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 September 30, 2010 |
or
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o |
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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 from 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
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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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 November 8, 2010 |
Common Stock, No Par Value
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36,440,550 shares |
NAVARRE CORPORATION
Index
2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
NAVARRE CORPORATION
Consolidated Balance Sheets
(In thousands, except share amounts)
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September 30, |
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March 31, |
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2010 |
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2010 |
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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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$ |
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$ |
2 |
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Accounts receivable, less allowances of $9,155 and $8,913, respectively |
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57,739 |
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61,880 |
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Inventories |
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27,694 |
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21,164 |
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Prepaid expenses and other current assets |
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13,800 |
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13,511 |
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Income tax receivable |
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94 |
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Deferred tax assets current, net |
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6,624 |
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7,603 |
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Current assets of discontinued operations |
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8,748 |
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6,071 |
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Total current assets |
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114,605 |
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110,325 |
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Property and equipment, net of accumulated depreciation of $21,260 and $19,556, respectively |
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10,548 |
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11,790 |
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Software development costs, net of accumulated amortization of $543 and $324, respectively |
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1,964 |
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1,723 |
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Other assets: |
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Intangible assets, net of accumulated amortization of $217 and $38, respectively |
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2,640 |
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32 |
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Goodwill |
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5,719 |
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Deferred tax assets non-current, net |
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12,553 |
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13,808 |
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Other assets |
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4,021 |
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4,491 |
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Non-current assets of discontinued operations |
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29,907 |
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29,434 |
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Total assets |
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$ |
181,957 |
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$ |
171,603 |
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Liabilities and shareholders equity: |
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Current liabilities: |
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Revolving line of credit |
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$ |
14,428 |
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$ |
6,634 |
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Accounts payable |
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74,512 |
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79,968 |
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Checks written in excess of cash balances |
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8,757 |
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4,816 |
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Deferred compensation |
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1,333 |
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Accrued expenses |
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6,063 |
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10,977 |
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Contingent
payment obligation short-term acquisition (Note 3) |
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526 |
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Note payable acquisition (Note 3) |
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1,002 |
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Other liabilities short-term |
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292 |
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51 |
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Current liabilities of discontinued operations |
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8,914 |
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5,760 |
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Total current liabilities |
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114,494 |
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109,539 |
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Long-term liabilities: |
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Contingent
payment obligation long-term acquisition (Note 3) |
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422 |
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Other liabilities long-term |
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1,428 |
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1,303 |
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Total liabilities |
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116,344 |
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110,842 |
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Commitments and contingencies (Note 12) |
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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 36,382,835 at
September 30, 2010 and 36,366,668 at March 31, 2010 |
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162,503 |
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162,015 |
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Accumulated deficit |
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(97,019 |
) |
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(101,254 |
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Accumulated other comprehensive income |
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129 |
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Total shareholders equity |
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65,613 |
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60,761 |
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Total liabilities and shareholders equity |
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$ |
181,957 |
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$ |
171,603 |
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Note: The balance sheet at March 31, 2010 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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Six Months Ended |
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September 30, |
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September 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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Net sales |
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$ |
120,476 |
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$ |
113,491 |
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$ |
219,268 |
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$ |
236,907 |
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Cost of sales (exclusive of depreciation and amortization) |
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103,216 |
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96,748 |
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187,531 |
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205,201 |
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Gross profit |
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17,260 |
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16,743 |
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31,737 |
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31,706 |
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Operating expenses: |
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Selling and marketing |
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5,277 |
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4,462 |
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10,161 |
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8,530 |
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Distribution and warehousing |
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2,686 |
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2,435 |
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5,158 |
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4,511 |
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General and administrative |
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5,149 |
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5,818 |
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10,223 |
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12,271 |
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Depreciation and amortization |
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991 |
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1,027 |
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1,882 |
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2,249 |
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Total operating expenses |
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14,103 |
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13,742 |
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27,424 |
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27,561 |
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Income from operations |
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3,157 |
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3,001 |
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4,313 |
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4,145 |
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Other income (expense): |
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Interest income (expense), net |
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(456 |
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(482 |
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(851 |
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(1,043 |
) |
Other income (expense), net |
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(172 |
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364 |
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(431 |
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815 |
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Income from continuing operations before income tax |
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2,529 |
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2,883 |
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3,031 |
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3,917 |
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Income tax expense |
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(1,072 |
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(1,038 |
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(1,371 |
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(1,218 |
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Net income from continuing operations |
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1,457 |
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1,845 |
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1,660 |
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2,699 |
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Discontinued operations: |
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Income from discontinued operations, net of tax |
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1,680 |
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435 |
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2,575 |
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3,742 |
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Net income |
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$ |
3,137 |
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$ |
2,280 |
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$ |
4,235 |
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$ |
6,441 |
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Basic earnings per common share: |
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Continued operations |
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0.04 |
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0.05 |
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0.05 |
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0.08 |
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Discontinued operations |
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0.05 |
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0.01 |
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0.07 |
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0.10 |
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Net income |
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$ |
0.09 |
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$ |
0.06 |
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$ |
0.12 |
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$ |
0.18 |
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Diluted earnings per common share: |
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Continued operations |
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0.04 |
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0.05 |
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0.04 |
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0.08 |
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Discontinued operations |
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0.05 |
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0.01 |
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0.07 |
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0.10 |
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Net income |
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$ |
0.09 |
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$ |
0.06 |
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$ |
0.11 |
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$ |
0.18 |
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Weighted average shares outstanding: |
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Basic |
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36,376 |
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36,237 |
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36,371 |
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36,237 |
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Diluted |
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36,995 |
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36,650 |
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36,886 |
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36,530 |
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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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Six Months Ended |
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September 30, |
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2010 |
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2009 |
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Operating activities: |
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Net income |
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$ |
4,235 |
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$ |
6,441 |
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Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
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Income from discontinued operations |
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(2,575 |
) |
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(3,742 |
) |
Depreciation and amortization |
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1,882 |
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|
2,249 |
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Amortization of debt acquisition costs |
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298 |
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217 |
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Amortization of software development costs |
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219 |
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21 |
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Share-based compensation expense |
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468 |
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|
529 |
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Deferred income taxes |
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|
2,234 |
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|
3,116 |
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Deferred compensation expense |
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(400 |
) |
Other |
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218 |
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|
87 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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5,344 |
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|
6,704 |
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Inventories |
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(5,658 |
) |
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(4,740 |
) |
Prepaid expenses |
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(194 |
) |
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(41 |
) |
Income taxes receivable |
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|
94 |
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|
4,541 |
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Other assets |
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(43 |
) |
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|
304 |
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Accounts payable |
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(5,973 |
) |
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(17,122 |
) |
Income taxes payable |
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|
392 |
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|
150 |
|
Accrued expenses |
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(4,982 |
) |
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|
1,809 |
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Net cash (used in) provided by operating activities |
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(4,041 |
) |
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|
123 |
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Investing activities: |
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Cash paid for acquisition |
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(8,090 |
) |
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Purchases of property and equipment |
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(435 |
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(361 |
) |
Investment in software development |
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(460 |
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(958 |
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Proceeds from sale of intangible assets |
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20 |
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Net cash used in investing activities |
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(8,985 |
) |
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(1,299 |
) |
Financing activities: |
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Proceeds from revolving line of credit |
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99,685 |
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|
112,004 |
|
Payments on revolving line of credit |
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(91,891 |
) |
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|
(116,221 |
) |
Payment of deferred compensation |
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(1,333 |
) |
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|
Checks written in excess of cash balances |
|
|
3,991 |
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|
4,386 |
|
Debt acquisition costs |
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(246 |
) |
Other |
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(5 |
) |
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(34 |
) |
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Net cash provided by (used in) financing activities |
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10,447 |
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(111 |
) |
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Net cash used in continuing operations |
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(2,579 |
) |
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(1,287 |
) |
Discontinued operations: |
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Net cash provided by operating activities |
|
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2,776 |
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|
1,377 |
|
Net cash used in investing activities |
|
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(191 |
) |
|
|
(85 |
) |
Net cash used in financing activities |
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(6 |
) |
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(5 |
) |
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Net increase (decrease) in cash |
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Cash at beginning of period |
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Cash at end of period |
|
$ |
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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 |
|
$ |
863 |
|
|
$ |
1,017 |
|
Income taxes, net of refunds |
|
|
40 |
|
|
|
(4,394 |
) |
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) is a distributor, provider of
complete logistics solutions and publisher of computer software. The Company operates through two
business segments distribution and publishing.
Through the distribution segment, the Company distributes computer software, home video, video
games, and consumer electronics and peripherals and provides fee-based logistical services. The
distribution business focuses on providing a range of value-added services, including
vendor-managed inventory, electronic and internet-based ordering and gift card fulfillment.
Through the publishing segment, the Company owns or licenses various widely-known computer
software brands through Encore Software, Inc. (Encore). In addition to retail publishing, Encore
also sells directly to consumers through its websites.
The Company also publishes and sells anime content through FUNimation Productions, Ltd.
(FUNimation). During the first quarter of fiscal 2011, the Company announced the engagement of a
third party to assist in structuring and negotiating a potential sale of FUNimation. The Company
has committed to a plan to sell FUNimation, is actively locating a buyer and believes that the sale
of the business is probable, although there can be no assurances regarding when or if this process
will result in the consummation of a transaction. Accordingly, all results of operations and assets
and liabilities of FUNimation for all periods presented are classified as discontinued operations,
and the Companys consolidated financial statements, including the notes, have been reclassified to
reflect such segregation for all periods presented (see further disclosure in Note 2).
The Companys publishing segment also formerly published budget home video through BCI Eclipse
Company, LLC (BCI), which began winding down its licensing operations related to budget home
video during fiscal 2009. The wind-down was completed during the fourth quarter of fiscal 2010.
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 inter-company 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 and six month periods ended September 30, 2010 are not necessarily indicative of the
results that may be expected for the fiscal year ending March 31, 2011. 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, 2010.
Basis of Consolidation
The consolidated financial statements include the accounts of Navarre Corporation and its
wholly-owned subsidiaries, Encore and BCI (collectively referred to herein as the Company). The
results of operations and assets and liabilities of FUNimation for all periods presented are
classified as discontinued operations.
6
Fair Value of Financial Instruments
The carrying value of the Companys current financial assets and liabilities, because of their
short-term nature, approximates fair value.
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 and six month periods ended September 30, 2010 and 2009. The Company permits its customers to
return products under certain conditions. The Company records a reserve for sales returns and
allowances against amounts due to reduce the net recognized receivables to the amounts the Company
reasonably believes will be collected. These reserves are based on the application of the Companys
historical or anticipated gross profit percent against average sales returns, sales discounts
percent against average gross sales and specific reserves for marketing programs.
The Companys distribution customers, at times, qualify for certain price protection benefits
from the Companys vendors. The Company serves as an intermediary to settle these amounts between
vendors and customers. The Company accounts for these amounts as reductions of revenue with
corresponding reductions in cost of sales.
The Companys publishing business, at times, provides certain price protection, promotional
monies, volume rebates and other incentives to customers. The Company records these amounts as
reductions in revenue.
Revenues from home video distribution are recognized, net of an allowance for estimated
returns, in the period in which the product is available for sale by the Companys customers
(generally upon shipment to the customer and in the case of new releases, after street date
restrictions lapse). Revenues from broadcast licensing and home video sublicensing are recognized
when the programming is available to the licensee and other recognition requirements of Accounting
Standards Codification (ASC) 926, Entertainment Films 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.
Note 2 Discontinued Operations
On May 27, 2010, the Company announced the engagement of a third party to assist in
structuring and negotiating a potential sale of FUNimation. Additionally,
the Company recently announced that it is currently soliciting and evaluating indications of interest from potential purchasers in
connection with the FUNimation sale process and hopes to be able to identify a buyer and move
forward with a potential sale transaction before the calendar year end. FUNimation was acquired on
May 11, 2005 and operated as part of the Companys publishing business segment. The Company has
committed to a plan to sell FUNimation, is actively locating a buyer and believes that the sale of
the business is probable, although there can be no assurance regarding when or if this process will
result in the consummation of a transaction. Accordingly, all results of operations and assets and
liabilities of FUNimation for all periods presented are classified as discontinued operations, and
the consolidated financial statements, including the notes, have been reclassified to reflect such
segregation for all periods presented.
The Company has elected to
allocate a portion of the consolidated interest expense related to
the revolving line of credit, based on a percentage of its assets, to the discontinued operations. The
Company expects to use the proceeds received upon the sale of
FUNimation to reduce the Companys revolving line
of credit. The effect of suspending depreciation and amortization
since the reclassification of the results of operations and assets
and liabilities of FUNimation to discontinued
operations was $250,000, which amount would have increased operating expenses and reduced operating and
net income for both the three and six months ended September 30, 2010 provided these expenses not
been suspended. The Company presently expects that it will continue to distribute FUNimations
product in periods subsequent to any sale.
