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 second quarter ended October 26, 2002 Commission File Number 1-7923
Handleman Company
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-1242806
----------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 Kirts Boulevard, Troy, Michigan 48084-4142 (248) 362-4400
-------------------------------------------- -------------- ---------------------------------
(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
------- -------
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 November 29, 2002 25,839,839
HANDLEMAN COMPANY
INDEX
PAGE NUMBER
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PART I - FINANCIAL INFORMATION
Consolidated Statements of Income 1
Consolidated Balance Sheets 2
Consolidated Statement of Shareholders' Equity 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5 - 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 13
Controls and Procedures 14
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits or Reports on Form 8-K 15
Signatures 15
Certifications 16 - 18
HANDLEMAN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(amounts in thousands except per share data)
Three Months (13 Weeks) Ended Six Months (26 Weeks) Ended
---------------------------------- -----------------------------------
October 26, October 27, October 26, October 27,
2002 2001 2002 2001
-------------- ------------- -------------- --------------
Revenues $ 348,891 $ 355,223 $ 619,855 $ 616,338
Costs and expenses:
Direct product costs 265,912 268,753 476,366 469,236
Selling, general and
administrative expenses 58,255 60,585 114,087 114,750
Interest expense, net 223 1,298 606 2,194
---------- ---------- ---------- -----------
Income before income taxes
and minority interest 24,501 24,587 28,796 30,158
Income tax expense (8,660) (8,948) (10,435) (12,568)
Minority interest 192 106 366 193
---------- ---------- ---------- -----------
Net income $ 16,033 $ 15,745 $ 18,727 $ 17,783
========== ========== ========== ===========
Net income per share
Basic $ 0.61 $ 0.59 $ 0.71 $ 0.67
========== ========== ========== ===========
Diluted $ 0.61 $ 0.58 $ 0.71 $ 0.66
========== ========== ========== ===========
Weighted average number of shares
outstanding during the period
Basic 26,202 26,707 26,339 26,663
========== ========== ========== ===========
Diluted 26,217 26,948 26,361 26,834
========== ========== ========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
1
HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
October 26,
2002 April 27,
(Unaudited) 2002
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 6,898 $ 20,254
Accounts receivable, less allowance of $15,042 at
October 26, 2002 and $14,067 at April 27, 2002, respectively,
for the gross profit impact of estimated future returns 303,815 274,490
Merchandise inventories 182,563 126,145
Other current assets 16,097 22,441
--------- ---------
Total current assets 509,373 443,330
--------- ---------
Property and equipment:
Land, buildings and improvements 13,738 15,914
Display fixtures 37,373 38,030
Computer hardware and software 55,524 51,465
Equipment, furniture and other 33,280 32,042
--------- ---------
139,915 137,451
Less accumulated depreciation 76,434 69,744
--------- ---------
63,481 67,707
--------- ---------
Other assets, net 93,040 94,466
--------- ---------
Total assets $ 665,894 $ 605,503
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 265,503 $ 206,180
Debt, current portion 3,571 3,571
Accrued and other liabilities 34,392 39,054
--------- ---------
Total current liabilities 303,466 248,805
--------- ---------
Debt, non-current 46,263 53,749
Other liabilities 10,932 13,331
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; 25,850,000 and 26,472,000 shares
issued at October 26, 2002 and April 27, 2002, respectively 259 265
Foreign currency translation adjustment (3,997) (7,005)
Unearned compensation (2,639) (1,708)
Retained earnings 311,610 298,066
--------- ---------
Total shareholders' equity 305,233 289,618
--------- ---------
Total liabilities and shareholders' equity $ 665,894 $ 605,503
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
2
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(amounts in thousands)
Six Months (26 Weeks) Ended October 26, 2002
--------------------------------------------------------------------------
Common Stock Foreign
-------------------- Currency Total
Shares Translation Unearned Retained Shareholders'
Issued Amount Adjustment Compensation Earnings Equity
-------- ---------- ------------- ------------ ---------- --------------
April 27, 2002 26,472 $ 265 $ (7,005) $ (1,708) $298,066 $289,618
Net income 18,727 18,727
Adjustment for foreign
currency translation 3,008 3,008
--------
Comprehensive income, net of tax 21,735
--------
Common stock issuances, net
of forfeitures, in connection
with employee benefit plans 81 1 (931) 1,453 523
Common stock repurchased (703) (7) (6,986) (6,993)
Tax benefit from exercise
of stock options 350 350
------ -------- -------- -------- -------- --------
October 26, 2002 25,850 $ 259 $ (3,997) $ (2,639) $311,610 $305,233
====== ======== ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
3
HANDLEMAN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
