UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
Commission File Number 0-22982
NAVARRE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1704319
(State or 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK,
NO PAR VALUE
Indicate by checkmark 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. Yes ( x ) No ( )
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes ( x ) No ( )
As of June 19, 1998, the aggregate value of the Company's Common Stock held by
non-affiliates of the Company was $29,801,544 based on the closing market price
on that date.
As of June 19, 1998, the Company had outstanding 7,012,128 shares of Common
Stock, no par value and had outstanding 1,523,810 shares of Class A Convertible
Preferred Stock, each of which is convertible and has voting rights equal to
five shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement for its 1998 Annual Meeting of Shareholders, a
copy of which will be filed within 120 days of March 31, 1998, is incorporated
by reference into Part III of this Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Navarre Corporation ("Navarre" or the "Company"), a Minnesota corporation formed
in 1983, is a major distributor of music, software and interactive CD ROM
products. Navarre sells to major music and software retailers, wholesalers and
rackjobbers. In addition, through its wholly-owned subsidiary, NetRadio
Corporation, Navarre also owns and operates NetRadio Network, a leading audio
content provider on the internet.
The Company operates through two principal divisions, its Computer Products
Division and its Music Products Division. The only major distributor to
distribute both music and software, the Company is recognized as an industry
leader in the distribution of consumer software in addition to being recognized
as a leader in the distribution of independent music labels and artists. The
Company's product line contains over 20,000 SKU's of compact discs, cassettes,
personal computer software and interactive CD-ROM software sold to over 500
customers with over 9,000 locations throughout the United States. The Company's
broad base of customers include (i) wholesale clubs, (ii) mass merchandisers,
(iii) computer specialty stores, (iv) music specialty stores and (v) book
stores.
Digital Entertainment, Inc., a wholly-owned subsidiary of the Company, is a
CD-ROM publishing company which has its products exclusively distributed by the
Company through its Computer Products Division.
NetRadio Corporation is the first Internet-only radio network and is currently
one of the world's largest on-demand Webcaster of originally programmed audio
content, with over 150 channels of on-demand music and information.
THE COMPANY'S MARKETS
PRERECORDED MUSIC
The prerecorded music industry is a relatively new industry which grew largely
during the 1950's and throughout subsequent decades. Prior to the late 1970's,
prerecorded music competed primarily with radio, television and literature for
home entertainment. By the late 1970's and early 1980's, technological advances
brought new forms of home entertainment including video games, video cassettes
and cable television. Even though these types of home entertainment have
developed, the prerecorded music industry in the United States has traditionally
experienced steady growth, with sales increasing in each year since 1982 until
1997 when they experienced a decline in unit shipments and dollar value
according to the Recording Industry Association of America ("RIAA"). At 1997
year-end, manufacturers saw a 6.5% net decrease in audio and video product
shipped to domestic markets (from 1.14 billion units in 1996 to 1.06 billion
units in 1997) and a corresponding 2.4% decrease in the dollar value of the
product at suggested list price (from $12.5 billion in 1996 to $12.2 billion in
1997).
Beginning in the 1970's, a significant amount of consolidation occurred in both
the production and distribution components of the prerecorded music industry.
Industry sources indicate that approximately seventy-five percent (75%) of the
industry's total revenue is derived from production or distribution by the six
major companies through their record labels and their affiliated distribution
companies. They are (i) Time-Warner and Warner/Elektra/Atlantic Corporation
(WEA); (ii) Sony Corporation and Sony Music Distribution; (iii) Phillips
N.V./Polygram N.V. and PGD Distribution; (iv) Thorn/EMI and EMI Music
Distribution; (v) Bertelsmann A.G. and BMG Distribution and (vi) The Seagram
Company, Ltd./MCA, Inc. and Universal Music and Video Distribution. In addition
to these major labels and their distribution companies, there are a number of
independent labels that produce recordings for artists and a number of
independent distribution companies that enter into exclusive distribution
agreements with
<PAGE>
these labels on either a regional or national basis. These independent labels
and their distributors currently represent twenty five percent (25%) of the
industry's total revenue.
Distributors perform a number of functions in the music industry. Although the
major labels are generally distributed to the retail channel directly by their
affiliated distribution companies, there are a number of areas where alternative
distribution methods are required. These include (i) the distribution of labels
other than major labels, which cover recordings by national, regional and local
artists, (ii) the distribution of products to retailers that are too small to
buy in quantity from the major label distribution companies, (iii) distribution
channels that the major label distribution companies choose not to sell to and
(iv) the distribution of products as secondary suppliers filling in temporary
out-of-stock conditions.
PERSONAL COMPUTER SOFTWARE
The distribution of personal computer software is more fragmented than the
distribution process for prerecorded music, in part, because there has been no
equivalent of the six major label distribution companies in the software
industry. As the industry matures, there will be a shift from many smaller
publishers to fewer major publishers. These publishers will have the clout
necessary to influence standards like pricing, packaging and returns. The key
retailers continue to be the mass merchants, computer superstores and warehouse
clubs. However, there are new emerging channels such as music retailers,
bookstores, specialty stores and drug and grocery stores.
During 1997 the software industry did experience a high level of consolidation.
Some of the large companies leading the consolidation efforts were The Learning
Company, Cendent Software, Electronic Arts, Hasbro Interactive and Mattel. The
strong retailers are Best Buy, Comp USA, The Musicland Group, the office
superstores and the warehouse clubs. The large retailers utilize both
distribution and direct publisher relationships to purchase software. As the
publishers grow they develop the operational efficiencies and capacity to
establish direct customer relationships.
Consumer software sales in 1997 increased to $4.4 billion according to P.C.
Data. The six categories that comprise the 1997 annual distributor sales for the
software market share are business, the largest contributor with over eighty
(80%) of the total sales, followed by entertainment, finance, personal
productivity, education and reference. The Company's software sales primarily
fall into the categories of education, entertainment, personal productivity and
reference.
During the past several years, the Company has experienced a pronounced shift in
its product mix. Whereas earlier in its history, the Company's music division
had accounted for more than half the Company's sales. In recent years, computer
software sales have accounted for a higher percentage of sales; accounting for
66.7% of the Company's net sales in fiscal 1996, 75.2% in fiscal 1997 and 69.9%
in fiscal 1998.
NETRADIO NETWORK
The NetRadio Network, 24-hour a day audio program, is one of the leading
providers of original audio broadcasting over the Internet. With over 150
channels of music, news and infotainment, the NetRadio Network offers a wide
range of choices for any taste, age or demographic. NetRadio Network programming
includes the following variety of music, Jazz, Blues, Christian Hits, Classical,
Country, Dance and Urban, Electronica, Dance Kids Modern Rock, New Age, Vintage
Rock and World Music.
By providing highly focused and targeted audio content, NetRadio Network enables
listeners to enjoy their favorite music and news at work or at home, without the
dilution inevitable with traditional radio programming. For example, instead of
settling for a generic jazz station, NetRadio listeners can choose between
twelve distinct jazz channels, including Big Band, Crooners, Acid Jazz,
Contemporary Jazz and Jazz artist of the month. The listener may surf the net or
run other software applications while listening to the NetRadio Network.
NetRadio's audience has been growing, and the Company attributes this growth to
increasing demand of its programming.
<PAGE>
The core objective of The NetRadio Network is to continue to build large and
loyal audiences through compelling, original multimedia content and
simultaneously to expose this audience to a variety of commercial and revenue
generating opportunities, including the sale of music and interactive CD-ROMs
through their Cyber Retail Store(TM), CDPoint(TM) and Software Point(TM). These
programs allow NetRadio Network listeners to listen, point and purchase products
directly on-line. While the Company has not derived significant revenues from
the NetRadio Network and has incurred losses from NetRadio Network, the Company
believes that the Internet will become an important medium for promoting,
marketing and selling its products.
COMPETITION
Competition in both the personal computer software industry and in the music
industry is intense and based upon a number of factors, including price, breadth
and availability of products, speed of delivery, and various types of support
provided by the distributor to the retailer. In the personal computer software
industry, the Company faces competition from a number of distributors including
Ingram Micro, Merisel, Inc., and Tech Data Corporation as well as from
manufacturers that sell directly to retailers.
In the pre-recorded music industry, the Company faces competition from the six
major label distribution companies, from regional distributors and from other
entities that sell directly to retailers.
The Company believes that the distribution of both personal computer software
and pre-recorded music will remain highly competitive and the keys to growth and
profitability will be customer service, continued focus on improvements and
operating efficiencies, the ability to develop proprietary products and the
ability to distribute on a national basis. The Company also believes that over
the next several years, both the personal computer software distribution
industry and pre-recorded music distribution industry will continue to further
consolidate.
The market for Internet content providers is highly competitive and rapidly
changing. Since the Internet's commercialization in the early 1990's, the number
of websites on the Internet competing for consumer's attention and spending has
proliferated. With no substantial barriers to entry, the Company expects that
competition will continue to intensify. Currently there are more than one
hundred music retailing websites on the Internet. With respect to recorded music
and interactive CD-ROMs sales, the Company competes with numerous Internet
retailers, including traditional music retail chains, record labels and
independents with websites on the Internet.
DEPENDENCE UPON SIGNIFICANT CUSTOMERS
In each of the past several years, the Company has had one or more customers
that has accounted for ten percent (10%) or more of the Company's net sales.
During the fiscal year ended March 31, 1998, sales to three customers, Comp USA,
Sam's Clubs and Best Buy, each represented more than ten percent (10%) of net
sales. The Company competes with other companies for the business of each of its
customers and there can be no assurance that the Company will continue to
recognize a significant amount of revenue from sales to any specific customers.
If the Company is unable to continue to sell its products to all or any of these
three customers or is unable to continue to maintain its sales to these
customers at their current levels, and is unable to find other customers to
replace the list sales, there would be an adverse impact on the Company's
revenues and future profitability.
EMPLOYEES
As of June 1, 1998, the Company had 213 employees, including 105 in finance and
administration, 35 in sales and marketing and 73 in distribution.
SEASONALITY
Much of the Company's business is seasonal in nature with a higher percentage of
sales during the second half of the calendar year. As a distributor of products
ultimately sold at retail, the Company's
<PAGE>
business is affected by the pattern of seasonality common to other suppliers of
retailers, particularly the holiday selling season. Historically, more than
seventy percent (70%) of the Company's sales and a substantial portion of the
Company's profits have been in the third and fourth quarters of the calendar
year. Due to the lower level of sales during the off periods, the Company has
historically incurred losses during these periods. Because of this seasonality,
if the Company experiences a weak holiday season, it could significantly affect
the Company's profitability for the entire year.
BACKLOG
Because the Company's products are shipped in response to orders, the Company
does not maintain any significant backlog.
THE COMPANY'S STRATEGY AND RECENT ACQUISITIONS
The Company's goal is to distribute on an international basis in both music and
interactive CD-ROM, as well as become a leading content provider to the
Internet. The Company intends to achieve this goal by (i) increasing the number
and quality of exclusive national distribution arrangements with proprietary
prerecorded music artists and labels, (ii) increasing its exclusive personal
computer software and interactive CD-ROM software product lines through licenses
and distribution agreements, (iii) continuing to deliver high levels of service
to the growth channels of retailing, including customized services and
technological advances such as Electronic Commerce ("EC"), (iv) continuing to
expand the sale of prerecorded music and personal computer software products
together in the marketplace, (v) continuing to improve its efficiencies and
technologies at its state of the art distribution center (vi) expanding its
business through strategic acquisitions in areas or in businesses that
complement the Company's existing businesses and (vii) utilizing the Internet to
expand the appeal of its products to a broader consumer base internationally.
NETRADIO NETWORK
On May 1, 1996 the Company entered into a stock purchase agreement with Net
Radio Corporation, a Nevada corporation ("Net Radio (Nevada)"), which owned and
operated NetRadio Network, an Internet-only radio network under which it
acquired fifty percent of the stock of NetRadio. On March 7, 1997 the Company
entered into an Agreement and Plan of Reorganization with Net Radio (Nevada)
under which it agreed to acquire NetRadio Network. Under the terms of the
transaction, which closed on March 21, 1997, Net Radio (Nevada) was merged with
a wholly-owned subsidiary of the Company and the Company agreed to issue to the
former shareholders of Net Radio (Nevada) up to 2,100,000 shares of its Common
Stock (the "Navarre Shares"). Of the shares, 20,000 were issued at closing in
exchange for certain guarantees by former shareholders of Net Radio and 105,000
were placed in an escrow account at closing. The issuance of the remaining
shares was subject to NetRadio achieving specified levels of sales and profits
in periods roughly corresponding to the Company's fiscal year 1998 and fiscal
year 1999. Based upon NetRadio's performance in fiscal 1998, no additional
shares are currently issuable with respect to that year.
Concurrent with the Company's acquisition of NetRadio, ValueVision
International, Inc. ("ValueVision") agreed to make an investment in the
Company's subsidiary, NetRadio in exchange for an fifteen percent (15%) equity
interest in NetRadio shares. ValueVision International is an integrated
electronic and print media direct marketing company and the nation's
third-largest television home shopping network. Under certain circumstances,
ValueVision may acquire an additional amount of NetRadio securities. ValueVision
also has the right to convert its shares of NetRadio stock into the Company's
Common Stock in the future upon the occurrence of certain events, including
insolvency of NetRadio. In the event that NetRadio has not commenced an initial
public offering by March 2002, ValueVision will have the right to put its
investment back to the Company in exchange for cash or, at the option of the
Company, common stock of the Company.
<PAGE>
VELVEL
On August 28, 1996, the Company entered into a Unit Purchase Agreement and
Operating Agreement (the "Velvel Agreement") with Velvel Musical Industries,
Inc. Under the terms of the Velvel Agreement, Velvel Musical Industries, Inc.
agreed to form Velvel Records LLC, a Delaware limited liability company ("Velvel
Records") and contribute certain of its assets to Velvel Records. The Company
agreed to make a $10.0 million investment in Velvel Records. Of this amount, the
Company made an investment of $5.0 million in Velvel Records on November 15,
1996 and agreed to make an additional investment of $5.0 million in Velvel
Records on or before April 10, 1997. In connection with its investment, the
Company received the right for a period of five years to distribute
substantially all of the Velvel Records products within the United States.
Velvel Records replaced the $5.0 million note due April 10, 1997 with a demand
note in the amount of $5.0 million. In November 1997, Velvel and the Company
agreed to terminate the Company's distribution rights in exchange for the
cancellation of the remaining balance on the Promissory Note from the Company to
Velvel. Although the Company retains a 15% interest in Velvel Records, the
Company has assigned no monetary value to its interest at this time.
FORWARD LOOKING STATEMENTS
Certain information in this Form 10-K contains forward-looking statements
related to the Company's strategic expectations with respect to future
performance. While Navarre's management is optimistic about the Company's
long-term prospects, the following issues and uncertainties, among others,
should be considered in evaluating its growth outlook.
DEPENDENCE UPON BANK BORROWINGS
The Company has relied upon bank borrowings to finance its expansion, primarily
for inventory and accounts receivable financing and currently has a $45.0
million credit facility in place. At June 19, 1998, the Company had total bank
borrowings of $29.9 million. The Company believes that it may be necessary for
it to acquire additional bank financing in the future depending upon the growth
of its business and the possible financing of acquisitions. If the Company is
unable to obtain additional bank financing, its future growth and profitability
would be adversely affected. Under the terms of the Company's credit facility,
borrowings are dependent upon the eligibility of accounts receivable and
inventory, and certain other covenants in the discretion of the bank.
