<PAGE>
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 May 1, 1999 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 Identification No.)
incorporation or organization)
500 Kirts Boulevard, Troy, Michigan 48084 - 4142
________________________________________________________________________________
(Address of principal executive offices) (Zip Code)
248-362-4400
________________________________________________________________________________
(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 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 check mark 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 14, 1999 was $350,862,000.
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 14, 1999 was 30,322,450.
Item 14(a) 3. on page 44 describes the exhibits filed with the Securities and
Exchange Commission.
Certain sections of the definitive Proxy Statement to be filed for the 1999
Annual Meeting of Shareholders are incorporated by reference into Part III.
1
<PAGE>
PART 1
Item 1. BUSINESS
Handleman Company, a Michigan corporation (herein referred to as the "Company"
or "Handleman" or "Registrant"), which has its executive offices in Troy,
Michigan, is the successor to a proprietorship formed in 1934, and to a
partnership formed in 1937.
DESCRIPTION OF BUSINESS:
- ------------------------
The Company through fiscal 1999 had three operating units: Handleman
Entertainment Resources ("H.E.R."), North Coast Entertainment ("NCE") and
Handleman International ("International").
On June 2, 1998, the Company's Board of Directors approved a comprehensive
strategic repositioning program designed to focus the Company on its core music
distribution business. The 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; and
. Implement a new common stock repurchase program.
As of May 1, 1999, all of the operational repositioning actions have been
completed. H.E.R. and International have exited the video and software
distribution business activities, as well as ceased providing services to a
number of music customers. In addition, during the first quarter of fiscal
1999, the Company sold its book distribution operations and its Sofsource
subsidiary.
As a result of the repositioning program, the Company's activities are organized
as follows. H.E.R. consists of music distribution and category management
operations in the U.S. and Canada. (Canadian operations, which were reported in
International in fiscal 1998, have been included in H.E.R. for fiscal 1999 and
prior years). NCE encompasses the Company's proprietary operations, which
include music, video and licensing operations. International includes music
distribution and category management operations principally in Mexico and
Brazil. (For fiscal 2000, responsibility for International operations has been
transferred to H.E.R.).
See Note 3 of Notes to Consolidated Financial Statements, as well as
Management's Discussion and Analysis of Financial Condition and Results of
Operations, for additional information regarding the Company's repositioning
program.
2
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The following table sets forth net sales, and the percentage contribution to
consolidated revenues, for the Company's three operating units for the fiscal
years ended May 1, 1999, May 2, 1998 and May 3, 1997.
<TABLE>
<CAPTION>
Year Ended
(dollar amounts in millions)
--------------------------------------------------------------------------
May 1, 1999 May 2, 1998 May 3, 1997
(52 weeks) (52 weeks) (53 weeks)
---------------------- -------------------- --------------------
<S> <C> <C> <C>
Handleman Entertainment Resources
Music /(1)/ $ 833.5 $ 727.4 $ 632.3
% of Total 78.7 65.8 53.5
Other /(2)/ 38.0 205.0 387.3
% of Total 3.6 18.6 32.8
--------- -------- --------
Sub-Total 871.5 932.4 1,019.6
% of Total 82.3 84.4 86.3
North Coast Entertainment 151.1 110.7 111.7
% of Total 14.3 10.0 9.5
International 50.8 62.8 56.7
% of Total 4.8 5.7 4.8
Eliminations, principally NCE sales to H.E.R. (17.5) (22.0) (29.7)
% of Total (1.7) (2.0) (2.5)
Sold Operation (Sofsource) /(3)/ 2.7 20.6 22.7
% of Total .3 1.9 1.9
--------- -------- --------
TOTAL $1,058.6 $1,104.5 $1,181.0
========= ======== ========
</TABLE>
/(1)/ Canadian operations, which were previously reported in International
in fiscal 1998 and fiscal 1997, have been included in H.E.R. for all
years presented herein.
/(2)/ Other represents sales of the exited video, book and software product
lines.
/(3)/ Sofsource, which was previously included in NCE, was sold during the
first quarter of fiscal 1999.
Business Segments
-----------------
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 replaced the "industry segment" disclosure approach with
the "management" approach which designates the internal organization that is
used by management for making operating decisions and assessing performance as
the basis for the Company's reportable segments.
In prior years the Company had determined, using the industry segment approach,
that it operated principally in one business segment: selling music, video, book
and personal computer software products primarily to mass merchants. The Company
has determined, using the management approach, that it operated in three
business segments: H.E.R. provides category management services of music
products to select United States and Canadian mass merchants; NCE encompasses
the Company's proprietary activities, which include music, video and licensing
operations; and International provides category management services of music
products to mass merchants principally in Brazil and Mexico.
The accounting policies of the segments are the same as those described in Note
1 of Notes to Consolidated Financial Statements, "Accounting Policies." The
Company evaluates performance of its segments and allocates resources to them
based on income before interest, income taxes, minority interest and
repositioning and related charges.
See Note 2 of Notes to Consolidated Financial Statements for additional
information regarding segment activities.
3
<PAGE>
Handleman Entertainment Resources and Handleman International
-------------------------------------------------------------
The major business activity of H.E.R. and International is to act as a link
between music distributors and mass merchant chain stores. The following
discussion pertains to these category management activities of H.E.R. and
International, which together comprise over 85% of the Company's sales.
The Company's vendors and customers use the services of H.E.R. and International
for a variety of reasons:
. Music is a local and national business requiring that products selected for
each individual store meet the unique demand of consumers who frequent each
store.
. Store service - the Company's field sales force visits each mass merchant
store to ensure that product is appropriately displayed as close to the
release date as possible.
. Direct store shipment - the Company bypasses mass merchant distribution
centers and ships directly to over 4,000 unique retail locations.
. Numerous small quantity shipments - to tailor each store inventory to
unique and changing consumer demand in each store, the Company must make
frequent shipments of less than case lot quantities to each store.
The Company distributes throughout vast geographic regions and adapts selections
to local tastes via a coordination of national and local purchasing
responsibility, both monitored by inventory control programs.
Vendors
- -------
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 vendors. Though a small number of major,
financially sound vendors account for a high percentage of purchases, product
must be selected from a variety of additional 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.
Since the public's taste for the products the Company supplies 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. Accordingly, the Company may possess in its inventories non-
saleable product that can only be returned to vendors 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.
4
<PAGE>
Customers
- ---------
H.E.R. and International's customers utilize their services for a variety of
reasons. Products must be selected from a multitude of vendors offering
numerous titles, different formats (e.g., compact discs, cassettes) and
different payment and return arrangements. In addition, mass merchants utilize
category managers due to the complexity of managing the numerous number of SKUs
required per department, the wide array of programs offered by the multitude of
vendors, the "hits" nature of the business and the high risk of inventory
obsolescence. As a result, customers avoid most of the risks inherent in
product selection and the 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.
H.E.R. and International also offer 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.
Handleman 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
estimated customer returns.
During the fiscal year ended May 1, 1999 one customer, Wal-Mart, accounted for
approximately 39% of the Company's consolidated sales, while a second customer,
Kmart, accounted for approximately 31%. Handleman generally does 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 and earnings.
