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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2001
Commission File Number 0-22982
NAVARRE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1704319
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7400 49TH AVENUE NORTH, NEW HOPE, MN 55428
(Address of principal executive offices)
Registrant's telephone number, including area code: (763) 535-8333
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE.
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 (x) No ( )
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 registrant's 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. ( )
As of June 15, 2001, the Company had 23,537,163 outstanding shares of Common
Stock, no par value.
As of June 15, 2001, the aggregate value of the Company's Common Stock held by
non-affiliates of the Company was approximately $25,419,401 based on the last
reported sale price of $1.30 on The Nasdaq Stock Market on that date.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement for its 2001 Annual Meeting of Shareholders, a
copy of which will be filed with the Securities and Exchange Commission within
120 days of March 31, 2001, is incorporated by reference into Part III of this
Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Navarre Corporation ("Navarre" or the "Company"), a Minnesota corporation formed
in 1983, is a major distributor of music, software, interactive CD-ROM products,
and DVD videos. Navarre sells to major music and software retailers, and
wholesalers, such as CompUSA, Inc., Best Buy Co., Inc., Sam's Clubs, Circuit
City Stores, Inc. and Costco Wholesale Corporation. We believe the Company is
the largest distributor that strictly focuses on consumer software in the United
States and the largest distributor of independent music in North America.
Navarre's operations for fiscal 2001 were classified into two business segments,
based upon products and services provided. They were home entertainment products
and eSplice, Inc., as described below. The home entertainment products segment
distributes two principal products, computer software products and music
products. As the only major distributor to handle both music and software, the
Company is recognized as an industry leader in the distribution of consumer
software in addition to being recognized as a leader in the distribution of
independent music labels and artists. The Company's product line contains over
20,000 stock keeping units ("SKUs") of compact discs, cassettes, personal
computer software, interactive CD-ROM software and DVD/VHS videos sold to over
500 customers with over 10,000 locations throughout the United States. The
Company's broad base of customers includes (i) wholesale clubs, (ii) mass
merchandisers, (iii) computer specialty stores, (iv) music specialty stores and
(v) book stores. During fiscal years 1999, 2000, and 2001, computer software
accounted for 71.5%, 65.4%, and 68.3% of net sales, while sales of music
products accounted for 28.4%, 34.3% and 31.6% of net sales, respectively.
In addition to these two business segments, Navarre maintains an ownership
interest in the common stock of NetRadio Corporation. During fiscal 2000,
Navarre reduced its ownership position to less than 50% and no longer
consolidated the operations of NetRadio. As described below, NetRadio is the
leading broadcaster of originally programmed audio entertainment over the
Internet through its Web site www.netradio.com.
In October 1999, Navarre formed eSplice, Inc. to engage in the development of a
platform to aggregate and distribute digital content, including music and
software utilizing industry-leading solutions for encoding, encryption, digital
rights management and playback. In the fourth quarter of fiscal 2001, Navarre
management and Board of Directors determined that the Company would not continue
to support the further development of eSplice operations.
With the reduction of ownership in NetRadio and the decision stated above not to
support eSplice, it is the Company's intent to focus on its core distribution
business. In 2001 the core distribution business showed an operating profit of
$3.6 million.
The Company's corporate headquarters are located at 7400 49th Avenue North, New
Hope, MN 55428 and its web-site is www.navarre.com.
THE COMPANY'S MARKETS
HOME ENTERTAINMENT PRODUCTS
Personal Computer Software
Over the past few years, considerable consolidation has occurred within the
personal consumer software distribution channel. This consolidation, which was a
migration to publishing/distribution entities with increased market power and
numerous subsidiary or affiliate labels, slowed during the past year.
According to P.C. Data, retail software revenues were approximately $5.5 billion
in 2000, an increase of 10% since 1998. Navarre's compounded annual growth in
the distribution of computer software has been 16% since 1998. During calender
year 2000, Navarre's market share in the consumer software distribution channel
increased substantially in all six major software categories. At calendar year
end, Navarre's percent of unit share in each
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category was: entertainment at 62%, personal productivity at 34%, education at
40%, reference at 37%, finance at 3.4%, and business at 3.0%.
Several key publisher agreements lead to this overall distribution market share
increase. Additionally, the company recently was appointed a Microsoft
distributor in March 2001. The Company believes the Microsoft agreement can help
it to gain additional market share across all categories with special emphasis
on the business, personal productivity, and entertainment categories. It is the
Company's intent to continue to add publishers that will enable it to achieve an
even greater stronghold across all software categories. In its fiscal year ended
March 31, 2001, the Company's net software sales rose by 15.1% over the previous
fiscal year.
During the 2001 fiscal year, the Company continued to expanded the number of
e-commerce customers for whom it performs fulfillment and distribution services.
These services include sales of personal computer software, prerecorded music
and DVD/VHS videos. The Company's business-to-business Web site, www.navarre.com
which integrates on-line ordering and deployment of text and visual product
information, has been enhanced to allow for easier user navigation and ordering.
Prerecorded Music
A significant amount of consolidation has recently occurred in both the
production and distribution components of the prerecorded music industry.
Industry sources indicate that approximately 83% or approximately $11.9 billion
of the industry's total revenue is derived from five major companies through
their record labels. They are Time-Warner, Sony Corporation, EMI Music
Distribution, BMG Distribution and The Seagram Company. In addition to these
major labels and their distribution companies, there are a number of independent
distribution companies that distribute for artists and a number of independent
distribution companies that enter into exclusive distribution agreements with
these labels on either a regional or national basis. These independent
distributors currently represent $2.4 billion or approximately 17% of the
industry's total revenue. According to the Recording Industry Association of
American ("RIAA"), audio and video product shipped to domestic markets was $14.3
billion in calendar 2000.
Distributors perform a number of functions in the music industry. Although the
major labels are generally distributed to the retail channel directly by their
affiliated distribution companies, there are a number of areas where alternative
distribution methods are required. These include (i) the distribution of labels
other than major labels, which cover recordings by national, regional and local
artists; (ii) the distribution of products to retailers that are too small to
buy in quantity from the major label distribution companies; (iii) distribution
channels that the major label distribution companies choose not to sell to; (iv)
the distribution of products as secondary suppliers filling in temporary
out-of-stock conditions; (v) the distribution to retailers requiring special
packaging needs, vendor managed inventory and consolidation of independent
labels; and (vi) fulfillment for Internet retailers direct to consumers.
The Company's music products division has two divisions, the Independent Music
Division ("IMD") which sells music of independent artists and labels and the
Alternative Retail Marketing Division ("ARM") which sells major label music CDs
and DVD/VHS products to alternative retail outlets such as wholesale clubs and
mass merchants. IMD has become the distributor of choice for a variety of
independent artists and labels. With a sales force covering 50 states and
Canada, the IMD group delivers these independent artists and labels access to
the retail accounts. ARM's focus is its strategic move into the distribution of
DVD videos to its current and new customer base.
Although the Company does, at times, compete with the major labels, it is the
Company's intent to increase its market share of the $2.4 billion independent
distribution business by continuing to attract higher quality music labels and
provide greater service to our customers.
2002 Division Realignment
Effective April 1, 2001 the Company realigned its divisions as Navarre
Distribution Services (NDS) and Navarre Entertainment Media (NEM). NDS currently
is comprised of the previously noted computer software sales and the alternative
retail marketing sales. All products that are non-proprietary to Navarre will be
sold by NDS. This division is focused on providing the highest level of services
to its retail customers. Growth of sales and increased
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market share of NDS will rely upon its ability to provide value-added services
to its retail customers. At present, NEM is made up of sales of pre-recorded
music. Unlike NDS' emphasis on the retail customers, growth in NEM is based on
the level of services given to our content providers, which include labels,
studios, and artists. Products sold through NEM will be proprietary to Navarre
through exclusive distribution, licensing and/or ownership. It is the intent of
NEM to stimulate margin growth through the ownership or licensing of content
from independent artists and labels selling a minimum of 50,000 to 100,000
units.
NETRADIO
NetRadio is the leading webcaster specializing in originally programmed audio
entertainment through its website, www.netradio.com. NetRadio.com provides more
than 100 channels of music and information, 24 hours a day, seven days a week.
Depending on the seasons, approximately 2-3 million unique guests visit
NetRadio.com several times per month. It also provides its business to business
customers with co-branded players that include 10 to 20 channels of our
originally programmed music. The co-branded player allows our B2B customers to
deliver synchronized audio and banner advertising messages to their users.
On June 14, 2001, NetRadio announced that it had made significant progress in
reducing its cash usage by reducing headcount through attrition and eliminating
or outsourcing certain expenses. NetRadio estimates that its $7.5 million cash
balance at the end of the first quarter will fund operations through the first
quarter of 2002. NetRadio also announced that its board of directors had
approved an amendment to its Articles of Incorporation to effect a one-for-4.5
shares reverse stock split of its outstanding common stock. After the reverse
split, NetRadio Corporation will have approximately 2,240,230 million shares of
common stock outstanding,
NetRadio also announced that in addition to cutting cash expenses, it is
aggressively pursuing a two-pronged business strategy to grow revenues. Current
NetRadio revenue streams include banner advertising, e-commerce and fees from
co-branded players. New revenue streams are expected to come from audio and
video advertising and content subscription revenues related to new distribution
channels, including providing content and advertising to bricks and mortar
operations through its new B2B initive.
COMPETITION
The home entertainment products segment, comprised of prerecorded music and
personal computer software distribution industry, is highly competitive. The
Company's competitors include other national and regional distributors, as well
as some suppliers that sell directly to retailers. Some of these competitors
have substantially greater financial and other resources than the Company has.
The ability of the Company to effectively compete in the future depends upon a
number of factors, including its ability to (i) obtain exclusive national
distribution contracts and licenses with independent labels and manufacturers;
(ii) maintain its margins and volume; (iii) expand its sales through a varied
range of products and personalized services; (iv) anticipate changes in the
marketplace including technological developments and successfully continue its
ability to distribute products in light of these developments; (v) continue to
channel retail customers; and (vi) maintain operating expenses at an appropriate
level.
