<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 second quarter ended October 28, 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 December 4, 2000 27,158,496
<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 - 8
Management's Discussion and Analysis of Operations 9 - 11
PART II - OTHER INFORMATION AND SIGNATURES 12
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three Months (13 Weeks) Ended Six Months (26 Weeks) Ended
----------------------------- ---------------------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 297,593 $ 288,855 $ 529,028 $ 515,212
Costs and expenses:
Direct product costs 218,270 213,071 391,620 382,279
Selling, general and
administrative expenses 54,965 51,465 109,213 106,423
Interest expense, net 749 832 1,603 1,337
--------- --------- --------- ---------
Income before income taxes
and minority interest 23,609 23,487 26,592 25,173
Income tax expense (9,046) (9,396) (10,345) (10,203)
Minority interest (421) (612) (363) (810)
--------- --------- --------- ---------
Net income $ 14,142 $ 13,479 $ 15,884 $ 14,160
========= ========= ========= =========
Net income per share :
Basic $ 0.51 $ 0.45 $ 0.57 $ 0.47
========= ========= ========= =========
Diluted $ 0.51 $ 0.45 $ 0.57 $ 0.46
========= ========= ========= =========
Weighted average number of shares
outstanding during the period:
Basic 27,639 29,851 27,665 30,278
========= ========= ========= =========
Diluted 27,926 30,189 27,905 30,592
========= ========= ========= =========
</TABLE>
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>
October 28,
2000 April 29,
(Unaudited) 2000
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,670 $ 27,510
Accounts receivable, less allowance of $15,151 at
October 28, 2000 and $17,383 at April 29, 2000, respectively,
for the gross profit impact of estimated future returns 248,701 234,005
Merchandise inventories 145,564 100,298
Other current assets 13,457 16,036
--------- ---------
Total current assets 415,392 377,849
--------- ---------
Property and equipment:
Land 1,877 3,078
Buildings and improvements 16,558 19,352
Display fixtures 53,406 52,362
Equipment, furniture and other 56,811 47,456
--------- ---------
128,652 122,248
Less accumulated depreciation and amortization 76,838 70,396
--------- ---------
Property and equipment, net 51,814 51,852
--------- ---------
Other assets, net 98,480 89,982
--------- ---------
Total assets $ 565,686 $ 519,683
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 230,899 $ 202,339
Debt, current portion 14,571 14,571
Accrued and other liabilities 39,328 31,218
--------- ---------
Total current liabilities 284,798 248,128
--------- ---------
Debt, non-current 33,986 33,986
Other liabilities 12,700 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; 27,364,000 and 27,691,000 shares
issued at October 28, 2000 and April 29, 2000, respectively 274 277
Foreign currency translation adjustment (7,774) (6,449)
Unearned compensation (246) (443)
Retained earnings 241,948 229,897
--------- ---------
Total shareholders' equity 234,202 223,282
--------- ---------
Total liabilities and shareholders' equity $ 565,686 $ 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>
Six Months (26 Weeks) Ended October 28, 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 15,884 15,884
Adjustment for foreign
currency translation (1,325) (1,325)
-------------
Comprehensive income, net of tax 14,559
-------------
Common stock issuances, net
of forfeitures, in connection
with employee benefit plans 39 197 226 423
Common stock repurchased (366) (3) (4,059) (4,062)
------- ------- ----------- ------------ -------- -------------
October 28, 2000 27,364 $274 ($7,774) ($246) $241,948 $234,202
======= ======== =========== ============ ======== =============
</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>
Six Months (26 Weeks) Ended
---------------------------
October 28, October 30,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 15,884 $ 14,160
--------- ---------
Adjustments to reconcile net income to net cash
provided from (used by) operating activities:
Depreciation 8,222 7,521
Amortization of acquisition costs 1,889 1,704
Recoupment of license advances 5,800 4,106
Increase in accounts receivable (14,695) (49,442)
Increase in merchandise inventories (45,266) (37,857)
