SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the second quarter ended October 31, 1998 Commission File Number 1-7923
Handleman Company
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(Exact name of registrant as specified in its charter)
MICHIGAN 38-1242806
- ------------------------------------ -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 KIRTS BOULEVARD TROY, MICHIGAN 48084-4142 Area Code 248 362-4400
- --------------------------------------- ------------- ---------------------------------
(Address of principal executive offices) (Zip code) (Registrant's telephone number)
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS DATE SHARES OUTSTANDING
- ----------------------------- ------------------- ----------------------
Common Stock - $.01 Par Value December 4, 1998 31,612,204
HANDLEMAN COMPANY
INDEX
PAGE NUMBER
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PART I - FINANCIAL INFORMATION
Consolidated Statement of Operations ....................... 1
Consolidated Balance Sheet ................................. 2
Consolidated Statement of Shareholders' Equity ............. 3
Consolidated Statement of Cash Flows ....................... 4
Notes to Consolidated Financial Statements ................. 5
Management's Discussion and Analysis of Operations ......... 6 - 11
PART II - OTHER INFORMATION AND SIGNATURES ........................ 12
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(amounts in thousands except per share data)
Three Months (13 Weeks) Ended Six Months (26 Weeks) Ended
------------------------------- ---------------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
---------- ---------- ----------- ------------
Revenues $ 289,565 $ 315,285 $ 511,442 $ 524,322
Costs and expenses:
Direct product costs 217,529 240,029 386,094 399,546
Selling, general and
administrative expenses 50,961 60,795 106,814 117,050
Interest expense, net 2,563 3,492 4,916 6,490
Non-recurring and repositioning
related charges 6,962 -- 116,962 --
Gain on sale of subsidiary -- -- (31,000) --
--------- --------- --------- ---------
Income (loss) before income
taxes and minority interest 11,550 10,969 (72,344) 1,236
Income tax (expense) benefit (4,640) (4,387) 20,357 (1,318)
Minority interest (825) 1,738 (966) 1,932
--------- --------- --------- ---------
Net income (loss) $ 6,085 $ 8,320 ($ 52,953) $ 1,850
========= ========= ========= =========
Net income (loss) per share - basic
and diluted $ .19 $ .25 ($ 1.67) $ .06
========= ========= ========= =========
Weighted average number of shares
outstanding during the period - basic 31,583 33,171 31,695 33,270
========= ========= ========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
1
HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(amounts in thousands except share data)
October 31, May 2,
1998 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 7,211 $ 25,562
Accounts receivable, less allowance of $17,242
and $17,339 at October 31, 1998 and May 2, 1998, respectively,
for the gross profit impact of estimated future returns 253,687 242,445
Merchandise inventories 169,502 187,173
Other current assets 74,610 10,834
--------- ---------
Total current assets 505,010 466,014
--------- ---------
Property and equipment:
Land 3,782 4,012
Buildings and improvements 22,409 22,280
Display fixtures 56,292 89,954
Equipment, furniture and other 40,343 70,630
--------- ---------
122,826 186,876
Less accumulated depreciation and amortization 58,868 108,165
--------- ---------
63,958 78,711
--------- ---------
Other assets, net of allowances 64,279 68,331
--------- ---------
Total assets $ 633,247 $ 613,056
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 213,801 $ 179,227
Accrued and other liabilities 79,731 39,871
--------- ---------
Total current liabilities 293,532 219,098
--------- ---------
Debt, non-current 130,989 114,768
Other liabilities 1,551 5,383
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value; 1,000,000 shares
authorized; none issued -- --
Common stock, $.01 par value; 60,000,000 shares
authorized; 31,588,000 and 31,977,000 shares
issued at October 31, 1998 and May 2, 1998, respectively 316 320
Paid-in capital 16,568 20,710
Foreign currency translation adjustment and other (17,133) (7,600)
Retained earnings 207,424 260,377
--------- ---------
Total shareholders' equity 207,175 273,807
--------- ---------
Total liabilities and shareholders' equity $ 633,247 $ 613,056
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
2
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(amounts in thousands)
