##### 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 December 31, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 for the transition period fromto
 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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ
  Class
    
    Outstanding at February 6, 2008Common Stock, No Par Value
    
    36,210,686 shares




---



##### 



NAVARRE CORPORATION
 Index
 PART I. FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements. (Unaudited)Consolidated Balance Sheets  December 31, 2007 and March 31, 2007 (Audited)Consolidated Statements of Operations  Three and Nine Months ended December 31,
2007 and 2006Consolidated Statements of Cash Flows  Nine Months ended December 31, 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. ExhibitsSIGNATURES302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements.
 NAVARRE CORPORATION
 
 Consolidated Balance Sheets
 (In thousands, except share amounts)
 December 31,
    
    
    March 31,2007
    
    
    2007(Unaudited)
    
    
    (Note)Assets:Current assets:Cash and cash equivalents
    
    $
    4,248
    
    
    $
    966Marketable securities
    
    
    1,420
    
    
    
    Accounts receivable, less allowances of $16,891 and $18,284, respectively
    
    
    116,171
    
    
    
    70,609Inventories
    
    
    50,823
    
    
    
    36,791Prepaid expenses and other current assets
    
    
    12,208
    
    
    
    11,126Income tax receivable
    
    
    29
    
    
    
    828Deferred tax assets  current
    
    
    9,979
    
    
    
    8,935Assets of discontinued operations
    
    
    210
    
    
    
    21,889Total current assets
    
    
    195,088
    
    
    
    151,144Property and equipment, net of accumulated depreciation of $13,633 and $10,786, respectively
    
    
    17,342
    
    
    
    14,042Other assets:Marketable securities
    
    
    2,667
    
    
    
    Goodwill
    
    
    81,697
    
    
    
    81,697Intangible assets, net of amortization of $19,765 and $15,588, respectively
    
    
    11,107
    
    
    
    14,197License fees, net of amortization of $16,670 and $12,688, respectively
    
    
    19,784
    
    
    
    15,609Other assets
    
    
    11,479
    
    
    
    11,193Assets of discontinued operations
    
    
    
    
    
    
    343Total assets
    
    $
    339,164
    
    
    $
    288,225Liabilities and shareholders equity:Current liabilities:Note payable  line of credit
    
    $
    48,917
    
    
    $
    38,956Note payable  short term
    
    
    150
    
    
    
    150Capital lease obligation  short term
    
    
    74
    
    
    
    102Accounts payable
    
    
    129,741
    
    
    
    87,145Deferred compensation
    
    
    2,066
    
    
    
    Accrued expenses
    
    
    15,852
    
    
    
    13,578Liabilities of discontinued operations
    
    
    846
    
    
    
    12,748Total current liabilities
    
    
    197,646
    
    
    
    152,679Long-term liabilities:Note payable  long-term
    
    
    9,632
    
    
    
    14,850Capital lease obligation  long-term
    
    
    73
    
    
    
    120Deferred compensation
    
    
    3,685
    
    
    
    6,358Income taxes payable
    
    
    733
    
    
    
    Deferred tax liabilities  non-current
    
    
    3,212
    
    
    
    7Other long-term liabilities
    
    
    760
    
    
    
    760Total liabilities
    
    
    215,741
    
    
    
    174,774Commitments and contingencies (Note 20)Shareholders equity:Common stock, no par value:Authorized shares  100,000,000; issued and outstanding shares  36,210,686 and
36,038,295, respectively
    
    
    159,801
    
    
    
    158,801Accumulated deficit
    
    
    (36,378
    )
    
    
    (45,350
    )Total shareholders equity
    
    
    123,423
    
    
    
    113,451Total liabilities and shareholders equity
    
    $
    339,164
    
    
    $
    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




---



##### Table of Contents



NAVARRE CORPORATION
 
 Consolidated Statements of Operations
 (In thousands, except per share amounts)
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    217,547
    
    
    $
    195,424
    
    
    $
    498,284
    
    
    $
    486,488Cost of sales (exclusive of depreciation and amortization)
    
