##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended March 31, 2010
 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
    
    41-1704319(State or other jurisdiction of 
incorporation or organization)
    
    (IRS Employer
Identification No.)
 7400 49th Avenue North, New Hope, MN 55428
 (763) 535-8333
  Title of each class
    
    Name of each exchange on which registeredCommon Stock, No par value
    
    The NASDAQ Global Market
 None
 o þ
 o þ
 þ o
 o o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o

(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



NAVARRE CORPORATION
 FORM 10-K
 TABLE OF CONTENTS
 PagePART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    9Item 1B. Unresolved Staff Comments
    
    
    20Item 2. Properties
    
    
    20Item 3. Legal Proceedings
    
    
    20Item 4. (Removed and Reserved)
    
    
    20PART IIItem 5. Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
    
    
    21Item 6. Selected Financial Data
    
    
    23Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    23Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
    
    
    41Item 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
    
    
    43PART IIIItem 10. Directors, Executive Officers, and Corporate
Governance
    
    
    43Item 11. Executive Compensation
    
    
    43Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
    
    
    43Item 13. Certain Relationships and Related Transactions, and
Director Independence
    
    
    44Item 14. Principal Accounting Fees and
Services
    
    
    44PART IVItem 15. Exhibits and Financial Statement
Schedules
    
    
    44Signatures
    
    
    51EX-10.39EX-10.46EX-10.47EX-10.48EX-10.69EX-21.1EX-23.1EX-24.1EX-31.1EX-31.2EX-32.1EX-32.2
  2




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PART I
 
 Item 1   Business
 Overview
   Information About Our Segments
  Distribution.
  Publishing Print Shop, Print Master, Mavis Beacon Teaches Typing, Advantage, Diner
Dash, H&R Block, Bicycle Hoyle PC Gaming anime Dragon Ball Z, Dragon Ball Kai, Dragon Ball, Dragon Ball GT, Fullmetal Alchemist, Fullmetal
Alchemist Brotherhood, One Piece, Afro Samurai, Shin Chan, Claymore, Darker Than Black, Robotech
The Shadow Chronicles, Evangelion1.11, Trigun and Eden of The East. Shinobi, Genghis Khan, RoboGeisha, Kamui Gaiden.
   3




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anim
 Business Strategy & Strengths
  
    
    Distribution of a Broad Range of Products
    
    Provision of Value-Added and Logistical Services
    
    Acquisition of Attractive Publishing Content
    
    Integration of Our Technology and Systems with Customers and Vendors
    
    Established Relationships with Publishers and Customers.
 Distribution Markets
 Computer Software
    Video Games
    4




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Home Video
    Independent Label Music
  Customers
 www.navarre.com Business Navarres Distribution Business Model: E-Commerce
  Navarres Distribution Business Model
 Vendor Relationships
   5




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Retail Services
   Warehouse Systems
  E-Commerce
 www.navarre.com
 Navarres Publishing Business Model
 anime
 Encore
 Print Shop, Print Master,
H&R Block, Advantage, Mavis Beacon Teaches Typing, Diner Dash, Bicycle Hoyle PC Gaming .
   6




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Broderbund, H&R Block, Bicycle Hoyle
 FUNimation
 anime Dragon Ball Z, Dragon Ball Kai, Dragon Ball, Dragon Ball GT, Fullmetal Alchemist, Fullmetal
Alchemist Brotherhood, One Piece, Afro Samurai, Shin Chan, Claymore, Darker Than Black, Robotech
The Shadow Chronicles, Evangelion1.11, Trigun and Eden of The East. Shinobi, Genghis Khan, RoboGeisha, Kamui Gaiden.
 anime anime anime
 Home Video Distribution
 Broadcast anime
 Licensing and Merchandising
 Retail Sales and Web Sites anime ,
 Competition
    7




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Backlog
  Environmental Matters
  Employees
  Capital Resources  Financing
 Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and Capital Resources.
 Available Information
 www.navarre.com http://www.sec.gov
 Executive Officers of the Company
  Name
    
    Age
    
    PositionCary L.
Deacon
    
    
    58
    
    
    President and Chief Executive OfficerJ. Reid
Porter
    
    
    61
    
    
    Executive Vice President, Chief Financial OfficerJoyce Fleck
    
    
    57
    
    
    President of Navarre DistributionCalvin Morrell
    
    
    54
    
    
    President of EncoreGen Fukunaga
    
    
    49
    
    
    Chief Executive Officer and President of FUNimationJohn Turner
    
    
    56
    
    
    Senior Vice President of Global LogisticsRyan F. Urness
    
    
    38
    
    
    General Counsel and Secretary
 Cary L. Deacon
 J. Reid Porter
 8




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Joyce Fleck
 Calvin Morrell
 Gen Fukunaga
 John Turner
 Ryan F. Urness
 
 Item 1A   Risk Factors
 FORWARD-LOOKING STATEMENTS / RISK FACTORS
    9




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Risks Relating to Our Business and Industry
 We derive a substantial portion of our total net sales from two customers. A reduction in sales to
either of these customers, or another significant customer, 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.
   Our revenues are dependent on consumer preferences and demand, which can change at any time.
 anime
 
    
    any of the current properties, product concepts or programming will continue to be
popular for any significant period of time;
    
    any new properties, product concepts or programming will achieve commercial acceptance;
or
 10




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
    
    any propertys life cycle will be sufficient to permit adequate profitably to recover
advance payments, guarantees, development, marketing, royalties and other costs.
  A continued deterioration in the businesses of significant customers, due to weak economic
conditions, could harm our business.
  
    
    the credit available to our customers;
    
    the popularity of our products released during the quarter;
    
    the opening and closing of retail stores by our major customers;
    
    the extension, termination or non-renewal of existing distribution agreements and
licenses;
    
    the credit available from our vendors and other sources;
    
    product marketing and promotional activities; and
    
    general economic changes affecting the buying pattern of retailers, particularly those
changes affecting consumer demand for home entertainment products and computer software.
  As our non-U.S. sales and operations grow, we could become increasingly subject to additional risks
that could harm our business.
  
    
    compliance with foreign regulatory and market requirements;
    
    variability of foreign economic, political and labor conditions;
    
    changing restrictions imposed by regulatory requirements, tariffs or other trade
barriers or by U.S. import and export laws;
    
    longer accounts receivable payment cycles;
    
    potentially adverse tax consequences;
    
    difficulties in protecting intellectual property;
 11




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
    
    burdens of complying with foreign laws; and
    
    as we generate cash flow in non-U.S. jurisdictions, we may experience difficulty
transferring such funds to the U.S. in a tax efficient manner.
  Pending SEC investigation or litigation may subject us to significant costs, judgments or penalties
and could divert managements attention.
  Our business is seasonal and variable in nature and, as a result, the level of sales and
profitability during our peak season could adversely affect our results of operations and
liquidity.
  A substantial portion of FUNimations revenues are derived 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
  FUNimations revenues are substantially dependent on television exposure for its licensed
properties.
 anime
 Technology developments, particularly in the electronic downloading arena, may adversely affect our
net sales, margins and results of operations.
  12




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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.
  The loss of key personnel 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.
   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 negatively
impact our liquidity.
  13




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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.
    Developing software is complex, costly and uncertain and operational errors or defects in such
products could result in liabilities and/or impair such products marketability.
   Further impairment in the carrying value of our assets could negatively affect our consolidated
results of operations and net worth.
  We have significant credit exposure and negative product demand trends or other factors could cause
us significant credit loss.
  14




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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.
    anime anime
  We depend on third party shipping and fulfillment companies for the delivery of our products.
  15




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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.
     Any future acquisitions or divestitures 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 acquired companies into our business, it could materially and adversely
affect our financial condition and operating results.
  Interruption of our business or catastrophic loss at any of our facilities could lead to a
curtailment or shutdown of our business.
  16




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Future terrorist or military actions could result in disruption to our operations or loss of
assets.
  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 acquiring new content, exploring other business opportunities or
strategic acquisitions;
    
    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;
    
    limit our flexibility in planning for, or reacting to, changes in our business and
industry; and
    
    cause vendors to reduce or restrict vendor financing.
 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 could
adversely affect our leveraged capital structure.
  We may be unable to generate sufficient cash flow to service our debt obligations.
  17




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
    
    our financial condition at the time;
    
    the amount of financing outstanding and lender requirements 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.
  Risks Relating to Our Common Stock
 Our common stock price has been volatile. Fluctuations in our stock price could impair our ability
to raise capital and make an investment in our securities undesirable.
  If we fail to meet the Nasdaq Global Market listing requirements, our common stock could be
delisted.
  18




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The exercise of outstanding warrants and options may adversely affect our stock price.
  Our anti-takeover provisions, our ability to issue preferred stock and our staggered board may
discourage takeover attempts that could be beneficial for our shareholders.
   We currently do not intend to pay dividends on our common stock and, consequently, there will be no
opportunity for our shareholders to achieve a return on their investment through dividend payments.
  Our directors may not be held personally liable for certain actions, which could discourage
shareholder suits against them.
  Other Risks
   19




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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
 Distribution
    Publishing
    
 Item 3. Legal Proceedings
  
 Item 4. (Removed and Reserved)
 20




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Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
 Common Stock
  Quarter
    
    High
    
    
    LowFiscal 2010
    
    First
    
    $
    1.65
    
    
    $
    0.40Second
    
    
    2.28
    
    
    
    1.53Third
    
    
    2.96
    
    
    
    2.03Fourth
    
    
    2.17
    
    
    
    1.90Fiscal 2009
    
    First
    
    
    1.87
    
    
    
    1.48Second
    
    
    1.79
    
    
    
    1.41Third
    
    
    1.45
    
    
    
    0.38Fourth
    
    
    0.57
    
    
    
    0.34
 Holders
  Dividend Policy
  Comparative Stock Performance
   21




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*
    
    $100 invested on 3/31/05 in stock or index-including reinvestment of dividends.
Fiscal year ending March 31. 3/05
    
    
    3/06
    
    
    3/07
    
    
    3/08
    
    
    3/09
    
    
    3/10Navarre Corporation
    
    $
    100.00
    
    
    $
    53.96
    
    
    $
    47.17
    
    
    $
    22.14
    
    
    $
    5.53
    
    
    $
    26.16NASDAQ Composite
    
    $
    100.00
    
    
    $
    119.97
    
    
    $
    134.27
    
    
    $
    118.46
    
    
    $
    85.30
    
    
    $
    142.80Peer Group
    
    $
    100.00
    
    
    $
    96.43
    
    
    $
    95.14
    
    
    $
    86.83
    
    
    $
    52.88
    
    
    $
    79.54
 Source: Research Data Group, Inc.
 Purchases of Equity Securities
  Equity Compensation Plan Information
   Number of securitiesWeighted-average
    
    
    remaining available forexercise
    
    
    future issuance underNumber of securities to be
    
    
    price of
    
    
    equityissued upon exercise of
    
    
    outstanding
    
    
    compensation plansoutstanding options,
    
    
    options,
    
    
    (excluding securitieswarrants and rights
    
    
    warrants and rights
    
    
    reflected in column (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation plans approved by security holders
    
