##### 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 June 30, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 for the transition period from  to
 Commission File Number 0-22982
 NAVARRE CORPORATION
  Minnesota
    
    41-1704319(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)
 7400 49th Avenue North, New Hope, MN 55428
 (763) 535-8333
 þ o
  o þ o
 o þ
  Class 
Common Stock, No Par Value
    
    Outstanding at August 6, 2007
36,180,404 shares




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##### 



NAVARRE CORPORATION
 Index
 PART I. FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements. (Unaudited)Consolidated Balance Sheets  June 30, 2007 and March 31, 2007Consolidated Statements of Operations  Three Months ended June 30, 2007 and 2006Consolidated Statements of Cash Flows  Three Months ended June 30, 2007 and 2006Notes to Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESCertification of the Chief Executive Officer Pursuant to Section 302Certification of the Chief Financial Officer Pursuant to Section 302Certification of the Chief Executive Officer Pursuant to Section 906Certification of the Chief Financial Officer Pursuant to Section 906
  2




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PART I. FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements
 NAVARRE CORPORATION
 
 Consolidated Balance Sheets
 (In thousands, except share amounts)
 June 30, 2007
    
    
    March 31, 2007(Unaudited)
    
    
    (Note)Assets:Current assets:Cash and cash equivalents
    
    $
    2,026
    
    
    $
    966Marketable securities
    
    
    1,367
    
    
    
    Accounts receivable, less allowances of $17,022 and $18,284, respectively
    
    
    70,271
    
    
    
    70,609Inventories
    
    
    42,073
    
    
    
    36,791Prepaid expenses and other current assets
    
    
    13,252
    
    
    
    11,126Income taxes receivable
    
    
    
    
    
    
    828Deferred tax assets  current
    
    
    9,982
    
    
    
    8,935Assets of discontinued operations
    
    
    10,211
    
    
    
    21,889Total current assets
    
    
    149,182
    
    
    
    151,144Property and equipment, net of accumulated depreciation of $11,615 and $10,786, respectively
    
    
    16,018
    
    
    
    14,042Other assets:Marketable securities
    
    
    2,667
    
    
    
    Goodwill
    
    
    81,697
    
    
    
    81,697Intangible assets, net of amortization of $16,957 and $15,588, respectively
    
    
    13,162
    
    
    
    14,197License fees, net of amortization of $14,353 and $12,688, respectively
    
    
    15,970
    
    
    
    15,609Assets of discontinued operations
    
    
    
    
    
    
    343Other assets
    
    
    11,312
    
    
    
    11,193Total assets
    
    $
    290,008
    
    
    $
    288,225Liabilities and shareholders equity:Current liabilities:Note payable  line of credit
    
    $
    43,003
    
    
    $
    38,956Note payable  short-term
    
    
    150
    
    
    
    150Capital lease obligation  short-term
    
    
    103
    
    
    
    102Accounts payable
    
    
    89,263
    
    
    
    87,145Deferred compensation
    
    
    2,241
    
    
    
    Accrued expenses
    
    
    13,057
    
    
    
    13,578Income taxes payable
    
    
    593
    
    
    
    Liabilities of discontinued operations
    
    
    2,905
    
    
    
    12,748Total current liabilities
    
    
    151,315
    
    
    
    152,679Long-term liabilities:Note payable  long-term
    
    
    12,707
    
    
    
    14,850Capital lease obligation  long-term
    
    
    95
    
    
    
    120Deferred compensation
    
    
    4,065
    
    
    
    6,358Deferred tax
liabilities  non-current
    
    
    1,723
    
    
    
    7Other long-term liabilities
    
    
    760
    
    
    
    760Total liabilities
    
    
    170,665
    
    
    
    174,774Commitments and contingencies (Note 21)Shareholders equity:Common stock, no par value:Authorized shares  100,000,000 issued and outstanding shares  36,107,943 and
36,038,295, respectively
    
    
    159,249
    
    
    
    158,801Accumulated deficit
    
    
    (39,906
    )
    
    
    (45,350
    )Total shareholders equity
    
    
    119,343
    
    
    
    113,451Total liabilities and shareholders equity
    
    $
    290,008
    
    
    $
    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.
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NAVARRE CORPORATION
 
 Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
 Three Months EndedJune 30,2007
    
    
    2006Net sales
    
    $
    137,022
    
    
    $
    132,171Cost of sales (exclusive of depreciation and amortization)
    
