UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
Form 8-K
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 6, 1997
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.)
0-22982
(Commission File Number)
7400 49th Avenue North
New Hope, Minnesota 55428
(Address of principal executiv (Zip Code)
offices)
Registrant's telephone number, including area code: (612) 535-8333
Item 5. Other Information.
Net Radio Corporation.
In a letter dated March 7, 1997, Navarre Corporation
("Navarre" or the "Company") announced that it has entered into a
series of agreements under which Net Radio Corporation, a Nevada
corporation ("Net Radio (Nevada)") would be merged into and with
a wholly-owned subsidiary of the Company, Net Radio Corporation,
a Minnesota corporation ("Net Radio (Minnesota)"). Net Radio
(Nevada) owns and operates Net Radio Network, an Internet-only radio
network. Under the terms of the proposed transaction, the
Company would issue up to 2,100,000 of its common stock to the
former shareholders of Net Radio (Nevada). The exact number
of shares to be issued to former shareholders of Net Radio
(Nevada) depends upon the achievement by Net Radio (Minnesota)
of sales and operating profit goals in the two years after the
closing date of the merger.
The Company also indicated in the letter that in connection
with the acquisition of Net Radio (Nevada), that ValueVision
International, Inc. ("ValueVision") would acquire fifteen percent
(15%) of Net Radio (Minnesota) after the transaction in exchange
for an investment of $3.0 million consisting of $1.0 million in
cash at closing, with an additional $2.0 million to be
contributed to future advertising. Once Net Radio (Minnesota)
achieves sales revenue of $3.0 million in any rolling, consecutive
four quarter
period, (i) Net Radio (Minnesota), at its option, may require
ValueVision to purchase an additional 4.95 percent of Net Radio
(Minnesota) for $500,000 in cash and (ii) ValueVision, at its option,
may invest $500,000 in cash and receive 4.95 percent of Net Radio
(Minnesota). In the event that either Net Radio (Minnesota) or
ValueVision exercises its option, the other party's option expires.
ValueVision also has the right to convert its Net Radio (Minnesota)
shares into shares of Navarre's Common Stock in the future upon the
occurrence of certain events. A copy of the Company's Letter to
Shareholders is attached as Exhibit 99.1 to this Form 8-K. Exhibit A
to the shareholder letter sets forth the circumstances under which the
shares will be issued to the shareholders of Net Radio (Nevada).
Exhibit B sets forth the terms of the ValueVision investment and the
circumstances under which the ValueVision shares are convertible
into shares of the common stock of Navarre Corporation.
Musicland Stores Corporation
In February 1997, Musicland Stores Corporation ("Musicland")
announced that it had entered into oral arrangements with
substantially all of its major vendors, including the Company,
under which Musicland agreed that it would cease making
additional payments on outstanding accounts payable in existence
as of February 6, 1997. In connection with this announcement
Musicland agreed that future invoices would be paid on each
Thursday for the prior week's invoices. On February 6, 1997,
Musicland believed that the accounts payable to Navarre, net of
adjustments, to be approximately $5.2 million. The Company is
continuing to ship Musicland product per the agreement and has
been receiving payment within the terms set forth. The Company
believes that as long as this arrangement continues, it will not
have a material adverse effect on the Company's cash flow
position. Musicland has not yet indicated the circumstances
under which it intends to pay the outstanding balance on its
accounts payable, including the accounts payable with respect to
the Company. The Company continues to work with Musicland to try
to facilitate its continued operations. In the event that
Musicland was to cease operations or were unable to pay all or
significant portions of the Company's current receivable for
Musicland, it could have an adverse effect on the Company.
Item 7. Exhibits
Exhibit 99.1 March 7, 1997 Letter to Shareholders
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
Dated: March 19, 1997
By: /S/ Eric H. Paulson
Chief Executive Officer
March 7, 1997
To Shareholders of Navarre Corporation
We are writing you to advise you with respect to a
pending transaction ("Transaction") between Navarre
Corporation, a Minnesota corporation ("Navarre" or the
"Company"), Net Radio Corporation, a Nevada corporation
("Net Radio"), and ValueVision International, Inc., a
Minnesota corporation ("ValueVision").