    
    5,651,786
    
    
    $
    4.54
    
    
    
    98,913Equity compensation plans not approved by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    5,651,786
    
    
    $
    4.54
    
    
    
    98,913
 22




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Item 6. Selected Financial Data
 Financial
Statements and Supplementary Data Managements Discussion and
Analysis of Financial Condition and Results of Operations
 Fiscal Years ended March 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006(1)Statement of operations data (2):Net sales
    
    $
    528,332
    
    
    $
    630,991
    
    
    $
    658,472
    
    
    $
    644,790
    
    
    $
    615,557Gross profit, exclusive of depreciation and amortization
    
    
    87,925
    
    
    
    67,047
    
    
    
    101,559
    
    
    
    107,357
    
    
    
    101,425Income (loss) from operations
    
    
    18,683
    
    
    
    (97,118
    )
    
    
    17,831
    
    
    
    16,362
    
    
    
    6,767Interest expense
    
    
    (2,818
    )
    
    
    (4,630
    )
    
    
    (6,127
    )
    
    
    (10,220
    )
    
    
    (11,217
    )Other income (expense)
    
    
    804
    
    
    
    (1,169
    )
    
    
    625
    
    
    
    56
    
    
    
    2,764Income (loss) from continuing operations
    
    
    16,669
    
    
    
    (102,917
    )
    
    
    12,329
    
    
    
    6,198
    
    
    
    (1,686
    )Income tax benefit (expense)
    
    
    6,203
    
    
    
    14,483
    
    
    
    (5,273
    )
    
    
    (2,594
    )
    
    
    654Net income (loss) from continuing operations
    
    
    22,872
    
    
    
    (88,434
    )
    
    
    7,056
    
    
    
    3,604
    
    
    
    (1,032
    )Gain on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    4,892
    
    
    
    
    
    
    
    Income (loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (2,290
    )
    
    
    455
    
    
    
    (2,143
    )Net income (loss)
    
    $
    22,872
    
    
    $
    (88,434
    )
    
    $
    9,658
    
    
    $
    4,059
    
    
    $
    (3,175
    )Basic earnings (loss) per common share:Continuing operations
    
    $
    0.63
    
    
    $
    (2.44
    )
    
    $
    0.20
    
    
    $
    0.10
    
    
    $
    (0.04
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.07
    
    
    
    0.01
    
    
    
    (0.07
    )Net income (loss)
    
    $
    0.63
    
    
    $
    (2.44
    )
    
    $
    0.27
    
    
    $
    0.11
    
    
    $
    (0.11
    )Diluted earnings (loss) per common share:Continuing operations
    
    $
    0.62
    
    
    $
    (2.44
    )
    
    $
    0.20
    
    
    $
    0.10
    
    
    $
    (0.04
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.07
    
    
    
    0.01
    
    
    
    (0.07
    )Net income (loss)
    
    $
    0.62
    
    
    $
    (2.44
    )
    
    $
    0.27
    
    
    $
    0.11
    
    
    $
    (0.11
    )Weighted average shares outstanding:Basic
    
    
    36,285
    
    
    
    36,207
    
    
    
    36,105
    
    
    
    35,786
    
    
    
    29,898Diluted
    
    
    36,643
    
    
    
    36,207
    
    
    
    36,269
    
    
    
    36,228
    
    
    
    29,898Balance sheet data:Total assets
    
    $
    171,603
    
    
    $
    183,169
    
    
    $
    283,462
    
    
    $
    288,225
    
    
    $
    309,614Short-term debt
    
    
    6,634
    
    
    
    24,133
    
    
    
    31,523
    
    
    
    39,208
    
    
    
    5,115Long-term debt
    
    
    
    
    
    
    
    
    
    
    9,654
    
    
    
    14,970
    
    
    
    75,352Temporary equity  Unregistered common stock (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,634Shareholders equity
    
    
    60,761
    
    
    
    37,007
    
    
    
    124,411
    
    
    
    113,451
    
    
    
    88,906
 
 (1)
    
    Includes acquisition of FUNimation from date of acquisition  May 11, 2005.(2)
    
    Fiscal years 2008, 2007 and 2006 have been restated for discontinued operations related to
the divestiture of NEM.(3)
    
    See Note 20 to the consolidated financial statements. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
  23




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Distribution.
  Publishing
 Overall Summary of Fiscal 2010 Financial Results
     24




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Working Capital and Debt
      25




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Critical Accounting Policies and Estimates
   Revenue Recognition
    Entertainment-Films.
 Production Costs and License Fees  FUNimation
   26




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Allowance for Doubtful Accounts
  Goodwill and Intangible Assets
  Intangibles  Goodwill and Other
 Impairment of Long-Lived Assets
  27




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Inventory Valuation
  Share-Based Compensation
 Compensation  Stock Compensation
  Income Taxes
  Income Taxes
 28




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Contingencies and Litigation
  Recently Issued Accounting Pronouncements
 Consolidation
 Business Combinations
 
    
    Acquisition costs are generally expensed as incurred;
    
    Noncontrolling interests (formerly known as minority interests) are valued at fair
value at the acquisition date;
    
    Acquired contingent liabilities are recorded at fair value at the acquisition date and
subsequently measured at either the higher of such amount or the amount determined under
existing guidance for non-acquired contingencies;
    
    In-process research and development are recorded at fair value as an indefinite-lived
intangible asset at the acquisition date;
    
    Restructuring costs associated with a business combination are generally expensed
subsequent to the acquisition date; and
    
    Changes in deferred tax asset valuation allowances and income tax uncertainties after the
acquisition date generally affect income tax expense.
  Derivatives and Hedging
 29




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Subsequent Events
 Transfers and Servicing
 Consolidation
 Generally Accepted Accounting Principles (GAAP)
 Reconciliation of GAAP Net Sales to Net Sales Before Inter-Company Eliminations
  30




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Fiscal Year Ended(Unaudited)
    
    March 31,
    
    
    March 31,
    
    
    March 31,(In thousands)
    
    2010
    
    
    2009
    
    
    2008Net salesDistribution
    
    $
    487,692
    
    
    $
    592,893
    
    
    $
    611,007Publishing
    
    
    86,003
    
    
    
    102,828
    
    
    
    117,423Net sales before inter-company eliminations
    
    
    573,695
    
    
    
    695,721
    
    
    
    728,430Inter-company sales
    
    
    (45,363
    )
    
    
    (64,730
    )
    
    
    (69,958
    )Net sales as reported
    
    $
    528,332
    
    
    $
    630,991
    
    
    $
    658,472
 Results of Operations
 Consolidated Statements of Operations
 Fiscal Years Ended March 31,2010
    
    
    2009
    
    
    2008Net sales:Distribution
    
    
    92.3
    %
    
    
    94.0
    %
    
    
    92.8
    %Publishing
    
    
    16.3
    
    
    
    16.3
    
    
    
    17.8Inter-company sales
    
    
    (8.6
    )
    
    
    (10.3
    )
    
    
    (10.6
    )Total net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales, exclusive of depreciation and amortization
    
    
    83.4
    
    
    
    89.4
    
    
    
    84.6Gross profit
    
    
    16.6
    
    
    
    10.6
    
    
    
    15.4Operating ExpensesSelling and marketing
    
    
    4.4
    
    
    
    4.0
    
    
    
    4.2Distribution and warehousing
    
    
    1.9
    
    
    
    1.9
    
    
    
    1.9General and administrative
    
    
    5.6
    
    
    
    5.2
    
    
    
    5.2Depreciation and amortization
    
    
    1.2
    
    
    
    1.8
    
    
    
    1.4Goodwill and intangible asset impairment
    
    
    
    
    
    
    13.1
    
    
    
    Total operating expenses
    
    
    13.1
    
    
    
    26.0
    
    
    
    12.7Income (loss) from operations
    
    
    3.5
    
    
    
    (15.4
    )
    
    
    2.7Interest expense
    
    
    (0.5
    )
    
    
    (0.7
    )
    
    
    (0.9
    )Other income (expense), net
    
    
    0.2
    
    
    
    (0.2
    )
    
    
    0.1Income (loss) from continuing operations  before taxes
    
    
    3.2
    
    
    
    (16.3
    )
    
    
    1.9Income tax benefit (expense)
    
    
    1.2
    
    
    
    2.3
    
    
    
    (0.8
    )Net income (loss) from continuing operations
    
    
    4.4
    
    
    
    (14.0
    )
    
    
    1.1Discontinued operations, net of taxGain on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.7Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.3
    )Net income (loss)
    
    
    4.4
    %
    
    
    (14.0
    )%
    
    
    1.5
    %
 31




---



##### Table of Contents



Segment Results
 Business  Forward-Looking Statements/Risk Factors
 Distribution Segment
  Fiscal 2010 Results Compared With Fiscal 2009
 Net Sales (before inter-company eliminations)
  Gross Profit
  Operating Expenses
     32




---



##### Table of Contents



Operating Income
  Fiscal 2009 Results Compared With Fiscal 2008
 Net Sales (before inter-company eliminations)
  Gross Profit
  Operating Expenses
      33




---



##### Table of Contents



Operating Income
  Publishing Segment
  Fiscal 2010 Results Compared With Fiscal 2009
 Net Sales (before inter-company eliminations)
  Gross Profit
   Operating Expenses
    34




---



##### Table of Contents



Operating Income (Loss)
  Fiscal 2009 Results Compared With Fiscal 2008
 Net Sales (before inter-company eliminations)
  Gross Profit
  Operating Expenses
     35




---



##### Table of Contents



Operating Income (Loss)
  Consolidated Other Income and Expense for All Periods
     Consolidated Income Tax Expense or Benefit from Continuing Operations for All Periods
   36




---



##### Table of Contents



Consolidated Net (Loss) Income from Continuing Operations
  Discontinued Operations
  Consolidated Net (Loss) Income for All Periods
  Market Risk
 Quantitative and Qualitative Disclosure About Market
Risk
 Seasonality and Inflation
  37




---



##### Table of Contents



Liquidity and Capital Resources
 Cash Flow Analysis
 Operating Activities
     Investing Activities
   38




---



##### Table of Contents



Financing Activities
     Discontinued Operations
  Capital Resources
     39




---



##### Table of Contents



Liquidity
    40




---



##### Table of Contents



Contractual Obligations
  Less than 1
    
    
    1-3
    
    
    3-5
    
    
    More than 5Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases
    
    $
    23,243
    
    
    $
    2,973
    
    
    $
    6,201
    
    
    $
    5,565
    
    
    $
    8,504Capital leases
    
    
    152
    
    
    
    66
    
    
    
    86
    
    
    
    
    
    
    
    License and distribution agreements
    
    
    12,812
    
    
    
    2,687
    
    
    
    8,965
    
    
    
    1,160
    
    
    
    Deferred compensation
    
    
    1,333
    
    
    
