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 Ended September 30, 2000
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 (763) 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 - 25,655,004 shares as of October 31, 2000
<PAGE>
NAVARRE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
September 30, 2000 and March 31, 2000
Consolidated Statements of Operations -
Three months and six months ended September 30, 2000 and 1999
Consolidated Statements of Cash Flows -
Six months ended September 30, 2000 and 1999
Notes to Consolidated Financial Statements - September 30, 2000
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 AND USE OF PROCEEDS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 MARCH 31, 2000
-----------------------------------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 4,851 $ 15,739
Accounts receivable, less allowance for doubtful accounts and sales
returns of $4,996 and $4,349, respectively 67,624 56,483
Inventories 35,403 22,421
Note receivable, related parties 594 375
Prepaid expenses and other current assets 188 216
-----------------------------------------
Total current assets $ 108,660 $ 95,234
NetRadio note receivable -- 9,597
Equity investment in NetRadio -- 1,941
Property and equipment, net of accumulated depreciation of $4,696 and
$4,473, respectively 4,364 2,469
Other assets:
Goodwill 373 391
Other assets 93 79
-----------------------------------------
Total assets $ 113,490 $ 109,711
=========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ -- $ --
Accounts payable 80,314 66,718
Accrued expenses 2,234 1,570
-----------------------------------------
Total current liabilities $ 82,548 $ 68,288
Shareholders' equity:
Preferred stock, no par value:
Authorized shares - 10,000,000,
Issued and outstanding Class B convertible preferred shares - 13,610
and 34,000, respectively 3,206 8,010
Common stock, no par value:
Authorized shares - 100,000,000,
Issued and outstanding shares-25,655,004 and 23,534,435, respectively 96,371 91,501
Retained deficit (68,618) (58,051)
Unearned compensation (17) (37)
-----------------------------------------
Total shareholders' equity 30,942 41,423
-----------------------------------------
Total liabilities and shareholders' equity $ 113,490 $ 109,711
=========================================
</TABLE>
NOTE: THE BALANCE SHEET AT MARCH 31, 2000 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
<PAGE>
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,
2000 1999 2000 1999
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 78,378 $ 67,399 $ 133,544 $ 125,150
Cost of sales 69,245 58,629 116,763 109,575
------------------------------------------------------------------
Gross profit 9,133 8,770 16,781 15,575
Operating expenses:
Selling and promotion 2,196 3,331 4,129 5,662
Distribution and warehousing 1,736 1,443 3,360 2,629
General and administration 3,960 6,860 8,564 12,259
Depreciation and amortization 625 441 822 878
------------------------------------------------------------------
8,517 12,075 16,875 21,428
------------------------------------------------------------------
Income (loss) from operations 616 (3,305) (94) (5,853)
Other expense:
Interest expense (11) (97) (69) (296)
Other income 545 218 1,133 361
------------------------------------------------------------------
Income (loss) before equity in loss of NetRadio Corporation 1,150 (3,184) 970 (5,788)
Equity in loss of NetRadio Corporation (9,597) -- (11,538) --
------------------------------------------------------------------
Loss before income taxes (8,447) (3,184) (10,568) (5,788)
Income tax benefit -- -- -- --
------------------------------------------------------------------
Net loss attributable to common shareholders $ (8,447) $ (3,184) $ (10,568) $ (5,788)
==================================================================
Loss per common share:
Basic and diluted $ (0.33) $ (0.14) $ (0.42) $ (0.25)
==================================================================
Weighted average common and
common equivalent shares outstanding
Basic and diluted 25,654 23,509 25,120 23,441
==================================================================
</TABLE>
4
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NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
--------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (10,568) $ (5,788)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of intangible assets 859 873
Amortization of unearned compensation 20 48
Equity in loss of NetRadio Corporation 11,538 --
Employee stock compensation 53 --
Changes in operating assets and liabilities:
Accounts receivable (11,141) (12,807)
Inventories (12,982) (5,596)
Prepaid expenses and other assets 14 (1,718)
Income tax receivable -- 613
Accounts payable and accrued expenses 14,260 18,890
--------------------------------------
Net cash used in operating activities (7,947) (5,485)
INVESTING ACTIVITIES
Note receivable, related parties (219) (16)
Purchase of equipment and leasehold improvements (2,735) (1,112)
--------------------------------------
Net cash used in investing activities (2,954) (1,128)
FINANCING ACTIVITIES
Net change in long-term debt -- 30
Proceeds from notes payable, bank -- 104,448
Payment on notes payable, bank -- (104,777)
Proceeds from sale of preferred stock and warrants 13 8,019
Exercise of common stock options and warrants -- 741
--------------------------------------
Net cash provided by financing activities 13 8,461
--------------------------------------
Net decrease in cash (10,888) 1,848
Cash at beginning of period 15,739 92
--------------------------------------
Cash at end of period $ 4,851 $ 1,940
======================================
</TABLE>
5
<PAGE>
NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Navarre Corporation and its
wholly owned subsidiary, eSplice, Inc., 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, 2000 are not necessarily indicative of the results that may be
expected for the year ending March 31, 2001. 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, 2000.
