<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 27, 1996 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 48084-4142 Area Code 810 362-4400
- ---------------------- ------------ ---------------------------------
(Address of principal (Zip code) (Registrant's telephone number)
executive offices)
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 September 6, 1996 33,495,836
<PAGE>
HANDLEMAN COMPANY
INDEX
PAGE NUMBER
-----------
PART I - FINANCIAL INFORMATION
Consolidated Statement of Operations . . . . . . . . . 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
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
July 27, July 29,
1996 1995
------------ ------------
<S> <C> <C>
Net sales $225,026 $230,789
Direct product costs 174,297 178,231
------------ ------------
Gross profit 50,729 52,558
Selling, general and
administrative expenses 58,734 57,247
Amortization of acquisition costs 1,900 2,120
Interest expense, net 2,721 3,022
------------ ------------
Loss before income taxes (12,626) (9,831)
Income tax benefit 4,445 3,362
------------ ------------
Net loss ($8,181) ($6,469)
============ ============
Loss per average common share
outstanding during the period ($0.24) ($0.19)
============ ============
Average number of shares
outstanding during the period 33,497 33,567
============ ============
Dividends per share -- $0.11
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-1-
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(amounts in thousands except share data)
<TABLE>
<CAPTION>
July 27, April 27,
1996 1996
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $7,711 $19,936
Accounts receivable, less allowance of $21,953 at
July 27, 1996 and $22,141 at April 27, 1996 for
gross profit impact of estimated future returns 238,336 257,828
Merchandise inventories 210,860 212,700
Other current assets 14,010 19,349
------------ ------------
Total current assets 470,917 509,813
------------ ------------
Property and equipment:
Land 4,867 4,877
Buildings and improvements 31,876 31,793
Display fixtures 112,224 112,207
Equipment, furniture and other 60,516 59,447
Leasehold improvements 1,539 1,536
------------ ------------
211,022 209,860
Less accumulated depreciation and amortization 105,321 98,505
------------ ------------
105,701 111,355
------------ ------------
Other assets, net of allowances 70,829 72,746
------------ ------------
Total assets $647,447 $693,914
============ ============
LIABILITIES
Current liabilities:
Accounts payable $183,382 $223,023
Accrued and other liabilities 35,043 41,461
------------ ------------
Total current liabilities 218,425 264,484
------------ ------------
Debt, non-current 151,600 143,600
Deferred income taxes 6,299 6,270
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; 33,496,000 and 33,498,000 shares issued at
July 27, 1996 and April 27, 1996, respectively 335 335
Paid-in capital 32,072 32,089
Foreign currency translation adjustment and other (7,816) (7,577)
Retained earnings 246,532 254,713
------------ ------------
Total shareholders' equity 271,123 279,560
------------ ------------
Total liabilities and shareholders' equity $647,447 $693,914
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-2-
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended July 27, 1996
-----------------------------------------------------------------------
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 27, 1996 33,498 $335 $32,089 ($7,577) $254,713 $279,560
Net loss (8,181) (8,181)
Forfeitures of common
stock related to
employee benefit plans (2) -- (17) 17 --
Adjustment for foreign
currency translation (256) (256)
------- -------- -------- ----------- --------- -------------
July 27, 1996 33,496 $335 $32,072 ($7,816) $246,532 $271,123
======= ======== ======== =========== ========= =============
</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>
Three Months Ended
---------------------------
July 27, July 29,
1996 1995
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($8,181) ($6,469)
--------- ---------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 7,422 7,230
Amortization of acquisition costs 1,900 2,120
Recoupment of license advances 1,486 629
(Increase) decrease in assets:
Accounts receivable 19,492 6,910
Merchandise inventories 1,840 (2,328)
Other current assets 5,339 162
Other assets, net of allowances 791 (314)
Increase (decrease) in liabilities:
Accounts payable (39,641) (31,920)
Accrued and other liabilities (6,418) (8,095)
Deferred income taxes 29 3
--------- ---------
Total adjustments (7,760) (25,603)
--------- ---------
Net cash used by operating activities (15,941) (32,072)
--------- ---------
Cash flows from investing activities:
Additions to property and equipment (3,562) (4,072)
Retirements of property and equipment 1,590 1,078
License advances (2,056) (3,161)
--------- ---------
Net cash used by investing activities (4,028) (6,155)
--------- ---------
Cash flows from financing activities:
Issuances of debt 229,211 470,900
Repayments of debt (221,211) (447,600)
Cash dividends 0 (3,696)
Other changes in shareholders' equity, net (256) (22)
--------- ---------
Net cash provided from financing activities 7,744 19,582
--------- ---------
Net decrease in cash and cash equivalents (12,225) (18,645)
Cash and cash equivalents at beginning
of period 19,936 24,392
Cash and cash equivalents at end of --------- ---------
period $7,711 $5,747
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
<PAGE>
HANDLEMAN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of Management, the accompanying consolidated balance sheet
and consolidated statements of operations, shareholders' equity and cash
flows contain all adjustments, consisting only of normal recurring adjust-
ments necessary to present fairly the financial position of the Company as
of July 27, 1996, 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 27, 1996 are not necessarily indicative of what the results will be for
the full year. The consolidated balance sheet as of April 27, 1996 is
derived from the audited consolidated financial statements of the Company
included in the Company's 1996 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 27, 1996.