    
    113,039
    
    
    
    109,381Gross profit
    
    
    23,983
    
    
    
    22,790Operating expenses:Selling and marketing
    
    
    6,103
    
    
    
    6,013Distribution and warehousing
    
    
    1,800
    
    
    
    1,905General and administrative
    
    
    9,204
    
    
    
    8,849Bad debt expense
    
    
    55
    
    
    
    457Depreciation and amortization
    
    
    2,218
    
    
    
    2,624Total operating expenses
    
    
    19,380
    
    
    
    19,848Income from operations
    
    
    4,603
    
    
    
    2,942Other income (expense):Interest expense
    
    
    (1,674
    )
    
    
    (1,920
    )Interest income
    
    
    68
    
    
    
    119Warrant expense
    
    
    
    
    
    
    (424
    )Other income (expense), net
    
    
    223
    
    
    
    82Net income before income tax
    
    
    3,220
    
    
    
    799Income tax expense
    
    
    (1,314
    )
    
    
    (323
    )Net income from continuing operations
    
    
    1,906
    
    
    
    476Discontinued operations, net of taxGain on sale of discontinued operations
    
    
    4,647
    
    
    
    Income (loss) from discontinued operations
    
    
    (1,109
    )
    
    
    158Net income
    
    $
    5,444
    
    
    $
    634Basic earnings per common share:Continuing operations
    
    $
    .05
    
    
    $
    .01Discontinued operations
    
    $
    .10
    
    
    $
    .01Net income
    
    $
    .15
    
    
    $
    .02Diluted earnings per common share:Continuing operations
    
    $
    .05
    
    
    $
    .01Discontinued operations
    
    $
    .10
    
    
    $
    .01Net income
    
    $
    .15
    
    
    $
    .02Weighted-average shares outstanding:Basic
    
    
    35,985
    
    
    
    35,650Diluted
    
    
    36,276
    
    
    
    36,176
 See accompanying notes to consolidated financial statements.
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NAVARRE CORPORATION
 
 Consolidated Statements of Cash Flows
 (unaudited)
 (in thousands)
 Three Months Ended June 30,2007
    
    
    2006Operating activities:Net income
    
    $
    5,444
    
    
    $
    634Adjustments to reconcile net income to net cash (used in) provided by operating activities:Income (loss) from discontinued operations
    
    
    1,109
    
    
    
    (158
    )Gain on sale of discontinued operations
    
    
    (4,647
    )
    
    
    Depreciation and amortization
    
    
    2,227
    
    
    
    2,649Amortization and write-off of deferred financing costs
    
    
    70
    
    
    
    149Amortization of license fees
    
    
    1,665
    
    
    
    1,368Amortization of production costs
    
    
    581
    
    
    
    416Change in deferred revenue
    
    
    777
    
    
    
    878Share-based compensation expense
    
    
    288
    
    
    
    144Change in fair market value of warrants
    
    
    
    
    
    
    424Deferred income taxes
    
    
    669
    
    
    
    (133
    )Other
    
    
    (32
    )
    
    
    128Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    338
    
    
    
    3,770Inventories
    
    
    (5,282
    )
    
    
    (4,115
    )Prepaid expenses
    
    
    (2,126
    )
    
    
    (4,579
    )Income taxes receivable
    
    
    827
    
    
    
    568Other assets
    
    
    311
    
    
    
    592Production costs
    
    
    (1,107
    )
    
    
    (906
    )License fees
    
    
    (2,026
    )
    
    
    (2,162
    )Accounts payable
    
    
    2,118
    
    
    
    (3,136
    )Income taxes payable
    
    
    593
    
    
    
    Accrued expenses
    
    
    (1,297
    )
    
    
    (4,095
    )Net cash provided by (used in) operating activities
    
    
    500
    
    
    
    (7,564
    )Investing activities:Purchases of property and equipment
    
    
    (2,805
    )
    
    
    (467
    )Purchases of intangible assets
    
    
    (335
    )
    
    
    (447
    )Purchases of marketable securities
    
    
    (4,000
    )
    
    
    Payment of earn-out related to an acquisition
    
    
    
    
    
    
    (280
    )Net cash used in investing activities
    
    
    (7,140
    )
    
    
    (1,194
    )Financing activities:Repayment of note payable
    
    
    (2,143
    )
    
    
    (1,250
    )Repayment of note payable  line of credit
    
    
    (43,708
    )
    
