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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
<S> <C>
For the 1st quarter ended August 2, 1997 Commission File Number 1-7923
HANDLEMAN COMPANY
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(Exact name of registrant as specified in its charter)
MICHIGAN 38-1242806
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 KIRTS BOULEVARD, TROY, MICHIGAN 48084-4142 Area Code 248 362-4400
- ---------------------------------------- ----------- ------------------------------
(Address of principal executive offices) (Zip code) (Registrant's telephone number)
Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such filing requirements for at least
the past 90 days.
YES X NO
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
CLASS DATE SHARES OUTSTANDING
- ------------------------------- ----------------------- ------------------------------
Common Stock - $.01 Par Value September 8, 1997 33,366,529
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HANDLEMAN COMPANY
INDEX
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PAGE NUMBER
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PART I - FINANCIAL INFORMATION
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Consolidated Statement of Operations . . . . . . . . 1
Consolidated Balance Sheet . . . . . . . . . . . . . 2
Consolidated Statement of Shareholders' Equity . . . 3
Consolidated Statement of Cash Flows . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . 5
Management's Discussion and Analysis of Operations . 6 - 7
PART II - OTHER INFORMATION AND SIGNATURES . . . . . . . . 8
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HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(amounts in thousands except per share data)
Three Months (13 Weeks) Ended
-----------------------------
August 2, July 27,
1997 1996
--------- ---------
<S> <C> <C>
Net sales $209,037 $225,026
Direct product costs 159,517 174,297
-------- --------
Gross profit 49,520 50,729
Selling, general and
administrative expenses 54,955 58,075
Amortization of acquisition costs 1,300 1,900
Interest expense, net 2,998 2,721
-------- --------
Loss before income taxes and
minority interest (9,733) (11,967)
Income tax benefit 3,069 4,445
Minority interest 194 (659)
-------- --------
Net loss ($6,470) ($8,181)
======== ========
Loss per average common share
outstanding during the period ($0.19) ($0.24)
======== ========
Average number of shares
outstanding during the period 33,369 33,497
======== ========
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The accompanying notes are an integral part of the consolidated
financial statements.
-1-
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HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(amounts in thousands except share data)
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August 2, May 3,
1997 1997
ASSETS ---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,294 $ 12,449
Accounts receivable, less allowance of $19,217 at
August 2, 1997 and $21,834 at May 3, 1997 for
gross profit impact of estimated future returns 249,933 290,071
Merchandise inventories 202,972 188,215
Other current assets 9,915 9,643
---------- ----------
Total current assets 471,114 500,378
---------- ----------
Property and equipment:
Land 4,238 4,238
Buildings and improvements 24,574 24,564
Display fixtures 98,776 96,721
Equipment, furniture and other 68,723 67,450
---------- ----------
196,311 192,973
Less accumulated depreciation and amortization 104,036 97,254
---------- ----------
92,275 95,719
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Other assets, net of allowances 72,188 71,789
---------- ----------
Total assets $635,577 $667,886
========== ==========
LIABILITIES
Current liabilities:
Accounts payable $183,820 $197,301
Accrued and other liabilities 35,956 42,141
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Total current liabilities 219,776 239,442
---------- ----------
Debt, non-current 130,520 135,520
Other liabilities 8,309 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; 33,366,996 and 33,373,000 shares issued at
August 2, 1997 and May 3, 1997, respectively 334 334
Paid-in capital 30,735 30,800
Foreign currency translation adjustment and other (7,692) (7,546)
Retained earnings 253,595 260,065
---------- ----------
Total shareholders' equity 276,972 283,653
---------- ----------
Total liabilities and shareholders' equity $635,577 $667,886
========== ==========
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The accompanying notes are an integral part of the consolidated financial
statements.
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HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(amounts in thousands)
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Three Months Ended August 2, 1997
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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 loss (6,470) (6,470)
Forfeitures of common
stock related to
employee benefit plans (6) (65) 65 --
Adjustment for foreign
currency translation (211) (211)
------ ---- ------- ------- -------- --------
August 2, 1997 33,367 $334 $30,735 ($7,692) $253,595 $276,972
====== ==== ======= ======= ======== ========
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The accompanying notes are an integral part of the consolidated financial
statements.
