##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 for the quarterly period ended December 31, 2010
 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 
incorporation or organization)
    
    (IRS Employer
Identification No.)
 7400 49th Avenue North, New Hope, MN 55428
 (763) 535-8333
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ
  Class
    
    Outstanding at February 8, 2011Common Stock, No Par Value
    
    36,575,938 shares




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##### 



NAVARRE CORPORATION
 Index
 PagePART I. FINANCIAL INFORMATION
    
    
    3Item 1. Consolidated Financial Statements.
    
    
    3Consolidated Balance Sheets  December 31, 2010 and March 31, 2010
    
    
    3Consolidated Statements of Operations  Three and Nine Months ended December 31, 2010 and 2009
    
    
    4Consolidated Statements of Cash Flows  Nine Months ended December 31, 2010 and 2009
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    22Item 3. Quantitative and Qualitative Disclosures about Market Risk.
    
    
    35Item 4. Controls and Procedures.
    
    
    36PART II. OTHER INFORMATION
    
    
    36Item 1. Legal Proceedings.
    
    
    36Item 1A. Risk Factors.
    
    
    36Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    36Item 3. Defaults Upon Senior Securities.
    
    
    36Item 4. (Removed and Reserved).
    
    
    36Item 5. Other Information.
    
    
    36Item 6. Exhibits.
    
    
    36SIGNATURES
    
    
    38EX-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)
 December 31,
    
    
    March 31,2010
    
    
    2010(Unaudited)
    
    
    (Note)Assets:Current assets:Marketable securities
    
    $
    
    
    
    $
    2Accounts receivable, less allowances of $8,351 and $8,913, respectively
    
    
    79,330
    
    
    
    61,880Inventories
    
    
    28,469
    
    
    
    21,164Prepaid expenses and other current assets
    
    
    14,008
    
    
    
    13,511Income tax receivable
    
    
    
    
    
    
    94Deferred tax assets  current, net
    
    
    5,254
    
    
    
    7,603Current assets of discontinued operations
    
    
    5,339
    
    
    
    6,071Total current assets
    
    
    132,400
    
    
    
    110,325Property and equipment, net of accumulated depreciation of $22,114 and $19,556, respectively
    
    
    9,758
    
    
    
    11,790Software development costs, net of accumulated amortization of $683 and $324, respectively
    
    
    2,056
    
    
    
    1,723Other assets:Intangible assets, net of accumulated amortization of $349 and $38, respectively
    
    
    2,508
    
    
    
    32Goodwill
    
    
    5,719
    
    
    
    Deferred tax assets  non-current, net
    
    
    11,973
    
    
    
    13,808Other assets
    
    
    3,885
    
    
    
    4,491Non-current assets of discontinued operations
    
    
    30,716
    
    
    
    29,434Total assets
    
    $
    199,015
    
    
    $
    171,603Liabilities and shareholders equity:Current liabilities:Revolving line of credit
    
    $
    12,547
    
    
    $
    6,634Accounts payable
    
    
    92,640
    
    
    
    79,968Checks written in excess of cash balances
    
    
    7,487
    
    
    
    4,816Deferred compensation
    
    
    
    
    
    
    1,333Accrued expenses
    
    
    6,630
    
    
    
    10,977Contingent payment obligation short-term  acquisition (Note 3)
    
    
    526
    
    
    
    Note payable  acquisition (Note 3)
    
    
    1,002
    
    
    
    Other liabilities  short-term
    
    
    62
    
    
    
    51Current liabilities of discontinued operations
    
    
    7,543
    
    
    
    5,760Total current liabilities
    
    
    128,437
    
    
    
    109,539Long-term liabilities:Contingent payment obligation long-term  acquisition (Note 3)
    
    
    422
    
    
    
    Other liabilities  long-term
    
    
    1,266
    
    
    
    1,303Total liabilities
    
    
    130,125
    
    
    
    110,842Commitments and contingencies (Note 12)Shareholders equity:Common stock, no par value:Authorized shares  100,000,000; issued and outstanding shares  36,559,938 at
December 31, 2010 and 36,366,668 at March 31, 2010
    
    
    162,675
    
    
    
    162,015Accumulated deficit
    
    
    (94,103
    )
    
    
    (101,254
    )Accumulated other comprehensive income
    
    
    318
    
    
    
    Total shareholders equity
    
    
    68,890
    
    
    
    60,761Total liabilities and shareholders equity
    
    $
    199,015
    
    
    $
    171,603
 
 Note: The balance sheet at March 31, 2010 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
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Net sales
    
    $
    147,325
    
    
    $
    125,846
    
    
    $
    366,593
    
    
    $
    362,753Cost of sales (exclusive of depreciation and amortization)
    
