##### 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, 2010
 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 
incorporation or organization)
    
    (IRS Employer
Identification No.)
 7400 49th Avenue North, New Hope, MN 55428
 (763) 535-8333
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ
  Class
    
    Outstanding at November 8, 2010Common Stock, No Par Value
    
    36,440,550 shares




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##### 



NAVARRE CORPORATION
 Index
 PagePART I. FINANCIAL INFORMATION
    
    3Item 1. Consolidated Financial Statements.
    
    3Consolidated Balance Sheets  September 30, 2010 and March 31, 2010
    
    3Consolidated Statements of Operations  Three and Six Months ended September 30, 2010 and 2009
    
    4Consolidated Statements of Cash Flows  Six Months ended September 30, 2010 and 2009
    
    5Notes to Consolidated Financial Statements
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    22Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    35Item 4. Controls and Procedures
    
    35PART II. OTHER INFORMATION
    
    36Item 1. Legal Proceedings
    
    36Item 1A. Risk Factors
    
    36Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    36Item 3. Defaults Upon Senior Securities
    
    36Item 4. (Removed and Reserved)
    
    36Item 5. Other Information
    
    36Item 6. Exhibits
    
    36SIGNATURES
    
    37EX-31.1EX-31.2EX-32.1EX-32.2
 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 31,2010
    
    
    2010(Unaudited)
    
    
    (Note)Assets:Current assets:Marketable securities
    
    $
    
    
    
    $
    2Accounts receivable, less allowances of $9,155 and $8,913, respectively
    
    
    57,739
    
    
    
    61,880Inventories
    
    
    27,694
    
    
    
    21,164Prepaid expenses and other current assets
    
    
    13,800
    
    
    
    13,511Income tax receivable
    
    
    
    
    
    
    94Deferred tax assets  current, net
    
    
    6,624
    
    
    
    7,603Current assets of discontinued operations
    
    
    8,748
    
    
    
    6,071Total current assets
    
    
    114,605
    
    
    
    110,325Property and equipment, net of accumulated depreciation of $21,260 and $19,556, respectively
    
    
    10,548
    
    
    
    11,790Software development costs, net of accumulated amortization of $543 and $324, respectively
    
    
    1,964
    
    
    
    1,723Other assets:Intangible assets, net of accumulated amortization of $217 and $38, respectively
    
    
    2,640
    
    
    
    32Goodwill
    
    
    5,719
    
    
    
    Deferred tax assets  non-current, net
    
    
    12,553
    
    
    
    13,808Other assets
    
    
    4,021
    
    
    
    4,491Non-current assets of discontinued operations
    
    
    29,907
    
    
    
    29,434Total assets
    
    $
    181,957
    
    
    $
    171,603Liabilities and shareholders equity:Current liabilities:Revolving line of credit
    
    $
    14,428
    
    
    $
    6,634Accounts payable
    
    
    74,512
    
    
    
    79,968Checks written in excess of cash balances
    
    
    8,757
    
    
    
    4,816Deferred compensation
    
    
    
    
    
    
    1,333Accrued expenses
    
    
    6,063
    
    
    
    10,977Contingent
payment obligation short-term  acquisition (Note 3)
    
    
    526
    
    
    
    Note payable  acquisition (Note 3)
    
    
    1,002
    
    
    
    Other liabilities  short-term
    
    
    292
    
    
    
    51Current liabilities of discontinued operations
    
    
    8,914
    
    
    
    5,760Total current liabilities
    
    
    114,494
    
    
    
    109,539Long-term liabilities:Contingent
payment obligation long-term  acquisition (Note 3)
    
    
    422
    
    
    
    Other liabilities  long-term
    
    
    1,428
    
    
    
    1,303Total liabilities
    
    
    116,344
    
    
    
    110,842Commitments and contingencies (Note 12)Shareholders equity:Common stock, no par value:Authorized shares  100,000,000; issued and outstanding shares  36,382,835 at
September 30, 2010 and 36,366,668 at March 31, 2010
    
    
    162,503
    
    
    
    162,015Accumulated deficit
    
    
    (97,019
    )
    
    
    (101,254
    )Accumulated other comprehensive income
    
    
    129
    
    
    
    Total shareholders equity
    
    
    65,613
    
    
    
    60,761Total liabilities and shareholders equity
    
    $
    181,957
    
    
    $
    171,603
 
 Note: The balance sheet at March 31, 2010 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 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net sales
    
    $
    120,476
    
    
    $
    113,491
    
    
    $
    219,268
    
    
    $
    236,907Cost of sales (exclusive of depreciation and amortization)
    
    
    103,216
    
    
    
