##### 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, 2006
 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 registeredNone
    
    None
 Common Stock, No par value
 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
    
    
    11Item 1B.
    
    Unresolved Staff Comments
    
    
    21Item 2.
    
    Properties
    
    
    21Item 3.
    
    Legal Proceedings
    
    
    21Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    21PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities
    
    
    22Item 6.
    
    Selected Financial Data
    
    
    23Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 8.
    
    Financial Statements and Supplementary Data
    
    
    36Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    36Item 9A.
    
    Controls and Procedures
    
    
    36Item 9B.
    
    Other Information
    
    
    37PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    37Item 11.
    
    Executive Compensation
    
    
    37Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    37Item 13.
    
    Certain Relationships and Related Transactions
    
    
    37Item 14.
    
    Principal Accountant Fees and Services
    
    
    37PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    38Signatures
    
    
    44Addendum to Licensing and Distribution AgreementsConsent of Independent Registered Public Accounting Firm - Grant Thornton LLPConsent of Independent Registered Public Accounting Firm - Ernst & Young LLPCertification of the CEO Pursuant to Section 302Certification of the CFO Pursuant to Section 302Certification of the CEO Pursuant to Section 906Certification of the CFO Pursuant to Section 906
  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 Hoyle PC Gaming products He-man and the Masters of the Universe anim Dragon Ball Z, Fullmetal Alchemist, Code Lyoko, Samari Seven, Burst Angel, Noddy, Yu
Yu Hakusho Degrassi.
 Other
 Strategy
  
    
    Acquisitions of Attractive Content.We seek to continue to expand our publishing business
through the acquisition or licensing of well-established titles or other attractive content.
We believe these acquisitions and/or licenses will help position us to increase our net
sales in our publishing business, which historically has had higher margins than our
distribution business, and will allow us to distribute additional home entertainment and
multimedia content through our distribution business. In addition,
 3




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we believe that by allowing the management of these publishing companies to focus on content
licensing and marketing rather than on distribution operations, they will be able to devote
more time and greater resources to their core competency, publishing. We believe that
leveraging the core assets and strengths of our distribution business will provide broader
retail penetration, distribution expertise and other services for our content and increase
sales of our publishing products. We may also seek selective acquisitions of distribution
businesses.
 
    
    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.
    
    Integrating Our Technology and Systems with Retailers.We seek to enhance the link in the
supply chain between us and our publishers and retail customers through the integration of
our respective information and technology systems, including inventory management tools,
replenishment systems and point-of-sale information. We believe this integration will lead
to better in-stock levels of product, improved on-time arrivals of product to the customer,
enhanced inventory management and lower return rates for our customers, thereby
strengthening customer relationships.
    
    Providing Value-Added Services.We believe that due to increasing retailer logistic needs
and demands, including demands for new technology standards such as GTIN® (global trade item
number), RFID (radio frequency identification devices) and VMI (vendor managed inventory),
many publishers will be required to decide whether to spend additional resources to update
their distribution capabilities or to select a distributor such as us that intends to offer
such services. We believe that implementing and offering these and other technologies should
position us well to capture additional business from existing and new publishers.
  Competitive Strengths
  
    
    Value-Added Services.We offer a wide range of distribution services and procurement
solutions intended to capitalize on our broad understanding of the products that we
distribute, the procurement process and the supply chain, as well as our logistics expertise
and systems capabilities. We believe that our advanced distribution infrastructure enables
us to provide customized procurement programs for our retail customers at a lower overall
cost than many of our competitors. In addition, we believe that our information technology
systems provide cost-effective interfacing with our customers information technology
systems, supporting integration of the procurement process. We believe that our focus on
providing customer-specific and cost-effective solutions is a key benefit that we provide to
our retail customers.
    
    Broad Product Offering.We provide our retail customers with a broad selection of home
entertainment and multimedia products that we believe allows us to better serve their home
entertainment and multimedia product requirements. In addition, we regularly survey the
markets we serve for new products with significant retail potential, that come from
publishers we currently have relationships with as well as those we have not distributed for
in the past.
    
    Established Content in our Publishing Business.We currently license a number of
well-known home entertainment and multimedia titles. Encore 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, our BCI
subsidiary 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 our FUNimation business we also
license and distribute a portfolio of established animeand childrens entertainment titles
in the United States, including Dragon Ball Z, Fullmetal Alchemist, Code Lyoko, Samari
Seven, Burst Angel, Noddy, Yu Yu Hakusho and Degrassi.
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
    
    Established Relationships with Publishers and Retailers.Since our founding in 1983, we
have established distribution relationships with major retailers including Best Buy,
Wal-Mart/Sams Club and CompUSA, and we currently distribute to over 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 that these relationships give us a
competitive advantage in the markets in which we operate and provide us with attractive
channels to distribute current and future products offered by our publishing business.
    
    Efficient Operations and Operating Leverage.We believe that our competitive position is
enhanced by our efficient operations, which are based on extensive use of automation and
technology in our distribution facility; centralization of functions such as 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 that we
distribute.
 Distribution Markets
 PC Software
    Video Games Software and Accessories
   Major Label Music
  5




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Independent Label Music
   Major Studio Home Video
   Customers
 www.navarre.com
  Navarres Distribution Business Model
 Vendor Relationships
   Retail Services
  6




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Warehouse Systems
  E-Commerce
 www.navarre.com
 Publishing Markets
 Hoyle anime
 Encore
 Print Shop, Print Master, PC Tools Spyware Doctor Hoyle PC Gaming
products. Hoyle Hoyle Card Games
   Hoyle
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##### Table of Contents



BCI
  He-Man
and the Masters of the Universe, Rides Overhaulin PRIDE
Fighting Championships,
 FUNimation
 anime Dragon Ball Z, Fullmetal Alchemist, Code
Lyoko, Samurai Seven, Burst Angel, Noddy, Yu Yu Hakusho Degrassi
 anime anime anime
 Broadcast
 Home Video
Distribution
 Licensing and Merchandising
 Retail Sales and Web Sites anime Z-Store,
 Competition
  8




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
    
    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.
   Backlog
  Environmental Matters
  Employees
  Capital Resources  Financing
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Available Information
 www.navarre.com
 Executive Officers of the Company
  Name
    
    Age
    
    PositionEric H. Paulson
    
    61
    
    Chairman of the Board and Chief Executive OfficerCary L. Deacon
    
    54
    
    President and Chief Operating OfficerJ. Reid Porter
    
    57
    
    Executive Vice President, Chief Financial OfficerBrian M.T. Burke
    
    35
    
    President of Navarre Distribution ServicesMichael A. Bell
    
    41
    
    Chief Executive Officer of EncoreGen Fukunaga
    
    45
    
    Chief Executive Officer and President of FUNimationEdward D. Goetz
    
    62
    
    President of BCI EclipseJohn Turner
    
    52
    
    Senior Vice President of Global LogisticsRyan F. Urness
    
    34
    
    General Counsel and Secretary
 Eric H. Paulson
 Cary L. Deacon
 J. Reid Porter
 Brian M. T. Burke
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Michael A. Bell
 Gen Fukunaga
 Edward D. Goetz
 John Turner
 Ryan F. Urness
 
 Item 1A  Risk Factors
 FORWARD-LOOKING STATEMENTS / RISK FACTORS
    11




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Risks Relating To Our Business And Industry
 We derive a substantial portion of our total net sales from a small group of customers. A reduction
in sales to any of these customers could have a material adverse effect on our net sales and
profitability.
  The loss of a significant vendor or manufacturer or a decline in the popularity of its products
could negatively affect our product offerings and reduce our net sales and profitability.
   The loss of our founder could affect the depth, quality and effectiveness of our management team.
In addition, if we fail to attract and retain qualified personnel, the depth, quality and
effectiveness of our management team and employees could be negatively affected.
   We may not be able to sustain the recent growth in our publishing segment.
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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 pre-recorded music, DVD and PC software titles released during the quarter;
    
    product marketing and promotional activities;
    
    the opening and closing of retail stores by our major customers;
    
    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.
 Pending litigation or regulatory inquiry may
subject us to significant litigation costs, judgments or
penalties and could divert management attention.
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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
 FUNimations revenues are dependent on consumer preferences and demand.
 anime
 
    
    any of FUNimations current properties, product concepts or programming will continue to
be popular for any significant period of time;
    
    any new properties, product concepts or programming FUNimation represents or produces
will achieve an adequate degree of popularity; or
    
    any propertys life cycle will be sufficient to permit FUNimation to profitably recover
advance payments, guarantees, development, marketing, royalties and other costs.
  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.
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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.
   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.
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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
  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.
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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.
  Interruption of our business or catastrophic loss at any of our facilities could lead to a
curtailment or shutdown of our business.
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Future terrorist or military actions could result in disruption to our operations or loss of
assets, in certain markets or globally.
  Legislative actions, higher director and officer insurance costs and potential new accounting
pronouncements are likely to cause our general and administrative expenses to increase and impact
our future financial condition and results of operations.
   Any material weakness or significant deficiency in our internal controls may adversely affect our
ability to report our financial results on a timely and accurate basis.
  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;
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
    
