##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 for the quarterly period ended September 30, 2007
 or
 o
    
    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
  Minnesota
    
    41-1704319(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)
 7400 49th Avenue North, New Hope, MN 55428
 (763) 535-8333
 þ o
  o þ o
 o þ
  Class
    
    Outstanding at November 5, 2007Common Stock, No Par Value
    
    36,210,686 shares




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##### 



NAVARRE CORPORATION
 Index
 PART I. FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements. (Unaudited)Consolidated Balance Sheets  September 30, 2007 and March 31, 2007Consolidated Statements of Operations  Three and Six Months ended September 30, 2007 and 2006Consolidated Statements of Cash Flows  Six Months ended September 30, 2007 and 2006Notes to Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURES2004 Stock Plan Restricted Stock Unit Agreement302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements.
 NAVARRE CORPORATION
 
 Consolidated Balance Sheets
 (In thousands, except share amounts)
 September 30,
    
    
    March 31,2007
    
    
    2007(Unaudited)
    
    
    (Note)Assets:Current assets:Cash and cash equivalents
    
    $
    
    
    
    $
    966Marketable securities
    
    
    1,421
    
    
    
    Accounts receivable, less allowances of $17,403 and $18,284, respectively
    
    
    84,077
    
    
    
    70,609Inventories
    
    
    59,192
    
    
    
    36,791Prepaid expenses and other current assets
    
    
    13,052
    
    
    
    11,126Income tax receivable
    
    
    574
    
    
    
    828Deferred tax assets  current
    
    
    10,204
    
    
    
    8,935Assets of discontinued operations
    
    
    143
    
    
    
    21,889Total current assets
    
    
    168,663
    
    
    
    151,144Property and equipment, net of accumulated depreciation of $12,524 and $10,786, respectively
    
    
    16,882
    
    
    
    14,042Other assets:Marketable securities
    
    
    2,667
    
    
    
    Goodwill
    
    
    81,697
    
    
    
    81,697Intangible assets, net of amortization of $18,366 and $15,588, respectively
    
    
    12,136
    
    
    
    14,197License fees, net of amortization of $15,435 and $12,688, respectively
    
    
    19,171
    
    
    
    15,609Other assets
    
    
    11,582
    
    
    
    11,193Assets of discontinued operations
    
    
    
    
    
    
    343Total assets
    
    $
    312,798
    
    
    $
    288,225Liabilities and shareholders equity:Current liabilities:Note payable  line of credit
    
    $
    43,049
    
    
    $
    38,956Note payable  short term
    
    
    150
    
    
    
    150Capital lease obligation  short term
    
    
    88
    
    
    
    102Accounts payable
    
    
    111,015
    
    
    
    87,145Checks written in excess of cash balance
    
    
    6,057
    
    
    
    Deferred compensation
    
    
    2,470
    
    
    
    Accrued expenses
    
    
    12,959
    
    
    
    13,578Liabilities of discontinued operations
    
    
    796
    
    
    
    12,748Total current liabilities
    
    
    176,584
    
    
    
    152,679Long-term liabilities:Note payable  long-term
    
    
    9,670
    
    
    
    14,850Capital lease obligation  long-term
    
    
    84
    
    
    
    120Deferred compensation
    
    
    3,876
    
    
    
    6,358Income taxes payable
    
    
    540
    
    
    
    Deferred tax liabilities  non-current
    
    
    1,895
    
    
    
    7Other long-term liabilities
    
    
    760
    
    
    
    760Total liabilities
    
    
    193,409
    
    
    
    174,774Commitments
and contingencies (Note 20)Shareholders equity:Common stock, no par value:Authorized shares  100,000,000; issued and outstanding shares  36,216,204 and
36,038,295, respectively
    
    
    159,670
    
    
    
    158,801Accumulated deficit
    
    
    (40,281
    )
    
    
    (45,350
    )Total shareholders equity
    
    
    119,389
    
    
    
    113,451Total liabilities and shareholders equity
    
    $
    312,798
    
    
    $
    288,225
 Note: The balance sheet at March 31, 2007 has been derived from the audited consolidated financial
statements at that date but does not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for complete consolidated
financial statements.
 See accompanying notes to consolidated financial statements.
 3




