Rule 424(b)(3) Prospectus
SEC File No. 333-87145
NAVARRE CORPORATION
PROSPECTUS
2,702,703 SHARES OF COMMON STOCK
* These shares of the common stock of Navarre Corporation may be offered
and sold from time to time by Fletcher International Limited.
* The shares of common stock registered under this prospectus are
issuable upon conversion of 34,000 shares of Class B convertible
preferred stock, or the preferred stock, issued to Fletcher on August
20, 1999 and upon conversion of 16,000 shares of the preferred stock
issuable upon exercise of a warrant granted to Fletcher on that date.
See "Selling Shareholder" for additional information.
* Our common stock is quoted on the Nasdaq National Market under the
symbol "NAVR."
* On January 10, 2000, the last reported sale price of our common stock
was $6.21875 per share.
This investment is speculative and involves a high degree of risk. PLEASE SEE
"RISK FACTORS" BEGINNING ON PAGE 3 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS JANUARY 11, 2000
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TABLE OF CONTENTS
PAGE
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OUR COMPANY 1
WHERE YOU CAN FIND ADDITIONAL INFORMATION 2
INFORMATION INCORPORATED BY REFERENCE 2
RISK FACTORS 3
USE OF PROCEEDS 7
SELLING SHAREHOLDER 7
PLAN OF DISTRIBUTION 8
INTERESTS OF NAMED EXPERTS AND COUNSEL 8
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES 9
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS OFFERING TO SELL, AND SEEKING
OFFERS TO BUY, SHARES OF OUR COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND
SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME THE PROSPECTUS IS
DELIVERED OR THE TIME THE COMMON STOCK IS SOLD.
THIS PROSPECTUS, INCLUDING THE RISK FACTORS SECTION, CONTAINS FORWARD-LOOKING
STATEMENTS WHICH RELATE TO POSSIBLE FUTURE EVENTS, OUR FUTURE PERFORMANCE AND
FUTURE OPERATIONS. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY
THE USE OF WORDS SUCH AS "MAY," "WILL," "SHOULD," "ANTICIPATES," "BELIEVES,"
"EXPECTS," "PLANS," "FUTURE," "INTENDS," "COULD," "ESTIMATE," "PREDICT,"
"POTENTIAL," "CONTINUE," OR THE NEGATIVE OF THESE TERMS OR SIMILAR EXPRESSIONS.
THESE FORWARD-LOOKING STATEMENTS ARE ONLY OUR PREDICTIONS. OUR ACTUAL RESULTS
COULD AND LIKELY WILL DIFFER MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS
FOR MANY REASONS, INCLUDING RISKS DESCRIBED BELOW AND APPEARING ELSEWHERE IN
THIS PROSPECTUS. WE CANNOT GUARANTEE FUTURE RESULTS, LEVELS OF ACTIVITY,
PERFORMANCE OR ACHIEVEMENTS. WE ARE UNDER NO DUTY TO UPDATE ANY OF THE
FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS PROSPECTUS TO CONFORM THEM TO
ACTUAL RESULTS OR TO CHANGES IN OUR EXPECTATIONS.
WHEN WE REFER TO "WE," "OUR," AND "US" IN THIS PROSPECTUS WE MEAN NAVARRE
CORPORATION.
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OUR COMPANY
OVERVIEW
We are a major distributor of prerecorded music, personal computer software and
digital video disks, or DVDs. We distribute these products to both small and
large music and software retailers, wholesalers and rackjobbers. Our operations
are classified into two business segments based upon products and services
provided, home entertainment products and NetRadio Corporation. Our home
entertainment products segment distributes two principal products, computer
software products and music products. Our minority-owned subsidiary, NetRadio
Corporation, operates an Internet radio network featuring 120 channels of
originally programmed audio content.
