##### 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, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 for the transition period from to
 Commission File Number 0-22982
 NAVARRE CORPORATION
  Minnesota
(State or other jurisdiction of 
incorporation or organization)
    
    41-1704319
(IRS Employer
Identification No.)
 7400 49th Avenue North, New Hope, MN 55428
 (763) 535-8333
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Class
    
    Outstanding at February 6, 2009Common Stock, No Par Value
    
    36,260,116 shares




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##### 



NAVARRE CORPORATION
 Index
 PART I. FINANCIAL INFORMATION
    
    
    3Item 1. Consolidated Financial Statements. (Unaudited)
    
    
    3Consolidated Balance Sheets  December 31, 2008 and March 31, 2008 (Audited)
    
    
    3Consolidated Statements of Operations  Three and Nine Months Ended December 31, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows  Nine Months Ended December 31, 2008 and 2007
    
    
    5Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    40Item 4. Controls and Procedures
    
    
    40PART II. OTHER INFORMATION
    
    
    40Item 1. Legal Proceedings
    
    
    40Item 1A. Risk Factors
    
    
    41Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    42Item 3. Defaults Upon Senior Securities
    
    
    42Item 4. Submission of Matters to a Vote of Security Holders
    
    
    42Item 5. Other Information
    
    
    42Item 6. Exhibits
    
    
    43SIGNATURES
    
    
    44EX-10.1EX-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 31,2008
    
    
    2008(Unaudited)
    
    
    (Note)Assets:Current assets:Cash and cash equivalents
    
    $
    132
    
    
    $
    4,445Marketable securities
    
    
    1,231
    
    
    
    1,506Accounts receivable, less allowance for doubtful accounts and sales reserves of $20,259
at December 31, 2008 and $15,417 at March 31, 2008
    
    
    89,149
    
    
    
    76,806Inventories
    
    
    34,602
    
    
    
    32,654Prepaid expenses and other current assets
    
    
    11,165
    
    
    
    12,118Income tax receivable
    
    
    5,173
    
    
    
    937Deferred tax assets  current, net
    
    
    5,110
    
    
    
    9,100Total current assets
    
    
    146,562
    
    
    
    137,566Property and equipment, net of accumulated depreciation of $16,534 and $14,484, respectively
    
    
    16,994
    
    
    
    17,181Assets held for sale, net of accumulated depreciation of $194 at March 31, 2008
    
    
    
    
    
    
    1,428Software development costs, net
    
    
    400
    
    
    
    Other assets:Marketable securities
    
    
    1,333
    
    
    
    2,667Goodwill
    
    
    3,109
    
    
    
    81,697Intangible assets, net of amortization of $26,706 and $21,180, respectively
    
    
    4,093
    
    
    
    9,984License fees, net of amortization of $26,348 and $19,595, respectively
    
    
    19,041
    
    
    
    20,515Production costs, net of amortization of $11,496 and $7,439, respectively
    
    
    8,673
    
    
    
    7,316Deferred tax assets  non-current, net
    
    
    9,345
    
    
    
    Other assets
    
    
    4,170
    
    
    
    5,108Total assets
    
    $
    213,720
    
    
    $
    283,462Liabilities and shareholders equity:Current liabilities:Note payable  line of credit
    
    $
    48,689
    
    
    $
    31,314Note payable  short term
    
    
    
    
    
    
    150Capital lease obligation  short term
    
    
    90
    
    
    
    59Accounts payable
    
    
    109,068
    
    
    
    92,199Deferred compensation
    
    
    2,125
    
    
    
    2,080Accrued expenses
    
    
    17,336
    
    
    
    16,118Total current liabilities
    
    
    177,308
    
    
    
    141,920Long-term liabilities:Note payable  long-term
    
    
    
    
    
    
    9,594Capital lease obligation  long-term
    
    
    137
    
    
    
    60Deferred compensation
    
    
    1,551
    
    
    
    3,491Deferred tax liabilities  non-current
    
    
    
    
    
    
    3,106Income taxes payable
    
    
    1,130
    
    
    
    880Total liabilities
    
    
    180,126
    
    
    
    159,051Commitments and contingencies (Note 23)Shareholders equity:Common stock, no par value:Authorized shares  100,000,000; issued and outstanding shares  36,260,116 at
December 31, 2008 and 36,227,886 at March 31, 2008
    
    
    160,888
    
    
    
    160,103Accumulated deficit
    
    
    (127,297
    )
    
    
    (35,692
    )Accumulated other comprehensive income
    
    
    3
    
    
    
    Total shareholders equity
    
    
    33,594
    
    
    
    124,411Total liabilities and shareholders equity
    
    $
    213,720
    
    
    $
    283,462
 
 Note:
    
    The balance sheet at March 31, 2008 has been derived from the audited consolidated financial
statements at that date but does not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for complete consolidated
financial statements. See accompanying notes to consolidated financial statements.
 3




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##### Table of Contents



NAVARRE CORPORATION
 
 Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
 Three Months Ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales
    
    $
    171,580
    
    
    $
    217,547
    
    
    $
    483,901
    
    
    $
    498,284Cost of sales (exclusive of depreciation and amortization)
    
