SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the first quarter ended July 28, 2001 Commission File Number 1-7923
Handleman Company
-------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1242806
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 KIRTS BOULEVARD TROY, MICHIGAN 48084-4142 Area Code 248 362-4400
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(Address of principal executive offices) (Zip code) (Registrant's telephone number)
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
YES X NO _______
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS DATE SHARES OUTSTANDING
----------------------------- --------------------- -----------------------------------
Common Stock - $.01 Par Value September 5, 2001 26,817,966
HANDLEMAN COMPANY
INDEX
PAGE NUMBER
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PART I - FINANCIAL INFORMATION
Consolidated Statement of Income 1
Consolidated Balance Sheet 2
Consolidated Statement of Shareholders' Equity 3
Consolidated Statement of Cash Flows 4
Notes to Consolidated Financial Statements 5-7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-10
PART II - OTHER INFORMATION AND SIGNATURES 11
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(amounts in thousands except per share data)
Three Months (13 Weeks) Ended
-----------------------------
July 28, July 29,
2001 2000
----------- -----------
Revenues $ 261,115 $ 231,435
Costs and expenses:
Direct product costs 200,483 173,350
Selling, general and
administrative expenses 54,165 54,248
Interest expense, net 896 854
------------ -----------
Income before income taxes
and minority interest 5,571 2,983
Income tax expense (3,620) (1,299)
Minority interest 87 58
------------ -----------
Net income $ 2,038 $ 1,742
============ ===========
Net income per share
Basic $ 0.08 $ 0.06
============ ===========
Diluted $ 0.08 $ 0.06
============ ===========
Weighted average number of shares
outstanding during the period
Basic 26,618 27,692
============ ===========
Diluted 26,841 27,898
============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
1
HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
(amounts in thousands except share data)
July 28,
2001 April 28,
(Unaudited) 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,842 $ 33,628
Accounts receivable, less allowance of $ 14,527 at July 28,
2001 and $16,336 at April 28, 2001, respectively, for the
gross profit impact of estimated future returns 269,331 265,280
Merchandise inventories 154,030 113,348
Other current assets 15,095 19,720
--------- ---------
Total current assets 440,298 431,976
--------- ---------
Property and equipment:
Land 1,233 1,233
Buildings and improvements 14,665 14,621
Display fixtures 36,570 34,627
Equipment, furniture and other 68,882 68,302
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121,350 118,783
Less accumulated depreciation 66,256 61,896
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55,094 56,887
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Other assets, net 102,760 101,804
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Total assets $ 598,152 $ 590,667
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 197,791 $ 209,766
Debt, current portion 14,571 14,571
Accrued and other liabilities 28,510 44,772
--------- ---------
Total current liabilities 240,872 269,109
--------- ---------
Debt, non-current 82,662 53,014
Other liabilities 17,184 15,316
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value; 1,000,000 shares authorized;
none issued -- --
Common stock, $.01 par value; 60,000,000 shares authorized;
26,688,000 and 26,540,000 shares issued at July 28, 2001 and
April 28, 2001, respectively 267 265
Foreign currency translation adjustment (7,183) (7,479)
Unearned compensation (13) (63)
Retained earnings 264,363 260,505
--------- ---------
Total shareholders' equity 257,434 253,228
--------- ---------
Total liabilities and shareholders' equity $ 598,152 $ 590,667
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
2
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(amounts in thousands)
Three Months (13 Weeks) Ended July 28, 2001
---------------------------------------------------------------------------------------
Common Stock
-------------------------- Foreign
Currency Total
Shares Translation Unearned Retained Shareholders'
Issued Amount Adjustment Compensation Earnings Equity
------------ -------- ---------- ------------ --------- -----------
April 28, 2001 26,540 $ 265 ($ 7,479) ($ 63) $ 260,505 $ 253,228
Net income 2,038 2,038
Adjustment for foreign
currency translation 296 296
-----------
Comprehensive income, net of tax 2,334
-----------
Common stock issuances, net
of forfeitures, in connection
with employee benefit plans 148 2 50 663 715
Tax benefit from exercise
of stock options 1,157 1,157
------------ -------- ---------- ------------ --------- -----------
July 28, 2001 26,688 $ 267 ($ 7,183) ($ 13) $ 264,363 $ 257,434
============ ======== ========== ============ ========= ===========
The accompanying notes are an integral part of the consolidated financial
statements.
