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 third quarter ended January 31, 2001 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 (Zip code) (Registrant's telephone
executive offices) 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 March 2, 2001 26,932,117
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 - 8
Management's Discussion and Analysis of Operations 9 - 12
PART II - OTHER INFORMATION AND SIGNATURES 13
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(amounts in thousands except per share data)
Three Months (13 Weeks) Ended Nine Months (39 Weeks) Ended
---------------------------- ----------------------------
January 31, January 31, January 31, January 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues $348,974 $343,246 $878,002 $858,458
Costs and expenses:
Direct product costs 266,836 262,652 658,456 644,931
Selling, general and
administrative expenses 58,518 54,375 167,731 160,798
Interest expense, net 336 1,088 1,939 2,425
----------- ----------- ----------- -----------
Income before income taxes
and minority interest 23,284 25,131 49,876 50,304
Income tax expense (6,646) (10,175) (16,991) (20,378)
Minority interest (382) (296) (745) (1,106)
----------- ----------- ----------- -----------
Net income $ 16,256 $ 14,660 $ 32,140 $ 28,820
=========== =========== =========== ===========
Net income per share:
Basic $ 0.60 $ 0.50 $ 1.17 $ 0.97
=========== =========== =========== ===========
Diluted $ 0.60 $ 0.50 $ 1.16 $ 0.95
=========== =========== =========== ===========
Weighted average number of shares
outstanding during the period:
Basic 27,149 29,034 27,493 29,863
=========== =========== =========== ===========
Diluted 27,214 29,383 27,649 30,186
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
1
HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
(amounts in thousands except share data)
January 31,
2001 April 29,
(Unaudited) 2000
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 18,980 $ 27,510
Accounts receivable, less allowance of $13,245 at
January 31, 2001 and $17,383 at April 29, 2000, respectively,
for the gross profit impact of estimated future returns 226,780 234,005
Merchandise inventories 112,903 100,298
Other current assets 13,862 16,036
------------ -----------
Total current assets 372,525 377,849
Property and equipment:
Land 1,233 3,078
Buildings and improvements 17,038 19,352
Display fixtures 35,337 52,362
Equipment, furniture and other 58,306 47,456
------------ -----------
111,914 122,248
Less accumulated depreciation 58,834 70,396
------------ -----------
Property and equipment, net 53,080 51,852
Other assets, net 97,323 89,982
------------ -----------
Total assets $522,928 $519,683
============ ===========
LIABILITIES
Current liabilities:
Accounts payable $161,973 $202,339
Debt, current portion 14,571 14,571
Accrued and other liabilities 34,970 31,218
------------ -----------
Total current liabilities 211,514 248,128
Debt, non-current 47,986 33,986
Other liabilities 15,219 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; 26,987,000 and 27,691,000 shares
issued at January 31, 2001 and April 29, 2000, respectively 270 277
Foreign currency translation adjustment (7,154) (6,449)
Unearned compensation (147) (443)
Retained earnings 255,240 229,897
------------ -----------
Total shareholders' equity 248,209 223,282
------------ -----------
Total liabilities and shareholders' equity $522,928 $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)
Nine Months (39 Weeks) Ended January 31, 2001
--------------------------------------------------------------------------------
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 32,140 32,140
Adjustment for foreign
currency translation (705) (705)
----------
Comprehensive income, net of tax 31,435
----------
Common stock issuances, net
of forfeitures, in connection
with employee benefit plans 38 296 220 516
Common stock repurchased (742) (7) (7,017) (7,024)
------------ ------------ ------------- -------------- ----------- ------------
January 31, 2001 26,987 $270 ($7,154) ($147) $255,240 $248,209
============ ============ ============= ============== =========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
Nine Months (39 Weeks) Ended
-----------------------------------------------
January 31, January 31,
2001 2000
-------------------- -------------------
Cash flows from operating activities:
Net income $ 32,140 $ 28,820
------------------- -------------------
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation 11,939 11,615
Amortization of acquisition costs 3,269 2,820
Recoupment of license advances 9,197 8,488
(Increase) decrease in accounts receivable 7,225 (13,257)
Increase in merchandise inventories (12,605) (8,994)
(Increase) decrease in other operating assets (405) 3,667
