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 ended December 31, 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 - 21,616,187 shares as of February 10, 2002
NAVARRE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - December 31, 2001 and March 31, 2001
Consolidated Statements of Operations - Three months and nine months
ended December 31, 2001 and 2000
Consolidated Statements of Cash Flows - Nine months ended
December 31, 2001 and 2000
Notes to Consolidated Financial Statements - December 31, 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
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, 2001 MARCH 31, 2001
----------------- --------------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash $ 15,581 $ 19,118
Accounts receivable, less allowance for
doubtful accounts and sales returns of
$3,259 and $4,986, respectively 76,369 47,874
Inventories 22,259 22,629
Note receivable, related parties -- 56
Prepaid expenses and other current assets 121 209
--------- ---------
Total current assets $ 114,330 $ 89,886
Property and equipment, net of accumulated
depreciation of $4,667 and $6,069, respectively 3,160 3,546
Other assets 784 486
--------- ---------
Total assets $ 118,274 $ 93,918
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ -- $ --
Accounts payable 91,524 66,918
Accrued expenses 2,741 2,659
--------- ---------
Total current liabilities $ 94,265 $ 69,577
Shareholders' equity:
Common stock, no par value:
Authorized shares - 100,000,000,
Issued and outstanding shares - 21,616,187 and
24,030,379, respectively 91,403 94,110
Retained deficit (67,394) (69,769)
--------- ---------
Total shareholders' equity 24,009 24,341
--------- ---------
Total liabilities and shareholders' equity $ 118,274 $ 93,918
========= =========
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.
3
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net sales $ 116,040 $ 119,465 $ 238,201 $ 253,009
Cost of sales 104,483 105,461 213,312 222,224
--------- --------- --------- ---------
Gross profit 11,557 14,004 24,889 30,785
Operating expenses:
Selling and promotion 2,374 2,829 5,958 6,958
Distribution and warehousing 1,514 2,766 3,928 6,126
General and administration 5,408 5,418 13,551 13,982
Depreciation and amortization 515 517 1,218 1,339
--------- --------- --------- ---------
9,811 11,530 24,655 28,405
--------- --------- --------- ---------
Income from operations 1,746 2,474 234 2,380
Other expense:
Interest expense (104) (122) (131) (191)
Other income 156 524 789 1,657
--------- --------- --------- ---------
Income before impact of investment in NetRadio Corporation 1,798 2,876 892 3,846
Impact of investment in NetRadio Corporation 1,480 -- 1,480 (11,538)
--------- --------- --------- ---------
Income (loss) before income taxes $ 3,278 $ 2,876 $ 2,372 $ (7,692)
Premium on redemption of preferred stock -- (794) -- (794)
Net income (loss) attributable to common shareholders $ 3,278 $ 2,082 $ 2,372 $ (8,486)
========= ========= ========= =========
Income (loss) per common share:
Basic $ 0.15 $ 0.08 $ 0.10 $ (0.34)
========= ========= ========= =========
Diluted $ 0.15 $ 0.08 $ 0.10 $ (0.34)
========= ========= ========= =========
Weighted average common and
common equivalent shares outstanding
Basic 21,686 25,569 22,860 25,270
========= ========= ========= =========
Diluted 21,724 26,227 22,877 25,270
========= ========= ========= =========
4
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
---------------------------
2001 2000
---------- ---------
OPERATING ACTIVITIES
Net income (loss) $ 2,372 $ (7,692)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,218 1,346
Amortization of unearned compensation -- 30
Impact of investment in NetRadio Corporation (1,480) 11,538
Stock option compensation -- 53
Write off of notes receivable 56 --
Changes in operating assets and liabilities:
Accounts receivable (28,495) (34,794)
Inventories 370 (7,813)
Prepaid expenses and other assets (360) 21
Accounts payable and accrued expenses 24,691 44,548
-------- --------
Net cash provided by (used in) operating activities (1,628) 7,237
INVESTING ACTIVITIES
Note receivable, related parties -- (141)
Payments on NetRadio note 1,480
