<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 1st quarter ended July 29, 1995 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 Identification No.)
incorporation or organization)
500 KIRTS BOULEVARD, TROY, MICHIGAN 48084-4142 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
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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 September 1, 1995 33,589,590
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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
-----------------------------
July 29, July 30,
1995 1994
------------ ------------
<S> <C> <C>
Net sales $230,789 $212,464
Direct product costs 178,231 161,448
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Gross profit 52,558 51,016
Selling, general and
administrative expenses 57,247 46,372
Amortization of acquisition costs 2,120 1,723
Interest expense, net 3,022 1,457
------------ ------------
Income (loss) before income taxes (9,831) 1,464
Income tax expense (benefit) (3,362) 563
------------ ------------
Net income (loss) ($6,469) $901
============ ============
Earnings (loss) per average common share
outstanding during the period ($0.19) $0.03
============ ============
Average number of shares
outstanding during the period 33,567 33,471
============ ============
Dividends per share $0.11 $0.11
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(amounts in thousands except share data)
<TABLE>
<CAPTION>
July 29, April 29,
1995 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $5,747 $24,392
Accounts receivable, less allowance of $23,992 at
July 29, 1995 and $24,053 at April 29, 1995
for gross profit impact of future returns 251,741 258,651
Merchandise inventories 278,437 276,109
Other current assets 1,617 1,779
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Total current assets 537,542 560,931
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Property and equipment:
Land 6,684 6,741
Buildings and improvements 41,407 42,312
Display fixtures 106,653 109,747
Equipment, furniture and other 50,554 49,716
Leasehold improvements 2,878 3,101
------------ ------------
208,176 211,617
Less accumulated depreciation and amortization 89,872 86,845
------------ ------------
118,304 124,772
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Other assets, net of allowances 71,231 68,373
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Total assets $727,077 $754,076
============ ============
LIABILITIES
Current liabilities:
Accounts payable $211,218 $243,138
Accrued and other liabilities 42,628 46,823
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Total current liabilities 253,846 289,961
------------ ------------
Debt, non-current 165,500 146,200
Deferred income taxes 6,266 6,263
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; 33,598,000 and 33,533,000 shares issued at
July 29, 1995 and April 29, 1995, respectively 336 335
Paid-in capital 33,384 33,188
Foreign currency translation adjustment and other (8,349) (8,130)
Retained earnings 276,094 286,259
------------ ------------
Total shareholders' equity 301,465 311,652
------------ ------------
Total liabilities and shareholders' equity $727,077 $754,076
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended July 29, 1995
-----------------------------------------------------------------------
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 29, 1995 33,533 $335 $33,188 ($8,130) $286,259 $311,652
Equity adjustment for
foreign currency
translation (68) (68)
Net income (loss) (6,469) (6,469)
Cash dividends,
$.11 per share (3,696) (3,696)
Common stock issued for
employee benefit plans,
net of forfeitures 65 1 196 (151) 46
------- -------- -------- ----------- --------- -------------
July 29, 1995 33,598 $336 $33,384 ($8,349) $276,094 $301,465
======= ======== ======== =========== ========= =============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
July 29, July 30,
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($6,469) $901
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Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation 7,230 6,473
Amortization of acquisition costs 2,120 1,723
Recoupment of license advances 629 1,832
(Increase) decrease in assets:
Accounts receivable 6,910 14,078
Merchandise inventories (2,328) (4,078)
Other current assets 162 510
Other assets, net of allowances (314) (373)
Increase (decrease) in liabilities:
Accounts payable (31,920) (23,951)
Accrued and other liabilities (8,095) (773)
Deferred income taxes 3 665
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Total adjustments (25,603) (3,894)
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Net cash used by operating activities (32,072) (2,993)
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Cash flows from investing activities:
Additions to property and equipment (4,072) (4,619)
Retirements of property and equipment 1,078 1,109
License advances (3,161) (4,536)
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Net cash used by investing activities (6,155) (8,046)
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Cash flows from financing activities:
Issuances of debt 470,900 233,650
Repayments of debt (447,600) (215,967)
Cash dividends (3,696) (3,656)
Other changes in shareholders' equity, net (22) (87)
----------- ------------
Net cash provided from financing activities 19,582 13,940
----------- ------------
Net increase (decrease) in cash and
cash equivalents (18,645) 2,901
Cash and cash equivalents at beginning
of period 24,392 10,568
Cash and cash equivalents at end of ----------- ------------
period $5,747 $13,469
=========== ============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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<PAGE>
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
July 29, 1995, and the results of operations and changes in cash flows for
the three months then ended. Because of the seasonal nature of the Company's
business, sales and earnings results for the three months ended July 29,
1995 are not necessarily indicative of what the results will be for the full
year. The consolidated balance sheet as of April 29, 1995 is derived from
the audited consolidated financial statements of the Company included in the
Company's 1995 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, 1995.
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<PAGE>
HANDLEMAN COMPANY
-----------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
--------------------------------------------------
Net sales for the first quarter ended July 29, 1995 were $230.8 million, an
increase of 9% from net sales of $212.5 million for the first quarter ended July
30, 1994. However, as a result of increased selling, general and administrative
(SG&A) expenses, coupled with a lower gross profit margin percentage, the
Company incurred a net loss for the first quarter ended July 29, 1995 of $6.5
million or $.19 per share. During the comparable quarter last year the
Company's net income was $.9 million or $.03 per share.