Six Months (26 Weeks) Ended October 31, 1998
---------------------------------------------------------------------------------------------
Common Stock Foreign
---------------------------- Currency
Translation Total
Shares Paid-in Adjustment Retained Shareholders'
Issued Amount Capital and Other Earnings Equity
--------- --------- --------- --------- ----------- ------------
May 2, 1998 31,977 $ 320 $ 20,710 ($ 7,600) $ 260,377 $ 273,807
Net loss (52,953) (52,953)
Common stock issuances
and forfeitures in connection
with employee benefit plans 249 3 2,811 (2,149) 665
Common stock repurchased (852) (9) (9,774) (9,783)
Adjustment for foreign
currency translation (7,384) (7,384)
Additional investment in
The itsy bitsy Entertainment
Company, Inc. 214 2 2,821 2,823
--------- --------- --------- --------- --------- ---------
October 31, 1998 31,588 $ 316 $ 16,568 ($ 17,133) $ 207,424 $ 207,175
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
3
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
Six Months (26 weeks) Ended
-------------------------------
October 31, November 1,
1998 1997
-------------- ------------
Cash flows from operating activities:
Net income (loss) ($ 52,953) $ 1,850
----------- -----------
Adjustments to reconcile net income (loss) to net cash provided
from operating activities:
Depreciation 8,970 14,208
Amortization of acquisition costs 1,663 2,644
Recoupment of license advances 4,241 6,716
Repositioning charge 110,000 --
Gain on sale of subsidiary (31,000) --
Loss on sale of book business 1,291 --
(Increase) decrease in assets:
Accounts receivable (25,784) (34,198)
Merchandise inventories (4,933) (26,533)
Other current assets (20,663) (978)
Other assets, net of allowances (1,446) 1,846
Increase (decrease) in liabilities:
Accounts payable 35,990 48,875
Accrued and other liabilities (21,682) (5,237)
Other liabilities (3,072) (4,536)
----------- -----------
Total adjustments 53,575 2,807
----------- -----------
Net cash provided from operating activities 622 4,657
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (8,862) (10,268)
Retirements of property and equipment 933 1,811
License advances (8,673) (10,881)
Additional investment in The itsy bitsy
Entertainment Company, Inc. (4,754) --
Proceeds from sale of book business 2,665 --
----------- -----------
Net cash used by investing activities (18,691) (19,338)
----------- -----------
Cash flows from financing activities:
Issuances of debt 1,457,675 687,600
Repayments of debt (1,441,455) (672,680)
Repurchase of common stock (9,783) (2,470)
Other changes in shareholders' equity, net (6,719) (653)
----------- -----------
Net cash provided from (used by) financing activities (282) 11,797
----------- -----------
Net decrease in cash and cash equivalents (18,351) (2,884)
Cash and cash equivalents at beginning of period 25,562 12,449
----------- -----------
Cash and cash equivalents at end of period $ 7,211 $ 9,565
=========== ===========
The accompanying notes are an integral part
of the consolidated financial statements.
4
HANDLEMAN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of Management, the accompanying consolidated balance sheet
and consolidated statements of operations, shareholders' equity and cash
flows contain all adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial position of the
Company as of October 31, 1998, and the results of operations and changes
in cash flows for the six months then ended. Because of the seasonal
nature of the Company's business, sales and earnings results for the six
months ended October 31, 1998 are not necessarily indicative of what the
results will be for the full year. The consolidated balance sheet as of
May 2, 1998 included in this Form 10-Q was derived from the audited
consolidated financial statements of the Company included in the Company's
1998 Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Reference should be made to the Company's Form 10-K for the
year ended May 2, 1998.
2. On June 2, 1998 the Board of Directors approved a comprehensive strategic
repositioning program designed to focus on the Company's core business and
product lines. The program has four major components:
- Exiting the domestic video, book and software distribution and
service operations.
- Reduction of the number of customers serviced in the music
distribution business.
- Sale of Sofsource, the Company's software publishing subsidiary, for
approximately $45 million which was received in cash after October
31, 1998.
- Implementation of a new common stock repurchase program.
