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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 1994 Commission File No. 1-7923
HANDLEMAN COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1242806
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 Kirts Boulevard, Troy, Michigan 48084 - 5299
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(Address of principal executive offices) (Zip Code)
810-362-4400
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ---------------------------- -----------------------------------------
COMMON STOCK $.01 PAR VALUE NEW YORK STOCK EXCHANGE
-------------------------------
PACIFIC STOCK EXCHANGE
-------------------------------
CHICAGO STOCK EXCHANGE
-------------------------------
Securities registered pursuant to Section 12(g) of the Act:
NONE
------------------
(Title of Class)
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
----- -----
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
The aggregate market value as of July 15, 1994 was $336,906,809.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. The number of shares of common
stock outstanding as of July 15, 1994 was 33,531,359.
Item 14(a) 3. on page 31 describes the exhibits filed with the Securities and
Exchange Commission.
Certain sections of the definitive Proxy Statement to be filed for the 1994
Annual Meeting of Shareholders are incorporated by reference into Part III.
Page 1 of 36
PART 1
Item 1. BUSINESS
Handleman Company, a Michigan corporation (herein referred to as the
"Company" or "Handleman" or "Registrant"), which has its executive office in
Troy, Michigan, is the successor to a proprietorship formed in 1934, and to a
partnership formed in 1937.
DESCRIPTION OF BUSINESS:
- ------------------------
Handleman Company is engaged in the sale and distribution of prerecorded
music, video, hardcover and paperback books, and personal computer software
primarily to mass merchants throughout the United States and Canada. In fiscal
1994 the Registrant established a distribution company with headquarters in
Mexico City to supply music and video products to retail outlets throughout
Mexico. In addition, the Company provides various services as a specialized
merchandiser (rackjobber) to these accounts. The Company is also in the
business of acquiring video licenses, giving it exclusive rights to manufacture
and distribute certain video products.
The following table sets forth net sales, and the approximate percentage
contribution to consolidated sales, for the fiscal years ended April 30, 1994,
May 1, 1993 and May 2, 1992, for the prerecorded music, video, books, and
personal computer software product lines of the Company.
YEAR ENDED
(DOLLAR AMOUNTS IN THOUSANDS)
----------------------------------------
APRIL 30, 1994 MAY 1, 1993 MAY 2, 1992
-------------- ----------- -----------
Prerecorded Music $ 571,555 $ 626,990 $ 542,298
% of Total 53.6 55.9 53.1
Video 389,532 378,604 387,304
% of Total 36.5 33.8 38.0
Books 66,061 70,850 53,149
% of Total 6.2 6.3 5.2
Personal Computer Software 39,418 45,261 37,486
% of Total 3.7 4.0 3.7
---------- ---------- ----------
TOTAL $1,066,566 $1,121,705 $1,020,237
========== ========== ==========
2
Business Segments
-----------------
The Company operates in one business segment, selling home entertainment
software to mass merchant and specialty chain stores, drugstores and
supermarkets. The Company has both United States and Canadian operations which
are set forth below. Operations in Mexico were not material in fiscal 1994.
DOLLAR AMOUNTS IN THOUSANDS
------------------------------------
1994 1993 1992
---------- ---------- ----------
Net sales:
United States $1,017,993 $1,062,723 $ 969,944
Canada 48,573 58,982 50,293
---------- ---------- ----------
Total net sales $1,066,566 $1,121,705 $1,020,237
========== ========== ==========
Operating income:
United States $ 70,574 $ 94,313 $ 85,007
Canada 920 5,067 5,615
General corporate expense, net (25,353) (27,672) (25,029)
---------- ---------- ----------
Income before income taxes $ 46,141 $ 71,708 $ 65,593
========== ========== ==========
Identifiable assets:
United States $ 614,215 $ 624,322 $ 619,806
Canada 26,783 34,754 35,269
---------- ---------- ----------
Total assets $ 640,998 $ 659,076 $ 655,075
========== ========== ==========
GENERAL
-------
The Company is a link between manufacturers of home entertainment software
products and mass merchant chain stores. Customers purchase from Handleman due
to the value-added benefits the Company adds to the basic product, and due to
the benefit of only dealing with one vendor. Manufacturers utilize the
Company's services to avoid the necessity of distributing to thousands of
individual stores throughout a vast geographic range. Information regarding the
number of active vendors from which the Company purchases, number of titles the
Company is currently distributing and number of retail departments presently
serviced follows:
NUMBER OF NUMBER OF
TITLES CURRENTLY RETAIL
NUMBER OF DISTRIBUTED DEPARTMENTS
VENDORS BY THE COMPANY SERVICED
--------- ---------------- -----------
Music 200 22,900 8,200
Video 153 5,700 7,500
Books 200 7,000 2,200
Software 130 800 2,800
The Company is also engaged in acquiring licenses providing exclusive rights for
the duplication and distribution of certain video products. These activities
are conducted by Video Treasures, Inc., a wholly owned subsidiary of the
Company. Video Treasures' fiscal 1994 sales, including $13.7 million in sales
to Handleman Company, were $34.8 million, compared to $33.2 million in the prior
year. Video Treasures currently has over 2,000 titles available for
distribution in its catalog. Video Treasures is continuously seeking to expand
its product catalog with budget and selected frontline titles.
3
Vendors
-------
An important reason the Company's customers utilize its services is due to the
multitude of vendors offering products for-sale, the complexity of vendor
programs, the "hits" nature of the business, and the high risk of inventory
obsolescence.
The Company must anticipate consumer demand for individual titles. In order to
maximize sales, the Company must be able to immediately react to "breakout"
titles, while simultaneously minimizing inventory exposure for artists or titles
which do not sell. In addition, because the Company distributes throughout the
U.S. and Canada, it must adapt selections it offers to local tastes. This is
accomplished via a coordination of national and local purchasing responsibility,
both monitored by inventory control programs.
The Company purchases from many different vendors. The volume of purchases from
individual vendors fluctuates from year-to-year based upon the saleability of
selections being offered by such vendor. Though within each product line a
small number of major, financially sound vendors account for a high percentage
of purchases, product must be selected from a variety of vendors in order to
maintain an adequate selection for consumers. The Company must closely monitor
its inventory exposure and accounts payable balances with smaller vendors which
may not have the financial resources to honor their return commitments. At this
time, the high risk vendors which require close monitoring tend to be
concentrated in the video and software product lines.
Since the public's taste in prerecorded music, video, books, and personal
computer software is broad and varied, Handleman is required to maintain large
inventories to satisfy diverse tastes. The Company minimizes the effect of
obsolescence through planned purchasing methods and computerized inventory
controls. Since substantially all vendors from which the Company purchases
product offer some level of return allowances and price protection, the
Company's exposure to markdown risk is limited unless vendors are unable to
fulfill their return obligation or non-saleable product purchases exceed vendor
return limitations. It is possible that the Company may possess in its
inventories certain product that it cannot utilize in the ordinary course of
business and may only be returnable with cost penalties or may be non-returnable
until the Company can comply with the provisions of the vendor's return
policies. Vendors offer a variety of return programs, ranging from 100% returns
to zero return allowance. Other vendors offer incentive and penalty
arrangements to restrict returns.
Handleman generally does not have distribution contracts with manufacturers or
suppliers; consequently, its relationships with them may be discontinued at any
time by such manufacturers or suppliers, or by Handleman.
4
Customers
---------
Handleman Company's customers utilize its services for a variety of reasons.
The Company selects products from a multitude of vendors offering numerous
titles, different formats (e.g., cassettes, compact discs) and different payment
and return arrangements. As a result, customers avoid most of the risks
inherent in product selection and the risk of inventory obsolescence.
Handleman also offers its customers a variety of "value-added" services:
STORE SERVICE: Sales representatives visit individual retail stores and meet
with store management to discuss upcoming promotions, special merchandising
efforts, department changes, current programs, or breaking releases which will
increase sales. They also monitor inventory levels, check merchandise displays,
and install point-of-purchase advertising materials.
ADVERTISING: Handleman supplies point-of-purchase materials and assists
customers in preparing radio, television and print advertisements.
FIXTURING: Handleman provides specially designed fixtures that emphasize
product visibility and accessibility.
FREIGHT: Handleman coordinates delivery of product to each store.
PRODUCT EXCHANGE: Handleman protects its continuing customers against product
markdowns by offering the privilege of exchanging slower-selling product for
best sellers.
The nature of the Company's business lends itself to computerized ordering and
distribution techniques, which the Company pioneered and implemented in the
United States and Canada through development of its computerized system, known
as Retail Inventory Management Systems (RIMS). RIMS is refined continuously to
meet the more sophisticated needs of its customer base. RIMS captures consumer
demand and integrates retail inventory control with ordering and distributing
functions. RIMS can also accept transmissions of customer point-of-sale data so
as to immediately react to store selling patterns. Using RIMS, the Company is
able to tailor the inventories of individual stores to reflect the customer
profile of each store and to adjust inventory levels, product mix and selections
according to seasonal and current selling trends.
The Company determines the selections to be offered in its customers' retail
stores, and ships these selections to the stores from one of its distribution
centers located throughout North America. Slow selling items are removed from
the stores by the Company and are recycled for redistribution or returned to the
manufacturers. Returns from customer stores occur for a variety of reasons,
including new releases which did not achieve their expected sales potential, ad
product to be returned after the ad has run, regularly scheduled realignment
pick-ups and customer directed returns. The Company provides a reserve for the
gross profit margin impact of expected customer returns.
During the fiscal year ended April 30, 1994, one customer, Kmart Corporation,
accounted for approximately 41% of the Company's consolidated sales, while a
second customer, Wal-Mart, accounted for approximately 26%. Handleman may not
have contracts with its customers, and such relationships may be discontinued at
any time by the customers or Handleman; the discontinuance of the relationships
with either of the two largest customers would have a materially adverse effect
upon the Company's future sales and earnings.