HOME ENTERTAINMENT PRODUCTS
COMPUTER PRODUCTS DISTRIBUTION
In the last twelve months, increasing costs and acquisitions have led to the
consolidation of publishing and distribution companies in the personal consumer
software industry. Today the industry consists of very large publishers
including The Learning Company, Cendant Software, Electronic Arts, Hasbro
Interactive, and Mattel, as well as strong retail players such as Best Buy, Comp
USA, The Musicland Group, and Fry's Electronics, as well as office superstores
and warehouse clubs. We distribute computer software produced by these
publishers to these large retailers as well as smaller wholesalers and
retailers.
PRERECORDED MUSIC DISTRIBUTION
In addition to the major music labels and their distribution companies, there
are a number of independent labels that produce recordings and a number of
independent distribution companies, such as Navarre, that enter into
distribution agreements with labels on a regional or national basis. We
distribute independent labels seeking representation in the retail music market.
Many top name artists, seeking artistic freedom, are forming their own
independent labels, making this the fastest growing segment of the music
industry. In addition, we distribute both major and independent labels to
alternative retail markets such as wholesale clubs, mass merchandisers, and
Internet sources, including NetRadio.
NETRADIO CORPORATION
NetRadio broadcasts 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, and
from Internet advertising, including advertisements placed within NetRadio audio
broadcasts.
LEGAL PROCEEDINGS
On December 6, 1999, we learned that Daniel Chen commenced a lawsuit in the
United States District Court for Minnesota against us and the members of our
board of directors for alleged violations of Securities Exchange Act of 1934.
Chen's complaint is styled as a purported class action on behalf of all persons
and entities who purchased our common stock between November 25, 1998 and
December 9, 1998. The complaint alleges that we and the members of our board
violated the federal securities laws by making false and misleading statements
concerning the registration of securities of NetRadio. We believe that these
allegations are without merit and intend to vigorously defend this litigation.
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WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file annual, quarterly and special reports, proxy statements, and other
information with the Securities and Exchange Commission. You may read and copy
any document we file at the public reference room in Washington D.C. located at
Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms, including locations of regional offices. Some of our recent SEC
filings are also available to the public from our Web site at
http://www.navarre.com or at the SEC Web site at http://www.sec.gov. Information
on our Web site is not a part of this prospectus.
INFORMATION INCORPORATED BY REFERENCE
We "incorporate by reference" the information we file with the SEC. This means
we can disclose important information to you by referring you to those
documents. The information incorporated by reference is an important part of
this prospectus. We incorporate by reference the documents listed below, and any
future filings made with the SEC under Sections 13(a), 13(c), 14 of 15(d) of the
Securities Exchange Act of 1934 until all the securities offered by this
prospectus are sold. This prospectus is part of a registration statement we
filed with the SEC (Registration No. 333-87145). The following documents are
incorporated by reference:
* Our Annual Report on Form 10-K for the fiscal year ended March
31, 1999, as amended;
* Our Quarterly Reports on Form 10-Q for the quarters ended June
30, 1999 and September 30, 1999;
* Our Definitive Proxy Statement dated July 30, 1999 for the
Annual Meeting of Shareholders held on September 9, 1999;
* Our Current Report on Form 8-K dated August 20, 1999 and filed
September 2, 1999; and
* The description of our common stock contained in the
Registration Statement on Form 8-A dated November, 1993
including any amendments or reports filed for the purpose of
updating the information.
You may request a copy of these filings, at no cost, by writing or telephoning
us at the following address:
Navarre Corporation
7400 49th Avenue North
New Hope, Minnesota 55428
Attention: Investor Relations
(612) 535-8333
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RISK FACTORS
RISKS ASSOCIATED WITH OUR BUSINESS
WE ARE DEPENDENT UPON OUR MANAGEMENT TEAM.
Eric H. Paulson, our President and Chief Executive Officer, and Charles E.
Cheney, our Vice Chairman, Executive Vice President and Chief Financial Officer,
have run Navarre for the past five years. Although we have invested a
substantial amount of time and effort in developing our total management team,
the loss of either Mr. Paulson or Mr. Cheney could have a materially adverse
effect upon our business.
WE DEPEND UPON A FEW SIGNIFICANT CUSTOMERS.
