##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended March 31, 2007
 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
    
    (IRS Employerincorporation or organization)
    
    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 Stock Market LLC
 None
 o þ
 o þ
 þ o
 o
  o þ o
 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
    
    
    12Item 1B. Unresolved Staff Comments
    
    
    22Item 2. Properties
    
    
    22Item 3. Legal Proceedings
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities
    
    
    23Item 6. Selected Financial Data
    
    
    25Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    40Item 8. Financial Statements and Supplementary Data
    
    
    40Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    41Item 9A. Controls and Procedures
    
    
    41Item 9B. Other Information
    
    
    41PART IIIItem 10. Directors. Executive Officers of the Registrant, and Corporate Governance
    
    
    42Item 11. Executive Compensation
    
    
    42Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    42Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    42Item 14. Principal Accountant Fees and Services
    
    
    42PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    43Signatures
    
    
    50Office LeaseSubsidiaries of the RegistrantConsent of Independent Registered Public Accounting Firm302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
  2




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##### Table of Contents



PART I
 
 Item 1  Business
 Overview
    Distribution.
 Publishing Print Shop, Print Master, PC Tools Spyware Doctor, Monopoly Here and Now Hoyle PC
Gaming products He-man and the Masters of the Universe, Pride Fighting Championship, Classic
Cartoons anim Dragon Ball
Z, Fullmetal Alchemist, Trinity Blood, Samari Seven, Basilisk, Yu Yu Hakusho, Negima Robotech.
 Other Consolidation of Variable Interest Entities
  3




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Business Strategy
  
    
    Acquisitions of Attractive Content.We seek to continue to expand our
publishing business through the acquisition or licensing of well-established titles or
other attractive content. We believe these acquisitions and/or licenses will help position
us to increase our net sales in our publishing business, which historically has had higher
margins than our distribution business, and will allow us to distribute additional home
entertainment and multimedia content through our distribution business. In addition, we
believe that by allowing the management of these publishing companies to focus on content
licensing and marketing rather than on distribution operations, they will be able to devote
more time and greater resources to their core competency, publishing. We believe that
leveraging the core assets and strengths of our distribution business will provide broader
retail penetration, distribution expertise and other services for our content and increase
sales of our publishing products.
    
    Distribute a Broader Range and Larger Volume of Products.We seek to distribute
a broader range and larger volume of home entertainment and multimedia products to our
retail customers by providing a broad selection of products and capitalizing on our
customer relationships. We seek to capture additional business from new and existing retail
customers by providing them with a lower all-in cost of procuring merchandise and getting
product to retailers shelves through efficient distribution. We expect that providing
additional products to retailers will enable us to gain category management opportunities
and enhance our reputation for product distribution expertise. We believe our strategic
account associates located throughout the United States and Canada will help position us to
improve the retail penetration of our published products to new and existing retail
customers. We may also seek selective acquisitions of distribution businesses.
    
    Integrating Our Technology and Systems with Retailers.We seek to enhance the
link in the supply chain between us and our vendors and retail customers through the
integration of our respective information and technology systems, including inventory
management tools, replenishment systems and point-of-sale information. We believe this
integration will lead to better in-stock levels of product, improved on-time arrivals of
product to the customer, enhanced inventory management and lower return rates for our
customers, thereby strengthening customer relationships.
    
    Providing Value-Added Services.Due to increasing retailer logistic needs and
demands, including new technology standards such as GTIN(R) (global trade item number),
RFID (radio frequency identification devices) and VMI (vendor managed inventory), we
believe many publishers will be required to decide whether to spend additional resources to
update their distribution capabilities or to select a distributor, such as us, that intends
to offer such services. We believe implementing and offering these and other technologies
should position us to capture additional business from existing and new publishers.
  Competitive Strengths
  
    
    Value-Added Services.We offer a wide range of distribution services and
procurement solutions intended to capitalize on our broad understanding of the products we
distribute, the procurement process and the supply chain, as well as our logistics
expertise and systems capabilities. We believe our advanced distribution infrastructure
enables us to provide customized procurement programs for our retail customers at a lower
overall cost than many of our competitors. In addition, we believe our information
technology systems provide cost-effective interfacing with our customers information
technology systems,
 4




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supporting integration of the procurement process. We believe our focus on providing
customer-specific and cost-effective solutions is a key benefit that we provide to our retail
customers.
    
    Broad Product Offering.We provide our retail customers with a broad selection
of home entertainment and multimedia products that we believe allows us to better serve
their home entertainment and multimedia product requirements. In addition, we regularly
survey the markets we serve for new products with significant retail potential, that come
from publishers we currently have relationships with as well as from those for which we
have not distributed previously.
    
    Established Content in our Publishing Business.We currently license a number
of well-known home entertainment and multimedia software titles. Encore publishes leading
titles in the education, productivity, kids and games software categories, including Print
Shop, Print Master, PC Tools Spyware Doctor,and Hoyle PC Gaming Products.In addition,
BCI currently publishes home video for He-man and the Masters of the Universe, the
television shows Ridesand Overhaulin,both featured on The Learning Channel, and PRIDE
Fighting Championships,featured on Pay-Per-View. Through FUNimation we also license and
distribute a portfolio of established animeand childrens entertainment titles in the
United States, including Dragon Ball Z, Fullmetal Alchemist, Trinity Blood, Samari Seven,
Basilisk, Yu Yu Hakusho, Negimaand Robotech.
    
    Established Relationships with Publishers and Retailers.Since our founding in
1983, we have established distribution relationships with major retailers including Best
Buy, Wal-Mart/Sams Club, Circuit City, Staples and Costco, and we have historically
distributed to over 19,000 retail and distribution center locations throughout the United
States and Canada. We believe our strong relationships throughout the supply chain, broad
product offering and our distribution facility permit us to offer industry-leading home
entertainment and multimedia products to our retail customers and provide access to
attractive retail channels for publishers of these products. We believe our relationships
with leading publishers and our efficient distribution of their products should provide
opportunities for us to secure distribution rights to leading products in the future. We
believe these relationships give us a competitive advantage in the markets in which we
operate and provide us with attractive channels to distribute current and future products
offered by our publishing business.
    
    Efficient Operations and Operating Leverage.We believe our competitive
position is enhanced by our efficient operations, including the extensive use of automation
and technology in our distribution facility; centralized purchasing, accounting and
information systems; and economies of scale. Our warehouse facility adjacent to our
corporate headquarters provides us with the ability to efficiently service our vendors and
retail customers, and the capacity to increase the number of products we distribute.
 Distribution Markets
 PC Software
    5




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Video Games Software and Accessories
   Major Label Music
  Independent Label Music
  Major Studio Home Video
   Customers
 www.navarre.com
  Navarres Distribution Business Model
 Vendor Relationships
   6




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##### Table of Contents



Retail Services
   Warehouse Systems
  E-Commerce
 www.navarre.com
 Navarres Publishing Business Model
 Hoyle anime
 Encore
 Print Shop, Print Master, PC Tools Spyware Doctor, Monopoly Here and Now Hoyle PC
Gaming products.
   7




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Hoyle
 BCI
  He-Man and
the Masters of the Universe, Classic Cartoons, Rides Overhaulin PRIDE Fighting Championships
 FUNimation
 anime Dragon Ball Z, Fullmetal Alchemist, Trinity Blood,
Samari Seven, Basilisk, Yu Yu Hakusho, Negima Robotech.
 anime anime anime
 Home Video Distribution
 Broadcast
 Licensing and Merchandising
 Retail Sales and Web Sites anime ,
 8




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Competition
  
    
    obtain exclusive national distribution contracts;
    
    obtain proprietary publishing rights with various rights holders and brand owners;
    
    maintain our margins and volume;
    
    expand our sales through a varied range of products and personalized services;
    
    anticipate changes in the marketplace including technological developments and
consumer interest in our proprietary products; and
    
    maintain operating expenses at an appropriate level.
   Backlog
  Environmental Matters
  Employees
  Capital Resources  Financing
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Available Information
 www.navarre.com www.sec.gov
 Executive Officers of the Company
  Name
    
    Age
    
    PositionCary L. Deacon
    
    55
    
    President and Chief Executive OfficerJ. Reid Porter
    
    58
    
    Executive Vice President, Chief Financial OfficerBrian M.T. Burke
    
    36
    
    President of Navarre DistributionJill Griffin
    
    34
    
    President of EncoreGen Fukunaga
    
    46
    
    Chief Executive Officer and President of FUNimationTroy Hayes
    
    49
    
    President of BCI EclipseJohn Turner
    
    53
    
    Senior Vice President of Global LogisticsRyan F. Urness
    
    35
    
    General Counsel and Secretary
 Cary L. Deacon
 J. Reid Porter
 Brian M. T. Burke
 Jill Griffin
 Gen Fukunaga
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Troy Hayes
 John Turner
 Ryan F. Urness
 11




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Item 1A  Risk Factors
 FORWARD-LOOKING STATEMENTS / RISK FACTORS
    Risks Relating To Our Business And Industry
 We derive a substantial portion of our total net sales from a small group of customers. A reduction
in sales to any of these customers could have a material adverse effect on our net sales and
profitability.
  The loss of a significant vendor or manufacturer or a decline in the popularity of its products
could negatively affect our product offerings and reduce our net sales and profitability.
  12




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Publishing revenues are dependent on consumer preferences and demand.
 anime
 
    
    any of the publishing segments current properties, product concepts or
programming will continue to be popular for any significant period of time;
    
    any new properties, product concepts or programming will achieve an adequate
degree of popularity; or
    
    any propertys life cycle will be sufficient to permit adequate profitably to
recover advance payments, guarantees, development, marketing, royalties and other costs.
  Our business is seasonal and variable in nature and, as a result, the level of sales and payment
terms during our peak season could adversely affect our results of operations and liquidity.
  
    
    the popularity of the DVD, PC software titles and pre-recorded music released during the quarter;
    
    product marketing and promotional activities;
    
    the opening and closing of retail stores by our major customers;
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
    
    the extension, termination or non-renewal of existing distribution agreements and licenses; and
    
    general economic changes affecting the buying pattern of retailers,
particularly those changes affecting consumer demand for home entertainment products and PC
software.
 We may not be able to grow our publishing segment.
  Pending litigation or regulatory inquiry may subject us to significant costs, judgments or
penalties and could divert management attention.
  A substantial portion of FUNimations revenues typically derive from a small number of licensed
properties and a small number of licensors and FUNimations content is highly concentrated in the anime genre.
 anime
  FUNimations revenues are substantially dependent on television exposure for its licensed
properties.
 anime
 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.
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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.
  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.
   15




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We have significant credit exposure and negative trends or other factors could cause us significant
credit loss.
   We may not be able to adequately adjust our cost structure in a timely fashion in response to a
decrease in net sales, which may cause our profitability to suffer.
  Our distribution and publishing businesses operate in highly competitive industries and compete
with large national firms. Further competition, among other things, could reduce our sales volume
and margins.
  
    
    obtain exclusive national distribution contracts and licenses with independent music labels and manufacturers;
    
    obtain proprietary publishing rights with various rights holders and brand owners;
    
    maintain our margins and volume;
    
    expand our sales through a varied range of products and personalized services;
    
    anticipate changes in the marketplace including technological developments and
consumer interest in our proprietary products; and
    
    maintain operating expenses at an appropriate level.
  anime anime
 16




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We depend on third party shipping and fulfillment companies for the delivery of our products.
  We depend on a variety of systems for our operations, and a failure of these systems could disrupt
our business and harm our reputation and net sales and negatively impact our results of operations.
     We are implementing a new enterprise resource planning system. Failure to fully implement the new
system in an effective and a timely fashion could adversely affect our results of operations and
timely reporting of financial results.
  17




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Technology developments, particularly in the electronic downloading arena, may adversely affect our
net sales, margins and results of operations.
  We may not be successful in implementing our acquisition strategy, and future acquisitions could
result in disruptions to our business by, among other things, distracting management time and
diverting financial resources. Further, if we are unsuccessful in integrating acquired companies
into our business, it could materially and adversely affect our financial condition and operating
results.
  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.
  18




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Interruption of our business or catastrophic loss at any of our facilities could lead to a
curtailment or shutdown of our business.
  Future terrorist or military actions could result in disruption to our operations or loss of
assets, in certain markets or globally.
  Legislative actions, higher director and officer insurance costs and potential new accounting
pronouncements are likely to cause our general and administrative expenses to increase and impact
our future financial condition and results of operations.
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Risks Relating to Indebtedness
 The level of our indebtedness could adversely affect our financial condition.
   
