##### 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, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 for the transition period from  to
 Commission File Number 0-22982
 NAVARRE CORPORATION
  Minnesota
    
    41-1704319(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)
 7400 49th Avenue North, New Hope, MN 55428
 (763) 535-8333
  Title of Each Class
Common Stock, No Par Value
    
    Name of Each Exchange of Which Registered
The Nasdaq Stock Market LLC
 
 þ o
  o þ o
 o þ
  Class
    
    Outstanding at August 4, 2006Common Stock, No Par Value
    
    35,667,695 shares




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##### 



NAVARRE CORPORATION
 Index
  
 PART I. FINANCIAL INFORMATION
    
    
    3Item 1. Consolidated Financial Statements. (Unaudited)
    
    
    3Consolidated Balance Sheets  June 30, 2006 and March 31, 2006
    
    
    3Consolidated Statements of Operations  Three Months ended June 30, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows  Three Months ended June 30, 2006 and 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 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
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    33SIGNATURES
    
    
    34Certification 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)
 June 30, 2006
    
    
    March 31, 2006(Unaudited)
    
    
    (Note)Assets:Current assets:Cash and cash equivalents
    
    $
    6,170
    
    
    $
    14,296Note receivable, related parties
    
    
    150
    
    
    
    200Accounts receivable, less allowances of $18,808 and $19,345, respectively
    
    
    83,206
    
    
    
    87,653Inventories
    
    
    47,794
    
    
    
    43,624Prepaid expenses and other current assets
    
    
    15,622
    
    
    
    11,273Income taxes receivable
    
    
    3,840
    
    
    
    4,408Deferred tax assets  current
    
    
    8,911
    
    
    
    8,830Total current assets
    
    
    165,693
    
    
    
    170,284Property and equipment, net of accumulated depreciation of $9,051 and $8,349, respectively
    
    
    10,065
    
    
    
    10,298Other assets:Goodwill
    
    
    81,627
    
    
    
    81,202Intangible assets, net of amortization of $10,180 and $8,258, respectively
    
    
    19,318
    
    
    
    20,863License fees, net of amortization of $6,703 and $5,334, respectively
    
    
    14,141
    
    
    
    13,347Interest rate swap
    
    
    213
    
    
    
    37Other assets
    
    
    13,375
    
    
    
    13,583Total assets
    
    $
    304,432
    
    
    $
    309,614Liabilities and shareholders equity:Current liabilities:Note payable  short-term
    
    $
    5,000
    
    
    $
    5,000Capital lease obligation  short-term
    
    
    112
    
    
    
    115Accounts payable
    
    
    96,088
    
    
    
    97,923Warrant liability
    
    
    2,659
    
    
    
    2,236Accrued expenses
    
    
    13,102
    
    
    
    16,646Total current liabilities
    
    
    116,961
    
    
    
    121,920Long-term liabilities:Note payable  long-term
    
    
    73,880
    
    
    
    75,130Capital lease obligation  long-term
    
    
    197
    
    
    
    222Deferred compensation
    
    
    5,344
    
    
    
    5,272Deferred tax liabilities  non-current
    
    
    776
    
    
    
    770Other long-term liabilities
    
    
    760
    
    
    
    760Total liabilities
    
    
    197,918
    
    
    
    204,074Commitments and contingencies (Note 21)Temporary-equity  Unregistered common stock, no par value; 5,699,998 issued and
outstanding (Note 18)
    
    
    16,634
    
    
    
    16,634Shareholders equity:Common stock, no par value:Authorized shares  100,000,000 issued and outstanding shares  29,951,497 and
29,911,097, respectively
    
    
    138,522
    
    
    
    138,292Accumulated other comprehensive income
    
    
    133
    
    
    
    23Accumulated deficit
    
    
    (48,775
    )
    
    
    (49,409
    )Total shareholders equity
    
    
    89,880
    
    
    
