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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 27, 1996 Commission File No. 1-7923
HANDLEMAN COMPANY
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1242806
-------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Kirts Boulevard, Troy, Michigan 48084 - 4142
---------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
810-362-4400
--------------------------------------
(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
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 12, 1996 was $206,733,200.
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 12, 1996 was 33,496,410.
Item 14(a) 3. on page 33 describes the exhibits filed with the Securities and
Exchange Commission.
Certain sections of the definitive Proxy Statement to be filed for the 1996
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 music, video,
book, and personal computer software products primarily to mass merchants
throughout the United States, Canada, Mexico, Argentina and Brazil. In addition,
the Company provides various services as a specialized merchandiser (rackjobber)
to these accounts. The Company's Handleman Entertainment Resources division
provides such products and services in the United States and Canada, while the
International division provides such services in Mexico, Argentina and Brazil.
The Company, through its North Coast Entertainment subsidiary, is also in the
business of acquiring video, music and software licenses, giving it exclusive
rights to manufacture and distribute such products.
The following table sets forth net sales, and the approximate percentage
contribution to consolidated sales, for the fiscal years ended April 27, 1996,
April 29, 1995, and April 30, 1994, for the Company's three operating divisions:
YEAR ENDED
(AMOUNTS IN THOUSANDS)
------------------------------------------------
APRIL 27, 1996 APRIL 29, 1995 APRIL 30, 1994
-------------- -------------- --------------
HANDLEMAN ENTERTAINMENT RESOURCES
Music $ 593,348 $ 614,608 $ 556,211
% of Total 52.4 50.1 52.1
Video 316,485 423,826 367,102
% of Total 27.9 34.6 34.4
Book 53,947 57,411 67,012
% of Total 4.8 4.7 6.3
Personal Computer Software 50,990 50,007 39,405
% Total 4.5 4.1 3.7
---------- ---------- ----------
Sub-Total 1,014,770 1,145,852 1,029,730
% of Total 89.6 93.5 96.5
---------- ---------- ----------
NORTH COAST ENTERTAINMENT (A) 120,300 106,186 68,905
% of Total 10.6 8.6 6.5
INTERNATIONAL 15,647 14,511 ---
% of Total 1.4 1.2 ---
ELIMINATIONS (18,110) (40,487) (32,069)
% of Total (1.6) (3.3) (3.0)
---------- ---------- ----------
TOTAL $1,132,607 $1,226,062 $1,066,566
========== ========== ==========
(A) Includes sales of Entertainment Zone in all fiscal years.
2
Business Segments
-----------------
The Company operates in one business segment, selling home entertainment
software to mass merchants and also to specialty chain stores, drugstores and
supermarkets. The Company has United States, Canadian, Mexican, Brazilian and
Argentine operations. All operations outside of the U.S. are included in "Other"
which is displayed separately below.
DOLLAR AMOUNTS IN THOUSANDS
--------------------------------------
1996 1995 1994
---------- ---------- ----------
Net sales:
United States $1,050,545 $1,152,681 $1,017,993
Other 82,062 73,381 48,573
---------- ---------- ----------
Total net sales $1,132,607 $1,226,062 $1,066,566
========== ========== ==========
Operating income (loss):
United States $ (18,045) $ 54,935 $ 52,963
Other (5,130) (1,079) (1,113)
Interest expense, net (12,039) (8,024) (6,211)
---------- ---------- ----------
Income (loss) before income taxes $ (35,214) $ 45,832 $ 45,639
========== ========== ==========
Identifiable assets:
United States $ 660,465 $ 705,916 $ 614,215
Other 33,449 48,160 26,783
---------- ---------- ----------
Total assets $ 693,914 $ 754,076 $ 640,998
========== ========== ==========
GENERAL
-------
The Company's major business activity is to act as 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 for each product line. 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
SKUS CURRENTLY RETAIL
NUMBER OF DISTRIBUTED DEPARTMENTS
VENDORS BY THE COMPANY SERVICED
--------- -------------- -----------
Music 179 25,100 6,300
Video 122 6,100 6,775
Book 192 6,800 2,675
Software 132 900 4,950
3
North Coast Entertainment, Inc. ("NCE"), a subsidiary of Handleman Company,
includes the Company's proprietary product operations. NCE is the umbrella
company for subsidiaries which acquire or develop existing master recordings,
exclusive licensing and distribution agreements and, to a lesser extent,
original productions. Such items are manufactured and then distributed to
either rackjobbers, including Handleman Company, distributors or directly to
retailers. NCE has operations in the United States, Canada, Germany and the
United Kingdom. In addition, NCE products are available in Mexico, through a
joint venture, and South America. Most NCE products are categorized as budget,
with most retailing for under $10. Products are designed to provide high
margins to the retailer at prices that generate impulse sales.
NCE's goal is to support the profitable growth of the non-rackjobbing portion of
the business. NCE provides opportunities as follows:
. First, it provides a platform from which to distribute proprietary music,
video, and personal computer (PC) software products.
. Second, NCE enables the Company to take a more active, and more profitable,
role in the production of home entertainment products. This enhances the
Company's profit potential.
. Third, NCE provides the Company with a wide array of product development and
licensing opportunities, access to and ownership of new music and video
labels, and proprietary PC software and publishing products. This enables the
Company to offer a broader range of more profitable products to its customers.
. Fourth, NCE gives the Company access to new distribution channels, new markets
and new customers. For example, the Company can cross-sell music, video and
PC software to new or existing customers through any NCE subsidiary sales
organization.
NCE is comprised of a group of enterprises operating under different names:
. Anchor Bay Entertainment develops an assortment of videos through licensing
and distribution agreements. It also is the producer of original children's
and exercise programming. Anchor Bay's catalog consists of over 2,000
selections which encompass many categories. Labels include Video Treasures,
Audio Treasures, MNtex and Starmaker. Anchor Bay supplies products to
rackjobbers, specialty stores, mass merchants and distributors, as well as via
direct response and catalog channels.
. Sellthrough Entertainment (formerly Holly Music) distributes year-round theme
promotions such as Christmas, Halloween and exercise throughout the U.S. and
Canada. In addition to the Company, its customers include mass merchants,
which have year-round audio and video departments, as well as in-and-out
promotions with retail chains such as drug stores, grocery stores and
specialty stores.
. Madacy Entertainment Group offers budget music, video and PC software products
within the United States and Canada. Madacy's audio catalog has more than
2,000 selections which encompass many categories. Its video collection
consists of over 600 licensed as well as public domain titles. Madacy's CD-
ROM PC software catalog has over 90 selections. Mediphon GmbH, a German-based
subsidiary, distributes audio products throughout Germany and the rest of
Europe.
. Sofsource, Inc. acquires and develops software titles through exclusive
licensing and distribution agreements. Its catalog consists of over 300
selections. Sofsource is among the industry leaders in the sale of
educational software. It supplies PC software to distributors, rackjobbers,
specialty stores and other retailers.
NCE's management will be focusing its attention on growing the business through
additional product licensing, new markets, new products, geographical growth,
growth within the home entertainment industry, and selective acquisitions and
joint ventures.
4
The following discussion pertains to the Company's rackjobbing activities which
comprise approximately 90% of the Company's sales.
Vendors
-------
An important reason the Company's customers utilize its services is due to the
multitude of manufacturers and suppliers offering products for-sale, the
complexity of programs offered by those vendors, 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 vast
geographic regions (U.S., Canada, Mexico, Argentina and Brazil) 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 salability 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 music, video, book, and personal computer software
is broad and varied, Handleman is required to maintain sufficient 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
obligations or non-saleable product purchases exceed vendor return limitations.
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. 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.
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.
5
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
newer product.
The nature of the Company's business lends itself to computerized ordering,
distribution and store inventory management techniques. 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. Slow selling items are removed from the stores by the Company and are
recycled for redistribution or return 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 27, 1996, one customer, Kmart Corporation,
accounted for approximately 40% of the Company's consolidated sales, while a
second customer, Wal-Mart, accounted for approximately 21%. Handleman may not
have contracts with its customers, and such relationships may be changed or
discontinued at any time by the customers or Handleman; the discontinuance or a
significant unfavorable change in the relationships with either of the two
largest customers would have a materially adverse effect upon the Company's
future sales or earnings.
6
Operations
----------
The Company distributes products from facilities throughout the U.S., Canada,
Mexico, Brazil and Argentina. 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 and
one in Canada 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.
During fiscal 1996, the Company opened its second high-technology Automated
Distribution Center ("ADC") in Indianapolis, Indiana. The Company had realigned
its Western region by replacing certain distribution centers with its first ADC
located in Sparks, Nevada. The implementation of the ADCs 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, Provisions for
Inventory Reduction and Realignment of Operations, on page 24 under Item 8, for
additional information regarding the facility realignment.
The Company also has installed a new proprietary inventory management system
("PRISM"). PRISM automates and integrates the functions of ordering product,
receiving, warehousing, order fulfillment, ticket printing and perpetual
inventory maintenance. 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 music, video,
book 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) specialty retail
outlets, (2) video rental outlets, and (3) record and book clubs. 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. Also, new
methods of in-home delivery of entertainment software products are being
introduced, including Pay Per View and home satellite video viewing.
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.
A major customer of the Company has begun to purchase a substantial portion of
its video product directly from manufacturers. Net video sales to this customer
were $4.5 million in fiscal 1996, $57.5 million in fiscal 1995, and $75.7
million in fiscal 1994.
7
Industry Outlook
----------------
The following are some statistics from various industry sources.
. According to the Electronic Industries Association, compact disc hardware
sales increased 22% to an estimated 32.3 million units in calendar 1995. As a
result, penetration into U.S. households has reached 47%.
. Video cassette recorder ("VCR") penetration into U.S. households reached 83%
in 1995, and is expected to grow to approximately 90% by 1999, according to
Veronis, Suhler & Associates ("Veronis"), an entertainment industry investment
banker.
. According to Veronis, PC penetration into U.S. households could reach 36% by
the end of calendar 1996.
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, the U.S. music
industry posted sales, at list price, of $12.3 billion in 1995, growing 2% from
1994. According to Veronis, the U.S. market is expected to grow at a 9.4%
compound annual rate through 1999.
Compact discs ("CDs") remained the catalyst of music industry growth in 1995,
accounting for over 77% of net revenues for the year.
Despite the growing dominance of CDs, cassettes still remain a popular format.
Industry-wide sales of cassettes, including cassette singles, still represent
sales of over $2.5 billion. Car stereos and portable systems, two areas where
CDs have had little impact, still rely principally on the cassette. The size,
cost and convenience of cassettes are also important factors in the continuing
popularity of this music format.
Video
- -----
The continued success of VCR hardware has translated directly into increased
sell-through revenues. According to Veronis, for-sale home video sales in the
United States grew 6.6% in 1995, at retail. Veronis projects industry video
sales to grow at a 6.3% compound annual rate through calendar 1999.
Book
- ----
Book industry sales grew an estimated 7% in 1995 to $16.3 billion, according to
Veronis. In addition, consumer books are projected to grow at a 7.3% compound
annual rate through calendar 1999.
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.
8
Software
- --------
Personal computer software sales, at retail, grew in excess of 30% in calendar
1995, compared to 1994, and are forecasted to grow at a 23.2% compound annual
rate through 1999, both according to Veronis. Increases in personal computer
software sales are driven by sales of the related hardware. According to the
Consumers Electronics Manufacturers Association, PC hardware unit sales grew 25%
in calendar 1995 versus calendar 1994.
While any of the above industry forecasts could positively impact future results
of operations, the growth rates should be viewed only as forecasts by a single
source which may not be achieved. In addition, many additional factors
influence the Company's growth opportunities, including competition from other
suppliers, growth or contraction of the Company's customers' market share,
financial viability of existing customers and introduction of new configurations
(e.g., CD, cassette). An adverse impact from any one of these factors could
offset the benefit from another factor.
* * * * *
See Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 2, Acquisition of Business, on page 25 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 30 under Item 8 discloses
quarterly results which indicate the seasonality of the Company's business.
The Company has approximately 3,800 employees, of whom approximately 185
are members of various local unions.
9
Item 2. PROPERTIES
The Company leases 8 warehouses in the United States, 5 in Canada and 1 each
in Mexico City, Mexico; Sao Paulo, Brazil; Buenos Aires, Argentina; and Germany.
The U.S. leased warehouses are located in the states of Missouri, New York, Ohio
(2), Indiana (2), New Jersey and Nevada. The Company also leases satellite
sales offices in Massachusetts, Texas, New Mexico, Colorado, California (2),
Oregon and Missouri, as well as a 9,800 square foot storage facility in Troy,
Michigan. In Canada, leased warehouses are located in the provinces of Alberta,
Ontario and Quebec (3). The Company owns warehouses in Brighton, Michigan;
Chicago, Illinois; Atlanta, Georgia; Little Rock, Arkansas; Tampa, Florida; and
Baltimore, Maryland. The warehouses in Brighton, Chicago and Little Rock will
be sold in connection with moving the operations to the Company's Midwest ADC
(see Note 4 on page 25 under Item 8). The Company owns its 130,000 square feet
corporate office building located in Troy, Michigan. The Atlanta and Little Rock
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.
10
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.
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 27, 1996 April 29, 1995
-------------------- -----------------
Quarter Low High Low High
------- ------------------------------------------
First................ 9 1/2 11 7/8 10 11 1/4
Second............... 8 1/8 10 1/2 10 1/4 11 7/8
Third................ 5 1/4 8 1/4 10 1/2 11 3/4
Fourth............... 4 7 3/8 10 1/4 11 1/8
---------------------------------------------------------------
As of July 12, 1996, the Company had 4,348 shareholders of record.
Below is a summary of the dividends declared during the past two fiscal years:
Fiscal Year Ended
----------------------------------
Quarter April 27, 1996 April 29, 1995
------- -------------- --------------
First.......... $ .11 $ .11
Second......... .11 .11
Third.......... .05 .11
Fourth......... -- .11
----- -----
TOTAL...... $ .27 $ .44
===== =====
11
Item 6. SELECTED FINANCIAL DATA
HANDLEMAN COMPANY
FIVE YEAR REVIEW
(amounts in thousands except per share data and ratios)
-----------------
1996 % 1995 % 1994 % 1993 % 1992 %
----------- ------ ----------- ------ ----------- ------ ----------- ------ ----------- ------
SUMMARY OF OPERATIONS:
Net sales $1,132,607 100.0 $1,226,062 100.0 $1,066,566 100.0 $1,121,705 100.0 $1,020,237 100.0
Gross profit, after direct
product costs * 244,685 21.6 278,464 22.7 249,049 23.4 278,159 24.8 257,711 25.3
Selling, general &
administrative expenses 243,895 21.5 212,094 17.3 187,663 17.6 191,882 17.1 177,073 17.4
Depreciation: included in
selling, general
& administrative
expenses 28,919 2.6 24,787 2.0 24,189 2.3 21,722 1.9 20,399 2.0
Provision for realignment
of operations 1,500 .1 5,500 .4 2,000 .2
Amortization of
acquisition costs 7,965 .7 7,014 .6 7,536 .7 8,679 .8 7,365 .7
Interest expense, net 12,039 1.1 8,024 .7 6,211 .6 6,713 .6 7,034 .7
Income (loss) before
income taxes (35,214) ** 45,832 3.7 45,639 4.3 70,885 6.3 64,916 6.4
Income tax expense
(benefit) (12,738) ** 17,809 1.4 17,983 1.7 27,142 2.4 24,903 2.5
Effective tax rate 36.2% 38.9% 39.4% 38.3% 38.4%
Net income (loss) (22,476) ** 28,023 2.3 27,656 2.6 43,743 3.9 40,013 3.9
Dividends 9,070 14,755 14,701 13,589 13,258
Average number of shares
outstanding 33,576 33,518 33,389 33,229 33,166
PER SHARE DATA:
Earnings (loss) per share $ (.67) $ .84 $ .83 $ 1.32 $ 1.21
Dividends per share .27 .44 .44 .41 .40
FINANCIAL DATA:
Cash and receivables $ 277,764 $ 283,043 $ 237,846 $ 257,319 $ 250,169
Inventories 212,700 276,109 234,594 241,502 240,369
Current assets 509,813 560,931 477,376 501,052 491,975
Additions to property and
equipment 33,596 40,675 28,737 33,391 22,714
Total assets 693,914 754,076 640,998 659,076 655,075
Debt, current --- --- 32,200 17,860 ---
Current liabilities 264,484 289,961 261,227 259,723 254,824
Debt, non-current 143,600 146,200 76,364 105,702 135,750
Working capital 245,329 270,970 216,149 241,329 237,151
Shareholders' equity 279,560 311,652 299,493 288,700 260,861
FINANCIAL RATIOS:
Quick ratio
(Cash and
receivables/current
liabilities) 1.1 1.0 .9 1.0 1.0
Working capital ratio
(Current assets/current
liabilities) 1.9 1.9 1.8 1.9 1.9
Inventory turnover
(Direct product
costs/average
inventories) 3.4 3.5 3.2 3.3 3.5
Debt to total
capitalization ratio
(Debt, non-current/debt,
non-current plus
shareholders' equity) 33.9% 31.9% 20.3% 26.8% 34.2%
Return on beginning
shareholders' equity
(Net income/beginning
shareholders' equity) ** 9.4% 9.6% 16.8% 17.1%
* - Fiscal 1996 amount is before inventory reduction provision of $14,500.
