##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q/A
 (Amendment No. 1)
 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 49th Avenue North, New Hope, MN 55428
 (763) 535-8333
  Title of Each Class
Common Stock, No Par Value
    
    Name of Each Exchange of Which Registered
Nasdaq National Market
 
 þ o
 þ o
 o þ




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##### Table of Contents



NAVARRE CORPORATION
EXPLANATORY NOTE
  Consolidation of Variable Interest
Entities Omnibus Opinion  1967  Classification and Disclosure of Allowance; Disclosure of
Depreciable Assets and Depreciation; Deferred Compensation Contracts; Capital Changes; Convertible
Debt and Debt Issued with Stock Warrants; Amortization of Debt Discount and Expenses or Premium
     2




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NAVARRE CORPORATION
 Index
 PART I. FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements. (Unaudited)Consolidated Balance Sheets 
June 30, 2005 (Restated) and March 31, 2005 (Restated)

4Consolidated Statements of Operations 
Three months ended June 30, 2005(Restated) and 2004 (Restated)

5Consolidated Statements of Cash Flows 
Three months ended June 30, 2005 (Restated) and 2004 (Restated)

6Notes to Consolidated Financial Statements

7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.

26Item 3. Quantitative and Qualitative Disclosures about Market Risk.

34Item 4. Controls and Procedures.

34PART II. OTHER INFORMATIONItem 1. Legal Proceedings.

35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

36Item 3. Defaults Upon Senior Securities.

36Item 4. Submission of Matters to a Vote of Securities Holders.

36Item 5. Other Information

36Item 6. Exhibits

36SIGNATURESCertification 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
  3




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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)(Restated)
    
    
    (Restated)AssetsCurrent assets:Cash and cash equivalents
    
    $
    23,342
    
    
    $
    15,571Note receivable, related parties
    
    
    200
    
    
    
    200Accounts receivable, less allowances of $23,650 and $13,815, respectively
    
    
    103,098
    
    
    
    93,983Inventories
    
    
    52,983
    
    
    
    40,759Prepaid expenses and other current assets
    
    
    12,211
    
    
    
    10,052Deferred tax assets
    
    
    7,741
    
    
    
    7,398Total current assets
    
    
    199,575
    
    
    
    167,963Property and equipment, net of accumulated depreciation of $7,889 and $7,259, respectively
    
    
    10,262
    
    
    
    8,152Other assets:Notes receivable, related parties
    
    
    150
    
    
    
    200Goodwill
    
    
    95,044
    
    
    
    9,832Intangible assets, net of amortization of $2,764 and $2,369, respectively
    
    
    4,885
    
    
    
    5,198License fees, net of amortization of $570 at June 30, 2005
    
    
    20,779
    
    
    
    Other assets
    
    
    9,234
    
    
    
    4,547Total assets
    
    $
    339,929
    
    
    $
    195,892Liabilities and shareholders equity:Current liabilitiesNote payable  short term
    
    $
    5,650
    
    
    $
    250Capital lease obligation  short term
    
    
    68
    
    
    
    84Accounts payable
    
    
    98,839
    
    
    
    96,387Income taxes payable
    
    
    1,865
    
    
    
    8Accrued expenses
    
    
    13,189
    
    
    
    15,067Total current liabilities
    
    
    119,611
    
    
    
    111,796Long-term liabilities:Note payable  long-term
    
    
    120,000
    
    
    
    Capital lease obligation  long-term
    
    
    271
    
    
    
    237Deferred compensation
    
    
    5,020
    
    
    
    4,984Deferred tax liabilities
    
    
    1,432
    
    
    
    1,591Total liabilities
    
    
    246,334
    
    
    
    118,608Commitments and contingencies (Note 20)Shareholders equity:Common stock, no par value:Authorized shares  100,000,000Issued and outstanding shares  29,791,966 and 27,896,080, respectively
    
    
    137,886
    
    
    
    123,481Accumulated deficit
    
    
    (44,291
    )
    
    
    (46,197
    )Total shareholders equity
    
    
    93,595
    
    
    
    77,284Total liabilities and shareholders equity
    
    $
    339,929
    
    
    $
    195,892
 Note: The balance sheet at
March 31, 2005 has been derived from the restated 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.
 4




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NAVARRE CORPORATION
 
 Consolidated Statements of Operations
 (In thousands, except per share amounts)
 (Unaudited)
 Three Months Ended June 30,2005
    
    
    2004(Restated)
    
    
    (Restated)Net sales
    
    $
    140,941
    
    
    $
    127,306Cost of sales (exclusive of depreciation and amortization)
    
    
    116,152
    
    
    
    108,428Gross profit
    
    
    24,789
    
    
    