A summary of the components of the $117 million (pre-tax) non-recurring
and repositioning related charge is as follows (in millions):
First Quarter Second Quarter Six Months
Fiscal 1999 Fiscal 1999 Fiscal 1999
------------- ------------ -------------
Adjustments of assets to net realizable value $ 84.5 -- $ 84.5
Intangibles write-off 13.0 -- 13.0
Other repositioning related costs, including debt
restructuring, advisory fees and employee
severance and related benefit costs 12.5 $ 7.0 19.5
------ ------ ------
Total $110.0 $ 7.0 $117.0
====== ====== ======
Adjustments of assets to net realizable value includes adjustments to
reflect the estimated recovery amount of assets to be disposed of,
principally inventory and property and equipment, as well as certain
adjustments to the carrying value of receivables, payables and
investments, including international investments. Intangibles related to
either business to be exited, or customers no longer to be serviced, are
included in the intangibles write-off.
Accrued and other liabilities in the October 31, 1998 balance sheet
includes $39.0 million related to the non-recurring and repositioning
related charges.
The Company continues to believe that estimated non-recurring and
repositioning related charges to be incurred in fiscal 1999 that were not
accruable in the first quarter will not exceed $15 million (pre-tax). Of
that amount, the Company incurred $7.0 million (pre-tax) of non-recurring
and repositioning related charges during the second quarter of fiscal
1999. It is anticipated that the majority of the repositioning activities
will be completed during fiscal 1999, but that some costs will be incurred
during fiscal 2000.
5
HANDLEMAN COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues for the second quarter ended October 31, 1998 decreased 8% to
$289.6 million from $315.3 million for the second quarter ended November
1, 1997. The lower revenue level was attributable to the withdrawal from
three product lines and the discontinuance of service to a number of
smaller music customers in conjunction with the Company's previously
announced strategic repositioning program. Net income for the second
quarter of fiscal 1999 was $6.1 million or $.19 per share, compared to net
income of $8.3 million or $.25 per share for the second quarter of fiscal
1998. The Company's fiscal 1999 second quarter results included pre-tax
non-recurring and repositioning charges of $7.0 million ($.14 per share
after tax).
Revenues were $511.4 million for the first six months this year, compared
to $524.3 million for the first six months last year. The Company's
revenues this year included Sofsource and the book distribution business,
which were sold during the first quarter, for the period through the dates
these businesses were sold. The net loss for the first six months of this
year was $53.0 million or $1.67 per share, compared to net income of $1.9
million or $.06 per share for the first six months last year. The
Company's results of operations for the six months ended October 31, 1998
included pre-tax non-recurring and repositioning charges of $117 million
($2.51 per share after tax) and a pre-tax gain on the sale of the
Company's SofSource subsidiary of $31 million ($.63 per share after tax).
The Company has three operating units: Handleman Entertainment Resources
("H.E.R."), North Coast Entertainment ("NCE") and Handleman International
("International"). H.E.R., which includes category management operations
in the U.S. and Canada, had net sales of $232.9 million for the second
quarter of fiscal 1999, a decrease of 11% from net sales of $262.1 million
for the second quarter last year. (Canadian operations, which were
previously included in International, have been included in H.E.R. for
both this year and last year.) Within H.E.R., music sales grew 15% to
$220.5 million for the second quarter of fiscal 1999, from $191.1 million
for the second quarter of fiscal 1998. The increase in music sales was due
to strong retail sales of recent hit items, as well as lower product
returns from customers. The lower returns are the result of H.E.R.
implementing category management processes and new systems initiatives.
The remainder of H.E.R. sales ($12.4 million in the second quarter this
year versus $71.0 million in the second quarter last year) were
attributable to the video, book and software product lines which have now
been exited in connection with the Company's strategic repositioning
program.
H.E.R. net sales for the six months ended October 31, 1998 were $418.6
million, compared to $438.7 million for the six months ended November 1,
1997, a decrease of 5%. Within H.E.R., music sales for the first six
months this year were $380.6 million, compared to $326.1 million for the
first six months last year, an increase of 17%.