    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.
  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.
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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.
   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.
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Other Risks
   
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
 Distribution
  Publishing
   
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  21




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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 2006
    
    First
    
    $
    9.21
    
    
    $
    6.73Second
    
    
    8.40
    
    
    
    5.65Third
    
    
    6.61
    
    
    
    3.51Fourth
    
    
    6.53
    
    
    
    3.45Fiscal 2005
    
    First
    
    $
    14.39
    
    
    $
    5.84Second
    
    
    16.37
    
    
    
    12.65Third
    
    
    18.13
    
    
    
    14.27Fourth
    
    
    19.02
    
    
    
    6.68
  Dividend Policy
  Private Placement
  Additional
Sales of Unregistered Securities
  Equity Compensation Plan Information
      22




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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
securityholders
    
    
    3,341,100
    
    
    $
    7.17
    
    
    
    1,441,054Equity compensation
plans not approved
by securityholders
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-Total
    
    
    3,341,100
    
    
    $
    7.17
    
    
    
    1,441,054
 
 Item 6. Selected Financial Data
   Fiscal Years ended March 31,2006(1)
    
    2005
    
    2004
    
    2003
    
    2002Statement of operations data:Net sales
    
    $
    686,126
    
    
    $
    596,615
    
    
    $
    470,877
    
    
    $
    356,816
    
    
    $
    303,817Gross profit, exclusive of depreciation and amortization
    
    
    107,093
    
    
    
    91,352
    
    
    
    58,021
    
    
    
    45,475
    
    
    
    32,893Income from operations
    
    
    2,684
    
    
    
    9,711
    
    
    
    7,067
    
    
    
    3,597
    
    
    
    521Interest expense
    
    
    (11,217
    )
    
    
    (783
    )
    
    
    (378
    )
    
    
    (194
    )
    
    
    (173
    )Other income (expense)
    
    
    3,344
    
    
    
    232
    
    
    
    (458
    )
    
    
    447
    
    
    
    884Net income (loss) before tax
    
    
    (5,189
    )
    
    
    9,160
    
    
    
    6,231
    
    
    
    3,850
    
    
    
    2,712Income tax benefit
    
    
    2,014
    
    
    
    1,006
    
    
    
    583
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (3,175
    )
    
    $
    10,166
    
    
    $
    6,814
    
    
    $
    3,913
    
    
    $
    2,712Earnings (loss) per common share:Basic
    
    $
    (.11
    )
    
    $
    .38
    
    
    $
    .30
    
    
    $
    .18
    
    
    $
    .12Diluted
    
    $
    (.11
    )
    
    $
    .35
    
    
    $
    .28
    
    
    $
    .18
    
    
    $
    .12Weighted average shares outstanding:Basic
    
    
    29,898
    
    
    
    26,830
    
    
    
    22,780
    
    
    
    21,616
    
    
    
    22,553Diluted
    
    
    29,898
    
    
    
    28,782
    
    
    
    24,112
    
    
    
    21,841
    
    
    
    22,575Balance
sheet data:(2)Total assets
    
    $
    309,614
    
    
    $
    195,892
    
    
    $
    154,579
    
    
    $
    109,665
    
    
    $
    87,368Short-term borrowings
    
    
    5,115
    
    
    
    334
    
    
    
    651
    
    
    
    805
    
    
    
    Long-term debt
    
    
    75,352
    
    
    
    237
    
    
    
    
    
    
    
    268
    
    
    
    Temporary
equity  Unregistered common stock
    
    
    16,634
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity
    
    
    88,906
    
    
    
    77,284
    
    
    
    53,078
    
    
    
    28,263
    
    
    
    24,350
 
 (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
   23




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Distribution.
 Publishing Print Shop, Print
Master, PC Tools Spyware Doctor, Hoyle PC
Gaming products anime Dragon Ball
Z, Fullmetal Alchemist, Code Lyoko, Samari Seven, Burst Angel, Noddy, Yu Yu Hakusho Degrassi
 Other
 Overall Summary of Fiscal 2006 Financial Results
   Working Capital and Debt
  2006 Private Placement
  FUNimation Acquisition
 anime
 24




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Critical Accounting Policies and Estimates
   Revenue Recognition
    Accounting by Producers or Distributors of
Films.
 Production
Costs and License Fees
    SOP 00-2
 25




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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
 Inventory Valuation
  Income Taxes
  Contingencies and Litigation
  26




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Reconciliation of GAAP Net Sales to Net Sales Before Inter-company Eliminations
  Year Ended(Unaudited)
    
    March 31,
    
    
    March 31,
    
    
    March 31,(In thousands)
    
    2006
    
    
    2005
    
    
    2004Net salesDistribution
    
    $
    621,739
    
    
    $
    556,927
    
    
    $
    444,743Publishing
    
    
    127,612
    
    
    
    95,777
    
    
    
    46,177Other
    
    
    424
    
    
    
    352
    
    
    
    Net sales before inter-company eliminations
    
    
    749,775
    
    
    
    653,056
    
    
    
    490,920Inter-company eliminations
    
    
    (63,649
    )
    
    
    (56,441
    )
    
    
    (20,043
    )Net sales as reported
    
    $
    686,126
    
    
    $
    596,615
    
    
    $
    470,877
 Results of Operations
  Fiscal Years Ended March 31,2006
    
    
    2005
    
    
    2004Net sales:Distribution
    
    
    90.6
    %
    
    
    93.3
    %
    
    
    94.4
    %Publishing
    
    
    18.6
    
    
    
    16.1
    
    
    
    9.8Other
    
    
    0.1
    
    
    
    0.1
    
    
    
    Elimination of sales
    
    
    (9.3
    )
    
    
    (9.5
    )
    
    
    (4.2
    )Total net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales  exclusive of depreciation and amortization
    
    
    84.4
    
    
    
    84.7
    
    
    
    87.7Gross profit
    
    
    15.6
    
    
    
    15.3
    
    
    
    12.3Selling and marketing
    
    
    4.3
    
    
    
    3.6
    
    
    
    3.6Distribution and warehousing
    
    
    1.5
    
    
    
    1.5
    
    
    
    1.3General and administrative
    
    
    6.4
    
    
    
    8.0
    
    
    
    5.5Bad debt
    
    
    1.7
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    1.3
    
    
    
    0.6
    
    
    
    0.4Total operating expenses
    
    
    15.2
    
    
    
    13.7
    
    
    
    10.8Income from operations
    
    
    0.4
    
    
    
    1.6
    
    
    
    1.5Interest expense
    
    
    (1.6
    )
    
    
    (0.1
    )
    
    
    (0.1
    )Interest income
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Debt extinguishment
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Deconsolidation of variable interest entity
    
    
    0.3
    
    
    
    
    
    
    
    Warrant expense
    
    
    (0.1
    )
    
    
    
    
    
    
    Other income (expense), net
    
    
    0.1
    
    
    
    
    
    
    
    Net (loss) income, before tax
    
    
    (0.8
    )
    
    
    1.6
    
    
    
    1.3Tax benefit
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.1Net (loss) income
    
    
    (0.5
    )%
    
    
    1.7
    %
    
    
    1.4
    %
 27




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##### Table of Contents



Distribution Segment
  Fiscal 2006 Results Compared With Fiscal 2005
 Net Sales
  Gross Profit
  Operating Expenses
   28




---



##### Table of Contents



Fiscal 2005 Results Compared With Fiscal 2004
 Net Sales
  Gross Profit
  Operating Expenses
   29




---



##### Table of Contents



Publishing Segment
  Fiscal 2006 Results Compared With Fiscal 2005
 He-Man and the Masters of the Universe
  He-Man and the Masters of the Universe
  30




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##### Table of Contents



Fiscal 2005 Results Compared With Fiscal 2004
     Other Segment
  Fiscal 2006 Results Compared With Fiscal 2005
  Fiscal 2005 Results Compared With Fiscal 2004
  Consolidated Other Income and Expense for All Periods
  31




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##### Table of Contents



Consolidated Income Tax 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
    32




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##### Table of Contents



Investing Activities
     Financing Activities
   Capital Resources
   33




---



##### Table of Contents



Liquidity
      34




---



##### Table of Contents



Contractual Obligations
  Lessthan 1
    
    
    1  3
    
    
    4  5
    
    
    More than 5Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases
    
    $
    27,880
    
    
    $
    2,941
    
    
    $
    5,743
    
    
    $
    4,448
    
    
    $
    14,748Capital leases
    
    
    438
    
    
    
    161
    
    
    
    209
    
    
    
    68
    
    
    
    Note payable
    
    
    80,130
    
    
    
    5,000
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    55,130License and distribution agreement
    
    
    19,009
    
    
    
    14,960
    
    
    
    4,049
    
    
    
    
    
    
    
    Total
    
    $
    127,457
    
    
    $
    23,062
    
    
    $
    20,001
    
    
    $
    14,516
    
    
    $
    69,878
 
 Item 7a  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Market Risk.
 Interest Rate Risk.
 Foreign Currency Risk
 35




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
  Reports of Independent Registered Public Accounting Firms
    