NOTE B - BUSINESS SEGMENTS
Financial information by reportable business segment is included in the
following summary:
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
NET SALES
Home Entertainment Products $ 78,376 $ 67,011 $ 133,540 $ 124,542
eSplice 2 -- 4 --
NetRadio -- 388 -- 608
----------------------------------------------------------
CONSOLIDATED $ 78,378 $ 67,399 $ 133,544 $ 125,150
==========================================================
OPERATING INCOME (LOSS)
Home Entertainment Products $ 932 $ 734 $ 836 $ 342
eSplice (316) -- (930) --
NetRadio -- (4,039) -- (6,195)
----------------------------------------------------------
CONSOLIDATED INCOME (LOSS) FROM OPERATIONS $ 616 $ (3,305) $ (94) $ (5,853)
==========================================================
Interest Expense $ (11) $ (97) $ (69) $ (296)
Other Income 545 218 1,133 361
Equity loss from investment in NetRadio (9,597) -- (11,538) --
----------------------------------------------------------
LOSS BEFORE INCOME TAXES $ (8,447) $ (3,184) $ (10,568) $ (5,788)
==========================================================
</TABLE>
NOTE C - NET EARNINGS (LOSS) PER SHARE
For the periods ending September 30, 2000 and 1999, preferred stock, preferred
stock warrants and employee stock options are not included in the computation of
the dilutive, weighted-average shares calculation because they are
anti-dilutive.
6
<PAGE>
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,
2000 1999 2000 1999
-------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net loss applicable to common stock $ (8,447) $ (3,184) $(10,568) $ (5,788)
-------------------------------------------------------
Denominator:
Denominator for basic earnings per
share--weighted-average shares 25,654 23,509 25,120 23,441
Denominator for diluted earnings
per share--adjusted
weighted-average shares 25,654 23,509 25,120 23,441
-------------------------------------------------------
Basic and dilutive loss per share $ (0.33) $ (0.14) $ (0.42) $ (0.25)
=======================================================
</TABLE>
NOTE D - 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
International") 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"). Under the
terms of the Subscription Agreement, the Class B Preferred Stock could 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. Under the warrant, Fletcher International would pay an additional $4.0
million, or $250 per share of Class B Preferred Stock, if it exercised the
warrant in its entirety. On May 18, 2000, Fletcher International converted
20,390 shares of Class B Preferred Stock to 2,115,057 shares of common stock.
Subsequent to the Balance Sheet date, Navarre and Fletcher International entered
into and closed on a portion of the obligations contained in a Securities
Redemption Agreement ("Redemption Agreement"). Under the Redemption Agreement
and closing, Navarre repurchased all of the 13,610 shares of its Class B
Preferred Stock not yet converted with a carrying value of approximately $3.2
million. In connection with the repurchase, Navarre paid Fletcher International
$3.4 million and issued to Fletcher International a promissory note due November
21, 2000 for an additional $600,000. Under the Redemption Agreement, Navarre and
Fletcher International agreed that upon payment of the $600,000 promissory note,
Fletcher International will return the outstanding warrant to purchase an
additional $4.0 million of Class B Preferred Stock and all rights of Fletcher
International and Navarre to purchase and sell Navarre securities under the
Subscription Agreement will be terminated.