    88,906Total liabilities and shareholders equity
    
    $
    304,432
    
    
    $
    309,614
 
 Note: The balance sheet at March 31, 2006 has been derived from the audited consolidated financial
statements at that date but does not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for complete consolidated
financial statements.
 See accompanying notes to consolidated financial statements.
 3




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NAVARRE CORPORATION
 
 Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
 Three Months EndedJune 30,2006
    
    
    2005Net sales
    
    $
    146,339
    
    
    $
    141,288Cost of sales (exclusive of depreciation and amortization)
    
    
    121,059
    
    
    
    116,457Gross profit
    
    
    25,280
    
    
    
    24,831Operating expenses:Selling and marketing
    
    
    6,770
    
    
    
    6,591Distribution and warehousing
    
    
    2,460
    
    
    
    2,190General and administrative
    
    
    10,212
    
    
    
    10,050Depreciation and amortization
    
    
    2,624
    
    
    
    1,024Total operating expenses
    
    
    22,066
    
    
    
    19,855Income from operations
    
    
    3,214
    
    
    
    4,976Other income (expense):Interest expense
    
    
    (1,920
    )
    
    
    (2,075
    )Interest income
    
    
    119
    
    
    
    286Warrant expense
    
    
    (424
    )
    
    
    Other income (expense), net
    
    
    76
    
    
    
    304Net income before income tax
    
    
    1,065
    
    
    
    3,491Income tax expense
    
    
    (431
    )
    
    
    (1,585
    )Net income
    
    $
    634
    
    
    $
    1,906Earnings per common share:Basic
    
    $
    .02
    
    
    $
    .07Diluted
    
    $
    .02
    
    
    $
    .06Weighted average shares outstanding:Basic
    
    
    35,650
    
    
    
    28,947Diluted
    
    
    36,176
    
    
    
    30,031
 See accompanying notes to consolidated financial statements.
 4




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NAVARRE CORPORATION
 
 Consolidated Statements of Cash Flows
(unaudited)(in thousands)
 Three Months Ended June 30,2006
    
    
    2005Operating activities:Net income
    
    $
    634
    
    
    $
    1,906Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    2,649
    
    
    
    1,052Amortization and write-off of deferred financing costs
    
    
    149
    
    
    
    335Amortization of license fees
    
    
    1,369
    
    
    
    570Amortization of production costs
    
    
    415
    
    
    
    294Change in deferred revenue
    
    
    878
    
    
    
    (860
    )Share-based compensation expense
    
    
    144
    
    
    
    Deferred compensation expense
    
    
    72
    
    
    
    36Change in fair market value of warrants
    
    
    424
    
    
    
    Write-off of notes receivable
    
    
    50
    
    
    
    50Tax benefit from employee stock option plans
    
    
    6
    
    
    
    40Deferred income taxes
    
    
    (143
    )
    
    
    (502
    )Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    4,303
    
    
    
    (796
    )Inventories
    
    
    (4,170
    )
    
    
    (8,682
    )Prepaid expenses
    
    
    (4,349
    )
    
    
    (2,106
    )Income taxes receivable
    
    
    568
    
    
    
    Other assets
    
    
    592
    
    
    
    (5
    )Production costs
    
    
    (906
    )
    
    
    (294
    )License fees
    
    
    (2,162
    )
    
    
    (767
    )Accounts payable
    
    
    (1,835
    )
    
    
    (650
    )Income taxes payable
    
    
    
    
    
    
    1,857Accrued expenses
    
    
    (4,422
    )
    
    
    (7,478
    )Net cash used in operating activities
    
    
    (5,734
    )
    
    
    (16,000
    )Investing activities:Acquisitions, net of cash acquired
    
    
    
    
    
    
    (98,103
    )Purchases of property and equipment
    
    
    (467
    )
    
    
    (640
    )Purchases of intangible assets
    
    
    (447
    )
    
    
    (83
    )Payment of earn-out related to an acquisition
    
    
    (280
    )
    