** - Not meaningful
Note: See Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations, for additional information regarding the
Company's activities.
12
Item 7.
Management's Discussion and
Analysis of Financial Condition
and Results of Operations
COMPARISON OF 1996 WITH 1995
- ----------------------------
The Company operates principally in one business segment: selling music, video,
book and personal computer software products primarily to mass merchants, and
also to specialty chain stores, drugstores and supermarkets.
Net sales for fiscal 1996 were $1.13 billion, compared with $1.23 billion for
fiscal 1995, a decrease of 8%. The Company's operating results were negatively
impacted by the lower sales level, coupled with a lower gross profit margin
percentage and higher selling, general and administrative (SG&A) expenses. As a
result of these factors, the Company experienced a net loss of $22.5 million or
a loss of $.67 per share for fiscal 1996, compared with net income of $28.0
million or $.84 per share for fiscal 1995. The results for fiscal 1996 included
a $14.5 million pre-tax provision ($.26 per share) recorded for markdowns and
other costs being incurred in connection with an inventory reduction program,
and a $1.5 million pre-tax charge ($.03 per share) in connection with closing
Entertainment Zone, a subsidiary which sold music, video and book products in
departments leased from certain retailers.
The Company has three operating divisions: Handleman Entertainment Resources or
H.E.R., (formerly referred to as the Core Rackjobbing division), North Coast
Entertainment (NCE) and International. H.E.R. is a rackjobber of music, video,
book and computer software products to mass merchants in the U.S. and Canada.
NCE, which includes the Company's proprietary product operations, sells licensed
music, video and computer software products to retailers and rackjobbers
(including H.E.R. and the International division). The International division is
a rackjobber of music, video and computer software products to mass merchants in
Mexico, Brazil and Argentina. The sales amounts by division discussed below
include sales between divisions which are eliminated in consolidation.
H.E.R. sales for fiscal 1996 were $1.01 billion, compared to $1.15 billion for
fiscal 1995, a decrease of 11%. Following is a discussion of sales for H.E.R.'s
four major product lines:
Music sales for fiscal 1996 were $593.3 million, compared with $614.6 million
for fiscal 1995, a decrease of 3%. The decrease in music sales was primarily
caused by overall softness in the retail music marketplace. In addition,
customer shipment restrictions contributed to the decrease in music sales.
Compact disc (CD) sales for fiscal 1996 were $414.1 million or 70% of H.E.R.'s
music sales, compared to $362.4 million or 59% of H.E.R.'s music sales in fiscal
1995. For the entire music industry in calendar 1995, CD dollar sales reached
77% of total music revenues, according to the Recording Industry Association of
America, a music industry trade group. As CD hardware continues to be purchased
by middle-income Americans, who tend to be shoppers at mass merchant outlets
(the Company's primary customers), H.E.R.'s CD sales mix is expected to continue
to approach the industry level.
Fiscal 1996 video sales were $316.5 million, compared to $423.8 million for
fiscal 1995, a decrease of 25%. The decrease in video sales was primarily
attributable to lower sales to a major customer which began to purchase a
substantial portion of its product directly from manufacturers, and reduced
sales of catalog and budget products.
Book product sales for fiscal 1996 were $53.9 million, compared to $57.4 million
in fiscal 1995, a decrease of 6%. The decline in book sales was predominantly
caused by lower sales to a major customer resulting from a decrease in number of
departments shipped.
Personal computer software sales increased 2% to $51.0 million in fiscal 1996,
from $50.0 million in fiscal 1995; the increase in sales of personal computer
products was principally due to sales to a customer the Company added to its
account base.
13
NCE sales, excluding Entertainment Zone sales, were $101.5 million in fiscal
1996, compared to $81.0 million in fiscal 1995, an increase of 25%. This sales
increase was primarily attributable to sales from companies acquired in fiscal
1995. NCE sales to other divisions within the Company were $18.0 million in
fiscal 1996 and $29.9 million in fiscal 1995.
During fiscal 1996, NCE closed Entertainment Zone, a subsidiary that sold music,
video and book products in departments leased from certain retailers.
Entertainment Zone sales for fiscal 1996 and fiscal 1995 were $18.8 million and
$25.2 million, respectively. During fiscal 1996, the Company recorded a $1.5
million pre-tax charge ($.03 per share after tax), principally related to
display fixture write-offs, in connection with closing Entertainment Zone.
International division sales were $15.6 million in fiscal 1996, compared to
$14.5 million in fiscal 1995, an increase of 8%. This increase was attributable
to sales in Argentina and Brazil, new markets the Company entered during fiscal
1996.
The gross profit margin percentage for the Company, before the impact of the
inventory reduction provision, was 21.6% for fiscal 1996, compared to 22.7% for
fiscal 1995. The majority of this decline resulted from the shift of music
sales to higher priced CD product, which carries a lower gross profit margin
percentage than other music products. CD unit sale prices, however, are greater
than cassette unit sales prices; thus gross profit dollars per CD unit sold are
higher than gross profit dollars per cassette unit sold.
The Company has begun implementation of an aggressive inventory reduction
program which will reduce financing costs, as well as lower SG&A costs due to
increased operating efficiency. During the fourth quarter of fiscal 1996, the
Company recorded a $14.5 million pre-tax provision ($.26 per share after tax)
related to markdowns and other costs being incurred in connection with the
inventory reduction program. The Company believes the long-term benefit of
lower financing and SG&A costs will exceed this one-time provision. The
inventory reduction program will have a positive cash flow effect.
SG&A expenses were $243.9 million or 21.5% of net sales in fiscal 1996, compared
to $212.1 million or 17.3% of net sales for fiscal 1995. H.E.R. contributed to
the increase in SG&A expenses as a percentage of net sales due to: incremental
costs associated with providing services not offered last year, including
servicing key account book departments, expansion of in-store interactive
devices and re-fixturing programs; the effect of the relationship of fixed costs
(e.g., computer and administrative staffs) on a lower sales level; and
additional costs resulting from transition to the Midwest automated distribution
center (ADC).
NCE and start-up costs within the Company's International division also
contributed to the increase in SG&A expenses as a percentage of net sales. NCE
has a higher SG&A expense to net sales percentage than the comparable percentage
for the Company as a whole. NCE sales represented a greater proportion of
overall sales this year than last year, thus increasing the overall SG&A expense
to net sales percentage.
The Company's second ADC, located in Indianapolis, Indiana, opened during the
third quarter of fiscal 1996. The operations of three music/video shipping
branches and one book shipping branch have already been transferred to the ADC.
The operations of two additional music/video shipping branches and two more book
shipping branches will be transferred to the ADC during the summer of 1996. The
ADC is expected to improve delivery times and increase the quality of service to
customers in the Midwest region of the country. This new ADC is also expected
to reduce inventory, labor and product distribution costs. In fiscal 1995, the
Company opened its first ADC, located in Sparks, Nevada, to service the Western
region of the U.S.
Interest expense increased to $12.0 million in fiscal 1996 from $8.0 million in
fiscal 1995 due to both higher borrowings and higher average interest rates.
The higher average borrowing level was primarily caused by the operating losses,
as well as the acquisition of certain companies during fiscal 1995.
The Company's first fiscal quarter is traditionally its weakest. The Company
has historically generated the predominant share of its earnings after the first
quarter. In addition, due to pricing pressures from customers and competition
from direct-to-retail manufacturers, the Company expects to experience
continuing pressure on its overall gross profit margin percentage. For the
first quarter of fiscal 1996, the Company incurred a loss of $.19 per share.
Based on these facts, the Company expects that a loss will be incurred during
the first quarter of fiscal 1997.
14
Merchandise inventories were $212.7 million at April 27, 1996, compared to
$276.1 million at April 29, 1995, a decrease of $63.4 million or 23%. This
decrease was substantially the result of the Company's inventory reduction
program.
Other current assets were higher at April 27, 1996 than April 29, 1995 due to
the inclusion of an income tax receivable in the current year which resulted
from the loss incurred in fiscal 1996.
The decrease in property and equipment from 1995 to 1996 was the result of the
disposal of facilities as part of the transition to the ADC distribution system.
The accounts payable balance was $223.0 million as of April 27, 1996, compared
to $243.1 million as of April 29, 1995. This decrease was primarily
attributable to the lower inventory level. Net inventory investment (inventory
less accounts payable) was a negative $10.3 million as of April 27, 1996, an
improvement of $43.3 million from the previous year.
Comparison of 1995 with 1994
- ----------------------------
Net sales for fiscal 1995 were $1.23 billion versus $1.07 billion in fiscal
1994, an increase of $159.5 million or 15%. Net income for fiscal 1995 was
$28.0 million or $.84 per share, compared to $27.7 million or $.83 per share in
fiscal 1994.
H.E.R. sales in fiscal 1995 were $1.15 billion, compared to $1.03 billion in
fiscal 1994, an increase of 11%. A discussion of the division's sales by
product line follows:
Music sales in fiscal 1995 were $614.6 million, compared to $556.2 million in
fiscal 1994. The increase in music sales resulted generally from an overall
improvement in product quality and depth, as well as a high level of promotional
display activity. The growth in music sales was also driven by the continuing
increase in CD sales as a percentage of the Company's total music sales.
H.E.R.'s CD sales for fiscal 1995 were $362.4 million or 59% of its music sales,
up from $273.8 million or 49% of its music sales in fiscal 1994.
Video sales for fiscal 1995 were $423.8 million, compared to $367.1 million in
fiscal 1994, an increase of 15%. The improvement in video sales resulted from
sales of hit video product.
Book sales for fiscal 1995 were $57.4 million versus $67.0 million in fiscal
1994, a decrease of 14%. The decrease in book sales was a result of lower
shipments to certain of the division's major customers.
Personal computer software sales increased 27% to $50.0 million in fiscal 1995
from $39.4 million in fiscal 1994. This increase was principally due to
expansion of the software customer base. Many customers of H.E.R. opened or
expanded personal computer software departments in their stores.
NCE sales, excluding Entertainment Zone sales in both years, were $81.0 million
in fiscal 1995, compared to $45.3 million in fiscal 1994, an increase of 79%.
This increase in NCE sales was primarily attributable to sales from companies
acquired in fiscal 1995. (Sales at the Entertainment Zone subsidiary, which was
closed in fiscal 1996, were $23.6 million in fiscal 1994.)
During fiscal 1995, its initial year of operation, the International division
had sales of $14.5 million, all attributable to new customers in the Mexico
marketplace.
The gross profit margin percentage for fiscal 1995 was 22.7%, compared to 23.4%
in fiscal 1994. The decrease in gross profit margin percentage was primarily
due to increased sales of low-margin mega-hit video product and a shift in music
sales to CDs which earn a lower gross profit margin percentage than cassettes.
SG&A expenses for fiscal 1995 were $212.1 million or 17.3% of net sales versus
$187.7 million or 17.6% of net sales for fiscal 1994. The increase in SG&A
expense dollars was principally due to the higher sales level.
Net interest expense for fiscal 1995 was $8.0 million, compared to $6.2 million
for fiscal 1994. The increase was primarily due to higher interest rates and
higher borrowing levels in fiscal 1995 compared to fiscal 1994.
15
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital at April 27, 1996 was $245.3 million compared to $271.0 million
at April 29, 1995, a decrease of $25.7 million or 9%. The decrease in working
capital resulted primarily from a reduction in inventory levels, substantially
the result of the Company's inventory reduction program. The working capital
ratio was 1.9 to 1 at both April 27, 1996 and April 29, 1995. For fiscal 1996,
net cash provided from operating activities primarily resulted from non-cash
charges for depreciation, amortization and recoupment of license advances, as
well as the decrease in inventory in excess of the decrease in accounts payable.
Capital assets consist primarily of display fixtures and facilities. The Company
also acquires licenses for video, music and software products which it markets.
Purchases of these assets are expected to be funded primarily by cash flow from
operations.
The Company has entered into amendments to the credit agreement. The amendments
modify certain financial ratio covenant tests and the formula used to determine
permissible borrowing levels under the agreement, in light of the Company's
recent operating performance. Management believes that the agreement, as
amended, will continue to provide sufficient amounts to fund its day-to-day
operations and higher peak seasonal demands. At April 27, 1996, the Company had
outstanding borrowings under its credit agreement of $45,000,000.
On December 6, 1995, the quarterly dividend was reduced from the prior level of
$.11 per share to $.05 per share. On March 6, 1996, the Board of Directors
eliminated the quarterly dividend in view of the Company's current operating
results. The Board will continue to review the dividend payout on a quarterly
basis based upon the operating performance and financial condition of the
Company.
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.
* * * * *
16
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 27, 1996, April 29, 1995 and April 30, 1994.
Consolidated Statement of Operations - Years Ended April 27, 1996, April 29,
1995 and April 30, 1994.
Consolidated Statement of Shareholders' Equity - Years Ended April 27, 1996,
April 29, 1995 and April 30, 1994.
Consolidated Statement of Cash Flows - Years Ended April 27, 1996, April 29,
1995 and April 30, 1994.