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HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
Three Months (13 Weeks) Ended
-----------------------------
<S> <C> <C>
August 2, July 27,
1997 1996
--------- ----------
Cash flows from operating activities:
Net loss ($6,470) ($8,181)
--------- ----------
Adjustments to reconcile net loss to net cash
provided from (used by) operating activities:
Depreciation 7,034 7,422
Amortization of acquisition costs 1,300 1,900
Recoupment of license advances 2,110 1,486
(Increase) decrease in assets:
Accounts receivable 40,138 19,492
Merchandise inventories (14,757) 1,840
Other current assets (272) 5,339
Other assets, net of allowances 744 791
Increase (decrease) in liabilities:
Accounts payable (13,481) (39,641)
Accrued and other liabilities (6,185) (6,418)
Other liabilities (962) 29
--------- ----------
Total adjustments 15,669 (7,760)
--------- ----------
Net cash provided from (used by)
operating activities 9,199 (15,941)
--------- ----------
Cash flows from investing activities:
Additions to property and equipment (3,992) (3,562)
Retirements of property and equipment 402 1,590
License advances (4,553) (2,056)
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Net cash used by investing activities (8,143) (4,028)
--------- ----------
Cash flows from financing activities:
Issuances of debt 209,600 229,211
Repayments of debt (214,600) (221,211)
Other changes in shareholders' equity, net (211) (256)
--------- ----------
Net cash provided from (used by)
financing activities (5,211) 7,744
--------- ----------
Net decrease in cash and cash equivalents (4,155) (12,225)
Cash and cash equivalents at beginning
of period 12,449 19,936
Cash and cash equivalents at end of --------- ----------
period $ 8,294 $ 7,711
========= ==========
The accompanying notes are an integral part of the consolidated financial
statements.
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HANDLEMAN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of Management, the accompanying consolidated balance sheet
and consolidated statements of operations, shareholders' equity and cash
flows contain all adjustments, consisting only of normal recurring adjust-
ments necessary to present fairly the financial position of the Company as
of August 2, 1997, and the results of operations and changes in cash flows
for the three months then ended. Because of the seasonal nature of the
Company's business, sales and earnings results for the three months ended
August 2, 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.
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HANDLEMAN COMPANY
-----------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net sales for the first quarter ended August 2, 1997 decreased 7% to $209.0
million from $225.0 million for the first quarter of last year. The net loss for
the first quarter ended August 2, 1997 was $6.5 million or a loss of $.19 per
share, compared to a net loss of $8.2 million or a loss of $.24 per share for
the first quarter ended July 27, 1996.
The Company has three operating units: Handleman Entertainment Resources
("H.E.R."), North Coast Entertainment ("NCE") and Handleman International
("International"). The sales amounts discussed below include sales between
operating units which were eliminated in consolidation.
H.E.R. had net sales of $165.9 million for the first quarter of fiscal 1998,
compared to $182.9 million for the first quarter of fiscal 1997, a decrease of
9%. Within H.E.R., music sales were $127.4 million for the first quarter of this
year, compared to $118.9 million for the first quarter last year, an increase of
7%. The increase in music sales was primarily the result of increased emphasis
by the Company's customers on this product category and the strength of best
selling items in the first quarter of this year versus the comparable quarter of
last year. Sales of the Company's top 10 best selling items in the first quarter
this year exceeded by approximately $14 million sales of the Company's top 10
best selling items in the first quarter last year.
H.E.R. video sales were $19.1 million for the first quarter of this year, a
decrease of 54% from $41.6 million for the comparable prior year period. The
decrease in video sales was substantially attributable to an approximate $10
million decrease in sales of mega-hit titles, as well as continuing increases in
direct purchases of video products from manufacturers and studios by some of the
Company's major customers, including its largest customer. The Company expects
that 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.
H.E.R. book sales were $12.3 million for the first quarter of fiscal 1998,
compared to $14.7 million for the first quarter of fiscal 1997, a decrease of
16%. The first quarter of last year benefited from the release of a successful
series of children's products that were heavily promoted by the Company's
customers. H.E.R. personal computer software sales were $7.1 million for the
first quarter of this year, compared to $7.7 million for the comparable prior
year period, a decrease of 8%. The reduction in personal computer software sales
primarily resulted from a decrease in the number of departments shipped, which
was substantially attributable to customers exiting the computer business.