    18,878Operating expenses:Selling and marketing
    
    
    6,591
    
    
    
    4,732Distribution and warehousing
    
    
    2,190
    
    
    
    1,533General and administrative
    
    
    10,050
    
    
    
    10,508Depreciation and amortization
    
    
    1,024
    
    
    
    704Total operating expenses
    
    
    19,855
    
    
    
    17,477Income from operations
    
    
    4,934
    
    
    
    1,401Other income (expense):Interest expense
    
    
    (2,075
    )
    
    
    (41
    )Interest income
    
    
    286
    
    
    
    129Other income (expense), net
    
    
    346
    
    
    
    (8
    )Net income before income tax
    
    
    3,491
    
    
    
    1,481Income tax (expense) benefit
    
    
    (1,585
    )
    
    
    416Net income
    
    $
    1,906
    
    
    $
    1,897Earnings per common share:Basic
    
    $
    .07
    
    
    $
    .07Diluted
    
    $
    .06
    
    
    $
    .07Weighted average shares outstanding:Basic
    
    
    28,947
    
    
    
    26,175Diluted
    
    
    30,031
    
    
    
    28,377
 See accompanying notes to consolidated financial statements.
 5




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NAVARRE CORPORATION
 
 Consolidated Statements of Cash Flows
 (In thousands)
 (Unaudited)
 Three Months Ended June 30,2005
    
    
    2004(Restated)
    
    
    (Restated)Operating activities:Net income
    
    $
    1,906
    
    
    $
    1,897Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    1,052
    
    
    
    704Amortization and write-off of deferred financing costs
    
    
    335
    
    
    
    39Deferred compensation expense
    
    
    36
    
    
    
    2,187Write-off of notes receivable
    
    
    50
    
    
    
    50Amortization of license fees
    
    
    570
    
    
    
    Amortization of production costs
    
    
    294
    
    
    
    Change in deferred revenue
    
    
    (860
    )
    
    
    Tax benefit from employee stock option plans
    
    
    40
    
    
    
    Deferred income taxes
    
    
    (502
    )
    
    
    (1,058
    )Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    (796
    )
    
    
    697Inventories
    
    
    (8,682
    )
    
    
    (11,709
    )Prepaid expenses
    
    
    (2,106
    )
    
    
    156Other assets
    
    
    (5
    )
    
    
    (1,327
    )Production costs
    
    
    (294
    )
    
    
    License fees
    
    
    (767
    )
    
    
    Accounts payable
    
    
    (650
    )
    
    
    1,436Income taxes payable
    
    
    1,857
    
    
    
    514Accrued expenses
    
    
    (7,478
    )
    
    
    495Net cash used in operating activities
    
    
    (16,000
    )
    
    
    (5,919
    )Investing activities:Acquisitions, net of cash acquired
    
    
    (98,103
    )
    
    
    Purchases of property and equipment
    
    
    (640
    )
    
    
    (4,824
    )Net proceeds from sale leaseback
    
    
    
    
    
    
    6,401Purchases of intangible assets
    
    
    (83
    )
    
    
    (171
    )Payment of earn-out related to an acquisition
    
    
    (85
    )
    
    
    Net cash (used in) provided by investing activities
    
    
    (98,911
    )
    
    
    1,406Financing 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
    
    
    140,400
    
    
    
    2,814Debt acquisition costs
    
    
    (2,917
    )
    
    
    (413
    )Repayments of capital lease obligations
    
    
    (21
    )
    
    
    Proceeds from exercise of common stock options and warrants
    
    
    220
    
    
    
    3,277Net cash provided by financing activities
    
    
    122,682
    
    
    
    2,213Net increase (decrease) in cash
    
    
    7,771
    
    
    
    (2,300
    )Cash at beginning of period
    
    
    15,571
    
    
    
    14,495Cash at end of period
    
    $
    23,342
    
    
    $
    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
    Restatement of Financial Statements
 Consolidation
of Variable Interest Entities
 Segment Reporting
 Disclosure about
Segments of an Enterprise and Related Information
 Revenue Recognition
    Accounting by Producers or Distributors of Films.
 Research
and Development  Mix & Burn
 Note 2
 Inventories
  June 30,
    
    
    March 31,2005
    
    
    2005(Restated)
    
    
    (Restated)Finished products
    
    $
    47,622
    
    
    $
    36,222Raw materials
    
    
    5,361
    
    
    
    4,537$
    52,983
    
    
    $
    40,759
 7




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Note 3
 Restatements
 Mix & Burn
  Post Retirement Payments
  The following table presents the effect of the Restatement on the consolidated balance sheet (in
thousands):
 June 30, 2005As Previously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    23,332
    
    
    $
    10
    
    
    $
    23,342Note receivable, related parties
    
    
    2,834
    
    
    
