##### 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, 2005
 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
(State or other jurisdiction of
incorporation or organization)
    
    41-1704319
(IRS Employer
Identification No.)
 7400 49th Avenue North, New Hope, MN 55428
 (763) 535-8333
  Title of Each Class
Common Stock, No Par Value
    
    Name of Each Exchange of Which Registered
Nasdaq National Market
 
 R £
  £ R £
 £ R
  Class
    
    Outstanding at February 3, 2006Common Stock, No Par Value
    
    29,907,097 shares




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##### 



NAVARRE CORPORATION
 Index
 PART I. FINANCIAL INFORMATION
    
    
    3Item 1. Consolidated Financial Statements. (Unaudited)
    
    
    3Consolidated Balance Sheets  December 31, 2005 and March 31, 2005 (Restated)
    
    
    3Consolidated Statements of Operations  Three Months and Nine Months ended December 31, 2005 and 2004 (Restated)
    
    
    4Consolidated Statements of Cash Flows  Nine Months ended December 31, 2005 and 2004 (Restated)
    
    
    5Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4. Controls and Procedures
    
    
    36PART II. OTHER INFORMATION
    
    
    36Item 1. Legal Proceedings
    
    
    36Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3. Defaults Upon Senior Securities
    
    
    36Item 4. Submission of Matters to a Vote of Security Holders
    
    
    36Item 5. Other Information
    
    
    37Item 6. Exhibits
    
    
    37SIGNATURES
    
    
    38Amendment No. 4 to Standard Commercial LeaseCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
 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, 20052005
    
    
    (Note)(Unaudited)
    
    
    (Restated)Assets:Current assets:Cash and cash equivalents
    
    $
    14,401
    
    
    $
    15,571Note receivable, related parties
    
    
    200
    
    
    
    200Accounts receivable, less allowances of $21,217 and $7,723, respectively
    
    
    116,468
    
    
    
    88,732Inventories
    
    
    53,351
    
    
    
    40,759Prepaid expenses and other current assets
    
    
    12,536
    
    
    
    15,303Income taxes receivable
    
    
    5,678
    
    
    
    Deferred tax assets  current
    
    
    5,888
    
    
    
    7,398Total current assets
    
    
    208,522
    
    
    
    167,963Property and equipment, net of accumulated depreciation of $9,158 and $7,259, respectively
    
    
    9,547
    
    
    
    8,152Other assets:Notes receivable, related parties
    
    
    50
    
    
    
    200Goodwill
    
    
    56,782
    
    
    
    9,832Intangible assets, net of amortization of $8,671 and $2,369, respectively
    
    
    39,983
    
    
    
    5,198License
fees, net of amortization of $4,036
    
    
    24,813
    
    
    
    Other assets
    
    
    14,550
    
    
    
    4,547Deferred tax assets  non-current
    
    
    1,620
    
    
    
    Total assets
    
    $
    355,867
    
    
    $
    195,892Liabilities and shareholders equity:Current liabilities:Note payable  short-term
    
    $
    5,000
    
    
    $
    250Capital lease obligation  short-term
    
    
    106
    
    
    
    84Accounts payable
    
    
    126,249
    
    
    
    96,387Income taxes payable
    
    
    
    
    
    
    8Accrued expenses
    
    
    18,554
    
    
    
    15,067Total current liabilities
    
    
    149,909
    
    
    
    111,796Long-term liabilities:Note payable  long-term
    
    
    112,500
    
    
    
    Capital lease obligation  long-term
    
    
    232
    
    
    
    237Interest rate swap
    
    
    549
    
    
    
    Deferred compensation
    
    
    5,200
    
    
    
    4,984Deferred tax liabilities  non-current
    
    
    
    
    
    
    1,591Total liabilities
    
    
    268,390
    
    
    
    118,608Commitments and contingencies (Note 22)Shareholders equity:Common stock, no par value:Authorized shares  100,000,000
Issued and outstanding shares  29,897,066 and 27,896,080, respectively
    
    
    138,269
    
    
    
    123,481Accumulated other comprehensive income (loss)
    
    
    (320
    )
    
    
    Accumulated deficit
    
    
    (50,472
    )
    
    
    (46,197
    )Total shareholders equity
    
    
    87,477
    
    
    
    77,284Total liabilities and shareholders equity
    
    $
    355,867
    
    
    $
    195,892
 Note: The balance sheet at March 31, 2005 has been derived from the restated 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 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)Net sales
    
    $
    214,128
    
    
    $
    182,876
    
    
    $
    512,892
    
    
    $
    454,583Cost of sales (exclusive of depreciation and amortization)
    
    
    185,887
    
    
    
    155,639
    
    
    
    431,418
    
    
    
    387,459Gross profit
    
    
    28,241
    
    
    
    27,237
    
    
    
    81,474
    
    
    
    67,124Operating expenses:Selling and marketing
    
    
    7,819
    
    
    
