<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 3, 1997 Commission File No. 1-7923
HANDLEMAN COMPANY
- --------------------------------------------------------------------------------
(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)
500 Kirts Boulevard, Troy, Michigan 48084 - 4142
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
248-362-4400
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
--------------------------- -----------------------------------------
COMMON STOCK $.01 PAR VALUE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
------------------
(Title of Class)
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
----- -----
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
The aggregate market value as of July 14, 1997 was $222,534,000.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. The number of shares of common
stock outstanding as of July 14, 1997 was 33,366,996.
Item 14(a) 3. on page 35 describes the exhibits filed with the Securities and
Exchange Commission.
Certain sections of the definitive Proxy Statement to be filed for the 1997
Annual Meeting of Shareholders are incorporated by reference into Part III.
Page 1 of 38
<PAGE>
PART 1
Item 1. BUSINESS
Handleman Company, a Michigan corporation (herein referred to as the "Company"
or "Handleman" or "Registrant"), which has its executive office in Troy,
Michigan, is the successor to a proprietorship formed in 1934, and to a
partnership formed in 1937.
DESCRIPTION OF BUSINESS:
Handleman Company is engaged in the sale and distribution of music, video, book,
and personal computer software products primarily to mass merchants throughout
the United States, Canada, Mexico, Argentina and Brazil. The operations of the
Company are divided into three operating units: Handleman Entertainment
Resources ("H.E.R."), North Coast Entertainment ("NCE") and Handleman
International ("International"). The Company's H.E.R. and International
operating units provide additional services as a category manager (rackjobber)
to their accounts. The Company's H.E.R. division provides such products and
services in the United States, while the International division provides such
products and services in Canada, Mexico, Argentina and Brazil. NCE is in the
business of acquiring or licensing video, music and software products, giving it
exclusive rights to manufacture and distribute such products.
The following table sets forth net sales, and the approximate percentage
contribution to consolidated sales, for the fiscal years ended May 3, 1997,
April 27, 1996 and April 29, 1995, for the Company's three operating divisions:
<TABLE>
<CAPTION>
Year Ended
(Amounts in Millions)
------------------------------------------------------
May 3, 1997 April 27, 1996(B) April 29, 1995(B)
----------- -------------- --------------
Handleman Entertainment Resources
<S> <C> <C> <C>
Music $ 595.6 $ 560.9 $ 581.6
% of Total 50.4 49.5 47.4
Video 266.4 293.4 401.6
% of Total 22.6 25.9 32.8
Book 55.6 53.7 57.3
% of Total 4.7 4.8 4.7
Personal Computer Software 41.7 50.2 49.3
% Total 3.5 4.4 4.0
-------- -------- --------
Sub-Total 959.3 958.2 1,089.8
% of Total 81.2 84.6 88.9
-------- -------- --------
North Coast Entertainment (A) 134.4 101.5 81.0
% of Total 11.4 9.0 6.6
International 117.0 72.2 70.5
% of Total 9.9 6.4 5.7
Eliminations (29.7) (18.1) (40.4)
% of Total (2.5) (1.6) (3.3)
Discontinued Operations --- 18.8 25.2
% of Total 1.6 2.1
-------- -------- --------
TOTAL $1,181.0 $1,132.6 $1,226.1
======== ======== ========
</TABLE>
(A) Excludes Entertainment Zone sales in fiscal years 1996 and 1995. Such sales
are reported as discontinued operations.
(B) Restated for reclassification of Canadian sales to International from
H.E.R.
2
<PAGE>
Business Segments
-----------------
The Company operates in one business segment, selling home entertainment
software to mass merchants, specialty chain stores, drugstores and supermarkets.
The Company has United States, Canadian, Mexican, Brazilian and Argentine
operations. All operations outside of the U.S. are included in "Other" which is
displayed separately below.
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net sales:
United States $1,053,358 $1,050,545 $1,152,681
Other 127,679 82,062 73,381
---------- ---------- ----------
Total net sales $1,181,037 $1,132,607 $1,226,062
========== ========== ==========
Operating income (loss):
United States $ 20,051 $ (18,562) $ 53,532
Other 3,921 (5,130) (1,079)
Interest expense, net (10,967) (12,039) (8,024)
---------- ---------- ----------
Income (loss) before income taxes
and minority interest $ 13,005 $ (35,731) $ 44,429
========== ========== ==========
Identifiable assets:
United States $ 632,900 $ 660,465 $ 705,916
Other 34,986 33,449 48,160
---------- ---------- ----------
Total assets $ 667,886 $ 693,914 $ 754,076
========== ========== ==========
</TABLE>
General
-------
The Company's major business activity is to act as a link between manufacturers
of home entertainment software products and mass merchant chain stores.
Customers purchase from Handleman due to the value-added benefits the Company
adds to the basic product, and due to the benefit of only dealing with one
vendor for each product line. Manufacturers utilize the Company's services to
avoid the necessity of distributing to thousands of individual stores throughout
a vast geographic range. Information regarding the number of active vendors from
which the Company purchases, number of titles the Company is currently
distributing and number of retail departments presently serviced follows:
<TABLE>
<CAPTION>
Number of Number of
SKUs Currently Retail
Number of Distributed Departments
Vendors by the Company Serviced
--------- -------------- -----------
<S> <C> <C> <C>
Music 168 25,400 6,350
Video 107 6,900 6,550
Book 181 6,000 3,150
Software 115 700 4,025
</TABLE>
3
<PAGE>
Handleman Entertainment Resources and Handleman International
-------------------------------------------------------------
The following discussion pertains to the category management (rackjobbing)
activities of the H.E.R. and International divisions, which together comprise
approximately 90% of the Company's sales.
Vendors
- -------
An important reason customers utilize H.E.R.'s and International's services is
due to the multitude of manufacturers and suppliers offering products for-sale,
the complexity of programs offered by those vendors, the "hits" nature of the
business, and the high risk of inventory obsolescence.
The Company must anticipate consumer demand for individual titles. In order to
maximize sales, the Company must be able to immediately react to "breakout"
titles, while simultaneously minimizing inventory exposure for artists or titles
which do not sell. In addition, because the Company distributes throughout vast
geographic regions (U.S., Canada, Mexico, Argentina and Brazil) it must adapt
selections it offers to local tastes. This is accomplished via a coordination of
national and local purchasing responsibility, both monitored by inventory
control programs.
The Company purchases from many different vendors. The volume of purchases from
individual vendors fluctuates from year-to-year based upon the salability of
selections being offered by such vendor. Though within each product line a small
number of major, financially sound vendors account for a high percentage of
purchases, product must be selected from a variety of additional vendors in
order to maintain an adequate selection for consumers. The Company must closely
monitor its inventory exposure and accounts payable balances with smaller
vendors which may not have the financial resources to honor their return
commitments. At this time, the high risk vendors which require close monitoring
tend to be concentrated in the video, book and software product lines.
Since the public's taste in music, video, book, and personal computer software
is broad and varied, Handleman is required to maintain sufficient inventories to
satisfy diverse tastes. The Company minimizes the effect of obsolescence through
planned purchasing methods and computerized inventory controls. Since
substantially all vendors from which the Company purchases product offer some
level of return allowances and price protection, the Company's exposure to
markdown risk is limited unless vendors are unable to fulfill their return
obligations or non-saleable product purchases exceed vendor return limitations.
Vendors offer a variety of return programs, ranging from 100% returns to zero
return allowance. Other vendors offer incentive and penalty arrangements to
restrict returns. It is possible that the Company may possess in its inventories
certain product that it cannot utilize in the ordinary course of business and
may only be returnable with cost penalties or may be non-returnable until the
Company can comply with the provisions of the vendor's return policies.
Handleman generally does not have distribution contracts with manufacturers or
suppliers; consequently, its relationships with them may be discontinued at any
time by such manufacturers or suppliers, or by Handleman.
4
<PAGE>
Customers
- ---------
H.E.R.'s and International's customers utilize their services for a variety of
reasons. Products must be selected from a multitude of vendors offering numerous
titles, different formats (e.g., compact discs, cassettes) and different payment
and return arrangements. As a result, customers avoid most of the risks inherent
in product selection and the risk of inventory obsolescence.
H.E.R. and International also offer their customers a variety of "value-added"
services:
Store Service: Sales representatives visit individual retail stores and meet
with store management to discuss upcoming promotions, special merchandising
efforts, department changes, current programs, or breaking releases which will
increase sales. They also monitor inventory levels, check merchandise displays,
and install point-of-purchase advertising materials.
Advertising: Handleman supplies point-of-purchase materials and assists
customers in preparing radio, television and print advertisements.
Fixturing: Handleman provides specially designed fixtures that emphasize
product visibility and accessibility.
Freight: Handleman coordinates delivery of product to each store.
Product Exchange: Handleman protects its continuing customers against product
markdowns by offering the privilege of exchanging slower-selling product for
newer product.
The nature of the Company's business lends itself to computerized ordering,
distribution and store inventory management techniques. The Company is able to
tailor the inventories of individual stores to reflect the customer profile of
each store and to adjust inventory levels, product mix and selections according
to seasonal and current selling trends.
The Company determines the selections to be offered in its customers' retail
stores, and ships these selections to the stores from one of its distribution
centers. Slow selling items are removed from the stores by the Company and are
recycled for redistribution or return to the manufacturers. Returns from
customer stores occur for a variety of reasons, including new releases which did
not achieve their expected sales potential, ad product to be returned after the
ad has run, regularly scheduled realignment pick-ups and customer directed
returns. The Company provides a reserve for the gross profit margin impact of
expected customer returns.
During the fiscal year ended May 3, 1997, one customer, Kmart Corporation,
accounted for approximately 38% of the Company's consolidated sales, while a
second customer, Wal-Mart, accounted for approximately 23%. The Company does
not generally have contracts with its customers, and relationships may change or
be discontinued at any time by the customers or Handleman; the discontinuance or
a significant unfavorable change in the relationships with either of the two
largest customers would have a materially adverse effect upon the Company's
future sales and earnings.
5
<PAGE>
Operations
----------
The Company distributes products from facilities throughout the U.S., Canada,
Mexico, Brazil and Argentina. Besides economies of scale and through-put
considerations in determining the number of facilities it operates, the Company
must also consider freight costs to and from customers' stores and the
importance of timely delivery of new releases. Due to the nature of the home
entertainment software business, display of new releases close to authorized
"street dates" is an important driver of both retail sales and customer
satisfaction.
The Company also operates three regional return centers in the United States and
one in Canada as a means to expedite the processing of customer returns. In
order to minimize inventory investment, customer returns must be sorted and
identified for either redistribution or return to vendors as expeditiously as
possible. An item returned from one store may be required for shipment to
another store. Therefore, timely recycling prevents purchasing duplicate product
for a store whose order could be filled from returns from other stores.
During fiscal 1996, the Company opened its second high-technology Automated
Distribution Center ("ADC") in Indianapolis, Indiana. The Company had previously
realigned its Western region by replacing certain distribution centers with its
first ADC located in Sparks, Nevada. Due to the opening of the two ADCs, the
Company has been able to transfer the operations of 10 music/video/software
shipping branches, 4 book shipping branches and 3 product return centers to
either the ADCs or other existing facilities. Management expects that
implementation of the ADCs will reduce operating costs and decrease inventory
levels, while improving the Company's speed and reliability in supplying
products to its customers. See Note 4, Provisions for Inventory Reduction and
Realignment of Operations, on page 26 under Item 8, for additional information
regarding the facility realignment.
The Company also has installed a new proprietary inventory management system
("PRISM"). PRISM automates and integrates the functions of ordering product,
receiving, warehousing, order fulfillment, ticket printing and perpetual
inventory maintenance. PRISM also provides the basis to develop title specific
billing to allow the Company to better serve its customers.
North Coast Entertainment
-------------------------
NCE, a subsidiary of Handleman Company, includes the Company's proprietary
product operations. NCE is the umbrella company for subsidiaries which acquire
or develop existing master recordings, exclusive licensing and distribution
agreements, and original productions. Such items are manufactured and then
distributed to either rackjobbers, including H.E.R. and International,
distributors or directly to retailers. NCE has operations in the United States
and Canada, and to a much lesser extent in Germany and the United Kingdom. In
addition, NCE products are available in Mexico and South America. Most NCE
products are categorized as budget, with most retailing for under $10. Products
are designed to provide high margins to the retailer at prices that generate
impulse sales.
NCE, the non-rackjobbing portion of the Company, has the goal to grow as a
global source of innovative entertainment and educational content products. NCE
provides the following opportunities to the Company:
. NCE provides a platform from which to distribute proprietary music, video, and
personal computer (PC) software products.
. NCE enables the Company to take a more active, and more profitable, role in
the production of home entertainment and educational products. This enhances
the Company's profit potential.
6
<PAGE>
. NCE provides the Company with a wide array of product development and
licensing opportunities for music, video, and software products. This enables
the Company to offer a broader range of more profitable products to its
customers.
. NCE gives the Company access to new distribution channels, new markets and new
customers. For example, the Company can cross-sell music, video and PC
software to new or existing customers through any NCE subsidiary sales
organization.
NCE is comprised of a group of enterprises operating under different names:
. Anchor Bay Entertainment develops an assortment of videos through licensing
and distribution agreements. It also is the producer of original children's
and exercise programming. Anchor Bay's catalog consists of over 2,000
selections which encompass many categories. Labels include Video Treasures,
Audio Treasures, MNtex and Starmaker. Anchor Bay supplies products to
rackjobbers, specialty stores, mass merchants and distributors, as well as via
direct response and catalog channels.
. Madacy Entertainment Group offers value-priced music and video products
primarily within the United States and Canada. Madacy's audio catalog has
more than 5,100 selections which encompass many categories. Its video
collection consists of over 1,000 licensed as well as public domain titles.
Mediphon GmbH, a German-based subsidiary, owns over 800 hours of classical
audio recordings from which it has already created masters for over 2,000
selections. Such selections, as well as other licensed products, are
distributed throughout Germany and the rest of Europe.
. Sofsource, Inc. acquires and develops software titles through exclusive
licensing, production and distribution agreements. Its catalog consists of
over 300 selections. Sofsource is among the industry leaders in the sale of
educational software. It supplies PC software to distributors, rackjobbers,
specialty stores and other retailers.
. Sellthrough Entertainment (formerly Holly Music) distributes year-round theme
promotions such as Christmas and Halloween throughout the U.S. In addition to
the Company, its customers include mass merchants, drug stores, grocery stores
and specialty stores.
NCE's management will continue to focus its attention on growing the business
through licensing, acquiring or producing new products, as well as via new
markets, geographical growth, growth within the home entertainment and
educational categories, and selective acquisitions and joint ventures.
Competition
-----------
Handleman is primarily a category manager (rackjobber) of music, video, book and
personal computer software products. The business of the Company is highly
competitive as to both price and alternative supply arrangements in all of its
product lines. Besides competition among the Company's mass merchant customers,
the Company's customers compete with alternative sources from which consumers
could purchase the same product, such as (1) specialty retail outlets, (2)
electronic specialty stores, (3) video rental outlets, and (4) record and book
clubs. The Company competes directly for sales to its customers with (1)
manufacturers which bypass wholesalers and sell directly to retailers, (2)
independent distributors, and (3) other rackjobbers. In addition, some large
mass merchants have "vertically integrated" so as to provide their own
rackjobbing. Some of these companies, however, also purchase from independent
rackjobbers. Also, new methods of in-home delivery of entertainment software
products are being introduced, including Pay Per View and home satellite video
viewing.
H.E.R. video sales were $266.4 million in fiscal 1997, compared to $401.6
million in fiscal 1995. Video sales to a major customer that began to purchase
a substantial portion of its video product directly from manufacturers in fiscal
1995 have decreased from $57.5 million in fiscal 1995 to less than $1.0 million
in fiscal 1997. Certain other customers have begun to purchase video products
directly from manufacturers, or are exploring such purchase arrangements. The
Company expects that the downward trend in video sales will continue in fiscal
1998.
The Company believes that the distribution of home entertainment software will
remain highly competitive. The Company believes that customer service and
continual progress in operational efficiencies are the keys to growth in this
competitive environment.
7
<PAGE>
Industry Outlook
----------------
Information regarding industry outlook by product line follows (all years cited
herein are calendar years):
Music
- -----
According to the Recording Industry Association of America, the U.S. music
industry posted sales, at list price, of $12.5 billion in 1996, growing 2% from
1995. According to Veronis, Suhler & Associates ("Veronis"), an entertainment
industry investment banker, the U.S. market is expected to grow at an 8.1%
compound annual rate through 2000.
Compact discs ("CDs") accounted for over 81% of music industry net revenues in
1996.
Despite the growing dominance of CDs, cassettes still remain a popular format.
Industry-wide sales of cassettes, including cassette singles, still represent
sales of over $2.0 billion. Car stereos and portable systems, two areas where
CDs have had less impact, still rely principally on the cassette. The size,
cost and convenience of cassettes are also important factors in the continuing
market for this music format.
Video
- -----
According to Adams Media Research, an independent market research firm, for-sale
home video sales in the United States grew 14% in 1996, at retail. Veronis
projects industry video sales to grow at a 6.6% compound annual rate through
2000.
