<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the 2nd quarter ended November 1, 1997 Commission File Number 1-7923
Handleman Company
____________________________________________________
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1242806
___________________ ____________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
<TABLE>
<CAPTION>
<S> <C> <C>
500 Kirts Boulevard, Troy, Michigan 48084-4142 Area Code 248 362-4400
___________________________________ __________ ______________________
(Address of principal executive offices) (Zip code) (Registrant's telephone number)
</TABLE>
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
YES X NO
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS DATE SHARES OUTSTANDING
______________________________ __________ __________________
<S> <C> <C>
Common Stock - $.01 Par Value December 8, 1997 32,869,554
</TABLE>
<PAGE>
HANDLEMAN COMPANY
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
PART I - FINANCIAL INFORMATION
<S> <C>
Consolidated Statement of Operations................ 1
Consolidated Balance Sheet.......................... 2
Consolidated Statement of Shareholders' Equity...... 3
Consolidated Statement of Cash Flows................ 4
Notes to Consolidated Financial Statements.......... 5
Management's Discussion and Analysis of Operations.. 6-9
PART II - OTHER INFORMATION AND SIGNATURES . . . . . . . . 10
</TABLE>
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three Months (13 Weeks) Ended Six Months (26 Weeks) Ended
----------------------------- ---------------------------
November 1, October 26, November 1, October 26,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $315,285 $347,080 $524,322 $572,106
Direct product costs 240,029 268,749 399,546 443,046
----------- ----------- ----------- -----------
Gross profit 75,256 78,331 124,776 129,060
Selling, general and
administrative expenses 59,451 61,992 114,406 120,067
Amortization of acquisition costs 1,344 1,472 2,644 3,372
Interest expense, net 3,492 2,970 6,490 5,691
----------- ----------- ----------- -----------
Income (loss) before income taxes
and minority interest 10,969 11,897 1,236 (70)
Income tax expense (4,387) (4,704) (1,318) (259)
Minority interest 1,738 (371) 1,932 (1,030)
----------- ----------- ----------- -----------
Net income (loss) $8,320 $6,822 $1,850 ($1,359)
=========== =========== =========== ===========
Income (loss) per average common share
outstanding during the period $0.25 $0.20 $0.06 ($0.04)
=========== =========== =========== ===========
Average number of shares
outstanding during the period 33,171 33,495 33,270 33,496
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-1-
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(amounts in thousands except share data)
<TABLE>
<CAPTION>
November 1, May 3,
1997 1997
----------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,565 $ 12,449
Accounts receivable, less allowance of $22,692 at
November 1, 1997 and $21,834 at May 3, 1997 for
gross profit impact of estimated future returns 324,269 290,071
Merchandise inventories 214,748 188,215
Other current assets 10,621 9,643
-------- --------
Total current assets 559,203 500,378
-------- --------
Property and equipment:
Land 4,068 4,238
Buildings and improvements 22,995 24,564
Display fixtures 102,352 96,721
Equipment, furniture and other 70,471 67,450
-------- --------
199,886 192,973
Less accumulated depreciation and amortization 109,918 97,254
-------- --------
89,968 95,719
-------- --------
Other assets, net of allowances 71,464 71,789
-------- --------
Total assets $720,635 $667,886
======== ========
LIABILITIES
Current liabilities:
Accounts payable $246,176 $197,301
Accrued and other liabilities 36,904 42,141
-------- --------
Total current liabilities 283,080 239,442
-------- --------
Debt, non-current 150,440 135,520
Other liabilities 4,735 9,271
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value; 1,000,000 shares
authorized; none issued -- --
Common stock, $.01 par value; 60,000,000 shares
authorized; 32,969,907 and 33,373,000 shares issued
at November 1, 1997 and May 3, 1997, respectively 330 334
Paid-in capital 28,252 30,800
Foreign currency translation adjustment and other (8,117) (7,546)
Retained earnings 261,915 260,065
-------- --------
Total shareholders' equity 282,380 283,653
-------- --------
Total liabilities and shareholders' equity $720,635 $667,886
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-2-
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended November 1, 1997
-------------------------------------------------------------------
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>
May 3, 1997 33,373 $334 $30,800 ($7,546) $260,065 $283,653
Net income 1,850 1,850
Forfeitures of common
stock related to
employee benefit plans (8) (82) 82 --
Common stock repurchased (395) (4) (2,466) (2,470)
Adjustment for foreign
currency translation (653) (653)
-------- -------- -------- -------- ---------- -----------
