##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 for the quarterly period ended September 30, 2008
 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
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Class
    
    Outstanding at November 7, 2008Common Stock, No Par Value
    
    36,229,856 shares




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##### 



NAVARRE CORPORATION
 Index
 PART I. FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements. (Unaudited)
    
    
    3Consolidated Balance Sheets  September 30, 2008 and March 31, 2008 (Audited)
    
    
    3Consolidated Statements of Operations  Three and Six Months ended September 30, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows  Six Months ended September 30, 2008 and 2007
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    32PART II. OTHER INFORMATION
    
    
    32Item 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    34Item 5. Other Information
    
    
    34Item 6. Exhibits
    
    
    34SIGNATURES
    
    
    35EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements.
 NAVARRE CORPORATION
 
 Consolidated Balance Sheets
 (In thousands, except share amounts)
 September 30,
    
    
    March 31,2008
    
    
    2008(Unaudited)
    
    
    (Note)Assets:Current assets:Cash and cash equivalents
    
    $
    
    
    
    $
    4,445Marketable securities
    
    
    1,211
    
    
    
    1,506Accounts receivable, less allowance for doubtful accounts and sales reserves of $15,432 at
September 30, 2008 and $15,417 at March 31, 2008
    
    
    94,689
    
    
    
    76,806Inventories
    
    
    49,632
    
    
    
    32,654Prepaid expenses and other current assets
    
    
    14,459
    
    
    
    12,118Income tax receivable
    
    
    825
    
    
    
    937Deferred tax assets  current
    
    
    9,401
    
    
    
    9,100Total current assets
    
    
    170,217
    
    
    
    137,566Property and equipment, net of accumulated depreciation of $15,520 and $14,484, respectively
    
    
    17,949
    
    
    
    17,181Assets held for sale, net of accumulated depreciation of $194 at March 31, 2008
    
    
    
    
    
    
    1,428Other assets:Marketable securities
    
    
    1,333
    
    
    
    2,667Goodwill
    
    
    8,285
    
    
    
    81,697Intangible assets, net of amortization of $23,625 and $21,180, respectively
    
    
    7,952
    
    
    
    9,984License fees, net of amortization of $18,104 and $19,595, respectively
    
    
    26,578
    
    
    
    20,515Production costs, net of amortization of $9,064 and $7,439, respectively
    
    
    9,216
    
    
    
    7,316Deferred tax assets  non-current
    
    
    23,051
    
    
    
    Other assets
    
    
    4,224
    
    
    
    5,108Total assets
    
    $
    268,805
    
    
    $
    283,462Liabilities and shareholders equity:Current liabilities:Note payable  line of credit
    
    $
    45,597
    
    
    $
    31,314Note payable  short term
    
    
    
    
    
    
    150Capital lease obligation  short term
    
    
    50
    
    
    
    59Accounts payable
    
    
    120,432
    
    
    
    92,199Checks written in excess of cash balance
    
    
    527
    
    
    
    Deferred compensation
    
    
    2,110
    
    
    
    2,080Accrued expenses
    
    
    16,195
    
    
    
    16,118Total current liabilities
    
    
    184,911
    
    
    
    141,920Long-term liabilities:Note payable  long-term
    
    
    
    
    
    
    9,594Capital lease obligation  long-term
    
    
    34
    
    
    
    60Deferred compensation
    
    
    1,757
    
    
    
    3,491Deferred tax liabilities  non-current
    
    
    
    
    
    
    3,106Income taxes payable
    
    
    1,059
    
    
    
    880Total liabilities
    
    
    187,761
    
    
    
    159,051Commitments and contingencies (Note 20)Shareholders equity:Common stock, no par value:Authorized shares  100,000,000; issued and outstanding shares  36,237,486 at
September 30, 2008 and 36,227,886 at March 31, 2008
    
    
    160,617
    
    
    
    160,103Accumulated deficit
    
    
    (79,573
    )
    
    
    (35,692
    )Total shareholders equity
    
    
    81,044
    
    
    
    124,411Total liabilities and shareholders equity
    
    $
    268,805
    
    
    $
    283,462
 Note: The balance sheet at March 31, 2008 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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##### Table of Contents