    1,333
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    37,540
    
    
    $
    7,059
    
    
    $
    15,252
    
    
    $
    6,725
    
    
    $
    8,504
  Off-Balance Sheet Arrangements
  
 Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
 Market Risk.
 Interest Rate Risk.
 Foreign Currency Risk
  41




---



##### Table of Contents



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
 Evaluation of Disclosure Controls and Procedures
   Managements Report on Internal Control over Financial Reporting
  (i.) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of an issuers assets;
 42




---



##### Table of Contents



(ii.) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that an issuers receipts
and expenditures are being made only in accordance with authorizations of its management and
directors; and(iii.) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of an issuers assets that could have a material effect on
the consolidated financial statements.
  Internal Control  Integrated Framework
  Changes in Internal Control over Financial Reporting
  
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors, Executive Officers of the Registrant and Corporate Governance
 Executive Officers of the Company
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  43




---



##### Table of Contents



Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accounting Fees and Services
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
  (1)
    
    Financial Statements. Our following consolidated financial statements and the Reports
of Independent Registered Public Accounting Firm thereon are set forth at the end of this
document:
 (i)
    
    Reports of Independent Registered Public Accounting Firm.(ii)
    
    Consolidated Balance Sheets as of March 31, 2010 and 2009.(iii)
    
    Consolidated Statements of Operations for the years ended March 31, 2010, 2009 and 2008(iv)
    
    Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) for the
years ended March 31, 2008, 2009 and 2010.(v)
    
    Consolidated Statements of Cash Flows for the years ended March 31, 2010, 2009 and 2008.(vi)
    
    Notes to Consolidated Financial Statements
 (2)
    
    Financial Statement Schedules
 (i)
    
    Schedule II  Valuation and Qualifying Accounts and ReservesSchedules other than those listed above have been omitted because they are inapplicable
or the required information is either immaterial or shown in the Consolidated Financial
Statements or the notes thereto.
 (3)
    
    Exhibit Listing
 Filed
    
    Incorporated by referenceExhibit
    
    
    
    here
    
    
    
    Period
    
    
    
    
    
    Filingnumber
    
    Exhibit description
    
    with
    
    Form
    
    ending
    
    Exhibit
    
    date3.1
    
    Navarre Corporation Amended and
Restated Articles of Incorporation
    
    
    
    S-1
    
    
    
    
    3.1
    
    
    04/13/063.2
    
    Navarre Corporation Amended and
Restated Bylaws
    
    
    
    8-K
    
    
    
    
    3.1
    
    
    01/25/074.1
    
    Form of Specimen Certificate for Common
Stock
    
    
    
    S-1
    
    
    
    
    4.1
    
    
    04/13/064.2
    
    Form of Warrant dated March 21, 2006
    
    
    
    S-1
    
    
    
    
    4.4
    
    
    04/13/064.3
    
    Form of Agents Warrant
    
    
    
    S-1/A
    
    
    
    
    4.5
    
    
    06/26/06
 44




---



##### Table of Contents



Filed
    
    Incorporated by referenceExhibit
    
    
    
    here
    
    
    
    Period
    
    
    
    
    
    Filingnumber
    
    Exhibit description
    
    with
    
    Form
    
    ending
    
    Exhibit
    
    date10.1*
    
    Navarre Corporation Amended and
Restated 1992 Stock Option Plan
    
    
    
    10-K
    
    03/31/02
    
    
    10.3
    
    
    07/01/0210.2*
    
    2003 Amendment to 1992 Stock Option Plan
    
    
    
    S-8
    
    
    
    
    99.1
    
    
    09/23/0310.3*
    
    Form of Individual Stock Option
Agreement under 1992 Stock Option Plan
    
    
    
    S-1
    
    
    
    
    10.4
    
    
    09/03/9310.4*
    
    Navarre Corporation Amended and
Restated 2004 Stock Plan, as amended
September 13, 2007 (but only as to the
addition of 1,500,000 shares available
for issuance)
    
    
    
    S-8
    
    
    
    
    4
    
    
    02/22/0610.5*
    
    Amendment No. 2 to Amended and Restated
2004 Stock Plan
    
    
    
    DEF14A
    
    
    
    
    A
    
    
    07/28/0910.6*
    
    Form of Employee Stock Option Agreement
under 2004 Stock Plan
    
    
    
    10-K
    
    03/31/05
    
    
    10.58
    
    
    06/14/0510.7*
    
    Form of Non-Employee Director Stock
Option Agreement under 2004 Stock Plan
    
    
    
    10-K
    
    03/31/05
    
    
    10.59
    
    
    06/14/0510.8*
    
    Form of Employee Restricted Stock
Agreement under 2004 Stock Plan
    
    
    
    8-K
    
    
    
    
    10.2
    
    
    04/04/0610.9*
    
    Form of Director Restricted Stock
Agreement under 2004 Stock Plan
    
    
    
    8-K
    
    
    
    
    10.3
    
    
    04/04/0610.10*
    
    Form of TSR Stock Unit Agreement under
2004 Stock Plan
    
    
    
    8-K
    
    
    
    
    10.4
    
    
    04/04/0610.11*
    
    Form of Performance Stock Unit
Agreement under 2004 Stock Plan
    
    
    
    8-K
    
    
    
    
    10.5
    
    
    04/04/0610.12*
    
    Form of Restricted Stock Unit Agreement
under 2004 Stock Plan
    
    
    
    10-Q
    
    09/31/07
    
    
    10.1
    
    
    11/08/0710.13*
    
    Employment Agreement dated November 1,
2001 between the Company and Eric H.
Paulson
    
    
    
    10-Q
    
    12/31/01
    
    
    10.1
    
    
    02/13/0210.14*
    
    Amendment dated December 28, 2006 to
Employment Agreement between the
Company and Eric H. Paulson
    
    
    
    8-K
    
    
    
    
    99.2
    
    
    12/29/0610.15*
    
    Amendment dated March 30, 2007 to
Employment Agreement between the
Company and Eric H. Paulson
    
    
    
    8-K
    
    
    
    
    99.1
    
    
    04/04/0710.16*
    
    Form of Separation Agreement between
the Company and Charles E. Cheney
    
    
    
    10-K
    
    03/31/04
    
    
    10.41
    
    
    06/29/0410.17*
    
    Form of Post-Acquisition Employment
Agreement among the Company, FUNimation
Productions, Ltd. and Gen Fukunaga
    
    
    
    8-K
    
    
    
    
    10.1
    (b)
    
    01/11/05
 45




---



##### Table of Contents



Filed
    
    Incorporated by referenceExhibit
    
    
    
    here
    
    
    
    Period
    
    
    
    
    
    Filingnumber
    
    Exhibit description
    
    with
    
    Form
    
    ending
    
    Exhibit
    
    date10.18*
    
    Employment Agreement dated May 7, 2010
among the Company, FUNimation
Productions Ltd., animeOnline Ltd. and
Gen Fukunaga
    
    
    
    8-K
    
    
    
    
    99.1
    
    
    5/27/1010.19*
    
    Amended and Restated Employment
Agreement dated December 28, 2006
between the Company and Cary L. Deacon
    
    
    
    8-K
    
    
    
    
    99.1
    
    
    12/29/0610.20*
    
    Amendment dated January 29, 2007 to
Amended and Restated Employment
Agreement between the Company and Cary
L. Deacon
    
    
    
    8-K
    
    
    
    
    10.1
    
    
    01/30/0710.21*
    
    Amendment dated March 20, 2008 to
Amended and Restated Employment
Agreement between the Company and Cary
L. Deacon
    
    
    
    8-K
    
    
    
    
    10.1
    
    
    03/21/0810.22*
    
    Amended and Restated Executive
Severance Agreement dated March 20,
2008 between the Company and J. Reid
Porter
    
    
    
    8-K
    
    
    
    
    10.2
    
    
    03/21/0810.23*
    
    Executive Severance Agreement dated
March 20, 2008 between the Company and
Brian Burke
    
    
    
    8-K
    
    
    
    
    10.3
    
    
    03/21/0810.24*
    
    Executive Severance Agreement dated
March 20, 2008 between the Company and
John Turner
    
    
    
    8-K
    
    
    
    
    10.4
    
    
    03/21/0810.25*
    
    Executive Severance Agreement dated
March 20, 2008 between the Company and
Joyce Fleck
    
    
    
    10-K
    
    03/31/09
    
    
    10.22
    
    
    06/09/0910.26*
    
    Executive Severance Agreement dated
March 20, 2008 between the Company and
Calvin Morrell
    
    
    
    10-K
    
    03/31/09
    
    
    10.23
    
    
    06/09/0910.27*
    
    Form of Lock-Up Agreement
    
    
    
    8-K
    
    
    
    
    10.1
    
    
    03/23/0610.28*
    
    Fiscal Year 2008 Annual Management
Incentive Plan
    
    
    
    8-K
    
    
    
    
    10.1
    
    
    07/12/0710.29*
    
    Fiscal Year 2009 Annual Management
Incentive Plan
    
    
    
    10-K
    
    03/31/08
    
    
    10.26
    
    
    06/16/0810.30*
    
    Fiscal Year 2010 Annual Management
Incentive Plan
    
    
    
    8-K
    
    
    
    
    10.1
    
    
    04/21/0910.31*
    
    Fiscal Year 2011 Annual Management
Incentive Plan
    
    
    
    8-K
    
    
    
    
    10.1
    
    
    05/14/1010.32
    
    Office/Warehouse Lease dated April 1,
1998 between the Company and Cambridge
Apartments, Inc.
    
    
    
    10-K
    
    03/31/99
    
    
    10.6
    
    
    06/29/99
 46




---



##### Table of Contents



Filed
    
    Incorporated by referenceExhibit
    
    
    
    here
    
    
    
    Period
    
    
    
    
    
    Filingnumber
    
    Exhibit description
    
    with
    
    Form
    
    ending
    
    Exhibit
    
    date10.33
    
    Amendment dated September 27, 2001 to
Office/Warehouse Lease between the
Company and Cambridge Apartments, Inc.
    
    
    
    10-Q
    
    06/30/03
    
    
    10.9.1
    
    
    08/14/0310.34
    
    Agreement of Reciprocal Easements,
Covenants, Conditions and Restrictions
dated June 16, 2003
    
    
    
    10-Q
    
    06/30/03
    
    
    10.9.3
    
    
    08/14/0310.35
    
    Amendment dated July 14, 2003 to
Office/Warehouse Lease between the
Company and Cambridge Apartments, Inc.
    
    
    
    10-Q
    
    06/30/03
    
    
    10.9.2
    
    
    08/14/0310.36
    
    Form of Amendment dated February 23,
2004 to Office/Warehouse Lease between
the Company and Cambridge Apartments,
Inc.
    
    
    
    10-K
    
    03/31/04
    
    
    10.48
    
    
    06/29/0410.37
    
    Form of Amendment dated June 2004 to
Office/Warehouse Lease between the
Company and Cambridge Apartments, Inc.
    
    
    
    10-K
    
    03/31/04
    
    
    10.49
    
    
    06/29/0410.38
    
    Addendum dated May 27, 2004 to
Office/Warehouse Lease between the
Company and Cambridge Apartments, Inc.
    
