<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 26, 1996 Commission File Number 1-7923
HANDLEMAN COMPANY
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(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
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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 November 29, 1996 33,478,950
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<TABLE>
<CAPTION>
HANDLEMAN COMPANY
INDEX
PAGE NUMBER
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PART I - FINANCIAL INFORMATION
<S> <C>
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
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HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- ---------------------------
October 26, October 28, October 26, October 28,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $347,080 $295,170 $572,106 $525,959
Direct product costs 268,749 224,091 443,046 402,322
------------ ------------ ------------ ------------
Gross profit 78,331 71,079 129,060 123,637
Selling, general and
administrative expenses 62,363 60,526 121,097 117,773
Amortization of acquisition
costs 1,472 2,038 3,372 4,158
Interest expense, net 2,970 3,464 5,691 6,486
------------ ------------ ------------ ------------
Income (loss) before income
taxes 11,526 5,051 (1,100) (4,780)
Income tax expense (benefit) 4,704 1,686 259 (1,676)
------------ ------------ ------------ ------------
Net income (loss) $6,822 $3,365 ($1,359) ($3,104)
============ ============ ============ ============
Earnings (loss) per average
common share outstanding
during the period $0.20 $0.10 ($0.04) ($0.09)
============ ============ ============ ============
Average number of shares
outstanding during the period 33,495 33,589 33,496 33,578
============ ============ ============ ============
Dividends per share -- $0.11 -- $0.22
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<TABLE>
<CAPTION>
HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(amounts in thousands except share data)
October 26, April 27,
1996 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $9,779 $19,936
Accounts receivable, less allowance of $26,375 at
October 26, 1996 and $22,141 at April 27, 1996 for
gross profit impact of estimated future returns 347,513 257,828
Merchandise inventories 213,803 212,700
Other current assets 6,523 19,349
------------ ------------
Total current assets 577,618 509,813
------------ ------------
Property and equipment:
Land 4,888 4,877
Buildings and improvements 31,821 31,793
Display fixtures 115,999 112,207
Equipment, furniture and other 63,365 59,447
Leasehold improvements 1,632 1,536
------------ ------------
217,705 209,860
Less accumulated depreciation and amortization 112,371 98,505
------------ ------------
105,334 111,355
------------ ------------
Other assets, net of allowances 71,579 72,746
------------ ------------
Total assets $754,531 $693,914
============ ============
LIABILITIES
Current liabilities:
Accounts payable $271,878 $223,023
Accrued and other liabilities 41,919 41,461
------------ ------------
Total current liabilities 313,797 264,484
------------ ------------
Debt, non-current 156,387 143,600
Deferred income taxes 6,406 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; 33,493,000 and 33,498,000 shares issued at
October 26, 1996 and April 27, 1996, respectively 335 335
Paid-in capital 32,038 32,089
Foreign currency translation adjustment and other (7,786) (7,577)
Retained earnings 253,354 254,713
------------ ------------
Total shareholders' equity 277,941 279,560
------------ ------------
Total liabilities and shareholders' equity $754,531 $693,914
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(amounts in thousands except per share data)
Six Months Ended October 26, 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 (1,359) (1,359)
Forfeitures of common
stock related to
employee benefit plans (5) -- (51) 51 --
Adjustment for foreign
currency translation (260) (260)
------- -------- -------- ----------- --------- -------------
October 26, 1996 33,493 $335 $32,038 ($7,786) $253,354 $277,941
======= ======== ======== =========== ========= =============
The accompanying notes are an integral part of the consolidated financial statements.