Background
On May 1, 1996, the Company entered into a Stock
Purchase Agreement (the "May 1996 Agreement") with Net
Radio. Net Radio owns and operates Net Radio Network, an
Internet-only radio network. Under the terms of the May
1996 Agreement, the Company agreed to pay $1.5 million for
one-half of the outstanding Common Stock of Net Radio. The
$1.5 million was used by Net Radio for working capital. In
addition, the Company entered into an option agreement with
the existing shareholders of Net Radio under which the
Company had the right to purchase up to twenty percent (20%)
of Net Radio's outstanding stock owned by these shareholders
pursuant to a formula based upon Net Radio's earnings before
interest and taxes from May 1, 1997 through April 30, 1998.
The Company's acquisition of its equity interest in Net
Radio was described in the Company's 1996 Annual Report to
Shareholders and its Form 10-K for the year ended March 31, 1996.
The Company acquired the interest in Net Radio as part
of its diversification strategy, which includes becoming a
content provider to the Internet as well as a national
distributor of both prerecorded music and personal computer
software. In its 1996 Form 10-K, the Company detailed the
steps that it was taking to achieve these goals, including
expanding its business through strategic acquisitions.
Subsequent to the Company's investment in Net Radio,
it became apparent to the Company that Net Radio needed
additional funds for working capital. The Company worked
with Net Radio to assist it in improving its sales and
marketing. Although this resulted in additional sales, Net
Radio has not been able to achieve significant sales
revenues or to achieve operating profit. Net Radio's
revenues for the five-month period ended September 30, 1996
were $147,000 and Navarre recognized a loss of $414,000 with
respect to its investment in Net Radio. For the three
months ended December 31, 1996, Net Radio reported revenues
of $352,505 and Navarre recognized a loss of $172,000 with
respect to its investment in Net Radio. During the period
from May 1, 1996 through January 31, 1997, Net Radio had
revenue of $597,000 and a loss of $1,344,000.
The Transaction
The Company believed and continues to believe that Net
Radio has a very exciting concept, but that Net Radio
requires substantial additional capital and expertise. The
Company provided additional support to Net Radio, but
eventually advised Net Radio that the Company was unwilling
to invest additional sums of money unless it could arrive at
a means of acquiring Net Radio. Notwithstanding the
continuing losses incurred by Net Radio, part of the
attractiveness of the Transaction for the Company is the
diversification opportunity presented by Net Radio. The
Company believes that Internet radio is a powerful medium
for delivering music as well as advertising.
The Company began to negotiate with management and
controlling shareholders of Net Radio to purchase Net Radio.
These negotiations became protracted and were discontinued
on several occasions. In the meantime, Net Radio continued
to lose money and was forced to lay off some of its staff.
In March 1997, the Company and Net Radio reached agreement
on final terms and agreed to proceed with the Transaction.
Under the terms of the Transaction, Net Radio will be
merged into a wholly-owned subsidiary of the Company and the
Company will issue to the former shareholders of Net Radio
up to 2,100,000 shares of its Common Stock (the "Navarre
Shares"). Substantially all the Navarre Shares to be issued
are, however, contingent on Net Radio achieving specified
levels of sales and operating profits. The Navarre Shares
would be issued as follows:
125,00 shares are to be issued at closing. Of
these shares, 20,000 shares will be issued to
certain shareholder-creditors of Net Radio for
release of their security interests in Net Radio
assets. The remaining 105,000 shares will be put
in an escrow account, subject to forfeiture
depending upon the resolution of certain claims
pending against Net Radio.
Up to 1,175,000 shares are to be issued contingent
upon Net Radio achieving specified sales and pre-
tax income results in the initial twelve months
after the closing of the Transaction.
Up to 800,000 shares (plus an additional 800,000
shares if not previously earned) are to be issued
upon achievement of certain sales and operating
results in the thirteenth through twenty-fourth
months after the closing of the Transaction.
Attached as Schedule A is a detailed description of the
Navarre Shares issuable under the Transaction. The Company
and Net Radio decided to structure the transaction as an
"earn-out" with substantially all of the consideration
contingent upon future performance of Net Radio. The
parties believe that although Net Radio has the potential
to achieve significant sales and operating income in the
future, it has been unable to achieve these milestones in
the past, and, therefore, establishing an earn-out based on
future performance is designed to best achieve both parties'
expectations.
