<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 3rd quarter ended January 31, 1994 Commission File Number 1-7923
HANDLEMAN COMPANY
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(Exact name of registrant as specified in its charter)
MICHIGAN 38-1242806
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 KIRTS BOULEVARD,
TROY, MICHIGAN 48084-4142 Area Code 810 362-4400
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(Address of principal (Zip code) (Registrant's telephone
executive offices) number)
Indicate by check mark 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
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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 4, 1994 33,419,416
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HANDLEMAN COMPANY
INDEX
PAGE NUMBER
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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
Management's Discussion and Analysis of Operations............ 6 - 7
PART II - OTHER INFORMATION AND SIGNATURES........................... 8
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HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
January 31, January 31, January 31, January 31,
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales ............................................................ $300,027 $335,656 $816,487 $869,820
Costs and expenses:
Direct product costs .............................................. 231,411 254,138 625,987 657,096
Selling, general and administrative expenses ...................... 48,677 54,630 142,357 146,777
Amortization of acquisition costs ................................. 1,857 2,218 5,762 6,319
Interest expense, net ............................................. 1,339 1,161 4,496 5,150
-------- -------- -------- --------
Income before income taxes ........................................... 16,743 23,509 37,885 54,478
Income taxes ......................................................... 6,659 9,185 15,116 21,262
-------- -------- -------- --------
Net income ........................................................... $ 10,084 $ 14,324 $ 22,769 $ 33,216
======== ======== ======== ========
Earnings per average common share outstanding during the period ...... $ 0.30 $ 0.43 $ 0.68 $ 1.00
======== ======== ======== ========
Average number of shares outstanding during the period ............... 33,415 33,206 33,381 33,232
======== ======== ======== ========
Dividends per share .................................................. $ 0.11 $ 0.10 $ 0.33 $ 0.30
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(amounts in thousands except share data)
<TABLE>
<CAPTION>
January 31, May 1,
1994 1993
ASSETS ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................. $23,264 $57,306
Accounts receivable, less allowance of $19,258 at
January 31, 1994 and $21,184 at May 1, 1993
for gross profit impact of future returns ................ 239,681 200,547
Merchandise inventories .................................... 251,911 238,310
Other current assets ........................................ 4,314 2,231
------------ ------------
Total current assets ........................ 519,170 498,394
------------ ------------
Property and equipment:
Land ........................................................ 7,966 8,044
Buildings and improvements .................................. 43,955 43,417
Display fixtures ............................................ 87,360 76,683
Equipment, furniture and other .............................. 41,379 38,840
Leasehold improvements ...................................... 2,798 2,848
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183,458 169,832
Less accumulated depreciation and amortization .............. 70,082 58,432
------------ ------------
113,376 111,400
------------ ------------
Other assets, net of allowances.................................. 53,160 46,090
------------ ------------
Total assets ................................ $685,706 $655,884
============ ============
LIABILITIES
Current liabilities:
Accounts payable ............................................ $212,939 $200,394
Debt, current................................................ 32,200 17,860
Income taxes, currently payable.............................. 2,529 7,124
Accrued and other liabilities................................ 35,873 31,153
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Total current liabilities .................. 283,541 256,531
------------ ------------
Debt, noncurrent ................................................ 97,270 105,702
Deferred income taxes .......................................... 4,948 4,951
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; 33,415,140 and 33,218,273 shares issued at
January 31, 1994 and May 1, 1993, respectively .............. 334 332
Paid-in capital ................................................ 32,015 29,136
Foreign currency translation adjustment and other .............. (4,180) (804)
Retained earnings .............................................. 271,778 260,036
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Total shareholders' equity .................... 299,947 288,700
------------ ------------
Total liabilities and shareholders' equity...... $685,706 $655,884
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(amounts in thousands except per share data)
<TABLE>
<CAPTION>
Nine Months Ended January 31, 1994
-----------------------------------------------------------------------
Foreign
Common Stock Currency
------------------ Translation Total
Shares Paid-in Adjustment Retained Shareholders'
Issued Amount Capital and Other Earnings Equity
------- -------- -------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
May 1, 1993 . . . . . . 33,218 $332 $29,136 ($804) $260,036 $288,700
Equity adjustment for
foreign currency
translation . . . . . (1,108) (1,108)
Net income . . . . . . 22,769 22,769
Common stock issued for
employee benefit
plans . . . . . . . . 197 2 2,879 (2,268) 613
Cash dividends,
$.33 per share . . . . (11,027) (11,027)
------- -------- -------- ----------- --------- -------------
January 31, 1994 . . . 33,415 $334 $32,015 ($4,180) $271,778 $299,947
======= ======== ======== =========== ========= =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
January 31, January 31,
1994 1993
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................ $22,769 $33,216
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation ...................................... 17,940 16,164
Amortization ...................................... 5,762 6,319
(Increase) decrease in assets:
Accounts receivable .............................. (39,134) (11,989)
Merchandise inventories .......................... (13,601) (15,408)
Other current assets ............................ (2,083) (2,522)
Other assets, net of allowances .................. 3,847 2,167
Increase (decrease) in liabilities:
Accounts payable ................................ 12,545 15,453
Income taxes, currently payable .................. (4,595) (1,390)
Deferred income taxes ............................ (3) 1,403
Accrued and other liabilities .................... 5,020 1,675
------------ ------------
Total adjustments ................................ (14,302) 11,872
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Net cash provided from
operating activities ...................... 8,467 45,088
------------ ------------
Cash flows from investing activities:
Additions to property and equipment .................. (23,079) (22,919)
Retirements of property and equipment ................ 1,221 4,952
Video license advances ................................ (15,037) (1,957)
------------ ------------
Net cash used by investing activities ........ (36,895) (19,924)
------------ ------------
Cash flows from financing activities:
Issuances of debt .................................... 659,390 471,600
Repayments of debt .................................... (653,482) (512,857)
Cash dividends ........................................ (11,027) (9,952)
Other, net ............................................ (495) (802)
------------ ------------
Net cash used by financing activities ........ (5,614) (52,011)
------------ ------------
Net decrease in cash and cash equivalents ..... (34,042) (26,847)
Cash and cash equivalents at beginning
of period .................................. 57,306 34,775
Cash and cash equivalents at end of ------------ ------------
period .................................... $23,264 $7,928
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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HANDLEMAN COMPANY
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, 1994, 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, 1994, are not necessarily indicative of what the results will
be for the full year. The consolidated balance sheet as of May 1, 1993 is
derived from the audited consolidated financial statements of the Company
included in the Company's 1993 Annual Report on Form 10-K filed with the
Securities and Exchange Commission. Reference should also be made to the
complete statements included in the Company's Form 10-K.