The Companys consolidated financial statements have been reclassified to segregate the
assets, liabilities and operating results of the discontinued operations for all periods presented.
The summary of operating results from discontinued operations for the three and six months ended
September 30, 2010 and 2009 is as follows (in thousands):
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net sales |
|
$ |
9,008 |
|
|
$ |
8,921 |
|
|
$ |
16,709 |
|
|
$ |
19,810 |
|
Interest expense |
|
|
122 |
|
|
|
119 |
|
|
|
219 |
|
|
|
270 |
|
Net income from discontinued operations, before income taxes |
|
|
2,637 |
|
|
|
687 |
|
|
|
4,059 |
|
|
|
5,908 |
|
Income tax expense |
|
|
(957 |
) |
|
|
(252 |
) |
|
|
(1,484 |
) |
|
|
(2,166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations, net of taxes |
|
$ |
1,680 |
|
|
$ |
435 |
|
|
$ |
2,575 |
|
|
$ |
3,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The major classes of assets and liabilities of discontinued operations as of September 30,
2010 and March 31, 2010 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2010 |
|
|
2010 |
|
Accounts receivable, net |
|
$ |
3,504 |
|
|
$ |
747 |
|
Inventory |
|
|
5,177 |
|
|
|
5,108 |
|
Prepaid expenses and other current assets |
|
|
67 |
|
|
|
216 |
|
|
|
|
|
|
|
|
Current assets of discontinued operations |
|
|
8,748 |
|
|
|
6,071 |
|
Property and equipment, net of accumulated depreciation |
|
|
1,568 |
|
|
|
1,516 |
|
Intangible assets, net of amortization |
|
|
1,365 |
|
|
|
1,469 |
|
License fees, net of amortization |
|
|
16,224 |
|
|
|
16,565 |
|
Production costs, net of amortization |
|
|
10,682 |
|
|
|
9,814 |
|
Other assets |
|
|
68 |
|
|
|
70 |
|
|
|
|
|
|
|
|
Total assets of discontinued operations |
|
$ |
38,655 |
|
|
$ |
35,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
3,938 |
|
|
$ |
2,483 |
|
Accrued expenses and other |
|
|
4,976 |
|
|
|
3,277 |
|
|
|
|
|
|
|
|
Current liabilities of discontinued operations |
|
$ |
8,914 |
|
|
$ |
5,760 |
|
|
|
|
|
|
|
|
Note 3 Acquisition
Punch! Software, LLC
On May 17, 2010, the Company completed the acquisition of substantially all of the assets of
Punch! Software, LLC, (Punch!) a leading provider of home and landscape architectural design and
CAD software in the United States. Total consideration included; $8.1 million in cash at closing, a
$1.1 million note payable on the first anniversary of the closing with interest at a rate of 0.67%
per annum, plus up to two performance payments (contingent consideration) of up to $1.25 million
each (undiscounted), based on the Company achieving minimum net sales of $8.0 million in connection
with the acquired assets. If earned, these payments are payable on the first and second anniversary
of the closing date. The combined fair value of the contingent consideration of $948,000 was
estimated by applying the income approach. That measure is based on significant inputs that are not
observable in the market (i.e., Level 3 inputs). Key assumptions include (1) a discount rate range
of 20%-25% and (2) a probability adjusted level of revenues between $7.7 million and $9.4 million.
The purchase price could be increased or decreased on a post-closing basis depending upon, among
other items, a further review of the amount of net working capital delivered to the Company by
Punch! on the closing date. During the second quarter of fiscal 2011, the purchase price was
reduced by $98,000 based on the working capital review, bringing the balance of the Companys note
payable to $1.0 million as of September 30, 2010.
The acquisition of Punch! is a
continuation of the Companys strategy for growth by expanding
content ownership and gross margin enhancement. Preliminary goodwill of $5.7 million arising from the
acquisition consists largely of the synergies and economies of scale expected from combining the
operations of the Company and Punch!. All goodwill was assigned to the Companys publishing
segment. All of the goodwill recognized is expected to be deductible for income tax purposes over a
15 year tax amortization period. This transaction does not qualify as an acquisition of a
significant business pursuant to Regulation S-X and financial statements for the acquired business
will not be filed. Operating results are included within the publishing business.
The purchase price is being allocated based on estimates of the fair value of assets acquired
and liabilities assumed as follows (in thousands).
8
|
|
|
|
|
Consideration: |
|
|
|
|
Cash |
|
$ |
8,090 |
|
Note payable |
|
|
1,002 |
|
Contingent
payment obligation short-term |
|
|
526 |
|
Contingent
payment obligation long-term |
|
|
422 |
|
|
|
|
|
Fair value of total consideration transferred |
|
$ |
10,040 |
|
|
|
|
|
|
|
|
|
|
Preliminarily, the Punch! purchase price will be allocated as follows: |
|
|
|
|
Accounts receivable |
|
$ |
1,152 |
|
Inventory |
|
|
815 |
|
Prepaid expenses |
|
|
94 |
|
Property and equipment |
|
|
18 |
|
Purchased intangibles |
|
|
2,787 |
|
Goodwill |
|
|
5,719 |
|
Accounts payable |
|
|
(479 |
) |
Accrued expenses |
|
|
(66 |
) |
|
|
|
|
|
|
$ |
10,040 |
|
|
|
|
|
Net sales of
Punch! included in the Consolidated Statements of Operations for
the three and six months ended September 30, 2010 were $1.9 million and $2.7 million,
respectively. Although the Company has made reasonable efforts to calculate the precise
impact that the Punch! acquisition has had on the Companys net income for these periods,
the Company has deemed it impracticable to determine such
amounts.
Acquisition-related costs (included in selling, general, and administrative expenses in the
Consolidated Statements of Operations) for the three and six months ended September 30, 2010 were
zero and $185,000, respectively.
Note 4 Marketable Securities
ASC 820-10, Fair Value Measurements and Disclosures, defines fair value, establishes a
framework for measuring fair value in GAAP and expands disclosures about fair value measurements.
ASC 820-10 defines fair value as the price that would be received for an asset or paid to transfer
a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date.
Marketable securities consisted of a money market fund at March 31, 2010. The account was
liquidated during the first quarter of fiscal 2011 in conjunction with the final deferred
compensation payment and there are no unrealized holding gains or losses (see further disclosure in
Note 21).
At March 31, 2010, the Company classified these securities as available-for-sale and recorded
these securities at fair value using Level 1 quoted market prices. Dividend and interest income
were recognized when earned. Realized gains and losses for securities classified as
available-for-sale were included in income and were derived using the specific identification
method for determining the cost of the securities sold. Gross unrealized holding gains at March 31,
2010 were $1,000.
At March 31, 2010, all marketable securities were classified as current based on the scheduled
payout of the deferred compensation, and are restricted to use only for the settlement of the
deferred compensation liability. All available-for-sale debt securities were fully matured at March
31, 2010.
Note 5 Accounts Receivable
Accounts receivable consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2010 |
|
|
2010 |
|
Trade receivables |
|
$ |
64,298 |
|
|
$ |
68,463 |
|
Vendor receivables |
|
|
2,289 |
|
|
|
1,802 |
|
Other receivables |
|
|
307 |
|
|
|
528 |
|
|
|
|
|
|
|
|
|
|
|
66,894 |
|
|
|
70,793 |
|
Less: allowance for doubtful accounts and sales discounts |
|
|
3,563 |
|
|
|
4,100 |
|
Less: allowance for sales returns, net margin impact |
|
|
5,592 |
|
|
|
4,813 |
|
|
|
|
|
|
|
|
Total |
|
$ |
57,739 |
|
|
$ |
61,880 |
|
|
|
|
|
|
|
|
9
Note 6 Inventories
Inventories, net of reserves, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2010 |
|
|
2010 |
|
Finished products |
|
$ |
22,682 |
|
|
$ |
18,180 |
|
Consigned inventory |
|
|
2,994 |
|
|
|
1,619 |
|
Raw materials |
|
|
2,018 |
|
|
|
1,365 |
|
|
|
|
|
|
|
|
Total |
|
$ |
27,694 |
|
|
$ |
21,164 |
|
|
|
|
|
|
|
|
Consigned inventory represents the Companys finished goods inventory at customers locations,
where revenue recognition criteria have not been met.
Note 7 Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2010 |
|
|
2010 |
|
Prepaid royalties |
|
$ |
12,874 |
|
|
$ |
12,241 |
|
Other |
|
|
926 |
|
|
|
1,270 |
|
|
|
|
|
|
|
|
Total |
|
$ |
13,800 |
|
|
$ |
13,511 |
|
|
|
|
|
|
|
|
Note 8 Property and Equipment
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2010 |
|
|
2010 |
|
Furniture and fixtures |
|
$ |
1,159 |
|
|
$ |
1,140 |
|
Computer and office equipment |
|
|
18,640 |
|
|
|
17,500 |
|
Warehouse equipment |
|
|
10,068 |
|
|
|
10,049 |
|
Leasehold improvements |
|
|
1,941 |
|
|
|
1,898 |
|
Construction in progress |
|
|
|
|
|
|
759 |
|
|
|
|
|
|
|
|
Total |
|
|
31,808 |
|
|
|
31,346 |
|
Less: accumulated depreciation and amortization |
|
|
21,260 |
|
|
|
19,556 |
|
|
|
|
|
|
|
|
Net property and equipment |
|
$ |
10,548 |
|
|
$ |
11,790 |
|
|
|
|
|
|
|
|
10
Note 9 Capitalized Software Development Costs
The Company incurs software development costs for software to be sold, leased or marketed in
the publishing segment. Software development costs include third-party contractor fees and overhead
costs. The Company capitalizes these costs once technological feasibility is achieved.
Capitalization ceases and amortization of costs begins when the software product is available for
general release to customers. The Company amortizes capitalized software development costs by the
greater of the ratio of gross revenues of a product to the total current and anticipated future
gross revenues of that product or the straight-line method over the remaining estimated economic
life of the product. The carrying amount of software development costs may change in the future if
there are any changes to anticipated future gross revenue or the remaining estimated economic life
of the product. The Company tests for possible impairment whenever events or changes in
circumstances, such as a reduction in expected cash flows, indicate that the carrying amount of the
asset may not be recoverable. If indicators exist, the Company compares the undiscounted cash flows
related to the asset to the carrying value of the asset. If the carrying value is greater than the
undiscounted cash flow amount, an impairment charge is recorded in cost of goods sold in the
Consolidated Statement of Operations for amounts necessary to reduce the carrying value of the
asset to fair value. Software development costs consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2010 |
|
|
2010 |
|
Software development costs |
|
$ |
2,507 |
|
|
$ |
2,047 |
|
Less: accumulated amortization |
|
|
543 |
|
|
|
324 |
|
|
|
|
|
|
|
|
Net software development costs |
|
$ |
1,964 |
|
|
$ |
1,723 |
|
|
|
|
|
|
|
|
Amortization expense was $118,000 and $219,000 for the three and six months ended September
30, 2010, respectively and $21,000 for both the three and six months ended September 30, 2009.
Note 10 Goodwill and Intangible Assets
Goodwill
The Company recognizes the excess cost of an acquired entity over the net amount assigned to
the fair value of the assets acquired and liabilities assumed as goodwill. The Companys publishing
segment had a goodwill balance of $5.7 million and zero as of September 30, 2010 and March 31,
2010, respectively. The Company has no goodwill associated with its distribution segment.
The Company reviews goodwill and indefinite lived intangible assets for potential impairment
annually for each reporting unit, or when events or changes in circumstances indicate that the
carrying value of the goodwill might exceed its current fair value. Factors which may cause
impairment include negative industry or economic trends and significant underperformance relative
to historical or projected future operating results. The Company determines fair value using widely
accepted valuation techniques, including discounted cash flow and market multiple analysis. The
amount of impairment loss would be recognized as the excess of the assets carrying value over its
fair value.