    96,748
    
    
    
    187,531
    
    
    
    205,201Gross profit
    
    
    17,260
    
    
    
    16,743
    
    
    
    31,737
    
    
    
    31,706Operating expenses:Selling and marketing
    
    
    5,277
    
    
    
    4,462
    
    
    
    10,161
    
    
    
    8,530Distribution and warehousing
    
    
    2,686
    
    
    
    2,435
    
    
    
    5,158
    
    
    
    4,511General and administrative
    
    
    5,149
    
    
    
    5,818
    
    
    
    10,223
    
    
    
    12,271Depreciation and amortization
    
    
    991
    
    
    
    1,027
    
    
    
    1,882
    
    
    
    2,249Total operating expenses
    
    
    14,103
    
    
    
    13,742
    
    
    
    27,424
    
    
    
    27,561Income from operations
    
    
    3,157
    
    
    
    3,001
    
    
    
    4,313
    
    
    
    4,145Other income (expense):Interest income (expense), net
    
    
    (456
    )
    
    
    (482
    )
    
    
    (851
    )
    
    
    (1,043
    )Other income (expense), net
    
    
    (172
    )
    
    
    364
    
    
    
    (431
    )
    
    
    815Income from continuing operations before income tax
    
    
    2,529
    
    
    
    2,883
    
    
    
    3,031
    
    
    
    3,917Income tax expense
    
    
    (1,072
    )
    
    
    (1,038
    )
    
    
    (1,371
    )
    
    
    (1,218
    )Net income from continuing operations
    
    
    1,457
    
    
    
    1,845
    
    
    
    1,660
    
    
    
    2,699Discontinued operations:Income from discontinued operations, net of tax
    
    
    1,680
    
    
    
    435
    
    
    
    2,575
    
    
    
    3,742Net income
    
    $
    3,137
    
    
    $
    2,280
    
    
    $
    4,235
    
    
    $
    6,441Basic earnings per common share:Continued operations
    
    
    0.04
    
    
    
    0.05
    
    
    
    0.05
    
    
    
    0.08Discontinued operations
    
    
    0.05
    
    
    
    0.01
    
    
    
    0.07
    
    
    
    0.10Net income
    
    $
    0.09
    
    
    $
    0.06
    
    
    $
    0.12
    
    
    $
    0.18Diluted earnings per common share:Continued operations
    
    
    0.04
    
    
    
    0.05
    
    
    
    0.04
    
    
    
    0.08Discontinued operations
    
    
    0.05
    
    
    
    0.01
    
    
    
    0.07
    
    
    
    0.10Net income
    
    $
    0.09
    
    
    $
    0.06
    
    
    $
    0.11
    
    
    $
    0.18Weighted average shares outstanding:Basic
    
    
    36,376
    
    
    
    36,237
    
    
    
    36,371
    
    
    
    36,237Diluted
    
    
    36,995
    
    
    
    36,650
    
    
    
    36,886
    
    
    
    36,530
 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 30,2010
    
    
    2009Operating activities:Net income
    
    $
    4,235
    
    
    $
    6,441Adjustments to reconcile net income to net cash (used in) provided by operating activities:Income from discontinued operations
    
    
    (2,575
    )
    
    
    (3,742
    )Depreciation and amortization
    
    
    1,882
    
    
    
    2,249Amortization of debt acquisition costs
    
    
    298
    
    
    
    217Amortization of software development costs
    
    
    219
    
    
    
    21Share-based compensation expense
    
    
    468
    
    
    
    529Deferred income taxes
    
    
    2,234
    
    
    
    3,116Deferred compensation expense
    
    
    
    
    
    
    (400
    )Other
    
    
    218
    
    
    
    87Changes in operating assets and liabilities:Accounts receivable
    
    
    5,344
    
    
    
    6,704Inventories
    
    
    (5,658
    )
    
    
    (4,740
    )Prepaid expenses
    
    
    (194
    )
    
    
    (41
    )Income taxes receivable
    
    
    94
    
    
    
    4,541Other assets
    
    
    (43
    )
    
    
    304Accounts payable
    
    
    (5,973
    )
    
    
    (17,122
    )Income taxes payable
    
    
    392
    
    
    
    150Accrued expenses
    
    
    (4,982
    )
    
    
    1,809Net cash (used in) provided by operating activities
    
    
    (4,041
    )
    
    
    123Investing activities:Cash paid for acquisition
    
    
    (8,090
    )
    
    
    Purchases of property and equipment
    
    
    (435
    )
    
    
    (361
    )Investment in software development
    
    
    (460
    )
    
    
    (958
    )Proceeds from sale of intangible assets
    
    
    
