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 December 31, 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 - 7,009,170 SHARES AS OF JANUARY 31, 1998
<PAGE>
NAVARRE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated balance sheets -
December 31, 1997 and March 31, 1997
Consolidated statements of operations -
Three and nine months ended December 31, 1997 and 1996
Consolidated statements of cash flows -
Nine months ended December 31, 1997 and 1996
Notes to consolidated financial statements - December 31, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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>
DECEMBER 31, MARCH 31,
1997 1997
-------- --------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 16 $ 655
Accounts receivable, less allowance for doubtful accounts
and sales returns of $1,521 and $3,585, respectively 64,793 47,163
Inventories 24,910 16,854
Note receivable, officer 229 214
Prepaid expenses and other current assets 2,810 3,062
-------- --------
Total current assets 92,758 67,948
Property and equipment, net of accumulated depreciation of
$3,345 and $2,571, respectively 3,144 3,438
Other assets:
Velvel distribution rights -- 5,346
Goodwill 1,254 1,492
Other assets 443 173
-------- --------
Total assets $ 97,599 $ 78,397
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 39,615 $ 20,750
Current maturities of long-term debt 167 5,142
Accounts payable 51,570 45,503
Accrued expenses 875 1,453
Income taxes payable -- 135
-------- --------
Total current liabilities 92,227 72,983
Minority interest in subsidiaries (49) --
Long-term debt, less current maturities 204 315
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 -
6,906,420 and 6,902,248, respectively 8,015 8,005
Retained earnings (deficit) (2,547) (2,584)
Unearned compensation (251) (322)
-------- --------
Total shareholders' equity 5,217 5,099
-------- --------
Total liabilities and shareholders' equity $ 97,599 $ 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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales:
Computer software $ 49,878 $ 56,563 $ 108,207 $ 117,985
Music 19,559 13,053 49,607 39,419
-------- --------- --------- ---------
69,437 69,616 157,814 157,404
Cost of sales 61,148 62,597 139,012 139,204
-------- --------- --------- ---------
Gross profit 8,289 7,019 18,802 18,200
Operating expenses:
Selling and promotion 1,457 1,652 4,012 4,124
Distribution and warehousing 849 818 2,144 1,960
General and administration 3,438 5,164 8,977 10,298
Amortization of intangible assets 368 148 1,182 169
-------- --------- --------- ---------
6,112 7,782 16,315 16,551
-------- --------- --------- ---------
Income (loss) from operations 2,177 (763) 2,487 1,649
Other expense:
Interest expense (1,049) (655) (2,264) (1,619)
Other expense (236) (233) (420) (481)
-------- --------- --------- ---------
Income (loss) before income taxes 892 (1,651) (197) (451)
Income tax expense (benefit) 368 (677) (78) (185)
Equity in loss of affiliate -- (171) -- (585)
Minority interest in subsidiaries 55 -- 156 --
-------- --------- --------- ---------
Net income (loss) $ 579 $ (1,145) $ 37 $ (851)
======== ========= ========= =========
Basic earnings (loss) per share $ .08 $ (.17) $ .01 $ (.13)
======== ========= ========= =========
Weighted average common shares 6,906 6,770 6,904 6,654
Dilutive earnings (loss)
per common share $ .08 $ (.17) $ .01 $ (.13)
======== ========= ========= =========
Weighted average number of
common and common equivalent
shares outstanding 7,223 6,770 7,187 6,654
======== ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
1997 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 37 $ (851)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities:
Depreciation and amortization of leasehold
improvements 788 887
Amortization of intangible assets 1,084 --
Amortization on unearned compensation 71 --
Equity in loss of affiliate -- 585
Minority interests in subsidiaries (49) --
Changes in operating assets and liabilities:
Accounts receivable (17,630) (14,026)
Inventories (8,056) (9,445)
Prepaid expenses and other assets (18) (69)
Accounts payable and accrued expenses 5,489 27,220
Income taxes payable (135) (309)
--------- ---------
Net cash (used in) provided by operating activities (18,419) 3,992
INVESTING ACTIVITIES
Note receivable, officer (15) (210)
Purchase of business -- (250)
Equity investment in business -- (6,000)
Purchase of equipment and leasehold improvements (494) (839)
--------- ---------
Net cash used in investing activities (509) (7,299)
FINANCING ACTIVITIES
Payment on long-term debt (586) --
Proceeds from notes payable, bank 136,215 129,695
Payment on notes payable, bank (117,350) (126,062)
Payment on notes payable, other -- (500)
Exercise of common stock options 10 177
--------- ---------
Net cash provided by financing activities 18,289 3,310
--------- ---------
Net decrease in cash (639) 3
Cash at beginning of period 655 4
--------- ---------
Cash at end of period $ 16 $ 7
========= =========
Supplemental schedule of non-cash transactions:
Cancellation of Velvel distribution agreement $ 4,500 --
Common stock issued as partial consideration for
acquisition and equity investment in businesses -- $ 1,575
========= =========
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
NAVARRE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 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 nine month period ended December 31, 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
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 conform to the
Statement 128 requirements.
