##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-K/A
 (Amendment No. 2)
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended March 31, 2005
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 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
    
    Name of each exchange on which registeredCommon Stock, No par value
    
    NASDAQ National Market
 None
 þ o
 o
 þ o
 o þ
   o þ
 o þ
 DOCUMENTS INCORPORATED BY REFERENCE




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##### 



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
FORM 10-K
 TABLE OF CONTENTS
 PagePART IItem 1.
    
    Business
    
    
    4Item 2.
    
    Properties
    
    
    24Item 3.
    
    Legal Proceedings
    
    
    25Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    27PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchase of
Equity Securities
    
    
    28Item 6.
    
    Selected Financial Data
    
    
    29Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    42Item 8.
    
    Financial Statements and Supplementary Data
    
    
    42Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    42Item 9A.
    
    Controls and Procedures
    
    
    42Item 9B.
    
    Other Information
    
    
    44PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    45Item 11.
    
    Executive Compensation
    
    
    45Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    45Item 13.
    
    Certain Relationships and Related Transactions
    
    
    45Item 14.
    
    Principal Accountant Fees and Services
    
    
    45PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    45Signatures
    
    
    52
 3




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##### 



PART I
 
 Item 1  Business
 Overview
    Distribution.
 Publishing Print Shop, Mavis Beacon Zone Alarm Reader Rabbit anime
 Other
 Strategy
  
    
    Acquisitions of Attractive Content.We seek to continue to expand our publishing business
through the acquisition or licensing of well-established titles or other attractive content.
We believe these acquisitions and/or licenses will help position us to increase our net
sales in our publishing business, which historically has had higher margins than our
distribution business, and will allow us to distribute additional home entertainment and
multimedia content through our distribution business. In addition, we believe that by
allowing the management of these publishing companies to focus on content licensing and
marketing rather than on distribution operations, they will be able to devote more time and
greater resources to their core competency, publishing. We believe that leveraging the core
assets and strengths of our distribution business will provide broader retail penetration,
distribution expertise and other services for our content and increase sales of our
publishing products. We may also seek selective acquisitions of distribution businesses.
 4




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##### 




    
    Distribute a Broader Range and Larger Volume of Products.We seek to distribute a broader
range and larger volume of home entertainment and multimedia products to our retail
customers by providing a broad selection of products and capitalizing on our customer
relationships. We seek to capture additional business from new and existing retail customers
by providing them with a lower all-in cost of procuring merchandise and getting product to
retailers shelves through efficient distribution. We expect that providing additional
products to retailers will enable us to gain category management opportunities and enhance
our reputation for product distribution expertise. We believe our approximately 60 strategic
account associates located throughout the United States and Canada will help position us to
improve the retail penetration of our published products to new and existing retail
customers.
    
    Integrating Our Technology and Systems with Retailers.We seek to enhance the link in the
supply chain between us and our publishers and retail customers through the integration of
our respective information and technology systems, including inventory management tools,
replenishment systems and point-of-sale information. We believe this integration will lead
to better in-stock levels of product, improved on-time arrivals of product to the customer,
enhanced inventory management and lower return rates for our customers, thereby
strengthening customer relationships.
    
    Providing Value-Added Services.We believe that due to increasing retailer logistic needs
and demands, including demands for new technology standards such as GTIN® (global trade item
number) and RFID (radio frequency identification devices), many publishers will be required
to decide whether to spend additional resources to update their distribution capabilities or
to select a distributor such as us that intends to offer such services. We believe that
implementing and offering these and other technologies should position us well to capture
additional business from existing and new publishers.
  Competitive Strengths
  
    
    Value-Added Services.We offer a wide range of distribution services and procurement
solutions intended to capitalize on our broad understanding of the products that we
distribute, the procurement process and the supply chain, as well as our logistics expertise
and systems capabilities. We believe that our advanced distribution infrastructure enables
us to provide customized procurement programs for our retail customers at a lower overall
cost than many of our competitors. In addition, we believe that our information technology
systems provide cost-effective interfacing with our customers information technology
systems, supporting integration of the procurement process. We believe that our focus on
providing customer-specific and cost-effective solutions is a key benefit that we provide to
our retail customers.
    
    Broad Product Offering.We provide our retail customers with a broad selection of home
entertainment and multimedia products that we believe allows us to better serve their home
entertainment and multimedia product requirements. In addition, we regularly survey the
markets we serve for new products with significant retail potential, that come from
publishers we currently have relationships with as well as those we have not distributed for
in the past.
    
    Established Content in our Publishing Business.We currently license a number of
well-known home entertainment and multimedia titles. Encore, whose published brands when
combined, rank it as the sixth largest PC software publisher in North America by dollar
sales (according to The NPD Group), publishes leading titles in the education, productivity,
kids and games software categories, including Print Shop, Print Master, Mavis Beacon, Zone
Alarm, Reader Rabbitand Hoyle Casino.According to The NPD Group, as of January 2005, Hoyle
Casinoheld the #1 rank in the PC Games/Family Entertainment category and the Hoylebrand
held a 14% share of this category based on dollar sales. According to The NPD Group, Mavis
Beacon isthe #1 ranking typing title with a 54% market share, as of January 2005. In
addition, our BCI subsidiary currently publishes home video for the television shows Rides
and Overhaulin,both featured on The Learning Channel, and PRIDE Fighting Championships,
featured on Pay-Per-View. Through our FUNimation business we also license and distribute a
portfolio of established animeand childrens entertainment titles in the United States,
including Dragon Ball Z, Fullmetal Alchemist, Yu-Gi-Oh!, Code Lyoko, Teenage Mutant Ninja
Turtles, Arthur, Noddy, Case Closed, Yu Yu Hakusho, Beyblade, Fruits Basketand Cabbage
Patch Kids.
 5




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##### 




    
    Established Relationships with Publishers and Retailers.Since our founding in 1983, we
have established distribution relationships with major retailers including Best Buy,
Wal-Mart/Sams Club and CompUSA, and we currently distribute to over 18,000 retail and
distribution center locations throughout the United States and Canada. We believe our strong
relationships throughout the supply chain, broad product offering and state-of-the-art
distribution facility permit us to offer industry-leading home entertainment and multimedia
products to our retail customers and provide access to attractive retail channels for
publishers of these products. We believe our relationships with leading publishers and our
efficient distribution of their products should provide opportunities for us to secure
distribution rights to leading products in the future. We believe that these relationships
give us a competitive advantage in the markets in which we operate and provide us with
attractive channels to distribute current and future products offered by our publishing
business.
    
    Efficient Operations and Operating Leverage.We believe that our competitive position is
enhanced by our efficient operations, which are based on extensive use of automation and
technology in our state-of-the-art distribution facility; centralization of functions such
as purchasing, accounting and information systems; and economies of scale. We recently
completed a state-of-the-art warehouse facility adjacent to our corporate headquarters. We
believe that this facility provides us with an industry-leading fulfillment infrastructure,
the ability to efficiently service our vendors and retail customers, and the capacity to
increase the number of products that we distribute.
 Distribution Markets
 PC Software
    Video Games Software and Accessories
   Major Label Music
   6




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##### 



Independent Label Music
   Major Studio Home Video
   Customers
 www.navarre.com
  Navarres Distribution Business Model
 Vendor Relationships
   7




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##### 



Retail Services
   Warehouse Systems
  E-Commerce
 www.navarre.com
 Publishing Markets
 Hoyle anime
 Encore
 Print Shop, Print
Master, Mavis Beacon, Zone Alarm, Reader Rabbit Hoyle Casino. Hoyle Hoyle Casino Mavis Beacon
  8




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##### 



Hoyle
 BCI
  Rides Overhaulin PRIDE Fighting Championships,
 FUNimation Business
 anime Dragon Ball Z, Fullmetal Alchemist, Yu-Gi-Oh!, Code Lyoko, Teenage Mutant Ninja
Turtles, Noddy, Arthur, Case Closed, Yu Yu Hakusho, Beyblade, Fruits Basket Cabbage Patch Kids
 anime anime anime
 Broadcast
 anime
 Titles
    
    Broadcast OutletDragon Ball Z
    
    Cartoon NetworkYu-Gi-Oh!*
    
    Cartoon Network and WBTeenage Mutant Ninja Turtles*
    
    Cartoon Network and FoxFullmetal Alchemist
    
    Cartoon NetworkBeyblade*
    
    ABC Family and ToonDisneyBraceface*
    
    DisneyArthur*
    
    PBSConnie the Cow*
    
    Noggin
 9




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##### 



Titles
    
    Broadcast OutletDragon Booster*
    
    ABC Family and ToonDisneyCode Lyoko*
    
    Cartoon NetworkSonic X*
    
    FoxShaman King*
    
    FoxTimothy Goes to School*
    
    Discovery Kids and TLCNever Ending Story*
    
    HBO FamilyDegrassi: The Next Generation*
    
    The NMy Dad the Rockstar*
    
    NickelodeonRedwall*
    
    PBSWinx*
    
    Cartoon Network and FoxCase Closed
    
    Cartoon Network
 
 
    
    FUNimation currently licenses the U.S. home video distribution rights for such titles.*
    
    Broadcast and certain other rights for such property are owned or licensed by third parties. Home Video Distribution
 anime
 Licensing and Merchandising
  Retail Sales and Web Sites
 anime Z-Store,
 Competition
  
    
    obtain exclusive national distribution contracts and licenses with independent music labels and manufacturers;
    
    obtain proprietary publishing rights with various rights holders and brand owners;
    
    maintain our margins and volume;
    
    expand our sales through a varied range of products and personalized services;
    
    anticipate changes in the marketplace including technological developments and consumer
interest in our proprietary products; and
    
    maintain operating expenses at an appropriate level.
 10




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##### 



Backlog
  Environmental Matters
  Employees
  RECENT DEVELOPMENTS
 Restatements
 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
  11




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##### 



Restatements  Previously Reported
    Capital Resources  Financing
    FUNimation Acquisition
  AVAILABLE INFORMATION
 www.navarre.com
 12




---



##### 



FORWARD-LOOKING STATEMENTS / IMPORTANT RISK FACTORS
    13




---



##### 



Risks Relating To Our Business And Industry
 We derive a substantial portion of our total net sales from a small group of customers. A reduction
in sales to any of these customers could have a material adverse effect on our net sales and
profitability.
  The loss of a significant vendor or manufacturer or a decline in the popularity of its products
could negatively affect our product offerings and reduce our net sales and profitability.
   The continued growth and breadth of our exclusive distribution business could be negatively
affected if we fail to sign or renew distribution agreements with independent music labels.
  The loss of our founder could affect the depth, quality and effectiveness of our management team.
In addition, if we fail to attract and retain qualified personnel, the depth, quality and
effectiveness of our management team and employees could be negatively affected.
 14




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##### 



We may not be able to sustain the recent growth in our publishing segment.
  We may not be successful in implementing our acquisition strategy, and future acquisitions could
result in disruptions to our business by, among other things, distracting management time and
diverting financial resources. Further, if we are unsuccessful in integrating FUNimation or other
acquired companies into our business, it could materially and adversely affect our financial
condition and operating results.
  Our business is seasonal and variable in nature and, as a result, the level of sales and payment
terms during our peak season could adversely affect our results of operations and liquidity.
  15




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##### 




    
    the popularity of the pre-recorded music, DVD and PC software titles released during the quarter;
    
    product marketing and promotional activities;
    
    the opening and closing of retail stores by our major customers;
    
    payment terms offered to certain of our retail customers during the holiday season;
    
    fluctuations of inventory levels;
    
    the extension, termination or non-renewal of existing distribution agreements and licenses; and
    
    general economic changes affecting the buying pattern of retailers, particularly those
changes affecting consumer demand for home entertainment products and PC software.
 If we fail to meet our significant working capital requirements or if our working capital
requirements increase substantially, our business and prospects could be adversely affected.
   Product returns or inventory obsolescence could reduce our sales and profitability or could
negatively impact our liquidity.
  We are subject to the risk that our inventory values may decline due to, among other things,
changes in demand and that protective terms under our supplier agreements may not adequately cover
the decline in values, which could result in lower gross margins or inventory write-downs.
  16




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##### 



We have significant credit exposure and negative trends or other factors could cause us significant
credit loss.
   We may not be able to adequately adjust our cost structure in a timely fashion in response to a
decrease in net sales, which may cause our profitability to suffer.
  Our distribution and publishing businesses operate in highly competitive industries and compete
with large national firms. Further competition, among other things, could reduce our sales volume
and margins.
  
    
    obtain exclusive national distribution contracts and licenses with independent music labels and manufacturers;
    
    obtain proprietary publishing rights with various rights holders and brand owners;
    
    maintain our margins and volume;
    
    expand our sales through a varied range of products and personalized services;
    
    anticipate changes in the marketplace including technological developments and consumer
interest in our proprietary products; and
    
    maintain operating expenses at an appropriate level.
  17




---



##### 



We depend on third party shipping and fulfillment companies for the delivery of our products.
  We depend on a variety of systems for our operations, and a failure of these systems could disrupt
our business and harm our reputation and net sales and negatively impact our results of operations.
     Technology developments, particularly in the electronic downloading arena, may adversely affect our
net sales, margins and results of operations.
  18




---



##### 



Increased counterfeiting or piracy may negatively affect the demand for our home entertainment
products.
  We may not be able to successfully protect our intellectual property rights.
  Interruption of our business or catastrophic loss at any of our facilities could lead to a
curtailment or shutdown of our business, which would reduce our net sales and earnings.
  Future terrorist or military actions could result in disruption to our operations or loss of
assets, in certain markets or globally.
  Legislative actions, higher director and officer insurance costs and potential new accounting
pronouncements are likely to cause our general and administrative expenses to increase and impact
our future financial condition and results of operations.
  Any material weakness or significant deficiency in our internal controls may adversely affect our
ability to report our financial results on a timely and accurate basis.
  19




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##### 



Risks Relating to the FUNimation Business
 A substantial portion of FUNimations revenues typically derive from a small number of licensed
properties and a small number of licensors and FUNimations content is highly concentrated in the anime genre.
 anime Dragon Ball
  FUNimations success depends upon retaining the services of key FUNimation personnel.
   FUNimations business is dependent on a few customers, and a loss of any of these customers could
have a material adverse effect on its revenues and profitability.
 Accounting
by Producers or Distributors of Films.
 FUNimations revenues are dependent on consumer preferences and demand.
 anime
 20




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##### 




    
    any of FUNimations current properties, product concepts or programming will continue to
be popular for any significant period of time;
    
    any new properties, product concepts or programming FUNimation represents or produces
will achieve an adequate degree of popularity; or
    
    any propertys life cycle will be sufficient to permit FUNimation to profitably recover
advance payments, guarantees, development, marketing, royalties and other costs.
  FUNimation has significant credit exposure. Negative trends and other factors could cause it
significant credit loss.
  FUNimations revenues are substantially dependent on television exposure for its licensed
properties.
 anime
 Excessive product returns or inventory obsolescence could significantly reduce FUNimations
revenues or profitability.
   FUNimation may experience significant fluctuations in operating results resulting from management
judgments.
  21




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##### 



FUNimations business operates in a highly competitive industry and its business could be
negatively affected if it fails to sign or renew licenses of attractive content.
 anime anime
 If FUNimation fails to meet its significant working capital requirements, its ability to license
and distribute future content or finance accounts receivable could be negatively affected.
 anime
 FUNimation may not be able to successfully protect its intellectual property rights.
  FUNimations business depends in part on the Internet, and a failure of this system could disrupt
and harm FUNimations business.
  Interruption of FUNimations business or catastrophic loss at any of its facilities or its
production masters could lead to a curtailment or shutdown of its business.
  22




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##### 



FUNimation depends on third party shipping and fulfillment companies for the delivery of its
products.
  Increased counterfeiting or piracy may negatively affect the demand for FUNimations home
entertainment products.
  Future terrorist or military actions could result in disruption to FUNimations operations or loss
of assets, in certain markets or globally.
  Risks Relating to Indebtedness
 The level of our indebtedness could adversely affect our financial condition.
   
