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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period June 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from_______________to________________
Commission File Number 0-22982
NAVARRE CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1704319
(State 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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, No Par Value - 23,314,960 shares as of July 31, 2001
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NAVARRE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
June 30, 2001 and March 31, 2001
Consolidated Statements of Operations -
Three months ended June 30, 2001 and 2000
Consolidated Statements of Cash Flows - Three months
ended June 30, 2001 and 2000
Notes to Consolidated Financial Statements - June 30, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
JUNE 30, 2001 MARCH 31, 2001
-------------- --------------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash $ 14,248 $ 19,118
Accounts receivable, less allowance for doubtful accounts
and sales returns of $4,167 and $4,986, respectively 39,745 47,874
Inventories 24,057 22,629
Note receivable, related parties 33 56
Prepaid expenses and other current assets 179 209
-------------- --------------
Total current assets $ 78,262 $ 89,886
Property and equipment, net of accumulated depreciation of $3,931
and $6,069, respectively 3,618 3,546
Other assets:
Other assets 508 486
-------------- --------------
Total assets $ 82,388 $ 93,918
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ -- $ --
Accounts payable 57,182 66,918
Accrued expenses 2,544 2,659
-------------- --------------
Total current liabilities $ 59,726 $ 69,577
Shareholders' equity:
Common stock, no par value:
Authorized shares - 100,000,000,
Issued and outstanding shares-23,492,160 and
24,030,379, respectively 93,359 94,110
Retained deficit (70,697) (69,769)
-------------- --------------
Total shareholders' equity 22,662 24,341
-------------- --------------
Total liabilities and shareholders' equity $ 82,388 $ 93,918
============== ==============
</Table>
Note: The balance sheet at March 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
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NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30,
2001 2000
------------ ------------
Net sales $ 54,485 $ 55,166
Cost of sales 48,101 47,518
------------ ------------
Gross profit 6,384 7,648
Operating expenses:
Selling and promotion 1,850 1,933
Distribution and warehousing 1,245 1,624
General and administration 4,161 4,604
Depreciation and amortization 342 197
------------ ------------
7,598 8,358
------------ ------------
Loss from operations (1,214) (710)
Other expense:
Interest expense (24) (58)
Other income 300 588
------------ ------------
Loss before equity in loss of NetRadio Corporation (938) (180)
Equity in loss of NetRadio Corporation -- (1,941)
------------ ------------
Net loss $ (938) $ (2,121)
============ ============
Loss per common share:
Basic and diluted $ (.04) $ (.09)
============ ============
Weighted average common and
common equivalent shares outstanding
Basic and diluted 23,702 24,580
============ ============
</Table>
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NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30,
2001 2000
------------ ------------
OPERATING ACTIVITIES
Net loss $ (938) $ (2,121)
Adjustments to reconcile net loss to net cash
Provided by (used in) operating activities:
Depreciation and amortization 352 197
Amortization of unearned compensation -- 10
Equity in loss of NetRadio Corporation -- 1,941
Stock option compensation -- 53
Write off of notes receivable 23 --
Changes in operating assets and liabilities:
Accounts receivable 8,129 13,624
Inventories (1,428) (4,154)
Prepaid expenses and assets (1) (243)
Accounts payable and accrued expenses (9,851) (8,135)
------------ ------------
Net cash provided by (used in) operating activities (3,714) 1,172
INVESTING ACTIVITIES
Note receivable, related parties -- (36)
Purchase of equipment and leasehold improvements (405) (611)
------------ ------------
Net cash used in investing activities (405) (647)
FINANCING ACTIVITIES
Repurchase of Navarre common stock (751) --
------------ ------------
Net cash used in financing activities (751) --
Net decrease (increase) in cash (4,870) 525
Cash at beginning of period 19,118 15,739
------------ ------------
Cash at end of period $ 14,248 $ 16,264
</Table>
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NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2001
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Navarre Corporation have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
All intercompany accounts and transactions have been eliminated. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Because of the
seasonal nature of the Company's business, the operating results for the three
month period ended June 30, 2001 are not necessarily indicative of the results
that may be expected for the year ending March 31, 2002. For further
information, refer to the financial statements and footnotes thereto included in
Navarre Corporation's Annual Report on Form 10-K for the year ended March 31,
2001. The fiscal 2001 information includes results of the Company's formerly
wholly owned subsidiary, eSplice, Inc. 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.
NOTE B - ADOPTION OF FASB STATEMENT NO. 142
At the beginning of fiscal year 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. Under the
Statement, amortization of goodwill is prohibited. Instead, it is tested at
least annually for impairment. The adoption of this Statement did not have a
material effect on the Company.
