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EX-21.1 - EX-21.1 - Speed Commerce, Inc. | c58626exv21w1.htm |
EX-31.2 - EX-31.2 - Speed Commerce, Inc. | c58626exv31w2.htm |
EX-24.1 - EX-24.1 - Speed Commerce, Inc. | c58626exv24w1.htm |
EX-32.1 - EX-32.1 - Speed Commerce, Inc. | c58626exv32w1.htm |
EX-32.2 - EX-32.2 - Speed Commerce, Inc. | c58626exv32w2.htm |
EX-23.1 - EX-23.1 - Speed Commerce, Inc. | c58626exv23w1.htm |
EX-10.48 - EX-10.48 - Speed Commerce, Inc. | c58626exv10w48.htm |
EX-10.46 - EX-10.46 - Speed Commerce, Inc. | c58626exv10w46.htm |
EX-10.39 - EX-10.39 - Speed Commerce, Inc. | c58626exv10w39.htm |
EX-10.47 - EX-10.47 - Speed Commerce, Inc. | c58626exv10w47.htm |
EX-10.69 - EX-10.69 - Speed Commerce, Inc. | c58626exv10w69.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 2010
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 0-22982
NAVARRE CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota | 41-1704319 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
7400 49th Avenue North, New Hope, MN 55428
(Address of principal executive offices)
(Address of principal executive offices)
(763) 535-8333
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, No par value | The NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act:
None
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
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 o No þ
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 þ No o
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
o No o
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 registrants 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. o
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. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the registrants Common Stock, no par value per share, held by
non-affiliates of the registrant as of September 30, 2009 was approximately $73,292,600 (based on
the closing price of such stock as quoted on The NASDAQ Global Market of $2.20 on such date).
The number of shares outstanding of the registrants Common Stock, no par value per share, was
36,366,668 as of June 10, 2010.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference to portions of the registrants Proxy Statement
for the 2010 Annual Meeting of Shareholders, which the company expects to file with the
Securities and Exchange Commission (SEC) within 120 days after the fiscal year end.
NAVARRE CORPORATION
FORM 10-K
TABLE OF CONTENTS
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2
Table of Contents
PART I
Item 1 Business
Overview
Navarre Corporation distributes and publishes a wide range of computer software, home
entertainment and multimedia products and provides value-added services to third-party publishers.
Since our founding in 1983, we have established distribution relationships with major retailers
including Best Buy, Wal-Mart/Sams Club, Costco Wholesale Corporation, Staples, Office Depot and
Target, and we distribute to more than 19,000 retail and distribution center locations throughout
the United States and Canada. We believe our established relationships throughout the supply chain
and our broad product offering permit us to offer these products to our retail customers and
provide access to a retail channel for the publishers of such products.
Historically, our business has focused on providing distribution services, such as third party
logistics (3PL), to vendors. Over the past several years, we have expanded our business to include
the licensing and publishing of home entertainment and multimedia content, primarily through the
acquisition of publishers in select markets. By expanding our product offerings through such
acquisitions, we believe we can leverage both our sales experience and distribution capabilities to
drive increased retail penetration and more effective distribution of such products, and enable
content developers and publishers that we acquire to focus more on their core competencies.
Information About Our Segments
Our business operates through two business segments Distribution and Publishing.
Distribution. Through our distribution business, we distribute computer software, home video,
video games and accessories and provide fee-based 3PL services to North American retailers and
their suppliers. Our vendors include Symantec Corporation, Kaspersky Lab, Inc., Roxio (a division
of Sonic Solutions), Webroot Software, Inc., Nuance Communications, Inc., McAfee, Inc., Corel
Corporation, LucasArts Entertainment Company and our own publishing business.
On May 31, 2007, the Company sold its wholly-owned subsidiary, Navarre Entertainment Media,
Inc. (NEM) to an unrelated third party. NEM operated the Companys independent music distribution
activities. The Company has presented the independent music distribution business as discontinued
operations. As part of this transaction, the Company recorded a gain during fiscal 2008 of $6.1
million ($4.6 million net of tax), which included severance and legal costs of $339,000 and other
direct costs to sell of $842,000. The gain is included in Gain on sale of discontinued operations
in the Consolidated Statements of Operations. For the fiscal year ended March 31, 2008, net sales
for NEM were $5.2 million. This transaction divested the Company of all of its independent music
distribution activities.
Publishing. Through our publishing business, which generally has higher gross margins than our
distribution business, we own or license various computer software and home video titles, and other
related merchandising and broadcasting rights. Our publishing business packages, brands, markets
and sells directly to retailers, third party distributors and our distribution business. Our
publishing business currently consists of Encore Software, Inc. (Encore) and FUNimation
Productions, Ltd. (FUNimation). Encore, which we acquired in July 2002, publishes print, personal
productivity, education, family entertainment and system utilities computer software categories,
including titles such as Print Shop, Print Master, Mavis Beacon Teaches Typing, Advantage, Diner
Dash, H&R Block, Bicycle and Hoyle PC Gaming products. FUNimation, acquired on May 11, 2005, is the
leading anime content provider in North America. FUNimation licenses and distributes titles such as
Dragon Ball Z, Dragon Ball Kai, Dragon Ball, Dragon Ball GT, Fullmetal Alchemist, Fullmetal
Alchemist Brotherhood, One Piece, Afro Samurai, Shin Chan, Claymore, Darker Than Black, Robotech
The Shadow Chronicles, Evangelion1.11, Trigun and Eden of The East. FUNimation also distributes
live action films such as Shinobi, Genghis Khan, RoboGeisha, Kamui Gaiden. Our digital strategy
consists primarily of the sale of home video titles through online digital retailers such as
iTunes. The Company also continues to explore additional digital distribution opportunities for our
other product categories.
In fiscal 2009, a former component of our publishing business, BCI Eclipse Company, LLC
(BCI), began winding down its licensing operations related to budget home video, and the
wind-down was completed during the fourth quarter of fiscal 2010.
On May 27, 2010, we announced we have engaged Houlihan Lokey to assist it in structuring and
negotiating a potential transaction for the sale of FUNimation, although there can be no assurances
that this process will result in the consummation of a transaction.
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Table of Contents
FUNimation, the leading anime content provider in North America, was acquired on May 11, 2005
and operates as part of the Companys publishing business segment. Accordingly, all results of
operations and assets and liabilities of FUNimation for all periods presented in any future filings
will be classified as discontinued operations.
Business Strategy & Strengths
We seek to grow our business through a combination of organic growth and targeted
acquisitions. We intend to execute this strategy by focusing on our competitive strengths, which
include:
| Distribution of a Broad Range of Products | ||
| Provision of Value-Added and Logistical Services | ||
| Acquisition of Attractive Publishing Content | ||
| Integration of Our Technology and Systems with Customers and Vendors | ||
| Established Relationships with Publishers and Customers. |
Distribution Markets
Computer Software
According to The NPD Group, the leading North American provider of consumer and retail market
research information for manufacturers and retailers, the computer software industry achieved $2.9
billion in sales on a trailing 12 month basis ended December 31, 2009 compared to $3.3 billion in
2008. During fiscal 2010, we distributed approximately $430.0 million of software product. We,
like the industry, experienced a sales decrease during this time period.
We presently have relationships with computer software publishers such as Symantec
Corporation, Kaspersky Lab, Inc., Roxio (a division of Sonic Solutions) and Webroot Software, Inc.
These relationships are important to our distribution business and during the fiscal year ended
March 31, 2010, each of these publishers accounted for more than $20.0 million in revenues. In the
case of Symantec, net sales accounted for approximately $102.9 million, $104.0 million and $95.0
million in the fiscal years ended March 31, 2010, 2009 and 2008, respectively.
We have agreements in place with each of the vendors whose products we distribute, but, in
most instances, such agreements are short-term in nature and may be cancelled without cause and
upon short notice, typically 30 days. The agreements typically cover the right to distribute in the
United States and Canada, but do not restrict the vendors from distributing their products through
other distributors or directly to retailers and do not guarantee product availability to us for
distribution. These agreements allow us to purchase the vendors products at a wholesale price and
to provide various distribution and fulfillment services in connection with the vendors products.
We believe these arrangements are standard for such vendors and are essentially operational
requirements.
Video Games
According to The NPD Group, sales in the video game and accessories industry were $19.3
billion in 2009 compared to $21.0 billion in 2008. During fiscal 2010, we distributed
approximately $27.3 million of video game product. According to industry sources, the installed
base of video game consoles in North America is expected to grow to approximately 302.2 million
users by 2014 compared to 170.5 million users in December 2009.
Retailers concentrated on a few major releases, most of which were distributed direct to
retail by major studios during fiscal year 2010. Additionally, there was a reduction in the number
of titles available for us to distribute, which negatively affected our fiscal 2010 sales.
Our relationships with video game vendors such as Lucas Arts Entertainment, Square Enix, USA,
and Southpeak, are important to this category of our distribution business.
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Table of Contents
Home Video
According to industry sources, U.S. home video industry sales totaled $20.0 billion in 2009
compared to $21.0 billion in 2008. During fiscal 2010, we distributed approximately $71.1 million
of home video product. We, like the industry, experienced a sales decrease during this time
period.
Economic pressures increased purchase resistance by consumers in home video, as rental
spending was up 4.2% and video-on-demand was up 32%, while sell-through on media-based formats was
down 13%, according to trade sources. Retailers responded by reducing catalog offerings and shelf
space, resulting in significant pressure on smaller publishers who rely on normal distribution
channels, while large studios typical distribute directly to major retailers.
Our relationships with Digital1Stop, Magnolia Pictures and Topics Entertainment, Inc. are
important to our home video distribution business.
Independent Label Music
Until the May 2007 divestiture of NEM, we were one of a limited number of large, independent
distribution companies that represented independent labels exclusively on a regional or national
basis.
Customers
Since our founding in 1983, we have established relationships with retailers across mass
merchant, specialty and wholesale club channels, including Best Buy, Wal-Mart/Sams Club, Costco
Wholesale Corporation, Staples, Office Depot and Target. We annually sell and distribute products
to more than 19,000 retail and distribution center locations throughout the United States and
Canada. While a significant portion of our revenues is generated from these major retailers, we
also supply products to smaller independent retailers and through our business-to-business site
located at www.navarre.com. See further disclosure in Part I, Item 1. Business
Navarres Distribution Business Model: E-Commerce. Through these sales channels, we seek to ensure
a broad reach of product throughout North America in a cost-efficient manner. References to our
website are not intended to and do not incorporate information on the website into this Annual
Report.
In each of the past several years, we have had a small number of customers that each accounted
for 10% or more of our net sales. During the fiscal years ended March 31, 2010, 2009 and 2008,
sales to two customers, Best Buy and Wal-Mart/Sams Club, accounted for approximately 34% and 19%,
35% and 16%, and 31% and 13%, respectively, of our total net sales. Substantially all of the
products we distribute to these customers are supplied on a non-exclusive basis under arrangements
that may be cancelled without cause and upon short notice. These arrangements do not include such
material terms as purchase price of the goods purchased but rather principally address operational
requirements of the transactions. None of our retail customers are required to make minimum
purchases, including our largest customers Best Buy and Wal-Mart/Sams Club.
Navarres Distribution Business Model
Vendor Relationships
We view our vendors as customers and work to manage retail relationships to make their
business easier and more productive. By doing so, we believe our reputation as a service-oriented
organization has helped us expand and retain our vendor relationships with such companies as:
Symantec Corporation, Kaspersky Lab, Inc., Roxio (a division of Sonic Solutions), Webroot Software,
Inc., Nuance Communications, Inc., McAfee, Inc., Corel Corporation and LucasArts Entertainment
Company.
Furthermore, our dedication to smaller, second-tier vendors has helped to complement our
vendor roster. We provide these vendors the opportunity to access shelf space and assist in the
solicitation, logistics, promotion and management of products that they otherwise may be unable to
obtain. We also conduct one-on-one meetings with smaller vendors to give them the opportunity to
establish crucial business relationships with our retail customers.
5
Table of Contents
Retail Services
Along with the value-added sales functions we provide to vendors, we also have the ability to
customize shipments to each individual customer. With respect to certain customers, we provide
products on a consignment basis, which allows the vendors of these products to receive placement at
retail while minimizing inventory costs to our customers, and in some cases to Navarre. In the case
of the warehouse club channel, we may pre-sticker multiple different labels, based on the
vendor/customer preference. We assemble creative marketing programs, which include pallet programs,
product bundles and specialized packaging. We also create multi-vendor assortments for the club
channel, providing the retailer with a broad assortment of products. Our marketing and creative
services department designs and produces a variety of advertising vehicles including in-store
flyers, direct mail pieces and magazine/newspaper ads, as well as free standing displayers for
retail.
We are committed to offering first-rate information flow for all vendors. We understand the
importance of sharing sell-through, inventory, sales forecasts, promotional forecasts, SKU status
and all SKU data with the respective vendor. We provide the aforementioned information via a secure
online portal for vendors. Furthermore, each individual account manager has account-specific
information that is shared on a regular basis with appropriate vendors. We also accommodate
specialized reporting requests for our vendors, which we believe helps in the management of their
business.
Warehouse Systems
A primary focus of our distribution business is logistics and supply chain management. As
customer demands become more sophisticated, we have continued to update our technology. With our
returns processing system, we process returns and issue both credit and vendor deductions
efficiently and timely. We believe our inventory system offers adequate in-stock levels of product,
on-time arrivals of product to the customer, inventory management and acceptable return rates,
thereby strengthening our customer relationships.
E-Commerce
During fiscal year 2010, we continued to expand the number of electronic commerce
(e-commerce) customers for whom we perform fulfillment and distribution. Our business-to-business
web-site www.navarre.com integrates on-line ordering and deployment of text and visual
product information, and has been enhanced to allow for easier user navigation and ordering.
References to our website are not intended to and do not incorporate information on the website
into this Annual Report.
Navarres Publishing Business Model
In July 2002, we acquired Encore, a publisher of computer software. Encore has an exclusive
North American licensing agreement with Riverdeep, Inc. (Riverdeep) for the sales and marketing
of Riverdeeps interactive products in the print and productivity markets, that includes all
products published under the Broderbund brand. Encore also has exclusive licensing agreements with
Sony Online Entertainment, Hasbro, H&R Block and The United States Playing Card Company, Inc.
FUNimation, acquired on May 11, 2005, is the leading anime content provider in North America. In
November 2003, we acquired BCI, a provider of niche home video and audio products. In fiscal 2009,
BCI began winding down its licensing operations related to budget home video and the wind-down was
completed during the fourth quarter of fiscal 2010.
Encore
Encore publishes leading titles in the desktop publishing, family entertainment, education,
system utilities, productivity and value software categories, including: Print Shop, Print Master,
H&R Block, Advantage, Mavis Beacon Teaches Typing, Diner Dash, Bicycle and Hoyle PC Gaming
products.
Encore focuses on retail and direct to consumer sales by marketing its licensed content,
without the distraction and financial risk of significant content development. The benefit to our
licensed vendors is that they can focus on their core competencies of content and brand
development.
Encore continues to evaluate emerging computer software brands that have the potential to
become successful franchises and also focuses on establishing relationships with developed brands
that are seeking to change their business models.
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Table of Contents
Encores strategy is to continue to license quality branded computer software titles. It has
experience in signing single-brand products as well as taking on multiple titles in single
agreements, as demonstrated by the signing of the Broderbund, H&R Block, Bicycle and Hoyle
publishing agreements.
FUNimation
FUNimation is the leading anime content provider in the North American market, which it
licenses from Japanese rights holders, and translates and adapts the content for television
programming and home videos, primarily targeting audiences between the ages of 18 and 34.
FUNimation leverages its licensed content into various revenue streams, including television
broadcast, home video distribution, and licensing of merchandising rights for toys, video games and
trading cards. FUNimations licensed titles include Dragon Ball Z, Dragon Ball Kai, Dragon Ball, Dragon Ball GT, Fullmetal Alchemist, Fullmetal
Alchemist Brotherhood, One Piece, Afro Samurai, Shin Chan, Claymore, Darker Than Black, Robotech
The Shadow Chronicles, Evangelion1.11, Trigun and Eden of The East. FUNimation also distributes
live action films such as Shinobi, Genghis Khan, RoboGeisha, Kamui Gaiden.
Based on its own market research, FUNimation identifies properties that it believes can be
successfully adapted to the U.S. anime market. This market research generally involves analyzing
television ratings, merchandise sales trends, home video sales, anime magazines and popularity
polls in both the U.S. and Japanese markets. After identifying a property that has the potential
for success in the United States, FUNimation seeks to capitalize on its relationships with Japanese
rights holders and its reputation as a content provider of anime in North America to obtain the
commercial rights to such property, primarily for television programming, home video distribution
and merchandising.
Home Video Distribution. FUNimation seeks to increase the revenue derived from its
licensed properties through home video distribution. While a majority of its home videos are sold
directly to major retail chains, they are also distributed digitally.
Broadcast. For television programming, FUNimation translates and adapts its licensed
anime titles to conform to U.S. television programming standards. FUNimation performs most of its
production work in-house at its production facility in a suburb of Dallas/Fort Worth, Texas.
Licensing and Merchandising. Over the years, FUNimation has developed a network of
over 200 license partners for the merchandising of toys, video games, apparel, trading and
collectible card games and books. FUNimation manages its properties in order to provide a
consistent and accurate portrayal throughout the marketplace.
Retail Sales and Web Sites. FUNimation operates websites devoted to the anime fan
base. Typically, as part of its brand management strategy, FUNimation will develop an interactive
site for each licensed property. These sites provide information about upcoming episodes and the
characters associated with the show. In addition, FUNimations products can be purchased through
its internet store, which offers downloadable videos, as well as home videos and licensed
merchandise.
Competition
All aspects of our business are highly competitive. Our competitors include other national and
regional businesses, as well as some suppliers that sell directly to retailers. Certain of these
competitors have substantially greater financial and other resources than we do. Our ability to
effectively compete in the future depends upon a number of factors, including our ability to:
obtain national distribution contracts; obtain publishing rights with various rights holders and
brand owners; maintain our margins and volume; expand our sales through a varied range of products
and personalized services; anticipate changes in the marketplace including technological
developments and consumer interest in our products; and maintain operating expenses at an
appropriate level.
We face competition from a number of distributors including Ingram Micro, Inc., Ingram
Entertainment, Tech Data Corporation and Activision, as well as from manufacturers and publishers
that sell directly to retailers. Encores competitors include: Topics Entertainment,
Nova/Avanquest, Valusoft, and Phantom EFX. FUNimations competitors include: VIZ Media, Bandai
Entertainment, Section 23, Starz, Sony Pictures and Media Blasters.
We believe competition in all of our businesses will remain intense. The Company believes that
the keys to our growth and profitability include: (i) customer service, (ii) continued focus on
improvements and operating efficiencies, (iii) the ability to license and develop products, and
(iv) the ability to attract desirable content and additional suppliers, studios and software
publishers.
7
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Backlog
Because a substantial portion of our products are shipped in response to orders, we do not
maintain any significant backlog.
Environmental Matters
We do not anticipate any material effect on our capital expenditures, earnings or competitive
position due to compliance with government regulations involving environmental matters.
Employees
As of March 31, 2010, we had 530 employees, including 132 in administration, finance,
merchandising and licensing, 96 in sales and marketing and 302 in production and distribution.
These employees are not subject to collective bargaining agreements and are not represented by
unions. We consider our relations with our employees to be good.
Capital Resources Financing
See further disclosure in Part II, Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Capital Resources.
Available Information
We also make available, free of charge, in the Investors SEC Filings section of our
website, www.navarre.com, annual, quarterly and current reports (and amendments thereto)
that we may file or furnish to the Securities and Exchange Commission (SEC) pursuant to Sections
13(a) or 15(d) of Securities Act of 1934 as soon as reasonably practicable after our electronic
filing. In addition, the SEC maintains a website containing these reports that can be located at
http://www.sec.gov. These reports may also be read and copied at the SECs Public Reference
Room at 100 Fifth Street, NE, Washington, D.C. 20549. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0300. References to our website are
not intended to and do not incorporate information on the website into this Annual Report.
Executive Officers of the Company
The following table sets forth our executive officers and certain management as of June 11,
2010:
Name | Age | Position | ||||
Cary L.
Deacon
|
58 | President and Chief Executive Officer | ||||
J. Reid
Porter
|
61 | Executive Vice President, Chief Financial Officer | ||||
Joyce Fleck
|
57 | President of Navarre Distribution | ||||
Calvin Morrell
|
54 | President of Encore | ||||
Gen Fukunaga
|
49 | Chief Executive Officer and President of FUNimation | ||||
John Turner
|
56 | Senior Vice President of Global Logistics | ||||
Ryan F. Urness
|
38 | General Counsel and Secretary |
Cary L. Deacon has been President and Chief Executive Officer since March 31, 2007. He
previously served as President and Chief Operating Officer, Publishing since August 2005. Prior to
this, Mr. Deacon was the Corporate Relations Officer since joining the Company in September 2002.
Previously, he held executive positions at NetRadio Corporation, SkyMall, Inc. and ValueVision
International, Inc.
J. Reid Porter has been Executive Vice President and Chief Financial Officer since joining the
Company in December 2005. From October 2001 to October 2004, Mr. Porter, served as Executive Vice
President and Chief Financial Officer of IMC Global Inc., a leading producer and marketer of
concentrated phosphate and potash for the agricultural industry. From 1998 to October 2001, Mr.
Porter served as Vice President and partner of Hidden Creek Industries and Chief Financial Officer
of Heavy Duty Holdings, partnerships in the automotive-related and heavy-duty commercial vehicle
industries, respectively. Previously, he held executive positions at Andersen Windows, Onan
Corporation and McGraw-Edison Company, Inc.
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Joyce Fleck has been President of Navarre Distribution since March 2008. She previously served
as the Vice President of Sales and Marketing since July 2005. Prior to this, Ms. Fleck served as
Vice President of Marketing since January 2000. She joined the Company in May 1999 as Director of
Marketing. Prior to joining Navarre she held divisional marketing and merchandising positions and
senior buying positions at The Musicland Group and Grow Biz International.
Calvin Morrell has been the President of Encore since joining the Company in April 2008. Prior
to joining Navarre, Mr. Morrell was responsible for sales, marketing, business development and
operations at Macrovision and TryMedia. Mr. Morrells previous experience also includes Vice
President of Marketing at Interplay. Mr. Morrell began his career at IBM where he worked for 18
years holding a number of positions, including Director of IBM Multimedia Studios.
Gen Fukunaga is the Chief Executive Officer and President of FUNimation Productions, Ltd., and
has served in that role since May 2005, when the Company acquired FUNimation. Mr. Fukunaga
co-founded FUNimation in 1994 and has served as its President from its founding. Prior to starting
FUNimation, Mr. Fukunaga served as Product Manager of Software Development Tools for Tandem
Computers. Previously, Mr. Fukunaga held a strategic consulting position with Andersen Consulting.
John Turner has been Senior Vice President of Global Logistics since September 2003. He
previously served as Senior Vice President of Operations since December 2001, and Vice President of
Operations since joining the Company in September 1995. Prior to joining Navarre, Mr. Turner was
Senior Director of Distribution for Nordic Track in Chaska, MN and he also previously held various
positions in logistics in the United States and in the United Kingdom.
Ryan F. Urness has been General Counsel of Navarre since July 2004 and Secretary of Navarre
since May 2004. He previously served as Assistant Secretary of Navarre since February 2004 and as
Corporate Counsel since January 2003. Prior to joining Navarre, a significant portion of Mr.
Urness efforts were engaged in various matters for the Company as outside legal counsel in the
Minneapolis, Minnesota office of Winthrop & Weinstine, P.A. Mr. Urness is a graduate of the
University of St. Thomas and William Mitchell College of Law.
Item 1A Risk Factors
FORWARD-LOOKING STATEMENTS / RISK FACTORS
We make written and oral statements from time to time regarding our business and prospects,
such as projections of future performance, statements of managements plans and objectives,
forecasts of market trends, and other matters that are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Statements containing the words or phrases will likely result, are expected to, will
continue, is anticipated, estimates, projects, believes, expects, anticipates,
intends, target, goal, plans, objective, should or similar expressions identify
forward-looking statements, which may appear in documents, reports, filings with the Securities and
Exchange Commission, including this Annual Report, news releases, written or oral presentations
made by officers or other representatives made by us to analysts, shareholders, investors, news
organizations and others and discussions with management and other representatives of us. For such
statements, we claim the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995.
Our future results, including results related to forward-looking statements, involve a number
of risks and uncertainties. No assurance can be given that the results reflected in any
forward-looking statements will be achieved. Any forward-looking statement made by or on behalf of
us speaks only as of the date on which such statement is made. Our forward-looking statements are
based on assumptions that are sometimes based upon estimates, data, communications and other
information from suppliers, government agencies and other sources that may be subject to revision.
Except as required by law, we do not undertake any obligation to update or keep current either (i)
any forward-looking statement to reflect events or circumstances arising after the date of such
statement, or (ii) the important factors that could cause our future results to differ materially
from historical results or trends, results anticipated or planned by us, or which are reflected
from time to time in any forward-looking statement which may be made by or on behalf of us.
In addition to other matters identified or described by us from time to time in filings with
the SEC, there are several important factors that could cause our future results to differ
materially from historical results or trends, results anticipated or planned by us, or results that
are reflected from time to time in any forward-looking statement that may be made by or on behalf
of us. Some of these important factors, but not necessarily all important factors, include the
following:
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Risks Relating to Our Business and Industry
We derive a substantial portion of our total net sales from two customers. A reduction in sales to
either of these customers, or another significant customer, could have a material adverse effect on
our net sales and profitability.
For the fiscal year ended March 31, 2010, net sales to Best Buy and Wal-Mart/Sams Club,
represented approximately 34% and 19%, respectively, of our total net sales, and, in the aggregate,
approximately 53% of our total net sales. For the fiscal year ended March 31, 2009, net sales to
Best Buy and Wal-Mart/Sams Club accounted for approximately 35% and 16%, respectively, of our
total net sales, and, in the aggregate, approximately 51% of our total net sales. For the fiscal
year ended March 31, 2008, net sales to Best Buy and Wal-Mart/Sams Club accounted for
approximately 31% and 13%, respectively, of our total net sales, and, in the aggregate,
approximately 44% of our total net sales. Substantially all of the products we distribute to these
customers are supplied on a non-exclusive basis under arrangements that may be cancelled without
cause and upon short notice. These arrangements do not include such material terms as purchase
price of the goods purchased but rather principally address operational requirements of the
transactions. None of our retail customers are required to make minimum purchases, including our
largest customers Best Buy and Wal-Mart/Sams Club. If we are unable to continue to sell our
products to either of these customers or are unable to maintain our sales to these customers at
current levels and cannot find other customers to replace these sales, there would be an adverse
impact on our net sales and profitability. We believe sales to these customers will continue to
represent a significant percentage of our total net sales and there can be no assurance that we
will continue to recognize a significant amount of revenue from sales to any specific customer.
The loss of a significant vendor or manufacturer or a decline in the popularity of its products
could negatively affect our product offerings and reduce our net sales and profitability.
A significant portion of net sales in recent years has been due to sales of computer software
provided by software publishers such as Symantec Corporation, Kaspersky Lab, Inc., Roxio (a
division of Sonic Solutions) and Webroot Software, Inc. During the fiscal year ended March 31, 2010
each of these publishers accounted for more than $20.0 million of our net sales. Symantec products
accounted for approximately $102.9 million, $104.0 million and $95.0 million in net sales in the
fiscal years ended March 31, 2010, 2009 and 2008, respectively. We have agreements in place with
each of the vendors whose products we distribute, but, in most instances, such agreements are
short-term in nature and may be cancelled without cause and upon short notice, typically 30 days.
The agreements typically cover the right to distribute in the United States and Canada, but do not
restrict the vendors from distributing their products through other distributors or directly to
retailers and do not guarantee product availability to us for distribution. These agreements allow
us to purchase the vendors products at a wholesale price and to provide various distribution and
fulfillment services in connection with the vendors products. We believe these arrangements are
standard for such vendors and are essentially operational requirements. If we were to lose our
right to distribute products of any of the above computer software publishers or the popularity of
such product were to decrease, our net sales and profitability would be adversely impacted.
Our future growth and success depends partly upon our ability to procure and renew popular
product distribution agreements and to sell the underlying products. There can be no assurance that
we will enter into new distribution agreements or that we will be able to sell products under
existing distribution agreements. Further, our current distribution agreements may be terminated on
short notice. The loss of a significant vendor could negatively affect our product offerings and,
accordingly, our net sales. Similarly, a decrease in customer demand for such products could
negatively affect our net sales.
Our revenues are dependent on consumer preferences and demand, which can change at any time.
Our business and operating results depend upon the appeal of properties, product concepts and
programming to consumers, including the popularity of anime in the North American market and trends
in the toy, game and entertainment businesses. A decline in the popularity of existing properties
or the failure of new properties and product concepts to achieve and sustain market acceptance
could result in reduced overall revenues, which could have a material adverse effect on our
financial condition and results of operations. Consumer preferences with respect to entertainment
are continuously changing, are difficult to predict and can vary over time. In addition,
entertainment properties often have short life cycles. There can be no assurance that:
| any of the current properties, product concepts or programming will continue to be popular for any significant period of time; | ||
| any new properties, product concepts or programming will achieve commercial acceptance; or |
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| any propertys life cycle will be sufficient to permit adequate profitably to recover advance payments, guarantees, development, marketing, royalties and other costs. |
Our failure to successfully anticipate, identify and react to consumer preferences could have
a material adverse effect on revenues, profitability and results of operations. In addition,
changes in consumer preferences may cause our revenues and net income to vary significantly between
comparable periods.
A continued deterioration in the businesses of significant customers, due to weak economic
conditions, could harm our business.
During weak economic times there is an increased risk that certain of our customers will,
among other things, reduce orders, delay payment for product purchased, fail or increase product
returns. Our revenues could negatively be affected by a number of factors, including the following:
| the credit available to our customers; | ||
| the popularity of our products released during the quarter; | ||
| the opening and closing of retail stores by our major customers; | ||
| the extension, termination or non-renewal of existing distribution agreements and licenses; | ||
| the credit available from our vendors and other sources; | ||
| product marketing and promotional activities; and | ||
| general economic changes affecting the buying pattern of retailers, particularly those changes affecting consumer demand for home entertainment products and computer software. |
In addition, if a customer files for bankruptcy, we may be required to forego collection of
pre-petition amounts owed and to repay amounts remitted to us during the 90-day preference period
preceding the filing. The bankruptcy laws, as well as specific circumstances of each bankruptcy,
may limit our ability to collect pre-petition amounts. Although we believe that we have sufficient
reserves to cover our exposure resulting from anticipated customer difficulties, bankruptcies or
defaults, we can provide no assurance that such reserves will be adequate. If they are not
adequate, our business, operating results and financial condition could be adversely affected.
As our non-U.S. sales and operations grow, we could become increasingly subject to additional risks
that could harm our business.
Recently we have generated increasing amounts of sales outside of the Unites States, mainly in
connection with our Canadian operations. We have a limited number of customers in Canada, where
the sales and purchasing activity results in receivables and accounts payables denominated in
Canadian dollars. These transactions expose us to foreign currency exchange risks because gain or
loss on these activities is a function of the foreign exchange rate, over which we have no control.
In addition, our non-U.S. operations are subject to a variety of risks, which could cause
fluctuations in the results of our non-U.S. operations. These additional risks include, but are not
limited to:
| compliance with foreign regulatory and market requirements; | ||
| variability of foreign economic, political and labor conditions; | ||
| changing restrictions imposed by regulatory requirements, tariffs or other trade barriers or by U.S. import and export laws; | ||
| longer accounts receivable payment cycles; | ||
| potentially adverse tax consequences; | ||
| difficulties in protecting intellectual property; |
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| burdens of complying with foreign laws; and | ||
| as we generate cash flow in non-U.S. jurisdictions, we may experience difficulty transferring such funds to the U.S. in a tax efficient manner. |
Any one or more of these factors could have an adverse effect on our business, financial
condition and operating results.
Pending SEC investigation or litigation may subject us to significant costs, judgments or penalties
and could divert managements attention.
Since 2006, we have been the subject of a non-public investigation by the Securities and
Exchange Commission (the SEC). The SEC has not provided us with notice asserting that any
violations of the securities laws have occurred, but there can be no assurance as to the outcome of
this investigation. We are also involved in a number of litigation matters. Irrespective of the
validity of the assertions made in these suits, or the positions asserted in these proceedings or
any final resolution in these matters, we could incur substantial costs and managements attention
could be diverted, either of which could adversely affect our business, financial condition or
operating results.
