##### 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, 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
49 th 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
 
 þ o
 þ o




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NAVARRE CORPORATION
 Index
  
 PART I. FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements. (Unaudited)Consolidated
Balance Sheets  June 30, 2005 and March 31, 2005
    
    Page 3Consolidated
Statements of Operations  Three months ended June 30, 2005 and 2004
    
    Page 4Consolidated
Statements of Cash Flows  Three months ended June 30, 2005 and 2004
    
    Page 5Notes to Consolidated Financial Statements
    
    Page 6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    Page 20Item 3. Quantitative and Qualitative Disclosures about Market Risk.
    
    Page 28Item 4. Controls and Procedures.
    
    Page 28PART II. OTHER INFORMATIONItem 1. Legal Proceedings.
    
    Page 29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    
    Page 32Item 3. Defaults Upon Senior Securities.
    
    Page 32Item 4. Submission of Matters to a Vote of Securities Holders.
    
    Page 32Item 5. Other Information
    
    Page 32Item 6. Exhibits
    
    Page 32SIGNATURES
    
    Page 33Certification of CEO Pursuant to Section 302Certification of Interim CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of Interim 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, 2005
    
    March 31, 2005(Unaudited)
    
    (Note)AssetsCurrent assets:Cash and cash equivalents
    
    $
    23,332
    
    
    $
    15,519Note receivable, related parties
    
    
    2,834
    
    
    
    2,700Accounts receivable, less allowances of $23,650 and $13,815, respectively
    
    
    103,000
    
    
    
    94,003Inventories
    
    
    52,804
    
    
    
    40,593Prepaid expenses and other current assets
    
    
    12,186
    
    
    
    10,028Deferred tax assets
    
    
    7,593
    
    
    
    7,250Total current assets
    
    
    201,749
    
    
    
    170,093Property and equipment, net of accumulated depreciation of $7,874 and $7,247,
respectively
    
    
    10,194
    
    
    
    8,081Other assets:Notes receivable, related parties
    
    
    150
    
    
    
    200Goodwill
    
    
    95,044
    
    
    
    9,832Intangible assets, net of amortization of $2,764 and $2,369, respectively
    
    
    4,856
    
    
    
    5,174License
fees, net of amortization of $570 at June 30, 2005
    
    
    20,779
    
    
    
    Other assets
    
    
    9,109
    
    
    
    4,422Total assets
    
    $
    341,881
    
    
    $
    197,802Liabilities and shareholders equityCurrent liabilities:Note payable  short term
    
    $
    5,000
    
    
    $
    Capital lease obligation  short term
    
    
    68
    
    
    
    84Accounts payable
    
    
    98,525
    
    
    
    96,146Income taxes payable
    
    
    1,865
    
    
    
    8Accrued expenses
    
    
    12,799
    
    
    
    14,664Total current liabilities
    
    
    118,257
    
    
    
    110,902Long-term liabilities:Note payable  long-term
    
    
    120,000
    
    
    
    Capital lease obligation  long-term
    
    
    271
    
    
    
    237Deferred compensation
    
    
    4,000
    
    
    
    4,000Deferred tax liabilities
    
    
    1,798
    
    
    
    1,957Total liabilities
    
    
    244,326
    
    
    
    117,096Commitments
and contingencies (Note 19)Shareholders equity:Common stock, no par value:Authorized shares  100,000,000Issued and outstanding shares  29,791,966 and 27,896,080, respectively
    
    
    137,850
    
    
    
    123,445Accumulated deficit
    
    
    (40,295
    )
    
    
    (42,739
    )Total shareholders equity
    
    
    97,555
    
    
    
    80,706Total liabilities and shareholders equity
    
    $
    341,881
    
    
    $
    197,802
 Note: The balance sheet at March 31, 2005 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 June 30,2005
    
    2004(Restated)Net sales
    
    $
    140,833
    
    
    $
    127,306Cost of sales (exclusive of depreciation and amortization)
    
    
    116,065
    
    
    
    108,428Gross profit
    
    
    24,768
    
    
    
    18,878Operating expenses:Selling and marketing
    
    
    6,591
    
    
    
    4,732Distribution and warehousing
    
    
    2,190
    
    
    
    1,533General and administrative
    
    
    9,542
    
    
    
