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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
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For the 3rd quarter ended January 31, 1995 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)
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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
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
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CLASS DATE SHARES OUTSTANDING
- ------------------------------ ------------------ --------------------------------------------
Common Stock - $.01 Par Value March 3, 1995 33,537,328
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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)
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
January 31, January 31, January 31, January 31,
1995 1994 1995 1994
------------ ------------ ------------ ------------
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Net sales $362,911 $300,027 $922,535 $816,487
Direct product costs 280,824 231,411 709,200 624,987
-------- -------- -------- --------
Gross profit 82,087 68,616 213,335 191,500
Selling, general and
administrative expenses 59,686 48,780 157,973 143,667
Amortization of acquisition
costs 1,703 1,857 4,956 5,762
Interest expense, net 1,804 1,339 4,838 4,496
-------- ------- -------- --------
Income before income taxes 18,894 16,640 45,568 37,575
Income tax expense 7,798 6,556 18,091 14,806
-------- ------- -------- --------
Net income $11,096 $10,084 $27,477 $22,769
======== ======= ======== ========
Earnings per average common share
outstanding during the period $0.33 $0.30 $0.82 $0.68
======== ======= ======== ========
Average number of shares
outstanding during the period 33,537 33,415 33,512 33,381
======== ======= ======== ========
Dividends per share $0.11 $0.11 $0.33 $0.33
======== ======= ======== ========
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)
January 31, April 30,
1995 1994
ASSETS ------------ ------------
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Current assets:
Cash and cash equivalents $ 234 $ 10,568
Accounts receivable, less allowance of $23,500 at
January 31, 1995 and $19,613 at April 30, 1994
for gross profit impact of future returns 279,709 227,278
Merchandise inventories 296,894 234,594
Other current assets 20,100 4,936
-------- --------
Total current assets 596,937 477,376
-------- --------
Property and equipment:
Land 6,708 7,176
Buildings and improvements 42,200 44,056
Display fixtures 101,194 87,538
Equipment, furniture and other 55,258 40,940
Leasehold improvements 3,142 2,802
-------- --------
208,502 182,512
Less accumulated depreciation and amortization 88,206 70,485
-------- --------
120,296 112,027
-------- --------
Other assets, net of allowances 69,734 51,595
-------- --------
Total assets $786,967 $640,998
======== ========
LIABILITIES
Current liabilities:
Accounts payable $258,097 $197,676
Debt, current -- 32,200
Income taxes, currently payable 8,947 3,677
Accrued and other liabilities 36,976 27,674
-------- --------
Total current liabilities 304,020 261,227
-------- --------
Debt, noncurrent 163,709 76,364
Deferred income taxes 4,597 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; 33,538,000 and 33,411,000 shares issued at
January 31, 1995 and April 30, 1994, respectively 335 334
Paid-in capital 33,259 31,900
Foreign currency translation adjustment and other (8,355) (5,732)
Retained earnings 289,402 272,991
-------- --------
Total shareholders' equity 314,641 299,493
-------- --------
Total liabilities and shareholders' equity $786,967 $640,998
======== ========
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)
Nine Months Ended January 31, 1995
-----------------------------------------------------------------------
Foreign
Common Stock Currency
------------------ Translation Total
Shares Paid-in Adjustment Retained Shareholders'
Issued Amount Capital and Other Earnings Equity
------- -------- -------- ----------- --------- -------------
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April 30, 1994 33,411 $334 $31,900 ($5,732) $272,991 $299,493
Equity adjustment for
foreign currency
translation (1,448) (1,448)
Net income 27,477 27,477
Cash dividends,
$.33 per share (11,066) (11,066)
Common stock issued for
employee benefit plans 127 1 1,359 (1,175) 185
------ ------- ------- --------- -------- --------
January 31, 1995 33,538 $335 $33,259 ($8,355) $289,402 $314,641
====== ======= ======= ========= ======== ========
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)
Nine Months Ended
-----------------------------
January 31, January 31,
1995 1994
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Cash flows from operating activities:
Net income $27,477 $22,769
----------- -----------
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation 18,515 17,940
Amortization of acquisition costs 4,956 5,762
Amortization of video license advances 7,578 3,574
(Increase) decrease in assets:
Accounts receivable (38,180) (39,079)
Merchandise inventories (55,980) (10,409)
Other current assets (436) (2,083)
Other assets, net of allowances (2,540) 928
Increase (decrease) in liabilities:
Accounts payable 54,391 12,545
Income taxes, currently payable 4,215 (4,595)
Deferred income taxes 683 (3)
Accrued and other liabilities 2,768 278
----------- -----------
Total adjustments (4,030) (15,142)
----------- -----------
Net cash provided from operating activities 23,447 7,627
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (28,663) (22,239)
Retirements of property and equipment 2,650 1,221
Video license advances (7,868) (15,037)
Acquisition of business (22,670) 0
Deposit for purchase of assets (16,300) 0
----------- -----------
Net cash used by investing activities (72,851) (36,055)
----------- -----------
Cash flows from financing activities:
Issuances of debt 836,010 659,390
Repayments of debt (784,611) (653,482)
Cash dividends (11,066) (11,027)
Other changes in shareholders' equity, net (1,263) (495)
----------- -----------
Net cash provided from (used by)
financing activities 39,070 (5,614)
----------- -----------
Net decrease in cash and cash equivalents (10,334) (34,042)
Cash and cash equivalents at beginning
of period 10,568 57,306
Cash and cash equivalents at end of ----------- -----------
period $234 $23,264
=========== ===========
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, 1995, and the results of operations for the three and nine
months then ended, 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, 1995 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 are
being 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. The Company received $25 million additional
in February 1995, with the remaining $20 million to be received in April
1995. The Company's existing bank credit agreement has been reduced from
$250 million to $145 million.