Book
- ----
Book industry sales grew an estimated 7.3% in 1996 to $16.8 billion, according
to Veronis. In addition, consumer books are projected to grow at a 5.8%
compound annual rate through 2000.
The book industry is a more mature market, and thus a less volatile market, than
either the music or video industry. However, mass media promotions have helped
spur increased interest and consumer demand. Both paperbacks and hardcovers are
being promoted via print and television advertising, and many talk show programs
profile authors and their books. In addition, mega-star authors such as John
Grisham, Stephen King and Danielle Steel continue to produce best sellers which
are purchased by their loyal readers.
Software
- --------
Personal computer software sales, at retail, grew in excess of 21% in 1996,
compared to 1995, and are forecasted to grow at a 16.5% compound annual rate
through 2000, both according to Veronis. Increases in personal computer
software sales are driven by sales of the related hardware. According to the
Consumers Electronics Manufacturers Association, PC hardware unit sales grew 12%
in 1996 versus 1995.
The above-referenced forecast information is not Company information, but
instead has been extracted from material obtained from certain industry
analysts. With respect to these forecasts, as well as any other forward-looking
statements contained throughout this document, we wish to express cautionary
statements that actual results could differ materially based on many meaningful
factors, such as the number of departments shipped; customer requirements; the
nature and extent of new product releases; the introduction of new
configurations (e.g., CD, cassettes or VHS, DVD); implementation of new
operating facilities and expense control items; the retail environment and the
success of the Company's customers in such environment; and pricing and
competitive pressures. An adverse impact from any one of these factors could
offset the benefit from another factor.
8
<PAGE>
* * * * *
See Management's Discussion and Analysis of Financial Condition and
Results of Operations for additional information regarding the Company's
activities.
The Company's sales and earnings are of a seasonal nature. Note 10,
Quarterly Financial Summary (Unaudited), on page 32 under Item 8 discloses
quarterly results which indicate the seasonality of the Company's business.
The Company has approximately 3,500 employees, of whom approximately 72
are members of a local union.
9
<PAGE>
Item 2. PROPERTIES
The Company's H.E.R. division occupies five leased warehouses, four owned
warehouses and six leased satellite sales offices, all in the United States. The
leased warehouses are located in Albany, New York, Indianapolis, Indiana (2),
Reno, Nevada and Youngstown, Ohio. The owned warehouse are located in Atlanta,
Georgia, Baltimore, Maryland, Brighton, Michigan and Chicago, Illinois. The
satellite sales offices are located in the states of Massachusetts, Ohio,
Missouri, Arkansas, California and Oregon. The lease on the warehouse in Ohio
expires on July 31, 1997, and will not be renewed or replaced due to the
operations being integrated into other warehouses, primarily the Midwest
automated distribution center. A second satellite sales office will be opened in
Ohio coincident with closing the Youngstown warehouse. The Company-owned
warehouses in Brighton, Michigan and Chicago, Illinois are being sold in
connection with implementation of the Company's Midwest ADC (see note 4 on page
26 under Item 8). The sales of the Brighton and Chicago warehouses should close
by the end of the second quarter of the Company's fiscal year ending May 1,
1998.
The Company's NCE division owns one warehouse located in Tampa, Florida, and
leases four warehouses located in Columbus, Ohio, Montreal, Quebec (2), and
Toronto, Ontario. NCE also occupies leased office space within the United States
in the states of Texas, New Mexico, New Jersey and Missouri, as well as in
Canada and Germany.
The Company's International division has leased warehouses in Montreal and
Toronto, Canada, Buenos Aires, Argentina, Sao Paulo, Brazil and Mexico City,
Mexico. The International division also has a leased satellite sales office in
Calgary, Canada.
The Company owns its 130,000 square feet corporate office building located in
Troy, Michigan. H.E.R.s Atlanta building is encumbered by Economic Development
Corporation Revenue Bonds as explained in Note 6 to Handleman's Consolidated
Financial Statements under Item 8. The bonds were issued in connection with the
construction of the building.
Item 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Registrant or
any of its subsidiaries is a party other than ordinary routine litigation
incidental to the business.
Item 4. SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON
STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange.
Below is a summary of the market price of the Company's common stock as traded
on the New York Stock Exchange:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------
May 3, 1997 April 27, 1996
-------------------- --------------------
Quarter Low High Low High
------- ---------------------------------------------
<S> <C> <C> <C> <C>
First............... 4 3/4 7 3/8 9 1/2 11 7/8
Second.............. 4 5/8 7 8 1/8 10 1/2
Third............... 6 3/8 9 5 1/4 8 1/4
Fourth.............. 6 1/8 9 4 7 3/8
--------------------------------------------------------------------
</TABLE>
As of July 14, 1997, the Company had 5,042 shareholders of record.
Below is a summary of the dividends declared during the past two fiscal years:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------
Quarter May 3, 1997 April 27, 1996
------- ----------------- ------------------
<S> <C> <C>
First.............. --- $.11
Second............. --- .11
Third.............. --- .05
Fourth............. --- ---
========= ========
TOTAL...... $ --- $ .27
========= ========
</TABLE>
11
<PAGE>
Item 6. SELECTED FINANCIAL DATA
HANDLEMAN COMPANY
FIVE YEAR REVIEW
(amounts in thousands except per share data and ratios)
<TABLE>
<CAPTION>
1997 % 1996 % 1995 % 1994 % 1993 %
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net sales $1,181,037 100.0 $1,132,607 100.0 $1,226,062 100.0 $1,066,566 100.0 $1,121,705 100.0
Gross profit, after direct
product costs * 274,258 23.2 244,685 21.6 278,464 22.7 249,049 23.4 278,159 24.8
Selling, general & administrative
expenses 244,161 20.7 244,412 21.6 213,497 17.4 187,663 17.6 191,882 17.1
Depreciation: included in selling,
general & administrative expenses 29,205 2.5 28,919 2.6 24,787 2.0 24,189 2.3 21,722 1.9
Provision for realignment of
operations --- 1,500 .1 5,500 .4 2,000 .2
Amortization of acquisition costs 6,125 .5 7,965 .7 7,014 .6 7,536 .7 8,679 .8
Interest expense, net 10,967 .9 12,039 1.1 8,024 .7 6,211 .6 6,713 .6
Income (loss) before income taxes
& minority interest 13,005 1.1 (35,731) ** 44,429 3.6 45,639 4.3 70,885 6.3
Income tax expense (benefit) 4,909 .4 (12,738) ** 17,809 1.4 17,983 1.7 27,142 2.4
Effective tax rate 37.7% 35.6% 40.1% 39.4% 38.3%
Minority interest (2,744) .2 517 ** 1,403 **
Net income (loss) 5,352 .5 (22,476) ** 28,023 2.3 27,656 2.6 43,743 3.9
Dividends --- 9,070 14,755 14,701 13,589
Average number of shares outstanding 33,481 33,576 33,518 33,389 33,229
PER SHARE DATA:
Earnings (loss) per share $ .16 $ (.67) $ .84 $.83 $1.32
Dividends per share --- .27 .44 .44 .41
FINANCIAL DATA:
Cash and receivables $ 302,520 $ 277,764 $ 283,043 $ 237,846 $ 257,319
Inventories 188,215 212,700 276,109 234,594 241,502
Current assets 500,378 509,813 560,931 477,376 501,052
Additions to property and equipment 22,635 33,596 40,675 28,737 33,391
Total assets 667,886 693,914 754,076 640,998 659,076
Debt, current 15,000 4,000 --- 32,200 17,860
Current liabilities 239,442 264,484 289,961 261,227 259,723
Debt, non-current 135,520 143,600 146,200 76,364 105,702
Working capital 260,936 245,329 270,970 216,149 241,329
Shareholders' equity 283,653 279,560 311,652 299,493 288,700
FINANCIAL RATIOS:
Quick ratio
(Cash and receivables/current
liabilities) 1.3 1.1 1.0 .9 1.0
Working capital ratio
(Current assets/current
liabilities) 2.1 1.9 1.9 1.8 1.9
Inventory turns
(Direct product costs/average
inventories throughout year) 4.1 3.4 3.5 3.2 3.3
Debt to total capitalization ratio
(Debt, non-current/debt, non-current
plus shareholders' equity) 32.3% 33.9% 31.9% 20.3% 26.8%
Return on assets
(Net income/average assets) .8% ** 4.0% 4.3% 6.7%
Return on beginning shareholders'
equity
(Net income/beginning shareholders'
equity) 1.9% ** 9.4% 9.6% 16.8%
</TABLE>
* - Fiscal 1996 amount is before inventory reduction provision of $14,500.
** - Not meaningful
Note 1: See Item 7., Management's Discussion and Analysis of Financial
Condition and Results of Operations, for additional information
regarding the Company's activities.
Note 2: The Company's fiscal year ends on the Saturday closest to April
30th. Fiscal 1997 consisted of 53 weeks, whereas fiscal years
1993 - 1996 consisted of 52 weeks.
12
<PAGE>
Item 7.
Management's Discussion and
Analysis of Financial Condition
and Results of Operations
The Company operates principally in one business segment: selling music, video,
book and personal computer software products primarily to mass merchants, and
also to specialty chain stores, drugstores and supermarkets.
Comparison of 1997 with 1996
- ----------------------------
Net sales for the fiscal year ended May 3, 1997 ("fiscal 1997") were $1.18
billion, compared to $1.13 billion for the fiscal year ended April 27, 1996
("fiscal 1996"), an increase of 4%. Net income for fiscal 1997 was $5.4 million
or $.16 per share, compared to a net loss of $22.5 million or $.67 per share for
fiscal 1996. The operating results for fiscal 1996 included a $14.5 million pre-
tax provision ($.26 per share) recorded for markdowns and other costs incurred
in connection with the Company's inventory reduction program, and a $1.5 million
pre-tax charge ($.03 per share) in connection with closing Entertainment Zone, a
subsidiary which sold music, video and book products in departments leased from
certain retailers.
The Company's fiscal year ends on the Saturday closest to April 30th. Fiscal
1997 consisted of 53 weeks, whereas fiscal 1996 consisted of 52 weeks.
Management believes the inclusion of one additional week in fiscal 1997 did not
have a material effect on results of operations for fiscal 1997.
The Company has three operating units: Handleman Entertainment Resources
("H.E.R."), North Coast Entertainment ("NCE") and Handleman International
("International"). H.E.R. is a category manager of music, video, book and
personal computer software products to mass merchants in the United States. NCE,
which includes the Company's proprietary operations, sells music, video and
personal computer software products to retailers and category managers
(including H.E.R. and International). International provides category management
services in Canada, Mexico, Brazil and Argentina. The sales amounts discussed
below include sales between operating units which are eliminated in
consolidation.
H.E.R. net sales for fiscal 1997 were $959.3 million, approximately equal to
fiscal 1996 net sales of $958.2 million. Following is a discussion of sales for
each of H.E.R.'s four major product lines:
Music sales for fiscal 1997 increased 6% to $595.6 million from $560.9 million
for fiscal 1996, mainly due to increased sales of compact discs. Compact disc
("CD") sales for fiscal 1997 were $460.7 million or 77% of H.E.R.'s music sales,
compared to $401.1 million or 72% of H.E.R's music sales for fiscal 1996.
According to the Recording Industry Association of America ("RIAA"), a music
industry trade group, music industry CD dollar sales reached 81% of total music
industry revenues for calendar 1996. Though CDs have reached 77% of Handleman's
music sales, the Company continues to emphasize the sale of cassette products
for which a substantial base of user hardware continues to exist. According to
RIAA, music industry sales of cassettes, at suggested list price, were $2.1
billion in calendar 1996.
Video sales for fiscal 1997 were $266.4 million, a decline of 9% from $293.4
million for fiscal 1996, substantially attributable to a $17.8 million decline
in sales of mega-hit titles. Certain major customers and vendors are exploring
the expansion of direct relationships for selling certain video products,
primarily mega-hit videos. It is unclear what impact, if any, these direct
relationships will have on the Company's results of operations. Mega-hit video
sales carry low gross profit margin percentages and the customers may continue
to require a provider of other video products, as well as merchandising services
for their video departments.
Book sales increased 4% to $55.6 million for fiscal 1997 from $53.7 million for
fiscal 1996, principally resulting from an increase in the number of departments
shipped.
Personal computer software sales decreased 17% to $41.7 million for fiscal 1997
from $50.2 million for fiscal 1996, primarily the result of an $8.3 million
sales decline from a major customer which exited the product line during the
third quarter of fiscal 1997.
13
<PAGE>
NCE net sales were $134.4 million for fiscal 1997, compared to $101.5 million
for fiscal 1996, an increase of 32%. This increase was driven by sales growth
ranging from $7.9 million to $12.6 million in each of NCE's three primary
operating units. NCE net sales for fiscal 1996 exclude $18.8 million of sales
from NCE's Entertainment Zone subsidiary, which closed during fiscal 1996. NCE
sales to other divisions within the Company were $29.2 million in fiscal 1997
and $18.0 million in fiscal 1996.
International net sales for fiscal 1997 were $117.0 million, compared to $72.2
million for fiscal 1996, an increase of 62%. Approximately 68% of the increase
in International net sales was driven by the addition of new customers to the
account base in Mexico. In addition, approximately 23% of the increase in
International net sales resulted from expansion of operations in Brazil and
Argentina. The growth of the International operating unit and expansion to
additional foreign countries has introduced operating risks (e.g., currency
fluctuation, political and economic instability) that could have an effect on
results of operations.
The consolidated gross profit margin percentage for fiscal 1997 was 23.2%. The
gross profit margin percentage for fiscal 1996, before the impact of an
inventory reduction provision recorded in the fourth quarter of fiscal 1996, was
21.6% (20.3% after the impact of the inventory reduction provision). The year-
over-year increase in gross profit margin percentage resulted from a number of
factors including an increase in the proportion of NCE sales in the overall
sales mix. This positively impacted the overall gross profit margin percentage
since sales of NCE products carry higher gross profit margin percentages than
the overall gross profit margin percentage. A significant portion of the
increase in the gross profit margin percentage as compared to last year resulted
from improved margin percentages at each operating unit. The improvement within
H.E.R. was substantially the result of music sales becoming a larger proportion
of the H.E.R. sales mix and a reduction in sales of low margin mega-hit video
titles. Approximately 80% of the 1.6 percentage point increase in gross profit
margin percentage from 21.6% for fiscal 1996 to 23.2% for fiscal 1997 could be
attributed to the increase in NCE sales in the overall sales mix and improved
gross profit margin percentage within H.E.R.
Selling, general and administrative ("SG&A") expenses were $244.2 million (20.7%
of net sales) for fiscal 1997, compared to $244.4 million (21.6% of net sales)
for fiscal 1996. The decrease in SG&A expenses as a percentage of net sales was
attributable to improvements in the International and H.E.R. operating units.
Within the International operating unit, which accounted for approximately 60%
of the reduction in the SG&A expense to net sales percentage, the improvement
principally resulted from the spreading of fixed costs over the higher sales
level and the inclusion of costs in fiscal 1996 related to the start-up of
operations in Brazil and Argentina. The lower SG&A expense to net sales
percentage at H.E.R., which accounted for approximately 40% of the overall
improvement, was driven by the impact of the various initiatives implemented to
improve operational efficiency, such as implementing best practices at the
warehouse and distribution facilities. These improvements were partially offset
by higher SG&A expenses related to proprietary product activities in the NCE
operating unit.
During fiscal 1997, the operations of two music/video shipping branches and two
book shipping branches were transferred to the Indianapolis, Indiana automated
distribution center (ADC), which opened during the third quarter of fiscal 1996.
Interest expense for fiscal 1997 decreased to $11.0 million from $12.0 million
for last year. The decrease in interest expense was primarily attributable to
lower borrowing levels.
The Company's first fiscal quarter is traditionally its weakest quarter. The
Company has historically generated the predominant share of its sales and
earnings after the first quarter. For the first quarter of fiscal 1997, the
Company incurred a loss of $.24 per share. Based on these facts, the Company
expects that a loss will be incurred during the first quarter of fiscal 1998
(ending August 2, 1997).
Accounts receivable were $290.1 million at the end of fiscal 1997, compared to
$257.8 million at the end of fiscal 1996, an increase of 13%. The increase in
accounts receivable was partially the result of the higher level of sales during
the fourth quarter of this year compared to the fourth quarter of last year; in
addition, the impact of customers immediately reducing payments for product
returns also contributed to the increase in accounts receivable. Over 50% of the
year-over-year increase in accounts receivable can be attributed to these
factors.
14
<PAGE>
Merchandise inventories were $188.2 million as of May 3, 1997, compared to
$212.7 million as of April 27, 1996, a decrease of $24.5 million or 12%. The
decrease was substantially the result of the Company's inventory reduction
program and ADC implementation.
The decrease in other current assets at May 3, 1997 compared to April 27, 1996
was primarily due to a decrease in income taxes receivable.