    
    make it more difficult for us to satisfy our obligations with respect to other indebtedness;
    
    increase our vulnerability to adverse economic and industry conditions;
    
    require us to dedicate a substantial portion of our cash flow from operations
to the payment of our indebtedness, thereby reducing the availability of cash to fund
working capital and capital expenditures and for other general corporate purposes;
    
    restrict us from making strategic acquisitions, acquiring new content or exploring other business opportunities;
    
    limit our ability to obtain financing for working capital, capital expenditures, general corporate purposes or acquisitions;
    
    place us at a disadvantage compared to our competitors that have less indebtedness; and
    
    limit our flexibility in planning for, or reacting to, changes in our business and industry.
 Our outstanding indebtedness bears interest at variable rates. Any increase in interest rates will
reduce funds available to us for our operations and future business opportunities and will
adversely affect our leveraged capital structure.
  We may be unable to generate sufficient cash flow to service our debt obligations.
    
    
    our financial condition at the time;
    
    restrictions in our credit agreement or other outstanding indebtedness; and
    
    other factors, including the condition of the financial markets or the distribution and publishing markets.
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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.
  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.
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We currently do not intend to pay dividends on our common stock and, consequently, your only
opportunity to achieve a return on your investment is if the price of our common stock appreciates.
  Our directors may not be held personally liable for certain actions, which could discourage
shareholder suits against them.
  Other Risks
   
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
 Distribution
  Publishing
  22




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Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5. Market for Registrants Common Equity, and Related Stockholder Matters and Issuer Purchase
of Equity Securities
 Common Stock
  Quarter
    
    High
    
    LowFiscal 2007
    
    First
    
    $
    4.98
    
    
    $
    3.30Second
    
    
    5.18
    
    
    
    3.38Third
    
    
    5.06
    
    
    
    3.98Fourth
    
    
    4.24
    
    
    
    3.60Fiscal 2006
    
    First
    
    $
    9.21
    
    
    $
    6.73Second
    
    
    8.40
    
    
    
    5.65Third
    
    
    6.61
    
    
    
    3.51Fourth
    
    
    6.53
    
    
    
    3.45
  Dividend Policy
  Comparative Stock Performance
  23




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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
 
 3/02
    

3/03
    

3/04
    

3/05
    

3/06
    

3/07Navarre
Corporation
    
    
    100.00
    
    
    
    154.55
    
    
    
    539.09
    
    
    
    722.73
    
    
    
    390.00
    
    
    
    340.91NASDAQ
Composite
    
    
    100.00
    
    
    
    72.11
    
    
    
    109.76
    
    
    
    111.26
    
    
    
    132.74
    
    
    
    139.65Peer Group
    
    
    100.00
    
    
    
    69.64
    
    
    
    116.50
    
    
    
    109.57
    
    
    
    105.66
    
    
    
    104.24
 Private Placement
  Additional Sales of Unregistered Securities
  Purchases of Equity Securities
  Equity Compensation Plan Information
  24




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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
    
    
    3,601,700
    
    
    $
    6.92
    
    
    
    461,000Equity compensation
plans not approved
by security holders
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-Total
    
    
    3,601,700
    
    
    $
    6.92
    
    
    
    461,000
 
 Item 6. Selected Financial Data
  25




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Fiscal Years ended March 31,2007
    
    2006(1)
    
    2005
    
    2004
    
    2003Statement of operations data:Net sales
    
    $
    698,371
    
    
    $
    686,126
    
    
    $
    596,615
    
    
    $
    470,877
    
    
    $
    356,816Gross profit, exclusive of depreciation and amortization
    
    
    116,702
    
    
    
    107,093
    
    
    
    91,352
    
    
    
    58,021
    
    
    
    45,475Income from operations
    
    
    17,303
    
    
    
    2,684
    
    
    
    9,711
    
    
    
    7,067
    
    
    
    3,597Interest expense
    
    
    (10,220
    )
    
    
    (11,217
    )
    
    
    (783
    )
    
    
    (378
    )
    
    
    (194
    )Other income (expense)
    
    
    (139
    )
    
    
    3,344
    
    
    
    232
    
    
    
    (458
    )
    
    
    447Net income (loss) before tax
    
    
    6,944
    
    
    
    (5,189
    )
    
    
    9,160
    
    
    
    6,231
    
    
    
    3,850Income tax benefit (expense)
    
    
    (2,885
    )
    
    
    2,014
    
    
    
    1,006
    
    
    
    583
    
    
    
    Net income (loss)
    
    $
    4,059
    
    
    $
    (3,175
    )
    
    $
    10,166
    
    
    $
    6,814
    
    
    $
    3,913Earnings (loss) per common share:Basic
    
    $
    .11
    
    
    $
    (.11
    )
    
    $
    .38
    
    
    $
    .30
    
    
    $
    .18Diluted
    
    $
    .11
    
    
    $
    (.11
    )
    
    $
    .35
    
    
    $
    .28
    
    
    $
    .18Weighted average shares outstanding:Basic
    
    
    35,786
    
    
    
    29,898
    
    
    
    26,830
    
    
    
    22,780
    
    
    
    21,616Diluted
    
    
    36,228
    
    
    
    29,898
    
    
    
    28,782
    
    
    
    24,112
    
    
    
    21,841Balance sheet data:(2)Total assets
    
    $
    288,225
    
    
    $
    309,614
    
    
    $
    195,892
    
    
    $
    154,579
    
    
    $
    109,665Shortterm debt
    
    
    39,208
    
    
    
    5,115
    
    
    
    334
    
    
    
    651
    
    
    
    805Longterm debt
    
    
    14,970
    
    
    
    75,352
    
    
    
    237
    
    
    
    
    
    
    
    268Temporary equity  Unregistered common stock
    
    
    
    
    
    
    16,634
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity
    
    
    113,451
    
    
    
    88,906
    
    
    
    77,284
    
    
    
    53,078
    
    
    
    28,263
 
 (1)
    
    Includes acquisition of FUNimation completed May 11, 2005 (see Note 3 to the consolidated
financial statements).(2)
    
    Includes 2006 Private Placement (see Note 18 to the consolidated financial statements). 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
    Distribution.
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Publishing Print Shop, Print Master, PC Tools
Spyware Doctor, Monopoly Here and Now, Hoyle PC Gaming products He-man and the Masters of the Universe, Pride Fighting Championship,
Classic Cartoons anime Dragon Ball
Z, Fullmetal Alchemist, Trinity Blood, Samari Seven, Basilisk, Yu Yu Hakusho, Negima Robotech.
 Other
 Overall Summary of Fiscal 2007 Financial Results
   Share-Based Payment
 Working Capital and Debt
  27




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Critical Accounting Policies and Estimates
   Revenue Recognition
    Accounting by
Producers or Distributors of Films.
 Production Costs and License Fees
   28




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Allowance for Doubtful Accounts
  Goodwill and Intangible Assets
   Impairment of Long-Lived Assets
 Accounting for
the Impairment or Disposal of Long-Lived Assets
 29




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Inventory Valuation
  Share-based Compensation
 Accounting for Stock Issued to Employees
  Income Taxes
  30




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Contingencies and Litigation
  Reconciliation of GAAP Net Sales to Net Sales Before Inter-Company Eliminations
  Year Ended(Unaudited)
    
    March 31,
    
    
    March 31,
    
    
    March 31,(In thousands)
    
    2007
    
    
    2006
    
    
    2005Net salesDistribution
    
    $
    641,462
    
    
    $
    621,739
    
    
    $
    556,927Publishing
    
    
    126,651
    
    
    
    127,612
    
    
    
    95,777Other
    
    
    
    
    
    
    424
    
    
    
    352Net sales before intercompany eliminations
    
    
    768,113
    
    
    
    749,775
    
    
    
    653,056Intercompany eliminations
    
    
    (69,742
    )
    
    
    (63,649
    )
    
    
    (56,441
    )Net sales as reported
    
    $
    698,371
    
    
    $
    686,126
    
    
    $
    596,615
 31




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Results of Operations
  Fiscal Years Ended March 31,2007
    
    
    2006
    
    
    2005Net sales:Distribution
    
    
    91.9
    %
    
    
    90.6
    %
    
    
    93.3
    %Publishing
    
    
    18.1
    
    
    
    18.6
    
    
    
    16.1Other
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.1Elimination of sales
    
    
    (10.0
    )
    
    
    (9.3
    )
    
    
    (9.5
    )Total net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales  exclusive of depreciation and amortization
    
    
    83.3
    
    
    
    84.4
    
    
    
    84.7Gross profit
    
    
    16.7
    
    
    
    15.6
    
    
    
    15.3Selling and marketing
    
    
    4.1
    
    
    
    4.3
    
    
    
    3.6Distribution and warehousing
    
    
    1.7
    
    
    
    1.7
    
    
    
    1.7General and administrative
    
    
    6.3
    
    
    
    6.1
    
    
    
    7.7Bad debt
    
    
    0.5
    
    
    
    1.8
    
    
    
    0.1Depreciation and amortization
    
    
    1.6
    
    
    
    1.3
    
    
    
    0.6Total operating expenses
    
    
    14.2
    
    
    
    15.2
    
    
    
    13.7Income from operations
    
    
    2.5
    
    
    
    0.4
    
    
    
    1.6Interest expense
    
    
    (1.5
    )
    
    
    (1.6
    )
    
    
    (0.1
    )Interest income
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Deconsolidation of variable interest entity
    
    
    
    
    
    
    0.3
    
    
    
    Warrant expense
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    Other income (expense), net
    
    
    
    
    
    
    0.1
    
    
    
    (0.1
    )Net (loss) income, before tax
    
    
    1.0
    
    
    
    (0.8
    )
    
    
    1.5Tax (expense) benefit
    
    
    (0.4
    )
    
    
    0.3
    
    
    
    0.2Net (loss) income
    
    
    0.6
    %
    
    
    (0.5
    )%
    
    
    1.7
    %
  Distribution Segment
  Fiscal 2007 Results Compared With Fiscal 2006
 Net Sales
  32




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##### Table of Contents



Gross Profit
  Operating Expenses
        Fiscal 2006 Results Compared With Fiscal 2005
 Net Sales
  33




---



##### Table of Contents



Gross Profit
  Operating Expenses
       34




---



##### Table of Contents



Operating Income (Loss)
  Publishing Segment
  Fiscal 2007 Results Compared With Fiscal 2006
 Net Sales
 anime BlackCat, Basilisk, Fullmetal Panic, Trinity Blood Dragon Ball Z
 Gross Profit
  Operating Expenses
      Operating Income (Loss)
  35




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##### Table of Contents



Fiscal 2006 Results Compared With Fiscal 2005
 Net Sales
 He-Man and the Masters of the Universe Print Shop Print Master
 Gross Profit
  Operating Expenses
 He-Man and the Masters of
the Universe
 Operating Income (Loss)
  Other Segment
  Fiscal 2007 Results Compared With Fiscal 2006
  Fiscal 2006 Results Compared With Fiscal 2005
  36




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##### Table of Contents



Consolidated Other Income and Expense for All Periods
   Consolidated Income Tax Expense or Benefit for All Periods
  Consolidated Net Income (Loss) for All Periods
  Market Risk
  Seasonality and Inflation
  Liquidity and Capital Resources
 Cash Flow Analysis
 Operating Activities
  37




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##### Table of Contents



Investing Activities
    Financing Activities
  38




---



##### Table of Contents



Capital Resources
      Liquidity
   39




---



##### Table of Contents



Contractual Obligations
  Lessthan 1
    
    
    2  3
    
    
    4  5
    
    
    More than 5Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases
    
    $
    31,635
    
    
    $
    3,442
    
    
    $
    6,938
    
    
    $
    5,053
    
    
    $
    16,202Capital leases
    
    
    276
    
    
    
    132
    
    
    
    136
    
    
    
    8
    
    
    
    Note payable
    
    
    15,000
    
    
    
    150
    
    
    
    300
    
    
    
    14,550
    
    
    
    License and distribution agreement
    
    
    22,352
    
    
    
    15,618
    
    
    
    6,734
    
    
    
    
    
    
    
    Total
    
    $
    69,263
    
    
    $
    19,342
    
    
    $
    14,108
    
    
    $
    19,611
    
    
    $
    16,202
 
 Item 7a  Quantitative and Qualitative Disclosures About Market Risk
 Market Risk.
 Interest Rate Risk.
 Foreign Currency Risk
 
 Item 8. Financial Statements and Supplementary Data
          40




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##### Table of Contents



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
            Changes in Internal Control over Financial Reporting
  
 Item 9B. Other Information
  41




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##### Table of Contents



PART III
 
 Item 10. Directors, Executive Officers of the Registrant and Corporate Governance
      
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  42




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##### Table of Contents



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, 2007 and 2006.(iii)
    
    Consolidated Statements of Operations for the years ended March 31,
2007, 2006 and 2005.(iv)
    
    Consolidated Statements of Shareholders Equity and Comprehensive Income
(Loss) for the years ended March 31, 2007, 2006 and 2005.(v)
    
    Consolidated Statements of Cash Flows for the years ended March 31, 2007,
2006 and 2005.(vi)
    
    Notes to Consolidated Financial Statements
 (2)
    
    Financial Statement Schedules
 (i)
    
    Schedule II  Valuation and Qualifying Accounts and Reserves
  (3)
    
    Exhibits
 ItemNo.
    
