e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 0-22982
NAVARRE CORPORATION
(Exact name of registrant as specified in its charter)
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Minnesota
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41-1704319 |
(State or other jurisdiction of
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(IRS Employer |
incorporation or organization)
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Identification No.) |
7400 49th Avenue North, New Hope, MN 55428
(Address of principal executive offices)
(763) 535-8333
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered |
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Common Stock, No par value
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The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the Common Stock, no par value per share, held by non-affiliates of
the registrant as of September 30, 2006 was approximately $128,915,249 (based on the closing price
of such stock as quoted on the NASDAQ Global Market of $4.02 on such date).
The number of shares outstanding of the registrants Common Stock, no par value per share, was
36,072,695 as of June 12, 2007.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference to portions of the registrants Proxy Statement for
the 2007 Annual Meeting of Shareholders.
NAVARRE CORPORATION
FORM 10-K
TABLE OF CONTENTS
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PART I
Item 1 Business
Overview
Navarre Corporation is a distributor and publisher of physical and digital home entertainment
and multimedia products, including PC software, CD audio, DVD video, video games and accessories.
Since inception in 1983, we have established distribution relationships with major retailers
including Best Buy, Wal-Mart/Sams Club, Circuit City, Staples and Costco, and we have historically
distributed to over 19,000 retail and distribution center locations throughout the United States
and Canada. We believe our established relationships throughout the supply chain, our broad product
offering and our distribution facility permit us to offer industry-leading home entertainment and
multimedia products to our retail customers and to provide access to attractive retail channels for
the publishers of such products.
Historically, our business has focused on providing distribution services for third party
vendors. Over the past several years, we have expanded our business to include the licensing and
publishing of home entertainment and multimedia software content, primarily through our
acquisitions of software publishers in select markets. By expanding our product offerings through
such acquisitions, we believe we can leverage both our sales experience and distribution
capabilities to drive increased retail penetration and more effective distribution of such
products, and enable content developers and publishers that we acquire to focus more on their core
competencies.
Our business is divided into three segments Distribution, Publishing and Other.
Distribution. Through our distribution business, we distribute and provide fulfillment
services in connection with a variety of finished goods that are provided by our vendors, which
include PC software and video game publishers and developers, independent music labels (through May 31,
2007), major music labels (through December 2005), and independent and major motion picture
studios. These vendors provide us with PC software, CD audio, DVD video, and video games and
accessories which we, in turn, distribute to our retail customers. Our distribution business
focuses on providing vendors and retailers with a range of value-added services including:
vendor-managed inventory, Internet-based ordering, electronic data interchange (EDI) services,
fulfillment services and retailer-oriented marketing services. Our vendors include Symantec
Corporation, Adobe Systems, Inc., Webroot, Inc., and Dreamcatcher Interactive, Inc.
Publishing. Through our publishing business, which generally has higher gross margins than our
distribution business, we own or license various PC software, CD audio and DVD video titles, and
other related merchandising and broadcasting rights. Our publishing business packages, brands,
markets and sells directly to retailers, third party distributors and our distribution business.
Our publishing business currently consists of Encore Software, Inc. (Encore), BCI Eclipse
Company, LLC (BCI), FUNimation Productions, Ltd. and The FUNimation Store, Ltd. (together,
FUNimation). Encore, which we acquired in July 2002, licenses and publishes personal
productivity, genealogy, utility, education and interactive gaming PC products, including titles
such as Print Shop, Print Master, PC Tools Spyware Doctor, Monopoly Here and Now and Hoyle PC
Gaming products. BCI, which we acquired in November 2003, is a provider of niche DVD and video
products such as He-man and the Masters of the Universe, Pride Fighting Championship, Classic
Cartoons and in-house produced CDs and DVDs. FUNimation, acquired on May 11, 2005, is the leading
anime content provider in the United States and licenses and publishes titles such as Dragon Ball
Z, Fullmetal Alchemist, Trinity Blood, Samari Seven, Basilisk, Yu Yu Hakusho, Negima and Robotech.
Our digital strategy consists primarily of the sale of home video titles through online digital
retailers such as iTunes. The Company also continues to explore additional digital distribution
opportunities for other product categories.
Other. The other segment consists of a variable interest entity (VIE), Mix & Burn, Inc.
(Mix & Burn), included in our consolidated results during the period commencing December 31, 2003
and ending December 31, 2005, in accordance with the provisions of FASB Interpretation Number 46
(revised December 2003), Consolidation of Variable Interest Entities (FIN 46(R)). Mix & Burn
designs and markets digital music delivery services for music and other specialty retailers. During
the three months ended December 31, 2005, the Company deconsolidated Mix & Burn, as the Company was
no longer deemed to be the primary beneficiary of this VIE.
On May 31, 2007,
the Company and its wholly-owned subsidiary, Navarre Entertainment Media,
Inc. (NEM), sold 100% of the outstanding capital
stock of NEM for $6.5 million in cash, plus the assignment to
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the Company at closing of the trade receivables of
NEM. The purchase price is subject to the completion of certain
customary closing conditions. For the fiscal years ended March 31, 2007, 2006 and 2005 net sales
for the independent music business were $52.0 million,
$62.0 million and $62.9 million, respectively. The Company will reflect the transaction in the
first quarter of fiscal 2008 as discontinued operations. This transaction will divest the Company of all its independent
music distribution activities.
Business Strategy
We seek to continue to grow our distribution and publishing businesses, through a combination
of organic growth and targeted acquisitions, intended to leverage the complementary strengths of
our businesses. We intend to execute this strategy as follows:
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Acquisitions of Attractive Content. We seek to continue to expand our
publishing business through the acquisition or licensing of well-established titles or
other attractive content. We believe these acquisitions and/or licenses will help position
us to increase our net sales in our publishing business, which historically has had higher
margins than our distribution business, and will allow us to distribute additional home
entertainment and multimedia content through our distribution business. In addition, we
believe that by allowing the management of these publishing companies to focus on content
licensing and marketing rather than on distribution operations, they will be able to devote
more time and greater resources to their core competency, publishing. We believe that
leveraging the core assets and strengths of our distribution business will provide broader
retail penetration, distribution expertise and other services for our content and increase
sales of our publishing products. |
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Distribute a Broader Range and Larger Volume of Products. We seek to distribute
a broader range and larger volume of home entertainment and multimedia products to our
retail customers by providing a broad selection of products and capitalizing on our
customer relationships. We seek to capture additional business from new and existing retail
customers by providing them with a lower all-in cost of procuring merchandise and getting
product to retailers shelves through efficient distribution. We expect that providing
additional products to retailers will enable us to gain category management opportunities
and enhance our reputation for product distribution expertise. We believe our strategic
account associates located throughout the United States and Canada will help position us to
improve the retail penetration of our published products to new and existing retail
customers. We may also seek selective acquisitions of distribution businesses. |
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Integrating Our Technology and Systems with Retailers. We seek to enhance the
link in the supply chain between us and our vendors and retail customers through the
integration of our respective information and technology systems, including inventory
management tools, replenishment systems and point-of-sale information. We believe this
integration will lead to better in-stock levels of product, improved on-time arrivals of
product to the customer, enhanced inventory management and lower return rates for our
customers, thereby strengthening customer relationships. |
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Providing Value-Added Services. Due to increasing retailer logistic needs and
demands, including new technology standards such as GTIN(R) (global trade item number),
RFID (radio frequency identification devices) and VMI (vendor managed inventory), we
believe many publishers will be required to decide whether to spend additional resources to
update their distribution capabilities or to select a distributor, such as us, that intends
to offer such services. We believe implementing and offering these and other technologies
should position us to capture additional business from existing and new publishers. |
Our overall goal is to create a structure that leverages the complementary strengths of our
businesses: publishing, which provides brand management and marketing, licensing, and home video
sales; and distribution, which provides enhanced distribution, logistics and customer relations.
Competitive Strengths
We believe that we possess the following competitive strengths:
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Value-Added Services. We offer a wide range of distribution services and
procurement solutions intended to capitalize on our broad understanding of the products we
distribute, the procurement process and the supply chain, as well as our logistics
expertise and systems capabilities. We believe our advanced distribution infrastructure
enables us to provide customized procurement programs for our retail customers at a lower
overall cost than many of our competitors. In addition, we believe our information
technology systems provide cost-effective interfacing with our customers information
technology systems, |
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supporting integration of the procurement process. We believe our focus on providing
customer-specific and cost-effective solutions is a key benefit that we provide to our retail
customers. |
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Broad Product Offering. We provide our retail customers with a broad selection
of home entertainment and multimedia products that we believe allows us to better serve
their home entertainment and multimedia product requirements. In addition, we regularly
survey the markets we serve for new products with significant retail potential, that come
from publishers we currently have relationships with as well as from those for which we
have not distributed previously. |
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Established Content in our Publishing Business. We currently license a number
of well-known home entertainment and multimedia software titles. Encore publishes leading
titles in the education, productivity, kids and games software categories, including Print
Shop, Print Master, PC Tools Spyware Doctor, and Hoyle PC Gaming Products. In addition,
BCI currently publishes home video for He-man and the Masters of the Universe, the
television shows Rides and Overhaulin, both featured on The Learning Channel, and PRIDE
Fighting Championships, featured on Pay-Per-View. Through FUNimation we also license and
distribute a portfolio of established anime and childrens entertainment titles in the
United States, including Dragon Ball Z, Fullmetal Alchemist, Trinity Blood, Samari Seven,
Basilisk, Yu Yu Hakusho, Negima and Robotech. |
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Established Relationships with Publishers and Retailers. Since our founding in
1983, we have established distribution relationships with major retailers including Best
Buy, Wal-Mart/Sams Club, Circuit City, Staples and Costco, and we have historically
distributed to over 19,000 retail and distribution center locations throughout the United
States and Canada. We believe our strong relationships throughout the supply chain, broad
product offering and our distribution facility permit us to offer industry-leading home
entertainment and multimedia products to our retail customers and provide access to
attractive retail channels for publishers of these products. We believe our relationships
with leading publishers and our efficient distribution of their products should provide
opportunities for us to secure distribution rights to leading products in the future. We
believe these relationships give us a competitive advantage in the markets in which we
operate and provide us with attractive channels to distribute current and future products
offered by our publishing business. |
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Efficient Operations and Operating Leverage. We believe our competitive
position is enhanced by our efficient operations, including the extensive use of automation
and technology in our distribution facility; centralized purchasing, accounting and
information systems; and economies of scale. Our warehouse facility adjacent to our
corporate headquarters provides us with the ability to efficiently service our vendors and
retail customers, and the capacity to increase the number of products we distribute. |
Distribution Markets
PC Software
According to The NPD Group, the PC software industry achieved $3.9 billion in sales on a
trailing 12 month basis ending December 31, 2006. Categories that experienced an increase during
this time period were business and finance products.
We presently have relationships with PC software publishers such as Symantec Corporation,
Roxio, Inc., Adobe Systems Inc., Trend Micro, Inc., NC Interactive Inc., CA, and Webroot Software,
Inc. These relationships are important to our distribution business and during the fiscal year
ended March 31, 2007 each of these publishers accounted for more than $10.0 million in revenues. In
the case of Symantec, sales accounted for approximately $81.9 million in net sales in the fiscal
year ended March 31, 2007 and $86.9 million in net sales for the fiscal year ended March 31, 2006.
During the past fiscal year, we added several publishers to our distribution roster.
While we have agreements in place with our major suppliers, they are generally short-term in
nature with terms of one to three years. They typically cover the right to distribute in the
United States and Canada, do not restrict the publisher from distributing their products through
other distributors or directly to retailers and they do not guarantee product availability to us
for distribution. Our agreements with these publishers provide us with the ability to purchase
products at a reduced wholesale price and for us to provide a variety of distribution and
fulfillment services in connection with the products. We continue to add publishers to further
increase our market share in the PC software industry.
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Video Games Software and Accessories
According to The NPD Group, sales of the video games software and accessories industry was
$12.5 billion in 2006 compared to $10.5 billion in 2005. According to industry sources, the
installed base of video game consoles in North America is expected to grow to approximately 169.3
million users in 2011 compared to 120.4 million users in December 2006.
We continued to expand our distribution of console-based video games in fiscal 2007. Our
relationships with video game vendors such as Square Enix USA, Inc., Lucas Arts, Disney
Interactive, Bethesda, THQ and Vivendi are important to this category of our distribution business.
Major Label Music
The Company distributed CDs on behalf of major labels to a few select retailers. Generally,
major music labels control distribution of their products through major music retail chains and
other channels. During fiscal 2006, we exited the major label music category to focus our resources
on other product categories.
Independent Label Music
Until May 31, 2007, we were one of a limited number of large, independent distribution companies
that represented independent labels exclusively on a regional or national basis. These companies
provide products and services to the nations leading music specialty stores and wholesalers.
Major Studio Home Video
According to industry sources, U.S. home video industry sales totaled $24.2 billion in 2006
compared to $24.3 billion in 2005.
Our relationships with Universal Distribution Corp., Twentieth Century Fox Home Entertainment
and Buena Vista Home Video are important to our major studio home video distribution business.
Customers
Since our founding in 1983, we have established relationships with retailers across mass
merchant, specialty and wholesale club channels, including Best Buy, Wal-Mart/Sams Club, Circuit
City, Staples and Costco. We have historically sold and distributed products to over 19,000 retail
and distribution center locations throughout the United States and Canada. While a major portion of
our revenues are generated from these major retailers, we also supply products to smaller
independent retailers and our business-to-business site located at www.navarre.com. See
E-Commerce. Through these sales channels, we seek to ensure a broad reach of product throughout
the country in a cost-efficient manner.
In each of the past several years, we have had a small number of customers that accounted for
10% or more of our net sales. During the fiscal years ended March 31, 2007, 2006 and 2005, sales to
two customers, Best Buy and Wal-Mart/Sams Club, accounted for approximately 23% and 11%, 18% and
12% and 19% and 20%, respectively, of our total net sales.
Navarres Distribution Business Model
Vendor Relationships
We view our vendors as customers and work to manage retail relationships to make their
business easier and more productive. By doing so, we believe our reputation as a service-oriented
organization has helped us expand our vendor roster. We believe companies such as Symantec
Corporation, Adobe Systems, Webroot Software, Inc., Trend Micro, Lucas Arts, Sony Media and Square
Enix have been added to our vendor roster because of our reputation as a service-driven
organization.
Furthermore, our dedication to smaller, second-tier vendors has helped to complement our
vendor roster. Many of these vendors do not have the leverage necessary to manage their business
effectively with major retailers. We provide these vendors the opportunity to access shelf space
and assist in the solicitation, logistics, promotion and management of products. We also conduct
one-on-one meetings with smaller vendors to give them the opportunity to establish crucial business
relationships with our retail customers.
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Examples of such vendors include: Dreamcatcher Interactive, Inc., First Look Home
Entertainment, Hart Sharp Video, Intec Inc. and Majesco.
Retail Services
Along with the value added sales functions we provide to vendors, we also have the ability to
customize shipments to each individual customer. With respect to certain customers, we provide
products on a consignment basis, which allows the vendors of these products to receive placement at
retail while minimizing inventory costs to our customers, and in some cases to Navarre. In the case
of the warehouse club channel, we may pre-sticker multiple different labels, based on the
vendor/customer preference. We assemble creative marketing programs, which include pallet programs,
product bundles and specialized packaging. We also create multi-vendor assortments for the club
channel, providing the retailer with a broad assortment of products. Our marketing and creative
services department designs and produces a variety of advertising vehicles including in-store
flyers, direct mail pieces and magazine/newspaper ads, as well as free standing displayers for
retail.
We are committed to offering first-rate information flow for all vendors. We understand the
importance of sharing sell-through, inventory, sales forecasts, promotional forecasts, SKU status
and all SKU data with the respective vendor. We provide the aforementioned information via a secure
online portal for vendors. Furthermore, each individual account manager has account-specific
information that is shared on a regular basis with appropriate vendors. We also accommodate
specialized reporting requests for our vendors, which we believe helps in the management of their
business.
Warehouse Systems
A primary focus of our distribution business is logistics and supply chain management. As
customer demands become more sophisticated, we have continued to update our technology. In fiscal
2005, we made a significant investment in a new, highly-automated material handling facility. With
our returns processing system, we process returns and issue both credit and vendor deductions
efficiently and timely. We believe that our inventory system offers adequate in-stock levels of
product, on-time arrivals of product to the customer, inventory management and acceptable return
rates for our customers, thereby strengthening our customer relationships.
E-Commerce
During fiscal year 2007, we continued to expand the number of electronic commerce
(e-commerce) customers for whom we perform fulfillment and distribution. Our business-to-business
web-site www.navarre.com integrates on-line ordering and deployment of text and visual
product information, and has been enhanced to allow for easier user
navigation and ordering. Reference to our website are not intended to
and do not incorporate information on the website into this Annual
Report.
Navarres Publishing Business Model
In July 2002 and November 2003, we acquired Encore and BCI, respectively. Encore is a
publisher of PC products and BCI is a provider of niche DVD/video and audio products. Both of these
businesses exclusively own or license and produce PC/DVD/video products. Encore has an exclusive
co-publishing agreement with Riverdeep, Inc. (Riverdeep) for the sales and marketing of
Riverdeeps interactive products in the educational and productivity markets, which includes
products published under the Broderbund and The Learning Company labels. Encore also has exclusive
licensing agreements with Vivendi and The United States Playing Card Company, Inc. for the sales
and marketing of the Hoyle brand of family entertainment software products. FUNimation, acquired on
May 11, 2005, is a leading anime content provider in the United States.
Encore
Encore publishes leading titles in the education, productivity, kids and games software
categories, including Print Shop, Print Master, PC Tools Spyware Doctor, Monopoly Here and Now and Hoyle PC
Gaming products.
Encore focuses on retail sales and marketing of its licensed content, without the distraction
and financial risk of significant content development. The benefit to our licensed vendors is they
can focus on their core competencies of content development and delivery.
Encore continues to evaluate emerging PC software brands that have the potential to become
successful franchises. Encore continues to focus on establishing relationships with developed
brands that are seeking to change their business models.
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Encores strategy is to continue to license quality branded PC software titles. It has
experience in signing single-brand products as well as taking on multiple titles in single
agreements, as demonstrated by the signing of the Riverdeep and Hoyle publishing agreements.
BCI
BCI is a developer, licensor, packager and marketer of entertainment video and audio products.
Since 1988, BCI has sought to redefine the standards and concepts in the budget DVD category. We
believe that BCI was among one of the first vendors to introduce five-pack, ten-pack and 20-pack
DVDs to the marketplace. We also believe that BCI was one of the first to introduce dollar DVDs
to the dollar store marketplace.
BCIs portfolio of titles represents both licensed titles, in-house produced CDs and DVDs from
production groups, and specialty television programming. BCIs home video titles include He-Man and
the Masters of the Universe, Classic Cartoons, Rides and Overhaulin (featured on The Learning
Channel), and PRIDE Fighting Championships (featured on Pay-Per-View).
FUNimation
FUNimation is the leading content provider in the United States market for anime, which it
licenses from Japanese rights holders, and translates and adapts the content for television
programming and home videos, primarily targeting audiences between the ages of 6 and 17. FUNimation
leverages its licensed content into various revenue streams, including television broadcast, DVD
home video distribution, and licensing of merchandising rights for toys, video games and trading
cards. FUNimations licensed titles include Dragon Ball Z, Fullmetal Alchemist, Trinity Blood,
Samari Seven, Basilisk, Yu Yu Hakusho, Negima and Robotech.
Based on its own market research, FUNimation identifies properties that it believes can be
successfully adapted to the U.S. anime and childrens content market. This market research
generally involves analyzing television ratings, merchandise sales trends, home video sales, anime
magazines and popularity polls in both the U.S. and Japanese markets. After identifying a property
that has the potential for success in the United States, FUNimation seeks to capitalize on its
relationships with Japanese rights holders and its reputation as a content provider of anime in the
United States to obtain the commercial rights to such property, primarily for television
programming, home video distribution and merchandising.
Home Video Distribution. FUNimation seeks to increase the revenue derived from its
licensed properties through home video distribution. FUNimation also currently provides home video
distribution services for other childrens content providers, including 4Kids Entertainment,
Nelvana and Alliance Atlantis. A majority of its home videos are sold directly to major retail
chains and are also distributed digitally.
Broadcast. For television programming, FUNimation translates and adapts its licensed
anime titles to conform to U.S. television programming standards. FUNimation performs most of its
production work in-house at its production facility in Fort Worth, Texas.
Licensing and Merchandising. For properties which FUNimation controls the merchandise
rights, it seeks to further leverage its licensed content by sub-licensing these rights to
manufacturers of childrens and other products. FUNimation has developed a network of over 80
license partners for the merchandising of toys, video games, apparel, trading and collectible card
games and books. FUNimation manages its properties for consistent and accurate portrayal throughout
the marketplace. FUNimation receives royalties from its sublicensees based on a predetermined
royalty rate, subject to guaranteed minimums in certain cases.
Retail Sales and Web Sites. FUNimation operates websites devoted to the anime fan
base. Typically, as part of its brand management strategy, FUNimation will develop an interactive
site for each licensed property. These sites provide information about upcoming episodes and the
characters associated with the show. In addition, FUNimations properties are supported by its
in-house Internet store, which sells home videos and licensed merchandise.
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Competition
All aspects of our business are highly competitive. Our competitors include other national and
regional businesses, as well as some suppliers that sell directly to retailers. Certain of these
competitors have substantially greater financial and other resources than we do. Our ability to
effectively compete in the future depends upon a number of factors, including our ability to:
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obtain exclusive national distribution contracts; |
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obtain proprietary publishing rights with various rights holders and brand owners; |
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maintain our margins and volume; |
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expand our sales through a varied range of products and personalized services; |
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anticipate changes in the marketplace including technological developments and
consumer interest in our proprietary products; and |
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maintain operating expenses at an appropriate level. |
In the PC software industry, we face competition from a number of distributors including
Ingram Micro, Inc., Tech Data Corporation and Atari, Inc., as well as from manufacturers and
publishers that sell directly to retailers. FUNimations competitors include: 4Kids, ADV Films,
Geneon Entertainment, Bandai, Ventura, Media Blasters and Buena Vista.
We believe competition in all of our businesses will remain intense. The keys to our growth
and profitability include: (i) customer service, (ii) continued focus on improvements and operating
efficiencies, (iii) the ability to license and develop proprietary products, and (iv) the ability
to attract desirable content and additional suppliers, studios and software publishers.
Backlog
Because a substantial portion of our products are shipped in response to orders, we do not
maintain any significant backlog.
Environmental Matters
We do not anticipate any material effect on our capital expenditures, earnings or competitive
position due to compliance with government regulations involving environmental matters.
Employees
As of March 31, 2007, we had 798 employees, including 220 in administration, finance,
merchandising and licensing, 114 in sales and marketing and 464 in production and distribution.
These employees are not subject to collective bargaining agreements and are not represented by
unions. We consider our relations with our employees to be good.
Capital Resources Financing
Our credit agreement with GE Commercial Finance was amended and restated in its entirety on
March 22, 2007. The credit agreement currently provides for a senior secured three-year $95.0
million revolving credit facility. The revolving facility is available for working capital and
general corporate needs and is subject to a borrowing base requirement. The revolving facility is
secured by a first priority security interest in all of our assets, as well as the capital stock of
our subsidiary companies and expires on March 22, 2010. At March 31, 2007 we had $39.0 million
outstanding and approximately $26.2 million
available on the revolving facility.
We entered into a term credit agreement with Monroe Capital Advisors, LLC as administrative
agent, agent and lender on March 22, 2007. The credit agreement currently provides for a four year
$15.0 million Term Loan facility which expires on March 22, 2011. The Term Loan facility calls for
monthly installments of $12,500 and final payment of
$14.6 million on March 22, 2011. The facility is secured by a second
priority security interest in all of the assets of the Company. At March 31, 2007 we had $15.0
million outstanding on the sub-facility.
Interest is currently payable on revolving credit borrowings at
variable rates determined by the applicable LIBOR plus 2.0%, or the prime rate plus .75%. Interest is
currently payable on the Term Loan at a variable
rate equal to the LIBOR plus 7.5%. The applicable margins will
be adjusted quarterly on a prospective basis as determined by
the previous quarters ratio of borrowings to borrowing
availability.
Under both of the credit agreements 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
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expenditures, a minimum ratio of EBITDA to fixed charges, minimum EBITDA, and a maximum of
indebtedness to EBITDA. The revolving facility also has a borrowing base availability requirement.
Available Information
We also make available, free of charge, in the Investors SEC Filings section of our
website, www.navarre.com, annual, quarterly and current reports (and amendments thereto)
that we may file or furnish to the Securities and Exchange Commission (SEC) pursuant to Sections
13(a) or 15(d) of Securities Exchange Act of 1934 as soon as reasonably practicable after our electronic
filing. In addition, the SEC maintains a website containing these reports that can be located at
www.sec.gov. These reports may also be read and copied at the SECs Public Reference Room
at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
Reference to our website are not intended to and do not incorporate
information on the website into this Annual Report.
Executive Officers of the Company
The following table sets forth our executive officers and certain management of Navarre as of
June 14, 2007:
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Position |
Cary L. Deacon |
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President and Chief Executive Officer |
J. Reid Porter |
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Executive Vice President, Chief Financial Officer |
Brian M.T. Burke |
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36 |
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President of Navarre Distribution |
Jill Griffin |
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President of Encore |
Gen Fukunaga |
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Chief Executive Officer and President of FUNimation |
Troy Hayes |
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President of BCI Eclipse |
John Turner |
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Senior Vice President of Global Logistics |
Ryan F. Urness |
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General Counsel and Secretary |
Cary L. Deacon has been President and Chief Executive Officer since March 31, 2007 and
President and Chief Operating Officer since August 2005. Prior to this, Mr. Deacon was the Chief
Operating Officer, Publishing and Corporate Relations Officer since joining the Company in
September 2002. From September 2001 to August 2002, Mr. Deacon served as President and Chief
Executive Officer of NetRadio Corporation, a media company. From July 2000 to August 2001, he
served as President, Chief Operating Officer and as a member of the Board of Directors of SkyMall,
Inc., an integrated specialty retailer. From August 1998 to July 2000, Mr. Deacon served as
President of ValueVision International, Inc., a home-shopping network company.
J. Reid Porter has been Executive Vice President and Chief Financial Officer since joining our
Company in December 2005. From October 2001 to October 2004, Mr. Porter, served as Executive Vice
President and Chief Financial Officer of IMC Global Inc., a leading producer and marketer of
concentrated phosphate and potash for the agricultural industry. From 1998 to October 2001, Mr.
Porter served as Vice President and partner of Hidden Creek Industries and Chief Financial Officer
of Heavy Duty Holdings, partnerships in the automotive-related and heavy-duty commercial vehicle
industries, respectively. Previously, he held executive positions at Andersen Windows, Onan
Corporation and McGraw-Edison Company, Inc.
Brian M. T. Burke has been President of Navarre Distribution since August 2005. He previously
served as Chief Operating Officer, Distribution, since February 2004, Senior Vice President and
General Manager, Navarre Distribution since April 2001, Vice President and General Manager,
Computer Products Division since July 2000 and Vice President, Computer Products Division since
October 1999. Prior to that, Mr. Burke held a series of positions of increasing responsibility in
Navarre Computer Products Division since joining the Company in July 1995. Previously, Mr. Burke
held various marketing, sales and account manager positions with Imtron and Blue Cross/Blue Shield
of Minnesota.
Jill Griffin is the President of Encore and has served the Company in that role since February
2007. In her previous position, Ms. Griffin served as the Vice President of Sales and Marketing of Encore.
Ms. Griffin has been a member of the Encore management team for over nine years holding various
positions in sales, marketing and new business development.
Gen Fukunaga is the Chief Executive Officer and President of FUNimation Productions, Ltd., and
has served in that role since May 2005, when the Company acquired FUNimation. Mr. Fukunaga
co-founded FUNimation in 1994 and has served as its President from its founding. Prior to starting
FUNimation, Mr. Fukunaga served as Product Manager of Software Development Tools for Tandem
Computers. Previously, Mr. Fukunaga held a strategic consulting position with Andersen Consulting.
10
Troy Hayes has been President of the Companys subsidiary, BCI Eclipse, since February 2007.
Prior to his appointment as President of BCI, Mr. Hayes roles at Navarre included the Vice
President of Sales at Encore and most recently the Vice President Sales and Marketing at BCI.
Mr. Hayes previous experience also includes Vice President of Sales positions at SVG
Distribution/Crave Entertainment and Wm. Wrigley Jr. Company.
John Turner has been Senior Vice President of Global Logistics since September 2003. He
previously served as Senior Vice President of Operations since December 2001, and Vice President of
Operations since joining the Company in September 1995. Prior to joining Navarre, Mr. Turner was
Senior Director of Distribution for Nordic Track in Chaska, MN from July 1993 to September 1995.
Previously, he held various positions in logistics in the United States and in the United Kingdom.
Ryan F. Urness has been General Counsel of Navarre since July 2004 and Secretary of Navarre
since May 2004. He previously served as Assistant Secretary of Navarre since February 2004 and as
Corporate Counsel since January 2003. Prior to joining Navarre a significant portion of Mr. Urness
efforts were engaged in various matters for the Company as outside legal counsel in the
Minneapolis, Minnesota office of Winthrop & Weinstine, P.A. Mr. Urness is a graduate of the
University of St. Thomas and William Mitchell College of Law.
11
Item 1A Risk Factors
FORWARD-LOOKING STATEMENTS / RISK FACTORS
We make written and oral statements from time to time regarding our business and prospects,
such as projections of future performance, statements of managements plans and objectives,
forecasts of market trends, and other matters that are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Statements containing the words or phrases will likely result, are expected to, will
continue, is anticipated, estimates, projects, believes, expects, anticipates,
intends, target, goal, plans, objective, should or similar expressions identify
forward-looking statements, which may appear in documents, reports, filings with the Securities and
Exchange Commission, including this Annual Report, news releases, written or oral presentations
made by officers or other representatives made by us to analysts, shareholders, investors, news
organizations and others and discussions with management and other representatives of us. For such
statements, we claim the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995.
Our future results, including results related to forward-looking statements, involve a number
of risks and uncertainties. No assurance can be given that the results reflected in any
forward-looking statements will be achieved. Any forward-looking statement made by or on behalf of
us speaks only as of the date on which such statement is made. Our forward-looking statements are
based on assumptions that are sometimes based upon estimates, data, communications and other
information from suppliers, government agencies and other sources that may be subject to revision.
Except as required by law, we do not undertake any obligation to update or keep current either (i)
any forward-looking statement to reflect events or circumstances arising after the date of such
statement, or (ii) the important factors that could cause our future results to differ materially
from historical results or trends, results anticipated or planned by us, or which are reflected
from time to time in any forward-looking statement which may be made by or on behalf of us.
In addition to other matters identified or described by us from time to time in filings with
the SEC, there are several important factors that could cause our future results to differ
materially from historical results or trends, results anticipated or planned by us, or results that
are reflected from time to time in any forward-looking statement that may be made by or on behalf
of us. Some of these important factors, but not necessarily all important factors, include the
following:
Risks Relating To Our Business And Industry
We derive a substantial portion of our total net sales from a small group of customers. A reduction
in sales to any of these customers could have a material adverse effect on our net sales and
profitability.
For the fiscal year ended March 31, 2007, net sales to two customers, Best Buy and
Wal-Mart/Sams Club accounted for approximately 23% and 11%, respectively, of our total net sales,
and, in the aggregate, approximately 34% of our total net sales. For the fiscal year ended March
31, 2006, net sales to Best Buy and Wal-Mart/Sams Club accounted for approximately 18% and 12%,
respectively, of our total net sales, and, in the aggregate, approximately 30% of our total net
sales. For the fiscal year ended March 31, 2005, net sales to Best Buy and Wal-Mart/Sams Club,
represented approximately 19% and 20%, respectively, of our total net sales, and, in the aggregate,
approximately 39% of our total net sales. We believe sales to a small group of customers will
continue to represent a significant percentage of our total net sales. Substantially all of the
products we distribute to these customers are supplied on a non-exclusive basis under arrangements
that may be cancelled without cause and upon short notice, and our retail customers generally are
not required to make minimum purchases. If we are unable to continue to sell our products to all or
any of these customers or are unable to maintain our sales to these customers at current levels and
cannot find other customers to replace these sales, there would be an adverse impact on our net
sales and profitability. There can be no assurance that we will continue to recognize a significant
amount of revenue from sales to any specific customer.
The loss of a significant vendor or manufacturer or a decline in the popularity of its products
could negatively affect our product offerings and reduce our net sales and profitability.
A significant portion of our increase in net sales in recent years has been due to increased
sales of PC software provided by software publishers such as Symantec Corporation, Roxio, Inc.,
Adobe Systems Inc., Trend Micro, Inc., NC Interactive Inc., Computer Associates, and Webroot
Software, Inc. During the fiscal year ended March 31, 2007 each of these publishers accounted for
more than $10.0 million in net sales of products provided. Symantec products accounted for
approximately $81.9 million in net sales
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for the fiscal year ended March 31, 2007. While we have agreements in place with each of these
parties, such agreements generally are short-term in nature and may be cancelled without cause and
upon short notice. They typically cover the right to distribute in the United States and Canada, do
not restrict the publishers from distributing their products through other distributors or directly
to retailers and do not guarantee product availability to us for distribution. These agreements
allow us to purchase the publishers products at a reduced wholesale price and to provide various
distribution and fulfillment services in connection with the publishers products. If we were to
lose our right to distribute products of any of the above PC software publishers or the popularity
of such product were to decrease, our net sales and profitability would be adversely impacted.
Our future growth and success depends partly upon our ability to procure and renew popular
product distribution agreements and to sell the underlying products. There can be no assurance that
we will enter into new distribution agreements or that we will be able to sell products under
existing distribution agreements. Further, our current distribution agreements may be terminated on
short notice. The loss of a significant vendor could negatively affect our product offerings and,
accordingly, our net sales. Similarly, a decrease in customer demand for such products could
negatively affect our net sales.
Publishing revenues are dependent on consumer preferences and demand.
Our business and operating results depend upon the appeal of its properties, product concepts
and programming to consumers, including the popularity of anime in the United States market and
trends in the toy, game and entertainment businesses. A decline in the popularity of its existing
properties or the failure of new properties and product concepts to achieve and sustain market
acceptance could result in reduced overall revenues, which could have a material adverse effect on
the publishing segment, financial condition and results of operations. Consumer preferences with
respect to entertainment are continuously changing and are difficult to predict and can vary from
months to years and entertainment properties often have short life cycles. There can be no
assurances that:
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any of the publishing segments current properties, product concepts or
programming will continue to be popular for any significant period of time; |
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any new properties, product concepts or programming will achieve an adequate
degree of popularity; or |
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any propertys life cycle will be sufficient to permit adequate profitably to
recover advance payments, guarantees, development, marketing, royalties and other costs. |
Our failure to successfully anticipate, identify and react to consumer preferences could have
a material adverse effect on revenues, profitability and results of operations. In addition,
changes in consumer preferences may cause our revenues and net income to vary significantly between
comparable periods.
Our business is seasonal and variable in nature and, as a result, the level of sales and payment
terms during our peak season could adversely affect our results of operations and liquidity.