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NAVARRE CORPORATION
 
 Consolidated Statements of Operations
 (In thousands, except per share amounts)
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    143,715
    
    
    $
    158,893
    
    
    $
    280,737
    
    
    $
    291,065Cost of sales (exclusive of depreciation and amortization)
    
    
    121,654
    
    
    
    130,627
    
    
    
    234,693
    
    
    
    240,009Gross profit
    
    
    22,061
    
    
    
    28,266
    
    
    
    46,044
    
    
    
    51,056Operating expenses:Selling and marketing
    
    
    6,685
    
    
    
    7,695
    
    
    
    13,599
    
    
    
    14,232Distribution and warehousing
    
    
    3,100
    
    
    
    2,981
    
    
    
    5,343
    
    
    
    5,427General and administrative
    
    
    8,298
    
    
    
    8,294
    
    
    
    16,248
    
    
    
    16,078Bad debt expense
    
    
    30
    
    
    
    2,362
    
    
    
    85
    
    
    
    2,819Depreciation and amortization
    
    
    2,323
    
    
    
    2,683
    
    
    
    4,541
    
    
    
    5,307Total operating expenses
    
    
    20,436
    
    
    
    24,015
    
    
    
    39,816
    
    
    
    43,863Income from operations
    
    
    1,625
    
    
    
    4,251
    
    
    
    6,228
    
    
    
    7,193Other income (expense):Interest expense
    
    
    (1,405
    )
    
    
    (2,007
    )
    
    
    (3,079
    )
    
    
    (3,927
    )Interest income
    
    
    56
    
    
    
    92
    
    
    
    124
    
    
    
    211Warrant expense
    
    
    
    
    
    
    173
    
    
    
    
    
    
    
    (251
    )Other income (expense), net
    
    
    148
    
    
    
    20
    
    
    
    371
    
    
    
    102Net income before income tax
    
    
    424
    
    
    
    2,529
    
    
    
    3,644
    
    
    
    3,328Income tax expense
    
    
    (202
    )
    
    
    (1,013
    )
    
    
    (1,516
    )
    
    
    (1,336
    )Net income from continuing operations
    
    
    222
    
    
    
    1,516
    
    
    
    2,128
    
    
    
    1,992Discontinued operations, net of taxGain (loss) on sale of discontinued operations
    
    
    (3)
    
    
    
    
    
    
    
    4,644
    
    
    
    Income (loss) from discontinued operations
    
    
    (594
    )
    
    
    96
    
    
    
    (1,703
    )
    
    
    254Net income (loss)
    
    $
    (375
    )
    
    $
    1,612
    
    
    $
    5,069
    
    
    $
    2,246Basic earnings (loss) per common share:Continuing operations
    
    $
    .01
    
    
    $
    .05
    
    
    $
    .06
    
    
    $
    .06Discontinued operations
    
    $
    (.02
    )
    
    $
    
    
    
    $
    .08
    
    
    $
    Net income (loss)
    
    $
    (.01
    )
    
    $
    .05
    
    
    $
    .14
    
    
    $
    .06Diluted
earnings (loss) per common share:Continuing operations
    
    $
    .01
    
    
    $
    .04
    
    
    $
    .06
    
    
    $
    .06Discontinued operations
    
    $
    (.02
    )
    
    $
    
    
    
    $
    .08
    
    
    $
    Net income (loss)
    
    $
    (.01
    )
    
    $
    .04
    
    
    $
    .14
    
    
    $
    .06Weighted average shares outstanding:Basic
    
    
    36,110
    
    
    
    35,735
    
    
    
    36,048
    
    
    
    35,691Diluted
    
    
    36,303
    
    
    
    36,201
    
    
    
    36,289
    
    
    
    36,184
 See accompanying notes to consolidated financial statements.
 4




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NAVARRE CORPORATION
 
 Consolidated Statements of Cash Flows
 (In thousands)
 (Unaudited)
 Six Months EndedSeptember 30,2007
    