In June 2000, Navarre hired the investment-banking firm Sutro & Co., Inc. to
advise Navarre with respect to various strategic matters. In connection with its
engagement of Sutro, on October 1, 2000, subsequent to the Balance Sheet date,
Navarre issued Sutro a warrant to purchase 10,000 shares of Navarre Common stock
at a price of $4.50 per share.
7
<PAGE>
NOTE E - NETRADIO CORPORATION
On October 19, 1999, NetRadio Corporation, the Company's formerly 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 has not
consolidated NetRadio's results for periods after November 5, 1999 in Navarre
financial statements, but has reported 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 separation agreement, Navarre and NetRadio agreed at
closing of the initial public offering that a Term Note would replace this
Multiple Advance Note. Under the Term 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 Term Note bears interest at prime plus one half-percentage point.
Interest payments are due monthly. The principal balance of the Term Note,
approximately $9.6 million, is due on November 14, 2001. During the quarter
ended September 30, 2000, Navarre determined that the Term Note was impaired and
Navarre recorded a valuation reserve for the $9.6 million carrying value of the
Note. As a result, Navarre's basis in the Note has been reduced to zero.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Navarre Corporation ("Navarre" or the "Company") 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 wholly owned subsidiary, eSplice, Inc., a development stage company,
Navarre is engaged in the development of a platform to aggregate and distribute
digital content including music and software utilizing industry-leading
solutions for encoding, encryption, digital rights management and playback.
Navarre's operations are classified into two business segments for fiscal 2001,
based upon products and services provided. They are home entertainment products
and eSplice, Inc. The home entertainment products segment distributes two
principal products, computer software products and music products.
For a portion of the fiscal year ended March 31, 2000, Navarre was the majority
shareholder, of NetRadio Corporation; a leading broadcaster of originally
programmed audio entertainment over the Internet through its Web site
www.netradio.com. On October 19, 1999, NetRadio closed on an initial public
offering. Navarre's ownership of NetRadio subsequently decreased to less than
fifty percent. Accordingly, Navarre has not consolidated NetRadio's results for
periods after November 5, 1999 in Navarre financial statements, but has reported
its interest in NetRadio using the equity method. As discussed above in Note E
of "Notes to Consolidated Financial Statements," Navarre incurred a charge of
$9.6 million in quarter ended September 30, 2000 with respect to its
indebtedness from NetRadio Corporation.
8
<PAGE>
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."
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
----------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales:
Computer software 65.6% 62.2% 65.6% 63.3%
Music 34.4 37.2 34.4 36.3
----------------------------------------------------------
Home entertainment products 100.0 99.4 100.0 99.6
eSplice, Inc. -- -- -- --
NetRadio Corporation -- 0.6 -- 0.4
----------------------------------------------------------
Total net sales 100.0 100.0 100.0 100.0
Cost of sales 88.3 87.0 87.4 87.6
----------------------------------------------------------
Gross profit 11.7 13.0 12.6 12.4
Selling and promotion 2.8 4.9 3.1 4.5
Distribution and warehousing 2.2 2.1 2.5 2.1
General and administration 5.1 10.2 6.5 9.8
Depreciation and amortization 0.8 0.7 0.6 0.7
----------------------------------------------------------
Income (loss) from operations 0.8 (4.9) (0.1) (4.7)
Interest expense (0.0) (0.1) (0.1) (0.2)
Other income 0.7 0.3 0.9 0.3
Equity loss from investment in NetRadio (12.2) -- (8.6) --
----------------------------------------------------------
Net loss (10.7)% (4.7)% (7.9)% (4.6)%
==========================================================
</TABLE>
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, 2000, and
the section "Risk Factors" in the Company's Prospectus dated January 11, 2000
and filed with the SEC on January 12, 2000.