Purchase of equipment and leasehold improvements (682) (3,908)
-------- --------
Net cash provided by (used in) investing activities 798 (4,049)
FINANCING ACTIVITIES
Repurchase of Navarre common stock (2,707) (683)
Repurchase of Class B preferred stock -- (4,000)
Exercise of common stock options and warrants -- 13
-------- --------
Net cash used in financing activities (2,707) (4,670)
-------- --------
Net decrease in cash (3,537) (1,482)
Cash at beginning of period 19,118 15,739
-------- --------
Cash at end of period $ 15,581 $ 14,257
======== ========
5
NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 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 nine
month period ended December 31, 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 and intangible assets with an indefinite
life is prohibited. Instead, the asset 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:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
(In thousands) 2001 2000 2001 2000
--------- --------- --------- ---------
NET SALES
Home Entertainment Products $ 116,040 $ 119,461 $ 238,201 $ 253,001
ESplice -- 4 -- 8
--------- --------- --------- ---------
CONSOLIDATED $ 116,040 $ 119,465 $ 238,201 $ 253,009
========= ========= ========= =========
OPERATING INCOME (LOSS)
Home Entertainment Products $ 1,746 $ 3,297 $ 234 $ 4,132
ESplice -- (823) -- (1,752)
--------- --------- --------- ---------
CONSOLIDATED INCOME FROM OPERATIONS $ 1,746 $ 2,474 $ 234 $ 2,380
========= ========= ========= =========
Interest Expense $ (104) $ (122) $ (131) $ (191)
Other Income 156 524 789 1,657
Impact of investment in NetRadio 1,480 -- 1,480 (11,538)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES $ 3,278 $ 2,876 $ 2,372 $ (7,692)
========= ========= ========= =========
6
NOTE D - NET EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
(In thousands, except per share data) 2001 2000 2001 2000
-------- -------- -------- --------
Numerator:
Net income (loss) $ 3,278 $ 2,876 $ 2,372 $ (7,692)
-------- -------- -------- --------
Premium on redemption of preferred stock -- (794) -- (794)
-------- -------- -------- --------
Net income (loss) applicable to common stock $ 3,278 $ 2,082 $ 2,372 $ (8,486)
-------- -------- -------- --------
Denominator:
Denominator for basic earnings per
Share - weighted-average shares 21,686 25,569 22,860 25,270
Weighted average preferred shares -- 658 -- --
Dilutive securities:
Employee Stock Options 38 -- 17 --
Denominator for diluted earnings
Per share - adjusted
weighted-average shares 21,724 26,227 22,877 25,270
-------- -------- -------- --------
Basic loss per share $ 0.15 $ 0.08 $ 0.10 $ (0.34)
======== ======== ======== ========
Dilutive loss per share $ 0.15 $ 0.08 $ 0.10 $ (0.34)
======== ======== ======== ========
NOTE E -NET RADIO
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 $5,238,840 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.
During the quarter ended December 31, 2001, in connection with the liquidation
of NetRadio, the Company received a $1.5 million payment against the previously
fully reserved Term Note. At this time, the Company is unable to determine the
final settlement, if any, related to its equity ownership in Net Radio.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
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 Club, Circuit City
Stores, Inc. and Costco Wholesale Corporation.
Navarre's operations for fiscal 2002 are classified into one business segment:
home entertainment. In fiscal 2001, the Company had two business segments; home
entertainment and eSplice, Inc. The home entertainment segment distributes the
Company's two principal products, computer software and music. eSplice, Inc. was
engaged in the development of a platform to aggregate and distribute digital
content including music and software. 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 sells all products that are non-proprietary to Navarre such as computer
software products, DVDs, and major label music. This division is focused on
providing the highest level of services to its retail customers. The Company
hopes to grow sales and increase market share of NDS by relying upon the
Company's ability to provide value-added services to its retail customers.