Traditionally, our third quarter (October 1-December 31) has accounted for our largest
quarterly revenue figures and a substantial portion of our earnings. Our third quarter accounted
for approximately 30.1%, 31.3% and 30.6% of our net sales for the fiscal years ended March 31,
2007, 2006 and 2005, respectively. As a distributor of products ultimately sold to consumers, our
business is affected by the pattern of seasonality common to other suppliers of retailers,
particularly during the holiday season. Because of this seasonality, if we or our customers
experience a weak holiday season or if we provide extended payment terms for sales during the
holiday season or determine to increase our inventory levels to meet anticipated retail customer
demand, our financial results and liquidity could be negatively affected. In addition, our
borrowing levels and inventory levels can increase substantially during this time. In addition to
seasonality issues, other factors contribute to the variability of our revenues and cash flows in
our business segments on a quarterly basis. These factors include:
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the popularity of the DVD, PC software titles and pre-recorded music released during the quarter; |
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product marketing and promotional activities; |
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the opening and closing of retail stores by our major customers; |
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the extension, termination or non-renewal of existing distribution agreements and licenses; and |
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general economic changes affecting the buying pattern of retailers,
particularly those changes affecting consumer demand for home entertainment products and PC
software. |
We may not be able to grow our publishing segment.
Our publishing
business has grown significantly over the past several fiscal years and this segments financial results may significantly vary in
future quarters. We could encounter difficulties in the operation of this segment that could negatively affect
its financial condition and results of operation. Accordingly, there is no assurance that we will
be able to grow this segments business or profits of our business. Investors should not rely on the past
performance of our publishing segment, and there can be no
assurance that we will be able to successfully implement our publishing growth strategy.
Pending litigation or regulatory inquiry may subject us to significant costs, judgments or
penalties and could divert management attention.
We are involved in a number of litigation matters, including shareholder class action suits
and an informal inquiry by the U.S. Securities and Exchange Commission. Irrespective of the
validity of the assertions made in these or other suits, or the positions asserted in these
proceedings or any final resolution in these matters, we could incur substantial costs and
managements attention could be diverted, either of which could adversely affect our business,
financial condition or operating results.
A substantial portion of FUNimations revenues typically derive from a small number of licensed
properties and a small number of licensors and FUNimations content is highly concentrated in the
anime genre.
FUNimation derives a substantial portion of its revenues from a small number of properties and
such properties usually generate revenues only for a limited period of time. Additionally,
FUNimations content is concentrated in the anime sector and its revenues are highly subject to the
changing trends in the toy, game and entertainment businesses. In particular, two licensed
properties accounted for $14.2 million and $12.7 million, or 24% and 21%, respectively, of
FUNimations net sales for the fiscal year ended March 31, 2007. FUNimations revenues may
fluctuate significantly from year to year due to, among other reasons, the popularity of its
licensed properties and the timing of entering into new licensing contracts.
During the fiscal year ended March 31, 2007, 67% of FUNimations revenues were derived from
sales of products under multiple licensing arrangements with three licensors. The loss of any of
these licensing relationships could have a material negative effect on FUNimations revenues.
FUNimations revenues are substantially dependent on television exposure for its licensed
properties.
The ability for certain anime and childrens entertainment content to gain television exposure
is an important promotional vehicle for home video sales and licensing opportunities. To the extent
that FUNimations content is not able to gain television exposure, sales of these products could be
limited. Similarly, demand for properties broadcast on television generally is based on television
ratings. In addition, FUNimation does not own the broadcast rights for some of its properties, so
it depends on third parties to secure or renew broadcast rights for such content. A decline in
television ratings or programming time of FUNimations licensed properties could adversely affect
FUNimations revenues.
The loss of key personnel could affect the depth, quality and effectiveness of our management team.
In addition, if we fail to attract and retain qualified personnel, the depth, quality and
effectiveness of our management team and employees could be negatively affected.
We depend on the services of our key senior executives and other key personnel because of
their experience in the distribution, publishing and licensing areas. The loss of the services of
one or several of our key employees could result in the loss of customers or otherwise inhibit our
ability to operate and grow our business successfully.
14
Our ability to enhance and develop markets for our current products and to introduce new
products to the marketplace also depends on our ability to attract and retain qualified management
personnel. We compete for such personnel with other companies and organizations, many of which have
substantially greater capital resources and name recognition than we do. If we are not successful
in recruiting or retaining such personnel, it could have a material adverse effect on our business.
If we fail to meet our significant working capital requirements or if our working capital
requirements increase substantially, our business and prospects could be adversely affected.
As a distributor and publisher, we purchase and license products directly from manufacturers
and content developers for resale to retailers. As a result, we have significant working capital
requirements, principally to acquire inventory, procure licenses and finance accounts receivable.
Our working capital needs will increase as our inventory, licensing activities and accounts
receivable increase in response to our growth. In addition, license advances, prepayments to
enhance margins, investments, and inventory increases to meet customer requirements could increase
our working capital needs. The failure to obtain additional financing or maintain working capital
credit facilities on reasonable terms in the future could adversely affect our business. In
addition, if the cost of financing is too expensive or not available, it could require a reduction
in our distribution or publishing activities.
We rely upon bank borrowings to fund our general working capital needs and it may be necessary
for us to secure additional financing in the future depending upon the growth of our business and
the possible financing of additional acquisitions. If we were unable to borrow under our credit
facility or otherwise unable to secure sufficient financing on acceptable terms or at all, our
future growth and profitability could be adversely affected.
Product returns or inventory obsolescence could reduce our sales and profitability or negatively
impact our liquidity.
We maintain a significant investment in product inventory. Like other companies operating in
our industry, product returns from our retail customers are significant when expressed as a
percentage of revenues. Adverse financial or other developments with respect to a particular
supplier or product could cause a significant decline in the value and marketability of our
products, possibly making it difficult for us to return products to a supplier or recover our
initial product acquisition costs. Under such circumstances, our sales and profitability, including
our liquidity, could be adversely affected. We maintain a sales return reserve based on historical
product line experience rates. There can be no assurance that our reserves will be adequate to
cover potential returns.
We are subject to the risk that our inventory values may decline due to, among other things,
changes in demand and that protective terms under our supplier agreements may not adequately cover
the decline in values, which could result in lower gross margins or inventory write-downs.
The demand for products that we sell and distribute is subject to rapid technological change,
new and enhanced product specification requirements, consumer preferences and evolving industry
standards. These changes may cause our inventory to decline substantially in value or to become
obsolete which may occur in a short period of time. We generally are entitled to receive a credit
from certain suppliers for products returned to us based upon the terms and conditions with those
suppliers, including maintaining a minimum level of inventory of their products and limitations on
the amount of product that can be returned and/or restocking fees. If major suppliers decrease or
eliminate the availability of price protection or inventory returnability to us, such a change in
policy could lower our gross margins or cause us to record inventory write-downs. We are also
exposed to inventory risk to the extent that supplier protections are not available on all products
or quantities and are subject to time restrictions. In addition, suppliers may become insolvent and
unable to fulfill their protection obligations to us. As a result, these policies do not protect us
in all cases from declines in inventory value or product demand. We offer no assurance that price
protection or inventory returnability terms may not change or be eliminated in the future, that
unforeseen new product developments will not materially adversely affect our revenues or
profitability or that we will successfully manage our existing and future inventories.
In our publishing business, prices could decline due to decreased demand and, therefore, there
may be greater risk of declines in our owned inventory value. To the extent that our publishing
business has not properly reserved for inventory exposure or price reductions needed to sell
remaining inventory, our profitability may suffer.
15
We have significant credit exposure and negative trends or other factors could cause us significant
credit loss.
We provide credit to our customers for a significant portion of our net sales. During the
holiday season, certain of our retail customers may request and be granted extended payment terms.
Extended terms could require additional borrowings under our credit facilities. We are subject to
the risk that our customers will not pay for the products they have purchased. This risk may be
increased with respect to goods provided under our consignment programs due to our lack of physical
control over our owned inventory. This risk may increase if our customers experience decreases in
demand for their products and services or become less financially stable due to adverse economic
conditions or otherwise. If there is a substantial deterioration in the collectibility of our
receivables, our earnings and cash flows could be adversely affected.
In addition, from time to time, we may make royalty advances, or loans to, or invest in, other
businesses. These business or investment opportunities may not be successful, which could result in
the loss of our invested capital.
We may not be able to adequately adjust our cost structure in a timely fashion in response to a
decrease in net sales, which may cause our profitability to suffer.
A significant portion of selling, general and administrative expense is comprised of
personnel, facilities and costs of invested capital. In the event of a significant downturn in net
sales, we may not be able to exit facilities, reduce personnel, improve business processes, reduce
inventory or make other significant changes to our cost structure without significant disruption to
our operations or without significant termination and exit costs. Additionally, if management is
not be able to implement such actions in a timely manner or at all to offset a shortfall in net
sales and gross profit, our profitability would suffer.
Our distribution and publishing businesses operate in highly competitive industries and compete
with large national firms. Further competition, among other things, could reduce our sales volume
and margins.
The business of distributing home entertainment and multimedia products is highly competitive.
Our competitors in the distribution business include other national and regional distributors as
well as suppliers that sell directly to retailers. These competitors include the distribution
affiliates of Time-Warner, Sony/BMG Music Entertainment, EMI, Ingram Micro and Tech Data
Corporation. Our competitors in the publishing business include both independent national
publishers as well as large international firms. These competitors include Ventura, Madacy, Direct
Source, Platinum Image, Topics, Vivendi and Buena Vista. Certain of our competitors have
substantially greater financial and other resources than we have. Our ability to compete
effectively in the future depends upon a number of factors, including our ability to:
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obtain exclusive national distribution contracts and licenses with independent music labels and manufacturers; |
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obtain proprietary publishing rights with various rights holders and brand owners; |
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maintain our margins and volume; |
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expand our sales through a varied range of products and personalized services; |
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anticipate changes in the marketplace including technological developments and
consumer interest in our proprietary products; and |
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maintain operating expenses at an appropriate level. |
Our failure to perform adequately one or more of these tasks may materially harm our business.
In addition, FUNimations business depends upon its ability to procure and renew agreements to
license certain rights for attractive titles on favorable terms. Competition for attractive anime
and childrens entertainment content and television broadcasting slots is intense. FUNimations
principal competitors in the anime sector are media companies such as AD Vision, 4Kids
Entertainment, VIZ and Geneon and Japanese rights holders operating in the United States.
FUNimation also competes with various toy companies, other licensing companies, numerous others
acting as licensing representatives and large media companies such as Disney and Time Warner. Many
of FUNimations competitors have substantially greater resources than FUNimation and own or license
properties
16
which are more commercially successful than FUNimations properties. There are low barriers to
enter the licensing and brand management business and therefore there is potential for new
competitors to enter the market.
Competition in the home entertainment and multimedia products industries is intense and is
often based on price. Distributors generally experience low gross profit margins and operating
margins. Consequently, our distribution profitability is highly dependent upon achieving effective
cost and management controls and maintaining sales volumes. A material decrease in our gross profit
margins or sales volumes would harm our financial results.
We depend on third party shipping and fulfillment companies for the delivery of our products.
We rely almost entirely on arrangements with third party shipping and fulfillment companies,
principally UPS and Federal Express, for the delivery of our products. The termination of our
arrangements with one or more of these third party shipping companies, or the failure or inability
of one or more of these third party shipping companies to deliver products on a timely or cost
efficient basis from suppliers to us, or products from us to our reseller customers or their
end-user customers, could disrupt our business and harm our reputation and net sales. Furthermore,
an increase in amounts charged by these shipping companies could negatively affect our gross
margins and earnings.
We depend on a variety of systems for our operations, and a failure of these systems could disrupt
our business and harm our reputation and net sales and negatively impact our results of operations.
We depend on a variety of systems for our operations. Certain of these systems are operated by
third parties and their performance may be outside of our control. These systems support our
operating functions, including inventory management, order processing, shipping, receiving and
accounting. Any failures or significant downtime in our systems could prevent us from taking
customer orders, printing product pick-lists, and/or shipping product. It could also prevent
customers from accessing our price and product availability information.
From time to time we may acquire other businesses having information systems and records,
which may be converted and integrated into our information systems. This can be a lengthy and
expensive process that results in a material diversion of resources from other operations. In
addition, because our information systems are comprised of a number of legacy, internally-developed
applications, they can be harder to upgrade and may not be adaptable to commercially available
software. As our needs for technology evolve, we may experience difficulty or significant cost in
upgrading or significantly replacing our systems.
We also rely on the Internet for a portion of our orders and information exchanges with our
customers. The Internet and individual websites can experience disruptions and slowdowns. In
addition, some websites have experienced security breakdowns. Our website could experience material
breakdowns, disruptions or breaches in security. If we were to experience a security breakdown,
disruption or breach that compromised sensitive information, this could harm our relationship with
our customers or suppliers. Disruption of our website or the Internet in general could impair our
order processing or more generally prevent our customers and suppliers from accessing information.
This could cause us to lose business.
We believe customer information systems and product ordering and delivery systems, including
Internet-based systems, are becoming increasingly important in the distribution of our products and
services. Although we seek to enhance our customer information systems by adding new features, we
offer no assurance that competitors will not develop superior customer information systems or that
we will be able to meet evolving market requirements by upgrading our current systems at a
reasonable cost, or at all. Our inability to develop competitive customer information systems or
upgrade our current systems could cause our business and market share to suffer.
We are implementing a new enterprise resource planning system. Failure to fully implement the new
system in an effective and a timely fashion could adversely affect our results of operations and
timely reporting of financial results.
We are implementing a new enterprise resource planning system. In addition, the new system includes
implementation of improved business processes that we expect to improve our efficiency and our
ability to manage our business. Failure to fully implement the new system in an effective and
timely fashion could adversely affect our implementation of these improved business processes and
the achievement of our goals. In some cases, the current business processes that are being replaced
or improved will no longer be operational once the new system is implemented, and any failure of
the new system to function effectively upon initial implementation
17
could adversely affect our ongoing business processes and efficiency. For example, we will depend
on the new system for functions such as order entry and invoicing, and a failure of the new system
to perform these functions effectively could materially adversely affect our sales to customers,
receipt of payment for our sales or other matters that could materially adversely affect our
results of operations and timely reporting of financial results.
Technology developments, particularly in the electronic downloading arena, may adversely affect our
net sales, margins and results of operations.
Home entertainment products have traditionally been marketed and delivered on a physical
delivery basis. If, in the future, these products are increasingly marketed and delivered through
technology transfers, such as electronic downloading through the Internet or similar delivery
methods, then our retail and wholesale distribution business could be negatively impacted. As
electronic downloading grows through Internet retailers, competition between suppliers to
electronic retailers in traditional ways will intensify and likely negatively impact our net sales
and margins. Furthermore, we may be required to spend significant capital to enter or participate
in this delivery channel. If we are unable to develop necessary vendor and customer relationships
to facilitate electronic downloading or if the terms of these arrangements differ from those
related to our physical product sales, our business may be materially harmed.
We may not be successful in implementing our acquisition strategy, and future acquisitions could
result in disruptions to our business by, among other things, distracting management time and
diverting financial resources. Further, if we are unsuccessful in integrating acquired companies
into our business, it could materially and adversely affect our financial condition and operating
results.
One of our growth strategies is the acquisition of complementary businesses. We may not be
able to identify suitable acquisition candidates or, if we do, we may not be able to make such
acquisitions on commercially acceptable terms or at all. If we make acquisitions, a significant
amount of managements time and financial resources may be required to complete the acquisition and
integrate the acquired business into our existing operations. Even with this investment of
management time and financial resources, an acquisition may not produce the revenue, earnings or
business synergies anticipated. Acquisitions involve numerous other risks, including assumption of
unanticipated operating problems or legal liabilities, problems integrating the purchased
operations, technologies or products, diversion of managements attention from our core businesses,
adverse effects on existing business relationships with suppliers and customers, incorrect
estimates made in the accounting for acquisitions and amortization of acquired intangible assets
that would reduce future reported earnings (goodwill impairments), ensuring acquired companies
compliance with the requirements of the Sarbanes-Oxley Act of 2002 and potential loss of customers
or key employees of acquired businesses. We cannot assure you that if we make any future
acquisitions, investments, strategic alliances or joint ventures they will be completed in a timely
manner or achieve anticipated synergies, that they will be structured or financed in a way that
will enhance our business or creditworthiness or that they will meet our strategic objectives or
otherwise be successful. In addition, we may not be able to secure the financing necessary to
consummate future acquisitions, and future acquisitions and investments could involve the issuance
of additional equity securities or the incurrence of additional debt, which could harm our
financial condition or creditworthiness.
Increased counterfeiting or piracy may negatively affect the demand for our home entertainment
products.
The product categories that we sell have been adversely affected by counterfeiting, piracy and
parallel imports, and also by websites and technologies that allow consumers to illegally download
and access this content. Increased proliferation of these alternative access methods to these
products could impair our ability to generate net sales and could cause our business to suffer.
We may not be able to successfully protect our intellectual property rights.
We rely on a combination of copyright, trademark and other proprietary rights laws to protect
the intellectual property we license. Third parties may try to challenge the ownership by us or our
licensors of such intellectual property. In addition, our business is subject to the risk of third
parties infringing on our intellectual property rights or those of our licensors and producing
counterfeit products. We may need to resort to litigation in the future to protect our intellectual
property rights or those of our licensors, which could result in substantial costs and diversion of
resources and could have a material adverse effect on our business and competitive position.
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Interruption of our business or catastrophic loss at any of our facilities could lead to a
curtailment or shutdown of our business.
We receive, manage and distribute our inventory from a centralized warehouse and distribution
facility that is located adjacent to our corporate headquarters. An interruption in the operation
of or in the service capabilities at this facility or our separate returns processing center as a
result of equipment failure or other reasons could result in our inability to distribute products,
which would reduce our net sales and earnings for the affected period. In the event of a stoppage
at such facilities, even if only temporary, or if we experience delays as a result of events that
are beyond our control, delivery times to our customers and our relationship with such customers
could be severely affected. Any significant delay in deliveries to our customers could lead to
increased returns or cancellations and cause us to lose future sales. Our facilities are also
subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions,
violent weather conditions or other natural disasters. We may experience a shutdown of our
facilities or periods of reduced production as a result of equipment failure, delays in deliveries
or catastrophic loss, which could have a material adverse effect on our business, results of
operations or financial condition.
Future terrorist or military actions could result in disruption to our operations or loss of
assets, in certain markets or globally.
Future terrorist or military actions, in the U.S. or abroad, could result in destruction or
seizure of assets or suspension or disruption of our operations. Additionally, such actions could
affect the operations of our suppliers or customers, resulting in loss of access to products,
potential losses on supplier programs, loss of business, higher losses on receivables or inventory,
or other disruptions in our business, which could negatively affect our operating results. We do
not carry insurance covering such terrorist or military actions, and even if we were to seek such
coverage and such coverage were available, the cost likely would not be commercially reasonable.
Legislative actions, higher director and officer insurance costs and potential new accounting
pronouncements are likely to cause our general and administrative expenses to increase and impact
our future financial condition and results of operations.
In order to comply with the Sarbanes-Oxley Act of 2002, as well as changes to the NASDAQ
listing standards and rules adopted by the Securities and Exchange Commission, we have been
required to strengthen our internal controls, hire additional personnel and retain additional
legal, accounting and advisory services, all of which have caused and could continue to cause our
general and administrative costs to increase. In addition, insurers have increased and could
continue to increase premiums for our directors and officers insurance policies.
Our financial statements are prepared in accordance with U.S. generally accepted accounting
principles. These principles are subject to interpretation by various governing bodies, including
the FASB, the Public Company Accounting Oversight Board (the PCAOB), and the SEC, who create and
interpret appropriate accounting standards. Changes in, or new, accounting standards could have a
significant adverse effect on our results of operations.
19
Risks Relating to Indebtedness
The level of our indebtedness could adversely affect our financial condition.
We have significant debt service obligations. As of March 31, 2007, our total indebtedness
under our revolving facility and term loan facility was $39.0 million and $15.0 million,
respectively. We have the ability to borrow up to $95.0 million under the revolving credit
agreement.
The level of our indebtedness could have important consequences. For example, it could:
|
|
|
make it more difficult for us to satisfy our obligations with respect to other indebtedness; |
|
|
|
|
increase our vulnerability to adverse economic and industry conditions; |
|
|
|
|
require us to dedicate a substantial portion of our cash flow from operations
to the payment of our indebtedness, thereby reducing the availability of cash to fund
working capital and capital expenditures and for other general corporate purposes; |
|
|
|
|
restrict us from making strategic acquisitions, acquiring new content or exploring other business opportunities; |
|
|
|
|
limit our ability to obtain financing for working capital, capital expenditures, general corporate purposes or acquisitions; |
|
|
|
|
place us at a disadvantage compared to our competitors that have less indebtedness; and |
|
|
|
|
limit our flexibility in planning for, or reacting to, changes in our business and industry. |
Our outstanding indebtedness bears interest at variable rates. Any increase in interest rates will
reduce funds available to us for our operations and future business opportunities and will
adversely affect our leveraged capital structure.
Our debt service requirements
will be impacted by changing interest rates. All of our $54.0
million in debt outstanding at March 31, 2007 is subject to variable interest rates. A 100-basis
point change in LIBOR would cause our projected annual interest expense to change by approximately
$540,000. The fluctuation in our debt service requirements, in addition to interest rate changes,
may be impacted by future borrowings under our credit facility or other alternative financing
arrangements.
We may be unable to generate sufficient cash flow to service our debt obligations.
Our ability to make payments on and to refinance our indebtedness and to fund our operations,
working capital and capital expenditures, depends on our ability to generate cash in the future,
which is subject to general economic, industry, financial, competitive, operating, legislative,
regulatory and other factors that are beyond our control. Additionally, if principal payments are
made early, additional expense may be incurred.
We cannot assure you that our business will generate sufficient cash flow from operations or
that future borrowings will be available to us under our credit agreement in an amount sufficient
to enable us to pay amounts due on our indebtedness or to fund our other liquidity needs.
We may need to refinance all or a portion of our indebtedness on or before maturity. Our
ability to refinance our indebtedness or obtain additional financing will depend on, among other
things:
|
|
|
our financial condition at the time; |
|
|
|
|
restrictions in our credit agreement or other outstanding indebtedness; and |
|
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|
|
other factors, including the condition of the financial markets or the distribution and publishing markets. |
20
As a result, we may not be able to refinance any of our indebtedness on commercially
reasonable terms, or at all. If we do not generate sufficient cash flow from operations, and
additional borrowings or refinancings or proceeds of asset sales are not available to us, we may
not have sufficient cash to enable us to meet all of our obligations.
We may be able to incur additional indebtedness, which could further exacerbate the risks
associated with our current indebtedness level.
We and our subsidiaries may be able to incur substantial additional indebtedness in the
future. Although our credit facility contains restrictions on the incurrence of additional
indebtedness, debt incurred in compliance with these restrictions could be substantial. Our
revolving working capital credit facility provided pursuant to a credit agreement, permits total
borrowings of up to $95.0 million. In addition, our credit agreement will not prevent us from
incurring certain other obligations. If we and our subsidiaries incur additional indebtedness or
other obligations, the related risks that we and they face could be magnified.
Our credit agreement contains significant restrictions that limit our operating and financial
flexibility.
Our credit agreement requires us to maintain specified financial ratios and includes other
restrictive covenants. We may be unable to meet such ratios and covenants. Any of these
restrictions may limit our ability to execute our business strategy. Moreover, if operating results
fall below current levels, we may be unable to comply with these covenants. If that occurs, our
lenders could accelerate our indebtedness, in which case we may not be able to repay all of our
indebtedness.
Risks Relating to Our Common Stock
Our common stock price has been volatile. Fluctuations in our stock price could impair our ability
to raise capital and make an investment in our securities undesirable.
The market price of our common stock has fluctuated significantly. We believe factors such as
the markets acceptance of our products and the performance of our business relative to market
expectations, as well as general volatility in the securities markets, could cause the market price
of our common stock to fluctuate substantially. In addition, the stock markets have experienced
price and volume fluctuations, resulting in changes in the market prices of the stock of many
companies, which may not have been directly related to the operating performance of those
companies. Fluctuations in our stock price could impair our ability to raise capital and make an
investment in our securities undesirable. During the period from April 1, 2006 to March 31, 2007,
the last reported price of our common stock as quoted on the NASDAQ
Global Market ranged from a
low of $3.30 to a high of $5.18.
The exercise of outstanding warrants and options may adversely affect our stock price.
Our
stock option plans authorize the issuance of options and other
securities to purchase 7.7
million shares of our common stock. As of March 31, 2007, options and warrants to purchase
5,197,701 shares of our common stock were outstanding. Approximately 4,230,934 options and warrants
were exercisable as of March 31, 2007. Warrants totaling 1,596,001 were issued in connection with
the private placement completed in March 2006. Our outstanding options and warrants are likely to
be exercised at a time when the market price for our common stock is higher than the exercise
prices of the options and warrants. If holders of these outstanding options and warrants sell the
common stock received upon exercise, it may have a negative effect on the market price of our
common stock.
Our anti-takeover provisions, our ability to issue preferred stock and our staggered board may
discourage takeover attempts that could be beneficial for our shareholders.
We are subject to Sections 302A.671 and 302A.673 of the Minnesota Business Corporation Act,
which may have the effect of limiting third parties from acquiring significant amounts of our
common stock without our approval. These laws, among others, may have the effect of delaying,
deferring or preventing a third party from acquiring us or may serve as a barrier to shareholders
seeking to amend our articles of incorporation or bylaws. Our articles of incorporation also permit
us to issue preferred stock, which could allow us to delay or block a third party from acquiring
us. The holders of preferred stock could also have voting and conversion rights that could
adversely affect the voting power of the holders of the common stock. Finally, our articles of
incorporation and bylaws divide our board of directors into three classes that serve staggered,
three-year terms. Each of these factors could make it difficult for a third party to effect a
change in control of us. As a result, our shareholders may lose opportunities to dispose of their
shares at the higher prices typically available in takeover attempts or that may be available under
a merger proposal.
21
In addition, these measures may have the effect of permitting our current directors to retain
their positions and place them in a better position to resist changes that our shareholders may
wish to make if they are dissatisfied with the conduct of our business.
We currently do not intend to pay dividends on our common stock and, consequently, your only
opportunity to achieve a return on your investment is if the price of our common stock appreciates.
We currently do not plan to declare dividends on shares of our common stock in the foreseeable
future. Further, the payment of dividends by us is restricted by our credit facility. Consequently,
your only opportunity to achieve a return on your investment is if the price of our common stock
appreciates and you sell your shares at a profit.
Our directors may not be held personally liable for certain actions, which could discourage
shareholder suits against them.
Minnesota law and our articles of incorporation and bylaws provide that our directors shall
not be personally liable to us or our shareholders for monetary damages for breach of fiduciary
duty as a director, with certain exceptions. These provisions may discourage shareholders from
bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of
derivative litigation brought by shareholders on behalf of us against a director. In addition, our
bylaws provide for mandatory indemnification of directors and officers to the fullest extent
permitted by Minnesota law.
Other Risks
We operate a large business in a continually changing environment that involves numerous risks
and uncertainties. It is not reasonable for us to itemize all of the factors that could affect us
and/or the products and services distribution industry or the publishing industry as a whole.
Future events that may not have been anticipated or discussed here could adversely affect our
business, financial condition, results of operations or cash flows.
Thus, the foregoing is not a complete description of all risks relevant to our future
performance, and the foregoing risk factors should be read and understood together with and in the
context of similar discussions which may be contained in the documents that we file with the SEC in
the future. We undertake no obligation to release publicly any revision to the foregoing or any
update to any forward-looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Distribution
Located in the Minneapolis suburb of New Hope, Minnesota, our corporate headquarters is made
up of approximately 322,000 square feet of combined office and warehouse space situated on three
contiguous properties. The leases for two of the properties expire on June 30, 2019 and the lease
for the third property expires on September 30, 2016. These leased properties include approximately
44,000 square feet of office space; approximately 73,000 square feet of space utilized in the
manufacturing and assembly of new products; and approximately 205,000 square feet of space devoted
to warehousing, product picking and shipping. Our product returns processing facility is located in
the Minneapolis suburb of Brooklyn Center which consists of approximately 74,000 square feet of
warehouse space. The lease for this property expires in May 2008. We also operate a satellite sales
office in Bentonville, Arkansas which resides in approximately 2,000 square feet of leased office space. The
lease for this space expires on February 28, 2010. The present aggregate base monthly rent for all
Navarre facilities is approximately $180,000.
Publishing
Encore currently operates its offices out of approximately 13,000 square feet of leased office
space located in Los Angeles, California. This lease currently provides for base monthly payments
to be made in the amount of approximately $26,000 and expires April 30, 2010.
22
BCI operates its offices out of approximately 8,000 square feet of leased office space located in Newbury
Park, California. This lease currently provides for base monthly payments to be made in the amount
of approximately $8,000 and expires June 30, 2009. FUNimation operates its office out of approximately 23,000 square feet of
leased space located in Forth Worth, Texas. This lease currently provides for base monthly rental
payments to be made in the amount of approximately $30,000 and expires July 31, 2009. FUNimation entered into an
additional lease commencing in August 2007, which expires August 2017 and has monthly base rent in the
amount of approximately $53,000. FUNimation also operates its online store out of approximately 84,000 square
feet in Decatur, Texas, which is owned by the Company.
We believe our facilities are adequate for our present operations as well as for the
incorporation of growth. We continually explore alternatives to certain of these facilities that
could expand our capacities and enhance efficiencies, and we believe we can renew or obtain
replacement or additional space, if required, on commercially reasonable terms.
Item 3. Legal Proceedings
See Litigation discussion in Note 21 to the Companys consolidated financial statements
included herein.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of shareholders, through the solicitation of proxies
or otherwise, during the fourth quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Registrants Common Equity, and Related Stockholder Matters and Issuer Purchase
of Equity Securities
Common Stock
Our common stock,
no par value, is traded on the NASDAQ Global Market under the symbol
NAVR. The following table presents the range of high and low closing sale prices for our stock
for each period indicated as reported on the NASDAQ Global Market. Such prices reflect
inter-dealer prices, do not include adjustments for retail mark-ups, markdowns or commissions and
may not necessarily represent actual transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
High |
|
Low |
Fiscal 2007 |
|
First |
|
$ |
4.98 |
|
|
$ |
3.30 |
|
|
|
Second |
|
|
5.18 |
|
|
|
3.38 |
|
|
|
Third |
|
|
5.06 |
|
|
|
3.98 |
|
|
|
Fourth |
|
|
4.24 |
|
|
|
3.60 |
|
Fiscal 2006 |
|
First |
|
$ |
9.21 |
|
|
$ |
6.73 |
|
|
|
Second |
|
|
8.40 |
|
|
|
5.65 |
|
|
|
Third |
|
|
6.61 |
|
|
|
3.51 |
|
|
|
Fourth |
|
|
6.53 |
|
|
|
3.45 |
|
At June 14, 2007,
we had an estimated 725 common shareholders of record and an
estimated 8,200
beneficial owners whose shares were held by nominees or broker dealers.
Dividend Policy
We have never declared or paid cash dividends on our common stock. We currently intend to
retain all earnings for use in our business and do not intend to pay any dividends on our common
stock in the foreseeable future.
Comparative Stock Performance
The following
Performance Graph compares performance of our common stock on the NASDAQ
Global Market System to the NASDAQ Composite Index and the Peer Group
Indices described below. The graph compares the cumulative total return from March 31, 2002 to
March 31, 2007 on $100 invested on March 31, 2002, assumes reinvestment of all dividends, and has
been adjusted to reflect stock splits.
23
The Peer Group Index below includes the stock performance of the following companies:
Handleman Company, Ingram Micro Inc., Tech Data Corp., 4 Kids Entertainment Inc. and Take Two
Interactive Software Inc. These companies have operations similar to our distribution and
publishing businesses.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Navarre Corporation, The NASDAQ Composite Index
And A Peer Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/02 |
|
3/03 |
|
3/04 |
|
3/05 |
|
3/06 |
|
3/07 |
Navarre
Corporation |
|
|
100.00 |
|
|
|
154.55 |
|
|
|
539.09 |
|
|
|
722.73 |
|
|
|
390.00 |
|
|
|
340.91 |
|
NASDAQ
Composite |
|
|
100.00 |
|
|
|
72.11 |
|
|
|
109.76 |
|
|
|
111.26 |
|
|
|
132.74 |
|
|
|
139.65 |
|
Peer Group |
|
|
100.00 |
|
|
|
69.64 |
|
|
|
116.50 |
|
|
|
109.57 |
|
|
|
105.66 |
|
|
|
104.24 |
|
Private Placement
During fiscal 2006, we completed a private placement in which we sold 5,699,998 shares of
common stock and issued 1,425,001 shares issuable upon the exercise of five year warrants exercisable
at $5.00 (excluding 171,000 placement agent warrants). We sold the shares in the private placement
to the selling shareholders for $3.50 per share for total proceeds of approximately $20.0 million
and net proceeds of approximately $18.5 million. Such securities were offered and issued in
reliance on the exemption from registration provided by Rule 506 of Regulation D and Section 4(2)
of the Securities Act of 1933, as a transaction not involving a public offering of securities. The
Company based such reliance upon factual representations made to the Company by the purchaser
regarding the purchasers investment intent, sophistication, and status as an accredited investor
(as defined in Regulation D), among other things.
Additional Sales of Unregistered Securities
In addition to the 2006 Private Placement, the Company completed the sales of unregistered
securities described in Note 17 of the notes to the consolidated financial statements during the
past three fiscal years.
Purchases of Equity Securities
We did not purchase any shares of our common stock during the fourth quarter of fiscal 2007.
Equity Compensation Plan Information
We adopted our 1992 Stock Option Plan and 2004 Stock Option Plan (together, the Plans) to
attract and retain persons to perform services for us by providing an incentive to those persons
through equity participation in the Company and by rewarding such persons who contribute to the
achievement of our economic objectives. Eligible recipients are all employees including, without
limitation, officers and directors who are also our employees as well as our non-employee
directors, consultants and independent contractors or employees of any of our subsidiaries. A
maximum number of 5,224,000 shares and 2,500,000 shares, respectively, of common stock have been
authorized and reserved for issuance under the Plans. The number of shares authorized may also be
24
increased from time to time by approval of the Board and the shareholders. The 1992 Stock Option
Plan terminated in 2006 and the 2004 Stock Option Plan terminates in 2014.
We are authorized to grant stock options, restricted stock grants and other awards under the
Plans. Stock options have a maximum term fixed by the Compensation Committee, not to exceed 10
years from the date of grant. Stock options become exercisable during their terms in the manner
determined by the Compensation Committee. Performance-based options are subject to variable
accounting and will be recognized when, and if, the criteria are met for vesting.
On April 1 of each year, each director who is not an employee of Navarre is granted an option
to purchase 6,000 shares of common stock under the Plans, at a price equal to fair market value.