    
    129,512
    
    
    
    108,621
    
    
    
    317,043
    
    
    
    313,822Gross profit
    
    
    17,813
    
    
    
    17,225
    
    
    
    49,550
    
    
    
    48,931Operating expenses:Selling and marketing
    
    
    5,910
    
    
    
    4,797
    
    
    
    16,071
    
    
    
    13,327Distribution and warehousing
    
    
    2,922
    
    
    
    2,544
    
    
    
    8,080
    
    
    
    7,055General and administrative
    
    
    5,924
    
    
    
    6,099
    
    
    
    16,147
    
    
    
    18,370Depreciation and amortization
    
    
    983
    
    
    
    928
    
    
    
    2,865
    
    
    
    3,177Total operating expenses
    
    
    15,739
    
    
    
    14,368
    
    
    
    43,163
    
    
    
    41,929Income from operations
    
    
    2,074
    
    
    
    2,857
    
    
    
    6,387
    
    
    
    7,002Other income (expense):Interest income (expense), net
    
    
    (506
    )
    
    
    (801
    )
    
    
    (1,357
    )
    
    
    (1,844
    )Other income (expense), net
    
    
    (108
    )
    
    
    70
    
    
    
    (539
    )
    
    
    885Income from continuing operations before income tax
    
    
    1,460
    
    
    
    2,126
    
    
    
    4,491
    
    
    
    6,043Income tax (expense) benefit
    
    
    (393
    )
    
    
    4,185
    
    
    
    (1,764
    )
    
    
    2,967Net income from continuing operations
    
    
    1,067
    
    
    
    6,311
    
    
    
    2,727
    
    
    
    9,010Discontinued operations:Income from discontinued operations, net of tax
    
    
    1,849
    
    
    
    928
    
    
    
    4,424
    
    
    
    4,670Net income
    
    $
    2,916
    
    
    $
    7,239
    
    
    $
    7,151
    
    
    $
    13,680Basic earnings per common share:Continued operations
    
    
    0.03
    
    
    
    0.17
    
    
    
    0.08
    
    
    
    0.25Discontinued operations
    
    
    0.05
    
    
    
    0.03
    
    
    
    0.12
    
    
    
    0.13Net income
    
    $
    0.08
    
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.38Diluted earnings per common share:Continued operations
    
    
    0.03
    
    
    
    0.17
    
    
    
    0.07
    
    
    
    0.24Discontinued operations
    
    
    0.05
    
    
    
    0.03
    
    
    
    0.12
    
    
    
    0.13Net income
    
    $
    0.08
    
    
    $
    0.20
    
    
    $
    0.19
    
    
    $
    0.37Weighted average shares outstanding:Basic
    
    
    36,471
    
    
    
    36,301
    
    
    
    36,405
    
    
    
    36,258Diluted
    
    
    37,008
    
    
    
    36,744
    
    
    
    36,925
    
    
    
    36,617
 See accompanying notes to consolidated financial statements.
 4




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NAVARRE CORPORATION
 
 Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 Nine Months EndedDecember 31,2010
    
    
    2009Operating activities:Net income
    
    $
    7,151
    
    
    $
    13,680Adjustments to reconcile net income to net cash (used in) provided by operating activities:Income from discontinued operations
    
    
    (4,424
    )
    
    
    (4,670
    )Depreciation and amortization
    
    
    2,865
    
    
    
    3,177Amortization of debt acquisition costs
    
    
    447
    
    
    
    352Write-off of debt acquisition costs
    
    
    
    
    
    
    289Amortization of software development costs
    
    
    360
    
    
    
    108Share-based compensation expense
    
    
    786
    
    
    
    781Deferred income taxes
    
    
    4,184
    
    
    
    468Deferred compensation expense
    
    
    
    
    
    
    (606
    )Other
    
    
    182
    
    
    
    161Changes in operating assets and liabilities:Accounts receivable
    
    
    (16,195
    )
    
    
    6,155Inventories
    
    
    (6,394
    )
    
    
    (1,070
    )Prepaid expenses
    
    
    (402
    )
    
    
    (2,605
    )Income taxes receivable
    
    
    94
    
    
    
    3,534Other assets
    
    
    (28
    )
    
    
    177Accounts payable
    
    
    12,212
    
    
    
    (22,982
    )Income taxes payable
    
    
    12
    
    
    
    220Accrued expenses
    
    
    (4,585
    )
    
    
    2,977Net cash (used in) provided by operating activities
    
    
    (3,735
    )
    
    
    146Investing activities:Cash paid for acquisition
    
    
    (8,090
    )
    
    
    Purchases of property and equipment
    
    
    (483
    )
    
    
    (782
    )Investment in software development
    
    
    (693
    )
    