November 1, 1997 32,970 $330 $28,252 ($8,117) $261,915 $282,380
======== ======== ======== ======== ========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
<TABLE>
<CAPTION>
Six Months (26 weeks) Ended
---------------------------
November 1, October 26
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $1,850 ($1,359)
------------ ------------
Adjustments to reconcile net income (loss) to net cash
provided from (used by) operating activities:
Depreciation 14,208 14,682
Amortization of acquisition costs 2,644 3,372
Recoupment of license advances 6,716 4,572
(Increase) decrease in assets:
Accounts receivable (34,198) (89,685)
Merchandise inventories (26,533) (1,103)
Other current assets (978) 12,826
Other assets, net of allowances 1,846 (677)
Increase (decrease) in liabilities:
Accounts payable 48,875 48,855
Accrued and other liabilities (5,237) 458
Other liabilities (4,536) 136
------------ ------------
Total adjustments 2,807 (6,564)
------------ ------------
Net cash provided from (used by)
operating activities 4,657 (7,923)
------------ ------------
Cash flows from investing activities:
Additions to property and equipment (10,268) (10,340)
Retirements of property and equipment 1,811 1,475
License advances (10,881) (5,896)
------------ ------------
Net cash used by investing activities (19,338) (14,761)
------------ ------------
Cash flows from financing activities:
Issuances of debt 687,600 604,982
Repayments of debt (672,680) (592,195)
Repurchase of common stock (2,470) 0
Other changes in shareholders' equity, net (653) (260)
------------ ------------
Net cash provided from financing activities 11,797 12,527
------------ ------------
Net decrease in cash and cash equivalent (2,884) (10,157)
Cash and cash equivalents at beginning of period 12,449 19,936
------------ ------------
Cash and cash equivalents at end of period $9,565 $9,779
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
-4-
</TABLE>
<PAGE>
HANDLEMAN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of Management, the accompanying consolidated balance sheet
and consolidated statements of operations, shareholders' equity and cash
flows contain all adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial position of the
Company as of November 1, 1997, and the results of operations and changes
in cash flows for the six months then ended. Because of the seasonal nature
of the Company's business, sales and earnings results for the six months
ended November 1, 1997 are not necessarily indicative of what the results
will be for the full year. The consolidated balance sheet as of May 3, 1997
is derived from the audited consolidated financial statements of the
Company included in the Company's 1997 Annual Report on Form 10-K filed
with the Securities and Exchange Commission. Reference should be made to
the Company's Form 10-K for the year ended May 3, 1997.
2. In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 superseded APB 15, "Earnings Per Share," and
simplified the computation of earnings per share ("EPS") by replacing the
"primary" EPS requirements of APB 15 with a "basic" EPS computation based
upon weighted shares outstanding. The new standard requires presentation of
both basic and diluted EPS. Diluted EPS is similar to "fully diluted" EPS
required under APB 15. The Company will adopt the provisions of this
statement, as required, in the third quarter of fiscal 1998. The adoption
of this statement will not have a material effect on EPS.
-5-
<PAGE>
HANDLEMAN COMPANY
-----------------
Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
Net sales for the second quarter ended November 1, 1997 decreased 9% to $315.3
million, from $347.1 million for the second quarter ended October 26, 1996.
This decline was attributable to a $59.8 million decrease in video sales
(predominantly low-margin, mega-hit titles) within the Company's Handleman
Entertainment Resources ("H.E.R.") operating unit. Net income for the second
quarter ended November 1, 1997 increased to $8.3 million or $.25 per share, from
$6.8 million or $.20 per share for the second quarter last year.
Net sales for the first six months of fiscal 1998 were $524.3 million, compared
to $572.1 million for the comparable six-month period last year, a decrease of
8%. Net income for the first six months this year was $1.9 million or $.06 per
share, compared to a net loss of $(1.4) million or a loss of $(.04) per share
for the first six months last year, an improvement of $.10 per share.
The Company has three operating units: H.E.R., North Coast Entertainment
("NCE") and Handleman International ("International"). H.E.R. had net sales of
$241.6 million for the second quarter this year, compared to $284.4 million for
the second quarter last year, a decrease of 15%. For the first six months of
fiscal 1998, H.E.R. net sales were $407.5 million, compared to $467.3 million
for the first six months of fiscal 1997, a decrease of 13% primarily due to a
reduction in sales of mega-hit videos.