3
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
Three Months (13 Weeks) Ended
-----------------------------
July 28, July 29,
2001 2000
----------- -----------
Cash flows from operating activities:
Net income $ 2,038 $ 1,742
----------- -----------
Adjustments to reconcile net income to net cash used by operating
activities:
Depreciation 4,327 4,052
Amortization of acquisition costs 863 800
Recoupment of license advances 2,408 1,535
Loss on disposal of property and equipment 78 310
(Increase) decrease in accounts receivable (4,051) 48,185
(Increase) decrease in merchandise inventories (40,682) (23,167)
(Increase) decrease in other operating assets 3,383 (1,239)
Increase (decrease) in accounts payable (11,975) (45,619)
Increase (decrease) in other operating liabilities (13,237) 3,054
----------- -----------
Total adjustments (58,886) (12,089)
----------- -----------
Net cash used by operating activities (56,848) (10,347)
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Cash flows from investing activities:
Additions to property and equipment (2,648) (4,267)
Proceeds from disposition of property and equipment 37 --
License advances and acquired rights (2,986) (7,274)
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Net cash used by investing activities (5,597) (11,541)
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Cash flows from financing activities:
Issuances of debt 1,419,759 254,600
Repayments of debt (1,390,111) (254,600)
Other changes in shareholders' equity, net 1,011 188
----------- -----------
Net cash provided from financing activities 30,659 188
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Net decrease in cash and cash equivalents (31,786) (21,700)
Cash and cash equivalents at beginning of period 33,628 27,510
----------- -----------
Cash and cash equivalents at end of period $ 1,842 $ 5,810
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying consolidated balance
sheet and consolidated statements of income, shareholders' equity and
cash flows contain all adjustments, consisting only of normal
recurring adjustments necessary to present fairly the financial
position of the Company as of July 28, 2001, and the results of
operations and changes in cash flows for the three months then ended.
Because of the seasonal nature of the Company's business, sales and
earnings results for the three months ended July 28, 2001 are not
necessarily indicative of what the results will be for the full year.
The consolidated balance sheet as of April 28, 2001 included in this
Form 10-Q was derived from the audited consolidated financial
statements of the Company included in the Company's 2001 Annual Report
on Form 10-K filed with the Securities and Exchange Commission.
Reference should be made to the Company's Form 10-K for the year ended
April 28, 2001.
2. At each balance sheet date, management evaluates the carrying value
and remaining estimated lives of long-lived assets, including
intangible assets, for potential impairment by considering several
factors, including management's plans for future operations, recent
operating results, market trends and other economic factors relating
to the operation to which the assets apply. Recoverability of these
assets is measured by a comparison of the carrying amount of such
assets to the future undiscounted net cash flows expected to be
generated by the assets. If such assets were deemed to be impaired as
a result of this measurement, the impairment that would be recognized
is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets as determined on a discounted
basis.
3. Statements of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangible Assets" were
approved by the Financial Accounting Standards Board effective June
30, 2001. SFAS No. 141 eliminates the pooling-of-interests method for
business combinations initiated after June 30, 2001. SFAS No. 141
requires the use of the purchase method of accounting and provides
criteria for the recognition of intangible assets separately from
goodwill. SFAS No. 142 changes the accounting for goodwill and other
intangible assets with indefinite lives from an amortization approach
to a non-amortization (impairment) approach. SFAS No. 142 requires
amortization of goodwill recorded in connection with previous business
combinations to cease upon adoption of the Statement which is required
for fiscal years beginning after December 15, 2001 (fiscal 2003 for
the Company). The Company is currently evaluating the impact of the
statements and has not yet determined what effect, if any, they might
have on the consolidated financial position and results of operations
of the Company.
5
Notes to Consolidated Financial Statements (continued)
4. The Company operates in two business segments: Handleman Entertainment
Resources ("H.E.R.") is responsible for music category management and
distribution operations, and North Coast Entertainment ("NCE") is
responsible for the Company's proprietary operations, which include
music, video and licensing operations.
The accounting policies of the segments are the same as those
described in Note 1, "Accounting Policies," contained in the Company's
Form 10-K for the year ended April 28, 2001. Segment data includes
intersegment revenues, as well as a charge allocating corporate costs
to the operating segments. The Company evaluates performance of its
segments and allocates resources to them based on income before
interest, income taxes and minority interest ("segment income").