Increase (decrease) in accounts payable (40,366) 23,614
Increase in other operating liabilities 4,685 5,307
------------------- -------------------
Total adjustments (17,061) 33,260
------------------- -------------------
Net cash provided from operating activities 15,079 62,080
------------------- -------------------
Cash flows from investing activities:
Additions to property and equipment (19,112) (15,546)
Retirements of property and equipment 5,458 777
License advances and acquired rights (16,742) (27,987)
Cash investment in Lifetime Entertainment Limited -- (6,432)
------------------- -------------------
Net cash used by investing activities (30,396) (49,188)
------------------- -------------------
Cash flows from financing activities:
Issuances of debt 498,475 881,321
Repayments of debt (484,475) (886,821)
Repurchase of common stock (7,024) (34,843)
Other changes in shareholders' equity, net (189) 1,735
------------------- -------------------
Net cash provided from (used by) financing activities 6,787 (38,608)
------------------- -------------------
Net decrease in cash and cash equivalents (8,530) (25,716)
Cash and cash equivalents at beginning of period 27,510 27,405
------------------- -------------------
Cash and cash equivalents at end of period $ 18,980 $ 1,689
=================== ===================
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
January 31, 2001, and the results of operations and changes in cash flows
for the nine months then ended. Because of the seasonal nature of the
Company's business, sales and earnings results for the nine months ended
January 31, 2001 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 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 January 31, 2001 and January 31, 2000 (in thousands of
dollars):
Three Months Ended January 31, 2001: H.E.R. NCE Total
------ --- -----
Revenues, external customers $314,446 $ 34,528 $348,974
Intersegment revenues -- 4,306 4,306
Segment income 20,958 2,531 23,489
Capital expenditures 5,490 775 6,265
Three Months Ended January 31, 2000: H.E.R. NCE Total
------ --- -----
Revenues, external customers $312,144 $ 31,102 $343,246
Intersegment revenues -- 4,306 4,306
Segment income 22,708 3,180 25,888
Capital expenditures 2,696 1,865 4,561
A reconciliation of total segment revenues to consolidated revenues and
total segment income to total consolidated income before income taxes and
minority interest for the three months ended January 31, 2001 and January
31, 2000 is as follows (in thousands of dollars):
Jan. 31, 2001 Jan. 31, 2000
------------- -------------
Revenues
--------
Total segment revenues $353,280 $347,552
Elimination of intersegment revenues (4,306) (4,306)
-------- --------
Consolidated revenues $348,974 $343,246
======== ========
Income Before Income Taxes and Minority Interest
------------------------------------------------
Total segment income for reportable segments $23,489 $25,888
Interest revenue 715 435
Interest expense (1,051) (1,523)
Unallocated corporate income (costs) 131 331
-------- --------
Consolidated income before income taxes
and minority interest $23,284 $25,131
======== ========
6
Notes to Consolidated Financial Statements (continued)
The tables below present information about reported segments as of and for the
nine months ended January 31, 2001 and January 31, 2000 (in thousands of
dollars):
Nine Months Ended January 31, 2001: H.E.R. NCE Total
-------- -------- --------
Revenues, external customers $777,309 $100,693 $878,002
Intersegment revenues -- 8,928 8,928
Segment income 44,804 6,458 51,262
Total assets 422,867 189,918 612,785
Capital expenditures 16,396 2,716 19,112
Nine Months Ended January 31, 2000: H.E.R. NCE Total
-------- -------- --------
Revenues, external customers $757,760 $100,698 $858,458
Intersegment revenues -- 9,955 9,955
Segment income 39,975 12,723 52,698
Total assets 401,795 177,319 579,114
Capital expenditures 10,814 4,732 15,546
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 as of and for
the nine months ended January 31, 2001 and January 31, 2000 is as follows (in
thousands of dollars):
Jan. 31, 2001 Jan. 31, 2000
------------- -------------
Revenues
--------
Total segment revenues $ 886,930 $ 868,413
Elimination of intersegment revenues (8,928) (9,955)
--------- ---------
Consolidated revenues $ 878,002 $ 858,458
========= =========
Income Before Income Taxes and Minority Interest
------------------------------------------------
Total segment income for reportable segments $ 51,262 $ 52,698
Interest revenue 1,520 1,565
Interest expense (3,459) (3,990)
Unallocated corporate income (costs) 553 31
--------- ---------
Consolidated income before income taxes
and minority interest $ 49,876 $ 50,304
========= =========
7
Notes to Consolidated Financial Statements (continued)
Jan. 31, 2001 Jan. 31, 2000