    Description3.1
    
    Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Companys Annual Report
on Form 10-K for the year ended March 31, 2000 (File No. 0-22982)).3.2
    
    Bylaws of the Company (incorporated by reference to Exhibit 4.2 to the Companys Registration
Statement on Form S-3 (File No. 333-111733)).3.5
    
    Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the
Companys Registration Statement on Form S-1 filed April 13, 2006 (File No. 000-22982)).3.6
    
    Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Companys
Registration Statement on Form S-1 filed April 13, 2006 (File No. 000-22982)).3.7
    
    Companys Amended and Restated Bylaws as of January 25, 2007 (incorporated by reference to Exhibit
3.1 to the Companys Form 8-K dated January 25, 2007 (File No. 0-22982)).4.1
    
    Form of Specimen Certificate for Common Stock (incorporated by reference to Exhibit 4.1 to the
Companys Registration Statement on Form S-1 filed April 13, 2006 (File No. 000-22982)).4.2
    
    Form of Warrant dated March 21, 2006 (incorporated by reference to Exhibit 4.4 to the Companys
Registration Statement on Form S-1 filed April 13, 2006 (File No. 000-22982)).4.3
    
    Form of Agents Warrant (incorporated by reference to Exhibit 4.5 to the Companys Registration
Statement on Form S-1/A filed June 26, 2006 (File No. 3-133280)).10.1 *
    
    Employment Agreement dated November 1, 2001 between the Company and Eric H. Paulson (incorporated by
reference
 43




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##### Table of Contents



ItemNo.
    
    Descriptionto Exhibit 10.1 to the Companys Form 10-Q for the quarter ended December 31, 2001 (File
No. 0-22982)).10.2 *
    
    Amendment to Employment Agreement between the Company and Eric H. Paulson (incorporated by reference
to Exhibit 10.1.1 to the Companys Form 10-Q for the quarter ended December 31, 2003 (File No.
0-22982)).10.3 *
    
    Employment Agreement dated January 2, 2002 between the Company and Charles E. Cheney (incorporated
by reference to Exhibit 10.2 to the Companys Annual Report on Form 10-K for the year ended March
31, 2002 (File No. 0-22982)).10.4 *
    
    Employment Agreement between Encore Software, Inc. and Michael Bell (incorporated by reference to
Exhibit 10.3 to the Companys Annual Report on Form 10-K for the year ended March 31, 2003 (File No.
0-22982)).10.5 *
    
    Employment Agreement dated November 5, 2003, between BCI Eclipse Company, LLC and Edward D. Goetz
(incorporated by reference to Exhibit 10.16 to the Companys Form 10-Q for the quarter ended
September 30, 2003 (File No. 0-22982)).10.6 *
    
    1992 Stock Option Plan, amended and restated (incorporated by reference to Exhibit 10.3 to the
Companys Annual Report on Form 10-K for the year ended March 31, 2002 (File No. 0-22982)).10.7 *
    
    2003 Amendment to the Companys 1992 Stock Option Plan (incorporated by reference to Exhibit 99.1 to
the Companys Registration Statement on Form S-8 (File No. 333-109056)).10.8 *
    
    Form of Individual Stock Option Agreement under 1992 Stock Option Plan (incorporated by reference to
Exhibit 10.4 to the Companys Registration Statement on Form S-1 (No. 333-68392)).10.9 *
    
    Form of Termination Agreement for certain of the Companys Executives (incorporated by reference to
Exhibit 10.2 to the Companys Form 10-Q for the quarter ended December 31, 2001 (File No. 0-22982)).10.10
    
    Lease dated March 12, 1998 between the Company and Cambridge Apartments, Inc. with respect to the
corporate headquarters in New Hope, MN (incorporated by reference to Exhibit 10.6 to the Companys
Annual Report on Form 10-K for the year ended March 31, 1999 (File No. 0-22982)).10.11
    
    Amendment No. 1 to Lease Agreement between the Company and Cambridge Apartments, Inc. dated April 1,
1998 (incorporated by reference to Exhibit 10.9.1 to the Companys Form 10-Q for the quarter ended
June 30, 2003 (File No. 0-22982)).10.12
    
    Amendment No. 2 to Lease Agreement between the Company and Cambridge Apartments, Inc. dated July 14,
2003 (incorporated by reference to Exhibit 10.9.2 to the Companys Form 10-Q for the quarter ended
June 30, 2003 (File No. 0-22982)).10.13
    
    Lease dated May 1, 1999 between the Company and Sunlite III, LLP with respect to a second facility
in Brooklyn Park, MN (incorporated by reference to Exhibit 10.7 to the Companys Annual Report on
Form 10-K for the year ended March 31, 1999 (File No. 0-22982)).10.14
    
    Amendment Nos. 1, 2 and 3 to Lease Agreement (incorporated by reference to Exhibit 10.10.1 to the
Companys Annual Report on Form 10-K for the year ended March 31, 2003 (File No. 0-22982)).10.15
    
    Lease dated December 17, 1999 between Encore and EastGroup Properties L.P., with respect to a third
facility in Gardena, California (incorporated by reference to Exhibit 10.11 to the Companys Annual
Report on Form 10-K for the year ended March 31, 2003 (File No. 0-22982)).10.16
    
    First Amendment to Lease dated June 27, 2002 between Encore and Eastgroup Properties L.P.
(incorporated by reference to Exhibit 10.11.1 to the Companys Annual Report on Form 10-K for the
year ended March 31, 2003 (File No. 0-22982)).10.31
    
    Agreement of Reciprocal Easements, Covenants, Conditions and Restrictions dated June 16, 2003
(incorporated by reference to Exhibit 10.9.3 to the Companys Form 10-Q for the quarter ended June
30, 2003 (File No. 0-22982)).
 44




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##### Table of Contents



ItemNo.
    
    Description10.32 *
    
    Incentive Stock Option Agreement dated September 6, 2002 between Cary Deacon and the Company
(incorporated by reference to Exhibit 10.17 to the Companys Form 10-Q for the quarter ended
September 30, 2003 (File No. 0-22982)).10.33
    
    Addendum to Incentive Stock Option Agreement dated November 13, 2003 (incorporated by reference to
Exhibit 10.17.1 to the Companys Form 10-Q for the quarter ended September 30, 2003 (File No.
0-22982)).10.36
    
    Form of Separation Agreement with Charles E. Cheney dated April 30, 2004 (incorporated by reference
to Exhibit 10.41 to the Companys Form 10-K for the year ended March 31, 2004 (File No. 0-22982)).10.37
    
    Form of Assignment of Lease between BCI Eclipse LLC and BCI Eclipse Company, LLC dated November 3,
2003 (incorporated by reference to Exhibit 10.42 to the Companys Form 10-K for the year ended March
31, 2004 (File No. 0-22982)).10.41
    
    Form of Amended and Restated Credit Agreement with General Electric Capital Corporation dated June
18, 2004 (incorporated by reference to Exhibit 10.46 to the Companys Form 10-K for the year ended
March 31, 2004 (File No. 0-22982)).10.42
    
    Form of Lease Agreement between the Company and NL Ventures IV New Hope, L.P. dated May 27, 2004
(incorporated by reference to Exhibit 10.47 to the Companys Form 10-K for the year ended March 31,
2004 (File No. 0-22982)).10.43
    
    Form of Third Amendment to Office/Warehouse Lease between Cambridge Apartments, Inc. and the Company
dated February 23, 2004 (incorporated by reference to Exhibit 10.48 to the Companys Form 10-K for
the year ended March 31, 2004 (File No. 0-22982)).10.44
    
    Form of Fourth Amendment to Office/Warehouse Lease between Cambridge Apartments, Inc. and the
Company dated June 2004 (incorporated by reference to Exhibit 10.49 to the Companys Form 10-K for
the year ended March 31, 2004 (File No. 0-22982)).10.45
    
    Amendment No. 2 to Lease Agreement between Airport One Limited Partnership and the Company dated
March 21, 2004 (incorporated by reference to Exhibit 10.50 to the Companys Form 10-K for the year
ended March 31, 2004 (File No. 0-22982)).10.46
    
    Addendum to Lease Agreement between Cambridge Apartments, Inc. and the Company dated May 27, 2004
(incorporated by reference to Exhibit 10.51 to the Companys Form 10-K for the year ended March 31,
2004 (File No. 0-22982)).10.47
    
    Form of BCI Eclipse Lease Agreement effective October 1, 1999 (incorporated by reference to Exhibit
10.52 to the Companys Form 10-K for the year ended March 31, 2004 (File No. 0-22982)).10.48
    
    First Amendment to BCI Eclipse Lease Agreement made as of January 5, 2000 (incorporated by reference
to Exhibit 10.53 to the Companys Form 10-K for the year ended March 31, 2004 (File No. 0-22982)).10.49
    
    Amended and Restated Credit Agreement dated June 18, 2004 between the Company and General Electric
Capital Corporation (incorporated by reference to Exhibit 10.54 to the Companys Form 10-Q for the
quarter ended September 30, 2004 (File No. 0-22982)).10.50
    
    Amendment No. 1 and Limited Waiver with Respect to Amended and Restated Credit Agreement dated
August 25, 2004 (incorporated by reference to Exhibit 10.55 to the Companys Form 10-Q for the
quarter ended September 30, 2004 (File No. 0-22982)).10.51
    
    Amendment No. 2 and Limited Waiver with Respect to Amended and Restated Credit Agreement dated
October 18, 2004 (incorporated by reference to Exhibit 10.56 to the Companys Form 10-Q for the
quarter ended September 30, 2004 (File No. 0-22982)).10.52
    
    Lease dated October 8, 2004, between Encore Software, Inc. and Kilroy Realty, L.P., with respect to
an office facility in El Segundo, California (incorporated by reference to Exhibit 10.57 to the
Companys Form 10-Q for the quarter ended September 30, 2004 (File No. 0-22982)).
 45




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##### Table of Contents



ItemNo.
    