5
Operations
----------
The Company distributes products from facilities throughout the U.S. and Canada.
Besides economies of scale and through-put considerations in determining the
number of facilities it operates, the Company must also consider freight costs
to and from customers' stores and the importance of timely delivery of new
releases. Due to the nature of the home entertainment software business,
display of new releases close to authorized "street dates" is an important
driver of both retail sales and customer satisfaction.
The Company also operates four regional return centers in the United States as a
means to expedite the processing of customer returns. In order to minimize
inventory investment, customer returns must be sorted and identified for either
redistribution or return to vendors as expeditiously as possible. An item
returned from one store may actually be required for shipment to another store.
Therefore, timely recycling prevents purchasing duplicate product for a store
whose order could be filled from returns from other stores.
The Registrant has established a distribution company, with its headquarters and
warehouse in Mexico City, to supply music and video products to retail outlets
throughout Mexico
On June 9, 1994, the Company announced that it was realigning its Western region
by replacing certain distribution centers with a new automated distribution
center ("ADC") to be located in Sparks, Nevada. The implementation of the ADC
will reduce operating costs and decrease inventory levels, while improving the
Company's speed and reliability in supplying products to its customers. See Note
4, Provision for Facility Realignment, on page 24 under Item 8, for additional
information regarding the facility realignment.
The Company is installing a new proprietary inventory management system
("PRISM"). As of April 30, 1994, PRISM had been installed in three branches,
and it is scheduled to be installed in the remaining U.S. and Canadian, music
and video shipping branches and return centers during fiscal 1995. PRISM
automates and integrates the functions of ordering product, receiving,
warehousing, order fulfillment, ticket printing, perpetual inventory maintenance
and accounts payable. PRISM also provides the basis to develop title specific
billing to allow the Company to better serve its customers.
Competition
-----------
Handleman is primarily a specialized merchandiser (rackjobber) of prerecorded
music, video, books and personal computer software. The business of the
Company is highly competitive as to both price and alternative supply
arrangements in all of its product lines. The Company's customers compete with
alternative sources from which consumers could purchase the same product, such
as (1) record and book clubs, (2) video rental outlets, and (3) specialty retail
outlets. The Company competes directly for sales to its customers with (1)
manufacturers which bypass wholesalers and sell directly to retailers, (2)
independent distributors, and (3) other specialized merchandisers. In addition,
some large mass merchants have "vertically integrated" so as to provide their
own rackjobbing. Some of these companies, however, also purchase from
independent rackjobbers.
The Company believes that the distribution of home entertainment software will
remain highly competitive. The Company believes that customer service and
continual progress in operational efficiencies are the keys to growth in this
competitive environment.
6
Industry Outlook
----------------
The following are some statistics from various industry sources.
. According to the Electronic Industries Association ("EIA"), compact disc
hardware sales increased 27% to 20.5 million units in 1993 from 16.1 million
units in 1992. As a result, penetration into U.S. households has reached 43%.
. Video cassette recorder ("VCR") penetration into U.S. households reached 82%
in 1993, and is expected to grow to approximately 90% by 1997, according to
Veronis, Suhler & Associates ("Veronis").
. According to the EIA, sales of personal computers increased 10% to 7.8 million
units in 1993, and are expected to increase an additional 11% in 1994.
While Handleman does not market home electronic hardware, its business is
closely correlated to the health of the consumer electronics market and
developments within that industry. The Company's expertise lies in the
selection of the best product available from the multitude of suppliers for each
hardware format.
Information regarding industry outlook by product line follows:
Music
- -----
According to the Recording Industry Association of America (RIAA), the U.S.
music industry posted sales, at list price, of $10.0 billion in 1993, growing
11% from $9.0 billion in 1992. According to Veronis, the U.S. market is
expected to grow at a 7.4% compound annual rate through 1997, to a total market
size of approximately $13 billion, at list.
Compact discs ("CDs") remained the catalyst of music industry growth in 1993. In
1993, net revenues from CD sales increased over 22% to $6.5 billion for the
year.
Despite the growing dominance of CDs, cassettes still remain a popular format.
Industry-wide sales of cassettes, including cassette singles, were $3.2 billion
in calendar 1993. Car stereos and portable systems, two areas where CDs have
had very little impact, still rely almost entirely on the analog cassette. The
size, cost and convenience of cassettes are also important factors in the
continuing popularity of this music format.
The Canadian Recording Industry Association reported results similar to its U.S.
counterpart. Net revenues rose 12% from $467 million in 1992 to $525 million in
1993. This increase is again due to the continued growth in CDs, sales of which
increased 21% in 1993 to $368 million.
Video
- -----
The continued success of VCR hardware has translated directly into increased
sell-through revenues. According to Veronis, for-sale home video in the United
States was a $4.2 billion business in 1993, at retail, growing 12% from 1992.
Media analysts Paul Kagan Associates project industry video sales to be $7
billion by 1997, at retail.
The Company is monitoring developments within the Pay Per View (PPV) market, but
does not perceive such developments as a near term threat to the sell-through
video market. From a longer-term perspective, the Company believes PPV, in some
way, shape or form, is probably inevitable. However, PPV replacing video sell-
through is not believed to be inevitable. There are numerous reasons why the
Company and many industry experts feel this way. First is cost. The cost of
PPV systems will be high and for many consumers, prohibitive. Second, PPV is
perceived to be a substitute for rental more than it is for sell-through. In
fact, some feel that PPV will serve to increase the sell-through market by
increasing consumer awareness of video product. Finally, PPV's impact on sell-
through will be limited because PPV cannot replace the appealing characteristics
of video sell-through. Sell-through offers consumers the shopping experience,
the ability to collect and display, and the option to give a video as a gift.
7
Books
- -----
Consumer interest in reading continues to remain strong according to industry
sources. Book industry sales grew 7.0% in 1993 to $14.4 billion, according to
Veronis. In addition, consumer books are projected to grow at a 7.4% compound
annual rate to $19.2 billion by 1997.
The book industry is a more mature market, and thus a less volatile market, than
either the music or video industry. However, mass media promotions have helped
spur increased interest and consumer demand. Both paperbacks and hardcovers are
being promoted via print and television advertising, and many talk show programs
profile authors and their books. In addition, mega-star authors such as John
Grisham, Stephen King and Danielle Steel continue to produce best sellers which
are purchased by their loyal readers.
Software
- --------
Approximately 7.8 million personal computers ("PCs") were sold to dealers in
1993, up 715,000 units from 1992, according to the EIA. This growth is expected
to carry forward to 1994, with a further 12% increase in PC sales projected by
the EIA. These growth rates are indicative of the strong demand for personal
computers and the software to operate them.
One of the factors helping propel PC sales has been the steady decrease in PC
per unit prices. For example, a state-of-the-art PC in January 1990 could have
had a retail price up to $5,995. In June 1994, a comparable PC cost less than
$1,000. The retail price of a PC is now in the price range where a typical mass
merchant shopper is able to purchase a PC and this accordingly spurs sales of
software products at the mass merchant outlet.
The vast majority of PC sales in the U.S. are IBM compatible units which utilize
a DOS operating system. However, a new operating system, Windows, is quickly
growing in popularity. The advent of this new technology is exciting for
software manufacturers, distributors and retailers, because as PC owners switch
to Windows, they often purchase the Windows version of their current software.
This effect is similar to music buyers rebuilding their libraries with CDs.
* * * * *
See Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 2, Acquisition of Business, on page 24 under Item
8, for additional information regarding the Company's activities.
The Company's sales and earnings are of a seasonal nature. Note 10,
Quarterly Financial Summary (Unaudited), on page 28 under Item 8 discloses
quarterly results which indicate the seasonality of the Company's business.
The Company has approximately 3,742 employees, of whom approximately 490
are members of various local unions.
8
Item 2. PROPERTIES
The Company leases 6 warehouses in the United States and 3 in Canada. The
U.S. leased warehouses are located in the states of Missouri, New York, Ohio,
Oregon, Indiana, and Maryland. The Company also leases satellite sales offices
in Massachusetts (381 sq. ft.) and Minnesota (6,000 sq. ft.). In Canada, leased
warehouses are located in the provinces of Alberta, Ontario and Quebec. The
Company owns warehouses in Sparks, Nevada; Brighton, Michigan; Chicago,
Illinois; Dallas, Texas; Los Angeles, California; Atlanta, Georgia; Little Rock,
Arkansas; Tampa, Florida; Baltimore, Maryland; Cincinnati, Ohio and Denver,
Colorado. The Company owns two buildings in Troy, Michigan; one facility is the
130,000 square feet corporate office building, and the second facility is the
20,000 square feet building which houses the Company's print shop. The Atlanta,
Little Rock and Troy buildings are encumbered by Economic Development
Corporation Revenue Bonds as explained in Note 6 to Handleman's Consolidated
Financial Statements under Item 8. The bonds were issued in connection with the
construction of these buildings.
Item 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Registrant or any
of its subsidiaries is a party other than ordinary routine litigation incidental
to the business.
Item 4. SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS
Not applicable.
9
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON
STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange, Chicago
Stock Exchange, and Pacific Stock Exchange.
Below is a summary of the market price of the Company's common stock as traded
on the New York Stock Exchange:
Fiscal Year Ended
-----------------------------------
April 30, 1994 May 1, 1993
-------------- ---------------
Quarter Low High Low High
------- ------ ------ ------ -------
First....... 10 3/8 15 1/4 12 1/2 15 1/8
Second...... 9 7/8 12 3/4 10 7/8 15
Third....... 11 5/8 13 7/8 10 5/8 15 5/8
Fourth...... 10 1/2 14 14 1/2 16
-----------------------------------------------------
As of July 15, 1994, the Company had 3,423 shareholders of record.
