<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 3rd quarter ended January 31, 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 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
------ ------
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 March 8, 1996 33,580,569
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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 - 8
PART II -- OTHER INFORMATION AND SIGNATURES....................... 9
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HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
January 31, January 31, January 31, January 31,
1996 1995 1996 1995
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net sales $345,605 $362,911 $871,564 $922,535
Direct product costs 274,675 280,824 676,997 709,200
-------- -------- -------- --------
Gross profit 70,930 82,087 194,567 213,335
Selling, general and
administrative expenses 63,032 59,686 180,805 157,973
Provision for realignment
of operations 1,500 -- 1,500 --
Amortization of acquisition
costs 1,908 1,703 6,066 4,956
Interest expense, net 2,857 1,804 9,343 4,838
-------- -------- -------- --------
Income (loss) before income
taxes 1,633 18,894 (3,147) 45,568
Income tax expense (benefit) 536 7,798 (1,140) 18,091
-------- -------- -------- --------
Net income (loss) $1,097 $11,096 ($2,007) $27,477
======== ======== ======== ========
Earnings per average common share
outstanding during the period $0.03 $0.33 ($0.06) $0.82
======== ======== ======== ========
Average number of shares
outstanding during the period 33,583 33,537 33,580 33,512
======== ======== ======== ========
Dividends per share $0.05 $0.11 $0.27 $0.33
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-1-
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(amounts in thousands except share data)
<TABLE>
<CAPTION>
January 31, April 29,
1996 1995
ASSETS ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $11,877 $24,392
Accounts receivable, less allowance of $22,610 at
January 31, 1996 and $24,053 at April 29, 1995
for gross profit impact of estimated future returns 266,369 258,651
Merchandise inventories 252,571 276,109
Other current assets 3,212 1,779
------------ ------------
Total current assets 534,029 560,931
------------ ------------
Property and equipment:
Land 4,869 6,741
Buildings and improvements 31,824 42,312
Display fixtures 111,393 109,747
Equipment, furniture and other 59,332 49,716
Leasehold improvements 3,629 3,101
------------ ------------
211,047 211,617
Less accumulated depreciation and amortization 95,041 86,845
------------ ------------
116,006 124,772
------------ ------------
Other assets, net of allowances 71,560 68,373
------------ ------------
Total assets $721,595 $754,076
============ ============
LIABILITIES
Current liabilities:
Accounts payable $208,259 $243,138
Accrued and other liabilities 37,146 46,823
------------ ------------
Total current liabilities 245,405 289,961
------------ ------------
Debt, non-current 170,100 146,200
Deferred income taxes 6,268 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; 33,581,000 and 33,533,000 shares issued at
January 31, 1996 and April 29, 1995, respectively 336 335
Paid-in capital 33,193 33,188
Foreign currency translation adjustment and other (8,889) (8,130)
Retained earnings 275,182 286,259
------------ ------------
Total shareholders' equity 299,822 311,652
------------ ------------
Total liabilities and shareholders' equity $721,595 $754,076
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(amounts in thousands except per share data)
Nine Months Ended January 31, 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 29, 1995 33,533 $335 $33,188 ($8,130) $286,259 $311,652
Net loss (2,007) (2,007)
Cash dividends,
$.27 per share (9,070) (9,070)
Common stock issued for
employee benefit plans,
net of forfeitures 48 1 5 41 47
Adjustment for foreign
currency translation (800) (800)
------- -------- -------- ----------- --------- -------------
January 31, 1996 33,581 $336 $33,193 ($8,889) $275,182 $299,822
======= ======== ======== =========== ========= =============
</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>
Nine Months Ended
-----------------------------
January 31, January 31,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($2,007) $27,477
------------ ------------
Adjustments to reconcile net income (loss) to
net cash provided from (used by) operating
activities:
Depreciation 20,555 18,515
Amortization of acquisition costs 6,066 4,956
Recoupment of license advances 6,057 7,578
(Increase) decrease in assets:
Accounts receivable (7,718) (38,179)
Merchandise inventories 23,538 (56,022)
Other current assets (1,433) (593)
Other assets, net of allowances (7,824) (2,493)
Increase (decrease) in liabilities:
Accounts payable (34,879) 54,431
Accrued and other liabilities (11,611) 7,036
Deferred income taxes 5 683
------------ ------------
Total adjustments (7,244) (4,088)
------------ ------------
Net cash provided from (used by)
operating activities (9,251) 23,389
------------ ------------
Cash flows from investing activities:
Additions to property and equipment (23,983) (28,952)
Retirements of property and equipment 15,866 2,650
License advances (11,158) (7,868)
Acquisition of business, net of cash acquired 0 (22,521)
Bulk purchase of inventory and other assets 0 (16,126)
------------ ------------
Net cash used by investing activities (19,275) (72,817)
------------ ------------
Cash flows from financing activities:
Issuances of debt 1,765,210 836,009
Repayments of debt (1,739,376) (784,586)
Cash dividends (9,070) (11,066)
Other changes in shareholders' equity, net (753) (1,263)
------------ ------------
Net cash provided from financing activities 16,011 39,094
------------ ------------
Net decrease in cash and cash equivalents (12,515) (10,334)
Cash and cash equivalents at beginning
of period 24,392 10,568
Cash and cash equivalents at end of ------------ ------------
period $11,877 $234
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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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, except as noted below, necessary to present fairly the
financial position of the Company as of January 31, 1996, 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, 1996 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.
