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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 2002
Commission File Number 0-22982
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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)
(763) 535-8333
(Registrant's telephone number, including area code)
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. ( )
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at June 18, 2002 was $24,930,587 based on the closing sale price on
such date of $1.37 per share.
The Registrant had 21,616,187 shares of Common Stock, no par value, outstanding
at June 18, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's Annual Meeting of
Shareowners to be held September 5, 2002 are incorporated by reference into Part
III of this Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS
GENERAL
Navarre Corporation, a Minnesota corporation formed in 1983, is a premier
provider of distribution, fulfillment and marketing services for a broad range
of home entertainment and multimedia products, including PC software, audio and
video titles, and interactive games. We maintain and leverage strong
relationships on both ends of the content distribution chain, including
relationships with leading national retailers, wholesalers and rackjobbers, as
well as major publishers and music labels.
We are recognized as an industry leader in the distribution of consumer PC
software, interactive video games and independent music labels and artists. Our
product line contains a broad assortment of compact discs, cassettes, personal
computer software, interactive CD-ROM software and DVD/VHS videos sold to over
500 customers through over 12,000 locations throughout the United States. Our
broad base of customers includes (i) wholesale clubs, (ii) mass merchandisers,
(iii) computer specialty stores, (iv) music specialty stores, (v) book stores,
(vi) office superstores, and (vii) electronic superstores.
Effective April 1, 2001, we realigned our operations into Navarre Distribution
Services (NDS) and Navarre Entertainment Media (NEM). Our reporting of prior
years' results has been conformed to this presentation. In January 2002, we
announced the expansion of our distribution services to the market for
console-based video games.
Through NDS, we distribute non-proprietary entertainment products including PC
software, major label music and DVD video. We focus on providing retailers and
publishers a wide array of high-quality services, including vendor-managed
inventory, full EDI protocol, packaging, manufacturing, fulfillment, and
marketing, for the broad, efficient distribution of non-proprietary home
entertainment products. We will pursue substantial growth of NDS in several
ways: (i) by extending the number of software categories we serve, such as the
productivity category, where we recently signed an agreement with Roxio, Inc., a
leading manufacturer of digital media software; (ii) by expanding the presence
in distribution of home entertainment content formats, such as DVD and
interactive games; and (iii) by leveraging our unique mix of capabilities to
deepen relationships with existing retailers and publisher clients, such as Best
Buy Co., Inc., and Symantec Corporation, a publisher of network security
software and appliance solutions.
Through NEM, we distribute proprietary prerecorded music of primarily
independent artists and labels on CD and DVD audio, and video in DVD and VHS
format to national and retail music retailers, rackjobbers, and one-stops
throughout the United States and Canada. We offer independent content creators
such as labels, studios and artists, the resources and exposure to generate high
visibility with valuable distribution in a broad array of major outlets
nationwide. We seek to significantly enhance our competitive position in
independent music label distribution in several ways (i) with increased
ownership of content, (ii) exclusive licenses and outright acquisition, (iii)
possible acquisition of competing independent distribution companies, and (iv)
continuing to seek new proprietary distribution opportunities.
During fiscal years 2002, 2001, and 2000, sales for NDS accounted for 85.2%,
85.6% and 79.1% of net sales, while sales of NEM accounted for 14.8%, 14.4%, and
20.9% of net sales, respectively.
Our corporate headquarters are located at 7400 49th Avenue North, in New Hope,
Minnesota, 55428 and our web-site address is www.navarre.com.
OUR MARKETS
HOME ENTERTAINMENT PRODUCTS
NAVARRE DISTRIBUTION SERVICE - PC SOFTWARE, VIDEO GAMES, MAJOR LABEL MUSIC
AND DVD
PC Software
According to NPD Intelect (formerly P.C. Data), the PC software industry
achieved $5.5 billion in sales in 2001. Categories that experienced an increase
over 2000 were business, finance and entertainment. During the past fiscal year,
we added several publishers to our distribution roster. Network Associates
(McAfee), a provider of network security and available technology products,
appointed us as a distributor in August of 2001. In May of 2002, Roxio, Inc., a
leading manufacturer of digital media software, also appointed us as a
distributor. We intend to continue to add publishers that will increase our
market share across all categories of the PC software industry.
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Video Games
In January 2002, we announced that we will expand into the distribution of
console-based video games. In 2001, worldwide sales in the interactive
entertainment industry surpassed $20 billion for the first time. This growth was
a result of new console introductions such as Sony's PlayStation 2(TM), which
was widely available throughout 2001, Nintendo's Game Boy Advance(TM) and
GameCube(TM) which were introduced in June 2001 and November 2001, respectively,
and Microsoft's Xbox(TM), which was introduced in November 2001. According to
industry researcher UBS Warburg, the industry is estimated to reach $31 billion
in worldwide sales by 2005.
Major Label Music
According to the Recording Industry Association of American ("RIAA"), audio and
music video product shipped to domestic markets was $13.7 billion in calendar
2001. Industry sources indicate that approximately 84.5% or approximately $11.6
billion of the industry's total revenue is derived from major recording labels
controlled by five major companies. Those companies are AOL Time-Warner, Sony
Corporation, EMI Music Distribution, BMG Distribution and Vivendi Universal.
Generally, these companies control distribution of their products through major
music retail chains and other channels. We distribute major label music to
wholesale clubs and mass merchant retailers through our NDS division.
Major Studio DVD
A major studio resource reported that DVD software sales in 2001 were $4.6
billion versus $3.3 billion in 2000, and forecasts the DVD market to achieve
$7.9 billion in 2002. During fiscal year 2002, we expanded both our selection
and customers, including an exclusive agreement with CompUSA to fulfill the
distribution of all DVD to its retail locations.
NAVARRE ENTERTAINMENT MEDIA - PROPRIETARY INDEPENDENT MUSIC AND DVD/VHS
In addition to the major labels and their distribution companies, there are a
number of independent music and video companies or labels and artists that are
distributed by independent distribution companies that enter into exclusive
distribution agreements with these labels on either a regional or national
basis.
The independent segment of the music industry currently represents $2.1 billion
or approximately 15.5% of total music product. We are one of a limited number of
large independent distribution companies that represent independent labels
exclusively on a regional or national basis. These companies provide products
and services to the nation's leading music specialty stores, wholesalers and
rackjobbers. They provide unique services to their labels and artists including
financing, manufacturing, marketing, promotion and access to North American
retailers.
We intend to increase our market share of the $2.1 billion independent
distribution business by continuing to select higher quality music labels and
provide greater service to our customers, in addition to providing content
ownership and licensing opportunities. We may also acquire other distribution
companies that complement our business.
E-COMMERCE
During fiscal year 2002, we continued to expand the number of electronic
commerce ("e-commerce") customers for whom we perform fulfillment and
distribution services. These services include sales of personal computer
software, prerecorded music and DVD/VHS videos and video games. Our
business-to-business Web site www.navarre.com integrates on-line ordering and
deployment of text and visual product information, and has been enhanced to
allow for easier user navigation and ordering.
COMPETITION
The home entertainment products segment, comprised of prerecorded music,
personal computer software, DVD video and video games distribution industry, is
highly competitive. Our 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
we do. Our ability to effectively compete in the future depends upon a number of
factors, including our ability to (i) obtain exclusive national distribution
contracts and licenses with independent labels, studios and manufacturers; (ii)
maintain our margins and volume; (iii) expand our sales through a varied range
of products and personalized services; (iv) anticipate changes in the
marketplace including technological developments and successfully continue our
ability to distribute products in light of these developments; (v) continue to
provide our varied retail customers with specialized services; and (vi) maintain
operating expenses at an appropriate level.
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In the personal computer software industry, we face competition from a number of
distributors including Ingram Micro, Inc. and Tech Data Corporation as well as
from manufacturers and publishers that sell directly to retailers. In the
prerecorded music industry, we face competition from the five major label
distribution companies, as well as other national independent distributors, such
as Koch Entertainment, RED Music Distribution, Alternative Distribution Alliance
("ADA"), Ryko Distribution, and Caroline Distribution, as well as from other
entities that sell directly to retailers.
We believe that the distribution of personal computer software, prerecorded
music, DVD Video and video games will remain highly competitive and the keys to
growth and profitability will be: (i) customer service, (ii) continued focus on
improvements and operating efficiencies, (iii) the ability to develop
proprietary products, and (iv) the ability to attract higher quality artist and
software publishers. We also believe that over the next several years, both the
personal computer software distribution industry and prerecorded music
distribution industry particularly on the independent side will continue to
further consolidate.
The market for Internet content providers is highly competitive and rapidly
changing. We expect that competition between suppliers to Web retailers will
continue to intensify. We support numerous Internet retailers, including
traditional music retail chains, record labels and independents with Web sites
on the Internet.
OUR STRATEGY
Our goal is to distribute products on an international basis in music, software,
video games and DVDs. We intend to achieve this goal by (i) increasing the
number and quality of exclusive national distribution arrangements with
proprietary prerecorded music artists, and labels, as well as, production
studios for DVD product; (ii) increasing our exclusive personal computer
software and video game 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
e-commerce; (iv) continuing to expand the sale of prerecorded music, personal
computer software, video games and DVD video products together in the
marketplace; (v) continuing to improve our efficiencies and technologies at our
state-of-the-art distribution center; (vi) expanding our business through
strategic acquisitions in areas or in businesses that complement our existing
businesses; and (vii) utilizing the Internet to expand the appeal of our
products to a broader customer base internationally.