    
    (85
    )Net cash used in investing activities
    
    
    (1,194
    )
    
    
    (98,911
    )Financing activities:Repayment of note payable
    
    
    (1,250
    )
    
    
    (15,000
    )Proceeds of note payable
    
    
    
    
    
    
    140,400Debt acquisition costs
    
    
    
    
    
    
    (2,917
    )Repayments of capital lease obligations
    
    
    (27
    )
    
    
    (21
    )Proceeds from exercise of common stock options and warrants
    
    
    79
    
    
    
    220Net cash (used in) provided by financing activities
    
    
    (1,198
    )
    
    
    122,682Net increase (decrease) in cash
    
    
    (8,126
    )
    
    
    7,771Cash at beginning of period
    
    
    14,296
    
    
    
    15,571Cash at end of period
    
    $
    6,170
    
    
    $
    23,342Supplemental cash flow information:Cash paid for:Interest
    
    $
    1,975
    
    
    $
    337Income taxes
    
    
    
    
    
    
    194Supplemental schedule of non-cash investing and financing activities:Reclassification of acquisition costs from other assets to goodwill
    
    $
    
    
    
    $
    1,656Purchase price adjustments affecting: accounts receivable and goodwill
    
    
    145
    
    
    
    Capital lease obligations incurred for the purchase of computer equipment
    
    
    
    
    
    
    39Acquisition:Fair value of assets acquired
    
    $
    
    
    
    $
    125,979Less: Assumed liabilities
    
    
    
    
    
    
    9,593Fair value of stock issued
    
    
    
    
    
    
    14,144Cash acquired
    
    
    
    
    
    
    4,139Acquisition net of cash acquired
    
    $
    
    
    
    $
    98,103
 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
     Segment Reporting
 Disclosure about Segments of an Enterprise and
Related Information
 Revenue Recognition
    6




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Accounting by Producers or Distributors of
Films.
 Recently Issued Accounting Pronouncements
 Share-Based Payment Accounting for Stock-Based
Compensation Accounting for Stock Issued to Employees
 , Accounting for Conditional Asset
Retirement Obligations Accounting for Asset Retirement Obligations
 Accounting Changes and Error Corrections Accounting Changes Reporting Accounting
Changes in Interim Financial Statements
 Accounting for
Uncertainty in Income Taxes  an interpretation of FASB Statement 109
 Note 2  Acquisitions
 FUNimation
 anime
 7




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Purchase Price
 Business Combinations
   Accounts receivable
    
    $
    7,052Inventories
    
    
    315Prepaid expenses and other current assets
    
    
    53Property and equipment
    
    
    2,037License fees
    
    
    7,125Production costs
    
    
    2,608Goodwill
    
    
    71,165License arrangements and other intangibles
    
    
    21,646Current liabilities
    
    
    (9,116
    )Total purchase price, less cash acquired
    
    $
    102,885
   Three Months EndedJune 30, 2005As reported
    
    
    Pro formaNet sales
    
    $
    141,288
    
    
    $
    147,010Net income
    
    
    1,906
    
    
    
    2,152Earnings per common share:Basic
    
    $
    .07
    
    
    $
    .07Diluted
    
    $
    .06
    
    
    $
    .07
 Note 3  Mix & Burn, Inc.
 Variable Interest Entity
 Consolidation of Variable Interest Entities Consolidated
Financial Statements
 8




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Investment
  Note 4  Share-Based Compensation
 Statement of Cash Flows Accounting for
Stock-Based Compensation
 Accounting for Stock-Based Compensation  Transitional
Disclosure
  Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards
 9




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##### Table of Contents



Equity Compensation Plans
    1 3
   Stock Options
  WeightedWeighted
    
    
    averageaverage
    
    
    remaining
    
    
    Aggregateexercise
    
    
    contractual
    
    
    intrinsic2006
    
    

price
    
    

term
    
    

valueOptions outstanding, beginning of period:
    