    (2,634
    )
    
    
    200Accounts receivable, net
    
    
    103,000
    
    
    
    98
    
    
    
    103,098Inventories
    
    
    52,804
    
    
    
    179
    
    
    
    52,983Prepaid expenses and other current assets
    
    
    12,186
    
    
    
    25
    
    
    
    12,211Deferred tax assets
    
    
    7,593
    
    
    
    148
    
    
    
    7,741Total current assets
    
    
    201,749
    
    
    
    (2,174
    )
    
    
    199,575Property and equipment, net
    
    
    10,194
    
    
    
    68
    

    
    
    10,262Other assets:Notes receivable, related parties
    
    
    150
    
    
    
    
    
    
    
    150Goodwill
    
    
    95,044
    
    
    
    
    
    
    
    95,044Intangible assets, net
    
    
    4,856
    
    
    
    29
    
    
    
    4,885License fees, net
    
    
    20,779
    
    
    
    
    
    
    
    20,779Other assets
    
    
    9,109
    
    
    
    125
    
    
    
    9,234Total assets
    
    $
    341,881
    
    
    $
    (1,952
    )
    
    $
    339,929Liabilities and shareholders equityCurrent liabilities:Note payable, short term
    
    $
    5,000
    
    
    
    650
    
    
    $
    5,650Capital lease obligation, short term
    
    
    68
    
    
    
    
    
    
    
    68Accounts payable
    
    
    98,525
    
    
    
    314
    
    
    
    98,839Income taxes payable
    
    
    1,865
    
    
    
    
    
    
    
    1,865Accrued expenses
    
    
    12,799
    
    
    
    390
    
    
    
    13,189Total current liabilities
    
    
    118,257
    
    
    
    1,354
    
    
    
    119,611Note payable, long term
    
    
    120,000
    
    
    
    
    
    
    
    120,000Capital lease obligation, long term
    
    
    271
    
    
    
    
    
    
    
    271Deferred compensation
    
    
    4,000
    
    
    
    1,020
    
    
    
    5,020Deferred tax liabilities
    
    
    1,798
    
    
    
    (366
    )
    
    
    1,432Total liabilities
    
    
    244,326
    
    
    
    2,008
    
    
    
    246,334Commitments and contingenciesShareholders equity:Common stock, no par value
    
    
    137,850
    
    
    
    36
    
    
    
    137,886Accumulated deficit
    
    
    (40,295
    )
    
    
    (3,996
    )
    
    
    (44,291
    )Total shareholders equity
    
    
    97,555
    
    
    
    (3,960
    )
    
    
    93,595Total liabilities and shareholders equity
    
    $
    341,881
    
    
    $
    (1,952
    )
    
    $
    339,929
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The following table presents the effect of the Restatement on the consolidated statement of
operations (in thousands except per share data):
 Three Months endedJune 30, 2005AsPreviously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedNet sales
    
    $
    140,833
    
    
    $
    108
    
    
    $
    140,941Cost of sales (exclusive of depreciation and amortization)
    
    
    116,065
    
    
    
    87
    
    
    
    116,152Gross profit
    
    
    24,768
    
    
    
    21
    
    
    
    24,789Operating expenses:Selling and marketing
    
    
    6,591
    
    
    
    
    
    
    
    6,591Distribution and warehousing
    
    
    2,190
    
    
    
    
    
    
    
    2,190General and administrative
    
    
    9,542
    
    
    
    508
    
    
    
    10,050Depreciation and amortization
    
    
    1,024
    
    
    
    
    
    
    
    1,02419,347
    
    
    
    508
    
    
    
    19,855Income from operations
    
    
    5,421
    
    
    
    (487
    )
    
    
    4,934Other income (expense):Interest expense
    
    
    (2,063
    )
    
    
    (12
    )
    
    
    (2,075
    )Interest income
    
    
    325
    
    
    
    (39
    )
    
    
    286Other income (expense)
    
    
    346
    
    
    
    
    
    
    
    346Net income before tax
    
    
    4,029
    
    
    
    (538
    )
    
    
    3,491Tax expense
    
    
    (1,585
    )
    
    
    
    
    
    
    (1,585
    )Net income
    
    $
    2,444
    
    
    $
    (538
    )
    
    $
    1,906Earnings per common share:Basic
    
    $
    .08
    
    
    $
    (.01
    )
    
    $
    .07Diluted
    
    $
    .08
    
    
    $
    (.02
    )
    
    $
    .06Weighted average shares outstanding:Basic
    
    
    28,947
    
    
    
    
    
    
    
    28,947Diluted
    
    
    30,031
    
    
    
    
    
    
    