    
    185,913
    
    
    
    162,717
    
    
    
    420,606
    
    
    
    402,725Gross profit
    
    
    31,634
    
    
    
    32,707
    
    
    
    77,678
    
    
    
    83,763Operating expenses:Selling and marketing
    
    
    7,323
    
    
    
    7,916
    
    
    
    20,922
    
    
    
    22,148Distribution and warehousing
    
    
    3,592
    
    
    
    4,048
    
    
    
    8,935
    
    
    
    9,475General and administrative
    
    
    9,591
    
    
    
    9,646
    
    
    
    25,839
    
    
    
    25,724Bad debt expense
    
    
    
    
    
    
    52
    
    
    
    85
    
    
    
    2,871Depreciation and amortization
    
    
    2,506
    
    
    
    2,792
    
    
    
    7,047
    
    
    
    8,099Total operating expenses
    
    
    23,012
    
    
    
    24,454
    
    
    
    62,828
    
    
    
    68,317Income from operations
    
    
    8,622
    
    
    
    8,253
    
    
    
    14,850
    
    
    
    15,446Other income (expense):Interest expense
    
    
    (1,778
    )
    
    
    (2,061
    )
    
    
    (4,857
    )
    
    
    (5,988
    )Interest income
    
    
    43
    
    
    
    42
    
    
    
    167
    
    
    
    253Warrant expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (251
    )Other income (expense), net
    
    
    60
    
    
    
    (80
    )
    
    
    431
    
    
    
    21Net income before income tax
    
    
    6,947
    
    
    
    6,154
    
    
    
    10,591
    
    
    
    9,481Income tax expense
    
    
    (2,938
    )
    
    
    (2,354
    )
    
    
    (4,454
    )
    
    
    (3,690
    )Net income from continuing operations
    
    
    4,009
    
    
    
    3,800
    
    
    
    6,137
    
    
    
    5,791Discontinued operations, net of taxGain on sale of discontinued operations
    
    
    70
    
    
    
    
    
    
    
    4,714
    
    
    
    Income (loss) from discontinued operations
    
    
    (176
    )
    
    
    251
    
    
    
    (1,879
    )
    
    
    505Net income
    
    $
    3,903
    
    
    $
    4,051
    
    
    $
    8,972
    
    
    $
    6,296Basic earnings per common share:Continuing operations
    
    $
    .11
    
    
    $
    .10
    
    
    $
    .17
    
    
    $
    .16Discontinued operations
    
    $
    
    
    
    $
    .01
    
    
    $
    .08
    
    
    $
    .02Net income
    
    $
    .11
    
    
    $
    .11
    
    
    $
    .25
    
    
    $
    .18Diluted earnings per common share:Continuing operations
    
    $
    .11
    
    
    $
    .10
    
    
    $
    .17
    
    
    $
    .16Discontinued operations
    
    $
    
    
    
    $
    .01
    
    
    $
    .08
    
    
    $
    .01Net income
    
    $
    .11
    
    
    $
    .11
    
    
    $
    .25
    
    
    $
    .17Weighted average shares outstanding:Basic
    
    
    36,143
    
    
    
    35,868
    
    
    
    36,080
    
    
    
    35,750Diluted
    
    
    36,257
    
    
    
    36,271
    
    
    
    36,281
    
    
    
    36,205
 See accompanying notes to consolidated financial statements.
 4




---



##### Table of Contents



NAVARRE CORPORATION
 
 Consolidated Statements of Cash Flows
 (In thousands)
 (Unaudited)
 Nine Months EndedDecember 31,2007
    
    
    2006Operating activities:Net income
    
    $
    8,972
    
    
    $
    6,296Adjustments to reconcile net income to net cash provided by operating activities:(Income) loss from discontinued operations
    
    
    1,879
    
    
    
    (505
    )Gain on sale of discontinued operations
    
    
    (4,714
    )
    