    
    2006Operating activities:Net income
    
    $
    5,069
    
    
    $
    2,246Adjustments to reconcile net income to net cash provided by operating activities:(Income) loss from discontinued operations
    
    
    1,703
    
    
    
    (254
    )Gain on sale of discontinued operations
    
    
    (4,644
    )
    
    
    Depreciation and amortization
    
    
    4,580
    
    
    
    5,364Amortization of deferred financing costs
    
    
    153
    
    
    
    298Amortization of license fees
    
    
    2,747
    
    
    
    3,334Amortization of production costs
    
    
    1,213
    
    
    
    1,082Change in deferred revenue
    
    
    242
    
    
    
    442Share-based compensation expense
    
    
    567
    
    
    
    300Deferred income taxes
    
    
    619
    
    
    
    (1,483
    )Change in fair market value of warrants
    
    
    
    
    
    
    251Deferred compensation
    
    
    (12
    )
    
    
    382Other
    
    
    47
    
    
    
    288Changes in operating assets and liabilities:Accounts receivable
    
    
    (13,468
    )
    
    
    (21,624
    )Inventories
    
    
    (22,401
    )
    
    
    (16,956
    )Prepaid expenses
    
    
    (1,926
    )
    
    
    (4,536
    )Income taxes receivable
    
    
    254
    
    
    
    4,408Other assets
    
    
    696
    
    
    
    972Production costs
    
    
    (2,257
    )
    
    
    (1,815
    )License fees
    
    
    (6,309
    )
    
    
    (4,178
    )Accounts payable
    
    
    23,870
    
    
    
    33,185Income taxes payable
    
    
    540
    
    
    
    337Accrued expenses
    
    
    (861
    )
    
    
    (3,022
    )Net cash used in operating activities
    
    
    (9,578
    )
    
    
    (979
    )Investing activities:Purchases of property and equipment
    
    
    (4,596
    )
    
    
    (2,486
    )Purchases of intangible assets
    
    
    (717
    )
    
    
    (913
    )Purchases of marketable equity securities
    
    
    (4,000
    )
    
    
    Payment of earn-out related to an acquisition
    
    
    
    
    
    
    (350
    )Net cash used in investing activities
    
    
    (9,313
    )
    
    
    (3,749
    )Financing activities:Proceeds from note payable, line of credit
    
    
    84,601
    
    
    
    9,282Payments on note payable, line of credit
    
    
    (80,508
    )
    
    
    (9,282
    )Payments on note payable
    
    
    (5,180
    )
    
    
    (2,500
    )Repayments of capital lease obligations
    
    
    (50
    )
    
    
    (56
    )Checks written in excess of cash
    
    
    6,057
    
    
    
    Debt acquisition costs
    
    
    (242
    )
    
    
    Proceeds from exercise of common stock options and warrants
    
    
    169
    
    
    
    342Other
    
    
    
    
    
    
    (102
    )Net cash provided by (used in) financing activities
    
    
    4,847
    
    
    
    (2,316
    )Discontinued operations:Net cash provided by operating activities
    
    
    6,578
    
    
    
    1,154Proceeds from sale of discontinued operations
    
    
    6,500
    
    
    
    Net decrease in cash
    
    
    (966
    )
    
    
    (5,890
    )Cash at beginning of period
    
    
    966
    
    
    
    14,296Cash at end of period
    
    $
    
    
    
    $
    8,406Supplemental cash flow information:Cash paid for (received from):Interest
    
    $
    2,887
    
    
    $
    5,247Income taxes, net of refunds
    
    
    468
    
    
    
    (2,300
    )Supplemental schedule of non-cash investing and financing activities:Purchase price adjustments affecting accounts receivable and goodwill
    
    
    
    
    
    
    145
 See accompanying notes to consolidated financial statements.
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NAVARRE CORPORATION
 
 Notes to Consolidated Financial Statements
 (Unaudited)
 Note 1  Organization and Basis of Presentation
      Basis of Consolidation
  Revenue Recognition
    Accounting by
Producers or Distributors of Films.
 6