In the personal computer software industry, the Company faces competition from a
number of distributors including Ingram Micro, Merisel, Inc. and Tech Data
Corporation as well as from manufacturers and publishers that sell directly to
retailers. In the prerecorded music industry, the Company faces competition from
the five major label distribution companies, as well as other regional
distributors, such as Koch International, RED, DNA, Ryko Distribution and from
other entities that sell directly to retailers.
The Company believes that the distribution of both personal computer software
and prerecorded music will remain highly competitive and the keys to growth and
profitability will be customer service, continued focus on improvements and
operating efficiencies, the ability to develop proprietary products, and the
ability to attract higher quality artist and software publishers. The Company
also believes that over the next several years, both the personal computer
software distribution industry and prerecorded music distribution industry will
continue to further consolidate.
The market for Internet content providers is highly competitive and rapidly
changing. Since the Internet's commercialization in early 1990, the number of
Web sites on the Internet competing for consumer's attention and
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spending has proliferated. In the second half of 2000, however, a large number
of internet companies went out of business. The Company expects that competition
between suppliers to Web retailers will continue to intensify. With respect to
recorded music and interactive CD-ROM sales, the Company supports numerous
Internet retailers, including traditional music retail chains, record labels and
independents with Web sites on the Internet.
SIGNIFICANT CUSTOMERS
In each of the past several years, the Company has had one or more customers
that have accounted for 10% or more of the Company's net sales. During the
fiscal year ended March 31, 2001, sales to three customers, CompUSA, Inc., Best
Buy Co., Inc., and Sam's Clubs each represented more than 10% of net sales. The
Company competes with other companies for the business of each of its customers
and there can be no assurance that the Company will continue to recognize a
significant amount of revenue from sales to any specific customer. If the
Company is unable to continue to sell its products to all or any of these three
customers or is unable to continue to maintain its sales to these customers at
their current levels and is unable to find other customers to replace these
sales, there would be an adverse impact on the Company's revenues and future
profitability.
EMPLOYEES
As of June 1, 2001, the Company had 314 employees, including 92 in finance and
administration, 48 in sales and marketing and 174 in distribution.
BACKLOG
Because the Company's products are shipped in response to orders, the Company
does not maintain any significant backlog.
THE COMPANY'S STRATEGY
The Company's goal is to distribute products on an international basis in music,
software (including CD-ROM products), and DVDs. The Company intends to achieve
this goal by (i) increasing the number and quality of exclusive national
distribution arrangements with proprietary prerecorded music artists, labels and
production studios for DVD product; (ii) increasing its exclusive personal
computer software and interactive CD-ROM software product lines through
distribution agreements; (iii) continuing to deliver high levels of service to
the growth channels of retailing, including customized services and
technological advances such as electronic commerce ("e-commerce"); (iv)
continuing to expand the sale of prerecorded music and personal computer
software products together in the marketplace; (v) continuing to expand the
distribution of DVD videos to its current and new customer base; (vi) continuing
to improve its efficiencies and technologies at its state of the art
distribution center; (vii) expanding its business through strategic acquisitions
in areas or in businesses that complement the Company's existing businesses; and
(viii) utilizing the Internet to expand the appeal of its products to a broader
customer base internationally.
FORWARD LOOKING STATEMENTS
Certain information in this Form 10-K includes forward-looking statements
related to the Company's strategic expectations with respect to future
performance. While Navarre's management is optimistic about the Company's
long-term prospects, investors should consider the following issues and
uncertainties, among others, in evaluating the Company's future.
ADDITIONAL RISKS MAY AFFECT OPERATING RESULTS
The following risk factors and other information included in this Annual Report
on Form 10-K should be carefully considered. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also impair our business operations. If any of the following risks occur, our
business, financial condition, operating results and cash flows could be
materially adversely affected.
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NAVARRE IS DEPENDENT UPON ITS MANAGEMENT TEAM
Eric H. Paulson, the Company's Chairman of the Board, President and Chief
Executive Officer, and Charles E. Cheney, its Vice Chairman, Executive Vice
President, Chief Strategic Officer, and Treasurer and Secretary, have been with
the Company since its inception in 1983 and since 1985, respectively. Although
the Company has invested a substantial amount of time and effort in developing
its total management team, the loss of either Mr. Paulson or Mr. Cheney could
have a materially adverse effect upon the Company.
NAVARRE'S BUSINESS IS SEASONAL
Much of the Company's business is seasonal in nature. As a distributor of
products ultimately sold at retail, the Company's business is affected by the
pattern of seasonality common to other suppliers of retailers, particularly the
holiday selling season. Historically, more than 60% of the Company's sales and
substantial portion of the Company's profits have been in the third and fourth
quarters of the calendar year. Due to the lower level of sales during the off
periods, the Company has historically incurred losses during these periods.
Because of this seasonality, if the Company experiences a weak holiday season,
it could significantly affect the Company's profitability for the entire year.
NAVARRE'S INDUSTRY TYPICALLY EXPERIENCES LOW INDUSTRY MARGINS
Competition in the prerecorded music and personal computer software distribution
industries is often based on price. Distributors, such as the Company, generally
experience low gross and operating margins. Consequently, the Company's
profitability is highly dependent upon achieving expected sales levels as well
as effective cost and management controls. Any erosion in the Company's gross
profit margins could affect the Company's ability to maintain profitability.
NAVARRE MAY DEPEND UPON BANK BORROWINGS TO SUPPORT ITS BUSINESS
In the past the Company has relied upon bank borrowings to finance its
expansion, primarily for inventory and accounts receivable. Although on March
31, 2001 and March 31, 2000, the Company had no debt, it believes that it may be
necessary for it to acquire additional bank financing in the future depending
upon the growth of its business and the possible financing of acquisitions. If
the Company were unable to obtain additional bank financing, its future growth
and profitability would be adversely affected. Under the terms of the Company's
credit facility, borrowings are dependent upon the eligibility of accounts
receivable and inventory, and certain other covenants in the discretion of the
bank.
NAVARRE MAY HAVE ADDITIONAL SIGNIFICANT WORKING CAPITAL NEEDS
As a distributor of prerecorded music and personal computer software products,
the Company purchases products directly from manufacturers for resale to
retailers. As a result, the Company has significant working capital
requirements, the majority of which are to finance inventory and accounts
receivable. These working capital needs will expand as inventory and accounts
receivable increase in response to the Company's growth. Future growth will
likely require additional working capital. Although the Company has obtained
financing sufficient to meet its requirements to date, there can be no assurance
that the Company will be able to obtain additional financing upon favorable
terms when required in the future.
DEPENDENCE UPON SOFTWARE DEVELOPERS AND MANUFACTURERS
The Company distributes interactive CD-ROM software pursuant to distribution
agreements with software developers and manufacturers. The continued growth and
success of the Company depends partly upon its ability to procure and renew
these agreements and sell the underlying software. There can be no assurance
that the Company will sign such developers and manufacturers to distribution
agreements or that it will be able to sell software under existing distribution
agreements. Further, there can be no assurance that any current distribution
agreement will be renewed or that current agreements will not be terminated.
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DEPENDENCE UPON RECORDING ARTISTS
Portions of the sales of the Company's Music Products Division are made pursuant
to exclusive distribution agreements. The continued growth and success of the
Company depends partly upon its ability to procure and renew these agreements
and sell the underlying recordings. In addition, the Company is dependent upon
these artists and labels to generate additional quality recordings. In order to
procure future marketing agreements, the Company regularly reviews artists.
There are no assurances that the Company will sign such artists to distribution
agreements or that it will be able to sell recordings under existing
distribution agreements. Further, there can be no assurance that any current
distribution agreements will be renewed or that current agreements will not be
terminated.
RETURNS AND INVENTORY OBSOLESCENCE POSE RISKS TO NAVARRE
The Company maintains a significant investment in product inventory and, like
other companies in this industry, experiences a relatively high level of product
returns as a percentage of revenues. The Company's agreements with its suppliers
generally permit the Company to return products that are in the suppliers'
current product listing. Adverse financial or other developments, with respect
to a particular supplier, could cause a significant decline in the value and
marketability of its products and could make it difficult for the Company to
return products to such a supplier and recover its initial product acquisition
costs. Such an event could have a materially adverse effect upon the Company's
business and financial results. The Company maintains a sales return reserve
based on its trailing twelve months experience of sales returns by product line.
The Company has historically experienced an actual return rate range of 18% to
23%, depending upon the product, which the Company believes is in line with the
industry practice. Although the Company's past experience indicates that these
levels are adequate to cover potential returns in these areas, there can be no
assurance that these reserves are adequate or will be adequate in the future.
The Company also takes a portion of its product offerings on consignment in
order to lessen its exposure to this risk.
TECHNOLOGY DEVELOPMENTS MAY ADVERSELY AFFECT DISTRIBUTION
Prerecorded music and personal computer software have traditionally been
marketed and delivered on a physical delivery basis. Traditionally all the
Company's revenues have been generated from sales to retail and wholesale
channels. If in the future these products are increasingly marketed and
delivered through technology transfers, such as "electronic downloading" to a
retail store or consumer's home, through the Internet or another delivery
mechanism, then retail and distribution could be revolutionized. As physical and
electronic distribution grows exponentially through Internet resellers,
competition between suppliers to such resellers will intensify. Navarre has
developed a significant number of supplier relationships with major electronic
retailers resulting in significant growth in fulfillment of software, music, and
video products. The Company anticipates that this will represent a rapidly
increasing share of overall sales. The Company is also developing relationships
to facilitate electronic distribution of software and music content as new
industry standards become established.
COUNTERFEITING AND FREE MUSIC DOWNLOADS MAY AFFECT OUR REVENUES
The recorded music industry continues to be adversely affected by counterfeiting
of both audiocassettes and CDs, piracy and parallel imports, and also by Web
sites and technologies that allow consumers to electronically download quality
sound reproductions from the Internet without authorization. Listeners' ability
to access music from these sources could impair our ability to generate revenues
and could cause our business to suffer.
WHOLESALERS AND RETAILERS MAY CHANGE THEIR METHODS OF DISTRIBUTION
The success of the Company's current sales strategy depends upon its wholesale
and retail customers' continued purchasing of products through the Company
rather than directly from manufacturers, other distributors, or other means of
distribution. These customers and retailers are constantly searching for ways to
lower costs in an attempt to maintain competitive prices and meet the pricing
demands of consumers. The Company's business could be adversely affected if its
customers decide to purchase directly from manufacturers, other distributors or
other distribution channels rather than from the Company.