These options are designated as non-qualified stock options. Each such option granted prior to
September 15, 2005, vests in five annual increments of 20% of the original option grant beginning
one year from the date of grant and expires on the earlier of (i) six years from the date of the
grant, and (ii) one year after the person ceases to serve as a director. Each option granted on or
after September 15, 2005, vests in three annual increments of
33⅓% of the original option grant
beginning one year from the date of grant, expires on the earlier of (i) ten years from the date of
grant, and (ii) one year after the person ceases to serve as a director, and shall provide for the
acceleration of vesting if the person ceases to serve as a director as a result of the Companys
mandatory director retirement rule.
In March 2006, the Company accelerated the vesting of out of the money options (see Note 2 to
the consolidated financial statements).
We are entitled to withhold and deduct from future wages of the participant (or from other
amounts that may be due and owing to the participant from us), or make other arrangements for the
collection of, all legally required amounts necessary to satisfy any and all federal, state and
local withholding and employment-related tax requirements (i) attributable to the grant or exercise
of an option or a restricted stock award or to a disqualifying disposition of stock received upon
exercise of an incentive stock option, or (ii) otherwise incurred with respect to an option or a
restricted stock award, or (iii) require the participant promptly to remit the amount of such
withholding to us before taking any action with respect to an option or a restricted stock award.
The following table below presents certain information regarding our Equity Compensation Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
Weighted-average |
|
|
remaining available for |
|
|
|
|
|
|
|
exercise |
|
|
future issuance under |
|
|
|
Number of securities to be |
|
|
price of |
|
|
equity |
|
|
|
issued upon exercise of |
|
|
outstanding |
|
|
compensation plans |
|
|
|
outstanding options, |
|
|
options, |
|
|
(excluding securities |
|
|
|
warrants and rights |
|
|
warrants and rights |
|
|
reflected in column (a)) |
|
Plan Category |
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity
compensation plans
approved by
security holders |
|
|
3,601,700 |
|
|
$ |
6.92 |
|
|
|
461,000 |
|
Equity compensation
plans not approved
by security holders |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,601,700 |
|
|
$ |
6.92 |
|
|
|
461,000 |
|
|
|
|
|
|
|
|
|
|
|
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with our consolidated
financial statements and related notes, Managements Discussion and Analysis of Financial
Condition and Results of Operations, and other financial information appearing elsewhere in this
Form 10-K. We derived the following historical financial information from our consolidated
financial statements for the fiscal years ended March 31, 2007, 2006, 2005, 2004 and 2003 which
have been audited by Grant Thornton LLP (years ended March 31, 2007, 2006 and 2005) and Ernst &
Young LLP (for the remaining periods).
25
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years ended March 31, |
|
|
2007 |
|
2006(1) |
|
2005 |
|
2004 |
|
2003 |
Statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
698,371 |
|
|
$ |
686,126 |
|
|
$ |
596,615 |
|
|
$ |
470,877 |
|
|
$ |
356,816 |
|
Gross profit, exclusive of depreciation and amortization |
|
|
116,702 |
|
|
|
107,093 |
|
|
|
91,352 |
|
|
|
58,021 |
|
|
|
45,475 |
|
Income from operations |
|
|
17,303 |
|
|
|
2,684 |
|
|
|
9,711 |
|
|
|
7,067 |
|
|
|
3,597 |
|
Interest expense |
|
|
(10,220 |
) |
|
|
(11,217 |
) |
|
|
(783 |
) |
|
|
(378 |
) |
|
|
(194 |
) |
Other income (expense) |
|
|
(139 |
) |
|
|
3,344 |
|
|
|
232 |
|
|
|
(458 |
) |
|
|
447 |
|
Net income (loss) before tax |
|
|
6,944 |
|
|
|
(5,189 |
) |
|
|
9,160 |
|
|
|
6,231 |
|
|
|
3,850 |
|
Income tax benefit (expense) |
|
|
(2,885 |
) |
|
|
2,014 |
|
|
|
1,006 |
|
|
|
583 |
|
|
|
|
|
Net income (loss) |
|
$ |
4,059 |
|
|
$ |
(3,175 |
) |
|
$ |
10,166 |
|
|
$ |
6,814 |
|
|
$ |
3,913 |
|
Earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.11 |
|
|
$ |
(.11 |
) |
|
$ |
.38 |
|
|
$ |
.30 |
|
|
$ |
.18 |
|
Diluted |
|
$ |
.11 |
|
|
$ |
(.11 |
) |
|
$ |
.35 |
|
|
$ |
.28 |
|
|
$ |
.18 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
35,786 |
|
|
|
29,898 |
|
|
|
26,830 |
|
|
|
22,780 |
|
|
|
21,616 |
|
Diluted |
|
|
36,228 |
|
|
|
29,898 |
|
|
|
28,782 |
|
|
|
24,112 |
|
|
|
21,841 |
|
Balance sheet data:(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
288,225 |
|
|
$ |
309,614 |
|
|
$ |
195,892 |
|
|
$ |
154,579 |
|
|
$ |
109,665 |
|
Shortterm debt |
|
|
39,208 |
|
|
|
5,115 |
|
|
|
334 |
|
|
|
651 |
|
|
|
805 |
|
Longterm debt |
|
|
14,970 |
|
|
|
75,352 |
|
|
|
237 |
|
|
|
|
|
|
|
268 |
|
Temporary equity Unregistered common stock |
|
|
|
|
|
|
16,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
113,451 |
|
|
|
88,906 |
|
|
|
77,284 |
|
|
|
53,078 |
|
|
|
28,263 |
|
|
|
|
(1) |
|
Includes acquisition of FUNimation completed May 11, 2005 (see Note 3 to the consolidated
financial statements). |
|
(2) |
|
Includes 2006 Private Placement (see Note 18 to the consolidated financial statements). |
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a distributor and publisher of physical and digital home entertainment and multimedia
products, including PC software, CD audio, DVD video, video games and accessories. Since our
founding in 1983, we have established distribution relationships with major retailers including
Best Buy, Wal-Mart/Sams Club, Circuit City, Staples, and Costco, and we have historically distributed to over
19,000 retail and distribution center locations throughout the United States and Canada. We believe
our established relationships throughout the supply chain, our broad product offering and our
distribution facility permit us to offer industry-leading home entertainment and multimedia
products to our retail customers and to provide access to attractive retail channels for the
publishers of such products.
Historically, our business focused on providing distribution services for third party vendors.
Over the past several years, we expanded our business to include the licensing and publishing of
home entertainment and multimedia content, primarily through our acquisitions of publishers in
select markets. By expanding our product offerings through such acquisitions, we believe we can
leverage both our sales experience and distribution capabilities to drive increased retail
penetration and more effective distribution of such products, and enable content developers and
publishers that we acquire to focus more on their core competencies.
Our business is divided into three segments Distribution, Publishing and Other (through
December 2005).
Distribution. Through our distribution business, we distribute and provide fulfillment
services in connection with a variety of finished goods that are provided by our vendors, which
include PC software and video game publishers and developers,
independent music labels (through May 31, 2007), major music labels (through December 2005), and independent and major motion picture
studios. These vendors provide us with PC software, CD audio, DVD video, and video games and
accessories which we, in turn, distribute to our retail customers. Our distribution business
focuses on providing vendors and retailers with a range of value-added services including:
vendor-managed inventory, Internet-based ordering, electronic data interchange services,
fulfillment services and retailer-
26
oriented marketing services. Our vendors include Symantec Corporation, Adobe Systems, Inc.,
McAfee, Inc., and Dreamcatcher Interactive, Inc.
Publishing. Through our publishing business, which generally has higher gross margins than our
distribution business, we own or license various PC software, CD audio and DVD video titles, and
other related merchandising and broadcasting rights. Our publishing business packages, brands,
markets and sells directly to retailers, third party distributors and our distribution business.
Our publishing business currently consists of Encore Software, Inc. (Encore), BCI Eclipse
Company, LLC (BCI), FUNimation Productions, Ltd. and The FUNimation Store, Ltd. (together,
FUNimation). Encore licenses and publishes personal productivity, genealogy, utility, education
and interactive gaming PC products, including titles such as Print Shop, Print Master, PC Tools
Spyware Doctor, Monopoly Here and Now, and Hoyle PC Gaming products. BCI is a provider of niche DVD
and video products such as He-man and the Masters of the Universe, Pride Fighting Championship,
Classic Cartoons and in-house produced CDs and DVDs. FUNimation, acquired on May 11, 2005, is the
leading provider of anime home video products and licenses and publishes titles such as Dragon Ball
Z, Fullmetal Alchemist, Trinity Blood, Samari Seven, Basilisk, Yu Yu Hakusho, Negima and Robotech.
Other. The other segment consisted of a variable interest entity, Mix & Burn, Inc. (Mix &
Burn), that was included in our consolidated results during the period commencing December 31,
2003 and ending December 31, 2005, in accordance with the provisions of FIN 46(R). During the three
months ended December 31, 2005, the Company deconsolidated Mix & Burn, as the Company was no longer
deemed to be the primary beneficiary of this variable interest entity.
Overall Summary of Fiscal 2007 Financial Results
Fiscal 2007 consolidated net sales increased 1.8% to $698.4 million compared to $686.1 million
in fiscal 2006. This increase was achieved through new product releases and a full year of
operating results from our FUNimation subsidiary. Our gross profit increased to $116.7 million or
16.7% of net sales for fiscal 2007 compared with $107.1 million or 15.6% of net sales for fiscal
2006. The increase in gross margin percent for 2007 was primarily due to product sales mix. Also,
prior year gross margin included the write-off of balances related to independent music labels
during the year.
Total operating expenses for fiscal 2007 were $99.4 million or 14.2% of net sales, compared
with $104.4 million or 15.2% of net sales for fiscal 2006. The decrease in operating expenses in
fiscal 2007 was primarily due to the reduction in write-off of accounts receivable of $8.5 million.
This was partially offset by fluctuations in other operating expenses. Net income for fiscal 2007
was $4.1 million or $0.11 per diluted share compared to net loss of $3.2 million or $0.11 per
diluted share for last year.
Effective April 1, 2006, we adopted the fair value recognition provisions of Statement of
Financial Accounting Standard No. 123R, Share-Based Payment, (SFAS 123R) for share based
compensation using the modified prospective transition method, and therefore we have not restated
prior periods results. All share-based compensation expense is recorded as general and
administrative expense. Total share-based compensation expense recorded in the year ended March 31,
2007 was $910,000. This amount would have been $12.6 million for the year ended March 31, 2006, had
we recognized share-based expense in the consolidated statements of operations under SFAS 123R.
During fiscal 2006, we accelerated vesting of stock options with exercise prices of $4.50 or
greater. Unrecognized compensation expense from unvested options was $2.0 million as of March 31,
2007 and is expected to be recognized over a weighted-average period of 1.46 years.
Working Capital and Debt
Our business is working capital intensive and requires significant levels of working capital
primarily to finance accounts receivable and inventories. We have relied on trade credit from
vendors, amounts received on accounts receivable and our revolving credit facility for our working
capital needs. In March 2007, we amended and restated our credit agreement with General Electric
Capital Corporation (GE) and entered into a four-year Term Loan facility with Monroe Capital
Advisors, LLC (Monroe). The GE agreement provides for a three-year $95.0 million revolving credit facility
and the Monroe agreement provides for a $15.0 million Term Loan facility. At March 31, 2007 we had
total debt outstanding of $39.0 million related to our $95.0 million revolving credit facility and
$15.0 million outstanding related to our Term Loan facility, as compared to total debt outstanding
of $80.1 million at March 31, 2006. Excess availability at March 31, 2007 on our revolving facility
was approximately $26.2 million.
27
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in conformity with accounting
principles generally accepted in the United States of America. The preparation of these
consolidated financial statements requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we review and evaluate our estimates,
including those related to customer programs and incentives, product returns, bad debt, production
costs and license fees, inventories, long-lived assets including intangible assets, goodwill,
share-based compensation, income taxes, contingencies and litigation. We base our estimates on
historical experience and various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Actual results could
differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies are affected by our judgment, estimates
and/or assumptions used in the preparation of our consolidated financial statements.
Revenue Recognition
We recognize revenue on products shipped when title and risk of loss transfers, delivery has
occurred, the price to the buyer is determinable and collectibility is reasonably assured. We
recognize service revenues upon delivery of the services. Service revenues represented less than
10% of total net sales for fiscal 2007, 2006 and 2005. Under specific conditions, we permit our
customers to return products. We record a reserve for sales returns and allowances against amounts
due to reduce the net recognized receivables to the amounts we reasonably believe will be
collected. These reserves are based on the application of our historical gross profit percent
against averages sales returns, sales discounts percent against average gross sales and specific
reserves for marketing programs. Our actual sales return rates have averaged between 12% to 14%
over the past three years. Although our past experience has been a good indicator of future reserve
levels, there can be no assurance that our current reserve levels will be adequate in the future.
Our distribution customers at times qualify for certain price protection benefits from our
vendors. We serve as an intermediary to settle these amounts between vendors and customers. We
account for these amounts as reductions of revenues with corresponding reductions in cost of sales.
Our publishing business at times provides certain price protection, promotional monies, volume
rebates and other incentives to customers. We record these amounts as reductions in revenue.
FUNimation revenue is recognized upon meeting the recognition requirements of American
Institute of Certified Public Accountants Statement of Position 00-2 (SOP 00-2), Accounting by
Producers or Distributors of Films. Revenues from home video distribution are recognized, net of an
allowance for estimated returns, in the period in which the product is available for sale by the
Companys customers (generally upon shipment to the customer and in the case of new releases, after
street date restrictions lapse). Revenues from broadcast licensing and home video sublicensing
are recognized when the programming is available to the licensee and other recognition requirements
of SOP 00-2 are met. Fees received in advance of availability are deferred until revenue
recognition requirements have been satisfied. Royalties on sales of licensed products are
recognized in the period earned. In all instances, provisions for uncollectible amounts are
provided for at the time of sale.
Production Costs and License Fees
In accordance with accounting principles generally accepted in the United States and industry
practice, the Company amortizes the costs of production using the individual-film-forecast method
under which such costs are amortized for each title or group of titles in the ratio that revenue
earned in the current period for such title bears to managements estimate of the total revenues to
be realized for such titles. All exploitation costs, including advertising and marketing costs are
expensed as incurred.
Management regularly reviews, and revises when necessary, its total revenue estimates on a
title-by-title or group of titles basis, which may result in a change in the rate of amortization
and/or a write-down of the asset to estimated fair value. The Company
28
determines the estimated fair value for properties based on the estimated future ultimate
revenues and costs in accordance with SOP 00-2.
Any revisions to ultimate revenues can result in significant quarter-to-quarter and
year-to-year fluctuation in production cost write-downs and amortization. The commercial potential
of individual films can vary dramatically, and is not directly correlated with production or
acquisition costs. Therefore, it is difficult to predict or project the impact that individual
films will have on the Companys results of operations. Significant fluctuations in reported income
or loss can occur, particularly on a quarterly basis, depending on the release schedules, broadcast
dates, the timing of advertising campaigns and the relative performance of the individual films.
License fees represent advance license/royalty payments made to program suppliers for
exclusive distribution rights. A program suppliers share of distribution revenues (Participation
Cost) is retained by the Company until the share equals the license fees paid to the program
supplier plus recoupable production costs. Thereafter, any excess is paid to the program supplier.
License fees are amortized as recouped by the Company which equals participation/royalty costs
earned by the program suppliers. Participation/royalty costs are accrued/expensed in the same ratio
that current period revenue for a title or group of titles bear to the estimated remaining
unrecognized ultimate revenue for that title, as defined by SOP 00-2. When estimates of total
revenues and costs indicate that an individual title will result in an ultimate loss, an impairment
charge is recognized to the extent that license fees and production costs exceed estimated fair
value, based on cash flows, in the period when estimated.
Allowance for Doubtful Accounts
We perform periodic credit evaluations of our customers financial condition and generally do
not require collateral. In determining the adequacy of our allowances, we analyze customer
financial statements, historical collection experience, aging of receivables, substantial
down-grading of credit scores, bankruptcy filings, and other economic and industry factors.
Although we utilize risk management practices and methodologies to determine the adequacy of the
allowance, the accuracy of the estimation process can be materially impacted by different judgments
as to collectibility based on the information considered and further deterioration of accounts. Our
largest collection risks exist for retail customers that are in bankruptcy, or at risk of
bankruptcy, such as the bankruptcy of certain retailers in fiscal 2007 and 2006 which resulted in
write-offs of $1.7 million and $12.2 million, respectively. If customer circumstances change (i.e.,
higher than expected defaults or an unexpected material adverse change in a major customers
ability to meet its financial obligations to us), our estimates of the recoverability of amounts
due could be reduced by a material amount.
Goodwill and Intangible Assets
We review goodwill for potential impairment annually for each reporting unit or when events or
changes in circumstances indicate the carrying value of the goodwill might exceed its current fair
value. We also assess potential impairment of goodwill and intangible assets when there is evidence
that recent events or changes in circumstances have made recovery of an assets carrying value
unlikely. The amount of impairment loss would be recognized as the excess of the assets carrying
value over its fair value. Factors which may cause impairment include negative industry or economic
trends and significant underperformance relative to historical or projected future operating
results.
We have no goodwill associated with our distribution segment, while our publishing segment has
goodwill. We determine fair value using widely accepted valuation techniques, including discounted
cash flow and market multiple analysis. These types of analyses require us to make certain
assumptions and estimates regarding industry economic factors and the profitability of future
business strategies. We conduct impairment testing at least once annually based on our most current
business strategy in light of present industry and economic conditions, as well as future
expectations. Our goodwill balances were $81.7 million and $81.2 million as of March 31, 2007 and
2006, respectively. If the operating results for our publishing segment deteriorate considerably
and are not consistent with our assumptions and estimates, we may be exposed to a goodwill
impairment charge that could be material.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property and equipment
and amortizable intangible assets, are evaluated for impairment whenever events or changes in
circumstances indicate the carrying value of an asset may not be recoverable. An impairment loss is
29
recognized when estimated undiscounted cash flows expected to result from the use of the asset
plus net proceeds expected from disposition of the asset (if any) are less than the carrying value
of the asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to
its estimated fair value. If our results from operations deteriorate considerably and are not
consistent with our assumptions, we may be exposed to a material impairment charge.
Inventory Valuation
Our inventories are recorded at the lower of cost or market. We use certain estimates and
judgments to properly value inventory. We monitor our inventory to ensure that we properly identify
inventory items that are slow-moving, obsolete or non-returnable, on a timely basis. A significant
risk in our distribution business is product that has been purchased from vendors that cannot be
sold at full distribution prices and is not returnable to the vendors. A significant risk in our
publishing business is that certain products may run out of shelf life and be returned by our
customers. Generally, these products can be sold in bulk to a variety of liquidators. We establish
reserves for the difference between carrying value and estimated realizable value in the periods
when we first identify the lower of cost or market issue. If future demand or market conditions are
less favorable than current analyses, additional inventory write-downs or reserves may be required
and would be reflected in cost of sales in the period the determination is made.
Share-based Compensation
We have granted stock options, restricted stock units and restricted stock to certain
employees and non-employee directors. We recognize compensation expense for all share-based
payments granted after March 31, 2006 and all share-based payments granted prior to but not yet
vested as of March 31, 2006, in accordance with SFAS 123R. Under the fair value recognition
provisions of SFAS 123R, we recognize share-based compensation net of an estimated forfeiture rate
and only recognize compensation cost for those shares expected to vest on a straight-line basis
over the requisite service period of the award (normally the vesting period) or when the
performance condition has been met. Prior to the adoption of SFAS 123R, we accounted for
share-based payments under APB Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25)
and accordingly, only recognized compensation expense for stock options or restricted stock, which
had a grant date intrinsic value.
Determining the appropriate fair value model and calculating the fair value of share-based
payment awards require the input of highly subjective assumptions, including the expected life of
the share-based payment awards and stock price volatility. We use the Black-Scholes model to value
our stock option awards and a lattice model to value restricted stock unit awards. We believe
future volatility will not materially differ from the historical volatility. Thus, the fair value
of the share-based payment awards represents our best estimates, but these estimates involve
inherent uncertainties and the application of management judgment. As a result, if factors change
and we use different assumptions, share-based compensation expense could be materially different in
the future. In addition, we are required to estimate the expected forfeiture rate and only
recognize expense for those shares expected to vest. If the actual forfeiture rate is materially
different from the estimate, share-based compensation expense could be significantly different from
what has been recorded in the current period. See Note 19 to the consolidated financial statements
for a further discussion of share-based compensation.
Income Taxes
Income taxes are recorded under the liability method, whereby deferred income taxes are
provided for temporary differences between the financial reporting and tax basis of assets and
liabilities. In the preparation of our consolidated financial statements, management is required to
estimate income taxes in each of the jurisdictions in which we operate. This process involves
estimating actual current tax exposures together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included in our consolidated balance sheet.
Management reviews its deferred tax assets for recoverability on a quarterly basis and assesses the
need for valuation allowances. These deferred tax assets are evaluated by considering historical
levels of income, estimates of future taxable income streams and the impact of tax planning
strategies. A valuation allowance is recorded to reduce deferred tax assets when it is determined
that it is more likely than not that we would not be able to realize all or part of our deferred
tax assets. We carried a valuation allowance against our net deferred tax assets at March 31, 2007
and 2006 of $1.0 million, respectively, related to the variable interest entity (VIE), Mix &
Burn.
30
Contingencies and Litigation
There are various claims, lawsuits and pending actions against us. If a loss arising from
these actions is probable and can be reasonably estimated, we record the amount of the estimated
loss. If the loss is estimated using a range within which no point is more probable than another,
the minimum estimated liability is recorded. Based on current available information, we believe the
ultimate resolution of existing actions will not have a materially adverse effect on our
consolidated financial statements (see Note 21 to our consolidated financial statements). As
additional information becomes available, we assess any potential liability related to existing
actions and may need to revise our estimates. Future revisions of our estimates could materially
impact our consolidated results of operations, cash flows or financial position.
Reconciliation of GAAP Net Sales to Net Sales Before Inter-Company Eliminations
In evaluating our financial performance and operating trends, management considers information
concerning our net sales before inter-company eliminations of sales that are not prepared in
accordance with generally accepted accounting principles (GAAP) in the United States. Management
believes these non-GAAP measures are useful because they provide supplemental information that
facilitates comparisons to prior periods and for the evaluations of financial results. Management
uses these non-GAAP measures to evaluate its financial results, develop budgets and manage
expenditures. The method we use to produce non-GAAP results is not computed according to GAAP, is
likely to differ from the methods used by other companies and should not be regarded as a
replacement for corresponding GAAP measures. Net sales before inter-company eliminations has
limitations as a supplemental measure, and you should not consider it in isolation or as a
substitute for analysis of our results as reported under GAAP. The following table represents a
reconciliation of GAAP net sales to net sales before inter-company eliminations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
(Unaudited) |
|
March 31, |
|
|
March 31, |
|
|
March 31, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution |
|
$ |
641,462 |
|
|
$ |
621,739 |
|
|
$ |
556,927 |
|
Publishing |
|
|
126,651 |
|
|
|
127,612 |
|
|
|
95,777 |
|
Other |
|
|
|
|
|
|
424 |
|
|
|
352 |
|
|
|
|
|
|
|
|
|
|
|
Net sales before intercompany eliminations |
|
|
768,113 |
|
|
|
749,775 |
|
|
|
653,056 |
|
Intercompany eliminations |
|
|
(69,742 |
) |
|
|
(63,649 |
) |
|
|
(56,441 |
) |
|
|
|
|
|
|
|
|
|
|
Net sales as reported |
|
$ |
698,371 |
|
|
$ |
686,126 |
|
|
$ |
596,615 |
|
|
|
|
|
|
|
|
|
|
|
31
Results of Operations
The following table sets forth for the periods indicated, the percentage of net sales
represented by certain items included in our Consolidated Statements of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution |
|
|
91.9 |
% |
|
|
90.6 |
% |
|
|
93.3 |
% |
Publishing |
|
|
18.1 |
|
|
|
18.6 |
|
|
|
16.1 |
|
Other |
|
|
0.0 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Elimination of sales |
|
|
(10.0 |
) |
|
|
(9.3 |
) |
|
|
(9.5 |
) |
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of sales exclusive of depreciation and amortization |
|
|
83.3 |
|
|
|
84.4 |
|
|
|
84.7 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
16.7 |
|
|
|
15.6 |
|
|
|
15.3 |
|
Selling and marketing |
|
|
4.1 |
|
|
|
4.3 |
|
|
|
3.6 |
|
Distribution and warehousing |
|
|
1.7 |
|
|
|
1.7 |
|
|
|
1.7 |
|
General and administrative |
|
|
6.3 |
|
|
|
6.1 |
|
|
|
7.7 |
|
Bad debt |
|
|
0.5 |
|
|
|
1.8 |
|
|
|
0.1 |
|
Depreciation and amortization |
|
|
1.6 |
|
|
|
1.3 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
14.2 |
|
|
|
15.2 |
|
|
|
13.7 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
2.5 |
|
|
|
0.4 |
|
|
|
1.6 |
|
Interest expense |
|
|
(1.5 |
) |
|
|
(1.6 |
) |
|
|
(0.1 |
) |
Interest income |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Deconsolidation of variable interest entity |
|
|
|
|
|
|
0.3 |
|
|
|
|
|
Warrant expense |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
|
|
Other income (expense), net |
|
|
|
|
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
Net (loss) income, before tax |
|
|
1.0 |
|
|
|
(0.8 |
) |
|
|
1.5 |
|
Tax (expense) benefit |
|
|
(0.4 |
) |
|
|
0.3 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
0.6 |
% |
|
|
(0.5 |
)% |
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
Certain information in this section contains forward-looking statements. Our actual results
could differ materially from the statements contained in the forward-looking statements as a result
of a number of factors, including risks and uncertainties inherent in our business, dependency upon
key employees, the seasonality of our business, dependency upon significant customers and vendors,
erosions in our gross profit margins, dependency upon financing, obtaining additional financing
when required, dependency upon software developers and manufacturers, risks of returns and
inventory obsolescence, effect of technology developments, effect of free music downloads, change
in retailers methods of distribution and the possible volatility of our stock price. See also
Business Forward-Looking Statements/Risk Factors in Item 1A of this Form 10-K.
Distribution Segment
The distribution segment distributes PC software, video games, accessories, major label music
(through December 2005), and DVD video, as well as independent
music (through May 31, 2007).
Fiscal 2007 Results Compared With Fiscal 2006
Net Sales
Net sales for the distribution segment were $641.5 million (before inter-company eliminations)
for fiscal 2007 compared to $621.7 million (before inter-company eliminations) for fiscal 2006. The
$19.8 million or 3.2% increase in net sales for fiscal 2007 was principally due to increases in
sales in all categories, except for our independent music category. Sales increased in the software
product group to $466.4 million for fiscal 2007 compared to $448.7 million for fiscal 2006.
Software continues to expand its market share presence. DVD video grew to $61.7 million for fiscal
2007 from $52.8 million in fiscal 2006 and video games increased to $44.8 million in fiscal 2007
from $39.9 million in fiscal 2006, due to increased publisher and customer rosters and strong
releases throughout the year. Independent music and independent DVD net sales decreased to $68.6
million from $71.9 million in the prior year due to timing of releases. On May 31, 2007, the Company
exited the independent music distribution business, which had net sales of
32
$52.0 million
and $62.0 million for fiscal 2007 and 2006, respectively. The Company exited the major label music
category in fiscal 2006, which had net sales of $8.4 million. The Company believes future sales
increases will be dependent upon the ability to continue to add new, appealing content and upon the
strength of the retail environment as a whole.
Gross Profit
Gross profit for the distribution segment was $70.1 million or 10.9% of net sales for fiscal
2007 compared to $59.6 million or 9.6% of net sales for fiscal 2006. The increase in gross profit
as a percent of net sales for fiscal 2007 was due to a shift in sales mix to higher gross margin
products. Also, prior year gross profit was negatively impacted by the write-off of balances of
$4.1 million related to an independent music label. The Company expects gross profit to fluctuate
depending upon the make-up of product sold.
Operating Expenses
Total operating expenses for the distribution segment were $62.9 million or 9.8% of net sales
for fiscal 2007 compared to $68.2 million or 11.0% of net sales for fiscal 2006. Overall expenses
for selling and marketing and bad debt expense decreased, which were partially offset by increases
in general and administrative expenses, distribution and warehouse expenses and depreciation and
amortization.
Selling and marketing expenses for the distribution segment were $15.7 million or 2.5% of net
sales for fiscal 2007 compared to $17.3 million or 2.8% of net sales for fiscal 2006. The decrease
in selling and marketing expenses for fiscal 2007 resulted primarily from decreased freight
costs and commissions. Freight costs as a percent of net sales, decreased to 1.6% for fiscal 2007
compared to 1.8% for fiscal 2006. The decreased expense incurred in freight costs was primarily due
to changes in customer shipping requirements, such as shipment of product to distribution centers
versus store locations and decreased fuel surcharges. Sales commissions decreased due to outside
sales commission rate changes relating to merchandising services at a major mass merchandiser.
Distribution and warehousing expenses for the distribution segment were $12.1 million or 1.9%
of net sales for fiscal 2007 compared to $11.7 million or 1.9% of net sales for fiscal 2006.
Expenses remained flat in comparison with prior year.
General and administration expenses for the distribution segment consist principally of
executive, accounting and administrative personnel and related expenses, including professional
fees. General and administration expenses for the distribution segment were $31.0 million or 4.8%
of net sales for fiscal 2007 compared to $28.2 million or 4.5% of net sales for fiscal 2006. The
total fluctuation between periods reflected higher expenses for fiscal 2007 including increased
salaries of $817,000 primarily related to incentive-based deferred compensation expense related to
the former CEOs employment agreement, increased bonus expense of $370,000 due to the overall
performance of the Company, increased stock-based compensation expense of $910,000 due to the
implementation of FAS 123R, and an increase of $1.3 million due to the implementation of a new ERP
system. These increases were partially offset by decreases in professional and legal fees of
approximately $1.2 million and other general and administrative expenses.
Bad debt expense
was $1.4 million or 0.2% of net sales for fiscal 2007 compared
to $8.8 million or 1.4% of net sales for fiscal 2006. Fiscal 2007 and 2006 included the write-off of accounts
receivable of $1.7 million and $9.0 million, respectively, due to the bankruptcy of certain
retailers. These were partially offset by some recoveries of other accounts receivable.
Depreciation and amortization for the distribution segment was $2.6 million for fiscal 2007
compared to $2.2 million for fiscal 2006. The increase is principally due to new warehouse
equipment depreciation.
Net operating income for the distribution segment was $7.2 million for fiscal 2007 compared to
a net operating loss of $8.6 million for fiscal 2006.
Fiscal 2006 Results Compared With Fiscal 2005
Net Sales
Net sales for the distribution segment were $621.7 million (before inter-company eliminations)
for fiscal 2006 compared to $556.9 million (before inter-company eliminations) for fiscal 2005. The
$64.8 million or 11.6% increase in net sales for fiscal 2006 was
33
principally due to increases in sales in all categories, except for major label music as the
Company exited this category in fiscal 2006. Sales increased by $9.6 million due to the transfer of
a third party software products distribution relationship with a major mass merchandiser from the
publishing segment. Sales also increased in the software product group to $448.7 million for fiscal
2006 compared to $399.3 million for fiscal 2005. The increase in net sales in this product group
was primarily due to continued increases in a variety of software categories, including internet
security utility products where sales remained strong due to continued demand. DVD video grew to
$52.8 million for fiscal 2006 from $38.9 million in fiscal 2005 and video games increased to $39.9
million in fiscal 2006 from $30.0 million in fiscal 2005, due to increased publisher and customer
rosters and strong releases throughout the year. Independent music and independent DVD net sales
increased to $71.9 million from $64.8 million in the prior year due to significant title releases
during fiscal 2006. Major label music net sales decreased to $8.4 million for fiscal 2006 from
$23.9 million for fiscal 2005 due to a change in buying patterns at a major retailer and the
Companys decision to exit this category during fiscal 2006. The Company exited the major label
music category to focus its resources on other product categories.
Gross Profit
Gross profit for the distribution segment was $59.6 million or 9.6% of net sales for fiscal
2006 compared to $59.9 million or 10.8% of net sales for fiscal 2005. The decrease in gross profit
as a percent of net sales for fiscal 2006 was primarily due to the write-off of balances related to
an independent music labels and higher sales of products with lower gross margins, such as video
games. We typically incur lower operating costs as a result of the non-returnable nature of the
terms of sales related to the video games category.
Operating Expenses
Total operating expenses for the distribution segment were $68.2 million or 11.0% of net sales
for fiscal 2006 compared to $62.1 million or 11.2% of net sales for fiscal 2005. Overall expenses
for selling and marketing and bad debt expense increased, which were partially offset by a decrease
in general and administrative expenses.
Selling and marketing expenses for the distribution segment were $17.3 million or 2.8% of net
sales for fiscal 2006 compared to $14.4 million or 2.6% of net sales for fiscal 2005. The increase
as a percent of net sales for fiscal 2006 resulted primarily from increased sales freight costs and
commissions. Freight costs as a percent of net sales, increased to 1.8% for fiscal 2006 compared to
1.7% for fiscal 2005. The increased expense incurred in freight costs was primarily due to changes
in customer shipping requirements, such as shipment of product to store locations versus
distribution centers and fuel surcharges. Sales commissions increased due to charges relating to
merchandising services at a major mass merchandiser.
Distribution and warehousing expenses for the distribution segment were $11.7 million or 1.9%
of net sales for fiscal 2006 compared to $10.0 million or 1.8% of net sales for fiscal 2005.
General and administration expenses for the distribution segment consist principally of
executive, accounting and administrative personnel and related expenses, including professional
fees. General and administration expenses for the distribution segment were $28.2 million or 4.5%
of net sales for fiscal 2006 compared to $35.5 million or 6.4% of net sales for fiscal 2005. Fiscal
2005 included $2.5 million of incentive-based deferred compensation expense related to the former
CEOs employment agreement and $5.8 million to acquire the remaining twenty percent ownership
position in Encore. The decrease in expenses from fiscal 2005 is also due to a reduction in bonus
expense of approximately $1.9 million due to the overall performance of the Company. These
decreases were partially offset by an increase in professional and legal fees of approximately
$800,000 and an increase in employee health benefits of approximately $1.0 million.
Bad debt expense was $8.8 million or 1.4% as a percent of net sales for fiscal 2006 compared
to $330,000 for fiscal 2005. The increase was due to the write-off of an accounts receivable in
fiscal 2006 of $9.0 million due to the bankruptcy of a major retailer. This was partially offset by
some recoveries of other accounts receivable.
Depreciation and amortization for the distribution segment was $2.2 million for fiscal 2006
compared to $1.8 million for fiscal 2005. The increase is principally due to the new warehouse
system and equipment.
34
Operating Income (Loss)
Net operating loss for the distribution segment was $8.6 million for fiscal 2006 compared to a
net operating loss of $2.2 million for fiscal 2005.
Publishing Segment
The publishing segment includes Encore, BCI and FUNimation. We acquired FUNimation on May 11,
2005, and its operating results are included from the date of acquisition.
