UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 December 31, 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 - 23,533,835 shares as of January 31, 2000
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NAVARRE CORPORATION
INDEX
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
December 31, 1999 and March 31, 1999
Consolidated Statements of Operations -
Three months and nine months ended December 31, 1999 and 1998
Consolidated Statements of Cash Flows - Nine months ended
December 31, 1999 and 1998
Notes to Condensed Consolidated Financial Statements - December 31, 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 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
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2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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DECEMBER 31, 1999 MARCH 31, 1999
-------------------------------------
ASSETS (UNAUDITED) (NOTE)
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Current assets:
Cash $ 8,715 $ 92
Accounts receivable, less allowance for doubtful accounts
and sales returns of $4,311 and $3,810, respectively 77,475 43,465
Inventories 28,130 29,223
Note receivable, related parties 9,937 221
Refundable income taxes -- 613
Prepaid expenses and other current assets 147 908
------------------------------
Total current assets 124,404 74,522
Property and equipment, net of accumulated depreciation of
$4,133 and $5,251, respectively 2,230 3,361
Other assets:
Goodwill 399 853
Other assets 113 744
Equity investment in NetRadio 4,089 --
Total assets $ 131,235 $ 79,480
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ -- $ 329
Current portion of long-term debt -- 93
Accounts payable 85,688 51,831
Accrued expenses 2,180 1,949
------------------------------
Total current liabilities 87,868 54,202
Long-term debt, less current maturities -- 114
Shareholders' equity:
Preferred stock, no par value:
Authorized shares - 10,000,000
Issued and outstanding shares - 34,000 and none, respectively 8,011 --
Common stock, no par value:
Authorized shares - 100,000,000
Issued and outstanding shares-23,523,435 and 23,344,046, respectively 91,469 91,415
Retained deficit (56,053) (66,119)
Unearned compensation (60) (132)
------------------------------
Total shareholders' equity 43,367 25,164
------------------------------
Total liabilities and shareholders' equity $ 131,235 $ 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)
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THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
----------------- ----------------- ---------------- -----------------
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Net sales $ 99,137 $ 74,740 $ 224,287 $ 182,682
Cost of sales 86,855 65,922 196,430 161,012
----------------- ----------------- ---------------- -----------------
Gross profit 12,282 8,818 27,857 21,670
Operating expenses:
Selling and promotion 2,920 3,078 8,582 6,409
Distribution and warehousing 1,741 1,589 4,370 3,356
General and administration 5,515 5,477 17,773 13,469
Depreciation and amortization 394 639 1,273 1,255
----------------- ----------------- ---------------- -----------------
10,570 10,783 31,998 24,489
----------------- ----------------- ---------------- -----------------
Income (loss) from operations 1,712 (1,965) (4,141) (2,819)
Other expense:
Interest expense (110) (741) (405) (2,264)
Other income 414 136 774 446
Equity loss from investment in NetRadio (2,006) -- (2,006) --
----------------- ----------------- ---------------- -----------------
Income (loss) before income taxes 10 (2,570) (5,778) (4,637)
Income tax benefit -- 1,427 -- 642
Minority interests in subsidiary -- -- -- (110)
----------------- ----------------- ---------------- -----------------
Net income (loss) $ 10 $ (3,997) $ (5,778) $ (5,389)
Preferred nondetachable conversion feature
and warrant valuation -- -- -- (34,229)
Preferred dividend requirements -- (85) -- (662)
----------------- ----------------- ---------------- -----------------
Net income (loss) applicable to common shares $ 10 $ (4,082) $ (5,778) $ (40,280)
================= ================= ================ =================
Net income (loss) per common share:
Basic $ .00 $ (.26) $ (.25) $ (3.55)
================= ================= ================ =================
Diluted $ .00 $ (.26) $ (.25) $ (3.55)
================= ================= ================ =================
Weighted average common and
Common equivalent shares outstanding
Basic 23,518 15,914 23,466 11,335
================= ================= ================ =================
Diluted 25,950 15,914 23,466 11,335
================= ================= ================ =================
</TABLE>
4
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NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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NINE MONTHS ENDED DECEMBER 31