Notes to Consolidated Financial Statements
17
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 schedule listed in Item 14(a) of this Annual Report on Form 10-K of
Handleman Company and Subsidiaries. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 27, 1996, April 29, 1995 and April 30, 1994 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 schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Detroit, Michigan
June 5, 1996
18
HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
APRIL 27, 1996, APRIL 29, 1995 AND APRIL 30, 1994
(amounts in thousands except share data)
----------------
ASSETS 1996 1995 1994
- ------ --------- --------- ---------
Current assets:
Cash and cash equivalents $ 19,936 $ 24,392 $ 10,568
Accounts receivable, less allowance of
$22,141 in 1996, $24,053 in 1995 and
$19,613 in 1994 for gross profit impact
of estimated future returns 257,828 258,651 227,278
Merchandise inventories 212,700 276,109 234,594
Other current assets 19,349 1,779 4,936
-------- -------- --------
Total current assets 509,813 560,931 477,376
Property and equipment, net 111,355 124,772 112,027
Other assets, net of allowances 72,746 68,373 51,595
-------- -------- --------
Total assets $693,914 $754,076 $640,998
======== ======== ========
LIABILITIES
- -----------
Current liabilities:
Accounts payable $223,023 $243,138 $197,676
Debt, current -- -- 32,200
Income taxes -- 2,702 3,677
Accrued and other liabilities 41,461 44,121 27,674
-------- -------- --------
Total current liabilities 264,484 289,961 261,227
Debt, non-current 143,600 146,200 76,364
Deferred income taxes 6,270 6,263 3,914
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; 33,498,000, 33,533,000
and 33,411,000 shares issued in 1996,
1995 and 1994 335 335 334
Paid-in capital 32,089 33,188 31,900
Foreign currency translation adjustment and other (7,577) (8,130) (5,732)
Retained earnings 254,713 286,259 272,991
-------- -------- --------
Total shareholders' equity 279,560 311,652 299,493
-------- -------- --------
Total liabilities and shareholders' equity $693,914 $754,076 $640,998
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
19
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED APRIL 27, 1996, APRIL 29, 1995 AND APRIL 30, 1994
(amounts in thousands except per share data)
------------------
1996 1995 1994
------ ------ ------
Net sales $1,132,607 $1,226,062 $1,066,566
Direct product costs 887,922 947,598 817,517
Inventory reduction provision 14,500 -- --
---------- ---------- ----------
Gross profit 230,185 278,464 249,049
Selling, general and administrative expenses 243,895 212,094 187,663
Provision for realignment of operations 1,500 5,500 2,000
Amortization of acquisition costs 7,965 7,014 7,536
Interest expense, net 12,039 8,024 6,211
---------- ---------- ----------
Income (loss) before income taxes (35,214) 45,832 45,639
Income tax (expense) benefit 12,738 (17,809) (17,983)
---------- ---------- ----------
Net income (loss) $ (22,476) $ 28,023 $ 27,656
========== ========== ==========
Earnings (loss) per average common share
outstanding during the year $ (.67) $ .84 $ .83
========== ========== ==========
Average number of common shares outstanding
during the year 33,576 33,518 33,389
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
20
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED APRIL 27, 1996, APRIL 29, 1995 AND APRIL 30, 1994
(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
------- ------ -------- ----------- -------- -------------
May 1, 1993 33,218 $332 $29,136 $ (804) $260,036 $288,700
Net income 27,656 27,656
Cash dividends, $.44
per share (14,701) (14,701)
Common stock issued for
employee benefit plans,
net of forfeitures 193 2 2,764 (2,731) 35
Adjustment for foreign
currency translation (2,197) (2,197)
------ ---- ------- ------- -------- --------
April 30, 1994 33,411 334 31,900 (5,732) 272,991 299,493
Net income 28,023 28,023
Cash dividends, $.44
per share (14,755) (14,755)
Common stock issued for
employee benefit plans,
net of forfeitures 122 1 1,288 (951) 338
Adjustment for foreign
currency translation (1,447) (1,447)
------ ---- ------- ------- -------- --------
April 29, 1995 33,533 335 33,188 (8,130) 286,259 311,652
Net income (loss) (22,476) (22,476)
Cash dividends, $.27
per share (9,070) (9,070)
Common stock issued for
employee benefit plans,
net of forfeitures (35) (1,099) 1,000 (99)
Adjustment for foreign
currency translation (447) (447)
------ ---- ------- ------- -------- --------
April 27, 1996 33,498 $335 $32,089 $(7,577) $254,713 $279,560
====== ==== ======= ======= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
21
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED APRIL 27, 1996, APRIL 29, 1995 AND APRIL 30, 1994
(amounts in thousands)
----------------
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ (22,476) $ 28,023 $ 27,656
----------- ----------- -----------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 28,919 24,787 24,189
Amortization of acquisition costs 7,965 7,014 7,536
Recoupment of license advances 7,496 10,057 4,915
(Increase) decrease in assets from
operating activities:
Accounts receivable 823 (17,122) (27,265)
Merchandise inventories 63,409 (35,194) 6,908
Other assets (22,400) 16 (706)
Increase (decrease) in liabilities from
operating activities:
Accounts payable (20,115) 39,432 (2,718)
Income taxes (2,702) (2,030) (3,447)
Deferred income taxes 7 2,349 (3,272)
Accrued and other liabilities 1,557 6,266 (4,036)
----------- ----------- -----------
Total adjustments 64,959 35,575 2,104
----------- ----------- -----------
Net cash provided from operating activities 42,483 63,598 29,760
----------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment (33,596) (40,675) (28,737)
Retirements of property and equipment 11,033 3,142 2,826
License advances (12,160) (11,343) (18,726)
Acquisition of Madacy Entertainment Group, Inc. --- (22,670) ---
----------- ----------- -----------
Net cash used by investing activities (34,723) (71,546) (44,637)
----------- ----------- -----------
Cash flows from financing activities:
Issuances of debt 2,053,087 1,680,200 993,890
Payments of debt (2,055,687) (1,642,564) (1,008,888)
Cash dividends (9,070) (14,755) (14,701)
Other changes in shareholders' equity, net (546) (1,109) (2,162)
----------- ----------- -----------
Net cash provided from (used by)
financing activities (12,216) 21,772 (31,861)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (4,456) 13,824 (46,738)
Cash and cash equivalents at
beginning of year 24,392 10,568 57,306
----------- ----------- -----------
Cash and cash equivalents at
end of year $ 19,936 $ 24,392 $ 10,568
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
1. Accounting Policies:
-------------------
Business
The Company operates principally in one business segment: selling music,
video, book 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 1996, 1995 and 1994 consisted of 52 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its domestic and foreign subsidiaries where the Company has voting or
contractual control. All material intercompany accounts and transactions
have been eliminated.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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 foreign subsidiaries to United States
dollars. Net transaction gains (losses) included in the statement of
operations were $(235,000), $254,000 and $(208,000) for the years ended
April 27, 1996, April 29, 1995 and April 30, 1994, respectively.
Recognition of Revenue and Future Returns
Revenues are recognized upon shipment of the merchandise. The Company
reduces gross sales and cost of sales for estimated future returns at the
time the merchandise is sold.
Pension Plan
The Company has a noncontributory defined benefit pension plan covering
substantially all hourly and salaried employees. Pension benefits are
generally 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 recorded 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 $17,582,000, $19,299,000 and $16,289,000 were
incurred during the years ended April 27, 1996, April 29, 1995 and April 30,
1994, respectively. Merchandise inventories as of April 27, 1996, April 29,
1995 and April 30, 1994 include $3,056,000, $3,554,000 and $3,621,000,
respectively, of such costs.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
----------------
1. Accounting Policies: (continued)
-------------------
Property and Equipment
Property and equipment are 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 operations for the period. Repair costs are
charged to expense as incurred.
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 3-5 years
Equipment, furniture and other 3-10 years
Leasehold improvements Lesser of lease term or
useful life
Licenses
The Company acquires video, audio and software licenses giving it exclusive
rights to manufacture and distribute such products. The cost of licenses are
included in other assets in the consolidated balance sheet and are amortized
over a period which is the lesser of the term of the license agreement or
its estimated useful life. As of April 27, 1996, April 29, 1995 and April
30, 1994, licenses, net of amortization, amounted to $26,744,000,
$22,571,000 and $21,285,000, respectively.
Intangible Assets
Intangible assets, included in other assets in the consolidated balance
sheet, consist of the excess of consideration paid over the estimated fair
values of net assets of businesses acquired and non-competition and other
ancillary agreements. These assets are amortized using the straight-line
method over periods predominantly ranging from 5 to 15 years. As of April
27, 1996, the weighted average period remaining to be amortized was
approximately 10 years.
Cash Equivalents
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 under Statement of Financial Accounting
Standards No. 107. The Company estimates that fair values generally
approximated carrying values at April 27, 1996, April 29, 1995 and April 30,
1994. Fair values have been determined through information obtained from
market sources and management estimates.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
----------------
2. Acquisition of Business:
-----------------------
Effective January 1, 1995, two majority-owned subsidiaries of the Company
acquired the assets of Madacy Music Group, Inc. The aggregate cash
consideration paid for the assets approximated $22,670,000,including
certain transaction costs. The acquisition was accounted for as a purchase
transaction and, accordingly, the purchase price was allocated to assets
and liabilities based on estimated fair values as of the acquisition date.
The excess of the consideration paid over the estimated fair values of net
assets acquired of approximately $20,000,000 is being amortized on the
straight-line basis over 15 years.
The following unaudited proforma results of operations for the years ended
April 29, 1995 and April 30, 1994 assume the acquisition occurred as of the
beginning of the respective periods after giving effect to certain
adjustments, including amortization of goodwill, increased interest expense
on acquisition debt and related income tax effects. The proforma results
have been prepared for informational purposes only and do not purport to
indicate the results of operations which would have actually occurred had
the combination been in effect on the dates indicated, or which may occur
in the future.
Fiscal Fiscal
1995 1994
-------------- --------------
Net sales $1,249,777,000 $1,091,968,000
Net income 29,677,000 29,612,000
Earnings per common share .89 .89
3. Sales and Accounts Receivable:
-----------------------------
The Company's customers are comprised mainly of mass merchant retail chains
located predominantly in the United States and Canada. For the years ended
April 27, 1996, April 29, 1995 and April 30, 1994, one customer accounted
for approximately 40 percent, 40 percent and 41 percent of the Company's
net sales, and a second customer accounted for approximately 21 percent, 25
percent and 26 percent of the Company's net sales, respectively.
Collectively, these customers accounted for approximately 54 percent, 57
percent and 69 percent of accounts receivable at April 27, 1996, April 29,
1995 and April 30, 1994, respectively.
4. Provisions for Inventory Reduction and Realignment of Operations
----------------------------------------------------------------
The Company has begun implementation of an inventory reduction program
which will reduce financing costs, as well as lower selling, general and
administrative costs due to increased operating efficiency. During the
fourth quarter of fiscal 1996, the Company recorded a $14,500,000 pre-tax
provision related to markdowns and other costs being incurred in connection
with the inventory reduction program.
During fiscal 1996, the Company closed its Entertainment Zone subsidiary,
which sold music, video and book products in departments leased from
certain retailers. In connection with closing this subsidiary, the Company
recognized a $1,500,000 pre-tax charge in the third quarter of fiscal 1996
primarily related to write-offs of display fixtures and other equipment.
The Company is also realigning its operations by replacing existing
distribution centers with new automated distribution centers (ADCs). The
Company recorded a $5,500,000 pre-tax charge against fourth quarter fiscal
1995 results related to costs associated with the transition from the prior
distribution structure to an ADC in its Midwestern region. This charge
included costs for disposal of certain existing facilities and certain
compensation costs. The Company recognized a $2,000,000 pre-tax charge in
the fourth quarter of fiscal 1994 related to realigning its Western region.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
----------------
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 27, 1996, April 29, 1995 and April 30,
1994 are as follows:
1996 1995 1994
----------- ----------- ----------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $12,783,000,
$12,057,000, and $10,352,000 in 1996,
1995 and 1994, respectively $13,769,000 $12,835,000 $11,012,000
=========== =========== ===========
Projected benefit obligation $16,918,000 $15,648,000 $13,401,000
Plan assets at fair value 15,627,000 13,102,000 12,781,000
----------- ----------- -----------
Projected benefit obligation in excess of
plan assets (1,291,000) (2,546,000) (620,000)
Unrecognized net loss from past
experience different from that assumed 503,000 1,450,000 389,000
Unrecognized net gain from excess funding,
being amortized over eighteen years
beginning April 28, 1985 (847,000) (966,000) (1,085,000)
Unrecognized prior service cost 257,000 268,000 280,000
----------- ----------- -----------
Accrued pension liability included in
other liabilities $(1,378,000) $(1,794,000) $(1,036,000)
=========== =========== ===========
Assumptions used in determining the actuarial present value of the
projected benefit obligation included a weighted average discount rate of
7.75 percent for 1996 and 8.0 percent for 1995 and 1994, and a rate of
increase in future compensation levels of 5.0 percent for all periods.
1996 1995 1994
------ ------ ------
Net pension expense included the
following components:
Service cost $ 869,000 $ 797,000 $ 724,000
Interest cost 1,182,000 1,132,000 978,000
Actual return on plan assets (2,149,000) (1,031,000) (580,000)
Net amortization and deferral 926,000 (140,000) (625,000)
----------- ----------- ---------
Net pension expense $ 828,000 $ 758,000 $ 497,000
=========== =========== =========
The assumed long-term rate of return on assets was 8.5 percent for all
years. Plan assets are invested in various pooled investment funds and
mutual funds maintained by the Plan trustee and common stock of the
Company.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
----------------
6. Debt:
----
The Company has a contractually committed, unsecured, five-year,
$145,000,000 credit agreement with a consortium of banks, which is
scheduled to expire in July 1999. Under the agreement, the Company may make
borrowings according to a formula based on eligible accounts receivable. At
April 27, 1996, the maximum borrowings available under the agreement were
approximately $100,000,000, of which $45,000,000 was outstanding at that
date. The Company may elect to pay interest under a variety of formulae
tied principally to either prime or "LIBOR". As of April 27, 1996, interest
rates on the borrowings outstanding ranged from 6.81% to 6.84%.
The Company has entered into amendments to the credit agreement. The
amendments modify certain financial ratio covenant tests and the formula
used to determine permissible borrowing levels under the agreement, in
light of the Company's recent operating performance. Management believes
that the agreement, as amended, will continue to provide sufficient amounts
to fund its day-to-day operations and higher peak seasonal demands. As the
Company intends to extend the maturities of the outstanding balance under
the credit agreement beyond one year, and has the ability to do so, the
debt has been classified as non-current. Borrowings outstanding will be due
on the termination date of the agreement.
In November 1994, the Company entered into a $100,000,000 senior note
agreement with a group of insurance companies. The balance outstanding as
of April 27, 1996 was $96,000,000 of which $4,000,000 is classified as
current. These notes bear interest at rates of 7.81% to 8.59% with average
maturities ranging from three to seven years.
Scheduled maturities for the senior note, credit agreement, and $6,200,000
of Economic Development Corporation (EDC) limited obligation revenue bonds
are as follows:
1998................. $15,400,000
1999................. $63,571,000
2000................. $18,571,000
2001................. $14,571,000
After 2001........... $31,487,000
The EDC bonds, senior note and the credit agreement all contain certain
restrictions and covenants, relating to, among others, interest coverage
ratios, working capital, debt and net worth.
Interest expense for the years ended April 27, 1996, April 29, 1995 and
April 30, 1994, was $13,119,000, $9,136,000 and $7,029,000, respectively.
Interest paid for the years ended April 27, 1996, April 29, 1995 and
April 30, 1994 was $13,178,000, $8,004,000 and $7,262,000, respectively.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
_______________
7. Income Taxes:
------------
The domestic and foreign components of income (loss) before income taxes for
the years ended April 27, 1996, April 29, 1995 and April 30, 1994 are as
follows:
1996 1995 1994
------------- ----------- ------------
Domestic $(32,308,000) $43,723,000 $46,426,000
Foreign (2,906,000) 2,109,000 (787,000)
------------ ----------- -----------
Income (loss) before
income taxes $(35,214,000) $45,832,000 $45,639,000
============ =========== ===========
Provisions for income taxes for the years ended April 27, 1996, April 29, 1995
and April 30, 1994 consist of the following:
1996 1995 1994
------------- ------------ ------------
Currently payable:
Federal $(11,059,000) $14,738,000 $17,749,000
Foreign 1,049,000 475,000 249,000
State and other (2,560,000) 2,882,000 3,257,000
Deferred, net:
Federal 87,000 (390,000) (2,418,000)
Foreign, state and other (255,000) 104,000 (854,000)
------------ ----------- -----------
$(12,738,000) $17,809,000 $17,983,000
============ =========== ===========
The following table provides a reconciliation of the Company's effective
income tax rate to the statutory federal income tax rate:
Percent of Income
--------------------
1996 1995 1994
---- ---- ----
Federal statutory rate 35.0% 35.0% 35.0%
State and local income taxes 5.2 4.3 4.3
Effect of foreign tax provisions (4.1) .6 (.8)
Other .1 (1.0) .9
---- ---- ----
Effective tax rate 36.2% 38.9% 39.4%
==== ==== ====
Items that gave rise to significant portions of the deferred tax accounts at
April 27, 1996, April 29, 1995 and April 30, 1994 are as follows:
April 27, 1996 April 29, 1995 April 30, 1994
--------------------------- -------------------------- ---------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities Assets Liabilities
- --------------------------------------------------------------------------------------------------------------------
Allowances $ 6,807,000 $ 5,228,000 $4,732,000 $ 2,972,000 $2,196,000 $ 3,794,000
Employee benefits 1,585,000 122,000 1,810,000 370,000 1,524,000 369,000
Property and equipment 1,462,000 8,076,000 856,000 7,459,000 1,054,000 5,708,000
Inventories 278,000 4,513,000 342,000 4,861,000 277,000 3,512,000
Other 172,000 --- 176,000 57,000 319,000 76,000
----------- ----------- ---------- ----------- ---------- -----------
$10,304,000 $17,939,000 $7,916,000 $15,719,000 $5,370,000 $13,459,000
=========== =========== ========== =========== ========== ===========
The undistributed earnings of the foreign subsidiaries for which no U.S.
federal income tax liabilities have been recorded were $24,540,000 at April
27, 1996. The Company intends to reinvest indefinitely the undistributed
earnings of its foreign subsidiaries. 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. The Company has net operating loss
carryforwards in certain of its foreign subsidiaries for tax purposes of
$4,845,000 which expire predominantly in 2001 to 2006.