NAVARRE CORPORATION
 
 Consolidated Statements of Operations
 (In thousands, except per share amounts)
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales
    
    $
    170,296
    
    
    $
    143,715
    
    
    $
    312,321
    
    
    $
    280,737Cost of sales (exclusive of depreciation and amortization)
    
    
    146,066
    
    
    
    121,654
    
    
    
    265,965
    
    
    
    234,693Gross profit
    
    
    24,230
    
    
    
    22,061
    
    
    
    46,356
    
    
    
    46,044Operating expenses:Selling and marketing
    
    
    7,206
    
    
    
    6,665
    
    
    
    12,921
    
    
    
    13,600Distribution and warehousing
    
    
    3,046
    
    
    
    3,344
    
    
    
    5,930
    
    
    
    6,056General and administrative
    
    
    8,181
    
    
    
    8,074
    
    
    
    16,634
    
    
    
    15,534Bad debt expense
    
    
    200
    
    
    
    30
    
    
    
    200
    
    
    
    85Depreciation and amortization
    
    
    2,376
    
    
    
    2,323
    
    
    
    4,697
    
    
    
    4,541Goodwill impairment
    
    
    73,412
    
    
    
    
    
    
    
    73,412
    
    
    
    Total operating expenses
    
    
    94,421
    
    
    
    20,436
    
    
    
    113,794
    
    
    
    39,816Income (loss) from operations
    
    
    (70,191
    )
    
    
    1,625
    
    
    
    (67,438
    )
    
    
    6,228Other income (expense):Interest expense
    
    
    (833
    )
    
    
    (1,405
    )
    
    
    (2,448
    )
    
    
    (3,079
    )Interest income
    
    
    14
    
    
    
    56
    
    
    
    29
    
    
    
    124Other income (expense), net
    
    
    (223
    )
    
    
    148
    
    
    
    (321
    )
    
    
    371Income from continuing operations before income tax
    
    
    (71,233
    )
    
    
    424
    
    
    
    (70,178
    )
    
    
    3,644Income tax benefit (expense)
    
    
    26,725
    
    
    
    (202
    )
    
    
    26,297
    
    
    
    (1,516
    )Net income (loss) from continuing operations
    
    
    (44,508
    )
    
    
    222
    
    
    
    (43,881
    )
    
    
    2,128Discontinued operations, net of taxGain (loss) on sale of discontinued operations
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    4,644Loss from discontinued operations
    
    
    
    
    
    
    (594
    )
    
    
    
    
    
    
    (1,703
    )Net income (loss)
    
    $
    (44,508
    )
    
    $
    (375
    )
    
    $
    (43,881
    )
    
    $
    5,069Basic earnings (loss) per common share:Continuing operations
    
    $
    (1.23
    )
    
    $
    .01
    
    
    $
    (1.21
    )
    
    $
    .06Discontinued operations
    
    
    
    
    
    
    (.02
    )
    
    
    
    
    
    
    .08Net income (loss)
    
    $
    (1.23
    )
    
    $
    (.01
    )
    
    $
    (1.21
    )
    
    $
    .14Diluted earnings (loss) per common share:Continuing operations
    
    $
    (1.23
    )
    
    $
    .01
    
    
    $
    (1.21
    )
    
    $
    .06Discontinued operations
    
    
    
    
    
    
    (.02
    )
    
    
    
    
    
    
    .08Net income (loss)
    
    $
    (1.23
    )
    
    $
    (.01
    )
    
    $
    (1.21
    )
    
    $
    .14Weighted average shares outstanding:Basic
    
    
    36,191
    
    
    
    36,110
    
    
    
    36,188
    
    
    
    36,048Diluted
    
    
    36,191
    
    
    
    36,303
    
    
    
    36,188
    
    
    
    36,289
 See accompanying notes to consolidated financial statements.
 4




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NAVARRE CORPORATION
 
 Consolidated Statements of Cash Flows
 (In thousands)
 (Unaudited)
 Six Months EndedSeptember 30,2008
    
    
    2007Operating activities:Net income (loss)
    
    $
    (43,881
    )
    