    
    Depreciation and amortization
    
    
    7,107
    
    
    
    8,182Amortization of deferred financing costs
    
    
    243
    
    
    
    447Amortization of license fees
    
    
    3,983
    
    
    
    5,295Amortization of production costs
    
    
    2,163
    
    
    
    1,771Change in deferred revenue
    
    
    229
    
    
    
    610Share-based compensation expense
    
    
    826
    
    
    
    520Deferred income taxes
    
    
    2,161
    
    
    
    (1,867
    )Change in fair market value of warrants
    
    
    
    
    
    
    251Deferred compensation
    
    
    (607
    )
    
    
    811Other
    
    
    (54
    )
    
    
    250Changes in operating assets and liabilities:Accounts receivable
    
    
    (45,562
    )
    
    
    (44,812
    )Inventories
    
    
    (14,032
    )
    
    
    (4,686
    )Prepaid expenses
    
    
    (1,082
    )
    
    
    (4,063
    )Income taxes receivable
    
    
    799
    
    
    
    4,408Other assets
    
    
    1,118
    
    
    
    1,305Production costs
    
    
    (3,637
    )
    
    
    (2,777
    )License fees
    
    
    (8,158
    )
    
    
    (7,460
    )Accounts payable
    
    
    42,596
    
    
    
    45,724Income taxes payable
    
    
    733
    
    
    
    1,564Accrued expenses
    
    
    2,017
    
    
    
    (3,394
    )Net cash (used in) provided by operating activities
    
    
    (3,020
    )
    
    
    7,870Investing activities:Purchases of property and equipment
    
    
    (6,165
    )
    
    
    (4,232
    )Purchases of intangible assets
    
    
    (1,087
    )
    
    
    (1,234
    )Purchases of marketable equity securities
    
    
    (4,000
    )
    
    
    Other
    
    
    
    
    
    
    (298
    )Net cash used in investing activities
    
    
    (11,252
    )
    
    
    (5,764
    )Financing activities:Proceeds from note payable, line of credit
    
    
    136,773
    
    
    
    44,297Payments on note payable, line of credit
    
    
    (126,812
    )
    
    
    (44,297
    )Payments on note payable
    
    
    (5,218
    )
    
    
    (3,750
    )Repayments of capital lease obligations
    
    
    (75
    )
    
    
    (85
    )Debt acquisition costs
    
    
    (240
    )
    
    
    (75
    )Proceeds from exercise of common stock options and warrants
    
    
    171
    
    
    
    421Other
    
    
    
    
    
    
    (131
    )Net cash provided by (used in) financing activities
    
    
    4,599
    
    
    
    (3,620
    )Discontinued operations:Net cash provided by (used in) operating activities
    
    
    6,455
    
    
    
    (2,050
    )Proceeds from sale of discontinued operations
    
    
    6,500
    
    
    
    Net increase (decrease) in cash
    
    
    3,282
    
    
    
    (3,564
    )Cash at beginning of period
    
    
    966
    
    
    
    14,296Cash at end of period
    
    $
    4,248
    
    
    $
    10,732Supplemental cash flow information:Cash paid for (received from):Interest
    
    $
    4,394
    
    
    $
    7,229Income taxes, net of refunds
    
    
    495
    
    
    
    (595
    )Supplemental schedule of non-cash investing and financing activities:Purchase price adjustments affecting accounts receivable and gain on sale, net of tax
    
    
    70
    
    
    
    Shares received for payment of tax withholding obligations
    
    
    28
    
    
    
    Purchase price adjustments affecting accounts receivable and goodwill
    
    
    
    
    
    
    145Reclassification of warrant accrual and temporary equity to common stock
    
    
    
    
    
    
    19,120
 See accompanying notes to consolidated financial statements.
 5




---



##### Table of Contents



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




---



##### Table of Contents



Accounting by
Producers or Distributors of Films.
 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
  7




---



##### Table of Contents




    
    Acquisition costs will generally be expensed as incurred;
    
