Navarre Corporation History

Address:

7900 49th Avenue North
New Hope, Minnesota 55428
U.S.A.

Telephone: (612) 535-8333
Toll Free: 800-728-4000
Fax: (612) 533-2156

Public Company
Incorporated: 1983
Employees: 239
Sales: $196.65 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: NAVR
SICs: 5045 Software, Computer: Wholesale; 5099 Compact Discs: Wholesale, Tapes & Cassettes, Prerecorded: Wholesale; 5734 Computer Software; 7372 Software, Computer: Prepackaged

Company Perspectives:

To be the premier worldwide provider of quality consumer software and entertainment products while maintaining the highest ethical standards with our employees and other stakeholders.

Company History:

Navarre Corporation is one of the largest independent distributors of compact discs, cassettes, and computer software in the United States. Some of the company's business consists of rackjobbing, or placing and maintaining displays of its products in stores, which share in the profits. The company also wholesales directly to retailers. Navarre has exclusive distribution of the music products of more than 30 independent record companies, while it also distributes products from all of the major labels. Navarre subsidiary Digital Entertainment, Inc. produces and markets multimedia CD-ROMs, while the Net Radio Network subsidiary broadcasts more than 150 channels of music and information programming over the Internet, and sells compact discs directly to listeners.

Founded in 1983

Navarre began operations in 1983, when Eric Paulson founded the company. Paulson had worked since the 1960s for Pickwick International and had risen to the position of senior vice-president and general manager. Pickwick was one of the largest rackjobbers and distributors of its time, and also was known for its many "supermarket albums." These widely distributed, budget-priced lps frequently consisted of cheaply licensed early recordings by such then current stars as Simon and Garfunkel or Ray Charles, packaged to suggest that they were actually new releases. Paulson started Navarre with the concept that it would sell both record albums and computer software, because of the two products' complementary sales cycles (record sales peaked before Christmas, while software sales took off after that point), and within two years the company had become the third largest rackjobber of computer software in the United States, and the largest distributor of independent-label records and tapes in its home base of Minneapolis-St. Paul, Minnesota. Paulson took pride in his new company carrying the Pickwick banner, both in its field of rackjobbing and for the fact that Navarre had hired more than half of its workforce from Pickwick, which had fallen on hard times by the early 1980s, when most of its assets were sold to rival Handleman Co. of Troy, Michigan. Paulson also took pride in the company's use of sophisticated computer inventory control and billing systems, which he claimed to be the best in the industry. Because the profit margin on computer software was typically low, such systems were important in helping to contain costs.

During the 1980s the company grew steadily, with annual sales, according to Paulson, rising from about $8 million in the first year to around $40 million by 1989. The company's clients for computer software rackjobbing by this time included the largest chain of computer stores in the U.S., Computerland, as well as the Dayton Hudson department store chain, Best Buy, and others. Typically, Navarre would place software racks in stores which concentrated on sales of other types of products, and had little extra time or energy to manage sales of software. Navarre sent salespeople out to restock and keep track of what was selling, taking care of advertising and other marketing decisions for the retailer. Store managers reported that sales of software often increased dramatically after Navarre took over, and were pleased by the additional foot traffic the displays attracted. While 60 percent of the company's revenues came from its software sales, Navarre also continued to distribute music products on a regional basis.

1990: Navarre Acquired by Lieberman Enterprises

In early 1990, Minneapolis-based Lieberman Enterprises, a recently acquired unit of LIVE Entertainment Inc., completed purchase of Navarre from founder Paulson and several partners, merging Navarre's Computer Products division into Lieberman. Lieberman, the United States' second largest distributor of music products, videocassettes, and software, made Paulson executive vice-president and chief operating officer. Though the purchase looked like a good one for all concerned at the time, following a change of leadership LIVE Entertainment decided to concentrate on the motion picture business, and sold money-losing Lieberman to the Handleman Co. in late 1991, with Paulson and his partners reacquiring Navarre soon after. They had in fact sued Lieberman in 1990 for allegedly breaching "an implied covenant of good faith ... by taking actions designed to prevent [Navarre] from realizing the benefits of the contract," according to Billboard magazine.