    
    (1,278
    )Other
    
    
    
    
    
    
    8Net cash used in investing activities
    
    
    (9,266
    )
    
    
    (2,052
    )Financing activities:Proceeds from revolving line of credit
    
    
    156,923
    
    
    
    158,851Payments on revolving line of credit
    
    
    (151,010
    )
    
    
    (157,938
    )Payment of deferred compensation
    
    
    (1,333
    )
    
    
    Checks written in excess of cash balances
    
    
    2,757
    
    
    
    1,309Debt acquisition costs
    
    
    
    
    
    
    (1,784
    )Other
    
    
    7
    
    
    
    (29
    )Net cash provided by financing activities
    
    
    7,344
    
    
    
    409Net cash used in continuing operations
    
    
    (5,657
    )
    
    
    (1,497
    )Discontinued operations:Net cash provided by operating activities
    
    
    6,026
    
    
    
    2,021Net cash used in investing activities
    
    
    (362
    )
    
    
    (517
    )Net cash used in financing activities
    
    
    (7
    )
    
    
    (7
    )Net increase (decrease) in cash
    
    
    
    
    
    
    Cash at beginning of period
    
    
    
    
    
    
    Cash at end of period
    
    $
    
    
    
    $
    Supplemental cash flow information:Cash paid for (received from):Interest
    
    $
    1,306
    
    
    $
    1,514Income taxes, net of refunds
    
    
    7
    
    
    
    (4,440
    )Supplemental schedule of non-cash operating activities:Shares received for payment of tax withholding obligations
    
    $
    170
    
    
    $
    127Note payable and contingent payment obligations related to the Punch! purchase price allocation
    
    
    1,950
    
    
    
    Other comprehensive income related to gain on foreign exchange rate translation
    
    
    318
    
    
    
    Other comprehensive income related to gain on marketable securities
    
    
    
    
    
    
    1
 See accompanying notes to consolidated financial statements.
 5




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##### Table of Contents



NAVARRE CORPORATION
 
 Notes to Consolidated Financial Statements
(Unaudited)
 Note 1  Organization and Basis of Presentation
         Basis of Consolidation
  6




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##### Table of Contents



Fair Value of Financial Instruments
  Revenue Recognition
    Entertainment  Films
 Note 2  Discontinued Operations
    7




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Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Net sales
    
    $
    8,918
    
    
    $
    7,451
    
    
    $
    25,627
    
    
    $
    27,261Interest expense
    
    
    109
    
    
    
    199
    
    
    
    328
    
    
    
    469Net income from discontinued operations, before income taxes
    
    
    2,899
    
    
    
    1,469
    
    
    
    6,958
    
    
    
    7,377Income tax expense
    
    
    (1,050
    )
    
    
    (541
    )
    
    
    (2,534
    )
    
    
    (2,707
    )Net income from discontinued operations, net of taxes
    
    $
    1,849
    
    
    $
    928
    
    
    $
    4,424
    
    
    $
    4,670
  December 31,
    
    
    March 31,2010
    
    
    2010Accounts receivable, net
    
    $
    891
    
    
    $
    747Inventory
    
    
    4,387
    
    
    
    5,108Prepaid expenses and other current assets
    
    
    61
    
    
    
    216Current assets of discontinued operations
    
    
    5,339
    
    
    
    6,071Property and equipment, net of accumulated depreciation
    
    
    1,739
    
    
    
    1,516Intangible assets, net of amortization
    
    
    1,365
    
    
    
    1,469License fees, net of amortization
    
    
    16,830
    
    
    
    16,565Production costs, net of amortization
    
    
    10,716
    
    
    
    9,814Other assets
    
    
    66
    
    
    
    70Total assets of discontinued operations
    
    $
    36,055
    
    
    $
    35,505Accounts payable
    
    $
    2,254
    
    
    $
    2,483Accrued expenses and other
    
    
    5,289
    
    
    
    3,277Current liabilities of discontinued operations
    
    $
    7,543
    
    
    $
    5,760
 Note 3  Acquisition
 Punch! Software, LLC
    8




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Consideration:Cash
    
    $
    8,090Note payable
    
    
    1,002Contingent payment obligation  short-term
    
    
    526Contingent payment obligation  long-term
    
    
    422Fair value of total consideration transferred
    
    $
    10,040The Punch! purchase price was allocated as follows:Accounts receivable
    
    $
    1,152Inventory
    
    
    815Prepaid expenses
    
    
    94Property and equipment
    
    
    18Purchased intangibles
    
    
    2,787Goodwill
    
    
    5,719Accounts payable
    
    
    (479
    )Accrued expenses
    
    
    (66
    )$
    10,040
 Consolidated Statements of Operations
 Consolidated Statements of Operations
 Note 4  Marketable Securities
 Fair Value Measurements and Disclosures
    9