NOTE C - BUSINESS SEGMENTS
Financial Information by reportable business segment is included in the
following summary:
<Table>
<Caption>
(in thousands) QUARTERS ENDED
JUNE 30, 2001 JUNE 30, 2000
------------- -------------
NET SALES
Home Entertainment Products $ 54,485 $ 55,164
eSplice -- 2
------------- -------------
CONSOLIDATED $ 54,485 $ 55,166
OPERATING LOSS
Home Entertainment Products (1,214) (96)
eSplice -- (614)
------------- -------------
CONSOLIDATED LOSS (1,214) (710)
Net Interest Expense (24) (58)
Other Income 300 588
Equity loss from investment in NetRadio -- (1,941)
------------- -------------
LOSS BEFORE INCOME TAXES $ (938) $ (2,121)
</Table>
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NOTE C - NET EARNINGS (LOSS) PER SHARE
For the periods ending June 30, 2001 and 2000, preferred stock, preferred stock
warrants and employee stock options are not included in the computation of the
dilutive, weighted-average shares calculation because they are anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per
share:
(In thousands, except per share data)
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30,
2001 2000
------------ ------------
Numerator:
Net loss $ (938) $ (2,121)
Denominator:
Denominator for basic earnings per
share--weighted-average shares 23,702 24,580
Denominator for diluted earnings
per share--adjusted
weighted-average shares 23,702 24,580
------------ ------------
Basic and dilutive loss per share $ (.04) $ (.09)
============ ============
</Table>
ITEM 2. 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 2002 were classified into one business segment;
home entertainment; the Company had two business segments; home entertainment
and eSplice, Inc. for fiscal 2001. In the fourth quarter of fiscal 2001,
Navarre's management and its Board of Directors determined that the Company
would not continue to support the further development of eSplice operations.
Effective April 1, 2001 the Company realigned its home entertainment 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 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 to
retailers. Unlike NDS's 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.
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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."
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30
2001 2000
------------ ------------
Net sales:
Distribution Services 88.1% 85.0%
Entertainment Media 11.9 15.0
------------ ------------
Home entertainment products 100.0 100.0
eSplice, Inc. -- --
------------ ------------
Total net sales 100.0 100.0
Cost of sales 88.3 86.1
------------ ------------
Gross profit 11.7 13.9
Selling and promotion 3.5 3.5
Distribution and warehousing 2.2 2.9
General and administration 7.7 8.3
Depreciation and amortization 0.6 0.4
------------ ------------
Loss from operations (2.2) (1.3)
Interest expense (0.0) (0.1)
Other expense .5 1.1
Equity loss from investment in NetRadio -- (3.5)
------------ ------------
Net loss (1.7)% (3.8)%
============ ============
</Table>
Certain information in this section contains forward-looking statements. The
Company's actual results could differ materially from the statements contained
in the forward-looking statements as a result of a number of factors, including
risks and uncertainties inherent in the Company's business, the consumer market
for music products and computer software products, retail customer buying
patterns, new or different competition in the Company's traditional and new
markets and the rate of new product development and commercialization. For a
detailed discussion of these factors see the section entitled "Forward Looking
Statements" in the Company's Form 10-K for the year ended March 31, 2001.
Net sales for the first quarter ended June 30, 2001 decreased 1.3% to $54.5
million in fiscal 2002 from $55.2 million for the same period in fiscal 2001.
Navarre Distribution Services sales for the first quarter ended June 30, 2001
increased by 2.3% to $48.0 million for fiscal 2002 from $46.9 million for the
same period in fiscal 2001. This increase was primarily due to the Company's
growth in entertainment software and its new distribution agreement with
Microsoft. Navarre Entertainment Media sales for the first quarter ended June
30, 2001 decreased 21.7% to $6.5 million for fiscal 2002 from $8.3 million for
the same period in fiscal 2001. This revenue decrease was primarily due to a
shift of new release titles closer to the upcoming holiday season along with a
general tightening of inventory levels among various retail stores.