1999 1998
--------------- ----------------
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OPERATING ACTIVITIES
Net loss $ (5,778) $ (5,389)
Adjustments to reconcile net earnings (loss) to net cash
Used in operating activities:
Depreciation 1,041 1,017
Amortization of intangible assets 232 238
Amortization of unearned compensation 72 71
Equity loss from investment in NetRadio 2,006 --
Minority interests in subsidiary -- 110
Valuation-stock compensation 495 --
Changes in operating assets and liabilities:
Accounts receivable (27,218) (29,021)
Inventories 1,093 (16,466)
Prepaid expenses and other assets (409) 271
Income tax receivable 613 2,265
Accounts payable and accrued expenses 30,227 20,001
--------- ---------
Net cash provided (used in) operating activities 2,374 (26,903)
INVESTING ACTIVITIES
Note receivable, related parties (119) 47
Purchase of equipment and leasehold improvements (2,093) (1,474)
--------- ---------
Net cash used in investing activities (2,212) (1,427)
FINANCING ACTIVITIES
Payment on long-term debt -- (103)
Proceeds from notes payable, bank 104,448 152,669
Payment on notes payable, bank (104,777) (165,291)
Proceeds from notes payable, other -- 125
Proceeds from sale of subsidiary stock -- 65
Proceeds from sale of preferred stock and warrants 8,011 18,823
Exercise of common stock warrants 12 21,528
Exercise of common stock options 767 1,067
Payment of dividends -- (509)
--------- ---------
Net cash provided by financing activities 8,461 28,374
--------- ---------
Net increase in cash 8,623 44
Cash at beginning of period 92 23
--------- ---------
Cash at end of period $ 8,715 $ 67
========= =========
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5
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NAVARRE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Navarre Corporation and its
partially 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 nine
month period ended December 31, 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 December 31, 1998 have been reclassified to conform to
the December 31, 1999 presentation.
NOTE B - BUSINESS SEGMENTS
Financial Information by reportable business segment is included in the
following summary:
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THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
(In thousands) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES
Home Entertainment Products 99,009 74,630 223,561 182,474
NetRadio (1) 129 110 737 214
---------------------------------------------------------------
CONSOLIDATED NET SALES 99,137 74,740 224,287 182,682
===============================================================
OPERATING INCOME (LOSS)
Home Entertainment Products 3,390 321 3,521 813
NetRadio (1) (1,638) (2,274) (7,833) (3,632)
---------------------------------------------------------------
CONSOLIDATED INCOME (LOSS) 1,712 (1,965) (4,141) (2,819)
===============================================================
Net Interest Expense (110) (741) (405) (2,264)
Other Income (Expense) 414 136 774 446
Equity loss from investment in NetRadio (2006) ---- (2006) ----
---------------------------------------------------------------
NET INCOME (LOSS) BEFORE INCOME TAXES 10 (2,570) (5,778) (4,637)
===============================================================
</TABLE>
(1) Includes consolidated results of NetRadio only through November 5, 1999.
See Note E.
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 calculation for the periods ending December 31, 1999 and 1998,
respectively, 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)
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THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31
1999 1998 1999 1998
----------------------- ---------------------------
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Numerator:
Net income (loss) $ 10 $ (3,997) $ (5,778) $ (5,389)
Less preferred nondetachable conversion feature
and warrant valuation -- -- -- (34,229)
Less preferred dividend requirements -- (85) -- (662)
--------- ------------- ------------ -------------
Adjusted net income (loss) applicable to common stock $ 10 $ (4,082) $ (5,778) $(40,280)
Denominator:
Denominator for basic earnings per
Share--weighted-average shares 23,518 15,914 23,466 11,335
Dilutive securities:
Preferred stock -- -- -- --
Employee stock options -- -- -- --
Denominator for diluted earnings
per share--adjusted
weighted-average shares 25,950 15,914 23,466 11,335
--------- ------------- ------------ -------------
Basic net income (loss) per share $ .00 $ (.26) $ (.25) $ (3.55)
========= ============= ============ =============
Dilutive net income (loss) per share $ .00 $ (.26) $ (.25) $ (3.55)
========= ============= ============ =============
</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.