Below is a summary of the dividends declared during the past two fiscal years:
Fiscal Year Ended
--------------------------------
Quarter April 30, 1994 May 1, 1993
------- ---------------- --------------
First.......... $.11 $.10
Second......... .11 .10
Third.......... .11 .10
Fourth......... .11 .11
---- ----
TOTAL..... $.44 $.41
==== ====
10
Item 6. SELECTED FINANCIAL DATA
HANDLEMAN COMPANY
FIVE YEAR REVIEW
(amounts in thousands except per share data and ratios)
-----------------
1994 % 1993 % 1992 % 1991 % 1990 %
----------- ------ ----------- ------ ----------- ------ --------- ------ --------- ------
SUMMARY OF OPERATIONS:
Net sales $1,066,566 100.0 $1,121,705 100.0 $1,020,237 100.0 $702,737 100.0 $716,622 100.0
Gross profit, after direct
product costs 248,049 23.3 278,159 24.8 257,711 25.3 185,874 26.5 190,128 26.5
Selling, general &
administrative expenses 186,161 17.5 191,059 17.0 176,396 17.3 142,127 20.2 129,716 18.1
Depreciation: included in
selling, general &
administrative expenses 24,189 2.3 21,722 1.9 20,399 2.0 15,765 2.2 13,992 2.0
Amortization of acquisition
costs 7,536 .7 8,679 .8 7,365 .7 137 -- 50 --
Nonrecurring acquisition &
integration expenses -- -- -- -- 1,323 .1 3,500 .5
Interest (income) expense, net 6,211 .6 6,713 .6 7,034 .7 1,606 .2 61 --
Income before income taxes 46,141 4.3 71,708 6.4 65,593 6.4 38,504 5.5 60,301 8.4
Income taxes 18,485 1.7 27,965 2.5 25,580 2.5 15,017 2.1 23,511 3.3
Effective tax rate 40.1% 39.0% 39.0% 39.0% 39.0%
Net income 27,656 2.6 43,743 3.9 40,013 3.9 23,487 3.3 36,790 5.1
Dividends 14,701 13,589 13,258 13,081 12,780
Average number of shares
outstanding 33,389 33,229 33,166 32,771 32,646
Earnings per share $ 0.83 $ 1.32 $ 1.21 $ .72 $ 1.13
Dividends per share 0.44 .41 .40 .40 .39
FINANCIAL DATA:
Cash and receivables $ 237,846 $ 257,319 $ 250,169 $128,784 $129,454
Inventories 234,594 241,502 240,369 167,073 165,326
Current assets 477,376 501,052 491,975 296,611 295,701
Additions to property and
equipment 28,737 33,391 22,714 16,068 37,506
Total assets 640,998 659,076 655,075 423,727 414,345
Debt, current 33,200 17,860 -- 23,600 --
Current liabilities 261,227 259,723 254,824 170,052 175,582
Debt, non-current 76,364 105,702 135,750 15,930 15,785
Working capital 216,149 241,329 237,151 126,559 120,119
Shareholders' equity 299,493 288,700 260,861 233,614 220,382
FINANCIAL RATIOS:
Quick ratio
(Cash and receivables/
current liabilities) .9 1.0 1.0 .8 .7
Current ratio
(Current assets/current
liabilities) 1.8 1.9 1.9 1.7 1.7
Inventory turnover *
(Direct product costs/
average inventories) 3.2 3.3 3.5 3.1 3.2
Debt to equity ratio
(Debt, non-current/
shareholders' equity) 25.5% 36.6% 52.0% 6.8% 7.2%
Return on beginning
shareholders' equity
(Net income/beginning
shareholders' equity) 9.6% 16.8% 17.1% 10.7% 18.8%
* Inventory turnover ratio has been restated for prior years to conform with
current year calculation method.
Note: See Item 7., Management's Discussion and Analysis of Financial
Condition and Results of Operations, and Note 2, Acquisition of
Business, on page 24 under Item 8., for additional information
regarding the Company's activities.
11
Item 7.
Management's Discussion and
Analysis of Financial Condition
and Results of Operations
COMPARISON OF 1994 WITH 1993
- ----------------------------
Net sales for fiscal 1994 were $1.07 billion versus $1.12 billion last year, a
decrease of $55.1 million or 5%. Following is a discussion regarding each of
the Company's four major product lines.
MUSIC - Sales for fiscal 1994 were $571.6 million, compared to $626.9 million in
fiscal 1993, a decrease of $55.3 million or 9%. The Company attributes the
decline in sales of music product to two primary factors. First was the impact
of customer inventory concerns, which resulted in reduced sales volume and
increased merchandise returns. The second factor was a reduction in the number
of departments serviced.
Within the music category, the proportion of compact disc ("CD") sales to the
overall sales mix continues to increase. According to the Recording Industry
Association of America ("RIAA"), a music industry trade association, industry-
wide CD shipments at list price reached 65% of total music revenue in calendar
1993. Handleman's CD sales for fiscal 1994 were $278.1 million, or 49% of its
music sales. In fiscal 1993, CD's accounted for 46% of Handleman's music sales.
CD sales growth, like any software product, is influenced by growth in the
underlying hardware. In 1993, the installed base of CD players was 43% of U.S.
households, according to the Electronic Industries Association ("EIA"). As CD
hardware continues to be purchased by middle-income Americans, who tend to be
shoppers at mass merchant outlets (the Company's primary customer), Handleman's
sales of CDs should continue to grow.
The gross profit margin percentage on CD sales is lower than on cassette sales.
As a result of CD unit sales prices, however, being greater than cassette unit
sales prices, gross profit dollars per CD unit sold are higher than gross profit
dollars per cassette unit sold.
Music sales are driven by a continuous supply of releases from popular artists,
as well as emerging new artists. Below is a summary of Handleman's music sales
by genre, as a percent to total music sales dollars.
MUSIC SALES BY GENRE
YEAR ENDED
_____________________
April April April
1994 1993 1992
----- ----- -----
Rock 36% 34% 40%
Country 23 25 19
Budget 18 20 18
Soul 7 8 10
Other 16 13 13
--- --- ---
100% 100% 100%
=== === ===
Country music continues to be popular. Mass merchant stores serviced by
Handleman sell more country music as a percentage of total music volume than do
specialty music stores. Rock music continues to be the largest sales category
for both Handleman and the music industry.
A statistical overview of the U.S music industry as contained in the RIAA 1993
annual report showed that music buyers are continuing to spend more at mass
merchant and discount stores than in past years. The mass merchant share of
music sales increased to 24% in 1993, from 16% in 1989. During the same time
period, the specialty music store market share decreased from 72% to 60%.
Veronis, Suhler & Associates ("Veronis"), an entertainment industry investment
banker, forecasted in July 1993 that the U.S. music market will register sales
growth at a 7.4% compounded annual rate through 1997.
12
VIDEO - Sales for fiscal 1994 were $389.5 million, compared to $378.6 million in
fiscal 1993, a $10.9 million or 3% increase. This sales level of video product
was the highest for any year in the Company's history.
Movies, including G-rated family oriented features, and children's product are
the largest unit sales categories for Handleman, representing approximately 80%
of unit sales. However, a full catalog assortment is necessary to achieve
maximum sales. The Company maintains a commitment to its video program with
approximately 5,700 titles in its catalog.
The continued penetration of video cassette recorders ("VCR") into U.S.
households has helped increase sell-through video revenue. The VCR's
penetration into U.S. households reached an estimated 82% in 1993; furthermore
20% of households with a VCR now own a second VCR. Much of this growth has been
due to the steady decline of VCR prices. In 1979 the average price of a VCR was
approximately $1,200. According to the EIA, the average retail price of a VCR
dropped to $294 by 1987 and to $231 by 1993. Although growth is predictably
slowing, Veronis forecasts that an installed base of 90% of U.S. households
should be achieved by 1996. This penetration level represents a base capable of
supporting expansion of the home video market through the 1990's.
The continual release of movie box office hits builds consumer awareness of for-
sale videos, which drives sales not only for those titles but for other videos
as well. Articles appearing in both Billboard and Video Store Magazine state
that calendar 1994 will be an excellent year for direct-to-sell-through titles
as movie studios are increasingly willing to by-pass the rental market as the
first window of opportunity for a title. Further, instead of releasing the
majority of titles for the Christmas selling season, studios are scheduling
major titles for release throughout the year.
Veronis projects that calendar 1993 industry video sales hit a record high of
$4.2 billion, at retail, a 12% increase over calendar 1992. According to media
analysts Paul Kagan Associates, industry video sales are projected to be $7
billion by 1997, at retail.
BOOKS - Sales for fiscal year 1994 were $66.1 million, compared to $70.9 million
last year, a decrease of $4.8 million or 7%. This decrease was primarily due to
a reduction in the number of departments supplied.
Consumer interest in reading continues to remain strong according to industry
sources. Book industry sales grew an estimated 7.0% to $14.4 billion at retail
in 1993. According to Veronis, consumer books are projected to grow at a 7.4%
compounded annual rate to $19.2 billion at retail by 1997. Much of this growth
appears to be fueled by increased reading habits by a larger segment of the
population, increasing literacy among Americans, and the ability of the book
publishing industry to better define and target consumer markets.
PERSONAL COMPUTER SOFTWARE - Sales for fiscal 1994 were $39.4 million, compared
to $45.3 million for fiscal 1993, a decrease of $5.9 million or 13%. The
decline in sales was primarily due to the loss of two customers in the third
quarter this year, who switched to suppliers that do not provide in-store
service.