    Noncontrolling interests (formerly known as minority interests will be valued at fair
value at the acquisition date);
    
    Acquired contingent liabilities will be recorded at fair value at the acquisition date
and subsequently measured at either the higher of such amount or the amount determined
under existing guidance for non-acquired contingencies;
    
    In-process research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date;
    
    Restructuring costs associated with a business combination will be generally expensed
subsequent to the acquisition date; and
    
    Changes in deferred tax asset valuation allowances and income tax uncertainties after
the acquisition date generally will affect income tax expense.
  Note 2  Discontinued Operations
     Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    10
    
    
    $
    14,824
    
    
    $
    5,098
    
    
    $
    43,248Net income (loss) from discontinued operations, before income tax
    
    
    (367
    )
    
    
    407
    
    
    
    (3,202
    )
    
    
    831Income tax benefit (expense)
    
    
    191
    
    
    
    (156
    )
    
    
    1,323
    
    
    
    (326
    )Net income (loss) from discontinued operations, net of tax
    
    $
    (176
    )
    
    $
    251
    
    
    $
    (1,879
    )
    
    $
    505
  8




---



##### Table of Contents



December 31,
    
    
    March 31,2007
    
    
    2007Accounts receivable
    
    $
    
    
    
    $
    15,175Inventory
    
    
    
    
    
    
    3,436Prepaid expenses and other current assets
    
    
    
    
    
    
    2,694Deferred tax assets  current
    
    
    210
    
    
    
    584Current assets of discontinued operations
    
    
    210
    
    
    
    21,889Intangible assets, net of amortization
    
    
    
    
    
    
    343Total assets of discontinued operations
    
    $
    210
    
    
    $
    22,232Accounts payable
    
    $
    273
    
    
    $
    12,075Accrued expenses
    
    
    573
    
    
    
    673Current liabilities of discontinued operations
    
    $
    846
    
    
    $
    12,748
 Note 3  Marketable Securities
    As of December 31, 2007Gross
    
    
    GrossEstimated fair
    
    
    unrealized
    
    
    unrealizedvalue
    
    
    holding gains
    
    
    holding lossesAvailable-for-sale:Government agency bonds
    
    $
    2,004
    
    
    $
    
    
    
    $
    Money market fund
    
    
    2,083
    
    
    
    
    
    
    
    $
    4,087
    
    
    $
    
    
    
    $
    
   Note 4  Share-Based Compensation
  9




---



##### Table of Contents



Stock Options
  WeightedWeighted
    
    
    averageaverage
    
    
    remaining
    
    
    AggregateNumber of
    
    
    exercise
    
    
    contractual
    
    
    intrinsicoptions
    
    
    price
    
    
    term
    
    
    valueOptions outstanding, March 31, 2007:
    
    
    3,601,700
    
    
    $
    6.92Granted
    
    
    404,000
    
    
    
    2.73Exercised
    
    
    (220,248
    )
    
    
    1.51Canceled
    
    
    (419,252
    )
    
    
    7.01Options outstanding, December 31, 2007
    
    
    3,366,200
    
    
    $
    6.76
    
    
    
    7.6
    
    
    $
    125Options exercisable, December 31, 2007
    
    
    2,403,272
    
    
    $
    8.00
    
    
    
    7.0
    
    
    $
    101Shares available for future grant, December 31, 2007
    
    
    1,763,899
    Restricted Stock
   WeightedWeighted
    
    
    averageaverage
    
    
    remaininggrant date
    
    
    contractualShares
    
    
    fair value
    
    
    termUnvested, beginning of period:
    
    
    120,000
    
    
    $
    4.68
    
    
    
    1.59Granted
    
    
    131,000
    
    
    
    2.41
    
    
    
    Vested
    
    
    (73,333
    )
    
    
    4.41
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    Unvested, end of period
    
    
    177,677
    
    
    $
    3.00
    
    
    
    9.59
 10




---



##### Table of Contents



Restricted Stock Units
   Valuation and Expense Information Under SFAS 123R
  Three Months Ended
    
