<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the 3rd quarter ended January 31, 1998 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)
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<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)
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Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
YES X NO
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS DATE SHARES OUTSTANDING
______________________________ _______________ ____________________
Common Stock - $.01 Par Value March 10, 1998 32,256,100
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HANDLEMAN COMPANY
INDEX
PAGE NUMBER
-----------
PART I - FINANCIAL INFORMATION
Consolidated Statement of Income.............................. 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
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HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three Months (13 Weeks) Ended Nine Months (39 Weeks) Ended
----------------------------- ----------------------------
January 31, January 31, January 31, January 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $308,202 $330,532 $832,524 $902,638
Direct product costs 231,882 250,553 631,428 693,599
-------- -------- -------- --------
Gross profit 76,320 79,979 201,096 209,039
Selling, general and
administrative expenses 62,017 63,673 176,423 183,740
Amortization of acquisition costs 1,309 1,342 3,953 4,714
Interest expense, net 3,097 2,888 9,587 8,579
-------- -------- -------- --------
Income before income taxes
and minority interest 9,897 12,076 11,133 12,006
Income tax expense (3,852) (4,078) (5,170) (4,337)
Minority interest 909 (1,471) 2,841 (2,501)
-------- -------- -------- --------
Net income $6,954 $6,527 $8,804 $5,168
======== ======== ======== ========
Earnings per share - basic and diluted $0.21 $0.19 $0.27 $0.15
======== ======== ======== ========
Weighted average number of shares
outstanding during the period - basic 32,741 33,480 33,094 33,491
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-1-
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HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(amounts in thousands except share data)
<TABLE>
<CAPTION>
January 31, May 3,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $14,654 $12,449
Accounts receivable, less allowance of $18,873 at
January 31, 1998 and $21,834 at May 3, 1997 for
gross profit impact of estimated future returns 257,962 290,071
Merchandise inventories 205,949 188,215
Other current assets 10,581 9,643
---------- ----------
Total current assets 489,146 500,378
---------- ----------
Property and equipment:
Land 4,039 4,238
Buildings and improvements 24,774 24,564
Display fixtures 102,480 96,721
Equipment, furniture and other 69,679 67,450
---------- ----------
200,972 192,973
Less accumulated depreciation and amortization 112,851 97,254
---------- ----------
88,121 95,719
---------- ----------
Other assets, net of allowances 71,153 71,789
---------- ----------
Total assets $648,420 $667,886
========== ==========
LIABILITIES
Current liabilities:
Accounts payable $198,023 $197,301
Accrued and other liabilities 40,140 42,141
---------- ----------
Total current liabilities 238,163 239,442
---------- ----------
Debt, non-current 122,140 135,520
Other liabilities 2,634 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; 32,406,100 and 33,373,000 shares issued at
January 31, 1998 and May 3, 1997, respectively 324 334
Paid-in capital 23,926 30,800
Foreign currency translation adjustment and other (7,636) (7,546)
Retained earnings 268,869 260,065
---------- ----------
Total shareholders' equity 285,483 283,653
---------- ----------
Total liabilities and shareholders' equity $648,420 $667,886
========== ==========
</TABLE>
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)
<TABLE>
<CAPTION>
Nine Months (39 Weeks) Ended January 31, 1998
-------------------------------------------------------------------------
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 8,804 8,804
Forfeitures of common
stock related to
employee benefit plans (122) (1) (1,394) 1,395 --
Common stock repurchased (845) (9) (5,480) (5,489)
Adjustment for foreign
currency translation (1,485) (1,485)
-------- -------- -------- ----------- ---------- -------------
January 31, 1998 32,406 $324 $23,926 ($7,636) $268,869 $285,483
======== ======== ======== =========== ========== =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-3-
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HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
<TABLE>
<CAPTION>
Nine Months (39 weeks) Ended
----------------------------
<S> <C> <C>
January 31, January 31,
1998 1997
----------- -----------
Cash flows from operating activities:
Net income $8,804 $5,168
----------- -----------
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation 20,960 22,160
Amortization of acquisition costs 3,953 4,714
Recoupment of license advances 9,832 7,335
(Increase) decrease in assets:
Accounts receivable 32,109 (14,522)
Merchandise inventories (17,734) (19,752)
Other current assets (938) 12,309
Other assets, net of allowances 2,545 (2,190)
Increase (decrease) in liabilities:
Accounts payable 722 (13,239)
Accrued and other liabilities (2,001) 4,617
Other liabilities (6,637) (39)
----------- -----------
Total adjustments 42,811 1,393
----------- -----------
Net cash provided from operating activities 51,615 6,561
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (15,783) (15,668)
Retirements of property and equipment 2,421 5,233
License advances (15,694) (9,059)
---------- -----------
Net cash used by investing activities (29,056) (19,494)
---------- -----------
Cash flows from financing activities:
Issuances of debt 1,308,050 948,010
Repayments of debt (1,321,430) (953,090)
Repurchase of common stock (5,489) 0
Other changes in shareholders' equity, net (1,485) (567)
---------- ----------
Net cash used by financing activities (20,354) (5,647)
---------- ----------
Net increase (decrease) in cash and cash equivalents 2,205 (18,580)
Cash and cash equivalents at beginning of period 12,449 19,936
---------- ----------
Cash and cash equivalents at end of period $14,654 $1,356
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
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HANDLEMAN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of Management, the accompanying consolidated balance sheet
and consolidated statements of income, 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
January 31, 1998, and the results of operations and changes in cash flows
for the nine months then ended. Because of the seasonal nature of the
Company's business, sales and earnings results for the nine months ended
January 31, 1998 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.
