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 quarter ended September 30, 1997
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 of other jurisdiction of (I.R.S. 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 (612) 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 - 6,906,420 SHARES AS OF OCTOBER 31, 1997
<PAGE>
NAVARRE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated balance sheets -
September 30, 1997 and March 31, 1997
Consolidated statements of operations -
Three and six months ended September 30, 1997 and 1996
Consolidated statements of cash flows Six months
ended September 30, 1997 and 1996
Notes to consolidated financial statements - September 30, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1997
----------- -----------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 14 $ 655
Accounts receivable, less allowance for doubtful accounts
and sales returns of $1,459 and $3,585, respectively 51,986 47,163
Inventories 28,316 16,854
Note receivable, officer 224 214
Prepaid expenses and other current assets 2,965 3,062
----------- -----------
Total current assets 83,505 67,948
Property and equipment, net of accumulated depreciation of
$3,070 and $2,571, respectively 3,329 3,438
Other assets:
Velvel distribution rights 4,763 5,346
Goodwill 1,366 1,492
Other assets 474 173
----------- -----------
Total assets $ 93,437 $ 78,397
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 34,790 $ 20,750
Current maturities of long-term debt 4,642 5,142
Accounts payable 48,373 45,503
Accrued expenses 632 1,453
Income taxes payable 135 135
----------- -----------
Total current liabilities 88,572 72,983
Minority interest in subsidiaries 5 --
Long-term debt, less current maturities 255 315
Shareholders' equity:
Preferred stock, no par value: Authorized shares -
5,000,000, Issued and outstanding shares - None
Common stock, no par value: Authorized shares -
20,000,000, Issued and outstanding shares - 6,902,248 8,005 8,005
Retained earnings (deficit) (3,125) (2,584)
Unearned compensation (275) (322)
----------- -----------
Total shareholders' equity 4,605 5,099
----------- -----------
Total liabilities and shareholders' equity $ 93,437 $ 78,397
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES
NOTE: THE BALANCE SHEET AT MARCH 31, 1997 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.
<PAGE>
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales:
Computer software $ 31,822 $ 33,412 $ 58,329 $ 61,422
Music 16,757 14,783 30,048 26,366
-------- -------- -------- --------
48,579 48,195 88,377 87,788
Cost of sales 42,341 42,082 77,864 76.607
-------- -------- -------- --------
Gross profit 6,238 6,113 10,513 11,181
Operating expenses:
Selling and promotion 1,284 1,304 2,555 2,472
Distribution and warehousing 632 627 1,295 1,142
General and administration 2,379 2,660 5,539 5,134
Amortization of intangible assets 405 19 814 21
-------- -------- -------- --------
4,700 4,610 10,203 8,769
4,610
-------- -------- -------- --------
Income from operations 1,538 1,503 310 2,412
Other expense:
Interest expense (656) (501) (1,215) (964)
Other expense (81) (143) (183) (248)
Equity in loss of affiliate -- (414) -- (414)
-------- -------- -------- --------
Income (loss) before income taxes 801 445 (1,088) 786
Income tax expense (benefit) 329 352 (446) 492
Minority interest in subsidiaries 47 -- 101 --
-------- -------- -------- --------
Net income (loss) $ 519 $ 93 $ (541) $ 294
======== ======== ======== ========
Earnings (loss) per common share $ .07 $ .01 $ (.08) $ .04
======== ======== ======== ========
Weighted average number of
common and common equivalent
shares outstanding 7,188 7,564 6,902 7,494
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (541) $ 294
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization of leasehold
improvements 602 474
Amortization of intangible assets 726 --
Amortization on unearned compensation 47 --
Minority interests in subsidiaries 5 --
Changes in operating assets and liabilities:
Accounts receivable (4,823) (6,088)
Inventories (11,462) (5,706)
Prepaid expenses and other assets (221) (74)
Accounts payable and accrued expenses 2,049 11,501
Income taxes payable -- (239)
Equity in loss of affiliate -- 414
-------- --------
Net cash (used in) provided by operating activities (13,618) 576
INVESTING ACTIVITIES
Note receivable, officer (10) (200)
Purchase of business -- (250)
Equity investment in business -- (887)
Purchase of equipment and leasehold improvements (493) (563)
-------- --------
Net cash used in investing activities (503) (1,900)
FINANCING ACTIVITIES
Payment on long-term debt (560) (132)
Proceeds from notes payable, bank 81,940 74,317
Payment on notes payable, bank (67,900) (73,006)
Exercise of common stock options -- 145
-------- --------
Net cash provided by financing activities 13,480 1,234
-------- --------
Net increase in cash 641 --
Cash at beginning of period 655 4
-------- --------
Cash at end of period $ 14 $ 4
======== ========
Supplemental schedule of non-cash
transactions; Common stock issued
as partial consideration for acquisition
and equity investment in businesses -- $ 1,075
======== ========
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
NAVARRE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Navarre Corporation and its
majority owned subsidiaries, Digital Entertainment, Inc. and Net Radio, Inc.,
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. All intercompany accounts and transactions
have been eliminated. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Because of the seasonal nature of the Company's business, the
operating results for the six month period ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
March 31, 1998. 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, 1997.