    $
    5,069Adjustments to reconcile net income to net cash used in operating activities:Loss from discontinued operations
    
    
    
    
    
    
    1,703Gain on sale of discontinued operations
    
    
    
    
    
    
    (4,644
    )Depreciation and amortization
    
    
    4,697
    
    
    
    4,580Amortization of license fees
    
    
    1,776
    
    
    
    2,747Amortization of production costs
    
    
    1,625
    
    
    
    1,213Write-off of debt acquisition costs
    
    
    490
    
    
    
    Goodwill impairment
    
    
    73,412
    
    
    
    Change in deferred revenue
    
    
    617
    
    
    
    242Share-based compensation expense
    
    
    501
    
    
    
    567Deferred income taxes
    
    
    (26,458
    )
    
    
    619Other
    
    
    81
    
    
    
    188Changes in operating assets and liabilities:Accounts receivable
    
    
    (17,883
    )
    
    
    (13,468
    )Inventories
    
    
    (16,978
    )
    
    
    (22,401
    )Prepaid expenses
    
    
    (2,341
    )
    
    
    (1,926
    )Income taxes receivable
    
    
    112
    
    
    
    254Other assets
    
    
    487
    
    
    
    696Production costs
    
    
    (3,525
    )
    
    
    (2,257
    )License fees
    
    
    (7,839
    )
    
    
    (6,309
    )Accounts payable
    
    
    28,260
    
    
    
    23,870Income taxes payable
    
    
    179
    
    
    
    540Accrued expenses
    
    
    (540
    )
    
    
    (861
    )Net cash used in operating activities
    
    
    (7,208
    )
    
    
    (9,578
    )Investing activities:Purchases of property and equipment
    
    
    (3,020
    )
    
    
    (4,596
    )Purchases of intangible assets
    
    
    (413
    )
    
    
    (717
    )Sale of marketable equity securities
    
    
    1,654
    
    
    
    Proceeds from sale of assets held for sale
    
    
    1,353
    
    
    
    Purchases of marketable equity securities
    
    
    
    
    
    
    (4,000
    )Net cash used in investing activities
    
    
    (426
    )
    
    
    (9,313
    )Financing activities:Proceeds from note payable, line of credit
    
    
    112,386
    
    
    
    84,601Payments on note payable, line of credit
    
    
    (98,103
    )
    
    
    (80,508
    )Repayments of note payable
    
    
    (9,744
    )
    
    
    (5,180
    )Payment of deferred compensation
    
    
    (1,654
    )
    
    
    Checks written in excess of cash
    
    
    527
    
    
    
    6,057Debt acquisition costs
    
    
    (200
    )
    
    
    Other
    
    
    (23
    )
    
    
    (123
    )Net cash provided by financing activities
    
    
    3,189
    
    
    
    4,847Net decrease in cash from continuing operations
    
    
    (4,445
    )
    
    
    (14,044
    )Discontinued operations:Net cash provided by operating activities
    
    
    
    
    
    
    6,578Net cash provided by investing activities, proceeds from sale of discontinued operations
    
    
    
    
    
    
    6,500Net decrease in cash
    
    
    (4,445
    )
    
    
    (966
    )Cash at beginning of period
    
    
    4,445
    
    
    
    966Cash at end of period
    
    $
    
    
    
    $
    Supplemental cash flow information:Cash paid for (received from):Interest
    
    $
    2,129
    
    
    $
    2,887Income taxes, net of refunds
    
    
    (90
    )
    
    
    468
 See accompanying notes to consolidated financial statements.
 5




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NAVARRE CORPORATION
 
 Notes to Consolidated Financial Statements
 (Unaudited)
 Note 1  Organization and Basis of Presentation
      Basis of Consolidation
  Revenue Recognition
    Accounting by
Producers or Distributors of Films.
 6




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##### Table of Contents



Recently Issued Accounting Pronouncements
 Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement Accounting for
Convertible Debt and Debt issued with Stock Purchase Warrants
 Note 2  Discontinued Operations
   Three Months
    
    
    Six MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2007
    
    
    2007Net sales
    
    $
    18
    
    
    $
    5,088Loss from discontinued operations, before income tax
    
    
    (970
    )
    
