UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
June 3, 1998
- --------------------------------------------------------------------------------
Date of Report (Date of earliest event reported)
HANDLEMAN COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 1-7923 38-1242806
- ---------------------------- ----------- -------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
500 Kirts Boulevard, Troy, Michigan 48084-4142
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (248) 362-4400
---------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
1 of 12 Pages
Form 8-K
Item 5. Other Events
- ----------------------
On June 3, 1998, the Company announced a strategic repositioning plan, the
details of which are set forth in the attached press release hereto, which forms
a part of this Item 5.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
HANDLEMAN COMPANY
By: /s/Stephen Strome
------------------------------------------
Stephen Strome
President and Chief Executive Officer
Dated: June 10, 1998
2 of 12 Pages
IMMEDIATE RELEASE
-----------------
Company Contacts: Investor Relations Contact:
Tom C. Oviatt Donald A. Drew
Vice President/Treasurer Stone, August, Medrich
(248) 362-4400 (Ext. 891) (248) 362-9300 (Ext. 423)
Leonard A. Brams
Senior Vice President, CFO
and Secretary
(248) 362-4400 (Ext. 787)
HANDLEMAN COMPANY ANNOUNCES STRATEGIC REPOSITIONING PROGRAM, INCLUDING EXITING
CERTAIN BUSINESS ACTIVITIES, DIVESTITURES OF CERTAIN NON-CORE BUSINESSES,
REDUCTION OF NUMBER OF CUSTOMERS SERVICED IN THE CORE MUSIC DISTRIBUTION
BUSINESS AND ADOPTION OF STOCK REPURCHASE PLAN.
HANDLEMAN COMPANY ALSO REPORTS OPERATING RESULTS FOR THE YEAR AND QUARTER ENDED
MAY 2, 1998.
Troy, Michigan - June 3, 1998 Handleman Company (NYSE: HDL) today
announced that on June 2, 1998, its Board of Directors approved a comprehensive
strategic repositioning program designed to focus on Handleman's core music
distribution business and product line. When completed, Handleman will be
recognized as the channel of choice in the music distribution business. The
repositioning program has four major components:
. Exiting the domestic video, book and software distribution and service
operations.
. Sale of North Coast Entertainment's SofSource software publishing subsidiary.
3 of 12 Pages
. Significant reduction of the number of customers serviced in the music
distribution business, which, combined with the retention of high volume
customers, will decrease annual service costs at a substantially greater rate
than the decline in sales.
. Repurchase in the open market of up to $70 million of the outstanding common
stock of Handleman Company over the next 18 months. This repurchase program
is subject to the realization of cash from asset sales and reduced working
capital needs, as well as renegotiation of existing credit facilities.
For the fiscal year ended May 2, 1998, net sales decreased 6% to $1.10
billion from $1.18 billion in fiscal 1997, primarily as a result of lower
revenues in the video distribution business. Excluding nonrecurring charges, net
income would have increased to $11.5 million or $.35 per share in fiscal 1998,
compared to $5.4 million or $.16 per share in fiscal 1997. Including
nonrecurring items, net income in fiscal 1998 was $.3 million or $.01 per share.
The Company also announced results for the fourth quarter ended May 2, 1998.
Net sales were $272.0 million for the fourth quarter of fiscal 1998, down 2%
compared to 1997 net sales of $278.4 million. Net income for the fourth
quarter, excluding nonrecurring charges, would have been $2.7 million or $.08
per share, compared to $.2 million or $.01 per share for the fourth quarter of
fiscal 1997. Including nonrecurring charges, the Company experienced a net loss
of $8.5 million or $.26 per share for the fourth quarter of fiscal 1998.
Since the repositioning program was approved and announced in the first
quarter of fiscal 1999, the principal portion of the estimated repositioning
costs will be charged to earnings in the first quarter of fiscal 1999. Net
earnings for fiscal 1998 include after tax nonrecurring charges of $11.2
million, representing costs already incurred to facilitate the repositioning and
for asset impairments associated with certain investments and costs related to
the previously announced closings of distribution centers in Albany and Atlanta.
