##### 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, 2006
 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 February 5, 2007Common Stock, No Par Value
    
    36,006,495 shares




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##### 



NAVARRE CORPORATION
 Index
 PART I. FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements. (Unaudited)Consolidated Balance Sheets  December 31, 2006 and March 31, 2006Consolidated Statements of Operations  Three and Nine Months ended December 31, 2006 and
2005Consolidated Statements of Cash Flows  Nine Months ended December 31, 2006 and
2005Notes 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




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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)
 December 31,
    
    
    March 31,2006
    
    
    2006(Unaudited)
    
    
    (Note)Assets:Current assets:Cash and cash equivalents
    
    $
    10,732
    
    
    $
    14,296Note receivable, related parties
    
    
    50
    
    
    
    200Accounts receivable, less allowances of $19,848 and $19,345, respectively
    
    
    135,769
    
    
    
    87,653Inventories
    
    
    49,024
    
    
    
    43,624Prepaid expenses and other current assets
    
    
    16,779
    
    
    
    11,273Income tax receivable
    
    
    
    
    
    
    4,408Deferred tax assets  current
    
    
    9,684
    
    
    
    8,830Total current assets
    
    
    222,038
    
    
    
    170,284Property and equipment, net of accumulated depreciation of $10,561 and
$8,349, respectively
    
    
    12,259
    
    
    
    10,298Other assets:Goodwill
    
    
    81,697
    
    
    
    81,202Intangible assets, net of amortization of $14,117 and $8,258, respectively
    
    
    16,082
    
    
    
    20,863License fees, net of amortization of $10,630 and $5,334, respectively
    
    
    15,512
    
    
    
    13,347Interest rate swap
    
    
    67
    
    
    
    37Other assets
    
    
    12,817
    
    
    
    13,583Total assets
    
    $
    360,472
    
    
    $
    309,614Liabilities and shareholders equity:Current liabilities:Note payable  short term
    
    $
    5,000
    
    
    $
    5,000Capital lease obligation  short term
    
    
    106
    
    
    
    115Accounts payable
    
    
    146,225
    
    
    
    97,923Warrant liability
    
    
    
    
    
    
    2,236Income taxes payable
    
    
    1,564
    
    
    
    Accrued expenses
    
    
    13,779
    
    
    
    16,646Total current liabilities
    
    
    166,674
    
    
    
    121,920Long-term liabilities:Note payable  long-term
    
    
    71,380
    
    
    
    75,130Capital lease obligation  long-term
    
    
    146
    
    
    
    222Deferred compensation
    
    
    6,083
    
    
    
    5,272Deferred tax liabilities  non-current
    
    
    163
    
    
    
    770Other long-term liabilities
    
    
    760
    
    
    
    760Total liabilities
    
    
    245,206
    
    
    
    204,074Commitments and contingencies (Note 21)Temporary equity  unregistered common stock, no par value; 5,699,998 issued
and outstanding (Note 18)
    
    
    
    
    
    
    16,634Shareholders equity:Common stock, no par value:Authorized shares  100,000,000Issued and outstanding shares  36,004,895 and 29,911,097, respectively
    
    
    158,338
    
    
    
    138,292Accumulated other comprehensive income
    
    
    41
    
    
    
    23Accumulated deficit
    
    
    (43,113
    )
    
    
    (49,409
    )Total shareholders equity
    
    
    115,266
    
    
    
    88,906Total liabilities and shareholders equity
    
    $
    360,472
    
    
    $
    309,614
 
 Note: The balance sheet at March 31, 2006 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
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    210,248
    
    
    $
    214,841
    
    
    $
    529,736
    
    
    $
    514,259Cost of sales (exclusive of depreciation and amortization)
    
    
    174,982
    
    
    
    186,614
    
    
    
    438,475
    
    
    
    432,762Gross profit
    
    
    35,266
    
    
    
    28,227
    
    
    
    91,261
    
    
    
    81,497Operating expenses:Selling and marketing
    
    
    8,075
    
    
    
    7,819
    
    
    
    22,743
    
    
    
    22,040Distribution and warehousing
    
    
    3,988
    
    
    
    3,067
    
    
    
    9,371
    
    
    
    7,500General and administrative
    
    
    11,616
    
    
    
    11,321
    
    
    