PROPOSED ACQUISITION OF ASSETS OF ENCORE SOFTWARE
On June 10, 2002, we announced that we had entered into a purchase agreement to
acquire certain business assets of Encore Software, Inc., the nation's largest
privately owned entertainment and education PC software publisher. Encore also
publishes console video game titles.
Encore Software, Inc. filed for protection under Chapter 11 of the United States
Bankruptcy Code on March 22, 2002 in the United States Bankruptcy Court for the
Central District of California and is currently operating as a debtor in
possession. We have acted as a distributor of Encore software products since
1995. Under the purchase agreement, we would generally not assume the
liabilities of Encore.
The purchase agreement is subject to approval of the United States Bankruptcy
Court, and other conditions, including bank approval, and conditions related to
the continued operations of Encore Software's business. Bankruptcy court
approval is also subject to there being no higher qualifying bids from
third parties other than Navarre for the assets of Encore.
Subject to satisfaction of these conditions, the Company currently expects the
transaction to close on or before July 31, 2002. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation -- Liquidity and
Capital Resources."
SIGNIFICANT CUSTOMERS
In each of the past several years, we have had one or more customers that have
accounted for 10% or more of our net sales. During the fiscal year ended March
31, 2002, sales to three customers, Best Buy Co., Inc., Sam's Clubs and CompUSA,
Inc. each represented more than 10% of net sales. We are a non-exclusive
supplier to each of our customers and there can be no assurance that we will
continue to recognize a significant amount of revenue from sales to any specific
customer. If we are unable to continue to sell our products to all or any of
these three customers or are unable to continue to maintain our sales to these
customers at their current levels and are unable to find other customers to
replace these sales, there would be an adverse impact on our revenues and future
profitability.
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SIGNIFICANT VENDORS
Relationships with our publishers and labels such as Microsoft, Symantec
Corporation, Roxio, Inc., Network Associates, Dreamcatcher Entertainment,
American Gramaphone, LLC, Cleopatra Records, Inc., and Riviera Entertainment are
important to Navarre. We offer publishers a wide array of services for the
broad, efficient distribution of non-proprietary home entertainment products.
The level of services given to our content providers, which include labels,
studios, and artists improve our sales of prerecorded music of primarily
independent artists and labels. We offer independent content creators the
resources and exposure to generate high visibility for proprietary audio and DVD
titles. If we are unable to continue to sell these products there would be an
adverse impact on our revenues and future profitability.
EMPLOYEES
As of June 1, 2002, we had 302 employees, including 90 in finance and
administration, 45 in sales and marketing and 167 in distribution.
BACKLOG
Because our products are shipped in response to orders, we do not maintain any
significant backlog.
FORWARD LOOKING STATEMENTS
Certain information in this Form 10-K includes forward-looking statements
related to our strategic expectations with respect to future performance. While
our management is optimistic about our long-term prospects, investors should
consider the following issues and uncertainties, among others, in evaluating our
future.
ADDITIONAL RISKS MAY AFFECT OPERATING RESULTS
The following risk factors and other information included in this Annual Report
on Form 10-K should be carefully considered. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also impair our business operations. If any of the following risks occur, our
business, financial condition, operating results and cash flows could be
materially adversely affected.
WE ARE DEPENDENT UPON OUR MANAGEMENT TEAM
Eric H. Paulson, our Chairman of the Board, President and Chief Executive
Officer, and Charles E. Cheney, our Vice Chairman, Executive Vice President,
Chief Strategic Officer, Treasurer and Secretary, have been with us since our
inception in 1983 and since 1985, respectively. Although we have invested a
substantial amount of time and effort in developing our total management team,
the loss of either Mr. Paulson or Mr. Cheney could have a materially adverse
effect upon us.
OUR BUSINESS IS SEASONAL
Much of our business is seasonal in nature. As a distributor of products
ultimately sold to retailers, our business is affected by the pattern of
seasonality common to other suppliers of retailers, particularly the holiday
selling season. Historically, more than 60% of our sales and a substantial
portion of our profits have been in the third and fourth quarters of the
calendar year. Due to the lower level of sales during the off periods, we have
historically incurred losses during these periods. Because of this seasonality,
if we experience a weak holiday season, it could significantly affect our
profitability for the entire year.
OUR INDUSTRY TYPICALLY EXPERIENCES LOW INDUSTRY MARGINS
Competition in the prerecorded music and personal computer software distribution
industries is often based on price. Distributors, such as us, generally
experience low gross and operating margins. Consequently, our profitability is
highly dependent upon achieving expected sales levels as well as effective cost
and management controls. Any erosion in our gross profit margins could affect
our ability to maintain profitability.
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WE MAY DEPEND UPON BANK BORROWINGS TO SUPPORT OUR BUSINESS
In the past, we have relied upon bank borrowings to finance our expansion,
primarily for inventory and accounts receivable. Although on March 31, 2002,
2001 and 2000, we had no debt, we have a credit facility in place and if
necessary could borrow to finance working capital requirements during the year.
We believe that it may be necessary for us to acquire additional bank financing
in the future depending upon the growth of our business and the possible
financing of acquisitions. If we were unable to obtain additional bank
financing, our future growth and profitability would be adversely affected.
Under the terms of our credit facility, borrowings are dependent upon the
eligibility of accounts receivable and inventory, and certain other covenants in
the discretion of the bank.
WE MAY HAVE ADDITIONAL SIGNIFICANT WORKING CAPITAL NEEDS
As a distributor of prerecorded music and personal computer software products,
we purchase products directly from manufacturers for resale to retailers. As a
result, we have 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 our
growth. Future growth will likely require additional working capital. Although
we have obtained financing sufficient to meet our requirements to date, there
can be no assurance that we will be able to obtain additional financing upon
favorable terms when required in the future.
DEPENDENCE UPON SOFTWARE DEVELOPERS AND MANUFACTURERS
We distribute interactive software pursuant to distribution agreements with
software developers and manufacturers. The continued growth and success of our
business depends partly upon our ability to procure and renew these agreements
and sell the underlying software. There can be no assurance that we will sign
such developers and manufacturers to distribution agreements or that we will be
able to sell software under existing distribution agreements. Further, there can
be no assurance that any current distribution agreement will be renewed or that
current agreements will not be terminated.
DEPENDENCE UPON RECORDING ARTISTS
A portion of the sales in our NEM Division are made pursuant to exclusive
distribution agreements. Our continued growth and success depends partly upon
our ability to procure and renew these agreements and sell the underlying
recordings. In addition, we are dependent upon these artists and labels to
generate additional quality recordings. In order to procure future distribution
agreements, we regularly review artists and labels. There is no assurance that
we will sign such artists and labels to distribution agreements or that we 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 US
We maintain a significant investment in product inventory and, like other
companies in this industry, experience a relatively high level of product
returns as a percentage of revenues. Our agreements with our suppliers generally
permit us to return products that are in our 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 our products
and could make it difficult for us to return products to such a supplier and
recover our initial product acquisition costs. Such an event could have a
materially adverse effect upon our business and financial results. We maintain a
sales return reserve based on our trailing twelve months experience of sales
returns by product line. We have historically experienced an actual return rate
range of 18% to 21%, depending upon the product, which we believe is in line
with the industry practice. Although our 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 in the future. Although we do take a
portion of our product offerings on consignment in order to lessen our 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 our
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. We have developed a significant
number of supplier relationships with major
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electronic retailers resulting in significant growth in fulfillment of software,
music, and video products. We anticipate that this will represent a rapidly
increasing share of overall sales. We are also developing relationships to
facilitate electronic distribution of software and music content as new industry
standards become established.
COUNTERFEITING AND FREE MUSIC DOWNLOADS MAY AFFECT OUR REVENUES
The recorded music industry continues to be adversely affected by counterfeiting
of both audiocassettes and CDs, piracy and parallel imports, and also by Web
sites and technologies that allow consumers to electronically download quality
sound reproductions from the Internet without authorization. Listeners' ability
to access music from these sources could impair our ability to generate revenues
and could cause our business to suffer.
WHOLESALERS AND RETAILERS MAY CHANGE THEIR METHODS OF DISTRIBUTION
The success of our current sales strategy depends upon our wholesale and retail
customers' continued purchasing of products through us rather than directly from
manufacturers, other distributors, or other means of distribution. These
customers and retailers are constantly searching for ways to lower costs in an
attempt to maintain competitive prices and meet the pricing demands of
consumers. Our business could be adversely affected if our customers decide to
purchase directly from manufacturers, other distributors or other distribution
channels.
POSSIBLE VOLATILITY OF STOCK PRICE
The stock markets have experienced price and volume fluctuations that have
resulted in changes in the market prices of the stock of many companies; these
fluctuations may not have been directly related to the operating performance of
those companies. In addition, the market price of our common stock has
fluctuated significantly since April 1996. We believe that factors such as
indications of the market's acceptance of our products and failure to meet
market expectations, as well as general volatility in the securities markets,
could cause the market price of our common stock to fluctuate substantially.