NEM sells pre-recorded music of primarily independent artists and labels to
retailers. Unlike NDS's emphasis on retail customers, growth in NEM is based on
the level of services given to the Company's content providers, which include
labels, studios, and artists. Products sold through NEM are typically
proprietary to Navarre through exclusive distribution, licensing and/or
ownership arrangements. The Company hopes to increase NEM's margin growth
through the continued ownership or licensing of content from independent artists
and labels.
8
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of net
sales represented by certain items included in the Company's "Consolidated
Statements of Operations."
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ -----------------
2001 2000 2001 2000
------- ------- ------- -------
Net sales:
Distribution Services 77.9% 86.6% 83.1% 83.7%
Entertainment Media 22.1 13.4 16.9 16.3
----- ----- ----- -----
Total net sales 100.0 100.0 100.0 100.0
Cost of sales 90.0 88.3 89.6 87.8
----- ----- ----- -----
Gross profit 10.0 11.7 10.4 12.2
Selling and promotion 2.0 2.4 2.5 2.8
Distribution and warehousing 1.3 2.3 1.6 2.4
General and administration 4.6 4.5 5.7 5.5
Depreciation and amortization 0.4 0.4 0.5 0.5
----- ----- ----- -----
Income from operations 1.5 2.1 0.1 1.0
Interest expense (0.1) (0.1) (0.1) (0.1)
Other income 0.1 0.4 0.3 0.7
Impact of investment in NetRadio 1.3 -- 0.6 (4.6)
----- ----- ----- -----
Net income (loss) 2.8% 2.4% 1.0% (3.0)%
===== ===== ===== =====
NET SALES
Net sales for the third quarter ended December 31, 2001 decreased 2.9% to $116.0
million from $119.5 million in the same period in fiscal 2001. For the
nine-month period ended December 31, 2001, net sales decreased 5.9% to $238.2
million from $253.0 million in the same period in fiscal 2001. The decrease in
sales for the third quarter was due to lower sales in Distribution Services. For
the nine-month period the decrease was due to lower sales in both Distribution
Services and Entertainment Media. Distribution Services net sales for the third
quarter ended December 31, 2001 decreased 12.7% to $90.3 million from $103.5
million in the same period in fiscal 2001. For the nine-month period ended
December 31, 2001, net sales of Distribution Services decreased 6.6% to $197.9
million from $211.9 million in the same period in fiscal 2001. The decrease of
Distribution Services net sales for the third quarter and nine-month period was
primarily due to the lack of hit releases provided by the studios compared to
prior years. Entertainment Media net sales for the third quarter ended December
31, 2001 increased 60.3% to $25.7 million from $16.0 million in the same period
in fiscal 2001. For the nine-month period ended December 31, 2001, Entertainment
Media net sales decreased 2.0% to $40.3 million from $41.1 million in the same
period in fiscal 2001. The increase of Entertainment Media net sales for the
third quarter was primarily due to a strong holiday selling season, highlighted
by one label's success in selling over 1.4 million units. The decrease in
Entertainment Media net sales for the nine-month period was due to the lack of
high-quality content and new releases during the period.
GROSS PROFIT
Gross profit for the third quarter ended December 31, 2001 decreased 17.5% or
$2.6 million to $11.6 million from $14.0 million for the same period in fiscal
2001. For the nine-month period ended December 31, 2001, gross profit decreased
19.2% or $5.9 million to $24.9 million from $30.8 million for the same period in
fiscal 2001. As a percentage of net sales, gross profit for third quarter ended
December 31, 2001 decreased to 10.0% from 11.7% for the same period in fiscal
2001. For the nine-month period ended December 31, 2001, as a
9
percentage of net sales, gross profit decreased to 10.4% from 12.2% for the same
period in fiscal 2001. The decrease in gross profit for the quarter and
nine-month period ended December 31, 2001 was due to decreases in both
Distribution Services and Entertainment Media. Gross profit from Distribution
Services net sales for the third quarter ended December 31, 2001 was $8.8
million or 9.7% as a percentage of net sales compared with $10.9 million or
10.6% as a percentage of net sales in the same period in fiscal 2001. For the
nine-month period ended December 31, 2001, gross profit from Distribution
Services net sales was $19.8 million or 10.0% as a percentage of net sales
compared with $22.9 million or 10.8% as a percentage of net sales in the same
period in fiscal 2001. The decrease in gross margin from Distribution Services
net sales for the quarter and nine-month period ended December 31, 2001 was
primarily due to the sales mix of products at a lower gross margin percentage.
