<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 2nd quarter ended October 29, 1994 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 48084-5299 Area Code 810 362-4400
- ---------------------------------------- ------------ ------------------------
(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 2, 1994 33,538,478
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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
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 Six Months Ended
-------------------------- --------------------------
October 29, October 30, October 29, October 30,
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $347,160 $322,465 $559,624 $516,460
Direct product costs 266,928 245,040 428,376 393,576
-------- -------- -------- --------
Gross profit 80,232 77,425 131,248 122,884
Selling, general and
administrative expenses 51,915 48,703 98,287 94,887
Amortization of acquisition
costs 1,530 1,561 3,253 3,905
Interest expense, net 1,577 1,658 3,034 3,157
-------- -------- -------- --------
Income before income taxes 25,210 25,503 26,674 20,935
Income tax expense 9,730 10,050 10,293 8,250
-------- -------- -------- --------
Net income $15,480 $15,453 $16,381 $12,685
======== ======== ======== ========
Earnings per average common share
outstanding during the period $0.46 $0.46 $0.49 $0.38
-------- -------- -------- --------
Average number of shares
outstanding during the period 33,529 33,413 33,500 33,364
======== ======== ======== ========
Dividends per share $0.11 $0.11 $0.22 $0.22
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-1-
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(amounts in thousands except share data)
<TABLE>
<CAPTION>
October 29, April 30,
1994 1994
----------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,644 $ 10,568
Accounts receivable, less allowance of $24,500 at
October 29, 1994 and $19,613 at April 30, 1994
for gross profit impact of future returns 323,822 227,278
Merchandise inventories 298,204 234,594
Other current assets 4,318 4,936
-------- --------
Total current assets 633,988 477,376
-------- --------
Property and equipment:
Land 6,744 7,176
Buildings and improvements 42,221 44,056
Display fixtures 93,556 87,538
Equipment, furniture and other 50,184 40,940
Leasehold improvements 3,202 2,802
-------- --------
195,907 182,512
Less accumulated depreciation and amortization 82,018 70,485
-------- --------
113,889 112,027
-------- --------
Other assets, net of allowances 50,433 51,595
-------- --------
Total assets $798,310 $640,998
======== ========
LIABILITIES
Current liabilities:
Accounts payable $312,203 $197,676
Debt, current -- 32,200
Income taxes, currently payable 10,862 3,677
Accrued and other liabilities 32,382 27,674
-------- --------
Total current liabilities 355,447 261,227
-------- --------
Debt, non-current 129,200 76,364
Deferred income taxes 4,554 3,914
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; 33,528,000 and 33,411,000 shares issued at
October 29, 1994 and April 30, 1994, respectively 335 334
Paid-in capital 33,140 31,900
Foreign currency translation adjustment and other (6,361) (5,732)
Retained earnings 281,995 272,991
-------- --------
Total shareholders' equity 309,109 299,493
-------- --------
Total liabilities and shareholders' equity $798,310 $640,998
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-2-
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(amounts in thousands except per share data)
<TABLE>
<CAPTION>
Six Months Ended October 29, 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>
April 30, 1994 33,411 $334 $31,900 ($5,732) $272,991 $299,493
Equity adjustment for
foreign currency
translation 486 486
Net income 16,381 16,381
Cash dividends,
$.22 per share (7,377) (7,377)
Common stock issued for
employee benefit plans 117 1 1,240 ($1,115) 126
------- -------- -------- ----------- -------- -------------
October 29, 1994 33,528 $335 $33,140 ($6,361) $281,995 $309,109
======= ======== ======== =========== ======== =============
</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 Ended
-----------------------------
October 29, October 30,
1994 1993
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $16,381 $12,685
------------ ------------
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation 12,087 11,688
Amortization of acquisition costs 3,253 3,905
Amortization of video license advances 5,682 1,848
(Increase) decrease in assets:
Accounts receivable (96,544) (100,655)
Merchandise inventories (63,610) (43,086)
Other current assets 618 7
Other assets, net of allowances (55) (812)
Increase (decrease) in liabilities:
Accounts payable 114,527 110,004
Income taxes, currently payable 7,185 3,040
Deferred income taxes 640 (8)
Accrued and other liabilities 4,506 505
------------ ------------
Total adjustments (11,711) (13,564)
------------ ------------
Net cash provided from (used by)
operating activities 4,670 (879)
------------ ------------
Cash flows from investing activities:
Additions to property and equipment (17,024) (14,300)
Retirements of property and equipment 2,114 1,004
Video license advances (6,957) (10,667)
------------ ------------
Net cash used by investing activities (21,867) (23,963)
------------ ------------
Cash flows from financing activities:
Issuances of debt 542,600 358,390
Repayments of debt (521,562) (361,543)
Cash dividends (7,377) (7,351)
Other changes in shareholders' equity, net 612 (558)
------------ ------------
Net cash provided from (used by)
financing activities 14,273 (11,062)
------------ ------------
Net decrease in cash and cash equivalents (2,924) (35,904)
Cash and cash equivalents at beginning
of period 10,568 57,306
Cash and cash equivalents at end of ------------ ------------
period $7,644 $21,402
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
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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
October 29, 1994, 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 29, 1994 are not necessarily indicative of what the results will
be for the full year. The consolidated balance sheet as of April 30, 1994
is derived from the audited consolidated financial statements of the Company
included in the Company's 1994 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 30, 1994.
