e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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for the quarterly period ended June 30, 2009 |
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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for the transition period
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to |
Commission File Number 0-22982
NAVARRE CORPORATION
(Exact name of registrant as specified in its charter)
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Minnesota
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41-1704319 |
(State or other jurisdiction of
incorporation or organization)
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(IRS Employer
Identification No.) |
7400 49th Avenue North, New Hope, MN 55428
(Address of principal executive offices)
Registrants telephone number, including area code (763) 535-8333
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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No 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):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practical date.
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Class
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Outstanding at August 11, 2009 |
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Common Stock, No Par Value
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36,260,116 shares |
NAVARRE CORPORATION
Index
2
PART I. FINANCIAL INFORMATION
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Item 1. |
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Consolidated Financial Statements. |
NAVARRE CORPORATION
Consolidated Balance Sheets
(In thousands, except share amounts)
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June 30, |
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March 31, |
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2009 |
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2009 |
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(Unaudited) |
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(Note) |
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Assets: |
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Current assets: |
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Marketable securities |
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$ |
1,030 |
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$ |
1,024 |
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Accounts receivable, less allowances of $19,035 and $19,010, respectively |
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57,314 |
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72,817 |
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Inventories |
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34,427 |
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26,732 |
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Prepaid expenses and other current assets |
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11,252 |
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11,090 |
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Income tax receivable |
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4,620 |
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4,866 |
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Deferred tax assets current, net |
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4,074 |
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6,219 |
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Total current assets |
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112,717 |
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122,748 |
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Property and equipment, net of accumulated depreciation of $17,943 and $16,704, respectively |
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14,959 |
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15,957 |
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Software development costs |
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1,103 |
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677 |
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Other assets: |
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Intangible assets, net of amortization of $25,913 and $25,364, respectively |
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2,855 |
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3,406 |
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License fees, net of amortization of $23,789 and $21,570, respectively |
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17,664 |
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17,728 |
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Production costs, net of amortization of $13,160 and $12,223, respectively |
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9,112 |
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8,408 |
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Deferred tax assets non-current, net |
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10,556 |
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10,299 |
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Other assets |
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3,685 |
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3,946 |
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Total assets |
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$ |
172,651 |
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$ |
183,169 |
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Liabilities and shareholders equity: |
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Current liabilities: |
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Note payable line of credit |
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$ |
23,229 |
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$ |
24,133 |
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Capital lease obligation short term |
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82 |
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90 |
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Accounts payable |
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91,880 |
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106,708 |
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Checks written in excess of cash balance |
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153 |
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297 |
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Deferred compensation |
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1,951 |
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2,149 |
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Accrued expenses |
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12,569 |
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11,504 |
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Total current liabilities |
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129,864 |
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144,881 |
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Long-term liabilities: |
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Capital lease obligation long-term |
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101 |
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115 |
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Income taxes payable |
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1,260 |
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1,166 |
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Total liabilities |
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131,225 |
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146,162 |
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Commitments and contingencies (Note 18) |
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Shareholders equity: |
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Common stock, no par value: |
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Authorized shares 100,000,000; issued and outstanding shares 36,260,116 at
both June 30, 2009 and March 31, 2009 |
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161,391 |
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161,134 |
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Accumulated deficit |
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(119,965 |
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(124,126 |
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Accumulated other comprehensive loss |
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(1 |
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Total shareholders equity |
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41,426 |
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37,007 |
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Total liabilities and shareholders equity |
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$ |
172,651 |
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$ |
183,169 |
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Note: The balance sheet at March 31, 2009 has been derived from the audited consolidated financial
statements at that date but does not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for complete consolidated
financial statements. |
See accompanying notes to consolidated financial statements.
3
NAVARRE CORPORATION
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended |
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June 30, |
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2009 |
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2008 |
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Net sales |
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$ |
134,306 |
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$ |
142,025 |
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Cost of sales (exclusive of depreciation and amortization) |
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110,742 |
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119,899 |
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Gross profit |
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23,564 |
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22,126 |
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Operating expenses: |
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Selling and marketing |
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5,155 |
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5,715 |
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Distribution and warehousing |
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2,076 |
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2,884 |
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General and administrative |
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8,028 |
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8,453 |
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Depreciation and amortization |
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1,789 |
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2,321 |
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Total operating expenses |
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17,048 |
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19,373 |
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Income from operations |
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6,516 |
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2,753 |
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Other income (expense): |
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Interest expense |
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(719 |
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(1,615 |
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Interest income |
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7 |
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15 |
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Other income (expense), net |
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451 |
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(98 |
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Net income before income tax |
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6,255 |
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1,055 |
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Income tax expense |
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(2,094 |
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(428 |
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Net income |
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$ |
4,161 |
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$ |
627 |
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Earnings per common share: |
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Basic |
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$ |
0.11 |
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$ |
0.02 |
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Diluted |
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$ |
0.11 |
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$ |
0.02 |
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Weighted average shares outstanding: |
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Basic |
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36,237 |
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36,186 |
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Diluted |
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36,347 |
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36,250 |
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See accompanying notes to consolidated financial statements.
4
NAVARRE CORPORATION
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Three Months Ended |
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June 30, |
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2009 |
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2008 |
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Operating activities: |
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Net income |
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$ |
4,161 |
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$ |
627 |
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Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
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Depreciation and amortization |
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1,789 |
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2,321 |
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Amortization of debt acquisition costs |
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109 |
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72 |
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Write-off of debt acquisition costs |
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490 |
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Amortization of license fees |
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2,219 |
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1,052 |
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Amortization of production costs |
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936 |
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781 |
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Change in deferred revenue |
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92 |
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525 |
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Share-based compensation expense |
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257 |
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288 |
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Deferred income taxes |
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1,888 |
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1,165 |
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Deferred compensation expense |
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(198 |
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208 |
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Other |
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20 |
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(2 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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15,503 |
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(11,722 |
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Inventories |
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(7,695 |
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(9,392 |
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Prepaid expenses |
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(162 |
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(1,753 |
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Income taxes receivable |
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246 |
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(1,206 |
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Other assets |
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227 |
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201 |
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Production costs |
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(1,640 |
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(1,579 |
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License fees |
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(2,155 |
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(2,389 |
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Accounts payable |
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(14,828 |
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13,991 |
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Income taxes payable |
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94 |
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67 |
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Accrued expenses |
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973 |
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(3,692 |
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Net cash (used in) provided by operating activities |
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1,836 |
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(9,947 |
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Investing activities: |
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Purchases of property and equipment |
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(242 |
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(2,444 |
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Purchases of intangible assets |
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(239 |
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Purchases of software development |
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(426 |
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Proceeds from sale of intangible assets |
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2 |
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Sale of marketable equity securities |
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1,654 |
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Net cash used in investing activities |
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(666 |
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(1,029 |
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Financing activities: |
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Proceeds from note payable, line of credit |
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68,141 |
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59,545 |
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Payments on note payable, line of credit |
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(69,045 |
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(42,128 |
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Repayments of note payable |
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(9,744 |
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Payment of deferred compensation |
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(1,654 |
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Checks written in excess of cash |
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(144 |
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524 |
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Debt acquisition costs |
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(100 |
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Repayments of capital lease obligations |
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(22 |
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(24 |
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Other |
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12 |
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Net cash (used in) provided by financing activities |
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(1,170 |
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6,531 |
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Net decrease in cash |
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(4,445 |
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Cash at beginning of period |
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4,445 |
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Cash at end of period |
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$ |
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$ |
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Supplemental cash flow information: |
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Cash paid for (received from): |
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Interest |
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$ |
546 |
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$ |
1,372 |
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Income taxes, net of refunds |
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(113 |
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412 |
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Supplemental schedule of non-cash investing and financing activities: |
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Debt acquisition costs included in accounts payable |
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200 |
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See accompanying notes to consolidated financial statements.