LOW INDUSTRY MARGINS
Competition in the prerecorded music and personal computer software distribution
industry is often based on price, and distributors such as the Company generally
experience low gross and operating margins. Consequently, the Company's
profitability is highly dependent upon achieving expected sales levels as well
as effective cost and management controls. Any erosion in the Company's gross
profit margins could affect the Company's ability to maintain profitability.
DEPENDENCE UPON MANAGEMENT
Eric H. Paulson, the Company's President and Chief Executive Officer, and
Charles E. Cheney, its Executive Vice President and Chief Financial Officer,
have been with the Company since its inception in 1983 and since 1985,
respectively. Although the Company has invested a substantial amount of time and
effort in developing its total management team and its management team has over
90 years of experience in the industry, the loss of either Mr. Paulson or Mr.
Cheney could have a materially adverse effect upon the Company. The Company
carries "key person" insurance on the life of Mr. Paulson in the amount of $1.0
million, one-half of which is pledged to cover any existing indebtedness to the
bank.
NEED FOR ADDITIONAL CAPITAL
As a distributor of prerecorded music and personal computer software products,
the Company purchases products directly from manufacturers for resale to
retailers. As a result, the Company has significant
<PAGE>
working capital requirements, the majority of which are to finance inventory and
accounts receivable. These working capital needs will expand as inventory and
accounts receivable increase in response to the Company's growth. Future growth
will likely require additional working capital. Although the Company has
obtained financing sufficient to meet its requirements to date, there can be no
assurance that the Company will be able to obtain additional financing upon
favorable terms when required in the future.
DEPENDENCE UPON RECORDING ARTISTS
A portion of the sales of the Company's Music Products Division are made
pursuant to exclusive, multi-year distribution agreements. The continued growth
and success of the Company depends partly upon its ability to procure and renew
these agreements and sell the underlying recordings. In addition, the Company is
dependent upon these artists and labels to generate additional quality
recordings. In order to procure future marketing agreements, the Company
regularly reviews artists. There is no assurance that the company will sign such
artists to distribution agreements or that it will be able to sell recordings
under existing distribution agreements. Further, there can be no assurance that
any current distribution agreements will be renewed or that current agreements
will not be terminated.
DEPENDENCE UPON SOFTWARE DEVELOPERS AND MANUFACTURERS
The Company, through its wholly owned subsidiary Digital Entertainment, Inc.,
distributes interactive CD-ROM software pursuant to distribution agreements with
software developers and manufacturers. A portion of the sales are made pursuant
to exclusive distribution agreements. The continued growth and success of the
Company depends partly upon its ability to procure and renew these agreements
and sell the underlying software. There can be no assurance that the Company
will sign such developers and manufacturers to distribution agreements or that
it will be able to sell software under existing distribution agreements.
Further, there can be no assurance that any current distribution agreements will
be renewed or that current agreements will not be terminated.
EFFECT OF TECHNOLOGY DEVELOPMENTS AND DISTRIBUTION
Prerecorded music and personal computer software have traditionally been
marketed and delivered on a physical delivery basis. If in the future these
products are marketed and delivered through technology transfers, such as
"electronic downloading" to a retail store or consumer's home through the
Internet or another delivery mechanism, then retail and distribution could be
revolutionized. Although the Company has made certain acquisitions and taken
other measures that are designed to mitigate the potential impact that such
changes in the retail and distribution industry could have on the Company, if
such type of sales of prerecorded music and personal computer software became
widespread, they could have a material adverse impact on the Company. The
Company believes, however, that technological changes in sales methods will
occur slowly.
RETURNS; INVENTORY OBSOLESCENCE
The Company maintains a significant investment in product inventory and, like
other companies in this industry, experiences a relatively high level of product
returns as a percentage of revenues. The Company's agreements with its suppliers
generally permit the Company to return products that are in the suppliers'
current product listing. Adverse financial or other developments with respect to
a particular supplier could cause a significant decline in the value and
marketability of its products, and could make it difficult for the Company to
return products to such a supplier and recover its initial product acquisition
costs. Such an event could have a materially adverse effect upon the Company's
business and financial results. The Company maintains a sales return reserve
based on its trailing twelve months experience of sales returns by product line
and an appropriate inventory obsolescence reserve. The Company has historically
experienced an actual return rate range of thirteen percent (13%) to twenty
percent (20%), depending upon the product, which the Company believes is in line
with the industry experience. Although the Company's past experience indicates
that these levels are adequate to cover potential returns in these areas, there
can be no assurance that these reserves are adequate or will be adequate in the
<PAGE>
future. The Company also takes a portion of its product offerings on consignment
in order to lessen its exposure to this risk.
ADVERSE CHANGES IN METHODS OF DISTRIBUTION
The success of the Company's current sales strategy depends upon its wholesale
and retail customers' continued purchasing of products through the Company
rather than directly from manufacturers, through other distributors or through
other means of distribution. These customers and retailers are constantly
searching for ways to lower costs in an attempt to maintain competitive prices
and meet the pricing demands of consumers. The Company's business could be
adversely affected if its customers decide to purchase directly from
manufacturers, other distributors or other distribution channels rather than
from the Company.
PREFERRED STOCK DIVIDEND
On May 1, 1998, the Company issued its Class A Convertible Preferred Stock to
accredited investors in a private placement for aggregate net consideration of
$19.0 million. The Class A Convertible Preferred Stock was issued at a price of
$13.125 per share and is convertible into five shares of Common Stock at any
time after June 30, 1998. The holders of the Class A Convertible Preferred Stock
are entitled to receive cumulative dividends of ten percent (10%) per annum
payable quarterly beginning on June 30, 1998. The Company's obligation to pay
this dividend may adversely affect the Company's revenues and future
profitability.
ITEM 2. PROPERTIES
On September 25, 1995, the Company entered into an operating lease with a
partnership whose two partners are major shareholders and officers of the
Company. The Company leases approximately 88,000 square feet of office and
warehouse space for its principal facilities in suburban Minneapolis. The lease
expires in the year 2005 and provides for a monthly rental of $34,418 over the
lease term, adjusted for the change in the Consumer Price Index annually. In
addition, the Company is responsible for all operating costs associated with the
building. The Company has one additional five-year option to renew the lease.
ITEM 3. 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 Federal
District Court, Northern District of Illinois against the company, 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 Company is preparing discovery.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the three month period ended March
31, 1998.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq Stock Market under the symbol
NAVR. The following table below presents the range of high and low trading sale
prices for the Company's stock for each period indicated as reported by Nasdaq.
All prices have been adjusted to reflect the Company's two-for-one stock split
in the form of a 100% stock dividend distributed June 21, 1996.
Quarter High Low
Fiscal 1998
First $ 3.38 $2.25
Second 4.13 2.00
Third 5.25 2.00
Fourth 3.13 2.00
Fiscal 1997
First $18.31 $3.81
Second 13.00 5.38
Third 7.13 2.63
Fourth 4.38 2.38
At May 31, 1998, the Company had approximately 3,449 shareholders of record. The
Company has not paid any dividends on its common stock and does not intend to
pay any dividends on its common stock in the foreseeable future. Under terms of
the Company's credit facility, the Company is prohibited from paying cash
dividends without the consent of the lender. The Company is required to pay cash
dividends on its Class A Convertible Preferred Stock.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, DECEMBER 31,
1998 1997 1996 1995 1994
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales
Computer software $137,479 $150,859 $105,575 $50,223 $ 6,110
Music 59,169 49,838 52,779 69,275 9,307
----------------------------------------------------------------------
Total 196,648 200,697 158,354 119,498 15,417
Gross profit 24,993 23,282 19,851 15,452 1,362
Income (loss) from operations 1,458 (3,703) 3,889 3,461 (683)
Interest expense (3,108) (2,110) (1,521) (753) (65)
Income taxes (benefit) (470) (527) 917 1,061 (296)
Equity (loss) in Net Radio Corp. - (719) - - -
Net income (loss) (974) (6,189) 1,319 1,607 (445)
Earnings (loss) per diluted share $(.14) $(.92) $.20 $.26 $(.07)
Diluted weighted average common
shares outstanding (1) 6,921 6,692 6,458 6,283 5,948
BALANCE SHEET DATA:
Total assets $ 83,689 $ 78,397 $ 60,108 $45,705 $24,076
Short-term borrowings 32,607 25,892 21,115 9,639 3,632
Long-term debt 181 315 - 445 -
Shareholders' equity 4,328 5,099 9,648 8,215 6,574
</TABLE>
(1) Adjusted to reflect a two-for-one stock split in the form of a 100% stock
dividend distributed June 21, 1996
<PAGE>
ITEM 7. 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."
1998 1997 1996
---------------------------------
Net sales:
Computer software 69.9% 75.2% 66.7%
Music 30.1 24.8 33.3
---------------------------------
Total net sales 100.0 100.0 100.0
Cost of sales 87.3 88.4 87.5
---------------------------------
Gross profit 12.7 11.6 12.5
Selling and promotion 2.9 2.8 3.1
Distribution and warehousing 1.5 1.3 1.2
General and administration 6.9 6.8 5.7
Amortization and writedown
of intangible assets 0.7 2.5 ---
Income (loss) from operations 0.7 (1.8) 2.5
Interest expense 1.6 1.1 1.0
---------------------------------
Net (loss) income (0.5) (3.1) 0.8
=================================
Certain 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.
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales decreased 2.0% from $200.7 million in fiscal 1997 to $196.7 million in
fiscal 1998. Computer software sales decreased as a percent of total Company
sales from 75.2% of net sales in fiscal 1997 to 69.9% of net sales in fiscal
1998. Music sales which yield higher margins increased as a percent of total
Company sales from 24.8% of net sales for fiscal 1997 to 30.1% of net sales in
fiscal 1998. Computer software sales decreased by 8.9% from $150.9 million in
fiscal 1997 to $137.5 million in fiscal 1998. The decrease was primarily a
result of several major publishers shifting to a direct ship to the retailer
business model and the limitations of the Company's working capital caused by
the difficulties of certain retailers. Music sales increased 18.9% from $49.8
million in fiscal 1997 to $59.2 million in fiscal 1998. Music sales increased
primarily due to the restructuring of the music label base with the addition of
several higher quality labels. Price increases did not materially contribute to
the increase in music net sales.
Gross profit increased $1.7 million or 7.3% from $23.3 million in fiscal 1997 to
$25.0 million in fiscal 1998. As a percentage of net sales, gross profit
increased from 11.6% in fiscal 1997 to 12.7% in fiscal 1998. Overall gross
margins increased due to the increase in the computer software gross profit and
the increase in music sales which produce higher margins than software sales.
The gross profit from computer software sales was $16.4 million or 11.9% of
computer software net sales in fiscal 1998 compared with $13.6 million or 9.0%
of computer software net sales in fiscal 1997. This increase in the gross margin
percent of computer software sales was primarily due to strategic decisions with
regard to our computer software suppliers. The gross margin from music sales was
$8.6 million or 14.5% of music net sales in fiscal 1998 compared with $9.7
million or 19.5% of music net sales in fiscal 1997.
<PAGE>
Selling and promotion expenses remained the same at $5.7 million in fiscal 1997
and in fiscal 1998 but increased slightly as a percentage of sales from 2.8% in
fiscal 1997 to 2.9% in fiscal 1998 reflecting the lower net sales.
Distribution and warehousing expenses increased from $2.7 million in 1997 to
$2.9 million in 1998 and also increased as a percentage of sales from 1.3% in
1997 to 1.5% in 1998. This increase was primarily due to the value-added
services provided to customers which allowed the Company to increase margins.
General and administrative expenses decreased from $13.7 million in fiscal 1997
to $13.5 million in fiscal 1998. As a percentage of sales they increased
slightly from 6.8% in fiscal 1997 to 6.9% in fiscal 1998 reflecting the lower
net sales.
Amortization and writedown of intangible assets decreased from $4.9 million in
fiscal 1997 to $1.3 million in fiscal 1998. Both writedowns were attributed in
part to the Company's former relationship with VelVel Records as discribed
below. In fiscal 1997, the Company wrote down the value of its interest in
Velvel by $3.8 million. In November 1997, the Company terminated its
distribution agreement with VelVel and wrote off its remaining investment.
Interest expense increased from $2.1 million for fiscal 1997 to $3.1 million for
fiscal 1998. This increase resulted from higher borrowings to support the
Company's accounts receivable and inventory levels.
The net loss was $974,000 for fiscal 1998 compared to a loss of $6.2 million for
fiscal 1997. The net loss for fiscal 1998 was primarily due to the Company's
$1.6 million loss in Net Radio.
The Company's effective tax rate increased from 8.8% in fiscal 1997 to 28.0% for
fiscal 1998 as a result of the $1.75 million valuation allowance against
deferred tax assets related to the write down and amortization of VelVel's
distribution rights.
The company has performed an assessment of its major information technology
systems and expects that all necessary modifications or replacements of existing
systems will be completed prior to December 1998. Progress in this effort is
being monitored by senior management as well as the Audit Committee. Based on
current expenditures and estimates, the costs of addressing the Year 2000 Issue
are not expected to be material to the financial results or operations of the
Company. The Company intends to contact its significant vendors and suppliers
regarding the Year 2000 issue and the status of their compliance. At this time,
the impact on the Company if significant vendors or suppliers are not in
compliance cannot be reasonably estimated. However, the Company will be
developing plans to mitigate the impact of vendors or suppliers who are not in
compliance with the Year 2000 Issue.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased 26.7% from $158.4 million in fiscal 1996 to $200.7 million
in fiscal 1997. Computer software, including CD-ROM software sales, increased by
42.9% from $105.6 million to $150.9 million. Computer software sales increased
from 66.7% of net sales in fiscal 1996 to 75.2% of net sales in fiscal 1997.
These increases were due primarily to the Company's gains in CD-ROM market
share, and formalized agreements with new accounts and major retailers. Price
increases did not materially contribute to the increase in computer software net
sales. Music sales decreased 5.6% from $52.8 million to $49.8 million. Music
sales decreased primarily due to weak major label music sales to both specialty
stores and the membership wholesale club channels.
Gross profit increased $3.5 million or 17.8% from $19.8 million in fiscal 1996
to $23.3 million in fiscal 1997. As a percentage of net sales, gross profit
decreased from 12.5% in fiscal 1996 to 11.6% in fiscal 1997. Overall gross
margins declined due to the fact that lower gross margin computer products sales
accounted for a higher percentage of net sales. The gross profit from computer
software sales was $13.6 million or 9.0% of computer software net sales in
fiscal 1997 compared with $10.2 million or 9.6% of computer software net sales
in fiscal 1996. This decrease in gross margin percent of computer software sales
was primarily due to increased price competition in the industry. The gross
margin from music sales was $9.7 million or 19.5% of music net sales in fiscal
1997 compared with $9.5 million or 18.0% of music net sales in fiscal 1996. The
increase in the gross margin percent for music sales was primarily due
<PAGE>
to a higher percentage of sales of product by labels under exclusive contracts,
which are at a higher gross profit percent.
Selling and promotion expenses increased from $4.9 million in fiscal 1996 to
$5.7 million in fiscal 1997 but decreased as a percentage of sales from 3.0% in
fiscal 1996 to 2.8% in fiscal 1997. This decrease was primarily due to
efficiencies achieved from higher sales volume.