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 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.
The NetRadio results included in Navarre's results for the quarter and nine
months ended December 31, 1999 differ from the results reported by NetRadio due
to certain timing and consolidating 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 the periods indicated the percentage of net sales
represented by certain items included in the Company's "Consolidated Statements
of Operations."
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THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
--------------------- -------------------
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Net sales:
Computer 64.2 69.2 63.7 67.8
Music 35.7 30.7 36.0 32.1
---------- ---------- --------- ----------
Home entertainment products 99.9 99.9 99.7 99.9
NetRadio 0.1 0.1 0.3 0.1
---------- ---------- --------- ----------
Total net sales 100.0 100.0 100.0 100.0
Cost of sales 87.6 88.2 87.6 88.1
---------- ---------- --------- ----------
Gross Profit 12.4 11.8 12.4 11.9
Selling and promotion 2.9 4.1 3.8 3.5
Distribution and warehousing 1.8 2.1 2.0 1.8
General and administration 5.6 7.3 8.0 7.4
Depreciation and amortization 0.4 0.9 0.6 0.7
---------- ---------- --------- ----------
Income (loss) from operations 1.7 (2.6) (1.8) (1.5)
Interest expense (0.1) (1.0) (0.2) (1.2)
Other income 0.4 0.2 0.3 0.2
Equity loss from investment in NetRadio (2.0) -- (0.9) --
========== ========== ========= ==========
Net income (loss) 0.0 (5.3) (2.6) (2.9)
========== ========== ========= ==========
</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, 1999, and
the section "Risk Factors" in the Company's Prospectus dated January 11, 2000
and filed with the SEC on January 12, 2000.
As noted in Note E of Notes to financial statements, as a result of NetRadio
Corporation October 1999 initial public offering and subsequent exercise of
options by NetRadio optionholders, Navarre's ownership of NetRadio decreased to
less than fifty percent as of November 5, 1999. As a result, for periods after
November 5, 1999, Navarre is not required to consolidate the results of NetRadio
in its results. In this Management,s Discussion and Analysis section, the
Company separately discusses its results of operations for the home
entertainment products distributed by Navarre and the results of operations
attributable to NetRadio.
HOME ENTERTAINMENT PRODUCTS
- ---------------------------
Home entertainment products net sales for the three-month period ended December
31, 1999 increased 32.7% from $74.6 million in fiscal 1999 to $99.0 million in
fiscal 2000. For the nine-month period ended December 31, 1999, net sales of
home entertainment products increased 22.5% from $182.5 million in fiscal 1999
to $223.6 million for fiscal 2000. The gain was due to increased sales in both
the Computer Products Division and the Music Products Division. Computer product
sales for the three-month period ended December 31, 1999 increased by 23.2% from
$51.7 million in fiscal 1999 to $63.6 million for fiscal 2000. For the
nine-month period ended December 31, 1999, net sales of computer products
increased 15.4% from $123.8 million in fiscal 1999 to $142.8 million for fiscal
2000. This increase was primarily due to the rapid growth in PC software
fulfillment with e-commerce retailers. Music
9
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sales for the three-month period ended December 31, 1999 increased 54.0% from
$23.0 million in fiscal 1999 to $35.4 million for fiscal 2000. For the
nine-month period ended December 31, 1999, net sales of music increased 37.6%
from $58.7 million in fiscal 1999 to $80.8 million for fiscal 2000. This
increase was primarily due to stronger releases from our exclusive independent
labels.