5
<PAGE>
Operations
- ----------
The Company distributes products from facilities in the U.S., Canada, Mexico and
Brazil. 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 music 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 automated return centers in the United States and
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 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.
Within the United States, the Company operates two high-technology automated
distribution centers ("ADC"); one in Indianapolis, Indiana and one in Sparks,
Nevada. During the first half of fiscal 1999, the Company completed its
consolidation of the distribution and return processing activities at its prior
Albany, Atlanta and Baltimore warehouses into the ADC in Indianapolis, Indiana.
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.
North Coast Entertainment
-------------------------
NCE, a subsidiary of Handleman Company, includes the Company's proprietary
product operations. NCE is the umbrella company for subsidiaries which acquire
or develop master recordings, exclusive licensing and distribution agreements
and original productions. Such items are manufactured and then distributed to
either rackjobbers, including H.E.R. and International, distributors or directly
to retailers. NCE has operations in the United States and Canada, and to a
lesser extent in Germany and the United Kingdom. In addition, NCE products are
available in Mexico and South America. Most NCE products are categorized as
budget, with many retailing for under $10. Products are designed to provide
high margins to the retailer at prices that generate impulse sales.
NCE provides the following opportunities:
. 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.
. NCE provides the Company with a wide array of product development and
licensing opportunities for music products. This enables H.E.R. and
International to offer a broader range of more profitable products to its
customers.
. NCE gives the Company access to new distribution channels, new markets and
new customers. For example, the Company can cross-sell music and video to
new or existing customers through any NCE subsidiary sales organization.
6
<PAGE>
NCE is currently comprised of a group of enterprises operating under different
names:
. Anchor Bay Entertainment markets a wide selection of video titles ranging
from children's programs such as Thomas the Tank Engine, Tots TV, family
movies like Huckleberry Finn, the Mobil Masterpiece Theater line, a popular
Collector's Edition Series, holiday titles, best-selling horror/sci-fi
movies and original fitness videos. Anchor Bay's film library encompasses
several thousand titles and includes such classics as David O. Selznick's
"Duel in the Sun" and Alfred Hitchcock's "Rebecca," as well as modern
thrillers such as George Romero's "Dawn of the Dead" and John Carpenter's
"Halloween." Its fitness programs include the popular series Crunch and a
brand new line of Paula Abdul dance theme exercise videos. Anchor Bay
provides films on the digital video disk format, the fastest growing
segment of the video market. Anchor Bay supplies products to rackjobbers,
specialty stores, mass merchants and distributors, as well as via direct
response and catalog channels.
. Madacy Entertainment Group packages music and video products. In addition,
the company owns the masters to more than 2,000 classical recordings. Its
diverse offerings include a wide selection of pop, classical, contemporary
and dance titles. Madacy has created a special expertise in compilation
albums and recently signed an agreement with Time Inc. to package, promote
and distribute for retail sale a number of Time/Life's musical collections,
previously only available through direct channels. As a value-added
service, Madacy also supplies private label products to major retailers.
Mediaphon GmbH, a German-based subsidiary, distributes audio products
throughout Germany and the rest of Europe.
. The itsy bitsy Entertainment Company ("itsy bitsy") - During the first
fiscal quarter, NCE purchased additional shares of 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. Day-to-day management of itsy bitsy remains with its continuing
management team.
NCE's management will continue to focus its attention on growing the business
through licensing, acquiring or producing new products, as well as via new
markets, new customers, geographical growth, growth within the home
entertainment category and selective acquisitions and joint ventures.
7
<PAGE>
Competition
-----------
Handleman is primarily a category manager of music products. The business of
the Company is highly competitive as to both price and alternative supply
arrangements. Besides competition among the Company's mass merchant customers,
the Company's customers compete with alternative sources from which consumers
could purchase the same product, such as (1) specialty retail outlets, (2)
electronic specialty stores, (3) record clubs, and (4) internet direct sales,
including direct to home shipment and direct downloading through a consumer's
home computer. Also, new methods of in-home delivery of entertainment software
products are being introduced. 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 rackjobbers. In
addition, some large mass merchants have "vertically integrated" so as to
provide their own rackjobbing. Some of these companies, however, also purchase
from independent rackjobbers.
The Company believes that the distribution of home entertainment software will
remain highly competitive. The Company believes that customer service and
continual progress in operational efficiencies are the keys to growth and
profitability in this competitive environment.
* * * * * * * *
See Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 3, Repositioning and Related Charges, on page 33 under Item
8, for additional information regarding the Company's activities.
The Company's sales and earnings are of a seasonal nature. Note 9, Quarterly
Financial Summary (Unaudited), on page 41 under Item 8 discloses quarterly
results which indicate the seasonality of the Company's business.
The Company has approximately 2,300 employees. As of May 1, 1999, none was
unionized. The 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 and the Troy corporate
headquarters.
8
<PAGE>
Item 2. PROPERTIES
As of May 1, 1999, the Company's H.E.R. division occupies in the United States
and Canada three leased warehouses and seven leased satellite sales offices.
The leased warehouses are located in Indianapolis, Indiana; Reno, Nevada and
Toronto, Ontario. The satellite sales offices are located in the states of
Missouri, California, Georgia, Illinois and New York, as well as the Canadian
provinces of Alberta and Quebec. The Company-owned warehouse in Baltimore,
Maryland is being sold in connection with the Company's repositioning program.
The Company's NCE unit owns one warehouse located in Tampa, Florida and leases
four warehouses located in Columbus, Ohio; Quebec, Canada (2), and Ontario,
Canada. The warehouse in Tampa, Florida is being sold as operations previously
conducted in such warehouse are being transferred to the H.E.R. warehouse in
Indianapolis, Indiana. NCE also occupies leased office space within the United
States in the states of Michigan, New Jersey and Minnesota, as well as in Canada
and Germany.
The Company's International division has leased warehouses in Sao Paulo, Brazil
and Mexico City, Mexico.
The Company owns its 130,000 square feet corporate office building located in
Troy, Michigan.
Item 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Registrant or any of its
subsidiaries is a party, other than routine litigation incidental to the
business, none of which are deemed material.
Item 4. SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS
Not applicable.
9
<PAGE>
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:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------------
May 1, 1999 May 2, 1998
----------- -----------
Quarter Low High Low High
------- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
First 8 3/4 12 15/16 5 15/16 7 1/8
Second 5 13/16 10 1/8 5 1/8 7 5/16
Third 9 3/4 15 5 13/16 7 3/8
Fourth 9 15/16 14 13/16 5 15/16 11 1/4
</TABLE>
As of July 14, 1999, the Company had 3,377 shareholders of record.
The Company has not declared or paid dividends during the past two fiscal years.
10
<PAGE>
Item 6.