5
NAVARRE CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 Organization and Basis of Presentation
Navarre Corporation (the Company or Navarre), publishes and distributes physical and
digital home entertainment and multimedia products, including PC software, DVD video, and video
games and accessories. The business is divided into two business segments publishing and
distribution. The publishing business consists of Encore Software, Inc. (Encore), FUNimation
Productions, Ltd. (FUNimation) and BCI Eclipse Company, LLC (BCI). In fiscal 2009, BCI began
winding down its licensing operations related to budget DVD video.
The accompanying unaudited consolidated financial statements of Navarre Corporation have been
prepared in accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q and Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete consolidated financial
statements.
All significant intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of the Company, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included.
Because of the seasonal nature of the Companys business, the operating results and cash flows
for the three month periods ended June 30, 2009 are not necessarily indicative of the results that
may be expected for the fiscal year ending March 31, 2010. For further information, refer to the
consolidated financial statements and footnotes thereto included in Navarre Corporations Annual
Report on Form 10-K for the year ended March 31, 2009.
Basis of Consolidation
The consolidated financial statements include the accounts of Navarre Corporation and its
wholly-owned subsidiaries, Encore, FUNimation and BCI (collectively referred to herein as the
Company).
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 represented less than 10% of total net sales for the
three months ended June 30, 2009 and 2008. The Company, under specific conditions, permits its
customers to return products. The Company records a reserve for sales returns and allowances
against amounts due in order 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 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.
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 revenue with
corresponding reductions in cost of sales.
FUNimations revenue is recognized upon meeting the recognition requirements of American
Institute of Certified Public Accountants Statement of Position 00-2 (SOP 00-2), Accounting by
Producers or Distributors of 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 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
6
and other recognition requirements
of SOP 00-2 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.
Recently Issued Accounting Pronouncements
In May 2009, the Financial Accounting Standards Board (FASB) issued Statements of Financial
Standards No. 165 (SFAS No. 165), Subsequent Events. SFAS No. 165 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. SFAS No. 165 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. SFAS No. 165 is
effective for interim and annual periods ending after June 15, 2009 and must be applied
prospectively. We adopted SFAS No. 165 during fiscal 2010, with no impact to our consolidated
financial statements other than subsequent event footnote disclosures (see further disclosure in
Note 22).
In June 2009, the FASB issued Statements of Financial Standards No. 166 (SFAS No. 166),
Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140. 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. SFAS No. 166 is effective for
fiscal years beginning after November 15, 2009. We will adopt SFAS No. 166 in fiscal 2011 and are
evaluating the impact, if any, it will have to our consolidated financial statements.
In June 2009, the FASB also published Statements of Financial Standards No 167 (SFAS No.
167), Consolidation of Variable Interest Entities an amendment to FIN 46(R). SFAS No. 167
addresses the effects of eliminating the qualified special purpose entity concept from SFAS No. 140
and responds to concerns about the application of certain key provisions of FIN 46(R), including
concerns over the transparency of enterprises involvement with Variable Interest Entities (VIEs).
SFAS No. 167 is effective for fiscal years beginning after November 15, 2009. We will adopt SFAS
No. 167 is fiscal 2011 and are evaluating the impact, if any, it will have to our consolidated
financial statements.
In July 2009, the FASB issued Statements of Financial Standards No. 168 (SFAS No. 168), The
FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles. This standard replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles, and will become the source of authoritative non-SEC authoritative GAAP. SFAS No. 168
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. SFAS No. 168, including the Codification, is effective for financial statements of
interim and annual periods ending after September 15, 2009 and we will adopt SFAS No. 168 during
the period ending September 30, 2009. As the Codification was not intended to change or alter
existing GAAP, it will not have any impact on our consolidated financial statements.
Note 2 Marketable Securities
SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP) and expands disclosures about fair value measurements. SFAS
No. 157 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 transaction between market participants on the measurement date. SFAS No. 157 also
describes three levels of inputs that may be used to measure fair value:
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Level 1 quoted prices in active markets for identical assets and liabilities. |
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Level 2 observable inputs other than quoted prices in active markets for identical
assets and liabilities. |
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Level 3 unobservable inputs in which there is little or no market data available,
which require the reporting entity to develop its own assumptions. |
7
Marketable securities at June 30, 2009 consist of corporate bonds and a money market fund
which are held in a Rabbi trust which was established for the payment of deferred compensation for
a former Chief Executive Officer (see further disclosure in Note 20).
The Company classifies these securities as available-for-sale and at June 30, 2009 and March
31, 2009 recorded these at fair value using Level 1 quoted market prices. Unrealized holding gains
and losses on available-for-sale securities were excluded from income and were reported as a
separate component of shareholders equity until realized. A decline in the market value of any
available-for-sale security below cost, that is deemed other than temporary, would be charged to
income, resulting in the establishment of a new cost basis for the security.
The fair value of securities was determined by 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 June 30, 2009 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
Estimated fair |
|
|
unrealized |
|
|
unrealized |
|
|
|
value |
|
|
holding gains |
|
|
holding losses |
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
411 |
|
|
$ |
|
|
|
$ |
|
|
Money market fund |
|
|
619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,030 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
The marketable securities are classified in the Consolidated Balance Sheets as current and
non-current in accordance with the scheduled payout of the deferred compensation and are restricted
to use only for the settlement of the deferred compensation liability. At June 30, 2009 and March
31, 2009, all the marketable securities were classified as current. Contractual maturities of
available-for-sale debt securities at June 30, 2009 ranged between August 2009 and January 2010.
Note 3 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. These Plans are described in detail in the
Companys Annual Report filed on Form 10-K for the fiscal year ended March 31, 2009.
8
Stock Options
A summary of the Companys stock option activity as of June 30, 2009 and changes during the
three months ended June 30, 2009 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average |
|
|
|
Number of |
|
|
exercise |
|
|
|
options |
|
|
price |
|
Options outstanding, beginning of period: |
|
|
3,165,528 |
|
|
$ |
5.74 |
|
Granted |
|
|
63,000 |
|
|
|
0.66 |
|
Exercised |
|
|
|
|
|
|
|
|
Canceled |
|
|
(225,495 |
) |
|
|
6.69 |
|
|
|
|
|
|
|
|
Options outstanding, end of period |
|
|
3,003,033 |
|
|
$ |
5.56 |
|
|
|
|
|
|
|
|
Options exercisable, end of period |
|
|
1,922,006 |
|
|
$ |
7.72 |
|
|
|
|
|
|
|
|
Shares available for future grant, end of period |
|
|
1,441,667 |
|
|
|
|
|
The weighted average remaining contractual term for options outstanding was 6.3 years and for
options exercisable was 4.9 years at June 30, 2009.
The total intrinsic value of stock options exercised during the three months ended June 30,
2009 and 2008 were zero and $5,000, respectively. The aggregate intrinsic value represents the
total pretax intrinsic value, based on the Companys closing stock price of $1.65 as of June 30,
2009, 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
$630,000 and for options exercisable was zero at June 30, 2009. The total number of in-the-money
options exercisable as of June 30, 2009 and 2008 was 674,000 and 700 options, respectively.
As of June 30, 2009, total compensation cost related to non-vested stock options not yet
recognized was $633,000, which is expected to be recognized over the next 1.1 years on a
weighted-average basis.
During the three months ended June 30, 2009 and 2008, the Company received cash from the
exercise of stock options totaling zero and $12,000, respectively. There was no excess tax benefit
recorded for the tax deductions related to stock options during either the three months ended June
30, 2009 or 2008.
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 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.