    
    make it more difficult for us to satisfy our obligations with respect to other indebtedness;
    
    increase our vulnerability to adverse economic and industry conditions;
    
    require us to dedicate a substantial portion of our cash flow from operations to the
payment of our indebtedness, thereby reducing the availability of cash to fund working
capital and capital expenditures and for other general corporate purposes;
    
    restrict us from making strategic acquisitions, acquiring new content or exploring other business opportunities;
    
    limit our ability to obtain financing for working capital, capital expenditures, general corporate purposes or acquisitions;
    
    place us at a disadvantage compared to our competitors that have less indebtedness; and
    
    limit our flexibility in planning for, or reacting to, changes in our business and industry.
 We may be unable to generate sufficient cash flow to service our debt obligations.
  23




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##### 




    
    our financial condition at the time;
    
    restrictions in our credit agreement or other outstanding indebtedness; and
    
    other factors, including the condition of the financial markets or the distribution and publishing markets.
  We may be able to incur additional indebtedness, which could further exacerbate the risks
associated with our current indebtedness level.
  Our credit agreement contains significant restrictions that limit our operating and financial
flexibility.
  Most of our outstanding indebtedness bears interest at variable rates. Any increase in interest
rates will reduce funds available to us for our operations and future business opportunities and
will adversely affect our leveraged capital structure.
  Other Risks
  
 Item 2. Properties
  24




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##### 



Item 3. Legal Proceedings
  ValueVision Media, Inc. v. Navarre Corporation
     25




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##### 



Sybersound Records, Inc. v. BCI Eclipse, LLC, et al.
   Sybersound Records, Inc. v. Navarre Corporation, BCI Eclipse, LLC, et al.
    Faulconer Productions Music Corp. v. FUNimation Productions, Inc. et al
    26




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##### 



Aviva Partners LLC, individually on behalf of all other similarly situated, v. Navarre
Corporation, Eric H. Paulsen and James Gilbertson
    
 Item 4. Submission of Matters to a Vote of Security Holders
  27




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##### 



PART II
 
 Item 5. Market for Registrants Common Equity, and Related Stockholder Matters and Issuer Purchase
of Equity Securities
 Price Range of Common Stock
  Quarter
    
    High
    
    LowFiscal 2005
    
    First
    
    $
    14.39
    
    
    $
    5.84Second
    
    
    16.37
    
    
    
    12.65Third
    
    
    18.13
    
    
    
    14.27Fourth
    
    
    19.02
    
    
    
    6.68Fiscal 2004
    
    First
    
    $
    2.37
    
    
    $
    1.67Second
    
    
    3.00
    
    
    
    1.96Third
    
    
    7.13
    
    
    
    2.74Fourth
    
    
    7.44
    
    
    
    5.85
 Holders and Dividends
  Equity Compensation Plan Information
     28




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##### 



Plan Category
    
    Number of securities to be
    
    Weighted-average exercise
    
    Number of securitiesissued upon exercise of
    
    price of outstanding options,
    
    remaining available foroutstanding options,
    
    warrants and rights
    
    future issuance under equitywarrants and rights
    
    
    
    compensation plans(excluding securitiesreflected in column (a))(a)
    
    (b)
    
    (c)Equity
compensation plans
approved by
security holders
    
    
    2,787,800
    
    
    $
    7.24
    
    
    
    771,854Equity compensation
plans not approved
by security holders
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-Total
    
    
    2,787,800
    
    
    $
    7.24
    
    
    
    771,854
 
 Item 6. Selected Financial Data
  29




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##### 



Fiscal Years ended March 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(Restated)
    
    (Restated)
    
    (Restated)Statement of operations data:Net sales
    
    $
    596,615
    
    
    $
    470,877
    
    
    $
    356,816
    
    
    $
    303,817
    
    
    $
    314,199Gross profit, exclusive of depreciation and amortization
    
    
    91,177
    
    
    
    58,021
    
    
    
    45,475
    
    
    
    32,893
    
    
    
    37,421Income (loss) from operations
    
    
    9,535
    
    
    
    7,065
    
    
    
    3,597
    
    
    
    521
    
    
    
    (2,364
    )Interest expense
    
    
    (783
    )
    
    
    (378
    )
    
    
    (194
    )
    
    
    (173
    )
    
    
    (223
    )Other income (expense)
    
    
    408
    
    
    
    (456
    )
    
    
    447
    
    
    
    884
    
    
    
    2,000Net income (loss) before tax
    
    
    9,160
    
    
    
    6,231
    
    
    
    3,850
    
    
    
    2,712
    
    
    
    (10,925
    )Tax benefit
    
    
    1,006
    
    
    
    583
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    10,166
    
    
    $
    6,814
    
    
    $
    3,913
    
    
    $
    2,712
    
    
    $
    (10,925
    )Earnings (loss) per common share:Basic
    
    $
    .38
    
    
    $
    .30
    
    
    $
    .18
    
    
    $
    .12
    
    
    $
    (.43
    )Diluted
    
    $
    .35
    
    
    $
    .28
    
    
    $
    .18
    
    
    $
    .12
    
    
    $
    (.43
    )Weighted average shares outstanding:Basic
    
    
    26,830
    
    
    
    22,780
    
    
    
    21,616
    
    
    
    22,553
    
    
    
    25,137Diluted
    
    
    28,782
    
    
    
    24,112
    
    
    
    21,841
    
    
    
    22,575
    
    
    
    25,137Balance sheet data:Total assets
    
    $
    195,892
    
    
    $
    154,579
    
    
    $
    109,665
    
    
    $
    87,368
    
    
    $
    93,918Short-term borrowings
    
    
    334
    
    
    
    651
    
    
    
    805
    
    
    
    
    
    
    
    Long-term debt
    
    
    237
    
    
    
    
    
    
    
    268
    
    
    
    
    
    
    
    Shareholders equity
    
    
    77,284
    
    
    
    53,078
    
    
    
    28,263
    
    
    
    24,350
    
    
    
    24,350
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
    anime
  30




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##### 



Restatement
 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
  Restatement
 Previously reported
    Executive Summary
   31




---



##### 



Critical Accounting Policies and Estimates
   Revenue Recognition
    Allowance for Doubtful Accounts
  32




---



##### 



Goodwill Impairment
  Impairment of Long-Lived Assets
 Accounting for
the Impairment or Disposal of Long-Lived Assets
 Inventory Valuation
  Income Taxes
  Contingencies and Litigation
  33




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##### 



Reconciliation of GAAP Net Sales to Net Sales Before Inter-company Eliminations
  Year EndedMarch 31,
    
    
    March 31,
    
    
    March 31,(Unaudited)
    
    2005
    
    
    2004
    
    
    2003(In thousands)
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Net salesDistribution
    
    $
    556,927
    
    
    $
    444,743
    
    
    $
    353,316Publishing
    
    
    95,777
    
    
    
    46,177
    
    
    
    14,715Other
    
    
    352
    
    
    
    
    
    
    
    Net sales before inter-company eliminations
    
    
    653,056
    
    
    
    490,920
    
    
    
    368,031Inter-company eliminations
    
    
    (56,441
    )
    
    
    (20,043
    )
    
    
    (11,215
    )Net sales as reported
    
    $
    596,615
    
    
    $
    470,877
    
    
    $
    356,816
 Results of Operations
  Fiscal Years Ended March 31,2005
    
    2004
    
    2003(Restated)
    
    (Restated)
    
    (Restated)Net sales:Distribution
    
    
    93.3
    %
    
    
    94.4
    %
    
    
    99.0
    %Publishing
    
    
    16.1
    
    
    
    9.8
    
    
    
    4.1Other
    
    
    0.1
    
    
    
    
    
    
    
    Elimination of sales
    
    
    (9.5
    )
    
    
    (4.2
    )
    
    
    (3.1
    )Total net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales  exclusive of depreciation and amortization
    
    
    84.7
    
    
    
    87.7
    
    
    
    87.3Gross profit
    
    
    15.3
    
    
    
    12.3
    
    
    
    12.7Selling and marketing
    
    
    3.6
    
    
    
    3.6
    
    
    
    3.9Distribution and warehousing
    
    
    1.5
    
    
    
    1.3
    
    
    
    1.5General and administrative
    
    
    8.0
    
    
    
    5.5
    
    
    
    5.7Depreciation and amortization
    
    
    0.6
    
    
    
    0.4
    
    
    
    0.6Total operating expenses
    
    
    13.7
    
    
    
    10.8
    
    
    
    11.7Income from operations
    
    
    1.6
    
    
    
    1.5
    
    
    
    1.0Interest expense
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (0.1
    )Interest income
    
    
    0.1
    
    
    
    0.1
    
    
    
    Debt extinguishment
    
    
    
    
    
    
    (0.2
    )
    
    
    Other income (expense), net
    
    
    
    
    
    
    
    
    
    
    0.2Tax benefit
    
    
    0.1
    
    
    
    0.1
    
    
    
    Net income
    
    
    1.7
    %
    
    
    1.4
    %
    
    
    1.1
    %
  34




---



##### 



Distribution Segment
  Fiscal 2005 (Restated) Results Compared With Fiscal 2004 (Restated)
 Net Sales
  Gross Profit
  Operating Expenses
     35




---



##### 



Fiscal 2004 (Restated) Results Compared With Fiscal 2003 (Restated)
 Net Sales
  Gross Profit
  Operating Expenses
    36




---



##### 



Publishing Segment
  Fiscal 2005 (Restated) Results Compared With Fiscal 2004 (Restated)
     Fiscal 2004 (Restated) Results Compared With Fiscal 2003 (Restated)
    37




---



##### 



Other Segment
  Fiscal 2005 (Restated) Results Compared With Fiscal 2004 (Restated)
  Market Risk
  Seasonality and Inflation
  Liquidity and Capital Resources
 Cash Flow Analysis
 Operating Activities
    38




---



##### 



39




---



##### 



Investing Activities
     Financing Activities
   Capital Resources
     40




---



##### 



Liquidity
        41




---



##### 



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
    
    
    250
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    License and distribution agreement
    
    
    7,287
    
    
    
    7,287
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    30,955
    
    
    $
    9,900
    
    
    $
    4,145
    
    
    $
    3,897
    
    
    $
    13,013
 
 Item 7a  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Market risk.
 Interest Rate Risk.
 FOREIGN CURRENCY RISK
  
 Item 8. Financial Statements and Supplementary Data
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Managements Report on Internal Control over Financial Reporting
  Internal Control-Integrated Framework
 42




---



##### 




    
    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 a 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, 2003, 2004 and 2005.
    
    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 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.
  Evaluation of Disclosure Controls and Procedures
    Changes in Internal Control over Financial Reporting
  Remediation Efforts Related to Deficiencies Noted in Managements Report on Internal Control over
Financial Reporting
  43




---



##### 



Item 9B. Other Information
 Not applicable.
 44




---



##### 



PART III
 
 Item 10. Directors and Executive Officers of the Registrant
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13. Certain Relationships and Related Transactions
  
 Item 14. Principal Accountant Fees and Services
  
 PART IV
 
 Item 15. Exhibits and Financial Statements Schedules
 (a)
    
    Documents filed as part of this report -
 (1)
    
    Financial Statements. Our following consolidated financial statements and the
Reports of Independent Registered Public Accounting Firms thereon are set forth at the end
of this document:
 (i)
    
    Reports of Independent Registered Public Accounting Firms.(ii)
    
    Consolidated Balance Sheets as of March 31, 2005
(Restated) and 2004 (Restated).(iii)
    
    Consolidated Statements of Operations for the years ended
March 31, 2005 (Restated), 2004 (Restated) and 2003 (Restated).(iv)
    
    Consolidated Statements of Shareholders Equity for the
years ended March 31, 2005 (Restated), 2004 (Restated) and 2003 (Restated).(v)
    
    Consolidated Statements of Cash Flows for the years ended
March 31, 2005 (Restated), 2004
(Restated) and 2003 (Restated).(vi)
    
    Notes to Consolidated Financial Statements
 45




---



##### 



(2)
    
    Financial Statement Schedules
 (i)
    
    Schedule II  Valuation and Qualifying Accounts and Reserves
  (3)
    
    Exhibits
 ItemNo.
    
    Description2.1
    
    Asset Purchase Agreement dated November 3, 2003 between BCI Eclipse Company, LLC and the Company
(incorporated by reference to Exhibit 2.1 to the Companys Form 10-Q for the quarter ended September
30, 2003 (File No. 0-22982)).3.1
    
    Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Companys Annual Report
on Form 10-K for the year ended March 31, 2000 (File No. 0-22982)).3.2
    
    Bylaws of the Company (incorporated by reference to Exhibit 4.2 to the Companys Registration
Statement on Form S-3 (File No. 333-111733)).3.3
    
    Certificate of Rights and Preferences of Series B Convertible Preferred Stock (incorporated by
reference to Exhibit 2 to the Companys Form 8-K dated August 20, 1999 (File No. 0-22982)).3.4
    
    Form of Warrant Agreement (incorporated by reference to Exhibit 10.3 to the Companys Form 8-K dated
December 16, 2003 (File No. 0-22982)).10.1 *
    
    Employment Agreement dated November 1, 2001 between the Company and Eric H. Paulson (incorporated by
reference to Exhibit 10.1 to the Companys Form 10-Q for the quarter ended December 31, 2001 (File
No. 0-22982)).10.2 *
    
    Amendment to Employment Agreement between the Company and Eric H. Paulson (incorporated by reference
to Exhibit 10.1.1 to the Companys Form 10-Q for the quarter ended December 31, 2003 (File No.
0-22982)).10.3 *
    
    Employment Agreement dated January 2, 2002 between the Company and Charles E. Cheney (incorporated
by reference to Exhibit 10.2 to the Companys Annual Report on Form 10-K for the year ended March
31, 2002 (File No. 0-22982)).10.4 *
    
    Employment Agreement between Encore Software, Inc. and Michael Bell (incorporated by reference to
Exhibit 10.3 to the Companys Annual Report on Form 10-K for the year ended March 31, 2003 (File No.
0-22982)).10.5 *
    
    Employment Agreement dated November 5, 2003, between BCI Eclipse Company, LLC and Edward D. Goetz
(incorporated by reference to Exhibit 10.16 to the Companys Form 10-Q for the quarter ended
September 30, 2003 (File No. 0-22982)).10.6 *
    
    1992 Stock Option Plan, amended and restated (incorporated by reference to Exhibit 10.3 to the
Companys Annual Report on Form 10-K for the year ended March 31, 2002 (File No. 0-22982)).10.7 *
    
    2003 Amendment to the Companys 1992 Stock Option Plan (incorporated by reference to Exhibit 99.1 to
the Companys Registration Statement on Form S-8 (File No. 333-109056)).10.8 *
    
    Form of Individual Stock Option Agreement under 1992 Stock Option Plan (incorporated by reference to
Exhibit 10.4 to the Companys Registration Statement on Form S-1 (No. 333-68392)).10.9 *
    
    Form of Termination Agreement for certain of the Companys Executives (incorporated by reference to
Exhibit 10.2 to the Companys Form 10-Q for the quarter ended December 31, 2001 (File No. 0-22982)).10.10
    
    Lease dated March 12, 1998 between the Company and Cambridge Apartments, Inc. with respect to the
corporate headquarters in New Hope, MN (incorporated by reference to Exhibit 10.6 to the Companys
Annual Report on Form 10-K for the year ended March 31, 1999 (File No. 0-22982)).10.11
    
    Amendment No. 1 to Lease Agreement between the Company and Cambridge Apartments, Inc. dated April 1,
1998 (incorporated by reference to Exhibit 10.9.1 to the Companys Form 10-Q for the quarter ended
June 30, 2003 (File No. 0-22982)).
 46




---



##### 



ItemNo.
    