    
    
    
    20Net cash used in investing activities
    
    
    (8,985
    )
    
    
    (1,299
    )Financing activities:Proceeds from revolving line of credit
    
    
    99,685
    
    
    
    112,004Payments on revolving line of credit
    
    
    (91,891
    )
    
    
    (116,221
    )Payment of deferred compensation
    
    
    (1,333
    )
    
    
    Checks written in excess of cash balances
    
    
    3,991
    
    
    
    4,386Debt acquisition costs
    
    
    
    
    
    
    (246
    )Other
    
    
    (5
    )
    
    
    (34
    )Net cash provided by (used in) financing activities
    
    
    10,447
    
    
    
    (111
    )Net cash used in continuing operations
    
    
    (2,579
    )
    
    
    (1,287
    )Discontinued operations:Net cash provided by operating activities
    
    
    2,776
    
    
    
    1,377Net cash used in investing activities
    
    
    (191
    )
    
    
    (85
    )Net cash used in financing activities
    
    
    (6
    )
    
    
    (5
    )Net increase (decrease) in cash
    
    
    
    
    
    
    Cash at beginning of period
    
    
    
    
    
    
    Cash at end of period
    
    $
    
    
    
    $
    Supplemental cash flow information:Cash paid for (received from):Interest
    
    $
    863
    
    
    $
    1,017Income taxes, net of refunds
    
    
    40
    
    
    
    (4,394
    )
 See accompanying notes to consolidated financial statements.
 5




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NAVARRE CORPORATION
 
 Notes to Consolidated Financial Statements
(Unaudited)
 Note 1  Organization and Basis of Presentation
         Basis of Consolidation
  6




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Fair Value of Financial Instruments
  Revenue Recognition
    Entertainment  Films
 Note 2  Discontinued Operations
    7




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Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net sales
    
    $
    9,008
    
    
    $
    8,921
    
    
    $
    16,709
    
    
    $
    19,810Interest expense
    
    
    122
    
    
    
    119
    
    
    
    219
    
    
    
    270Net income from discontinued operations, before income taxes
    
    
    2,637
    
    
    
    687
    
    
    
    4,059
    
    
    
    5,908Income tax expense
    
    
    (957
    )
    
    
    (252
    )
    
    
    (1,484
    )
    
    
    (2,166
    )Net income from discontinued operations, net of taxes
    
    $
    1,680
    
    
    $
    435
    
    
    $
    2,575
    
    
    $
    3,742
  September 30,
    
    
    March 31,2010
    
    
    2010Accounts receivable, net
    
    $
    3,504
    
    
    $
    747Inventory
    
    
    5,177
    
    
    
    5,108Prepaid expenses and other current assets
    
    
    67
    
    
    
    216Current assets of discontinued operations
    
    
    8,748
    
    
    
    6,071Property and equipment, net of accumulated depreciation
    
    
    1,568
    
    
    
    1,516Intangible assets, net of amortization
    
    
    1,365
    
    
    
    1,469License fees, net of amortization
    
    
    16,224
    
    
    
    16,565Production costs, net of amortization
    
    
    10,682
    
    
    
    9,814Other assets
    
    
    68
    
    
    
    70Total assets of discontinued operations
    
    $
    38,655
    
    
    $
    35,505Accounts payable
    
    $
    3,938
    
    
    $
    2,483Accrued expenses and other
    
    
    4,976
    
    
    
    3,277Current liabilities of discontinued operations
    
    $
    8,914
    
    
    $
    5,760
 Note 3  Acquisition
 Punch! Software, LLC
    8




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Consideration:Cash
    
    $
    8,090Note payable
    
    
    1,002Contingent
payment obligation  short-term
    
    
    526Contingent
payment obligation  long-term
    
    
    422Fair value of total consideration transferred
    
    $
    10,040Preliminarily, the Punch! purchase price will be allocated as follows:Accounts receivable
    
    $
    1,152Inventory
    
    
    815Prepaid expenses
    
    
    94Property and equipment
    
    
    18Purchased intangibles
    
    
    2,787Goodwill
    
    
    5,719Accounts payable
    
    
    (479
    )Accrued expenses
    
    
    (66
    )$
    10,040
 Consolidated Statements of Operations
 Consolidated Statements of Operations
 Note 4  Marketable Securities
 Fair Value Measurements and Disclosures
    Note 5  Accounts Receivable
  September 30,
    
    
    March 31,2010
    
    
    2010Trade receivables
    
    $
    64,298
    
    
    $
    68,463Vendor receivables
    
    
    2,289
    
    
    
    1,802Other receivables
    
    
    307
    
    
    
