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 third quarter ended January 31, 1999 Commission File Number 1-7923
Handleman Company
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1242806
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 KIRTS BOULEVARD TROY, MICHIGAN 48084-4142 Area Code 248 362-4400
- ---------------------------------- ------------ -------------------------------
(Address of principal (Zip code) (Registrant's telephone number)
executive offices)
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
YES X NO
------- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS DATE SHARES OUTSTANDING
- ----------------------------- --------------------- -----------------------
Common Stock - $.01 Par Value March 5, 1999 31,499,622
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 - 6
Management's Discussion and Analysis .................. 7 - 12
PART II - OTHER INFORMATION AND SIGNATURES ................... 13
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(amounts in thousands except per share data)
Three Months (13 Weeks) Ended Nine Months (39 Weeks) Ended
----------------------------------- ---------------------------------------
January 31, January 31, January 31, January 31,
1999 1998 1999 1998
------------ ------------- ------------ ----------
Revenues $ 290,115 $ 308,202 $ 801,557 $ 832,524
Costs and expenses:
Direct product costs 219,889 231,882 605,983 631,428
Selling, general and
administrative expenses 51,281 63,326 158,095 180,376
Interest expense, net 1,853 3,097 6,769 9,587
Non-recurring and repositioning
related charges 6,939 -- 123,901 --
Gain on sale of subsidiary -- -- (31,000) --
--------- --------- --------- ---------
Income (loss) before income
taxes and minority interest 10,153 9,897 (62,191) 11,133
Income tax (expense) benefit (3,559) (3,852) 16,798 (5,170)
Minority interest (966) 909 (1,932) 2,841
--------- --------- --------- ---------
Net income (loss) $ 5,628 $ 6,954 ($ 47,325) $ 8,804
========= ========= ========= =========
Net income (loss) per share - basic
and diluted $ .18 $ .21 ($ 1.49) $ .27
========= ========= ========= =========
Weighted average number of shares
outstanding during the period - basic 31,584 32,741 31,658 33,094
========= ========= ========= =========
The accompanying notes are an integral part of
the consolidated financial statements.
1
HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(amounts in thousands except share data)
January 31, May 2,
1999 1998
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 8,780 $ 25,562
Accounts receivable, less allowance of $14,886 and $17,339
at January 31, 1999 and May 2, 1998, respectively, for the
gross profit impact of estimated future returns 213,726 242,445
Merchandise inventories 127,148 187,173
Other current assets 22,344 10,834
--------- ---------
Total current assets 371,998 466,014
--------- ---------
Property and equipment:
Land 3,329 4,012
Buildings and improvements 19,165 22,280
Display fixtures 48,823 89,954
Equipment, furniture and other 40,266 70,630
--------- ---------
111,583 186,876
Less accumulated depreciation and amortization 57,016 108,165
--------- ---------
54,567 78,711
--------- ---------
Other assets, net of allowances 63,307 68,331
--------- ---------
Total assets $ 489,872 $ 613,056
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 177,530 $ 179,227
Debt, current portion 18,571 18,571
Accrued and other liabilities 26,025 21,300
--------- ---------
Total current liabilities 222,126 219,098
--------- ---------
Debt, non-current 47,429 114,768
Other liabilities 2,919 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; 31,410,000 and 31,977,000 shares
issued at January 31, 1999 and May 2, 1998, respectively 314 320
Paid-in capital 13,515 20,710
Foreign currency translation adjustment (7,834) (7,600)
Unearned compensation (1,649) --
Retained earnings 213,052 260,377
--------- ---------
Total shareholders' equity 217,398 273,807
--------- ---------
Total liabilities and shareholders' equity $ 489,872 $ 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)
Nine Months (39 Weeks) Ended January 31, 1999
-----------------------------------------------------------------------------------------------
Common Stock
------------------
Foreign
Currency Total
Shares Paid-in Translation Unearned Retained Shareholders'
Issued Amount Capital Adjustment Compensation Earnings Equity
------ ------ ------- ----------- ------------ ---------- -------------
May 2, 1998 31,977 $320 $20,710 ($7,600) $ -- $260,377 $273,807
Net loss (47,325) (47,325)
Adjustment for foreign
currency translation (234) (234)
--------
Comprehensive loss, net of tax (47,559)
---------
Common stock issuances
and forfeitures in connection
with employee benefit plans 365 3 3,360 (1,649) 1,714
Common stock repurchased (1,146) (11) (13,376) (13,387)
Additional investment in
The itsy bitsy Entertainment
Company, Inc. 214 2 2,821 2,823
------- ------ -------- -------- -------- -------- --------
January 31, 1999 31,410 $314 $13,515 ($7,834) ($1,649) $213,052 $217,398
======= ====== ======== ======== ======== ======== ========
The accompanying notes are an integral part of
the consolidated financial statements.