In each of the past several years, we have had one or more customers that
accounted for 10% or more of our sales. During the fiscal year ended March 31,
1999, sales to three customers, CompUSA, Sam's Clubs and Best Buy, each
represented more than 10% of sales. We compete with other companies for the
business of each of our customers and there can be no assurance that we will
continue to recognize a significant amount of revenue from sales to any specific
customer. If we are unable to continue to sell our products to all or any of
these customers or are unable to maintain our sales to these customers at
current levels, and are unable to find other customers to replace these sales,
our financial results could be materially affected.
OUR BUSINESS CAN BE SEASONAL.
As a distributor of products ultimately sold at retail, our business is affected
by the pattern of seasonality common to other suppliers of retailers,
particularly during the holiday selling season. Historically, more than 70% of
our sales and a substantial portion of our profits have been in the third and
fourth quarters of the calendar year. Due to the lower level of sales during the
off periods, we have historically incurred losses during these periods. If we
experience low sales during the holiday season, our financial results could be
materially affected.
WE MAY HAVE SIGNIFICANT WORKING CAPITAL NEEDS.
As a distributor of prerecorded music and personal computer software products,
we purchase products directly from manufacturers for resale to retailers. As a
result, we have significant working capital requirements, the majority of which
are used to finance inventory and accounts receivable. These working capital
needs will expand as inventory and accounts receivable increase in response to
our growth. Although we have obtained financing sufficient to meet our working
capital requirements to date, we may not be able to obtain additional financing
upon favorable terms when required in the future.
WE DEPEND UPON BANK BORROWINGS TO SUPPORT OUR BUSINESS.
We have relied upon bank borrowings to finance our expansion, and currently have
a $45.0 million credit facility in place. Under the terms of our credit
facility, borrowings are dependent upon the eligibility of accounts receivable
and inventory, and other financial covenants. We believe we may need to acquire
additional bank financing in the future depending upon the growth of our
business and the need to finance possible future acquisitions. If we were
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unable to borrow under the credit facility and were unable to secure additional
financing, our business could be harmed.
RETURNS AND INVENTORY OBSOLESCENCE POSE RISKS TO OUR BUSINESS.
We invest a large amount in product inventory. Like other companies operating in
our industries, our product returns are significant when expressed as a
percentage of revenues. Our agreements with suppliers generally permit us 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 us to return products to a supplier and recover our
initial product acquisition costs. This would materially harm our business and
financial results. We maintain a sales return reserve based on our trailing
twelve month sales returns by product line and a small inventory obsolescence
reserve. We have historically experienced an actual return rate ranging from 15%
to 23%, depending upon the product, which we believe is in line with industry
practice. In the past, these levels have been adequate to cover potential
returns. There can be no assurance that our reserves will be adequate in the
future.
WE ARE DEPENDENT UPON SOFTWARE DEVELOPERS AND MANUFACTURERS.
We distribute interactive software under distribution agreements with software
developers and manufacturers. Our continued growth and success depend partly
upon our ability to procure and renew these agreements and to sell the
underlying software. There can be no assurance that we will enter into new
distribution agreements with developers and manufacturers or that we will be
able to sell software under existing distribution agreements. Further, current
distribution agreements may be terminated.
WE DEPEND UPON RECORDING LABELS AND ARTISTS.
Our music products division makes a portion of its sales as a result of
exclusive distribution agreements with recording artists. Our continued growth
and success depend partly upon our ability to procure and renew these agreements
and to sell the underlying recordings. In addition, we depend upon artists and
labels to generate additional quality recordings. In the future, we may not be
able to sign artists to distribution agreements or sell recordings under
existing distribution agreements. Our current distribution agreements may also
be terminated by the artists or labels.
OUR STOCK PRICE MAY BE AFFECTED BY THE SUCCESS OF OUR SUBSIDIARY
NETRADIO.
