UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended June 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from______________to_______________
Commission File Number 0-22982
NAVARRE CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1704319
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7400 49TH AVENUE NORTH, NEW HOPE, MN 55428
(Address of principle executive offices)
Registrant's telephone number, including area code (612) 535-8333
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
COMMON STOCK, NO PAR VALUE - 6,902,248 SHARES AS OF JULY 31, 1997
NAVARRE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated balance sheets -
June 30, 1997 and March 31, 1997
Consolidated statements of operations -
Three months ended June 30, 1997 and 1996
Consolidated statements of cash flows -
Three months ended June 30, 1997 and 1996
Notes to consolidated financial statements - June 30, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
PART I. FINANCIAL INFORMATION
NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, MARCH 31,
1997 1997
-------- --------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash $ 62 $ 655
Accounts receivable, less allowance for doubtful accounts
and sales returns of $3,350 and $3,585, respectively 41,312 47,163
Inventories 18,154 16,854
Note receivable, officer 218 214
Prepaid expenses and other current assets 3,108 3,062
-------- --------
Total current assets 62,854 67,948
Property and equipment, net of accumulated depreciation of
$2,807 and $2,571, respectively 3,388 3,438
Other assets:
Velvel distribution rights 5,054 5,346
Goodwill 1,449 1,492
Other assets 524 173
-------- --------
Total assets $ 73,269 $ 78,397
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 24,770 $ 20,750
Current maturities of long-term debt 4,642 5,142
Accounts payable 39,124 45,503
Accrued expenses 204 1,453
Income taxes payable 135 135
-------- --------
Total current liabilities 68,875 72,983
Minority interest in subsidiaries 52 --
Long-term debt, less current maturities 280 315
Shareholders' equity:
Preferred stock, no par value: Authorized shares -
5,000,000, Issued and outstanding shares - None
Common stock, no par value: Authorized shares -
20,000,000, Issued and outstanding shares - 6,902,248 8,005 8,005
Retained earnings (deficit) (3,644) (2,584)
Unearned compensation (299) (322)
-------- --------
Total shareholders' equity 4,062 5,099
-------- --------
Total liabilities and shareholders' equity $ 73,269 $ 78,397
======== ========
SEE ACCOMPANYING NOTES
NOTE: THE BALANCE SHEET AT MARCH 31, 1997 HAS BEEN DERIVED FROM THE AUDITED
FINANCIAL STATEMENTS AT THAT DATE BUT DOES NOT INCLUDE ALL OF THE INFORMATION
AND FOOTNOTES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR COMPLETE
FINANCIAL STATEMENTS.
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
1997 1996
-------- --------
Net sales:
Computer software $ 26,507 $ 28,009
Music 13,291 11,583
-------- --------
39,798 39,592
Cost of sales 35,523 34,525
-------- --------
Gross profit 4,275 5,067
Operating expenses:
Selling and promotion 1,271 1,168
Distribution and warehousing 663 515
General and administration 3,160 2,476
Amortization of intangible assets 409 --
-------- --------
5,503 4,159
-------- --------
Income (loss) from operations (1,228) 908
Other expense:
Interest expense (559) (463)
Other expense (102) (104)
-------- --------
Income (loss) before income taxes (1,889) 341
Income tax expense(benefit) (775) 140
Minority interest in subsidiaries 54 --
-------- --------
Net income(loss) $ (1,060) $ 201
======== ========
Earnings(loss) per common share: $ (.15) $ .03
======== ========
Weighted average number of common and
common equivalent shares outstanding 6,902 7,616
======== ========
SEE ACCOMPANYING NOTES
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
1997 1996
-------- --------
OPERATING ACTIVITIES
Net income(loss) $ (1,060) $ 201
Adjustments to reconcile net income(loss)
to net cash used in operating activities:
Depreciation and amortization of leasehold
improvements 295 211
Amortization of intangible assets 364 --
Amortization on unearned compensation 23 --
Minority interests in subsidiaries 52 --
Changes in operating assets and liabilities:
Accounts receivable 5,851 (1,393)
Inventories (1,300) (1,634)
Prepaid expenses and other assets (425) 29
Accounts payable and accrued expenses (7,628) 1,696
Income taxes payable -- (239)
-------- --------
Net cash used in operating activities (3,828) (1,129)
INVESTING ACTIVITIES
Note receivable, officer (4) (200)
Purchase of business -- (250)
Equity investment in business -- (1,000)
Purchase of equipment and leasehold improvements (245) (211)
-------- --------
Net cash used in investing activities (249) (1,661)
FINANCING ACTIVITIES
Payment on long-term debt (536) (14)
