NAVARRE CORP /MN/ - 10-K Annual Report

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UNITED STATES
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, 2000

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 13, 2000, the Company had 25,649,492 outstanding shares of Common
Stock, no par value.

As of June 13, 2000, the aggregate value of the Company's Common Stock held by
non-affiliates of the Company was $43,897,690 based on the last reported sale
price of $2.00 on the Nasdaq Stock Market on that date.

DOCUMENTS INCORPORATED BY REFERENCE

The Company's Proxy Statement for its 2000 Annual Meeting of Shareholders, a
copy of which will be filed within 120 days of March 31, 2000, is incorporated
by reference into Part III of this Form 10-K.

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, wholesalers
and rackjobbers. In addition, through its wholly owned subsidiary, eSplice,
Inc., a development stage company, Navarre is 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.

Navarre's operations were classified into three business segments for fiscal
2000, based upon products and services provided. They were home entertainment
products, NetRadio Corporation and eSplice, Inc. The home entertainment products
segment distributes two principal products, computer software products and music
products. The only major distributor to distribute 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 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 1998, 1999, and 2000 computer software accounted for
69.9%, 71.5% and 65.4% of net sales while sales of music products accounted for
30.0%, 28.4% and 34.3% of net sales.

NetRadio is a leading broadcaster of originally programmed audio entertainment
over the Internet through its Web site www.netradio.com. NetRadio uses audio
content to generate revenues from sales of audio merchandise through its online
store and from Internet advertising, including advertisements placed within
NetRadio audio broadcasts. On October 19, 1999, NetRadio closed on an initial
public offering. Navarre's ownership of NetRadio subsequently decreased to less
than fifty percent.

eSplice, Inc. is 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. With access to a large catalog of music and software content in
digital form, eSplice has the ability to offer secure download solutions to the
broadest possible base of e-commerce customers.

THE COMPANY'S MARKETS

HOME ENTERTAINMENT PRODUCTS

Personal Computer Software

The personal computer software distribution channel has traditionally been more
fragmented than the more mature distribution channels for prerecorded music and
video. During 1998, considerable consolidation occurred within the personal
consumer software distribution channel. This consolidation, which was a
migration to publishing/distribution entities with increased market power and
numerous sub or affiliate labels, slowed somewhat during 1999.

According to P.C. Data, retail software revenues increased 8.7% to $5.6 billion
in 1999 compared to an increase of 13% for 1998. The industry wide, retail price
of software dropped in 1999; however, the price fall-off was slower than in
previous years, while unit sales increased 10.6%. Three of the six categories
that comprise distributor sales for the software market experienced substantial
growth during the year. Those being, finance, which increased 23%, the business
category increased 10.4% and the game category grew 9.2%. The personal
productivity and education software categories experienced single-digit
increases, 2.1% and 1.2% respectively. Additionally, these categories' unit
growth was also low, 4.3% and 6.2% respectively. Reference experienced the
biggest drop-off, 12%. This is

due primarily to the fact that many reference products are now available on the
web. In its fiscal year ended March 31, 2000, the Company's net software sales
rose by 24% over the previous fiscal year.

During the 2000 fiscal year, the Company dramatically expanded the number of
e-commerce customers for whom it performs fulfillment and distribution services.
The Company's business-to-business Web site, which integrates on-line ordering
and deployment of text and visual product information, was revised to allow for
easier navigation and ordering. These services include sales of both prerecorded
music and personal computer software.

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 seventy-five (75%) of the
industry's total revenue is derived from production or distribution by the five
major companies through their record labels and their affiliated distribution
companies. They are (i) Time-Warner and Warner/Electra/Atlantic Corporation
(WEA); (ii) Sony Corporation and Sony Music Distribution; (iii) Thorn/EMI and
EMI Music Distribution; (iv) Bertelsmann A.G. and BMG Distribution; and (v) The
Seagram Company, Ltd./MCA, Inc., Universal Music and Video Distribution. In
addition to these major labels and their distribution companies, there are a
number of independent labels that produce recordings 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 labels and their distributors currently represent twenty-five (25%)
of the industry's total revenue.

According to the Recording Industry Association of America ("RIAA") at 1999
year-end, manufacturers saw a 6.3% increase in audio and video product shipped
to domestic markets (from $13.7 billion in 1998 to $14.6 billion units in 1999)
at suggested list price.

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 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. The Alternative Retail Marketing Division's focus in 1999 was its
strategic move into the distribution of DVD videos to its current and new
customer base.

NETRADIO

NetRadio is a leading broadcaster of originally programmed audio entertainment
over the Internet through its Web site, www.netradio.com. NetRadio uses content
to attract a large, diverse audience and retain them on its site for extended
periods of time. The site connects music enthusiasts with 15 interactive music
communities from Jazz and Rock, to New Age and Classical. With NetRadio.com's
On-Screen Player, listeners can see the title and artist of every song as it
plays and can simply click at any time to seamlessly purchase what they have
been hearing. Revenues are generated from sales of audio merchandise through its
online music store, and Internet advertising, which consists of banner
advertising placed on its Web site, barter advertising, special promotional
advertisements and advertisements placed within its audio broadcasts.

On May 1, 1996, the Company entered into a stock purchase agreement with
NetRadio Corporation, a Nevada corporation ("NetRadio (Nevada)"), which owned
and operated NetRadio Network, an Internet-only radio network

under which Navarre acquired fifty percent of the stock of NetRadio. In March
1997, the Company acquired the remainder of NetRadio and sold 15% of NetRadio to
ValueVision International, Inc.

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 using the equity
method.