NCE encompasses the Company's proprietary operations, which include music,
video and licensing operations. NCE net sales increased 30% to $52.6
million for the second quarter of fiscal 1999. This compares to $40.6
million for the second quarter of fiscal 1998, which excludes sales of the
Sofsource subsidiary which was sold during the first quarter of fiscal
1999. The NCE sales increase was primarily a result of strong sales at the
Anchor Bay and Madacy units, where the improvements were attributable to
the release of new titles and products, the addition of new customers and
a resurgence in the horror video category where the NCE units have a
strong catalog. NCE net sales for the second quarter of fiscal 1999
modestly benefited from the inclusion of The itsy bitsy Entertainment
Company, in which NCE increased its ownership interest to 75% during the
first quarter of this fiscal year. For the six months of fiscal 1999,
6
NCE net sales increased 27% to $75.2 million, from $59.4 million for the
comparable six-month period last year, excluding SofSource sales in both
periods.
International includes category management operations in Mexico, Brazil
and Argentina. International had net sales of $12.4 million for the second
quarter of fiscal 1999, compared to $15.4 million for the second quarter
of fiscal 1998, a decrease of 19%. This decrease was attributable to an
overall weakness in the Latin American economies, which has severely
impacted the music industry in each market, as well as the exiting of the
video and software businesses and a reduction in customers served in
connection with the repositioning program. International net sales were
$25.3 million for the first six months of fiscal 1999, compared to $29.5
million for the first six months of fiscal 1998, a decrease of 14%.
Direct product costs as a percentage of revenues was 75.1% for the second
quarter of fiscal 1999, compared to 76.1% for the second quarter of fiscal
1998. The year-over-year improvement resulted from a change in sales mix
within H.E.R.; music sales increased while video, book and software sales
represented less than 6% of H.E.R. sales this year, versus 27% of H.E.R.
sales in the second quarter last year. Further, NCE sales (which have
lower direct product costs) represented a larger percentage of the
Company's overall sales. Direct product costs as a percentage of revenues
was 75.5% for the six months ended October 31, 1998, compared to 76.2% for
the six months ended November 1, 1997.
Selling, general and administrative ("SG&A") expenses for the second
quarter of fiscal 1999 were $51.0 million, or 17.6% of revenues, compared
to $60.8 million, or 19.3% of revenues, for the second quarter last year.
For the second quarter, H.E.R. reduced its year-over-year SG&A expenses by
$10.0 million, or by approximately 23%. SG&A expenses for the first six
months of fiscal 1999 were $106.8 million or 20.9% of revenues, compared
to $117.1 million or 22.3% of revenues for the comparable prior year
period.
Income before interest, income taxes, minority interest and non-recurring
and repositioning related charges ("operating income") for the second
quarter of fiscal 1999 increased 45% to $21.0 million, from $14.5 million
for the second quarter of fiscal 1998. H.E.R. operating income improved
79% to $14.3 million, from $8.0 million last year. NCE operating income
improved 16% to $8.5 million, from $7.3 million (excluding $2.3 million of
operating income for Sofsource) last year. International reduced its
operating loss by 42% to $1.8 million this year, from $3.1 million last
year.
Operating income for the first six months of fiscal 1999 increased 140% to
$18.5 million, from $7.7 million for the first six months of fiscal 1998.
H.E.R. operating income improved to $13.3 million, from $.8 million last
year. NCE operating income improved to $8.8 million, from $8.2 million
(excluding $2.2 million of operating income for Sofsource) last year.
International's operating loss was $3.6 million this year, compared to an
operating loss of $3.5 million last year.
Accounts receivable increased to $253.7 million at October 31, 1998, from
$242.4 million at May 2, 1998. This increase was primarily attributable to
the increased sales volume in the second quarter of fiscal 1999, compared
to the fourth quarter of fiscal 1998, partially offset by certain
adjustments to the carrying value of accounts receivable due to the
repositioning program. Accounts receivable this year decreased $70.6
million from $324.3 million at November 1, 1997.
Merchandise inventories decreased to $169.5 million at October 31, 1998,
from $187.2 million at May 2, 1998. This decrease principally resulted
from an adjustment of inventory to net realizable value resulting from the
repositioning program.
Other current assets were $74.6 million at October 31, 1998, compared to
$10.8 million at May 2, 1998. This increase in other current assets was
mainly due to two items: a $45 million investment in The Learning Company
resulting from the sale of Sofsource and an increase in income taxes
receivable of $21 million. In November 1998, the Company sold The Learning
Company stock obtained in the sale of Sofsource for $45 million.
