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, 1998
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 - 12,202,580 SHARES AS OF JULY 31, 1998
NAVARRE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated balance sheets -
June 30, 1998 and March 31, 1998
Consolidated statements of operations -
Three months ended June 30, 1998 and 1997
Consolidated statements of cash flows -
Three months ended June 30, 1998 and 1997
Notes to consolidated financial statements - June 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, 1998 MARCH 31, 1998
------------- --------------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash $ 27 $ 23
Accounts receivable, less allowance for doubtful accounts
and sales returns of $2,481 and $2,412, respectively 63,325 52,383
Inventories 27,156 23,188
Note receivable, related parties 337 406
Refundable income taxes 2,265 2,265
Prepaid expenses and other current assets 1,033 962
-------- --------
Total current assets 94,143 79,227
Property and equipment, net of accumulated depreciation of
$3,832 and $3,647, respectively 2,933 2,957
Other assets:
Goodwill 1,094 1,174
Other assets 204 331
-------- --------
Total assets $ 98,374 $ 83,689
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 29,248 $ 32,445
Current portion of long-term debt 114 162
Accounts payable 44,874 45,554
Accrued expenses 596 1,019
-------- --------
Total current liabilities 74,832 79,180
Long-term debt, less current maturities 153 181
Shareholders' equity:
Preferred stock, no par value:
Authorized shares - 10,000,000,
Issued and outstanding shares - 1,523,810 and none, respectively 19,002 --
Common stock, no par value:
Authorized shares - 50,000,000,
Issued and outstanding shares -7,012,128 and 7,009,170, respectively 8,121 8,113
Retained deficit (3,531) (3,558)
Unearned compensation (203) (227)
-------- --------
Total shareholders' equity 23,389 4,328
-------- --------
Total liabilities and shareholders' equity $ 98,374 $ 83,689
======== ========
SEE ACCOMPANYING NOTES
NOTE: THE BALANCE SHEET AT MARCH 31, 1998 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,
1998 1997
-------- --------
Net sales:
Computer software $ 36,058 $ 26,507
Music 17,159 13,291
-------- --------
53,217 39,798
Cost of sales 46,148 35,523
-------- --------
Gross profit 7,069 4,275
Operating expenses:
Selling and promotion 1,609 1,271
Distribution and warehousing 854 663
General and administration 3,851 3,298
Amortization of intangible assets 88 409
-------- --------
6,402 5,641
-------- --------
Income (loss) from operations 667 (1,366)
Other expense:
Interest expense (712) (559)
Other income 30 36
-------- --------
Income (loss) before income taxes (15) (1,889)
Income tax benefit (5) (775)
Minority interest 37 54
-------- --------
Net earnings (loss) $ 27 $ (1,060)
Preferred Dividend Requirements 334 --
-------- --------
Net loss applicable to common shares (307) --
======== ========
Loss per common share:
Basic and diluted $ (.04) $ (.15)
======== ========
Weighted average common and
common equivalent shares outstanding
Basic and diluted 7,010 6,902
======== ========
Dividends declared per preferred share: $ .22 --
======== ========
SEE ACCOMPANYING NOTES
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
1998 1997
-------- ---------
OPERATING ACTIVITIES
Net earnings (loss) $ 27 $ (1,060)
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Depreciation 216 295
Amortization of intangible assets 88 364
Amortization on unearned compensation 24 23
Minority interests in subsidiaries 36 52
Changes in operating assets and liabilities:
Accounts receivable (10,942) 5,851
Inventories (3,968) (1,300)
Prepaid expenses and other assets 136 (425)
Accounts payable and accrued expenses (1,139) (7,628)
-------- --------
Net cash used in operating activities (15,522) (3,828)
INVESTING ACTIVITIES
Note receivable, related parties 69 (4)
Purchase of equipment and leasehold improvements (280) (245)
-------- --------
Net cash used in investing activities (211) (249)
FINANCING ACTIVITIES
Payment on long-term debt (76) (536)
Proceeds from notes payable, bank 44,630 41,524
Payment on notes payable, bank (47,827) (37,504)
Proceeds from sale of preferred stock and warrants 19,002 --
Exercise of common stock options 8 --
-------- --------
Net cash provided by financing activities 15,737 3,484
-------- --------
Net increase in cash 4 (593)
Cash at beginning of period 23 655
-------- --------
Cash at end of period $ 27 $ 62
======== ========
SEE ACCOMPANYING NOTES
NAVARRE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Navarre Corporation and its
majority owned subsidiaries, Digital Entertainment, Inc. and Net Radio, Corp.,
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by 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, 1998 are not
necessarily indicative of the results that may be expected for the year ended
March 31, 1999. 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, 1998. Certain balances at June 30, 1997 have been
reclassified to conform to the June 30, 1998 presentation.