    
    172,734
    
    
    
    185,913
    
    
    
    438,699
    
    
    
    420,606Gross profit (loss)
    
    
    (1,154
    )
    
    
    31,634
    
    
    
    45,202
    
    
    
    77,678Operating expenses:Selling and marketing
    
    
    7,536
    
    
    
    7,323
    
    
    
    20,457
    
    
    
    20,923Distribution and warehousing
    
    
    3,538
    
    
    
    3,592
    
    
    
    9,468
    
    
    
    9,648General and administrative
    
    
    9,198
    
    
    
    9,591
    
    
    
    25,832
    
    
    
    25,125Bad debt expense
    
    
    
    
    
    
    
    
    
    
    200
    
    
    
    85Depreciation and amortization
    
    
    4,330
    
    
    
    2,506
    
    
    
    9,027
    
    
    
    7,047Goodwill and intangible impairment
    
    
    6,209
    
    
    
    
    
    
    
    79,621
    
    
    
    Total operating expenses
    
    
    30,811
    
    
    
    23,012
    
    
    
    144,605
    
    
    
    62,828Income (loss) from operations
    
    
    (31,965
    )
    
    
    8,622
    
    
    
    (99,403
    )
    
    
    14,850Other income (expense):Interest expense
    
    
    (1,427
    )
    
    
    (1,778
    )
    
    
    (3,875
    )
    
    
    (4,857
    )Interest income
    
    
    20
    
    
    
    43
    
    
    
    49
    
    
    
    167Other income (expense), net
    
    
    (766
    )
    
    
    60
    
    
    
    (1,087
    )
    
    
    431Income (loss) from continuing operations before income tax
    
    
    (34,138
    )
    
    
    6,947
    
    
    
    (104,316
    )
    
    
    10,591Income tax benefit (expense)
    
    
    (13,586
    )
    
    
    (2,938
    )
    
    
    12,711
    
    
    
    (4,454
    )Net income (loss) from continuing operations
    
    
    (47,724
    )
    
    
    4,009
    
    
    
    (91,605
    )
    
    
    6,137Discontinued operations, net of taxGain on sale of discontinued operations
    
    
    
    
    
    
    70
    
    
    
    
    
    
    
    4,714Loss from discontinued operations
    
    
    
    
    
    
    (176
    )
    
    
    
    
    
    
    (1,879
    )Net income (loss)
    
    $
    (47,724
    )
    
    $
    3,903
    
    
    $
    (91,605
    )
    
    $
    8,972Basic earnings (loss) per common share:Continuing operations
    
    $
    (1.32
    )
    
    $
    0.11
    
    
    $
    (2.53
    )
    
    $
    0.17Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.08Net income (loss)
    
    $
    (1.32
    )
    
    $
    0.11
    
    
    $
    (2.53
    )
    
    $
    0.25Diluted earnings (loss) per common share:Continuing operations
    
    $
    (1.32
    )
    
    $
    0.11
    
    
    $
    (2.53
    )
    
    $
    0.17Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.08Net income (loss)
    
    $
    (1.32
    )
    
    $
    0.11
    
    
    $
    (2.53
    )
    
    $
    0.25Weighted average shares outstanding:Basic
    
    
    36,216
    
    
    
    36,143
    
    
    
    36,198
    
    
    
    36,080Diluted
    
    
    36,216
    
    
    
    36,257
    
    
    
    36,198
    
    
    
    36,281
 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 31,2008
    
    
    2007Operating activities:Net income (loss)
    
    $
    (91,605
    )
    
    $
    8,972Adjustments to reconcile net income  (loss) to net cash used in operating activities:Loss from discontinued operations
    
    
    
    
    
    
    1,879Gain on sale of discontinued operations
    
    
    
    
    
    
    (4,714
    )Depreciation and amortization
    
    
    9,027
    
    
    
    7,107Amortization of license fees
    
    
    10,021
    
    
    
    3,983Amortization of production costs
    
    
    4,057
    
    
    
    2,163Write-off of debt acquisition costs
    
    
    950
    
    
    
    Goodwill and intangible impairment
    
    
    79,621
    
    
    
    Change in deferred revenue
    
    
    245
    
    
    
    229Share-based compensation expense
    
    
    787
    
    
    
    826Deferred income taxes
    
    
    (8,462
    )
    
    
    2,161Other
    
    
    (75
    )
    
    
    (418
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (12,343
    )
    
    
    (45,562
    )Inventories
    
    
    (1,948
    )
    
    
    (14,032
    )Prepaid expenses
    
    
    953
    
    
    
    (1,082
    )Income taxes receivable
    
    
    (4,236
    )
    
    
    799Other assets
    
    
    689
    
    
    
    1,118Production costs
    
    
    (5,414
    )
    
    
    (3,637
    )License fees
    
    
    (8,547
    )
    
    
    (8,158
    )Accounts payable
    
    
    16,896
    
    
    
    42,596Income taxes payable
    
    
    250
    
    
    
    733Accrued expenses
    
    
    308
    
    
    
    2,017Net cash used in operating activities
    
    
    (8,826
    )
    
    
    (3,020
    )Investing activities:Purchases of property and equipment
    
    
    (3,325
    )
    