    52866,894
    
    
    
    70,793Less: allowance for doubtful accounts and sales discounts
    
    
    3,563
    
    
    
    4,100Less: allowance for sales returns, net margin impact
    
    
    5,592
    
    
    
    4,813Total
    
    $
    57,739
    
    
    $
    61,880
 9




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Note 6  Inventories
  September 30,
    
    
    March 31,2010
    
    
    2010Finished products
    
    $
    22,682
    
    
    $
    18,180Consigned inventory
    
    
    2,994
    
    
    
    1,619Raw materials
    
    
    2,018
    
    
    
    1,365Total
    
    $
    27,694
    
    
    $
    21,164
  Note 7  Prepaid Expenses and Other Current Assets
  September 30,
    
    
    March 31,2010
    
    
    2010Prepaid royalties
    
    $
    12,874
    
    
    $
    12,241Other
    
    
    926
    
    
    
    1,270Total
    
    $
    13,800
    
    
    $
    13,511
 Note 8  Property and Equipment
  September 30,
    
    
    March 31,2010
    
    
    2010Furniture and fixtures
    
    $
    1,159
    
    
    $
    1,140Computer and office equipment
    
    
    18,640
    
    
    
    17,500Warehouse equipment
    
    
    10,068
    
    
    
    10,049Leasehold improvements
    
    
    1,941
    
    
    
    1,898Construction in progress
    
    
    
    
    
    
    759Total
    
    
    31,808
    
    
    
    31,346Less: accumulated depreciation and amortization
    
    
    21,260
    
    
    
    19,556Net property and equipment
    
    $
    10,548
    
    
    $
    11,790
 10




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Note 9  Capitalized Software Development Costs
 Consolidated Statement of Operations
 September 30,
    
    
    March 31,2010
    
    
    2010Software development costs
    
    $
    2,507
    
    
    $
    2,047Less: accumulated amortization
    
    
    543
    
    
    
    324Net software development costs
    
    $
    1,964
    
    
    $
    1,723
  Note 10  Goodwill and Intangible Assets
 Goodwill
   Intangible assets
  As of September 30, 2010Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetDeveloped technology *
    
    $
    1,940
    
    
    $
    149
    
    
    $
    1,791Customer relationships *
    
    
    80
    
    
    
    4
    
    
    
    76Customer list *
    
    
    167
    
    
    
    20
    
    
    
    147Domain name
    
    
    70
    
    
    
    44
    
    
    
    26Trademarks (not amortized) *
    
    
    600
    
    
    
    
    
    
    
    600$
    2,857
    
    
    $
    217
    
    
    $
    2,640
 
 *
    
    Intangible assets acquired as part of the Punch! acquisition (see further disclosure in Note
3). 11




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As of March 31, 2010Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetDomain name
    
    $
    70
    
    
    $
    38
    
    
    $
    32
  Remainder of fiscal 2011
    
    $
    2652012
    
    
    5262013
    
    
    4842014
    
    
    386Thereafter
    
    
    379
 Debt issuance costs
  September 30,
    
    
    March 31,2010
    
    
    2010Debt issuance costs
    
    $
    1,790
    
    
    $
    1,790Less: accumulated amortization
    
    
    547
    
    
    
    249Net debt issuance costs
    
    $
    1,243
    
    
    $
    1,541
 Consolidated Statements of
Operations
 Note 11  Accrued Expenses
  September 30,
    
    
    March 31,2010
    
    
    2010Compensation and benefits
    
    $
    1,817
    
    
    $
    6,527Royalties
    
    
    121
    
    
    
    614Rebates
    
    
    1,094
    
    
    
    1,252Rent
    
    
    930
    
    
    
    862Deferred revenue
    
    
    10
    
    
    
    Interest
    
    
    114
    
    
    
    205Other
    
    
    1,977
    
    
    
    1,517Total
    
    $
    6,063
    
    
    $
    10,977
 Note 12  Commitments and Contingencies
 Contingent payment  Punch! acquisition
  12




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Leases
   Remainder of fiscal 2011
    
    $
    1,2242012
    
    
    2,4442013
    
    
    2,4402014
    
    
    2,0722015
    
    
    2,035Thereafter
    
    
    6,183$
    16,398
 Litigation and Proceedings
  SEC Investigation
  Note 13  Capital Leases
  September 30, 2010
    
    
    March 31, 2010Computer and office equipment
    
    $
    297
    
    
    $
    298Less: accumulated amortization
    
    
    197
    
    
    
    172Property and equipment, net
    
    $
    100
    
    
    $
    126
  13




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Minimum LeaseCommitmentsRemainder of fiscal 2011
    