Fiscal 2007 Results Compared With Fiscal 2006
Net Sales
Net sales for the publishing segment decreased 1% to $126.7 million (before inter-company
eliminations) for fiscal 2007 from $127.6 million (before inter-company eliminations) for fiscal
2006. Of the change in net sales, FUNimation contributed $55.0 million and $37.2 million during
fiscal 2007 and 2006, respectively, partially due to a full year contribution in fiscal 2007. The
decrease in net sales was primarily due to a softness in net sales due to a decline in certain PC
software and DVD categories, offset by strong anime home video net sales from releases which
included BlackCat, Basilisk, Fullmetal Panic, Trinity Blood and two Dragon Ball Z movie 3-packs.
The Company believes future sales increases will be dependent upon the ability to continue to add
new, appealing content and upon the strength of the retail environment as a whole.
Gross Profit
Gross profit for the publishing segment was $46.6 million or 36.8% as a percent of net sales
for fiscal 2007 and $47.4 million or 37.1% as a percent of net sales for fiscal 2006. The gross
margin rate remained relatively flat between the periods. The Company expects gross profit to fluctuate depending upon the make-up of product sold.
Operating Expenses
Operating expenses for the publishing segment were $36.5 million, or 28.8% of net sales, for
fiscal 2007 and $34.5 million, or 27.1% of net sales for fiscal 2006. Overall expenses for selling
and marketing, general and administrative, and depreciation and amortization expenses increased,
which were partially offset by a decrease in bad debt expense. The expense increases in fiscal
2007 was partially due to a full year contribution of FUNimation for fiscal 2007.
Selling and marketing
expenses were $13.3 million or 10.5% of net sales for fiscal 2007 and
$12.0 million or 9.4% of nets sales for fiscal 2006. The increase of $1.3 million from the prior
year is primarily due to increased advertising spending on new products.
General and administrative expenses were $12.6 million or 10.0% of net sales for fiscal 2007
and $12.2 million or 9.6% of nets sales for fiscal 2006. The expenses remained relatively flat
over the prior year.
Bad debt expense was $2.2 million for fiscal 2007 and $3.3 million for fiscal 2006. Fiscal
2006 included the write-off of amounts due to the bankruptcy of a retailer.
Depreciation and amortization expense was $8.3 million for fiscal 2007 and $7.0 million for
fiscal 2006. Fiscal 2006 amortization expense was reduced by $2.2 million based on the adjusted
purchase price allocation in the fourth quarter of fiscal 2006, related to the FUNimation
acquisition.
Operating Income (Loss)
Net operating income for the
publishing segment was $10.1 million for fiscal 2007 and $12.9 million
for fiscal 2006.
35
Fiscal 2006 Results Compared With Fiscal 2005
Net Sales
Net sales for the publishing segment were $127.6 million (before inter-company eliminations)
for fiscal 2006 and $95.8 million (before inter-company eliminations) for fiscal 2005. Of the
change in net sales, FUNimation contributed $37.2 million during fiscal 2006. The transfer of a
third-party software products distribution relationship with a major mass merchandiser from the
publishing segment to the distribution segment in fiscal 2005, accounted for a $9.6 million
decrease in fiscal 2006 net sales. The publishing segment benefited from a strong performance of
the new release, He-Man and the Masters of the Universe DVD and new versions of Print Shop and
Print Master, during fiscal 2006.
Gross Profit
Gross profit for the publishing segment was $47.4 million or 37.1% as a percent of net sales
for fiscal 2006 and $31.4 million or 32.8% as a percent of net sales for fiscal 2005. The gross
margin rate increase was primarily due to the transfer of a third-party software products
distribution arrangement with a mass merchandiser carrying lower than average profit margins to the
distribution segment in fiscal year 2005. In addition, FUNimations product mix increased profit
margins for fiscal 2006.
Operating Expenses
Operating expenses for the publishing segment were $34.5 million, or 27.1% of net sales, for
fiscal 2006 and $17.3 million, or 18.1% of net sales for fiscal 2005. The expense increase in
fiscal 2006 was primarily due to the addition of FUNimation in May 2005, which added $17.8 million
in additional expense, including $5.0 million of period amortization of intangibles related to
purchase accounting and the write-off of an accounts receivable of $3.2 million due to the
bankruptcy of a major retailer. Amortization expense was reduced by $2.2 million based on the
adjusted purchase price allocation in the fourth quarter of fiscal 2006. The increase is also due
to the advertising and marketing of new front line products, primarily He-Man and the Masters of
the Universe DVD. These increases were partially offset by a reduction in bonus expense of
approximately $850,000 due to the performance of the Company.
Operating Income (Loss)
Net operating income for the
publishing segment of $12.9 million for fiscal 2006 and $14.0 million
for fiscal 2005.
Other Segment
The other segment included the operations of Mix & Burn, a consolidated VIE. The VIE was
deconsolidated as of December 1, 2005 due to our determination that we were no longer the primary
beneficiary as defined by FIN 46(R).
Fiscal 2007 Results Compared With Fiscal 2006
There were no sales for the other segment in fiscal 2007 due to the deconsolidation in
December 2005 compared to net sales for the other segment of $424,000 (before inter-company
eliminations) for fiscal 2006. Gross profit for the other segment was $81,000 or 19.6% as a percent
of net sales for fiscal 2006. Total operating expenses for the other segment were $1.7 million for
fiscal 2006. The other segment had operating losses of $1.8 million for fiscal 2006.
Fiscal 2006 Results Compared With Fiscal 2005
Net sales for the other segment were $424,000 (before inter-company eliminations) for fiscal
2006 and $352,000 (before inter-company eliminations) for fiscal 2005. Gross profit for the other
segment was $81,000 or 19.6% as a percent of net sales for fiscal 2006 and $65,000 or 18.5% as a
percent of net sales for fiscal 2005. Total operating expenses for the other segment were $1.7
million for fiscal 2006 and $2.2 million for fiscal 2005. The other segment had operating losses of
$1.8 million for fiscal 2006 and $2.2 million for fiscal 2005.
36
Consolidated Other Income and Expense for All Periods
Other income and expense, net, increased to expense of $10.4 million in fiscal 2007 from
expense of $7.9 million in fiscal 2006. Interest expense was $10.2 million for fiscal 2007 compared
to $11.2 million for fiscal 2006. The decrease in interest expense for fiscal 2007 is a result of
the reduction in debt, partially offset by the write-off of debt financing costs of $2.4 million,
related to our prior debt facility. Other income (expense) amounts for fiscal 2007 consisted
primarily of interest income of $355,000, warrant expense of $251,000 related to the 2006 Private
Placement and $342,000 of other income (expense), net. Other income (expense) amounts for fiscal
2006 consisted primarily of interest income of $777,000, other income of $1.9 million related to
the deconsolidation of the variable interest entity, $342,000 of warrant expense related to the
2006 Private Placement, a gain on interest rate swaps of $623,000, and other income
(expense), net, of $390,000 which primarily related to a vendor contract buy-out of $375,000.
Other income and expense, net, increased to expense of $7.9 million in fiscal 2006 from
expense of $551,000 in fiscal 2005. Interest expense was $11.2 million for fiscal 2006 compared to
$783,000 for fiscal 2005. The increase in interest expense for fiscal 2006 is a result of financing
the FUNimation acquisition through bank debt and the write-off of debt acquisition costs of
$239,000 associated with the previous debt agreement. Other income (expense) amounts for fiscal
2006 consisted primarily of a vendor contract buy-out of $375,000, a gain on interest rate swaps of
$623,000 and interest income of $777,000. This category in fiscal 2006 also included other income
of $1.9 million related to the deconsolidation of the variable interest entity and $342,000 of
warrant expense related to the 2006 Private Placement. Other income (expense) amounts for
fiscal 2005 consisted primarily of interest income of $473,000 and other income (expense), net, of
$(241,000).
Consolidated Income Tax Expense or Benefit for All Periods
We recorded income tax expense for fiscal 2007 of $2.9 million or an effective tax rate of
41.5%, an income tax benefit of $2.0 million for fiscal 2006 or an effective tax rate of 38.8%, and
an income tax benefit of $1.0 million for fiscal 2005 or an effective tax rate of 11.0%. We
utilized net operating loss carryforwards in fiscal 2006 and 2005. No net operating loss carryforwards existed at March 31, 2007.
Consolidated Net Income (Loss) for All Periods
Net (loss) income for the fiscal years 2007, 2006 and 2005 were $4.1 million, $(3.2) million
and $10.2 million, respectively.
Market Risk
The Companys exposure to market risk is primarily due to the fluctuating interest rate
associated with variable rate indebtedness. See Item 7a - Quantitative and Qualitative Disclosure
About Market Risk.
Seasonality and Inflation
Quarterly operating results are affected by the seasonality of our business. Specifically, our
third quarter (October 1-December 31) typically accounts for our largest quarterly revenue figures
and a substantial portion of our earnings. Our third quarter accounted for approximately 30.1%,
31.3% and 30.6% of our net sales for the fiscal years ended March 31, 2007, 2006 and 2005, respectively. In
fiscal 2006 our third quarter earnings were not in line with our earnings trends primarily due to
the impact of the bankruptcy of a major retailer and the write-off of balances of an independent
label. As a distributor 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. Inflation is not expected to have a significant impact on our business, financial
condition or results of operations since we can generally offset the impact of inflation through a
combination of productivity gains and price increases.
Liquidity and Capital Resources
Cash Flow Analysis
Operating Activities
Cash provided by operating activities for fiscal 2007 totaled $22.5 million, cash used in
operating activities for fiscal 2006 totaled $7.3 million, and cash used in operating activities
totaled $2.5 million in fiscal 2005.
37
The net cash provided by operating activities for fiscal 2007 mainly reflected our net income,
combined with various non-cash charges, including depreciation and amortization of $11.1 million,
amortization and write-off of deferred financing costs of $3.0 million, amortization of license
fees of $7.4 million, amortization of production costs of $2.3 million, share-based compensation
expense of $910,000, deferred compensation costs of $1.1 million, offset by a change in deferred
income taxes of $1.4 million and by our working capital demands. The following are changes in the
operating assets and liabilities during fiscal 2007: accounts receivable decreased by $1.7
million, reflecting our increased focus on managing working capital; inventories decreased by $3.4
million, primarily reflecting a focus on reducing inventory levels combined with sales activity;
prepaid expenses and other current assets increased by $2.3 million, primarily reflecting royalty
advances in the publishing segment; income taxes receivable decreased by $3.6 million, primarily
due to the timing of required tax payments and tax refunds; other assets decreased $1.9 million,
primarily due to amortization and recoupments, production costs and license fees increased $3.9
million and $9.6 million, respectively, due primarily to new content acquisitions; accounts payable
increased $1.3 million, primarily due to timing of disbursements and accrued expenses decreased
$2.3 million primarily due to a result of decreased accrued interest expense and royalty payments.
The net cash used in operating activities for fiscal 2006 mainly reflected our net loss,
combined with various non-cash charges, including depreciation and amortization of $9.4 million,
amortization of license fees of $5.3 million, amortization of production costs of $1.9 million,
deferred taxes of $2.3 million, change in deferred revenue of $1.0 million, and a gain from the
deconsolidation of Mix & Burn of $1.9 million, offset by our working capital demands. Changes in
the following operating assets and liabilities for fiscal 2006 are net of the effect of the addition of the
FUNimation assets and liabilities due to the acquisition: accounts receivable decreased by $8.5
million, reflecting the focus on managing working capital; inventories increased by $2.7 million,
primarily reflecting higher inventories required to support the Companys $89.5 million net sales
increase; prepaid expenses increased by $1.3 million, primarily reflecting royalty advances in the
publishing segment; production costs and license fees increased $3.0 million and $11.3 million,
respectively, due primarily to new content acquisitions and income taxes receivable increased $4.4
million primarily due to timing of required tax payments.
The net cash used in fiscal 2005 mainly reflected our net earnings, combined with various
non-cash charges, including depreciation and amortization of $3.7 million and executive and stock
compensation expense of $8.6 million, deferred taxes of $4.8 million, and tax benefit from employee
stock plans of $2.4 million, offset by our working capital demands. Accounts receivable increased
by $14.5 million, reflecting the growth in sales for fiscal 2005. Inventories increased by $10.7
million, reflecting the higher inventories required by the Companys increased sales activities.
Prepaid expenses increased by $5.9 million, primarily reflecting royalty advances in the publishing
business. Accounts payable increased $4.4 million, primarily as a result of increased inventory.
Accrued expenses increased $6.0 million as a result of increased bonuses and royalties payable
resulting from increased profitability and sales.
Investing Activities
Cash flows used in investing activities totaled $8.9 million, $91.0 million and $3.7 million
in fiscal 2007, 2006 and 2005, respectively.
Acquisition of property and equipment totaled $7.1 million, $2.9 million and $9.4 million in
fiscal 2007, 2006 and 2005, respectively. Purchases of fixed assets in fiscal 2007 primarily
related to the new ERP project and warehouse equipment. Purchases of assets in fiscal 2006
consisted primarily of warehouse equipment. Purchases of assets in fiscal 2005 primarily related
to a new warehouse and warehouse system. In fiscal 2005, the purchases of fixed assets were offset
by $6.4 million in proceeds from the sale and leaseback of our new building. Purchase of intangible
assets totaled $1.5 million, $644,000 and $608,000 for fiscal 2007, 2006 and 2005, respectively.
Acquisition of businesses totaled $87.1 million for fiscal 2006 related to the acquisition of
FUNimation, a leading home video distributor and licensor of Japanese animation and childrens
entertainment in the United States. The Company completed this acquisition to continue to build its
catalog of content and grow the publishing segment.
Financing Activities
Cash flows used in financing activities was $26.9 million in fiscal 2007 and cash provided
from financing activities totaled $97.0 million and $7.3 million for fiscal 2006 and 2005,
respectively.
38
The Company recorded net proceeds from note payable line of credit of $39.0 million, net
proceeds from note payable of $15.0 million and repayments of note payable of $80.1 million for
fiscal 2007. Debt acquisition costs were $990,000 and proceeds received upon the exercise of
common stock options were $466,000 for fiscal 2007.
The Company recorded proceeds from notes payable of $141.1 million for fiscal 2006 and debt
issuance costs of $3.1 million for fiscal 2006. The Company recorded $59.9 million in repayments on
notes payable, net proceeds from the 2006 private placement of $18.5 million and proceeds from the
exercise of common stock options and warrants of $455,000 for fiscal 2006.
The Company recorded repayments on notes payable of $651,000, debt acquisition costs of
$527,000, and proceeds from exercise of common stock options and warrants of $8.2 million for
fiscal 2005.
Capital Resources
In October 2001, we entered into a credit agreement with General Electric Capital Corporation
as administrative agent, agent and lender, and GECC Capital Markets Group, Inc. as Lead Arranger,
for a three-year, $30.0 million revolving credit facility for use in connection with our working
capital needs. This agreement has been restated and amended on a number of occasions to accommodate
our growth and working capital needs.
On March 22, 2007, the credit agreement was amended and restated in its entirety and currently
provides for a senior secured three-year $95.0 million revolving
credit facility which expires on March 22, 2010.
The revolving
facility is available to us for working capital and general corporate needs and is subject to a
borrowing base requirement. The revolving facility is secured by a first priority security
interest in all of our assets, as well as the capital stock of our subsidiary companies. At March
31, 2007 we had $39.0 million outstanding on the revolving facility and approximately $26.2 million in excess
availability.
We also entered into a credit agreement with Monroe Capital Advisors, LLC as administrative agent,
agent and lender on March 22, 2007. The credit agreement currently provides for a four-year $15.0
million Term Loan facility which expires on March 22, 2011. The Term Loan facility calls for monthly
installments of $12,500 and final payment of $14.6 million on March 22, 2011. The facility is secured by a second
priority security interest in all of our assets of the Company. At March 31, 2007 we had $15.0
million outstanding on the facility.
Interest is currently
payable on revolving credit borrowings at variable rates determined by the applicable LIBOR plus 2.0%,
or the prime rate plus .75%. Interest is
currently payable on the Term Loan at a variable rate equal to the
LIBOR plus 7.5%. The applicable margins on the revolving facility will
be adjusted quarterly on a prospective basis as determined by the previous quarters ratio of borrowings to borrowing
availability.
Under both of the credit agreements, we are required to meet certain financial and
non-financial covenants. The financial covenants include a variety of financial metrics that are
used to determine our overall financial stability and include limitations on our capital
expenditures, a minimum ratio of EBITDA to fixed charges, a minimum EBITDA and a maximum of
indebtedness to EBITDA. We were in compliance with all the covenants related to the credit facility
on March 31, 2007.
Liquidity
We continually monitor our actual and forecasted cash flows, our liquidity and our capital
resources. We plan for potential increases in accounts receivable, inventory and payment of
obligations to creditors and fund 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:
(1) investments in our publishing segment in order to license content; (2) investments in our
distribution segment in order to sign exclusive distribution agreements; (3) equipment needs for
our operations; (4) amounts payable to our former Chief Executive Officer for post retirement
benefits; and (5) amounts payable in connection with the licensing and implementation of an
enterprise resource planning system (ERP) that we have undertaken. During fiscal year 2007, we invested
approximately $27.7 million, before recoveries, in connection with the acquisition of licensed and
exclusively distributed product in our publishing and distribution segments. Additionally, we had
cash outlays of $5.3 million in connection with the licensing and implementation of our enterprise
resource planning system during the year ended March 31, 2007. We anticipate that cash
outlays in connection with the ERP system for fiscal 2008 will be approximately
$8.8 million which will be funded by working capital.
Our credit agreements currently provide a three-year $95.0 million revolving facility and a
four-year Term loan facility for $15.0 million. The revolving sub-facility of up to $95.0 million
is available for working capital and general corporate needs. During fiscal 2007, we made payments
of $80.1 million to pay off the amounts outstanding of the former Term Loan B sub-facility. As of
March 31, 2007, we had $15.0 million outstanding on the new Term Loan facility and $39.0
million outstanding on the revolving facility and excess availability of approximately $26.2 million.
39
We currently believe cash and cash equivalents, funds generated from the expected results of
operations and funds available under our existing credit facility will be sufficient to satisfy our
working capital requirements, other cash needs, and to finance expansion plans and strategic
initiatives in the foreseeable future, absent significant acquisitions. We have stated our plans to
grow through acquisitions; however, such opportunities will likely require the use of additional
equity or debt capital, some combination thereof, or other financing.
Contractual Obligations
The following table presents information regarding contractual obligations that exist as of
March 31, 2007 by fiscal year (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
than 1 |
|
|
2 3 |
|
|
4 5 |
|
|
More than 5 |
|
|
|
Total |
|
|
Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
Operating leases |
|
$ |
31,635 |
|
|
$ |
3,442 |
|
|
$ |
6,938 |
|
|
$ |
5,053 |
|
|
$ |
16,202 |
|
Capital leases |
|
|
276 |
|
|
|
132 |
|
|
|
136 |
|
|
|
8 |
|
|
|
|
|
Note payable |
|
|
15,000 |
|
|
|
150 |
|
|
|
300 |
|
|
|
14,550 |
|
|
|
|
|
License and distribution agreement |
|
|
22,352 |
|
|
|
15,618 |
|
|
|
6,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
69,263 |
|
|
$ |
19,342 |
|
|
$ |
14,108 |
|
|
$ |
19,611 |
|
|
$ |
16,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 7a Quantitative and Qualitative Disclosures About Market Risk
Market Risk. Market risk refers to the risk that a change in the level of one or more market
prices, interest rates, indices, volatilities, correlations or other market factors such as
liquidity will result in losses for a certain financial instrument or group of financial
instruments. We do not hold or issue financial instruments for trading purposes, and do not enter
into forward financial instruments to manage and reduce the impact of changes in foreign currency
rates because we have few foreign relationships and substantially all of our foreign transactions
are negotiated, invoiced and paid in U.S. dollars. Based on the controls in place and the relative
size of the financial instruments entered into, we believe the risks associated with not using
these instruments will not have a material adverse effect on our consolidated financial position or
results of operations.
Interest Rate Risk. Our exposure to changes in interest rates results primarily from credit
facility borrowings. As of March 31, 2007 we had $54.0 million of indebtedness, which was subject
to interest rate fluctuations. Based on these borrowings subject to interest rate fluctuations
outstanding on March 31, 2007, a 100-basis point change in LIBOR would cause the Companys annual
interest expense to change by $540,000.
Foreign Currency Risk. We have a limited number of foreign transactions. Substantially all of
our foreign transactions are negotiated, invoiced and paid in U.S. dollars. Fluctuations
in the value of the dollar as compared to other foreign currencies
for fiscal 2007 was a loss of $413,000.
Item 8. Financial Statements and Supplementary Data
The information called for by
this item is set forth in the Consolidated Financial Statements
and Schedule covered by the Reports of Independent Registered Public Accounting Firm at the end of
this report commencing at the pages indicated below:
Reports of Independent
Registered Public Accounting Firm
Consolidated Balance Sheets at March 31, 2007 and 2006
Consolidated Statements of Operations for the years ended March 31, 2007, 2006 and 2005
Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) for the years ended March 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the years ended March 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
Valuation and Qualifying Accounts Schedule for the years ended March 31, 2007, 2006 and 2005
All of the foregoing Consolidated Financial Statements and Schedule are hereby incorporated in this
Item 8 by reference.
40
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (Disclosure Controls), as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that
information required to be disclosed in our Exchange Act reports, including the Companys Annual
Report on Form 10-K, is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) and 15d-15(b) under the Exchange Act, we carried out an
evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures as of the end of the period covered by this report. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of the date of such evaluation.
Managements Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting (Internal Control) as defined in Rules 13a-15(f) under the
Securities Exchange Act of 1934, as amended (the Exchange Act). The Companys internal control
system is designed to provide reasonable assurance to the Companys management and Board of
Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:
(i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions
and dispositions of our assets;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted
accounting principles, and that our receipts and expenditures
are being made only in accordance with the authorizations of our
management and directors; and
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on our financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
An internal control material weakness is a significant deficiency, or combination of
significant deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented or detected.
Management has assessed the effectiveness of the Companys internal control over financial
reporting as of March 31, 2007. In making its assessment of internal control over financial
reporting, management used the criteria set forth by the Committee of Sponsoring Organizations
(COSO) of the Treadway Commission in Internal Control-Integrated Framework. Based on our
assessment, we believe that, as of March 31, 2007, the Companys internal control over financial
reporting is effective based on those criteria.
Grant Thornton LLP, the Companys independent registered public accounting firm, has issued an
attestation report included herein on managements assessment of the Companys internal control
over financial reporting.
Changes in Internal Control over Financial Reporting
There were no changes in the Companys internal control over financial reporting that occurred
during the Companys last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
Item 9B. Other Information
None.
41
PART III
Item 10. Directors, Executive Officers of the Registrant and Corporate Governance
We refer you to our Proxy Statement for our 2007 Annual Meeting of Shareholders, which will be
filed with the Securities and Exchange Commission (SEC) within 120 days after the close of our
fiscal year, for information regarding this item and our directors and nominees for director. This
information is incorporated by reference into this item of the report.
Information regarding our executive officers is found in Part I, Item 1 of this report under
the heading Executive Officers of the Company.
We refer you to our Proxy Statement for our 2007 Annual Meeting of Shareholders, which will be
filed with the SEC within 120 days after the close of our fiscal year, for information regarding
our Audit Committee members and audit committee financial experts. This information is
incorporated by reference into this item of the report.
We refer to our Proxy Statement for our 2007 Annual Meeting of Shareholders, which will be
filed with the SEC within 120 days after the close of our fiscal year, for information regarding
compliance with Section 16(a) of the Securities Exchange Act of 1934. This information is
incorporated by reference into this item of the report.
The information regarding the Companys Code of Business Ethics is incorporated by reference
to the information to be contained in our Proxy Statement for our 2007 Annual Meeting of
Shareholders, which will be filed with the SEC within 120 days after the close our fiscal year.
Item 11. Executive Compensation
Information required under this item will be contained in our Proxy Statement for our 2007
Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the close
our fiscal year and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information required under this item will be contained in our Proxy Statement for our 2007
Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the close
our fiscal year and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required under this item will be contained in our Proxy Statement for our 2007
Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the close
our fiscal year and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information required under this item will be contained in our Proxy Statement for our 2007
Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the close
our fiscal year and is incorporated herein by reference.
42
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report -
|
(1) |
|
Financial Statements. Our following consolidated financial statements and the
Reports of Independent Registered Public Accounting Firm thereon are set forth at the end
of this document: |
|
(i) |
|
Reports of Independent Registered Public Accounting Firm. |
|
|
(ii) |
|
Consolidated Balance Sheets as of March 31, 2007 and 2006. |
|
|
(iii) |
|
Consolidated Statements of Operations for the years ended March 31,
2007, 2006 and 2005. |
|
|
(iv) |
|
Consolidated Statements of Shareholders Equity and Comprehensive Income
(Loss) for the years ended March 31, 2007, 2006 and 2005. |
|
|
(v) |
|
Consolidated Statements of Cash Flows for the years ended March 31, 2007,
2006 and 2005. |
|
|
(vi) |
|
Notes to Consolidated Financial Statements |
|
(2) |
|
Financial Statement Schedules |
|
(i) |
|
Schedule II Valuation and Qualifying Accounts and Reserves |
Schedules other than those listed above have been omitted because they are inapplicable
or the required information is either immaterial or shown in the Consolidated Financial
Statements or the notes thereto.
|
|
|
Item |
|
|
No. |
|
Description |
3.1
|
|
Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Companys Annual Report
on Form 10-K for the year ended March 31, 2000 (File No. 0-22982)). |
|
|
|
3.2
|
|
Bylaws of the Company (incorporated by reference to Exhibit 4.2 to the Companys Registration
Statement on Form S-3 (File No. 333-111733)). |
|
|
|
3.5
|
|
Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the
Companys Registration Statement on Form S-1 filed April 13, 2006 (File No. 000-22982)). |
|
|
|
3.6
|
|
Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Companys
Registration Statement on Form S-1 filed April 13, 2006 (File No. 000-22982)). |
|
|
|
3.7
|
|
Companys Amended and Restated Bylaws as of January 25, 2007 (incorporated by reference to Exhibit
3.1 to the Companys Form 8-K dated January 25, 2007 (File No. 0-22982)). |
|
|
|
4.1
|
|
Form of Specimen Certificate for Common Stock (incorporated by reference to Exhibit 4.1 to the
Companys Registration Statement on Form S-1 filed April 13, 2006 (File No. 000-22982)). |
|
|
|
4.2
|
|
Form of Warrant dated March 21, 2006 (incorporated by reference to Exhibit 4.4 to the Companys
Registration Statement on Form S-1 filed April 13, 2006 (File No. 000-22982)). |
|
|
|
4.3
|
|
Form of Agents Warrant (incorporated by reference to Exhibit 4.5 to the Companys Registration
Statement on Form S-1/A filed June 26, 2006 (File No. 3-133280)). |
|
|
|
10.1 *
|
|
Employment Agreement dated November 1, 2001 between the Company and Eric H. Paulson (incorporated by
reference |
43
|
|
|
Item |
|
|
No. |
|
Description |
|
|
to Exhibit 10.1 to the Companys Form 10-Q for the quarter ended December 31, 2001 (File
No. 0-22982)). |
|
|
|
10.2 *
|
|
Amendment to Employment Agreement between the Company and Eric H. Paulson (incorporated by reference
to Exhibit 10.1.1 to the Companys Form 10-Q for the quarter ended December 31, 2003 (File No.
0-22982)). |
|
|
|
10.3 *
|
|
Employment Agreement dated January 2, 2002 between the Company and Charles E. Cheney (incorporated
by reference to Exhibit 10.2 to the Companys Annual Report on Form 10-K for the year ended March
31, 2002 (File No. 0-22982)). |
|
|
|
10.4 *
|
|
Employment Agreement between Encore Software, Inc. and Michael Bell (incorporated by reference to
Exhibit 10.3 to the Companys Annual Report on Form 10-K for the year ended March 31, 2003 (File No.
0-22982)). |
|
|
|
10.5 *
|
|
Employment Agreement dated November 5, 2003, between BCI Eclipse Company, LLC and Edward D. Goetz
(incorporated by reference to Exhibit 10.16 to the Companys Form 10-Q for the quarter ended
September 30, 2003 (File No. 0-22982)). |
|
|
|
10.6 *
|
|
1992 Stock Option Plan, amended and restated (incorporated by reference to Exhibit 10.3 to the
Companys Annual Report on Form 10-K for the year ended March 31, 2002 (File No. 0-22982)). |
|
|
|
10.7 *
|
|
2003 Amendment to the Companys 1992 Stock Option Plan (incorporated by reference to Exhibit 99.1 to
the Companys Registration Statement on Form S-8 (File No. 333-109056)). |
|
|
|
10.8 *
|
|
Form of Individual Stock Option Agreement under 1992 Stock Option Plan (incorporated by reference to
Exhibit 10.4 to the Companys Registration Statement on Form S-1 (No. 333-68392)). |
|
|
|
10.9 *
|
|
Form of Termination Agreement for certain of the Companys Executives (incorporated by reference to
Exhibit 10.2 to the Companys Form 10-Q for the quarter ended December 31, 2001 (File No. 0-22982)). |
|
|
|
10.10
|
|
Lease dated March 12, 1998 between the Company and Cambridge Apartments, Inc. with respect to the
corporate headquarters in New Hope, MN (incorporated by reference to Exhibit 10.6 to the Companys
Annual Report on Form 10-K for the year ended March 31, 1999 (File No. 0-22982)). |
|
|
|
10.11
|
|
Amendment No. 1 to Lease Agreement between the Company and Cambridge Apartments, Inc. dated April 1,
1998 (incorporated by reference to Exhibit 10.9.1 to the Companys Form 10-Q for the quarter ended
June 30, 2003 (File No. 0-22982)). |
|
|
|
10.12
|
|
Amendment No. 2 to Lease Agreement between the Company and Cambridge Apartments, Inc. dated July 14,
2003 (incorporated by reference to Exhibit 10.9.2 to the Companys Form 10-Q for the quarter ended
June 30, 2003 (File No. 0-22982)). |
|
|
|
10.13
|
|
Lease dated May 1, 1999 between the Company and Sunlite III, LLP with respect to a second facility
in Brooklyn Park, MN (incorporated by reference to Exhibit 10.7 to the Companys Annual Report on
Form 10-K for the year ended March 31, 1999 (File No. 0-22982)). |
|
|
|
10.14
|
|
Amendment Nos. 1, 2 and 3 to Lease Agreement (incorporated by reference to Exhibit 10.10.1 to the
Companys Annual Report on Form 10-K for the year ended March 31, 2003 (File No. 0-22982)). |
|
|
|
10.15
|
|
Lease dated December 17, 1999 between Encore and EastGroup Properties L.P., with respect to a third
facility in Gardena, California (incorporated by reference to Exhibit 10.11 to the Companys Annual
Report on Form 10-K for the year ended March 31, 2003 (File No. 0-22982)). |
|
|
|
10.16
|
|
First Amendment to Lease dated June 27, 2002 between Encore and Eastgroup Properties L.P.
(incorporated by reference to Exhibit 10.11.1 to the Companys Annual Report on Form 10-K for the
year ended March 31, 2003 (File No. 0-22982)). |
|
|
|
10.31
|
|
Agreement of Reciprocal Easements, Covenants, Conditions and Restrictions dated June 16, 2003
(incorporated by reference to Exhibit 10.9.3 to the Companys Form 10-Q for the quarter ended June
30, 2003 (File No. 0-22982)). |
44
|
|
|
Item |
|
|
No. |
|
Description |
10.32 *
|
|
Incentive Stock Option Agreement dated September 6, 2002 between Cary Deacon and the Company
(incorporated by reference to Exhibit 10.17 to the Companys Form 10-Q for the quarter ended
September 30, 2003 (File No. 0-22982)). |
|
|
|
10.33
|
|
Addendum to Incentive Stock Option Agreement dated November 13, 2003 (incorporated by reference to
Exhibit 10.17.1 to the Companys Form 10-Q for the quarter ended September 30, 2003 (File No.
0-22982)). |
|
|
|
10.36
|
|
Form of Separation Agreement with Charles E. Cheney dated April 30, 2004 (incorporated by reference
to Exhibit 10.41 to the Companys Form 10-K for the year ended March 31, 2004 (File No. 0-22982)). |
|
|
|
10.37
|
|
Form of Assignment of Lease between BCI Eclipse LLC and BCI Eclipse Company, LLC dated November 3,
2003 (incorporated by reference to Exhibit 10.42 to the Companys Form 10-K for the year ended March
31, 2004 (File No. 0-22982)). |
|
|
|
10.41
|
|
Form of Amended and Restated Credit Agreement with General Electric Capital Corporation dated June
18, 2004 (incorporated by reference to Exhibit 10.46 to the Companys Form 10-K for the year ended
March 31, 2004 (File No. 0-22982)). |
|
|
|
10.42
|
|
Form of Lease Agreement between the Company and NL Ventures IV New Hope, L.P. dated May 27, 2004
(incorporated by reference to Exhibit 10.47 to the Companys Form 10-K for the year ended March 31,
2004 (File No. 0-22982)). |
|
|
|
10.43
|
|
Form of Third Amendment to Office/Warehouse Lease between Cambridge Apartments, Inc. and the Company
dated February 23, 2004 (incorporated by reference to Exhibit 10.48 to the Companys Form 10-K for
the year ended March 31, 2004 (File No. 0-22982)). |
|
|
|
10.44
|
|
Form of Fourth Amendment to Office/Warehouse Lease between Cambridge Apartments, Inc. and the
Company dated June 2004 (incorporated by reference to Exhibit 10.49 to the Companys Form 10-K for
the year ended March 31, 2004 (File No. 0-22982)). |
|
|
|
10.45
|
|
Amendment No. 2 to Lease Agreement between Airport One Limited Partnership and the Company dated
March 21, 2004 (incorporated by reference to Exhibit 10.50 to the Companys Form 10-K for the year
ended March 31, 2004 (File No. 0-22982)). |
|
|
|
10.46
|
|
Addendum to Lease Agreement between Cambridge Apartments, Inc. and the Company dated May 27, 2004
(incorporated by reference to Exhibit 10.51 to the Companys Form 10-K for the year ended March 31,
2004 (File No. 0-22982)). |
|
|
|
10.47
|
|
Form of BCI Eclipse Lease Agreement effective October 1, 1999 (incorporated by reference to Exhibit
10.52 to the Companys Form 10-K for the year ended March 31, 2004 (File No. 0-22982)). |
|
|
|
10.48
|
|
First Amendment to BCI Eclipse Lease Agreement made as of January 5, 2000 (incorporated by reference
to Exhibit 10.53 to the Companys Form 10-K for the year ended March 31, 2004 (File No. 0-22982)). |
|
|
|
10.49
|
|
Amended and Restated Credit Agreement dated June 18, 2004 between the Company and General Electric
Capital Corporation (incorporated by reference to Exhibit 10.54 to the Companys Form 10-Q for the
quarter ended September 30, 2004 (File No. 0-22982)). |
|
|
|
10.50
|
|
Amendment No. 1 and Limited Waiver with Respect to Amended and Restated Credit Agreement dated
August 25, 2004 (incorporated by reference to Exhibit 10.55 to the Companys Form 10-Q for the
quarter ended September 30, 2004 (File No. 0-22982)). |
|
|
|
10.51
|
|
Amendment No. 2 and Limited Waiver with Respect to Amended and Restated Credit Agreement dated
October 18, 2004 (incorporated by reference to Exhibit 10.56 to the Companys Form 10-Q for the
quarter ended September 30, 2004 (File No. 0-22982)). |
|
|
|
10.52
|
|
Lease dated October 8, 2004, between Encore Software, Inc. and Kilroy Realty, L.P., with respect to
an office facility in El Segundo, California (incorporated by reference to Exhibit 10.57 to the
Companys Form 10-Q for the quarter ended September 30, 2004 (File No. 0-22982)). |
45
|
|
|
Item |
|
|
No. |
|
Description |
10.53
|
|
Form of License and Distribution Agreement (Manufacturing Rights) (2004-2005) between Riverdeep Inc.
and Encore Software, Inc. dated as of March 29, 2004 (incorporated by reference to Exhibit 10.1 to
the Companys Form 10-Q/A for the quarter ended September 30, 2004 (File No. 0-22982)). |
|
|
|
10.54
|
|
Form of License and Distribution Agreement (Manufacturing Rights) (2005-2007) between Riverdeep Inc.
and Encore Software, Inc. dated as of March 29, 2004 (incorporated by reference to Exhibit 10.2 to
the Companys Form 10-Q/A for the quarter ended September 30, 2004 (File No. 0-22982)). |
|
|
|
10.55
|
|
Form of Addendum #1 to Licensing and Distribution Agreements (2004-2005 and 2005-2007) between
Riverdeep, Inc. and Encore Software, Inc. dated as of April 13, 2004 (incorporated by reference to
Exhibit 10.3 to the Companys Form 10-Q/A for the quarter ended September 30, 2004 (File No.