In connection with the NetRadio initial public offering, in March 1999, Navarre
and NetRadio entered into a separation agreement under which Navarre agreed to
contribute to the capital of NetRadio $5.2 million 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 $5.2 million 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, is due on November 14, 2001.

eSPLICE, INC.

eSplice, Inc. is 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. With access to a large catalog of music and software content in
digital form, eSplice has the ability to offer secure download solutions to the
broadest possible base of e-commerce customers. eSplice is charged with
implementing a distribution model that incorporates Navarre's current physical
product line-up of PC software, music, and DVD as well as offering a secure
digital solution to its current customers and future affiliate partners. Through
eSplice, Navarre has the ability to offer its retail customers the ability to
seamlessly integrate digital content within their e-commerce sites, permitting
the combination of physical and digital goods within a single transaction.

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. 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; (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 that sell directly to retailers. In
the prerecorded music industry, the Company faces competition from the five
major label distribution companies, from regional distributors 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 spending has
proliferated. The Company expects that competition between suppliers to Web
retailers will continue to intensify. With respect to recorded music and
interactive CD-ROMs 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, 2000, sales to three customers, CompUSA, Sam's Clubs
and Best Buy Company, Inc., 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 customers. 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, 2000 the Company had 303 employees, including 101 in finance and
administration, 52 in sales and marketing and 150 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, as well as become a leading
content provider to the Internet. 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.

The Company has also aggressively moved to acquire digital distribution rights
from its independently distributed record labels and software publishers.
Through eSplice, Inc., Navarre's newest subsidiary, the Company is 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.

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.

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 Financial 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 CAN BE SEASONAL

Much of the Company's business is seasonal in nature with a higher percentage of
sales during the second half of the calendar year. 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 70% 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, and 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 DEPENDS UPON BANK BORROWINGS TO SUPPORT ITS BUSINESS

The Company has relied upon bank borrowings to finance its expansion, primarily
for inventory and accounts receivable financing with a former $45.0 million
credit facility in place. On May 21, 2000, the original loan agreement was
amended and the "Maximum Credit" was decreased to $25.0 million due to a
decrease in the Company's reliance on bank borrowing. In spite of the fact that
on 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 those current agreements will not be terminated.

NAVARRE DEPENDS 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
and a small inventory obsolescence reserve. The Company has historically
experienced an actual return rate range of 17% 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 industry
standards become established.

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, through other distributors or through
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.

NETRADIO CORPORATION

At closing of NetRadio's initial public offering it issued a Term Note under in
which 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 and is due monthly. The principal balance
of the Term Note, approximately $9.6 million, is due on

November 14, 2001. There can be no assurance that NetRadio will be able to pay
the principal balance of the Term Note when due.

NAVARRE'S WHOLLY-OWNED SUBSIDIARY eSPLICE

Navarre is currently supplying eSplice's working capital needs. If eSplice is
unable to obtain financing from another party, Navarre may be required to
continue to fund eSplice's working capital needs. In addition, there can be no
assurance that eSplice will ever achieve future profitability and there can be
no assurance that Navarre will be able to recoup its investment in eSplice.

THE CONVERSION OF OUR CLASS B CONVERTIBLE PREFERRED STOCK INTO COMMON STOCK
COULD DEPRESS OUR STOCK PRICE.

On August 20, 1999, Navarre 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
"Subscription Agreement"). The Class B Preferred Stock may 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 paid a
purchase price of $8.5 million, or $250 per share of Class B Preferred Stock,
and will pay an additional $4.0 million, or $250 per share of Class B Preferred
Stock, if Fletcher exercises the warrant in its entirety. The conversion ratio
of the Class B Preferred Stock is variable and is tied to the market price of
Navarre common stock during periods prior to conversion On May 17, 2000,
Fletcher converted 20,390 shares of Class B Preferred Stock to 2,115,057 shares
of common stock. Fletcher has the right to convert its remaining 13,610 shares
of Class B Preferred Stock, and any future shares of Class B Preferred Stock
that may be issued upon exercise of the three-year warrant or future tranches,
into common stock at prices based on the market price of Navarre stock. The sale
of a substantial amount of common stock upon the conversion of the preferred
stock may depress the stock price of Navarre common stock.

LEGAL PROCEEDINGS

We are subject to legal proceeding, including a class action that was filed in
December 1999 against the Company and its directors. See Item 3, Legal
Proceeding in this Form 10-K. Although Navarre intends to vigorously defend
itself in connection with this lawsuit, securities litigation is complicated and
expensive and there can be no assurance that the lawsuit will not have a
material adverse effect on the Company.

POSSIBLE VOLATILITY OF STOCK PRICE

The stock markets have experienced price and volume fluctuations, resulting 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 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 expires
in the year 2001 and provides for a monthly rental of $7,891 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 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 May 1, 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.

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 December 6, 1999, Daniel Chen, on behalf of himself and others similarly
situated, filed a complaint in the United States District Court, District of
Minnesota, against the Company and its directors alleging, among other things,
violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 of the Securities Exchange Commission, and violation of Section 20(a) of
the Securities Exchange Act of 1934. Plaintiff's complaint is essentially based
on the factual allegations that Navarre and/or its directors made material
misleading statements or omissions regarding the timing of an initial public
offering of shares in its subsidiary, NetRadio Corporation. The plaintiff seeks
unspecified damages and certification of a class to include all those similarly
situated and who acquired shares of Navarre Corporation during the time period
of November 25, 1998 through December 9, 1998. Navarre and the directors have
timely answered the Chen complaint, denied liability, asserted numerous
affirmative defenses including among others, failure to state a claim and
failure to comply with the pleading requirements of Federal Rule of Civil
Procedure 9 and the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Navarre and the directors intend to vigorously defend against
plaintiff's claims.