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</TABLE>
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<TABLE>
<CAPTION>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
Six Months Ended
-----------------------------
October 26, October 28,
1996 1995
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Cash flows from operating activities:
<S> <C> <C>
Net loss ($1,359) ($3,104)
------------ ------------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 14,682 13,454
Amortization of acquisition costs 3,372 4,158
Recoupment of license advances 4,572 2,788
(Increase) decrease in assets:
Accounts receivable (89,685) (90,896)
Merchandise inventories (1,103) 18,924
Other current assets 12,826 138
Other assets, net of allowances (677) (2,043)
Increase (decrease) in liabilities:
Accounts payable 48,855 (1,662)
Accrued and other liabilities 458 (6,009)
Deferred income taxes 136 1
------------ ------------
Total adjustments (6,564) (61,147)
------------ ------------
Net cash used by operating activities (7,923) (64,251)
------------ ------------
Cash flows from investing activities:
Additions to property and equipment (10,340) (11,057)
Retirements of property and equipment 1,475 12,344
License advances (5,896) (4,853)
------------ ------------
Net cash used by investing activities (14,761) (3,566)
------------ ------------
Cash flows from financing activities:
Issuances of debt 604,982 1,100,904
Repayments of debt (592,195) (1,046,700)
Cash dividends 0 (7,390)
Other changes in shareholders' equity, net (260) (465)
------------ ------------
Net cash provided from financing activities 12,527 46,349
------------ ------------
Net decrease in cash and cash equivalents (10,157) (21,468)
Cash and cash equivalents at beginning
of period 19,936 24,392
Cash and cash equivalents at end of ------------ ------------
period $9,779 $2,924
============ ============
</TABLE>
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 operations, 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 26, 1996, 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 26, 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.
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HANDLEMAN COMPANY
-----------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net sales for the second quarter ended October 26, 1996 increased 18% to $347.1
million, from $295.2 million for the second quarter ended October 28, 1995. Net
income for the second quarter doubled to $6.8 million or $.20 per share, from
net income of $3.4 million or $.10 per share for the second quarter of last
year.
Net sales for the first six months of fiscal 1997 were $572.1 million, compared
to $526.0 million for the first six months of fiscal 1996, an increase of 9%.
The net loss for the first six months of this year was $(1.4) million or $(.04)
per share, compared to a net loss of $(3.1) million or $(.09) per share for the
comparable period last year, an improvement of $.05 per share.
The Company has three operating units: Handleman Entertainment Resources
(H.E.R.), North Coast Entertainment (NCE) and International. H.E.R. had net
sales of $284.4 million for the second quarter of this year, compared to $244.8
million for the comparable prior year period, an increase of 16%. The following
discussion of H.E.R.'s sales is organized by product line: music, video, book
and software.
Music sales were $163.9 million for the second quarter, compared to $147.3
million for the second quarter of last year, an increase of 11%. The increase
in music sales was primarily attributable to improved sales to major customers
driven by increased promotional activity. Music sales for the first six months
of fiscal 1997 were $282.8 million, compared to $267.7 million for the first six
months of last year, an increase of 6%. Compact disc ("CD") sales for the
second quarter this year were $122.2 million or 75% of music sales, compared to
$99.9 million or 68% of music sales for the second quarter last year. For the
first six months of this year, CD sales were $213.4 million or 75% of music
sales, compared to $183.4 million or 69% of music sales for the comparable six
month period last year. According to the Recording Industry Association of
America, music industry CD dollar sales reached 80% of total music revenues for
the first six months of calendar 1996 versus 75% for the comparable prior year
six month period.
Video sales were $97.6 million for the second quarter of this year, an increase
of 40% from $69.6 million for the comparable quarter last year. The higher
level of video sales was generated by increased sales of mega-hit releases
(e.g., "Toy Story," "Twister") and a reduction in product returns from
customers. Video sales for the first six months of this year were $139.2
million, compared to $123.0 million for the first six months of last year,
an increase of 13%.
Book sales were $16.5 million for the second quarter of fiscal 1997, compared to
$15.4 million for the second quarter of fiscal 1996, an increase of 7%. The
increase in book sales principally resulted from new store openings with a major
customer. Book sales for the first six months of fiscal 1997 were $31.2 million,
compared to $29.0 million for the comparable six month period last year, an
increase of 8%. Personal computer software sales were $6.4 million for the
second quarter this year, compared to $12.5 million for the second quarter last
year, a decrease of 49%. The reduction in personal computer software sales
resulted from continued efforts to realign store inventories with certain key
customers to more closely mirror retail selling patterns. In addition, personal
computer software sales in the second quarter last year benefitted from the
release of Microsoft's Windows 95. Personal computer software sales for the
first six months of this year were $14.1 million, compared to $25.6 million for
the comparable prior year period, a decrease of 45%.