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Recently Issued Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for
Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115
 Note 2  Discontinued Operations
 Accounting for the Impairment of
Disposal of Long-Lived Assets
   Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    18
    
    
    $
    14,256
    
    
    $
    5,088
    
    
    $
    28,424Net income (loss) from discontinued operations, before income tax
    
    
    (970
    )
    
    
    158
    
    
    
    (2,835
    )
    
    
    424Income tax benefit (expense)
    
    
    376
    
    
    
    (62
    )
    
    
    1,132
    
    
    
    (170
    )Net income (loss) from discontinued operations, net of tax
    
    $
    (594
    )
    
    $
    96
    
    
    $
    (1,703
    )
    
    $
    254
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September 30,
    
    
    March 31,2007
    
    
    2007Accounts receivable
    
    $
    (581
    )
    
    $
    15,175Inventory
    
    
    
    
    
    
    3,436Prepaid expenses and other current assets
    
    
    
    
    
    
    2,694Deferred tax assets  current
    
    
    724
    
    
    
    584Current assets of discontinued operations
    
    
    143
    
    
    
    21,889Intangible assets, net of amortization
    
    
    
    
    
    
    343Total assets of discontinued operations
    
    
    143
    
    
    
    22,232Accounts payable
    
    
    227
    
    
    
    12,075Accrued expenses
    
    
    569
    
    
    
    673Current liabilities of discontinued operations
    
    $
    796
    
    
    $
    12,748
 Note 3  Marketable Securities
    As of September 30, 2007Gross
    
    
    GrossEstimated fair
    
    
    unrealized
    
    
    unrealizedvalue
    
    
    holding gains
    
    
    holding lossesAvailable-for-sale:Government agency bonds
    
    $
    2,004
    
    
    $
    
    
    
    $
    Money market fund
    
    
    2,084
    
    
    
    
    
    
    
    $
    4,088
    
    
    $
    
    
    
    $
    
   Note 4  Share-Based Compensation
  Share-Based Payment, (SFAS 123R)
 8




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##### Table of Contents



Stock Options
  WeightedWeighted
    
    
    averageaverage
    
    
    remaining
    
    
    Aggregateexercise
    
    
    contractual
    
    
    intrinsicprice
    
    
    term
    
    
    valueOptions
outstanding, March 31, 2007:
    
    
    3,601,700
    
    
    $
    6.92Granted
    
    
    91,000
    
    
    $
    3.94Exercised
    
    
    (218,148
    )
    
    $
    1.51Canceled
    
    
    (305,686
    )
    
    $
    6.64Options
outstanding, September 30, 2007
    
    
    3,168,866
    
    
    $
    7.23
    
    
    
    5.9
    
    
    $
    756Options
exercisable, September 30, 2007
    
    
    2,300,664
    
    
    $
    8.29
    
    
    
    4.9
    
    
    $
    591Shares
available for future grant, September 30, 2007
    
    
    1,978,333
    Restricted Stock
  9




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WeightedWeighted
    
    
    averageaverage
    
    
    remaininggrant date
    
    
    contractualShares
    
    
    fair value
    
    
    termUnvested, beginning of period:
    
    
    120,000
    
    
    $
    4.68
    
    
    
    1.59Granted
    
    
    
    
    
    $
    
    
    
    
    Vested
    
    
    (50,000
    )
    
    $
    4.29
    
    
    
    Forfeited
    
    
    
    
    
    $
    
    
    
    
    Unvested, end of period
    
    
    70,000
    
    
    $
    4.95
    
    
    
    1.09
   Restricted Stock Units
   Valuation and Expense Information Under SFAS 123R
  Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Expected life (in years)
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Expected volatility
    
    
    64
    %
    
    
    70
    %
    
    
    67
    %
    
    
    70
    %Risk-free interest rate
    
    
    4.43
    %
    
    
    4.90
    %
    
    
    4.57
    %
    
    
    4.88
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Weighted-average fair value of grants
    
    $
    2.28
    
    
    $
    2.62
    
    
    $
    2.35
    
    
    $
    2.59
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Note 5  Earnings Per Share
   Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Net income from continuing operations
    