    45Consolidated Balance Sheets at March 31, 2006 and 2005
    
    48Consolidated Statements of Operations for the years ended March 31, 2006, 2005 and 2004
    
    49Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss)
for the years ended
March 31, 2006, 2005 and 2004
    
    50Consolidated Statements of Cash Flows for the years ended March 31, 2006, 2005 and 2004
    
    51Notes to Consolidated Financial Statements
    
    53Valuation and Qualifying Accounts Schedule for the years ended March 31, 2006, 2005 and 2004
    
    79
  
 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
    36




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors and Executive Officers of the Registrant
      
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  
 Item 13. Certain Relationships and Related Transactions
  
 Item 14. Principal Accountant Fees and Services
  37




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statements Schedules
  (1)
    
    Financial Statements. Our following consolidated financial statements and the
Reports of Independent Registered Public Accounting Firms thereon are set forth at the end
of this document:
 (i)
    
    Reports of Independent Registered Public Accounting Firms.(ii)
    
    Consolidated Balance Sheets as of March 31, 2006 and 2005 .(iii)
    
    Consolidated Statements of Operations for the years ended March 31, 2006, 2005 and
2004 .(iv)
    
    Consolidated Statements of Shareholders Equity and
Comprehensive Income (Loss) for the
years ended March 31, 2006, 2005 and 2004 .(v)
    
    Consolidated Statements of Cash Flows for the years ended March 31, 2006, 2005 and
2004.(vi)
    
    Notes to Consolidated Financial Statements
 (2)
    
    Financial Statement Schedules
 (i)
    
    Schedule II  Valuation and Qualifying Accounts and Reserves
 Schedules other than those listed above have been omitted because they are inapplicable or the
required information is either immaterial or shown in the Consolidated Financial Statements or
the notes thereto.
 (3)
    
    Exhibits
 ItemNo.
    
    Description2.1
    
    Asset Purchase Agreement dated November 3, 2003 between BCI Eclipse Company, LLC and the Company
(incorporated by reference to Exhibit 2.1 to the Companys Form 10-Q for the quarter ended September
30, 2003 (File No. 0-22982)).3.1
    
    Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Companys Annual Report
on Form 10-K for the year ended March 31, 2000 (File No. 0-22982)).3.2
    
    Bylaws of the Company (incorporated by reference to Exhibit 4.2
to the Companys Registration
Statement on Form S-3 (File No. 333-111733)).3.3
    
    Certificate of Rights and Preferences of Series B Convertible Preferred Stock (incorporated by
reference to Exhibit 2 to the Companys Form 8-K dated August 20, 1999 (File No. 0-22982)).3.4
    
    Form of Warrant Agreement (incorporated by reference to Exhibit 10.3 to the Companys Form 8-K dated
December 16, 2003 (File No. 0-22982)).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)).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)).10.1 *
    
    Employment Agreement dated November 1, 2001 between the Company and Eric H. Paulson (incorporated by
reference to Exhibit 10.1 to the Companys Form 10-Q for the quarter ended December 31, 2001 (File
No. 0-22982)).10.2 *
    
    Amendment to Employment Agreement between the Company and Eric H. Paulson (incorporated by reference
to Exhibit 10.1.1 to the Companys Form 10-Q for the quarter ended December 31, 2003 (File No.
0-22982)).10.3 *
    
    Employment Agreement dated January 2, 2002 between the Company and Charles E. Cheney (incorporated
by reference to Exhibit 10.2 to the Companys Annual Report on Form 10-K for the year ended March
31, 2002 (File No. 0-22982)).10.4 *
    
    Employment Agreement between Encore Software, Inc. and Michael Bell (incorporated by reference to
Exhibit 10.3 to the Companys Annual Report on Form 10-K for the year ended March 31, 2003 (File No.
0-22982)).
 38




---



##### Table of Contents



ItemNo.
    
    Description10.5 *
    
    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)).10.17
    
    Credit Agreement dated October 3, 2001 between General Electric Capital Corporation and the Company
(incorporated by reference to Exhibit 10.1 to the Companys Form 10-Q for the quarter ended
September 30, 2001 (File No. 0-22982)).10.18
    
    Amendment No. 1 and Limited Waiver with Respect to Credit Agreement dated March 4, 2002
(incorporated by reference to Exhibit 10.8.1 to the Companys Annual Report on Form 10-K for the
year ended March 31, 2002 (File No. 0-22982)).10.19
    
    Amendment No. 2 to Credit Agreement dated August 1, 2002 (incorporated by reference to Exhibit 10.1
to the Companys Form 10-Q for the quarter ended September 30, 2002 (File No. 0-22982)).10.20
    
    Amendment No. 3 to Credit Agreement dated March 30, 2003 (incorporated by reference to Exhibit
10.12.3 to the Companys Annual Report on Form 10-K for the year ended March 31, 2003 (File No.
0-22982)).10.21
    
    Amendment No. 4 to Credit Agreement dated June 24, 2003 (incorporated by reference to Exhibit
10.12.4 to the Companys Annual Report on Form 10-K for the year ended March 31, 2003 (File No.
0-22982)).10.22
    
    Amendment No. 5 to Credit Agreement dated October 23, 2003 (incorporated by reference to Exhibit
10.12.5 to the Companys Form 10-Q for the quarter ended September 30, 2003 (File No. 0-22982)).10.23
    
    Amendment No. 6 to Credit Agreement dated November 5, 2003 (incorporated by reference to Exhibit
10.12.6 to the Companys Form 10-Q for the quarter ended September 30, 2003 (File No. 0-22982)).10.24
    
    Separation Agreement dated as of March 1, 1999 between the Company and NetRadio Corporation
(incorporated by
 39




---



##### Table of Contents



ItemNo.
    
    Descriptionreference to Exhibit 10.16 to NetRadio Corporations Form S-1/A Registration Statement (File No. 333-73261)).10.25
    
    Term Note dated October 14, 1999, between the Company and NetRadio Corporation (incorporated by
reference to Exhibit 10.11 to the Companys Annual Report on Form 10-K for the year ended March 31,
2000 (File No. 0-22982)).10.26
    
    Amendment No. 1 to Term Note dated March 26, 2001, between the Company and NetRadio Corporation
(incorporated by reference to Exhibit 10.1 to NetRadio Corporations Form 10-Q for the quarter ended
March 31, 2001 (File No. 0-27575)).10.27
    
    Amendment No. 2 to Term Note dated March 30, 2001, between the Company and NetRadio Corporation
(incorporated by reference to Exhibit 10.2 to NetRadio Corporations Form 10-Q for the quarter ended
March 31, 2001 (File No. 0-27575)).10.28
    
    Form of Warrant dated May 1, 1998 issued to investors in connection with the Companys May 1, 1998
private placement of Class A Convertible Preferred Stock (incorporated by reference to Exhibit 4 to
the Companys Form 8-K dated May 1, 1998 (File No. 0-22982)).10.29
    
    Amended and Restated Asset Purchase Agreement effective as of July 10, 2002 by and between the
Company and Encore Software, Inc. (incorporated by reference to Exhibit 10.1 to the Companys Form
8-K dated August 14, 2002 (File No. 0-22982)).10.30
    
    Amendment No. 1 to Asset Purchase Agreement effective as of July 31, 2002, by and among the Company,
Encore Software, Inc. and Encore Acquisition Corporation (incorporated by reference to Exhibit 10.2
to the Companys Form 8-K dated August 14, 2002 (File No. 0-22982)).10.31
    
    Agreement of Reciprocal Easements, Covenants, Conditions and Restrictions dated June 16, 2003
(incorporated by reference to Exhibit 10.9.3 to the Companys Form 10-Q for the quarter ended June
30, 2003 (File No. 0-22982)).10.32
    
    Incentive Stock Option Agreement dated September 6, 2002 between Cary Deacon and the Company
(incorporated by reference to Exhibit 10.17 to the Companys Form 10-Q for the quarter ended
September 30, 2003 (File No. 0-22982)).10.33
    
    Addendum to Incentive Stock Option Agreement dated November 13, 2003 (incorporated by reference to
Exhibit 10.17.1 to the Companys Form 10-Q for the quarter ended September 30, 2003 (File No.
0-22982)).10.34
    
    Form of Securities Purchase Agreement dated as of December 15, 2003 among the Corporation and the
various purchasers (incorporated by reference to Exhibit 10.1 to the Companys Form 8-K dated
December 16, 2003 (File No. 0-22982)).10.35
    
    Form of Registration Rights Agreement dated as of December 15, 2003 among the Corporation and the
various purchasers (incorporated by reference to Exhibit 10.2 to the Companys Form 8-K dated
December 16, 2003 (File No. 0-22982)).10.36
    
    Form of Separation Agreement with Charles E. Cheney dated April 30, 2004 (incorporated by reference
to Exhibit 10.41 to the Companys Form 10-K for the year ended March 31, 2004 (File No. 0-22982)).10.37
    
    Form of Assignment of Lease between BCI Eclipse LLC and BCI Eclipse Company, LLC dated November 3,
2003 (incorporated by reference to Exhibit 10.42 to the Companys Form 10-K for the year ended March
31, 2004 (File No. 0-22982)).10.38
    