    $
    302012
    
    
    582013
    
    
    28Total minimum lease payments
    
    $
    116Less: amounts representing interest at rates ranging from 6.9% to 9.4%
    
    
    9Present value of minimum capital lease payments, reflected in the
balance sheet as current and noncurrent capital lease obligations of
$52 and $55, respectively
    
    $
    107
 Note 14  Bank Financing and Debt
      Letter of Credit
  Note 15  Share-Based Compensation
  14




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Stock Options
  WeightedaverageNumber of
    
    
    exerciseoptions
    
    
    priceOptions outstanding, April 1, 2010:
    
    
    3,547,299
    
    
    $
    4.77Granted
    
    
    146,000
    
    
    $
    2.20Exercised
    
    
    (16,167
    )
    
    $
    1.24Canceled
    
    
    (293,633
    )
    
    $
    9.08Options outstanding, September 30, 2010
    
    
    3,383,499
    
    
    $
    4.30Options exercisable, September 30, 2010
    
    
    2,048,514
    
    
    $
    6.05Shares available for future grant, September 30, 2010
    
    
    3,397,412
     Restricted Stock
   Weightedaveragegrant dateShares
    
    
    fair valueUnvested, April 1, 2010:
    
    
    508,486
    
    
    $
    1.47Granted
    
    
    147,500
    
    
    
    2.49Vested
    
    
    
    
    
    
    Forfeited
    
    
    (11,666
    )
    
    
    1.82Unvested, September 30, 2010
    
    
    644,320
    
    
    $
    1.70
  15




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Share-Based Compensation Valuation and Expense Information
  Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Expected life (in years)
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Expected volatility
    
    
    73
    %
    
    
    74
    %
    
    
    73
    %
    
    
    74
    %Risk-free interest rate
    
    
    1.46
    %
    
    
    2.33-2.37
    %
    
    
    1.46-2.60
    %
    
    
    1.65-2.93
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
  Consolidated Statements of Operations
 Note 16  Shareholders Equity
   Note 17  Private Placement Warrants
  16




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##### Table of Contents



Note 18  Earnings Per Share
  Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Numerator:Net income from continuing operations
    
    
    1,457
    
    
    
    1,845
    
    
    
    1,660
    
    
    
    2,699Income from discontinued operations, net of tax
    
    
    1,680
    
    
    
    435
    
    
    
    2,575
    
    
    
    3,742Net income
    
    $
    3,137
    
    
    $
    2,280
    
    
    $
    4,235
    
    
    $
    6,441Denominator:Denominator for basic earnings per shareweighted-average shares
    
    
    36,376
    
    
    
    36,237
    
    
    
    36,371
    
    
    
    36,237Dilutive securities: Employee stock options and warrants
    
    
    619
    
    
    
    413
    
    
    
    515
    
    
    
    293Denominator for diluted earnings per shareadjusted weighted-average shares
    
    
    36,995
    
    
    
    36,650
    
    
    
    36,886
    
    
    
    36,530Basic earnings per common share:Continuing operations
    
    $
    0.04
    
    
    $
    0.05
    
    
    $
    0.05
    
    
    $
    0.08Discontinued operations
    
    
    0.05
    
    
    
    0.01
    
    
    
    0.07
    
    
    
    0.10Net income
    
    $
    0.09
    
    
    $
    0.06
    
    
    $
    0.12
    
    
    $
    0.18Diluted earnings per common share:Continuing operations
    
    $
    0.04
    
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.08Discontinued operations
    
    
    0.05
    
    
    
    0.01
    
    
    
    0.07
    
    
    
    0.10Net income
    
    $
    0.09
    
    
    $
    0.06
    
    
    $
    0.11
    
    
    $
    0.18
   Note 19  Comprehensive Income
   Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income
    
    $
    3,137
    
    
    $
    2,280
    
    
    $
    4,235
    
    
    $
    6,441Net unrealized gain on marketable securities
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    2Net unrealized gain on foreign exchange rate translation
    
    
    189
    
    
    
    
    
    
    
    129
    
    
    
    Comprehensive income
    
    $
    3,326
    
    
    $
    2,281
    
    
    $
    4,364
    
    
    $
    6,443
   17




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##### Table of Contents



Note 20  Income Taxes
        Note 21  Related Party Transactions
 Employment/Severance Agreements
  18




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##### Table of Contents



Employment Agreement  FUNimation
  Note 22  Business Segments
      19




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##### Table of Contents



Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedThree months ended September 30, 2010Net sales (1)
    
    $
    118,761
    
    
    $
    8,656
    
    
    $
    (6,941
    )
    