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.
4. Effective January 1, 1995, two majority-owned subsidiaries of the Company
purchased certain assets, and assumed certain liabilities, of Madacy Music
Group, Inc., a Canadian corporation, for approximately $23 million
(U.S. dollars). The acquisition has been accounted for as a purchase
transaction and, accordingly, the purchase price was allocated to assets and
liabilities based on the fair market value as of the acquisition date. The
approximate $20 million excess of consideration paid over the estimated fair
value of the net assets acquired has been recorded as goodwill to be
amortized on the straight-line basis over 15 years.
Also during the third quarter, the Company made a deposit in connection with
the acquisition of certain assets (consisting primarily of inventory,
store fixtures and vehicles). Such assets have been tentatively valued at
approximately $16.3 million, pending a final accounting.
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HANDLEMAN COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Net sales for the third quarter ended January 31, 1995 were $362.9 million, an
increase of $62.9 million or 21% over net sales of $300.0 million reported for
the third quarter ended January 31, 1994. Net income for the third quarter of
fiscal 1995 was $11.1 million or $0.33 per share, compared to $10.1 million or
$0.30 per share for the third quarter last year.
Net sales for the nine months ended January 31, 1995 were $922.5 million,
compared to $816.5 million for the comparable prior year period, an increase of
13%. Net income for the nine months ended January 31, 1995 was $27.5 million or
$0.82 per share, an increase of 21% from net income of $22.8 million or $0.68
per share for the nine months ended January 31, 1994.
Music sales for the third quarter of fiscal 1995 were $219.2 million, compared
to $161.1 million for the third quarter last year, an increase of $58.1 million
or 36%. The increase in music sales primarily resulted from an overall
improvement in product quality and depth, as well as a high level of promotional
and display activity. Compact disc (CD) sales for the third quarter ended
January 31, 1995 were $126.0 million or 57.5% of music sales, compared to $75.2
million or 46.7% of music sales in the third quarter of last year. The growth
of Handleman's CD sales continues to exceed the industry's rate because CDs are
now being purchased by more middle-income Americans who tend to be shoppers at
the mass merchant outlets serviced by the Company. Music sales for the nine
months ended January 31, 1995 increased 12% to $508.2 million from $454.2
million for the comparable prior year period. CD sales for the first nine
months of fiscal 1995 were $280.6 million or 55.2% of music sales, compared to
$213.2 million or 46.9% of music sales for the comparable period last year.
Video sales for the third quarter ended January 31, 1995 were $111.5 million,
compared to $103.3 million for the third quarter of the prior year, an increase
of $8.2 million or 8%. The increase in video sales primarily resulted from an
increase in the number of direct to sell-through titles released by the movie
studios. Direct to sell-through titles represent those items where sales
expectations motivate movie studios to by-pass the rental channel and distribute
directly to the sell-through channel. Video sales for the nine months ended
January 31, 1995 were $331.4 million, compared to $276.9 million for the nine
months ended January 31, 1994, an increase of 20%.
Book sales for the third quarter of this year were $16.1 million, compared to
$21.2 million for the third quarter of last year, a decrease of 24%. The year-
over-year decrease in book sales was caused by comparison to the unusually high
sales level achieved in the third quarter last year and to a reduction in the
number of customer departments which the Company services. Book sales for the
nine months ended January 31, 1995 decreased 10% to $46.0 million, from $50.9
million reported for the nine months ended January 31, 1994.
Personal computer software sales increased 12% to $16.1 million this year, from
$14.4 million last year, primarily as a result of expansion of the software
customer base. Personal computer software sales for the nine months ended
January 31, 1995 were $36.9 million, an increase of 7% from sales of $34.5
million for the nine months ended January 31, 1994.