    Form of Amendment No. 7 to Credit Agreement dated January 26, 2004 (incorporated by reference to
Exhibit 10.43 to the Companys Form 10-K for the year ended March 31, 2004 (File No. 0-22982)).10.39
    
    Form of Amendment No. 8 to Credit Agreement dated March 9, 2004 (incorporated by reference to
Exhibit 10.44 to the Companys Form 10-K for the year ended March 31, 2004 (File No. 0-22982)).10.40
    
    Form of Amendment No. 9 to Credit Agreement dated March 30, 2004 (incorporated by reference to
Exhibit 10.45 to the Companys Form 10-K for the year ended March 31, 2004 (File No. 0-22982)).10.41
    
    Form of Amended and Restated Credit Agreement with General Electric Capital Corporation dated June
18, 2004 (incorporated by reference to Exhibit 10.46 to the Companys Form 10-K for the year ended
March 31, 2004 (File No. 0-22982)).10.42
    
    Form of Lease Agreement between the Company and NL Ventures IV New Hope, L.P. dated May 27, 2004
(incorporated by reference to Exhibit 10.47 to the Companys Form 10-K for the year ended March 31,
2004 (File No. 0-22982)).10.43
    
    Form of Third Amendment to Office/Warehouse Lease between Cambridge Apartments, Inc. and the Company
dated February 23, 2004 (incorporated by reference to Exhibit 10.48 to the Companys Form 10-K for
the year ended March 31, 2004 (File No. 0-22982)).
 40




---



##### Table of Contents



ItemNo.
    
    Description10.44
    
    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)).10.53
    
    Form of License and Distribution Agreement (Manufacturing Rights) (2004-2005) between Riverdeep Inc.
and Encore Software, Inc. dated as of March 29, 2004 (incorporated by reference to Exhibit 10.1 to
the Companys Form 10-Q/A for the quarter ended September 30, 2004 (File No. 0-22982)).10.54
    
    Form of License and Distribution Agreement (Manufacturing Rights) (2005-2007) between Riverdeep Inc.
and Encore Software, Inc. dated as of March 29, 2004 (incorporated by reference to Exhibit 10.2 to
the Companys Form 10-Q/A for the quarter ended September 30, 2004 (File No. 0-22982)).10.55
    
    Form of Addendum #1 to Licensing and Distribution Agreements (2004-2005 and 2005-2007) between
Riverdeep, Inc. and Encore Software, Inc. dated as of April 13, 2004 (incorporated by reference to
Exhibit 10.3 to the Companys Form 10-Q/A for the quarter ended September 30, 2004 (File No.
0-22982)).10.56
    
    Form of Addendum #2 to Licensing and Distribution agreements (2004-2005 and 2005-2007) between
Riverdeep, Inc. and Encore Software, Inc. dated October 2004 (incorporated by reference to Exhibit
10.4 to the Companys Form 10-Q/A for the quarter ended September 30, 2004 (File No. 0-22982)).10.57 *
    
    Navarre Corporation 2004 Stock Plan (incorporated by reference to Exhibit D to the Companys Proxy
Statement filed July 27, 2004 (File No. 0-22982)).10.58*
    
    Form of 2004 Stock Plan Incentive Stock Option Agreement.10.59*
    
    Form of 2004 Stock Plan Non-Employee Director Stock Option Agreement.10.60
    
    Form of Senior Debt Indenture (incorporated by reference to Exhibit 4(a) to the Companys
Registration Statement on Form S-3 filed September 28, 2004 (File No. 333-119260)).10.61
    
    Form of Senior Debt Indenture (incorporated by reference to Exhibit 4(c) to the Companys
Registration Statement on Form S-3 filed September 28, 2004 (File No. 333-119260)).10.62
    
    FUNimation Partnership Interest Purchase Agreement, dated January 10, 2005 (incorporated by
reference to Exhibit 10.1 to the Companys Form 8-K filed January 14, 2005 (File No. 0-22982)).
 41




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##### Table of Contents



ItemNo.
    
    Description10.63
    
    Form of Assignment and Assumption Agreement (incorporated by reference to Exhibit 10.1(a) to the
Companys Form 8-K filed January 14, 2005 (File No. 0-22982)).10.64*
    
    Form of Gen Fukanaga Employment Agreement (incorporated by reference to Exhibit 10.1(b) to the
Companys Form 8-K filed January 14, 2005 (File No. 0-22982)).10.65
    
    Form of Escrow Agreement (incorporated by reference to Exhibit 10.1(c) to the Companys Form 8-K
filed January 14, 2005 (File No. 0-22982)).10.66
    
    Form of Non-Competition Agreement (incorporated by reference to Exhibit 10.1(d) to the Companys
Form 8-K filed January 14, 2005 (File No. 0-22982)).10.67
    
    Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.1(e) to the Companys
Form 8-K filed January 14, 2005 (File No. 0-22982)).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 reference to Exhibit 10.1 to the Companys Form 8-K filed March 17, 2005 (File No.
0-22982)).10.74
    
    Stock Purchase Agreement between the Company and Michael Bell dated March 14, 2005 (incorporated by
reference to Exhibit 10.2 to the Companys Form 8-K filed March 17, 2005 (File No. 0-22982)).10.75
    
    Registration Rights Agreement between the Company and Michael Bell dated March 14, 2005
(incorporated by reference to Exhibit 10.3 to the Companys Form 8-K filed March 17, 2005 (File No.
0-22982)).10.76
    
    Amendment to Stock Purchase Agreement between the Company and Michael Bell dated March 31, 2005
(incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed April 14, 2005 (File No.
0-22982)).10.77
    
    Amendment to Registration Rights Agreement between the Company and Michael Bell dated March 31, 2005
(incorporated by reference to Exhibit 10.2 to the Companys Form 8-K filed April 14, 2005 (File No.
0-22982)).10.78
    
    Limited Waiver with Respect to Amended and Restated General Electric Capital Corporation Credit
Agreement dated March 31, 2005 (incorporated by reference to Exhibit 10.3 to the Companys Form 8-K
filed April 14, 2005 (File No. 0-22982)).10.79
    
    Pledge Agreement between the Company and General Electric Capital Corporation related to Encore
shares dated March 31, 2005 (incorporated by reference to Exhibit 10.4 to the Companys Form 8-K
filed April 14, 2005 (File No. 0-22982)).10.80
    
    Amendment No. 1 to Partnership Interest Purchase Agreement dated May 11, 2005 (incorporated by
reference to Exhibit 10.1 to the Companys Form 8-K filed May 17, 2005 (File No. 0-22982)).10.81
    
    Second Amended and Restated Credit Agreement dated as of May 11, 2005 between the Company and
General Electric Capital Corporation (incorporated by reference to Exhibit 10.2 to the Companys
Form 8-K filed May 17, 2005 (File No. 0-22982)).10.82
    
    Form of Third Amended and Restated Credit Agreement with Lenders and General Electric Capital
Corporation dated June 1, 2005 (incorporated by reference to Exhibit 10.1 to the Companys Form 8-K
filed June 3, 2005 (File No. 0-22982)).10.83
    
    Form of Limited Waiver to General Electric Capital Corporation Second Amended and Restated Credit
Agreement dated June 1, 2005 (incorporated by reference to Exhibit 10.2 to the Companys Form 8-K
filed June 3, 2005 (File No. 0-22982)).
 42




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##### Table of Contents



ItemNo.
    
    Description10.84
    
    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 February 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 ü
    
    Addendum #7 to Licensing and Distribution Agreements
(2004-2005) and (2005-2007).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)).14.1
    
    The Companys Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 to the
Companys Form 10-K for the year ended March 31, 2004 (File No. 0-22982)).21.1
    
    Subsidiaries of the Registrant.23.1R ü
    
    Consent of Independent Registered Public Accounting Firm  Grant Thornton LLP23.2 ü
    
    Consent of Independent Registered Public Accounting Firm  Ernst & Young 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 43




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##### Table of Contents



SIGNATURES
  Navarre Corporation(Registrant)June 14, 2006
    
    
    
    By
    
    /s/ Eric H. PaulsonEric H. PaulsonChairman of the Boardand Chief Executive Officer
  POWER OF ATTORNEY
  Signature
    
    Title
    
    Date/s/ Eric H. Paulson
    
    Chairman of the Board and Chief Executive Officer
    
    June 14, 2006Eric H. Paulson
    
    (principal executive officer)/s/ J. Reid Porter
    
    Chief Financial Officer (principal financial
    
    June 14, 2006J. Reid Porter
    
    and accounting officer)/s/ Charles E. Cheney
    
    Director
    
    June 14, 2006Charles E. Cheney/s/ Keith A. Benson
    
    Director
    
    June 14, 2006Keith A. Benson/s/ Timothy R. Gentz
    
    Director
    
    June 14, 2006Timothy R. Gentz/s/ James G. Sippl
    
    Director
    
    June 14, 2006James G. Sippl/s/ Michael L. Snow
    
    Director
    
    June 14, 2006Michael L. Snow/s/ Tom Weyl
    
    Director
    
    June 14, 2006Tom Weyl/s/ Dickinson G. Wiltz
    
    Director
    
    June 14, 2006Dickinson G. Wiltz/s/ Richard Gary St. Marie
    
    Director
    
    June 14, 2006Richard Gary St. Marie
 44




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     Internal ControlIntegrated
Framework
 