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HANDLEMAN COMPANY
-----------------
Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
Net sales for the third quarter ended January 31, 1998 decreased 7% to $308.2
million, from $330.5 million for the third quarter ended January 31, 1997. This
decline was primarily attributable to a decrease in video sales within the
Company's Handleman Entertainment Resources ("H.E.R.") operating unit. Net
income for the third quarter ended January 31, 1998 was $7.0 million or $.21 per
share (basic and diluted), compared to $6.5 million or $.19 per share (basic and
diluted) for the third quarter ended January 31, 1997.
Net sales for the first nine months of fiscal 1998 were $832.5 million, compared
to $902.6 million for the comparable nine-month period last year, a decrease of
8%. Net income for the first nine months this year was $8.8 million or $.27 per
share (basic and diluted), compared to $5.2 million or $.15 per share (basic and
diluted) for the first nine months last year, an improvement of $.12 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
$236.0 million for the third quarter this year, compared to $262.7 million for
the third quarter last year, a decrease of 10%. For the first nine months of
fiscal 1998, H.E.R. net sales were $643.5 million, compared to $730.0 million
for the first nine months last year, a 12% decrease primarily due to lower video
sales.
Within H.E.R., music sales were $192.3 million for the third quarter of fiscal
1998, compared to $162.4 million for the third quarter of fiscal 1997, an
increase of 18%. 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 items in the third quarter this year versus the
comparable quarter last year. Sales of H.E.R.'s top 10 best-selling music items
in the third quarter this year exceeded sales of H.E.R.'s top 10 best-selling
music items in the third quarter last year by approximately $21.8 million.
Music sales for the nine-month period ended January 31, 1998 were $498.4
million, compared to $445.2 million for the nine-month period ended January 31,
1997, an increase of 12%.
Compact disc ("CD") sales for the third quarter this year were $159.5 million or
83% of H.E.R.'s music sales, compared to $126.9 million or 78% of H.E.R.'s music
sales for the third quarter last year. For the first nine months of fiscal
1998, CD sales were $413.5 million or 83% of H.E.R.'s music sales, compared to
$340.3 million or 76% of H.E.R.'s music sales for the comparable nine-month
period last year.
6
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H.E.R.'s video sales declined to $19.6 million for the third quarter this year,
from $70.7 million for the comparable quarter last year, a decrease of $51.1
million or 72%. Video sales for the first nine months of fiscal 1998 were
$76.5 million, compared to $209.9 million for the first nine months of fiscal
1997, a decrease of 64%. The decreases in video sales for both the third
quarter and nine-month period were caused by continuing increases in direct
purchases of video products from manufacturers by 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, however, believes the video sales level for
the third quarter of fiscal 1998 is reflective of ongoing volume with its video
account base.
H.E.R. book sales were $12.2 million for the third quarter of fiscal 1998,
compared to $13.0 million for the third quarter of fiscal 1997, a decrease of
6%. The decrease in book sales reflected the strength of best-selling items in
the third quarter last year and the lack of best sellers available during the
third quarter this year. Book sales for the first nine months this year were
$40.0 million, compared to $44.2 million for the comparable nine-month period
last year, a decrease of 10%. Fiscal 1997 nine-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 $11.9 million for the third quarter this
year, compared to $16.6 million for the same period last year, a decrease of
28%. The decrease in personal computer software sales primarily resulted from a
decrease in the number of departments shipped, which was substantially
attributable to two customers exiting the computer software business. Personal
computer software sales were $28.6 million for the first nine months of fiscal
1998, compared to $30.7 million for the first nine months of fiscal 1997, a
decrease of 7%.
NCE is responsible for the Company's proprietary product operations, which
includes music, video and personal computer software products. NCE had net
sales of $36.1 million for the third quarter of fiscal 1998, compared to $34.0
million for the third quarter last year, an increase of 6%. The increase was
primarily attributable to strong sales of seasonal items. NCE had net sales of
$107.1 million for the first nine months this year, compared to $104.9 million
for the comparable nine-month period last year.