7
The decrease in property and equipment, net at October 31, 1998, compared
to May 2, 1998 primarily resulted from the write-off of display fixtures,
furniture and other equipment in connection with the repositioning
program.
Accounts payable at October 31, 1998 was $213.8 million, compared to
$179.2 million at May 2, 1998. This increase principally resulted from
increased purchases in the second quarter of fiscal 1999, compared to the
fourth quarter of fiscal 1998, in preparation for the upcoming holiday
season.
Accrued and other liabilities at October 31, 1998 were $79.7 million,
compared to $39.9 million at May 2, 1998. This increase in accrued and
other liabilities primarily resulted from the accrual for non-recurring
and repositioning related charges recorded during the first quarter of
fiscal 1999.
During the first fiscal quarter, NCE purchased shares of The itsy bitsy
Entertainment Company, Inc. ("itsy bitsy"). As a result, NCE owns a 75%
share in itsy bitsy, a firm dedicated to licensing and marketing
entertainment properties for children and their caregivers. itsy bitsy has
the exclusive right to license a number of childrens properties including
Ragdoll Productions, Teletubbies and Tots TV, and Enid Blyton's Noddy.
Under the terms of the agreement, itsy bitsy will establish a childrens
unit with responsibility for the acquisition, development and marketing of
future childrens entertainment properties and concepts for NCE. Managerial
and operating control of itsy bitsy will remain with its current
management, who are retaining a meaningful minority interest in that
company.
THE FOLLOWING COMMENTS RELATE TO THE COMPANY'S STRATEGIC REPOSITIONING
PROGRAM:
The strategic repositioning program was designed to focus the Company on
its core music distribution business. As previously announced, the
repositioning program has four major components:
- Exiting the H.E.R. and International video, book and software
distribution and service operations.
- Reduction of the number of customers serviced in the music
distribution business within H.E.R. and International to a select
group of strategic partners who can best benefit from Handleman's
category management and systems investments.
- Sale of Sofsource, the Company's software publishing subsidiary.
- Implementation of a new common stock repurchase program.
During the first quarter of fiscal 1999, the Company sold its book
distribution business to Levy Home Entertainment at a pre-tax loss of $1.3
million, and its Sofsource subsidiary to The Learning Company at a pre-tax
gain of $31.0 million.
By the end of the second quarter of fiscal 1999, H.E.R. has exited its
video and software distribution business activities, as well as ceased
providing services to many customers, and accordingly, now services seven
U.S. customers and two Canadian customers in the music category management
business.
The Company conducted an in-depth review of its International business.
The purpose of this review was to determine how best to maximize
shareholder value from the Argentina, Brazil and Mexico operations. Based
on this analysis, the Company has decided to implement in Latin America
the repositioning program concepts of focusing on the music business and a
select group of key customers.
The Company has determined that Brazil represents a long-term opportunity
for growth, but will require an organizationally intensive effort to fully
exploit the potential of this market. Therefore, the Company is actively
seeking a local partner to take a substantial position in the Brazilian
unit. Operations in Argentina may be packaged with those in Brazil for
inclusion in any subsequent local joint venture, or may be sold in whole
or in part to local interests in Argentina. The Company has also
determined that portions of its operations in Mexico are strategically
tied to core operations in the United States and Canada.
8
Accordingly, the Company intends to focus on those Mexican operations
represented by its core customers, and manage an orderly exit from the
remainder. The Company is also reviewing its Mexico operations to
determine if combining with a local joint venture partner would enable it
to improve profitability, as well as service levels to customers and
suppliers. The provision for non-recurring and repositioning related
charges recorded in the first quarter of fiscal 1999 includes an estimate
of the costs required to implement the repositioning strategy contemplated
for International operations.
In connection with the repositioning program, the Board of Directors
approved a common stock repurchase program, subject to the generation of
cash from the sale of assets and reduced working capital needs, as well as
the requirements of the Company's credit agreements. During the first
quarter of fiscal 1999, the Company purchased 852,000 shares at a cost of
$9.8 million under the repurchase program. These repurchases were in
addition to the 1,295,000 shares repurchased in fiscal 1998 under a
repurchase program which has now been replaced by this new authorization.
