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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from_______________to________________
Commission File Number 0-22982
NAVARRE CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1704319
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7400 49TH AVENUE NORTH, NEW HOPE, MN 55428
(Address of principal executive offices)
Registrant's telephone number, including area code (763) 535-8333
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, No Par Value - 21,616,187 shares as of July 31, 2002
NAVARRE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
June 30, 2002 and March 31, 2002
Consolidated Statements of Operations -
Three months ended June 30, 2002 and 2001
Consolidated Statements of Cash Flows - Three months
ended June 30, 2002 and 2001
Notes to Consolidated Financial Statements - June 30, 2002
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATION
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, 2002 MARCH 31, 2002
------------- --------------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash $ 9,587 $ 18,966
Accounts receivable, less allowance for doubtful accounts
and sales returns of $2,572 and $2,411 respectively 46,587 42,666
Inventories 26,236 15,316
Prepaid expenses and other current assets 510 163
------------ ------------
Total current assets 82,920 77,111
Property and equipment, net of accumulated depreciation of $4,307
and $5,089, respectively 3,056 3,028
Other assets:
Note receivable, related parties 953 289
Other assets 1,499 657
------------ ------------
Total assets $ 88,428 $ 81,085
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ -- $ --
Accounts payable 61,687 54,305
Accrued expenses 2,193 2,430
------------ ------------
Total current liabilities 63,880 56,735
Shareholders' equity:
Common stock, no par value:
Authorized shares - 100,000,000,
issued and outstanding shares-21,616,187 and
21,616,187, respectively 91,404 91,404
Retained deficit (66,856) (67,054)
------------ ------------
Total shareholders' equity 24,548 24,350
------------ ------------
Total liabilities and shareholders' equity $ 88,428 $ 81,085
============ ============
Note: The balance sheet at March 31, 2002 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
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NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
2002 2001
---------- ----------
Net sales $ 69,974 $ 54,485
Cost of sales 61,926 48,101
---------- ----------
Gross profit 8,048 6,384
Operating expenses:
Selling and promotion 2,130 1,850
Distribution and warehousing 1,148 1,245
General and administration 4,403 4,161
Depreciation and amortization 290 342
---------- ----------
7,971 7,598
---------- ----------
Income (loss) from operations 77 (1,214)
Other expense:
Interest expense (32) (24)
Other income and expense 153 300
---------- ----------
Net income (loss) $ 198 $ (938)
========== ==========
Income (loss) per common share:
Basic $ .01 $ (.04)
========== ==========
Diluted $ .01 $ (.04)
========== ==========
Weighted average common and
common equivalent shares outstanding
Basic 21,616 23,702
========== ==========
Diluted 21,764 23,702
========== ==========
4
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
2002 2001
---------- ----------
OPERATING ACTIVITIES
Net income (loss) $ 198 $ (938)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 290 352
Write off of notes receivable 64 23
Changes in operating assets and liabilities:
Accounts receivable (3,921) 8,129
Inventories (10,920) (1,428)
Prepaid expenses and assets (1,189) (1)
Accounts payable and accrued expenses 7,145 (9,851)
---------- ----------
Net cash used in operating activities (8,333) (3,714)
INVESTING ACTIVITIES
Note receivable, related parties (728) --
Purchase of equipment and leasehold improvements (318) (405)
---------- ----------
Net cash used in investing activities (1,046) (405)
FINANCING ACTIVITIES
Repurchase of Navarre common stock -- (751)
---------- ----------
Net cash used in financing activities -- (751)
Net decrease in cash (9,379) (4,870)
Cash at beginning of period 18,966 19,118
---------- ----------
Cash at end of period $ 9,587 $ 14,248
5
NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Navarre Corporation have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
All intercompany accounts and transactions have been eliminated. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Because of the
seasonal nature of our business, the operating results for the three month
period ended June 30, 2002 are not necessarily indicative of the results that
may be expected for the year ending March 31, 2003. For further information,
refer to the financial statements and footnotes thereto included in Navarre
Corporation's Annual Report on Form 10-K for the year ended March 31, 2002.