    9,790Depreciation and amortization
    
    
    1,024
    
    
    
    704Total operating expenses
    
    
    19,347
    
    
    
    16,759Income from operations
    
    
    5,421
    
    
    
    2,119Other income (expense):Interest expense
    
    
    (2,063
    )
    
    
    (41
    )Interest income
    
    
    325
    
    
    
    129Other income (expense), net
    
    
    346
    
    
    
    (8
    )Net income before income tax
    
    
    4,029
    
    
    
    2,199Income tax (expense) benefit
    
    
    (1,585
    )
    
    
    11Net income
    
    $
    2,444
    
    
    $
    2,210Earnings per common share:Basic
    
    $
    .08
    
    
    $
    .08Diluted
    
    $
    .08
    
    
    $
    .08Weighted average shares outstanding:Basic
    
    
    28,947
    
    
    
    26,175Diluted
    
    
    30,031
    
    
    
    28,377
 See accompanying notes to consolidated financial statements.
 4




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##### Table of Contents





NAVARRE CORPORATION





Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)


Three Months Ended June 30,2005
    
    2004(Restated)Operating activities:Net income
    
    $
    2,444
    
    
    $
    2,210Adjustments to reconcile net income to net cash (used in) provided by
operating activities:Depreciation and amortization
    
    
    1,048
    
    
    
    704Amortization and
write-off of deferred financing costs
    
    
    335
    
    
    
    39Deferred compensation expense
    
    
    53
    
    
    
    2,187Write-off of notes receivable
    
    
    50
    
    
    
    50Amortization of license fees
    
    
    570
    
    
    
    Amortization of production costs
    
    
    294
    
    
    
    Change in deferred revenue
    
    
    (856
    )
    
    
    Tax benefit from employee stock option plans
    
    
    40
    
    
    
    Deferred income taxes
    
    
    (502
    )
    
    
    (653
    )Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    (678
    )
    
    
    693Inventories
    
    
    (8,669
    )
    
    
    (11,689
    )Prepaid expenses
    
    
    (2,106
    )
    
    
    157Other assets
    
    
    
    
    
    
    (1,327
    )Production costs
    
    
    (294
    )
    
    
    License fees
    
    
    (767
    )
    
    
    Accounts payable
    
    
    (723
    )
    
    
    1,400Income taxes payable
    
    
    1,857
    
    
    
    514Accrued expenses
    
    
    (7,527
    )
    
    
    107Net cash used in operating activities
    
    
    (15,431
    )
    
    
    (5,608
    )Investing activities:Acquisitions, net of cash acquired
    
    
    (98,103
    )
    
    
    Purchases of property and equipment
    
    
    (639
    )
    
    
    (4,819
    )Net proceeds from sale leaseback
    
    
    
    
    
    
    6,401Purchases of intangible assets
    
    
    (78
    )
    
    
    (171
    )Payment of earn-out related to an acquisition
    
    
    (85
    )
    
    
    Notes receivable, related parties
    
    
    (134
    )
    
    
    (316
    )Net cash (used in) provided by investing activities
    
    
    (99,039
    )
    
    
    1,095Financing activities:Proceeds from note payable, line of credit
    
    
    
    
    
    
    5,022Payments on note payable, line of credit
    
    
    
    
    
    
    (5,022
    )Payment on note payable
    
    
    (15,000
    )
    
    
    (3,465
    )Proceeds from note payable
    
    
    140,000
    
    
    
    2,814Debt acquisition costs
    
    
    (2,917
    )
    
    
    (413
    )Repayments of capital lease obligations
    
    
    (21
    )
    
    
    Proceeds from exercise of common stock options and warrants
    
    
    221
    
    
    
    3,277Net cash provided by financing activities
    
    
    122,283
    
    
    
    2,213Net increase (decrease) in cash
    
    
    7,813
    
    
    
    (2,300
    )Cash at
beginning of period
    
    
    15,519
    
    
    
    14,495Cash at end
of period
    
    $
    23,332
    
    
    $
    12,195Supplemental cash flow information:Cash paid for:Interest
    
    $
    337
    
    
    $
    54Income taxes
    
    
    194
    
    
    
    128Supplemental 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
    
    
    39
    
    
    
    Acquisition:Fair value
of assets acquired
    
    $
    125,979
    
    
    $
    Less:
Liabilities assumed
    
    
    9,593
    
    
    
    Fair value
of stock issued
    
    
    14,144
    
    
    
    Cash acquired
    
    
    4,139
    
    
    
    Acquisition
net of cash acquired
    
    $
    98,103
    
    
    $
    


See accompanying notes to consolidated financial statements.