    31,770
    
    
    
    32,835Bad debt expense
    
    
    52
    
    
    
    12,259
    
    
    
    2,871
    
    
    
    12,308Depreciation and amortization
    
    
    2,792
    
    
    
    3,101
    
    
    
    8,099
    
    
    
    8,273Total operating expenses
    
    
    26,523
    
    
    
    37,567
    
    
    
    74,854
    
    
    
    82,956Income (loss) from operations
    
    
    8,743
    
    
    
    (9,340
    )
    
    
    16,407
    
    
    
    (1,459
    )Other income (expense):Interest expense
    
    
    (2,061
    )
    
    
    (2,983
    )
    
    
    (5,988
    )
    
    
    (8,179
    )Interest income
    
    
    42
    
    
    
    
    
    
    
    251
    
    
    
    601Warrant expense
    
    
    
    
    
    
    
    
    
    
    (251
    )
    
    
    Deconsolidation of variable interest entity
    
    
    
    
    
    
    1,896
    
    
    
    
    
    
    
    1,896Other income (expense), net
    
    
    (163
    )
    
    
    4
    
    
    
    (107
    )
    
    
    383Net income (loss) before income tax
    
    
    6,561
    
    
    
    (10,423
    )
    
    
    10,312
    
    
    
    (6,758
    )Income tax (expense) benefit
    
    
    (2,510
    )
    
    
    4,355
    
    
    
    (4,016
    )
    
    
    2,521Net income (loss)
    
    $
    4,051
    
    
    $
    (6,068
    )
    
    $
    6,296
    
    
    $
    (4,237
    )Earnings (loss) per common share:Basic
    
    $
    .11
    
    
    $
    (.20
    )
    
    $
    .18
    
    
    $
    (.14
    )Diluted
    
    $
    .11
    
    
    $
    (.20
    )
    
    $
    .17
    
    
    $
    (.14
    )Weighted average shares outstanding:Basic
    
    
    35,868
    
    
    
    29,893
    
    
    
    35,750
    
    
    
    29,563Diluted
    
    
    36,271
    
    
    
    29,893
    
    
    
    36,205
    
    
    
    29,563
 See accompanying notes to consolidated financial statements.
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NAVARRE CORPORATION
 
 Consolidated Statements of Cash Flows
 (In thousands)
(Unaudited)
 Nine Months EndedDecember 31,2006
    
    
    2005Operating activities:Net income
(loss)
    
    $
    6,296
    
    
    $
    (4,237
    )Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    8,182
    
    
    
    8,371Amortization and write-off of deferred financing costs
    
    
    447
    
    
    
    619Deferred compensation expense
    
    
    811
    
    
    
    216Write-off of notes receivable
    
    
    150
    
    
    
    150Amortization of license fees
    
    
    5,295
    
    
    
    4,036Amortization of production costs
    
    
    1,771
    
    
    
    1,139Share-based compensation expense
    
    
    520
    
    
    
    Tax benefit from employee stock option plans
    
    
    114
    
    
    
    233Gain on disposal of fixed assets
    
    
    (16
    )
    
    
    (2
    )Change in deferred revenue
    
    
    610
    
    
    
    (480
    )Deferred income taxes
    
    
    (1,475
    )
    
    
    (1,487
    )Loss on derivative instruments
    
    
    1
    
    
    
    15Gain on deconsolidation of variable interest entity
    
    
    
    
    
    
    (1,896
    )Change in fair market value of warrants
    
    
    251
    
    
    
    Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    (48,260
    )
    
    
    (21,113
    )Inventories
    
    
    (5,400
    )
    
    
    (10,610
    )Prepaid expenses
    
    
    (5,427
    )
    
    
    (2,789
    )Income taxes receivable
    
    
    4,408
    
    
    
    (5,678
    )Other assets
    
    
    1,305
    
    
    
    151Production costs
    
    
    (2,777
    )
    
    
    (1,570
    )License fees
    
    
    (7,460
    )
    
    
    (8,267
    )Accounts payable
    
    
    48,302
    
    
    
    27,409Income taxes payable
    
    
    1,564
    
    
    
    (8
    )Accrued expenses
    
    
    (3,477
    )
    
    
    (1,121
    )Net cash provided by (used in) operating activities
    
    
    5,735
    
    
    