Proceeds from notes payable, bank 41,524 36,230
Payment on notes payable, bank (37,504) (34,066)
Proceeds from notes payable, officer -- 497
Exercise of common stock options -- 142
-------- --------
Net cash provided by financing activities 3,484 2,789
-------- --------
Net increase (decrease) in cash 593 (1)
Cash at beginning of period 655 4
-------- --------
Cash at end of period $ 62 $ 3
======== ========
Supplemental schedule of non-cash
transactions; Common stock issued
as partial consideration for acquisition
and equity investment in businesses -- $ 984
======== ========
SEE ACCOMPANYING NOTES
NAVARRE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Navarre Corporation and its
majority owned subsidiaries, Digital Entertainment, Inc. and Net Radio, Inc.,
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. All intercompany accounts and transactions
have been eliminated. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Because of the seasonal nature of the Company's business, the
operating results for the three month period ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
March 31, 1998. For further information, refer to the financial statements and
footnotes thereto included in Navarre Corporation's Annual Report on Form 10-K
for the year ended March 31, 1997.
NOTE B - NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding during the period. Common equivalent shares from stock
options are excluded from the computation as their effect is antidilutive. In
February 1997, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 128, "Earnings Per Share". This Statement replaces the
presentation of primary earnings per share (EPS) with basic EPS and also
requires dual presentation of basic and diluted EPS for entities with complex
capital structures. This statement is effective for financial statements for
periods ending after December 15, 1997. For quarter ended June 30, 1997, there
is no difference between the basic loss share under Statement No. 128 and net
loss per share as reported.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of net
sales represented by certain items included in the Company's "Consolidated
Statements of Operations."
THREE MONTHS ENDED JUNE 30
1997 1996
-------------- --------------
Net sales:
Computer 66.6% 70.7%
Music 33.4 29.3
-------------- --------------
Total net sales 100.0 100.0
Cost of sales 89.3 87.2
-------------- --------------
Gross profit 10.7 12.8
Selling and promotion 3.2 3.0
Distribution and warehousing 1.7 1.3
General and administration 7.9 6.3
Amortization of intangible assets 1.0 --
-------------- --------------
Income (loss) from operations (3.1) 2.3
Interest expense 1.4 1.2
Other expense 0.3 0.3
-------------- --------------
Net income (loss) (2.7)% 0.5%
============== ==============
Certain of this information in this section contains forward-looking statements.
The Company's 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 the Company's business, the
consumer market for music products and computer software products, retail
customer buying patterns, new or different competition in the Company's
traditional and new markets and the rate of new product development and
commercialization.
Net sales increased 0.5% from $39.6 million to $39.8 million. The gain was
primarily due to increased sales in the Music Products Division. Music sales
increased 14.7% from $11.6 million to $13.3 million. This was primarily due to
aggressive release schedules from a number of the Music Products Division's new
proprietary labels. Computer products sales decreased by 5.4% from $28.0 million
to $26.5 million. The decrease was primarily due to a much smaller number of new
releases of hit products.
Gross profit decreased 15.6% or $792,000 from $5.1 million to $4.3 million. As a
percentage of net sales, gross profit decreased from 12.8% during the three
month period ending June 30, 1996 to 10.7% for the same period in 1997. Overall
gross margin declined due to a lower gross margin in the Company's music
business caused in part by a loss incurred in connection with the settlement of
litigation with one of the Company's vendors in which the Company agreed to
accept partial payment of certain amounts due to it and wrote off the balance
due to concerns about collectability of the balance with certain music vendors
who have gone out of business. Gross margins from the Computer Products
Division's net sales were $2.6 million or 9.7% as a percentage of net sales
during the three month period in 1997 compared with $2.7 million or 9.7% as a
percentage of net sales in the same period in 1996. Gross margins from music
sales were $1.8 million or 13.7% of music net sales for the three month period
in 1997 compared with $2.4 million or 20.4% of music net sales for the same
period in 1996.