A summary of the Companys restricted stock activity as of June 30, 2009 and of changes during
the three months ended June 30, 2009 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average |
|
|
|
|
|
|
|
grant date |
|
|
|
Shares |
|
|
fair value |
|
Unvested, beginning of period: |
|
|
445,155 |
|
|
$ |
1.18 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(5,583 |
) |
|
|
1.10 |
|
|
|
|
|
|
|
|
Unvested, end of period |
|
|
439,572 |
|
|
$ |
1.18 |
|
|
|
|
|
|
|
|
9
The weighted average remaining contractual term for restricted stock awards outstanding
at June 30, 2009 was 9.1 years.
No shares vested during either the three months ended June 30, 2009 or 2008.
As of June 30, 2009 total compensation cost related to non-vested restricted stock awards not
yet recognized was $345,000 which is expected to be recognized over the next 1.3 years on a
weighted-average basis. There was no excess tax benefit recorded for the tax deductions related to
restricted stock during the three month periods ended June 30, 2009 and 2008.
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. The amount recorded for the three months ended June 30, 2008 was
$28,000 based upon the number of units granted. The Company did not achieve the TSR targets 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 three months ended June 30, 2009
and 2008 were calculated using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, |
|
|
2009 |
|
2008 |
Expected life (in years) |
|
|
5.0 |
|
|
|
5.0 |
|
Expected volatility |
|
|
71 |
% |
|
|
65 |
% |
Risk-free interest rate |
|
|
1.65-2.93 |
% |
|
|
2.65 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected life uses historical employee exercise and option expiration data to estimate the
expected life assumption. The Company believes 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 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.
Share-based compensation expense related to employee stock options, restricted stock and
restricted stock units, net of estimated forfeitures, for the three months ended June 30, 2009 and
2008 was $257,000 and $288,000, respectively, and was included in general and administrative
expenses in the Consolidated Statements of Operations. No amount of share-based compensation was
capitalized.
10
Note 4 Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Numerator: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,161 |
|
|
$ |
627 |
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for basic earnings per shareweighted-average shares |
|
|
36,237 |
|
|
|
36,186 |
|
Dilutive securities: Employee stock options and warrants |
|
|
110 |
|
|
|
64 |
|
|
|
|
|
|
|
|
Denominator for diluted earnings per shareadjusted weighted-average shares |
|
|
36,347 |
|
|
|
36,250 |
|
|
|
|
|
|
|
|
Net earnings per share: |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.11 |
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.11 |
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
Approximately 2.9 million and 3.2 million of the Companys stock options and restricted stock
awards were excluded from the calculation of diluted earnings per share for the three months ended
June 30, 2009 and 2008, respectively, because the exercise prices of the stock options and
restricted stock awards were greater than the average market price of the Companys common stock
and therefore their inclusion would have been anti-dilutive.
The effect of the inclusion of warrants for the both the three months ended June 30, 2009 and
2008 would have been anti-dilutive. Approximately 1.6 million warrants were excluded for both the
three month periods ended June 30, 2009 and 2008, because the exercise prices of the warrants was
greater than the average market price of the Companys common stock and therefore their inclusion
would have been anti-dilutive.
Note 5 Shareholders Equity
The Companys Article of Incorporation authorizes 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 either the three months ended June 30, 2009
or 2008.
Note 6 Accounts Receivable
Accounts receivable consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2009 |
|
|
2009 |
|
Trade receivables |
|
$ |
70,850 |
|
|
$ |
86,345 |
|
Vendor receivables |
|
|
2,758 |
|
|
|
2,894 |
|
Other receivables |
|
|
2,741 |
|
|
|
2,588 |
|
|
|
|
|
|
|
|
|
|
|
76,349 |
|
|
|
91,827 |
|
Less: allowance for doubtful accounts and sales discounts |
|
|
5,874 |
|
|
|
7,043 |
|
Less: allowance for sales returns, net margin impact |
|
|
13,161 |
|
|
|
11,967 |
|
|
|
|
|
|
|
|
Total |
|
$ |
57,314 |
|
|
$ |
72,817 |
|
|
|
|
|
|
|
|
11
Note 7 Inventories
Inventories, net of reserves, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2009 |
|
|
2009 |
|
Finished products |
|
$ |
29,199 |
|
|
$ |
20,437 |
|
Consigned inventory |
|
|
1,813 |
|
|
|
1,868 |
|
Raw materials |
|
|
3,415 |
|
|
|
4,427 |
|
|
|
|
|
|
|
|
Total |
|
$ |
34,427 |
|
|
$ |
26,732 |
|
|
|
|
|
|
|
|
Consigned inventory represents the Companys finished goods inventory at customers locations,
where revenue recognition criteria have not been met.
Note 8 Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2009 |
|
|
2009 |
|
Prepaid royalties |
|
$ |
9,284 |
|
|
$ |
9,826 |
|
Other |
|
|
1,968 |
|
|
|
1,264 |
|
|
|
|
|
|
|
|
Total |
|
$ |
11,252 |
|
|
$ |
11,090 |
|
|
|
|
|
|
|
|
Note 9 Property and Equipment
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2009 |
|
|
2009 |
|
Furniture and fixtures |
|
$ |
1,306 |
|
|
$ |
1,306 |
|
Computer and office equipment |
|
|
17,825 |
|
|
|
17,782 |
|
Warehouse equipment |
|
|
10,116 |
|
|
|
10,116 |
|
Production equipment |
|
|
1,346 |
|
|
|
1,296 |
|
Leasehold improvements |
|
|
2,086 |
|
|
|
2,081 |
|
Construction in progress |
|
|
223 |
|
|
|
80 |
|
|
|
|
|
|
|
|
Total |
|
|
32,902 |
|
|
|
32,661 |
|
Less: accumulated depreciation and amortization |
|
|
17,943 |
|
|
|
16,704 |
|
|
|
|
|
|
|
|
Net property and equipment |
|
$ |
14,959 |
|
|
$ |
15,957 |
|
|
|
|
|
|
|
|
Note 10 Capitalized Software Development Costs
The Company incurs software development costs in the publishing segment. The Company accounts
for these costs in accordance with the provisions of SFAS No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed. Software development costs include
third-party contractor fees and overhead costs. Capitalization ceases and amortization of costs
begins when the software product is available for general release to customers. 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 statement of
operations for amounts necessary to reduce the carrying value of the asset to fair value.
Unamortized software development costs were $1.1 million and $677,000 at June 30, 2009 and March
31, 2009, respectively.
12
Note 11 Intangible Assets
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 June 30, 2009 |
|
|
|
Gross carrying |
|
|
Accumulated |
|
|
|
|
|
|
amount |
|
|
amortization |
|
|
Net |
|
Masters |
|
$ |
8,084 |
|
|
$ |
8,084 |
|
|
$ |
|
|
License relationships |
|
|
20,078 |
|
|
|
17,798 |
|
|
|
2,280 |
|
Domain name |
|
|
70 |
|
|
|
31 |
|
|
|
39 |
|
Trademarks (not amortized) |
|
|
536 |
|
|
|
|
|
|
|
536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
28,768 |
|
|
$ |
25,913 |
|
|
$ |
2,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009 |
|
|
|
Gross carrying |
|
|
Accumulated |
|
|
|
|
|
|
amount |
|
|
amortization |
|
|
Net |
|
Masters |
|
$ |
8,086 |
|
|
$ |
7,986 |
|
|
$ |
100 |
|
License relationships |
|
|
20,078 |
|
|
|
17,350 |
|
|
|
2,728 |
|
Domain name |
|
|
70 |
|
|
|
28 |
|
|
|
42 |
|
Trademarks (not amortized) |
|
|
536 |
|
|
|
|
|
|
|
536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
28,770 |
|
|
$ |
25,364 |
|
|
$ |
3,406 |
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense for the three months ended June 30, 2009 and 2008 was $549,000
and $1.2 million, respectively.