The tables below present information about reported segments for the three
months ended July 28, 2001 and July 29, 2000 (in thousands of dollars):
Three Months Ended July 28, 2001: H.E.R. NCE Total
------ --- -----
Revenues, external customers $239,442 $ 21,584 $261,026
Intersegment revenues -- 3,823 3,823
Segment income 10,243 (4,043) 6,200
Total assets 518,714 178,266 696,980
Capital expenditures 1,737 911 2,648
Three Months Ended July 29, 2000: H.E.R. NCE Total
------ --- -----
Revenues, external customers $207,709 $ 23,726 $231,435
Intersegment revenues -- 448 448
Segment income 5,993 (2,373) 3,620
Total assets 381,906 179,862 560,768
Capital expenditures 2,572 1,695 4,267
6
Notes to Consolidated Financial Statements (continued)
A reconciliation of total segment revenues to consolidated revenues, total
segment income to total consolidated income before income taxes and minority
interest, and total segment assets to consolidated assets as of and for the
three months ended July 28, 2001 and July 29, 2000 is as follows (in thousands
of dollars):
July 28, 2001 July 29, 2000
------------- -------------
Revenues
--------
Total segment revenues $264,849 $231,883
Corporate rental income 89 --
Elimination of intersegment revenues (3,823) (448)
-------- --------
Consolidated revenues $261,115 $231,435
======== ========
Income Before Income Taxes and Minority Interest
------------------------------------------------
Total segment income for reportable segments $ 6,200 $ 3,620
Interest revenue 386 413
Interest expense (1,282) (1,267)
Unallocated corporate income 267 217
-------- --------
Consolidated income before income taxes
and minority interest $ 5,571 $ 2,983
======== ========
Assets
------
Total segment assets $696,980 $560,768
Elimination of intercompany receivables
and payables (98,828) (81,720)
-------- --------
Total consolidated assets $598,152 $479,048
======== ========
5. A reconciliation of the weighted average shares used in the
calculation of basic and diluted shares is as follows (in thousands):
Three Months Ended
------------------
July 28, 2001 July 29, 2000
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Weighted average shares during the period-basic 26,618 27,692
Additional shares from assumed exercise
of stock options 223 206
------ ------
Weighted average shares adjusted for assumed
exercise of stock options-diluted 26,841 27,898
====== ======
7
Handleman Company
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Revenues for the first quarter of fiscal 2002 which ended July 28, 2001,
increased 13% to $261.1 million from $231.4 million for the first quarter of
fiscal 2001 which ended July 29, 2000. Net income for the first quarter of
fiscal 2002 was $2.0 million, or $.08 per diluted share, compared to $1.7
million or $.06 per diluted share for the first quarter of fiscal 2001.
The Company has two business segments: Handleman Entertainment Resources
("H.E.R.") and North Coast Entertainment ("NCE"). H.E.R. consists of music
category management and distribution operations in the United States, Canada,
United Kingdom, Mexico and Brazil. NCE encompasses the Company's proprietary
operations which include music, video and licensing operations.
H.E.R. net sales were $239.4 million for the first quarter of fiscal 2002,
compared to $207.7 million for the first quarter of fiscal 2001, an increase of
15%. The increase in H.E.R. net sales for the first quarter of this year was
generated by Handleman UK Limited which accounted for approximately 60% of the
sales increase due to the commencement of category management, distribution and
service to a new customer within the United Kingdom, and by H.E.R. United States
operations which accounted for approximately 40% of the sales increase primarily
due to new releases by top artists shipped during the first quarter of this
year.
NCE net sales for the first quarter of this year were $25.4 million, compared to
$24.2 million for the first quarter of last year, an increase of 5%. The higher
net sales level this year was primarily due to the Madacy operating unit; net
sales at the Anchor Bay Entertainment operating unit were up slightly over the
prior year, while net sales at The itsy bitsy Entertainment Company ("TibECo")
were lower versus the prior year.
Consolidated direct product costs as a percentage of revenues was 76.8% for the
first quarter of fiscal 2002, compared to 74.9% for the first quarter of fiscal
2001. Consolidated direct product costs as a percentage of revenues this year
was more in line with consolidated direct product costs as a percentage of
revenues achieved during the last half of fiscal 2001.
Selling, general and administrative ("SG&A") expenses were $54.2 million for the
first quarter of both this year and last year, in spite of the 13% increase in
the Company's revenues, primarily due to an ongoing focus on expense control.