The following table sets forth the compution of basic and diluted earnings per
share:
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------ ------- ------ -------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 579 $(1,145) $ 37 $ (851)
Denominator:
Denominator for basic earnings per
share--weighted-average shares 6,906 6,770 6,904 6,654
Dilutive securities:
Employee stock options 317 -- 283 --
Denominator for diluted earnings
per share--adjusted
weighted-average shares 7,223 6,770 7,187 6,654
------ ------- ------ -------
Basic earnings per share $ .08 (.17) $ .01 (.13)
====== ======= ====== =======
Diluted earnings per share $ .08 (.17) $ .01 (.13)
====== ======= ====== =======
</TABLE>
NOTE C - TERMINATION OF VELVEL RELATIONSHIP
In November 1996, the Company acquired an interest in Velvel Music Products LLC
in exchange for distribution rights with respect to Velvel products. As of
November 4, 1997, Velvel and the Company agreed to terminate the Company's
distribution rights in exchange for the cancelation of the $4.5 million Demand
Promissory Note from Navarre to Velvel. Although the Company retains a 15%
interest in Velvel, the Company has assigned no monetary value to its interest
at this time.
<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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
----- ----- ----- -----
Net sales:
Computer software 71.8% 81.2% 68.6% 75.0%
Music 28.2 18.8 31.4 25.0
----- ----- ----- -----
Total net sales 100.0 100.0 100.0 100.0
Cost of sales 88.1 89.9 88.1 88.4
----- ----- ----- -----
Gross profit 11.9 10.1 11.9 11.6
Selling and promotion 2.1 2.4 2.5 2.6
Distribution and warehousing 1.2 1.2 1.4 1.2
General and administration 5.0 7.4 5.7 6.6
Amortization of intangible assets 0.5 0.2 0.7 0.1
----- ----- ----- -----
Income from operations 3.1 (1.1) 1.6 1.2
Interest expense 1.5 0.9 1.4 1.0
Other expense 0.3 0.3 0.3 0.3
----- ----- ----- -----
Net income (loss) 0.8% (1.6)% 0.0% (0.5)%
===== ===== ===== =====
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 decreased 0.3% from $69.6 million to $69.4 million for the three month
period but increased 0.3% from $157.4 million to $157.8 million for the nine
month period. The decrease for the three month period was due to lower sales in
the Computer Software Products Division and the increase for the nine month
period was due to increased sales in the Music Products Division. Music sales
increased by 49.6% from $13.1 million to $19.6 million during the three month
period and by 25.9% from $39.4 million to $49.6 million for the nine month
period. This was primarily due to sales aided by a strong release schedule from
labels during the quarter. Computer products sales decreased by 11.8% from $56.6
million to $49.9 million for the three month period and by 8.3% from $118.0
million to $108.2 million for the nine month period. The decrease was primarily
due to a much smaller number of new releases of hit products.
Gross profit increased 18.6% or $1.3 million from $7.0 million to $8.3 million
for the three month period and 3.3% or $602,000 from $18.2 million to $18.8
million for the nine month period. As a percentage of net sales, gross profit
increased from 10.1% during the three month period ending December 31, 1996 to
11.9% for the same period in 1997 and from 11.6% for the nine month period
ending December 31, 1996 to 11.9% for the same period in 1997. The increase in
overall gross margin for the three month period as well as the nine month period
was primarily due to increased margins in the Computer Products Division. Gross
margins from the Computer Products Division's net sales were $5.5 million or
11.1% as a percentage of net sales during the three month period in 1997 and
$11.3 million or 10.4% as a percentage of net sales for the nine month period in
1997 compared with $4.7 million or 8.3% as a percentage of net sales in the same
three month period in 1996 and $10.6 million or 9.0% as a percentage of net
sales for the same nine month period in 1996. The improvement in gross margin
for the Computer Products Division was primarily due to being more selective in
the vendors we do business
<PAGE>
with and by improving the quality of our content. Gross margins from music sales
were $2.8 million or 14.1% of music net sales for the three month period in 1997
and $7.5 million or 15.1% of music net sales for the nine month period in 1997
compared with $2.3 million or 17.6% of music net sales for the same three month
period in 1996 and $7.6 million or 19.3% of music net sales for the same nine
month period in 1996. The decrease in gross margin for the Music Products
Division during the three month period was primarily due to the new return
policy that was put into place during the quarter. The nine month decline in
gross margin for the Music Products Division was caused in part by the new
return policy, a one-time write off of the balance of one of the Company's
vendors in which the Company agreed to accept partial payment of certain amounts
due to it and higher sales with lower margins at the Company's Hawaiian branch.