On January 26, 2000, Judy Poucher filed a complaint virtually identical to the
complaint filed by Mr. Chen seeking essentially the same relief as that
requested by Mr. Chen. Navarre and the directors timely answered the Poucher
complaint, denied liability, asserted numerous affirmative defenses including,
among others, failure to state a claim and failure to comply with the pleading
requirements of Rule 9 of the Federal Rules of Civil Procedure and the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). Navarre and the
directors intend to vigorously defend against Ms. Poucher's claims.

On February 22, 2000, Navarre and the directors served a motion to dismiss the
Chen and Poucher complaints for failure to state a claim which relief can be
granted. Thereafter, on February 25, 2000, the court held a hearing on Mr.
Chen's and Ms. Poucher's motion to appoint Lead Plaintiffs and Lead Counsel and
to consolidate and amend the complaints. The magistrate judge, by Order dated
March 1, 2000, denied, without prejudice, the motion to appoint Lead Plaintiffs
and Lead Counsel, granted the motion to consolidate the pleadings so that the
litigation is now entitled "In re: Navarre Securities Corp. Litigation," denied,
without prejudice, the motion to amend, and stayed Navarre and the directors'
motion to dismiss pending resolution of the amendment issues, the Lead
Plaintiffs issues, and the Lead Counsel issues. Plaintiffs re-filed their motion
to appoint Lead Plaintiffs and Lead Counsel, and the court granted in part and
denied in part the motion by Order dated April 18, 2000. Plaintiffs have now
moved to amend the complaint, which Navarre and the directors have opposed. No
decision has been issued on the motion at this time.

This litigation is in the very early stages of proceeding, and pursuant to
applicable procedural rules governing class action lawsuits and the Reform Act,
as well as the agreement between the parties, discovery in the matter is
currently stayed.

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, 2000.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is traded on the Nasdaq Stock Market under the symbol
NAVR. The following table below presents the range of high and low sale prices
for the Company's stock for each period indicated as reported by Nasdaq.

QUARTER HIGH LOW
------- -----------------------------
Fiscal 2000
First $18.63 $ 8.44
Second 12.00 5.56
Third 15.50 5.50
Fourth 6.94 3.53
Fiscal 1999
First $12.75 $ 2.38
Second 11.13 2.82
Third 27.00 2.19
Fourth 21.94 10.00

At June 1, 2000, the Company had approximately 23,500 shareholders. The Company
has not paid any dividends on its common stock and does not intend to pay any
dividends on its common stock in the foreseeable future.

RECENT SALE OF UNREGISTERED SECURITIES

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 "Subscription Agreement"). The Class B Preferred Stock may 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
paid a purchase price of $8.5 million, or $250 per share of Class B Preferred
Stock, and will pay an additional $4.0 million, or $250 per share of Class B
Preferred Stock, if Fletcher exercises the warrant in its entirety. On May 17,
2000, Fletcher International Limited converted 20,390 shares of Class B
Preferred Stock to 2,115,057 shares of common stock. The Company believes the
transactions with Fletcher were exempt pursuant to Section 4(2) of the
Securities Act of 1933.

ITEM 6. SELECTED FINANCIAL DATA

(In thousands, except per share data)

YEARS ENDED MARCH 31
2000 1999 1998 1997 1996
---------------------------------------------------------------------

STATEMENT OF OPERATIONS DATA:
Net sales $ 285,165 $ 210,386 $ 196,648 $ 200,697 $ 158,354

Gross profit 36,381 8,762 24,993 23,282 19,851

Income (loss) from operations (4,554) (25,572) 1,458 (3,703) 3,889

Interest expense (476) (2,543) (3,108) (2,110) (1,521)
Income taxes (benefit) -- -- (470) (527) 917
Equity loss in NetRadio (4,154) -- -- (719) --
Net income (loss) $ (7,785) $ (27,670) $ (974) $ (6,189) $ 1,319

Net income (loss) per basic
and diluted share(1) $ (.33) $ (4.41) $ (.14) $ (.92) $ .20
Diluted weighted average common
shares outstanding(2) 23,483 14,179 6,921 6,692 6,458

BALANCE SHEET DATA:
Total assets $ 109,711 $ 79,480 $ 83,689 $ 78,397 $ 60,108
Short-term borrowings -- 422 32,607 25,892 21,115
Long-term debt -- 114 181 315 --
Shareholders' equity 41,423 25,164 4,328 5,099 9,648

(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.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the percentage of net
sales represented by certain items included in the Company's "Consolidated
Statements of Operations."

YEARS ENDED MARCH 31
2000 1999 1998
----------------------------------------
Net sales:
Computer software 65.4% 71.5% 69.9%
Music 34.3 28.4 30.0
----------------------------------------
Home entertainment products 99.7 99.9 99.9
NetRadio .3 .1 .1
----------------------------------------
Total net sales 100.0 100.0 100.0
Cost of sales 87.2 95.8 87.3
----------------------------------------
Gross profit 12.8 4.2 12.7
Selling and marketing 3.7 4.1 2.9
Distribution and warehousing 2.2 2.2 1.5
General and administrative 7.9 9.0 6.3
Depreciation and amortization 0.6 0.9 1.2
----------------------------------------
Income (loss) from operations (1.6) (12.0) 0.7
Interest expense 0.2 1.2 1.6
----------------------------------------
Net (loss) (2.7) (13.2) (0.5)
========================================

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. See
"Business - Forward Looking Statements" in Item 1 of this Form 10-K.

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.

Selling and marketing expenses of home entertainment products increased in
fiscal 2000 to $8.9 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 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 for fiscal 1999.

The consolidated net loss for the Company was $7.8 million for fiscal 2000
compared to a loss of $27.7 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 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 statement 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. 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.

eSplice's net loss for fiscal 2000 was $983,000.