Within H.E.R., music sales were $178.7 million for the second quarter this year,
compared to $163.9 million for the second quarter last year, an increase of 9%.
The increase in music sales was primarily attributable to increased emphasis by
the Company's customers on this product category and the strength of best
selling music items in the second quarter this year versus the comparable
quarter last year. Sales of H.E.R.'s top 10 best selling music items in the
second quarter this year exceeded by approximately $5.9 million sales of
H.E.R.'s top 10 best selling music items in the second quarter last year. Music
sales for the first six months this year were $306.1 million, compared to $282.8
million for the first six months last year, an increase of 8%.
Compact disc ("CD") sales for the second quarter of fiscal 1998 were $149.8
million or 84% of H.E.R.'s music sales, compared to $122.2 million or 75% of
H.E.R.'s music sales for the second quarter of fiscal 1997. For the first six
months this year, CD sales were $254.0 million or 83% of H.E.R.'s music sales,
compared to $213.4 million or 76% of H.E.R.'s music sales for the first six
months last year.
6
<PAGE>
As mentioned earlier, H.E.R.'s video sales declined $59.8 million, or 61%, to
$37.8 million for the second quarter this year, from $97.6 million for the
comparable quarter last year. Video sales for the first six months of fiscal
1998 were $56.9 million, compared to $139.2 million for the first six months of
fiscal 1997, a decrease of 59%. The decreases in video sales during the second
quarter and six-month periods resulted from lower sales of mega-hit titles, as
well as continuing increases in direct purchases of video products from
manufacturers by some of the Company's major customers, including its largest
customer. The Company expects the trend of certain major customers purchasing
some or all video products directly from manufacturers and studios will
continue. The Company cannot yet determine the impact, if any, the
aforementioned trend will have on results of operations for fiscal 1998 and
subsequent fiscal years.
Book sales were $15.5 million for the second quarter of fiscal 1998, compared to
$16.5 million for the second quarter of fiscal 1997, a decrease of 6%. The
decrease in book sales reflected the strength of best selling items in the
second quarter last year, compared to best selling items available during the
second quarter this year. Sales of H.E.R.'s top 10 best selling books in the
second quarter this year exceeded by approximately $.9 million sales of H.E.R.'s
top 10 best selling books in the second quarter last year. Book sales for the
six-month period ended November 1, 1997 were $27.8 million, compared to $31.2
million for the comparable six-month period last year, a decrease of 11%.
Fiscal 1997 six-month sales benefited from the release of a successful series of
children's products that were heavily promoted by the Company's customers.
Personal computer software sales were $9.6 million for the second quarter this
year, compared to $6.4 million for the same period last year, an increase of
50%. The increase in personal computer software sales resulted from a
combination of continued growth of personal computer software sales within the
mass merchant channel and the strength of recent new releases. Personal
computer software sales increased 18% to $16.7 million for the first six months
this year, from $14.1 million for the first six months last year.
NCE is responsible for the Company's proprietary product operations, which
includes music, video and personal computer software products. NCE had net
sales of $48.2 million for the second quarter of fiscal 1998, compared to $44.4
million for the second quarter last year, an increase of 9%. This increase was
attributed to favorable retailer and consumer response to NCE's proprietary
products, as well as an approximately $3 million increase in sales of seasonal
items. NCE had net sales of $71.0 million for the first six months this year,
compared to $70.9 million for the same six-month period last year.
7
<PAGE>
International includes category management operations in Canada, Mexico, Brazil
and Argentina. International had net sales of $35.9 million for the second
quarter of fiscal 1998, compared to $30.1 million for the second quarter of
fiscal 1997, an increase of 19%. The increase in International sales was driven
by the addition of new customers, with one new customer accounting for
approximately $3.2 million in sales in the second quarter of fiscal 1998, as
well as increases in the number of departments shipped for existing customers.
International had net sales of $60.7 million for the first six months of fiscal
1998, compared to $51.9 million for the first six months of fiscal 1997, an
increase of 17%.
The consolidated gross profit margin percentage for the second quarter this year
was 23.9%, compared to 22.6% for the second quarter last year. Approximately
two-thirds of the increase in the gross profit margin percentage was the result
of reduced sales of low-margin video titles and increased H.E.R. music sales
(which carry higher gross margins than other H.E.R. products). Music grew to
74% of H.E.R. net sales in the second quarter this year from 58% of H.E.R. net
sales in the second quarter last year. Also contributing to the improvement in
the gross profit margin percentage was an increase in NCE sales as a percentage
of the overall sales mix (NCE sales carry a higher gross margin than sales in
the other operating units). For the first six months this year, the gross
profit margin percentage was 23.8%, compared to 22.6% for the comparable prior
year period.