    6,321
    
    
    
    22,040
    
    
    
    15,439Distribution and warehousing
    
    
    3,067
    
    
    
    2,848
    
    
    
    7,499
    
    
    
    6,602General and administrative
    
    
    11,321
    
    
    
    9,772
    
    
    
    32,837
    
    
    
    29,228Bad debt
expense
    
    
    12,259
    
    
    
    66
    
    
    
    12,308
    
    
    
    366Depreciation and amortization
    
    
    3,101
    
    
    
    896
    
    
    
    8,272
    
    
    
    2,443Total operating expenses
    
    
    37,567
    
    
    
    19,903
    
    
    
    82,956
    
    
    
    54,078Income (loss) from operations
    
    
    (9,326
    )
    
    
    7,334
    
    
    
    (1,482
    )
    
    
    13,046Other income (expense):Interest expense
    
    
    (2,983
    )
    
    
    (168
    )
    
    
    (8,179
    )
    
    
    (270
    )Interest income
    
    
    
    
    
    
    103
    
    
    
    601
    
    
    
    359Deconsolidation of variable interest entity
    
    
    1,896
    
    
    
    
    
    
    
    1,896
    
    
    
    Other income (expense), net
    
    
    (10
    )
    
    
    6
    
    
    
    406
    
    
    
    Net income (loss) before income tax
    
    
    (10,423
    )
    
    
    7,275
    
    
    
    (6,758
    )
    
    
    13,135Income tax (expense) benefit
    
    
    4,355
    
    
    
    (42
    )
    
    
    2,521
    
    
    
    377Net income (loss)
    
    $
    (6,068
    )
    
    $
    7,233
    
    
    $
    (4,237
    )
    
    $
    13,512Earnings (loss) per common share:Basic
    
    $
    (.20
    )
    
    $
    .27
    
    
    $
    (.14
    )
    
    $
    .51Diluted
    
    $
    (.20
    )
    
    $
    .25
    
    
    $
    (.14
    )
    
    $
    .47Weighted average shares outstanding:Basic
    
    
    29,893
    
    
    
    27,002
    
    
    
    29,563
    
    
    
    26,645Diluted
    
    
    29,893
    
    
    
    28,937
    
    
    
    29,563
    
    
    
    28,778
 See accompanying notes to consolidated financial statements.
 4




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NAVARRE CORPORATION
 
 Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 Nine Months EndedDecember 31,2005
    
    
    2004(Restated)Operating activities:Net income (loss)
    
    $
    (4,237
    )
    
    $
    13,512Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    8,371
    
    
    
    2,506Amortization and write-off of deferred financing costs
    
    
    619
    
    
    
    160Deferred compensation expense
    
    
    216
    
    
    
    2,187Write-off of notes receivable
    
    
    150
    
    
    
    150Amortization of license fees
    
    
    4,036
    
    
    
    Amortization of production costs
    
    
    1,139
    
    
    
    Change in deferred revenue
    
    
    (480
    )
    
    
    14Tax benefit from employee stock option plans
    
    
    233
    
    
    
    2,428Gain on disposal of fixed assets
    
    
    (2
    )
    
    
    Deferred
income taxes, including tax effect of hedge derivatives
    
    
    (1,487
    )
    
    
    (3,073
    )Realized loss from hedge derivatives
    
    
    15
    
    
    
    Gain on deconsolidation of variable interest entity
    
    
    (1,896
    )
    
    
    Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    (21,113
    )
    
    
    (37,443
    )Inventories
    
    
    (10,610
    )
    
    
    (32,293
    )Prepaid expenses
    
    
    (2,789
    )
    
    
    (5,467
    )Income taxes receivable
    
    
    (5,678
    )
    
    
    Other assets
    
    
    151
    
    
    
    (1,798
    )Production costs
    
    
    (1,570
    )
    
    
    License fees
    
    
    (8,267
    )
    
    
    Accounts payable
    
    
    27,409
    
    
    
    26,481Income taxes payable
    
    
    (8
    )
    
    
    (855
    )Accrued expenses
    
    
    (1,121
    )
    
    
    2,850Net cash used in operating activities
    
    
    (16,919
    )
    
    
    (30,641
    )Investing activities:Acquisitions, net of cash acquired
    
    
    (98,147
    )
    
    
    Purchases of property and equipment
    
    
    (1,411
    )
    
    
    (7,504
    )Net proceeds from sale leaseback
    
    
    
    
    
    
    6,401Purchases of intangible assets
    
    
    (360
    )
    
    
    (514
    )Payment of earn-out related to an acquisition
    
    
    (350
    )
    
    
    (88
    )Other
    
    
    (55
    )
    
    
    Net cash used in investing activities
    
    
    (100,323
    )
    
    
    (1,705
    )Financing activities:Proceeds from note payable, line of credit
    
    
    
    
    