    
    
    10-K
    
    03/31/04
    
    
    10.51
    
    
    06/29/0410.39
    
    Addendum dated November 12, 2009 to
Office/Warehouse Lease between the
Company and Cambridge Apartments, Inc.
    
    X10.40
    
    Amendment dated March 21, 2004 to
Office/Warehouse Lease between the
Company and Airport One Limited
Partnership
    
    
    
    10-K
    
    03/31/04
    
    
    10.50
    
    
    06/29/0410.41
    
    Amendment dated November 23, 2004 to
Office/Warehouse Lease between the
Company and Airport One Limited
Partnership
    
    
    
    10-Q
    
    12/31/04
    
    
    10.1
    
    
    02/14/0510.42
    
    Amendment dated February 2, 2006 to
Office/Warehouse Lease between the
Company and Airport One Limited
Partnership
    
    
    
    10-Q
    
    12/31/05
    
    
    10.1
    
    
    02/09/0610.43
    
    Form of Office/Warehouse Lease dated
May 27, 2004 between the Company and NL
Ventures IV New Hope, L.P.
    
    
    
    10-K
    
    03/31/04
    
    
    10.47
    
    
    06/29/0410.44
    
    Office Lease dated October 8, 2004
between Encore Software, Inc. and
Kilroy Realty, L.P.
    
    
    
    10-Q
    
    09/30/04
    
    
    10.57
    
    
    11/15/0410.45
    
    Amendment dated December 29, 2004 to
Office Lease between Encore Software,
Inc. and Kilroy Realty, L.P.
    
    
    
    10-Q
    
    12/31/04
    
    
    10.3
    
    
    02/14/0510.46
    
    Addendum dated April 29, 2010 to Office
Lease between Encore Software, Inc. and
Kilroy Realty, L.P.
    
    X
 47




---



##### Table of Contents



Filed
    
    Incorporated by referenceExhibit
    
    
    
    here
    
    
    
    Period
    
    
    
    
    
    Filingnumber
    
    Exhibit description
    
    with
    
    Form
    
    ending
    
    Exhibit
    
    date10.47
    
    Office/Warehouse Lease dated November
19, 2009 between the Company and
Orlando Corporation
    
    X10.48
    
    Consent to Assignment dated March 1,
2010 of Office/Warehouse Lease between
the Company, Navarre Distribution
Services ULC and Orlando Corporation
    
    X10.49
    
    Partnership Interest Purchase Agreement
dated January 10, 2005 among FUNimation
Sellers and the Company
    
    
    
    8-K
    
    
    
    
    10.1
    
    
    01/11/0510.50
    
    Form of Assignment and Assumption of
FUNimation Limited Partnership
Interests
    
    
    
    8-K
    
    
    
    
    10.1
    (a)
    
    02/14/0510.51
    
    Form of FUNimation Sellers
Non-Competition Agreement
    
    
    
    8-K
    
    
    
    
    10.1
    (d)
    
    02/14/0510.52
    
    Amendment dated May 11, 2005 to
Partnership Interest Purchase Agreement
among FUNimation Sellers and the
Company
    
    
    
    8-K
    
    
    
    
    10.1
    
    
    05/17/0510.53
    
    Memorandum of Understanding dated
February 7, 2006 among FUNimation
Sellers and the Company
    
    
    
    8-K
    
    
    
    
    99.1
    
    
    02/08/0610.54
    
    Office Lease dated May 29, 2007 between
FUNimation Productions, Ltd. and FMBP
Industrial I LP
    
    
    
    10-K
    
    03/31/07
    
    
    10.117
    
    
    06/14/0710.55
    
    Form of Securities Purchase Agreement
dated March 2006 between the Company
and various purchasers
    
    
    
    S-1
    
    
    
    
    4.2
    
    
    04/13/0610.56
    
    Form of Registration Rights Agreement
dated March 2006 between the Company
and various purchasers
    
    
    
    S-1
    
    
    
    
    4.3
    
    
    04/13/0610.57
    
    Purchase and Sale Agreement dated May
11, 2007 by and among the Company,
Navarre Entertainment Media, Inc. and
Koch Entertainment LP
    
    
    
    8-K
    
    
    
    
    10.1
    
    
    05/14/0710.58
    
    Form of Fourth Amended and Restated
Credit Agreement dated March 22, 2007
among the Company, General Electric
Capital Corporation, as Agent, and
Lenders
    
    
    
    8-K
    
    
    
    
    10.1
    
    
    03/23/0710.59
    
    Form of Amendment and Limited Waiver
dated May 30, 2007 to Fourth Amended
and Restated Credit Agreement among the
Company, General Electric Capital
Corporation, as Agent, and Lenders
    
    
    
    8-K
    
    
    
    
    10.1
    
    
    05/31/07
 48




---



##### Table of Contents



Filed
    
    Incorporated by referenceExhibit
    
    
    
    here
    
    
    
    Period
    
    
    
    
    
    Filingnumber
    
    Exhibit description
    
    with
    
    Form
    
    ending
    
    Exhibit
    
    date10.60
    
    Form of Amendment and Limited Waiver
dated June 30, 2007 to Fourth Amended
and Restated Credit Agreement among the
Company, General Electric Capital
Corporation, as Agent, and Lenders
    
    
    
    8-K
    
    
    
    
    10.1
    
    
    08/13/0710.61
    
    Form of Amendment and Limited Waiver
dated June 12, 2008 to Fourth Amended
and Restated Credit Agreement among the
Company, General Electric Capital
Corporation, as Agent, and Lenders
    
    
    
    10-K
    
    3/31/08
    
    
    10.59
    
    
    06/16/0810.62
    
    Form of Amendment dated October 30,
2008 to Fourth Amended and Restated
Credit Agreement among the Company,
General Electric Capital Corporation,
as Agent, and Lenders
    
    
    
    8-K
    
    
    
    
    10.1
    
    
    10/31/0810.63
    
    Form of Amendment and Limited Waiver
dated February 5, 2009 to Fourth
Amended and Restated Credit Agreement
among the Company, General Electric
Capital Corporation, as Agent, and
Lenders
    
    
    
    10-Q
    
    12/31/08
    
    
    10.1
    
    
    02/09/0910.64
    
    Form of Amendment dated February 17,
2009 to Fourth Amended and Restated
Credit Agreement among the Company,
General Electric Capital Corporation,
as Agent, and Lenders
    
    
    
    8-K
    
    
    
    
    10.1
    
    
    02/19/0910.65
    
    Form of Credit Agreement dated March
22, 2007 among the Company, Monroe
Capital Advisors, LLC, as Agent, and
Lenders
    
    
    
    8-K
    
    
    
    
    10.2
    
    
    03/23/0710.66
    
    Limited Waiver dated May 30, 2007 to
Credit Agreement among the Company,
Monroe Capital Advisors, LLC, as Agent,
and Lenders
    
    
    
    8-K
    
    
    
    
    10.2
    
    
    05/31/0710.67
    
    Form of Amendment dated June 30, 2007
to Credit Agreement among the Company,
Monroe Capital Advisors, LLC, as Agent,
and Lenders
    
    
    
    8-K
    
    
    
    
    10.2
    
    
    08/13/0710.68
    
    Form of Credit Agreement dated November
12, 2009 among the Company, Wells Fargo
Capital Finance, LLC, as Agent, and
Lenders
    
    
    
    8-K
    
    
    
    
    10.1
    
    
    11/13/0910.69
    
    Consent and Amendment dated April 29,
2010 to Credit Agreement among the
Company, Wells Fargo Capital Finance,
LLC, as Agent, and Lenders
    
    X10.70
    
    Consent and Amendment dated May 17,
2010 to Credit Agreement among the
Company, Wells Fargo Capital Finance,
LLC, as Agent, and Lenders
    
    
    
    8-K
    
    
    
    
    10.2
    
    
    05/17/10
 49




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##### Table of Contents



Filed
    
    Incorporated by referenceExhibit
    
    
    
    here
    
    
    
    Period
    
    
    
    
    
    Filingnumber
    
    Exhibit description
    
    with
    
    Form
    
    ending
    
    Exhibit
    
    date10.71
    
    Asset Purchase Agreement dated May 17,
2010 by and among Encore Software,
Inc., Navarre Corporation and Punch
Software, LLC
    
    
    
    8-K
    
    
    
    
    10.1
    
    
    05/17/1014.1
    
    Navarre Corporation Code of Business
Conduct and Ethics
    
    
    
    10-K
    
    03/31/04
    
    
    14.1
    
    
    06/29/0421.1
    
    Subsidiaries of the Registrant
    
    X23.1
    
    Consent of Independent Registered
Public Accounting Firm  Grant Thornton
LLP
    
    X24.1
    
    Power of Attorney, contained on
signature page
    
    X31.1
    
    Certification of the Chief Executive
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Rules
13a-14 and 15d-14 of the Exchange Act)
    
    X31.2
    
    Certification of the Chief Financial
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Rules
13a-14 and 15d-14 of the Exchange Act)
    
    X32.1
    
    Certification of the Chief Executive
Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350)
    
    X32.2
    
    Certification of the Chief Financial
Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350)
    
    X
 
 *
    
    Indicates a management contract or compensatory plan or arrangement 50




---



##### Table of Contents



SIGNATURES
  Navarre Corporation
(Registrant)June 11, 2010
    By
    /s/ Cary L. DeaconCary L. DeaconPresident and Chief Executive Officer  51




---



##### Table of Contents



POWER OF ATTORNEY
  Signature
    
    Title
    
    Date/s/ Cary L. Deacon
    
    President and Chief Executive Officer and Director
    
    June 11, 2010Cary L. Deacon
    
    (principal executive officer)/s/ J. Reid Porter
J. Reid Porter
    
    Chief Financial Officer
(principal financial and accounting officer)
    
    June 11, 2010/s/ Eric H. Paulson
    
    Chairman of the Board
    
    June 11, 2010Eric H. Paulson/s/ Keith A. Benson
    
    Director
    
    June 11, 2010Keith A. Benson/s/ Timothy R. Gentz
    
    Director
    
    June 11, 2010Timothy R. Gentz/s/ Kathleen P. Iverson
    
    Director
    
    June 11, 2010Kathleen P. Iverson/s/ David F. Dalvey
    
    Director
    
    June 11, 2010David F. Dalvey/s/ Tom F. Weyl
    
    Director
    
    June 11, 2010Tom F. Weyl/s/ Deborah L. Hopp
    
    Director
    
    June 11, 2010Deborah L. Hopp/s/ Frederick C. Green IV
    
    Director
    
    June 11, 2010Frederick C. Green IV
 52




---



##### Table of Contents



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




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal
Control-Integrated Framework
    Internal Control-Integrated Framework
   
 54




---



##### Table of Contents



NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
 March 31,2010
    
    
    2009AssetsCurrent assets:Marketable securities
    
    $
    2
    
    
    $
    1,024Accounts receivable, less allowances of $13,193 and $19,010, respectively
    
    
    62,627
    
    
    
