<PAGE>
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, 1998
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 - 13,487,880 SHARES AS OF OCTOBER 31, 1998
<PAGE>
NAVARRE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated balance sheets -
September 30, 1998 and March 31, 1998
Consolidated statements of operations -
Three and six months ended September 30, 1998 and 1997
Consolidated statements of cash flows -
Six months ended September 30, 1998 and 1997
Notes to consolidated financial statements - September 30, 1998
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 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 MARCH 31, 1998
--------------------------------------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 19 $ 23
Accounts receivable, less allowance for doubtful accounts
and sales returns of $3,419 and $2,412, respectively 74,234 52,383
Inventories 29,742 23,188
Note receivable, related parties 307 406
Refundable income taxes 2,265 2,265
Prepaid expenses and other current assets 1,047 962
--------------------------------------------
Total current assets 107,614 79,227
Property and equipment, net of accumulated depreciation of
$4,074 and $3,647, respectively 3,147 2,957
Other assets:
Goodwill 1,013 1,174
Other assets 247 331
--------------------------------------------
Total assets $112,021 $83,689
--------------------------------------------
--------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 38,386 $32,445
Current maturities of long-term debt 241 162
Accounts payable 49,370 45,554
Accrued expenses 458 1,019
--------------------------------------------
Total current liabilities 88,455 79,180
Long-term debt, less current maturities 125 181
Shareholders' equity:
Preferred stock, no par value:
Authorized shares - 10,000,000,
Issued and outstanding shares - 349,426 and none,
respectively 4,586 ----
Common stock, no par value:
Authorized shares - 50,000,000,
Issued and outstanding shares - 13,447,880 and
7,009,170, respectively 24,253 8,113
Retained deficit (5,218) (3,558)
Unearned compensation (180) (227)
--------------------------------------------
Total shareholders' equity 23,441 4,328
--------------------------------------------
Total liabilities and shareholders' equity $112,021 $83,689
--------------------------------------------
--------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
NOTE: THE BALANCE SHEET AT MARCH 31, 1998 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,
1998 1997 1998 1997
----------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales:
Computer software $36,072 $31,822 $ 72,130 $58,329
Music 18,801 16,757 35,960 30,048
----------------------------------------------------------
54,873 48,579 108,090 88,377
Cost of sales 48,942 42,341 95,090 77,864
----------------------------------------------------------
Gross profit 5,931 6,238 13,000 10,513
Operating expenses:
Selling and promotion 1,735 1,284 3,344 2,555
Distribution and warehousing 913 632 1,767 1,295
General and administration 4,356 2,324 7,992 5,372
Depreciation and amortization 313 669 616 1,328
----------------------------------------------------------
7,317 4,909 13,719 10,550
----------------------------------------------------------
Income (loss) from operations (1,386) 1,329 (719) (37)
Other income (expense):
Interest expense (811) (656) (1,523) (1,215)
Other income 145 128 175 164
----------------------------------------------------------
Income (loss) before income taxes (2,052) 801 (2,067) (1,088)
Income tax (benefit) expense (780) 329 (785) (446)
Minority interest (147) 47 (110) 101
----------------------------------------------------------
Net earnings (loss) $(1,419) $ 519 $ (1,392) $ (541)
----------------------------------------------------------
----------------------------------------------------------
Preferred dividend requirements (243) ---- (577) ----
----------------------------------------------------------
Net earnings (loss) applicable to common shares $(1,662) $ 519 $ (1,969) $ (541)
----------------------------------------------------------
----------------------------------------------------------
Loss per common share:
Basic $ (.15) $ .08 $ (.22) $ (.08)
----------------------------------------------------------
----------------------------------------------------------
Diluted $ (.15) $ .07 $ (.22) $ (.08)
----------------------------------------------------------
----------------------------------------------------------
Weighted average common and
common equivalent shares outstanding
Basic 11,034 6,902 9,033 6,902
----------------------------------------------------------
----------------------------------------------------------
Diluted 11,034 7,189 9,033 6,902
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
1998 1997
------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,392) $ (541)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 458 602
Amortization of intangible assets 158 726
Amortization on unearned compensation 47 47
Minority interests in subsidiary 110 5
Changes in operating assets and liabilities:
Accounts receivable (21,851) (4,823)
Inventories (6,554) (11,462)
Prepaid expenses and other assets 2 (221)
Accounts payable and accrued expenses 3,145 2,049
------------------------------------
Net cash used in operating activities (25,877) (13,618)
INVESTING ACTIVITIES
Note receivable, related parties 99 (10)
Purchase of equipment and leasehold improvements (648) (493)
------------------------------------
Net cash used in investing activities (549) (503)
FINANCING ACTIVITIES
Payment on long-term debt (102) (560)
Proceeds from notes payable, bank 92,238 81,940
Payment on notes payable, bank (86,297) (67,900)
Proceeds from notes payable, other 125 -----
Proceeds from sale of subsidiary stock 65 -----
Proceeds from sale of preferred stock and warrants 18,823 -----
Exercise of common stock warrants 1,807 -----
Exercise of common stock options 31 -----
Payment of dividends (268) -----
------------------------------------
Net cash provided by financing activities 26,422 13,480
------------------------------------
Net decrease in cash (4) (641)
Cash at beginning of period 23 655
------------------------------------
Cash at end of period $ 19 $ 14
------------------------------------
------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
NAVARRE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Navarre Corporation and its
majority owned subsidiaries, Digital Entertainment, Inc. and Net Radio
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 the
Company's business, the operating results for the six month period ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended March 31, 1999. 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, 1998.
