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| NAVR > SEC Filings for NAVR > Form 10-K on 9-Jun-2009 | All Recent SEC Filings |
9-Jun-2009
Annual Report
and subsequently deciding to liquidate. Consequently, our financial results have
been negatively impacted by the downtown in the economy.
During fiscal 2009, we reviewed our portfolio of businesses for poor
performing activities to identify areas where continued business investments
would not meet our requirements for financial returns. As such, the following
occurred:
• BCI began winding down its licensing operations related to budget DVD
video. For the year ended March 31, 2009, we recorded impairment and other
charges of $25.9 million in connection with these activities.
• FUNimation is no longer involved in licensing operations related to DVD video of children's properties. For the year ended March 31, 2009, we recorded $81.0 million in impairment and other charges, which included $8.2 million for license fees and production costs, $71.2 million for goodwill (see further disclosure in Note 3), $1.0 million for trademarks and $555,000 for inventory.
We, like many public companies, experienced a significant decline in our
stock price as the market reacted to the overall worsening of the economy and
the "credit crisis" among major lending institutions. This decline triggered an
impairment of goodwill and other intangibles in our publishing segment. During
the year ended March 31, 2009, we recorded pre-tax. non-cash goodwill and
intangible impairment charges in the amount of $82.7 million. Additionally, we
completed a company-wide reduction in force with a restructuring cost of
$1.1 million. The total restructuring, impairment and other charges recorded for
fiscal 2009 were $111.1 million.
Consolidated net sales decreased 4.2% during fiscal 2009 to $631.0 million
compared to $658.5 million in fiscal 2008. This decrease in net sales, primarily
in the software and home video categories, was due to decreased sales related to
overall deteriorating economic conditions and the loss of sales from a large
retailer that filed for bankruptcy and subsequently decided to liquidate.
Our gross profit decreased to $67.0 million or 10.6% of net sales for fiscal
2009 compared with $101.6 million or 15.4% of net sales for fiscal 2008. The
decrease in gross margin of $34.6 million was a result of:
• impairment and other charges of $16.4 million related to accounts
receivable reserves, inventory and prepaid royalties associated with the
BCI restructuring;
• impairment and other charges of $8.8 million related to license advances, production costs and inventory associated with the FUNimation restructuring; and
• decreased sales volume.
The decrease in gross profit margin percent from 15.4% to 10.6%, a total
decrease of 4.8%, was due principally to the impairment and other charges
related to our restructuring (which constituted 4.0% of the decrease) and
product sales mix.
Total operating expenses for fiscal 2009 were $164.2 million or 26.0% of net
sales, compared with $83.7 million or 12.7% of net sales for fiscal 2008. The
increase in operating expenses of $80.5 million in fiscal 2009 was primarily a
result of pre-tax, non-cash goodwill and trademark impairment charges of
$82.7 million, $2.0 million of impairment related to masters and severance costs
of $1.1 million. These increased expenses were offset by $5.4 million decrease
in the professional fee expenses resulting from the completion of the enterprise
resource planning ("ERP") system implementation.
Net loss for fiscal 2009 was $88.4 million or $2.44 per diluted share
compared to net income of $9.7 million or $0.27 per diluted share for last year.
The restructuring activities that we undertook during fiscal 2009, including
a company-wide workforce reduction and the winding down of the budget DVD video
publishing business, have created an operating platform that yields a reduced
expense base. In addition to improving profitability through expense-reduction
initiatives, we anticipate that such initiatives will allow us to focus greater
attention on maximizing the results of the more profitable areas of our
business.
Despite these challenging times, we are committed to licensing, acquisition
of content and driving sales and efficiencies. We intend to monitor the current
business environment in order to adjust our strategies appropriately.
Discontinued Operations
On May 31, 2007, the Company sold all of the outstanding capital stock of its
wholly-owned subsidiary, Navarre Entertainment Media, Inc. ("NEM") to an
unrelated third party. In accordance with SFAS No. 144, Accounting for the
Impairment of Disposal of Long-Lived Assets, the Company has presented the
independent music distribution business 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. The consolidated
financial statements were reclassified to segregate the assets, liabilities and
operating results of the discontinued operations for all periods presented.
Prior to reclassification, the discontinued operations were reported in the
distribution operating segment.
As part of this transaction, the Company recorded a gain in the first quarter
of fiscal 2008 of $6.1 million ($4.6 million net of tax), which included
severance and legal costs of $339,000 and other direct costs to sell of
$842,000. The gain is included in "Gain on sale of discontinued operations" in
the Consolidated Statements of Operations.
During fiscal 2008, the Company adjusted the carrying value of the assets and
liabilities of discontinued operations by $502,000, ($245,000 net of tax) to
reflect settled contingencies and reserve adjustments. The additional gain is
included in "Gain on sale of discontinued operations" in the Consolidated
Statement of Operations.
Net sales from discontinued operations for the years ended March 31, 2009,
2008 and 2007 were zero, $5.2 million and $53.6 million, respectively. Net
income (loss) from discontinued operations was zero, $2.6 million or $0.07 per
diluted share and $455,000 or $0.01 per diluted share for the years ended
March 31, 2009, 2008 and 2007, respectively.