Our business is seasonal and variable in nature and, as a result, the level of sales and
profitability during our peak season could adversely affect our results of operations and
liquidity.
Traditionally, our third quarter (October 1-December 31) has accounted for our largest
quarterly revenue figures and a substantial portion of our earnings. Our third quarter accounted
for approximately 25.2%, 27.2% and 33.0% of our net sales for the fiscal years ended March 31,
2010, 2009 and 2008, respectively. As a distributor of products ultimately sold to consumers, our
business is affected by the pattern of seasonality common to other suppliers of retailers,
particularly during the holiday season. Because of this seasonality, if we or our customers
experience a weak holiday season (like 2008 and 2009), or if we provide price protection for sales
during the holiday season or decide to increase our inventory levels to meet anticipated customer
demand, our financial results and liquidity could be negatively affected. Our borrowing levels and
inventory levels typically increase substantially during the holiday season.
A substantial portion of FUNimations revenues are derived from a small number of licensed
properties and a small number of licensors and FUNimations content is highly concentrated in the
anime genre.
FUNimation derives a substantial portion of its revenues from a small number of properties and
such properties usually generate revenues only for a limited period of time. Additionally,
FUNimations content is concentrated in the anime sector and its revenues are highly subject to the
changing trends in the toy, game and entertainment businesses. In particular, one licensed property
accounted for $22.6 million, or 40%, of FUNimations revenues for the fiscal year ended March 31,
2010. FUNimations revenues may fluctuate significantly from year to year due to, among other
reasons, the popularity of its licensed properties and the timing of entering into new licensing
contracts.
During the fiscal year ended March 31, 2010, 60% of FUNimations revenues were derived from
sales of products under multiple licensing arrangements with three licensors. The loss of any one
of these licensing relationships could have a material negative effect on FUNimations revenues.
FUNimations revenues are substantially dependent on television exposure for its licensed
properties.
Television exposure is an important promotional vehicle for home video sales and licensing
opportunities for anime content. To the extent that FUNimations content is not able to gain
television exposure, sales of these products could be limited. Similarly, demand for properties
broadcast on television generally is based on television ratings. In addition, FUNimation does not
own the broadcast rights for some of its properties, so it relies on third parties to secure or
renew broadcast rights for such content. A decline in television ratings or programming time of
FUNimations licensed properties could adversely affect FUNimations revenues.
Technology developments, particularly in the electronic downloading arena, may adversely affect our
net sales, margins and results of operations.
Our products have traditionally been marketed and delivered on a physical delivery basis.
If these products continue to be heavily marketed and delivered through technology transfers, such
as electronic downloading through the Internet or similar delivery methods,
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then our retail and wholesale distribution business could be negatively impacted. As
electronic downloading grows through Internet retailers, competition between electronic retailer
suppliers using traditional methods will continue to intensify and likely negatively impact our net
sales and margins. Furthermore, we may be required to spend significant capital to enter or
participate in this delivery channel. If we are unable to develop necessary vendor and customer
relationships to facilitate electronic downloading or if the terms of these arrangements or are not
as favorable as those related to our physical product sales, our business may be materially harmed.
Increased counterfeiting or piracy may negatively affect the demand for our home entertainment
products.
The product categories that we sell have been adversely affected by counterfeiting, piracy and
parallel imports, and also by websites and technologies that allow consumers to illegally download
and access this content. Increased proliferation of these alternative access methods to these
products could impair our ability to generate net sales and could cause our business to suffer.
We may not be able to successfully protect our intellectual property rights.
We rely on a combination of copyright, trademark and other proprietary rights laws to protect
the intellectual property we license. Third parties may try to challenge the ownership of such
intellectual property by us or our licensors. In addition, our business is subject to the risk of
third parties infringing on our intellectual property rights or those of our licensors and
producing counterfeit products. If we need to resort to litigation in the future to protect our
intellectual property rights or those of our licensors, such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on our business and
competitive position.
The loss of key personnel could affect the depth, quality and effectiveness of our management team.
In addition, if we fail to attract and retain qualified personnel, the depth, quality and
effectiveness of our management team and employees could be negatively affected.
We depend on the services of our key senior executives and other key personnel because of
their experience in the distribution, publishing and licensing areas. The loss of the services of
one or several of our key employees could result in the loss of customers or vendor relationships,
or otherwise inhibit our ability to operate and grow our business successfully.
Our ability to enhance and develop markets for our current products and to introduce new
products to the marketplace also depends on our ability to attract and retain qualified management
personnel. We compete for such personnel with other companies and organizations, many of which have
substantially greater capital resources and name recognition than we do. If we are not successful
in recruiting or retaining such personnel, it could have a material adverse effect on our business.
If we fail to meet our significant working capital requirements or if our working capital
requirements increase substantially, our business and prospects could be adversely affected.
As a distributor and publisher, we purchase and license products directly from manufacturers
and content developers for resale to retailers. As a result, we have significant working capital
requirements, principally to acquire inventory, procure licenses and finance accounts receivable.
Our working capital needs will increase as our inventory, licensing activities and accounts
receivable increase in response to growth. In addition, license advances, prepayments to enhance
margins, investments and inventory increases to meet customer requirements could increase our
working capital needs. The failure to obtain additional financing or maintain working capital
credit facilities on reasonable terms in the future could adversely affect our business. In
addition, if the cost of financing is too expensive or not available, it could require a reduction
in our distribution or publishing activities.
We rely upon bank borrowings and vendor credit and payment terms to fund our general working
capital needs and it may be necessary for us to secure additional financing in the future depending
upon the growth of our business and the possible financing of additional acquisitions. If we were
unable to borrow under our credit facility, obtain acceptable vendor terms or were otherwise unable
to secure sufficient financing on acceptable terms or at all, our future growth and profitability
could be adversely affected.
Product returns or inventory obsolescence could reduce our sales and profitability or negatively
impact our liquidity.
We maintain a significant investment in product inventory. Like other companies operating in
our industry, product returns from our retail customers are significant when expressed as a
percentage of revenues. Adverse financial or other developments with respect to a particular
supplier or product could cause a significant decline in the value and marketability of our
products, possibly making it difficult for us to return products to a supplier or recover our
initial product acquisition costs. Under such circumstances, our sales and
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profitability, including our liquidity, could be adversely affected. We maintain a sales
return reserve based on historical product line experience rates. There can be no assurance that
our reserves will be adequate to cover potential returns.
We are subject to the risk that our inventory values may decline due to, among other things,
changes in demand and that protective terms under our supplier agreements may not adequately cover
the decline in values, which could result in lower gross margins or inventory write-downs.
The demand for products that we sell and distribute is subject to rapid technological change,
new and enhanced product specification requirements, consumer preferences and evolving industry
standards. These changes may cause our inventory to decline substantially in value or to become
obsolete which may occur in a short period of time. We offer no assurance that price protection or
inventory returnability terms may not change or be eliminated in the future, that unforeseen new
product developments will not materially adversely affect our revenues or profitability or that we
will successfully manage our existing and future inventories.
In our distribution business, we generally are entitled to receive a credit from certain
suppliers for products returned to us based upon the terms and conditions with those suppliers,
including maintaining a minimum level of inventory of their products and limitations on the amount
of product that can be returned and/or restocking fees. If major suppliers decrease or eliminate
the availability of price protection or inventory returnability to us, such a change in policy
could lower our gross margins or cause us to record inventory write-downs. We are also exposed to
inventory risk to the extent that supplier protections are not available on all products or
quantities and are subject to time restrictions. In addition, suppliers may become insolvent and
unable to fulfill their protection obligations to us. As a result, these policies do not protect us
in all cases from declines in inventory value or product demand.
In our publishing business, prices could decline due to decreased demand and, therefore, there
may be greater risk of declines in our owned inventory value. To the extent that our publishing
business has not properly reserved for inventory exposure or price reductions needed to sell
remaining inventory, our profitability may suffer.
Developing software is complex, costly and uncertain and operational errors or defects in such
products could result in liabilities and/or impair such products marketability.
We have recently expanded our software development capabilities. The process of developing
new software and/or enhancing existing products is complex, costly and uncertain. Any failure by
us to anticipate customers changing needs and emerging trends accurately could harm the value of
our investment in software development activities. In connection with these activities, we must
make long-term investments (sometimes long before cash returns are experienced), develop or obtain
appropriate intellectual property and commit resources before knowing whether our predictions will
accurately reflect customer demand for our products. Failure to successfully develop and/or sell
these products could result in the loss/impairment of our investment, which could negatively impact
our results of operations.
In addition, existing and future products may develop operational problems or contain
undetected defects or errors. If we do not discover such defects, errors, or other operational
problems until after a product has been released and used by the customer, we may incur significant
costs to correct such defects, errors, or other operational problems, including product liability
claims or other contract liabilities to customers. Moreover, defects or errors in our products may
result in claims for damages and questions regarding the integrity of the products, which could
cause adverse publicity and impair their market acceptance.
Further impairment in the carrying value of our assets could negatively affect our consolidated
results of operations and net worth.
We recorded significant impairment charges to goodwill and other assets during the fiscal year
ended March 31, 2009. We evaluate assets on the balance sheet whenever events or a change in
circumstance indicates that their carrying value may not be recoverable. Materially different
assumptions regarding the future performance of our businesses could result in additional other
asset impairment charges which could negatively affect our operating results and potentially result
in future operating losses.
We have significant credit exposure and negative product demand trends or other factors could cause
us significant credit loss.
We provide credit to our customers for a significant portion of our net sales. We are subject
to the risk that our customers will not pay for the products they have purchased. This risk may be
increased with respect to goods provided under our consignment programs due to our lack of physical
control over the inventory. This risk may increase if our customers experience decreases in demand
for their
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products and services or become less financially stable due to adverse economic conditions or
otherwise. If there is a substantial deterioration in the collectability of our receivables, our
earnings and cash flows could be adversely affected.
In addition, from time to time, we may make royalty advances, or invest in, other businesses.
These business or investment opportunities may not be successful, which could result in the loss of
our invested capital.
We may not be able to adequately adjust our cost structure in a timely fashion in response to a
decrease in net sales, which may cause our profitability to suffer.
A significant portion of our selling, general and administrative expense is comprised of
personnel, facilities and costs of invested capital. In the event of a significant downturn in net
sales, we may not be able to exit facilities, reduce personnel, improve business processes, reduce
inventory or make other significant changes to our cost structure without significant disruption to
our operations or without significant termination and exit costs. Additionally, if management is
not able to implement such actions in a timely manner, or at all, to offset a shortfall in net
sales and gross profit, our profitability could suffer.
Our distribution and publishing businesses operate in highly competitive industries and compete
with large national firms. Further competition, among other things, could reduce our sales volume
and margins.
The business of distributing home entertainment and multimedia products is highly competitive.
Our competitors in the distribution business include other national and regional distributors as
well as suppliers that sell directly to retailers. These competitors include the distribution
affiliates of Time-Warner, Ingram Micro, Inc., Ingram Entertainment, Tech Data Corporation and
Activision.
Our competitors in the publishing business include both independent national publishers as
well as large international firms. These competitors include Topics Entertainment, Nova/Avanquest,
Valusoft, and Phantom EFX. Certain of our competitors have substantially greater financial and
other resources than we have. Our ability to compete effectively in the future depends upon a
number of factors, including our ability to: obtain national distribution contracts and licenses
with manufacturers/vendors; obtain publishing rights with various rights holders and brand owners;
maintain our margins and volume; expand our sales through a varied range of products and
personalized services; anticipate changes in the marketplace including technological developments
and consumer interest in our products; and maintain operating expenses at an appropriate level.
Our failure to perform adequately one or more of the foregoing may materially harm our
business.
In addition, FUNimations business depends upon its ability to procure and renew agreements to
license certain rights for attractive titles on favorable terms. Competition for attractive anime
and television broadcasting slots is intense. FUNimations principal competitors in the anime
sector are media companies such as VIZ Media, Bandai Entertainment, Section23, Media Blasters, and
Starz. FUNimation also competes with various toy companies, other licensing companies, numerous
others acting as licensing representatives and large media companies such as Sony Pictures and
Disney. Many of FUNimations competitors may have substantially greater resources than FUNimation
and own or license properties which are more commercially successful than FUNimations properties.
There are low capital barriers to enter the licensing and brand management business and therefore
there is potential for new competitors to enter the market.
Competition in the home entertainment and multimedia products industries is intense and is
often based on price. Distributors generally experience low gross profit margins and operating
margins. Consequently, our distribution profitability is highly dependent upon achieving effective
cost and management controls and maintaining sales volumes. A material decrease in our gross profit
margins or sales volumes would harm our financial results.
We depend on third party shipping and fulfillment companies for the delivery of our products.
We rely almost entirely on arrangements with third party shipping and fulfillment companies,
principally UPS and Federal Express, for the delivery of our products. The termination of our
arrangements with one or more of these third party shipping companies, or the failure or inability
of one or more of these third party shipping companies to deliver products on a timely or cost
efficient basis from suppliers to us, or products from us to our reseller customers or their
end-user customers, would significantly disrupt our business and harm our reputation and net sales.
Furthermore, an increase in amounts charged by these shipping companies could negatively affect our
gross margins and earnings.
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We depend on a variety of systems for our operations, and a failure of these systems could disrupt
our business and harm our reputation and net sales and negatively impact our results of operations.
We depend on a variety of systems for our operations. These systems support our operating
functions, including inventory management, order processing, shipping, receiving and accounting.
Certain of these systems are operated by third parties and their performance may be outside of our
control. Any failures or significant downtime in our systems could prevent us from taking customer
orders, printing product pick-lists, and/or shipping product. It could also prevent customers from
accessing our price and product availability information.
From time to time we may acquire other businesses having information systems and records,
which may be converted and integrated into our information systems. This can be a lengthy and
expensive process that results in a material diversion of resources from other operations. In
addition, because our information systems are comprised of a number of legacy, internally-developed
applications, they can be harder to upgrade and may not be adaptable to commercially available
software. As our needs for technology evolve, we may experience difficulty or significant cost in
upgrading or significantly replacing our systems.
We also rely on the Internet for a portion of our orders and information exchanges with our
customers. The Internet and individual websites can experience disruptions and slowdowns. In
addition, some websites have experienced security breakdowns. Our website could experience material
breakdowns, disruptions or breaches in security. If we were to experience a security breakdown,
disruption or breach that compromised sensitive information, this could harm our relationship with
our customers or suppliers. Disruption of our website or the Internet in general could impair our
order processing or more generally prevent our customers and suppliers from accessing information.
This could cause us to lose business.
We believe customer information systems and product ordering and delivery systems, including
Internet-based systems, are becoming increasingly important in the distribution of our products and
services. Although we seek to enhance our customer information systems by adding new features, we
offer no assurance that competitors will not develop superior customer information systems or that
we will be able to meet evolving market requirements by upgrading our current systems at a
reasonable cost, or at all. Our inability to develop competitive customer information systems or
upgrade our current systems could cause our business and market share to suffer.
Any future acquisitions or divestitures could result in disruptions to our business by, among other
things, distracting management time and diverting financial resources. Further, if we are
unsuccessful in integrating acquired companies into our business, it could materially and adversely
affect our financial condition and operating results.
If we make acquisitions or divestitures, a significant amount of managements time and
financial resources may be required to complete the acquisition or divestiture and integrate the
acquired business into our existing operations or divest a business from our operations. Even with
this investment of management time and financial resources, an acquisition may not produce the
revenue, earnings or business synergies anticipated. Acquisitions involve numerous other risks,
including assumption of unanticipated operating problems or legal liabilities, problems integrating
the purchased operations, technologies or products, diversion of managements attention from our
core businesses, adverse effects on existing business relationships with suppliers and customers,
incorrect estimates made in the accounting for acquisitions and amortization of acquired intangible
assets that would reduce future reported earnings (goodwill impairments), ensuring acquired
companies compliance with the requirements of the Sarbanes-Oxley Act of 2002 and potential loss of
customers or key employees of acquired businesses. We cannot assure you that if we make any future
acquisitions, investments, strategic alliances, joint ventures or begin a divestiture of a
component of our business, that such transactions will be completed in a timely manner or achieve
anticipated synergies, that they will be structured or financed in a way that will enhance our
business or creditworthiness or that they will meet our strategic objectives or otherwise be
successful. In addition, we may not be able to secure the financing necessary to consummate future
acquisitions, and future acquisitions and investments could involve the issuance of additional
equity securities or the incurrence of additional debt, which could harm our financial condition or
creditworthiness or result in dilution. Moreover, we may be unable to locate a suitable candidate
with whom to accomplish a divestiture, or may be unable to do so on terms favorable to us, which
failure could negatively impact our profitability.
Interruption of our business or catastrophic loss at any of our facilities could lead to a
curtailment or shutdown of our business.
We receive, manage, distribute and process returns of our inventory from a centralized
warehouse and distribution facility that is located adjacent to our corporate headquarters. An
interruption in the operation of or in the service capabilities at this facility as a result of
equipment failure or other reasons could result in our inability to distribute products, which
would reduce our net sales and earnings for the affected period. In the event of a stoppage at such
facilities, even if only temporary, or if we experience delays as a result of events
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that are beyond our control, delivery times to our customers and our relationship with such
customers could be severely affected. Any significant delay in deliveries to our customers could
lead to increased returns or cancellations and cause us to lose future sales. Our facilities are
also subject to the risk of catastrophic loss due to unanticipated events such as fires,
explosions, violent weather conditions or other natural disasters. We may experience a shutdown of
our facilities or periods of reduced production as a result of equipment failure, delays in
deliveries or catastrophic loss, which could have a material adverse effect on our business,
results of operations or financial condition.
Future terrorist or military actions could result in disruption to our operations or loss of
assets.
Future terrorist or military actions, in the U.S. or abroad, could result in destruction or
seizure of assets or suspension or disruption of our operations. Additionally, such actions could
affect the operations of our suppliers or customers, resulting in loss of access to products,
potential losses on supplier programs, loss of business, higher losses on receivables or inventory,
or other disruptions in our business, which could negatively affect our operating results. We do
not carry insurance covering such terrorist or military actions, and even if we were to seek such
coverage and such coverage was available, the cost likely would not be commercially reasonable.
Risks Relating to Indebtedness
The level of our indebtedness could adversely affect our financial condition.
We have the ability, subject to borrowing base requirements, to borrow up to $65.0 million
under the revolving credit agreement. The level of our indebtedness could have important
consequences. For example, it could:
| make it more difficult for us to satisfy our obligations with respect to other indebtedness; | ||
| increase our vulnerability to adverse economic and industry conditions; | ||
| require us to dedicate a substantial portion of our cash flow from operations to the payment of our indebtedness, thereby reducing the availability of cash to fund working capital and capital expenditures and for other general corporate purposes; | ||
| restrict us from acquiring new content, exploring other business opportunities or strategic acquisitions; | ||
| limit our ability to obtain financing for working capital, capital expenditures, general corporate purposes or acquisitions; | ||
| place us at a disadvantage compared to our competitors that have less indebtedness; | ||
| limit our flexibility in planning for, or reacting to, changes in our business and industry; and | ||
| cause vendors to reduce or restrict vendor financing. |
Our outstanding indebtedness bears interest at variable rates. Any increase in interest rates will
reduce funds available to us for our operations and future business opportunities and could
adversely affect our leveraged capital structure.
All of the $6.6 million of our outstanding debt at March 31, 2010 is subject to variable
interest rates. A 100-basis point change in the current LIBOR rate would cause our projected annual
interest expense, based on current borrowed amounts, to change by approximately $66,000. The
fluctuation in our debt service requirements, in addition to interest rate changes, may be impacted
by future borrowings under our credit facility or other alternative financing arrangements.
We may be unable to generate sufficient cash flow to service our debt obligations.
Our ability to make payments on and refinance our indebtedness and to fund our operations,
working capital and capital expenditures depends on our ability to generate cash in the future. Our
ability to generate future cash is subject to general economic, industry, financial, competitive,
operating, legislative, regulatory and other factors that are beyond our control.
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We cannot assure you that our business will generate sufficient cash flow from operations or
that future borrowings will be available to us under our credit agreement in an amount sufficient
to enable us to pay amounts due on our indebtedness or to fund our other liquidity needs.
We will need to refinance all or a portion of our indebtedness on or before the maturity date
of our revolving line of credit (November 2012). Our ability to refinance our indebtedness or
obtain additional financing will depend on, among other things:
| our financial condition at the time; | ||
| the amount of financing outstanding and lender requirements at the time; | ||
| restrictions in our credit agreement or other outstanding indebtedness; and | ||
| other factors, including the condition of the financial markets or the distribution and publishing markets. |
As a result, we may not be able to refinance any of our indebtedness on commercially
reasonable terms, or at all. If we do not generate sufficient cash flow from operations, and
additional borrowings or refinancings or proceeds of asset sales are not available to us, we may
not have sufficient cash to enable us to meet all of our obligations.
We may be able to incur additional indebtedness, which could further exacerbate the risks
associated with our current indebtedness level.
We and our subsidiaries may be able to incur substantial additional indebtedness in the
future. Although our credit facility contains restrictions on the incurrence of additional
indebtedness, debt incurred in compliance with these restrictions could be substantial. Our
revolving working capital credit facility provided pursuant to a credit agreement, permits, subject
to borrowing base requirements, total borrowings of up to $65.0 million. In addition, our credit
agreement will not prevent us from incurring certain other obligations. If we and our subsidiaries
incur additional indebtedness or other obligations, the related risks that we face could be
magnified.
Our credit agreement contains significant restrictions that limit our operating and financial
flexibility.
Our credit agreement requires us to maintain specified financial ratios and includes other
restrictive covenants. We may be unable to meet such ratios and covenants. Any of these
restrictions may limit our ability to execute our business strategy. Moreover, if operating results
fall below current levels, we may be unable to comply with these covenants. If that occurs, our
lenders could accelerate our indebtedness, in which case we may not be able to repay all of our
indebtedness.
Risks Relating to Our Common Stock
Our common stock price has been volatile. Fluctuations in our stock price could impair our ability
to raise capital and make an investment in our securities undesirable.
The market price of our common stock has fluctuated significantly. During the period from
April 1, 2009 to March 31, 2010, the last reported price of our common stock as quoted on The
NASDAQ Global Market ranged from a low of $0.40 to a high of $2.96. We believe factors such as the
markets acceptance of our products and the performance of our business relative to market
expectations, as well as general volatility in the securities markets, could cause the market price
of our common stock to fluctuate substantially. In addition, the stock markets have experienced
price and volume fluctuations, resulting in changes in the market prices of the stock of many
companies, which may not have been directly related to the operating performance of those
companies. Fluctuations in our stock price could impair our ability to raise capital and could make
an investment in our securities undesirable.
If we fail to meet the Nasdaq Global Market listing requirements, our common stock could be
delisted.
Our common stock is traded on the Nasdaq Global Market, which has various listing
requirements. If our stock price does not meet minimum standards, we may not be able to maintain
the standards for continued listing on the Nasdaq Global Market, which include, among other things,
that our common stock maintain a minimum closing bid price of at least $1.00 per share and minimum
shareholders equity of $10.0 million (subject to applicable grace and cure periods). During fiscal
year 2010, our common stock traded below the minimum $1.00 closing bid price for 42 consecutive
business days. There is no guarantee it will remain above $1.00. If, as a result of the
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application of such listing requirements, our common stock is delisted from the Nasdaq Global
Market, our stock could become more difficult to buy and sell. Consequently, if we were removed
from the Nasdaq Global Market, the ability or willingness of broker-dealers to sell or make a
market in our common stock might decline. As a result, the ability to purchase or resell shares of
our common stock could be adversely affected.
The exercise of outstanding warrants and options may adversely affect our stock price.
As of March 31, 2010, options and warrants to purchase 5,651,786 shares of our common stock
were outstanding, of which 2,149,646 options and 1,596,001 warrants were exercisable as of that
date. Our outstanding options and warrants are likely to be exercised at a time when the market
price for our common stock is higher than the exercise prices of the options and warrants. If
holders of these outstanding options and warrants sell the common stock received upon exercise, it
may have a negative effect on the market price of our common stock.
Our anti-takeover provisions, our ability to issue preferred stock and our staggered board may
discourage takeover attempts that could be beneficial for our shareholders.
We are subject to Sections 302A.671 (Control Share Acquisitions) and 302A.673 (Business
Combinations) of the Minnesota Business Corporation Act, which may have the effect of limiting
third parties from acquiring significant amounts of our common stock without our approval. These
laws, among others, may have the effect of delaying, deferring or preventing a third party from
acquiring us or may serve as a barrier to shareholders seeking to amend our articles of
incorporation or bylaws. Our articles of incorporation also permit us to issue preferred stock,
which could allow us to delay or block a third party from acquiring us. The holders of preferred
stock could also have voting and conversion rights that could adversely affect the voting power of
the holders of the common stock. Finally, our articles of incorporation and bylaws divide our board
of directors into three classes that serve staggered, three-year terms. Each of these factors could
make it difficult for a third party to effect a change in control of us. As a result, our
shareholders may lose opportunities to dispose of their shares at the higher prices typically
available in takeover attempts or that may be available under a merger or other proposal.
In addition, these measures may have the effect of permitting our current directors to retain
their positions and place them in a better position to resist changes that our shareholders may
wish to make if they are dissatisfied with the conduct of our business.
We currently do not intend to pay dividends on our common stock and, consequently, there will be no
opportunity for our shareholders to achieve a return on their investment through dividend payments.
We currently do not plan to declare dividends on shares of our common stock in the foreseeable
future. Further, the payment of dividends by us is restricted by our credit facility and loan
agreements. Consequently, shareholders should not expect an opportunity to achieve a return on
their investment through dividend payments.
Our directors may not be held personally liable for certain actions, which could discourage
shareholder suits against them.
Minnesota law and our articles of incorporation and bylaws provide that our directors shall
not be personally liable to us or our shareholders for monetary damages for breach of fiduciary
duty as a director, with certain exceptions. These provisions may discourage shareholders from
bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of
derivative litigation brought by shareholders on behalf of us against a director. In addition, our
bylaws provide for mandatory indemnification of directors and officers to the fullest extent
permitted by Minnesota law.
Other Risks
Our business operates in a continually changing environment that involves numerous risks and
uncertainties. It is not reasonable for us to itemize all of the factors that could affect us
and/or the products and services or the distribution industry or the publishing industry as a
whole. Future events that may not have been anticipated or discussed here could adversely affect
our business, financial condition, results of operations or cash flows.
Thus, the foregoing is not a complete description of all risks relevant to our future
performance, and the foregoing risk factors should be read and understood together with and in the
context of similar discussions which may be contained in the documents that we file with the SEC in
the future.
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Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Distribution
Located in the Minneapolis suburb of New Hope, Minnesota, our corporate headquarters consists
of approximately 322,000 square feet of combined office and warehouse space situated on three
contiguous properties. The leases for two of the properties expire on June 30, 2019 and the lease
for the third property expires on February 29, 2016. These leased properties include approximately
44,000 square feet of office space; approximately 73,000 square feet of space utilized in the
manufacturing and assembly of new products; and approximately 205,000 square feet of space devoted
to warehousing, product picking and shipping.
Additionally, we operate a satellite sales office in Bentonville, Arkansas which occupies
2,000 square feet of leased office space. The lease for this space expires on February 28, 2013. In
March, 2010, we began start-up operations for a satellite distribution center in Mississauga,
Ontario which occupies 30,000 square feet of leased warehouse space. The lease for this space
expires on February 28, 2015.
The present aggregate base monthly rent for all of our distribution and office facilities is
approximately $167,000.
Publishing
Encore currently operates its offices out of approximately 13,000 square feet of leased office
space located in Los Angeles, California. This lease currently provides for base monthly payments
to be made in the amount of $27,000 and expires April 30, 2013. Encore also operates a call center
in Cedar Rapids, Iowa which occupies 3,000 square feet of leased office space. The lease for this
space expires on March 31, 2013 and currently provides for base monthly payments to be made in the
amount of $3,000.
FUNimation currently operates its offices out of approximately 48,500 square feet of leased
office space located in a suburb of Dallas/Fort Worth, Texas. This lease currently provides for
base monthly rental payments to be made in the amount of $50,000 and expires October 31, 2017. In
September 2008, we completed the sale of an unused facility owned by FUNimation (see Note 12 to the
consolidated financial statements).
We believe our facilities are adequate for our present operations as well as for the
incorporation of growth. We continually explore alternatives to certain of these facilities that
could expand our capacities and enhance efficiencies, and we believe we can renew or obtain
replacement or additional space, if required, on commercially reasonable terms.
Item 3. Legal Proceedings
See Note 23 to the consolidated financial statements.
Item 4. (Removed and Reserved)
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PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Common Stock
Our common stock, no par value, is traded on The NASDAQ Global Market under the symbol NAVR.
The following table presents the range of high and low closing sale prices for our stock for each
period indicated as reported on The NASDAQ Global Market. Such prices reflect inter-dealer prices,
do not include adjustments for retail mark-ups, markdowns or commissions and may not necessarily
represent actual transactions.
Quarter | High | Low | ||||||||
Fiscal 2010 |
First | $ | 1.65 | $ | 0.40 | |||||
Second | 2.28 | 1.53 | ||||||||
Third | 2.96 | 2.03 | ||||||||
Fourth | 2.17 | 1.90 | ||||||||
Fiscal 2009 |
First | 1.87 | 1.48 | |||||||
Second | 1.79 | 1.41 | ||||||||
Third | 1.45 | 0.38 | ||||||||
Fourth | 0.57 | 0.34 |
Holders
At
June 10, 2010, we had 593 common shareholders of record and an estimated 6,800 beneficial
owners whose shares were held by nominees or broker dealers.
Dividend Policy
We have never declared or paid cash dividends on our common stock. We currently intend to
retain all earnings for use in our business and do not intend to pay any dividends on our common
stock in the foreseeable future.
Comparative Stock Performance
The following Performance Graph compares performance of our common stock on The NASDAQ Global
Market of The NASDAQ Stock Market LLC (US companies), the NASDAQ Composite Index and the Peer Group
Indices described below. The graph compares the cumulative total return from March 31, 2005 to
March 31, 2010 on $100 invested on March 31, 2005, assumes reinvestment of all dividends, and has
been adjusted to reflect stock splits.
The Peer Group Index below includes the stock performance of the following companies:
Handleman Company, Ingram Micro Inc., Tech Data Corp., 4 Kids Entertainment Inc. and Take Two
Interactive Software Inc. These companies have operations similar to our distribution and
publishing businesses.
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* | $100 invested on 3/31/05 in stock or index-including reinvestment of dividends. Fiscal year ending March 31. |
3/05 | 3/06 | 3/07 | 3/08 | 3/09 | 3/10 | |||||||||||||||||||
Navarre Corporation |
$ | 100.00 | $ | 53.96 | $ | 47.17 | $ | 22.14 | $ | 5.53 | $ | 26.16 | ||||||||||||
NASDAQ Composite |
$ | 100.00 | $ | 119.97 | $ | 134.27 | $ | 118.46 | $ | 85.30 | $ | 142.80 | ||||||||||||
Peer Group |
$ | 100.00 | $ | 96.43 | $ | 95.14 | $ | 86.83 | $ | 52.88 | $ | 79.54 |
Source: Research Data Group, Inc.
Purchases of Equity Securities
We did not purchase any shares of our common stock during the fourth quarter of fiscal 2010.
Equity Compensation Plan Information
During fiscal 2010 we granted 848,500 options and awarded 242,750 restricted shares.