Intangible assets
Other identifiable intangible assets, with zero residual value, are being amortized (except
for the trademarks which have an indefinite life) over useful lives of five years for developed
technology, eight years for customer relationships, three years for customer list and seven years
for the domain name and are valued as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
|
Gross carrying |
|
|
Accumulated |
|
|
|
|
|
|
amount |
|
|
amortization |
|
|
Net |
|
Developed technology * |
|
$ |
1,940 |
|
|
$ |
149 |
|
|
$ |
1,791 |
|
Customer relationships * |
|
|
80 |
|
|
|
4 |
|
|
|
76 |
|
Customer list * |
|
|
167 |
|
|
|
20 |
|
|
|
147 |
|
Domain name |
|
|
70 |
|
|
|
44 |
|
|
|
26 |
|
Trademarks (not amortized) * |
|
|
600 |
|
|
|
|
|
|
|
600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,857 |
|
|
$ |
217 |
|
|
$ |
2,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Intangible assets acquired as part of the Punch! acquisition (see further disclosure in Note
3). |
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010 |
|
|
|
Gross carrying |
|
|
Accumulated |
|
|
|
|
|
|
amount |
|
|
amortization |
|
|
Net |
|
Domain name |
|
$ |
70 |
|
|
$ |
38 |
|
|
$ |
32 |
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense for the three and six months ended September 30, 2010 was
$132,000 and $178,000, respectively Aggregate amortization expense for the three and six months
ended September 30, 2009 was ($15,000) and $86,000, respectively (which included an amortization
credit of $18,000 and expense of $80,000, respectively due to the write-off of masters). The
following is a schedule of estimated future amortization expense (in thousands):
|
|
|
|
|
Remainder of fiscal 2011 |
|
$ |
265 |
|
2012 |
|
|
526 |
|
2013 |
|
|
484 |
|
2014 |
|
|
386 |
|
Thereafter |
|
|
379 |
|
Debt issuance costs
Debt issuance costs are included in Other Assets and are amortized over the life of the
related debt. Debt issuance costs consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2010 |
|
|
2010 |
|
Debt issuance costs |
|
$ |
1,790 |
|
|
$ |
1,790 |
|
Less: accumulated amortization |
|
|
547 |
|
|
|
249 |
|
|
|
|
|
|
|
|
Net debt issuance costs |
|
$ |
1,243 |
|
|
$ |
1,541 |
|
|
|
|
|
|
|
|
Amortization expense of $149,000 and $298,000 for the three and six months ended September 30,
2010, respectively and $108,000 and $217,000 for the three and six months ended September 30, 2009,
respectively, is included in interest expense in the accompanying Consolidated Statements of
Operations.
Note 11 Accrued Expenses
Accrued expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
March 31, |
|
|
|
2010 |
|
|
2010 |
|
Compensation and benefits |
|
$ |
1,817 |
|
|
$ |
6,527 |
|
Royalties |
|
|
121 |
|
|
|
614 |
|
Rebates |
|
|
1,094 |
|
|
|
1,252 |
|
Rent |
|
|
930 |
|
|
|
862 |
|
Deferred revenue |
|
|
10 |
|
|
|
|
|
Interest |
|
|
114 |
|
|
|
205 |
|
Other |
|
|
1,977 |
|
|
|
1,517 |
|
|
|
|
|
|
|
|
Total |
|
$ |
6,063 |
|
|
$ |
10,977 |
|
|
|
|
|
|
|
|
Note 12 Commitments and Contingencies
Contingent payment Punch! acquisition
The Company accrued a $1.0 million note payable related to a deferred payment due on the first
anniversary of the Punch! acquisition closing, plus interest at a rate of 0.67% per annum.
Additionally, the Company may be obligated to make two contingent performance payments of up to
$1.25 million each (undiscounted), based on the Company achieving minimum net sales of $8.0 million
in connection with the acquired assets. If earned, these payments are payable on the first and
second anniversary of the closing date. The combined fair value of the contingent consideration of
$948,000 was estimated by applying the income approach. That measure is based on significant inputs
that are not observable in the market (i.e. Level 3 inputs). Key assumptions include (1) a
12
discount rate range of 20%-25% and (2) a probability adjusted level of revenues between $7.7
million and $9.4 million. (see Note 3 for further details on the acquisition).
Leases
The Company leases its 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 $613,000 and $1.2
million for the three and six months ended September 30, 2010, respectively and $583,000 and $1.2
million for the three and six months ended September 30, 2009, respectively.
The following is a schedule of future minimum rental payments required under noncancelable
operating leases as of September 30, 2010 (in thousands):
|
|
|
|
|
Remainder of fiscal 2011 |
|
$ |
1,224 |
|
2012 |
|
|
2,444 |
|
2013 |
|
|
2,440 |
|
2014 |
|
|
2,072 |
|
2015 |
|
|
2,035 |
|
Thereafter |
|
|
6,183 |
|
|
|
|
|
|
|
$ |
16,398 |
|
|
|
|
|
Litigation and Proceedings
In the normal course of business, the Company is involved in a number of
litigation/arbitration and administrative/regulatory matters that, other than the matter described
immediately below, are incidental to the operation of the Companys business. These proceedings
generally include, among other things, various matters with regard to products distributed by the
Company and the collection of accounts receivable owed to the Company. The Company does not
currently believe that the resolution of any of those pending matters will have a material adverse
effect on the Companys financial position or liquidity, but an adverse decision in more than one
of these matters could be material to the Companys consolidated results of operations. Because of
the preliminary status of the Companys various legal proceedings, as well as the contingencies and
uncertainties associated with these types of matters, it is difficult, if not impossible, to
predict the exposure to the Company, if any.
SEC Investigation
On February 17, 2006, the Company received an inquiry from the Division of Enforcement of the
U.S. Securities and Exchange Commission (the SEC) requesting certain documents and information.
This information request, and others received since that date, relate to information regarding the
Companys restatements of previously-issued financial statements, certain write-offs, reserve
methodologies and revenue recognition practices. The Company has cooperated fully with the SECs
requests in connection with this formal, non-public investigation.
Note 13 Capital Leases
The Company leases certain equipment under noncancelable capital leases. At September 30, 2010
and March 31, 2010, leased capital assets included in property and equipment were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
March 31, 2010 |
|
Computer and office equipment |
|
$ |
297 |
|
|
$ |
298 |
|
Less: accumulated amortization |
|
|
197 |
|
|
|
172 |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
100 |
|
|
$ |
126 |
|
|
|
|
|
|
|
|
Amortization expense for the three and six months ended September 30, 2010 was $13,000 and
$25,000, respectively, and $14,000 and $27,000, respectively, for the three and six months ended
September 30, 2009. Future minimum lease payments, excluding additional costs such as insurance and
maintenance expense payable by the Company under these agreements, by year and in the aggregate are
as follows (in thousands):
13
|
|
|
|
|
|
|
Minimum Lease |
|
|
|
Commitments |
|
Remainder of fiscal 2011 |
|
$ |
30 |
|
2012 |
|
|
58 |
|
2013 |
|
|
28 |
|
|
|
|
|
Total minimum lease payments |
|
$ |
116 |
|
Less: amounts representing interest at rates ranging from 6.9% to 9.4% |
|
|
9 |
|
|
|
|
|
Present value of minimum capital lease payments, reflected in the
balance sheet as current and noncurrent capital lease obligations of
$52 and $55, respectively |
|
$ |
107 |
|
|
|
|
|
Note 14 Bank Financing and Debt
In March 2007, the Company amended and restated its $65.0 million revolving credit facility
with General Electric Corporation (the GE Facility) and amended the GE Facility again on February
5, 2009. The GE Facility called for monthly interest payments at the index rate plus 5.75%, or
LIBOR plus 4.75% and was subject to certain borrowing base requirements. The GE Facility was
available for working capital and general corporate needs and was secured by a first priority
security interest in all of the Companys assets, as well as the capital stock of the Companys
subsidiaries. The GE Facility was paid off on November 12, 2009 in connection with the new credit
facility, as described below.
On November 12, 2009, the Company entered into a three year, $65.0 million revolving credit
facility (the Credit Facility) with Wells Fargo Foothill, LLC as agent and lender, and Capital
One Leverage Financing Corp. as a participating lender. The Credit Facility is secured by a first
priority security interest in all the Companys assets, as well as the capital stock of its
subsidiary companies. Additionally, the Credit Facility calls for monthly interest payments at the
banks base rate (as defined in the Credit Facility) plus 4.0%, or LIBOR plus 4.0%, at the
Companys discretion. The entire outstanding balance of principal and interest is due in full on
November 12, 2012.
At September 30, 2010 and March 31, 2010 the Company had $14.4 million and $6.6 million,
respectively, outstanding on the Credit Facility. Amounts available under the Credit Facility are
subject to a borrowing base formula. Changes in the assets within the borrowing base formula can
impact the amount of availability. Based on the facilitys borrowing base and other requirements
at such dates, we had excess availability of $29.2 million and $38.4 million, respectively.
In association with, and per the terms of the Credit Facility, the Company also pays and has
paid certain facility and agent fees. Weighted average interest on the Credit Facility was 6.5% at
September 30, 2010 and was 7.5% at March 31, 2010. Such interest amounts have been, and continue to
be, payable monthly.
Under the Credit Facility, the Company is required to meet certain financial and non-financial
covenants. The financial covenants include a variety of financial metrics that are used to
determine the Companys overall financial stability as well as limitations on capital expenditures,
a minimum ratio of EBITDA to fixed charges, limitations on prepaid royalties and licenses and a
borrowing base availability requirement. At September 30, 2010, the Company was in compliance with
all covenants under the Credit Facility. We currently believe we will be in compliance with all
covenants in the Credit Facility over the next twelve months.
Letter of Credit
The Company is party to a $250,000 letter of credit related to a vendor at both September 30,
2010 and March 31, 2010. In the Companys experience, no claims have been made against this
financial instrument.
Note 15 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 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, 2010.
14
Stock Options
A summary of the Companys stock option activity as of September 30, 2010 and changes during
the six months ended September 30, 2010 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average |
|
|
|
Number of |
|
|
exercise |
|
|
|
options |
|
|
price |
|
Options outstanding, April 1, 2010: |
|
|
3,547,299 |
|
|
$ |
4.77 |
|
Granted |
|
|
146,000 |
|
|
$ |
2.20 |
|
Exercised |
|
|
(16,167 |
) |
|
$ |
1.24 |
|
Canceled |
|
|
(293,633 |
) |
|
$ |
9.08 |
|
|
|
|
|
|
|
|
|
Options outstanding, September 30, 2010 |
|
|
3,383,499 |
|
|
$ |
4.30 |
|
|
|
|
|
|
|
|
Options exercisable, September 30, 2010 |
|
|
2,048,514 |
|
|
$ |
6.05 |
|
|
|
|
|
|
|
|
Shares available for future grant, September 30, 2010 |
|
|
3,397,412 |
|
|
|
|
|
The weighted average remaining contractual term for options outstanding was 6.7 years and for
options exercisable was 5.5 years at September 30, 2010.
The total intrinsic value of stock options exercised during the six months ended September 30,
2010 was $19,000. The aggregate intrinsic value represents the total pretax intrinsic value, based
on the Companys closing stock price of $2.60 as of September 30, 2010, which theoretically could
have been received by the option holders had all option holders exercised their options as of that
date. The aggregate intrinsic value for options outstanding was $1.8 million, and for options
exercisable was $553,000 at September 30, 2010. The total number of in-the-money options
exercisable as of September 30, 2010 and 2009 was 1.9 million and 1.1 million, respectively.
As of September 30, 2010, total compensation cost related to non-vested stock options not yet
recognized was $946,000, which is expected to be recognized over the next 1.5 years on a
weighted-average basis.
During the six months ended September 30, 2010 and 2009, the Company received cash from the
exercise of stock options totaling $20,000 and zero, respectively. There was no excess tax benefit
recorded for the tax deductions related to stock options during either of the six months ended
September 30, 2010 or 2009.
Restricted Stock
Restricted stock granted to employees typically has a vesting period of three years and
expense is recognized on a straight-line basis over the vesting period, or when the performance
criteria have been met. The value of the restricted stock is established by the market price on the
date of 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 September 30, 2010 and of changes
during the six months ended September 30, 2010 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average |
|
|
|
|
|
|
|
grant date |
|
|
|
Shares |
|
|
fair value |
|
Unvested, April 1, 2010: |
|
|
508,486 |
|
|
$ |
1.47 |
|
Granted |
|
|
147,500 |
|
|
|
2.49 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(11,666 |
) |
|
|
1.82 |
|
|
|
|
|
|
|
|
Unvested, September 30, 2010 |
|
|
644,320 |
|
|
$ |
1.70 |
|
|
|
|
|
|
|
|
The weighted average remaining vesting period for restricted stock awards outstanding at
September 30, 2010 was 1.0 year.
15
No shares vested during either of the six months ended September 30, 2010 or 2009.
As of September 30, 2010 total compensation cost related to non-vested restricted stock awards
not yet recognized was $793,000, which amount is expected to be recognized over the next 1.4 years
on a weighted-average basis. There was no excess tax benefit recorded for the tax deductions
related to restricted stock during either of the six month periods ended September 30, 2010 or
2009.