    Description10.12
    
    Amendment No. 2 to Lease Agreement between the Company and Cambridge Apartments, Inc. dated July 14,
2003 (incorporated by reference to Exhibit 10.9.2 to the Companys Form 10-Q for the quarter ended
June 30, 2003 (File No. 0-22982)).10.13
    
    Lease dated May 1, 1999 between the Company and Sunlite III, LLP with respect to a second facility
in Brooklyn Park, MN (incorporated by reference to Exhibit 10.7 to the Companys Annual Report on
Form 10-K for the year ended March 31, 1999 (File No. 0-22982)).10.14
    
    Amendment Nos. 1, 2 and 3 to Lease Agreement (incorporated by reference to Exhibit 10.10.1 to the
Companys Annual Report on Form 10-K for the year ended March 31, 2003 (File No. 0-22982)).10.15
    
    Lease dated December 17, 1999 between Encore and EastGroup Properties L.P., with respect to a third
facility in Gardena, California (incorporated by reference to Exhibit 10.11 to the Companys Annual
Report on Form 10-K for the year ended March 31, 2003 (File No. 0-22982)).10.16
    
    First Amendment to Lease dated June 27, 2002 between Encore and Eastgroup Properties L.P.
(incorporated by reference to Exhibit 10.11.1 to the Companys Annual Report on Form 10-K for the
year ended March 31, 2003 (File No. 0-22982)).10.17
    
    Credit Agreement dated October 3, 2001 between General Electric Capital Corporation and the Company
(incorporated by reference to Exhibit 10.1 to the Companys Form 10-Q for the quarter ended
September 30, 2001 (File No. 0-22982)).10.18
    
    Amendment No. 1 and Limited Waiver with Respect to Credit Agreement dated March 4, 2002
(incorporated by reference to Exhibit 10.8.1 to the Companys Annual Report on Form 10-K for the
year ended March 31, 2002 (File No. 0-22982)).10.19
    
    Amendment No. 2 to Credit Agreement dated August 1, 2002 (incorporated by reference to Exhibit 10.1
to the Companys Form 10-Q for the quarter ended September 30, 2002 (File No. 0-22982)).10.20
    
    Amendment No. 3 to Credit Agreement dated March 30, 2003 (incorporated by reference to Exhibit
10.12.3 to the Companys Annual Report on Form 10-K for the year ended March 31, 2003 (File No.
0-22982)).10.21
    
    Amendment No. 4 to Credit Agreement dated June 24, 2003 (incorporated by reference to Exhibit
10.12.4 to the Companys Annual Report on Form 10-K for the year ended March 31, 2003 (File No.
0-22982)).10.22
    
    Amendment No. 5 to Credit Agreement dated October 23, 2003 (incorporated by reference to Exhibit
10.12.5 to the Companys Form 10-Q for the quarter ended September 30, 2003 (File No. 0-22982)).10.23
    
    Amendment No. 6 to Credit Agreement dated November 5, 2003 (incorporated by reference to Exhibit
10.12.6 to the Companys Form 10-Q for the quarter ended September 30, 2003 (File No. 0-22982)).10.24
    
    Separation Agreement dated as of March 1, 1999 between the Company and NetRadio Corporation
(incorporated by reference to Exhibit 10.16 to NetRadio Corporations Form S-1/A Registration
Statement (File No. 333-73261)).10.25
    
    Term Note dated October 14, 1999, between the Company and NetRadio Corporation (incorporated by
reference to Exhibit 10.11 to the Companys Annual Report on Form 10-K for the year ended March 31,
2000 (File No. 0-22982)).10.26
    
    Amendment No. 1 to Term Note dated March 26, 2001, between the Company and NetRadio Corporation
(incorporated by reference to Exhibit 10.1 to NetRadio Corporations Form 10-Q for the quarter ended
March 31, 2001 (File No. 0-27575)).10.27
    
    Amendment No. 2 to Term Note dated March 30, 2001, between the Company and NetRadio Corporation
(incorporated by reference to Exhibit 10.2 to NetRadio Corporations Form 10-Q for the quarter ended
March 31, 2001 (File No. 0-27575)).10.28
    
    Form of Warrant dated May 1, 1998 issued to investors in connection with the Companys May 1, 1998
private placement of Class A Convertible Preferred Stock (incorporated by reference to Exhibit 4 to
the Companys Form 8-K dated May 1, 1998 (File No. 0-22982)).10.29
    
    Amended and Restated Asset Purchase Agreement effective as of July 10, 2002 by and between the
Company and Encore Software, Inc. (incorporated by reference to Exhibit 10.1 to the Companys Form
8-K dated August 14, 2002 (File No. 0-22982)).
 47




---



##### 



ItemNo.
    
    Description10.30
    
    Amendment No. 1 to Asset Purchase Agreement effective as of July 31, 2002, by and among the Company,
Encore Software, Inc. and Encore Acquisition Corporation (incorporated by reference to Exhibit 10.2
to the Companys Form 8-K dated August 14, 2002 (File No. 0-22982)).10.31
    
    Agreement of Reciprocal Easements, Covenants, Conditions and Restrictions dated June 16, 2003
(incorporated by reference to Exhibit 10.9.3 to the Companys Form 10-Q for the quarter ended June
30, 2003 (File No. 0-22982)).10.32
    
    Incentive Stock Option Agreement dated September 6, 2002 between Cary Deacon and the Company
(incorporated by reference to Exhibit 10.17 to the Companys Form 10-Q for the quarter ended
September 30, 2003 (File No. 0-22982)).10.33
    
    Addendum to Incentive Stock Option Agreement dated November 13, 2003 (incorporated by reference to
Exhibit 10.17.1 to the Companys Form 10-Q for the quarter ended September 30, 2003 (File No.
0-22982)).10.34
    
    Form of Securities Purchase Agreement dated as of December 15, 2003 among the Corporation and the
various purchasers (incorporated by reference to Exhibit 10.1 to the Companys Form 8-K dated
December 16, 2003 (File No. 0-22982)).10.35
    
    Form of Registration Rights Agreement dated as of December 15, 2003 among the Corporation and the
various purchasers (incorporated by reference to Exhibit 10.2 to the Companys Form 8-K dated
December 16, 2003 (File No. 0-22982)).10.36
    
    Form of Separation Agreement with Charles E. Cheney dated April 30, 2004 (incorporated by reference
to Exhibit 10.41 to the Companys Form 10-K for the year ended March 31, 2004 (File No. 0-22982)).10.37
    
    Form of Assignment of Lease between BCI Eclipse LLC and BCI Eclipse Company, LLC dated November 3,
2003 (incorporated by reference to Exhibit 10.42 to the Companys Form 10-K for the year ended March
31, 2004 (File No. 0-22982)).10.38
    
    Form of Amendment No. 7 to Credit Agreement dated January 26, 2004 (incorporated by reference to
Exhibit 10.43 to the Companys Form 10-K for the year ended March 31, 2004 (File No. 0-22982)).10.39
    
    Form of Amendment No. 8 to Credit Agreement dated March 9, 2004 (incorporated by reference to
Exhibit 10.44 to the Companys Form 10-K for the year ended March 31, 2004 (File No. 0-22982)).10.40
    
    Form of Amendment No. 9 to Credit Agreement dated March 30, 2004 (incorporated by reference to
Exhibit 10.45 to the Companys Form 10-K for the year ended March 31, 2004 (File No. 0-22982)).10.41
    
    Form of Amended and Restated Credit Agreement with General Electric Capital Corporation dated June
18, 2004 (incorporated by reference to Exhibit 10.46 to the Companys Form 10-K for the year ended
March 31, 2004 (File No. 0-22982)).10.42
    
    Form of Lease Agreement between the Company and NL Ventures IV New Hope, L.P. dated May 27, 2004
(incorporated by reference to Exhibit 10.47 to the Companys Form 10-K for the year ended March 31,
2004 (File No. 0-22982)).10.43
    
    Form of Third Amendment to Office/Warehouse Lease between Cambridge Apartments, Inc. and the Company
dated February 23, 2004 (incorporated by reference to Exhibit 10.48 to the Companys Form 10-K for
the year ended March 31, 2004 (File No. 0-22982)).10.44
    
    Form of Fourth Amendment to Office/Warehouse Lease between Cambridge Apartments, Inc. and the
Company dated June 2004 (incorporated by reference to Exhibit 10.49 to the Companys Form 10-K for
the year ended March 31, 2004 (File No. 0-22982)).10.45
    
    Amendment No. 2 to Lease Agreement between Airport One Limited Partnership and the Company dated
March 21, 2004 (incorporated by reference to Exhibit 10.50 to the Companys Form 10-K for the year
ended March 31, 2004 (File No. 0-22982)).10.46
    
    Addendum to Lease Agreement between Cambridge Apartments, Inc. and the Company dated May 27, 2004
(incorporated by reference to Exhibit 10.51 to the Companys Form 10-K for the year ended March 31,
2004 (File No. 0-22982)).10.47
    
    Form of BCI Eclipse Lease Agreement effective October 1, 1999 (incorporated by reference to Exhibit
10.52 to the Companys Form 10-K for the year ended March 31, 2004 (File No. 0-22982)).10.48
    
    First Amendment to BCI Eclipse Lease Agreement made as of January 5, 2000 (incorporated by reference
to Exhibit
 48




---



##### 



ItemNo.
    
    Description10.53 to the Companys Form 10-K for the year ended March 31, 2004 (File No. 0-22982)).10.49
    
    Amended and Restated Credit Agreement dated June 18, 2004 between the Company and General Electric
Capital Corporation (incorporated by reference to Exhibit 10.54 to the Companys Form 10-Q for the
quarter ended September 30, 2004 (File No. 0-22982)).10.50
    
    Amendment No. 1 and Limited Waiver with Respect to Amended and Restated Credit Agreement dated
August 25, 2004 (incorporated by reference to Exhibit 10.55 to the Companys Form 10-Q for the
quarter ended September 30, 2004 (File No. 0-22982)).10.51
    
    Amendment No. 2 and Limited Waiver with Respect to Amended and Restated Credit Agreement dated
October 18, 2004 (incorporated by reference to Exhibit 10.56 to the Companys Form 10-Q for the
quarter ended September 30, 2004 (File No. 0-22982)).10.52
    
    Lease dated October 8, 2004, between Encore Software, Inc. and Kilroy Realty, L.P., with respect to
an office facility in El Segundo, California (incorporated by reference to Exhibit 10.57 to the
Companys Form 10-Q for the quarter ended September 30, 2004 (File No. 0-22982)).10.53
    
    Form of License and Distribution Agreement (Manufacturing Rights) (2004-2005) between Riverdeep Inc.
and Encore Software, Inc. dated as of March 29, 2004 (incorporated by reference to Exhibit 10.1 to
the Companys Form 10-Q/A for the quarter ended September 30, 2004 (File No. 0-22982)).10.54
    
    Form of License and Distribution Agreement (Manufacturing Rights) (2005-2007) between Riverdeep Inc.
and Encore Software, Inc. dated as of March 29, 2004 (incorporated by reference to Exhibit 10.2 to
the Companys Form 10-Q/A for the quarter ended September 30, 2004 (File No. 0-22982)).10.55
    
    Form of Addendum #1 to Licensing and Distribution Agreements (2004-2005 and 2005-2007) between
Riverdeep, Inc. and Encore Software, Inc. dated as of April 13, 2004 (incorporated by reference to
Exhibit 10.3 to the Companys Form 10-Q/A for the quarter ended September 30, 2004 (File No.
0-22982)).10.56
    
    Form of Addendum #2 to Licensing and Distribution agreements (2004-2005 and 2005-2007) between
Riverdeep, Inc. and Encore Software, Inc. dated October 2004 (incorporated by reference to Exhibit
10.4 to the Companys Form 10-Q/A for the quarter ended September 30, 2004 (File No. 0-22982)).10.57 *
    
    Navarre Corporation 2004 Stock Plan (incorporated by reference to Exhibit D to the Companys Proxy
Statement filed July 27, 2004 (File No. 0-22982)).10.58*
    
    Form of 2004 Stock Plan Incentive Stock Option Agreement.10.59*
    
    Form of 2004 Stock Plan Non-Employee Director Stock Option Agreement.10.60
    
    Form of Senior Debt Indenture (incorporated by reference to Exhibit 4(a) to the Companys
Registration Statement on Form S-3 filed September 28, 2004 (File No. 333-119260)).10.61
    
    Form of Senior Debt Indenture (incorporated by reference to Exhibit 4(c) to the Companys
Registration Statement on Form S-3 filed September 28, 2004 (File No. 333-119260)).10.62
    
    FUNimation Partnership Interest Purchase Agreement, dated January 10, 2005 (incorporated by
reference to Exhibit 10.1 to the Companys Form 8-K filed January 14, 2005 (File No. 0-22982)).10.63
    
    Form of Assignment and Assumption Agreement (incorporated by reference to Exhibit 10.1(a) to the
Companys Form 8-K filed January 14, 2005 (File No. 0-22982)).10.64*
    
    Form of Gen Fukanaga Employment Agreement (incorporated by reference to Exhibit 10.1(b) to the
Companys Form 8-K filed January 14, 2005 (File No. 0-22982)).10.65
    
    Form of Escrow Agreement (incorporated by reference to Exhibit 10.1(c) to the Companys Form 8-K
filed January 14, 2005 (File No. 0-22982)).10.66
    
    Form of Non-Competition Agreement (incorporated by reference to Exhibit 10.1(d) to the Companys
Form 8-K filed January 14, 2005 (File No. 0-22982)).10.67
    
    Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.1(e) to the Companys
Form 8-K filed January 14, 2005 (File No. 0-22982)).
 49




---



##### 



ItemNo.
    
    Description10.68
    
    Form of Release (incorporated by reference to Exhibit 10.1(f) to the Companys Form 8-K filed
January 14, 2005 (File No. 0-22982)).10.69
    
    Limited Waiver and Third Amendment to Amended and Restated Credit Agreement, filed January 14, 2005
(incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed January 14, 2005 (File
No. 0-22982)).10.70
    
    Amendment No. 3 to Lease Agreement between Airport One Limited Partnership and the Company dated
November 23, 2004 (incorporated by reference to Exhibit 10.1 to the Companys Form 10-Q for the
quarter ended December 31, 2005 (File No. 0-22982)).10.71
    
    Form of Addendum #3 to Licensing and Distribution Agreements (2004-2005 and 2005-2007) between
Riverdeep, Inc. and Encore Software, Inc. dated November 2004 (incorporated by reference to Exhibit
10.2 to the Companys Form 10-Q for the quarter ended December 31, 2005 (File No. 0-22982)).10.72
    
    Amendment No. 1 to Lease Agreement between Encore Software, Inc. and Kilroy Realty, L.P. dated
December 29, 2004 (incorporated by reference to Exhibit 10.3 to the Companys Form 10-Q for the
quarter ended December 31, 2005 (File No. 0-22982)).10.73
    
    Limited Waiver With Respect To Amended and Restated Credit Agreement dated March 15, 2005
(incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed March 17, 2005 (File No.
0-22982)).10.74
    
    Stock Purchase Agreement between the Company and Michael Bell dated March 14, 2005 (incorporated by
reference to Exhibit 10.2 to the Companys Form 8-K filed March 17, 2005 (File No. 0-22982)).10.75
    
    Registration Rights Agreement between the Company and Michael Bell dated March 14, 2005
(incorporated by reference to Exhibit 10.3 to the Companys Form 8-K filed March 17, 2005 (File No.
0-22982)).10.76
    
    Amendment to Stock Purchase Agreement between the Company and Michael Bell dated March 31, 2005
(incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed April 14, 2005 (File No.
0-22982)).10.77
    
    Amendment to Registration Rights Agreement between the Company and Michael Bell dated March 31, 2005
(incorporated by reference to Exhibit 10.2 to the Companys Form 8-K filed April 14, 2005 (File No.
0-22982)).10.78
    
    Limited Waiver with Respect to Amended and Restated General Electric Capital Corporation Credit
Agreement dated March 31, 2005 (incorporated by reference to Exhibit 10.3 to the Companys Form 8-K
filed April 14, 2005 (File No. 0-22982)).10.79
    
    Pledge Agreement between the Company and General Electric Capital Corporation related to Encore
shares dated March 31, 2005 (incorporated by reference to Exhibit 10.4 to the Companys Form 8-K
filed April 14, 2005 (File No. 0-22982)).10.80
    
    Amendment No. 1 to Partnership Interest Purchase Agreement dated May 11, 2005 (incorporated by
reference to Exhibit 10.1 to the Companys Form 8-K filed May 17, 2005 (File No. 0-22982)).10.81
    
    Second Amended and Restated Credit Agreement dated as of May 11, 2005 between the Company and
General Electric Capital Corporation (incorporated by reference to Exhibit 10.2 to the Companys
Form 8-K filed May 17, 2005 (File No. 0-22982)).10.82
    
    Form of Third Amended and Restated Credit Agreement with Lenders and General Electric Capital
Corporation dated June 1, 2005 (incorporated by reference to Exhibit 10.1 to the Companys Form 8-K
filed June 3, 2005 (File No. 0-22982)).10.83
    
    Form of Limited Waiver to General Electric Capital Corporation Second Amended and Restated Credit
Agreement dated June 1, 2005 (incorporated by reference to Exhibit 10.2 to the Companys Form 8-K
filed June 3, 2005 (File No. 0-22982)).10.84
    
    Office Lease dated August 1, 2004 between Cocanaugher Asset #1, Ltd. and FUNimation Productions, Ltd.10.85
    
    Letter dated June 14, 2005 regarding Companys policy to use straight-line method of depreciation
from Grant Thornton LLP.14.1
    
    The Companys Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 to the
Companys Form 10-K for the year ended March 31, 2004 (File No. 0-22982)).21.1
    
    Subsidiaries of the Registrant.
 50




---



##### 



ItemNo.
    