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POSSIBLE VOLATILITY OF STOCK PRICE
The stock markets have experienced price and volume fluctuations that have
resulted 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. In addition, the market price of the Company's common stock has
fluctuated significantly since April 1996. The Company believes that factors
such as indications of the market's acceptance of the Company's products and
failure to meet market expectations, as well as general volatility in the
securities markets, could cause the market price of Navarre's common stock to
fluctuate substantially.
ITEM 2. PROPERTIES
On March 12, 1998, the Company entered into a new operating lease agreement for
its principal facilities in suburban Minneapolis. Under the new lease, the
Company leases approximately 86,500 square feet of office and warehouse space.
The lease expires in 2013 and provides for monthly payments of $38,750 over the
lease term, with a 2.5% increase every 30 months. In addition, the Company is
responsible for taxes and all operating costs associated with the building.
On April 22, 1999, the Company entered into an operating lease agreement for a
second facility in suburban Minneapolis. The Company leases approximately 74,000
square feet of office and warehouse space. The lease expires in the year 2002
and provides for a monthly rental of $32,640 over the lease term. In addition,
the Company is responsible for taxes and all operating costs associated with the
building.
On March 30, 2000, the Company entered into an operating lease agreement for a
third facility in suburban Minneapolis. The Company leases approximately 40,000
square feet of warehouse space. The lease expires in the year 2002 and provides
for a monthly rental of $13,333 over the lease term. In addition, the Company is
responsible for taxes and all operating costs associated with the building.
On June 27, 1996, the Company acquired an operating lease with the acquisition
of Surfside Distributor, Inc. in Honolulu, Hawaii. The Company leases
approximately 4,885 square feet of office and warehouse space. The lease, which
was renewed June 1, 2001, expires in the year 2006 and provides for a monthly
rental of $5,618 over the lease term. In addition, the Company is responsible
for taxes and all operating costs associated with the building.
ITEM 3. 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 generally include collection matters with regard to products
distributed by the Company and accounts receivable owed to the Company. The
Company currently believes that the resolution of any of these pending matters
will not have a material adverse effect on its financial position or results of
operation. In addition, the Company is subject to the litigation listed below.
NAVARRE SECURITIES LITIGATION
On or about December 6, 1999, Daniel Chen, on behalf of himself and all others
similarly situated, filed a class action complaint in the United States District
Court for the District of Minnesota, Case No. 99-1955, alleging violations of
the Securities Exchange Act of 1934 against Navarre Corporation and its
directors. Specifically, Plaintiff alleged, among other things, violations of
Section 10(b) of the 1934 Securities Exchange Act and Rule 10b-5 of the
Securities and Exchange Commission, and violation of Section 20(a) of the 1934
Securities Exchange Act. Plaintiff sought a determination that the action was a
proper class action pursuant to Fed. R. Civ. Pro. 23 and sought compensatory
damages in an unspecified amount along with costs and expenses incurred,
including the reasonable allowance of fees for attorneys, accountants and
experts. Navarre and the directors timely answered the Complaint on December 29,
1999, denying liability and damages and asserting certain affirmative defenses.
On January 26, 2000, Judy Poucher filed a complaint virtually identical to the
complaint filed by Mr. Chen seeking the same relief as that requested by Mr.
Chen. Navarre and the directors timely answered the Poucher complaint,
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denied liability, and asserted numerous affirmative defenses. Navarre has
tendered these matters to its insurance carrier for coverage under the terms of
its policy.
On November 27, 2000, Navarre and the directors served a motion and supporting
papers to dismiss Plaintiffs' complaint with prejudice for failure to state a
claim. Plaintiffs responded to the motion on January 11, 2001, and Navarre
served and filed its reply on February 1, 2001. A hearing on the motion to
dismiss was held on February 13, 2001, before the Magistrate Judge. On April 23,
2001, the Magistrate Judge issued his Report and Recommendation that the case be
dismissed with prejudice and on the merits. Plaintiffs objected to the Report
and Recommendation, but, by Order dated May 29, 2001, the District Court
overruled the objection and adopted the Report and Recommendation and dismissed
Plaintiffs' claims with prejudice and on the merits.
On June 20, 2001, Plaintiffs filed a Notice of Appeal with the Eighth Circuit
Court of Appeals. The court has set a schedule for the appeal process which
requires, among other things, that Plaintiffs'/Appellants' Brief and Appendix be
filed by August 15, 2001, and that Navarre and the directors file their Response
Brief by September 14, 2001. Navarre and the directors intend to vigorously
defend against the appeal.
BEAMSCOPE CANADA, INC.
Navarre announced that it had entered into an Asset Purchase Agreement with
Toronto-based Beamscope Canada, Inc. on September 25, 2000 to acquire two
operating divisions from Beamscope. On October 30, 2000, Navarre announced that
it had advised Beamscope that Navarre would not proceed to close the Asset
Purchase Agreement because, among other things, certain closing conditions could
not be satisfied and that certain material adverse information about the
business was not disclosed to Navarre. Beamscope informed Navarre that it
disputes Navarre's view (the "Dispute") that certain closing conditions could
not be satisfied and maintains that all material information was disclosed to
Navarre.
Under the terms of the Asset Purchase Agreement, the parties were required to
use their best efforts to resolve the Dispute. The parties were unable to
resolve the Dispute and the matters were submitted to arbitration in accordance
with the provisions of the Asset Purchase Agreement and the Ontario Arbitration
Act. On February 9, 2001, Beamscope submitted its claim under the arbitration
proceeding, alleging damages of $28 million. Navarre delivered its defense under
the arbitration proceeding asserting its position that the Asset Purchase
Agreement was lawfully terminated and denying Beamscope's claim. Although the
arbitration was to be conducted and an award made 60 days of the submission of
the dispute to arbitration, Beamscope took no further steps to advance its
claim. On March 19, 2001, a Receiver and Manager was appointed and the
arbitrator has accordingly closed its file.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
three-month period ended March 31, 2001.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on The Nasdaq Stock Market under the
symbol NAVR. The following table below presents the range of high and low
closing sale prices for the Company's stock for each period indicated as
reported on The Nasdaq Stock Market.
QUARTER HIGH LOW
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Fiscal 2001
First $ 4.00 $ 1.19
Second 3.50 1.44
Third 2.09 1.06
Fourth 2.13 1.06
Fiscal 2000
First $18.63 $ 8.44
Second 12.00 5.56
Third 15.50 5.50
Fourth 6.94 3.53
At June 1, 2001, the Company had approximately 17,700 shareholders, including
shareholders holding stock in street name. The Company has never paid any
dividends on its common stock and does not intend to pay any dividends on its
common stock in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
YEARS ENDED MARCH 31
2001(3) 2000(3) 1999 1998 1997
--------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Net sales $ 314,199 $ 285,165 $ 210,386 $ 196,648 $ 200,697
Gross profit 37,421 36,381 8,762 24,993 23,282
Income (loss) from operations (2,364) (4,554) (25,572) 1,458 (3,703)
Interest expense (223) (476) (2,543) (3,108) (2,110)
Other income (expense) 2,000 1,399 445 (184) (10)
Income taxes (benefit) -- -- -- (470) (527)
Equity loss in NetRadio (10,338) (4,154) -- -- (719)
Net loss $ (10,925) $ (7,785) $ (27,670) $ (974) $ (6,189)
Loss per basic and
And diluted share(1) $ (.47) $ (.33) $ (4.41) $ (.14) $ (.92)
Diluted weighted average common
Shares outstanding(2) 25,137 23,483 14,179 6,921 6,692
BALANCE SHEET DATA:
Total assets $ 93,918 $ 109,711 $ 79,480 $ 83,689 $ 78,397
Short-term borrowings -- -- 422 32,607 25,892
Long-term debt -- -- 114 181 315
Shareholders' equity 24,341 41,423 25,164 4,328 5,099
(1) See Note 1 of Notes to Financial Statements for the computation of basic and
diluted (loss) per share.
(2) Adjusted to reflect a two-for-one stock split in the form of a 100% stock
dividend distributed June 21, 1996.
(3) Net income for Navarre's home entertainment products segment before the
Company's equity loss in investment in NetRadio was $3.6 million for fiscal
2001 and $5.6 million for fiscal 2000.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Navarre Corporation ("Navarre" or the "Company"), a Minnesota corporation formed
in 1983, is a major distributor of music, software, interactive CD-ROM products,
and DVD videos. Navarre sells to major music and software retailers, and
wholesalers; such as CompUSA, Inc., Best Buy Co., Inc., Sam's Clubs, Circuit
City Stores, Inc. and Costco Wholesale Corporation. We believe the Company is
the largest distributor of distributed consumer software in the United States
and the largest distributor of independent music in North America.
Navarre's operations for fiscal 2001 were classified into two business segments,
based upon products and services provided. They were home entertainment products
and eSplice, Inc. The home entertainment products segment distributes two
principal products, computer software products and music products.
For a portion of the fiscal year ended March 31, 2000, Navarre was the majority
shareholder of NetRadio Corporation, a leading broadcaster of originally
programmed audio entertainment over the Internet through its Web site
www.netradio.com. On October 19, 1999, NetRadio closed on an initial public
offering. Navarre's ownership of NetRadio subsequently decreased to less than
fifty percent. Accordingly, Navarre has not consolidated NetRadio's results for
periods after November 5, 1999 in Navarre financial statements, but has reported
its interest in NetRadio using the equity method. As discussed above in Note 2
of "Notes to Consolidated Financial Statements", Navarre incurred a non-cash
charge of $9.6 million in the quarter ended September 30, 2000 with respect to
its receivable from NetRadio Corporation. On March 26, 2001, Navarre and
NetRadio amended the Term Note and the Company agreed to forgive the repayment
of $5.5 million in exchange for NetRadio's prepayment of $1.0 million. The
principal balance of the Term Note has been adjusted to $3.1 million and is due
March 31, 2002.
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."