    
    Proceeds of note payable  line of credit
    
    
    47,755
    
    
    
    Repayments of capital lease obligations
    
    
    (24
    )
    
    
    (27
    )Proceeds from exercise of common stock options and warrants
    
    
    106
    
    
    
    79Other
    
    
    (2
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    1,984
    
    
    
    (1,198
    )Discontinued operations:Net cash provided by (used in) operating activities
    
    
    (784
    )
    
    
    1,830Proceeds from sale of discontinued operations
    
    
    6,500
    
    
    
    Net increase (decrease) in cash
    
    
    1,060
    
    
    
    (8,126
    )Cash at beginning of period
    
    
    966
    
    
    
    14,296Cash at end of period
    
    $
    2,026
    
    
    $
    6,170Supplemental cash flow information:Cash paid for:Interest
    
    $
    1,372
    
    
    $
    1,806Income taxes
    
    
    3
    
    
    
    Supplemental schedule of non-cash investing and financing activities:Purchase price adjustments affecting: accounts receivable and goodwill
    
    
    
    
    
    
    145
 See accompanying notes to consolidated financial statements.
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NAVARRE CORPORATION
 
 Notes to Consolidated Financial Statements
 (Unaudited)
 Note 1  Organization and Basis of Presentation
     Basis of Consolidation
  Revenue Recognition
    Accounting by
Producers or Distributors of Films.
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Recently Issued Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for
Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115
 Note 2  Discontinued Operations
 Accounting for the Impairment of
Disposal of Long-Lived Assets
   Three Months EndedJune 30,2007
    
    
    2006Net sales
    
    $
    5,070
    
    
    $
    14,168Net income (loss) from discontinued operations,
before income tax
    
    
    (1,865
    )
    
    
    266Income tax benefit (expense)
    
    
    756
    
    
    
    (108
    )Net income (loss) from discontinued operations, net of tax
    
    $
    (1,109
    )
    
    $
    158
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June 30,
    
    
    March 31,2007
    
    
    2007Accounts receivable
    
    $
    8,459
    
    
    $
    15,175Inventory
    
    
    36
    
    
    
    3,436Prepaid expenses and other current assets
    
    
    1,030
    
    
    
    2,694Deferred tax assets  current
    
    
    686
    
    
    
    584Current assets of discontinued operations
    
    
    10,211
    
    
    
    21,889Intangible assets, net of amortization
    
    
    
    
    
    
    343Total assets of discontinued operations
    
    $
    10,211
    
    
    $
    22,232Accounts payable
    
    
    2,018
    
    
    
    12,075Accrued expenses
    
    
    887
    
    
    
    673Current liabilities of discontinued operations
    
    $
    2,905
    
    
    $
    12,748
 Note 3  Marketable Securities
    As of June 30, 2007Gross
    
    
    GrossEstimated fair
    
    
    unrealized
    
    
    unrealizedvalue
    
    
    holding gains
    
    
    holding lossesAvailable-for-sale:Government agency bonds
    
    $
    1,998
    
    
    $
    
    
    
    $
    Money market fund
    
    
    2,036
    
    
    
    
    
    
    
    $
    4,034
    
    
    $
    
    
    
    $
    
   Note 4  Share-Based Compensation
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Share-Based Payment, (SFAS 123R)
  Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards
 Stock Options
  WeightedWeighted
    
    
    averageaverage
    
    
    remaining
    
    
    Aggregateexercise
    
    
    contractual
    
    
    intrinsic2007
    
    
    price
    
    
    term
    
    
    valueOptions outstanding, beginning of period:
    
    
    3,601,700
    
    
    $
    6.92Granted
    
    
    80,000
    
    
    $
    3.94Exercised
    
    
    (159,648
    )
    
    $
    1.63Canceled
    
    
    (189,300
    )
    
    $
    6.83Options outstanding, end of period
    
    
    3,332,752
    
    
    $
    7.11
    
    
    
    6.0
    
    
    $
    983Options exercisable, end of period
    
    
    2,388,051
    
    
    $
    8.17
    
    
    
    5.0
    
    
    $
    772Shares available for future grant, end of period
    
    
    427,000
    Restricted Stock
  9




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##### Table of Contents



WeightedWeighted
    
    
    averageaverage
    
    
    remaininggrant date
    
    
    contractualShares
    
    
    fair value
    
    
    termUnvested, beginning of period:
    