SELECTED FINANCIAL DATA
HANDLEMAN COMPANY
FIVE-YEAR REVIEW
(amounts in thousands except per share data and ratios)
<TABLE>
<CAPTION>
1999 % 1998 % 1997 %
---- - ---- - ---- -
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenues $1,058,553 100.0 $1,104,522 100.0 $ 1,181,037 100.0
Gross profit, after direct product costs* 266,870 25.2 270,052 24.4 274,258 23.2
Selling, general & administrative expenses 211,682 20.0 243,778 22.1 250,286 21.2
Depreciation and amortization: included in
selling, general & administrative expenses 20,488 1.9 32,733 3.0 35,330 3.0
Repositioning and related charges, and other
unusual charges*** 96,362 9.1 13,684 1.2 --- ---
Interest expense, net 8,088 0.8 12,319 1.1 10,967 .9
Income (loss) before income taxes
and minority interest (49,262) ** 271 ** 13,005 1.1
Income tax expense (benefit) (16,449) ** 2,800 .3 4,909 .4
Net income (loss) (35,052) ** 312 ** 5,352 .5
Dividends --- --- ---
Weighted average number of shares outstanding 31,568 32,868 33,481
PER SHARE DATA:
Earnings (loss) per share - basic and diluted $ (1.11) $ .01 $ .16
Dividends per share --- --- ---
BALANCE SHEET DATA:
Cash and receivables $ 245,373 $ 268,007 $ 302,520
Inventories 102,589 187,173 188,215
Current assets 369,522 466,014 500,378
Additions to property and equipment 17,054 21,369 22,635
Total assets 487,856 613,056 667,886
Debt, current 18,571 18,571 15,000
Current liabilities 216,801 219,098 239,442
Debt, non-current 39,857 114,768 135,520
Working capital 152,721 246,916 260,936
Shareholders' equity 225,686 273,807 283,653
FINANCIAL RATIOS:
Quick ratio
(Cash and receivables/current liabilities) 1.1 1.2 1.3
Working capital ratio
(Current assets/current liabilities) 1.7 2.1 2.1
Inventory turns
(Direct product costs/average inventories
throughout year) 5.5 3.9 4.1
Debt to total capitalization ratio
(Debt, non-current/debt, non-current plus
shareholders' equity) 15.0% 29.5% 32.3%
Return on assets (Net income/average assets) ** ** .8%
Return on beginning shareholders' equity
(Net income/beginning shareholders' equity) ** .1% 1.9%
<CAPTION>
1996 % 1995 %
---- - ------ -
<S> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenues $1,132,607 100.0 $1,226,062 100.0
Gross profit, after direct product costs* 230,185 20.3 278,464 22.7
Selling, general & administrative expenses 252,377 22.3 220,511 18.0
Depreciation and amortization: included in
selling, general & administrative expenses 36,884 3.3 31,801 2.6
Repositioning and related charges, and other
unusual charges*** 1,500 .1 5,500 .4
Interest expense, net 12,039 1.1 8,024 .7
Income (loss) before income taxes
and minority interest (35,731) ** 44,429 3.6
Income tax expense (benefit) (12,738) ** 17,809 1.4
Net income (loss) (22,476) ** 28,023 2.3
Dividends 9,070 14,755
Weighted average number of shares outstanding 33,576 33,518
PER SHARE DATA:
Earnings (loss) per share - basic and diluted $ (.67) $ .84
Dividends per share .27 .44
BALANCE SHEET DATA:
Cash and receivables $ 277,764 $ 283,043
Inventories 212,700 276,109
Current assets 509,813 560,931
Additions to property and equipment 33,596 40,675
Total assets 693,914 754,076
Debt, current 4,000 ---
Current liabilities 264,484 289,961
Debt, non-current 143,600 146,200
Working capital 245,329 270,970
Shareholders' equity 279,560 311,652
FINANCIAL RATIOS:
Quick ratio
(Cash and receivables/current liabilities) 1.1 1.0
Working capital ratio
(Current assets/current liabilities) 1.9 1.9
Inventory turns
(Direct product costs/average inventories
throughout year) 3.4 3.5
Debt to total capitalization ratio
(Debt, non-current/debt, non-current plus
shareholders' equity) 33.9% 31.9%
Return on assets (Net income/average assets) ** 4.0%
Return on beginning shareholders' equity
(Net income/beginning shareholders' equity) ** 9.4%
</TABLE>
* - Amount in fiscal 1996 includes an inventory reduction provision of
$14,500.
** - Not meaningful
*** - Amount for fiscal 1999 is net of $31,000 gain on sale of subsidiary.
Note 1: See Item 7., Management's Discussion and Analysis of Financial
Condition and Results of Operations, for additional information
regarding the Company's activities.
Note 2: The Company's fiscal year ends on the Saturday closest to April 30th.
Fiscal years 1999, 1998, 1996 and 1995 consisted of 52 weeks, whereas
fiscal 1997 consisted of 53 weeks. Management believes the inclusion
of one additional week in fiscal 1997 did not have a material effect
on results of operations for fiscal 1997.
11
<PAGE>
Item 7.
Management's Discussion and
Analysis of Financial Condition
and Results of Operations
The Company through fiscal 1999 had three operating units: Handleman
Entertainment Resources ("H.E.R."), North Coast Entertainment ("NCE") and
Handleman International ("International"). H.E.R. consists of music
distribution and category management operations in the U.S. and Canada.
(Canadian operations, which were reported in International in fiscal 1998, have
been included in H.E.R. throughout this discussion for fiscal 1999 and prior
years.) NCE encompasses the Company's proprietary operations, which include
music, video and licensing operations. (All references herein to NCE exclude
Sofsource, which was sold during the first quarter of fiscal 1999.)
International includes music distribution and category management operations in
Mexico, Brazil and Argentina. (For fiscal 2000, responsibility for
International operations has been transferred to H.E.R.). Operating unit sales
discussed herein include intercompany sales which are eliminated in
consolidation.
The following table sets forth net sales, and the percentage contribution to
consolidated revenues, for the Company's three operating units for the fiscal
years ended May 1, 1999, May 2, 1998 and May 3, 1997.
Year Ended
(dollar amounts in millions)
----------------------------------------
May 1, 1999 May 2, 1998 May 3, 1997
(52 weeks) (52 weeks) (53 weeks)
----------- ----------- ------------
Handleman Entertainment Resources
Music /(1)/ $ 833.5 $ 727.4 $ 632.3
% of Total 78.7 65.8 53.5
Other /(2)/ 38.0 205.0 387.3
% of Total 3.6 18.6 32.8
-------- -------- --------
Sub-Total 871.5 932.4 1,019.6
% of Total 82.3 84.4 86.3
North Coast Entertainment 151.1 110.7 111.7
% of Total 14.3 10.0 9.5
International 50.8 62.8 56.7
% of Total 4.8 5.7 4.8
Eliminations, principally NCE sales
to H.E.R. (17.5) (22.0) (29.7)
% of Total (1.7) (2.0) (2.5)
Sold Operation (Sofsource) /(3)/ 2.7 20.6 22.7
% of Total .3 1.9 1.9
-------- -------- --------
TOTAL $1,058.6 $1,104.5 $1,181.0
======== ======== ========
/(1)/ Canadian operations, which were previously reported in International in
fiscal 1998 and fiscal 1997, have been included in H.E.R. for all years
presented herein.