    
    (6,165
    )Purchases of intangible assets
    
    
    (666
    )
    
    
    (1,087
    )Purchased software development
    
    
    (400
    )
    
    
    Sale of marketable equity securities
    
    
    1,654
    
    
    
    Proceeds from sale of assets held for sale
    
    
    1,353
    
    
    
    Purchases of marketable equity securities
    
    
    
    
    
    
    (4,000
    )Net cash used in investing activities
    
    
    (1,384
    )
    
    
    (11,252
    )Financing activities:Proceeds from note payable, line of credit
    
    
    167,410
    
    
    
    136,773Payments on note payable, line of credit
    
    
    (150,035
    )
    
    
    (126,812
    )Repayments of note payable
    
    
    (9,744
    )
    
    
    (5,218
    )Payment of deferred compensation
    
    
    (1,654
    )
    
    
    Debt acquisition costs
    
    
    (200
    )
    
    
    (240
    )Other
    
    
    120
    
    
    
    96Net cash provided by financing activities
    
    
    5,897
    
    
    
    4,599Net decrease in cash from continuing operations
    
    
    (4,313
    )
    
    
    (9,673
    )Discontinued operations:Net cash provided by operating activities
    
    
    
    
    
    
    6,455Net cash provided by investing activities, proceeds from sale of discontinued operations
    
    
    
    
    
    
    6,500Net increase (decrease) in cash
    
    
    (4,313
    )
    
    
    3,282Cash at beginning of period
    
    
    4,445
    
    
    
    966Cash at end of period
    
    $
    132
    
    
    $
    4,248
 5




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##### Table of Contents



Nine months endedDecember 31,2008
    
    
    2007Supplemental cash flow information:Cash paid for (received from):Interest
    
    $
    2,985
    
    
    $
    4,394Income taxes, net of refunds
    
    
    (212
    )
    
    
    495Supplemental schedule of non-cash investing and financing activities:Accrual of debt acquisition costs
    
    
    650
    
    
    
    Purchase price adjustments affecting accounts receivable and gain on sale, net of tax
    
    
    
    
    
    
    70Shares received for payment of tax withholding obligations
    
    
    15
    
    
    
    28
 See accompanying notes to consolidated financial statements.
 6




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NAVARRE CORPORATION
 
 Notes to Consolidated Financial Statements
(Unaudited)
 Note 1  Organization and Basis of Presentation
      Basis of Consolidation
  Revenue Recognition
    Accounting by
Producers or Distributors of Films.
 7




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##### Table of Contents



Recently Issued Accounting Pronouncements
 Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement Accounting for
Convertible Debt and Debt issued with Stock Purchase Warrants
 Note 2  Goodwill and Intangible Assets
 Goodwill
      8




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Publishing
    
    
    Distribution
    
    
    TotalBalance at March 31, 2008
    
    $
    81,697
    
    
    $
    
    
    
    $
    81,697Impairment charges
    
    
    78,588
    
    
    
    
    
    
    
    78,588Balance at December 31, 2008
    
    $
    3,109
    
    
    $
    
    
    
    $
    3,109
 Intangible assets
  As of December 31, 2008Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters
    
    $
    10,115
    
    
    $
    10,015
    
    
    $
    100License relationships
    
    
    20,078
    
    
    
    16,665
    
    
    
    3,413Domain name
    
    
    70
    
    
    
    26
    
    
    
    44Trademarks (not amortized)
    
    
    536
    
    
    
    
    
    
    
    536$
    30,799
    
    
    $
    26,706
    
    
    $
    4,093
 As of March 31, 2008Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters
    
    $
    9,448
    
    
    $
    6,550
    
    
    $
    2,898License relationships
    
    
    20,078
    
    
    
    14,612
    
    
    
    5,466Domain name
    
    
    70
    
    
    
    18
    
    
    
    52Trademarks (not amortized)
    
    
    1,568
    
    
    
    
    
    
    
    1,568$
    31,164
    
    
    $
    21,180
    
    
    $
    9,984
 Goodwill and Other Intangible Assets.
  Goodwill and Other Intangible Assets.
  Remainder of fiscal 2009
    
    $
    6872010
    
    
    1,8062011
    
    
    4252012
    
    
    2372013
    
    
    302Thereafter
    
    
    
 9




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##### Table of Contents



Debt issuance costs
  Note 3  Impairments and Other Charges
  
    
    BCI will no longer be involved in licensing operations related to budget DVD video and
the remaining BCI content will be transferred to the distribution segment.  For the three
months ended December 31, 2008, the Company recorded $18.6 million in impairment and other
charges related to the restructuring of BCI, which included $7.3 million for inventory,
$7.1 million for prepaid royalties, $2.0 million for masters, $2.0 million for accounts receivable reserves and $181,000 for goodwill.
    
    FUNimation will no longer be involved in licensing operations related to DVD video of
childrens properties. For the three months ended December 31, 2008, the Company recorded
$14.8 million in impairment and other charges related to the restructuring of FUNimation,
which included $8.2 million for license fees and production costs, $5.0 million for
goodwill, $1.0 million for trademarks and $555,000 for inventory.
 License Fees and Production Costs Accounting by Producers or Distributors of Films,
 Prepaid
Royalties.
 Masters,
Trademarks and Goodwill.
 