3
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
Nine Months (39 weeks) Ended
------------------------------------------
January 31, January 31,
1999 1998
----------- ------------
Cash flows from operating activities:
Net income (loss) ($ 47,325) $ 8,804
----------- -----------
Adjustments to reconcile net income (loss) to net cash provided
from operating activities:
Depreciation 12,638 20,960
Amortization of acquisition costs 2,799 3,953
Recoupment of license advances 6,527 9,832
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 6,323 32,109
Merchandise inventories 34,707 (17,734)
Other current assets (13,598) (938)
Other assets, net of allowances (1,153) 2,545
Increase (decrease) in liabilities:
Accounts payable (3,797) 722
Accrued and other liabilities (39,770) (2,001)
Other liabilities (1,704) (6,637)
----------- -----------
Total adjustments 83,263 42,811
----------- -----------
Net cash provided from operating activities 35,938 51,615
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (11,848) (15,783)
Retirements of property and equipment 6,881 2,421
License advances (11,417) (15,694)
Additional investment in The itsy bitsy
Entertainment Company, Inc. (4,754) --
Proceeds from sale of subsidiary 45,000 --
Proceeds from sale of book business 2,665 --
----------- -----------
Net cash provided from (used by) investing activities 26,527 (29,056)
----------- -----------
Cash flows from financing activities:
Issuances of debt 1,849,475 1,308,050
Repayments of debt (1,916,815) (1,321,430)
Repurchase of common stock (13,387) (5,489)
Other changes in shareholders' equity, net 1,480 (1,485)
----------- -----------
Net cash used by financing activities (79,247) (20,354)
----------- -----------
Net increase (decrease) in cash and cash equivalents (16,782) 2,205
Cash and cash equivalents at beginning of period 25,562 12,449
----------- -----------
Cash and cash equivalents at end of period $ 8,780 $ 14,654
=========== ===========
The accompanying notes are an integral part of
the consolidated financial statements.
4
HANDLEMAN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of Management, the accompanying consolidated balance sheet and
consolidated statements of operations, shareholders' equity and cash flows
contain all adjustments, consisting only of normal recurring adjustments
necessary to present fairly the financial position of the Company as of
January 31, 1999, and the results of operations and changes in cash flows for
the nine months then ended. Because of the seasonal nature of the Company's
business, sales and earnings results for the nine months ended January 31,
1999 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 had four major components:
. Exit the domestic video, book and software distribution and service
operations.
. Reduce the number of customers serviced in the music distribution
business.
. Sell Sofsource, the Company's software publishing subsidiary ($45 million
was received in cash in November 1998).
. Implement a new common stock repurchase program.
A summary of the components of the $123.9 million (pre-tax) non-recurring and
repositioning related charge is as follows (in millions):
Second Third Nine
First Quarter Quarter Quarter Months
Fiscal 1999 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 $6.9 26.4
------ ---- ---- ------
Total $110.0 $7.0 $6.9 $123.9
====== ==== ==== ======
Adjustments of assets to net realizable value included adjustments to reflect
the estimated recovery amount of assets being disposed of, principally
inventory, as well as certain adjustments to the carrying value of receivables,
payables and investments, including International investments. The carrying
amount of goodwill related directly to either business exited, or customers no
longer serviced, were included in the intangibles write-off.