    Description10.53
    
    Form of License and Distribution Agreement (Manufacturing Rights) (2004-2005) between Riverdeep Inc.
and Encore Software, Inc. dated as of March 29, 2004 (incorporated by reference to Exhibit 10.1 to
the Companys Form 10-Q/A for the quarter ended September 30, 2004 (File No. 0-22982)).10.54
    
    Form of License and Distribution Agreement (Manufacturing Rights) (2005-2007) between Riverdeep Inc.
and Encore Software, Inc. dated as of March 29, 2004 (incorporated by reference to Exhibit 10.2 to
the Companys Form 10-Q/A for the quarter ended September 30, 2004 (File No. 0-22982)).10.55
    
    Form of Addendum #1 to Licensing and Distribution Agreements (2004-2005 and 2005-2007) between
Riverdeep, Inc. and Encore Software, Inc. dated as of April 13, 2004 (incorporated by reference to
Exhibit 10.3 to the Companys Form 10-Q/A for the quarter ended September 30, 2004 (File No.
0-22982)).10.56
    
    Form of Addendum #2 to Licensing and Distribution agreements (2004-2005 and 2005-2007) between
Riverdeep, Inc. and Encore Software, Inc. dated October 2004 (incorporated by reference to Exhibit
10.4 to the Companys Form 10-Q/A for the quarter ended September 30, 2004 (File No. 0-22982)).10.57 *
    
    Navarre Corporation 2004 Stock Plan (incorporated by reference to Exhibit D to the Companys Proxy
Statement filed July 27, 2004 (File No. 0-22982)).10.58*
    
    Form of 2004 Stock Plan Incentive Stock Option Agreement.10.59*
    
    Form of 2004 Stock Plan Non-Employee Director Stock Option Agreement.10.62
    
    FUNimation Partnership Interest Purchase Agreement, dated January 10, 2005 (incorporated by
reference to Exhibit 10.1 to the Companys Form 8-K filed January 14, 2005 (File No. 0-22982)).10.63
    
    Form of Assignment and Assumption Agreement (incorporated by reference to Exhibit 10.1(a) to the
Companys Form 8-K filed January 14, 2005 (File No. 0-22982)).10.64*
    
    Form of Gen Fukanaga Employment Agreement (incorporated by reference to Exhibit 10.1(b) to the
Companys Form
8-K filed January 14, 2005 (File No. 0-22982)).10.66
    
    Form of Non-Competition Agreement (incorporated by reference to Exhibit 10.1(d) to the Companys
Form 8-K filed January 14, 2005 (File No. 0-22982)).10.67
    
    Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.1(e) to the Companys
Form 8-K filed January 14, 2005 (File No. 0-22982)).10.68
    
    Form of Release (incorporated by reference to Exhibit 10.1(f) to the Companys Form 8-K filed
January 14, 2005 (File No. 0-22982)).10.69
    
    Limited Waiver and Third Amendment to Amended and Restated Credit Agreement, filed January 14, 2005
(incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed January 14, 2005 (File
No. 0-22982)).10.70
    
    Amendment No. 3 to Lease Agreement between Airport One Limited Partnership and the Company dated
November 23, 2004 (incorporated by reference to Exhibit 10.1 to the Companys Form 10-Q for the
quarter ended December 31, 2005 (File No. 0-22982)).10.71
    
    Form of Addendum #3 to Licensing and Distribution Agreements (2004-2005 and 2005-2007) between
Riverdeep, Inc. and Encore Software, Inc. dated November 2004 (incorporated by reference to Exhibit
10.2 to the Companys Form 10-Q for the quarter ended December 31, 2005 (File No. 0-22982)).10.72
    
    Amendment No. 1 to Lease Agreement between Encore Software, Inc. and Kilroy Realty, L.P. dated
December 29, 2004 (incorporated by reference to Exhibit 10.3 to the Companys Form 10-Q for the
quarter ended December 31, 2005 (File No. 0-22982)).10.73
    
    Limited Waiver With Respect To Amended and Restated Credit Agreement dated March 15, 2005
(incorporated by
 46




---



##### Table of Contents



ItemNo.
    
    Descriptionreference to Exhibit 10.1 to the Companys Form 8-K filed March 17, 2005 (File No.
0-22982)).10.74
    
    Stock Purchase Agreement between the Company and Michael Bell dated March 14, 2005 (incorporated by
reference to Exhibit 10.2 to the Companys Form 8-K filed March 17, 2005 (File No. 0-22982)).10.75
    
    Registration Rights Agreement between the Company and Michael Bell dated March 14, 2005
(incorporated by reference to Exhibit 10.3 to the Companys Form 8-K filed March 17, 2005 (File No.
0-22982)).10.76
    
    Amendment to Stock Purchase Agreement between the Company and Michael Bell dated March 31, 2005
(incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed April 14, 2005 (File No.
0-22982)).10.77
    
    Amendment to Registration Rights Agreement between the Company and Michael Bell dated March 31, 2005
(incorporated by reference to Exhibit 10.2 to the Companys Form 8-K filed April 14, 2005 (File No.
0-22982)).10.78
    
    Limited Waiver with Respect to Amended and Restated General Electric Capital Corporation Credit
Agreement dated March 31, 2005 (incorporated by reference to Exhibit 10.3 to the Companys Form 8-K
filed April 14, 2005 (File No. 0-22982)).10.79
    
    Pledge Agreement between the Company and General Electric Capital Corporation related to Encore
shares dated March 31, 2005 (incorporated by reference to Exhibit 10.4 to the Companys Form 8-K
filed April 14, 2005 (File No. 0-22982)).10.80
    
    Amendment No. 1 to Partnership Interest Purchase Agreement dated May 11, 2005 (incorporated by
reference to Exhibit 10.1 to the Companys Form 8-K filed May 17, 2005 (File No. 0-22982)).10.81
    
    Second Amended and Restated Credit Agreement dated as of May 11, 2005 between the Company and
General Electric Capital Corporation (incorporated by reference to Exhibit 10.2 to the Companys
Form 8-K filed May 17, 2005 (File No. 0-22982)).10.82
    
    Form of Third Amended and Restated Credit Agreement with Lenders and General Electric Capital
Corporation dated June 1, 2005 (incorporated by reference to Exhibit 10.1 to the Companys Form 8-K
filed June 3, 2005 (File No. 0-22982)).10.83
    
    Form of Limited Waiver to General Electric Capital Corporation Second Amended and Restated Credit
Agreement dated June 1, 2005 (incorporated by reference to Exhibit 10.2 to the Companys Form 8-K
filed June 3, 2005 (File No. 0-22982)).10.84
    
    Office Lease dated August 1, 2004 between Cocanaugher Asset #1, Ltd. and FUNimation Productions, Ltd.10.85
    
    Letter dated June 14, 2005 regarding Companys policy to use straight-line method of depreciation
from Grant Thornton LLP.10.86
    
    Form of Addendum #6 to Licensing and Distribution Agreements (2004-2005 and 2005-2007) between
Riverdeep, Inc. and Encore Software, Inc. dated October 6, 2005 (incorporated by reference to
Exhibit 10.1 to the Companys Form 10-Q for the quarter ended September 30, 2005 (File No.
000-22982)).10.87
    
    First Amendment and Limited Waiver to Third Amended and Restated Credit Agreement with Lenders and
General Electric Capital Corporation dated October 14, 2005 (incorporated by reference to Exhibit
99.1 to the Companys Form 8-K filed October 14, 2005 (File No. 000-22982)).10.88
    
    Limited Waiver with Respect to Third Amended and Restated Credit Agreement with Lenders and General
Electric Capital Corporation dated November 18, 2005 (incorporated by reference to Exhibit 99.1 to
the Companys Form 8-K filed November 18, 2005 (File No. 000-22982)).10.89*
    
    Executive Severance Agreement between the Company and J. Reid Porter dated December 12, 2005
(incorporated by reference to Exhibit 99.1 to the Companys Form 8-K filed December 12, 2005 (File
No. 000-22982)).10.90
    
    Amendment No. 4. to Standard Commercial Lease between Airport One Limited Partnership and the
Company dated
 47




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##### Table of Contents



ItemNo.
    
    DescriptionFebruary 2, 2006 (incorporated by reference to Exhibit 10.1 to the Companys Form 10-Q
for the quarter ended December 31, 2005 (File No. 000-22982)).10.91
    
    Memorandum of Understanding between the Company and the FUNimation sellers dated February 7, 2006
(incorporated by reference to Exhibit 99.1 to the Companys Form 8-K filed February 7, 2006 (File
No. 000-22982)).10.92
    
    Limited Waiver and Second Amendment with Respect to Third Amended and Restated Credit Agreement with
Lenders and General Electric Capital Corporation dated February 7, 2006 (incorporated by reference
to Exhibit 99.2 to the Companys Form 8-K filed February 7, 2006 (File No. 000-22982)).10.93*
    
    Navarre Corporation Amended and Restated 2004 Stock Plan (incorporated by reference to Exhibit 4 to
the Companys Registration Statement on Form S-8 filed February 22, 2006 (File No. 000-22982)).10.94*
    
    Form of Lock-Up Agreement regarding the Navarre Corporation Stock Option Acceleration effective
March 20, 2006 (incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed March 20,
2006 (File No. 000-22982)).10.95
    
    Form of Securities Purchase Agreement between the Company and various purchasers dated March 21,
2006 (incorporated by reference to Exhibit 4.2 to the Companys Registration Statement on Form S-1
filed April 13, 2006 (File No. 000-22982)).10.96
    
    Form of Registration Rights Agreement between the Company and various purchasers dated March 21,
2006 (incorporated by reference to Exhibit 4.3 to the Companys Registration Statement on Form S-1
filed April 13, 2006 (File No. 000-22982)).10.97
    
    Third Amendment to the Third Amended and Restated Credit Agreement with Lenders and General Electric
Capital Corporation dated March 21, 2006 (incorporated by reference to Exhibit 99.2 to the Companys
Form 8-K filed March 21, 2006 (File No. 000-22982)).10.98
    
    Addendum #7 to Licensing and
Distribution Agreements (2004-2005) and (2005-2007) (incorporated by
reference to Exhibit 10.98 to the Companys Form 10-K
for the year ended March 31, 2006 (File No. 0-22982)).10.99*
    
    Fiscal Year 2007 Annual Incentive Plan (incorporated by reference to Exhibit 10.1 to the Companys
Form 8-K filed April 1, 2006 (File No. 000-22982)).10.100*
    
    Form of Navarre Corporation 2004 Stock Plan Employee Restricted Stock Agreement (incorporated by
reference to Exhibit 10.2 to the Companys Form 8-K filed April 1, 2006 (File No. 000-22982)).10.101*
    
    Form of Navarre Corporation 2004 Stock Plan Director Restricted Stock Agreement (incorporated by
reference to Exhibit 10.3 to the Companys Form 8-K filed April 1, 2006 (File No. 000-22982)).10.102*
    
    Form of Navarre Corporation 2004 Stock Plan TSR Stock Unit Agreement (incorporated by reference to
Exhibit 10.4 to the Companys Form 8-K filed April 1, 2006 (File No. 000-22982)).10.103*
    
    Form of Navarre Corporation 2004 Stock Plan Performance Stock Unit Agreement (incorporated by
reference to Exhibit 10.5 to the Companys Form 8-K filed April 1, 2006 (File No. 000-22982)).10.104*
    
    Employment Agreement by and between the Company and Cary L. Deacon (incorporated by reference to
Exhibit 99.1 to the Companys Form 8-K/A dated June 21, 2006 (File No. 0-22982)).10.105*
    
    Amendment to Employment Agreement between BCI Eclipse Company, LLC and Edward Goetz (incorporated by
reference to Exhibit 99.1 to the Companys Form 8-K dated August 14, 2006 (File No. 0-22982)).10.106
    
    Form of Limited Waiver with Respect to Third Amended and Restated Credit Agreement by and among the
Company, General Electric Capital Corporation and the Lenders thereto, dated November 2, 2006
(incorporated by reference to Exhibit 10.1 to the Companys Form 10-Q for the quarter ended
September 30, 2006 (File No. 0-22982)).10.107*
    
    Amended and Restated Employment Agreement dated December 28, 2006, by and between the Company and
Cary L. Deacon (incorporated by reference to Exhibit 99.1 to the Companys Form 8-K dated December
28, 2006 (File No. 0-22982)).
 48




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##### Table of Contents



ItemNo.
    