ITEM 2. PROPERTIES
On March 12, 1998, we entered into an operating lease agreement of approximately
86,500 square feet of office and warehouse space for our principal facilities in
suburban Minneapolis. 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, we are responsible for taxes and all operating costs associated
with the building.
On April 22, 1999, we entered into an operating lease agreement of approximately
74,000 square feet of office and warehouse space for a second facility in
suburban Minneapolis. The lease expires in the year 2003 and provides for a
monthly rental of $32,640 over the lease term. In addition, we are responsible
for taxes and all operating costs associated with the building.
On March 30, 2000, we entered into an operating lease agreement of approximately
40,000 square feet of warehouse space for a third facility in suburban
Minneapolis. The lease expires in the year 2004 and provides for a monthly
rental of $13,333 over the lease term. In addition, we are responsible for taxes
and all operating costs associated with the building.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of our business, we are involved in a number of routine
litigation matters that are incidental to the operation of our business. These
matters generally include collection matters with regard to products distributed
by us and accounts receivable owed to us. We currently believe that the
resolution of any of these pending matters will not have a material adverse
effect on our financial position or results of operation. In addition, we are
subject to the litigation listed below.
SECURITIES LITIGATION
On or about December 6, 1999, Daniel Chen, on behalf of himself and all others
similarly situated, filed a class action complaint in the United States District
Court for the District of Minnesota, Case No. 99-1955, alleging violations of
the Securities Exchange Act of 1934 against us and our directors. Specifically,
Plaintiff alleged, among other things, violations of Section 10(b) of the 1934
Securities Exchange Act and Rule 10b-5 of the Securities and Exchange
Commission, and violation of Section 20(a) of the 1934 Securities Exchange Act.
Plaintiff sought a determination that the action was a proper class action
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pursuant to Fed. R. Civ. Pro. 23 and sought compensatory damages in an
unspecified amount along with costs and expenses incurred, including the
reasonable allowance of fees for attorneys, accountants and experts. We and our
directors timely answered the Complaint on December 29, 1999, denying liability
and damages and asserting certain affirmative defenses.
On January 26, 2000, Judy Poucher filed a complaint virtually identical to the
complaint filed by Mr. Chen seeking the same relief as that requested by Mr.
Chen. We and our directors timely answered the Poucher complaint, denied
liability, and asserted numerous affirmative defenses. We have tendered these
matters to our insurance carrier for coverage under the terms of our policy.
On November 27, 2000, we and our directors served a motion and supporting papers
to dismiss Plaintiffs' complaint with prejudice for failure to state a claim.
Plaintiffs responded to the motion on January 11, 2001, and we served and filed
our reply on February 1, 2001. A hearing on the motion to dismiss was held on
February 13, 2001, before the Magistrate Judge. On April 23, 2001, the
Magistrate Judge issued his Report and Recommendation that the case be dismissed
with prejudice and on the merits. Plaintiffs objected to the Report and
Recommendation, but, by Order dated May 29, 2001, the District Court overruled
the objection and adopted the Report and Recommendation and dismissed
Plaintiffs' claims with prejudice and on the merits.
On June 20, 2001, Plaintiffs filed a Notice of Appeal with the Eighth Circuit
Court of Appeals. Plaintiffs/Appellants served and filed their brief and
appendix on August 15, 2001. We and our directors filed our response brief on
September 14, 2001, and Plaintiffs/Appellants filed and served their reply brief
on September 28, 2001. In addition, by letter dated October 26, 2001,
Plaintiffs/Appellants advised the court of a recent Eighth Circuit Court of
Appeals decision captioned In re Green Tree Financial Corporation Stock
Litigation.
The Eighth Circuit Court of Appeals held oral argument on March 13, 2002. On
July 1, 2002, the Eighth Circuit Court of Appeals affirmed the District Court's
dismissal of Plaintiff's claim.
MIKE SPALLA D/B/A JINGLE CATS MUSIC
On or about April 2001, Mike Spalla, d/b/a Jingle Cats Music ("Plaintiff")
commenced an action in the United States District Court for the District of
Minnesota, Case No. 01-CV-598, alleging, among other things, breach of contract,
and seeking an accounting, injunctive relief, and damages in an amount in excess
of $75,000 against us in connection with a distribution agreement between it and
us.
On April 26, 2002, we answered Plaintiff's Complaint, denied liability, asserted
certain affirmative defenses, and asserted its counterclaim against Plaintiff
alleging, among other things, breach of contract and failure to pay account
stated. We seek damages in an amount of at least $60,000. On September 28, 2001,
the court issued its Pretrial Order and the parties have engaged in and
completed discovery.
Plaintiff moved to amend the complaint to include additional theories of relief
and a claim for punitive damages. We argued against the motion, and the court
denied the motion on May 30, 2002.
On May 31, 2002, we served our motion for summary judgment, seeking dismissal of
Plaintiff's claims and an award of damages against the Plaintiff on the
counterclaim. The summary judgment motion will be fully briefed and filed on or
before July 1, 2002, but a hearing date has yet to be set for the same. The case
is to be trial ready as of August 1, 2002. We intend to vigorously defend
ourselves in connection with the lawsuit.
BOB GRADY MUSIC AND WILSON MEADOWS
Plaintiffs Bob Grady Music and Wilson Meadows commenced this action on January
29, 2001, by service and filing of a complaint against us in the United States
District Court for the Northern District of Georgia, Case No. 1 01-CV-0252
(JOF). Plaintiffs allege claims for copyright infringement and unfair
competition in violation of Plaintiffs' right of publicity, and seek damages in
an amount in excess of $150,000. Plaintiffs' claims arise from our distribution
of Wilson Meadows' "Memories" musical album.
On March 13, 2001, we answered Plaintiffs' complaint, denying liability and
asserting affirmative defenses. The parties have engaged in and completed
discovery. Each side has moved for summary judgment in its favor, and briefing
on the summary judgment motions was completed as of April 29, 2002. The court
has not set a hearing date or rendered a decision in connection with the
motions. No trial date has been set with respect to the matter. We intend to
vigorously defend ourselves in connection with this lawsuit.
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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, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Our Common Stock has been quoted on The Nasdaq Stock Market under the symbol
NAVR. The following table presents the range of high and low closing sale prices
for our stock for each period indicated as reported on The Nasdaq Stock Market.
QUARTER HIGH LOW
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Fiscal 2002
First $ 1.53 $ 1.15
Second 1.20 0.85
Third 1.52 1.00
Fourth 1.25 0.90
Fiscal 2001
First $ 4.00 $ 1.19
Second 3.50 1.44
Third 2.09 1.06
Fourth 2.13 1.06
HOLDERS AND DIVIDENDS
At June 1, 2002, we had approximately 13,700 shareholders, including
shareholders holding stock in street name. We have never paid any dividends on
our common stock and do not intend to pay any dividends on our common stock in
the foreseeable future.
EQUITY COMPENSATION PLAN INFORMATION
We adopted our 1992 Stock Option Plan to attract and retain persons to perform
services for Navarre by providing an incentive to these persons through equity
participation in Navarre and by rewarding such persons who contribute to the
achievement of Navarre's economic objectives. Eligible recipients are all
employees including, without limitation, officers and directors who are also
employees and non-employee directors, consultants and independent contractors of
Navarre or any subsidiary. A maximum number of 4,224,000 shares of common stock
have been authorized and reserved for issuance under the Plan. The number of
shares authorized may also be increased from time to time by approval of the
Board and the shareholders
We are authorized to grant stock options and restricted stock grants under the
Plan. Options generally vest in increments of 20% of the original option grant
beginning one year from the date of grant and expire six years from the date of
grant, subject to early termination upon death, disability or termination of
employment.
Each director who is not an employee of Navarre on April 1 of each year is
granted an option to purchase 6,000 shares of common stock at a price equal to
fair market value. These options are designated as non-qualified stock options
and are subject to the same terms and provisions as are then in effect with
respect to granting of non-qualified stock options to salaried officers and key
employees of Navarre. These options vest in increments of 20% of the original
option grant beginning one year from the date of grant and expire six years from
the date of grant.
We are entitled to (a) withhold and deduct from future wages of the participant
(or from other amounts that may be due and owing to the participant from the
Company), or make other arrangements for the collection of, all legally required
amounts necessary to satisfy any and all federal, state and local withholding
and employment-related tax requirements (i) attributable to the grant or
exercise of an option or a restricted stock award or to a disqualifying
disposition of stock received upon exercise of an incentive stock option, or
(ii) otherwise incurred with respect to an option or a restricted stock award,
or (iii) require the Participant promptly to remit the amount of such
withholding to the Company before taking any action with respect to an option or
a restricted stock award.