(Increase) decrease in other operating assets 571 (2,693)
Increase in accounts payable 28,560 82,790
Increase in other operating liabilities 6,523 4,312
--------- ---------
Total adjustments (8,396) 10,441
--------- ---------
Net cash provided from operating activities 7,488 24,601
--------- ---------
Cash flows from investing activities:
Additions to property and equipment (12,847) (10,985)
Retirements of property and equipment 4,327 871
License advances and acquired rights (13,844) (22,415)
--------- ---------
Net cash used by investing activities (22,364) (32,529)
--------- ---------
Cash flows from financing activities:
Issuances of debt 323,000 211,707
Repayments of debt (323,000) (206,207)
Repurchase of common stock (4,062) (25,306)
Other changes in shareholders' equity, net (902) 1,032
--------- ---------
Net cash used by financing activities (4,964) (18,774)
--------- ---------
Net decrease in cash and cash equivalents (19,840) (26,702)
Cash and cash equivalents at beginning of period 27,510 27,405
--------- ---------
Cash and cash equivalents at end of period $ 7,670 $ 703
========= =========
</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 October 28, 2000, 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 28, 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 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 October 28, 2000 and October 30, 1999 (in thousands
of dollars):
Three Months Ended October 28, 2000: H.E.R. NCE Total
------ --- -----
Revenues, external customers $255,154 $ 42,439 $297,593
Intersegment revenues -- 4,174 4,174
Segment income 17,853 6,300 24,153
Capital expenditures 8,334 246 8,580
Three Months Ended October 30, 1999: H.E.R. NCE Total
------ --- -----
Revenues, external customers $245,651 $ 43,204 $288,855
Intersegment revenues -- 3,463 3,463
Segment income 17,006 7,427 24,433
Capital expenditures 4,176 2,056 6,232
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 October 28, 2000 and
October 30, 1999 is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Oct. 28, 2000 Oct. 30, 1999
------------- -------------
<S> <C> <C>
Revenues
--------
Total segment revenues $ 301,767 $ 292,318
Elimination of intersegment revenues (4,174) (3,463)
--------- ---------
Consolidated revenues $ 297,593 $ 288,855
========= =========
Income Before Income Taxes and Minority Interest
------------------------------------------------
Total segment income for reportable segments $ 24,153 $ 24,433
Interest revenue 392 425
Interest expense (1,141) (1,257)
Unallocated corporate results 205 (114)
--------- ---------
Consolidated income before income taxes
and minority interest $ 23,609 $ 23,487
========= =========
</TABLE>
6
<PAGE>
Notes to Consolidated Financial Statements (continued)
The tables below present information about reported segments as of and
for the six months ended October 28, 2000 and October 30, 1999 (in
thousands of dollars):
Six Months Ended October 28, 2000: H.E.R. NCE Total
------ --- -----
Revenues, external customers $462,863 $ 66,165 $529,028
Intersegment revenues -- 4,622 4,622
Segment income 23,846 3,927 27,773
Total assets 461,346 191,071 652,417
Capital expenditures 10,906 1,941 12,847
Six Months Ended October 30, 1999: H.E.R. NCE Total
------ --- -----
Revenues, external customers $445,616 $ 69,596 $515,212
Intersegment revenues -- 5,649 5,649
Segment income 17,267 9,543 26,810
Total assets 447,178 185,697 632,875
Capital expenditures 8,118 2,867 10,985
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 six months ended October 28, 2000 and October
30, 1999 is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Oct. 28, 2000 Oct. 30, 1999
------------- -------------
<S> <C> <C>
Revenues
--------
Total segment revenues $ 533,650 $ 520,861
Elimination of intersegment revenues (4,622) (5,649)
--------- ---------
Consolidated revenues $ 529,028 $ 515,212
========= =========
Income Before Income Taxes and Minority Interest
------------------------------------------------
Total segment income for reportable segments $ 27,773 $ 26,810
Interest revenue 805 1,130
Interest expense (2,408) (2,467)
Unallocated corporate results 422 (300)
--------- ---------
Consolidated income before income taxes
and minority interest $ 26,592 $ 25,173
========= =========
</TABLE>
7
<PAGE>
Notes to Consolidated Financial Statements (continued)
Oct. 28, 2000 Oct. 30, 1999