------------- -------------
Assets
------
Total segment assets $ 612,785 $ 579,114
Elimination of intercompany receivables
and payables (89,857) (61,864)
--------- ---------
Total consolidated assets $ 522,928 $ 517,250
========= =========
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 Nine Months Ended
------------------ -----------------
Jan. 31, Jan. 31, Jan. 31, Jan. 31,
2001 2000 2001 2000
---- ---- ---- -----
Weighted average shares during the
period-basic 27,149 29,034 27,493 29,863
Additional shares from assumed exercise
of stock options 65 349 156 323
------ ------ ------ ------
Weighted average shares adjusted for
assumed exercise of stock options-diluted 27,214 29,383 27,649 30,186
====== ====== ====== ======
8
Handleman Company
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
Revenues for the third quarter of fiscal 2001, which ended January 31, 2001,
increased to $349.0 million, from $343.2 million for the third quarter of fiscal
2000, which ended January 31, 2000. Net income for the third quarter of fiscal
2001 was $16.3 million or $.60 per diluted share, compared to $14.7 million or
$.50 per diluted share for the third quarter of fiscal 2000.
Revenues for the first nine months of fiscal 2001 were $878.0 million, compared
to $858.5 million for the first nine months of fiscal 2000. Net income for the
nine-month period this year was $32.1 million or $1.16 per diluted share,
compared to $28.8 million or $.95 per diluted share for the comparable
nine-month period 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 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 $314.4 million for the third quarter of this year,
compared to $312.1 million for the third quarter of last year. H.E.R. net sales
for the nine months ended January 31, 2001 increased to $777.3 million from
$757.8 million for the nine months ended January 31, 2000. This increase in net
sales for the nine-month period this year versus last year was principally due
to increased sales within the United Kingdom.
NCE net sales were $38.8 million for the third quarter of fiscal 2001, compared
to $35.4 million for the third quarter of fiscal 2000. The increased sales
volume in the third quarter of this year versus last year was driven by higher
sales at the Anchor Bay Entertainment operating unit. Net sales at NCE for the
first nine months of this year were $109.6 million, compared to $110.7 million
for the first nine months of last year.
Consolidated direct product costs as a percentage of consolidated revenues was
76.5% for the third quarter of both this year and last year, and for the nine
months ended January 31, 2001 was 75.0%, compared to 75.1% for the nine months
ended January 31, 2000.
Consolidated selling, general and administrative ("SG&A") expenses were $58.5
million or 16.8% of consolidated revenues for the third quarter of fiscal 2001,
compared to $54.4 million or 15.8% of consolidated revenues for the third
quarter of fiscal 2000. SG&A expenses this year were impacted by $3.4 million of
incremental costs incurred to implement the Company's Channel of Choice strategy
in the United Kingdom and develop the Company's e-business initiatives. The
Company expects costs associated with these activities to continue in the fourth
quarter of this year; however, there will be revenues generated in the fourth
quarter from these investments, particularly in the United Kingdom.
9
Consolidated SG&A expenses for the first nine months of this year were $167.7
million or 19.1% of consolidated revenues, compared to $160.8 million or 18.7%
of consolidated revenues for the comparable nine-month period last year. This
increase in SG&A expenses was primarily a result of the incremental costs
associated with the implementation of the Company's Channel of Choice strategy
and e-business initiatives, as mentioned above.
Income before interest, income taxes and minority interest ("operating income")
for the third quarter of fiscal 2001 was $23.6 million, compared to $26.2
million for the third quarter of fiscal 2000. H.E.R. operating income was $21.0
million for the third quarter of this year, compared to $22.7 million for the
third quarter of last year. Operating income at H.E.R. was impacted by the $3.4
million of incremental costs associated with the implementation of the Company's
Channel of Choice strategy in the United Kingdom and the development of the
Company's e-business initiatives. NCE operating income was $2.5 million for the
third quarter of fiscal 2001, compared to $3.2 million for the third quarter of
fiscal 2000. This decrease at NCE was due to lower operating results this year
versus last year at the Madacy Entertainment and The itsy bitsy Entertainment
Company operating units, while operating income at Anchor Bay Entertainment
improved over last year.