0-22982)). |
|
|
|
10.56
|
|
Form of Addendum #2 to Licensing and Distribution agreements (2004-2005 and 2005-2007) between
Riverdeep, Inc. and Encore Software, Inc. dated October 2004 (incorporated by reference to Exhibit
10.4 to the Companys Form 10-Q/A for the quarter ended September 30, 2004 (File No. 0-22982)). |
|
|
|
10.57 *
|
|
Navarre Corporation 2004 Stock Plan (incorporated by reference to Exhibit D to the Companys Proxy
Statement filed July 27, 2004 (File No. 0-22982)). |
|
|
|
10.58*
|
|
Form of 2004 Stock Plan Incentive Stock Option Agreement. |
|
|
|
10.59*
|
|
Form of 2004 Stock Plan Non-Employee Director Stock Option Agreement. |
|
|
|
10.62
|
|
FUNimation Partnership Interest Purchase Agreement, dated January 10, 2005 (incorporated by
reference to Exhibit 10.1 to the Companys Form 8-K filed January 14, 2005 (File No. 0-22982)). |
|
|
|
10.63
|
|
Form of Assignment and Assumption Agreement (incorporated by reference to Exhibit 10.1(a) to the
Companys Form 8-K filed January 14, 2005 (File No. 0-22982)). |
|
|
|
10.64*
|
|
Form of Gen Fukanaga Employment Agreement (incorporated by reference to Exhibit 10.1(b) to the
Companys Form
8-K filed January 14, 2005 (File No. 0-22982)). |
|
|
|
10.66
|
|
Form of Non-Competition Agreement (incorporated by reference to Exhibit 10.1(d) to the Companys
Form 8-K filed January 14, 2005 (File No. 0-22982)). |
|
|
|
10.67
|
|
Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.1(e) to the Companys
Form 8-K filed January 14, 2005 (File No. 0-22982)). |
|
|
|
10.68
|
|
Form of Release (incorporated by reference to Exhibit 10.1(f) to the Companys Form 8-K filed
January 14, 2005 (File No. 0-22982)). |
|
|
|
10.69
|
|
Limited Waiver and Third Amendment to Amended and Restated Credit Agreement, filed January 14, 2005
(incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed January 14, 2005 (File
No. 0-22982)). |
|
|
|
10.70
|
|
Amendment No. 3 to Lease Agreement between Airport One Limited Partnership and the Company dated
November 23, 2004 (incorporated by reference to Exhibit 10.1 to the Companys Form 10-Q for the
quarter ended December 31, 2005 (File No. 0-22982)). |
|
|
|
10.71
|
|
Form of Addendum #3 to Licensing and Distribution Agreements (2004-2005 and 2005-2007) between
Riverdeep, Inc. and Encore Software, Inc. dated November 2004 (incorporated by reference to Exhibit
10.2 to the Companys Form 10-Q for the quarter ended December 31, 2005 (File No. 0-22982)). |
|
|
|
10.72
|
|
Amendment No. 1 to Lease Agreement between Encore Software, Inc. and Kilroy Realty, L.P. dated
December 29, 2004 (incorporated by reference to Exhibit 10.3 to the Companys Form 10-Q for the
quarter ended December 31, 2005 (File No. 0-22982)). |
|
|
|
10.73
|
|
Limited Waiver With Respect To Amended and Restated Credit Agreement dated March 15, 2005
(incorporated by |
46
|
|
|
Item |
|
|
No. |
|
Description |
|
|
reference to Exhibit 10.1 to the Companys Form 8-K filed March 17, 2005 (File No.
0-22982)). |
|
|
|
10.74
|
|
Stock Purchase Agreement between the Company and Michael Bell dated March 14, 2005 (incorporated by
reference to Exhibit 10.2 to the Companys Form 8-K filed March 17, 2005 (File No. 0-22982)). |
|
|
|
10.75
|
|
Registration Rights Agreement between the Company and Michael Bell dated March 14, 2005
(incorporated by reference to Exhibit 10.3 to the Companys Form 8-K filed March 17, 2005 (File No.
0-22982)). |
|
|
|
10.76
|
|
Amendment to Stock Purchase Agreement between the Company and Michael Bell dated March 31, 2005
(incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed April 14, 2005 (File No.
0-22982)). |
|
|
|
10.77
|
|
Amendment to Registration Rights Agreement between the Company and Michael Bell dated March 31, 2005
(incorporated by reference to Exhibit 10.2 to the Companys Form 8-K filed April 14, 2005 (File No.
0-22982)). |
|
|
|
10.78
|
|
Limited Waiver with Respect to Amended and Restated General Electric Capital Corporation Credit
Agreement dated March 31, 2005 (incorporated by reference to Exhibit 10.3 to the Companys Form 8-K
filed April 14, 2005 (File No. 0-22982)). |
|
|
|
10.79
|
|
Pledge Agreement between the Company and General Electric Capital Corporation related to Encore
shares dated March 31, 2005 (incorporated by reference to Exhibit 10.4 to the Companys Form 8-K
filed April 14, 2005 (File No. 0-22982)). |
|
|
|
10.80
|
|
Amendment No. 1 to Partnership Interest Purchase Agreement dated May 11, 2005 (incorporated by
reference to Exhibit 10.1 to the Companys Form 8-K filed May 17, 2005 (File No. 0-22982)). |
|
|
|
10.81
|
|
Second Amended and Restated Credit Agreement dated as of May 11, 2005 between the Company and
General Electric Capital Corporation (incorporated by reference to Exhibit 10.2 to the Companys
Form 8-K filed May 17, 2005 (File No. 0-22982)). |
|
|
|
10.82
|
|
Form of Third Amended and Restated Credit Agreement with Lenders and General Electric Capital
Corporation dated June 1, 2005 (incorporated by reference to Exhibit 10.1 to the Companys Form 8-K
filed June 3, 2005 (File No. 0-22982)). |
|
|
|
10.83
|
|
Form of Limited Waiver to General Electric Capital Corporation Second Amended and Restated Credit
Agreement dated June 1, 2005 (incorporated by reference to Exhibit 10.2 to the Companys Form 8-K
filed June 3, 2005 (File No. 0-22982)). |
|
|
|
10.84
|
|
Office Lease dated August 1, 2004 between Cocanaugher Asset #1, Ltd. and FUNimation Productions, Ltd. |
|
|
|
10.85
|
|
Letter dated June 14, 2005 regarding Companys policy to use straight-line method of depreciation
from Grant Thornton LLP. |
|
|
|
10.86
|
|
Form of Addendum #6 to Licensing and Distribution Agreements (2004-2005 and 2005-2007) between
Riverdeep, Inc. and Encore Software, Inc. dated October 6, 2005 (incorporated by reference to
Exhibit 10.1 to the Companys Form 10-Q for the quarter ended September 30, 2005 (File No.
000-22982)). |
|
|
|
10.87
|
|
First Amendment and Limited Waiver to Third Amended and Restated Credit Agreement with Lenders and
General Electric Capital Corporation dated October 14, 2005 (incorporated by reference to Exhibit
99.1 to the Companys Form 8-K filed October 14, 2005 (File No. 000-22982)). |
|
|
|
10.88
|
|
Limited Waiver with Respect to Third Amended and Restated Credit Agreement with Lenders and General
Electric Capital Corporation dated November 18, 2005 (incorporated by reference to Exhibit 99.1 to
the Companys Form 8-K filed November 18, 2005 (File No. 000-22982)). |
|
|
|
10.89*
|
|
Executive Severance Agreement between the Company and J. Reid Porter dated December 12, 2005
(incorporated by reference to Exhibit 99.1 to the Companys Form 8-K filed December 12, 2005 (File
No. 000-22982)). |
|
|
|
10.90
|
|
Amendment No. 4. to Standard Commercial Lease between Airport One Limited Partnership and the
Company dated |
47
|
|
|
Item |
|
|
No. |
|
Description |
|
|
February 2, 2006 (incorporated by reference to Exhibit 10.1 to the Companys Form 10-Q
for the quarter ended December 31, 2005 (File No. 000-22982)). |
|
|
|
10.91 |
|
Memorandum of Understanding between the Company and the FUNimation sellers dated February 7, 2006
(incorporated by reference to Exhibit 99.1 to the Companys Form 8-K filed February 7, 2006 (File
No. 000-22982)). |
|
|
|
10.92 |
|
Limited Waiver and Second Amendment with Respect to Third Amended and Restated Credit Agreement with
Lenders and General Electric Capital Corporation dated February 7, 2006 (incorporated by reference
to Exhibit 99.2 to the Companys Form 8-K filed February 7, 2006 (File No. 000-22982)). |
|
|
|
10.93* |
|
Navarre Corporation Amended and Restated 2004 Stock Plan (incorporated by reference to Exhibit 4 to
the Companys Registration Statement on Form S-8 filed February 22, 2006 (File No. 000-22982)). |
|
|
|
10.94* |
|
Form of Lock-Up Agreement regarding the Navarre Corporation Stock Option Acceleration effective
March 20, 2006 (incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed March 20,
2006 (File No. 000-22982)). |
|
|
|
10.95 |
|
Form of Securities Purchase Agreement between the Company and various purchasers dated March 21,
2006 (incorporated by reference to Exhibit 4.2 to the Companys Registration Statement on Form S-1
filed April 13, 2006 (File No. 000-22982)). |
|
|
|
10.96 |
|
Form of Registration Rights Agreement between the Company and various purchasers dated March 21,
2006 (incorporated by reference to Exhibit 4.3 to the Companys Registration Statement on Form S-1
filed April 13, 2006 (File No. 000-22982)). |
|
|
|
10.97 |
|
Third Amendment to the Third Amended and Restated Credit Agreement with Lenders and General Electric
Capital Corporation dated March 21, 2006 (incorporated by reference to Exhibit 99.2 to the Companys
Form 8-K filed March 21, 2006 (File No. 000-22982)). |
|
|
|
10.98 |
|
Addendum #7 to Licensing and
Distribution Agreements (2004-2005) and (2005-2007) (incorporated by
reference to Exhibit 10.98 to the Companys Form 10-K
for the year ended March 31, 2006 (File No. 0-22982)). |
|
|
|
10.99*
|
|
Fiscal Year 2007 Annual Incentive Plan (incorporated by reference to Exhibit 10.1 to the Companys
Form 8-K filed April 1, 2006 (File No. 000-22982)). |
|
|
|
10.100*
|
|
Form of Navarre Corporation 2004 Stock Plan Employee Restricted Stock Agreement (incorporated by
reference to Exhibit 10.2 to the Companys Form 8-K filed April 1, 2006 (File No. 000-22982)). |
|
|
|
10.101*
|
|
Form of Navarre Corporation 2004 Stock Plan Director Restricted Stock Agreement (incorporated by
reference to Exhibit 10.3 to the Companys Form 8-K filed April 1, 2006 (File No. 000-22982)). |
|
|
|
10.102*
|
|
Form of Navarre Corporation 2004 Stock Plan TSR Stock Unit Agreement (incorporated by reference to
Exhibit 10.4 to the Companys Form 8-K filed April 1, 2006 (File No. 000-22982)). |
|
|
|
10.103*
|
|
Form of Navarre Corporation 2004 Stock Plan Performance Stock Unit Agreement (incorporated by
reference to Exhibit 10.5 to the Companys Form 8-K filed April 1, 2006 (File No. 000-22982)). |
|
|
|
10.104*
|
|
Employment Agreement by and between the Company and Cary L. Deacon (incorporated by reference to
Exhibit 99.1 to the Companys Form 8-K/A dated June 21, 2006 (File No. 0-22982)). |
|
|
|
10.105*
|
|
Amendment to Employment Agreement between BCI Eclipse Company, LLC and Edward Goetz (incorporated by
reference to Exhibit 99.1 to the Companys Form 8-K dated August 14, 2006 (File No. 0-22982)). |
|
|
|
10.106
|
|
Form of Limited Waiver with Respect to Third Amended and Restated Credit Agreement by and among the
Company, General Electric Capital Corporation and the Lenders thereto, dated November 2, 2006
(incorporated by reference to Exhibit 10.1 to the Companys Form 10-Q for the quarter ended
September 30, 2006 (File No. 0-22982)). |
|
|
|
10.107*
|
|
Amended and Restated Employment Agreement dated December 28, 2006, by and between the Company and
Cary L. Deacon (incorporated by reference to Exhibit 99.1 to the Companys Form 8-K dated December
28, 2006 (File No. 0-22982)). |
48
|
|
|
Item |
|
|
No. |
|
Description |
10.108* |
|
Amendment to Employment Agreement dated December 28, 2006, by and between the Company and Eric H.
Paulson (incorporated by reference to Exhibit 99.2 to the Companys Form 8-K dated December 28, 2006
(File No. 0-22982)). |
|
|
|
10.109* |
|
Amendment, dated January 29, 2007, to Amended and Restated Employment Agreement, dated December 28,
2006, by and between the Company and Cary L. Deacon (incorporated by reference to Exhibit 10.1 to
the Companys Form 8-K dated January 25, 2007 (File No. 0-22982)). |
|
|
|
10.110 |
|
Letter Agreement regarding Goetz employment agreement termination dated February 5, 2007
(incorporated by reference to Exhibit 10.1 to the Companys Form 8-K dated February 5, 2007 (File
No. 0-22982)). |
|
|
|
10.111 |
|
Form of Fourth Amended and Restated Credit Agreement by and among the Company and General Electric
Capital Corporation dated March 22, 2007 (incorporated by reference to Exhibit 10.1 to the Companys
Form 8-K dated March 22, 2007 (File No. 0-22982)). |
|
|
|
10.112 |
|
Form of Credit Agreement by and among the Company and Monroe Capital Advisors, LLC dated March 22,
2007 (incorporated by reference to Exhibit 10.2 to the Companys Form 8-K dated March 22, 2007 (File
No. 0-22982)). |
|
|
|
10.113* |
|
Amendment to Employment Agreement dated March 30, 2007, by and between the Company and Eric H.
Paulson (incorporated by reference to Exhibit 99.1 to the Companys Form 8-K dated March 30, 2007
(File No. 0-22982)). |
|
|
|
10.114 |
|
Form of Sale and Purchase Agreement dated May 11, 2007, by and among the Company, Navarre
Entertainment Media, Inc., and Koch Entertainment LP (incorporated by reference to Exhibit 10.1 to
the Companys Form 8-K dated May 11, 2007 (File No. 0-22982)). |
|
|
|
10.115 |
|
Form of First Amendment and Limited Waiver with Respect to Fourth Amended and Restated Credit
Agreement by and among the Company and General Electric Capital Corporation dated May 30, 2007
(incorporated by reference to Exhibit 10.1 to the Companys Form 8-K dated May 31, 2007 (File No.
0-22982)). |
|
|
|
10.116 |
|
Limited Waiver to Credit Agreement by and among the Company and Monroe Capital Advisors, LLC dated
May 30, 2007 (incorporated by reference to Exhibit 10.2 to the Companys Form 8-K dated May 31, 2007
(File No. 0-22982)). |
|
|
|
10.117 ü |
|
Office lease dated May 29,
2007 between FMBP Industrial I LP and FUNimation Productions, Ltd. |
|
|
|
14.1 |
|
The Companys Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 to the
Companys Form 10-K for the year ended March 31, 2004 (File No. 0-22982)). |
|
|
|
21.1 ü
|
|
Subsidiaries of the Registrant. |
|
|
|
23.1 ü
|
|
Consent of Independent Registered
Public Accounting Firm - Grant Thornton LLP |
|
|
|
24.1 ü
|
|
Power of Attorney, contained on signature page |
|
|
|
31.1 ü |
|
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 ü |
|
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 ü |
|
Certifications of the Chief Executive Officer pursuant Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350) |
|
|
|
32.2 ü |
|
Certifications of the Chief Financial Officer pursuant Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350) |
|
|
|
* |
|
Indicates management contract or compensatory plan or agreement. |
|
ü |
|
filed herewith |
49
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
Navarre Corporation
(Registrant)
|
|
June 14, 2007 |
By |
/s/ Cary L. Deacon
|
|
|
|
Cary L. Deacon |
|
|
|
President and Chief Executive Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
50
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Cary L. Deacon and J. Reid
Porter, or either of them, as his or her true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign this Annual Report on Form 10-K and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying and confirming all
said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be
done by virtue thereof.
|
|
|
|
|
Signature |
|
Title |
|
Date |
/s/ Cary L. Deacon
|
|
President and Chief Executive Officer
(principal executive officer)
|
|
June 14, 2007 |
|
|
|
|
|
|
|
|
|
|
/s/ J. Reid Porter
|
|
Chief Financial Officer (principal financial and
accounting officer)
|
|
June 14, 2007 |
|
|
|
|
|
|
|
|
|
|
/s/ Charles E. Cheney
|
|
Director
|
|
June 14, 2007 |
|
|
|
|
|
|
|
|
|
|
/s/ Keith A. Benson
|
|
Director
|
|
June 14, 2007 |
|
|
|
|
|
|
|
|
|
|
/s/ Timothy R. Gentz
|
|
Director
|
|
June 14, 2007 |
|
|
|
|
|
|
|
|
|
|
/s/ James G. Sippl
|
|
Director
|
|
June 14, 2007 |
|
|
|
|
|
|
|
|
|
|
/s/ Michael L. Snow
|
|
Director
|
|
June 14, 2007 |
|
|
|
|
|
|
|
|
|
|
/s/ Tom Weyl
|
|
Director
|
|
June 14, 2007 |
|
|
|
|
|
|
|
|
|
|
/s/ Deborah L. Hopp
|
|
Director
|
|
June 14, 2007 |
|
|
|
|
|
|
|
|
|
|
/s/ Richard Gary St. Marie
|
|
Director
|
|
June 14, 2007 |
|
|
|
|
|
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Navarre Corporation
We have audited the accompanying consolidated balance sheets of Navarre Corporation and
subsidiaries as of March 31, 2007 and 2006, and the related consolidated statements of operations,
shareholders equity and other comprehensive income (loss), and cash flows for each of the three
years in the period ended March 31, 2007. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Navarre Corporation and subsidiaries as of March 31,
2007 and 2006, and the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended March 31, 2007, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, effective April 1, 2006, the
Company changed its method of accounting for share-based payments to adopt Financial Accounting
Standards Board Statement No. 123(R), Share-Based Payments.
Our audits were conducted for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. The accompanying Schedule II of Navarre Corporation and
subsidiaries is presented for purposes of complying with the rules of the Securities and Exchange
Commission and is not a required part of the basic consolidated financial statements. This schedule
has been subjected to the auditing procedures applied in the audit of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein, in relation to the basic consolidated financial statements taken
as a whole.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Companys internal control over financial
reporting as of March 31, 2007, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated June 12, 2007 expressed unqualified opinions on managements assessment of the
effectiveness of the Companys internal control over financial reporting and unqualified opinions
on the effectiveness of the Companys internal control over financial reporting.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
June 12, 2007
52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Navarre Corporation
We have audited managements assessment, included in the accompanying Managements Report on
Internal Control over Financial Reporting appearing under Item 9A, that Navarre Corporation and
subsidiaries (the Company) maintained effective internal control over financial reporting as of
March 31, 2007 and 2006, based on the criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Companys management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on managements assessment and an opinion on the
effectiveness of the internal control over financial reporting of the Company based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Navarre Corporation and subsidiaries maintained
effective internal control over financial reporting as of March 31, 2007, is fairly stated, in all
material respects, based on criteria established in Internal Control-Integrated Framework issued by
COSO. Also, in our opinion, Navarre Corporation and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of March 31, 2007, based on the
criteria established in Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Navarre Corporation and
subsidiaries as of March 31, 2007 and 2006 and the related consolidated statements of operations,
shareholders equity and comprehensive income (loss), and cash flows for each of the three years in
the period ended March 31, 2007 and our report dated June 12, 2007 expressed an unqualified opinion
on those consolidated financial statements.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
June 12, 2007
53
NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
966 |
|
|
$ |
14,296 |
|
Note receivable, related parties |
|
|
|
|
|
|
200 |
|
Accounts receivable, less allowance for doubtful accounts, vendor advances and sales
returns of $19,708 and $19,345, respectively |
|
|
85,784 |
|
|
|
87,653 |
|
Inventories |
|
|
40,227 |
|
|
|
43,624 |
|
Prepaid expenses and other current assets |
|
|
13,820 |
|
|
|
11,273 |
|
Income taxes receivable |
|
|
828 |
|
|
|
4,408 |
|
Deferred tax assets current |
|
|
9,519 |
|
|
|
8,830 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
151,144 |
|
|
|
170,284 |
|
Property and equipment, net of accumulated depreciation of $10,786 and $8,349, respectively |
|
|
14,042 |
|
|
|
10,298 |
|
Other assets: |
|
|
|
|
|
|
|
|
Goodwill |
|
|
81,697 |
|
|
|
81,202 |
|
Intangible assets, net of amortization of $16,115 and $8,258, respectively |
|
|
14,540 |
|
|
|
20,863 |
|
License fees, net of amortization of $12,688 and $5,334, respectively |
|
|
15,609 |
|
|
|
13,347 |
|
Interest rate swap |
|
|
|
|
|
|
37 |
|
Other assets |
|
|
11,193 |
|
|
|
13,583 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
288,225 |
|
|
$ |
309,614 |
|
|
|
|
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Note payable line of credit |
|
$ |
38,956 |
|
|
$ |
|
|
Note payable short term |
|
|
150 |
|
|
|
5,000 |
|
Capital lease obligation short term |
|
|
102 |
|
|
|
115 |
|
Accounts payable |
|
|
99,220 |
|
|
|
97,923 |
|
Warrant liability |
|
|
|
|
|
|
2,236 |
|
Accrued expenses |
|
|
14,251 |
|
|
|
16,646 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
152,679 |
|
|
|
121,920 |
|
Longterm liabilities |
|
|
|
|
|
|
|
|
Note payable long-term |
|
|
14,850 |
|
|
|
75,130 |
|
Capital lease obligation long-term |
|
|
120 |
|
|
|
222 |
|
Deferred compensation |
|
|
6,358 |
|
|
|
5,272 |
|
Deferred tax liabilities non-current |
|
|
7 |
|
|
|
770 |
|
Other longterm liabilities |
|
|
760 |
|
|
|
760 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
174,774 |
|
|
|
204,074 |
|
Commitments and contingencies (Note 21) |
|
|
|
|
|
|
|
|
Temporary-equity Unregistered common stock, no par value; 5,699,998 issued and
outstanding (Note 18) |
|
|
|
|
|
|
16,634 |
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Common stock, no par value: |
|
|
|
|
|
|
|
|
Authorized shares 100,000,000 |
|
|
|
|
|
|
|
|
Issued and outstanding shares 36,038,295 and 29,911,097, respectively |
|
|
158,801 |
|
|
|
138,292 |
|
Accumulated other comprehensive income |
|
|
|
|
|
|
23 |
|
Accumulated deficit |
|
|
(45,350 |
) |
|
|
(49,409 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
113,451 |
|
|
|
88,906 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
288,225 |
|
|
$ |
309,614 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
54
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net sales |
|
$ |
698,371 |
|
|
$ |
686,126 |
|
|
$ |
596,615 |
|
Cost of sales (exclusive of depreciation and amortization) |
|
|
581,669 |
|
|
|
579,033 |
|
|
|
505,263 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
116,702 |
|
|
|
107,093 |
|
|
|
91,352 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
29,030 |
|
|
|
29,320 |
|
|
|
21,483 |
|
Distribution and warehousing |
|
|
12,098 |
|
|
|
11,656 |
|
|
|
10,023 |
|
General and administrative |
|
|
43,658 |
|
|
|
42,063 |
|
|
|
46,190 |
|
Bad debt expense |
|
|
3,655 |
|
|
|
12,111 |
|
|
|
423 |
|
Depreciation and amortization |
|
|
10,958 |
|
|
|
9,259 |
|
|
|
3,522 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
99,399 |
|
|
|
104,409 |
|
|
|
81,641 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
17,303 |
|
|
|
2,684 |
|
|
|
9,711 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(10,220 |
) |
|
|
(11,217 |
) |
|
|
(783 |
) |
Interest income |
|
|
355 |
|
|
|
777 |
|
|
|
473 |
|
Deconsolidation of variable interest entity |
|
|
|
|
|
|
1,896 |
|
|
|
|
|
Warrant expense |
|
|
(251 |
) |
|
|
(342 |
) |
|
|
|
|
Derivative gain |
|
|
|
|
|
|
623 |
|
|
|
|
|
Other income (expense), net |
|
|
(243 |
) |
|
|
390 |
|
|
|
(241 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income tax |
|
|
6,944 |
|
|
|
(5,189 |
) |
|
|
9,160 |
|
Income tax benefit (expense) |
|
|
(2,885 |
) |
|
|
2,014 |
|
|
|
1,006 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
4,059 |
|
|
$ |
(3,175 |
) |
|
$ |
10,166 |
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.11 |
|
|
$ |
(.11 |
) |
|
$ |
.38 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
.11 |
|
|
$ |
(.11 |
) |
|
$ |
.35 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
35,786 |
|
|
|
29,898 |
|
|
|
26,830 |
|
Diluted |
|
|
36,228 |
|
|
|
29,898 |
|
|
|
28,782 |
|
See accompanying notes to consolidated financial statements.
55
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
Temporary Equity Unregistered |
|
|
|
Common Stock |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Shareholders |
|
|
Common Stock |
|
|
|
Shares |
|
|
Amount |
|
|
Deficit |
|
|
Income (Loss) |
|
|
Equity |
|
|
Shares |
|
|
Amount |
|
Balance at March 31, 2004 |
|
|
25,817,965 |
|
|
$ |
109,441 |
|
|
$ |
(56,363 |
) |
|
$ |
|
|
|
$ |
53,078 |
|
|
|
|
|
|
$ |
|
|
Shares issued upon exercise of
stock options and warrants |
|
|
1,778,115 |
|
|
|
8,238 |
|
|
|
|
|
|
|
|
|
|
|
8,238 |
|
|
|
|
|
|
|
|
|
Shares issued upon repurchase of
Encore stock |
|
|
300,000 |
|
|
|
2,400 |
|
|
|
|
|
|
|
|
|
|
|
2,400 |
|
|
|
|
|
|
|
|
|
Tax benefit from employee stock
option plans |
|
|
|
|
|
|
2,428 |
|
|
|
|
|
|
|
|
|
|
|
2,428 |
|
|
|
|
|
|
|
|
|
Stockbased compensation expense |
|
|
|
|
|
|
269 |
|
|
|
|
|
|
|
|
|
|
|
269 |
|
|
|
|
|
|
|
|
|
Reclassification of stockbased
compensation accrual |
|
|
|
|
|
|
705 |
|
|
|
|
|
|
|
|
|
|
|
705 |
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
10,166 |
|
|
|
|
|
|
|
10,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2005 |
|
|
27,896,080 |
|
|
|
123,481 |
|
|
|
(46,197 |
) |
|
|
|
|
|
|
77,284 |
|
|
|
|
|
|
|
|
|
Shares issued upon exercise of
stock options and warrants |
|
|
187,531 |
|
|
|
455 |
|
|
|
|
|
|
|
|
|
|
|
455 |
|
|
|
|
|
|
|
|
|
Shares issued with acquisition of
FUNimation |
|
|
1,827,486 |
|
|
|
14,144 |
|
|
|
|
|
|
|
|
|
|
|
14,144 |
|
|
|
|
|
|
|
|
|
Shares issued with private
placement, net of expenses $1,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,699,998 |
|
|
|
16,634 |
|
Other |
|
|
|
|
|
|
(37 |
) |
|
|
(37 |
) |
|
|
|
|
|
|
(74 |
) |
|
|
|
|
|
|
|
|
Tax benefit
from employee stock option plans |
|
|
|
|
|
|
249 |
|
|
|
|
|
|
|
|
|
|
|
249 |
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
(3,175 |
) |
|
|
|
|
|
|
(3,175 |
) |
|
|
|
|
|
|
|
|
Unrealized gain on derivative
instrument, net of tax of $14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,152 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006 |
|
|
29,911,097 |
|
|
|
138,292 |
|
|
|
(49,409 |
) |
|
|
23 |
|
|
|
88,906 |
|
|
|
5,699,998 |
|
|
|
16,634 |
|
Shares issued upon exercise of
stock options, restricted stock and
warrants |
|
|
427,200 |
|
|
|
466 |
|
|
|
|
|
|
|
|
|
|
|
466 |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
(131 |
) |
|
|
|
|
|
|
|
|
|
|
(131 |
) |
|
|
|
|
|
|
|
|
Reclassification of warrant accrual |
|
|
|
|
|
|
2,487 |
|
|
|
|
|
|
|
|
|
|
|
2,487 |
|
|
|
|
|
|
|
|
|
Reclassification of temporary equity |
|
|
5,699,998 |
|
|
|
16,634 |
|
|
|
|
|
|
|
|
|
|
|
16,634 |
|
|
|
(5,699,998 |
) |
|
|
(16,634 |
) |
Share based compensation |
|
|
|
|
|
|
910 |
|
|
|
|
|
|
|
|
|
|
|
910 |
|
|
|
|
|
|
|
|
|
Tax benefit
from employee stock option plans |
|
|
|
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
143 |
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
4,059 |
|
|
|
|
|
|
|
4,059 |
|
|
|
|
|
|
|
|
|
Unrealized gain on derivative
instrument, net of tax of $14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23 |
) |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
|
36,038,295 |
|
|
$ |
158,801 |
|
|
$ |
(45,350 |
) |
|
$ |
|
|
|
$ |
113,451 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
56
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
4,059 |
|
|
$ |
(3,175 |
) |
|
$ |
10,166 |
|
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
11,068 |
|
|
|
9,384 |
|
|
|
3,673 |
|
Amortization and write-off of deferred financing costs |
|
|
551 |
|
|
|
523 |
|
|
|
240 |
|
Write-off of deferred financing costs |
|
|
2,426 |
|
|
|
239 |
|
|
|
|
|
Amortization of license fees |
|
|
7,353 |
|
|
|
5,334 |
|
|
|
|
|
Amortization of production costs |
|
|
2,278 |
|
|
|
1,875 |
|
|
|
|
|
Change in deferred revenue |
|
|
(80 |
) |
|
|
(954 |
) |
|
|
|
|
Share-based compensation expense |
|
|
910 |
|
|
|
|
|
|
|
269 |
|
Deferred compensation expense |
|
|
1,086 |
|
|
|
288 |
|
|
|
2,838 |
|
Compensation expense incurred with repurchase of Encore stock |
|
|
|
|
|
|
|
|
|
|
5,800 |
|
Writeoff of notes receivable, related party |
|
|
200 |
|
|
|
200 |
|
|
|
200 |
|
Impairment of capitalized software development costs |
|
|
|
|
|
|
|
|
|
|
465 |
|
Tax benefit from employee stock option plans |
|
|
143 |
|
|
|
249 |
|
|
|
2,428 |
|
Loss (gain) on disposal of property and equipment |
|
|
(13 |
) |
|
|
37 |
|
|
|
82 |
|
Deferred income taxes |
|
|
(1,439 |
) |
|
|
(2,266 |
) |
|
|
(4,771 |
) |
Change in fair market value of warrants |
|
|
251 |
|
|
|
342 |
|
|
|
|
|
Gain on deconsolidation of variable interest entity |
|
|
|
|
|
|
(1,896 |
) |
|
|
|
|
Changes in operating assets and liabilities, net of effects of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
1,725 |
|
|
|
8,483 |
|
|
|
(14,459 |
) |
Inventories |
|
|
3,397 |
|
|
|
(2,671 |
) |
|
|
(10,702 |
) |
Prepaid expenses |
|
|
(2,305 |
) |
|
|
(1,302 |
) |
|
|
(5,925 |
) |
Income taxes receivable |
|
|
3,581 |
|
|
|
(4,408 |
) |
|
|
|
|
Other assets |
|
|
1,855 |
|
|
|
143 |
|
|
|
(3,129 |
) |
Production costs |
|
|
(3,918 |
) |
|
|
(3,044 |
) |
|
|
|
|
License fees |
|
|
(9,615 |
) |
|
|
(11,263 |
) |
|
|
|
|
Accounts payable |
|
|
1,297 |
|
|
|
(731 |
) |
|
|
4,441 |
|
Income taxes payable |
|
|
|
|
|
|
(8 |
) |
|
|
(113 |
) |
Accrued expenses |
|
|
(2,316 |
) |
|
|
(2,684 |
) |
|
|
5,992 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
22,494 |
|
|
|
(7,305 |
) |
|
|
(2,505 |
) |
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired |
|
|
|
|
|
|
(87,085 |
) |
|
|
|
|
Purchases of property and equipment |
|
|
(7,053 |
) |
|
|
(2,899 |
) |
|
|
(9,375 |
) |
Proceeds from sale of property and equipment |
|
|
57 |
|
|
|
|
|
|
|
|
|
Net proceeds from sale leaseback |
|
|
|
|
|
|
|
|
|
|
6,401 |
|
Purchases of intangible assets |
|
|
(1,534 |
) |
|
|
(644 |
) |
|
|
(608 |
) |
Payment of earn-out related to an acquisition |
|
|
(350 |
) |
|
|
(350 |
) |
|
|
(88 |
) |
Deconsolidation of variable interest entity |
|
|
|
|
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(8,880 |
) |
|
|
(90,996 |
) |
|
|
(3,670 |
) |
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from note payable, line of credit |
|
|
97,240 |
|
|
|
|
|
|
|
117,197 |
|
Payments on note payable, line of credit |
|
|
(58,284 |
) |
|
|
|
|
|
|
(117,197 |
) |
Repayment of note payable |
|
|
(80,130 |
) |
|
|
(59,870 |
) |
|
|
(651 |
) |
Proceeds of note payable |
|
|
15,000 |
|
|
|
141,075 |
|
|
|
250 |
|
Debt acquisition costs |
|
|
(990 |
) |
|
|
(3,071 |
) |
|
|
(527 |
) |
Repayments of capital lease obligations |
|
|
(115 |
) |
|
|
(91 |
) |
|
|
(59 |
) |
Other |
|
|
(131 |
) |
|
|
|
|
|
|
|
|
Proceeds from sale of common stock and warrants |
|
|
|
|
|
|
18,528 |
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of common stock options and warrants |
|
|
466 |
|
|
|
455 |
|
|
|
8,238 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(26,944 |
) |
|
|
97,026 |
|
|
|
7,251 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
(13,330 |
) |
|
|
(1,275 |
) |
|
|
1,076 |
|
Cash at beginning of year |
|
|
14,296 |
|
|
|
15,571 |
|
|
|
14,495 |
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year |
|
$ |
966 |
|
|
$ |
14,296 |
|
|
$ |
15,571 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
8,834 |
|
|
$ |
9,328 |
|
|
$ |
771 |
|
Income taxes |
|
|
601 |
|
|
|
4,421 |
|
|
|
1,449 |
|
Supplemental schedule of noncash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of acquisition costs from other assets to goodwill |
|
$ |
|
|
|
$ |
1,656 |
|
|
$ |
|
|
Reclassification of stock compensation accrual to shareholders equity |
|
|
|
|
|
|
|
|
|
|
705 |
|
Purchase price adjustments affecting: accounts receivable, prepaid
expenses, goodwill and accounts payable |
|
|
|
|
|
|
|
|
|
|
627 |
|
Purchase price adjustments affecting accounts receivable and goodwill |
|
|
145 |
|
|
|
|
|
|
|
|
|
Capital lease obligations incurred for the purchase of computer equipment |
|
|
|
|
|
|
107 |
|
|
|
380 |
|
Reclassification of deposits from property and equipment to prepaid expenses |
|
|
164 |
|
|
|
|
|
|
|
|
|
Reclassification of prepaid rent to long-term rent |
|
|
|
|
|
|
|
|
|
|
450 |
|
Reclassification of prepaid royalties to other assets |
|
|
|
|
|
|
5,363 |
|
|
|
|
|
Reclassification of warrant accrual and temporary equity to common stock |
|
|
19,121 |
|
|
|
|
|
|
|
|
|
Acquisition: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired |
|
$ |
|
|
|
$ |
114,484 |
|
|
$ |
|
|
Less: Assumed liabilities |
|
|
|
|
|
|
9,116 |
|
|
|
|
|
Fair value of stock issued |
|
|
|
|
|
|
14,144 |
|
|
|
|
|
Cash acquired |
|
|
|
|
|
|
4,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition net of cash acquired |
|
$ |
|
|
|
$ |
87,085 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Deconsolidation of variable interest entity: |
|
|
|
|
|
|
|
|
|
|
|
|
Assets, including cash |
|
$ |
|
|
|
$ |
642 |
|
|
$ |
|
|
Less: Liabilities and shareholders equity |
|
|
|
|
|
|
2,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liabilities and shareholders equity |
|
$ |
|
|
|
$ |
1,859 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
58
NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007
Note 1 Business Description
Navarre Corporation, a Minnesota corporation formed in 1983, publishes and distributes
physical and digital home entertainment and multimedia products, including PC software, CD audio,
DVD video, video games and accessories. Historically, the business was divided into two business
segments - Distribution and Publishing. Through the distribution and publishing business segments,
the Company maintains and leverages strong relationships throughout the publishing and distribution
chain. During fiscal 2006, the Company expanded its segments to include a segment which is titled
other and includes the operations of a variable interest entity as further discussed below. The
other segment was deconsolidated during the third quarter of fiscal 2006 as further discussed
below. The Companys broad base of customers includes: (i) wholesale clubs, (ii) mass
merchandisers, (iii) other third party distributors, (iv) computer specialty stores, (v) music
specialty stores, (vi) book stores, (vii) office superstores, and (viii) electronic superstores.