Six Months (26 Weeks) Ended
---------------------------------
October 26, October 27,
2002 2001
----------- -----------
Cash flows from operating activities:
Net income $ 18,727 $ 17,783
----------- -----------
Adjustments to reconcile net income to net cash
provided from (used by)operating activities:
Depreciation 9,716 9,071
Amortization of acquisition costs 135 2,057
Recoupment of license advances 11,573 7,888
(Gain) loss on disposal of property and equipment (63) 807
Tax benefit from exercise of stock options 350 1,157
Changes in operating assets and liabilities:
Increase in accounts receivable (27,595) (107,751)
Increase in merchandise inventories (56,317) (66,893)
Decrease in other operating assets 9,640 4,037
Increase in accounts payable 58,706 62,677
Decrease in other operating liabilities (8,986) (11,818)
----------- -----------
Total adjustments (2,841) (98,768)
----------- -----------
Net cash provided from (used by) operating activities 15,886 (80,985)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (7,157) (16,827)
Proceeds from dispositions of properties 4,738 37
License advances and acquired rights (10,035) (11,197)
Additional investments in subsidiary companies (5,840) 0
----------- -----------
Net cash used by investing activities (18,294) (27,987)
----------- -----------
Cash flows from financing activities:
Issuances of debt 1,498,508 2,760,885
Repayments of debt (1,505,994) (2,672,239)
Repurchases of common stock (6,993) (2,883)
Other changes in shareholders' equity, net 3,531 2,112
----------- -----------
Net cash (used by) provided from financing activities (10,948) 87,875
----------- -----------
Net decrease in cash and cash equivalents (13,356) (21,097)
Cash and cash equivalents at beginning of period 20,254 33,628
----------- -----------
Cash and cash equivalents at end of period $ 6,898 $ 12,531
=========== ===========
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 sheets
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
October 26, 2002, and the results of operations and changes in cash flows
for the six months then ended. Because of the seasonal nature of the
Company's business, sales and earnings results for the six months ended
October 26, 2002 are not necessarily indicative of what the results will be
for the full year. The consolidated balance sheet as of April 27, 2002
included in this Form 10-Q was derived from the audited consolidated
financial statements of the Company included in the Company's 2002 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 27, 2002, including the discussion of the Company's critical
accounting policies.
2. The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets," effective for
fiscal 2003, which began on April 28, 2002. 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. The
Company analyzed the impact of SFAS No. 142 on its consolidated financial
position and results of operations and determined that no adjustment to the
carrying value of goodwill was required in the second quarter ended October
26, 2002. The Company will perform impairment analyses for goodwill and
other intangible assets with indefinite lives on an annual basis going
forward. Adoption of SFAS No. 142 will result in an increase in net income
of approximately $1.3 million for fiscal 2003.
The Company has adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," effective for fiscal 2003. SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." This Statement applies to long-lived
assets other than goodwill. SFAS No. 144 prescribes a probability-weighted
cash flow estimation approach to evaluate the recoverability of the
carrying amount of long-lived assets such as property, plant and equipment.
The Company does not expect that SFAS No. 144 will have a significant
effect on its operating results.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds
FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of
Debt," and an amendment of that Statement, FASB Statement No. 64,
"Extinguishments of Debt Made
5
Notes to Consolidated Financial Statements (continued)
to Satisfy Sinking-Fund Requirements." This Statement also amends FASB
Statement No. 13, "Accounting for Leases," to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement
also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability
under changed conditions. The Company is currently evaluating the impact of
this Statement and has not yet determined what effect, if any, it may have
on the consolidated financial position and results of operations of the
Company.
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued by the Financial Accounting Standards
Board. SFAS No. 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The provisions of this Statement
become effective for exit or disposal activities that are initiated after
December 31, 2002. The Company is currently evaluating the impact of this
Statement and has not yet determined what effect, if any, it may have on
the consolidated financial position and results of operations of the
Company.
3. 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
and video product.
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 27, 2002. 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").