No purchases were made during the second quarter of fiscal 1999.
See note 2 of Notes to Consolidated Financial Statements for additional
information regarding the repositioning program.
YEAR2000 PROJECT
In May 1997, the Company formed an internal team to study the information
system's issue commonly referred to as 'Year2000'. As a result, a project
plan was developed to address the Year2000 issue. The Company's Year2000
plan covers the enterprise wide information technology systems. The
Company's information technology systems are comprised of mainframe
applications, AS400 applications, AS400 systems, PC Client Server
applications, PC desktop/LAN infrastructure, Telecomm/Voice
infrastructure, Embedded systems, Sales Force Automation and Stirling
Douglas Application. The Company's information technology systems play a
vital role to support its business operations.
In December 1997, the Company's Chief Executive Officer issued the
Company's Year2000 compliance policy. The Company's Chief Information
Officer ('CIO') is the Year2000 project sponsor. The Year2000 project
management team meets with the CIO on a weekly basis to report on project
progress and discuss issues.
The planning and assessment phase of the Company's Year2000 project is
complete. To date, all Year2000 projects are in the remediation, upgrade
and/or testing phase. The Company anticipates completing the remediation
and testing of 80% of its mission critical enterprise applications by
December 31, 1998. The Company anticipates the completion of its
enterprise Year2000 project by June 30, 1999.
The Company's mainframe applications are a major part of its information
technology systems inventory. The Year2000 project incorporates the
remediation and testing of the Company's 4.1 million lines of code for
mainframe applications which was launched in October 1997. The Company is
using the services of third-party consulting firms in conjunction with its
own information technology staff for the mainframe applications Year2000
project. The mainframe applications Year2000 project management team has
divided the mainframe application inventory into eight logical groups
called 'Upgrade Groups'. To date, the Company has finished the remediation
and testing of 75% of its mainframe application inventory and anticipates
completing the remediation and testing of its entire mainframe application
inventory by the end of the current fiscal year, May 1, 1999.
The Company's mainframe data center is an outsourced operation. The
Company is closely working with its data center service provider to
address the system related Year2000 issues and achieve system level
Year2000 readiness status by May 1, 1999.
The Company has prepared the Year2000 remediation, upgrade and test plans
to address its AS400 applications, AS400 Systems, PC Client Server
applications, PC desktop/LAN server infrastructure,
9
Telecomm/Voice infrastructure, Embedded systems, Sales Force Automation
and Stirling Douglas Applications. All of these project plans are in
the upgrade, remediation and/or testing phase.
As a part of the Year2000 project, the Company has trained its information
technology staff on the Year2000 awareness and Year2000 remediation and
testing methodologies, on an as needed basis.
The Year2000 issue can arise at any point in the Company's supply,
processing, distribution and financial chains. The Company has surveyed
its merchandise trading partners to assess their general IT and EDI
Year2000 readiness status. The Company has prepared plans for the Year2000
compliance of its EDI systems. The Company has successfully completed the
National Retail Federation's EDI test to handle two position year dates.
The Company is currently testing Year2000 compliant EDI transactions with
one of its merchandise trading partners.
The Company is in the process of establishing internal and external
contingency plans intended to mitigate the possible disruptions in
business operations that may result from the Year2000 issue. The
contingency plans may include increasing inventory levels, stockpiling
packaging materials, securing alternative sources of supply, adjusting
facility schedules, manual workarounds, additional staffing and other
appropriate measures. The Company anticipates completing its initial
contingency plans by June 30, 1999. These plans will continue to be
evaluated and modified throughout the Year2000 transition period as
additional information becomes available.
The Company is surveying its non-merchandising trading partners ( data
center service provider, application support service providers, critical
material suppliers, banks, electricity and telecommunications service
providers, etc. ) for their Year2000 readiness status.