The Company believes that the signing of certain larger, more prominent vendors
may result in reduced gross profit, consistent with current quarter levels;
however the overall profitability of these vendors may be greater due to
historically lower return levels, resulting in reduced warehousing costs. Gross
margin from Entertainment Media net sales for the third quarter ended December
31, 2001 was $2.7 million or 10.8% as a percentage of net sales compared with
$3.1 million or 19.2% as a percentage of net sales for the same period in fiscal
2001. For the nine-month period ended December 31, 2001, gross margin from
Entertainment Media net sales was $5.1 million or 12.7% as a percentage of net
sales compared with $7.9 million or 19.2% as a percentage of net sales in the
same period in fiscal 2001. Due to economic uncertainty concerning retailers
prior to the holiday season, the Company offered various discounts to a select
group of suppliers and customers to alleviate the effects of any potential
downturn in the retail business. As a result, the Company experienced strong
sales but at a lower margin.
OPERATING EXPENSES
Selling and promotion expense for the third quarter ended December 31, 2001
decreased to $2.4 million from $2.8 million for the same period in fiscal 2001.
As a percentage of net sales, selling and promotion expense decreased to 2.0%
for the third quarter of fiscal 2002 from 2.4% for the same period in fiscal
2001. For the nine-month period ended December 31, 2001, selling and promotion
expense decreased to $6.0 million from $7.0 million for the same period in
fiscal 2001. As a percentage of net sales, selling and promotion expense
decreased to 2.5% for the nine-month period of fiscal 2002 from 2.8% for the
same period in fiscal 2001. The decrease in selling and promotion expense and
decrease as a percentage of net sales for the quarter and nine-month period were
primarily due to the lower costs associated with improved management and
communication with our vendors to reduce the need for expedited freight.
Distribution and warehousing expense for the third quarter ended December 31,
2001 decreased to $1.5 million from $2.8 million for the same period in fiscal
2001. As a percentage of net sales, distribution and warehousing expense
decreased to 1.3% for the third quarter of fiscal 2002 from 2.3% for the same
period in fiscal 2001. For the nine-month period ended December 31, 2001,
distribution and warehousing expense decreased to $3.9 million from $6.1 million
for the same period in fiscal 2001. As a percentage of net sales, distribution
and warehousing expense decreased to 1.6% for the nine-month period of fiscal
2002 from 2.4% for the same period in fiscal 2001. This decrease in distribution
and warehousing expense and decrease as a percentage of net sales for the
quarter and nine months were primarily due to the capabilities and ensuing
efficiencies derived from the Company's fully automatic dedicated returns
facility which has improved the handling of all the products Navarre
distributes.
General and administration expenses for the third quarter ended December 31,
2001 remained the same at $5.4 million compared to $5.4 million for the same
period in fiscal 2001. As a percentage of net sales, general and administration
expenses increased to 4.7% for the third quarter of fiscal 2002 from 4.5% for
the same period in fiscal 2001. For the nine-month period ended December 31,
2001, general and administration expenses decreased to $13.6 million from $14.0
million for the same period in fiscal 2001. But as a percentage of net sales,
general and administration expenses increased to 5.7% for the nine-month period
of fiscal 2002 from 5.5% for the same period in fiscal 2001. The increase in
general and administration expenses as a percentage of
10
net sales for the quarter and nine months resulted from lower sales revenue.
Additionally the Company provided additional collectibility reserves resulting
from a difficult retail environment.