 45




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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
  
 46




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    
  47




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##### Table of Contents



NAVARRE CORPORATION
CONSOLIDATED BALANCE SHEETS
 March 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    14,296
    
    
    $
    15,571Note receivable, related parties
    
    
    200
    
    
    
    200Accounts receivable, less allowance for doubtful accounts, vendor advances and sales
returns of $19,345 and $13,815, respectively
    
    
    87,653
    
    
    
    88,732Inventories
    
    
    43,624
    
    
    
    40,759Prepaid expenses and other current assets
    
    
    11,273
    
    
    
    15,303Income taxes receivable
    
    
    4,408
    
    
    
    Deferred tax assets  current
    
    
    8,830
    
    
    
    7,398Total current assets
    
    
    170,284
    
    
    
    167,963Property and equipment, net of accumulated depreciation of $8,349 and $7,259, respectively
    
    
    10,298
    
    
    
    8,152Other assets:Notes receivable, related parties
    
    
    
    
    
    
    200Goodwill
    
    
    81,202
    
    
    
    9,832Intangible assets, net of amortization of $8,258 and $2,369, respectively
    
    
    20,863
    
    
    
    5,198License fees, net of amortization of $5,334
    
    
    13,347
    
    
    
    Interest rate swap
    
    
    37
    
    
    
    Other assets
    
    
    13,583
    
    
    
    4,547Total assets
    
    $
    309,614
    
    
    $
    195,892Liabilities and shareholders equityCurrent liabilities:Note payable
    
    $
    5,000
    
    
    $
    250Capital lease obligation  short term
    
    
    115
    
    
    
    84Accounts payable
    
    
    97,923
    
    
    
    96,387Income taxes payable
    
    
    
    
    
    
    8Warrant
liability
    
    
    2,236
    
    
    
    Accrued expenses
    
    
    16,646
    
    
    
    15,067Total current liabilities
    
    
    121,920
    
    
    
    111,796Long-term liabilitiesNote payable  long-term
    
    
    75,130
    
    
    
    Capital lease obligation  long-term
    
    
    222
    
    
    
    237Deferred compensation
    
    
    5,272
    
    
    
    4,984Deferred tax liabilities  non-current
    
    
    770
    
    
    
    1,591Other long-term liabilities
    
    
    760
    
    
    
    Total liabilities
    
    
    204,074
    
    
    
    118,608Commitments and contingencies (Note 21)Temporary-equity
 Unregistered common stock, no par value; 5,699,998 issued and outstanding (Note 18)
    
    
    16,634
    
    
    
    Shareholders equity:Common stock, no par value:Authorized shares  100,000,000Issued and outstanding shares  29,911,097 and 27,896,080, respectively
    
    
    138,292
    
    
    
    123,481Accumulated other comprehensive income (loss)
    
    
    23
    
    
    
    Accumulated deficit
    
    
    (49,409
    )
    
    
    (46,197
    )Total shareholders equity
    
    
    88,906
    
    
    
    77,284Total liabilities and shareholders equity
    
    $
    309,614
    
    
    $
    195,892
 See accompanying notes to consolidated financial statements.
 48




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##### Table of Contents



NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
 Fiscal Years ended March 31,2006
    
    
    2005
    
    
    2004Net sales
    
    $
    686,126
    
    
    $
    596,615
    
    
    $
    470,877Cost of sales (exclusive of depreciation and amortization)
    
    
    579,033
    
    
    
    505,263
    
    
    
    412,856Gross profit
    
    
    107,093
    
    
    
    91,352
    
    
    
    58,021Operating expenses:Selling and marketing
    
    
    29,320
    
    
    
    21,483
    
    
    
    16,895Distribution and warehousing
    
    
    10,087
    
    
    
    8,848
    
    
    
    6,000General and administrative
    
    
    43,632
    
    
    
    47,365
    
    
    
    26,182Bad debt expense (recovery)
    
    
    12,111
    
    
    
    423
    
    
    
    (123
    )Depreciation and amortization
    
    
    9,259
    
    
    
    3,522
    
    
    
    2,000Total operating expenses
    
    
    104,409
    
    
    
    81,641
    
    
    
    50,954Income from operations
    
    
    2,684
    
    
    
    9,711
    
    
    
    7,067Other income (expense):Interest expense
    
    
    (11,217
    )
    
    
    (783
    )
    
    
    (378
    )Interest income
    
    
    777
    
    
    
    473
    
    
    
    446Deconsolidation of variable interest entity
    
    
    1,896
    
    
    
    
    
    
    
    Debt extinguishment
    
    
    
    
    
    
    
    
    
    
    (908
    )Warrant expense
    
    
    (342
    )
    
    
    
    
    
    
    Derivative gain (loss)
    
    
    623
    
    
    
    
    
    
    
    Other income (expense), net
    
    
    390
    
    
    
    (241
    )
    
    
    4Net income (loss) before income tax
    
    
    (5,189
    )
    
    
    9,160
    
    
    
    6,231Income tax benefit
    
    
    2,014
    
    
    
    1,006
    
    
    
    583Net income (loss)
    
    $
    (3,175
    )
    
    $
    10,166
    
    
    $
    6,814Earnings (loss) per common share:Basic
    
    $
    (.11
    )
    
    $
    .38
    
    
    $
    .30Diluted
    
    $
    (.11
    )
    
    $
    .35
    
    
    $
    .28Weighted average shares outstanding:Basic
    
    
    29,898
    
    
    
    26,830
    
    
    
    22,780Diluted
    
    
    29,898
    
    
    
    28,782
    
    
    
    24,112
 See accompanying notes to consolidated financial statements.
 49




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##### Table of Contents



NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
 AccumulatedOther
    
    
    TotalCommon Stock
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Shareholders
    
    

Temporary
Equity  UnregisteredCommon StockShares
    
    
    Amount
    
    
    Deficit
    
    
    Income (Loss)
    
    
    Equity
    
    
    Shares
    
    
    AmountBalance at March 31, 2003
    
    
    21,616,187
    
    
    $
    91,404
    
    
    $
    (63,141
    )
    
    $
    
    
    
    $
    28,263
    
    
    
    
    
    
    $
    Shares issued upon
exercise of stock options
    
    
    570,231
    
    
    
    814
    
    
    
    
    
    
    
    
    
    
    
    814
    
    
    
    
    
    
    
    Shares issued with private
placement
    
    
    2,631,547
    
    
    
    11,735
    
    
    
    
    
    
    
    
    
    
    
    11,735
    
    
    
    
    
    
    
    Shares issued with
acquisition of BCI
    
    
    1,000,000
    
    
    
    5,080
    
    
    
    
    
    
    
    
    
    
    
    5,080
    
    
    
    
    
    
    
    Value of warrants issued
to Hilco
    
    
    
    
    
    
    372
    
    
    
    
    
    
    
    
    
    
    
    372
    
    
    
    
    
    
    
    Other  variable interest
entity
    
    
    
    
    
    
    36
    
    
    
    (36
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    6,814
    
    
    
    
    
    
    
    6,814
    
    
    
    
    
    
    
    Balance 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
    
    
    $
    16,634
 See accompanying notes to consolidated financial statements.
 50




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##### Table of Contents



NAVARRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Fiscal Years ended March 31,2006
    
    
    2005
    
    
    2004Operating activities:Net income (loss)
    
    $
    (3,175
    )
    
    $
    10,166
    
    
    $
    6,814Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    9,384
    
    
    
    3,673
    
    
    
    2,000Amortization of deferred financing costs
    
    
    523
    
    
    
    240
    
    
    
    87Write-off of acquisition costs
    
    
    239
    
    
    
    
    
    
    
    Amortization of license fees
    
    
    5,334
    
    
    
    
    
    
    
    Amortization of production costs
    
    
    1,875
    
    
    
    
    
    
    
    Change in deferred revenue
    
    
    (954
    )
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    269
    
    
    
    705Deferred compensation expense
    
    
    288
    
    
    
    2,838
    
    
    
    1,738Compensation expense incurred with repurchase of Encore Stock
    
    
    
    
    
    
    5,800
    
    
    
    Expense related to warrant exercise
    
    
    
    
    
    
    
    
    
    
    372Write-off of notes receivable
    
    
    200
    
    
    
    200
    
    
    
    200Impairment of capitalized software development costs
    
    
    
    
    
    
    465
    
    
    
    5,588Tax benefit from employee stock option plans
    
    
    249
    
    
    
    2,428
    
    
    
    Loss on disposal of property and equipment
    
    
    37
    
    
    
    82
    
    
    
    Deferred income taxes
    
    
    (2,266
    )
    
    
    (4,771
    )
    
    
    (1,036
    )Change in
fair market value of warrants
    
    
    342
    
    
    
    
    
    
    
    Gain on deconsolidation of variable interest entity
    
    
    (1,896
    )
    