    
    84,361Payments on note payable, line of credit
    
    
    
    
    
    
    (71,665
    )Payments on note payable
    
    
    (22,500
    )
    
    
    (651
    )Proceeds from note payable
    
    
    141,075
    
    
    
    250Checks written in excess of cash balance
    
    
    
    
    
    
    1,974Debt acquisition costs
    
    
    (2,921
    )
    
    
    (465
    )Repayments of capital lease obligations
    
    
    (66
    )
    
    
    Proceeds from exercise of common stock options and warrants
    
    
    484
    
    
    
    4,380Net cash provided by financing activities
    
    
    116,072
    
    
    
    18,184Net decrease in cash
    
    
    (1,170
    )
    
    
    (14,162
    )Cash at beginning of period
    
    
    15,571
    
    
    
    14,495Cash at end of period
    
    $
    14,401
    
    
    $
    333
 (Continued) See accompanying notes to consolidated financial statements.
 5




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Nine Months EndedDecember 31,2005
    
    
    2004(Restated)Supplemental cash flow information:Cash paid for:Interest
    
    $
    5,365
    
    
    $
    198Income taxes
    
    
    4,421
    
    
    
    995Supplemental schedule of non-cash investing and financing activities:Reclassification of acquisition costs from other assets to goodwill
    
    
    1,656
    
    
    
    Capital lease obligations incurred for the purchase of computer equipment
    
    
    84
    
    
    
    Reclassification of prepaid royalties to other assets
    
    
    5,488
    
    
    
    Reclassification of stock compensation accrual to shareholders equity
    
    
    
    
    
    
    704Purchase price adjustment affecting: accounts receivable, prepaid expenses, goodwill and accounts payable
    
    
    
    
    
    
    627Acquisition:Fair value of assets acquired
    
    $
    125,135
    
    
    $
    Less:  assumed
    
    
    8,705
    
    
    
    Fair value of stock issued
    
    
    14,144
    
    
    
    Cash acquired
    
    
    4,139
    
    
    
    Acquisition net of cash acquired
    
    $
    98,147
    
    
    $
    Deconsolidation of variable interest entity:Assets, including cash
    
    $
    641
    
    
    $
    Less: Liabilities
    
    
    2,537
    
    
    
    Net liabilities
    
    $
    1,896
    
    
    $
    
 See accompanying notes to consolidated financial statements.
 6




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NAVARRE CORPORATION
 
 Notes to Consolidated Financial Statements
(Unaudited)
 Note 1  Organization and Basis of Presentation
     Restatement of Financial Statements
 Consolidation of Variable Interest Entities
 Segment Reporting
 Disclosure about Segments
of an Enterprise and Related Information
 Revenue Recognition
  7




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##### Table of Contents



Accounting by
Producers or Distributors of Films.
 Prepaid Royalties
 Financial Reporting in the
Record and Music Industry
 Royalties Payable  SOP 00-2
   Advertising
  Research and Development  Mix & Burn
  8




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Note 2  Restatements
 Restatements  Mix & Burn and Post Retirement Payments
 Mix & Burn
  Post Retirement Payments
  The following table presents the effect of the Restatement on the consolidated statement of
operations (in thousands except per share data):
 Three Months endedDecember 31, 2004(Unaudited)AsPreviously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedNet sales
    
    $
    182,730
    
    
    $
    146
    
    
    $
    182,876Cost of sales (exclusive of depreciation and amortization)
    
    
    155,517
    
    
    
    122
    
    
    
    155,639Gross profit
    
    
    27,213
    
    
    
    24
    
    
    
    27,237Operating expenses:Selling and marketing
    
    
    6,321
    
    
    
    
    
    
    
    6,321Distribution and warehousing
    
    
    2,848
    
    
    
    
    
    
    
    2,848General and administrative
    
    
    9,075
    
    
    
    763
    
    
    
    9,838Depreciation and amortization
    
    
    896
    
    
    
    
    
    
    
    896Total operating expenses
    
    
    19,140
    
    
    
    763
    
    
    
    19,903Income from operations
    
    
    8,073
    
    
    
    (739
    )
    
    
    7,334Other income (expense):Interest expense
    
    
    (168
    )
    
    
    
    
    
    
    (168
    )Interest income
    
    
    102
    
    
    
    1
    
    
    
    103Other income (expense)
    
    
    6
    
    
    
    
    
    
    
    6Net income before income tax
    
    
    8,013
    
    
    
    (738
    )
    
    
    7,275Tax expense
    
    
    (42
    )
    
    
    
    
    
    
    (42
    )Net income
    
    $
    7,971
    
    
    $
    (738
    )
    
    $
    7,233Earnings per common share:Basic
    
    $
    .30
    
    
    $
    (.03
    )
    
    $
    .27Diluted
    
    $
    .28
    
    
    $
    (.03
    )
    