    
    120,000
    
    
    $
    4.68
    
    
    
    1.59Granted
    
    
    
    
    
    $
    
    
    
    
    Vested
    
    
    (50,000
    )
    
    $
    4.29
    
    
    
    Forfeited
    
    
    
    
    
    $
    
    
    
    
    Unvested, end of period
    
    
    70,000
    
    
    $
    4.95
    
    
    
    1.34
   Restricted Stock Units
   Valuation and Expense Information Under SFAS 123R
  Three Months EndedJune 30, 2007
    
    June 30, 2006Expected life (in years)
    
    
    5.0
    
    
    
    5.0Expected volatility
    
    
    67
    %
    
    
    70
    %Risk-free interest rate
    
    
    4.59
    %
    
    
    4.88
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Weighted-average fair value of grants
    
    $
    2.35
    
    
    $
    2.56
  10




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Note 5  Earnings Per Share
   Three Months Ended June 30,2007
    
    
    2006Numerator:Net income from continuing operations
    
    $
    1,906
    
    
    $
    476Denominator:Denominator for basic earnings per shareweighted-average shares
    
    
    35,985
    
    
    
    35,650Equivalent shares from share-based compensation plans
    
    
    291
    
    
    
    526Denominator for diluted earnings per share -adjusted weighted-average shares
    
    
    36,276
    
    
    
    36,176Net earnings per share from continuing operations:Basic
    
    $
    .05
    
    
    $
    .01Diluted
    
    $
    .05
    
    
    $
    .01
   Note 6  Comprehensive Income
   Three Months Ended June 30,2007
    
    
    2006Net income from continuing operations
    
    $
    
    
    
    $
    476Net unrealized gain on hedge derivatives, net of tax
    
    
    
    
    
    
    110Comprehensive income
    
    $
    
    
    
    $
    586
  Note 7  Shareholders Equity
  11




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Note 8  Accounts Receivable
  June 30,
    
    
    March 31,2007
    
    
    2007Trade receivables
    
    $
    85,432
    
    
    $
    86,903Vendor receivables
    
    
    709
    
    
    
    447Other receivables
    
    
    1,152
    
    
    
    1,543$
    87,293
    
    
    $
    88,893Less: allowance for doubtful accounts, vendor receivables and sales discounts
    
    
    5,830
    
    
    
    6,301Less: allowance for sales returns, net margin impact
    
    
    11,192
    
    
    
    11,983Total
    
    $
    70,271
    
    
    $
    70,609
 Note 9  Prepaid Expenses and Other Assets
  June 30,
    
    
    March 31,2007
    
    
    2007Prepaid royalties
    
    $
    11,158
    
    
    $
    9,621Other
    
    
    2,094
    
    
    
    1,505Total
    
    $
    13,252
    
    
    $
    11,126
 Note 10  Inventories
  June 30,
    
    
    March 31,2007
    
    
    2007Finished products
    
    $
    32,767
    
    
    $
    27,313Consigned inventory
    
    
    3,678
    
    
    
    3,790Raw materials
    
    
    5,628
    
    
    
    5,688Total
    
    $
    42,073
    
    
    $
    36,791
  Note 11  License Fees
  June 30,
    
    
    March 31,2007
    
    
    2007License fees
    
    $
    30,323
    
    
    $
    28,297Less: accumulated amortization
    
    
    14,353
    
    
    
    12,688$
    15,970
    
    
    $
    15,609
   SOP 00-2
 12




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Note 12  Production Costs
  June 30,
    
    
    March 31,2007
    
    
    2007Production costs
    
    $
    10,679
    
    
    $
    9,572Less: accumulated amortization
    
    
    4,736
    
    
    
    4,155$
    5,943
    
    
    $
    5,417
  SOP 00-2
 Note 13  Property and Equipment
  June 30,
    
    
    March 31,2007
    
    
    2007Land and buildings
    
    $
    1,623
    
    
    $
    1,623Furniture and fixtures
    
    
    1,143
    
    
    
    1,111Computer and office equipment
    
    
    6,738
    
    
    
    6,425Warehouse equipment
    
    
    9,280
    
    
    
    9,103Production equipment
    
    
    560
    
    
    
    520Leasehold improvements
    
    
    1,925
    
    
    
    1,913Construction in progress
    
    
    6,364
    
    
    
