-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hu6yR590ob9Q0H+mLsnuqiPPRxS/6maYjOKNp0zAGZSCRU19lHRNjxvIc1X+UDRv fyVfFSsMqRv09fLGn1gfSQ== /in/edgar/work/20000912/0000928385-00-002519/0000928385-00-002519.txt : 20000922 0000928385-00-002519.hdr.sgml : 20000922 ACCESSION NUMBER: 0000928385-00-002519 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000729 FILED AS OF DATE: 20000912 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANDLEMAN CO /MI/ CENTRAL INDEX KEY: 0000314727 STANDARD INDUSTRIAL CLASSIFICATION: [5099 ] IRS NUMBER: 381242806 STATE OF INCORPORATION: MI FISCAL YEAR END: 0429 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07923 FILM NUMBER: 721204 BUSINESS ADDRESS: STREET 1: 500 KIRTS BLVD STREET 2: PO BOX 7045 CITY: TROY STATE: MI ZIP: 48084-4142 BUSINESS PHONE: 2483624400 MAIL ADDRESS: STREET 1: 500 KIRTS BLVD STREET 2: P O BOX 7045 CITY: TROY STATE: MI ZIP: 48084-4142 10-Q 1 0001.txt QUARTERLY REPORT DATED JULY 29, 2000 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 1st quarter ended July 29, 2000 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 Area Code 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 September 6, 2000 27,713,153 HANDLEMAN COMPANY INDEX PAGE NUMBER --------------- 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 29, July 31, 2000 1999 -------------- ---------------- Revenues $231,435 $226,357 Costs and expenses: Direct product costs 173,350 169,208 Selling, general and administrative expenses 54,248 54,958 Interest expense, net 854 505 -------------- ---------------- Income before income taxes and minority interest 2,983 1,686 Income tax expense (1,299) (807) Minority interest 58 (197) -------------- ---------------- Net income $ 1,742 $ 682 ============== ================ Net income per share -basic $ 0.06 $ 0.02 ============== ================ -diluted $ 0.06 $ 0.02 ============== ================ Weighted average number of shares outstanding during the period -basic 27,692 30,705 ============== ================ -diluted 27,898 31,033 ============== ================ 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 29, 2000 April 29, (Unaudited) 2000 ------------ ----------- ASSETS Current assets: Cash and cash equivalents $ 5,810 $ 27,510 Accounts receivable, less allowance of $14,023 at July 29, 2000 and $17,383 at April 29, 2000, respectively, for the gross profit impact of estimated future returns 185,821 234,005 Merchandise inventories 123,465 100,298 Other current assets 14,575 16,036 --------- ----------- Total current assets 329,671 377,849 --------- ----------- Property and equipment: Land 3,079 3,078 Buildings and improvements 19,363 19,352 Display fixtures 53,186 52,362 Equipment, furniture and other 50,568 47,456 --------- ----------- 126,196 122,248 Less accumulated depreciation and amortization 74,438 70,396 --------- ----------- 51,758 51,852 --------- ----------- Other assets, net 97,619 89,982 --------- ----------- Total assets $479,048 $ 519,683 ========= =========== LIABILITIES Current liabilities: Accounts payable $156,720 $ 202,339 Debt, current portion 14,571 14,571 Accrued and other liabilities 32,391 31,218 --------- ----------- Total current liabilities 203,682 248,128 --------- ----------- Debt, non-current 33,986 33,986 Other liabilities 16,168 14,287 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; 27,707,000 and 27,691,000 shares issued at July 29, 2000 and April 29, 2000, respectively 277 277 Foreign currency translation adjustment (6,466) (6,449) Unearned compensation (293) (443) Retained earnings 231,694 229,897 --------- ----------- Total shareholders' equity 225,212 223,282 --------- ----------- Total liabilities and shareholders' equity $479,048 $ 519,683 ========= ===========
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 29, 2000 ------------------------------------------------------------------------------------- Common Stock ------------------------ Foreign Currency Total Shares Translation Unearned Retained Shareholders' Issued Amount Adjustment Compensation Earnings Equity ---------- ---------- ----------- ------------- ------------ -------------- April 29, 2000 27,691 $277 ($6,449) ($443) $229,897 $223,282 Net income 1,742 1,742 Adjustment for foreign currency translation (17) (17) -------------- Comprehensive income, net of tax 1,725 -------------- Common stock issuances, net of forfeitures, in connection with employee benefit plans 16 150 55 205 ---------- ---------- ---------- ------------ ------------ -------------- July 29, 2000 27,707 $277 ($6,466) ($293) $231,694 $225,212 ========== ========== ========== ============ ============ ==============
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 29, July 31, 2000 1999 --------------- ---------------- Cash flows from operating activities: Net income $1,742 $682 --------------- ---------------- Adjustments to reconcile net income to net cash provided from (used by) operating activities: Depreciation 4,903 3,765 Amortization of acquisition costs 800 696 Recoupment of license advances 684 1,665 (Increase) decrease in accounts receivable 48,185 25,433 (Increase) decrease in merchandise inventories (23,167) (13,785) (Increase) decrease in other operating assets (929) (353) Increase (decrease) in accounts payable (45,619) 7,256 Increase (decrease) in other operating liabilities 3,054 (2,862) --------------- ---------------- Total adjustments (12,089) 21,815 --------------- ---------------- Net cash provided from (used by) operating activities (10,347) 22,497 --------------- ---------------- Cash flows from investing activities: Additions to property and equipment (4,267) (4,753) Retirements of property and equipment -- 61 License advances and acquired rights (7,274) (1,446) --------------- ---------------- Net cash used by investing activities (11,541) (6,138) --------------- ---------------- Cash flows from financing activities: Issuances of debt 254,600 -- Repayments of debt (254,600) -- Repurchase of common stock -- (11,319) Other changes in shareholders' equity, net 188 (723) --------------- ---------------- Net cash provided from (used by) financing activities 188 (12,042) --------------- ---------------- Net increase (decrease) in cash and cash equivalents (21,700) 4,317 Cash and cash equivalents at beginning of period 27,510 27,405 --------------- ---------------- Cash and cash equivalents at end of period $5,810 $31,722 =============== ================