The following table below presents certain information regarding our Equity Compensation
Plans:
Number of securities | ||||||||||||
Weighted-average | remaining available for | |||||||||||
exercise | future issuance under | |||||||||||
Number of securities to be | price of | equity | ||||||||||
issued upon exercise of | outstanding | compensation plans | ||||||||||
outstanding options, | options, | (excluding securities | ||||||||||
warrants and rights | warrants and rights | reflected in column (a)) | ||||||||||
Plan Category | (a) | (b) | (c) | |||||||||
Equity compensation plans approved by security holders |
5,651,786 | $ | 4.54 | 98,913 | ||||||||
Equity compensation plans not approved by security holders |
| | | |||||||||
Total |
5,651,786 | $ | 4.54 | 98,913 | ||||||||
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Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with Item 8, Financial
Statements and Supplementary Data and related notes and Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations, and other financial information
appearing elsewhere in this Annual Report on Form 10-K. We derived the following historical
financial information from our consolidated financial statements for the fiscal years ended March
31, 2010, 2009, 2008, 2007 and 2006 which have been audited by Grant Thornton LLP. (In thousands,
except per share data)
Fiscal Years ended March 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006(1) | ||||||||||||||||
Statement of operations data (2): |
||||||||||||||||||||
Net sales |
$ | 528,332 | $ | 630,991 | $ | 658,472 | $ | 644,790 | $ | 615,557 | ||||||||||
Gross profit, exclusive of depreciation and amortization |
87,925 | 67,047 | 101,559 | 107,357 | 101,425 | |||||||||||||||
Income (loss) from operations |
18,683 | (97,118 | ) | 17,831 | 16,362 | 6,767 | ||||||||||||||
Interest expense |
(2,818 | ) | (4,630 | ) | (6,127 | ) | (10,220 | ) | (11,217 | ) | ||||||||||
Other income (expense) |
804 | (1,169 | ) | 625 | 56 | 2,764 | ||||||||||||||
Income (loss) from continuing operations |
16,669 | (102,917 | ) | 12,329 | 6,198 | (1,686 | ) | |||||||||||||
Income tax benefit (expense) |
6,203 | 14,483 | (5,273 | ) | (2,594 | ) | 654 | |||||||||||||
Net income (loss) from continuing operations |
22,872 | (88,434 | ) | 7,056 | 3,604 | (1,032 | ) | |||||||||||||
Gain on sale of discontinued operations |
| | 4,892 | | | |||||||||||||||
Income (loss) from discontinued operations |
| | (2,290 | ) | 455 | (2,143 | ) | |||||||||||||
Net income (loss) |
$ | 22,872 | $ | (88,434 | ) | $ | 9,658 | $ | 4,059 | $ | (3,175 | ) | ||||||||
Basic earnings (loss) per common share: |
||||||||||||||||||||
Continuing operations |
$ | 0.63 | $ | (2.44 | ) | $ | 0.20 | $ | 0.10 | $ | (0.04 | ) | ||||||||
Discontinued operations |
| | 0.07 | 0.01 | (0.07 | ) | ||||||||||||||
Net income (loss) |
$ | 0.63 | $ | (2.44 | ) | $ | 0.27 | $ | 0.11 | $ | (0.11 | ) | ||||||||
Diluted earnings (loss) per common share: |
||||||||||||||||||||
Continuing operations |
$ | 0.62 | $ | (2.44 | ) | $ | 0.20 | $ | 0.10 | $ | (0.04 | ) | ||||||||
Discontinued operations |
| | 0.07 | 0.01 | (0.07 | ) | ||||||||||||||
Net income (loss) |
$ | 0.62 | $ | (2.44 | ) | $ | 0.27 | $ | 0.11 | $ | (0.11 | ) | ||||||||
Weighted average shares outstanding: |
||||||||||||||||||||
Basic |
36,285 | 36,207 | 36,105 | 35,786 | 29,898 | |||||||||||||||
Diluted |
36,643 | 36,207 | 36,269 | 36,228 | 29,898 | |||||||||||||||
Balance sheet data: |
||||||||||||||||||||
Total assets |
$ | 171,603 | $ | 183,169 | $ | 283,462 | $ | 288,225 | $ | 309,614 | ||||||||||
Short-term debt |
6,634 | 24,133 | 31,523 | 39,208 | 5,115 | |||||||||||||||
Long-term debt |
| | 9,654 | 14,970 | 75,352 | |||||||||||||||
Temporary equity Unregistered common stock (3) |
| | | | 16,634 | |||||||||||||||
Shareholders equity |
60,761 | 37,007 | 124,411 | 113,451 | 88,906 |
(1) | Includes acquisition of FUNimation from date of acquisition May 11, 2005. | |
(2) | Fiscal years 2008, 2007 and 2006 have been restated for discontinued operations related to the divestiture of NEM. | |
(3) | See Note 20 to the consolidated financial statements. |
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a distributor and publisher of physical and digital home entertainment and multimedia
products, including computer software, home video, video games and accessories. Since our founding
in 1983, we have established distribution relationships with major retailers including Best Buy,
Wal-Mart/Sams Club, Costco Wholesale Corporation, Staples, Office Depot and Target, and we
distribute to more than 19,000 retail and distribution center locations throughout the United
States and Canada. We believe our established relationships throughout the supply chain, our broad
product offering and our distribution facility permit us to offer industry-leading home
entertainment and multimedia products to our retail customers and to provide access to a retail
channel for the publishers of such products.
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Historically, our business has focused on providing distribution services for third party
vendors. Over the past several years, we have expanded our business to include the licensing and
publishing of home entertainment and multimedia content, primarily through our acquisitions of
publishers in select markets. By expanding our product offerings through such acquisitions, we
believe we can leverage both our sales experience and distribution capabilities to drive increased
retail penetration and more effective distribution of such products, and enable content developers
and publishers that we acquire to focus more on their core competencies.
Our business is divided into two segments Distribution and Publishing.
Distribution. Through our distribution business, we distribute and provide fulfillment
services in connection with a variety of finished goods that are provided by our vendors, which
include computer software, home video, video games, accessories and independent music labels
(through May 2007), and by our publishing business. These vendors provide us with products, which
we, in turn, distribute to our retail customers. Our distribution business focuses on providing
vendors and retailers with a range of value-added services including: vendor-managed inventory,
Internet-based ordering, electronic data interchange services, fulfillment services and
retailer-oriented marketing services. Our vendors include Symantec Corporation, Kaspersky Lab,
Inc., Roxio (a division of Sonic Solutions), Webroot Software, Inc., Nuance Communications, Inc.,
McAfee, Inc. Corel Corporation, LucasArts Entertainment Company and our own publishing business.
On May 31, 2007, we sold our wholly-owned subsidiary, NEM, to an unrelated third party. NEM
operated our independent music distribution activities. We received $6.5 million in cash proceeds
from the sale, plus the assignment of the trade receivables related to this business. As part of
this transaction, we recorded a gain in the first quarter of fiscal 2008 of $6.1 million ($4.6
million net of tax), which included severance and legal costs of $339,000 and other direct costs to
sell of $842,000. The gain is included in Gain on sale of discontinued operations in the
Consolidated Statements of Operations. Net sales from discontinued operations for the fiscal year
ended March 31, 2008 were $5.2 million. Net income from discontinued operations was $2.6 million or
$0.07 per diluted share for the fiscal year ended March 31, 2008. The consolidated financial
statements were reclassified to segregate the assets, liabilities and operating results of the
discontinued operations for all periods presented.
Publishing. Through our publishing business, which generally has higher gross margins than our
distribution business, we own or license various computer software, and home video titles, and
other related merchandising and broadcasting rights. Our publishing business packages, brands,
markets and sells directly to retailers, third party distributors and our distribution business.
Our publishing business is the leading provider of anime home video products in North America
through FUNimation Productions, Ltd. (FUNimation) and publishes software through Encore Software,
Inc. (Encore). In fiscal 2009, a former component of our publishing business, BCI, began winding
down its licensing operations related to budget home video, and the wind-down was completed during
the fourth quarter of fiscal 2010.
Overall Summary of Fiscal 2010 Financial Results
We reduced our debt balance by $17.5 million to $6.6 million at March 31, 2010, from $24.1
million at March 31, 2009. Working capital management, strong earnings and lack of cash federal tax
payments contributed to the debt balance reduction.
At March 31, 2010, the amount of deferred tax assets that we will more likely than not be able
to realize increased due to a tax law change allowing us to carry our net operating losses back
additional years as well as us having higher than projected book income. As a result, we released
$11.7 million of the valuation allowance against these deferred tax assets, reducing the valuation
allowance balance to $9.7 million at March 31, 2010.
Consolidated net sales decreased 16.3% during fiscal 2010 to $528.3 million compared to $631.0
million in fiscal 2009. This decrease in net sales, primarily in the software and video game
categories, was due to a $36.3 million loss of sales to a large retailer that filed for bankruptcy
and was liquidated during fiscal 2009, a shift to fee-based value-added services, departure of low
margin vendors (which generated $57.2 million additional net sales during fiscal 2009), a decrease
in distribution sales resulting from a lack of new major video game and software releases versus
the prior fiscal year, the weak retail market and poor overall economic conditions as well as the
inclusion of BCI in fiscal 2009 (which generated $10.0 million in net sales during fiscal 2009).
Our gross profit increased to $87.9 million or 16.6% of net sales for fiscal 2010 compared to
$67.0 million or 10.6% of net sales for fiscal 2009. The increase in gross margin of $20.9 million
was a result of fiscal 2009 impairment and other charges of $25.2 million which were offset by
decreased sales volume in fiscal 2010.
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The increase in gross profit margin percent to 16.6% from 10.6%, a total increase of 6.0%, was
due principally to a more beneficial product sales mix, which included increased sales of higher
margin software products, departure of low margin vendors and an increase in fee-based value-added
services during fiscal 2010, and the prior year results being impacted by impairment and other
charges related to our restructuring (which constituted 4.0% of the increase).
Total operating expenses for fiscal 2010 were $69.2 million or 13.1% of net sales, compared
with $164.2 million or 26.0% of net sales for fiscal 2009. The $95.0 million decrease was primarily
a result of pre-tax, non-cash goodwill and trademark impairment charges of $82.7 million which were
recorded in fiscal 2009, $2.0 million of impairment related to masters recorded in fiscal 2009 and
severance costs of $1.1 million related to reduction in force recorded in fiscal 2009. We
experienced additional decreases in all expense categories during fiscal 2010 due to the
elimination of costs related to BCI in fiscal 2010, the benefit received from the implementation of
company-wide expense reduction initiatives during fiscal 2009 (which included workforce
reductions), a decrease in enterprise resource planning (ERP) expenses for systems that were
implemented in fiscal 2009 and operational efficiencies. These expense reductions were partially
offset by a $4.8 million increase of performance-based compensation expense for fiscal 2010
compared to fiscal 2009.
Net income for fiscal 2010 was $22.9 million or $0.62 per diluted share compared to net loss
of $88.4 million or a loss of $2.44 per diluted share last year.
Working Capital and Debt
Our business is working capital intensive and requires significant levels of working capital
primarily to finance accounts receivable and inventories. We finance our operations through cash
and cash equivalents, funds generated through operations, accounts payable and our revolving credit
facility. The timing of cash collections and payments to vendors requires usage of our revolving
credit facility in order to fund our working capital needs. We have a cash sweep arrangement with
our lender, whereby, daily, all cash receipts from our customers reduce borrowings outstanding
under the credit facility. Additionally, all payments to our vendors that are presented by the
vendor to our bank for payment increase borrowings outstanding under the credit facility. Checks
written in excess of cash balances may occur from time to time, including period ends, and
represent payments made to vendors that have not yet been presented by the vendor to our bank. On a
terms basis, we extend varying levels of credit to our customers and receive varying levels of
credit from our vendors. We have not had any significant changes in the terms extended to customers
or provided by vendors which would have a material impact to the reported financial statements.
In March 2007, we amended and restated our credit agreement with General Electric Capital
Corporation (GE) (the GE Facility) and entered into a four year Term Loan facility with Monroe
Capital Advisors, LLC (Monroe). The GE Facility provided for a $65.0 million revolving credit
facility and the Monroe agreement provided for a $15.0 million Term Loan facility. The Monroe
facility was paid in full in connection with the Third Amendment of the GE Facility on June 12,
2008 and the GE Facility itself was paid in full on November 12, 2009, when we obtained a new
credit facility.
On November 12, 2009, we entered into a three year, $65.0 million revolving credit facility
(the Credit Facility) with Wells Fargo Foothill, LLC as agent and lender, and Capital One
Leverage Financing Corp. as a participating lender. The Credit Facility is secured by a first
priority security interest in all of our assets, as well as the capital stock of our subsidiary
companies. Additionally, the Credit Facility calls for monthly interest payments at the banks base
rate, as defined in the Credit Facility, plus 4.0% or LIBOR plus 4.0%, at our discretion. The
entire outstanding balance of principal and interest is due in full on November 12, 2012.
At March 31, 2010, we had $6.6 million outstanding on the Credit Facility and, based on the
facilitys borrowing base and other requirements, we had excess availability of $38.4 million.
Amounts available under the credit facility are subject to a borrowing base formula. Changes in the
assets within the borrowing base formula can impact the amount of availability. At March 31, 2009,
we had $24.1 million outstanding on the GE Facility and, based on that facilitys borrowing base
and other requirements, $16.2 million was available.
In association with both credit facilities, and per the respective terms, we pay and have paid
certain facility and agent fees. Weighted average interest on the Credit Facility was 7.5% at March
31, 2010 and at March 31, 2009 under the GE Facility was 5.6%. Such interest amounts have been and
continue to be payable monthly.
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Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in conformity with accounting
principles generally accepted in the United States of America. The preparation of these
consolidated financial statements requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we review and evaluate our estimates,
including those related to customer programs and incentives, product returns, bad debt, production
costs and license fees, inventories, long-lived assets including intangible assets, goodwill,
share-based compensation, income taxes, contingencies and litigation. We base our estimates on
historical experience and various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Actual results could
differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies are affected by our judgment, estimates
and/or assumptions used in the preparation of our consolidated financial statements.
Revenue Recognition
We recognize revenue on products shipped when title and risk of loss transfers, delivery has
occurred, the price to the buyer is determinable and collectability is reasonably assured. We
recognize service revenues upon delivery of the services. Service revenues represented less than
10% of total net sales for fiscal 2010, 2009 and 2008. Under specific conditions, we permit our
customers to return products. We record a reserve for sales returns and allowances against amounts
due to reduce the net recognized receivables to the amounts we reasonably believe will be
collected. These reserves are based on the application of our historical gross profit percent
against average sales returns. Our actual sales return rates have averaged between 9% and 13% over
the past three years. Although our past experience has been a good indicator of future reserve
levels, there can be no assurance that our current reserve levels will be adequate in the future.
Our distribution customers at times qualify for certain price protection and promotional
monies from our vendors. We serve as an intermediary to settle these amounts between vendors and
customers. We account for these amounts as reductions of revenues with corresponding reductions in
cost of sales.
Our publishing business at times provides certain price protection, promotional monies, volume
rebates and other incentives to customers. We record these amounts as reductions in revenue.
FUNimations revenue is recognized upon meeting the recognition requirements of ASC 926,
Entertainment-Films. Revenues from home video distribution are recognized, net of an allowance for
estimated returns, in the period in which the product is available for sale by our customers
(generally upon shipment to the customer and in the case of new releases, after street date
restrictions lapse). Revenues from broadcast licensing and home video sublicensing are recognized
when the programming is available to the licensee and other recognition requirements of ASC 926 are
met. Revenues received in advance of availability are deferred until revenue recognition
requirements have been satisfied. Royalties on sales of licensed products are recognized in the
period earned. In all instances, provisions for uncollectible amounts are provided for at the time
of sale.
Production Costs and License Fees FUNimation
In accordance with accounting principles generally accepted in the United States and industry
practice, we amortize the costs of production using the individual-film-forecast method under which
such costs are amortized for each title or group of titles in the ratio that revenue earned in the
current period for such title bears to managements estimate of the total revenues to be realized
for such titles. All exploitation costs, including advertising and marketing costs are expensed as
incurred.
We regularly review, and revise when necessary, our total revenue estimates on a
title-by-title or group of titles basis, which may result in a change in the rate of amortization
and/or a write-down of the asset to estimated fair value. We determine the estimated fair value for
properties based on the estimated future ultimate revenues and costs in accordance with ASC 926.
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Any revisions to ultimate revenues can result in significant quarter-to-quarter and
year-to-year fluctuation in production cost write-downs and amortization. The commercial potential
of individual films can vary dramatically, and is not directly correlated with production or
acquisition costs. Therefore, it is difficult to predict or project the impact that individual
films will have on our results of operations. Significant fluctuations in reported income or loss
can occur, particularly on a quarterly basis, depending on the release schedules, broadcast dates,
the timing of advertising campaigns and the relative performance of the individual films.
License fees represent advance license/royalty payments made to program suppliers for
exclusive distribution rights. A program suppliers share of distribution revenues
(participation/royalty cost) is retained until the share equals the license fees paid to the
program supplier plus recoupable production costs. Thereafter, any excess is paid to the program
supplier. License fees are amortized as recouped which equals participation/royalty costs earned by
the program suppliers. Participation/royalty costs are accrued/expensed in the same ratio that
current period revenue for a title or group of titles bear to the estimated remaining unrecognized
ultimate revenue for that title, as defined by ASC 926. When estimates of total revenues and costs
indicate that an individual title will result in an ultimate loss, an impairment charge is
recognized to the extent that license fees and production costs exceed estimated fair value, based
on cash flows, in the period when estimated.
Allowance for Doubtful Accounts
We perform periodic credit evaluations of our customers financial condition. In determining
the adequacy of our allowances, we analyze customer financial statements, historical collection
experience, aging of receivables, substantial down-grading of credit scores, bankruptcy filings,
and other economic and industry factors. Although we utilize risk management practices and
methodologies to determine the adequacy of the allowance, the accuracy of the estimation process
can be materially impacted by different judgments as to collectability based on the information
considered and further deterioration of accounts. Our largest collection risks exist for customers
that are in bankruptcy, or at risk of bankruptcy. If customer circumstances change (i.e., higher
than expected defaults or an unexpected material adverse change in a major customers ability to
meet its financial obligations to us), our estimates of the recoverability of amounts due could be
reduced by a material amount.
Goodwill and Intangible Assets
We review goodwill for potential impairment annually for each reporting unit, or when events
or changes in circumstances indicate the carrying value of the goodwill might exceed its current
fair value. We also assess potential impairment of goodwill and intangible assets when there is
evidence that recent events or changes in circumstances have made recovery of an assets carrying
value unlikely. The amount of impairment loss would be recognized as the excess of the assets
carrying value over its fair value. Factors which may cause impairment include negative industry or
economic trends and significant underperformance relative to historical or projected future
operating results.
We determine fair value using widely accepted valuation techniques, including discounted cash
flow and market multiple analysis. These types of analyses require us to make certain assumptions
and estimates regarding industry economic factors and the profitability of future business
strategies. We conduct impairment testing at least once annually based on our most current business
strategy in light of present industry and economic conditions, as well as future expectations. If
the operating results for our publishing segment deteriorate considerably and are not consistent
with our assumptions and estimates, we may be exposed to a goodwill impairment charge that could be
material. As discussed above, during the fiscal year ended March 31, 2009, we determined that the
fair value of three of our reporting units was less than their fair values, and accordingly, an
impairment of goodwill and other intangibles was recorded. In determining the amount of impairment,
ASC 350, Intangibles Goodwill and Other, requires us to analyze the fair values of the assets
and liabilities of the reporting units as if the reporting units had been acquired in a current
business combination. At March 31, 2010 and 2009 we had no goodwill associated with our publishing
or distribution segments.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment and amortizable intangible assets, are
evaluated for impairment whenever events or changes in circumstances indicate the carrying value of
an asset may not be recoverable. An impairment loss is recognized when estimated undiscounted cash
flows expected to result from the use of the asset plus net proceeds expected from disposition of
the asset (if any) are less than the carrying value of the asset. When an impairment loss is
recognized, the carrying amount of the asset is reduced to its estimated fair value. If our results
from operations deteriorate considerably and are not consistent with our assumptions, we may be
exposed to a material impairment charge. As discussed above, during the fiscal year ended March 31,
2009, we determined that the fair value of various long-lived assets was less than their fair
values, and accordingly, an impairment of other intangibles was recorded. In
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determining the amount of impairment, ASC 350 and ASC 360, require us to analyze the fair
values of the assets and liabilities of the reporting units as if the reporting units had been
acquired in a current business combination.
Inventory Valuation
Our inventories are recorded at the lower of cost or market. We use certain estimates and
judgments to value inventory. We monitor our inventory to ensure that we properly identify
inventory items that are slow-moving, obsolete or non-returnable, on a timely basis. A significant
risk in our distribution business is product that has been purchased from vendors that cannot be
sold at full distribution prices and is not returnable to the vendors. A significant risk in our
publishing business is that certain products may run out of shelf life and be returned by our
customers. Generally, these products can be sold in bulk to a variety of liquidators. We establish
reserves for the difference between carrying value and estimated realizable value in the periods
when we first identify the lower of cost or market issue. If future demand or market conditions are
less favorable than current analyses, additional inventory write-downs or reserves may be required
and would be reflected in cost of sales in the period the determination is made.
Share-Based Compensation
We have granted stock options, restricted stock units and restricted stock to certain
employees and non-employee directors. We recognize compensation expense for all share-based
payments granted after March 31, 2006 and all share-based payments granted prior to but not yet
vested as of March 31, 2006, in accordance with ASC 718, Compensation Stock Compensation. Under
the fair value recognition provisions of ASC 718, we recognize share-based compensation net of an
estimated forfeiture rate and only recognize compensation cost for those shares expected to vest on
a straight-line basis over the requisite service period of the award (normally the vesting period)
or when the performance condition has been met. Prior to the adoption of ASC 718, we only
recognized compensation expense for stock options or restricted stock, which had a grant date
intrinsic value.
Determining the appropriate fair value model and calculating the fair value of share-based
payment awards require the input of highly subjective assumptions, including the expected life of
the share-based payment awards and stock price volatility. We use the Black-Scholes model to value
our stock option awards and a lattice model to value restricted stock unit awards. We believe
future volatility will not materially differ from the historical volatility. Thus, the fair value
of the share-based payment awards represents our best estimates, but these estimates involve
inherent uncertainties and the application of management judgment. As a result, if factors change
and we use different assumptions, share-based compensation expense could be materially different in
the future. In addition, we are required to estimate the expected forfeiture rate and only
recognize expense for those shares expected to vest. If the actual forfeiture rate is materially
different from the estimate, share-based compensation expense could be significantly different from
what has been recorded in the current period.
Income Taxes
Income taxes are recorded under the liability method, whereby deferred income taxes are
provided for temporary differences between the financial reporting and tax basis of assets and
liabilities. In the preparation of our consolidated financial statements, management is required to
estimate income taxes in each of the jurisdictions in which we operate. This process involves
estimating actual current tax exposures together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included in our Consolidated Balance Sheets.
Management reviews our deferred tax assets for recoverability on a quarterly basis and assesses the
need for valuation allowances. These deferred tax assets are evaluated by considering historical
levels of income, estimates of future taxable income streams and the impact of tax planning
strategies. A valuation allowance is recorded to reduce deferred tax assets when it is determined
that it is more likely than not that we would not be able to realize all or part of our deferred
tax assets. At March 31, 2009 we carried a valuation allowance against our net deferred tax assets
of $21.4 million which represents the amount of temporary differences which we do not anticipate
recognizing with future projected income for fiscal years 2010 through 2013, or by net operating
loss carrybacks. During fiscal 2010, the amount of deferred tax assets that we will more likely
than not be able to realize increased due to a tax law change allowing us to carry our net
operating losses back additional years as well as us having higher than projected book income. As a
result, we released $11.7 million of the valuation allowance against these deferred tax assets,
reducing the valuation allowance balance to $9.7 million at March 31, 2010.
In July 2006, ASC 740-10, Income Taxes was issued and was adopted and became effective for us
on April 1, 2007. ASC 740-10 defines the threshold for recognizing the benefits of tax positions in
the financial statements as more-likely-than-not to be sustained upon examination. The
interpretation also provides guidance on the de-recognition, measurement and classification of
income tax
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uncertainties, along with any related interest and penalties. ASC 740-10 also requires
expanded disclosure at the end of each annual reporting period including a tabular reconciliation
of unrecognized tax benefits.
Contingencies and Litigation
There are various claims, lawsuits and pending actions against us. If a loss arising from
these actions is probable and can be reasonably estimated, we record the amount of the estimated
loss. If the loss is estimated using a range within which no point is more probable than another,
the minimum estimated liability is recorded. Based on current available information, we believe the
ultimate resolution of existing actions will not have a material adverse effect on our consolidated
financial statements. As additional information becomes available, we assess any potential
liability related to existing actions and may need to revise our estimates. Future revisions of our
estimates could materially impact our consolidated results of operations, cash flows or financial
position.
Recently Issued Accounting Pronouncements
During December 2007, the FASB issued ASC 810-10, Consolidation. ASC 810-10 establishes new
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, ASC 810-10 requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated financial statements and
separate from the parents equity. The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income statement. ASC
810-10 clarifies that changes in a parents ownership interest in a subsidiary that do not result
in deconsolidation are equity transactions if the parent retains its controlling financial
interest. In addition, ASC 810-10 requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the
noncontrolling equity investment on the deconsolidation date. ASC 810-10 also includes expanded
disclosure requirements regarding the interests of the parent and its noncontrolling interest. ASC
810-10 was effective, and adopted by us, beginning with the quarter ended June 30, 2009. We did
not experience any impact on our financial condition, results of operations and cash flows from the
adoption of ASC 810-10.
On December 4, 2007, the FASB issued ASC 805-10, Business Combinations. ASC 805-10
significantly changed the accounting for business combinations. Under ASC 805-10, an acquiring
entity is required to recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. ASC 805-10 changed the accounting
treatment for certain specific items, including:
| Acquisition costs are generally expensed as incurred; | ||
| Noncontrolling interests (formerly known as minority interests) are valued at fair value at the acquisition date; | ||
| Acquired contingent liabilities are recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies; | ||
| In-process research and development are recorded at fair value as an indefinite-lived intangible asset at the acquisition date; | ||
| Restructuring costs associated with a business combination are generally expensed subsequent to the acquisition date; and | ||
| Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally affect income tax expense. |
ASC 805-10 also included a substantial number of new disclosure requirements. The statement
applies prospectively to business combinations for which the acquisition date is on or after the
beginning of an entitys fiscal year that begins after December 15, 2008. We adopted ASC 805-10 in
the first quarter of fiscal 2010, which did not have an impact on our consolidated financial
statements.
In March 2008, the FASB issued ASC 815-10, Derivatives and Hedging. ASC 815-10 is intended to
improve financial reporting standards for derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand the effects these
instruments and activities have on an entitys financial position, financial performance, and cash
flows. ASC 815-10 also improves transparency about the location and amounts of derivative
instruments in an entitys financial statements; how derivative instruments and related hedged
items are accounted for; and how derivative instruments and related hedged items affect its
financial position, financial performance, and cash flows. ASC 815-10 is effective for financial
statements issued for fiscal years and interim
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periods beginning after November 15, 2008. We adopted ASC 815-10 on January 1, 2009, which did
not have an impact on our consolidated financial statements.
In May 2009, the FASB issued ASC 855-10, Subsequent Events which requires all public entities
to evaluate subsequent events through the date that the financial statements are available to be
issued and disclose in the notes the date through which we have evaluated subsequent events and
whether the financial statements were issued or were available to be issued on the disclosed date.
ASC 855-10 defines two types of subsequent events as follows: the first type consists of events or
transactions that provide additional evidence about conditions that existed at the date of the
balance sheet and the second type consists of events that provide evidence about conditions that
did not exist at the date of the balance sheet but arose after that date. ASC 855-10 is effective
for interim and annual periods ending after June 15, 2009 and must be applied prospectively. In
February 2010, subsequent to our adoption of the new guidance discussed above, the FASB issued
updated guidance on subsequent events, amending the May 2009 guidance. This updated guidance
revised various terms and definitions within the guidance and requires us, as an SEC filer, to
evaluate subsequent events through the date the financial statements are issued, rather than
through the date the financial statements are available to be issued. Furthermore, we no longer are
required to disclose the date through which subsequent events have been evaluated. The updated
guidance was effective for us immediately upon issuance. As such, we adopted ASC 855-10 during
fiscal 2010. Our adoption of both the new and updated guidance did not have an impact on our
consolidated financial position or results of operations.
In June 2009, the FASB issued ASC 860-10, Transfers and Servicing. This Statement eliminates
the concept of a qualified special-purpose entity, changes the requirements for derecognizing
financial assets and requires additional disclosures in order to enhance information reported to
users of financial statements by providing greater transparency about transfers of financial
assets, including securitization transactions, and an entitys continuing involvement in and
exposure to the risks related to transferred financial assets. ASC 860-10 is effective for fiscal
years beginning after November 15, 2009. We will adopt ASC 860-10 in fiscal 2011 and are evaluating
the impact, if any, it will have to our consolidated financial statements.
In June 2009, the FASB also amended ASC 810-10, Consolidation, which addresses the effects of
eliminating the qualified special purpose entity concept from ASC 860-10 and responds to concerns
about the application and transparency of enterprises involvement with Variable Interest Entities
(VIEs). ASC 810-10 is effective for fiscal years beginning after November 15, 2009. We will adopt
ASC 810-10 in fiscal 2011 and are evaluating the impact, if any, it will have to our consolidated
financial statements.
In July 2009, the FASB issued ASC 105-10, Generally Accepted Accounting Principles (GAAP).
This standard will become the source of authoritative non-SEC authoritative GAAP. ASC 105-10
establishes a two-level GAAP hierarchy for nongovernmental entities: authoritative guidance and
nonauthoritative guidance. Authoritative guidance consists of the Codification and, for SEC
registrants, rules and interpretative releases of the Commission. Nonauthoritative guidance
consists of non-SEC accounting literature that is not included in the Codification and has not been
grandfathered. ASC 105-10, including the Codification, is effective for financial statements of
interim and annual periods ending after September 15, 2009 and we adopted ASC 105-10 during the
period ending September 30, 2009. As the Codification was not intended to change or alter existing
GAAP, it did not have any impact to our consolidated financial statements.
Reconciliation of GAAP Net Sales to Net Sales Before Inter-Company Eliminations
In evaluating our financial performance and operating trends, management considers information
concerning our net sales before inter-company eliminations of sales that are not prepared in
accordance with generally accepted accounting principles (GAAP) in the United States. Management
believes these non-GAAP measures are useful because they provide supplemental information that
facilitates comparisons to prior periods and for the evaluations of financial results. Management
uses these non-GAAP measures to evaluate its financial results, develop budgets and manage
expenditures. The method we use to produce non-GAAP results is not computed according to GAAP, is
likely to differ from the methods used by other companies and should not be regarded as a
replacement for corresponding GAAP measures. Net sales before inter-company eliminations has
limitations as a supplemental measure, and you should not consider it in isolation or as a
substitute for analysis of our results as reported under GAAP.
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The following table represents a reconciliation of GAAP net sales to net sales before
inter-company eliminations:
Fiscal Year Ended | ||||||||||||
(Unaudited) | March 31, | March 31, | March 31, | |||||||||
(In thousands) | 2010 | 2009 | 2008 | |||||||||
Net sales |
||||||||||||
Distribution |
$ | 487,692 | $ | 592,893 | $ | 611,007 | ||||||
Publishing |
86,003 | 102,828 | 117,423 | |||||||||
Net sales before inter-company eliminations |
573,695 | 695,721 | 728,430 | |||||||||
Inter-company sales |
(45,363 | ) | (64,730 | ) | (69,958 | ) | ||||||
Net sales as reported |
$ | 528,332 | $ | 630,991 | $ | 658,472 | ||||||
Results of Operations
The following table sets forth for the periods indicated, the percentage of net sales
represented by certain items included in our Consolidated Statements of Operations.
Fiscal Years Ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net sales: |
||||||||||||
Distribution |
92.3 | % | 94.0 | % | 92.8 | % | ||||||
Publishing |
16.3 | 16.3 | 17.8 | |||||||||
Inter-company sales |
(8.6 | ) | (10.3 | ) | (10.6 | ) | ||||||
Total net sales |
100.0 | 100.0 | 100.0 | |||||||||
Cost of sales, exclusive of depreciation and amortization |
83.4 | 89.4 | 84.6 | |||||||||
Gross profit |
16.6 | 10.6 | 15.4 | |||||||||
Operating Expenses |
||||||||||||
Selling and marketing |
4.4 | 4.0 | 4.2 | |||||||||
Distribution and warehousing |
1.9 | 1.9 | 1.9 | |||||||||
General and administrative |
5.6 | 5.2 | 5.2 | |||||||||
Depreciation and amortization |
1.2 | 1.8 | 1.4 | |||||||||
Goodwill and intangible asset impairment |
| 13.1 | | |||||||||
Total operating expenses |
13.1 | 26.0 | 12.7 | |||||||||
Income (loss) from operations |
3.5 | (15.4 | ) | 2.7 | ||||||||
Interest expense |
(0.5 | ) | (0.7 | ) | (0.9 | ) | ||||||
Other income (expense), net |
0.2 | (0.2 | ) | 0.1 | ||||||||
Income (loss) from continuing operations before taxes |
3.2 | (16.3 | ) | 1.9 | ||||||||
Income tax benefit (expense) |
1.2 | 2.3 | (0.8 | ) | ||||||||
Net income (loss) from continuing operations |
4.4 | (14.0 | ) | 1.1 | ||||||||
Discontinued operations, net of tax |
||||||||||||
Gain on sale of discontinued operations |
| | 0.7 | |||||||||
Loss from discontinued operations |
| | (0.3 | ) | ||||||||
Net income (loss) |
4.4 | % | (14.0 | )% | 1.5 | % | ||||||
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Segment Results
Certain information in this section contains forward-looking statements. Our actual results
could differ materially from the statements contained in the forward-looking statements as a result
of a number of factors, including but not limited to risks and uncertainties inherent in our
business, dependency upon significant customers and vendors, the seasonality of our business,
dependency upon software developers and manufacturers, effect of technology developments, effect of
free product downloads, dependency upon key employees, risks of returns and inventory obsolescence,
erosions in our gross profit margins, change in retailers methods of distribution, dependency upon
financing, obtaining additional financing when required and the possible volatility of our stock
price. See also Business Forward-Looking Statements/Risk Factors in Item 1A of this Form 10-K.