------------- -------------
Assets
Total segment assets $ 652,417 $ 632,875
Elimination of intercompany receivables
and payables (86,731) (62,531)
--------- ---------
Total consolidated assets $ 565,686 $ 570,344
========= =========
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 Six Months Ended
------------------ ----------------
Oct. 28, Oct. 30, Oct. 28, Oct. 30,
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average shares during the period-basic 27,639 29,851 27,665 30,278
Additional shares from assumed exercise of
stock options 287 338 240 314
------ ------ ------ ------
Weighted average shares adjusted for assumed
exercise of stock options-diluted 27,926 30,189 27,905 30,592
====== ====== ====== ======
</TABLE>
8
<PAGE>
Handleman Company
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Revenues for the second quarter of fiscal 2001 which ended October 28, 2000
increased to $297.6 million, from $288.9 million for the second quarter of
fiscal 2000 which ended October 30, 1999. Net income for the second quarter of
fiscal 2001 was $14.1 million or $.51 per diluted share, compared to $13.5
million or $.45 per diluted share for the second quarter of fiscal 2000.
Revenues for the first six months of fiscal 2001 were $529.0 million, compared
to $515.2 million for the first six months of fiscal 2000. Net income for the
first six months of fiscal 2001 was $15.9 million or $.57 per diluted share,
compared to $14.2 million or $.46 per diluted share for the comparable period of
the prior fiscal 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 $255.2 million for the second quarter of fiscal 2001,
compared to net sales of $245.6 million for the second quarter of fiscal 2000.
This increase in net sales 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. H.E.R. net sales for the first six months of this
fiscal year were $462.9 million, compared to $445.6 million for the first six
months of last fiscal year. This increase in net sales for the six-month period
this year versus last year was principally due to sales generated by Lifetime
Entertainment Limited, as mentioned above.
NCE net sales were $46.6 million for the second quarter of fiscal 2001, compared
to $46.7 million for the second quarter of fiscal 2000. Net sales for the first
six months of this year were $70.8 million, compared to $75.2 million for the
first six months of last year. This decrease in net sales for the first six
months of this year compared to last year was mainly due to lower sales at the
Madacy Entertainment operating unit.
Direct product costs as a percentage of revenues was 73.3% for the second
quarter ended October 28, 2000, compared to 73.8% for the second quarter ended
October 30, 1999. This reduction in direct product costs as a percentage of
revenues was principally due to a greater proportion of catalog sales versus
sales of new music releases in the overall sales mix. Catalog sales have higher
sales prices compared to sales prices of new music releases. Direct product
costs as a percentage of revenues for the first six months of fiscal 2001 was
74.0%, compared to 74.2% for the comparable six-month period last year.
Consolidated selling, general and administrative ("SG&A") expenses were $55.0
million or 18.5% of revenues for the second quarter of this year, compared to
$51.5 million or 17.8% of revenues for the second quarter of last year. SG&A
expenses were higher this year principally due to costs associated with
development of the Company's new e-business initiatives.
9
<PAGE>
SG&A expenses for the first six months of fiscal 2001 were $109.2 million or
20.6% of revenues, compared to $106.4 million or 20.7% of revenues for the first
six months of fiscal 2000.
Income before interest, income taxes and minority interest ("operating income")
for the second quarter of this fiscal year was $24.4 million, compared to $24.3
million for the second quarter of last fiscal year. H.E.R. operating income
increased to $17.9 million for the second quarter of this year, from $17.0
million for the second quarter of last year. NCE operating income was $6.3
million for the second quarter of fiscal 2001, compared to $7.4 million for the
second quarter of fiscal 2000. The decline in NCE operating income resulted from
the operating performance at The itsy bitsy Entertainment Company.