    Description23.1ü
    
    Consent of Independent Registered Public Accounting Firm  Grant Thornton LLP23.2ü
    
    Consent of Independent Registered Public Accounting Firm  Ernst & Young LLP24.1ü
    
    Power of Attorney, contained on signature page31.01ü
    
    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)31.02ü
    
    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)32.01ü
    
    Certifications of the Chief Executive Officer pursuant Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350)32.02ü
    
    Certifications of the Chief Financial Officer pursuant Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350)* Indicates management contract or compensatory plan or agreement.ü filed herewith
 51




---



##### 



SIGNATURES
  Navarre Corporation
(Registrant)November 21, 2005
    By
    /s/ Eric H. PaulsonEric H. PaulsonChairman of the Board
and Chief Executive Officer  POWER OF ATTORNEY
  Signature
    
    Title
    
    Date/s/ Eric H. Paulson

Eric H. Paulson
    
    Chairman of the Board and Chief
Executive Officer (principal executive officer)
    
    November 21, 2005/s/ Diane D. Lapp

Diane D. Lapp
    
    Interim Chief Financial Officer (principal financial and accounting
officer)
    
    November 21, 2005/s/ Charles E. Cheney

Charles E. Cheney
    
    Director
    
    November 21, 2005/s/ Timothy R. Gentz

Timothy R. Gentz
    
    Director
    
    November 21, 2005/s/ James G. Sippl

James G. Sippl
    
    Director
    
    November 21, 2005/s/ Michael L. Snow

Michael L. Snow
    
    Director
    
    November 21, 2005/s/ Tom Weyl

Tom Weyl
    
    Director
    
    November 21, 2005/s/ Dickinson G. Wiltz

Dickinson G. Wiltz
    
    Director
    
    November 21, 2005/s/ Keith A. Benson

Keith A. Benson
    
    Director
    
    November 21, 2005/s/ Richard Gary St. Marie

Richard Gary St. Marie
    
    Director
    
    November 21, 2005
 52




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      Internal ControlIntegrated
Framework
  
 53




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal Control
 Integrated Framework
     Accounting for Certain Compensation Arrangements
  Accounting for Income Taxes
  54




---



##### 



Accounting for Variable Interest Entities
   Internal Control 
Integrated Framework Internal Control  Integrated Framework
   
 55




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
  56




---



##### 



NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
 March 31,2005
    
    
    2004(Restated)
    
    
    (Restated)AssetsCurrent assets:Cash and cash equivalents
    
    $
    15,571
    
    
    $
    14,495Note receivable, related parties
    
    
    200
    
    
    
    200Accounts receivable, less allowance for doubtful accounts, vendor advances and sales
returns of $13,815 and $11,159, respectively
    
    
    93,983
    
    
    
    79,963Inventories
    
    
    40,759
    
    
    
    30,151Prepaid expenses and other current assets
    
    
    10,052
    
    
    
    4,139Deferred tax assets
    
    
    7,398
    
    
    
    1,036Total current assets
    
    
    167,963
    
    
    
    129,984Property and equipment, net of accumulated depreciation of $7,259 and $6,650, respectively
    
    
    8,152
    
    
    
    6,914Other assets:Notes receivable, related parties
    
    
    200
    
    
    
    400Goodwill
    
    
    9,832
    
    
    
    10,371Intangible assets, net of amortization of $2,369 and $812, respectively
    
    
    5,198
    
    
    
    6,128Other assets
    
    
    4,547
    
    
    
    782Total assets
    
    $
    195,892
    
    
    $
    154,579Liabilities and shareholders equityCurrent liabilities:Note payable
    
    $
    250
    
    
    $
    651Capital lease obligation  short term
    
    
    84
    
    
    
    Accounts payable
    
    
    96,387
    
    
    
    92,206Income taxes payable
    
    
    8
    
    
    
    121Accrued expenses
    
    
    15,067
    
    
    
    6,377Total current liabilities
    
    
    111,796
    
    
    
    99,355Capital lease obligation  long-term
    
    
    237
    
    
    
    Deferred compensation
    
    
    4,984
    
    
    
    2,146Deferred tax liabilities
    
    
    1,591
    
    
    
    Total liabilities
    
    
    118,608
    
    
    
    101,501Commitments and contingencies (Note 16)Shareholders equity:Common stock, no par value:Authorized shares  100,000,000Issued and outstanding shares  27,896,080 and 25,817,965, respectively
    
    
    123,481
    
    
    
    109,441Accumulated deficit
    
    
    (46,197
    )
    
    
    (56,363
    )Total shareholders equity
    
    
    77,284
    
    
    
    53,078Total liabilities and shareholders equity
    
    $
    195,892
    
    
    $
    154,579
 See accompanying notes to consolidated financial statements.
 57




---



##### 



NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
 Fiscal Years ended March 31,2005
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)Net sales
    
    $
    596,615
    
    
    $
    470,877
    
    
    $
    356,816Cost of sales (exclusive of depreciation and amortization)
    
    
    505,438
    
    
    
    412,856
    
    
    
    311,341Gross profit
    
    
    91,177
    
    
    
    58,021
    
    
    
    45,475Operating expenses:Selling and marketing
    
    
    21,483
    
    
    
    16,895
    
    
    
    13,792Distribution and warehousing
    
    
    8,840
    
    
    
    6,000
    
    
    
    5,514General and administrative
    
    
    47,798
    
    
    
    26,061
    
    
    
    20,455Depreciation and amortization
    
    
    3,521
    
    
    
    2,000
    
    
    
    2,11781,642
    
    
    
    50,956
    
    
    
    41,878Income from operations
    
    
    9,535
    
    
    
    7,065
    
    
    
    3,597Other income (expense):Interest expense
    
    
    (783
    )
    
    
    (378
    )
    
    
    (194
    )Interest income
    
    
    473
    
    
    
    446
    
    
    
    Debt extinguishment
    
    
    
    
    
    
    (908
    )
    
    
    Other income (expense)
    
    
    (65
    )
    
    
    6
    
    
    
    447Income before equity in income of NetRadio Corp.
    
    
    9,160
    
    
    
    6,231
    
    
    
    3,850Equity in income of NetRadio Corp.
    
    
    
    
    
    
    
    
    
    
    63Net income before tax
    
    
    9,160
    
    
    
    6,231
    
    
    
    3,913Tax benefit
    
    
    1,006
    
    
    
    583
    
    
    
    Net income
    
    $
    10,166
    
    
    $
    6,814
    
    
    $
    3,913Earnings per common share:Basic
    
    $
    .38
    
    
    $
    .30
    
    
    $
    .18Diluted
    
    $
    .35
    
    
    $
    .28
    
    
    $
    .18Weighted average shares outstanding:Basic
    
    
    26,830
    
    
    
    22,780
    
    
    
    21,616Diluted
    
    
    28,782
    
    
    
    24,112
    
    
    
    21,841
 See accompanying notes to consolidated financial statements.
 58




---



##### 



NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 Common StockAccumulatedShares
    
    
    Amount
    
    
    Deficit
    
    
    TotalBalance at March 31, 2002
    
    
    21,616,187
    
    
    $
    91,404
    
    
    $
    (67,054
    )
    
    $
    24,350Net income
    
    
    
    
    
    
    
    
    
    
    3,913
    
    
    
    3,913Balance at March 31, 2003 (Restated)
    
    
    21,616,187
    
    
    $
    91,404
    
    
    $
    (63,141
    )
    
    $
    28,263Shares issued upon exercise of stock options
    
    
    570,231
    
    
    
    814
    
    
    
    
    
    
    
    814Shares issued with private placement
    
    
    2,631,547
    
    
    
    11,735
    
    
    
    
    
    
    
    11,735Shares issued with acquisition of BCI
    
    
    1,000,000
    
    
    
    5,080
    
    
    
    
    
    
    
    5,080Value of warrants issued to Hilco
    
    
    
    
    
    
    372
    
    
    
    
    
    
    
    372Other  variable interest entity
    
    
    
    
    
    
    36
    
    
    
    (36
    )
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    6,814
    
    
    
    6,814Balance at March 31, 2004 (Restated)
    
    
    25,817,965
    
    
    $
    109,441
    
    
    $
    (56,363
    )
    
    $
    53,078Shares issued upon exercise of stock options and warrants
    
    
    1,778,115
    
    
    
    8,238
    
    
    
    
    
    
    
    8,238Shares issued upon repurchase of Encore stock
    
    
    300,000
    
    
    
    2,400
    
    
    
    
    
    
    
    2,400Tax benefit from employee stock option plans
    
    
    
    
    
    
    2,428
    
    
    
    
    
    
    
    2,428Stock-based compensation expense
    
    
    
    
    
    
    269
    
    
    
    
    
    
    
    269Reclassification of stock- based compensation accrual
    
    
    
    
    
    
    705
    
    
    
    
    
    
    
    705Net income
    
    
    
    
    
    
    
    
    
    
    10,166
    
    
    
    10,166Balance at March 31, 2005 (Restated)
    
    
    27,896,080
    
    
    $
    123,481
    
    
    $
    (46,197
    )
    
    $
    77,284
 See accompanying notes to consolidated financial statements.
 59




---



##### 



NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Fiscal Years ended March 31,2005
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)Operating activities:Net income
    
    $
    10,166
    
    
    $
    6,814
    
    
    $
    3,913Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    3,673
    
    
    
    2,000
    
    
    
    2,117Amortization of deferred financing costs
    
    
    240
    
    
    
    87
    
    
    
    108Equity in income of NetRadio Corp.
    
    
    
    
    
    
    
    
    
    
    (63
    )Stock-based compensation expense
    
    
    269
    
    
    
    705
    
    
    
    Deferred compensation expense
    
    
    2,838
    
    
    
    1,738
    
    
    
    408Compensation expense incurred with repurchase of Encore Stock
    
    
    5,800
    
    
    
    
    
    
    
    Expense related to warrant exercise
    
    
    
    
    
    
    372
    
    
    
    Write-off of notes receivable
    
    
    200
    
    
    
    200
    
    
    
    200Impairment of capitalized software development costs
    
    
    465
    
    
    
    5,588
    
    
    
    Tax benefit from employee stock option plans
    
    
    2,428
    
    
    
    
    
    
    
    Loss on disposal of property and equipment
    
    
    82
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    (4,771
    )
    
    
    (1,036
    )
    
    
    Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    (13,605
    )
    
    
    (11,316
    )
    
    
    (10,370
    )Inventories
    
    
    (10,702
    )
    
    
    (4,252
    )
    
    
    (5,495
    )Prepaid expenses
    
    
    (6,779
    )
    
    
    (4,180
    )
    
    
    (4,580
    )Other assets
    
    
    (3,129
    )
    
    
    (7
    )
    
    
    (1,359
    )Accounts payable
    
    
    4,441
    
    
    
    13,115
    
    
    
    15,165Income taxes payable
    
    
    (113
    )
    
    
    121
    
    
    
    Accrued expenses
    
    
    5,992
    
    
    
    (992
    )
    
    
    1,244Net cash (used in) provided by operating activities
    
    
    (2,505
    )
    
    
    8,957
    
    
    
    1,288Investing activities:Acquisitions, net of cash acquired
    
    
    
    
    
    
    (10,465
    )
    
    
    (7,546
    )Purchases of property and equipment
    
    
    (9,375
    )
    
    
    (5,048
    )
    
    
    (1,039
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    60
    
    
    
    Net proceeds from sale leaseback
    
    
    6,401
    
    
    
    
    
    
    
    Purchases of intangible assets
    
    
    (608
    )
    
    
    (1,246
    )
    
    
    Payment of earn-out related to an acquisition
    
    
    (88
    )
    
    
    
    
    
    
    Notes receivable, related parties
    
    
    
    
    
    
    
    
    
    
    (711
    )Payments on NetRadio note
    
    
    
    
    
    
    
    
    
    
    63Net cash used in investing activities
    
    
    (3,670
    )
    
    
    (16,699
    )
    
    
    (9,233
    )Financing activities:Proceeds from note payable, bank
    
    
    117,197
    
    
    
    75,930
    
    
    
    42,067Payments on note payable, bank
    
    
    (117,197
    )
    
    
    (75,930
    )
    
    
    (42,067
    )Repayment of note payable
    
    
    (651
    )
    
    
    (1,073
    )
    
    
    (536
    )Proceeds of note payable
    
    
    250
    
    
    
    651
    
    
    
    Debt acquisition costs
    
    
    (527
    )
    
    
    (375
    )
    
    
    Repayments of capital lease obligations
    
    
    (59
    )
    
    
    
    
    
    
    Proceeds from sale of common stock
    
    
    
    
    
    
    11,735
    
    
    
    Proceeds from exercise of common stock options and warrants
    
    
    8,238
    
    
    
    814
    
    
    
    Net cash provided by (used in) financing activities
    
    
    7,251
    
    
    
    11,752
    
    
    
    (536
    )Net increase (decrease) in cash
    
    
    1,076
    
    
    
    4,010
    
    
    
    (8,481
    )Cash at beginning of year
    
    
    14,495
    
    
    
    10,485
    
    
    
    18,966Cash at end of year
    
    $
    15,571
    
    
    $
    14,495
    
    
    $
    10,485Supplemental cash flow information:Cash paid for:Interest
    
    $
    771
    
    
    $
    353
    
    
    $
    194Income taxes
    
    
    1,449
    
    
    
    324
    
    
    
    Supplemental schedule of non-cash investing and financing activities:Reclassification of stock compensation accrual to shareholders equity
    
    $
    705
    
    
    
    
    
    
    
    Purchase price adjustments affecting: accounts receivable, prepaid expenses, goodwill
and accounts payable
    
    
    627
    
    
    
    
    
    
    
    Capital lease obligations incurred for the purchase of computer equipment
    
    
    380
    
    
    
    
    
    
    
    Reclassification of prepaid rent to long-term rent
    
    
    450
    
    
    
    
    
    
    
    
 See accompanying notes to consolidated financial statements.
 60




---



##### 



NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2005
 Note 1 Business Description
     Note 2 Summary of Significant Accounting Policies
 Basis of Consolidation
  Segment Reporting
 Disclosure about
Segments of an Enterprise and Related Information
 Fiscal Year
  61




---



##### 



Use of Estimates
  Reclassifications
  Fair Value of Financial Instruments
  Cash and Cash Equivalents
  Research and Development - Mix & Burn
  Inventories
  Property and Equipment
  Asset
    
    Life in YearsFurniture and fixtures
    
    
    7Office equipment
    
    
    5Computer equipment
    
    
    3Warehouse equipment
    
    
    5Leasehold improvements
    
    
    5-10
  62




---



##### 



Impairment of Long-Lived Assets
 Accounting for
the Impairment or Disposal of Long-Lived Assets
 Goodwill
 Goodwill and
Other Intangible Assets
  Intangible Assets
  Debt Issuance costs
  Revenue Recognition
    63




---



##### 



Vendor Allowances
 Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor
 Allowance for Doubtful Accounts
  Classification of Shipping Costs
   Foreign Currency Transactions
  Income Taxes
  Stock-Based Compensation
 Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
 64




