HANDLEMAN CO /MI/ – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS
Edgar Online, Inc. |
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's fiscal year 2012 ended on
At the Company's annual shareholders' meeting onOctober 1, 2008 , the Company's shareholders approved a Plan of Final Liquidation of the Company. As a result of this approval, the Company adopted the liquidation basis of accounting as ofOctober 5, 2008 . This basis of accounting is appropriate when the liquidation of a company appears imminent and the net realizable value of its assets is reasonably determinable. Under this basis of accounting, assets and liabilities are stated at their net realizable value, and estimated costs through the liquidation date are accrued for, to the extent reasonably determinable. OnMay 5, 2009 ,Handleman Company filed a Certificate of Dissolution with theMichigan Department of Energy , Labor and Economic Growth,Bureau of Commercial Services , Corporate Division. As a dissolved company,Handleman will continue its corporate existence, but will not conduct business, except for the purpose of winding down its affairs. UnderState of Michigan law, before making any distribution to shareholders, a dissolved corporation must pay or make provision for its non-barred, valid debts, including those obligations that arise after the effective date of dissolution, but before the bar date and before the distribution. Accordingly,Handleman's activities are now limited to: selling, collecting or otherwise realizing the value of its remaining assets; making tax and other regulatory filings; winding down the Company's remaining business activities; paying (or adequately providing for the payment) of all non-barred, valid creditor claims and obligations; and making a distribution toHandleman's shareholders. The Company must complete the termination ofthe United States ("U.S.") and Canadian pension plans. Pursuant to Board of Directors' approval onMarch 11, 2009 for the termination of the U.S. pension plan, and the subsequent approval of an amendment onNovember 22, 2010 , the Company terminated this pension plan and paid participants either in a lump sum payout or through the purchase of an annuity contract, dependent upon the participant's selection of payment. U.S. pension plan participants had untilFebruary 24, 2012 to elect the lump sum payout option. As ofApril 28, 2012 , the Company had purchased non-participating annuity contracts fromMetropolitan Life Insurance Company ("MetLife") or issued lump sum payments to the U.S. participants. MetLife completed an audit of the census data and will issue a final contract. The Company is preparing all final filings as required for the pension plan. The Canadian pension plan, which received Board of Directors approval for termination early in fiscal 2009, paid participants either by lump sum payout or through the purchase of an annuity contract, dependent upon the participant's selection of payment. As ofApril 30, 2011 , the Company had purchased non-participating annuity contracts from Desjardins Financial Security or issued lump sum payments to the majority of the Canadian participants. The remaining participants were issued payments in fiscal 2012. Based on the Company's net asset balance as ofApril 28, 2012 , the Company believes that it will have sufficient liquidity to fund the Company's wind down related costs and provide payment in full to its creditors. These distributions are primarily dependent upon the resolution of all open items and periods with taxing authorities. If the Company is unable to resolve outstanding tax issues in a reasonable period of time, the Company's ability to settle its liabilities in full while incurring necessary wind down costs could be in doubt. If the Company is able to generate cash proceeds in excess of what is needed to satisfy all of the Company's obligations, the Company will distribute any such proceeds to shareholders. Whether there will be any excess cash proceeds for distribution to shareholders is subject to a number of material risks and uncertainties that may prevent any such distribution from occurring. Accordingly, while the Company believes that a cash distribution is possible, actual results may differ from current estimates, perhaps materially, possibly resulting in no excess cash proceeds available for distribution to shareholders or in increasing the final distribution from that currently anticipated. Payments during the liquidation period will be prioritized in the following hierarchy: (i) wind down related costs, including supplier costs necessary to the wind down of the business, employee obligations such as on-going salaries, fringe benefits and retention costs; (ii) income tax payments and other regulatory filing fees; (iii) payment of unsecured valid creditor claims and obligations, including the settlement of the terminated U.S. and Canadian pension plans; and (iv) distribution to shareholders. 5 -------------------------------------------------------------------------------- OnJune 20, 2009 ,Handleman Company's common shares became non-transferable. This allows the Company to reduce costs during liquidation and maximize the liquidated value of the Company for the benefit of its creditors and potential benefit to its shareholders. The Company will distribute proceeds, if any, to shareholders in proportion to their interests as of the close of business onJune 20, 2009 , the date of record. Prior to the wind down of business operations,Handleman Company operated as a category manager and distributor of prerecorded music and console video game hardware, software and accessories to leading retailers in the U.S.,United Kingdom ("UK") andCanada . During fiscal 2009, the Company completed sales agreements for certain assets related to the U.S.,UK and Canadian category management and distribution operations, as well as theCrave Entertainment Group, Inc. ("Crave") video game operations and theREPS LLC ("REPS") field service business unit. All of those operations were wound down and the Company has no continuing involvement in those businesses.