    30,031
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The following table presents the effect of the Restatement on the consolidated statement
of cash flows (in thousands):
 Three Months endedJune 30, 2005AsPreviously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedOperating activities:Net income
    
    $
    2,444
    
    
    $
    (538
    )
    
    $
    1,906Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    1,048
    
    
    
    4
    
    
    
    1,052Amortization of deferred financing costs
    
    
    335
    
    
    
    
    
    
    
    335Deferred compensation expense
    
    
    53
    
    
    
    (17
    )
    
    
    36Write-off of notes receivable
    
    
    50
    
    
    
    
    
    
    
    50Amortization of license fees
    
    
    570
    
    
    
    
    
    
    
    570Amortization of production costs
    
    
    294
    
    
    
    
    
    
    
    294Change in deferred revenue
    
    
    (856
    )
    
    
    (4
    )
    
    
    (860
    )Tax benefit from employee stock option plans
    
    
    40
    
    
    
    
    
    
    
    40Deferred income taxes
    
    
    (502
    )
    
    
    
    
    
    
    (502
    )Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    (678
    )
    
    
    (118
    )
    
    
    (796
    )Inventories
    
    
    (8,669
    )
    
    
    (13
    )
    
    
    (8,682
    )Prepaid expenses
    
    
    (2,106
    )
    
    
    
    
    
    
    (2,106
    )Other assets
    
    
    
    
    
    
    (5
    )
    
    
    (5
    )Production costs
    
    
    (294
    )
    
    
    
    
    
    
    (294
    )License fees
    
    
    (767
    )
    
    
    
    
    
    
    (767
    )Accounts payable
    
    
    (723
    )
    
    
    73
    
    
    
    (650
    )Income taxes payable
    
    
    1,857
    
    
    
    
    
    
    
    1,857Accrued expenses
    
    
    (7,527
    )
    
    
    49
    
    
    
    (7,478
    )Net cash (used in) provided by operating activities
    
    
    (15,431
    )
    
    
    (569
    )
    
    
    (16,000
    )Investing activities:Acquisitions, net of cash acquired
    
    
    (98,103
    )
    
    
    
    
    
    
    (98,103
    )Purchases of property and equipment
    
    
    (639
    )
    
    
    (1
    )
    
    
    (640
    )Purchases of intangible assets
    
    
    (78
    )
    
    
    (5
    )
    
    
    (83
    )Payment of earn-out related to an acquisition
    
    
    (85
    )
    
    
    
    
    
    
    (85
    )Notes receivable, related parties
    
    
    (134
    )
    
    
    134
    
    
    
    Net cash used in investing activities
    
    
    (99,039
    )
    
    
    128
    
    
    
    (98,911
    )Financing activities:Repayment of note payable
    
    
    (15,000
    )
    
    
    
    
    
    
    (15,000
    )Proceeds of note payable
    
    
    140,000
    
    
    
    400
    
    
    
    140,400Debt acquisition costs
    
    
    (2,917
    )
    
    
    
    
    
    
    (2,917
    )Repayment of capital lease obligations
    
    
    (21
    )
    
    
    
    
    
    
    (21
    )Proceeds from exercise of common stock options and warrants
    
    
    221
    
    
    
    (1
    )
    
    
    220Net cash provided by (used in) financing activities
    
    
    122,283
    
    
    
    399
    
    
    
    122,682Net increase (decrease) in cash
    
    
    7,813
    
    
    
    (42
    )
    
    
    7,771Cash at beginning of year
    
    
    15,519
    
    
    
    52
    
    
    
    15,571Cash at end of year
    
    $
    23,332
    
    
    $
    10
    
    
    $
    23,342
 10




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The following table presents the effect of the Restatement on the consolidated statement of
operations (in thousands except per share data):
 Three Months endedJune 30, 2004AsPreviously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedNet sales
    
    $
    127,306
    
    
    $
    
    
    
    $
    127,306Cost of sales (exclusive of depreciation and amortization)
    
    
    108,428
    
    
    
    
    
    
    
    108,428Gross profit
    
    
    18,878
    
    
    
    
    
    
    
    18,878Operating expenses:Selling and marketing
    
    
    4,732
    
    
    
    
    
    
    
    4,732Distribution and warehousing
    
    
    1,533
    
    
    
    
    
    
    
    1,533General and administrative
    
    
    9,790
    
    
    
    718
    
    
    
    10,508Depreciation and amortization
    
    
    704
    
    
    
    
    
    
    
    70416,759
    
    
    
    718
    
    
    
    17,477Income from operations
    
    
    2,119
    
    
    
    (718
    )
    
    
    1,401Other income (expense):Interest expense
    
    
    (41
    )
    
    
    
    
    
    
    (41
    )Interest income
    
    
    129
    
    
    
    
    
    
    