The decrease in property and equipment from fiscal 1996 to fiscal 1997 was due
to the disposal of certain Company owned facilities resulting from the
transition to the ADC distribution system.
The accounts payable balance at the end of fiscal 1997 was $197.3 million,
compared to $223.0 million last year. Net inventory investment (inventory less
accounts payable) was a negative $9.1 million as of May 3, 1997, compared to a
negative $10.3 million as of April 27, 1996.
Comparison of 1996 with 1995
- ----------------------------
Net sales for fiscal 1996 were $1.13 billion, compared with $1.23 billion for
fiscal 1995, a decrease of 8%. The Company's operating results were negatively
impacted by the lower sales level, coupled with a lower gross profit margin
percentage and higher selling, general and administrative (SG&A) expenses. As a
result of these factors, the Company experienced a net loss of $22.5 million or
a loss of $.67 per share for fiscal 1996, compared with net income of $28.0
million or $.84 per share for fiscal 1995. The results for fiscal 1996 included
a $14.5 million pre-tax provision ($.26 per share) recorded for markdowns and
other costs being incurred in connection with the Company's inventory reduction
program, and a $1.5 million pre-tax charge ($.03 per share) in connection with
closing Entertainment Zone, a subsidiary which sold music, video and book
products in departments leased from certain retailers.
Fiscal 1996 and fiscal 1995 both consisted of 52 weeks. Effective with fiscal
1997, Canadian operations were transferred from the H.E.R. operating unit to the
International operating unit. Sales information for fiscal 1996 and fiscal 1995
have been restated to include sales related to Canadian operations in
International.
H.E.R. net sales for fiscal 1996 were $958.2 million, compared to $1.09 billion
for fiscal 1995, a decrease of 12%. Following is a discussion of sales for
H.E.R.'s four major product lines:
Music sales for fiscal 1996 were $560.9 million, compared with $581.6 million
for fiscal 1995, a decrease of 4%. The decrease in music sales was primarily
caused by overall softness in the retail music marketplace. In addition,
customer shipment restrictions contributed to the decrease in music sales. CD
sales for fiscal 1996 were $401.1 million or 72% of H.E.R.'s music sales,
compared to $339.6 million or 58% of H.E.R.'s music sales in fiscal 1995.
Fiscal 1996 video sales were $293.4 million, compared to $401.6 million for
fiscal 1995, a decrease of 27%. Over 90% of the decrease in video sales was
attributable to a $53 million reduction in sales to a major customer which began
to purchase a substantial portion of its product directly from manufacturers and
lower sales of catalog and budget products.
Book product sales for fiscal 1996 were $53.7 million, compared to $57.3 million
in fiscal 1995, a decrease of 6%. The decline in book sales was predominantly
caused by lower sales to a major customer resulting from a decrease in number of
departments shipped.
Personal computer software sales increased 2% to $50.2 million in fiscal 1996,
from $49.3 million in fiscal 1995; the increase in sales of personal computer
products was principally due to sales to a customer the Company added to its
account base.
NCE sales, excluding Entertainment Zone sales, were $101.5 million in fiscal
1996, compared to $81.0 million in fiscal 1995, an increase of 25%. This sales
increase was primarily attributable to sales from companies acquired in fiscal
1995. NCE sales to other divisions within the Company were $18.0 million in
fiscal 1996 and $29.9 million in fiscal 1995.
During fiscal 1996, NCE closed Entertainment Zone, a subsidiary that sold music,
video and book products in departments leased from certain retailers.
Entertainment Zone sales for fiscal 1996 and fiscal 1995 were $18.8 million and
$25.2 million, respectively.
15
<PAGE>
During fiscal 1996, the Company recorded a $1.5 million pre-tax charge ($.03 per
share), principally related to display fixture write-offs, in connection with
closing Entertainment Zone.
International sales were $72.2 million in fiscal 1996, compared to $70.5 million
in fiscal 1995, an increase of 2%. Over 60% of this increase was attributable to
sales in Argentina and Brazil, new markets the Company entered during fiscal
1996.
The gross profit margin percentage for the Company, before the impact of the
inventory reduction provision, was 21.6% for fiscal 1996, compared to 22.7% for
fiscal 1995. Approximately 75% of this decline can be attributed to the shift of
music sales to higher priced CD product, which carries a lower gross profit
margin percentage than other music products. CD unit sale prices, however, are
greater than cassette unit sales prices; thus gross profit dollars per CD unit
sold are higher than gross profit dollars per cassette unit sold.
SG&A expenses were $244.4 million or 21.6% of net sales in fiscal 1996, compared
to $213.5 million or 17.4% of net sales for fiscal 1995. H.E.R. contributed to
the increase in SG&A expenses 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 programs; the effect of the relationship of fixed costs
(e.g., computer and administrative staffs) on a lower sales level; and
additional costs resulting from transition to the Midwest ADC.
NCE and start-up costs within the Company's International division also
contributed to the increase in SG&A expenses as a percentage of net sales. NCE
has a higher SG&A expense to net sales percentage than the comparable percentage
for the Company as a whole. 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.
The Company's second ADC, located in Indianapolis, Indiana, opened during the
third quarter of fiscal 1996, with the operations of three music/video shipping
branches and one book shipping branch transferring to the ADC. In fiscal 1995,
the Company opened its first ADC, located in Sparks, Nevada, to service the
Western region of the U.S.
Interest expense increased to $12.0 million in fiscal 1996 from $8.0 million in
fiscal 1995 due to both higher borrowings and higher average interest rates. The
higher average borrowing level, which accounted for approximately 85% of the
increase in interest expense, was primarily caused by the operating losses, as
well as the acquisition of certain companies during fiscal 1995.
Merchandise inventories were $212.7 million at April 27, 1996, compared to
$276.1 million at April 29, 1995, a decrease of $63.4 million or 23%. This
decrease was substantially the result of the Company's inventory reduction
program.
Other current assets were higher at April 27, 1996 than April 29, 1995 due to
the inclusion of an income tax receivable at April 27, 1996 which resulted from
the loss incurred in fiscal 1996.
The decrease in property and equipment from 1995 to 1996 was the result of the
disposal of facilities as part of the transition to the ADC distribution system.
The accounts payable balance was $223.0 million as of April 27, 1996, compared
to $243.1 million as of April 29, 1995. This decrease was primarily attributable
to the lower inventory level. Net inventory investment (inventory less accounts
payable) was a negative $10.3 million as of April 27, 1996, an improvement of
$43.3 million from the previous year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital at May 3, 1997 was $260.9 million compared to $245.3 million at
April 27, 1996, an increase of $15.6 million or 6%. The increase in working
capital primarily resulted from an increase in accounts receivable, partially
offset by a decrease in merchandise inventories. The working capital ratio
increased to 2.1 to 1 at May 3, 1997 from 1.9 to 1 at April 27, 1996. For fiscal
1997, net cash provided from operating activities primarily resulted from non-
cash charges for depreciation, amortization and recoupment of license advances.
16
<PAGE>
Capital assets consist primarily of display fixtures, warehouse equipment and
facilities. The Company also acquires or licenses video, music and software
products which it markets. Purchases of these assets are expected to be funded
primarily by cash flow from operations.
The Company has a credit agreement, as amended, which management believes will
continue to provide sufficient amounts to fund its day-to-day operations and
higher peak seasonal demands. At May 3, 1997, the Company had $82,000,000
available for borrowings under its credit agreement of which $55,000,000 was
outstanding at that date. For further information, reference should be made to
note 6 of the notes to consolidated financial statements.
Effects of Inflation on Operations
- ----------------------------------
The Company's financial statements have reported amounts based on historical
costs which represent dollars of varying purchasing power and do not measure the
effects of inflation. If the financial statements had been restated for
inflation, net income would have been lower because depreciation expense would
have to be increased to reflect the most current costs.
Inflation within the economies in which the Company does business has not had a
material effect on the Company's results of operations.
* * * * *
17
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and supplementary data are filed as a part of
this report:
Report of Independent Accountants
Consolidated Balance Sheet at May 3, 1997, April 27, 1996 and April 29, 1995.
Consolidated Statement of Operations - Years Ended May 3, 1997, April 27, 1996
and April 29, 1995.
Consolidated Statement of Shareholders' Equity - Years Ended May 3, 1997, April
27, 1996 and April 29, 1995.
Consolidated Statement of Cash Flows - Years Ended May 3, 1997, April 27, 1996
and April 29, 1995.
Notes to Consolidated Financial Statements
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Handleman Company:
We have audited the consolidated financial statements and the financial
statement schedule listed in Item 14(a) of this Annual Report on Form 10-K of
Handleman Company and Subsidiaries. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Handleman Company
and Subsidiaries as of May 3, 1997, April 27, 1996, and April 29, 1995 and the
related consolidated results of operations and cash flows for the years then
ended, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Detroit, Michigan
June 11, 1997
19
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
MAY 3, 1997, APRIL 27, 1996 AND APRIL 29, 1995
(amounts in thousands except share data)
----------------
<TABLE>
<CAPTION>
ASSETS 1997 1996 1995
- ------ -------- -------- --------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 12,449 $ 19,936 $ 24,392
Accounts receivable, less allowance of
$21,834 in 1997, $22,141 in 1996
and $24,053 in 1995 for gross profit
impact of estimated future returns 290,071 257,828 258,651
Merchandise inventories 188,215 212,700 276,109
Other current assets 9,643 19,349 1,779
-------- -------- --------
Total current assets 500,378 509,813 560,931
Property and equipment, net 95,719 111,355 124,772
Other assets, net of allowances 71,789 72,746 68,373
-------- -------- --------
Total assets $667,886 $693,914 $754,076
======== ======== ========
LIABILITIES
- -----------
Current liabilities:
Accounts payable $197,301 $223,023 $243,138
Accrued and other liabilities 42,141 41,461 46,823
-------- -------- --------
Total current liabilities 239,442 264,484 289,961
Debt, non-current 135,520 143,600 146,200
Other liabilities 9,271 6,270 6,263
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock, par value $1.00; 1,000,000
shares authorized; none issued -- -- --
Common stock, $.01 par value; 60,000,000
shares authorized; 33,373,000, 33,498,000
and 33,533,000 shares issued in 1997,
1996 and 1995 334 335 335
Paid-in capital 30,800 32,089 33,188
Foreign currency translation adjustment and other (7,546) (7,577) (8,130)
Retained earnings 260,065 254,713 286,259
-------- -------- --------
Total shareholders' equity 283,653 279,560 311,652
-------- -------- --------
Total liabilities and shareholders' equity $667,886 $693,914 $754,076
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED MAY 3, 1997, APRIL 27, 1996 AND APRIL 29, 1995
(amounts in thousands except per share data)
------------------
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net sales $1,181,037 $1,132,607 $1,226,062
Direct product costs 906,779 887,922 947,598
Inventory reduction provision -- 14,500 --
---------- ---------- ----------
Gross profit 274,258 230,185 278,464
Selling, general and administrative expenses 244,161 244,412 213,497
Provision for realignment of operations -- 1,500 5,500
Amortization of acquisition costs 6,125 7,965 7,014
Interest expense, net 10,967 12,039 8,024
---------- ---------- ----------
Income (loss) before income taxes and
minority interest 13,005 (35,731) 44,429
Income tax (expense) benefit (4,909) 12,738 (17,809)
Minority interest (2,744) 517 1,403
---------- ---------- ----------
Net income (loss) $ 5,352 $ (22,476) $ 28,023
========== ========== ==========
Earnings (loss) per average common share
outstanding during the year $ .16 $ (.67) $ .84
========== ========== ==========
Average number of common shares outstanding
during the year 33,481 33,576 33,518
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED MAY 3, 1997, APRIL 27, 1996 AND APRIL 29, 1995
(amounts in thousands except per share data)
----------------
<TABLE>
<CAPTION>
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 30, 1994 33,411 $ 334 $31,900 $(5,732) $272,991 $299,493
Net income 28,023 28,023
Cash dividends, $.44
per share (14,755) (14,755)
Common stock issued for
employee benefit plans,
net of forfeitures 122 1 1,288 (951) 338
Adjustment for foreign
currency translation (1,447) (1,447)
------ ----- ------- ------ -------- -------
April 29, 1995 33,533 335 33,188 (8,130) 286,259 311,652
Net loss (22,476) (22,476)
Cash dividends, $.27
per share (9,070) (9,070)
Common stock issued for
employee benefit plans,
net of forfeitures (35) (1,099) 1,000 (99)
Adjustment for foreign
currency translation (447) (447)
------ ----- ------- ------ -------- -------
April 27, 1996 33,498 335 32,089 (7,577) 254,713 279,560
Net income 5,352 5,352
Common stock forfeitures
in connection with
employee benefit plans (125) (1) (1,289) 1,290 ---
Adjustment for foreign
currency translation (1,259) (1,259)
------ ----- ------- ------- -------- --------
May 3, 1997 33,373 $ 334 $30,800 $(7,546) $260,065 $283,653
====== ===== ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MAY 3, 1997, APRIL 27, 1996 AND APRIL 29, 1995
(amounts in thousands)
----------------
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,352 $ (22,476) $ 28,023
----------- ----------- -----------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 29,205 28,919 24,787
Amortization of acquisition costs 6,125 7,965 7,014
Recoupment of license advances 9,123 7,496 10,057
(Increase) decrease in assets from
operating activities:
Accounts receivable (32,243) 823 (17,122)
Merchandise inventories 24,485 63,409 (35,194)
Other assets 10,167 (22,400) 16
Increase (decrease) in liabilities from
operating activities:
Accounts payable (25,722) (20,115) 39,432
Accrued and other liabilities (5,216) (1,138) 6,585
----------- ----------- -----------
Total adjustments 15,924 64,959 35,575
----------- ----------- -----------
Net cash provided from operating activities 21,276 42,483 63,598
----------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment (22,635) (33,596) (40,675)
Retirements of property and equipment 3,963 11,033 3,142
License advances (11,752) (12,160) (11,343)
Acquisition of Madacy Entertainment Group, Inc. --- --- (22,670)
----------- ----------- -----------
Net cash used by investing activities (30,424) (34,723) (71,546)
----------- ----------- -----------
Cash flows from financing activities:
Issuances of debt 1,363,311 2,053,087 1,680,200
Payments of debt (1,360,391) (2,055,687) (1,642,564)
Cash dividends --- (9,070) (14,755)
Other changes in shareholders' equity, net (1,259) (546) (1,109)
----------- ----------- -----------
Net cash provided from (used by)
financing activities 1,661 (12,216) 21,772
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (7,487) (4,456) 13,824
Cash and cash equivalents at
beginning of year 19,936 24,392 10,568
----------- ----------- -----------
Cash and cash equivalents at
end of year $ 12,449 $ 19,936 $ 24,392
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
1. Accounting Policies:
-------------------
Business
The Company operates principally in one business segment: selling music,
video, book and personal computer software products primarily to mass
merchants, and also to specialty chain stores, drugstores and supermarkets.
Annual Closing Date
The Company's fiscal year ends on the Saturday closest to April 30th.
Fiscal year 1997 consisted of 53 weeks, whereas fiscal years 1996 and 1995
consisted of 52 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its domestic and foreign subsidiaries where the Company has voting or
contractual control. All material intercompany accounts and transactions
have been eliminated. Minority interest recognized in the statement of
operations represents the minority shareholders' portion of the income
(loss) for less than wholly-owned subsidiaries. The minority interest share
of the net assets of these subsidiaries of $2,343,000 as of May 3, 1997 is
included in other liabilities in the accompanying consolidated balance
sheet.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
The Company utilizes the policies outlined in Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation", to convert the
balance sheet and operations of its foreign subsidiaries to United States
dollars. Net transaction gains (losses), and net translation gains (losses)
resulting from translating results of operations in foreign countries deemed
highly inflationary, included in the statement of operations were
$(40,000), $(235,000) and $254,000 for the years ended, May 3, 1997, April
27, 1996 and April 29, 1995, respectively.
Recognition of Revenue and Future Returns
Revenues are recognized upon shipment of the merchandise. The Company
reduces gross sales and cost of sales for estimated future returns at the
time the merchandise is sold.
Pension Plan
The Company has a noncontributory defined benefit pension plan covering
substantially all hourly and salaried employees. Pension benefits are
generally based upon length of service and average annual compensation for
the five highest years of compensation in the last 10 years of employment.
Net periodic pension cost is accrued on a current basis, and funded as
permitted or required by applicable regulations.
Inventory Valuation
Merchandise inventories are recorded at the lower of cost (first-in, first-
out method) or market. The Company accounts for inventories using the full
cost method which includes costs associated with acquiring and preparing
inventory for distribution. Costs associated with acquiring and preparing
inventory for distribution of $ 15,946,000, $17,582,000 and $19,299,000 were
incurred during the years ended May 3, 1997, April 27, 1996 and April 29,
1995, respectively. Merchandise inventories as of May 3, 1997, April 27,
1996 and April 29, 1995 include $ 3,078,000, $3,056,000 and $3,554,000,
respectively, of such costs.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
----------------
1. Accounting Policies: (continued)
Property and Equipment
Property and equipment are recorded at cost. Upon retirement or disposal,
the asset cost and related accumulated depreciation are eliminated from the
respective accounts and the resulting gain or loss is included in the
consolidated statement of operations for the period. Repair costs are
charged to expense as incurred.
