UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1999
Commission File Number 0-22982
NAVARRE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1704319
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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. ( )
As of June 21, 1999, the aggregate value of the Company's Common Stock held by
non-affiliates of the Company was $229,461,245 based on the last reported sale
price of $9.81 on the Nasdaq Stock Market on that date.
As of June 21, 1999, the Company had outstanding 23,383,394 shares of Common
Stock, no par value.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement for its 1999 Annual Meeting of Shareholders, a
copy of which will be filed within 120 days of March 31, 1999, is incorporated
by reference into Part III of this Form 10-K.
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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, interactive CD-ROM products
and DVD videos. Navarre sells to major music and software retailers, wholesalers
and rackjobbers. In addition, through its majority-owned subsidiary, NetRadio
Corporation, Navarre owns and operates NetRadio Network, a leading audio content
broadcaster on the Internet.
Navarre's operations are classified into two business segments based upon
products and services provided: home entertainment products and NetRadio. The
home entertainment products segment operates through two principal products, its
computer software products and its music products. 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, interactive CD-ROM software and DVD videos sold to
over 500 customers with over 10,000 locations throughout the United States. The
Company's broad base of customers includes (i) wholesale clubs, (ii) mass
merchandisers, (iii) computer specialty stores, (iv) music specialty stores and
(v) book stores. During fiscal years 1997, 1998 and 1999, computer software
accounted for 75.2%, 69.9% and 71.5% of net sales while sales of music products
accounted for 24.8%, 30.0% and 28.4% of net sales.
NetRadio is a leading broadcaster of originally programmed audio entertainment
over the Internet through its Web site www.netradio.com. NetRadio uses audio
content to generate revenues from sales of audio merchandise through its music
store, CDPoint(TM), and from Internet advertising, including advertisements
placed within NetRadio audio broadcasts. Net revenues from NetRadio have not
been significant.
THE COMPANY'S MARKETS
HOME ENTERTAINMENT PRODUCTS
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,
CD's and cable television. According to the Recording Industry Association of
America ("RIAA") at 1998 year-end, manufacturers saw a 12.3% increase in audio
and video product shipped to domestic markets (from $12.2 billion in 1997 to
$13.7 billion units in 1998) at suggested list price.
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 five
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) Thorn/EMI and
EMI Music Distribution; (iv) Bertelsmann A.G. and BMG Distribution and (v) The
Seagram Company, Ltd./MCA, Inc., Universal Music and Video Distribution, along
with recently acquired PGD 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 these labels on
either a regional or national basis. These independent labels and their
distributors currently represent 25% of the industry's total revenue.
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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 (iv)
the distribution of products as secondary suppliers filling in temporary
out-of-stock conditions, (v) the distribution to retailers requiring special
packaging needs, VMI and consolidation of independent labels and (vi)
fulfillment for Internet retailers direct to consumers.
PERSONAL COMPUTER SOFTWARE
The personal computer software distribution channel has traditionally been more
fragmented than the more mature distribution channels for pre-recorded music and
video. In the last twelve months, however, considerable consolidation has
occurred within the personal consumer software distribution channel as Hasbro
Interactive absorbed Microprose, Mattel acquired The Learning Company,
Infogrames Entertainment acquired Accolade and Gremlin, Electronic Arts acquired
Westwood Studios, and Microsoft announced the formation of direct relationships
with a number of key accounts. The consolidation is a migration to
publishing/distribution entities with increased market power and numerous sub or
affiliate labels.
According to P.C. Data, retail software revenues increased 13% in 1998 to $5.2
billion and retail price of software fell 8.9%, the largest year over year
decline on record. The six categories that comprise the 1998 distributor sales
for the software market are business, at 82.9% of units, the largest
contributor, followed by entertainment, finance, personal productivity,
education and reference. In its fiscal year ended March 31, 1999, the Company's
net software sales rose by 9.4% over the previous fiscal year.
During the 1999 fiscal year, the Company dramatically expanded the number of
e-commerce customers for whom it performs fulfillment and distribution services,
and introduced a new business-to-business Web site that integrates on-line
ordering and deployment of text and visual product information. These services
include sales of both prerecorded music and personal computer software.
NETRADIO
NetRadio is a leading broadcaster of originally programmed audio entertainment
over the Internet through its Web site, www.netradio.com. NetRadio organizes its
music and information content into highly targeted audio channels grouped as
communities of similar interest or "COSIs". As of May 1, 1999, NetRadio had over
120 different channels organized in 14 COSIs.
NetRadio uses audio content to generate revenues from sales of audio merchandise
through its music store, CDPoint(TM), and from Internet advertising, including
advertisements placed within NetRadio audio broadcasts. Its interactive display,
NetCompanion encourages impulse purchases by providing information about the
music being played, or the products being advertised, and by linking the
listener either directly to CDPoint(TM) or to NetRadio's advertisers' Web sites.
As noted below, Navarre owns approximately 85% of NetRadio and ValueVision
International, Inc. owns approximately 15%. On March 3, 1999, NetRadio
Corporation filed a registration statement with the Securities and Exchange
Commission for the sale of its common stock to the public.
COMPETITION
The home entertainment products segment comprised of prerecorded music and
personal computer software distribution industry is highly competitive. The
Company's competitors include other national and regional distributors as well
as certain suppliers that sell directly to retailers. Certain of these
competitors have
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substantially greater financial and other resources than the Company. The
ability of the Company to effectively compete in the future depends upon a
number of factors, including its ability to (i) obtain exclusive national
distribution contracts and licenses with independent labels and manufacturers,
(ii) maintain its margins and volume, (iii) expand its sales through a varied
range of products and personalized services, (iv) anticipate changes in the
marketplace including technological developments, and (v) maintain operating
expenses at an appropriate level.
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 five
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 attract higher quality artist and software publishers. 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 Web sites on the Internet competing for consumer's attention and spending has
proliferated. The Company expects that competition between suppliers to Web
retailers will continue to intensify. With respect to recorded music and
interactive CD-ROMs sales, the Company supports numerous Internet retailers,
including traditional music retail chains, record labels and independents with
Web sites on the Internet.
NAVARRE DEPENDS UPON A FEW SIGNIFICANT CUSTOMERS
In each of the past several years, the Company has had one or more customers
that have accounted for 10% or more of the Company's net sales. During the
fiscal year ended March 31, 1999, sales to three customers, CompUSA, Sam's Clubs
and Best Buy, Inc., each represented more than 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 these
sales, there would be an adverse impact on the Company's revenues and future
profitability.
EMPLOYEES
As of May 1, 1999, the Company had 305 employees, including 100 in finance and
administration, 46 in sales and marketing and 159 in distribution.
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-ROMs, 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
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interactive CD-ROM software product lines through 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 ("e-commerce"), (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 customer base internationally.
The Company has also aggressively moved to acquire digital distribution rights
from its independently distributed record labels and software publishers.
NETRADIO
On May 1, 1996 the Company entered into a stock purchase agreement with NetRadio
Corporation, a Nevada corporation ("NetRadio (Nevada)"), which owned and
operated NetRadio Network, an Internet-only radio network under which Navarre
acquired fifty percent of the stock of NetRadio. On March 7, 1997 the Company
entered into an Agreement and Plan of Reorganization with NetRadio (Nevada)
under which it agreed to acquire NetRadio. Under the terms of the transaction,
which closed on March 21, 1997, NetRadio (Nevada) was merged with a wholly owned
subsidiary of the Company ("NetRadio"). Navarre agreed to issue 125,000 shares
of its common stock to the former shareholders of NetRadio (Nevada) and agreed
to issue up to an additional 2,075,000 shares of 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. No
additional shares were earned. As a result of these two transactions, Navarre
acquired ownership of all the issued and outstanding shares of common stock of
NetRadio.
Concurrent with the Company's acquisition of NetRadio, ValueVision
International, Inc. ("ValueVision") agreed to make a $3,000,000 investment in
NetRadio, consisting of $1,000,000 in cash and an agreement to provide
$2,000,000 worth of television advertising time in exchange for a 15% equity
interest in NetRadio shares. At the time of the ValueVision investment, NetRadio
determined to assign a carrying value of $1,000,000 to the $2,000,000 of
advertising time. ValueVision International is an integrated electronic and
print media direct marketing company that operates a 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.
On March 3, 1999, NetRadio Corporation filed a registration statement with the
Securities and Exchange Commission for the initial public offering of shares of
its common stock. In connection with the filing, ValueVision agreed to exercise
its right to purchase additional shares of NetRadio concurrent with the closing
of the NetRadio initial public offering.
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
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received the right for a period of five years to distribute substantially all of
the Velvel Records products within the United States. 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. During May 1999, Navarre's 15% interest in Velvel
was sold to Koch Entertainment LLC for $47,500.
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.
NAVARRE IS DEPENDENT UPON ITS MANAGEMENT TEAM
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, 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.
NAVARRE'S BUSINESS CAN BE SEASONAL
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 business is affected by the pattern of
seasonality common to other suppliers of retailers, particularly the holiday
selling season. Historically, more than 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.
NAVARRE'S INDUSTRY TYPICALLY EXPERIENCES LOW INDUSTRY MARGINS
Competition in the prerecorded music and personal computer software distribution
industries 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.
NAVARRE DEPENDS UPON BANK BORROWINGS TO SUPPORT ITS BUSINESS
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. 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 were 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.
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NAVARRE MAY HAVE ADDITIONAL SIGNIFICANT WORKING CAPITAL NEEDS
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 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 SOFTWARE DEVELOPERS AND MANUFACTURERS
The Company distributes interactive CD-ROM software pursuant to distribution
agreements with software developers and manufacturers. 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 those current agreements will not be terminated.
NAVARRE DEPENDS UPON RECORDING ARTISTS
Portions of the sales of the Company's Music Products Division 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 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 are no assurances 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.
RETURNS AND INVENTORY OBSOLESCENCE POSE RISKS TO NAVARRE
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 small inventory obsolescence reserve. The Company has historically
experienced an actual return rate range of 15% to 23%, depending upon the
product, which the Company believes is in line with the industry practice.
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 future. The Company also takes
a portion of its product offerings on consignment in order to lessen its
exposure to this risk.
TECHNOLOGY DEVELOPMENTS MAY ADVERSELY AFFECT DISTRIBUTION
Prerecorded music and personal computer software have traditionally been
marketed and delivered on a physical delivery basis. Traditionally all the
Company's revenues have been generated from sales to retail and wholesale
channels. If in the future these products are increasingly 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. As physical
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and electronic distribution grows exponentially through Internet resellers,
competition between suppliers to such resellers will intensify. Navarre has
developed a significant number of supplier relationships with major electronic
retailers resulting in significant growth in fulfil1ment of software, music and
video products. The company anticipates that this will represent a rapidly
increasing share of overall sales. The Company is also developing relationships
to facilitate electronic distribution of software and music content as industry
standards become established.
WHOLESALERS AND RETAILERS MAY CHANGE THEIR 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.
NAVARRE'S MAJORITY-OWNED SUBSIDIARY NETRADIO
In March 1997, the Company, which had an equity interest in NetRadio, completed
an acquisition of all of the outstanding stock of NetRadio in an effort to
increase its presence in the marketplace as a content provider on the Internet,
and to become a publisher and distributor on an international basis in both
music and interactive CD-ROM. Navarre currently owns eighty-five percent (85%)
of the outstanding shares of NetRadio Corporation. NetRadio owns and operates
the NetRadio Network, an Internet-only radio network. NetRadio has operated at a
loss since the Company acquired it, and Navarre has continued to supply
NetRadio's working capital needs. Although NetRadio has filed a registration
statement with the Securities and Exchange Commission for an initial public
offering there can no assurance that it will successfully complete the offering.
If NetRadio is unable to successfully complete its initial public offering and
is unable to obtain financing from third parties, Navarre may be required to
continue to fund NetRadio working capital needs. In addition, there can be no
assurance that NetRadio will ever achieved future printability and there can be
no assurance that Navarre will be able to recoup its investment in NetRadio.
POSSIBLE VOLATILITY OF STOCK PRICE
The stock markets have experienced price and volume fluctuations, resulting in
changes in the market prices of the stock of many companies, which may not have
been directly related to the operating performance of those companies. In
addition, the market price of the Company's common stock has fluctuated
significantly since April 1996. The Company believes that factors such as
indications of the market's acceptance of the Company's products and failure to
meet market expectations, as well as general volatility in the securities
markets, could cause the market price of Navarre's common stock to fluctuate
substantially.
ITEM 2. PROPERTIES
On March 12, 1998, the Company entered into a new operating lease agreement for
its principal facilities in suburban Minneapolis. The prior operating lease was
with a partnership whose two partners are major shareholders and officers of the
Company. Under the new lease, the Company leases approximately 86,500 square
feet of office and warehouse space. The lease expires in 2013 and provides for
monthly payments of $38,750 over the lease term, with a 2.5% increase every 30
months. In addition, the Company is responsible for taxes and all operating
costs associated with building.
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On May 1, 1999, the Company entered into an operating lease agreement for a
second facility in suburban Minneapolis. The Company leases approximately 74,000
square feet of office and warehouse space. The lease expires in the year 2002
and provides for a monthly rental of $32,640 over the lease term. In addition,
the Company is responsible for taxes and all operating costs associated with the
building.
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. The Company currently
believes that the resolution of any pending matters will not have a material
adverse effect on its financial position or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
three-month period ended March 31, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY 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.
Quarter High Low
Fiscal 1999
First $ 12.75 $ 2.38
Second 11.13 2.82
Third 27.00 2.19
Fourth 21.94 10.00
Fiscal 1998
First $ 3.38 $ 2.25
Second 4.13 2.00
Third 5.25 2.00
Fourth 3.13 2.00
At June 9, 1999, the Company had approximately 23,400 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.
RECENT SALE OF UNREGISTERED SECURITIES
On May 1, 1998, the Company issued 1,523,810 shares of Class A Convertible
Preferred Stock in a private placement to a group of investors for aggregate
consideration of $20.0 million. The Class A Convertible Preferred Stock was
issued at a price of $13.125 per share and was convertible into five shares of
Navarre common stock 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 $3.50 per
share. The Class A Convertible Preferred Stock had a cumulative annual dividend
of 10% per annum payable quarterly, beginning on June 30, 1998. In connection
with the private placement, the Company also granted a four year warrant to
purchase 380,953 shares of common stock at a price of $2.625 per share to Delphi
Financial Corporation, the Company's agent in the private placement, and paid
Delphi selling commissions of five percent of the gross proceeds from the sale
of the Class A Convertible Preferred Stock.
During the period from July 1, 1998 through March 31, 1999, holders of all
1,523,810 shares of the Company's Class A Convertible Preferred Stock converted
their Preferred Stock into 7,619,050 shares of common stock and holders of
warrants issued May 1998 exercised their warrants for an aggregate of 7,913,815
shares and paid the Company gross proceeds of $27,348,500. The Company believes
that the transactions were exempt pursuant to Section 4(2) of the Securities Act
of 1933 and Rule 506 under Regulation D.
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ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 210,386 $ 196,648 $ 200,697 $ 158,354 $ 119,498
Gross profit 8,762 24,993 23,282 19,851 15,452
Income (loss) from operations (25,572) 1,458 (3,703) 3,889 3,461
Interest expense (2,543) (3,108) (2,110) (1,521) (753)
Income taxes (benefit) -- (470) (527) 917 1,061
Equity earnings (loss) in NetRadio
Corporation -- -- (719) -- --
Net income (loss) $ (27,670) $ (974) $ (6,189) $ 1,319 $ 1,607
Earnings (loss) per basic and diluted
share(1) $ (4.41) $ (.14) $ (.92) $ .20 $ .26
Diluted weighted average common
shares outstanding(2) 14,179 6,921 6,692 6,458 6,283
BALANCE SHEET DATA:
Total assets $ 79,480 $ 83,689 $ 78,397 $ 60,108 $ 45,705
Short-term borrowings 422 32,607 25,892 21,115 9,639
Long-term debt 114 181 315 -- 445
Shareholders' equity 25,164 4,328 5,099 9,648 8,215
</TABLE>
(1) See Note 1 of Notes to Financial Statements for the computation of basic
and diluted (loss) per share.
(2) Adjusted to reflect a two-for-one stock split in the form of a 100% stock
dividend distributed June 21, 1996.
10
<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."
1999 1998 1997
-----------------------------------
Net sales:
Computer software 71.5% 69.9% 75.2%
Music 28.4 30.0 24.8
-----------------------------------
Home entertainment products 99.9 99.9 100.0
NetRadio .1 .1 --
-----------------------------------
Total net sales 100.0 100.0 100.0
Cost of sales 95.8 87.3 88.4
-----------------------------------
Gross profit 4.2 12.7 11.6
Selling and marketing 4.1 2.9 2.8
Distribution and warehousing 2.2 1.5 1.3
General and administration 9.0 6.3 6.4
Depreciation and amortization 0.9 1.2 2.9
-----------------------------------
Income (loss) from operations (12.0) 0.7 (1.8)
Interest expense 1.2 1.6 1.1
-----------------------------------
Net (loss) (13.2) (0.5) (3.1)
===================================
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. See
"Business - Forward Looking Statements" in Item 1 of the Form 10-K.