    $
    .25Weighted average shares outstanding:Basic
    
    
    27,002
    
    
    
    
    
    
    
    27,002Diluted
    
    
    28,937
    
    
    
    
    
    
    
    28,937
 9




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The following table presents the effect of the Restatement on the consolidated statement of
cash flows (in thousands):
 Nine Months endedDecember 31, 2004(Unaudited)AsPreviously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedOperating activities:Net income
    
    $
    15,088
    
    
    $
    (1,576
    )
    
    $
    13,512Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    2,498
    
    
    
    8
    
    
    
    2,506Amortization of deferred financing costs
    
    
    160
    
    
    
    
    
    
    
    160Deferred compensation expense
    
    
    2,187
    
    
    
    
    
    
    
    2,187Write-off of notes receivable
    
    
    150
    
    
    
    
    
    
    
    150Tax benefit from employee stock option plans
    
    
    2,428
    
    
    
    
    
    
    
    2,428Deferred income taxes
    
    
    (2,668
    )
    
    
    (405
    )
    
    
    (3,073
    )Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    (37,644
    )
    
    
    (121
    )
    
    
    (37,765
    )Inventories
    
    
    (32,117
    )
    
    
    (176
    )
    
    
    (32,293
    )Prepaid expenses
    
    
    (5,120
    )
    
    
    (25
    )
    
    
    (5,145
    )Other assets
    
    
    (1,574
    )
    
    
    (224
    )
    
    
    (1,798
    )Accounts payable
    
    
    26,290
    
    
    
    191
    
    
    
    26,481Income taxes payable
    
    
    (855
    )
    
    
    
    
    
    
    (855
    )Accrued expenses
    
    
    2,416
    
    
    
    448
    
    
    
    2,864Net used in provided by operating activities
    
    
    (28,761
    )
    
    
    (1,880
    )
    
    
    (30,641
    )Investing activities:Purchases of property and equipment
    
    
    (7,421
    )
    
    
    (83
    )
    
    
    (7,504
    )Net proceeds from sale leaseback
    
    
    6,401
    
    
    
    
    
    
    
    6,401Purchases of intangible assets
    
    
    (490
    )
    
    
    (24
    )
    
    
    (514
    )Payment of earn-out related to an acquisition
    
    
    (88
    )
    
    
    
    
    
    
    (88
    )Notes receivable, related parties
    
    
    (2,065
    )
    
    
    2,065
    
    
    
    Net cash used in investing activities
    
    
    (3,663
    )
    
    
    1,958
    
    
    
    (1,705
    )Financing activities:Proceeds from note payable, bank
    
    
    84,361
    
    
    
    
    
    
    
    84,361Payments on note payable, bank
    
    
    (71,665
    )
    
    
    
    
    
    
    (71,665
    )Repayment of note payable
    
    
    (651
    )
    
    
    
    
    
    
    (651
    )Proceeds of note payable
    
    
    
    
    
    
    250
    
    
    
    250Debt acquisition costs
    
    
    (465
    )
    
    
    
    
    
    
    (465
    )Checks written in excess of cash balance
    
    
    1,974
    
    
    
    
    
    
    
    1,974Proceeds from exercise of common stock options and warrants
    
    
    4,380
    
    
    
    
    
    
    
    4,380Net cash provided by financing activities
    
    
    17,934
    
    
    
    250
    
    
    
    18,184Net increase (decrease) in cash
    
    
    (14,490
    )
    
    
    328
    
    
    
    (14,162
    )Cash at beginning of period
    
    
    14,495
    
    
    
    
    
    
    
    14,495Cash at end of period
    
    $
    5
    
    
    $
    328
    
    
    $
    333
 Restatements  Incentive Based Deferred Compensation and Income Taxes
   10




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Note 3  Acquisitions
 FUNimation
  Employment Agreement
      11




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##### Table of Contents



Purchase Price
 Business Combinations
   Accounts receivable
    
    $
    6,683Inventories
    
    
    2,103Prepaid expenses and other current assets
    
    
    52Property and equipment
    
    
    2,064License fees
    
    
    20,582Production costs
    
    
    3,810Goodwill
    
    
    46,600License
arrangements and other intangibles
    
    
    40,758Current liabilities
    
    
    (8,705
    )Total purchase price, less cash acquired
    
    $
    113,947
   Three Months EndedDecember 31, 2004As reported
    
    
    Pro forma(Restated)Net sales
    
    
    $
    182,876
    
    
    $
    210,814Net income (loss)
    
    
    
    7,233
    
    
    
    12,364Earnings per common share:Basic
    
    
    $
    .27
    
    
    $
    .46Diluted
    
    
    $
    .25
    
    
    $
    .43
 Nine Months Ended
    
    
    Nine Months EndedDecember 31, 2005
    
    
    December 31, 2004As reported
    
    
    Pro forma
    
    
    As reported
    
    
    Pro forma(Restated)Net sales
    
    $
    512,892
    
    
    $
    518,967
    
    
    $
    454,583
    
    
    $
    512,614Net income
    
    
    (4,237
    )
    
