<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
(amounts in thousands except share data)
<TABLE>
<CAPTION>
July 29,
2000 April 29,
(Unaudited) 2000
------------ -----------
<S> <C> <C>
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
========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(amounts in thousands)
<TABLE>
<CAPTION>
Three Months (13 Weeks) Ended July 29, 2000
-------------------------------------------------------------------------------------
Common Stock
------------------------ Foreign
Currency Total
Shares Translation Unearned Retained Shareholders'
Issued Amount Adjustment Compensation Earnings Equity
---------- ---------- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
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
========== ========== ========== ============ ============ ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
<TABLE>
<CAPTION>
Three Months (13 Weeks) Ended
------------------------------------
July 29, July 31,
2000 1999
--------------- ----------------
<S> <C> <C>
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
=============== ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
Three Months Ended July 29, 2000: H.E.R. NCE Total
-------------- -------------- ------------
<S> <C> <C> <C>
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
<CAPTION>
Three Months Ended July 31, 1999: H.E.R. NCE Total
-------------- ------------- ------------
<S> <C> <C> <C>
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
</TABLE>
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):
<TABLE>
<CAPTION>
July 29, 2000 July 31, 1999
------------- -------------
Revenues
--------
<S> <C> <C>
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
======== =========
</TABLE>
6
<PAGE>
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):
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
July 29, 2000 July 31, 1999
------------- -------------
<S> <C> <C>
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
====== ======
</TABLE>
7
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