    
    Masters The Company evaluates its definite lived intangible amortizing assets in
accordance with SFAS No. 142, Goodwill and Other Intangible Assets.  SFAS No. 142
requires the Company to record impairment losses on amortizing intangible assets when
changes in events and circumstances indicate the asset might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than their
carrying amounts.  Impairment losses are measured by comparing the fair value of the
assets to their carrying amounts.  The Company determines fair value utilizing current
market values and future market trends. The impairment related to BCI masters was $2.0
million.
    
    Trademarks The Company evaluates its indefinite lived intangible assets in
accordance with SFAS No. 142, Goodwill and Other Intangible Assets.  The Company reviews
intangible assets for impairment annually or when events or change in circumstances
indicate that the carrying value might exceed the current fair value.  In determining
the implied fair value of each reporting units goodwill as compared to carrying value,
a hypothetical valuation of all tangible and intangibles assets of the reporting unit as
if the reporting unit had been acquired in a business combination is completed.  As part
of this analysis, the trademarks associated with FUNimation were determined to have an
estimated fair value less than the carrying value.  The Company determined fair value
using the relief from royalty valuation technique. The impairment for FUNimation
trademarks was $1.0 million.
 10




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
    
    Goodwill The Company recognizes the excess cost of an acquired entity over the net
amount assigned to the fair value of the assets acquired and liabilities assumed as
goodwill. The Company reviews goodwill for potential impairment annually for each
reporting unit, or when events or changes in circumstances indicate that the carrying
value of the goodwill might exceed its current fair value. Factors which may cause
impairment include negative industry or economic trends and significant underperformance
relative to historical or projected future operating results. The Company determines
fair value using widely accepted valuation techniques, including discounted cash flow
and market multiple analysis. The amount of impairment loss would be recognized as the
excess of the assets carrying value over its fair value. The goodwill impairment charge for the
publishing segment was $5.2 million.
 Inventory
 Accounts Receivable Reserves
 Severance Accounting for Costs Associated with Disposal or Exit Activities Employers Accounting for Postemployment
Benefits,
  License Fees
    
    
    
    
    
    
    Masters,
    
    
    
    
    
    
    Accountsand Production
    
    
    Prepaid
    
    
    Goodwill and
    
    
    
    
    
    
    ReceivableCosts -
    
    
    Royalties -
    
    
    Trademarks-
    
    
    Inventory-
    
    
    Reserves-
    
    
    Severance-
    
    
    Severance-Publishing
    
    
    Publishing
    
    
    Publishing
    
    
    Publishing
    
    
    Publishing
    
    
    Publishing
    
    
    Distribution
    
    
    TotalSales
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,057
    
    
    $
    
    
    
    $
    
    
    
    $
    1,057Cost of sales
    
    
    8,239
    
    
    
    7,076
    
    
    
    
    
    
    
    7,855
    
    
    
    985
    
    
    
    52
    
    
    
    
    
    
    
    24,207Selling and marketing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159
    
    
    
    13
    
    
    
    172Distribution and
warehousing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74
    
    
    
    74General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    330
    
    
    
    504
    
    
    
    834Depreciation and
amortization
    
    
    
    
    
    
    
    
    
    
    2,029
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,029Goodwill and intangible
impairment
    
    
    
    
    
    
    
    
    
    
    6,209
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,209Total
    
    $
    8,239
    
    
    $
    7,076
    
    
    $
    8,238
    
    
    $
    7,855
    
    
    $
    2,042
    
    
    $
    541
    
    
    $
    591
    
    
    $
    34,582
  11




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##### Table of Contents



AccountsReceivableSeverance-
    
    
    Severance-
    
    
    Reserves-Distribution
    
    
    Publishing
    
    
    Publishing
    
    
    TotalReserve balance at March 31, 2008
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Provision for restructuring
    
    
    591
    
    
    
    541
    
    
    
    2,042
    
    
    
    3,174Cash payments
    
    
    
    
    
    
    73
    
    
    
    
    
    
    
    73Reserve balance at December 31, 2008
    
    $
    591
    
    
    $
    468
    
    
    $
    2,042
    
    
    $
    3,101
 Note 4  Discontinued Operations
   Three Months
    
    
    Nine MonthsEnded
    
    
    EndedDecember 31,
    
    
    December 31,2007
    
    
    2007Net sales
    
    $
    10
    
    
    $
    5,098Loss from discontinued operations, before income tax
    
    
    (367
    )
    
    
    (3,202
    )Income tax benefit
    
    
    191
    
    
    
    1,323Net loss from discontinued operations
    
    $
    (176
    )
    
    $
    (1,879
    )
   Note 5  Marketable Securities
   12




---



##### Table of Contents



As of December 31, 2008Gross
    
    
    GrossEstimated fair
    
    
    unrealized
    
    
    unrealizedvalue
    
    
    holding gains
    
    
    holding lossesAvailable-for-sale:Government agency and corporate bonds
    
    $
    921
    
    
    $
    6
    
    
    $
    3Money market fund
    
    
    1,643
    
    
    
    
    
    
    
    $
    2,564
    
    
    $
    6
    
    
    $
    3
 As of March 31, 2008Gross
    
    
    GrossEstimated fair
    
    
    unrealized
    
    
    unrealizedvalue
    
    
    holding gains
    
    
    holding lossesAvailable-for-sale:Government agency and corporate bonds
    
    $
    410
    
    
    $
    
    
    
    $
    Money market fund
    
    
    3,763
    
    
    
    
    
    
    
    $
    4,173
    
    
    $
    
    
    
    $
    
  Fair Value Measurements
  
    
    Level 1  quoted prices in active markets for identical assets and liabilities.
    