    Description10.108*
    
    Amendment to Employment Agreement dated December 28, 2006, by and between the Company and Eric H.
Paulson (incorporated by reference to Exhibit 99.2 to the Companys Form 8-K dated December 28, 2006
(File No. 0-22982)).10.109*
    
    Amendment, dated January 29, 2007, to Amended and Restated Employment Agreement, dated December 28,
2006, by and between the Company and Cary L. Deacon (incorporated by reference to Exhibit 10.1 to
the Companys Form 8-K dated January 25, 2007 (File No. 0-22982)).10.110
    
    Letter Agreement regarding Goetz employment agreement termination dated February 5, 2007
(incorporated by reference to Exhibit 10.1 to the Companys Form 8-K dated February 5, 2007 (File
No. 0-22982)).10.111
    
    Form of Fourth Amended and Restated Credit Agreement by and among the Company and General Electric
Capital Corporation dated March 22, 2007 (incorporated by reference to Exhibit 10.1 to the Companys
Form 8-K dated March 22, 2007 (File No. 0-22982)).10.112
    
    Form of Credit Agreement by and among the Company and Monroe Capital Advisors, LLC dated March 22,
2007 (incorporated by reference to Exhibit 10.2 to the Companys Form 8-K dated March 22, 2007 (File
No. 0-22982)).10.113*
    
    Amendment to Employment Agreement dated March 30, 2007, by and between the Company and Eric H.
Paulson (incorporated by reference to Exhibit 99.1 to the Companys Form 8-K dated March 30, 2007
(File No. 0-22982)).10.114
    
    Form of Sale and Purchase Agreement dated May 11, 2007, by and among the Company, Navarre
Entertainment Media, Inc., and Koch Entertainment LP (incorporated by reference to Exhibit 10.1 to
the Companys Form 8-K dated May 11, 2007 (File No. 0-22982)).10.115
    
    Form of First Amendment and Limited Waiver with Respect to Fourth Amended and Restated Credit
Agreement by and among the Company and General Electric Capital Corporation dated May 30, 2007
(incorporated by reference to Exhibit 10.1 to the Companys Form 8-K dated May 31, 2007 (File No.
0-22982)).10.116
    
    Limited Waiver to Credit Agreement by and among the Company and Monroe Capital Advisors, LLC dated
May 30, 2007 (incorporated by reference to Exhibit 10.2 to the Companys Form 8-K dated May 31, 2007
(File No. 0-22982)).10.117  ü
    
    Office lease dated May 29,
2007 between FMBP Industrial I LP and FUNimation Productions, Ltd.14.1
    
    The Companys Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 to the
Companys Form 10-K for the year ended March 31, 2004 (File No. 0-22982)).21.1 ü
    
    Subsidiaries of the Registrant.23.1 ü
    
    Consent of Independent Registered
Public Accounting Firm - Grant Thornton LLP24.1 ü
    
    Power of Attorney, contained on signature page31.1 ü
    
    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (Rules 13a-14 and 15d-14 of the Exchange Act)31.2 ü
    
    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (Rules 13a-14 and 15d-14 of the Exchange Act)32.1 ü
    
    Certifications of the Chief Executive Officer pursuant Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350)32.2 ü
    
    Certifications of the Chief Financial Officer pursuant Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350)
 
 *
    
    Indicates management contract or compensatory plan or agreement.ü
    
    filed herewith 49




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##### Table of Contents



SIGNATURES
  Navarre Corporation
(Registrant)June 14, 2007
    By
    /s/ Cary L. DeaconCary L. DeaconPresident and Chief Executive Officer  50




---



##### Table of Contents



POWER OF ATTORNEY
  Signature
    
    Title
    
    Date/s/ Cary L. Deacon
    
    President and Chief Executive Officer
(principal executive officer)
    
    June 14, 2007Cary L. Deacon/s/ J. Reid Porter
    
    Chief Financial Officer (principal financial and
accounting officer)
    
    June 14, 2007J. Reid Porter/s/ Charles E. Cheney
    
    Director
    
    June 14, 2007Charles E. Cheney/s/ Keith A. Benson
    
    Director
    
    June 14, 2007Keith A. Benson/s/ Timothy R. Gentz
    
    Director
    
    June 14, 2007Timothy R. Gentz/s/ James G. Sippl
    
    Director
    
    June 14, 2007James G. Sippl/s/ Michael L. Snow
    
    Director
    
    June 14, 2007Michael L. Snow/s/ Tom Weyl
    
    Director
    
    June 14, 2007Tom Weyl/s/ Deborah L. Hopp
    
    Director
    
    June 14, 2007Deborah L. Hopp/s/ Richard Gary St. Marie
    
    Director
    
    June 14, 2007Richard Gary St. Marie
 51




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Share-Based Payments
  Internal Control-Integrated
Framework
 
 52




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##### Table of Contents



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




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##### Table of Contents



NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
 March 31,2007
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    966
    
    
    $
    14,296Note receivable, related parties
    
    
    
    
    
    
    200Accounts receivable, less allowance for doubtful accounts, vendor advances and sales
returns of $19,708 and $19,345, respectively
    
    
    85,784
    
    
    
    87,653Inventories
    
    
    40,227
    
    
    
    43,624Prepaid expenses and other current assets
    
    
    13,820
    
    
    
    11,273Income taxes receivable
    
    
    828
    
    
    
    4,408Deferred tax assets  current
    
    
    9,519
    
    
    
    8,830Total current assets
    
    
    151,144
    
    
    
    170,284Property and equipment, net of accumulated depreciation of $10,786 and $8,349, respectively
    
    
    14,042
    
    
    
    10,298Other assets:Goodwill
    
    
    81,697
    
    
    
    81,202Intangible assets, net of amortization of $16,115 and $8,258, respectively
    
    
    14,540
    
    
    
    20,863License fees, net of amortization of $12,688 and $5,334, respectively
    
    
    15,609
    
    
    
    13,347Interest rate swap
    
    
    
    
    
    
    37Other assets
    
    
    11,193
    
    
    
    13,583Total assets
    
    $
    288,225
    
    
    $
    309,614Liabilities and shareholders equityCurrent liabilities:Note payable  line of credit
    
    $
    38,956
    
    
    $
    Note payable  short term
    
    
    150
    
    
    
    5,000Capital lease obligation  short term
    
    
    102
    
    
    
    115Accounts payable
    
    
    99,220
    
    
    
    97,923Warrant liability
    
    
    
    
    
    
    2,236Accrued expenses
    
    
    14,251
    
    
    
    16,646Total current liabilities
    
    
    152,679
    
    
    
    121,920Longterm liabilitiesNote payable  long-term
    
    
    14,850
    
    
    
    75,130Capital lease obligation  long-term
    
    
    120
    
    
    
    222Deferred compensation
    
    
    6,358
    
    
    
    5,272Deferred tax liabilities  non-current
    
    
    7
    
    
    
    770Other longterm liabilities
    
    
    760
    
    
    
    760Total liabilities
    
    
    174,774
    
    
    
    204,074Commitments and contingencies (Note 21)Temporary-equity  Unregistered common stock, no par value; 5,699,998 issued and
outstanding (Note 18)
    
    
    
    
    
    
    16,634Shareholders equity:Common stock, no par value:Authorized shares  100,000,000Issued and outstanding shares  36,038,295 and 29,911,097, respectively
    
    
    158,801
    
    
    
    138,292Accumulated other comprehensive income
    
    
    
    
    
    
    23Accumulated deficit
    
    
    (45,350
    )
    
    
    (49,409
    )Total shareholders equity
    
    
    113,451
    
    
    
    88,906Total liabilities and shareholders equity
    
    $
    288,225
    
    
    $
    309,614
 See accompanying notes to consolidated financial statements.
 54




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##### Table of Contents



NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
 Fiscal Years ended March 31,2007
    
    
    2006
    
    
    2005Net sales
    
    $
    698,371
    
    
    $
    686,126
    
    
    $
    596,615Cost of sales (exclusive of depreciation and amortization)
    
    
    581,669
    
    
    
    579,033
    
    
    
    505,263Gross profit
    
    
    116,702
    
    
    
    107,093
    
    
    
    91,352Operating expenses:Selling and marketing
    
    
    29,030
    
    
    
    29,320
    
    
    
    21,483Distribution and warehousing
    
    
    12,098
    
    
    
    11,656
    
    
    
    10,023General and administrative
    
    
    43,658
    
    
    
    42,063
    
    
    
    46,190Bad debt expense
    
    
    3,655
    
    
    
    12,111
    
    
    
    423Depreciation and amortization
    
    
    10,958
    
    
    
    9,259
    
    
    
    3,522Total operating expenses
    
    
    99,399
    
    
    
    104,409
    
    
    
    81,641Income from operations
    
    
    17,303
    
    
    
    2,684
    
    
    
    9,711Other income (expense):Interest expense
    
    
    (10,220
    )
    
    
    (11,217
    )
    
    
    (783
    )Interest income
    
    
    355
    
    
    
    777
    
    
    
    473Deconsolidation of variable interest entity
    
    
    
    
    
    
    1,896
    
    
    
    Warrant expense
    
    
    (251
    )
    
    
    (342
    )
    
    
    Derivative gain
    
    
    
    
    
    
    623
    
    
    
    Other income (expense), net
    
    
    (243
    )
    
    
    390
    
    
    
    (241
    )Net income (loss) before income tax
    
    
    6,944
    
    
    
    (5,189
    )
    
    
    9,160Income tax benefit (expense)
    
    
    (2,885
    )
    
    
    2,014
    
    
    
    1,006Net income (loss)
    
    $
    4,059
    
    
    $
    (3,175
    )
    
    $
    10,166Earnings (loss) per common share:Basic
    
    $
    .11
    
    
    $
    (.11
    )
    
    $
    .38Diluted
    
    $
    .11
    
    
    $
    (.11
    )
    
    $
    .35Weighted average shares outstanding:Basic
    
    
    35,786
    
    
    
    29,898
    
    
    
    26,830Diluted
    
    
    36,228
    
    
    
    29,898
    
    
    
    28,782
 See accompanying notes to consolidated financial statements.
 55




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##### Table of Contents



NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
 AccumulatedOther
    
    
    Total
    
    
    Temporary Equity UnregisteredCommon Stock
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Shareholders
    
    
    Common StockShares
    
    
    Amount
    
    
    Deficit
    
    
    Income (Loss)
    
    
    Equity
    
    
    Shares
    
    
    AmountBalance at March 31, 2004
    
    
    25,817,965
    
    
    $
    109,441
    
    
    $
    (56,363
    )
    
    $
    
    
    
    $
    53,078
    
    
    
    
    
    
    $
    Shares issued upon exercise of
stock options and warrants
    
    
    1,778,115
    
    
    
    8,238
    
    
    
    
    
    
    
    
    
    
    
    8,238
    
    
    
    
    
    
    
    Shares issued upon repurchase of
Encore stock
    
    
    300,000
    
    
    
    2,400
    
    
    
    
    
    
    
    
    
    
    
    2,400
    
    
    
    
    
    
    
    Tax benefit from employee stock
option plans
    
    
    
    
    
    
    2,428
    
    
    
    
    
    
    
    
    
    
    
    2,428
    
    
    
    
    
    
    
    Stockbased compensation expense
    
    
    
    
    
    
    269
    
    
    
    
    
    
    
    
    
    
    
    269
    
    
    
    
    
    
    
    Reclassification of stockbased
compensation accrual
    
    
    
    
    
    
    705
    
    
    
    
    
    
    
    
    
    
    
    705
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    10,166
    
    
    
    
    
    
    
    10,166
    
    
    
    
    
    
    
    Balance at March 31, 2005
    
    
    27,896,080
    
    
    
    123,481
    
    
    
    (46,197
    )
    
    
    
    
    
    
    77,284
    
    
    
    
    
    
    
    Shares issued upon exercise of
stock options and warrants
    
    
    187,531
    
    
    
    455
    
    
    
    
    
    
    
    
    
    
    
    455
    
    
    
    
    
    
    
    Shares issued with acquisition of
FUNimation
    
    
    1,827,486
    
    
    
    14,144
    
    
    
    
    
    
    
    
    
    
    
    14,144
    
    
    
    
    
    
    
    Shares issued with private
placement, net of expenses $1,421
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,699,998
    
    
    
    16,634Other
    
    
    
    
    
    
    (37
    )
    
    
    (37
    )
    
    
    
    
    
    
    (74
    )
    
    
    
    
    
    
    Tax benefit
from employee stock option plans
    
    
    
    
    
    
    249
    
    
    
    
    
    
    
    
    
    
    
    249
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    (3,175
    )
    
    
    
    
    
    
    (3,175
    )
    
    
    
    
    
    
    Unrealized gain on derivative
instrument, net of tax of $14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    23
    
    
    
    
    
    
    
    Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,152
    )
    
    
    
    
    
    
    Balance at March 31, 2006
    
    
    29,911,097
    
    
    
    138,292
    
    
    
    (49,409
    )
    
    
    23
    
    
    
    88,906
    
    
    
    5,699,998
    
    
    
    16,634Shares issued upon exercise of
stock options, restricted stock and
warrants
    
    
    427,200
    
    
    
    466
    
    
    
    
    
    
    
    
    
    
    
    466
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    (131
    )
    
    
    
    
    
    
    
    
    
    
    (131
    )
    
    
    
    
    
    
    Reclassification of warrant accrual
    
    
    
    
    
    
    2,487
    
    
    
    
    
    
    
    
    
    
    
    2,487
    
    
    
    
    
    
    
    Reclassification of temporary equity
    
    
    5,699,998
    
    
    
    16,634
    
    
    
    
    
    
    
    
    
    
    
    16,634
    
    
    
    (5,699,998
    )
    
    
    (16,634
    )Share based compensation
    
    
    
    
    
    
    910
    
    
    
    
    
    
    
    
    
    
    
    910
    
    
    
    
    
    
    
    Tax benefit
from employee stock option plans
    
    
    
    
    
    
    143
    
    
    
    
    
    
    
    
    
    
    
    143
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    4,059
    
    
    
    
    
    
    
    4,059
    
    
    
    
    
    
    
    Unrealized gain on derivative
instrument, net of tax of $14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23
    )
    
    
    (23
    )
    
    
    