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales of home entertainment products increased 6.9% from $196.4 million in
fiscal 1998 to $210.0 million in fiscal 1999. Computer software sales increased
as a percent of total Company sales from 69.9% of net sales in fiscal 1998 to
71.5% of net sales in fiscal 1999. Music sales, which yield higher margins,
decreased as a percent of total Company sales from 30.0% of net sales for fiscal
1998 to 28.4% of net sales in fiscal 1999. Computer software sales increased by
9.4% from $137.5 million in fiscal 1998 to $150.4 million in fiscal 1999. The
increase was primarily due to a higher level of sales to both existing customers
as well as to new customers. Music sales increased 1.2% from $58.9 million in
fiscal 1998 to $59.6 million in fiscal 1999. The increase was primarily due to
the addition of several higher quality labels. Price increases did not
materially contribute to the increase in net sales.
Gross profit of home entertainment products decreased $16.3 million or 65.7%
from $24.8 million in fiscal 1998 to $8.5 million in fiscal 1999. As a
percentage of net sales, gross profit decreased from 12.6% in fiscal 1998 to
4.1% in fiscal 1999. The gross profit from computer software sales was $10.0
million or 6.6% of computer software net sales in fiscal 1999 compared with
$16.4 million or 11.9% of computer software net sales in fiscal 1998. The
decrease in gross margin in computer sales was primarily due to a one-time,
non-cash adjustment to inventory and the write-off of accounts payable debit
balances of several financially distressed vendors. The gross margin from music
sales was $(1.5) million or (2.5%) of music net sales in fiscal 1999 compared
with $8.4 million or 14.3% of music net sales in fiscal 1998. The
11
<PAGE>
decrease in gross margin in music sales was primarily due to the write-off of
accounts payable debit balances of several financially distressed vendors.
Selling and marketing expenses of home entertainment products increased from
$5.5 million in fiscal 1998 to $7.6 in fiscal 1999 and increased as a percentage
of sales from 2.8% in fiscal 1998 to 3.6% in fiscal 1999. The increase resulted
primarily from higher freight costs. NetRadio's selling and marketing increased
from $221,000 in fiscal 1998 to $1.1 million in fiscal 1999. The increase in
sales and marketing expenses was primarily due to the growth in NetRadio's sales
force and marketing staff and the usage of $150,000 in advertising contributed
by ValueVision.
Distribution and warehousing expenses increased from $2.9 million in 1998 to
$4.7 million in 1999 and increased as a percentage of sales from 1.5% in 1998 to
2.2% in 1999. This increase was primarily due to the expenses associated with
the improved returns processing system.
General and administrative expenses of home entertainment products increased
from $10.7 million in fiscal 1998 to $14.7 million in fiscal 1999. As a
percentage of sales, they increased from 5.5% in fiscal 1998 to 7.0% in fiscal
1999. The higher expenses were primarily due to the growth of the Company and
legal expenses associated with the financially distressed vendors. NetRadio's
general and administrative expenses increased from $1.7 million in fiscal 1998
to $4.3 million in fiscal 1999. The increase in general and administrative
expense reflects the costs associated with adding key personnel and building
infrastructure for NetRadio and $880,000 in compensation expense as a result of
the issuance of stock options to employees and directors with exercise prices
below the estimated fair market value of their common stock on the date of
grant.
Depreciation and amortization decreased from $2.4 million in fiscal 1998 to $2.0
million in fiscal 1999. In November 1997, the Company terminated its
distribution agreement with Velvel and wrote off its remaining investment.
The net operating loss for the home entertainment products was $20.1 million for
fiscal 1999 compared to a profit of $3.6 million for fiscal 1998. The net
operating loss for NetRadio was $5.5 million for fiscal 1999 compared to $2.1
million for fiscal 1998.
Interest expense decreased from $3.1 million for fiscal 1998 to $2.5 million for
fiscal 1999. This decrease resulted from substantially lower borrowings due to
the Company's issuance of its Class A Convertible Preferred Stock in a private
placement and those purchasers exercising the five-year warrants attached to
those shares.
The consolidated net loss for the Company was $27.7 million for fiscal 1999
compared to a loss of $974,000 for fiscal 1998.
The Company's effective tax rate decreased to zero for fiscal 1999 as a result
of the operating loss.
The Company's basic and diluted loss per share for the twelve months ended March
31, 1999 included a $34,229,000 charge associated with the non-detachable
conversion feature included in the preferred stock and the accompanying warrants
issued May 1, 1998.
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales of home entertainment products decreased 2.0% from $200.7 million in
fiscal 1997 to $196.4 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 30.0% of net sales in fiscal 1998. Computer software sales decreased by
8.8% 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 direct
12
<PAGE>
shipments to retailers and the limitations of the Company's working capital
caused by the difficulties of certain retailers. Music sales increased 18.3%
from $49.8 million in fiscal 1997 to $58.9 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 of home entertainment products increased $1.5 million or 6.4% from
$23.3 million in fiscal 1997 to $24.8 million in fiscal 1998. As a percentage of
net sales, gross profit increased from 11.6% in fiscal 1997 to 12.6% 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 $8.4 million or 14.3% of music net sales in
fiscal 1998 compared with $9.7 million or 19.5% of music net sales in fiscal
1997.
Selling and marketing expenses of home entertainment products decreased from
$5.7 million in fiscal 1997 to $5.5 million in fiscal 1998 and as a percentage
of sales remained the same at 2.8% for both fiscal 1997 and fiscal 1998.
NetRadio's selling and marketing expenses increased to $221,000 in fiscal 1998.
Distribution and warehousing expenses of home entertainment products 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 of home entertainment products decreased
from $12.7 million in fiscal 1997 to $10.7 million in fiscal 1998. As a
percentage of sales they decreased slightly from 6.3% in fiscal 1997 to 5.5% in
fiscal 1998 reflecting the lower net sales. NetRadio's general and
administrative expenses rose from $96,000 in fiscal 1997 to $1.7 million in
fiscal 1998 due to the growth of their company.
Amortization and writedown of intangible assets decreased from $5.8 million in
fiscal 1997 to $2.4 million in fiscal 1998. 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. Both writedowns were attributed in part to the Company's
former relationship with Velvel Records.
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 consolidated 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 $1.8 million valuation allowance against
deferred tax assets related to the write down and amortization of Velvel's
distribution rights.
YEAR 2000
The Company has been evaluating the potential impact of what is commonly
referred to as the Year 2000 issue, concerning the inability of certain
information systems to properly recognize and process dates containing the year
2000 and beyond. The Company established a Year 2000 team working with every
operational area throughout the Company, and this team worked with management to
commence the following steps: (i) implementing a Year 2000 Assessment and
Testing Plan for all internal information
13
<PAGE>
systems and other systems that contain micro-controllers that may be affected by
the Year 2000 date change; (ii) implementing a Year 2000 Assessment and Testing
Plan for all Company products, (iii) communicating with third parties that
supply product to the Company to ensure they are addressing the Year 2000 issue;
and (iv) contingency and disaster recovery planning to ensure Year 2000 problem
resolution.
The Company has identified and tested the systems it believes are critical and
the test results indicate that these systems are Year 2000 compliant. The
Company engaged in an ongoing process to test, reprogram, update or replace all
computer system non-compliant hardware and software and non-computer system
related non-compliant office and warehouse systems and equipment. The Company
has completed testing of mission critical systems and expects to complete
testing of non-mission critical systems by June 30, 1999. Implementation of
software upgrades and replacement of non-compliant hardware is substantially
completed. The Company also completed the upgrade of the warehouse systems and
Electronic Data Interchange (EDI) systems and is listed as being compliant by
the National Retail Federation. Regardless of the Year 2000 compliance of the
Company's systems and products, there can be no assurance that the Company will
not be adversely affected by the failure of others to become Year 2000
compliant.
To date, the Company has incurred expenditures totaling $216,000 in connection
with the Company's effort to become Year 2000 compliant. At this time, the
Company estimates that its additional costs for Year 2000 compliance will
consist of costs related to Year 2000 compliance and expenditures for software
in the approximate amount of $350,000.
While the Company cannot at this time state with certainty that the Year 2000
issues will not have a material adverse impact on its financial condition,
results of operations and liquidity, the Company considers it unlikely. The
Company believes that the following situations make up the Company's "most
reasonably likely worst case Year 2000 scenarios": (i) disruption of a
significant customer's ability to accept products or pay invoices, (ii)
disruption of suppliers, (iii) disruption of the Company's internal management
information systems, and (iv) disruption of the Company's external management
information systems.
While the Company recognized the need for contingency planning, it has not yet
developed any specific contingency plans for potential Year 2000 disruptions.
The Company does anticipate developing contingency plans for its most critical
areas, but details of such plans will depend on the Company's final assessment
of the problems of customers and suppliers as well as the evaluation and success
of its remediation efforts.
MARKET RISK
The Company is subject to interest rate risk. A 10% increase or reduction in
interest rates would not have a material effect on future earnings, fair values
or cash flows.
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, 1999, the Company had net accounts receivable of
$43.5 million and inventory of $29.2 million and had accounts payable of $51.8
million and bank borrowings of $329,000 to finance these assets.
For the fiscal year ended March 31, 1999, net sales were $210.4 million, an
increase of $13.7 million over 1998 fiscal year net sales of $196.7 million. The
Company had a net loss of $27.7 million during this period. The Company used
cash of $13.4 million in operating activities. During the period, accounts
receivable decreased by $8.9 million. This change was offset by an increase in
inventories of $6.0 million. Accounts payable increased by $7.2 million.
Investing activities used $1.9 million of cash, including $2.0 million for the
purchase of furniture, equipment and leasehold improvements. The Company
generated net cash of $15.3 million in financing activities during the period
primarily through proceeds from a private
14
<PAGE>
placement and exercise of options and warrants for the aggregate net
consideration of $46.9 million and made bank payments of $32.1 million.
The Company has 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 issued 1,523,810 shares of Class A Convertible
Preferred Stock in a private placement to a group of investors for aggregate
consideration of $19.0 million, net of expenses. Each share of Class A
Convertible Preferred Stock was issued at a price of $13.125 per share and was
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. Under the terms of the Class
A Convertible Preferred Stock, the Company was required to pay cumulative
dividends of 10% per annum payable quarterly, beginning on June 30, 1998. During
the year ended March 31, 1999, the Company paid cash and stock dividends of
$594,000 and $68,000, respectively.
During the year ended March 31, 1999, holders of all 1,523,810 shares of the
Company's Class A Convertible Preferred Stock converted their Preferred Stock
into 7,619,050 shares of common stock and holders of warrants issued May 1998
exercised their warrants for an aggregate of 7,913,815 shares and paid the
Company gross proceeds of $27,348,500. The Company used the proceeds of the
offering for working capital purposes, including payment of amounts due under
its credit facility.
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 over the next twelve months.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information with respect to disclosures about market risk is contained in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Market Risk" in Item 7 of this Form 10-K.
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.
15
<PAGE>
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 9, 1999 (the "1999 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 1999 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 of Certain Beneficial Owners and Management" in the
Company's 1999 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 1999 Proxy Statement and is incorporated
herein by reference.
16
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
(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, 1999 and 1998
Consolidated Statements of Operations for each of the three
years in the period ended March 31, 1999
Consolidated Statement of Shareholders' Equity as of March 31,
1999
Consolidated Statements of Cash Flows for each of the three
years in the period ended March 31, 1999
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule for each of the three years in the
period ended March 31, 1999
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 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 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.
10.4 Form of Individual Stock Option Agreement under 1992
Stock Option Plan, from Exhibit 10.4 to Form
S-1.
10.5 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.
10.6 Lease dated March 12, 1998 between Navarre Corporation
and Cambridge Apartments, Inc. with respect to
the corporate headquarters in New Hope, MN.
10.7 Lease dated May 1, 1999 between Navarre Corporation and
Sunlite III, LLP with respect to a second
facility in Brooklyn Park, MN
10.8 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.
17
<PAGE>
10.8.1 Amendment No.1 to Loan Documents, dated September 19,
1997, incorporated herein by reference from
Exhibit 10.11.1 to Form 10-K for year ended
March 31, 1998.
10.8.2 Amendment No.2 to Loan Documents, dated October 29,
1997, incorporated herein by reference from
Exhibit 10.11.2 to Form 10-K for year ended
March 31, 1998.
10.8.3 Amendment No.3 to Loan Documents, dated May 1, 1998,
incorporated herein by reference from Exhibit
10.11.3 to Form 10-K for year ended March 31,
1998.
10.9 Agreement and Plan of Reorganization dated March 7, 1997
by and among NetRadio Corporation, a Nevada
corporation, Navarre Corporation and NetRadio
Corporation, a Minnesota Corporation,
incorporated herein by reference from Exhibit
10.14 to Form 10-K for year ended March 31,
1997.
10.10 Stock Purchase Agreement dated as of March 7, 1997, by
and among ValueVision International, Inc.
NetRadio Corporation (Minnesota), Navarre
Corporation, and NetRadio Corporation
(Delaware), incorporated herein by reference
from Exhibit 10.18 to Form 10-K for year ended
March 31, 1997.
10.11 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.
10.12 Form of Warrant dated May 1, 1998 issued to Delphi
Financial Corporation.
10.13 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.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
March 31, 1999
18
<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, 1999 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, 1999
- ---------------------------- and Chief Executive Officer
Eric H. Paulson
/s/ Charles E. Cheney Director, Treasurer and Secretary, June 29, 1999
- ---------------------------- Executive Vice President and
Charles E. Cheney Chief Financial Officer
/s/ Dickinson G. Wiltz Director June 29, 1999
- ----------------------------
Dickinson G. Wiltz
/s/ James G. Sippl Director June 29, 1999
- ----------------------------
James G. Sippl
/s/ Michael L. Snow Director June 29, 1999
- ----------------------------
Michael L. Snow
/s/ Alfred Teo Director June 29, 1999
- ----------------------------
Alfred Teo
19
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Navarre Corporation
We have audited the accompanying consolidated balance sheets of Navarre
Corporation as of March 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended March 31, 1999. Our audit also included the
financial statement schedule for the year ended March 31, 1999 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Navarre
Corporation at March 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1999, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement 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.
Minneapolis, Minnesota
April 30, 1999
20
<PAGE>
Navarre Corporation
Consolidated Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
MARCH 31
1999 1998
---------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 92 $ 23
Accounts receivable, less allowance for doubtful accounts
and sales returns of $3,810 in 1999 and $2,412 in 1998 43,465 52,383
Inventories 29,223 23,188
Notes receivable, related parties 221 406
Refundable income taxes 613 2,265
Prepaid expenses and other current assets 908 962
---------------------------
Total current assets 74,522 79,227
Property and equipment, net of accumulated depreciation of $5,251 and
$3,647, respectively 3,361 2,957
Other assets:
Goodwill 853 1,174
Other assets 744 331
---------------------------
Total assets $ 79,480 $ 83,689
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 329 $ 32,445
Current portion of long-term debt 93 162
Accounts payable 51,831 45,554
Accrued expenses 1,949 1,019
---------------------------
Total current liabilities 54,202 79,180
Long-term debt, less current maturities 114 181
Shareholders' equity:
Preferred stock, no par value:
Authorized shares - 10,000,000
Issued and outstanding shares - None -- --
Common stock, no par value:
Authorized shares - 50,000,000
Issued and outstanding shares - 23,344,046 and 7,009,170, respectively 91,415 8,113
Retained deficit (66,119) (3,558)
Unearned compensation (132) (227)
---------------------------
Total shareholders' equity 25,164 4,328
---------------------------
Total liabilities and shareholders' equity $ 79,480 $ 83,689
===========================
</TABLE>
SEE ACCOMPANYING NOTES.
21
<PAGE>
Navarre Corporation
Consolidated Statements of Operations
(in thousands, except share amounts)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
Net sales: $ 210,386 $ 196,648 $ 200,697
Cost of sales 201,624 171,655 177,415
--------------------------------------------
Gross profit 8,762 24,993 23,282
Operating expenses:
Selling and marketing 8,675 5,716 5,669
Distribution and warehousing 4,712 2,936 2,697
General and administrative 18,994 12,445 12,793
Depreciation and amortization 1,953 2,438 5,826
--------------------------------------------
34,334 23,535 26,985
--------------------------------------------
(Loss) income from operations (25,572) 1,458 (3,703)
Other expense:
Interest expense (2,543) (3,108) (2,110)
Other income (expense) 445 (10) (184)
--------------------------------------------
Loss before income taxes and equity
in loss of NetRadio Corporation (27,670) (1,660) (5,997)
Income tax benefit -- (470) (527)
Minority interest in subsidiary -- (216) --
Equity in loss of NetRadio Corporation -- -- (719)
--------------------------------------------
Net loss $ (27,670) $ (974) $ (6,189)
============================================
Net loss available to common shareholders $ (62,561) $ (974) $ (6,189)
============================================
Basic and diluted loss per share $ (4.41) $ (.14) $ (.92)
Basic and diluted weighted average common shares
outstanding 14,179 6,921 6,692
</TABLE>
SEE ACCOMPANYING NOTES.