Personal computers ("PCs") continue to gain acceptance in U.S. households as
computers become more user friendly. According to the EIA, the installed base
of computers has increased from 7% in 1983 to 37% of households at the end of
1993. The installed base is expected to increase to 40% by 1995. Mass
merchants increasingly play an important role in the growth of this market.
Handleman is expected to benefit as more middle-income Americans, the typical
shoppers at stores supplied by Handleman, purchase computers.
One of the factors helping propel PC sales has been a steady decrease in PC unit
prices. For example, a state-of-the-art PC in January 1990 could have had a
retail price up to $5,995. In June 1994, a comparable PC cost less than $1,000.
The retail price of a PC is now in the price range where a typical mass merchant
shopper is able to purchase a PC and this accordingly spurs sales of software
products at the mass merchant outlet.
The retail price of PC software is rapidly declining due to strong competition
among software companies trying to capture market share in their respective
categories. For example, retail prices for many productivity software packages
have fallen from an introductory price of $300 - $500 to less than $100. In
fiscal 1994, over 70% of Handleman's unit sales were for software titles with
suggested retail prices under $15. This trend should benefit mass merchants, as
their shoppers are more likely to purchase the lower-priced software.
13
OTHER DATA - The gross profit margin percentage for fiscal year 1994 was 23.3%,
compared to 24.8% for fiscal year 1993. The reduction in gross profit margin
percentage was primarily due to an increase in mega-hit video sales, which carry
lower gross profit margins than other products, and a decrease in music gross
profit margin partially attributable to a decline in sales of high margin budget
products and to an increasing percentage of sales of CDs.
Selling, general and administrative expenses for fiscal year 1994 declined $4.9
million, to $186.2 million or 17.5% of net sales, from $191.1 million or 17.0%
of net sales last year. The decrease in selling, general and administrative
expense dollars was primarily due to cost reductions initiated by Company
management and the lower sales volume. Except for the first quarter of fiscal
1994, selling, general and administrative expenses, as a percent of net sales,
were lower in each fiscal quarter compared to the corresponding quarter in
fiscal 1993. Selling, general and administrative expenses exclude the
amortization of costs associated with prior year acquisitions which amounted to
$7,536,000 in fiscal 1994.
On June 9, 1994, the Company announced that it was realigning its Western region
by replacing certain distribution centers with a new automated distribution
center ("ADC") to be located in Sparks, Nevada. The Company recorded a $2.0
million pre-tax charge against fourth quarter fiscal 1994 results related to
costs associated with the transition from the current distribution structure to
the ADC. This charge included costs for disposal of certain facilities as well
as relocation expenses and certain compensation costs. The implementation of
the ADC will reduce operating costs and decrease inventory levels, while
improving the Company's speed and reliability in supplying products to its
customers.
Net interest expense for fiscal 1994 was $6,211,000, compared to $6,713,000 in
fiscal 1993. The decline in net interest expense was primarily the result of
lower interest rates in fiscal 1994 compared to fiscal 1993.
Net income for fiscal 1994 was $27.7 million or $.83 per share, compared to
$43.7 million or $1.32 per share for fiscal 1993. The reduction in net income
was primarily attributable to the reduction in sales and the decrease in gross
profit margin percentage.
COMPARISON OF 1993 WITH 1992
- ----------------------------
Net sales for fiscal 1993 were $1.12 billion versus $1.02 billion in fiscal
1992, an increase of $101.5 million or 10%. The first quarter of fiscal 1993
included sales of approximately $40.0 million to customers gained following the
July 26, 1991 purchase of assets from Lieberman Enterprises. The first quarter
of fiscal 1992 did not include sales to such customers since the transaction did
not occur until the end of the first quarter of fiscal 1992. The Company's
fiscal year ends on the Saturday closest to April 30th; as a result, fiscal 1992
was a 53 week year while fiscal 1993 was a 52 week year. Following is a
discussion regarding each of the Company's four major product lines.
MUSIC - Sales for fiscal 1993 were $626.9 million, compared to $542.3 million in
fiscal 1992, an increase of $84.6 million or 16%. The increase in music sales
was achieved primarily through increased sales of compact discs ("CD") and the
continued popularity of country music. The Company benefits from the strength
in country music sales since its market share of the country music segment of
the industry exceeds its share of overall music industry sales.
The Company's fiscal 1993 CD sales of $287 million represented a 38% increase
over the prior year's CD sales volume. CDs accounted for 46% of Handleman's
music sales in fiscal 1993 versus 38% of the Company's music sales in fiscal
1992.
VIDEO - Sales for fiscal 1993 were $378.6 million, compared to $387.3 million in
fiscal 1992, a decrease of 2%. The decline in video sales was primarily due to
lower sales of Disney products. In July 1992, Disney began selling its video
products directly to Handleman's largest customer. Excluding Disney, sales of
other video products in fiscal 1993 would have increased approximately 5% over
fiscal 1992 video sales. Pricing on Disney product is so competitive that such
products have the lowest gross profit margin percentages of any Handleman-
supplied video product.
BOOKS - Sales for fiscal 1993 were $70.9 million. The increase of $17.8 million
or 33% over fiscal 1992 sales was primarily due to approximately 750 departments
being added to the Company's book service program during fiscal 1993.
14
PERSONAL COMPUTER SOFTWARE - Sales for fiscal 1993 were $45.3 million, compared
to $37.5 million in fiscal 1992, an increase of $7.8 million or 21%. Software
sales continued to benefit from the penetration of personal computers into U.S.
households.
OTHER DATA - The gross profit margin percentage for fiscal 1993 was 24.8%,
compared to 25.3% for fiscal 1992. The gross profit margin percentage for the
video product line improved in fiscal 1993 as a result of the decline in sales
of low-margin Disney products. The music gross profit margin percentage
declined slightly in fiscal 1993 as CDs (which carry lower gross profit margin
percentages than cassettes) became a proportionately larger share of the
Company's music sales mix. Declines during fiscal 1993 in book and personal
computer software gross profit margin percentages were the primary reason for
the overall decline in gross profit margin percentage in fiscal 1993, compared
to fiscal 1992. The decline in book and personal computer software gross profit
margin percentages was partially attributable to increased sales to certain
customers with whom the Company earns a lower gross profit margin percentage
because of the non-service nature of the sales arrangement. An increase in the
proportion of book and personal computer software sales to total Company sales
also contributed to the overall decline in gross profit margin percentage since
these product lines carry gross profit margin percentages lower than the
Company's overall margin percentage.
Selling, general and administrative expenses for fiscal 1993 were $191.1 million
(17.0% of net sales), compared to $176.4 million (17.3% of net sales) in fiscal
1992. The dollar increase was primarily due to increases in variable expenses
related to the higher sales level. However, the higher net sales provided the
opportunity for efficiencies which lowered expenses as a percentage of net
sales. Selling, general and administrative expenses exclude the amortization of
costs associated with prior year acquisitions which amounted to $8,679,000 in
fiscal 1993.
Net interest expense for fiscal 1993 was $6,713,000, compared to $7,340,000 for
fiscal 1992. The decrease was the result of both lower average borrowings
throughout the period and lower average interest rates in fiscal 1993 compared
to fiscal 1992.
Net income for fiscal 1993 was $43.7 million, or $1.32 per share, compared to
$40.0 million or $1.21 per share for fiscal 1992.
LIQUIDITY AND CAPITAL RESOURCES - Working capital at April 30, 1994 was $216
million, compared to $241 million at May 1, 1993, a decrease of $25 million or
10%. The decrease in working capital resulted primarily from a $16 million
increase in the amount of senior notes classified as current liabilities. The
working capital ratio was 1.8 to 1 at April 30, 1994 and 1.9 to 1 at May 1,
1993. The Company's capital assets consist primarily of display fixtures and
facilities. The Company also acquires licenses for video, music and software
products which it distributes. Purchases of these assets are expected to be
funded primarily by cash flows from operations.
In July 1994, the Company replaced its $147 million revolving credit agreement
with a five year, $250 million unsecured revolving credit agreement entered into
with a group of banks. Under the new agreement, the Company may elect to pay
interest under a variety of formulae tied principally to either prime or
"LIBOR". During the first three years of the agreement, the Company may elect
to enter into term loans with maturities not to exceed five years in length and
having a final maturity not later than July 12, 2001 for amounts up to an
aggregate of $150 million. Interest on these term loans will be based upon a
pre-determined formula. The agreement also provides for issuance of standby
letters of credit for maturities not to exceed one year. The Company expects to
use proceeds from the new credit agreement to pay-off the $31 million of senior
notes due on October 1, 1994 which bear an 8.44% annual interest rate.
EFFECTS OF INFLATION ON OPERATIONS
- ----------------------------------
The Company's financial statements have reported amounts based on historical
costs which represent dollars of varying purchasing power and do not measure the
effects of inflation. If the financial statements had been restated for
inflation, net income would have been lower because depreciation expense would
have to be increased to reflect the most current costs.
15
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and supplementary data are filed as a part of
this report:
Report of Independent Accountants
Consolidated Balance Sheet at April 30, 1994, May 1, 1993 and May 2, 1992.
Consolidated Statement of Income - Years Ended April 30, 1994, May 1, 1993 and
May 2, 1992.
Consolidated Statement of Shareholders' Equity - Years Ended April 30, 1994, May
1, 1993 and May 2, 1992.
Consolidated Statement of Cash Flows - Years Ended April 30, 1994, May 1, 1993
and May 2, 1992.