Distribution and warehousing expense increased from $1.9 million in 1996 to $2.7
million in 1997 and also increased as a percentage of sales from 1.2% in 1996 to
1.3% in 1997. This increase was primarily driven by the increased sales of
computer products which are less efficient to pick and pack.
General and administrative expenses increased from $9.1 million in fiscal 1996
to $18.6 million in fiscal 1997. They also increased as a percentage of sales
from 5.7% in fiscal 1996 to 9.3% in fiscal 1997. This increase was primarily due
to a $3.8 million write down of Navarre's investment in the exclusive
distribution rights of Velvel Records and the $1.1 million of amortization of
intangible assets, and a $1.8 million increase in the provision for allowance
for doubtful accounts. The Company increased its provision for doubtful accounts
because of its concern that some customers may be unable to pay all or a portion
of the amount due with respect to its receivables.
Interest expense increased from $1.5 million for the fiscal 1996 period to $2.1
million for the fiscal 1997 period. This increase resulted from substantially
higher borrowing to support the Company's continued gain in market share, growth
in sales and to maintain higher inventory levels. Net income was $1.3 million
for fiscal 1996 compared to a loss of $6.2 million for fiscal 1997. The net loss
for fiscal 1997 was primarily due to previously discussed write down and
amortization of intangible assets and increase of the provision for doubtful
accounts. Also included in the net loss for fiscal 1997 was the equity loss in
Net Radio.
The Company's effective tax rate decreased from 41.0% in fiscal 1996 to 8.8% in
fiscal 1997 as a result of the $1.75 million valuation allowance against
deferred tax assets related to the write down and amortization of VelVel's
distribution rights.
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 March 31, 1998, the Company had net accounts receivable of
$52.4 million and inventory of $23.2 million. These assets are primarily
financed by accounts payable of $45.6 million and bank borrowings of $32.4
million.
For the fiscal year ended March 31, 1998 net sales were $196.6 million, a
decrease of $4.1 million over 1997 fiscal year net sales of $200.7 million. The
Company had a net loss of $974,000 during this period. The Company used cash of
$10.9 million in operating activities. Accounts receivable increased by $5.2
million and inventories increased by $6.4 million during the period. These
changes were offset partially by a decrease of $1.9 million in prepaid expenses
and other assets. Investing activities used $940,000 of cash, including $748,000
for the purchase of furniture, equipment and leasehold improvements. Financing
activities provided net cash of $11.2 million during the period primarily from
net bank borrowings.
On June 11, 1997, the Company entered into a revolving line of credit with
Congress Financial Corporation. The credit facility has a maximum borrowing
limit of $45 million and is secured by substantially all the Company's assets.
The available amount fluctuates based on an asset borrowing base.
On May 1, 1998, the Company raised $20.0 million in a private placement of
1,523,810 shares of 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. For each share of Class A
Convertible Preferred Stock, each purchaser received a warrant to purchase five
shares of Navarre common stock at $3.50 per share. The Company used the proceeds
of the offering for working
<PAGE>
capital purposes, including payment of the amounts due its credit facility.
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.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this item with respect to directors is contained in
the section "Election of Directors" in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on September 3, 1998 (the "1998 Proxy
Statement"), a definitive copy of which will be filed with the Commission within
120 days of the close of the past fiscal year, and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item is contained in the sections entitled
"Executive Compensation," "Employment Agreements" and "Stock Option Plan" in the
Company's 1998 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item is contained in the section entitled
"Security Ownership for Certain beneficial Owners and Management" in the
Company's 1998 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required under this item is contained in the section entitled
"Certain Transactions" in the Company's 1998 Proxy Statement and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
<PAGE>
(1) Financial Statements. The following financial statements of the
Company are set forth at the end of this document.
Report of Independent Auditors
Consolidated Balance Sheets as of March 31, 1998 and 1997
Consolidated Statements of Operations for each of the three
years in the period ended March 31, 1998
Consolidated Statement of Shareholders' Equity as of March 31,
1998
Consolidated Statements of Cash Flows for each of the three
years in the period ended March 31, 1998
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule for each of the three years in the
period ended March 31, 1998
Schedule II - Valuation and Qualifying Accounts and Reserves
Schedules other than those listed above have been omitted
because they are inapplicable or the required
information is either immaterial or shown in the
Financial Statements or the notes thereto.
(3) Exhibits
* Indicates compensatory agreement.
3.1 Articles of Incorporation.
3.2 Certificate of Rights and Preferences of Class A
Convertible Preferred Stock of Navarre Corporation,
incorporated herein by reference from Exhibit 2 to Form
8-K dated May 1, 1998.
3.3 Bylaws, incorporated herein by reference from Exhibit
3.2 to Form S-1, Registration Number 33-68392.
10.1 *Employment Agreement, dated October 1, 1996, between
the Company and Eric H. Paulson, incorporated herein by
reference from Exhibit 10.1 to Form 10-K for year ended
March 31, 1997.
10.2 *Employment Agreement, dated October 1, 1996, between
the Company and Charles E. Cheney, incorporated herein
by reference from Exhibit 10.2 to Form 10-K for year
ended March 31, 1997.
10.3 *Employment Agreement, dated November 21, 1996, between
the Company and Guy M. Marsala, incorporated herein by
reference from Exhibit 10.3 to Form 10-K for year ended
March 31, 1997.
10.4 *Employment Agreement with Stuart S. Marlowe, dated June
18, 1996, incorporated by reference from Exhibit 10.14
to Form 10-K for year ended March 31, 1996.
10.5 1992 Stock Option Plan, amended and restated,
incorporated herein by reference from Exhibit 10.3 to
the Company's Form 10-Q for the quarter ended December
31, 1996.
10.6 Form of Individual Stock Option Agreement under 1992
Stock Option Plan, from Exhibit 10.4 to Form S-1.
10.7 Form of Distribution Agreement, incorporated herein by
reference from Exhibit 10.5 to Form S-1.
10.8 Form of Termination Agreement for Executives of the
Company, incorporated herein by reference from Exhibit
10.6 to Form 10-K for year ended March 31, 1996.
10.9 Lease dated September 25, 1995 between Navarre
Corporation and New Hope, LLP with respect to the
Corporate Headquarters in New Hope, MN, incorporated
herein by reference from Exhibit 10.10 to Form 10-Q for
quarter ended September 30, 1995.
<PAGE>
10.10 Loan and Security Agreement between Congress Financial
Corporation and Navarre Corporation, dated June 12,
1997, incorporated herein by reference from Exhibit
10.13 to Form 10-K for year ended March 31, 1997.
10.11.1 Amendment No.1 to Loan Documents, dated September 19,
1997
10.11.2 Amendment No.2 to Loan Documents, dated October 29, 1997
10.11.3 Amendment No.3 to Loan Documents, dated May 1, 1998
10.12 Agreement and Plan of Reorganization dated March 7, 1997
by and Among Net Radio Corporation, a Nevada
corporation, Navarre Corporation and Net Radio
Corporation, a Minnesota Corporation, incorporated
herein by reference from Exhibit 10.14 to Form 10-K for
year ended March 31, 1997.
10.13 Escrow Agreement dated March 20, 1997 between Navarre
Corporation and Net Radio Corporation, incorporated
herein by reference from Exhibit 10.15 to Form 10-K for
year ended March 31, 1997.
10.14 Form of Shareholder Rights Agreement dated March 24,
1997 between former shareholders of Net Radio
Corporation and Navarre Corporation, incorporated herein
by reference from Exhibit 10.16 to Form 10-K for year
ended March 31, 1997.
10.15 Form of Voting Agreement dated March 11, 1997 between
former shareholders of Net Radio Corporation and Navarre
Corporation, incorporated herein by reference from
Exhibit 10.17 to Form 10-K for year ended March 31,
1997.
10.16 Stock Purchase Agreement dated as of March 7, 1997, by
and among ValueVision International, Inc. Net Radio
Corporation (Minnesota), Navarre Corporation, and Net
Radio Corporation (Delaware), incorporated herein by
reference from Exhibit 10.18 to Form 10-K for year ended
March 31, 1997.
10.17 Conversion Agreement dated March 20, 1997 by and between
ValueVision International, Inc. and Navarre
Corporation), incorporated herein by reference from
Exhibit 10.18 to Form 10-K for year ended March 31,
1997.
10.18 Registration Rights, incorporated herein by reference
from Exhibit 3 to Form 8-K dated May 1, 1998.
10.19 Form of Warrant dated May 1, 1998 issued to Delphi
Financial Corporation.
10.20 Form of Warrant dated May 1, 1998 issued to investors in
connection with the Company's May 1, 1998 private
placement of Class A Convertible Preferred Stock,
incorporated by reference to Exhibit 4 to Form 8-K dated
May 1, 1998.
21 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
27.3 Financial Data Schedule.
27.4 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports of Form 8-K filed during the quarter ended
March 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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)
June 29, 1998 By /s/ Eric H. Paulson
-------------------
Eric H. Paulson
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints Eric H.
Paulson and Charles E. Cheney as his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
of all amendments to this Annual Report on Form 10-K and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
Signature Title Date
--------- ----- ----
/s/ Eric H. Paulson Chairman of the Board, President June 29, 1998
- --------------------------- and Chief Executive Officer
Eric H. Paulson
/s/ Charles E. Cheney Director, Treasurer and Secretary, June 29, 1998
- --------------------------- Executive Vice President and
Charles E. Cheney Chief Financial Officer
/s/ Dickinson G. Wiltz Director June 29, 1998
- ---------------------------
Dickinson G. Wiltz
/s/ James G. Sippl Director June 29, 1998
- ---------------------------
James G. Sippl
/s/ Michael L. Snow Director June 29, 1998
- ---------------------------
Michael L. Snow
/s/ Alfred Teo Director June 29, 1998
- ---------------------------
Alfred Teo
<PAGE>
Report of Independent Auditors
The Board of Directors
Navarre Corporation
We have audited the accompanying consolidated balance sheets of Navarre
Corporation as of March 31, 1998 and 1997, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended March 31, 1998. Our audit also included
the financial statement schedule for the year ended March 31, 1998 listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Navarre
Corporation at March 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statements schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Ernst & Young LLP
---------------------
Minneapolis, Minnesota
April 24, 1998
<PAGE>
NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31
1998 1997
---------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 23 $ 655
Accounts receivable, less allowance for doubtful accounts and sales returns
of $2,412 in 1998 and $3,585 in 1997 52,383 47,163
Inventories 23,188 16,854
Note receivable, related parties 406 214
Refundable income taxes 2,265 -
Prepaid expenses and other current assets 962 3,062
--------------------------
Total current assets 79,227 67,948
Property and equipment, net of accumulated depreciation of $3,647 and
$2,571, respectively 2,957 3,438
Other assets:
Velvel distribution rights - 5,346
Goodwill 1,174 1,492
Other assets 331 173
--------------------------
Total assets $83,689 $78,397
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $32,445 $20,750
Current portion of long-term debt 162 5,142
Accounts payable 45,554 45,503
Accrued expenses 1,019 1,453
Income taxes payable - 135
--------------------------
Total current liabilities 79,180 72,983
Long-term debt, less current maturities 181 315
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 - 7,009,170 and 6,902,248, respectively 8,113 8,005
Retained deficit (3,558) (2,584)
Unearned compensation (227) (322)
--------------------------
Total shareholders' equity 4,328 5,099
--------------------------
Total liabilities and shareholders' equity $83,689 $78,397
==========================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
Net sales:
Computer software $137,479 $150,859 $105,575
Music 59,169 49,838 52,779
---------------------------------------------------
196,648 200,697 158,354
Cost of sales 171,655 177,415 138,503
---------------------------------------------------
Gross profit 24,993 23,282 19,851
Operating expenses:
Selling and promotion 5,716 5,669 4,940
Distribution and warehousing 2,936 2,697 1,945
General and administrative 13,535 13,664 9,077
Amortization and writedown of intangible assets 1,348 4,955 -
---------------------------------------------------
23,535 26,985 15,962
---------------------------------------------------
Income (loss) from operations 1,458 (3,703) 3,889
Other expense:
Interest expense (3,108) (2,110) (1,521)
Other expense (10) (184) (132)
---------------------------------------------------
Income (loss) before income taxes and equity in loss of Net
Radio Corporation (1,660) (5,997) 2,236
Income tax expense (benefit) (470) (527) 917
Equity in loss of Net Radio Corporation - (719) -
Minority interest (216) - -
---------------------------------------------------
Net income (loss) $ (974) $ (6,189) $ 1,319
===================================================
Basic earnings (loss) per share $ (.14) $ (.92) $ .22
Diluted earnings (loss) per share $ (.14) $ (.92) $ .20
Basic weighted average common shares outstanding 6,921 6,692 6,070
Diluted weighted average common shares outstanding 6,921 6,692 6,458
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
RETAINED
SHARES COMMON EARNINGS UNEARNED
ISSUED STOCK (DEFICIT) COMPENSATION
---------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at March 31, 1995 6,069,346 $6,043 $ 2,286 $(114)
Common stock issued under restricted stock grants 150,000 338 - (338)
Shares issued upon exercise of stock options 109,600 79 - -
Net income - - 1,319 -
Amortization of unearned compensation - - - 35
---------------------------------------------------------
Balance at March 31, 1996 6,328,946 6,460 3,605 (417)
Shares issued in acquisitions 475,000 1,359 - -
Shares issued upon exercise of stock options 98,302 186 - -
Net loss - - (6,189) -
Amortization of unearned compensation - - - 95
---------------------------------------------------------
Balance at March 31, 1997 6,902,248 8,005 (2,584) (322)
Shares issued upon exercise of stock options 106,922 108 - -
Net loss - - (974) -
Amortization of unearned compensation - - - 95
---------------------------------------------------------
Balance at March 31, 1998 7,009,170 $8,113 $(3,558) $(227)
=========================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (974) $ (6,189) $ 1,319
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation 1,090 871 843
Amortization and writedown of intangible assets 1,348 4,955 -
Amortization of unearned compensation 95 95 35
Equity in loss of Net Radio Corporation - 719 -
Minority interest in subsidiary (216) - -
Changes in operating assets and liabilities:
Accounts receivable (5,220) (6,114) (13,794)
Inventories (6,379) (2,038) 166
Prepaid expenses and other assets 1,942 (737) (415)
Income tax receivable (2,265)
Accounts payable and accrued expenses (166) 16,589 1,799
Income taxes payable (135) (174) 150
---------------------------------------------
Net cash (used in) provided by operating activities (10,880) 7,977 (9,897)
INVESTING ACTIVITIES
Note receivable, related parties (192) (214) 255
Acquisition of businesses, net of cash received - (552) -
Payment for Velvel distribution rights - (5,000) -
Purchases of equipment and leasehold improvements (748) (870) (1,456)
---------------------------------------------
Net cash used in investing activities (940) (6,636) (1,201)
FINANCING ACTIVITIES
Payments on long-term debt (614) (511) (629)
Proceeds from note payable, bank 176,925 170,717 142,729
Payments on note payable, bank (165,231) (171,082) (130,777)
Payment on notes payable, shareholders - - (302)
Proceeds from sale of common stock - 186 79
Exercise of common stock options 108 - -
---------------------------------------------
Net cash provided by (used in) financing activities 11,188 (690) 11,100
---------------------------------------------
Net increase/(decrease) in cash (632) 651 2
Cash at beginning of year 655 4 2
---------------------------------------------
Cash at end of year $ 23 $ 655 $ 4
=============================================
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Velvel distribution rights partially financed by note payable $ - $ 5,000 $ -
Note payable and common stock issued for acquired businesses $ - $ 1,859 $ -
Cancellation of Velvel distribution agreement $ 4,500 $ - $ -
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company distributes home entertainment products including prerecorded tapes,
compact discs and personal computer software and interactive CD-ROM computer
software primarily to retailers and wholesalers in the United States.