Operating income for the first nine months of this year was $51.8 million,
compared to $52.7 million for the first nine months of last year. H.E.R.
operating income increased to $44.8 million for the first nine months of fiscal
2001 from $40.0 million for the comparable prior year period. This increase in
H.E.R. operating income was mainly due to increased sales volume. NCE operating
income was $6.5 million for the first nine months of this year, compared to
$12.7 million for the first nine months of last year. This decrease in operating
income at NCE was primarily due to lower operating results at the Madacy
Entertainment and The itsy bitsy Entertainment Company operating units. The
Company expects that NCE operating income for fiscal 2001 will be less than its
operating income for fiscal 2000.
During the third quarter of this year, the Company recognized tax benefits
resulting from tax planning initiatives. The effective income tax rate for the
third quarter was 28.5%, compared to 40.5% for the same period last year. The
Company expects the effective tax rate in the fourth quarter of this year to be
in line with the fiscal 2001 nine-month rate of 34.1%.
Interest expense for the third quarter of fiscal 2001 was $.3 million, compared
to $1.1 million for the third quarter of fiscal 2000. Interest expense for the
nine months ended January 31, 2001 decreased to $1.9 million from $2.4 million
for the nine months ended January 31, 2000. This decrease in interest expense
for both the quarter and nine-month period was attributable to lower borrowing
levels.
Accounts receivable decreased to $226.8 million at January 31, 2001 from $234.0
million at April 29, 2000. This decrease was mainly due to the Company's
on-going collection efforts.
10
Merchandise inventories increased to $112.9 million at January 31, 2001 from
$100.3 million at April 29, 2000. This increase was primarily due to the
seasonality of product returns from customers.
Other assets, net at January 31, 2001 was $97.3 million, compared to $90.0
million at April 29, 2000. This increase was principally due to additional
license investments within NCE.
Accounts payable at January 31, 2001 was $162.0 million, compared to $202.3
million at April 29, 2000. This decrease was primarily due to the timing of
vendor payments relating to inventory purchases made during the holiday season.
Debt, non-current at January 31, 2001 was $48.0 million, compared to $34.0
million at April 29, 2000. This increase was mainly due to higher borrowing
levels during the third quarter of fiscal 2001 versus the fourth quarter of
fiscal 2000.
During the third quarter of this year, the Company repurchased 376,080 shares of
its stock at an average price of $7.88 per share. Included in the shares
purchased during the quarter were 115,000 shares repurchased as part of the 10%
share repurchase program announced in December 2000. The Company has repurchased
741,580 shares of its stock during the nine-month period ending January 31, 2001
at an average price of $9.47 per share. Since September 1997, the Company has
repurchased approximately 22% of its outstanding shares (prior to initiating the
stock repurchase programs) at a cost of $79 million. As of January 31, 2001, the
Company had 26,987,450 shares outstanding, compared to 28,469,324 shares
outstanding as of January 31, 2000.
The Company continued its international expansion with the commencement of
category management, distribution and service to a discount retailer in the
United Kingdom beginning February 1, 2001. The Company anticipates, going
forward, that Handleman UK Limited will generate an additional $100 million of
sales on an annual basis. In addition, the Company has made progress in the
implementation of its e-business initiatives linked to its category management
services. The expansion of the Company's SKU selection to provide fulfillment
for e-commerce is anticipated to be completed by the fourth quarter of fiscal
2001. When completed, the Company's U.S. SKU count will total approximately
60,000, and accommodate direct to consumer fulfillment in partnership with the
Company's retail customers, or support in-store pickup of merchandise ordered
electronically. The Company installed its first generation, internet-based music
kiosks in a pilot group of customer retail stores during the third quarter of
this year. 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
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 fourth quarter of fiscal 2001, the Company anticipates the testing of
manufacturing on demand through these kiosks. In addition, the Company has
developed an application service provider ("ASP") service to support ordering
music product through customer web sites.
11
* * * * * * * * * * * *
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.
12
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: March 15, 2001 BY: /s/ Stephen Strome
------------------------ --------------------------------
STEPHEN STROME
Chairman and
Chief Executive Officer
DATE: March 15, 2001 BY: /s/ Leonard A. Brams
------------------------ --------------------------------
LEONARD A. BRAMS
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
13