Based on the intangibles in service as of June 30, 2009, estimated future amortization expense
is as follows (in thousands):
|
|
|
|
|
Remainder of fiscal 2010 |
|
|
|
$ 1,354 |
2011 |
|
|
|
425 |
2012 |
|
|
|
237 |
2013 |
|
|
|
303 |
Thereafter |
|
|
|
|
Debt issuance costs
Debt issuance costs are amortized over the life of the related debt and are included in Other
Assets. Debt issuance costs totaled $750,000 and $650,000 at June 30, 2009 and March 31, 2009,
respectively. Accumulated amortization amounted to approximately $217,000 and $108,000 at June 30,
2009 and March 31, 2009, respectively. Amortization expense is included in interest expense in the
accompanying Consolidated Statements of Operations. During the first three months of fiscal 2009,
the Company wrote-off $490,000 in debt acquisition costs related to the payoff of the Companys
Term Loan facility, which are included in interest expense.
Note 12 License Fees
License fees related to the publishing segment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2009 |
|
|
2009 |
|
License fees |
|
$ |
41,453 |
|
|
$ |
39,298 |
|
Less: accumulated amortization |
|
|
23,789 |
|
|
|
21,570 |
|
|
|
|
|
|
|
|
Total |
|
$ |
17,664 |
|
|
$ |
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 bear to the
13
estimated remaining unrecognized ultimate revenue for that title, as defined by SOP 00-2. 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.
Amortization of license fees for the three months ended June 30, 2009 and 2008 was $2.2
million and $1.1 million, respectively. These amounts have been included in royalty expense in cost
of sales in the accompanying Consolidated Statements of Operations.
Note 13 Production Costs
Production costs related to the publishing segment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2009 |
|
|
2009 |
|
Production costs |
|
$ |
22,272 |
|
|
$ |
20,631 |
|
Less: accumulated amortization |
|
|
13,160 |
|
|
|
12,223 |
|
|
|
|
|
|
|
|
Total |
|
$ |
9,112 |
|
|
$ |
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 SOP 00-2.
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 discounted cash flows, in the period when estimated.
Amortization of production costs for the three months ended June 30, 2009 and 2008 was
$937,000, and $781,000, respectively. These amounts have been included in cost of sales in the
accompanying Consolidated Statements of Operations.
Note 14 Accrued Expenses
Accrued expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
|
2009 |
|
|
2009 |
|
Compensation and benefits |
|
$ |
4,227 |
|
|
$ |
3,263 |
|
Royalties |
|
|
3,054 |
|
|
|
3,056 |
|
Rebates |
|
|
1,898 |
|
|
|
1,264 |
|
Rent |
|
|
1,241 |
|
|
|
1,249 |
|
Deferred revenue |
|
|
395 |
|
|
|
303 |
|
Interest |
|
|
103 |
|
|
|
39 |
|
Other |
|
|
1,651 |
|
|
|
2,330 |
|
|
|
|
|
|
|
|
Total |
|
$ |
12,569 |
|
|
$ |
11,504 |
|
|
|
|
|
|
|
|
Note 15 Bank Financing and Debt
At June 30, 2009, the Company was a party to a credit agreement which provides for a $65.0
million revolving credit facility (through June 30, 2010), which is subject to certain borrowing
base requirements. The revolving facility is available for working capital and general corporate
needs. The revolving 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. At June 30, 2009 and
March 31, 2009 the Company had $23.2 million and $24.1 million, respectively, outstanding. At June
30, 2009, based on the facilitys borrowing base and other requirements, the Company had excess
availability of $9.3 million.
In association with the revolving credit facility, the Company also pays certain facility and
agent fees. Weighted average interest on the credit agreement was at 5.1% and 5.6% at June 30, 2009
and March 31, 2009, respectively, and is payable monthly.
14
Under the revolving credit facility the Company is required to meet certain financial and
non-financial covenants. The financial covenants included a variety of financial metrics that were
used to determine the Companys overall financial stability as well as limitations on its capital
expenditures, a minimum ratio of EBITDA to fixed charges, minimum EBITDA and a borrowing base
availability requirement. At June 30, 2009, the Company was in compliance with all covenants under
the revolving credit facility.
Letter of Credit
The Company is party to a letter of credit totaling $250,000 related to a vendor at both June
30, 2009 and March 31, 2009. In the Companys past experience, no claims have been made against
these financial instruments.
Note 16 Private Placement Warrants
As of June 30, 2009 and March 31, 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 $4.50 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.
Note 17 Income Taxes
The Company adopted the provisions of FIN 48 on April 1, 2007. The adoption of FIN 48
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 FIN 48 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 was net of federal
and state tax benefits. During the three months ended June 30, 2009 an additional $73,000 of UTBs
were accrued, which was net of $20,000 of deferred federal and state income tax benefits. As of
June 30, 2009, interest accrued was $142,000 and total UTBs, net of deferred federal and state
income tax benefits, that would impact the effective tax rate if recognized, were $1.0 million.
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 2003 through
2009. The Company does not anticipate that the total unrecognized tax benefits will significantly
change prior to March 31, 2010.
For the three months ended June 30, 2009 and 2008, the Company recorded income tax expense of
$2.1 million and $428,000, respectively. The effective income tax rate for the three months ended
June 30, 2009 was 33.5%, compared to 40.6% for the three months ended June 30, 2008.
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 current market conditions and their impact on the Companys future outlook,
during the fiscal 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 have 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
15
tax assets. Accordingly, at March 31, 2009, a valuation
allowance for a portion of the net deferred tax assets of $21.4 million was recorded and was
included in income tax expense for the year ended March 31, 2009.
As of June 30, 2009, the Company had a net deferred tax asset position, before valuation
allowance, of $35.8 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. At June 30, 2009, the Company continued
to carry a $21.2 million valuation allowance against these deferred tax assets.
Note 18 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 $731,000 and $724,000 for the three months ended June 30, 2009 and 2008, respectively.
The following is a schedule of future minimum rental payments required under noncancelable
operating leases as of June 30, 2009 (in thousands):
|
|
|
|
|
Remainder of fiscal 2010 |
|
$ |
2,194 |
|
2011 |
|
|
2,543 |
|
2012 |
|
|
2,518 |
|
2013 |
|
|
2,516 |
|
2014 |
|
|
2,502 |
|
Thereafter |
|
|
10,198 |
|
|
|
|
|
|
|
$ |
22,471 |
|
|
|
|
|
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
Securities and Exchange Commission (the SEC) requesting certain documents and information
relating to 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.
Note 19 Capital Leases
The Company leases certain equipment under noncancelable capital leases. At June 30, 2009 and
March 31, 2009, leased capital assets included in property and equipment were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
March 31, 2009 |
|
Computer and office equipment |
|
$ |
314 |
|
|
$ |
314 |
|
Less: accumulated amortization |
|
|
144 |
|
|
|
113 |
|
|
|
|
|
|
|
|
Net property and equipment |
|
$ |
170 |
|
|
$ |
201 |
|
|
|
|
|
|
|
|
16
Amortization expense for the periods ended June 30, 2009 and 2008 was $16,000 and $19,000,
respectively. Future minimum lease payments, excluding additional costs such as real estate taxes,
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 |
|
Remainder of fiscal 2010 |
|
$ |
80 |
|
2011 |
|
|
55 |
|
2012 |
|
|
47 |
|
2013 |
|
|
23 |
|
|
|
|
|
Total minimum lease payments |
|
$ |
205 |
|
Less: amounts representing interest at rates ranging from 6.9% to 31.6% |
|
|
22 |
|
|
|
|
|
Present value of minimum capital lease payments, reflected in the
balance sheet as current and noncurrent capital lease obligations of
$82 and $101, respectively |
|
$ |
183 |
|
|
|
|
|
Note 20 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. The Company expensed $40,000 and $81,000
for this obligation during the three months ended June 30, 2009 and 2008, respectively. At June 30,
2009 and March 31, 2009, outstanding accrued balances due under this arrangement were $617,000 and
$815,000, respectively.