In March 1997, we acquired all the outstanding stock of NetRadio Corporation in
an effort to increase our presence in the marketplace as a content provider on
the Internet. NetRadio has operated at a loss since we acquired it, and we have
continued to supply NetRadio's working capital needs. NetRadio commenced a
public offering of 3,200,000 shares of its common stock at a price of $11.00 per
share on October 14, 1999. Prior to the public offering, we owned approximately
eighty-five percent (85%) of the outstanding shares of NetRadio. As a result of
the completion of the public offering and the subsequent exercise of options by
NetRadio option holders, our ownership in NetRadio has decreased to less than
fifty percent (50%). Accordingly, we will not be required to consolidate
NetRadio's results in our future financial statements, but will report our
interest in NetRadio on the equity method. Our investment in NetRadio is not
liquid, and we may never be able to sell our shares. In addition, at September
30, 1999, NetRadio owed us approximately $9,600,000 under the terms of a note
that bears interest at midwest prime plus one half percentage point. The note is
due on November 14, 2001. There can be no assurance that NetRadio will be able
to achieve profitability, will be able to repay the note or will ultimately
contribute to the profitability of Navarre.
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RISKS ASSOCIATED WITH OUR INDUSTRY
OUR INDUSTRIES ARE HIGHLY COMPETITIVE.
The home entertainment products segment, comprised of the prerecorded music and
the personal computer software industries, is highly competitive. Our
competitors include other national and regional distributors as well as
suppliers that sell directly to retailers. These competitors include the
distribution affiliates of Time-Warner, Sony Corporation, Thorn/EMI, Bertelsmann
A.G. and The Seagram Company. Some of these competitors have substantially
greater financial and other resources than we have. Our ability to effectively
compete in the future depends upon a number of factors, including our ability
to:
* obtain exclusive national distribution contracts and licenses
with independent labels and manufacturers;
* maintain our margins and volume;
* expand our sales through a varied range of products and
personalized services;
* anticipate changes in the marketplace including technological
developments; and
* maintain operating expenses at an appropriate level.
Our failure to adequately perform one or more of these tasks may materially harm
our business.
OUR INDUSTRY TYPICALLY EXPERIENCES LOW INDUSTRY MARGINS.
Competition in the prerecorded music and personal computer software distribution
industries is often based on price, and distributors like us generally
experience low gross and operating margins. Our gross margin for the fiscal year
1999 was 4.1%. Consequently, our profitability is highly dependent upon
achieving expected sales levels as well as effective cost and management
controls. Any erosion in our gross profit margins could harm our financial
results.
TECHNOLOGY DEVELOPMENTS MAY ADVERSELY AFFECT OUR DISTRIBUTION.
Prerecorded music and personal computer software have traditionally been
marketed and delivered on a physical delivery basis. Generally, all our 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" through the Internet or
another delivery mechanism, then retail and wholesale distribution could become
obsolete. As physical and electronic distribution grows through Internet
resellers, competition between suppliers to electronic retailers will intensify.
If we are unable to develop necessary supplier relationships with electronic
retailers or are unable to develop relationships to facilitate electronic
distribution of software and music, our business may be materially harmed.
WHOLESALERS AND RETAILERS MAY CHANGE THEIR METHODS OF DISTRIBUTION.
Our current sales strategy will only be successful if our wholesale and retail
customers continue to purchase products through us rather than directly from
manufacturers, through other distributors or through other means of
distribution. 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. Our business could be adversely affected if our customers decide
to purchase directly from manufacturers, other distributors or other
distribution channels rather than from us.
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RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE HAS EXPERIENCED VOLATILITY AND MAY CONTINUE TO
FLUCTUATE SIGNIFICANTLY.
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 our common stock has historically fluctuated
significantly. We believe factors such as indications of the market's acceptance
of our products and failure to meet market expectations, as well as general
volatility in the securities markets, could cause the market price of our common
stock to fluctuate substantially.
ANTI-TAKEOVER PROVISIONS, OUR RIGHT TO ISSUE PREFERRED STOCK, AND OUR
STAGGERED BOARD COULD MAKE A THIRD-PARTY ACQUISITION OF US DIFFICULT.