Working Capital and Debt
Our business is working capital intensive and requires significant levels of
working capital primarily to finance accounts receivable and inventories. We
have relied on trade credit from vendors, amounts received on accounts
receivable and our revolving credit facility for our working capital needs. In
March 2007, we amended and restated our credit agreement with General Electric
Capital Corporation ("GE") and entered into a four year Term Loan facility with
Monroe Capital Advisors, LLC ("Monroe"). The GE agreement currently provides for
a $65.0 million revolving credit facility and the Monroe agreement provided for
a $15.0 million Term Loan facility, which was paid in full in connection with
the Third Amendment of the GE revolving facility. At March 31, 2009 we had
$24.1 million outstanding on the revolving facility and, based on the facility's
borrowing base and other requirements, $16.2 million was available. At March 31,
2008 we had total debt outstanding of $31.3 million related to our revolving
credit facility and $9.7 million outstanding related to our Term Loan facility.
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 2009, 2008 and 2007. Under specific conditions, we permit
our customers to return products. We record a reserve for sales returns and
allowances against amounts due to reduce the net recognized receivables to the
amounts we reasonably believe will be collected. These reserves are based on the
application of our historical gross profit percent against average sales
returns. Our actual sales return rates have averaged between 10% and 13% over
the past three years. Although our past experience has been a good indicator of
future reserve levels, there can be no assurance that our current reserve levels
will be adequate in the future.
Our 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.
Our distribution customers at times qualify for certain price protection and
promotional monies from our vendors. We serve as an intermediary to settle these
amounts between vendors and customers. We account for these amounts as
reductions of revenues with corresponding reductions in cost of sales.
FUNimation's revenue is recognized upon meeting the recognition requirements
of American Institute of Certified Public Accountants Statement of Position
No. 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
Company's 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 - FUNimation
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 management's 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 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 Company's 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 supplier's share of
distribution revenues ("participation/royalty cost") is retained by the Company
until the share equals the license fees paid to the program supplier plus
recoupable production costs. Thereafter, any excess is paid to the program
supplier. License fees are amortized as recouped by the Company which equals
participation/royalty costs earned by the program suppliers.
Participation/royalty costs are accrued/expensed in the same ratio that current
period revenue for a title or group of titles bear to the estimated remaining
unrecognized ultimate revenue for that title, as defined by 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.
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 customers that are in
bankruptcy, or at risk of bankruptcy, such as the bankruptcy of certain
customers in fiscal 2009 and 2007. If customer circumstances change (i.e.,
higher than expected defaults or an unexpected material adverse change in a
major customer's 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 asset's carrying
value unlikely. The amount of impairment loss would be recognized as the excess
of the asset's 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.
Our publishing segment had goodwill balances of zero and $81.7 million as of
March 31, 2009 and 2008. We have no goodwill associated with our distribution
segment. We determine fair value using widely accepted valuation techniques,
including discounted cash flow and market multiple analysis. These types of
analyses require us to make certain assumptions and estimates regarding industry
economic factors and the profitability of future business strategies. We conduct
impairment testing at least once annually based on our most current business
strategy in light of present industry and economic conditions, as well as future
expectations. If the operating results for our publishing segment deteriorate
considerably and are not consistent with our assumptions and estimates, we may
be exposed to a goodwill impairment charge that could be material. As discussed
above, during the year ended March 31, 2009, we determined that the fair value
of three of our reporting units was less than their fair values, and
accordingly, an impairment of goodwill and other intangibles was recorded. In
determining the amount of impairment, SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS 142), requires the Company to analyze the fair values of
the assets and liabilities of the reporting units as if the reporting units had
been acquired in a current business combination.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment and amortizable intangible
assets, are evaluated for impairment whenever events or changes in circumstances
indicate the carrying value of an asset may not be recoverable. An impairment
loss is recognized when estimated undiscounted cash flows expected to result
from the use of the asset plus net proceeds expected from disposition of the
asset (if any) are less than the carrying value of the asset. When an impairment
loss is recognized, the carrying amount of the asset is reduced to its estimated
fair value. If our results from operations deteriorate considerably and are not
consistent with our assumptions, we may be exposed to a material impairment
charge. As discussed above, during the year ended March 31, 2009, we determined
that the fair value of various long-lived assets was less than their fair
values, and accordingly, an impairment of other intangibles was recorded. In
determining the amount of impairment, SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS 142) and SOP 00-2, Accounting by Producers or
Distributors of Films, require the Company to analyze the fair values of the
assets and liabilities of the reporting units as if the reporting units had been
acquired in a current business combination.
Inventory Valuation
Our inventories are recorded at the lower of cost or market. We use certain
estimates and judgments to 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.
Income Taxes
Income taxes are recorded under the liability method, whereby deferred income
taxes are provided for temporary differences between the financial reporting and
tax basis of assets and liabilities. In the preparation of our consolidated
financial statements, management is required to estimate income taxes in each of
the jurisdictions in which we operate. This process involves estimating actual
current tax exposures together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included in
our Consolidated Balance Sheets. Management reviews our deferred tax assets for
recoverability on a quarterly basis and assesses the need for valuation
allowances. These deferred tax assets are evaluated by considering historical
levels of income, estimates of future taxable income streams and the impact of
tax planning strategies. A valuation allowance is recorded to reduce deferred
tax assets when it is determined that it is more likely than not that we would
not be able to realize all or part of our deferred tax assets. We carried a
valuation allowance at March 31, 2007 of $1.0 million related to the loss
associated with the variable interest entity ("VIE"), Mix & Burn. We determined
. . .
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