The employment agreement also contains 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
June 30, 2009 and March 31, 2009, outstanding accrued balances due under this arrangement were $1.3
million.
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 year 2005. The Company made
no payments during the three months ended June 30, 2009 as the final $22,000 was paid during the
three months ended June 30, 2008. The Company has no further obligation under this agreement.
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. At
June 30, 2009 and March 31, 2009, outstanding accrued balances due under this arrangement were $7,000 and
$10,000, respectively.
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
event that certain financial targets are met by the FUNimation business during the fiscal years
ending March 31, 2006-2010. If the total earnings before interest and tax (EBIT) of the
FUNimation business is in excess of $60.0 million during the period consisting of the fiscal years
ending March 31, 2009 and 2010, the FUNimation CEO is entitled to receive a bonus payment in an
amount equal to 5% of the EBIT that exceeds $60.0 million; however, this bonus payment shall not
exceed $4.0 million. No amounts have been expensed or paid under this agreement as the targets have
not been achieved.
17
Note 21 Business Segments
The presentation of segment information reflects the manner in which management organizes
segments for making operating decisions and assessing performance. On this basis, the Company has
determined it has two reportable business segments: publishing and distribution.
Financial information by reportable business segment is included in the following summary (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing |
|
Distribution |
|
Eliminations |
|
Consolidated |
Three months ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
24,865 |
|
|
$ |
121,396 |
|
|
$ |
(11,955 |
) |
|
$ |
134,306 |
|
Income from operations |
|
|
6,152 |
|
|
|
364 |
|
|
|
|
|
|
|
6,516 |
|
Net income, before income tax |
|
|
5,587 |
|
|
|
668 |
|
|
|
|
|
|
|
6,255 |
|
Depreciation and amortization expense |
|
|
732 |
|
|
|
1,057 |
|
|
|
|
|
|
|
1,789 |
|
Capital expenditures |
|
|
99 |
|
|
|
143 |
|
|
|
|
|
|
|
242 |
|
Total assets |
|
|
57,984 |
|
|
|
120,819 |
|
|
|
(6,152 |
) |
|
|
172,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing |
|
Distribution |
|
Eliminations |
|
Consolidated |
Three months ended June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
27,418 |
|
|
$ |
133,095 |
|
|
$ |
(18,488 |
) |
|
$ |
142,025 |
|
Income (loss) from operations |
|
|
3,444 |
|
|
|
(691 |
) |
|
|
|
|
|
|
2,753 |
|
Net income (loss), before income tax |
|
|
2,431 |
|
|
|
(1,376 |
) |
|
|
|
|
|
|
1,055 |
|
Depreciation and amortization expense |
|
|
1,386 |
|
|
|
935 |
|
|
|
|
|
|
|
2,321 |
|
Capital expenditures |
|
|
242 |
|
|
|
2,202 |
|
|
|
|
|
|
|
2,444 |
|
Total assets |
|
|
161,021 |
|
|
|
143,189 |
|
|
|
(1,021 |
) |
|
|
303,189 |
|
Note 22 Subsequent Events
The Company evaluated its June 30, 2009 consolidated financial statements for subsequent
events through August 13, 2009, the date the consolidated financial statements were issued. The
Company is not aware of any subsequent events which would require recognition or disclosure in the
consolidated financial statements.
18
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We are a publisher and distributor of physical and digital home entertainment and multimedia
products, including PC software, DVD video, video games and accessories. Our business is divided
into two business segments publishing and distribution. 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.
Our broad base of customers includes: (i) wholesale clubs, (ii) mass merchandisers, (iii)
other third-party distributors, (iv) computer specialty stores, (v) discount retailers, (vi) book
stores, (vii) office superstores, and (viii) electronic superstores. We currently distribute to
over 19,000 retail and distribution center locations throughout the United States and Canada.
Through our publishing business, which generally has higher gross margins than our
distribution business, we own or license various PC software and DVD 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, FUNimation and BCI. Encore licenses and publishes
personal productivity, genealogy, utility, education and interactive gaming PC products. FUNimation
is the leading provider of anime home video products in the United States. In fiscal 2009, BCI
began winding down its licensing operations related to budget DVD video.
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 PC
software, DVD video, video games and accessories 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.
Executive Summary
Consolidated net sales for the first quarter of fiscal 2010 decreased 5.4% to $134.3 million
compared to $142.0 million for the first quarter of fiscal 2009. The decrease in net sales was
related to the wind down of BCI in fiscal 2009 which generated $4.4 million in net sales during the
first quarter of fiscal 2009 compared to $136,000 during the first quarter of fiscal 2010, overall
deteriorating economic conditions and the loss of sales to a large retailer that filed for
bankruptcy during fiscal 2009 and subsequently decided to liquidate.
Our gross profit was $23.6 million or 17.5% of net sales in the first quarter of fiscal 2010
compared to $22.1 million or 15.6% of net sales for the same period in fiscal 2009. The 1.9%
increase in gross profit margin and $1.5 million increase in gross profit was due principally to
product sales mix which included increased sales of higher margin products within both the
publishing and distribution segments as well as an agent fee received in connection with a major
licensing agreement.
Total operating expenses for the first quarter of fiscal 2010 were $17.0 million or 12.6% of
net sales, compared to $19.4 million or 13.6% of net sales in the same period for fiscal 2009. We
experienced a decrease in all expense categories due to the wind down of BCI in fiscal 2009,
company-wide expense reduction initiatives, which included workforce reductions and operational
efficiencies, and a reduction in enterprise resource planning (ERP) expenses for systems that
were implemented in fiscal 2009.
Net income for the first quarter of fiscal 2010 was $4.2 million or $0.11 per diluted share
compared to $627,000 or $0.02 per diluted share for the same period last year.
The restructuring activities that we undertook during fiscal 2009, including personnel
reductions and the winding down of the budget DVD video publishing business, have created an
operating platform with a reduced expense base. In addition to improving profitability through
expense-reduction initiatives, we anticipate that such initiatives will allow us to focus greater
attention on maximizing the results of the more profitable areas of our business.
19
Despite the challenges facing the economy as a whole, we are committed to licensing,
acquisition of content and driving sales and efficiencies. We intend to monitor the current
business environment in order to adjust our strategies appropriately.
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 have relied on trade credit from
vendors, amounts received on accounts receivable and our revolving credit facility for our working
capital needs. In March 2007, we amended and restated our credit agreement with General Electric
Capital Corporation (GE) and entered into a four year Term Loan facility with Monroe Capital
Advisors, LLC (Monroe). The GE agreement currently provides for a $65.0 million revolving credit
facility and the Monroe agreement provided for a $15.0 million Term Loan facility, which was paid
in full in connection with the Third Amendment of the GE revolving facility on June 12, 2008.
At June 30, 2009 and March 31, 2009 we had $23.2 million and $24.1 million, respectively,
outstanding on the revolving facility and, based on the facilitys borrowing base and other
requirements, $9.3 million and $16.2 million, respectively, was available.
In association with the revolving credit facility, the Company also pays certain facility and
agent fees. Weighted average interest under the revolving facility was at 5.1% and 5.6% at June 30,
2009 and March 31, 2009, respectively, and is payable monthly.