CONSOLIDATION
The financial statements include the accounts of the Company and its majority
owned subsidiaries, Digital Entertainment, Inc. and Net Radio Corporation
(collectively, the Company). Net Radio has been consolidated beginning March
1997, when the Company purchased a controlling interest in the operation.
All intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION
Revenues from sales of product are recorded upon shipment. Allowances are
provided for estimated sales returns at the time the sale is recorded based on
the Company's trailing twelve months' experience by product line.
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Receivables generally are
due within sixty days. Credit losses relating to customers consistently have
been within management's expectations.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined on
the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method for leasehold improvements and accelerated methods for
equipment over estimated useful lives of 3 to 10 years.
<PAGE>
1. ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR LONG LIVED ASSETS
The Company records losses on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
("Statement 123"). The Company adopted the disclosure only provisions of
Statement 123. Accordingly, the Company has made pro forma disclosures of what
net income and income per share would have been had the provisions of Statement
123 been applied to the Company's stock options.
VELVEL DISTRIBUTION RIGHTS
The distribution rights were written off in 1998. Prior to 1998, the carrying
value of the distribution rights had been amoritized assuming a five year life.
<PAGE>
1. ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill primarily represents the excess of the purchase price over the fair
value of the net tangible assets of acquired businesses and is amortized on a
straight line basis over 5 to 15 years. Accumulated amortization at March 31,
1998 and 1997 was $684,000 and $321,000, respectively.
INCOME TAXES
Income taxes are recorded under the liability method. Deferred income taxes are
provided for temporary differences between the financial reporting and tax bases
of assets and liabilities.
EARNINGS PER COMMON SHARE
In fiscal 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE. Statement No. 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 No. 128 requirements.
<PAGE>
1. ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the compution of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
(In thousands, except for per share data) YEAR ENDED MARCH 31
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Numerator:
Net income (loss) $ (974) $(6,189) $1,319
==========================================
Denominator:
Denominator for basic earnings per share--weighted-
average shares 6,921 6,692 6,070
Dilutive securities:
Employee stock options - - 388
------------------------------------------
Denominator for diluted earnings per share--adjusted
weighted-average shares 6,921 6,692 6,458
==========================================
Basic earnings per share $ (.14) $ (.92) $ .22
==========================================
Diluted earnings per share $ (.14) $ (.92) $ .20
==========================================
</TABLE>
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
REPORTING COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 130 establishes standards for
reporting and presenting comprehensive income and its components. SFAS No. 131
establishes standards for defining operating segments and reporting certain
information regarding operating segments. The Company does not believe that
either statement will have a material impact on the financial statements since
both standards are for informational purposes only. If the Company determines
that it has a reporting obligation under either new standard, the necessary
information will be disclosed as part of the Company's financial reporting when
effective.
<PAGE>
2. ACQUISITIONS
During May 1996, the Company acquired a 50% interest in Net Radio Corporation,
an internet radio network. The Company accounted for its investment in Net Radio
Corporation under the equity method. In March 1997, the Company acquired the
remaining 50% of Net Radio Corporation. In total, the Company paid $1,000,000 in
cash, issued a $500,000 note payable and issued 295,000 shares of the Company's
common stock valued at $954,000.
The purchase price of the remaining 50% interest may be adjusted if Net Radio
Corporation attains certain revenue and income results. Based upon NetRadio's
performance in fiscal 1998, no adjustment to the purchase price was made in the
current year. The excess of purchase price over fair value of the assets
acquired in March 1997 resulted in goodwill of approximately $1,263,000 which is
being amortized on a straight line basis over a 5 year period.
Concurrent with the closing of the second investment in Net Radio Corporation,
the Company sold 15% of the common stock of Net Radio Corporation to ValueVision
International, Inc., (ValueVision) for $1,000,000 in the form of cash and
$2,000,000 in future advertising on the ValueVision network valued by the
Company at $1,000,000. In the event that Net Radio Corporation has not commenced
an initial public offering by March 2002, ValueVision will have the right to put
its investment back to the Company payable to ValueVision in cash or common
stock at the option of the Company.
In May 1996, the Company purchased Record Service, Inc., with its wholly owned
subsidiary, Surfside Distributors, Inc., a Hawaii based music distributor for
$250,000 in cash and 180,000 shares of the Company's common stock valued at
$405,000. The excess of purchase price over fair value of the assets acquired
resulted in goodwill of approximately $479,000 which is being amortized on a
straight line basis over a 15 year period.
Both acquisitions have been accounted for as purchases and, accordingly, their
net assets and operating results are included in the Company's financial
statements from the respective dates of acquisition. The pro forma impact of the
acquisitions on the Company's results of operations for all years presented was
not material.
<PAGE>
3. VELVEL DISTRIBUTION RIGHTS
In August 1996, the Company entered into a unit purchase agreement (agreement)
with Velvel Records LLC (Velvel) to acquire the exclusive distribution rights of
Velvel's wholly-owned labels for a period of five years. The Company invested
$10 million in Velvel of which $5 million was paid upon entering the agreement
and the remaining $5 million in the form of a demand promissory note. Upon
payment of the first installment, the Company received a capital interest in
Velvel of 14.2%. The Company paid $500,000 of the demand promissory note in May
1997. Under the agreement, owners of capital interest would not participate in
earnings or losses of Velvel.
Amortization of the distribution rights was $834,000 for the year ended March
31, 1997. In March 1997, the Company recorded a write-down of $3,820,000 in the
Velvel distribution agreement where the expected future cash flows (undiscounted
and without interest) is less than the carrying amount of the distribution
agreement. Under SFAS 121, the amount of the impairment loss is the excess
carrying amount of the impaired asset over the fair value of the asset
discounted at a rate commensurate with the risks involved. The remaining
carrying value of the distribution rights as of March 31, 1997 was $5,346,000.
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 the Company to Velvel. The net effect of amortization
expense from the cancellation of the Velvel agreement was $167,000. Total
amortization for the year ended March 31, 1998 was $846,000.
4. NOTE RECEIVABLE, RELATED PARTIES
The related party notes receivable are due on demand and bear interest at 8.75%
per year and are unsecured.
5. BANK FINANCING AND DEBT
On June 11, 1997, the Company entered into a new revolving line of credit with
Congress Financial Corporation. The credit facility has a maximum borrowing
limit of $45 million, fluctuates based on an asset borrowing base, and is
secured by substantially all Company assets.
<PAGE>
5. BANK FINANCING AND DEBT (CONTINUED)
Interest is at prime plus 1% (9.5% at March 31, 1998) and LIBOR rate plus 3.25%
(8.9375% at March 31, 1998) and is payable monthly. The weighted average
interest rate was 9.5% for the years ended March 31, 1998 and 1997,
respectively. In connection with the new credit facility with Congress Financial
Corporation, the Company paid off all amounts due under its revolving line of
credit in place at March 31, 1997.
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31
1998 1997
-------------------------------
<S> <C> <C>
Promissory note payable to Velvel Records LLC, due on demand,
interest at the prime rate on the unpaid balance only after demand,
secured by capital interest $ - $5,000
Capital equipment leases with monthly payments of $1 to $6,
secured by equipment 288 381
Notes payable in monthly installments of $5 through September
1998, interest at 10%, unsecured 55 76
-------------------------------
343 5,457
Less current portion 162 5,142
-------------------------------
Long-term debt $ 181 $ 315
===============================
</TABLE>
Interest paid was $3,238,000, $2,112,000 and $1,521,000 for the years ended
March 31, 1998, 1997 and 1996, respectively.
Maturities of long-term debt are as follows: 1999 - $162,000; 2000 - $87,000;
2001 - $70,000; 2002 - $24,000; and 2003 - $0.
6. SHAREHOLDERS' EQUITY
The Company has issued warrants to the lead underwriter, of the December 16,
1993 public offering, to purchase 180,000 common shares, exercisable for five
years from the date of the public offering at $3.90 per share. No warrants have
been exercised at March 31, 1998.
<PAGE>
6. SHAREHOLDERS' EQUITY (CONTINUED)
On May 21, 1996, the Board of Directors declared a two-for-one stock split in
the form of a fifty percent stock dividend distributed on June 21, 1996, to
shareholders of record on June 5, 1996. All earnings (loss) per share and per
share data have been adjusted to reflect the two-for-one stock split.
Also on June 13, 1996, the Board of Directors resolved to amend the Company's
articles of incorporation to authorize the creation of a class of preferred
stock of 5,000,000 shares. The amendment was approved by the Company's
shareholders on September 5, 1996.
7. STOCK OPTIONS AND GRANTS
The Company has an incentive stock option plan for officers, key employees and
directors. The options are granted at fair market value and expire five years
after the grant date. Option activity is summarized as follows:
<TABLE>
<CAPTION>
PLAN OPTIONS WEIGHTED AVERAGE
AVAILABLE FOR PLAN OPTIONS EXERCISE PRICE PER
GRANT OUTSTANDING SHARE
---------------------------------------------------------
<S> <C> <C> <C>
Balance on March 31, 1995 383,394 481,290 $1.27
Additional shares 1,300,000 - -
Granted (847,390) 847,390 2.93
Canceled 17,596 (17,596) 3.15
Exercised - (123,860) 1.28
----------------------------------------------------------
Balance on March 31, 1996 853,600 1,187,224 2.43
Granted (141,000) 141,000 5.37
Canceled 99,356 (99,356) 2.29
Exercised - (98,302) 1.89
----------------------------------------------------------
Balance on March 31, 1997 811,956 1,130,566 2.85
Granted (357,350) 357,350 2.88
Canceled 91,820 (91,820) 5.05
Exercised - (106,922) 1.01
----------------------------------------------------------
Balance on March 31, 1998 546,426 1,289,174 $2.92
==========================================================
</TABLE>
<PAGE>
7. STOCK OPTIONS AND GRANTS (CONTINUED)
In October 1997, the Company's Board of Directors repriced options covering
51,850 shares, representing all of the qualified outstanding options with
exercise prices ranging from $5.12 to $11.38, to an exercise price of $4.38 per
share. The vesting terms of these options remains unchanged.
The weighted average fair value of options granted in 1998, 1997 and 1996 was
$1.69, $2.45 and $1.63 per share, respectively.
The exercise price of options outstanding at March 31, 1998 ranged from $.96 to
$6.625 per share, as summarized in the following table:
<TABLE>
<CAPTION>
SHARES
OUTSTANDING WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
RANGE OF AT MARCH 31, REMAINING SHARES EXERCISE
EXERCISE PRICE 1998 CONTRACTUAL LIFE EXERCISABLE PRICE PER SHARE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ .96 - $2.25 568,244 2.5 years 369,716 $2.02
2.26 - 2.75 317,540 4.5 years 61,876 2.64
2.76 - 4.38 376,390 2.8 years 201,956 4.23
4.39 - 8.50 27,000 2.4 years 15,000 6.83
--------------------------------------------------------------------------
Total 1,289,174 3.1 years 648,548 2.92
==========================================================================
</TABLE>
The number of options exercisable at March 31, 1998, 1997 and 1996 was 648,548,
425,334 and 322,306, respectively, at a weighted average exercise price of
$2.84, $2.07 and $1.68 per share, respectively.
Pro forma information regarding net income (loss) and earnings (loss) per share
is required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
Statement 123. The fair value for these options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for 1998 and 1997, respectively; risk-free interest
rate of 4.9% and 6.7%, volatility factor of the expected market price of the
Company's Common Stock of .82 and .57 and a weighted-average expected life of
the option of five years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective
<PAGE>
7. STOCK OPTIONS AND GRANTS (CONTINUED)
input assumptions can materially affect the fair value statement, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Pro forma net income (loss) $(1,187) $(6,352) $1,255
Pro forma basic earnings (loss) per share (.17) (.94) .21
Pro forma diluted earnings (loss) per share (.17) (.94) .19
</TABLE>
These pro forma amounts may not be indicative of future years' amounts since the
Statement provides for a phase-in of option values beginning with those granted
in fiscal 1996.
The Company has granted restricted common shares to key employees which are
recorded at the market value on the date of the grant. A total of 150,000 common
shares were issued under restricted stock grants for the year ended March 31,
1996. The total market value on the date of grant of common shares is treated as
unearned compensation charged to expense over the vesting period of five years.
Compensation charged to expense was $95,000, $95,000 and $35,000 for the years
ended March 31, 1998, 1997 and 1996, respectively. The remaining unamortized
unearned compensation is expected to be charged to operations over the five year
vesting period.
<PAGE>
8. INCOME TAXES
The components of income tax expense (benefit) are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $(2,256) $ 560 $850
State (166) 120 85
--------------------------------------------------
(2,422) 680 935
Deferred 1,952 (1,207) (18)
--------------------------------------------------
Income tax expense (benefit) $ (470) $ (527) $917
==================================================
</TABLE>
Deferred income taxes reflect the available tax carryforwards and the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets as of
March 31, 1998 and 1997 included in prepaid expenses and other assets are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997
------------------------
<S> <C> <C>
Amortization of intangible assets $ - $1,750
Net operating loss carryforward 117 117
Allowance for uncollectible accounts 443 955
Allowance for sales returns 520 479
Book/tax depreciation 58 50
Reserve for sales discounts 142 145
Accrued vacations 85 55
Inventory - uniform capitalization 118 86
Inventory - obsolescence - 65
Price protection reserve 120 -
------------------------
1,603 3,702
Valuation allowance (1,603) (1,750)
------------------------
Total deferred tax assets (included in prepaid expenses
and other current assets) $ - $1,952
========================
</TABLE>
<PAGE>
8. INCOME TAXES (CONTINUED)
The net operating loss carryforward of $222,000 is limited to a utilization
limit of $111,000 per year through the year 2000 as a result of the change in
the Company's year end in 1994.
A reconciliation of income tax expense to the statutory federal rate is as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Tax expense (benefit) at statutory rate $(564) $(2,039) $ 782
State income taxes (benefit), net of
federal benefit (94) (365) 80
Valuation allowance (147) 1,750 -
Goodwill amortization 43 92 -
Other 292 35 55
-----------------------------------------------
$(470) $ (527) $ 917
-----------------------------------------------
Effective tax rate (28.0)% (8.8)% 41.0%
===============================================
</TABLE>
Cash paid for income taxes was $0, $855,000 and $791,000 for the years ended
March 31, 1998, 1997 and 1996, respectively.
9. COMMITMENTS
LEASES
On September 25, 1995, the Company entered into an operating lease agreement for
office and warehouse space with a partnership whose two partners are major
shareholders and officers of the Company. The lease expires in 2005 and provides
for monthly payments of $34,418 over the lease term, adjusted for the Consumer
Price Index after five years. In addition, the Company is responsible for all
operating costs associated with the building. The Company has one additional
five-year option to renew the lease.
Total rent expense was $1,069,000, $804,000 and $546,000 for the years ended
March 31, 1998, 1997 and 1996, respectively.