Depreciation
Depreciation is computed using primarily the straight-line method based on
the following estimated useful lives:
Buildings and improvements 10-40 years
Display fixtures 3-5 years
Equipment, furniture and other 3-10 years
Licenses
The Company acquires video, audio and software licenses giving it exclusive
rights to manufacture and distribute such products. The cost of license
advances are included in other assets in the consolidated balance sheet and
are amortized over a period which is the lesser of the term of the license
agreement or its estimated useful life. The effective lives of the licenses
tend to range from three to five years. As of May 3, 1997, April 27, 1996
and April 29, 1995, licenses, net of amortization, amounted to $30,570,000,
$26,744,000 and $22,571,000, respectively.
Intangible Assets
Intangible assets, included in other assets in the consolidated balance
sheet, consist of the excess of consideration paid over the estimated fair
values of net assets of businesses acquired and non-competition and other
ancillary agreements. These assets are amortized using the straight-line
method over periods predominantly ranging from 5 to 15 years. As of May 3,
1997, the weighted average period remaining to be amortized was
approximately 10 years.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Financial Instruments
The Company has evaluated the fair value of those assets and liabilities
identified as financial instruments under Statement of Financial Accounting
Standards No. 107. The Company estimates that fair values generally
approximated carrying values at May 3, 1997, April 27, 1996 and April 29,
1995. Fair values have been determined through information obtained from
market sources and management estimates.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
----------------
2. Acquisition of Business:
Effective January 1, 1995, two majority-owned subsidiaries of the Company
acquired the assets of Madacy Entertainment Group, Inc. The aggregate cash
consideration paid for the assets approximated $22,670,000, including
certain transaction costs. The acquisition was accounted for as a purchase
transaction and, accordingly, the purchase price was allocated to assets and
liabilities based on estimated fair values as of the acquisition date. The
excess of the consideration paid over the estimated fair values of net
assets acquired of approximately $20,000,000 is being amortized on the
straight-line basis over 15 years.
3. Sales and Accounts Receivable:
The Company's customers are comprised mainly of mass merchant retail chains
located predominantly in the United States, Canada and Mexico. For the years
ended May 3, 1997, April 27, 1996 and April 29, 1995, one customer accounted
for approximately 38 percent, 40 percent and 40 percent of the Company's net
sales, and a second customer accounted for approximately 23 percent, 21
percent and 25 percent of the Company's net sales, respectively.
Collectively, these customers accounted for approximately 45 percent, 54
percent and 57 percent of accounts receivable at May 3, 1997, April 27, 1996
and April 29, 1995, respectively.
4. Provisions for Inventory Reduction and Realignment of Operations
The Company implemented an inventory reduction program to reduce financing
costs, as well as lower selling, general and administrative costs due to
increased operating efficiency. During the fourth quarter of fiscal 1996,
the Company recorded a $14,500,000 pre-tax provision related to markdowns
and other costs to be incurred in connection with the inventory reduction
program. As of May 3, 1997, most of the identified inventory has been marked
down or disposed of.
During fiscal 1996, the Company closed its Entertainment Zone subsidiary,
which sold music, video and book products in departments leased from certain
retailers. In connection with closing this subsidiary, the Company
recognized a $1,500,000 pre-tax charge in the third quarter of fiscal 1996
primarily related to write-offs of display fixtures and other equipment.
The Company has been realigning its operations by replacing existing
distribution centers with new automated distribution centers (ADCs). The
Company recorded a $5,500,000 pre-tax charge against fourth quarter fiscal
1995 results related to costs associated with the transition from the prior
distribution structure to an ADC in its Midwestern region. This charge
included costs for disposal of certain existing facilities and certain
compensation costs.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
----------------
5. Pension Plan:
The Handleman Company Pension Plan's funded status, the components of net
pension expense, and the amount which is recorded in the Company's
consolidated balance sheet at May 3, 1997, April 27, 1996 and April 29, 1995
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $14,339,000, $12,783,000,
and $12,057,000 in 1997, 1996 and
1995, respectively $15,403,000 $13,769,000 $12,835,000
=========== =========== ===========
Projected benefit obligation $18,158,000 $16,918,000 $15,648,000
Plan assets at fair value 16,492,000 15,627,000 13,102,000
----------- ----------- -----------
Projected benefit obligation in excess of
plan assets (1,666,000) (1,291,000) (2,546,000)
Unrecognized net loss from past
experience different from that assumed 188,000 503,000 1,450,000
Unrecognized net gain from excess funding,
being amortized over eighteen years (728,000) (847,000) (966,000)
Unrecognized prior service cost 246,000 257,000 268,000
----------- ----------- -----------
Accrued pension liability included in
other liabilities $(1,960,000) $(1,378,000) $(1,794,000)
=========== =========== ===========
</TABLE>
Assumptions used in determining the actuarial present value of the projected
benefit obligation included a weighted average discount rate of 7.75 percent
for 1997 and 1996 and 8.0 percent for 1995, and a rate of increase in future
compensation levels of 5.0 percent for all periods.
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net pension expense included the
following components:
Service cost $ 886,000 $ 869,000 $ 797,000
Interest cost 1,321,000 1,182,000 1,132,000
Actual return on plan assets (2,046,000) (2,149,000) (1,031,000)
Net amortization and deferral 626,000 926,000 (140,000)
----------- ----------- -----------
Net pension expense $ 787,000 $ 828,000 $ 758,000
=========== =========== ===========
</TABLE>
The assumed long-term rate of return on assets was 8.5 percent for all
periods. Plan assets are invested in various pooled investment funds and
mutual funds maintained by the Plan trustee and common stock of the Company.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
----------------
6. Debt:
The Company has a contractually committed, unsecured, five-year,
$145,000,000 credit agreement with a consortium of banks, which is scheduled
to expire in July 1999. Under the agreement, the Company may make borrowings
according to a formula based on eligible accounts receivable. At May 3,
1997, the maximum borrowings available under the agreement were
approximately $82,000,000, of which $55,000,000 was outstanding at that
date. The Company may elect to pay interest under a variety of formulae tied
principally to either prime or "LIBOR". As of May 3, 1997, the interest rate
on the borrowings outstanding was 7.06%.
Management believes that the agreement, as amended, will continue to provide
sufficient amounts to fund its day-to-day operations and higher peak
seasonal demands. As the Company intends to extend the maturities of the
outstanding balance under the credit agreement beyond one year, and has the
ability to do so, the debt has been classified as non-current. Borrowings
outstanding will be due on the termination date of the agreement.
In November 1994, the Company entered into a $100,000,000 senior note
agreement with a group of insurance companies. The balance outstanding as of
May 3, 1997 was $92,000,000 of which $15,000,000 is classified as current
and included in accrued and other liabilities in the accompanying
consolidated balance sheet. These notes bear interest at rates of 7.81% to
8.59%.
Scheduled maturities for the senior note, credit agreement, and $3,200,000
of Economic Development Corporation (EDC) limited obligation revenue bonds
are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999................ $18,891,000
2000................ $73,572,000
2001................ $14,571,000
2002................ $14,572,000
After 2002.......... $13,914,000
</TABLE>
The EDC bonds, senior note and the credit agreement all contain certain
restrictions and covenants, relating to, among others, interest coverage
ratios, working capital, debt and net worth.
Interest expense for the years ended May 3, 1997, April 27, 1996 and April
29, 1995, was $12,099,000, $13,119,000 and $9,136,000, respectively.
Interest paid for the years ended May 3, 1997, April 27, 1996 and April 29,
1995 was $11,222,000, $13,178,000 and $8,004,000, respectively.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
---------------
7. Income Taxes:
------------
The domestic and foreign components of income (loss) before income taxes
and minority interests for the years ended May 3, 1997, April 27, 1996 and
April 29, 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Domestic $10,896,000 $(33,663,000) $44,127,000
Foreign 2,109,000 (2,068,000) 302,000
----------- ------------ -----------
Income (loss) before income
taxes and minority interests $13,005,000 $(35,731,000) $44,429,000
=========== ============ ===========
</TABLE>
Provisions for income taxes for the years ended May 3, 1997, April 27, 1996
and April 29, 1995 consist of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Currently payable:
<S> <C> <C> <C>
Federal $ 9,054,000 $(11,059,000) $14,738,000
Foreign 477,000 1,049,000 475,000
State and other 794,000 (2,560,000) 2,882,000
Deferred, net:
Federal (4,646,000) 87,000 (390,000)
Foreign, state and other (770,000) (255,000) 104,000
----------- ------------ -----------
$ 4,909,000 $(12,738,000) $17,809,000
=========== ============ ===========
</TABLE>
The following table provides a reconciliation of the Company's effective
income tax rate to the statutory federal income tax rate:
<TABLE>
<CAPTION>
Percent of Income/Loss
----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State and local income taxes (1.8) 5.1 4.4
Effect of foreign tax provisions (2.6) (4.1) 0.6
Effect of minority interests 1.9 0.5 (1.2)
Other 5.2 (0.9) 1.3
---- ---- ----
Effective tax rate 37.7% 35.6% 40.1%
==== ==== ====
</TABLE>
Items that gave rise to significant portions of the deferred tax accounts
at May 3, 1997, April 27, 1996 and April 29, 1995 are as follows:
<TABLE>
<CAPTION>
May 3, 1997 April 27, 1996 April 29, 1995
---------------------------- -------------------------- --------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities Assets Liabilities
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Allowances $10,612,000 $ 6,503,000 $ 6,807,000 $ 5,228,000 $4,732,000 $ 2,972,000
Employee benefits 2,139,000 10,000 1,585,000 122,000 1,810,000 370,000
Property and equipment 738,000 8,190,000 1,462,000 8,076,000 856,000 7,459,000
Inventories 906,000 2,053,000 278,000 4,513,000 342,000 4,861,000
Other 550,000 408,000 172,000 --- 176,000 57,000
----------- ----------- ----------- ----------- ---------- -----------
$14,945,000 $17,164,000 $10,304,000 $17,939,000 $7,916,000 $15,719,000
=========== =========== =========== =========== ========== ===========
</TABLE>
The Company intends to reinvest indefinitely the undistributed earnings of
its foreign subsidiaries. Accordingly, the potential withholding tax of
approximately $1,300,000 on undistributed earnings of foreign subsidiaries
of approximately $26,500,000 has not been recorded as of May 3, 1997. The
Company has net operating loss carryforwards in certain of its foreign
subsidiaries for tax purposes of $8,393,000 which expire predominantly in
2001 to 2006.
Income taxes paid in 1997, 1996 and 1995 were approximately $8,833,000,
$1,865,000 and $19,569,000, respectively.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
----------------
8. Property and Equipment:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Land $ 4,238,000 $ 4,877,000 $ 6,741,000
Buildings and improvements 24,564,000 31,793,000 42,312,000
Display fixtures 96,721,000 112,207,000 101,051,000
Equipment, furniture and other 67,450,000 60,983,000 61,513,000
------------ ------------ ------------
192,973,000 209,860,000 211,617,000
Less accumulated depreciation
and amortization 97,254,000 98,505,000 86,845,000
------------ ------------ ------------
$ 95,719,000 $111,355,000 $124,772,000
============ ============ ============
</TABLE>
9. Stock Plans:
The Company's shareholders approved the adoption of the Handleman Company
1992 Performance Incentive Plan (the "Plan"), which authorizes the granting
of stock options, stock appreciation rights and restricted stock. At any
given time, the maximum number of shares of stock which may be issued
pursuant to restricted stock awards or granted pursuant to stock options or
stock appreciation rights shall not exceed 5% of the number of shares of
the Company's common stock outstanding as of the immediately preceding
fiscal year end. After deducting restricted stock, options and awards
issued or granted under the Plan since adoption in September 1992, 724,999
shares of the Company's stock are available for use under the Plan as of
May 3, 1997.
Pursuant to the restricted stock provisions of the Plan, 124,529 shares of
common stock were forfeited during the year ended May 3, 1997. Restricted
shares are held in the custody of the Company and vest only if specified
performance goals are achieved. These shares are treated as outstanding
for purposes of calculating earnings per share and payment of dividends.
If the minimum performance goals under which an award is issued are not
satisfied, the shares are forfeited. If performance goals are exceeded, a
maximum of 81,826 additional shares can be issued. The number of shares
which may vest will be prorated to the extent actual results are between
minimum and maximum performance goals. Through 1997, the Company has not
recorded any net compensation expense related to the restricted stock
because minimum performance goals have not been achieved.
Information with respect to options outstanding under the previous and
current stock option plans, which have various terms and vesting periods as
approved by the Compensation and Stock Option Committee of the Board of
Directors, for the years ended April 29, 1995, April 27, 1996 and May 3,
1997 is set forth below. Options were granted during such years at no less
than fair market value at the date of grant.
<TABLE>
<CAPTION>
Number Option Weighted
Of Shares Price Range Average Price
--------- --------------- -------------
<S> <C> <C> <C>
Balance, April 30, 1994 1,217,454 $11.75 - $22.17 $14.64
Granted 99,200 10.44 - 14.25 12.36
Terminated (93,825) 10.44 - 21.83 14.70
Exercised - 0 - -- -- --
--------- --------------- ------
Balance, April 29, 1995 1,222,829 $10.44 - $22.17 14.45
Granted 336,000 10.06 - 10.06 10.06
Terminated (256,145) 10.06 - 21.83 13.65
Exercised - 0 - -- -- --
--------- --------------- ------
Balance, April 27, 1996 1,302,684 $10.06 - $22.17 13.48
Granted 350,000 6.75 - 8.31 6.80
Repriced 56,975 6.38 - 7.13 7.03
Terminated, including repriced options (396,744) 6.75 - 22.17 12.93
Exercised - 0 - -- -- --
--------- --------------- ------
Balance, May 3, 1997 1,312,915 $ 6.38 - $21.83 $11.58
========= =============== ======
Number of shares exercisable
at May 3, 1997 777,940
=========
</TABLE>
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,(continued)
----------------
9. Stock Plans: (continued)
-----------
The Company has elected to continue to apply the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and accordingly, no stock option compensation expense is
included in the determination of net income in the statement of operations.
Had stock option compensation expense been determined pursuant to the
methodology of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the pro forma effects on the
Company's earnings and earnings per share in fiscal years 1997 and 1996
would not have been material.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
----------------
10. Quarterly Financial Summary (Unaudited):
(amounts in thousands except per share data)
FOR THE THREE MONTHS ENDED
--------------------------
<TABLE>
<CAPTION>
July 27, Oct. 26, Jan. 31, May 3,
Fiscal Year 1997 1996 1996 1997 1997
---------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $225,026 $347,080 $330,532 $278,399
Gross profit 50,729 78,331 79,979 65,219
Income (loss) before income taxes (11,967) 11,897 12,076 999
Minority interest (659) (371) (1,471) (243)
Net income (loss) (8,181) 6,822 6,527 184
Earnings (loss) per share (.24) .20 .19 .01*
Dividends per share -- -- -- --
July 29, Oct. 28, Jan. 31, April 27,
Fiscal Year 1996 1995 1995 1996 1996
---------------- -------- -------- -------- --------
Net sales $230,789 $295,170 $345,605 $261,043
Gross profit 52,558 71,079 70,930 35,618
Income (loss) before income taxes (9,727) 4,662 1,543 (32,209)
Minority interest (104) 389 90 142
Net income (loss) (6,469) 3,365 1,097 (20,469)
Earnings (loss) per share (.19) .10 .03* (.61)*
Dividends per share .11 .11 .05 ---
July 30, Oct. 29, Jan. 31, April 29,
Fiscal Year 1995 1994 1994 1995 1995
---------------- -------- -------- -------- ---------
Net sales $212,464 $347,160 $362,911 $303,527
Gross profit 51,016 80,232 82,087 65,129
Income before income taxes 1,401 25,229 17,457 342
Minority interest 63 (19) 1,437 (78)
Net income 901 15,480 11,096 546
Earnings per share .03 .46 .33 .02*
Dividends per share .11 .11 .11 .11
</TABLE>
* Earnings per common share were improved by $.06 and $.04 for the fourth
quarters of fiscal 1997 and fiscal 1995, respectively, resulting from
various year-end adjustments to previous accrual estimates. Income before
income taxes for the quarter ended April 27, 1996 includes the effect of a
$14,500,000 pre-tax inventory reduction provision ($.26 per share after
tax). Income before income taxes for the quarters ended January 31, 1996
and April 29, 1995 include the effect of pre-tax provisions for realignment
of operations of $1,500,000 ($.03 per share after tax) and $5,500,000 ($.10
per share after tax), respectively. See note 4 to the consolidated
financial statements.