HOME ENTERTAINMENT PRODUCTS
Net sales of home entertainment products for the second quarter ended September
30, 2000 increased 16.7% to $78.3 million in fiscal 2001 from $67.1 million in
fiscal 2000. For the six-month period ended September 30, 2000, net sales of
home entertainment products increased 7.1% to $133.5 million in fiscal 2001 from
$124.6 million in fiscal 2000. The increase in sales for the second quarter and
six-month period was due to increased sales in both the Computer Products
Division and the Music Products Division. Computer Products net sales for the
second quarter ended September 30, 2000 increased 22.1% to $51.3 million for
fiscal 2001 from $42.0 million in fiscal 2000. For the six-month period ended
September 30, 2000, net sales of Computer Products increased 10.5% to $87.5
million in fiscal 2001 from $79.2 million in fiscal 2000. The increase in sales
for the second quarter and six-month period was primarily due to growth in
Navarre's distributed market share of consumer software. Music Products net
sales for the second quarter ended September 30, 2000 increased 7.6% to $27.0
million for fiscal 2001 from $25.1 million in fiscal 2000. For the six-month
period ended September 30, 2000, net sales of Music Products increased 1.3% to
$46.0 million in fiscal 2001 from $45.4 million in fiscal 2000. The increase in
sales for the second quarter and six-month period was primarily due to sales of
new release titles for the holiday season.
9
<PAGE>
Gross margin from home entertainment products for the second quarter ended
September 30, 2000 was $9.1 million or 11.7% as a percentage of net sales for
fiscal 2001 compared with $8.6 million or 12.8% as a percentage of net sales in
fiscal 2000. The decrease in margin as a percentage of net sales for the second
quarter was due to decreases in both the Computer Products and Music Products
Divisions. For the six-month period ended September 30, 2000, gross margin from
home entertainment products was $16.8 million or 12.6% as a percentage of net
sales for fiscal 2001 compared with $15.3 million or 12.3% as a percentage of
net sales in fiscal 2000. The six-month increase in margin as a percentage of
net sales was due to increases in both the Computer Products and Music Products
Divisions.
Gross margin from the Computer Products Division's net sales for the second
quarter ended September 30, 2000 was $5.2 million or 10.1% as a percentage of
net sales in fiscal 2001 compared with $4.4 million or 10.5% as a percentage of
net sales in fiscal 2000. The decrease in margin as a percentage of net sales
for the second quarter was due to a lower margin sales mix. For the six-month
period ended September 30, 2000, gross margin from the Computer Products
Division's net sales was $9.5 million or 10.9% as a percentage of net sales in
fiscal 2001 compared with $8.5 million or 10.7% as a percentage of net sales in
fiscal 2000. The six-month increase was primarily due to higher margin sales
mix.
Gross margin from the Music Products Division's net sales for the second quarter
ended September 30, 2000 was $4.0 million or 14.8% as a percentage of net sales
in fiscal 2001 compared with $4.2 million or 16.7% as a percentage of net sales
in fiscal 2000. The decrease in margin as a percentage of net sales for the
second quarter was due to a lower margin sales mix. For the six-month period
ended September 30, 2000, gross margin from the Music Products Division's net
sales was $7.3 million or 15.9% as a percentage of net sales in fiscal 2001
compared with $6.8 million or 15.0% as a percentage of net sales in fiscal 2000.
The six-month increase in margin as a percentage of net sales was primarily
attributable to rebate programs implemented with the proprietary independent
labels.
Selling and promotion expense of home entertainment products for the second
quarter ended September 30, 2000 decreased to $2.1 million in fiscal 2001 from
$2.3 million in fiscal 2000 and as a percentage of net sales decreased to 2.7%
in fiscal 2001 from 3.4% in fiscal 2000. For the six-month period ended
September 30, 2000, selling and promotion expense of home entertainment products
decreased to $4.0 million in fiscal 2001 from $4.2 million in fiscal 2000 and as
a percentage of net sales decreased to 3.0% in fiscal 2001 from 3.4% in fiscal
2000. The decrease for the second quarter and the six-month period was due to
lower costs associated with expedited freight.