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Note 5  Accounts Receivable
  December 31,
    
    
    March 31,2010
    
    
    2010Trade receivables
    
    $
    84,406
    
    
    $
    68,463Vendor receivables
    
    
    2,907
    
    
    
    1,802Other receivables
    
    
    368
    
    
    
    52887,681
    
    
    
    70,793Less: allowance for doubtful accounts and sales discounts
    
    
    3,545
    
    
    
    4,100Less: allowance for sales returns, net margin impact
    
    
    4,806
    
    
    
    4,813Total
    
    $
    79,330
    
    
    $
    61,880
 Note 6  Inventories
  December 31,
    
    
    March 31,2010
    
    
    2010Finished products
    
    $
    24,572
    
    
    $
    18,180Consigned inventory
    
    
    2,023
    
    
    
    1,619Raw materials
    
    
    1,874
    
    
    
    1,365Total
    
    $
    28,469
    
    
    $
    21,164
  Note 7  Prepaid Expenses and Other Current Assets
  December 31,
    
    
    March 31,2010
    
    
    2010Prepaid royalties
    
    $
    12,515
    
    
    $
    12,241Other
    
    
    1,493
    
    
    
    1,270Total
    
    $
    14,008
    
    
    $
    13,511
 Note 8  Property and Equipment
  December 31,
    
    
    March 31,2010
    
    
    2010Furniture and fixtures
    
    $
    1,989
    
    
    $
    1,140Computer and office equipment
    
    
    17,845
    
    
    
    17,500Warehouse equipment
    
    
    10,068
    
    
    
    10,049Leasehold improvements
    
    
    1,942
    
    
    
    1,898Construction in progress
    
    
    28
    
    
    
    759Total
    
    
    31,872
    
    
    
    31,346Less: accumulated depreciation and amortization
    
    
    22,114
    
    
    
    19,556Property and equipment, net
    
    $
    9,758
    
    
    $
    11,790
 10




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Note 9  Capitalized Software Development Costs
 Consolidated Statement of Operations
 December 31,
    
    
    March 31,2010
    
    
    2010Software development costs
    
    $
    2,739
    
    
    $
    2,047Less: accumulated amortization
    
    
    683
    
    
    
    324Software development costs, net
    
    $
    2,056
    
    
    $
    1,723
  Note 10  Goodwill and Intangible Assets
 Goodwill
   Intangible assets
  As of December 31, 2010Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetDeveloped technology *
    
    $
    1,940
    
    
    $
    261
    
    
    $
    1,679Customer relationships *
    
    
    80
    
    
    
    7
    
    
    
    73Customer list *
    
    
    167
    
    
    
    35
    
    
    
    132Domain name
    
    
    70
    
    
    
    46
    
    
    
    24Trademarks (not amortized) *
    
    
    600
    
    
    
    
    
    
    
    600$
    2,857
    
    
    $
    349
    
    
    $
    2,508
 
 *
    
    Intangible assets acquired as part of the Punch! acquisition (see further disclosure in Note
3). 11




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##### Table of Contents



As of March 31, 2010Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetDomain name
    
    $
    70
    
    
    $
    38
    
    
    $
    32
  Remainder of fiscal 2011
    
    $
    1332012
    
    
    5262013
    
    
    4842014
    
    
    386Thereafter
    
    
    379Total
    
    $
    1,908
 Debt issuance costs
  December 31,
    
    
    March 31,2010
    
    
    2010Debt issuance costs
    
    $
    1,790
    
    
    $
    1,790Less: accumulated amortization
    
    
    696
    
    
    
    249Debt issuance costs, net
    
    $
    1,094
    
    
    $
    1,541
 Consolidated Statements of Operations
 Note 11  Accrued Expenses
  December 31,
    
    
    March 31,2010
    
    
    2010Compensation and benefits
    
    $
    2,554
    
    
    $
    6,527Royalties
    
    
    82
    
    
    
    614Rebates
    
    
    1,425
    
    
    
    1,252Rent
    
    
    939
    
    
    
    862Deferred revenue
    
    
    3
    
    
    
    Interest
    
    
    123
    
    
    
    205Other
    
    
    1,504
    
    
    
    1,517Total
    
    $
    6,630
    
    
    $
    10,977
 Note 12  Commitments and Contingencies
 Contingent payment  Punch! acquisition
  12




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Leases
   Remainder of fiscal 2011
    
    $
    6142012
    
    
    2,4472013
    
    
    2,4432014
    
    
    2,0752015
    
    
    2,038Thereafter
    
    
    6,183$
    15,800
 Litigation and Proceedings
  SEC Investigation
  Note 13  Capital Leases
  December 31, 2010
    