32
<PAGE>
Item 9. DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 10, with the exception of the following information regarding executive
officers of the Registrant required by Item 10, is contained in the Handleman
Company definitive Proxy Statement for its 1997 Annual Meeting of Shareholders
to be filed on or before August 28, 1997, and such information is incorporated
herein by reference. All officers serve at the discretion of the Board of
Directors.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name and Age Office and Year First Elected
- ------------------------ ----------------------------------------------------
<S> <C>
Stephen Strome 52 (1) President (1990), Chief Executive Officer (1991)
and Director (1989)
Peter J. Cline 50 (2) Executive Vice President/President of Handleman
Entertainment Resources (1994)
Lawrence R. Hicks 52 (3) Executive Vice President/Sales and Merchandising
(1994)
Stephen Nadelberg 56 (4) Senior Vice President/President of NCE (1997)
Arnold Gross 56 (5) Senior Vice President/President of Handleman
International (1997)
Leonard A. Brams 46 (6) Senior Vice President/Finance, Chief Financial
Officer and Secretary (1997)
Thomas C. Braum, Jr. 42 (7) Vice President (1992) and Corporate
Controller (1988)
</TABLE>
1. Stephen Strome has served as President since March 1990. On May 1, 1991,
Mr. Strome was named Chief Executive Officer.
2. Peter J. Cline has served as Executive Vice President/President of
Handleman Entertainment Resources since joining the Company in April 1994.
Prior to joining Handleman Company, Mr. Cline was employed by the Snacks
and International Consumer Products Division of Borden, Inc. from August
1990 until April 1994 where he served in various executive positions, most
recently as Group Vice President - North American Snacks.
3. Lawrence R. Hicks has served as a Vice President since January 1982. Mr.
Hicks was elected Senior Vice President in June 1988, and Executive Vice
President in April 1994.
4. Stephen Nadelberg has served as Senior Vice President/President of North
Coast Entertainment since joining the Company in February 1997. Prior to
joining Handleman Company, Mr. Nadelberg was employed from 1974 to 1996 by
Allied Domecq Spirits & Wines, parent company of Hiram Walker, Inc., where
he held various positions most recently as Vice President and General
Manager of global product development.
5. Arnold Gross has served as Senior Vice President/International since 1996.
In June of 1997, Mr. Gross was elected Senior Vice President/President of
Handleman International. From 1994 to 1995, Mr. Gross served as Director
General of Rackjobbing, S.A. de C.V., the Company's joint venture in
Mexico. Prior to joining Handleman Company, Mr. Gross served from 1983 to
1993 as President of A&M Development.
6. Leonard A. Brams has served as Senior Vice President/Finance, Chief
Financial Officer and Secretary since joining the Company in June 1997.
Prior to joining Handleman Company, Mr. Brams was Vice
President/Administration and Chief Financial Officer for Talon LLC from
1995 until 1997, and Vice President Finance of United Technologies
Automotive from 1990 until 1994.
7. Thomas C. Braum, Jr. has served as Corporate Controller since June 1988.
In February 1992, Mr. Braum was elected Vice President.
33
<PAGE>
Item 11. EXECUTIVE COMPENSATION
Information required by this item is contained in the Handleman Company
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders, to be
filed on or before August 28, 1997 and such information is incorporated herein
by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is contained in the Handleman Company
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders, to be
filed on or before August 28, 1997 and such information is incorporated herein
by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is contained in the Handleman Company
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders, to be
filed on or before August 28, 1997 and such information is incorporated herein
by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The following financial statements and supplementary data are
filed as a part of this report under Item 8.:
Report of Independent Accountants
Consolidated Balance Sheet at May 3, 1997, April 27, 1996
and April 29, 1995.
Consolidated Statement of Operations - Years Ended May 3, 1997,
April 27, 1996 and April 29, 1995.
Consolidated Statement of Shareholders' Equity - Years Ended
May 3, 1997, April 27, 1996 and April 29, 1995.
Consolidated Statement of Cash Flows - Years Ended May 3, 1997,
April 27, 1996 and April 29, 1995.
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
II. Valuation and Qualifying Accounts and Reserves
All other schedules for Handleman Company have been omitted since
the required information is not present or not present in an
amount sufficient to require submission of the schedule, or
because the information required is included in the financial
statements or the notes thereto.
34
<PAGE>
3. Exhibits as required by Item 601 of Regulation S-K.
S-K Item 601 (3)
The Registrant's Restated Articles of Incorporation dated June 30,
1989 were filed with the Form 10-K dated May 1, 1993, and are
incorporated herein by reference. The Registrant's Bylaws adopted
March 7, 1990, as amended June 16, 1993 and further amended December
6, 1995, were filed with the Form 10-K dated April 27, 1996, and are
incorporated herein by reference.
S-K Item 601 (10)
The Registrant's 1983 Stock Option Plan was filed with the Commission
in Form S-8 dated January 18, 1985, File No. 2-95421. The first
amendment to the 1983 Stock Option Plan, adopted on March 11, 1987,
was filed with the Commission with the Form 10-K for the year ended
May 2, 1987. The plan, as amended, is incorporated herein by
reference.
The Registrant's 1992 Performance Incentive Plan was filed with the
Commission in Form S-8, dated March 5, 1993, File No. 33-59100.
The advisory agreement with David Handleman was filed with the Form
10-K for the year ended April 28, 1990.
The Credit Agreement among Handleman Company, the Banks named therein
and NBD Bank, N.A., as Agent, dated July 12, 1994 was filed with the
Form 10-K for the year ended April 28, 1995. Amendments Nos. 1, 2 and
3 to the Credit Agreement were filed with Commission with the Form 10-
K for the year ended April 27, 1996.
The Note Agreement dated as of November 1, 1994 was filed with the
Form 10-K for the year ended April 28, 1995.
The change in control agreements dated March 17, 1997 between
Handleman Company and certain executive officers of the Company are
filed as Exhibits A and B to this Form 10-K.
S-K Item 601 (21) - Subsidiaries of the Registrant:
Handleman Company of Canada, Limited, an Ontario Corporation
Scorpio Productions, Inc., a Texas Corporation
Hanley Advertising Company, a Michigan Corporation
Rackjobbing, S.A. de C.V.
Rackjobbing Services, S.A. de C.V.
Michigan Property and Risk Management Company, a Michigan Corporation
North Coast Entertainment, Inc., a Michigan Corporation
Anchor Bay Entertainment, Inc., a Michigan Corporation
Sellthrough Entertainment, Inc., a Michigan Corporation
North Coast Entertainment, Ltd., a Canadian Corporation
Sofsource, Inc., a Michigan Corporation
Madacy Entertainment Group, Inc., a Michigan Corporation
Mediaphon, Gmbh, a German Corporation
Madacy Entertainment Group, Ltd., a Canadian Corporation
American Sterling Corp., a Delaware Corporation
Handleman de Argentina S.A.
Handleman do Brasil Commercial Ltd.
Sellthrough Entertainment, Limited, a Canadian Corporation
Madacy Entertainment (U.K.) Limited
Bosco Music, Inc., a Michigan Corporation
HGV Video Productions, Inc., an Ontario Corporation
S-K Item 601 (23) - Consent of Independent Accountants:
Filed with this report.
(b) No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
Note: The Exhibits attached to this report will be furnished to requesting
security holders upon payment of a reasonable fee to reimburse the
Registrant for expenses incurred by Registrant in furnishing such
Exhibits.
35
<PAGE>
Exhibit (23)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Handleman Company and Subsidiaries on Form S-3 (File Nos. 33-16553, 33-26456,
33-33797 and 33-42018) and Form S-8 (File Nos. 2-60162, 2-95421, 33-59100,
33-16637 and 33-69030) of our report dated June 11, 1997, on our audits of the
consolidated financial statements and financial statement schedule of Handleman
Company and Subsidiaries as of May 3, 1997, April 27, 1996, and April 29, 1995
and for the years then ended, which report is included in this Annual Report on
Form 10-K.
Coopers & Lybrand L.L.P.
Detroit, Michigan
July 24, 1997
36
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED APRIL 29, 1995, APRIL 27, 1996 AND MAY 3, 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------------------- ---------- ---------- -------------- -------------
Deductions:
Balance at Additions: Adjustments
Beginning Charged to of, or Charges Balance at
Description Of Period Expense to, Reserve end of Period
---------------------- ---------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
Year ended April 29, 1995:
Accounts receivable,
allowance for gross
profit impact of estimated
future returns $19,613,000 $ 8,510,000 $ 4,070,000 $24,053,000
=========== =========== =========== ===========
Other assets, collectability
allowance for receivables
from bankrupt customers $13,060,000 $ 698,000 $ 582,000 $13,176,000
=========== =========== =========== ===========
Year ended April 27, 1996:
Accounts receivable,
allowance for gross
profit impact of estimated
future returns $24,053,000 $13,972,000 $15,884,000 $22,141,000
=========== =========== =========== ===========
Other assets, collectability
allowance for receivables
from bankrupt customers
$13,176,000 $ 4,687,000 $ 3,913,000 $13,950,000
=========== =========== =========== ===========
Year ended May 3, 1997:
Accounts receivable,
allowance for gross
profit impact of estimated
future returns $22,141,000 $ 7,959,000 $ 8,266,000 $21,834,000
=========== =========== =========== ===========
Other assets, collectability
allowance for receivables
from bankrupt customers $13,950,000 $ 3,805,000 $ 4,754,000 $13,001,000
=========== =========== =========== ===========
</TABLE>
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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: July 25, 1997 BY: /s/ Stephen Strome
------------------- -------------------------------
Stephen Strome, President, Chief
Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
/s/ Leonard A. Brams /s/ Thomas C. Braum, Jr.
- --------------------------------------- ------------------------------------
<S> <C>
Leonard A. Brams, Senior Vice President, Thomas C. Braum, Jr., Vice President,
Finance and Chief Financial Officer Corporate Controller
(Principal Financial Officer) (Principal Accounting Officer)
</TABLE>
July 25, 1997 July 25, 1997
- --------------------------------------- ------------------------------------
DATE DATE
/s/ David Handleman /s/ Richard H. Cummings
- --------------------------------------- ------------------------------------
David Handleman, Director Richard H. Cummings, Director
(Chairman of the Board)
July 25, 1997 July 25, 1997
- --------------------------------------- ------------------------------------
DATE DATE
/s/ James B. Nicholson /s/ Alan E. Schwartz
- --------------------------------------- ------------------------------------
James B. Nicholson, Director Alan E. Schwartz, Director
July 25, 1997 July 25, 1997
- --------------------------------------- ------------------------------------
DATE DATE
/s/ Lloyd E. Reuss /s/ Gilbert R. Whitaker
- --------------------------------------- ------------------------------------
Lloyd E. Reuss, Director Gilbert R. Whitaker, Jr., Director
July 25, 1997 July 25, 1997
- --------------------------------------- ------------------------------------
DATE DATE
/s/ John M. Barth
- ---------------------------------------
John M. Barth, Director
July 25, 1997
- ---------------------------------------
DATE
38
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-03-1997
<PERIOD-START> APR-28-1996
<PERIOD-END> MAY-03-1997
<CASH> 12,449
<SECURITIES> 0
<RECEIVABLES> 290,071
<ALLOWANCES> 0
<INVENTORY> 188,215
<CURRENT-ASSETS> 500,378
<PP&E> 192,973
<DEPRECIATION> 97,254
<TOTAL-ASSETS> 667,886
<CURRENT-LIABILITIES> 239,442
<BONDS> 135,520
0
0
<COMMON> 334
<OTHER-SE> 283,319
<TOTAL-LIABILITY-AND-EQUITY> 667,886
<SALES> 1,181,037
<TOTAL-REVENUES> 1,181,037
<CGS> 906,779
<TOTAL-COSTS> 906,779
<OTHER-EXPENSES> 250,286
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,967
<INCOME-PRETAX> 13,005
<INCOME-TAX> 4,909
<INCOME-CONTINUING> 5,352
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,352<F1>
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
<FN>
<F1> The Company recognized minority interest expense in the amount of
$2,744,000 in the consolidated statement of operations, which represents
the minority shareholders' portion of the income for less than wholly-
owned subsidiaries. The minority interest share of the net assets of these
subsidiaries of $2,343,000 as of May 3, 1997 is included in other
liabilities in the consolidated balance sheet of the Company.
</FN>
</TABLE>
<PAGE>
Exhibit 'A'
A G R E E M E N T
-----------------
THIS AGREEMENT is entered into this 17th day of March, 1997, between
HANDLEMAN COMPANY, a Michigan corporation (the "Company"), and Stephen Strome
(the "Executive").
RECITALS
--------
A. The Board of Directors of the Company (the "Board") recognizes that
merger and acquisition activities have increased in recent years and that the
threat of, or occurrence of, a Change in Control (as hereinafter defined)
relating to the Company could result in significant distractions of its key
management personnel because of the uncertainties inherent in such a situation.
B. The Board has determined that it is in the best interests of the
Company and its shareholders to retain the services of the Executive in the
event of any threat or occurrence of a Change in Control and to ensure his
continued dedication and efforts in such event without undue concern for his
personal financial and employment security.
C. In order to induce the Executive to remain in the employ of the
Company, particularly in the event of a threat or the occurrence of a Change in
Control, the Company desires to enter into this Agreement with the Executive to
provide the Executive with certain benefits in the event his employment is
terminated as a result of, or in connection with, a Change in Control.
In consideration of the foregoing Recitals and the respective agreements
contained herein, Company and Executive agree as follows:
1. Definitions.
(a) For purposes of this Agreement, a "Change in Control" shall be
deemed to occur on the first date (the "Effective Date") any one or more of the
following occurs:
(1) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), together with all affiliates and associates of such
person (as such terms are defined in Rule 12b-2 under the Exchange Act) but
excluding all "Excluded Persons" (as defined in paragraph 1(b)), becomes
the direct or indirect beneficial owner (within the meaning of Rule 13d-3
under the Exchange Act), other than directly from the Company, of
securities of the Company representing (A) twenty-five percent (25%) or
more of the combined voting power of all of the Company's outstanding
securities entitled to vote generally in the election of the Company's
directors, or (B) twenty-five percent (25%) or more of the combined shares
<PAGE>
of the Company's capital stock then outstanding, all except in connection
with any merger, consolidation, reorganization or share exchange involving
the Company;
(2) the consummation of any merger, consolidation,
reorganization or share exchange involving the Company, unless the
holders of the Company's capital stock outstanding immediately before such
transaction own more than fifty percent (50%) of the combined outstanding
shares of capital stock and have more than fifty percent (50%) of the
combined voting power in the Entity (as defined in paragraph 1(f)) after
such transaction and they own such securities in substantially the same
proportions (relative to each other) as they owned the Company's capital
stock immediately before such transaction;
(3) the consummation of any sale or other disposition (in one
transaction or a series of related transactions) of all, or substantially
all, of the Company's assets to a transferee or transferees (the
"Transferee") other than a transaction or transactions as a result of which
the shareholders of the Company's capital stock outstanding immediately
before such transaction(s) own or receive more than fifty percent (50%) of
the capital stock and combined voting power in the Transferee after such
transaction(s), at least a majority of the Board of Directors of the
Transferee are "Continuing Directors" (as hereinafter defined), and no
person owns twenty-five percent (25%) or more of the capital stock and
combined voting power of the Transferee who did not own such percentage
immediately before the transaction(s);
(4) a complete liquidation or dissolution of the Company; or
(5) the Continuing Directors cease to be a majority of the
Company's directors.
A determination by the Company's Continuing Directors (by resolution
of at least a majority of the Continuing Directors) as to whether a Change in
Control has occurred for purposes of this Agreement, or the date on which the
Change in Control has occurred (the Effective Date), or both, shall be
conclusive for purposes of this Agreement if made in good faith.
(b) The "Excluded Persons" are defined as (1) the Executive, (2) any
"group" (as that term is used in Section 13(d) of the Exchange Act and the rules
thereunder) that includes the Executive or in which the Executive is, or has
agreed to become, an equity participant, (3) any entity in which the Executive
is, or has agreed to become, an equity participant, (4) the Company, (5) any
subsidiary of the Company, (6) any employee benefit plan of the Company
-2-
<PAGE>
or any subsidiary of the Company or the related trust, and (7) any entity to the
extent it is holding capital stock of the Company for or pursuant to the terms
of any employee benefit plan of the Company or any subsidiary of the Company.
For purposes of this Agreement, Executive shall not be deemed an "equity
participant" in any group or entity (A) in which Executive owns for investment
purposes only no more than five percent (5%) of the stock of a publicly-traded
entity whose stock is either listed on a national stock exchange or quoted in
The Nasdaq National Market, if Executive is not otherwise affiliated with such
group or entity, or (B) if Executive's participation is fully-disclosed to, and
approved by, a majority of the Continuing Directors before the Change in
Control occurs.
(c) The "Continuing Directors" are defined as the directors of the
Company as of the date of this Agreement, and any person who subsequently
becomes a director if such person is appointed to be a director by a majority of
the Continuing Directors or if such person's initial nomination for election or
initial election as a director is recommended or approved by a majority of the
Continuing Directors; provided, however, that no director shall be considered a
Continuing Director if such individual initially assumed office as a director as
a result of either an actual or threatened "Election Contest" (as described in
Rule 14a-11 of the Exchange Act) or other actual or threatened solicitation of
proxies or consents by or on behalf of a person other than the Board (a "Proxy
Contest"), including by reason of any agreement intended to avoid or settle any
Election Contest or Proxy Contest.