YEARS ENDED MARCH 31
2001 2000 1999
--------------- --------------- --------------
Net sales:
Computer software 68.3% 65.4% 71.5%
Music 31.6 34.3 28.4
--------------- --------------- --------------
Home entertainment products 99.9 99.7 99.9
Other .1 .3 .1
--------------- --------------- --------------
Total net sales 100.0 100.0 100.0
Cost of sales 88.1 87.2 95.8
--------------- --------------- --------------
Gross profit 11.9 12.8 4.2
Selling and marketing 2.9 3.7 4.1
Distribution and warehousing 2.5 2.2 2.2
General and administrative 6.2 7.9 9.0
Depreciation and amortization 1.0 0.6 0.9
--------------- --------------- --------------
Loss from operations (0.8) (1.6) (12.2)
Interest expense (0.1) (0.2) (1.2)
Other income 0.6 0.5 0.2
--------------- --------------- --------------
Net loss (3.5) (2.7) (13.2)
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, the seasonality of the
Company's business, new or different competition in the Company's traditional
and new markets, changing methods of distribution and the Company's ability to
sign and
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retain artists who will appeal to popular tastes over a period of time. See
"Business - Forward Looking Statements" in Item 1 of this Form 10-K.
FISCAL 2001 COMPARED TO FISCAL 2000
HOME ENTERTAINMENT PRODUCTS
Net sales of home entertainment products segment increased 10.5% to $314.2
million in fiscal 2001 from $284.4 million in fiscal 2000. Computer software
sales increased as a percent of home entertainment sales to 68.4% in fiscal 2001
from 65.6% of net sales in fiscal 2000. Music sales, which yield higher margins,
decreased as a percent of home entertainment sales to 31.6% in fiscal 2001 from
34.4% of net sales in fiscal 2000. Computer software sales increased by 15.1% to
$214.7 million in fiscal 2001 from $186.5 million in fiscal 2000. The increase
was due to continued growth, increased sales, and the Company's ability to
maintain strong distribution market share in the entertainment and education
categories. Music sales increased 1.5% to $99.4 million in fiscal 2001 from
$97.9 million in fiscal 2000. The increase was due to increased sales of new
release titles over the holiday season. Price increases did not materially
contribute to the increase in net sales.
Gross profit of home entertainment products segment increased $1.4 million to
$37.4 million in fiscal 2001 from $36.0 million in fiscal 2000. As a percent of
net sales, gross profit decreased to 11.9% in fiscal 2001 from 12.7% in fiscal
2000. The gross profit from computer software sales was $23.9 million or 11.1%
of computer software net sales in fiscal 2001 compared with $21.3 million or
11.4% of computer software net sales in fiscal 2000. The decrease in gross
margin in computer software sales was primarily due to a change in the mix of
products as the Company began distributing software products, such as
productivity products, at a lower gross margin percentage. The gross margin from
music sales was $13.5 million or 13.6% of music net sales in fiscal 2001
compared with $14.7 million or 15.0% of music net sales in fiscal 2000. The
decrease in gross margin in music sales was primarily due to increased returns
and an unfavorable marginal sales mix. It is the Company's intention to develop
a better quality of music assortment to reduce returns in future periods.
Selling and marketing expenses of home entertainment products segment remained
the same at $8.9 million in fiscal 2001 and in fiscal 2000 but decreased as a
percent of sales to 2.8% in fiscal 2001 from 3.1% in fiscal 2000. The decrease
was due to the lower costs associated with improved management of our vendors to
reduce the need for expedited freight.
Distribution and warehousing expenses of home entertainment products segment
increased to $8.0 million in fiscal 2001 from $6.2 million in 2000, and
increased as a percent of sales to 2.5% as a percent of sales in fiscal 2001
from 2.2% in fiscal 2000. The increase was due to reduced order sizes and an
increase in shipping directly to store locations as opposed to shipping to
distribution centers.
General and administrative expenses of home entertainment products segment
increased to $17.6 million in fiscal 2001 from $15.8 million in fiscal 2000, but
remained the same at 5.6% as a percent of sales in fiscal 2001 and in fiscal
2000. General and administration expenses include professional fees, salaries,
IT expenses and rent.
Depreciation and amortization of home entertainment products segment increased
to $1.3 million in fiscal 2001 from $1.2 million in fiscal 2000.
The net operating income for the home entertainment products segment for fiscal
2001 was $1.6 million compared to $4.3 million for fiscal 2000.
Net income for home entertainment products, before the Company's equity loss in
investment of $10.3 million attributable to NetRadio, was $3.6 million for
fiscal 2001 compared to $5.6 million for fiscal 2000.
ESPLICE, INC.
Net sales for eSplice were $37,000 for fiscal 2001. eSplice's total operating
expenses for fiscal 2001 were $3,983,000, including $219,000 for selling and
promotion expenses, $1,844,000 for general and administration
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expenses, and $1,921,000 for depreciation and amortization expense, which
includes charges of $1.2 million for accelerated depreciation of impaired
assets, compared to total operating expenses of $978,000 for fiscal 2000,
including $915,000 for general and administration expenses.
The net operating loss for eSplice for fiscal 2001 was $3,957,000 compared to a
net operating loss of $978,000 for fiscal 2000.
In the fourth quarter of fiscal 2001, Navarre management and Board of Directors
determined that the Company would not continue to support the further
development of eSplice operations.
OTHER INCOME AND EXPENSE
Interest expense for the Company decreased to $223,000 for fiscal 2001 from
$476,000 in fiscal 2000. This decrease resulted from the Company having
substantially no bank debt during fiscal 2001.
Other income for the Company, which consists principally of interest income, was
$2,000,000 for fiscal 2001 compared to $1,399,000 for fiscal 2000. The increase
was primarily due to having higher levels of funds available for investments.
Due to the accumulated losses from prior years and the current year's loss, the
Company has not recorded any tax benefit.
The consolidated net loss for the Company was $10.9 million for fiscal 2001
compared to a loss of $7.8 million for fiscal 2000.
IMPACT OF INVESTMENT IN NETRADIO CORPORATION
The impact of the investment in NetRadio Corporation was a loss of $10.3 million
in fiscal 2001, which is comprised of the write-off of the note receivable and
the remaining equity loss.
FISCAL 2000 COMPARED TO FISCAL 1999
HOME ENTERTAINMENT PRODUCTS
Net sales of home entertainment products increased 35.4% to $284.4 million in
fiscal 2000 from $210.0 million in fiscal 1999. Computer software sales
decreased as a percent of home entertainment sales to 65.6% in fiscal 2000 from
71.6% of net sales in fiscal 1999. Music sales, which yield higher margins,
increased as a percent of home entertainment sales to 34.4% in fiscal 2000 from
28.4% of net sales in fiscal 1999. Computer software sales increased by 24.0% to
$186.5 million in fiscal 2000 from $150.4 million in fiscal 1999. The increase
was due to continued growth and increased sales to the wholesale clubs and the
mass merchant channel. Music sales increased 64.0% to $97.9 million in fiscal
2000 from $59.7 million in fiscal 1999. The increase was due to the
implementation of vendor managed inventory which maximizes the performance of
each title on a store by store basis and the strong acceptance of releases from
our proprietary labels. Price increases did not materially contribute to the
increase in net sales.
Gross profit of home entertainment products increased $27.5 million to $36.0
million in fiscal 2000 from $8.5 million in fiscal 1999. As a percent of net
sales, gross profit increased to 12.7% in fiscal 2000 from 4.1% in fiscal 1999.
The gross profit from computer software sales was $21.3 million or 11.4% of
computer software net sales in fiscal 2000 compared with $10.0 million or 6.7%
of computer software net sales in fiscal 1999. The increase in gross margin in
computer sales was primarily due to a one-time, non-cash adjustment to inventory
and the write-off of accounts payable debit balances of several financially
distressed vendors in fiscal 1999. The gross margin from music sales was $14.7
million, or 15.0% of music net sales in fiscal 2000 compared with $(1.5) million
or (2.5%) of music net sales in fiscal 1999. The increase in gross margin in
music sales was primarily due to the write-off of accounts payable debit
balances of several financially distressed vendors in fiscal 1999.
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Selling and marketing expenses of home entertainment products increased in
fiscal 2000 to $8.9 million from $7.6 million in fiscal 1999, but decreased as a
percent of sales to 3.1% in fiscal 2000 from 3.6% in fiscal 1999.
Distribution and warehousing expenses of home entertainment products increased
to $6.2 million in fiscal 2000 from $4.7 million in 1999, but remained at 2.2%
as a percent of sales in fiscal 2000 as it was in fiscal 1999.
General and administrative expenses of home entertainment products increased to
$15.8 million in fiscal 2000 from $14.7 million in fiscal 1999, but decreased as
a percent of sales to 5.6% in fiscal 2000 from 7.0% in fiscal 1999.
Depreciation and amortization decreased to $1.2 million in fiscal 2000 from $1.6
million in fiscal 1999.
The above improvements for fiscal 2000 were primarily due to the strategic
management of all the Company's assets and expenses.
The net operating income for the home entertainment products for fiscal 2000 was
$4.0 million compared to a net operating loss of $20.1 million for fiscal 1999.
Interest expense decreased from $2.5 million for fiscal 1999 to $448,000 for
fiscal 2000. This decrease resulted from the Company having substantially no
debt during fiscal 2000.
Net income for home entertainment products before the Company's equity loss in
investment of $4.2 million attributable to NetRadio was $5.6 million for fiscal
2000 compared to a loss of $22.2 million for fiscal 1999.
The consolidated net loss for the Company was $7.8 million for fiscal 2000
compared to a loss of $27.7 million for fiscal 1999. The decrease in net loss
resulted from increased sales, higher gross margins and relatively lower
operating expenses.
The Company's effective tax rate was zero for each of fiscal 2000 and 1999 as a
result of its operating loss in each year.
NETRADIO CORPORATION
Because Navarre did not consolidate NetRadio's results for periods after
November 5, 1999, NetRadio results for periods after November 5,1999 are
reflected in Navarre's financial statements using the equity method. Under the
equity method, Navarre reports losses in NetRadio for each period as "Equity
loss from investment in NetRadio" in an amount equal to Navarre's ownership of
NetRadio until the carrying value is reduced to zero. The fiscal 2000 equity
loss from investment in NetRadio for the period after November 5, 1999 that was
reflected in Navarre's financial statement was $4.2 million.
NetRadio's net sales increased to $737,000 for fiscal 2000 from $386,000 in
fiscal 1999. NetRadio's selling and marketing expenses increased to $1.7 million
in fiscal 2000 from $1.1 million in fiscal 1999. NetRadio's general and
administrative expenses increased to $5.8 million in fiscal 2000 from $4.3
million in fiscal 1999.