/(2)/ Other represents sales of the exited video, book and software product
lines. Refer to later discussion regarding the Company's repositioning
program.
/(3)/ Sofsource, which was previously included in NCE, was sold during the
first quarter of fiscal 1999.
The Company's fiscal year ends on the Saturday closest to April 30th. Fiscal
1999 and Fiscal 1998 consisted of 52 weeks, whereas fiscal 1997 consisted of 53
weeks. Management believes the inclusion of one additional week in fiscal 1997
did not have a material effect on results of operations for fiscal 1997.
12
<PAGE>
Comparison of Fiscal 1999 with Fiscal 1998
- ------------------------------------------
For the fiscal year ended May 1, 1999 ("fiscal 1999"), revenues decreased 4% to
$1.06 billion from $1.10 billion for the fiscal year ended May 2, 1998 ("fiscal
1998"). This decrease in revenues was primarily the result of lower sales in the
video, book and software product lines which H.E.R. and International exited
during fiscal 1999 in connection with the Company's repositioning program. The
Company's fiscal 1999 revenues also included Sofsource, which was sold during
the first quarter of fiscal 1999, and its Argentina unit, which was sold during
the fourth quarter of fiscal 1999, for the periods until these businesses were
sold .
Net loss for fiscal 1999 was $(35.1) million or $(1.11) per share, compared to
net income for fiscal 1998 of approximately $300,000 or $.01 per share. The
Company's fiscal 1999 results include pre-tax repositioning and related charges
of $127.4 million and a pre-tax gain on sale of subsidiary of $31 million. The
Company's fiscal 1998 results include pre-tax repositioning and related charges
of $13.7 million.
H.E.R.'s net music sales grew 15% to $833.5 million for fiscal 1999, from $727.4
million for fiscal 1998. The increase in net music sales was primarily due to
four factors:
. the Company's customers were building market share by achieving music sales
growth rates that outpaced the overall industry sales;
. strong retail sales from releases by top artists;
. addition of a new customer (during fiscal 1999, Zellers, a Canadian mass
merchant, retained the Company to provide category management and
distribution services for all of its stores); and,
. lower product returns from customers resulting from the Company's improved
category management processes and new systems; (music product returns from
H.E.R. customers represented 21.4% of gross sales in fiscal 1999, compared
to 24.9% of gross sales in fiscal 1998).
The remainder of H.E.R. sales ($38.0 million in fiscal 1999 and $205.0 million
in fiscal 1998) was attributable to the video, book and software product lines
which are no longer being serviced by H.E.R.
NCE net sales increased 36% to $151.1 million for fiscal 1999, from $110.7
million for fiscal 1998. The NCE sales increase of $40.4 million was primarily
attributable to the Anchor Bay and Madacy units, where the sales increases were
driven by the release of new titles, the addition of new customers and a
resurgence in the horror video category where the NCE units have a strong
catalog. NCE sales to other divisions within the Company were $14.6 million in
fiscal 1999 and $19.1 million for fiscal 1998.
International had net sales of $50.8 million for fiscal 1999, compared to $62.8
million for fiscal 1998, a decrease of 19%. The decrease was primarily
attributable to operations in Mexico where sales were impacted by exiting the
video and software businesses and reducing the customers served in connection
with the repositioning program. During the fourth quarter of fiscal 1999, the
Company sold its Argentina operations, which had net sales of $6.0 million in
fiscal 1999 and $9.6 million in fiscal 1998.
The International operating unit has financial and operating risks (e.g.,
currency fluctuation, political and economic instability) that may continue to
have an adverse effect on results of operations.
Direct product costs as a percentage of reported revenues was 74.8% for fiscal
1999, compared to 75.6% for fiscal 1998. The year-over-year reduction in direct
product costs as a percentage of revenues was primarily attributable to H.E.R.,
which experienced a reduction in low-margin video, book and software sales and
an increase in music sales. Music products have a cost to revenue relationship
lower than the cost to revenue relationship for the exited video, book and
software product lines.
Selling, general & administrative ("SG&A") expenses for fiscal 1999 were $211.7
million, or 20.0% of revenues, compared to $243.8 million, or 22.1% of revenues
in fiscal 1998. The $32.1 million decrease in SG&A expenses was attributable to
H.E.R., which reduced year-over-year SG&A expenses by $33.0 million,
13
<PAGE>
or by 18%, through increased productivity and other operating efficiency
initiatives, as well as the impact of the repositioning program.
Operating income (i.e., income before interest, income taxes, minority interest,
repositioning and related charges and gain on sale of subsidiary) for fiscal
1999 increased to $55.2 million, from $26.3 million for fiscal 1998. H.E.R.'s
operating income improved to $43.0 million, from $18.4 million last year. NCE's
operating income improved to $18.0 million, from $12.1 million last year.
International's operating loss was $5.5 million this year, compared to an
operating loss of $7.0 million last year.
Repositioning and related charges were $127.4 million in fiscal 1999, and $13.7
million in fiscal 1998. Further discussion follows regarding the Company's
strategic repositioning program.
Net interest expense for fiscal 1999 was $8.1 million, compared to $12.3 million
for fiscal 1998. This decrease in interest expense was attributable to lower
borrowing levels.
Minority interest recognized in the statement of operations represents the
minority shareholders' portion of the income (loss) for less than wholly-owned
subsidiaries. The Mexican unit's losses during fiscal 1998 were mitigated to
some extent by the sharing of the losses with the Company's joint venture
partner. During the fourth quarter of fiscal 1998, the Company acquired the
interest of its partner in Mexico. During the fourth quarter of fiscal 1999, the
Company sold a 21% interest in its Mexican operations to a new joint venture
partner. Minority interest was expense of $2.2 million in fiscal 1999 and income
of $2.8 million in fiscal 1998.
Accounts receivable were $218.0 million at May 1, 1999, compared to $242.4
million at May 2, 1998. This decrease was primarily attributable to the lower
level of sales in the fourth quarter of fiscal 1999 compared to the fourth
quarter of fiscal 1998.
Merchandise inventories were $102.6 million at May 1, 1999, compared to $187.2
million at May 2, 1998. The decrease in merchandise inventories was primarily
attributable to the H.E.R. and International video, book and software
inventories, which were reduced in connection with exiting these product lines.
The increase in other current assets to $21.6 million at May 1, 1999 from $10.8
million at May 2, 1998 was attributable to an increase in income tax receivable
related to a net operating loss carryback arising from the repositioning charges
in fiscal 1999.
The decrease in property and equipment, net to $53.4 million at May 1, 1999 from
$78.7 million at May 2, 1998 was caused by the write-off of certain fixed assets
in connection with the Company's repositioning program, principally video, book
and software display fixtures, as well as the sale of certain Company-owned
facilities.
The decrease in accounts payable to $156.3 million at May 1, 1999 from $179.2
million at May 2, 1998 was directly related to the decrease in merchandise
inventories during the comparable time period.
The increase in other current liabilities to $41.9 million at May 1, 1999 from
$21.3 million at May 2, 1998 was chiefly due to an $8 million increase in
accrued royalties within NCE and an increase of $4 million in accrued employee
compensation.