    129Other income (expense)
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )Net income before tax
    
    
    2,199
    
    
    
    (718
    )
    
    
    1,481Tax benefit
    
    
    11
    
    
    
    405
    
    
    
    416Net income
    
    $
    2,210
    
    
    $
    (313
    )
    
    $
    1,897Earnings per common share:Basic
    
    $
    .08
    
    
    $
    (.01
    )
    
    $
    .07Diluted
    
    $
    .08
    
    
    $
    (.01
    )
    
    $
    .07Weighted average shares outstanding:Basic
    
    
    26,175
    
    
    
    
    
    
    
    26,175Diluted
    
    
    28,377
    
    
    
    
    
    
    
    28,377
 11




---



##### Table of Contents



The following table presents the effect of the Restatement on the consolidated statement of
cash flows (in thousands):
 Three Months endedJune 30, 2004AsPreviously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedOperating activities:Net income
    
    $
    2,210
    
    
    $
    (313
    )
    
    $
    1,897Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    704
    
    
    
    
    
    
    
    704Amortization of deferred financing costs
    
    
    39
    
    
    
    
    
    
    
    39Deferred compensation expense
    
    
    2,187
    
    
    
    
    
    
    
    2,187Write-off of notes receivable
    
    
    50
    
    
    
    
    
    
    
    50Deferred income taxes
    
    
    (653
    )
    
    
    (405
    )
    
    
    (1,058
    )Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    694
    
    
    
    3
    
    
    
    697Inventories
    
    
    (11,689
    )
    
    
    (20
    )
    
    
    (11,709
    )Prepaid expenses
    
    
    156
    
    
    
    
    
    
    
    156Other assets
    
    
    (1,327
    )
    
    
    
    
    
    
    (1,327
    )Accounts payable
    
    
    1,400
    
    
    
    36
    
    
    
    1,436Income taxes payable
    
    
    514
    
    
    
    
    
    
    
    514Accrued expenses
    
    
    107
    
    
    
    388
    
    
    
    495Net cash (used in) provided by operating activities
    
    
    (5,608
    )
    
    
    (311
    )
    
    
    (5,919
    )Investing activities:Purchases of property and equipment
    
    
    (4,819
    )
    
    
    (5
    )
    
    
    (4,824
    )Net proceeds from sale leaseback
    
    
    6,401
    
    
    
    
    
    
    
    6,401Purchases of intangible assets
    
    
    (171
    )
    
    
    
    
    
    
    (171
    )Notes receivable, related parties
    
    
    (316
    )
    
    
    316
    
    
    
    Net cash used in investing activities
    
    
    1,095
    
    
    
    311
    
    
    
    1,406Financing activities:Proceeds from note payable, bank
    
    
    5,022
    
    
    
    
    
    
    
    5,022Payments on note payable, bank
    
    
    (5,022
    )
    
    
    
    
    
    
    (5,022
    )Repayment of note payable
    
    
    (3,465
    )
    
    
    
    
    
    
    (3,465
    )Proceeds of note payable
    
    
    2,814
    
    
    
    
    
    
    
    2,814Debt acquisition costs
    
    
    (413
    )
    
    
    
    
    
    
    (413
    )Proceeds from exercise of common stock options and warrants
    
    
    3,277
    
    
    
    
    
    
    
    3,277Net cash provided by (used in) financing activities
    
    
    2,213
    
    
    
    
    
    
    
    2,213Net increase (decrease) in cash
    
    
    (2,300
    )
    
    
    
    
    
    
    (2,300
    )Cash at beginning of year
    
    
    14,495
    
    
    
    
    
    
    
    14,495Cash at end of year
    
    $
    12,195
    
    
    $
    
    
    
    $
    12,195
 12




---



##### Table of Contents



Previously Reported
    Note 4
 Acquisitions
 FUNimation
  Employment Agreement
      Purchase Price
 Business Combinations
   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
 13




---



##### Table of Contents



Three Months Ended
    
    
    Three Months EndedJune 30, 2005
    
    
    June 30, 2004As reported
    
    
    Pro Forma
    
    
    As reported
    
    
    Pro forma(Restated)
    
    



    
    
    (Restated)Net sales
    
    $
    140,941
    
    
    $
    146,663
    
    
    $
    127,306
    
    
    $
    144,651Net income
    
    
    1,906
    
    
    
    2,152
    
    
    
    1,897
    
    
    
    2,296Earnings per common share:Basic
    
    $
    .07
    
    
    $
    .07
    
    
    $
    .07
    
    
    $
    .09Diluted
    
    $
    .06
    
    
    $
    .07
    
    
    $
    .07
    
    
    $
    .08
 Note 5
 Stock-Based Compensation
 Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
  Three Months Ended June 30,2005
    