Income taxes paid in 1996, 1995 and 1994 were approximately $1,865,000,
$19,569,000 and $25,204,000, respectively.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
----------------
8. Property and Equipment:
-----------------------
Property and equipment consists of the following:
1996 1995 1994
------------ ------------ ------------
Land $ 4,877,000 $ 6,741,000 $ 7,176,000
Buildings and improvements 31,793,000 42,312,000 44,056,000
Display fixtures 112,207,000 101,051,000 87,538,000
Equipment, furniture and other 59,447,000 58,412,000 40,940,000
Leasehold improvements 1,536,000 3,101,000 2,802,000
------------ ------------ ------------
209,860,000 211,617,000 182,512,000
Less accumulated depreciation
and amortization 98,505,000 86,845,000 70,485,000
------------ ------------ ------------
$111,355,000 $124,772,000 $112,027,000
============ ============ ============
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. After deducting restricted stock, options and awards
issued or granted under the Plan since adoption in September 1992, 808,801
shares of the Company's stock are available for use under the Plan as of
April 27, 1996.
Pursuant to the restricted stock provisions of the Plan, 167,378 shares of
common stock were issued and 221,458 shares of common stock were forfeited
during the year ended April 27, 1996. 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
113,191 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. Through 1996, the Company has not recorded any
net compensation expense related to the restricted stock because minimum
performance goals have not been achieved.
Information with respect to options outstanding under the previous and
current stock option plans, which have various terms and vesting periods as
approved by the Compensation and Stock Option Committee of the Board of
Directors, for the years ended April 30, 1994, April 29, 1995 and April 27,
1996 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, 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
Granted 99,200 10.44 - 14.25
Terminated (93,825) 10.44 - 21.83
Exercised - 0 - -- - --
--------- ---------------
Balance, April 29, 1995 1,222,829 10.44 - 22.17
Granted 336,000 10.06 - 10.06
Terminated (256,145) 10.06 - 21.83
Exercised - 0 - -- - --
--------- ---------------
Balance, April 27, 1996 1,302,684 $10.06 - $22.17
========= ===============
Number of shares exercisable
at April 27, 1996 929,634
=========
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
----------------
10. Quarterly Financial Summary (Unaudited):
---------------------------------------
(amounts in thousands except per share data)
FOR THE THREE MONTHS ENDED
--------------------------
July 29, Oct. 28, Jan. 31, April 27,
Fiscal Year 1996 1995 1995 1996 1996
- ---------------- --------- --------- --------- ---------
Net sales $230,789 $295,170 $345,605 $261,043
Gross profit 52,558 71,079 70,930 35,618
Income (loss) before income taxes (9,831) 5,051 1,633 (32,067)
Net income (loss) (6,469) 3,365 1,097 (20,469)
Earnings (loss) per share (.19) .10 .03* (.61)*
Dividends per share .11 .11 .05 ---
July 30, Oct. 29, Jan. 31, April 29,
Fiscal Year 1995 1994 1994 1995 1995
- ---------------- -------- -------- -------- --------
Net sales $212,464 $347,160 $362,911 $303,527
Gross profit 51,016 80,232 82,087 65,129
Income before income taxes 1,464 25,210 18,894 264
Net income 901 15,480 11,096 546
Earnings per share .03 .46 .33 .02*
Dividends per share .11 .11 .11 .11
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 77,425 68,616 57,549
Income (loss) before income taxes (4,568) 25,503 16,640 8,064
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
* Earnings per common share were improved by $.04 and $.07 for the fourth
quarters of fiscal 1995 and 1994, respectively, resulting from various
year-end adjustments to previous accrual estimates. Income before income
taxes for the quarter ended April 27, 1996 includes the effect of a
$14,500,000 pre-tax inventory reduction provision ($.26 per share after
tax). Income before income taxes for the quarters ended January 31, 1996,
April 29, 1995 and April 30, 1994 include the effect of pre-tax provisions
for realignment of operations of $1,500,000 ($.03 per share after tax),
$5,500,000 ($.10 per share after tax) and $2,000,000 ($.03 per share after
tax), respectively. See note 4 to the consolidated financial statements.
29
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 1996 Annual Meeting of Shareholders
to be filed on or before August 23, 1996, 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 51 (1) President (1990), Chief Executive Officer (1991)
and Director (1989)
Peter J. Cline 49 (2) Executive Vice President/President of Handleman
Entertainment Resources (1994)
Lawrence R. Hicks 51 (3) Executive Vice President/Sales and Merchandising
(1994)
Louis A. Kircos 42 (4) Executive Vice President/Corporate Development
and President of NCE (1994)
Richard J. Morris 50 (5) Senior Vice President/Finance (1994), Secretary
and Chief Financial Officer (1993)
Thomas C. Braum, Jr. 41 (6) 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.
2. Peter J. Cline has served as Executive Vice President/President of
Handleman Entertainment Resources 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.
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 Senior Vice President - Corporate Development
and Subsidiaries in March 1993, and Executive Vice President in April 1994.
In July 1986, Mr. Kircos was elected Treasurer and Secretary, and served as
Treasurer until February 1992, and as Secretary until August 1993. Mr.
Kircos was elected Vice President -Finance in September 1987. In March
1990, Mr. Kircos was elected Senior Vice President - Finance.
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. Thomas C. Braum, Jr. has served as Corporate Controller since June 1988.
In February 1992, Mr. Braum was elected Vice President.
31
Item 11. EXECUTIVE COMPENSATION
Information required by this item is contained in the Handleman Company
definitive Proxy Statement for its 1996 Annual Meeting of Shareholders, to be
filed on or before August 23, 1996 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 1996 Annual Meeting of Shareholders, to be
filed on or before August 23, 1996 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 1996 Annual Meeting of Shareholders, to be
filed on or before August 23, 1996 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 27, 1996, April 29, 1995
and April 30, 1994.
Consolidated Statement of Operations - Years Ended April 27, 1996,
April 29, 1995 and April 30, 1994.
Consolidated Statement of Shareholders' Equity - Years Ended
April 27, 1996, April 29, 1995 and April 30, 1994.
Consolidated Statement of Cash Flows - Years Ended April 27, 1996,
April 29, 1995 and April 30, 1994.
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
II. Valuation and Qualifying Accounts and Reserves
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.
32
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 were filed with the Form 10-K dated May 1, 1993, and are
incorporated herein by reference. The Registrant's Bylaws adopted
March 7, 1990, as amended June 16, 1993 and further amended December
6, 1995, are filed as Exhibit B to this Form 10-K.
S-K Item 601 (10)
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, the Banks named therein
and NBD Bank, N.A., as Agent, dated July 12, 1994 was filed with the
Form 10-K for the year ended April 28, 1995. Amendments Nos. 1, 2 and
3 to the Credit Agreement are filed as Exhibit A to this Form 10-K.
The Note Agreement dated as of November 1, 1994 was filed with the
Form 10-K for the year ended April 28, 1995.
S-K Item 601 (21) - Subsidiaries of the Registrant:
Handleman Company of Canada, Limited, an Ontario Corporation
Entertainment Zone, Inc., a Michigan Corporation
Scorpio Productions, Inc., a Texas Corporation
Hanley Advertising Company, a Michigan Corporation
Rackjobbing, S.A. de C.V.
Rackjobbing Services, S.A. de C.V.
Michigan Property and Risk Management Company, a Michigan Corporation
North Coast Entertainment, Inc., a Michigan Corporation
Anchor Bay Entertainment, Inc., a Michigan Corporation
Sellthrough Entertainment, Inc., a Michigan Corporation
North Coast Entertainment, Ltd., a Canadian Corporation
Sofsource, Inc., a Michigan Corporation
Madacy Entertainment Group, Inc., a Michigan Corporation
Mediaphon, Gmbh, a German Corporation
Madacy Entertainment Group, Ltd., a Canadian Corporation
American Sterling Corp., a Delaware Corporation
Handleman de Argentina S.A.
Handleman do Brasil Comercial Ltda.
Sellthrough Entertainment, Limited, a Canadian Corporation
Madacy Entertainment (U.K.) Limited
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.
33
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,
33-16637 and 33-69030) of our report dated June 5, 1996, on our audits of the
consolidated financial statements and financial statement schedule of Handleman
Company and Subsidiaries as of April 27, 1996, April 29, 1995 and April 30, 1994
and for the years then ended, which report is included in this Annual Report on
Form 10-K.
Coopers & Lybrand L.L.P.
Detroit, Michigan
July 22, 1996
34
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED APRIL 30, 1994, APRIL 29, 1995 AND APRIL 27, 1996
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 April 30, 1994:
Accounts receivable,
allowance for gross
profit impact of estimated
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
=========== =========== =========== ===========
Year ended April 29, 1995:
Accounts receivable,
allowance for gross
profit impact of estimated
future returns $19,613,000 $ 8,510,000 $ 4,070,000 $24,053,000
=========== =========== =========== ===========
Other assets, collectability
allowance for receivables
from bankrupt customers $13,060,000 $ 698,000 $ 582,000 $13,176,000
=========== =========== =========== ===========
Year ended April 27, 1996:
Accounts receivable,
allowance for gross
profit impact of estimated
future returns $24,053,000 $13,972,000 $15,884,000 $22,141,000
=========== =========== =========== ===========
Other assets, collectability
allowance for receivables
from bankrupt customers $13,176,000 $ 4,687,000 $ 3,913,000 $13,950,000
=========== =========== =========== ===========
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 25, 1996 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 Thomas C. Braum, Jr., Vice President,
President, Finance, Secretary Corporate Controller
and Chief Financial Officer (Principal Accounting Officer)
(Principal Financial Officer)
July 25, 1996 July 25, 1996
- --------------------------------- ------------------------------------
DATE DATE
/s/ David Handleman /s/ Richard H. Cummings
- --------------------------------- ------------------------------------
David Handleman, Director Richard H. Cummings, Director
(Chairman of the Board)
July 25, 1996 July 25, 1996
- --------------------------------- ------------------------------------
DATE DATE
/s/ James B. Nicholson /s/ Alan E. Schwartz
- --------------------------------- -----------------------------------
James B. Nicholson, Director Alan E. Schwartz, Director
July 25, 1996 July 25, 1996
- --------------------------------- ------------------------------------
DATE DATE
/s/ Lloyd E. Reuss /s/ Gilbert R. Whitaker
- --------------------------------- ------------------------------------
Lloyd E. Reuss, Director Gilbert R. Whitaker, Jr., Director
July 25, 1996 July 25, 1996
- --------------------------------- ------------------------------------
DATE DATE
/s/ John M. Barth
- ---------------------------------
John M. Barth, Director
July 25, 1996
- ---------------------------------
DATE
36
EXHIBIT A
---------
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT, dated and effective as of
January 30, 1996 (this "Amendment"), is among HANDLEMAN COMPANY, a Michigan
corporation (the "Company"), each of the Subsidiaries of the Company parties to
the Credit Agreement described below (the "Borrowing Subsidiaries"), each of the
Banks party to the Credit Agreement described below (the "Banks") and NBD BANK,
formerly known as NBD Bank, N.A., as agent for the Banks (in such capacity, the
"Agent").
RECITALS
--------
A. The Company, the Borrowing Subsidiaries, the Banks and the Agent are
parties to a Credit Agreement dated as of July 12, 1994 (the "Credit
Agreement").
B. The Company and the Borrowing Subsidiaries have requested that the
Agent and the Banks amend the Credit Agreement as provided herein, and the Agent
and the Banks are willing to do so strictly in accordance with the terms hereof.
TERMS
-----
In consideration of the premises and of the mutual agreements herein
contained, the parties agree as follows:
ARTICLE I. AMENDMENTS. Upon fulfillment of the conditions set forth in Article
III hereof, the Credit Agreement shall be amended as follows:
1.1 The definition of "Applicable Facility Fee" contained in Section 1.1
is restated in its entirety to read as follows:
"Applicable Facility Fee" shall mean twenty one-hundredths of one
percent (0.20%) per annum.
1.2 The definition of "Applicable Margin" contained in Section 1.1 is
restated in its entirety to read as follows:
"Applicable Margin" shall mean, with respect to any Application
Period, the per annum rate set forth based upon the Leverage Ratio for the
Determination Period:
Leverage Ratio Applicable Margin
-------------- ------------------
(a) Greater than or equal to 0.835%
1.25
(b) Less than 1.25 but greater 0.710%
than or equal to 0.65
(c) Less than 0.65 0.550%
For purposes of this definition of the term "Applicable Margin", (a) the term
"Application Period" means a period commencing with and including the 60th day
after the end of the most recently completed fiscal quarter of the Company to
and including the 59th day after the end of the next following fiscal quarter of
the Company or the next succeeding Business Day, (b) the term "Determination
Date" means, with respect to any Application Period, the last day of the
Determination Period for such Application Period, and (c) the term
"Determination Period" means, with respect to any Application Period, the period
of four consecutive fiscal quarters of the Company ending with the fiscal
quarter ending immediately preceding such Application Period.
1.3 Section 5.2(d) is amended by adding the following after the words "May
2, 1996," at the end of clause (i) thereof: "provided that for the fiscal
quarter ending January 31, 1996 the foregoing reference to "2.00 to 1.00" shall
be changed to "1.00 to 1.00".
ARTICLE II. REPRESENTATIONS. The Company and the Borrowing Subsidiaries
represent and warrant to the Agent and the Banks that:
2.1 The execution, delivery and performance of this Amendment has been
duly authorized by all necessary corporate action and is not in contravention of
any law, rule or regulation, or any judgment, decree, writ, injunction, order or
award of any arbitrator, court or governmental authority, or of the terms of the
Company's or any Borrowing Subsidiary's charter or by laws or other
organizational document, or of any contract or undertaking to which the Company
or any Borrowing Subsidiary is a party or by which the Company or any Borrowing
Subsidiary or their respective properties may be bound or affected and will not
result in the imposition of any Lien except for Permitted Liens.
2.2 This Amendment is the legal, valid and binding obligation of the
Company and each Borrowing Subsidiary enforceable against each in accordance
with the terms hereof; except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to creditors' rights and except that the remedy of specific performance
and injunctive and other forms of equitable relief are subject to equitable
defenses and to the discretion of the court before which any proceedings may be
brought.
2.3 After giving effect to the amendments herein contained, the
representations and warranties contained in the Credit Documents are true on and
as of the date hereof with the same force and effect as if made on and as of the
date hereof.
ARTICLE III. CONDITIONS OF EFFECTIVENESS. Article I of this Amendment shall
not become effective until each of the following has been satisfied, unless
waived in writing by the Required Banks at any time:
3.1 Copies of resolutions adopted by the executive committee of the board
of directors of the Company and each Borrowing Subsidiary, certified by an
officer of the Company and each Borrowing Subsidiary, as the case may be, as
being true and correct and in full force and effect without amendment as of the
date hereof, authorizing the Company and each Borrowing Subsidiary to enter into
this Amendment, shall have been delivered to the Agent.
FIRST AMENDMENT TO CREDIT AGREEMENT Page 2
3.2 This Amendment shall be signed by the Company, each Borrowing
Subsidiary, the Required Banks and the Agent.
3.3 The Company shall have paid an amendment fee to the Agent, for the pro
rata benefit of the Banks executing this Amendment, in an amount equal to 0.10%
of the aggregate Commitments.
ARTICLE IV. MISCELLANEOUS.
--------------
4.1 References in the Credit Agreement or in any other Loan Document to
the Credit Agreement shall be deemed to be references to the Credit Agreement as
amended hereby and as further amended from time to time.
4.2 The Company and the Borrowing Subsidiaries agree to pay and to save
the Agent harmless for the payment of all costs and expenses arising in
connection with this Amendment, including the reasonable fees of counsel to the
Agent in connection with preparing this Amendment and the related documents.
4.3 Except as expressly amended hereby, the Company and the Borrowing
Subsidiaries agree that the Credit Agreement and all other Loan Documents are
ratified and confirmed and shall remain in full force and effect and that the
Company and the Borrowing Subsidiaries have no set off, counterclaim or defense
with respect to any of the foregoing. Terms used but not defined herein shall
have the respective meanings ascribed thereto in the Credit Agreement.
4.4 Notwithstanding anything in the Credit Agreement to the contrary, it
is acknowledged and agreed by all parties that as of January 30, 1996 the
Applicable Margin is 0.550% and the Applicable Facility Fee is 0.20%.
4.5 This Amendment may be signed upon any number of counterparts with the
same effect as if the signatures thereto and hereto were upon the same
instrument.
IN WITNESS WHEREOF, the parties signing this Amendment have caused this
Amendment to be executed and delivered as of the day and year first above
written.
HANDLEMAN COMPANY NORTH COAST ENTERTAINMENT, INC.