<PAGE>
9. COMMITMENTS (CONTINUED)
The following is a schedule of future minimum rental payments required under
noncancelable operating leases as of March 31, 1998 (in thousands):
1999 $ 622
2000 518
2001 505
2002 413
2003 413
Thereafter 1,033
-------------
$3,504
=============
10. MAJOR CUSTOMERS
The Company has three major customers which accounted for 44%, 47% and 54% of
sales in fiscal 1998, 1997 and 1996.
11. SUBSEQUENT EVENT
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 $20 million. 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 $3.50 per
share. The Class A Convertible Preferred Stock has a cumulative quarterly
dividend of ten percent (10%) payable 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 warrant in certain circumstances.
<PAGE>
NAVARRE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- --------------------------------------------------------------------------------------------------------------------------------
Additions
----------------------------------
(2)
(1) Charged to
Balance at Charged to Other Accounts Balance at
Beginning Costs and -- Describe Deductions -- End of
Description Of Period Expenses Describe Period
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $2,388,000 ($ 22,000) $1,253,000(1) $1,112,000
Allowance for sales returns 1,197,000 103,000 1,300,000
---------------------------------- ------------------------------------
Totals $3,585,000 81,000 $1,253,000(1) $2,412,000
================================== ====================================
Year ended March 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $196,000 $2,439,000 $508,000(2) $755,000(1) $2,388,000
Allowance for sales returns 747,000 450,000 1,197,000
-----------------------------------------------------------------------------------------
Totals $943,000 $2,889,000 $508,000 $755,000 $3,585,000
=========================================================================================
Year ended March 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $325,000 $576,000 $705,000(1) $196,000
Allowance for sales returns 453,000 294,000 747,000
---------------------------------- ------------------------------------
Totals $778,000 $870,000 $705,000 $943,000
================================== ====================================
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
(2) Increase in allowance transfered from acquistion of Record
Service, Inc. and NetRadio, Inc.
EXHIBIT 3.1
RESTATED
ARTICLES OF INCORPORATION
OF
NAVARRE CORPORATION
ARTICLE I.
The name of the Corporation is Navarre Corporation.
ARTICLE II.
The purposes of this Corporation are general business purposes.
ARTICLE III.
This Corporation shall possess all powers necessary to conduct any business in
which it is authorized to engage, including but not limited to all those powers
expressly conferred upon business corporations by Minnesota Statutes, together
with those powers implied therefrom.
ARTICLE IV.
This Corporation shall have perpetual duration.
ARTICLE V.
The location and post office address of the registered office of this
Corporation in Minnesota is 7400 49th Avenue North, New Hope, MN 55428.
<PAGE>
ARTICLE VI.
The aggregate number of shares that the Corporation has authority to issue shall
be 60,000,000 shares, no par value per share, which shall consist of 50,000,000
shares of common stock and 10,000,000 shares of preferred stock. The Board of
Directors of the Corporation is authorized to establish from the preferred
shares, by resolution adopted and filed in the manner provided by law, one or
more classes or series of shares, to designate each class or series, and to fix
the relative powers, qualifications, restrictions, rights and preferences of
each such class or series, including, without limitation, the right to create
voting, dividend and liquidation rights and preferences greater than those of
common stock. There shall be no cumulative voting by the shareholders of the
Corporation. The shareholders of the Corporation shall not have pre-emptive
rights to subscribe for or acquire securities or rights to purchase securities
of any kind, class or series of the Corporation.
ARTICLE VII.
Section 1. Number and Term. The business and affairs of this
Corporation shall be managed by or under the direction of a Board of Directors
consisting of not less than three (3) or more than nine (9) directors, as may be
designated by the Board of Directors from time to time. The directors shall be
divided into three (3) classes, as nearly equal in number as the then total
number of directors constituting the whole Board permits, with the term of
office of one class expiring each year at the annual meeting of shareholders.
Except as otherwise provided in this Article VII, each director shall be elected
by the shareholders to hold office for a term of three consecutive years. Each
director shall serve until a successor shall have been duly elected and
qualified, or until the earlier death, resignation, removal, or disqualification
of the director.
Section 2. Transitional Board. Upon the adoption of this new Article
VII to the Articles of Incorporation, one class of directors shall hold office
for a term expiring at the annual meeting of shareholders to be held after the
end of the Corporation's 1997 fiscal year, another class shall hold office for a
term expiring at the annual meeting of shareholders to be held after the end of
the Corporation's 1998 fiscal year and another class shall hold office for a
term expiring at the annual meeting of shareholders to be held after the end of
the Corporation's 1999 fiscal year. After the expiration of each term, the
provisions of Section 1 of this Article VII shall control.
Section 3. Vacancies. Any vacancies occurring in the Board of
Directors for any reason, and any newly created directorships resulting from an
increase in the number of directors, may be filled by a majority of the
directors then in office. Any directors so chosen shall hold office until the
next election of the class for which such directors shall have been chosen and
until their successors shall be elected and qualified subject, however, to prior
retirement, resignation, death or removal from office. Any newly created
directorships resulting from an increase in the authorized number of directors
shall be apportioned by the Board of Directors among the three classes of
directors so as to maintain such classes as nearly equal in number as possible.
<PAGE>
Section 4. Quorum. A majority of the members of the Board of
Directors shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors, but if less than such a majority is present
at a meeting, a majority of the directors present may adjourn the meeting from
time to time without further notice. The directors present at a duly organized
meeting may continue to transact business until adjournment notwithstanding that
the withdrawal of enough directors originally present leaves less than the
number otherwise required for a quorum.
Section 5. Nomination. Advance notice of nominations for the
election of directors, other than by the Board of Directors or a committee
thereof, shall be given within the time and in the manner provided in the
Bylaws.
Section 6. Written Action by Directors. Any action required or
permitted to be taken at a meeting of the Board of Directors, or a committee
thereof, may be taken by written action, or counterparts of a written action,
signed by all of the directors or, in cases where the action need not be
approved by the shareholders, by written action, or counterparts of a written
action, signed by the number of directors that would be required to take the
same action at a meeting of the Board or a committee thereof at which all
directors were present.
EXHIBIT 10.11.1
As of September 19, 1997
CONGRESS FINANCIAL CORPORATION
(CENTRAL)
150 South Wacker Drive
Chicago, Illinois 60606
Re: Amendment No. 1 to Financing Agreements
Gentlemen:
Reference is made to the financing arrangements between CONGRESS
FINANCIAL CORPORATION (CENTRAL) ("Lender") and NAVARRE CORPORATION ("Borrower"),
pursuant to which Lender may extend loans, advances and other financial
accommodations to Borrower pursuant to the terms and provisions of the Loan and
Security Agreement dated June 12, 1997 between Borrower and Lender (the "Loan
Agreement"). All capitalized terms used herein and not otherwise defined herein
shall have their respective meanings as defined in the Loan Agreement.
Borrower has requested that the Lender amend the Loan Agreement and
make additional loans, advances and other financial accommodations to Borrower
under the Loan Agreement, which Lender is willing to make, on and subject to the
terms and conditions of the Loan Agreement and the terms and conditions set
forth in this Letter Re: Amendment No. 1 to Financing Agreements ("Amendment").
In consideration of the foregoing, the parties hereto hereby agree as follows:
1. (a) In addition to the loans and advances as set forth in the
Loan Agreement, Lender agrees to make, subject to the terms hereof and as a
one-time financial accommodation to Borrower, a supplemental loan to Borrower in
the principal amount of $3,000,000 (the "Supplemental Loan"). The proceeds from
the Supplemental Loan shall be used by Borrower in connection with the purchase
of goods from American Gramaphone, L.L.C. The Supplemental Loan shall be a
Revolving Loan under the Loan Agreement and all references in the Loan Agreement
to "Revolving Loans" are hereby amended to include, within the definition
thereof, the Supplemental Loan. The Supplemental Loan shall accrue interest at
the rate set forth in the Loan Agreement with such interest being payable in
accordance with the terms of the Loan Agreement and the Supplemental Loan shall
be repaid on or prior to the date which is sixty (60) days from the date that
the Supplemental Loan is disbursed by Lender to Borrower (such sixtieth (60th)
day being the "Repayment Date"). Notwithstanding the foregoing, from the date
hereof up to and including the Repayment Date, the outstanding amount of the
Supplemental Loan shall not be included in the calculation, from time to time,
of Borrower's availability under the lending formulas as set forth in the Loan
Agreement. The outstanding principal amount of the Supplemental Loan plus the
aggregate amount
<PAGE>
of the Loans (excluding the Supplemental Loan) and the Letter of Credit
Accommodations outstanding at any time shall not exceed the Maximum Credit.
(b) The Supplemental Loan may be prepaid in whole or in part
without penalty or premium.
(c) At Lender's option, all payments required hereunder, together
with interest thereon, may be charged to any loan account of Borrower maintained
by Lender.
(d) Borrower hereby acknowledges, confirms and agrees that Lender
shall have no obligation to make the Supplemental Loan to Borrower until such
time as (i) Lender shall have received, to its satisfaction, evidence that all
disputes between Borrower and American Gramaphone, L.L.C., including the issues,
allegations and damages which are the subject to any lawsuit between Borrower
and American Gramaphone, L.L.C., have been settled or otherwise resolved; (ii)
Lender shall have received a Limited Guarantee duly executed by each of Eric H.
Paulson and Charles E. Cheney, respectively; and (iii) Lender shall have
received evidence that Lender has a perfected security interest in the Pledged
Securities (as said term is defined in those certain Collateral Assignment and
Pledge of Pledged Securities Agreements dated as of the date hereof and executed
and delivered in favor of Lender by each of Eric H. Paulson and Charles E.
Cheney, respectively).
2. Section 1.20 of the Loan Agreement is hereby amended and restated
in its entirety as follows:
"1.20 "INTEREST RATE" shall mean: (a) From the date of
that certain Letter Re: Amendment No. 1 to Financing
Agreements between Borrower and Lender dated as of September
__, 1997 ("Amendment No. 1"), up to and including June 30,
1998, and at any time from and after June 30, 1998 that Lender
declares an Event of Default hereunder or Borrower fails to
maintain an Adjusted Net Worth equal to or greater than
$5,000,000, "Interest Rate" shall mean as to Prime Rate Loans,
a rate of one (1%) percent per annum in excess of the Prime
Rate and, as to Eurodollar Rate Loans, a rate of three and
one-quarter (3 1/4%) percent per annum in excess of the
Adjusted Eurodollar Rate (based on the Eurodollar Rate
applicable for the Interest Period selected by Borrower as in
effect three (3) Business Days after the date of receipt by
Lender of the request of Borrower for such Eurodollar Rate
Loans in accordance with the terms hereof, whether such rate
is higher or lower than any rate previously quoted to
Borrower); provided, that, the Interest Rate shall mean the
rate of three (3%) percent per annum in excess of the Prime
Rate as to Prime Rate Loans and the rate of five and one
quarter (5 1/4%) percent per annum in excess of the Adjusted
Eurodollar Rate as to Eurodollar Rate Loans, at Lender's
option, without notice, (i) for the period (1) from and after
the date of termination or non-renewal hereof until Lender has
received full and final
<PAGE>
payment of all obligations (notwithstanding entry of a
judgment against Borrower) and (2) from and after the date of
the occurrence of an Event of Default for so long as such
Event of Default is continuing as determined by Lender, and
(ii) on the Revolving Loans at any time outstanding in excess
of the amounts available to Borrower under Section 2 (whether
or not such excess(es), arise or are made with or without
Lender's knowledge or consent and whether made before or after
an Event of Default); and
(b) From and after June 30, 1998, so long as Borrower
maintains an Adjusted Net Worth of $5,000,000 or greater and
no Event of Default has been declared by Lender hereunder,
"Interest Rate" shall mean as to Prime Rate Loans, a rate of
one-half (1/2%) percent per annum in excess of the Prime Rate
and, as to Eurodollar Rate Loans, a rate of two and
three-quarter (2 3/4%) percent per annum in excess of the
Adjusted Eurodollar Rate (based on the Eurodollar Rate
applicable for the Interest Period selected by Borrower as in
effect three (3) Business Days after the date of receipt by
Lender of the request of Borrower for such Eurodollar Rate
Loans in accordance with the terms hereof, whether such rate
is higher or lower than any rate previously quoted to
Borrower); provided, that, the Interest Rate shall mean the
rate of two and one-half (2 1/2%) percent per annum in excess
of the Prime Rate as to Prime Rate Loans and the rate of four
and three-quarters (4 3/4%) percent per annum in excess of the
Adjusted Eurodollar Rate as to Eurodollar Rate Loans, at
Lender's option, without notice, (i) for the period (1) from
and after the date of termination or non-renewal hereof until
Lender has received full and final payment of all obligations
(notwithstanding entry of a judgment against Borrower) and (2)
from and after the date of the occurrence of an Event of
Default for so long as such Event of Default is continuing as
determined by Lender, and (ii) on the Revolving Loans at any
time outstanding in excess of the amounts available to
Borrower under Section 2 (whether or not such excess(es),
arise or are made with or without Lender's knowledge or
consent and whether made before or after an Event of
Default)."
3. In further consideration of Lender's willingness to make
additional loans to Borrower as set forth herein, in addition to all other fees
due and payable by Borrower under the Loan Agreement, Borrower agrees to pay to
Lender a fee in the amount of $20,000. Such fee shall be fully earned as of the
date hereof and shall be payable in two (2) installments, with the first
installment in the amount of $10,000 payable contemporaneously with the
execution of this Amendment, and the second installment in the amount of $10,000
payable on the date which is thirty (30) days from the date of this Amendment.
Such fee may be charged by Lender to any loan account(s) of Borrower maintained
by Lender.
4. This Amendment shall not constitute a waiver or amendment of any
provision of the Loan Agreement not expressly referred to herein. Except as
expressly
<PAGE>
set forth herein, no other changes or modifications to the Loan Agreement are
intended or implied and the Loan Agreement shall remain in full force and effect
in accordance with its terms.
5. This Amendment may be executed in counterparts, each of which,
when executed, shall be deemed to constitute one and the same Amendment.
6. This Amendment shall be governed by, and construed and
interpreted in accordance with, the laws of the State of Illinois.
Very truly yours,
NAVARRE CORPORATION
By: /s/ Eric H. Paulson
-----------------------------------
Eric H. Paulson
Title: President
--------------------------------
ACCEPTED AND AGREED TO:
CONGRESS FINANCIAL CORPORATION
(CENTRAL)
By: /s/ Keith Chapman
-------------------------------------
Title: Vice President
----------------------------------
ACKNOWLEDGED AND AGREED TO:
/s/ Eric H. Paulson
- ----------------------------------------
ERIC H. PAULSON
/s/ Charles E. Cheney
- ----------------------------------------
CHARLES E. CHENEY
EXHIBIT 10.11.2
As of October 29, 1997
CONGRESS FINANCIAL CORPORATION
(CENTRAL)
150 South Wacker Drive
Chicago, Illinois 60606
Re: Amendment No. 2 to Financing Agreements
Gentlemen:
Reference is made to the financing arrangements between CONGRESS
FINANCIAL CORPORATION (CENTRAL) ("Lender") and NAVARRE CORPORATION ("Borrower"),
pursuant to which Lender may extend loans, advances and other financial
accommodations to Borrower pursuant to the terms and provisions of the Loan and
Security Agreement dated June 12, 1997 between Borrower and Lender (as amended
pursuant to Amendment No. 1 to Financing Agreements dated as of September 29,
1997 (the "First Amendment"), the "Loan Agreement"). All capitalized terms used
herein and not otherwise defined herein shall have their respective meanings as
defined in the Loan Agreement.