The decrease in debt, non-current to $39.9 million at May 1, 1999 from $114.8
million at May 2, 1998 was substantially attributable to cash generated in
connection with the Company's repositioning program (including $45 million from
the sale of stock received in connection with the sale of the Sofsource
subsidiary), reclassification of $18.6 million of senior notes to debt, current
portion and reduced working capital requirements attributable to the
repositioning program. This decrease in debt was achieved even though the
Company spent approximately $21.0 million in connection with its share
repurchase program.
During the first quarter of fiscal 1999, NCE purchased additional 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
14
<PAGE>
license a number of childrens properties including Ragdoll Productions,
Teletubbies and Tots TV, and Enid Blyton's Noddy. The inclusion of itsy bitsy's
results of operations in fiscal 1999 did not have a material effect on reported
consolidated revenues or consolidated results of operations.
The following comments relate to the Company's strategic repositioning program.
On June 2, 1998, the Company's Board of Directors approved a comprehensive
strategic repositioning program designed to focus the Company on its core music
distribution business. The 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; and
. Implement a new common stock repurchase program.
The operational repositioning activities, including employee severance programs,
were all completed during fiscal 1999.
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 number of music
customers. The decision was made to exit these activities, as well as to reduce
the number of customers serviced in the music distribution business, because
these businesses or customers either did not provide an appropriate and
consistent rate of return or did not have the potential for sustainable growth
and profitability.
The repositioning program resulted in a $110 million charge to earnings in the
first quarter of fiscal 1999, representing asset adjustments and cost accruals
directly related to the repositioning program, other than those costs actually
incurred and charged to earnings in fiscal 1998 and certain costs that were
incurred in the last three quarters of fiscal 1999 that were required to be
expensed as incurred.
A summary of the components of the $127.4 million (pre-tax) repositioning and
related charge recognized in fiscal 1999 is as follows (in millions):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Fiscal 1999
------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
Adjustments of assets to net realizable value $ 84.5 $ 84.5
Intangibles write-off 13.0 13.0
Other repositioning related costs 12.5 7.0 6.9 3.5 29.9
------ ---- ---- ---- ------
Total $110.0 $7.0 $6.9 $3.5 $127.4
====== ==== ==== ==== ======
</TABLE>
Adjustments of assets to net realizable value included adjustments to reflect
the estimated recovery amount of assets disposed of during fiscal 1999 that were
directly related to exited businesses or customers no longer serviced. The
components of the provision were, principally, inventory of $31.6 million and
property and equipment of $11.8 million, as well as certain adjustments to the
carrying value of receivables of $27.2 million, payables of $4.1 million and
investments, including international investments of $9.2 million. Intangibles
related
15
<PAGE>
to either businesses exited, or customers no longer serviced, are included in
the intangibles write-off. Other repositioning related costs recorded in the
first quarter of fiscal 1999 were principally employee severance costs of $3.5
million, advisory fees of $3.0 million, debt restructuring costs of $2.0 million
and inventory handling costs of $2.0 million. Other repositioning related costs
recognized in subsequent quarters were primarily employee stay bonus costs and
advisory fees, which were not accruable as part of the initial repositioning
charge, and therefore, were expensed as incurred.
The amount of each element of the overall repositioning charge was determined
based upon the actual cost of the asset and management estimates of
recoverability. In the case of receivables, the fact that certain accounts would
be settled with customer product returns rather than cash, which resulted in a
reversal of gross margin, was taken into consideration, as well as liquidation
value of the inventory returned since ongoing relationships with certain vendors
no longer existed and, therefore, return authorizations would be difficult to
obtain. In the case of property and equipment, which was principally display
fixtures in customer stores, the charge represented the net book value of such
abandoned display fixtures.
There were no adjustments necessary to the original estimated repositioning
provision of $110 million recognized in the first quarter of fiscal 1999.
The repositioning program resulted in a reduction of approximately 1,000
positions (approximately 30% of the Company's total workforce). This reduction
occurred predominantly in the H.E.R. division. For the most part the reductions
were in the following areas: field sales representatives; distribution facility
employees; and the corporate headquarters. Employee severance amounts were
determined based upon an employee's length of service, salary grade level and
compensation. Total employee severance paid in fiscal 1999 in connection with
the repositioning program was approximately $3.5 million.
As a result of the repositioning actions, the Company expected to realize an
improvement in operating income in excess of $25 million (pre-tax). The savings
were to result from a reduction in operating costs at a rate greater than the
projected decrease in revenues, because both average customer size and average
sales volume of departments serviced increased significantly. Benefits of the
repositioning program began to occur in the second quarter of fiscal 1999 as the
program was implemented.
Also on June 2, 1998, the Board of Directors approved an 18-month 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 fiscal 1999, the Company purchased 1,742,000 shares at
a cost of approximately $21.0 million under the repurchase program. The Company
now expects that an additional $25 million to $30 million will be spent under
the repurchase program through the expiration of the Board approved
authorization in December 1999. These repurchases are in addition to the
1,295,000 shares repurchased in fiscal 1998 under a repurchase program which was
replaced by this new authorization.
16
<PAGE>
Comparison of Fiscal 1998 with Fiscal 1997
- ------------------------------------------
For fiscal 1998, revenues decreased 6% to $1.10 billion from $1.18 billion for
the fiscal year ended May 3, 1997 ("fiscal 1997"), primarily as a result of
lower sales in the video distribution business. Net income for fiscal 1998 was
$.3 million or $.01 per share, compared to $5.4 million or $.16 per share for
fiscal 1997.
Net earnings for fiscal 1998 included pre-tax repositioning and related charges
of $13.7 million, representing costs incurred in fiscal 1998 to facilitate the
repositioning, as well as costs associated with closing the Albany and Atlanta
warehouses and the abandonment of certain investments.
H.E.R. had net sales of $932.4 million for fiscal 1998, compared to $1,019.6
million for fiscal 1997, a decrease of 9%. H.E.R. fiscal 1998 music sales grew
15% to $727.4 million from $632.3 million for fiscal 1997, due to increased
sales of compact discs, increased market share with mass merchants and more
"hit" albums in fiscal 1998.
Video sales declined 64% to $95.0 million for fiscal 1998 from $266.4 million
for fiscal 1997, substantially attributable to customers buying direct from the
major video studios. Book sales decreased 3% to $54.1 million for fiscal 1998
from $55.6 million for fiscal 1997, principally resulting from fewer hit titles.
Personal computer software sales decreased 10% to $37.5 million for fiscal 1998
from $41.7 million for fiscal 1997, primarily the result of two major customers
exiting the product line.
NCE had net sales of $110.7 million for fiscal 1998, compared to $111.7 for
fiscal 1997, a decrease of less than 1%. NCE sales to other divisions within the
Company were $19.1 million for fiscal 1998 and $27.2 million for fiscal 1997.
International had net sales of $62.8 million for fiscal 1998, compared to $56.7
million for fiscal 1997, an increase of 11%. The increase in International sales
was principally from operations in Brazil and Argentina, where year-over-year
net sales increased by $8.0 million and $4.4 million, respectively. Sales in
International, however, were somewhat impacted by pressure from Mexican
retailers to reduce store inventories which limited shipments and increased
returns.