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 and six months ended
September 30, 2010 and 2009 was calculated using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Expected life (in years) |
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
Expected volatility |
|
|
73 |
% |
|
|
74 |
% |
|
|
73 |
% |
|
|
74 |
% |
Risk-free interest rate |
|
|
1.46 |
% |
|
|
2.33-2.37 |
% |
|
|
1.46-2.60 |
% |
|
|
1.65-2.93 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected life uses historical employee exercise and option expiration data to estimate the
expected life assumption for the Black-Scholes grant-date valuation. The Company believes that this
historical data is currently the best estimate of the expected term of a new option. The Company
uses a weighted-average expected life for all awards and has identified one employee population.
Expected volatility uses the Company stocks historical volatility for the same period of time as
the expected life. The Company has no reason to believe its future volatility will differ from the
past. The risk-free interest rate is based on the U.S. Treasury rate in effect at the time of the
grant for the same period of time as the expected life. Expected dividend yield is zero, as the
Company historically has not paid dividends. The Company used a forfeiture rate of 4.63% during the
three and six months ended September 30, 2010 and 5.40% during the three and six months ended
September 30, 2009.
Share-based compensation expense related to employee stock options, restricted stock and
restricted stock units, net of estimated forfeitures, for the three and six months ended September
30, 2010 was $242,000 and $468,000, respectively, and $272,000 and $529,000, respectively, for the
three and six months ended September 30, 2009. These amounts are included in general and
administrative expenses in the Consolidated Statements of Operations. No amount of share-based
compensation was capitalized.
Note 16 Shareholders Equity
The Companys Articles of Incorporation authorize 10,000,000 shares of preferred stock, no par
value. No preferred shares are issued or outstanding.
The Company did not repurchase any shares during either of the six months ended September 30,
2010 or 2009.
Note 17 Private Placement Warrants
As of September 30, 2010 and March 31, 2010, the Company had 1,596,001 warrants outstanding
related to a private placement completed March 21, 2006, which includes warrants to purchase
171,000 shares issued by the Company to its agent in the private placement. The warrants have a
term of five years and are exercisable at $5.00 per share. The Company has the right to require
exercise of the warrants if, among other things, the volume weighted average price of the Companys
common stock exceeds $8.50 per share for each of 30 consecutive trading days. In addition, the
warrants provide the investors the option to require the Company to repurchase the warrants for a
purchase price, payable in cash within five (5) business days after such request, equal to the
Black-Scholes value of any unexercised warrant shares, but only if, while the warrants are
outstanding, the Company initiates the following change in control transactions: (i) the Company
effects any merger or consolidation, (ii) the Company effects any sale of all or substantially all
of its assets, (iii) any tender offer or exchange offer is completed whereby holders of the
Companys common stock are permitted to tender or exchange their shares for other securities, cash
or property, or (iv) the Company effects any reclassification of the Companys common stock whereby
it is effectively converted into or exchanged for other securities, cash or property.
16
Note 18 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 |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
|
1,457 |
|
|
|
1,845 |
|
|
|
1,660 |
|
|
|
2,699 |
|
Income from discontinued operations, net of tax |
|
|
1,680 |
|
|
|
435 |
|
|
|
2,575 |
|
|
|
3,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,137 |
|
|
$ |
2,280 |
|
|
$ |
4,235 |
|
|
$ |
6,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per shareweighted-average shares |
|
|
36,376 |
|
|
|
36,237 |
|
|
|
36,371 |
|
|
|
36,237 |
|
Dilutive securities: Employee stock options and warrants |
|
|
619 |
|
|
|
413 |
|
|
|
515 |
|
|
|
293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per shareadjusted weighted-average shares |
|
|
36,995 |
|
|
|
36,650 |
|
|
|
36,886 |
|
|
|
36,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.04 |
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
$ |
0.08 |
|
Discontinued operations |
|
|
0.05 |
|
|
|
0.01 |
|
|
|
0.07 |
|
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.09 |
|
|
$ |
0.06 |
|
|
$ |
0.12 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.04 |
|
|
$ |
0.05 |
|
|
$ |
0.04 |
|
|
$ |
0.08 |
|
Discontinued operations |
|
|
0.05 |
|
|
|
0.01 |
|
|
|
0.07 |
|
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.09 |
|
|
$ |
0.06 |
|
|
$ |
0.11 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 2.3 million and 2.6 million stock options and restricted stock were excluded
from the calculation of diluted earnings per share for the three and six months ended September 30,
2010, respectively, and 2.4 million and 2.5 million stock options and restricted stock were
excluded from the calculation of diluted earnings per share for the three and six months ended
September 30, 2009, respectively, because the exercise prices of such stock options and the
grant-date fair value of such restricted stock were greater than the average price of the Companys
common stock and therefore their inclusion would have been anti-dilutive.
Approximately 1.6 million warrants were also excluded from the calculation of diluted earnings
per share for both the three and six months ended September 30, 2010 and 2009 because the exercise
prices of such warrants was greater than the average price of the Companys common stock and
therefore their inclusion would have been anti-dilutive.
Note 19 Comprehensive Income
Other comprehensive income pertains to net unrealized gains and losses on foreign exchange
rate translation of the Companys balance sheet pertaining to foreign operations and net unrealized
gain on marketable securities. These net unrealized gains and losses are not included in net income
but rather are recorded in accumulated other comprehensive income within shareholders equity.
Comprehensive income consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income |
|
$ |
3,137 |
|
|
$ |
2,280 |
|
|
$ |
4,235 |
|
|
$ |
6,441 |
|
Net unrealized gain on marketable securities |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
2 |
|
Net unrealized gain on foreign exchange rate translation |
|
|
189 |
|
|
|
|
|
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
3,326 |
|
|
$ |
2,281 |
|
|
$ |
4,364 |
|
|
$ |
6,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in other comprehensive income are non-cash items.
Accumulated other comprehensive income balances, net of tax effects, were $129,000 and zero at
September 30, 2010 and March 31, 2010, respectively.
17
Note 20 Income Taxes
The Company adopted the provisions ASC 740-10 related to uncertain tax positions on April 1,
2007. The Company recognizes interest accrued related to unrecognized income tax benefits (UTBs)
in the provision for income taxes. At March 31, 2010, interest accrued was approximately $147,000,
which was net of federal and state tax benefits and total UTBs net of federal and state tax
benefits that would impact the effective tax rate if recognized were $716,000. During the six
months ended September 30, 2010 an additional $123,000 of UTBs were accrued, which was net of
$29,000 of deferred federal and state income tax benefits. As of September 30, 2010, interest
accrued was $178,000 and total UTBs, net of deferred federal and state income tax benefits, that
would impact the effective tax rate if recognized, were $839,000.
The Companys federal income tax returns for tax years ending in 2007 through 2009 remain
subject to examination by tax authorities. The Company files in numerous state jurisdictions with
varying statutes of limitations. The Companys unrecognized state tax benefits are related to state
returns that remain subject to examination by tax authorities from tax years ending in 2006 through
2009. The Company does not anticipate that the total unrecognized tax benefits will significantly
change prior to March 31, 2011.
For the three months ended September 30, 2010 and 2009, the Company recorded income tax
expense from continuing operations of $1.1 million and $1.0 million, respectively. The effective
income tax rate applied to continuing operations for the three months ended September 30, 2010 was
42.4%, compared to 36.0% for the three months ended September 30, 2009. For the six months ended
September 30, 2010 and 2009, the Company recorded income tax expense from continuing operations of
$1.4 million and $1.2 million, respectively. The effective income tax rate applied to continuing
operations for the six months ended September 30, 2010 was 45.2%, compared to 31.1% for the six
months ended September 30, 2009.
For the three months ended September 30, 2010 and 2009, the Company recorded income tax
expense from discontinued operations of $957,000 and $252,000, respectively. The effective tax rate
for the three months ended September 30, 2010 was 36.3%, compared to 36.7% for the three months
ended September 30, 2009. For the six months ended September 30, 2010 and 2009, the Company
recorded income tax expense from discontinued operations of $1.5 million and $2.2 million,
respectively. The effective tax rate for the six months ended September 30, 2010 was 36.6%,
compared to 36.7% for the six months ended September 30, 2009.
Deferred tax assets are evaluated by considering historical levels of income, estimates of
future taxable income streams and the impact of tax planning strategies. A valuation allowance is
recorded to reduce deferred tax assets when it is determined that it is more likely than not, based
on the weight of available evidence, the Company would not be able to realize all or part of its
deferred tax assets. An assessment is required of all available evidence, both positive and
negative, to determine the amount of any required valuation allowance.
As a result of the challenging market conditions and their continued impact on the Companys
future outlook, during the fiscal year ended March 31, 2010, 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 tax assets. Accordingly, at March 31,
2010, a valuation allowance of $9.7 million was recorded.
As of September 30, 2010, the Company had a net deferred tax asset position, before valuation
allowance, of $28.9 million and the Company continued to carry a $9.7 million valuation allowance
against these deferred tax assets. These deferred tax assets were composed of temporary differences
primarily related to the book write-off of certain intangibles and net operating loss carryforwards
of $7.7 million, which will begin to expire in fiscal 2029. The Company also had foreign tax credit
carryforwards of $259,000 at September 30, 2010 which will begin to expire in 2016.
Note 21 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 zero for this
obligation for both the three and six months ended September 30, 2010 and $37,000 and $77,000
during the three and six months
18
ended September 30, 2009, respectively. At September 30, 2010 and March 31, 2010, outstanding
accrued balances due under this arrangement were zero.
The employment agreement also contained a deferred compensation component that was earned by
the former CEO upon the stock price achieving certain targets, which was to be forfeited in the
event that he did 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 paid annually $1.3 million, plus interest at 8%, for three years. At
March 31, 2010, outstanding accrued balances due under this arrangement were $1.3 million, which
were paid in full during the first quarter of fiscal 2011.
Employment Agreement FUNimation
On May 27, 2010, the Company entered into a one-year new executive employment agreement with a
key FUNimation employee in connection with his continued employment as President and Chief
Executive Officer of FUNimation (the FUNimation CEO). The new agreement, which replaced a prior
agreement entered into upon the acquisition of FUNimation, provides for a continuation of the
executive employees current base salary and an annual bonus payment consistent with the Companys
Annual Management Incentive Plan. The FUNimation CEO was also granted a restricted stock unit award
of 22,500 shares of the Companys Common Stock at the time of the agreement, which vests in three
equal installments on November 3, 2010, 2011 and 2012. Under the agreement, the FUNimation CEO is
also eligible for customary benefits that are provided to similarly-situated executives. Among
other items, the agreement requires the FUNimation CEO to cooperate and participate in the
Companys efforts to market FUNimation for potential sale. In the event that a transaction to sell
FUNimation should occur during the term of the agreement, the FUNimation CEO will receive, in
addition to any other compensation payable to him, a transaction success fee in an amount equal to
the greater of (i) $250,000, and (ii) 5% of certain transaction proceeds. The Company has not
accrued any expense related to this agreement as an accrual is not appropriate until a sale is
certain.
Note 22 Business Segments
The Company identifies its segments based on its organizational structure, which is primarily
by business activity. Operating profit represents earnings before interest expense, interest
income, income taxes and allocations of corporate costs to the respective divisions. Inter-company
sales are made at market prices. The Companys corporate office maintains a majority of the
Companys cash and revolving line of credit under its cash management policy.
Navarre operates two business segments: distribution and publishing.
Through the distribution segment, the Company distributes computer software, home video, video
games and consumer electronics and peripherals and provides complete logistics solutions. The
distribution business focuses on providing vendors and retailers with a range of value-added
services, including vendor-managed inventory, electronic and internet-based ordering, and gift card
fulfillment.
Through the publishing segment the Company owns or licenses various widely-known computer
software brands through Encore. In addition to retail publishing, Encore also sells directly to
consumers through its websites. The publishing segment packages, brands, markets and sells published
software directly to retailers, third party distributors, and to the Companys distribution
segment.
The Company also publishes and sells anime content through FUNimation Productions, Ltd.
(FUNimation). However, the results of operations and assets and liabilities of FUNimation for all
periods presented are classified as discontinued operations (see further disclosure in Note 2).