    72,817Inventories
    
    
    26,272
    
    
    
    26,732Prepaid expenses and other current assets
    
    
    13,727
    
    
    
    11,090Income tax receivable
    
    
    94
    
    
    
    4,866Deferred tax assets  current, net
    
    
    7,603
    
    
    
    6,219Total current assets
    
    
    110,325
    
    
    
    122,748Property and equipment, net of accumulated depreciation of $20,863 and $16,704, respectively
    
    
    13,307
    
    
    
    15,957Software development costs, net of amortization of $324 and zero, respectively
    
    
    1,723
    
    
    
    677Other assets:Intangible assets, net of accumulated amortization of $19,184 and $25,364, respectively
    
    
    1,500
    
    
    
    3,406License fees, net of accumulated amortization of $28,107 and $21,570, respectively
    
    
    16,565
    
    
    
    17,728Production costs, net of accumulated amortization of $16,745 and $12,223, respectively
    
    
    9,814
    
    
    
    8,408Deferred tax assets  non-current, net
    
    
    13,808
    
    
    
    10,299Other assets
    
    
    4,561
    
    
    
    3,946Total assets
    
    $
    171,603
    
    
    $
    183,169Liabilities and shareholders equityCurrent liabilities:Revolving line of credit
    
    $
    6,634
    
    
    $
    24,133Capital lease obligation  short-term
    
    
    57
    
    
    
    90Accounts payable
    
    
    82,451
    
    
    
    106,708Checks written in excess of cash balances
    
    
    4,816
    
    
    
    297Deferred compensation
    
    
    1,333
    
    
    
    2,149Accrued expenses
    
    
    14,248
    
    
    
    11,504Total current liabilities
    
    
    109,539
    
    
    
    144,881Long-term liabilitiesCapital lease obligation  long-term
    
    
    82
    
    
    
    115Income taxes payable
    
    
    1,221
    
    
    
    1,166Total liabilities
    
    
    110,842
    
    
    
    146,162Commitments and contingencies (Note 23)Shareholders equity:Common stock, no par value:Authorized shares  100,000,000; issued and outstanding shares  36,366,668 at March
31, 2010 and 36,260,116 at March 31, 2009
    
    
    162,015
    
    
    
    161,134Accumulated deficit
    
    
    (101,254
    )
    
    
    (124,126
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (1
    )Total shareholders equity
    
    
    60,761
    
    
    
    37,007Total liabilities and shareholders equity
    
    $
    171,603
    
    
    $
    183,169
 See accompanying notes to consolidated financial statements.
 55




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##### Table of Contents



NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
 Years ended March 31,2010
    
    
    2009
    
    
    2008Net sales
    
    $
    528,332
    
    
    $
    630,991
    
    
    $
    658,472Cost of sales (exclusive of depreciation and amortization)
    
    
    440,407
    
    
    
    563,944
    
    
    
    556,913Gross profit
    
    
    87,925
    
    
    
    67,047
    
    
    
    101,559Operating expenses:Selling and marketing
    
    
    23,140
    
    
    
    25,334
    
    
    
    27,371Distribution and warehousing
    
    
    9,799
    
    
    
    12,166
    
    
    
    12,689General and administrative
    
    
    29,730
    
    
    
    32,664
    
    
    
    34,096Bad debt expense (recovery)
    
    
    257
    
    
    
    300
    
    
    
    (15
    )Depreciation and amortization
    
    
    6,316
    
    
    
    10,972
    
    
    
    9,587Goodwill and intangible asset impairment
    
    
    
    
    
    
    82,729
    
    
    
    Total operating expenses
    
    
    69,242
    
    
    
    164,165
    
    
    
    83,728Income (loss) from operations
    
    
    18,683
    
    
    
    (97,118
    )
    
    
    17,831Other income (expense):Interest expense
    
    
    (2,818
    )
    
    
    (4,630
    )
    
    
    (6,127
    )Interest income
    
    
    16
    
    
    
    86
    
    
    
    259Other income (expense), net
    
    
    788
    
    
    
    (1,255
    )
    
    
    366Income (loss) from continuing operations before income tax
    
    
    16,669
    
    
    
    (102,917
    )
    
    
    12,329Income tax benefit (expense)
    
    
    6,203
    
    
    
    14,483
    
    
    
    (5,273
    )Net income (loss) from continuing operations
    
    
    22,872
    
    
    
    (88,434
    )
    
    
    7,056Discontinued operations, net of taxGain on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    4,892Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (2,290
    )Net income (loss)
    
    $
    22,872
    
    
    $
    (88,434
    )
    
    $
    9,658Basic earnings (loss) per common share:Continuing operations
    
    $
    0.63
    
    
    $
    (2.44
    )
    
    $
    0.20Discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.07Net income (loss)
    
    $
    0.63
    
    
    $
    (2.44
    )
    
    $
    0.27Diluted earnings (loss) per common share:Continuing operations
    
    $
    0.62
    
    
    $
    (2.44
    )
    
    $
    0.20Discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.07Net income (loss)
    
    $
    0.62
    
    
    $
    (2.44
    )
    
    $
    0.27Weighted average shares outstanding:Basic
    
    
    36,285
    
    
    
    36,207
    
    
    
    36,105Diluted
    
    
    36,643
    
    
    
    36,207
    
    
    
    36,269
 See accompanying notes to consolidated financial statements.
 56




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##### Table of Contents



NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
 AccumulatedOther
    
    
    TotalCommon Stock
    
    
    Accumulated
    
    
    Comprehensive
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Deficit
    
    
    Income (Loss)
    
    
    EquityBalance at March 31, 2007
    
    
    36,038,295
    
    
    $
    158,801
    
    
    $
    (45,350
    )
    
    $
    
    
    
    $
    113,451Shares issued upon exercise of stock options
and for restricted stock
    
    
    197,209
    
    
    
    190
    
    
    
    
    
    
    
    
    
    
    
    190Share based compensation
    
    
    
    
    
    
    1,072
    
    
    
    
    
    
    
    
    
    
    
    1,072Tax benefit from employee stock option plans
    
    
    
    
    
    
    67
    
    
    
    
    
    
    
    
    
    
    
    67Redemptions of common stock to cover tax
withholdings
    
    
    (7,618
    )
    
    
    (27
    )
    
    
    
    
    
    
    
    
    
    
    (27
    )Net income
    
    
    
    
    
    
    
    
    
    
    9,658
    
    
    
    
    
    
    
    9,658Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,658Balance at March 31, 2008
    
    
    36,227,886
    
    
    
    160,103
    
    
    
    (35,692
    )
    
    
    
    
    
    
    124,411Shares issued upon exercise of stock options
and for restricted stock
    
    
    50,199
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    12Share based compensation
    
    
    
    
    
    
    1,033
    
    
    
    
    
    
    
    
    
    
    
    1,033Tax benefit from employee stock option plans
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Redemptions of common stock to cover tax
withholdings
    
    
    (17,969
    )
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    (15
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (88,434
    )
    
    
    
    
    
    
    (88,434
    )Unrealized loss on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (88,435
    )Balance at March 31, 2009
    
    
    36,260,116
    
    
    
    161,134
    
    
    
    (124,126
    )
    
    
    (1
    )
    
    
    37,007Shares issued upon exercise of stock options
and for restricted stock
    
    
    158,003
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Share based compensation
    
    
    
    
    
    
    1,004
    
    
    
    
    
    
    
    
    
    
    
    1,004Redemptions of common stock to cover tax
withholdings
    
    
    (51,451
    )
    
    
    (128
    )
    
    
    
    
    
    
    
    
    
    
    (128
    )Net income
    
    
    
    
    
    
    
    
    
    
    22,872
    
    
    
    
    
    
    
    22,872Unrealized gain on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,873Balance at March 31, 2010
    
    
    36,366,668
    
    
    $
    162,015
    
    
    $
    (101,254
    )
    
    $
    
    
    
    $
    60,761
 See accompanying notes to consolidated financial statements.
 57




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NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years ended March 31,2010
    
    
    2009
    
    
    2008Operating activities:Net income (loss)
    
    $
    22,872
    
    
    $
    (88,434
    )
    
    $
    9,658Adjustments to reconcile net income (loss) to net cash provided by operating activities:Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    2,290Gain on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (4,892
    )Depreciation and amortization
    
    
    6,316
    
    
    
    10,961
    
    
    
    9,672Amortization of debt acquisition costs
    
    
    502
    
    
    
    250
    
    
    
    333Write-off of debt acquisition costs
    
    
    289
    
    
    
    950
    
    
    
    Amortization of license fees
    
    
    8,042
    
    
    
    13,372
    
    
    
    6,907Amortization of production costs
    
    
    4,967
    
    
    
    6,230
    
    
    
    3,284Amortization of software development costs
    
    
    324
    
    
    
    
    
    
    
    Goodwill and intangible asset impairment
    
    
    
    
    
    
    82,729
    
    
    
    Change in deferred revenue
    
    
    (283
    )
    
    
    182
    
    
    
    (311
    )Share-based compensation expense
    
    
    1,004
    
    
    
    1,033
    
    
    
    1,072Deferred compensation expense
    
    
    (816
    )
    
    
    (222
    )
    
    
    (787
    )Tax benefit from employee stock options
    
    
    
    
    
    
    1
    
    
    
    67Deferred income taxes
    
    
    (4,893
    )
    
    
    (10,524
    )
    
    
    2,788Other
    
    
    60
    
    
    
    88
    
    
    
    (171
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    10,190
    
    
    
    3,989
    
    
    
    (6,197
    )Inventories
    
    
    460
    
    
    
    5,922
    
    
    
    4,137Prepaid expenses
    
    
    (2,637
    )
    
    
    1,028
    
    
    
    (992
    )Contingent liabilities
    
    
    
    
    
    
    
    
    
    
    (760
    )Income taxes receivable
    
    
    4,772
    
    
    
    (3,929
    )
    
    
    (109
    )Other assets
    
    
    319
    
    
    
    739
    
    
    
    634Production costs
    
    
    (6,373
    )
    
    
    (7,322
    )
    
    
    (5,183
    )License fees
    
    
    (6,879
    )
    
    
    (10,585
    )
    
    
    (11,813
    )Accounts payable
    
    
    (24,257
    )
    
    
    14,536
    
    
    
    5,054Income taxes payable
    
    
    55
    
    
    
    286
    
    
    
    880Accrued expenses
    
    
    2,899
    
    
    
    (4,811
    )
    
    
    2,824Net cash provided by operating activities
    
    
    16,933
    
    
    
    16,469
    
    
    
    18,385Investing activities:Purchases of property and equipment
    
    
    (1,768
    )
    
    
    (3,544
    )
    
    
    (8,562
    )Purchases of intangible assets
    
    
    (12
    )
    
    
    (666
    )
    
    
    (1,379
    )Software development costs incurred
    
    
    (1,370
    )
    
    
    (677
    )
    
    
    Purchases of marketable equity securities
    
    
    
    
    
    
    
    
    
    
    (4,000
    )Proceeds from sale of marketable equity securities
    
    
    1,028
    
    
    