6
Notes to Consolidated Financial Statements (continued)
The tables below present information about reported segments for the three
months ended October 26, 2002 and October 27, 2001 (in thousands of
dollars):
Three Months Ended October 26, 2002: H.E.R. NCE Total
------ --- -----
Revenues, external customers $313,612 $35,133 $348,745
Intersegment revenues -- 8,942 8,942
Segment income 19,925 4,461 24,386
Capital expenditures 4,901 107 5,008
Three Months Ended October 27, 2001: H.E.R. NCE Total
------ --- -----
Revenues, external customers $315,589 $39,546 $355,135
Intersegment revenues -- 6,493 6,493
Segment income 23,037 2,581 25,618
Capital expenditures 12,971 1,208 14,179
A reconciliation of total segment revenues to consolidated revenues and
total segment income to consolidated income before income taxes and
minority interest, for the three months ended October 26, 2002 and October
27, 2001 is as follows (in thousands of dollars):
October 26, 2002 October 27, 2001
---------------- ----------------
Revenues
--------
Total segment revenues $357,687 $361,628
Corporate rental income 146 88
Elimination of intersegment revenues (8,942) (6,493)
-------- --------
Consolidated revenues $348,891 $355,223
======== ========
Income Before Income Taxes and Minority Interest
------------------------------------------------
Total segment income for reportable segments $ 24,386 $ 25,618
Interest income 178 257
Interest expense (401) (1,555)
Unallocated corporate income 338 267
-------- --------
Consolidated income before income taxes
and minority interest $ 24,501 $ 24,587
======== ========
7
Notes to Consolidated Financial Statements (continued)
The tables below present information about reported segments as of and for
the six months ended October 26, 2002 and October 27, 2001 (in thousands of
dollars):
Six Months Ended October 26, 2002: H.E.R. NCE Total
------ --- -----
Revenues, external customers $557,530 $ 62,034 $619,564
Intersegment revenues -- 13,173 13,173
Segment income 23,483 5,230 28,713
Total assets 576,810 161,521 738,331
Capital expenditures 6,789 368 7,157
Six Months Ended October 27, 2001: H.E.R. NCE Total
------ --- -----
Revenues, external customers $555,031 $ 61,130 $616,161
Intersegment revenues -- 10,316 10,316
Segment income (loss) 33,280 (1,462) 31,818
Total assets 658,569 190,327 848,896
Capital expenditures 14,708 2,119 16,827
A reconciliation of total segment revenues to consolidated revenues, total
segment income to consolidated income before income taxes and minority
interest, and total segment assets to consolidated assets as of and for the
six months ended October 26, 2002 and October 27, 2001 is as follows (in
thousands of dollars):
October 26, 2002 October 27, 2001
---------------- ----------------
Revenues
--------
Total segment revenues $ 632,737 $ 626,477
Corporate rental income 291 177
Elimination of intersegment revenues (13,173) (10,316)
--------- ---------
Consolidated revenues $ 619,855 $ 616,338
========= =========
Income Before Income Taxes and Minority Interest
------------------------------------------------
Total segment income for reportable segments $ 28,713 $ 31,818
Interest income 332 643
Interest expense (938) (2,837)
Unallocated corporate income 689 534
--------- ---------
Consolidated income before income taxes
and minority interest $ 28,796 $ 30,158
========= =========
Assets
------
Total segment assets $ 738,331 $ 848,896
Elimination of intercompany receivables
and payables (72,437) (100,555)
--------- ---------
Consolidated assets $ 665,894 $ 748,341
========= =========
8
Notes to Consolidated Financial Statements (continued)
4. Comprehensive income is net income plus certain other items recorded
directly to shareholders' equity. Comprehensive income, net of tax was
$21.7 million for the six months ended October 26, 2002, compared to $17.7
million for the six months ended October 27, 2001.
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 Six Months Ended
------------------ ----------------
Oct. 26, Oct. 27, Oct. 26, Oct. 27,
2002 2001 2002 2001
---- ---- ---- ----
Weighted average shares during the period-basic 26,202 26,707 26,339 26,663
Additional shares from assumed exercise of
stock options 15 241 22 171
------ ------ ------ ------
Weighted average shares adjusted for assumed exercise
of stock options-diluted 26,217 26,948 26,361 26,834
====== ====== ====== ======
9
Handleman Company
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Revenues for the second quarter of fiscal 2003, which ended October 26, 2002,
decreased 2% to $348.9 million from $355.2 million for the second quarter of
fiscal 2002, which ended October 27, 2001. Net income for the second quarter of
fiscal 2003 was $16.0 million or $.61 per diluted share, compared to $15.7
million or $.58 per diluted share for the second quarter of fiscal 2002.