    (16,919
    )Investing activities:Acquisitions, net of cash acquired
    
    
    
    
    
    
    (98,147
    )Purchases of property and equipment
    
    
    (4,232
    )
    
    
    (1,411
    )Purchases of intangible assets
    
    
    (1,148
    )
    
    
    (360
    )Payment of earn-out related to an acquisition
    
    
    (350
    )
    
    
    (350
    )Other
    
    
    51
    
    
    
    (55
    )Net cash used in investing activities
    
    
    (5,679
    )
    
    
    (100,323
    )Financing activities:Proceeds from note payable, line of credit
    
    
    44,297
    
    
    
    Payments on note payable, line of credit
    
    
    (44,297
    )
    
    
    Payments on note payable
    
    
    (3,750
    )
    
    
    (22,500
    )Proceeds from note payable
    
    
    
    
    
    
    141,075Debt acquisition costs
    
    
    (75
    )
    
    
    (2,921
    )Other
    
    
    (131
    )
    
    
    Repayments of capital lease obligations
    
    
    (85
    )
    
    
    (66
    )Proceeds from exercise of common stock options and warrants
    
    
    421
    
    
    
    484Net cash (used in) provided by financing activities
    
    
    (3,620
    )
    
    
    116,072Net decrease in cash
    
    
    (3,564
    )
    
    
    (1,170
    )Cash at beginning of period
    
    
    14,296
    
    
    
    15,571Cash at end of period
    
    $
    10,732
    
    
    $
    14,401Supplemental cash flow information:Cash paid for:Interest
    
    $
    7,229
    
    
    $
    5,365Income taxes, net of refunds
    
    
    (595
    )
    
    
    4,421Supplemental schedule of non-cash investing and financing activities:Reclassification of acquisition costs from other assets to goodwill
    
    
    
    
    
    
    1,656Capital lease obligations incurred for the purchase of computer equipment
    
    
    
    
    
    
    84Reclassification of prepaid royalties to other assets
    
    
    
    
    
    
    5,488Purchase price adjustments affecting: accounts receivable and goodwill
    
    
    145
    
    
    
    Reclassification
of warrant accrual and temporary equity to common stock
    
    
    19,120
    
    
    
    Acquisition:Fair value of assets acquired
    
    $
    
    
    
    $
    125,135Less: Liabilities assumed
    
    
    
    
    
    
    8,705Fair value of stock issued
    
    
    
    
    
    
    14,144Cash acquired
    
    
    
    
    
    
    4,139Acquisition net of cash acquired
    
    $
    
    
    
    $
    98,147Deconsolidation of variable interest entity:Assets, including cash
    
    $
    
    
    
    $
    641Less: Liabilities
    
    
    
    
    
    
    2,537Net Liabilities
    
    $
    
    
    
    $
    1,896
 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
     Segment Reporting
 Disclosure about Segments of an Enterprise and Related Information
 Revenue Recognition
    6




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##### Table of Contents



Accounting by Producers or Distributors of Films.
 Recently Issued Accounting Pronouncements
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 Accounting for
Uncertainty in Income Taxes  an Interpretation of FASB Statement 109
 Fair Value Measurements
 Accounting for
Planned Major Maintenance Activities
 Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements
 7




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##### Table of Contents



Note 2  Acquisitions
 FUNimation
 anime
 Purchase Price
 Business Combinations
   Accounts receivable
    
    $
    7,052Inventories
    
    
    315Prepaid expenses and other current assets
    
    
    53Property and equipment
    
    
    2,037License fees
    
    
    7,125Production costs
    
    
    2,608Goodwill
    
    
    71,165License arrangements and other intangibles
    
    
    21,646Current liabilities
    
    
    (9,116
    )Total purchase price, less cash acquired
    
    $
    102,885
   Nine Months EndedDecember 31, 2005As reported
    
    
    Pro formaNet sales
    
    $
    514,259
    
    
    $
    520,334Net income
    
    
    (4,237
    )
    
    
    (3,162
    )Earnings per common share:Basic
    
    $
    (.14
    )
    
    $
    (.11
    )Diluted
    
    $
    (.14
    )
    