Direct product costs as a percentage of revenues declined to 75.6% in fiscal
1998 from 76.8% in fiscal 1997. The improvement in direct product costs as a
percentage of revenues was substantially attributable to H.E.R., which
experienced a reduction in low-margin, mega-hit video sales and an increase in
music sales. Music products have a cost to revenue relationship lower than
H.E.R's overall relationship of direct product costs to revenues.
SG&A expenses were $243.8 million (22.1% of revenues) for fiscal 1998, compared
to $250.3 million (21.2% of revenues) for fiscal 1997. The decrease in SG&A
expenses was attributable to improvements in the H.E.R. operating unit. The
decrease in H.E.R. SG&A expenses was somewhat offset by increased SG&A expenses
within the NCE and International operating units.
NCE fiscal 1998 SG&A expenses increased by $3.8 million over the fiscal 1997
SG&A expense level, primarily related to new product introductions. SG&A
expenses in International increased by $5.6 million over the fiscal 1997 expense
level as a result of the increased product returns in Mexico and the growth of
the Brazilian and Argentine operations. Despite the increases in International
and NCE, consolidated SG&A expenses declined $6.5 million for fiscal 1998 as a
result of continued cost reductions in H.E.R., as discussed above.
Operating income for fiscal 1998 was $26.3 million, compared to $24.0 million
for fiscal 1997. H.E.R.'s operating income was $18.4 million in fiscal 1998,
versus $4.3 million in fiscal 1997. NCE's operating income was $12.1 million in
fiscal 1998, compared to $13.7 million in fiscal 1997. International's operating
loss was $7.0 million in fiscal 1998, versus operating income of $2.9 million in
fiscal 1997.
17
<PAGE>
Improvement in operating income within H.E.R. was offset by deterioration in
operating income within International. The improvement in H.E.R. was driven by
the aforementioned reductions in both direct product costs as a percentage of
revenues and SG&A expenses. The deterioration within International was primarily
attributable to Mexico, which experienced a $7.1 million year-over-year decrease
in operating income. The resultant loss in Mexico was caused by the combination
of lower customer shipments, increased product returns and higher SG&A expenses,
as discussed above. Decreases in operating income in Brazil and Argentina of
$1.3 million and $1.0 million, respectively, and an increase in corporate costs
to support International activities, also contributed to the overall operating
loss in International.
Net interest expense for fiscal 1998 was $12.3 million, compared to $11.0
million for fiscal 1997. The increase was primarily attributable to higher
interest rates.
Income before income taxes and minority interest in fiscal 1998 was $271,000,
compared to $13.0 million in fiscal 1997. This decrease was primarily
attributable to the $13.7 million provision for repositioning and related
charges recorded in the fourth quarter of fiscal 1998.
Mexican losses during the first three quarters of fiscal 1998 were mitigated to
some extent by a sharing of the losses with the Company's joint venture partner.
The minority interest was income of $2.8 million for fiscal 1998 and expense of
$2.7 million for fiscal 1997.
Accounts receivable were $242.4 million at the end of fiscal 1998, compared to
$290.1 million at the end of fiscal 1997, a decrease of 16%. The lower
receivable balance was attributable to the lower level of sales during the
fourth quarter this year compared to the fourth quarter last year, as well as a
concerted collection effort which reduced days sales outstanding in accounts
receivable by seven days.
Merchandise inventories were $187.2 million as of May 2, 1998, compared to
$188.2 million as of May 3, 1997, a decrease of $1.0 million. A substantial
decrease in H.E.R. inventory levels, resulting from the Company's inventory
reduction program, was mostly offset by increases in NCE and International
inventory levels.
The decrease in net property and equipment for fiscal 1998 from fiscal 1997 was
due to the disposal of video display fixtures, related to customers buying
direct from the major studios, as well as the sale of certain Company-owned
facilities resulting from the transition to the automated distribution center
system.
Debt, non-current was reduced by $20.7 million from $135.5 million as of May 3,
1997 to $114.8 million as of May 2, 1998. This decrease was achieved despite
spending approximately $9.0 million in connection with the Company's share
repurchase program.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital at May 1, 1999 was $152.7 million, compared to $246.9 million at
May 2, 1998, a decrease of $94.2 million or 38%. The decrease in working capital
primarily resulted from a reduction in merchandise inventories without a
comparable reduction in accounts payable. The working capital ratio was 1.7 to 1
at May 1, 1999, compared to 2.1 to 1 at May 2, 1998. For fiscal 1999, net cash
provided from operating activities primarily resulted from H.E.R. and NCE
operating income, as well as non-cash charges for depreciation, amortization and
recoupment of license advances.
Capital assets consist primarily of display fixtures, warehouse equipment and
facilities. The Company also acquires or licenses video and music products which
it markets. Purchases of these assets are expected to be funded primarily by
cash flow from operations.
The Company has an unsecured, five-year, $150,000,000 credit agreement with a
consortium of banks, that expires in September 2002. No borrowings were
outstanding under the credit agreement as of May 1, 1999. The Company also has
$58,428,000 outstanding as of May 1, 1999 under a senior note agreement with a
18
<PAGE>
group of insurance companies. See Note 5 of Notes to Consolidated Financial
Statements for scheduled maturities of the senior notes.
In connection with the repositioning program discussed previously, the Company
amended its bank credit agreement and senior note agreement to effect compliance
with existing restrictions and covenants of the agreements. Management believes
that the amended credit agreement, and the amended senior note agreement, will
provide sufficient amounts to fund day-to-day operations and higher peak
seasonal demands. For further information, reference should be made to Notes 3
and 5 of Notes to Consolidated Financial Statements.
OTHER INFORMATION
- -----------------
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.
Inflation within the economies in which the Company does business has not had a
material effect on the Company's results of operations.
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 Systems, PC
Client Server applications, PC desktop/LAN infrastructure, Telecomm/Voice
infrastructure, Embedded systems, Sales Force Automation and Stirling Douglas
Merchandising and Replenishment 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.
All Year2000 projects are in the final testing phase or have been completed.
The Company completed the remediation and testing of 92% of its mission critical
enterprise applications by May 1, 1999. The Company anticipates the completion
of its enterprise Year2000 project by August 31, 1999.
The Company's mainframe applications are a major part of its information
technology systems inventory. The Year2000 project incorporated the remediation
and testing of the Company's 4.1 million lines of code for mainframe
applications. The Company used the services of third-party consulting firms, in
conjunction with its own information technology staff, for the mainframe
applications Year2000 project. The Company completed the remediation and
testing of its entire mainframe application inventory by May 1, 1999.
The Company's mainframe data center is an outsourced operation. The Company
worked closely with its data center service provider to address the system
related Year2000 issues. System level Year2000 readiness status was achieved by
May 1, 1999.
The Company prepared the Year2000 remediation, upgrade and test plans to address
its AS400 Systems, PC Client Server applications, PC desktop/LAN server
infrastructure, Telecomm/Voice infrastructure, Embedded systems, Sales Force
Automation and Stirling Douglas Applications. The vast majority of these
projects are completed and in production. The few remaining are in the final
testing phase.