    Level 2  observable inputs other than quoted prices in active markets for identical
assets and liabilities.
    
    Level 3  unobservable inputs in which there is little or no market data available,
which require the reporting entity to develop its own assumptions.
  The Fair Value Option for Financial
Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115
 13




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##### Table of Contents



Note 6  Comprehensive Income (Loss)
   Three Months Ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss) from continuing operations
    
    $
    (47,724
    )
    
    $
    4,009
    
    
    $
    (91,605
    )
    
    $
    6,137Net unrealized gain on marketable securities
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    Comprehensive income (loss)
    
    $
    (47,721
    )
    
    $
    4,009
    
    
    $
    (91,602
    )
    
    $
    6,137
   Note 7  Share-Based Compensation
  Stock Options
  WeightedWeighted
    
    
    averageaverage
    
    
    remaining
    
    
    AggregateNumber of
    
    
    exercise
    
    
    contractual
    
    
    intrinsicoptions
    
    
    price
    
    
    term
    
    
    valueOptions outstanding, beginning of period:
    
    
    3,132,499
    
    
    $
    6.78Granted
    
    
    782,500
    
    
    
    0.83Exercised
    
    
    (9,600
    )
    
    
    1.26Canceled
    
    
    (252,033
    )
    
    
    7.75Options outstanding, end of period
    
    
    3,653,366
    
    
    $
    5.46
    
    
    
    6.2
    
    
    $
    Options exercisable, end of period
    
    
    2,424,035
    
    
    $
    7.28
    
    
    
    4.6
    
    
    $
    Shares available for future grant, end of period
    
    
    1,182,334
    14




---



##### Table of Contents



Restricted Stock
   WeightedWeighted
    
    
    averageaverage
    
    
    remaininggrant date
    
    
    contractualShares
    
    
    fair value
    
    
    termUnvested, beginning of period:
    
    
    171,917
    
    
    $
    3.02
    
    
    
    9.34Granted
    
    
    390,250
    
    
    
    0.07
    
    
    
    Vested
    
    
    (63,932
    )
    
    
    3.23
    
    
    
    Forfeited
    
    
    (10,498
    )
    
    
    1.30
    
    
    
    Unvested, end of period
    
    
    487,737
    
    
    $
    0.67
    
    
    
    9.60
   Restricted Stock  Performance Based
  Share-Based Compensation Valuation and Expense Information
  Three Months Ended
    
    Nine months endedDecember 31,
    
    December 31,2008
    
    2007
    
    2008
    
    2007Expected life (in years)
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Expected volatility
    
    
    66
    %
    
    
    67
    %
    
    
    66
    %
    
    
    67
    %Risk-free interest rate
    
    
    2.51
    %
    
    
    3.28-4.34
    %
    
    
    2.51-2.87
    %
    
    
    3.28-5.02
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
  15




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##### Table of Contents



Note 8  Earnings (Loss) Per Share
  Three Months Ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,(In thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Net income (loss) from continuing operations
    
    $
    (47,724
    )
    
    $
    4,009
    
    
    $
    (91,605
    )
    
    $
    6,137Denominator:Denominator for basic earnings per shareweighted-average shares
    
    
    36,216
    
    
    
    36,143
    
    
    
    36,198
    
    
    
    36,080Dilutive securities: Employee stock options and warrants
    
    
    
    
    
    
    114
    
    
    
    
    
    
    
    201Denominator for diluted earnings per shareadjusted
weighted-average shares
    
    
    36,216
    
    
    
    36,257
    
    
    
    36,198
    
    
    
    36,281Net earnings (loss) per share from continuing operations:Basic earnings (loss) per share
    
    $
    (1.32
    )
    
    $
    .11
    
    
    $
    (2.53
    )
    
    $
    .17Diluted earnings (loss) per share
    
    $
    (1.32
    )
    
    $
    .11
    
    
    $
    (2.53
    )
    
    $
    .17
   Note 9  Shareholders Equity
   16




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##### Table of Contents



Note 10  Accounts Receivable
  December 31,
    
    
    March 31,2008
    
    
    2008Trade receivables
    
    $
    107,907
    
    
    $
    87,801Vendor receivables
    
    
    1,237
    
    
    
    2,575Other receivables
    
    
    264
    
    
    
    1,847109,408
    
    
    
    92,223Less: allowance for doubtful accounts and sales discounts
    
    
    7,824
    
    
    
    6,067Less: allowance for sales returns, net margin impact
    
    
    12,435
    
    
    