Notes to Consolidated Financial Statements
16
Report of Independent Accountants
To the Board of Directors and Shareholders of
Handleman Company:
We have audited the consolidated financial statements and the financial
statement schedules listed in Item 14(a) of this Form 10-K of Handleman Company
and Subsidiaries. These financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Handleman Company
and Subsidiaries as of April 30, 1994, May 1, 1993 and May 2, 1992, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand
Detroit, Michigan
June 16, 1994
17
HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
APRIL 30, 1994, MAY 1, 1993 AND MAY 2, 1992
(amounts in thousands except share data)
----------------
ASSETS 1994 1993 1992
- ------ --------- --------- --------
Current assets:
Cash and cash equivalents $ 10,568 $ 57,306 $ 34,775
Accounts receivable, less allowance of
$19,613 in 1994, $21,184 in 1993 and
$19,523 in 1992 for gross profit impact
of future returns 227,278 200,013 215,394
Merchandise inventories 234,594 241,502 240,369
Other current assets 4,936 2,231 1,437
-------- -------- --------
Total current assets 477,376 501,052 491,975
Property and equipment, net 112,027 112,829 108,670
Other assets, net of allowances 51,595 45,195 54,430
-------- -------- --------
Total assets $640,998 $659,076 $655,075
======== ======== ========
LIABILITIES
- -----------
Current liabilities:
Accounts payable $197,676 $200,394 $213,812
Debt, current 32,200 17,860 --
Income taxes, currently payable 3,677 7,124 9,393
Accrued and other liabilities 27,674 34,345 31,619
-------- -------- --------
Total current liabilities 261,227 259,723 254,824
Debt, non-current 76,364 105,702 135,750
Deferred income taxes 3,914 4,951 3,640
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock, par value $1.00; 1,000,000
shares authorized; none issued -- -- --
Common stock, $.01 par value; 60,000,000
shares authorized; 33,411,000, 33,218,000
and 33,276,000 shares issued in 1994,
1993 and 1992 334 332 333
Paid-in capital 31,900 29,136 29,870
Foreign currency translation adjustment and other (5,732) (804) 776
Retained earnings 272,991 260,036 229,882
-------- -------- --------
Total shareholders' equity 299,493 288,700 260,861
-------- -------- --------
Total liabilities and shareholders' equity $640,998 $659,076 $655,075
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
18
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED APRIL 30, 1994, MAY 1, 1993 AND MAY 2, 1992
(amounts in thousands except per share data)
1994 1993 1992
---------- ---------- ----------
Net sales $1,066,566 $1,121,705 $1,020,237
Direct product costs 818,517 843,546 762,526
---------- ---------- ----------
Gross profit 248,049 278,159 257,711
Selling, general and administrative expenses 186,161 191,059 176,396
Provision for facility realignment 2,000 -- --
Amortization of acquisition costs 7,536 8,679 7,365
Nonrecurring acquisition and integration
expenses -- -- 1,323
Interest expense, net 6,211 6,713 7,034
---------- ---------- ----------
Income before income taxes 46,141 71,708 65,593
Income taxes 18,485 27,965 25,580
---------- ---------- ----------
Net income $ 27,656 $ 43,743 $ 40,013
========== ========== ==========
Earnings per average common share outstanding
during the year $ .83 $ 1.32 $ 1.21
========== ========== ==========
Average number of common shares outstanding
during the year 33,389 33,229 33,166
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
19
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED APRIL 30, 1994, MAY 1, 1993 AND MAY 2, 1992
(amounts in thousands except per share data)
----------------
Foreign
Common Stock Currency
--------------- Translation Total
Shares Paid-In Adjustment Retained Shareholders'
Issued Amount Capital and Other Earnings Equity
------- ------ -------- ----------- --------- -------------
April 27, 1991 32,976 $330 $28,557 $ 1,600 $203,127 $233,614
Equity adjustment,
foreign currency
translation (824) (824)
Net income 40,013 40,013
Cash dividends, $.40
per share (13,258) (13,258)
Stock options exercised,
net of shares tendered
upon exercise 113 1 1,313 1,314
Other, net 187 2 2
------ ---- ------- ------- -------- --------
May 2, 1992 33,276 333 29,870 776 229,882 260,861
Equity adjustment,
foreign currency
translation (1,580) (1,580)
Net income 43,743 43,743
Cash dividends, $.41
per share (13,589) (13,589)
Stock options exercised,
net of shares tendered
upon exercise 11 137 137
Other, net (69) (1 ) (871) (872)
------ ---- ------- ------- -------- --------
May 1, 1993 33,218 332 29,136 (804) 260,036 288,700
Equity adjustment,
foreign currency
translation (2,197) (2,197)
Net income 27,656 27,656
Cash dividends, $.44
per share (14,701) (14,701)
Stock options exercised,
net of shares tendered
upon exercise 7 35 35
Common stock issued for
employee benefit plans 186 2 2,729 (2,731)
------ ---- ------- ------- -------- --------
April 30, 1994 33,411 $334 $31,900 $(5,732) $272,991 $299,493
====== ==== ======= ======= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
20
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED APRIL 30, 1994, MAY 1, 1993 AND MAY 2, 1992
(amounts in thousands)
----------------
1994 1993 1992
------------ ---------- ----------
Cash flows from operating activities:
Net income $ 27,656 $ 43,743 $ 40,013
----------- --------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 24,189 21,722 20,399
Amortization of acquisition costs 7,536 8,679 7,365
Amortization of video license advances 4,915 3,219 2,445
(Increase) decrease in assets from
operating activities:
Accounts receivable (27,265) 15,381 (94,527)
Merchandise inventories 6,908 (1,133) (42,165)
Other assets (706) 323 107
Increase (decrease) in liabilities from
operating activities:
Accounts payable (2,718) (13,418) 81,046
Income taxes, currently payable (3,447) (2,269) 5,014
Deferred income taxes (3,272) 3,923 2,860
Accrued and other liabilities (4,036) 514 18,005
----------- --------- ---------
Total adjustments 2,104 36,941 549
----------- --------- ---------
Net cash provided by operating activities 29,760 80,684 40,562
----------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment (28,737) (33,391) (22,714)
Retirements of property and equipment 2,826 5,724 2,332
Video license advances (18,726) (2,394) (1,377)
Acquisition of certain assets of Lieberman
Enterprises, Inc. -- -- (74,655)
----------- --------- ---------
Net cash used by investing activities (44,637) (30,061) (96,414)
----------- --------- ---------
Cash flows from financing activities:
Repayments of short-term bank borrowings under
line of credit arrangement -- -- (23,600)
Issuances of debt 993,890 640,300 593,300
Payments of debt (1,008,888) (652,488) (474,224)
Cash dividends (14,701) (13,589) (13,258)
Proceeds from stock options exercised 35 137 1,314
Other changes in shareholders' equity, net ( 2,197) (2,452) (822)
----------- --------- ---------
Net cash provided by (used by)
financing activities (31,861) (28,092) 82,710
----------- --------- ---------
Net increase (decrease) in cash and
cash equivalents (46,738) 22,531 26,858
Cash and cash equivalents at
beginning of year 57,306 34,775 7,917
----------- --------- ---------
Cash and cash equivalents at
end of year $ 10,568 $ 57,306 $ 34,775
=========== ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
1. Accounting Policies:
-------------------
Business
The Company operates principally in one business segment: selling
prerecorded music, video, hardcover and paperback books and personal
computer software products primarily to mass merchants, and also to
specialty chain stores, drugstores and supermarkets.
Annual Closing Date
The Company's fiscal year ends on the Saturday closest to April 30th. Fiscal
years 1994 and 1993 consisted of 52 weeks, whereas fiscal 1992 consisted of
53 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned domestic and Canadian subsidiaries. All material
intercompany accounts and transactions have been eliminated.
Foreign Currency Translation
The Company utilizes the policies outlined in Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation", to convert the
balance sheet and operations of its Canadian subsidiary to United States
dollars.
Recognition of Revenue and Future Returns
Revenues are recognized upon shipment of the merchandise. The Company
reduces gross sales and cost of sales for expected returns at the time the
merchandise is sold.
Income Taxes
The Company employs the method required by Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Under this method,
deferred taxes arise from differences between financial reporting and tax
reporting.
Pension Plan
The Company has a noncontributory defined benefit pension plan covering
substantially all hourly and salaried employees. Pension benefits are based
upon length of service and average annual compensation for the five highest
years of compensation in the last 10 years of employment. Net periodic
pension cost is accrued on a current basis, and funded as permitted or
required by applicable regulations.
Inventory Valuation
Merchandise inventories are stated at the lower of cost (first-in, first-out
method) or market. The Company accounts for inventories using the full cost
method which includes costs associated with acquiring and preparing
inventory for distribution. Costs associated with acquiring and preparing
inventory for distribution of $16,289,000, $17,618,000 and $15,942,000 were
incurred during the years ended April 30, 1994, May 1, 1993 and May 2, 1992,
respectively. Merchandise inventories as of April 30, 1994, May 1, 1993 and
May 2, 1992 include $3,621,000, $3,503,000, and $3,127,000, respectively, of
such costs.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
----------------
1. Accounting Policies: (continued)
-------------------
Property and Equipment
Property and equipment is recorded at cost. Upon retirement or disposal, the
asset cost and related accumulated depreciation are eliminated from the
respective accounts and the resulting gain or loss is included in the
consolidated statement of income for the period. Repair costs are charged to
expense as incurred. Display fixtures placed in customers' stores have
minimum value, if any, outside of the store departments in which they are
initially placed.
Depreciation
Depreciation is computed using primarily the straight-line method based on
the following estimated useful lives:
Buildings and improvements 10-40 years
Display fixtures, equipment,
furniture and other 3-10 years
Leasehold improvements Lesser of lease term or
useful life
Licenses
--------
The Company acquires video licenses giving it exclusive rights to
manufacture and distribute certain prerecorded video products. The licenses
are included in other assets in the consolidated balance sheet and are
amortized over a period which is the lesser of the license agreement or its
expected useful life. As of April 30, 1994, May 1, 1993 and May 2, 1992,
licenses, net of amortization, amounted to $21,285,000, $7,474,000, and
$8,299,000, respectively.