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 29, 2000, 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 29, 2000 are not necessarily indicative of what the results will be for the full year. The consolidated balance sheet as of April 29, 2000 included in this Form 10-Q was derived from the audited consolidated financial statements of the Company included in the Company's 2000 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 29, 2000. 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. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. This statement will be adopted in fiscal 2002. The Company does not believe the impact of SFAS 133 on reported earnings and financial position will be material. 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 29, 2000. Segment data includes intersegment revenues, as well as a charge allocating all 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"). 5 Notes to Consolidated Financial Statements (continued) The tables below present information about reported segments for the three months ended July 29, 2000 and July 31, 1999 (in thousands of dollars):
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 (loss) 5,993 (2,373) 3,620 Segment assets 381,906 178,862 560,768 Capital expenditures 2,572 1,695 4,267 Three Months Ended July 31, 1999: H.E.R. NCE Total -------------- ------------- ------------ Revenues, external customers $199,965 $ 26,392 $226,357 Intersegment revenues -- 2,186 2,186 Segment income 261 2,116 2,377 Segment assets 482,024 140,373 622,397 Capital expenditures 3,942 811 4,753
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 total consolidated assets for the three months ended July 29, 2000 and July 31, 1999 is as follows (in thousands of dollars):
July 29, 2000 July 31, 1999 ------------- ------------- Revenues -------- Total segment revenues $231,883 $ 228,543 Elimination of intersegment revenue (448) (2,186) -------- --------- Consolidated revenues $231,435 $ 226,357 ======== ========= Income Before Income Taxes and Minority Interest ------------------------------------------------ Total segment income for reportable segments $ 3,620 $ 2,377 Interest revenue 413 705 Interest expense (1,267) (1,210) Intersegment profit elimination 217 (186) -------- --------- Consolidated income before income taxes and minority interest $ 2,983 $ 1,686 ======== ========= Assets ------- Total segment assets $560,768 $ 622,397 Elimination of intercompany receivables and payables (81,720) (141,331) -------- --------- Total consolidated assets $479,048 $ 481,066 ======== =========
6 Notes to Consolidated Financial Statements (continued) 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 29, 2000 July 31, 1999 ------------- ------------- Weighted average shares during the period-basic 27,692 30,705 Additional shares from assumed exercise of stock options 206 328 ------ ------ Weighted average shares adjusted for assumed exercise of stock options-diluted 27,898 31,033 ====== ======
7 Handleman Company Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------------------------------- Revenues for the first quarter of fiscal 2001 which ended July 29, 2000, increased 2% to $231.4 million, from $226.4 million for the first quarter of fiscal 2000 which ended July 31, 1999. Net income for the first quarter of fiscal 2001 was $1.7 million or $.06 per diluted share, compared to $.7 million or $.02 per diluted share for the first quarter of fiscal 2000. 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, Mexico, Brazil and the United Kingdom. NCE encompasses the Company's proprietary operations, which include music, video and licensing operations. H.E.R. net sales were $207.7 million for the first quarter of fiscal 2001, compared to net sales of $200.0 million for the first quarter of last year, an increase of 4%. This sales increase was primarily due to the inclusion of sales generated by Lifetime Entertainment Limited, which was acquired during the third quarter of the prior fiscal year. NCE net sales were $24.2 million for the first quarter of fiscal 2001, compared to $28.6 million for the first quarter of fiscal 2000, a decrease of 15%. This sales decrease was primarily due to timing-related sales variances at the Madacy Entertainment business unit. Sales at the Anchor Bay and The itsy bitsy Entertainment Company ("TibECo") business units approximated last year's first quarter performance. Direct product costs as a percentage of revenues was 74.9% for the first quarter ended July 29, 2000, compared to 74.8% for the first quarter ended July 31, 1999. Selling, general and administrative ("SG&A") expenses for the first quarter of fiscal 2001 were $54.2 million, compared to $55.0 million for the comparable prior year period. Income before interest, income taxes and minority interest ("operating income") for the first quarter ended July 29, 2000 was $3.8 million, compared to $2.2 million for the first quarter ended July 31, 1999. H.E.R. operating income improved to $6.0 million for the first quarter of this year, from $.3 million for the first quarter of last year. This increase in operating income was primarily due to a decrease in SG&A expenses related to the implementation of the Company's Channel of Choice programs which was substantially completed in fiscal 2000. NCE experienced an operating loss of $2.4 million for the first quarter of this year, compared to operating income of $2.1 million for the comparable period last year. This decrease in operating income was due to the sales shortfall at Madacy Entertainment and increased SG&A expenses at TibECo, which continues to implement its strategy of transitioning into a full-line entertainment company. Management remains optimistic that NCE operating income for fiscal 2001 will approximate the fiscal 2000 operating income level. 