Critical Accounting Estimates
The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. The Company continually evaluates its estimates and assumptions, which are based on historical experience, future expectations and other various factors that are believed to be reasonable under the circumstances. The results of these estimates and assumptions form the basis for making judgments about the carrying values of certain assets and liabilities.
The following are the Company's critical accounting estimates under the liquidation basis of accounting:
Accrued Liquidation Costs
The Company adopted the liquidation basis of accounting as ofOctober 5, 2008 . This basis of accounting is appropriate when the liquidation of a company appears imminent and the net realizable value of its assets is reasonably determinable. Under this basis of accounting, assets and liabilities are stated at their net realizable value, and estimated costs through the liquidation date are accrued for, to the extent reasonably determinable. The Company reviews, on a quarterly basis, all remaining operating expenses and contractual commitments such as payroll and related expenses, professional fees and other outside services to determine the estimated costs to be incurred during the liquidation period. The Company expects most of the activities will cease by the end of calendar year 2012 and assumed costs throughNovember 2012 .
Income Taxes
Deferred income taxes are provided for the effect of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and amounts recognized for income tax purposes. Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that the assets will not be realized. In assessing the likelihood of realization, consideration is given to all available evidence including estimates of future taxable income and the character of income needed to realize future benefits. Based on information available to date, the Company recorded any income tax receivable or payable for the ultimate tax amount owed to wind down the Company. The calculation of current and deferred tax assets (including valuation allowances) and liabilities requires management to apply significant judgment related to the application of complex tax laws, changes in tax laws or related interpretations, uncertainties related to the outcomes of tax audits and changes in the 6
-------------------------------------------------------------------------------- Company's operations or other facts and circumstances. Further, management must continually monitor changes in these factors. Changes in such factors may result in changes to management estimates and could require the Company to adjust its tax assets and liabilities, perhaps significantly, and record additional income tax expense or benefits.Handleman Company makes assumptions about individual tax positions before any part of the related benefit can be recognized in its financial statements. A company must consider whether it is more likely than not that a tax position will be sustained upon examination by a taxing authority. Significant judgment is required in assessing the timing and amounts of deductible and taxable items. The Company establishes reserves when, despite its belief that its tax return positions are supportable, it is determined that certain positions may be successfully challenged by the taxing authorities. When facts and circumstances change, the Company adjusts these reserves through its provision for income taxes. The Company's estimates of tax implications related to the liquidation of the Company are subject to change, perhaps significantly, as the Company continues to finalize tax matters. Accordingly, the amount of liability, if any, will be included in the Company's financial statements as changes in estimates occur.
