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Handleman Selling Anchor Bay

25 Nov, 2003 By: Holly J. Wagner


Rack jobber Handleman Co. has struck a tentative deal to sell its Anchor Bay Entertainment label to an unnamed buyer, according to a financial statement released last week.

The terms of the sale have not been disclosed, and the sale is subject to closing conditions. Once those requirements have been met, the closing is expected to take place within 30 days.

If the sale goes through, the roughly $60 million in cash generated from it will be used, in part, to continue repurchasing shares of common stock under the board-authorized 20 percent share repurchase program, executives said. The company has 3.5 million shares remaining to repurchase under that authorization.

Anchor Bay's roster includes several TV franchises including “Three's Company,” “The Highlander,” “Xena the Warrior Princess,” “Hercules: The Legendary Journeys,” and the old “The Hulk” series. The label also has a substantial bank of fitness titles and the Thomas the Tank Engine children's franchise.

Handleman's overall financial performance was hurt when Kmart went bankrupt and shuttered 300 stores. Handleman had serviced those stores and noted in its second quarter financial report that loss of those stores and 75 Meijer stores in May hurt its results.

Going forward, Handleman will report Anchor Bay financials as discontinued operations.

"Sales and earnings in Handleman Company's U.S. operation were below expectations for the second quarter. However, sales and earnings in our ongoing UK and Canadian operations continue to grow,” Handleman chairman and CEO Stephen Strome said, “In addition, music industry sales have recently begun to improve compared to the same period last year. We also expect an increase in the number of quality new releases during the next four weeks. As a result, we are cautiously optimistic about the favorable impact that improved music industry sales and new releases may have on our sales and earnings going forward."

For the second fiscal quarter of 2004, ended Nov. 1, Handleman reported sales from continuing operations of $269.9 million, down 11 percent from $303.2 million same quarter last year.

The sales decline was attributable to lower sales in the company's U.S. operation and the absence of Madacy Entertainment sales included in fiscal 2003, partially offset by higher sales in the UK and Canada.

Income from continuing operations for the quarter $8.5 million, or 34 cents per diluted share, compared to $11.4 million or 43 cents per diluted share for the second quarter of fiscal 2003.

Handleman reported total net income of $10.2 million or 41 cents per diluted share for the second quarter 2004. Total net income for the 2003 second quarter was $13.7 million, or 52 cents per diluted share, of which $2.3 million or 9 cents per diluted share was from discontinued operations.

Continuing operations include music category management and distribution operations in the United States, United Kingdom, Canada and Mexico, as well as category management operations in Argentina and Brazil.

In addition to the loss of mass merchant clients, the company cited lower music retail sales in certain customers' stores, and that some clients delayed building seasonal inventory levels for the holiday season, as compared to last year.

Operating income (income before interest, income taxes and minority interest) from continuing operations was $12.3 million for the second quarter of this year, compared to $17 million for the same quarter last year. The decline in operating income was attributed to lower sales in the company's U.S. operation and the absence of Madacy Entertainment.

Sales from continuing operations for the first six months of 2004 were $475.2 million, compared to $567.9 million from continuing operations for the first six months of last year. Income from continuing operations for the first six months of fiscal 2004 was $9.3 million or 37 cents per diluted share, compared to $13.9 million or $.53 per diluted share from continuing operations for the comparable period last year.

Based on the projected Anchor Bay sale, Handleman revised its outlook for the balance of fiscal 2004.

The company expects sales from continuing operations for its third and fourth quarters of this fiscal year to be comparable to, or slightly greater than, sales from continuing operations for its third and fourth quarters of last year, which were $711 million. The company also expects earnings per share from continuing operations for its third and fourth quarters this year to be comparable to, or slightly higher than, the diluted earnings per share of $1.03 from continuing operations for the same period last year. Last year's earnings per share excluded charges relating to the impairment of subsidiary assets of 67 cents per share during the third quarter.

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