Certain balances at September 30, 1997 have been reclassified to conform to
the September 30, 1998 presentation.
NOTE B - NET EARNINGS (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE, Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to confirm to
the Statement 128 requirements. Preferred shares and employee stock options
are not included in the calculation because they are anti-dilutive.
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
(In thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------------------------- --------------------------
<S> <C> <C> <C> <C>
Numerator:
Net earnings (loss) $(1,419) $ 519 $(1,392) $ (541)
Less preferred dividend requirements (243) ---- (577) ----
Adjusted net earnings (loss) applicable to common
stock (1,662) $ 519 (1,969) $ (541)
Denominator:
Denominator for basic earnings per
share--weighted-average shares 11,034 6,902 9,033 6,902
Dilutive securities:
Preferred stock ----- ---- ----- ----
Preferred stock warrants ----- ---- ----- ----
Employee stock options ----- 287 ----- ----
Denominator for diluted earnings
per share--adjusted
weighted-average shares 11,034 7,189 9,033 6,902
--------------------------- --------------------------
Basic earnings (loss) per share $ (.15) $ .08 $ (.22) $ (.08)
--------------------------- --------------------------
--------------------------- --------------------------
Dilutive earnings (loss) per share $ (.15) $ .07 $ (.22) $ (.08)
--------------------------- --------------------------
--------------------------- --------------------------
</TABLE>
<PAGE>
Under the terms of the Certificate of Rights and Preferences of the Class A
Convertible Preferred Stock ("Certificate") of the Company, the holders of the
Preferred Stock are entitled to receive cumulative dividends of 10% per annum
payable quarterly, beginning on June 30, 1998. The dividend can be paid in
cash or if the shareholder elects, in Company Common Stock which will be issued
when the shareholder converts the Preferred Stock. With respect to the quarter
ended September 30, 1998, the Company accrued an aggregate dividend of
$243,205. Because certain holders of Preferred Shares elected to receive their
dividend in Common Stock, the Company ultimately paid cash dividends of only
$240,684.
As previously disclosed, on May 1, 1998, the Company issued $20.0 million in
Class A Convertible Preferred Stock. Each share of Class A Convertible
Preferred Stock was issued at a price of $13.125 per share and is convertible
into five shares of Navarre common stock at a price of $2.625, which was the
fair market value on April 2, 1998, the date the Company had an agreement in
principal with investors to proceed with the offering. Under the terms of the
Class A Convertible Preferred Stock, the Company is required to pay cumulative
dividends of 10% per annum payable quarterly, beginning on June 30, 1998. In
addition, for each share of Class A Convertible Preferred Stock, each purchaser
received a five-year warrant to purchase five shares of Navarre common stock at
$3.50 per share which was equal to one hundred and thirty-three percent (133%)
of the effective conversion price of the Class A Convertible Preferred Stock
into common stock.
At the time the Company agreed to issue the Class A Convertible Preferred Stock
and the warrants, it did not assign a separate value to the conversion feature
of the Class A Convertible Preferred Stock or the warrants; rather, the amount
and pricing of the securities to be issued were arrived at as a result of
negotiations between the Company and third party investors. The Company has
subsequently determined that under general accepted accounting principals and
recent accounting pronouncements, the Company may be required to allocate the
purchase price between the Class A Convertible Preferred Stock and the
warrants.