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




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##### Table of Contents



Note 2  Inventories
  June 30,
    
    March 31,2005
    
    2005Finished products
    
    $
    47,443
    
    
    $
    36,056Raw materials
    
    
    5,361
    
    
    
    4,537$
    52,804
    
    
    $
    40,593
 Note 3  Restatements
     (in thousands, except per share data)
 Year Ended March 31, 2005First
    
    FirstQuarter
    
    Quarter(Reported)
    
    (Restated)Balance Sheet Data:Deferred compensation
    
    $
    
    
    
    $
    3,637Total liabilities
    
    
    92,072
    
    
    
    95,709Total shareholders equity
    
    
    63,418
    
    
    
    59,781Total liabilities and shareholders equity
    
    $
    155,490
    
    
    $
    155,490Statements of Operations Data:General and administrative
    
    $
    7,603
    
    
    $
    9,790Income from operations
    
    
    4,306
    
    
    
    2,119Net income before tax
    
    
    4,386
    
    
    
    2,199Net income
    
    $
    4,397
    
    
    $
    2,210Earnings per common share:Basic
    
    $
    .17
    
    
    $
    .08Diluted
    
    $
    .15
    
    
    $
    .08Statements of Cash Flow DataNet income
    
    $
    4,397
    
    
    $
    2,210Deferred compensation expense
    
    
    
    
    
    
    2,187
 7




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##### Table of Contents



Note 4  Acquisitions
 FUNimation
  Employment Agreement
      Purchase Price
 Business Combinations
  8




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##### Table of Contents



Accounts receivable
    
    $
    8,319Inventories
    
    
    3,542Prepaid expenses and other current assets
    
    
    52Property and equipment
    
    
    2,064License fees
    
    
    20,582Production costs
    
    
    3,810Goodwill
    
    
    85,127Current liabilities
    
    
    (9,593
    )Total purchase price, less cash acquired
    
    $
    113,903
   Three Months Ended June 30, 2005
    
    Three Months Ended June 30, 2004As reported
    
    Pro Forma
    
    As reported
    
    Pro forma(Restated)
    
    (Restated)Net sales
    
    $
    140,833
    
    
    $
    146,555
    
    
    $
    127,306
    
    
    $
    144,651Net income
    
    
    2,444
    
    
    
    2,690
    
    
    
    2,210
    
    
    
    3,859Earnings per common share:Basic
    
    $
    .08
    
    
    $
    .09
    
    
    $
    .08
    
    
    $
    .14Diluted
    
    $
    .08
    
    
    $
    .09
    
    
    $
    .08
    
    
    $
    .13
 Note 5  Stock-Based Compensation
 Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
  Three Months Ended June 30,2005
    
    2004(Restated)Net income, as reported
    
    $
    2,444
    
    
    $
    2,210Deduct: Stock-based compensation
expense determined under fair value
method for all awards, net of tax
    
    
    (360
    )
    
    
    (137
    )Net income, pro forma
    
    $
    2,084
    
    
    $
    2,073Income per share:Basic  as reported
    
    $
    .08
    
    
    $
    .08Basic  pro forma
    
    $
    .07
    
    
    $
    .08Diluted  as reported
    
    $
    .08
    
    
    $
    .08Diluted  pro forma
    
    $
    .07
    
    
    $
    .07
 9




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##### Table of Contents



Note 6  Net Earnings Per Share
   Three Months Ended June 30,2005
    
    2004(Restated)Numerator:Net income
    
    $
    2,444
    
    
    $
    2,210Denominator:Denominator for basic earnings per
shareweighted-average shares
    
    
    28,947
    
    
    
    26,175Dilutive securities: Employee stock
options
And warrants
    
    
    1,084
    
    
    
    2,202Denominator for diluted earnings per share
-adjusted weighted-average shares
    
    
    30,031
    
    
    