19
Financial information by reportable segment is included in the following summary (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution |
|
|
Publishing |
|
|
Eliminations |
|
|
Consolidated |
|
Three months ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales (1) |
|
$ |
118,761 |
|
|
$ |
8,656 |
|
|
$ |
(6,941 |
) |
|
$ |
120,476 |
|
Income from operations |
|
|
1,699 |
|
|
|
1,458 |
|
|
|
|
|
|
|
3,157 |
|
Income (loss) from continuing operations, before income tax (2) |
|
|
1,712 |
|
|
|
1,583 |
|
|
|
(766 |
) |
|
|
2,529 |
|
Depreciation and amortization expense |
|
|
828 |
|
|
|
163 |
|
|
|
|
|
|
|
991 |
|
Capital expenditures |
|
|
79 |
|
|
|
22 |
|
|
|
|
|
|
|
101 |
|
Total assets (3) |
|
|
117,748 |
|
|
|
32,122 |
|
|
|
(6,568 |
) |
|
|
143,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution |
|
|
Publishing |
|
|
Eliminations |
|
|
Consolidated |
|
Three months ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales (1) |
|
$ |
111,336 |
|
|
$ |
8,156 |
|
|
$ |
(6,001 |
) |
|
$ |
113,491 |
|
Income from operations |
|
|
1,274 |
|
|
|
1,727 |
|
|
|
|
|
|
|
3,001 |
|
Income from continuing operations, before income tax (2) |
|
|
1,648 |
|
|
|
2,001 |
|
|
|
(766 |
) |
|
|
2,883 |
|
Depreciation and amortization expense |
|
|
977 |
|
|
|
50 |
|
|
|
|
|
|
|
1,027 |
|
Capital expenditures |
|
|
167 |
|
|
|
7 |
|
|
|
|
|
|
|
174 |
|
Total assets (3) |
|
|
115,859 |
|
|
|
20,429 |
|
|
|
(6,040 |
) |
|
|
130,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution |
|
|
Publishing |
|
|
Eliminations |
|
|
Consolidated |
|
Six months ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales (1) |
|
$ |
214,714 |
|
|
$ |
15,710 |
|
|
$ |
(11,156 |
) |
|
$ |
219,268 |
|
Income from operations |
|
|
1,708 |
|
|
|
2,605 |
|
|
|
|
|
|
|
4,313 |
|
Income from continuing operations, before income tax (2) |
|
|
1,711 |
|
|
|
2,876 |
|
|
|
(1,556 |
) |
|
|
3,031 |
|
Depreciation and amortization expense |
|
|
1,637 |
|
|
|
245 |
|
|
|
|
|
|
|
1,882 |
|
Capital expenditures |
|
|
378 |
|
|
|
57 |
|
|
|
|
|
|
|
435 |
|
Total assets (3) |
|
|
117,748 |
|
|
|
32,122 |
|
|
|
(6,568 |
) |
|
|
143,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution |
|
|
Publishing |
|
|
Eliminations |
|
|
Consolidated |
|
Six months ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales (1) |
|
$ |
232,732 |
|
|
$ |
14,953 |
|
|
$ |
(10,778 |
) |
|
$ |
236,907 |
|
Income from operations |
|
|
1,638 |
|
|
|
2,507 |
|
|
|
|
|
|
|
4,145 |
|
Income from continuing operations, before income tax (2) |
|
|
2,316 |
|
|
|
3,109 |
|
|
|
(1,508 |
) |
|
|
3,917 |
|
Depreciation and amortization expense |
|
|
2,034 |
|
|
|
215 |
|
|
|
|
|
|
|
2,249 |
|
Capital expenditures |
|
|
310 |
|
|
|
51 |
|
|
|
|
|
|
|
361 |
|
Total assets (3) |
|
|
115,859 |
|
|
|
20,429 |
|
|
|
(6,040 |
) |
|
|
130,248 |
|
|
|
|
(1) |
|
Excluded from publishing sales above, are net sales from discontinued operations for the
three and six months ended September 30, 2010 of $9.0 million and $16.7 million, respectively,
and $8.9 million and $19.8 million, respectively, for the three and six months ended September
30, 2009. |
|
(2) |
|
Eliminations represents the interest expense previously allocated to FUNimation, which, in
accordance with ASC 205-20, is not allowed to be allocated to discontinued operations. |
|
(3) |
|
Excluded from total publishing assets above are $38.7 million and $35.9 million in assets of
discontinued operations at September 30, 2010 and 2009, respectively. |
20
The following table provides net sales by product line for each business segment (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution |
|
|
Publishing |
|
|
Eliminations |
|
|
Consolidated |
|
Three months ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software |
|
$ |
94,372 |
|
|
$ |
8,656 |
|
|
$ |
(6,941 |
) |
|
$ |
96,087 |
|
Home video |
|
|
9,997 |
|
|
|
|
|
|
|
|
|
|
|
9,997 |
|
Video games |
|
|
7,924 |
|
|
|
|
|
|
|
|
|
|
|
7,924 |
|
Consumer electronics and peripherals |
|
|
6,468 |
|
|
|
|
|
|
|
|
|
|
|
6,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
118,761 |
|
|
$ |
8,656 |
|
|
$ |
(6,941 |
) |
|
$ |
120,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution |
|
|
Publishing |
|
|
Eliminations |
|
|
Consolidated |
|
Three months ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software |
|
$ |
93,706 |
|
|
$ |
8,057 |
|
|
$ |
(6,064 |
) |
|
$ |
95,699 |
|
Home video |
|
|
8,388 |
|
|
|
99 |
|
|
|
63 |
|
|
|
8,550 |
|
Video games |
|
|
6,188 |
|
|
|
|
|
|
|
|
|
|
|
6,188 |
|
Consumer electronics and peripherals |
|
|
3,054 |
|
|
|
|
|
|
|
|
|
|
|
3,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
111,336 |
|
|
$ |
8,156 |
|
|
$ |
(6,001 |
) |
|
$ |
113,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution |
|
|
Publishing |
|
|
Eliminations |
|
|
Consolidated |
|
Six months ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software |
|
$ |
172,797 |
|
|
$ |
15,710 |
|
|
$ |
(11,156 |
) |
|
$ |
177,351 |
|
Home video |
|
|
19,066 |
|
|
|
|
|
|
|
|
|
|
|
19,066 |
|
Video games |
|
|
11,594 |
|
|
|
|
|
|
|
|
|
|
|
11,594 |
|
Consumer electronics and peripherals |
|
|
11,257 |
|
|
|
|
|
|
|
|
|
|
|
11,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
214,714 |
|
|
$ |
15,710 |
|
|
$ |
(11,156 |
) |
|
$ |
219,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution |
|
|
Publishing |
|
|
Eliminations |
|
|
Consolidated |
|
Six months ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software |
|
$ |
192,963 |
|
|
$ |
14,718 |
|
|
$ |
(11,105 |
) |
|
$ |
196,576 |
|
Home video |
|
|
19,843 |
|
|
|
235 |
|
|
|
327 |
|
|
|
20,405 |
|
Video games |
|
|
15,114 |
|
|
|
|
|
|
|
|
|
|
|
15,114 |
|
Consumer electronics and peripherals |
|
|
4,812 |
|
|
|
|
|
|
|
|
|
|
|
4,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
232,732 |
|
|
$ |
14,953 |
|
|
$ |
(10,778 |
) |
|
$ |
236,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 23 Subsequent Events
The Company evaluated its September 30, 2010 consolidated financial statements for subsequent
events through the date the consolidated financial statements were issued. The Company is not aware
of any subsequent events which would require recognition or disclosure in the consolidated
financial statements.
21
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We are a distributor, provider of complete logistics solutions and publisher of
computer software. Our business is divided into two business segments distribution and
publishing. We believe our established relationships throughout the supply chain, our broad product
offering and our leading distribution facilities permit us to offer 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 North America.
Through our distribution business, we distribute computer software, home video, video games
and consumer electronics and peripherals provided by our vendors and by our publishing business and
provide fee-based logistical services. Our distribution business focuses on providing a range of
value-added services including: vendor-managed inventory, electronic and internet-based ordering
and gift card fulfillment.
Through our publishing business, which generally has higher gross margins than our
distribution business, we own or license various widely-known computer software brands through
Encore. In addition to retail publishing, Encore also sells directly to consumers through its
websites. Our publishing business packages, brands, markets and sells directly to retailers,
third-party distributors and our distribution business.
On May 17, 2010, Encore completed the acquisition of substantially all of the assets of
Punch!, a leading provider of home and landscape architectural design and CAD software in the
United States. The acquisition of Punch! is a continuation of our strategy for growth by expanding
content ownership and gross margin enhancement.
We also publish anime content through FUNimation Productions, Ltd. (FUNimation). The results
of operations and assets and liabilities of FUNimation for all periods presented are classified as
discontinued operations (see further disclosure in Note 2 to our consolidated financial
statements).
In fiscal 2009, a former component of our publishing business, BCI, began winding down its
licensing operations related to budget home video, and the wind-down was completed during the
fourth quarter of fiscal 2010.
Executive Summary
Continuing Operations
Consolidated net sales from continuing operations for the second quarter of fiscal 2011
increased 6.2% to $120.5 million compared to $113.5 million for the second quarter of fiscal 2010.
This $7.0 million increase in net sales was due to the distribution of new product categories
within consumer electronics and peripherals, additional sales out of our Canadian distribution
facility (which opened in fiscal 2011), sales generated from the new architectural design products
and strong home video and video game product releases during the second quarter of fiscal 2011.
Our gross profit from continuing operations increased to $17.3 million or 14.4% of net sales
in the second quarter of fiscal 2011 compared to $16.7 million or 14.8% of net sales for the same
period in fiscal 2010. The $517,000 increase in gross profit was principally due to increased sales
volume.
Gross profit margin percent decreased to 14.4% in the second quarter of fiscal 2011 from 14.8%
for the same period in fiscal 2010, a total decrease of 0.4%. The decrease in gross profit margin
percent was due principally to a move to fee-based value-added services.
Total operating expenses from continuing operations for the second quarter of fiscal 2011 were
$14.1 million or 11.7% of net sales, compared to $13.7 million or 12.1% of net sales in the same
period for fiscal 2010. The $361,000 increase was primarily a result of a $783,000 increase in
various selling and marketing expenses and a $400,000 increase in various general and
administrative
22
expenses for fiscal 2011 both of which related to resources to support the new Canadian
distribution facility as well as professional fees and personnel costs related to the Punch!
acquisition and direct-to-consumer marketing initiatives. These expense increases were partially
offset by an $815,000 performance-based compensation expense recorded during the second quarter of
fiscal 2010 compared to zero during the second quarter of fiscal 2011.
Net income from continuing operations for the second quarter of fiscal 2011 was $1.5 million
or $0.04 per diluted share compared to $1.8 million or $0.05 per diluted share for the same period
last year.
Consolidated net sales from continuing operations for the six months ended September 30, 2010
were $219.3 million compared to $236.9 million for the first six months of fiscal 2010, a decrease
of 7.4%. The $17.6 million decrease in net sales was due to a decrease in distribution sales
resulting from a move to fee-based value-added services, the departure of low margin vendors as
well as overall deteriorating economic conditions, most of which occurred in the first quarter.
These decreases in revenue were partially offset by the increased sales of new product categories
within consumer electronics and peripherals, increased sales made directly to consumers and
additional sales generated from new architectural design products.
Our gross profit from continuing operations was $31.7 million or 14.5% of net sales for the
first six months of fiscal 2011, compared with $31.7 million or 13.4% of net sales for the same
period in fiscal 2010. Although sales have decreased year over year, we profited from a better product
sales mix.
Gross profit margin percent increased to 14.5% for the first six months of fiscal 2011 from
13.4% for the same period in fiscal 2010, a total increase of 1.1%. The increase in gross profit
margin percent was due principally to a more beneficial product sales mix, which included the
departure of low margin vendors, sales of new higher margin architectural design products and
higher margin sales made directly to consumers during the first six months of fiscal 2011.
Total operating expenses from continuing operations for the six months ended September 30,
2010 were $27.4 million or 12.5% of net sales, compared to $27.6 million or 11.7% of net sales in
the same period for fiscal 2010. The $137,000 decrease was primarily due to $2.1 million in
performance-based compensation expense recorded during the first six months of fiscal 2010 compared
to zero in the first six months of fiscal 2011, partially offset by $1.4 million increase in
various selling and marketing expenses and a $600,000 increase in various general and
administrative expenses for fiscal 2011 both of which related to resources to support the new
Canadian distribution facility, professional fees and additional personnel costs related to the
Punch! acquisition and direct to consumer marketing initiatives.
Net income from continuing operations for the six months ended September 30, 2010 was $1.7
million or $0.04 per diluted share compared to $2.7 million or $0.08 per diluted share for the same
period last year.
Discontinued Operations
On May 27, 2010, we announced that we engaged a third party to provide assistance in
structuring and negotiating a potential sale of FUNimation. We have committed to a plan to sell
FUNimation, are actively locating a buyer and believe that the sale of the business is probable,
although there can be no assurance regarding when or if this process will result in the
consummation of a transaction. Accordingly, all results of operations and assets and liabilities of
FUNimation for all periods presented are classified as discontinued operations, and our
consolidated financial statements, including the notes, have been reclassified to reflect such
segregation for all periods presented.
Net sales from discontinued operations for the three months ended September 30, 2010 and 2009
were $9.0 million and $8.9 million, respectively. FUNimation benefitted from increased sales of the
Dragonball Z titles during the second quarter of fiscal 2011,
whereas the second quarter of fiscal 2010
benefitted from the receipt of an agency fee related to a licensing agreement.