    $
    (.11
    )
 8




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##### Table of Contents



Note 3  Mix & Burn
 Variable Interest Entity
 Consolidation of Variable Interest Entities Consolidated
Financial Statements
   Investment
  Note 4  Share-Based Compensation
 Statement of Cash Flows Accounting for Stock-Based Compensation
 Accounting for Stock-Based Compensation  Transitional
Disclosure
  9




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##### Table of Contents



Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards
 Equity Compensation Plans
       10




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##### Table of Contents



Stock Options
  WeightedWeighted
    
    
    averageaverage
    
    
    remaining
    
    
    AggregateNumber of
    
    
    exercises
    
    
    contractual
    
    
    intrinsicoptions
    
    
    price
    
    
    term
    
    
    valueOptions outstanding, March 31, 2006:
    
    
    3,341,100
    
    
    $
    7.17Granted
    
    
    803,000
    
    
    $
    4.83Exercised
    
    
    (267,800
    )
    
    $
    1.57Canceled
    
    
    (183,200
    )
    
    $
    9.16Options outstanding, December 31, 2006
    
    
    3,693,100
    
    
    $
    6.97
    
    
    
    6.0
    
    
    $
    1,584Options exercisable at December 31, 2006
    
    
    2,633,500
    
    
    $
    8.13
    
    
    
    5.2
    
    
    $
    1,020Shares available for future grant
    
    
    459,000
    Restricted Stock
   WeightedWeighted
    
    
    averageaverage
    
    
    remaininggrant date
    
    
    contractualShares
    
    
    fair value
    
    
    termUnvested, March 31, 2006:
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    151,000
    
    
    $
    4.66
    
    
    
    1.18Vested
    
    
    (6,000
    )
    
    $
    4.29
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    Unvested, December 31, 2006
    
    
    145,000
    
    
    $
    4.68
    
    
    
    1.18
   11




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##### Table of Contents



Restricted Stock Units
   Valuation and Expense Information Under SFAS 123R
  Three Months
    
    
    Nine MonthsEnded
    
    
    EndedDecember 31,
    
    
    December 31,2006
    
    
    2006Expected life (in years)
    
    
    5.0
    
    
    
    5.0Expected volatility
    
    
    69
    %
    
    
    69
    %Risk-free interest rate
    
    
    4.55
    %
    
    
    4.60
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Weighted-average fair value of grants
    
    $
    3.00
    
    
    $
    2.94
   Three Months
    
    
    Nine MonthsEnded
    
    
    EndedDecember 31,
    
    
    December 31,2006
    
    
    2006General and administrative expenses
    
    $
    (220
    )
    
    $
    (520
    )Share-based compensation expense before income taxes
    
    
    (220
    )
    
    
    (520
    )Tax benefit
    
    
    84
    
    
    
    203Share-based compensation after income taxes
    
    
    (136
    )
    
    
    (317
    )Effect on earnings (loss) per share:Basic
    
    $
    .00
    
    
    $
    (.01
    )Diluted
    
    $
    .00
    
    
    $
    (.01
    )
 12




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##### Table of Contents



Pro Forma Information Under SFAS 123 for Periods Prior to Fiscal 2007
   Three Months
    
    
    Nine MonthsEnded
    
    
    EndedDecember 31,
    
    
    December 31,2005
    
    
    2005Net loss, as reported
    
    $
    (6,068
    )
    
    $
    (4,237
    )Deduct: Share-based compensation expense
determined under fair value based method
for all awards, net of related taxes
    
    
    (499
    )
    
    
    (1,293
    )Pro forma net loss
    
    $
    (6,567
    )
    
    $
    (5,530
    )Basic loss per share:As reported
    
    $
    (.20
    )
    
    $
    (.14
    )Pro forma
    
    $
    (.22
    )
    
    $
    (.19
    )Diluted loss per share:As reported
    
    $
    (.20
    )
    
    $
    (.14
    )Pro forma
    
    $
    (.22
    )
    
    $
    (.19
    )
  Three MonthsEndedDecember 31,2005Expected life (in years)
    
    
    5.0Expected volatility
    
    
    66
    %Risk-free interest rate
    
    
    4.46
    %Expected dividend yield
    
    
    0.0
    %Weighted-average fair value of grants
    
    $
    2.99
 Note 5  Earnings Per Share
   Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Net income (loss)
    