Distribution Segment
The distribution segment distributes computer software, home video, video games and
independent music (through May 2007).
Fiscal 2010 Results Compared With Fiscal 2009
Net Sales (before inter-company eliminations)
Net sales for the distribution segment were $487.7 million for fiscal 2010 compared to $592.9
million for fiscal 2009, a decrease of $105.2 million or 17.7%. Net sales decreased $44.7 million
in the software product group to $422.3 million for fiscal 2010 compared to $467.0 million for
fiscal 2009, primarily due to approximately $28.3 million loss of sales from a large retailer that
filed for bankruptcy and was liquidated during fiscal 2009, the departure of a low margin vendor
(which accounted for an additional $33.1 million of sales in fiscal 2009), a shift to fee-based
value-added services and the overall retail decline and weak economic conditions. These decreases
in net sales were partially offset by increased sales to current customers by providing additional
product offerings. Home video net sales decreased $17.1 million to $38.1 million for fiscal 2010
from $55.2 million in fiscal 2009, due primarily to shelf space reductions at retailer locations
and the weak retail market and poor overall economic conditions. Video games net sales decreased
$43.4 million to $27.3 million in fiscal 2010 from $70.7 million in fiscal 2009, due to an $8.0
million loss of sales from a large retailer that filed for bankruptcy and was liquidated during
fiscal 2009, the departure of a low margin vendor (which accounted for an additional $24.1 million
of sales in fiscal 2009) and a lack of new releases versus the prior fiscal year. We believe future
net sales will be dependent upon the ability to continue to add new, appealing content and upon the
strength of the retail environment and overall economic conditions.
Gross Profit
Gross profit for the distribution segment was $53.5 million or 11.0% of net sales for fiscal
2010 compared to $52.8 million or 8.9% of net sales for fiscal 2009. The $700,000 increase in gross
profit and 2.1% increase in gross profit margin were primarily due to increased sales of higher
margin software products, an increase in fee-based value-added services and the departure of low
margin vendors. We expect gross profit rates to fluctuate depending principally upon the make-up
of products sold.
Operating Expenses
Total operating expenses for the distribution segment were $47.1 million or 9.7% of net sales
for fiscal 2010 compared to $51.7 million or 8.7% of net sales for fiscal 2009. Overall expenses
decreased in all categories.
Selling and marketing expenses for the distribution segment decreased to $13.3 million or 2.7%
of net sales for fiscal 2010 compared to $14.1 million or 2.4% of net sales for fiscal 2009
primarily due to a decrease in variable freight expenses. The reduction in current period expenses
resulted from lower sales volumes and lower freight rates. These cost decreases were partially
offset by an increase in marketing expenses resulting from reduced vendor participation during
fiscal 2010.
Distribution and warehousing expenses for the distribution segment decreased $2.4 million to
$9.8 million or 2.0% of net sales for fiscal 2010 compared to $12.2 million or 2.1% of net sales
for fiscal 2009 due to lower shipment volume compared to the prior year, which contributed to a
workforce reduction.
General and administration expenses for the distribution segment consist principally of
executive, accounting and administrative personnel and related expenses, including professional
fees. General and administration expenses for the distribution segment were $20.1 million or 4.1%
of net sales for fiscal 2010 compared to $21.2 million or 3.6% of net sales for fiscal 2009. The
$1.1 million
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decrease was primarily a result of reduced expenses related to the fiscal 2009 ERP
implementation of $1.8 million, a workforce reduction during fiscal 2009 and a decrease in
professional fees, which were partially offset by the $3.4 million performance-based compensation
expense recorded during fiscal 2010 compared to zero in fiscal 2009.
Bad debt expense for the distribution segment was $160,000 for fiscal 2010 compared to
$200,000 in fiscal 2009. Our regular review of the trade receivables portfolio resulted in an
adjustment to the allowance reserves.
Depreciation and amortization for the distribution segment was $3.7 million for fiscal 2010
compared to $4.1 million for fiscal 2009. The decrease is principally due to certain assets
becoming fully depreciated.
Operating Income
Net operating income from continuing operations for the distribution segment was $6.4 million
for fiscal 2010 compared to a net operating income from continuing operations of $1.1 million for
fiscal 2009.
Fiscal 2009 Results Compared With Fiscal 2008
Net Sales (before inter-company eliminations)
Net sales for the distribution segment were $592.9 million for fiscal 2009 compared to $611.0
million for fiscal 2008. The $18.1 million or 3.0% decrease in net sales for fiscal 2009 was due to
decreased sales in the software and home video categories, offset by increased sales of video game
product. Sales decreased $31.3 million in the software product group to $467.0 million for fiscal
2009 compared to $498.3 million for fiscal 2008 primarily due to the approximately $24.5 million
loss of sales from a large retailer that filed a bankruptcy petition and the overall retail decline
and deteriorating economic conditions. Home video decreased to $55.2 million for fiscal 2009 from
$64.7 million in fiscal 2008 due primarily to overall retail decline and deteriorating economic
conditions. Video games increased to $70.7 million in fiscal 2009 from $48.1 million in fiscal
2008, due to increased sales from new product releases.
Gross Profit
Gross profit for the distribution segment was $52.8 million or 8.9% of net sales for fiscal
2009 compared to $58.4 million or 9.6% of net sales for fiscal 2008. The decrease in gross profit
of $5.6 million was primarily due to the sales volume decrease. The decrease in gross profit margin
percentage for fiscal 2009 was due to the increased sales of lower margin products.
Operating Expenses
Total operating expenses for the distribution segment were $51.7 million or 8.7% of net sales
for fiscal 2009 compared to $53.3 million or 8.7% of net sales for fiscal 2008. Overall expenses
for selling and marketing, distribution and warehouse and general and administrative expenses
decreased, which were partially offset by increases in bad debt expense and depreciation and
amortization.
Selling and marketing expenses for the distribution segment remained flat at $14.1 million or
2.4% of net sales for fiscal 2009 compared to $14.2 million or 2.3% of net sales for fiscal 2008.
Distribution and warehousing expenses for the distribution segment remained flat at $12.2
million or 2.1% of net sales for fiscal 2009 compared to $12.7 million or 2.1% of net sales for
fiscal 2008.
General and administration expenses for the distribution segment consist principally of
executive, accounting and administrative personnel and related expenses, including professional
fees. General and administration expenses for the distribution segment were $21.2 million or 3.6%
of net sales for fiscal 2009 compared to $23.1 million or 3.8% of net sales for fiscal 2008. The
$1.9 million decrease was primarily due to $1.4 million of decreased professional and legal fees
and a decrease of $1.4 million in fees related to the ERP implementation offset by severance costs
of $504,000.
Bad debt expense for the distribution segment was $200,000 for fiscal 2009 compared to $60,000
for fiscal 2008 due to an increase in reserves for a large retailer that filed for bankruptcy and
subsequently decided to liquidate.
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Depreciation and amortization for the distribution segment was $4.1 million for fiscal 2009
compared to $3.3 million for fiscal 2008. The increase was principally due to the depreciation of
the ERP system.
Operating Income
Net operating income from continuing operations for the distribution segment was $1.1 million
for fiscal 2009 compared to a net operating income from continuing operations of $5.1 million for
fiscal 2008.
Publishing Segment
The publishing segment includes Encore and FUNimation. In fiscal 2009, a former component of
our publishing business, BCI, began winding down its licensing operations related to budget home
video, and the wind-down was completed during the fourth quarter of fiscal 2010.
Fiscal 2010 Results Compared With Fiscal 2009
Net Sales (before inter-company eliminations)
Net sales for the publishing segment were $86.0 million for fiscal 2010 versus $102.8 million
for fiscal 2009. The $16.8 million or 16.4% decrease in net sales was primarily due to the
inclusion of BCI in fiscal 2009 (which generated $10.0 million in net sales in fiscal 2009), shelf
space reductions at retailer locations and decreased sales due to the weak retail market and poor
overall economic conditions. We believe sales results in the future will be dependent upon the
ability to continue to add new, appealing content and upon the strength of the retail environment.
Gross Profit
Gross profit for the publishing segment was $34.5 million or 40.1% of net sales for fiscal
2010 compared to $14.2 million or 13.8% of net sales for fiscal 2009. The $20.3 million increase in
gross profit was primarily a result of the impairment and other charges of $16.4 million recorded
in fiscal 2009 related to accounts receivable reserves, inventory and prepaid royalties associated
with the BCI restructuring and impairment of $8.8 million recorded during fiscal 2009 related to
license advances, production costs and inventory associated with the FUNimation restructuring, all
of which impairment charges were offset by reduced sales during fiscal 2010.
The increase in gross profit margin percentage to 40.1% from 13.8%, a total increase of 26.3%,
was due to impairment and other charges recorded in fiscal 2009 (24.6% of the increase), and
improved margins from product sales mix and reduced royalty rates payable to certain licensors in
fiscal 2010. We expect future gross profit rates to fluctuate depending principally upon the
make-up of product sales.
Operating Expenses
Total operating expenses decreased $90.4 million for the publishing segment to $22.1 million
or 25.7% of net sales, for fiscal 2010, from $112.5 million or 109.4% of net sales for fiscal 2009.
Expenses in fiscal 2009 included goodwill and other impairment charges recorded of $85.2 million.
Overall expenses decreased in all categories of operating expenses.
Selling and marketing expenses for the publishing segment were $9.8 million or 11.4% of net
sales for fiscal 2010 compared to $11.2 million or 10.9% of net sales for fiscal 2009. The $1.4
million decrease was primarily due to $160,000 in severance expenses during fiscal 2009, personnel
cost savings resulting from the restructuring activities that we undertook during fiscal 2009 and a
reduction in travel expenses.
General and administrative expenses for the publishing segment consist principally of
executive, accounting and administrative personnel and related expenses, including professional
fees. General and administrative expenses for the publishing segment were $9.6 million or 11.1% of
net sales for fiscal 2010 compared to $11.5 million or 11.2% of net sales for fiscal 2009. The $1.9
million decrease was primarily due to restructuring severance costs of $330,000 recorded during
fiscal 2009, personnel cost savings resulting from the restructuring activities that we undertook
during fiscal 2009 and a reduction of professional fees, partially offset by $1.4 million of
performance-based compensation expense recorded during fiscal 2010 compared to zero recorded during
the prior year.
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Bad debt expense was $97,000 for fiscal 2010 and $100,000 for fiscal 2009. Our regular review
of the trade receivables portfolio resulted in additional allowance reserves.
Depreciation and amortization expense for the publishing segment was $2.6 million for fiscal
2010 compared to $6.9 million for fiscal 2009. The $4.3 million decrease was primarily due to a
$2.0 million impairment of intangibles charge that was recorded during fiscal 2009 and was related
to the operations of BCI, the reduction in amortization expense associated with the masters cost
basis reduction, which occurred as part of the restructuring activities that we undertook during
fiscal 2009, as well as a decrease in the amortization of acquisition-related intangibles in fiscal
2010.
Goodwill and intangible asset impairment for the publishing segment was zero for fiscal 2010
compared to $82.7 million for fiscal 2009. The prior year charge primarily reflected the sustained
decline in our share price during fiscal 2009, which resulted in our market capitalization being
less than book value.
Operating Income (Loss)
The publishing segment had operating income from continuing operations of $12.3 million for
fiscal 2010 compared to operating loss of $98.3 million for fiscal 2009.
Fiscal 2009 Results Compared With Fiscal 2008
Net Sales (before inter-company eliminations)
Net sales for the publishing segment decreased 12.4% to $102.8 million for fiscal 2009 from
$117.4 million for fiscal 2008. The $14.6 million decrease in net sales was primarily due to an
overall retail decline and deteriorating economic conditions.
Gross Profit
Gross profit for the publishing segment was $14.2 million or 13.8% as a percent of net sales
for fiscal 2009 and $43.2 million or 36.8% as a percent of net sales for fiscal 2008. The $29.0
million decrease in gross profit was primarily a result of the impairment and other charges of
$16.4 million related to accounts receivable reserves, inventory and prepaid royalties associated
with the BCI restructuring; impairment and other charges of $8.8 million related to license
advances, production costs and inventory associated with the FUNimation restructuring and decreased
sales volume, offset by a reduction in royalty rates to certain licensors. The decrease in gross
profit margin percentage from 36.8% to 13.8%, a total decrease of 23.0%, was due to impairment and
other charges (24.6% of the decrease), which was offset by improved margins from product sales mix
and reduced royalty rates to certain licensors.
Operating Expenses
Total operating expenses for the publishing segment increased $82.0 million to $112.5 million
or 109.4% of net sales, for fiscal 2009, from $30.5 million or 26.0% of net sales for fiscal 2008.
Overall expenses increased in all categories of operating expenses except selling and marketing
expenses.
Selling and marketing expenses for the publishing segment were $11.2 million or 10.9% of net
sales for fiscal 2009 compared to $13.2 million or 11.2% of net sales for fiscal 2008. The $2.0
million decrease from the prior year was primarily due to personnel cost savings of $950,000
primarily from BCIs headcount reduction, a $400,000 reduction in travel and entertainment expenses
and a $650,000 reduction of discretionary marketing and advertising program expense.
General and administrative expenses for the publishing segment consist principally of
executive, accounting and administrative personnel and related expenses, including professional
fees. General and administrative expenses for the publishing segment were $11.5 million or 11.2% of
net sales for fiscal 2009 compared to $11.0 million or 9.4% of net sales for fiscal 2008. The
$500,000 increase was primarily due to restructuring severance costs of $330,000, $560,000 in
increased legal and professional costs related to new business initiatives offset by decreased rent
expense in fiscal 2009, resulting from the BCI relocation from California to Minnesota during
fiscal 2008.
Bad debt expense for the publishing segment was $100,000 for fiscal 2009 compared to bad debt
recovery was $75,000 for fiscal 2008. Our regular review of the trade receivables portfolio
resulted in additional allowance reserves.
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Depreciation and amortization expense for the publishing segment was $6.9 million for fiscal
2009 compared to $6.3 million for fiscal 2008. The $600,000 increase was primarily due to
impairment of intangibles related to the operations of BCI of $2.0 million, offset by a reduction
in amortization expense related to acquisition related intangibles.
Goodwill and intangible asset impairment for the publishing segment was $82.7 million for
fiscal 2009 compared to zero for fiscal 2008. During fiscal 2009, we concluded that indicators of
potential impairment were present due to the sustained decline in our share price which resulted in
our market capitalization being less than its book value. We conducted impairment tests during
fiscal 2009 based on present facts and circumstances and its business strategy in light of existing
industry and economic conditions, as well as taking, into consideration future expectations.
Accordingly, goodwill impairments were recorded throughout fiscal 2009.
Operating Income (Loss)
The publishing segment had operating loss from continuing operations of $98.3 million for
fiscal 2009 compared to operating income of $12.7 million for fiscal 2008.
Consolidated Other Income and Expense for All Periods
Other income and expense, net, decreased to net expense of $2.0 million in fiscal 2010 from
net expense of $5.8 million in fiscal 2009. Interest expense was $2.8 million for fiscal 2010
compared to $4.6 million for fiscal 2009. The decrease in interest expense for fiscal 2010 was a
result of a reduction in debt borrowings and a write-off of debt acquisition costs of $289,000
during fiscal 2010 compared to $950,000 during fiscal 2009.
Other income (expense) amounts for fiscal 2010 consisted primarily of interest income of
$16,000 and $788,000 of other income, primarily related to foreign exchange gain. Other income
(expense) amounts for fiscal 2009 consisted primarily of interest income of $86,000 and $1.3
million of other expense, primarily related to foreign exchange loss.
Other income and expense, net, increased to net expense of $5.8 million in fiscal 2009 from
net expense of $5.5 million in fiscal 2008. Interest expense was $4.6 million for fiscal 2009
compared to $6.1 million for fiscal 2008. The decrease in interest expense for fiscal 2009 was a
result of a reduction in total outstanding debt and effective interest rates from the prior year,
partially offset by the write-off of debt acquisition fees and prepayment penalty fees.
Other income (expense) amounts for fiscal 2009 consisted primarily of interest income of
$86,000 and $1.3 million of other expense, primarily related to foreign exchange loss. Other income
(expense) amounts for fiscal 2008 consisted primarily of interest income of $259,000 and $366,000
of net other income, primarily related to foreign exchange gain.
Consolidated Income Tax Expense or Benefit from Continuing Operations for All Periods
We recorded a consolidated income tax benefit of $6.2 million for fiscal 2010, or an effective
rate of 37.2%, income tax benefit for fiscal 2009 of $14.5 million, or an effective tax
rate of 14.1% and income tax expense of $5.3 million, or an effective tax rate of 42.8% for fiscal
2008. The change in our effective tax rate for fiscal 2010 compared to fiscal 2009 is primarily
due to a $11.7 million release of the valuation allowance and a change in the effective state
income tax rate as a result of our completed fiscal 2009 income tax returns. We reduced the
valuation allowance during fiscal 2010 because of an increase in deferred tax assets that the
Company will more likely than not be able to realize due to a tax law change allowing the Company
to carry its net operating losses back additional years as well as the Company having higher than
projected book income.
Deferred tax assets are evaluated by considering historical levels of income, estimates of
future taxable income streams and the impact of tax planning strategies. A valuation allowance is
recorded to reduce deferred tax assets when it is determined that it is more likely than not, based
on the weight of available evidence, we would not be able to realize all or part of our deferred
tax assets. An assessment is required of all available evidence, both positive and negative, to
determine the amount of any required valuation allowance. During fiscal 2009, we recorded a
valuation allowance against the deferred tax assets of $21.4 million, which represented the amount
of temporary differences we do not anticipate recognizing with future projected taxable income, or
by net operating loss carrybacks. During fiscal 2010, we released $11.7 million of the valuation
allowance against these deferred tax assets, thus reducing the valuation allowance to $9.7 million.
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We adopted the provisions of ASC 740-10 on April 1, 2007 which had no impact on our retained
earnings. At adoption, we had approximately $417,000 of gross unrecognized income tax benefits
(UTBs) as a result of the implementation of ASC 740-10 and approximately $327,000 of UTBs, net
of deferred federal and state income tax benefits, related to various federal and state matters,
that would impact the effective tax rate if recognized. We recognize interest accrued related to
UTBs in the provision for income taxes. As of April 1, 2009, interest accrued was approximately
$127,000, which was net of federal and state tax benefits and total UTBs net of federal and state
tax benefits that would impact the effective tax rate if recognized were $964,000. During the
fiscal year ended March 31, 2010 an additional $83,000 of UTBs were accrued, which was net of
$152,000 of deferred federal and state income tax benefits. Additionally, $191,000 of UTBs were
reversed related to a statute of limitations lapse and $140,000 UTBs were reversed related to
provision adjustments during the fiscal year ended March 31, 2010. As of March 31, 2010, interest
accrued was $147,000 and total UTBs, net of deferred federal and state income tax benefits that
would impact the effective tax rate if recognized, were $716,000.
Consolidated Net (Loss) Income from Continuing Operations
We recorded net income from continuing operations of $22.9 million for fiscal 2010, a net loss
from continuing operations of $88.4 million for fiscal 2009 and net income from continuing
operations of $7.1 million for fiscal 2008.
Discontinued Operations
Our business classified as discontinued operations recorded net loss from operations of $2.3
million, net of tax, for the fiscal year ended March 31, 2008. We recorded a gain on the sale of
discontinued operations of $4.9 million, net of tax, for the fiscal year ended March 31, 2008.
This transaction divested the Company of all of its independent music distribution activities.
Consolidated Net (Loss) Income for All Periods
Net income for fiscal 2010 was $22.9 million, net loss for fiscal 2009 was $88.4 million and
net income for fiscal 2008 was $9.7 million.
Market Risk
Our exposure to market risk was primarily due to the fluctuating interest rates associated
with variable rate indebtedness. See Item 7A Quantitative and Qualitative Disclosure About Market
Risk.
Seasonality and Inflation
Quarterly operating results are affected by the seasonality of our business. Specifically, our
third quarter (October 1-December 31) typically accounts for our largest quarterly revenue figures
and a substantial portion of our earnings. Our third quarter accounted for approximately 25.2%,
27.2%, and 33.0% of our net sales for the fiscal years ended March 31, 2010, 2009 and 2008,
respectively. As a supplier of products ultimately sold to retailers, our business is affected by
the pattern of seasonality common to other suppliers of retailers, particularly during the holiday
selling season. The 2008 and 2009 holiday seasons, however, were disappointing to most retailers
and distributors as consumers remained cautious about discretionary spending. As a result, several
of our customers recently experienced significant financial difficulty, with one major customer
filing for bankruptcy and subsequently liquidating. Consequently, our financial results have been
negatively impacted by the downturn in the economy. Inflation is not expected to have a significant
impact on our business, financial condition or results of operations since we can generally offset
the impact of inflation through a combination of productivity gains and price increases.
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Liquidity and Capital Resources
Cash Flow Analysis
Operating Activities
Cash provided by operating activities for fiscal 2010 totaled $16.9 million, compared to $16.5
million and $18.4 million for fiscal 2009 and 2008, respectively.
The net cash provided by operating activities for fiscal 2010 mainly reflected our net income,
combined with various non-cash charges, including depreciation and amortization of $19.6 million,
amortization of debt-acquisition costs of $502,000, write-off of debt acquisition costs of
$289,000, share-based compensation of $1.0 million, increase in deferred income taxes of $4.9
million, a decrease in deferred compensation of $816,000, and a decrease in deferred revenue of
$283,000, offset by our working capital demands. The following are changes in the operating assets
and liabilities during fiscal 2010: accounts receivable decreased by $10.2 million primarily due to
a sales decrease and the timing of receipts; inventories decreased by $460,000, primarily due to
decreased sales; prepaid expenses increased by $2.6 million primarily due to prepaid royalty
advances; production costs and license fees increased $6.4 million and $6.9 million, respectively,
due primarily to new content acquisitions; income taxes receivable decreased $4.8 million,
primarily due to our net operating loss carryback refund; other assets decreased $319,000 due to
amortization and recoupments; accounts payable decreased $24.3 million, primarily as a result of
reduced purchases driven by lower sales volume, timing of disbursements, cash collections and
operations of the Company; and accrued expenses increased $2.9 million primarily related to accrued
performance-based compensation expense offset by a decrease in sales driven royalty expenses.
The net cash provided by operating activities for fiscal 2009 mainly reflected our net loss,
combined with various non-cash charges, including depreciation and amortization of $30.6 million,
write-off of debt acquisition costs of $950,000, goodwill and intangible asset impairment of $82.7
million, share-based compensation of $1.0 million, deferred income taxes of $10.5 million and an
increase in deferred revenue of $182,000, offset by our working capital demands. The following are
changes in the operating assets and liabilities during fiscal 2009: accounts receivable decreased
by $4.0 million primarily due to a sales decrease and the timing of receipts; inventories decreased
by $5.9 million, primarily due to the inventory impairment of $7.2, offset by operating needs
associated with broadened title selections; prepaid expenses decreased by $1.0 million primarily
due to prepaid royalty advances, net of impairment of $7.1 million; production costs and license
fees increased $7.3 million and $10.6 million, respectively, due primarily to new content
acquisitions; income taxes receivable increased $3.9 million, primarily due to our anticipated net
operating loss carryback; other assets decreased $739,000 due to amortization and recoupments;
accounts payable increased $14.5 million, primarily as a result of timing of disbursements; and
accrued expenses decreased $4.8 million primarily related to sales driven royalty expenses.
The net cash provided by operating activities for fiscal 2008 mainly reflected our net income
combined with various non-cash charges, including depreciation and amortization of $9.7 million,
amortization of license fees of $6.9 million, amortization of production costs of $3.3 million,
share-based compensation expense of $1.1 million, deferred compensation costs of $787,000, a change
in deferred income taxes of $2.8 million and by our working capital demands. The following are
changes in the operating assets and liabilities during fiscal 2008: accounts receivable increased
by $6.2 million, reflecting timing of collections; inventories decreased by $4.1 million, primarily
reflecting a focus on reducing inventory; prepaid expenses increased by $1.0 million, primarily
reflecting royalty advances in the publishing segment; other assets decreased $600,000, primarily
due to amortization and recoupments; production costs and license fees increased $5.2 million and
$11.8 million, respectively, due primarily to new content acquisitions; accounts payable increased
$5.1 million, primarily due to timing of disbursements and accrued expenses increased $2.8 million,
primarily as result of royalties payable on sales.
Investing Activities
Cash flows used in investing activities totaled $2.1 million, $334,000 and $13.9 million in
fiscal 2010, 2009 and 2008, respectively.
Acquisition of property and equipment totaled $1.8 million, $3.5 million and $8.6 million in
fiscal 2010, 2009 and 2008, respectively. Purchases of assets in fiscal 2010 consisted primarily of
computer equipment and system development and equipment for our Canadian warehouse. Purchases of
fixed assets in fiscal 2009 consisted primarily of computer equipment and the final implementation
of our ERP project. Purchases of fixed assets in fiscal 2008 primarily related to the ERP project
and warehouse equipment.
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Purchase of intangible assets totaled $12,000, $666,000 and $1.4 million for fiscal 2010, 2009
and 2008, respectively. The costs incurred related to software development totaled $1.4 million and
$677,000 for fiscal 2010 and fiscal 2009, respectively.
Proceeds from the sales of assets held for sale were $1.4 million for fiscal 2009 and were
realized in conjunction with the sale of real estate and related assets located in Decatur, Texas
to an unrelated party.
Purchases of marketable equity securities totaled $4.0 million for fiscal 2008, which related
to the creation of a Rabbi trust formed for purposes of funding future deferred compensation
payments to our former CEO. These securities were sold for $1.0 million and $3.2 million during
fiscal 2010 and fiscal 2009, respectively.
Financing Activities
Cash flows used in financing activities were $14.8 million in fiscal 2010, $20.6 million in
fiscal 2009 and $13.1 million in fiscal 2008.
We had proceeds from the revolving line of credit of $196.1 million, repayments of the
revolving line of credit of $213.6 million, increase in checks written in excess of cash balances
of $4.5 million and debt acquisition costs of $1.8 million in fiscal 2010.
We had proceeds from the revolving line of credit of $208.8 million, repayments of the
revolving line of credit of $215.9 million, repayments on notes payable of $9.7 million, payment of
deferred compensation of $3.2 million, checks written in excess of cash balances of $297,000 and
debt acquisition costs of $850,000 in fiscal 2009.
We had proceeds from the revolving line of credit of $198.4 million, repayments of the
revolving line of credit of $206.0 million, and net payments on note payable of $5.3 million for
fiscal 2008. Debt acquisition costs were $240,000 and proceeds received upon the exercise of common
stock options were $190,000 in fiscal 2008.
Discontinued Operations
Cash flows provided by operating activities of discontinued operations were $5.6 million for
fiscal 2008. Proceeds from the sale of discontinued operations were $6.5 million for fiscal 2008.
Capital Resources
In March 2007, we amended and restated our credit agreement with General Electric Corporation
(GE) (the GE Facility) and entered into a four-year Term Loan facility with Monroe Capital
Advisors, LLC (Monroe). The GE Facility provided for a $65.0 million revolving credit facility
and the Monroe agreement provided for a $15.0 million Term Loan facility. The Monroe facility was
paid in full on June 12, 2008 in connection with the Third Amendment to the GE Facility.
On June 12, 2008, we entered into a Third Amendment and Waiver to Fourth Amended and Restated
Credit Agreement (the Third Amendment) with GE which, among other things, revised the terms of
the GE Facility as follows: (i) permitted us to pay off the remaining $9.7 million balance of the
term loan facility with Monroe; (ii) created a $6.0 million tranche of borrowings subject to
interest at the index rate plus 6.25%, or LIBOR plus 7.5%; (iii) modified the interest rate payable
in connection with borrowings to range from an index rate of 0.75% to 1.75%, or LIBOR plus 2.0% to
3.0%, depending upon borrowing availability during the prior fiscal quarter; (iv) extended the term
of the GE Facility to March 22, 2012; (v) modified the prepayment penalty to 1.5% during the first
year following the date of the Third Amendment, 1% during the second year following the date of the
Third Amendment, and 0.5% during the third year following the date of the Third Amendment; and (vi)
modified certain financial covenants as of March 31, 2008.
On October 30, 2008, we entered into a Fourth Amendment and Waiver to Fourth Amended and
Restated Credit Agreement (the Fourth Amendment) with GE which revised the GE Facility as
follows: effective as of September 30, 2008, (i) clarified the calculation of EBITDA under the
credit agreement to indicate that it would not be impacted by any pre-tax, non-cash charges to
earnings related to goodwill impairment (adjusted EBITDA); and (ii) revised the definition of
Index Rate to indicate that the interest rate for non-LIBOR borrowings would not be less than the
LIBOR rate for an interest period of three months.
On February 5, 2009, we entered into a Fifth Amendment and Waiver to Fourth Amended and
Restated Credit Agreement (the Fifth Amendment) with GE which revised the terms of the GE
Facility as follows: effective as of December 31, 2008, (i) clarified that the
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calculation of EBITDA under the credit agreement would not be impacted by certain pre-tax,
non-cash restructuring charges to earnings, or in connection with cash charges to earnings
recognized in our financial results related to a force reduction (adjusted EBITDA); (ii)
eliminated the $6.0 million tranche of borrowings under the credit facility; (iii) modified the
interest rate in connection with borrowings under the facility to index rate plus 5.75%, or LIBOR
plus 4.75%; (iv) altered the commitment termination date of the GE Facility to June 30, 2010; (v)
eliminated the pre-payment penalty; and (vi) modified certain financial covenants as of December
31, 2008 and thereafter. Additionally, the Fifth Amendment modified the total borrowings available
to $65.0 million. At March 31, 2009, we had $24.1 million outstanding on the GE Facility, which was
paid in full on November 12, 2009 in connection with us obtaining a new credit facility, as
described below.
On November 12, 2009, we entered into a three year, $65.0 million revolving credit facility
(the Credit Facility) with Wells Fargo Foothill, LLC as agent and lender, and Capital One
Leverage Financing Corp. as a participating lender. The Credit Facility is secured by a first
priority security interest in all of our assets, as well as the capital stock of our subsidiary
companies. Additionally, the Credit Facility calls for monthly interest payments at the banks base
rate, as defined in the Credit Facility, plus 4.0% or LIBOR plus 4.0%, at our discretion. The
entire outstanding balance of principal and interest is due in full on November 12, 2012. Amounts
available under the credit facility are subject to a borrowing base formula. Changes in the assets
within the borrowing base formula can impact the amount of availability. At March 31, 2010 we had
$6.6 million outstanding and based on the facilitys borrowing base and other requirements, we had
excess availability of $38.4 million.
In association with both credit facilities, and per the respective terms, we pay and have paid
certain facility and agent fees. Weighted average interest on the Credit Facility was 7.5% at March
31, 2010 and under the GE Facility was 5.6% and 4.7% at March 31, 2009 and 2008, respectively.
Such interest amounts have been and continue to be payable monthly. The interest rate payable
under the Term Loan facility was 10.6% at March 31, 2008.
Under the Credit Facility we are required to meet certain financial and non-financial
covenants. The financial covenants include a variety of financial metrics that are used to
determine our overall financial stability and include limitations on our capital expenditures, a
minimum ratio of adjusted EBITDA to fixed charges, limitations on net vendor advances and a
borrowing base availability requirement. At March 31, 2010, we were in compliance with all
covenants under the revolving facility. We currently believe we will be in compliance with all
covenants over the next twelve months.
