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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 28, 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)
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<S> <C> <C>
500 KIRTS BOULEVARD, TROY, MICHIGAN 48084-4142 Area Code 810 362-4400
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(Address of principal executive offices) (Zip code) (Registrant's telephone number)
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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 December 1, 1995 33,583,761
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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)
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<CAPTION>
Three Months Ended Six Months Ended
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October 28, October 29, October 28, October 29,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $295,170 $347,160 $525,959 $559,624
Direct product costs 224,091 266,928 402,322 428,376
------------ ------------ ------------ ------------
Gross profit 71,079 80,232 123,637 131,248
Selling, general and
administrative expenses 60,526 51,915 117,773 98,287
Amortization of acquisition
costs 2,038 1,530 4,158 3,253
Interest expense, net 3,464 1,577 6,486 3,034
------------ ------------ ------------ ------------
Income (loss) before income
taxes 5,051 25,210 (4,780) 26,674
Income tax expense (benefit) 1,686 9,730 (1,676) 10,293
------------ ------------ ------------ ------------
Net income (loss) $3,365 $15,480 ($3,104) $16,381
============ ============ ============ ============
Earnings per average common share
outstanding during the period $0.10 $0.46 ($0.09) $0.49
============ ============ ============ ============
Average number of shares
outstanding during the period 33,589 33,529 33,578 33,500
============ ============ ============ ============
Dividends per share $0.11 $0.11 $0.22 $0.22
============ ============ ============ ============
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)
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<CAPTION>
October 28, April 29,
1995 1995
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<S>
ASSETS <C> <C>
Current assets:
Cash and cash equivalents $2,924 $24,392
Accounts receivable, less allowance of $25,796 at
October 28, 1995 and $24,053 at April 29, 1995
for gross profit impact of future returns 349,547 258,651
Merchandise inventories 257,185 276,109
Other current assets 1,641 1,779
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Total current assets 611,297 560,931
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Property and equipment:
Land 4,937 6,741
Buildings and improvements 32,776 42,312
Display fixtures 109,710 109,747
Equipment, furniture and other 53,565 49,716
Leasehold improvements 2,863 3,101
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203,851 211,617
Less accumulated depreciation and amortization 94,401 86,845
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109,450 124,772
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Other assets, net of allowances 68,904 68,373
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Total assets $789,651 $754,076
============ ============
LIABILITIES
Current liabilities:
Accounts payable $241,476 $243,138
Accrued and other liabilities 40,814 46,823
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Total current liabilities 282,290 289,961
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Debt, non-current 200,404 146,200
Deferred income taxes 6,264 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; 33,585,000 and 33,533,000 shares issued at
October 28, 1995 and April 29, 1995, respectively 336 335
Paid-in capital 33,243 33,188
Foreign currency translation adjustment and other (8,651) (8,130)
Retained earnings 275,765 286,259
------------ ------------
Total shareholders' equity 300,693 311,652
------------ ------------
Total liabilities and shareholders' equity $789,651 $754,076
============ ============
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)
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<CAPTION>
Six Months Ended October 28, 1995
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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 (511) (511)
Net income (loss) (3,104) (3,104)
Cash dividends,
$.11 per share (7,390) (7,390)
Common stock issued for
employee benefit plans,
net of forfeitures 52 1 55 (10) 46
------- -------- -------- ----------- --------- -------------
October 28, 1995 33,585 $336 $33,243 ($8,651) $275,765 $300,693
======= ======== ======== =========== ========= =============
The accompanying notes are an integral part of the consolidated financial statements.
