UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period September 30, 1999
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ________________
Commission File Number 0-22982
NAVARRE CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1704319
(State 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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, No Par Value - 23,513,235 shares as of October 31, 1999
1
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NAVARRE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
September 30, 1999 and March 31, 1999
Consolidated Statements of Operations -
Three months and six months ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows -
Six months ended September 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements -
September 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 1999
-----------------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,940 $ 92
Accounts receivable, less allowance for doubtful accounts
and sales returns of $4,574 and $3,810, respectively 56,272 43,465
Inventories 34,819 29,223
Note receivable, related parties 237 221
Refundable income taxes -- 613
Prepaid expenses and other current assets 1,811 908
-----------------------
Total current assets 95,079 74,522
Property and equipment, net of accumulated depreciation of
$5,155 and $5,251, respectively 3,755 3,361
Other assets:
Goodwill 692 853
Other assets 1,559 744
-----------------------
Total assets $ 101,085 $ 79,480
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ -- $ 329
Current portion of long-term debt 133 93
Accounts payable 69,116 51,831
Accrued expenses 3,554 1,949
-----------------------
Total current liabilities 72,803 54,202
Long-term debt, less current maturities 104 114
Shareholders' equity:
Preferred stock, no par value:
Authorized shares - 10,000,000,
Issued and outstanding shares - 34,000 and none, respectively 8,019 --
Common stock, no par value:
Authorized shares - 100,000,000,
Issued and outstanding shares-23,511,435 and 23,344,046, respectively 92,156 91,415
Retained deficit (71,913) (66,119)
Unearned compensation (84) (132)
-----------------------
Total shareholders' equity 28,178 25,164
-----------------------
Total liabilities and shareholders' equity $ 101,085 $ 79,480
=======================
</TABLE>
NOTE: THE BALANCE SHEET AT MARCH 31, 1999 HAS BEEN DERIVED FROM THE AUDITED
FINANCIAL STATEMENTS AT THAT DATE BUT DOES NOT INCLUDE ALL OF THE INFORMATION
AND FOOTNOTES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR COMPLETE
FINANCIAL STATEMENTS.
3
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NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---------------------------------------------------
<S> <C> <C> <C> <C>
Net sales: $ 67,399 $ 54,873 $ 125,150 $ 107,942
Cost of sales 58,629 48,942 109,575 95,090
---------------------------------------------------
Gross profit 8,770 5,931 15,575 12,852
Operating expenses:
Selling and promotion 3,331 1,722 5,662 3,331
Distribution and warehousing 1,443 913 2,629 1,767
General and administration 6,860 4,356 12,259 7,992
Depreciation and amortization 441 313 878 616
---------------------------------------------------
12,075 7,304 21,428 13,706
---------------------------------------------------
Loss from operations (3,305) (1,373) (5,853) (854)
Other expense:
Interest expense (97) (811) (296) (1,523)
Other income 218 132 361 310
---------------------------------------------------
Loss before income taxes (3,184) (2,052) (5,788) (2,067)
Income tax benefit -- (780) -- (785)
Minority interest -- (147) -- (110)
---------------------------------------------------
Net loss $ (3,184) $ (1,419) $ (5,788) $ (1,392)
Preferred nondetachable conversion feature
and warrant valuation -- -- -- (34,229)
Preferred dividend requirements -- (243) -- (577)
---------------------------------------------------
Net loss applicable to common shares $ (3,184) $ (1,662) $ (5,788) $ (36,198)
===================================================
Loss per common share:
Basic and diluted $ (.14) $ (.15) $ (.25) $ (4.01)
===================================================
Weighted average common and
common equivalent shares outstanding
Basic and diluted 23,509 11,034 23,441 9,033
===================================================
</TABLE>
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NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
1999 1998
-----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (5,788) $ (1,392)
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Depreciation 718 458
Amortization of intangible assets 155 158
Amortization on unearned compensation 48 47
Minority interests in subsidiaries -- 110