---



##### 



(In thousands, except for per share data)Fiscal years ended March 31,2005
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)Net income, as reported
    
    $
    10,166
    
    
    $
    6,814
    
    
    $
    3,913Deduct: Stock-based compensation
determined under fair value method
for all awards, net of tax
    
    
    (936
    )
    
    
    (319
    )
    
    
    (694
    )Net income, pro forma
    
    $
    9,230
    
    
    $
    6,495
    
    
    $
    3,219Income per share:Basic  as reported
    
    $
    .38
    
    
    $
    .30
    
    
    $
    .18Basic  pro forma
    
    $
    .34
    
    
    $
    .29
    
    
    $
    .15Diluted  as reported
    
    $
    .35
    
    
    $
    .28
    
    
    $
    .18Diluted  pro forma
    
    $
    .32
    
    
    $
    .27
    
    
    $
    .15
  Weighted Average
    
    
    Dividend
    
    
    Expected
    
    
    ExpectedRisk Free Rate
    
    
    Yield
    
    
    Lives
    
    
    Volatility2005
    
    
    3.6
    %
    
    
    0.0
    %
    
    
    5
    
    
    
    71
    %2004
    
    
    2.9
    %
    
    
    0.0
    %
    
    
    5
    
    
    
    70
    %2003
    
    
    2.9
    %
    
    
    0.0
    %
    
    
    5
    
    
    
    73
    %
  65




---



##### 



Earnings Per Share
  (In thousands, except for per share data)Fiscal Years ended March 31,2005
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)Numerator:Net income
    
    $
    10,166
    
    
    $
    6,814
    
    
    $
    3,913Denominator:Denominator for basic earnings per share  weighted average shares
    
    
    26,830
    
    
    
    22,780
    
    
    
    21,616Dilutive securities: Employee stock options and warrants
    
    
    1,952
    
    
    
    1,332
    
    
    
    225Denominator for diluted earnings per share  weighted average shares
    
    
    28,782
    
    
    
    24,112
    
    
    
    21,841Basic earnings per share
    
    $
    .38
    
    
    $
    .30
    
    
    $
    .18Diluted earnings per share
    
    $
    .35
    
    
    $
    .28
    
    
    $
    .18
  Capitalized Software Development Costs
  Recently Issued Accounting Pronouncements
 Consolidated of Variable Interest Entities
 Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity,
 66




---



##### 



,
Inventory Costs, an amendment of ARB No. 43, Chapter 4
 Share-Based Payment
 Note 3 Restatements
 Restatements  Current  Mix & Burn and Employment Agreements
 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
  67




---



##### 



The following table presents the effect of the Restatement on the consolidated balance sheet
(in thousands):
 March 31, 2005As Previously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    15,519
    
    
    $
    52
    
    
    $
    15,571Note receivable, related parties
    
    
    2,700
    
    
    
    (2,500
    )
    
    
    200Accounts receivable, net
    
    
    94,003
    
    
    
    (20
    )
    
    
    93,983Inventories
    
    
    40,593
    
    
    
    166
    
    
    
    40,759Prepaid expenses and other current assets
    
    
    10,028
    
    
    
    24
    
    
    
    10,052Deferred tax assets
    
    
    7,250
    
    
    
    148
    
    
    
    7,398Total current assets
    
    
    170,093
    
    
    
    (2,130
    )
    
    
    167,963Property and equipment, net
    
    
    8,081
    
    
    
    71
    
    
    
    8,152Other assets:Notes receivable, related parties
    
    
    200
    
    
    
    
    
    
    
    200Goodwill
    
    
    9,832
    
    
    
    
    
    
    
    9,832Intangible assets, net
    
    
    5,174
    
    
    
    24
    
    
    
    5,198Other assets
    
    
    4,422
    
    
    
    125
    
    
    
    4,547Total assets
    
    $
    197,802
    
    
    $
    (1,910
    )
    
    $
    195,892Liabilities and shareholders equityCurrent liabilities:Note payable
    
    $
    
    
    
    
    250
    
    
    $
    250Capital lease obligation  short term
    
    
    84
    
    
    
    
    
    
    
    84Accounts payable
    
    
    96,146
    
    
    
    241
    
    
    
    96,387Income taxes payable
    
    
    8
    
    
    
    
    
    
    
    8Accrued expenses
    
    
    14,664
    
    
    
    403
    
    
    
    15,067Total current liabilities
    
    
    110,902
    
    
    
    894
    
    
    
    111,796Capital lease obligation  long-term
    
    
    237
    
    
    
    
    
    
    
    237Deferred compensation
    
    
    4,000
    
    
    
    984
    
    
    
    4,984Deferred tax liabilities
    
    
    1,957
    
    
    
    (366
    )
    
    
    1,591Total liabilities
    
    
    117,096
    
    
    
    1,512
    
    
    
    118,608Commitments and contingenciesShareholders equity:Common stock, no par value
    
    
    123,445
    
    
    
    36
    
    
    
    123,481Accumulated deficit
    
    
    (42,739
    )
    
    
    (3,458
    )
    
    
    (46,197
    )Total shareholders equity
    
    
    80,706
    
    
    
    (3,422
    )
    
    
    77,284Total liabilities and shareholders equity
    
    $
    197,802
    
    
    $
    (1,910
    )
    
    $
    195,892
 68




---



##### 



The following table presents the effect of the Restatement on the consolidated statement of
operations (in thousands except per share data):
 Fiscal Year ended March 31, 2005AsPreviously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedNet sales
    
    $
    596,263
    
    
    $
    352
    
    
    $
    596,615Cost of sales (exclusive of depreciation and amortization)
    
    
    505,151
    
    
    
    287
    
    
    
    505,438Gross profit
    
    
    91,112
    
    
    
    65
    
    
    
    91,177Operating expenses:Selling and marketing
    
    
    21,483
    
    
    
    
    
    
    
    21,483Distribution and warehousing
    
    
    8,840
    
    
    
    
    
    
    
    8,840General and administrative
    
    
    44,934
    
    
    
    2,864
    
    
    
    47,798Depreciation and amortization
    
    
    3,521
    
    
    
    
    
    
    
    3,52178,778
    
    
    
    2,864
    
    
    
    81,642Income from operations
    
    
    12,334
    
    
    
    (2,799
    )
    
    
    9,535Other income (expense):Interest expense
    
    
    (778
    )
    
    
    (5
    )
    
    
    (783
    )Interest income
    
    
    565
    
    
    
    (92
    )
    
    
    473Other income (expense)
    
    
    (65
    )
    
    
    
    
    
    
    (65
    )Net income before tax
    
    
    12,056
    
    
    
    (2,896
    )
    
    
    9,160Tax benefit
    
    
    492
    
    
    
    514
    
    
    
    1,006Net income
    
    $
    12,548
    
    
    $
    (2,382
    )
    
    $
    10,166Earnings per common share:Basic
    
    $
    .47
    
    
    $
    (.09
    )
    
    $
    .38Diluted
    
    $
    .44
    
    
    $
    (.09
    )
    
    $
    .35Weighted average shares outstanding:Basic
    
    
    26,830
    
    
    
    
    
    
    
    26,830Diluted
    
    
    28,782
    
    
    
    
    
    
    
    28,782
 69




---



##### 



The following table presents the effect of the Restatement on the consolidated statement of
cash flows (in thousands):
 Fiscal Year ended March 31, 2005AsPreviously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedOperating activities:Net income
    
    $
    12,548
    
    
    $
    (2,382
    )
    
    $
    10,166Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    3,661
    
    
    
    12
    
    
    
    3,673Amortization of deferred financing costs
    
    
    240
    
    
    
    
    
    
    
    240Stock-based compensation expense
    
    
    269
    
    
    
    
    
    
    
    269Deferred compensation expense
    
    
    2,550
    
    
    
    288
    
    
    
    2,838Compensation expense incurred with repurchase of Encore Stock
    
    
    5,800
    
    
    
    
    
    
    
    5,800Write-off of notes receivable
    
    
    200
    
    
    
    
    
    
    
    200Impairment of capitalized software development costs
    
    
    465
    
    
    
    
    
    
    
    465Tax benefit from employee stock option plans
    
    
    2,428
    
    
    
    
    
    
    
    2,428Loss on disposal of property and equipment
    
    
    82
    
    
    
    
    
    
    
    82Deferred income taxes
    
    
    (4,257
    )
    
    
    (514
    )
    
    
    (4,771
    )Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    (13,641
    )
    
    
    36
    
    
    
    (13,605
    )Inventories
    
    
    (10,536
    )
    
    
    (166
    )
    
    
    (10,702
    )Prepaid expenses
    
    
    (6,754
    )
    
    
    (25
    )
    
    
    (6,779
    )Other assets
    
    
    (2,985
    )
    
    
    (144
    )
    
    
    (3,129
    )Accounts payable
    
    
    4,276
    
    
    
    165
    
    
    
    4,441Income taxes payable
    
    
    (113
    )
    
    
    
    
    
    
    (113
    )Accrued expenses
    
    
    5,599
    
    
    
    393
    
    
    
    5,992Net cash (used in) provided by operating activities
    
    
    (168
    )
    
    
    (2,337
    )
    
    
    (2,505
    )Investing activities:Purchases of property and equipment
    
    
    (9,292
    )
    
    
    (83
    )
    
    
    (9,375
    )Net proceeds from sale leaseback
    
    
    6,401
    
    
    
    
    
    
    
    6,401Purchases of intangible assets
    
    
    (608
    )
    
    
    
    
    
    
    (608
    )Payment of earn-out related to an acquisition
    
    
    (88
    )
    
    
    
    
    
    
    (88
    )Notes receivable, related parties
    
    
    (2,222
    )
    
    
    2,222
    
    
    
    Net cash used in investing activities
    
    
    (5,809
    )
    
    
    2,139
    
    
    
    (3,670
    )Financing activities:Proceeds from note payable, bank
    
    
    117,197
    
    
    
    
    
    
    
    117,197Payments on note payable, bank
    
    
    (117,197
    )
    
    
    
    
    
    
    (117,197
    )Repayment of note payable
    
    
    (651
    )
    
    
    
    
    
    
    (651
    )Proceeds of note payable
    
    
    
    
    
    
    250
    
    
    
    250Debt acquisition costs
    
    
    (527
    )
    
    
    
    
    
    
    (527
    )Repayments of capital lease obligations
    
    
    (59
    )
    
    
    
    
    
    
    (59
    )Proceeds from exercise of common stock options and warrants
    
    
    8,238
    
    
    
    
    
    
    
    8,238Net cash provided by (used in) financing activities
    
    
    7,001
    
    
    
    250
    
    
    
    7,251Net increase (decrease) in cash
    
    
    1,024
    
    
    
    52
    
    
    
    1,076Cash at beginning of year
    
    
    14,495
    
    
    
    
    
    
    
    14,495Cash at end of year
    
    $
    15,519
    
    
    $
    52
    
    
    $
    15,571
 70




---



##### 



The following table presents the effect of the Restatement on the consolidated balance sheet
(in thousands):
 March 31, 2004As Previously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    14,495
    
    
    $
    
    
    
    $
    14,495Note receivable, related parties
    
    
    463
    
    
    
    (263
    )
    
    
    200Accounts receivable, net
    
    
    79,963
    
    
    
    
    
    
    
    79,963Inventories
    
    
    30,151
    
    
    
    
    
    
    
    30,151Prepaid expenses and other current assets
    
    
    4,139
    
    
    
    
    
    
    
    4,139Deferred tax assets
    
    
    1,036
    
    
    
    
    
    
    
    1,036Total current assets
    
    
    130,247
    
    
    
    (263
    )
    
    
    129,984Property and equipment, net
    
    
    6,914
    
    
    
    
    
    
    
    6,914Other assets:Notes receivable, related parties
    
    
    400
    
    
    
    
    
    
    
    400Goodwill
    
    
    10,371
    
    
    
    
    
    
    
    10,371Intangible assets, net
    
    
    6,123
    
    
    
    5
    
    
    
    6,128Other assets
    
    
    782
    
    
    
    
    
    
    
    782Total assets
    
    $
    154,837
    
    
    $
    (258
    )
    
    $
    154,579Liabilities and shareholders equityCurrent liabilities:Note payable
    
    $
    651
    
    
    
    
    
    
    $
    651Accounts payable
    
    
    92,120
    
    
    
    86
    
    
    
    92,206Income taxes payable
    
    
    121
    
    
    
    
    
    
    
    121Accrued expenses
    
    
    6,377
    
    
    
    
    
    
    
    6,377Total current liabilities
    
    
    99,269
    
    
    
    86
    
    
    
    99,355Deferred compensation
    
    
    1,450
    
    
    
    696
    
    
    
    2,146Total liabilities
    
    
    100,719
    
    
    
    782
    
    
    
    101,501Commitments and contingenciesShareholders equity:Common stock, no par value
    
    
    109,405
    
    
    
    36
    
    
    
    109,441Accumulated deficit
    
    
    (55,287
    )
    
    
    (1,076
    )
    
    
    (56,363
    )Total shareholders equity
    
    
    54,118
    
    
    
    (1,040
    )
    
    
    53,078Total liabilities and shareholders equity
    
    $
    154,837
    
    
    $
    (258
    )
    
    $
    154,579
 71




---



##### 



The following table presents the effect of the Restatement on the consolidated statement of
operations (in thousands except per share data):
 Fiscal Year ended March 31, 2004AsPreviously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedNet sales
    
    $
    470,877
    
    
    $
    
    
    
    $
    470,877Cost of sales (exclusive of depreciation and amortization)
    
    
    412,856
    
    
    
    
    
    
    
    412,856Gross profit
    
    
    58,021
    
    
    
    
    
    
    
    58,021Operating expenses:Selling and marketing
    
    
    16,895
    
    
    
    
    
    
    
    16,895Distribution and warehousing
    
    
    6,000
    
    
    
    
    
    
    
    6,000General and administrative
    
    
    25,429
    
    
    
    632
    
    
    
    26,061Depreciation and amortization
    
    
    2,000
    
    
    
    
    
    
    
    2,00050,324
    
    
    
    632
    
    
    
    50,956Income from operations
    
    
    7,697
    
    
    
    (632
    )
    
    
    7,065Other income (expense):Interest expense
    
    
    (378
    )
    
    
    
    
    
    
    (378
    )Interest income
    
    
    446
    
    
    
    
    
    
    
    446Debt extinguishment
    
    
    (908
    )
    
    
    
    
    
    
    (908
    )Other income (expense)
    
    
    6
    
    
    
    
    
    
    
    6Net income before tax
    
    
    6,863
    
    
    
    (632
    )
    
    
    6,231Tax benefit
    
    
    583
    
    
    
    
    
    
    
    583Net income
    
    $
    7,446
    
    
    $
    (632
    )
    
    $
    6,814Earnings per common share:Basic
    
    $
    .33
    
    
    $
    (.03
    )
    
    $
    .30Diluted
    
    $
    .31
    
    
    $
    (.03
    )
    
    $
    .28Weighted average shares outstanding:Basic
    
    
    22,780
    
    
    
    
    
    
    
    22,780Diluted
    
    
    24,112
    
    
    
    
    
    
    
    24,112
 72




---



##### 



The following table presents the effect of the Restatement on the consolidated statement of
cash flows (in thousands):
 Fiscal Year ended March 31, 2004AsPreviously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedOperating activities:Net income
    
    $
    7,446
    
    
    $
    (632
    )
    
    $
    6,814Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    2,000
    
    
    
    
    
    
    
    2,000Amortization of deferred financing costs
    
    
    87
    
    
    
    
    
    
    
    87Stock-based compensation expense
    
    
    705
    
    
    
    
    
    
    
    705Deferred compensation expense
    
    
    1,450
    
    
    
    288
    
    
    
    1,738Expense related to warrant exercise
    
    
    372
    
    
    
    
    
    
    
    372Write-off of notes receivable
    
    
    200
    
    
    
    
    
    
    
    200Impairment of capitalized software development costs
    
    
    5,588
    
    
    
    
    
    
    
    5,588Deferred income taxes
    
    
    (1,036
    )
    
    
    
    
    
    
    (1,036
    )Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    (11,301
    )
    