2. During the third quarter, the Company announced the closing of Entertainment
Zone, a subsidiary which sold music, video and book products in departments
leased from certain retailers. In connection with closing this subsidiary,
the Company recognized a $1.5 million pre-tax provision for realignment of
operations in the third quarter of fiscal 1996, primarily related to the
write-off of display fixtures.
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HANDLEMAN COMPANY
-----------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
--------------------------------------------------
Net sales for the third quarter ended January 31, 1996 decreased 5% to $345.6
million from $362.9 million for the third quarter last year. As a result of the
lower sales level, coupled with a lower gross profit margin percentage and
higher selling, general and administrative (SG&A) expenses, the Company's net
income for the quarter ended January 31, 1996 decreased to $1.1 million or $.03
per share, from $11.1 million or $.33 per share for the third quarter last year.
Net income for the third quarter ended January 31, 1996 reflects a $1.5 million
pre-tax charge ($.03 per share), principally related to display fixture write-
offs, in connection with closing Entertainment Zone, a subsidiary which sold
music, video and book products in departments leased from certain retailers.
Net sales for the first nine months of fiscal 1996 were $871.6 million, compared
to $922.5 million last year, a decrease of 6%. For the first nine months of
this year, the Company had a net loss of $2.0 million (a loss of $.06 per
share), compared to net income of $27.5 million (or income of $.82 per share)
last year.
Music sales were $200.1 million for the third quarter this year, compared to
$219.2 million for the third quarter last year, a decrease of 9%. This decrease
was a result of lower sales to certain key customers resulting from customer
shipment restrictions, as well as continuing softness in the retail music
marketplace. Compact disc sales for the third quarter this year were $137.6
million, or 69% of Handleman music sales, compared to $126.0 million or 58% of
music sales for the third quarter of last year. Music sales for the nine months
ended January 31, 1996 were $515.8 million, compared to $508.2 million for the
nine months ended January 31, 1995, an increase of 1%.
Video sales for the third quarter this year were $111.9 million, up slightly
from the $111.5 million for the third quarter of last year. For the first nine
months of fiscal 1996 video sales were $264.4 million, compared to $331.4
million for the comparable period last year, a decrease of 20%.
Book sales were $14.8 million for the third quarter of fiscal 1996, compared to
$16.1 million for the third quarter of last year, a decrease of 8%. This
decrease in book sales primarily resulted from lower sales to a major customer
caused by a decrease in the number of departments shipped. For the first nine
months of this year, book sales were $43.8 million, compared to $46.0 million
for the same period of last year, a decrease of 5%.
Personal computer software sales increased 17% to $18.8 million for the third
quarter this year, from $16.1 million last year, principally resulting from
sales growth within the existing customer base. For the first nine months of
this year, personal computer software sales were $47.6 million, compared to
$36.9 million for the same period of last year, an increase of 29%.
North Coast Entertainment, Inc. ("NCE"), a subsidiary of Handleman Company,
includes the Company's proprietary product operations. NCE sales, which are
included in the results reported above, represent sales of licensed video, music
and personal computer software products. NCE sales (excluding Entertainment
Zone sales in both periods) for the third quarter of fiscal 1996 were $25.2
million, compared to $18.2 million in the third quarter last year, a 38%
increase. NCE sales (excluding Entertainment Zone in both periods) for the
first nine months of fiscal 1996 were $83.7 million, compared to $57.3 million
for the first nine months last year, an increase of 46%. The sales increase for
both the third quarter and first nine months was primarily attributable to sales
from companies acquired in fiscal 1995. The Company is pursuing opportunities
to increase sales of proprietary products, which contribute a relatively higher
gross profit margin percentage.
- 6 -
<PAGE>
Gross profit margin for the third quarter this year was 20.5%, compared to 22.6%
for the third quarter last year. The decrease in gross profit margin percentage
was primarily caused by both lower sales and reduced margin on video catalog and
budget products, and the shift of music sales to higher-priced compact disc
product, which carries a lower gross profit margin percentage than other music
products. The gross profit margin percentage for the nine months ended January
31, 1996 was 22.3%, compared to 23.1% for the comparable prior year period.
SG&A expenses increased to $63.0 million or 18.2% of net sales for the third
quarter this year, from $59.7 million or 16.4% of net sales for the third
quarter last year. The Core Rackjobbing division contributed to the increase in
SG&A expense as a percentage of net sales due to: incremental costs associated
with providing services not offered last year, including servicing key account
book departments, expansion of in-store interactive devices and re-fixturing;
the effect of the relationship of fixed costs (e.g., computer and administrative
staffs) on a lower sales level; and additional costs resulting from the
transition to the Midwest automated distribution center ("ADC").