Changes in operating assets and liabilities:
Accounts receivable (12,807) (21,851)
Inventories (5,596) (6,554)
Prepaid expenses and other assets (1,718) 2
Income tax receivable 613 --
Accounts payable and accrued expenses 18,890 3,145
-----------------------
Net cash used in operating activities (5,485) (25,877)
INVESTING ACTIVITIES
Note receivable, related parties (16) 99
Purchase of equipment and leasehold improvements (1,112) (648)
-----------------------
Net cash used in investing activities (1,128) (549)
FINANCING ACTIVITIES
Payment on long-term debt 30 (102)
Proceeds from notes payable, bank 104,448 92,238
Payment on notes payable, bank (104,777) (86,297)
Proceeds from notes payable, other -- 125
Proceeds from sale of subsidiary stock -- 65
Proceeds from sale of preferred stock and warrants 8,019 18,823
Exercise of common stock warrants 12 1,807
Exercise of common stock options 729 31
Payment of dividends -- (268)
-----------------------
Net cash provided by financing activities 8,461 26,422
-----------------------
Net increase in cash 1,848 (4)
Cash at beginning of period 92 23
-----------------------
Cash at end of period $ 1,940 $ 19
=======================
</TABLE>
5
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NAVARRE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Navarre Corporation and its
majority owned subsidiary, NetRadio, Corporation, have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
All intercompany accounts and transactions have been eliminated. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Because of the
seasonal nature of the Company's business, the operating results for the six
month period ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending March 31, 2000. For further
information, refer to the financial statements and footnotes thereto included in
Navarre Corporation's Annual Report on Form 10-K for the year ended March 31,
1999. Certain balances at September 30, 1998 have been reclassified to conform
to the September 30, 1999 presentation.
NOTE B - BUSINESS SEGMENTS
Financial Information by reportable business segment is included in the
following summary:
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
In thousands 1999 1998 1999 1998
-------------------------------------------------
NET SALES
Home Entertainment Products $ 67,015 $ 54,832 $124,552 $ 107,841
NetRadio 388 41 608 105
-------------------------------------------------
CONSOLIDATED $ 67,399 $ 54,873 $125,150 $ 107,942
=================================================
OPERATING INCOME (LOSS)
Home Entertainment Products $ 524 $ (547) $ 132 $ 504
NetRadio (4,039) (842) (6,195) (1,358)
-------------------------------------------------
CONSOLIDATED $ (3,305) $ (1,373) $ (5,853) $ (854)
=================================================
Net Interest Expense $ (97) $ (811) $ (296) $ (1,523)
Other Income (Expense) 218 131 361 310
-------------------------------------------------
LOSS BEFORE INCOME TAXES $ (3,184) $ (2,053) $ (5,788) $ (2,067)
=================================================
6
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NOTE C - NET EARNINGS (LOSS) PER SHARE
Preferred stock, preferred stock warrants and employee stock options are not
included in the periods ending September 30, 1999 and 1998, respectively,
calculation because they are anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per
share:
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-----------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (3,184) $ (1,419) $ (5,788) $ (1,392)
Less preferred nondetachable conversion feature
and warrant valuation -- -- -- (34,229)
Less preferred dividend requirements -- (243) -- (577)
-----------------------------------------------
Adjusted net loss applicable to common stock $ (3,184) $ (1,662) $ (5,788) $(36,198)
Denominator:
Denominator for basic earnings per
share--weighted-average shares 23,509 11,034 23,441 9,033
Dilutive securities:
Preferred stock -- -- -- --
Employee stock options -- -- -- --
Denominator for diluted earnings
per share--adjusted
weighted-average shares 23,509 11,034 23,441 9,033
-----------------------------------------------
Basic and dilutive loss per share $ (.14) $ (.15) $ (.25) $ (4.01)
===============================================
</TABLE>
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. Based on the Company's stock price on May 1, 1998, the date of issuance
of the Class A Convertible Preferred Stock, these securities were deemed to have
contained beneficial conversion features that must be recognized as a dividend
paid to preferred shareholders. The value of the nondetachable conversion
feature and accompanying warrants for the securities issued in May 1998 was
$34,228,583.