22
<PAGE>
Navarre Corporation
Consolidated Statements of Shareholders' Equity
(in thousands, except share amounts)
<TABLE>
<CAPTION>
PREFERRED COMMON RETAINED
SHARES PREFERRED SHARES COMMON EARNINGS UNEARNED
ISSUED STOCK ISSUED STOCK (DEFICIT) COMPENSATION
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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)
Preferred shares issued in private placement 1,523,810 18,821 -- -- -- --
Preferred share conversions, net of fees (1,523,810) (18,821) 7,619,050 18,821 -- --
Value of preferred stock conversion feature -- -- -- 34,229 (34,229) --
Shares issued upon exercise of stock warrants -- -- 8,093,815 28,050 -- --
Shares issued upon exercise of stock options -- -- 611,568 1,216 -- --
Dividends paid -- -- -- -- (594) --
Dividends issued in the form of shares -- -- 10,443 40 (68) --
NetRadio stock option valuation adjustment -- -- -- 880 -- --
NetRadio shares issued -- -- -- 66 -- --
Net loss -- -- -- -- (27,670) --
Amortization of unearned compensation -- -- -- -- -- 95
----------------------------------------------------------------------------------
Balance at March 31, 1999 -- $ -- 23,344,046 $ 91,415 $ (66,119) $ (132)
==================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
23
<PAGE>
Navarre Corporation
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (27,670) $ (974) $ (6,189)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 1,635 1,090 871
Amortization and writedown of intangible assets 321 1,348 4,955
Amortization of unearned compensation 95 95 95
Equity in loss of NetRadio Corporation -- -- 719
Minority interest in subsidiary -- (216) --
NetRadio stock valuation adjustment 880 -- --
Changes in operating assets and liabilities:
Accounts receivable 8,918 (5,220) (6,114)
Inventories (6,035) (6,379) (2,038)
Prepaid expenses and other assets (359) 1,942 (737)
Refundable income taxes 1,652 (2,265) --
Accounts payable and accrued expenses 7,178 (166) 16,589
Income taxes payable -- (135) (174)
--------------------------------------------
Net cash (used in) provided by operating activities (13,385) (10,880) 7,977
INVESTING ACTIVITIES
Notes receivable, related parties 185 (192) (214)
Acquisition of businesses, net of cash received -- -- (552)
Payment for Velvel distribution rights -- -- (5,000)
Purchases of equipment and leasehold improvements (2,039) (748) (870)
--------------------------------------------
Net cash used in investing activities (1,854) (940) (6,636)
FINANCING ACTIVITIES
Payments on long-term debt (135) (614) (511)
Proceeds from note payable, bank 197,230 176,925 170,717
Payments on note payable, bank (229,346) (165,231) (171,082)
Proceeds from sale of common stock -- -- 186
Proceeds from sale of subsidiary stock 66 -- --
Proceeds from sale of preferred stock and warrants 18,821 -- --
Proceeds from exercise of common stock warrants 28,050 -- --
Payment of dividends on Class A stock (594) -- --
Proceeds from exercise of common stock options 1,216 108 --
--------------------------------------------
Net cash provided by (used in) financing activities 15,308 11,188 (690)
--------------------------------------------
Net increase/(decrease) in cash 69 (632) 651
Cash at beginning of year 23 655 4
--------------------------------------------
Cash at end of year $ 92 $ 23 $ 655
============================================
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.
24
<PAGE>
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company distributes home entertainment products including prerecorded tapes,
compact discs, digital versatile disks (DVD's), personal computer software and
interactive CD-ROM computer software primarily to retailers and wholesalers in
the United States. In addition, through its majority-owned subsidiary, NetRadio
Corporation, Navarre owns and operates NetRadio Network, a leading audio content
broadcaster on the Internet.
CONSOLIDATION
The financial statements include the accounts of the Company and its wholly
owned subsidiary, Digital Entertainment, Inc. and its majority-owned subsidiary,
NetRadio Corporation (collectively, the Company). NetRadio has been consolidated
since the Company purchased 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.
INTERNAL-USE SOFTWARE
The Company follows the Accounting Standards Executive Committee of the AICPA
Statement of Position (SOP) 98-1, Accounting for Costs of Computer Software
Developed or Obtained for Internal Use. The SOP requires the capitalization of
certain costs incurred to develop or obtain internal-use software.
Software is being depreciated over a three-year life.
25
<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.
GOODWILL
Goodwill 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, 1999 and 1998
was $1,005,000 and $684,000, 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.
26
<PAGE>
1. ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER COMMON SHARE
The basic earnings per share is computed by dividing the net loss by the
weighted average number of common shares outstanding.
Preferred stock, preferred stock warrants and employee stock options are not
included in the period ending March 31, 1999 calculation because they are
anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
(In thousands, except for per share data) YEAR ENDED MARCH 31
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Numerator:
Net loss $ (27,670) $ (974) $ (6,189)
Less preferred non-detachable conversion
feature and warrant valuation (34,229) -- --
Less preferred dividend requirements (662) -- --
-----------------------------------------
Adjusted net loss applicable to common stock $ (62,561) $ (974) $ (6,189)
=========================================
Denominator for basic and diluted earnings per share -
weighted average shares 14,179 6,921 6,692
=========================================
Basic and diluted earnings per share $ (4.41) $ (.14) $ (.92)
=========================================
</TABLE>
RECLASSIFICATION
Certain balances have been reclassified to conform to the March 31, 1999,
presentation.
27
<PAGE>
2. ACQUISITIONS
During May 1996, the Company acquired a 50% interest in NetRadio Corporation, an
Internet radio network. The Company accounted for its investment in NetRadio
Corporation under the equity method. In March 1997, the Company acquired the
remaining 50% of NetRadio 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 NetRadio
Corporation attains certain revenue and income results. 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-yesr period.
Concurrent with the closing of the second investment in NetRadio Corporation,
the Company sold 15% of the common stock of NetRadio 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. ValueVision International is an integrated electronic and
print media direct marketing company, that operates a 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 common stock upon the occurrence of
certain events, including the insolvency of NetRadio. In the event that NetRadio
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.
28
<PAGE>
3. VELVEL DISTRIBUTION RIGHTS
In August 1996, the Company entered into a unit purchase 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 do 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 to amortization
expense from the cancellation of the Velvel agreement was $167,000. Total
amortization recorded for the year ended March 31, 1998 was $846,000. During May
1999, Navarre's 15% interest in Velvel was sold to Koch Entertainment LLC for
$47,500.
4. NOTES RECEIVABLE, RELATED PARTIES
The related party notes receivable are due on demand and bear interest at rates
between 7.75% and 8.75% per year and are unsecured.
29
<PAGE>
5. BANK FINANCING AND DEBT
On June 12, 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, fluctuates based on an asset-borrowing base, and is
secured by substantially all the Company's assets. The agreement requires the
Company to deliver various reports to Congress Financial as well as maintain
accurate inventory and fixed asset records. The covenant also gives Congress
access to the Company's books and records for auditing the collateral. The
revolving line of credit with Congress Financial Corporation expires June 12,
2000.
Interest is at prime plus 1% (8.75% at March 31, 1999) and LIBOR rate plus 2.75%
(7.687% at March 31, 1999) and is payable monthly. The weighted average interest
rate was 9.5% for the years ended March 31, 1999 and 1998.
Long-term debt consists of the following (in thousands):
MARCH 31
1999 1998
------------------
Capital equipment leases with monthly payments of $1 to $6,
secured by equipment $ 207 $ 288
Notes payable in monthly installments of $5 through September
1998, interest at 10%, unsecured -- 55
------------------
207 343
Less current portion 93 162
------------------
Long-term debt $ 114 $ 181
==================
Interest paid was $2,543,000, $3,238,000 and $2,112,000 for the years ended
March 31, 1999, 1998 and 1997, respectively.
Maturities of long-term debt are as follows: 2000- $93,000; 2001- $78,000; 2002-
$36,000; and $0 thereafter.
30
<PAGE>
6. SHAREHOLDERS' EQUITY
The Company had 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. All warrants were
exercised for $702,000 in the current year.
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.
The Board of Directors resolved to amend the Company's articles of incorporation
to increase the authorization of a class of preferred stock from 5,000,000 to
10,000,000 shares. The amendment was approved by the Company's shareholders on
June 19, 1998.
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 was convertible into five shares of Navarre
common stock at any time after June 30, 1998. All of the Class A Convertible
Preferred Stock was converted into common stock in the current year. 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 Company also issued warrants to the
underwriters to purchase 380,953 common shares at $2.625 per share. During the
current year 7,913,815 common stock warrants were exercised for $27,348,500.
There were 75,908 warrants outstanding at March 31, 1999. The Class A
Convertible Preferred Stock paid cumulative quarterly dividends of ten percent
(10%) payable beginning June 30, 1998. Total cash and stock dividends paid for
the year were $594,000 and 68,000, respectively.
The Class A Convertible Preferred Stock securities were deemed to have contained
beneficial conversion features that were recognized as a dividend paid to
preferred stockholders. Allocation of proceeds to the beneficial conversion
feature and warrants are analogous to a dividend, and were recognized as a
return to the preferred stockholders over the minimum conversion period (from
date securities were issued to date they were first convertible). The Company
valued the Nondetachable Conversion Feature and accompanying warrants at
$34,229,000.
31
<PAGE>
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 between five
and eight years after the grant date. Option activity is summarized as follows:
PLAN OPTIONS WEIGHTED AVERAGE
AVAILABLE FOR PLAN OPTIONS EXERCISE PRICE PER
GRANT OUTSTANDING SHARE
----------------------------------------------------
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
Granted (532,000) 532,000 3.07
Canceled 100,772 (100,772) 3.57
Exercised -- (644,806) 1.89
----------------------------------------------------
Balance on March 31, 1999 115,198 1,075,596 $ 2.92
====================================================
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 remain unchanged.
The weighted average fair value of options granted in 1999, 1998 and 1997 was
$2.18, $1.69 and $2.45 per share, respectively.
32
<PAGE>
7. STOCK OPTIONS AND GRANTS (CONTINUED)
The exercise price of options outstanding at March 31, 1999 ranged from $1.9375
to $13.625 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 1999 CONTRACTUAL LIFE EXERCISABLE PRICE PER SHARE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 1.94 - $2.63 440,966 3.9 years 182,284 $ 2.36
$ 2.64 - 2.94 421,600 4.9 years 20,800 $ 2.87
$ 2.95 - 4.38 207,030 3.9 years 41,874 $ 3.99
$ 4.39 - 13.63 6,000 4.7 years 1,200 $11.06
-------------- -------------
Total 1,075,596 4.3 years 246,158 $ 2.92
============== =============
</TABLE>
The number of options exercisable at March 31, 1999, 1998 and 1997 was 246,158,
648,548 and 425,334, respectively, at a weighted average exercise price of
$2.92, $2.84 and $2.07 per share, respectively.
Pro forma information regarding net loss and 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 1999, 1998 and 1997, respectively; risk-free interest rate of
5.2%, 4.9% and 6.7%, volatility factor of the expected market price of the
Company's common stock of 82%, 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 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.
33
<PAGE>
7. STOCK OPTIONS AND GRANTS (CONTINUED)
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:
MARCH 31
1999 1998 1997
--------------------------------------
Pro forma net loss $(62,736) $(1,187) $(6,352)
Pro forma basic and diluted loss per share $(4.42) $(.17) $(.94)
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 for the years ended March 31, 1999,
1998 and 1997. The remaining unamortized unearned compensation is expected to be
charged to operations over the five-year vesting period.
In March 1999 the Company recognized $880,000 in compensation expense associated
with the issuance of incentive stock options of its subsidiary NetRadio to
employees with stock prices below the estimated fair market value of the
Company's common stock on the date of grant.
8. INCOME TAXES
The components of income tax benefit are as follows (in thousands):
YEAR ENDED MARCH 31
1999 1998 1997
------------------------------------
Current:
Federal $ 0 $(2,256) $ 560
State 0 (166) 120
------------------------------------
0 (2,422) 680
Deferred 0 1,952 (1,207)
------------------------------------
Income tax expense (benefit) $ 0 $ (470) $ (527)
====================================
34
<PAGE>
8. INCOME TAXES (CONTINUED)
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, 1999 and 1998 included in prepaid expenses and other assets are as
follows (in thousands):
MARCH 31
1999 1998
-------------------------
Debit balance $ 1,867 $ --
Net operating loss carryforward 7,913 117
Allowance for uncollectible accounts 836 443
Allowance for sales returns 686 520
Book/tax depreciation 44 58
Reserve for sales discounts 176 142
Accrued vacations 79 85
Inventory - uniform capitalization 150 118
Inventory - obsolescence 257 --
Price protection reserve 159 120
-------------------------
12,167 1,603
Valuation allowance (12,167) (1,603)
-------------------------
Total deferred tax assets $ -- $ --
=========================
The net operating loss carryforward of $222,000 created as a result of the
change in the Company's year-end in 1994 is limited to a utilization limit of
$111,000 per year through the year 2000. The remaining net operating loss of
$19,672,000 expires in the year 2019.
35
<PAGE>
8. INCOME TAXES (CONTINUED)
A reconciliation of income tax benefit to the statutory federal rate is as
follows (in thousands):
YEAR ENDED MARCH 31
1999 1998 1997
-----------------------------------------
Tax expense (benefit) at statutory rate $ (9,408) $ (564) $ (2,039)
State income taxes (benefit), net of
federal benefit (1,220) (94) (365)
Valuation allowance 10,564 (147) 1,750
Goodwill amortization 28 43 92
Other 36 292 35
-----------------------------------------
$ 0 $ (470) $ (527)
=========================================
Effective tax rate 0% (28)% (8.8)%
=========================================
Cash paid (received) for income taxes was $(1,623,000), $0 and $855,000 for the
years ended March 31, 1999, 1998 and 1997, respectively.
9. COMMITMENTS
LEASES
On March 12, 1998, the Company entered into an operating lease agreement for
office and warehouse space. The lease expires in 2013 and provides for monthly
payments of $38,750 over the lease term, with a 2.5% increase every 30 months.
In addition, the Company is responsible for all operating costs associated with
the building. The prior operating lease was with a partnership whose two
partners are major shareholders and officers of the Company. The Company also
leases additional facilities and office equipment. The partners sold the
building in 1999 to an unrelated party.
Total rent expense was $1,368,000, $1,069,000 and $804,000 for the years ended
March 31, 1999, 1998 and 1997, respectively.
36
<PAGE>
9. COMMITMENTS (CONTINUED)
The following is a schedule of future minimum rental payments required under
noncancelable operating leases as of March 31, 1999 (in thousands):
2000 $ 820
2001 622
2002 521
2003 523
2004 527
Thereafter 4,788
--------------
$ 7,801
==============
10. MAJOR CUSTOMERS
The Company has three major customers who accounted for 59%, 44% and 47% of
sales in fiscal 1999, 1998 and 1997, respectively.
11. BUSINESS SEGMENTS
The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION, during the quarter ended March 31, 1999. SFAS 131
establishes standards for reporting information about operating segments in
annual financial statements of public companies and requires selected
information about operating segments to be reported in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services and geographic areas. The Company has defined its
operating segments based upon the financial information available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
Navarre's operations are classified into two business segments based upon
products and services provided: home entertainment products and NetRadio. The
Company distributes home entertainment products including prerecorded tapes,
compact discs, interactive CD-ROM computer software, DVD products and personal
computer software primarily to retailers and wholesalers in the United States
and Canada. NetRadio is an internet-only radio network.
37
<PAGE>
Financial Information by reportable business segment is included in the
following summary:
<TABLE>
<CAPTION>
YEARS ENDED
- ------------------------------------------------------------------------------------------------------------------
In thousands MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES FROM EXTERNAL CUSTOMERS
Home Entertainment Products $ 210,000 $ 196,444 $ 200,697
NetRadio 386 204 --
- ------------------------------------------------------------------------------------------------------------------
CONSOLIDATED $ 210,386 $ 196,648 $ 200,697
==================================================================================================================
OPERATING INCOME (LOSS)
Home Entertainment Products $ (20,082) $ 3,607 $ (3,602)
NetRadio (5,490) (2,149) (101)
- ------------------------------------------------------------------------------------------------------------------
CONSOLIDATED $ (25,572) $ 1,458 $ (3,703)
- ------------------------------------------------------------------------------------------------------------------
Net Interest Expense (2,543) (3,108) (2,110)
Other Income (Expense) 445 (10) (184)
- ------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES $ (27,670) $ (1,660) $ (5,997)
==================================================================================================================
IDENTIFIABLE ASSETS
Home Entertainment Products $ 76,363 $ 82,287 $ 76,005
NetRadio 3,117 1,402 2,392
- ------------------------------------------------------------------------------------------------------------------
CONSOLIDATED $ 79,480 $ 83,689 $ 78,397
==================================================================================================================
DEPRECIATION AND AMORTIZATION
Home Entertainment Products $ 1,572 $ 2,023 $ 5,826
NetRadio 381 415 0
- ------------------------------------------------------------------------------------------------------------------
CONSOLIDATED $ 1,953 $ 2,438 $ 5,826
==================================================================================================================
CAPITAL EXPENDITURES
Home Entertainment Products $ 1,020 $ 732 $ 870
NetRadio 1,019 16 --
- ------------------------------------------------------------------------------------------------------------------
CONSOLIDATED $ 2,039 $ 748 $ 870
==================================================================================================================
<CAPTION>
YEARS ENDED
- ------------------------------------------------------------------------------------------------------------------
In thousands MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997
- ------------------------------------------------------------------------------------------------------------------
SALES BY CLASSES OF SIMILAR PRODUCTS OR SERVICES
Computer Software $ 150,350 $ 137,479 $ 150,859
Music 59,650 58,965 49,838
NetRadio 386 204 --
- ------------------------------------------------------------------------------------------------------------------
CONSOLIDATED $ 210,386 $ 196,648 $ 200,697
==================================================================================================================
</TABLE>
38
<PAGE>
NAVARRE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------------------------------------
Additions
--------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Accounts -- Deductions -- End of
Description Of Period Expenses Describe Describe Period
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1999:
Deducted from asset accounts:
Inventory obsolescence reserve $ 0 $ 658,000 $ 0 $ 658,000
Allowance for doubtful accounts 1,112,000 960,000 (23,000)(1) 2,095,000
Allowance for sales returns 1,300,000 415,000 1,715,000
------------------------------ ------------------------------------
Totals $ 2,412,000 $ 2,033,000 $ (23,000)(1) $ 4,468,000
============================== ====================================
Year ended March 31, 1998:
Deducted from asset accounts:
Inventory obsolescence reserve $ 0 $ 0 $ 0 $ 0
Allowance for doubtful accounts 2,388,000 (22,000) 1,254,000(1) 1,112,000
Allowance for sales returns 1,197,000 103,000 1,300,000
------------------------------ ------------------------------------
Totals $ 3,585,000 $ 81,000 $ 1,254,000(1) $ 2,412,000
================================ ====================================
Year ended March 31, 1997:
Deducted from asset accounts:
Inventory obsolescence reserve $ 0 $ 0 $ 0 $ 0
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
===============================================================================================
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
(2) Increase in allowance transferred from acquisition of Record
Service, Inc. and NetRadio, Inc.