    9,350Total
    
    $
    89,149
    
    
    $
    76,806
 Note 11  Prepaid Expenses and Other Current Assets
  December 31,
    
    
    March 31,2008
    
    
    2008Prepaid royalties
    
    $
    10,055
    
    
    $
    11,297Other
    
    
    1,110
    
    
    
    821Total
    
    $
    11,165
    
    
    $
    12,118
 Note 12  Capitalized Software Development Costs
 Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed
 Note 13 Inventories
  December 31,
    
    
    March 31,2008
    
    
    2008Finished products
    
    $
    26,319
    
    
    $
    23,545Consigned inventory
    
    
    2,024
    
    
    
    2,569Raw materials
    
    
    6,259
    
    
    
    6,540Total
    
    $
    34,602
    
    
    $
    32,654
  17




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##### Table of Contents



Note 14  License Fees
  December 31,
    
    
    March 31,2008
    
    
    2008License fees
    
    $
    45,389
    
    
    $
    40,110Less: accumulated amortization
    
    
    26,348
    
    
    
    19,595Total
    
    $
    19,041
    
    
    $
    20,515
  Accounting by Producers or Distributors of
Films
   Note 15  Production Costs
  December 31,
    
    
    March 31,2008
    
    
    2008Production costs
    
    $
    20,169
    
    
    $
    14,755Less: accumulated amortization
    
    
    11,496
    
    
    
    7,439Total
    
    $
    8,673
    
    
    $
    7,316
 Accounting by Producers or Distributors of Films
   18




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##### Table of Contents



Note 16  Property and Equipment
  December 31,
    
    
    March 31,2008
    
    
    2008Furniture and fixtures
    
    $
    1,329
    
    
    $
    1,332Computer and office equipment
    
    
    18,706
    
    
    
    14,944Warehouse equipment
    
    
    10,188
    
    
    
    9,564Production equipment
    
    
    1,221
    
    
    
    917Leasehold improvements
    
    
    2,081
    
    
    
    2,060Construction in progress
    
    
    3
    
    
    
    2,848Total
    
    
    33,528
    
    
    
    31,665Less: accumulated depreciation and amortization
    
    
    16,534
    
    
    
    14,484Net property and equipment
    
    $
    16,994
    
    
    $
    17,181
 Note 17  Assets Held for Sale
  Note 18  Accrued Expenses
  December 31,
    
    
    March 31,2008
    
    
    2008Compensation and benefits
    
    $
    4,155
    
    
    $
    3,818Royalties
    
    
    6,360
    
    
    
    7,830Rebates
    
    
    2,121
    
    
    
    1,955Deferred revenue
    
    
    366
    
    
    
    121Interest
    
    
    291
    
    
    
    495Other
    
    
    4,043
    
    
    
    1,899Total
    
    $
    17,336
    
    
    $
    16,118
 Note 19  Bank Financing and Debt
   19




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Letters of Credit
  Note 20  Private Placement Warrants
  20




---



##### Table of Contents



Note 21  Income Taxes
 Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109
        21




---



##### Table of Contents



Note 22  License and Distribution Agreement
   Note 23  Commitments and Contingencies
 Litigation and Proceedings
  SEC Investigation
  Note 24  Related Party Transactions
 Employment/Severance Agreements
   22




---



##### Table of Contents



Employment Agreement  FUNimation
  23




---



##### Table of Contents



Note 25  Business Segments
   Publishing
    
    Distribution
    
    Eliminations
    
    ConsolidatedThree months ended December 31, 2008Net sales
    
    $
    24,567
    
    
    $
    162,904
    
    
    $
    (15,891
    )
    
    $
    171,580Loss from operations
    
    
    (30,940
    )
    
    
    (1,025
    )
    
    
    
    
    
    
    (31,965
    )Loss from continuing operations, before income tax
    
    
    (31,942
    )
    
    
    (2,196
    )
    
    
    
    
    
    
    (34,138
    )Depreciation and amortization expense
    
    
    3,253
    
    
    
    1,077
    
    
    
    
    
    
    
    4,330Capital expenditures
    
    
    63
    
    
    
    242
    
    
    
    
    
    
    
    305Total assets
    
    $
    60,604
    
    
    $
    152,295
    
    
    $
    821
    
    
    $
    213,720Publishing
    
    Distribution
    
    Eliminations
    
    ConsolidatedThree months ended December 31, 2007Net sales
    
    $
    31,354
    
    
    $
    205,221
    
    
    $
    (19,028
    )
    
    $
    217,547Income from operations
    
    
    5,730
    
    
    
    2,892
    
    
    
    
    
    
    
    8,622Income from continuing operations, before income tax
    
    
    4,609
    
    
    
    2,338
    
    
    
    
    
    
    
    6,947Depreciation and amortization expense
    
    
    1,596
    
    
    
    910
    
    
    
    
    
    
    
    2,506Capital expenditures
    
    
    449
    
    
    
    1,119
    
    
    
    
    
    
    
    1,568Total assets
    
    $
    178,345
    
    
    $
    280,869
    
    
    $
    (120,050
    )
    