    4,133Total
    
    $
    27,633
    
    
    $
    24,828Less: accumulated depreciation and amortization
    
    
    11,615
    
    
    
    10,786Net property and equipment
    
    $
    16,018
    
    
    $
    14,042
 Note 14  Goodwill and Intangible Assets
 Goodwill
  13




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Intangible assets
  As of June 30, 2007Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters
    
    $
    8,403
    
    
    $
    5,016
    
    
    $
    3,387License relationships
    
    
    20,078
    
    
    
    11,931
    
    
    
    8,147Domain name
    
    
    70
    
    
    
    10
    
    
    
    60Trademark (not amortized)
    
    
    1,568
    
    
    
    
    
    
    
    1,568$
    30,119
    
    
    $
    16,957
    
    
    $
    13,162
 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
    
    
    
    62Trademark (not amortized)
    
    
    1,568
    
    
    
    
    
    
    
    1,568$
    29,785
    
    
    $
    15,588
    
    
    $
    14,197
   Remainder of
fiscal 2008
    
    $
    3,9362009
    
    
    4,3032010
    
    
    2,0572011
    
    
    4252012
    
    
    237
 Debt issuance costs
  Note 15  Accrued Expenses
  June 30,
    
    
    March 31,2007
    
    
    2007Compensation and benefits
    
    $
    2,572
    
    
    $
    4,112Royalties
    
    
    4,751
    
    
    
    4,172Rebates
    
    
    2,023
    
    
    
    2,091Interest
    
    
    392
    
    
    
    160Other
    
    
    3,319
    
    
    
    3,043Total
    
    $
    13,057
    
    
    $
    13,578
 Note 16  Bank Financing and Debt
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June 30,
    
    
    March 31,2007
    
    
    2007Note payable
    
    $
    12,857
    
    
    $
    15,000Less: current portion
    
    
    150
    
    
    
    150Total longterm debt
    
    $
    12,707
    
    
    $
    14,850
 Letters of Credit
  Note 17  Derivative Instruments
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Note 18  2006 Private Placement
    Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock
  16




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Note 19  Income Taxes
 Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109
       Note 20  License and Distribution Agreement
  Note
21  Commitments and Contingencies
 Litigation
  17




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##### Table of Contents



Sybersound Records, Inc. v. BCI Eclipse, LLC, et al.
     Sybersound Records, Inc. v. Navarre Corporation, BCI Eclipse, LLC, et al.
    Securities Litigation Lawsuits
  18




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##### Table of Contents



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
      Note 22  Related Party Transactions
 Employment/Severance Agreements
   19




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##### Table of Contents



Employment Agreement  FUNimation
  Note 23  Business Segments
   Three months ended June 30, 2007
    
    Publishing
    
    Distribution
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    29,624
    
    
    $
    123,889
    
    
    $
    (16,491
    )
    
    $
    137,022Income from continuing operations
    
    
    3,030
    
    
    
    1,573
    
    
    
    
    
    
    
    4,603Net income from continuing operations, before income tax
    
    
    1,977
    
    
    
    1,243
    
    
    
    
    
    
    
    3,220Total assets
    
    $
    155,069
    
    
    $
    235,398
    
    
    $
    (100,459
    )
    
    $
    290,008
 Three months ended June 30, 2006
    
    Publishing
    
    Distribution
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    26,038
    
    
    $
    118,583
    
    
    $
    (12,450
    )
    
    $
    132,171Income from continuing operations
    
    
    2,009
    
    
    
    933
    
    
    
    
    
    
    
    2,942Net income from continuing operations, before income tax
    
    
    2,068
    
    
    
    (1,269
    )
    
    
    
    
    
    
    799Total assets
    
    $
    162,668
    
    
    $
    262,457
    
    
    $
    (120,693
    )
    
    $
    304,432
 20




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Executive Summary
   Discontinued Operations
 Accounting for the Impairment of
Disposal of Long-Lived Assets
  Working Capital and Debt
  Overview
    21




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##### Table of Contents



anime
  Forward-Looking Statements / Important Risk Factors
   anime
 22




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##### Table of Contents



Critical Accounting Policies
  Reconciliation of GAAP Net Sales to Net Sales Before Inter-Company Eliminations
  Three Months Ended June 30,(Unaudited)(In thousands)
    
    2007
    
    
    2006Net sales:Distribution
    
    $
    123,889
    
    
    $
    118,583Publishing
    
    
    29,624
    
    
    