Net income from discontinued operations for the second quarter of fiscal 2011 was $1.7 million
or $0.05 per diluted share compared to $435,000 or $0.01 per diluted share for the same period last
year.
Net sales from discontinued operations for the six months ended September 30, 2010 and 2009
were $16.7 million and $19.8 million, respectively. FUNimation benefitted during the first six
months of fiscal 2010 from a strong release schedule of Dragonball Z titles and receipt of agency
fees related to a licensing agreement.
23
Net income from discontinued operations for the first six months of fiscal 2011 was $2.6
million or $0.07 per diluted share compared to $3.7 million or $0.10 per diluted share for the same
period last year.
Working Capital and Debt
Our business is working capital intensive and requires significant levels of working capital
primarily to finance accounts receivable and inventories. We finance our operations through cash
and cash equivalents, funds generated through operations, accounts payable and our revolving credit
facility. The timing of cash collections and payments to vendors requires usage of our revolving
credit facility in order to fund our working capital needs. We have a cash sweep arrangement with
our lender, whereby, daily, all cash receipts from our customers reduce borrowings outstanding
under the credit facility. Additionally, all payments to our vendors that are presented by the
vendor to our bank for payment increase borrowings outstanding under the credit facility. Checks
written in excess of cash balances may occur from time to time, including period ends, and
represent payments made to vendors that have not yet been presented by the vendor to our bank, and
therefore a corresponding advance on our revolving line of credit has not yet occurred. On a terms
basis, we extend varying levels of credit to our customers and receive varying levels of credit
from our vendors. We have not had any significant changes in the terms extended to customers or
provided by vendors which would have a material impact to the reported financial statements.
In March 2007, we amended and restated our $65.0 million revolving credit facility with
General Electric Corporation (the GE Facility) and amended the GE Facility again on February 5,
2009. The GE Facility called for monthly interest payments at the index rate plus 5.75%, or LIBOR
plus 4.75% and was subject to certain borrowing base requirements. The GE Facility was available
for working capital and general corporate needs and was secured by a first priority security
interest in all of the our assets, as well as the capital stock of our subsidiary companies. The GE
Facility was paid off on November 12, 2009 in connection with the new credit facility, as described
below.
On November 12, 2009, we entered into a three year, $65.0 million revolving credit facility
(the Credit Facility) with Wells Fargo Foothill, LLC as agent and lender, and Capital One
Leverage Financing Corp. as a participating lender. The Credit Facility is secured by a first
priority security interest in all of our assets, as well as the capital stock of our subsidiary
companies. Additionally, the Credit Facility calls for monthly interest payments at the banks base
rate, as defined in the Credit Facility, plus 4.0% or LIBOR plus 4.0%, at our discretion. The
entire outstanding balance of principal and interest is due in full on November 12, 2012.
At September 30, 2010 and March 31, 2010 we had $14.4 million and $6.6 million, respectively,
outstanding on the Credit Facility and, based on the facilitys borrowing base and other
requirements, we had excess availability of $29.2 million and $38.4 million, respectively. Amounts
available under the Credit Facility are subject to a borrowing base formula. Changes in the assets
within the borrowing base formula can impact the amount of availability. At September 30, 2010, we
were in compliance with all covenants under the Credit Facility and currently believe we will be in
compliance with all covenants over the next twelve months.
In association with, and per the terms of the Credit Facility, we also pay and have paid
certain facility and agent fees. Weighted average interest on the Credit Facility was 6.5% at
September 30, 2010 and was 7.5% at March 31, 2010. Such interest amounts have been, and continue to
be, 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 to analysts, shareholders, investors, news organizations and others and discussions
with management and other representatives. 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 statement will be achieved. Any forward-looking statement
24
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; some
revenues are dependent on consumer preferences and demand; a deterioration in businesses of
significant customers, due to weak economic conditions, or otherwise could harm the Companys
business; growth of non-U.S. sales and operations could increasingly subject the Company to
additional risk that could harm the Companys business; pending SEC investigation or litigation
could subject the Company to significant costs, judgments or penalties and could divert
managements attention; 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
affect 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 impact the Companys liquidity; the potential for inventory values to decline;
developing software is complex, costly and uncertain and operational errors or defects in such
products could result in liabilities and/or impair such products marketability; 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 result in potentially
unsuccessful integration of acquired companies; future divestitures of sold businesses could
materially and adversely affect the Companys financial condition and operating results; future
acquisitions or divestitures could disrupt business; the proposed
sale of FUNimation, if
consummated, could yield a sale price less than the carrying value
of the assets; 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 operating and financial flexibility;
fluctuations in stock price could adversely affect the Companys ability to raise capital or make
the Companys 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, 2010 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,
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
25
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, 2010.
Reconciliation of GAAP Net Sales to Net Sales Before Inter-Company Eliminations
In evaluating our financial performance and operating trends, management considers information
concerning our net sales before inter-company eliminations of sales that are not prepared in
accordance with generally accepted accounting principles (GAAP) in the United States. Management
believes these non-GAAP measures are useful because they provide supplemental information that
facilitates comparisons to prior periods and for the 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 |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution |
|
$ |
118,761 |
|
|
$ |
111,336 |
|
|
$ |
214,714 |
|
|
$ |
232,732 |
|
Publishing |
|
|
8,656 |
|
|
|
8,156 |
|
|
|
15,710 |
|
|
|
14,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales before inter-company eliminations |
|
|
127,417 |
|
|
|
119,492 |
|
|
|
230,424 |
|
|
|
247,685 |
|
Inter-company sales |
|
|
(6,941 |
) |
|
|
(6,001 |
) |
|
|
(11,156 |
) |
|
|
(10,778 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales as reported |
|
$ |
120,476 |
|
|
$ |
113,491 |
|
|
$ |
219,268 |
|
|
$ |
236,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
Six Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution |
|
|
98.6 |
% |
|
|
98.1 |
% |
|
|
97.9 |
% |
|
|
98.2 |
% |
Publishing |
|
|
7.2 |
|
|
|
7.2 |
|
|
|
7.2 |
|
|
|
6.3 |
|
Inter-company sales |
|
|
(5.8 |
) |
|
|
(5.3 |
) |
|
|
(5.1 |
) |
|
|
(4.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of sales, exclusive of amortization and depreciation |
|
|
85.6 |
|
|
|
85.2 |
|
|
|
85.5 |
|
|
|
86.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
14.4 |
|
|
|
14.8 |
|
|
|
14.5 |
|
|
|
13.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
4.4 |
|
|
|
3.9 |
|
|
|
4.6 |
|
|
|
3.6 |
|
Distribution and warehousing |
|
|
2.2 |
|
|
|
2.2 |
|
|
|
2.3 |
|
|
|
1.9 |
|
General and administrative |
|
|
4.3 |
|
|
|
5.1 |
|
|
|
4.7 |
|
|
|
5.2 |
|
Depreciation and amortization |
|
|
0.8 |
|
|
|
0.9 |
|
|
|
0.9 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
11.7 |
|
|
|
12.1 |
|
|
|
12.5 |
|
|
|
11.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
2.7 |
|
|
|
2.7 |
|
|
|
2.0 |
|
|
|
1.7 |
|
Interest expense |
|
|
(0.4 |
) |
|
|
(0.4 |
) |
|
|
(0.4 |
) |
|
|
(0.4 |
) |
Other income (expense), net |
|
|
(0.1 |
) |
|
|
0.3 |
|
|
|
(0.2 |
) |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes |
|
|
2.2 |
|
|
|
2.6 |
|
|
|
1.4 |
|
|
|
1.7 |
|
Income tax expense |
|
|
(0.9 |
) |
|
|
(0.9 |
) |
|
|
(0.6 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
|
1.3 |
|
|
|
1.7 |
|
|
|
0.8 |
|
|
|
1.2 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax |
|
|
1.4 |
|
|
|
0.4 |
|
|
|
1.2 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
2.7 |
% |
|
|
2.1 |
% |
|
|
2.0 |
% |
|
|
2.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Distribution Segment
The distribution segment distributes computer software, home video, video games, and consumer
electronics and peripherals, and provides fee-based logistical services.
Fiscal 2011 Second Quarter Results from Continuing Operations Compared To Fiscal 2010 Second
Quarter
Net Sales (before inter-company eliminations)
Net sales for the distribution segment were $118.8 million for the second quarter of fiscal
2011 compared to $111.3 million for the second quarter of fiscal 2010, an increase of $7.5 million
or 6.7%. Net sales increased $666,000 in the software product group to $94.4 million during the
second quarter of fiscal 2011 from $93.7 million for the same period last year due to additional
sales in Canadian markets, product revisions as well as an additional $1.0 million in sales of a
new software product. These sales increases were partially offset by the departure of two vendors
and a move to fee-based value-added services. Home video net sales increased $1.6 million to $10.0
million in the second quarter of fiscal 2011 from $8.4 million in second quarter of fiscal 2010,
primarily due to a stronger release schedule in the second quarter of fiscal 2011. Video games net
sales increased $1.7 million to $7.9 million in the second quarter of fiscal 2011 from $6.2 million
for the same period last year, due to a stronger release schedule in
the second quarter of fiscal 2011.
Consumer electronics and peripherals net sales increased $3.4 million to $6.5 million during the
second quarter of fiscal 2011 from $3.1 million for the same period last year due to the
distribution of new product categories. We believe future net sales will be dependent upon the
ability to continue to add new, appealing content and upon the strength of the retail environment
and overall economic conditions.
Gross Profit
Gross profit for the distribution segment was $12.5 million or 10.5% of net sales for the
second quarter of fiscal 2011 compared to $12.7 million or 11.5% of net sales for second quarter of
fiscal 2010. The $268,000 decrease in gross profit and the 1.0% decrease in gross profit margin
percent was primarily due to a move to fee-based value-added services. 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 $10.8 million or 9.1% of net sales
for the second quarter of fiscal 2011 compared to $11.5 million or 10.3% of net sales for the
second quarter of fiscal 2010. Overall expenses for general and administrative and depreciation and
amortization expenses decreased, which were partially offset by the increased selling and marketing
and distribution and warehousing expenses.
Selling and marketing expenses for the distribution segment were $3.5 million or 2.9% of net
sales for the second quarter of fiscal 2011 compared to $3.3 million or 3.0% of net sales for the
second quarter of fiscal 2010. The $147,000 increase was primarily due to the addition of
resources to support the new Canadian distribution facility as well as increased freight expense
due to higher volume of consigned product shipments.
Distribution and warehousing expenses for the distribution segment were $2.7 million or 2.3%
of net sales for the second quarter of fiscal 2011 compared to $2.4 million or 2.2% of net sales
for the second quarter of fiscal 2010. The $251,000 increase was primarily a result of rent related
to the Canadian distribution facility and an increase in sales volume during the second quarter of
fiscal 2011 compared to the second quarter of fiscal 2010.
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 $3.8 million or 3.1% of
net sales for the second quarter of fiscal 2011 compared to $4.7 million or 4.2% of net sales for
the second quarter of fiscal 2010. The $942,000 decrease in the second quarter of fiscal 2011 was
primarily a result of $611,000 in performance-based compensation expense recorded during the second
quarter of fiscal 2010 compared to zero during the second quarter of fiscal 2011 as well as a
decrease of $300,000 in bad debt expense due to the release of a portion of the allowance for
doubtful accounts as a result of reduced customer receivable collection risk.
27
Depreciation and amortization expense for the distribution segment was $828,000 for the second
quarter of fiscal 2011 compared to $977,000 for the second quarter of fiscal 2010. The $149,000
decrease was primarily due to certain assets becoming fully depreciated.
Operating Income
Net operating income for the distribution segment was $1.7 million for the second quarter of
fiscal 2011 compared to net operating income of $1.3 million for the second quarter of fiscal 2010.
Fiscal 2011 Six Months Results from Continuing Operations Compared With Fiscal 2010 Six Months
Net Sales (before inter-company eliminations)
Net sales for the distribution segment were $214.7 million for the first six months of fiscal
2011 compared to $232.7 million for the first six months of fiscal 2010, a decrease of $18.0
million or 7.7%. Net sales decreased $20.2 million in the software product group to $172.8 million
for the first six months of fiscal 2011 from $193.0 million for the same period last year primarily
due to the departure of two vendors (which accounted for an additional $18.9 million of sales in
the first six months of fiscal 2010), and a move to fee-based value-added services, partially
offset by $4.2 million of additional sales in Canadian markets. Home video net sales decreased
$777,000 to $19.1 million for the first six months of fiscal 2011 from $19.8 million for the first
six months of fiscal 2010, primarily due to a stronger release schedule in the first quarter of
fiscal 2010 compared to the strong product release in the second quarter of fiscal 2011. Video
games net sales decreased $3.5 million to $11.6 million for the first six months of fiscal 2011
from $15.1 million for the same period last year, due to the departure of a low margin vendor
(which accounted for an additional $4.4 million of sales in first six months of fiscal 2010),
partially offset by a strong release schedule during the second quarter of fiscal 2011. Consumer
electronics and peripherals net sales increased $6.5 million to $11.3 million during the second
quarter of fiscal 2011 from $4.8 million for the same period last year due to the distribution of
new product categories. We believe future net sales will be dependent upon the ability to continue
to add new, appealing content and upon the strength of the retail environment and overall economic
conditions.