    
    3,341,100
    
    
    $
    7.17Granted
    
    
    65,000
    
    
    $
    4.17Exercised
    
    
    (40,400
    )
    
    $
    1.97Canceled
    
    
    (70,000
    )
    
    $
    7.62Options outstanding, end of period
    
    
    3,295,700
    
    
    $
    7.17
    
    
    
    5.4
    
    
    $
    3,256Options exercisable
    
    
    2,866,300
    
    
    $
    7.93
    
    
    
    5.6
    
    
    $
    2,010Shares available for future grant
    
    
    1,592,054
 10




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##### Table of Contents



Restricted Stock
   WeightedWeighted
    
    
    averageaverage
    
    
    remaininggrant date
    
    
    contractualShares
    
    

fair
value
    
    

termUnvested, beginning of period:
    
    
    
    
    
    $
    
    
    
    
    Granted
    
    
    81,000
    
    
    $
    4.29
    
    
    
    .70Vested
    
    
    
    
    
    $
    
    
    
    
    Forfeited
    
    
    
    
    
    $
    
    
    
    
    Unvested, end of period
    
    
    81,000
    
    
    $
    4.29
    
    
    
    .70
   Restricted Stock Units
   11




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Valuation and Expense Information Under SFAS 123R
  Three Months EndedJune 30, 2006
    
    June 30, 2005Expected life (in years)
    
    
    5.0
    
    
    
    5.0Expected volatility
    
    
    70
    %
    
    
    70
    %Risk-free interest rate
    
    
    4.88
    %
    
    
    3.94
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Weighted-average fair value of grants
    
    $
    2.56
    
    
    $
    5.03
    Three MonthsEndedJune 30, 2005General and administrative expenses
    
    $
    (144
    )Share-based compensation expense before income taxes
    
    
    (144
    )Tax benefit
    
    
    58Share-based compensation after income taxes
    
    $
    (86
     )Effect on earnings per share:Basic
    
    $
    .00Diluted
    
    $
    .00
 12




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Pro Forma Information Under SFAS 123R for Periods Prior to Fiscal 2007
   Three MonthsEndedJune 30, 2005Net income, as reported
    
    $
    1,906Deduct: Share-based compensation expense determined
under fair value based method for all awards, net of
related taxes
    
    
    (360
    )Pro forma net income
    
    $
    1,546Basic income per share:As reported
    
    $
    .07Pro forma
    
    $
    .05Diluted income per share:As reported
    
    $
    .06Pro forma
    
    $
    .05
 Note 5  Earnings Per Share
   Three Months Ended June 30,2006
    
    
    2005Numerator:Net income
    
    $
    634
    
    
    $
    1,906Denominator:Denominator for basic earnings per shareweighted-average shares
    
    
    35,650
    
    
    
    28,947Equivalent shares from share-based compensation plans
    
    
    526
    
    
    
    1,084Denominator for diluted earnings per share -adjusted weighted-average shares
    
    
    36,176
    
    
    
    30,031Basic income per share
    
    $
    .02
    
    
    $
    .07Dilutive income per share
    
    $
    .02
    
    
    $
    .06
   13




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Note 6  Comprehensive Income
   Three Months Ended June 30,2006
    
    
    2005Net income
    
    $
    634
    
    
    $
    1,906Net unrealized gain on hedge derivatives, net of tax
    
    
    110
    
    
    
    Comprehensive income
    
    $
    744
    
    
    $
    1,906
   June 30,
    
    
    March 31,2006
    
    

2006Unrealized gain from:Hedge derivatives
    
    $
    133
    
    
    $
    23Accumulated other comprehensive income
    
    $
    133
    
    
    $
    23
 Note 7  Shareholders Equity
  Note 8  Accounts Receivable
  June 30,
    
    
    March 31,2006
    
    
    2006Trade receivables
    
    $
    97,929
    
    
    $
    102,722Vendor receivables
    
    
    2,502
    
    
    