The Company is in the process of analyzing the relative value of the securities
issued in the offering. The Company believes that any allocation will in no
way affects the Company's operating results, net shareholders' equity or its
assets. If the conversion feature of the Class A Convertible Preferred Stock
or warrants are assigned a separate value, however, the amount so allocated may
be treated as a "deemed dividend" in the first quarter of fiscal 1999 and the
Company's basic and diluted earnings per share would be adjusted downward to
reflect the amount of the deemed dividend. The Company intends to file an
amended Form 10-Q with the Securities and Exchange Commission with respect to
any adjustment required as a result of its analysis.
<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."
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Net sales:
Computer software 65.7% 65.5% 66.7% 66.0%
Music 34.3 34.5 33.3 34.0
-------------------------- --------------------------
Total net sales 100.0 100.0 100.0 100.0
Cost of sales 89.2 87.2 88.0 88.1
-------------------------- --------------------------
Gross profit 10.8 12.8 12.0 11.9
Selling and promotion 3.2 2.6 3.1 2.9
Distribution and warehousing 1.7 1.3 1.6 1.5
General and administration 7.9 4.8 7.4 6.1
Depreciation and amortization 0.6 1.4 0.6 1.5
-------------------------- --------------------------
Income (loss) from operations (2.5) 2.7 (0.7) 0.0
Interest expense (1.5) (1.4) (1.4) (1.4)
Other income 0.3 0.3 0.2 0.2
-------------------------- --------------------------
Net earnings (loss) (2.6)% 1.1% (1.3)% (0.6)%
-------------------------- --------------------------
-------------------------- --------------------------
</TABLE>
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. For a more detailed discussion of the factors, see the
"Business Section" in the Company's Form 10-K for the year ended March 31,
1998.
Net sales increased 13.0% from $48.6 million to $54.9 million for the three
month period and 22.3% from $88.4 million to $108.1 million for the six month
period. The gain was due to sales gains in both the Computer Products Division
and the Music Products Division. Computer products sales increased by 13.5%
from $31.8 million to $36.1 million for the three month period and by 23.7%
from $58.3 million to $72.1 million for the six month period. The increase was
primarily due to the acquisition of new customers. Music sales increased by
11.9% from $16.8 million to $18.8 million during the three month period and by
20.0% from $30.0 million to $36.0 million for the six month period. This
increase was primarily due to the addition of new labels that provide a higher
quality of artists.
Gross profit decreased 5.0% or $307,000 from $6.2 million last fiscal year to
$5.9 million for the three month period ended September 30, 1998 but increased
23.7% or $2.5 million from $10.5 last fiscal year to $13.0 for the six month
period ended September 30, 1998. As a percentage of net sales, gross profit
decreased from 12.8% last fiscal year to 10.8% for the three month period ended
September 30, 1998 but increased from 11.9% last fiscal year to 12.0% for the
six month period ending September 30, 1998. Gross margins from the Computer
Products Division's net sales were $3.2 million or 8.8% as a percentage of net
sales during the three month period and $6.7 million or 9.2% as a percentage of
net sales for the six month period ended September 30, 1998 compared with $3.2
million or 10.1% as a percentage of net sales during the three month period and
$5.8 million or 9.9% for the six month period last fiscal year. Gross margins
from music sales were $2.8 million or 14.7% of music net sales for the three
month period and $6.3 million or 17.6% of music sales for the six month period
ended September 30, 1998 compared with $3.0 million or 18.0% of music net sales
for the three month period and $4.7 million or 15.7% for the six month period
last fiscal year. The decrease in gross profit for the three month period for
both the Computer and Music Products Divisions was due to write-offs from
settlements associated with financially distressed
<PAGE>
vendors. The increase in overall gross margin for the six month period was
primarily due to increased margins in the Music Products Division from higher
margin sales of proprietary products.
Selling and promotion expense increased from $1.3 million last fiscal year to
$1.7 million during the three month period and from $2.6 million last fiscal
year to $3.3 million during the six month period ended September 30, 1998. As
a percentage of net sales, it increased from 2.6% last fiscal year to 3.2%
during the three month period and from 2.9% last fiscal year to 3.1% during the
six month period ended September 30, 1998. The higher level of expense was due
to increased costs associated with the higher level of sales.
Distribution and warehousing expense increased from $632,000 last fiscal year
to $913,000 during the three month period and from $1.3 million last fiscal
year to $1.8 million during the six month period ended September 30. As a
percentage of net sales it increased from 1.3% to 1.7% of net sales during the
three month period and from 1.5% to 1.6% of net sales during the six month
period ended September 30, 1998. The increase was primarily due to a decrease
in the average order size.