9
THE FOLLOWING TABLE BELOW PRESENTS OUR EQUITY COMPENSATION PLAN INFORMATION:
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and rights future issuance under equity
warrants and rights compensation plans
(excluding securities
reflected in column (a)
Equity compensation plan
approved by security holders 1,985,900 $3.77 1,064,054
============================== ============================== ==============================
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
YEARS ENDED MARCH 31
2002 2001 2000 1999 1998
-------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Net sales $ 303,817 $ 314,199 $ 285,165 $ 210,386 $ 196,648
Gross profit 32,893 37,421 36,381 8,762 24,993
Income (loss) from operations 521 (2,364) (4,554) (25,572) 1,458
Interest expense (173) (223) (476) (2,543) (3,108)
Other income (expense) 884 2,000 1,399 445 (10)
Income taxes (benefit) -- -- -- -- (470)
Impact of investment in NetRadio Corporation 1,480 (10,338) (4,154) -- --
Net income (loss) $ 2,712 $ (10,925) $ (7,785) $ (27,670) $ (974)
=============================================================
Income (loss) per basic share $ .12 $ (.47) $ (.33) $ (4.41) $ (.14)
Income (loss) per diluted share $ .12 $ (.47) $ (.33) $ (4.41) $ (.14)
=============================================================
Basic weighted average common
shares outstanding 22,553 25,137 23,483 14,179 6,921
Diluted weighted average common
shares outstanding 22,575 25,137 23,483 14,179 6,921
=============================================================
BALANCE SHEET DATA:
Total assets $ 81,085 $ 93,918 $ 109,711 $ 79,480 $ 83,689
Short-term borrowings -- -- -- 422 32,607
Long-term debt -- -- -- 114 181
Shareholders' equity 24,350 24,350 41,423 25,164 4,328
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Navarre Corporation, a Minnesota corporation formed in 1983, is a premier
provider of distribution, fulfillment and marketing services of a broad range of
home entertainment and multimedia products, including PC software, audio and
video titles, and interactive games. We maintain and leverage strong
relationships on both ends of the content distribution chain, including leading
national retailers, wholesalers and rackjobbers, as well as major publishers and
music labels.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in conformity with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we review and evaluate our estimates,
including those related to customer programs and incentives, product returns,
bad debt, inventories, investments, intangible assets, restructuring reserves,
and litigation. We base our estimates on historical experience and various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making its judgment about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results could differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies are affected by our
judgment, estimates and/or assumptions used in the preparation of our
consolidated financial statements.
Revenue Recognition
Revenue from sales of product is recorded upon shipment. As a general matter, we
established an allowance for sale returns at the time the sale is recorded based
on our trailing twelve months' experience by product line. We record estimated
reductions to revenue for customer programs and incentive offerings including
special pricing agreements, price protection, promotions and other volume-based
incentives and estimated returns. If market conditions were to decline, we may
take actions to increase customer incentive offerings possibly resulting in an
incremental reduction of revenue at the time the incentive is offered.
Allowance for Doubtful Accounts
We evaluate the collectibility of our accounts receivable, including advances
and balances with independent labels, based on a combination of factors. In
circumstances where we are aware of a specific customer's inability to meet our
financial obligations to us (e.g., bankruptcy filings, substantial down-grading
of credit scores), we record a specific reserve for bad debts against amounts
due to reduce the net recognized receivable to the amount we reasonably believe
will be collected. For all other customers, we recognize reserves for bad debts
based on the length of time the receivables are past due based on their
historical experience. If circumstances change (i.e., higher than expected
defaults or an unexpected material adverse change in a major customer's ability
to meet its financial obligations to us), our estimates of the recoverability of
amounts due could be reduced by a material amount. These estimates are
consistent with our historical experience.
Restructuring
During fiscal year 2002, we recorded significant reserves in connection with our
restructuring program. These reserves include estimates pertaining to employee
separation costs and the settlements of contractual obligations resulting from
our actions. Although we do not anticipate significant changes, the actual costs
may differ from these estimates.
11
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of net
sales represented by certain items included in our "Consolidated Statements of
Operations." We have revised our 2001 and 2000 numbers to conform to the 2002
presentation.
YEARS ENDED MARCH 31
2002 2001 2000
----- ----- -----
Net sales:
Home Entertainment
Distribution Services 85.2% 85.6% 78.9%
Entertainment Media 14.8 14.4 20.8
----- ----- -----
Total Home Entertainment 100.0 100.0 99.7
eSplice -- -- --
NetRadio -- -- 0.3
----- ----- -----
Total net sales 100.0 100.0 100.0
Cost of sales 89.2 88.1 87.2
----- ----- -----
Gross profit 10.8 11.9 12.8
Selling and marketing 2.7 2.9 3.7
Distribution and warehousing 1.7 2.5 2.2
General and administrative 5.6 6.2 7.9
Depreciation and amortization 0.5 1.0 0.6
Restructuring 0.2 -- --
----- ----- -----
Total operating expenses 10.7 12.7 14.3
----- ----- -----
Income (loss) from operations 0.2 (0.8) (1.6)
Interest expense (0.1) (0.1) (0.2)
Other income 0.3 0.6 0.5
----- ----- -----
Net income (loss) 0.9 (3.5) (2.7)
===== ===== =====
Certain information in this section contains forward-looking statements. Our
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 our business, the consumer market for music
products and computer software products, the seasonality of our business, new or
different competition in our traditional and new markets, changing methods of
distribution and our ability to sign and retain artists who will appeal to
popular tastes over a period of time. See "Business - Forward Looking
Statements" in Item 1 of this Form 10-K.
HOME ENTERTAINMENT PRODUCTS
NET SALES
Net sales of home entertainment products were $303.8 million for fiscal 2002,
$314.2 million for fiscal 2001, and $284.4 million for fiscal 2000. The 3.3%
decrease in sales for fiscal 2002 was due to lower sales in both Distribution
Services and Entertainment Media as discussed below and the 10.5% increase in
sales for fiscal 2001 was due to increased sales in both Distribution Services
and Entertainment Media as discussed below.
Net sales for Distribution Services were $258.7 million for fiscal 2002, $268.8
million for fiscal 2001, and $225.1 million for fiscal 2000. The 3.8% decrease
in net sales for fiscal 2002 was primarily due to lower music and DVD sales,
resulting from the lack of hit releases provided by the studios compared to
prior years, coupled with lower overall industry sales resulting from the weaker
economy. The 19.4% increase in sales for fiscal 2001 was due to the continued
growth in the industry and our ability to maintain strong distribution market
share in the entertainment and education categories.
Net sales of Entertainment Media were $45.1 million for fiscal 2002, $45.4
million for fiscal 2001, and $59.3 million for fiscal 2000. The slight decrease
for fiscal 2002 was due to no increases in new releases and the 23.4% decrease
of net sales for fiscal 2001 was primarily due from the lack of new releases
compared to ones in fiscal 2000.
12
GROSS PROFIT
Gross profit of home entertainment products was $32.9 million or 10.8% as a
percent of net sales for fiscal 2002, $37.4 million or 11.9% as a percent of net
sales for fiscal 2001, and $36.0 million or 12.7% as a percent of net sales for
fiscal 2000. The decreases as a percentage of net sales for fiscal 2002 and 2001
were due to margin decreases in both Distribution Services and Entertainment
Media as discussed below.
The gross profit from Distribution Services net sales was $26.8 million or 10.4%
of Distribution Services net sales for fiscal 2002, $29.0 million or 10.8% of
Distribution Services net sales for fiscal 2001, and $25.1 million or 11.2% of
Distribution Services net sales for fiscal 2000. The decreases in Distribution
Services as a percentage of net sales for fiscal 2002 and fiscal 2001 were
primarily due to changes in the mix of products, such as productivity products,
that we began distributing which accounted for a larger percent of total sales
and have lower gross margin percentage.
The gross profit from Entertainment Media net sales was $6.1 million or 13.5% of
Entertainment Media net sales for fiscal 2002, $8.4 million or 18.5% of
Entertainment Media net sales for fiscal 2001, and $10.9 million or 18.4% of
Entertainment Media net sales for fiscal 2000. The decrease in gross profit and
as a percentage of Entertainment Media net sales for fiscal 2002 was due to our
election not to offer select discounts to certain customers and vendors due to
an unstable economic environment, in addition to the restructuring charges from
the relocation of our Hawaiian location to Minneapolis. The decrease in gross
profit and as a percentage of Entertainment Media net sales for fiscal 2001 was
due to an unfavorable margin sales mix.
OPERATING EXPENSES
Selling and marketing expenses of home entertainment products were $8.1 million
or 2.7% as a percent of net sales for fiscal 2002, $8.9 million or 2.8% as a
percent of net sales for fiscal 2001, and $8.9 million or 3.1% as a percent of
net sales for fiscal 2000. The decreases in selling and marketing expenses and
the decreases as a percent of net sales for fiscal 2002 and fiscal 2001 were due
to the lower costs associated with improved management and communication with
our vendors to reduce the need for expedited freight.
Distribution and warehousing expenses of home entertainment products were $5.2
million or 1.7% as a percent of net sales for fiscal 2002, $8.0 million or 2.5%
as a percent of net sales for fiscal 2001, and $6.2 million or 2.2% as a percent
of net sales for fiscal 2000. The decrease in distribution and warehousing
expenses and decrease as a percent of net sales for fiscal 2002 was primarily
due to the capabilities and ensuing efficiencies derived from our fully
automatic dedicated returns facility which has improved the handling of all the
products we distribute. The increase in distribution and warehousing expenses
and increase as a percent of net sales for fiscal 2001 was due to an increase in
shipping directly to store locations as opposed to distribution centers as well
as a reduction in order sizes.