Interest expense for the third quarter ended December 31, 2001 decreased to
$104,000 from $122,000 for the same period in fiscal 2001. For the nine-month
period ended December 31, 2001, interest expense decreased to $131,000 from
$191,000 for the same period in fiscal 2001. This decrease for the quarter and
nine-month period primarily resulted from lower interest rates.
OTHER INCOME
Other income, which consists principally of interest income, for the third
quarter ended December 31, 2001 decreased to $156,000 from $524,000 for the same
period in fiscal 2001. For the nine-month period ended December 31, 2001, other
income decreased to $789,000 from $1.7 million for the same period in fiscal
2001. The decrease for the quarter and nine months resulted from having a lower
principal balance on the note to NetRadio and lower interest rates.
The Company recorded no tax expense for the period because of the availability
of net operating loss carryforwards.
Net income for the third quarter ended December 31, 2001 was $3.3 million
compared to $2.9 million for the same period in fiscal 2001. For the nine-month
period ended December 31, 2001, net income was $2.4 million compared to a loss
of $7.7 million for the same period in fiscal 2001.
As discussed Note E, for the nine-month period ended December 31, 2000, the
Company recorded a loss of $11.5 million on its investment in NetRadio
Corporation. In the third quarter of fiscal 2002, the Company recovered $1.5
million in connection with the liquidation of NetRadio.
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, at times, financed its working capital needs through cash
generated from operations, bank borrowings and sale of equity securities. The
level of borrowings has historically fluctuated significantly during the year.
During the three months ended December 31, 2001, the Company's maximum
borrowings under the credit facility were $14.5 million. At December 31, 2001,
the Company had net accounts receivable of $76.4 million, inventory of $22.3
million, accounts payable of $91.5 million, cash and cash equivalents of $15.5
million and no bank borrowings.
The Company used cash of $1.6 million for operating activities. Accounts
receivable increased by $28.5 million, inventories decreased by $370,000 and
accounts payable and accrued expense increased by $24.7 million. Investing
activities provided $798,000 mostly from a $1.5 million payment from NetRadio
offset by the purchase of furniture, equipment and leasehold improvements. The
Company also used $2.7 million for the repurchase of Navarre common stock during
the nine-month period through December 31, 2001. Since October 2000, the Company
has repurchased 4,038,817 shares for an average price of $1.23. Cash at the end
of the period decreased by $3.5 million.
Although the Company believes it has sufficient cash and working capital to meet
its short-term liquidity and capital requirements, the Company anticipates it
will utilize its credit facility during the next twelve months to
11
meet seasonal working capital needs or to expand the business through new
business lines or opportunistic acquisitions. On October 3, 2001, the Company
entered into an agreement with General Electric Capital Corporation for a
three-year $30 million credit facility. On December 31, 2001, the Company had no
balance on this facility.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no changes in market risk exposures that affect the quantitative
disclosures presented as of March 31, 2001 in the Company's 10-K.
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 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 Plaintiffs Brief was served and filed on August 15, 2001.
The Company and directors' brief was filed and served on September 14, 2001 and
the Plaintiffs' Reply Brief was served and filed on September 28, 2001.
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On October 26, 2001, the Plaintiffs advised the court of a recent Eight Circuit
Court of Appeals decision captioned "In re Green Tree Financial Corporation
Stock Litigation." The Eight Circuit Court of Appeals has not yet set a date for
oral argument on this case. The Company and directors intend to vigorously
defend against the appeal and preserve the judgment of dismissal of Plaintiffs'
claims.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
Exhibit 10.1 Employment Agreement, dated November 1, 2001, between the
Company and Eric Paulson.
Exhibit 10.2 Form of Termination Agreement for Executives of the
Company.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended December 31, 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: February 13, 2002 By /s/ Eric H. Paulson
----------------------------------
Eric H. Paulson
Chairman of the Board,
President and
Chief Executive Officer
Date: February 13, 2002 By /s/ James Gilbertson
----------------------------------
James Gilbertson
Chief Accounting Officer
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