Liquidity
We finance our operations through cash and cash equivalents, funds generated through
operations, accounts payable and our revolving credit facility. The timing of cash collections and
payments to vendors requires usage of our revolving credit facility in order to fund our working
capital needs. We have a cash sweep arrangement with our lender, whereby, daily, all cash receipts
from our customers reduce borrowings outstanding under the credit facility. Additionally, all
payments to our vendors that are presented by the vendor to our bank for payment increase
borrowings outstanding under the credit facility. Checks written in excess of cash balances may
occur from time to time, including period ends, and represent payments made to vendors that have
not yet been presented by the vendor to our bank. On a terms basis, we extend varying levels of
credit to our customers and receive varying levels of credit from our vendors. We have not had any
significant changes in the terms extended to customers or provided by vendors which would have a
material impact on the reported financial statements.
We continually monitor our actual and forecasted cash flows, our liquidity and our capital
resources. We plan for potential fluctuations in accounts receivable, inventory and payment of
obligations to creditors and unbudgeted business activities that may arise during the year as a
result of changing business conditions or new opportunities. In addition to working capital needs
for the general and administrative costs of our ongoing operations, we have cash requirements for
among other things: (1) investments in our publishing segment in order to license content and
develop software for established products; (2) investments in our distribution segment in order to
sign exclusive distribution agreements; (3) equipment needs for our operations; and (4) asset or
company acquisitions. During fiscal 2010, we invested approximately $11.8 million, before
recoveries, in connection with the acquisition of licensed and exclusively distributed product in
our publishing and distribution segments.
Our credit agreement provides for a $65.0 million revolving credit facility, which is subject
to certain borrowing base requirements and is available for working capital and general corporate
needs. As of March 31, 2009, we had $6.6 million outstanding on the revolving sub-facility and
excess availability of $38.4 million, based on the terms of the agreement. Amounts available under
the credit facility are subject to a borrowing base formula. Changes in the assets within the
borrowing base formula can impact the amount of availability.
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We currently believe cash and cash equivalents, funds generated from the expected results of
operations, funds available under our existing credit facility and vendor terms will be sufficient
to satisfy our working capital requirements, other cash needs, and to finance expansion plans and
strategic initiatives for at least the next 12 months, absent significant acquisitions.
Additionally, with respect to long term liquidity, we have an effective shelf registration
statement covering the offer and sale of up to $20.0 million of common and/or preferred shares. Any
growth through acquisitions would likely require the use of additional equity or debt capital, some
combination thereof, or other financing
Contractual Obligations
The following table presents information regarding contractual obligations that exist as of
March 31, 2010 by fiscal year (in thousands):
Less than 1 | 1-3 | 3-5 | More than 5 | |||||||||||||||||
Total | Year | Years | Years | Years | ||||||||||||||||
Operating leases |
$ | 23,243 | $ | 2,973 | $ | 6,201 | $ | 5,565 | $ | 8,504 | ||||||||||
Capital leases |
152 | 66 | 86 | | | |||||||||||||||
License and distribution agreements |
12,812 | 2,687 | 8,965 | 1,160 | | |||||||||||||||
Deferred compensation |
1,333 | 1,333 | | | | |||||||||||||||
Total |
$ | 37,540 | $ | 7,059 | $ | 15,252 | $ | 6,725 | $ | 8,504 | ||||||||||
We have excluded liabilities resulting from uncertain tax positions of $1.2 million from the
table above because we are unable to make a reasonably reliable estimate of the period of cash
settlement with the respective taxing authorities. Additionally, interest payments related to the
Credit Facility have been excluded as future interest rates are uncertain.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements (as such term is defined in Item 303 of
regulation S-K) that are reasonably likely to have a current or future effect on our financial
condition or changes in financial condition, operating results, or liquidity.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk. Market risk refers to the risk that a change in the level of one or more market
prices, interest rates, indices, volatilities, correlations or other market factors such as
liquidity will result in losses for a certain financial instrument or group of financial
instruments. We do not hold or issue financial instruments for trading purposes, and do not enter
into forward financial instruments to manage and reduce the impact of changes in foreign currency
rates because we have few foreign relationships and substantially all of our foreign transactions
are negotiated, invoiced and paid in U.S. dollars. Based on the controls in place and the relative
size of the financial instruments entered into, we believe the risks associated with not using
these instruments will not have a material adverse effect on our consolidated financial position or
results of operations.
Interest Rate Risk. Our exposure to changes in interest rates results primarily from credit
facility borrowings. As of March 31, 2010 we had $6.6 million of indebtedness, which was subject to
interest rate fluctuations. Based on these borrowings subject to interest rate fluctuations
outstanding on March 31, 2010, a 100-basis point change in the current LIBOR rate would cause our
annual interest expense to change by $66,000.
Foreign Currency Risk. We have a limited number of customers in Canada, where the sales and
purchasing activity results in receivables and accounts payables denominated in Canadian dollars.
When these transactions are translated into U.S. dollars at the effective exchange rate in effect
at the time of each transaction, gain or loss is recognized. These gains and/or losses are reported
as a separate component within other income and expense.
During the years ended March 31, 2010, 2009 and 2008, we had $788,000 of foreign exchange
gain, $1.2 million of foreign exchange loss and $252,000 of foreign exchange gain, respectively.
Gain or loss on these activities is a function of the change in the foreign exchange rate between
the sale or purchase date and the collection or payment of cash. Though the change in the exchange
rate is out of our control, we periodically monitors our Canadian activities and can reduce
exposure from the exchange rate fluctuations by limiting these activities or taking other actions,
such as exchange rate hedging.
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Item 8. Financial Statements and Supplementary Data
The information called for by this item is set forth in the Consolidated Financial Statements
and Schedule covered by the Reports of Independent Registered Public Accounting Firms at the end of
this report commencing at the pages indicated below:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at March 31, 2010 and 2009
Consolidated Statements of Operations for the years ended March 31, 2010, 2009 and 2008
Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) for the years
ended March 31, 2008, 2009 and 2010
Consolidated Statements of Cash Flows for the years ended March 31, 2010, 2009 and 2008
Notes to Consolidated Financial Statements
Schedule II Valuation and Qualifying Accounts and Reserves for the years ended March 31,
2010, 2009 and 2008
All of the foregoing Consolidated Financial Statements and Schedule are hereby incorporated in
this Item 8 by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (Disclosure Controls), as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that
information required to be disclosed in our Exchange Act reports, including our Annual Report on
Form 10-K, was recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms, and that such information was accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) and 15d-15(b) promulgated under the Exchange Act, we carried out
an evaluation, under the supervision and with the participation of our management, including our
Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of the date of such evaluation.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act. Internal
control over financial reporting is a process designed by, or under the supervision of, our Chief
Executive Officer and Chief Financial Officer and effected by our Board of Directors, management
and other personnel, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of an issuers financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of America (GAAP).
Internal control over financial reporting includes policies and procedures that:
(i.) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of an issuers assets; |
42
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(ii.) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that an issuers receipts and expenditures are being made only in accordance with authorizations of its management and directors; and | |||
(iii.) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of an issuers assets that could have a material effect on the consolidated financial statements. |
An internal control material weakness is a significant deficiency, or combination of
significant deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented or detected.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, the application of any evaluation of effectiveness to future periods is
subject to the risk that controls may become inadequate because of changes in conditions, or that
compliance with the policies or procedures may deteriorate.
As required by Rule 13a-15(c) promulgated under the Exchange Act, our management, with the
participation of our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our internal control over financial reporting as of March 31, 2010. Managements
assessment was based on criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control Integrated Framework (COSO). Based on Managements
assessment, Management believes that, as of March 31, 2010, our internal control over financial
reporting is effective based on those criteria.
Grant Thornton LLP, our independent registered public accounting firm, has issued an
attestation report, included herein, on our internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
our last fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting, as defined in Rule 13a-15(f) under the
Exchange Act.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers of the Registrant and Corporate Governance
Information regarding our executive officers is found in Part I, Item 1 of this report under
the heading Executive Officers of the Company.
All other information required under this item will be contained in our Proxy Statement for
our 2010 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after our
fiscal year end and is incorporated herein by reference.
Item 11. Executive Compensation
Information required under this item will be contained in our Proxy Statement for our 2010
Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after our fiscal
year end and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information required under this item will be contained in our Proxy Statement for our 2010
Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after our fiscal
year end and is incorporated herein by reference.
43
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Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required under this item will be contained in our Proxy Statement for our 2010
Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after our fiscal
year end and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
Information required under this item will be contained in our Proxy Statement for our 2010
Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after our fiscal
year end and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report -
(1) | Financial Statements. Our following consolidated financial statements and the Reports of Independent Registered Public Accounting Firm thereon are set forth at the end of this document: |
(i) | Reports of Independent Registered Public Accounting Firm. | ||
(ii) | Consolidated Balance Sheets as of March 31, 2010 and 2009. | ||
(iii) | Consolidated Statements of Operations for the years ended March 31, 2010, 2009 and 2008 | ||
(iv) | Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) for the years ended March 31, 2008, 2009 and 2010. | ||
(v) | Consolidated Statements of Cash Flows for the years ended March 31, 2010, 2009 and 2008. | ||
(vi) | Notes to Consolidated Financial Statements |
(2) | Financial Statement Schedules |
(i) | Schedule II Valuation and Qualifying Accounts and Reserves | ||
Schedules other than those listed above have been omitted because they are inapplicable or the required information is either immaterial or shown in the Consolidated Financial Statements or the notes thereto. |
(3) | Exhibit Listing |
Filed | Incorporated by reference | |||||||||||||
Exhibit | here | Period | Filing | |||||||||||
number | Exhibit description | with | Form | ending | Exhibit | date | ||||||||
3.1
|
Navarre Corporation Amended and Restated Articles of Incorporation | S-1 | 3.1 | 04/13/06 | ||||||||||
3.2
|
Navarre Corporation Amended and Restated Bylaws | 8-K | 3.1 | 01/25/07 | ||||||||||
4.1
|
Form of Specimen Certificate for Common Stock | S-1 | 4.1 | 04/13/06 | ||||||||||
4.2
|
Form of Warrant dated March 21, 2006 | S-1 | 4.4 | 04/13/06 | ||||||||||
4.3
|
Form of Agents Warrant | S-1/A | 4.5 | 06/26/06 |
44
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Filed | Incorporated by reference | |||||||||||||
Exhibit | here | Period | Filing | |||||||||||
number | Exhibit description | with | Form | ending | Exhibit | date | ||||||||
10.1*
|
Navarre Corporation Amended and Restated 1992 Stock Option Plan | 10-K | 03/31/02 | 10.3 | 07/01/02 | |||||||||
10.2*
|
2003 Amendment to 1992 Stock Option Plan | S-8 | 99.1 | 09/23/03 | ||||||||||
10.3*
|
Form of Individual Stock Option Agreement under 1992 Stock Option Plan | S-1 | 10.4 | 09/03/93 | ||||||||||
10.4*
|
Navarre Corporation Amended and Restated 2004 Stock Plan, as amended September 13, 2007 (but only as to the addition of 1,500,000 shares available for issuance) | S-8 | 4 | 02/22/06 | ||||||||||
10.5*
|
Amendment No. 2 to Amended and Restated 2004 Stock Plan | DEF14A | A | 07/28/09 | ||||||||||
10.6*
|
Form of Employee Stock Option Agreement under 2004 Stock Plan | 10-K | 03/31/05 | 10.58 | 06/14/05 | |||||||||
10.7*
|
Form of Non-Employee Director Stock Option Agreement under 2004 Stock Plan | 10-K | 03/31/05 | 10.59 | 06/14/05 | |||||||||
10.8*
|
Form of Employee Restricted Stock Agreement under 2004 Stock Plan | 8-K | 10.2 | 04/04/06 | ||||||||||
10.9*
|
Form of Director Restricted Stock Agreement under 2004 Stock Plan | 8-K | 10.3 | 04/04/06 | ||||||||||
10.10*
|
Form of TSR Stock Unit Agreement under 2004 Stock Plan | 8-K | 10.4 | 04/04/06 | ||||||||||
10.11*
|
Form of Performance Stock Unit Agreement under 2004 Stock Plan | 8-K | 10.5 | 04/04/06 | ||||||||||
10.12*
|
Form of Restricted Stock Unit Agreement under 2004 Stock Plan | 10-Q | 09/31/07 | 10.1 | 11/08/07 | |||||||||
10.13*
|
Employment Agreement dated November 1, 2001 between the Company and Eric H. Paulson | 10-Q | 12/31/01 | 10.1 | 02/13/02 | |||||||||
10.14*
|
Amendment dated December 28, 2006 to Employment Agreement between the Company and Eric H. Paulson | 8-K | 99.2 | 12/29/06 | ||||||||||
10.15*
|
Amendment dated March 30, 2007 to Employment Agreement between the Company and Eric H. Paulson | 8-K | 99.1 | 04/04/07 | ||||||||||
10.16*
|
Form of Separation Agreement between the Company and Charles E. Cheney | 10-K | 03/31/04 | 10.41 | 06/29/04 | |||||||||
10.17*
|
Form of Post-Acquisition Employment Agreement among the Company, FUNimation Productions, Ltd. and Gen Fukunaga | 8-K | 10.1 | (b) | 01/11/05 |
45
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Filed | Incorporated by reference | |||||||||||||
Exhibit | here | Period | Filing | |||||||||||
number | Exhibit description | with | Form | ending | Exhibit | date | ||||||||
10.18*
|
Employment Agreement dated May 7, 2010 among the Company, FUNimation Productions Ltd., animeOnline Ltd. and Gen Fukunaga | 8-K | 99.1 | 5/27/10 | ||||||||||
10.19*
|
Amended and Restated Employment Agreement dated December 28, 2006 between the Company and Cary L. Deacon | 8-K | 99.1 | 12/29/06 | ||||||||||
10.20*
|
Amendment dated January 29, 2007 to Amended and Restated Employment Agreement between the Company and Cary L. Deacon | 8-K | 10.1 | 01/30/07 | ||||||||||
10.21*
|
Amendment dated March 20, 2008 to Amended and Restated Employment Agreement between the Company and Cary L. Deacon | 8-K | 10.1 | 03/21/08 | ||||||||||
10.22*
|
Amended and Restated Executive Severance Agreement dated March 20, 2008 between the Company and J. Reid Porter | 8-K | 10.2 | 03/21/08 | ||||||||||
10.23*
|
Executive Severance Agreement dated March 20, 2008 between the Company and Brian Burke | 8-K | 10.3 | 03/21/08 | ||||||||||
10.24*
|
Executive Severance Agreement dated March 20, 2008 between the Company and John Turner | 8-K | 10.4 | 03/21/08 | ||||||||||
10.25*
|
Executive Severance Agreement dated March 20, 2008 between the Company and Joyce Fleck | 10-K | 03/31/09 | 10.22 | 06/09/09 | |||||||||
10.26*
|
Executive Severance Agreement dated March 20, 2008 between the Company and Calvin Morrell | 10-K | 03/31/09 | 10.23 | 06/09/09 | |||||||||
10.27*
|
Form of Lock-Up Agreement | 8-K | 10.1 | 03/23/06 | ||||||||||
10.28*
|
Fiscal Year 2008 Annual Management Incentive Plan |
8-K | 10.1 | 07/12/07 | ||||||||||
10.29*
|
Fiscal Year 2009 Annual Management Incentive Plan |
10-K | 03/31/08 | 10.26 | 06/16/08 | |||||||||
10.30*
|
Fiscal Year 2010 Annual Management Incentive Plan |
8-K | 10.1 | 04/21/09 | ||||||||||
10.31*
|
Fiscal Year 2011 Annual Management Incentive Plan |
8-K | 10.1 | 05/14/10 | ||||||||||
10.32
|
Office/Warehouse Lease dated April 1, 1998 between the Company and Cambridge Apartments, Inc. | 10-K | 03/31/99 | 10.6 | 06/29/99 |
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Filed | Incorporated by reference | |||||||||||||
Exhibit | here | Period | Filing | |||||||||||
number | Exhibit description | with | Form | ending | Exhibit | date | ||||||||
10.33
|
Amendment dated September 27, 2001 to Office/Warehouse Lease between the Company and Cambridge Apartments, Inc. | 10-Q | 06/30/03 | 10.9.1 | 08/14/03 | |||||||||
10.34
|
Agreement of Reciprocal Easements, Covenants, Conditions and Restrictions dated June 16, 2003 | 10-Q | 06/30/03 | 10.9.3 | 08/14/03 | |||||||||
10.35
|
Amendment dated July 14, 2003 to Office/Warehouse Lease between the Company and Cambridge Apartments, Inc. | 10-Q | 06/30/03 | 10.9.2 | 08/14/03 | |||||||||
10.36
|
Form of Amendment dated February 23, 2004 to Office/Warehouse Lease between the Company and Cambridge Apartments, Inc. | 10-K | 03/31/04 | 10.48 | 06/29/04 | |||||||||
10.37
|
Form of Amendment dated June 2004 to Office/Warehouse Lease between the Company and Cambridge Apartments, Inc. | 10-K | 03/31/04 | 10.49 | 06/29/04 | |||||||||
10.38
|
Addendum dated May 27, 2004 to Office/Warehouse Lease between the Company and Cambridge Apartments, Inc. | 10-K | 03/31/04 | 10.51 | 06/29/04 | |||||||||
10.39
|
Addendum dated November 12, 2009 to Office/Warehouse Lease between the Company and Cambridge Apartments, Inc. | X | ||||||||||||
10.40
|
Amendment dated March 21, 2004 to Office/Warehouse Lease between the Company and Airport One Limited Partnership | 10-K | 03/31/04 | 10.50 | 06/29/04 | |||||||||
10.41
|
Amendment dated November 23, 2004 to Office/Warehouse Lease between the Company and Airport One Limited Partnership | 10-Q | 12/31/04 | 10.1 | 02/14/05 | |||||||||
10.42
|
Amendment dated February 2, 2006 to Office/Warehouse Lease between the Company and Airport One Limited Partnership | 10-Q | 12/31/05 | 10.1 | 02/09/06 | |||||||||
10.43
|
Form of Office/Warehouse Lease dated May 27, 2004 between the Company and NL Ventures IV New Hope, L.P. | 10-K | 03/31/04 | 10.47 | 06/29/04 | |||||||||
10.44
|
Office Lease dated October 8, 2004 between Encore Software, Inc. and Kilroy Realty, L.P. | 10-Q | 09/30/04 | 10.57 | 11/15/04 | |||||||||
10.45
|
Amendment dated December 29, 2004 to Office Lease between Encore Software, Inc. and Kilroy Realty, L.P. | 10-Q | 12/31/04 | 10.3 | 02/14/05 | |||||||||
10.46
|
Addendum dated April 29, 2010 to Office Lease between Encore Software, Inc. and Kilroy Realty, L.P. | X |
47
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Filed | Incorporated by reference | |||||||||||||
Exhibit | here | Period | Filing | |||||||||||
number | Exhibit description | with | Form | ending | Exhibit | date | ||||||||
10.47
|
Office/Warehouse Lease dated November 19, 2009 between the Company and Orlando Corporation | X | ||||||||||||
10.48
|
Consent to Assignment dated March 1, 2010 of Office/Warehouse Lease between the Company, Navarre Distribution Services ULC and Orlando Corporation | X | ||||||||||||
10.49
|
Partnership Interest Purchase Agreement dated January 10, 2005 among FUNimation Sellers and the Company | 8-K | 10.1 | 01/11/05 | ||||||||||
10.50
|
Form of Assignment and Assumption of FUNimation Limited Partnership Interests | 8-K | 10.1 | (a) | 02/14/05 | |||||||||
10.51
|
Form of FUNimation Sellers Non-Competition Agreement | 8-K | 10.1 | (d) | 02/14/05 | |||||||||
10.52
|
Amendment dated May 11, 2005 to Partnership Interest Purchase Agreement among FUNimation Sellers and the Company | 8-K | 10.1 | 05/17/05 | ||||||||||
10.53
|
Memorandum of Understanding dated February 7, 2006 among FUNimation Sellers and the Company | 8-K | 99.1 | 02/08/06 | ||||||||||
10.54
|
Office Lease dated May 29, 2007 between FUNimation Productions, Ltd. and FMBP Industrial I LP | 10-K | 03/31/07 | 10.117 | 06/14/07 | |||||||||
10.55
|
Form of Securities Purchase Agreement dated March 2006 between the Company and various purchasers | S-1 | 4.2 | 04/13/06 | ||||||||||
10.56
|
Form of Registration Rights Agreement dated March 2006 between the Company and various purchasers | S-1 | 4.3 | 04/13/06 | ||||||||||
10.57
|
Purchase and Sale Agreement dated May 11, 2007 by and among the Company, Navarre Entertainment Media, Inc. and Koch Entertainment LP | 8-K | 10.1 | 05/14/07 | ||||||||||
10.58
|
Form of Fourth Amended and Restated Credit Agreement dated March 22, 2007 among the Company, General Electric Capital Corporation, as Agent, and Lenders | 8-K | 10.1 | 03/23/07 | ||||||||||
10.59
|
Form of Amendment and Limited Waiver dated May 30, 2007 to Fourth Amended and Restated Credit Agreement among the Company, General Electric Capital Corporation, as Agent, and Lenders | 8-K | 10.1 | 05/31/07 |
48
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Filed | Incorporated by reference | |||||||||||||
Exhibit | here | Period | Filing | |||||||||||
number | Exhibit description | with | Form | ending | Exhibit | date | ||||||||
10.60
|
Form of Amendment and Limited Waiver dated June 30, 2007 to Fourth Amended and Restated Credit Agreement among the Company, General Electric Capital Corporation, as Agent, and Lenders | 8-K | 10.1 | 08/13/07 | ||||||||||
10.61
|
Form of Amendment and Limited Waiver dated June 12, 2008 to Fourth Amended and Restated Credit Agreement among the Company, General Electric Capital Corporation, as Agent, and Lenders | 10-K | 3/31/08 | 10.59 | 06/16/08 | |||||||||
10.62
|
Form of Amendment dated October 30, 2008 to Fourth Amended and Restated Credit Agreement among the Company, General Electric Capital Corporation, as Agent, and Lenders | 8-K | 10.1 | 10/31/08 | ||||||||||
10.63
|
Form of Amendment and Limited Waiver dated February 5, 2009 to Fourth Amended and Restated Credit Agreement among the Company, General Electric Capital Corporation, as Agent, and Lenders | 10-Q | 12/31/08 | 10.1 | 02/09/09 | |||||||||
10.64
|
Form of Amendment dated February 17, 2009 to Fourth Amended and Restated Credit Agreement among the Company, General Electric Capital Corporation, as Agent, and Lenders | 8-K | 10.1 | 02/19/09 | ||||||||||
10.65
|
Form of Credit Agreement dated March 22, 2007 among the Company, Monroe Capital Advisors, LLC, as Agent, and Lenders | 8-K | 10.2 | 03/23/07 | ||||||||||
10.66
|
Limited Waiver dated May 30, 2007 to Credit Agreement among the Company, Monroe Capital Advisors, LLC, as Agent, and Lenders | 8-K | 10.2 | 05/31/07 | ||||||||||
10.67
|
Form of Amendment dated June 30, 2007 to Credit Agreement among the Company, Monroe Capital Advisors, LLC, as Agent, and Lenders | 8-K | 10.2 | 08/13/07 | ||||||||||
10.68
|
Form of Credit Agreement dated November 12, 2009 among the Company, Wells Fargo Capital Finance, LLC, as Agent, and Lenders | 8-K | 10.1 | 11/13/09 | ||||||||||
10.69
|
Consent and Amendment dated April 29, 2010 to Credit Agreement among the Company, Wells Fargo Capital Finance, LLC, as Agent, and Lenders | X | ||||||||||||
10.70
|
Consent and Amendment dated May 17, 2010 to Credit Agreement among the Company, Wells Fargo Capital Finance, LLC, as Agent, and Lenders | 8-K | 10.2 | 05/17/10 |
49
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Filed | Incorporated by reference | |||||||||||||
Exhibit | here | Period | Filing | |||||||||||
number | Exhibit description | with | Form | ending | Exhibit | date | ||||||||
10.71
|
Asset Purchase Agreement dated May 17, 2010 by and among Encore Software, Inc., Navarre Corporation and Punch Software, LLC | 8-K | 10.1 | 05/17/10 | ||||||||||
14.1
|
Navarre Corporation Code of Business Conduct and Ethics | 10-K | 03/31/04 | 14.1 | 06/29/04 | |||||||||
21.1
|
Subsidiaries of the Registrant | X | ||||||||||||
23.1
|
Consent of Independent Registered Public Accounting Firm Grant Thornton LLP | X | ||||||||||||
24.1
|
Power of Attorney, contained on signature page | X | ||||||||||||
31.1
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act) | X | ||||||||||||
31.2
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act) | X | ||||||||||||
32.1
|
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) | X | ||||||||||||
32.2
|
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) | X |
* | Indicates a management contract or compensatory plan or arrangement |
50
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Navarre Corporation (Registrant) |
||||
June 11, 2010 | By | /s/ Cary L. Deacon | ||
Cary L. Deacon | ||||
President and Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
51
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints Cary L. Deacon and J. Reid Porter, or either of them, as his/her true and lawful
attorney-in-fact and agent, each with the power of substitution and resubstitution, for him/her and
in his/her name, place and stead, in any and all capacities, to sign any amendments to this Annual
Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all said attorney-in-fact and agent,
or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
Signature | Title | Date | ||
/s/ Cary L. Deacon
|
President and Chief Executive Officer and Director | June 11, 2010 | ||
Cary L. Deacon
|
(principal executive officer) | |||
/s/ J. Reid Porter
|
Chief Financial Officer (principal financial and accounting officer) |
June 11, 2010 | ||
/s/ Eric H. Paulson
|
Chairman of the Board | June 11, 2010 | ||
Eric H. Paulson |
||||
/s/ Keith A. Benson
|
Director | June 11, 2010 | ||
Keith A. Benson |
||||
/s/ Timothy R. Gentz
|
Director | June 11, 2010 | ||
Timothy R. Gentz |
||||
/s/ Kathleen P. Iverson
|
Director | June 11, 2010 | ||
Kathleen P. Iverson |
||||
/s/ David F. Dalvey
|
Director | June 11, 2010 | ||
David F. Dalvey |
||||
/s/ Tom F. Weyl
|
Director | June 11, 2010 | ||
Tom F. Weyl |
||||
/s/ Deborah L. Hopp
|
Director | June 11, 2010 | ||
Deborah L. Hopp |
||||
/s/ Frederick C. Green IV
|
Director | June 11, 2010 | ||
Frederick C. Green IV |
52
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Navarre Corporation
Navarre Corporation
We have audited the accompanying consolidated balance sheets of Navarre Corporation (a
Minnesota corporation) and subsidiaries as of March 31, 2010 and 2009, and the related consolidated
statements of operations, shareholders equity and comprehensive income (loss), and cash flows for
each of the three years in the period ended March 31, 2010. Our audits of the basic financial
statements included the financial statement schedule listed in the index appearing under Item
15(a)(2). These financial statements and financial statement schedule are the responsibility of the
Companys 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 Navarre Corporation and subsidiaries as of March 31,
2010 and 2009, and the results of their operations and their cash flows for each of the three years
in the period ended March 31, 2010, 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), Navarre Corporation and subsidiaries internal control over
financial reporting as of March 31, 2010, 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 11, 2010 expressed an unqualified opinion on the
effectiveness of the Companys internal control over financial reporting.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
June 11, 2010
June 11, 2010
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Navarre Corporation
Navarre Corporation
We have audited Navarre Corporation (a Minnesota corporation) and subsidiaries internal
control over financial reporting as of March 31, 2010, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Managements Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Navarre Corporation and subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of March 31, 2010, based on criteria
established in Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Navarre Corporation and
subsidiaries as of March 31, 2010 and 2009 and the related consolidated statements of operations,
shareholders equity and comprehensive income (loss), and cash flows for each of the three years in
the period ended March 31, 2010, and our report dated June 11, 2010 expressed an unqualified
opinion on those financial statements.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
June 11, 2010
June 11, 2010
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NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
March 31, | ||||||||
2010 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Marketable securities |
$ | 2 | $ | 1,024 | ||||
Accounts receivable, less allowances of $13,193 and $19,010, respectively |
62,627 | 72,817 | ||||||
Inventories |
26,272 | 26,732 | ||||||
Prepaid expenses and other current assets |
13,727 | 11,090 | ||||||
Income tax receivable |
94 | 4,866 | ||||||
Deferred tax assets current, net |
7,603 | 6,219 | ||||||
Total current assets |
110,325 | 122,748 | ||||||
Property and equipment, net of accumulated depreciation of $20,863 and $16,704, respectively |
13,307 | 15,957 | ||||||
Software development costs, net of amortization of $324 and zero, respectively |
1,723 | 677 | ||||||
Other assets: |
||||||||
Intangible assets, net of accumulated amortization of $19,184 and $25,364, respectively |
1,500 | 3,406 | ||||||
License fees, net of accumulated amortization of $28,107 and $21,570, respectively |
16,565 | 17,728 | ||||||
Production costs, net of accumulated amortization of $16,745 and $12,223, respectively |
9,814 | 8,408 | ||||||
Deferred tax assets non-current, net |
13,808 | 10,299 | ||||||
Other assets |
4,561 | 3,946 | ||||||
Total assets |
$ | 171,603 | $ | 183,169 | ||||
Liabilities and shareholders equity |
||||||||
Current liabilities: |
||||||||
Revolving line of credit |
$ | 6,634 | $ | 24,133 | ||||
Capital lease obligation short-term |
57 | 90 | ||||||
Accounts payable |
82,451 | 106,708 | ||||||
Checks written in excess of cash balances |
4,816 | 297 | ||||||
Deferred compensation |
1,333 | 2,149 | ||||||
Accrued expenses |
14,248 | 11,504 | ||||||
Total current liabilities |
109,539 | 144,881 | ||||||
Long-term liabilities |
||||||||
Capital lease obligation long-term |
82 | 115 | ||||||
Income taxes payable |
1,221 | 1,166 | ||||||
Total liabilities |
110,842 | 146,162 | ||||||
Commitments and contingencies (Note 23) |
||||||||
Shareholders equity: |
||||||||
Common stock, no par value: |
||||||||
Authorized shares 100,000,000; issued and outstanding shares 36,366,668 at March
31, 2010 and 36,260,116 at March 31, 2009 |
162,015 | 161,134 | ||||||
Accumulated deficit |
(101,254 | ) | (124,126 | ) | ||||
Accumulated other comprehensive loss |
| (1 | ) | |||||
Total shareholders equity |
60,761 | 37,007 | ||||||
Total liabilities and shareholders equity |
$ | 171,603 | $ | 183,169 | ||||
See accompanying notes to consolidated financial statements.
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NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net sales |
$ | 528,332 | $ | 630,991 | $ | 658,472 | ||||||
Cost of sales (exclusive of depreciation and amortization) |
440,407 | 563,944 | 556,913 | |||||||||
Gross profit |
87,925 | 67,047 | 101,559 | |||||||||
Operating expenses: |
||||||||||||
Selling and marketing |
23,140 | 25,334 | 27,371 | |||||||||
Distribution and warehousing |
9,799 | 12,166 | 12,689 | |||||||||
General and administrative |
29,730 | 32,664 | 34,096 | |||||||||
Bad debt expense (recovery) |
257 | 300 | (15 | ) | ||||||||
Depreciation and amortization |
6,316 | 10,972 | 9,587 | |||||||||
Goodwill and intangible asset impairment |
| 82,729 | | |||||||||
Total operating expenses |
69,242 | 164,165 | 83,728 | |||||||||
Income (loss) from operations |
18,683 | (97,118 | ) | 17,831 | ||||||||
Other income (expense): |
||||||||||||
Interest expense |
(2,818 | ) | (4,630 | ) | (6,127 | ) | ||||||
Interest income |
16 | 86 | 259 | |||||||||
Other income (expense), net |
788 | (1,255 | ) | 366 | ||||||||
Income (loss) from continuing operations before income tax |
16,669 | (102,917 | ) | 12,329 | ||||||||
Income tax benefit (expense) |
6,203 | 14,483 | (5,273 | ) | ||||||||
Net income (loss) from continuing operations |
22,872 | (88,434 | ) | 7,056 | ||||||||
Discontinued operations, net of tax |
||||||||||||
Gain on sale of discontinued operations |
| | 4,892 | |||||||||
Loss from discontinued operations |
| | (2,290 | ) | ||||||||
Net income (loss) |
$ | 22,872 | $ | (88,434 | ) | $ | 9,658 | |||||
Basic earnings (loss) per common share: |
||||||||||||
Continuing operations |
$ | 0.63 | $ | (2.44 | ) | $ | 0.20 | |||||
Discontinued operations |
| | 0.07 | |||||||||
Net income (loss) |
$ | 0.63 | $ | (2.44 | ) | $ | 0.27 | |||||
Diluted earnings (loss) per common share: |
||||||||||||
Continuing operations |
$ | 0.62 | $ | (2.44 | ) | $ | 0.20 | |||||
Discontinued operations |
| | 0.07 | |||||||||
Net income (loss) |
$ | 0.62 | $ | (2.44 | ) | $ | 0.27 | |||||
Weighted average shares outstanding: |
||||||||||||
Basic |
36,285 | 36,207 | 36,105 | |||||||||
Diluted |
36,643 | 36,207 | 36,269 |
See accompanying notes to consolidated financial statements.