NOTE B - NET EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
(In thousands, except per share data)
THREE MONTHS ENDED JUNE 30,
2002 2001
---------- ----------
Numerator:
Net income (loss) $ 198 $ (938)
Denominator:
Denominator for basic earnings per
share--weighted-average shares 21,616 23,702
Dilutive securities: Employee Stock Options 148 --
---------- ----------
Denominator for diluted earnings
per share--adjusted
weighted-average shares 21,764 23,702
========== ==========
Basic income (loss) per share $ .01 $ (.04)
========== ==========
Dilutive income (loss) per share $ .01 $ (.04)
========== ==========
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NOTE C: 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 June 30, 2002, the Company has
paid or incurred $615,000 of the $831,000 charge. The Company anticipates that
substantially all of the restructuring costs will be paid by March 2003.
In thousands INCURRED THOUGH BALANCE AS OF
TOTAL CHARGE JUNE 30, 2002 JUNE 30, 2002
------------ --------------- -------------
Inventory write-downs $ 159,000 $ 159,000 --
Severance costs 131,000 61,000 70,000
Impairment charge 356,000 $ 356,000 --
Other 185,000 39,000 146,000
---------- ---------- ----------
$ 831,000 $ 615,000 $ 216,000
---------- ---------- ----------
ITEM 2. 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 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. We operate in one
business segment and have two operating units: Navarre Distribution Services
(NDS) and Navarre Entertainment Media (NEM).
Through NDS, we distribute non-proprietary entertainment products including PC
software, major label music, DVD video and video games. 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; (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.
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 including (i) increased
ownership of content, (ii) exclusive licenses and
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outright acquisition, (iii) possible acquisition of competing independent
distribution companies, and (iv) continuing to seek new proprietary distribution
opportunities.
FORWARD LOOKING STATEMENTS
Certain information in this Management's Discussion and Analysis section
contains forward-looking statements. The statements in this Management's
Discussion and Analysis section that are not strictly historical are "forward
looking" statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934 and are intended to
be covered by the safe harbors created by these sections. The forward looking
statements are subject to risks and uncertainties and the actual results that
the Company achieves may differ materially from these forward-looking statements
due to such risks and uncertainties, including (i) developments in the retail
and consumer markets for prerecorded music products, video products and computer
software products; (ii) retail consumer buying patterns; (iii) the ability of
consumers to download or acquire products for free on the internet; (iv) new and
different competition in the Company's traditional and new markets; (v) the
Company's dependence upon seasonality in its business; (vi) the Company's
ability to attract and retain large retail customers that account for a
significant part of its business; (vii) the Company's ability to successfully
act as distributor to on-line retailers; (viii) the Company's ability to manage
its inventory; (ix) the Company's dependence upon content providers including
recording labels and artists and software developers; (x) the Company's ability
to react to changes in the distribution of software and prerecorded music,
including electronic distribution; (xi) the Company's dependence upon bank
financing to satisfy its seasonal working capital requirements; (xii) the
Company's ability to successfully defend itself against litigation and (xiii)
the Company's successful integration of Encore Software into the Company's
business. A detailed statement of risks and uncertainties related to the Company
is included in the Section "Business- Forward Looking Statements" in the
Company's Form 10-K for the year ended March 31, 2002.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of net
sales represented by certain items included in our "Consolidated Statements of
Operations."