7
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NOTE D - ISSUANCE OF CLASS B CONVERTIBLE PREFERRED STOCK
On August 20, 1999, the Company announced that it had entered into a
subscription agreement with Fletcher International Limited ("Fletcher") for the
issuance of up to 150,000 shares of Navarre's Class B Convertible Preferred
Stock ("Class B Preferred Stock") for an aggregate purchase price of up to $37.5
million (the "Subscription Agreement"). The Class B Preferred Stock may be
issued in three principal tranches. On August 20, 1999, Navarre issued the first
tranche, consisting of 34,000 shares of Class B Preferred Stock and a three-year
warrant to purchase up to 16,000 shares of Class B Preferred Stock. Fletcher
paid a purchase price of $8.5 million, or $250 per share of Class B Preferred
Stock, and will pay an additional $4.0 million, or $250 per share of Class B
Preferred Stock, if Fletcher exercises the warrant in its entirety. See Item 2,
"Changes in Securities - Recent Sale of Unregistered Securities."
NOTE E - NETRADIO CORPORATION
On October 19, 1999, NetRadio Corporation, the Company's majority owned
subsidiary, closed on an initial public offering of 3,200,000 shares of its
common stock at a price of $11.00 per share. As a result of the completion of
the NetRadio initial public offering and the subsequent exercise of options by
NetRadio option holders, Navarre's ownership of NetRadio decreased to less than
fifty percent effective November 5, 1999. Accordingly, Navarre will not be
required to consolidate NetRadio's results for periods after November 5, 1999 in
Navarre future financial statements, but will report its interest in NetRadio on
the equity method.
In connection with the NetRadio initial public offering, Navarre and NetRadio
entered into a separation agreement in March 1999 under which Navarre agreed to
contribute to the capital of NetRadio $5,234,840 of principal indebtedness owed
by NetRadio to Navarre as of December 31, 1998. In connection with the execution
of the separation agreement, NetRadio and Navarre agreed to enter into a
Multiple Advance Note. Under the Note, NetRadio agreed to repay to Navarre all
amounts advanced to NetRadio beginning January 1, 1999, plus accrued interest on
$5,234,840 of principal indebtedness incurred through December 31, 1998. The
Note bears interest at midwest prime plus one half-percentage point. The
principal balance of the Note, approximately $9.6 million, is due on June 1,
2001.
The NetRadio results included in Navarre's results for the quarter and six
months ended September 30, 1999 differ from the results reported by NetRadio due
to certain timing and consolidated adjustments at Navarre.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of net
sales represented by certain items included in the Company's "Consolidated
Statements of Operations."
THREE MONTHS ENDED SIX MONTHS ENDED
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
1999 1998 1999 1998
--------------------------------------
Net sales:
Computer 62.2% 65.7% 63.3% 66.8%
Music 37.2 34.2 36.3 33.1
--------------------------------------
Home entertainment products 99.4 99.9 99.6 99.9
NetRadio 0.6 0.1 0.4 0.1
--------------------------------------
Total net sales 100.0 100.0 100.0 100.0
Cost of sales 87.0 89.2 87.6 88.1
--------------------------------------
Gross profit 13.0 10.8 12.4 11.9
Selling and promotion 4.9 3.1 4.5 3.1
Distribution and warehousing 2.1 1.7 2.1 1.6
General and administration 10.2 7.9 9.8 7.4
Depreciation and amortization 0.7 0.6 0.7 0.6
--------------------------------------
Income (loss) from operations (4.9) (2.5) (4.7) (0.8)
Interest expense (0.1) (1.5) (0.2) (1.4)
Other expense 0.3 0.2 0.3 0.3
Net income (loss) (4.7)% (2.6)% (4.6)% (1.3)%
======================================
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. For a
detailed discussion of these factors see the section entitled "Forward Looking
Statements" in the Company's Form 10-K for the year ended March 31, 1999.