In pursuing the Transaction, the Company decided to
proceed only if it could find a corporate partner to provide
additional funding and expertise to Net Radio.
Simultaneously with the Company's acquisition of Net Radio,
ValueVision will make an investment of $3.0 million in the
new subsidiary, which will be named Net Radio, consisting of
$1.0 million in cash and an agreement to provide $2.0
million in advertising time in exchange for acquiring
fifteen percent (15%) of the Net Radio shares. Once Net
Radio achieves sales revenue of $3.0 million in any rolling,
consecutive four quarter period, (i) Net Radio, at its
option, may require ValueVision to purchase an additional
4.95 percent of Net Radio for $500,000 in cash and (ii)
ValueVision, at its option, may invest $500,000 in cash and
receive 4.95 percent of Net Radio. In the event that either
Net Radio or ValueVision exercises its option, the other
party's option expires. ValueVision also has the right to
convert its Net Radio shares into shares of Navarre's Common
Stock in the future upon the occurrence of certain events.
A description of the ValueVision investment and conversion
right is described in Schedule B.
In connection with the Transaction, the Company has
entered or will enter into the following agreements with Net
Radio's directors, officers and shareholders:
Noncompete Agreements. Certain shareholders and
employees of Net Radio will sign non-compete agreements with
Navarre and Net Radio.
Employment Agreements. Net Radio will enter into
employment or consulting agreements with certain officers of
Net Radio.
Voting Agreement. Certain of the former shareholders
of Net Radio ("Net Radio Shareholders") will enter into a
shareholder voting agreement appointing Eric H. Paulson and
Charles E. Cheney, with full power of substitution, to vote
the Net Radio Shareholders' Navarre Shares for a certain
time period which shall terminate the earlier of: (i) ten
(10) years from the effective date of the merger; or (ii)
such time that any Navarre Shares are sold by such
shareholders in conjunction with a registered public
offering by Navarre. Commencing January 1, 2001, any
Navarre Shares subject to the Voting Agreement held by any
shareholder who owns or controls (including through
affiliates of the shareholder) less than 200,000 of the
subject shares shall no longer be subject to this Voting
Agreement.
Shareholder Rights Agreement. Certain Net Radio
Shareholders will enter into a shareholder rights agreement
with certain lock-up, registration rights and rights of
first refusal with respect to the Navarre Shares to be
received pursuant to the terms of the merger.
Other Agreements. In addition, shareholders or other
employees of Net Radio also will receive or enter into one
or more of the following documents: (i) agreement of
employees under which employees acknowledge that they are
"at will" employees, (ii) an option termination agreement
which acknowledges that any warrants, options or other
exercise rights in Net Radio stock that were outstanding
prior to the effective date have been released and were
terminated, (iii) a termination agreement with respect to
certain provisions of the May 1996 Agreement and (iv) a
disclosure statement summarizing the terms of the
Transaction. Navarre is also entering into a credit
facility with Net Radio under which Navarre will provide
working capital under certain circumstances to Net Radio.
Shareholder Approval Requirement
Under Rule 4460(i) of the Nasdaq Stock Market, unless
exempted by Nasdaq, each Nasdaq issuer is required to have
shareholder approval of a plan or arrangement in connection
with the acquisition of the stock or assets of another
company where the present or potential issuance of Common
Stock would result in the issuance of voting power equal to
or greater than 20% of the voting power outstanding prior to
the issuance of the additional shares. The Rule further
provides, however, that exceptions may be granted upon
application to the Association in certain circumstances.
The maximum number of Navarre Shares potentially
issuable by the Company in this Transaction, assuming all
shares are earned by Net Radio, would exceed twenty percent
(20%) of the Company's currently outstanding shares. In
addition, any conversion by ValueVision of its Net Radio
shares into Navarre Common Stock would result in additional
shares being issued. Accordingly, the Company was required
by Rule 4460(i) to either obtain shareholder approval of the
Transaction or obtain an exception from Nasdaq.
The Net Radio Transaction was studied by the Navarre
Board and discussed at the Company's board meetings on a
number of occasions. Most recently, the Navarre Board
unanimously voted to proceed with the Transaction and, given
the urgency of Net Radio's financial distress, the Board
directed management to complete the Transaction at the
earliest possible time. Based upon a number of factors,
the Company sought and received Nasdaq consent to proceed
with the Transaction without seeking formal shareholder
approval contemplated by Rule 4460(i). These reasons
included:
1. The Company believed an immediate acquisition of Net
Radio was the only way for Net Radio to survive since
Net Radio has been unable to attract any capital.