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NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share amounts)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share amounts)
Accumulated | ||||||||||||||||||||
Other | Total | |||||||||||||||||||
Common Stock | Accumulated | Comprehensive | Shareholders | |||||||||||||||||
Shares | Amount | Deficit | Income (Loss) | Equity | ||||||||||||||||
Balance at March 31, 2007 |
36,038,295 | $ | 158,801 | $ | (45,350 | ) | $ | | $ | 113,451 | ||||||||||
Shares issued upon exercise of stock options
and for restricted stock |
197,209 | 190 | | | 190 | |||||||||||||||
Share based compensation |
| 1,072 | | | 1,072 | |||||||||||||||
Tax benefit from employee stock option plans |
| 67 | | | 67 | |||||||||||||||
Redemptions of common stock to cover tax
withholdings |
(7,618 | ) | (27 | ) | | | (27 | ) | ||||||||||||
Net income |
| | 9,658 | | 9,658 | |||||||||||||||
Comprehensive income |
| | | | 9,658 | |||||||||||||||
Balance at March 31, 2008 |
36,227,886 | 160,103 | (35,692 | ) | | 124,411 | ||||||||||||||
Shares issued upon exercise of stock options
and for restricted stock |
50,199 | 12 | | | 12 | |||||||||||||||
Share based compensation |
| 1,033 | | | 1,033 | |||||||||||||||
Tax benefit from employee stock option plans |
| 1 | | | 1 | |||||||||||||||
Redemptions of common stock to cover tax
withholdings |
(17,969 | ) | (15 | ) | | | (15 | ) | ||||||||||||
Net loss |
| | (88,434 | ) | | (88,434 | ) | |||||||||||||
Unrealized loss on marketable securities |
| | | (1 | ) | (1 | ) | |||||||||||||
Comprehensive loss |
| | | | (88,435 | ) | ||||||||||||||
Balance at March 31, 2009 |
36,260,116 | 161,134 | (124,126 | ) | (1 | ) | 37,007 | |||||||||||||
Shares issued upon exercise of stock options
and for restricted stock |
158,003 | 5 | | | 5 | |||||||||||||||
Share based compensation |
| 1,004 | | | 1,004 | |||||||||||||||
Redemptions of common stock to cover tax
withholdings |
(51,451 | ) | (128 | ) | | | (128 | ) | ||||||||||||
Net income |
| | 22,872 | | 22,872 | |||||||||||||||
Unrealized gain on marketable securities |
1 | 1 | ||||||||||||||||||
Comprehensive income |
| | | | 22,873 | |||||||||||||||
Balance at March 31, 2010 |
36,366,668 | $ | 162,015 | $ | (101,254 | ) | $ | | $ | 60,761 | ||||||||||
See accompanying notes to consolidated financial statements.
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NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Operating activities: |
||||||||||||
Net income (loss) |
$ | 22,872 | $ | (88,434 | ) | $ | 9,658 | |||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||||||
Loss from discontinued operations |
| | 2,290 | |||||||||
Gain on sale of discontinued operations |
| | (4,892 | ) | ||||||||
Depreciation and amortization |
6,316 | 10,961 | 9,672 | |||||||||
Amortization of debt acquisition costs |
502 | 250 | 333 | |||||||||
Write-off of debt acquisition costs |
289 | 950 | | |||||||||
Amortization of license fees |
8,042 | 13,372 | 6,907 | |||||||||
Amortization of production costs |
4,967 | 6,230 | 3,284 | |||||||||
Amortization of software development costs |
324 | | | |||||||||
Goodwill and intangible asset impairment |
| 82,729 | | |||||||||
Change in deferred revenue |
(283 | ) | 182 | (311 | ) | |||||||
Share-based compensation expense |
1,004 | 1,033 | 1,072 | |||||||||
Deferred compensation expense |
(816 | ) | (222 | ) | (787 | ) | ||||||
Tax benefit from employee stock options |
| 1 | 67 | |||||||||
Deferred income taxes |
(4,893 | ) | (10,524 | ) | 2,788 | |||||||
Other |
60 | 88 | (171 | ) | ||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable |
10,190 | 3,989 | (6,197 | ) | ||||||||
Inventories |
460 | 5,922 | 4,137 | |||||||||
Prepaid expenses |
(2,637 | ) | 1,028 | (992 | ) | |||||||
Contingent liabilities |
| | (760 | ) | ||||||||
Income taxes receivable |
4,772 | (3,929 | ) | (109 | ) | |||||||
Other assets |
319 | 739 | 634 | |||||||||
Production costs |
(6,373 | ) | (7,322 | ) | (5,183 | ) | ||||||
License fees |
(6,879 | ) | (10,585 | ) | (11,813 | ) | ||||||
Accounts payable |
(24,257 | ) | 14,536 | 5,054 | ||||||||
Income taxes payable |
55 | 286 | 880 | |||||||||
Accrued expenses |
2,899 | (4,811 | ) | 2,824 | ||||||||
Net cash provided by operating activities |
16,933 | 16,469 | 18,385 | |||||||||
Investing activities: |
||||||||||||
Purchases of property and equipment |
(1,768 | ) | (3,544 | ) | (8,562 | ) | ||||||
Purchases of intangible assets |
(12 | ) | (666 | ) | (1,379 | ) | ||||||
Software development costs incurred |
(1,370 | ) | (677 | ) | | |||||||
Purchases of marketable equity securities |
| | (4,000 | ) | ||||||||
Proceeds from sale of marketable equity securities |
1,028 | 3,200 | | |||||||||
Proceeds from sale of assets held for sale |
| 1,353 | | |||||||||
Proceeds from sale of intangible assets |
20 | | | |||||||||
Net cash used in investing activities |
(2,102 | ) | (334 | ) | (13,941 | ) | ||||||
Financing activities: |
||||||||||||
Proceeds from revolving line of credit |
196,060 | 208,758 | 198,379 | |||||||||
Payments on revolving line of credit |
(213,559 | ) | (215,939 | ) | (206,021 | ) | ||||||
Repayment of note payable |
| (9,744 | ) | (5,256 | ) | |||||||
Payment of deferred compensation |
| (3,200 | ) | | ||||||||
Checks written in excess of cash balances |
4,519 | 297 | | |||||||||
Payment of debt acquisition costs |
(1,790 | ) | (850 | ) | (240 | ) | ||||||
Other |
(61 | ) | 98 | 87 | ||||||||
Net cash used in financing activities |
(14,831 | ) | (20,580 | ) | (13,051 | ) | ||||||
Net decrease in cash from continuing operations |
| (4,445 | ) | (8,607 | ) | |||||||
Discontinued operations: |
||||||||||||
Net cash provided by operating activities |
| | 5,586 | |||||||||
Net cash provided by investing activities, proceeds from sale of discontinued operations |
| | 6,500 | |||||||||
Net increase (decrease) in cash |
| (4,445 | ) | 3,479 | ||||||||
Cash at beginning of year |
| 4,445 | 966 | |||||||||
Cash at end of year |
$ | | $ | | $ | 4,445 | ||||||
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Years ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Supplemental cash flow information: |
||||||||||||
Cash paid (received) for: |
||||||||||||
Interest |
$ | 1,861 | $ | 3,885 | $ | 5,460 | ||||||
Income taxes, net of refunds |
(5,773 | ) | (262 | ) | 1,086 | |||||||
Supplemental schedule of non-cash investing and financing activities: |
||||||||||||
Purchase price adjustments affecting accounts receivable and gain on sale, net |
| | 245 | |||||||||
Shares received for payment of tax withholding obligations |
128 | 15 | 27 | |||||||||
Expiration of fully amortized masters |
8,078 | | | |||||||||
Expiration of fully amortized license fees |
1,504 | 11,397 | | |||||||||
Expiration of fully amortized production costs |
445 | 1,446 | |
See accompanying notes to consolidated financial statements.
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NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
Note 1 Business Description
Navarre Corporation, (the Company or Navarre), a Minnesota corporation formed in 1983,
distributes and publishes a wide range of computer software and home entertainment and multimedia
products and provides value-added services to third-party publishers. The Company operates through
two business segments distribution and publishing. The Companys broad base of customers
includes: (i) wholesale clubs, (ii) mass merchandisers, (iii) other third party distributors, (iv)
computer specialty stores, (v) book stores, (vi) office superstores, and (vii) electronic
superstores.
Through the distribution segment, the Company distributes computer software, home video, video
games and accessories that are provided by our vendors and provides fee-based third-party
logistical services to North American retailers and their suppliers. The Companys vendors provide
products, which in turn are distributed to retail customers. The distribution business focuses on
providing vendors and retailers with a range of value-added services, including vendor-managed
inventory, Internet-based ordering, electronic data interchange services, fulfillment services and
retailer-oriented marketing services.
Through the publishing segment, the Company owns or licenses various computer software and
home video titles. The publishing segment publishes computer software through Encore Software, Inc.
(Encore), anime content through FUNimation Productions, Ltd. (FUNimation) and formerly
published budget home video through BCI Eclipse Company, LLC (BCI). In fiscal 2009, BCI began
winding down its licensing operations related to budget home video, and the wind-down was completed
during the fourth quarter of fiscal 2010.
Note 2 Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of Navarre Corporation and its
wholly-owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Segment Reporting
The Companys current presentation of segment data consists of two operating and reportable
segments distribution and publishing.
Fiscal Year
References in these footnotes to fiscal 2010, 2009 and 2008 represent the twelve months ended
March 31, 2010, March 31, 2009 and March 31, 2008, respectively.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates include the realizability
of accounts receivable, vendor advances, inventories, goodwill, intangible assets, prepaid
royalties, production costs, license fees, income taxes and the adequacy of certain accrued
liabilities and reserves. Actual results could differ from these estimates.
Reclassifications
Certain operating expense amounts included in the consolidated financial statements have been
reclassified from the prior years presentations to conform to the current year presentation.
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Fair Value of Financial Instruments
The carrying value of the Companys current financial assets and liabilities, because of their
short-term nature, approximates fair value.
Cash and Cash Equivalents
The Company considers short-term investments with an original maturity of three months or less
when purchased to be cash equivalents. Cash equivalents are carried at cost, which approximates
fair value. From time to time, the Company reports checks written in excess of cash balances.
This amount represent payments made to vendors that have not yet been presented by the vendor to
the Companys bank and drawn against the Companys revolving line of credit.
Marketable Securities
The Company has classified all marketable securities as available-for-sale which requires the
securities to be reported at fair value, with unrealized gains and losses, net of tax, reported as
a separate component of shareholders equity. Marketable securities at March 31, 2010 consist of a
money market fund and at March 31, 2009 consisted of government agency and corporate bonds and a
money market fund. A decline in the market value of any available-for-sale security below cost that
is deemed other than temporary is charged to income, resulting in the establishment of a new cost
basis for the security.
The fair value of securities is determined by quoted market prices. Dividend and interest
income are recognized when earned. Realized gains and losses for securities classified as
available-for-sale are included in income and are derived using the specific identification method
for determining the cost of the securities sold.
Inventories
Inventories are stated at the lower of cost or market with cost determined on the first-in,
first-out (FIFO) method. The Company monitors its inventory to ensure that it properly identifies,
on a timely basis, inventory items that are slow-moving and non-returnable. Certain publishing
business products may run out of shelf life and be returned. Generally, these products can be sold
in bulk to a variety of liquidators. A significant risk is product that cannot be sold at carrying
value and is not returnable to the vendor or manufacturer. The Company establishes reserves for the
difference between carrying value and estimated realizable value in the periods when the Company
first identifies the lower of cost or market issue. Consigned inventory includes product that has
been delivered to customers for which revenue recognition criteria have not been met.
Royalties Payable FUNimation
Royalties payable, pursuant to ASC 926, Entertainment Films, represents managements
estimate of accrued and unpaid participation costs as of the end of the period. Royalties are
generally due and paid to the licensor one month after each quarterly period for sales of
merchandise and license fees received. The Company expects to pay 100% of accrued royalties related
to FUNimation in the amount of $1.3 million during the year ended March 31, 2011.
Advertising
Advertising costs are expensed as incurred. Advertising expense was $3.1 million, $2.6 million
and $3.2 million for the years ended March 31, 2010, 2009 and 2008, respectively.
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Property and Equipment
Property and equipment are recorded at cost. Depreciation is recorded, using the straight-line
method, over estimated useful lives, ranging from three to twenty five years. Depreciation is
computed using the straight-line method for leasehold improvements over the shorter of the lease
term or the estimated useful life. Estimated useful lives by major asset categories are as follows:
Asset | Life in Years | |||
Buildings |
25 | |||
Furniture and fixtures |
7 | |||
Office equipment |
5 | |||
Computer equipment |
3-5 | |||
Warehouse equipment |
5 | |||
Production equipment |
5 | |||
Leasehold improvements |
1-10 | |||
Enterprise resource planning (ERP) system |
7 |
Maintenance, repairs and minor renewals are charged to expense as incurred. Additions, major
renewals and betterments to property and equipment are capitalized.
In September 2008, the Company completed the sale of the real estate and related assets that
were classified as held for sale at March 31, 2008 to an unrelated party for proceeds of $1.4
million. The Company recognized a loss of $48,000 on this transaction, net of costs paid by the
purchaser at closing (see further disclosure in Note 12).
Production Costs FUNimation
Production costs represent unamortized costs of films and television programs, which have been
produced by the Company or for which the Company has acquired distribution rights. Costs of
produced films and television programs include all production costs, which are expected to be
recovered from future revenues. Amortization of production costs is determined based on the ratio
that current revenue earned from the films and television programs bear to the ultimate future
revenue, as defined by ASC 926.
When estimates of total revenues and costs indicate that an individual title will result in an
ultimate loss, an impairment charge is recognized to the extent that license fees and production
costs exceed estimated fair value, based on cash flows, in the period when estimated.
License Fees FUNimation
License fees represent advance license/royalty payments made to program suppliers for
exclusive distribution rights. A program suppliers share of distribution revenues
(participation/royalty cost) is retained by the Company until the share equals the license fees
paid to the program supplier plus recoupable production costs. Thereafter, any excess is paid to
the program supplier. License fees are amortized as recouped by the Company which equals
participation/royalty costs earned by the program suppliers. Participation/royalty costs are
accrued/expensed in the same ratio that current period revenue for a title or group of titles bear
to the estimated remaining unrecognized ultimate revenue for that title, as defined by ASC 926.
When estimates of total revenues and costs indicate that an individual title will result in an
ultimate loss, an impairment charge is recognized to the extent that license fees and production
costs exceed estimated fair value, based on cash flows, in the period when estimated.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment and amortizable intangible assets, are
evaluated for impairment whenever events or changes in circumstances indicate the carrying value of
an asset may not be recoverable. An impairment loss is recognized when estimated undiscounted cash
flows expected to result from the use of the asset plus net proceeds expected from disposition of
the asset, if any, are less than the carrying value of the asset. When an impairment loss is
recognized, the carrying amount of the asset is reduced to its estimated fair value (see further
disclosure in Note 3 and Note 4).
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Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net
assets acquired in business combinations accounted for under the purchase method. The Company
reviews goodwill for potential impairment annually for each reporting unit or when events or
changes in circumstances indicate the carrying value of the goodwill might exceed its current fair
value. Factors which may cause impairment include negative industry or economic trends and
significant underperformance relative to historical or projected future operating results. The
Company determines fair value using widely accepted valuation techniques, including discounted cash
flow and market multiple analysis. The amount of impairment loss is recognized as the excess of the
assets carrying value over its fair value (see further disclosure in Note 3 and Note 4).
Intangible Assets
Intangible assets include license relationships, trademarks related to the FUNimation
acquisition, masters acquired during the acquisition of BCI, and other intangibles. Intangible
assets (except for trademarks) are amortized on a straight-line basis with estimated useful lives
ranging from three to seven and one half years. The straight-line method of amortization of these
assets reflects an appropriate allocation of the costs of the intangible assets to its useful life.
Intangible assets are tested for impairment whenever events or circumstances indicate that a
carrying amount of an asset may not be recoverable. An impairment loss is generally recognized when
the carrying amount of an asset exceeds the estimated fair value of the asset. Fair value is
generally determined using a discounted cash flow analysis (see further disclosure in Note 3 and
Note 4).
Trademarks are deemed to have indefinite lives and are evaluated for impairment annually.
Debt Issuance Costs
Debt issuance costs are included in Other Assets and are amortized over the life of the
related debt. Amortization expense is included in interest expense in the accompanying Consolidated
Statements of Operations.
Operating Leases
The Company conducts substantially all operations in leased facilities. Leasehold allowances,
rent holidays and escalating rent provisions are accounted for on a straight-line basis over the
term of the lease. Deferred rent is included in accrued expenses in the accompanying Consolidated Balance Sheets.
Revenue Recognition
Revenue on products shipped, including consigned products owned by the Company, is recognized
when title and risk of loss transfers, delivery has occurred, the price to the buyer is
determinable and collectability is reasonably assured. Service revenues are recognized upon
delivery of the services. Service revenues have represented less than 10% of total net sales for
each of the reporting periods, fiscal 2010, 2009 and 2008. The Company permits its customers to
return products, under certain conditions. The Company records a reserve for sales returns and
allowances against amounts due to reduce the net recognized receivables to the amounts the Company
reasonably believes will be collected. These reserves are based on the application of the Companys
historical or anticipated gross profit percent against average sales returns, sales discounts
percent against average gross sales and specific reserves for marketing programs.
The Companys distribution customers, at times, qualify for certain price protection benefits
from the Companys vendors. The Company serves as an intermediary to settle these amounts between
vendors and customers. The Company accounts for these amounts as reductions of revenues with
corresponding reductions in cost of sales.
The Companys publishing business, at times, provides certain price protection, promotional
monies, volume rebates and other incentives to customers. The Company records these amounts as
reductions in revenue.
FUNimations revenue is recognized upon meeting the recognition requirements of ASC 926.
Revenues from home video distribution are recognized, net of an allowance for estimated returns, in
the period in which the product is available for sale by the Companys customers (generally upon
shipment to the customer and in the case of new releases, after street date restrictions lapse).
Revenues from broadcast licensing and home video sublicensing are recognized when the programming
is available to the licensee and
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other recognition requirements of ASC 926 are met. Revenues received in advance of
availability are deferred until revenue recognition requirements have been satisfied. Royalties on
sales of licensed products are recognized in the period earned. In all instances, provisions for
uncollectible amounts are provided for at the time of sale.
Vendor Allowances
In the distribution business, the Company receives allowances from certain vendors as a result
of purchasing their products. Vendor allowances are initially deferred. The deferred amounts are
then recorded as a reduction of cost of sales when the related product is sold.
Marketing Development Funds
The Company has classified marketing development funds, such as price protection and
promotions, as a reduction to revenues in the publishing segment.
Accounts Receivable and Allowance for Doubtful Accounts
Credit is extended based on evaluation of a customers financial condition and, generally,
collateral is not required. Accounts receivable are generally due within 30-90 days and are stated
at amounts due from customers, net of an allowance for doubtful accounts. Accounts receivable
outstanding longer than the contractual payment terms are considered past due. The Company does not
accrue interest on past due accounts receivable. The Company performs periodic credit evaluations
of its customers financial condition. The Company makes estimates of the uncollectability of its
accounts receivable. In determining the adequacy of its allowances, the Company analyzes customer
financial statements, historical collection experience, aging of receivables, substantial
down-grading of credit scores, bankruptcy filings and other economic and industry factors. The
Company writes off accounts receivable when they become uncollectible, and payments subsequently
received on such receivables are credited to the allowance for doubtful accounts. Although risk
management practices and methodologies are utilized to determine the adequacy of the allowance, it
is possible that the accuracy of the estimation process could be materially impacted by different
judgments as to collectability based on the information considered and further deterioration of
accounts. The Companys largest collection risks exist for customers that are in bankruptcy, or at
risk of bankruptcy. The occurrence of these events is infrequent, but can be material when it does
occur.
Classification of Shipping Costs
Costs incurred in the distribution segment related to the shipment of product to its customers
are classified in selling expenses. These costs were $7.8 million, $9.4 million and $9.4 million
for the years ended March 31, 2010, 2009 and 2008, respectively.
Costs incurred in the publishing segment related to the shipment of product to its customers
are classified in cost of sales. These costs were $456,000, $1.1 million and $1.4 million for the
years ended March 31, 2010, 2009 and 2008, respectively.
Foreign Currency Transactions
Transaction gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the results of
operations when settled or at the most recent balance sheet date if the transaction has not
settled. Foreign currency gains and losses were a gain of $788,000, loss of $1.2 million and gain
of $252,000 for the years ended March 31, 2010, 2009 and 2008, respectively.
Income Taxes
Income taxes are recorded under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
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Stock-Based Compensation
The Company has two stock option plans for officers, non-employee directors and key employees.
The Company follows ASC 718, which provides guidance on accounting for transactions in which an
entity obtains employee services through share-based payment transactions and requires an entity to
measure the cost of employee services received in exchange for the award of equity instruments
based on the fair value of the award at the date of grant. The cost is to be recognized over the
period during which an employee is required to provide services in exchange for the award.
ASC 718 also requires the benefit of tax deductions in excess of recognized compensation
expense to be reported as a financing cash flow, rather than an operating cash flow as prescribed
under previous accounting rules. This requirement reduces net operating cash flows and increases
net financing cash flows in periods subsequent to adoption. Total cash flows remain unchanged from
those reported under previous accounting rules.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding during the year. Diluted earnings (loss) per share is
computed by dividing net income (loss) by the sum of the weighted average number of common shares
outstanding during the year plus all additional common shares that would have been outstanding if
potentially dilutive common shares related to stock options, restricted stock and warrants had been
issued. The following table sets forth the computation of basic and diluted earnings (loss) per
share (in thousands, except for per share data):
Years ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Numerator: |
||||||||||||
Net income (loss) from continuing operations |
$ | 22,872 | $ | (88,434 | ) | $ | 7,056 | |||||
Denominator: |
||||||||||||
Denominator for basic earnings per share weighted average shares |
36,285 | 36,207 | 36,105 | |||||||||
Dilutive securities: Employee stock options, restricted stock and warrants |
358 | | 164 | |||||||||
Denominator for diluted earnings per share potentially dilutive common shares |
36,643 | 36,207 | 36,269 | |||||||||
Net earnings (loss) per share from continuing operations: |
||||||||||||
Basic earnings (loss) per share |
$ | 0.63 | $ | (2.44 | ) | $ | 0.20 | |||||
Diluted earnings (loss) per share |
$ | 0.62 | $ | (2.44 | ) | $ | 0.20 | |||||
Approximately 2.8 million and 2.9 million of the Companys stock options were excluded from
the calculation of diluted earnings per share in fiscal 2010 and 2008, respectively, because the
exercise prices of the stock options and the grant date fair value of the restricted stock were
greater than the average price of the Companys common stock and therefore their inclusion would
have been anti-dilutive.
Approximately 1.6 million warrants were also excluded for the years ended March 31, 2010, 2009
and 2008, because the exercise prices of the warrants was greater than the average price of the
Companys common stock and therefore their inclusion would have been anti-dilutive.
Due to the Companys net loss for the year ended March 31, 2009, diluted loss per share from
continuing operations excludes 3.2 million stock options and restricted stock awards because their
inclusion would have been anti-dilutive.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued ASC 810-10, Consolidation. ASC 810-10 establishes new
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, ASC 810-10 requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated financial statements and
separate from the parents equity. The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income statement. ASC
810-10 clarifies that changes in a parents ownership interest in a subsidiary that do not result
in deconsolidation are equity transactions if the parent retains its controlling financial
interest. In addition, ASC 810-10 requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the
noncontrolling equity investment on the deconsolidation date. ASC 810-10 also includes expanded
disclosure requirements regarding the interests of the parent and its noncontrolling interest. ASC
810-10 was effective, and adopted by the Company, beginning
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with the quarter ended June 30, 2009. Earlier adoption was prohibited. The Company did not
experience any impact on its financial condition, results of operations and cash flows from the
adoption of ASC 810-10.
On December 4, 2007, the FASB issued ASC 805-10, Business Combinations. ASC 805-10
significantly changed the accounting for business combinations. Under ASC 805-10, an acquiring
entity is required to recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. ASC 805-10 changed the accounting
treatment for certain specific items, including:
| Acquisition costs are generally expensed as incurred; | ||
| Noncontrolling interests (formerly known as minority interests) are valued at fair value at the acquisition date; | ||
| Acquired contingent liabilities are recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies; | ||
| In-process research and development are recorded at fair value as an indefinite-lived intangible asset at the acquisition date; | ||
| Restructuring costs associated with a business combination are generally expensed subsequent to the acquisition date; and | ||
| Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally affect income tax expense. |
ASC 805-10 also included a substantial number of new disclosure requirements. The statement
applies prospectively to business combinations for which the acquisition date is on or after the
beginning of an entitys fiscal year that begins after December 15, 2008. The Company adopted ASC
805-10 in the first quarter of fiscal 2010, which did not have an impact on its consolidated
financial statements.
In March 2008, the FASB issued ASC 815-10, Derivatives and Hedging. ASC 815-10 is intended to
improve financial reporting standards for derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand the effects these
instruments and activities have on an entitys financial position, financial performance, and cash
flows. ASC 815-10 also improves transparency about the location and amounts of derivative
instruments in an entitys financial statements; how derivative instruments and related hedged
items are accounted for under ASC 815-10; and how derivative instruments and related hedged items
affect its financial position, financial performance, and cash flows. ASC 815-10 is effective for
financial statements issued for fiscal years and interim periods beginning after November 15, 2008.
The Company adopted ASC 815-10 on January 1, 2009, which did not have an impact on its consolidated
financial statements.
In May 2009, the FASB issued ASC 855-10, Subsequent Events, which requires all public entities
to evaluate subsequent events through the date that the financial statements are available to be
issued and disclose in the notes the date through which the Company has evaluated subsequent events
and whether the financial statements were issued or were available to be issued on the disclosed
date. ASC 855-10 defines two types of subsequent events, as follows: the first type consists of
events or transactions that provide additional evidence about conditions that existed at the date
of the balance sheet and the second type consists of events that provide evidence about conditions
that did not exist at the date of the balance sheet but arose after that date. ASC 855-10 is
effective for interim and annual periods ending after June 15, 2009 and must be applied
prospectively. In February 2010, subsequent to our adoption of the new guidance discussed above,
the FASB issued updated guidance on subsequent events, amending the May 2009 guidance. This updated
guidance revised various terms and definitions within the guidance and requires us, as an SEC
filer, to evaluate subsequent events through the date the financial statements are issued, rather
than through the date the financial statements are available to be issued. Furthermore, we no
longer are required to disclose the date through which subsequent events have been evaluated. The
updated guidance was effective for us immediately upon issuance. As such, we adopted ASC 855-10
during fiscal 2010 and have included the required disclosures in Note 29. Our adoption of both the
new and updated guidance did not have an impact on our consolidated financial position or results
of operations.
In June 2009, the FASB issued ASC 860-10, Transfers and Servicing. This Statement eliminates
the concept of a qualified special-purpose entity, changes the requirements for derecognizing
financial assets and requires additional disclosures in order to enhance information reported to
users of financial statements by providing greater transparency about transfers of financial
assets,
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including securitization transactions, and an entitys continuing involvement in and exposure
to the risks related to transferred financial assets. ASC 860-10 is effective for fiscal years
beginning after November 15, 2009. The Company will adopt ASC 860-10 in fiscal 2011 and is
evaluating the impact, if any, it will have to its consolidated financial statements.
In June 2009, the FASB also amended ASC 810-10, Consolidation, which addresses the effects of
eliminating the qualified special purpose entity concept from ASC 860-10 and responds to concerns
about the application and transparency of enterprises involvement with Variable Interest Entities
(VIEs). ASC 810-10 is effective for fiscal years beginning after November 15, 2009. The Company
will adopt ASC 810-10 in fiscal 2011 and is evaluating the impact, if any, it will have to its
consolidated financial statements.
In July 2009, the FASB issued ASC 105-10, Generally Accepted Accounting Principles (GAAP).
This standard will become the source of authoritative non-SEC authoritative GAAP. ASC 105-10
establishes a two-level GAAP hierarchy for nongovernmental entities: authoritative guidance and
nonauthoritative guidance. Authoritative guidance consists of the Codification and, for SEC
registrants, rules and interpretative releases of the Commission. Nonauthoritative guidance
consists of non-SEC accounting literature that is not included in the Codification and has not been
grandfathered. ASC 105-10, including the Codification, is effective for financial statements of
interim and annual periods ending after September 15, 2009 and the Company adopted ASC 105-10
during the period ending September 30, 2009. As the Codification was not intended to change or
alter existing GAAP, it did not have any impact to the Companys consolidated financial statements.
Note 3 Goodwill and Intangible Assets
Goodwill
The Company recognizes the excess cost of an acquired entity over the net amount assigned to
the fair value of the assets acquired and liabilities assumed as goodwill. The Company reviews
goodwill for potential impairment annually for each reporting unit, or when events or changes in
circumstances indicate that the carrying value of the goodwill might exceed its current fair value.
Under ASC 350, the measurement of impairment of goodwill consists of two steps. In the first
step, the Company compares the fair value of each reporting unit to its carrying value. Management
completes a valuation of the fair value of its reporting units which incorporates existing
market-based considerations as well as a discounted cash flow methodology based on current results
and projections. Following this assessment, ASC 350 requires the Company to perform a second step
in order to determine the implied fair value of each reporting units goodwill, as compared to
carrying value. The activities in the second step include hypothetically valuing all of the
tangible and intangible assets of the impaired reporting unit as if the reporting unit had been
acquired in a business combination.
Upon completion of the annual evaluation, there was no such goodwill impairment recorded
during fiscal 2008. During the fiscal 2009 evaluation however, the Company concluded that
indicators of potential impairment were present due to the sustained decline in the Companys share
price which resulted in the market capitalization of the Company being less than its book value. It
was also determined that the fair value of Encore, FUNimation and BCI was less than their carrying
value. The Company conducted impairment tests during fiscal 2009 based on facts and circumstances
at those times and its business strategy in light of existing industry and economic conditions, as
well as taking into consideration future expectations. Accordingly, during fiscal 2009, the Company
recorded pre-tax, non-cash goodwill impairment charges of $81.7 million. After recording the above
impairments, the Company had no goodwill balance at March 31, 2010 and 2009. These pre-tax,
non-cash charges had no impact on the Companys compliance with the financial covenants in its
credit agreement.
Intangible assets
The Company evaluates its definite lived intangible amortizing assets in accordance with ASC
350 which requires the Company to record impairment losses on amortizing intangible assets when
changes in events and circumstances indicate the asset might be impaired and the undiscounted cash
flows estimated to be generated by those assets are less than their carrying amounts. The Company
determines fair value utilizing current market values and future market trends. Based on the
Company no longer publishing budget home videos at BCI, the Company recorded an impairment charge
related to masters of $2.0 million, which is included in depreciation and amortization on the
Companys Consolidated Statements of Operations for the year ended March 31, 2009.
The Company evaluates its indefinite lived intangible assets in accordance with ASC 350. The
Company reviews these intangible assets for impairment annually or when events or a change in
circumstances indicate that the carrying value might exceed the current fair
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value. In determining the implied fair value of each reporting units goodwill as compared to
carrying value, a hypothetical valuation of all tangible and intangibles assets of the reporting
unit as if the reporting unit had been acquired in a business combination was completed. As part of
this analysis during fiscal 2009, the trademarks associated with FUNimation were determined to have
an estimated fair value less than the carrying value. The Company determines fair value using the
relief from royalty valuation techniques. The Company recorded a $1.0 million impairment charge,
which is included in goodwill and intangible asset impairment expense in the Consolidated
Statements of Operations, for the year ended March 31, 2009.