The Companys customer base historically has included over 500 individual customers with over
19,000 locations, certain of which are international locations.
Through the
distribution segment, the Company distributes and provides fulfillment services in
connection with a variety of finished goods that are provided by our vendors, which include PC
software and video game publishers and developers, independent music labels (through May 31, 2007), and
major music labels (through December 2005), and independent and major motion picture studios. These
vendors provide the Company with PC software, CD audio, DVD video, and video games and accessories,
which are in turn distributed to retail customers. The distribution business focuses on providing
vendors and retailers with a range of value-added services, including vendor-managed inventory,
Internet-based ordering, electronic data interchange services, fulfillment services, and
retailer-oriented marketing services.
Through the publishing segment the
Company owns or licenses various PC software, CD audio, and
DVD video titles. The publishing business packages, brands, markets and sells directly to
retailers, third-party distributors, and our distribution business. The publishing business
consists of Encore Software, Inc. (Encore), BCI Eclipse
Company, LLC (BCI), and FUNimation Productions, Ltd. and
animeOnline, Ltd. (together, FUNimation). Encore, which was acquired in July 2002, licenses
and publishes personal productivity, genealogy, utility, education and interactive gaming PC
products. BCI, which was acquired in November 2003, is a provider of niche DVD and video products
and in-house produced CDs and DVDs. FUNimation which was acquired in May of 2005, is a publisher
and licensor of Japanese animation and entertainment video products for children and young adults.
The other segment included the operations of Mix & Burn, Inc., (Mix & Burn), a separate
corporation whose operations were consolidated with our financial results during the periods from
December 31, 2003 to December 31, 2005 in accordance with the provisions of FIN 46(R). The variable
interest entity was deconsolidated as of December 1, 2005 due to the Companys determination that
the Company is no longer the primary beneficiary as defined by FIN 46(R). Mix & Burn designs and
markets digital music delivery services for music and other specialty retailers.
Note 2 Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial
statements include the accounts of Navarre Corporation and its wholly-owned
subsidiaries or entities in which it has a controlling interest
(collectively referred to herein as the Company). Mix & Burn, a variable interest entity, was
deconsolidated in December 2005. Prior to March 2005, Encore was a majority-owned subsidiary.
All significant intercompany accounts and transactions have been eliminated in consolidation.
Segment Reporting
The Companys current presentation of segment data consists of two operating and reportable
segments distribution and publishing. In fiscal 2006, the Companys presentation included a third
operating and reportable segment titled other. The other segment consisted of the variable
interest entity, Mix & Burn, which was deconsolidated in December 2005. In light of the
deconsolidation of Mix & Burn, the Company re-evaluated its application of Financial Accounting
Standards Board (FASB)
59
Statement 131, Disclosure about Segments of an Enterprise and Related Information, (SFAS
131) and revised its operations and reportable segments to historical presentation before the
inclusion of the other segment.
Fiscal Year
References in these footnotes to fiscal 2007, 2006 and 2005 represent the twelve months ended
March 31, 2007, March 31, 2006 and March 31, 2005.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates include the realizability
of accounts receivable, vendor advances, inventories, goodwill, intangible assets, prepaid
royalties, production costs, license fees, income taxes and the adequacy of certain accrued
liabilities and reserves. Actual results could differ from these estimates.
Reclassifications
Certain amounts included in the consolidated financial statements have been reclassified for
the prior years to conform with the current year presentation.
Fair Value of Financial Instruments
The carrying value of the Companys current financial assets and liabilities, because of their
short-term nature, approximates fair value.
Cash and Cash Equivalents
The Company considers short-term investments with an original maturity of three months or less
when purchased to be cash equivalents. Cash equivalents are carried at cost, which approximates
fair value.
Derivatives and Hedging
The Company accounts for derivatives in accordance with SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, as amended and interpreted. SFAS 133 requires that all
derivatives be measured at fair value on the balance sheet. The treatment of changes in the fair
value of a derivative depends on the character of the transaction, including whether it has been
designated and qualifies as part of a hedging relationship as defined under SFAS 133. Derivatives
that do not meet the SFAS 133 criteria for hedge accounting are designated as economic hedges and
changes in the fair value associated with these instruments are included in the consolidated
statements of operations as (gain) loss on derivative instruments. In those cases where the
derivative meets the SFAS 133 hedge accounting criteria for a cash flow hedge, the change in fair
value of the derivative that is effective in offsetting changes in cash flows of the designated
risk being hedged is reported, net of related taxes, as accumulated other comprehensive income in
shareholders equity until realized. The change in fair value of the derivative that is associated
with ineffectiveness in the hedging relationship is reported in current earnings. The Company
entered into interest rate derivative instruments for the purpose of economically hedging interest
rate risk and not for speculative activity. The Companys economic hedging activities included the
use of swaps, in the case of interest rate derivatives. (See further discussion of Derivative
Instruments in Note 15).
In accordance with the interpretive guidance in EITF Issue No. 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, the
Company valued warrants issued in connection with the March 2006 private placement as a derivative
liability. The Company made certain periodic assumptions and estimates to value the derivative
liability. Factors affecting the amount of this liability included changes in the stock price, the
computed volatility of the stock price and other assumptions. The change in value is reflected in
the consolidated statements of operations as income or expense. For the year ended March 31, 2007
and 2006, the Company recognized expense of $251,000 and $342,000, respectively, related to the
valuation of
60
warrants that are subject to this accounting treatment. The derivative liability associated
with these warrants is reflected on the consolidated balance sheets as a short-term liability and
was zero and $2.2 million at March 31, 2007 and 2006, respectively. The Company marked the value of
the warrants to market as of July 27, 2006 and reclassified the warrant accrual balance to equity
at that time.
Research and Development Mix & Burn
Research and development costs for the other segment of approximately $347,000 and $765,000
were charged to expense for the periods ended March 31, 2006 and 2005, respectively.
Inventories
Inventories are stated at the lower of cost or market with cost determined on the first-in,
first-out (FIFO) method. The Company monitors its inventory to ensure that it properly identifies,
on a timely basis, inventory items that are slow-moving and non-returnable. A significant risk in
the Companys distribution business is product that has been purchased from vendors that cannot be
sold at full distribution prices and is not returnable to the vendors. A significant risk in the
Companys publishing business is that certain products may run out of shelf life and be returned.
Generally, these products can be sold in bulk to a variety of liquidators. The Company establishes
reserves for the difference between carrying value and estimated realizable value in the periods
when the Company first identifies the lower of cost or market issue. The Companys accounting
policy is to record inventory acquired in a business combination at fair value, defined as the
estimated selling price less the costs of disposal and a reasonable selling margin. Consigned
inventory includes product that has been delivered to customers for which revenue recognition
criteria have not been met.
Prepaid Royalties
In the distribution segment, the Company regularly commits to and pays advance royalties to
its independent music labels (Labels) in respect of future sales. The Company accounts for these
advance royalty payments under the related guidance in FASB Statement No. 50, Financial Reporting
in the Record and Music Industry (SFAS 50). Certain advance royalty payments that are believed to
be recoverable from future royalties to be earned by the Labels are capitalized as assets. The
decision to capitalize an advance as an asset requires significant judgment as to the
recoverability of these advances. The recoverability of these assets is assessed upon initial
commitment of the advance, based upon the Companys forecast of anticipated revenues from the sale
of future and existing music. In determining whether these amounts are recoverable, the Company
evaluates the current and past popularity of the Labels, the initial or expected commercial
acceptability of the product, the current and past popularity of the genre of music that the
product is designed to appeal to, and other relevant factors. Based upon this information, the
portion of such advances that are believed not to be recoverable is expensed. Otherwise, the
prepaid royalties are expensed as earned by the Labels. All advances are assessed for
recoverability periodically and at a minimum on a quarterly basis.
Royalties Payable
Royalties payable, under the American Institute of Certified Public Accountants Statement of
Position 00-2 (SOP 00-2), Accounting by Producers or Distributors of Films, represents
managements estimate of accrued and unpaid participation costs as of the end of the period.
Royalties are generally due and paid to the licensor one month after each quarterly period for
sales of merchandise and license fees received. The Company expects to pay 100% of accrued
royalties related to FUNimation in the amount of $2.6 million during the period ended March 31,
2008.
Advertising
Advertising costs are expensed as incurred. Advertising expense was $3.8 million, $2.6 million
and $428,000 for the periods ended March 31, 2007, 2006 and 2005, respectively.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is recorded over estimated useful
lives, ranging from three to twenty five years. Depreciation is computed using the straight-line
method for leasehold improvements over the shorter of the lease term or the estimated useful life.
The straight-line method of depreciation was adopted for all property and equipment placed into
service after March 31, 2004. For property and equipment placed into service prior to April 1,
2004, except leasehold improvements, depreciation is provided using accelerated methods. The change
in accounting principle to the use of straight-line depreciation was made to reflect
61
a better matching of expense to the use of the equipment and the new method is prevalent in
the industry in which the Company operates. Under the accelerated method, depreciation expense
would have been higher by $559,000 in fiscal 2005 for new additions. Estimated useful lives by
major asset categories are as follows:
|
|
|
|
|
Asset |
|
Life in Years |
Buildings |
|
|
25 |
|
Furniture and fixtures |
|
|
7 |
|
Office equipment |
|
|
5 |
|
Computer equipment |
|
|
3 |
|
Warehouse equipment |
|
|
5 |
|
Leasehold improvements |
|
|
510 |
|
Maintenance, repairs and minor renewals are charged to expense as incurred. Additions, major
renewals and betterments to property and equipment are capitalized.
Production Costs
Production costs represent unamortized costs of films and television programs, which have been
produced by the Company or for which the Company has acquired distribution rights. Costs of
produced films and television programs include all production costs, which are expected to be
recovered from future revenues. Amortization of production costs is determined based on the ratio
that current revenue earned from the films and television programs bear to the ultimate future
revenue, as defined by American Institute of Certified Public Accountants Statement of Position
00-2 (SOP 00-2), Accounting by Producers or Distributors of Films.
When estimates of total revenues and costs indicate that an individual title will result in an
ultimate loss, an impairment charge is recognized to the extent that license fees and production
costs exceed estimated fair value, based on discounted cash flows, in the period when estimated.
License Fees
License fees represent advance license/royalty payments made to program suppliers for
exclusive distribution rights. A program suppliers share of distribution revenues (Participation
Cost) is retained by the Company until the share equals the license fees paid to the program
supplier plus recoupable production costs. Thereafter, any excess is paid to the program supplier.
License fees are amortized as recouped by the Company which equals participation/royalty costs
earned by the program suppliers. Participation/royalty costs are accrued/expensed in the same ratio
that current period revenue for a title or group of titles bear to the estimated remaining
unrecognized ultimate revenue for that title, as defined by SOP 00-2. When estimates of total
revenues and costs indicate that an individual title will result in an ultimate loss, an impairment
charge is recognized to the extent that license fees and production costs exceed estimated fair
value, based on cash flows, in the period when estimated.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment and amortizable intangible assets, are
evaluated for impairment whenever events or changes in circumstances indicate the carrying value of
an asset may not be recoverable. An impairment loss is recognized when estimated undiscounted cash
flows expected to result from the use of the asset plus net proceeds expected from disposition of
the asset (if any) are less than the carrying value of the asset. When an impairment loss is
recognized, the carrying amount of the asset is reduced to its estimated fair value.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net
assets acquired in business combinations accounted for under the purchase method. The Company
reviews goodwill for potential impairment annually for each reporting unit or when events or
changes in circumstances indicate the carrying value of the goodwill might exceed its current fair
value. The Company has no goodwill associated with its distribution segment. The publishing segment
has three reporting units that have goodwill - Encore, BCI and FUNimation. The Company determines
fair value using widely accepted valuation techniques. These types of
62
analyses require the Company to make certain assumptions and estimates regarding industry
economic factors and the profitability of future business strategies.
In the fourth quarter of fiscal 2007 and 2006, the Company completed its annual impairment
testing of goodwill related to the acquisitions of Encore, BCI and FUNimation and determined that
there were no impairments.
Intangible Assets
Intangible assets include masters acquired during the acquisition of BCI, masters acquired
from independent parties, license relationships and trademarks related to the FUNimation acquisition,
and other intangibles. Intangible assets (except for trademarks) are amortized on a straight-line
basis with estimated useful lives ranging from three to seven and one half years. The straight-line
method of amortization of these assets reflects an appropriate allocation of the costs of the
intangible assets to its useful life. Intangible assets are tested for impairment whenever events
or circumstances indicate that a carrying amount of an asset may not be recoverable. An impairment
loss is generally recognized when the carrying amount of an asset exceeds the estimated fair value
of the asset. Fair value is generally determined using a discounted cash flow analysis.
Debt Issuance Costs
Debt issuance costs are amortized over the life of the related debt. Accumulated amortization
amounted to approximately $5,000 and $827,000 at March 31, 2007 and 2006, respectively.
Amortization expense of $551,000, $523,000 and $240,000 for the periods ended March 31, 2007, 2006
and 2005, respectively, are included in interest expense in the accompanying consolidated
statements of operations. During fiscal 2007 and 2006, the Company wrote-off $2.4 million and
$239,000, respectively, in debt acquisition costs related to previous debt agreements, also
included in interest expense.
Operating Leases
The Company conducts substantially all operations in leased facilities. Leasehold allowances,
rent holidays and escalating rent provisions are accounted for on a straight-line basis over the
term of the lease.
Revenue Recognition
Revenue on products shipped is recognized when title and risk of loss transfers, delivery has
occurred, the price to the buyer is determinable and collectibility is reasonably assured. Service
revenues are recognized upon delivery of the services. Service revenues have represented less than
10% of total net sales for each of the reporting periods, fiscal 2007, 2006 and 2005. The Company,
under specific conditions, permits its customers to return products. The Company records a reserve
for sales returns and allowances against amounts due to reduce the net recognized receivables to
the amounts the Company reasonably believes will be collected. These reserves are based on the
application of the Companys historical or anticipated gross profit percent against average sales
returns, sales discounts percent against average gross sales and specific reserves for marketing
programs.
The Companys distribution customers at times qualify for certain price protection benefits
from the Companys vendors. The Company serves as an intermediary to settle these amounts between
vendors and customers. The Company accounts for these amounts as reductions of revenues with
corresponding reductions in cost of sales.
The Companys publishing business at times provides certain price protection, promotional
monies, volume rebates and other incentives to customers. The Company records these amounts as
reductions in revenue.
FUNimation revenue is recognized upon meeting the recognition requirements of SOP 00-2.
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 SOP 00-2 are met. Revenue
received in advance of availability is 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.
63
Vendor Allowances
The Company receives allowances from certain vendors as a result of purchasing their products.
In accordance with Emerging Issues Task Force (EITF) 02-16, Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor, vendor allowances are initially
deferred. The deferred amounts are then recorded as a reduction of cost of sales when the related
product is sold.
Marketing Development Funds
In accordance with Emerging Issues Task Force (EITF) 01-09, Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendors Products, the Company has classified
marketing development funds deducted from payment for purchases by customers as a reduction to
revenues.
Accounts Receivable and Allowance for Doubtful Accounts
Credit is extended based on
evaluation of a customers financial condition and, generally, collateral is not required. Accounts receivable
are generally due within 30-90 days and are stated at amounts due from customers net of an allowance for doubtful
accounts. Accounts receivable outstanding longer than the contractual payment terms are considered past due.
The Company performs periodic credit evaluations of its customers financial condition and
generally does not require collateral. The Company makes estimates of the uncollectibility of its
accounts receivable, including advances and balances with independent labels. In determining the
adequacy of its allowances, the Company analyzes customer financial statements, historical
collection experience, aging of receivables, substantial down-grading of credit scores, bankruptcy
filings, and other economic and industry factors.
The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on
such receivables are credited
to the allowance for doubtful accounts.
Although risk management practices and
methodologies are utilized to determine the adequacy of the allowance, it is possible that the
accuracy of the estimation process could be materially impacted by different judgments as to
collectibility based on the information considered and further deterioration of accounts. The
Companys largest collection risks exist for retail customers that are in bankruptcy, or at risk of
bankruptcy. The occurrence of these events is infrequent, but can be material when it does occur.
In fiscal 2007 and 2006, the Company wrote-off $1.7 million and $12.2 million, respectively, in
accounts receivable related to the bankruptcy of retail customers.
Classification of Shipping Costs
Costs incurred in the publishing segment related to the shipment of product to its customers
are classified in cost of sales. These costs were $2.0 million, $3.4 million and $3.0 million for
the years ended March 31, 2007, 2006 and 2005, respectively.
Costs incurred in the distribution segment related to the shipment of product to its customers
are classified in selling expenses. These costs were $10.6 million, $11.2 million and $9.5 million
for the years ended March 31, 2007, 2006 and 2005, respectively.
Foreign Currency Transactions
Transaction gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the results of
operations when settled or at the most recent balance sheet date if the transaction has not
settled. Foreign currency gains and losses were $(413,000), $20,000 and $(151,000) for the years
ended March 31, 2007, 2006 and 2005, respectively.
Income Taxes
Income taxes are recorded under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Stock-Based Compensation
The Company has two stock option plans for officers, non-employee directors and key employees.
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 123R, Share-Based Payment. Statement 123R is a revision of FASB
Statement 123, Accounting for Stock-Based Compensation, and supersedes
64
APB Opinion No. 25, Accounting for Stock Issued to Employees and amends SFAS No. 95, Statement
of Cash Flows, and its related implementation guidance. SFAS 123R focuses primarily on accounting
for transactions in which an entity obtains employee services through share-based payment
transactions and requires an entity to measure the cost of employee services received in exchange
for the award of equity instruments based on the fair value of the award at the date of grant. The
cost is to be recognized over the period during which an employee is required to provide services
in exchange for the award.
SFAS 123R also requires the benefit of tax deductions in excess of recognized compensation
expense to be reported as a financing cash flow, rather than an operating cash flow as prescribed
under previous accounting rules. This requirement reduces net operating cash flows and increases
net financing cash flows in periods subsequent to adoption. Total cash flows remain unchanged from
those reported under previous accounting rules. Effective April 1, 2006, the Company adopted the
provisions of SFAS 123R using the modified prospective transition method. Results of operations
for prior annual periods have not been restated to reflect recognition of share-based compensation
expense. Upon adoption of SFAS 123R, the Company applied an estimated forfeiture rate to unvested
awards. Previously, the Company recorded forfeitures as incurred.
Prior to the adoption of SFAS 123R, the Company utilized the intrinsic-value based method of
accounting under APB 25 to account for employee stock options. Accordingly, no compensation
expense was recognized for share purchase rights granted in connection with the issuance of stock
options under the Companys employee stock option plan; however, compensation expense was
recognized in connection with the issuance of restricted stock awards. The adoption of SFAS 123R
primarily resulted in a change in the Companys method of recognizing share-based compensation and
estimating forfeitures for unvested awards. See Note 19 to the consolidated financial statements
for additional information on share-based compensation.
On March 23, 2006, the Board of Directors and the Compensation Committee to the Board of
Directors of Navarre approved the accelerated vesting of stock options with exercise prices of
$4.50 or greater. As a result of the vesting acceleration, options to purchase 2.1 million shares
of Navarre common stock became fully vested, which would have otherwise vested over the next three
to five years. This acceleration had the effect of reducing future expense by approximately $9.7
million over the next three years. The Companys decision to accelerate the vesting of these
options was, in large part, to minimize future compensation expense associated with the accelerated
options upon the Companys adoption of SFAS 123R. The Company also placed restrictions on the
directors and executive officers that are deemed a Section 16 officer for filing purposes. This
restriction was to prevent the selling of any shares upon the exercise of accelerated options until
the date on which the exercise would have been permitted under the stock options pre-accelerated
vesting terms or, if earlier, the officers last day of employment with, or the directors last day
of service to the Company.
Earnings Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding during the year. Diluted earnings (loss) per share is
computed by dividing net income (loss) by the sum of the weighted average number of common shares
outstanding plus all additional common shares that would have been outstanding if potentially
dilutive common shares related to stock options and warrants had been issued. The following table
sets forth the computation of basic and diluted earnings (loss) per share:
(In thousands, except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
4,059 |
|
|
$ |
(3,175 |
) |
|
$ |
10,166 |
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share weighted average shares |
|
|
35,786 |
|
|
|
29,898 |
|
|
|
26,830 |
|
Dilutive securities: Employee stock options and warrants |
|
|
442 |
|
|
|
|
|
|
|
1,952 |
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share weighted average shares |
|
|
36,228 |
|
|
|
29,898 |
|
|
|
28,782 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
$ |
.11 |
|
|
$ |
(.11 |
) |
|
$ |
.38 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share |
|
$ |
.11 |
|
|
$ |
(.11 |
) |
|
$ |
.35 |
|
|
|
|
|
|
|
|
|
|
|
Approximately 2,645,202, 1,455,500 and 737,000 of the Companys stock options and warrants
were excluded from the calculation of diluted earnings (loss) per share in fiscal 2007, 2006 and
2005, respectively, because the exercise prices of the stock
65
options and warrants were greater than the average price of the Companys common stock and
therefore their inclusion would have been antidilutive.
Capitalized Software Development Costs
Software development costs incurred subsequent to the determination of the technological
feasibility of software products are capitalized. Capitalization ceases and amortization of costs
begins when the software product is available for general release to customers. The Company tests
for possible impairment whenever events or changes in circumstances, such as a reduction in
expected cash flows, indicate that the carrying amount of the asset may not be recoverable. If
indicators exist, the Company compares the undiscounted cash flows related to the asset to the
carrying value of the asset. If the carrying value is greater than the undiscounted cash flow
amount, an impairment charge is recorded in cost of goods sold in the statement of operations for
amounts necessary to reduce the carrying value of the asset to fair value. The Company recorded an
impairment charge of $465,000 for the year ended March 31, 2005, related to product development
costs. The Company recorded no impairment charges related to product development costs in the years
ended March 31, 2007 and 2006 and had no unamortized software development costs as of March 31,
2007 and 2006.
Recently Issued Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes an Interpretation of FASB Statement 109. FIN 48 is effective for the
Company as of April 1, 2007. FIN 48 defines the threshold for recognizing the benefits of tax
positions in the financial statements as more-likely-than-not to be sustained upon examination.
The interpretation also provides guidance on the de-recognition, measurement and classification of
income tax uncertainties, along with any related interest and penalties. FIN 48 also requires
expanded disclosure at the end of each annual reporting period including a tabular reconciliation
of unrecognized tax benefits. In accordance with FIN 48, the Company will report the difference
between the net amount of assets and liabilities recognized in the statement of financial position
prior to and after the application of FIN 48 as a cumulative effect adjustment to the April 1, 2007
balance of retained earnings. The adoption of FIN 48 is currently not expected to have a material
effect on the Companys consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS
No. 157 establishes a common definition for fair value to be applied to US GAAP guidance requiring
use of fair value, establishes a framework for measuring fair value, and expands disclosure about
such fair value measurements. Previously, different definitions of fair value were contained in
various accounting pronouncements creating inconsistencies in measurement and disclosures. SFAS
157 applies under those previously issued pronouncements that prescribe fair value as the relevant
measure of value, except SFAS 123R and related interpretations and pronouncements that require or
permit measurement similar to fair value, but are not intended to measure fair value. SFAS 157 is
effective for financial statements used for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Company is currently assessing the impact of SFAS
157 on its consolidated financial position and results of operations.
In September 2006, the FASB issued FASB Staff Position (FSP) AUG AIR-1, Accounting for
Planned Major Maintenance Activities (FSP AUG AIR-1). FSP AUG AIR-1 amends the guidance on the
accounting for planned major maintenance activities. Specifically, it precludes the use of the
previously acceptable accrue in advance method. FSP AUG AIR-1 is effective for fiscal years
beginning after December 15, 2006. The Company believes the implementation of this standard will
not have a material impact on the consolidated financial position or results of operations.
In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (SAB 108). SAB 108 requires that public companies utilize a dual-approach to assessing
the quantitative effects of financial misstatements. This dual approach includes both an income
statement focused assessment and a balance sheet focused assessment. The guidance in SAB 108 must
be applied to annual financial statements for fiscal years ending after November 15, 2006. The
adoption SAB 108 did not have a material effect on the consolidated financial position or results
of operations.
66
Note 3 Acquisition
On May 11, 2005, the Company completed the acquisition of 100% of the general and limited
partnership interests of FUNimation a leading home video distributor and licensor of Japanese
animation and childrens entertainment in the United States. The acquisition of FUNimation is a
continuation of the Companys strategy for growth by expanding content ownership and gross margin
enhancement. The purchase price consisted of $100.4 million in cash, subject to post-closing
adjustments not to exceed $5.0 million and excess cash as defined in the purchase agreement, and
1,827,486 shares of the Companys common stock. In addition, during the five-year period following
the closing of the transaction, the Company may pay up to an additional $17.0 million in cash if
certain financial targets are met, which amount will be included as part of the purchase price and
thus increase goodwill in subsequent periods. During February 2006, the Company received a purchase
price adjustment of $11.1 million in cash.
Purchase Price
The purchase price was allocated to the underlying assets and liabilities based on their
estimated fair values. The acquisition was accounted for using the purchase method in accordance
with FASB No. 141, Business Combinations. Accordingly, the net assets were recorded at their
estimated fair values and operating results were included in the Companys consolidated financial
statements from the date of acquisition.
The purchase price allocation resulted in goodwill of $71.2 million, intangibles of $1.5
million related to a trademark, which will not be amortized and other intangibles of $20.1 million
related to license and distribution arrangements, which will be amortized over a period between
five to seven and one half years, based on revenue streams.
The final purchase price allocation is as follows (in thousands):
|
|
|
|
|
Accounts receivable |
|
$ |
7,052 |
|
Inventories |
|
|
315 |
|
Prepaid expenses and other current assets |
|
|
53 |
|
Property and equipment |
|
|
2,037 |
|
License fees |
|
|
7,125 |
|
Production costs |
|
|
2,608 |
|
Goodwill |
|
|
71,165 |
|
License arrangements and other intangibles |
|
|
21,646 |
|
Current liabilities |
|
|
(9,116 |
) |
|
|
|
|
Total purchase price, less cash acquired |
|
$ |
102,885 |
|
|
|
|
|
The results of FUNimation have been included in the consolidated financial statements since
the date of acquisition of May 11, 2005. Unaudited pro forma results of operations for the years
ended March 31, 2006 and 2005 are included below. Such pro forma information assumes that the above
acquisition had occurred as of April 1, 2004. This summary is not necessarily indicative of what
the Companys results of operations would have been had the companies been a combined entity during
the years ended March 31, 2006 or 2005, nor does it represent results of operations for any future
periods. Pro forma adjustments consist primarily of interest expense and amortization expense:
(In thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
March 31, 2005 |
|
|
|
As reported |
|
|
Pro forma |
|
|
As reported |
|
|
Pro forma |
|
Net sales |
|
$ |
686,126 |
|
|
$ |
691,848 |
|
|
$ |
596,615 |
|
|
$ |
661,638 |
|
Net income (loss) |
|
|
(3,175 |
) |
|
|
(3,315 |
) |
|
|
10,166 |
|
|
|
17,228 |
|
Earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(.11 |
) |
|
$ |
(.11 |
) |
|
$ |
.38 |
|
|
$ |
.64 |
|
Diluted |
|
$ |
(.11 |
) |
|
$ |
(.11 |
) |
|
$ |
.35 |
|
|
$ |
.60 |
|
67
Note 4 Comprehensive Income (Loss)
Other comprehensive income (loss) pertains to net unrealized gains and losses on hedge
derivatives that are not included in net income (loss) but rather are recorded directly in
shareholders equity (see further discussion Note 15).
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Net income (loss) |
|
$ |
4,059 |
|
|
$ |
(3,175 |
) |
Change in net unrealized gain (loss) on hedge derivatives, net of tax |
|
|
(27 |
) |
|
|
646 |
|
Less realized net gain (loss) on hedge derivatives, net of tax |
|
|
4 |
|
|
|
(623 |
) |
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
4,036 |
|
|
$ |
(3,152 |
) |
|
|
|
|
|
|
|
The changes in other comprehensive income (loss) are primarily non-cash items.
Accumulated other comprehensive income (loss) balances, net of tax effects, were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
March 31, 2006 |
|
Unrealized gain (loss) from: |
|
|
|
|
|
|
|
|
Hedge derivatives |
|
$ |
|
|
|
$ |
23 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
$ |
|
|
|
$ |
23 |
|
|
|
|
|
|
|
|
Note 5 Accounts Receivable
Accounts receivable consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
March 31, 2006 |
|
Trade receivables |
|
$ |
100,716 |
|
|
$ |
102,722 |
|
Vendor advance receivables |
|
|
3,211 |
|
|
|
2,623 |
|
Other receivables |
|
|
1,566 |
|
|
|
1,653 |
|
|
|
|
|
|
|
|
|
|
$ |
105,493 |
|
|
$ |
106,998 |
|
Less: allowance for doubtful accounts, vendor receivables and sales discounts |
|
|
7,233 |
|
|
|
6,544 |
|
Less: allowance for sales returns, net margin impact |
|
|
12,476 |
|
|
|
12,801 |
|
|
|
|
|
|
|
|
Total |
|
$ |
85,784 |
|
|
$ |
87,653 |
|
|
|
|
|
|
|
|
Note 6 Prepaid Expenses and Other Assets
Prepaid expenses and other assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
March 31, 2006 |
|
Prepaid royalties |
|
$ |
12,313 |
|
|
$ |
10,060 |
|
Other |
|
|
1,507 |
|
|
|
1,213 |
|
|
|
|
|
|
|
|
Total |
|
$ |
13,820 |
|
|
$ |
11,273 |
|
|
|
|
|
|
|
|
Note 7 Variable Interest Entity
In December 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
Number (FIN) 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN
46(R)). FIN 46(R), along with its related interpretations, clarifies the application of Accounting
Research Bulleting No. 51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance activities without additional subordinated
financial support. FIN 46(R) clarifies how companies should identify a VIE, assess whether they
have a variable interest in that entity, and determine the primary beneficiary from among the
variable interest holders to conclude as to which entity should consolidate the assets,
liabilities, non-controlling interests and results of activities of a VIE in its consolidated
financial statements. A company that absorbs a majority of a VIEs expected residual losses,
returns, or both, is the primary beneficiary and is required to consolidate the VIEs financial
results into its consolidated financial statements. FIN 46(R) also
68
requires disclosure of certain information where the reporting company is the primary
beneficiary or holds significant variable interests in a VIE but is not the primary beneficiary.
The Company adopted FIN 46(R) with respect to its investment in Mix & Burn during the quarter
ended December 31, 2003. During the quarter ended December 31, 2005, the Company deconsolidated Mix
& Burn, as the Company was no longer deemed to be the primary beneficiary. A reconsideration event
was caused by additional funding Mix & Burn received from a third party.
Mix & Burns financial results were consolidated with those of the Company for the period
through the deconsolidation date, December 1, 2005. Mix & Burn had net sales of $424,000 and
$352,000 for the years ended March 31, 2006 and 2005, respectively, which are included in the
consolidated financial statements. Mix & Burn had net losses of $1.8 million and $2.2 million for
the years ended March 31, 2006 and 2005, respectively. Mix & Burn is a development stage company
that designs and markets digital music delivery services for music and other specialty retailers.