International includes category management operations in Canada, Mexico, Brazil
and Argentina. International net sales were $42.1 million for the third quarter
of fiscal 1998, compared to $41.9 million for the third quarter of fiscal 1997.
International experienced decreased sales in Mexico of approximately $3.5
million in the third quarter this year, compared to the third quarter last year,
primarily attributable to increased product returns and lower shipments driven
by pressure from customers to reduce store inventory positions; this was offset
by sales increases of approximately 14% in Brazil, Argentina, and, to some
extent, Canada.
7
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Sales growth in the Canadian unit, however, was negatively impacted by
developments with two key customers during the quarter: one customer decided to
exit the music and video business, and the Kmart stores serviced by the Company
were sold to a retailer serviced by a competitor. Sales to these two customers
for the quarter and nine months ended January 31, 1998 were $2.2 million and
$14.6 million, respectively.
International had net sales of $102.8 million for the first nine months of
fiscal 1998, compared to $93.8 million for the first nine months of fiscal 1997,
an increase of 10%.
As a result of the lower sales in Mexico, as well as the need to recognize an
additional provision for bad debts, the Company's Mexican unit had a net loss
for the third quarter and first nine months of fiscal 1998. The Company has
signed a letter of understanding to acquire its partner's equity interest in the
Mexican operating unit; such transaction is expected to be consummated in the
fourth quarter of fiscal 1998.
The consolidated gross profit margin percentage for the third quarter this year
was 24.8%, compared to 24.2% for the third quarter last year. The increase in
the gross profit margin percentage was predominantly the result of the increase
in NCE sales as a percentage of overall Company sales (since sales of NCE
products carry higher gross profit margin percentages than the overall gross
profit margin percentage), as well as reduced sales of low-margin video titles.
For the first nine months this year, the gross profit margin percentage was
24.2%, compared to 23.2% for the first nine months last year.
Selling, general and administrative ("SG&A") expenses decreased by $1.7 million
to $62.0 million for the third quarter this year, from $63.7 million for the
third quarter last year. For the nine months ended January 31, 1998, the
Company has decreased SG&A expenses by $7.3 million from the comparable prior
year period. The reduction in SG&A expenses primarily resulted from many of the
cost saving initiatives the Company has implemented.
Interest expense for the third quarter and first nine months of fiscal 1998 was
$3.1 million and $9.6 million, compared to $2.9 million and $8.6 million for the
third quarter and first nine months last year, respectively. The increases were
primarily attributable to higher borrowing levels.
The decrease in accounts receivable to $258.0 million as of January 31, 1998,
from $290.1 million as of May 3, 1997 primarily resulted from a concerted multi-
discipline, on-going collection effort.
The increase in merchandise inventories to $205.9 million as of January 31,
1998, from $188.2 million as of May 3, 1997 mainly resulted from the higher
volume of customer returns in the third quarter this year, compared to the
fourth quarter last year. The January 31, 1998 inventory level represents a
$26.6 million reduction from the $232.5 million inventory balance the Company
had as of January 31, 1997.
8
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In order to continue to focus on more efficient distribution channels and to
better control inventory levels and reduce costs, the Company has decided to
consolidate the distribution activities currently at the Albany, New York
warehouse into the Company's automated distribution center in Indianapolis,
Indiana. Management will continue to review opportunities to further lower
costs through increasing productivity of the two automated distribution centers.
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. The shares are being acquired for
general corporate purposes including stock programs. As of March 13, 1998, the
Company has purchased 995,400 shares at an average price of approximately $6.50
per share.
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
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None during the quarter.
Item 6. Exhibits or Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
SIGNATURES: Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
HANDLEMAN COMPANY
DATE: March 16, 1998 BY: /s/ Stephen Strome
-------------- -------------------
STEPHEN STROME
President and
Chief Executive Officer
DATE: March 16, 1998 BY: /s/ Leonard A. Brams
-------------- ---------------------
LEONARD A. BRAMS
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
-10-
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-02-1998
<PERIOD-START> NOV-02-1997
<PERIOD-END> JAN-31-1998
<CASH> 14654
<SECURITIES> 0
<RECEIVABLES> 257962
<ALLOWANCES> 0
<INVENTORY> 205949
<CURRENT-ASSETS> 489146
<PP&E> 200972
<DEPRECIATION> 112851
<TOTAL-ASSETS> 648420
<CURRENT-LIABILITIES> 238163
<BONDS> 122140
0
0
<COMMON> 324
<OTHER-SE> 285159
<TOTAL-LIABILITY-AND-EQUITY> 648420
<SALES> 308202
<TOTAL-REVENUES> 308202
<CGS> 231882
<TOTAL-COSTS> 231882
<OTHER-EXPENSES> 63326
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3097
<INCOME-PRETAX> 9897
<INCOME-TAX> 3852
<INCOME-CONTINUING> 6954
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6954
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
<FN>
Notes:
The Company recognized minority interest income in the amount of $909,000 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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