Gross profit of home entertainment products for the three-month period ended
December 31, increased 40.2% or $3.5 million from $8.7 million in fiscal 1999 to
$12.2 million for fiscal 2000. For the nine-month period ended December 31,
gross profit of home entertainment products increased 27.8% or $6.0 million from
$21.5 million in fiscal 1999 to $27.5 million for fiscal 2000. As a percentage
of net sales, gross profit of home entertainment products for the three- month
period ended December 31, increased from 11.7% in fiscal 1999 to 12.3% for
fiscal 2000 and for the nine-month period ended December 31, increased from
11.8% 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 December 31, were
$6.8 million or 10.8% as a percentage of net sales in fiscal 2000 compared with
$5.0 million or 9.6% as a percentage of net sales in the same period in fiscal
1999. For the nine-month period ended December 31, gross margins from the
Computer Products Division's net sales were $15.3 million or 10.7% as a
percentage of net sales in fiscal 2000 compared with $11.6 million or 9.4% 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 December 31, were $5.4 million or
15.2% of music net sales in fiscal 2000 compared with $3.8 million or 16.5% of
music net sales for the same period in fiscal 1999. For the nine-month period
ended December 31, gross margins from the music sales were $12.2 million or
15.1% as a percentage of net sales in fiscal 2000 compared with $9.9 million or
16.8% as a percentage of net sales in the same period in fiscal 1999. The
decrease was primarily due to customer returns of lower margin inventory titles.
Selling and promotion expense of home entertainment products for the three-month
period ended December 31, increased from $2.5 million in fiscal 1999 to $2.6
million in fiscal 2000, but as a percentage of net sales decreased from 3.4% in
fiscal 1999 to 2.7% for fiscal 2000. For the nine-month period ended December
31, selling and promotion expense of home entertainment products increased from
$5.7 million in fiscal 1999 to $6.8 million for fiscal 2000, but as a percentage
of net sales it remained the same at 3.1% for both fiscal 2000 and 1999.
Distribution and warehousing expense of home entertainment products for the
three-month period ended December 31, increased from $1.6 million in fiscal 1999
to $1.7 million for fiscal 2000, but as a percentage of net sales decreased from
2.1% in fiscal 1999 to 1.8% for fiscal 2000. For the nine-month period ended
December 31, distribution and warehousing expense increased from $3.4 million or
1.8% as a percentage of net sales in fiscal 1999 to $4.4 million or 2.0% as a
percentage of net sales during the same period for fiscal 2000. The increase was
primarily due to costs associated with the increase in returns processing.
General and administration expenses of home entertainment products for the
three-month period ended December 31, increased from $4.0 million in fiscal 1999
to $4.2 million for fiscal 2000 but decreased as a percentage of net sales from
5.4% in fiscal 1999 to 4.2% as a percentage of net sales during fiscal 2000. For
the nine-month period ended December 31, general and administration expenses of
home entertainment products increased from $10.8 million in fiscal 1999 to $11.9
million for fiscal 2000 but decreased as a percentage of net sales from 5.9% in
fiscal 1999 to 5.3% as a percentage of net sales for fiscal 2000. The decrease
was primarily due to its asset management strategic program.
Interest expense for the three-month period ended December 31, decreased from
$741,000 in fiscal 1999 to $110,000 for fiscal 2000. For the nine-month period
ended December 31, interest expense decreased from $2.3 million in fiscal 1999
to $405,000 for fiscal 2000. This decrease resulted from substantially lower
borrowings.
Other income consists of interest income for the three-month period ended
December 31, increased from $136,000 in fiscal 1999 to $414,000 for fiscal 2000.
For the nine-month period ended December 31, interest income increased from
$446,000 in fiscal 1999 to $774,000 for fiscal 2000. This increase was primarily
due to interest received from our cash investments.
Due to the unused losses from prior years and the current quarter's loss, the
Company has not recorded any tax benefit.
10
<PAGE>
Net income of home entertainment products for the three-month period ended
December 31, was $1.8 million for fiscal 2000 compared to a net loss of $1.3
million in the same three-month period in fiscal 1999. For the nine-month period
ended December 31, net income of home entertainment products was $2.6 million
for fiscal 2000 compared to a net loss of $1.8 million in the same period in
fiscal 1999.