Revenues for the first six months of fiscal 2003 were $619.9 million, a slight
increase from $616.3 million for the first six months of fiscal 2002. Net income
for the first six months of this year was $18.7 million or $.71 per diluted
share, compared to $17.8 million or $.66 per diluted share for the comparable
six-month period of last year.
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 principally in North America and
the United Kingdom ("UK"). NCE encompasses the Company's proprietary operations,
which include music and video product.
H.E.R. revenues were $313.6 million for the second quarter of fiscal 2003,
compared to $315.6 million for the second quarter of fiscal 2002. H.E.R.
revenues for the first six months of this year were $557.5 million, up modestly
from $555.0 million for the first six months of last year.
NCE revenues for the second quarter of fiscal 2003 decreased 4% to $44.1 million
from $46.0 million for the second quarter of fiscal 2002. The decrease in
revenues was principally due to lower sales at the Anchor Bay Entertainment
unit, primarily resulting from focusing on better aligning customer shipments
with consumer demand, which should result in lower returns from Anchor Bay
customers in the third quarter of this fiscal year. NCE revenues for the first
six months of this year totaled $75.2 million, compared to $71.4 million for the
first six months of last year, an increase of 5%.
Consolidated direct product costs as a percentage of revenues was 76.2% for the
second quarter ended October 26, 2002, compared to 75.7% for the second quarter
ended October 27, 2001. Consolidated direct product costs as a percentage of
revenues was 76.9% for the first six months of fiscal 2003, compared to 76.1%
for the first six months of fiscal 2002. These increases in consolidated direct
product costs as a percentage of revenues, for both the second quarter and first
six months, were primarily due to a change in sales mix, specifically, increased
sales to certain customers which do not utilize the full suite of H.E.R.
category management services, and accordingly, resulted in sales with higher
direct product costs as a percentage of revenues.
Consolidated selling, general and administrative ("SG&A") expenses were $58.3
million or 16.7% of revenues for the second quarter of fiscal 2003, compared to
$60.6 million or 17.1% of revenues for the second quarter of fiscal 2002. The
decrease in consolidated SG&A expenses was primarily due to lower expenses at
NCE of $3.6 million, chiefly a result of the discontinuance of operations at The
itsy bitsy Entertainment Company ("TibECo") and lower consulting expenses, which
accounted for 47% and 25% of the decrease in NCE SG&A expenses, respectively.
Consolidated SG&A expenses for the first six months of this year were
10
$114.1 million or 18.4% of revenues, compared to $114.8 million or 18.6% of
revenues for the first six months of last year.
Consolidated income before interest, income taxes and minority interest
("operating income") for the second quarter of fiscal 2003 was $24.7 million,
compared to $25.9 million for the second quarter of fiscal 2002. Operating
income for the first six months of this fiscal year was $29.4 million, compared
to $32.4 million for the first six months of last fiscal year. The decrease in
operating income for the first six months of fiscal 2003 was primarily
attributable to the increase in direct product costs as a percentage of
revenues, as mentioned above.
H.E.R. operating income for the second quarter of this year was $19.9 million,
compared to $23.0 million for the second quarter of last year, a decrease of
13%. The decrease in H.E.R. operating income was primarily due to higher direct
product costs as a percentage of revenues, driven by a change in the sales mix.
H.E.R. operating income for the first six months of fiscal 2003 was $23.5
million, compared to $33.3 million for the first six months of fiscal 2002.
Approximately 55% of the decrease in H.E.R. operating income for the first six
months of this year was a result of increased SG&A expenses over the same period
of last year. Approximately 74% of this increase in SG&A expenses was due to
non-recurring charges in the first half of fiscal 2003, while increased costs at
Handleman Online accounted for the balance of the increase in H.E.R expenses.
The remaining decrease in H.E.R. operating income for the first six months of
this year was due to a change in H.E.R. sales mix, as mentioned above.
NCE operating income for the second quarter ended October 26, 2002 increased 73%
to $4.5 million from $2.6 million for the comparable prior year period. The
improvement in NCE operating income was predominately due to an increase in
operating income of $1.6 million at the Madacy Entertainment unit and the
discontinuance of TibECo operations which incurred a $1.1 million operating loss
in the second quarter of fiscal 2002. The improvement in Madacy operating income
was principally due to cost control efforts. NCE had operating income of $5.2
million for the first six months of fiscal 2003, compared to an operating loss
of $1.5 million for the comparable period of fiscal 2002. The discontinuance of
operations at TibECo accounted for approximately 73% of the improvement in
year-to-date NCE operating income, with the remaining improvement resulting from
increased operating income at Madacy.