(d) Termination of employment for "Good Reason" means Executive's
voluntary termination of employment with the Entity (as hereinafter defined)
before or after a Change in Control as a result of (1) any change by the Entity
(without Executive's consent) in Executive's title from Executive's title
immediately before such Change in Control, (2) any decrease by the Entity
(without Executive's consent) in Executive's compensation (including base salary
and bonus arrangements) or incentives from Executive's compensation or
incentives immediately before such Change in Control; provided that Executive's
bonus shall not be deemed to have decreased if Executive shall have a
substantially similar opportunity to earn a bonus as Executive did in the last
full fiscal year before such Change in Control, (3) any material decrease by the
Entity (without Executive's consent) in Executive's employee benefits from
Executive's employee benefits immediately before such Change in Control unless
the substitute or replacement employee benefits are substantially similar to or
uniformly applicable to the employee benefits being provided to all executive
employees of the Entity; (4) a substantial change by the Entity (without
Executive's consent) in Executive's duties or
-3-
<PAGE>
responsibilities (including reporting responsibilities) from Executive's duties
and responsibilities immediately before such Change in Control, (5) any
requirement by the Entity (to which Executive does not consent) that Executive
change Executive's primary place of business to be outside the metropolitan
Detroit area, (6) if such Change in Control results in a new Entity being a
successor to the Company's business, the failure of such Entity to assume
expressly in writing the Company's obligations under this Agreement or under any
written employment agreement between Executive and the Company in effect
immediately before such Change in Control, or (7) any material breach by the
Entity of any provision of this Agreement. "Good Reason" does not include
Executive's termination of employment due to Executive's death, Disability (as
defined below) or Retirement (as defined below), or Executive's resignation
other than as provided in the preceding sentence. For purposes of this
Agreement, (A) "Disability" means (i) if Executive is covered by an Entity-
provided disability insurance policy, the definition of disability contained in,
and entitling Executive to benefits under, that policy, or (ii) if Executive is
not covered by such a policy, Executive's inability, whether physical or mental,
to perform the normal duties of Executive's position for six (6) consecutive
months; and (B) "Retirement" means Executive's retirement from the Entity in
accordance with the Entity's normal policies.
Determination by the Executive of "Good Reason" shall be conclusive
for purposes of this Agreement if made in good faith.
Any event or condition described in paragraph 1(d)(1) through (7)
which occurs prior to a Change in Control, but which the Executive reasonably
demonstrates (A) was at the request of a third party who has indicated an
intention or taken steps reasonably calculated to effect a Change in Control, or
(B) otherwise arose in connection with, or in anticipation of a Change in
Control, shall constitute Good Reason for purposes of this Agreement,
notwithstanding that it occurred prior to the Change in Control, provided that
any such event or condition described in paragraph 1(d)(1)-(7) shall have
occurred within ninety (90) days prior to the Change in Control.
(e) "Cause" means (1) the wilful and continued failure of the
Executive to perform his employment duties (unless due to illness or
Disability), (2) the wilful engaging by the Executive in illegal, improper or
gross misconduct materially injurious to the Entity, or (3) any breach by the
Executive of the provisions of paragraph 5 of this Agreement; provided, however,
that no termination of the Executive's employment shall be for Cause until there
shall have been delivered to the Executive a copy of a written notice specifying
the particulars of the conduct constituting "Cause" and the Executive shall have
been provided an opportunity to be
-4-
<PAGE>
heard by the Board (and the Board shall have rendered a decision as to whether
the Executive's employment shall have been terminated for Cause in accordance
with this Agreement).
(f) "Entity" shall mean both (1) the Company and (2) in connection
with a Change in Control defined in paragraph 1(a)(2) or paragraph 1(a)(3), the
survivor of the merger consolidation, reorganization or share exchange involving
the Company or the Transferee of the Company's assets.
2. Right to Receive Severance Benefits. Executive shall receive the
severance benefits described in paragraph 3 if (a) a Change in Control occurs
during the Period (as defined in paragraph 4), and (b) at any time during the
period beginning ninety (90) days before, and ending two (2) years after, the
Effective Date, Executive terminates Executive's employment with the Entity for
Good Reason or the Entity terminates Executive's employment without Cause.
Executive shall not be deemed to have terminated Executive's employment
with the Entity for Good Reason, and the Entity shall not be deemed to have
terminated Executive's employment without Cause, (a) if the Entity has offered
to employ Executive on such terms that would not constitute Good Reason for
termination of Executive's employment if imposed by the Entity, (b) Executive
refuses to accept such employment, and (c) the Entity thereupon terminates
Executive's employment.
For purposes of this Agreement, a "Notice of Termination" shall mean a
written notice which indicates the specific termination provision in this
Agreement, if any, relied upon and which sets forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated. Any purported
termination by the Entity or by the Executive shall be communicated by Notice of
Termination to the other. For purposes of this Agreement, no purported
termination of employment shall be effective without such Notice of Termination.
The "Termination Date" shall be the date of termination of the Executive's
employment specified in the Notice of Termination, provided, however, that if
the Executive's employment is terminated by the Executive for Good Reason, the
Termination Date shall be no more than thirty (30) days from the date the Notice
of Termination is delivered to the Entity.
3. Severance Benefits. If Executive is entitled to severance benefits
pursuant to paragraph 2, Executive shall be paid the following by the Entity
(Company):
(a) All amounts earned or accrued by Executive through the
Termination Date but not paid as of the Termination Date, including base salary
or compensation, reimbursement
-5-
<PAGE>
for reasonable and necessary expenses incurred by the Executive on behalf of the
Company during the period ending on the Termination Date, vacation pay and sick
leave; and
(b) A prorata bonus for the Company's current fiscal year in an
amount equal to (1) the average of the annual bonus accrued on behalf of the
Executive during the Company's three (3) full fiscal years ended prior to the
Effective Date, multiplied by (2) a fraction, the numerator of which is the
number of days in the current fiscal year through the Termination Date and the
denominator of which is 365; and
(c) The Entity shall pay the Executive as severance pay and in lieu
of any further compensation for periods subsequent to the Termination Date, in a
single payment, an amount (the "Severance Amount") in cash equal to 2.99 times
the sum of (1) the Executive's base salary at the highest rate in effect at any
time within one hundred eighty (180) days prior to the Effective Date, and (2)
the average of the annual bonus accrued on behalf of the Executive during the
three (3) full fiscal years ended prior to the Effective Date; and
(d) For thirty six (36) months following the Termination Date, the
Entity shall at its expense continue on behalf of the Executive and his
dependents and beneficiaries the life insurance, disability, medical,
prescription, dental and hospitalization benefits provided to the Executive at
any time during the ninety (90) day period prior to the Effective Date. The
Entity's obligation hereunder with respect to the foregoing benefits shall be
limited to the extent that the Executive obtains any such specified benefits
pursuant to a subsequent employer's benefit plans, in which case the Entity may
reduce the coverage of any such specified benefits it is required to provide the
Executive under this subparagraph (d) if the Executive is enrolled in a
subsequent employer's benefit plan for such specified benefit without any pre-
existing condition restriction or limitation; and
(e) All restrictions on any outstanding incentive awards (including
restricted stock) granted to the Executive under the Company's 1992 Performance
Incentive Plan or any other incentive plan or arrangement shall lapse and such
incentive award shall become 100% vested, and all stock options and stock
appreciation rights granted to the Executive under the Company's 1992
Performance Incentive Plan or any other incentive plan or arrangement shall
become immediately exercisable and shall become 100% vested. The Executive
shall have the right to require the Company to purchase, for cash, any shares
purchased by the Executive upon the exercise of any such stock options, at a
price equal to the fair market value of such shares on the date of purchase by
the Company.
-6-
<PAGE>
Notwithstanding the foregoing, the total amount of all payments of cash or
property in the nature of compensation contingent on a change in the ownership
or effective control of the Company or in the ownership of a substantial portion
of the Company's assets, including, without limitation, the benefits provided
pursuant to this paragraph 3 and payments relating to any stock options or
restricted stock that vest as a result of a Change in Control, shall not exceed
the maximum amount that may be paid to Executive and not be deemed a "parachute
payment" resulting in an excise tax to Executive and a loss of compensation
deduction to the Company, all within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended, or any successor provision. If the benefits
otherwise provided pursuant to this paragraph 3 or otherwise would result in
Executive receiving such a "parachute payment", they shall be reduced (in the
order set forth above) until they are $1.00 less than the amount that would
result in Executive receiving such a "parachute payment". Notwithstanding the
foregoing, in the event that any benefits provided pursuant to paragraph 3 or
otherwise are reduced because they are deemed a "parachute payment" which would
have resulted in the excise tax and loss of compensation deduction, and
subsequently it is determined that such benefits would not constitute such a
"parachute payment," then the Entity shall promptly pay to Executive the amount
by which any such benefit had been so previously reduced but as to which the
determination was subsequently made that the amount of such benefit would not
constitute such a "parachute payment".
The Severance Amount and other benefits provided in paragraphs 3(a), 3(b),
and 3(e) shall be paid to Executive in an undiscounted lump sum within thirty
(30) days after the Termination Date. Within ten (10) days after the
Termination Date, Executive may send a written notice to the Entity requesting
that, in lieu of payment of the benefits in paragraph 3(d) for the thirty-six
(36) month period following the Termination Date, the Executive would elect to
receive (in fulfillment and full satisfaction of the Entity's obligation to
provide the benefits under paragraph 3(d)), a lump sum amount equal to the
Entity's current monthly cost of providing all such benefits multiplied by
thirty-six (36) and discounted to present value based upon a discount rate equal
to the then Wall Street Journal prime rate; if Executive sends such notice
within the ten (10) day period after the Termination Date, the discounted lump
sum payment for such benefits shall be paid within thirty (30) days after the
Termination Date. The Entity may withhold from all payments under this
Agreement all federal, state, city and other taxes if such payments would be
taxable income to the Executive and to the extent such taxes are permitted to be
withheld by applicable law.
-7-
<PAGE>
4. Period. The period (the "Period") shall begin on the date of this
Agreement and end on the first to occur of (a) Retirement or Executive's
resignation other than for Good Reason, (b) Executive's death, (c) Executive's
Disability, (d) ninety (90) days after the termination of Executive's employment
(voluntarily or involuntarily and with or without Cause or Good Reason) if (1)
such termination occurs before a Change in Control, and (2) a Change in Control
does not occur during such ninety (90) day period, and (e) December 31, 1999,
provided that such date of December 31, 1999 shall be automatically renewed to
December 31 of each subsequent year unless and until either the Company or the
Executive shall send a written notice of termination of this Agreement to the
other party by September 30, 1999 (with respect to December 31, 1999 terminating
the Agreement as of December 31, 1999) or by September 30 of each following
applicable year terminating the Agreement as of the December 31 of such year.
Notwithstanding the foregoing, if Executive becomes entitled to severance
benefits under paragraph 2, the provisions of paragraph 3 of this Agreement
shall continue until Executive's eligibility to receive severance benefits under
this Agreement ceases and such provisions and the other provisions of this
Agreement not limited by the Period, including, without limitation, paragraphs
5, 7, 8, 11 and 12 shall survive the end of the Period.
5. Confidentiality; Non-Solicitation; and Non-Competition.
(a) Except as otherwise required in Executive's duties to the Company
or as authorized in writing by the Company, Executive shall not at any time,
either during or after Executive's employment with the Company, disseminate,
disclose, use, communicate or otherwise appropriate, either directly or
indirectly, through any individual, person or entity, any Confidential
Information (as defined below), and Executive shall retain all such information
in trust in a fiduciary capacity for the sole use and benefit of the Company.
Executive acknowledges that the Confidential Information is valuable, special,
proprietary and unique to the Company, that the Company's business depends on
such Confidential Information, and that the Company wishes to protect such
Confidential Information by keeping it secret and for the sole use and benefit
of the Company. Executive shall take all steps necessary and all steps
reasonably requested by Company to insure that all such Confidential Information
is kept secret and confidential for the sole use and benefit of the Company.
All records and other materials pertaining to the Confidential Information,
whether or not developed by Executive, shall be and remain the exclusive
property of the Company. Upon termination of Executive's employment or at any
other time that the Company in writing so requests, Executive shall promptly
deliver to Company all materials concerning any Confidential Information and all
copies of such
-8-
<PAGE>
materials and any other materials of the Company which are in Executive's
possession or under Executive's control, and Executive shall not make or retain
any copies or extracts of such materials.
For purposes of this paragraph 5(a), Confidential Information means
and includes all information known or used by the Company in the Company's
business and/or developed by or for the Company by any person, including
Executive, which is not otherwise explicitly, consciously, properly, legally and
generally known in any industry in which the Company is or may become engaged.
Confidential Information does not include general skills and general knowledge
of any industry obtained by reason of Executive's association with the Company.
Confidential Information specifically includes, but is not limited to,
such information, whether now possessed or later obtained, concerning plans,
marketing, sales and inventory methods, materials, processes, procedures,
devices used by the Company, business forms, prices, suppliers, retail merchants
with which the Company deals, organizations or other entities or persons
associated with such retail merchants, contractors, representatives and
customers of the Company, plans for the development of new products and services
and expansion into new areas or markets, internal operations and any variations,
purchasing policies, bidding practices or procedures, pricing policies, customer
identities and lists, trade secrets, trade names, trademarks, servicemarks,
copyrights, and other proprietary or confidential information of any type,
together with all written, graphic and other materials relating to all or any
part of the same.
(b) During the period of Executive's employment with the Company and
for a period of one (1) year after the termination of Executive's employment
with the Company, for any reason whatsoever, Executive shall not, either
directly or indirectly, himself or through or for any person or entity wherever
located:
(1) Solicit, attempt to hire or hire any person who is then
employed by, is a consultant to, or is an agent of, the Company or who was
within the prior four (4) months employed by, a consultant to, or an agent
of, the Company.
(2) Encourage, induce or attempt to induce, or aid, assist or
abet any other party or person in encouraging, inducing or attempting to
induce, any such employee, consultant or agent to alter or terminate his or
her employment, consultation or agency with the Company.
(3) Solicit any Company Customer (as defined below) to supply
products or perform services for the Company Customer of a similar nature
to those
-9-
<PAGE>
products provided or services performed by the Company in the Company's
business during Executive's employment with the Company. For purposes of
this paragraph 5(b)(3), the term "Company Customer" means any person or
entity with whom Executive has been involved or in contact within the prior
year and to or for whom the Company, within the prior year: (A) provided
products or performed services, or entered into an agreement for the
providing of products or performance of services; or (B) submitted a bid
for, or otherwise negotiated for, the providing of products or the
performing of services.
The provisions of this paragraph 5(b) shall not apply to Executive after the
termination of Executive's employment with the Company if Executive's employment
is terminated by the Company without Cause (of which the Board shall be the sole
judge) more than ninety (90) days prior to any Change in Control.
(c) During the period of Executive's employment with the Company and
for a period of one (1) year after Executive's termination of employment with
the Company, for any reason whatsoever, Executive shall not, either directly or
indirectly, himself or through or for any individual, person or entity wherever
located:
(1) Engage in any activities, perform any services or conduct any
businesses which are competitive with any business of the Company and which
are the same or similar to the business of the Company conducted by
Executive, at Executive's direction or under Executive's supervision during
the term of Executive's employment with the Company ("Executive's Company
Business"); or
(2) Be engaged by, employed by, consult with, own any capital
stock of, or have any financial interest of any kind in, any individual,
person or entity wherever located, which conducts a business which is
competitive with any business of the Company and which is the same as or
similar to Executive's Company Business. Notwithstanding the foregoing,
Executive may own, for investment purposes only, up to 5% of the stock of
any publicly-traded entity whose stock is either listed on a national stock
exchange quoted in The Nasdaq National Market (if Executive is not
otherwise affiliated with such entity).
The provisions of this paragraph 5(c) shall not apply to Executive after the
termination of Executive's employment with the Company if Executive's employment
is terminated by the Company without Cause (of which the Board shall be the sole
judge) more than ninety (90) days prior to any Change in Control.
-10-
<PAGE>
(d) Executive acknowledges and agrees that the covenants and
undertakings contained in this paragraph 5 of this Agreement relate to matters
which are of a special, unique and extraordinary character and that a breach of
any of the terms of this paragraph 5 constitutes a material breach by Executive
under this Agreement and shall cause substantial injury to the Company and the
Company's business, and that the amount of such injury will be difficult, if not
impossible, to estimate or determine and cannot be adequately compensated.
Therefore, Executive acknowledges that in the event of his breach of any of the
covenants or undertakings contained in this paragraph 5, the Entity (Company)
shall be entitled, in addition to all other rights and remedies available under
applicable law, to terminate immediately its obligation to pay to Executive the
Severance Amount, the other benefits and payments set forth in paragraphs 3(b)
and (d), and the fees, costs and expenses set forth in paragraph 11; and if
Executive shall have received any portion of the Severance Amount or such other
benefits and payments or such fees, costs and expenses, Executive shall be
obligated and required to forthwith remit the Severance Amount and other
benefits or payments or fees, costs and expenses theretofore made to or on
behalf of Executive by the Entity (Company).