8 Interest expense, net for the first quarter ended July 29, 2000 was $.9 million, compared to $.5 million for the first quarter ended July 31, 1999. This increase in interest expense, net was primarily due to the inclusion in the first quarter last year of interest income received from the Internal Revenue Service. 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 is optimistic regarding sales and earnings for the second quarter of fiscal 2001, and anticipates Company net sales to increase in the mid-single digits, as a percent, over the second quarter of last year. This is predicated on current projections for total music sales combined with known and anticipated releases by top artists. Management believes direct product costs and net income, as a percentage of revenues for the second quarter of fiscal 2001, will remain relatively level with the second quarter of fiscal 2000. On August 7, 2000, the Company announced that it was selected by the ASDA stores in the United Kingdom, a member of the Wal-Mart family, to be ASDA's category manager of music and video products effective February 1, 2001. The Company anticipates this new business will increase consolidated Company revenues by ten percent during the first full year of service. Accounts receivable at July 29, 2000 were $185.8 million, compared to $234.0 million at April 29, 2000. This decrease in accounts receivable was principally due to the lower sales volume during the first quarter of fiscal 2001, compared to the fourth quarter of fiscal 2000. Merchandise inventories increased to $123.5 million at July 29, 2000, from $100.3 million at April 29, 2000. This increase in merchandise inventories was primarily due to increased inventory purchases to support the higher sales level anticipated in the second quarter of fiscal 2001. Other assets, net at July 29, 2000 totaled $97.6 million, compared to $90.0 million at April 29, 2000. This increase in other assets, net was mainly attributable to an increase in license advances at the Anchor Bay business unit. Accounts payable at July 29, 2000 decreased to $156.7 million, from $202.3 million at April 29, 2000. This decrease in accounts payable was mainly due to the timing of payments to vendors. In December 1999, the Board of Directors approved an authorization, that expires in December 2000, for the repurchase of up to $20 million of common stock. The Company did not purchase any common stock under this Board authorization during the first quarter of fiscal 2001. Under the current Board authorization, the Company can repurchase up to $6 million in additional shares of stock. The Company continues to make progress relative to its internet strategy. The expansion of the Company's SKU selection to provide fulfillment for e-commerce is anticipated to be completed by the end of the second quarter of fiscal 2001. When completed, the Company's SKU count will total approximately 60,000, accommodate direct to consumer fulfillment, and in partnership with the Company's retail customers, 9 will support in-store pickup of merchandise ordered electronically through the mass merchants. In addition, the Company expects to have its first generation kiosk available to test pilot in a select group of customer retail stores within the next 90 days. These kiosks will serve as the "music expert," providing a wide range of information on each title, including track information, music sampling and product availability. Through the kiosks, consumers will be able to order additional titles not found on the store shelves. The Company will integrate its new e-fulfillment options with its customers, allowing the consumer to have the product shipped to the consumer's home or to the retail store for pickup. During the third or fourth quarter of fiscal 2001, the Company anticipates the testing of manufacturing-on-demand through these kiosks. * * * * * * * * * * * 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 limitations, conditions in the music industry, 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, 2000 BY: /s/ Stephen Strome ---------------------- ------------------------------ STEPHEN STROME President and Chief Executive Officer DATE: September 11, 2000 BY: /s/ Leonard A. Brams ---------------------- ------------------------------ LEONARD A. BRAMS Senior Vice President, Finance and Chief Financial Officer (Principal Financial Officer) 11 EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 1,000 3-MOS APR-28-2001 APR-30-2000 JUL-29-2000 5,810 0 185,821 0 123,465 329,671 126,196 74,438 479,048 203,682 33,986 0 0 277 224,935 479,048 231,435 231,435 173,350 173,350 54,248 0 854 2,983 1,299 1,742 0 0 0 1,742 .06 .06 The Company recognized minority interest income in the amount of $58,000 in the consolidated statement of income, which represents the minority shareholders' portion of the loss for less than wholly-owned subsidiaries.
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