General and administrative expenses of home entertainment products were $16.9
million or 5.6% as a percent of net sales for fiscal 2002, $17.6 million or 5.6%
as a percent of net sales for fiscal 2001, and $15.8 million or 5.6% as a
percent of net sales for fiscal 2000. The decrease in general and administration
expenses was due to increased efficiencies of IT expense as it relates to
warehousing operations and better control of professional fees. General and
administrative expenses of home entertainment products for fiscal 2002 included
the restructuring costs associated with relocation of the Hawaiian location.
Depreciation and amortization of home entertainment products was $1.5 million in
fiscal 2002, $1.3 million in fiscal 2001, and $1.2 million in fiscal 2000.
Included in fiscal 2002 was goodwill impairment of $356,000 associated with
relocation of the Hawaiian location.
The net operating income for home entertainment products was $521,000 for fiscal
2002, $1.6 million for fiscal 2001, and $4.0 million for fiscal 2000.
Net income for home entertainment products, before the impact of our investment
in NetRadio Corporation was $1.2 million for fiscal 2002, $3.6 million for
fiscal 2001, and $5.6 million for fiscal 2000.
13
ESPLICE, INC.
Net sales for eSplice were $37,000 for fiscal 2001. eSplice's total operating
expenses were $3,983,000 for fiscal 2001, including $219,000 for selling and
promotion expenses, $1,844,000 for general and administration expenses, and
$1,921,000 for depreciation and amortization expense, which includes charges of
$1.2 million for accelerated depreciation of impaired assets and $978,000 for
fiscal 2000, including $915,000 for general and administration expenses. The net
operating loss for eSplice was $3,957,000 for fiscal 2001 and a loss of $978,000
for fiscal 2000. In the fourth quarter of fiscal 2001, our management and Board
of Directors determined that we would not continue to support the further
development of eSplice operations.
IMPACT OF INVESTMENT IN NETRADIO CORPORATION
Because we did not consolidate NetRadio's results for periods after November 5,
1999, NetRadio results for periods after November 5, 1999 are reflected in our
financial statements using the equity method. Under the equity method, Navarre
reports losses or gains in NetRadio for each period as "Impact of investment in
NetRadio Corporation."
The impact of the investment in NetRadio Corporation was a gain of $1.5 million
for fiscal 2002, a loss of $10.3 million for fiscal 2001 and for fiscal 2000 for
the period after November 5, 1999 was a loss of $4.2 million for fiscal 2000.
For fiscal 2000, NetRadio had sales of $737,000, selling and marketing expenses
of $1.7 million and general and administration expenses of $5.8 for a net loss
of $8.5 million. NetRadio made a final payment of $1.5 million in November 2001
on its indebtedness to us.
OTHER INCOME AND EXPENSE
Interest expense was $173,000 for fiscal 2002, $223,000 for fiscal 2001, and
$476,000 for fiscal 2000. The decreases resulted from lower interest rates and
from us having substantially no bank debt during fiscal 2002 and 2001.
Other income, which consists principally of interest income, was $884,000 for
fiscal 2002, $2.0 million for fiscal 2001, and $1.4 million for fiscal 2000. The
decreases for fiscal 2002 and 2001 resulted from having a lower principal
balance on the note from NetRadio and lower interest rates.
Due to the accumulated losses from prior years and the current year's loss, we
have not recorded any tax benefit.
We had net income of $2.7 million for fiscal 2002 compared a loss of $10.9
million for fiscal 2001 and a loss of $7.8 million for fiscal 2000.
MARKET RISK
Although we are subject to some interest rate risk, because we currently have no
bank debt, we believe 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
We have historically financed our working capital needs through bank borrowings,
proceeds from the sale of equity securities and cash flows from operations. The
level of borrowings has historically fluctuated significantly during the year.
At March 31, 2002, we had net accounts receivable of $42.7 million, inventory of
$15.3 million, accounts payable of $54.3 million and no bank debt.
For the fiscal year ended March 31, 2002, net sales were $303.8 million, a
decrease of $10.4 million from net sales of $314.2 million in fiscal 2001. We
had a net income of $2.7 million during the year. We generated net cash of $2.3
million from operations. During the period, accounts receivable decreased by
$5.2 million and inventories decreased by $7.3 million. Accounts payable and
accrued expenses decreased by $12.8 million. Investing activities provided
$218,000 of cash of which $1.5 million was a payment from NetRadio offset by
$973,000 for the purchase of furniture, equipment and leasehold improvements. We
used net cash of $2.7 million in financing activities during the period
primarily for the repurchase of our common stock. On March 31, 2001, we had no
debt.
In October 2001, we entered into a new agreement with General Electric Capital
Corporation for a three-year $30 million credit facility. Although we borrowed
under this credit facility during fiscal 2002, as of March 31, 2002, we had no
balance outstanding on this facility. We anticipate that we may borrow
additional amounts under this credit facility from time to time during the
current fiscal year to meet our seasonable working capital requirements.
14
We currently believe funds generated from the expected results of operations
and available cash and cash equivalents and borrowings under our credit facility
will be sufficient to satisfy our working capital requirements and finance
anticipated expansion plans and strategic initiatives for the next fiscal year.
As noted above under Item 1, "Business --Proposed Acquisition of Assets of
Encore Software," on June 10, 2002, we announced that we had entered into a
purchase agreement to acquire certain business assets of Encore Software, Inc,
subject to a number of conditions, including Bankruptcy Court approval. We
currently anticipate that, if successful in purchasing the assets in bankruptcy,
the purchase price will be approximately $10 million barring any unforeseen
overbids. We expect to finance the purchase with a combination of available
cash, working capital and bank borrowings.
CONTRACTUAL OBLIGATIONS
The following table presents information regarding contractual obligations by
fiscal year ($in thousands).
2003 2004 2005 2006 2007 THEREAFTER
---- ---- ---- ---- ---- ----------
Operating leases 1,205 1,079 556 559 523 3,224
--------- --------- ---------- --------- ---------- -------------
Total 1,205 1,079 556 559 523 3,224
========= ========= ========== ========= ========== =============
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information with respect to disclosures about market risk is contained in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Market Risk" in Item 7 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of Navarre and the
Report of Independent Auditors thereon are included at the end of this document.
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 our Proxy Statement for the Annual
Meeting of Shareholders to be held on September 5, 2002 (the "2002 Proxy
Statement"), a definitive copy of which will be filed with the Commission within
120 days of the close of the fiscal year ended March 31, 2002, 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 our
2002 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 our 2002
Proxy Statement and is incorporated herein by reference.
15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required under this item is contained in the section entitled
"Certain Transactions" in our 2002 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. Our following financial statements and
the Report of Independent Auditors thereon are set forth
at the end of this document.
Report of Independent Auditors
Consolidated Balance Sheets as of March 31, 2002 and 2001
Consolidated Statements of Operations for each of the three
years in the period ended March 31, 2002
Consolidated Statements of Shareholders' Equity as of March
31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for each of the three
years in the period ended March 31, 2002
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule for each of the three years in
the period ended March 31, 2002
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
3.1 Articles of Incorporation, incorporated herein by
reference from Exhibit 3.1 to Form 10-K, for year
ended March 31, 2000.
3.2 Bylaws, incorporated herein by reference from Exhibit
3.2 to our Registration Statement on Form S-1, No.
333-68392.
10.1 *Employment Agreement, dated November 1, 2001,
between us and Eric H. Paulson, incorporated herein
by reference from Exhibit 10.1 to Form 10-Q, for the
period ended December 31, 2001.
10.2 *Employment Agreement, January 2, 2002, between us
and Charles E. Cheney.
10.3 *1992 Stock Option Plan, amended and restated.
10.4 *Form of Individual Stock Option Agreement under 1992
Stock Option Plan, incorporated herein by reference
from Exhibit 10.4 to our Registration Statement on
Form S-1 (No. 333-68392).
10.5 *Form of Termination Agreement for our Executives,
incorporated herein by reference from Exhibit 10.2 to
Form 10-Q, for the period ended December 31, 2001.
10.6 Lease dated March 12, 1998 between us 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 us 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 Credit Agreement, dated October 3, 2001, between
General Electric Capital Corporation and us,
incorporated herein by reference from Exhibit 10.1 to
Form 10-Q, for the period ended September 30, 2001.
10.8.1 Amendment No. 1 to Loan Documents, dated March 4,
2002.
23.1 Consent of Ernst & Young LLP.
* Indicates management contract or compensatory plan or
agreement required to be filed as an exhibit pursuant
to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter
ended March 31, 2002.