Distribution and warehousing expense of home entertainment products for the
second quarter ended September 30, 2000 increased to $1.7 million for fiscal
2001 from $1.4 million in fiscal 2000 but as a percentage of net sales, it
remained constant at 2.2% of net sales in both fiscal 2001 and fiscal 2000. For
the six-month period ended September 30, 2000, distribution and warehousing
expense increased to $3.3 million in fiscal 2001 from $2.6 million in fiscal
2000 and increased as a percentage of net sales to 2.5% in fiscal 2001 from 2.1%
in fiscal 2000. The six-month increase was due to increased costs associated
with increased returns processing in the first quarter.
General and administration expense of home entertainment products for the second
quarter ended September 30, 2000 increased to $4.0 million for fiscal 2001 from
$3.9 million in fiscal 2000 but as a percentage of net sales, it decreased to
5.2% for fiscal 2001 from 5.8% in fiscal 2000. For the six-month period ended
September 30, 2000, general and administration expenses of home entertainment
products increased to $8.1 million in fiscal 2001 from $7.7 million in fiscal
2000 but as a percentage of net sales, it decreased to 6.1% in fiscal 2001 from
6.2% in fiscal 2000. The percentage of net sales decrease for the second quarter
and six-month period was attributable to improved efficiencies associated with
operating at a higher level of sales.
10
<PAGE>
eSPLICE, INC.
The Company wholly-owned subsidiary, eSplice, Inc. is engaged in the development
of a platform to aggregate and distribute digital content including music and
software utilizing industry-leading solutions for encoding, encryption, digital
rights management and playback.
During the second quarter ended September 30, 2000, eSplice, Inc. had revenue of
$2,000, operating expenses of $318,000 including $66,000 in selling and
promotion expense and $252,000 in general and administration and depreciation
expense. For the six-month period ended September 30, 2000, eSplice, Inc. had
revenue of $4,000, operating expenses of $933,000 including $128,000 in selling
and promotion expense and $455,000 in general and administration and $350,000
depreciation expense.
Interest expense for the second quarter ended September 30, 2000 decreased to
$11,000 in fiscal 2001 from $97,000 in fiscal 2000. For the six-month period
ended September 30, interest expense decreased to $69,000 in fiscal 2001 from
$296,000 in fiscal 2000. This decrease resulted from improved cash management,
which resulted in no debt.
Other income, which consists principally of interest income, for the second
quarter ended September 30, 2000 increased to $545,000 for fiscal 2001 from
$218,000 in fiscal 2000. For the six-month period ended September 30, 2000,
other income increased to $1.1 million for fiscal 2001 from $361,000 in fiscal
2000. The increase was primarily due to higher interest rates received on our
cash investments.
Due to the accumulated losses from prior years and the current quarter's loss,
the Company has not recorded any tax benefit.
Income, before the equity in loss of NetRadio Corporation, for the second
quarter ended September 30, 2000 was $1.1 million for fiscal 2001 compared to a
loss of $3.2 million in fiscal 2000. For the six-month period ended September
30, 2000, income, before the equity in loss of NetRadio Corporation, was $1.0
million for fiscal 2001 compared to a loss of $5.8 in fiscal 2000.
MARKET RISK
Although the Company is subject to some interest rate risk, because the Company
currently has no bank debt, the Company believes 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 and funds raised through private equity financing. The level of bank
borrowings has historically fluctuated significantly during the year. At
September 30, 2000, the Company had accounts payable of $80.3 million financing
assets of net accounts receivable of $67.6 million and inventory of $35.4
million.