    3,200
    
    
    
    Proceeds from sale of assets held for sale
    
    
    
    
    
    
    1,353
    
    
    
    Proceeds from sale of intangible assets
    
    
    20
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (2,102
    )
    
    
    (334
    )
    
    
    (13,941
    )Financing activities:Proceeds from revolving line of credit
    
    
    196,060
    
    
    
    208,758
    
    
    
    198,379Payments on revolving line of credit
    
    
    (213,559
    )
    
    
    (215,939
    )
    
    
    (206,021
    )Repayment of note payable
    
    
    
    
    
    
    (9,744
    )
    
    
    (5,256
    )Payment of deferred compensation
    
    
    
    
    
    
    (3,200
    )
    
    
    Checks written in excess of cash balances
    
    
    4,519
    
    
    
    297
    
    
    
    Payment of debt acquisition costs
    
    
    (1,790
    )
    
    
    (850
    )
    
    
    (240
    )Other
    
    
    (61
    )
    
    
    98
    
    
    
    87Net cash used in financing activities
    
    
    (14,831
    )
    
    
    (20,580
    )
    
    
    (13,051
    )Net decrease in cash from continuing operations
    
    
    
    
    
    
    (4,445
    )
    
    
    (8,607
    )Discontinued operations:Net cash provided by operating activities
    
    
    
    
    
    
    
    
    
    
    5,586Net cash provided by investing activities, proceeds from sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    6,500Net increase (decrease) in cash
    
    
    
    
    
    
    (4,445
    )
    
    
    3,479Cash at beginning of year
    
    
    
    
    
    
    4,445
    
    
    
    966Cash at end of year
    
    $
    
    
    
    $
    
    
    
    $
    4,445
 58




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##### Table of Contents



Years ended March 31,2010
    
    
    2009
    
    
    2008Supplemental cash flow information:Cash paid (received) for:Interest
    
    $
    1,861
    
    
    $
    3,885
    
    
    $
    5,460Income taxes, net of refunds
    
    
    (5,773
    )
    
    
    (262
    )
    
    
    1,086Supplemental schedule of non-cash investing and financing activities:Purchase price adjustments affecting accounts receivable and gain on sale, net
    
    
    
    
    
    
    
    
    
    
    245Shares received for payment of tax withholding obligations
    
    
    128
    
    
    
    15
    
    
    
    27Expiration of fully amortized masters
    
    
    8,078
    
    
    
    
    
    
    
    Expiration of fully amortized license fees
    
    
    1,504
    
    
    
    11,397
    
    
    
    Expiration of fully amortized production costs
    
    
    445
    
    
    
    1,446
    
    
    
    
 See accompanying notes to consolidated financial statements.
 59




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##### Table of Contents



NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
 Note 1 Business Description
    Note 2 Summary of Significant Accounting Policies
 Basis of Consolidation
  Segment Reporting
  Fiscal Year
  Use of Estimates
  Reclassifications
  60




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##### Table of Contents



Fair Value of Financial Instruments
  Cash and Cash Equivalents
  Marketable Securities
   Inventories
  Royalties Payable  FUNimation
 Entertainment  Films
 Advertising
  61




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##### Table of Contents



Property and Equipment
  Asset
    
    Life in YearsBuildings
    
    
    25Furniture and fixtures
    
    
    7Office equipment
    
    
    5Computer equipment
    
    
    3-5Warehouse equipment
    
    
    5Production equipment
    
    
    5Leasehold improvements
    
    
    1-10Enterprise resource planning (ERP) system
    
    
    7
   Production Costs  FUNimation
   License Fees  FUNimation
 ASC 926
 Impairment of Long-Lived Assets
  62




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##### Table of Contents



Goodwill
  Intangible Assets
   Debt Issuance Costs
  Operating Leases
  Revenue Recognition
     63




---



##### Table of Contents



Vendor Allowances
  Marketing Development Funds
  Accounts Receivable and Allowance for Doubtful Accounts
  Classification of Shipping Costs
   Foreign Currency Transactions
  Income Taxes
  64




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##### Table of Contents



Stock-Based Compensation
   Earnings (Loss) Per Share
  Years ended March 31,2010
    
    
    2009
    
    
    2008Numerator:Net income (loss) from continuing operations
    
    $
    22,872
    
    
    $
    (88,434
    )
    
    $
    7,056Denominator:Denominator for basic earnings per share  weighted average shares
    
    
    36,285
    
    
    
    36,207
    
    
    
    36,105Dilutive securities: Employee stock options, restricted stock and warrants
    
    
    358
    
    
    
    
    
    
    
    164Denominator for diluted earnings per share  potentially dilutive common shares
    
    
    36,643
    
    
    
    36,207
    
    
    
    36,269Net earnings (loss) per share from continuing operations:Basic earnings (loss) per share
    
    $
    0.63
    
    
    $
    (2.44
    )
    
    $
    0.20Diluted earnings (loss) per share
    
    $
    0.62
    
    
    $
    (2.44
    )
    
    $
    0.20
    Recently Issued Accounting Pronouncements
 Consolidation
 65




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##### Table of Contents



Business Combinations
 
    
    Acquisition costs are generally expensed as incurred;
    
    Noncontrolling interests (formerly known as minority interests) are valued at fair
value at the acquisition date;
    
    Acquired contingent liabilities are recorded at fair value at the acquisition date and
subsequently measured at either the higher of such amount or the amount determined under
existing guidance for non-acquired contingencies;
    
    In-process research and development are recorded at fair value as an indefinite-lived
intangible asset at the acquisition date;
    
    Restructuring costs associated with a business combination are generally expensed
subsequent to the acquisition date; and
    
    Changes in deferred tax asset valuation allowances and income tax uncertainties after the
acquisition date generally affect income tax expense.
  Derivatives and Hedging
 Subsequent Events
 Transfers and Servicing
 66




---



##### Table of Contents



Consolidation
 Generally Accepted Accounting Principles (GAAP)
 Note 3 Goodwill and Intangible Assets
 Goodwill
    Intangible assets
  .
 67




---



##### Table of Contents



As of March 31, 2010Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetLicense relationships
    
    $
    20,078
    
    
    $
    19,145
    
    
    $
    933Domain name
    
    
    70
    
    
    
    39
    
    
    
    31Trademarks (not subject to amortization)
    
    
    536
    
    
    
    
    
    
    
    536$
    20,684
    
    
    $
    19,184
    
    
    $
    1,500
 As of March 31, 2009Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters (1)
    
    $
    8,086
    
    
    $
    7,986
    
    
    $
    100License relationships
    
    
    20,078
    
    
    
    17,350
    
    
    
    2,728Domain name
    
    
    70
    
    
    
    28
    
    
    
    42Trademarks (not subject to amortization)
    
    
    536
    
    
    
    
    
    
    
    536$
    28,770
    
    
    $
    25,364
    
    
    $
    3,406
 
 (1)
    
    Reflects a $2.0 million impairment charge related to masters which reduced both the gross
carrying amount and accumulated amortization. The $2.0 million impairment charge was included
in amortization expense for the year ended March 31, 2009 (see further disclosure in Note 4).  2011
    
    $
    4252012
    
    
    2372013
    
    
    302
 Debt issuance costs
  Note 4 Impairments and Other Charges
  68




---



##### Table of Contents




    
    BCI would no longer be involved in licensing operations related to budget home video and
the remaining BCI content would be transferred to the distribution segment. For the year
ended March 31, 2009, the Company recorded $25.9 million in impairment and other charges
related to the restructuring of BCI, which included $7.3 million for inventory, $7.1 million
for prepaid royalties, $2.0 million for masters, $2.0 million for accounts receivable
reserves and $7.4 million for goodwill.
    
    FUNimation would no longer be involved in licensing operations related to home video of
childrens properties. For the year ended March 31, 2009, the Company recorded $81.0 million
in impairment and other charges related to the restructuring of FUNimation, which included
$8.2 million for license fees and production costs, $71.2 million for goodwill, $1.0 million
for trademarks and $555,000 for inventory.
 License Fees and Production Costs
 Prepaid Royalties.
 Masters, Trademarks and Goodwill.
 
    
    MastersThe impairment related to BCI masters was $2.0 million during fiscal 2009.
Impairment losses are measured by comparing the fair value of the assets (utilizing current
market values and future market trends) to their carrying amounts.
    
    TrademarksThe impairment for FUNimation trademarks was $1.0 million during fiscal
2009. The trademarks associated with FUNimation were determined to have an estimated fair
value (using the relief from royalty valuation technique ) less than the carrying value.
    
    GoodwillThe goodwill impairment charge for the publishing segment was $81.7 million
during fiscal 2009 based on the excess of the assets carrying value over its fair value.
 Inventory
 Accounts Receivable Reserves
 Severance Exit or Disposal Cost Obligations, , Compensation  Nonretirement Postemployment Benefits,
 69




---



##### Table of Contents



License Fees
    
    
    
    
    
    
    Masters,
    
    
    
    
    
    
    Accountsand Production
    
    
    Prepaid
    
    
    Goodwill and
    
    
    
    
    
    
    ReceivableCosts -
    
    
    Royalties -
    
    
    Trademarks-
    
    
    Inventory-
    
    
    Reserves-
    
    
    Severance-
    
    
    Severance-Publishing
    
    
    Publishing
    
    
    Publishing
    
    
    Publishing
    
    
    Publishing
    
    
    Publishing
    
    
    Distribution
    
    
    TotalSales
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,057
    
    
    $
    
    
    
    $
    
    
    
    $
    1,057Cost of sales
    
    
    8,239
    
    
    
    7,076
    
    
    
    
    
    
    
    7,855
    
    
    
    985
    
    
    
    52
    
    
    
    
    
    
    
    24,207Selling and marketing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159
    
    
    
    13
    
    
    
    172Distribution and warehousing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74
    
    
    
    74General and administrative
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    330
    
    
    
    504
    
    
    
    834Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    2,029
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,029Goodwill and intangible asset
impairment
    
    
    
    
    
    
    
    
    
    
    82,729
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82,729Total
    
    $
    8,239
    
    
    $
    7,076
    
    
    $
    84,758
    
    
    $
    7,855
    
    
    $
    2,042
    
    
    $
    541
    
    
    $
    591
    
    
    $
    111,102
  AccountsReceivableSeverance-
    
    
    Severance-
    
    
    Reserves-Distribution
    
    
    Publishing
    
    
    Publishing
    
    
    TotalReserve balance at March 31, 2009
    
    $
    45
    
    
    $
    337
    
    
    $
    1,026
    
    
    $
    1,408Provision for restructuring
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash payments
    
    
    45
    
    
    
    337
    
    
    
    1,026
    
    
    
    1,408Reserve balance at March 31, 2010
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 Note 5 Discontinued Operations
    Years ended March 31,2010
    
    
    2009
    
    
    2008Net sales
    
    $
    
    
    
    $
    
    
    
    $
    5,197Loss from discontinued operations, before income tax
    
    
    
    
    
    
    
    
    
    
    (3,947
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    1,657Loss from discontinued operations, net of tax
    
    $
    
    
    
    $
    
    
    
    $
    (2,290
    )
 Note 6 Marketable Securities
 Fair Value Measurements and Disclosures
 70




---



##### Table of Contents




    
    Level 1 quoted prices in active markets for identical assets and liabilities.
    