    $
    120,476Income from operations
    
    
    1,699
    
    
    
    1,458
    
    
    
    
    
    
    
    3,157Income (loss) from continuing operations, before income tax (2)
    
    
    1,712
    
    
    
    1,583
    
    
    
    (766
    )
    
    
    2,529Depreciation and amortization expense
    
    
    828
    
    
    
    163
    
    
    
    
    
    
    
    991Capital expenditures
    
    
    79
    
    
    
    22
    
    
    
    
    
    
    
    101Total assets (3)
    
    
    117,748
    
    
    
    32,122
    
    
    
    (6,568
    )
    
    
    143,302
 Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedThree months ended September 30, 2009Net sales (1)
    
    $
    111,336
    
    
    $
    8,156
    
    
    $
    (6,001
    )
    
    $
    113,491Income from operations
    
    
    1,274
    
    
    
    1,727
    
    
    
    
    
    
    
    3,001Income from continuing operations, before income tax (2)
    
    
    1,648
    
    
    
    2,001
    
    
    
    (766
    )
    
    
    2,883Depreciation and amortization expense
    
    
    977
    
    
    
    50
    
    
    
    
    
    
    
    1,027Capital expenditures
    
    
    167
    
    
    
    7
    
    
    
    
    
    
    
    174Total assets (3)
    
    
    115,859
    
    
    
    20,429
    
    
    
    (6,040
    )
    
    
    130,248
 Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedSix months ended September 30, 2010Net sales (1)
    
    $
    214,714
    
    
    $
    15,710
    
    
    $
    (11,156
    )
    
    $
    219,268Income from operations
    
    
    1,708
    
    
    
    2,605
    
    
    
    
    
    
    
    4,313Income from continuing operations, before income tax (2)
    
    
    1,711
    
    
    
    2,876
    
    
    
    (1,556
    )
    
    
    3,031Depreciation and amortization expense
    
    
    1,637
    
    
    
    245
    
    
    
    
    
    
    
    1,882Capital expenditures
    
    
    378
    
    
    
    57
    
    
    
    
    
    
    
    435Total assets (3)
    
    
    117,748
    
    
    
    32,122
    
    
    
    (6,568
    )
    
    
    143,302
 Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedSix months ended September 30, 2009Net sales (1)
    
    $
    232,732
    
    
    $
    14,953
    
    
    $
    (10,778
    )
    
    $
    236,907Income from operations
    
    
    1,638
    
    
    
    2,507
    
    
    
    
    
    
    
    4,145Income from continuing operations, before income tax (2)
    
    
    2,316
    
    
    
    3,109
    
    
    
    (1,508
    )
    
    
    3,917Depreciation and amortization expense
    
    
    2,034
    
    
    
    215
    
    
    
    
    
    
    
    2,249Capital expenditures
    
    
    310
    
    
    
    51
    
    
    
    
    
    
    
    361Total assets (3)
    
    
    115,859
    
    
    
    20,429
    
    
    
    (6,040
    )
    
    
    130,248
 
 (1)
    
    Excluded from publishing sales above, are net sales from discontinued operations for the
three and six months ended September 30, 2010 of $9.0 million and $16.7 million, respectively,
and $8.9 million and $19.8 million, respectively, for the three and six months ended September
30, 2009.(2)
    
    Eliminations represents the interest expense previously allocated to FUNimation, which, in
accordance with ASC 205-20, is not allowed to be allocated to discontinued operations.(3)
    
    Excluded from total publishing assets above are $38.7 million and $35.9 million in assets of
discontinued operations at September 30, 2010 and 2009, respectively. 20




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##### Table of Contents



Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedThree months ended September 30, 2010Software
    
    $
    94,372
    
    
    $
    8,656
    
    
    $
    (6,941
    )
    
    $
    96,087Home video
    
    
    9,997
    
    
    
    
    
    
    
    
    
    
    
    9,997Video games
    
    
    7,924
    
    
    
    
    
    
    
    
    
    
    
    7,924Consumer electronics and peripherals
    
    
    6,468
    
    
    
    
    
    
    
    
    
    
    
    6,468Consolidated
    
    $
    118,761
    
    
    $
    8,656
    
    
    $
    (6,941
    )
    
    $
    120,476
 Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedThree months ended September 30, 2009Software
    
    $
    93,706
    
    
    $
    8,057
    
    
    $
    (6,064
    )
    
    $
    95,699Home video
    
    
    8,388
    
    
    
    99
    
    
    
    63
    
    
    
    8,550Video games
    
    
    6,188
    
    
    
    
    
    
    
    
    
    
    