-5-
<PAGE>
HANDLEMAN COMPANY
-----------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net sales for the first quarter ended July 27, 1996 decreased 3% to $225.0
million, from $230.8 million for the first quarter of last year. Net loss for
the quarter ended July 27, 1996 was $8.2 million or a loss of $.24 per share,
compared to a net loss of $6.5 million or a loss of $.19 per share for the first
quarter ended July 29, 1995.
The Company has three operating units: Handleman Entertainment Resources
(formerly referred to as the Core Rackjobbing division), North Coast
Entertainment and International. Handleman Entertainment Resources (H.E.R.) had
net sales of $182.9 million for the first quarter of this year, compared to
$200.5 million for the first quarter of last year, a decrease of 9%. Within
H.E.R., music sales were $118.9 million for the first quarter of this year,
compared to $120.4 million for the first quarter of last year, a decrease of 1%.
H.E.R.'s video sales were $41.6 million for the first quarter of this year, a
decrease of 22% from $53.4 million for the comparable quarter last year. The
decreases in music and video sales were primarily attributable to the absence in
the first quarter this year of certain non-recurring promotions shipped in the
first quarter of last year.
H.E.R.'s book sales were $14.7 million for the first quarter of fiscal 1997,
compared to $13.6 million for the first quarter of fiscal 1996, an increase of
8%. The increase in book sales resulted from increased shipments to, and lower
returns from, a key customer. H.E.R.'s personal computer software sales were
$7.7 million this year, compared to $13.1 million last year, a decrease of 41%.
The reduction in personal computer software sales resulted from lower shipments
and a higher return percentage due to the focus on realigning store inventories
with certain key customers to more closely mirror retail selling patterns. In
addition, personal computer software sales in the first quarter of last year
benefitted from expansion of the product line with a major customer.
North Coast Entertainment, Inc. (NCE) includes the Company's proprietary product
operations -- licensed music, video and personal computer software products. NCE
had net sales of $26.5 million for the first quarter of fiscal 1997, compared to
$21.0 million for the first quarter of last year, an increase of 26%. Net sales
for the first quarter of last year exclude sales of NCE's Entertainment Zone
subsidiary, which was closed during fiscal 1996. The sales increase was
generated predominantly by the distribution of recently acquired product in new
promotions by the Madacy subsidiary, introduction of new products and expansion
of the customer base at the Sofsource unit, and a reduction in customer returns.
The International division had net sales of $21.8 million for the first quarter
of fiscal 1997, compared to $12.1 million for the first quarter of fiscal 1996,
an increase of 80%. International includes rackjobbing operations in Canada,
Mexico, Brazil and Argentina. The increase in International sales was primarily
attributable to the addition of a new customer to the account base in Mexico, as
well as the commencement of operations in Brazil and Argentina.
-6-
<PAGE>
The consolidated gross profit margin percentage for the first quarter of this
year was 22.5%, compared to 22.8% for the first quarter of last year. The
decrease in gross profit margin percentage was chiefly the result of a higher
level of H.E.R. discounted sales, partially offset by improved margins at both
NCE and International.
Selling, general and administrative ("SG&A") expenses were $58.7 million (26.1%
of net sales) for the first quarter of this year, compared to $57.2 million
(24.8% of net sales) for the first quarter of last year. The increase in SG&A
expenses as a percentage of net sales was principally caused by the effect of
the relationship of fixed costs on the lower sales level, additional costs
resulting from the transition to the Midwest automated distribution center
("ADC") and consulting costs incurred to reduce operating expenses and improve
gross margin.
The Company's first fiscal quarter is traditionally its weakest quarter. The
Company has historically generated the predominant share of its earnings in
subsequent fiscal quarters.
Accounts receivable decreased to $238.3 million at July 27, 1996 from $257.8
million at April 27, 1996. The decrease in accounts receivable primarily
resulted from the lower sales volume during the first quarter of fiscal 1997,
compared to the fourth quarter of fiscal 1996.
Accounts payable at July 27, 1996 was $183.4 million compared to $223.0 million
at April 27, 1996. The decrease in accounts payable was primarily attributable
to increased payments and lower inventory purchases in the first quarter of
fiscal 1997, compared to the fourth quarter of fiscal 1996.
-7-
<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 9, 1996 BY: /s/ Stephen Strome
------------------------------- --------------------------------
STEPHEN STROME
President and
Chief Executive Officer
DATE: September 9, 1996 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> 3-MOS
<FISCAL-YEAR-END> MAY-03-1997
<PERIOD-START> APR-28-1996
<PERIOD-END> JUL-27-1996
<CASH> 7711
<SECURITIES> 0
<RECEIVABLES> 238336
<ALLOWANCES> 0
<INVENTORY> 210860
<CURRENT-ASSETS> 470917
<PP&E> 211022
<DEPRECIATION> 105321
<TOTAL-ASSETS> 647447
<CURRENT-LIABILITIES> 218425
<BONDS> 151600
<COMMON> 335
0
0
<OTHER-SE> 270788
<TOTAL-LIABILITY-AND-EQUITY> 647447
<SALES> 225026
<TOTAL-REVENUES> 225026
<CGS> 174297
<TOTAL-COSTS> 174297
<OTHER-EXPENSES> 60634
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2721
<INCOME-PRETAX> (12626)
<INCOME-TAX> (4445)
<INCOME-CONTINUING> (8181)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8181)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