Identifiable intangible assets, with zero residual value, are being amortized (except for the
trademarks which have an indefinite life) over useful lives of three years for masters, seven and
one half years for license relationships and seven years for the domain name and are valued as
follows (in thousands):
As of March 31, 2010 | ||||||||||||
Gross carrying | Accumulated | |||||||||||
amount | amortization | Net | ||||||||||
License relationships |
$ | 20,078 | $ | 19,145 | $ | 933 | ||||||
Domain name |
70 | 39 | 31 | |||||||||
Trademarks (not subject to amortization) |
536 | | 536 | |||||||||
$ | 20,684 | $ | 19,184 | $ | 1,500 | |||||||
As of March 31, 2009 | ||||||||||||
Gross carrying | Accumulated | |||||||||||
amount | amortization | Net | ||||||||||
Masters (1) |
$ | 8,086 | $ | 7,986 | $ | 100 | ||||||
License relationships |
20,078 | 17,350 | 2,728 | |||||||||
Domain name |
70 | 28 | 42 | |||||||||
Trademarks (not subject to amortization) |
536 | | 536 | |||||||||
$ | 28,770 | $ | 25,364 | $ | 3,406 | |||||||
(1) | Reflects a $2.0 million impairment charge related to masters which reduced both the gross carrying amount and accumulated amortization. The $2.0 million impairment charge was included in amortization expense for the year ended March 31, 2009 (see further disclosure in Note 4). |
Aggregate amortization expense for the years ended March 31, 2010, 2009 and 2008 was $1.9
million (which included $92,000 related to masters), $6.2 million (which included a $2.0 million
impairment charge related to masters) and $5.6 million, respectively. The following is a schedule
of estimated future amortization expense (in thousands):
2011 |
$ | 425 | ||
2012 |
237 | |||
2013 |
302 |
Debt issuance costs
Debt issuance costs are included in Other Assets and are amortized over the life of the
related debt. Gross debt issuance costs totaled $1.8 million and $650,000 at March 31, 2010 and
2009, respectively. Accumulated amortization amounted to approximately $249,000 and $108,000 at
March 31, 2010 and 2009, respectively. Amortization expense of $502,000, $250,000 and $333,000 for
the years ended March 31, 2010, 2009 and 2008, respectively are included in interest expense in the
accompanying Consolidated Statements of Operations. During fiscal 2010, the Company wrote-off
$289,000 in debt acquisition costs related to the payoff of the Companys revolving facility with
General Electric Capital Corporation (GE), which charges were included in interest expense.
During fiscal 2009, the Company wrote-off $950,000 in debt acquisition costs related to the payoff
of the Companys Term Loan facility and material modifications to the Companys revolving facility
with GE, which charges were included in interest expense.
Note 4 Impairments and Other Charges
Based on an annual impairment review, the Company concluded there were no indicators of
impairment during the years ended March 31, 2010 or 2008. During fiscal 2009, however, the Company
reviewed its portfolio of businesses for poor performing activities and to identify areas where
continued business investments would not meet its requirements for financial returns. Net assets
impacted
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included accounts receivable reserves, inventory, prepaid royalties, goodwill, masters,
trademarks, license fees and production costs. As a result of the analysis, the Company announced
the following actions during fiscal 2009:
| BCI would no longer be involved in licensing operations related to budget home video and the remaining BCI content would be transferred to the distribution segment. For the year ended March 31, 2009, the Company recorded $25.9 million in impairment and other charges related to the restructuring of BCI, which included $7.3 million for inventory, $7.1 million for prepaid royalties, $2.0 million for masters, $2.0 million for accounts receivable reserves and $7.4 million for goodwill. | ||
| FUNimation would no longer be involved in licensing operations related to home video of childrens properties. For the year ended March 31, 2009, the Company recorded $81.0 million in impairment and other charges related to the restructuring of FUNimation, which included $8.2 million for license fees and production costs, $71.2 million for goodwill, $1.0 million for trademarks and $555,000 for inventory. |
License Fees and Production Costs. The total impairment of license fees and production cost
charges related to the FUNimation restructuring were $7.0 million and $1.2 million, respectively
during fiscal 2009. The Company records a charge to the income statement for the amount by which
the unamortized license fees and production costs exceed the films fair value. The Company
determines the fair value based upon cash flows or quoted market prices.
Prepaid Royalties. The total prepaid royalty charges related to the BCI restructuring were
$7.1 million during fiscal 2009. With the Company no longer publishing content in the budget home
video category, the prepaid royalties will not be recouped by earnings from the sale of the
product, and as such the Company took an impairment charge during fiscal 2009 for amounts that will
not be recouped.
Masters, Trademarks and Goodwill. The total masters, goodwill and trademark impairment charges
related to the publishing segment were $84.7 million during fiscal 2009.
| Masters The impairment related to BCI masters was $2.0 million during fiscal 2009. Impairment losses are measured by comparing the fair value of the assets (utilizing current market values and future market trends) to their carrying amounts. | ||
| Trademarks The impairment for FUNimation trademarks was $1.0 million during fiscal 2009. The trademarks associated with FUNimation were determined to have an estimated fair value (using the relief from royalty valuation technique ) less than the carrying value. | ||
| Goodwill The goodwill impairment charge for the publishing segment was $81.7 million during fiscal 2009 based on the excess of the assets carrying value over its fair value. |
Inventory. The total inventory charges related to the publishing segment were $7.9 million
during fiscal 2009. The Company records inventory at the lower of cost or market. When it is
determined that the market value is lower than the cost, the Company establishes a reserve for the
difference between carrying value and estimated realizable value. The Company determines the
estimated realizable value by reviewing quoted prices in active markets for similar or identical
products.
Accounts Receivable Reserves. The total accounts receivable reserve charges were $2.0 million
during fiscal 2009, which primarily represent anticipated returns of BCI content.
Severance. The Company completed a company-wide reduction in force during fiscal 2009. The
total severance costs related to the reduction in force were $1.1 million, $591,000 of which were
associated with the distribution segment and $541,000 with the publishing segment. In accordance
with ASC 420-10, Exit or Disposal Cost Obligations, the Company records one-time termination
benefit arrangement costs at the date of communication to employees as long as the plan establishes
the benefits that employees will receive upon termination in sufficient detail to enable employees
to determine the type and amount of benefits the employee would receive if involuntarily
terminated. Certain executives had contractual benefits related to involuntary termination. In
accordance with ASC 712-10, Compensation Nonretirement Postemployment Benefits, the Company
records severance costs when the payment of the benefits is probable and reasonably estimable.
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The following table summarizes the impairment and other charges included in the Companys
Consolidated Statements of Operations for the year ended March 31, 2009 (in thousands):
License Fees | Masters, | Accounts | ||||||||||||||||||||||||||||||
and Production | Prepaid | Goodwill and | Receivable | |||||||||||||||||||||||||||||
Costs - | Royalties - | Trademarks- | Inventory- | Reserves- | Severance- | Severance- | ||||||||||||||||||||||||||
Publishing | Publishing | Publishing | Publishing | Publishing | Publishing | Distribution | Total | |||||||||||||||||||||||||
Sales |
$ | | $ | | $ | | $ | | $ | 1,057 | $ | | $ | | $ | 1,057 | ||||||||||||||||
Cost of sales |
8,239 | 7,076 | | 7,855 | 985 | 52 | | 24,207 | ||||||||||||||||||||||||
Selling and marketing |
| | | | | 159 | 13 | 172 | ||||||||||||||||||||||||
Distribution and warehousing |
| | | | | | 74 | 74 | ||||||||||||||||||||||||
General and administrative |
| | | | | 330 | 504 | 834 | ||||||||||||||||||||||||
Depreciation and amortization |
| | 2,029 | | | | | 2,029 | ||||||||||||||||||||||||
Goodwill and intangible asset
impairment |
| | 82,729 | | | | | 82,729 | ||||||||||||||||||||||||
Total |
$ | 8,239 | $ | 7,076 | $ | 84,758 | $ | 7,855 | $ | 2,042 | $ | 541 | $ | 591 | $ | 111,102 | ||||||||||||||||
The restructuring reserve activity was as follows (in thousands):
Accounts | ||||||||||||||||
Receivable | ||||||||||||||||
Severance- | Severance- | Reserves- | ||||||||||||||
Distribution | Publishing | Publishing | Total | |||||||||||||
Reserve balance at March 31, 2009 |
$ | 45 | $ | 337 | $ | 1,026 | $ | 1,408 | ||||||||
Provision for restructuring |
| | | | ||||||||||||
Cash payments |
45 | 337 | 1,026 | 1,408 | ||||||||||||
Reserve balance at March 31, 2010 |
$ | | $ | | $ | | $ | | ||||||||
Note 5 Discontinued Operations
On May 31, 2007, the Company sold its wholly-owned subsidiary, NEM, to an unrelated third
party. NEM operated the Companys independent music distribution activities. The Company has
presented the independent music distribution business as discontinued operations. As part of this
transaction, the Company recorded a gain during fiscal 2008 of $6.1 million ($4.6 million net of
tax), which included severance and legal costs of $339,000 and other direct costs to sell of
$842,000. The gain is included in Gain on sale of discontinued operations in the Consolidated
Statements of Operations in fiscal year 2008. This transaction divested the Company of all of its
independent music distribution activities.
During fiscal 2008, the Company adjusted the carrying value of the assets and liabilities of
discontinued operations by $502,000, ($245,000 net of tax) to reflect settled contingencies and
reserve adjustments. The additional gain is included in Gain on sale of discontinued operations
in the Consolidated Statements of Operations. The Company believes these adjustments reflect the
final transactions related to this divesture.
The Companys consolidated financial statements have been reclassified to segregate the
assets, liabilities and operating results of the discontinued operations for all periods presented.
Prior to reclassification, the discontinued operations were reported in the distribution operating
segment. The summary of operating results from discontinued operations is as follows (in
thousands):
Years ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net sales |
$ | | $ | | $ | 5,197 | ||||||
Loss from discontinued operations, before income tax |
| | (3,947 | ) | ||||||||
Income tax benefit |
| | 1,657 | |||||||||
Loss from discontinued operations, net of tax |
$ | | $ | | $ | (2,290 | ) | |||||
Note 6 Marketable Securities
ASC 820-10, Fair Value Measurements and Disclosures, defines fair value, establishes a
framework for measuring fair value in GAAP and expands disclosures about fair value measurements.
ASC 820-10 defines fair value as the price that would be received for an asset or paid to transfer
a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly
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transaction between market participants on the measurement date. ASC 820-10 also
describes three levels of inputs that may be used to measure fair value:
| Level 1 quoted prices in active markets for identical assets and liabilities. | ||
| Level 2 observable inputs other than quoted prices in active markets for identical assets and liabilities. | ||
| Level 3 unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions. |
The effective date for certain aspects of ASC 820-10 was deferred and is currently being
evaluated by the Company. Areas impacted by the deferral relate to nonfinancial assets and
liabilities that are measured at fair value, but are recognized or disclosed at fair value on a
nonrecurring basis. This deferral applies to such items as nonfinancial long-lived asset groups
measured at fair value for an impairment assessment. The effects of these remaining aspects of ASC
820-10 are to be applied by the Company to fair value measurements prospectively beginning April 1,
2010. The Company does not expect them to have a material impact on its financial condition or
results of operations.
Marketable securities consist of a money market fund at March 31, 2010 and government and
corporate bonds and a money market fund at March 31, 2009, which are held in a Rabbi trust
established for the payment of deferred compensation for a former Chief Executive Officer (see
further disclosure in Note 25).
At March 31, 2010 and 2009, the Company recorded these securities at fair value using Level 1
quoted market prices. Dividend and interest income were recognized when earned. Realized gains and
losses for securities classified as available-for-sale were included in income and were derived
using the specific identification method for determining the cost of the securities sold.
Available-for-sale securities consisted of the following (in thousands):
As of March 31, 2010 | ||||||||||||
Gross | Gross | |||||||||||
Estimated fair | unrealized | unrealized | ||||||||||
value | holding gains | holding losses | ||||||||||
Available-for-sale: |
||||||||||||
Government agency and corporate
bonds |
$ | | $ | 1 | $ | | ||||||
Money market
fund |
2 | | | |||||||||
$ | 2 | $ | 1 | $ | | |||||||
As of March 31, 2009 | ||||||||||||
Gross | Gross | |||||||||||
Estimated fair | unrealized | unrealized | ||||||||||
value | holding gains | holding losses | ||||||||||
Available-for-sale: |
||||||||||||
Government agency and corporate
bonds |
$ | 712 | $ | 1 | $ | 2 | ||||||
Money market
fund |
312 | | | |||||||||
$ | 1,024 | $ | 1 | $ | 2 | |||||||
At March 31, 2010 and 2009, all marketable securities were classified as current based on the
scheduled payout of the deferred compensation, and are restricted to use only for the settlement of
the deferred compensation liability. All available-for-sale debt securities are fully matured at
March 31, 2010.
Note 7 Comprehensive Income (Loss)
Other comprehensive income (loss) pertains to net unrealized gains and losses on marketable
securities held in a Rabbi Trust for the benefit of a former CEO that are not included in net
income (loss) but rather are recorded in shareholders equity (see further disclosure in Note 6).
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Comprehensive income (loss) consisted of the following (in thousands):
Years Ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net income (loss) from continuing operations |
$ | 22,872 | $ | (88,434 | ) | $ | 9,658 | |||||
Net unrealized gain (loss) on marketable securities, net of tax |
1 | (1 | ) | | ||||||||
Comprehensive income (loss) |
$ | 22,873 | $ | (88,435 | ) | $ | 9,658 | |||||
The changes in other comprehensive income (loss) are primarily non-cash items.
Accumulated other comprehensive loss balances, net of tax effects, were zero and $1,000 at
March 31, 2010 and 2009, respectively.
Note 8 Accounts Receivable
Accounts receivable consisted of the following (in thousands):
March 31, 2010 | March 31, 2009 | |||||||
Trade receivables |
$ | 72,641 | $ | 86,345 | ||||
Vendor
receivables |
1,700 | 2,894 | ||||||
Other
receivables |
1,479 | 2,588 | ||||||
75,820 | 91,827 | |||||||
Less: allowance for doubtful accounts and
sales discounts |
4,966 | 7,043 | ||||||
Less: allowance for sales returns, net
margin impact |
8,227 | 11,967 | ||||||
Total |
$ | 62,627 | $ | 72,817 | ||||
Note 9 Inventories
Inventories, net of reserves, consisted of the following (in thousands):
March 31, 2010 | March 31, 2009 | |||||||
Finished
products |
$ | 21,229 | $ | 20,437 | ||||
Consigned
inventory |
1,794 | 1,868 | ||||||
Raw
materials |
3,249 | 4,427 | ||||||
Total |
$ | 26,272 | $ | 26,732 | ||||
Note 10 Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
March 31, 2010 | March 31, 2009 | |||||||
Prepaid
royalties |
$ | 12,241 | $ | 9,826 | ||||
Other |
1,486 | 1,264 | ||||||
Total |
$ | 13,727 | $ | 11,090 | ||||
Note 11 Property and Equipment
Property and equipment consisted of the following (in thousands):
March 31, 2010 | March 31, 2009 | |||||||
Furniture and
fixtures |
$ | 1,369 | $ | 1,306 | ||||
Computer and office
equipment |
18,472 | 17,782 | ||||||
Warehouse
equipment |
10,049 | 10,116 | ||||||
Production
equipment |
1,421 | 1,296 | ||||||
Leasehold
improvements |
2,087 | 2,081 | ||||||
Construction in
progress |
772 | 80 | ||||||
Total |
34,170 | 32,661 | ||||||
Less: accumulated depreciation and
amortization |
20,863 | 16,704 | ||||||
Net property and
equipment |
$ | 13,307 | $ | 15,957 | ||||
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Note 12 Assets Held for Sale
At March 31, 2008, the Company held for sale real estate and related assets located in
Decatur, Texas. These assets were no longer required due to the move of FUNimations inventory to
the Companys Minnesota distribution center. During fiscal 2009, the Company completed the sale of
the real estate and related assets to an unrelated party for proceeds of $1.4 million. The Company
recognized a loss of $48,000 on this transaction, net of costs paid by the purchaser at closing.
Note 13 Capitalized Software Development Costs
The Company incurs software development costs for software to be sold, leased or marketed in
the publishing segment. The Company accounts for these costs in accordance with the provisions of
ASC 985-20, Software. Software development costs include third-party contractor fees and overhead
costs. The Company capitalizes these costs once technological feasibility is achieved.
Capitalization ceases and amortization of costs begins when the software product is available for
general release to customers. The Company amortizes capitalized software development costs by the
greater of the ratio of gross revenues of a product to the total current and anticipated future
gross revenues of that product or the straight-line method over the remaining estimated economic
life of the product. The carrying amount of software development costs may change in the future if
there are any changes to anticipated future gross revenue or the remaining estimated economic life
of the product. The Company tests for possible impairment whenever events or changes in
circumstances, such as a reduction in expected cash flows, indicate that the carrying amount of the
asset may not be recoverable. If indicators exist, the Company compares the undiscounted cash flows
related to the asset to the carrying value of the asset. If the carrying value is greater than the
undiscounted cash flow amount, an impairment charge is recorded in cost of goods sold in the
Consolidated Statements of Operations for amounts necessary to reduce the carrying value of the
asset to fair value. Software development costs were $2.0 million and $677,000 at March 31, 2010
and 2009, respectively. Accumulated amortization amounted to approximately $324,000 and zero at
March 31, 2010 and 2009, respectively. Amortization expense was $324,000 for the year ended March
31, 2010 and zero for both the years ended March 31, 2009 and 2008.
Note 14 License Fees
License fees related to the publishing segment consisted of the following (in thousands):
March 31, 2010 | March 31, 2009 | |||||||
License
fees |
$ | 44,672 | $ | 39,298 | ||||
Less: accumulated
amortization |
28,107 | 21,570 | ||||||
Total |
$ | 16,565 | $ | 17,728 | ||||
License fees represent advance license/royalty payments made to program suppliers for
exclusive distribution rights. A program suppliers share of distribution revenues
(participation/royalty cost) is retained by the Company until the share equals the license fees
paid to the program supplier plus recoupable production costs. Thereafter, any excess is paid to
the program supplier.
License fees are amortized as recouped by the Company, which equals participation/royalty
costs earned by the program suppliers. Participation/royalty costs are accrued/expensed in the same
ratio that current period revenue for a title or group of titles bears to the estimated remaining
unrecognized ultimate revenue for that title, as defined by ASC 926. When estimates of total
revenues and costs indicate that an individual title will result in an ultimate loss, an impairment
charge is recognized to the extent that license fees and production costs exceed estimated fair
value, based on cash flows, in the period when estimated.
During fiscal 2009, the Company made the decision to no longer be involved in the licensing
operations related to home video of childrens properties at FUNimation. Based on this decision,
the Company determined that the license advances related to these activities exceeded fair value.
Accordingly, the Company recorded an impairment charge of $7.0 million against these license
advances, which is included in cost of sales on the Companys Consolidated Statements of Operations
for the year ended March 31, 2009.
Amortization of license fees for the years ended March 31, 2010, 2009 and 2008 was $8.0
million, $13.4 million (which includes a $7.0 million impairment charge) and $6.9 million,
respectively. These amounts have been included in royalty expense in cost of sales in the
accompanying Consolidated Statements of Operations.
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Note 15 Production Costs
Production costs related to the publishing segment consisted of the following (in thousands):
March 31, 2010 | March 31, 2009 | |||||||
Production
costs |
$ | 26,559 | $ | 20,631 | ||||
Less: accumulated
amortization |
16,745 | 12,223 | ||||||
Total |
$ | 9,814 | $ | 8,408 | ||||
Production costs represent unamortized costs of films and television programs, which have been
produced by the Company or for which the Company has acquired distribution rights. Costs of
produced films and television programs include all production costs, which are expected to be
recovered from future revenues. Amortization of production costs is determined based on the ratio
that current revenue earned from the films and television programs bear to the ultimate future
revenue, as defined by ASC 926.
When estimates of total revenues and costs indicate that an individual title will result in an
ultimate loss, an impairment charge is recognized to the extent that license fees and production
costs exceed estimated fair value, based on cash flows, in the period when estimated.
During fiscal 2009, the Company made the decision to no longer be involved in the licensing
operations related to home video of childrens properties at FUNimation. Based on this decision,
the Company determined that the production costs related to these activities exceeded their fair
value. Accordingly, a $1.2 million impairment charge was recorded against these production costs,
which is included in cost of sales on the Companys Consolidated Statements of Operations for the
year ended March 31, 2009.
The Company presently expects to amortize 82% of the March 31, 2010 unamortized production
costs by March 31, 2013. Amortization of production costs for the years ended March 31, 2010, 2009
and 2008 was $4.5 million, $4.8 million (which includes a $1.2 million impairment charge) and $3.3
million, respectively. These amounts have been included in cost of sales in the accompanying
Consolidated Statements of Operations.
Note 16 Accrued Expenses
Accrued expenses consisted of the following (in thousands):
March 31, 2010 | March 31, 2009 | |||||||
Compensation and
benefits |
$ | 7,930 | $ | 3,263 | ||||
Royalties |
1,954 | 3,056 | ||||||
Rebates |
1,253 | 1,264 | ||||||
Deferred
revenue |
20 | 303 | ||||||
Interest |
205 | 39 | ||||||
Other |
2,886 | 3,579 | ||||||
Total |
$ | 14,248 | $ | 11,504 | ||||
Note 17 Bank Financing and Debt
In March 2007, the Company amended and restated its credit agreement with GE (the GE
Facility) and entered into a four year Term Loan facility with Monroe Capital Advisors, LLC
(Monroe). The GE Facility provided for a $65.0 million revolving credit facility and the Monroe
agreement provided for a $15.0 million Term Loan facility. The Monroe facility was paid in full in
connection with the Third Amendment to the GE Facility on June 12, 2008.
On June 12, 2008, the Company entered into a Third Amendment and Waiver to Fourth Amended and
Restated Credit Agreement (the Third Amendment) with GE which, among other things, revised the
terms of the GE Facility as follows: (i) permitted the Company to pay off the remaining $9.7
million balance of the term loan facility with Monroe; (ii) created a $6.0 million tranche of
borrowings subject to interest at the index rate plus 6.25%, or LIBOR plus 7.5%; (iii) modified the
interest rate in connection with borrowings to range from an index rate of 0.75% to 1.75%, or LIBOR
plus 2.0% to 3.0%, depending upon borrowing availability during the prior fiscal quarter; (iv)
extended the term of the GE Facility to March 22, 2012; (v) modified the prepayment penalty to 1.5%
during the first year following the date of the Third Amendment, 1% during the second year
following the date of the Third Amendment, and
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0.5% during the third year following the date of the Third Amendment; and (vi) modified
certain financial covenants as of March 31, 2008.
On October 30, 2008, the Company entered into a Fourth Amendment and Waiver to Fourth Amended
and Restated Credit Agreement (the Fourth Amendment) with GE which revised the terms of the GE
Facility as follows: effective as of September 30, 2008, (i) clarified the calculation of EBITDA
under the credit agreement to indicate that it would not be impacted by any pre-tax, non-cash
charges to earnings related to goodwill impairment (adjusted EBITDA); and (ii) revised the
definition of Index Rate to indicate that the interest rate for non-LIBOR borrowings would not be
less than the LIBOR rate for an interest period of three months.
On February 5, 2009, the Company entered into a Fifth Amendment and Waiver to Fourth Amended
and Restated Credit Agreement (the Fifth Amendment) with GE which revised the terms of the GE
Facility as follows: effective as of December 31, 2008, (i) clarified that the calculation of
EBITDA under the credit agreement would not be impacted by certain pre-tax, non-cash restructuring
charges to earnings, or in connection with cash charges to earnings recognized in the Companys
financial results related to a force reduction (adjusted EBITDA); (ii) eliminated the $6.0
million tranche of borrowings under the credit facility; (iii) modified the interest rate in
connection with borrowings under the facility to index rate plus 5.75%, or LIBOR plus 4.75%; (iv)
altered the commitment termination date of the GE Facility to June 30, 2010; (v) eliminated the
pre-payment penalty; and (vi) modified certain financial covenants as of December 31, 2008 and
thereafter. Additionally, the Fifth Amendment modified the total borrowings available to $65.0
million. At March 31, 2009 the Company had $24.1 million outstanding on the GE Facility, which was
paid in full on November 12, 2009 in connection with the new credit facility, as described below.
On November 12, 2009, the Company entered into a three year, $65.0 million revolving credit
facility (the Credit Facility) with Wells Fargo Foothill, LLC as agent and lender, and Capital
One Leverage Financing Corp. as a participating lender. The Credit Facility is secured by a first
priority security interest in all of the Companys assets, as well as the capital stock of its
subsidiary companies. Additionally, the Credit Facility calls for monthly interest payments at the
banks base rate, as defined in the Credit Facility, plus 4.0% or LIBOR plus 4.0%, at the Companys
discretion. The entire outstanding balance of principal and interest is due in full on November 12,
2012. At March 31, 2010 we had $6.6 million outstanding and based on the facilitys borrowing base
and other requirements, we had excess availability of $38.4 million. Amounts available under the
credit facility are subject to a borrowing base formula. Changes in the assets within the borrowing
base formula can impact the amount of availability.
In association with both credit facilities, and per the respective terms, we pay and have paid
certain facility and agent fees. Weighted average interest on the Credit Facility was 7.5% at March
31, 2010 and was 5.6% and 4.7% under the GE Facility at March 31, 2009 and 2008, respectively. Such
interest amounts have been and continue to be payable monthly. Interest under the Term Loan
facility was at 10.6% at March 31, 2008.
Under the Credit Facility the Company is required to meet certain financial and non-financial
covenants. The financial covenants include a variety of financial metrics that are used to
determine the Companys overall financial stability as well as limitations on capital expenditures,
a minimum ratio of adjusted EBITDA to fixed charges, limitations on net vendor advances and a
borrowing base availability requirement. At March 31, 2010, the Company was in compliance with all
covenants under the Credit Facility. We currently believe we will be in compliance with all
covenants over the next twelve months.
Letters of Credit
The Company is party to a letter of credit totaling $250,000 related to a vendor at both March
31, 2010 and 2009. In the Companys past experience, no claims have been made against these
financial instruments.
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Note 18 Income Taxes
The income tax provision (benefit) from continuing operations is comprised of the following
(in thousands):
Years ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Current |
||||||||||||
Federal |
$ | (1,418 | ) | $ | (4,020 | ) | $ | 1,610 | ||||
Foreign |
| | 300 | |||||||||
State |
109 | 60 | 429 | |||||||||
Valuation allowance |
(11,706 | ) | 21,432 | | ||||||||
Deferred |
6,812 | (31,955 | ) | 2,934 | ||||||||
Tax expense
(benefit) |
$ | (6,203 | ) | $ | (14,483 | ) | $ | 5,273 | ||||
A reconciliation of income tax expense (benefit) from continuing operations to the statutory
federal rate is as follows (in thousands):
Years ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Expected federal income tax at
statutory rate |
$ | 5,668 | $ | (34,983 | ) | $ | 4,315 | |||||
State income taxes, net of federal tax
effect |
361 | (2,140 | ) | 523 | ||||||||
Valuation
allowance |
(11,706 | ) | 21,432 | | ||||||||
Equity
compensation |
101 | 185 | 222 | |||||||||
Uncertain tax
liability |
(108 | ) | 90 | 97 | ||||||||
Other |
(519 | ) | 933 | 116 | ||||||||
Tax expense
(benefit) |
$ | (6,203 | ) | $ | (14,483 | ) | $ | 5,273 | ||||
Years ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Expected federal income tax at statutory
rate |
34.0 | % | 34.0 | % | 35.0 | % | ||||||
State income taxes, net of federal tax
effect |
2.2 | 2.1 | 4.2 | |||||||||
Valuation
allowance |
(70.2 | ) | (20.8 | ) | | |||||||
Equity
compensation |
0.6 | (0.2 | ) | 1.8 | ||||||||
Return to
provision |
(3.2 | ) | | | ||||||||
Other |
(0.6 | ) | (1.0 | ) | 1.8 | |||||||
Effective tax rate (continuing
operations) |
(37.2 | )% | 14.1 | % | 42.8 | % | ||||||
The Companys overall effective tax rate, including both continuing and discontinued
operations, was 37.2%, 14.1% and 35.7% for the years ended March 31, 2010, 2009 and 2008,
respectively. The change in the effective tax rate for the years ended March 31, 2010 and 2009 is
principally attributable to the fact that the Company recorded a valuation allowance against its
deferred tax assets of $21.4 million during the year ended March 31, 2009 and the Company released
$11.7 million of the valuation allowance during the year ended March 31, 2010.
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Deferred income taxes reflect the available tax carryforwards, which begin to expire in fiscal
2029, and the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Companys deferred tax assets as of March 31, 2010 and 2009 are as
follows (in thousands):
Years ended March 31, | ||||||||
2010 | 2009 | |||||||
Deferred tax asset current |
||||||||
Collectability
reserves |
$ | 5,854 | $ | 7,970 | ||||
Reserve for inventory
write-off |
349 | 1,263 | ||||||
Reserve for sales
discounts |
243 | 58 | ||||||
Accrued
vacations |
312 | 313 | ||||||
Inventory uniform
capitalization |
138 | 147 | ||||||
Incentive based deferred
compensation |
483 | 776 | ||||||
Other |
214 | 226 | ||||||
Net operating loss
carryforward |
3,137 | 3,535 | ||||||
Subtotal deferred tax asset
current |
10,730 | 14,288 | ||||||
Valuation
allowance |
(3,127 | ) | (8,069 | ) | ||||
Deferred tax asset current,
net |
7,603 | 6,219 | ||||||
Deferred tax asset non-current |
||||||||
Stock based
compensation |
404 | 396 | ||||||
Book/tax intangibles
amortization |
21,562 | 25,041 | ||||||
Book/tax
depreciation |
(2,233 | ) | (2,280 | ) | ||||
Other |
674 | 505 | ||||||
Subtotal deferred tax asset
non-current |
20,407 | 23,662 | ||||||
Valuation
allowance |
(6,599 | ) | (13,363 | ) | ||||
Deferred tax asset non-current,
net |
13,808 | 10,299 | ||||||
Total deferred tax asset,
net |
$ | 21,411 | $ | 16,518 | ||||
At March 31, 2010 and 2009, the Company had federal net operating loss carryforwards of $7.7
million and $10.3 million, respectively, which will begin to expire in 2029. The Company had foreign tax credit carryforwards of $259,000 at March 31, 2010 and 2009, which will
begin to expire in 2016.
For the years ended March 31, 2010 and 2009, the Company recognized an income tax benefit
related to stock option deductions of zero and $443,000, respectively. The income tax benefit from these
stock option deductions will be recorded as an increase to equity
upon utilization of the net operating loss
carryforwards.
The Company adopted the provisions of ASC 740-10 related to uncertain tax positions on April
1, 2007. The adoption of ASC 740-10 resulted in no impact to accumulated deficit for the Company.
At adoption, the Company had approximately $417,000 of gross unrecognized income tax benefits
(UTBs) as a result of the implementation of ASC 740-10 and approximately $327,000 of UTBs, net
of federal and state income tax benefits, related to various federal and state matters, that would
impact the effective tax rate if recognized. The Company recognizes interest accrued related to
UTBs in the provision for income taxes. As of April 1, 2009, interest accrued was approximately
$127,000, which is net of federal and state tax benefits and total UTBs net of federal and state
tax benefits that would impact the effective tax rate if recognized were $964,000. During the year
ended March 31, 2010, an additional $83,000 of UTBs were accrued, which was net of $152,000 of
deferred federal and state income tax benefits. Additionally, $191,000 of UTBs were reversed
related to a statute of limitations lapse and $140,000 UTBs were reversed related to provision
adjustments during the year ended March 31, 2010. As of March 31, 2010, interest accrued was
$147,000 and total UTBs, net of deferred federal and state income tax benefits that would impact
the effective tax rate if recognized, were $716,000.
A reconciliation of the beginning and ending amount of unrecognized tax benefits in fiscal
2010 is as follows (in thousands):
Years ended March 31, | ||||||||
2010 | 2009 | |||||||
Income taxes payable, beginning of period |
$ | 1,166 | $ | 880 | ||||
Gross increases related to prior year tax positions |
74 | 101 | ||||||
Gross increases related to current year tax positions |
195 | 203 | ||||||
Decrease related to statute of limitations lapses |
(214 | ) | (18 | ) | ||||
Income taxes payable, end of period |
$ | 1,221 | $ | 1,166 | ||||
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The Companys federal income tax returns for tax years ending in 2006 through 2009 remain
subject to examination by tax authorities. The Company files in numerous state jurisdictions with
varying statutes of limitations. The Companys unrecognized state tax benefits are related to state
returns that remain subject to examination by tax authorities from tax years ending in 2006 through
2009. The Company does not anticipate that the total unrecognized tax benefits will significantly
change prior to March 31, 2011.