The gross profit margin percentage for the third quarter of fiscal 1995 was
22.6%, compared to 22.9% for the third quarter of fiscal 1994. The decrease in
gross profit margin percentage primarily resulted from increased sales of low
margin, hit video product. For the nine months ended January 31, 1995 the gross
profit margin percentage was 23.1%, compared to 23.5% for the comparable prior
year period.
6
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Selling, general and administrative expenses (SG&A) increased to $59.7 million
or 16.4% of net sales this year, from $48.8 million or 16.3% of net sales for
the third quarter last year. The increase in SG&A dollars was primarily a
result of the increased sales volume. If it were not for the loss resulting from
the recent Mexican peso devaluation, SG&A expenses as a percentage of net sales
would have been level with last year. For the nine months ended January 31,
1995, SG&A expenses were $158.0 millon or 17.1% of net sales, compared to $143.7
million or 17.6% of net sales for the comparable prior year period.
North Coast Entertainment, Inc. ("NCE"), a subsidiary of Handleman Company,
consists of the Company's proprietary products and retail operations. NCE
sales, which are included in the results discussed above, represent sales of
licensed video, music and personal computer software products and sales at
licensed retail departments. NCE sales during the third quarter of fiscal 1995
were $29.0 million, compared to $19.8 million for the three months ended January
31, 1994, an increase of 46% The increase was primarily attributable to sales
from companies acquired during fiscal 1995. NCE sales for the first nine months
of fiscal 1995 were $77.2 million, compared to $58.8 million for the comparable
prior year period.
Notes 3. and 4. of Notes To Consolidated Financial Statements, which are
included on page 5 of this Form 10-Q, contain additional discussion regarding
the issuance of $100 million of senior notes and the purchase of certain net
assets of Madacy Music Group, Inc., and are incorporated herein by reference.
Accounts receivable as of January 31, 1995 amounted to $279.7 million, compared
to $227.3 million at April 30, 1994. The increase was primarily due to the
higher sales volume in the third quarter this year compared to the fourth
quarter last year. The Company's third quarter includes a portion of the sales
impact of the Christmas selling season. The increases in merchandise inventory
and accounts payable at January 31, 1995, compared to April 30, 1994, were
primarily due to increased purchases to support the higher sales volume. The
increases in accounts receivable, inventory and accounts payable were also
partially attributable to the inclusion of businesses acquired during the year.
The decrease in debt, current at January 31, 1995, compared to April 30, 1994,
resulted from the repayment of $31 million of notes on October 1, 1994 and the
replacement of such debt with noncurrent debt. Net cash provided by operations
was favorably affected by the timing of payments for income taxes.
Management's Discussion and Analysis of Operations included in the Company's
Form 10-Q for the first and second quarters of fiscal 1995 provide additional
discussion regarding sales and earnings results for those quarters, and are
incorporated herein by reference.
* * * * * *
On March 9, 1995, the Company announced it was realigning its Midwestern
operations by replacing certain existing distribution centers with a new
automated distribution center ("ADC"). The Company will record an estimated
$5.5 million pre-tax charge against fourth quarter fiscal 1995 results related
to costs associated with the transition from the current distribution structure
to an ADC in its Midwestern region. The charge is principally related to
projected losses on the sales of buildings currently used as distribution
facilities in the Midwest.
7
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PART II - OTHER INFORMATION
Item 6. Exhibits or Reports on Form 8-K
A report on Form 8-K was filed with the Securities and Exchange
Commission on February 24, 1995 as required by Item 2.,
Acquisition or Disposition of Assets. Financial statements
and pro forma financial information regarding the acquired
assets and business formerly operated by Madacy Music Group,
Inc. will be filed, by amendment, on or before April 25, 1995.
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 10, 1995 BY: /s/ Stephen Strome
------------------------------- --------------------------------
STEPHEN STROME
President and
Chief Executive Officer
DATE: March 10, 1995 BY: /s/ Richard J. Morris
------------------------------- --------------------------------
RICHARD J. MORRIS
Senior Vice President/Finance-
Chief Financial Officer and
Secretary
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<FISCAL-YEAR-END> APR-29-1995
<PERIOD-START> MAY-01-1994
<PERIOD-END> JAN-31-1995
<CASH> 234
<SECURITIES> 0
<RECEIVABLES> 279,709
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<INVENTORY> 296,894
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<PP&E> 208,502
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<BONDS> 163,709
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<OTHER-SE> 314,306
<TOTAL-LIABILITY-AND-EQUITY> 786,967
<SALES> 362,911
<TOTAL-REVENUES> 362,911
<CGS> 280,824
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<OTHER-EXPENSES> 61,389
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