    
    (3,162
    )
    
    
    13,512
    
    
    
    18,578Earnings per common share:Basic
    
    $
    (.14
    )
    
    $
    (.11
    )
    
    $
    .51
    
    
    $
    .70Diluted
    
    $
    (.14
    )
    
    $
    (.11
    )
    
    $
    .47
    
    
    $
    .65
 12




---



##### Table of Contents



Note 4  Mix & Burn, Inc.
 Variable Interest Entity
 Consolidated of Variable Interest Entities Consolidated Financial Statements
   Equity Investment
  Note 5  Stock-Based Compensation
 Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)Net income (loss), as reported
    
    $
    (6,068
    )
    
    $
    7,233
    
    
    $
    (4,237
    )
    
    $
    13,512Deduct: Stock-based compensation
expense determined under fair
value method for all awards, net
of tax
    
    
    (499
    )
    
    
    (253
    )
    
    
    (1,293
    )
    
    
    (576
    )Net income (loss), pro forma
    
    $
    (6,567
    )
    
    $
    6,980
    
    
    $
    (5,530
    )
    
    $
    12,936Income (loss) per share:Basic  as reported
    
    $
    (.20
    )
    
    $
    .27
    
    
    $
    (.14
    )
    
    $
    .51Basic  pro forma
    
    $
    (.22
    )
    
    $
    .26
    
    
    $
    (.19
    )
    
    $
    .49Diluted  as reported
    
    $
    (.20
    )
    
    $
    .25
    
    
    $
    (.14
    )
    
    $
    .47Diluted  pro forma
    
    $
    (.22
    )
    
    $
    .24
    
    
    $
    (.19
    )
    
    $
    .45
 13




---



##### Table of Contents



Note 6  Earnings Per Share
   Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)Numerator:Net income (loss)
    
    $
    (6,068
    )
    
    $
    7,233
    
    
    $
    (4,237
    )
    
    $
    13,512Denominator:Denominator for basic earnings per shareweighted-average shares
    
    
    29,893
    
    
    
    27,002
    
    
    
    29,563
    
    
    
    26,645Dilutive
securities: employee stock options and warrants
    
    
    
    
    
    
    1,935
    
    
    
    
    
    
    
    2,133Denominator for diluted earnings per share -adjusted
weighted-average shares
    
    
    29,893
    
    
    
    28,937
    
    
    
    29,563
    
    
    
    28,778Basic income (loss) per share
    
    $
    (.20
    )
    
    $
    .27
    
    
    $
    (.14
    )
    
    $
    .51Dilutive income (loss) per share
    
    $
    (.20
    )
    
    $
    .25
    
    
    $
    (.14
    )
    
    $
    .47
  14




---



##### Table of Contents



Note 7  Comprehensive Income (Loss)
   Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)Net income (loss)
    
    $
    (6,068
    )
    
    $
    7,233
    
    
    $
    (4,237
    )
    
    $
    13,512Net
unrealized gain (loss) on hedge derivatives
    
    
    609
    
    
    
    
    
    
    
    (320
    )
    
    
    Comprehensive income (loss)
    
    $
    (5,459
    )
    
    $
    7,233
    
    
    $
    (4,557
    )
    
    $
    13,512
   December 31,
    
    
    March 31,2005
    
    
    2005(Restated)Unrealized gain (loss) from:Hedge derivatives
    
    $
    (320
    )
    
    $
    Accumulated other comprehensive income (loss)
    
    $
    (320
    )
    
    $
    
 Note 8  Shareholders Equity
  Note 9  Accounts Receivable
  December 31,
    
    
    March 31,2005
    
    
    2005(Restated)Trade receivables
    
    $
    133,302
    
    
    $
    88,196Vendor receivables
    
    
    2,494
    
    
    
    5,514Other receivables
    
    
    1,889
    
    
    
    2,745$
    137,685
    
    
    $
    94,455Less: allowance for doubtful accounts, vendor receivables and sales discounts
    
    
    1,734
    
    
    
    3,533Less: allowance for sales returns, net margin impact
    
    
    19,483
    
    
    
    4,190Total
    
    $
    116,468
    
    
    $
    88,732
 Note 10  Inventories
  December 31,
    
    
    March 31,2005
    
    
    2005(Restated)Finished products
    
    $
    46,247
    
    
    $
    36,222Raw materials
    
    
    7,104
    
    
    
    4,537$
    53,351
    
    
    $
    40,759
 15




---



##### Table of Contents



Note 11  License Fees
  December 31,
    
    
    March 31,2005
    
    
    2005(Restated)License fees
    
    $
    28,849
    
    
    $
    Less: accumulated amortization
    
    
    4,036
    
    
    
    $
    24,813
    
    
    