    28,377Basic income per share
    
    $
    .08
    
    
    $
    .08Dilutive income per share
    
    $
    .08
    
    
    $
    .08
  Note 7  Shareholders Equity
  Note 8  Accounts Receivable
  June 30, 2005
    
    March 31, 2005Trade receivables
    
    $
    108,511
    
    
    $
    88,120Vendor advance receivables
    
    
    17,244
    
    
    
    16,857Other receivables
    
    
    895
    
    
    
    2,841$
    126,650
    
    
    $
    107,818Less: allowance for doubtful accounts, vendor
advances and sales discounts
    
    
    11,009
    
    
    
    9,625Less: allowance for sales returns, net margin impact
    
    
    12,641
    
    
    
    4,190Total
    
    $
    103,000
    
    
    $
    94,003
 10




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##### Table of Contents



Note 9  License Fees
  June 30, 2005
    
    March 31, 2005License fees
    
    $
    21,349
    
    
    $
    Less: accumulated amortization
    
    
    570
    
    
    
    $
    20,779
    
    
    
    
   Note 10  Production Costs
  June 30, 2005
    
    March 31, 2005Production costs
    
    $
    4,105
    
    
    $
    Less: accumulated amortization
    
    
    294
    
    
    
    $
    3,811
    
    
    
    
    Note 11  Property and Equipment
  June 30, 2005
    
    March 31, 2005Land and buildings
    
    $
    1,623
    
    
    $
    Furniture and fixtures
    
    
    1,146
    
    
    
    1,092Computer and office equipment
    
    
    4,985
    
    
    
    4,400Warehouse equipment
    
    
    7,131
    
    
    
    6,868Leasehold improvements
    
    
    2,936
    
    
    
    2,894Construction in progress
    
    
    247
    
    
    
    74Total
    
    $
    18,068
    
    
    $
    15,328Less: accumulated depreciation and amortization
    
    
    7,874
    
    
    
    7,247Net property and equipment
    
    $
    10,194
    
    
    $
    8,081
 Note 12  Goodwill and Intangible Assets
 Goodwill
   Distribution
    
    Publishing
    
    ConsolidatedBalances as of March 31, 2005
    
    $
    
    
    
    $
    9,832
    
    
    $
    9,832Goodwill resulting from an acquisition
    
    
    
    
    
    
    85,127
    
    
    
    85,127Earn-out
related to an acquisition
    
    
    
    
    
    
    85
    
    
    
    85Balances as of June 30, 2005
    
    $
    
    
    
    $
    95,044
    
    
    $
    95,044
 11




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##### Table of Contents



Intangible assets
  As of June 30, 2005Gross carrying
    
    Accumulatedamount
    
    amortization
    
    NetMasters
    
    $
    6,915
    
    
    $
    2,059
    
    
    $
    4,856Other
    
    
    705
    
    
    
    705
    
    
    
    $
    7,620
    
    
    $
    2,764
    
    
    $
    4,856
 As of March 31, 2005Gross carrying
    
    Accumulatedamount
    
    amortization
    
    NetMasters
    
    $
    6,838
    
    
    $
    1,687
    
    
    $
    5,151Other
    
    
    705
    
    
    
    682
    
    
    
    23$
    7,543
    
    
    $
    2,369
    
    
    $
    5,174
   2006
    
    $
    1,4942007
    
    
    1,3942008
    
    
    1,1582009
    
    
    1,0522010
    
    
    154
 Debt issuance costs
  Note 13  Accrued Expenses
  June 30, 2005
    
    March 31, 2005Compensation and benefits
    
    $
    1,635
    
    
    $
    8,679Royalties
    
    
    6,362
    
    
    
    2,491Accrued interest
    
    
    1,757
    
    
    
    31Deferred revenue
    
    
    1,379
    
    
    
    Rebates
    
    
    805
    
    
    
    1,023Other
    
    
    861
    
    
    
    2,440Total
    
    $
    12,799
    
    
    $
    14,664
 Note 14  Bank Financing and Debt
  12




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##### Table of Contents



June 30, 2005
    
    March 31, 2005Term Loan B sub-facility
    
    $
    100,000
    
    
    $
    Term Loan C sub-facility
    
    
    25,000
    
    
    