NOTE B - NET EARNINGS (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE, Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to conform to the
Statement 128 requirements. Preferred shares and employee stock options are not
included in the calculation because they are anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per
share:
(In thousands, except per share data)
THREE MONTHS ENDED
JUNE 30,
1998 1997
------- --------
Numerator:
Net earnings $ 27 $(1,060)
Less preferred dividend requirements (334) --
Adjusted net loss applicable to common stock (307) --
Denominator:
Denominator for basic earnings per
share--weighted-average shares 7,010 6,902
Dilutive securities:
Preferred stock -- --
Employee stock options -- --
Denominator for diluted earnings
per share--adjusted
weighted-average shares 7,010 6,902
------- -------
Basic earnings (loss) per share (.04) (.15)
======= =======
Dilutive earnings (loss) per share (.04) (.15)
======= =======
Under the terms of the Certificate of Rights and Preferences of the Class A
Convertible Preferred Stock ("Certificate") of the Company, the holders of the
Preferred Stock are entitled to receive cumulative dividends of 10% per annum
payable quarterly, beginning on June 30, 1998. The dividend can be paid in cash
or if the shareholder elects, in Company Common Stock which will be issued when
the shareholder converts the Preferred Stock. With respect to the quarter ended
June 30, 1998, the Company accrued a dividend of $334,000 or $.22 per Preferred
Share. Because certain holders of Preferred Shares elected to receive their
dividend in Common Stock, the Company ultimately paid cash dividends of only
$268,103, or $.03 per share of Common Stock. The Company inadvertently
originally publicly reported only the cash dividend and reported a loss of $.03
per share. With this Form 10-Q, the Company is reporting the corrected loss of
$.04 per share, which reflects both the payment of cash and the issuance of
Common Stock in lieu of cash.
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
1998 1997
---- ----
Net sales:
Computer 67.8% 66.6%
Music 32.2 33.4
---- ----
Total net sales 100.0 100.0
Cost of sales 86.7 89.3
---- ----
Gross profit 13.3 10.7
Selling and promotion 3.0 3.2
Distribution and warehousing 1.6 1.7
General and administration 7.2 8.2
Amortization of intangible assets 0.2 1.0
---- ----
Income (loss) from operations 1.3 (3.4)
Interest expense 1.3 1.4
Other expense 0.1 0.1
---- ----
Net income (loss) 0.1% (2.7)%
==== ====
Certain 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. For a
detailed discussion of these factors see the section entitled "Forward Looking
Statements" in the Company's Form 10-K for year ended March 31, 1998.
Net sales for the three month period ended June 30, 1998 increased 33.7% from
$39.8 million in fiscal 1998 to $53.2 million in fiscal 1999. The gain was due
to increased sales in the both the Computer Products Division and the Music
Products Division. Computer products sales increased by 36.2% from $26.5 million
for the three month period ending June 30, 1997 to $36.1 million for the three
month period ending June 30, 1998. This increase was primarily due to the
addition of new customers and publishers. Music sales increased 29.3% from $13.3
million for the three month period ending June 30, 1997 to $17.2 million for the
three month period ending June 30, 1998. This increase was primarily due from
new improved content from new proprietary labels.
Gross profit increased 65.1% or $2.8 million from $4.3 million for the three
month period ending June 30, 1997 to $7.1 million for the for the same period in
1998. As a percentage of net sales, gross profit increased from 10.7% during the
three month period ending June 30, 1997 to 13.3% for the same period in 1998.