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NCE includes the Company's proprietary product operations -- licensed music,
video and personal computer software products. NCE had net sales of $44.4
million for the second quarter of fiscal 1997, compared to $37.5 million for the
second quarter last year, an increase of 18%. This increase was generated
predominantly by sales of licensed personal computer software products. NCE had
net sales of $70.9 million for the first six months this year, compared to $58.5
million for the comparable six month period last year, an increase of 21%. Net
sales for the second quarter and first six months of last year exclude sales of
NCE's Entertainment Zone subsidiary, which was closed during fiscal 1996.
International includes category management operations in Canada, Mexico, Brazil
and Argentina. International had net sales of $30.1 million for the second
quarter of fiscal 1997, compared to $18.3 million for the second quarter of
fiscal 1996, an increase of 64%. The increase in International sales was driven
by the addition of a new customer to the account base in Mexico and the
commencement of operations in Brazil and Argentina. International net sales for
the first six months of this year were $51.9 million, compared to $30.4 million
for the first six months of last year, an increase of 71%.
The consolidated gross profit margin percentage for the second quarter of this
year was 22.6%, compared to 24.1% for the second quarter last year. The decrease
in the gross profit margin percentage was chiefly the result of reduced net
proceeds from promotional activities within H.E.R. The consolidated gross profit
margin percentage for the first six months of fiscal 1997 was 22.6%, compared to
23.5% for the first six months of fiscal 1996.
Selling, general and administrative ("SG&A") expenses were $62.4 million (18.0%
of net sales) for the second quarter this year, compared to $60.5 million (20.5%
of net sales) for the second quarter last year. The decrease in SG&A expenses as
a percentage of net sales, which was attributable to H.E.R., resulted from
benefits derived from implementation of certain cost control initiatives and a
reduction in product returns from customers, as well as the effect of the
relationship of fixed costs on the higher sales level. SG&A expenses for the
first six months of fiscal 1997 were $121.1 million (21.2% of net sales),
compared to $117.8 million (22.4% of net sales) for the comparable prior year
period.
Interest expense for the second quarter and first six months of fiscal 1997 was
$3.0 million and $5.7 million, respectively, compared to $3.5 million and $6.5
million for the second quarter and first six months of last year, respectively.
The decreases were due to lower borrowing levels.
The increase in accounts receivable to $347.5 million as of October 26, 1996
from $257.8 million as of April 27, 1996 primarily resulted from the impact of
the higher sales level in the second quarter of fiscal 1997, compared to the
sales level in the fourth quarter of fiscal 1996.
The decrease in other current assets to $6.5 million as of October 26, 1996 from
$19.3 million as of April 27, 1996 was principally the result of collection of
income tax receivables.
The increase in the accounts payable balance to $271.9 million as of October 26,
1996 from $223.0 million as of April 27, 1996 resulted from increased purchases
to support the higher sales level in the second quarter this year versus the
fourth quarter last year.
Management's Discussion and Analysis of Operations included in the Company's
Form 10-Q for the first quarter ended July 27, 1996 provides additional
discussion regarding sales and earnings results for the first quarter of fiscal
1997, and is incorporated herein by reference.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
An Annual Meeting of Shareholders of Handleman Company was
held on September 4, 1996. The only item voted on at the
Annual Meeting was the election of directors. The following
individuals were elected as directors of the Company with
each receiving at least 29,591,484 shares voted for election,
while a maximum of 950,718 shares were withheld: Messrs.
David Handleman, Richard H. Cummings and Gilbert R. Whitaker,
Jr.
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.
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<CAPTION>
HANDLEMAN COMPANY
<S> <C>
DATE: December 9, 1996 BY: /s/ Stephen Strome
------------------------------- --------------------------------
STEPHEN STROME
President and
Chief Executive Officer
DATE: December 9, 1996 BY: /s/ Richard J. Morris
------------------------------- --------------------------------
RICHARD J. MORRIS
Senior Vice President/Finance-
Chief Financial Officer and
Secretary
</TABLE>
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<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-03-1997
<PERIOD-START> APR-28-1996
<PERIOD-END> OCT-26-1996
<CASH> 9779
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<BONDS> 156387
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0
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<OTHER-SE> 277606
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</TABLE>