    
    March 31, 2010Computer and office equipment
    
    $
    297
    
    
    $
    298Less: accumulated amortization
    
    
    209
    
    
    
    172Property and equipment, net
    
    $
    88
    
    
    $
    126
  13




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##### Table of Contents



Minimum LeaseCommitmentsRemainder of fiscal 2011
    
    $
    152012
    
    
    582013
    
    
    29Total minimum lease payments
    
    $
    102Less: amounts representing interest at rates ranging from 6.9% to 9.4%
    
    
    7Present value of minimum capital lease payments, reflected in the
balance sheet as current and noncurrent capital lease obligations of
$53 and $42, respectively
    
    $
    95
 Note 14  Bank Financing and Debt
      Letter of Credit
  Note 15  Share-Based Compensation
  14




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##### Table of Contents



Stock Options
  WeightedaverageNumber of
    
    
    exerciseoptions
    
    
    priceOptions outstanding, April 1, 2010:
    
    
    3,547,299
    
    
    $
    4.77Granted
    
    
    807,000
    
    
    $
    2.14Exercised
    
    
    (34,669
    )
    
    $
    1.27Canceled
    
    
    (520,965
    )
    
    $
    12.17Options outstanding, December 31, 2010
    
    
    3,798,665
    
    
    $
    3.23Options exercisable, December 31, 2010
    
    
    2,241,345
    
    
    $
    4.17Shares available for future grant, December 31, 2010
    
    
    2,542,410
     Restricted Stock
   Weightedaveragegrant dateShares
    
    
    fair valueUnvested, April 1, 2010:
    
    
    508,486
    
    
    $
    1.47Granted
    
    
    383,500
    
    
    $
    2.26Vested
    
    
    (232,403
    )
    
    $
    1.45Forfeited
    
    
    (20,332
    )
    
    $
    1.77Unvested, December 31, 2010
    
    
    639,251
    
    
    $
    1.95
  15




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##### Table of Contents



Share-Based Compensation Valuation and Expense Information
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Expected life (in years)
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Expected volatility
    
    
    72
    %
    
    
    75
    %
    
    
    72
    %
    
    
    75
    %Risk-free interest rate
    
    
    1.04
    %
    
    
    2.33
    %
    
    
    1.04-2.60
    %
    
    
    1.65-2.93
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
  Consolidated Statements of Operations
 Note 16  Shareholders Equity
   Note 17  Private Placement Warrants
  16




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##### Table of Contents



Note 18  Earnings Per Share
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Numerator:Net income from continuing operations
    
    $
    1,067
    
    
    $
    6,311
    
    
    $
    2,727
    
    
    $
    9,010Income from discontinued operations, net of tax
    
    
    1,849
    
    
    
    928
    
    
    
    4,424
    
    
    
    4,670Net income
    
    $
    2,916
    
    
    $
    7,239
    
    
    $
    7,151
    
    
    $
    13,680Denominator:Denominator for basic earnings per shareweighted-average shares
    
    
    36,471
    
    
    
    36,301
    
    
    
    36,405
    
    
    
    36,258Dilutive securities: Employee stock options, restricted stock and warrants
    
    
    537
    
    
    
    443
    
    
    
    520
    
    
    
    359Denominator for diluted earnings per shareadjusted weighted-average shares
    
    
    37,008
    
    
    
    36,744
    
    
    
    36,925
    
    
    
    36,617Basic earnings per common share:Continuing operations
    
    $
    0.03
    
    
    $
    0.17
    
    
    $
    0.08
    
    
    $
    0.25Discontinued operations
    
    
    0.05
    
    
    
    0.03
    
    
    
    0.12
    
    
    
    0.13Net income
    
    $
    0.08
    
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.38Diluted earnings per common share:Continuing operations
    
    $
    0.03
    
    
    $
    0.17
    
    
    $
    0.07
    
    
    $
    0.24Discontinued operations
    
    
    0.05
    
    
    
    0.03
    
    
    
    0.12
    
    
    
    0.13Net income
    
    $
    0.08
    
    
    $
    0.20
    
    
    $
    0.19
    
    
    $
    0.37
    Note 19  Comprehensive Income
   Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income
    
    $
    2,916
    
    
    $
    7,239
    
    
    $
    7,151
    
    
    $
    13,680Net unrealized (loss) gain on marketable securities
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    1Net unrealized gain on foreign exchange rate translation
    
    
    189
    
    
    
    
    
    
    
    318
    
    
    