FISCAL 1999 COMPARED TO FISCAL 1998

HOME ENTERTAINMENT PRODUCTS

Net sales of home entertainment products increased 6.9% from $196.4 million in
fiscal 1998 to $210.0 million in fiscal 1999. Computer software sales increased
as a percent of total Company sales from 69.9% of net sales in fiscal 1998 to
71.5% of net sales in fiscal 1999. Music sales, which yield higher margins,
decreased as a percent of total Company sales from 30.0% of net sales for fiscal
1998 to 28.4% of net sales in fiscal 1999. Computer software sales increased by
9.4% from $137.5 million in fiscal 1998 to $150.4 million in fiscal 1999. The
increase was primarily due to a higher level of sales to both existing customers
as well as to new customers. Music sales increased 1.2% from $58.9 million in
fiscal 1998 to $59.6 million in fiscal 1999. The increase was primarily due to
the addition of several high quality labels. Price increases did not materially
contribute to the increase in net sales.

Gross profit of home entertainment products decreased $16.3 million or 65.7%
from $24.8 million in fiscal 1998 to $8.5 million in fiscal 1999. As a percent
of net sales, gross profit decreased from 12.6% in fiscal 1998 to 4.1% in fiscal
1999. The gross profit from computer software sales was $10.0 million or 6.6% of
computer software net sales in fiscal 1999 compared with $16.4 million or 11.9%
of computer software net sales in fiscal 1998. The decrease 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. The gross margin from music sales was $(1.5) million or
(2.5%) of music net sales in fiscal 1999 compared with $8.4 million or 14.3% of
music net sales in fiscal 1998. The decrease in gross margin in music sales was
primarily due to the write-off of accounts payable debit balances of several
financially distressed vendors.

Selling and marketing expenses of home entertainment products increased from
$5.5 million in fiscal 1998 to $7.6 million in fiscal 1999 and increased as a
percent of sales from 2.8% in fiscal 1998 to 3.6% in fiscal 1999. The increase
resulted primarily from higher freight costs.

Distribution and warehousing expenses increased from $2.9 million in 1998 to
$4.7 million in 1999 and increased as a percent of sales from 1.5% in 1998 to
2.2% in 1999. This increase was primarily due to the expenses associated with
the improved returns processing system.

General and administrative expenses of home entertainment products increased
from $10.7 million in fiscal 1998 to $14.7 million in fiscal 1999. As a percent
of sales, they increased from 5.5% in fiscal 1998 to 7.0% in fiscal 1999. The
higher expenses were primarily due to the growth of the Company and legal
expenses associated with the financially distressed vendors.

Depreciation and amortization decreased from $2.4 million in fiscal 1998 to $2.0
million in fiscal 1999. In November 1997, the Company terminated its
distribution agreement with Velvel and wrote off its remaining investment.

The net operating loss for the home entertainment products was $20.1 million for
fiscal 1999 compared to a profit of $3.6 million for fiscal 1998.

Interest expense decreased from $3.1 million for fiscal 1998 to $2.5 million for
fiscal 1999. This decrease resulted from substantially lower borrowings due to
the Company' issuance of its Class A Convertible Preferred Stock in a private
placement and those purchasers exercising the five-year warrants attached to
those shares.

The consolidated net loss for the Company was $27.7 million for fiscal 1999
compared to a loss of $974,000 for fiscal 1998. The loss was attributable in
large part to a one-time, non-cash adjustment to inventory and the write-offs of
accounts payable debit balances of several financially distressed music and
software vendors.

The Company's effective tax rate decreased to zero for fiscal 1999 as a result
of the operating loss.

The Company's basic and diluted loss per share for the twelve months ended March
31, 1999 included a $34,229,000 charge associated with the non-detachable
conversions feature included in the preferred stock and the accompanying
warrants issued May 1, 1998.

NETRADIO CORPORATION

NetRadio's selling and marketing expenses increased from $221,000 in fiscal 1998
to $1.1 million in fiscal 1999. The increase in sales and marketing expenses was
primarily due to the growth in NetRadio's sales force and marketing staff and
the usage of $150,000 in advertising contributed by ValueVision.

NetRadio's general and administrative expenses increased from $1.7 million in
fiscal 1998 to $4.3 million in fiscal 1999. The increase in general and
administrative expense reflects the costs associated with adding key personnel
and building infrastructure for NetRadio and $880,000 in compensation expense as
a result of the issuance of stock options to employees and directors with
exercise prices below the estimated fair market value of their common stock on
the date of grant.

The net operating loss for NetRadio was $5.5 million for fiscal 1999 compared to
a net operating loss of $2.1 million for fiscal 1998.

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. The level of borrowings has historically fluctuated significantly
during the year. At March 31, 2000, the Company had net accounts receivable of
$56.5 million, inventory of $22.4 million, accounts payable of $66.7 million and
no bank debt.

For the fiscal year ended March 31, 2000, net sales were $285.2 million, an
increase of $74.8 million over fiscal year 1999 net sales of $210.4 million. The
Company had a net loss of $7.8 million during this period. The Company generated
net cash of $10.0 million from operations. During the period, accounts
receivable increased by $6.2 million. This change was offset by a decrease in
inventories of $6.8 million. Accounts payable increased by $10.6 million.
Investing activities used $2.8 million of cash, including $2.7 million for the
purchase of furniture, equipment and leasehold improvements. The Company
generated net cash of $8.5 million in financing activities during the period
primarily through proceeds from a private placement of $8.0 million.