Selling and promotion expense decreased from $1.7 million during the three month
period in 1996 to $1.5 million during the same period in 1997 and from $4.1
million for the nine month period in 1996 to $4.0 million for the same period in
1997. As a percentage of net sales, it decreased from 2.4% during the three
month period in 1996 to 2.1% during the same period in 1997 and from 2.6% during
the nine month period in 1996 to 2.5% for the same period in 1997. This decrease
for the three month period and nine month period was primarily due to lower
freight costs.
Distribution and warehousing expense increased slightly from $818,000 in the
three month period for 1996 to $849,000 in the same period in 1997 and from $2.0
million for the nine month period in 1996 to $2.1 million for the same period in
1997. As a percentage of net sales, it remained the same at 1.2% of net sales
for the three month period in 1996 and 1997 and increased from 1.2% of net sales
for the nine month period in 1996 to 1.4% of net sales for the same period in
1997. The increased expense for the nine month period was related to increased
costs associated with a decrease in the average order size.
General and administration expenses decreased from $5.2 million during the three
month period in 1996 to $3.4 million during the same period in 1997 and from
$10.3 million during the nine month period in 1996 to $9.0 million during the
same period in 1997. As a percentage of net sales, it decreased from 7.4% during
the three month period in 1996 to 5.0% during the same period in 1997 and from
6.6% during the nine month period in 1996 to 5.7% for the same period in 1997.
The decrease for the three month period and nine month period was primarily due
to an additional provision of $2.0 million to the Company's allowance for
doubtful accounts in 1996. This year's increase in dollars as well as a
percentage of net sales for the both the three and nine month periods 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. As of November 4, 1997, Velvel
and the Company agreed to terminate the Company's distribution rights in
exchange for the cancellation of the $4.5 million Demand Promissory Note from
Navarre to Velvel. The net effect of amortization expense from the cancellation
of the Velvel agreement was $167,000 for the nine month period.
Interest expense increased from $655,000 for the three month period in 1996 to
$1.0 million for the three month period in 1997 and from $1.6 million for the
nine month period in 1996 to $2.3 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 $579,000 for the three month period in 1997 compared with a
net loss of $1.1 million in the same three month period in 1996 and net earnings
of $37,000 for the nine month period in 1997 compared with a net loss of
$851,000 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 December 31, 1997, the Company had net accounts receivable
of $64.8 million and inventory of $24.9 million. These assets are primarily
financed by accounts payable of $51.6 million and bank borrowings of $39.6
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 net earnings of $37,000 during this nine month period. The
Company financed its operations in part by using cash of $18.4 million in
operating activities. Accounts receivable increased by $17.6 million and
inventories increased by $8.1 million during the period. These changes were
offset partially by a $5.5 million increase in accounts payable and accrued
expenses. Investing activities used $509,000 of cash, including $494,000 for the
purchase of furniture, equipment and leasehold improvements. The Company
generated net cash of $18.3 million in financing activities primarily through
proceeds of net bank borrowings of $18.9 million during the period offset
against payments of $586,000 on long-term debt. Cash at the end of the period
increased by $639,000.
Although 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 requirements over the next twelve months, the Company believes
that it will need additional debt or equity to sustain its historical growth
rates. The Company is exploring alternatives for raising additional debt or
equity.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the Company's legal proceedings.
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 December 31, 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: February 13, 1998 By /s/ Eric H. Paulson
-----------------------
Eric H. Paulson
Chairman of the Board,
President and
Chief Executive Officer
Date: February 13, 1998 By /s/ Charles E. Cheney
------------------------
Charles E. Cheney
Treasurer and Secretary,
Executive Vice President,
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 16
<SECURITIES> 0
<RECEIVABLES> 65,022
<ALLOWANCES> 1,521
<INVENTORY> 24,910
<CURRENT-ASSETS> 92,758
<PP&E> 3,144
<DEPRECIATION> 3,345
<TOTAL-ASSETS> 97,599
<CURRENT-LIABILITIES> 92,227
<BONDS> 0
0
0
<COMMON> 8,015
<OTHER-SE> (2,798)
<TOTAL-LIABILITY-AND-EQUITY> 97,599
<SALES> 157,814
<TOTAL-REVENUES> 157,814
<CGS> 139,012
<TOTAL-COSTS> 16,315
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 783
<INTEREST-EXPENSE> 2,264
<INCOME-PRETAX> (197)
<INCOME-TAX> (78)
<INCOME-CONTINUING> 2,487
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
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