The increase in overall gross margin for the three month period was primarily
due to increased margins in the Music Products Division. Gross margins from
music sales were $3.6 million or 20.9% of music net sales for the three month
period in 1998 compared with $1.7 million or 12.8% of music net sales for the
same period in 1997. The increase was primarily due to increased gross margins
on proprietary products due to lower costs in acquiring product. Gross margins
from the Computer Products Division's net sales were $3.5 million or 9.8% as a
percentage of net sales during the three month period in 1998 compared with $2.6
million or 9.7% as a percentage of net sales in the same period in 1997.
Selling and promotion expense increased from $1.3 million during the three month
period in 1997 to $1.6 million during the same period in 1998 but decreased as a
percentage of net sales from 3.2% during the three month period in 1997 to 3.0%
during the same period in 1998. This decrease for the three month period was
primarily due to efficiencies achieved from higher sales volume.
Distribution and warehousing expense increased from $663,000 in the three month
period for 1997 to $854,000 in the same period in 1998. As a percentage of net
sales it decreased from 1.7% of net sales to 1.6% of net sales. The decrease for
the three month period was primarily due to efficiencies achieved from higher
sales volume.
General and Administration expenses increased from $3.3 million during the three
month period in 1997 to $3.9 million during the same period in 1998. As a
percentage of net sales it decreased from 8.2% during the three month period in
1997 to 7.2% during the same period in 1998.
Interest expense increased from $559,000 for the three month period in 1997 to
$712,000 for the three month period in 1998. This increase resulted from
substantially higher borrowing to support the Company's higher inventory levels
resulting from its growth in sales.
Net earnings were $27,000 for the three month period in 1998 compared with a net
loss of $1.1 million in the same three month period in 1997. This was primarily
the result of increased sales along with increased margins.
YEAR 2000
The Company has performed an assessment of its major information technology
systems and expects that all necessary modifications or replacements of existing
systems will be completed prior to December 1998. Progress in this effort is
being monitored by senior management as well as the Audit Committee. Based on
current expenditures and estimates, the costs of addressing the Year 2000 Issue
are not expected to be material to the financial results or operations of the
Company. The Company intends to contact its significant vendors and suppliers
regarding the Year 2000 Issue and the status of their compliance. At this time,
the impact on the Company if significant vendors or suppliers are not in
compliance cannot be reasonably estimated. However, the Company will be
developing plans to mitigate the impact of vendors or suppliers who are not in
compliance with the Year 2000 Issue.
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, 1998, the Company had net accounts receivable of
$63.3 million and inventory of $27.2 million. These assets are primarily
financed by accounts payable of $44.9 million and bank borrowings of $29.2
million.
For the three month period ended June 30, 1998, net sales were $53.2 million, an
increase of $13.4 million over net sales of $39.8 million during the same period
in 1997. The Company used cash of $15.5 million in operating activities.
Accounts receivable increased by $10.9 million and inventories increased by $4.0
million and accounts payable and accrued expense decreased by $1.1 million.
Investing activities used $211,000 of cash, including $280,000 for the purchase
of furniture, equipment and leasehold improvements. This was partially offset by
paying down the bank note by $3.2 million. The
Company generated net cash of $15.7 million in financing activities primarily
through proceeds from a private placement to a group of investors for the
aggregate net consideration of $19.0 million. Cash at the end of the period
increased by $4,000.
On May 1, 1998, the Company raised $19.0 million, net of expense, in a private
placement of 1,523,810 shares of Class A Convertible Preferred Stock. Each share
of Class A Convertible Preferred Stock was issued at a price of $13.125 per
share and is convertible into five shares of Navarre common stock. For each
share of Class A Convertible Preferred Stock, each purchaser received a warrant
to purchase five shares of Navarre common stock at $3.50 per share. The Company
used the proceeds of the offering for working capital purposes, including
payment of the amounts due on its credit facility. Under the terms of the Class
A Convertible Preferred Stock, the Company is required to pay cumulative
dividends of 10% per annum payable quarterly, beginning on June 30, 1998.