    
  SOP 00-2
 Note 12  Production Costs
  December 31,
    
    
    March 31,2005
    
    
    2005(Restated)Production costs
    
    $
    5,382
    
    
    $
    Less: accumulated amortization
    
    
    1,141
    
    
    
    $
    4,241
    
    
    
    
  SOP 00-2
  Note 13  Property and Equipment
  December 31,
    
    
    March 31,2005
    
    
    2005(Restated)Land and buildings
    
    $
    1,623
    
    
    $
    Furniture and fixtures
    
    
    1,185
    
    
    
    1,092Computer and office equipment
    
    
    5,486
    
    
    
    4,483Warehouse equipment
    
    
    7,053
    
    
    
    6,868Leasehold improvements
    
    
    3,033
    
    
    
    2,894Production equipment
    
    
    246
    
    
    
    Construction in progress
    
    
    79
    
    
    
    74Total
    
    $
    18,705
    
    
    $
    15,411Less: accumulated depreciation and amortization
    
    
    9,158
    
    
    
    7,259Net property and equipment
    
    $
    9,547
    
    
    $
    8,152
 16




---



##### Table of Contents



Note 14  Goodwill and Intangible Assets
 Goodwill
   Distribution
    
    
    Publishing
    
    
    Other
    
    
    ConsolidatedBalances as of March 31, 2005 (Restated)
    
    $
    
    
    
    $
    9,832
    
    
    $
    
    
    
    $
    9,832Goodwill resulting from an acquisition
    
    
    
    
    
    
    46,600
    
    
    
    
    
    
    
    46,600Earn-out related to an acquisition
    
    
    
    
    
    
    350
    
    
    
    
    
    
    
    350Balances as of December 31, 2005
    
    $
    
    
    
    $
    56,782
    
    
    $
    
    
    
    $
    56,782
 Intangible assets
  As of December 31, 2005Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters
    
    $
    7,191
    
    
    $
    2,817
    
    
    $
    4,374License relationships
    
    
    39,100
    
    
    
    5,149
    
    
    
    33,951Trademark (not amortized)
    
    
    1,658
    
    
    
    
    
    
    
    1,658Other
    
    
    705
    
    
    
    705
    
    
    
    $
    48,654
    
    
    $
    8,671
    
    
    $
    39,983
 As of March 31, 2005 (Restated)Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters
    
    $
    6,838
    
    
    $
    1,687
    
    
    $
    5,151Other
    
    
    729
    
    
    
    682
    
    
    
    47$
    7,567
    
    
    $
    2,369
    
    
    $
    5,198
   2006
    
    $
    2,5312007
    
    
    12,4282008
    
    
    10,4862009
    
    
    7,2942010
    
    
    3,501
 Debt issuance costs
  17




---



##### Table of Contents



Note 15  Accrued Expenses
  December 31,
    
    
    March 31,2005
    
    
    2005(Restated)Compensation and benefits
    
    $
    3,451
    
    
    $
    9,067Royalties
    
    
    5,661
    
    
    
    2,491Accrued interest
    
    
    2,677
    
    
    
    31Rebates
    
    
    1,749
    
    
    
    1,023Freight
    
    
    1,482
    
    
    
    62Other
    
    
    3,534
    
    
    
    2,393Total
    
    $
    18,554
    
    
    $
    15,067
 Note 16  Bank Financing and Debt
      18




---



##### Table of Contents



December 31,
    
    
    March 31,2005
    
    
    2005(Restated)Term Loan B sub-facility
    
    $
    92,500
    
    
    $
    Term Loan C sub-facility
    
    
    25,000
    
    
    
    Other (see Mix & Burn above)
    
    
    
    
    
    
    250Total debt
    
    
    117,500
    
    
    
    250Less: current portion
    
    
    5,000
    
    
    
    250Total
long-term debt
    
    $
    112,500
    
    
    $
    
  2006
    
    $
    5,0002007
    
    
    5,0002008
    
    
    5,0002009
    
    
    5,0002010
    
    
    5,0002011 and thereafter
    
    
    92,500Total
    
    $
    117,500
 Letters of Credit
  Note 17  Derivative Instruments
   Note 18  Income Taxes
   19




---



##### Table of Contents



Note 19  Sale/Leaseback of Warehouse Facility
   Note 20  License and Distribution Agreement
   20




---



##### Table of Contents



Note 21  Business Segments
  Three months ended December 31, 2005
    
    Distribution
    
    Publishing
    
    Other
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    199,705
    
    
    $
    35,940
    
    
    $
    169
    
    
    $
    (21,686
    )
    
    $
    214,128Income (loss) from operations
    
    
    (9,638
    )
    
    
    799
    
    
    
    (487
    )
    
    
    
    
    
    
    (9,326
    )Net income (loss) before income tax
    
    
    (12,555
    )
    
    
    775
    
    
    
    1,357
    
    
    
