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, 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)
500 KIRTS BOULEVARD, TROY, MICHIGAN 48084-4142 Area Code 810 362-4400
- ------------------------------------------ ------------ ---------------------------------
(Address of principal executive offices) (Zip code) (Registrant's telephone number)
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
YES X NO
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of
the latest practicable date.
CLASS DATE SHARES OUTSTANDING
- -------------------------------- ------------------------ ---------------------------------------
Common Stock - $.01 Par Valueue March 7, 1997 33,469,764
HANDLEMAN COMPANY
INDEX
PAGE NUMBER
-----------
PART I - FINANCIAL INFORMATION
Consolidated Statement of Operations . . . . . . . . . 1
Consolidated Balance Sheet . . . . . . . . . . . . . . 2
Consolidated Statement of Shareholders' Equity . . . . 3
Consolidated Statement of Cash Flows . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . 5
Management's Discussion and Analysis of Operations . . 6 - 8
PART II - OTHER INFORMATION AND SIGNATURES . . . . . . . . . 9
[CAPTION]
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(amounts in thousands except per share data)
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
January 31, January 31, January 31, January 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Net sales $330,532 $345,605 $902,638 $871,564
Direct product costs 250,553 274,675 693,599 676,997
------------ ------------ ------------ ------------
Gross profit 79,979 70,930 209,039 194,567
Selling, general and
administrative expenses 65,144 63,032 186,241 180,805
Provision for realignment
of operations -- 1,500 -- 1,500
Amortization of acquisition
costs 1,342 1,908 4,714 6,066
Interest expense, net 2,888 2,857 8,579 9,343
------------ ------------ ------------ ------------
Income (loss) before income
taxes 10,605 1,633 9,505 (3,147)
Income tax expense (benefit) 4,078 536 4,337 (1,140)
------------ ------------ ------------ ------------
Net income (loss) $6,527 $1,097 $5,168 ($2,007)
============ ============ ============ ============
Earnings (loss) per average
common share outstanding
during the period $0.19 $0.03 $0.15 ($0.06)
============ ============ ============ ============
Average number of shares
outstanding during the period 33,480 33,583 33,491 33,580
============ ============ ============ ============
Dividends per share -- $0.05 -- $0.27
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements.
-1-
HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(amounts in thousands except share data)
January 31, April 27,
1997 1996
ASSETS ------------ ------------
Current assets:
Cash and cash equivalents $1,356 $19,936
Accounts receivable, less allowance of $23,642 at
January 31, 1997 and $22,141 at April 27, 1996 for
gross profit impact of estimated future returns 272,350 257,828
Merchandise inventories 232,452 212,700
Other current assets 8,515 19,349
------------ ------------
Total current assets 514,673 509,813
------------ ------------
Property and equipment:
Land 4,261 4,877
Buildings and improvements 24,564 31,793
Display fixtures 92,674 112,207
Equipment, furniture and other 63,015 59,447
Leasehold improvements 1,707 1,536
------------ ------------
186,221 209,860
Less accumulated depreciation and amortization 90,373 98,505
------------ ------------
95,848 111,355
------------ ------------
Other assets, net of allowances 72,150 72,746
------------ ------------
Total assets $682,671 $693,914
============ ============
LIABILITIES
Current liabilities:
Accounts payable $209,784 $223,023
Accrued and other liabilities 54,975 41,461
------------ ------------
Total current liabilities 264,759 264,484
------------ ------------
Debt, non-current 127,520 143,600
Deferred income taxes 6,231 6,270
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; 33,470,000 and 33,498,000 shares issued at
January 31, 1997 and April 27, 1996, respectively 335 335
Paid-in capital 31,806 32,089
Foreign currency translation adjustment and other (7,861) (7,577)
Retained earnings 259,881 254,713
------------ ------------
Total shareholders' equity 284,161 279,560
------------ ------------
Total liabilities and shareholders' equity $682,671 $693,914
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
-2-
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(amounts in thousands)
Nine Months Ended January 31, 1997
-----------------------------------------------------------------------
Foreign
Common Stock Currency
------------------ Translation Total
Shares Paid-in Adjustment Retained Shareholders'
Issued Amount Capital and Other Earnings Equity
------- -------- -------- ----------- --------- -------------
April 27, 1996 33,498 $335 $32,089 ($7,577) $254,713 $279,560
Net income 5,168 5,168
Forfeitures of common
stock related to
employee benefit plans (28) -- (283) 283 --
Adjustment for foreign
currency translation (567) (567)
------- -------- -------- ----------- --------- -------------
January 31, 1997 33,470 $335 $31,806 ($7,861) $259,881 $284,161
======= ======== ======== =========== ========= =============
The accompanying notes are an integral part of the consolidated
financial statements.