    $
    222
    
    
    $
    1,516
    
    
    $
    2,128
    
    
    $
    1,992Denominator:Denominator for basic earnings per shareweighted-average shares
    
    
    36,110
    
    
    
    35,735
    
    
    
    36,048
    
    
    
    35,691Equivalent shares from share-based compensation plans
    
    
    193
    
    
    
    469
    
    
    
    241
    
    
    
    493Denominator for diluted earnings per share -adjusted
weighted-average shares
    
    
    36,303
    
    
    
    36,204
    
    
    
    36,289
    
    
    
    36,184Net earnings per share from continuing operations:Basic
    
    $
    .01
    
    
    $
    .05
    
    
    $
    .06
    
    
    $
    .06Diluted
    
    $
    .01
    
    
    $
    .04
    
    
    $
    .06
    
    
    $
    .06
   Note 6  Comprehensive Income
   Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
from continuing operations
    
    $
    222
    
    
    $
    1,516
    
    
    $
    2,128
    
    
    $
    1,992Net unrealized gain on hedge derivatives, net of tax
    
    
    
    
    
    
    (74
    )
    
    
    
    
    
    
    36Comprehensive income
    
    $
    222
    
    
    $
    1,442
    
    
    $
    2,128
    
    
    $
    2,028
  11




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Note 7  Shareholders Equity
  Note 8  Accounts Receivable
  September 30,
    
    
    March 31,2007
    
    
    2007Trade receivables
    
    $
    96,546
    
    
    $
    86,903Vendor receivables
    
    
    3,466
    
    
    
    447Other receivables
    
    
    1,468
    
    
    
    1,543$
    101,480
    
    
    $
    88,893Less: allowance for doubtful accounts, vendor receivables and sales discounts
    
    
    6,556
    
    
    
    6,301Less: allowance for sales returns, net margin impact
    
    
    10,847
    
    
    
    11,983Total
    
    $
    84,077
    
    
    $
    70,609
 Note 9  Prepaid Expenses and Other Assets
  September 30,
    
    
    March 31,2007
    
    
    2007Prepaid royalties
    
    $
    11,676
    
    
    $
    9,621Other
    
    
    1,376
    
    
    
    1,505Total
    
    $
    13,052
    
    
    $
    11,126
 Note 10  Inventories
  September 30,
    
    
    March 31,2007
    
    
    2007Finished products
    
    $
    50,950
    
    
    $
    27,313Consigned inventory
    
    
    2,591
    
    
    
    3,790Raw materials
    
    
    5,651
    
    
    
    5,688Total
    
    $
    59,192
    
    
    $
    36,791
  Note 11  License Fees
  September 30,
    
    
    March 31,2007
    
    
    2007License fees
    
    $
    34,606
    
    
    $
    28,297Less: accumulated amortization
    
    
    15,435
    
    
    
    12,688$
    19,171
    
    
    $
    15,609
   12




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##### Table of Contents



SOP 00-2
 Note 12  Production Costs
  September 30,
    
    
    March 31,2007
    
    
    2007Production costs
    
    $
    11,829
    
    
    $
    9,572Less: accumulated amortization
    
    
    5,368
    
    
    
    4,155$
    6,461
    
    
    
    5,417
  SOP 00-2
 Note 13  Property and Equipment
  September 30,
    
    
    March 31,2007
    
    
    2007Land and buildings
    
    $
    1,623
    
    
    $
    1,623Furniture and fixtures
    
    
    1,146
    
    
    
    1,111Computer and office equipment
    
    
    14,447
    
    
    
    6,425Warehouse equipment
    
    
    9,552
    
    
    
    9,103Production equipment
    
    
    703
    
    
    
    520Leasehold improvements
    
    
    1,925
    
    
    
    1,913Construction in progress
    
    
    10
    
    
    
    4,133Total
    
    $
    29,406
    
    
    $
    24,828Less: accumulated depreciation and amortization
    
    
    12,524
    
    
    
    10,786Net property and equipment
    
    $
    16,882
    
    
    $
    14,042
 Note 14  Goodwill and Intangible Assets
 Goodwill
  13




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##### Table of Contents



Intangible assets
  As of September 30, 2007Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters
    