    
    (2,835
    )Income tax benefit
    
    
    376
    
    
    
    1,132Net loss from discontinued operations
    
    $
    (594
    )
    
    $
    (1,703
    )
   Note 3  Marketable Securities
   7




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As of September 30, 2008Gross
    
    
    GrossEstimated fair
    
    
    unrealized
    
    
    unrealizedvalue
    
    
    holding gains
    
    
    holding lossesAvailable-for-sale:Government agency and corporate bonds
    
    $
    607
    
    
    $
    1
    
    
    $
    1Money market fund
    
    
    1,937
    
    
    
    
    
    
    
    $
    2,544
    
    
    $
    1
    
    
    $
    1
 As of March 31, 2008Gross
    
    
    GrossEstimated fair
    
    
    unrealized
    
    
    unrealizedvalue
    
    
    holding gains
    
    
    holding lossesAvailable-for-sale:Government agency and corporate bonds
    
    $
    410
    
    
    $
    
    
    
    $
    Money market fund
    
    
    3,763
    
    
    
    
    
    
    
    $
    4,173
    
    
    $
    
    
    
    $
    
  Fair Value Measurements
  
    
    Level 1  quoted prices in active markets for identical assets and liabilities.
    
    Level 2  observable inputs other than quoted prices in active markets for identical assets and liabilities.
    
    Level 3  unobservable inputs in which there is little or no market
data available, which require the reporting entity to develop its own
assumptions.
  Effective Date of FASB Statement No. 157
 The Fair Value Option for
Financial Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115
 8




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##### Table of Contents



Note 4  Share-Based Compensation
  Stock Options
  WeightedWeighted
    
    
    averageaverage
    
    
    remaining
    
    
    AggregateNumber of
    
    
    exercise
    
    
    contractual
    
    
    intrinsicoptions
    
    
    price
    
    
    term
    
    
    valueOptions outstanding, beginning of period:
    
    
    3,132,499
    
    
    $
    6.78Granted
    
    
    103,000
    
    
    
    1.76Exercised
    
    
    (9,600
    )
    
    
    1.26Canceled
    
    
    (206,866
    )
    
    
    8.42Options outstanding, end of period
    
    
    3,019,033
    
    
    $
    6.50
    
    
    
    5.6
    
    
    $
    Options exercisable, end of period
    
    
    2,153,437
    
    
    $
    7.70
    
    
    
    4.4
    
    
    $
    Shares available for future grant, end of period
    
    
    1,822,167
    Restricted Stock
   9




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##### Table of Contents



WeightedWeighted
    
    
    averageaverage
    
    
    remaininggrant date
    
    
    contractualShares
    
    
    fair value
    
    
    termUnvested, beginning of period:
    
    
    171,917
    
    
    $
    3.02
    
    
    
    9.34Granted
    
    
    
    
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (1,000
    )
    
    
    2.41
    
    
    
    Unvested, end of period
    
    
    170,917
    
    
    $
    3.02
    
    
    
    8.83
   Restricted Stock  Performance Based
  Share-Based Compensation Valuation and Expense Information
  Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Expected life (in years)
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Expected volatility
    
    
    64
    %
    
    
    64
    %
    
    
    64
    %
    
    
    67
    %Risk-free interest rate
    
    
    2.87
    %
    
    
    4.07-4.57
    %
    
    
    2.65-2.87
    %
    
    
    4.07-5.02
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
   Note 5  Earnings (Loss) Per Share
  10




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Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,(In thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Net income (loss) from continuing operations
    
    $
    (44,508
    )
    
    $
    222
    
    
    $
    (43,881
    )
    
    $
    2,128Denominator:Denominator for basic earnings per shareweighted-average shares
    
    
    36,191
    
    
    
    36,110
    
    
    
    36,188
    
    
    
    36,048Dilutive securities: Employee stock options and warrants
    
    
    
    
    
    
    193
    
    
    
    
    
    
    
    241Denominator for diluted earnings per shareadjusted
weighted-average shares
    
    
    36,191
    
    
    
    36,303
    
    
    
    36,188
    
    
    