NOTE B - NET EARNINGS (LOSS) PER SHARE
Net earnings and loss per share is computed using the weighted average number of
common shares outstanding during the period. Common equivalent shares from stock
options are excluded from the computation as their effect is antidilutive. In
February 1997, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 128, "Earnings Per Share." This Statement replaces the
presentation of primary earnings per share (EPS) with basic EPS and also
requires dual presentation of basic and diluted EPS for entities with complex
capital structures. This statement is effective for financial statements for
periods ending after December 15, 1997. For the three month period ended
September 30, 1997, there is no difference between the dilutive net income per
share under Statement No. 128 and net income per share as reported. For the six
month period ended September 30, 1997, there is no difference between the basic
loss share under Statement No. 128 and net loss per share as reported.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of net
sales represented by certain items included in the Company's "Consolidated
Statements of Operations."
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
----- ----- ----- -----
Net sales:
Computer software 65.5% 69.3% 66.0% 70.0%
Music 34.5 30.7 34.0 30.0
----- ----- ----- -----
Total net sales 100.0 100.0 100.0 100.0
Cost of sales 87.2 87.3 88.1 87.3
----- ----- ----- -----
Gross profit 12.8 12.7 11.9 12.7
Selling and promotion 2.6 2.7 2.9 2.8
Distribution and warehousing 1.3 1.3 1.5 1.3
General and administration 4.9 5.6 6.3 5.9
Amortization of intangible assets 0.8 -- 0.9 --
----- ----- ----- -----
Income from operations 3.2 3.1 0.3 2.7
Interest expense 1.4 1.0 1.4 1.1
Other expense 0.2 0.3 0.2 0.3
----- ----- ----- -----
Net income (loss) 1.1% 0.2% (0.6)% 0.3%
===== ===== ===== =====
Certain of this information in this section contains forward-looking statements.
The Company's actual results could differ materially from the statements
contained in the forward-looking statements as a result of a number of factors,
including risks and uncertainties inherent in the Company's business, the
consumer market for music products and computer software products, retail
customer buying patterns, new or different competition in the Company's
traditional and new markets and the rate of new product development and
commercialization.
Net sales increased 0.8% from $48.2 million to $48.6 million for the three month
period and 0.7% from $87.8 million to $88.4 million for the six month period.
The gain was due to increased sales in the Music Products Division which were
partially offset by lower sales in the Computer Software Products Division.
Music sales increased by 13.5% from $14.8 million to $16.8 million during the
three month period and by 13.6% from $26.4 million to $30.0 million for the six
month period. This was primarily due to sales from labels added during the
second quarter. Computer products sales decreased by 4.8% from $33.4 million to
$31.8 million for the three month period and by 5.0% from $61.4 million to $58.3
million for the six month period. The decrease was primarily due to a much
smaller number of new releases of hit products.
Gross profit increased 1.6% or $125,000 from $6.1 million to $6.2 million for
the three month period but decreased 6.0% or $668,000 from $11.2 million to
$10.5 million for the six month period. As a percentage of net sales, gross
profit increased from 12.7% during the three month period ending September 30,
1996 to 12.8% for the same period in 1997 but decreased from 12.7% for the six
month period ending September 30, 1996 to 11.9% for the same period in 1997.