Interest expense, net for the second quarter of fiscal 2003 was $0.2 million,
compared to $1.3 million for the second quarter of fiscal 2002. Interest
expense, net for the six months ended October 26, 2002 was $0.6 million,
compared to $2.2 million for the six-month period ended October 27, 2001. The
decreases in interest expense, net, for both the second quarter and six-month
period, were due to lower borrowing levels achieved in fiscal 2003, compared to
those in fiscal 2002.
During the second quarter of fiscal 2003, the Company repurchased 577,150 shares
of its common stock at an average price of $9.52 per share. An additional
950,000 shares remain available for repurchase under the existing Board of
Directors authorization. The Company plans to continue to repurchase shares
during the balance of fiscal 2003. The amount of repurchase activity will depend
on the Company's cash flow, investment alternatives and the market price of the
stock.
11
Accounts receivable at October 26, 2002 was $303.8 million, compared to $274.5
million at April 27, 2002. The increase reflects the higher sales volume in the
second quarter of this year versus the fourth quarter of last year.
Merchandise inventories at October 26, 2002 was $182.6 million, compared to
$126.1 million at April 27, 2002. This increase was primarily due to higher
inventory purchases in preparation for the upcoming holiday season.
Other current assets decreased to $16.1 million at October 26, 2002 from $22.4
million at April 27, 2002. The decrease in other current assets was primarily
attributable to a reduction in deferred tax assets and prepaid expenses.
Accounts payable increased to $265.5 million at October 26, 2002 from $206.2
million at April 27, 2002. The increase in accounts payable chiefly resulted
from higher inventory purchases in the second quarter of fiscal 2003, compared
to the fourth quarter of fiscal 2002, as mentioned above.
Debt, non-current at October 26, 2002 was $46.3 million, compared to $53.7
million at April 27, 2002. The decrease in debt, non-current resulted from lower
borrowing requirements due to increased cash provided from operating activities
for the first six months of this fiscal year.
Cash provided from operating activities for the first six months of fiscal 2003
was $15.9 million, compared to cash used by operating activities of $81.0
million for the same six-month period of last year. Decreases in accounts
receivable and merchandise inventories over the prior year continue to drive the
improvement in cash flows from operations. Net cash used by investing activities
decreased to $18.3 million for the six months ended October 26, 2002, from cash
used by investing activities of $28.0 million for the six months ended October
27, 2001. The decrease in cash used by investing activities was mainly due to
fewer additions to property, plant and equipment, resulting from reduced
expenditures for customer store fixtures over the same period of last year. Cash
used by financing activities was $10.9 million for the first six months of this
fiscal year, compared to cash provided from financing activities of $87.9
million for the first six months of last fiscal year. The decrease in cash flows
from financing activities over the comparable prior year period was primarily
due to lower overall borrowing levels and repurchases of the Company's common
stock, both resulting from increased cash provided from operating activities.
The Company has an unsecured $170 million line of credit, arranged with a
consortium of banks. During the quarter, the expiration date of this agreement
was extended one year to August 2005. Management believes that the revolving
credit agreement, along with cash provided from operations, provide sufficient
liquidity to fund the Company's day-to-day operations, including seasonal
increases in working capital. The balance due at October 26, 2002 on the credit
agreement was $39.1 million. The Company also has a senior note agreement with a
group of insurance companies. The remaining balance on the senior note agreement
is $10.7 million and is payable in equal annual installments through fiscal
2005.
Reference should be made to Note 2 of the Notes to Consolidated Financial
Statements, in this Form 10-Q, for new accounting pronouncements adopted in
fiscal 2003, and those currently being evaluated by the Company.
12
The Company expects sales for the remainder of fiscal 2003 to increase in the
low to mid-single digit range. This projection is in line with prior guidance
and is dependent upon multiple factors including the success of new music
releases during the upcoming holiday season, the level of post-holiday season
customer returns, the timing and specifics of the Company's key customer Chapter
11 restructuring and that customer's ability to revive store sales, and the
health of the economy, the retail sector and the music industry. The lack of
strong selling new releases in the second half of fiscal 2003 could result in
lower sales and higher returns, which may negatively impact the Company's
performance for the remainder of this fiscal year. Consolidated product costs as
a percentage of revenues is expected to increase to approximately 78% for the
balance of fiscal 2003. Management expects SG&A expenses to continue to decline,
both in dollars and as a percentage of revenues when compared to the second half
of fiscal 2002. In the third quarter of last fiscal year, the Company incurred a
$7.4 million pre-tax charge to adjust TibECo assets to net realizable value, and
the effective income tax rate was unusually low, resulting from the losses
incurred at TibECo. The Company expects no further adjustments to TibECo for the
remainder of this fiscal year, and as a result, expects a more normalized tax
rate in the 36 - 38% range for fiscal 2003. Additionally, the Company plans to
continue to repurchase shares of its common stock during the balance of fiscal
2003. Based on the above, management expects earnings for fiscal 2003 to be in
the range of $1.58 - $1.62 on a per share basis, compared to $1.39 per share
last year.