-3-
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
Nine Months Ended
-----------------------------
January 31, January 31,
1997 1996
------------ ------------
Cash flows from operating activities:
Net income (loss) $5,168 ($2,007)
------- ---------
Adjustments to reconcile net income
(loss) to net cash provided from
(used by) operating activities:
Depreciation 22,160 20,555
Amortization of acquisition costs 4,714 6,066
Recoupment of license advances 7,335 6,057
(Increase) decrease in assets:
Accounts receivable (14,522) (7,718)
Merchandise inventories (19,752) 23,538
Other current assets 12,309 (1,433)
Other assets, net of allowances (2,190) (7,824)
Increase (decrease) in liabilities:
Accounts payable (13,239) (34,879)
Accrued and other liabilities 4,617 (11,611)
Deferred income taxes (39) 5
------- ---------
Total adjustments 1,393 (7,244)
------- ---------
Net cash provided from (used by)
operating activities 6,561 (9,251)
------- ---------
Cash flows from investing activities:
Additions to property and equipment (15,668) (23,983)
Retirements of property and equipment 5,233 15,866
License advances (9,059) (11,158)
------- ---------
Net cash used by investing activities (19,494) (19,275)
------- ---------
Cash flows from financing activities:
Issuances of debt 948,010 1,765,210
Repayments of debt (953,090) (1,739,376)
Cash dividends 0 (9,070)
Other changes in shareholders' equity, net (567) (753)
------- ---------
Net cash provided from (used by)
financing activities (5,647) 16,011
------- ---------
Net decrease in cash and cash equivalents (18,580) (12,515)
Cash and cash equivalents at beginning
of period 19,936 24,392
------- ---------
Cash and cash equivalents at end of
period $1,356 $11,877
======= =========
The accompanying notes are an integral part of the consolidated financial statements.
-4-
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 January 31, 1997, and the results of operations for the three
and nine months then ended, and changes in cash flows for the nine months
then ended. Because of the seasonal nature of the Company's business, sales
and earnings results for the nine months ended January 31, 1997 are not
necessarily indicative of what the results will be for the full year. The
consolidated balance sheet as of April 27, 1996 is derived from the audited
consolidated financial statements of the Company included in the Company's
1996 Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Reference should be made to the Company's Form 10-K for the year
ended April 27, 1996.
-5-
HANDLEMAN COMPANY
-----------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net sales for the third quarter ended January 31, 1997 decreased 4% to $330.5
million, from $345.6 million for the third quarter ended January 31, 1996. Net
income for the third quarter this year increased to $6.5 million or $.19 per
share, from $1.1 million or $.03 per share for the third quarter last year.
For the first nine months of fiscal 1997, net sales were $902.6 million,
compared to $871.6 million for the comparable nine month period last year, an
increase of 4%. Net income for the first nine months this year was $5.2 million
or $.15 per share, compared to a net loss of $(2.0) million or a loss of $(.06)
per share for the first nine months last year.
The Company has three operating units: Handleman Entertainment Resources
(H.E.R.), North Coast Entertainment (NCE) and Handleman International. H.E.R.
had net sales of $262.7 million for the third quarter this year, compared to
$292.7 million for the comparable quarter last year, a decrease of 10%. H.E.R.
net sales for the nine months ended January 31, 1997 were $730.0 million,
compared to $738.0 million for the nine months ended January 31, 1996, a 1%
decrease. The following discussion of H.E.R.'s sales is organized by product
line: music, video, book and software.
Music sales for the third quarter ended January 31, 1997 declined 5% to $162.4
million, from $171.7 million for the third quarter ended January 31, 1996, due
to softness in the retail music marketplace. Music sales for the first nine
months of fiscal 1997 were $445.2 million, compared to $439.4 million for the
first nine months of fiscal 1996, an increase of 1%. Compact disc ("CD") sales
for the third quarter of fiscal 1997 were $126.9 million or 78% of H.E.R. music
sales, compared to $122.8 million or 72% of H.E.R. music sales for the third
quarter of fiscal 1996. For the first nine months this year, CD sales were
$340.3 million or 76% of H.E.R. music sales, compared to $306.2 million or 70%
of H.E.R. music sales for the comparable nine month period last year. According
to the Recording Industry Association of America, a music industry trade group,
music industry CD dollar sales reached 80% of total music revenues for the first
six months of calendar 1996 versus 75% for the comparable prior year six month
period.
Video sales were down 22% to $70.7 million for the third quarter this year, from
$90.1 million for the comparable quarter last year, chiefly caused by reduced
sales of mega-hits. Video sales for the first nine months ended January 31, 1997
were $209.9 million, compared to $213.1 million for the first nine months last
year, a decrease of 2%.
Book sales decreased 10% to $13.0 million for the third quarter of fiscal 1997,
from $14.4 million for the third quarter of fiscal 1996, principally resulting
from lower sales to certain key customers. Book sales for the first nine months
this year were $44.2 million, compared to $43.4 million for the comparable nine
month period last year, an increase of 2%. Third quarter personal computer
software sales were $16.6 million this year, up slightly from $16.5 million for
the third quarter last year. Personal computer software sales were $30.7 million
for the first nine months this year, compared to $42.1 million for the first
nine months last year, a decrease of 27%. The sales decrease for comparable nine
month periods resulted from efforts to realign store inventories with certain
key customers to more closely mirror retail selling patterns. In addition,
personal computer software sales last year benefitted from the release of
Microsoft's "Windows 95."