Accrued and other liabilities in the January 31, 1999 balance sheet includes
$1.1 million related to the accrued but not yet incurred repositioning related
charges. The decrease from the $39.0 million of accrued but not yet incurred
repositioning related charges at October 31, 1998 resulted from the final
determination and reclassification of the amounts assignable to certain asset
balances, principally International inventories and receivables.
5
Notes to Consolidated Financial Statements (continued)
The Company incurred $7.0 million (pre-tax) and $6.9 million (pre-tax) of
non-recurring and repositioning related charges during the second and third
quarters of fiscal 1999, respectively, that were not accruable in the first
quarter (primarily advisory fees). The majority of the repositioning
activities, including employee severance programs, will be completed during
fiscal 1999, though some additional repositioning costs will be incurred
during fiscal 2000.
3. The Company evaluates the carrying value of goodwill for potential impairment
on an ongoing basis. Such evaluations consider management's plans for future
operations, recent operating results, undiscounted annual cash flows and
other economic factors related to the operation to which the goodwill
applies.
4. In June 1998, FASB issued SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This Statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to
as derivatives), and for hedging activities. This statement will be adopted
in fiscal 2001. The Company does not believe the impact of SFAS 133 on the
earnings and financial position will be material.
6
HANDLEMAN COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Revenues for the third quarter ended January 31, 1999 decreased 6% to $290.1
million from $308.2 million for the third quarter ended January 31, 1998. The
lower revenue level was attributable to the withdrawal from three product lines
and the discontinuance of service to a number of music customers in conjunction
with the Company's strategic repositioning program. Net income for the third
quarter of fiscal 1999 was $5.6 million or $.18 per share, compared to $7.0
million or $.21 per share for the third quarter of fiscal 1998. The Company's
third quarter results included pre-tax non-recurring and repositioning related
charges of $6.9 million ($.14 per share after tax).
Revenues were $801.6 million for the first nine months of this year, compared to
$832.5 million for the first nine 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 nine months ended January 31, 1999 was $47.3 million
or $1.49 per share, compared to net income of $8.8 million or $.27 per share for
the nine months ended January 31, 1998. The Company's results of operations for
the nine-month period this year included pre-tax non-recurring and repositioning
charges of $123.9 million ($2.65 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. consists of music category management operations in
the U.S. and Canada. H.E.R. net music sales grew 14% to $239.0 million for the
third quarter of fiscal 1999, from $208.8 million for the third quarter of
fiscal 1998. (Canadian operations, which were reported in International in
fiscal 1998, have been included in H.E. R. for both this year and last year.)
The increase in net 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 improved category management processes and new
systems. The remainder of H.E.R. sales ($49.2 million for the third quarter
last year) was attributable to the video, book and software product lines which
are no longer being serviced by the Company; no net sales existed for those
product lines for the third quarter of this year.
H.E.R. net music sales for the first nine months of this year were $619.6
million, compared to $534.9 million for the comparable period last year, an
increase of 16%. The remainder of H.E.R. sales ($38 million this year versus
$161.9 million last year) was attributable to the video, book and software
product lines which have now been exited in connection with the Company's
strategic repositioning program.
NCE encompasses the Company's proprietary operations, which include music, video
and licensing operations. NCE net sales increased 25% to $38.9 million for the
third quarter of fiscal 1999. This compares to $31.0 million for the third
quarter of fiscal 1998, excluding sales by Sofsource which was sold during the
first quarter of fiscal 1999. NCE net sales for the third quarter of fiscal
1999 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. Approximately one-half of NCE's increase in sales for the
quarter was generated by The itsy bitsy Entertainment Company. The NCE sales
increase was also attributable to strong sales at the Anchor Bay and Madacy
units, where the improvements were driven by the release of new titles, plus the
addition of new customers and a resurgence in the horror video category where
the NCE units have a strong catalog. Net sales for the first nine months of
fiscal 1999 increased 26% to $114.1 million from $90.4 million for the first
nine months of fiscal 1998, excluding Sofsource sales in both periods.