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 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 anticipated working capital
requirements, including dividends on the Class A Convertible Preferred Stock,
over the next twelve months.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of its business, the Company is involved in a number of
routine litigation matters that are incidental to the operation of its business.
These matters include collection matters with regard to products distributed by
the Company and accounts receivable owed to the Company. In addition the Company
is involved in the following legal proceeding.
On March 5, 1998, Bank of Montreal ("Plaintiff") commenced an action in Federal
District Court, Northern District of Illinois, alleging, among other things,
breach of contract, breach of duty to negotiate in good faith and breach of
trade confirmation in connection with a proposed commercial transaction between
the Company and the Plaintiff. The Plaintiff seeks damages in an amount in
excess of $1,053,451.59. On April 23, 1998, the Company submitted its Answer to
the Complaint denying liability and asserting various affirmative defenses. The
Company intends to vigorously defend against Plaintiff's claims. The parties are
engaged in discovery.
ITEM 2. CHANGES IN SECURITIES
(c) ISSUANCE OF UNREGISTERED SECURITIES
On May 1, 1998, the Company issued 1,523,810 shares of Class A Convertible
Preferred Stock in a private placement to a group of investors for aggregate
consideration of $20.0 million. The Class A Convertible Preferred Stock was
issued at a price of $13.125 per share and is convertible into five shares of
Navarre common stock at any time after June 30, 1998. In addition, for each
share of Class A Convertible Preferred Stock acquired, each investor received a
five-year warrant to purchase five shares of Navarre common stock at a price of
$3.50 per share. The Class A Convertible Preferred Stock has a cumulative annual
dividend of ten (10%) payable quarterly beginning June 30, 1998. The Company has
the right to call the Class A Convertible Preferred Stock at any time after June
30, 1998 if the price of the Company's Common Stock is at least 200% of the
effective conversion price for ten consecutive trading days, subject to certain
other conditions. The Company cannot call more than one-third of the original
aggregate Class A Convertible Preferred Stock in any six-month period. The
Company also has the right to call the warrant in certain circumstances. In
connection with the private placement, the Company also granted a four year
warrant to purchase 380,953 shares of Common Stock at a price of $2.625 per
share to Delphi Financial Corporation, the Company's agent in the private
placement. The Company believes that the transactions were exempt pursuant to
Section 4(2) of the Securities Act of 1933 and Rule 506 under Regulation D.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 19, 1998, the Company held a Special Meeting of Shareholders to consider
an amendment to the Company's Articles of Incorporation that would increase the
number of the Company's authorized shares of capital stock. The amendment
proposed to increase the number of authorized shares of capital stock from
twenty million (20,000,000) to sixty million (60,000,000) no par value shares.
The amendment designated fifty million (50,000,000) shares as Common Stock, and
ten (10) million shares as Preferred Stock.
The Company's security holders passed the amendment by the vote of 8,342,861
shares in favor of the amendment, 160,263 shares against the amendment, 7,783
shares abstained, and no shares were broker non-votes.
ITEM 5. OTHER INFORMATION
During the period from July 1, 1998 through July 31, 1998, holders of 982,554
shares of the Company's Class A Preferred Stock converted their Preferred Stock
into 4,912,770 shares of Common Stock and holders of warrants issued in May 1998
exercised their warrants for an aggregate of 403,615 shares and paid the Company
gross proceeds of $1,355,778. In addition, during this period, employees of the
Company exercised options to purchase an additional 5,012 shares of Common
Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
Exhibit 27: Financial data schedule
(b) Reports on Form 8-K
Report on Form 8-K dated May 1, 1998 was filed reporting the
Company's issuance of a Class A Convertible Preferred Stock
and the compliance with Nasdaq Stock Market Rules.
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 10, 1998 By /s/ Eric H. Paulson
-----------------------
Eric H. Paulson
Chairman of the Board,
President and
Chief Executive Officer
Date: August 10, 1998 By /s/ Charles E. Cheney
------------------------
Charles E. Cheney
Treasurer and Secretary,
Executive Vice President,
and Chief Financial Officer