THREE MONTHS ENDED JUNE 30
2002 2001
---------- ----------
Net sales:
Distribution Services 84.8% 88.1%
Entertainment Media 15.2 11.9
---------- ----------
Total net sales 100.0 100.0
Cost of sales 88.5 88.3
---------- ----------
Gross profit 11.5 11.7
Selling and promotion 3.0 3.4
Distribution and warehousing 1.6 2.3
General and administration 6.3 7.6
Depreciation and amortization 0.4 0.6
---------- ----------
Income (loss) from operations 0.1 (2.2)
Interest expense (0.0) (0.0)
Other income and expense 0.2 0.5
---------- ----------
Net income (loss) 0.3% (1.7)%
========== ==========
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NET SALES
Net sales for the first quarter ended June 30, 2002 increased 28.4% to $70.0
million from $54.5 million in the same period in fiscal 2002. The increase in
net sales was due to increased sales for both Navarre Distribution Services and
Navarre Entertainment Media. Net sales for NDS increased 23.7% to $59.3 million
for the first quarter ended June 30, 2002 from $48.0 million for the same period
in fiscal 2002. This increase was the result of significant increases in the
volume of sales of all non-proprietary categories, including video games, DVD
video, entertainment, personal productivity and education software. Net sales
for NEM increased 63.7% to $10.6 million for the first quarter ended June 30,
2002 from $6.5 million for the same period in fiscal 2002. This increase was the
result of our ability to acquire or license a deeper range of proprietary
independent music and video content.
GROSS PROFIT
Gross profit increased 26.1% or $1.6 million to $8.0 million for the first
quarter ended June 30, 2002 from $6.4 million for the same period in fiscal
2002. As a percentage of net sales, gross profit for first quarter ended June
30, 2002 decreased to 11.5% from 11.7% for the same period in fiscal 2002. Gross
profit from NDS net sales for the first quarter ended June 30, 2002 was $6.4
million or 10.7% as a percentage of net sales compared with $5.0 million or
10.4% as a percentage of net sales in the same period in fiscal 2002. This
increase in gross profit and as a percentage of net sales for NDS resulted from
our ability to use working capital to obtain early pay discounts from our
vendors. Gross profit from NEM net sales for the first quarter ended June 30,
2002 was $1.7 million or 15.9% as a percentage of net sales compared with $1.4
million or 21.5% as a percentage of net sales in the same period in fiscal 2002.
The higher gross profit as a percentage of net sales for NEM for the period
ended June 30, 2001 was due to a reduction in the returns reserve. We believe
that the fiscal 2003 gross profit for NEM to be more reflective of what we can
expect in the future.
OPERATING EXPENSES
Selling and promotion expense for the first quarter ended June 30, 2002
increased to $2.1 million from $1.9 million for the same period in fiscal 2002.
As a percentage of net sales, selling and promotion expense decreased to 3.0%
for the first quarter ended June 30, 2002 from 3.4% for the same period in
fiscal 2002. The decrease as a percentage of net sales was due to lower costs
associated with improved management of our vendors to reduce the need for
expedited freight.
Distribution and warehousing expense for the first quarter ended June 30, 2002
decreased to $1.1 million from $1.2 million for the same period in fiscal 2002.
As a percentage of net sales, distribution and warehousing expense decreased to
1.6% for the first quarter ended June 30, 2002 from 2.3% for the same period in
fiscal 2002. The decrease in distribution and warehousing expense and decrease
as a percentage of net sales were due to the overall improved management of the
warehousing expenses.
General and administration expenses for the first quarter ended June 30, 2002
increased to $4.4 million from $4.2 million for the same period in fiscal 2002.
As a percentage of net sales, general and administration expenses decreased to
6.3% for the first quarter ended June 30, 2002 from 7.6% for the same period in
fiscal 2002. The decrease as a percentage of net sales was due to increased
efficiencies of IT expense as it relates to warehousing operations.
Depreciation and amortization was $290,000 for the first quarter ended June 30,
2002 compared to $342,000 for the same period in fiscal 2002.
Interest expense for the first quarter ended June 30, 2002 was $32,000 compared
to $24,000 for the same period in fiscal 2002. This increase resulted from
having a larger available line of credit for the first quarter ended June 30,
2002 than for the same period in fiscal 2002.
9
Other income, which consists principally of interest income, was $153,000 for
the first quarter ended June 30, 2002 compared to $300,000 for the same period
in fiscal 2002. The decrease resulted from not having a principal balance on the
NetRadio note and lower interest rates.