Net sales of home entertainment products for the three-month period ended
September 30, 1999 increased 22.3% from $54.8 million in fiscal 1999 to $67.0
million in fiscal 2000. For the six-month period ended September 30, 1999, net
sales of home entertainment products increased 15.6% from $107.8 million in
fiscal 1999 to $124.6 million for fiscal 2000. The gain was due to increased
sales in the both the Computer Products Division and the Music Products
Division. Computer products sales for the three-month period ended September 30,
1999 increased by 16.4% from $36.0 million in fiscal 1999 to $41.9 million for
fiscal 2000. For the six-month period ended September 30, 1999, net sales of
Computer products increased 9.8% from $72.1 million in fiscal 1999 to $79.2
million for fiscal 2000. This increase was primarily due to the rapid growth in
PC software fulfillment with e-commerce retailers. Music sales for the
three-month period ended September 30, 1999 increased 33.5% from $18.8 million
in fiscal 1999 to $25.1 million for fiscal 2000. For the six-month period ended
September 30, 1999, net sales of music increased 27.2% from $35.7 million in
fiscal 1999 to $45.4 million for fiscal 2000. This increase was primarily due to
popular releases from our exclusive independent labels. NetRadio sales for the
three-month period ending September 30, 1999 increased from $41,000 in fiscal
1999 to $388,000 for fiscal 2000. For the six-month period ended September 30,
1999, NetRadio's net sales increased from $105,000 in fiscal 1999 to $608,000
for fiscal 2000. NetRadio's increase was primarily due to the growth of its
advertising internet business.
9
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Gross profit of home entertainment products for the three-month period ended
September 30, 1999 increased 45.8% or $2.7 million from $5.9 million in fiscal
1999 to $8.6 million for fiscal 2000. For the six-month period ended September
30, 1999, gross profit of home entertainment products increased 19.5% or $2.5
million from $12.8 million in fiscal 1999 to $15.3 million for fiscal 2000. As a
percentage of net sales, gross profit of home entertainment products for the
three-month period ended September 30, 1999 increased from 10.8% in fiscal 1999
to 12.8% for fiscal 2000 and for the six-month period ended September 30, 1999,
increased from 11.9% in fiscal 1999 to 12.3% for fiscal 2000. Gross margins from
the Computer Products Division's net sales for the three-month period ended
September 30, 1999 were $4.4 million or 10.5% as a percentage of net sales in
fiscal 2000 compared with $3.2 million or 8.9% as a percentage of net sales in
the same period in fiscal 1999. For the six-month period ended September 30,
1999, gross margins from the Computer Products Division's net sales were $8.5
million or 10.7% as a percentage of net sales in fiscal 2000 compared with $6.7
million or 9.3% as a percentage of net sales in the same period in fiscal 1999.
The increase was primarily due to higher margin sales to e-commerce customers.
Gross margins from music sales for the three-month period ended September 30,
1999 were $4.2 million or 16.7% of music net sales in fiscal 2000 compared with
$2.7 million or 14.4% of music net sales for the same period in fiscal 1999. For
the six-month period ended September 30, 1999, gross margins from the music
sales were $6.8 million or 15.0% as a percentage of net sales in fiscal 2000
compared with $6.1 million or 17.1% as a percentage of net sales in the same
period in fiscal 1999. The decrease was primarily due to customer returns of
devaluated inventory titles.
Selling and promotion expense of home entertainment products for the three-month
period ended September 30, 1999 increased from $1.7 million or 3.1% as a
percentage of net sales in fiscal 1999 to $2.3 million or 3.4% as a percentage
of net sales during the same period for fiscal 2000. For the six-month period
ended September 30, 1999, selling and promotion expense of home entertainment
products increased from $3.2 million or 3.0% as a percentage of net sales in
fiscal 1999 to $4.2 million or 3.4% as a percentage of net sales during the same
period for fiscal 2000. This increase was primarily due to increased freight
costs. NetRadio's selling and marketing expense for the three-month period ended
September 30, 1999 increased from $69,000 in fiscal 1999 to $1.0 million for
fiscal 2000. For the six-month period ended September 30, 1999, NetRadio's
selling and promotion expense increased from $126,000 in fiscal 1999 to $1.5
million for fiscal 2000. The increase in sales and marketing expenses was
primarily due to the growth in NetRadio's sales force and marketing staff.