    Nine Months EndedDecember 31,
    
    December 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2007
    
    2006Expected life (in years)
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Expected volatility
    
    
    67
    %
    
    
    69
    %
    
    
    67
    %
    
    
    69
    %Risk-free interest rate
    
    
    3.83
    %
    
    
    4.55
    %
    
    
    4.00
    %
    
    
    4.60
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Weighted-average fair value of grants
    
    $
    1.40
    
    
    $
    3.00
    
    
    $
    1.61
    
    
    $
    2.94
   11




---



##### Table of Contents



Note 5  Earnings Per Share
   Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Net income from continuing operations
    
    $
    4,009
    
    
    $
    3,800
    
    
    $
    6,137
    
    
    $
    5,791Denominator:Denominator for basic earnings per shareweighted-average shares
    
    
    36,143
    
    
    
    35,868
    
    
    
    36,080
    
    
    
    35,750Equivalent shares from share-based compensation plans
    
    
    114
    
    
    
    403
    
    
    
    201
    
    
    
    455Denominator for diluted earnings per shareadjusted
weighted-average shares
    
    
    36,257
    
    
    
    36,271
    
    
    
    36,281
    
    
    
    36,205Net earnings per share from continuing operations:Basic
    
    $
    .11
    
    
    $
    .10
    
    
    $
    .17
    
    
    $
    .16Diluted
    
    $
    .11
    
    
    $
    .10
    
    
    $
    .17
    
    
    $
    .16
   Note 6  Comprehensive Income
   Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    3,903
    
    
    $
    4,051
    
    
    $
    8,972
    
    
    $
    6,296Net unrealized gain on hedge derivatives, net of tax
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    18Comprehensive income
    
    $
    3,903
    
    
    $
    4,033
    
    
    $
    8,972
    
    
    $
    6,314
  Note 7  Shareholders Equity
  12




---



##### Table of Contents



Note 8  Accounts Receivable
  December 31,
    
    
    March 31,2007
    
    
    2007Trade receivables
    
    $
    130,639
    
    
    $
    86,903Vendor receivables
    
    
    939
    
    
    
    447Other receivables
    
    
    1,484
    
    
    
    1,543$
    133,062
    
    
    $
    88,893Less: allowance for doubtful accounts and sales discounts
    
    
    6,304
    
    
    
    6,301Less: allowance for sales returns, net margin impact
    
    
    10,587
    
    
    
    11,983Total
    
    $
    116,171
    
    
    $
    70,609
 Note 9  Prepaid Expenses and Other Assets
  December 31,
    
    
    March 31,2007
    
    
    2007Prepaid royalties
    
    $
    11,189
    
    
    $
    9,621Other
    
    
    1,019
    
    
    
    1,505Total
    
    $
    12,208
    
    
    $
    11,126
 Note 10  Inventories
  December 31,
    
    
    March 31,2007
    
    
    2007Finished products
    
    $
    41,554
    
    
    $
    27,313Consigned inventory
    
    
    2,612
    
    
    
    3,790Raw materials
    
    
    6,657
    
    
    
    5,688Total
    
    $
    50,823
    
    
    $
    36,791
  Note 11  License Fees
  December 31,
    
    
    March 31,2007
    
    
    2007License fees
    
    $
    36,454
    
    
    $
    28,297Less: accumulated amortization
    
    
    16,670
    
    
    
    12,688$
    19,784
    
    
    $
    15,609
   13




---



##### Table of Contents



SOP 00-2
 Note 12  Production Costs
  December 31,
    
    
    March 31,2007
    
    
    2007Production costs
    
    $
    13,209
    
    
    $
    9,572Less: accumulated amortization
    
    
    6,318
    
    
    
    4,155$
    6,891
    
    
    $
    5,417
  SOP 00-2
 Note 13  Property and Equipment
  December 31,
    
    
    March 31,2007
    
    
    2007Land and buildings
    
    $
    1,623
    
    
    $
    1,623Furniture and fixtures
    
    
    1,332
    
    
    