    
    2004(Restated)
    
    
    (Restated)Net income, as reported
    
    $
    1,906
    
    
    $
    1,897Deduct: Stock-based compensation
expense determined under fair value
method for all awards, net of tax
    
    
    (360
    )
    
    
    (137
    )Net income, pro forma
    
    $
    1,546
    
    
    $
    1,760Income per share:Basic  as reported
    
    $
    .07
    
    
    $
    .07Basic  pro forma
    
    $
    .05
    
    
    $
    .07Diluted  as reported
    
    $
    .06
    
    
    $
    .07Diluted  pro forma
    
    $
    .05
    
    
    $
    .06
  14




---



##### Table of Contents



Note 6  Net Earnings Per Share
   Three Months Ended June 30,2005
    
    
    2004(Restated)
    
    
    (Restated)Numerator:Net income
    
    $
    1,906
    
    
    $
    1,897Denominator: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
    
    $
    .07
    
    
    $
    .07Dilutive income per share
    
    $
    .06
    
    
    $
    .07
  Note 7
 Shareholders Equity
  Note 8  Accounts Receivable
  June 30, 2005
    
    
    March 31, 2005(Restated)
    
    
    (Restated)Trade receivables
    
    $
    108,609
    
    
    $
    88,196Vendor advance receivables
    
    
    17,244
    
    
    
    16,857Other receivables
    
    
    895
    
    
    
    2,745$
    126,748
    
    
    $
    107,798Less: allowance for doubtful accounts, vendor advances and sales discounts
    
    
    11,009
    
    
    
    9,625Less: allowance for sales returns, net margin impact
    
    
    12,641
    
    
    
    4,190Total
    
    $
    103,098
    
    
    $
    93,983
 Note 9
 Variable Interest Entity
 Consolidated of Variable Interest Entities Consolidated Financial Statements
 15




---



##### Table of Contents



Note
10  License Fees
  June 30, 2005
    
    
    March 31, 2005(Restated)
    
    
    (Restated)License fees
    
    $
    21,349
    
    
    $
    Less: accumulated amortization
    
    
    570
    
    
    
    $
    20,779
    
    
    
    
   Note
11  Production Costs
  June 30, 2005
    
    
    March 31, 2005(Restated)
    
    
    (Restated)Production costs
    
    $
    4,105
    
    
    $
    Less: accumulated amortization
    
    
    294
    
    
    
    $
    3,811
    
    
    
    
    16




---



##### Table of Contents



Note
12  Property and Equipment
  June 30, 2005
    
    
    March 31, 2005(Restated)
    
    
    (Restated)Land and buildings
    
    $
    1,623
    
    
    $
    Furniture and fixtures
    
    
    1,146
    
    
    
    1,092Computer and office equipment
    
    
    5,068
    
    
    
    4,483Warehouse equipment
    
    
    7,131
    
    
    
    6,868Leasehold improvements
    
    
    2,936
    
    
    
    2,894Construction in progress
    
    
    247
    
    
    
    74Total
    
    $
    18,151
    
    
    $
    15,411Less: accumulated depreciation and amortization
    
    
    7,889
    
    
    
    7,259Net property and equipment
    
    $
    10,262
    
    
    $
    8,152
 Note 13  Goodwill and Intangible Assets
 Goodwill
   Distribution
    
    
    Publishing
    
    
    ConsolidatedBalances as of March 31, 2005 (Restated)
    
    $
    
    
    
    $
    9,832
    
    
    $
    9,832Goodwill resulting from an acquisition
    
    
    
    
    
    
    85,127
    
    
    
    85,127Earn-out related to an acquisition
    
    
    
    
    
    
    85
    
    
    
    85Balances as of June 30, 2005 (Restated)
    
    $
    
    
    
    $
    95,044
    
    
    $
    95,044
 Intangible assets
  As of June 30, 2005 (Restated)Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters
    
    $
    6,915
    
    
    $
    2,059
    
    
    $
    4,856Other
    
    
    734
    
    
    
    705
    
    
    
    29$
    7,649
    
    
    $
    2,764
    
    
    $
    4,885
 As of March 31, 2005 (Restated)Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters
    
    $
    6,838
    
    
    $
    1,687
    
    
    $
    5,151Other
    
    
    729
    
    
    
    682
    
    
    
    47$
    7,567
    
    
    $
    2,369
    
    
    $
    5,198
   2006
    
    $
    1,4942007
    
    
    1,3942008
    
    
    1,1582009
    
    
    1,0522010
    
    
    154
 17




---



##### Table of Contents



Debt issuance costs
  Note 14  Accrued Expenses
  June 30, 2005
    
    
    March 31, 2005(Restated)
    