    36,289Net earnings (loss) per share from continuing operations:Basic earnings (loss) per share
    
    $
    (1.23
    )
    
    $
    .01
    
    
    $
    (1.21
    )
    
    $
    .06Diluted earnings (loss) per share
    
    $
    (1.23
    )
    
    $
    .01
    
    
    $
    (1.21
    )
    
    $
    .06
   Note 6  Shareholders Equity
   Note 7  Accounts Receivable
  September 30,
    
    
    March 31,2008
    
    
    2008Trade receivables
    
    $
    106,021
    
    
    $
    87,801Vendor receivables
    
    
    3,008
    
    
    
    2,575Other receivables
    
    
    1,092
    
    
    
    1,847110,121
    
    
    
    92,223Less: allowance for doubtful accounts and sales discounts
    
    
    5,291
    
    
    
    6,067Less: allowance for sales returns, net margin impact
    
    
    10,141
    
    
    
    9,350Total
    
    $
    94,689
    
    
    $
    76,806
 11




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Note 8  Prepaid Expenses and Other Current Assets
  September 30,
    
    
    March 31,2008
    
    
    2008Prepaid royalties
    
    $
    13,628
    
    
    $
    11,297Other
    
    
    831
    
    
    
    821Total
    
    $
    14,459
    
    
    $
    12,118
 Note 9 Inventories
  September 30,
    
    
    March 31,2008
    
    
    2008Finished products
    
    $
    41,100
    
    
    $
    23,545Consigned inventory
    
    
    2,097
    
    
    
    2,569Raw materials
    
    
    6,435
    
    
    
    6,540Total
    
    $
    49,632
    
    
    $
    32,654
  Note 10  License Fees
  September 30,
    
    
    March 31,2008
    
    
    2008License fees
    
    $
    44,682
    
    
    $
    40,110Less: accumulated amortization
    
    
    18,104
    
    
    
    19,595Total
    
    $
    26,578
    
    
    $
    20,515
   SOP 00-2
 12




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##### Table of Contents



Note 11  Production Costs
  September 30,
    
    
    March 31,2008
    
    
    2008Production costs
    
    $
    18,280
    
    
    $
    14,755Less: accumulated amortization
    
    
    9,064
    
    
    
    7,439Total
    
    $
    9,216
    
    
    $
    7,316
  Accounting by Producers or Distributors of Films
  Note 12  Property and Equipment
  September 30,
    
    
    March 31,2008
    
    
    2008Furniture and fixtures
    
    $
    1,342
    
    
    $
    1,332Computer and office equipment
    
    
    18,571
    
    
    
    14,944Warehouse equipment
    
    
    9,604
    
    
    
    9,564Production equipment
    
    
    1,272
    
    
    
    917Leasehold improvements
    
    
    2,080
    
    
    
    2,060Construction in progress
    
    
    600
    
    
    
    2,848Total
    
    
    33,469
    
    
    
    31,665Less: accumulated depreciation and amortization
    
    
    15,520
    
    
    
    14,484Net property and equipment
    
    $
    17,949
    
    
    $
    17,181
 Note 13  Assets Held for Sale
  Note 14  Goodwill and Intangible Assets
 Goodwill
  13




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##### Table of Contents



Publishing
    
    
    Distribution
    
    
    TotalBalance at March 31, 2008
    
    $
    81,697
    
    
    $
    3
    
    
    $
    81,697Impairment charge
    
    
    73,412
    
    
    
    
    
    
    
    73,412Balance at September 30, 2008
    
    $
    8,285
    
    
    $
    
    
    
    $
    8,285
 Intangible assets
  As of September 30, 2008Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters
    
    $
    9,861
    
    
    $
    7,621
    
    
    $
    2,240License relationships
    
    
    20,078
    
    
    
    15,981
    
    
    
    4,097Domain name
    
    
    70
    
    
    
    23
    
    
    
    47Trademarks (not amortized)
    
    
    1,568
    
    
    
    
    
    
    
    1,568$
    31,577
    
    
    $
    23,625
    
    
    $
    7,952
 14




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##### Table of Contents



As of March 31, 2008Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters
    
    $
    9,448
    
    
    $
    6,550
    
    
    $
    2,898License relationships
    
    
    20,078
    
    
    