39
EXHIBIT #10.6
OFFICE/WAREHOUSE LEASE
THIS INDENTURE of lease, entered into this 1st day of April , 19 98 ,
by and between Cambridge Apartments, Inc. a MN Corporation hereinafter referred
to as "Lessor", and Navarre Corporation, a MN Corporation hereinafter referred
to as "Lessee".
DEFINITIONS:
"Premises" - That certain real property located in the City of New
Hope, County of Hennepin and State of Minnesota and legally described on Exhibit
"A" attached hereto and made a part hereof, including all buildings and site
improvements located thereon.
"Building" - That certain office/warehouse building containing
approximately 86,430 square feet located upon the Premises and commonly
described as Navarre Building located at 7400 49th Avenue North, New Hope, MN. .
"Demised Premises" - That certain portion of the Building located at
7400 49th Avenue North, New Hope, MN consisting of approximately eighty six
thousand four hundred thirty feet (86,430) square feet of office and warehouse
space, as measured from the outside walls of the Demised Premises to the center
of the partition wall, as shown on the floor plan attached hereto as Exhibit "B"
and made a part hereof. The Demised Premises include a non-exclusive easement
for access to common areas, as hereinafter defined, and all licenses and
easements appurtenant to the Demised Premises.
"Common Areas" - The term "common area" means the entire areas to be
used for the non-exclusive use by Lessee and other lessees in the Building,
including, but not limited to, corridors, lavatories, driveways, truck docks,
parking lots and landscaped areas. Subject to reasonable rules and regulations
promulgated by Lessor, the common areas are hereby made available to Lessee and
its employees, agents, customers, and invitees for reasonable use in common with
other lessees, their employees, agents, customers and invitees.
WITNESSETH:
TERM:
1. For and in consideration of the rents, additional rents, terms, provisions
and covenants herein contained, Lessor hereby lets, leases and demises to Lessee
the Demised Premises for the term of 180 months commencing on the 1st day of
July, 1998 (sometimes called "the Commencement Date") and expiring the 30th day
of June , 2013 (sometimes called "Expiration Date"), unless sooner terminated as
hereinafter provided.
BASE RENT:
2. Lessee shall pay Lessor, a total annual rental of Four hundred sixty five
thousand dollars ($465,000.000) payable in advance, in equal monthly
installments of Thirty eight thousand seven hundred and fifty Dollars ($
38,750.00), commencing on the Commencement Date and continuing on the first day
of each and every month thereafter for the next succeeding months during the
balance of the term (sometimes called "Base Rent"). After the 30th month a 2.5%
increase will occur every 30 months.
ADDITIONAL RENT:
3. Lessee shall pay throughout the term of this Lease the following: Lessee
shall pay a sum equal to one hundred percent (100%) of the Real Estate taxes
when due. The term "Real Estate Taxes" shall mean all real estate taxes, all
assessments and any taxes in lieu thereof which may be levied upon or assessed
against the Premises of which the Demised Premises are a part.
In the event the taxing authorities include in such real estate taxes
and assessments the value of any improvements made by Lessee, or of machinery,
equipment, fixtures, inventory or other personal property or assets of lessee,
then Lessee shall pay all
<PAGE>
the taxes attributable to such items in addition to its proportionate share of
said aforementioned real estate taxes and assessments.
b. A sum equal to one hundred percent (100%) of the annual aggregate operating
expenses for the operation, maintenance and repair of the Premises. The term
"Operating Expenses" shall include but not be limited to maintenance, repair,
replacement and care of all common area lighting, common area plumbing and
roofs, parking and landscaped areas, signs, snow removal, non-structural repair
and maintenance of the exterior of the Building, insurance premiums, management
fee, wages and fringe benefits of personnel employed for such work, costs of
equipment purchased and used for such purposes, and the cost or portion thereof
properly allocable to the Premises.
c. In no event shall the total adjusted monthly rent be less than Thirty eight
thousand seven hundred and fifty dollars ($ 38,750.00 ) per month during the
term of this Lease.
The payment of the sums set forth in this Article 3 shall be in addition to the
Base Rent payable pursuant to Article 2 of this Lease.
COVENANT TO PAY RENT:
4. The covenants of Lessee to pay the Base Rent and the Additional Rent are each
independent of any other covenant, condition, provision or agreement contained
in this Lease. All rents are payable to Lessor at: Cambridge Apartments, Inc.
c/o John R. Paulson 320 Edgewood Ave., Golden Valley, Minnesota 55426
UTILITIES:
5. Lessor shall provide mains and conduits to supply water, gas, electricity and
sanitary sewage to the Premises. Lessee shall pay, when due, all charges for
sewer usage or rental, garbage, disposal, refuse removal, water, electricity,
gas, fuel oil, LP gas, telephone and/or other utility services or energy source
furnished to the Demised Premises during the term of this Lease, or any renewal
or extension thereof. If Lessor elects to furnish any of the foregoing utility
services or other services furnished or caused to be furnished to Lessee, then
the rate charged by Lessor shall not exceed the rate Lessee would be required to
pay to a utility company or service company furnishing any of the foregoing
utilities or services. The charges thereof shall be deemed additional rent in
accordance with Article 3.
CARE AND REPAIR OF DEMISED PREMISES:
6. Lessee shall, at all times throughout the term of this Lease, including
renewals and extensions, and at its sole expense, keep and maintain the Demised
Premises in a clean, safe, sanitary and first class condition and in compliance
with all applicable laws, codes, ordinances, rules and regulations. Lessee's
obligations hereunder shall include but not be limited to the maintenance,
repair and replacement, if necessary, of heating, air conditioning fixtures,
equipment, and systems, all lighting and plumbing fixtures and equipment,
fixtures, motors and machinery, all interior walls, partitions, doors and
windows, including the regular painting thereof, all exterior entrances,
windows, doors and docks and the replacement of all broken glass. When used in
this provision, the term "repairs" shall include replacements or renewals when
necessary, and all such repairs made by the Lessee shall be equal in quality and
class to the original work. The Lessee shall keep and maintain all portions of
the Demised Premises and the sidewalk and areas adjoining the same in a clean
and orderly condition, free of accumulation of dirt, rubbish, snow and ice.
If Lessee fails, refuses or neglects to maintain or repair the Demised
Premises as required in this Lease after notice shall have been given Lessee, in
accordance with Article 33 of this Lease, Lessor may make such repairs without
liability to Lessee for any loss or damage that may accrue to Lessee's
merchandise, fixtures or other property or to Lessee's business by reason
thereof, and upon completion thereof, Lessee shall pay to Lessor all costs plus
15% for overhead incurred by Lessor in making such repairs upon presentation to
Lessee of bill therefor.
Lessee shall repair, at its expense, the structural portions of the
Building.
The Lessee shall be responsible for all outside maintenance of the
Demised Premises, including grounds and parking areas.
SIGNS:
7. Any sign, lettering, picture, notice or advertisement installed on or in any
part of the Premises and visible from the exterior of the Building, or visible
from exterior of the Demised Premises, shall be approved and installed by Lessor
at Lessee's expense. In the event of a violation of the foregoing by Lessee,
Lessor may remove the same without any liability and may charge the expense
incurred by such removal to Lessee.
ALTERATIONS, INSTALLATION, FIXTURES:
8. Except as hereinafter provided, Lessee shall not make any alteration,
additions, or improvements in or to the Demised Premises or add, disturb or in
any way change any plumbing or wiring therein without the prior written consent
of the Lessor. In the event alterations are required by any governmental agency
2
<PAGE>
by reason of the use and occupancy of the Demised Premises by Lessee, Lessee
shall make such alterations at its own cost and expense after first obtaining
Lessor's approval of plans and specifications therefor and furnishing such
indemnification as Lessor may reasonably require against liens, costs, damages
and expenses arising out of such alterations. Alterations or additions by Lessee
must be built in compliance with all laws, ordinances and governmental
regulations affecting the Premises and Lessee shall warrant to Lessor that all
such alterations, additions, or improvements shall be in strict compliance with
all relevant laws, ordinances, governmental regulations, and insurance
requirements. Construction of such alterations or additions shall commence only
upon Lessee obtaining and exhibiting to Lessor the requisite approvals, licenses
and permits and indemnification against liens. All alterations, installations,
physical additions or improvements to the Demised Premises made by Lessee shall
at once become the property of Lessor and shall be surrendered to Lessor upon
the termination of this Lease; provided, however, this clause shall not apply to
movable equipment or furniture owned by Lessee which may be removed by Lessee at
the end of the term of this Lease if Lessee is not then in default. Tenant shall
be responsible for all costs related to improvements or modifications to the
Demised Premises required or necessary to comply with the Americans With
Disabilities Act of 1990 (ADA), or similar statutes or law.
POSSESSION:
9. Except as hereinafter provided Lessor shall deliver possession of the Demised
Premises to Lessee in the condition required by this Lease on or before the
Commencement Date, but delivery of possession prior to or later than such
Commencement Date shall not affect the expiration date of this Lease. The
rentals herein reserved shall commence on the date when possession of the
Demised Premises is delivered by Lessor to Lessee. Any occupancy by Lessee prior
to the beginning of the term shall in all respects be the same as that of a
Lessee under this Lease. Lessor shall have no responsibility or liability for
loss or damage to fixtures, facilities or equipment installed or left on the
Demised Premises. If Demised Premises are not ready for occupancy by
Commencement Date and possession is later than Commencement Date, rent shall
begin on date of possession.
USE:
10. The Demised Premises shall be used and occupied by Lessee solely for the
purposes of General Office and Warehouse so long as such use is in compliance
with all applicable laws, ordinances and governmental regulations affecting the
Building and Premises. The Demised Premises shall not be used in such manner
that, in accordance with any requirement of law or of any public authority,
Lessor shall be obliged on account of the purpose or manner of said use to make
any addition or alteration to or in the Building. The Demised Premises shall not
be used in any manner which will increase the rates required to be paid for
public liability or for fire and extended coverage insurance covering the
Premises. Lessee shall occupy the Demised Premises, conduct its business and
control its agents, employees, invitees and visitors in such a way as is lawful,
and reputable and will not permit or create any nuisance, noise, odor, or
otherwise interfere with, annoy or disturb any other tenant in the Building in
its normal business operations or Lessor in its management of the Building.
Lessee's use of the Demised Premises shall conform to all the Lessor's rules and
regulations relating to the use of the Premises. Outside storage on the Premises
of any type of equipment, property or materials owned or used on the Premise by
Lessee or its customers and suppliers shall not be permitted.
ACCESS TO DEMISED PREMISES:
11. The Lessee agrees to permit the Lessor and the authorized representatives of
the Lessor to enter the Demised Premises at all times during usual business
hours for the purpose of inspecting the same and making any necessary repairs to
the Demised Premises and performing any work therein that may be necessary to
comply with any laws, ordinances, rules, regulations or requirements of any
public authority or of the Board of Fire Underwriters or any similar body or
that the Lessor may deem necessary to prevent waste or deterioration in
connection with the Demised Premises. Nothing herein shall imply any duty upon
the part of the Lessor to do any such work which, under any provision of this
Lease, the Lessee may be required to perform and the performance thereof by the
Lessor shall not constitute a waiver of the Lessee's default in failing to
perform the same. The Lessor may, during the progress of any work in the Demised
Premises, keep and store upon the Demised Premises all necessary materials,
tools and equipment. The Lessor shall not in any event be liable for
inconvenience, annoyance, disturbance, loss of business, or other damage of the
Lessee by reason of making repairs or the performance of any work in the Demised
Premises, or on account of bringing materials, supplies and equipment into or
through the Demised Premises during the course thereof and the obligations of
the Lessee under this Lease shall not thereby be affected in any manner
whatsoever.
3
<PAGE>
Lessor reserves the right to enter upon the Demised Premises at any
time in the event of an emergency and at reasonable hours to exhibit the Demised
Premises to prospective purchasers or others; and to exhibit the Demised
Premises to prospective Lessees and to the display "For Lease" or similar signs
on windows or doors in the Demised Premises during the last one hundred eighty
(180) days of the term of this Lease, all without hindrance or molestation by
Lessee.
EMINENT DOMAIN:
12. In the event of any eminent domain or condemnation proceeding or private
sale in lieu thereof in respect to the Premises during the term thereof, the
following provisions shall apply:
a. If the whole of the Premises shall be acquired or condemned by eminent domain
for any public or quasi-public use or purpose, then the term of this Lease shall
cease and terminate as of the date possession shall be taken in such proceeding
and all rentals shall be paid up to that date.
b. If any part constituting less than the whole of the Premises shall be
acquired or condemned as aforesaid, and in the event that such partial taking or
condemnation shall materially affect the Demised Premises so as to render the
Demised Premises unsuitable for the business of the Lessee, in the reasonable
opinion of Lessor, then the term of this Lease shall cease and terminate as of
the date possession shall be taken by the condemning authority and rent shall be
paid to the date of such termination.
In the event of a partial taking or condemnation of the Premises which
shall not materially affect the Demised Premises so as to render the Demised
Premises unsuitable for the business of the Lessee, in the reasonable opinion of
the Lessor, this Lease shall continue in full force and effect but with a
proportionate abatement of the Base Rent and Additional Rent based on the
portion, if any, of the Demised Premises taken. Lessor reserves the right, at
its option, to restore the Building and the Demised Premises to substantially
the same condition as they were prior to such condemnation. In such event,
Lessor shall give written notice to Lessee, within thirty (30) days following
the date possession shall be taken by the condemning authority, of Lessor's
intention to restore. Upon Lessor's notice of election to restore, Lessor shall
commence restoration and shall restore the Building and the Demised Premises
with reasonable promptness, subject to delays beyond Lessor's control and delays
in the making of condemnation or sale proceeds adjustments by Lessor; and Lessee
shall have no right to terminate this Lease except as herein provided. Upon
completion of such restoration, the rent shall be adjusted based upon the
portion, if any, of the Demised Premises restored.
c. In the event of any condemnation or taking as aforesaid, whether whole or
partial, the Lessee shall not be entitled to any part of the award paid for such
condemnation and Lessor is to receive the full amount of such award, the Lessee
hereby expressly waiving any right to claim to any part thereof.
d. Although all damages in the event of any condemnation shall belong to the
Lessor whether such damages are awarded as compensation for diminution in value
of the leasehold or to the fee of the Demised Premises, Lessee shall have the
right to claim and recover from the condemning authority, but not from Lessor,
such compensation as may be separately awarded or recoverable by Lessee in
Lessee's own right on account of any and all damage to Lessee's business by
reason of the condemnation and for or on account of any cost or loss to which
Lessee might be put in removing Lessee's merchandise, furniture, fixtures,
leasehold improvements and equipment. However, Lessee shall have no claim
against Lessor or make any claim with the condemning authority for the loss of
its leasehold estate, any unexpired term or loss of any possible renewal or
extension of said lease or loss of any possible value of said lease, any
unexpired term renewal or extension of said Lease.
DAMAGE OR DESTRUCTION:
13. In the event of any damage or destruction to the Premises by fire or other
cause during the term hereof, the following provisions shall apply:
a. If the Building is damaged by fire or any other cause to such extent that the
cost of restoration, as reasonably estimated by Lessor, will equal or exceed
thirty percent (30%) of the replacement value of the Building (exclusive of
foundations) just prior to the occurrence of the damage, then Lessor may, no
later than the sixtieth (60th) day following the damage, give Lessee written
notice of Lessor's election to terminate this Lease.
b. If the cost of restoration as estimated by Lessor will equal or exceed fifty
percent (50%) of said replacement value of the Building and if the Demised
Premises are not suitable as a result of said damage for the purposes for which
they are demised hereunder, in the reasonable opinion of Lessee, then Lessee
may, no later than the sixtieth (60th) day following the damage, give Lessor a
written notice of election to terminate this Lease.
c. If the cost of restoration as estimated by Lessor shall amount to less than
thirty percent (30%) of said replacement value of the Building, or if, despite
the cost, Lessor does not elect to terminate this Lease,
4
<PAGE>
Lessor shall restore the Building and the Demised Premises with reasonable
promptness, subject to delays beyond Lessor's control and delays in the making
of insurance adjustments by Lessor; and Lessor shall not be responsible for
restoring or repairing leasehold improvements of the Lessee.
d. In the event of either of the elections to terminate, this Lease shall be
deemed to terminate on the date of the receipt of the notice of election and all
rents shall be paid up to that date. Lessee shall have no claim against Lessor
for the value of any unexpired term of this Lease.
e. In any case where damage to the Building shall materially affect the Demised
Premises so as to render them unsuitable in whole or in part for the purposes
for which they are demised hereunder, then, unless such destruction was wholly
or partially caused by the negligence or breach of the terms of this Lease by
Lessee, its employees, contractors or licensees, a portion of the rent based
upon the amount of the extent which the Demised Premises are rendered unsuitable
shall be abated until repaired or restored. If the destruction or damage was
wholly or partially caused by negligence or breach of the terms of this Lease by
Lessee as aforesaid and if Lessor shall elect to rebuild, the rent shall not
abate and the Lessee shall remain liable for the same.