-6-
NCE is responsible for the Company's proprietary operations, which includes
music, video and personal computer software products. NCE had net sales of $34.0
million for the third quarter of fiscal 1997, compared to $25.2 million for the
third quarter last year, an increase of 35%. This increase was attributable to a
$5.4 million improvement over the prior year by NCE's Madacy subsidiary, and a
$4.6 million improvement over the prior year in sales of personal computer
software products by NCE's Sofsource subsidiary. NCE had net sales of $104.9
million for the first nine months this year, compared to $83.7 million for the
comparable nine month period last year, an increase of 25% which also was
substantially attributable to sales growth at the Madacy and Sofsource
subsidiaries. Net sales for the third quarter and first nine months last year
exclude sales of NCE's Entertainment Zone subsidiary, which was closed during
fiscal 1996.
Handleman International includes category management operations in Canada,
Mexico, Brazil and Argentina. Handleman International net sales were $41.9
million for the third quarter of fiscal 1997, compared to $26.1 million for the
third quarter of fiscal 1996, an increase of 61%. Over 74% of the increase in
Handleman International sales was attributable to operations in Mexico where
sales were spurred by the addition of new customers to the account base. The
increase in Handleman International sales was also generated by the expansion of
operations in Brazil and Argentina. Handleman International net sales for the
first nine months this year were $93.8 million, compared to $56.5 million for
the first nine months last year, an increase of 66%. The sales increase for the
comparable nine month periods was also directly related to the addition of new
customers in Mexico and the expansion of operations in Brazil and Argentina.
The consolidated gross profit margin percentage for the third quarter this year
was 24.2%, compared with 20.5% for the third quarter last year. The 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 by approximately
1.2 percentage points since sales of NCE products carry higher gross profit
margin percentages than the Company's overall gross profit margin percentage.
The majority of the remainder of the increase in gross profit margin percentage
resulted from improvements in gross profit margin percentage across the H.E.R.
product lines, as well as at NCE and International. The Company expects that the
gross profit margin percentage for the fourth fiscal quarter will be at a more
customary level. The gross profit margin for the first nine months of fiscal
1997 and fiscal 1996 was 23.2% and 22.3%, respectively.
Selling, general and administrative ("SG&A") expenses were $65.1 million (19.7%
of net sales) for the third quarter this year, compared with $63.0 million
(18.2% of net sales) for the third quarter last year. H.E.R.'s SG&A expenses
were lower in the third quarter this year compared to the third quarter last
year. The effect of the relationship of H.E.R.'s fixed costs on its lower sales
level, however, contributed to more than 50% of the increase in SG&A expenses as
a percentage of net sales. Also contributing to approximately 25% of the
increase in SG&A expenses as a percentage of net sales was NCE, which has a
higher SG&A expense to net sales percentage than the comparable percentages for
the overall Company. As noted above, NCE sales represented a greater proportion
of overall sales in the third quarter this year than in the third quarter last
year, adversely impacting the overall SG&A expense to net sales percentage. SG&A
expenses were $186.2 million (20.6% of net sales) for the first nine months of
fiscal 1997, compared to $180.8 million (20.7% of net sales) for the first nine
months of the prior fiscal year.
The increase in accounts receivable to $272.4 million as of January 31, 1997,
from $257.8 million as of April 27, 1996 primarily resulted from the impact of
the higher sales level in the third quarter of fiscal 1997, compared to the
sales level in the fourth quarter of fiscal 1996.
-7-
The increase in merchandise inventories to $232.5 million as of January 31,
1997, from $212.7 million as of April 27, 1996 principally resulted from the
higher volume of customer returns in the third quarter this year, compared to
the fourth quarter last year. Merchandise inventories as of January 31, 1996
were $252.6 million.
The decrease in other current assets to $8.5 million as of January 31, 1997,
from $19.3 million as of April 27, 1996 mainly related to the collection of
income tax receivables.
The decrease in property and equipment, net to $95.8 million as of January 31,
1997 from $111.4 million as of April 27, 1996 principally related to the sale
of certain Company owned facilities, retirements and depreciation.
The decrease in accounts payable to $209.8 million as of January 31, 1997, from
$223.0 million as of April 27, 1996 primarily related to the volume and timing
of mega-hit video releases and the related payments for such releases.
The increase in accrued and other liabilities to $55.0 million as of January 31,
1997 from $41.5 million as of April 27, 1996, as well as the decrease in debt,
non-current to $127.5 million as of January 31, 1997, from $143.6 million as of
April 27, 1996, principally related to the reclassification of certain notes
payable to current liabilities.
Reference should be made to the Company's Form 10-Qs for the quarters ended
October 26, 1996 and July 27, 1996 for additional discussion regarding sales and
earnings results for fiscal 1997.
-8-
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 17, 1997 BY: /s/ Stephen Strome
------------------------------- --------------------------------
STEPHEN STROME
President and
Chief Executive Officer
DATE: March 17, 1997 BY: /s/ Richard J. Morris
------------------------------- --------------------------------
RICHARD J. MORRIS
Senior Vice President/Finance-
Chief Financial Officer and
Secretary
-9-