General and administration expenses increased from $2.3 million last fiscal
year to $4.4 million during the three month period and from $5.4 million last
fiscal year to $8.0 during the six month period ended September 30, 1998. As a
percentage of net sales, it increased from 4.8% to 7.9% of net sales during the
three month period and from 6.1% last fiscal year to 7.4% during the six month
period ended September 30, 1998. The higher level of expense was primarily due
to expenses associated with the Company's Net Radio subsidiary.
Interest expense increased from $656,000 for last fiscal year to $811,000 for
the three month period and from $1.2 million last fiscal year to $1.5 million
for the six month period ended September 30, 1998. This increase resulted from
substantially higher borrowing to support the Company's higher inventory levels
resulting from its growth in sales.
The net loss was $1.4 million for both the three and six month period ended
September 30, 1998 compared with net earnings of $519,000 for the three month
period and a net loss of $541,000 for the six month period last fiscal year.
YEAR 2000
The Company is evaluating the potential impact of what is commonly referred to
as the Year 2000 issue, concerning the inability of certain information systems
to properly recognize and process dates containing the year 2000 and beyond.
The Company has established a Year 2000 team working with every operational
area throughout the Company, and this team has worked with management to
commence the following steps: (i) implementing a Year 2000 Assessment and
Testing Plan for all internal information systems and other systems that
contain micro-controllers that may be affected by the Year 2000 date change;
(ii) implementing a Year 2000 Assessment and Testing Plan for all Company
products, (iii) communicating with third parties that supply product to the
Company to ensure they are addressing the Year 2000 issue; and (iv) contingency
and disaster recovery planning to ensure Year 2000 problem resolution.
The Company has identified and tested the systems it believes are critical and
the test results indicate that these systems are Year 2000 compliant or will
become Year 2000 compliant with additional software upgrades. The Company
expects to complete testing and establish compliance with respect to all of its
systems and products by December 31, 1998, subject to possible equipment
upgrades during 1999 and ongoing communications with third parties. Regardless
of the Year 2000 compliance of the Company's systems and products, there can be
no assurance that the Company will not be adversely affected by the failure of
others to become Year 2000 compliant.
To date, the Company has not incurred any material expenditures in connection
with identifying or evaluating Year 2000 compliance issues. The Company has
incurred the majority of its costs from the opportunity cost of time spent by
employees of the Company evaluating Year 2000 compliance matters generally. At
this time, the Company does not possess information necessary to estimate the
potential financial impact of Year 2000 compliance issues relating to its non-
management information systems, products, vendors, customers, and third
parties. Such impact, including the effect of a Year 2000 business disruption,
could have a material adverse impact on the Company's financial condition and
results of operations.
<PAGE>
Because the Company is still in the discovery and evaluation process of
assessing its overall Year 2000 exposure, it cannot at this time state with
certainty that the Year 2000 issues will not have a material adverse impact on
its financial condition, results of operations and liquidity. Although the
Company considers them unlikely, the Company believes that the following
situations make up the Company's "most reasonably likely worst cast Year 2000
scenarios": (i) disruption of a significant customer's ability to accept
products or pay invoices, (ii) disruption of suppliers, (iii) disruption of the
Company's internal management information systems, and (iv) disruption of the
Company's external management information systems.
While the Company recognizes the need for contingency planning, it has not yet
developed any specific contingency plans for potential Year 2000 disruptions.
The Company does anticipate developing contingency plans for its most critical
areas, but details of such plans will depend on the Company's final assessment
of the problem as well as the evaluation and success of its remediation
efforts. Future disclosures will include contingency plans as they become
available.
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, 1998, the Company had net accounts
receivable of $74.2 million and inventory of $29.7 million. These assets are
primarily financed by accounts payable of $49.4 million and bank borrowings of
$38.4 million.
For the six month period ended September 30, 1998, net sales were $108.1
million, an increase of $19.7 million over net sales of $88.4 million during
the same period last fiscal year. The Company used cash of $25.9 million in
operating activities. Accounts receivable increased by $21.9 million and
inventories increased by $6.6 million while accounts payable and accrued
expenses increased by $3.1 million. Investing activities used $549,000 of
cash, including $648,000 for the purchase of furniture, equipment and leasehold
improvements. The Company generated net cash of $26.4 million in financing
activities primarily through proceeds from a private placement for the
aggregate net consideration of $19.0 million and from net bank borrowings of
$5.9 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.