Intangible Assets
Intangible assets, included in other assets in the consolidated balance
sheet, consist of excess cost over net assets of businesses acquired and
non-competition and other ancillary agreements. These assets are amortized
over periods ranging from 5 to 40 years using the straight-line method. As
of April 30, 1994, the weighted average period remaining to be amortized was
approximately 9 years.
Cash Flows
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Financial Instruments
The Company has evaluated the fair value of those assets and liabilities
identified as financial instruments by Statement of Financial Accounting
Standards No. 107. As of April 30, 1994, the Company has determined that the
fair value approximated the carrying values. Fair values have been
determined through information obtained from market sources and management
estimates.
Reclassifications
Certain 1993 and 1992 amounts have been reclassified to conform with
presentations adopted in 1994.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
----------------
2. Acquisition of Business:
-----------------------
On July 26, 1991, the Company acquired certain assets of Lieberman Enterprises,
Inc. (Lieberman), a specialty merchandiser of prerecorded music and video.
Assets acquired aggregating $74,655,000 consisted primarily of inventory and
supplies, display fixtures, certain warehouse equipment and non-competition and
other agreements (of the total purchase price, approximately $21,700,000 was
allocated to non-competition and other agreements). Costs of $1,323,000 which
were incurred in connection with the acquisition and integration of these assets
were charged against results of operations during fiscal 1992.
3. Sales and Accounts Receivable:
-----------------------------
The Company's customers are comprised mainly of mass merchant retail chains
located in the United States and Canada. For the years ended April 30, 1994,
May 1, 1993 and May 2, 1992, one customer accounted for approximately 41
percent, 38 percent and 37 percent of the Company's net sales, and a second
customer accounted for approximately 26 percent, 24 percent and 23 percent of
the Company's net sales, respectively. Collectively, these customers accounted
for approximately 69 percent, 54 percent and 51 percent of accounts receivable
at April 30, 1994, May 1, 1993 and May 2, 1992, respectively.
4. Provision for Facility Realignment
----------------------------------
The Company is realigning its Western region by replacing certain existing
distribution centers with a new automated distribution center (ADC). The
Company recorded a $2,000,000 pre-tax charge against fourth quarter fiscal 1994
results related to costs associated with the transition from the current
distribution structure to the ADC. This charge included costs for disposal of
certain existing facilities, as well as relocation expenses and certain
compensation costs.
5. Pension Plan:
------------
The Handleman Company Pension Plan's funded status, the components of net
pension expense, and the amount which is recorded in the Company's consolidated
balance sheet at April 30, 1994, May 1, 1993 and May 2, 1992 are as follows:
1994 1993 1992
------------ ------------ ------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $10,352,000,
$9,266,000 and $7,685,000, in 1994,
1993 and 1992, respectively $11,012,000 $ 9,734,000 $ 8,280,000
----------- ----------- -----------
Projected benefit obligation $13,401,000 $11,603,000 $11,388,000
Plan assets at fair value 12,781,000 12,967,000 11,381,000
----------- ----------- -----------
Plan assets in excess of (less than)
projected benefit obligation (620,000) 1,364,000 (7,000)
Unrecognized net loss (gain) from past
experience different from that assumed 389,000 (1,112,000) (5,000)
Unrecognized net gain from excess funding,
being amortized over eighteen years
beginning April 28, 1985 (1,085,000) (1,204,000) (1,323,000)
Unrecognized prior service cost 280,000 413,000 440,000
----------- ----------- -----------
Accrued pension liability included in
other liabilities $(1,036,000) $ (539,000) $ (895,000)
=========== =========== ===========
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
----------------
5. Pension Plan (continued)
------------------------
Weighted average discount rates of 8.0 percent, 8.0 percent and 8.5 percent at
April 30, 1994, May 1, 1993 and May 2, 1992, respectively, and a rate of
increase in future compensation levels of 5.0 percent for all periods were used
in determining the actuarial present value of the projected benefit obligation.
1994 1993 1992
--------- ----------- ---------
Net pension expense included the
following components:
Service cost $ 724,000 $ 601,000 $ 698,000
Interest cost 978,000 840,000 889,000
Actual return on plan assets (580,000) (1,524,000) (949,000)
Net amortization and deferral (625,000) 391,000 (78,000)
--------- ----------- ---------
Net pension expense $ 497,000 $ 308,000 $ 560,000
========= =========== =========
The expected long-term rate of return on assets was 8.5 percent for all years.
The assets are invested in various pooled investment funds and mutual funds
maintained by the Plan trustee and common stock of the Company.
6. Debt:
----
In November 1991, the Company entered into a $46,000,000 senior note agreement
with a group of institutional lenders, of which $15,000,000 was repaid on
October 1, 1993. The $31,000,000 balance of the note is due October 1, 1994 and
bears an 8.44% annual interest rate.
In June 1991, the Company entered into a contractually-committed, four year,
$175,000,000 revolving credit arrangement with a consortium of banks. In June
1993, the credit arrangement was amended and reduced to $147,000,000. As of
April 30, 1994, $70,100,000 was outstanding under the revolving credit
arrangement, at interest rates ranging from 4.44% to 6.75%. As the Company
intends to extend the maturities of the outstanding balance beyond one year, and
has the ability to do so, the debt has been classified as non-current.
Borrowings outstanding are due on the termination date of the arrangement.
Scheduled maturities for the senior note, revolving credit arrangement, and
Economic Development Corporation (EDC) limited obligation revenue bonds are as
follows:
1995 $32,200,000
1996 70,164,000
After 1999 6,200,000
The EDC bonds, senior note and the borrowings under the revolving credit
arrangement all contain certain restrictions, including working capital, debt
limitations and net worth. The EDC bonds are collateralized by land, buildings
and equipment with an aggregate net book value of approximately $16,333,000 at
April 30, 1994.
Interest expense for the years ended April 30, 1994, May 1, 1993 and May 2,
1992, was $7,029,000, $8,004,000 and $8,871,000, respectively. Interest paid
for the years ended April 30, 1994, May 1, 1993 and May 2, 1992 was $7,262,000,
$8,514,000 and $7,992,000, respectively.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
_______________
7. Income Taxes:
------------
The domestic and foreign components of income before income taxes for the years
ended April 30, 1994, May 1, 1993 and May 2, 1992 are as follows:
1994 1993 1992
----------- ----------- -----------
Domestic $46,928,000 $68,626,000 $61,878,000
Foreign (787,000) 3,082,000 3,715,000
----------- ----------- -----------
Income before income taxes $46,141,000 $71,708,000 $65,593,000
=========== =========== ===========
Provisions for income taxes for the years ended April 30, 1994, May 1, 1993 and
May 2, 1992 consist of the following:
1994 1993 1992
----------- ----------- -----------
Currently payable:
Federal $17,749,000 $18,739,000 $16,890,000
Foreign 249,000 1,174,000 1,882,000
State and other 3,759,000 4,129,000 3,950,000
Deferred, net:
Federal (2,418,000) 3,015,000 2,489,000
Foreign, state and other (854,000) 908,000 369,000
----------- ----------- -----------
$18,485,000 $27,965,000 $25,580,000
=========== =========== ===========
The following table provides a reconciliation of the Company's effective income
tax rate to the statutory federal income tax rate:
Percent of Income
-----------------------------
1994 1993 1992
----- ---- ----
Federal statutory rate 35.0% 34.0% 34.0%
State and local income taxes 5.0 4.5 4.5
Other .1 .5 .5
---- ---- ----
Effective tax rate 40.1% 39.0% 39.0%
==== ==== ====
Items that gave rise to significant portions of the deferred tax accounts at
April 30, 1994, May 1, 1993 and May 2, 1992 are as follows:
April 30, 1994 May 1, 1993 May 2, 1992
-------------------------- -------------------------- --------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities Assets Liabilities
- --------------------------------------------------------------------------------------------------------------------
Allowances $2,196,000 $ 3,794,000 $1,188,000 $ 7,972,000 $1,413,000 $ 4,886,000
Employee benefits 1,524,000 369,000 1,008,000 432,000 813,000 507,000
Property and equipment 1,054,000 5,708,000 490,000 5,757,000 569,000 4,809,000
Inventories 277,000 3,512,000 217,000 127,000 585,000 325,000
Other 319,000 76,000 257,000 233,000 86,000 377,000
----------- ----------- ---------- ----------- ---------- -----------
$5,370,000 $13,459,000 $3,160,000 $14,521,000 $3,466,000 $10,904,000
=========== =========== ========== =========== ========== ===========
The undistributed earnings of the Canadian subsidiary for which no U.S. federal
income tax liabilities have been recorded were $22,892,000 at April 30, 1994.
The Company intends to reinvest indefinitely the undistributed earnings of its
foreign subsidiary. Due to the availability of foreign tax credits, no
significant U.S. federal income tax liabilities are expected to result if such
earnings were distributed.
Income taxes paid in 1994, 1993 and 1992 were approximately $25,204,000,
$26,095,000 and $17,018,000, respectively.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
----------
8. Property and Equipment:
-----------------------
Property and equipment consists of the following:
1994 1993 1992
------------ ------------ ------------
Land $ 7,176,000 $ 8,044,000 $ 7,841,000
Buildings and improvements 44,056,000 43,417,000 41,327,000
Display fixtures 87,538,000 77,217,000 78,447,000
Equipment, furniture and other 40,940,000 39,735,000 34,603,000
Leasehold improvements 2,802,000 2,848,000 2,805,000
------------ ------------ ------------
182,512,000 171,261,000 165,023,000
Less accumulated depreciation
and amortization 70,485,000 58,432,000 56,353,000
------------ ------------ ------------
$112,027,000 $112,829,000 $108,670,000
============ ============ ============
9. Stock Plans:
-----------
The Company's shareholders approved the adoption of the Handleman Company
1992 Performance Incentive Plan (the "Plan"), which authorizes the granting
of stock options, stock appreciation rights and restricted stock. At any
given time, the maximum number of shares of stock which may be issued
pursuant to restricted stock awards or granted pursuant to stock options or
stock appreciation rights shall not exceed 5% of the number of shares of the
Company's common stock outstanding as of the immediately preceding fiscal
year end, less restricted stock, options and awards issued or granted under
the Plan since adoption in September 1992. As of April 30, 1994, 1,217,420
shares of the Company's stock are available for use under the Plan.