    
    
    
    
    
    Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable
    
    
    8,483
    
    
    
    (14,459
    )
    
    
    (5,212
    )Inventories
    
    
    (2,671
    )
    
    
    (10,702
    )
    
    
    (4,252
    )Prepaid expenses
    
    
    (1,302
    )
    
    
    (5,925
    )
    
    
    (10,284
    )Income taxes receivable
    
    
    (4,408
    )
    
    
    
    
    
    
    Other assets
    
    
    143
    
    
    
    (3,129
    )
    
    
    (7
    )Production costs
    
    
    (3,044
    )
    
    
    
    
    
    
    License fees
    
    
    (11,263
    )
    
    
    
    
    
    
    Accounts payable
    
    
    (731
    )
    
    
    4,441
    
    
    
    13,115Income taxes payable
    
    
    (8
    )
    
    
    (113
    )
    
    
    121Accrued expenses
    
    
    (2,684
    )
    
    
    5,992
    
    
    
    (992
    )Net cash (used in) provided by operating activities
    
    
    (7,305
    )
    
    
    (2,505
    )
    
    
    8,957Investing activities:Acquisitions, net of cash acquired
    
    
    (87,085
    )
    
    
    
    
    
    
    (10,465
    )Purchases of property and equipment
    
    
    (2,899
    )
    
    
    (9,375
    )
    
    
    (5,048
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    
    
    
    
    60Net proceeds from sale leaseback
    
    
    
    
    
    
    6,401
    
    
    
    Purchases of intangible assets
    
    
    (644
    )
    
    
    (608
    )
    
    
    (1,246
    )Payment of earn-out related to an acquisition
    
    
    (350
    )
    
    
    (88
    )
    
    
    Deconsolidation of variable interest entity
    
    
    (18
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (90,996
    )
    
    
    (3,670
    )
    
    
    (16,699
    )Financing activities:Proceeds from note payable, bank
    
    
    
    
    
    
    117,197
    
    
    
    75,930Payments on note payable, bank
    
    
    
    
    
    
    (117,197
    )
    
    
    (75,930
    )Repayment of note payable
    
    
    (59,870
    )
    
    
    (651
    )
    
    
    (1,073
    )Proceeds of note payable
    
    
    141,075
    
    
    
    250
    
    
    
    651Debt acquisition costs
    
    
    (3,071
    )
    
    
    (527
    )
    
    
    (375
    )Repayments of capital lease obligations
    
    
    (91
    )
    
    
    (59
    )
    
    
    Proceeds from sale of common stock and warrants
    
    
    18,528
    
    
    
    
    
    
    
    11,735Proceeds from exercise of common stock options and warrants
    
    
    455
    
    
    
    8,238
    
    
    
    814Net cash provided by financing activities
    
    
    97,026
    
    
    
    7,251
    
    
    
    11,752Net increase
(decrease) in cash
    
    
    (1,275
    )
    
    
    1,076
    
    
    
    4,010Cash at beginning of year
    
    
    15,571
    
    
    
    14,495
    
    
    
    10,485Cash at end of year
    
    $
    14,296
    
    
    $
    15,571
    
    
    $
    14,495Supplemental cash flow information:Cash paid for:Interest
    
    $
    9,328
    
    
    $
    771
    
    
    $
    353Income taxes
    
    
    4,421
    
    
    
    1,449
    
    
    
    324
 51




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##### Table of Contents



Fiscal Years ended March 31,2006
    
    
    2005
    
    
    2004Supplemental 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
    
    
    
    
    
    
    705
    
    
    
    Purchase price adjustments affecting: accounts receivable, prepaid expenses, goodwill
and accounts payable
    
    
    
    
    
    
    627
    
    
    
    Capital lease obligations incurred for the purchase of computer equipment
    
    
    107
    
    
    
    380
    
    
    
    Reclassification of prepaid rent to long-term rent
    
    
    
    
    
    
    450
    
    
    
    Reclassification of prepaid royalties to other assets
    
    
    5,363
    
    
    
    
    
    
    
    Acquisition:Fair value of assets acquired
    
    $
    114,484
    
    
    $
    
    
    
    $
    21,379Less: Assumed liabilities
    
    
    9,116
    
    
    
    
    
    
    
    5,834Fair value of stock issued
    
    
    14,144
    
    
    
    
    
    
    
    5,080Cash acquired
    
    
    4,139
    
    
    
    
    
    
    
    Acquisition net of cash acquired
    
    $
    87,085
    
    
    $
    
    
    
    $
    10,465Deconsolidation 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.
 52




---



##### Table of Contents



NAVARRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
 Note 1 Business Description
     Note 2 Summary of Significant Accounting Policies
 Basis of Consolidation
  Segment Reporting
 Disclosure about Segments
of an Enterprise and Related Information
 53




---



##### Table of Contents



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,
 54




---



##### Table of Contents



Research and Development  Mix & Burn
  Inventories
  Prepaid Royalties
 Financial Reporting in the
Record and Music Industry
 Royalties Payable  SOP 00-2
   Advertising
  Property and Equipment
  Asset
    
    Life in YearsBuildings
    
    
    25Furniture and fixtures
    
    
    7Office equipment
    
    
    5Computer equipment
    
    
    3Warehouse equipment
    
    
    5Leasehold improvements
    
    
    5-10
 55




---



##### Table of Contents



Production Costs
 Accounting by Producers or Distributors of Films
  License Fees
 SOP 00-2
 Impairment of Long-Lived Assets
 Accounting for
the Impairment or Disposal of Long-Lived Assets
 Goodwill
 Goodwill and
Other Intangible Assets
  Intangible Assets
  56




---



##### Table of Contents



Debt Issuance Costs
  Operating Leases
  Revenue Recognition
     Vendor Allowances
 Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor
 Market Development Funds
 Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendors Products,
 Allowance for Doubtful Accounts
  57




---



##### Table of Contents



Classification of Shipping Costs
   Foreign Currency Transactions
  Income Taxes
  Stock-Based Compensation
 Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation, Accounting for Stock-Based
Compensation  Transition and Disclosure  An Amendment of FASB Statement No. 123
 Share-Based Payments
 58




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##### Table of Contents



Fiscal years ended March 31,2006
    
    
    2005
    
    
    2004Net (loss) income, as reported
    
    $
    (3,175
    )
    
    $
    10,166
    
    
    $
    6,814Deduct: Stock-based compensation
determined under fair value method
for all awards, net of tax
    
    
    (7,848
    )
    
    
    (936
    )
    
    
    (319
    )Net (loss) income, pro forma
    
    $
    (11,023
    )
    
    $
    9,230
    
    
    $
    6,495Income (loss) per share:Basic  as reported
    
    $
    (.11
    )
    
    $
    .38
    
    
    $
    .30Basic  pro forma
    
    $
    (.37
    )
    
    $
    .34
    
    
    $
    .29Diluted  as reported
    
    $
    (.11
    )
    
    $
    .35
    
    
    $
    .28Diluted  pro forma
    
    $
    (.37
    )
    
    $
    .32
    
    
    $
    .27
  Weighted Average
    
    Dividend
    
    Expected
    
    ExpectedRisk Free Rate
    
    Yield
    
    Lives
    
    Volatility2006
    
    
    4.2
    %
    
    
    0.0
    %
    
    
    5
    
    
    
    67
    %2005
    
    
    3.6
    %
    
    
    0.0
    %
    
    
    5
    
    
    
    71
    %2004
    
    
    2.9
    %
    
    
    0.0
    %
    
    
    5
    
    
    
    70
    %
  Earnings Per Share
   Fiscal Years ended March 31,2006
    
    
    2005
    
    
    2004Numerator:Net (loss) income
    
    $
    (3,175
    )
    
    $
    10,166
    
    
    $
    6,814Denominator:Denominator for basic earnings per share  weighted average shares
    
    
    29,898
    
    
    
    26,830
    
    
    
    22,780Dilutive securities: Employee stock options and warrants
    
    
    
    
    
    
    1,952
    
    
    
    1,332Denominator for diluted earnings per share  weighted average shares
    
    
    29,898
    
    
    
    28,782
    
    
    
    24,112Basic earnings (loss) per share
    
    $
    (.11
    )
    
    $
    .38
    
    
    $
    .30Diluted earnings (loss) per share
    
    $
    (.11
    )
    
    $
    .35
    
    
    $
    .28
  59




---



##### Table of Contents



Capitalized Software Development Costs
  Recently Issued Accounting Pronouncements
 Inventory Costs
 Share-Based Payment Share-Based
Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 Accounting for Conditional Asset
Retirement Obligations , Accounting for Asset Retirement Obligations
 Accounting Changes and Error Corrections Accounting Changes Reporting Accounting
Changes in Interim Financial Statements
 Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004
 60




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##### Table of Contents



Note 3 Acquisition
 FUNimation
  Employment Agreement
      61




---



##### Table of Contents



Purchase Price
 Business Combinations
    Accounts receivable
    
    $
    7,197Inventories
    
    
    315Prepaid expenses and other current assets
    
    
    53Property and equipment
    
    
    2,037License fees
    
    
    7,125Production costs
    
    
    2,608Goodwill
    
    
    71,020License 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
 62




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##### Table of Contents



Note 4 Comprehensive Income (Loss)
   Years Ended
March 31,2006
    
2005Net
income (loss)
    