The Company used cash of $7.9 million in operating activities. Accounts
receivable increased by $11.1 million, inventories increased by $13.0 million
and accounts payable and accrued expense increased by $14.3 million. The
Company's accounts receivable, inventory, and accounts payable typically
increase during the second quarter of its fiscal year because of the seasonal
nature of the Company's business. Investing activities used $2.9 million of
cash, including $2.7 million for the purchase of furniture, equipment and
leasehold improvements. Cash at the end of the period decreased by $10.9
million.
The Company has a revolving line of credit with Congress Financial Corporation.
The credit facility has a maximum borrowing limit of $25.0 million and is
secured by substantially all the Company's assets. The available
11
<PAGE>
amount fluctuates based on an asset-borrowing base. The Company anticipates it
will utilize its credit facility during the current quarter 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. As disclosed above under
Note D of "Notes to Consolidated Finance Statements", subsequent to the Balance
Sheet date, Navarre repurchased 13,610 shares of its Class B Preferred Stock for
$3.4 million and delivered a $600,000 promissory note due November 21, 2000.
ITEM 3. 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 this Form 10-Q.
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 generally 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 of these pending matters
will not have a material adverse effect on its financial position or results of
operation. In addition, the Company is subject to the litigation listed below.
NAVARRE SECURITIES LITIGATION
On or about December 6, 1999, Daniel Chen, on behalf of himself and all others
similarly situated, filed a class action complaint in the United States District
Court, District of Minnesota, against the Company and its directors alleging,
among other things, violations of Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10b-5 of the Securities Exchange Commission, and violation of
Section 20(a) of the Securities Exchange Act of 1934. Plaintiff's complaint is
essentially based on the factual allegations that Navarre and/or its directors
made material misleading statements or omissions regarding the timing of an
initial public offering of shares in its subsidiary, NetRadio Corporation. The
plaintiff seeks unspecified damages and certification of a class to include all
those similarly situated and who acquired shares of Navarre Corporation during
the time period of November 25, 1998 through December 9, 1998.
Navarre and the directors have timely answered the Chen complaint, denied
liability, asserted numerous affirmative defenses including among others,
failure to state a claim and failure to comply with the pleading requirements of
Federal Rule of Civil Procedure 9 and the Private Securities Litigation Reform
Act of 1995 (the "Reform Act"). Navarre and the directors intend to vigorously
defend against plaintiff's claims.
On January 26, 2000, Judy Poucher filed a complaint virtually identical to the
complaint filed by Mr. Chen seeking essentially the same relief as that
requested by Mr. Chen. Navarre and the directors timely answered the Poucher
complaint, denied liability, asserted numerous affirmative defenses including,
among others, failure to state a claim and failure to comply with the pleading
requirements of Rule 9 of the Federal Rules of Civil Procedure and the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). Navarre and the
directors intend to vigorously defend against Ms. Poucher's claims.
On February 22, 2000, Navarre and the directors served a motion to dismiss the
Chen and Poucher complaints for failure to state a claim for which relief can be
granted. Thereafter, on February 25, 2000, the court held a hearing on Mr.
Chen's and Ms. Poucher's motion to appoint Lead Plaintiffs and Lead Counsel and
to consolidate and amend the complaints. The magistrate judge, by Order dated
March 1, 2000, denied, without prejudice, the motion to appoint Lead Plaintiffs
and Lead Counsel, granted the motion to consolidate the pleadings so that the
litigation is
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now entitled "In re: Navarre Securities Corp. Litigation," denied, without
prejudice, the motion to amend, and stayed Navarre and the directors' motion to
dismiss pending resolution of the amendment issues, the Lead Plaintiffs issues,
and the Lead Counsel issues. Plaintiffs re-filed their motion to appoint Lead
Plaintiffs and Lead Counsel, and the court granted in part and denied in part
the motion by Order dated April 18, 2000.