    Comprehensive income
    
    $
    3,105
    
    
    $
    7,238
    
    
    $
    7,469
    
    
    $
    13,681
 17




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##### Table of Contents



Note 20  Income Taxes
        18




---



##### Table of Contents



Note 21  Related Party Transactions
 Employment/Severance Agreements
   Employment Agreement  FUNimation
  Note 22  Business Segments
      19




---



##### Table of Contents



Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedThree months ended December 31, 2010Net sales (1)
    
    $
    144,402
    
    
    $
    8,311
    
    
    $
    (5,388
    )
    
    $
    147,325Income from operations
    
    
    802
    
    
    
    1,272
    
    
    
    
    
    
    
    2,074Income from continuing operations, before income tax (2)
    
    
    805
    
    
    
    1,421
    
    
    
    (766
    )
    
    
    1,460Depreciation and amortization expense
    
    
    820
    
    
    
    163
    
    
    
    
    
    
    
    983Capital expenditures
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    48Total assets (3)
    
    
    137,006
    
    
    
    30,532
    
    
    
    (4,578
    )
    
    
    162,960
 Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedThree months ended December 31, 2009Net sales (1)
    
    $
    124,786
    
    
    $
    8,459
    
    
    $
    (7,399
    )
    
    $
    125,846Income from operations
    
    
    1,590
    
    
    
    1,267
    
    
    
    
    
    
    
    2,857Income from continuing operations, before income tax (2)
    
    
    1,347
    
    
    
    1,467
    
    
    
    (688
    )
    
    
    2,126Depreciation and amortization expense
    
    
    861
    
    
    
    67
    
    
    
    
    
    
    
    928Capital expenditures
    
    
    351
    
    
    
    70
    
    
    
    
    
    
    
    421Total assets (3)
    
    
    117,182
    
    
    
    22,281
    
    
    
    (5,219
    )
    
    
    134,244
 Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedNine months ended December 31, 2010Net sales (1)
    
    $
    359,116
    
    
    $
    24,021
    
    
    $
    (16,544
    )
    
    $
    366,593Income from operations
    
    
    2,510
    
    
    
    3,877
    
    
    
    
    
    
    
    6,387Income from continuing operations, before income tax (2)
    
    
    2,516
    
    
    
    4,297
    
    
    
    (2,322
    )
    
    
    4,491Depreciation and amortization expense
    
    
    2,457
    
    
    
    408
    
    
    
    
    
    
    
    2,865Capital expenditures
    
    
    426
    
    
    
    57
    
    
    
    
    
    
    
    483Total assets (3)
    
    
    137,006
    
    
    
    30,532
    
    
    
    (4,578
    )
    
    
    162,960
 Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedNine months ended December 31, 2009Net sales (1)
    
    $
    357,518
    
    
    $
    23,412
    
    
    $
    (18,177
    )
    
    $
    362,753Income from operations
    
    
    3,228
    
    
    
    3,774
    
    
    
    
    
    
    
    7,002Income from continuing operations, before income tax (2)
    
    
    3,663
    
    
    
    4,576
    
    
    
    (2,196
    )
    
    
    6,043Depreciation and amortization expense
    
    
    2,895
    
    
    
    282
    
    
    
    
    
    
    
    3,177Capital expenditures
    
    
    661
    
    
    
    121
    
    
    
    
    
    
    
    782Total assets (3)
    
    
    117,182
    
    
    
    22,281
    
    
    
    (5,219
    )
    
    
    134,244
 
 (1)
    
    Excluded from publishing sales above, are net sales from discontinued operations for the
three and nine months ended December 31, 2010 of $8.9 million and $25.6 million, respectively,
and $7.5 million and $27.3 million, respectively, for the three and nine months ended December
31, 2009.(2)
    
    Eliminations represents the interest expense previously allocated to FUNimation, which, in
accordance with ASC 205-20, is not allowed to be allocated to discontinued operations.(3)
    
    Excluded from total publishing assets above are $36.1 million and $36.3 million in assets of
discontinued operations at December 31, 2010 and 2009, respectively. 20




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##### Table of Contents



Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedThree months ended December 31, 2010Software
    
    $
    112,257
    
    
    $
    8,311
    
    
    $
    (5,388
    )
    
    $
    115,180Home video
    
    
    12,087
    
    
    
    
    
    
    
    
    
    
    
    12,087Video games
    
    
    8,750
    
    
    
    
    
    
    
    
    
    
    
    8,750Consumer electronics and accessories
    
    
    11,308
    
    
    
    
    
    
    
    
    
    
    
    11,308Consolidated
    
    $
    144,402
    
    
    $
    8,311
    
    
    $
    (5,388
    )
    
    $
    147,325
 Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedThree months ended December 31, 2009Software
    
    $
    101,816
    
    
    $
    8,459
    
    
    $
    (7,314
    )
    