7
International includes category management operations in Mexico, Brazil and
Argentina. International had sales of $15.5 million for the third quarter of
fiscal 1999, compared to $20.1 million for the third quarter of fiscal 1998, a
decrease of 23%. 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 strategic repositioning
program. The devaluation of the Brazilian currency also contributed to the
reduced revenues. International net sales were $40.8 million for the nine-month
period ended January 31, 1999, a decrease of 18% from net sales of $49.6 million
for the comparable nine-month period last year.
Direct product costs as a percentage of revenues was 75.8% for the third quarter
of fiscal 1999, compared to 75.2% for the third quarter of fiscal 1998. Direct
product costs as a percentage of revenues for the first nine months of fiscal
1999 was 75.6%, compared to 75.8% for the first nine months of fiscal 1998.
Selling, general and administrative ("SG&A") expenses for the third quarter of
fiscal 1999 were $51.3 million or 17.7% of net sales, compared to $63.3 million,
or 20.5% of net sales, for the third quarter last year. SG&A expenses for the
first nine months ended January 31, 1999 were $158.1 million or 19.7% of
revenues, compared to $180.4 million or 21.7% of revenues for the comparable
prior year period.
Income before interest, income taxes, minority interest, non-recurring and
repositioning related charges, and gain on sale of subsidiary ("operating
income") for the third quarter of fiscal 1999 increased 45% to $18.9 million,
from $13.0 million for the third quarter of fiscal 1998. H.E.R. operating
income improved 55% to $15.7 million, from $10.1 million last year. NCE
operating income improved 34% to $4.7 million, from $3.5 million (excluding $1.0
million of operating income for Sofsource) last year. International's operating
loss was $1.5 million this year, compared to an operating loss of $1.6 million
last year.
Operating income for the first nine months of fiscal 1999 increased 81% to $37.5
million, from $20.7 million last year. H.E.R. operating income improved to
$29.1 million, from $11.0 million last year. NCE operating income improved to
$13.5 million, from $11.4 million (excluding $3.3 million of operating income
for Sofsource) last year. International's operating loss was $5.1 million this
year, compared to an operating loss of $5.0 million last year.
Interest expense for the third quarter and first nine months of fiscal 1999 was
$1.8 million and $6.8 million, respectively, compared to $3.1 million and $9.6
million for the third quarter and first nine months last year, respectively.
The decrease was primarily attributable to lower borrowing levels.
Accounts receivable decreased to $213.7 million at January 31, 1999, from $242.4
million at May 2, 1998. This decrease primarily resulted from the Company's on-
going collection efforts, as well as certain adjustments to the carrying value
of accounts receivable due to the repositioning program.
Merchandise inventories decreased to $127.1 million at January 31, 1999 from
$187.2 million at May 2, 1998. The decrease was mainly attributed to reduced
inventory purchases and the liquidation of inventories related to product lines
being exited in connection with the repositioning program, as well as an
adjustment of inventory to net realizable value also resulting from the
repositioning program.
Other current assets were $22.3 million at January 31, 1999, compared to $10.8
million at May 2, 1998. This increase was principally due to an increase in
income taxes receivable of $13 million.
The decrease in property and equipment, net at January 31, 1999, compared to May
2, 1998 primarily resulted from the write-off of display fixtures and the sale
of certain Company-owned facilities in connection with the repositioning
program.
Debt, non-current decreased to $47.4 million at January 31, 1999 from $114.8
million at May 2, 1998. This decrease was principally attributable to the cash
generated from the sale of the Sofsource subsidiary and reduced working capital
requirements attributable to the repositioning program.
8
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. Day-to-day management of itsy bitsy remains
with its continuing management team, who retained a meaningful minority interest
in that company.
The following comments relate to the Company's strategic repositioning program:
The strategic repositioning program redirected the Company to its core music
distribution business. The repositioning program had four major components:
. Exit the H.E.R. and International video, book and software distribution and
service operations.