The Company anticipates it will utilize its credit facility during the next
twelve months to meet seasonal working capital needs. The Company believes
that the funds available under its current credit facility together with cash
flow from operations will be adequate to fund its anticipated working capital
requirements, including dividends on the Class A Convertible Preferred Stock,
over the next twelve months.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of its business, the Company is involved in a number of
routine litigation matters that are incidental to the operation of its
business. These matters include collection matters with regard to products
distributed by the Company and accounts receivable owed to the Company. In
addition the Company is involved in the following legal proceeding.
On March 5, 1998, Bank of Montreal ("Plaintiff") commenced an action in United
States District Court in the Northern District of Illinois alleging, among
other things, breach of contract, breach of duty to negotiate in good faith and
breach of trade confirmation in connection with a proposed commercial
transaction between the Company and the Plaintiff. The Plaintiff seeks damages
in an amount in excess of $1,053,451.59. On April 23, 1998, the Company
submitted its Answer to the Complaint denying liability and asserting various
affirmative defenses. The Company intends to vigorously defend against
Plaintiff's claims. The parties are engaged in discovery.
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(C) ISSUANCE OF UNREGISTERED SECURITIES
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 $19.0 million, net of expense. The Class A Convertible
Preferred Stock was issued at a price of $13.125 per share and is convertible
into five shares of Navarre common stock at any time after June 30, 1998. 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 of $3.50 per share. The Class A Convertible Preferred Stock
has a cumulative annual dividend of ten (10%) payable quarterly beginning June
30, 1998. The Company has the right to call the Class A Convertible Preferred
Stock at any time after June 30, 1998 if the price of the Company's Common
Stock is at least 200% of the effective conversion price for ten consecutive
trading days, subject to certain other conditions. The Company cannot call
more than one-third of the original aggregate Class A Convertible Preferred
Stock in any six-month period. The Company also has the right to call the
warrants in certain circumstances. In connection with the private placement,
the Company also granted a four year warrant to purchase 380,953 shares of
Common Stock at a price of $2.625 per share to Delphi Financial Corporation,
the Company's agent in the private placement. During the period from July 1,
1998 through October 31, 1998, certain holders of warrants issued in May 1998
exercised their warrants to purchase an aggregate of 556,660 shares and paid
the Company gross proceeds of $1,807,435. The Company believes that the
transactions were exempt pursuant to Section 4(2) of the Securities Act of 1933
and Rule 506 under Regulation D. During the period from July 1, 1998 through
October 31, 1998, holders of 1,182,384 shares of the Company's Class A
Preferred Stock converted their Preferred Stock into 5,911,920 shares of Common
Stock and holders of warrants issued in May 1998 exercised their warrants for
an aggregate of 556,660 shares and paid the Company gross proceeds of
$1,807,435.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SCEURITY HOLDERS.
The Company's Annual Meeting of Shareholders was held on September 3, 1998. At
the meeting, the following persons were elected as directors of the Company:
<TABLE>
<CAPTION>
NAMES VOTES FOR VOTES WITHHELD
----- --------- --------------
<S> <C> <C>
Charles E. Cheney 8,997,507 38,694
Dickinson G. Wiltz 8,988,793 47,398
Alfred Teo 9,011,412 24,779
</TABLE>
ITEM 5. OTHER INFORMATION
The deadline for the submission of shareholder proposal pursuant to Rule 14a-8
under the Securities Exchange Act of 1934, as amended, for inclusion in the
Company's proxy statement for its 1999 Annual Meeting of Shareholders is April
1, 1999. Additionally, if the Company receives notice of a shareholder
proposal after June 16, 1999, such proposal will be considered untimely
pursuant to Rules 14a-4 and 14a-5(e) and the persons named in proxies solicited
by the Board of Directors of the Company for its 1999 Annual Meeting of
Shareholders may exercise discretionary voting power with respect to such
proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
Exhibit 27: Financial data schedule
(b) The Company did not file any reports on Form 8-K during the three
months ended September 30, 1998.
<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 13, 1998 By /s/ Eric H. Paulson
-----------------------
Eric H. Paulson
Chairman of the Board,
President and
Chief Executive Officer
Date: November 13, 1998 By /s/ Charles E. Cheney
-------------------------
Charles E. Cheney
Treasurer and Secretary,
Executive Vice President,
and Chief Financial Officer
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