Mix & Burn had a $2.5 million note payable to the Company, which was written off through
deconsolidation during the three months ended December 31, 2005. For the period ended March 31,
2006, the Company recognized $1.9 million of other income related to the deconsolidation of the
variable interest entity, representing Mix & Burns losses that were consolidated in excess of the
note payable to the Company.
Investment
The Company owned a 45% equity interest in Mix & Burn through March 16, 2006. As of the
reconsideration event noted above, the Company utilized the equity method to account for this
investment, subsequent to the deconsolidation of the entity. As of March 31, 2007 and 2006 the
Company owns a 7% interest in Mix & Burn and accounts for the investment under the cost method. At
March 31, 2007 and 2006, this investment is recorded at zero due to the continued losses
experienced by Mix & Burn, which exceeded the Companys loans and equity investments in Mix & Burn.
At March 31, 2007 the Company has no guarantees or future commitments related to Mix & Burn.
Note 8 Inventories
Inventories, net of reserves, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
March 31, 2006 |
|
Finished products |
|
$ |
30,749 |
|
|
$ |
34,154 |
|
Consigned inventory |
|
|
3,790 |
|
|
|
4,119 |
|
Raw materials |
|
|
5,688 |
|
|
|
5,351 |
|
|
|
|
|
|
|
|
|
|
$ |
40,227 |
|
|
$ |
43,624 |
|
|
|
|
|
|
|
|
Consigned inventory represents inventory at customers where revenue recognition criteria have
not been met.
Note 9 Goodwill and Intangible Assets
Goodwill
As of March 31, 2007 and March 31, 2006, goodwill amounted to $81.7 million and $81.2 million,
respectively. During fiscal 2007, purchase price adjustments related to the FUNimation acquisition
of $145,000 resulted in additional goodwill. Also, during fiscal 2007 purchase price adjustments
related to the annual earn-out payment of $350,000 were made relating to the BCI acquisition
resulting in additional goodwill.
The changes in the carrying amount of goodwill by segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution |
|
|
Publishing |
|
|
Other |
|
|
Consolidated |
|
Balances as of March 31, 2006 |
|
$ |
|
|
|
$ |
81,202 |
|
|
$ |
|
|
|
$ |
81,202 |
|
Goodwill resulting from an acquisition |
|
|
|
|
|
|
145 |
|
|
|
|
|
|
|
145 |
|
Earnout related to an acquisition |
|
|
|
|
|
|
350 |
|
|
|
|
|
|
|
350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of March 31, 2007 |
|
$ |
|
|
|
$ |
81,697 |
|
|
$ |
|
|
|
$ |
81,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
Intangible assets
Other identifiable intangible assets, net of amortization, of $14.5 million and $20.9 million
as of March 31, 2007 and March 31, 2006, respectively, are being amortized (except for the
trademark) over useful lives ranging from between three and seven and one half years and are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007 |
|
|
|
Gross carrying |
|
|
Accumulated |
|
|
|
|
|
|
amount |
|
|
amortization |
|
|
Net |
|
Masters |
|
$ |
8,939 |
|
|
$ |
5,069 |
|
|
$ |
3,870 |
|
License relationships |
|
|
20,078 |
|
|
|
11,038 |
|
|
|
9,040 |
|
Domain name |
|
|
70 |
|
|
|
8 |
|
|
|
62 |
|
Trademark (not amortized) |
|
|
1,568 |
|
|
|
|
|
|
|
1,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,655 |
|
|
$ |
16,115 |
|
|
$ |
14,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006 |
|
|
|
Gross carrying |
|
|
Accumulated |
|
|
|
|
|
|
amount |
|
|
amortization |
|
|
Net |
|
Masters |
|
$ |
7,475 |
|
|
$ |
3,213 |
|
|
$ |
4,262 |
|
License relationships |
|
|
20,078 |
|
|
|
5,045 |
|
|
|
15,033 |
|
Trademark (not amortized) |
|
|
1,568 |
|
|
|
|
|
|
|
1,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
29,121 |
|
|
$ |
8,258 |
|
|
$ |
20,863 |
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense for the periods ended March 31, 2007, 2006 and 2005 were $7.9
million, $6.6 million and $1.6 million, respectively.
The following is a schedule of estimated future amortization expense (in thousands):
|
|
|
|
|
2008 |
|
$ |
5,419 |
|
2009 |
|
|
4,417 |
|
2010 |
|
|
2,171 |
|
2011 |
|
|
425 |
|
2012 |
|
|
237 |
|
Debt issuance costs
Debt issuance costs are amortized over the life of the related debt and are included in Other
Assets. Debt issuance costs totaled $990,000 and $3.8 million at March 31, 2007 and March 31,
2006, respectively. Accumulated amortization amounted to approximately $5,000 and $827,000 at March
31, 2007 and March 31, 2006, respectively. The Company wrote off net debt issuance costs of $2.4
million and $239,000 during fiscal 2007 and 2006, respectively, associated with previous debt
agreements. Amortization expense and the write-off are included in interest expense in the
accompanying consolidated statements of operations.
Note 10 Production Costs
Production costs consisted of the following and are included in Other Assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Production costs |
|
$ |
9,572 |
|
|
$ |
5,653 |
|
Less: accumulated amortization |
|
|
4,155 |
|
|
|
1,877 |
|
|
|
|
|
|
|
|
|
|
$ |
5,417 |
|
|
$ |
3,776 |
|
|
|
|
|
|
|
|
The Company presently expects to amortize 72% of the March 31, 2007 unamortized production by
March 31, 2010. Amortization of production costs for the periods ended March 31, 2007 and 2006 were
$2.3 million and $1.9 million, respectively, and none for the period ended March 31, 2005. These
amounts have been included in cost of sales in the accompanying consolidated statements of
operations.
70
Note 11 Property and Equipment
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Land and buildings |
|
$ |
1,623 |
|
|
$ |
1,623 |
|
Furniture and fixtures |
|
|
1,111 |
|
|
|
1,052 |
|
Computer and office equipment |
|
|
6,425 |
|
|
|
5,541 |
|
Warehouse equipment |
|
|
9,103 |
|
|
|
7,062 |
|
Production equipment |
|
|
520 |
|
|
|
257 |
|
Leasehold improvements |
|
|
1,913 |
|
|
|
1,843 |
|
Construction in progress |
|
|
4,133 |
|
|
|
1,269 |
|
|
|
|
|
|
|
|
Total |
|
$ |
24,828 |
|
|
$ |
18,647 |
|
Less: accumulated depreciation and amortization |
|
|
10,786 |
|
|
|
8,349 |
|
|
|
|
|
|
|
|
Net property and equipment |
|
$ |
14,042 |
|
|
$ |
10,298 |
|
|
|
|
|
|
|
|
Note 12 License Fees
License fees consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
License fees |
|
$ |
28,297 |
|
|
$ |
18,681 |
|
Less: accumulated amortization |
|
|
12,688 |
|
|
|
5,334 |
|
|
|
|
|
|
|
|
|
|
$ |
15,609 |
|
|
$ |
13,347 |
|
|
|
|
|
|
|
|
Amortization of license fees for the periods ended March 31, 2007 and 2006 were $7.4 million
and $5.3 million, respectively, and none for the period ended March 31, 2005. These amounts have
been included in royalty expense in cost of sales in the accompanying consolidated statements of
operations.
Note 13 Accrued Expenses
Accrued expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Compensation and benefits |
|
$ |
4,500 |
|
|
$ |
3,067 |
|
Royalties |
|
|
4,431 |
|
|
|
6,134 |
|
Rebates |
|
|
2,091 |
|
|
|
1,354 |
|
Interest |
|
|
160 |
|
|
|
1,751 |
|
Other |
|
|
3,069 |
|
|
|
4,340 |
|
|
|
|
|
|
|
|
Total |
|
$ |
14,251 |
|
|
$ |
16,646 |
|
|
|
|
|
|
|
|
Note 14 Bank Financing and Debt
In October 2001, the Company entered into a credit agreement with General Electric Capital
Corporation as administrative agent, agent and lender, and GECC Capital Markets Group, Inc. as Lead
Arranger, for a three year, $30.0 million revolving credit facility for use in connection with our
working capital needs. In June 2004, this credit agreement was amended and restated to, among other
things, provide for two senior secured revolving sub-facilities: a $10.0 million revolving
acquisition sub-facility, and a $40.0 million revolving working capital sub-facility. Under the
amended and restated credit agreement, the maturity date of the revolving working capital facility
was December 2007 and the maturity date of the revolving acquisition facility was June 2006.
The credit agreement was amended and restated on May 11, 2005 in order to provide the Company
with funding to complete the FUNimation acquisition (see Note 3) and was again amended and restated
on June 1, 2005. The credit agreement provided a six-year $115.0 million Term Loan B sub-facility
with quarterly payments of $1.25 million and the remaining principal due on May 11, 2011, a $25.0
million five and one-half year Term Loan C sub-facility due on November 11, 2011, and a five-year
revolving sub-facility for
71
up to $25.0 million which expires on May 11, 2010. The entire $115.0 million of the Term Loan
B sub-facility was drawn at May 11, 2005 and the entire $25.0 million of the Term Loan C
sub-facility was drawn at June 1, 2005. The revolving sub-facility of up to $25.0 million was
available to the Company for its working capital and general corporate needs.
The credit agreement was amended and restated in its entirety on March 22, 2007. The credit
agreement currently provides for a senior secured three-year $95.0 million revolving credit
facility and expires on March 22, 2010. The revolving facility is available to the Company for working
capital and general corporate needs and is subject to a borrowing base requirement. The revolving
facility is secured by a first priority security interest in all of the assets, as well as the
capital stock of the Companys subsidiary companies
The Company entered into a term loan facility with Monroe Capital Advisors, LLC as
administrative agent, agent and lender on March 22, 2007. The credit agreement currently provides
for a four-year $15.0 million Term Loan facility which expires
on March 22, 2011. The Term Loan
facility calls for monthly installments of $12,500 and final payment
of $14.6 million on March 22, 2011. The facility is
secured by a second priority security interest in all of the assets of the Company.
In association with the credit agreements, the Company also pays certain facility and agent
fees. Interest under the revolving facility was at the index rate and
LIBOR rates plus .75% and 2.0%, respectively at March 31,
2007 and the index rate plus 2.25% at March 31,
2006, (9.0% and 7.3% at March 31, 2007, respectively, and 10.0% at March 31, 2006,)
and is payable monthly. As of March 31, 2007 and March 31, 2006, the Company had $39.0 million and
no balance, respectively, under the revolving working capital facilities. Interest under the Term
Loan facility and the Term Loan B sub-facility was at the LIBOR rate plus 7.5% and the LIBOR rate
plus 3.75% at March 31, 2007 and 2006, respectively, (12.8% and 8.3% as of March 31, 2007 and
2006, respectively). The balance under the Term Loan facility and the Term Loan B sub-facility were
$15.0 million and $80.1 million at March 31, 2007 and 2006, respectively. The Term Loan C
sub-facility was paid in full during fiscal 2006.
Under both of the credit agreements 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 our overall financial stability and include limitations on our capital
expenditures, a minimum ratio of EBITDA to fixed charges, a minimum EBITDA, and a maximum of
indebtedness to EBITDA. The Company was in compliance with all the covenants related to the credit
facility as of March 31, 2007.
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Note payable |
|
$ |
15,000 |
|
|
$ |
80,130 |
|
Less: current portion |
|
|
150 |
|
|
|
5,000 |
|
|
|
|
|
|
|
|
Total longterm debt |
|
$ |
14,850 |
|
|
$ |
75,130 |
|
|
|
|
|
|
|
|
As of March 31, 2007, annual debt maturities were as follows (in thousands):
|
|
|
|
|
2008 |
|
$ |
150 |
|
2009 |
|
|
150 |
|
2010 |
|
|
150 |
|
2011 and thereafter |
|
|
14,550 |
|
|
|
|
|
Total |
|
$ |
15,000 |
|
|
|
|
|
Letters of Credit
The Company is party to letters of credit totaling $250,000 related to a vendor at March 31,
2007. In the Companys past experience, no claims have been made against these financial
instruments.
Note 15 Derivative Instruments
The Company used derivative instruments to assist in the management of exposure to interest
rates. The Company used derivative instruments only to limit the underlying exposure to floating
interest rates, and not for speculation purposes. The Company documented relationships between
hedging instruments and the hedged items, as well as its riskmanagement objective and strategy for
undertaking various hedge transactions. The Company assessed, both at the hedges inception and on
an ongoing basis, whether the derivatives that were used in hedging transactions were highly
effective in offsetting changes in cash flows of the hedged item.
72
The Company entered into interest rate swap agreements to hedge the risk from floating rate
longterm debt to fixed rate debt. These contracts were designed as cash flow hedges with the fair
value recorded in accumulated other comprehensive income (loss) and as a hedge asset or liability
in other longterm assets or other longterm liabilities, as applicable. Once the forecasted
transaction actually occurred, the related fair value of the derivative hedge contract was
reclassified from accumulated other comprehensive income (loss) into earnings. Any ineffectiveness
of the hedges was also recognized in earnings as incurred. On August 9, 2005, the Company entered
into two interestrate swap agreements with notional amounts of $98.8 million and $25.0 million.
These interest rate swaps were terminated in February 2006 and January 2006, resulting in realized
gains of $613,000 and $10,000, respectively, and was reported in other income (expense) in the
consolidated statements of operations for the period ending March 31, 2006. As of March 31, 2006,
total realized gain on these two interest rate swaps was $623,000. On March 6, 2006, the Company
entered into an interest rate swap agreement with a notational amount of $53.0 million, which would
have expired on May 11, 2007. At March 31, 2006, the fair value of the interest rate swap had
increased from inception by $37,000 and is included in the other longterm assets. The unrecognized
aftertax gain portion of the fair value of the contracts recorded in accumulated other
comprehensive income (loss) was $23,000 at March 31, 2006. This interest rate swap was terminated
in March 2007, resulting in a realized gain of $4,000 and is reported in other income (expense) in
the consolidated statements of operations for the period ended March 31, 2007. As of March 31,
2007, the Company does not have any interest rate swap agreements.
See additional disclosure in Note 18.
Note 16 Income Taxes
The income tax provision (benefit) is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
3,658 |
|
|
$ |
241 |
|
|
$ |
3,306 |
|
State |
|
|
698 |
|
|
|
16 |
|
|
|
459 |
|
Deferred |
|
|
(1,471 |
) |
|
|
(2,271 |
) |
|
|
(4,771 |
) |
|
|
|
|
|
|
|
|
|
|
Tax expense (benefit) |
|
$ |
2,885 |
|
|
$ |
(2,014 |
) |
|
$ |
(1,006 |
) |
|
|
|
|
|
|
|
|
|
|
A reconciliation of income tax expense (benefit) to the statutory federal rate is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Expected federal income tax at statutory rate |
|
$ |
2,361 |
|
|
$ |
(1,764 |
) |
|
$ |
3,114 |
|
State income taxes, net of federal tax effect |
|
|
470 |
|
|
|
(227 |
) |
|
|
293 |
|
Nondeductible compensation charge |
|
|
|
|
|
|
|
|
|
|
1,972 |
|
Reversal of valuation allowance |
|
|
|
|
|
|
|
|
|
|
(7,496 |
) |
Effect of variable interest entity |
|
|
|
|
|
|
|
|
|
|
755 |
|
Write off of note to variable interest entity |
|
|
|
|
|
|
(850 |
) |
|
|
|
|
Valuation allowance |
|
|
|
|
|
|
875 |
|
|
|
|
|
Warrant expense |
|
|
85 |
|
|
|
116 |
|
|
|
|
|
Equity compensation |
|
|
100 |
|
|
|
|
|
|
|
|
|
Other |
|
|
(131 |
) |
|
|
(164 |
) |
|
|
356 |
|
|
|
|
|
|
|
|
|
|
|
Tax expense (benefit) |
|
$ |
2,885 |
|
|
$ |
(2,014 |
) |
|
$ |
(1,006 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Expected federal income tax at statutory rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
State income taxes, net of federal tax effect |
|
|
6.8 |
|
|
|
4.4 |
|
|
|
3.2 |
|
Nondeductible compensation charge |
|
|
|
|
|
|
|
|
|
|
21.5 |
|
Reversal of valuation allowance |
|
|
|
|
|
|
|
|
|
|
(81.8 |
) |
Effect of variable interest entity |
|
|
|
|
|
|
|
|
|
|
8.2 |
|
Write off of note to variable interest entity |
|
|
|
|
|
|
16.4 |
|
|
|
|
|
Valuation allowance |
|
|
|
|
|
|
(16.9 |
) |
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
Warrant expense |
|
|
1.2 |
|
|
|
(2.2 |
) |
|
|
|
|
Equity compensation |
|
|
1.4 |
|
|
|
|
|
|
|
|
|
Other |
|
|
(1.9 |
) |
|
|
3.1 |
|
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41.5 |
% |
|
|
38.8 |
% |
|
|
(11.0 |
)% |
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the available tax carryforwards and the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the
Companys deferred tax assets as of March 31, 2007 and 2006 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Net deferred tax asset (liability)noncurrent |
|
|
|
|
|
|
|
|
Incentive based deferred compensation |
|
$ |
2,420 |
|
|
$ |
2,028 |
|
Stock based compensation |
|
|
147 |
|
|
|
103 |
|
Book/tax intangibles amortization |
|
|
(3,107 |
) |
|
|
(3,261 |
) |
Book/tax depreciation |
|
|
(225 |
) |
|
|
(437 |
) |
Capital loss carryforwards |
|
|
1,000 |
|
|
|
1,000 |
|
Other |
|
|
18 |
|
|
|
49 |
|
|
|
|
|
|
|
|
Subtotal deferred tax asset (liability)noncurrent |
|
|
253 |
|
|
|
(518 |
) |
Valuation allowance |
|
|
(260 |
) |
|
|
(252 |
) |
|
|
|
|
|
|
|
Total deferred tax asset (liability)noncurrent |
|
$ |
(7 |
) |
|
$ |
(770 |
) |
|
|
|
|
|
|
|
Net deferred tax asset (liability)current |
|
|
|
|
|
|
|
|
Collectibility reserves |
|
$ |
8,590 |
|
|
$ |
7,718 |
|
Allowance for sales returns |
|
|
468 |
|
|
|
473 |
|
Reserve for sales discounts |
|
|
265 |
|
|
|
419 |
|
Accrued vacations |
|
|
400 |
|
|
|
376 |
|
Inventory uniform capitalization |
|
|
257 |
|
|
|
309 |
|
Incentive based deferred compensation |
|
|
59 |
|
|
|
111 |
|
Other |
|
|
220 |
|
|
|
172 |
|
|
|
|
|
|
|
|
Subtotal deferred tax assetcurrent |
|
$ |
10,259 |
|
|
$ |
9,578 |
|
Valuation allowance |
|
|
(740 |
) |
|
|
(748 |
) |
|
|
|
|
|
|
|
Total deferred tax assetcurrent |
|
|
9,519 |
|
|
|
8,830 |
|
|
|
|
|
|
|
|
Total deferred tax asset |
|
$ |
9,512 |
|
|
$ |
8,060 |
|
|
|
|
|
|
|
|
Total deferred tax assets, before
valuation allowance, were $13.8 million and $12.8 million at March 31, 2007 and 2006, respectively.
Total deferred
tax liabilities were $3.3 million and $3.7 million at March 31, 2007 and 2006, respectively.
At March 31, 2007,
the Company had capital loss carryforwards of $2.5 million which expire in
2011.
During the years
ended March 31, 2007 and 2006, $143,000 and $300,000, respectively, was added
to common stock in accordance with APB No. 25 reflecting the tax difference relating
to employee stock option transactions.
The Companys
net deferred income tax assets were completely reserved in fiscal 2003 because
of its history of pre-tax losses. Reversals of these valuation reserves during fiscal 2005 and 2004
resulted in the recording of tax benefits associated with its utilization of net operating loss
carryforwards due to the generation of taxable income. As of March 31, 2007, all net-operating
losses have been utilized. The Company has booked a deferred tax asset for the capital loss
carryforward related to the write off of an investment. The capital loss carryforward was fully
reserved, as the Company has determined that it is unlikely that a capital gain will be generated
to offset the capital loss carryforward. Management has determined that it is more likely than not
that the results of future operations will generate sufficient taxable income to realize the
deferred tax assets, therefore no valuation allowance is required for other remaining deferred tax
assets.
Note 17 Shareholders Equity
The Company has 10,000,000 shares of preferred stock, no par value, which is authorized. No
preferred shares are issued or outstanding.
Navarre did not repurchase any shares during the fiscal years ended March 31, 2007, March 31,
2006 or March 31, 2005.
74
On December 15, 2003, the Company completed a private placement to institutional and other
accredited investors of 2,631,547 shares of common stock and 657,887 shares of common stock
issuable upon exercise of warrants. The Company issued to its agent in the 2003 private placement,
Craig-Hallum Capital Group, LLC, a warrant to purchase 131,577 shares. The Company exercised the
mandatory exercise provision contained in this warrant on June 9, 2004 and the warrant was
exercised on June 10, 2004.
On April 28, 2004, the Company registered for resale by the selling shareholders the shares of
common stock and the shares of common stock issuable upon exercise of the warrants issued in the
private placement under a registration statement on Form S-3. This registration statement also
covered the registration of 131,577 shares issuable upon the exercise of the agents warrant as
well as 320,000 shares issuable upon the exercise of a warrant issued to Hilco Capital, LP, which
provided financing in connection with the Companys November 2003 acquisition of the assets of BCI
Eclipse and 1,000,000 shares issued in connection with the BCI Eclipse acquisition.
During fiscal 2005, the Company issued 300,000 shares of Navarre common stock in conjunction
with the purchase of 20,000 shares of Encore stock.
During fiscal 2006, the Company issued 1,827,486 shares of Navarre common stock in conjunction
with the acquisition of FUNimation.
Note 18 Private Placement
On March 21, 2006 (the Closing Date), the Company completed a private placement (the PIPE)
to institutional and other accredited investors of 5,699,998 shares of common stock and 1,596,001
shares of common stock issuable upon exercise of warrants. The Company sold the securities for
$3.50 per share for total proceeds of approximately $20.0 million and net proceeds of approximately
$18.5 million. The per share price of $3.50 represented a discount of approximately 8.4% of the
closing price of the Companys common stock on the date the purchase was completed. The net
proceeds were used to discharge the Companys $25.0 million Term Loan C sub-facility debt to GE,
incurred in connection with the FUNimation acquisition. The warrants issued to the 2006 placement
investors were five-year warrants exercisable at any time after the sixth month anniversary of the
date of issuance at $5.00 per share. As of March 31, 2007 and 2006, 1,596,001 warrants were
outstanding related to this issuance, which includes a warrant to purchase 171,000 shares issued by
the Company to its agent in the private placement, Craig-Hallum Capital Group, LLC.
In accordance with the terms of the PIPE, the Company was required to file with the SEC,
within thirty (30) days from the Closing Date, a registration statement covering the common shares
issued and issuable in the PIPE. The Company was also required to cause the registration statement
to go effective on or before August 18, 2006 and to use its best efforts to maintain the
effectiveness of the registration. The Company was subject to liquidated damages of one percent
(1%) per month of the aggregate gross proceeds ($20.0 million) with a 9% cap, as to the total
liquidated damages, if the Company failed to cause the registration statement to become effective
prior to August 18, 2006, or if, following its having been declared effective, it should cease to
be effective prior to the expiration of a period of time as is set forth in the registration rights
agreement between the Company and the PIPE purchasers. As the registration statement was declared
effective by the Securities and Exchange Commission (SEC) on July 27, 2006 and is currently
effective, the Company has not been required to pay any liquidated damages.
The warrants, which were issued together with the common stock, have a term of five years, and
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 our
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 (Minnesota corporate law provides the Company with an opportunity to exert control over
such a transaction), 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. In addition, the Company has the right
after the first anniversary date of the warrant to require exercise
of the warrant if, among other things, the volume weighted average
price of our common stock exceeds $8.50 per share for each of 30
consecutive trading days.
Under EITF 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock (EITF 00-19), the fair value of the warrants issued under the
PIPE were reported as a liability and the value of the common stock was reported as temporary
equity due to the requirement to net-cash settle the transaction. The reason for this treatment was
75
because EITF 00-19 required the Company to use best efforts language in conjunction with the
discussion regarding the effectiveness of the registration statement. Otherwise, it is assumed that
the effectiveness of the registration statement is out of the Companys control, thereby assuming
net-cash settlement.
On the Closing Date, the warrants had a fair value of approximately $1.9 million, which was
determined using a lattice valuation model. The assumptions utilized in computing the fair value of
the warrants were as follows: expected life of 5 years, estimated volatility of 66%, a risk free
interest rate of 4.6% and a call option of $8.50 one year after the Closing Date. On the Closing
Date, the common stock was recorded at approximately $16.6 million, or the difference between the
net proceeds and the fair value of the warrants. The warrants were considered a derivative
financial instrument and were marked to fair value on a quarterly basis. Any changes in fair value
of the warrants were recorded through the consolidated statement of operations as other income
(expense). For the year ended March 31, 2007 and 2006, the Company recognized expense of $251,000
and $342,000, respectively, associated with the fair value adjustment of the warrants and as of
March 31, 2006 the warrants had a fair value of $2.2 million. There was no fair value adjustment in
fiscal 2005. On the Closing Date and at March 31, 2006, the value of the common stock was recorded
at $16.6 million in temporary equity on the consolidated balance sheets. The Company reclassified
the $16.6 million of temporary equity to equity as of July 27, 2006, as the shares were registered
with the effectiveness of the registration statement. The Company marked the value of the warrants
to market as of July 27, 2006 and reclassified the warrant accrual balance to equity at that time.
Note 19 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). Eligible participants
under the plans are key employees and directors. The Company accelerated the vesting of certain
stock options, as noted in Note 2, during fiscal 2006.
Effective April 1, 2006, the start of the first quarter of fiscal 2007, the Company began
recording compensation expense associated with equity compensation awards over the vesting period
based on their grant date fair value in accordance with SFAS 123R as interpreted by SEC Staff
Accounting Bulletin 107. SFAS 123R supersedes APB 25 and SFAS No. 95, Statement of Cash Flows.
Generally, the approach in SFAS 123R is similar to the approach described in SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123). However, SFAS 123R requires all share-based
payments to employees and non-employee directors, including grants of employee stock options, to be
recognized in the consolidated statement of operations based on their fair values at the date of
grant.
Prior to the adoption of SFAS 123R, the Company utilized the intrinsic-value based method of
accounting under APB 25 and related interpretations, and adopted the disclosure requirements of
SFAS 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation Transitional
Disclosure. Under the intrinsic-value based method of accounting, compensation expense for stock
options granted to the Companys employees and non-employee directors was measured as the excess of
the quoted market price of common stock at the grant date over the exercise price the employee and
non-employee directors must pay for the stock. The Companys policy is to grant stock options with
exercise prices equal to the market price of common stock on the date of grant and as a result no
compensation expense was historically recognized for stock options.
The Company adopted the modified prospective transition method provided for under SFAS 123R,
and consequently has not retroactively adjusted results from prior periods. Under this transition
method, compensation cost associated with share-based awards recognized in fiscal year 2007
include: (a) compensation costs for all share-based payments granted prior to, but not yet vested
as of March 31, 2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent
to March 31, 2006, based on the grant-date fair value estimated in accordance with the provisions
of SFAS 123R.
On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123R-3, Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards (FSP 123-R). An entity could
take up to one year from the effective date of FSP 123-R to evaluate its available transition
alternatives and make its one time election. The Company adopted the alternative transition method
provided in the FASB Staff Position for calculating the tax effects of share-based compensation
pursuant to SFAS 123R. The alternative transition method includes simplified methods to establish
the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax
effects of employee and non-employee directors share-based compensation, and to determine the
subsequent impact on the APIC pool and consolidated statements of cash flows of the tax effects of
employee and non-employee directors share-based compensation awards that are outstanding upon
adoption of SFAS 123R.
76
Equity Compensation Plans
The Company currently grants stock options, restricted stock and restricted stock units under
equity compensation plans.
The Company adopted the 1992 Stock Option Plan and 2004 Stock Option Plan (together, the
Plans) to attract and retain persons to perform services for the Company by providing an
incentive to these persons through equity participation in the Company and by rewarding such
persons who contribute to the achievement of the Companys economic objectives. Eligible recipients
are all employees including, without limitation, officers and directors who are also employees as
well as non-employee directors, consultants and independent contractors or employees of any of the
Companys subsidiaries. A maximum number of 5.2 million shares and 2.5 million shares,
respectively, of common stock have been authorized and reserved for issuance under the Plans. The
number of shares authorized may also be increased from time to time by approval of the Board of
Directors and the shareholders. The 1992 Stock Option Plan terminated in July 2006 and the 2004
Stock Option Plan terminates in September 2014. There are 461,000 shares remaining for grant under
the 2004 Stock Option Plan at March 31, 2007.
The Company is authorized to grant, among other equity instruments, stock options and
restricted stock grants under the 2004 Stock Option Plan. Stock options have a maximum term fixed
by the Compensation Committee of the Board of Directors, not to exceed 10 years from the date of
grant. Stock options become exercisable during their terms in the manner determined by the
Compensation Committee of the Board of Directors. Vesting for performance-based stock awards is
subject to the performance criteria being achieved.
On April 1 of each year, each director who is not an employee of the Company is granted an
option to purchase 6,000 shares of common stock under the 2004 Stock Option Plan, with an exercise
price equal to fair market value. These options are designated as non-qualified stock options. Each
option granted prior to September 15, 2005, vests in five annual increments of 20% of the original
option grant beginning one year from the date of grant and expires on the earlier of (i) six years
from the date of the grant, and (ii) one year after the person ceases to serve as a director. Each
option granted on or after September 15, 2005, vests in three annual increments of 33 1/3% of the
original option grant beginning one year from the date of grant, expires on the earlier of (i) ten
years from the date of grant, and (ii) one year after the person ceases to serve as a director, and
shall provide for the acceleration of vesting if the person ceases to serve as a director as a
result of the Companys mandatory director retirement policy.
The Company is entitled to (a) withhold and deduct from future wages of the participant (or
from other amounts that may be due and owing to the participant from the Company), or make other
arrangements for the collection of all legally required amounts necessary to satisfy any and all
federal, state and local withholding and employment-related tax requirements (i) attributable to
the grant or exercise of an option or a restricted stock award or to a disqualifying disposition of
stock received upon exercise of an incentive stock option, or (ii) otherwise incurred with respect
to an option or a restricted stock award, or (iii) require the participant promptly to remit the
amount of such withholding to the Company before taking any action with respect to an option or a
restricted stock award.
Restricted stock awards are non-vested stock awards that may include grants of restricted
stock or restricted stock units. Restricted stock awards are independent of option grants and are
generally subject to forfeiture if employment terminates prior to the release of the restrictions.
Such awards vest as determined by the Compensation Committee of the Board of Directors, depending
on the grant. Prior to vesting, ownership of the shares cannot be transferred. The Company expenses
the cost of the restricted stock awards, which is the grant date fair value, ratably over the
period during which the restrictions lapse. The grant date fair value is the Companys opening
stock price on the date of grant.
77
Stock Options
Option
activity for the Plans for the years ended March 31, 2007, 2006 and 2005 are summarized
as follows (in thousands, except options and exercise price amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended |
|
|
Fiscal year ended |
|
|
Fiscal year ended |
|
|
|
March 31, 2007 |
|
|
March 31, 2006 |
|
|
March 31, 2005 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average |
|
|
|
|
|
|
average |
|
|
|
|
|
|
average |
|
|
|
Number of |
|
|
exercise |
|
|
Number of |
|
|
exercise |
|
|
Number of |
|
|
exercise |
|
|
|
options |
|
|
price |
|
|
options |
|
|
price |
|
|
options |
|
|
price |
|
Options outstanding, beginning of period: |
|
|
3,341,100 |
|
|
$ |
7.17 |
|
|
|
2,787,800 |
|
|
$ |
7.24 |
|
|
|
2,907,200 |
|
|
$ |
3.41 |
|
Granted |
|
|
842,000 |
|
|
$ |
4.79 |
|
|
|
1,195,000 |
|
|
$ |
6.64 |
|
|
|
917,500 |
|
|
$ |
15.25 |
|
Exercised |
|
|
(301,200 |
) |
|
$ |
1.55 |
|
|
|
(277,500 |
) |
|
$ |
3.76 |
|
|
|
(724,700 |
) |
|
$ |
3.03 |
|
Canceled |
|
|
(280,200 |
) |
|
$ |
9.32 |
|
|
|
(364,200 |
) |
|
$ |
8.50 |
|
|
|
(312,200 |
) |
|
$ |
5.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, end of period |
|
|
3,601,700 |
|
|
$ |
6.92 |
|
|
|
3,341,100 |
|
|
$ |
7.17 |
|
|
|
2,787,800 |
|
|
$ |
7.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, end of period |
|
|
2,634,933 |
|
|
$ |
7.86 |
|
|
|
2,937,300 |
|
|
$ |
7.93 |
|
|
|
741,900 |
|
|
$ |
3.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares available for future grant, end of
period |
|
|
461,000 |
|
|
|
|
|
|
|
1,441,054 |
|
|
|
|
|
|
|
771,854 |
|
|
|
|
|
The following table summarizes information about the weighted average remaining contracted
life (in years) and the weighted average exercise prices for stock options outstanding as of the
year ended March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
|
Options exercisable |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
average |
|
|
|
|
|
|
average |
|
Range of |
|
Number of |
|
|
Remaining |
|
exercise |
|
|
Number of |
|
|
exercise |
|
exercise prices |
|
options |
|
|
life |
|
price |
|
|
options |
|
|
price |
|
$0.99 to $1.73 |
|
|
562,800 |
|
|
1.48 years |
|
$ |
1.61 |
|
|
|
452,900 |
|
|
$ |
1.60 |
|
$2.00 to $4.71 |
|
|
497,900 |
|
|
7.87 years |
|
$ |
4.07 |
|
|
|
311,033 |
|
|
$ |
4.24 |
|
$4.95 to $4.95 |
|
|
657,000 |
|
|
9.59 years |
|
$ |
4.95 |
|
|
|
|
|
|
$ |
|
|
$5.25 to $6.09 |
|
|
574,500 |
|
|
4.86 years |
|
$ |
5.87 |
|
|
|
561,500 |
|
|
$ |
5.88 |
|
$6.33 to $8.38 |
|
|
673,000 |
|
|
7.39 years |
|
$ |
7.72 |
|
|
|
673,000 |
|
|
$ |
7.72 |
|
$9.60 to $17.39 |
|
|
629,500 |
|
|
3.56 years |
|
$ |
15.96 |
|
|
|
629,500 |
|
|
$ |
15.96 |
|
$18.08 to $18.27 |
|
|
7,000 |
|
|
3.78 years |
|
$ |
18.21 |
|
|
|
7,000 |
|
|
$ |
18.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,601,700 |
|
|
5.86 years |
|
$ |
6.92 |
|
|
|
2,634,933 |
|
|
$ |
7.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual term for options outstanding and exercisable at
March 31, 2007 was 5.9 years and 4.9 years, respectively.