    
    
    
    
    (10,423
    )Total assets
    
    $
    317,834
    
    
    $
    172,193
    
    
    $
    
    
    
    $
    (134,160
    )
    
    $
    355,867
 Three months ended December 31, 2004 (Restated)
    
    Distribution
    
    Publishing
    
    Other
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    175,022
    
    
    $
    21,667
    
    
    $
    146
    
    
    $
    (13,959
    )
    
    $
    182,876Income (loss) from operations
    
    
    4,044
    
    
    
    4,029
    
    
    
    (739
    )
    
    
    
    
    
    
    7,334Net income (loss) before income tax
    
    
    4,097
    
    
    
    3,917
    
    
    
    (739
    )
    
    
    
    
    
    
    7,275Total assets
    
    $
    205,841
    
    
    $
    47,250
    
    
    $
    941
    
    
    $
    (33,710
    )
    
    $
    220,322
 Nine months ended December 31, 2005
    
    Distribution
    
    Publishing
    
    Other
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    470,232
    
    
    $
    93,849
    
    
    $
    424
    
    
    $
    (51,613
    )
    
    $
    512,892Income (loss) from operations
    
    
    (7,358
    )
    
    
    7,466
    
    
    
    (1,590
    )
    
    
    
    
    
    
    (1,482
    )Net income (loss) before income tax
    
    
    (14,192
    )
    
    
    7,297
    
    
    
    137
    
    
    
    
    
    
    
    (6,758
    )Total assets
    
    $
    317,834
    
    
    $
    172,193
    
    
    $
    
    
    
    $
    (134,160
    )
    
    $
    355,867
 Nine months ended December 31, 2004 (Restated)
    
    Distribution
    
    Publishing
    
    Other
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    419,434
    
    
    $
    74,283
    
    
    $
    259
    
    
    $
    (39,393
    )
    
    $
    454,583Income (loss) from operations
    
    
    4,212
    
    
    
    10,427
    
    
    
    (1,593
    )
    
    
    
    
    
    
    13,046Net income (loss) before income tax
    
    
    4,549
    
    
    
    10,179
    
    
    
    (1,593
    )
    
    
    
    
    
    
    13,135Total assets
    
    $
    205,841
    
    
    $
    47,250
    
    
    $
    941
    
    
    $
    (33,710
    )
    
    $
    220,322
 Note 22  Commitments and Contingencies
 Commitments  Other
  Litigation
  ValueVision Media, Inc. v. Navarre Corporation
    ®
 21




---



##### Table of Contents



Sybersound Records, Inc. v. BCI Eclipse, LLC, et al.
       Sybersound Records, Inc. v. Navarre Corporation, BCI Eclipse, LLC, et al.
     Faulconer Productions Music Corp. v. FUNimation Productions, Inc. et al
  22




---



##### Table of Contents



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
   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.
 23




---



##### Table of Contents



Note 23  Related Party Transactions
 Employment/Severance Agreements
    24




---



##### Table of Contents



Chief Executive Officer Investment in Mix & Burn
  Note
24  Subsequent Event
  Note 25  Recently Issued Accounting Pronouncements
 ,
Inventory Costs, an amendment of ARB No. 43, Chapter 4
 Share-Based Payment 123(R) 123(R) Accounting
for Stock-Based Compensation Accounting for Stock Issued to
Employees
 , Accounting for Conditional Asset
Retirement Obligations Accounting for Asset Retirement Obligations
 Accounting Changes and Error Corrections Accounting Changes Reporting Accounting
Changes in Interim Financial Statements
 25




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Note: Comparisons to fiscal year 2005 results refer to restated numbers as discussed in Note 2 of
the consolidated financial statements.
 Executive Summary
     Overview
    anime
  26




---



##### Table of Contents



Forward-Looking Statements / Important Risk Factors
     Restatements
 Restatements
 Mix & Burn and Post Retirement Payments
  27




---



##### Table of Contents



Consolidation of Variable Interest Entities
 Restatement
 Incentive Based Deferred Compensation and Income Taxes
    Critical Accounting Policies
  Reconciliation of GAAP Net Sales to Net Sales Before Inter-Company Eliminations
  28




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,(Unaudited)
    
    
    (Unaudited)2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands)
    
    
    
    
    
    (Restated)
    
    
    
    
    
    
    (Restated)Net sales:Distribution
    
    $
    199,705
    
    
    $
    175,022
    
    
    $
    470,232
    
    
    $
    419,434Publishing
    
    
    35,940
    
    
    
    21,667
    
    
    
    93,849
    
    
    
    74,283Other
    
    
    169
    
    
    
    146
    
    
    
    424
    
    
    
    259Net sales before inter-company eliminations
    
    
    235,814
    
    
    
    196,835
    
    
    
    564,505
    
    
    
    493,976Inter-company eliminations
    
    
    (21,686
    )
    