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 SEC, including
this Report on Form 10-Q, 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: the Companys revenues being derived from a small group of customers; the Companys
dependence on significant vendors and manufacturers and the popularity of their products; pending
SEC investigation or litigation could subject the Company to significant costs, judgments or
penalties and could divert managements attention; some revenues are dependent on consumer
preferences and demand; a continued deterioration in businesses of significant customers, due to
weak economic conditions, could harm the Companys business; the seasonality and variability in the
Companys business and that decreased sales during peak season could adversely affect its results
of operations; the Companys dependence on a small number of licensed property and licensors in the
anime genre; some revenues are substantially dependent on television exposure; technological
developments, particularly in the electronic downloading arena which could adversely impact sales,
margins and results of operations; increased counterfeiting or piracy which could negatively affect
demand for the Companys products; the Company may not be able to protect its intellectual
property; the loss of key personnel could effect the depth, quality and effectiveness of the
management team; the Companys ability to meet its significant working capital requirements or if
working capital requirements change significantly; product returns or inventory obsolescence could
reduce sales and profitability or negatively
20
impact the Companys liquidity; the potential for
inventory values to decline; further impairment in the carrying value of the Companys assets could
negatively affect consolidated results of operations; the Companys credit exposure due to reseller
arrangements or negative trends which could cause credit loss; the Companys ability to
adequately and timely adjust cost structure for decreased demand; the Companys ability to compete
effectively in publishing and distribution, which are highly competitive industries; the Companys
dependence on third-party shipping of its product; the Companys dependence on information systems;
future acquisitions could disrupt business; interruption of the Companys business or catastrophic
loss at a facility which could curtail or shutdown its business; the potential for future terrorist
activities to disrupt operations or harm assets; the level of indebtedness could adversely affect
the Companys financial condition; a change in interest rates on our variable rate debt could
adversely impact the Companys operations; the Company may be unable to generate sufficient cash
flow to service debt obligations; the Company may incur additional debt, which could exacerbate the
risks associated with current debt levels; the Companys debt agreement limits our operating and
financial flexibility; fluctuations in stock price could adversely affect the Companys ability to
raise capital or make our securities undesirable; the Company may fail to meet the Nasdaq Global
Market requirements and therefore its common stock could be delisted; the exercise of outstanding
warrants and options adversely affecting stock price; the Companys anti-takeover provisions, its
ability to issue preferred stock and its staggered board may discourage take-over attempts
beneficial to shareholders; the Company does not plan to pay dividends on common stock, thus
shareholders should not expect a return on investment through dividend payments; and the Companys
directors may not be personally liable for certain actions which may discourage shareholder suits
against them.
A detailed statement of risks and uncertainties is contained in our reports to the SEC,
including, in particular, our Annual Report on Form 10-K for the year ended March 31, 2009 and
other public filings and disclosures. Investors and shareholders are urged to read these documents
carefully.
Critical Accounting Policies
We consider our critical accounting policies to be those related to revenue recognition,
production costs and license fees, allowance for doubtful accounts, goodwill and intangible assets,
impairment of long-lived assets, inventory valuation, share-based compensation, income taxes, and
contingencies and litigation. There have been no material changes to these critical accounting
policies as discussed in greater detail under this heading in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the
year ended March 31, 2009.
Reconciliation of GAAP Net Sales to Net Sales Before Inter-Company Eliminations
In evaluating our financial performance and operating trends, management considers information
concerning 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 evaluation 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.
The following table represents a reconciliation of GAAP net sales to net sales before
inter-company eliminations:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
(Unaudited) |
|
(In thousands) |
|
2009 |
|
|
2008 |
|
Net sales: |
|
|
|
|
|
|
|
|
Publishing |
|
$ |
24,865 |
|
|
$ |
27,418 |
|
Distribution |
|
|
121,396 |
|
|
|
133,095 |
|
|
|
|
|
|
|
|
Net sales before inter-company eliminations |
|
|
146,261 |
|
|
|
160,513 |
|
Inter-company sales |
|
|
(11,955 |
) |
|
|
(18,488 |
) |
|
|
|
|
|
|
|
Net sales as reported |
|
$ |
134,306 |
|
|
$ |
142,025 |
|
|
|
|
|
|
|
|
21
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.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
2009 |
|
|
|
2008 |
|
|
|
|
|
|
|
|
Net sales: |
|
|
|
|
|
|
|
|
Publishing |
|
|
18.5 |
% |
|
|
19.4 |
% |
Distribution |
|
|
90.4 |
|
|
|
93.6 |
|
Inter-company sales |
|
|
(8.9 |
) |
|
|
(13.0 |
) |
|
|
|
|
|
|
|
Total net sales |
|
|
100.0 |
|
|
|
100.0 |
|
Cost of sales, exclusive of amortization and depreciation |
|
|
82.5 |
|
|
|
84.4 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
17.5 |
|
|
|
15.6 |
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
3.8 |
|
|
|
4.0 |
|
Distribution and warehousing |
|
|
1.5 |
|
|
|
2.0 |
|
General and administrative |
|
|
6.0 |
|
|
|
6.0 |
|
Depreciation and amortization |
|
|
1.3 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
12.6 |
|
|
|
13.6 |
|
|
|
|
|
|
|
|
Income from operations |
|
|
4.9 |
|
|
|
2.0 |
|
Interest expense |
|
|
(0.5 |
) |
|
|
(1.1 |
) |
Other income (expense), net |
|
|
0.3 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
Net income before taxes |
|
|
4.7 |
|
|
|
0.8 |
|
Income tax expense |
|
|
(1.6 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
Net income |
|
|
3.1 |
% |
|
|
0.5 |
% |
|
|
|
|
|
|
|
22
Publishing Segment
The publishing segment includes Encore, FUNimation and BCI. In fiscal 2009, BCI began winding
down its licensing operations related to budget DVD video.
Fiscal 2010 First Quarter Results Compared To Fiscal 2009 First Quarter
Net Sales
Net sales for the publishing segment were $24.9 million (before inter-company eliminations)
for the first quarter of fiscal 2010 compared to $27.4 million (before inter-company eliminations)
for the first quarter of fiscal 2009. The 9.3% decrease in net sales over the prior year quarter
was primarily due to the wind down of BCI in fiscal 2009 which generated $4.4 million in net sales
during the first quarter of fiscal 2009 compared to $136,000 during the first quarter of fiscal
2010 and decreased sales due to the deteriorating economic conditions. These sales decreases were
partially offset by an increase in sales of anime products of $4.1 million due to increased sales
to a major retailer and an agent fee related to a new licensing agreement. The Company believes
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 publishing segment was $11.8 million or 47.6% of net sales for the first
quarter of fiscal 2010 compared to $10.3 million or 37.5% of net sales for the first quarter of
fiscal 2009. The increase in gross profit was a result of product sales mix and reduced royalty
rates payable to certain licensors. The increase in gross profit margin percentage from 37.5% to
47.6%, a total increase of 10.1%, was due to improved margins from product sales mix, reduced
royalty rates payable to certain licensors and an agent fee related to a new licensing agreement.
We expect gross profit rates to fluctuate depending principally upon the make-up of products sold
and the amount, if any, of sublicensing or agency revenue.
Operating Expenses
Total operating expenses decreased $1.1 million for the publishing segment to $5.7 million or
22.8% of net sales, for the first quarter of fiscal 2010, from $6.8 million or 24.9% of net sales
for the first quarter of fiscal 2009. Overall expenses decreased in all categories of operating
expenses except general and administrative expense.
Selling and marketing expenses for the publishing segment were $2.1 million or 8.5% of net
sales for the first quarter of fiscal 2010 compared to $2.8 million or 10.4% of net sales for the
first quarter of fiscal 2009. The decrease was principally due to expense savings from the
restructuring activities that we undertook during fiscal 2009.
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 $2.8 million or 11.4% of
net sales for the first quarter of fiscal 2010 compared to $2.6 million or 9.5% of net sales for
the first quarter of fiscal 2009. The increase was primarily due to the $648,000 performance based
cash compensation accrual recorded during the first quarter of fiscal 2010 compared to a nominal
bonus accrual recorded during the prior year quarter.
Depreciation and amortization expense for the publishing segment was $732,000 for the first
quarter of fiscal 2010 compared to $1.4 million for the first quarter of fiscal 2009. The reduction
in amortization expense was 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.