Borrower has requested that the Lender amend the Loan Agreement
which Lender is willing to do, on and subject to the terms and conditions of the
Loan Agreement and the terms and conditions set forth in this Letter Re:
Amendment No. 2 to Financing Agreements ("Amendment"). In consideration of the
foregoing, the parties hereto hereby agree as follows:
1. Notwithstanding anything to the contrary contained in Section
1.24 of the Loan Agreement, from October 29, 1997 up to and including December
31, 1997, "Maximum Credit" shall mean the amount of $48,000,000. From and after
January 1, 1998, and at all times thereafter, "Maximum Credit" shall have the
meaning set forth in Section 1.24 of the Loan Agreement (i.e., "Maximum Credit"
shall mean the amount of $45,000,000).
2. Paragraph 1 of the First Amendment is hereby deleted in its
entirety effective as of the date hereof.
3. This Amendment shall not constitute a waiver or amendment of any
provision of the Loan Agreement not expressly referred to herein. Except as
expressly set forth herein, no other changes or modifications to the Loan
Agreement are intended or implied and the Loan Agreement shall remain in full
force and effect in accordance with its terms.
4. This Amendment may be executed in counterparts, each of which,
when executed, shall be deemed to constitute one and the same Amendment.
<PAGE>
5. This Amendment shall be governed by, and construed and
interpreted in accordance with, the laws of the State of Illinois.
Very truly yours,
NAVARRE CORPORATION
By: /s/ Charles E. Cheney
------------------------------------
Charles E. Cheney
Title: Executive Vice President and CFO
---------------------------------
ACCEPTED AND AGREED TO:
CONGRESS FINANCIAL CORPORATION
(CENTRAL)
By: /s/ Keith Chapman
-------------------------------------
Title: Vice President
----------------------------------
ACKNOWLEDGED AND AGREED TO:
/s/ Eric H. Paulson
- ----------------------------------------
Eric H. Paulson
/s/ Charles E. Cheney
- ----------------------------------------
Charles E. Cheney
EXHIBIT 10.11.3
As of May 1, 1998
Congress Financial Corporation
(Central)
150 South Wacker Drive
Chicago, Illinois 60606
Re: Amendment No. 3 to Financing Agreements
Gentlemen:
Reference is made to the Loan and Security Agreement, dated June 12,
1997, between Congress Financial Corporation (Central) ("Lender") and Navarre
Corporation ("Borrower"), as amended by Amendment No. 1 to Financing Agreements,
dated as of September 19, 1997, and Amendment No. 2 to Financing Agreements,
dated as of October 29, 1997 (the "Loan Agreement"), together with all other
agreements, documents, supplements and instruments now or at any time hereafter
executed and/or delivered by Borrower or any other person, with, to or in favor
of Lender in connection therewith (all of the foregoing, together with this
Amendment and the other agreements and instruments delivered hereunder, as the
same now exist or may hereafter be amended, modified, supplemented, extended,
renewed, restated or replaced, collectively, the "Financing Agreements"). All
capitalized terms used herein and not otherwise defined herein shall have the
meanings given to them in the Loan Agreement.
Borrower has requested that Lender (a) consent to certain
transactions to be effected pursuant to the Class A Preferred Stock Purchase
Agreements (as hereinafter defined), (b) waive the Event of Default arising by
reason of the change in majority control of Borrower upon the sale of the Class
A Preferred Stock pursuant to the Class A Preferred Stock Purchase Agreement,
and (c) permit certain dividend payments to the holders of the Class A Preferred
Stock. Lender is willing to do so to the extent and subject to the terms and
conditions set forth herein.
In consideration of the foregoing, the mutual agreements and
covenants contained in this Amendment No. 3 to Financing Agreements (this
"Amendment"), and other good and valuable consideration, the adequacy and
sufficiency of which are hereby acknowledged, Borrower and Lender agree as
follows:
<PAGE>
1. Additional Definitions. As used herein or in any of the other
Financing Agreements, the following terms shall have the respective meanings
given to them below, and the Loan Agreement shall be deemed and is hereby
amended to include, in addition and not in limitation, each of the following
definitions:
(a) "Change of Control" shall mean the occurrence of any of the
following: (i) the failure of the Permitted Holders at any time (A) to own
beneficially free and clear of all security interests, liens, pledges or other
encumbrances at all times, at least fifty-one (51%) percent of the issued and
outstanding shares of capital stock of Borrower (both voting and non-voting), on
a fully diluted basis or (B) to have and exercise voting power for the election
of at least a majority of the Board of Directors of Borrower; (ii) the direct or
indirect acquisition by any Person or a group (as such term is defined in
Section 13(d)(3) of the Securities Exchange Act), other than Permitted Holders,
of beneficial ownership (as such term is defined in Rule 13D-3 issued under the
Securities Exchange Act) of twenty (20%) percent or more of the outstanding
shares of capital stock of Borrower; (iii) a change in the majority of the Board
of Directors of Borrower as in effect on the date hereof; or (iv) a change in
the chief executive officer or chief financial officer of Borrower as elected,
appointed and serving on the date hereof.
(b) "Class A Preferred Stock" shall mean the Class A Convertible
Preferred Stock issued pursuant to the Class A Preferred Stock Purchase
Agreements as designated pursuant to the Certificate of Rights and Preferences
of Class A Convertible Preferred Stock of Navarre Corporation.
(c) "Class A Preferred Stock Purchase Agreements" shall mean,
collectively, (i) the Class A Convertible Preferred Stock Purchase Agreement,
dated April 21, 1998, among the investors named on Exhibit A thereto and
Borrower, as amended by Amendment Number One to the Class A Convertible
Preferred Stock Purchase Agreement and Escrow Agreement, dated April 28, 1998,
among Borrower, the investors listed on Exhibit A thereto, and Lindquist &
Vennum, P.L.L.P., (ii) the Certificate of Rights and Preferences of Class A
Convertible Preferred Stock of Navarre Corporation, (iii) the Warrants, and (iv)
all other agreements, documents and instruments related to the issuance of the
Class A Preferred Stock, as the same now exist among hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.
(d) "NASDAQ Consent Letter" shall mean the letter, dated April
23, 1998, from the counsel's office of The NASDAQ Stock Market, Inc. to
Lindquist & Vennum, P.L.L.P., counsel for Borrower, re: Navarre Corporation,
NASDAQ Listing Qualifications Panel, Division 2076NC-98, as in effect on April
23, 1998.
(e) "Permitted Holders" shall mean the Persons listed on Exhibit
A hereto.
<PAGE>
(f) "Securities Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended, as the same now exists or may hereafter be amended,
modified, recodified or supplemented, together with all rules, regulations and
interpretations thereunder or related thereto.
(g) "Securities Laws" shall mean the Securities Act of 1993, as
amended, the Securities Exchange Act, and all rules, regulations and
interpretations issued pursuant thereto or in connection therewith, and all
State and local statutes, rules and regulations issued in connection therewith
or related thereto, including, without limitation, the rules and regulations of
The NASDAQ Stock Market, Inc., as the same now exist or may hereafter be
amended, modified, interpreted, recodified or supplemented.
(h) "Warrants" shall mean the Warrants issued to the purchasers
of the Class A Preferred Stock as provided in the Class A Preferred Stock
Purchase Agreements, as the same now exist or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.
2. Consent. Notwithstanding anything contained in Section 9.7(b) of
the Loan Agreement to the contrary, and subject to the terms and conditions
contained herein, Lender hereby consents to the sale of up to 2,000,000 shares
of Class A Preferred Stock and Warrants in consideration of the aggregate gross
cash purchase price of up to $20,000,000, as provided in the Class A Preferred
Stock Purchase Agreements (as in effect on the date hereof).
3. Waiver. Notwithstanding anything contained in Section 10.1(j) of
the Loan Agreement to the contrary, Lender hereby waives the Event of Default
arising under Section 10.1(j) by reason of the change of controlling ownership
of Borrower upon the consummation of the sale of the Class A Preferred Stock
pursuant to the Class A Preferred Stock Purchase Agreements (as in effect on the
date hereof).
4. Dividends and Redemptions. Section 9.11 of the Loan Agreement is
hereby deleted in its entirety and replaced with the following:
"9.11 Dividends and Redemptions. Borrower shall not, directly or
indirectly, declare or pay any dividends on account of any shares of
any class of capital stock of Borrower now or hereafter outstanding,
or set aside or otherwise deposit or invest any sums for such
purpose, or redeem, retire, defease, purchase or otherwise acquire
any shares of any class of capital stock (or set aside or otherwise
deposit or invest any sums for such purpose) for any consideration
other than common stock, or apply or set apart any sum, or make any
other distribution (by reduction of capital or otherwise) in respect
of any such shares, or agree to do any of the foregoing, except
that, Borrower may, out of legally available funds therefor, pay
dividends to the holders of the Class A Preferred Stock; provided,
that,
<PAGE>
as to each payment of dividends, each of the following conditions is
satisfied as determined by Lender: (a) Lender shall have received
not less than five (5) days prior written notice of the intention of
Borrower to pay such dividend; (b) as of the date of such payment
and after giving effect thereto, no Event of Default or act,
condition or event that with notice or passage of time or both would
constitute an Event of Default, shall exist or have occurred and be
continuing, (c) as of the date of such payment and after giving
effect thereto, the Excess Availability of Borrower for each of the
immediately preceding thirty (30) days shall have been not less than
One Dollar ($1.00), (d) as of the date of any such payment and after
giving effect thereto, the Excess Availability of Borrower shall be
not less than One Dollar ($1.00), and (e) Lender has received from
Borrower, together with the written notice of Borrower as provided
in Section 9.11(a) hereof, financial projections, in form and
substance satisfactory to Lender, indicating that for each day of
the three (3) months immediately following any such payment,
Borrower is projected to have Excess Availability of not less than
One Dollar ($1.00) and to satisfy Section 9.14 hereof."
5. Adjusted Net Worth. Section 9.14 of the Loan Agreement is hereby
amended by replacing the reference to the figure "$4,000,000" with the figure
"$12,000,000".
6. Events of Default. Section 10.1(j) of the Loan Agreement is
hereby deleted in its entirety and replaced with the following:
"(j) any Change of Control;
7. Representations, Warranties and Covenants. In addition to the
continuing representations, warranties and covenants heretofore or hereafter
made by Borrower to Lender pursuant to the other Financing Agreements, Borrower
hereby represents, warrants and covenants with and to Lender as follows (which
representations, warranties and covenants are continuing and shall survive the
execution and delivery hereof and shall be incorporated into and made a part of
the Financing Agreements):
(a) The Class A Preferred Stock Purchase Agreements and the
transactions contemplated thereunder have, contemporaneously herewith, been duly
executed, delivered and performed in accordance with their terms by the
respective parties thereto in all respects, including the fulfillment (not
merely the waiver) of all conditions precedent set forth therein.
(b) All of the shares of the Class A Preferred Stock have been
duly authorized, validly issued and are fully paid and non-assessable. All of
the shareholders of Borrower who own of record, or, directly or indirectly
beneficially own, five
<PAGE>
(5%) percent or more of the issued and outstanding shares of capital stock of
Borrower are listed, and their percentage ownership of record and beneficial
ownership, is set forth next to that shareholder's name, on Exhibit B attached
hereto.
(c) All actions and proceedings required by the Class A Preferred
Stock Purchase Agreements, applicable law and regulation have been taken and the
transactions required thereunder have, contemporaneously herewith, been duly and
validly taken and consummated, including, without limitation, all requirements
set forth in the NASDAQ Consent Letter, including the notice given by Borrower
to shareholders and the issuance by Borrower of a press release with respect to
the transactions contemplated by the Class A Preferred Stock Purchase Agreement.
Borrower has received no notice of, and does not know of, any objection by any
of the shareholders of Borrower to the transactions contemplated by the Class A
Preferred Stock Purchase Agreements.
(d) No court of competent jurisdiction has issued any injunction,
restraining order or other order which prohibits consummation of any of the
transactions described in the Class A Preferred Stock Purchase Agreements, and
no governmental action or proceeding has been threatened or commenced seeking
any injunction, restraining order or other order which seeks to void or
otherwise modify the transactions contemplated by or any provision of the Class
A Preferred Stock Purchase Agreements.
(e) Borrower has delivered, or caused to be delivered, to Lender
true, correct and complete copies of the Class A Preferred Stock Purchase
Agreements.
(f) Neither the execution and delivery of the Class A Preferred
Stock Purchase Agreements and the instruments and documents to be delivered
pursuant thereto, nor the consummation of the transactions therein contemplated,
nor compliance with the provisions thereof, (i) has violated or will violate any
Securities Laws or any other law or regulation or any order or decree of any
court or governmental instrumentality in any respect or (ii) does or will
conflict with or result in the breach of, or constitute a default in any respect
under, any indenture, mortgage, deed of trust, agreement or instrument to which
Borrower is a party or may be bound, or (iii) result in the creation or
imposition of any lien, charge or encumbrance upon any of the property of
Borrower, except as specifically permitted under the other Financing Agreements,
or (iv) does or shall violate any provision of the Certificate of Incorporation
or By-Laws of Borrower.
(g) The NASDAQ Consent Letter is in full force and effect as of
the date hereof and has not been rescinded, revoked, superseded, amended,
modified or supplemented.
(h) No Event of Default exists on the date of this Amendment
(after giving effect to the consents and waiver under, and amendments to the
Loan Agreement provided in, this Amendment).
<PAGE>
(i) This Amendment has been duly authorized, executed and
delivered by Borrower, and the agreements and obligations of Borrower contained
herein constitute legal, valid and binding obligations of Borrower enforceable
against Borrower in accordance with its terms.
(j) Borrower shall furnish to Lender a copy of the filing with,
contemporaneously with the sending thereof to, the Securities and Exchange
Commission and NASDAQ, (as required to be sent on or before May 15, 1998, unless
extended by the NASDAQ Stock Market, Inc., as agreed to by Lender in writing)
together with all financial statements and other documents indicating that
Borrower has net tangible assets of at least $5,000,000 as set forth in the
NASDAQ Consent Letter.
8. Conditions Precedent. The effectiveness of the consent, waiver
and amendments set forth herein shall be subject to the receipt by Lender of
each of the following, in form and substance satisfactory to Lender:
(a) an original of this Amendment, duly authorized, executed and
delivered by Borrower;
(b) Lender shall have received evidence, in form and substance
satisfactory to Lender, that Borrower has received net cash proceeds from the
sale of the Class A Preferred Stock and Warrants of not less than $18,000,000;
(c) all requisite corporate action and proceedings in connection
with this Amendment and the documents and instruments to be delivered hereunder
shall be in form and substance satisfactory to Lender, and Lender shall have
received all information and copies of all documents, including, without
limitation, records of requisite corporate action and proceedings which Lender
may have requested in connection therewith, such documents where requested by
Lender or its counsel to be certified by appropriate corporate officers or
governmental authorities;
(d) Lender shall have received the NASDAQ Consent Letter and
evidence, in form and substance satisfactory to Lender, that Borrower has
satisfied the requirements set forth therein other than the May 15, 1998 filing
described in Section 7(i) hereof;
(e) an opinion letter of counsel to Borrower, addressed to Lender
or upon which Lender is expressly permitted to rely, with respect to the Class A
Preferred Stock Purchase Agreements and such other matters as Lender may
request; and
(f) after giving effect to the consents and waivers under, and
amendments to the Loan Agreement provided in, this Amendment, no Event of
Default shall exist or have occurred and no event or condition shall have
occurred or exist which with notice or passage of time or both would constitute
an Event of Default.