    
    (Restated)Compensation and benefits
    
    $
    1,987
    
    
    $
    9,067Royalties
    
    
    6,362
    
    
    
    2,491Accrued interest
    
    
    1,757
    
    
    
    31Deferred revenue
    
    
    1,385
    
    
    
    10Rebates
    
    
    805
    
    
    
    1,023Other
    
    
    893
    
    
    
    2,445Total
    
    $
    13,189
    
    
    $
    15,067
 Note 15  Bank Financing and Debt
      18




---



##### Table of Contents



June 30, 2005
    
    
    March 31, 2005Term Loan B sub-facility
    
    $
    100,000
    
    
    $
    Term Loan C sub-facility
    
    
    25,000
    
    
    
    Other (see Mix & Burn above)
    
    
    650
    
    
    
    250Total debt
    
    
    125,650
    
    
    
    250Less: current portion
    
    
    5,650
    
    
    
    250Total long-term debt
    
    $
    120,000
    
    
    $
    
  2006
    
    $
    5,6502007
    
    
    5,0002008
    
    
    5,0002009
    
    
    5,0002010
    
    
    5,0002011 and thereafter
    
    
    100,000Total
    
    $
    125,650
 Note 16  Income Taxes
    19




---



##### Table of Contents



Note 17  Sale/Leaseback of Warehouse Facility
   Note 18  License and Distribution Agreement
   Note 19  Business Segments
  Three months ended June 30, 2005 (Restated)
    
    Distribution
    

Publishing
    

Other
    

Eliminations
    
    ConsolidatedNet sales
    
    $
    129,754
    
    
    $
    26,108
    
    
    $
    108
    
    
    $
    (15,029
    )
    
    $
    140,941Income (loss) from operations
    
    
    1,114
    
    
    
    4,307
    
    
    
    (487
    )
    
    
    
    
    
    
    4,934Net income (loss) before income tax
    
    
    (208
    )
    
    
    4,237
    
    
    
    (538
    )
    
    
    
    
    
    
    3,491Total assets
    
    $
    311,632
    
    
    $
    175,371
    
    
    $
    533
    
    
    $
    (147,607
    )
    
    $
    339,929Three months ended June 30, 2004 (Restated)
    
    Distribution
    
    Publishing
    
    Other
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    110,260
    
    
    $
    30,050
    
    
    $
    
    
    
    $
    (13,004
    )
    
    $
    127,306Income (loss) from operations
    
    
    (1,832
    )
    
    
    3,563
    
    
    
    (330
    )
    
    
    
    
    
    
    1,401Net income (loss) before income tax
    
    
    (1,274
    )
    
    
    3,501
    
    
    
    (330
    )
    
    
    
    
    
    
    1,897Total assets
    
    $
    149,471
    
    
    $
    43,168
    
    
    $
    30
    
    
    $
    (29,087
    )
    
    $
    163,582
 20




---



##### Table of Contents



Note
20  Commitments and Contingencies
 Litigation
  ValueVision Media, Inc. v. Navarre Corporation
      Sybersound Records, Inc. v. BCI Eclipse, LLC, et al.
   21




---



##### 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
   22




---



##### 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.
     Shannon Binns v. Charles Cheney, et al.
 Karel Filip v. Charles Cheney, et al.
    Note
21  Related Party Transactions
 Employment/Severance Agreements
  23




---



##### Table of Contents



Note 22  Recently Issued Accounting Pronouncements
 ,
Inventory Costs, an amendment of ARB No. 43, Chapter 4
 Share-Based Payment Accounting
for Stock-Based Compensation Accounting for Stock Issued to
Employees
 , Accounting for Conditional Asset
Retirement Obligations Accounting for Asset Retirement Obligations
 Accounting Changes and Error Corrections Accounting Changes Reporting Accounting
Changes in Interim Financial Statements
 24




---



##### Table of Contents



Note 23  Subsequent Event
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Note: Comparisons refer to restated numbers as discussed in Note 3 of the
consolidated financial statements.
 Note In connection with the identification of the VIE Mix & Burn, the Company undertook a project
to evaluate whether other relationships it has with other entities should be considered under FIN
46 (R) and, therefore, subject to consolidation with the consolidated financial statements of the
Company. The Company has not completed its review and is unable to come to any conclusions as of
the date of this report. This review may result in changes to prior period consolidated financial
statements
 Executive Summary
  Overview
    anime
  Forward-Looking Statements / Important Risk Factors
  25




---



##### Table of Contents



Restatements
 Mix & Burn
  Post Retirement Payments
  26




---



##### Table of Contents



Restatements
 Previously Reported
    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
    
    
    
    30,050Other
    
    
    108
    
    
    
    Net sales before inter-company eliminations
    
    
    155,970
    
    
    