2. Certain prior period amounts have been reclassified to conform with
presentations adopted by the Company in fiscal 1994.
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<PAGE>
HANDLEMAN COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Net sales for the third quarter ended January 31, 1994 were $300.0 million,
compared to $335.7 million for the third quarter ended January 31, 1993. Net
income for the third quarter of fiscal 1994 was $10.1 million (or $.30 per
share), compared to $14.3 million (or $.43 per share) for the third quarter last
year.
For the first nine months of fiscal 1994, net sales were $816.5 million,
compared to $869.8 million for the same period last year. Net income for the
first nine months of this year was $22.8 million (or $.68 per share), compared
to $33.2 million (or $1.00 per share) for the same period last year.
Music sales during the third quarter this year were $161.1 million, compared to
$195.8 million for the third quarter last year, a decrease of 18%. The Company
attributes the decline in sales of music product to the impact of customer
fiscal year-end inventory concerns, which resulted in reduced sales volume and
increased merchandise returns in January 1994. Music sales for the first nine
months this year were $454.2 million, compared to $504.9 million for the same
period last year.
For the third quarter of fiscal 1994, prerecorded video sales were $103.3
million, compared to $103.5 million for the same period a year-ago. For the
first nine months of fiscal 1994, video sales were $276.9 million, compared to
$279.1 million for the same period last year.
Handleman Company's book sales for the third quarter this year were $21.2
million, compared to $18.2 million for the third quarter last year, an increase
of 16%. The increase in book sales was primarily attributable to increased
sales to the Company's major book customer. Book sales for the first nine
months of this year were $51.0 million, compared to $50.2 million for the same
period last year.
Home computer software sales for the third quarter of fiscal year 1994 were
$14.4 million, compared to $18.2 million for the third quarter last year, a
decrease of 21%. The decrease in home computer software sales was primarily due
to the loss of two customers which switched to suppliers that are not providing
in-store service. Home computer software sales for the first nine months of
fiscal 1994 were $34.4 million, compared to $35.6 million for the first nine
months of fiscal 1993.
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Gross profit margin for the third quarter this year was 22.9%, compared to 24.3%
for the third quarter last year. The primary reason for the decrease in the
gross profit margin percentage was the restricting by customers of music reorder
shipments to top selling items. These better selling titles carry lower gross
profit margins since they are heavily discounted. These restrictions also
resulted in a decrease in sales of higher margin budget music product,
negatively impacting the overall gross profit margin. For the first nine months
this year the gross profit margin was 23.3%, compared to 24.5% for the
comparable period last year.
Selling, general and administrative expenses in the third quarter this year were
$48.7 million or 16.2% of net sales, compared with $54.6 million or 16.3% of net
sales for the third quarter last year. The primary reason for the decline in
selling, general and administrative expenses was the lower sales level. For the
first nine months this year, selling, general and administrative expenses were
$142.4 million or 17.4% of net sales, compared to $146.8 million or 16.9% of net
sales for the same period last year.
Interest expense, net of interest income, for the third quarter this year was
$1.3 million, compared to $1.2 million for the third quarter last year. This
increase was substantially related to lower interest earnings which primarily
resulted from a lower rate of return on invested funds. Interest expense, net
of interest income, for the first nine months of fiscal 1994 was $4.5 million,
compared to $5.2 million for the comparable period last year.
Accounts receivable, as of January 31, 1994 were $239.7 million, compared to
$200.5 million as of May 1, 1993. The increase was primarily due to the
seasonal nature of the Company's business. The Company's third quarter includes
a portion of the sales impact of the Christmas selling season. The increase in
other assets, net of allowances, primarily relates to video license advances.
The increase in debt, current, results from the reclassification to current
liabilities of certain notes due on October 1, 1994.
Customer concerns about overall store inventory levels will continue to have a
dampening effect on the Company's sales in the fourth quarter of fiscal 1994.
The Company is exploring opportunities to create additional promotions in its
product lines to offset a forecasted sales decline.
Management's Discussion and Analysis of Operations included in the Company's
Form 10-Q's for the first quarter ended July 31, 1993 and the second quarter
ended October 30, 1993 provide additional discussion regarding sales and
earnings results for the Company's first and second quarters of fiscal 1994, and
are incorporated herein by reference.
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<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: March 11, 1994 BY: /s/ Stephen Strome
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STEPHEN STROME
President and
Chief Executive Officer
DATE: March 11, 1994 BY: /s/ Richard J. Morris
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RICHARD J. MORRIS
Vice President/Finance-
Chief Financial Officer and
Secretary
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