    14,612
    
    
    
    5,466Domain name
    
    
    70
    
    
    
    18
    
    
    
    52Other (not amortized)
    
    
    1,568
    
    
    
    
    
    
    
    1,568$
    31,164
    
    
    $
    21,180
    
    
    $
    9,984
   Remainder of fiscal 2009
    
    $
    2,4282010
    
    
    2,6382011
    
    
    7542012
    
    
    2642013
    
    
    303Thereafter
    
    
    
 Debt issuance costs
  Note 15  Accrued Expenses
  September 30,
    
    
    March 31,2008
    
    
    2008Compensation and benefits
    
    $
    4,208
    
    
    $
    3,818Royalties
    
    
    7,545
    
    
    
    7,830Rebates
    
    
    1,958
    
    
    
    1,955Deferred revenue
    
    
    738
    
    
    
    121Interest
    
    
    215
    
    
    
    495Other
    
    
    1,531
    
    
    
    1,899Total
    
    $
    16,195
    
    
    $
    16,118
 Note 16  Bank Financing and Debt
   15




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##### Table of Contents



Letters of Credit
  Note 17  Private Placement Warrants
  16




---



##### Table of Contents



Note 18  Income Taxes
 Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109
       Note 19  License and Distribution Agreement
  17




---



##### Table of Contents



Note 20  Commitments and Contingencies
 Litigation and Proceedings
  SEC Investigation
  Note 21  Related Party Transactions
 Employment/Severance Agreements
   Employment Agreement  FUNimation
  18




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##### Table of Contents



Note 22  Business Segments
   Publishing
    
    Distribution
    
    Eliminations
    
    ConsolidatedThree months ended September 30, 2008Net sales
    
    $
    28,794
    
    
    $
    158,458
    
    
    $
    (16,956
    )
    
    $
    170,296Income (loss) from operations *
    
    
    (70,305
    )
    
    
    114
    
    
    
    
    
    
    
    (70,191
    )Income (loss) from continuing operations, before income tax *
    
    
    (71,404
    )
    
    
    171
    
    
    
    
    
    
    
    (71,233
    )Depreciation and amortization expense
    
    
    1,399
    
    
    
    977
    
    
    
    
    
    
    
    2,376Capital expenditures
    
    
    149
    
    
    
    427
    
    
    
    
    
    
    
    576Total assets *
    
    $
    91,149
    
    
    $
    175,931
    
    
    $
    1,725
    
    
    $
    268,805
 Publishing
    
    Distribution
    
    Eliminations
    
    ConsolidatedThree months ended September 30, 2007Net sales
    
    $
    27,043
    
    
    $
    133,391
    
    
    $
    (16,719
    )
    
    $
    143,715Income from operations
    
    
    1,248
    
    
    
    377
    
    
    
    
    
    
    
    1,625Income from continuing operations, before income tax
    
    
    177
    
    
    
    247
    
    
    
    
    
    
    
    424Depreciation and amortization expense
    
    
    1,579
    
    
    
    744
    
    
    
    
    
    
    
    2,323Capital expenditures
    
    
    158
    
    
    
    1,633
    
    
    
    
    
    
    
    1,791Total assets
    
    $
    174,921
    
    
    $
    264,362
    
    
    $
    (126,485
    )
    
    $
    312,798
 Publishing
    
    Distribution
    
    Eliminations
    
    ConsolidatedSix months ended September 30, 2008Net sales
    
    $
    56,212
    
    
    $
    291,553
    
    
    $
    (35,444
    )
    
    $
    312,321Income (loss) from operations *
    
    
    (66,861
    )
    
    
    (577
    )
    
    
    
    
    
    
    (67,438
    )Income (loss) from continuing operations, before income tax *
    
    
    (68,973
    )
    
    
    (1,205
    )
    
    
    
    
    
    
    (70,178
    )Depreciation and amortization expense
    
    
    2,785
    
    
    
    1,912
    
    
    
    
    
    
    
    4,697Capital expenditures
    
    
    391
    
    
    
    2,629
    
    
    
    
    
    
    