Pursuant to the restricted stock provisions of the Plan, the Company issued,
net of forfeitures, 185,521 shares of common stock during the year ended
April 30, 1994. These restricted shares are held in the custody of the
Company and vest only if specified performance goals are achieved. These
shares are treated as outstanding for purpose of calculating earnings per
share and payment of dividends. If the minimum performance goals under which
an award is issued are not satisfied, the shares are forfeited. If
performance goals are exceeded, a maximum of 144,875 additional shares can
be issued. The number of shares which may vest will be prorated to the
extent actual results are between minimum and maximum performance goals. The
Company did not record any compensation expense related to the restricted
stock in 1994 because minimum performance goals were not achieved.
Information with respect to options outstanding under the previous and
current stock option plans for the years ended May 2, 1992, May, 1 1993 and
April 30, 1994 is set forth below. Options were granted during such years at
no less than fair market value at the date of grant.
Number Option
Of Shares Price Range
---------- ---------------
Balance, April 27, 1991 817,672 $ 6.29 - $22.17
Granted 221,808 11.75 - 18.50
Terminated (51,838) 11.75 - 21.83
Exercised (136,247) 11.92 - 14.78
--------- ---------------
Balance, May 2, 1992 851,395 6.29 - 22.17
Granted 201,111 13.63 - 15.25
Terminated (28,300) 11.75 - 21.83
Exercised (11,736) 11.92 - 12.75
--------- ---------------
Balance, May 1, 1993 1,012,470 6.29 - 22.17
Granted 258,509 13.75 - 14.25
Terminated (40,275) 11.75 - 21.83
Exercised (13,250) 6.29 - 11.92
--------- ---------------
Balance, April 30, 1994 1,217,454 $11.75 - $22.17
========= ===============
Number of shares exercisable
at April 30, 1994 769,745
=========
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
----------------
10. Quarterly Financial Summary (Unaudited):
---------------------------------------
(amounts in thousands except per share data)
FOR THE THREE MONTHS ENDED
----------------------------------------
July 31, Oct. 30, Jan. 31, April 30,
Fiscal Year 1994 1993 1993 1994 1994
---------------- -------- -------- -------- --------
Net sales $193,995 $322,465 $300,027 $250,079
Gross profit 45,459 76,425 68,616 57,549
Income (loss) before income
taxes (4,614) 25,756 16,743 8,256
Net income (loss) (2,768) 15,453 10,084 4,887
Earnings (loss) per share (.08) .46 .30 .15*
Dividends per share .11 .11 .11 .11
Aug. 1, Oct. 31, Jan. 31, May 1,
Fiscal Year 1993 1992 1992 1993 1993
---------------- -------- -------- -------- --------
Net sales $212,312 $321,852 $335,656 $251,885
Gross profit 56,042 75,164 81,518 65,435
Income before income taxes 7,430 23,539 23,509 17,230
Net income 4,532 14,360 14,324 10,527
Earnings per share .14 .43 .43 .32*
Dividends per share .10 .10 .10 .11
July 27, Oct. 26, Jan. 31, May 2,
Fiscal Year 1992 1991 1991 1992 1992
---------------- -------- -------- -------- --------
Net sales $166,775 $278,858 $306,285 $268,319
Gross profit 43,261 68,211 75,342 70,897
Income before income taxes 9,039 20,619 19,762 16,173
Net income 5,514 12,578 12,054 9,867
Earnings per share .17 .38 .36 .30*
Dividends per share .10 .10 .10 .10
* Earnings per common share were improved by $.07, $.06 and $.05 for the fourth
quarters of fiscal 1994, 1993 and 1992, respectively, resulting from various
year-end adjustments to previous accrual estimates.
28
Item 9. DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 10, with the exception of the following information regarding executive
officers of the Registrant required by Item 10, is contained in the Handleman
Company Definitive Proxy Statement for its 1994 Annual Meeting of Shareholders
to be filed on or before August 18, 1994, and such information is incorporated
herein by reference. All officers serve at the discretion of the Board of
Directors.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AND AGE OFFICE AND YEAR FIRST ELECTED
- ----------------------------------------- ------------------------------------------------
Stephen Strome 49 (1) President (1990), Chief Executive Officer (1991)
and Director (1989)
Peter J. Cline 47 (2) Executive Vice President/President of
Distribution (1994)
Lawrence R. Hicks 49 (3) Executive Vice President/Merchandising (1994)
Louis A. Kircos 40 (4) Executive Vice President/Corporate Development
and Subsidiaries (1994)
Richard J. Morris 48 (5) Senior Vice President/Finance (1994), Secretary
and Chief Financial Officer (1993)
Mario DeFilippo 65 (6) Senior Vice President (1988)
Samuel J. Milicia 52 (7) Vice President - Branch Operations (1990)
Jerry L. Lauer 50 (8) Vice President - Information Services (1986)
Thomas C. Braum, Jr. 39 (9) Vice President (1992) and Corporate
Controller (1988)
1. Stephen Strome has served as President since March 1990. On May 1, 1991,
Mr. Strome was named Chief Executive Officer. In September 1989 Mr. Strome
was named Chief Operating Officer. In September of 1987, Mr. Strome was
elected Executive Vice President.
2. Peter J. Cline has served as Executive Vice President/President of
Distribution since joining the Company in April, 1994. Prior to joining
Handleman Company, Mr. Cline was employed by the Snacks and International
Consumer Products Division of Borden, Inc. from August 1990 until April
1994 where he served in various executive positions, most recently as Group
Vice President - North American Snacks. Previously, Mr. Cline was employed
by The Stroh Brewery Company from July 1986 to August 1990 where he served
in a variety of executive positions, including Senior Vice President -
Sales and Marketing from August 1989 to August 1990.
3. Lawrence R. Hicks has served as a Vice President since January 1982. Mr.
Hicks was elected Senior Vice President in June 1988, and Executive Vice
President in April 1994.
4. Louis A. Kircos was elected Executive Vice President in April 1994. Mr.
Kircos was elected Senior Vice President - Corporate Development and
Subsidiaries in March 1993. In March 1990, Mr. Kircos was elected Senior
Vice President - Finance. Mr. Kircos was elected Vice President - Finance
in September 1987. In July 1986, Mr. Kircos was elected Treasurer and
Secretary, and served as Treasurer until February 1992, and as Secretary
until August 1993.
5. Richard J. Morris has served as Vice President/Finance, Secretary and Chief
Financial Officer since August 1993. In April 1994, Mr. Morris was elected
Senior Vice President. Prior to joining Handleman Company, Mr. Morris was
employed by PolyGram Holding, Inc., where he served as Senior Vice
President, Finance from January 1983 until July 1993.
6. Mario DeFilippo has served as a Vice President since January 1983. In June
1988, Mr. DeFilippo was elected Senior Vice President. Mr. DeFilippo
retired on June 30, 1994.
7. Samuel J. Milicia has served as Vice President since June 1990. In June
1988, Mr. Milicia was named Assistant Vice President - Eastern Region
Branch Operations.
8. Jerry L. Lauer has served as Vice President since June 1986.
9. Thomas C. Braum, Jr. has served as Corporate Controller since June 1988.
In February 1992, Mr. Braum was elected Vice President.
29
Item 11. EXECUTIVE COMPENSATION
Information required by this item is contained in the Handleman Company
definitive Proxy Statement for its 1994 Annual Meeting of Shareholders, to be
filed on or before August 18, 1994 and such information is incorporated herein
by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is contained in the Handleman Company
definitive Proxy Statement for its 1994 Annual Meeting of Shareholders, to be
filed on or before August 18, 1994 and such information is incorporated herein
by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is contained in the Handleman Company
definitive Proxy Statement for its 1994 Annual Meeting of Shareholders, to be
filed on or before August 18, 1994 and such information is incorporated herein
by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The following financial statements and supplementary data are filed
as a part of this report under Item 8.:
Report of Independent Accountants
Consolidated Balance Sheet at April 30, 1994, May 1, 1993
and May 2, 1992.
Consolidated Statement of Income - Years Ended April 30, 1994,
May 1, 1993 and May 2, 1992.
Consolidated Statement of Shareholders' Equity - Years Ended
April 30, 1994, May 1, 1993 and May 2, 1992.
Consolidated Statement of Cash Flows - Years Ended April 30, 1994,
May 1, 1993 and May 2, 1992.
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
II. Amounts Receivable from Related Parties and
Underwriters, Promoters, and Employees Other
Than Related Parties
VIII. Valuation and Qualifying Accounts and Reserves
IX. Short-term Borrowings
All other schedules for Handleman Company have been omitted
since the required information is not present or not present in an
amount sufficient to require submission of the schedule, or because
the information required is included in the financial statements or
the notes thereto.
30
3. Exhibits as required by Item 601 of Regulation S-K.
S-K Item 601 (3)
The Registrant's Restated Articles of Incorporation dated June 30,
1989 and Revised Bylaws adopted March 7, 1990 and Amendments to the
Bylaws adopted June 16, 1993, were filed with the Form 10-K dated May
1, 1993, and are incorporated herein by reference.