6. Other Items. In addition to all other benefits or payments provided
to Executive in this Agreement:
(a) In the event Company is then providing a leased automobile to
Executive at Company's expense, the Entity (Company) shall continue to make all
payments required under such automobile lease for a period of sixty (60) days
following the Termination Date and Executive may utilize the leased automobile
during such sixty (60) day period for purposes substantially similar to which
the leased automobile was utilized prior to the Termination Date, and upon
completion of such sixty (60) day period Executive shall return possession of
the leased automobile to the Entity.
(b) Entity shall enter into an arrangement at Entity's cost to provide
so-called "high end" out-placement services for Executive with a quality third-
party agency, which services shall be provided, if required, to Executive for a
period of up to one (1) year following the Termination Date.
7. Benefits Exclusive. The severance benefits (including without
limitation the Severance Amount) and all other payments provided in this
Agreement are exclusive and in lieu of any other termination or severance
benefits to which Executive may be entitled in the event of Executive's
termination of employment with the Entity (Company). Executive shall not be
required to mitigate the amount of any payment provided for in this Agreement by
seeking other
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employment or otherwise, and no such payment shall be offset or reduced by the
amount of any compensation or benefits provided to the Executive in any
subsequent employment, except as provided in paragraph 3(d).
8. Employment Status. Nothing in this Agreement changes the present
status of Executive's continued employment with the Company or otherwise affects
Executive's present employment status with the Company. Executive and Company
acknowledge that, except only as may otherwise be provided in this Agreement in
the event of a Change in Control or under any other written agreement between
the Executive and Company, the employment of the Executive by the Company is "at
will". If Executive's employment with the Company terminates more than ninety
(90) days before the Change in Control, the Executive shall have no rights for
payments or benefits whatsoever under this Agreement, and if the termination of
employment occurs during such ninety (90) days before the Change in Control the
Executive shall have only such payments and benefits, if any, specifically
provided under the provisions of this Agreement.
9. Modification. This Agreement is the complete agreement between the
parties and may be modified (or any provision may be waived) only by a written
instrument executed by both parties.
10. Law. This Agreement will be governed by and construed in accordance
with the internal laws of the State of Michigan.
11. Costs of Enforcement. The Company shall pay on demand all of
Executive's reasonable out-of-pocket fees, costs and expenses (including
reasonable attorneys' fees, court costs and other legal expenses and costs of
investigation) incurred by Executive in connection with the enforcement of
Executive's rights under this Agreement or in connection with any disputes
concerning the meaning or interpretation of this Agreement; provided, however,
that in the event of Executive's breach of any of the covenants or undertakings
contained in paragraph 5, the Entity (Company) shall not be obligated or liable
in any manner for any payments under this paragraph 11. The obligations
contained in this paragraph 11 shall survive the end of the Period.
12. Arbitration.
(a) Any disputes between the parties with respect to the terms and
conditions of this Agreement that are not resolved within thirty (30) days after
one party notifies the other party in writing of the dispute shall be resolved
by and through binding arbitration conducted under the auspices of the American
Arbitration Association (or any like organization successor
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thereto) in Southfield, Michigan. Both the foregoing agreement of the parties
to arbitrate any and all claims, and the results, determination, finding,
judgment and/or award rendered through such arbitration, shall be final and
binding on the parties to this Agreement and may be specifically enforced by
legal proceedings, and, pursuant to MCLA (S)600.5001, the parties agree that a
judgment of any Michigan circuit court may be rendered upon any arbitration
award rendered pursuant to this paragraph 12. The parties agree and acknowledge
that money damages may not be an adequate remedy for any breach of the
provisions of this arbitration agreement and that any party may, in his or its
sole discretion, ask through the arbitration for specific performance and/or
injunctive relief in order to enforce or prevent any violations of the
provisions of this arbitration agreement; notwithstanding anything to the
contrary, in the event the arbitrator rules that the arbitrator does not have
jurisdiction or authority to grant specific performance and/or injunctive
relief, the dispute with respect to which such equitable relief is requested may
be brought in a court of appropriate jurisdiction encompassing Oakland County,
Michigan.
(b) Such arbitration shall be initiated by the written notice of the
dispute described in paragraph 12(a), and such arbitration shall be a compulsory
and binding proceeding on each party. Such arbitration proceeding shall be
conducted under the commercial arbitration rules (formal or informal) of the
American Arbitration Association before one arbitrator, and the arbitrator in
any such arbitration shall be such person who is expert in the subject matter of
the dispute. The costs of the arbitrator and the arbitration shall be borne by
the Company. Each party shall bear separately the cost of its or his respective
attorneys, witnesses and experts in connection with such arbitration, subject to
the Company's obligations under paragraph 11. Time is of the essence of this
arbitration procedure, and the arbitrator shall be requested to render his or
her decision within ten (10) days following completion of the arbitration.
13. Successor Obligations. This Agreement shall be binding upon and inure
to the benefit of the Company and its successors and assigns, and the Company
shall require any successor to, assignee, or transferee of, all or substantially
all of its business or assets to expressly assume and agree to perform all of
the Company's obligations under this Agreement (such successor, transferee or
assignee shall be deemed, for purposes of this Agreement, to be the Company).
This Agreement shall be binding upon Executive and shall inure to Executive's
benefit and may be enforceable by the Executive's legal personal
representatives, but Executive may not assign this Agreement without the
Company's prior written consent.
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14. Duplicate Copies. This Agreement may be executed in counterparts,
both of which together will be deemed an original of this Agreement.
15. Severability. The provisions of this Agreement shall be deemed
severable, and if any part of any provision is held illegal, void or invalid
under applicable law, such provision may be changed to the extent reasonably
necessary to make the provision, as so changed, legal, valid and binding. If
any provision of this Agreement is held illegal, void or invalid in its
entirety, the remaining provisions of this Agreement shall not in any way be
affected or impaired but shall remain binding in accordance with their terms.
DATED as of the day and year first above written.
HANDLEMAN COMPANY,
a Michigan corporation
By:__________________________
Its:____________________
"Company"
_____________________________
"Executive"
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Exhibit 'B'
A G R E E M E N T
THIS AGREEMENT is entered into this 17th day of March, 1997, between
HANDLEMAN COMPANY, a Michigan corporation (the "Company"), and Peter J. Cline
(the "Executive").
RECITALS
A. The Board of Directors of the Company (the "Board") recognizes that
merger and acquisition activities have increased in recent years and that the
threat of, or occurrence of, a Change in Control (as hereinafter defined)
relating to the Company could result in significant distractions of its key
management personnel because of the uncertainties inherent in such a situation.
B. The Board has determined that it is in the best interests of the
Company and its shareholders to retain the services of the Executive in the
event of any threat or occurrence of a Change in Control and to ensure his
continued dedication and efforts in such event without undue concern for his
personal financial and employment security.
C. In order to induce the Executive to remain in the employ of the
Company, particularly in the event of a threat or the occurrence of a Change in
Control, the Company desires to enter into this Agreement with the Executive to
provide the Executive with certain benefits in the event his employment is
terminated as a result of, or in connection with, a Change in Control.
In consideration of the foregoing Recitals and the respective agreements
contained herein, Company and Executive agree as follows:
1. Definitions.
(a) For purposes of this Agreement, a "Change in Control" shall be
deemed to occur on the first date (the "Effective Date") any one or more of the
following occurs:
(1) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), together with all affiliates and associates of such
person (as such terms are defined in Rule 12b-2 under the Exchange Act) but
excluding all "Excluded Persons" (as defined in paragraph 1(b)), becomes
the direct or indirect beneficial owner (within the meaning of Rule 13d-3
under the Exchange Act), other than directly from the Company, of
securities of the Company representing (A) twenty-five percent (25%) or
more of the combined voting power of all of the Company's outstanding
securities entitled to vote generally in the election of the Company's
directors, or (B) twenty-five percent (25%) or more of the combined shares
<PAGE>
of the Company's capital stock then outstanding, all except in connection
with any merger, consolidation, reorganization or share exchange involving
the Company;
(2) the consummation of any merger, consolidation,
reorganization or share exchange involving the Company, unless the
holders of the Company's capital stock outstanding immediately before such
transaction own more than fifty percent (50%) of the combined outstanding
shares of capital stock and have more than fifty percent (50%) of the
combined voting power in the Entity (as defined in paragraph 1(f)) after
such transaction and they own such securities in substantially the same
proportions (relative to each other) as they owned the Company's capital
stock immediately before such transaction;
(3) the consummation of any sale or other disposition (in one
transaction or a series of related transactions) of all, or substantially
all, of the Company's assets to a transferee or transferees (the
"Transferee") other than a transaction or transactions as a result of which
the shareholders of the Company's capital stock outstanding immediately
before such transaction(s) own or receive more than fifty percent (50%) of
the capital stock and combined voting power in the Transferee after such
transaction(s), at least a majority of the Board of Directors of the
Transferee are "Continuing Directors" (as hereinafter defined), and no
person owns twenty-five percent (25%) or more of the capital stock and
combined voting power of the Transferee who did not own such percentage
immediately before the transaction(s);
(4) a complete liquidation or dissolution of the Company; or
(5) the Continuing Directors cease to be a majority of the
Company's directors.
A determination by the Company's Continuing Directors (by resolution
of at least a majority of the Continuing Directors) as to whether a Change in
Control has occurred for purposes of this Agreement, or the date on which the
Change in Control has occurred (the Effective Date), or both, shall be
conclusive for purposes of this Agreement if made in good faith.
(b) The "Excluded Persons" are defined as (1) the Executive, (2) any
"group" (as that term is used in Section 13(d) of the Exchange Act and the rules
thereunder) that includes the Executive or in which the Executive is, or has
agreed to become, an equity participant, (3) any entity in which the Executive
is, or has agreed to become, an equity participant, (4) the Company, (5) any
subsidiary of the Company, (6) any employee benefit plan of the Company
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or any subsidiary of the Company or the related trust, and (7) any entity to the
extent it is holding capital stock of the Company for or pursuant to the terms
of any employee benefit plan of the Company or any subsidiary of the Company.
For purposes of this Agreement, Executive shall not be deemed an "equity
participant" in any group or entity (A) in which Executive owns for investment
purposes only no more than five percent (5%) of the stock of a publicly-traded
entity whose stock is either listed on a national stock exchange or quoted in
The Nasdaq National Market, if Executive is not otherwise affiliated with such
group or entity, or (B) if Executive's participation is fully-disclosed to, and
approved by, a majority of the Continuing Directors before the Change in
Control occurs.
(c) The "Continuing Directors" are defined as the directors of the
Company as of the date of this Agreement, and any person who subsequently
becomes a director if such person is appointed to be a director by a majority of
the Continuing Directors or if such person's initial nomination for election or
initial election as a director is recommended or approved by a majority of the
Continuing Directors; provided, however, that no director shall be considered a
Continuing Director if such individual initially assumed office as a director as
a result of either an actual or threatened "Election Contest" (as described in
Rule 14a-11 of the Exchange Act) or other actual or threatened solicitation of
proxies or consents by or on behalf of a person other than the Board (a "Proxy
Contest"), including by reason of any agreement intended to avoid or settle any
Election Contest or Proxy Contest.
(d) Termination of employment for "Good Reason" means Executive's
voluntary termination of employment with the Entity (as hereinafter defined)
before or after a Change in Control as a result of (1) any change by the Entity
(without Executive's consent) in Executive's title from Executive's title
immediately before such Change in Control, (2) any decrease by the Entity
(without Executive's consent) in Executive's compensation (including base salary
and bonus arrangements) or incentives from Executive's compensation or
incentives immediately before such Change in Control; provided that Executive's
bonus shall not be deemed to have decreased if Executive shall have a
substantially similar opportunity to earn a bonus as Executive did in the last
full fiscal year before such Change in Control, (3) any material decrease by the
Entity (without Executive's consent) in Executive's employee benefits from
Executive's employee benefits immediately before such Change in Control unless
the substitute or replacement employee benefits are substantially similar to or
uniformly applicable to the employee benefits being provided to all executive
employees of the Entity; (4) a substantial change by the Entity (without
Executive's consent) in Executive's duties or
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responsibilities (including reporting responsibilities) from Executive's duties
and responsibilities immediately before such Change in Control, (5) any
requirement by the Entity (to which Executive does not consent) that Executive
change Executive's primary place of business to be outside the metropolitan
Detroit area, (6) if such Change in Control results in a new Entity being a
successor to the Company's business, the failure of such Entity to assume
expressly in writing the Company's obligations under this Agreement or under any
written employment agreement between Executive and the Company in effect
immediately before such Change in Control, or (7) any material breach by the
Entity of any provision of this Agreement. "Good Reason" does not include
Executive's termination of employment due to Executive's death, Disability (as
defined below) or Retirement (as defined below), or Executive's resignation
other than as provided in the preceding sentence. For purposes of this
Agreement, (A) "Disability" means (i) if Executive is covered by an Entity-
provided disability insurance policy, the definition of disability contained in,
and entitling Executive to benefits under, that policy, or (ii) if Executive is
not covered by such a policy, Executive's inability, whether physical or mental,
to perform the normal duties of Executive's position for six (6) consecutive
months; and (B) "Retirement" means Executive's retirement from the Entity in
accordance with the Entity's normal policies.
Determination by the Executive of "Good Reason" shall be conclusive
for purposes of this Agreement if made in good faith.
Any event or condition described in paragraph 1(d)(1) through (7)
which occurs prior to a Change in Control, but which the Executive reasonably
demonstrates (A) was at the request of a third party who has indicated an
intention or taken steps reasonably calculated to effect a Change in Control, or
(B) otherwise arose in connection with, or in anticipation of a Change in
Control, shall constitute Good Reason for purposes of this Agreement,
notwithstanding that it occurred prior to the Change in Control, provided that
any such event or condition described in paragraph 1(d)(1)-(7) shall have
occurred within ninety (90) days prior to the Change in Control.
(e) "Cause" means (1) the wilful and continued failure of the
Executive to perform his employment duties (unless due to illness or
Disability), (2) the wilful engaging by the Executive in illegal, improper or
gross misconduct materially injurious to the Entity, or (3) any breach by the
Executive of the provisions of paragraph 5 of this Agreement; provided, however,
that no termination of the Executive's employment shall be for Cause until there
shall have been delivered to the Executive a copy of a written notice specifying
the particulars of the conduct constituting "Cause" and the Executive shall have
been provided an opportunity to be
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heard by the Board (and the Board shall have rendered a decision as to whether
the Executive's employment shall have been terminated for Cause in accordance
with this Agreement).
(f) "Entity" shall mean both (1) the Company and (2) in connection
with a Change in Control defined in paragraph 1(a)(2) or paragraph 1(a)(3), the
survivor of the merger consolidation, reorganization or share exchange involving
the Company or the Transferee of the Company's assets.
2. Right to Receive Severance Benefits. Executive shall receive the
severance benefits described in paragraph 3 if (a) a Change in Control occurs
during the Period (as defined in paragraph 4), and (b) at any time during the
period beginning ninety (90) days before, and ending two (2) years after, the
Effective Date, Executive terminates Executive's employment with the Entity for
Good Reason or the Entity terminates Executive's employment without Cause.
Executive shall not be deemed to have terminated Executive's employment
with the Entity for Good Reason, and the Entity shall not be deemed to have
terminated Executive's employment without Cause, (a) if the Entity has offered
to employ Executive on such terms that would not constitute Good Reason for
termination of Executive's employment if imposed by the Entity, (b) Executive
refuses to accept such employment, and (c) the Entity thereupon terminates
Executive's employment.
For purposes of this Agreement, a "Notice of Termination" shall mean a
written notice which indicates the specific termination provision in this
Agreement, if any, relied upon and which sets forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated. Any purported
termination by the Entity or by the Executive shall be communicated by Notice of
Termination to the other. For purposes of this Agreement, no purported
termination of employment shall be effective without such Notice of Termination.
The "Termination Date" shall be the date of termination of the Executive's
employment specified in the Notice of Termination, provided, however, that if
the Executive's employment is terminated by the Executive for Good Reason, the
Termination Date shall be no more than thirty (30) days from the date the Notice
of Termination is delivered to the Entity.