By: By:
----------------------------- ------------------------------
Its: Its:
-------------------------- ---------------------------
"Company" "Borrowing Subsidiary"
FIRST AMENDMENT TO CREDIT AGREEMENT Page 3
NBD BANK, as a Bank and as Agent COMERICA BANK
By: By:
------------------------------- -------------------------------
Its: Its:
--------------------------- ---------------------------
PNC BANK, NATIONAL ASSOCIATION UNITED STATES NATIONAL BANK OF OREGON
By: By:
------------------------------- -------------------------------
Its: Its:
--------------------------- ---------------------------
ROYAL BANK OF CANADA, Grand Cayman SUNTRUST BANK, ATLANTA, formerly
(North America No. 1) Branch known as TRUST COMPANY BANK
By: By:
------------------------------- -------------------------------
Its: Its:
--------------------------- ---------------------------
By:
-------------------------------
Its:
---------------------------
THE FIFTH THIRD BANK
By:
-------------------------------
Its:
----------------------------
FIRST AMENDMENT TO CREDIT AGREEMENT Page 4
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT, dated and effective as of March
29, 1996 (this "Amendment"), is among HANDLEMAN COMPANY, a Michigan corporation
(the "Company"), each of the Subsidiaries of the Company parties to the Credit
Agreement described below (the "Borrowing Subsidiaries"), each of the Banks
party to the Credit Agreement described below (the "Banks") and NBD BANK,
formerly known as NBD Bank, N.A., as agent for the Banks (in such capacity, the
"Agent").
RECITALS
--------
A. The Company, the Borrowing Subsidiaries, the Banks and the Agent are
parties to a Credit Agreement dated as of July 12, 1994, as amended by a First
Amendment to Credit Agreement dated as of January 30, 1996 (the "Credit
Agreement").
B. The Company and the Borrowing Subsidiaries have requested that the
Agent and the Banks amend the Credit Agreement as provided herein, and the Agent
and the Banks are willing to do so strictly in accordance with the terms hereof.
TERMS
-----
In consideration of the premises and of the mutual agreements herein
contained, the parties agree as follows:
ARTICLE I. AMENDMENTS. Upon fulfillment of the conditions set forth in Article
III hereof, the Credit Agreement shall be amended as follows:
1.1 The definitions of "Adjusted EBIT", "Applicable Facility Fee" and
"Applicable Margin" contained in Section 1.1 are restated in their entirety to
read as follows:
"Adjusted EBIT" of any person shall mean, for any period, the Net
Income of such person for such period plus, without duplication and to the
extent included in the computation of such Net Income (a) net interest expense,
(b) federal, state and local income taxes and other equivalent taxes, (c)
extraordinary items (net of any extraordinary gains) and special reserves and
(d) to the extent not otherwise included in the foregoing clause (c), charges
taken during the fourth fiscal quarter of fiscal year 1996 up to a maximum
amount of $15,000,000 associated with the inventory reduction program currently
being implemented by the Company, all as determined in accordance with generally
accepted accounting principles.
"Applicable Facility Fee" shall mean, (a) if the Company has not
received an Investment Grade Senior Debt Rating, with respect to any Application
Period, the per annum rate set forth below based upon the Interest Coverage
Ratio for the Determination Period, provided that it is acknowledged and agreed
that the Applicable Facility Fee as of March 29, 1996 is 0.375%:
INTEREST APPLICABLE
COVERAGE RATIO FACILITY FEE
-------------- ------------
equal to or greater than 3.0 0.150%
less than 3.0 but equal to or greater than 2.0 0.150%
less than 2.0 but equal to or greater than 1.5 0.250%
less than 1.5 but equal to or greater than 1.0 0.300%
less than 1.0 0.375%
or (b) if the Company, in its sole discretion, has received an Investment Grade
Senior Debt Rating, the per annum rate set forth below based upon the Investment
Grade Senior Debt Rating of the Company in effect on the date of determination
which change in the per annum rate shall be effective fourteen Business Days
after the Company provides written notice to the Agent that it has initially
obtained the Investment Grade Senior Debt Rating or of any subsequent change in
the Investment Grade Senior Debt Rating, which notice the Company agrees to
provide to the Agent within seven Business Days after obtaining the rating or
any subsequent change, provided, however, that in determining the Applicable
Facility Fee, the Investment Grade Senior Debt Rating shall be determined based
upon the debt ratings given the Company by S&P, Moody's and Fitch, and, in the
event such ratings are not equivalent, the Applicable Facility Fee shall be
determined based upon: (i) in the case of two different ratings, the lower of
the two ratings or (ii) in the case of three different ratings (A) if two
agencies ratings are in agreement, the rating on which two agencies are in
agreement or (B) if all three agencies have issued different ratings, the rating
between the highest and lowest rating of the agencies:
Investment Grade Applicable
Senior Debt Rating Facility
S&P/Moody's/Fitch Fee
------------------ ----------
(a) A/A2/A or higher 0.10%
(b) A-/A3/A- 0.125%
(c) BBB+/Baa/BBB+ 0.15%
(d) BBB/Baa2/BBB 0.15%
(e) BBB-/Baa3/BBB- 0.20%
"Applicable Margin" shall mean (a) if the Company has not received an
Investment Grade Senior Debt Rating, with respect to any Application Period, the
per annum rate found in the chart set forth below by reading down the column of
Leverage Ratio ranges to the row for the range into which the Leverage Ratio as
of the relevant Determination Date falls, and then reading across that row to
the Interest Coverage Ratio column for the range into which the Interest
Coverage Ratio for the relevant Determination Period falls, provided that as of
March 29, 1996 the Applicable Margin shall be 1.375%:
SECOND AMENDMENT TO CREDIT AGREEMENT Page 2
APPLICABLE INTEREST INTEREST INTEREST INTEREST INTEREST
MARGIN COVERAGE RATIO COVERAGE RATIO COVERAGE RATIO COVERAGE RATIO COVERAGE RATIO
CHART LESS THAN EQUAL TO OR EQUAL TO OR EQUAL TO OR EQUAL TO OR
1.00:1.00 GREATER THAN GREATER THAN GREATER THAN GREATER THAN
1.00:1.00 AND 1.50:1.00 AND 2.00:1.00 AND 3.00:1.00
LESS THAN LESS THAN LESS THAN
1.50:1.00 2.00:1.00 3.00:1.00
- --------------- -------------- -------------- -------------- -------------- ---------------
Leverage Ratio
less than 1.375% 1.200% 1.000% 0.5000% 0.3400%
0.65:1.00
- ------------------------------------------------------------------------------------------------------
Leverage Ratio
equal to or 1.625% 1.375% 1.200% 1.000% 0.500%
greater than
0.65:1.00 and
less than or
equal to
1.25:1.00
- -----------------------------------------------------------------------------------------------------
Leverage Ratio
greater than 1.625% 1.375% 1.375% 1.200% 0.625%
1.25:1.00
=========================================================================================================
or (b) if the Company, in its sole discretion, has received an Investment Grade
Senior Debt Rating as of the Determination Date, the per annum rate set forth in
the table below based upon the Investment Grade Senior Debt Rating of the
Company in effect on the Determination Date, which change in the per annum rate
shall be effective fourteen Business Days after the Company provides written
notice to the Agent that it has initially obtained the Investment Grade Senior
Rating or of any subsequent change in the Investment Grade Senior Debt Rating,
which notice the Company agrees to provide to the Agent within seven Business
Days after obtaining the rating or any subsequent change, provided, however,
that in determining the Applicable Margin pursuant to table below, the
Investment Grade Senior Debt Rating shall be determined based upon the debt
ratings given the Company by S&P, Moody's and Fitch, and, in the event such
ratings are not equivalent, the Applicable Margin shall be determined based
upon: (i) in the case of two different ratings, the lower of the two ratings or
(ii) in the case of three different ratings (A) if two agencies ratings are in
agreement, the rating on which two agencies are in agreement or (B) if all three
agencies have issued different ratings, the rating between the highest and
lowest rating of the agencies:
Investment Grade
Senior Debt Rating
S&P/Moody's/Fitch Applicable Margin
------------------ -----------------
(a) A/A2/A or higher 0.20%
(b) A-/A3/A- 0.275%
(c) BBB+/Baa1/BBB+ 0.30%
(d) BBB/Baa2/BBB 0.34%
SECOND AMENDMENT TO CREDIT AGREEMENT Page 3
(e) BBB-/Baa3/BBB- 0.40%
1.2 The following new definitions are hereby added to Section 1.1 in
appropriate alphabetical order:
"Adjusted EBITDA" of any person shall mean, for any period, the
Adjusted EBIT for such period plus, to the extent included in the computation of
such Adjusted EBIT, depreciation and amortization expense, all as determined in
accordance with generally accepted accounting principles.
"Application Period" shall mean a period commencing with and including
the 60th day after the end of the most recently completed fiscal quarter of the
Company to and including the 59th day after the end of the next following fiscal
quarter of the Company or the next succeeding Business Day.
"Borrowing Base" shall mean (a) as of any date in the fiscal months of
February, March, July, August and October, an amount equal to eighty percent
(80%) of Eligible Accounts Receivable, and (b) as of any other date, an amount
equal to seventy-five percent (75%) of Eligible Accounts Receivable.
"Capital Stock" shall include all capital stock and any securities
exchangeable for or convertible into capital stock and any warrants, rights,
restricted stock, employee stock options, or other options to purchase or
otherwise acquire capital stock or such securities or any other form of equity
securities.
"Determination Date" means, with respect to any Application Period,
the last day of the Determination Period for such Application Period.
"Determination Period" means, with respect to any Application Period,
the period of four consecutive fiscal quarters of the Company ending with the
fiscal quarter ending immediately preceding such Application Period.
"Eligible Accounts Receivable" shall mean, as of any date, those
accounts receivable owned by the Company or any of its Subsidiaries, on a
consolidated basis, valued at the face amount thereof (based upon the Dollar
amount thereof if payable in Dollars and based upon the Dollar Equivalent if
payable in any currency other than Dollars) less sales, excise or similar taxes
and less returns actually made, discounts, claims, credits and allowances of any
nature at any time issued, owing, granted, outstanding, available or claimed,
and as reduced by any reserves (except for reserves for future returns
consistent with past practices of the Company) or charges taken by the Company
or any of its Subsidiaries, on a consolidated basis, with respect thereto,
provided that all such reserves and other charges required under generally
acceptable accounting principles or consistent with the past practices of the
Company and its Subsidiaries shall be taken, but shall not include any such
account receivable (a) that is not a bona fide existing obligation created by
the sale and actual delivery of inventory, goods or other property or the
furnishing of services or other good and sufficient consideration in the
ordinary course of business, provided that deferred accounts receivable shall be
Eligible Accounts Receivable unless excluded by any of the following clauses (b)
through (g) of this definition, (b) that has been classified by the Company or
any of its Subsidiaries as doubtful or has otherwise failed to meet established
or customary credit standards of the Company or any of its Subsidiaries, except
to the extent it is already covered by a reserve, (c) that is payable by any
Significant Trade Debtor that is the subject
SECOND AMENDMENT TO CREDIT AGREEMENT Page 4
of any proceeding of the type described in Section 6.1(i) hereof, (d) which is
evidenced by a promissory note or other instrument, (e) that is payable by any
Significant Trade Debtor if 15% or more (based on value, such value to be
determined based on the lower of cost or market in accordance with generally
accepted accounting principles) of the inventory of such Significant Trade
Debtor is subject to any Lien superior in priority to any Lien on such assets in
favor of the Company, (f) that is subordinate or junior in right or priority of
payment to any other obligation or claim, or (g) that for any other reason is at
any time reasonably deemed by the Agent to be ineligible. Notwithstanding the
foregoing, it is agreed that the amount by which the aggregate deferred accounts
receivable of the Company or any of its Subsidiaries and other accounts
receivable of the Company or any of its Subsidiaries not payable on customary
terms owing from any Significant Trade Debtor exceeds $10,000,000 shall be
excluded from the determination of the amount of Eligible Accounts Receivable.
"Interest Coverage Ratio Condition" shall be deemed to exist on any
date when the Interest Coverage Ratio was not greater than or equal to 2.0 to
1.0 as calculated as of the last day of the most recently ended fiscal quarter
of the Company.
"Net Income" of any person shall mean, for any period, the net income
(or loss) of such person for such period taken as a single accounting period,
determined in accordance with generally accepted accounting principles.
"Senior Debt" shall mean the consolidated unsecured Indebtedness of
the Company and its Subsidiaries, exclusive of any Subordinated Debt and any
interest rate or currency swap, rate cap or other similar transaction. All
reimbursement obligations, guarantees and other contingent liabilities
constituting Senior Debt shall be valued at the maximum amount possible for such
liability.
"Significant Trade Debtor" shall mean any account debtor of the
Company as to which the payments received from such account debtor accounted for
20% or more of the revenues of the Company and its Subsidiaries for the most
recently ended fiscal year of the Company.
1.3 Section 2.1(a) is restated in its entirety to read as follows:
(a) Revolving Credit Advances. Each Bank agrees, for itself only,
subject to the terms and conditions of this Agreement, to make Revolving Credit
Loans to the Borrowers pursuant to Section 2.6 and Section 3.3 and to
participate in Letter of Credit Advances to the Borrowers pursuant to Section
2.6 from time to time from and including the Effective Date to but excluding the
Termination Date not to exceed an aggregate principal amount at any time
outstanding the amount of its respective Commitment as of the date any such
Syndicated Advance is made; provided, however, that (i) the aggregate principal
amount of Letter of Credit Advances outstanding at any time shall not exceed
$50,000,000 and (ii) at any time an Interest Coverage Ratio Condition exists,
the aggregate principal amount of all Senior Debt may not exceed the Borrowing
Base, and the Borrowers will not be entitled to obtain any Revolving Credit
Advances if such condition, in addition to other conditions contained herein, is
not satisfied both before and after giving effect to such Revolving Credit
Advance. Notwithstanding anything herein to the contrary, Advances may only be
used for necessary working capital requirements of the Borrowers, acquisitions
and capital expenditures by the Borrowers to the extent permitted hereunder and
other expenditures by the Borrowers in the ordinary course of business.
1.4 The following is hereby added to the end of Section 2.1(b):
SECOND AMENDMENT TO CREDIT AGREEMENT Page 5
Notwithstanding the foregoing, it is acknowledged and agreed that, at
any time an Interest Coverage Ratio Condition exists, the aggregate principal
amount of Senior Debt may not exceed the Borrowing Base, and the Borrowers will
not be entitled to obtain any Term Loan if such condition, in addition to other
conditions contained herein, is not satisfied both before and after such Term
Loan is made.
1.5 The following is hereby added to the end of each sentence contained in
Section 2.3:
"and, at any time an Interest Coverage Ratio Condition exists, the
aggregate principal amount of all Senior Debt may not exceed the Borrowing
Base."
1.6 Section 2.5(b) is amended by deleting reference therein to "two and
one-half basis points (2.5b.p.)" and substituting "0.125%" in place thereof.
1.7 Section 3.1(e) is hereby redesignated as Section 3.1(h), and the
following new Sections 3.1(e), (f) and (g) are hereby added after existing
Section 3.1(e) to read as follows:
(e) In addition to all other prepayments required hereunder, at any
time an Interest Coverage Ratio Condition exists and the Senior Debt exceeds the
Borrowing Base, the Company shall immediately prepay the Advances by an amount
such that the aggregate principal amount of the Senior Debt is equal to or less
than the Borrowing Base. Prepayments required under this subsection shall be
applied in a manner to minimize any amounts, if any, that may be due under
Section 3.9 hereof.
(f) In addition to all other prepayments required hereunder, if an
Interest Coverage Ratio Condition exists the Borrowers shall immediately prepay
the Advances by an amount equal to 100% of the net cash proceeds from any sale
or other disposition of any assets of any Borrower or any of their Subsidiaries
which net cash proceeds exceed $2,000,000 for any such sale or $10,000,000 in
the aggregate for all such sales in any twelve month period, other than
inventory sold in the ordinary course of business. Prepayments required under
this subsection shall be applied in a manner to minimize any amounts, if any,
that may be due under Section 3.9 hereof.
(g) In addition to all other payments and prepayments required
hereunder, if an Interest Coverage Ratio Condition exists the Borrowers shall
immediately prepay the Advances by an amount equal to 100% of all net cash
proceeds of any Subordinated Debt or any Capital Stock issued or otherwise sold
at any time, provided that up to $500,000 in aggregate amount of net cash
proceeds received by the Company as a result of the exercise of stock options
existing as of March 1, 1996 shall be excluded from the prepayment requirement
under this Section 3.1(g). Prepayments required under this subsection shall be
applied in a manner to minimize any amounts, if any, that may be due under
Section 3.9 hereof.