S-K Item 601 (10)
Consulting contract for director Mr. Paul Handleman was filed with the
Commission in the Form 10-K dated July 31, 1975, and is incorporated
herein by reference. Such contract has been extended to December l,
1994. Mr. Paul Handleman retired from the Board of Directors on June
16, 1993.
The Registrant's 1975 Stock Option Plan was filed with the Commission
in Form S-8, dated November 17, 1977, File No. 2-60162. The
Registrant's 1983 Stock Option Plan was filed with the Commission in
Form S-8 dated January 18, 1985, File No. 2-95421. The first
amendment to the 1983 Stock Option Plan, adopted on March 11, 1987,
was filed with the Commission with the Form 10-K for the year ended
May 2, 1987. Both plans are incorporated herein by reference.
The Registrant's 1992 Performance Incentive Plan was filed with the
Commission in Form S-8, dated March 5, 1993, File No. 33-59100.
The advisory agreement with David Handleman was filed with the Form
10-K for the year ended April 28, 1990.
The Credit Agreement among Handleman Company, Certain Banks And NBD
Bank, N.A., As Agent dated June 24, 1991 was filed with the Form 10-K
for the year ended May 2, 1992.
The Note Agreement dated October 1, 1991 was filed with the Form 10-K
for the year ended May 2, 1992.
S-K Item 601 (21) - Subsidiaries of the Registrant:
Handleman Company of Canada Limited, an Ontario Corporation
Video Treasures, Inc., a Michigan Corporation
Entertainment Zone, Inc., a Michigan Corporation
Scorpio Productions, Inc., a Texas Corporation
Hanley Advertising Company, a Michigan Corporation
Softprime, Inc., a Michigan Corporation
Rackjobbing, S.A. de C.V.
Rackjobbing Services, S.A. de C.V.
New Licenses, S.A. de C.V.
Handleman Technical Services, Inc., a Michigan Corporation
S-K Item 601 (23) - Consent of Independent Accountants:
Filed with this report.
(b) No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
Note: The Exhibits attached to this report will be furnished to requesting
security holders upon payment of a reasonable fee to reimburse the
Registrant for expenses incurred by Registrant in furnishing such
Exhibits.
31
Exhibit (23)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Handleman Company and Subsidiaries on Form S-3 (File Nos. 33-16553, 33-26456,
33-33797 and 33-42018) and Form S-8 (File Nos. 2-60162, 2-95421, 33-59100 and
33-69030) of our report dated June 16, 1994, on our audits of the consolidated
financial statements and financial statement schedules of Handleman Company and
Subsidiaries as of April 30, 1994, May 1, 1993 and May 2, 1992 and for the years
then ended, which report is included in this Annual Report on Form 10-K.
Coopers & Lybrand
Detroit, Michigan
July 27, 1994
32
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND
UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
YEARS ENDED MAY 2, 1992, MAY 1, 1993 AND APRIL 30, 1994
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------- ---------- ---------- ----------- --------------
Balance at
beginning Balance at
Name of debtor of period Additions Collections end of period
- ------------------------------ ---------- ---------- ----------- -------------
Year ended May 2, 1992:
Amount receivable,
HGV Video Productions, Inc. $ 327,000 $ 512,000 $ 557,000 $ 282,000
========== ========== ========== ==========
Amount receivable,
Mode Video Distribution, Inc. $ 17,000 $ 180,000 $ 71,000 $ 126,000
========== ========== ========== ==========
Year ended May 1, 1993:
Amounts receivable,
HGV Video Productions, Inc. $ 282,000 $1,903,000 $1,604,000 $ 581,000
========== ========== ========== ==========
Amounts receivable,
Mode Video Distribution, Inc. $ 126,000 $1,069,000 $ 951,000 $ 244,000
========== ========== ========== ==========
Amounts receivable,
SRT Video, Ltd. $ 100,000 $2,800,000 $1,300,000 $1,600,000
========== ========== ========== ==========
Year ended April 30, 1994:
Amounts receivable,
HGV Video Productions, Inc. $ 581,000 $2,509,000 $2,033,000 $1,057,000 (1)
========== ========== ========== ==========
Amounts receivable,
Mode Video Distribution, Inc. $ 244,000 $2,243,000 $2,290,000 $ 197,000 (1)
========== ========== ========== ==========
Amounts receivable,
SRT Video, Ltd. $1,600,000 $ 300,000 $1,300,000 $ 600,000 (1)
========== ========== ========== ==========
Amounts receivable,
Sofsource, Inc. $ -- $ 385,000 $ -- $ 385,000 (1)
========== ==========
Amounts receivable,
Mr. Richard J. Morris $ -- $ 142,000 $ 9,000 $ 133,000
========== ========== ==========
The Company is an equity participant in HGV Video Productions, Inc. (HGV),
an Ontario, Canada corporation, which was established to manufacture and
distribute licensed video product in Canada.
The Company is an equity participant in Mode Video Distribution, Inc.
(Mode), a Quebec, Canada corporation engaged in the distribution of video
products.
The Company is a partner in SRT Video, Ltd. (SRT), a partnership formed to
purchase and resell cut-out or surplus video cassettes.
The Company is an equity participant in Sofsource, Inc., a U.S. based
manufacturer and distributor of personal computer software products.
(1) The Company funds working capital requirements of HGV, Mode, SRT and
Sofsource, and such advances accrue interest at various rates ranging from
the prime rate to prime plus one percent.
33
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED MAY 2, 1992, MAY 1, 1993 AND APRIL 30, 1994
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ----------- ----------- -------------- ------------
Deductions:
Balance at Additions: Adjustments
Beginning Charged to of, or Charges Balance at
Description of Period Expense to, Reserve end of Period
----------- ----------- ----------- -------------- -------------
Year ended May 2, 1992:
Accounts receivable,
allowance for gross
profit impact of future
returns $13,066,000 $10,774,000 $4,317,000 $19,523,000
=========== =========== ========== ===========
Other assets, collectability
allowance for receivables
from bankrupt customers $12,900,000 $ -- $ 369,000 $12,531,000
=========== =========== ========== ===========
Year ended May 1, 1993:
Accounts receivable,
allowance for gross
profit impact of future
returns $19,523,000 $ 5,385,000 $3,724,000 $21,184,000
=========== =========== ========== ===========
Other assets, collectability
allowance for receivables
from bankrupt customers $12,531,000 $ 403,000 $1,007,000 $11,927,000
=========== =========== ========== ===========
Year ended April 30, 1994:
Accounts receivable,
allowance for gross
profit impact of future
returns $21,184,000 $ 3,467,000 $5,038,000 $19,613,000
=========== =========== ========== ===========
Other assets, collectability
allowance for receivables
from bankrupt customers
$11,927,000 $ 2,092,000 $ 959,000 $13,060,000
=========== =========== ========== ===========
34
SCHEDULE IX - SHORT-TERM BORROWINGS
YEARS ENDED APRIL 30, 1994, MAY 1, 1993 AND May 2, 1992
Year Ended Year Ended Year Ended
April 30, 1994 May 1, 1993 May 2, 1992
-------------- ----------- -----------
Balance at End of Period $ -- $ -- $ --
=========== ========== ===========
Interest Rate at End of Period $ -- $ -- $ --
=========== ========== ===========
Maximum Amount Outstanding
During the Period $15,000,000 $6,300,000 $55,500,000
=========== ========== ===========
Average Amount Outstanding
During the Period (1) $ 8,933,000 $6,300,000 $17,523,000
=========== ========== ===========
Weighted Average Interest
Rate During the Period (2) 4.23% 4.88% 6.75%
=========== ========== ===========
(1) The average amount outstanding during the period represents total daily
borrowings divided by the number of days such borrowings were outstanding.
(2) The weighted average interest rate represents the annualized effect of
short-term interest expense divided by the average debt outstanding.
Short-term borrowings are unsecured borrowings under bank lines of credit at
interest rates on an as offered basis not to exceed prime.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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: July 26, 1994 BY: /s/ Stephen Strome
----------------------------------- ---------------------------------------------
Stephen Strome, President, Chief
Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Richard J. Morris /s/ Thomas C. Braum, Jr.
- ------------------------------------------------ ----------------------------------------------
Richard J. Morris, Senior Vice President, Thomas C. Braum, Jr., Vice President,
Finance, Secretary and Chief Financial Officer Corporate Controller
(Principal Financial Officer) (Principal Accounting Officer)
July 26, 1994 July 26, 1994
- ------------------------------------------------ ----------------------------------------------
DATE DATE
/s/ David Handleman /s/ Richard H. Cummings
- ------------------------------------------------ ----------------------------------------------
David Handleman, Director Richard H. Cummings, Director
(Chairman of the Board)
July 26, 1994 July 26, 1994
- ------------------------------------------------ ----------------------------------------------
DATE DATE
/s/ James B. Nicholson /s/ Alan E. Schwartz
- ------------------------------------------------ ----------------------------------------------
James B. Nicholson, Director Alan E. Schwartz, Director
July 26, 1994 July 26, 1994
- ------------------------------------------------ ----------------------------------------------
DATE DATE
/s/ Verne G. Istock /s/ John F. Daly
- ------------------------------------------------ ----------------------------------------------
Verne G. Istock, Director John F. Daly, Director
July 26, 1994 July 26, 1994
- ------------------------------------------------ ----------------------------------------------
DATE DATE
/s/ Lloyd E. Reuss /s/ Gilbert R. Whitaker, Jr.
- ------------------------------------------------ ----------------------------------------------
Lloyd E. Reuss, Director Gilbert R. Whitaker, Jr., Director
July 26, 1994 July 26, 1994
- ------------------------------------------------ -----------------------------------------------
DATE DATE
36