Distribution and warehousing expense for the three-month period ended September
30, 1999 increased from $913,000 or 1.6% as a percentage of net sales in fiscal
1999 to $1.4 million or 2.1% as a percentage of net sales for fiscal 2000. For
the six-month period ended September 30, 1999, distribution and warehousing
expense increased from $1.8 million or 1.7% as a percentage of net sales in
fiscal 1999 to $2.6 million or 2.1% as a percentage of net sales during the same
period for fiscal 2000. The increase was primarily due to increased costs
associated with the increase in returns processing.
General and administration expenses of home entertainment products for the
three-month period ended September 30, 1999 increased from $3.6 million in
fiscal 1999 to $4.0 million for fiscal 2000 but decreased as a percentage of net
sales from 6.6% in fiscal 1999 to 6.0% as a percentage of net sales during
fiscal 2000. For the six-month period ended September 30, 1999, general and
administration expenses of home entertainment products increased from $6.8
million in fiscal 1999 to $7.7 million for fiscal 2000 but decreased as a
percentage of net sales from 6.3% in fiscal 1999 to 6.2% as a percentage of net
sales during for fiscal 2000. The decrease was primarily due to its asset
management strategic program. NetRadio's general and administration expenses for
the three-month period ended September 30, 1999 increased from $752,000 in
fiscal to $2.9 million for fiscal 2000. For the six-month period ended September
30, 1999, NetRadio's general and administration expenses increased from $1.2
million in fiscal 1999 to $4.5 million for fiscal 2000. The increase in
NetRadio's general and administration expenses was primarily due cost associated
with adding key personnel and building infrastructure.
10
<PAGE>
Net interest expense for the three-month period ended September 30, 1999
decreased from $811,000 in fiscal 1999 to $97,000 for fiscal 2000. For the
six-month period ended September 30, 1999, interest expense decreased from $1.5
million in fiscal 1999 to $296,000 for fiscal 2000. This decrease resulted from
substantially lower borrowings.
Due to the unused losses from prior years and the current quarter's loss, the
Company has not recorded any tax benefit.
Net income of home entertainment products for the three-month period ended
September 30, 1999 was $1.1 million for fiscal 2000 compared to a net loss of
$756,000 in the same three-month period in fiscal 1999. For the six-month period
ended September 30, 1999, net income of home entertainment products was $787,000
for fiscal 2000 compared to a net loss of $512,000 in the same period in fiscal
1999. NetRadio's net loss for the three-month period ended September 30, 1999
was $4.5 million for fiscal 2000 compared to a net loss of $527,000 in the same
three-month period in fiscal 1999. For the six-month period ended September 30,
1999, NetRadio's net loss was $6.8 million compared to a net loss of $770,000 in
the same period in fiscal 1999.
YEAR 2000
The Company has completed evaluation of the potential impact of what is commonly
referred to as the Year 2000 issue. The Company established a Year 2000 team
working with every operational area throughout the Company. This team worked
with management to commence the following steps: (i) implement a Year 2000
Assessment and Testing Plan for all internal information systems and other
systems that contain micro-controllers that may be affected by the Year 2000
date change; (ii) communicate with third parties that supply product to the
Company to ensure they are addressing the Year 2000 issue; (iii) assist our
trade partners with the conversion of their purchasing and invoicing Electronic
Data Interchange (EDI) documents to be Y2K compliant; 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 a 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 of non-mission critical
systems. Implementation of software upgrades and replacement of non-compliant
hardware is completed. The Company conducted a computer system and mission
critical equipment check during July and August, by processing documents for
both Fiscal 1999 and Fiscal 2000. The Company also completed the upgrade of its
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 $250,000 in connection
with the Company's effort to become Year 2000 compliant. No additional
expenditures are anticipated.
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.
The Company continues to develop contingency plans for its most critical areas.
Details of such plans are dependent on the Company's final assessment of the Y2K
readiness of its customers and suppliers.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its working capital needs through bank
borrowings and sales of its equity securities. The level of borrowings has
historically fluctuated significantly during the year. At September 30, 1999,
the Company had accounts payable of $69.1 million financing assets of net
accounts receivable of $56.3 million and inventory of $34.8 million.
For the six-month period ended September 30, 1999, net sales were $125.2 million
for fiscal 2000, an increase of $17.3 million over net sales of $107.9 million
in fiscal 1999. The Company used cash of $5.5 million in operating activities.