The Company has a revolving line of credit with Congress Financial Corporation.
The credit facility had a former maximum borrowing limit of $45 million. On May
21, 2000, the original loan agreement was amended and the maximum borrowing
limit was decreased to $25.0 million due to a decrease in the Company's reliance
on bank borrowing. The loan is secured by substantially all the Company's assets
and the available amount fluctuates based on an asset-borrowing base. On March
31, 2000, the Company had no debt.

The Company anticipates it will utilize its credit facility during the next
twelve months to meet seasonal working capital needs. The Company believes that
the funds available under its current credit facility together with cash flow
from operations will be adequate to fund its anticipated working capital
requirements over the next twelve months.

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 may 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 paid a purchase price of $8.5
million, or $250 per share of Class B Preferred Stock, and will pay an
additional $4.0 million, or $250 per share of Class B Preferred Stock, if
Fletcher exercises the warrant in its entirety. On May 17, 2000, Fletcher
converted 20,390 shares of their of Class B Preferred Stock to 2,115,057 shares
of common stock.

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 financial statements are included in Item 14.

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 7, 2000 (the "2000 Proxy
Statement"), a definitive copy of which will be filed with the Commission within
120 days of the close of the past fiscal year, 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 2000 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 2000 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 Transaction" in the Company's 2000 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 are set forth at the end of this document.

Report of Independent Auditors
Consolidated Balance Sheets as of March 31, 2000 and 1999
Consolidated Statements of Operations for each of the three
years in the period ended March 31, 2000
Consolidated Statement of Shareholders' Equity as of March 31,
2000
Consolidated Statements of Cash Flows for each of the three
years in the period ended March 31, 2000
Notes to Consolidated Financial Statements

(2) Financial Statement Schedule for each of the three years in
the period ended March 31, 2000

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.

(3) Exhibits
* Indicates compensatory agreement.
3.1 Articles of Incorporation.
3.2 Bylaws, incorporated herein by reference from Exhibit
3.2 to Form S-1, Registered Number 333-68392.
3.3 Certificate of Rights and Preferences of Series B
Convertible Preferred Stock, is incorporated
herein by reference from Exhibit 2 to Form 8-K,
dated August 20, 1999.
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 Form S-8, Registered Number
333-87143.
10.4 Form of Individual Stock Option Agreement under 1992
Stock Option Plan, from Exhibit 10.4 to Form
S-1.
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 Loan and Security Agreement between Congress
Financial Corporation and Navarre Corporation,
dated June 12, 1997, incorporated herein by
reference from Exhibit 10.13 to Form 10K for
year ended March 31, 1997.
10.8.1 Amendment No. 1 to Loan Documents, dated September
19, 1997, incorporated herein by reference from
Exhibit 10.11.1 to Form 10-K for year ended
March 31, 1998.
10.8.2 Amendment No. 2 to Loan Documents, dated October 29,
1997, incorporated herein by reference from
Exhibit 10.11.2 to Form 10-K for year ended
March 31, 1998.
10.8.3 Amendment No. 3 to Loan Documents, dated May 1, 1998,
incorporated herein by reference from Exhibit
10.11.3 to Form 10-K for year ended March 31,
1998.
10.8.4 Amendment No. 4 to Loan Documents, dated March 1,
1999.
10.8.5 Amendment No. 5 to Loan Documents, dated July 31,
1999.
10.8.6 Amendment No. 6 to Loan Documents, dated May 21,
2000.
10.9 Multiple Advance Term Note, dated March 1, 1999 of
NetRadio Corporation to Navarre, incorporated
herein by reference from Form S-1 Registration
Statement No. 333-73261 for NetRadio
Corporation.
10.10 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.
10.11 Term Note, dated October 14, 1999, between Navarre
and NetRadio Corporation.
10.12 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.
10.13 Subscription Agreement between Navarre Corporation
and Fletcher International Limited, dated July
31, 1999, incorporated herein by reference from
Exhibit 1 to Form 8-K, dated August 20, 1999.
10.14 Form of Warrant dated August 20, 1999 issued to
Fletcher International Limited incorporated
herein by reference from Exhibit 3 to Form 8-K,
dated August 20, 1999.
21 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.

(b) Reports on Form 8-K

There were no reports on Form 8-K filed during the quarter
ended March 31, 2000.

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 26, 2000 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 resubstituion,
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 26, 2000
- --------------------------- and Chief Executive Officer
Eric H. Paulson

/s/ Charles E. Cheney Vice-Chairman, Treasurer and June 26, 2000
- --------------------------- Secretary Executive Vice President
Charles E. Cheney and Chief Financial Officer

/s/ Dickinson G. Wiltz Director June 26, 2000
- ---------------------------
Dickinson G. Wiltz

/s/ James G. Sippl Director June 26, 2000
- ---------------------------
James G. Sippl

/s/ Michael L. Snow Director June 26, 2000
- ---------------------------
Michael L. Snow

/s/ Alfred Teo Director June 26, 2000
- ---------------------------
Alfred Teo

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, 2000 and 1999, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended March 31, 2000. Our audit also included the
financial statement schedule for the year ended March 31, 2000 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 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, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 2000, 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
April 28, 2000

NAVARRE CORPORATION

CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

MARCH 31
2000 1999
-------------------------------

ASSETS
Current assets:
Cash $ 15,739 $ 92
Accounts receivable, less allowance for doubtful accounts
and sales returns of $4,349 in 2000 and $3,810 in 1999 56,483 43,465
Inventories 22,421 29,223
Notes receivable, related parties 375 221
Refundable income taxes -- 613
Prepaid expenses and other current assets 216 908
-------------------------------
Total current assets 95,234 74,522
NetRadio note receivable 9,597 --
Investments 1,941 --

Property and equipment, net of accumulated depreciation of $4,473
in 2000 and $5,251 in 1999 2,469 3,361