    3,020Total assets *
    
    $
    91,149
    
    
    $
    175,931
    
    
    $
    1,725
    
    
    $
    268,805
 Publishing
    
    Distribution
    
    Eliminations
    
    ConsolidatedSix months ended September 30, 2007Net sales
    
    $
    56,666
    
    
    $
    257,281
    
    
    $
    (33,210
    )
    
    $
    280,737Income from operations
    
    
    4,277
    
    
    
    1,951
    
    
    
    
    
    
    
    6,228Income from continuing operations, before income tax
    
    
    2,153
    
    
    
    1,491
    
    
    
    
    
    
    
    3,644Depreciation and amortization expense
    
    
    3,113
    
    
    
    1,428
    
    
    
    
    
    
    
    4,541Capital expenditures
    
    
    266
    
    
    
    4,330
    
    
    
    
    
    
    
    4,596Total assets
    
    $
    174,921
    
    
    $
    264,362
    
    
    $
    (126,485
    )
    
    $
    312,798
 
 *
    
    Includes a goodwill impairment charge during the second quarter of fiscal 2009 of $73.4
million. See Note 14. Note 23  Subsequent Event
  19




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Executive Summary
     Goodwill
  Goodwill and Other Intangible Assets
   Discontinued Operations
     20




---



##### Table of Contents



Working Capital and Debt
       Overview
   21




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##### Table of Contents



Forward-Looking Statements / Important Risk Factors
    22




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##### Table of Contents



Critical Accounting Policies
  Goodwill and Other Intangible
Assets
 Reconciliation of GAAP Net Sales to Net Sales Before Inter-Company Eliminations
   Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,(Unaudited)
    
    
    (Unaudited)(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales:Publishing
    
    $
    28,794
    
    
    $
    27,043
    
    
    $
    56,212
    
    
    $
    56,666Distribution
    
    
    158,458
    
    
    
    133,391
    
    
    
    291,553
    
    
    
    257,281Net sales before inter-company eliminations
    
    
    187,252
    
    
    
    160,434
    
    
    
    347,765
    
    
    
    313,947Inter-company sales
    
    
    (16,956
    )
    
    
    (16,719
    )
    
    
    (35,444
    )
    
    
    (33,210
    )Net sales as reported
    
    $
    170,296
    
    
    $
    143,715
    
    
    $
    312,321
    
    
    $
    280,737
 23




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,(Unaudited)
    
    (Unaudited)2008
    
    2007
    
    2008
    
    2007Net sales:Publishing
    
    
    16.9
    %
    
    
    18.8
    %
    
    
    18.0
    %
    
    
    20.2
    %Distribution
    
    
    93.1
    
    
    
    92.8
    
    
    
    93.4
    
    
    
    91.6Inter-company sales
    
    
    (10.0
    )
    
    
    (11.6
    )
    
    
    (11.4
    )
    
    
    (11.8
    )Total net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales, exclusive of amortization and depreciation
    
    
    85.8
    
    
    
    84.6
    
    
    
    85.2
    
    
    
    83.6Gross profit
    
    
    14.2
    
    
    
    15.4
    
    
    
    14.8
    
    
    
    16.4Operating expensesSelling and marketing
    
    
    4.2
    
    
    
    4.7
    
    
    
    4.1
    
    
    
    4.9Distribution and warehousing
    
    
    1.8
    
    
    
    2.4
    
    
    
    1.9
    
    
    
    2.2General and administrative
    
    
    4.8
    
    
    
    5.6
    
    
    
    5.3
    
    
    
    5.5Bad debt expense
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    
    Depreciation and amortization
    
    
    1.4
    
    
    
    1.6
    
    
    
    1.5
    
    
    
    1.6Goodwill impairment
    
    
    43.1
    
    
    
    
    
    
    
    23.5
    
    
    
    Total operating expenses
    
    
    55.4
    
    
    
    14.3
    
    
    
    36.4
    
    
    
    14.2Income (loss) from operations
    
    
    (41.2
    )
    
    
    1.1
    
    
    
    (21.6
    )
    
    
    2.2Interest expense
    
    
    (0.5
    )
    