Gross profit for the first quarter ended June 30, 2001 decreased 15.8% or $1.2
million to $6.4 million for fiscal 2002 from $7.6 million for the same period in
fiscal 2001. As a percentage of net sales, gross profit for first quarter ended
June 30, 2001 decreased to 11.7% for fiscal 2002 from 13.9 for the same period
in fiscal 2001. Gross margin from Distribution Services net sales for the first
quarter ended June 30, 2001 was $5.0 million or 10.4% as a percentage of net
sales in fiscal 2002 compared with $5.5 million or 11.7% as a percentage of net
sales in the same period in fiscal 2001. The decrease in gross margin in
Distribution Services was primarily
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due to the mix of products at a lower gross margin percentage. The Company
believes that the signing of certain larger, more prominent vendors may reduce
the gross margin to its current level, however the overall profitability of
these vendors may be greater due to historically lower return levels with
certain "legendary product. Gross margin from Entertainment Media net sales for
the first quarter ended June 30, 2001 was $1.4 million or 21.5% of music net
sales in fiscal 2002 compared with $2.1 million or 25.3% of music net sales for
the same period in fiscal 2001. The decrease was primarily attributable to an
increase in returns as music inventories were still being adjusted from the
holiday season.
Selling and promotion expense for the first quarter ended June 30, 2001 remained
the same at $1.9 million in fiscal 2002 and $1.9 million for the same period in
fiscal 2001 and as a percentage of net sales remained at 3.5% in fiscal 2002 and
3.5% for the same period in fiscal 2001. This was due to the lower costs
associated with improved management of our vendors to reduce the need for
expedited freight.
Distribution and warehousing expense for the first quarter ended June 30, 2001
decreased to $1.2 million for fiscal 2002 from $1.6 million for the same period
in fiscal 2001 and as a percentage of net sales, decreased to 2.2% of net sales
in fiscal 2002 from 2.9% of net sales for fiscal 2001. This decrease in
distribution and warehousing expense and decrease as a percentage of net sales
for the first quarter was primarily due to the capabilities and ensuing
efficiencies derived from the Company's dedicated returns facility.
General and administration expenses for the first quarter ended June 30, 2001
decreased to $4.2 million for fiscal 2002 from $4.6 million for the same period
in fiscal 2001 and as a percentage of net sales, it decreased to 7.7% for fiscal
2002 from 8.3% for the same period in fiscal 2001. This decrease in general and
administration expenses and decrease as a percentage of net sales for the fiscal
first quarter was primarily due to the elimination of the support costs
associated with eSplice, Inc.
Interest expense for the first quarter ended June 30, 2000 decreased to $24,000
in fiscal 2002 from $58,000 for the same period in fiscal 2001. This decrease
resulted from having no debt during the quarter.
Other income which consists principally of interest income for the fiscal first
quarter ended June 30, 2001, decreased to $301,000 for fiscal 2002 from $588,000
in fiscal 2001. This decrease was due to having a lower principal balance on the
NetRadio note and lower interest rates.
Due to the accumulated losses from prior years and the current quarter's loss,
the Company has not recorded any tax benefit.
Net loss for fiscal first quarter ended June 30, 2001 was $938,000 in fiscal
2002 compared to a loss of $2.1 million for the same period in fiscal 2001.
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 and sale of equity securities. The level of borrowings has
historically fluctuated significantly during the year. At June 30, 2001, the
Company had net accounts receivable of $39.7 million, inventory of $24.1
million, accounts payable of $57.2 million and no bank debt.
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For the fiscal first quarter ended June 30, 2001, net sales were $54.5 million
for fiscal 2002, a decrease of $700,000 verses net sales of $55.2 million in
fiscal 2001. The Company used cash of $3.7 million for operating activities.
Accounts receivable decreased by $8.1 million, inventories increased by $1.4
million and accounts payable and accrued expense decreased by $9.9 million.
Investing activities used $405,000 for the purchase of furniture, equipment and
leasehold improvements. The Company also used $751,000 for the repurchase of
Navarre common stock. Cash at the end of the period decreased by $4.9 million.
Although the Company has sufficient cash and working capital to meet its
short-term liquidity and capital requirements, the Company anticipates it could
utilize a credit facility during the next twelve months to meet seasonal working
capital needs. Accordingly, the Company is in the process of obtaining a new
credit facility to fulfill potential holiday fluctuations in cash and has
recently signed a commitment letter with a potential lender for a three-year
facility. On June 30, 2001, the Company had no debt.
ITEM 3. 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 this Form 10-Q.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of its business, the Company is involved in a number of
routine litigation matters that are incidental to the operation of its business.
These matters 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, 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
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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 15, 2001. Navarre and the directors intend to vigorously
defend against the appeal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended June 30, 2001
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NAVARRE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NAVARRE CORPORATION
(Registrant)
Date: August 10, 2001 By /s/ Eric H. Paulson
----------------------------
Eric H. Paulson
Chairman of the Board,
President and
Chief Executive Officer
Date: August 10, 2001 By /s/ Charles E. Cheney
----------------------------
Charles E. Cheney
Vice-Chairman,
Treasurer and Secretary,
Executive Vice President,
and Chief Strategic Officer
(Principal Accounting Officer)
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