    2,623Other receivables
    
    
    1,583
    
    
    
    1,653$
    102,014
    
    
    $
    106,998Less: allowance for doubtful accounts, vendor receivables and sales discounts
    
    
    6,531
    
    
    
    6,544Less: allowance for sales returns, net margin impact
    
    
    12,277
    
    
    
    12,801Total
    
    $
    83,206
    
    
    $
    87,653
 Note 9  Prepaid Expenses and Other Assets
  June 30,
    
    
    March 31,2006
    
    
    2006Prepaid royalties
    
    $
    13,547
    
    
    $
    10,060Other
    
    
    2,075
    
    
    
    1,213Total
    
    $
    15,622
    
    
    $
    11,273
 14




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Note 10  Inventories
  June 30,
    
    
    March 31,2006
    
    
    2006Finished products
    
    $
    37,761
    
    
    $
    34,154Consigned inventory
    
    
    4,330
    
    
    
    4,119Raw materials
    
    
    5,703
    
    
    
    5,351Total
    
    $
    47,794
    
    
    $
    43,624
  Note 11  License Fees
  June 30,
    
    
    March 31,2006
    
    
    2006License fees
    
    $
    20,844
    
    
    $
    18,681Less: accumulated amortization
    
    
    6,703
    
    
    
    5,334$
    14,141
    
    
    $
    13,347
  SOP 00-2
 Note 12  Production Costs
  June 30,
    
    
    March 31,2006
    
    
    2006Production costs
    
    $
    6,559
    
    
    $
    5,653Less: accumulated amortization
    
    
    2,292
    
    
    
    1,877$
    4,267
    
    
    $
    3,776
  SOP 00-2
 15




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Note 13  Property and Equipment
  June 30,
    
    
    March 31,2006
    
    
    2006Land and buildings
    
    $
    1,623
    
    
    $
    1,623Furniture and fixtures
    
    
    1,069
    
    
    
    1,052Computer and office equipment
    
    
    5,651
    
    
    
    5,541Warehouse equipment
    
    
    7,097
    
    
    
    7,062Production equipment
    
    
    358
    
    
    
    257Leasehold improvements
    
    
    1,850
    
    
    
    1,843Construction in progress
    
    
    1,468
    
    
    
    1,269Total
    
    $
    19,116
    
    
    $
    18,647Less: accumulated depreciation and amortization
    
    
    9,051
    
    
    
    8,349Net property and equipment
    
    $
    10,065
    
    
    $
    10,298
 Note 14  Goodwill and Intangible Assets
 Goodwill
   Distribution
    
    Publishing
    
    Other
    
    ConsolidatedBalances as of March 31, 2006
    
    $                
    
    $
    81,202
    
    
    $      
    
    $
    81,202Goodwill adjustment related to an acquisition
    
    
    
    
    145
    
    
    
    
    
    145Earn-out related to an acquisition
    
    
    
    
    280
    
    
    
    
    
    280Balances as of June 30, 2006
    
    $                
    
    $
    81,627
    
    
    $      
    
    $
    81,627
 Intangible assets
  As of June 30, 2006Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters
    
    $
    7,852
    
    
    $
    3,636
    
    
    $
    4,216License relationships
    
    
    20,078
    
    
    
    6,544
    
    
    
    13,534Other (not amortized)
    
    
    1,568
    
    
    
    
    
    
    
    1,568$
    29,498
    
    
    $
    10,180
    
    
    $
    19,318
 As of March 31, 2006Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters
    
    $
    7,475
    
    
    $
    3,213
    
    
    $
    4,262License relationships
    
    
    20,078
    
    
    
    5,045
    
    
    
    15,033Other (not amortized)
    
    
    1,568
    
    
    
    
    
    
    