    140,310Inter-company eliminations
    
    
    (15,029
    )
    
    
    (13,004
    )Net sales as reported
    
    $
    140,941
    
    
    $
    127,306
 27




---



##### Table of Contents



Results of Operations
  Three Months Ended June 30,2005
    
    2004(Restated)Net sales:Distribution
    
    
    92.1
    %
    
    
    86.6
    %Publishing
    
    
    18.5
    
    
    
    23.6Other
    
    
    0.1
    
    
    
    Inter-company sales
    
    
    (10.7
    )
    
    
    (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
    
    
    7.1
    
    
    
    8.2Depreciation and amortization
    
    
    0.7
    
    
    
    0.6Total operating expenses
    
    
    14.1
    
    
    
    13.7Income from operations
    
    
    3.5
    
    
    
    1.1Interest expense
    
    
    (1.5
    )
    
    
    0.0Other income (expense), net
    
    
    0.5
    
    
    
    0.1Income tax (expense) benefit
    
    
    (1.1
    )
    
    
    .3Net income
    
    
    1.4
    %
    
    
    1.5
    %
 Distribution Segment
  Fiscal 2006 (Restated) First Quarter
Results Compared With Fiscal 2005 (Restated) First Quarter
 Net Sales
  Gross Profit
  28




---



##### Table of Contents



Operating Expenses
       Publishing Segment
  Fiscal 2006 (Restated) First
Quarter Results Compared With Fiscal 2005 (Restated) First Quarter
 Net Sales
 He-Man and the Masters of the Universe
 Gross Profit
  29




---



##### Table of Contents



Operating Expenses
    Other Segment
  Fiscal 2006 First Quarter (Restated) Results Compared With Fiscal 2005 Second Quarter (Restated)
  Consolidated Other Income and Expense
  Consolidated Income Tax (Expense) Benefit
  30




---



##### Table of Contents



Market Risk
  Seasonality and Inflation
  Liquidity and Capital Resources
 Cash Flow Analysis
 Operating Activities
    Investing Activities
    31




---



##### Table of Contents



Financing Activities
   Capital Resources
      Liquidity
   32




---



##### 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
    
    
    125,650
    
    
    
    5,650
    
    
    
    15,000
    
    
    
    10,000
    
    
    
    95,000License and distribution agreement
    
    
    7,287
    
    
    
    7,287
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    156,355
    
    
    $
    15,300
    
    
    $
    19,145
    
    
    $
    13,897
    
    
    $
    108,013
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
   33




---



##### Table of Contents




    
    The Company did not maintain effective controls over the accounting for certain
compensation and severance arrangements. Specifically, the Company had a deficiency in the design of
controls to identify the proper accounting treatment for compensation
and severance arrangements for key
employees. Adjustments related to deferred compensation and
retirement benefits, and a severance arrangement with a key employee
were included in the restatement of the Companys consolidated financial statements for the
years ended March 31, 2005 and 2004 and the period ending
March 31, 2003.
    
    The Company did not maintain effective controls over the accounting for income taxes.
Specifically, the Companys established internal controls surrounding the preparation of its
income tax provision for the third quarter ended December 31, 2004 were not effective.
During the year end financial reporting process, the Company identified an error in the
preparation of the third quarter tax provision. This material weakness resulted in
adjustments that were included in the restatement of the Companys consolidated financial
statements for the third quarter in the year ended March 31, 2005.
    
    The Company did not maintain effective controls over the identification and
determination of appropriate accounting treatment for certain business relationships it has
with entities that are VIEs under FIN 46 (R) and, therefore, potentially subject to
consolidation with the consolidated financial statements of the Company. Specifically, the
Company had a deficiency in the design of controls to identify the proper accounting
treatment for investments and loans to a third party that is a VIE. Adjustments related to the
consolidation of this VIE are included in the restatement of the Companys consolidated
financial statements for the years ending March 31, 2004 and 2005 and unaudited quarterly
financial data as of and for the periods ending December 31,
2003 through March 31, 2005.
  
    
    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.
    
    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.
    
    The Company has strengthened its controls
and procedures as it relates to accounting for variable interest entities through a comprehensive review
of its existing and all new business arrangements with other entities in order to determine the appropriate accounting
 treatment under U.S. GAAP.
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  34




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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
  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 Interim 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 Interim Chief Financial Officer pursuant Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
§1350).
 35




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##### Table of Contents



SIGNATURES
  Navarre Corporation
(Registrant)Date: November 21, 2005
    /s/ Eric H. PaulsonEric H. PaulsonChairman of the Board
and
Chief Executive OfficerDate: November 21, 2005
    /s/ Diane D. LappDiane D. LappInterim Chief Financial Officer 36