NCE is responsible for the Company's proprietary operations, which includes
music, video and personal computer software products. NCE had net sales of
$22.8 million for the first quarter of fiscal 1998, compared to $26.5 million
for the first quarter of the prior year, a decrease of 14%. The sales decrease
was chiefly caused by the timing and level of customer promotional activities
and general softness in the video market.
International includes category management operations in Canada, Mexico, Brazil
and Argentina. International had net sales of $24.8 million for the first
quarter of fiscal 1998, compared to $21.8 million for the first quarter of
fiscal 1997, an increase of 14%. The increase in International sales was
attributable to continued growth in each of the four markets in which the
division operates, with over 85% of the sales increase being attributable to the
Mexico and Argentina operations. These improved sales levels were spurred by
the addition of new customers and increases in the number of departments shipped
for existing customers.
6
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The consolidated gross profit margin percentage for the first quarter of this
year was 23.7% compared to 22.5% for the first quarter of last year. The
increase in gross profit margin percentage was predominantly the result of
reduced sales of low margin mega-hit video titles and increased H.E.R. music
sales, which grew to 77% of H.E.R. net sales in the first quarter of this year
from 65% of H.E.R. net sales in the first quarter of last year. Also
contributing to the improvement in the gross profit margin percentage was an
increase in the margin percentage on sales of NCE proprietary products.
Selling, general and administrative ("SG&A") expenses decreased by $3.1 million
or 5% to $55.0 million for the first quarter ended August 2, 1997 from $58.1
million for the first quarter ended July 27, 1996. The reduction in SG&A
expenses was attributable to many of the cost savings initiatives the Company
has implemented over the past two years.
The Company's first fiscal quarter is traditionally its weakest quarter. The
Company has historically generated the majority of its earnings in subsequent
fiscal quarters.
Accounts receivable at August 2, 1997 were $249.9 million, compared to $290.1
million at May 3, 1997, a decrease of 14%. The decrease in accounts receivable
principally resulted from the lower sales volume during the first quarter of
fiscal 1998 compared to the fourth quarter of fiscal 1997.
* * * * *
On September 3, 1997, the Company superseded its existing credit agreement. In
excess of 50% of the $150,000,000 facility available under the new agreement was
provided by banks which had participated in the prior agreement. The new
agreement, which expires in 2002, is substantially similar to the prior
agreement which would have expired in 1999.
Management believes the credit agreement, as well as cash flow from operating
activities, will continue to provide sufficient amounts to fund day-to-day
operations and higher peak seasonal demands.
On September 8, 1997, the Board of Directors of the Company approved a share
repurchase program pursuant to which up to 2 million shares of Handleman's
common stock would be purchased by the Company over the next 12 months. This
represents approximately 6 percent of the Company's currently issued and
outstanding 33,366,529 shares. These shares would be 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.
7
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PART II - OTHER INFORMATION
Item 6. Exhibits or Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
SIGNATURES: Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
HANDLEMAN COMPANY
DATE: September 16, 1997 BY: /s/ Stephen Strome
------------------------------- --------------------------------
STEPHEN STROME
President and
Chief Executive Officer
DATE: September 16, 1997 BY: /s/ Leonard A. Brams
------------------------------- --------------------------------
LEONARD A. BRAMS
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
-8-
PART II - OTHER INFORMATION
<TABLE> <S> <C>
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-02-1998
<PERIOD-START> MAY-04-1997
<PERIOD-END> AUG-02-1997
<CASH> 8,294
<SECURITIES> 0
<RECEIVABLES> 249,933
<ALLOWANCES> 0
<INVENTORY> 202,972
<CURRENT-ASSETS> 471,114
<PP&E> 196,311
<DEPRECIATION> 104,036
<TOTAL-ASSETS> 635,577
<CURRENT-LIABILITIES> 219,776
<BONDS> 130,520
0
0
<COMMON> 334
<OTHER-SE> 276,638
<TOTAL-LIABILITY-AND-EQUITY> 635,577
<SALES> 209,037
<TOTAL-REVENUES> 209,037
<CGS> 159,517
<TOTAL-COSTS> 159,517
<OTHER-EXPENSES> 56,255
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,998
<INCOME-PRETAX> (9,733)
<INCOME-TAX> (3,069)
<INCOME-CONTINUING> (6,470)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,470)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
<FN>
<F1> The Company recognized minority interest income in the amount of $194,000
in the consolidated statement of operations, which represents the minority
shareholders' portion of the loss for less than wholly-owned subsidiaries.
</FN>
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