For the years ended March 31, 2010 and 2009, the Company recorded an income tax benefit from
continuing operations of $6.2 million and $14.5 million, respectively. The effective income tax
rate for the year ended March 31, 2010 was 37.2%, compared to 14.1% for the year ended
March 31, 2009.
Deferred tax assets are evaluated by considering historical levels of income, estimates of
future taxable income streams and the impact of tax planning strategies. A valuation allowance is
recorded to reduce deferred tax assets when it is determined that it is more likely than not, based
on the weight of available evidence, the Company would not be able to realize all or part of its
deferred tax assets. An assessment is required of all available evidence, both positive and
negative, to determine the amount of any required valuation allowance.
As a result of the market conditions and their impact on the Companys future outlook, during
the year ended March 31, 2009, management reviewed its deferred tax assets and concluded that the
uncertainties related to the realization of some of its assets had become unfavorable. Management
considered the positive and negative evidence for the potential utilization of the net deferred tax
asset and concluded that it was more likely than not that the Company would not realize the full
amount of net deferred tax assets. Accordingly, at March 31, 2009, a valuation allowance of $21.4
million was recorded for a portion of the net deferred tax assets and was included in income tax
expense for the year ended March 31, 2009.
However, during fiscal 2010, the amount of deferred tax assets that the Company will more
likely than not be able to realize increased due to a tax law change allowing the Company to carry
the net operating losses back additional years as well as the Company having higher than projected
book income. As a result, the Company released $11.7 million of the valuation allowance against
these deferred tax assets, reducing the valuation allowance balance to $9.7 million at March 31,
2010. As of March 31, 2010, the Company had a net deferred tax asset position, before valuation
allowance, of $31.1 million. These deferred tax assets were composed of temporary differences
primarily related to the book write-off of certain intangibles and net operating loss
carryforwards, which will begin to expire in fiscal 2029.
Note 19 Shareholders Equity
The Companys Articles of Incorporation authorize 10,000,000 shares of preferred stock, no par
value. No preferred shares are issued or outstanding.
The Company did not repurchase any shares during the years ended March 31, 2010 and 2009.
Note 20 Private Placement Warrants
As of March 31, 2010 and 2009, the Company had 1,596,001 warrants outstanding related to a
private placement completed March 21, 2006, which includes warrants to purchase 171,000 shares
issued by the Company to its agent in the private placement. The warrants have a term of five years
and are exercisable at $5.00 per share. The Company has the right to require exercise of the
warrants if, among other things, the volume weighted average price of the Companys common stock
exceeds $8.50 per share for each of 30 consecutive trading days. In addition, the warrants provide
the investors the option to require the Company to repurchase the warrants for a purchase price,
payable in cash within five (5) business days after such request, equal to the Black-Scholes value
of any unexercised warrant shares, but only if, while the warrants are outstanding, the Company
initiates the following change in control transactions: (i) the Company effects any merger or
consolidation, (ii) the Company effects any sale of all or substantially all of its assets, (iii)
any tender offer or exchange offer is completed whereby holders of the Companys common stock are
permitted to tender or exchange their shares for other securities, cash or property, or (iv) the
Company effects any reclassification of the Companys common stock whereby it is effectively
converted into or exchanged for other securities, cash or property.
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Note 21 Share-Based Compensation
The Company has two equity compensation plans: the Navarre Corporation 1992 Stock Option Plan
and the Navarre Corporation 2004 Stock Plan (collectively, the Plans). The 1992 Plan expired on
July 1, 2006, and no further grants are allowed under this Plan, however, there are outstanding
options remaining under this Plan. The 2004 Plan provides for equity awards, including stock
options, restricted stock and restricted stock units. Eligible participants under the Plans are all
employees (including officers and directors), non-employee directors, consultants and independent
contractors.
Equity Compensation Plans
The Company currently grants stock options, restricted stock and restricted stock units under
equity compensation plans. The Company adopted the 1992 Stock Option Plan and 2004 Stock Plan to
attract and retain eligible persons to perform services for the Company. Eligible recipients
include all employees, without limitation, officers and directors who are also employees as well as
non-employee directors, consultants and independent contractors or employees of any of the
Companys subsidiaries. A maximum number of 4.0 million shares of common stock have been
authorized and reserved for issuance under the 2004 Stock Plan. The number of shares authorized may
also be increased from time to time by approval of the Board of Directors and the shareholders. The
1992 Stock Option Plan terminated in July 2006 and the 2004 Stock Plan terminates in September
2014. There were 98,913 shares remaining for grant under the 2004 Stock Plan at March 31, 2010.
The Company is authorized to grant, among other equity instruments, stock options and
restricted stock under the 2004 Stock Plan. Stock options have a maximum term fixed by the
Compensation Committee of the Board of Directors, not to exceed 10 years from the date of grant.
Stock options become exercisable during their terms in the manner determined by the Compensation
Committee of the Board of Directors. Vesting for performance-based stock awards is subject to the
performance criteria being achieved.
Restricted stock awards are non-vested stock awards that may include grants of restricted
stock or restricted stock units. Restricted stock awards are independent of option grants and are
generally subject to forfeiture if employment terminates prior to the release of the restrictions.
Such awards vest as determined by the Compensation Committee of the Board of Directors, depending
on the grant. Prior to vesting, ownership of the shares cannot be transferred. The Company expenses
the cost of the restricted stock awards, which is the grant date fair value, ratably over the
period during which the restrictions lapse. The grant date fair value is the Companys opening
stock price on the date of grant.
Through fiscal 2010, each director who is not an employee of the Company is granted an option
to purchase 6,000 shares of common stock under the 2004 Stock Plan on April 1 of each year, with an
exercise price equal to fair market value. These options are designated as non-qualified stock
options. Each option granted prior to September 15, 2005, vests in five annual increments of 20% of
the original option grant beginning one year from the date of grant and expires on the earlier of
(i) six years from the date of the grant, and (ii) one year after the person ceases to serve as a
director. Each option granted on or after September 15, 2005, vests in three annual increments of
33 1/3% of the original option grant beginning one year from the date of grant, expires on the
earlier of (i) ten years from the date of grant, and (ii) one year after the person ceases to serve
as a director, and provides for the acceleration of vesting if the person ceases to serve as a
director as a result of the Companys mandatory director retirement policy.
The Company is entitled to (a) withhold and deduct from future wages of the participant (or
from other amounts that may be due and owing to the participant from the Company), or make other
arrangements for the collection of all legally required amounts necessary to satisfy any and all
federal, state and local withholding and employment-related tax requirements (i) attributable to
the grant or exercise of an option or a restricted stock award or to a disqualifying disposition of
stock received upon exercise of an incentive stock option, or (ii) otherwise incurred with respect
to an option or a restricted stock award, or (iii) require the participant promptly to remit the
amount of such withholding to the Company before taking any action with respect to an option or a
restricted stock award.
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Stock Options
A summary of the Companys stock option activity as of March 31, 2010, 2009 and 2008 and for
those years ended is summarized as follows:
Year ended | Year ended | Year ended | ||||||||||||||||||||||
March 31, 2010 | March 31, 2009 | March 31, 2008 | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
average | average | average | ||||||||||||||||||||||
Number of | exercise | Number of | exercise | Number of | exercise | |||||||||||||||||||
options | price | options | price | options | price | |||||||||||||||||||
Options
outstanding,
beginning of
period |
3,165,528 | $ | 5.74 | 3,132,499 | $ | 6.78 | 3,601,700 | $ | 6.92 | |||||||||||||||
Granted |
848,500 | 1.89 | 782,500 | 0.83 | 429,000 | 2.68 | ||||||||||||||||||
Exercised |
(7,501 | ) | 0.69 | (9,600 | ) | 1.26 | (237,448 | ) | 1.48 | |||||||||||||||
Canceled |
(459,228 | ) | 6.18 | (739,871 | ) | 4.65 | (660,753 | ) | 6.77 | |||||||||||||||
Options
outstanding, end of
period |
3,547,299 | $ | 4.77 | 3,165,528 | $ | 5.74 | 3,132,499 | $ | 6.78 | |||||||||||||||
Options
exercisable, end of
period |
2,149,646 | $ | 6.83 | 2,071,203 | $ | 7.79 | 2,296,565 | $ | 7.89 | |||||||||||||||
Shares available
for future grant,
end of
period |
98,913 | 933,252 | 1,756,251 |
The weighted average remaining contractual term for options outstanding was 6.8 years and for
options exercisable was 5.3 years at March 31, 2010.
The total intrinsic value of stock options exercised during the years ended March 31, 2010 was
$12,000. The aggregate intrinsic value represents the total pre-tax intrinsic value, based on the
Companys closing stock price of $2.08 as of March 31, 2010, which theoretically could have been
received by the option holders had all option holders exercised their options as of that date. The
aggregate intrinsic value for options outstanding was $1.0 million and for options exercisable was
$278,000 at March 31, 2010. The total number of in-the-money options exercisable as of March 31,
2010 was 1.1 million. There were no in-the-money options exercisable as of March 31, 2009, when
the closing stock price was $0.44.
As of March 31, 2010, total compensation cost related to non-vested stock options not yet
recognized was $1.1 million, which is expected to be recognized over the next 1.56 years on a
weighted-average basis.
During the years ended March 31, 2010, 2009 and 2008, the Company received cash from the
exercise of stock options totaling $5,000, $12,000 and $190,000, respectively. There was no excess
tax benefit recorded for the tax deductions related to stock options during either the years ended
March 31, 2010 or 2009.
Restricted Stock
Restricted stock granted to employees typically has a vesting period of three years and
expense is recognized on a straight-line basis over the vesting period, or when the performance
criteria have been met. The value of the restricted stock is established by the market price on the
date of the grant or if based on performance criteria, on the date it is determined the performance
criteria will be met. Restricted stock awards vesting is based on service criteria or achievement
of performance targets. All restricted stock awards are settled in shares of common stock.
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A summary of the Companys restricted stock activity as of March 31, 2010, 2009 and 2008
and changes during those years ended is summarized as follows:
Year ended | Year ended | Year ended | ||||||||||||||||||||||
March 31, 2010 | March 31, 2009 | March 31, 2008 | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
average | average | average | ||||||||||||||||||||||
grant date | grant date | grant date | ||||||||||||||||||||||
Shares | fair value | Shares | fair value | Shares | fair value | |||||||||||||||||||
Unvested, beginning of period |
445,155 | $ | 1.18 | 171,917 | $ | 3.02 | 120,000 | $ | 4.68 | |||||||||||||||
Granted |
242,750 | 2.08 | 390,250 | 0.69 | 131,000 | 2.41 | ||||||||||||||||||
Vested |
(173,836 | ) | 1.61 | (63,932 | ) | 3.23 | (73,333 | ) | 4.41 | |||||||||||||||
Forfeited |
(5,583 | ) | 1.10 | (53,080 | ) | 1.11 | (5,750 | ) | 2.41 | |||||||||||||||
Unvested, end of period |
508,486 | $ | 1.47 | 445,155 | $ | 1.18 | 171,917 | $ | 3.02 | |||||||||||||||
The weighted average remaining contractual term for restricted stock awards outstanding at
March 31, 2009 was 9.0 years.
The total fair value of shares vested during the years ended March 31, 2010, 2009 and 2008 was
approximately $431,000, $52,000 and $271,000, respectively.
As of March 31, 2010, total compensation cost related to non-vested restricted stock awards
not yet recognized was $623,000 which is expected to be recognized over the next 1.54 years on a
weighted-average basis. There was no excess tax benefit recorded for the tax deductions related to
restricted stock during either the years ended March 31, 2010 or 2009.
Restricted Stock Units Performance-Based
On April 1, 2006, the Company awarded restricted stock units to certain key employees. Receipt
of the stock units was contingent upon the Company meeting Total Shareholder Return (TSR) targets
relative to an external market condition and meeting the service condition. Each participant was
granted a base number of units. The units, as determined at the end of the performance year (fiscal
2007), were to be issued at the end of the third year (fiscal 2009) if the Companys average TSR
target was achieved for the fiscal period 2007 through 2009. The total number of base units granted
for fiscal 2007 was 66,000. During fiscal 2009, the Company adjusted the forfeiture rate and
reduced stock based compensation expense by $134,000 based on actual terminations of recipients.
The amount recorded for the years ended March 31, 2010, 2009 and 2008 was zero, a $21,000 recovery
and a $113,000 expense, respectively, based upon the number of units granted. The Company did not
achieve the TSR target at March 31, 2009, and therefore zero shares were issued and all restricted
stock units were forfeited at that time.
Share-Based Compensation Valuation and Expense Information
The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value
of an option award. The fair value of options granted during the years ended March 31, 2010, 2009
and 2008 were calculated using the following assumptions:
Year | Year | Year | ||||||||||
Ended | Ended | Ended | ||||||||||
March 31, | March 31, | March 31, | ||||||||||
2010 | 2009 | 2008 | ||||||||||
Expected life (in years) |
5.0 | 5.0 | 5.0 | |||||||||
Expected volatility |
75 | % | 66 | % | 67 | % | ||||||
Risk-free interest rate |
1.652.93 | % | 2.512.87 | % | 2.535.02 | % | ||||||
Expected dividend yield |
0.0 | % | 0.0 | % | 0.0 | % |
Expected life uses historical employee exercise and option expiration data to estimate the
expected life assumption for the Black-Scholes grant-date valuation. The Company believes that this
historical data is currently the best estimate of the expected term of a new option. The Company
uses a weighted-average expected life for all awards and has identified one employee population.
Expected volatility uses the Company stocks historical volatility for the same period of time as
the expected life. The Company has no reason to believe that its future volatility will differ from
the past. The risk-free interest rate is based on the U.S. Treasury rate in effect at the time of
the grant for the same period of time as the expected life. Expected dividend yield is zero, as the
Company historically has not paid dividends. The Company used a forfeiture rate of 5.4% during the
years ended March 31, 2010, 2009 and 2008.
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Share-based compensation expense related to employee stock options, restricted stock and
restricted stock units, net of estimated forfeitures for the years ended March 31, 2010, 2009 and
2008 was $1.0 million, $1.0 million and $1.1 million, respectively. These amounts are included in
general and administrative expenses in the Consolidated Statements of Operations. No amount of
share-based compensation was capitalized.
Note 22 401(k) Plan
The Company has a defined contribution 401(k) profit-sharing plan for eligible employees,
which is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as
amended. The plan covers substantially all full-time employees. Employees are entitled to make tax
deferred contributions of up to 100% of their eligible compensation, subject to annual IRS
limitations. The Company matches 50% of employees contributions up to the first 4% of their base
pay, annually. The Companys contributions charged to expense were $357,000, $324,000 and $450,000
for the years ended March 31, 2010, 2009, and 2008, respectively. The Companys matching
contributions vest over three years.
Note 23 Commitments and Contingencies
Leases
The Company leases primarily all of its distribution facilities and a portion of its office
and warehouse equipment. The terms of the lease agreements generally range from 1 to 15 years. The
leases require payment of real estate taxes and operating costs in addition to rent. Total rent
expense was $2.9 million, $2.9 million and $3.6 million for the years ended March 31, 2010, 2009
and 2008, respectively.
The following is a schedule of future minimum rental payments required under noncancelable
operating leases as of March 31, 2010 (in thousands):
2011 |
$ | 2,973 | ||
2012 |
3,080 | |||
2013 |
3,121 | |||
2014 |
2,778 | |||
2015 |
2,787 | |||
Thereafter |
8,504 | |||
$ | 23,243 | |||
Litigation and Proceedings
In the normal course of business, the Company is involved in a number of
litigation/arbitration and administrative/regulatory matters that, other than the matter described
immediately below, are incidental to the operation of the Companys business. These proceedings
generally include, among other things, various matters with regard to products distributed by the
Company and the collection of accounts receivable owed to the Company. The Company does not
currently believe that the resolution of any of those pending matters will have a material adverse
effect on the Companys financial position or liquidity, but an adverse decision in more than one
of these matters could be material to the Companys consolidated results of operations. Because of
the preliminary status of the Companys various legal proceedings, as well as the contingencies and
uncertainties associated with these types of matters, it is difficult, if not impossible, to
predict the exposure to the Company, if any.
SEC Investigation
On February 17, 2006, the Company received an inquiry from the Division of Enforcement of the
U.S. Securities and Exchange Commission (the SEC) requesting certain documents and information.
This information request, and others received since that date, relate to information regarding the
Companys restatements of previously-issued financial statements, certain write-offs, reserve
methodologies, and revenue recognition practices. In connection with this formal non-public
investigation, the Company has cooperated fully with the SECs requests.
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Note 24 Capital Leases
The Company leases certain equipment under noncancelable capital leases. At March 31, 2010 and
2009, leased capital assets included in property and equipment were as follows (in thousands):
March 31, 2010 | March 31, 2009 | |||||||
Computer and office equipment |
$ | 343 | $ | 314 | ||||
Less: accumulated amortization |
212 | 128 | ||||||
Net property and equipment |
$ | 131 | $ | 186 | ||||
Amortization expense for the years ended March 31, 2010, 2009 and 2008 was $76,000, $64,000
and $96,000, respectively. Future minimum lease payments, excluding additional costs such as
insurance and maintenance expense payable by the Company under these agreements, by year and in the
aggregate are as follows (in thousands):
Minimum Lease | ||||
Commitments | ||||
Year ending March 31: |
||||
2011 |
$ | 66 | ||
2012 |
58 | |||
2013 |
28 | |||
Total minimum lease payments |
$ | 152 | ||
Less: amounts representing interest at rates ranging from 6.9% to 31.6% |
13 | |||
Present value of minimum capital lease payments, reflected in the balance
sheet as current and noncurrent capital lease obligations of $57 and $82,
respectively |
$ | 139 | ||
Note 25 Related Party Transactions
Employment/Severance Agreements
The Company entered into an employment agreement with its former Chief Executive Officer
(CEO) in 2001, which expired on March 31, 2007. Pursuant to the deferred compensation portion of
this agreement, the Company agreed to pay over three years, beginning April 1, 2008, approximately
$2.4 million plus interest at approximately 8% per annum. At March 31, 2010 and 2009, outstanding
accrued balances due under this arrangement were zero and $815,000, respectively.
The employment agreement also contained a deferred compensation component that was earned by
the former CEO upon the stock price achieving certain targets, which may be forfeited in the event
that he does not comply with certain non-compete obligations. In April 2007, the Company deposited
$4.0 million into a Rabbi trust, under the required terms of the agreement. Beginning April 1,
2008, the Rabbi trust pays annually $1.3 million, plus interest at 8%, for three years. At both
March 31, 2010 and 2009, outstanding accrued balances due under this arrangement were $1.3 million.
The Company expensed $141,000, $307,000 and $478,000 for these obligations during each of the
years ended March 31, 2010, 2009 and 2008, respectively.
The Company entered into a separation agreement with a former Chief Financial Officer (CFO)
in fiscal 2004. The Company was required to pay approximately $597,000 over a period of four years
beginning May 2004. The continued payout was contingent upon the individual complying with a
non-compete agreement. This amount was accrued and expensed in fiscal 2005. The Company paid zero,
$22,000 and $134,000 during the years ended March 31, 2010, 2009 and 2008, respectively. The
Company had no further obligation under this agreement as of March 31, 2009.
The Company entered into a separation agreement with a former Chief Operating Officer (COO)
in fiscal 2009. The Company was required to pay approximately $390,000 under this agreement. This
amount was accrued, expensed and paid during the year ended March 31, 2009.
Employment Agreement FUNimation
In connection with the FUNimation acquisition, the Company entered into an employment
agreement with a key FUNimation employee providing for his employment as President and Chief
Executive Officer of FUNimation Productions, Ltd. (the FUNimation CEO). Among other items, the
agreement provides the FUNimation CEO with the ability to earn two performance-based bonuses in the
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event that certain financial targets are met by the FUNimation business during the years
ending March 31, 2006-2010. No amounts were expensed or paid under this agreement as the targets
were not achieved.
Note 26 Major Customers
The Company has two major customers (both of which are within the distribution segment) who
accounted for 53% of consolidated net sales for fiscal 2010, of which each customer accounts for
over 10% of consolidated net sales. These customers accounted for 51% of consolidated net sales for
fiscal 2009 and 44% of consolidated net sales in fiscal 2008. Accounts receivable from these two
customer totaled $26.4 million and $26.0 million at March 31, 2010 and 2009, respectively.
Note 27 Business Segments
The Company identifies its segments based on its organizational structure, which is primarily
by business activity. Operating profit represents earnings before interest expense, interest
income, income taxes and allocations of corporate costs to the respective divisions. Intercompany
sales are made at market prices. The Companys corporate office maintains a majority of the
Companys cash under its cash management policy.
Navarre operates two business segments: distribution and publishing.
Through the distribution segment, the Company distributes computer software, home video, video
games and accessories and independent music labels (through May 2007) and provides fee-based
third-party logistical services to North American retailers and their suppliers. The distribution
business focuses on providing vendors and retailers with a range of value-added services, including
vendor-managed inventory, Internet-based ordering, electronic data interchange services,
fulfillment services and retailer-oriented marketing services.
Through the publishing segment the Company owns or licenses various computer software and home
video titles, and other related merchandising and broadcasting rights. The publishing segment
packages, brands, markets and sells directly to retailers, third party distributors, and the
Companys distribution segment.
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Financial information by reportable segment is included in the following summary for the years
ended March 31, 2010, 2009 and 2008 (in thousands):
Fiscal Year 2010 | Distribution | Publishing | Eliminations | Consolidated | ||||||||||||
Net sales |
$ | 487,692 | $ | 86,003 | $ | (45,363 | ) | $ | 528,332 | |||||||
Income from continuing operations |
6,353 | 12,330 | | 18,683 | ||||||||||||
Income from continuing operations before income taxes |
6,875 | 9,794 | | 16,669 | ||||||||||||
Depreciation and amortization expense |
3,687 | 2,629 | | 6,316 | ||||||||||||
Restructuring, impairment and other charges |
| | | | ||||||||||||
Capital expenditures |
1,076 | 692 | | 1,768 | ||||||||||||
Total assets |
121,667 | 56,470 | (6,534 | ) | 171,603 |
Fiscal Year 2009 | Distribution | Publishing | Eliminations | Consolidated | ||||||||||||
Net sales |
$ | 592,893 | $ | 102,828 | $ | (64,730 | ) | $ | 630,991 | |||||||
Income (loss) from continuing operations |
1,143 | (98,261 | ) | | (97,118 | ) | ||||||||||
Income (loss) from continuing operations before income taxes |
(484 | ) | (102,433 | ) | | (102,917 | ) | |||||||||
Depreciation and amortization expense |
4,060 | 6,912 | | 10,972 | ||||||||||||
Restructuring, impairment and other charges |
591 | 110,511 | | 111,102 | ||||||||||||
Capital expenditures |
2,960 | 584 | | 3,544 | ||||||||||||
Total assets |
131,401 | 50,204 | 1,564 | 183,169 |
Fiscal Year 2008 | Distribution | Publishing | Eliminations | Consolidated | ||||||||||||
Net sales |
$ | 611,007 | $ | 117,423 | $ | (69,958 | ) | $ | 658,472 | |||||||
Income from continuing operations |
5,138 | 12,693 | | 17,831 | ||||||||||||
Income from continuing operations before income taxes |
3,880 | 8,449 | | 12,329 | ||||||||||||
Depreciation and amortization expense |
3,280 | 6,307 | | 9,587 | ||||||||||||
Restructuring, impairment and other charges |
| | | | ||||||||||||
Capital expenditures |
7,462 | 1,100 | | 8,562 | ||||||||||||
Total assets |
221,912 | 176,907 | (115,357 | ) | 283,462 |
The following table provides net sales by product line for each business segment for the years
ended March 31, 2010, 2009 and 2008 (in thousands):
Fiscal Year 2010 | Distribution | Publishing | Eliminations | Consolidated | ||||||||||||
Software |
$ | 422,280 | $ | 31,823 | $ | (24,166 | ) | $ | 429,937 | |||||||
Home Video |
38,142 | 54,180 | (21,197 | ) | 71,125 | |||||||||||
Video Games |
27,270 | | | 27,270 | ||||||||||||
Consolidated |
$ | 487,692 | $ | 86,003 | $ | (45,363 | ) | $ | 528,332 | |||||||
Fiscal Year 2009 | Distribution | Publishing | Eliminations | Consolidated | ||||||||||||
Software |
$ | 467,034 | $ | 32,447 | $ | (28,537 | ) | $ | 470,944 | |||||||
Home Video |
55,199 | 70,381 | (36,193 | ) | 89,387 | |||||||||||
Video Games |
70,660 | | | 70,660 | ||||||||||||
Consolidated |
$ | 592,893 | $ | 102,828 | $ | (64,730 | ) | $ | 630,991 | |||||||
Fiscal Year 2008 | Distribution | Publishing | Eliminations | Consolidated | ||||||||||||
Software |
$ | 498,255 | $ | 39,362 | $ | (37,945 | ) | $ | 499,672 | |||||||
Home Video |
64,656 | 78,061 | (32,013 | ) | 110,704 | |||||||||||
Video Games |
48,096 | | | 48,096 | ||||||||||||
Consolidated |
$ | 611,007 | $ | 117,423 | $ | (69,958 | ) | $ | 658,472 | |||||||
Note 28 Quarterly Data Seasonality (Unaudited)
The Companys quarterly operating results fluctuate significantly and will likely do so in the
future as a result of seasonal variations of products ultimately sold at retail. The Companys
business is affected by the pattern of seasonality common to other suppliers of retailers,
particularly the holiday selling season. Traditionally, our third quarter (October 1-December 31)
has accounted for our largest
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quarterly revenue figures and a substantial portion of our earnings. Our third quarter
accounted for approximately 25.2%, 27.2% and 33.0% of our net sales for the years ended March 31,
2010, 2009 and 2008, respectively.
The 2008 and 2009 holiday seasons were disappointing to most retailers and distributors as
consumers remained cautious about discretionary spending. As a result, several of our customers
have recently experienced significant financial difficulty, with one major customer filing for
bankruptcy and subsequently deciding to liquidate. Consequently, our financial results have been
negatively impacted by the downturn in the economy.
The following table sets forth certain unaudited quarterly historical financial data of the
Companys operations on a consolidated basis for each of the four quarters in the years ended March
31, 2010 and March 31, 2009 (in thousands, except per share amounts):
Quarter Ended | ||||||||||||||||
Fiscal Year 2010 | June 30 | September 30 | December 31 | March 31 | ||||||||||||
Net sales |
$ | 134,306 | $ | 122,411 | $ | 133,298 | $ | 138,317 | ||||||||
Gross profit |
23,564 | 20,867 | 22,049 | 21,445 | ||||||||||||
Income from operations |
6,516 | 3,807 | 4,525 | 3,835 | ||||||||||||
Net income |
$ | 4,161 | $ | 2,280 | $ | 7,239 | $ | 9,192 | ||||||||
Earnings per common share: |
||||||||||||||||
Basic |
$ | 0.11 | $ | 0.06 | $ | 0.20 | $ | 0.25 | ||||||||
Diluted |
$ | 0.11 | $ | 0.06 | $ | 0.20 | $ | 0.25 | ||||||||
Restructuring, impairment and other charges |
| | | |
Quarter Ended | ||||||||||||||||
Fiscal Year 2009 | June 30 | September 30 | December 31 | March 31 | ||||||||||||
Net sales |
$ | 142,025 | $ | 170,296 | $ | 171,580 | $ | 147,090 | ||||||||
Gross profit (loss) |
22,126 | 24,230 | (1,154 | ) | 21,845 | |||||||||||
Income (loss) from operations |
2,753 | (70,191 | ) | (31,965 | ) | 2,285 | ||||||||||
Net income (loss) |
$ | 627 | $ | (44,508 | ) | $ | (47,724 | ) | $ | 3,171 | ||||||
Earnings (loss) per common share: |
||||||||||||||||
Basic |
$ | 0.02 | $ | (1.23 | ) | $ | (1.32 | ) | $ | 0.09 | ||||||
Diluted |
$ | 0.02 | $ | (1.23 | ) | $ | (1.32 | ) | $ | 0.09 | ||||||
Restructuring, impairment and other charges |
| 73,412 | 34,582 | 3,108 |
Note 29 Subsequent Events
On May 17, 2010, Encore completed the asset acquisition of Punch Software, LLC, (Punch) a
leading provider of home and landscape design and CAD software in the United States. Amounts paid
included $8.1 million in cash paid at closing, $1.1 million in deferred payments payable on the
first anniversary of the closing, paid into an escrow account to be held for one additional year,
plus up to two performance payments of up to $1.25 million each, if earned by Punch based upon net
sales achieved by Encore in connection with the acquired assets, payable following the first and
second anniversary of the closing date. The purchase price could be increased or decreased on a
post-closing basis depending upon a further review of the amount of net working capital delivered
to Encore by Punch on the closing date. The acquisition of Punch is a continuation of the Companys
strategy for growth by expanding content ownership and gross margin enhancement. This transaction
does not qualify as an acquisition of a significant business pursuant to Regulation S-X and
financial statements for the acquired business will not be filed. Future operating results will be
included within the publishing business.
On May 17, 2010, the Company entered into a Consent and Amendment to Credit Agreement with
Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC) and Capital One Leverage Finance
Corp. waiving the application of certain covenants in the Companys Credit Facility that otherwise
prohibited it from consummating the Punch transaction discussed above, as well as modifying certain
terms in the Companys Credit Facility in order to address the terms of this transaction.
On May 27, 2010, the Company announced it has engaged a third party to provide assistance in
the structuring and negotiating of a potential transaction for the sale of FUNimation, although
there can be no assurances that this process will result in the consummation of a transaction.
FUNimation, was acquired on May 11, 2005 and operates as part of the Companys publishing business
segment. Accordingly, all results of operations and assets and liabilities of FUNimation for all
periods presented in any future filings will be classified as discontinued operations.
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The Company evaluated its March 31, 2010 consolidated financial statements for subsequent
events through the date the consolidated financial statements were issued. The Company is not aware
of any subsequent events other than those listed above which would require recognition or
disclosure in the consolidated financial statements.
Navarre Corporation
Schedule II Valuation and Qualifying Accounts and Reserves
(in thousands)
Schedule II Valuation and Qualifying Accounts and Reserves
(in thousands)
Balance at | Charged to | Balance at | ||||||||||||||
Beginning | Costs and | Additions/ | End of | |||||||||||||
Description | of Period | Expenses | (Deductions) | Period | ||||||||||||
Year ended March 31, 2010: |
||||||||||||||||
Deducted from asset accounts: |
||||||||||||||||
Allowance for doubtful accounts |
$ | 1,729 | $ | 245 | $ | (639 | ) | $ | 1,335 | |||||||
Allowance for sales returns |
11,967 | 3,988 | (7,728 | ) | 8,227 | |||||||||||
Allowance for MDF and sales discounts |
5,314 | 11,088 | (12,771 | ) | 3,631 | |||||||||||
Total |
$ | 19,010 | $ | 15,321 | $ | (21,138 | ) | $ | 13,193 | |||||||
Year ended March 31, 2009: |
||||||||||||||||
Deducted from asset accounts: |
||||||||||||||||
Allowance for doubtful accounts |
$ | 1,332 | $ | 742 | $ | (345 | ) | $ | 1,729 | |||||||
Allowance for sales returns |
9,350 | 14,177 | (11,560 | ) | 11,967 | |||||||||||
Allowance for MDF and sales discounts |
4,736 | 16,417 | (15,839 | ) | 5,314 | |||||||||||
Total |
$ | 15,418 | $ | 31,336 | $ | (27,744 | ) | $ | 19,010 | |||||||
Year ended March 31, 2008: |
||||||||||||||||
Deducted from asset accounts: |
||||||||||||||||
Allowance for doubtful accounts |
$ | 1,036 | $ | 32 | $ | 264 | $ | 1,332 | ||||||||
Allowance for sales returns |
11,983 | 10,373 | (13,006 | ) | 9,350 | |||||||||||
Allowance for MDF and sales discounts |
5,265 | 17,721 | (18,250 | ) | 4,736 | |||||||||||
Total |
$ | 18,284 | $ | 28,126 | $ | (30,992 | ) | $ | 15,418 | |||||||
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