We are subject to Sections 302A.671 and 302A.673 of the Minnesota Business
Corporation Act, which may have the effect of limiting third parties from
acquiring significant amounts of our common stock without our approval. These
laws, among others, may have the effect of delaying, deferring or preventing a
third party from acquiring us or may serve as a barrier to shareholders seeking
to amend our articles of incorporation or bylaws. Our articles of incorporation
also grant us the right to issue preferred stock which could allow us to delay
or block a third party from acquiring us. Finally, our articles of incorporation
and bylaws divide our board of directors into three classes that serve staggered
three-year terms. This could make it difficult for a third party to effect a
change in control of us.
THE CONVERSION OF OUR CLASS B CONVERTIBLE PREFERRED STOCK INTO COMMON
STOCK COULD DEPRESS OUR STOCK PRICE.
The preferred stock can be converted into our common stock. The conversion ratio
of the preferred stock is variable and is tied to the market price of our common
stock during periods prior to conversion. As a result, we are unable to
determine the number of shares of common stock that may ultimately be issued
upon conversion. In August, 1999, we issued 34,000 shares of the preferred stock
and a warrant to purchase up to an additional 16,000 shares of the preferred
stock. The supply of a substantial amount of common stock upon the conversion of
the preferred stock may depress the stock price of our common stock.
THE INVESTMENT OF ADDITIONAL CAPITAL WILL DILUTE THE HOLDINGS OF OUR
STOCKHOLDERS.
Our common shareholders have no preemptive rights. If we:
* commence a subsequent public or private offering of our common
stock, convertible debt, or preferred stock; or
* issue preferred stock or shares of common stock upon exercise
of warrants to consultants or other parties providing goods
and services to us in lieu of or in addition to cash
consideration,
our shareholders, who may not participate in a future stock issuance, will
experience dilution of their equity investment. While we have no present plan to
engage in these transactions, if we did holders of our common stock could be
diluted.
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USE OF PROCEEDS
We will not receive any proceeds from the conversion of the preferred stock or
the sale of the common stock underlying the preferred stock.
We will only receive proceeds when Fletcher exercises its three-year warrant to
purchase up to 16,000 shares of the preferred stock. If this warrant is
exercised in full, we will receive aggregate proceeds of $4.0 million. There can
be no assurance that any portion of the warrant will be exercised. If the
warrant is exercised, we intend to use proceeds for working capital purposes.
SELLING SHAREHOLDER
In a private transaction on August 20, 1999, we issued Fletcher 34,000 shares of
the preferred stock in exchange for aggregate consideration of $8.5 million and
a warrant to purchase up to 16,000 shares of the preferred stock at a price of
$250.00 per share of preferred stock. The preferred stock issued to Fletcher and
issuable upon the exercise of its warrant is convertible into shares of our
common stock.
We may require Fletcher to purchase additional shares of the preferred stock and
Fletcher has the right to purchase additional shares of the preferred stock as
described in detail in our Current Report on Form 8-K dated August 20, 1999 and
filed on September 2, 1999. These additional shares of the preferred stock are
not being offered for sale by this prospectus.
The following table sets forth certain information with respect to Fletcher's
beneficial ownership of the common stock underlying the 34,000 shares of the
preferred stock and the 16,000 shares of the preferred stock issuable upon
exercise of the warrant, which are the only shares of common stock Fletcher
beneficially owns as of the date of this prospectus.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK UPON NUMBER OF SHARES OF MAXIMUM NUMBER NUMBER OF SHARES
CONVERSION OF COMMON STOCK UPON OF SHARES TO BE BENEFICIALLY OWNED
NAME PREFERRED STOCK EXERCISE OF WARRANT SOLD(1) AFTER OFFERING(2)
- ---- ------------------- ------------------- --------------- ------------------
<S> <C> <C> <C> <C>
Fletcher International Limited 919,020 432,480 1,351,500 0
</TABLE>
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(1) Assumes a conversion ratio of 27.03 shares of common stock to one share
of the preferred stock based upon the minimum conversion price of $9.25
effective as of the date of this prospectus and until February 20,
2000. Conversion rights for the preferred stock for dates after
February 20, 2000 are set forth in the Navarre Current Report on Form
8-K dated August 20, 1999.