    $
    4,051
    
    
    $
    (6,068
    )
    
    $
    6,296
    
    
    $
    (4,237
    )Denominator:Denominator for basic earnings per
shareweighted-average shares
    
    
    35,868
    
    
    
    29,893
    
    
    
    35,750
    
    
    
    29,563Equivalent shares from share-based compensation plans
    
    
    403
    
    
    
    
    
    
    
    455
    
    
    
    Denominator for diluted earnings per shareadjusted
weighted-average shares
    
    
    36,271
    
    
    
    29,893
    
    
    
    36,205
    
    
    
    29,563Basic income (loss) per share
    
    $
    .11
    
    
    $
    (.20
    )
    
    $
    .18
    
    
    $
    (.14
    )Dilutive income (loss) per share
    
    $
    .11
    
    
    $
    (.20
    )
    
    $
    .17
    
    
    $
    (.14
    )
  13




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Note 6  Comprehensive Income (Loss)
   Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    4,051
    
    
    $
    (6,068
    )
    
    $
    6,296
    
    
    $
    (4,237
    )Net unrealized gain (loss) on hedge derivatives, net of tax
    
    
    (18
    )
    
    
    609
    
    
    
    18
    
    
    
    (320
    )Comprehensive income (loss)
    
    $
    4,033
    
    
    $
    (5,459
    )
    
    $
    6,314
    
    
    $
    (4,557
    )
   December 31,
    
    
    March 31,2006
    
    
    2006Unrealized gain (loss) from:Hedge derivatives
    
    $
    41
    
    
    $
    23Accumulated other comprehensive income (loss)
    
    $
    41
    
    
    $
    23
 Note 7  Shareholders Equity
  Note 8  Accounts Receivable
  December 31,
    
    
    March 31,2006
    
    
    2006Trade receivables
    
    $
    150,737
    
    
    $
    102,722Vendor receivables
    
    
    3,256
    
    
    
    2,623Other receivables
    
    
    1,624
    
    
    
    1,653$
    155,617
    
    
    $
    106,998Less: allowance for doubtful accounts, vendor receivables and sales discounts
    
    
    8,247
    
    
    
    6,544Less: allowance for sales returns, net margin impact
    
    
    11,601
    
    
    
    12,801Total
    
    $
    135,769
    
    
    $
    87,653
 14




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##### Table of Contents



Note 9  Prepaid Expenses and Other Current Assets
  December 31,
    
    
    March 31,2006
    
    
    2006Prepaid royalties
    
    $
    14,995
    
    
    $
    10,060Other
    
    
    1,784
    
    
    
    1,213Total
    
    $
    16,779
    
    
    $
    11,273
 Note 10  Inventories
  December 31,
    
    
    March 31,2006
    
    
    2006Finished products
    
    $
    37,693
    
    
    $
    34,154Consigned inventory
    
    
    4,720
    
    
    
    4,119Raw materials
    
    
    6,611
    
    
    
    5,351Total
    
    $
    49,024
    
    
    $
    43,624
  Note 11  License Fees
  December 31,
    
    
    March 31,2006
    
    
    2006License fees
    
    $
    26,142
    
    
    $
    18,681Less: accumulated amortization
    
    
    10,630
    
    
    
    5,334$
    15,512
    
    
    $
    13,347
  SOP 00-2
 Note 12  Production Costs
  December 31,
    
    
    March 31,2006
    
    
    2006Production costs
    
    $
    8,431
    
    
    $
    5,653Less: accumulated amortization
    
    
    3,648
    
    
    
    1,877$
    4,783
    
    
    
    3,776
 15




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##### Table of Contents



SOP 00-2
 Note 13  Property and Equipment
  December 31,
    
    
    March 31,2006
    
    
    2006Land and buildings
    
    $
    1,623
    
    
    $
    1,623Furniture and fixtures
    
    
    1,106
    
    
    
    1,052Computer and office equipment
    
    
    6,201
    
    
    
    5,541Warehouse equipment
    
    
    8,685
    
    
    
    7,062Leasehold improvements
    
    
    1,875
    
    
    
    1,843Production equipment
    
    
    362
    
    
    
    257Construction in progress
    
    
    2,968
    
    
    
    1,269Total
    
    $
    22,820
    
    
    $
    18,647Less: accumulated depreciation and amortization
    
    
    10,561
    
    
    