Income before interest, income taxes and minority interest ("operating income")
for the first quarter ended July 28, 2001 was $6.5 million, compared to $3.8
million for the first quarter ended July 29, 2000. H.E.R. operating income
increased 70% to $10.2 million for the first quarter of this year from $6.0
million for the comparable prior year period. The increase in H.E.R. operating
income was primarily due to greater sales within the United States. NCE
experienced an operating loss of $4.0 million for the first quarter of fiscal
2002, compared to an operating loss of $2.4 million for the first quarter of
fiscal 2001. The increase in the NCE operating loss was due to a higher
operating loss at TibECo, caused by several one-time costs incurred in the first
quarter of this year. During the latter part of the first quarter of fiscal
2002, the Company took a more active role in managing the day-to-day operations
at TibECo and has implemented certain expense controls.
8
The effective income tax rate for the first quarter of fiscal 2002 was 65.0%,
compared to 43.5% for the first quarter of fiscal 2001. The higher rate this
year was due to increased losses at TibECo, for which the Company could not
recognize any tax benefit. The Company has recently restructured its TibECo
shareholder agreement, and beginning with the second quarter of fiscal 2002,
TibECo results will be included in the Company's tax return. Accordingly, the
Company will be able to recognize a tax benefit in the event of future operating
losses at TibECo.
On August 8, 2001, the Company replaced its $150 million revolving credit
facility with an unsecured $170 million line of credit, arranged with a
consortium of banks. This new agreement expires in August 2004. Management
believes that with this new credit facility and with cash provided from
operations, the Company will have sufficient liquidity to fund day-to-day
operations including seasonal increases in inventory levels.
The Company's first quarter is traditionally its weakest quarter. The Company
has historically generated the majority of its earnings in subsequent fiscal
quarters. Management expects net sales for the second quarter of fiscal 2002 to
increase in the low "teens," as a percent, over the second quarter of last year.
This is predicated upon increased sales expected at Handleman UK Limited and
current new releases by top artists scheduled for the second quarter of this
year, but tempered by current expectations of overall music industry sales.
Management believes direct product costs as a percentage of revenues will be
similar to that achieved in the first quarter of this year. Management also
expects a continuation of modest improvements in SG&A expenses as a percentage
of revenues, on a quarter-to-quarter basis, during the remainder of fiscal 2002.
The Company estimates the overall effective tax rate for the second quarter of
fiscal 2002 to be in the 38% range. As a result of these above mentioned
expectations, combined with less optimistic expectations for the overall music
market, management anticipates net income will increase in the mid-to-upper
single digits, as a percent, over the second quarter of last year.
Merchandise inventories at July 28, 2001 was $154.0 million, compared to $113.3
million at April 28, 2001. The increase in merchandise inventories was primarily
due to increased inventory purchases to support the higher sales level
anticipated in the second quarter of fiscal 2002.
Accounts payable at July 28, 2001 totaled $197.8 million, compared to $209.8
million at April 28, 2001. The decrease in accounts payable was chiefly due to
the timing of payments to vendors.
Accrued and other liabilities decreased to $28.5 million at July 28, 2001 from
$44.8 million at April 28, 2001. The decrease in accrued and other liabilities
was primarily attributable to the timing of payments related to income taxes
payable, accrued royalties and accrued bonuses.
Debt, non-current at July 28, 2001 was $82.7 million, compared to $53.0 million
at April 28, 2001. The increase in debt, non-current was primarily due to the
investment in working capital required to support the Company's growth.
9
* * * * * * * * * * * *
This document contains forward-looking statements that are not historical facts
and involve risk and uncertainties. Actual results, events and performance could
differ materially from those contemplated by these forward-looking statements,
including, without limitations, conditions in the music industry, ability to
enter into profitable agreements with customers in the new businesses outlined
in the Company's strategic growth plan, securing funding or providing sufficient
cash required to build and grow the new businesses, customer requirements,
continuation of satisfactory relationships with existing customers and
suppliers, nature and extent of new product releases, retail environment,
effects of electronic commerce, relationships with the Company's lenders,
pricing and competitive pressures, certain global and regional economic
conditions, and other factors discussed in this Form 10-Q and those detailed
from time to time in the Company's other filings with the Securities and
Exchange Commission. The Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date of
this document. Additional information that could cause actual results to differ
materially from any forward-looking statements may be contained in the Company's
Annual Report on Form 10-K.
10
PART II - OTHER INFORMATION
Item 6. Exhibits or Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
SIGNATURES: Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
HANDLEMAN COMPANY
DATE: September 11, 2001 BY: /s/ Stephen Strome
------------------ -------------------------------
STEPHEN STROME
Chairman and Chief
Executive Officer
DATE: September 11, 2001 BY: /s/ Thomas C. Braum, Jr.
------------------ -------------------------------
THOMAS C. BRAUM, JR.
Senior Vice President,
Chief Financial Officer
(Principal Financial
Officer)
11