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HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
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<CAPTION>
Six Months Ended
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October 28, October 29,
1995 1994
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,104) $ 16,381
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Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation 13,454 12,087
Amortization of acquisition costs 4,158 3,253
Recoupment of license advances 2,788 5,682
(Increase) decrease in assets:
Accounts receivable (90,896) (96,544)
Merchandise inventories 18,924 (63,610)
Other current assets 138 618
Other assets, net of allowances (2,043) (55)
Increase (decrease) in liabilities:
Accounts payable (1,662) 114,527
Accrued and other liabilities (6,009) 11,691
Deferred income taxes 1 640
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Total adjustments (61,147) (11,711)
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Net cash provided from (used by)
operating activities (64,251) 4,670
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Cash flows from investing activities:
Additions to property and equipment (11,057) (17,024)
Retirements of property and equipment 12,344 2,114
License advances (4,853) (6,957)
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Net cash used by investing activities (3,566) (21,867)
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Cash flows from financing activities:
Issuances of debt 1,100,904 542,600
Repayments of debt (1,046,700) (521,562)
Cash dividends (7,390) (7,377)
Other changes in shareholders' equity, net (465) 612
----------- ---------
Net cash provided from financing activities 46,349 14,273
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Net decrease in cash and cash equivalents (21,468) (2,924)
Cash and cash equivalents at beginning
of period 24,392 10,568
Cash and cash equivalents at end of ----------- ---------
period $ 2,924 $ 7,644
=========== =========
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
October 28, 1995, and the results of operations for the three and six months
then ended, 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 28, 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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HANDLEMAN COMPANY
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
--------------------------------------------------
Net sales for the second quarter ended October 28, 1995 decreased 15% to $295.2
million, from $347.2 million for the second quarter last year. As a result of
the lower sales level, coupled with increased selling, general and
administrative (SG&A) expenses, the Company's net income for the quarter ended
October 28, 1995 decreased to $3.4 million or $.10 per share, from $15.5 million
or $.46 per share for the second quarter last year.
Net sales for the first six months of fiscal 1996 were $526.0 million, compared
with $559.6 million for the same period last year, a decrease of 6%. A loss was
incurred in the first six months this year of $(3.1) million, or $(.09) per
share, compared to net income of $16.4 millon, or $.49 per share last year.
Music sales were $177.4 million for the second quarter this year, compared with
$170.1 million for the second quarter last year, an increase of 4%. The
increase in music sales was attributable to the Company's North Coast
Entertainment ("NCE") subsidiary. Compact disc sales for the second quarter
this year were $119.9 million, or 68% of Handleman music sales, compared to
$94.4 million or 55% of music sales for the second quarter last year. Music
sales for the six months ended October 28, 1995 were $315.7 million, an increase
of 9% from $289.0 million for the six months ended October 29, 1994.
Video sales decreased 42% to $87.9 millon for the second quarter this year from
$152.4 million for the same quarter last year. The decrease in video sales was
primarily attributable to the Company's Core Rackjobbing division which
experienced reduced mega-hit volume ("Jurassic Park" was released in the second
quarter last year), as well as lower shipments and increased returns with
certain key customers. The increased returns for the most part resulted from
reductions in store inventory levels. In addition, a major customer has begun
to purchase a substantial portion of its video product directly from
manufacturers. Video sales for the first six months this year were $152.5
million, compared with $220.0 million for comparable period last year, a
decrease of 31%.
Book sales were $15.4 million for the second quarter of fiscal 1996, compared
with $15.9 million for the second quarter last year, a decrease of 3%. The
decrease in book sales was caused by a reduction in sales to a major customer.
Book sales for the first six months of this year were $29.0 million, compared
with $29.9 million for the first six months of last year, a decrease of 3%.
Personal computer software sales were $14.5 million this year, compared with
$8.8 million last year, an increase of 65%. The increase in personal computer
software sales was primarily attributable to an increase in the number of
departments shipped. Personal computer software sales for the six months ended
October 28, 1995 were $28.8 million, compared with $20.7 million for the six
months ended October 29, 1994, an increase of 39%.
The gross profit margin percentage for the second quarter this year was 24.1%,
compared with 23.1% for the second quarter last year. The increase in the gross
profit margin percentage was generated by NCE which achieved both a higher sales
level and a higher gross profit margin percentage in the second quarter this
year compared to the second quarter last year. The gross profit margin
percentage for the first six months this year and last year was 23.5%.
However, the Company anticipates declines in its gross profit margin percentage
from prior year levels on a going forward basis. Forces affecting gross profit
margin include pricing pressures from customers, competition from direct-to-
retail manufacturers and manufacturers' price increases. Accordingly, the
Company expects to experience a continuing deterioration in its overall gross
profit margin percentage on a going forward basis.