    
    (15
    )
    
    
    (11,316
    )Inventories
    
    
    (4,252
    )
    
    
    
    
    
    
    (4,252
    )Prepaid expenses
    
    
    (4,180
    )
    
    
    
    
    
    
    (4,180
    )Other assets
    
    
    (2
    )
    
    
    (5
    )
    
    
    (7
    )Accounts payable
    
    
    13,029
    
    
    
    86
    
    
    
    13,115Income taxes payable
    
    
    121
    
    
    
    
    
    
    
    121Accrued expenses
    
    
    (992
    )
    
    
    
    
    
    
    (992
    )Net cash (used in) provided by operating activities
    
    
    9,235
    
    
    
    (278
    )
    
    
    8,957Investing activities:Acquisitions, net of cash acquired
    
    
    (10,465
    )
    
    
    
    
    
    
    (10,465
    )Purchases of property and equipment
    
    
    (5,048
    )
    
    
    
    
    
    
    (5,048
    )Proceeds from sale of property and equipment
    
    
    60
    
    
    
    
    
    
    
    60Purchases of intangible assets
    
    
    (1,246
    )
    
    
    
    
    
    
    (1,246
    )Notes receivable, related parties
    
    
    (278
    )
    
    
    278
    
    
    
    Net cash used in investing activities
    
    
    (16,977
    )
    
    
    278
    
    
    
    (16,699
    )Financing activities:Proceeds from note payable, bank
    
    
    75,930
    
    
    
    
    
    
    
    75,930Payments on note payable, bank
    
    
    (75,930
    )
    
    
    
    
    
    
    (75,930
    )Repayment of note payable
    
    
    (1,073
    )
    
    
    
    
    
    
    (1,073
    )Proceeds of note payable
    
    
    651
    
    
    
    
    
    
    
    651Debt acquisition costs
    
    
    (375
    )
    
    
    
    
    
    
    (375
    )Proceeds from sale of common stock
    
    
    11,735
    
    
    
    
    
    
    
    11,735Proceeds from exercise of common stock options and warrants
    
    
    814
    
    
    
    
    
    
    
    814Net cash provided by (used in) financing activities
    
    
    11,752
    
    
    
    
    
    
    
    11,752Net increase (decrease) in cash
    
    
    4,010
    
    
    
    
    
    
    
    4,010Cash at beginning of year
    
    
    10,485
    
    
    
    
    
    
    
    10,485Cash at end of year
    
    $
    14,495
    
    
    $
    
    
    
    $
    14,495
 73




---



##### 



The following table presents the effect of the Restatement on the consolidated statement of
operations (in thousands except per share data):
 Fiscal Year ended March 31, 2003AsPreviously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedNet sales
    
    $
    356,816
    
    
    $
    
    
    
    $
    356,816Cost of sales (exclusive of depreciation and amortization)
    
    
    311,341
    
    
    
    
    
    
    
    311,341Gross profit
    
    
    45,475
    
    
    
    
    
    
    
    45,475Operating expenses:Selling and marketing
    
    
    13,792
    
    
    
    
    
    
    
    13,792Distribution and warehousing
    
    
    5,514
    
    
    
    
    
    
    
    5,514General and administrative
    
    
    20,047
    
    
    
    408
    
    
    
    20,455Depreciation and amortization
    
    
    2,117
    
    
    
    
    
    
    
    2,11741,470
    
    
    
    408
    
    
    
    41,878Income from operations
    
    
    4,005
    
    
    
    (408
    )
    
    
    3,597Other income (expense):Interest expense
    
    
    (194
    )
    
    
    
    
    
    
    (194
    )Other income (expense)
    
    
    447
    
    
    
    
    
    
    
    447Income before equity in income of NetRadio Corp.
    
    
    4,258
    
    
    
    (408
    )
    
    
    3,850Equity in income of NetRadio Corp.
    
    
    63
    
    
    
    
    
    
    
    63Net income before tax
    
    
    4,321
    
    
    
    (408
    )
    
    
    3,913Tax benefit
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    4,321
    
    
    $
    (408
    )
    
    $
    3,913Earnings per common share:Basic
    
    $
    .20
    
    
    $
    (.02
    )
    
    $
    .18Diluted
    
    $
    .20
    
    
    $
    (.02
    )
    
    $
    .18Weighted average shares outstanding:Basic
    
    
    21,616
    
    
    
    
    
    
    
    21,616Diluted
    
    
    21,841
    
    
    
    
    
    
    
    21,841
 74




---



##### 



The following table presents the effect of the Restatement on the consolidated statement of
cash flows (in thousands):
 Fiscal Year ended March 31, 2003AsPreviously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedOperating activities:Net income
    
    $
    4,321
    
    
    $
    (408
    )
    
    $
    3,913Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    2,117
    
    
    
    
    
    
    
    2,117Amortization of deferred financing costs
    
    
    108
    
    
    
    
    
    
    
    108Equity in income of NetRadio Corp.
    
    
    (63
    )
    
    
    
    
    
    
    (63
    )Deferred compensation expense
    
    
    
    
    
    
    408
    
    
    
    408Write-off of notes receivable
    
    
    200
    
    
    
    
    
    
    
    200Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    (10,370
    )
    
    
    
    
    
    
    (10,370
    )Inventories
    
    
    (5,495
    )
    
    
    
    
    
    
    (5,495
    )Prepaid expenses
    
    
    (4,580
    )
    
    
    
    
    
    
    (4,580
    )Other assets
    
    
    (1,359
    )
    
    
    
    
    
    
    (1,359
    )Accounts payable
    
    
    15,165
    
    
    
    
    
    
    
    15,165Income taxes payable
    
    
    
    
    
    
    
    
    
    
    Accrued expenses
    
    
    1,244
    
    
    
    
    
    
    
    1,244Net cash (used in) provided by operating activities
    
    
    1,288
    
    
    
    
    
    
    
    1,288Investing activities:Acquisitions, net of cash acquired
    
    
    (7,546
    )
    
    
    
    
    
    
    (7,546
    )Purchases of property and equipment
    
    
    (1,039
    )
    
    
    
    
    
    
    (1,039
    )Notes receivable, related parties
    
    
    (711
    )
    
    
    
    
    
    
    (711
    )Payments on NetRadio note
    
    
    63
    
    
    
    
    
    
    
    63Net cash used in investing activities
    
    
    (9,233
    )
    
    
    
    
    
    
    (9,233
    )Financing activities:Proceeds from note payable, bank
    
    
    42,067
    
    
    
    
    
    
    
    42,067Payments on note payable, bank
    
    
    (42,067
    )
    
    
    
    
    
    
    (42,067
    )Repayment of note payable
    
    
    (536
    )
    
    
    
    
    
    
    (536
    )Net cash provided by (used in) financing activities
    
    
    (536
    )
    
    
    
    
    
    
    (536
    )Net increase (decrease) in cash
    
    
    (8,481
    )
    
    
    
    
    
    
    (8,481
    )Cash at beginning of year
    
    
    18,966
    
    
    
    
    
    
    
    18,966Cash at end of year
    
    $
    10,485
    
    
    $
    
    
    
    $
    10,485
 75




---



##### 



The following table presents the effect of the Restatement on the consolidated balance sheet
(in thousands):
 December 31, 2004(Unaudited)As Previously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    5
    
    
    $
    328
    
    
    $
    333Note receivable, related parties
    
    
    2,528
    
    
    
    (2,328
    )
    
    
    200Accounts receivable, net
    
    
    118,033
    
    
    
    109
    
    
    
    118,142Inventories
    
    
    62,174
    
    
    
    176
    
    
    
    62,350Prepaid expenses and other current assets
    
    
    9,309
    
    
    
    25
    
    
    
    9,334Deferred tax assets
    
    
    4,438
    
    
    
    405
    
    
    
    4,843Total current assets
    
    
    196,487
    
    
    
    (1,285
    )
    
    
    195,202Property and equipment, net
    
    
    6,599
    
    
    
    74
    
    
    
    6,673Other assets:Notes receivable, related parties
    
    
    250
    
    
    
    
    
    
    
    250Goodwill
    
    
    9,832
    
    
    
    
    
    
    
    9,832Intangible assets, net
    
    
    5,506
    
    
    
    24
    
    
    
    5,530Other assets
    
    
    2,630
    
    
    
    205
    
    
    
    2,835Total assets
    
    $
    221,304
    
    
    $
    (982
    )
    
    $
    220,322Liabilities and shareholders equityCurrent liabilities:Note payable
    
    $
    12,695
    
    
    
    250
    
    
    $
    12,945Accounts payable
    
    
    120,135
    
    
    
    277
    
    
    
    120,412Accrued expenses
    
    
    8,120
    
    
    
    410
    
    
    
    8,530Total current liabilities
    
    
    140,950
    
    
    
    937
    
    
    
    141,887Deferred compensation
    
    
    3,637
    
    
    
    696
    
    
    
    4,333Total liabilities
    
    
    144,587
    
    
    
    1,633
    
    
    
    146,220Shareholders equity:Common stock, no par value
    
    
    116,917
    
    
    
    36
    
    
    
    116,953Accumulated deficit
    
    
    (40,200
    )
    
    
    (2,651
    )
    
    
    (42,851
    )Total shareholders equity
    
    
    76,717
    
    
    
    (2,615
    )
    
    
    74,102Total liabilities and shareholders equity
    
    $
    221,304
    
    
    $
    (982
    )
    
    $
    220,322
 76




---



##### 



The following table presents the effect of the Restatement on the consolidated statement of
operations (in thousands except per share data):
 Three Months endedDecember 31, 2004(Unaudited)AsPreviously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedNet sales
    
    $
    182,730
    
    
    $
    146
    
    
    $
    182,876Cost of sales (exclusive of depreciation and amortization)
    
    
    155,517
    
    
    
    122
    
    
    
    155,639Gross profit
    
    
    27,213
    
    
    
    24
    
    
    
    27,237Operating expenses:Selling and marketing
    
    
    6,321
    
    
    
    
    
    
    
    6,321Distribution and warehousing
    
    
    2,848
    
    
    
    
    
    
    
    2,848General and administrative
    
    
    9,075
    
    
    
    763
    
    
    
    9,838Depreciation and amortization
    
    
    896
    
    
    
    
    
    
    
    89619,140
    
    
    
    763
    
    
    
    19,903Income from operations
    
    
    8,073
    
    
    
    (739
    )
    
    
    7,334Other income (expense):Interest expense
    
    
    (168
    )
    
    
    
    
    
    
    (168
    )Interest income
    
    
    102
    
    
    
    1
    
    
    
    103Other income (expense)
    
    
    6
    
    
    
    
    
    
    
    6Net income before tax
    
    
    8,013
    
    
    
    (738
    )
    
    
    7,275Tax expense
    
    
    (42
    )
    
    
    
    
    
    
    (42
    )Net income
    
    $
    7,971
    
    
    $
    (738
    )
    
    $
    7,233Earnings per common share:Basic
    
    $
    .30
    
    
    $
    (.03
    )
    
    $
    .27Diluted
    
    $
    .28
    
    
    $
    (.03
    )
    
    $
    .25Weighted average shares outstanding:Basic
    
    
    27,002
    
    
    
    
    
    
    
    27,002Diluted
    
    
    28,937
    
    
    
    
    
    
    
    28,937
 77




---



##### 



The following table presents the effect of the Restatement on the consolidated statement of
cash flows (in thousands):
 Nine Months endedDecember 31, 2004(Unaudited)AsPreviously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedOperating activities:Net income
    
    $
    15,088
    
    
    $
    (1,576
    )
    
    $
    13,512Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    2,498
    
    
    
    8
    
    
    
    2,506Amortization of deferred financing costs
    
    
    160
    
    
    
    
    
    
    
    160Deferred compensation expense
    
    
    2,187
    
    
    
    
    
    
    
    2,187Write-off of notes receivable
    
    
    150
    
    
    
    
    
    
    
    150Tax benefit from employee stock option plans
    
    
    2,428
    
    
    
    
    
    
    
    2,428Deferred income taxes
    
    
    (2,668
    )
    
    
    (405
    )
    
    
    (3,073
    )Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    (37,644
    )
    
    
    (121
    )
    
    
    (37,765
    )Inventories
    
    
    (32,117
    )
    
    
    (176
    )
    
    
    (32,293
    )Prepaid expenses
    
    
    (5,120
    )
    
    
    (25
    )
    
    
    (5,145
    )Other assets
    
    
    (1,574
    )
    
    
    (224
    )
    
    
    (1,798
    )Accounts payable
    
    
    26,290
    
    
    
    191
    
    
    
    26,481Income taxes payable
    
    
    (855
    )
    
    
    
    
    
    
    (855
    )Accrued expenses
    
    
    2,416
    
    
    
    448
    
    
    
    2,864Net cash used in operating activities
    
    
    (28,761
    )
    
    
    (1,880
    )
    
    
    (30,641
    )Investing activities:Purchases of property and equipment
    
    
    (7,421
    )
    
    
    (83
    )
    
    
    (7,504
    )Net proceeds from sale leaseback
    
    
    6,401
    
    
    
    
    
    
    
    6,401Purchases of intangible assets
    
    
    (490
    )
    
    
    (24
    )
    
    
    (514
    )Payment of earn-out related to an acquisition
    
    
    (88
    )
    
    
    
    
    
    
    (88
    )Notes receivable, related parties
    
    
    (2,065
    )
    
    
    2,065
    
    
    
    Net cash used in investing activities
    
    
    (3,663
    )
    
    
    1,958
    
    
    
    (1,705
    )Financing activities:Proceeds from note payable, bank
    
    
    84,361
    
    
    
    
    
    
    
    84,361Payments on note payable, bank
    
    
    (71,665
    )
    
    
    
    
    
    
    (71,665
    )Repayment of note payable
    
    
    (651
    )
    
    
    
    
    
    
    (651
    )Proceeds of note payable
    
    
    
    
    
    
    250
    
    
    
    250Debt acquisition costs
    
    
    (465
    )
    
    
    
    
    
    
    (465
    )Checks written in excess of cash balance
    
    
    1,974
    
    
    
    
    
    
    
    1,974Proceeds from exercise of common stock options and warrants
    
    
    4,380
    
    
    
    
    
    
    
    4,380Net cash provided by (used in) financing activities
    
    
    17,934
    
    
    
    250
    
    
    
    18,184Net increase (decrease) in cash
    
    
    (14,490
    )
    
    
    328
    
    
    
    (14,162
    )Cash at beginning of year
    
    
    14,495
    
    
    
    
    
    
    
    14,495Cash at end of year
    
    $
    5
    
    
    $
    328
    
    
    $
    333
 78




---



##### 



The
following table presents the effect of the Restatement on the
consolidated balance sheet (in thousands):
 September 30, 2004(Unaudited)As Previously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    8,262
    
    
    $
    4
    
    
    $
    8,266Note receivable, related parties
    
    
    1,623
    
    
    
    (1,423
    )
    
    
    200Accounts receivable, net
    
    
    105,347
    
    
    
    93
    
    
    
    105,440Inventories
    
    
    60,017
    
    
    
    257
    
    
    
    60,274Prepaid expenses and other current assets
    
    
    5,085
    
    
    
    25
    
    
    
    5,110Deferred tax assets
    
    
    2,543
    
    
    
    405
    
    
    
    2,948Total current assets
    
    
    182,877
    
    
    
    (639
    )
    
    
    182,238Property and equipment, net
    
    
    6,180
    
    
    
    5
    
    
    
    6,185Other assets:Notes receivable, related parties
    
    
    300
    
    
    
    
    
    
    
    300Goodwill
    
    
    9,738
    
    
    
    
    
    
    
    9,738Intangible assets, net
    
    
    5,800
    
    
    
    215
    
    
    
    6,015Other assets
    
    
    2,368
    
    
    
    
    
    
    
    2,368Total assets
    
    $
    207,263
    
    
    $
    (419
    )
    
    $
    206,844Liabilities and shareholders equityCurrent liabilities:Accounts payable
    
    $
    129,628
    
    
    
    369
    
    
    $
    129,997Accrued expenses
    
    
    8,176
    
    
    
    392
    
    
    
    8,568Total current liabilities
    
    
    137,804

    
    