    
    
    
    Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,036
    
    
    
    
    
    
    
    Balance at March 31, 2007
    
    
    36,038,295
    
    
    $
    158,801
    
    
    $
    (45,350
    )
    
    $
    
    
    
    $
    113,451
    
    
    
    
    
    
    $
    
 See accompanying notes to consolidated financial statements.
 56




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##### Table of Contents



NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Fiscal Years ended March 31,2007
    
    
    2006
    
    
    2005Operating activities:Net income (loss)
    
    $
    4,059
    
    
    $
    (3,175
    )
    
    $
    10,166Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:Depreciation and amortization
    
    
    11,068
    
    
    
    9,384
    
    
    
    3,673Amortization and write-off of deferred financing costs
    
    
    551
    
    
    
    523
    
    
    
    240Write-off of deferred financing costs
    
    
    2,426
    
    
    
    239
    
    
    
    Amortization of license fees
    
    
    7,353
    
    
    
    5,334
    
    
    
    Amortization of production costs
    
    
    2,278
    
    
    
    1,875
    
    
    
    Change in deferred revenue
    
    
    (80
    )
    
    
    (954
    )
    
    
    Share-based compensation expense
    
    
    910
    
    
    
    
    
    
    
    269Deferred compensation expense
    
    
    1,086
    
    
    
    288
    
    
    
    2,838Compensation expense incurred with repurchase of Encore stock
    
    
    
    
    
    
    
    
    
    
    5,800Writeoff of notes receivable, related party
    
    
    200
    
    
    
    200
    
    
    
    200Impairment of capitalized software development costs
    
    
    
    
    
    
    
    
    
    
    465Tax benefit from employee stock option plans
    
    
    143
    
    
    
    249
    
    
    
    2,428Loss (gain) on disposal of property and equipment
    
    
    (13
    )
    
    
    37
    
    
    
    82Deferred income taxes
    
    
    (1,439
    )
    
    
    (2,266
    )
    
    
    (4,771
    )Change in fair market value of warrants
    
    
    251
    
    
    
    342
    
    
    
    Gain on deconsolidation of variable interest entity
    
    
    
    
    
    
    (1,896
    )
    
    
    Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    1,725
    
    
    
    8,483
    
    
    
    (14,459
    )Inventories
    
    
    3,397
    
    
    
    (2,671
    )
    
    
    (10,702
    )Prepaid expenses
    
    
    (2,305
    )
    
    
    (1,302
    )
    
    
    (5,925
    )Income taxes receivable
    
    
    3,581
    
    
    
    (4,408
    )
    
    
    Other assets
    
    
    1,855
    
    
    
    143
    
    
    
    (3,129
    )Production costs
    
    
    (3,918
    )
    
    
    (3,044
    )
    
    
    License fees
    
    
    (9,615
    )
    
    
    (11,263
    )
    
    
    Accounts payable
    
    
    1,297
    
    
    
    (731
    )
    
    
    4,441Income taxes payable
    
    
    
    
    
    
    (8
    )
    
    
    (113
    )Accrued expenses
    
    
    (2,316
    )
    
    
    (2,684
    )
    
    
    5,992Net cash provided by (used in) operating activities
    
    
    22,494
    
    
    
    (7,305
    )
    
    
    (2,505
    )Investing activities:Acquisitions, net of cash acquired
    
    
    
    
    
    
    (87,085
    )
    
    
    Purchases of property and equipment
    
    
    (7,053
    )
    
    
    (2,899
    )
    
    
    (9,375
    )Proceeds from sale of property and equipment
    
    
    57
    
    
    
    
    
    
    
    Net proceeds from sale leaseback
    
    
    
    
    
    
    
    
    
    
    6,401Purchases of intangible assets
    
    
    (1,534
    )
    
    
    (644
    )
    
    
    (608
    )Payment of earn-out related to an acquisition
    
    
    (350
    )
    
    
    (350
    )
    
    
    (88
    )Deconsolidation of variable interest entity
    
    
    
    
    
    
    (18
    )
    
    
    Net cash used in investing activities
    
    
    (8,880
    )
    
    
    (90,996
    )
    
    
    (3,670
    )Financing activities:Proceeds from note payable, line of credit
    
    
    97,240
    
    
    
    
    
    
    
    117,197Payments on note payable, line of credit
    
    
    (58,284
    )
    
    
    
    
    
    
    (117,197
    )Repayment of note payable
    
    
    (80,130
    )
    
    
    (59,870
    )
    
    
    (651
    )Proceeds of note payable
    
    
    15,000
    
    
    
    141,075
    
    
    
    250Debt acquisition costs
    
    
    (990
    )
    
    
    (3,071
    )
    
    
    (527
    )Repayments of capital lease obligations
    
    
    (115
    )
    
    
    (91
    )
    
    
    (59
    )Other
    
    
    (131
    )
    
    
    
    
    
    
    Proceeds from sale of common stock and warrants
    
    
    
    
    
    
    18,528
    
    
    
    
 57




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##### Table of Contents



Fiscal Years ended March 31,2007
    
    
    2006
    
    
    2005Proceeds from exercise of common stock options and warrants
    
    
    466
    
    
    
    455
    
    
    
    8,238Net cash provided by (used in) financing activities
    
    
    (26,944
    )
    
    
    97,026
    
    
    
    7,251Net increase (decrease) in cash
    
    
    (13,330
    )
    
    
    (1,275
    )
    
    
    1,076Cash at beginning of year
    
    
    14,296
    
    
    
    15,571
    
    
    
    14,495Cash at end of year
    
    $
    966
    
    
    $
    14,296
    
    
    $
    15,571Supplemental cash flow information:Cash paid for:Interest
    
    $
    8,834
    
    
    $
    9,328
    
    
    $
    771Income taxes
    
    
    601
    
    
    
    4,421
    
    
    
    1,449Supplemental schedule of noncash investing and financing activities:Reclassification of acquisition costs from other assets to goodwill
    
    $
    
    
    
    $
    1,656
    
    
    $
    Reclassification of stock compensation accrual to shareholders equity
    
    
    
    
    
    
    
    
    
    
    705Purchase price adjustments affecting: accounts receivable, prepaid
expenses, goodwill and accounts payable
    
    
    
    
    
    
    
    
    
    
    627Purchase price adjustments affecting accounts receivable and goodwill
    
    
    145
    
    
    
    
    
    
    
    Capital lease obligations incurred for the purchase of computer equipment
    
    
    
    
    
    
    107
    
    
    
    380Reclassification of deposits from property and equipment to prepaid expenses
    
    
    164
    
    
    
    
    
    
    
    Reclassification of prepaid rent to long-term rent
    
    
    
    
    
    
    
    
    
    
    450Reclassification of prepaid royalties to other assets
    
    
    
    
    
    
    5,363
    
    
    
    Reclassification of warrant accrual and temporary equity to common stock
    
    
    19,121
    
    
    
    
    
    
    
    Acquisition:Fair value of assets acquired
    
    $
    
    
    
    $
    114,484
    
    
    $
    Less: Assumed liabilities
    
    
    
    
    
    
    9,116
    
    
    
    Fair value of stock issued
    
    
    
    
    
    
    14,144
    
    
    
    Cash acquired
    
    
    
    
    
    
    4,139
    
    
    
    Acquisition net of cash acquired
    
    $
    
    
    
    $
    87,085
    
    
    $
    Deconsolidation of variable interest entity:
    
    
    
    
    
    
    
    
    
    
    Assets, including cash
    
    $
    
    
    
    $
    642
    
    
    $
    Less: Liabilities and shareholders equity
    
    
    
    
    
    
    2,501
    
    
    
    Net liabilities and shareholders equity
    
    $
    
    
    
    $
    1,859
    
    
    $
    
 See accompanying notes to consolidated financial statements.
 58




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##### Table of Contents



NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007
 Note 1 Business Description
     Note 2 Summary of Significant Accounting Policies
 Basis of Consolidation
  Segment Reporting
  59




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##### Table of Contents



Disclosure about Segments of an Enterprise and Related Information
 Fiscal Year
  Use of Estimates
  Reclassifications
  Fair Value of Financial Instruments
  Cash and Cash Equivalents
  Derivatives and Hedging
 Accounting for Derivative
Instruments and Hedging Activities
 Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock,
 60




---



##### Table of Contents



Research and Development  Mix & Burn
  Inventories
  Prepaid Royalties
 Financial Reporting
in the Record and Music Industry
 Royalties Payable
 Accounting by Producers or Distributors of Films
 Advertising
  Property and Equipment
  61




---



##### Table of Contents



Asset
    
    Life in YearsBuildings
    
    
    25Furniture and fixtures
    
    
    7Office equipment
    
    
    5Computer equipment
    
    
    3Warehouse equipment
    
    
    5Leasehold improvements
    
    
    510
  Production Costs
 Accounting by Producers or Distributors of Films
  License Fees
 SOP 00-2
 Impairment of Long-Lived Assets
  Goodwill
  62




---



##### Table of Contents



Intangible Assets
  Debt Issuance Costs
  Operating Leases
  Revenue Recognition
     63




---



##### Table of Contents



Vendor Allowances
 Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor
 Marketing Development Funds
 Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendors Products,
 Accounts Receivable and Allowance for Doubtful Accounts
  Classification of Shipping Costs
   Foreign Currency Transactions
  Income Taxes
  Stock-Based Compensation
 Share-Based Payment Accounting for Stock-Based Compensation
 64




---



##### Table of Contents



Accounting for Stock Issued to Employees Statement
of Cash Flows
    Earnings Per Share
   Fiscal Years ended March 31,2007
    
    
    2006
    
    
    2005Numerator:Net (loss) income
    
    $
    4,059
    
    
    $
    (3,175
    )
    
    $
    10,166Denominator:Denominator for basic earnings per share  weighted average shares
    
    
    35,786
    
    
    
    29,898
    
    
    
    26,830Dilutive securities: Employee stock options and warrants
    
    
    442
    
    
    
    
    
    
    
    1,952Denominator for diluted earnings per share  weighted average shares
    
    
    36,228
    
    
    
    29,898
    
    
    
    28,782Basic earnings (loss) per share
    
    $
    .11
    
    
    $
    (.11
    )
    
    $
    .38Diluted earnings (loss) per share
    
    $
    .11
    
    
    $
    (.11
    )
    
    $
    .35
  65




---



##### Table of Contents



Capitalized Software Development Costs
  Recently Issued Accounting Pronouncements
 Accounting for
Uncertainty in Income Taxes  an Interpretation of FASB Statement 109
 Fair Value Measurements
 Accounting for
Planned Major Maintenance Activities
 Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements
 66




---



##### Table of Contents



Note 3 Acquisition
  Purchase Price
 Business Combinations
   Accounts receivable
    
    $
    7,052Inventories
    
    
    315Prepaid expenses and other current assets
    
    
    53Property and equipment
    
    
    2,037License fees
    
    
    7,125Production costs
    
    
    2,608Goodwill
    
    
    71,165License arrangements and other intangibles
    
    
    21,646Current liabilities
    
    
    (9,116
    )Total purchase price, less cash acquired
    
    $
    102,885
   March 31, 2006
    
    
    March 31, 2005As reported
    
    
    Pro forma
    
    
    As reported
    
    
    Pro formaNet sales
    
    $
    686,126
    
    
    $
    691,848
    
    
    $
    596,615
    
    
    $
    661,638Net income (loss)
    
    
    (3,175
    )
    
    
    (3,315
    )
    
    
    10,166
    
    
    
    17,228Earnings (loss) per common share:Basic
    
    $
    (.11
    )
    
    $
    (.11
    )
    
    $
    .38
    
    
    $
    .64Diluted
    
    $
    (.11
    )
    
    $
    (.11
    )
    
    $
    .35
    
    
    $
    .60
 67




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##### Table of Contents



Note 4 Comprehensive Income (Loss)
   Years EndedMarch 31,2007
    
    
    2006Net income (loss)
    
    $
    4,059
    
    
    $
    (3,175
    )Change in net unrealized gain (loss) on hedge derivatives, net of tax
    
    
    (27
    )
    
    
    646Less realized net gain (loss) on hedge derivatives, net of tax
    
    
    4
    
    
    
    (623
    )Comprehensive income (loss)
    
    $
    4,036
    
    
    $
    (3,152
    )
   March 31, 2007
    
    
    March 31, 2006Unrealized gain (loss) from:Hedge derivatives
    
    $
    
    
    
    $
    23Accumulated other comprehensive income (loss)
    
    $
    
    
    