Accounts receivable increased by $12.8 million, inventories increased by $5.6
million and accounts payable and accrued expense increased by $18.9 million.
Investing activities used $1.1 million of cash, primarily for the purchase of
furniture, equipment and leasehold improvements. The Company generated net cash
of $8.5 million in financing activities primarily through proceeds from the sale
of Class B Preferred Stock of $8.0 million, net of fees. Cash at the end of the
period increased $1.8 million.
The Company has a revolving line of credit with Congress Financial Corporation.
The credit facility has a maximum borrowing limit of $45.0 million and is
secured by substantially all the Company's assets. The available amount
fluctuates based on an asset-borrowing base. At September 30, 1999, the Company
had no borrowings under the 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk during the
three months ended September 30, 1999. For additional information, refer to page
27 of the Company's 1999 Annual Report to Shareholders.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of its business, the Company is involved in a number of
routine litigation matters that are incidental to the operation of its business.
These matters include collection matters with regard to products distributed by
the Company and accounts receivable owed to the Company. 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 2. CHANGES IN SECURITIES
Recent Sale of Unregistered Securities
On August 20, 1999, Navarre announced that it had entered into a subscription
agreement with Fletcher International Limited ("Fletcher") for the issuance of
up to 150,000 shares of Navarre's Class B Convertible Preferred Stock ("Class B
Preferred Stock") for an aggregate purchase price of up to $37.5 million (the
"Subscription Agreement"). The Class B Preferred Stock may be issued in three
principal tranches. On August 20, 1999, Navarre issued the first tranche,
consisting of 34,000 shares of Class B Preferred Stock and a three-year warrant
to purchase up to 16,000 shares of Class B Preferred Stock. Fletcher paid a
purchase price of $8.5 million, or $250 per share of Class B Preferred Stock,
and will pay an additional $4.0 million, or $250 per share of Class B Preferred
Stock, if Fletcher exercises the warrant in its entirety.
12
<PAGE>
Subject to certain conditions, Navarre may require Fletcher to purchase the
second tranche at any time beginning six months from the date a registration
statement covering the common stock underlying the Class B Preferred Stock
issued in the first tranche is declared effective and ending on August 20, 2002.
A registration statement covering the common stock underlying the Class B shares
was declared effective on October 12, 1999. The second tranche consists of
34,000 shares of Class B Preferred Stock and a three-year warrant to purchase up
to 16,000 shares of Class B Preferred Stock. The purchase price will be equal to
$8.5 million, or $250 per share of Class B Preferred Stock, and the warrant
exercise price is $4.0 million, or $250 per share of Class B Preferred Stock, if
Fletcher exercises the warrant in its entirety. If Navarre fails to exercise its
option within this time frame; Fletcher will have one year to demand that
Navarre issue Fletcher up to 50,000 additional shares of Class B Preferred Stock
at a purchase price of $250 per share.
The third tranche consists of 34,000 shares of Class B Preferred Stock and a
four-year warrant to purchase 16,000 shares of Class B Preferred Stock. Subject
to certain conditions, Navarre is required to issue the third tranche, at
Fletcher's option, during the period beginning six months from the date a
registration statement covering the common stock underlying the securities
issued in the first tranche becomes effective and ending three years from the
date the option commences. The purchase price will be $8.5 million, or $250 per
share of Class B Preferred Stock, and the warrant exercise price is $4.0
million, or $250 per share of Class B Preferred Stock, if Fletcher exercises the
warrant in its entirety. If Fletcher fails to exercise its option within this
time frame, Navarre will have one year to demand that Fletcher purchase up to
50,000 additional shares of Class B Preferred Stock at a purchase price of $250
per share.