1.8 A new Section 4.13 is hereby added to read as follows:
4.13 Borrowing Base. If an Interest Coverage Ratio Condition exists,
the Senior Debt is equal to or less than the Borrowing Base.
1.9 The period at the end of Section 5.1(d)(vi) is deleted and "; and" is
substituted in place thereof and the following new Section 5.1(d)(vii) is hereby
added thereafter:
SECOND AMENDMENT TO CREDIT AGREEMENT Page 6
(vii) If an Interest Coverage Ratio Condition exists, within 20
calendar days of the last day and of the fifteenth day of each fiscal month, a
Borrowing Base compliance certificate calculated as of such last day and such
fifteenth day, as the case may be, and in form satisfactory to the Agent.
1.10 Section 5.2(d) is hereby restated in its entirety to read as
follows:
(d) Interest Coverage Ratio. Permit or suffer the Interest Coverage
Ratio to be less than 2.0 to 1.0 as of the end of any fiscal
quarter, commencing with the fiscal quarter ending May 3, 1997.
1.11 Reference in Section 5.2(f) to "$35,000,000" is hereby deleted and
"(i) if an Interest Coverage Ratio Condition does not exist, $35,000,000 or (ii)
if an Interest Coverage Ratio Condition does exist, $25,000,000" is substituted
in place thereof.
1.12 The last paragraph of Section 5.2(g) beginning with the word
"Notwithstanding" is hereby restated in its entirety to read as follows:
";provided, however, that (A) if an Interest Coverage Ratio
Condition exists, the aggregate outstanding principal amount of Indebtedness
secured by all Liens permitted under Section 5.2(g)(v) above shall not exceed
10% of the consolidated Tangible Net Worth of the Company and its Subsidiaries
and (B) if an Interest Coverage Ratio Condition does not exist, then,
notwithstanding the foregoing subparagraphs (i) through (vii), and in addition
to the Liens permitted thereby, the Company and its Subsidiaries may create,
issue, incur or assume Liens in an aggregate amount at any time outstanding not
exceeding 15% of Consolidated Tangible Net Worth of the Company and its
Subsidiaries;".
1.13 Reference in Section 5.2(j) to "$50,000,000" is hereby deleted and
the following is substituted in place thereof: "(i) if an Interest Coverage
Ratio Condition does not exist, $50,000,000, or (ii) if an Interest Coverage
Ratio Condition does exist, (A) $5,000,000 in aggregate amount for the period
from February 1, 1996 through January 31, 1997 and (B) at any time thereafter,
$35,000,000 in aggregate amount in any twelve month period, provided that not
more than $17,500,000 of such $35,000,000 shall be in cash or cash equivalents."
1.14 The following new Sections are hereby added after Section 5.2(j):
(k) Nature of Business. If an Interest Coverage Ratio Condition
exists, make or suffer any substantial change in the nature of its business from
that engaged in on the date hereof or engage in any other businesses other than
those in which it is engaged on the date hereof or which are directly related to
its core business.
(l) Investments, Loans and Advances. If an Interest Coverage Ratio
Condition exists, purchase or otherwise acquire any Capital Stock of or other
ownership interest in, or debt securities of or other evidences of Indebtedness
of, any other person; nor acquire all or any material portion of the assets of
any person; nor make any loan or advance of any of its funds or property or make
any other extension of credit to, or make any investment or acquire any interest
whatsoever in, any other person; nor permit any Subsidiary to do any of the
foregoing; other than (i) extensions of trade credit made in the ordinary course
of business on customary credit terms and commission, travel, relocation and
similar advances made to officers and employees in the ordinary course of
business, (ii)
SECOND AMENDMENT TO CREDIT AGREEMENT Page 7
other investments consistent with the investment policy of the Company in effect
as of March 29, 1996, (iii) acquisitions and investments permitted pursuant to
Section 5.2(j), (iv) advances in the ordinary course of business for proprietary
products and (v) investments, loans and advances in and to any Subsidiary or
existing Affiliate of the Company.
(m) Negative Pledge Limitation. If an Interest Coverage Ratio
Condition exists, enter into any agreement with any person other than the Agent
and the Banks pursuant hereto which prohibits or limits the ability of any
Borrower to create, incur, assume or suffer to exist any Lien upon any of its
assets, rights, revenues or property, real, personal or mixed, tangible or
intangible, whether now owned or hereafter acquired.
(n) Payments and Modification of Debt. If an Interest Coverage Ratio
Condition exists, other than Indebtedness to the Banks and the Agent pursuant
hereto, make, or permit any Subsidiary to make, any optional payment, prepayment
or redemption of any of its or any of its Subsidiaries' Indebtedness or enter
into any agreement or arrangement providing for the defeasance of any of such
Indebtedness, or, other than amendments to the agreements governing any existing
letters of credit issued for the account of the Company by any Bank, which do
not shorten the maturity or require any other earlier or increased payment,
amend or modify, or consent or agree to any amendment or modification of, any
instrument or agreement under which any of its Indebtedness is issued or created
or otherwise related thereto,
(o) Additional Covenants. If an Interest Coverage Ratio Condition
exists, if at any time any Borrower shall enter into or be a party to any
instrument or agreement, including all such instruments or agreements in
existence as of the date hereof and all such instruments or agreements entered
into after the date hereof, relating to or amending any provisions applicable to
any of its Indebtedness which includes covenants or defaults not substantially
provided for in this Agreement or more favorable to the lender or lenders
thereunder than those provided for in this Agreement, then the Borrowers shall
promptly so advise the Agent and the Banks. Thereupon, if the Agent or the
Required Banks shall request, upon notice to the Borrowers, the Agents and the
Banks shall enter into an amendment to this Agreement or an additional agreement
(as the Agent may request), providing for substantially the same covenants and
defaults as those provided for in such instrument or agreement to the extent
required and as may be selected by the Agents. In addition to the foregoing, any
covenants or defaults in any existing agreements or other documents evidencing
or relating to any Indebtedness of any Borrower not substantially provided for
in this Agreement or more favorable to the holders of such Indebtedness, are
hereby incorporated by reference into this Agreement to the same extent as if
set forth fully herein, and no subsequent amendment, waiver or modification
thereof shall effect any such covenants or defaults as incorporated herein.
(p) Capital Expenditures. If an Interest Coverage Ratio Condition
exists, make any capital expenditures, other than capital expenditures for the
acquisition of fixtures, if the aggregate amount thereof made by the Company or
any of its Subsidiaries would exceed, on a consolidated basis, (i) $17,000,000
for the four consecutive fiscal quarter period ending April 27, 1996, (ii)
$25,500,000 for the four consecutive fiscal quarter period ending July 27, 1996,
(iii) $24,700,000 for the four consecutive fiscal quarter period ending October
26, 1996, (iv) $22,800,000 for the four consecutive fiscal quarter period ending
January 31, 1997, or (v) $19,400,000 for any four consecutive fiscal quarter
period ending thereafter. Notwithstanding the foregoing, the Company agrees
that (A) it may not make any capital expenditures for or relating to an eastern
automated distribution center until receipt and review by the Banks of the 1997
second quarter financial statements and covenant compliance showing that no
Default or Event of Default has occurred and is continuing and (B) if the
Company does not
SECOND AMENDMENT TO CREDIT AGREEMENT Page 8
establish an eastern automated distribution center, the amount described in the
foregoing sentence for the four consecutive fiscal quarter period ending January
31, 1997 shall be $19,800,000 instead of $22,800,000 and the amount for any four
consecutive fiscal quarter period ending after January 31, 1997 shall be
$15,400,000 instead of $19,400,000.
(r) Adjusted EBITDA. Permit or suffer the consolidated Adjusted
EBITDA of the Company and its Subsidiaries, determined cumulatively from
February 1, 1996 to the date of determination described below, to be less than
the amounts shown for such dates in the table below:
Date of Determination Adjusted EBITDA
--------------------- ---------------
April 27, 1996 -$ 3,000,000
July 27, 1996 -$ 3,000,000
October 26, 1996 $19,000,000
January 31, 1997 $51,000,000
1.15 The first two lines of Section 9.6(d) are restated to read as
follows: "(d) Each Bank may, with the prior consent of the Company (which
consent may not be unreasonably withheld) and the Agent, assign"
ARTICLE II. REPRESENTATIONS. The Company and the Borrowing Subsidiaries
represent and warrant to the Agent and the Banks that:
2.1 The execution, delivery and performance of this Amendment has been
duly authorized by all necessary corporate action and is not in contravention of
any material law, rule or regulation, or any judgment, decree, writ, injunction,
order or award of any arbitrator, court or governmental authority, or of the
terms of the Company's or any Borrowing Subsidiary's charter or by-laws or other
organizational document, or of any material contract or undertaking to which the
Company or any Borrowing Subsidiary is a party or by which the Company or any
Borrowing Subsidiary or their respective properties may be bound or affected and
will not result in the imposition of any Lien except for Permitted Liens.
2.2 This Amendment is the legal, valid and binding obligation of the
Company and each Borrowing Subsidiary enforceable against each in accordance
with the terms hereof; except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to creditors' rights and except that the remedy of specific performance
and injunctive and other forms of equitable relief are subject to equitable
defenses and to the discretion of the court before which any proceedings may be
brought.
2.3 After giving effect to the amendments herein contained, the
representations and warranties contained in the Credit Documents are true on and
as of the date hereof with the same force and effect as if made on and as of the
date hereof and no Default or Event of Default exists.
SECOND AMENDMENT TO CREDIT AGREEMENT Page 9
ARTICLE III. CONDITIONS OF EFFECTIVENESS. Article I of this Amendment shall
not become effective until each of the following has been satisfied, unless
waived in writing by the Required Banks at any time:
3.1 Copies of resolutions adopted by the executive committee of the board
of directors of the Company and each Borrowing Subsidiary, certified by an
officer of the Company and each Borrowing Subsidiary, as the case may be, as
being true and correct and in full force and effect without amendment as of the
date hereof, authorizing the Company and each Borrowing Subsidiary to enter into
this Amendment, shall have been delivered to the Agent.
3.2 This Amendment shall be signed by the Company, each Borrowing
Subsidiary, the Required Banks and the Agent.
3.3 The Company shall have paid an amendment fee to the Agent, for the pro
rata benefit of the Banks executing this Amendment by March 29, 1996, in an
amount equal to 0.15% of the aggregate Commitments of the Banks approving this
Amendment.
ARTICLE IV. MISCELLANEOUS.
--------------
4.1 References in the Credit Agreement or in any other Loan Document to
the Credit Agreement shall be deemed to be references to the Credit Agreement as
amended hereby and as further amended from time to time.
4.2 The Company and the Borrowing Subsidiaries agree to pay and to save
the Agent harmless for the payment of all costs of the Agent only and expenses
of the Agent only arising in connection with this Amendment, including the
reasonable fees of counsel to the Agent only in connection with preparing this
Amendment and the related documents.
4.3 Except as expressly amended hereby, the Company and the Borrowing
Subsidiaries agree that the Credit Agreement and all other Loan Documents are
ratified and confirmed and shall remain in full force and effect and that the
Company and the Borrowing Subsidiaries have no set off, counterclaim or defense
with respect to any of the foregoing. Terms used but not defined herein shall
have the respective meanings ascribed thereto in the Credit Agreement.
4.4 This Amendment may be signed upon any number of counterparts with the
same effect as if the signatures thereto and hereto were upon the same
instrument.
IN WITNESS WHEREOF, the parties signing this Amendment have caused this
Amendment to be executed and delivered as of the day and year first above
written.
HANDLEMAN COMPANY NORTH COAST ENTERTAINMENT, INC.
By:____________________________ By:____________________________
Its:__________________________ Its:_________________________
"Company" "Borrowing Subsidiary"
SECOND AMENDMENT TO CREDIT AGREEMENT Page 10
NBD BANK, AS A BANK AND AS AGENT COMERICA BANK
By:______________________________ By:__________________________________
Its:___________________________ Its:_______________________________
PNC BANK, NATIONAL ASSOCIATION UNITED STATES NATIONAL BANK OF OREGON
By:______________________________ By:__________________________________
Its:___________________________ Its:_______________________________
ROYAL BANK OF CANADA, GRAND CAYMAN SUNTRUST BANK, ATLANTA, FORMERLY
(NORTH AMERICA NO. 1) BRANCH KNOWN AS TRUST COMPANY BANK
By:______________________________ By:__________________________________
Its:___________________________ Its:_______________________________
By:__________________________________
Its:_______________________________
THE FIFTH THIRD BANK
By:______________________________
Its:___________________________
SECOND AMENDMENT TO CREDIT AGREEMENT Page 11
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT, dated as of June 12, 1996 (this
"Amendment"), is among HANDLEMAN COMPANY, a Michigan corporation (the
"Company"), each of the Subsidiaries of the Company parties to the Credit
Agreement described below (the "Borrowing Subsidiaries"), each of the Banks
party to the Credit Agreement described below (the "Banks") and NBD BANK,
formerly known as NBD Bank, N.A., as agent for the Banks (in such capacity, the
"Agent").
RECITALS
--------
A. The Company, the Borrowing Subsidiaries, the Banks and the Agent are
parties to a Credit Agreement dated as of July 12, 1994, as amended by a First
Amendment to Credit Agreement dated as of January 30, 1996 and a Second
Amendment dated as of March 29, 1996 (the "Credit Agreement").
B. The Company and the Borrowing Subsidiaries have requested that the
Agent and the Banks amend the Credit Agreement as provided herein, and the Agent
and the Banks are willing to do so strictly in accordance with the terms hereof.
TERMS
-----
In consideration of the premises and of the mutual agreements herein
contained, the parties agree as follows:
ARTICLE I. AMENDMENTS. Upon fulfillment of the conditions set forth in Article
III hereof, the Credit Agreement shall be amended as follows:
1.1 The definition of Borrowing Base in Section 1.1 is amended by adding
the following to the end thereof: "Notwithstanding anything herein to the
contrary, the Company, the Banks and the Agent agree that the percentages
specified in the clauses (a) and (b) of the foregoing shall be amended on or
before July 30, 1996, and the Company, the Banks and the Agent shall negotiate
prior to that date to find mutually acceptable percentages, provided that if a
mutually acceptable agreement cannot be reached the Required Banks alone may (i)
amend the percentages in their discretion to percentages not less than 70% at
any time on or after July 30, 1996, and (ii) amend the percentages in their
discretion to any percentage at any time on or after July 30, 1996 if the
Required Banks give the Company 60 days prior written notice of the effective
date of any such amendment.
1.2 Clause (e) of the definition of Eligible Accounts Receivable in
Section 1.1 is amended to read in its entirety as follows:
"(e) that is payable by any Significant Trade Debtor (other than Kmart
Corporation or any of its Subsidiaries) if 15% or more (based on value, such
value to be determined based on the lower of cost or market in accordance with
generally accepted accounting principles) of the inventory of such Significant
Trade Debtor (other than Kmart Corporation or any of its Subsidiaries) is
subject to any Lien superior in priority to any Lien on such assets in favor of
the Company,"
ARTICLE II. REPRESENTATIONS. The Company and the Borrowing Subsidiaries
represent and warrant to the Agent and the Banks that:
2.1 The execution, delivery and performance of this Amendment has been
duly authorized by all necessary corporate action and is not in contravention of
any material law, rule or regulation, or any judgment, decree, writ, injunction,
order or award of any arbitrator, court or governmental authority, or of the
terms of the Company's or any Borrowing Subsidiary's charter or by-laws or other
organizational document, or of any material contract or undertaking to which the
Company or any Borrowing Subsidiary is a party or by which the Company or any
Borrowing Subsidiary or their respective properties may be bound or affected and
will not result in the imposition of any Lien except for Permitted Liens.
2.2 This Amendment is the legal, valid and binding obligation of the
Company and each Borrowing Subsidiary enforceable against each in accordance
with the terms hereof; except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to creditors' rights and except that the remedy of specific performance
and injunctive and other forms of equitable relief are subject to equitable
defenses and to the discretion of the court before which any proceedings may be
brought.
2.3 After giving effect to the amendments herein contained, the
representations and warranties contained in the Credit Documents are true on and
as of the date hereof with the same force and effect as if made on and as of the
date hereof and no Default or Event of Default exists.