Overall gross margin increased for the three month period due to increased
margins in the Computer Products Division and declined during the six month
period due to a lower gross margin in the Company's music business caused in
part by a one-time change incurred in connection with the settlement of
litigation with one of the Company's vendors in which the Company agreed to
accept partial payment of certain amounts due to it and wrote off the balance
due to concerns about collectability of the balance. Gross margins from the
Computer Products Division's net sales were $3.2 million or 10.1% as a
percentage of net sales during the three month period in 1997 and $5.8 million
or 9.9% as a percentage of net sales for the six month period in 1997 compared
with $3.2 million or 9.5% as a percentage of net sales in the same three month
period in 1996 and $5.9 million or 9.6% as a percentage of net sales for the
same six month period in 1996. The improvement in gross margin
<PAGE>
for the Computer Products Division was due to strong performance in the two
CD-ROM categories targeted for growth -- personal productivity and reference
software. Gross margins from music sales were $3.0 million or 18.0% of music net
sales for the three month period in 1997 and $4.8 million or 16.1% of music net
sales for the six month period in 1997 compared with $2.9 million or 19.9% of
music net sales for the same three month period in 1996 and $5.3 million or
20.1% of music net sales for the same six month period in 1996. The decrease in
gross margin for the Music Products Division during the three month period was
primarily due to higher sales with lower margins at the Company's Hawaiian
branch. The six month decline in gross margin for the Music Products Division
was primarily due to the one time loss mentioned earlier.
Selling and promotion expense remained at $1.3 million during the same three
month period in 1997 and 1996 but increased from $2.5 for the six month period
in 1996 to $2.6 for the same period in 1997. As a percentage of net sales it
decreased from 2.7% during the three month period in 1996 to 2.6% during the
same period in 1997 but increased as a percentage of net sales from 2.8% during
the six month period in 1996 to 2.9% for the same period in 1997. This decrease
for the three month period was primarily due to efficiencies achieved from
higher sales volume. The higher level of expense for the six month period was
primarily due to expenses in Net Radio where none existed in the 1996 period and
higher levels of sales expense related to the expansion of the proprietary music
for the Music Products Division.
Distribution and warehousing expense increased slightly from $627,000 in the
three month period for 1996 to $632,000 in the same period in 1997 and from $1.1
million for the six month period in 1996 to $1.3 million for the same period in
1997. As a percentage of net sales, it remained the same at 1.3% of net sales
for the three month period in 1996 and 1997 and from 1.3% of net sales for the
six month period in 1996 to 1.5% of net sales for the same period in 1997. The
increased expense was related to increased costs associated with a decrease in
the average order size.
General and administration expenses decreased from $2.7 million during the three
month period in 1996 to $2.4 million during the same period in 1997 but
increased from $5.1 million during the six month period in 1996 to $5.5 million
during the same period in 1996. As a percentage of net sales, it decreased from
5.6% during the three month period in 1996 to 4.9% during the same period in
1997 but increased from 5.9% during the six month period in 1996 to 6.3% for the
same period in 1996. The decrease for the three month period was primarily due
to the Company's commitment in controlling these expenses and the increase for
the six month period was primarily due to expenses in the newly acquired Net
Radio where none existed last year and costs associated with increased staffing
to support anticipated growth. Amortization of intangible assets represents the
Company's amortization of its investment in Velvel Musical Products LLC. In
November 1996, the Company acquired an interest in Velvel Music Products in
exchange for distribution rights with respect to Velvel products. The Company is
amortizing its investment in the Velvel distribution rights over the five year
life of the distribution agreement. The decrease in the provision for doubtful
accounts was due to the application of the receivable balance of three customers
who filed bankruptcy this past quarter, to the provision.
Interest expense increased from $501,000 for the three month period in 1996 to
$656,000 for the three month period in 1997 and from $964,000 for the six month
period in 1996 to $1.2 million for the same period in 1997. This increase
resulted from substantially higher borrowing to support the Company's higher
inventory levels.
Net earnings were $519,000 for the three month period in 1997 compared with net
earnings of $93,000 in the same three month period in 1996 and a net loss of
$541,000 resulted for the six month period in 1997 compares with net earnings of
$294,000 for the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its working capital needs through bank
borrowings. The level of borrowings has historically fluctuated significantly
during the year. At September 30, 1997, the Company had net accounts receivable
of $52.0 million and inventory of $28.3 million. These assets are primarily
financed by accounts payable of $48.4 million and bank borrowings of $34.8
million.
The Company has a revolving line of credit with Congress Financial Corporation.
The credit facility has a maximum borrowing limit of $45.0 million and is
secured by substantially all the Company's assets. The available amount
fluctuates based on an asset borrowing base.