* * * * * * * * * * * *
This document contains forward-looking statements, which 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 limitation, conditions in the music industry, the
effect of a key customer's Chapter 11 proceedings, 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 new businesses, customer requirements, continuation
of satisfactory relationships with existing customers and suppliers, effects of
electronic commerce, effects of music product piracy, relationships with the
Company's lenders, pricing and competitive pressures, the occurrence of
catastrophic events or acts of terrorism, certain global and regional economic
conditions, and other factors detailed from time to time in the Company's
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.
13
CONTROLS AND PROCEDURES
(1) Evaluation of Disclosure Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules 13a-14(c) and
15d-14(c) of the Securities Exchange Act of 1934 (the "Exchange Act"). These
rules refer to the controls and other procedures of a company that are designed
to ensure that information required to be disclosed by a company in the reports
that it files under the Exchange Act is recorded, processed, summarized and
reported within required time periods. The Company's Chief Executive Officer and
Chief Financial Officer have evaluated the effectiveness of the Company's
disclosure controls and procedures as of a date within 90 days before the filing
of this quarterly report (the "Evaluation Date"), and, they have concluded that,
as of the Evaluation Date, such controls and procedures were effective in
ensuring that required information will be disclosed on a timely basis in the
Company's reports filed under the Exchange Act.
(2) Changes in Internal Controls
The Company maintains a system of internal accounting controls that is designed
to provide reasonable assurance that the transactions of the Company are
accurately reflected in its books of record. Since the Evaluation Date, there
have been no significant changes to the Company's internal controls or in other
factors that could significantly affect its internal controls, and management
has not identified any significant deficiencies or material weaknesses in the
Company's internal controls.
14
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
An Annual Meeting of Shareholders of Handleman Company was held on
September 10, 2002. One item was voted on at the Annual Meeting, the
election of directors. The following individuals were elected as
directors of the Company: Eugene A. Miller, 23,654,537 votes for,
489,529 votes withheld; Sandra E. Peterson, 23,302,161 votes for,
841,905 votes withheld; and Irvin D. Reid, 23,647,577 votes for,
496,489 votes withheld.
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 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: December 10, 2002 BY: /s/ Stephen Strome
----------------- -------------------------------
STEPHEN STROME
Chairman of the Board and
Chief Executive Officer
DATE: December 10, 2002 BY: /s/ Thomas C. Braum, Jr.
----------------- -------------------------------
THOMAS C. BRAUM, JR.
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
15
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of HANDLEMAN COMPANY (the "Company") on
Form 10-Q for the period ended October 26, 2002 (the "Report"), Stephen Strome,
Chairman of the Board and Chief Executive Officer of the Company, and Thomas C.
Braum, Jr., Senior Vice President and Chief Financial Officer of the Company,
each certifies in his capacity as an officer of the Company, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the consolidated financial condition and results of operations of
the Company.
Date: December 10, 2002 /s/ Stephen Strome
------------------------------------------
STEPHEN STROME
Chairman of the Board and
Chief Executive Officer
Date: December 10, 2002 /s/ Thomas C. Braum, Jr.
------------------------------------------
THOMAS C. BRAUM, JR.
Senior Vice President and
Chief Financial Officer
16
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stephen Strome, Chairman of the Board and Chief Executive Officer, certify
that:
(1) I have reviewed this quarterly report on Form 10-Q of HANDLEMAN COMPANY;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure control and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 10, 2002 /s/ Stephen Strome
----------------------------------
STEPHEN STROME
Chairman of the Board and
Chief Executive Officer
17
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas C. Braum, Jr., Senior Vice President and Chief Financial Officer,
certify that:
(1) I have reviewed this quarterly report on Form 10-Q of HANDLEMAN COMPANY;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure control and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 10, 2002 /s/ Thomas C. Braum, Jr.
-------------------------------------
THOMAS C. BRAUM, JR.
Senior Vice President and
Chief Financial Officer
18