    Total debt
    
    
    125,000
    
    
    
    Less: current portion
    
    
    5,000
    
    
    
    Total long-term debt
    
    $
    120,000
    
    
    $
    
  2006
    
    $
    5,0002007
    
    
    5,0002008
    
    
    5,0002009
    
    
    5,0002010
    
    
    5,0002011 and
thereafter
    
    
    100,000Total
    
    $
    125,000
 Note 15  Income Taxes
  13




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##### Table of Contents



Note 16  Sale/Leaseback of Warehouse Facility
   Note 17  License and Distribution Agreement
   Note 18  Business Segments
  Three months ended June 30, 2005
    
    Distribution
    
    Publishing
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    129,754
    
    
    $
    26,108
    
    
    $
    (15,029
    )
    
    $
    140,833Income from operations
    
    
    1,114
    
    
    
    4,307
    
    
    
    
    
    
    
    5,421Net income (loss) before income tax
    
    
    (208
    )
    
    
    4,237
    
    
    
    
    
    
    
    4,029Total assets
    
    $
    311,484

    
    
    $
    175,371
    
    
    $
    (144,974
    )
    
    $
    341,881
 Three months ended June 30, 2004 (Restated)
    
    Distribution
    
    Publishing
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    110,260
    
    
    $
    30,050
    
    
    $
    (13,004
    )
    
    $
    127,306Income (loss) from operations
    
    
    (1,444
    )
    
    
    3,563
    
    
    
    
    
    
    
    2,119Net income (loss) before income tax
    
    
    (1,302
    )
    
    
    3,501
    
    
    
    
    
    
    
    2,199Total assets
    
    $
    149,066
    
    
    $
    43,168
    
    
    $
    (28,505
    )
    
    $
    163,729
 14




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##### Table of Contents



Note 19  Commitments and Contingencies
 Litigation
  ValueVision Media, Inc. v. Navarre Corporation
      Sybersound Records, Inc. v. BCI Eclipse, LLC, et al.
  15




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##### Table of Contents



Sybersound Records, Inc. v. Navarre Corporation, BCI Eclipse, LLC, et al.
    Faulconer Productions Music Corp. v. FUNimation Productions, Inc. et al
     Securities Litigation Lawsuits
  16




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##### Table of Contents



AVIVA Partners, Ltd. v. Navarre Corp., et al.
 Vivian Oh v. Navarre Corp., et al.
 Matthew Grabler v. Navarre Corp., et al.
   Shareholder Derivative Lawsuits
  Shannon Binns v. Charles Cheney, et al.
 Karel Filip v. Charles Cheney, et al.
    Note 20  Related Party Transactions
 Employment/Severance Agreements
  17




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##### Table of Contents



Note 21  Recently Issued Accounting Pronouncements
 ,
Inventory Costs, an amendment of ARB No. 43, Chapter 4
 Share-Based Payment 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
 18




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##### Table of Contents



Note
22  Subsequent Event
  19




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Note: Comparisons to 2004 results refer to restated numbers as discussed in Note 3 of the
consolidated financial statements.
 Executive Summary
  Overview
    anime
 Forward-Looking Statements / Important Risk Factors
   20




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##### Table of Contents



Restatements
    21




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##### Table of Contents



Critical Accounting Policies
  Reconciliation of GAAP Net Sales to Net Sales Before Inter-company Eliminations
  Three Months Ended June 30,(Unaudited)2005
    
    2004(In thousands)
    
    
    
    (Restated)Net sales:Distribution
    
    $
    129,754
    
    
    $
    110,260Publishing
    
    
    26,108
    
    
    
    30,050Net sales before inter-company eliminations
    
    
    155,862
    
    
    
    140,310Inter-company eliminations
    
    
    (15,029
    )
    
    
    (13,004
    )Net sales as reported
    
    $
    140,833
    
    
    $
    127,306
 22




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##### Table of Contents



Results of Operations
  Three Months Ended June 30,2005
    
    2004(Restated)Net sales:Distribution
    
    
    92.1
    %
    
    
    86.6
    %Publishing
    
    
    18.5
    
    
    
    23.6Inter-company sales
    
    
    (10.6
    )
    
    
    (10.2
    )Total net sales
    
    
    100.0
    
    
    