    $
    102,961Home video
    
    
    9,280
    
    
    
    
    
    
    
    (85
    )
    
    
    9,195Video games
    
    
    8,610
    
    
    
    
    
    
    
    
    
    
    
    8,610Consumer electronics and accessories
    
    
    5,080
    
    
    
    
    
    
    
    
    
    
    
    5,080Consolidated
    
    $
    124,786
    
    
    $
    8,459
    
    
    $
    (7,399
    )
    
    $
    125,846
 Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedNine months ended December 31, 2010Software
    
    $
    285,054
    
    
    $
    24,021
    
    
    $
    (16,544
    )
    
    $
    292,531Home video
    
    
    31,153
    
    
    
    
    
    
    
    
    
    
    
    31,153Video games
    
    
    20,344
    
    
    
    
    
    
    
    
    
    
    
    20,344Consumer electronics and accessories
    
    
    22,565
    
    
    
    
    
    
    
    
    
    
    
    22,565Consolidated
    
    $
    359,116
    
    
    $
    24,021
    
    
    $
    (16,544
    )
    
    $
    366,593
 Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedNine months ended December 31, 2009Software
    
    $
    294,779
    
    
    $
    23,177
    
    
    $
    (18,419
    )
    
    $
    299,537Home video
    
    
    29,123
    
    
    
    235
    
    
    
    242
    
    
    
    29,600Video games
    
    
    23,724
    
    
    
    
    
    
    
    
    
    
    
    23,724Consumer electronics and accessories
    
    
    9,892
    
    
    
    
    
    
    
    
    
    
    
    9,892Consolidated
    
    $
    357,518
    
    
    $
    23,412
    
    
    $
    (18,177
    )
    
    $
    362,753
 Note 23  Subsequent Events
   21




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Overview
        Executive Summary
 Continuing Operations
     22




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##### Table of Contents



Discontinued Operations
  Dragonball
    23




---



##### Table of Contents



Working Capital and Debt
      Forward-Looking Statements / Risk Factors
   24




---



##### Table of Contents



Critical Accounting Policies
 Managements Discussion and Analysis of Financial Condition
and Results of Operations
 25




---



##### Table of Contents



Reconciliation of GAAP Net Sales to Net Sales Before Inter-Company Eliminations
   Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,(Unaudited)
    
    
    (Unaudited)2010
    
    
    2009
    
    
    2010
    
    
    2009Net sales:Distribution
    
    $
    144,402
    
    
    $
    124,786
    
    
    $
    359,116
    
    
    $
    357,518Publishing
    
    
    8,311
    
    
    
    8,459
    
    
    
    24,021
    
    
    
    23,412Net sales before inter-company eliminations
    
    
    152,713
    
    
    
    133,245
    
    
    
    383,137
    
    
    
    380,930Inter-company sales
    
    
    (5,388
    )
    
    
    (7,399
    )
    
    
    (16,544
    )
    
    
    (18,177
    )Net sales as reported
    
    $
    147,325
    
    
    $
    125,846
    
    
    $
    366,593
    
    
    $
    362,753
 Results of Operations
 Consolidated Statements of Operations
 Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,(Unaudited)
    
    
    (Unaudited)2010
    
    
    2009
    
    
    2010
    
    
    2009Net sales:Distribution
    
    
    98.0
    %
    
    
    99.2
    %
    
    
    98.0
    %
    
    
    98.6
    %Publishing
    
    
    5.7
    
    
    
    6.7
    
    
    
    6.5
    
    
    
    6.4Inter-company sales
    
    
    (3.7
    )
    
    
    (5.9
    )
    
    
    (4.5
    )
    
    
    (5.0
    )Total net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales (exclusive of depreciation and amortization)
    
    
    87.9
    
    
    
    86.3
    
    
    
    86.5
    
    
    
    86.5Gross profit
    
    
    12.1
    
    
    
    13.7
    
    
    
    13.5
    
    
    
    13.5Operating expensesSelling and marketing
    
    
    4.0
    
    
    
    3.8
    
    
    
    4.4
    
    
    
    3.7Distribution and warehousing
    
    
    2.0
    
    
    
    2.0
    
    
    
    2.1
    
    
    
    1.9General and administrative
    
    
    4.0
    
    
    
    4.9
    
    
    
    4.5
    
    
    
    5.1Depreciation and amortization
    
    
    0.7
    
    
    
    0.8
    
    
    
    0.8
    
    
    
    0.9Total operating expenses
    
    
    10.7
    
    
    
    11.5
    
    
    
    11.8
    
    
    
    11.6Income from operations
    
    
    1.4
    
    
    
    2.2
    
    
    
    1.7
    
    
    
    1.9Interest income (expense), net
    
    
    (0.3
    )
    