Gross Profit
Gross profit for the distribution segment was $22.9 million or 10.7% of net sales for the
first six months of fiscal 2011 compared to $24.5 million or 10.5% of net sales for the first six
months of fiscal 2010. The $1.6 million decrease in gross profit was primarily due to a move to
fee-based value-added services and a decrease in sales volume for the first six months of fiscal
2011 compared to the same period of fiscal 2010. The 0.2% increase in gross profit margin
percentage was due to the departure of low margin vendors. We expect gross profit rates to
fluctuate depending principally upon the make-up of products sold.
Operating Expenses
Total operating expenses for the distribution segment were $21.2 million or 9.9% of net sales
for the first six months of fiscal 2011 compared to $22.9 million or 9.8% of net sales for the same
period of fiscal 2010. Overall expenses for general and administrative and depreciation and
amortization expenses decreased, which were partially offset by the increased selling and marketing
and distribution and warehousing expenses.
Selling and marketing expenses for the distribution segment were $6.8 million or 3.2% of net
sales for the first six months of fiscal 2011 compared to $6.4 million or 2.7% of net sales for the
first six months of fiscal 2010. The $373,000 increase was primarily due to the addition of
resources to support the new Canadian distribution facility as well as increased freight costs
primarily related to consigned product shipments.
Distribution and warehousing expenses for the distribution segment were $5.2 million or 2.4%
of net sales for the first six months of fiscal 2011 compared to $4.5 million or 1.9% of net sales
for the same period of fiscal 2010. The $647,000 increase was primarily due to rent and other
warehouse costs incurred in connection with the opening of the new Canadian distribution facility.
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
28
$7.7 million or 3.6% of net sales for the first six months of fiscal 2011 compared to $9.9
million or 4.2% of net sales for the first six months of fiscal 2010. The $2.2 million decrease was
primarily a result of a $1.5 million performance based compensation accrual recorded during the
first six months of fiscal 2010 compared to zero recorded during the first six months of fiscal
2011, a decrease of $300,000 in bad debt expense due to the release of a portion of the allowance
for doubtful accounts as a result of reduced customer receivable collection risk, IT system support
savings and reductions in consulting fees.
Depreciation and amortization for the distribution segment was $1.6 million for the first six
months of fiscal 2011 compared to $2.0 million for the first six months of fiscal 2010. The
$397,000 decrease was primarily due to certain assets becoming fully depreciated.
Operating Income
Net operating income for the distribution segment was $1.7 million for the first six months of
fiscal 2011 compared to net operating income of $1.6 million for the same period of fiscal 2010.
Publishing Segment
The publishing segment owns or licenses various widely-known computer software brands through
Encore. In addition to retail publishing, Encore also sells directly to consumers through its
websites.
We also publish and sell anime content through FUNimation Productions, Ltd. (FUNimation).
The results of operations and assets and liabilities of FUNimation for all periods presented are
classified as discontinued operations (see further disclosure in Note 2 to our consolidated
financial statements).
In fiscal 2009, a former component of our publishing business, BCI, began winding down its
licensing operations related to budget home video, and the wind-down was completed during the
fourth quarter of fiscal 2010.
Fiscal 2011 Second Quarter Results from Continuing Operations Compared To Fiscal 2010 Second
Quarter
Net Sales (before inter-company eliminations)
Net sales for the publishing segment were $8.7 million for the second quarter of fiscal 2011
compared to $8.2 million for the second quarter of fiscal 2010. The $500,000 or 6.1% increase in
net sales was primarily due to sales generated from the addition of the Punch! line of home design
products and increased direct to consumers sales, partially offset by a decline in the retail sales
of existing print productivity and gaming products during the second quarter of fiscal 2011. We
believe sales results in the future will be dependent upon the ability to continue to add new,
appealing content and upon the strength of the retail environment.
Gross Profit
Gross profit for the publishing segment was $4.8 million or 55.2% of net sales for the second
quarter of fiscal 2011 compared to $4.0 million or 49.0% of net sales for the second quarter of
fiscal 2010. The $785,000 increase in gross profit and the 6.2% increase in gross profit margin
percentage were both a result of increased sales of new higher margin architectural design products
and higher margin direct to consumer sales. We expect gross profit rates to fluctuate depending
principally upon the make-up of product sales.
Operating Expenses
Total operating expenses increased $1.0 million for the publishing segment to $3.3 million or
38.4% of net sales for the second quarter of fiscal 2011, from $2.3 million or 27.8% of net sales
for the second quarter of fiscal 2010. Overall expenses increased in all categories of operating
expenses.
Selling and marketing expenses for the publishing segment were $1.8 million or 20.7% of net
sales for the second quarter of fiscal 2011 compared to $1.1 million or 13.7% of net sales for the
second quarter of fiscal 2010. The $668,000 increase was primarily due to the addition of sales
personnel related to the Punch! acquisition and additional advertising expenses related to the
direct to consumer business.
29
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 $1.4 million or 15.8% of
net sales for the second quarter of fiscal 2011 compared to $1.1 million or 13.5% of net sales for
the second quarter of fiscal 2010. The $272,000 increase was primarily due to additional
professional fees related to the Punch! acquisition and the hiring of additional personnel,
partially offset by $204,000 of performance-based compensation expense recorded during the second
quarter of fiscal 2010 compared to zero recorded during the second quarter of fiscal 2011.
Depreciation and amortization expense for the publishing segment was $163,000 for the second
quarter of fiscal 2011 compared to $50,000 for the second quarter of fiscal 2010. The $113,000
increase in amortization expense was associated with the amortization of the Punch!
acquisition-related intangibles.
Operating Income
The publishing segment
had net operating income of $1.5 million for
the second quarter of fiscal 2011 compared to $1.7 million for the second quarter of fiscal 2010.
Fiscal 2011 Six Months Results from Continuing Operations Compared With Fiscal 2010 Six Months
Net Sales (before inter-company eliminations)
Net sales for the publishing segment were $15.7 million for the first six months of fiscal
2011 compared to $15.0 million for the same period of fiscal 2010. The $757,000 or 5.1% increase in
net sales over the prior year six months was primarily due to sales generated from the addition of
the Punch! line of home design products and increased direct to consumer sales, partially offset by
a decline in the retail sales of existing print productivity and gaming products in the first six
months of fiscal 2011. We believe sales results in the future will be dependent upon the ability to
continue to add new, appealing content and upon the strength of the retail environment.
Gross Profit
Gross profit for the publishing segment was $8.8 million or 56.0% of net sales for the first
six months of fiscal 2011 compared to $7.2 million or 48.3% of net sales for the first six months
of fiscal 2010. The $1.6 million increase in gross profit and 7.7% increase in gross profit margin
percent were both primarily a result of improved margins from product sales mix and reduced royalty
rates payable to certain licensors. We expect gross profit rates to fluctuate depending principally
upon the make-up of product sales.
Operating Expenses
Total operating expenses increased $1.5 million for the publishing segment to $6.2 million for
the first six months of fiscal 2011 from $4.7 million for the first six months of fiscal 2010.
Overall expenses increased in all categories of operating expenses.
Selling and marketing expenses for the publishing segment were $3.4 million or 21.6% of net
sales for the first six months of fiscal 2011 compared to $2.1 million or 14.3% of net sales for
the first six months of fiscal 2010. The $1.3 million increase was principally due to the addition
of sales personnel related to the Punch! acquisition and additional advertising expenses related to
the direct to consumer business.
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 increased to $2.6 million or
16.3% of net sales for the first six months of fiscal 2011 compared to $2.4 million or 15.8% of net
sales for the first six months of fiscal 2010. The $191,000 increase was due to additional
professional fees related to the Punch! acquisition and the hiring of additional personnel,
partially offset by $507,000 of performance-based compensation expense recorded during the second
quarter of fiscal 2010 compared to zero recorded during the second quarter of fiscal 2011.
Depreciation and amortization for the publishing segment was $245,000 for the first six months
of fiscal 2011 compared to $215,000 for the first six months of fiscal 2010. The $30,000 increase
was associated with the amortization of the Punch! acquisition-related intangibles net of a
decrease related to the final write-off of uncollectable masters during the first quarter of fiscal
2010.
30
Operating Income
The publishing segment had net operating income of $2.6 million for the first six months of
fiscal 2011 compared to net operating income of $2.5 million for the first six months of fiscal
2010.
Consolidated Other Income and Expense
Interest
income (expense), net was expense of $456,000 for second quarter of
fiscal 2011 compared to expense of
$482,000 for second quarter of fiscal 2010. Interest income (expense), net was expense of $851,000 for the
first six months of fiscal 2011 compared to expense of $1.0 million for the same period of fiscal 2010. The
decrease in interest expense for both the second quarter and first six months of fiscal 2011 was a
result of a reduction in borrowings from the second quarter of fiscal 2010.
Other income (expense), net, for the three and six months ended September 30, 2010 was net
expense of $172,000 and $431,000, which amounts consisted of foreign exchange loss. Other income
(expense), net, for the three and six months ended September 30, 2010 was net income of $364,000
and $815,000, respectively which amounts consisted of foreign exchange gain.
Consolidated Income Tax Expense from Continuing Operations
We recorded income tax expense from continued operations of $1.1 million for the second
quarter of fiscal 2011 or an effective tax rate of 42.4% compared to $1.0 million or an effective
tax rate of 36.0% for the second quarter of fiscal 2010. We recorded income tax expense from
continued operations for the first six months of fiscal 2011 of $1.4 million or an effective tax
rate of 45.2% compared to $1.2 million or an effective tax rate of 31.1% for the first six months
of fiscal 2010. The increase in our effective tax rate for both the three and six months ended
September 30, 2010 was primarily due to the impact of various items recorded in the second quarter
of fiscal 2011 primarily arising from the income tax return for the period ended March 31, 2010.
Our state rate has been adjusted for additional state filings due to the Punch! acquisition and
changes to state apportionment rules. Additionally, an increase in the reserve for uncertain tax
positions that we recorded in the first six months of fiscal 2011 resulted in the higher impact on
the effective tax rate due to lower pretax income from continuing operations compared to the three
and six months ended September 30, 2009.
Deferred tax assets are evaluated by considering historical levels of income, estimates of
future taxable income streams and the impact of tax planning strategies. A valuation allowance is
recorded to reduce deferred tax assets when it is determined that it is more likely than not, based
on the weight of available evidence, we would not be able to realize all or part of our deferred
tax assets. An assessment is required of all available evidence, both positive and negative, to
determine the amount of any required valuation allowance. During fiscal 2009, we recorded a
valuation allowance against the deferred tax assets of $21.4 million, which represented the amount
of temporary differences we do not anticipate recognizing with future projected income, or by net
operating loss carrybacks. During fiscal 2010, we released $11.7 million of the valuation allowance
against these deferred tax assets, thus reducing the valuation allowance to $9.7 million.
We adopted the provisions of ASC 740-10 on April 1, 2007. We recognize interest accrued
related to unrecognized income tax benefits (UTBs) in the provision for income taxes. At March
31, 2010, interest accrued was approximately $147,000 which was net of federal and state tax
benefits and total UTBs net of federal and state tax benefits that would impact the effective tax
rate if recognized were $716,000. During the six months ended September 30, 2010, an additional
$123,000 of UTBs were accrued, which was net of $29,000 of deferred federal and state income tax
benefits. As of September 30, 2010, interest accrued was $178,000 and total UTBs, net of deferred
federal and state income tax benefits that would impact the effective tax rate if recognized, were
$839,000.
Consolidated Net Income from Continuing Operations
We recorded net income from continuing operations of $1.5 million for the second quarter of
fiscal 2011 compared to net income from continuing operations of $1.8 million for the second
quarter of fiscal 2010. For the first six months of fiscal 2011, we recorded net income from
continuing operations of $1.7 million, compared to net income from continuing operations of $2.7
million for the same period last year.
31
Discontinued Operations
On May 27, 2010, we announced that we engaged a third party to assist in structuring and
negotiating a potential sale of FUNimation. Additionally,
we recently announced that we are currently soliciting and evaluating
indications of interest from potential purchasers in connection with the FUNimation sale process
and that we hope to be able to identify a buyer and move forward with a potential sale transaction
before the calendar year end. We have committed to a plan to sell FUNimation, are actively
locating a buyer and believe that the sale of the business is probable, although there can be no
assurance regarding when or if this process will result in the consummation of a transaction.