    $
    8,786
    
    
    $
    5,528
    
    
    $
    3,258License relationships
    
    
    20,078
    
    
    
    12,825
    
    
    
    7,253Domain name
    
    
    70
    
    
    
    13
    
    
    
    57Other (not amortized)
    
    
    1,568
    
    
    
    
    
    
    
    1,568$
    30,502
    
    
    $
    18,366
    
    
    $
    12,136
 As of March 31, 2007Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters
    
    $
    8,069
    
    
    $
    4,542
    
    
    $
    3,527License relationships
    
    
    20,078
    
    
    
    11,038
    
    
    
    9,040Domain name
    
    
    70
    
    
    
    8
    
    
    
    62Other (not amortized)
    
    
    1,568
    
    
    
    
    
    
    
    1,568$
    29,785
    
    
    $
    15,588
    
    
    $
    14,197
   Remainder of fiscal 2008
    
    $
    2,5272009
    
    
    4,3032010
    
    
    2,0572011
    
    
    4252012
    
    
    237
 Debt issuance costs
  Note 15  Accrued Expenses
  September 30,
    
    
    March 31,2007
    
    
    2007Compensation and benefits
    
    $
    3,341
    
    
    $
    4,112Royalties
    
    
    4,355
    
    
    
    4,172Rebates
    
    
    2,402
    
    
    
    2,091Interest
    
    
    352
    
    
    
    160Other
    
    
    2,509
    
    
    
    3,043Total
    
    $
    12,959
    
    
    $
    13,578
 14




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##### Table of Contents



Note 16  Bank Financing and Debt
      September 30,
    
    
    March 31,2007
    
    
    2007Note payable
    
    $
    9,820
    
    
    $
    15,000Less: current portion
    
    
    150
    
    
    
    150Total longterm debt
    
    $
    9,670
    
    
    $
    14,850
 Letters of Credit
  15




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Note 17  2006 Private Placement
    Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock
  16




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##### Table of Contents



Note 18  Income Taxes
 Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109
       17




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##### Table of Contents



Note 19  License and Distribution Agreement
  Note 20  Commitments and Contingencies
 Litigation and Proceedings
  Sybersound Records, Inc. v. BCI Eclipse, LLC, et al.
     Sybersound Records, Inc. v. Navarre Corporation, BCI Eclipse, LLC, et al.
  18




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##### Table of Contents



SEC Investigation
  Securities Litigation Lawsuits
   AVIVA Partners, Ltd. v. Navarre Corp., et al.   Vivian Oh v. Navarre Corp., et al.   Matthew Grabler v. Navarre Corp., et al.
 In re Navarre Corporation Securities
Litigation
    19




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##### Table of Contents



Note 21  Related Party Transactions
 Employment/Severance Agreements
    Employment Agreement  FUNimation
  20




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##### Table of Contents



Note 22  Business Segments
   Three months ended September 30, 2007
    
    Publishing
    
    Distribution
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    27,043
    
    
    $
    133,391
    
    
    $
    (16,719
    )
    
    $
    143,715Income from continuing operations
    
    
    1,248
    
    
    
    377
    
    
    
    
    
    
    
    1,625Net income from continuing operations, before income tax
    
    
    177
    
    
    
    247
    
    
    
    
    
    
    
    424Total assets
    
    $
    174,921
    
    
    $
    264,362
    
    
    $
    (126,485
    )
    
    $
    312,798
 Three months ended September 30, 2006
    
    Publishing
    
    Distribution
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    34,705
    
    
    $
    142,638
    
    
    $
    (18,450
    )
    
    $
    158,893Income from continuing operations
    
    
    4,361
    
    
    
    (110
    )
    
    
    
    
    
    
    4,251Net income from continuing operations, before income tax
    
    
    4,407
    
    
    
    (1,878
    )
    
    
    
    
    
    
    2,529Total assets
    
    $
    168,436
    
    
    $
    293,244
    
    
    $
    (117,001
    )
    