Back in control, Paulson immediately began rebuilding Navarre into the company he had originally envisioned. He quickly reestablished relationships with executives of the six major record labels, and opened several regional branch offices to oversee the company's operations in different areas of the country. Navarre reactivated its Computer Products division, which soon began aggressively expanding, with business software and CD-ROMs key new elements of the mix. Strong relationships with such retailers as Best Buy were established, with products coming from such vendors as Sierra On-Line, Broderbund, Warner NewMedia, and Sony Electronic Publishing. Navarre also sought to introduce software products, such as mid-priced CD-ROM computer games, into nonsoftware chains like MusicLand and Kaybee Toy stores. Not unlike predecessor Pickwick, some titles, such as those published by Minneapolis company LaserSoft, were repackaged versions of slightly older releases, sold at a budget price, while others were still cheaper clearance items.

1993: Navarre Begins Publishing, and Goes Public

In late 1993 Navarre announced that it would begin to manufacture software products, typically licensed copies of educational or entertainment programs, and market them alongside the outside vendors' products that it already distributed. Additional software products were to be created in conjunction with other companies, but not published directly by Navarre. This new tack was also being taken by several of Navarre's competitors, such as Handleman and Slash Corp. A major motivating factor was the low profit margin on the products it distributed, which could be increased if Navarre acted as both middleman and originator. By late 1993, the company's software business had risen to over 37 percent of total sales, up from 21 percent the year before. Music sales constituted the largest portion of the company's business, with wholesale distribution to the then popular membership warehouse clubs particularly strong at this time. Annual sales for the 1992 fiscal year reportedly had totaled $42.1 million, slightly above the peak of $40 million claimed pre-Lieberman.

In December 1993, the company announced its Initial Public Offering of stock on the NASDAQ exchange. CEO Paulson, the majority owner, sold off a portion of his two-thirds ownership, retaining about 40 percent of the company. The stock offering was not entirely successful, with a fifth of the shares originally offered withdrawn after they went unsold. Six months after going public, Navarre announced the formation of a subsidiary, Digital Entertainment, a joint venture with another Minnesota company, Digital Café. The initial goal of Digital Entertainment was to create multimedia CD-ROMs which integrated music recordings by nationally known artists with video footage and interactive capabilities. Releases would be distributed exclusively by Navarre. The first title to be published was entitled Backstage with John Tesh, and featured music, interviews, images of sheet music, and interactive features such as the capability to remix the sound. The disc was made available in both Macintosh and IBM formats, and had a list price of about $40. This release followed shortly on the heels of a successful, exclusive agreement with BMG to distribute a similarly interactive CD, David Bowie's Jump. Integrating music and computer software had long been a goal of Navarre founder Eric Paulson, and Digital Entertainment was a culmination of that dream, as well as a new direction for the company, which could augment Navarre's primary business of distribution.

In late 1994 Navarre also consolidated its operations, moving from several different locations to a single facility in New Hope, Minnesota, a suburb of Minneapolis. The new 100,000-square-foot building housed the company's corporate offices, two specialized conference rooms, and the product distribution center. New state-of-the-art computer product movement systems were in place. Annual sales for the fiscal year ending in March 1995 totaled $119.5 million, up 73 percent from the $68.9 million of the previous year, and net income increased over this period by almost 400 percent. During this time the company's sales of music products was still the leading source of revenue, but computer software was gaining. The company continued to sign exclusive distribution contracts with independent record companies, and in September 1995 reached an agreement to market CD-ROMs in selected Blockbuster Music stores. Early 1996 saw similar agreements signed with national music chain Tower Records and The Good Guys!, a West Coast electronics store chain.

1996: Navarre Invests in Net Radio; Stock Frenzy Follows

In May 1996 Navarre announced that it had purchased a 50 percent stake in Net Radio, a small operation which broadcast music and informational audio programming over the Internet, and was considered a "hot" web site, with some 10 million monthly log-ins by users. Navarre planned to sell advertising to record companies and retailers, and presumably take advantage of the opportunity to promote specific artists by programming their recordings, something that was much more difficult to assure on commercial radio stations. Though the operation was not expected to generate any immediate revenue for Navarre, the stock market's fascination with all things Internet at the time caused a surprising amount of attention to be focused on Navarre and Net Radio. Within a few weeks, the price of a share had risen from under $10 to almost $30. Several large Navarre stockholders, including founder and CEO Paulson, made huge profits by selling small chunks of their holdings. Within a short period of time, the price dropped back to under $20. This had all taken place despite the closing figures of the 1996 fiscal year, announced in March, that Navarre's earnings had declined from 1995, with music sales off by 20 percent, although software profits were up, eclipsing music for the first time as the largest revenue source.