Operating Income
The publishing segment had net operating income of $6.2 million for the first quarter of
fiscal 2010 compared to $3.4 million for the first quarter of fiscal 2009.
23
Distribution Segment
The distribution segment distributes PC software, DVD video, video games and accessories.
Fiscal 2010 First Quarter Results Compared To Fiscal 2009 First Quarter
Net Sales
Net sales for the distribution segment decreased 8.8% to $121.4 million (before inter-company
eliminations) for the first quarter of fiscal 2010 compared to $133.1 million (before inter-company
eliminations) for the first quarter of fiscal 2009. Net sales decreased in the software product
group to $101.0 million during the first quarter of fiscal 2010 from $105.5 million for the same
period last year due to loss of sales from a large retailer that filed for bankruptcy during fiscal
2009 and subsequently decided to liquidate. DVD video net sales decreased to $11.5 million in the
first quarter of fiscal 2010 from $13.7 million in first quarter of fiscal 2009, due primarily to a
decrease in sales resulting from the timing of new releases and the overall deteriorating economic
conditions. Video games net sales decreased to $8.9 million in the first quarter of fiscal 2010
from $13.9 million for the same period last year, due to several new releases in the prior year.
The Company believes future net sales results 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 $11.7 million or 9.7% of net sales for the first
quarter of fiscal 2010 compared to $11.9 million or 8.9% of net sales for first quarter of fiscal
2009. The decrease in gross profit was primarily due to the sales volume decrease. The increase in
gross profit margin percentage for the first quarter of fiscal 2010 compared to the first quarter
of fiscal 2009 was due to the increased sales of higher margin products. 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 $11.4 million or 9.4% of net sales
for the first quarter of fiscal 2010 compared to $12.5 million or 9.4% as a percent of net sales
for the first quarter of fiscal 2009. Overall expenses for general and administrative and
distribution and warehouse expenses decreased, which were partially offset by the increased selling
and marketing and depreciation and amortization expenses.
Selling and marketing expenses for the distribution segment increased to $3.1 million or 2.5%
of net sales for the first quarter of fiscal 2010 compared to $2.9 million or 2.2% of net sales for
the first quarter of fiscal 2009 primarily due to an increase in commission expense driven by the
payment of commissions to customer specific brokers who achieved increased sales.
Distribution and warehousing expenses for the distribution segment decreased to $2.1 million
or 1.7% of net sales for the first quarter of fiscal 2010 compared to $2.9 million or 2.2% as a
percent of net sales for the first quarter of fiscal 2009 due to the restructuring activities, a
workforce reduction completed during fiscal 2009 and operational efficiencies.
General and administrative expenses for the distribution segment consist principally of
executive, accounting and administrative personnel and related expenses, including professional
fees. General and administrative expenses for the distribution segment were $5.2 million or 4.3% of
net sales for the first quarter of fiscal 2010 compared to $5.9 million or 4.4% of net sales for
the first quarter of fiscal 2009. The decrease in the first quarter of fiscal 2010 was primarily a
result of reduced expenses related to the fiscal 2009 ERP implementation of $1.0 million, a
workforce reduction and a decrease in professional fees, which were offset by the $1.0 million
performance based cash compensation accrual recorded during the first quarter of fiscal 2010
compared to a nominal bonus accrual recorded during the prior year quarter.
Depreciation and amortization for the distribution segment was $1.0 million for the first
quarter of fiscal 2010 compared to $935,000 for the first quarter of fiscal 2009. This increase was
primarily due to the depreciation of the ERP system, which was implemented during fiscal 2009.
24
Operating Income (Loss)
Net operating income for the distribution segment was $364,000 for the first quarter of fiscal
2010 compared to net operating loss of $691,000 for the first quarter of fiscal 2009.
Consolidated Other Income and Expense
Interest expense was $719,000 for first quarter of fiscal 2010 compared to $1.6 million for
first quarter of fiscal 2009. The decrease in interest expense for the first quarter of fiscal 2010
was a result of a reduction in debt, a reduction of effective interest rates and a write-off of
debt acquisition costs of $490,000 during the first quarter of fiscal 2009. Interest income, which
primarily relates to interest on available cash balances, was $7,000 for the first quarter of
fiscal 2010 compared to $15,000 for the same period last year. Other income (expense), net, for the
three months ended June 30, 2009 was net income of $451,000, which amount consisted of foreign
exchange gain. Other income (expense), net, for the three months ended June 30, 2008 was net
expense of $98,000 and consisted of foreign exchange loss.
Consolidated Income Tax Expense
We recorded consolidated income tax expense for the first quarter of fiscal 2010 of $2.1
million or an effective tax rate of 33.5% compared to $428,000 or an effective tax rate of 40.6%
for first quarter of fiscal 2009. The decrease in our effective tax rate for the first quarter of
fiscal 2010 was primarily due to a change in the effective state income tax rate as a result of our
completed fiscal 2009 income tax returns.
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 represents the amount
of temporary differences we do not anticipate recognizing with future projected income for fiscal
years 2010 through 2013, or by net operating loss carrybacks. The valuation allowance at June 30,
2009 was $21.2 million.
We adopted the provisions of FIN 48 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 FIN 48 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. During the three months ended June 30, 2009, an additional $73,000 of UTBs was accrued,
which was net of $20,000 of deferred federal and state income tax benefits. As of June 30, 2009,
interest accrued was $142,000 and total UTBs, net of deferred federal and state income tax
benefits that would impact the effective tax rate if recognized, were $1.0 million.
Consolidated Net Income
For the first quarter of fiscal 2010, we recorded net income of $4.2 million, compared to net
income of $627,000 for the same period last year.
Market Risk
As of June 30, 2009 we had $23.2 million of indebtedness, which was subject to interest rate
fluctuations. Based on these borrowings, which are subject to interest rate fluctuations, a
100-basis point change in LIBOR or index rate would cause our annual interest expense to change by
$232,000.
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.
25
During the three months ended June 30, 2009 we had foreign exchange gain of $451,000 compared
to foreign exchange loss of $98,000 during the three months ended June 30, 2008. 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 monitor the Canadian activities and can reduce exposure from the
exchange rate fluctuations by limiting these activities or taking other actions, such as exchange
rate hedging.
Seasonality and Inflation
Quarterly operating results are affected by the seasonality of our business. Specifically, our
third quarter (October 1December 31) typically accounts for our largest quarterly revenue figures
and a substantial portion of our earnings. 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. Poor economic conditions during this period could
negatively affect our operating results. 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.
Liquidity and Capital Resources
Cash Flow Analysis
Operating Activities
Cash provided by operating activities for the first three months of fiscal 2010 was $1.8
million and cash used in operating activities was $9.9 million for the same period last year.
The net cash provided by operating activities for the first three months of fiscal 2010 mainly
reflected our net income, combined with various non-cash charges, including depreciation and
amortization of $4.9 million, amortization of debt acquisition costs of $109,000, share-based
compensation of $257,000, deferred income taxes of $1.9 million, a decrease in deferred
compensation of $198,000 and an increase in deferred revenue of $92,000, offset by our working
capital demands. The following are changes in the operating assets and liabilities during the first
three months of fiscal 2010: accounts receivable decreased $15.5 million, reflecting strong cash
collections; inventories increased $7.7 million, primarily reflecting higher inventories in
anticipation of our second quarter operating needs; prepaid expenses increased $162,000, primarily
reflecting timing of insurance premium payments; production costs and license fees increased $1.6
million and $2.2 million, respectively, due to content acquisitions; income taxes receivable
decreased $246,000 primarily due to the timing of required tax payments and tax refunds; other
assets decreased $227,000 due to amortization and recoupments; accounts payable decreased $14.8
million, primarily as a result of timing of disbursements; and accrued expenses increased $973,000
primarily as a result of the performance based cash compensation accrual.