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SG&A expenses were $60.5 million (20.5% of net sales) for the second quarter
this year, compared with $51.9 million (15.0% of net sales) for the second
quarter last year. The Company's Core Rackjobbing division incurred extra costs
associated with higher customer returns and providing services not offered last
year. Also contributing to the increase in SG&A expenses as a percentage of net
sales were NCE and the International division. NCE has a higher SG&A to net
sales percentage, as well as a higher gross profit margin percentage, than the
comparable percentages for the Core Rackjobbing division. NCE sales represented
a greater proportion of overall sales in the second quarter this year than in
the second quarter last year, thus adversely impacting the overall SG&A to net
sales percentage. Start-up expenses related to the Company's operations in
Argentina and Brazil also negatively affected the SG&A to net sales percentage.
SG&A expenses for the first six months of fiscal 1996 were $117.8 million (22.4%
of net sales), compared with $98.3 million (17.6% of net sales) for the first
six months of fiscal 1995.
Interest expense for the second quarter and first six months of this year was
$3.5 million and $6.5 million, compared to $1.6 million and $3.0 million,
respectively, last year. The increases this year were due to both higher
borrowings and higher average interest rates.
NCE 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 second quarter of fiscal 1996
were $41.7 million, compared to $34.8 million for the second quarter of last
year, an increase of 20%. NCE sales for the first six months of fiscal 1996 were
$66.9 million, a 39% increase over net sales of $48.2 million for the first six
months of fiscal 1995. The sales increases for both the second quarter and first
six months were 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 receivable at October 28, 1995 totaled $349.5 million, compared to
$258.7 million at April 29, 1995. The increase in accounts receivable was
primarily attributable to increased sales volume in September and October 1995,
compared to March and April 1995, resulting from higher shipments related to the
upcoming holiday season and slower payments from certain key accounts.
Buildings and improvements at October 28, 1995 were $32.8 million, compared to
$42.3 million at April 29, 1995. The decrease in buildings and improvements was
primarily attributable to the sale of certain Company owned facilities in the
month of August 1995 resulting from the continuing transition to the Automated
Distribution Center concept.
Debt, non-current at October 28, 1995 was $200.4 million, compared to $146.2
million at April 29, 1995. This increase primarily resulted from the increase in
accounts receivable described above.
Management's Discussion and Analysis of Operations included in the Company's
Form 10-Q for the first quarter ended July 29, 1995 provides additional
discussion regarding sales and earnings results for the first quarter of fiscal
1996, and is incorporated herein by reference.
* * * * *
On December 6, 1995, the Board of Directors declared a quarterly dividend of
$.05 per share on the outstanding shares of common stock of the Company, payable
January 10, 1996 to shareholders of record at the close of business on December
27, 1995. In view of the Company's operating results for the second quarter, the
Board reduced the quarterly dividend from the prior level of $.11 per share. The
Board will continue to review the dividend payout on a quarterly basis based
upon the performance of the Company.
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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 11, 1995 BY: /s/ Stephen Strome
------------------------------- --------------------------------
STEPHEN STROME
President and
Chief Executive Officer
DATE: December 11, 1995 BY: /s/ Richard J. Morris
------------------------------- --------------------------------
RICHARD J. MORRIS
Senior Vice President/Finance-
Chief Financial Officer and
Secretary
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-27-1996
<PERIOD-START> APR-30-1995
<PERIOD-END> OCT-28-1995
<CASH> 2,924
<SECURITIES> 0
<RECEIVABLES> 349,547
<ALLOWANCES> 0
<INVENTORY> 257,185
<CURRENT-ASSETS> 611,297
<PP&E> 203,851
<DEPRECIATION> 94,401
<TOTAL-ASSETS> 789,651
<CURRENT-LIABILITIES> 282,290
<BONDS> 200,404
<COMMON> 336
0
0
<OTHER-SE> 300,357
<TOTAL-LIABILITY-AND-EQUITY> 789,651
<SALES> 295,170
<TOTAL-REVENUES> 295,170
<CGS> 224,091
<TOTAL-COSTS> 224,091
<OTHER-EXPENSES> 62,564
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,464
<INCOME-PRETAX> 5,051
<INCOME-TAX> 1,686
<INCOME-CONTINUING> 3,365
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<EPS-PRIMARY> .10
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