4 of 12 Pages
In the first quarter of fiscal 1999, the Company expects to recognize
additional nonrecurring charges of $90 million to $110 million (pre-tax) for
the following items:
. Severance and related benefit costs for employees being terminated.
. Reduction to net realizable value of assets in those business activities
being exited.
. Write-off of intangibles related to business activities being exited.
. Costs related to restructuring the Company's debt financing arrangements and
other costs related to repositioning activities.
These charges will result in the Company incurring a substantial loss in
the first quarter and for all of fiscal 1999. Repositioning related charges
after the first quarter will not exceed $15 million (pre-tax). The
repositioning program will be substantially completed during fiscal 1999.
Benefits are expected to begin in the second quarter as the program is
implemented.
The Company has entered into a definitive agreement to sell its book
distribution business at approximately net book value. The Company has also
signed a definitive agreement to sell its SofSource subsidiary to The Learning
Company at a pre-tax gain in excess of $30 million. These transactions are
expected to close during the first quarter of fiscal 1999. The gain on the sale
of SofSource is not included in the estimate of nonrecurring charges for the
first quarter of fiscal 1999.
SofSource has been a profitable growth business within Handleman's North
Coast Entertainment subsidiary. However, the software industry is going through
significant consolidation. SofSource is at a point where the resources
necessary for growth are best provided by another investor that has the critical
mass and commitment to focus on the industry. Placing SofSource with The
Learning Company will enable SofSource to have the opportunity to grow and
achieve its long-term potential.
5 of 12 Pages
Handleman also plans to exit its domestic video and software distribution
business activities as well as to cease providing services to smaller customers.
This is in addition to the sale of the book distribution business noted above.
The decision was made to exit these activities as well as to reduce the number
of customers serviced in the music distribution business because these
businesses or customers either did not provide an appropriate and consistent
rate of return, or do not have the potential for sustainable growth and
profitability. The businesses and customers retained are of the size and
capacity to provide profitable, sustainable growth.
In addition to the businesses being exited, the Company is reviewing its
operations in Argentina, Brazil and Mexico to determine how best to maximize
shareholder value from these entities. Decisions will be made with respect to
each of these markets, and announced by the end of August.
Management expects the repositioning activities to be substantially
completed during fiscal 1999. The program will generate cash flow exceeding
$150 million including the sale of assets and a reduction in working capital.
Upon completion of the repositioning actions, the Company expects to realize
annual ongoing savings in excess of $25 million (pre-tax). The expected savings
will result from a reduction in operating costs at a rate that is substantially
greater than the projected decrease in revenues, because both average customer
size and average sales volume of departments serviced increase significantly.
This repositioning program will result in a reduction of 900-1,000
positions (approximately 30% of the Company's total workforce). This reduction
will occur predominantly in the Handleman Entertainment Resources division and
the Troy corporate headquarters.
To insure senior management's consistent attention to the transition to the
channel of choice strategy, Handleman will operate its North Coast Entertainment
subsidiary as a holding company. Stephen Nadelberg, President of North Coast
Entertainment, will report to an internal Board of Directors chaired by Stephen
Strome, Handleman Company's President and Chief Executive Officer. Mr. Strome
commented "We are confident about the prospects at North Coast and are
6 of 12 Pages
committed to growing the business, as evidenced by our May 1998 acquisition of a
majority interest in the itsy bitsy Entertainment Company. At this time there
are no plans to divest any North Coast businesses other than SofSource."
In connection with the repositioning program, the Board of Directors has
approved a repurchase in the open market of up to $70 million of the Company's
common stock over the next 18 months. This repurchase program will be subject
to the generation of cash from the sale of assets and reduced working capital
needs, as well as the renegotiation of the Company's existing credit agreements.
In September 1997 the Board authorized a program to repurchase up to 2 million
shares, of which 1.3 million have been acquired to date at a cost of
approximately $9 million. This program will be discontinued and replaced by the
new repurchase program.
Commenting on the repositioning plan and fiscal 1998 results, Stephen
Strome said, "Although fiscal 1998 earnings before nonrecurring charges more
than doubled over last year, our returns to shareholders have still not been
adequate. As we execute this repositioning program, Handleman will become the
channel of choice in the music distribution business, assuring a long-term
sustainable and profitable business. We will maintain and improve our level of
service to our vendors and customers and ensure the appropriate challenges and
rewards for our employees. Moving forward, the channel of choice strategy will
provide the returns that our shareholders deserve and expect."