2. Certain prior period amounts have been reclassified to conform with
presentations adopted by the Company in the current year.
3. On November 21, 1994, the Company announced that it had placed $100 million
of senior notes with a group of six insurance companies. Proceeds will
be used to refinance floating rate bank indebtedness and for corporate
growth purposes. The principal amount of $100 million is broken into
three tranches of $20 million, $55 million and $25 million, with average
maturities of three years, five years and seven years, respectively.
Interest rates are 7.81% for the first tranche, 8.26% for the second tranche
and 8.59% for the third tranche. In November 1994, the Company received
$55 million of such proceeds, and will receive $25 million additional in
February 1995 and the remaining $20 million in April 1995. The Company's
existing bank credit agreement has been reduced from $250 million to
$190 million as a result of the private placement.
Also in November 1994, the Company sold its Sparks, Nevada Automated
Distribution Center (ADC) through a sale and lease-back arrangement.
The Company has leased the ADC for five years with an annual lease cost
of approximately $900,000, and also has two five-year renewal options
on the facility.
-5-
<PAGE>
HANDLEMAN COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Net sales for the second quarter ended October 29, 1994 were $347.2 million,
compared with $322.5 million for the second quarter ended October 30, 1993, an
increase of 8%. Net income for the second quarter ended October 29, 1994 was
$15.5 million or $.46 per share, which was equal to net income for the second
quarter of last year.
For the first six months of fiscal 1995, net sales were $559.6 million, compared
to $516.5 million for the same period last year, an increase of 8%. Net income
for the first six months of this year was $16.4 million, or $.49 per share,
compared to $12.7 million or $.38 per share last year, an increase of 29%.
Music sales during the second quarter this year were $170.1 million, compared to
$179.8 million for the second quarter last year, a decrease of 5%. The decrease
in music sales resulted from the timing of new releases in the second quarter
this year compared to the same quarter last year. Compact disc (CD) sales for
the second quarter this year were $94.4 million, or 55% of Handleman's music
sales, compared to $87.6 million or 49% of music sales during the second quarter
last year. Handleman's CD sales growth rate continues to exceed the industry's
because CDs are now being purchased by middle-income Americans who tend to be
shoppers at the mass merchant outlets serviced by the Company. Music sales for
the first six months this year were $289.0 million, compared to $293.1 million
for the same period last year, a decrease of 1%.
For the second quarter of fiscal 1995, video sales were $152.4 million, compared
to $116.4 million for the second quarter last year, an increase of 31%. The
increase in video sales was primarily due to sales of "Jurassic Park" and "Snow
White," which were released during the second quarter of fiscal 1995. For the
first six months of fiscal 1995, video sales were $220.0 million, compared to
$173.6 million last year, an increase of 27%.
Book sales for the second quarter this year were $15.9 million, compared to
$14.6 million for the second quarter last year, an increase of 9%. This
increase was primarily the result of increased sales to the Company's major
customers. For the first six months this year, book sales were $29.9 million,
compared to $29.7 million last year, an increase of 1%.
Personal computer software sales for the second quarter of fiscal 1995 were $8.8
million, compared to $11.7 million for the same period last year, a decrease of
25%. The decrease in personal computer software sales was primarily
attributable to the loss of two customers. Personal computer software sales for
the first six months of fiscal 1995 were $20.7 million, compared to $20.1
million for the comparable period last year, an increase of 3%.