NetRadio's net loss for fiscal 2000 was $8.5 million compared to a loss of $6.1
million in fiscal 1999.
ESPLICE, INC.
Total operating expenses for eSplice for fiscal 2000 were $978,000, including
$915,000 for general and administrative expenses.
The net loss for eSplice's for fiscal 2000 was $983,000.
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MARKET RISK
Although the Company is subject to some interest rate risk, because the Company
currently has no bank debt, the Company believes a 10% increase or reduction in
interest rates would not have a material effect on future earnings, fair values
or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its working capital needs through bank
borrowings, proceeds from the sale of equity securities and cash flows from
operations. The level of borrowings has historically fluctuated significantly
during the year. At March 31, 2001, the Company had net accounts receivable of
$47.9 million, inventory of $22.6 million, accounts payable of $66.9 million and
no bank debt.
For the fiscal year ended March 31, 2001, net sales were $314.2 million, an
increase of $29.0 million over fiscal year 1999 net sales of $285.2 million. The
Company had a net loss of $10.9 million during this period. The Company
generated net cash of $12.9 million from operations. During the period, accounts
receivable decreased by $8.6 million and inventories increased by $208,000.
Accounts payable and accrued expenses increased by $1.3 million. Investing
activities used $3.3 million of cash, including $4.3 million for the purchase of
furniture, equipment and leasehold improvements which was partially offset by a
$1.0 million payment from NetRadio. The Company used net cash of $6.2 million in
financing activities during the period primarily for the repurchase of Class B
preferred stock of $4.0 million and Navarre common stock of $2.3 million.
Navarre had a revolving line of credit with Congress Financial Corporation
through June 12, 2001. The Company's borrowing during Fiscal 2001 under the line
were limited. The Company is in the processing of obtaining a new credit
facility and has recently signed a commitment letter with a potential lender for
a three year facility. On March 31, 2001, the Company had no debt.
On August 20, 1999, the Company announced that it had entered into a
subscription agreement with Fletcher International Limited ("Fletcher") for the
issuance of up to 150,000 shares of Navarre's Class B Convertible Preferred
Stock ("Class B Preferred Stock") for an aggregate purchase price of up to $37.5
million. The Class B Preferred Stock was issued in three principal tranches. On
August 20, 1999, Navarre issued the first tranche, which consisted of 34,000
shares of Class B Preferred Stock and a three-year warrant to purchase up to
16,000 shares of Class B Preferred Stock. Fletcher paid a purchase price of $8.5
million, or $250 per share of Class B Preferred Stock, and agreed to pay an
additional $4.0 million, or $250 per share of Class B Preferred Stock, when they
exercised the warrant in its entirety. On May 17, 2000, Fletcher converted
20,390 shares of its Class B Preferred Stock to 2,115,057 shares of common
stock.
On October 24, 2000, Navarre and Fletcher entered into and closed on a portion
of the obligations contained in a Securities Redemption Agreement ("Redemption
Agreement"). Under the Redemption Agreement, Navarre repurchased all of the
13,610 shares of its Class B Preferred Stock not yet converted with a carrying
value of approximately $3.2 million. In connection with the repurchase, Navarre
paid Fletcher $3.4 million and issued to Fletcher a promissory note due November
21, 2000 for an additional $600,000. In November 2000, Navarre paid the
promissory note and Fletcher returned the Warrant and all rights of Fletcher and
Navarre to purchase and sell Navarre securities under the Subscription Agreement
were terminated.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information with respect to disclosures about market risk is contained in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Market Risk" in Item 7 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company and
the Report of Independent Auditors thereon are included at the end of this
document.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this item with respect to directors is contained in
the section "Election of Directors" in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on September 13, 2001 (the "2001 Proxy
Statement"), a definitive copy of which will be filed with the Commission within
120 days of the close of the fiscal year ended March 31, 2001, and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item is contained in the sections entitled
"Executive Compensation," "Employment Agreements" and "Stock Option Plan" in the
Company's 2001 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item is contained in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's 2001 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required under this item is contained in the section entitled
"Certain Transactions" in the Company's 2001 Proxy Statement and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
(1) Financial Statements. The following financial statements of
the Company and the Report of Independent Auditors
thereon are set forth at the end of this document.
Report of Independent Auditors
Consolidated Balance Sheets as of March 31, 2001 and 2000
Consolidated Statements of Operations for each of the three
years in the period ended March 31, 2001
Consolidated Statements of Shareholders' Equity as of March
31, 2001
Consolidated Statements of Cash Flows for each of the three
years in the period ended March 31, 2001
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule for each of the three years in
the period ended March 31, 2001
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
Financial Statements or the notes thereto.
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(3) Exhibits
3.1 Articles of Incorporation, incorporated herein by
reference from Exhibit 3.1 to Form 10-K, for year
ended March 31, 2000.
3.2 Bylaws, incorporated herein by reference from Exhibit
3.2 to the Company's Registration Statement on
Form S-1, No. 333-68392.
10.1 *Employment Agreement, dated October 1, 1996, between
the Company and Eric H. Paulson, incorporated
herein by reference from Exhibit 10.1 to Form
10-K, for year ended March 31, 1997.
10.2 *Employment Agreement, dated October 1, 1996, between
the Company and Charles E. Cheney, incorporated
herein by reference from Exhibit 10.2 to Form
10-K, for year ended March 31, 1997.
10.3 *1992 Stock Option Plan, amended and restated,
incorporated herein by reference from Exhibit 4.1
to the Company's Registration Statement on Form
S-8, No. 333-87143.
10.4 *Form of Individual Stock Option Agreement under 1992
Stock Option Plan, incorporated herein by
reference from Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (No.
333-68392).
10.5 *Form of Termination Agreement for Executives of the
Company, incorporated herein by reference from
Exhibit 10.6 to Form 10-K, for year ended March
31, 1996.
10.6 Lease dated March 12, 1998 between Navarre
Corporation and Cambridge Apartments, Inc. with
respect to the corporate headquarters in New
Hope, MN, incorporated herein by reference from
Exhibit 10.6 to Form 10-K, for year ended March
31, 1999.
10.7 Lease dated May 1, 1999 between Navarre Corporation
and Sunlite III, LLP with respect to a second
facility in Brooklyn Park, MN, incorporated
herein by reference from Exhibit 10.7 to Form
10-K, for year ended March 31, 1999.
10.8 Separation Agreement, dated as of March 1, 1999
between Navarre and NetRadio Corporation,
incorporated herein by reference from Form S-1
Registration Statement No. 333-73261 for NetRadio
Corporation.
10.10 Term Note, dated October 14, 1999, between Navarre
and NetRadio Corporation, incorporated herein by
reference from Exhibit 10.11 to Form 10-K, for
year ended March 31, 2000.
10.10.1 Amendment No. 1 to Term Note dated March 26, 2001,
between Navarre and NetRadio Corporation,
incorporated herein by reference from Exhibit
10.1 to Form 10-Q for NetRadio Corporation, for
the period ending March 31, 2001.
10.10.2 Amendment No. 2 to Term Note dated March 30, 2001,
between Navarre and NetRadio Corporation,
incorporated herein by reference from Exhibit
10.2 to Form 10-Q for NetRadio Corporation, for
the period ending March 31, 2001.
10.11 Form of Warrant dated May 1, 1998 issued to investors
in connection with the Company's May 1, 1998
private placement of Class A Convertible
Preferred Stock, incorporated by reference to
Exhibit 4 to Form 8-K, dated May 1, 1998.
21 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
* Indicates management contract or compensatory plan or
agreement required to be filed as an exhibit pursuant
to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter
ended March 31, 2001.
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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 29, 2001 By /s/ Eric H. Paulson
----------------------------
Eric H. Paulson
Chairman of the Board, 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.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints Eric H.
Paulson and Charles E. Cheney as his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
of all amendments to 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 attorneys-in-fact and
agents, each acting alone, 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 might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
Signature Title Date
- --------- ----- ----
/s/ Eric H. Paulson Chairman of the Board, President June 29, 2001
- --------------------------------------------- and Chief Executive Officer
Eric H. Paulson
/s/ Charles E. Cheney Vice-Chairman, Treasurer and Secretary June 29, 2001
- --------------------------------------------- Executive Vice President and Chief
Charles E. Cheney Strategic Officer
/s/ Dickinson G. Wiltz Director June 29, 2001
- ---------------------------------------------
Dickinson G. Wiltz
/s/ James G. Sippl Director June 29, 2001
- ---------------------------------------------
James G. Sippl
/s/ Michael L. Snow Director June 29, 2001
- ---------------------------------------------
Michael L. Snow
/s/ Alfred Teo Director June 29, 2001
- ---------------------------------------------
Alfred Teo
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REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Navarre Corporation
We have audited the accompanying consolidated balance sheets of Navarre
Corporation as of March 31, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended March 31, 2001. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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 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 consolidated financial position of Navarre
Corporation at March 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 2001, in conformity with accounting principles generally accepted in
the United States. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
Minneapolis, Minnesota
May 4, 2001
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NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
MARCH 31
2001 2000
---------------- --------------
ASSETS
Current assets:
Cash $ 19,118 $ 15,739
Accounts receivable, less allowance for doubtful accounts
and sales returns of $4,986 in 2001 and $4,349 in 2000 47,874 56,483
Inventories 22,629 22,421
Notes receivable, related parties 56 375
Prepaid expenses and other current assets 209 216
---------------- --------------
Total current assets 89,886 95,234
NetRadio note receivable -- 9,597
Investments -- 1,941
Property and equipment, net of accumulated depreciation of $6,069
in 2001 and $4,473 in 2000 3,546 2,469
Other assets 486 470
---------------- --------------
Total assets $ 93,918 $ 109,711
================ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ -- $ --
Accounts payable 66,918 66,718
Accrued expenses 2,659 1,570
---------------- --------------
Total current liabilities 69,577 68,288
Shareholders' equity
Preferred stock, no par value:
Authorized shares - 10,000,000
issued and outstanding Class B convertible preferred shares - -- 8,010
none in 2001 and 34,000 in 2000
Common stock, no par value:
Authorized shares - 100,000,000
issued and outstanding shares - 24,030,379 in 2001 and 23,534,435 in
2000 94,110 91,501
Retained deficit (69,769) (58,051)
Unearned compensation -- (37)
---------------- --------------
Total shareholders' equity 24,341 41,423
---------------- --------------
Total liabilities and shareholders' equity $ 93,918 $ 109,711
================ ==============
See accompanying notes
21
22
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share amounts)
YEARS ENDED MARCH 31
2001 2000 1999
---------------- ---------------- -----------------
Net sales $ 314,199 $ 285,165 $ 210,386
Cost of sales 276,778 248,784 201,624
---------------- ---------------- -----------------
Gross profit 37,421 36,381 8,762
Operating expenses:
Selling and marketing 9,132 10,599 8,675
Distribution and warehousing 7,990 6,197 4,712
General and administrative 19,451 22,517 18,994
Depreciation and amortization 3,212 1,622 1,953
---------------- ---------------- -----------------
39,785 40,935 34,334
---------------- ---------------- -----------------
Loss from operations (2,364) (4,554) (25,572)
Other income (expense):
Interest expense (223) (476) (2,543)
Other income (expense) 2,000 1,399 445
---------------- ---------------- -----------------
Loss before impact of investment in NetRadio Corporation (587) (3,631) (27,670)
Impact of investment in NetRadio Corporation (10,338) (4,154) --
---------------- ---------------- -----------------
Net loss (10,925) (7,785) (27,670)
Preferred nondetachable conversion feature and warrant valuation -- -- (34,891)
Excess of preferred stock buyback (793) -- --
---------------- ---------------- -----------------
Net loss available to common shareholders $ (11,718) $ (7,785) $ (62,561)
================ ================ =================
Basic and diluted loss per share $ (.47) $ (.33) $ (4.41)
Basic and diluted weighted average common shares outstanding 25,137 23,483 14,179
See accompanying notes.