16
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 28, 2002 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 28, 2002
- --------------------------------------------- and Chief Executive Officer
Eric H. Paulson
/s/ Charles E. Cheney Vice-Chairman, Treasurer and Secretary June 28, 2002
- --------------------------------------------- Executive Vice President and Chief
Charles E. Cheney Strategic Officer
/s/ James Gilbertson Chief Financial Officer June 28, 2002
- ---------------------------------------------
James Gilbertson
/s/ James G. Sippl Director June 28, 2002
- ---------------------------------------------
James G. Sippl
/s/ Michael L. Snow Director June 28, 2002
- ---------------------------------------------
Michael L. Snow
/s/ Alfred Teo Director June 28, 2002
- ---------------------------------------------
Alfred Teo
/s/ Tom Weyl Director June 28, 2002
- ---------------------------------------------
Tom Weyl
/s/ Dickinson G. Wiltz Director June 28, 2002
- ---------------------------------------------
Dickinson G. Wiltz
17
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, 2002 and 2001, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended March 31, 2002. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Navarre
Corporation at March 31, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 2002, 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.
Ernst & Young LLP
Minneapolis, Minnesota
April 26, 2002
18
NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
MARCH 31
2002 2001
-------- --------
ASSETS
Current assets:
Cash $ 18,966 $ 19,118
Accounts receivable, less allowance for doubtful accounts
and sales returns of $2,411 in 2002 and $4,986 in 2001 42,666 47,874
Inventories 15,316 22,629
Prepaid expenses and other current assets 163 209
-------- --------
Total current assets 77,111 89,830
Property and equipment, net of accumulated depreciation of
$5,089 in 2002 and $6,069 in 2001 3,028 3,546
Other assets:
Notes receivable, related parties 289 56
Other assets 657 486
-------- --------
Total assets $ 81,085 $ 93,918
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ -- $ --
Accounts payable 54,305 66,918
Accrued expenses 2,430 2,650
-------- --------
Total current liabilities 56,735 69,568
Shareholders' equity
Preferred stock, no par value:
Common stock, no par value:
Authorized shares - 100,000,000
issued and outstanding shares - 21,616,187 in 2002 and 24,030,379
in 2001 91,404 94,116
Retained deficit (67,054) (69,766)
-------- --------
Total shareholders' equity 24,350 24,350
-------- --------
Total liabilities and shareholders' equity $ 81,085 $ 93,918
======== ========
See accompanying notes
19
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share amounts)
YEARS ENDED MARCH 31
2002 2001 2000
--------- --------- ---------
Net sales $ 303,817 $ 314,199 $ 285,165
Cost of sales 270,924 276,778 248,784
--------- --------- ---------
Gross profit 32,893 37,421 36,381
Operating expenses:
Selling and marketing 8,098 9,132 10,599
Distribution and warehousing 5,202 7,990 6,197
General and administrative 16,909 19,451 22,517
Depreciation and amortization 1,491 3,212 1,622
Restructuring 672 -- --
--------- --------- ---------
32,372 39,785 40,935
--------- --------- ---------
Income(loss) from operations 521 (2,364) (4,554)
Other income (expense):
Interest expense (173) (223) (476)
Other income 884 2,000 1,399
--------- --------- ---------
Income(loss) before impact of investment in NetRadio Corp 1,232 (587) (3,631)
Impact of investment in NetRadio Corporation 1,480 (10,338) (4,154)
--------- --------- ---------
Net income(loss)
2,712 (10,925) (7,785)
Excess of preferred stock buyback -- (793) --
--------- --------- ---------
Net income(loss) available to common shareholders $ 2,712 $ (11,718) $ (7,785)
========= ========= =========
Basic income(loss) per share $ .12 $ (.47) $ (.33)
========= ========= =========
Diluted income(loss) per share $ .12 $ (.47) $ (.33)
========= ========= =========
Basic weighted average common shares outstanding 22,553 25,137 23,483
Diluted weighted average common shares outstanding 22,575 25,137 23,483
See accompanying notes.
20
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share amounts)
PREFERRED COMMON RETAINED
SHARES PREFERRED SHARES COMMON EARNINGS UNEARNED
ISSUED STOCK ISSUED STOCK (DEFICIT) COMPENSATION
-----------------------------------------------------------------------
Balance at March 31, 1999 -- $ -- 23,344,046 $91,415 $ (66,119) $ (132)
Preferred shares issued in private
placement, net of fees 34,000 8,010 -- -- -- --
Shares issued upon exercise of stock warrants -- -- 5,061 12 -- --
Shares issued upon exercise of stock options -- -- 185,328 524 -- --
Reversal of accrual for share dividends -- -- -- -- 29 --
Stock option issued to a vendor -- -- -- 495 -- --
Spin-off of NetRadio -- -- -- (945) 15,824 --
Net loss -- -- -- -- (7,785) --
Amortization of unearned compensation -- -- -- -- -- 95
----------------------------------------------------------------------
Balance at March 31, 2000 34,000 $ 8,010 23,534,435 $91,501 $ (58,051) $ (37)
Preferred share conversion (20,390) (4,804) 2,115,057 4,804 -- --
Stock option compensation -- -- -- 53 -- --
Shares issued upon exercise of stock options -- -- 5,512 13 -- --
Repurchase of preferred shares (13,610) (3,206) -- -- (790) --
Repurchase of common shares -- -- (1,624,625) (2,255) -- --
Net loss -- -- -- -- (10,925) --
Amortization of unearned compensation -- -- -- -- -- 37
----------------------------------------------------------------------
Balance at March 31, 2001 -- $ -- 24,030,379 $94,116 $ (69,766) $ --
REPURCHASE OF COMMON SHARES -- -- (2,414,192) (2,712) -- --
NET INCOME -- -- -- -- 2,712 --
----------------------------------------------------------------------
BALANCE AT MARCH 31, 2002 -- $ -- 21,616,187 $91,404 $ (67,054) $ --
======================================================================
See accompanying notes.
21
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED MARCH 31
2002 2001 2000
--------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 2,712 $ (10,925) $ (7,785)
Adjustments to reconcile net income(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,847 3,212 1,622
Amortization of unearned compensation -- 37 95
Equity in loss of NetRadio Corporation (1,480) 10,338 4,154
Stock option compensation -- 47 --
Vendor stock compensation -- -- 495
Value of NetRadio stock issued to vendor -- 200 --
Write-off of notes receivable 56 292 --
Changes in operating assets and liabilities:
Accounts receivable 5,208 8,609 (6,226)
Inventories 7,313 (208) 6,802
Prepaid expenses and assets (481) (9) (436)
Refundable income taxes -- -- 613
Accounts payable and accrued expenses (12,833) 1,289 10,647
-----------------------------------
Net cash provided by operating activities 2,342 12,882 9,981
INVESTING ACTIVITIES
Notes receivable, related parties (289) 27 (154)
Payments on NetRadio Note 1,480 1,000 --
Purchases of equipment and leasehold improvements (973) (4,288) (2,672)
-----------------------------------
Net cash provided by (used in) investing activities 218 (3,261) (2,826)
FINANCING ACTIVITIES
Proceeds from note payable, bank -- 5,000 104,448
Payments on note payable, bank -- (5,000) (104,777)
Repurchase of Navarre common stock (2,712) (2,255) --
Repurchase of Class B preferred stock -- (4,000) --
Proceeds from sale of preferred stock and warrants -- -- 8,010
Proceeds from exercise of common stock warrants -- -- 12
Proceeds from exercise of common stock options -- 13 799
-----------------------------------
Net cash provided by (used in) financing activities (2,712) (6,242) 8,492
-----------------------------------
Net (decrease) increase in cash (152) 3,379 15,647
Cash at beginning of year 19,118 15,739 92
-----------------------------------
Cash at end of year $ 18,966 $ 19,118 $ 15,739
===================================
NON CASH ITEMS:
Conversion of preferred stock to common stock -- $ 4,804 --
See accompanying notes.
22
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company distributes a broad range of home entertainment and multimedia
products including PC software, audio and video titles, and interactive games
primarily to retailers and wholesalers in the United States and Canada.
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.
In addition, through its wholly owned subsidiary, eSplice, Inc., Navarre was
engaged in the development of a platform to aggregate and distribute digital
content including music and software utilizing industry-leading solutions for
encoding, encryption, digital rights management and playback. In the fourth
quarter of fiscal 2001, Navarre management and Board of Directors determined
that the Company would not continue to support the further development of
eSplice operations.
REVENUE RECOGNITION
Revenues from sales of product are recorded upon shipment. Allowances are
provided for estimated sales returns at the time the sale is recorded based on
the Company's trailing twelve months' experience by product line.
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Receivables generally are
due within sixty days. Credit losses relating to customers consistently have
been within management's expectations.
CASH AND CASH EQUIVALENTS
The Company considers short-term investments with a maturity of three months or
less when purchased to be cash equivalents. Cash equivalents are carried at
cost, which approximates market value.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined on
the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method for leasehold improvements and accelerated methods for
equipment over estimated useful lives of 3 to 10 years. Software is being
depreciated over a three-year life.
ACCOUNTING FOR LONG LIVED ASSETS
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards no. 144 (SFAS 144), "Accounting for the
Impairment and Disposal of Long-Lived Assets," which is effective for fiscal
years beginning after December 15, 2001. The adoption of this standard is not
expected to have a material impact on the Company's consolidated results of
operations, financial position or cash flows.
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. In
Fiscal 2001, the Company recorded charges of $1.2 million for accelerated
depreciation of impaired assets related to management's and the Board of the
Directors' determination that the Company would not continue to support the
further development of eSplice operations.