CASUALTY INSURANCE:
14.a Lessor shall at all times during the term of this Lease, at its expense,
maintain a policy or policies of insurance with premiums paid in advance issued
by an insurance company licensed to do business in the State of Minnesota
insuring the Building against loss or damage by fire, explosion or other
insurance hazards and contingencies for the full replacement value, provided
that Lessor shall not be obligated to insure any furniture, equipment,
machinery, goods or supplies not covered by this Lease which Lessee may bring
upon the Demised Premises or any additional improvements which Lessee may
construct or install on the Demised Premises.
b. Lessee shall not carry any stock of goods or do anything in or about the
Demised Premises which will in any way impair or invalidate the obligation of
the insurer under any policy of insurance required by this Lease.
c. Lessor hereby waives and releases all claims, liability and causes of action
against Lessee and its agents, servants and employees for loss or damage to, or
destruction of, the Premises or any portion thereof, including the buildings and
other improvements situated thereon, resulting from fire, explosion and other
perils included in standard extended coverage insurance, whether caused by the
negligence of any of said persons or otherwise. Likewise, Lessee hereby waives
and releases all claims, liabilities and causes of action against Lessor and its
agents, servants and employees for loss or damage to, or destruction of, any of
the improvements, fixtures, equipment, supplies, merchandise and other property,
whether that of Lessee or of others in, upon or about the Premises resulting
from fire, explosion or the other perils included in standard extended coverage
insurance, whether caused by the negligence of any of said persons or otherwise.
The waiver shall remain in force whether or not the Lessee's insurer shall
consent thereto.
d. In the event that the use of the Demised Premises by Lessee increases the
premium rate for insurance carried by Lessor on the improvements of which the
Demised Premises are a part, Lessee shall pay Lessor, upon demand, the amount of
such premium increase. If Lessee installs any electrical equipment that
overloads the power lines to the building or its wiring, Lessee shall, at its
own expense, make whatever changes are necessary to comply with the requirements
of the insurance underwriter, insurance rating bureau and governmental
authorities having jurisdiction.
PUBLIC LIABILITY INSURANCE:
15. Lessee shall during the term hereof, keep in full force and effect at its
expense a policy or policies of public liability insurance with respect to the
Demised Premises and the business of Lessee, on terms with companies approved in
writing by Lessor, in which both Lessee and Lessor shall be covered by being
named as insured parties under reasonable limits of liability not less than:
$500,000 for injury/death to any one person; $1,000,000 for injury/death to more
than one person, and $500,000 with respect to damage to property. Such policy or
policies shall provide that ten (10) days written notice must be given to Lessor
prior to cancellation thereof. Lessee shall furnish evidence satisfactory to
Lessor at the time this Lease is executed that such coverage is in full force
and effect.
DEFAULT OF LESSEE:
16.a. In the event of any failure of Lessee to pay any rental due hereunder
within thirty (30) days after written notice that the same is due, or any
failure to perform any other of the terms, conditions or covenants of this Lease
to be observed or performed by Lessee for more than thirty (30) days after
written notice of such failure shall have been given to Lessee, or if Lessee or
an agent of Lessee shall falsify any report required to be furnished to Lessor
pursuant to the terms of this Lease, or if Lessee or any guarantor of this Lease
shall become bankrupt or insolvent, or file any debtor proceedings or any
5
<PAGE>
person shall take or have against Lessee or any guarantor of this Lease in any
court pursuant to any statute either of the United States or of any state a
petition in bankruptcy or insolvency or for reorganization or for the
appointment of a receiver or trustee of all or a portion of Lessee's or any such
guarantor's property, or if Lessee or any such guarantor makes an assignment for
the benefit of creditors, or petitions for or enters into an arrangement, or if
Lessee shall abandon the Demised Premises or suffer this Lease to be taken under
any writ of execution, then in any such event Lessee shall be in default
hereunder, and Lessor, in addition to their rights or remedies it may have,
shall have the immediate right of re-entry and may remove all persons and
property from the Demised Premises and such property may be removed and stored
in a public warehouse or elsewhere at the cost of, and for the account of
Lessee, all without service of notice or resort to legal process and without
being guilty of trespass, or becoming liable for any loss or damage which may be
occasioned thereby.
b. Should Lessor elect to re-enter the Demised Premises, as herein provided, or
should it take possession of the Demised Premises pursuant to legal proceedings
or pursuant to any notice provided for by law, it may either terminate this
Lease or it may from time to time, without terminating this Lease, make such
alterations and repairs as may be necessary in order to relet the Demised
Premises, and relet the Demised Premises or any part thereof upon such term or
terms (which may be for a term extending beyond the term of this lease) and at
such rental or rentals and upon such other terms and conditions as Lessor in its
sole discretion may deem advisable. Upon each such subletting all rentals
received by the Lessor from such reletting shall be applied first to the payment
of any indebtedness other than rent due hereunder from Lessee to Lessor; second,
to the payment of any costs and expenses of such reletting, including brokerage
fees and attorney's fees and costs of such alterations and repairs; third, to
the payment of the rent due and unpaid payment of future rent as the same may
become due and payable hereunder. If such rentals received from such reletting
during any month be less than that to be paid during that month by Lessee
hereunder, Lessee, upon demand, shall pay any such deficiency to Lessor. No such
re-entry or taking possession of the Demised Premises by Lessor shall be
construed as an election on its part to terminate this Lease unless a written
notice of such intention be given to Lessee or unless the termination thereof be
decreed by a court of competent jurisdiction. Notwithstanding any such reletting
without termination, Lessor may at any time after such re-entry and reletting
elect to terminate this Lease for any such breach, in addition to any other
remedies it may have, it may recover from Lessee all damages it may incur by
reason of such breach, including the cost of recovering the Demised Premises,
reasonable attorney's fees, and including the worth at the time of such
termination of the excess, if any, of the amount of rent and charges equivalent
to rent reserved in this Lease for the remainder of the stated term over the
then reasonable rental value of the Demised Premises for the remainder of the
stated term, all of which amounts shall be immediately due and payable from
Lessee to Lessor.
c. Lessor may, at its option, instead of exercising any other rights or remedies
available to it in this Lease or otherwise by law, statute or equity, spend such
money as is reasonably necessary to cure any default of Lessee herein and the
amount so spent, and costs incurred, including attorney's fees in curing such
default, shall be paid by Lessee, as additional rent, upon demand.
d. No remedy herein or elsewhere in this Lease or otherwise by law, statute or
equity, conferred upon or reserved to Lessor or Lessee shall be exclusive of any
other remedy, but shall be cumulative, and may be exercised from time to time
and as often as the occasion may arise.
COVENANTS TO HOLD HARMLESS:
17. Unless the liability for damage or loss is caused by the negligence of
Lessor, its agents or employees, Lessee shall hold harmless Lessor from any
liability for damages to any person or property in or upon the Demised Premises
and the Premises, including the person and the property of Lessee and its
employees and all persons in the Building at its or their invitation or
sufferance, and from all damages resulting from Lessee's failure to perform the
covenants of this Lease. All property kept, maintained or stored on the Demised
Premises shall be so kept, maintained or stored at the sole risk of Lessee.
Lessee agrees to pay all sums of money in respect of any labor, service,
materials, supplies or equipment furnished or alleged to have been furnished to
Lessee in or about the Premises, and not furnished on order of Lessor, which may
be secured by any Mechanic's Materialmen's or other lien to be discharged at the
time performance of any obligation secured thereby matures, provided that Lessee
may contest such lien, but if such lien is reduced to final judgment and if such
judgment or process thereon is not stayed, or if stayed and said stay expires,
then and in each such event, Lessee shall forthwith pay and discharge said
judgment. Lessor shall have the right to post and maintain on the Demised
Premises,
6
<PAGE>
notices of non-responsibility under the laws of the State of Minnesota.
NON-LIABILITY:
18. Subject to the terms and conditions of Article 14 hereof, Lessor shall not
be liable for damage to any property of Lessee or of others located on the
Premises, nor for the loss of or damage to any property of Lessee or of others
by theft or otherwise. Lessor shall not be liable for any injury or damage to
persons or property resulting from fire, explosion, any injury or damage to
persons or property resulting from fire, explosion, falling plaster, steam, gas,
electricity, water, rain or snow or leaks from any part of the Premises or from
the pipes, appliances, or plumbing works or from the roof, street or subsurface
or from any other place or by dampness or by any such damage caused by other
Lessees or persons in the Premises, occupants of adjacent property, of the
buildings, or the public or caused by operations in construction of any private,
public or quasi-public work. Lessor shall not be liable for any latent defect in
the Demised Premises. All property of Lessee kept or stored on the Demised
Premises shall be so kept or stored at the risk of Lessee only and Lessee shall
hold Lessor harmless from any claims arising out of damage to the same,
including subrogation claims by Lessee's insurance carrier.
SUBORDINATION:
19. This Lease shall be subordinated to any mortgages that may not exist or that
may hereafter be placed upon the Demised Premises and to any and all advances
made thereunder, and to the interest upon the indebtedness evidenced by such
mortgages, and to all renewals, replacements and extensions thereof. In the
event of execution by Lessor after the date of this Lease of any such mortgage,
renewal, replacement or extension, Lessee agrees to execute a subordination
agreement with the holder thereof which agreement shall provide that:
a. Such holder shall not disturb the possession and other rights of Lessee under
this Lease so long as Lessee is not in default hereunder,
b. In the event of acquisition of title to the Demised Premises by such holder,
such holder shall accept the Lessee as Lessee of the Demised Premises under the
terms and conditions of this Lease and shall perform all the obligations of
Lessor hereunder, and
c. The Lessee shall recognize such holder as Lessor hereunder.
Lessee shall, upon receipt of a request from Lessor therefor, execute
and deliver to Lessor or to any proposed holder of a mortgage or trust deed or
to any proposed purchaser of the Premises, a certificate in recordable form,
certifying that this Lease is in full force and effect, and that there are no
offsets against rent nor defenses to Lessee's performance under this Lease, or
setting forth any such offsets or defenses claimed by Lessee as the case may be.
ASSIGNMENT OR SUBLETTING:
Lessee agrees to use and occupy the Demised Premises throughout the entire term
hereof for the purpose of purposes herein specified and for no other purposes,
in the manner and to substantially the extent now intended, and not to transfer
or assign this Lease or sublet said Demised Premises, or any part thereof,
whether by voluntary act, operation of law, or otherwise, without obtaining the
prior written consent of Lessor in each instance. Lessee shall seek such consent
of Lessor by a written request therefor, setting forth such information as
Lessor may deem necessary. Lessor agrees not to withhold consent unreasonably.
Consent by Lessor to any assignment of this Lease or to any subletting of the
Demised Premises shall not be a waiver of Lessor's rights under this Article as
to any subsequent assignment or subletting. Lessor's rights to assign this Lease
are and shall remain unqualified. No such assignment or subleasing shall relieve
the Lessee from any of Lessee's obligations in this Lease contained, nor shall
any assignment or sublease or other transfer of this Lease be effective unless
the assignee, sublessee or transferee shall at the time of such assignment,
sublease or transfer, assume in writing for the benefit of Lessor, its
successors or assigns, all of the terms, covenants and conditions of this Lease
thereafter to be performed by Lessee and shall agree in writing to be bound
thereby.
ATTORNMENT:
21. In the event of a sale or assignment of Lessor's interest, in the Premises,
or the Building in which the Demised Premises are located, or this Lease, or if
the Premises come into custody or possession of a mortgagee or any other party
whether because of a mortgage foreclosure, or otherwise, Lessee shall attorn to
such assignee or other party and recognize such party as Lessor hereunder;
provided, however, Lessee's peaceable possession will not be disturbed so long
as Lessee faithfully performs its obligations under this Lease. Lessee shall
execute, on demand, any attornment agreement required by any such party to be
executed, containing such provisions and such other provisions as such party may
require.
NOVATION IN THE EVENT OF SALE:
22. In the event of the sale of the Demised Premises, Lessor shall be and hereby
is relieved of all of the covenants and obligations created hereby accruing
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from and after the date of sale, and such sale shall result automatically in the
purchaser assuming and agreeing to carry out all the covenants and obligations
of Lessor herein. Notwithstanding the foregoing provisions of this Article,
Lessor, in the event of a sale of the Demised Premises, shall cause to be
included in this agreement of sale and purchase a covenant whereby the purchase
of the Demised Premises assumes and agrees to carry out all of the covenants and
obligations of Lessor herein.
The Lessee agrees at any time and from time to time upon not less than
ten (10) days prior written request by the Lessor to execute, acknowledge and
deliver to the Lessor a statement in writing certifying that this Lease is
unmodified and in full force and effect as modified and stating the
modifications, and the dates to which the basic rent and other charges have been
paid in advance, if any, it being intended that any such statement delivered
pursuant to this paragraph may be relied upon by any prospective purchaser of
the fee or mortgagee or assignee of any mortgage upon the fee of the Demised
Premises.
SUCCESSORS AND ASSIGNS:
The terms, covenants and conditions hereof shall be binding upon and inure to
the successors and assigns of the parties hereto.
REMOVAL OF FIXTURES:
24. Notwithstanding anything contained in Article 8, 29 or elsewhere in this
Lease, if Lessor requests then Lessee will promptly remove at the sole cost and
expense of Lessee all fixtures, equipment and alterations made by Lessee
simultaneously with vacating the Demised Premises and Lessee will promptly
restore said Demised Premises to approximately the condition that existed
immediately prior to said fixtures, equipment and alterations having been made
all at the sole cost and expense of Lessee.
QUIET ENJOYMENT:
25. Lessor warrants that it has full right to execute and to perform this Lease
and to grant the estate demised, and that Lessee, upon payment of the rents and
other amounts due and the performance of all the terms, conditions, covenant and
agreements on Lessee's part to be observed and performed under this Lease, may
peaceably and quietly enjoy the Demised Premises for the business uses permitted
hereunder, subject, nevertheless, to the terms and conditions of this Lease.
RECORDING:
26. Lessee shall not record this Lease without the written consent of Lessor.
However, upon the request of either party hereto, the other party shall join in
the execution of the Memorandum lease for the purposes of recordation. Said
Memorandum lease shall describe the parties, the Demised Premises and the term
of the Lease and shall incorporate this Lease by reference. This Article 27
shall not be construed to limit Lessor's right to file this Lease under Article
22 of this Lease.
OVERDUE PAYMENTS:
27. All monies due under this Lease from Lessee to Lessor shall be due on
demand, unless otherwise specified and if not paid when due, shall result in the
imposition of a service charge for such late payment in the amount of four
percent (4%) of the amount due if rent not received by the tenth of the month.
SURRENDER:
28. On the Expiration Date or upon the termination hereof upon a day other than
the Expiration Date, Lessee shall peaceably surrender the Demised Premises
broom-clean in good order, condition and repair, reasonable wear and tear only
excepted. On or before the Expiration Date or upon termination of this Lease on
a day other than the Expiration Date, Lessee shall, at its expense, remove all
trade fixtures, personal property and equipment and signs from the Demised
Premises and any property not removed shall be deemed to have been abandoned.
Any damage caused in the removal of such items shall be repaired by Lessee and
at its expense. All alterations, additions, improvements and fixtures (other
than trade fixtures) which shall have been made or installed by Lessor or Lessee
upon the Demised Premises and all floor covering so installed shall remain upon
and be surrendered with the Demised Premises as a part thereof, without
disturbance, molestation or injury, and without charge, at the expiration of
termination of this Lease. If the Demised Premises are not surrendered on the
Expiration Date or the date of termination, Lessee shall indemnify Lessor
against loss or liability, claims, without limitation, made by any succeeding
Lessee founded on such delay. Lessee shall promptly surrender all keys for the
Demised Premises to Lessor at the place then fixed for payment of rent and shall
inform Lessor of combinations of any locks and safes on the Demised Premises.
HOLDING OVER:
29. In the event of a holding over by Lessee after expiration or termination of
this Lease without the consent in writing of Lessor, Lessee shall be deemed a
lessee at sufferance and shall pay rent for such occupancy at the rate of 150%
of the last-current aggregate Base and Additional Rent, prorated for the
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entire holdover period, plus all attorney's fees and expenses incurred by Lessor
in enforcing its rights hereunder, plus any other damages occasioned by such
holding over. Except as otherwise agreed, any holding over with the written
consent of Lessor shall constitute Lessee a month-to-month lessee.