Selling, general and administrative ("SG&A") expenses decreased by $2.5 million
to $59.5 million for the second quarter this year, from $62.0 million for the
second quarter last year. For the six months ended November 1, 1997, the
Company has reduced SG&A expenses by $5.7 million from the comparable prior year
period. The continued reduction in SG&A expenses has resulted from many of the
cost saving initiatives the Company has implemented over the past two years.
Interest expense for the second quarter of fiscal 1998 was $3.5 million,
compared to $3.0 million for the second quarter of fiscal 1997. The increase
was driven almost equally by higher interest rates and higher borrowing levels.
Interest expense for the first six months of fiscal 1998 was $6.5 million,
compared to $5.7 million for the first six months of fiscal 1997.
8
<PAGE>
The increase in accounts receivable to $324.3 million as of November 1, 1997,
from $290.1 million as of May 3, 1997 primarily resulted from the impact of the
higher sales level in the second quarter of fiscal 1998, compared to the sales
level in the fourth quarter of fiscal 1997.
The increase in merchandise inventories to $214.7 million as of November 1,
1997, from $188.2 million as of May 3, 1997 mainly resulted from increased
inventory purchases in preparation for the upcoming holiday season. Merchandise
inventories as of October 26, 1996 were $213.8 million.
The increase in accounts payable to $246.2 million as of November 1, 1997, from
$197.3 million as of May 3, 1997 was predominantly attributable to the increase
in merchandise inventories, mentioned above.
On September 8, 1997, the Board of Directors of the Company approved a share
repurchase program pursuant to which up to two million shares of Handleman's
common stock would be purchased by the Company over the succeeding 12 months.
This represented approximately six percent of the Company's issued and
outstanding shares as of September 8, 1997. These shares are being acquired for
general corporate purposes including stock programs.
With respect to any 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. Additional
information that could cause actual results to differ materially from any
forward looking statements may be contained in the Company's Annual Report on
Form 10-K.
9
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
An Annual Meeting of Shareholders of Handleman Company was held
on September 9, 1997. Two items were voted on at the Annual
Meeting. The first matter was the election of directors. The
following individuals were elected as directors of the Company
with each receiving at least 18,256,167 shares voted for
election, while a maximum of 2,612,323 were withheld: Messrs.
Stephen Strome, James B. Nicholson and Lloyd E. Reuss.
The second matter voted on was an Amendment to the Company's 1992
Performance Incentive Plan to meet certain requirements of
Section 162(m) of the Internal Revenue Code of 1986 and the
Treasury Regulations thereunder. The Amendment was approved,
with 20,141,053 shares voted for approval and a total of 727,437
shares voted either against or abstaining.
Item 6. Exhibits or Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
SIGNATURES: Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
HANDLEMAN COMPANY
DATE: December 15, 1997
BY: /s/ STEPHEN STROME
----------------- ---------------------------
STEPHEN STROME
President and
Chief Executive Officer
DATE: December 15, 1997 BY: /s/ LEONARD A. BRAMS
----------------- --------------------------
LEONARD A. BRAMS
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
-10-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-02-1998
<PERIOD-START> AUG-03-1997
<PERIOD-END> NOV-01-1997
<CASH> 9,565
<SECURITIES> 0
<RECEIVABLES> 324,269
<ALLOWANCES> 0
<INVENTORY> 214,748
<CURRENT-ASSETS> 559,203
<PP&E> 199,886
<DEPRECIATION> 109,918
<TOTAL-ASSETS> 720,635
<CURRENT-LIABILITIES> 283,080
<BONDS> 150,440
0
0
<COMMON> 330
<OTHER-SE> 282,050
<TOTAL-LIABILITY-AND-EQUITY> 720,635
<SALES> 315,285
<TOTAL-REVENUES> 315,285
<CGS> 240,029
<TOTAL-COSTS> 240,029
<OTHER-EXPENSES> 60,795
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,492
<INCOME-PRETAX> 10,969
<INCOME-TAX> 4,387
<INCOME-CONTINUING> 8,320<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,320
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
<FN>
<F1> The Company recognized minority interest income in the amount of $1,738,000
in the consolidated statement of operations, which represents the minority
Shareholders' portion of the loss for less than wholly owned subsidiaries.
</FN>
</TABLE>