Liquidity and Capital Resources
Based on the Company's net asset balance as ofApril 28, 2012 , the Company believes proceeds from the liquidation of assets will be sufficient to provide payment in full to its creditors; however, there can be no assurances. Payments are estimated as follows (in thousands of dollars): Total Assets Proration Available for Category Total Liabilities Percentage Distribution Wind down related costs $ 954 100% $ 954 Taxes (income and other) 130 100% 130 Unsecured creditor claims 9,753 100% 9,753 Total liabilities $ 10,837 $ 10,837 Available for shareholder distribution 769 Total assets for distribution $ 11,606 These projected payments are based on significant estimates and judgments. Through the liquidation period, if the Company is able to generate cash proceeds in excess of what is needed to satisfy all the Company's obligations, the Company will distribute any such proceeds to shareholders. The actual amount and timing of future liquidating distributions, if any, to shareholders is dependent upon the resolution of all open items and periods with taxing authorities; the ultimate settlement amounts of the Company's liabilities and obligations; and, actual costs incurred in connection with carrying out the Company's Plan of Final Liquidation, including administrative costs during the liquidation period. Included in the net assets of$0.8 million as ofApril 28, 2012 , was$11.5 million of cash and cash equivalents. The unsecured creditor claims ofApril 28, 2012 relate primarily to amounts payable to taxing authorities. The aggregate amount of distributions to shareholders is currently expected to be approximately$0.04 per share of common stock based on net assets as ofApril 28, 2012 ; however, the actual amount of cash remaining for distribution to shareholders following completion of the liquidation, and the dissolution of the Company could vary significantly from current estimates and could even result in no excess cash available for distribution or cash available for distribution in excess of the current estimate.
Included in the net assets of
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Other Information
Except as discussed in Note 6 of Notes to Consolidated Financial Statements, the Company is not currently involved in any legal proceedings that are material or for which it does not believe it has adequate reserves. Any other legal proceedings in which the Company is involved are routine legal matters that are incidental to the wind down of business operations. The Company establishes reserves for all claims and legal proceedings based on its best estimate of the amounts it expects to pay. The Company has no investments that are accounted for under the equity method in accordance with accounting principles generally accepted inthe United States of America . Accordingly, there are no liabilities associated with investments accounted for under the equity method that would be considered material to the Company. In addition, the Company had no significant off-balance sheet arrangements as ofApril 28, 2012 . OnNovember 27, 2007 , the Board of Directors appointed Mr.Albert A. Koch asHandleman's President and Chief Executive Officer throughHandleman's engagement ofAP Services, LLC ("APS"). AP Services is affiliated with AlixPartners, a financial advisory and consulting firm, whereMr. Koch is a Vice Chairman, Managing Director and Partner. In addition to an hourly rate and time commitment for services,Handleman's agreement, as amended, provides thatHandleman will pay APS a success fee based on 5% (currently estimated to be$38,000 ) of the fair value of cash and/or other assets that is distributed to shareholders if such a distribution is approved by the Company's Board of Directors. The success fee shall be paid in cash, concurrent with the date or dates that distributions are made toHandleman Company's shareholders. All APS staffing was approved, in advance of their joiningHandleman , by the CEO Governing Committee, which was a Committee of the Board that was formed to oversee the AlixPartners engagement. The Company now engagesMr. Koch on a part-time basis. All invoices greater than$100,000 from AlixPartners to the Company are reviewed and approved by a member of the Board of Directors prior to their payment. In accordance with accounting guidance, this relationship is viewed as a related party transaction since the APS consultants may control or significantly influence the management and operating policies of the Company.
The Company has not engaged in any other related party transactions, which would have had a material effect on the Company's financial position, results of operations or cash flows.
OnNovember 22, 2010 , the Company'sBoard of Director's approved a change in the employment status forRozanne Kokko effectiveJanuary 2, 2011 . Ms. Kokko continues to serve as the Company's Senior Vice President and Chief Financial Officer, but does so on a consulting basis due to the reduced workload during the wind down period. Ms. Kokko remains eligible for a discretionary bonus as of the Company's ultimate termination date and also received a discretionary bonus for the year ending on her termination as an employee of the Company. During the first quarter of fiscal 2010, the Company's two remaining members of its Board of Directors agreed to discontinue receiving director fees for their services. * * * * * * * * * * This document contains forward-looking statements, which are not historical facts. These statements involve risks and uncertainties, and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results, events and performance could differ materially from those contemplated by these forward-looking statements including, without limitation, resolving open items and periods with taxing authorities, maintaining sufficient liquidity to fund wind down operations, retaining key personnel, satisfactory resolution of any outstanding claims or claims which may arise, and other factors discussed in this document and those detailed from time to time in the Company's filings with theSecurities and Exchange Commission .Handleman Company notes that the preceding conditions are not a complete list of risks and uncertainties. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date of this document. 8
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