    6,188Consumer electronics and peripherals
    
    
    3,054
    
    
    
    
    
    
    
    
    
    
    
    3,054Consolidated
    
    $
    111,336
    
    
    $
    8,156
    
    
    $
    (6,001
    )
    
    $
    113,491
 Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedSix months ended September 30, 2010Software
    
    $
    172,797
    
    
    $
    15,710
    
    
    $
    (11,156
    )
    
    $
    177,351Home video
    
    
    19,066
    
    
    
    
    
    
    
    
    
    
    
    19,066Video games
    
    
    11,594
    
    
    
    
    
    
    
    
    
    
    
    11,594Consumer electronics and peripherals
    
    
    11,257
    
    
    
    
    
    
    
    
    
    
    
    11,257Consolidated
    
    $
    214,714
    
    
    $
    15,710
    
    
    $
    (11,156
    )
    
    $
    219,268
 Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedSix months ended September 30, 2009Software
    
    $
    192,963
    
    
    $
    14,718
    
    
    $
    (11,105
    )
    
    $
    196,576Home video
    
    
    19,843
    
    
    
    235
    
    
    
    327
    
    
    
    20,405Video games
    
    
    15,114
    
    
    
    
    
    
    
    
    
    
    
    15,114Consumer electronics and peripherals
    
    
    4,812
    
    
    
    
    
    
    
    
    
    
    
    4,812Consolidated
    
    $
    232,732
    
    
    $
    14,953
    
    
    $
    (10,778
    )
    
    $
    236,907
 Note 23  Subsequent Events
  21




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Overview
        Executive Summary
 Continuing Operations
     22




---



##### Table of Contents



Discontinued Operations
  Dragonball Z
  Dragonball Z
 23




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##### Table of Contents



Working Capital and Debt
      Forward-Looking Statements / Risk Factors
   24




---



##### Table of Contents



Critical Accounting Policies
  25




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##### Table of Contents



Managements Discussion and Analysis of Financial Condition
and Results of Operations
 Reconciliation of GAAP Net Sales to Net Sales Before Inter-Company Eliminations
   Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,(Unaudited)
    
    
    (Unaudited)2010
    
    
    2009
    
    
    2010
    
    
    2009Net sales:Distribution
    
    $
    118,761
    
    
    $
    111,336
    
    
    $
    214,714
    
    
    $
    232,732Publishing
    
    
    8,656
    
    
    
    8,156
    
    
    
    15,710
    
    
    
    14,953Net sales before inter-company eliminations
    
    
    127,417
    
    
    
    119,492
    
    
    
    230,424
    
    
    
    247,685Inter-company sales
    
    
    (6,941
    )
    
    
    (6,001
    )
    
    
    (11,156
    )
    
    
    (10,778
    )Net sales as reported
    
    $
    120,476
    
    
    $
    113,491
    
    
    $
    219,268
    
    
    $
    236,907
 Results of Operations
 Consolidated Statements of Operations
 Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,(Unaudited)
    
    
    (Unaudited)2010
    
    
    2009
    
    
    2010
    
    
    2009Net sales:Distribution
    
    
    98.6
    %
    
    
    98.1
    %
    
    
    97.9
    %
    
    
    98.2
    %Publishing
    
    
    7.2
    
    
    
    7.2
    
    
    
    7.2
    
    
    
    6.3Inter-company sales
    
    
    (5.8
    )
    
    
    (5.3
    )
    
    
    (5.1
    )
    
    
    (4.5
    )Total net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales, exclusive of amortization and depreciation
    
    
    85.6
    
    
    
    85.2
    
    
    
    85.5
    
    
    
    86.6Gross profit
    
    
    14.4
    
    
    
    14.8
    
    
    
    14.5
    
    
    
    13.4Operating expensesSelling and marketing
    
    
    4.4
    
    
    
    3.9
    
    
    
    4.6
    
    
    
    3.6Distribution and warehousing
    
    
    2.2
    
    
    
    2.2
    
    
    
    2.3
    
    
    
    1.9General and administrative
    
    
    4.3
    
    
    
    5.1
    
    
    
    4.7
    
    
    
    5.2Depreciation and amortization
    
    
    0.8
    
    
    
    0.9
    
    
    
    0.9
    
    
    
    1.0Total operating expenses
    
    
    11.7
    
    
    
    12.1
    
    
    
    12.5
    
    
    
    11.7Income from operations
    
    
    2.7
    
    
    
    2.7
    
    
    
    2.0
    
    
    
    1.7Interest expense
    
    
    (0.4
    )
    
    
    (0.4
    )
    
    
    (0.4
    )
    
    
    (0.4
    )Other income (expense), net
    
    
    (0.1
    )
    