    $
    23
 Note 5 Accounts Receivable
  March 31, 2007
    
    
    March 31, 2006Trade receivables
    
    $
    100,716
    
    
    $
    102,722Vendor advance receivables
    
    
    3,211
    
    
    
    2,623Other receivables
    
    
    1,566
    
    
    
    1,653$
    105,493
    
    
    $
    106,998Less: allowance for doubtful accounts, vendor receivables and sales discounts
    
    
    7,233
    
    
    
    6,544Less: allowance for sales returns, net margin impact
    
    
    12,476
    
    
    
    12,801Total
    
    $
    85,784
    
    
    $
    87,653
 Note 6 Prepaid Expenses and Other Assets
  March 31, 2007
    
    
    March 31, 2006Prepaid royalties
    
    $
    12,313
    
    
    $
    10,060Other
    
    
    1,507
    
    
    
    1,213Total
    
    $
    13,820
    
    
    $
    11,273
 Note 7 Variable Interest Entity
 Consolidation of Variable Interest Entities Consolidated Financial Statements
 68




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##### Table of Contents



Investment
  Note 8 Inventories
  March 31, 2007
    
    
    March 31, 2006Finished products
    
    $
    30,749
    
    
    $
    34,154Consigned inventory
    
    
    3,790
    
    
    
    4,119Raw materials
    
    
    5,688
    
    
    
    5,351$
    40,227
    
    
    $
    43,624
  Note 9 Goodwill and Intangible Assets
 Goodwill
   Distribution
    
    
    Publishing
    
    
    Other
    
    
    ConsolidatedBalances as of March 31, 2006
    
    $
    
    
    
    $
    81,202
    
    
    $
    
    
    
    $
    81,202Goodwill resulting from an acquisition
    
    
    
    
    
    
    145
    
    
    
    
    
    
    
    145Earnout related to an acquisition
    
    
    
    
    
    
    350
    
    
    
    
    
    
    
    350Balances as of March 31, 2007
    
    $
    
    
    
    $
    81,697
    
    
    $
    
    
    
    $
    81,697
 69




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##### Table of Contents



As of March 31, 2007Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters
    
    $
    8,939
    
    
    $
    5,069
    
    
    $
    3,870License relationships
    
    
    20,078
    
    
    
    11,038
    
    
    
    9,040Domain name
    
    
    70
    
    
    
    8
    
    
    
    62Trademark (not amortized)
    
    
    1,568
    
    
    
    
    
    
    
    1,568$
    30,655
    
    
    $
    16,115
    
    
    $
    14,540
 As of March 31, 2006Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters
    
    $
    7,475
    
    
    $
    3,213
    
    
    $
    4,262License relationships
    
    
    20,078
    
    
    
    5,045
    
    
    
    15,033Trademark (not amortized)
    
    
    1,568
    
    
    
    
    
    
    
    1,568$
    29,121
    
    
    $
    8,258
    
    
    $
    20,863
   2008
    
    $
    5,4192009
    
    
    4,4172010
    
    
    2,1712011
    
    
    4252012
    
    
    237
 Debt issuance costs
  Note 10 Production Costs
  March 31,
    
    
    March 31,2007
    
    
    2006Production costs
    
    $
    9,572
    
    
    $
    5,653Less: accumulated amortization
    
    
    4,155
    
    
    
    1,877$
    5,417
    
    
    $
    3,776
  70




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##### Table of Contents



Note 11 Property and Equipment
  March 31,
    
    
    March 31,2007
    
    
    2006Land and buildings
    
    $
    1,623
    
    
    $
    1,623Furniture and fixtures
    
    
    1,111
    
    
    
    1,052Computer and office equipment
    
    
    6,425
    
    
    
    5,541Warehouse equipment
    
    
    9,103
    
    
    
    7,062Production equipment
    
    
    520
    
    
    
    257Leasehold improvements
    
    
    1,913
    
    
    
    1,843Construction in progress
    
    
    4,133
    
    
    
    1,269Total
    
    $
    24,828
    
    
    $
    18,647Less: accumulated depreciation and amortization
    
    
    10,786
    
    
    
    8,349Net property and equipment
    
    $
    14,042
    
    
    $
    10,298
 Note 12 License Fees
  March 31,
    
    
    March 31,2007
    
    
    2006License fees
    
    $
    28,297
    
    
    $
    18,681Less: accumulated amortization
    
    
    12,688
    
    
    
    5,334$
    15,609
    
    
    $
    13,347
  Note 13 Accrued Expenses
  March 31,
    
    
    March 31,2007
    
    
    2006Compensation and benefits
    
    $
    4,500
    
    
    $
    3,067Royalties
    
    
    4,431
    
    
    
    6,134Rebates
    
    
    2,091
    
    
    
    1,354Interest
    
    
    160
    
    
    
    1,751Other
    
    
    3,069
    
    
    
    4,340Total
    
    $
    14,251
    
    
    $
    16,646
 Note 14 Bank Financing and Debt
   71




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##### Table of Contents



March 31,
    
    
    March 31,2007
    
    
    2006Note payable
    
    $
    15,000
    
    
    $
    80,130Less: current portion
    
    
    150
    
    
    
    5,000Total longterm debt
    
    $
    14,850
    
    
    $
    75,130
  2008
    
    $
    1502009
    
    
    1502010
    
    
    1502011 and thereafter
    
    
    14,550Total
    
    $
    15,000
 Letters of Credit
  Note 15 Derivative Instruments
  72




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##### Table of Contents



Note 16 Income Taxes
  Fiscal Years ended March 31,2007
    
    
    2006
    
    
    2005CurrentFederal
    
    $
    3,658
    
    
    $
    241
    
    
    $
    3,306State
    
    
    698
    
    
    
    16
    
    
    
    459Deferred
    
    
    (1,471
    )
    
    
    (2,271
    )
    
    
    (4,771
    )Tax expense (benefit)
    
    $
    2,885
    
    
    $
    (2,014
    )
    
    $
    (1,006
    )
  Fiscal Years ended March 31,2007
    
    
    2006
    
    
    2005Expected federal income tax at statutory rate
    
    $
    2,361
    
    
    $
    (1,764
    )
    
    $
    3,114State income taxes, net of federal tax effect
    
    
    470
    
    
    
    (227
    )
    
    
    293Nondeductible compensation charge
    
    
    
    
    
    
    
    
    
    
    1,972Reversal of valuation allowance
    
    
    
    
    
    
    
    
    
    
    (7,496
    )Effect of variable interest entity
    
    
    
    
    
    
    
    
    
    
    755Write off of note to variable interest entity
    
    
    
    
    
    
    (850
    )
    
    
    Valuation allowance
    
    
    
    
    
    
    875
    
    
    
    Warrant expense
    
    
    85
    
    
    
    116
    
    
    
    Equity compensation
    
    
    100
    
    
    
    
    
    
    
    Other
    
    
    (131
    )
    
    
    (164
    )
    
    
    356Tax expense (benefit)
    
    $
    2,885
    
    
    $
    (2,014
    )
    
    $
    (1,006
    )
 Fiscal Years ended March 31,2007
    
    
    2006
    
    
    2005Expected federal income tax at statutory rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %State income taxes, net of federal tax effect
    
    
    6.8
    
    
    
    4.4
    
    
    
    3.2Nondeductible compensation charge
    
    
    
    
    
    
    
    
    
    
    21.5Reversal of valuation allowance
    
    
    
    
    
    
    
    
    
    
    (81.8
    )Effect of variable interest entity
    
    
    
    
    
    
    
    
    
    
    8.2Write off of note to variable interest entity
    
    
    
    
    
    
    16.4
    
    
    
    Valuation allowance
    
    
    
    
    
    
    (16.9
    )
    
    
    
 73




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##### Table of Contents



Fiscal Years ended March 31,2007
    
    
    2006
    
    
    2005Warrant expense
    
    
    1.2
    
    
    
    (2.2
    )
    
    
    Equity compensation
    
    
    1.4
    
    
    
    
    
    
    
    Other
    
    
    (1.9
    )
    
    
    3.1
    
    
    
    3.941.5
    %
    
    
    38.8
    %
    
    
    (11.0
    )%
  Fiscal Years ended March 31,2007
    
    
    2006Net deferred tax asset (liability)noncurrentIncentive based deferred compensation
    
    $
    2,420
    
    
    $
    2,028Stock based compensation
    
    
    147
    
    
    
    103Book/tax intangibles amortization
    
    
    (3,107
    )
    
    
    (3,261
    )Book/tax depreciation
    
    
    (225
    )
    
    
    (437
    )Capital loss carryforwards
    
    
    1,000
    
    
    
    1,000Other
    
    
    18
    
    
    
    49Subtotal deferred tax asset (liability)noncurrent
    
    
    253
    
    
    
    (518
    )Valuation allowance
    
    
    (260
    )
    
    
    (252
    )Total deferred tax asset (liability)noncurrent
    
    $
    (7
    )
    
    $
    (770
    )Net deferred tax asset (liability)currentCollectibility reserves
    
    $
    8,590
    
    
    $
    7,718Allowance for sales returns
    
    
    468
    
    
    
    473Reserve for sales discounts
    
    
    265
    
    
    
    419Accrued vacations
    
    
    400
    
    
    
    376Inventory  uniform capitalization
    
    
    257
    
    
    
    309Incentive based deferred compensation
    
    
    59
    
    
    
    111Other
    
    
    220
    
    
    
    172Subtotal deferred tax assetcurrent
    
    $
    10,259
    
    
    $
    9,578Valuation allowance
    
    
    (740
    )
    
    
    (748
    )Total deferred tax assetcurrent
    
    
    9,519
    
    
    
    8,830Total deferred tax asset
    
    $
    9,512
    
    
    $
    8,060
     Note 17 Shareholders Equity
   74




---



##### Table of Contents



Note 18 Private Placement
    Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock
 75




---



##### Table of Contents



Note 19 Share-Based Compensation
  Statement of Cash Flows Accounting for Stock-Based Compensation
 Accounting for Stock-Based Compensation  Transitional
Disclosure
  Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards
 76




---



##### Table of Contents



Equity Compensation Plans
       77




---



##### Table of Contents



Stock Options
  Fiscal year ended
    
    
    Fiscal year ended
    
    
    Fiscal year endedMarch 31, 2007
    
    
    March 31, 2006
    
    
    March 31, 2005Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageNumber of
    
    
    exercise
    
    
    Number of
    
    
    exercise
    
    
    Number of
    
    
    exerciseoptions
    
    
    price
    
    
    options
    
    
    price
    
    
    options
    
    
    priceOptions outstanding, beginning of period:
    
    
    3,341,100
    
    
    $
    7.17
    
    
    
    2,787,800
    
    
    $
    7.24
    
    
    
    2,907,200
    
    
    $
    3.41Granted
    
    
    842,000
    
    
    $
    4.79
    
    
    
    1,195,000
    
    
    $
    6.64
    
    
    
    917,500
    
    
    $
    15.25Exercised
    
    
    (301,200
    )
    
    $
    1.55
    
    
    
    (277,500
    )
    
    $
    3.76
    
    
    
    (724,700
    )
    
    $
    3.03Canceled
    
    
    (280,200
    )
    
    $
    9.32
    
    
    
    (364,200
    )
    
    $
    8.50
    
    
    
    (312,200
    )
    
    $
    5.11Options outstanding, end of period
    
    
    3,601,700
    
    
    $
    6.92
    
    
    
    3,341,100
    
    
    $
    7.17
    
    
    
    2,787,800
    
    
    $
    7.24Options exercisable, end of period
    
    
    2,634,933
    
    
    $
    7.86
    
    
    
    2,937,300
    
    
    $
    7.93
    
    
    
    741,900
    
    
    $
    3.70Shares available for future grant, end of
period
    
    
    461,000
    
    
    
    
    
    
    
    1,441,054
    
    
    
    
    
    
    
    771,854
  Options outstanding
    
    
    Options exercisableWeighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    averageRange of
    
    Number of
    
    
    Remaining

    
    exercise
    
    
    Number of
    
    
    exerciseexercise prices
    
    options
    
    
    life

    
    price
    
    
    options
    
    
    price$0.99 to $1.73
    
    
    562,800
    
    
    1.48 years
    
    $
    1.61
    
    
    
    452,900
    
    
    $
    1.60$2.00 to $4.71
    
    
    497,900
    
    
    7.87 years
    
    $
    4.07
    
    
    
    311,033
    
    
    $
    4.24$4.95 to $4.95
    
    
    657,000
    
    
    9.59 years
    
    $
    4.95
    
    
    