2. The acquisition of Net Radio is contingent upon the
simultaneous infusion into Net Radio of $3.0 million by
ValueVision for fifteen percent (15%) of Net Radio.
This indicates that an independent party other than the
Company ascribes significant value to the Transaction.
The ValueVision investment will provide Net Radio with
sufficient working capital to enable it to meet its
funding requirements for approximately six months.
3. Navarre's credit facility with its lender, Heller
Financial, Inc. ("Heller"), prohibits the Company from
advancing funds to Net Radio, except with the consent
of Heller, and also requires that Heller approve the
Transaction. Heller has agreed to the terms of the
Transaction, including the investment by ValueVision
discussed above, but has refused to permit the Company
to otherwise use its working capital line to advance
funds to Net Radio. If the Net Radio Transaction is
not consummated in a short time, the Company believes a
bankruptcy proceeding by Net Radio or cessation of Net
Radio's business is probable.
4. Of the 2,100,000 million Navarre Shares issuable in the
Transaction to Net Radio Shareholders, all but 125,000
shares are contingent upon Net Radio achieving certain
revenue or income targets. If Net Radio fails to
achieve these targets, then the Company is not required
to issue such Navarre Shares. There exists, therefore,
the possibility that the total number of Navarre Shares
ultimately issued pursuant to the Transaction will be
less than the 20% threshold set by Rule 4460(i).
5. The Company's directors as a group beneficially own or
have voting rights with respect to over fifty percent
(50%) of the Company's outstanding securities, and
could therefore determine the result of any shareholder
vote.
6. The Company's Board of Directors, including the members
of the Audit Committee, have unanimously approved the
Transaction and have approved the Transaction on an
expedited basis, subject to Nasdaq approval.
As a result, Nasdaq granted the exemption to the
Company, provided that the Company provide its shareholders
with ten days' notice prior to the issuance of any shares
under the Transaction. The Company is providing this Notice
to Shareholders pursuant to the Nasdaq requirement. The
Company, Net Radio and ValueVision executed definitive
documents on March 7, 1997 and expect to close the
Transaction on or about March 17, 1997.
**************************
We at Navarre are very excited about our new
relationship with Net Radio and ValueVision and look forward
to an exciting opportunity with Net Radio.
NAVARRE CORPORATION
Eric H. Paulson, Chairman
SCHEDULE A
Net Radio Corporation
Total Shares Issuable 2,100,000
Phase 1 125,000 Shares issued at Closing; 20,000 shares
issued to shareholder creditors of Net Radio; 105,000
Placed in Escrow
105,000 Shares will be issued and placed into an
escrow account, to be released from escrow upon
resolution of certain claims pending against Net
Radio.
Phase 2 Up to 1,175,000 Shares to be issued upon Net Radio
achieving certain sales and pre-tax income in the
12 months following closing ("Year One") in three
separate Phases -- 2A, 2B and 2C.
Phase 2A Up to 375,000 Shares based upon achievement of
specific Net Radio Sales in Year One
Up to 375,000 shares will be issued upon
achievement by Net Radio of specified levels of
net sales of in Year One. If net sales in Year
One are less than $1,750,000 then no shares are
earned. If net sales exceed $1,750,000, then an
additional share will be issued for each $3.33 of
sales over $1,750,000 as shown below:
Year One Sales Additional Shares
$0 to $1,750,000 None
Over $1,750,000 to $3,000,000 One share for each
additional $3.33
in sales over $1,750,000
$3,000,000 or over All 375,000 shares
are earned
Net Sales is calculated in accordance with
Generally Accepted Accounting Principles, but
excludes any barter income and excludes any net
sales not collected with 60 days of the close of
the earn-out period. (Year One).
Phase 2B Up to 600,000 Shares upon achievement of specific
Year One Pre-Tax Income
No shares are issued if there is no pre-tax
income. If pre-tax income of $1 to $200,000 is
attained, 100,000 shares are issued. If pre-tax
income exceeds $200,000, an additional five shares
are earned for each additional $8.00 of pre-tax
income. All 600,000 shares are earned if Year One
pre-tax income is over $1,000,000.