The total intrinsic value of stock options exercised during the year ended March 31, 2007 was
$735,000. The aggregate intrinsic value in the preceding table represents the total pre-tax
intrinsic value, based on the Companys closing stock price of $3.75 as of March 31, 2007, 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 and exercisable at
March 31, 2007 was $1.3 million and $1.0 million, respectively. The total number of in-the-money
options exercisable as of March 31, 2007 was 499,100.
As of March 31, 2007, total compensation cost related to non-vested stock options not yet
recognized was $2.0 million, which amount is expected to be recognized over the next 1.46 years on
a weighted-average basis.
During the years ended March 31, 2007, 2006 and 2005, the Company received cash from the
exercise of stock options totaling $466,000, $455,000 and
$8.2 million, respectively. There was no
excess tax benefit recorded for the tax deductions related to stock options during the year ended
March 31, 2007.
The Company
granted 100,000 and 250,000 options, respectively, to two current key employees.
The option to purchase 100,000 shares was later amended to 80,000 shares. The options were deemed
commensurate with their level of responsibility. The options vested depending on attaining certain
performance-based criteria. The performance-based options were subject to fixed accounting and were
recognized when the criteria were met for vesting or due to the passage of time. Certain criteria
were met and all of the
78
options vested in fiscal 2005, therefore, the Company recorded stock-based compensation
expense of $269,000 for the year ended March 31, 2005. At March 31, 2007 no options remained
outstanding related to these two option grants.
Restricted Stock
Restricted stock granted to employees presently has a vesting period of one year and expense
is recognized on a straight-line basis over the vesting period, or when the performance criteria
has been met. The value of the restricted stock is established by the market price on the date of
the grant or if based on performance criteria, on the date which it is determined the performance
criteria will be met. Restricted stock award 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 for the year ended March 31, 2007 is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Weighted |
|
|
average |
|
|
|
|
|
|
|
average |
|
|
remaining |
|
|
|
|
|
|
|
grant date |
|
|
contractual |
|
|
|
Shares |
|
|
fair value |
|
|
term |
|
Unvested, March 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
151,000 |
|
|
$ |
4.60 |
|
|
|
1.59 |
|
Vested |
|
|
(6,000 |
) |
|
$ |
4.29 |
|
|
|
|
|
Forfeited |
|
|
(25,000 |
) |
|
$ |
4.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested, March 31, 2007 |
|
|
120,000 |
|
|
$ |
4.68 |
|
|
|
1.59 |
|
|
|
|
|
|
|
|
|
|
|
There were no restricted stock awards issued or outstanding during the years ended March 31,
2006 or 2005.
The total fair value of shares vested during the year ended March 31, 2007 was approximately
$26,000. The weighted average fair value of restricted stock units granted for the year ended March
31, 2007 was $4.66.
As of March 31, 2007, total compensation cost related to non-vested restricted stock awards
not yet recognized was $269,000 which is expected to be recognized over the next 1.59 years on a
weighted-average basis. There was no excess tax benefit recorded for the tax deductions related to
stock options during the year ended March 31, 2007.
Restricted Stock Units
On April 1, 2006, the Company awarded restricted stock units to certain key employees. Receipt
of the stock units is contingent upon the Company meeting Total Shareholder Return (TSR) relative
to an external market condition and meeting the service condition. Each participant was granted a
base number of units. The units, as determined at the end of the performance year (fiscal 2007),
will be issued at the end of the third year (fiscal 2009) if the Companys average TSR target is
achieved for the fiscal period 2007 through 2009. The total number of base units granted for fiscal
2007 was 66,000. The amount expensed for the year ended March 31, 2007 was $113,000, based upon the
number of units granted.
The restricted stock units calculated estimated fair value is based upon the closing market
price on the last trading day preceding the date of award and is charged to earnings on a
straight-line basis over the three year period. After vesting, the restricted stock units will be
settled by the issuance of Company common stock certificates in exchange for the restricted stock
units.
79
Valuation and Expense Information Under SFAS 123R
The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value
of an award. The fair value of options granted during the year ended March 31, 2007 was calculated
using the following assumptions:
|
|
|
|
|
|
|
Fiscal Year |
|
|
Ended |
|
|
March 31, |
|
|
2007 |
Expected life (in years) |
|
|
5.0 |
|
Expected volatility |
|
|
69 |
% |
Risk-free interest rate |
|
|
4.61 |
% |
Expected dividend yield |
|
|
0.0 |
% |
Weighted-average fair value of grants |
|
$ |
2.91 |
|
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. As part of its SFAS 123R adoption, the
Company examined its historical pattern of option exercises in an effort to determine if there were
any discernable activity patterns based on certain employee populations. From this analysis, the
Company identified one employee population. Expected volatility uses the Company stocks historical
volatility for the same period of time as the expected life. The Company has no reason to believe
that its future volatility will differ from the past. The risk-free interest rate is based on the
U.S. Treasury rate in effect at the time of the grant for the same period of time as the expected
life. Expected dividend yield is zero, as the Company historically has not paid dividends.
Share-based compensation expense related to employee stock options, restricted stock and
restricted stock units under SFAS 123R for the year ended March 31, 2007 was $910,000, and was
included in general and administrative expenses in the consolidated statements of operations. No
amount of share-based compensation was capitalized. The impact of applying SFAS 123R is as follows
(in thousands, except per share data):
|
|
|
|
|
|
|
Year |
|
|
|
Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
General and administrative expenses |
|
$ |
(910 |
) |
|
|
|
|
Share-based compensation expense before income taxes |
|
|
(910 |
) |
Tax benefit |
|
|
378 |
|
|
|
|
|
Share-based compensation after income taxes |
|
|
(532 |
) |
|
|
|
|
Effect on earnings (loss) per share: |
|
|
|
|
Basic |
|
$ |
(.01 |
) |
|
|
|
|
Diluted |
|
$ |
(.01 |
) |
|
|
|
|
Pro Forma Information Under SFAS 123 for Periods Prior to Fiscal 2007
The following table details the effect on net loss and loss per share had share-based
compensation expense been recorded for the years ended March 31, 2006 and 2005 based on the
fair-value method under SFAS 123. The reported and pro forma net income (loss) and earnings (loss)
per share for the year ended March 31, 2007 is the same, since share-based compensation expense was
calculated under the provisions of SFAS 123R.
80
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
Fiscal year |
|
|
Fiscal year |
|
|
|
ended |
|
|
ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Net income (loss), as reported |
|
$ |
(3,175 |
) |
|
$ |
10,166 |
|
Deduct: Share-based compensation expense
determined under fair value based method
for all awards, net of related taxes |
|
|
(7,848 |
) |
|
|
(936 |
) |
|
|
|
|
|
|
|
Pro forma net income (loss) |
|
$ |
(11,023 |
) |
|
$ |
9,230 |
|
|
|
|
|
|
|
|
Basic earnings (loss) per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
(.11 |
) |
|
$ |
.38 |
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
(.37 |
) |
|
$ |
.34 |
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
(.11 |
) |
|
$ |
.35 |
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
(.37 |
) |
|
$ |
.32 |
|
|
|
|
|
|
|
|
The fair value of options granted in the years ended March 31, 2006 and 2005 were estimated at
the date of grant using the Black-Scholes option pricing model with the following weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
Fiscal year |
|
Fiscal year |
|
|
ended |
|
ended |
|
|
March 31, |
|
March 31, |
|
|
2006 |
|
2005 |
Expected life (in years) |
|
|
5.0 |
|
|
|
5.0 |
|
Expected volatility |
|
|
67 |
% |
|
|
71 |
% |
Risk-free interest rate |
|
|
4.2 |
% |
|
|
3.6 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Weighted-average fair value of grants |
|
$ |
3.93 |
|
|
$ |
9.19 |
|
Note 20 401(k) Plan
The Company has a defined contribution 401(k) profit-sharing plan (the plan) for eligible
employees which is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986,
as amended. The plan covers substantially all full-time employees. Employees are entitled to make
tax deferred contributions of up to 100% of their eligible compensation, subject to annual IRS
limitations. The Company matches 100% of employees contributions up to 2% of their base pay,
annually. The Companys contributions charged to expense were $445,000, $515,000 and $199,000 for
the years ended March 31, 2007, 2006, and 2005, respectively. The Companys matching contributions
vest over three years.
Note 21 Commitments and Contingencies
Leases
The Company leases substantially all of its office, warehouse and distribution facilities. The
terms of the lease agreements generally range from 2 to 15 years. The leases require payment of
real estate taxes and operating costs in addition to rent. Total rent expense was $3.2 million,
$2.9 million, and $2.7 million for the years ended March 31, 2007, 2006, and 2005, respectively.
The following is a schedule of future minimum rental payments required under noncancelable
operating leases as of March 31, 2007 (in thousands):
|
|
|
|
|
2008 |
|
$ |
3,599 |
|
2009 |
|
|
3,795 |
|
2010 |
|
|
3,320 |
|
2011 |
|
|
2,562 |
|
2012 |
|
|
2,537 |
|
Thereafter |
|
|
15,239 |
|
|
|
|
|
|
|
$ |
31,052 |
|
|
|
|
|
81
Litigation
In the normal course of business, the Company is involved in a number of
litigation/arbitration matters that, other than the matters described immediately below, are
incidental to the operation of the Companys business. These matters generally include, among other
things, collection matters with regard to products distributed by the Company and accounts
receivable owed to the Company. Additionally, the Company is involved in an informal inquiry by the U.S. Securities and
Exchange Commission and has responded fully to all requests for information.
The Company currently believes that the resolution of any of these
pending matters will not have a material adverse effect on the Companys financial position or
liquidity, but an adverse decision in more than one of the matters not described below could be
material to the Companys consolidated results of operations. Because of the status of these
proceedings as well as the contingencies and uncertainties associated with litigation, it is
difficult, if not impossible, to predict the exposure to the Company, if any, in connection with
these matters.
Sybersound Records, Inc. v. BCI Eclipse, LLC, et al.
On May 12, 2005, Sybersound Records, Inc. (Sybersound) filed this action against the
Companys wholly-owned subsidiary, BCI Eclipse, LLC (BCI) and others in the Superior Court of
California, County of Los Angeles, West District, Case Number SC085498. Plaintiff alleged that BCI
and others sold unlicensed records in connection with their karaoke-related business or otherwise
failed to account for or pay licensing fees and/or royalties. Sybersound alleged that this conduct
gives BCI and others an illegal, competitive advantage in the marketplace. Based on this and
related conduct, Sybersound asserted the following causes of action: tortious interference with
business relations, unfair competition under the California Business and Professions Code, and
unfair trade practices under Californias Unfair Practices Act. Sybersound sought damages,
including punitive damages, of not less than $195.0 million dollars plus trebled actual damages,
injunctive relief, pre-judgment and post-judgment interest, costs, attorneys fees and expert fees.
On August 10, 2005, Sybersound filed a dismissal without prejudice of the case, and filed and
served a new Complaint in the United States District Court for the Central District of California
on August 11, 2005. In the new Complaint, Sybersound made similar allegations, but also alleged
that BCI was infringing on certain copyrights.
On November 7, 2005, the Court issued its order granting BCIs motion to dismiss as well as
other of the defendants motions to dismiss, but without prejudice to Sybersounds right to attempt
to save its claims by amending the Complaint. Sybersound served and filed an Amended Complaint on
November 21, 2005 which added various individual defendants, including Edward Goetz, BCIs former
president. In addition, Sybersound added claims under the Racketeer Influenced and Corrupt
Organizations Act. On December 22, 2005, BCI served and filed its motion to dismiss Sybersounds
Amended Complaint.
On January 6, 2006, the Court issued its order dismissing Sybersounds claims with prejudice.
An appeal of this order was filed by Sybersound on February 1, 2006 and a briefing schedule has
been set with respect to the issues present in the appeal. Sybersound has filed its opening brief
and BCI has filed its answering brief.
Sybersound Records, Inc. v. Navarre Corporation, BCI Eclipse, LLC, et al.
Sybersound Records, Inc. filed this action on or about May 12, 2005 in the Superior Court of
Justice, Toronto, Ontario, Canada, Court File Number 05-CV-289397Pd2. The factual basis for
Sybersounds claims in this case are essentially the same as those in the California action
described above. However, in addition to BCI, Sybersound has also named Navarre Corporation in this
case.
Sybersound claims that the alleged misconduct constitutes tortious interference with economic
interests, and seeks damages of not less than $5,745,000, plus punitive damages in the amount of
$800,000, plus injunctive relief against certain of the defendants other than Navarre and BCI.
Navarre and BCI have responded to the complaint, denied liability and damages and asserted a
counterclaim against Sybersound and its principal, Jan Stevens. In the counterclaim, BCI and
Navarre seek injunctive relief enjoining Sybersound and Stevens from making false statements
regarding BCI and Navarre, declaratory relief that Sybersound and Stevens have made false
statements, and money damages for the false statements. BCI and Navarre allege that Sybersound and
Stevens are liable to Navarre and BCI under the Competition Act, Trade-marks Act and common law for
certain false statements made and published by Sybersound and Stevens, and are seeking all damages
available.
82
Securities Litigation Lawsuits
Several purported class action lawsuits were commenced in 2005 by various plaintiffs against
Navarre Corporation and certain of its current and former officers and directors in the United
States District Court for the State of Minnesota. Plaintiffs cite to alleged violations of Sec.
10(b) of the Securities Exchange Act of 1934 (the Act) and Rule 10(b)(5), promulgated under the
Act, and as to the individual defendants only, violation of Sec. 20(a) of the Act.
Plaintiffs seek certification of the actions as a class action lawsuit, compensatory but
unspecified damages allegedly sustained as a result of the alleged wrongdoing, plus costs, counsel
fees and experts fees. The actions are identified as follows:
AVIVA Partners, Ltd. v. Navarre Corp., et al.
(Civ. No. 05-1151 (PAM/RLE))
Vivian Oh v. Navarre Corp., et al.
(Civ. No. 05-01211 (MJD/JGL))
Matthew Grabler v. Navarre Corp., et al.
(Civ. No. 05-1260 (DWF/JSM))
By Memorandum Opinion and Order dated December 12, 2005, the Court appointed The Pension
Group, comprised of the Operating Engineers Construction Industry and Miscellaneous Pension Fund
and Ms. Grace W. Lai, as Lead Plaintiff, and appointed the Reinhardt, Wendorf & Blanchfield law
firm as liaison counsel and the Lerach, Coughlin law firm as lead counsel. The Court also ordered
that the cases be consolidated under the caption In re Navarre Corporation Securities
Litigation, and further ordered that a Consolidated Amended Complaint be filed.
On February 3, 2006, Plaintiffs filed a Consolidated Amended Complaint with the Court. This
Consolidated Amended Complaint reiterates the allegations made in the individual complaints and
extends these allegations to the Companys restatements of its previously issued financial
statements that were made in November 2005.
A hearing on Defendants motion to dismiss was held on May 10, 2006 and by an order dated June
27, 2006, the Court granted Defendants motion to dismiss for failure to state a claim, without
prejudice. The Court gave Plaintiffs 30 days to file an amended complaint in an effort to cure the
identified pleading deficiencies.
On July 28, 2006 Plaintiffs filed their Second Consolidated Amended Complaint against
Defendants. Defendants filed a motion to dismiss the renewed complaint on September 22, 2006,
asserting, among other things, that Plaintiffs had not sufficiently cured the defects present in
the original Consolidated Amended Complaint.
By a Memorandum and Order dated December 21, 2006, the Court granted Defendants motion in
part, denied it in part, and specifically removed Cary L. Deacon, Brian M.T. Burke and Charles
Cheney as individual defendants. Defendants answered the Complaint on January 26, 2007 and
anticipate that typical disclosure requirements and discovery will proceed.
Shareholder Derivative Lawsuits
Several potential class plaintiffs commenced shareholder derivative lawsuits on behalf of all
of Navarres shareholders, alleging claims against certain of Navarres current and former officers
and directors. The complaints alleged that Navarres shareholders were treated unfairly based upon
the same factual allegations contained in the securities litigation lawsuit set forth above. These
actions were brought in the U.S. District Court for Minnesota, and are identified as follows:
Shannon Binns v. Charles Cheney, et al.
(Civ. No. 05-1191 (RHK/JSM))
Karel Filip v. Charles Cheney, et al.
(Civ. No. 05-01216 (DSD/SRN))
Jeffrey Evans v. Charles Cheney, et al.
(Civ. No. 05-01216 (JMR/FLN))
Joan Brewster v. Charles Cheney, et al.
(Civ. No. 05-2044 (JRT/FLN))
83
William Block v. Charles Cheney, et al.
(Civ. No. 05-2067 (DSD/SRN))
On July 26, 2005, the Navarres Board of Directors appointed a special litigation committee
pursuant to Minn. Stat. §302A.241 to consider whether it was in the best interests of the Company
to pursue the shareholder derivative claims. The special litigation committee retained experts,
conducted interviews with the named Defendants and others, and also contacted Plaintiffs counsel
for, and obtained, their input.
On January 19, 2006, the special litigation committee issued a comprehensive Resolution Report
(consisting of 40 pages) and Appendix (consisting of 17 exhibits) detailing its findings. The
special litigation committee resolved that the derivative actions are not meritorious and should
not be pursued, (and) that it is in the best interests of Navarre that such Derivative Complaints
be dismissed . . .
On April 21, 2006 Plaintiffs Binns and Filip and Defendants entered into a stipulation of
dismissal without prejudice of those two actions. This voluntary dismissal provides Plaintiffs
Binns and Filip with the opportunity to refile their actions in the future if circumstances
warrant, and Defendants reserved all rights to oppose and defend against any such future actions.
By Order dated May 16, 2006 the Court dismissed those actions.
A hearing on Defendants motion to dismiss the remaining suits brought by Plaintiffs Evans,
Brewster and Block was held on May 22, 2007. On May 24, 2007 the Court issued its Memorandum and
Order granting Defendants motion to dismiss these suits with prejudice.
Note 22 Capital Leases
The Company leases certain equipment under noncancelable capital leases. At March 31, 2007 and
2006, leased capital assets included in property and equipment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
March 31, 2006 |
|
Computer and office equipment |
|
$ |
487 |
|
|
$ |
487 |
|
Less: accumulated depreciation and amortization |
|
|
296 |
|
|
|
166 |
|
|
|
|
|
|
|
|
Net property and equipment |
|
$ |
191 |
|
|
$ |
321 |
|
|
|
|
|
|
|
|
Future minimum lease payments, excluding executory costs such as real estate taxes, insurance
and maintenance expense, by year and in the aggregate are as follows (in thousands):
|
|
|
|
|
|
|
Minimum Lease |
|
|
|
Commitments |
|
Year ending March 31: |
|
|
|
|
2008 |
|
$ |
132 |
|
2009 |
|
|
77 |
|
2010 |
|
|
60 |
|
2011 |
|
|
8 |
|
|
|
|
|
Total minimum lease payments |
|
$ |
277 |
|
Less: amounts representing interest at rates ranging from 9.6% to 31.6% |
|
|
55 |
|
|
|
|
|
Present value of minimum capital lease payments |
|
$ |
222 |
|
Less: current installments |
|
|
102 |
|
|
|
|
|
Obligations under capital lease, less current installments |
|
$ |
120 |
|
|
|
|
|
Note 23 Sale/Leaseback of Warehouse Facility
During June 2004, the Company entered into an agreement for the sale and leaseback of its
warehouse adjacent to the Companys
headquarters building in New Hope, Minnesota, for net proceeds of $6.4 million. The initial term of
the lease is 15 years, with options to renew for three additional five-year periods. The lease was
classified as an operating lease.
84
The $1.4 million difference between property and equipment sold and the net proceeds has been
established as prepaid rent and is being amortized over the life of the lease. Rental payments
under the lease approximate $659,000 for the first year, with an annual increase of 2.75% each year
thereafter.
Note 24 License and Distribution Agreement
The Company has a license and distribution agreement (Agreement) with a vendor that includes
provisions for a license fee and target payments. The Company will incur royalty expense for the
license fee based on product sales for the year. License fee royalties were $6.4 million, $8.2
million, and $9.1 million for the years ended March 31, 2007, 2006 and 2005, respectively, and are
reflected in cost of sales in the consolidated statements of operations. As of March 31, 2007 and
March 31, 2006, $2.8 million and $2.8 million in target payments are reflected in prepaid assets in
the consolidated balance sheets. The target payments are non-refundable, but are offset by
royalties incurred in order to recoup the payments. The Company monitors these prepaid assets for
potential impairment based on sales activity of products provided to it under this Agreement.
Note 25 Related Party Transactions
Employment/Severance Agreements
The Company entered into an employment agreement with its former Chief Executive Officer
(CEO) in 2001, which expired on March 31, 2007. The Company agreed to pay severance amounts equal
to a multiple of defined compensation and benefits under certain circumstances. Upon retirement,
the Company will pay approximately $2.4 million plus interest at approximately 8% per annum pursuant to the deferred compensation portion of
the arrangement. The Company will be required to pay this amount over a period of three years
subsequent to March 31, 2007. The Company has expensed $1.1 million, $288,000 and $288,000 for this
obligation during each of the years ended March 31, 2007, 2006 and 2005, respectively. At March 31,
2007 and 2006, $2.4 million and $1.3 million, respectively, had been accrued in the consolidated
financial statements. The employment agreement also contained a deferred compensation component that
was earned by the former CEO upon the stock price achieving certain targets, which may be forfeited
in the event that he does not comply with certain non-compete obligations. As of March 31, 2005 all
of the targets had been met and the remaining $2.5 million was expensed in the consolidated
financial statements. At both March 31, 2007 and 2006, $4.0 million had been accrued in the
consolidated financial statements.
The former CEOs
employment agreement also included a loan to the executive for a maximum of
$1.0 million, of which zero and $200,000 were outstanding at
March 31, 2007 and 2006, respectively.
Under the terms of the loan, which was entered into prior to the Sarbanes-Oxley Act of 2002,
$200,000 of the $1.0 million principal and all unpaid and unforgiven interest was forgiven by the
Company on each of March 31, 2007 and 2006. During each of fiscal 2007, 2006 and 2005, the Company
forgave $200,000 of principal and interest. The outstanding note amount bore an annual interest
rate of 5.25%.
The Company entered into a separation agreement with a former Chief Financial Officer
(CFO)in fiscal 2004. The Company was required to pay approximately $597,000 over a period of four
years beginning May 2004. The continued payout is contingent upon the individual complying with a
non-compete agreement. This amount was accrued and expensed in fiscal year 2005.
The Company entered into a separation agreement with another former Chief Financial Officer in
fiscal year 2006. The agreement obligated the Company to pay severance amounts equal to the
multiple of defined compensation and benefits. The Company was also required to pay approximately
$299,000 over a period of one year beginning July 2005. The Company expensed $299,000 in its
consolidated financial statements for the period ended March 31, 2006.
Stock Purchase Agreement
Subsequent to the Companys acquisition of the assets of Encore Software, Inc. (Encore)
2002, the Company entered into a five-year agreement on August 24, 2002 with Michael Bell, to serve
as Chief Executive Officer of Encore Software, Inc. The Company also entered into a stock purchase
agreement with Mr. Bell under which he acquired 20,000 of the 100,000 outstanding shares of Encore.
In connection with the stock purchase, a stock buy and sell agreement was entered into between Mr.
Bell and Encore. During fiscal 2005, the Company exercised its option under the buy sell agreement
and purchased the 20,000 shares of Encore stock for $5.8 million which consisted of $3.4 million in
cash and 300,000 shares of Navarre common stock. The Company recorded $5.8 million in
85
compensation expense which is reflected in selling, general and administrative expenses in the
consolidated statements of operations for the year ending March 31, 2005.
Employment Agreement FUNimation
In connection with the FUNimation acquisition, the Company entered into an employment
agreement with a key FUNimation employee providing for his employment as President and Chief
Executive Officer of FUNimation Productions, Ltd. (the FUNimation CEO). Among other items, the
agreement provides the FUNimation CEO with the ability to earn two performance-based bonuses in the
event that certain financial targets are met by the FUNimation business during the fiscal years
ending March 31, 2006-2010. Specifically, if the total earnings before interest and tax (EBIT) of
FUNimation during the fiscal years ending March 31, 2006 through March 31, 2008 is in excess of
$90.0 million, the FUNimation CEO is entitled to receive a bonus payment in an amount equal to 5%
of the EBIT that exceeds $90.0 million; however, this bonus payment shall not exceed $5.0 million.
Further, if the combined EBIT of the FUNimation business is in excess of $60.0 million during the
period consisting of the fiscal years ending March 31, 2009 and 2010, the FUNimation CEO is
entitled to receive a bonus payment in an amount equal to 5% of the EBIT that exceeds $60.0
million; however, this bonus payment shall not exceed $4.0 million. No amounts have been expensed
or paid under this agreement as the targets have not been achieved.
Former Chief Executive Officer Investment in Mix & Burn
The Companys former Chief Executive Officer made an investment in Mix & Burn in the form of a
convertible note. This note is convertible to common stock in Mix & Burn and accrues interest at an
annual rate of twelve percent. This investment was made only after the Company determined that it
would not make loans to or investments in Mix & Burn in excess of $2.5 million, an amount that had
been reached prior to the former Chief Executive Officers investment.
Note 26 Major Customers
The Company has two major customers who accounted for 34% of net sales for fiscal 2007, of
which each customer accounts for over 10% of net sales. These customers accounted for 30% of net
sales for fiscal 2006 and 39% of net sales in fiscal 2005.
Note 27 Business Segments
The Company identifies its segments based on its organizational structure, which is primarily
by business activity. Operating profit represents earnings before interest expense, interest
income, income taxes, and allocations of corporate costs to the respective divisions. Intersegment
sales are made at market prices. The Companys corporate office maintains a majority of the
Companys cash under its cash management policy.
Navarre operates three business segments: Distribution, Publishing and Other (through December
2005).
Through the distribution segment, the Company distributes and provides fulfillment services in
connection with a variety of finished goods that are provided by our vendors, which include PC
software and video game publishers and developers, independent music labels (through May 31, 2007),
major music labels (through December 2005), and independent and major motion picture studios. These
vendors provide the Company with PC software, CD audio, DVD video, and video games and accessories,
which are in turn distributed to retail customers. The distribution business focuses on providing
vendors and retailers with a range of value-added services, including vendor-managed inventory,
Internet-based ordering, electronic data interchange services, fulfillment services, and
retailer-oriented marketing services.
Through the publishing segment the Company owns or licenses various PC software, CD audio and
DVD video titles, and other related merchandising and broadcasting rights. The publishing segment
packages, brands, markets and sells directly to retailers, third party distributors, and the
Companys distribution segment.
The other segment was included from December 31, 2003 to December 31, 2005 and included the
operations of Mix & Burn, a separate corporation that is included in the Companys consolidated
results in accordance with the provisions of FIN 46(R). Mix & Burn designs and markets digital
music delivery services for music and other specialty retailers.
86
The following table provides information by business segment for the years ended March 31,
2007, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2007 |
|
Distribution |
|
Publishing |
|
Other |
|
Eliminations |
|
Consolidated |
Net sales |
|
$ |
641,462 |
|
|
$ |
126,651 |
|
|
$ |
|
|
|
$ |
(69,742 |
) |
|
$ |
698,371 |
|
Income (loss) from operations |
|
|
7,212 |
|
|
|
10,091 |
|
|
|
|
|
|
|
|
|
|
|
17,303 |
|
Net income (loss) before income taxes |
|
|
(3,574 |
) |
|
|
10,518 |
|
|
|
|
|
|
|
|
|
|
|
6,944 |
|
Depreciation and amortization expense |
|
|
2,616 |
|
|
|
8,342 |
|
|
|
|
|
|
|
|
|
|
|
10,958 |
|
Capital expenditures |
|
|
6,555 |
|
|
|
498 |
|
|
|
|
|
|
|
|
|
|
|
7,053 |
|
Total assets |
|
|
235,623 |
|
|
|
155,742 |
|
|
|
|
|
|
|
(103,140 |
) |
|
|
288,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2006 |
|
Distribution |
|
Publishing |
|
Other |
|
Eliminations |
|
Consolidated |
Net sales |
|
$ |
621,739 |
|
|
$ |
127,612 |
|
|
$ |
424 |
|
|
$ |
(63,649 |
) |
|
$ |
686,126 |
|
Income (loss) from operations |
|
|
(8,588 |
) |
|
|
12,862 |
|
|
|
(1,590 |
) |
|
|
|
|
|
|
2,684 |
|
Net income (loss) before income taxes |
|
|
(16,185 |
) |
|
|
12,755 |
|
|
|
(1,759 |
) |
|
|
|
|
|
|
(5,189 |
) |
Depreciation and amortization expense |
|
|
2,242 |
|
|
|
7,017 |
|
|
|
|
|
|
|
|
|
|
|
9,259 |
|
Capital expenditures |
|
|
2,477 |
|
|
|
303 |
|
|
|
119 |
|
|
|
|
|
|
|
2,899 |
|
Total assets |
|
|
269,774 |
|
|
|
160,834 |
|
|
|
|
|
|
|
(120,994 |
) |
|
|
309,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2005 |
|
Distribution |
|
Publishing |
|
Other |
|
Eliminations |
|
Consolidated |
Net sales |
|
$ |
556,927 |
|
|
$ |
95,777 |
|
|
$ |
352 |
|
|
$ |
(56,441 |
) |
|
$ |
596,615 |
|
Income (loss) from operations |
|
|
(2,172 |
) |
|
|
14,006 |
|
|
|
(2,123 |
) |
|
|
|
|
|
|
9,711 |
|
Net income (loss) before income taxes |
|
|
(2,199 |
) |
|
|
13,579 |
|
|
|
(2,220 |
) |
|
|
|
|
|
|
9,160 |
|
Depreciation and amortization expense |
|
|
1,827 |
|
|
|
1,695 |
|
|
|
|
|
|
|
|
|
|
|
3,522 |
|
Capital expenditures |
|
|
8,214 |
|
|
|
1,078 |
|
|
|
83 |
|
|
|
|
|
|
|
9,375 |
|
Total assets |
|
|
176,932 |
|
|
|
47,944 |
|
|
|
536 |
|
|
|
(29,520 |
) |
|
|
195,892 |
|
Note 28 Subsequent Events (Unaudited)
On
May 31, 2007, the Company sold the stock of
the independent music distribution business. In accordance with SFAS
No. 144, Accounting for the Impairment of
Disposal of Long-Lived Assets, the Company will reflect the sale in the first quarter of fiscal 2008 as
discontinued operations. The Company received $6.5 million in cash proceeds
from the sale, plus the assignment to the Company of the trade receivables related to this business. Total assets
as of March 31, 2007 were approximately
$21.6 million and primarily consisted of
accounts receivable, inventory and prepaid royalties. Total
liabilities as of March 31, 2007 were approximately $12.7 million and
primarily related to accounts payable.
Note 29 Quarterly Data Seasonality (Unaudited)
The Companys quarterly operating results have fluctuated significantly in the past and will
likely do so in the future as a result of seasonal variations of products ultimately sold at
retail. The Companys business is affected by the pattern of seasonality common to other suppliers
of retailers, particularly the holiday selling season. Historically, more than 30% of the Companys
sales and substantial portions of the Companys profits have been earned in the third fiscal
quarter.
The following table sets forth certain unaudited quarterly historical financial data for each
of the four quarters in the periods ended March 31, 2007 and March 31, 2006 (in thousands, except
per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
June 30 |
|
|
September 30 |
|
|
December 31 |
|
|
March 31 |
|
|
|
|
Fiscal Year 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
146,339 |
|
|
$ |
173,149 |
|
|
$ |
210,248 |
|
|
$ |
168,635 |
|
Gross profit |
|
|
25,280 |
|
|
|
30,715 |
|
|
|
35,266 |
|
|
|
25,440 |
|
Net income (loss) |
|
$ |
634 |
|
|
$ |
1,612 |
|
|
$ |
4,051 |
|
|
$ |
(2,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.02 |
|
|
$ |
0.05 |
|
|
$ |
.11 |
|
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.02 |
|
|
$ |
0.04 |
|
|
$ |
.11 |
|
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
June 30 |
|
|
September 30 |
|
|
December 31 |
|
|
March 31 |
|
|
|
|
Fiscal Year 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
141,288 |
|
|
$ |
158,130 |
|
|
$ |
214,842 |
|
|
$ |
171,866 |
|
Gross profit |
|
|
24,831 |
|
|
|
28,439 |
|
|
|
28,227 |
|
|
|
25,596 |
|
Net income (loss) |
|
$ |
1,906 |
|
|
$ |
(75 |
) |
|
$ |
(6,068 |
) |
|
$ |
1,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.07 |
|
|
$ |
0.00 |
|
|
$ |
(0.20 |
) |
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.06 |
|
|
$ |
0.00 |
|
|
$ |
(0.20 |
) |
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Navarre Corporation
Schedule II Valuation and Qualifying Accounts and Reserves
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Charged to |
|
|
|
|
|
|
Balance at |
|
|
|
Beginning |
|
|
Costs and |
|
|
Additions/ |
|
|
End of |
|
Description |
|
Of Period |
|
|
Expenses |
|
|
(Deductions) |
|
|
Period |
|
Year ended March 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for vendor receivables |
|
$ |
60 |
|
|
$ |
1,435 |
|
|
$ |
(722 |
) |
|
$ |
773 |
|
Allowance for doubtful accounts |
|
|
1,749 |
|
|
|
3,655 |
|
|
|
(4,210 |
) |
|
|
1,194 |
|
Allowance for sales returns |
|
|
12,801 |
|
|
|
325 |
|
|
|
(650 |
) |
|
|
12,476 |
|
Allowance for MDF and sales discounts |
|
|
4,736 |
|
|
|
20,533 |
|
|
|
(20,004 |
) |
|
|
5,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
19,346 |
|
|
$ |
25,948 |
|
|
$ |
(25,586 |
) |
|
$ |
19,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for vendor receivables |
|
$ |
6,092 |
|
|
$ |
8,912 |
|
|
$ |
(14,944 |
) |
|
$ |
60 |
|
Allowance for doubtful accounts |
|
|
1,375 |
|
|
|
12,111 |
|
|
|
(11,737 |
) |
|
|
1,749 |
|
Allowance for sales returns |
|
|
4,190 |
|
|
|
(207 |
) |
|
|
8,818 |
(1) |
|
|
12,801 |
|
Allowance for MDF and sales discounts |
|
|
2,158 |
|
|
|
24,537 |
|
|
|
(21,959 |
) |
|
|
4,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,815 |
|
|
$ |
45,353 |
|
|
$ |
(39,822 |
) |
|
$ |
19,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for vendor receivables |
|
$ |
4,808 |
|
|
$ |
4,287 |
|
|
$ |
(3,003 |
) |
|
$ |
6,092 |
|
Allowance for doubtful accounts |
|
|
1,394 |
|
|
|
423 |
|
|
|
(442 |
) |
|
|
1,375 |
|
Allowance for sales returns |
|
|
3,706 |
|
|
|
1,066 |
|
|
|
(582 |
) |
|
|
4,190 |
|
Allowance for MDF and sales discounts |
|
|
1,251 |
|
|
|
22,277 |
|
|
|
(21,370 |
) |
|
|
2,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,159 |
|
|
$ |
28,053 |
|
|
$ |
(25,397 |
) |
|
$ |
13,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Additional reserves associated with the acquisition of FUNimation.
|
88