    Level 2 observable inputs other than quoted prices in active markets for identical
assets and liabilities.
    
    Level 3 unobservable inputs in which there is little or no market data available,
which require the reporting entity to develop its own assumptions.
     As of March 31, 2010Gross
    
    
    GrossEstimated fair
    
    
    unrealized
    
    
    unrealizedvalue
    
    
    holding gains
    
    
    holding lossesAvailable-for-sale:Government agency and corporate
bonds
    
    $
    
    
    
    $
    1
    
    
    $
    Money market
fund
    
    
    2
    
    
    
    
    
    
    
    $
    2
    
    
    $
    1
    
    
    $
    
 As of March 31, 2009Gross
    
    
    GrossEstimated fair
    
    
    unrealized
    
    
    unrealizedvalue
    
    
    holding gains
    
    
    holding lossesAvailable-for-sale:Government agency and corporate
bonds
    
    $
    712
    
    
    $
    1
    
    
    $
    2Money market
fund
    
    
    312
    
    
    
    
    
    
    
    $
    1,024
    
    
    $
    1
    
    
    $
    2
  Note 7 Comprehensive Income (Loss)
  71




---



##### Table of Contents



Years Ended March 31,2010
    
    
    2009
    
    
    2008Net income (loss) from continuing operations
    
    $
    22,872
    
    
    $
    (88,434
    )
    
    $
    9,658Net unrealized gain (loss) on marketable securities, net of tax
    
    
    1
    
    
    
    (1
    )
    
    
    Comprehensive income (loss)
    
    $
    22,873
    
    
    $
    (88,435
    )
    
    $
    9,658
   Note 8 Accounts Receivable
  March 31, 2010
    
    
    March 31, 2009Trade receivables
    
    $
    72,641
    
    
    $
    86,345Vendor
receivables
    
    
    1,700
    
    
    
    2,894Other
receivables
    
    
    1,479
    
    
    
    2,58875,820
    
    
    
    91,827Less: allowance for doubtful accounts and
sales discounts
    
    
    4,966
    
    
    
    7,043Less: allowance for sales returns, net
margin impact
    
    
    8,227
    
    
    
    11,967Total
    
    $
    62,627
    
    
    $
    72,817
 Note 9 Inventories
  March 31, 2010
    
    
    March 31, 2009Finished
products
    
    $
    21,229
    
    
    $
    20,437Consigned
inventory
    
    
    1,794
    
    
    
    1,868Raw
materials
    
    
    3,249
    
    
    
    4,427Total
    
    $
    26,272
    
    
    $
    26,732
 Note 10 Prepaid Expenses and Other Current Assets
  March 31, 2010
    
    
    March 31, 2009Prepaid
royalties
    
    $
    12,241
    
    
    $
    9,826Other
    
    
    1,486
    
    
    
    1,264Total
    
    $
    13,727
    
    
    $
    11,090
 Note 11 Property and Equipment
  March 31, 2010
    
    
    March 31, 2009Furniture and
fixtures
    
    $
    1,369
    
    
    $
    1,306Computer and office
equipment
    
    
    18,472
    
    
    
    17,782Warehouse
equipment
    
    
    10,049
    
    
    
    10,116Production
equipment
    
    
    1,421
    
    
    
    1,296Leasehold
improvements
    
    
    2,087
    
    
    
    2,081Construction in
progress
    
    
    772
    
    
    
    80Total
    
    
    34,170
    
    
    
    32,661Less: accumulated depreciation and
amortization
    
    
    20,863
    
    
    
    16,704Net property and
equipment
    
    $
    13,307
    
    
    $
    15,957
 72




---



##### Table of Contents



Note 12 Assets Held for Sale
  Note 13 Capitalized Software Development Costs
 Software
 Note 14 License Fees
  March 31, 2010
    
    
    March 31, 2009License
fees
    
    $
    44,672
    
    
    $
    39,298Less: accumulated
amortization
    
    
    28,107
    
    
    
    21,570Total
    
    $
    16,565
    
    
    $
    17,728
     73




---



##### Table of Contents



Note 15 Production Costs
  March 31, 2010
    
    
    March 31, 2009Production
costs
    
    $
    26,559
    
    
    $
    20,631Less: accumulated
amortization
    
    
    16,745
    
    
    
    12,223Total
    
    $
    9,814
    
    
    $
    8,408
     Note 16 Accrued Expenses
  March 31, 2010
    
    
    March 31, 2009Compensation and
benefits
    
    $
    7,930
    
    
    $
    3,263Royalties
    
    
    1,954
    
    
    
    3,056Rebates
    
    
    1,253
    
    
    
    1,264Deferred
revenue
    
    
    20
    
    
    
    303Interest
    
    
    205
    
    
    
    39Other
    
    
    2,886
    
    
    
    3,579Total
    
    $
    14,248
    
    
    $
    11,504
 Note 17 Bank Financing and Debt
   74




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Letters of Credit
  75




---



##### Table of Contents



Note 18 Income Taxes
  Years ended March 31,2010
    
    
    2009
    
    
    2008CurrentFederal
    
    $
    (1,418
    )
    
    $
    (4,020
    )
    
    $
    1,610Foreign
    
    
    
    
    
    
    
    
    
    
    300State
    
    
    109
    
    
    
    60
    
    
    
    429Valuation allowance
    
    
    (11,706
    )
    
    
    21,432
    
    
    
    Deferred
    
    
    6,812
    
    
    
    (31,955
    )
    
    
    2,934Tax expense
(benefit)
    
    $
    (6,203
    )
    
    $
    (14,483
    )
    
    $
    5,273
  Years ended March 31,2010
    
    
    2009
    
    
    2008Expected federal income tax at
statutory rate
    
    $
    5,668
    
    
    $
    (34,983
    )
    
    $
    4,315State income taxes, net of federal tax
effect
    
    
    361
    
    
    
    (2,140
    )
    
    
    523Valuation
allowance
    
    
    (11,706
    )
    
    
    21,432
    
    
    
    Equity
compensation
    
    
    101
    
    
    
    185
    
    
    
    222Uncertain tax
liability
    
    
    (108
    )
    
    
    90
    
    
    
    97Other
    
    
    (519
    )
    
    
    933
    
    
    
    116Tax expense
(benefit)
    
    $
    (6,203
    )
    
    $
    (14,483
    )
    
    $
    5,273
 Years ended March 31,2010
    
    
    2009
    
    
    2008Expected federal income tax at statutory
rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    35.0
    %State income taxes, net of federal tax
effect
    
    
    2.2
    
    
    
    2.1
    
    
    
    4.2Valuation
allowance
    
    
    (70.2
    )
    
    
    (20.8
    )
    
    
    Equity
compensation
    
    
    0.6
    
    
    
    (0.2
    )
    
    
    1.8Return to
provision
    
    
    (3.2
    )
    
    
    
    
    
    
    Other
    
    
    (0.6
    )
    
    
    (1.0
    )
    
    
    1.8Effective tax rate (continuing
operations)
    
    
    (37.2
    )%
    
    
    14.1
    %
    
    
    42.8
    %
  76




---



##### Table of Contents



Years ended March 31,2010
    
    
    2009Deferred tax asset  currentCollectability
reserves
    
    $
    5,854
    
    
    $
    7,970Reserve for inventory
write-off
    
    
    349
    
    
    
    1,263Reserve for sales
discounts
    
    
    243
    
    
    
    58Accrued
vacations
    
    
    312
    
    
    
    313Inventory  uniform
capitalization
    
    
    138
    
    
    
    147Incentive based deferred
compensation
    
    
    483
    
    
    
    776Other
    
    
    214
    
    
    
    226Net operating loss
carryforward
    
    
    3,137
    
    
    
    3,535Subtotal deferred tax asset 
current
    
    
    10,730
    
    
    
    14,288Valuation
allowance
    
    
    (3,127
    )
    
    
    (8,069
    )Deferred tax asset  current,
net
    
    
    7,603
    
    
    
    6,219Deferred tax asset  non-currentStock based
compensation
    
    
    404
    
    
    
    396Book/tax intangibles
amortization
    
    
    21,562
    
    
    
    25,041Book/tax
depreciation
    
    
    (2,233
    )
    
    
    (2,280
    )Other
    
    
    674
    
    
    
    505Subtotal deferred tax asset 
non-current
    
    
    20,407
    
    
    
    23,662Valuation
allowance
    
    
    (6,599
    )
    
    
    (13,363
    )Deferred tax asset  non-current,
net
    
    
    13,808
    
    
    
    10,299Total deferred tax asset,
net
    
    $
    21,411
    
    
    $
    16,518
     Years ended March 31,2010
    
    
    2009Income taxes payable, beginning of period
    
    $
    1,166
    
    
    $
    880Gross increases related to prior year tax positions
    
    
    74
    
    
    
    101Gross increases related to current year tax positions
    
    
    195
    
    
    
    203Decrease related to statute of limitations lapses
    
    
    (214
    )
    
    
    (18
    )Income taxes payable, end of period
    
    $
    1,221
    
    
    $
    1,166
 77




---



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Note 19 Shareholders Equity
   Note 20 Private Placement Warrants
  78




---



##### Table of Contents



Note 21 Share-Based Compensation
  Equity Compensation Plans
      79




---



##### Table of Contents



Stock Options
  Year ended
    
    
    Year ended
    
    
    Year endedMarch 31, 2010
    
    
    March 31, 2009
    
    
    March 31, 2008Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageNumber of
    
    
    exercise
    
    
    Number of
    
    
    exercise
    
    
    Number of
    
    
    exerciseoptions
    
    
    price
    
    
    options
    
    
    price
    
    
    options
    
    
    priceOptions
outstanding,
beginning of
period
    
    
    3,165,528
    
    
    $
    5.74
    
    
    
    3,132,499
    
    
    $
    6.78
    
    
    
    3,601,700
    
    
    $
    6.92Granted
    
    
    848,500
    
    
    
    1.89
    
    
    
    782,500
    
    
    
    0.83
    
    
    
    429,000
    
    
    
    2.68Exercised
    
    
    (7,501
    )
    
    
    0.69
    
    
    
    (9,600
    )
    
    
    1.26
    
    
    
    (237,448
    )
    
    
    1.48Canceled
    
    
    (459,228
    )
    
    
    6.18
    
    
    
    (739,871
    )
    
    
    4.65
    
    
    
    (660,753
    )
    
    
    6.77Options
outstanding, end of
period
    
    
    3,547,299
    
    
    $
    4.77
    
    
    
    3,165,528
    
    
    $
    5.74
    
    
    
    3,132,499
    
    
    $
    6.78Options
exercisable, end of
period
    
    
    2,149,646
    
    
    $
    6.83
    
    
    
    2,071,203
    
    
    $
    7.79
    
    
    