    $
    (3,175
    )
    
    $
    10,166Change in
net unrealized gain (loss) on hedge derivatives, net of tax
    
    
    646
    
    
    
    Less
realized net gain (loss) on hedge derivatives, net of tax
    
    
    (623
    )
    
    
    Comprehensive
income (loss)
    
    $
    (3,152
    )
    
    $
    10,166
   March 31, 2006
    
    
    March 31, 2005Unrealized gain (loss) from:Hedge derivatives
    
    $
    23
    
    
    $
    Accumulated other comprehensive income (loss)
    
    $
    23
    
    
    $
    
 Note 5 Accounts Receivable
  March 31, 2006
    
    
    March 31, 2005Trade receivables
    
    $
    102,722
    
    
    $
    88,196Vendor advance receivables
    
    
    2,623
    
    
    
    5,514Other receivables
    
    
    1,653
    
    
    
    2,745$
    106,998
    
    
    $
    96,455Less: allowance for doubtful accounts, vendor receivables and sales discounts
    
    
    6,544
    
    
    
    3,533Less: allowance for sales returns, net margin impact
    
    
    12,801
    
    
    
    4,190Total
    
    $
    87,653
    
    
    $
    88,732
 Note 6 Prepaid
Expenses and Other Assets
  March
31, 2006
    
March
31, 2005Prepaid
royalties
    
    $
    10,060
    
    
    $
    13,483Other
    
    
    1,213
    
    
    
    1,820Total
    
    $
    11,273
    
    
    $
    15,303
 Note 7 Variable Interest Entity
 Consolidated of Variable Interest Entities Consolidated Financial Statements
   63




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##### Table of Contents



Investment
  Note 8 Inventories
  March 31, 2006
    
    
    March 31, 2005Finished products
    
    $
    34,154
    
    
    $
    33,265Consigned inventory
    
    
    4,119
    
    
    
    2,957Raw materials
    
    
    5,351
    
    
    
    4,537$
    43,624
    
    
    $
    40,759
  Note 9 Goodwill and Intangible Assets
 Goodwill
   Distribution
    
    
    Publishing
    
    
    Other
    
    
    ConsolidatedBalances as of March 31, 2005
    
    $
    
    
    
    $
    9,832
    
    
    $
    
    
    
    $
    9,832Goodwill resulting from an acquisition
    
    
    
    
    
    
    71,020
    
    
    
    
    
    
    
    71,020Earn-out related to an acquisition
    
    
    
    
    
    
    350
    
    
    
    
    
    
    
    350Balances as of March 31, 2006
    
    $
    
    
    
    $
    81,202
    
    
    $
    
    
    
    $
    81,202
 Intangible assets
  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
 As of March 31, 2005Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    NetMasters
    
    $
    6,838
    
    
    $
    1,687
    
    
    $
    5,151Other
    
    
    729
    
    
    
    682
    
    
    
    47$
    7,567
    
    
    $
    2,369
    
    
    $
    5,198
  64




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##### Table of Contents



2007
    
    $
    7,5732008
    
    
    4,9212009
    
    
    3,9192010
    
    
    1,9492011
    
    
    415
 Debt issuance costs
  Note 10 Production Costs
  March 31,
    
    
    March 31,2006
    
    
    2005Production costs
    
    $
    5,653
    
    
    $
    Less: accumulated amortization
    
    
    1,877
    
    
    
    $
    3,776
    
    
    
    
  Note 11 Property and Equipment
  March 31,
    
    
    March 31,2006
    
    
    2005Land and buildings
    
    $
    1,623
    
    
    $
    Furniture and fixtures
    
    
    1,052
    
    
    
    1,092Computer and office equipment
    
    
    5,541
    
    
    
    4,483Warehouse equipment
    
    
    7,062
    
    
    
    6,868Production equipment
    
    
    257
    
    
    
    Leasehold improvements
    
    
    1,843
    
    
    
    2,894Construction in progress
    
    
    1,269
    
    
    
    74Total
    
    $
    18,647
    
    
    $
    15,411Less: accumulated depreciation and amortization
    
    
    8,349
    
    
    
    7,259Net property and equipment
    
    $
    10,298
    
    
    $
    8,152
 65




---



##### Table of Contents



Note 12 License Fees
  March 31,
    
    
    March 31,2006
    
    
    2005License fees
    
    $
    18,681
    
    
    $
    Less: accumulated amortization
    
    
    5,334
    
    
    
    $
    13,347
    
    
    
    
  Note 13 Accrued Expenses
  March 31,
    
    
    March 31,2006
    
    
    2005Compensation and benefits
    
    $
    3,067
    
    
    $
    9,067Royalties
    
    
    6,134
    
    
    
    2,491Rebates
    
    
    1,354
    
    
    
    1,023Interest
    
    
    1,751
    
    
    
    31Other
    
    
    4,340
    
    
    
    2,455Total
    
    $
    16,646
    
    
    $
    15,067
 Note 14 Bank Financing and Debt
     66




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##### Table of Contents



Mix
& Burn (See further deconsolidation disclosure in Note 7)
     March 31,
    
    
    March 31,2006
    
    
    2005Term Loan B sub-facility
    
    $
    80,130
    
    
    $
    Other (see Mix & Burn above)
    
    
    
    
    
    
    250Total debt
    
    
    80,130
    
    
    
    250Less: current portion
    
    
    5,000
    
    
    
    250Total long-term debt
    
    $
    75,130
    
    
    $
    
  2007
    
    $
    5,0002008
    
    
    5,0002009
    
    
    5,0002010
    
    
    5,0002011
    
    
    5,0002012 and thereafter
    
    
    55,130Total
    
    $
    80,130
 Letters of Credit
  Note 15 Derivative Instruments
  67




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##### Table of Contents



Note 16 Income Taxes
  Fiscal Years ended March 31,2006
    
    
    2005
    
    
    2004CurrentFederal
    
    $
    241
    
    
    $
    3,306
    
    
    $
    417State
    
    
    16
    
    
    
    459
    
    
    
    36Deferred
    
    
    (2,271
    )
    
    
    (4,771
    )
    
    
    (1,036
    )Tax benefit
    
    $
    (2,014
    )
    
    $
    (1,006
    )
    
    $
    (583
    )
  Fiscal Years ended March 31,2006
    
    
    2005
    
    
    2004Tax expense at statutory rate
    
    $
    (1,764
    )
    
    $
    3,114
    
    
    $
    2,119State income taxes, net of federal benefit
    
    
    (227
    )
    
    
    293
    
    
    
    193Non-deductible compensation charge
    
    
    
    
    
    
    1,972
    
    
    
    Reversal of valuation allowance
    
    
    
    
    
    
    (7,496
    )
    
    
    (3,579
    )Effect of variable interest entity
    
    
    
    
    
    
    755
    
    
    
    117Write off of
note to variable interest entity
    
    
    (850
    )
    
    
    
    
    
    
    Valuation
allowance
    
    
    875
    
    
    
    
    
    
    
    Other
    
    
    (48
    )
    
    
    356
    
    
    
    567Tax benefit
    
    $
    (2,014
    )
    
    $
    (1,006
    )
    
    $
    (583
    )
 Fiscal Years ended March 31,2006
    
    2005
    
    2004Tax expense at statutory rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %State income taxes, net of federal benefit
    
    
    4.4
    %
    
    
    3.2
    %
    
    
    3.1
    %Non-deductible compensation charge
    
    
    
    
    
    
    21.5
    %
    
    
    Reversal of valuation allowance
    
    
    
    
    
    
    (81.8
    )%
    
    
    (57.4
    )%Effect of variable interest entity
    
    
    
    
    
    
    8.2
    %
    
    
    1.9
    %Write off of
note to variable interest entity
    
    
    16.4
    %
    
    
    
    
    
    
    Valuation
allowance
    
    
    (16.9
    )%
    
    
    
    
    
    
    Other
    
    
    0.9
    %
    
    
    3.9
    %
    
    
    9.1
    %Tax benefit
    
    
    38.8
    %
    
    
    (11.0
    )%
    
    
    (9.3
    )%
 68




---



##### Table of Contents



Fiscal Years ended March 31,2006
    
    
    2005Net deferred tax asset (liability)non-currentIncentive based deferred compensation
    
    $
    2,028
    
    
    $
    1,887Stock based compensation
    
    
    103
    
    
    
    121Book/tax intangibles amortization
    
    
    (3,261
    )
    
    
    (3,176
    )Book/tax depreciation
    
    
    (437
    )
    
    
    (423
    )Variable interest entity
    
    
    
    
    
    
    974Capital loss carryforwards
    
    
    1,000
    
    
    
    Other
    
    
    49
    
    
    
    Subtotal deferred tax asset (liability)non-current
    
    
    (518
    )
    
    
    (617
    )Valuation
allowance
    
    
    (252
    )
    
    
    (974
    )Total deferred tax asset (liability)non-current
    
    $
    (770
    )
    