Operating income for the first six months of this fiscal year increased to $28.2
million, from $26.5 million for the first six months of last fiscal year. H.E.R.
operating income improved 39% to $23.8 million for the first six months of
fiscal 2001, from $17.1 million for the comparable prior year period. NCE
operating income was $3.9 million for the first six months of this year,
compared to $9.5 million for the first six months of last year. This decrease in
operating income at NCE was primarily due to lower operating performance at The
itsy bitsy Entertainment Company. For fiscal 2001, Management expects the
combined operating results for NCE's Anchor Bay and Madacy Entertainment
operating units to approximate their fiscal 2000 operating income levels.
Interest expense for the second quarter of fiscal 2001 was $.7 million, compared
to $.8 million for the second quarter of fiscal 2000. Interest expense for the
six months ended October 28, 2000 was $1.6 million, compared to $1.3 million for
the six months ended October 30, 1999.
Accounts receivable increased to $248.7 million at October 28, 2000, from $234.0
million at April 29, 2000. This increase was primarily attributable to the
increased sales volume in the second quarter of this year, compared to the
fourth quarter of the prior year.
Merchandise inventories increased to $145.6 million at October 28, 2000, from
$100.3 million at April 29, 2000. This increase was mainly due to increased
inventory purchases in preparation for the upcoming holiday season.
Other assets, net at October 28, 2000 were $98.5 million, compared to $90.0
million at April 29, 2000. This increase was primarily due to additional license
investments within NCE.
Accounts payable at October 28, 2000 were $230.9 million, compared to $202.3
million at April 29, 2000. This increase principally resulted from increased
inventory purchases in the second quarter of fiscal 2001, compared to the fourth
quarter of fiscal 2000 as mentioned above.
Accrued and other liabilities at October 28, 2000 were $39.3 million, compared
to $31.2 million at April 29, 2000. This increase was primarily due to higher
royalties payable within NCE.
During the second quarter of this year, the Company repurchased 365,500 shares
of its stock at an average price of $11.11 per share. Since September 1997, the
Company has repurchased approximately 20% of its outstanding shares (prior to
initiating the stock repurchase programs) at a cost of $76 million. Under the
current Board of Directors stock
10
<PAGE>
repurchase authorization which expires on December 13, 2000, the Company can
repurchase up to $2 million in additional shares of stock.
The Company is cautiously optimistic regarding operating results for the next
quarter and balance of this fiscal year based on the strength of new music
releases that will be available this holiday season. The Company continues to
make progress relative to its new 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 end of calendar
2000. When completed, the Company's U.S. SKU count will total approximately
60,000, accommodate direct to consumer fulfillment in partnership with the
Company's retail customers, and will support in-store pickup of merchandise
ordered electronically. In addition, the Company expects to have its first
generation, internet-based music kiosk available to test pilot in a select group
of customer retail stores within the next 30 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. In addition, the Company has developed an application
service provider (ASP) service to support ordering music product through
customer web-sites.
* * * * * * * * * * * *
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 the 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.
11
<PAGE>
PART II - OTHER INFORMATION
Item 4. An Annual Meeting of Shareholders of Handleman Company was
held on September 6, 2000. One item was voted on at the Annual
Meeting. This item was the election of directors. The
following individuals were elected as directors of the Company
with each receiving at least 23,540,146 shares voted for
election, while a maximum of 806,379 were withheld: Messrs.
Stephen Strome, James B. Nicholson and Lloyd E. Reuss, each to
hold office until the Annual Meeting of Shareholders in 2003
or until their successors are elected and qualified.
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: December 7, 2000 BY: /s/ Stephen Strome
------------------- --------------------------------
STEPHEN STROME
President and
Chief Executive Officer
DATE: December 7, 2000 BY: /s/ Leonard A. Brams
------------------- --------------------------------
LEONARD A. BRAMS
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
12