    $
    339,164Publishing
    
    Distribution
    
    Eliminations
    
    ConsolidatedNine months ended December 31, 2008Net sales
    
    $
    80,779
    
    
    $
    454,457
    
    
    $
    (51,335
    )
    
    $
    483,901Loss from operations
    
    
    (97,801
    )
    
    
    (1,602
    )
    
    
    
    
    
    
    (99,403
    )Loss from continuing operations, before income tax
    
    
    (100,915
    )
    
    
    (3,401
    )
    
    
    
    
    
    
    (104,316
    )Depreciation and amortization expense
    
    
    6,038
    
    
    
    2,989
    
    
    
    
    
    
    
    9,027Capital expenditures
    
    
    454
    
    
    
    2,871
    
    
    
    
    
    
    
    3,325Total assets
    
    $
    60,604
    
    
    $
    152,295
    
    
    $
    821
    
    
    $
    213,720Publishing
    
    Distribution
    
    Eliminations
    
    ConsolidatedNine months ended December 31, 2007Net sales
    
    $
    88,020
    
    
    $
    462,502
    
    
    $
    (52,238
    )
    
    $
    498,284Income from operations
    
    
    10,007
    
    
    
    4,843
    
    
    
    
    
    
    
    14,850Income from continuing operations, before income tax
    
    
    6,762
    
    
    
    3,829
    
    
    
    
    
    
    
    10,591Depreciation and amortization expense
    
    
    4,709
    
    
    
    2,338
    
    
    
    
    
    
    
    7,047Capital expenditures
    
    
    624
    
    
    
    5,541
    
    
    
    
    
    
    
    6,165Total assets
    
    $
    178,345
    
    
    $
    280,869
    
    
    $
    (120,050
    )
    
    $
    339,164
 
 *
    
    See Notes 2 and 3 for discussion of impairment and other charges recorded during the period
ended December 31, 2008. 24




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Executive Summary
   
    
    BCI will no longer be involved in licensing operations related to budget DVD video and
the remaining BCI content will be transferred to the distribution segment. For the three
months ended December 31, 2008, we recorded impairment and other charges of $18.6
million in connection with these restructuring activities.
    
    FUNimation will no longer be involved in licensing operations related to DVD video of
childrens properties. For the three months ended
December 31, 2008, in connection with the restructuring activities, we recorded $8.8
million of impairment charges due to inventory, production costs and license advances related to these
childrens properties.
    Summary
of Results of Operations for the Three and Nine Months
   
    
    impairment and other charges of $16.4 million related to accounts receivable
reserves, inventory and prepaid royalties associated with the BCI restructuring;
    
    impairment and other charges of $8.8 million related to license advances, production
costs and inventory associated with the FUNimation restructuring; and
    
    decreased sales volume.
   25




---



##### Table of Contents




    
    impairment and other charges of $16.4 million related to accounts receivable
reserves, inventory and prepaid royalties associated with the BCI restructuring;
    
    impairment and other charges of $8.8 million related to license advances, production
costs and inventory associated with the FUNimation restructuring; and
    
    decreased sales volume.
    Discontinued Operations
     26




---



##### Table of Contents



Working Capital and Debt
         27




---



##### Table of Contents



Overview
    Forward-Looking Statements / Important Risk Factors
    28




---



##### Table of Contents



Critical Accounting Policies
  Goodwill and Other Intangible
Assets
 29




---



##### Table of Contents



Critical Accounting Estimates
   Reconciliation of GAAP Net Sales to Net Sales Before Inter-Company Eliminations
   Three Months Ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,(Unaudited)
    
    
    (Unaudited)(In thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales:Publishing
    
    $
    24,567
    
    
    $
    31,354
    
    
    $
    80,779
    
    
    $
    88,020Distribution
    
    
    162,904
    
    
    
    205,221
    
    
    
    454,457
    
    
    
    462,502Net sales before inter-company eliminations
    
    
    187,471
    
    
    
    236,575
    
    
    
    535,236
    
    
    
    550,522Inter-company sales
    
    
    (15,891
    )
    
    
    (19,028
    )
    
    
    (51,335
    )
    
    
    (52,238
    )Net sales as reported
    
    $
    171,580
    
    
    $
    217,547
    
    
    $
    483,901
    
    
    $
    498,284
 30




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    Nine months endedDecember 31,
    
    December 31,(Unaudited)
    
    (Unaudited)2008
    
    2007
    
    2008
    
    2007Net sales:Publishing
    
    
    14.3
    %
    
    
    14.4
    %
    
    
    16.7
    %
    
    
    17.7
    %Distribution
    
    
    95.0
    
    
    
    94.3
    
    
    
    93.9
    
    
    
    92.8Inter-company sales
    
    
    (9.3
    )
    
    
    (8.7
    )
    
    
    (10.6
    )
    
    
    (10.5
    )Total net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales, exclusive of amortization
and depreciation
    
    
    100.7
    
    
    
    85.5
    
    
    
    90.7
    
    
    
    84.4Gross profit (loss)
    
    
    (0.7
    )
    
    
    14.5
    
    
    
    9.3
    
    
    
    15.6Operating expensesSelling and marketing
    
    
    4.4
    
    
    
    3.4
    
    
    