    8,349Net property and equipment
    
    $
    12,259
    
    
    $
    10,298
 Note 14  Goodwill and Intangible Assets
 Goodwill
   Distribution
    
    
    Publishing
    
    
    ConsolidatedBalances as of March 31, 2006
    
    $
    
    
    
    $
    81,202
    
    
    $
    81,202Goodwill adjustment related to an acquisition
    
    
    
    
    
    
    145
    
    
    
    145Earn-out related to an acquisition
    
    
    
    
    
    
    350
    
    
    
    350Balances as of December 31, 2006
    
    $
    
    
    
    $
    81,697
    
    
    $
    81,697
 Intangible assets
  As of December 31, 2006Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters
    
    $
    8,553
    
    
    $
    4,577
    
    
    $
    3,976License relationships
    
    
    20,078
    
    
    
    9,540
    
    
    
    10,538Other (not amortized)
    
    
    1,568
    
    
    
    
    
    
    
    1,568$
    30,199
    
    
    $
    14,117
    
    
    $
    16,082
 16




---



##### Table of Contents



As of March 31, 2006Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters
    
    $
    7,475
    
    
    $
    3,213
    
    
    $
    4,262License relationships
    
    
    20,078
    
    
    
    5,045
    
    
    
    15,033Other (not amortized)
    
    
    1,568
    
    
    
    
    
    
    
    1,568$
    29,121
    
    
    $
    8,258
    
    
    $
    20,863
   Remainder of 2007
    
    $
    1,9702008
    
    
    5,2912009
    
    
    4,2882010
    
    
    2,0662011
    
    
    425
 Debt issuance costs
  Note 15  Accrued Expenses
  December 31,
    
    
    March 31,2006
    
    
    2006Compensation and benefits
    
    $
    3,772
    
    
    $
    3,067Royalties
    
    
    4,119
    
    
    
    6,134Interest
    
    
    511
    
    
    
    1,751Rebates
    
    
    1,556
    
    
    
    1,354Deferred revenue
    
    
    1,122
    
    
    
    990Other
    
    
    2,699
    
    
    
    3,350Total
    
    $
    13,779
    
    
    $
    16,646
 Note 16  Bank Financing and Debt
  17




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##### Table of Contents



December 31,
    
    
    March 31,2006
    
    
    2006Term Loan B sub-facility
    
    $
    76,380
    
    
    $
    80,130Less: current portion
    
    
    5,000
    
    
    
    5,000Total long-term debt
    
    $
    71,380
    
    
    $
    75,130
 Letters of Credit
  Note 17  Derivative Instruments
   18




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##### Table of Contents



Note 18  Private Placement
   Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock
  Note 19  Income Taxes
   19




---



##### Table of Contents



Note 20  License and Distribution Agreement
  Note 21  Commitments and Contingencies
 Commitments  Other
  Litigation
  Sybersound Records, Inc. v. BCI Eclipse, LLC, et al.
    20




---



##### Table of Contents



Sybersound Records, Inc. v. Navarre Corporation, BCI Eclipse, LLC, et al.
    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
  21




---



##### Table of Contents



Shareholder Derivative Lawsuits
  Shannon Binns v. Charles Cheney, et al.   Karel Filip v. Charles Cheney, et al.   Jeffrey Evans v. Charles Cheney, et al.   Joan Brewster v. Charles Cheney, et al.   William Block v. Charles Cheney, et al.
     22




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##### Table of Contents



Note 22  Related Party Transactions
 Employment/Severance Agreements
     Employment Agreement  FUNimation
  Chief Executive Officer Investment in Mix & Burn
  23




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##### Table of Contents



Note 23  Business Segments
   Three months ended December 31, 2006
    
    Distribution
    
    Publishing
    
    Other
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    198,914
    
    
    $
    35,045
    
    
    $
    
    
    
    $
    (23,711
    )
    
    $
    210,248Income (loss) from operations
    
    
    3,800
    
    
    
    4,943
    
    
    
    
    
    
    
    
    
    
    
    8,743Net income (loss) before income tax
    
    
    1,470
    
    
    
    5,091
    
    
    
    
    
    
    
    
    
    
    