    $
    344,679
 Six months ended September 30, 2007
    
    Publishing
    
    Distribution
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    56,666
    
    
    $
    257,281
    
    
    $
    (33,210
    )
    
    $
    280,737Income from continuing operations
    
    
    4,277
    
    
    
    1,951
    
    
    
    
    
    
    
    6,228Net income from continuing operations, before income tax
    
    
    2,153
    
    
    
    1,491
    
    
    
    
    
    
    
    3,644Total assets
    
    $
    174,921
    
    
    $
    264,362
    
    
    $
    (126,485
    )
    
    $
    312,798
 Six months ended September 30, 2006
    
    Publishing
    
    Distribution
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    60,743
    
    
    $
    261,222
    
    
    $
    (30,900
    )
    
    $
    291,065Income from continuing operations
    
    
    6,370
    
    
    
    823
    
    
    
    
    
    
    
    7,193Net income from continuing operations, before income tax
    
    
    6,475
    
    
    
    (3,147
    )
    
    
    
    
    
    
    3,328Total assets
    
    $
    168,436
    
    
    $
    293,244
    
    
    $
    (117,001
    )
    
    $
    344,679
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Executive Summary
   21




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Discontinued Operations
 Accounting for the Impairment of
Disposal of Long-Lived Assets
   Working Capital and Debt
  Overview
   anime
  22




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Forward-Looking Statements / Important Risk Factors
   anime
 23




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Critical Accounting Policies
  Reconciliation of GAAP Net Sales to Net Sales Before Inter-Company Eliminations
  Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,(Unaudited)
    
    
    (Unaudited)(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales:Distribution
    
    $
    133,391
    
    
    $
    142,638
    
    
    $
    257,281
    
    
    $
    261,222Publishing
    
    
    27,043
    
    
    
    34,705
    
    
    
    56,666
    
    
    
    60,743Net sales before inter-company eliminations
    
    
    160,434
    
    
    
    177,343
    
    
    
    313,947
    
    
    
    321,965Inter-company eliminations
    
    
    (16,719
    )
    
    
    (18,450
    )
    
    
    (33,210
    )
    
    
    (30,900
    )Net sales as reported
    
    $
    143,715
    
    
    $
    158,893
    
    
    $
    280,737
    
    
    $
    291,065
 24




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##### Table of Contents



Results of Operations
  Three Months Ended September 30,
    
    Six Months Ended September 30,(Unaudited)
    
    (Unaudited)2007
    
    2006
    
    2007
    
    2006Net sales:Distribution
    
    
    92.8
    %
    
    
    89.8
    %
    
    
    91.6
    %
    
    
    89.7
    %Publishing
    
    
    18.8
    
    
    
    21.8
    
    
    
    20.2
    
    
    
    20.9Inter-company sales
    
    
    (11.6
    )
    
    
    (11.6
    )
    
    
    (11.8
    )
    
    
    (10.6
    )Total net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales, exclusive of amortization and
depreciation
    
    
    84.6
    
    
    
    82.2
    
    
    
    83.6
    
    
    
    82.5Gross profit
    
    
    15.4
    
    
    
    17.8
    
    
    
    16.4
    
    
    
    17.5Operating expensesSelling and marketing
    
    
    4.7
    
    
    
    4.8
    
    
    
    4.8
    
    
    
    4.9Distribution and warehousing
    
    
    2.2
    
    
    
    1.9
    
    
    
    2.0
    
    
    
    1.9General and administrative
    
    
    5.8
    
    
    
    5.2
    
    
    
    5.8
    
    
    
    5.5Bad debt
    
    
    
    
    
    
    1.5
    
    
    
    
    
    
    
    1.0Depreciation and amortization
    
    
    1.6
    
    
    
    1.7
    
    
    
    1.6
    
    
    
    1.8Total operating expenses
    
    
    14.3
    
    
    
    15.1
    
    
    
    14.2
    
    
    
    15.1Income from operations
    
    
    1.1
    
    
    
    2.7
    
    
    
    2.2
    
    
    
    2.4Interest expense
    
    
    (1.0
    )
    
    
    (1.3
    )
    
    
    (1.1
    )
    