    1,111Computer and office equipment
    
    
    14,534
    
    
    
    6,425Warehouse equipment
    
    
    9,564
    
    
    
    9,103Production equipment
    
    
    704
    
    
    
    520Leasehold improvements
    
    
    2,104
    
    
    
    1,913Construction in progress
    
    
    1,114
    
    
    
    4,133Total
    
    $
    30,975
    
    
    $
    24,828Less: accumulated depreciation and amortization
    
    
    13,633
    
    
    
    10,786Net property and equipment
    
    $
    17,342
    
    
    $
    14,042
 Accounting for the Impairment or Disposal of Long-Lived
Assets Accounting for Costs Associated With Exit or Disposal Activities
  14




---



##### Table of Contents



Note 14  Goodwill and Intangible Assets
 Goodwill
  Intangible assets
  As of December 31, 2007Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters
    
    $
    9,156
    
    
    $
    6,031
    
    
    $
    3,125License relationships
    
    
    20,078
    
    
    
    13,718
    
    
    
    6,360Domain name
    
    
    70
    
    
    
    16
    
    
    
    54Other (not amortized)
    
    
    1,568
    
    
    
    
    
    
    
    1,568$
    30,872
    
    
    $
    19,765
    
    
    $
    11,107
 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
    
    $
    1,4032009
    
    
    4,6652010
    
    
    2,4032011
    
    
    5322012
    
    
    237Thereafter
    
    
    303
 15




---



##### Table of Contents



Debt issuance costs
  Note 15  Accrued Expenses
  December 31,
    
    
    March 31,2007
    
    
    2007Compensation and benefits
    
    $
    3,218
    
    
    $
    4,112Royalties
    
    
    6,504
    
    
    
    4,172Rebates
    
    
    2,886
    
    
    
    2,091Interest
    
    
    623
    
    
    
    160Other
    
    
    2,621
    
    
    
    3,043Total
    
    $
    15,852
    
    
    $
    13,578
 Note 16  Bank Financing and Debt
      December 31,
    
    
    March 31,2007
    
    
    2007Note payable
    
    $
    9,782
    
    
    $
    15,000Less: current portion
    
    
    150
    
    
    
    150Total longterm debt
    
    $
    9,632
    
    
    $
    14,850
 16




---



##### Table of Contents



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




---



##### Table of Contents



Note 18  Income Taxes
 Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109
   Share-Based Payment
    18




---



##### 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.
     19




---



##### 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
      20




---



##### Table of Contents



Note 21  Related Party Transactions
 Employment/Severance Agreements
    Employment Agreement  FUNimation
  Note 22  Business Segments
  21




---



##### Table of Contents



Publishing
    
    Distribution
    
    Eliminations
    
    ConsolidatedThree months ended December 31, 2007Net sales
    
    $
    31,354
    
    
    $
    205,221
    
    
    $
    (19,028
    )
    
    $
    217,547Income from continuing operations
    
    
    5,730
    
    
    
    2,892
    
    
    
    
    
    
    
    8,622Net income from continuing operations, before income tax
    
    
    4,609
    
    
    
    2,338
    
    
    
    
    
    
    
    6,947Total assets
    
    $
    178,345
    
    
    $
    280,869
    
    
    $
    (120,050
    )
    
    $
    339,164
 Publishing
    
    Distribution
    
    Eliminations
    
    ConsolidatedThree months ended December 31, 2006Net sales
    
    $
    35,045
    
    
    $
    184,090
    
    
    $
    (23,711
    )
    
    $
    195,424Income from continuing operations
    
    
    4,943
    
    
    
    3,310
    
    
    
    
    
    
    
    8,253Net income from continuing operations, before income tax
    
    
    5,091
    
    
    
    1,063
    
    
    
    
    
    
    
    6,154Total assets
    
    $
    305,382
    
    
    $
    165,076
    
    
    $
    (109,986
    )
    