The net cash used in operating activities in the first three months of fiscal 2009 of $9.9
million was primarily the result of net income, combined with various non-cash charges, including
depreciation and amortization of $4.2 million, write-off of debt acquisition costs of $490,000,
share-based compensation of $288,000, deferred income taxes of $1.2 million, an increase in
deferred compensation of $208,000 and an increase in deferred revenue of $525,000, offset by our
working capital demands.
Investing Activities
Cash flows used in investing activities totaled $666,000 for the first three months of fiscal
2010 and $1.0 million for the same period last year.
Acquisition of property and equipment totaled $242,000 and $2.4 million in the first three
months of fiscal 2010 and 2009, respectively. Purchases of property and equipment in fiscal 2010
consisted primarily of computer equipment. Purchases of property and equipment in fiscal 2009
consisted primarily of computer equipment and purchases related to the final implementation of our
ERP project.
Acquisition of intangible assets totaled zero and $239,000 for the first three months of
fiscal 2010 and 2009, respectively. The acquisition of software development totaled $426,000 for
the first three months of fiscal 2010.
26
The sale of marketable securities held in a Rabbi trust was zero and $1.7 million for the
first three months of fiscal 2010 and 2009, respectively, related to deferred compensation payments
to our former CEO.
Financing Activities
Cash flows used in financing activities totaled $1.2 million for the first three months of
fiscal 2010 and cash flows provided by financing activities totaled $6.5 million for the first
three months of fiscal 2009.
We had repayments of notes payable-line of credit of $69.0 million, proceeds from notes
payable-line of credit of $68.1 million, increased debt acquisition costs of $100,000 and a
decrease in checks written in excess of cash of $144,000 for the first three months of fiscal 2010.
We had repayments of notes payable-line of credit of $42.1 million, proceeds from notes
payable-line of credit of $59.5 million, repayments on notes payable of $9.7 million, payment of
deferred compensation of $1.7 million and an increase in checks written in excess of cash of
$524,000 for the first three months of fiscal 2009.
We recorded no proceeds from the exercise of common stock options and warrants during the
first three months of fiscal 2010 and $12,000 for the first three months of fiscal 2009.
Capital Resources
In October 2001, we entered into a credit agreement with General Electric Capital Corporation
(GE), which has been amended. The credit agreement currently provides for a senior secured
eighteen month (through June 30, 2010), $65.0 million revolving credit facility. The revolving
facility is available for working capital and general corporate needs and is subject to certain
borrowing base requirements. The revolving facility is secured by a first priority security
interest in all of our assets, as well as the capital stock of our subsidiary companies. At June
30, 2009 and March 31, 2009 the Company had $23.2 million and $24.1 million, respectively
outstanding. At June 20, 2009, based on the facilitys borrowing base and other requirements, the
Company had excess availability of $9.3 million.
We entered into a four-year $15.0 million Term Loan facility with Monroe Capital Advisors, LLC
(Monroe) as administrative agent, agent and lender on March 22, 2007. The Term Loan facility
called for monthly installments of $12,500, annual excess cash flow payments and final payment on
March 22, 2011. The facility was secured by a second priority security interest in all of our
assets. At March 31, 2008, we had $9.7 million outstanding on the Term Loan facility, which was
paid in full on June 12, 2008 in connection with the Third Amendment to the GE revolving facility.
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 Fourth Amended and Restated Credit Agreement (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 will not be impacted by any pre-tax, non-cash charges to
earnings related to goodwill impairment; and (ii) revised the definition of Index Rate to
indicate that the interest rate for non-LIBOR borrowings will 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 calculation of
EBITDA under the credit agreement will 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 for the period ending December 31, 2008
27
related to a force reduction; (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
credit 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.
In association with the credit agreement, we also pay certain facility and agent fees.
Weighted average interest on the revolving facility was 5.1% at June 30, 2009 and 5.6% at March 31,
2009 and is payable monthly.
Under the revolving 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 EBITDA to fixed charges, minimum EBITDA and a borrowing base
availability requirement. We were in compliance with all the covenants related to the revolving
credit facility as of June 30, 2009. We currently believe we will be in compliance with all
covenants over the next twelve months.
Liquidity
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; (2)
investments in our distribution segment in order to sign exclusive distribution agreements; (3)
equipment needs for our operations; and (4) the remaining $2.0 million payable to our former Chief
Executive Officer for post-retirement benefits. During the first three months of fiscal 2010, we
invested approximately $2.3 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 facility (through June 30, 2010),
which is subject to certain borrowing base requirements and is available for working capital and
general corporate needs. As of June 30, 2009, we had $23.2 million outstanding on the revolving
sub-facility and excess availability of $9.3 million, based on the terms of the agreement.
We currently believe cash and cash equivalents, funds generated from the expected results of
operations and funds available under our existing credit facility will be sufficient to satisfy our
working capital requirements, other cash needs, and to finance expansion plans and strategic
initiatives in the foreseeable future, absent significant acquisitions. 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 as of June 30, 2009
by fiscal year (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
|
than 1 |
|
|
1 3 |
|
|
3 5 |
|
|
than 5 |
|
|
|
Total |
|
|
Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
Operating leases |
|
$ |
23,616 |
|
|
$ |
2,162 |
|
|
$ |
5,083 |
|
|
$ |
5,200 |
|
|
$ |
11,171 |
|
Capital leases |
|
|
205 |
|
|
|
80 |
|
|
|
102 |
|
|
|
23 |
|
|
|
|
|
License and distribution agreement |
|
|
15,246 |
|
|
|
7,464 |
|
|
|
6,582 |
|
|
|
1,200 |
|
|
|
|
|
Deferred compensation |
|
|
1,951 |
|
|
|
1,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
41,018 |
|
|
$ |
11,657 |
|
|
$ |
11,767 |
|
|
$ |
6,423 |
|
|
$ |
11,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have excluded our FIN 48 liabilities 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 revolving credit facility have been
excluded.
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures about Market Risk |
Information with respect to disclosures about market risk is contained in the section entitled
Managements Discussion and Analysis of Financial Condition and Results of Operations Market
Risk in this Form 10-Q.
28
|
|
|
Item 4. |
|
Controls and Procedures |
(a) 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, is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms, and that
such information is 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) 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.
(b) Change in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting during the most
recently completed 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.
PART II. OTHER INFORMATION
|
|
|
Item 1. |
|
Legal Proceedings |
See Litigation and Proceedings disclosed in Note 18 to the Companys consolidated financial
statements included herein.
Information regarding risk factors appears in Managements Discussion and Analysis of
Financial Condition and Results of Operations Forward-Looking Statements / Risk Factors in Part
1 Item 2 of this Form 10-Q and in Part 1 Item 1A of our Annual Report on Form 10-K for the
fiscal year ended March 31, 2009. There have been no material changes from the risk factors
previously disclosed in our Annual Report of Form 10-K.
|
|
|
Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds |
None.
|
|
|
Item 3. |
|
Defaults Upon Senior Securities |
None.
|
|
|
Item 4. |
|
Submission of Matters to a Vote of Securities Holders |
None.
|
|
|
Item 5. |
|
Other Information |
None
29
(a) The following exhibits are included herein:
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) |
|
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) |
|
32.1 |
|
Certification of the Chief Executive Officer pursuant Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. Section 1350) |
|
32.2 |
|
Certification of the Chief Financial Officer pursuant Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. Section 1350) |
30
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)
|
|
Date: August 13, 2009 |
/s/ Cary L. Deacon
|
|
|
Cary L. Deacon |
|
|
President and Chief Executive
Officer (Principal Executive Officer) |
|
|
|
|
|
Date: August 13, 2009 |
/s/ J. Reid Porter
|
|
|
J. Reid Porter |
|
|
Executive Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer) |
|
|
31