22
23
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share amounts)
PREFERRED COMMON RETAINED
SHARES PREFERRED SHARES COMMON EARNINGS UNEARNED
ISSUED STOCK ISSUED STOCK (DEFICIT) COMPENSATION
----------------------------------------------------------------------------------
Balance at March 31, 1998 -- $ -- 7,009,170 $ 8,113 $ (3,558) $ (227)
Preferred shares issued in private placement 1,523,810 18,821 -- -- -- --
Preferred share conversions, net of fees (1,523,810) (18,821) 7,619,050 18,821 -- --
Value of preferred stock conversion feature -- -- -- 34,229 (34,229) --
Shares issued upon exercise of stock warrants -- -- 8,093,815 28,050 -- --
Shares issued upon exercise of stock options -- -- 611,568 1,216 -- --
Dividends paid -- -- -- -- (594) --
Dividends issued in the form of shares -- -- 10,443 40 (68) --
NetRadio stock option valuation adjustment -- -- -- 880 -- --
NetRadio shares issued -- -- -- 66 -- --
Net loss -- -- -- -- (27,670) --
Amortization of unearned compensation -- -- -- -- -- 95
----------------------------------------------------------------------------------
Balance at March 31, 1999 -- $ -- 23,344,046 $ 91,415 $ (66,119) $ (132)
Preferred shares issued in private
placement, net of fees 34,000 8,010 -- -- -- --
Shares issued upon exercise of stock warrants -- -- 5,061 12 -- --
Shares issued upon exercise of stock options -- -- 185,328 524 -- --
Reversal of accrual for share dividends -- -- -- -- 29 --
Stock option issued to a vendor -- -- -- 495 -- --
Spin-off of NetRadio -- -- -- (945) 15,824 --
Net loss -- -- -- -- (7,785) --
Amortization of unearned compensation -- -- -- -- -- 95
----------------------------------------------------------------------------------
Balance at March 31, 2000 34,000 $ 8,010 23,534,435 $ 91,501 $ (58,051) $ ( 37)
PREFERRED SHARE CONVERSION 20,390) (4,804) 2,115,057 4,804 -- --
STOCK OPTION COMPENSATION -- -- -- 47 -- --
SHARES ISSUED UPON EXERCISE OF STOCK OPTIONS -- -- 5,512 13 -- --
REPURCHASE OF PREFERRED SHARES (13,610) (3,206) -- -- (793) --
REPURCHASE OF COMMON SHARES -- -- (1,624,625) (2,255) -- --
NET LOSS -- -- -- -- (10,925) --
AMORTIZATION OF UNEARNED COMPENSATION -- -- -- -- -- 37
----------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2001 -- $ -- 24,030,379 $ 94,110 $ (69,769) $ --
==================================================================================
See accompanying notes.
23
24
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED MARCH 31
2001 2000 1999
--------------------------------------------
OPERATING ACTIVITIES
Net loss $ (10,925) $ (7,785) $ (27,670)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,212 1,622 1,956
Amortization of unearned compensation 37 95 95
Equity in loss of NetRadio Corporation 10,338 4,154 ---
Stock option compensation 47 --- ---
NetRadio stock valuation adjustment --- --- 880
Vendor stock compensation --- 495 ---
Value of NetRadio stock issued to vendor 200 --- ---
Write-off of notes receivable 292 --- ---
Changes in operating assets and liabilities:
Accounts receivable 8,609 (6,226) 8,918
Inventories (208) 6,802 (6,035)
Prepaid expenses and assets (9) (436) (359)
Refundable income taxes --- 613 1,652
Accounts payable and accrued expenses 1,289 10,647 7,178
--------------------------------------------
Net cash provided by (used in) operating activities 12,882 9,981 (13,385)
INVESTING ACTIVITIES
Notes receivable, related parties 27 (154) 185
Payments on NetRadio Note 1,000
Purchases of equipment and leasehold improvements (4,288) (2,672) (2,039)
--------------------------------------------
Net cash used in investing activities (3,261) (2,826) (1,854)
FINANCING ACTIVITIES
Payments on long-term debt --- --- (135)
Proceeds from note payable, bank 5,000 104,448 197,230
Payments on note payable, bank (5,000) (104,777) (229,346)
Repurchase of Navarre common stock (2,255) --- ---
Repurchase of Class B preferred stock (4,000) --- ---
Proceeds from sale of subsidiary stock --- --- 66
Proceeds from sale of preferred stock and warrants --- 8,010 18,821
Proceeds from exercise of common stock warrants --- 12 28,050
Payment of dividends on Class A stock --- --- (594)
Proceeds from exercise of common stock options 13 799 1,216
--------------------------------------------
Net cash provided by (used in) financing activities (6,242) 8,492 15,308
--------------------------------------------
Net increase in cash 3,379 15,647 69
Cash at beginning of year 15,739 92 23
--------------------------------------------
Cash at end of year $ 19,118 $ 15,739 $ 92
============================================
NON CASH ITEMS:
Conversion of preferred stock to common stock $ 4,804 --- ---
See accompanying notes.
24
25
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company distributes home entertainment products including prerecorded tapes,
compact discs, digital versatile disks, personal computer software and
interactive CD-ROM computer software primarily to retailers and wholesalers in
the United States. In addition, through its wholly owned subsidiary, eSplice,
Inc., Navarre was engaged in the development of a platform to aggregate and
distribute digital content including music and software utilizing
industry-leading solutions for encoding, encryption, digital rights management
and playback. In the fourth quarter of fiscal 2001, Navarre management and Board
of Directors determined that the Company would not continue to support the
further development of eSplice operations.
CONSOLIDATION
The financial statements include the accounts of the Company and its wholly
owned subsidiary, eSplice, Inc. and its formerly majority-owned subsidiary,
NetRadio Corporation (collectively, the Company). NetRadio was consolidated from
the time the Company purchased controlling interest in the operation until
November 5, 1999. All intercompany accounts and transactions have been
eliminated.
Subsequent to November 5, 1999, NetRadio became an unconsolidated subsidiary in
which the Company had a 49.98% ownership during fiscal 2001. In March 2001, the
Company's interest decreased to 46.6%. At March 31, 2001, NetRadio had total
assets and shareholders' equity of $11,974,000, and $6,865,000, respectively.
REVENUE RECOGNITION
Revenues from sales of product are recorded upon shipment. Allowances are
provided for estimated sales returns at the time the sale is recorded based on
the Company's trailing twelve months' experience by product line.
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Receivables generally are
due within sixty days. Credit losses relating to customers consistently have
been within management's expectations.
CASH AND CASH EQUIVALENTS
The Company considers short-term investments with a maturity of three months or
less when purchased to be cash equivalents. Cash equivalents are carried at
cost, which approximates market value.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined on
the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method for leasehold improvements and accelerated methods for
equipment over estimated useful lives of 3 to 10 years. Software is being
depreciated over a three-year life.
ACCOUNTING FOR LONG LIVED ASSETS
The Company records losses on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. The
Company recorded charges of $1.2 million for accelerated depreciation of
impaired assets related to management and the Board of the Directors
determination, that the Company would not continue to support the further
development of eSplice operations.
25
26
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CLASSIFICATION OF SHIPPING COSTS
Costs incurred with the shipment of product between the Company and its vendors
are classified in cost of goods sold. These costs were $1,129,000, $1,150,000
and $1,044,000 for the years ended March 31, 2001, 2000, and 1999, respectively.
Costs incurred with the shipment of product from the Company to its customers
are classified in selling expenses. These costs were $6,326,000. $6,424,000 and
$5,794,000 for the years ended March 31, 2001, 2000, and 1999, respectively.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25"), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of the
net tangible assets of acquired businesses and is amortized on a straight line
basis over 5 to 15 years. Accumulated amortization at March 31, 2001 and 2000
was $1,502,000 and $1,467,000, respectively.
INCOME TAXES
Income taxes are recorded under the liability method. Deferred income taxes are
provided for temporary differences between the financial reporting and tax bases
of assets and liabilities.
EARNINGS PER COMMON SHARE
The basic earnings per share is computed by dividing the net loss by the
weighted average number of common shares outstanding.