Other assets:
Goodwill 391 853
Other assets 79 744
-------------------------------
Total assets $ 109,711 $ 79,480
===============================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ -- $ 329
Current portion of long-term debt -- 93
Accounts payable 66,718 51,831
Accrued expenses 1,570 1,949
-------------------------------
Total current liabilities 68,288 54,202

Long-term debt, less current maturities -- 114

Shareholders' equity
Preferred stock, no par value:
Authorized shares - 10,000,000
Issued and outstanding Class B convertible preferred shares - 8,010 --
34,000 in 2000 and none in 1999
Common stock, no par value:
Authorized shares - 100,000,000
Issued and outstanding shares -23,534,435 in 2000 and 23,344,046 in 1999 91,501 91,415
Retained deficit (58,051) (66,119)
Unearned compensation (37) (132)
-------------------------------
Total shareholders' equity 41,423 25,164
-------------------------------
Total liabilities and shareholders' equity $ 109,711 $ 79,480
===============================

SEE ACCOMPANYING NOTES

NAVARRE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share amounts)

YEARS ENDED MARCH 31
2000 1999 1998
------------------------------------------------

Net sales $ 285,165 $ 210,386 $ 196,648
Cost of sales 248,784 201,624 171,655
------------------------------------------------

Gross profit 36,381 8,762 24,993

Operating expenses:
Selling and marketing 10,599 8,675 5,716
Distribution and warehousing 6,197 4,712 2,936
General and administrative 22,517 18,994 12,445
Depreciation and amortization 1,622 1,953 2,438
------------------------------------------------
40,935 34,334 23,535
------------------------------------------------

(Loss) income from operations (4,554) (25,572) 1,458

Other income (expense):
Interest expense (476) (2,543) (3,108)
Other income (expense) 1,399 445 (10)
------------------------------------------------
Loss before income taxes and equity
in loss of NetRadio Corporation (3,631) (27,670) (1,660)

Minority interest in subsidiary -- -- (216)
Equity in loss of NetRadio Corporation (4,154) -- --
Income tax benefit -- -- (470)
------------------------------------------------

Net loss attributable to common shareholders $ (7,785) $ (62,561) $ (974)
================================================

Basic and diluted loss per share $ (.33) $ (4.41) $ (.14)

Basic and diluted weighted average common shares outstanding 23,483 14,179 6,921

SEE ACCOMPANYING NOTES.

NAVARRE CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share amounts)

PREFERRED COMMON
SHARES PREFERRED SHARES COMMON RETAINED UNEARNED
ISSUED STOCK ISSUED STOCK (DEFICIT) COMPENSATION
--------------------------------------------------------------------------------

Balance at March 31, 1997 -- $ -- 6,902,248 $ 8,005 $ (2,584) $ (322)
Shares issued upon exercise of stock options -- -- 106,922 108 -- --
Net loss -- -- -- -- (974) --
Amortization of unearned compensation -- -- -- -- -- 95
--------------------------------------------------------------------------------
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)
================================================================================

SEE ACCOMPANYING NOTES.

NAVARRE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

YEARS ENDED MARCH 31
2000 1999 1998
----------------------------------------------

OPERATING ACTIVITIES
Net loss $ (7,785) $ (27,670) $ (974)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 1,381 1,635 1,090
Amortization and writedown of intangible assets 241 321 1,348
Amortization of unearned compensation 95 95 95
Equity in loss of NetRadio Corporation 4,154 -- --
Minority interest in subsidiary -- -- (216)
NetRadio stock valuation adjustment -- 880 --
Vendor stock compensation 495 -- --
Changes in operating assets and liabilities:
Accounts receivable (6,226) 8,918 (5,220)
Inventories 6,802 (6,035) (6,379)
Prepaid expenses and assets (436) (359) 1,942
Refundable income taxes 613 1,652 (2,265)
Accounts payable and accrued expenses 10,647 7,178 (166)
Income tax payable -- -- (135)
----------------------------------------------
Net cash provided by (used in) operating activities 9,981 (13,385) (10,880)

INVESTING ACTIVITIES
Notes receivable, related parties (154) 185 (192)
Purchases of equipment and leasehold improvements (2,672) (2,039) (748)
----------------------------------------------
Net cash used in investing activities (2,826) (1,854) (940)

FINANCING ACTIVITIES
Payments on long-term debt -- (135) (614)
Proceeds from note payable, bank 104,448 197,230 176,925
Payments on note payable, bank (104,777) (229,346) (165,231)
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 799 1,216 108
----------------------------------------------
Net cash provided by financing activities 8,492 15,308 11,188
----------------------------------------------

Net increase (decrease) in cash 15,647 69 (632)
Cash at beginning of year 92 23 655
----------------------------------------------
Cash at end of year $ 15,739 $ 92 $ 23
==============================================

SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
$ -- $ -- $ 4,500

SEE ACCOMPANYING NOTES.

1. ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

The Company distributes home entertainment products including prerecorded tapes,
compact discs, digital versatile disks (DVDs), 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 is 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.

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 is an unconsolidated subsidiary in
which the Company has a 49.98% ownership. At March 31, 2000, NetRadio had total
assets and shareholders' equity of $24,754 and $15,686, 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.

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.

INTERNAL-USE SOFTWARE

The Company follows the Accounting Standards Executive Committee of the AICPA
Statement of Position (SOP) 98-1, Accounting for Costs of Computer Software
Developed or Obtained for Internal Use. The SOP requires the capitalization of
certain costs incurred to develop or obtain internal-use software. 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.

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.