    4.2
    
    
    
    4.3Distribution and warehousing
    
    
    2.1
    
    
    
    1.6
    
    
    
    2.0
    
    
    
    1.9General and administrative
    
    
    5.4
    
    
    
    4.4
    
    
    
    5.3
    
    
    
    5.0Bad debt expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    2.5
    
    
    
    1.2
    
    
    
    1.9
    
    
    
    1.4Goodwill and intangible impairment
    
    
    3.6
    
    
    
    
    
    
    
    16.5
    
    
    
    Total operating expenses
    
    
    18.0
    
    
    
    10.6
    
    
    
    29.9
    
    
    
    12.6Income (loss) from operations
    
    
    (18.7
    )
    
    
    3.9
    
    
    
    (20.6
    )
    
    
    3.0Interest expense
    
    
    (0.8
    )
    
    
    (0.8
    )
    
    
    (0.8
    )
    
    
    (1.0
    )Other income (expense), net
    
    
    (0.4
    )
    
    
    0.1
    
    
    
    (0.2
    )
    
    
    0.1Income (loss) from continuing operations 
before taxes
    
    
    (19.9
    )
    
    
    3.2
    
    
    
    (21.6
    )
    
    
    2.1Income tax benefit (expense)
    
    
    (7.9
    )
    
    
    (1.4
    )
    
    
    2.6
    
    
    
    (0.9
    )Net income (loss) from continuing operations
    
    
    (27.8
    )
    
    
    1.8
    
    
    
    (19.0
    )
    
    
    1.2Discontinued operations, net of taxGain on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.0Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.4
    )Net income (loss)
    
    
    (27.8
    )%
    
    
    1.8
    %
    
    
    (19.0
    )%
    
    
    1.8
    %
 31




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##### Table of Contents



Publishing Segment
  Fiscal 2009 Third Quarter Results Compared With Fiscal 2008 Third Quarter
 Net Sales
  Gross Profit (Loss)
  Operating Expenses
      Operating Income (Loss)
  32




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##### Table of Contents



Fiscal 2009 Nine Months Results Compared With Fiscal 2008 Nine Months
 Net Sales
  Gross Profit
  Operating Expenses
      Operating Income (Loss)
  Distribution Segment
  33




---



##### Table of Contents



Fiscal 2009 Third Quarter Results Compared With Fiscal 2008 Third Quarter
 Net Sales
  Gross Profit
  Operating Expenses
      Operating Income (Loss)
  34




---



##### Table of Contents



Fiscal 2009 Nine Months Results Compared With Fiscal 2008 Nine Months
 Net Sales
  Gross Profit
  Operating Expenses
       Operating Income (Loss)
  35




---



##### Table of Contents



Consolidated Other Income and Expense
    Consolidated Income Tax Benefit (Expense) from Continuing Operations
    Consolidated Net Income (Loss) from Continuing Operations
  Discontinued Operations
  36




---



##### Table of Contents



Consolidated Net Income (Loss)
  Market Risk
    Seasonality and Inflation
  Liquidity and Capital Resources
 Operating Activities
  37




---



##### Table of Contents



Investing Activities
  Financing Activities
  Discontinued Operations
  Capital Resources
    38




---



##### Table of Contents



Liquidity
    39




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##### Table of Contents



Contractual Obligations
  Less
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    2  3
    
    
    4  5
    
    
    than 5Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases
    
    $
    24,922
    
    
    $
    677
    
    
    $
    5,354
    
    
    $
    5,102
    
    
    $
    13,789Capital leases
    
    
    256
    
    
    
    25
    
    
    
    161
    
    
    
    70
    
    
    
    License and distribution agreements
    
    
    11,566
    
    
    
    2,588
    
    
    
    8,508
    
    
    
    470
    
    
    
    Deferred compensation
    
    
    3,677
    
    
    
    1,528
    
    
    
    2,149
    
    
    
    
    
    
    
    Total
    
    $
    40,421
    
    
    $
    4,818
    
    
    $
    16,172
    
    
    $
    5,642
    
    
    $
    13,789
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
  
 Item 4. Controls and Procedures.
       
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  40




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##### Table of Contents



Item 1A. Risk Factors.
   Further impairment in the carrying value of goodwill or other assets could negatively affect our
consolidated results of operations and net worth.
  A continued deterioration in the businesses of significant customers, due to weak economic
conditions, could harm our business.
  41




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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.
   42




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##### Table of Contents



Item 6. Exhibits.
  31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the
Exchange Act)31.2
    
    Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the
Exchange Act)32.1
    
    Certification of the Chief Executive Officer pursuant Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)32.2
    
    Certification of the Chief Financial Officer pursuant Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)10.1
    
    Limited Waiver and Fifth Amendment to Fourth Amended and Restated
Credit Agreement by and among the Company and General Electric
Capital Corporation
 43




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##### Table of Contents



SIGNATURES
  Navarre Corporation
(Registrant)Date: February 9, 2009
    /s/ Cary L. DeaconCary L. DeaconPresident and Chief Executive Officer

(Principal Executive Officer) Date: February 9, 2009
    
    /s/ J. Reid PorterJ. Reid PorterExecutive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer) 44