Preferred stock, preferred stock warrants and employee stock options are not
included in the calculation for the periods presented because they are
anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per
share:
(In thousands, except for per share data) YEARS ENDED MARCH 31
2001 2000 1999
-------------------------------------------------
Numerator
Net loss $ (10,925) $ (7,785) $ (27,670)
Less excess of preferred share buyback (793) --- ---
Less preferred non-detachable conversion
feature and warrant valuation --- --- (34,229)
Less preferred dividend requirements --- --- (662)
-------------------------------------------------
Adjusted net loss applicable to common stock $ (11,718) $ (7,785) $ (62,561)
=================================================
Denominator for basic and diluted earnings per
share - weighted average shares 25,137 23,483 14,179
=================================================
Basic and diluted earnings per share $ (.47) $ (.33) $ (4.41)
=================================================
26
27
2. NETRADIO
On October 19, 1999, NetRadio Corporation, the Company's majority owned
subsidiary, closed on an initial public offering of 3,200,000 shares of its
common stock at a price of $11.00 per share. As a result of the completion of
the NetRadio initial public offering and the subsequent exercise of options by
NetRadio option holders, Navarre's ownership of NetRadio decreased to less than
fifty percent effective November 5, 1999. Accordingly, Navarre has not
consolidated NetRadio's results for periods after November 5, 1999 in Navarre
financial statements, but has reported its interest in NetRadio on the equity
method.
In connection with the NetRadio initial public offering, Navarre and NetRadio
entered into a separation agreement in March 1999 under which Navarre agreed to
contribute to the capital of NetRadio $5,234,840 of principal indebtedness owed
by NetRadio to Navarre as of December 31, 1998. In connection with the execution
of the separation agreement NetRadio and Navarre agreed to enter into a Multiple
Advance Note. Under the separation agreement, Navarre and NetRadio agreed at
closing of the initial public offering that a Term Note would replace this
Multiple Advance Note. Under the Term Note, NetRadio agreed to repay to Navarre
all amounts advanced to NetRadio beginning January 1, 1999, plus accrued
interest on $5,234,840 of principal indebtedness incurred through December 31,
1998. The Term Note bears interest at prime plus one half-percentage point.
Interest payments are due monthly. The principal balance of the Term Note,
approximately $9.6 million, was due on November 14, 2001. During the quarter
ended September 30, 2000, Navarre determined that the Term Note was impaired and
Navarre recorded a valuation reserve for the $9.6 million carrying value of the
Note.
On March 26, 2001, Navarre and NetRadio amended the Term Note and the Company
agreed to forgive the repayment of $5.5 million in exchange for NetRadio's
prepayment of $1.0 million. The principal balance of the Term Note has been
adjusted to $3.1 million and is due March 31, 2002. As of March 31, 2001, the
Company's carrying value of the Term Note was zero.
3. NOTES RECEIVABLE, RELATED PARTIES
The related party notes receivable are due on demand and bear interest at rates
between 8.75% and 10.5% per year and are unsecured.
4. BANK FINANCING AND DEBT
On March 31, 2001, Navarre had a revolving line of credit with Congress
Financial Corporation. The Company is in the processing of obtaining a new
credit facilities. On March 31, 2001, the Company had no debt.
Interest under the Congress line of credit is at prime plus .5% (8.5) at March
31, 2001 and is payable monthly.
Interest paid was $223,000, $476,000 and $2,543,000 for the years ended March
31, 2001, 2000, and 1999, respectively.
5. SHAREHOLDERS' EQUITY
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 million. The Class A Convertible Preferred Stock was issued
at a price of $13.125 per share and was convertible into five shares of Navarre
common stock at any time after June 30, 1998. All of the Class A Convertible
Preferred Stock was converted into common stock in fiscal 2000. 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 $3.50 per share. The Company also issued warrants to the private
placement agent to purchase 380,953 shares of common stock at $2.625 per share.
During fiscal 1999, 7,913,815 common stock warrants were exercised for
$27,348,500. There were 72,408 warrants outstanding at March 31, 2001. The Class
A Convertible Preferred Stock paid cumulative quarterly dividends of ten percent
(10%) payable beginning June 30, 1998. Total cash and stock dividends paid in
fiscal year 1999 were $594,000. No cash or stock dividends were paid in fiscal
year 2000 or 2001.
27
28
The Class A Convertible Preferred Stock securities were deemed to have contained
beneficial conversion features that were recognized as a dividend paid to
preferred stockholders. Allocation of proceeds to the beneficial conversion
feature and warrants are analogous to a dividend, and were recognized as a
return to the preferred stockholders over the minimum conversion period (from
date securities were issued to date they were first convertible). The Company
valued the Nondetachable Conversion Feature and accompanying warrants at
$34,229,000.
On August 20, 1999, the Company announced that it had entered into a
subscription agreement with Fletcher International Limited ("Fletcher
International") for the issuance of up to 150,000 shares of Navarre's Class B
Convertible Preferred Stock ("Class B Preferred Stock") for an aggregate
purchase price of up to $37.5 million (the "Subscription Agreement"). Under the
terms of the Subscription Agreement, the Class B Preferred Stock could be issued
in three principal tranches. On August 20, 1999, Navarre issued the first
tranche, consisting of 34,000 shares of Class B Preferred Stock and a three-year
"warrant" to purchase up to 16,000 shares of Class B Preferred Stock. Fletcher
International paid a purchase price of $8.5 million, or $250 per share of Class
B Preferred Stock. Fletcher International would pay an additional $4.0 million,
or $250 per share of Class B Preferred Stock, if it exercised the warrant in its
entirety. On May 17, 2000, Fletcher International converted 20,390 shares of
Class B Preferred Stock to 2,115,057 shares of common stock.
On October 24, 2000, Navarre and Fletcher International entered into and closed
on a portion of the obligations contained in a Securities Redemption Agreement
("Redemption Agreement"). Under the Redemption Agreement, Navarre repurchased
all of the 13,610 shares of its Class B Preferred Stock not yet converted with a
carrying value of approximately $3.2 million. In connection with the repurchase,
Navarre paid Fletcher International $3.4 million and issued to Fletcher
International a promissory note due November 21, 2000 for an additional
$600,000. In November 2000, Navarre paid the promissory note and Fletcher
International returned the Warrant and all rights of Fletcher International and
Navarre to purchase and sell Navarre securities under the Subscription Agreement
were terminated.
In June 2000, Navarre hired the investment banking firm Sutro & Co., Inc. to
advise Navarre with respect to various strategic matters. In connection with its
engagement of Sutro, on October 1, 2000, Navarre issued Sutro a warrant to
purchase 10,000 shares of Navarre Common stock at a price of $4.50 per share.
On October 17, 2000, Navarre announced that its board of directors had
authorized it to repurchase up to 5,000,000 shares of Navarre common stock or
approximately twenty percent of its outstanding common stock, in market or
private transactions. As of March 31, 2001, Navarre has repurchased 1,624,625
shares for an average price of $1.39.
28
29
6. STOCK OPTIONS AND GRANTS
The Company has an incentive stock option plan for officers, key employees and
directors. The options are granted at fair market value and expire between five
and eight years after the grant date. Option activity is summarized as follows:
PLAN OPTIONS WEIGHTED AVERAGE
AVAILABLE FOR PLAN OPTIONS EXERCISE PRICE PER
GRANT OUTSTANDING SHARE
------------------------------------------------------
Balance on March 31, 1998 546,426 1,289,174 $2.92
Granted (532,000) 532,000 3.07
Canceled 100,772 (100,772) 3.57
Exercised --- (644,806) 1.89
------------------------------------------------------
Balance on March 31, 1999 115,198 1,075,596 $2.92
Additional shares 1,300,000 ---- ----
Granted (593,000) 593,000 7.56
Canceled 32,100 (32,100) 4.69
Exercised --- (185,328) 2.83
------------------------------------------------------
Balance on March 31, 2000 854,298 1,451,168 $3.02
Granted (563,000) 563,000 3.12
Canceled 97,881 (97,881) 3.92
Terminated 147,766 (147,766) 2.25
Exercised --- (5,512) 2.32
------------------------------------------------------
Balance on March 31, 2001 536,945 1,763,009 $4.32
=====================================================+
In October 1997, the Company's Board of Directors repriced options covering
51,850 shares, representing all of the qualified outstanding options with
exercise prices ranging from $5.12 to $11.38, to an exercise price of $4.38 per
share. The vesting terms of these options remain unchanged.
The weighted average fair value of options granted in 2001, 2000, and 1999 was
$2.00, $2.82, and $2.18 per share, respectively.
The exercise price of options outstanding at March 31, 2001 ranged from $1.406
to 15.375 per share, as summarized in the following table:
SHARES
OUTSTANDING WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
RANGE OF AT MARCH 31, REMAINING SHARES EXERCISE
EXERCISE PRICE 2001 CONTRACTUAL LIFE EXERCISABLE PRICE PER SHARE
------------------------------------------------------------------------------------------------------
$ 1.41 - $ 2.94 547,400 2.53 years 222,150 $ 2.78
$ 3.19 - $ 3.28 514,900 4.28 years 108,750 3.28
$ 3.69 - $ 7.50 344,709 2.30 years 147,409 4.77
$ 7.81 - $ 15.38 356,000 4.45 years 85,000 8.92
------------------------------------------------------------------------------------------------------
1,763,009 3.67 years 563,309 $ 4.32
=============================================================================
The number of options exercisable at March 31, 2001, 2000, and 1999 was 563,309,
358,940, and 246,158, respectively, at a weighted average exercise price of
$4.32, $3.02, and $2.92 per share, respectively.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions, risk-free interest rate of 4.6%, 5.8%, and 5.2%, for 2001, 2000,
and 1999, respectively: volatility factor of the expected market price of the
Company's common stock of 134%, 30%, and 82% and a weighted-average expected
life of the option of five years.
29
30
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value statement, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
(In thousands, except for per share data)
MARCH 31
2001 2000 1999
-------------------------------------------------
Pro forma net loss $(12,595) $(8,285) $(62,736)
Pro forma basic and diluted loss per share $ (.50) $ (.36) $ (4.42)
These pro forma amounts may not be indicative of future years' amounts since the
Statement provides for a phase-in of option values beginning with those granted
in fiscal 1996.
The Company has granted restricted common shares to key employees, which are
recorded at the market value on the date of the grant. A total of 150,000 common
shares were issued under restricted stock grants for the year ended March 31,
1996. The total market value on the date of grant of common shares is treated as
unearned compensation charged to expense over the vesting period of five years.