As a part of the Year2000 project, the Company trained its information
technology staff on the Year2000 awareness and Year2000 remediation and testing
technologies, on an as needed basis.
19
<PAGE>
The Year2000 issue can arise at any point in the Company's supply, processing,
distribution and financial chains. The Company surveyed its merchandise trading
partners to assess their general IT and EDI Year2000 readiness status. The
Company prepared plans for the Year2000 capability of its EDI systems. The
Company successfully completed the National Retail Federation's EDI test to
handle two position year dates. The Company tested Year2000 compliant EDI
transactions with certain of its merchandise trading partners.
The Company continues to refine its contingency plans intended to mitigate
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. 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 $4.1 million of the total project costs have been incurred
as of May 1, 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. Costs associated with
new computer systems are being capitalized, as appropriate, under current
accounting standards.
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.
20
<PAGE>
Management recognizes that not becoming Year2000 capable in a timely manner
could result in material financial risk. While management expects all remaining
planned work to be completed timely, 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, conditions in the music industry,
continuation of satisfactory relationships with existing customers and
suppliers, 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 the Form 10-K and those detailed from time to time in the Company's
other filings with the Securities and Exchange Commission. The Company
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date of this document.
21
<PAGE>
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 May 1, 1999, May 2, 1998 and May 3, 1997.
Consolidated Statement of Operations - Years Ended May 1, 1999, May 2, 1998 and
May 3, 1997.
Consolidated Statement of Shareholders' Equity - Years Ended May 1, 1999, May 2,
1998 and May 3, 1997.
Consolidated Statement of Cash Flows - Years Ended May 1, 1999, May 2, 1998 and
May 3, 1997.
Notes to Consolidated Financial Statements
22
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Handleman Company:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity, and of cash flows
present fairly, in all material respects, the financial position of Handleman
Company and subsidiaries at May 1, 1999, May 2, 1998 and May 3, 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended May 1, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above. In addition, in our
opinion, the financial statement schedule listed in Item 14(a)2 of this Annual
Report on Form 10-K 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.
PricewaterhouseCoopers LLP
Detroit, Michigan
June 8, 1999
23
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
MAY 1, 1999, MAY 2, 1998 AND MAY 3, 1997
(amounts in thousands except share data)
----------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998 1997
- ------ ---- ---- ----
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 27,405 $ 25,562 $ 12,449
Accounts receivable, less allowance of $13,760
in 1999, $17,339 in 1998 and $21,834 in 1997
for gross profit impact of estimated future returns 217,968 242,445 290,071
Merchandise inventories 102,589 187,173 188,215
Other current assets 21,560 10,834 9,643
------------ ------------ -----------
Total current assets 369,522 466,014 500,378
Property and equipment, net 53,419 78,711 95,719
Other assets, net of allowances 64,915 68,331 71,789
------------ ------------ -----------
Total assets $ 487,856 $ 613,056 $ 667,886
============ ============ ===========
LIABILITIES
- -----------
Current liabilties:
Accounts payable $ 156,300 $ 179,227 $ 197,301
Debt, current portion 18,571 18,571 15,000
Accrued and other liabilities 41,930 21,300 27,141
------------ ------------ -----------
Total current liabilities 216,801 219,098 239,442
Debt, non-current 39,857 114,768 135,520
Other liabilities 5,512 5,383 9,271
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: 31,049,000, 31,977,000 and
33,373,000 shares issued in 1999, 1998 and 1997 310 320 334
Paid-in capital 6,828 20,710 30,800
Foreign currency translation adjustment (5,220) (7,600) (6,151)
Unearned compensation (1,557) --- (1,395)
Retained earnings 225,325 260,377 260,065
------------ ------------ -----------
Total shareholders' equity 225,686 273,807 283,653
------------ ------------ -----------
Total liabilities and shareholders' equity $ 487,856 $ 613,056 $ 667,886
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED MAY 1, 1999, MAY 2, 1998 AND MAY 3, 1997
(amounts in thousands except per share data)
-------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues $ 1,058,553 $ 1,104,522 $ 1,181,037
Costs and expenses:
Direct product costs 791,683 834,470 906,779
Selling, general and administrative expenses 211,682 243,778 250,286
Interest expense, net 8,088 12,319 10,967
Repositioning and related charges 127,362 13,684 ---
Gain on sale of subsidiary (31,000) --- ---
-------------- -------------- --------------
Income (loss) before income taxes
and minority interest (49,262) 271 13,005
Income tax (expense) benefit 16,449 (2,800) (4,909)
Minority interest (2,239) 2,841 (2,744)
-------------- -------------- --------------
Net income (loss) $ (35,052) $ 312 $ 5,352
============== ============== ==============
Earnings (loss) per common share
- basic and diluted $ (1.11) $ 0.01 $ 0.16
============== ============== ==============
Weighted average number of common shares
outstanding during the year - basic 31,568 32,868 33,481
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED MAY 1, 1999, MAY 2, 1998 AND MAY 3, 1997
(amounts in thousands except per share data)
--------------------------------------------
<TABLE>
<CAPTION>
Common Stock Foreign
---------------------------- Currency Unearned
Shares Paid-In Translation Compen-
Issued Amount Capital Adjustment sation
-------- -------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
April 27, 1996 33,498 $ 335 $ 32,089 $ (4,892) $ (2,685)
Net income
Adjustment for foreign
currency translation (1,259)
Comprehensive income, net of tax
Common stock forfeitures, net of issuances,
in connection with employee benefit plans (125) (1) (1,289) 1,290
-------- -------- --------- ------------- ---------
May 3, 1997 33,373 334 30,800 (6,151) (1,395)
Net income
Adjustment for foreign
currency translation (1,449)
Comprehensive loss, net of tax
Common stock forfeitures, net of issuances,
in connection with employee benefit plans (101) (1) (1,258) 1,395
Common stock repurchased (1,295) (13) (8,832)
-------- -------- --------- ------------- ---------
May 2, 1998 31,977 320 20,710 (7,600) --
Net loss
Adjustment for foreign
currency translation 2,380
Comprehensive loss, net of tax
Common stock issuances, net of forfeitures,
in connection with employee benefit plans 368 4 4,290 (1,557)
Common stock repurchased (1,742) (18) (20,991)
Additional investment in The itsy bitsy
Entertainment Company, Inc. 446 4 2,819
-------- -------- --------- ------------- ---------
May 1, 1999 31,049 $ 310 $ 6,828 $ (5,220) $ (1,557)
======== ======== ========= ============= =========
<CAPTION>
Total
Share-
Retained holders'
Earnings Equity
---------- ----------
<S> <C> <C>
April 27, 1996 $ 254,713 $ 279,560
Net income 5,352 5,352
Adjustment for foreign
currency translation (1,259)
----------
Comprehensive income, net of tax 4,093
----------
Common stock forfeitures, net of issuances,
in connection with employee benefit plans ---
---------- ----------
May 3, 1997 260,065 283,653
Net income 312 312
Adjustment for foreign
currency translation (1,449)
----------
Comprehensive loss, net of tax (1,137)
----------
Common stock forfeitures, net of issuances,
in connection with employee benefit plans 136
Common stock repurchased (8,845)
---------- ----------
May 2, 1998 260,377 273,807
Net loss (35,052) (35,052)
Adjustment for foreign
currency translation 2,380
----------
Comprehensive loss, net of tax (32,672)
----------
Common stock issuances, net of forfeitures,
in connection with employee benefit plans 2,737