Strome also commented, "This is an exciting time for the Company as we
embark on executing the most significant change in Handleman's history. It is
also an unsettling time as we must reduce our workforce as well as customers who
have long-term relationships with the Company. We will work diligently to make
this transition respectful and considerate by providing appropriate severance
benefits, helping our employees attain positions with the purchasers of those
businesses to be sold and working with our customers to provide an orderly
transition to new vendors. Handleman is firmly committed to maintaining and
improving our level of service with our customers during this transition period,
and beyond."
7 of 12 Pages
Mr. Strome went on to say, "Although we did not reach market level returns
in fiscal 1998, we did achieve significant improvements in several areas:
. We increased fiscal 1998 earnings by nearly 120% before nonrecurring charges.
. We reduced past due receivables by $33 million.
. We reduced debt by $17 million and repurchased $9 million of common stock.
I am pleased with the progress in these areas and thank everyone in the
organization for contributing to the accomplishments that enabled us to reach
the point where fundamental decisions about our Company's future could be made."
The following comments relate to annual and fiscal fourth quarter results,
prior to the fourth quarter repositioning charges:
The Company has three operating units: Handleman Entertainment Resources
("H.E.R."), North Coast Entertainment ("NCE") and Handleman International
("International"). H.E.R. had net sales of $870.7 million for fiscal 1998, a
decline of 9% from fiscal 1997 net sales of $959.3 million. Within H.E.R.,
music sales grew 15% to $684.1 million for fiscal 1998 from $595.6 million in
fiscal 1997, due to increased sales of compact discs, increased market share
with mass merchants and more "hit" albums in fiscal 1998 by artists such as
Celine Dion, Garth Brooks, Spice Girls, Chumbawumba and LeAnn Rimes. H.E.R.
video sales declined 64% to $95.0 million in fiscal 1998 from $266.4 million in
fiscal 1997, substantially attributable to customers buying direct from the
major video studios. Book sales decreased 3% to $54.1 million for fiscal 1998
from $55.6 million for fiscal 1997, principally resulting from fewer hit titles.
Personal computer software sales decreased 10% to $37.5 million this fiscal year
from $41.7 million last year, resulting from two major customers exiting the
product line.
8 of 12 Pages
NCE is responsible for the Company's proprietary operations, which include
music, video and personal computer software products. NCE had net sales of
$131.3 million for fiscal 1998, compared to fiscal 1997 net sales of $134.4
million. The slight decrease in sales was caused by a decrease in video sales
which followed industry trends as well as a slight decline in computer software
product sales due to delayed releases of new titles. Going forward, NCE's video
business, Anchor Bay Entertainment, has many new releases scheduled for fiscal
1999. We anticipate these new releases will result in increased revenues. Some
of the titles to be released include: a 20th anniversary edition of the movie
"Halloween," "Prizzi's Honor" and a "Godzilla" box set introduced with the new
movie.
The Handleman International business unit includes category management
operations in Canada, Mexico, Brazil and Argentina. International had net sales
of $124.5 million for fiscal 1998, compared to $117.0 million for fiscal 1997,
an increase of 6%. The increase in International sales was principally from
operations in Brazil and Argentina. These increases were offset to some extent
by the loss of two major customers in Canada; The Bay, which exited the music
and video businesses, and the Canadian Kmart stores which were acquired by
Zellers. Currently Zellers is serviced by a competitor. Sales in International
were also impacted by pressure from Mexican retailers to reduce store
inventories which limited shipments and increased returns.
Income before income taxes and nonrecurring items in fiscal 1998 increased
7% to $14.0 million from $13.0 million in fiscal 1997. The increase was
attributable to an improved cost structure in H.E.R., somewhat offset by
substantial losses in International operations (primarily Mexico). The Mexican
losses during the first three quarters of fiscal 1998 were mitigated to some
extent by a sharing of the losses with the Company's joint venture partner. The
minority interest was an expense of $2.7 million in fiscal 1997 and income of
$2.8 million in fiscal 1998. During the fourth quarter, Handleman acquired the
interest of its partner in Mexico and, therefore, minority interest was not
recorded.