    
    0.3
    
    
    
    (0.2
    )
    
    
    0.4Income from continuing operations  before taxes
    
    
    2.2
    
    
    
    2.6
    
    
    
    1.4
    
    
    
    1.7Income tax expense
    
    
    (0.9
    )
    
    
    (0.9
    )
    
    
    (0.6
    )
    
    
    (0.5
    )Net income from continuing operations
    
    
    1.3
    
    
    
    1.7
    
    
    
    0.8
    
    
    
    1.2Discontinued operations:Income from discontinued operations, net of tax
    
    
    1.4
    
    
    
    0.4
    
    
    
    1.2
    
    
    
    1.5Net income
    
    
    2.7
    %
    
    
    2.1
    %
    
    
    2.0
    %
    
    
    2.7
    %
 26




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##### Table of Contents



Distribution Segment
  Fiscal 2011 Second Quarter Results from Continuing Operations Compared To Fiscal 2010 Second
Quarter
 Net Sales (before inter-company eliminations)
  Gross Profit
  Operating Expenses
     27




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##### Table of Contents



Operating Income
  Fiscal 2011 Six Months Results from Continuing Operations Compared With Fiscal 2010 Six Months
 Net Sales (before inter-company eliminations)
  Gross Profit
  Operating Expenses
     28




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##### Table of Contents



Operating Income
  Publishing Segment
    Fiscal 2011 Second Quarter Results from Continuing Operations Compared To Fiscal 2010 Second
Quarter
 Net Sales (before inter-company eliminations)
  Gross Profit
  Operating Expenses
   29




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##### Table of Contents



Operating Income
  Fiscal 2011 Six Months Results from Continuing Operations Compared With Fiscal 2010 Six Months
 Net Sales (before inter-company eliminations)
  Gross Profit
  Operating Expenses
     30




---



##### Table of Contents



Operating Income
  Consolidated Other Income and Expense
   Consolidated Income Tax Expense from Continuing Operations
    Consolidated Net Income from Continuing Operations
  31




---



##### Table of Contents



Discontinued Operations
    Consolidated Net Income
  Market Risk
      32




---



##### Table of Contents



Seasonality and Inflation
  Liquidity and Capital Resources
 Cash Flow Analysis
 Operating Activities
    Investing Activities
     Financing Activities
  33




---



##### Table of Contents



Capital Resources
     Liquidity
   34




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##### Table of Contents



Contractual Obligations
  Less
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1  3
    
    
    3  5
    
    
    than 5Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases (1)
    
    $
    17,297
    
    
    $
    1,178
    
    
    $
    4,957
    
    
    $
    4,299
    
    
    $
    6,863Capital leases (2)
    
    
    116
    
    
    
    29
    
    
    
    87
    
    
    
    
    
    
    
    Contingent payment  acquisition (3)
    
    
    948
    
    
    
    
    
    
    
    948
    
    
    
    
    
    
    
    Note payable  acquisition (3)
    
    
    1,002
    
    
    
    
    
    
    
    1,002
    
    
    
    
    
    
    
    License and distribution agreements
    
    
    2,816
    
    
    
    606
    
    
    
    1,690
    
    
    
    520
    
    
    
    Contractual
obligations of discontinued operations
    
    
    12,428
    
    
    
    4,644
    
    
    
    4,881
    
    
    
    1,262
    
    
    
    1,641Total
    
    $
    34,607
    
    
    $
    6,457
    
    
    $
    13,565
    
    
    $
    6,081
    
    
    $
    8,504
 
 (1)
    
    See further disclosure in Note 12 to our consolidated financial statements.(2)
    
    See further disclosure in Note 13 to our consolidated financial statements.(3)
    
    See further disclosure in Note 3 to our consolidated financial statements.  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Managements Discussion and Analysis of Financial Condition and Results of Operations  Market
Risk
 
 Item 4. Controls and Procedures
   35




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##### Table of Contents



Part II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 Managements Discussion and Analysis of
Financial Condition and Results of Operations  Forward-Looking Statements / Risk Factors
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. (Removed and Reserved).
 
 Item 5. Other Information
  
 Item 6. Exhibits
  31.1
    
    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)
 36




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##### Table of Contents



SIGNATURES
  Navarre Corporation
(Registrant)Date: November 9, 2010
    
    /s/ Cary L. DeaconCary L. DeaconPresident and Chief Executive Officer
(Principal Executive Officer)Date: November 9, 2010
    
    /s/ J. Reid PorterJ. Reid PorterChief Operating Officer and Chief Financial Officer
(Principal Financial and Accounting Officer) 37