ABANDONMENT:
30. In the event Lessee shall remove its fixtures, equipment or machinery or
shall vacate the Demised Premises or any part thereof prior to the Expiration
Date of this Lease, or shall discontinue or suspend the operation of its
business conducted on the Demised Premises for a period of more than thirty (30)
consecutive days (except during any time when the Demised Premises may be
rendered untenantable by reason of fire or other casualty), then in any such
event Lessee shall be deemed to have abandoned the Demised Premises and Lessee
shall be in default under the terms of this Lease.
CONSENTS BY LESSOR:
31. Whenever provision is made under this Lease for Lessee securing the consent
or approval by Lessor, such consent or approval shall only be in writing.
NOTICES:
32. Any notice required or permitted under this Lease shall be deemed
sufficiently given or secured if sent by registered or certified return receipt
mail to Lessee at 7400 49th Avenue North, New Hope, MN 55426 and to Lessor at
the address then fixed for the payment of rent as provided in Article 4 of this
Lease, and either party may by like written notice at any time designate a
different address to which notices shall subsequently be sent or rent to be
paid.
RULES AND REGULATIONS:
33. Lessee shall observe and comply with the rules and regulations as Lessor may
prescribe, on written notice to Lessee for the safety, care and cleanliness of
the Building.
INTENT OF PARTIES:
34. Except as otherwise provided herein, the Lessee covenants and agrees that if
it shall any time fail to pay any such cost or expense, or fail to take out, pay
for, maintain or deliver any of the insurance policies above required, or fail
to make any other payment or perform any other act on its part to be made or
performed as in this Lease provided, then the Lessor may, but shall not be
obligated so to do, and without notice to or demand upon the Lessee and without
waiving or releasing the Lessee from any obligations of the Lessee in this Lease
contained, pay any such cost or expense, effect any such insurance coverage and
pay premiums therefor, and may make any other payment or perform any other act
on the part of the Lessee to be made and performed as in this Lease provided, in
such manner and to such extent as the Lessor may deem desirable, and in
exercising any such right, to also pay all necessary and incidental costs and
expenses, employ counsel and incur and pay reasonable attorneys' fees. All sums
so paid by Lessor and all necessary and incidental costs and expenses in
connection with the performance of any such act by the Lessor, together with
interest thereon at the rate of twelve percent ( 12 %) per annum from the date
of making of such expenditure, by Lessor, shall be deemed additional rent
hereunder, and shall be payable to Lessor on demand. Lessee covenants to pay any
such sum or sums with interest as aforesaid and the Lessor shall have the same
rights and remedies in the event of the nonpayment thereof by Lessee as in the
case of default by Lessee in the payment of the Base Rent payable under this
Lease.
GENERAL:
35. The Lease does not create the relationship of principal agent or of
partnership or of joint venture or of any association between Lessor and Lessee,
the sole relationship between the parties hereto being that of Lessor and
Lessee.
No waiver of any default of Lessee hereunder shall be implied from any
omission by Lessor to take any action on account of such default if such default
persists or is repeated, and no express waiver shall affect any default other
than the default specified in the express waiver and that only for the time and
to the extent therein stated. One or more waivers by Lessor shall not then be
construed as a waiver of a subsequent breach of the same covenant, term or
condition. The consent to or approval by Lessor of any act by Lessee requiring
Lessor's consent or approval shall not waive or render unnecessary Lessor's
consent to or approval of any subsequent similar act by Lessee shall be
construed to be both a covenant and a condition. No action required or permitted
to be taken by or on behalf of Lessor under the terms or provisions of this
Lease shall be deemed to constitute an eviction or disturbance of Lessee's
possession of the Demised Premises. All preliminary negotiations are merged into
and incorporated in this Lease. The laws of the State of Minnesota shall govern
the validity, performance and enforcement of this Lease.
a. This Lease and the exhibits, if any, attached hereto and forming a part
hereof, constitute the entire agreement between Lessor and Lessee affecting the
Demised Premises and there are no other agreements, subsequent alteration,
amendment, change or addition to this Lease shall be binding upon Lessor or
Lessee
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unless reduced to writing and executed in the same form and manner in which this
Lease is executed.
b. If any agreement, covenant or condition of this Lease or the application
thereof to any person or circumstance shall, to any extent, be invalid or
unenforceable, the remainder of this Lease, or the application of such
agreement, covenant or condition to persons or circumstances other than those as
to which it is held invalid or unenforceable, shall not be affected thereby and
each agreement, covenant or condition of this Lease shall be valid and be
enforced to the fullest extent permitted by law.
HAZARDOUS MATERIAL:
36.a. The Demised Premises hereby leased shall be used by and/or at the
sufferance of Lessee only for the purpose set forth in Article 11 above and for
no other purposes. Lessee shall not use or permit the use of the Demised
Premises in any manner that will tend to create waste or a nuisance, or will
tend to unreasonably disturb other Lessees in the Building or the Premises.
Lessee, its employees and all person visiting or doing business with Lessee in
the Demised Premises shall be bound by and shall observe the reasonable rules
and regulations made by Lessor relating to the Demised Premises, the Building or
the Premises of which notice in writing shall be given to the Lessee, and all
such rules and regulations shall be deemed to be incorporated into and form a
part of this Lease.
b. Lessee covenants through the Lease Term, at Lessee's sole cost and expense,
promptly to comply with all laws and ordinances and the orders, rules and
regulations and requirements of all federal, state and municipal governments and
appropriate departments, commission, boards, and officers thereof, and the
orders, rules and regulations of the Board of Fire Underwriters where the
Demised Premises are situated, or any other body now or hereafter as well as
extraordinary, and whether or not the same require structural repairs or
alterations, which may be applicable to the Demised Premises, or the use or
manner of use of the Demised Premises. Lessee will likewise observe and comply
with the requirements of all policies of public liability, fire and all other
policies of insurance at any time in force with respect to the building and
improvements on the Demised Premises and the equipment thereof.
c. In the event any Hazardous Material (hereinafter defined) is brought or
caused to be brought into or onto the Demised Premises, the Building or the
Premises by Lessee, Lessee shall handle any such material in compliance with all
applicable federal, state and/or local regulations. For purposes of this
Article, "Hazardous Material" means and includes any hazardous, toxic or
dangerous waste, substance or material defined as such in (or for purposes of)
the Comprehensive Environmental Response, Compensation, and Liability Act, any
so-called "Superfund" or "Superlien" law, or any federal, state or local
statute, law, ordinance, code, rule, regulation, order decree regulating,
relating to, or imposing liability or standards of conduct concerning, any
hazardous, toxic or dangerous waste, substance or materials, as now or at any
time hereafter in effect. Lessee shall submit to Lessor on an annual basis
copies of its approved hazardous materials communication plan, OSHA monitoring
plan, and permits required by the Resource Recovery and Conservation Act of
1976, if Lessee is required to prepare, file or obtain any such plans or
permits. Lessee will indemnify and hold harmless Lessor from any losses,
liabilities, damages, costs or expenses (including reasonable attorneys' fees)
which Lessor may suffer or incur as a result of Lessee's introduction into or
onto the Demised Premises, Building or Premises of any Hazardous Material. This
Article shall survive the expiration or sooner termination of this Lease.
CAPTIONS:
37. The captions are inserted only as a matter of convenience and for reference,
and in no way define, limit or describe the scope of this Lease nor the intent
or any provision thereof.
ATTACHMENTS:
38. See also rider attached hereto and made a part hereof containing articles 42
through inclusive as well as Exhibits A through B, inclusive, which Exhibits are
attached hereto and made a part hereof.
Exhibit Description
Exhibit A Legal Description
Exhibit B Demised Premises
SUBMISSION:
39. Submission of this instrument to Lessee or proposed Lessee or his agents or
attorneys for examination, review, consideration or signature does not
constitute or imply an offer to lease reservation of space, or option to lease,
and this instrument shall have no binding legal effect until execution hereof by
both Lessor/Owner and Lessee or its agents.
REPRESENTATION:
It is agreed and understood that Kevin Doyle, agent or broker with Welsh
Companies, Inc. is representing Cambridge Apartments, Inc, Lessor, and Jim Huey,
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broker with, James Huey Realty is representing Lessee.
OPTION TO RENEW:
41. Provided that neither the Lease nor Tenant's right of possession has been
terminated pursuant to applicable law, Lessor agrees that Tenant shall have the
option to renew the term of the Lease for an additional 120 month period on the
same terms and conditions and rental rate as provided for during the term of the
Lease, a 2.5% increase every 30 months. The renewal term shall begin on July1,
2013, and terminate on June 30, 2023. Tenant shall exercise its option to renew
the term of the Lease by giving Lessor written notice of the exercise of this
option by June 30, 2012.
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IN WITNESS WHEREOF, the Lessor and the Lessee have caused these presents to be
executed in form and manner sufficient to bind them at law, as of the day and
year first above written.
Lessee: Navarre Corporation, a MN corporation Lessor: Cambridge Apartments,
Inc., a MN Corporation
By: By
----------------------------
John R. Paulson
Its: Its: President
STATE OF
COUNTY OF ss.:
On this ____ day of _________, 19__, personally came before me, a Notary Public
within and for said County, __________________________ and ___, to me well known
to be the same persons described in and who executed the foregoing instrument,
and acknowledged that they executed the same as their free act and deed.
Notary Public
My commission expires:
STATE OF
COUNTY OF ss.:
On this ____ day of _________, 19__, personally came before me, a Notary Public
within and for said County, __________________________ and ___, to me well known
to be the same persons described in and who executed the foregoing instrument,
and acknowledged that they executed the same as their free act and deed.
Notary Public
12
EXHIBIT #10.7
SUNLITE III, LLP STANDARD OFFICE/WAREHOUSE LEASE
Landlord: Sunlite III, LLP, a Minnesota limited liability partnership
208 73rd Avenue North
Brooklyn Park, MN 55430-1306
Project: 6601 Parkway Circle
Brooklyn Center, Minnesota 55430
Tenant: Navarre Corporation
7400 49th Avenue North
New Hope, MN 55428
Lease Date: April ____, 1999
Term: Three (3) years eight (8) months from May 1, 1999 (the "Commencement
Date") through and including December 31, 2002, unless sooner terminated as
herein provided.
Premises: The Premises consisting of an office/warehouse building of
approximately 73,903 square feet (9,000 square feet of office space and 64,903
square feet of warehouse space) of rentable area in the Project with an address
at 6601Parkway Circle Brooklyn Center, Minnesota 55430, and appurtenances,
constructed on the tract of land (the "Land") located in the City of Brooklyn
Center, County of Hennepin, State of Minnesota, legally described on Exhibit A
attached hereto.
Security Deposit: $32,640.49, which deposit shall be restored to such amount by
Tenant upon demand by Landlord if used or applied by Landlord for the purposes
set forth in Exhibit C, attached hereto.
In consideration of this Lease, the rents and the other mutual covenants and
agreements herein contained, Landlord and Tenant covenant and agree:
1. PREMISES AND USE. Landlord leases to Tenant and Tenant leases from
Landlord, for the term stated, the Premises, with the right to use, in common
with others, the parking areas, walkways, driveways and any other areas,
facilities or improvements located in or on the Premises and designed or
intended to be used in common (the "Common Areas").
The Premises shall be occupied and used by Tenant exclusively for office,
software, music, video, DVD and related manufacturing and distribution purposes
only (Landlord making no warranty or representation, express or implied, that
the Premises may be lawfully used for such purposes) and for no other purpose,
in compliance with all applicable laws and regulations and also in compliance
with the "Rules and Regulations" of Landlord which are attached hereto as
Exhibit C, as the same may be supplemented or amended from time to time by
Landlord. Tenant shall, at its expense, make all alterations and improvements to
the Premises required for the Premises and the use thereof to comply therewith.
The Premises shall not be used for any dangerous, illegal or offensive purpose,
or which interferes unreasonably with the safety, comfort and convenience of the
Landlord, other tenants or nearby properties. If Tenant unlawfully stores any
hazardous substance on the Premises, Landlord may, in addition to its other
rights and remedies, remove and store the same at the sole cost and expense of
Tenant. If Tenant's use of the Premises causes an increase in any insurance
premium, Tenant shall pay or reimburse Landlord for the full amount of such
increase. This agreement of Tenant survives termination of all other parts of
this Lease.
2. RENT.
(i) "Lease Year" means the twelve-month period beginning on the
Commencement Date and each anniversary thereof.
<PAGE>
(ii) "Calendar Year" means the calendar year for which a Rent Adjustment
is computed.
(iii) "Tenant's Proportionate Share" means the percentage determined by
dividing the rentable area of Tenant's Premises (approximately 73,903 square
feet) by the total rentable area of the Premises (approximately 73,903 square
feet) and is herein fixed as one hundred percent (100%). For these purposes,
rentable area was computed by measuring to the outside finished surface of
permanent outer building walls on each enclosed floor of the building, including
mechanical, equipment, restroom, entry, and like spaces.
(iv) "Taxes" means all real estate taxes, installments of special
assessments, sewer charges, transit taxes, taxes based upon receipt of rent and
any other federal, state or local governmental charge, general, special,
ordinary or extraordinary (excluding income, franchise, or other taxes based
upon Landlord's income or profit, unless imposed in lieu of real estate taxes)
which shall now or hereafter be levied or assessed against the Premises
(including specifically nongovernmental charges and assessments for maintenance,
repair and improvement of Parkway Circle private roadway unless the same shall
become a publicly maintained roadway) and shall apply to said obligations at
such time in which said obligations are due and payable.
(v) "Operating Expense" mean all direct costs and expenses paid or incurred
by Landlord in the operation or maintenance of the Premises and the Land and all
surrounding walks, drives, roads, parking, ponding and landscaped areas as
determined by Landlord in accordance with generally accepted accounting
principles or other recognized accounting practices, consistently applied, plus
all additional direct costs and expenses of operation and maintenance which
Landlord determines it would have paid or incurred if the Premises had been
one-hundred percent (100%) occupied, including by way of illustration and not
limitation: (1) premiums of casualty, rent loss and public liability insurance
which Landlord maintains with respect to the Land and the Premises; (2) all
expenses for or on account of: (i) lighting, cleaning, removing snow from,
policing and otherwise properly operating, maintaining and repairing the parking
area and other surrounding areas on the Land, (ii) providing water and
irrigation and fire sprinkler services (including required inspections and tests
thereof) and other utilities which are not separately metered to and paid by
tenants, (iii) maintaining and repairing the exterior of the Premises, including
painting of the same (but excluding structural portions), and landscaped and
ponding portions of the Land, (iv) window washing, (v) making repairs and
replacements to and of the heating, cooling, ventilating, electrical, mechanical
and plumbing systems serving the Premises, and (vi) a management fee of four
(4%) percent of Rent and Additional Rent; and (3) all other costs necessary to
manage and maintain the Premises which would, under generally accepted
accounting principles, be regarded as operating and those which would normally
be amortized over a period not exceeding five (5) years. If Landlord makes any
special improvements during the term of this Lease in order to comply with any
law or governmental regulation, or to save energy or reduce maintenance costs,
the reasonable annual amortization of the cost thereof, with interest at the
lesser of the then effective publicly announced prime rate of interest of
Riverside Bank, Minneapolis, or the highest rate permitted by law, shall be
deemed an Operating Expense in each of the calendar years during which such
amortization occurs.
Tenant or its designees may inspect and copy, at reasonable times and in a
reasonable manner, during the ninety (90) day period following the delivery of
any Operating Expense statement, such of Landlord's books and records as contain
information concerning such costs and expenses in order to verify the amounts
thereof.
If Tenant disputes any item included in the Operating Expense in any
calendar year, and such dispute is not resolved by the parties within ninety
(90) days after the statement for such year is delivered to Tenant, then either
party may, within thirty (30) days thereafter, engage a firm of certified public
accountants selected by mutual agreement to render an opinion as to whether or
not the disputed item is properly included in the Operating Expense for such
year. The opinion of such firm on the matter shall be conclusive and binding
upon the parties hereto. The fees and expenses incurred for such opinion shall
be paid by the party adversely affected thereby. If more than one item is
disputed and the opinion adversely affects both parties, the fees and expenses
shall be apportioned accordingly. Any item included in the Operating Expense for
a year which is not disputed by Tenant in writing within ninety (90) days after
the statement for such year is delivered to Tenant shall be deemed to be
accepted by Tenant. This agreement of Tenant survives termination of all other
parts of this Lease.
(vi) "Rent Adjustment" shall be Landlord's reasonable estimate of the
amount to be paid monthly by Tenant to Landlord to equal the Additional Rent due
for the next succeeding Calendar year or part thereof of the Lease term.
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(vii) "Base Rent" shall be as set forth in Section 2A below.
(viii) "Additional Rent" means any and all payments or charges other than
Base Rent, payable under this Lease from Tenant to Landlord, including, without
limitation, Operating Expense, Taxes, and Rent Adjustment.
(ix) "Rent" means both Base Rent and Additional Rent.
A. Base Rent. Tenant shall annually pay to Landlord as Base Rent for the
Premises: (i) during each of the first one (1) year and eight (8) months of the
lease term, the a: annual sum of Three Hundred Ninety One Thousand Six Hundred
Eighty Five and 90/100ths ($391,685.90) Dollars payable in equal monthly
installments of Thirty Two Thousand Six Hundred Forty and 49/100ths ($32,640.49)
Dollars, (which is approximately Five and 30/100ths Dollars per square foot
($5.30 p.s.f.) on a blended rate), in advance, on or before the first day of
each and every calendar month during each of said first one (1) year and eight
(8) months of the lease term; and (ii) during the final two (2) years of said
lease term, the annual sum of Four Hundred Thirteen Thousand One Hundred
Seventeen and 77/100ths ($413,117.77) Dollars payable in equal monthly
installments of Thirty Four Thousand Four Hundred Twenty Six and 48/100ths
($34,426.48) Dollars, (which is approximately Five and 59/100ths Dollars per
square foot ($5.59 p.s.f.) on a blended rate), in advance, on or before the
first day of each and every calendar month during the final two (2) years of
said lease term. If the Commencement Date is other than the first day of a
calendar month or the Expiration Date other than the last day of a calendar
month, the Base Rent installment for such first or last fractional month shall
be prorated.