    
    (1.3
    )Interest income
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1Warrant expense
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    (0.1
    )Other income (expense), net
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    
    Net income from continuing operations
    
    
    0.2
    
    
    
    1.6
    
    
    
    1.2
    
    
    
    1.1Income tax expense
    
    
    (0.1
    )
    
    
    (0.6
    )
    
    
    (0.4
    )
    
    
    (0.4
    )Net income from continuing operations
    
    
    0.1
    
    
    
    1.0
    
    
    
    0.8
    
    
    
    0.7Discontinued operations, net of taxGain on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    1.7
    
    
    
    Net income (loss) from discontinued operations
    
    
    (0.4
    )
    
    
    0.1
    
    
    
    (0.7
    )
    
    
    0.1Net income
    
    
    (0.3
    )%
    
    
    1.1
    %
    
    
    1.8
    %
    
    
    0.8
    %
 Publishing Segment
  Fiscal 2008 Second Quarter Results Compared With Fiscal 2007 Second Quarter
 Net Sales
  Gross Profit
  25




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##### Table of Contents



Operating Expenses
       Fiscal 2008 Six Months Results Compared With Fiscal 2007 Six Months
 Net Sales
  Gross Profit
  Operating Expenses
      26




---



##### Table of Contents



Distribution Segment
  Fiscal 2008 Second Quarter Results Compared With Fiscal 2007 Second Quarter
 Net Sales
  Gross Profit
  Operating Expenses
        27




---



##### Table of Contents



Fiscal 2008 Six Months Results Compared With Fiscal 2007 Six Months
 Net Sales
  Gross Profit
  Operating Expenses
        Consolidated Other Income and Expense
  28




---



##### Table of Contents



Consolidated Income Tax Expense
  Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109
  Consolidated Net Income from Continuing Operations
  Discontinued Operations
   29




---



##### Table of Contents



Consolidated Net Income
  Market Risk
  Seasonality and Inflation
  Liquidity and Capital Resources
 Operating Activities
    Investing Activities
  Financing Activities
  30




---



##### Table of Contents



Discontinued Operations
  Capital Resources
      Liquidity
   31




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##### Table of Contents



Contractual Obligations
  Less
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    2  3
    
    
    4  5
    
    
    than 5Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases
    
    $
    28,802
    
    
    $
    3,726
    
    
    $
    5,900
    
    
    $
    5,230
    
    
    $
    13,946Capital leases
    
    
    145
    
    
    
    77
    
    
    
    68
    
    
    
    
    
    
    
    Note payable
    
    
    9,820
    
    
    
    150
    
    
    
    300
    
    
    
    9,370
    
    
    
    License and distribution agreement
    
    
    16,191
    
    
    
    9,390
    
    
    
    6,801
    
    
    
    
    
    
    
    Total
    
    $
    54,958
    
    
    $
    13,343
    
    
    $
    13,069
    
    
    $
    14,600
    
    
    $
    13,946
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
       32




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities
  33




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Securities Holders
   Names
    
    Votes For
    
    Votes WithheldKeith A. Benson
    
    
    28,860,622
    
    
    
    2,767,737Cary L. Deacon
    
    
    28,887,366
    
    
    
    2,790,993Timothy R. Gentz
    
    
    28,861,144
    
    
    
    2,767,215Tom F. Weyl
    
    
    28,593,421
    
    
    
    3,034,938
   
 Item 5. Other Information
  
 Item 6. Exhibits
  10.1
    
    Navarre Corporation 2004 Stock Plan Restricted Stock Unit Agreement31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the
Exchange Act)31.2
    
    Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the
Exchange Act)32.1
    
    Certification of the Chief Executive Officer pursuant Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)32.2
    
    Certification of the Chief Financial Officer pursuant Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
 34




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##### Table of Contents



SIGNATURES
  Navarre Corporation(Registrant)Date: November 8, 2007
    
    /s/ Cary L. DeaconCary L. DeaconPresident and Chief Executive Officer(Principal Executive Officer)Date: November 8, 2007
    
    /s/ J. Reid PorterJ. Reid PorterExecutive Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)
 35