    $
    (1,591
    )Net deferred tax asset (liability)currentCollectibility reserves
    
    $
    7,718
    
    
    $
    4,222Allowance for sales returns
    
    
    473
    
    
    
    2,016Reserve for sales discounts
    
    
    419
    
    
    
    278Accrued vacations
    
    
    376
    
    
    
    282Inventory  uniform capitalization
    
    
    309
    
    
    
    230Incentive based deferred compensation
    
    
    111
    
    
    
    148Other
    
    
    172
    
    
    
    222Subtotal deferred tax assetcurrent
    
    $
    9,578
    
    
    $
    7,398Valuation allowance
    
    
    (748
    )
    
    
    Total
deferred tax assetcurrent
    
    
    8,830
    
    
    
    7,398Total deferred tax asset
    
    $
    8,060
    
    
    $
    5,807
     Note 17 Shareholders Equity
      69




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##### Table of Contents



Note 18 Private Placement
    Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock
  70




---



##### Table of Contents



Note 19 Stock Options and Grants
   Plan Options
    
    
    
    
    
    
    Weighted AverageAvailable for
    
    
    Plan Options
    
    
    Exercise Price PerGrant
    
    
    Outstanding
    
    
    ShareBalance on March 31, 2003
    
    
    12,002
    
    
    
    3,037,952
    
    
    $
    2.91Additional shares authorized
    
    
    1,000,000
    
    
    
    
    
    
    
    Granted
    
    
    (701,748
    )
    
    
    701,748
    
    
    
    4.91Exercised
    
    
    
    
    
    
    (765,600
    )
    
    
    2.80Canceled
    
    
    47,300
    
    
    
    (47,300
    )
    
    
    3.26Terminated
    
    
    19,600
    
    
    
    (19,600
    )
    
    
    2.78Balance on March 31, 2004
    
    
    377,154
    
    
    
    2,907,200
    
    
    $
    3.41Additional shares authorized
    
    
    1,000,000
    
    
    
    
    
    
    
    Granted
    
    
    (917,500
    )
    
    
    917,500
    
    
    
    15.25Exercised
    
    
    
    
    
    
    (724,700
    )
    
    
    3.03Canceled
    
    
    312,200
    
    
    
    (312,200
    )
    
    
    5.11Balance on March 31, 2005
    
    
    771,854
    
    
    
    2,787,800
    
    
    $
    7.24Additional shares authorized
    
    
    1,500,000
    
    
    
    
    
    
    
    Granted
    
    
    (1,195,000
    )
    
    
    1,195,000
    
    
    
    6.64Exercised
    
    
    
    
    
    
    (277,500
    )
    
    
    3.76Canceled
    
    
    364,200
    
    
    
    (364,200
    )
    
    
    8.50Balance on March 31, 2006
    
    
    1,441,054
    
    
    
    3,341,100
    
    
    $
    7.17
  Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageRange of
    
    Number of
    
    
    Remaining
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseExercise Prices
    
    Options
    
    
    Life
    
    
    Price
    
    
    Options
    
    
    Price$0.93 to $1.73
    
    
    867,900
    
    
    2.64 years
    
    $
    1.50
    
    
    
    518,300
    
    
    $
    1.45$1.75 to $5.37
    
    
    513,200
    
    
    7.01 years
    
    $
    4.37
    
    
    
    459,000
    
    
    $
    4.60$5.48 to $6.09
    
    
    504,500
    
    
    6.07 years
    
    $
    5.99
    
    
    
    504,500
    
    
    $
    5.99$6.33 to $8.38
    
    
    699,000
    
    
    8.33 years
    
    $
    7.72
    
    
    
    699,000
    
    
    $
    7.72$9.60 to $17.39
    
    
    749,500
    
    
    4.55 years
    
    $
    15.85
    
    
    
    749,500
    
    
    $
    15.85$18.08 to $18.08
    
    
    2,000
    
    
    4.78 years
    
    $
    18.08
    
    
    
    2,000
    
    
    $
    18.08$18.27 to $18.27
    
    
    5,000
    
    
    4.78 years
    
    $
    18.27
    
    
    
    5,000
    
    
    $
    18.273,341,100
    
    
    5.45 years
    
    $
    7.17
    
    
    
    2,937,300
    
    
    $
    7.93
  71




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##### Table of Contents



Note 20 401(k) Plan
  Note 21 Commitments and Contingencies
 Leases
    2007
    
    $
    2,9412008
    
    
    2,8532009
    
    
    2,8902010
    
    
    2,5492011
    
    
    1,899Thereafter
    
    
    14,748$
    27,880
 Litigation
  Sybersound Records, Inc. v. BCI Eclipse, LLC, et al.
   72




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##### Table of Contents



Sybersound Records, Inc. v. Navarre Corporation, BCI Eclipse, LLC, et al.
    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.
  73




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##### Table of Contents



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.   William Block v. Charles Cheney, et al.
    74




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##### Table of Contents



Note 22 Capital Leases
  March 31, 2006
    
    
    March 31, 2005Computer and office equipment
    
    $
    487
    
    
    $
    380Less: accumulated depreciation and amortization
    
    
    166
    
    
    
    87Net property and equipment
    
    $
    321
    
    
    $
    293
  Minimum LeaseCommitmentsYear ending March 31:2007
    
    $
    1612008
    
    
    1322009
    
    
    772010
    
    
    602011
    
    
    8Thereafter
    
    
    Total minimum lease payments
    
    $
    438Less: amounts representing interest at rates ranging from 9.6% to 31.6%
    
    
    101Present value of minimum capital lease payments
    
    $
    337Less: current installments
    
    
    115Obligations under capital lease, less current installments
    
    $
    222
 75




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##### Table of Contents



Note 23 Sale/Leaseback of Warehouse Facility
    Note 24 License and Distribution Agreement
   Note 25 Related Party Transactions
 Employment/Severance Agreements
     76




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##### Table of Contents



Stock Purchase Agreement
  Chief Executive Officer Investment in Mix & Burn
  Note 26 Major Customers
  Note 27 Business Segments
       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
 77




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##### Table of Contents



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
 Fiscal Year 2004
    
    Distribution
    
    Publishing
    
    Other
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    444,743
    
    
    $
    46,177
    
    
    $
    
    
    
    $
    (20,043
    )
    
    $
    470,877Income (loss) from operations
    
    
    9,284
    
    
    
    (1,874
    )
    
    
    (343
    )
    
    
    
    
    
    
    7,067Net income (loss) before income taxes
    
    
    9,129
    
    
    
    (2,555
    )
    
    
    (343
    )
    
    
    
    
    
    
    6,231Depreciation and amortization expense
    
    
    1,327
    
    
    
    673
    
    
    
    
    
    
    
    
    
    
    
    2,000Capital expenditures
    
    
    4,957
    
    
    
    91
    
    
    
    
    
    
    
    
    
    
    
    5,048Total assets
    
    
    143,478
    
    
    
    27,499
    
    
    
    5
    
    
    
    (16,403
    )
    
    
    154,579
 Note 28 Subsequent Events
  Note 29 Quarterly Data  Seasonality (Unaudited)
   Quarter EndedJune 30
    
    
    September 30
    
    
    December 31
    
    
    March 31Fiscal year 2006Net sales
    
    $
    140,941
    
    
    $
    157,823
    
    
    $
    214,128
    
    
    $
    173,234Gross profit
    
    
    24,789
    
    
    
    28,444
    
    
    
    28,241
    
    
    
    25,619Net 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
 Quarter EndedJune 30
    
    
    September 30
    
    
    December 31
    
    
    March 31Fiscal year 2005Net sales
    
    $
    127,306
    
    
    $
    144,401
    
    
    $
    182,876
    
    
    $
    142,032Gross profit
    
    
    18,878
    
    
    
    21,009
    
    
    
    27,237
    
    
    
    24,053Net income (loss)
    
    $
    1,897
    
    
    $
    4,382
    
    
    $
    7,233
    
    
    $
    (3,346
    )Net earnings (loss) per share:Basic
    
    $
    0.07
    
    
    $
    0.16
    
    
    $
    0.27
    
    
    $
    (0.12
    )Diluted
    
    $
    0.07
    
    
    $
    0.15
    
    
    $
    0.25
    
    
    $
    (0.12
    )
 78




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##### Table of Contents



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, 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
    
    
    
    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
    )
    
    $
    13,815Year ended March 31, 2004:Deducted from asset accounts:Allowance for vendor receivables
    
    $
    4,174
    
    
    $
    2,618
    
    
    $
    (1,984
    )
    
    $
    4,808Allowance for doubtful accounts
    
    
    673
    
    
    
    (123
    )
    
    
    844
    
    
    
    1,394Allowance for sales returns
    
    
    4,160
    
    
    
    (1,872
    )
    
    
    1,418
    
    
    
    3,706Allowance for MDF and sales discounts
    
    
    1,107
    
    
    
    15,557
    
    
    
    (15,413
    )
    
    
    1,251Total
    
    $
    10,114
    
    
    $
    16,180
    
    
    $
    (15,135
    )
    
    $
    11,159
 79