Accordingly, all results of operations and assets and liabilities of FUNimation for all periods
presented are classified as discontinued operations, and our consolidated financial statements,
including the notes, have been reclassified to reflect such segregation for all periods presented.
We recorded net income from discontinued operations of $1.7 million, net of tax, for the
second quarter of fiscal 2011 compared to net income of $435,000, net of tax, for the second
quarter of fiscal 2010. We benefitted from improved margins due to product mix and zero performance
based compensation accrual recorded during the first six months of fiscal 2011 compared to $200,000
recorded during the first six months of fiscal 2010.
For the first six months of fiscal 2011, we recorded net income from discontinued operations
of $2.6 million, net of tax, compared to net income of $3.7 million, net of tax, for the first six
months of fiscal 2010. The reduction in net income was driven by a decline in sales volume,
partially offset by a zero performance based compensation accrual recorded during the first six
months of fiscal 2011 compared to $500,000 recorded during the first six months of fiscal 2010.
Consolidated Net Income
For the second quarter of fiscal 2011, we recorded net income of $3.1 million compared to $2.3
million for the same period last year. For the first six months of fiscal 2011, we recorded net
income of $4.2 million, compared to net income of $6.4 million for the same period last year.
Market Risk
As of September 30, 2010 we had $14.4 million of indebtedness, which was subject to interest
rate fluctuations. Based on these borrowings, a 100-basis point change in LIBOR or index rate would
cause our annual interest expense to change by $144,000.
Currently, we have a limited amount of selling and purchasing activity in Canada which creates
receivables and accounts payables denominated in Canadian dollars. 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. These gains and/or losses are reported as a separate component
within other income and expense.
During the three and six months ended September 30, 2010 we had foreign exchange loss of
$172,000 and $431,000, respectively compared to foreign exchange gain of $364,000 and $815,000,
respectively during the three and six months ended September 30, 2009.
Additionally, during the first six months of fiscal 2011 we began to distribute product out of
a warehouse facility located in Toronto, Canada. The related assets and liabilities are denominated
in Canadian currency which are translated into the U.S. dollar on the last day of each month. These
unrealized gains and/or losses were excluded from income and are reported as a separate component
of shareholders equity until realized. At September 30, 2010 we had foreign translation gain of
$129,000 compared to zero at March 31, 2010.
Though changes in the exchange rate are out of our control, we periodically monitor our
Canadian activities and may seek to mitigate exposure from the exchange rate fluctuations by
limiting these activities or taking other actions, such as exchange rate hedging.
32
Seasonality and Inflation
Quarterly operating results are affected by the seasonality of our business. Specifically, our
third quarter (October 1-December 31) typically accounts for our largest quarterly revenue figures
and a substantial portion of our earnings. 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
continue to 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 used in operating activities for the first six months of fiscal 2011 was $4.0 million and
cash provided by operating activities was $123,000 for the same period last year.
The net cash used in operating activities for the first six months of fiscal 2011 mainly
reflected our net income, combined with various non-cash charges, including depreciation and
amortization of $1.9 million, amortization of debt acquisition costs of $298,000, amortization of
software development costs of $219,000, share-based compensation of $468,000, a decrease in
deferred income taxes of $2.2 million, offset by our working capital demands. The following are
changes in the operating assets and liabilities during the first six months of fiscal 2011:
accounts receivable decreased $5.3 million, as a result of collection efforts; inventories increased
$5.7 million, primarily reflecting additional
inventory related to the opening of our Canadian distribution facility and the timing of other
inventory purchases; prepaid expenses increased $194,000, primarily resulting from prepaid royalty
advances; income taxes receivable decreased $94,000 and income taxes payable increased $392,000,
primarily due to the timing of required tax payments and tax refunds; accounts payable decreased
$6.0 million, primarily as a result of timing of payments and purchases; and accrued expenses
decreased $5.0 million, primarily due to the payment of the performance-based cash compensation
accrual.
The net cash provided by operating activities in the first six months of fiscal 2010 of
$123,000 was primarily the result of net income, combined with various non-cash charges, including
depreciation and amortization of $2.2 million, amortization of debt acquisition costs of $217,000,
share-based compensation of $529,000, a decrease in deferred income taxes of $3.1 million, a
decrease in deferred compensation of $400,000, offset by our working capital demands.
Investing Activities
Cash flows used in investing activities totaled $9.0 million for the first six months of
fiscal 2011 and $1.3 million for the same period last year.
The acquisition of Punch! totaled $8.1 million in the first six months of fiscal 2011.
The investment in software development totaled $460,000 and $958,000 for the first six months
of fiscal 2011 and 2010, respectively.
The acquisition of property and equipment totaled $435,000 and $361,000 in the first six
months of fiscal 2011 and 2010, respectively. Purchases of property and equipment in fiscal 2011
consisted primarily of computer equipment and assets related to our Canadian distribution facility.
Purchases of property and equipment in fiscal 2010 consisted primarily of computer equipment.
Financing Activities
Cash flows provided by financing activities totaled $10.4 million for the first six months of
fiscal 2011 and cash flows used in financing activities totaled $111,000 for the first six months
of fiscal 2010.
33
Proceeds from the revolving line of credit were $99.7 million, repayments of the revolving
line of credit were $91.9 million, and we had a payment of deferred compensation of $1.3 million
and an increase in checks written in excess of cash balances of $4.0 million for the first six
months of fiscal 2011.
Proceeds from the revolving line of credit were $112.0 million, repayments of the revolving
line of credit were $116.2 million, and we had increased debt acquisition costs of $246,000 and an
increase in checks written in excess of cash balances of $4.4 million for the first six months of
fiscal 2010.
Capital Resources
In March 2007, we amended and restated our $65.0 million revolving credit facility with
General Electric Corporation (the GE Facility) and amended the GE Facility again on February 5,
2009. The GE Facility called for monthly interest payments at the index rate plus 5.75%, or LIBOR
plus 4.75% and was subject to certain borrowing base requirements. The GE Facility was available
for working capital and general corporate needs and was secured by a first priority security
interest in all of our assets, as well as the capital stock of our subsidiary companies. The GE
Facility was paid off on November 12, 2009 in connection with the new credit facility, as described
below.
On November 12, 2009, we entered into a three year, $65.0 million revolving credit facility
(the Credit Facility) with Wells Fargo Foothill, LLC as agent and lender, and Capital One
Leverage Financing Corp. as a participating lender. The Credit Facility is secured by a first
priority security interest in all of our assets, as well as the capital stock of our subsidiary
companies. Additionally, the Credit Facility calls for monthly interest payments at the banks base
rate (as defined in the Credit Facility) plus 4.0%, or LIBOR plus 4.0%, at our discretion. The
entire outstanding balance of principal and interest is due in full on November 12, 2012. Amounts
available under the Credit Facility are subject to a borrowing base formula. Changes in the assets
within the borrowing base formula can impact the amount of availability. At September 30, 2010 we
had $14.4 million outstanding and based on the facilitys borrowing base and other requirements, we
had excess availability of $29.2 million.
In association with, and per the terms of the Credit Facility, we also pay and have paid
certain facility and agent fees. Weighted average interest on the Credit Facility was 6.5% at
September 30, 2010 and was 7.5% at March 31, 2010. Such interest amounts have been and continue to
be payable monthly.
Under the Credit Facility we are required to meet certain financial and non-financial
covenants. The financial covenants include a variety of financial metrics that are used to
determine our overall financial stability and include limitations on our capital expenditures, a
minimum ratio of adjusted EBITDA to fixed charges, limitations on prepaid royalties and licenses
and a borrowing base availability requirement. At September 30, 2010, we were in compliance with
all covenants under the revolving facility. We currently believe we will be in compliance with the
Credit Facility covenants over the next twelve months.
Liquidity
We finance our operations through cash and cash equivalents, funds generated through
operations, accounts payable and our revolving credit facility. The timing of cash collections and
payments to vendors requires usage of our revolving credit facility in order to fund our working
capital needs. We have a cash sweep arrangement with our lender, whereby, daily, all cash receipts
from our customers reduce borrowings outstanding under the Credit Facility. Additionally, all
payments to our vendors that are presented by the vendor to our bank for payment increase
borrowings outstanding under the Credit Facility. Checks written in excess of cash balances may
occur from time to time, including period ends, and represent payments made to vendors that have
not yet been presented by the vendor to our bank, and therefore a corresponding advance on our
revolving line of credit has not yet occurred. On a terms basis, we extend varying levels of credit
to our customers and receive varying levels of credit from our vendors. We have not had any
significant changes in the terms extended to customers or provided by vendors which would have a
material impact on the reported financial statements.
We continually monitor our actual and forecasted cash flows, our liquidity and our capital
resources. We plan for potential fluctuations in accounts receivable, inventory and payment of
obligations to creditors and unbudgeted business activities that may arise during the year as a
result of changing business conditions or new opportunities. In addition to working capital needs
for the general and administrative costs of our ongoing operations, we have cash requirements for
among other things: (1) investments in our publishing segment in order to license content and
develop software for established products; (2) investments in our distribution
34
segment in order to sign exclusive distribution agreements; (3) equipment needs for our
operations; and (4) asset or company acquisitions. During the first six months of fiscal 2011, we
invested approximately $1.5 million, before recoveries, in connection with the acquisition of
licensed and exclusively distributed product in our publishing and distribution segments.
Additionally, we invested approximately $8.1 million related to the Punch! acquisition.
Our $65.0 million Credit Facility is subject to certain borrowing base requirements and is
available for working capital and general corporate needs. As of September 30, 2010, we had $14.4
million outstanding and excess availability of $29.2 million, based on the terms of the agreement.
Amounts available under the Credit Facility are subject to a borrowing base formula. Changes in the
assets within the borrowing base formula can impact the amount of availability.
We currently believe cash and cash equivalents, funds generated from the expected results of
operations, funds available under our Credit Facility and vendor terms will be sufficient to
satisfy our working capital requirements, other cash needs, and to finance expansion plans and
strategic initiatives for at least the next 12 months, absent significant acquisitions.
Additionally, with respect to long term liquidity, we have an effective shelf registration
statement covering the offer and sale of up to $20.0 million of common and/or preferred shares. Any
growth through acquisitions would likely require the use of additional equity or debt capital, some
combination thereof, or other financing.
Contractual Obligations
The following table presents information regarding contractual obligations as of September 30,
2010 by fiscal year (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
|
than 1 |
|
|
1 3 |
|
|
3 5 |
|
|
than 5 |
|
|
|
Total |
|
|
Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
Operating leases (1) |
|
$ |
17,297 |
|
|
$ |
1,178 |
|
|
$ |
4,957 |
|
|
$ |
4,299 |
|
|
$ |
6,863 |
|
Capital leases (2) |
|
|
116 |
|
|
|
29 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
Contingent payment acquisition (3) |
|
|
948 |
|
|
|
|
|
|
|
948 |
|
|
|
|
|
|
|
|
|
Note payable acquisition (3) |
|
|
1,002 |
|
|
|
|
|
|
|
1,002 |
|
|
|
|
|
|
|
|
|
License and distribution agreements |
|
|
2,816 |
|
|
|
606 |
|
|
|
1,690 |
|
|
|
520 |
|
|
|
|
|
Contractual
obligations of discontinued operations |
|
|
12,428 |
|
|
|
4,644 |
|
|
|
4,881 |
|
|
|
1,262 |
|
|
|
1,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
34,607 |
|
|
$ |
6,457 |
|
|
$ |
13,565 |
|
|
$ |
6,081 |
|
|
$ |
8,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See further disclosure in Note 12 to our consolidated financial statements. |
|
(2) |
|
See further disclosure in Note 13 to our consolidated financial statements. |
|
(3) |
|
See further disclosure in Note 3 to our consolidated financial statements. |
We have excluded liabilities resulting from uncertain tax positions of $1.4 million from the
table above because we are unable to make a reasonably reliable estimate of the period of cash
settlement with the respective taxing authorities. Additionally, interest payments related to the
Credit Facility have been excluded as future interest rates are uncertain.
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.
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
35
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 12 to our consolidated financial statements
included herein.
Item 1A. Risk Factors
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, 2010. There have been no material changes from the risk factors
previously disclosed in our Annual Report on Form 10-K, except as
disclosed within our Quarterly Report on Form 10-Q for the period
ended June 30, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved).
Item 5. Other Information
None.
Item 6. Exhibits
(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) |
36
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: November 9, 2010 |
|
/s/ Cary L. Deacon
|
|
|
|
Cary L. Deacon |
|
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date: November 9, 2010 |
|
/s/ J. Reid Porter
|
|
|
|
J. Reid Porter |
|
|
|
Chief Operating Officer and Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
37