Fletcher may convert shares of Class B Preferred Stock into shares of Navarre's
common stock at any time after issuance provided certain conditions are met. In
addition, subject to certain conditions, Navarre may demand conversion of the
34,000 shares of Class B Preferred Stock issued in the first tranche and the
34,000 shares of Class B Preferred Stock issued in the second tranche one year
from the date the Class B Preferred Stock was issued. The conversion ratio is
determined by dividing $250 by a variable conversion price, which is tied to the
market price of the common stock. The conversion price can be no greater than
180% of the closing price of the common stock on the date prior to the date the
Class B Preferred Stock or the warrant covering shares of Class B Preferred
Stock was issued. In addition, for the six-month period ended February 20, 1000,
the conversion price can be no less than $9.25. Subject to certain conditions,
the Class B Preferred Stock will be automatically converted into common stock
three years after the issuance of the Class B Preferred Stock.
The holders of Class B Preferred Stock are entitled to a $250 per share
liquidation preference in the event Navarre ceases operations. Holders of Class
B Preferred Stock are not entitled to receive dividends unless a default event
has occurred. If a default event occurs, the holders of Class B Preferred Stock
are entitled to receive dividends of fifteen percent (15%) of $250 on an annual
basis for each share owned until the default event is cured. Holders of Class B
Preferred Stock do not have voting rights unless a default event has occurred
and Navarre fails to pay dividends. Upon the occurrence of a default event and
non-payment of dividends, the holders may appoint members of the Board of
Directors in proportion to their ownership of outstanding common stock as though
all outstanding Class B Preferred stock had been converted into Common Stock.
A default event occurs if Navarre fails to (i) register the common stock
underlying the Class B Preferred stock within a specified time frame, (ii)
obtain the consent of its shareholders to the issuance of shares when required,
or (iii) redeem Class B Preferred Stock owned by holders who objected to
combinations that do not meet certain criteria for a 33% premium over the
liquidation preference.
In connection with the execution of the Subscription Agreement, and the issuance
of the Class B Preferred Stock to Fletcher, Navarre engaged Wit Capital
Corporation as its investment banker and agreed to pay Wit Capital Corporation a
fee of five percent (5%) of the gross proceeds it receives under the
Subscription Agreement. Fees will be paid as funds are received by Navarre. The
Subscription Agreement was dated and entered into on July 31, 1999, but was
subject to subsequent approval by the Navarre Board of Directors and
satisfaction of certain closing conditions.
Navarre believes the issuance of the Class B Preferred Stock was exempt under
Section 4(2).
13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on September 9, 1999. At
the meeting, the following action was taken:
1. The following persons were re-elected as directors of the
Company:
NAMES VOTES FOR VOTES WITHHELD
----- --------- --------------
Eric H. Paulson 21,897,501 985,699
James G. Sippl 21,911,743 971,457
2. An amendment to the Company's Articles of Incorporation to
authorize the increase the number of authorized shares of common stock was
approved by a vote of 20,754,452 shares in favor, 2,028,825 shares against and
99,923 shares abstaining.
3. An amendment to the Company's 1992 Stock Option Plan was approved
by a vote of 6,591,728 shares in favor, 1,755,066 shares against, 142,268 shares
abstaining and 14,394,138 broker non-votes. The amendment required the
affirmative vote of a majority of the holders present and voting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
Exhibit 10.1 Multiple Advance Note dated as of March 1,
1999 between Navarre Corporation and NetRadio
Corporation, incorporated by reference from Exhibit
10.13 of the NetRadio Registration Statement on Form
S-1, File No 333-73621, as amended.
Exhibit 10.2 Separation Agreement dated as of March 2,
1999 between Navarre Corporation and NetRadio
Corporation, incorporated by reference from Exhibit
10.16 of the NetRadio Registration Statement on Form
S-1, File No 333-73621, as amended.
Exhibit 27: Financial data schedule
(b) Reports on Form 8-K
On September 2, 1999, the Company filed a Form 8-K dated
August 20, 1999 announcing its sale of shares of Class B
Convertible Preferred Stock to Fletcher International
Limited.
14
<PAGE>
NAVARRE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NAVARRE CORPORATION
(Registrant)
Date: November 12, 1999 By /s/ Eric H. Paulson
-----------------------
Eric H. Paulson
Chairman of the Board,
President and
Chief Executive Officer
Date: November 12, 1999 By /s/ Charles E. Cheney
------------------------
Charles E. Cheney
Treasurer and Secretary,
Executive Vice President,
and Chief Financial Officer
15
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