23
ADOPTION OF FASB STATEMENT NO. 142
At the beginning of fiscal year 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. Under the
Statement, amortization of goodwill and intangible assets with an indefinite
life is prohibited. Instead, the asset is tested at least annually for
impairment. The adoption of this statement did not have a material effect on the
Company.
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.
RECLASSIFICATION
Certain prior-year amounts have been reclassified to conform to current-year
presentation.
CLASSIFICATION OF SHIPPING COSTS
Costs incurred with the shipment of product between the Company and its vendors
are classified in cost of goods sold. These costs were $922,000, $1,129,000, and
$1,150,000 for the years ended March 31, 2002, 2001, and 2000, respectively.
Costs incurred with the shipment of product from the Company to its customers
are classified in selling expenses. These costs were $5,366,000, $6,326,000, and
$6,424,000 for the years ended March 31, 2002, 2001, and 2000, respectively.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25"), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
COMMITMENTS AND CONTINGENCIES
We are exposed to claims and litigation arising out of the ordinary course of
business. Management, after consulting with legal counsel, believes the
currently identified claims and litigation will not have a material adverse
effect on our results of operations or our financial condition taken as a whole.
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, 2002 and 2001
was $1,858,000 and $1,502,000, respectively. See note 3.
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.
24
EARNINGS PER COMMON SHARE
The Basic earnings per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding. 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
2002 2001 2000
---------------------------------------------
Numerator
Net income (loss) $ 2,712 $ (10,925) $ (7,785)
Less excess of preferred share buyback -- (793) --
Adjusted net income (loss) applicable to common stock $ 2,712 $ (11,718) $ (7,785)
=============================================
Denominator for basic earnings (loss) per
share - weighted average shares 22,553 25,137 23,483
Dilutive securities: Employee Stock Options 22 -- --
Denominator for diluted earnings (loss) per
share - weighted average shares 22,575 25,137 23,483
=============================================
Basic earnings (loss) per share $ .12 $ (.47) $ (.33)
=============================================
Diluted earnings (loss) per share $ .12 $ (.47) $ (.33)
=============================================
2. NETRADIO
In connection with the NetRadio initial public offering in October 1999, 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 that 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 principal balance of the Term Note, approximately $9.6
million, was due on November 14, 2001. During the quarter ended September 30,
2000, Navarre determined that the Term Note was impaired and Navarre recorded a
valuation reserve for the $9.6 million carrying value of the Note.
On March 26, 2001, Navarre and NetRadio amended the Term Note and the Company
agreed to forgive the repayment of $5.5 million in exchange for NetRadio's
prepayment of $1.0 million. The principal balance of the Term Note was adjusted
to $3.1 million and was due March 31, 2002.
During the quarter ended December 31, 2001, in connection with the liquidation
of NetRadio, the Company received a $1.5 million payment against the previously
fully reserved Term Note. At this time, the Company is unable to determine the
final settlement, if any, related to its equity ownership in Net Radio. As of
March 31, 2002 and 2001, the Company's carrying value of the Term Note was zero.
25
3. RESTRUCTURING
In December 2001, the Company initiated actions to close a warehouse and
distribution facility in Hawaii and subsequently consolidated the operations
into its Minneapolis facility. These actions resulted in the Company recording
an aggregate charge of $831,000, including goodwill impairment of $356,000. The
charges include $672,000 classified as restructuring and $159,000 of inventory
write-downs classified in cost of sales. Through March 31, 2002, the Company has
paid or incurred $356,000 of the $831,000 charge. The Company anticipates that
substantially all of the restructuring costs will be paid by March 2003.
INCURRED THOUGH BALANCE AS OF
TOTAL CHARGE MARCH 31, 2002 MARCH 31, 2002
------------------------------------------------------------
Inventory write-downs $ 159,000 $159,000 --
Severance costs 131,000 -- 131,000
Impairment charge 356,000 $356,000 --
Other 185,000 -- 185,000
------------------------------------------------------------
$ 831,000 $515,000 $316,000
------------------------------------------------------------
4. NOTES RECEIVABLE, RELATED PARTIES
During fiscal year 2002, the Company entered into a five year amended employment
contract with its Chief Executive Officer. The agreement includes a loan to the
executive for a maximum of $1,000,000, of which $285,225 was outstanding at
March 31, 2002 and an additional $714,775 was advanced to the Chief Executive
Officer on April 1, 2002. Under the terms of the loan, $200,000 of the
$1,000,000 principal and all unpaid and unforgiven interest is to be forgiven by
the Company on each of March 31, 2003, 2004, 2005, 2006 and 2007. The
outstanding note amount bears an annual interest rate of 5.25%.
5. BANK FINANCING AND DEBT
Navarre had a revolving line of credit with Congress Financial Corporation
through June 2001. On October 3, 2001, the Company entered into a new agreement
with General Electric Capital Corporation for a three-year $30 million credit
facility. In association with this agreement, we also pay certain facility and
agent fees. As of March 31, 2002, the Company had no balance outstanding on this
facility. Under this agreement the Company is required to meet certain
covenants. The Company is in compliance with these covenants as of March 31,
2002.
Interest under the GE Capital line of credit is at the Index Rate plus .25%
(5.0%) at March 31, 2002 and is payable monthly.
Interest paid was $173,000, $223,000, and $476,000 for the years ended March 31,
2002, 2001, and 2000, respectively.
6. SHAREHOLDERS' EQUITY
On May 1, 1998, the Company issued 1,523,810 shares of Class A Convertible
Preferred Stock in a private placement to a group of investors for aggregate
consideration of $20 million. The Class A Convertible Preferred Stock was issued
at a price of $13.125 per share and was convertible into five shares of Navarre
common stock at any time after June 30, 1998. All of the Class A Convertible
Preferred Stock was converted into common stock in fiscal 2000. In addition, for
each share of Class A Convertible Preferred Stock acquired, each investor
received a five-year warrant to purchase five shares of Navarre common stock at
a price $3.50 per share. The Company also issued warrants to the private
placement agent to purchase 380,953 shares of common stock at $2.625 per share.
During fiscal 1999, 7,913,815 common stock warrants were exercised for
$27,348,500. There were 72,408 warrants outstanding at March 31, 2002 and 2001.
The Class A Convertible Preferred Stock paid cumulative quarterly dividends of
ten percent (10%) payable beginning June 30, 1998. Total cash and stock
dividends paid in fiscal year 1999 were $594,000. No cash or stock dividends
were paid in fiscal year 2002, 2001, or 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.
26
On August 20, 1999, the Company announced that it had entered into a
subscription agreement with Fletcher International Limited ("Fletcher
International") for the issuance of up to 150,000 shares of Navarre's Class B
Convertible Preferred Stock ("Class B Preferred Stock") for an aggregate
purchase price of up to $37.5 million (the "Subscription Agreement"). Under the
terms of the Subscription Agreement, the Class B Preferred Stock could be issued
in three principal tranches. On August 20, 1999, Navarre issued the first
tranche, consisting of 34,000 shares of Class B Preferred Stock and a three-year
warrant to purchase up to 16,000 shares of Class B Preferred Stock. Fletcher
International paid a purchase price of $8.5 million, or $250 per share of Class
B Preferred Stock. Fletcher International would pay an additional $4.0 million,
or $250 per share of Class B Preferred Stock, if it exercised the warrant in its
entirety. On May 17, 2000, Fletcher International converted 20,390 shares of
Class B Preferred Stock to 2,115,057 shares of common stock.
On October 24, 2000, Navarre and Fletcher International entered into and closed
on a portion of the obligations contained in a Securities Redemption Agreement
("Redemption Agreement"). Under the Redemption Agreement, Navarre repurchased
all of the 13,610 shares of its Class B Preferred Stock not yet converted with a
carrying value of approximately $3.2 million. In connection with the repurchase,
Navarre paid Fletcher International $3.4 million and issued to Fletcher
International a promissory note due November 21, 2000 for an additional
$600,000. In November 2000, Navarre paid the promissory note and Fletcher
International returned the Warrant and all rights of Fletcher International and
Navarre to purchase and sell Navarre securities under the Subscription Agreement
were terminated.
In June 2000, Navarre hired the investment banking firm Sutro & Co., Inc. to
advise Navarre with respect to various strategic matters. In connection with its
engagement of Sutro, on October 1, 2000, Navarre issued Sutro a warrant to
purchase 10,000 shares of Navarre Common stock at a price of $4.50 per share.
On October 17, 2000, Navarre announced that its board of directors had
authorized it to repurchase up to 5,000,000 shares of Navarre common stock or
approximately twenty percent of its outstanding common stock, in market or
private transactions. During the years ending March 31, 2002 and 200, Navarre
repurchased 2,414,192 and 1,624,625 shares, respectively, for an average price
of $1.23.