NCE also contributed to the increase in SG&A expense as a percentage of net
sales. NCE has a higher SG&A expense to net sales percentage than the
comparable percentage for the Core Rackjobbing division. NCE sales represented
a greater proportion of overall sales this year than last year, thus increasing
the overall SG&A expense to net sales percentage.
SG&A expenses for the first nine months of fiscal 1996 were $180.8 million or
20.7% of net sales, compared to $158.0 million or 17.1% of net sales for the
first nine months of fiscal 1995.
Interest expense for the third quarter and first nine months of this year was
$2.9 million and $9.3 million, respectively, compared to $1.8 million and $4.8
million, respectively, last year. These increases were due to both higher
borrowings and higher average interest rates.
Forces affecting sales and gross profit margin include pricing pressures from
customers and competition from direct-to-retail manufacturers. As a result, the
Company expects to experience a continuing deterioration in its overall gross
profit margin percentage from prior year levels on a going forward basis. The
Company expects SG&A expenses, and SG&A expenses as a percentage of net sales,
for the fourth quarter of fiscal 1996 to exceed those for the comparable quarter
last year. The Company is taking steps to reduce SG&A expenses, however, year-
to-year benefit is not expected until fiscal 1997.
The Company has taken, and continues to take, many steps to reduce SG&A expenses
including implementation of ADCs, reorganization of the sales force, increased
use of automation and technology, and continued focus on employee headcount and
discretionary expenditures. Full implementation of the second ADC by the summer
of 1996 will enable the Company to reduce U.S. shipping locations from 14 to 6,
and further reductions are being studied. The benefits to be derived from the
ADCs and other technological initiatives include lower inventory levels, reduced
product distribution costs, improved delivery times, reduced customer return
rates and an increase in the quality of service to customers. The Company has
already reduced its inventory by 15% from the same period of last year, and
expects consequential reductions going forward. On an ongoing basis, all
opportunities for SG&A expense reduction are being aggressively pursued, with
the only caveat being maintenance of superior customer service.
Merchandise inventories at January 31, 1996 totaled $252.6 million, compared to
$276.1 million at April 29, 1995. The decrease in merchandise inventories was
primarily attributable to Company efforts to reduce overall inventory levels.
Buildings and improvements at January 31, 1996 were $31.8 million, compared to
$42.3 million at April 29, 1995. The decrease in buildings and improvements was
principally due to the sale of certain Company owned facilities resulting from
the continuing transition to the ADC concept.
- 7 -
<PAGE>
Accounts payable decreased to $208.3 million at January 31, 1996, from $243.1
million at April 29, 1995. The decrease in accounts payable was primarily
attributable to the decrease in merchandise inventories.
Effective January 30, 1996, the Credit Agreement between the Company and its
banks was amended. The amendment reduced the interest coverage ratio for the
quarter ended January 31, 1996. The Company and its banks are negotiating
another amendment to the Credit Agreement which should enable the Company to
comply with the interest coverage ratio covenant for the quarter ending April
27, 1996, and subsequent fiscal quarters. Management expects that the Company
will enter into a satisfactory amendment with its banks prior to the conclusion
of the fiscal quarter ending April 27, 1996.
Management's Discussion and Analysis of Operations included in the Company's
Form 10-Q for the first and second quarters of fiscal 1996 provide additional
discussion regarding sales and earnings results for those quarters, and are
incorporated herein by reference.
* * * * *
On December 6, 1995, the quarterly dividend was reduced from the prior level of
$.11 per share to $.05 per share. On March 6, 1996, the Board of Directors
eliminated the quarterly dividend in view of the Company's current operating
results. The Board will continue to review the dividend payout on a quarterly
basis based upon the performance of the Company.
- 8 -
<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: March 14, 1996 BY: /s/ Stephen Strome
------------------------------- --------------------------------
STEPHEN STROME
President and
Chief Executive Officer
DATE: March 14, 1996 BY: /s/ Richard J. Morris
------------------------------- --------------------------------
RICHARD J. MORRIS
Senior Vice President/Finance-
Chief Financial Officer and
Secretary
-9-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-27-1996
<PERIOD-START> APR-30-1995
<PERIOD-END> JAN-31-1996
<CASH> 11,877
<SECURITIES> 0
<RECEIVABLES> 266,369
<ALLOWANCES> 0
<INVENTORY> 252,571
<CURRENT-ASSETS> 534,029
<PP&E> 211,047
<DEPRECIATION> 95,041
<TOTAL-ASSETS> 721,595
<CURRENT-LIABILITIES> 245,405
<BONDS> 170,100
<COMMON> 336
0
0
<OTHER-SE> 299,486
<TOTAL-LIABILITY-AND-EQUITY> 721,595
<SALES> 345,605
<TOTAL-REVENUES> 345,605
<CGS> 274,675
<TOTAL-COSTS> 274,675
<OTHER-EXPENSES> 66,440
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,857
<INCOME-PRETAX> 1,633
<INCOME-TAX> 536
<INCOME-CONTINUING> 1,097
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,097
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