Music sales for the first quarter of fiscal 1996 were $138.3 million, compared
to $118.9 million for the first quarter of fiscal 1995, an increase of 16%. The
higher music sales level was primarily attributable to increased compact disc
(CD) sales. CD sales for the first quarter this year were $86.1 million or 62%
of music sales, compared to $60.5 million or 51% of music sales for the
comparable prior year quarter.
Video sales for the first quarter ended July 29, 1995 decreased 4% to $64.6
million from $67.6 million for the first quarter last year. The decrease in
video sales was primarily attributable to lower sales to a customer that has
begun to purchase a substantial portion of its video product directly from the
manufacturers.
Book sales for the first quarter of fiscal 1996 were $13.6 million, compared to
$14.1 million for the first quarter of fiscal 1995, a decrease of 4%. The
decrease in book sales primarily resulted from a lower level of sales to certain
of the Company's major customers.
Personal computer software sales increased 20% to $14.3 million for the first
quarter this year, from $11.9 million for the first quarter last year. The
increase in personal computer software sales was primarily attributable to an
increase in sales to the Company's major software customers.
The gross profit margin percentage for the first quarter ended July 29, 1995 was
22.8%, compared to 24.0% for the first quarter ended July 30, 1994. The
decrease in gross profit margin percentage primarily resulted from a lower gross
profit margin percentage on video sales and the continuing shift in the net
sales mix to lower margin CD sales.
SG&A expenses for the first quarter of fiscal 1996 were $57.2 million (24.8% of
net sales), compared to $46.4 million (21.8% of net sales) for the first quarter
of fiscal 1995. The higher level of SG&A expenses as a percentage of net sales
was primarily attributable to the Company's Core rackjobbing operations which
realized increases in customer shipments and customer returns. These increases
required a higher level of SG&A expenses (e.g., selling and warehouse labor,
freight) to handle the increased activity. The increase in customer returns was
partially a result of certain key customers reducing overall store inventories.
Also contributing to the increase in Core SG&A expenses as a percentage of net
sales were certain customer programs requiring significant labor costs (e.g.,
providing services not offered last year, installing new product fixtures). In
spite of the additional customer service requirements and the impact of
increased customer returns, the SG&A expenses of the Core operations as a
percentage of total dollar activity (gross sales plus returns) was approximately
level with that of the first quarter of last year.
-6-
<PAGE>
Interest expense, net of interest income, for the first quarter ended July 29,
1995 was $3.0 million, compared to $1.5 million for the first quarter of the
prior year. The increase in interest expense was primarily attributable to
higher borrowings and higher average interest rates.
North Coast Entertainment, Inc. ("NCE"), a subsidiary of Handleman Company,
includes the Company's proprietary products and retail operations. NCE sales,
which are included in the results reported above, represent sales of licensed
video, music and personal computer software products, and sales at licensed
retail departments. NCE sales for the first quarter of fiscal 1996 were $25.2
million, compared with $13.4 million for the first quarter last year, an
increase of 88%. The sales increase was generated predominantly by sales from
companies acquired in fiscal 1995. The Company is actively pursuing
opportunities to increase sales of proprietary products, which contribute a
relatively higher gross profit margin percentage.
Accounts payable at July 29, 1995 totaled $211.2 million, compared to $243.1
million at April 29, 1995. The decrease in accounts payable was primarily
attributable to a decrease in net inventory purchases in the first quarter of
this year, compared to the fourth quarter of last year.
On September 6, 1995 the Board of Directors of the Company declared a quarterly
dividend of $.11 per share on the outstanding shares of common stock of the
Company, payable on October 10, 1995 to shareholders of record at the close of
business on September 25, 1995. In view of the first quarter's operating loss,
the Board of Directors also stated that it will review the Company's dividend
policy at its December Board meeting taking into account actual operating
results for the second quarter and anticipated performance for the balance of
the fiscal year.
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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: September 11, 1995 BY: /s/ Stephen Strome
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STEPHEN STROME
President and
Chief Executive Officer
DATE: September 11, 1995 BY: /s/ Richard J. Morris
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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> 3-MOS
<FISCAL-YEAR-END> APR-27-1996
<PERIOD-START> APR-30-1995
<PERIOD-END> JUL-29-1995
<CASH> 5,747
<SECURITIES> 0
<RECEIVABLES> 251,741
<ALLOWANCES> 0
<INVENTORY> 278,437
<CURRENT-ASSETS> 537,542
<PP&E> 208,176
<DEPRECIATION> 89,872
<TOTAL-ASSETS> 727,077
<CURRENT-LIABILITIES> 253,846
<BONDS> 165,500
<COMMON> 336
0
0
<OTHER-SE> 301,129
<TOTAL-LIABILITY-AND-EQUITY> 727,077
<SALES> 230,789
<TOTAL-REVENUES> 230,789
<CGS> 178,231
<TOTAL-COSTS> 178,231
<OTHER-EXPENSES> 59,367
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,022
<INCOME-PRETAX> (9,831)
<INCOME-TAX> (3,362)
<INCOME-CONTINUING> (6,469)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,469)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