    6,561Total assets
    
    $
    305,382
    
    
    $
    165,076
    
    
    $
    
    
    
    $
    (109,986
    )
    
    $
    360,472
 Three months ended December 31, 2005
    
    Distribution
    
    Publishing
    
    Other
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    198,940
    
    
    $
    35,940
    
    
    $
    169
    
    
    $
    (20,208
    )
    
    $
    214,841Income (loss) from operations
    
    
    (9,652
    )
    
    
    799
    
    
    
    (487
    )
    
    
    
    
    
    
    (9,340
    )Net income (loss) before income tax
    
    
    (12,555
    )
    
    
    775
    
    
    
    1,357
    
    
    
    
    
    
    
    (10,423
    )Total assets
    
    $
    317,834
    
    
    $
    172,193
    
    
    $
    
    
    
    $
    (134,160
    )
    
    $
    355,867
 Nine months ended December 31, 2006
    
    Distribution
    
    Publishing
    
    Other
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    488,558
    
    
    $
    95,789
    
    
    $
    
    
    
    $
    (54,611
    )
    
    $
    529,736Income (loss) from operations
    
    
    5,093
    
    
    
    11,314
    
    
    
    
    
    
    
    
    
    
    
    16,407Net income (loss) before income tax
    
    
    (1,255
    )
    
    
    11,567
    
    
    
    
    
    
    
    
    
    
    
    10,312Total assets
    
    $
    305,382
    
    
    $
    165,076
    
    
    $
    
    
    
    $
    (109,986
    )
    
    $
    360,472
 Nine months ended December 31, 2005
    
    Distribution
    
    Publishing
    
    Other
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    468,002
    
    
    $
    93,849
    
    
    $
    424
    
    
    $
    (48,016
    )
    
    $
    514,259Income (loss) from operations
    
    
    (7,335
    )
    
    
    7,466
    
    
    
    (1,590
    )
    
    
    
    
    
    
    (1,459
    )Net income (loss) before income tax
    
    
    (14,192
    )
    
    
    7,297
    
    
    
    137
    
    
    
    
    
    
    
    (6,758
    )Total assets
    
    $
    317,834
    
    
    $
    172,193
    
    
    $
    
    
    
    $
    (134,160
    )
    
    $
    355,867
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Executive Summary
   24




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##### Table of Contents



Overview
    anime
  Forward-Looking Statements / Important Risk Factors
   25




---



##### Table of Contents



anime
  Critical Accounting Policies
  Share-based Compensation
  26




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##### Table of Contents



Reconciliation of GAAP Net Sales to Net Sales Before Inter-Company Eliminations
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales:Distribution
    
    $
    198,914
    
    
    $
    198,940
    
    
    $
    488,558
    
    
    $
    468,002Publishing
    
    
    35,045
    
    
    
    35,940
    
    
    
    95,789
    
    
    
    93,849Other
    
    
    
    
    
    
    169
    
    
    
    
    
    
    
    424Net sales before inter-company eliminations
    
    
    233,959
    
    
    
    235,049
    
    
    
    584,347
    
    
    
    562,275Inter-company eliminations
    
    
    (23,711
    )
    
    
    (20,208
    )
    
    
    (54,611
    )
    
    
    (48,016
    )Net sales as reported
    
    $
    210,248
    
    
    $
    214,841
    
    
    $
    529,736
    
    
    $
    514,259
 Results of Operations
  Three Months Ended December 31,
    
    Nine Months Ended December 31,2006
    
    2005
    
    2006
    
    2005Net sales:Distribution
    
    
    94.6
    %
    
    
    92.7
    %
    
    
    92.2
    %
    
    
    91.0
    %Publishing
    
    
    16.7
    
    
    
    16.7
    
    
    
    18.1
    
    
    
    18.2Other
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.1Inter-company sales
    
    
    (11.3
    )
    
    
    (9.4
    )
    
    
    (10.3
    )
    
    
    (9.3
    )Total net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales, exclusive of
amortization and
depreciation
    
    
    83.2
    
    
    
    86.9
    
    
    
    82.8
    
    
    
    84.2Gross profit
    
    
    16.8
    
    
    
    13.1
    
    
    
    17.2
    
    
    
    15.8Selling and marketing
    
    
    3.9
    
    
    
    3.6
    
    
    