NETRADIO
- --------
During the three-month period from October 1, 1999 through December 31, 1999 and
during the nine-month period from April 1, 1999 through December 31, 1999,
NetRadio had an increase in net sales. During these periods, NetRadio also had
increases in selling and promotion expenses, and in general and administration
expenses, reflecting a higher level of operations associated with the increase
in net sales. Because Navarre did not consolidate NetRadio's results for periods
after November 5, 1999, NetRadio results for periods after November 5, 1999 are
reflected in Navarre's financial statements on the equity method. Under the
equity method, Navarre reports losses in NetRadio for each period as "Equity
loss from investment in NetRadio" in an amount equal to Navarre's ownership of
NetRadio.
NetRadio sales increased from $110,000 for the three-month period ending
December 31, 1998 to $129,000 in the fiscal 2000 third quarter period ending
November 5, 1999. NetRadio's net sales increased from $214,000 in the nine-month
period ended December 31, 1998 to $737,000 in the fiscal 2000 year to date
period ending November 5, 1999.
NetRadio's selling and marketing expense were $564,000 for the three-month
period ended December 31, 1998 and $263,000 in the fiscal 2000 third quarter
period ending November 5, 1999. NetRadio's selling and promotion expense
increased from $689,000 in the nine-month period ended December 31, 1998 to $1.7
million in the fiscal 2000 year to date period ending November 5, 1999.
NetRadio's general and administration expenses were $1.5 million for the
three-month period ended December 31, 1998 and $1.3 million for fiscal 2000
third quarter period ending November 5, 1999. NetRadio's general and
administration expenses increased from $2.7 million for the nine-month period
ended December 31, 1998 to $5.8 million for the fiscal 2000 year to date period
ending November 5, 1999.
Net Radio's net loss was $2.7 million for the three-month period ended December
31, 1998 compared to a net loss of $1.7 million in the year 2000 third quarter
period November 5, 1999. For the nine-month period ended December 31, 1998,
NetRadio's net loss was $3.5 million compared to a net loss of $8.5 million in
fiscal 2000 year to date period ending November 5, 1999.
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 December 31, 1999, the
Company had net accounts receivable of $77.5 million, inventory of $28.1 million
and accounts payable of $85.7 million.
For the nine-month period ended December 31, 1999, net sales were $224.3
million, an increase of $41.6 million over net sales of $182.7 million in fiscal
1999. The Company generated cash of $2.4 million in operating activities.
Accounts receivable increased by $27.2 million and accounts payable and accrued
expense increased by $30.2 million, while inventories decreased by $1.1 million.
Investing activities used $2.2 million. 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 was $8.7 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 December 31, 1999, the Company
had no borrowings under the credit facility.
11
<PAGE>
Prior to October 1999, Navarre financed NetRadio's operations. With the
completion of the NetRadio initial public offering in October 1999, Navarre
ceased financing NetRadio's operations. As noted in Note E of Notes to financial
statements in this Form 10-Q, in connection with NetRadio's initial public
offering, Navarre and NetRadio entered into a Term Note under which 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.
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 December 31, 1999. For additional information, refer to
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company's Form 10-K.
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 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.
On December 6, 1999, Daniel Chen, on behalf of himself and others similarly
situated, filed a 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. The Poucher complaint has not yet been served, and a
response is not yet due. Navarre and the directors intend to vigorously defend
against this plaintiff's claims also.
These lawsuits are in the very early stages of the proceeding, and pursuant to
applicable procedural rules governing class action lawsuits and the Reform Act
as well as an agreement between the parties, discovery in the matter is
currently stayed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are included herein:
(a) 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
December 31, 1999.
12
<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: February 14, 1999 By /s/ Eric H. Paulson
----------------------
Eric H. Paulson
Chairman of the Board,
President and
Chief Executive Officer
Date: February 14, 1999 By /s/ Charles E. Cheney
------------------------
Charles E. Cheney
Vice Chairman of the Board,
Treasurer and Secretary,
Executive Vice President,
And Chief Financial Officer
13
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