B. Additional Rent. Tenant shall annually pay to Landlord, as Additional
Rent for the Premises, Tenant's Proportionate Share of all Taxes and all
Operating Expenses as provided herein.
C. Adjustments for Taxes and Operating Expense. Tenant's Proportionate
Share of Taxes and Operating Expense for each Calendar Year shall be estimated
annually by Landlord. Tenant shall pay Landlord each month, at the same time as
the monthly installment of Base Rent is due, an amount equal to one-twelfth
(1/12) of said annual estimate as the Rent Adjustment.
On or before March 1 of each calendar year during the Term, Landlord shall
provide to Tenant a statement showing Tenant's Additional Rent for the preceding
calendar year.
Within ten (10) days thereafter, Tenant shall pay to Landlord, or Landlord shall
credit against the next Rent payment or payments becoming due from Tenant, as
the case may be, the difference between Tenant's Additional Rent for the
preceding calendar year and the Rent Adjustment paid by Tenant during such year.
If this Lease shall commence, expire or be terminated on any date other than the
last day of a calendar year, then Tenant's proportionate share of Operating
Expense and Taxes for such partial calendar year shall be prorated on the basis
of the number of days during the year this Lease was in effect in relation to
the total number of days in such year.
If the Lease Term commences on any day other than the first day of January,
or if the Lease Term ends on any day other than the last day of December, any
Rent Adjustment Payment due Landlord shall be prorated, and Tenant shall pay
such amount within ten (10)days after being billed. Tenant's covenant and
agreement to pay Additional Rent for the Lease Term measured by Taxes and
Operating Expense survives the expiration or termination of this Lease.
In addition to the Base Rent set forth above, Tenant also agrees to pay to
Landlord, as Additional Rent, upon demand, all management fees, attorneys' fees
and other fees, and out-of-pocket costs and expenses, if any, incurred by
Landlord in connection with this Lease, including without limitation any such
fees, costs and expenses payable by Landlord to others for dealing with or
handling inquiries by Tenant, for dealing with or handling delinquencies or
defaults by Tenant, for negotiating or preparing any termination, cancellation,
extension, renewal, amendment or modification hereof, for enforcing the
provisions hereof, the amount of any gross receipts tax, sales tax or similar
tax (but excluding therefrom any income tax) incurred or paid by Landlord by
reason of receipt of Base Rent or Additional Rent, but specifically excluding
fees, costs and expenses payable by Landlord to others for negotiating or
preparing this Lease and excluding all other such fees, costs and expenses
incurred by Landlord prior to the Commencement Date. All Rent shall be due and
payable without demand, setoff or counterclaim.
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D. Service Charge. All Rent and other sums payable hereunder by Tenant to
Landlord which are not paid within ten (10) days after due shall be increased by
a service charge of $100.00 and shall bear interest from and after the date due
to the date paid at the rate of 18% per annum or the maximum lesser interest
rate permitted by law. This agreement of Tenant survives termination of all
other parts of this Lease.
E. Place of Payment. All Rent and other sums payable hereunder by Tenant to
Landlord shall be payable at 208 73rd Avenue North Brooklyn Park, MN 55430-1306,
or such other place within the State of Minnesota as may be designated by notice
from Landlord to Tenant.
3. POSSESSION. If Landlord is unable to deliver possession of the Premises
to Tenant by the Commencement Date, Landlord shall give Tenant notice to that
effect and the Commencement Date shall be postponed to the earlier of the date
upon which Tenant enters into possession of the Premises, or any part thereof,
after notice from Landlord to Tenant that possession is available or the
fifteenth (15th) day after the date set by notice from Landlord to Tenant that
the Premises will be ready for occupancy. In the event of such postponement, the
Term shall remain the same and the Expiration Date shall be extended for the
same number of days the Commencement Date was postponed. Tenant's obligation to
pay Rent shall be postponed and extended for a like number of days. Landlord
shall not be liable to Tenant for any loss or damage resulting from Landlord's
delay in delivering possession of the Premises to Tenant.
4. ACCEPTANCE. By entry into possession of all or any part of the Premises,
Tenant accepts the Premises and all equipment, fixtures, and machinery therein,
and all improvements upon the Land, in their then condition as suitable for the
purposes for which leased and as agreed. Notice of any exception to such
acceptance shall be given by Tenant to Landlord within fifteen (15) days after
the first such entry, time being of the essence, or deemed waived. Tenant
acknowledges that no promises or representations as to the improvement or repair
of the Premises have been made by Landlord, or anyone acting on Landlord's
behalf.
5. UTILITIES. Tenant shall pay for when due all utilities which now or in
the future shall be separately metered to the Premises including gas,
electricity, water, sewer and any other utility service used within the
Premises.
Tenant agrees that any of such utilities or other services may be
interrupted for causes beyond Landlord's reasonable control; that Landlord does
not represent or warrant the uninterrupted availability of utilities or
services; and that any such interruption is not an eviction, disturbance or
dispossession of Tenant and does not render Landlord liable to Tenant in damages
by abatement of rent or otherwise, or relieve Tenant from the obligation to pay
rent and perform its covenants and agreements in this Lease.
6. MAINTENANCE BY LANDLORD. Provided Tenant is not in default, and except
as otherwise specifically stated herein (e.g., in Article 8), Landlord shall, at
its sole expense, keep in good order, safe condition and repair, the structural
elements of the Premises including exterior walls, roof, floor, foundation and
interior support columns of the Premises, and the fire sprinkler system.
7. MAINTENANCE BY TENANT. Tenant shall provide and pay for its own trash
removal, janitorial services and window washing. Except for repairs Landlord is
expressly obligated to make in Article 6 herein, Tenant shall maintain, repair
and keep in good working order and condition all parts of the Premises,
including without limitation: the interior of the Premises; entrance and
interior doors; overhead doors; re-keying and related repairs of locks; heating,
cooling, ventilating, electrical and plumbing fixtures and equipment in or
serving the Premises; replacement of broken glass wherever located; and the
loading dock area of the Premises. Tenant shall maintain and furnish Landlord
with a copy of a maintenance service contract for any utility, fixture or
equipment which Tenant is required to maintain and repair or, in the
alternative, shall provide Landlord with periodic certifications when requested
by Landlord, that Tenant has performed all reasonable maintenance and repair. If
Tenant fails to correct any deficiency in the performance of these obligations
within ten (10) days after notice from Landlord, Landlord may, but need not,
provide such maintenance and bill Tenant for it. Costs so billed are be payable
upon receipt of invoice. This agreement of Tenant survives termination of all
other parts of this Lease.
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8. PARTICULAR REPAIRS. If the need for maintenance or repair arises from
the negligent, grossly negligent or deliberate act of Landlord or Tenant, or an
agent, employee or invitee of one of them, then such party shall perform and pay
for such maintenance or repair. Nothing in this Article negates or modifies
waiver of subrogation provisions of this Lease as to acts or omissions covered
by insurance.
9. INSURANCE.
A. Tenant shall maintain a comprehensive policy of public liability
insurance against any liability which arises from any occurrence on or about the
Premises or the Land or which arises from any claim against which Tenant is
require to indemnify Landlord. The policy is to be written by an insurer
authorized to do business in Minnesota and reasonably satisfactory to Landlord
and with a combined limit of at least $3,000,000.
B. Landlord shall insure the Premises on a "special form" (All Risk) basis
including perils of water damage and theft and including coverage for loss of
rental income, all on a replacement cost basis for improvements, including
leasehold improvements which will remain on the Premises after Tenant vacates
the Premises. Such insurance shall not, however, cover floor or wall coverings,
trade fixtures, special equipment, stock, merchandise or personal property of
Tenant, all of which Tenant shall insure, at its expense, on a "special form"
(All Risk) basis including perils of water damage and theft, with limits equal
to at least 80% of replacement cost. Tenant shall furnish Landlord with
certificate of such insurance before the Lease Commencement Date and at least
annually thereafter. Policies are to be written by an insurer authorized to do
business in Minnesota, reasonably satisfactory to Landlord, with Landlord named
as an additional insured and providing Landlord with least thirty (30) days
prior notice of change or cancellation from the insurer.
Personal property on or about the Premises shall be at the sole risk of
Tenant and Landlord is not liable to Tenant for loss, theft or damage thereof.
Neither Landlord nor its partners, agents or employees, are liable for any
injury, loss or damage to any person or property on or about the Premises from
any cause whatsoever except due to a wrongful intentional or grossly negligent
act or omission of Landlord without fault or negligence of Tenant or its agents,
employees or invitees. Tenant shall indemnify and hold Landlord harmless from
all other claims, liabilities, costs or expenses arising out of or pertaining to
the Premises or the Land.
10. INDEMNIFICATION. Tenant shall indemnify and hold harmless Landlord, and
its partners, agents and employees, against all claims, liabilities, costs,
expenses, damages, fines, and penalties, including attorneys' fees incurred by,
asserted against or imposed upon Landlord by reason of: (i) any use or condition
of the Premises or any part thereof; (ii) any personal injury or property damage
occurring on or about the Premises; (iii) any negligent or wrongful intentional
act or omission of Tenant, or its agents, employees, contractors, licensees or
invitees; (iv) any failure to comply with any governmental law or regulation;
(v) any prosecution or defense of any suit or other proceeding to discharge the
Premises or the Land, or any part thereof, from any liens, judgments or
encumbrances suffered or created thereon by Tenant or against Tenant's interest
therein; (vi) any proceedings to repossess the Premises or the Land after
termination of this Lease for any cause; (vii) any litigation commenced by or
against Tenant to which Landlord is made a party without any fault of Landlord;
(viii) any response costs, damages or expenses (including attorneys' and
experts' fees) claimed, imposed upon, incurred by or asserted against Landlord
arising out of the use, release, threatened release or disposal of pollutants,
hazardous or dangerous substances caused or alleged to have been caused by acts
or omissions of Tenant; and (ix) any failure of Tenant to perform or comply with
any covenant or agreement to be kept or performed by Tenant hereunder. These
covenants and agreements of Tenant survive termination of all other parts of
this Lease.
11. RELEASE AND WAIVER. Landlord and Tenant hereby release each other and
each other's partner's, employees, agents, customers, licensees and invitees
from any and all liability for any loss, damage or injury to person or property
occurring in, on or about or to the Premises, improvements to the Premises or
personal property on or about the Premises, by reason of any casualty covered by
applicable insurance policies. The provisions of this Article will preclude the
assignment of any such claim by way of subrogation or otherwise to an insurance
company or any other person. Therefore, each party to this Lease shall notify
each of its insurers of the terms of the releases contained in this Article and
have its insurance policies endorsed to prevent the invalidation of coverages by
reason of the releases contained in this Article. This agreement of Landlord and
Tenant survives termination of all other parts of this Lease.
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Tenant has sole responsibility for protecting the Premises against theft,
robbery or pilferage, and for the safety and security of its employees, agents,
customers, licensees and invitees on or about the Premises, both during and
outside of normal business hours.
12. DAMAGE OR DESTRUCTION. Landlord shall restore the Premises, if damaged,
to the extent of available insurance proceeds and with reasonable dispatch
unless Landlord shall, within sixty (60) days after the damage occurs, elect by
notice to Tenant not to restore or rebuild. If Landlord so elects not to restore
or rebuild, this Lease shall terminate as of the date of such election. Tenant
shall have no claim against Landlord arising from such termination or for the
value of any unexpired Term of this Lease, except that any prepaid Rent shall be
refunded by Landlord to Tenant. If Landlord restores or rebuilds, Rent shall
abate during the time of such work in proportion to the extent the Premises
shall be untenantable or it shall be impracticable to conduct business therein.
In no event shall Landlord be responsible to repair, restore or rebuild any
leasehold improvements, personal property, fixtures, machinery or equipment of
Tenant.
In the event Landlord undertakes to restore or rebuild the Premises
following such damage or destruction, but fails to substantially complete such
restoration or repair within six (6) months after such undertaking, Tenant may,
at its option upon not less than fifteen (15) days notice to Landlord during
which time such restoration or rebuilding is not substantially completed,
terminate this Lease, neither party being thereafter obligated to the other
hereunder.
13. ASSIGNMENT AND SUBLETTING. Tenant shall not sublease all or any part of
the Leased Premises without the prior written consent of Landlord. Tenant shall
not, voluntarily or by operation of law, assign, mortgage, pledge or otherwise
transfer this Lease, or any part hereof or interest herein, without the prior
written consent of Landlord. Landlord's consent shall not be unreasonably
withheld. Consent to one such sublease or assignment does not constitute consent
to any other or later sublease or assignment. No such sublease or assignment or
consent shall relieve Tenant of liability for the performance of all covenants,
agreements and obligations hereunder including the obligation to pay Rent for
the entire Term.
Landlord may assign this Lease or any of its rights hereunder. Upon any
such assignment, if the assignee assumes Landlord's obligations hereunder,
Landlord is thereafter relieved of any and all such obligations.
14. ALTERATIONS. Tenant shall make no alterations or improvements to the
Premises exceeding a cost of $2500.00 in the aggregate per alteration or
improvement without the prior written approval of the Landlord, which approval
may be conditioned on such reasonable requirements as Landlord may impose, but
which approval shall not be unreasonably withheld. Any permitted alterations or
improvements shall be timely completed according to plans and specifications
prepared by Tenant and approved by Landlord, in a good and workmanlike manner
conforming to applicable building codes and free and clear of mechanics' liens
and claims. All alterations and improvements become the property of Landlord at
the expiration or earlier termination of this Lease provided, however, that if
so directed by Landlord, Tenant, at its sole expense, shall remove any or all
such alterations and improvements from the Premises at the expiration or earlier
termination of this Lease and repair any damage to, and restore, the Premises.
This agreement of Tenant survives termination of all other parts of this Lease.
15. SURRENDER. Upon the expiration or earlier termination of this Lease,
Tenant shall peaceably surrender the Premises broom-clean, in good condition and
repair, fire and other casualty, reasonable wear and tear (which standard
excludes adverse effects from acid, salt, corrosives or other substances used by
Tenant in the operation of its business and alterations and improvements by
Tenant) excepted. Tenant shall, at its expense, also remove all of its trade
fixtures, personal property, machinery, equipment and signs from the Premises.
Any property of Tenant not removed upon the expiration or earlier termination of
this Lease shall be deemed abandoned. Any property of Tenant not removed upon
the expiration or earlier termination of this Lease may be removed by Landlord
and Landlord may repair any damage to the Premises caused such removal, at the
sole cost and expense of Tenant which Tenant agrees to pay upon billing. This
agreement of Tenant survives termination of all other parts of this Lease.
16. DEFAULT OF TENANT AND REMEDIES.
A. Events of Default and Remedies. If Tenant fails to pay when due any
installment of Rent hereunder, or to perform any other of the terms, agreements,
covenants, conditions or obligations of this Lease to be performed by Tenant, or
if Tenant abandons or vacates the Premises, or if any proceeding is commenced by
or against Tenant
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under any law relating to bankruptcy or insolvency or for an appointment of a
receiver of Tenant or any of Tenant's assets, or if Tenant makes an assignment
of assets for the benefit of creditors, then Tenant shall be in default
hereunder, and Landlord shall have the right, at its option, in addition to any
other rights and remedies it may have hereunder, or at law or in equity or
otherwise, to reenter and recover possession of the Premises (with or without
terminating this Lease) and/or terminate this Lease. Landlord may exercise its
rights and remedies at any times, in any order, to any extent, and as often as
Landlord deems advisable. Should Landlord at any time terminate this Lease by
reason of such default, in addition to any other remedies Landlord may have,
Landlord may recover from Tenant, and Tenant shall indemnify Landlord against,
all loss of rents and other damages Landlord may incur including the cost of
recovering and reletting the Premises and reasonable attorneys' fees. These
covenants and agreements of Tenant survive termination of all other parts of
this Lease.
B. Right of Landlord to Cure Default of Tenant. Landlord may, at its option,
in addition to exercising any other rights or remedies available to it in this
Lease or otherwise, spend such sums of money as is reasonably necessary to cure
any default of Tenant herein and the amount so spent, and cost incurred,
including reasonable attorneys' fees in curing such default, shall be paid by
Tenant, as Additional Rent, upon demand.
C. Legal and Other Expenses. In the event suit shall be brought of
possession of the Premises, for the recovery of Rent or any other amount due
under the provisions of this Lease, or because of the breach of any other
covenant, condition or agreement herein contained on the part of Tenant to be
kept or performed, Tenant shall pay Landlord all expenses incurred by Landlord
including reasonable attorneys' fees.
D. Cumulative Remedies. No remedy conferred on Landlord in this Lease or
otherwise, or reserved to Landlord, shall be exclusive of any other remedy, but
shall be cumulative and may be exercised from time to time and as often as the
occasion may arise.