    $
    360,472
 Publishing
    
    Distribution
    
    Eliminations
    
    ConsolidatedNine months ended December 31, 2007Net sales
    
    $
    88,020
    
    
    $
    462,502
    
    
    $
    (52,238
    )
    
    $
    498,284Income from continuing operations
    
    
    10,007
    
    
    
    4,843
    
    
    
    
    
    
    
    14,850Net income from continuing operations, before income tax
    
    
    6,762
    
    
    
    3,829
    
    
    
    
    
    
    
    10,591Total assets
    
    $
    178,345
    
    
    $
    280,869
    
    
    $
    (120,050
    )
    
    $
    339,164
 Publishing
    
    Distribution
    
    Eliminations
    
    ConsolidatedNine months ended December 31, 2006Net sales
    
    $
    95,788
    
    
    $
    445,311
    
    
    $
    (54,611
    )
    
    $
    486,488Income from continuing operations
    
    
    11,313
    
    
    
    4,133
    
    
    
    
    
    
    
    15,446Net income (loss) from continuing operations, before income tax
    
    
    11,566
    
    
    
    (2,085
    )
    
    
    
    
    
    
    9,481Total assets
    
    $
    305,382
    
    
    $
    165,076
    
    
    $
    (109,986
    )
    
    $
    360,472
 
 Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Executive Summary
   22




---



##### Table of Contents



Discontinued Operations
 Accounting for the Impairment of
Disposal of Long-Lived Assets
    Working Capital and Debt
  Overview
   23




---



##### Table of Contents



anime
  Forward-Looking Statements / Important Risk Factors
   24




---



##### Table of Contents



anime
  Critical Accounting Policies
  25




---



##### Table of Contents



Reconciliation of GAAP Net Sales to Net Sales Before Inter-Company Eliminations
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,(Unaudited)
    
    
    (Unaudited)(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales:Distribution
    
    $
    205,221
    
    
    $
    184,090
    
    
    $
    462,502
    
    
    $
    445,311Publishing
    
    
    31,354
    
    
    
    35,045
    
    
    
    88,020
    
    
    
    95,788Net sales before inter-company eliminations
    
    
    236,575
    
    
    
    219,135
    
    
    
    550,522
    
    
    
    541,099Inter-company eliminations
    
    
    (19,028
    )
    
    
    (23,711
    )
    
    
    (52,238
    )
    
    
    (54,611
    )Net sales as reported
    
    $
    217,547
    
    
    $
    195,424
    
    
    $
    498,284
    
    
    $
    486,488
 26




---



##### Table of Contents



Results of Operations
  Three Months Ended
    
    Nine Months EndedDecember 31,
    
    December 31,(Unaudited)
    
    (Unaudited)2007
    
    2006
    
    2007
    
    2006Net sales:Distribution
    
    
    94.3
    %
    
    
    94.2
    %
    
    
    92.8
    %
    
    
    91.5
    %Publishing
    
    
    14.4
    
    
    
    17.9
    
    
    
    17.7
    
    
    
    19.7Inter-company sales
    
    
    (8.7
    )
    
    
    (12.1
    )
    
    
    (10.5
    )
    
    
    (11.2
    )Total net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales, exclusive of amortization and depreciation
    
    
    85.5
    
    
    
    83.3
    
    
    
    84.4
    
    
    
    82.8Gross profit
    
    
    14.5
    
    
    
    16.7
    
    
    
    15.6
    
    
    
    17.2Operating expensesSelling and marketing
    
    
    3.4
    
    
    
    4.1
    
    
    
    4.2
    
    
    
    4.5Distribution and warehousing
    
    
    1.6
    
    
    
    2.1
    
    
    
    1.8
    
    
    
    1.9General and administrative
    
    
    4.4
    
    
    
    4.9
    
    
    
    5.2
    
    
    
    5.3Bad debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.6Depreciation and amortization
    
    
    1.2
    
    
    
    1.4
    
    
    
    1.4
    
    
    