NCE incurred increased selling, general and administrative expenses
relating to new product introductions. Selling, general and administrative
expenses in International increased
9 of 12 Pages
substantially as a result of the increased returns in Mexico and the growth of
the Brazilian and Argentinean operations. Despite the increases in
International and NCE, consolidated selling, general and administrative expenses
declined $6.5 million in fiscal 1998 as a result of continued improvement in
H.E.R.
Handleman Company 4th Quarter Net Sales by Product Line
-------------------------------------------------------
1998 1997 Variance % Difference
------ ------ -------- ------------
Music $185.7 $150.4 $ 35.3 23%
Video 18.5 56.5 (38.0) (67%)
Book 14.1 11.4 2.7 24%
Software 8.9 11.0 (2.1) (19%)
------ ------ ------
Total H.E.R. 227.2 229.3 (2.1) (1%)
NCE 24.2 29.5 (5.3) (18%)
International 21.7 23.2 (1.5) (6%)
Eliminations (1.1) (3.6) 2.5
------ ------ ------
Consolidated Net Sales $272.0 $278.4 $ (6.4) (2%)
====== ====== ======
Information in this press release contains forward-looking statements which
are not historical facts and involve risk and uncertainties. Actual results,
events, and performance could differ materially from those contemplated by these
forward-looking statements, including, without limitations, the Company's
ability to effectively divest certain assets, the cost and timing of
implementing repositioning actions, conditions in the industry, certain global
and regional economic conditions, and other factors discussed in this press
release and those detailed from time to time in the Company's filings with the
Securities and Exchange Commission. Handleman undertakes no obligation to
update any forward-looking statement to reflect events or circumstances after
the date of this press release.
- Tables Follow -
10 of 12 Pages
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
(amounts in thousands, except per share data)
Three Months Ended Year Ended
------------------ ----------
May 2, May 3, May 2, May 3,
1998 1997 1998 1997
---- ---- ---- ----
Revenues $271,998 $278,399 $1,104,522 $1,181,037
Costs and Expenses
Direct product costs 203,042 213,180 834,470 906,779
Selling, general and
administrative expenses 63,402 61,832 243,778 250,286
Interest expense, net 2,732 2,388 12,319 10,967
Nonrecurring and
repositioning related
charges 13,684 0 13,684 0
-------- -------- ---------- ----------
Income (loss) before income
taxes and minority
interest (10,862) 999 271 13,005
Income tax (expense) benefit 2,370 (572) (2,800) (4,909)
Minority interest 0 (243) 2,841 (2,744)
-------- -------- ---------- ----------
Net income (loss) $ (8,492) $ 184 $ 312 $ 5,352
======== ======== ========== ==========
Earnings (loss) per share -
basic and diluted $(.26) $.01 $.01 $.16
======== ======== ========== ==========
Average number of shares
outstanding 32,191 33,454 32,868 33,481
======== ======== ========== ==========
11 of 12 Pages
CONSOLIDATED CONDENSED BALANCE SHEET
------------------------------------
(amounts in thousands)
May 2, May 3,
1998 1997
---- ----
Assets
Cash and cash equivalents $ 25,562 $ 12,449
Accounts receivable, less allowance for
gross profit impact of estimated
future returns of $17,339 at
May 2, 1998 and $21,834 at
May 3, 1997 242,445 290,071
Merchandise inventories 187,173 188,215
Other current assets 10,834 9,643
-------- --------
Total current assets 466,014 500,378
Property and equipment, net of
depreciation and amortization 78,711 95,719
Other assets 68,331 71,789
-------- --------
Total assets $613,056 $667,886
======== ========
Liabilities:
Accounts payable $179,227 $197,301
Other current liabilities 39,871 42,141
-------- --------
Total current liabilities 219,098 239,442
Debt, noncurrent 114,768 135,520
Other liabilities 5,383 9,271
Shareholders' equity 273,807 283,653
-------- --------
Total liabilities and
shareholders' equity $613,056 $667,886
======== ========
12 of 12 Pages