(2) Assumes the sale of 1,351,500 shares of common stock.
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PLAN OF DISTRIBUTION
The common stock is being offered on behalf of Fletcher. The common stock may be
sold or distributed from time to time by Fletcher, or by pledgees, donees or
transferees of, or other successors in interest to Fletcher, directly to one or
more purchasers (including pledgees) or through brokers, dealers or underwriters
who may act solely as agents or may acquire common stock as principals, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices, at negotiated prices, or at fixed prices, which may be
changed.
The sale of the common stock may be effected in one or more of the following
methods:
* ordinary brokers' transactions;
* transactions involving cross or block trades or otherwise on
the Nasdaq National Market;
* purchases by brokers, dealers or underwriters as principals
and resale by such purchasers for their own accounts pursuant
to this prospectus;
* "at the market" to or through market makers or into an
existing market for the shares;
* in other ways not involving market makers or established
trading markets, including direct sales to purchasers or sales
effected through agents;
* through transactions in options, swaps or other derivatives
(whether exchange-listed or otherwise); or
* any combination of the foregoing, or by any other legally
available means.
In addition, Fletcher or its successors in interest may enter into hedging
transactions with broker-dealers who may engage in short sales of the common
stock in the course of hedging the positions they assume with Fletcher. Fletcher
or its successors in interest may also enter into option or other transactions
with broker-dealers that require the broker-dealers to deliver common stock,
which may be resold thereafter pursuant to this prospectus. Fletcher or its
successors in interest may also pledge the common stock in connection with
hedging transactions or other transactions.
Brokers, dealers, underwriters or agents participating in the distribution of
the common stock as agents may receive compensation in the form of commissions,
discounts or concessions from Fletcher or purchasers of the shares for whom such
broker-dealers may act as agent, or to whom they may sell as principals, or both
(which compensation as to a particular broker-dealer may be less than or in
excess of customary commissions). Fletcher and any broker-dealers who act in
connection with the sale of shares hereunder may be deemed to be "Underwriters"
within the meaning of the Securities Act of 1933, and any commissions they
receive and proceeds of any sale of common stock may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933. We know
of no existing arrangements between Fletcher and any other shareholder, broker,
dealer, underwriter or agent relating to the sale or distribution of the common
stock.
We have agreed to bear all expenses incurred in connection with registration,
filing or qualification of the common stock under federal and state securities
laws, other than underwriting discounts and commissions and fees and expenses of
counsel for the holders of preferred stock. In addition, we have agreed to
indemnify Fletcher against certain liabilities, including certain potential
liabilities under the Securities Act of 1933.
INTERESTS OF NAMED EXPERTS AND COUNSEL
The validity of the issuance of the common stock offered hereby will be passed
upon for us by Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota.
Ernst & Young LLP, independent auditors, have audited our consolidated financial
statements and schedule included in our Annual Report on Form 10-K for the year
ended March 31, 1999, as set forth in their report, which is incorporated by
reference in this prospectus and elsewhere in the registration statement. Our
financial statements and schedule are incorporated by reference in reliance on
Ernst & Young LLP's report, given on their authority as experts in accounting
and auditing.
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DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our bylaws provide for indemnification of directors to the full extent permitted
by the Minnesota Business Corporation Act. Minnesota Statutes Section 302A.521
provides that a Minnesota corporation shall indemnify any director, officer
employee or agent of the corporation made or threatened to be made a party to a
proceeding, by reason of the former or present official capacity of the person,
against judgments, penalties, fines, settlements, and reasonable expenses
incurred by the person in connection with the proceeding if certain statutory
standards are met. "Proceeding" means a threatened, pending or completed civil,
criminal, administrative, arbitration or investigative proceeding, including one
by or on behalf of us.
Indemnification for securities laws liabilities may be against public policy and
unenforceable.
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