1. ACCOUNTING POLICIES (CONTINUED)

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, 2000 and 1999
was $1,467,000 and $1,005,000, 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 period ending March 31, 2000 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
2000 1999 1998
----------------------------------------

Numerator:
Net loss $ (7,785) $ (27,670) $ (974)
Less preferred non-detachable conversion
feature and warrant valuation -- (34,229) --
Less preferred dividend requirements -- (662) --
-----------------------------------------
Adjusted net loss applicable to common stock $ (7,785) $ (62,561) $ (974)
=========================================

Denominator for basic and diluted earnings per
share - weighted average shares 23,483 14,179 6,921
=========================================

Basic and diluted earnings per share $ (.33) $ (4.41) $ (.14)
=========================================

RECLASSIFICATION

Certain balances have been reclassified to conform to the March 31, 2000
presentation.

2. NETRADIO SPIN-OFF

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, is due on November 14, 2001.

3. VELVEL DISTRIBUTION RIGHTS

As of November 4, 1997, Velvel and the Company agreed to terminate the Company's
distribution rights in exchange for the cancellation of the $4.5 million Demand
Promissory Note from the Company to Velvel. The net effect to amortization
expense from the cancellation of the Velvel agreement was $167,000. Total
amortization recorded for the year ended March 31, 1998 was $846,000. During May
1999, Navarre's 15% interest in Velvel was sold to Koch Entertainment LLC for
$47,500.

4. NOTES RECEIVABLE, RELATED PARTIES

The related party notes receivable are due on demand and bear interest at rates
between 0% and 9.25% per year and are unsecured.

5. BANK FINANCING AND DEBT

On June 12, 1997, the Company entered into a revolving line of credit with
Congress Financial Corporation. During fiscal 2000, the credit facility had a
maximum borrowing limit of $45 million, fluctuated based on an asset-borrowing
base, and was secured by substantially all the Company's assets. On May 21,
2000, the loan agreement was amended and the "Maximum Credit" was decreased to
$25.0 million due to a decrease in the Company's reliance on bank borrowings.
The agreement requires the Company to deliver various reports to Congress as
well as maintain accurate inventory and fixed asset records. The covenant also
gives Congress access to the Company's books and records for auditing the
collateral. The revolving line of credit with Congress now expires June 12,
2001. As of March 31, 2000, the Company had no debt.

Interest is at prime plus .5% (9% at March 31, 2000) and is payable monthly. The
weighted average interest rate was 9.5% for the years ended March 31, 2000 and
1999.

BANK FINANCING AND DEBT (CONTINUED)

Long-term debt consists of the following (in thousands):

MARCH 31
2000 1999
------------------

Capital equipment leases (monthly payments of $1 to $6 in fiscal 1999)
Secured by equipment $ -- $ 207
------------------

Less current portion $ -- $ 207
Long-term debt $ -- $ 93
------------------
$ -- $ 114
==================

Interest paid was $476,000, $2,543,000, and $3,238,000 for the years ended March
31, 2000, 1999, and 1998, respectively.

6. SHAREHOLDERS' EQUITY

The Company had issued warrants to the lead underwriter, of the December 16,
1993 public offering, to purchase 180,000 common shares, exercisable for five
years from the date of the public offering at $3.90 per share. All warrants were
exercised for $702,000 in fiscal 1999.

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 1999. 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, 2000. 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.

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") 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"). The Class B Preferred Stock may 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
paid a purchase price of $8.5 million, or $250 per share of Class B Preferred
Stock, and will pay an additional $4.0 million, or $250 per share of Class B
Preferred Stock, if Fletcher exercises the warrant in its entirety. On May 17,
2000, Fletcher International Limited converted 20,390 shares of Class B
Preferred Stock to 2,115,057 shares of common stock.

7. 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, 1997 811,956 1,130,566 $ 2.85
Granted (357,350) 357,350 2.88
Canceled 91,820 (91,820) 5.05
Exercised -- (106,922) 1.01
-------------------------------------------------
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
=================================================

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 2000, 1999, and 1998 was
$2.82, $2.18, and $1.69 per share, respectively.

The exercise price of options outstanding at March 31, 2000 ranged from $2.00 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 2000 CONTRACTUAL LIFE EXERCISABLE PRICE PER SHARE
-------------------------------------------------------------------------------------------

$ 2.00 - $ 2.69 370,785 2.28 years 209,635 $ 2.33
$ 2.70 - $ 2.94 328,200 2.80 years 75,000 2.88
$ 2.95 - $ 6.25 371,183 2.77 years 67,105 4.17
$ 6.26 - $15.38 381,000 4.97 years 7,200 13.51
-------------------------------------------------------------------------------------------
Total 1,451,168 3.79 years 358,940 $ 3.02
===================================================================

The number of options exercisable at March 31, 2000, 1999, and 1998 was 358,940,
246,158, and 648,548, respectively, at a weighted average exercise price of
$3.02, $2.92, and $2.84 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 5.8%, 5.2%, and 4.9%, for 2000, 1999,
and 1998, respectively; volatility factor of the expected market price of the
Company's common stock of 30%, 82%, and 82% and a weighted-average expected life
of the option of five years.

7. STOCK OPTIONS AND GRANTS (CONTINUED)

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:

YEARS ENDED MARCH 31
2000 1999 1998
--------------------------------

Pro forma net loss $(8,285) $(62,736) $(1,187)
Pro forma basic and diluted loss per share $ (.36) $ (4.42) $ (.17)

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 $95,000 for the years ended March 31, 2000,
1999, and 1998. The remaining unamortized unearned compensation is expected to
be charged to operations over the five-year vesting period.

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
a stock option to a vendor.