The gross profit margin percentage for the second quarter of fiscal 1995 was
23.1%, compared to 24.0% for the same period last year. The decline in gross
profit margin percentage resulted from sales of mega-hit video releases on which
the Company earns a lower gross profit margin percentage. For the first six
months this year the gross profit margin percentage was 23.5% of net sales,
compared to 23.8% for the first six months of fiscal 1994.
6
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Selling, general and administrative (SG&A) expenses were $51.9 million or 15.0%
of net sales for the second quarter this year, compared to $48.7 million or
15.1% of net sales for the second quarter last year. The dollar increase in
SG&A expenses was primarily attributable to expenses of companies acquired or
formed subsequent to the second quarter of fiscal 1994. For the first six
months of this year, SG&A expenses were $98.3 million or 17.6% of net sales,
compared to $94.9 million or 18.4% of net sales last year.
Proprietary Products & Retail sales, which are included in the results discussed
above, represent sales of the Company's licensed video, personal computer
software and music products, and sales at licensed retail departments.
Proprietary Products & Retail sales during the second quarter of fiscal 1995
were $34.8 million, compared to $31.4 million in the second quarter last year.
This 11% increase was primarily attributable to sales from companies acquired in
the first quarter of fiscal 1995. Proprietary Products & Retail sales for the
first six months of fiscal 1995 were $48.2 million, compared to $39.0 million
for the first six months last year, an increase of 24%. This increase resulted
from the aforementioned acquisitions, as well as the establishment of an in-
house software publishing company. The Company is actively pursuing
opportunities to increase sales of proprietary products, which contribute a
relatively higher gross profit margin percentage.
On November 21, 1994, the Company announced that it had placed $100 million of
senior notes with a group of six insurance companies. Proceeds will be used to
refinance floating rate bank indebtedness and for corporate growth purposes.
The principal amount of $100 million is broken into three tranches of $20
million, $55 million and $25 million, with average maturities of three years,
five years, and seven years, respectively. Interest rates are 7.81% for the
first tranche, 8.26% for the second tranche, and 8.59% for the third tranche.
In November 1994, the Company received $55 million of such proceeds, and will
receive $25 million additional in February 1995 and the remaining $20 million in
April 1995. The Company's existing bank credit agreement was reduced from $250
million to $190 million as a result of the private placement.
Accounts receivable at the end of October this year were $323.8 million,
compared to $227.3 million as of April 30, 1994. The increase was primarily due
to heavier sales in September and October of 1994, compared to March and April
of 1994. The Company's second quarter includes a portion of the sales impact of
the Christmas selling season. The increase in merchandise inventories and
accounts payable at October 29, 1994, compared to April 30, 1994, resulted from
increased purchases to support the larger sales volume expected for the
remainder of the Christmas selling season. The decrease in debt, current and the
increase in debt, non-current primarily resulted from the payment of $31 million
of notes on October 1, 1994, and the replacement of such debt
with non-current debt.
Management's Discussion and Analysis of Operations included in the Company's
Form 10-Q for the first quarter ended July 30, 1994 provides additional
discussion regarding sales and earnings results for the first quarter of fiscal
1995, and is incorporated herein by reference.
7
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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: December 9, 1994 BY: /s/ Stephen Strome
------------------------------- --------------------------------
STEPHEN STROME
President and
Chief Executive Officer
DATE: December 9, 1994 BY: /s/ Richard J. Morris
------------------------------- --------------------------------
RICHARD J. MORRIS
Senior Vice President/Finance-
Chief Financial Officer and
Secretary
-8-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> QTR-2
<FISCAL-YEAR-END> APR-29-1995
<PERIOD-START> MAY-01-1994
<PERIOD-END> OCT-29-1994
<CASH> 7,644
<SECURITIES> 0
<RECEIVABLES> 323,822
<ALLOWANCES> 0
<INVENTORY> 298,204
<CURRENT-ASSETS> 633,988
<PP&E> 195,907
<DEPRECIATION> 82,018
<TOTAL-ASSETS> 798,310
<CURRENT-LIABILITIES> 355,447
<BONDS> 129,200
<COMMON> 335
0
0
<OTHER-SE> 308,774
<TOTAL-LIABILITY-AND-EQUITY> 798,310
<SALES> 347,160
<TOTAL-REVENUES> 347,160
<CGS> 266,928
<TOTAL-COSTS> 266,928
<OTHER-EXPENSES> 53,445
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,577
<INCOME-PRETAX> 25,210
<INCOME-TAX> 9,730
<INCOME-CONTINUING> 15,480
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,480
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
</TABLE>