ARTICLE III. CONDITIONS OF EFFECTIVENESS. Article I of this Amendment shall
not become effective until each of the following has been satisfied, unless
waived in writing by the Required Banks at any time:
3.1 Copies of resolutions adopted by the executive committee of the board
of directors of the Company and each Borrowing Subsidiary, certified by an
officer of the Company and each Borrowing Subsidiary, as the case may be, as
being true and correct and in full force and effect without amendment as of the
date hereof, authorizing the Company and each Borrowing Subsidiary to enter into
this Amendment, shall have been delivered to the Agent.
3.2 This Amendment shall be signed by the Company, each Borrowing
Subsidiary, the Required Banks and the Agent.
3.3 Kmart Corporation ("Kmart") shall have closed on a new credit
facility providing a credit facility to Kmart, secured by all material
unencumbered assets, and successfully completed an offering of new preferred
stock of Kmart in an aggregate amount of at least $4,300,000,000, with the
preferred stock portion thereof being at least $650,000,000.
ARTICLE IV. MISCELLANEOUS.
4.1 References in the Credit Agreement or in any other Loan Document to
the Credit Agreement shall be deemed to be references to the Credit Agreement as
amended hereby and as further amended from time to time.
4.2 The Company and the Borrowing Subsidiaries agree to pay and to save
the Agent harmless for the payment of all costs of the Agent only and expenses
of the Agent only arising in
THIRD AMENDMENT TO CREDIT AGREEMENT Page 2
connection with this Amendment, including the reasonable fees of counsel to the
Agent only in connection with preparing this Amendment and the related
documents.
4.3 Except as expressly amended hereby, the Company and the Borrowing
Subsidiaries agree that the Credit Agreement and all other Loan Documents are
ratified and confirmed and shall remain in full force and effect and that the
Company and the Borrowing Subsidiaries have no set off, counterclaim or defense
with respect to any of the foregoing. Terms used but not defined herein shall
have the respective meanings ascribed thereto in the Credit Agreement.
4.4 This Amendment may be signed upon any number of counterparts with the
same effect as if the signatures thereto and hereto were upon the same
instrument.
IN WITNESS WHEREOF, the parties signing this Amendment have caused this
Amendment to be executed and delivered as of the day and year first above
written.
HANDLEMAN COMPANY NORTH COAST ENTERTAINMENT, INC.
By: By:
-------------------------------- -------------------------------
Its: Its:
----------------------------- ----------------------------
"Company" "Borrowing Subsidiary"
NBD BANK, AS A BANK AND AS AGENT COMERICA BANK
By: By:
-------------------------------- --------------------------------
Its: Its:
------------------------------- -----------------------------
PNC BANK, NATIONAL ASSOCIATION UNITED STATES NATIONAL BANK OF
OREGON
By: By:
-------------------------------- --------------------------------
Its: Its:
---------------------------- ----------------------------
ROYAL BANK OF CANADA, GRAND SUNTRUST BANK, ATLANTA, FORMERLY
CAYMAN (NORTH AMERICA NO. 1) BRANCH KNOWN AS TRUST COMPANY BANK
By: By:
-------------------------------- --------------------------------
Its: Its:
----------------------------- -------------------------------
THIRD AMENDMENT TO CREDIT AGREEMENT Page 3
By:
-------------------------------
Its:
---------------------------
THE FIFTH THIRD BANK
By:
-------------------------------
Its:---------------------------
THIRD AMENDMENT TO CREDIT AGREEMENT Page 4
EXHIBIT B
---------
ADOPTED MARCH 7, 1990
AS AMENDED JUNE 16, 1993;
FURTHER AMENDED DECEMBER 6, 1995
BYLAWS
OF
HANDLEMAN COMPANY,
A Michigan Corporation
BYLAWS OF HANDLEMAN COMPANY,
a Michigan Corporation
TABLE OF CONTENTS
-----------------
PAGE
----
ARTICLE I - OFFICES
1.1 Registered Office 1
1.2 Other Offices 1
ARTICLE II - MEETINGS OF SHAREHOLDERS
2.1 Time and Place 1
2.2 Annual Meetings 1
2.3 Special Meetings 1
2.4 List of Shareholders 1
2.5 Notice of Meetings 2
2.6 Quorum; Adjournment 2
2.7 Voting 2
2.8 Proxies 2
2.9 Questions Concerning Elections 2
2.10 Waiver of Notice 3
2.11 Telephonic Attendance 3
ARTICLES III - DIRECTORS
3.1 Governance 3
3.2 Number, Election and Term 3
3.3 Nominations for Director 3
3.4 Vacancies 4
3.5 Place of Meetings 4
3.6 Annual Meetings 4
3.7 Regular Meetings 4
3.8 Special Meetings 4
3.9 Quorum 5
3.10 Action by Written Consent 5
3.11 Committees 5
3.12 Executive Committee 6
3.13 Audit Committee 6
3.14 Compensation and Stock Option Committee 7
3.15 Nominating Committee 7
3.16 Committee Minutes 7
3.17 Compensation 7
3.18 Resignation 7
3.19 Waiver of Notice 7
3.20 Chairman of the Board 7
PAGE
----
ARTICLES IV - NOTICES
4.1 Delivery of Notices 8
4.2 Waiver of Notice 8
ARTICLE V - OFFICERS
5.1 Officers and Agents 8
5.2 Other Officers 9
5.3 Compensation 9
5.4 Term 9
5.5 President 9
5.6 Executive Vice Presidents and Presidents 9
5.7 Secretary 9
5.8 Treasurer 9
5.9 Assistant Vice Presidents, Secretaries
and Treasurers 10
5.10 Powers and Duties 10
ARTICLE VI - CERTIFICATES OF STOCK AND
SHAREHOLDERS OF RECORD
6.1 Certificates for Shares 10
6.2 Signatures 10
6.3 Lost or Destroyed Certificates 10
6.4 Transfer of Shares 10
6.5 Record Date 11
6.6 Registered Shareholders 11
ARTICLE VII - INDEMNIFICATION 11
ARTICLE VIII - GENERAL PROVISIONS
8.1 Checks and Funds 12
8.2 Fiscal Year 12
8.3 Corporate Seal 12
8.4 Books and Records 12
8.5 Interpretation 12
ARTICLE IX - AMENDMENTS 13
BYLAWS
OF
HANDLEMAN COMPANY
a Michigan Corporation
ARTICLE I
---------
OFFICES
-------
1.1 Registered Office. The registered office of the corporation shall be
located at 500 Kirts Boulevard, in the city of Troy, County of Oakland, and
State of Michigan or such other place as may be designated as the registered
office by the board of directors.
1.2 Other Offices. The corporation may also have offices or branches at
such other places, both within and without the State of Michigan, as the board
of directors may from time to time determine or as the business of corporation
may require.
ARTICLE II
----------
MEETINGS OF SHAREHOLDERS
------------------------
2.1 Time and Place. All meetings of the shareholders shall be held at the
registered office of the corporation, or at such other place either within the
State of Michigan as shall be designated from time to time by the board of
directors and stated in the notice of the meeting.
2.2 Annual Meetings. Annual meetings of shareholders shall be held on the
first Wednesday of every September of each fiscal year of the corporation if not
a legal holiday in the state in which the meeting shall be held, and if a legal
holiday, then on the next secular day following, at such time as determined by
the board of directors, or at such other date and time as shall be designated
from time to time by the board of directors and stated in the notice of the
meeting. At the annual meeting, the shareholders shall elect directors and
transact such other business as may properly be brought before the meeting. If
the annual meeting is not held on the date designated therefor, the board of
directors shall cause the meeting to be held as soon thereafter as convenient.
2.3 Special Meetings. Special meetings of the shareholders, for any
purpose, unless otherwise prescribed by statute or by the Articles of
Incorporation, may be called by the chairman of the board or president, or a
majority of the board of directors, or at the request in writing of the holders
of not less than a majority of all the shares entitled to vote at a meeting.
2.4 List of Shareholders. The officer or agent who has charge of the stock
ledger or stock transfer books for shares of the corporation shall make and
certify a complete list of the shareholders entitled to vote at a shareholders'
meeting, or any adjournment thereof. The list shall be arranged in alphabetical
order with each class and series and show the address of each
1
shareholder and the number of shares registered in the name of each shareholder.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any shareholder who is
present.
2.5 Notice of Meeting. Except as may be provided by statute, written
notice of an annual or special meeting of shareholders stating the place, date
and hour of the meeting and the purpose or purposes for which the meeting is
called, shall be given not less than ten (10) nor more than sixty (60) days
before the date of the meeting, to each shareholder of record entitled to vote
at such meeting.
2.6 Quorum; Adjournment. The holders of a majority of the stock issued
and outstanding and entitled to vote thereat, present in person or represented
by proxy, shall constitute a quorum at all meetings of the shareholders for the
transaction of business except as otherwise expressly required by statute or by
the Articles of Incorporation. All shareholders present in person or
represented by proxy at such meeting may continue to do business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less
than a quorum. Whether or not a quorum is present, a majority of the
shareholders entitled to vote thereat shall nevertheless have power to adjourn
the meeting from time to time and to another place, without notice other than
announcement at the meeting, until a quorum shall be present or represented, any
business may be transacted at the meeting as originally notified. If the
adjournment is for more than sixty (60) days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each shareholder of record entitled to vote at the
meeting.
2.7 Voting. When an action other than the election of directors is to be
taken by vote of the shareholders, it shall be authorized by a majority of the
votes cast by the holders of shares entitled to vote at such meeting, unless a
greater plurality is required by express requirement of the statutes or of the
Articles of Incorporation. Except as otherwise expressly required by the
Articles of Incorporation, directors shall be elected by a plurality of the
votes cast at an election.
2.8 Proxies. Each shareholder shall at every meeting of the shareholders
be entitled to one (1) vote in person or by proxy for each share of the capital
stock having voting power held by such shareholder except as otherwise expressly
required in the Articles of Incorporation. A vote may be cast either orally or
in writing. Each proxy shall be in writing and signed by the shareholder or the
shareholder's authorized agent or representative. A proxy is not valid after
the expiration of three (3) years after its date unless otherwise provided in
the proxy. All questions regarding the qualification of voters, the validity or
proxies and the acceptance or rejection of votes shall be decided by the
presiding officer of the meeting.
2.9 Questions Concerning Elections. The board of directors may, in
advance of the meeting, or the presiding officer may, at the meeting, appoint
one or more inspectors to act at a shareholders' meeting. If appointed, the
inspectors shall determine the number of shares outstanding and the voting power
of each, the shares represented at the meeting, the existence of a quorum, the
validity and effect of proxies, and shall receive votes, ballots or consents,
hear and determine challenges and questions arising in connection with the right
to vote, count and tabulate votes, ballots or consents, determine the result,
and shall do such acts as are proper to conduct the election or vote with
fairness to all shareholders.
2
2.10 Waiver of Notice. Attendance of a person at a meeting of shareholders
in person or by proxy constitutes a waiver of notice of the meeting except where
the shareholder attends a meeting for the express purpose of objecting at the
beginning of the meeting to the transaction of any business because the meeting
was not lawfully called or convened.
2.11 Telephonic Attendance. Shareholders and proxy holders may participate
in any meeting of shareholders by means of a conference telephone or similar
communications equipment by which all persons participating in the meeting can
hear each other and all participants are advised of the communications equipment
and names of the participants in the conference. Participation in a meeting
pursuant to this Section 2.11 shall be considered attendance in person at such
meeting.
ARTICLE III
-----------
DIRECTORS
---------
3.1 Governance. The business and affairs of the corporation shall be
managed by or under the direction of its board of directors which may exercise
all such powers of the corporation and do all such lawful acts and things as are
not by statute or by the Articles of Incorporation or by these Bylaws directed
or required to be exercised or done by the shareholders.
3.2 Number, Election and Term. The number of directors which shall
constitute the whole board of directors shall be not less than three (3). The
number of directors shall be determined from time to time by resolution of the
board of directors. The directors shall be elected at the annual meeting of
shareholders for a term of three (3) years except as provided in Article IX of
the Articles of Incorporation and in Section 3.4 of these Bylaws and each
director shall hold office until his or her successor is elected and qualified.
3.3 Nominations for Director. Except as otherwise set forth in these
Bylaws, only persons who are nominated in accordance with the procedures set
forth in this Section 3.3 shall be eligible for election as directors.
Nominations of persons for election to the board of directors of the corporation
may be made at a meeting of shareholders by or at the direction of the board of
directors or by any shareholder of the corporation entitled to vote for the
election of directors at the meeting who complies with the notice procedures set
forth in this Section 3.3. Such nominations, other than those made by or at the
direction of the board of directors, shall be made pursuant to timely notice in
writing to the secretary of the corporation. To be timely, a shareholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the corporation not less than one hundred eighty (180) days before
the meeting of shareholders or scheduled date for the annual meeting of
shareholders determined in accordance with these Bylaws. Such shareholder's
notice shall set forth (a) as to each person whom the shareholder proposes to
nominate for election or re-election as a director, (1) the name, age, business,
address and residence address of such person, (2) the principal occupation or
employment of such person, (3) the class and number of shares of the corporation
which are beneficially owned by such person and (4) any other information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act
3
of 1934, as amended (including each such person's written consent to being named
in the proxy statement as a nominee and to serving as a director if elected);
and (b) as to the shareholder giving the notice (1) the name and address, as
they appear on the corporation's books, of such shareholder and (2) the class
and number of shares of the corporation which are beneficially owned by such
shareholder. At the request of the board of directors, any person nominated by
the board of directors for election as a director shall furnish to the secretary
that information required to be set forth in a shareholder's notice of
nomination which pertains to the nominee. The presiding officer of the meeting
shall, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the procedures prescribed by these
Bylaws, and if the presiding officer should so determine, the presiding officer
shall so declare to the meeting and the defective nominations shall be
disregarded.
3.4 Vacancies. During the intervals between annual meetings of
shareholders, any vacancy occurring in the board of directors caused by
resignation, removal, death or other incapacity and any newly created
directorships resulting from an increase in the number of directors shall be
filled by a majority vote of the directors then in office, whether or not a
quorum. Each director chosen to fill a vacancy shall hold office for the
unexpired term in respect of which vacancy occurred. Each director chosen to
fill a newly created directorship shall hold office until the next election of
the class for which such director shall have been chosen. When the number of
directors is changed, any newly created directorships shall be so apportioned
among the classes as to make all classes as nearly equal in number as possible.
3.5 Place of Meetings. The board of directors may hold meetings, both
regular and special, either within or without the State of Michigan. Unless
otherwise restricted by the Articles of Incorporation, members of the board of
directors, or any committee designated by the board, may participate in a
meeting of the board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participating in the meeting pursuant to this
section shall constitute presence in person at such meeting.
3.6 Annual Meetings. The first meeting of each newly elected board of
directors shall be held promptly following the annual meeting of shareholders.
No notice of such meeting shall be necessary to the newly elected directors in
order to legally constitute the meeting, provided a quorum shall be present. In
the event such meeting is not so held, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the board of directors.
3.7 Regular Meetings. Regular meetings of the board of directors or board
committees may be held upon twenty-four (24) hour notice either personally, by
telephone, telegram or telecopy, or as otherwise provided in Section 4.1 hereof,
at such time and at such place as shall from time to time be determined by the
board of directors or committee or by the chairman of the board or president.
Any notice given of a regular meeting need not specify the business to be
transacted or the purpose of the meeting.
3.8 Special Meetings. Special meetings of the board of directors or board
committees may be called by the chairman of the board of directors or board
committees may be called by the chairman of the board or president on two (2)
days' notice to each director or committee member, as the case may be, by mail
or twenty-four (24) hours' notice either personally, by telephone, telegram or
telecopy; or as otherwise provided in Section 4.1 hereof, special meetings shall
be called by the chairman of the board or president in like manner and on like
notice on
4
the written request of two (2) directors. The notice need not specify the
business to be transacted or the purpose of the special meeting. The notice
shall specify the place of the special meeting.
3.9 Quorum. At all meetings of the board or a committee thereof, a
majority of the directors then in office or members of such committee, but not
less than two (2) (if there are at least two (2) members of the board or such
committee) shall constitute a quorum for the transaction of business. The act
of a majority of the members present at any meeting at which there is a quorum
shall be the act of the board of directors or the committee, unless the vote of
a large number is specifically required by statute, by the Articles of
Incorporation, or by these Bylaws. If a quorum shall not be present at any
meeting of the board of directors or a committee, the members present thereat
may adjourn the meeting from time to time and to another place without notice
other than announcement at the meeting, until a quorum shall be present.