Compensation charged to expense was $37,000, $95,000, and $95,000, respectively,
for the years ended March 31, 2001, 2000, and 1999.
In March 1999 the Company recognized $880,000 in compensation expense associated
with the issuance of incentive stock options of its subsidiary NetRadio to
employees with stock prices below the estimated fair market value of the
Company's common stock on the date of grant. In addition, in fiscal year 2000
the Company recognized $495,000 in compensation associated with the issuance of
stock option to a vendor.
7. INCOME TAXES
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 Company's deferred tax assets as of
March 31, 2001 and 2000 (in thousands):
MARCH 31
2001 2000
--------------------------------
Debit balance $ 698 $ 1,396
Net operating loss carryforward 12,717 8,108
Allowance for uncollectible accounts 2,408 1,005
Allowance for sales returns 828 735
Book/tax depreciation 102 30
Reserve for sales discounts 218 231
Accrued vacations 105 80
Inventory - uniform capitalization 119 114
Price protection reserve ---- 64
Compensation expense 120 198
--------------------------------
17,315 11,961
Valuation allowance (17,315) (11,961)
--------------------------------
Total deferred tax assets $ ---- $ ----
================================
30
31
The net operating loss carryforward of $222,000 created as a result of the
change in the Company's year-end in 1994 was utilized in fiscal year 2001. The
remaining net operating loss of $31,793,000 expires in the year 2019.
A reconciliation of income tax benefit to the statutory federal rate is as
follows (in thousands):
YEAR ENDED MARCH 31
2001 2000 1999
---------------------------------------------------
Tax expense (benefit) at statutory rate $ (3,715) $ (2,662) $ (9,408)
State income taxes (benefit), net of federal benefit (2.354) (215) (1,220)
Valuation allowance 5,354 1,422 10,564
Equity loss in NetRadio 591 1,412 ----
Goodwill amortization --- 9 28
Other 124 34 36
---------------------------------------------------
$ 0 $ 0 $ 0
====================================================
Effective tax rate 0% 0% 0%
====================================================
Cash paid (received) for income taxes was $0, $0, and $(1,623,000) for the years
ended March 31, 2001, 2000 and 1999, respectively.
8. COMMITMENTS
LEASES
On June 27, 1996, the Company acquired an operating lease with the acquisition
of Surfside Distributor, Inc. in Honolulu, Hawaii. The Company leases
approximately 4,885 square feet of office and warehouse space. The lease, which
was renewed June 1, 2001, expires in the year 2006 and provides for a monthly
rental of $5,618 over the lease term. In addition, the Company is responsible
for taxes and all operating costs associated with the building.
On March 12, 1998, the Company entered into an operating lease agreement for
office and warehouse space. The lease expires in 2013 and provides for monthly
payments of $38,750 over the lease term, with a 2.5% increase every 30 months.
In addition, the Company is responsible for all operating costs associated with
the building.
On April 22, 1999, the Company entered into an operating lease agreement for a
second office and warehouse space. The lease expires in the year 2002 and
provides for a monthly rental of $32,640 over the lease term. In addition, the
Company is responsible for taxes and all operating costs associated with the
building.
On March 30, 2000, the Company entered into an operating lease agreement for a
third warehouse space. The lease expires in the year 2002 and provides for a
monthly rental of $13,333 over the lease term. In addition, the Company is
responsible for taxes and all operating costs associated with the building.
Total rent expense was $1,731,000, $1,613,000, and $1,368,000 for the years
ended March 31, 2001, 2000, and 1999, respectively.
The following is a schedule of future minimum rental payments required under
noncancelable operating leases as of March 31, 2001 (in thousands):
2002 $ 1,187
2003 951
2004 600
2005 556
2006 559
Thereafter 3,748
===========
$ 7,601
===========
31
32
9. MAJOR CUSTOMERS
The Company has three major customers who accounted for 49%, 52%, and 59%, of
sales in fiscal 2001, 2000, and 1999, respectively.
10. 401K PLAN
The Company has a 401k plan, which covers substantially all full-time employees.
The Company contributed $90,846 and $54,231 to the plan for the years ended
March 31, 2001 and March 31, 2000, respectively.
11. BUSINESS SEGMENTS
Navarre's operations were classified into two business segments for fiscal 2001
based upon products and services provided: home entertainment products and
eSplice and three business segments for fiscal 2000, based upon products and
services provided: home entertainment products, NetRadio, through November 5,
1999, and eSplice. The Company distributes home entertainment products including
prerecorded tapes, compact discs, interactive CD-ROM computer software, DVD
products and personal computer software primarily to retailers and wholesalers
in the United States and Canada. NetRadio is an internet-only radio network and
eSplice was engaged in the development of a platform to aggregate and distribute
digital content including music and software utilizing industry-leading
solutions for encoding, encryption, digital rights management and playback.
On October 19, 1999, NetRadio closed on an initial public offering. Navarre's
ownership of NetRadio subsequently decreased to less than fifty percent.
Accordingly, Navarre has not consolidated NetRadio's results for periods after
November 5, 1999 in Navarre financial statements, but has reported its interest
in NetRadio using the equity method.
In the fourth quarter of fiscal 2001, Navarre management and Board of Directors
determined that the Company would not continue to support the further
development of eSplice operations.
32
33
Financial information by reportable business segment is included in the
following summary:
In thousands
YEARS ENDED MARCH 31
2001 2000 1999
------------------------------------------------------
NET SALES FROM EXTERNAL CUSTOMERS
Home Entertainment Products $ 314,162 $ 284,428 $ 210,000
NetRadio ---- 737 386
eSplice 37 ---- ----
------------------------------------------------------
CONSOLIDATED $ 314,199 $ 285,165 $ 210,386
OPERATING INCOME (LOSS)
Home Entertainment Products $ 1,593 $ 4,257 $ (20,082)
NetRadio ---- (7,833) (5,490)
eSplice (3,957) (978) ----
------------------------------------------------------
CONSOLIDATED $ (2,364) $ (4,554) $ (25,572)
Net Interest Expense (223) (476) (2,543)
Other Income (Expense) 2,000 1,399 445
------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES $ (587) $ (3,631) $ (27,670)
IDENTIFIABLE ASSETS
Home Entertainment Products $ 93,904 $ 109,705 $ 76,363
NetRadio ---- ---- 3,117
eSplice 14 6 ----
------------------------------------------------------
CONSOLIDATED $ 93,918 $ 109,711 $ 79,480
DEPRECIATION AND AMORTIZATION
Home Entertainment Products $ 1,291 $ 913 $ 1,573
NetRadio ---- 663 380
eSplice 1,921 46 ----
------------------------------------------------------
CONSOLIDATED $ 3,212 $ 1,622 $ 1,953
CAPITAL EXPENDITURES
Home Entertainment Products $ 2,459 $ 996 $ 1,020
NetRadio ---- 1,629 1,019
eSplice 1,829 47 ----
------------------------------------------------------
CONSOLIDATED $ 4,288 $ 2,672 $ 2,039
YEARS ENDED MARCH 31
In thousands 2001 2000 1999
------------------------------------------------------
SALES BY CLASSES OF SIMILAR PRODUCTS OR SERVICES
Computer Software $ 214,734 $ 186,498 $ 150,338
Music 99,428 97,930 59,662
NetRadio ---- 737 386
eSplice 37 ---- ----
------------------------------------------------------
CONSOLIDATED $ 314,199 $ 285,165 $ 210,386
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12. QUARTERLY DATA - SEASONALITY (UNAUDITED)
The Company's 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 Company's business is affected by the
pattern of seasonality common to other suppliers of retailers, particularly the
holiday selling season. Historically, more than 60% of the Company's sales and
substantial portion of the Company's profits have been in the third and fourth
quarters of the calendar year. Due to the lower level of sales during the off
periods, the Company has historically incurred losses during these periods.
The following table sets forth certain unaudited quarterly historical financial
data for each of the eight quarters in the period ended March 31, 2001. (In
thousands, except per share amounts)
QUARTER ENDED
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
-----------------------------------------------------------------------
FISCAL YEAR 2001
Net Sales $55,166 $78,378 $119,465 $61,190
Gross profit 7,648 9,133 14,004 6,636
Net income (loss) (2,121) (8,447) 2,876 (3,233)
Net income (loss) per common share:
Basic and diluted (.09) (.33) .08 (.13)
QUARTER ENDED
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
-----------------------------------------------------------------------
FISCAL YEAR 2000
Net Sales $57,751 $67,399 $99,137 $60,878
Gross profit 6,805 8,770 12,264 8,542
Net income (loss) (2,604) (3,184) 10 (2,007)
Net income (loss) per common share:
Basic and diluted (.11) (.14) .00 (.09)
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NAVARRE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND DEDUCTIONS -- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE PERIOD
================================================================================================================
YEAR ENDED MARCH 31, 2001:
DEDUCTED FROM ASSET ACCOUNTS:
INVENTORY OBSOLESCENCE RESERVE $ 0 $ 0 $ 0 $ 0
ALLOWANCE FOR DOUBTFUL ACCOUNTS 2,511,000 620,000 (214,000)(1) 2,917,000
ALLOWANCE FOR SALES RETURNS 1,838,000 231,000 ---- 2,069,000
----------------------------------------------------------------------
TOTALS $ 4,349,000 $ 851,000 $ (214,000)(1) $ 4,986,000
======================================================================
Year ended March 31, 2000:
Deducted from asset accounts:
Inventory obsolescence reserve $ 658,000 $ 0 $ (658,000) $ 0
Allowance for doubtful accounts 2,095,000 355,000 61,000 (1) 2,511,000
Allowance for sales returns 1,715,000 123,000 ---- 1,838,000
----------------------------------------------------------------------
Totals $ 4,468,000 $ 478,000 $ (597,000) $ 4,349,000
======================================================================
Year ended March 31, 1999:
Deducted from asset accounts:
Inventory obsolescence reserve $ 0 $ 658,000 $ 0 $ 658,000
Allowance for doubtful accounts 1,112,000 960,000 (23,000)(1) 2,095,000
Allowance for sales returns 1,300,000 415,000 ---- 1,715,000
----------------------------------------------------------------------
Totals $ 2,412,000 $ 2,033,000 $ (23,000)(1) $ 4,468,000
======================================================================
(1) Uncollectible accounts written off, net of recoveries.
35