Due to the accumulated losses from prior years, we have not recorded any
provision for taxes.
We had net income for the first quarter ended June 30, 2002 of $198,000 compared
to a loss of $938,000 for the same period in fiscal 2002.
MARKET RISK
Although we are subject to some interest rate risk, because we currently have
limited borrowings under our bank credit facility, 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
and sale of equity securities. The level of borrowings has historically
fluctuated significantly during the year. At June 30, 2002, we had net accounts
receivable of $46.6 million, inventory of $26.2 million, accounts payable of
$61.7 million and no borrowings under our bank credit facility.
For the fiscal first quarter ended June 30, 2002, net sales were $70.0 million,
an increase of $15.5 million compared to net sales of $54.5 million for the same
period in fiscal 2002. We used cash of $8.3 million for operating activities.
Accounts receivable increased by $3.9 million, inventories increased by $10.9
million and accounts payable and accrued expense increased by $7.1 million. Due
to the seasonal nature of our business and the holiday selling season, inventory
and accounts receivable typically increase during the first three quarters of
our fiscal year. Investing activities used $1.0 million of cash, $728,000 for an
advance to our Chief Executive Officer under an employment agreement that
includes a loan of $1.0 million and $318,000 for the purchase of furniture,
equipment and leasehold improvements. Cash decreased by $9.4 million during the
period.
On July 31, 2002, the Company purchased the primary assets of Encore Software,
Inc. ("Encore") pursuant to an Asset Purchase Agreement between the Company and
the Seller dated June 7, 2002 (the "Purchase Agreement"). Encore is an
interactive publisher in the videogame and PC CD-ROM markets, but was in a
Chapter 11 Bankruptcy in the U.S. Bankruptcy Court for the Central District of
California. The assets purchased by the Company included certain fixed assets,
intellectual property, inventory, receivables, and contract rights related to
Encore's business. Pursuant to the Purchase Agreement, the Company paid Encore
approximately $7.0 million in cash and $2.75 million in debt. A note for
$650,000 of the debt is contingent upon an approval date with one of the video
games purchased. To finance the purchase, Navarre borrowed $2.7 million under
its bank credit facility.
Although we believe we have sufficient cash and working capital to meet our
short-term liquidity and capital requirements, we anticipate we could utilize
our credit facility during the next twelve months to meet seasonal working
capital needs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information with respect to disclosures about market risk is contained in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Market Risk" in this Form 10-Q.
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PART II. OTHER INFORMATION
ITEM 1. 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 its 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 its financial position or results of operation. In addition, we are
subject to the litigation listed below.
SECURITIES LITIGATION
As previously disclosed, this section was brought against Navarre and its
directors in the United States District Court for the District of Minnesota. 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.
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 against Navarre 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 in connection with a distribution agreement between
Plaintiff and Navarre.
On April 26, 2001, we answered Plaintiff's Complaint, denied liability, asserted
certain affirmative defenses, and asserted a 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 Plaintiff served his response to the motion on June 21, 2002,
and we replied on June 30, 2002. The motion was heard on July 25, 2002, and the
court took the matter under advisement. The trial setting has been postponed
pending the outcome of the motion. 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 5. OTHER INFORMATION
On July 31, 2002, we purchased the assets of Encore Software, Inc from
United States Bankruptcy Court. We will file a Form 8-K within fifteen days of
July 31, 2002 with respect to this transaction.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is included herein:
Exhibit 99.1 Certification of Chief Executive Officer and
Chief Financial Officer pursuant to 18 USC Section 1350.
(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the three months ended
June 30, 2002.
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NAVARRE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NAVARRE CORPORATION
(Registrant)
Date: August 9, 2002 By /s/ Eric H. Paulson
----------------------------------
Eric H. Paulson
Chairman of the Board,
President and
Chief Executive Officer
Date: August 9, 2002 By /s/ James Gilbertson
----------------------------------
James Gilbertson,
Vice President and
Chief Financial Officer
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