    2,296,565
    
    
    $
    7.89Shares available
for future grant,
end of
period
    
    
    98,913
    
    
    
    
    
    
    
    933,252
    
    
    
    
    
    
    
    1,756,251
     Restricted Stock
  80




---



##### Table of Contents



Year ended
    
    
    Year ended
    
    
    Year endedMarch 31, 2010
    
    
    March 31, 2009
    
    
    March 31, 2008Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averagegrant date
    
    
    
    
    
    
    grant date
    
    
    
    
    
    
    grant dateShares
    
    
    fair value
    
    
    Shares
    
    
    fair value
    
    
    Shares
    
    
    fair valueUnvested, beginning of period
    
    
    445,155
    
    
    $
    1.18
    
    
    
    171,917
    
    
    $
    3.02
    
    
    
    120,000
    
    
    $
    4.68Granted
    
    
    242,750
    
    
    
    2.08
    
    
    
    390,250
    
    
    
    0.69
    
    
    
    131,000
    
    
    
    2.41Vested
    
    
    (173,836
    )
    
    
    1.61
    
    
    
    (63,932
    )
    
    
    3.23
    
    
    
    (73,333
    )
    
    
    4.41Forfeited
    
    
    (5,583
    )
    
    
    1.10
    
    
    
    (53,080
    )
    
    
    1.11
    
    
    
    (5,750
    )
    
    
    2.41Unvested, end of period
    
    
    508,486
    
    
    $
    1.47
    
    
    
    445,155
    
    
    $
    1.18
    
    
    
    171,917
    
    
    $
    3.02
    Restricted Stock Units  Performance-Based
  Share-Based Compensation Valuation and Expense Information
  Year
    
    
    Year
    
    
    YearEnded
    
    
    Ended
    
    
    EndedMarch 31,
    
    
    March 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2008Expected life (in years)
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Expected volatility
    
    
    75
    %
    
    
    66
    %
    
    
    67
    %Risk-free interest rate
    
    
    1.652.93
    %
    
    
    2.512.87
    %
    
    
    2.535.02
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
  81




---



##### Table of Contents



Note 22 401(k) Plan
  Note 23 Commitments and Contingencies
 Leases
   2011
    
    $
    2,9732012
    
    
    3,0802013
    
    
    3,1212014
    
    
    2,7782015
    
    
    2,787Thereafter
    
    
    8,504$
    23,243
 Litigation and Proceedings
  SEC Investigation
  82




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Note 24 Capital Leases
  March 31, 2010
    
    
    March 31, 2009Computer and office equipment
    
    $
    343
    
    
    $
    314Less: accumulated amortization
    
    
    212
    
    
    
    128Net property and equipment
    
    $
    131
    
    
    $
    186
  Minimum LeaseCommitmentsYear ending March 31:2011
    
    $
    662012
    
    
    582013
    
    
    28Total minimum lease payments
    
    $
    152Less: amounts representing interest at rates ranging from 6.9% to 31.6%
    
    
    13Present value of minimum capital lease payments, reflected in the balance
sheet as current and noncurrent capital lease obligations of $57 and $82,
respectively
    
    $
    139
 Note 25 Related Party Transactions
 Employment/Severance Agreements
     Employment Agreement  FUNimation
  83




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##### Table of Contents



Note 26 Major Customers
  Note 27 Business Segments
     84




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##### Table of Contents



Fiscal Year 2010
    
    Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    487,692
    
    
    $
    86,003
    
    
    $
    (45,363
    )
    
    $
    528,332Income from continuing operations
    
    
    6,353
    
    
    
    12,330
    
    
    
    
    
    
    
    18,683Income from continuing operations before income taxes
    
    
    6,875
    
    
    
    9,794
    
    
    
    
    
    
    
    16,669Depreciation and amortization expense
    
    
    3,687
    
    
    
    2,629
    
    
    
    
    
    
    
    6,316Restructuring, impairment and other charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital expenditures
    
    
    1,076
    
    
    
    692
    
    
    
    
    
    
    
    1,768Total assets
    
    
    121,667
    
    
    
    56,470
    
    
    
    (6,534
    )
    
    
    171,603
 Fiscal Year 2009
    
    Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    592,893
    
    
    $
    102,828
    
    
    $
    (64,730
    )
    
    $
    630,991Income (loss) from continuing operations
    
    
    1,143
    
    
    
    (98,261
    )
    
    
    
    
    
    
    (97,118
    )Income (loss) from continuing operations before income taxes
    
    
    (484
    )
    
    
    (102,433
    )
    
    
    
    
    
    
    (102,917
    )Depreciation and amortization expense
    
    
    4,060
    
    
    
    6,912
    
    
    
    
    
    
    
    10,972Restructuring, impairment and other charges
    
    
    591
    
    
    
    110,511
    
    
    
    
    
    
    
    111,102Capital expenditures
    
    
    2,960
    
    
    
    584
    
    
    
    
    
    
    
    3,544Total assets
    
    
    131,401
    
    
    
    50,204
    
    
    
    1,564
    
    
    
    183,169
 Fiscal Year 2008
    
    Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    611,007
    
    
    $
    117,423
    
    
    $
    (69,958
    )
    
    $
    658,472Income from continuing operations
    
    
    5,138
    
    
    
    12,693
    
    
    
    
    
    
    
    17,831Income from continuing operations before income taxes
    
    
    3,880
    
    
    
    8,449
    
    
    
    
    
    
    
    12,329Depreciation and amortization expense
    
    
    3,280
    
    
    
    6,307
    
    
    
    
    
    
    
    9,587Restructuring, impairment and other charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital expenditures
    
    
    7,462
    
    
    
    1,100
    
    
    
    
    
    
    
    8,562Total assets
    
    
    221,912
    
    
    
    176,907
    
    
    
    (115,357
    )
    
    
    283,462
  Fiscal Year 2010
    
    Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedSoftware
    
    $
    422,280
    
    
    $
    31,823
    
    
    $
    (24,166
    )
    
    $
    429,937Home Video
    
    
    38,142
    
    
    
    54,180
    
    
    
    (21,197
    )
    
    
    71,125Video Games
    
    
    27,270
    
    
    
    
    
    
    
    
    
    
    
    27,270Consolidated
    
    $
    487,692
    
    
    $
    86,003
    
    
    $
    (45,363
    )
    
    $
    528,332
 Fiscal Year 2009
    
    Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedSoftware
    
    $
    467,034
    
    
    $
    32,447
    
    
    $
    (28,537
    )
    
    $
    470,944Home Video
    
    
    55,199
    
    
    
    70,381
    
    
    
    (36,193
    )
    
    
    89,387Video Games
    
    
    70,660
    
    
    
    
    
    
    
    
    
    
    
    70,660Consolidated
    
    $
    592,893
    
    
    $
    102,828
    
    
    $
    (64,730
    )
    
    $
    630,991
 Fiscal Year 2008
    
    Distribution
    
    
    Publishing
    
    
    Eliminations
    
    
    ConsolidatedSoftware
    
    $
    498,255
    
    
    $
    39,362
    
    
    $
    (37,945
    )
    
    $
    499,672Home Video
    
    
    64,656
    
    
    
    78,061
    
    
    
    (32,013
    )
    
    
    110,704Video Games
    
    
    48,096
    
    
    
    
    
    
    
    
    
    
    
    48,096Consolidated
    
    $
    611,007
    
    
    $
    117,423
    
    
    $
    (69,958
    )
    
    $
    658,472
 Note 28 Quarterly Data  Seasonality (Unaudited)
  85




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Quarter EndedFiscal Year 2010
    
    June 30
    
    
    September 30
    
    
    December 31
    
    
    March 31Net sales
    
    $
    134,306
    
    
    $
    122,411
    
    
    $
    133,298
    
    
    $
    138,317Gross profit
    
    
    23,564
    
    
    
    20,867
    
    
    
    22,049
    
    
    
    21,445Income from operations
    
    
    6,516
    
    
    
    3,807
    
    
    
    4,525
    
    
    
    3,835Net income
    
    $
    4,161
    
    
    $
    2,280
    
    
    $
    7,239
    
    
    $
    9,192Earnings per common share:Basic
    
    $
    0.11
    
    
    $
    0.06
    
    
    $
    0.20
    
    
    $
    0.25Diluted
    
    $
    0.11
    
    
    $
    0.06
    
    
    $
    0.20
    
    
    $
    0.25Restructuring, impairment and other charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Quarter EndedFiscal Year 2009
    
    June 30
    
    
    September 30
    
    
    December 31
    
    
    March 31Net sales
    
    $
    142,025
    
    
    $
    170,296
    
    
    $
    171,580
    
    
    $
    147,090Gross profit (loss)
    
    
    22,126
    
    
    
    24,230
    
    
    
    (1,154
    )
    
    
    21,845Income (loss) from operations
    
    
    2,753
    
    
    
    (70,191
    )
    
    
    (31,965
    )
    
    
    2,285Net income (loss)
    
    $
    627
    
    
    $
    (44,508
    )
    
    $
    (47,724
    )
    
    $
    3,171Earnings (loss) per common share:Basic
    
    $
    0.02
    
    
    $
    (1.23
    )
    
    $
    (1.32
    )
    
    $
    0.09Diluted
    
    $
    0.02
    
    
    $
    (1.23
    )
    
    $
    (1.32
    )
    
    $
    0.09Restructuring, impairment and other charges
    
    
    
    
    
    
    73,412
    
    
    
    34,582
    
    
    
    3,108
 Note 29  Subsequent Events
    86




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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, 2010:Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    1,729
    
    
    $
    245
    
    
    $
    (639
    )
    
    $
    1,335Allowance for sales returns
    
    
    11,967
    
    
    
    3,988
    
    
    
    (7,728
    )
    
    
    8,227Allowance for MDF and sales discounts
    
    
    5,314
    
    
    
    11,088
    
    
    
    (12,771
    )
    
    
    3,631Total
    
    $
    19,010
    
    
    $
    15,321
    
    
    $
    (21,138
    )
    
    $
    13,193Year ended March 31, 2009:Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    1,332
    
    
    $
    742
    
    
    $
    (345
    )
    
    $
    1,729Allowance for sales returns
    
    
    9,350
    
    
    
    14,177
    
    
    
    (11,560
    )
    
    
    11,967Allowance for MDF and sales discounts
    
    
    4,736
    
    
    
    16,417
    
    
    
    (15,839
    )
    
    
    5,314Total
    
    $
    15,418
    
    
    $
    31,336
    
    
    $
    (27,744
    )
    
    $
    19,010Year ended March 31, 2008:Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    1,036
    
    
    $
    32
    
    
    $
    264
    
    
    $
    1,332Allowance for sales returns
    
    
    11,983
    
    
    
    10,373
    
    
    
    (13,006
    )
    
    
    9,350Allowance for MDF and sales discounts
    
    
    5,265
    
    
    
    17,721
    
    
    
    (18,250
    )
    
    
    4,736Total
    
    $
    18,284
    
    
    $
    28,126
    
    
    $
    (30,992
    )
    
    $
    15,418
 87