    
    (13,959
    )
    
    
    (51,613
    )
    
    
    (39,393
    )Net sales as reported
    
    $
    214,128
    
    
    $
    182,876
    
    
    $
    512,892
    
    
    $
    454,583
 Results of Operations
  Three Months Ended December 31,
    
    
    Nine Months Ended December 31,(Unaudited)
    
    
    (Unaudited)2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)Net sales:Distribution
    
    
    93.3
    %
    
    
    95.7
    %
    
    
    91.7
    %
    
    
    92.3
    %Publishing
    
    
    16.8
    
    
    
    11.8
    
    
    
    18.3
    
    
    
    16.3Other
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Inter-company sales
    
    
    (10.1
    )
    
    
    (7.6
    )
    
    
    (10.1
    )
    
    
    (8.7
    )Total net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales, exclusive of amortization
and depreciation
    
    
    86.8
    
    
    
    85.1
    
    
    
    84.1
    
    
    
    85.2Gross profit
    
    
    13.2
    
    
    
    14.9
    
    
    
    15.9
    
    
    
    14.8Selling and marketing
    
    
    3.7
    
    
    
    3.5
    
    
    
    4.3
    
    
    
    3.3Distribution and warehousing
    
    
    1.4
    
    
    
    1.6
    
    
    
    1.5
    
    
    
    1.5General and administrative
    
    
    5.3
    
    
    
    5.2
    
    
    
    6.4
    
    
    
    6.4Bad debt
expense
    
    
    5.7
    
    
    
    0.1
    
    
    
    2.3
    
    
    
    0.1Depreciation and amortization
    
    
    1.4
    
    
    
    0.5
    
    
    
    1.6
    
    
    
    0.5Total operating expenses
    
    
    17.5
    
    
    
    10.9
    
    
    
    16.1
    
    
    
    11.8Income (loss) from operations
    
    
    (4.3
    )
    
    
    4.0
    
    
    
    (0.2
    )
    
    
    3.0Interest expense
    
    
    (1.4
    )
    
    
    (0.1
    )
    
    
    (1.6
    )
    
    
    (0.1
    )Deconsolidation of variable interest entity
    
    
    0.9
    
    
    
    
    
    
    
    0.4
    
    
    
    Other income (expense), net
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    Income tax (expense) benefit
    
    
    2.0
    
    
    
    
    
    
    
    0.5
    
    
    
    0.1Net income
(loss)
    
    
    (2.8
    )%
    
    
    3.9
    %
    
    
    (0.8
    )%
    
    
    3.0
    %
 Distribution Segment
  Fiscal 2006 Third Quarter Results Compared With Fiscal 2005 (Restated) Third Quarter
 Net Sales
  29




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##### Table of Contents



Gross Profit
  Operating Expenses
        Fiscal 2006 Nine Months Results Compared With Fiscal 2005 (Restated) Nine Months
 Net Sales
  30




---



##### Table of Contents



Gross Profit
  Operating Expenses
        Publishing Segment
  Fiscal 2006 Third Quarter Results Compared With Fiscal 2005 (Restated) Third Quarter
 Net Sales
 He-Man and the Masters of the Universe
 31




---



##### Table of Contents



Gross Profit
  Operating Expenses
   Fiscal 2006 First Nine Months Results Compared With Fiscal 2005 (Restated) Nine Months
 Net Sales
 He-Man and the Masters
of the Universe
 Gross Profit
  Operating Expenses
 He-Man and the Masters of the Universe
  Other Segment
  32




---



##### Table of Contents



Fiscal 2006 Third Quarter Results Compared With Fiscal 2005 (Restated) Third Quarter
  Fiscal 2006 First Nine Months Results Compared With Fiscal 2005 (Restated) Nine Months
  Consolidated Other Income and Expense
  Consolidated Income Tax (Expense) Benefit
  Market Risk
  Seasonality and Inflation
  33




---



##### Table of Contents



Liquidity and Capital Resources
 Cash Flow Analysis
 Operating Activities
    Investing Activities
    Financing Activities
   Capital Resources
  34




---



##### Table of Contents



sub-facility
   Liquidity
      35




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 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
  36




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##### Table of Contents



Item 5. Other Information
  
 Item 6. Exhibits
  10.1
    
    Amendment No. 4 to Standard
Commercial Lease between Airport One Limited Partnership and Navarre
Corporation, dated February 2, 200631.1
    
    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
    
    Certifications of the Chief Executive Officer pursuant Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)32.2
    
    Certifications of the Chief Financial Officer pursuant Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
 37




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##### Table of Contents



SIGNATURES
  Navarre Corporation
(Registrant)Date: February 9, 2006
    /s/ Eric H. PaulsonEric H. PaulsonChairman of the Board and
Chief Executive OfficerDate: February 9, 2006
    /s/ J. Reid PorterJ. Reid PorterChief Financial Officer 38