    4.3
    
    
    
    4.3Distribution and warehousing
    
    
    1.9
    
    
    
    1.4
    
    
    
    1.8
    
    
    
    1.4General and administrative
    
    
    5.5
    
    
    
    5.3
    
    
    
    6.0
    
    
    
    6.4
 27




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##### Table of Contents



Three Months Ended December 31,
    
    Nine Months Ended December 31,2006
    
    2005
    
    2006
    
    2005Bad debt
    
    
    0.0
    
    
    
    5.7
    
    
    
    0.5
    
    
    
    2.4Depreciation and amortization
    
    
    1.3
    
    
    
    1.4
    
    
    
    1.5
    
    
    
    1.6Total operating expenses
    
    
    12.6
    
    
    
    17.4
    
    
    
    14.1
    
    
    
    16.1Income (loss) from operations
    
    
    4.2
    
    
    
    (4.3
    )
    
    
    3.1
    
    
    
    (0.3
    )Interest expense
    
    
    (1.0
    )
    
    
    (1.4
    )
    
    
    (1.1
    )
    
    
    (1.6
    )Interest income
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.1Warrant income (expense)
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Gain on deconsolidation of
variable interest entity
    
    
    0.0
    
    
    
    0.9
    
    
    
    0.0
    
    
    
    0.4Other income (expense), net
    
    
    (0.1
    )
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.1Income tax (expense) benefit
    
    
    (1.2
    )
    
    
    2.0
    
    
    
    (0.8
    )
    
    
    0.5Net income (loss)
    
    
    1.9
    %
    
    
    (2.8
    )%
    
    
    1.2
    %
    
    
    (0.8
    )%
 Distribution Segment
  Fiscal 2007 Third Quarter Results Compared With Fiscal 2006 Third Quarter
 Net Sales
  Gross Profit
  Operating Expenses
    28




---



##### Table of Contents



Fiscal 2007 Nine Months Results Compared With Fiscal 2006 Nine Months
 Net Sales
  Gross Profit
  Operating Expenses
   29




---



##### Table of Contents



Publishing Segment
  Fiscal 2007 Third Quarter Results Compared With Fiscal 2006 Third Quarter
 Net Sales
 anime BlackCat,
Basilisk, Fullmetal Panic, Trinity Blood Dragon Ball
Z
 Gross Profit
  Operating Expenses
   30




---



##### Table of Contents



Fiscal 2007 Nine Months Results Compared With Fiscal 2006 Nine Months
 Net Sales
 Dragon Ball Z Movie 13 Wrath of the Dragon Conqueror of Shamballa,
 Gross Profit
  Operating Expenses
   Other Segment
  Fiscal 2007 Third Quarter Results Compared With Fiscal 2006 Third Quarter
  Fiscal 2007 Nine Months Results Compared With Fiscal 2006 Nine Months
  Consolidated Other Income and Expense
  31




---



##### Table of Contents



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




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##### Table of Contents



Investing Activities
  Financing Activities
     Contractual Obligations
  Less
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    2  3
    
    
    4  5
    
    
    than 5Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases
    
    $
    25,975
    
    
    $
    743
    
    
    $
    6,003
    
    
    $
    4,481
    
    
    $
    14,748Capital leases
    
    
    315
    
    
    
    38
    
    
    
    209
    
    
    
    68
    
    
    
    Note payable
    
    
    76,380
    
    
    
    1,250
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    55,130License and distribution agreement
    
    
    23,580
    
    
    
    4,875
    
    
    
    18,580
    
    
    
    125
    
    
    
    Total
    
    $
    126,250
    
    
    $
    6,906
    
    
    $
    34,792
    
    
    $
    14,674
    
    
    $
    69,878
 33




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
     34




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Any material weakness or significant deficiency in our internal controls may adversely affect our
ability to report our financial results on a timely and accurate basis.
 Consolidation of Variable Interest Entities
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities
  35




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Securities Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 (a)
    
    The following exhibits are included herein:
 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: February 9, 2007
    
    /s/ Cary L. Deacon

Cary L. DeaconChief Executive Officer(Principal Executive Officer)Date: February 9, 2007
    
    /s/ J. Reid PorterJ. Reid PorterChief Financial Officer (Principal Financial andAccounting Officer)
 37