3.10 Action by Written Consent. Unless otherwise provided by the Articles
of Incorporation, any action required or permitted to be taken at any meeting of
the board of directors or of any committee thereof may be taken without a
meeting, if, before or after the action, all members of the board or committee
consent thereto in writing. The written consents shall be filed with the
minutes of proceedings of the board or committee. Such consents shall have the
same effect as a vote of the board or committee for all purposes.
3.11 Committees. The board of directors may, by resolution, designate one
(1) or more committees, each committee to consist of one (1) or more of the
directors of the corporation. The board may designate one (1) or more directors
as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee, the members thereof present
at any meeting and not disqualified from voting, whether or not they constitute
a quorum, may unanimously appoint another member of the board to act at the
meeting in place of such absent or disqualified member. Any such committee, to
the extent provided in the resolution of the board, shall have and may exercise
the powers of the board of directors in the management of the business and
affairs of the corporation; provided, however, such a committee shall not have
the power or authority to:
(a) Amend the Articles of Incorporation.
(b) Adopt an agreement of merger or consolidation.
(c) Recommend to shareholders the sale, lease or exchange of all, or
substantially all, of the corporation's property and assets.
(d) Recommend to shareholders a dissolution of the corporation or a
revocation of a dissolution.
(e) Amend the Bylaws of the corporation.
(f) Fill vacancies in the board.
(g) Unless the resolution designating the committee or a later board
of directors resolution expressly so provides, declare a
distribution or dividend or authorize the issuance of stock.
5
Such committee or committees shall have such name or names as may be determined
from time to time by resolution adopted by the board of directors. A committee,
and each member thereof, shall serve at the pleasure of the board.
3.12 Executive Committee. The board of directors shall have an Executive
Committee. Between meetings of the board of directors, the Executive Committee
shall have and may exercise all of the powers and authority of the board of
directors in the management of the business and affairs of the corporation,
except as provided in Section 3.11 above. The Executive Committee's exercise of
its powers and authority shall be consistent with any directions as to the
conduct of the corporation's affairs which the board of directors may provide.
The Executive Committee shall report its actions to the board of directors at
the board meeting following the Executive Committee meeting at which the action
is taken.
3.13 Audit Committee. The board of directors shall have an Audit
Committee. The Audit Committee's duties shall be:
(a) Recommending to the board of directors the retaining or
discharging of the independent auditor.
(b) Reviewing the arrangements and scope of the audit and non-audit
engagements and the compensation of the independent auditor.
(c) Reviewing with the independent auditor and the corporation's
chief financial officer the adequacy of the corporation's
internal accounting controls.
(d) Reviewing with the independent auditor and management the results
of the audit and financial statement presentation.
(e) Meeting at least twice a year with the corporation's financial
and accounting staff to review internal accounting and auditing
procedures.
(f) Directing investigations by the independent auditor and/or the
internal audit staff into any matter related to the corporation's
business or affairs.
(g) Recommending to the board the policies which the board should
adopt and actions the board should take to prevent any payments
constituting an unlawful and improper use of the corporation's
funds.
(h) Inquiring concerning deviations from the corporation's code of
business conduct and periodically reviewing that code.
(i) Reviewing annually the public release of the financial
information for the year ended.
(j) Reviewing the scope and results of pension audit.
6
(k) Meeting with the corporation's chief internal auditor at any time
deemed appropriate by the Audit Committee.
(l) Performing any other functions assigned to the Audit Committee by
the board of directors.
3.14 Compensation and Stock Option Committee. The board of directors shall
have a Compensation and Stock Option Committee. The duties of the Compensation
and Stock Option Committee shall be:
(a) Recommending to the board of directors compensation arrangements
for senior management and directors.
(b) Recommending to the board of directors compensation plans in
which officers or directors are eligible to participate.
(c) Granting options under the corporation's stock option plans.
(d) Such other functions as are assigned by the board of directors.
3.15 Nominating Committee. The board of directors shall have a Nominating
Committee. The Nominating Committee shall (a) recommend to the shareholders
nominees for election as directors; (b) consider nominees for directors
recommended by the shareholders; and (c) establish procedures to be followed by
shareholders in submitting such recommendations. Unless a specific Nominating
Committee is appointed, the board of directors shall serve as the Nominating
Committee.
3.16 Committee Minutes. Each committee shall keep regular minutes of its
meetings and report the same to the board of directors when required.
3.17 Compensation. The board by affirmative vote of a majority of
directors in office and irrespective of any personal interest of any of them,
may establish reasonable compensation of directors for services to the
corporation as directors, officers or members of a committee. No such payment
shall preclude any director from serving the corporation in any other capacity
and receiving compensation therefor.
3.18 Resignation. A director may resign by written notice to the
corporation. The resignation is effective upon its receipt by the corporation
or a subsequent time as set forth in the notice of resignation.
3.19 Waiver of Notice. Attendance of a director at a meeting constitutes a
waiver of notice of the meeting except where a director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened.
3.20 Chairman of the Board. The board of directors may elect from the
membership of the board of directors a chairman of the board, who shall not be
an officer or employee of the corporation. The chairman of the board shall
preside at all meetings of the shareholders and the board of directors.
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ARTICLE IV
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NOTICES
-------
4.1 Delivery of Notices. All written notices to shareholders, directors
and board committee members shall be given personally or by mail (registered,
certified or other first class mail, with postage pre-paid), addressed to such
person at the address designated by him or her for that purpose or, if none is
designated, at his or her last known address. Written notices to directors or
board committee members may also be delivered at his or her office on the
corporation's premises, if any, or by overnight carrier, telegram, telex,
telecopy, radiogram, cablegram, facsimile, computer transmission or similar form
of communication, addressed to the address referred to in the preceding
sentence. Notices given pursuant to this Section 4.1 shall be deemed to be
given when dispatched, or, if mailed, when deposited in a post office or
official depository under the exclusive care and custody of the United States
postal service. Notices given by overnight carrier shall be deemed "dispatched"
at 9:00 a.m. on the day the overnight carrier is reasonably requested to deliver
the notice. The corporation shall have no duty to change the written address of
any director, board committee member or shareholder unless the secretary
receives written notice of such address change.
4.2 Waiver of Notice. Action may be taken without a required notice and
without lapse of a prescribed period of time, if at any time before or after the
action is completed, the person entitled to notice or to participate in the
action to be taken or, in the case of a shareholder, his or her attorney-in-
fact, submits a signed waiver of the requirements, or if such requirements are
waived in such other manner permitted by applicable law. Neither the business
to be transacted at, nor the purpose of, the meeting need be specified in the
written waiver of notice. Attendance at any shareholders' meeting (in person or
by proxy) will result in both of the following:
(a) Waiver of objection to lack of notice or defective notice of
the meeting, unless the shareholder at the beginning of the
meeting objects to holding the meeting or transacting
business at the meeting.
(b) Waiver of objection to consideration of a particular matter
at the meeting that is not within the purpose or purposes
described in the meeting notice, unless the shareholder
objects to considering the matter when it is presented.
ARTICLE V
---------
OFFICERS
--------
5.1 Officers and Agents. The officers of the corporation shall be chosen
by the board of directors at its first meeting after each annual meeting of
shareholders and shall be a president, a secretary and a treasurer. The board
of directors may also create and fill the offices of one or more executive vice
presidents, senior vice presidents, vice presidents, assistant vice presidents,
assistant secretaries and assistant treasurers. Any number of offices may be
held by the same person.
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5.2 Other Officers. The board of directors may from time to time elect or
appoint such other officers and agents as it shall deem necessary who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as shall be determined from time to time by the board.
5.3 Compensation. The salaries of all officers of the corporation shall
be fixed by the board of directors.
5.4 Term. The officers of the corporation shall hold office at the
pleasure of the board of directors. Any officer elected or appointed by the
board of directors may be removed at any time by the board of directors with or
without cause. Any vacancy occurring in any office of the corporation by death,
resignation, removal or otherwise shall be filled by the board of directors. An
officer may resign by written notice to the corporation. The resignation is
effective upon its receipt by the corporation or at a subsequent time specified
in the notice of resignation.
5.5 President. Unless otherwise provided by resolution of the board of
directors, the president shall be the chief executive officer of the corporation
and shall have general and active management of the business and affairs of the
corporation and see that all orders and resolutions of the board of directors
are carried into effect. The president shall have the general power and duties
of supervision, control and management usually vested in the office of the chief
executive officer of a corporation. In the absence or non-election of a chairman
of the board, the president shall preside at all meetings of the board of
directors and shareholders. The president may delegate to the other officers
such of his or her authority and duties at such time and in such manner as he or
she deems advisable.
5.6 Executive Vice Presidents and Presidents, Senior Vice Presidents and
Vice Presidents. The executive vice presidents, senior vice presidents and vice
presidents shall act under the direction of the president. They shall perform
such other duties and have such other powers as the president or the board of
directors may from time to time prescribe. The board of directors may designate
one or more executive or senior vice presidents or may otherwise specify the
order of seniority of the vice presidents.
5.7 Secretary. The secretary shall act under the direction of the
president. The secretary shall attend all meetings of the board of directors and
all meetings of the shareholders and record the proceedings. The secretary shall
perform like duties for the standing committees when required. The secretary
shall give, or cause to be given, notice of all meetings of the shareholders and
special meetings of the board of directors, and shall perform such other duties
as may be prescribed by the president or the board of directors. The secretary
shall keep in safe custody the seal of the corporation and, when authorized by
the president or the board of directors, cause it to be affixed to any
instrument requiring it.
5.8 Treasurer. The treasurer shall act under the direction of the
president. The treasurer shall have custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the board of directors. The treasurer
shall disburse the funds of the corporation as may be ordered by the president
or the board of directors, taking proper vouchers for such disbursements, and
shall render to the president and the board of directors, at its regular
meetings, or when the board of directors so requires, an account of all his or
her transactions as treasurer and of the financial condition of the
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corporation. The treasurer may affix or cause to be affixed the seal of the
corporation to documents so requiring the seal.
5.9 Assistant Vice Presidents, Secretaries and Treasurers. The assistant
vice president, assistant secretary and assistant treasurer, if any, shall act
under the direction of the president and the officer they assist. In the order
of their seniority the assistant secretaries shall, in the absence or disability
of the secretary, perform the duties and exercise the authority of the
secretary. In the order of their seniority the assistant treasurers shall, in
the absence or disability of the treasurer, perform the duties and exercise the
authority of the treasurer.
5.10 Powers and Duties. To the extent the powers and duties of the
several officers are not provided from time to time by these Bylaws or
resolution or other directive of the board of directors or by the president
(with respect to other officers), the officers shall have all powers and shall
discharge the duties customarily and usually held and performed by like officers
of the corporations similar in organization and business purposes to this
corporation.
ARTICLE VI
----------
CERTIFICATES OF STOCK
AND SHAREHOLDERS OF RECORD
--------------------------
6.1 Certificates for Shares. The shares of stock of the corporation shall
be represented by certificates signed by, or in the name of the corporation by
the president or a vice president, and by the treasurer, assistant treasurer,
secretary or assistant secretary of the corporation. Each holder of stock in the
corporation shall be entitled to have such a certificate certifying the number
of shares owned by such holder in the corporation.
6.2 Signatures. Any of or all the signatures on the certificate may be a
facsimile if the certificate is countersigned by a transfer agent or registered
by a registrar other than the corporation itself or its employee. In case any
officer who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer before such certificate is
issued, it may be issued by the corporation with the same effect as if he or she
were such officer at the date of issue. The seal of the corporation or a
facsimile thereof may, but need not, be affixed to the certificates of stock.
6.3 Lost or Destroyed Certificates. The board of directors may direct a
new certificate for shares to be issued in place of any certificate theretofore
issued by the corporation alleged to have been lost or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate of
stock to be lost or destroyed. When authorizing such issue of a new certificate,
the board of directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost or destroyed certificate,
or such owner's legal representative, to give the corporation a bond in such sum
as it may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost or
destroyed.
6.4 Transfer of Shares. Shares of the corporation are transferable only
on the corporation's stock transfer books upon surrender to the corporation or
its transfer agent of a certificate for the shares, duly endorsed for transfer,
and the presentation of such evidence of ownership and validity of the transfer
as the corporation requires.
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6.5 Record Date. In order that the corporation may determine the
shareholders entitled to notice of, or to vote at, any meeting of shareholders
or any adjournment thereof, or to express consent to, or to dissent from, a
proposal without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or for the purpose of any other
action, the board of directors may fix, in advance, a date as a record date,
which shall not be more than sixty (60) days prior to any other action.
If no record date is fixed:
(a) The record date for determining the shareholders of record
entitled to notice of, or to vote at, a meeting of shareholders
shall be at the close of business on the day on which notice is
given, or, if no notice is given, at the close of business on the
day next preceding the day on which the meeting is held;
(b) If prior action by the board of directors is not required with
respect to the corporate action to be taken without a meeting,
the record date for determining shareholders entitled to express
consent to, or dissent from, a proposal without a meeting, shall
be the first date on which a signed written consent is properly
delivered to the corporation; and
(c) the record date for determining shareholders for any other
purpose shall be at the close of business on the day on which the
board of directors adopts the resolution relating thereto.
A determination of shareholders of record entitled to notice or to vote at a
meeting of shareholders shall apply to any adjournment of the meeting; provided,
however, that the board of directors may fix a new record date for the adjourned
meeting.
Only shareholders of record on the record date shall be entitled to notice of,
or to participate in, the action relating to the record date, notwithstanding
any transfer of shares on the corporation's books after the record date. This
Section 6.5 shall not affect the rights of a shareholder and the shareholder's
transferor or transferee as between themselves.
6.6 Registered Shareholders. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares for all purposes, including voting and dividends, and shall not be
bound to recognize any equitable or other claim to interest in such share or
shares on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of Michigan.
ARTICLE VII
-----------
INDEMNIFICATION
---------------
The corporation shall, to the fullest extent authorized or permitted by the
Michigan Business Corporation Act, (a) indemnify any person, and his or her
heirs, executors, administrators and legal representatives, who was, is, or is
threatened to be made, a party to any threatened, pending or completed action,
suit or proceeding (whether civil, criminal, administrative or investigative) by
reason of the fact that such person is or was a director, officer,
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partner, trustee, employee or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation (including a subsidiary corporation), limited liability
company, partnership, joint venture, trust, employee benefit plan or other
enterprise, whether or not for profit, or by reason of anything done by such
person in such capacity (collectively, "Covered Matters"); and (b) pay or
reimburse the reasonable expenses incurred by such person and his or her heirs,
executors, administrators and legal representatives in connection with any
Covered Matter in advance of final disposition of such Covered Matter. The
corporation may provide such other indemnification to directors, officers,
employees and agents by insurance, contract or otherwise as is permitted by law
and authorized by the Board of Directors.
ARTICLE VIII
------------
GENERAL PROVISIONS
------------------
8.1 Checks and Funds. All checks, drafts or demands for money and notes
of the corporation shall be signed by such officer or officers or such other
person or persons as the board of directors may from time to time designate. All
funds of the corporation not otherwise employed shall be deposited from time to
time to the credit of the corporation in such banks, trust companies or other
depositories as the board of directors may from time to time designate.
8.2 Fiscal Year. The fiscal year of the corporation shall end on the last
Saturday of April of each year or such other date as shall be fixed from time to
time by resolution of the board of directors.
8.3 Corporate Seal. The board of directors may adopt a corporate seal for
the corporation. The corporate seal shall have inscribed thereon the name of the
corporation and the words "Corporate Seal, Michigan". The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
8.4 Books and Records. The corporation shall keep within or without the
State of Michigan books and records of account and minutes of the proceedings of
its shareholders, board of directors and committees, if any. The corporation
shall keep at its registered office or at the office of its transfer agent
within or without the State of Michigan records containing the names and
addresses of all shareholders, the number, class and series of shares held by
each and the dates when they respectively became holders of record thereof. Any
of such books, records or minutes may be in written form or in any other form
capable of being converted into written form within a reasonable time.
8.5 Interpretation. These Bylaws shall govern the internal affairs of the
corporation to the extent they are consistent with law and the Articles of
Incorporation. Nothing contained in the Bylaws shall, however, prevent the
imposition by contract of greater voting, notice or other requirements than
those set forth in these Bylaws.
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ARTICLE IX
----------
AMENDMENTS
----------
The Bylaws may be amended or repealed, or new Bylaws may be adopted, by
action of either the shareholders (subject to the provisions and limitations of
Article XI of the Articles of Incorporation) or the board of directors. The
shareholders may from time to time specify particular provisions of the Bylaws
which shall not be altered or repealed by the board of directors.
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