Because of the vast number of business systems used by the Company and the
significant number of key business partners, the Company could experience
some disruption in its business due to the Year2000 issue. More
specifically, because of the interdependent nature of the business
systems, the Company could be adversely affected if utilities, private
businesses and governmental entities with which it does business or that
provide essential services are not Year2000 ready. Although it is not
currently possible to quantify the most reasonably likely worst case
scenario, the possible consequences of the Company or key business
partners not being fully Year2000 ready in a timely manner include, among
other things, delays in the delivery of products, delays in the receipt of
supplies, invoice and collection errors, and inventory and supply
obsolescence. Consequently, the business and results of operations of the
Company could be adversely affected by a temporary inability of the
Company to conduct its business in the ordinary course for periods of
time. However, the Company believes that its Year2000 readiness program,
including the contingency planning, should significantly reduce the
adverse effect, if any, of such disruptions.
The total estimated cost for the Year2000 project is approximately $5.0
million. These costs are being expensed as incurred, and are being
financed through operating cash flow. Approximately $2.8 million of the
total project costs have been incurred as of October 31, 1998.
The Company has also accelerated the replacement of certain non-compliant
systems to meet Year2000 requirements. In July 98, the Company launched an
Oracle Financials Implementation Project to replace its existing general
ledger, fixed assets and accounts receivables systems. The Company is
using third party consulting firms in conjunction with its own information
technology staff to implement the Oracle Financials System. The Company
anticipates completing the Oracle Financials Implementation Project by
August 1999. The new Oracle Financials System is Year2000 compliant. The
total estimated cost of the Oracle Financials Implementation Project is
$5.0 million. Costs associated with the replacement of non-compliant
computerized systems are being capitalized, as appropriate, under current
accounting standards.
10
Other non-Year2000 information system projects either have not been
materially delayed or impacted by the Company's Year2000 initiatives, or
if delayed, such delay does not have an adverse effect on results of
operations or financial position.
While management believes that the estimated cost of becoming Year2000
compliant is not significant to the Company's financial results, failure
to complete all the work in a timely manner could result in material
financial risk. While management expects all planned work to be completed,
there can be no assurance that all systems will be in compliance by the
Year2000, that the systems of other companies and government agencies on
which the Company relies will be converted in a timely manner, or that
contingency planning will be able to fully address all potential
interruptions. Therefore, date-related issues could cause delays in the
Company's ability to ship its products, process transactions, or otherwise
conduct business in any of its markets.
****************
This document contains forward-looking statements which are not historical
facts and involve risk and uncertainties. Actual results, events and
performance could differ materially from those contemplated by these
forward-looking statements, including without limitations, the Company's
ability to effectively divest certain assets, the cost and timing of
implementing repositioning actions, success in implementing actions
contemplated by the repositioning program, conditions in the music
industry, relationships with the Company's lenders, certain global and
regional economic conditions, and other factors discussed in this Form
10-Q and those detailed from time to time in the Company's other filings
with the Securities and Exchange Commission. Handleman undertakes no
obligation to update any forward-looking statement to reflect events or
circumstances after the date of this document. Additional information that
could cause actual results to differ materially from any forward looking
statements may be contained in the Company's Annual Report on Form 10-K.
11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
An Annual Meeting of Shareholders of Handleman Company was held on
September 8, 1998. Two items were voted on at the Annual Meeting.
The first matter was the election of directors. The following
individuals were elected as directors of the Company with each
receiving at least 27,978,377 shares voted for election, while a
maximum of 2,025,916 were withheld: Messrs. John M. Barth and Alan
E. Schwartz.
The second matter voted on was the approval of the Company's 1998
Stock Option and Incentive Plan which authorizes the granting of
stock options, stock appreciation rights and restricted stock to
key employees of the Company. The 1998 Stock Option and Incentive
Plan was approved, with 19,740,724 shares voted for approval,
while 10,176,544 shares voted against and 87,025 shares abstained.
Item 6. Exhibits or Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
SIGNATURES: Pursuant to the requirements of the Securities and Exchange
Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HANDLEMAN COMPANY
DATE: December 11, 1998 BY: /s/ Stephen Strome
------------------ ----------------------------
STEPHEN STROME
President and
Chief Executive Officer
DATE: December 11, 1998 BY: /s/ Leonard A. Brams
----------------- -----------------------------
LEONARD A. BRAMS
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
12