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, 1999 115,198 1,075,596 $ 2.92
Additional shares 1,300,000 -- --
Granted (593,000) 593,000 7.56
Canceled 32,100 (32,100) 4.69
Exercised -- (185,328) 2.83
----------------------------------------------------
Balance on March 31, 2000 854,298 1,451,168 $ 3.02
Granted (563,000) 563,000 3.12
Canceled 97,881 (97,881) 3.92
Terminated 147,766 (147,766) 2.25
Exercised -- (5,512) 2.32
----------------------------------------------------
Balance on March 31, 2001 536,945 1,763,009 $ 4.32
ADDITIONAL SHARES 750,000 -- --
GRANTED (494,000) 494,000 1.10
CANCELED 141,400 (141,400) 3.78
TERMINATED 129,709 (129,709) 3.99
EXERCISED -- -- --
----------------------------------------------------
BALANCE ON MARCH 31, 2002 1,064,054 1,985,900 $ 3.77
====================================================
The weighted average fair value of options granted in 2002, 2001, and 2000 was
$0.91, $2.00, and $2.82 per share, respectively.
27
The exercise price of options outstanding at March 31, 2002 ranged from $0.93 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 2002 CONTRACTUAL LIFE EXERCISABLE PRICE PER SHARE
--------------------------------------------------------------------------------------------------------------
$ 0.93 - $ 1.91 534,000 4.97 years 32,000 $ 1.18
$ 2.38 - $ 2.94 437,000 1.27 years 297,075 $ 2.79
$ 3.19 - $ 4.50 476,400 3.20 years 192,300 $ 3.33
$ 5.22 - $ 15.38 538,500 3.46 years 232,600 $ 7.75
--------------------------------------------------------------------------------------------------------------
1,985,900 3.38 years 753,975 $ 4.39
=====================================================================================
The number of options exercisable at March 31, 2002, 2001, and 2000 was 753,975,
563,309, 358,940, respectively, at a weighted average exercise price of $4.39,
$4.32, and $3.02, 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 3.5%, 4.6%, and 5.8%, for 2002, 2001,
and 2000, respectively; volatility factor of the expected market price of the
Company's common stock of 117%, 134%, and 30%; and a weighted-average expected
life of the option of five years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value statement, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
(In thousands, except for per share data)
MARCH 31
2002 2001 2000
---------------------------------------------------
Pro forma net income (loss) $2,183 $(12,595) $(8,285)
Pro forma basic and diluted earnings (loss) per share $.10 $(.50) $(.36)
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 $0, $37,000, and $95,000, respectively, for
the years ended March 31, 2002, 2001, and 2000.
In fiscal year 2000 the Company recognized $495,000 in compensation associated
with the issuance of stock options to a vendor.
28
8. INCOME TAXES
Deferred income taxes reflect the available tax carryforwards and the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets as of
March 31, 2002 and 2001 (in thousands):
MARCH 31
2002 2001
---------------------------------
Net operating loss carryforward $ 12,516 $ 12,717
Collectability reserves 2,108 3,106
Allowance for sales returns 520 828
Book/tax depreciation 86 102
Reserve for sales discounts 189 218
Accrued vacations 115 105
Inventory - uniform capitalization 89 119
Compensation expense -- 120
---------------------------------
$ 15,623 17,315
Valuation allowance (15,623) (17,315)
---------------------------------
Total deferred tax assets $ -- $ --
=================================
At March 31, 2002 the Company has net operating loss carryforwards of
approximately $31,291,000, which will begin to expire in 2014.
A reconciliation of income tax benefit to the statutory federal rate is as
follows (in thousands):
YEAR ENDED MARCH 31
2002 2001 2000
---------------------------------------------------
Tax expense (benefit) at statutory rate $ 922 $ (3,715) $ (2,662)
State income taxes (benefit), net of federal benefit 162 (2,354) (215)
Valuation allowance (1,117) 5,354 1,422
Equity loss in NetRadio -- 591 1,412
Other 33 124 43
---------------------------------------------------
$ 0 $ 0 $ 0
===================================================
Effective tax rate
0% 0% 0%
===================================================
Cash paid (received) for income taxes was $0, $0, and $0 for the years ended
March 31, 2002, 2001 and 2000, respectively.
29
9. COMMITMENTS
LEASES
The Company leases substantially all of its office, warehouse and distribution
facilities. The terms of the lease agreements generally range from two to 15
years. The leases require payment of real estate taxes and operating costs in
addition to rent.
Total rent expense was $1,736,000, $1,731,000, and $1,613,000 for the years
ended March 31, 2002, 2001, and 2000, respectively.
The following is a schedule of future minimum rental payments required under
noncancelable operating leases as of March 31, 2002 (in thousands):
2003 $ 1,205
2004 1,079
2005 556
2006 559
2007 523
Thereafter 3,224
=========================
$ 7,146
=========================
10. MAJOR CUSTOMERS
The Company has three major customers who accounted for 45%, 49%, and 52%, of
sales in fiscal 2002, 2001, and 2000, respectively.
11. 401K PLAN
The Company has a 401k plan, which covers substantially all full-time employees.
The Company contributed $91,596, $90,846, and $54,231 to the plan for the years
ended March 31, 2002, 2001, and 2000, respectively.
12. BUSINESS SEGMENTS
Navarre currently operates in one business segment: home entertainment products.
Prior to fiscal year 2002, Navarre reported additional segments related to
eSplice, which was discontinued in fiscal year 2001, and NetRadio, which was
included prior to its initial public offering in October of 1999.
Through NDS, we distribute non-proprietary entertainment products including PC
software, major label music and DVD video. Through NEM, we distribute
proprietary prerecorded music of primarily independent artists and labels on CD
and DVD audio, and video in DVD and VHS format to national and retail music
retailers, rackjobbers, and one-stops throughout the United States and Canada.
In thousands YEARS ENDED MARCH 31
2002 2001 2000
---- ---- ----
SALES BY OPERATING DIVISIONS:
Home Entertainment
Navarre Distribution Services $ 258,685 $ 268,815 $ 225,146
Navarre Entertainment Media 45,132 45,384 59,282
--------------------------------------------------------
Total Home Entertainment $ 303,817 $ 314,199 $ 284,428
eSplice -- -- --
NetRadio -- -- 737
--------------------------------------------------------
TOTAL SALES $ 303,817 $ 314,199 $ 285,165
========================================================
30
13. QUARTERLY DATA - SEASONALITY (UNAUDITED)
The Company's quarterly operating results have fluctuated significantly in the
past and will likely do so in the future as a result of seasonal variations of
products ultimately sold at retail. The Company's business is affected by the
pattern of seasonality common to other suppliers of retailers, particularly the
holiday selling season. Historically, more than 60% of the Company's sales and
substantial portions of the Company's profits have been in the third and fourth
quarters of the calendar year. Due to the lower level of sales during the off
periods, the Company has historically incurred losses during these periods.
The following table sets forth certain unaudited quarterly historical financial
data for each of the eight quarters in the period ended March 31, 2002. (In
thousands, except per share amounts)
QUARTER ENDED
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
-----------------------------------------------------------------------
FISCAL YEAR 2002
Net Sales $54,485 $67,676 $116,040 $65,616
Gross profit 6,384 6,948 11,557 8,004
Net income (loss) $ (938) $ 32 $ 3,278 $ 340
=======================================================================
Net income (loss) per common share:
Basic and diluted $ (.04) $ .00 $ .15 $ .02
=======================================================================
QUARTER ENDED
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
-----------------------------------------------------------------------
FISCAL YEAR 2001
Net Sales $55,166 $78,378 $119,465 $61,190
Gross profit 7,648 9,133 14,004 6,636
Net income (loss) $(2,121) $(8,447) $ 2,876 $(3,233)
=======================================================================
Net income (loss) per common share:
Basic and diluted $ (.09) $ (.33) $ .08 $ (.13)
=======================================================================
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NAVARRE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND DEDUCTIONS -- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE PERIOD
================================================================================================================
YEAR ENDED MARCH 31, 2002:
DEDUCTED FROM ASSET ACCOUNTS:
INVENTORY OBSOLESCENCE RESERVE $ 0 $ 0 $ 0 $ 0
ALLOWANCE FOR DOUBTFUL ACCOUNTS 2,917,000 1,035,000 (2,841,000)(1) 1,111,000
ALLOWANCE FOR SALES RETURNS 2,069,000 (769,000) 1,300,000
----------------------------------------------------------------------
TOTALS $ 4,986,000 $ 266,000 $(2,841,000)(1) $2,411,000
======================================================================
Year ended March 31, 2001:
Deducted from asset accounts:
Inventory obsolescence reserve $ 0 $ 0 $ 0 $ 0
Allowance for doubtful accounts 2,511,000 620,000 (214,000)(1) 2,917,000
Allowance for sales returns 1,838,000 231,000 -- 2,069,000
----------------------------------------------------------------------
Totals $ 4,349,000 $ 851,000 $ (214,000)(1) $ 4,986,000
======================================================================
Year ended March 31, 2000:
Deducted from asset accounts:
Inventory obsolescence reserve $ 658,000 $ 0 $ (658,000) $ 0
Allowance for doubtful accounts 2,095,000 355,000 61,000(1) 2,511,000
Allowance for sales returns 1,715,000 123,000 -- 1,838,000
----------------------------------------------------------------------
Totals $ 4,468,000 $ 478,000 $ (597,000) $ 4,349,000
======================================================================
(1) Uncollectible accounts written off, net of recoveries.
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