    100.0Cost of sales, exclusive of
amortization and depreciation
    
    
    82.4
    
    
    
    85.2Gross profit
    
    
    17.6
    
    
    
    14.8Selling and marketing
    
    
    4.7
    
    
    
    3.7Distribution and warehousing
    
    
    1.6
    
    
    
    1.2General and administrative
    
    
    6.8
    
    
    
    7.7Depreciation and amortization
    
    
    0.7
    
    
    
    0.6Total operating expenses
    
    
    13.8
    
    
    
    13.2Income from operations
    
    
    3.8
    
    
    
    1.6Interest expense
    
    
    (1.5
    )
    
    
    0.0Other income (expense), net
    
    
    0.5
    
    
    
    0.1Income tax (expense) benefit
    
    
    (1.1
    )
    
    
    Net income
    
    
    1.7
    %
    
    
    1.7
    %
 Distribution Segment
  Fiscal 2005 First Quarter Results Compared With Fiscal 2004 (Restated) First Quarter
 Net Sales
  Gross Profit
  23




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##### Table of Contents



Operating Expenses
       Publishing Segment
  Fiscal 2005 First Quarter Results
Compared With Fiscal 2004 (Restated) First Quarter
 Net Sales
 He-Man and the Masters of the Universe
 Gross Profit
  24




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##### Table of Contents



Operating Expenses
    Consolidated Other Income and Expense
  Consolidated Income Tax (Expense) Benefit
  Market Risk
  Seasonality and Inflation
  Liquidity and Capital Resources
 Cash Flow Analysis
 Operating Activities
   25




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##### Table of Contents



Investing
Activities
     Financing Activities
   Capital Resources
  26




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##### Table of Contents



Liquidity
      27




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##### Table of Contents



Contractual Obligations
  Lessthan 1
    
    1  3
    
    4  5
    
    More than 5Total
    
    Year
    
    Years
    
    Years
    
    YearsOperating leases
    
    $
    22,988
    
    
    $
    2,234
    
    
    $
    3,916
    
    
    $
    3,825
    
    
    $
    13,013Capital leases
    
    
    430
    
    
    
    129
    
    
    
    229
    
    
    
    72
    
    
    
    Note payable
    
    
    125,000
    
    
    
    5,000
    
    
    
    15,000
    
    
    
    10,000
    
    
    
    95,000License and
distribution agreement
    
    
    7,287
    
    
    
    7,287
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    155,705
    
    
    $
    14,650
    
    
    $
    19,145
    
    
    $
    13,897
    
    
    $
    108,013
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
       
    
    The Company has strengthened its controls and procedures as it relates to compensation arrangements
through a comprehensive review of new compensation arrangements and the continued
monitoring of existing compensation arrangements in order to determine appropriate
accounting treatment under U.S. GAAP.
 28




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##### Table of Contents




    
    The Company has strengthened its controls and procedures as it relates
to accounting for income taxes. The
Company has hired a tax manager to manage the process and ensure the controls and
procedures over financial reporting as it relates to income taxes are functioning.
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  ValueVision Media, Inc. v. Navarre Corporation
      29




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##### Table of Contents



Sybersound Records, Inc. v. BCI Eclipse, LLC, et al.
   Sybersound Records, Inc. v. Navarre Corporation, BCI Eclipse, LLC, et al.
    Faulconer Productions Music Corp. v. FUNimation Productions, Inc. et al
    30




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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.
   Shareholder Derivative Lawsuits
  Shannon Binns v. Charles Cheney, et al.
 Karel Filip v. Charles Cheney, et al.
  31




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##### Table of Contents



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 Securities Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 (a)
    
    The following exhibits are included herein:
 31
    (a)
    
    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
    (b)
    
    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
    (a)
    
    Certifications of the Chief Executive Officer pursuant Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).32
    (b)
    
    Certifications of the Chief Financial Officer pursuant Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).
 32




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##### Table of Contents



SIGNATURES
  Navarre Corporation
(Registrant)Date: August 9, 2005
    
    /s/ Eric H. PaulsonEric H. PaulsonChairman of the Board,President andChief Executive OfficerDate: August 9, 2005
    
    /s/ Diane D. LappDiane D. LappInterim Chief Financial Officer
 33