    1,568$
    29,121
    
    
    $
    8,258
    
    
    $
    20,863
  16




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Remainder of 2007
    
    $
    5,7492008
    
    
    5,0282009
    
    
    4,0252010
    
    
    1,9792011
    
    
    440
 Debt issuance costs
  Note 15  Accrued Expenses
  June 30,
    
    
    March 31,2006
    
    
    2006Compensation and benefits
    
    $
    2,613
    
    
    $
    3,067Royalties
    
    
    3,625
    
    
    
    6,134Rebates
    
    
    1,423
    
    
    
    1,354Interest
    
    
    1,696
    
    
    
    1,751Other
    
    
    3,745
    
    
    
    4,340Total
    
    $
    13,102
    
    
    $
    16,646
 Note 16  Bank Financing and Debt
    17




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June 30,
    
    
    March 31,2006
    
    
    2006Term Loan B sub-facility
    
    $
    78,880
    
    
    $
    80,130Less: current portion
    
    
    5,000
    
    
    
    5,000Total long-term debt
    
    $
    73,880
    
    
    $
    75,130
 Letters of Credit
  Note 17  Derivative Instruments
   Note 18  2006 Private Placement
  18




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##### Table of Contents



Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock
  Note 19  Income Taxes
    Note 20  License and Distribution Agreement
  Note 21  Commitments and Contingencies
 Commitments  Other
  19




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##### Table of Contents



Litigation
  Sybersound Records, Inc. v. BCI Eclipse, LLC, et al.
     Sybersound Records, Inc. v. Navarre Corporation, BCI Eclipse, LLC, et al.
    20




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##### 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.
  21




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##### Table of Contents



Note 22  Related Party Transactions
 Employment/Severance Agreements
  22




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##### Table of Contents



Employment Agreement  FUNimation
  Chief Executive Officer Investment in Mix & Burn
  Note 23  Subsequent Event
 $16.6 million
 23




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##### Table of Contents



Note 24  Business Segments
   Three months ended June 30, 2006
    
    Distribution
    
    Publishing
    
    Other
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    132,751
    
    
    $
    26,038
    
    
    $
    
    
    
    $
    (12,450
    )
    
    $
    146,339Income from operations
    
    
    1,205
    
    
    
    2,009
    
    
    
    
    
    
    
    
    
    
    
    3,214Net income (loss) before income tax
    
    
    (1,003
    )
    
    
    2,068
    
    
    
    
    
    
    
    
    
    
    
    1,065Total assets
    
    $
    262,457
    
    
    $
    162,668
    
    
    $
    
    
    
    $
    (120,693
    )
    
    $
    304,432
 Three months ended June 30, 2005
    
    Distribution
    
    Publishing
    
    Other
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    129,160
    
    
    $
    26,108
    
    
    $
    108
    
    
    $
    (14,088
    )
    
    $
    141,288Income (loss) from operations
    
    
    1,156
    
    
    
    4,307
    
    
    
    (487
    )
    
    
    
    
    
    
    4,976Net income (loss) before income tax
    
    
    (208
    )
    
    
    4,237
    
    
    
    (538
    )
    
    
    
    
    
    
    3,491Total assets
    
    $
    311,632
    
    
    $
    175,371
    
    
    $
    533
    
    
    $
    (147,607
    )
    
    $
    339,929
 24




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Executive Summary
    Overview
    anime
  25




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Forward-Looking Statements / Important Risk Factors
    26




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Critical Accounting Policies
  Share-based Compensation
   Reconciliation of GAAP Net Sales to Net Sales Before Inter-Company Eliminations
  Three Months Ended June 30,(Unaudited)(In thousands)
    
    2006
    
    
    2005Net sales:Distribution
    
    $
    132,751
    
    
    $
    129,160Publishing
    
    
    26,038
    
    
    
    26,108Other
    
    
    
    
    
    
    108Net sales before inter-company eliminations
    
    
    158,789
    
    
    