    26,038Net sales before inter-company eliminations
    
    
    153,513
    
    
    
    144,621Inter-company eliminations
    
    
    (16,491
    )
    
    
    (12,450
    )Net sales as reported
    
    $
    137,022
    
    
    $
    132,171
 23




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##### Table of Contents



Results of Operations
  Three Months Ended June 30,(Unaudited)2007
    
    2006Net sales:Distribution
    
    
    90.4
    %
    
    
    89.7
    %Publishing
    
    
    21.6
    
    
    
    19.7Inter-company sales
    
    
    (12.0
    )
    
    
    (9.4
    )Total net sales
    
    
    100.0
    
    
    
    100.0Cost of sales, exclusive of amortization and depreciation
    
    
    82.5
    
    
    
    82.8Gross profit
    
    
    17.5
    
    
    
    17.2Selling and marketing
    
    
    4.5
    
    
    
    4.5Distribution and warehousing
    
    
    1.3
    
    
    
    1.5General and administrative
    
    
    6.7
    
    
    
    6.7Bad debt expense
    
    
    
    
    
    
    0.3Depreciation and amortization
    
    
    1.6
    
    
    
    2.0Total operating expenses
    
    
    14.1
    
    
    
    15.0Income from operations
    
    
    3.4
    
    
    
    2.2Interest expense
    
    
    (1.2
    )
    
    
    (1.5
    )Interest income
    
    
    
    
    
    
    0.1Warrant expense
    
    
    
    
    
    
    (0.3
    )Other income (expense), net
    
    
    0.2
    
    
    
    0.1Net income from continuing operations, before tax
    
    
    2.4
    
    
    
    0.6Income tax expense
    
    
    (1.0
    )
    
    
    (0.2
    )Net income from continuing operations
    
    
    1.4
    
    
    
    0.4Discontinued operations, net of taxGain on sale of discontinued operations
    
    
    3.4
    
    
    
    Net income (loss) from continuing operations
    
    
    (0.8
    )
    
    
    0.1Net income
    
    
    4.0
    %
    
    
    0.5
    %
 Publishing Segment
  Fiscal 2008 First Quarter Results Compared With Fiscal 2007 First Quarter
 Net Sales
 anime Afro Samurai Dragon
Ball Z . Wheel of Fortune Deluxe, Jeopardy Deluxe, Advantage
2008, The Learning Company 2008 Adventure Workshop Version 9.
 Gross Profit
  24




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##### Table of Contents



Operating Expenses
      Distribution Segment
  Fiscal 2008 First Quarter Results Compared With Fiscal 2007 First Quarter
 Net Sales
  Gross Profit
  Operating Expenses
   25




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##### Table of Contents



Consolidated Other Income and Expense
  Consolidated Income Tax Expense
  Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109
  Consolidated Net Income from Continuing Operations
  Discontinued Operations
  Consolidated Net Income
  26




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##### Table of Contents



Market Risk
  Seasonality and Inflation
  Liquidity and Capital Resources
 Cash Flow Analysis
 Operating Activities
   Investing Activities
  Financing Activities
  27




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##### Table of Contents



Discontinued Operations
  Capital Resources
      Liquidity
   28




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##### Table of Contents



Contractual Obligations
  Lessthan 1
    
    
    2  3
    
    
    4  5
    
    
    More than 5Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases
    
    $
    30,775
    
    
    $
    2,582
    
    
    $
    6,938
    
    
    $
    5,053
    
    
    $
    16,202Capital leases
    
    
    243
    
    
    
    99
    
    
    
    136
    
    
    
    8
    
    
    
    Note payable
    
    
    15,000
    
    
    
    150
    
    
    
    300
    
    
    
    14,550
    
    
    
    License and distribution agreements
    
    
    18,344
    
    
    
    11,610
    
    
    
    6,734
    
    
    
    
    
    
    
    Total
    
    $
    64,362
    
    
    $
    14,441
    
    
    $
    14,108
    
    
    $
    19,611
    
    
    $
    16,202
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
      
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  29




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##### Table of Contents



Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security 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)
 30




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##### Table of Contents



SIGNATURES
  Navarre Corporation
(Registrant)Date: August 9, 2007
    /s/ Cary L. DeaconCary L. DeaconPresident and Chief Executive Officer (Principal Executive Officer)Date: August 9, 2007
    /s/ J. Reid PorterJ. Reid PorterExecutive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 31