    
    (0.6
    )
    
    
    (0.4
    )
    
    
    (0.5
    )Other income (expense), net
    
    
    (0.1
    )
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    0.3Income from continuing operations before income tax
    
    
    1.0
    
    
    
    1.7
    
    
    
    1.2
    
    
    
    1.7Income tax (expense) benefit
    
    
    (0.3
    )
    
    
    3.3
    
    
    
    (0.5
    )
    
    
    0.8Net income from continuing operations
    
    
    0.7
    
    
    
    5.0
    
    
    
    0.7
    
    
    
    2.5Discontinued operations:Income from discontinued operations, net of tax
    
    
    1.3
    
    
    
    0.8
    
    
    
    1.2
    
    
    
    1.3Net income
    
    
    2.0
    %
    
    
    5.8
    %
    
    
    1.9
    %
    
    
    3.8
    %
 26




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##### Table of Contents



Distribution Segment
  Fiscal 2011 Third Quarter Results from Continuing Operations Compared To Fiscal 2010 Third Quarter
 Net Sales (before inter-company eliminations)
  Gross Profit
  Operating Expenses
      27




---



##### Table of Contents



Operating Income
  Fiscal 2011 Nine Months Results from Continuing Operations Compared With Fiscal 2010 Nine Months
 Net Sales (before inter-company eliminations)
  Gross Profit
  Operating Expenses
     28




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##### Table of Contents



Operating Income
  Publishing Segment
    Fiscal 2011 Third Quarter Results from Continuing Operations Compared To Fiscal 2010 Third Quarter
 Net Sales (before inter-company eliminations)
  Gross Profit
  Operating Expenses
    29




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##### Table of Contents



Operating Income
  Fiscal 2011 Nine Months Results from Continuing Operations Compared With Fiscal 2010 Nine Months
 Net Sales (before inter-company eliminations)
  Gross Profit
  Operating Expenses
     30




---



##### Table of Contents



Operating Income
  Consolidated Other Income and Expense
   Consolidated Income Tax Expense from Continuing Operations
    Consolidated Net Income from Continuing Operations
  31




---



##### Table of Contents



Discontinued Operations
  Dragonball
  Consolidated Net Income
  Market Risk
      32




---



##### Table of Contents



Seasonality and Inflation
  Liquidity and Capital Resources
 Cash Flow Analysis
 Operating Activities
    Investing Activities
     Financing Activities
  33




---



##### Table of Contents



Capital Resources
     Liquidity
  34




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##### Table of Contents



Contractual Obligations
  Less
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1  3
    
    
    3  5
    
    
    than 5Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases (1)
    
    $
    16,722
    
    
    $
    590
    
    
    $
    4,964
    
    
    $
    4,305
    
    
    $
    6,863Capital leases (2)
    
    
    102
    
    
    
    15
    
    
    
    87
    
    
    
    
    
    
    
    Contingent payment  acquisition (3)
    
    
    948
    
    
    
    
    
    
    
    948
    
    
    
    
    
    
    
    Note payable  acquisition (3)
    
    
    1,002
    
    
    
    
    
    
    
    1,002
    
    
    
    
    
    
    
    License and distribution agreements
    
    
    2,770
    
    
    
    485
    
    
    
    1,690
    
    
    
    595
    
    
    
    Contractual obligations of discontinued operations
    
    
    11,749
    
    
    
    2,961
    
    
    
    5,849
    
    
    
    1,288
    
    
    
    1,651Total
    
    $
    33,293
    
    
    $
    4,051
    
    
    $
    14,540
    
    
    $
    6,188
    
    
    $
    8,514
 
 (1)
    
    See further disclosure in Note 12 to our consolidated financial statements.(2)
    
    See further disclosure in Note 13 to our consolidated financial statements.(3)
    
    See further disclosure in Note 3 to our consolidated financial statements.  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
 Managements Discussion and Analysis of Financial Condition and Results of Operations  Market
Risk
 35




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##### Table of Contents



Item 4. Controls and Procedures.
      
 Part II. OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
 Managements Discussion and Analysis of
Financial Condition and Results of Operations  Forward-Looking Statements / Risk Factors
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. (Removed and Reserved).
 
 Item 5. Other Information.
  
 Item 6. Exhibits.
  36




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##### Table of Contents



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)
 37




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##### Table of Contents



SIGNATURES
  Navarre Corporation
(Registrant)Date: February 9, 2011
    /s/ Cary L. DeaconCary L. DeaconPresident and Chief Executive Officer
(Principal Executive Officer)Date: February 9, 2011
    /s/ J. Reid PorterJ. Reid PorterChief Operating Officer and Chief Financial Officer
(Principal Financial and Accounting Officer) 38