    
    761
    
    
    
    138,565Deferred compensation
    
    
    3,637
    
    
    
    696
    
    
    
    4,333Total liabilities
    
    
    141,441
    
    
    
    1,457
    
    
    
    142,898Commitments and contingenciesShareholders equity:Common stock, no par value
    
    
    113,994
    
    
    
    36
    
    
    
    114,030Accumulated deficit
    
    
    (48,172
    )
    
    
    (1,912
    )
    
    
    (50,084
    )Total shareholders equity
    
    
    65,822
    
    
    
    (1,876
    )
    
    
    63,946Total liabilities and shareholders equity
    
    $
    207,263
    
    
    $
    (419
    )
    
    $
    207,844
 79




---



##### 



The following table presents the effect of the Restatement on the consolidated statement of
operations (in thousands except per share data):
 Three Months endedSeptember 30, 2004(Unaudited)AsPreviously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedNet sales
    
    $
    144,288
    
    
    $
    113
    
    
    $
    144,401Cost of sales (exclusive of depreciation and amortization)
    
    
    123,308
    
    
    
    84
    
    
    
    123,392Gross profit
    
    
    20,980
    
    
    
    29
    
    
    
    21,009Operating expenses:Selling and marketing
    
    
    4,386
    
    
    
    
    
    
    
    4,386Distribution and warehousing
    
    
    2,221
    
    
    
    
    
    
    
    2,221General and administrative
    
    
    8,696
    
    
    
    553
    
    
    
    9,249Depreciation and amortization
    
    
    843
    
    
    
    
    
    
    
    84316,146
    
    
    
    553
    
    
    
    16,699Income from operations
    
    
    4,834
    
    
    
    (524
    )
    
    
    4,310Other income (expense):Interest expense
    
    
    (60
    )
    
    
    
    
    
    
    (60
    )Interest income
    
    
    127
    
    
    
    
    
    
    
    127Other income (expense)
    
    
    2
    
    
    
    
    
    
    
    2Net income before tax
    
    
    4,903
    
    
    
    (524
    )
    
    
    4,379Tax benefit
    
    
    3
    
    
    
    
    
    
    
    3Net income
    
    $
    4,906
    
    
    $
    (524
    )
    
    $
    4,382Earnings per common share:Basic
    
    $
    .18
    
    
    $
    (.02
    )
    
    $
    .16Diluted
    
    $
    .17
    
    
    $
    (.02
    )
    
    $
    .15Weighted average shares outstanding:Basic
    
    
    26,753
    
    
    
    
    
    
    
    26,753Diluted
    
    
    28,884
    
    
    
    
    
    
    
    28,884
 80




---



##### 



The following table presents the effect of the Restatement on the consolidated statement of
cash flows (in thousands):
 Six Months endedSeptember 30, 2004(Unaudited)AsPreviously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedOperating activities:Net income
    
    $
    7,116
    
    
    $
    (837
    )
    
    $
    6,279Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    1,580
    
    
    
    
    
    
    
    1,580Amortization of deferred financing costs
    
    
    96
    
    
    
    
    
    
    
    96Deferred compensation expense
    
    
    2,187
    
    
    
    
    
    
    
    2,187Write-off of notes receivable
    
    
    100
    
    
    
    
    
    
    
    100Deferred income taxes
    
    
    (1,507
    )
    
    
    (405
    )
    
    
    (1,912
    )Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    (24,975
    )
    
    
    (88
    )
    
    
    (25,063
    )Inventories
    
    
    (29,866
    )
    
    
    (257
    )
    
    
    (30,123
    )Prepaid expenses
    
    
    (896
    )
    
    
    (25
    )
    
    
    (921
    )Other assets
    
    
    (1,364
    )
    
    
    (210
    )
    
    
    (1,574
    )Accounts payable
    
    
    36,926
    
    
    
    283
    
    
    
    37,209Income taxes payable
    
    
    718
    
    
    
    
    
    
    
    718Accrued expenses
    
    
    2,502
    
    
    
    393
    
    
    
    2,895Net cash (used in) provided by operating activities
    
    
    (7,383
    )
    
    
    (1,146
    )
    
    
    (8,529
    )Investing activities:Purchases of property and equipment
    
    
    (6,494
    )
    
    
    (5
    )
    
    
    (6,499
    )Net proceeds from sale leaseback
    
    
    6,401
    
    
    
    
    
    
    
    6,401Purchases of intangible assets
    
    
    (398
    )
    
    
    
    
    
    
    (398
    )Payment of earn-out related to an acquisition
    
    
    (88
    )
    
    
    
    
    
    
    (88
    )Notes receivable, related parties
    
    
    (1,155
    )
    
    
    1,155
    
    
    
    Net cash used in investing activities
    
    
    (1,734
    )
    
    
    1,150
    
    
    
    (584
    )Financing activities:Proceeds from note payable, bank
    
    
    27,394
    
    
    
    
    
    
    
    27,394Payments on note payable, bank
    
    
    (27,394
    )
    
    
    
    
    
    
    (27,394
    )Repayment of note payable
    
    
    (651
    )
    
    
    
    
    
    
    (651
    )Debt acquisition costs
    
    
    (350
    )
    
    
    
    
    
    
    (350
    )Proceeds from exercise of common stock options and warrants
    
    
    3,885
    
    
    
    
    
    
    
    3,885Net cash provided by (used in) financing activities
    
    
    2,884
    
    
    
    
    
    
    
    2,884Net increase (decrease) in cash
    
    
    (6,233
    )
    
    
    4
    
    
    
    (6,229
    )Cash at beginning of year
    
    
    14,495
    
    
    
    
    
    
    
    14,495Cash at end of year
    
    $
    8,262
    
    
    $
    4
    
    
    $
    8,266
 81




---



##### 



The
following table presents the effect of the Restatement on the
consolidated balance sheet (in thousands):
 June 30, 2004(Unaudited)As Previously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    12,195
    
    
    $
    
    
    
    $
    12,195Note receivable, related parties
    
    
    782
    
    
    
    (582
    )
    
    
    200Accounts receivable, net
    
    
    79,735
    
    
    
    
    
    
    
    79,735Inventories
    
    
    41,840
    
    
    
    20
    
    
    
    41,860Prepaid expenses and other current assets
    
    
    3,983
    
    
    
    
    
    
    
    3,983Deferred tax assets
    
    
    1,689
    
    
    
    405
    
    
    
    2,094Total current assets
    
    
    140,224
    
    
    
    (157
    )
    
    
    140,067Property and equipment, net
    
    
    4,977
    
    
    
    5
    
    
    
    4,982Other assets:Notes receivable, related parties
    
    
    350
    
    
    
    
    
    
    
    350Goodwill
    
    
    9,750
    
    
    
    
    
    
    
    9,750Intangible assets, net
    
    
    5,940
    
    
    
    5
    
    
    
    5,945Other assets
    
    
    2,488
    
    
    
    
    
    
    
    2,488Total assets
    
    $
    163,729
    
    
    $
    (147
    )
    
    $
    163,582Liabilities and shareholders equityCurrent liabilities:Accounts payable
    
    $
    94,010
    
    
    
    122
    
    
    $
    94,132Accrued expenses
    
    
    6,477
    
    
    
    388
    
    
    
    6,865Total current liabilities
    
    
    100,487
    
    
    
    510
    
    
    
    100,997Deferred compensation
    
    
    3,637
    
    
    
    696
    
    
    
    4,333Total liabilities
    
    
    104,124
    
    
    
    1,206
    
    
    
    105,330Commitments and contingenciesShareholders equity:Common stock, no par value
    
    
    112,682
    
    
    
    36
    
    
    
    112,718Accumulated deficit
    
    
    (53,077
    )
    
    
    (1,389
    )
    
    
    (54,466
    )Total shareholders equity
    
    
    59,605
    
    
    
    (1,353
    )
    
    
    58,252Total liabilities and shareholders equity
    
    $
    163,729
    
    
    $
    (147
    )
    
    $
    163,582
 82




---



##### 



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, 2004(Unaudited)AsPreviously
    
    
    
    
    
    
    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
 83




---



##### 



The following table presents the effect of the Restatement on the consolidated statement of
cash flows (in thousands):
 Three Months endedJune 30, 2004(Unaudited)AsPreviously
    
    
    
    
    
    
    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
 84




---



##### 



Restatements  Previously Reported
    (in thousands)
 Year Ended March 31, 2004(Unaudited)Third Quarter
    
    
    Third Quarter
    
    
    March 31, 2004
    
    
    March 31, 2004(Reported)
    
    
    (Restated)
    
    
    (Reported)
    
    
    (Restated)Balance Sheet Data:Deferred compensation
    
    $
    
    
    
    $
    1,450
    
    
    $
    
    
    
    $
    1,450Total liabilities
    
    
    118,672
    
    
    
    120,122
    
    
    
    99,269
    
    
    
    100,719Total shareholders equity
    
    
    46,973
    
    
    
    45,523
    
    
    
    55,568
    
    
    
    54,118Total liabilities and shareholders equity
    
    $
    165,645
    
    
    $
    165,645
    
    
    $
    154,837
    
    
    $
    154,837Statements of Operations Data:General and administrative
    
    $
    6,242
    
    
    $
    7,692
    
    
    $
    23,979
    
    
    $
    25,429Income from operations
    
    
    4,521
    
    
    
    3,071
    
    
    
    9,147
    
    
    
    7,697Net income before tax
    
    
    3,590
    
    
    
    2,140
    
    
    
    8,313
    
    
    
    6,863Net income
    
    $
    3,590
    
    
    $
    2,140
    
    
    $
    8,896
    
    
    $
    7,446Earnings per common share:Basic
    
    $
    .16
    
    
    $
    .10
    
    
    $
    .39
    
    
    $
    .33Diluted
    
    $
    .15
    
    
    $
    .09
    
    
    $
    .37
    
    
    $
    .31Statements of Cash Flow Data:Net income
    
    $
    5,621
    
    
    $
    4,171
    
    
    $
    8,896
    
    
    $
    7,446Deferred compensation expense
    
    
    
    
    
    
    1,450
    
    
    
    
    
    
    
    1,450
 (in thousands)
 Year Ended March 31, 2005(Unaudited)First
    
    
    First
    
    
    Second
    
    
    SecondQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(Reported)
    
    
    (Restated)
    
    
    (Reported)
    
    
    (Restated)Balance Sheet Data:Deferred compensation
    
    $
    
    
    
    $
    3,637
    
    
    $
    
    
    
    $
    3,637Total liabilities
    
    
    92,072
    
    
    
    95,709
    
    
    
    137,588
    
    
    
    141,225Total shareholders equity
    
    
    63,418
    
    
    
    59,781
    
    
    
    69,675
    
    
    
    66,038Total liabilities and shareholders equity
    
    $
    155,490
    
    
    $
    155,490
    
    
    $
    207,263
    
    
    $
    207,263Statements of Operations Data:General and administrative
    
    $
    7,603
    
    
    $
    9,790
    
    
    $
    8,697
    
    
    $
    8,697Income from operations
    
    
    4,306
    
    
    
    2,119
    
    
    
    4,834
    
    
    
    4,834Net income before tax
    
    
    4,386
    
    
    
    2,199
    
    
    
    4,902
    
    
    
    4,902Net income
    
    $
    4,397
    
    
    $
    2,210
    
    
    $
    4,906
    
    
    $
    4,906Earnings per common share:Basic
    
    $
    .17
    
    
    $
    .08
    
    
    $
    .18
    
    
    $
    .18Diluted
    
    $
    .15
    
    
    $
    .08
    
    
    $
    .17
    
    
    $
    .17Statements of Cash Flow DataNet income
    
    $
    4,397
    
    
    $
    2,210
    
    
    $
    9,303
    
    
    $
    7,116Deferred compensation expense
    
    
    
    
    
    
    2,187
    
    
    
    
    
    
    
    2,187
 85




---



##### 



(in thousands):
 Year Ended March 31, 2005(Unaudited)Third
    
    
    ThirdQuarter
    
    
    Quarter(Reported)
    
    
    (Restated)Balance Sheet Data:Deferred compensation
    
    $
    
    
    
    $
    3,637Total liabilities
    
    
    140,729
    
    
    
    144,366Total shareholders equity
    
    
    80,576
    
    
    
    76,939Total liabilities and shareholders equity
    
    $
    221,305
    
    
    $
    221,305Statements of Operations Data:Tax (benefit) expense
    
    $
    (2,386
    )
    
    $
    42Net income
    
    
    10,400
    
    
    
    7,972Earnings per common share:Basic
    
    $
    .39
    
    
    $
    .30Diluted
    
    $
    .36
    
    
    $
    .28Statements of Cash Flow Data:Net income
    
    $
    19,703
    
    
    $
    15,088Deferred compensation expense
    
    
    
    
    
    
    2,187Tax benefit from employee stock option plans
    
    
    
    
    
    
    2,428
 86




---



##### 



Note 4 Acquisition
 Business Combinations.
   Accounts receivable
    
    $
    5,739Inventories
    
    
    2,976Prepaid expenses and other current assets
    
    
    752Property and equipment
    
    
    30Identifiable intangible assets
    
    
    4,990Goodwill
    
    
    6,723Current liabilities
    
    
    (5,577
    )Total purchase price
    
    $
    15,633
 Note 5 Accounts Receivable
  March 31, 2005
    
    
    March 31, 2004(Restated)
    
    
    (Restated)Trade receivables
    
    $
    88,196
    
    
    $
    77,700Vendor advance receivables
    
    
    16,857
    
    
    
    12,718Other receivables
    
    
    2,745
    
    
    
    704$
    107,798
    
    
    $
    91,122Less: allowance for doubtful accounts and sales returns
    
    
    13,815
    
    
    
    11,159Total
    
    $
    93,983
    
    
    $
    79,963
 Note 6 Variable Interest Entity
  Consolidated of Variable Interest Entities Consolidated Financial Statements
 87




---



##### 



Note 7 Inventories
  March 31, 2005
    
    
    March 31, 2004(Restated)
    
    
    (Restated)Finished products
    
    $
    36,222
    
    
    $
    27,826Raw materials
    
    
    4,537
    
    
    
    2,325$
    40,759
    
    
    $
    30,151
 Note 8 Goodwill and Intangible Assets
   Distribution
    
    
    Publishing
    
    
    ConsolidatedBalances as of March 31, 2003 (Restated)
    
    $
    
    
    
    $
    3,109
    
    
    $
    3,109Goodwill resulting from an acquisition
    
    
    
    
    
    
    7,262
    
    
    
    7,262Balances as of March 31, 2004 (Restated)
    
    $
    
    
    
    $
    10,371
    
    
    $
    10,371Final purchase price allocation adjustment
    
    
    
    
    
    
    (627
    )
    
    
    (627
    )Earn-out related to acquisition
    
    
    
    
    
    
    88
    
    
    
    88Balances as of March 31, 2005 (Restated)
    
    $
    
    
    
    $
    9,832
    
    
    $
    9,832
  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
 As of March 31, 2004(Restated)Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters
    
    $
    6,230
    
    
    $
    220
    
    
    $
    6,010Other
    
    
    710
    
    
    
    592
    
    
    
    118$
    6,940
    
    
    $
    812
    
    
    $
    6,128
  88




---



##### 



2006
    
    $
    1,4302007
    
    
    1,3872008
    
    
    1,1522009
    
    
    1,0512010
    
    
    154
 Note 9 Property and Equipment
  March 31, 2005
    
    
    March 31, 2004(Restated)
    
    
    (Restated)Land and buildings
    
    $
    
    
    
    $
    399Furniture and fixtures
    
    
    1,092
    
    
    
    668Computer and office equipment
    
    
    4,483
    
    
    
    3,323Warehouse equipment
    
    
    6,868
    
    
    
    4,169Leasehold improvements
    
    
    2,894
    
    
    
    1,984Construction in progress
    
    
    74
    
    
    
    3,021Total
    
    $
    15,411
    
    
    $
    13,564Less: accumulated depreciation and amortization
    
    
    7,259
    
    
    
    6,650Net property and equipment
    
    $
    8,152
    
    
    $
    6,914
 89




---



##### 



Note 10 Accrued Expenses
  March 31, 2005
    
    
    March 31, 2004(Restated)
    