Year One Pre-Tax Income Additional Shares
$0 None
$1.00 to $200,000 100,000 shares
Over $200,000 An additional five
(5) shares for
each additional
$8.00 of pre-tax
income
$1,000,000 or over All 600,000 shares
are earned
Phase 2C Up to 200,000 shares based upon achievement of
pre-tax income and sales.
No shares are issued if there is no pre-tax
income. If there is pre-tax income up to 200,000
shares are issued on the basis of one additional
share for each $5.00 of sales over $4,000,000.
Pre-tax income excludes any banter income and any
sales that are not collected within 60 days of the
end of the earn-out period.
Year One Sales Year One
Additional Shares
$0-$4,000,000 0
Over $4,000,000 One share for each
additional $5.00
of sales over
$4,000,000
$5,000,000 or over All 200,000 shares
are earned
Adjustment of Shares issued in Year One
Notwithstanding anything to the contrary contained above,
any shares earned pursuant to Phase 2B and 2C shall be
adjusted as follows:
If the fair market value of Navarre Common Stock at the end
of Year One is greater than 125% of the fair market value of
Navarre Common Stock on the closing date of the Transaction
(the "Base Price") then the shares to be issued in Phase 2B
and 2C shall be equal (i) the product of 125% of the Base
Price and the number of shares otherwise issuable divided by
(ii) the fair market value of Navarre Common Stock at the
end of Year One.
Phase 3 Up to 800,000 Shares (plus up to an additional
800,000 shares if not earned in Phase 2B and 2C)
based upon cumulative pre-tax income at the end of
Year Two.
If cumulative pre-tax income is $1,000,000 or less,
then no shares will be earned. If Cumulative Pre-
Tax Income is greater than $1,000,000, then the
shares to be issued will be the difference between
(i) the product of (a) 1,600,000 shares and the (b)
quotient of (x) cumulative pre-tax income over
$1,000,000 and (y) $5,000,000 and (ii) the shares
actually earned in Phase 2B and 2C, as shown
below.
Cumulative Pre-Tax Income
Through Year Two Additional Shares
Under $1,000,000 None
Over $1,000,000 to (1,600,000 Shares)
$5,000,000 times [(cumulative
pre-tax income
-$1,000,000)
($5,000,000)] less
than shares earned
in Phase 2B and 2C
Over $5,000,000 1,600,000 shares less
shares earned in
Phase 2B and 2C
Adjustment of Shares issued in Year Two
Notwithstanding anything to the contrary contained above,
any shares earned pursuant to Phase 3 above shall be
adjusted as follows:
If the fair market value of Navarre Common Stock at the
end of Year Two is greater than 150% of the fair market
value of Navarre Common Stock on the closing date (the "Base
Price") then the shares to be issued in Phase 3 shall be
equal (i) the product of 150% of the Base Price and the
number of shares otherwise issuable divided by (ii) the fair
market value of Navarre Common Stock at the end of Year Two.
SCHEDULE B
ValueVision Investment and Conversion Rights
ValueVision will make an investment of $3.0 million in
Net Radio, consisting of $1.0 million in cash and an
agreement to provide $2.0 million in advertising time in
exchange for acquiring fifteen percent (15%) of the Net
Radio shares. Once Net Radio achieves sales revenue of $3.0
million in any rolling, consecutive four quarter period, (i)
Net Radio, at its option, may require ValueVision to
purchase an additional 4.95 percent of Net Radio for
$500,000 in cash and (ii) ValueVision, at its option, may
invest $500,000 in cash and receive 4.95 percent of Net
Radio. In the event that either Net Radio or ValueVision
exercises its option, the other party's option expires.
In connection with the investment, upon the occurrence
of certain "Events of Default" by Net Radio, including
Bankruptcy or receivership, ValueVision will have the right
to require Navarre to purchase ValueVision investment in Net
Radio, or at Navarre's option, convert ValueVision Net Radio
shares into Navarre Common Stock at a price equal to one
hundred and one percent (101%) of fair market value of
Navarre Common Stock on the date of conversion. ValueVision
will also have this right beginning five years from the date
of closing if Net Radio has not completed a public offering
by that date.
