding share with the studios have increased. These programs are, in part, an economic response to the changing dynamics of the home video rental market.  We expect the growth of these output programs to continue, and believe that they will be financially beneficial for the Participating Retailers, Program Suppliers and us.

Our base of Participating Retailers continues to be strong and we are implementing strategies to obtain new Participating Retailers and Program Suppliers in an effort to further stabilize and grow our overall PPT revenue and earnings streams.

We continue to be in good standing with all of our Program Suppliers and we make on-going efforts to enhance those business relationships through improvement of current services offered and the development of new service offerings. We are also continually seeking to develop business relationships with new Program Suppliers. In September 2003, we entered into a combined DVD/VHS revenue sharing program with one of the world’s largest studios that has resulted in their becoming one of our largest Program Suppliers representing 17% and 26% of our total revenues, respectively, in the six-month periods ended September 30, 2006 and 2005. Also, in November 2005, based on our successful involvement with another major studio in Canada, we entered into a revenue sharing agreement which extends product offerings to Participating Retailers in the United States. This agreement was effective for titles released beginning in January 2006. This will allow our U.S. Participating Retailers access to the large volume of high quality entertainment that this major studio has been delivering for years. Additional Program Suppliers represented 17%, 15%, 12% and 11% of our total revenues in the six-month period ended September 30, 2006. As a result, our product mix was evenly spread among five major Program Suppliers (see Note 3 of Notes to Condensed Consolidated Financial Statements). However, as is typical of our agreements with Program Suppliers, our relationships with these Program Suppliers may be terminated without cause upon thirty days’ written notice by either party.

AMI and Other Divisions

We are also allocating significant resources towards our business intelligence service offerings, both those services that are currently operational as well as those that are in various stages of development.  Our suite of business intelligence services has been well received in the various targeted markets to date, as our offerings fit well with the needs identified by those market participants. Our Essentialsä business intelligence service offerings which are fully operational and no longer in significant stages of development, realized a revenue increase of 33% during the six-month period ended September 30, 2006 compared to the same period of the prior fiscal year. We intend to continue to invest in our existing, as well as new, business intelligence services in the near-term as we expand the markets we serve and our service lines, which likely will lower our earnings. Longer-term, we believe these services will provide significant future revenue and earnings streams and contribute to our overall success.

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