    
    (1.0
    )
    
    
    (0.8
    )
    
    
    (1.1
    )Other income (expense), net
    
    
    (0.1
    )
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    0.1Income (loss) from continuing operations  before taxes
    
    
    (41.8
    )
    
    
    0.2
    
    
    
    (22.5
    )
    
    
    1.2Income tax benefit (expense)
    
    
    15.7
    
    
    
    (0.1
    )
    
    
    8.4
    
    
    
    (0.4
    )Net income (loss) from continuing operations
    
    
    (26.1
    )
    
    
    0.1
    
    
    
    (14.1
    )
    
    
    0.8Discontinued operations, net of taxGain on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.7Income (loss) from discontinued operations
    
    
    
    
    
    
    (0.4
    )
    
    
    
    
    
    
    (0.7
    )Net income (loss)
    
    
    (26.1
    )%
    
    
    (0.3
    )%
    
    
    (14.1
    )%
    
    
    1.8
    %
 24




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##### Table of Contents



Publishing Segment
  Fiscal 2009 Second Quarter Results Compared With Fiscal 2008 Second Quarter
 Net Sales
  Gross Profit
  Operating Expenses
      Operating Income (Loss)
  Fiscal 2009 Six Months Results Compared With Fiscal 2008 Six Months
 Net Sales
  25




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##### Table of Contents



Gross Profit
  Operating Expenses
      Operating Income (Loss)
  Distribution Segment
  Fiscal 2009 Second Quarter Results Compared With Fiscal 2008 Second Quarter
 Net Sales
  Gross Profit
  26




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##### Table of Contents



Operating Expenses
       Operating Income
  Fiscal 2009 Six Months Results Compared With Fiscal 2008 Six Months
 Net Sales
  Gross Profit
  27




---



##### Table of Contents



Operating Expenses
       Operating Income (Loss)
  Consolidated Other Income and Expense
  Consolidated Income Tax Benefit (Expense) from Continuing Operations
   28




---



##### Table of Contents



Consolidated Net Income (Loss) from Continuing Operations
  Discontinued Operations
  Consolidated Net Income (Loss)
  Market Risk
    Seasonality and Inflation
  Liquidity and Capital Resources
 Operating Activities
  29




---



##### Table of Contents



Investing Activities
  Financing Activities
  Discontinued Operations
  Capital Resources
    30




---



##### Table of Contents



Liquidity
    Contractual Obligations
  Less
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    2  3
    
    
    4  5
    
    
    than 5Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases
    
    $
    25,598
    
    
    $
    1,353
    
    
    $
    5,354
    
    
    $
    5,102
    
    
    $
    13,789Capital leases
    
    
    281
    
    
    
    50
    
    
    
    161
    
    
    
    70
    
    
    
    License and distribution agreements
    
    
    18,759
    
    
    
    6,655
    
    
    
    9,354
    
    
    
    2,750
    
    
    
    Deferred compensation
    
    
    3,867
    
    
    
    1,718
    
    
    
    2,149
    
    
    
    
    
    
    
    Total
    
    $
    48,505
    
    
    $
    9,776
    
    
    $
    17,018
    
    
    $
    7,922
    
    
    $
    13,789
  31




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##### 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 1A. Risk Factors
   An impairment in the carrying value of goodwill or other assets could negatively affect our
consolidated results of operations and net worth.
  32




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##### Table of Contents



An increase in bankruptcies of significant customers, due to weak economic conditions, could harm
our business.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities
  33




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Securities Holders
   Names
    
    Votes For
    
    Votes WithheldEric H. Paulson
    
    
    27,892,349
    
    
    
    4,125,651Cary L. Deacon
    
    
    28,088,144
    
    
    
    3,929,856Kathleen P. Iverson
    
    
    28,194,774
    
    
    
    3,823,226
  
 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)
 34




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##### Table of Contents



SIGNATURES
  Navarre Corporation
(Registrant)Date: November 10, 2008
    /s/ Cary L. DeaconCary L. DeaconPresident and Chief Executive Officer (Principal Executive Officer)Date: November 10, 2008
    /s/ J. Reid PorterJ. Reid PorterExecutive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 35