    
    
    
    $
    $5.25 to $6.09
    
    
    574,500
    
    
    4.86 years
    
    $
    5.87
    
    
    
    561,500
    
    
    $
    5.88$6.33 to $8.38
    
    
    673,000
    
    
    7.39 years
    
    $
    7.72
    
    
    
    673,000
    
    
    $
    7.72$9.60 to $17.39
    
    
    629,500
    
    
    3.56 years
    
    $
    15.96
    
    
    
    629,500
    
    
    $
    15.96$18.08 to $18.27
    
    
    7,000
    
    
    3.78 years
    
    $
    18.21
    
    
    
    7,000
    
    
    $
    18.213,601,700
    
    
    5.86 years
    
    $
    6.92
    
    
    
    2,634,933
    
    
    $
    7.86
      78




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##### Table of Contents



Restricted Stock
   WeightedWeighted
    
    
    averageaverage
    
    
    remaininggrant date
    
    
    contractualShares
    
    
    fair value
    
    
    termUnvested, March 31, 2006:
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    151,000
    
    
    $
    4.60
    
    
    
    1.59Vested
    
    
    (6,000
    )
    
    $
    4.29
    
    
    
    Forfeited
    
    
    (25,000
    )
    
    $
    4.29
    
    
    
    Unvested, March 31, 2007
    
    
    120,000
    
    
    $
    4.68
    
    
    
    1.59
    Restricted Stock Units
   79




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##### Table of Contents



Valuation and Expense Information Under SFAS 123R
  Fiscal YearEndedMarch 31,2007Expected life (in years)
    
    
    5.0Expected volatility
    
    
    69
    %Risk-free interest rate
    
    
    4.61
    %Expected dividend yield
    
    
    0.0
    %Weighted-average fair value of grants
    
    $
    2.91
   YearEndedMarch 31,2007General and administrative expenses
    
    $
    (910
    )Share-based compensation expense before income taxes
    
    
    (910
    )Tax benefit
    
    
    378Share-based compensation after income taxes
    
    
    (532
    )Effect on earnings (loss) per share:Basic
    
    $
    (.01
    )Diluted
    
    $
    (.01
    )
 Pro Forma Information Under SFAS 123 for Periods Prior to Fiscal 2007
  80




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##### Table of Contents



Fiscal year
    
    
    Fiscal yearended
    
    
    endedMarch 31,
    
    
    March 31,2006
    
    
    2005Net income (loss), as reported
    
    $
    (3,175
    )
    
    $
    10,166Deduct: Share-based compensation expense
determined under fair value based method
for all awards, net of related taxes
    
    
    (7,848
    )
    
    
    (936
    )Pro forma net income (loss)
    
    $
    (11,023
    )
    
    $
    9,230Basic earnings (loss) per share:As reported
    
    $
    (.11
    )
    
    $
    .38Pro forma
    
    $
    (.37
    )
    
    $
    .34Diluted earnings (loss) per share:As reported
    
    $
    (.11
    )
    
    $
    .35Pro forma
    
    $
    (.37
    )
    
    $
    .32
  Fiscal year
    
    Fiscal yearended
    
    endedMarch 31,
    
    March 31,2006
    
    2005Expected life (in years)
    
    
    5.0
    
    
    
    5.0Expected volatility
    
    
    67
    %
    
    
    71
    %Risk-free interest rate
    
    
    4.2
    %
    
    
    3.6
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Weighted-average fair value of grants
    
    $
    3.93
    
    
    $
    9.19
 Note 20 401(k) Plan
  Note 21 Commitments and Contingencies
 Leases
   2008
    
    $
    3,5992009
    
    
    3,7952010
    
    
    3,3202011
    
    
    2,5622012
    
    
    2,537Thereafter
    
    
    15,239$
    31,052
 81




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##### Table of Contents



Litigation
  Sybersound Records, Inc. v. BCI Eclipse, LLC, et al.
     Sybersound Records, Inc. v. Navarre Corporation, BCI Eclipse, LLC, et al.
    82




---



##### Table of Contents



Securities Litigation Lawsuits
   AVIVA Partners, Ltd. v. Navarre Corp., et al.   Vivian Oh v. Navarre Corp., et al.   Matthew Grabler v. Navarre Corp., et al.
 In re Navarre Corporation Securities
Litigation
     Shareholder Derivative Lawsuits
  Shannon Binns v. Charles Cheney, et al.   Karel Filip v. Charles Cheney, et al.   Jeffrey Evans v. Charles Cheney, et al.   Joan Brewster v. Charles Cheney, et al.
 83




---



##### Table of Contents



William Block v. Charles Cheney, et al.
     Note 22 Capital Leases
  March 31, 2007
    
    
    March 31, 2006Computer and office equipment
    
    $
    487
    
    
    $
    487Less: accumulated depreciation and amortization
    
    
    296
    
    
    
    166Net property and equipment
    
    $
    191
    
    
    $
    321
  Minimum LeaseCommitmentsYear ending March 31:2008
    
    $
    1322009
    
    
    772010
    
    
    602011
    
    
    8Total minimum lease payments
    
    $
    277Less: amounts representing interest at rates ranging from 9.6% to 31.6%
    
    
    55Present value of minimum capital lease payments
    
    $
    222Less: current installments
    
    
    102Obligations under capital lease, less current installments
    
    $
    120
 Note 23 Sale/Leaseback of Warehouse Facility
  84




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##### Table of Contents



Note 24 License and Distribution Agreement
  Note 25 Related Party Transactions
 Employment/Severance Agreements
     Stock Purchase Agreement
  85




---



##### Table of Contents



Employment Agreement  FUNimation
  Former Chief Executive Officer Investment in Mix & Burn
  Note 26 Major Customers
  Note 27 Business Segments
      86




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##### Table of Contents



Fiscal Year 2007
    
    Distribution
    
    Publishing
    
    Other
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    641,462
    
    
    $
    126,651
    
    
    $
    
    
    
    $
    (69,742
    )
    
    $
    698,371Income (loss) from operations
    
    
    7,212
    
    
    
    10,091
    
    
    
    
    
    
    
    
    
    
    
    17,303Net income (loss) before income taxes
    
    
    (3,574
    )
    
    
    10,518
    
    
    
    
    
    
    
    
    
    
    
    6,944Depreciation and amortization expense
    
    
    2,616
    
    
    
    8,342
    
    
    
    
    
    
    
    
    
    
    
    10,958Capital expenditures
    
    
    6,555
    
    
    
    498
    
    
    
    
    
    
    
    
    
    
    
    7,053Total assets
    
    
    235,623
    
    
    
    155,742
    
    
    
    
    
    
    
    (103,140
    )
    
    
    288,225
 Fiscal Year 2006
    
    Distribution
    
    Publishing
    
    Other
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    621,739
    
    
    $
    127,612
    
    
    $
    424
    
    
    $
    (63,649
    )
    
    $
    686,126Income (loss) from operations
    
    
    (8,588
    )
    
    
    12,862
    
    
    
    (1,590
    )
    
    
    
    
    
    
    2,684Net income (loss) before income taxes
    
    
    (16,185
    )
    
    
    12,755
    
    
    
    (1,759
    )
    
    
    
    
    
    
    (5,189
    )Depreciation and amortization expense
    
    
    2,242
    
    
    
    7,017
    
    
    
    
    
    
    
    
    
    
    
    9,259Capital expenditures
    
    
    2,477
    
    
    
    303
    
    
    
    119
    
    
    
    
    
    
    
    2,899Total assets
    
    
    269,774
    
    
    
    160,834
    
    
    
    
    
    
    
    (120,994
    )
    
    
    309,614
 Fiscal Year 2005
    
    Distribution
    
    Publishing
    
    Other
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    556,927
    
    
    $
    95,777
    
    
    $
    352
    
    
    $
    (56,441
    )
    
    $
    596,615Income (loss) from operations
    
    
    (2,172
    )
    
    
    14,006
    
    
    
    (2,123
    )
    
    
    
    
    
    
    9,711Net income (loss) before income taxes
    
    
    (2,199
    )
    
    
    13,579
    
    
    
    (2,220
    )
    
    
    
    
    
    
    9,160Depreciation and amortization expense
    
    
    1,827
    
    
    
    1,695
    
    
    
    
    
    
    
    
    
    
    
    3,522Capital expenditures
    
    
    8,214
    
    
    
    1,078
    
    
    
    83
    
    
    
    
    
    
    
    9,375Total assets
    
    
    176,932
    
    
    
    47,944
    
    
    
    536
    
    
    
    (29,520
    )
    
    
    195,892
 Note 28 Subsequent Events (Unaudited)
 Accounting for the Impairment of
Disposal of Long-Lived Assets
 Note 29 Quarterly Data  Seasonality (Unaudited)
   Quarter EndedJune 30
    
    
    September 30
    
    
    December 31
    
    
    March 31Fiscal Year 2007Net sales
    
    $
    146,339
    
    
    $
    173,149
    
    
    $
    210,248
    
    
    $
    168,635Gross profit
    
    
    25,280
    
    
    
    30,715
    
    
    
    35,266
    
    
    
    25,440Net income (loss)
    
    $
    634
    
    
    $
    1,612
    
    
    $
    4,051
    
    
    $
    (2,237
    )Net earnings (loss)
per share:Basic
    
    $
    0.02
    
    
    $
    0.05
    
    
    $
    .11
    
    
    $
    (0.06
    )Diluted
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    .11
    
    
    $
    (0.06
    )
 87




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##### Table of Contents



Quarter EndedJune 30
    
    
    September 30
    
    
    December 31
    
    
    March 31Fiscal Year 2006Net sales
    
    $
    141,288
    
    
    $
    158,130
    
    
    $
    214,842
    
    
    $
    171,866Gross profit
    
    
    24,831
    
    
    
    28,439
    
    
    
    28,227
    
    
    
    25,596Net income (loss)
    
    $
    1,906
    
    
    $
    (75
    )
    
    $
    (6,068
    )
    
    $
    1,062Net earnings (loss) per share:Basic
    
    $
    0.07
    
    
    $
    0.00
    
    
    $
    (0.20
    )
    
    $
    0.03Diluted
    
    $
    0.06
    
    
    $
    0.00
    
    
    $
    (0.20
    )
    
    $
    0.03
 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, 2007:Deducted from asset accounts:Allowance for vendor receivables
    
    $
    60
    
    
    $
    1,435
    
    
    $
    (722
    )
    
    $
    773Allowance for doubtful accounts
    
    
    1,749
    
    
    
    3,655
    
    
    
    (4,210
    )
    
    
    1,194Allowance for sales returns
    
    
    12,801
    
    
    
    325
    
    
    
    (650
    )
    
    
    12,476Allowance for MDF and sales discounts
    
    
    4,736
    
    
    
    20,533
    
    
    
    (20,004
    )
    
    
    5,265Total
    
    $
    19,346
    
    
    $
    25,948
    
    
    $
    (25,586
    )
    
    $
    19,708Year ended March 31, 2006:Deducted from asset accounts:Allowance for vendor receivables
    
    $
    6,092
    
    
    $
    8,912
    
    
    $
    (14,944
    )
    
    $
    60Allowance for doubtful accounts
    
    
    1,375
    
    
    
    12,111
    
    
    
    (11,737
    )
    
    
    1,749Allowance for sales returns
    
    
    4,190
    
    
    
    (207
    )
    
    
    8,818
    (1)
    
    
    12,801Allowance for MDF and sales discounts
    
    
    2,158
    
    
    
    24,537
    
    
    
    (21,959
    )
    
    
    4,736Total
    
    $
    13,815
    
    
    $
    45,353
    
    
    $
    (39,822
    )
    
    $
    19,346Year ended March 31, 2005:Deducted from asset accounts:Allowance for vendor receivables
    
    $
    4,808
    
    
    $
    4,287
    
    
    $
    (3,003
    )
    
    $
    6,092Allowance for doubtful accounts
    
    
    1,394
    
    
    
    423
    
    
    
    (442
    )
    
    
    1,375Allowance for sales returns
    
    
    3,706
    
    
    
    1,066
    
    
    
    (582
    )
    
    
    4,190Allowance for MDF and sales discounts
    
    
    1,251
    
    
    
    22,277
    
    
    
    (21,370
    )
    
    
    2,158Total
    
    $
    11,159
    
    
    $
    28,053
    
    
    $
    (25,397
    )
    
    $
    13,815
 
 (1)
    
    Additional reserves associated with the acquisition of FUNimation. 88