Selling and promotion expense increased from $1.2 million during the three month
period in 1996 to $1.3 million during the same period in 1997 and increased as a
percentage of net sales from 3.0% during the three month period in 1996 to 3.2%
during the same period in 1997. The higher level of expense was primarily due to
expenses in Net Radio where none existed last year and higher levels of sale
expense related to expansion of the proprietary music for the Music Division.
Distribution and warehousing expense increased from $515,000 in the three month
period for 1996 to $663,000 in the same period in 1997. As a percentage of net
sales it increased from 1.3% of net sales to 1.7% of net sales. The increased
expense was related to increased costs associated with a decrease in the average
order size.
General and Administration expenses increased from $2.5 million during the three
month period in 1996 to $3.2 million during the same period in 1997 in the
current period and increased as a percentage of net sales from 6.3% during the
three month period in 1996 to 7.9% during the same period in 1997. This
increased expense was primarily due to expenses in the newly acquired Net Radio
where none existed last year and costs associated with increased staffing to
support anticipated growth. Amortization of intangible assets represents the
Company's amortization of its investment in Velvel Musical Products LLC. In
November 1996, the Company acquired an interest in Velvel Music Products in
exchange for distribution rights with respect to Velvel products. The Company is
amortizing its investment in the Velvel distribution rights over the five year
life of the distribution agreement.
Interest expense increased from $463,000 for the three month period in 1996 to
$559,000 for the three month period in 1997. This increase resulted from
substantially higher borrowing to support the Company's higher inventory levels
resulting from its growth in sales.
A net loss of $1.1 million resulted for the three month period in 1997 compared
with net earnings of $201,000 in the same three month period in 1996. This loss
was the result of reduced gross profits and increased operating expenses as
described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its working capital needs through bank
borrowings. The level of borrowings has historically fluctuated significantly
during the year. At June 30, 1997, the Company had net accounts receivable of
$41.3 million and inventory of $18.2 million. These assets are primarily
financed by accounts payable of $39.1 million and bank borrowings of $24.8
million.
The Company has a revolving line of credit with Congress Financial Corporation.
The credit facility has a maximum borrowing limit of $45.0 million and is
secured by substantially all the Company's assets. The available amount
fluctuates based on an asset borrowing base.
The Company had a net loss of $1.1 million during this period. The Company
financed its operations in part by using cash of $3.8 million from operating
activities. Accounts receivable decreased by $5.9 million and inventories
increased by $1.3 million during the period. These changes were offset partially
by a $7.6 million decrease in accounts payable and accrued expenses. Investing
activities used $249,000 of cash, including $245,000 for the purchase of
furniture, equipment and leasehold improvements. The Company generated net cash
of $3.5 million in financing activities primarily through proceeds of net bank
borrowings of $4.0 million during the period offset against payments of $536,000
on long-term debt. Cash at the end of the period was reduced by $593,000.
The Company anticipates it will utilize its credit facility during the next
twelve months to meet seasonal working capital needs. The Company believes that
the funds available under its current credit facility together with cash flow
from operations will be adequate to fund its working capital needs over the next
twelve months.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the Company's legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
Exhibit 11: Statement Re: Computation of per share earnings
Exhibit 27: Financial data schedule
(b) The Company did not file any reports on Form 8-K during the three
months ended June 30, 1997
NAVARRE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NAVARRE CORPORATION
(Registrant)
Date: August 8, 1997 By /s/ Eric H. Paulson
-----------------------
Eric H. Paulson
Chairman of the Board,
President and
Chief Executive Officer
Date: August 8, 1997 By /s/ Charles E. Cheney
------------------------
Charles E. Cheney
Treasurer and Secretary,
Executive Vice President,
and Chief Financial Officer