<PAGE>
The Company had a net loss of $541,000 during this six month period. The Company
financed its operations in part by using cash of $13.6 million from operating
activities. Accounts receivable increased by $4.8 million and inventories
increased by $11.5 million during the period. These changes were offset
partially by a $2.0 million increase in accounts payable and accrued expenses.
Investing activities used $503,000 of cash, including $493,000 for the purchase
of furniture, equipment and leasehold improvements. The Company generated net
cash of $13.5 million in financing activities primarily through proceeds of net
bank borrowings of $14.0 million during the period offset against payments of
$560,000 on long-term debt. Cash at the end of the period increased by $641,000.
The Company anticipates it will utilize its credit facility during the next
twelve months to meet seasonal working capital needs. The Company believes that
the funds available under its current credit facility together with cash flow
from operations will be adequate to fund its working capital needs over the next
twelve months.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
STEPHEN KORNFELD AND WILLIAM WEISS V. NET RADIO CORPORATION
As previously disclosed, on April 5, 1996, Stephen Kornfeld and William
Weiss filed a lawsuit against Net Radio Corporation ("Net Radio") in Hennepin
County District Court in the matter of Stephen Kornfeld et. al v. Net Radio
Corporation et. al (Court File No. CT96-005402) alleging that they had an oral
agreement to acquire an equity interest in Net Radio and requesting specific
performance and damages. In April 1997, the Company acquired Net Radio. On
August 19, 1997, the Company and Net Radio entered into a settlement with the
plaintiffs under which the Company agreed to issue to the plaintiffs 10,000 of
the shares that the Company deposited in escrow in connection with its Net Radio
and the plaintiffs agreed to dismiss all claims against Net Radio.
ITEM 2. CHANGES IN SECURITIES
(c) ISSUANCE OF UNREGISTERED SECURITIES
As noted above, on August 19, 1997 the Company and Net Radio entered
into a settlement with the plaintiffs under which the Company agreed to issue to
the plaintiffs 10,000 of the shares that the Company deposited in escrow in
connection with its Net Radio and the plaintiffs agreed to dismiss all claims
against Net Radio. The Company believes that this transaction was exempt under
Section 4(2) of the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on September 4, 1997. At
the meeting, the following person was re-elected as director of the Company:
NAME VOTES FOR VOTES WITHHELD
---- --------- --------------
Michael L. Snow 5,580,361 46,052
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
Exhibit 11: Statement Re: Computation of per share earnings
Exhibit 27: Financial data schedule
(b) The Company did not file any reports on Form 8-K during the three
months ended September 30, 1997
<PAGE>
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: November 8, 1997 By /s/ Eric H. Paulson
-----------------------
Eric H. Paulson
Chairman of the Board,
President and
Chief Executive Officer
Date: November 8, 1997 By /s/ Charles E. Cheney
------------------------
Charles E. Cheney
Treasurer and Secretary,
Executive Vice President,
and Chief Financial Officer
NAVARRE CORPORATION
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------- ------- ------- -------
Weighted average shares outstanding 6,902 6,760 6,902 6,596
Net effect of dilutive stock options
and warrants - based on the treasury
stock method 286 804 -- 898
-------- ------- ------- -------
Total 7,188 7,564 6,902 7,494
======== ======= ======= =======
Net income(loss) $ 519 $ 93 $ (541) $ 294
======== ======= ======= =======
Net income(loss) per common share $ .07 $ .01 $ (.08) $ .04
======== ======= ======= =======
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 14
<SECURITIES> 0
<RECEIVABLES> 52,210
<ALLOWANCES> 1,459
<INVENTORY> 28,316
<CURRENT-ASSETS> 83,505
<PP&E> 3,329
<DEPRECIATION> 3,070
<TOTAL-ASSETS> 93,437
<CURRENT-LIABILITIES> 88,572
<BONDS> 0
0
0
<COMMON> 8,005
<OTHER-SE> (3,400)
<TOTAL-LIABILITY-AND-EQUITY> 93,437
<SALES> 88,377
<TOTAL-REVENUES> 88,377
<CGS> 77,864
<TOTAL-COSTS> 10,203
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 721
<INTEREST-EXPENSE> 1,215
<INCOME-PRETAX> (1,088)
<INCOME-TAX> (446)
<INCOME-CONTINUING> 310
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (541)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