    1.7Total operating expenses
    
    
    10.6
    
    
    
    12.5
    
    
    
    12.6
    
    
    
    14.0Income from operations
    
    
    3.9
    
    
    
    4.2
    
    
    
    3.0
    
    
    
    3.2Interest expense
    
    
    (0.8
    )
    
    
    (1.1
    )
    
    
    (1.0
    )
    
    
    (1.2
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Warrant expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Other income (expense), net
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    
    Net income from continuing operations
    
    
    3.2
    
    
    
    3.1
    
    
    
    2.1
    
    
    
    2.0Income tax expense
    
    
    (1.4
    )
    
    
    (1.2
    )
    
    
    (0.9
    )
    
    
    (0.8
    )Net income from continuing operations
    
    
    1.8
    
    
    
    1.9
    
    
    
    1.2
    
    
    
    1.2Discontinued operations, net of taxGain on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    Net income (loss) from discontinued operations
    
    
    
    
    
    
    0.2
    
    
    
    (0.4
    )
    
    
    0.1Net income
    
    
    1.8
    %
    
    
    2.1
    %
    
    
    1.8
    %
    
    
    1.3
    %
 Publishing Segment
  Fiscal 2008 Third Quarter Results Compared With Fiscal 2007 Third Quarter
 Net Sales
  Gross Profit
  27




---



##### Table of Contents



Operating Expenses
       Fiscal 2008 Nine Months Results Compared With Fiscal 2007 Nine Months
 Net Sales
  Gross Profit
  Operating Expenses
    28




---



##### Table of Contents



Distribution Segment
  Fiscal 2008 Third Quarter Results Compared With Fiscal 2007 Third Quarter
 Net Sales
  Gross Profit
  Operating Expenses
     29




---



##### Table of Contents



Fiscal 2008 Nine Months Results Compared With Fiscal 2007 Nine Months
 Net Sales
  Gross Profit
  Operating Expenses
       30




---



##### Table of Contents



Consolidated Other Income and Expense
  Consolidated Income Tax Expense
 Share-Based Payment
 Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109
  Consolidated Net Income from Continuing Operations
  Discontinued Operations
   31




---



##### Table of Contents



Consolidated Net Income
  Market Risk
    Seasonality and Inflation
  Liquidity and Capital Resources
 Operating Activities
    32




---



##### Table of Contents



Investing Activities
  Financing Activities
  Discontinued Operations
  Capital Resources
      33




---



##### Table of Contents



Liquidity
    Contractual Obligations
  Less
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    2  3
    
    
    4  5
    
    
    than 5Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases
    
    $
    29,618
    
    
    $
    762
    
    
    $
    6,983
    
    
    $
    5,181
    
    
    $
    16,692Capital leases
    
    
    177
    
    
    
    33
    
    
    
    136
    
    
    
    8
    
    
    
    Note payable
    
    
    9,782
    
    
    
    150
    
    
    
    300
    
    
    
    9,332
    
    
    
    License and distribution agreement
    
    
    12,778
    
    
    
    5,977
    
    
    
    6,801
    
    
    
    
    
    
    
    Deferred compensation
    
    
    5,751
    
    
    
    180
    
    
    
    4,238
    
    
    
    1,333
    
    
    
    Total
    
    $
    58,106
    
    
    $
    7,102
    
    
    $
    18,458
    
    
    $
    15,854
    
    
    $
    16,692
 
 Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
  34




---



##### Table of Contents



Item 4.
    
    Controls and Procedures
       
 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
  35




---



##### Table of Contents



Item 4. Submission of Matters to a Vote of Securities Holders
  
 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




---



##### Table of Contents



SIGNATURES
  Navarre Corporation
(Registrant)Date: February 8, 2008
    
    /s/ Cary L. DeaconCary L. DeaconPresident and Chief Executive Officer
(Principal Executive Officer)Date: February 8, 2008
    
    /s/ J. Reid PorterJ. Reid PorterExecutive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 37