. Reduce the number of customers serviced in the music distribution business
within H.E.R. and International to a select group of strategic partners who
could best benefit from Handleman's category management and systems
investments.
. Sell Sofsource, the Company's software publishing subsidiary.
. Implement a new common stock repurchase program.
As of January 31, 1999, substantially all of the operational repositioning
actions have been completed.
During the first quarter of fiscal 1999, the Company sold its book distribution
business to Levy Home Entertainment at a pre-tax loss of approximately $1.3
million, and its Sofsource subsidiary to The Learning Company at a pre-tax gain
of $31 million.
H.E.R. and International have exited the video and software distribution
business activities, as well as ceased providing services to a significant
number of music customers. H.E.R. now services six U.S. customers and two
Canadian customers in the music category management business.
This repositioning program resulted in a reduction of 900-1,000 positions
(approximately 30% of the Company's total workforce). This reduction occurred
predominantly in the H.E.R. division, primarily field sales representatives and
distribution facility employees, and the corporate headquarters.
The Company expects to realize annual ongoing cost savings in excess of $25
million (pre-tax) as a result of the repositioning actions. The expected
savings will result from a reduction in operating costs at a rate that is
greater than the projected decrease in revenues, because both average customer
size and average sales volume of departments serviced increased significantly.
The Company believes benefits of the repositioning program began to occur in the
second quarter as the program was implemented.
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 assessment, the
Company has implemented in Latin America the repositioning program concepts of
servicing a select group of key customers in the music business.
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 continuing to seek a
local partner to take a substantial position in the Brazilian unit. Operations
in Argentina will likely be sold to local interests in that country. The
Company has also determined that portions of its operations in Mexico are
strategically tied to core operations in the United States and Canada.
Accordingly, the Company intends to focus on those Mexican operations
represented by its core customers, and has managed an orderly exit from the
remainder. The Company is also reviewing its
9
Mexico operations to determine if combining with a local joint venture partner
would enable it to improve both profitability, as well as service levels to
customers and suppliers.
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 nine months of fiscal 1999, the
Company purchased 1,146,000 shares at a cost of $13.4 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.
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 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 completed 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 85% 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
working closely with its data center service provider to address the system
related Year2000 issues and achieve system level Year2000 readiness status by
March 31, 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, Telecomm/Voice infrastructure, Embedded
systems, Sales Force Automation and Stirling Douglas Applications. All of the
these project plans are in the upgrade, remediation and/or testing phase.
10
As a part of the Year2000 project, the Company has trained its information
technology staff on the Year2000 awareness and Year2000 remediation and testing
technologies, 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 capability 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 currently working on its Year2000 readiness plan for its non-IT
systems. Non-IT systems include security card systems, building access systems,
elevators, fax machines, copiers, security alarm systems, auxiliary power
generator systems, etc. The Company is surveying its non-merchandising trading
partners for both IT and non-IT systems (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 $5.0 million. These costs
are being expensed as incurred, and are being financed through operating cash
flow. Approximately $3.5 million of the total project costs have been incurred
as of January 31, 1999.
The Company has also accelerated the replacement of certain non-ready systems to
meet Year2000 requirements. In July 1998, 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 capable. The total estimated cost of the Oracle
Financials Implementation Project is $5.0 million. Costs associated with the
replacement of non-capable computerized systems are being capitalized, as
appropriate, under current accounting standards.
11
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 the results of operations or financial
position.
While management believes that the estimated cost of becoming Year2000 capable
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 capable by the year 2000, 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, risks associated with
the state of the Company's Year2000 readiness, as well as that of its vendors
and customers, 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.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None during the quarter.
Item 6. Exhibits or Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
SIGNATURES: Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
HANDLEMAN COMPANY
DATE: March 17, 1999 BY: /s/ Stephen Strome
-------------- -------------------------------
STEPHEN STROME
President and
Chief Executive Officer
DATE: March 17, 1999 BY: /s/ Leonard A. Brams
-------------- -------------------------------
LEONARD A. BRAMS
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
13