<PAGE>
9. Effect of this Amendment. This Amendment and any instruments and
agreements delivered pursuant hereto constitute the entire agreement of the
parties with respect to the subject matter hereof and thereof, and supersede all
prior oral or written communications, memoranda, proposals, negotiations,
discussions, term sheets and commitments with respect to the subject matter
hereof and thereof. Except for the specific amendments, consents and waivers
expressly set forth herein, no other changes or modifications to or consents or
waivers under the Financing Agreements are intended or implied, and in all other
respects the Financing Agreements are hereby specifically ratified, restated and
confirmed by all parties hereto as of the effective date hereof. To the extent
of conflict between the terms of this Amendment and the other Financing
Agreements, the terms of this Amendment shall control. The Loan Agreement and
this Amendment shall be read and construed as one agreement.
10. Further Assurances. Borrower shall execute and deliver such
additional documents and take such additional action as may be reasonably
requested by Lender to effectuate the provisions and purposes of this Amendment.
11. Governing Law. The rights and obligations hereunder of each of
the parties hereto shall be governed by and interpreted and determined in
accordance with the internal laws of the State of Illinois (without giving
effect to principles of conflicts of law).
12. Binding Effect. This Amendment shall be binding upon and inure
to the benefit of each of the parties hereto and their respective successors and
assigns.
13. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart thereof signed by each of
the parties hereto.
Please sign in the space provided below and return a counterpart of this
Amendment, whereupon this Amendment, as so agreed to and accepted, shall become
a binding agreement between Borrower and Lender.
Very truly yours,
NAVARRE CORPORATION
By: /s/ Charles Cheney
-----------------------------------
Charles Cheney
Title: Chief Financial Officer
--------------------------------
[SIGNATURES CONTINUE ON NEXT PAGE]
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
AGREED AND ACCEPTED:
CONGRESS FINANCIAL CORPORATION
(CENTRAL)
By: /s/ Keith Chapman
-------------------------------------
Title: Vice President
----------------------------------
<PAGE>
EXHIBIT A
PERMITTED HOLDERS
Eric H. Paulson
Charles E. Cheney
Dickinson G. Wiltz
Guy M. Marsala
Alfred and Annie Teo
American Gramaphone
Bernard Williams
Cranshire Capital, LP
Dakota Partners
Daniel S. Perkins
Daniel and Patrice Perkins
Delta Plastics 401K
Dennis D. Gonyea
Dr. Elmer Salovich
ELARA, LTD
(Tailisman Capital)
Ellis Limited Partnership
Goldhawk, LTD
H. William Lurton
Industricorp & Co
Irwin and Nora Friedman
Jerry Mathwig
<PAGE>
KA Investments
KAE Opportunity Master Fund LP
Kevin S. Underkofler
Keyway Investments
Kohler Capital Management: Gary Kohler
Mary Lach
Namax Corp
(Cranshire Affiliates I)
Nicholson Boys, LP
Okabena Partnership K
Paradigm Group, LLC
Patrice M. Perkins
Pemigewasset Partners, LP
(Vose Capital)
Pequot Scout Fund, LP
(Dawson Samberg)
Perkins Capital Management, Inc Profit Share Plan & Trust
Piper Jaffray as Cust FBO Richard C. Perkins IRA
Piper Jaffray as Cust FBO James G. Peters IRA
Piper Jaffray as Cust FBO David H. Potter IRA
Pyramid Partners LP
Robert G. Allison
Robert D. Furst
S. Robert Production
(Cranshire Affiliates II)
<PAGE>
Stanford Baratz (Revocable Trust Dated 9-7-94)
Tewaukon Partners
Thomas Schrade
Westfield Capital Performance Fund, LP
<PAGE>
EXHIBIT B
5% BENEFICIAL OWNERSSHIP
No. of Shares
Shareholder of Common Stock % Ownership(1)(2)
Eric H. Paulson 2,675,657 17.9%
Charles E. Cheney 886,980 5.9%
Alfred Teo 1,523,800 9.9%
American Gramaphone 806,360 5.3%
Cranshire Capital 838,090 5.5%
Pequot Scout Fund, L.P. 761,900 5.0%
KAE Opportunity Master Fund, L.P. 761,900 5.0%
Keyway Investments, LTD 1,523,800 9.9%
Goldhawk LTD 1,904,760 12.2%
Okabena Partnership K 761,900 5.0%
Paradigm Group, LLC 942,840 6.2%
KA Investments, LDC 1,523,800 9.9%
- -------------------
(1) Ownership numbers and percentages are computed in accordance with
Securities and Exchange Rule 13d-3. One or more of the Preferred Stockholders
has entered into an agreement with the Company providing that they will convert
their Preferred Stock into Common Stock and or exercise their Warrants in such a
manner that they will not, as a result of such conversion and/or exercise,
beneficially own more than 4.9% of the then outstanding Common Stock of the
Company, and that they will only be authorized or entitled to vote or exercise
proxies with respect to no more than 4.9% of the then outstanding Common Stock
of the Company. The percentage ownership shown here does not give effect to
those agreements.
(2) This list should not be construed as a legal conclusion that the
person listed is necessarily an affiliate of another.
<PAGE>
May 1, 1998
Navarre Corporation
7400 49th Avenue North
New Hope, Minnesota 55428
Re: Certain Post-Closing Items
Gentlemen:
Reference is made to the Loan and Security Agreement, dated June 12, 1997
(the "Loan Agreement"), between Congress Financial Corporation (Central)
("Lender") and Navarre Corporation ("Borrower"), as amended by Amendment No. 1
to Financing Agreements, dated as of September 19, 1997, Amendment No. 2 to
Financing Agreements, dated as of October 29, 1997, and Amendment No. 3 to
Financing Agreements, dated of even date herewith ("Amendment No. 3 to Financing
Agreements"), together with all other agreements, documents, supplements and
instruments now or at any time hereafter executed and/or delivered by Borrower
or any other person, with, to or in favor of Lender in connection therewith (all
of the foregoing, together with this Amendment and the other agreements and
instruments delivered hereunder, as the same now exist or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced,
collectively, the "Financing Agreements"). All capitalized terms used herein and
not otherwise defined herein shall have the meanings given to them in the Loan
Agreement as amended by Amendment No. 3 to Financing Agreements.
In order to induce Lender to enter into Amendment No. 3 to Financing
Agreements and to continue to make the Loans to Borrower under the Financing
Agreements:
1. Borrower hereby agrees that, in addition to all other terms, conditions
and provisions set forth in Amendment No. 3 to Financing Agreements, Borrower
shall deliver or cause to be delivered to Lender, the following items, each in
form and substance satisfactory to Lender, as soon as possible, but in any
event, no later than fifteen (15) days after the date hereof:
(a) a replacement Exhibit A to Amendment No. 3 to Financing
Agreements setting forth, in form and substance satisfactory to Lender, the list
of Permitted Holders, together with any related information that Lender may
reasonably request with respect thereto; and
<PAGE>
(b) a replacement Exhibit B to Amendment No. 3 to Financing
Agreements setting forth, in form and substance satisfactory to Lender, the list
of five percent (5%) beneficial holders of all of the capital stock of Borrower,
together with any related information that Lender may reasonably request with
respect thereto.
2. This Agreement shall not limit or otherwise affect the right of Lender
to require Borrower to execute and deliver of obtain or cause to be executed
and/or delivered any further agreements, documents or instruments as provided in
the Financing Agreements, including, without limitation, the letter agreement
re: Certain Post-Closing Matters, dated as of June 12, 1997, or otherwise or to
take any other actions otherwise required under the Financing Agreements,
including that letter agreement. The failure of Borrower to deliver the items
provided for in paragraph 1 above by the respective dates set forth therein
shall, at Lender's option, constitute an Event of Default.
Very truly yours,
CONGRESS FINANCIAL CORPORATION
(CENTRAL)
By: /s/ Keith Chapman
-------------------------------------
Title: Vice President
----------------------------------
AGREED:
NAVARRE CORPORATION
By: /s/ Charles Cheney
-------------------------------------
Title: Chief Financial Officer
----------------------------------
EXHIBIT 10.19
NAVARRE CORPORATION
COMMON STOCK PURCHASE WARRANT
DW - __________
Navarre Corporation, a Minnesota corporation (the "COMPANY"), hereby
agrees that, for value received, Delphi Financial Corp., Minneapolis, Minnesota,
or its assigns, is entitled, subject to the terms set forth below, to purchase
from the Company at any time or from time to time after May 1, 1998, and before
5:00 p.m., Minneapolis, Minnesota time, on May 1, 2002, Three Hundred Eighty
Thousand Nine Hundred Fifty-Three (380,953) shares of the no par value Common
Stock of the Company (the "COMMON STOCK"), at an exercise price of $2.625 which
exercise price is subject to adjustment as provided herein.
1. EXERCISE OF WARRANT. The purchase rights granted by this Warrant
shall be exercised (in minimum quantities of 1,000 shares) by the holder
surrendering this Warrant with the form of exercise attached hereto duly
executed by such holder, to the Company at its principal office, accompanied by
payment, in cash or by cashier's check payable to the order of the Company, of
the purchase price payable in respect of the Common Stock being purchased. If
less than all of the Common Stock purchasable hereunder is purchased, the
Company will, upon such exercise, execute and deliver to the holder hereof a new
Warrant (dated the date hereof) evidencing the number of shares of Common Stock
not so purchased. As soon as practicable after the exercise of this Warrant and
payment of the purchase price, the Company will cause to be issued in the name
of and delivered to the holder hereof, or as such holder may direct, a
certificate or certificates representing the shares purchased upon such
exercise. The Company may require that such certificate or certificates contain
on the face thereof a legend substantially as follows:
"The transfer of the shares represented by this certificate is restricted
pursuant to the terms of a Common Stock Purchase Warrant dated May 1, 1998,
issued by Navarre Corporation, a copy of which is available for inspection at
the offices of Navarre Corporation Transfer may not be made except in accordance
with the terms of the Common Stock Purchase Warrant. In addition, no sale, offer
to sell or transfer of the shares represented by this certificate shall be made
unless a registration statement under the Federal Securities Act of 1933, as
amended (the "ACT"), with respect to such shares is then in effect or an
exemption from the registration requirements of the Act is then in fact
applicable to such shares."
2. NEGOTIABILITY AND TRANSFER. This Warrant is issued upon the
following terms, to which each holder hereof consents and agrees:
(a) Until this Warrant is duly transferred on the books of the
Company, the Company may treat the registered holder of this Warrant as absolute
owner hereof for all purposes without being affected by any notice to the
contrary.
<PAGE>
(b) Each successive holder of this Warrant, or of any portion of
the rights represented thereby, shall be bound by the terms and conditions set
forth herein.
3. ANTIDILUTION ADJUSTMENTS. If the Company shall at any time
hereafter subdivide or combine its outstanding shares of Common Stock, or
declare a dividend payable in Common Stock, the exercise price in effect
immediately prior to the subdivision, combination or record date for such
dividend payable in Common Stock shall forthwith be proportionately increased,
in the case of combination, or proportionately decreased, in the case of
subdivision or declaration of a dividend payable in Common Stock, and each share
of Common Stock purchasable upon exercise of this Warrant, immediately preceding
such event, shall be changed to the number determined by dividing the then
current exercise price by the exercise price as adjusted after such subdivision,
combination or dividend payable in Common Stock.
No fractional shares of Common Stock are to be issued upon the
exercise of the Warrant, but the Company shall pay a cash adjustment in respect
of any fraction of a share which would otherwise be issuable in an amount equal
to the same fraction of the market price per share of Common Stock on the day of
exercise as determined in good faith by the Company.
In case of any capital reorganization or any reclassification of the
shares of Common Stock of the Company, or in the case of any consolidation with
or merger of the Company into or with another corporation, or the sale of all or
substantially all of its assets to another corporation, which is effected in
such a manner that the holders of Common Stock shall be entitled to receive
stock, securities or assets with respect to or in exchange for Common Stock,
then, as a part of such reorganization, reclassification, consolidation, merger
or sale, as the case may be, lawful provision shall be made so that the holder
of the Warrant shall have the right thereafter to receive, upon the exercise
hereof, the kind and amount of shares of stock or other securities or property
which the holder would have been entitled to receive if, immediately prior to
such reorganization, reclassification, consolidation, merger or sale, the holder
had held the number of shares of Common Stock which were then purchasable upon
the exercise of the Warrant. In any such case, appropriate adjustment (as
determined in good faith by the Board of Directors of the Company) shall be made
in the application of the provisions set forth herein with respect to the rights
and interest thereafter of the holder of the Warrant, to the end that the
provisions set forth herein (including provisions with respect to adjustments of
the exercise price) shall thereafter be applicable, as nearly as reasonably may
be, in relation to any shares of stock or other property thereafter deliverable
upon the exercise of the Warrant.
When any adjustment is required to be made in the exercise price,
initial or adjusted, the Company shall forthwith determine the new exercise
price, and
(a) prepare and retain on file a statement describing in reasonable
detail the method used in arriving at the new exercise price; and
(b) cause a copy of such statement to be mailed to the holder of the
Warrant as of a date within ten (10) days after the date when the circumstances
giving rise to the adjustment occurred.
<PAGE>
4. TRANSFERABILITY; REGISTRATION RIGHTS. Prior to making any
disposition of the Warrant or of any Common Stock purchased upon exercise of the
Warrant, the holder will give written notice to the Company describing briefly
the manner of any such proposed disposition. The holder will not make any such
disposition until (i) the Company has notified him that, in the opinion of its
counsel, registration under the Act is not required with respect to such
disposition, or (ii) a registration statement covering the proposed distribution
has been filed by the Company and has become effective. The holder then will
make any disposition only pursuant to the conditions of such opinion or
registration. The Company agrees that, upon receipt of written notice from the
holder hereof with respect to such proposed distribution, it will use its best
efforts, in consultation with the holder's counsel, to ascertain as promptly as
possible whether or not registration is required, and will advise the holder
promptly with respect thereto, and the holder will cooperate in providing the
Company with information necessary to make such determination.
If, at any time after the date hereof and prior to the expiration of
six (6) years from the date hereof, the Company shall propose to file any
registration statement under the Securities Act of 1933, as amended, covering a
public offering of the Company's Common Stock and permitting the inclusion of
shares of selling shareholders, it will notify the holder hereof at least thirty
(30) days prior to each such filing and will include in the registration
statement (to the extent permitted by applicable regulation) the Common Stock
purchased by the holder or purchasable by the holder upon the exercise of the
Warrant to the extent requested by the holder hereof. Notwithstanding the
foregoing, the number of shares of the holders of the Warrants proposed to be
registered thereby shall be reduced pro rata with any other selling shareholder
(other than the Company) upon the request of the managing underwriter of such
offering subject to the prior rights of any other selling shareholder that give
it first priority in any such registration. If the registration statement or
offering statement filed pursuant to such forty-five (45) day notice has not
become effective within six months following the date such notice is given to
the holder hereof, the Company must again notify such holder in the manner
provided above.
At any time after the date hereof and prior to the expiration of
four (4) years from the date hereof, and provided that a registration statement
on Form S-3 (or its equivalent) is then available to the Company, and on a
one-time basis only, if the holders of 51% or more of the warrants and the
shares acquired upon exercise of the Warrants request the registration of the
shares on Form S-3 (or its equivalent), the Company shall promptly thereafter
use its best efforts to effect the registration under the Securities Act of
1933, as amended, of all such shares which such holders request in writing to be
so registered, and in a manner corresponding to the methods of distribution
described in such holders' request.