Plaintiffs renewed their motion to amend which was heard by the magistrate judge
on June 19, 2000. Navarre and the directors opposed the motion to amend, and on
July 18, 2000, the magistrate judge handed down an order granting in party and
denying in part Plaintiffs' motion to amend, requiring Plaintiffs to file the
approved pleading on or before July 21, 2000. Navarre and the directors
contended that Plaintiffs failed to comply with the court's order regarding the
filing of the amended complaint, and moved to strike the same and for lifting
the stay on Navarre's motion to dismiss. On September 6, 2000, a hearing was
held on Navarre's motion to strike the purported amended complaint filed by
Plaintiffs and to lift the stay on Navarre's motion to dismiss. Plaintiffs
requested an additional opportunity to file a corrected amended complaint to
address the objections raised. Following the hearing, the court ordered that
Plaintiffs are permitted to file a final amended complaint provided, however,
that no further amendments of the complaint will be allowed except for good
cause shown by Plaintiffs. Plaintiffs filed the amended complaint on September
21, 2000. The amended complaint alleges the same causes of action as set forth
in the original complaint, and adds factual allegations regarding primarily the
claimed impropriety of Navarre's revenue recognition practices under generally
accepted accounting principles. In addition, the class period in the amended
complaint is expanded to include purchasers of shares of Navarre Corporation
during the time period of November 25, 1998, through July 26, 1999. Navarre has
given notice of its intention to move to dismiss the amended complaint, and its
supporting motion papers will be served and filed on or before November 27,
2000, pursuant to an agreed to briefing schedule.
This litigation is in the very early stages of proceeding, and pursuant to
applicable procedural rules governing class action lawsuits and the Reform Act,
as well as the agreement between the parties, discovery in the matter is
currently stayed.
The Company and the directors intend to vigorously defend against Plaintiffs'
claims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In June 2000, Navarre hired the investment-banking firm Sutro & Co., Inc. to
advise Navarre with respect to various strategic matters. In connection with its
engagement of Sutro, on October 1, 2000, subsequent to the Balance Sheet date,
Navarre issued Sutro a warrant to purchase 10,000 shares of Navarre Common stock
at a price of $4.50 per share.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on September 7, 2000. At
the meeting, the following action was taken:
The following persons were re-elected as directors of the Company:
NAMES VOTES FOR VOTES WITHHELD
----- --------- --------------
Michael L. Snow 23,102,845 329,875
Alfred Teo 23,110,221 322,499
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ITEM 5. OTHER INFORMATION
REPURCHASE OF CLASS B PREFERRED STOCK
Subsequent to the end of the quarter, Navarre repurchased its outstanding Class
B Preferred Stock. See Note D of Notes to Financial Statement in the Form 10-Q.
BEAMSCOPE CANADA, INC.
Navarre announced that it had entered into an Asset Purchase Agreement with
Toronto-based Beamscope Canada, Inc. on September 25, 2000 to acquire two
operating divisions from Beamscope. On October 30, 2000, Navarre announced that
it had advised Beamscope that Navarre would not proceed to close the Asset
Purchase Agreement because, among other things, certain closing conditions could
not be satisfied and that certain material adverse information about the
business was not disclosed to Navarre. Beamscope has informed Navarre that it
disputes Navarre's view (the "Dispute") that certain closing conditions could
not be satisfied and maintains that all material information was disclosed to
Navarre.
Under the terms of the Asset Purchase Agreement, the parties are required to use
their best efforts to resolve the Dispute. If the parties do not resolve the
Dispute by November 20, 2000, then upon written notice by either party, the
Dispute shall be settled by Arbitration in accordance with the provisions of the
Asset Purchase Agreement and the Ontario Arbitration Act.
AUTHORIZATION OF REPURCHASE PROGRAM
On October 17, 2000, Navarre announced that its board of directors had
authorized it to repurchase up to 5,000,000 shares of Navarre common stock or
approximately twenty percent of its outstanding common stock, in market or
private transactions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
Exhibit 27: Financial data schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
three months ended September 30, 2000
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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 10, 2000 By /s/ Eric H. Paulson
----------------------
Eric H. Paulson
Chairman of the Board,
President and
Chief Executive Officer
Date: November 10, 2000 By /s/ Charles E. Cheney
------------------------
Charles E. Cheney
Vice-Chairman,
Treasurer and Secretary,
Executive Vice President,
and Chief Financial Officer
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