E. Overdue Payments. All money due hereunder from Tenant to Landlord shall,
unless otherwise specified, be due on demand. All Rent and other sums payable
hereunder by Tenant to Landlord which are not paid within ten (10) days after
becoming due shall be increased by a service charge of $100.00 and shall bear
interest from and after the date due to the date paid at the rate of 18% per
annum or the maximum lesser interest rate permitted by law. This agreement of
Tenant survives termination of all other parts of this Lease.
F. Landlord's Default. In the event of any breach or default hereunder by
Landlord not cured within sixty (60) days after notice thereof from Tenant, or
within a greater reasonable time if Landlord proceeds diligently but the
remedial action requires more than sixty (60) days to complete, Tenant may, in
addition to other remedies available to Tenant, terminate this Lease upon notice
to Landlord.
17. SUBORDINATION AND ESTOPPEL. The rights of Tenant under this Lease are
subject and subordinate at all times to the lien of any mortgage to which the
Premises or the Land, or any part thereof or interest therein, is subject, now
or hereafter, and to all advances made or hereafter to be made upon the security
thereof, and to all renewals, modifications, consolidations, replacements and
extensions thereof. No further instrument of subordination is required provided
that, in confirmation of this subordination Tenant shall promptly execute such
further instruments as may be requested by Landlord. Tenant irrevocably appoints
Landlord as attorney-in-fact for Tenant with full power and authority to execute
and deliver in the name of Tenant any such instrument or instruments. Tenant, at
the option of any mortgagee, agrees to attorn to such mortgagee in the event of
a foreclosure sale or deed in lieu thereof. Tenant agrees within ten (10) days
after request of Landlord, to execute and deliver to Landlord or its designee an
estoppel certificate in such form as may be reasonably requested by Landlord.
Tenant agrees, within ten (10) days after request of Landlord, to deliver to
Landlord or its designee the most recent financial statements of Tenant,
certified to by Tenant or its certified public accountant as complete and
accurate. Landlord will proceed in good faith and exercise its best efforts to
secure a non-disturbance agreement from its permanent lender for the benefit of
Tenant.
18. HOLDING OVER. If Tenant remains in possession of any part of the
Premises after the expiration or earlier termination of this Lease, Tenant shall
be deemed, at Landlord's option, either to hold the Premises as a tenant at will
or month to month, in either case subject to all of the terms, conditions,
covenants and provisions of this Lease (which shall be applicable during the
holdover period), except that Tenant shall pay to Landlord one and one-half
(1.5) times the last current Base Rent and Additional Rent, which rent shall be
payable to Landlord on demand. In
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addition, Tenant shall be liable to Landlord for all damages occasioned by such
holding over. No holding over by Tenant, whether with or without the consent of
Landlord, shall operate to extend this Lease except as expressly provided in
this Article.
19. NOTICE. Any notice, request or consent required or permitted under this
Lease written and shall be given when personally delivered (if to Tenant, to an
officer of Tenant; if to Landlord, to a partner of Landlord) the second business
day following deposit in the United States mails, certified mail, return receipt
requested, postage prepaid, addressed to Tenant at the Premises or to Landlord
at the address then fixed for the payment of Rent. Either party may by notice at
any time designate a different address to which notices shall subsequently be
sent.
20. ACCESS BY LANDLORD. Landlord and its designees shall have the right to
enter and inspect the Premises at any time for purposes of inspection or the
exercise of any of its rights or the performance of any of its obligations
hereunder in such circumstances as Landlord may deem advisable provided,
however, that except in the case of actual or perceived emergency Landlord shall
exercise such rights only after notice to Tenant and upon such reasonable
conditions as Tenant may impose. During any work in or about the Premises by
Landlord or its designees, all necessary or useful materials, tools and
equipment may be stored upon the Premises. Landlord and its designees may enter
the Premises at reasonable times to exhibit the same for the purpose of sale or
mortgage and, during the last six (6) months of the Term, for the purpose of
showing the Premises to prospective Tenants. Landlord may erect and maintain a
rent or sale sign on the Premises. No such entry by or activity by Landlord
shall be deemed an eviction or disturbance of Tenant's possession of the
Premises, or render Landlord liable to Tenant for damages, or relieve Tenant
from performance any of Tenant's obligations under this Lease. The rights
reserved to Landlord in this Article shall not be deemed to impose any greater
obligation on Landlord to clean, maintain, repair or change the Premises than is
specifically provided elsewhere in this Lease. Landlord and its designees may at
any time in case of emergency enter the Premises and take such action as
Landlord may deem proper to protect persons, property or the Premises.
21. EMINENT DOMAIN. If all or any part of the Premises or the Land shall be
taken by governmental authority under the power of eminent domain or shall be
conveyed to governmental authority in lieu of such taking, and if such taking or
conveyance shall cause the remaining part of the Premises or the Land to be
untenantable and inadequate for use by Tenant for the purpose leased, then
Landlord may, at its option, terminate this Lease as of the date Tenant is
required to surrender possession of the Premises. If a part of the Premises or
the Land shall be so taken or conveyed but the remaining part is tenantable and
adequate for Tenant's use, in Tenant's reasonable discretion, then this Lease
shall be terminated as to the part taken or conveyed as of the date Tenant
surrenders possession. Landlord shall make such repairs, alterations and
improvements as may be necessary to render the part not taken or conveyed
tenantable. Rent shall be reduced in proportion to the part of the Premises so
taken or conveyed. All compensation awarded for such taking or conveyance shall
be the property of Landlord without any deduction therefrom for any present or
future estate of Tenant. Tenant hereby assigns to Landlord all its right, title
and interest in and to any such award. However, Tenant shall have the right to
recover from the governmental authority, but not from Landlord, such
compensation as may be separately awarded to Tenant on account of the
interruption of Tenant's business, moving and relocation expenses and
depreciation to and removal of Tenant's trade fixtures and personal property.
22. HAZARDOUS MATERIALS.
A. Hazardous Substance. As used herein, "hazardous substance" includes any
substance which presents or may present danger or potential danger for damage,
injury, or illness to health, welfare or the environment including, but not
limited to: (i) substances which are radioactive, explosive, ignitable,
corrosive, reactive, carcinogenic or toxic; and (ii) asbestos, urea
formaldehyde, polychlorinated biphenyls, nuclear fuel or materials, chemical
waste, radioactive materials, known carcinogens and petroleum products; and
(iii) other substances defined as hazardous substances by, or regulated under,
by applicable law or governmental rule or regulation as the same may be amended
from time to time.
B. Tenant's Responsibility. Tenant covenants and agrees with, and represents
and warrants to, Landlord that Tenant shall not manufacture, process,
distribute, use, produce, treat, store, dispose of or allow to be present any
hazardous substance in or about the Premises, except strictly according to all
applicable law and governmental regulation, and in conformity with any permit
required therefor. Tenant covenants and agrees, that it shall promptly
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comply, at Tenant's sole cost and expense, with all laws and governmental
regulations or orders now or hereafter existing, relating to any hazardous
substance located on or about the Premises by reason of an act or omission of
Tenant. All covenants, agreements, representations and warranties contained in
this Article are continuing and shall survive the termination of all other parts
of this Lease.
C. Indemnification. Tenant indemnifies and holds harmless Landlord, its
successors, assigns, partners, employees, lenders and agents, from and against
any and all claims, liabilities, losses, damages or expenses, including
attorneys', consultants', and experts' fees arising out of or pertaining to
breach by Tenant of any of the covenants, agreements, warranties or
representations contained herein, or to Landlord's enforcement thereof, or to
any violation of law or governmental regulation or order arising or alleged to
arise from an act or omission of Tenant, including cleanup of any hazardous
substance on or about the Premises or the Land. All costs indemnified against
shall be payable upon demand and shall thereafter bear interest at the rate 18%
per annum or the lesser maximum rate permitted by law. These covenants and
agreements shall survive the termination of all other parts of this Lease.
D. Notification. Tenant shall immediately notify Landlord of any enforcement
action against Tenant by any governmental authority arising out of the
possession or use by Tenant of any of hazardous substance whether or not on or
about the Premises or the Land.
E. Landlord Representations. Landlord represents and warrants to Tenant
that Landlord has no actual knowledge of, or notice from any governmental
authority about, the use, treatment, storage, or presence of any hazardous
substance in or about the Premises, except strictly according to all applicable
law and governmental regulation, and in conformity with any permit required
therefor.
23. MISCELLANEOUS
A. Waiver of Default. No waiver of any default shall be implied from any
omission to act on account of such default if such default persists or is
repeated. No express waiver shall affect any default other than the default
specified therein express waiver and that only for the time and to the extent
therein stated. One or more waivers shall not be construed as a waiver of a
subsequent breach of the same covenant, agreement, term or condition.
B. Payments Deemed Rent. Any amounts of money to be paid by Tenant to
Landlord under this Lease, whether or not called "Rent" or "Additional Rent" and
whether or not they are periodic or recurring, shall be deemed to be Rent or
Additional Rent for purposes of this Lease; and any failure to pay such amount
shall be deemed to be a failure to pay Rent entitling Landlord to exercise all
rights and remedies afforded for the collection and enforcement of Tenant's
obligation to pay Rent. Tenant's obligation to pay Rent survive the expiration
or earlier termination of all other parts of this Lease.
C. Claims for Fees. Landlord and Tenant each agree to indemnify and hold
harmless the other from any and all other claims, damages, liabilities or
expenses, including reasonable attorneys' fees, for any real estate or brokerage
commission or finder's fee claimed through their respective act or omission in
connection with the negotiation or execution of this Lease.
D. Applicable Law. This Lease shall be construed and enforced in accordance
with the laws of the State of Minnesota.
E. Binding Effect. This Lease binds and inures to the benefit of the parties
hereto and their respective successors and permitted assigns provided, however,
that Landlord, its successors and assigns, shall be obligated to perform
Landlord's covenants under this Lease only during its actual periods as Landlord
during the Term.
F. Severability. If any provision of this Lease shall be held to be invalid,
void or unenforceable, the remaining provisions hereof shall not be affected or
impaired and shall remain in full force and effect.
G. No Partnership. Landlord and Tenant shall not, by execution and
performance of this Lease, become or be deemed partners or joint venturers with
each other.
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H. Headings, Gender, Number. As used herein, unless the context clearly
requires otherwise, the singular and the plural include each other and the
masculine, feminine and neuter gender include each other. Topical headings are
for reference only, do not affect, define, or limit the scope or terms hereof
and form no part of the construction of this Lease.
I. Construction. The form as well as the substance of this Lease have been
fully negotiated by the parties. Each party therefor waives claim for any
particular construction of any ambiguous provision or portion hereof based upon
drafting by or on behalf of the other.
J. Limitation on Liability. Notwithstanding anything to the contrary herein,
Landlord shall have no obligation, nor incur any liability, beyond the then
interest, if any, of Landlord in the Premises and the Land and Tenant shall look
exclusively to such interest of Landlord in the Premises and the Land for
payment and discharge of any obligations imposed upon Landlord hereunder.
Landlord is hereby released and relieved of any other liability hereunder.
Tenant shall look solely to the estate or interest owned by Landlord in the
Premises and Tenant will not collect or attempt to collect any such obligation
or liability, or any judgment therefore, out of any other assets of Landlord or
its partners.
K. Exhibits. This Lease and signed Exhibits attached hereto and incorporated
herein by this reference as Exhibits A, B, C, D and E, forming a part hereof,
set forth all the covenants, promises, agreements, conditions and understandings
between Landlord and Tenant affecting the Premises and the Land there are no
covenants, promises, agreements, conditions or understandings, either oral or
written, between them other than are herein set forth.
Landlord and Tenant have caused this Lease to be duly signed on their
behalf by the undersigned persons each of whom personally warrants and
represents to the other party that he or she is fully authorized to so sign and
thereby bind such party as of the Lease Date.
LANDLORD: TENANT:
Sunlite III, LLP Navarre Corporation
by ________________________ by __________________________
Its Partner Its_______________________
and by ____________________ and by ______________________
Its Partner Its___________________
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EXHIBIT "A"
FLOOR PLAN OF PREMISES
EXHIBIT "B"
LAND LEGAL DESCRIPTION
Tract A, Registered Land Survey 1572,
Hennepin County, Minnesota
EXHIBIT "C"
SECURITY AND DAMAGE DEPOSIT
As of the Lease Date, Tenant deposited with Landlord the sum of $32,640.49,
receipt of which is acknowledged by Landlord, to be held by Landlord without
liability for interest, as a security and damage deposit for the faithful
performance by Tenant during the Lease Term. Landlord may intermingle such
deposit with Landlord's own funds. Tenant is to keep and perform any of the
terms, covenants and conditions of this Lease to be kept and performed by
Tenant. Landlord, either with or without terminating this Lease, may (but shall
not be required to) appropriate and apply such portion of said deposit as may be
necessary to compensate or repay Landlord for all losses or damages sustained or
to be sustained by Landlord due to such breach on the part of Tenant including,
but not limited to, overdue and unpaid Rent, any other sum payable by Tenant to
Landlord under this Lease, damages or deficiencies in the reletting of the
Premises, and costs and reasonable attorney's fees incurred by Landlord. Tenant,
upon demand by Landlord, shall pay Landlord the amount needed to restore said
security deposit to the original sum deposited. Tenant's failure to do so within
five (5) days after receipt of such demand constitutes a breach of this Lease.
Said security deposit shall be returned to Tenant, less any depletion thereof as
the result of the provisions of this paragraph, at the end of the Lease Term, or
upon the earlier termination of this Lease. Tenant shall not anticipate return
of said deposit by withholding any amount required to be paid under this Lease.
EXHIBIT "D"
BUILDING RULES AND REGULATIONS
1. TRASH. Tenant shall be responsible for contracting and paying for trash
removal, including the cost of obtaining suitable trash receptacles which must
conform to City of Brooklyn Center regulations. Such trash receptacles shall be
stored inside the Premises or at such other location as is approved by Landlord.
Tenant shall not leave or store trash, refuse, litter or material on the Land
outside the Premises.
2. DISTURBANCE. No noise, conduct or process shall be permitted at any time
which shall, in the reasonable opinion of Landlord, annoy or disturb other
tenants or nearby properties.
3. PARKING. Use of the parking area shall be subject to such rules as
Landlord may promulgate from time to time. Tenant shall not use or permit the
use of the parking area for the overnight storage of automobiles or other
vehicles without the prior approval of Landlord. Tenant shall not use, or permit
use of, the 20 parking spaces in the northeasterly corner of the Land.
4. SIGNS. No signs shall be placed on the windows, doors or any part of the
exterior of the building, on the Land or on the parking area, without the prior
approval of Landlord and conforming to City of Brooklyn Center regulations.
11
<PAGE>
5. FIXTURE MOVEMENT. Any and all furniture, fixtures and goods will be
moved by Tenant and at Tenant's expense whenever such moving is needed for the
purpose of repair or maintenance to be performed by Landlord.
6. WASTE; OVERLOADING. Tenant shall not do or suffer any waste or damage,
disfigurement or injury to the Premises, or any overloading of the floors or
facilities of the Premises.
7. UTILITIES. Tenant shall not overload any utility lines, pipes or systems
serving the Premises.
8. RULES AMENDMENT. These Rules may be added to or amended by Landlord and
such amendments will become effective immediately upon notice to Tenant.
9. BREACH. Tenant agrees that any violation of these Rules or any
amendments hereto is a default under the Lease.
EXHIBIT "E"
CERTAIN TENANT IMPROVEMENTS AND TRADE FIXTURES
Tenant has acquired from a prior tenant of the Premises certain tenant
improvements and alterations to the Premises and certain trade fixtures
installed therein including:
A. Concrete slabs installed to accommodate dumpsters in the area of doors 7 and
8 of the Premises; and
B. Racking and shelving.
With respect to said improvements, alterations and trade fixtures, Landlord and
Tenant covenant and agree that:
1. For all purposes under the Lease, including specifically but not limited to
the obligations to remove and restore upon termination of the Lease and
obligations concerning the condition of the Premises upon surrender, said
improvements, alterations and installed trade fixture shall be deemed to be
improvements and alterations made by, and trade fixtures of and installed by,
Tenant as if originally made and installed by Tenant and not by a prior tenant.
2. Tenant has acquired said improvements, alterations and trade fixtures from a
third party and waives all claims against Landlord arising therefrom. Landlord
makes no warranty or representation of any kind whatsoever with respect thereto
including any as to condition, fitness for use, fitness for any particular use,
compliance with law or proper installation. Notwithstanding the foregoing,
Landlord affirms that such improvements and alterations are permitted
improvements and alterations under the Lease.
3. Tenant acknowledges that warehouse lighting west of gridline 3 in the
Premises may be substandard.
12
NAVARRE CORPORATION
EXHIBIT 21
SUBSIDIARIES OF NAVARRE CORPORATION
NAME OF SUBSIDIARY STATE OF INCORPORATION PERCENT OF OWNERSHIP
Digital Entertainment, Inc. Minnesota 100%
NetRadio Corporation Minnesota 85%
NAVARRE CORPORATION
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 33-80218, No. 33-86762 and 333-31017 as amended) pertaining to
the Navarre Corporation 1992 Stock Option Plan, and the Registration Statements
(Forms S-3 No. 333-09231 and 333-58199) pertaining to the registration of
Navarre Corporation common stock of our report dated April 30, 1999, with
respect to the consolidated financial statements and the financial statement
schedule included in the Annual Report (Form 10-K) of Navarre Corporation for
the year ended March 31, 1999.
Minneapolis, Minnesota
June 25, 1999
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