All expenses of any such registrations referred to in this Section
4, except the fees of counsel to such holders and underwriting commissions or
discounts shall be borne by the Company.
The Company will mail to each record holder, at the last known post
office address, written notice of any exercise of the rights granted under this
Section 4, by certified or registered mail, return receipt requested, and each
holder shall have thirty (30) days from the date of deposit of such notice in
the U.S. Mail to notify the Company in writing whether such holder wishes to
join in such exercise.
<PAGE>
The Company will furnish the holder hereof with a reasonable number
of copies of any prospectus included in such filings and will amend or
supplement the same as required during the period of required use thereof. The
Company will maintain the effectiveness of any shelf registration statement or
the offering statement filed by the Company, whether or not at the request of
the holder hereof, for at least six (6) months following the effective date
thereof.
In the case of the filing of any registration statement, and to the
extent permissible under the Act and controlling precedent thereunder, the
Company and the holder hereof shall provide cross indemnification agreements to
each other in customary scope covering the accuracy and completeness of the
information furnished by each.
The holder of the Warrant agrees to cooperate with the Company in
the preparation and filing of any such registration statement or offering
statement, and in the furnishing of information concerning the holder for
inclusion therein, or in any efforts by the Company to establish that the
proposed sale is exempt under the Act as to any proposed distribution.
The Company shall have no obligation under this Section 4 to
register any of the shares of the holders if, in accordance with Rule 144,
promulgated under the Securities Act of 1933, as amended, the holder may sell
all his shares of common stock obtained upon an exercise of this Warrant within
ninety (90) days immediately following the request for registration.
5. CASHLESS EXERCISE OPTION.
(a) Provided the Company's Common Stock shall then be traded on
an exchange or quoted by NASDAQ or otherwise traded as described in 5(d) hereof,
the holder of this Warrant shall have the right to require the Company to
convert this Warrant (the "CONVERSION RIGHT"), at any time from May 1, 1998 and
prior to its expiration, into shares of Common Stock as provided for in this
Section 5. Upon exercise of the Conversion Right, the Company shall deliver to
the holder (without payment by the holder of any exercise price) that number of
shares of Common Stock equal to the number of shares of Common Stock resulting
from multiplying the number of shares of Common Stock issuable to the holder
upon exercise of the Warrant (and desired to be converted) times the quotient
obtained by dividing (x) the value of the Warrant at the time the Conversion
Right is exercised (determined by subtracting the exercise price for one Warrant
Share in effect immediately prior to the exercise of the Conversion Right from
the Fair Market Value (as determined below) for one Warrant Share immediately
prior to the exercise of the Conversion Right) by (y) the Fair Market Value of
one share of Common Stock immediately prior to the exercise of the Conversion
Right.
(b) The Conversion Right may be exercised by the holder, at any
time or from time to time, prior to its expiration, on any
business day, by delivering a written notice (the
"CONVERSION NOTICE") to the Company at the offices of the
Company exercising the Conversion Right and specifying (i)
the total number of shares of Stock the Warrant holder will
purchase pursuant to such conversion, and (ii) a place, and
a date not less than five (5) nor more than twenty (20)
business days from the date of the Conversion Notice for the
<PAGE>
closing of such purchase.
(c) At any closing under Section 5(b) hereof, (i) the holder
will surrender the Warrant, (ii) the Company will deliver to the holder a
certificate or certificates for the number of shares of Common Stock issuable
upon such conversion, together with cash, in lieu of any fraction of a share,
and (iii) the Company will deliver to the holder a new Warrant representing the
number of shares, if any, with respect to which the Warrant shall not have been
exercised.
(d) "FAIR MARKET VALUE" of a share of Common Stock as of a
particular date (the "DETERMINATION DATE") shall mean:
(i) If the Company's Common Stock is traded on an exchange
or is quoted on the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") National Market System, or the Small Cap Market, then the
average closing or last sale prices, respectively, reported for the ten (10)
business days immediately preceding the Determination Date.
(ii) If the Company's Common Stock is not traded on an
exchange or on the NASDAQ National Market System, or the Small Cap Market, but
is traded in the over-the-counter market, then the average of the closing bid
and asked prices reported for the ten (10) business days immediately preceding
the Determination Date.
(iii) If the Company's Common Stock is not publicly traded
and there has been a bona fide sale for cash on an arm's-length basis within 45
days prior to the Determination Date of such Common Stock by the Company
privately to one or more investors unaffiliated with the Company (a "Qualifying
Sale"), then the most recent such sales price.
(iv) If the Company's Common Stock is not publicly traded
and there has been no Qualifying Sale, then the appraised fair market value of
such stock, as determined by mutual agreement of the Company and the holder of
the Warrant; or if the parties cannot agree to such valuation, then each of the
Company and the holder shall select an arbitrator and such arbitrators shall
select a third, and such three arbitrators shall determine (in accordance with
the Commercial Arbitration Rules of the American Arbitration Association, such
expenses to be borne equally by the parties) the fair market value (without any
discount for lack of marketability or minority interest) of a share of Common
Stock of the Company.
6. NOTICES. The Company shall mail to the registered holder of the
Warrant, at his last known post office address appearing on the books of the
Company, not less than fifteen (l5) days prior to the date on which (a) a record
will be taken for the purpose of determining the holders of Common Stock
entitled to dividends (other than cash dividends) or subscription rights, or (b)
a record will be taken (or in lieu thereof, the transfer books will be closed)
for the purpose of determining the holders of Common Stock entitled to notice of
and to vote at a meeting of stockholders at which any capital reorganization,
reclassification of shares of Common Stock, consolidation, merger, dissolution,
liquidation, winding up or sale of substantially all of the
<PAGE>
Company's assets shall be considered and acted upon.
7. RESERVATION OF COMMON STOCK. A number of shares of Common Stock
sufficient to provide for the exercise of the Warrant upon the basis herein set
forth shall at all times be reserved for the exercise thereof.
8. MISCELLANEOUS. Whenever reference is made herein to the issue or
sale of shares of Common Stock, the term "COMMON STOCK" shall include any stock
of any class of the Company other than preferred stock with a fixed limit on
dividends and a fixed amount payable in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company.
Upon written request of the holder of this Warrant, the Company will
promptly provide such holder with a then current written list of the names and
addresses of all holders of warrants originally issued under the terms of, and
concurrent with, this Warrant.
The representations, warranties and agreements herein contained
shall survive the exercise of this Warrant. References to the "holder of"
include the immediate holder of shares purchased on the exercise of this
Warrant, and the word "holder" shall include the plural thereof. This Common
Stock Purchase Warrant shall be interpreted under the laws of the State of
Minnesota.
All shares of Common Stock or other securities issued upon the
exercise of the Warrant shall be validly issued, fully paid and non-assessable,
and the Company will pay all taxes in respect of the issuer thereof.
Notwithstanding anything contained herein to the contrary, the
holder of this Warrant shall not be deemed a stockholder (including, no right to
vote on any matters coming before the shareholders) of the Company for any
purpose whatsoever until and unless this Warrant is duly exercised.
IN WITNESS WHEREOF, this Warrant has been duly executed by Navarre
Corporation, this 1st day of May, 1998.
NAVARRE CORPORATION
By:
------------------------------------
Title:
----------------------------
<PAGE>
WARRANT EXERCISE FORM
To be signed only upon exercise of Warrant.
The undersigned, the holder of the within Warrant, hereby
irrevocably elects to exercise the purchase right represented by such Warrant
for, and to purchase thereunder, __________________ of the shares of Common
Stock of Navarre Corporation to which such Warrant relates and herewith makes
payment of $___________ therefor in cash or by certified check, and requests
that such shares be issued and be delivered to, _________________________, the
address for which is set forth below the signature of the undersigned.
Dated:
-------------------------
- -------------------------------- ----------------------------------------
(Taxpayer's I.D. Number) (Signature)
----------------------------------------
----------------------------------------
(Address)
- --------------------------------
ASSIGNMENT FORM
To be signed only upon authorized transfer of Warrant.
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers unto ______________________________ the right to purchase shares of
Common Stock of Navarre Corporation to which the within Warrant relates and
appoints _________________, attorney, to transfer said right on the books of
Navarre Corporation with full power of substitution in the premises.
Dated:
-------------------------
----------------------------------------
(Signature)
----------------------------------------
----------------------------------------
(Address)
<PAGE>
CASHLESS EXERCISE FORM
(To be executed upon exercise of Warrant pursuant to Section 5)
The undersigned hereby irrevocably elects a cashless exercise of the
right of purchase represented by the within Common Stock Purchase Warrant for,
and to purchase thereunder, ______________________ shares of Common Stock, as
provided for in Section 5 therein.
If said number of shares shall not be all the shares purchasable
under the within Common Stock Purchase Warrant, a new Warrant is to be issued in
the name of said undersigned for the balance remaining of the shares purchasable
thereunder rounded up to the next higher number of shares.
Please issue a certificate or certificates for such Common Stock in
the name of, and pay any cash for any fractional shares to:
NAME
---------------------------------------------------------------
(PLEASE PRINT NAME)
ADDRESS ----------------------------------------------------------------
----------------------------------------------------------------
SOCIAL SECURITY NO. -----------------------------------------------------------
SIGNATURE
---------------------------------------------------------------
NOTE: The above signature should correspond exactly with the name on the first
page of this Common Stock Purchase Warrant or with the name of the assignee
appearing in the assignment form on the preceding page.
NAVARRE CORPORATION
EXHIBIT 21
SUBSIDIARIES OF NAVARRE CORPORATION
NAME OF SUBSIDIARY STATE OF INCORPORATION PERCENT OF OWNERSHIP
Digital Entertainment, Inc. Minnesota 100%
Net Radio Corporation Minnesota 85%
NAVARRE CORPORATION
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-80218 and No. 33-86762 as amended) pertaining to the Navarre
Corporation 1992 Stock Option Plan and the Registration Statement (Form S-3 No.
333-09231) pertaining to the registration of 530,000 shares of Navarre
Corporation common stock of our report dated April 24, 1998, with respect to the
consolidated financial statements and the financial statement schedule included
in this Annual Report (Form 10-K) of Navarre Corporation for the year ended
March 31, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 23
<SECURITIES> 0
<RECEIVABLES> 52,789
<ALLOWANCES> 1,112
<INVENTORY> 23,188
<CURRENT-ASSETS> 79,227
<PP&E> 2,957
<DEPRECIATION> 3,647
<TOTAL-ASSETS> 83,689
<CURRENT-LIABILITIES> 79,289
<BONDS> 0
0
0
<COMMON> 8,113
<OTHER-SE> (3,785)
<TOTAL-LIABILITY-AND-EQUITY> 83,689
<SALES> 196,648
<TOTAL-REVENUES> 196,648
<CGS> 171,655
<TOTAL-COSTS> 23,535
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (22)
<INTEREST-EXPENSE> 3,108
<INCOME-PRETAX> (1,660)
<INCOME-TAX> (470)
<INCOME-CONTINUING> 1,458
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (974)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS INDICATED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1998 MAR-31-1998
<PERIOD-START> APR-01-1997 APR-01-1997 APR-01-1997
<PERIOD-END> JUN-30-1997 SEP-30-1997 DEC-31-1997
<CASH> 62 14 16
<SECURITIES> 0 0 0
<RECEIVABLES> 41,530 52,210 65,022
<ALLOWANCES> 3,350 1,459 1,521
<INVENTORY> 18,154 28,316 24,910
<CURRENT-ASSETS> 62,854 83,505 92,758
<PP&E> 3,388 3,329 3,144
<DEPRECIATION> 2,807 3,070 3,345
<TOTAL-ASSETS> 73,269 93,437 97,599
<CURRENT-LIABILITIES> 68,875 88,572 92,227
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 8,005 8,005 8,015
<OTHER-SE> (3,943) (3,400) (2,798)
<TOTAL-LIABILITY-AND-EQUITY> 73,269 93,437 97,599
<SALES> 39,798 88,377 157,814
<TOTAL-REVENUES> 39,798 88,377 157,814
<CGS> 35,523 77,864 139,012
<TOTAL-COSTS> 5,503 10,203 16,315
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 225 (472) (247)
<INTEREST-EXPENSE> 559 1215 2,264
<INCOME-PRETAX> (1,889) (1,088) (197)
<INCOME-TAX> (775) (446) (78)
<INCOME-CONTINUING> (1,228) 310 2,487
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (1,060) (541) 37
<EPS-PRIMARY> (.15) (.08) .01
<EPS-DILUTED> (.15) (.08) .01
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS INDICATED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1997 MAR-31-1997
<PERIOD-START> APR-01-1996 APR-01-1996 APR-01-1996
<PERIOD-END> JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 3 4 7
<SECURITIES> 0 0 0
<RECEIVABLES> 42,416 47,311 55,259
<ALLOWANCES> 1,336 1,183 2,468
<INVENTORY> 16,450 20,523 24,251
<CURRENT-ASSETS> 60,035 68,622 80,526
<PP&E> 2,863 2,997 3,055
<DEPRECIATION> 1,552 1,848 1,230
<TOTAL-ASSETS> 66,041 74,611 91,124
<CURRENT-LIABILITIES> 55,064 63,401 81,004
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 7,587 7,680 7,712
<OTHER-SE> 3,390 3,530 2,408
<TOTAL-LIABILITY-AND-EQUITY> 66,041 74,611 91,124
<SALES> 39,592 87,788 157,404
<TOTAL-REVENUES> 39,592 87,788 157,404
<CGS> 34,525 76,607 139,204
<TOTAL-COSTS> 4,159 8,769 16,551
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 150 289 2,389
<INTEREST-EXPENSE> 463 964 1,619
<INCOME-PRETAX> 341 786 (451)
<INCOME-TAX> 140 492 (185)
<INCOME-CONTINUING> 908 2,412 1,649
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 201 294 (851)
<EPS-PRIMARY> .03 .05 (.13)
<EPS-DILUTED> .03 .04 (.13)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS INDICATED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1996
<PERIOD-START> APR-01-1996 APR-01-1995
<PERIOD-END> MAR-31-1997 MAR-31-1996
<CASH> 655 4
<SECURITIES> 0 0
<RECEIVABLES> 47,377 41,023
<ALLOWANCES> 2,388 196
<INVENTORY> 16,854 14,816
<CURRENT-ASSETS> 67,948 56,740
<PP&E> 3,438 2,861
<DEPRECIATION> 2,571 1,351
<TOTAL-ASSETS> 78,397 60,108
<CURRENT-LIABILITIES> 72,877 50,460
<BONDS> 0 0
0 0
0 0
<COMMON> 8,005 6,460
<OTHER-SE> (2,906) 3,188
<TOTAL-LIABILITY-AND-EQUITY> 78,397 60,108
<SALES> 200,697 158,354
<TOTAL-REVENUES> 200,697 158,354
<CGS> 177,415 138,503
<TOTAL-COSTS> 26,985 15,962
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 2,439 576
<INTEREST-EXPENSE> 2,110 1,521
<INCOME-PRETAX> (5,997) 2,236
<INCOME-TAX> (527) 917
<INCOME-CONTINUING> (3,703) 3,889
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,189) 1,319
<EPS-PRIMARY> (.92) .22
<EPS-DILUTED> (.92) .20
</TABLE>