3. Severance Benefits. If Executive is entitled to severance benefits
pursuant to paragraph 2, Executive shall be paid the following by the Entity
(Company):
(a) All amounts earned or accrued by Executive through the
Termination Date but not paid as of the Termination Date, including base salary
or compensation, reimbursement
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for reasonable and necessary expenses incurred by the Executive on behalf of the
Company during the period ending on the Termination Date, vacation pay and sick
leave; and
(b) A prorata bonus for the Company's current fiscal year in an
amount equal to (1) the average of the annual bonus accrued on behalf of the
Executive during the Company's three (3) full fiscal years ended prior to the
Effective Date, multiplied by (2) a fraction, the numerator of which is the
number of days in the current fiscal year through the Termination Date and the
denominator of which is 365; and
(c) The Entity shall pay the Executive as severance pay and in lieu
of any further compensation for periods subsequent to the Termination Date, in a
single payment, an amount (the "Severance Amount") in cash equal to 2.99 times
the sum of (1) the Executive's base salary at the highest rate in effect at any
time within one hundred eighty (180) days prior to the Effective Date, and (2)
the average of the annual bonus accrued on behalf of the Executive during the
three (3) full fiscal years ended prior to the Effective Date; and
(d) For thirty six (36) months following the Termination Date, the
Entity shall at its expense continue on behalf of the Executive and his
dependents and beneficiaries the life insurance, disability, medical,
prescription, dental and hospitalization benefits provided to the Executive at
any time during the ninety (90) day period prior to the Effective Date. The
Entity's obligation hereunder with respect to the foregoing benefits shall be
limited to the extent that the Executive obtains any such specified benefits
pursuant to a subsequent employer's benefit plans, in which case the Entity may
reduce the coverage of any such specified benefits it is required to provide the
Executive under this subparagraph (d) if the Executive is enrolled in a
subsequent employer's benefit plan for such specified benefit without any pre-
existing condition restriction or limitation; and
(e) All restrictions on any outstanding incentive awards (including
restricted stock) granted to the Executive under the Company's 1992 Performance
Incentive Plan or any other incentive plan or arrangement shall lapse and such
incentive award shall become 100% vested, and all stock options and stock
appreciation rights granted to the Executive under the Company's 1992
Performance Incentive Plan or any other incentive plan or arrangement shall
become immediately exercisable and shall become 100% vested. The Executive
shall have the right to require the Company to purchase, for cash, any shares
purchased by the Executive upon the exercise of any such stock options, at a
price equal to the fair market value of such shares on the date of purchase by
the Company.
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Notwithstanding the foregoing, the total amount of all payments of cash or
property in the nature of compensation contingent on a change in the ownership
or effective control of the Company or in the ownership of a substantial portion
of the Company's assets, including, without limitation, the benefits provided
pursuant to this paragraph 3 and payments relating to any stock options or
restricted stock that vest as a result of a Change in Control, shall not exceed
the maximum amount that may be paid to Executive and not be deemed a "parachute
payment" resulting in an excise tax to Executive and a loss of compensation
deduction to the Company, all within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended, or any successor provision. If the benefits
otherwise provided pursuant to this paragraph 3 or otherwise would result in
Executive receiving such a "parachute payment", they shall be reduced (in the
order set forth above) until they are $1.00 less than the amount that would
result in Executive receiving such a "parachute payment". Notwithstanding the
foregoing, in the event that any benefits provided pursuant to paragraph 3 or
otherwise are reduced because they are deemed a "parachute payment" which would
have resulted in the excise tax and loss of compensation deduction, and
subsequently it is determined that such benefits would not constitute such a
"parachute payment," then the Entity shall promptly pay to Executive the amount
by which any such benefit had been so previously reduced but as to which the
determination was subsequently made that the amount of such benefit would not
constitute such a "parachute payment".
The Severance Amount and other benefits provided in paragraphs 3(a), 3(b),
and 3(e) shall be paid to Executive in an undiscounted lump sum within thirty
(30) days after the Termination Date. Within ten (10) days after the
Termination Date, Executive may send a written notice to the Entity requesting
that, in lieu of payment of the benefits in paragraph 3(d) for the thirty-six
(36) month period following the Termination Date, the Executive would elect to
receive (in fulfillment and full satisfaction of the Entity's obligation to
provide the benefits under paragraph 3(d)), a lump sum amount equal to the
Entity's current monthly cost of providing all such benefits multiplied by
thirty-six (36) and discounted to present value based upon a discount rate equal
to the then Wall Street Journal prime rate; if Executive sends such notice
within the ten (10) day period after the Termination Date, the discounted lump
sum payment for such benefits shall be paid within thirty (30) days after the
Termination Date. The Entity may withhold from all payments under this
Agreement all federal, state, city and other taxes if such payments would be
taxable income to the Executive and to the extent such taxes are permitted to be
withheld by applicable law.
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4. Period. The period (the "Period") shall begin on the date of this
Agreement and end on the first to occur of (a) Retirement or Executive's
resignation other than for Good Reason, (b) Executive's death, (c) Executive's
Disability, (d) ninety (90) days after the termination of Executive's employment
(voluntarily or involuntarily and with or without Cause or Good Reason) if (1)
such termination occurs before a Change in Control, and (2) a Change in Control
does not occur during such ninety (90) day period, and (e) December 31, 1999,
provided that such date of December 31, 1999 shall be automatically renewed to
December 31 of each subsequent year unless and until either the Company or the
Executive shall send a written notice of termination of this Agreement to the
other party by September 30, 1999 (with respect to December 31, 1999 terminating
the Agreement as of December 31, 1999) or by September 30 of each following
applicable year terminating the Agreement as of the December 31 of such year.
Notwithstanding the foregoing, if Executive becomes entitled to severance
benefits under paragraph 2, the provisions of paragraph 3 of this Agreement
shall continue until Executive's eligibility to receive severance benefits under
this Agreement ceases and such provisions and the other provisions of this
Agreement not limited by the Period, including, without limitation, paragraphs
5, 7, 8, 11 and 12 shall survive the end of the Period.
5. Confidentiality; Non-Solicitation; and Non-Competition.
(a) Except as otherwise required in Executive's duties to the Company
or as authorized in writing by the Company, Executive shall not at any time,
either during or after Executive's employment with the Company, disseminate,
disclose, use, communicate or otherwise appropriate, either directly or
indirectly, through any individual, person or entity, any Confidential
Information (as defined below), and Executive shall retain all such information
in trust in a fiduciary capacity for the sole use and benefit of the Company.
Executive acknowledges that the Confidential Information is valuable, special,
proprietary and unique to the Company, that the Company's business depends on
such Confidential Information, and that the Company wishes to protect such
Confidential Information by keeping it secret and for the sole use and benefit
of the Company. Executive shall take all steps necessary and all steps
reasonably requested by Company to insure that all such Confidential Information
is kept secret and confidential for the sole use and benefit of the Company.
All records and other materials pertaining to the Confidential Information,
whether or not developed by Executive, shall be and remain the exclusive
property of the Company. Upon termination of Executive's employment or at any
other time that the Company in writing so requests, Executive shall promptly
deliver to Company all materials concerning any Confidential Information and all
copies of such
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materials and any other materials of the Company which are in Executive's
possession or under Executive's control, and Executive shall not make or retain
any copies or extracts of such materials.
For purposes of this paragraph 5(a), Confidential Information means
and includes all information known or used by the Company in the Company's
business and/or developed by or for the Company by any person, including
Executive, which is not otherwise explicitly, consciously, properly, legally and
generally known in any industry in which the Company is or may become engaged.
Confidential Information does not include general skills and general knowledge
of any industry obtained by reason of Executive's association with the Company.
Confidential Information specifically includes, but is not limited to,
such information, whether now possessed or later obtained, concerning plans,
marketing, sales and inventory methods, materials, processes, procedures,
devices used by the Company, business forms, prices, suppliers, retail merchants
with which the Company deals, organizations or other entities or persons
associated with such retail merchants, contractors, representatives and
customers of the Company, plans for the development of new products and services
and expansion into new areas or markets, internal operations and any variations,
purchasing policies, bidding practices or procedures, pricing policies, customer
identities and lists, trade secrets, trade names, trademarks, servicemarks,
copyrights, and other proprietary or confidential information of any type,
together with all written, graphic and other materials relating to all or any
part of the same.
(b) During the period of Executive's employment with the Company and
for a period of one (1) year after the termination of Executive's employment
with the Company, for any reason whatsoever, Executive shall not, either
directly or indirectly, himself or through or for any person or entity wherever
located:
(1) Solicit, attempt to hire or hire any person who is then
employed by, is a consultant to, or is an agent of, the Company or who
was within the prior four (4) months employed by, a consultant to, or an
agent of, the Company.
(2) Encourage, induce or attempt to induce, or aid, assist or
abet any other party or person in encouraging, inducing or attempting to
induce, any such employee, consultant or agent to alter or terminate his or
her employment, consultation or agency with the Company.
(3) Solicit any Company Customer (as defined below) to supply
products or perform services for the Company Customer of a similar nature
to those
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products provided or services performed by the Company in the Company's
business during Executive's employment with the Company. For purposes of
this paragraph 5(b)(3), the term "Company Customer" means any person or
entity with whom Executive has been involved or in contact within the prior
year and to or for whom the Company, within the prior year: (A) provided
products or performed services, or entered into an agreement for the
providing of products or performance of services; or (B) submitted a bid
for, or otherwise negotiated for, the providing of products or the
performing of services.
The provisions of this paragraph 5(b) shall not apply to Executive after the
termination of Executive's employment with the Company if Executive's employment
is terminated by the Company without Cause (of which the Board shall be the sole
judge) more than ninety (90) days prior to any Change in Control.
(c) During the period of Executive's employment with the Company and
for a period of one (1) year after Executive's termination of employment with
the Company, for any reason whatsoever, Executive shall not, either directly or
indirectly, himself or through or for any individual, person or entity wherever
located:
(1) Engage in any activities, perform any services or conduct
any businesses which are competitive with any business of the Company and
which are the same or similar to the business of the Company conducted by
Executive, at Executive's direction or under Executive's supervision during
the term of Executive's employment with the Company ("Executive's Company
Business"); or
(2) Be engaged by, employed by, consult with, own any capital
stock of, or have any financial interest of any kind in, any individual,
person or entity wherever located, which conducts a business which is
competitive with any business of the Company and which is the same as or
similar to Executive's Company Business. Notwithstanding the foregoing,
Executive may own, for investment purposes only, up to 5% of the stock of
any publicly-traded entity whose stock is either listed on a national stock
exchange quoted in The Nasdaq National Market (if Executive is not
otherwise affiliated with such entity).
The provisions of this paragraph 5(c) shall not apply to Executive after the
termination of Executive's employment with the Company if Executive's employment
is terminated by the Company without Cause (of which the Board shall be the sole
judge) more than ninety (90) days prior to any Change in Control.
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(d) Executive acknowledges and agrees that the covenants and
undertakings contained in this paragraph 5 of this Agreement relate to matters
which are of a special, unique and extraordinary character and that a breach of
any of the terms of this paragraph 5 constitutes a material breach by Executive
under this Agreement and shall cause substantial injury to the Company and the
Company's business, and that the amount of such injury will be difficult, if not
impossible, to estimate or determine and cannot be adequately compensated.
Therefore, Executive acknowledges that in the event of his breach of any of the
covenants or undertakings contained in this paragraph 5, the Entity (Company)
shall be entitled, in addition to all other rights and remedies available under
applicable law, to terminate immediately its obligation to pay to Executive the
Severance Amount, the other benefits and payments set forth in paragraphs 3(b)
and (d), and the fees, costs and expenses set forth in paragraph 11; and if
Executive shall have received any portion of the Severance Amount or such other
benefits and payments or such fees, costs and expenses, Executive shall be
obligated and required to forthwith remit the Severance Amount and other
benefits or payments or fees, costs and expenses theretofore made to or on
behalf of Executive by the Entity (Company).
6. Other Items. In addition to all other benefits or payments provided
to Executive in this Agreement:
(a) In the event Company is then providing a leased automobile to
Executive at Company's expense, the Entity (Company) shall continue to make all
payments required under such automobile lease for a period of sixty (60) days
following the Termination Date and Executive may utilize the leased automobile
during such sixty (60) day period for purposes substantially similar to which
the leased automobile was utilized prior to the Termination Date, and upon
completion of such sixty (60) day period Executive shall return possession of
the leased automobile to the Entity.
(b) Entity shall enter into an arrangement at Entity's cost to
provide so-called "high end" out-placement services for Executive with a quality
third-party agency, which services shall be provided, if required, to Executive
for a period of up to one (1) year following the Termination Date.
7. Benefits Exclusive. The severance benefits (including without
limitation the Severance Amount) and all other payments provided in this
Agreement are exclusive and in lieu of any other termination or severance
benefits to which Executive may be entitled in the event of Executive's
termination of employment with the Entity (Company). Executive shall not be
required to mitigate the amount of any payment provided for in this Agreement by
seeking other
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employment or otherwise, and no such payment shall be offset or reduced by the
amount of any compensation or benefits provided to the Executive in any
subsequent employment, except as provided in paragraph 3(d).
8. Employment Status. Nothing in this Agreement changes the present
status of Executive's continued employment with the Company or otherwise affects
Executive's present employment status with the Company. Executive and Company
acknowledge that, except only as may otherwise be provided in this Agreement in
the event of a Change in Control or under any other written agreement between
the Executive and Company, the employment of the Executive by the Company is "at
will". If Executive's employment with the Company terminates more than ninety
(90) days before the Change in Control, the Executive shall have no rights for
payments or benefits whatsoever under this Agreement, and if the termination of
employment occurs during such ninety (90) days before the Change in Control the
Executive shall have only such payments and benefits, if any, specifically
provided under the provisions of this Agreement.
9. Modification. This Agreement is the complete agreement between the
parties and may be modified (or any provision may be waived) only by a written
instrument executed by both parties.
10. Law. This Agreement will be governed by and construed in accordance
with the internal laws of the State of Michigan.
11. Costs of Enforcement. The Company shall pay on demand all of
Executive's reasonable out-of-pocket fees, costs and expenses (including
reasonable attorneys' fees, court costs and other legal expenses and costs of
investigation) incurred by Executive in connection with the enforcement of
Executive's rights under this Agreement or in connection with any disputes
concerning the meaning or interpretation of this Agreement; provided, however,
that in the event of Executive's breach of any of the covenants or undertakings
contained in paragraph 5, the Entity (Company) shall not be obligated or liable
in any manner for any payments under this paragraph 11. The obligations
contained in this paragraph 11 shall survive the end of the Period.
12. Arbitration.
(a) Any disputes between the parties with respect to the terms and
conditions of this Agreement that are not resolved within thirty (30) days after
one party notifies the other party in writing of the dispute shall be resolved
by and through binding arbitration conducted under the auspices of the American
Arbitration Association (or any like organization successor
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thereto) in Southfield, Michigan. Both the foregoing agreement of the parties
to arbitrate any and all claims, and the results, determination, finding,
judgment and/or award rendered through such arbitration, shall be final and
binding on the parties to this Agreement and may be specifically enforced by
legal proceedings, and, pursuant to MCLA (S)600.5001, the parties agree that a
judgment of any Michigan circuit court may be rendered upon any arbitration
award rendered pursuant to this paragraph 12. The parties agree and acknowledge
that money damages may not be an adequate remedy for any breach of the
provisions of this arbitration agreement and that any party may, in his or its
sole discretion, ask through the arbitration for specific performance and/or
injunctive relief in order to enforce or prevent any violations of the
provisions of this arbitration agreement; notwithstanding anything to the
contrary, in the event the arbitrator rules that the arbitrator does not have
jurisdiction or authority to grant specific performance and/or injunctive
relief, the dispute with respect to which such equitable relief is requested may
be brought in a court of appropriate jurisdiction encompassing Oakland County,
Michigan.
(b) Such arbitration shall be initiated by the written notice of the
dispute described in paragraph 12(a), and such arbitration shall be a compulsory
and binding proceeding on each party. Such arbitration proceeding shall be
conducted under the commercial arbitration rules (formal or informal) of the
American Arbitration Association before one arbitrator, and the arbitrator in
any such arbitration shall be such person who is expert in the subject matter of
the dispute. The costs of the arbitrator and the arbitration shall be borne by
the Company. Each party shall bear separately the cost of its or his respective
attorneys, witnesses and experts in connection with such arbitration, subject to
the Company's obligations under paragraph 11. Time is of the essence of this
arbitration procedure, and the arbitrator shall be requested to render his or
her decision within ten (10) days following completion of the arbitration.
13. Successor Obligations. This Agreement shall be binding upon and inure
to the benefit of the Company and its successors and assigns, and the Company
shall require any successor to, assignee, or transferee of, all or substantially
all of its business or assets to expressly assume and agree to perform all of
the Company's obligations under this Agreement (such successor, transferee or
assignee shall be deemed, for purposes of this Agreement, to be the Company).
This Agreement shall be binding upon Executive and shall inure to Executive's
benefit and may be enforceable by the Executive's legal personal
representatives, but Executive may not assign this Agreement without the
Company's prior written consent.
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14. Duplicate Copies. This Agreement may be executed in counterparts,
both of which together will be deemed an original of this Agreement.
15. Severability. The provisions of this Agreement shall be deemed
severable, and if any part of any provision is held illegal, void or invalid
under applicable law, such provision may be changed to the extent reasonably
necessary to make the provision, as so changed, legal, valid and binding. If
any provision of this Agreement is held illegal, void or invalid in its
entirety, the remaining provisions of this Agreement shall not in any way be
affected or impaired but shall remain binding in accordance with their terms.
DATED as of the day and year first above written.
HANDLEMAN COMPANY,
a Michigan corporation
By:________________________________
Its:_________________________
"Company"
___________________________________
"Executive"
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