    155,376Inter-company eliminations
    
    
    (12,450
    )
    
    
    (14,088
    )Net sales as reported
    
    $
    146,339
    
    
    $
    141,288
 27




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##### Table of Contents



Results of Operations
  Three Months Ended June 30,(Unaudited)2006
    
    
    2005Net sales:Distribution
    
    
    90.7
    %
    
    
    91.4
    %Publishing
    
    
    17.8
    
    
    
    18.5Other
    
    
    
    
    
    
    0.1Inter-company sales
    
    
    (8.5
    )
    
    
    (10.0
    )Total net sales
    
    
    100.0
    
    
    
    100.0Cost of sales, exclusive of amortization and depreciation
    
    
    82.7
    
    
    
    82.4Gross profit
    
    
    17.3
    
    
    
    17.6Selling and marketing
    
    
    4.6
    
    
    
    4.7Distribution and warehousing
    
    
    1.7
    
    
    
    1.6General and administrative
    
    
    7.0
    
    
    
    7.1Depreciation and amortization
    
    
    1.8
    
    
    
    0.7Total operating expenses
    
    
    15.1
    
    
    
    14.1Income from operations
    
    
    2.2
    
    
    
    3.5Interest expense
    
    
    (1.3
    )
    
    
    (1.5
    )Interest income
    
    
    0.1
    
    
    
    0.2Warrant expense
    
    
    (0.3
    )
    
    
    Other income (expense), net
    
    
    
    
    
    
    0.2Income tax expense
    
    
    (0.3
    )
    
    
    (1.1
    )Net income (loss)
    
    
    0.4
    %
    
    
    1.3
    %
 Distribution Segment
  Fiscal 2007 First Quarter Results Compared With Fiscal 2006 First Quarter
 Net Sales
  Gross Profit
  28




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##### Table of Contents



Operating Expenses
       Publishing Segment
  Fiscal 2007 First Quarter Results Compared With Fiscal 2006 First Quarter
 Net Sales
 He-Man and the Masters of the Universe Full Metal Alchemist, Dragon Ball Z Desert Punk
 Gross Profit
 anime
 Operating Expenses
  29




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Other Segment
  Fiscal 2007 First Quarter Results Compared With Fiscal 2006 First Quarter
  Consolidated Other Income and Expense
  Consolidated Income Tax (Expense) Benefit
  Consolidated Net Income
  Market Risk
  Seasonality and Inflation
  30




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Liquidity and Capital Resources
 Operating Activities
   Investing Activities
  Financing Activities
     31




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##### Table of Contents



Contractual Obligations
  Lessthan 1
    
    
    1  3
    
    
    4  5
    
    
    More than 5Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases
    
    $
    27,151
    
    
    $
    2,207
    
    
    $
    5,748
    
    
    $
    4,448
    
    
    $
    14,748Capital leases
    
    
    398
    
    
    
    121
    
    
    
    209
    
    
    
    68
    
    
    
    Note payable
    
    
    78,880
    
    
    
    3,750
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    55,130License and
distribution agreements
    
    
    18,131
    
    
    
    14,248
    
    
    
    3,883
    
    
    
    
    
    
    
    Total
    
    $
    124,560
    
    
    $
    20,326
    
    
    $
    19,840
    
    
    $
    14,516
    
    
    $
    69,878
 
 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
  Any material weakness or significant deficiency in our internal controls may adversely affect our
ability to report our financial results on a timely and accurate basis.
  32




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Consolidation of Variable
Interest Entities
 
 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
    
    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)
 33




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##### Table of Contents



SIGNATURES
  Navarre Corporation
(Registrant)Date: August 9, 2006
    /s/ Eric H. PaulsonEric H. PaulsonChairman of the Board and Chief Executive Officer

(Principal Executive Officer) Date: August 9, 2006
    /s/ J. Reid PorterJ. Reid PorterChief Financial Officer
(Principal Financial and Accounting Officer) 34