8. INCOME TAXES

The components of income tax benefit are as follows (in thousands):

YEARS ENDED MARCH 31
2000 1999 1998
-----------------------------------
Current:
Federal $ -- $ -- $(2,256)
State -- -- (166)
-----------------------------------
-- -- (2,422)
Deferred -- -- 1,952
-----------------------------------
Income tax expense (benefit) $ -- $ -- $ (470)
===================================

8. INCOME TAXES (CONTINUED)

Deferred income taxes reflect the available tax carry forwards 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, 2000 and 1999 (in thousands):

MARCH 31
2000 1999
----------------------------

Debit balance $ 1,396 $ 1,867
Net operating loss carryfoward 8,108 6,285
Allowance for uncollectible accounts 1,005 836
Allowance for sales returns 735 686
Book/tax depreciation 30 44
Reserve for sales discounts 231 176
Accrued vacations 80 79
Inventory - uniform capitalization 114 150
Inventory - obsolescence -- 257
Price protection reserve 64 159
Compensation expense 198 --
----------------------------
11,961 10,539
Valuation allowance (11,961) (10,539)
----------------------------
Total deferred tax assets $ -- $ --
============================

The net operating loss carryfoward of $222,000 created as a result of the change
in the Company's year-end in 1994 was utilized in fiscal year 2000. The
remaining net operating loss of $20,270,000 expires in the year 2019.

A reconciliation of income tax benefit to the statutory federal rate is as
follows (in thousands):

YEARS ENDED MARCH 31
2000 1999 1998
-----------------------------------------------

Tax expense (benefit) at statutory rate $ (2,662) $ (9,408) $ (564)
State income taxes (benefit), net of federal benefit (215) (1,220) (94)
Valuation allowance 1,422 10,564 (147)
Equity investment 1,412 -- --
Goodwill amortization 9 28 43
Other 34 36 292
-----------------------------------------------
$ 0 $ 0 $ (470)
===============================================
Effective tax rate 0% 0% (28)%
===============================================

Cash paid (received) for income taxes was $0, $(1,623,000), and $0 for the years
ended March 31, 2000, 1999 and 1998, respectively.

9. 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 expires
in the year 2001 and provides for a monthly rental of $7,891 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 May 1, 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 $1,613,000, $1,368,000, and $1,069,000 for the years
ended March 31, 2000, 1999, and 1998, respectively.

The following is a schedule of future minimum rental payments required under
noncancelable operating leases as of March 31, 2000 (in thousands):

2001 $ 1,154
2002 1,094
2003 846
2004 528
2005 489
Thereafter 4,298
=================
$ 8,409
=================

10. MAJOR CUSTOMERS

The Company has three major customers who accounted for 52%, 59%, and 52% of
sales in fiscal 2000, 1999, and 1998, respectively.

11. BUSINESS SEGMENTS

The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION, during the quarter ended March 31, 1999. SFAS 131
establishes standards for reporting information about operating segments in
annual financial statements of public companies and requires selected
information about operating segments to be reported in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services and geographic areas. The Company has defined its
operating segments based upon the financial information available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.

Navarre's operations were classified into three business segments for fiscal
2000, based upon products and services provided: home entertainment products,
NetRadio 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 is 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.

Financial information by reportable business segment is included in the
following summary: In thousands

YEARS ENDED MARCH 31
2000 1999 1998
----------------------------------------------

NET SALES FROM EXTERNAL CUSTOMERS
Home Entertainment Products $ 284,428 $ 210,000 $ 196,444
NetRadio 737 386 204
eSplice -- -- --
----------------------------------------------
CONSOLIDATED $ 285,165 $ 210,386 $ 196,648

OPERATING INCOME (LOSS)
Home Entertainment Products $ 4,257 $ (20,082) $ 3,607
NetRadio (7,833) (5,490) (2,149)
eSplice (978) -- --
----------------------------------------------
CONSOLIDATED $ (4,554) $ (25,572) $ 1,458

Net Interest Expense (476) (2,543) (3,108)
Other Income (Expense) 1,399 445 (10)
----------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES $ (3,631) $ (27,670) $ (1,660)

IDENTIFIABLE ASSETS
Home Entertainment Products $ 109,705 $ 76,363 $ 82,287
NetRadio -- 3,117 1,402
eSplice 6 -- --
----------------------------------------------
CONSOLIDATED $ 109,711 $ 79,480 $ 83,689

DEPRECIATION AND AMORTIZATION
Home Entertainment Products $ 913 $ 1,573 $ 2,023
NetRadio 663 380 415
eSplice 46 -- --
----------------------------------------------
CONSOLIDATED $ 1,622 $ 1,953 $ 2,438

CAPITAL EXPENDITURES
Home Entertainment Products $ 996 $ 1,020 $ 732
NetRadio 1,629 1,019 16
eSplice 47 -- --
----------------------------------------------
CONSOLIDATED $ 2,672 $ 2,039 $ 748

YEARS ENDED MARCH 31
2000 1999 1998
----------------------------------------------

SALES BY CLASSES OF SIMILAR PRODUCTS OR SERVICES
Computer Software $ 186,498 $ 150,338 $ 137,479
Music 97,930 59,662 58,965
NetRadio 737 386 204
eSplice -- -- --
----------------------------------------------
CONSOLIDATED $ 285,165 $ 210,386 $ 196,648

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, 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 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
===============================================================

Year ended March 31, 1998:
Deducted from asset accounts:
Inventory obsolescence reserve $ 0 $ 0 $ 0 $ 0
Allowance for doubtful accounts 2,388,000 (22,000) 1,254,000(1) 1,112,000
Allowance for sales returns 1,197,000 103,000 1,300,000
---------------------------------------------------------------
Totals $ 3,585,000 $ 81,000 $ 1,254,000(1) $ 2,412,000
===============================================================

(1) Uncollectible accounts written off, net of recoveries.