    
    (Restated)Compensation and benefits
    
    $
    9,067
    
    
    $
    2,782Royalties
    
    
    2,491
    
    
    
    1,157Rebates
    
    
    1,023
    
    
    
    649Other
    
    
    2,486
    
    
    
    1,789Total
    
    $
    15,067
    
    
    $
    6,377
 Note 11 Bank Financing and Debt
        90




---



##### 



91




---



##### 



Note 12 Income Taxes
  Fiscal Years ended March 31,2005
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)CurrentFederal
    
    $
    3,306
    
    
    $
    417
    
    
    $
    State
    
    
    459
    
    
    
    36
    
    
    
    Deferred
    
    
    (4,771
    )
    
    
    (1,036
    )
    
    
    Tax benefit
    
    $
    (1,006
    )
    
    $
    (583
    )
    
    $
    
  Fiscal Years ended March 31,2005
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)Tax expense at statutory rate
    
    $
    3,114
    
    
    $
    2,119
    
    
    $
    1,467State income taxes, net of federal benefit
    
    
    293
    
    
    
    193
    
    
    
    259Non-deductible compensation charge
    
    
    1,972
    
    
    
    
    
    
    
    Reversal of valuation allowance
    
    
    (7,496
    )
    
    
    (3,579
    )
    
    
    (1,789
    )Effect of
variable interest entity
    
    
    755
    
    
    
    117
    
    
    
    Other
    
    
    356
    
    
    
    567
    
    
    
    63Tax benefit
    
    $
    (1,006
    )
    
    $
    (583
    )
    
    $
    
 Fiscal Years ended March 31,2005
    
    
    2004
    
    
    2003(Restated)
    
    
    (Restated)
    
    
    (Restated)Tax expense at statutory rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %State income taxes, net of federal benefit
    
    
    3.2
    %
    
    
    3.1
    %
    
    
    6.0
    %Non-deductible compensation charge
    
    
    21.5
    %
    
    
    
    
    
    
    Reversal of valuation allowance
    
    
    (81.8
    )%
    
    
    (57.4
    )%
    
    
    (41.5
    )%Effect of
variable interest entity
    
    
    8.2
    %
    
    
    1.9
    %
    
    
    Other
    
    
    3.9
    %
    
    
    9.1
    %
    
    
    1.5
    %Tax benefit
    
    
    (11.0
    )%
    
    
    (9.3
    )%
    
    
    
  Fiscal Years ended March 31,2005
    
    
    2004(Restated)
    
    
    (Restated)Net deferred tax asset (liability)long-termIncentive based deferred compensation
    
    $
    1,887
    
    
    
    793Stock based compensation
    
    
    121
    
    
    
    Book/tax intangibles amortization
    
    
    (3,176
    )
    
    
    (3,276
    )Book/tax depreciation
    
    
    (423
    )
    
    
    406Net operating loss carry forwards
    
    
    
    
    
    
    4,033Variable
interest entity
    
    
    974
    
    
    
    130Valuation
allowance  variable interest entity
    
    
    (974
    )
    
    
    (130
    )AMT credit carry forwards
    
    
    
    
    
    
    247Total deferred tax asset (liability)long-term
    
    $
    (1,591
    )
    
    $
    2,203Net deferred tax asset (liability)currentCollectibility reserves
    
    $
    4,222
    
    
    $
    4,478Allowance for sales returns
    
    
    2,016
    
    
    
    1,341Reserve for sales discounts
    
    
    278
    
    
    
    186Accrued vacations
    
    
    282
    
    
    
    169Inventory  uniform capitalization
    
    
    230
    
    
    
    155Incentive
based deferred compensation
    
    
    148
    
    
    
    Other
    
    
    222
    
    
    
    Total deferred tax asset current
    
    $
    7,398
    
    
    $
    6,329Valuation
allowance
    
    
    
    
    
    
    (7,496
    )Total deferred tax asset
    
    $
    5,807
    
    
    $
    1,036
  92




---



##### 



Note 13 Shareholders Equity
        Note 14 Stock Options and Grants
  93




---



##### 



Plan Options
    
    
    
    
    
    
    Weighted AverageAvailable for
    
    
    Plan Options
    
    
    Exercise Price PerGrant
    
    
    Outstanding
    
    
    ShareBalance on March 31, 2002
    
    
    1,064,054
    
    
    
    1,985,900
    
    
    $
    3.77Granted
    
    
    (1,294,252
    )
    
    
    1,294,252
    
    
    
    1.56Canceled
    
    
    151,000
    
    
    
    (151,000
    )
    
    
    2.60Terminated
    
    
    91,200
    
    
    
    (91,200
    )
    
    
    3.00Balance on March 31, 2003
    
    
    12,002
    
    
    
    3,037,952
    
    
    $
    2.91Additional shares authorized
    
    
    1,000,000
    
    
    
    
    
    
    
    Granted
    
    
    (701,748
    )
    
    
    701,748
    
    
    
    4.91Exercised
    
    
    
    
    
    
    (765,600
    )
    
    
    2.80Canceled
    
    
    47,300
    
    
    
    (47,300
    )
    
    
    3.26Terminated
    
    
    19,600
    
    
    
    (19,600
    )
    
    
    2.78Balance on March 31, 2004
    
    
    377,154
    
    
    
    2,907,200
    
    
    $
    3.41Additional shares authorized
    
    
    1,000,000
    
    
    
    
    
    
    
    Granted
    
    
    (917,500
    )
    
    
    917,500
    
    
    
    15.25Exercised
    
    
    
    
    
    
    (724,700
    )
    
    
    3.03Canceled
    
    
    312,200
    
    
    
    (312,200
    )
    
    
    5.11Balance on March 31, 2005
    
    
    771,854
    
    
    
    2,787,800
    
    
    $
    7.24
  Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageRange of
    
    Number of
    
    
    Remaining
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseExercise Prices
    
    Options
    
    
    Life
    
    
    Price
    
    
    Options
    
    
    Price$0.93 to $1.48
    
    
    519,700
    
    
    3.25 years
    
    $
    1.23
    
    
    
    239,900
    
    
    $
    1.20$1.56 to $1.73
    
    
    546,000
    
    
    3.78 years
    
    $
    1.72
    
    
    
    158,000
    
    
    $
    1.72$1.75 to $6.09
    
    
    718,400
    
    
    3.75 years
    
    $
    5.26
    
    
    
    246,800
    
    
    $
    5.12$6.25 to $15.06
    
    
    398,700
    
    
    4.41 years
    
    $
    10.88
    
    
    
    79,200
    
    
    $
    8.14$15.33 to $17.37
    
    
    64,000
    
    
    4.09 years
    
    $
    16.64
    
    
    
    18,000
    
    
    $
    15.38$17.39 to $17.39
    
    
    534,000
    
    
    5.65 years
    
    $
    17.39
    
    
    
    
    
    
    
    $18.08 to $18.27
    
    
    7,000
    
    
    5.78 years
    
    $
    18.21
    
    
    
    
    
    
    
    2,787,800
    
    
    4.14 years
    
    $
    7.24
    
    
    
    741,900
    
    
    $
    3.70
  Note 15 401(k) Plan
  94




---



##### 



Note 16 Commitments and Contingencies
 Leases
    2006
    
    $
    2,2342007
    
    
    2,0042008
    
    
    1,9122009
    
    
    1,9462010
    
    
    1,879Thereafter
    
    
    13,013$
    22,988
 Litigation
  ValueVision Media, Inc. v. Navarre Corporation
      95




---



##### 



Sybersound Records, Inc. v. BCI Eclipse, LLC, et al.
   Sybersound Records, Inc. v. Navarre Corporation, BCI Eclipse, LLC, et al.
    Faulconer Productions Music Corp. v. FUNimation Productions, Inc. et al
     96




---



##### 



Aviva Partners LLC, individually on behalf of all other similarly situated, v. Navarre
Corporation, Eric H. Paulsen and James Gilbertson
    Note 17 Capital Leases
  March 31, 2005
    
    
    March 31, 2004(Restated)
    
    
    (Restated)Computer and office equipment
    
    $
    380
    
    
    $
    Less: accumulated depreciation and amortization
    
    
    87
    
    
    
    Net property and equipment
    
    $
    293
    
    
    $
    
  Minimum LeaseCommitmentsYear ending March 31 (in thousands):2006
    
    $
    1292007
    
    
    1292008
    
    
    1002009
    
    
    442010
    
    
    28Thereafter
    
    
    Total minimum lease payments
    
    $
    430Less: amounts representing interest at rates ranging from 10% to 26%
    
    
    109Present value of minimum capital lease payments
    
    $
    321Less: current installments
    
    
    84Obligations under capital lease, less current installments
    
    $
    237
 Note 18 Sale/Leaseback of Warehouse Facility
  97




---



##### 



2006
    
    $
    6732007
    
    $
    6912008
    
    $
    7102009
    
    $
    7302010
    
    $
    750Thereafter
    
    $
    7,990$
    11,544
 Note 19 License and Distribution Agreement
   Note 20 Related Party Transactions
 Employment/Severance Agreements
    98




---



##### 



Stock Purchase Agreement
  Consulting Arrangement
  Note 21 Major Customers
  Note 22 Subsequent Events
   Goodwill and Other
Intangible Assets
 Note 23 Business Segments
   99




---



##### 



Fiscal Year 2005 (Restated)
    
    Distribution
    
    
    Publishing
    
    
    Other
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    556,927
    
    
    $
    95,777
    
    
    $
    352
    
    
    $
    (56,441
    )
    
    $
    596,615Income (loss) from operations
    
    
    (2,348
    )
    
    
    14,006
    
    
    
    (2,123
    )
    
    
    
    
    
    
    9,535Net income (loss) before income taxes
    
    
    (2,199
    )
    
    
    13,579
    
    
    
    (2,220
    )
    
    
    
    
    
    
    9,160Depreciation and amortization expense
    
    
    1,826
    
    
    
    1,695
    
    
    
    
    
    
    
    
    
    
    
    3,521Capital expenditures
    
    
    8,214
    
    
    
    1,078
    
    
    
    83
    
    
    
    
    
    
    
    9,375Total assets
    
    
    176,932
    
    
    
    47,944
    
    
    
    536
    
    
    
    (29,520
    )
    
    
    195,892
 Fiscal Year 2004 (Restated)
    
    Distribution
    
    
    Publishing
    
    
    Other
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    444,743
    
    
    $
    46,177
    
    
    $
    
    
    
    $
    (20,043
    )
    
    $
    470,877Income (loss) from operations
    
    
    9,282
    
    
    
    (1,874
    )(1)
    
    
    (343
    )
    
    
    
    
    
    
    7,065Net income (loss) before income taxes
    
    
    9,129
    
    
    
    (2,555
    )
    
    
    (343
    )
    
    
    
    
    
    
    6,231Depreciation and amortization expense
    
    
    1,327
    
    
    
    673
    
    
    
    
    
    
    
    
    
    
    
    2,000Capital expenditures
    
    
    4,957
    
    
    
    91
    
    
    
    
    
    
    
    
    
    
    
    5,048Total assets
    
    
    143,478
    
    
    
    27,499
    
    
    
    5
    
    
    
    (16,403
    )
    
    
    154,579
 Fiscal Year 2003 (Restated)
    
    Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    353,316
    
    
    $
    14,715
    
    
    $
    (11,215
    )
    
    $
    356,816Income from operations
    
    
    3,556
    
    
    
    41
    
    
    
    
    
    
    
    3,597Net income (loss) before income taxes
    
    
    4,221
    
    
    
    (308
    )
    
    
    
    
    
    
    3,913Depreciation and amortization expense
    
    
    1,295
    
    
    
    822
    
    
    
    
    
    
    
    2,117Capital expenditures
    
    
    994
    
    
    
    45
    
    
    
    
    
    
    
    1,039Total assets
    
    
    107,691
    
    
    
    14,797
    
    
    
    (12,823
    )
    
    
    109,665
  Note 24 Quarterly Data  Seasonality (Unaudited)
   Quarter EndedJune 30
    
    
    September 30
    
    
    December 31
    
    
    March 31(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Fiscal year 2005Net sales
    
    $
    127,306
    
    
    $
    144,401
    
    
    $
    182,876
    
    
    $
    142,032Gross profit
    
    
    18,878
    
    
    
    21,009
    
    
    
    27,237
    
    
    
    24,053Net income (loss)
    
    $
    1,897
    
    
    $
    4,382
    
    
    $
    7,233
    
    
    $
    (3,346
    )Net earnings (loss) per share:Basic
    
    $
    0.07
    
    
    $
    0.16
    
    
    $
    0.27
    
    
    $
    (0.12
    )Diluted
    
    $
    0.07
    
    
    $
    0.15
    
    
    $
    0.25
    
    
    $
    (0.12
    )
 June 30
    
    
    September 30
    
    
    December 31
    
    
    March 31(Restated)
    
    
    (Restated)Fiscal year 2004Net sales
    
    $
    72,613
    
    
    $
    106,200
    
    
    $
    151,170
    
    
    $
    140,894Gross profit
    
    
    10,207
    
    
    
    13,602
    
    
    
    18,117
    
    
    
    16,095Net income
    
    $
    308
    
    
    $
    1,723
    
    
    $
    2,140
    
    
    $
    2,643Net earnings per share:Basic
    
    $
    0.01
    
    
    $
    0.08
    
    
    $
    0.10
    
    
    $
    0.10Diluted
    
    $
    0.01
    
    
    $
    0.08
    
    
    $
    0.09
    
    
    $
    0.10
 100




---



##### 



Navarre Corporation
 Schedule II  Valuation and Qualifying Accounts and Reserves
 Balance at
    
    
    Charged to
    
    
    
    
    
    
    Balance atBeginning
    
    
    Costs and
    
    
    Additions/
    
    
    End ofDescription
    
    Of Period
    
    
    Expenses
    
    
    (Deductions)
    
    
    PeriodYear ended March 31, 2005:Deducted from asset accounts:Vendor advance reserve
    
    $
    4,808
    
    
    $
    4,287
    
    
    $
    (3,003
    )
    
    $
    6,092Allowance for doubtful accounts
    
    
    1,394
    
    
    
    423
    
    
    
    (442
    )
    
    
    1,375Allowance for sales returns
    
    
    3,706
    
    
    
    1,066
    
    
    
    (582
    )
    
    
    4,190Allowance for MDF and sales disc.
    
    
    1,251
    
    
    
    22,277
    
    
    
    (21,370
    )
    
    
    2,158Total
    
    $
    11,159
    
    
    $
    28,053
    
    
    $
    (25,397
    )
    
    $
    13,815Year ended March 31, 2004:Deducted from asset accounts:Vendor advance reserve
    
    $
    4,174
    
    
    $
    2,618
    
    
    $
    (1,984
    )
    
    $
    4,808Allowance for doubtful accounts
    
    
    673
    
    
    
    (123
    )
    
    
    844
    (1)
    
    
    1,394Allowance for sales returns
    
    
    4,160
    
    
    
    (1,872
    )
    
    
    1,418
    (1)
    
    
    3,706Allowance for MDF and sales disc.
    
    
    1,107
    
    
    
    15,557
    
    
    
    (15,413
    )
    
    
    1,251Total
    
    $
    10,114
    
    
    $
    16,180
    
    
    $
    (15,135
    )
    
    $
    11,159Year ended March 31, 2003:Deducted from asset accounts:Vendor advance reserve
    
    $
    433
    
    
    $
    3,338
    
    
    $
    403
    
    
    $
    4,174Allowance for doubtful accounts
    
    
    1,111
    
    
    
    93
    
    
    
    (531
    )
    
    
    673Allowance for sales returns
    
    
    1,300
    
    
    
    296
    
    
    
    2,564
    (2)
    
    
    4,160Allowance for MDF and sales disc.
    
    
    
    
    
    
    8,470
    
    
    
    (7,363
    )
    
    
    1,107Total
    
    $
    2,844
    
    
    $
    12,197
    
    
    $
    (4,927
    )
    
    $
    10,114
 (1)
    
    Additional reserves associated with the operations of BCI.(2)
    
    Includes additional reserves associated with the operations of Encore Software.
 101