Other developments in 1996 included the purchase of Hawaii's largest record distribution company, and the signing of an exclusive distribution agreement with Velvel Records, a new label founded by former CBS Records chief Walter Yetnikoff. Navarre committed itself to provide funding, marketing, promotion, and creative support to the label, the first time it had invested in a record company. Navarre had exclusive distribution agreements with close to 30 other labels at this point as well. The Digital Entertainment subsidiary was also active, releasing several new titles, including interactive sports and educational CD-ROMs.

1997: Restructuring As Music Sales Continue to Slip

Although it had seemingly set its ducks in a row and appeared poised for even greater success than before, another disappointing year in the music industry led Navarre to take a drastic hit in profits for the fiscal year ending in March 1997. Despite an overall sales increase of 26 percent, the company reported losses of $6.2 million, which it blamed on the low margins earned on sales of computer CD-ROMs, and a significant write-down on its investment in Velvel Records. Paulson had earlier stated on several occasions that Navarre would never let either music or software products exceed 60 percent of total revenues, but in fiscal 1997 software accounted for more than 70 percent of sales. Shortly after the unhappy financial report, Navarre announced plans for restructuring, which included a new five-year strategic plan, the departure of the head of the company's Music Products division, a reduction of sales regions from four to three, increased cooperation between sales offices, the company, and retailers, and an increased emphasis on "alternative marketing," including selling through mass merchants and via television shopping channels. At the company's annual employee meeting in July, CEO Paulson took pains to explain the problems Navarre was facing in its Music Products division, and, in a symbolic gesture, issued five shares of stock to each employee to convey to them the stake they had in returning Navarre to profitability.

Apparently, these measures were not deemed strong enough medicine, as the company announced a second restructuring in September. This time, regional distribution territories were reduced from three to two, and additional employees were terminated or moved to different jobs. At the same time that music sales continued to slump, several of Navarre's major retail accounts and music vendors had filed for bankruptcy, further reducing revenues. The company also restructured its lineup of record labels, dropping several lower quality ones, and signing new agreements with others. A lawsuit was initiated in December 1997 against CD-ROM vendor Broderbund, which was refusing to take returns on unsold products. The vendor countersued for payment for the discs. The CD-ROM market had suffered several years earlier from a glut of substandard computer games, and some companies had faced large returns as consumers reacted by keeping their cash in their wallets.

Navarre's efforts to tighten up its operation paid off; year-end results reported in March 1998 showed the company with a loss of only about a million dollars for the period, despite slightly smaller gross revenues, and an improving percentage of sales from music. Although the company was still not realizing a profit from the Net Radio Network, the now wholly owned subsidiary's web site had increased in traffic to over three million monthly "hits," and was now offering over 150 channels of original music, sports, and news programming available in the RealAudio format. The site had won several awards, and Navarre touted it as "the premier provider of real-time digital media on the Internet." Net Radio began selling music directly over the Web beginning in mid-1998, with a catalog of some 250,000 titles advertised. Despite the improving financial outlook, Navarre decided that it still needed an infusion of cash, and in April 1998 was granted the right by NASDAQ to privately sell $20 million worth of stock to a group of investors.

After suffering disappointing results several years running, Navarre appeared to be meeting the challenges posed by the downturn in sales in its Music Products division, and the company's restructuring and other changes were beginning to pay off. The Computer Products division and the Digital Entertainment subsidiary continued on track, although the future of Net Radio was still uncertain. The company had nonetheless shown that it was capable of adapting to the challenges it faced, and continued to stand its ground while others in the sometimes volatile music, software, and Internet businesses gave way.

Principal Subsidiaries: Digital Entertainment, Inc.; Net Radio Network.

Principal Divisions: Music Products; Computer Products.

Navarre Corporation History

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