NAVARRE COMPLETES ACQUISITION OF ENCORE
Navarre’s acquisition of Gardena, Cal., software publisher Encore was “completed on schedule” after obtaining approval last week from U.S. Bankruptcy Court, Minneapolis, home entertainment distributor’s CEO, Eric Paulson, told financial analysts in conference call Mon. CFO James Gilbertson said principal assets of Encore were acquired for $9.75 million -- $7 million in cash and rest in debt payable over 2 years. Navarre had announced in June that it had agreement to acquire assets of Encore, which distributor called “nation’s largest privately owned entertainment and education PC software publisher” (CED June 11 p6). Paulson said Mon. that purchase"marks our emergence as an owner, marketer and distributor of content that includes PC software and videogames now.”
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Over last year, Encore had mounted effort to become major player in videogame console games, even changing name -- Encore Software -- it had gone by since it was started in 1995. But Encore filed for Chapter 11 bankruptcy protection March 22 and was operating under debtor in possession until Navarre deal. Navarre has been distributor of Encore software since 1995. Despite Encore’s bankruptcy, Paulson said software publisher had sales of $32 million for its year ended Dec. 31 and 40-45% gross margin. Gilbertson said Encore consistently had been profitable until last 18 months when it made overly aggressive effort to shift its focus into new categories as it prepared to make bid to go public. In last 4 months, he said, Encore management team realized company “had gotten off track” and helped make it healthy once again by deciding to return focus to its traditionally strong PC games.
Paulson said Mon. that all outstanding issues involving purchase were settled Aug. 1, including those related to money, licensing, human resources. He said there were 50 primary licenses for software content involved and Navarre now had assumed 100% of them. Key software licenses Navarre received via acquisition included Dragon Tales, Fun & Skill Packs, Kaplan educational software, National Geographic and Sesame Street as well as license for upcoming console and handheld videogames Dragon’s Lair 3D and Daredevil. Latter license is based on Marvel comic of same name. Paulson said theatrical film based on Daredevil was scheduled to be released theatrically Feb. 14, starring Ben Affleck as title superhero, and said Navarre would ship Encore game based on license simultaneously with film’s release.
Encore will operate as wholly owned subsidiary of Navarre, Paulson said, and Encore’s 55 employees and Gardena, Cal., location presented strategic opportunities for future. Navarre said “transaction will not result in any share dilution, nor will Navarre assume any of Encore’s liabilities.” It also expects acquisition “to be accretive to its earnings per share this year.” Distributor said Encore CEO-founder Mike Bell would “continue in his duties overseeing Encore’s day-to-day operations.” Paulson also said Mon. that his company planned to have committee including Navarre and Encore representatives evaluate Encore titles currently being developed to decide on their potential viability, expected costs of development and marketing on “case-by-case basis.”
Paulson said: “The acquisition of Encore [will] strengthen our position in the interactive videogame marketplace. Industry analysts are currently predicting a 30% compound annual growth rate for the interactive videogame industry from 2001-2005, as new technology platforms such as PlayStation 2 and the Xbox videogame system gain broad consumer acceptance… Additionally, our participation in this industry enables us to further extend our direct distribution relationships with large retailers generating solid sellthrough of Encore titles.”
Paulson told analysts in conference call he expected Navarre now would be able to establish direct distribution relationship for software with retailers with which it currently did only music business. But when analyst asked if he could name specific retailers he had in mind, Paulson said he would rather wait to name them until Navarre actually started shipping to them on direct basis. Navarre’s main retail relationships are with Best Buy, Circuit City, CompUSA, Costco, Musicland Group (now owned by Best Buy), Sam’s Club, Trans World Entertainment.