Common stock repurchased (21,009)
Additional investment in The itsy bitsy
Entertainment Company, Inc. 2,823
---------- ----------
May 1, 1999 $ 225,325 $ 225,686
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
26
<PAGE>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MAY 1, 1999, MAY 2, 1998 AND MAY 3, 1997
(amounts in thousands)
--------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (35,052) $ 312 $ 5,352
--------------- ------------ ------------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 16,526 27,440 29,205
Amortization of acquisition costs 3,962 5,293 6,125
Recoupment of license advances 9,478 13,103 9,123
Repositioning charge 110,000 -- --
Gain on sale of subsidiary (31,000) -- --
Loss on sale of book business 1,291 -- --
Decrease in operating assets 87,313 50,847 2,409
Decrease in operating liabilities (97,150) (27,809) (30,938)
-------------- ------------ ------------
Total adjustments 100,420 68,874 15,924
-------------- ------------ ------------
Net cash provided from operating activities 65,368 69,186 21,276
-------------- ------------ ------------
Cash flows from investing activities:
Additions to property and equipment (17,054) (21,369) (22,635)
Retirements of property and equipment 14,339 10,937 3,963
License advances (13,561) (18,308) (11,752)
Cash investment in The itsy bitsy Entertainment
Company, Inc. (4,754) -- --
Proceeds from sale of subsidiary 45,000 -- --
Proceeds from sale of book business and other 3,308 -- --
-------------- ------------ ------------
Net cash provided from (used by) investing activities 27,278 (28,740) (30,424)
-------------- ------------ ------------
Cash flows from financing activities:
Issuances of debt 2,142,705 1,811,205 1,363,311
Payments of debt (2,217,616) (1,828,380) (1,360,391)
Repurchase of common stock (21,009) (8,845) ---
Other changes in shareholders' equity, net 5,117 (1,313) (1,259)
-------------- ------------ ------------
Net cash provided from (used by) financing activities (90,803) (27,333) 1,661
-------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,843 13,113 (7,487)
Cash and cash equivalents at beginning of year 25,562 12,449 19,936
-------------- ------------ ------------
Cash and cash equivalents at end of year $ 27,405 $ 25,562 $ 12,449
============== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________
1. Accounting Policies:
-------------------
Business
The Company is principally a category manager of music products for mass
merchants in North America, as well as a distributor of licensed music and
video products. In fiscal 1999, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 replaces the "industry
segment" disclosure approach with the "management" approach which
designates the internal organization that is used by management for making
operating decisions and assessing performance as the basis for the
Company's reportable segments. The adoption of SFAS 131 did not affect
consolidated results of operations or financial position but did affect the
disclosure of segment information (see "Segment Information" note).
Fiscal Year
The Company's fiscal year ends on the Saturday closest to April 30th.
Fiscal years 1999 and 1998 consisted of 52 weeks, whereas fiscal year 1997
consisted of 53 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all subsidiaries where the Company has voting or contractual control.
All material intercompany accounts and transactions have been eliminated.
Minority interest recognized in the statement of operations represents the
minority shareholders' portion of the income (loss) for less than wholly-
owned subsidiaries. The minority interest share of the net assets of these
subsidiaries of $5,244,000, $1,119,000 and $2,343,000 as of May 1, 1999,
May 2, 1998 and May 3, 1997, respectively, is included in other liabilities
in the accompanying consolidated balance sheet.
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 amounts 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 losses, as well as translation losses resulting
from translating results of operations in foreign countries deemed highly
inflationary, included in the statement of operations were $162,000,
$643,000 and $40,000 for the years ended May 1, 1999, May 2, 1998 and May
3, 1997, respectively.
Recognition of Revenue and Future Returns
Revenues are recognized upon shipment of the merchandise. The Company
reduces gross sales and direct product costs for estimated future returns
at the time the merchandise is sold.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
________________
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 $10,980,000, $14,157,000 and $15,946,000 were
incurred during the years ended May 1, 1999, May 2, 1998 and May 3, 1997,
respectively. Merchandise inventories as of May 1, 1999, May 2, 1998 and
May 3, 1997 include $892,000, $2,096,000 and $3,078,000, respectively, of
such costs.
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 5 years
Equipment, furniture and other 3-10 years
Licenses
The Company, principally in its proprietary product business, acquires
video and audio licenses giving it exclusive rights to manufacture and
distribute such products. The cost of license advances 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. The effective lives of the licenses tend to range
from three to five years. As of May 1, 1999, May 2, 1998 and May 3, 1997,
licenses, net of amortization, amounted to $31,654,000, $33,738,000 and
$30,570,000, respectively.
Intangible Assets
Intangible assets, included in other assets in the consolidated balance
sheet and aggregating $24,624,000, net of amortization, consists primarily
of the excess of consideration paid over the estimated fair values of net
assets of businesses acquired. These assets are amortized using the
straight-line method over periods predominantly ranging from five to 15
years. As of May 1, 1999, the weighted average period remaining to be
amortized was approximately seven years.
Long-Lived Assets
At each balance sheet date, management evaluates the carrying value and
remaining estimated lives of long-lived assets, including intangible
assets, for potential impairment by considering several factors, including
management's plans for future operations, recent operating results,
undiscounted annual cash flows, market trends and other economic factors
relating to the operation to which the assets apply.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
__________________
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 May 1, 1999, May 2, 1998 and May 3, 1997.
Fair values have been determined through information obtained from market
sources and management estimates.
Earnings Per Share
For computing diluted earnings per share in accordance with SFAS No. 128,
"Earnings Per Share," additional weighted average shares for the years
ended May 1, 1999, May 2, 1998 and May 3, 1997 were 64,000, 18,000 and
19,000, respectively. The Company incurred a net loss for the year ended
May 1, 1999, accordingly, additional weighted average shares were anti-
dilutive.
2. Segment Information:
-------------------
In fiscal 1999, the Company adopted SFAS 131. In prior years the Company
had determined, using the industry segment approach, that it operated
principally in one business segment: selling music, video, book and
personal computer software products primarily to mass merchants. The
Company has determined, using the management approach, that it operated in
three business segments: Handleman Entertainment Resources (H.E.R.)
provides category management services of music products to select United
States and Canadian mass merchants; North Coast Entertainment (NCE)
encompasses the Company's proprietary activities, which include music,
video and licensing operations; and International provides category
management services of music products to mass merchants in principally
Brazil and Mexico.
The accounting policies of the segments are the same as those described in
Note 1, "Accounting Policies." Segment data includes intersegment revenues,
as well as a charge allocating all corporate costs to the operating
segments. The Company evaluates performance of its segments and allocates
resources to them based on income before interest, income taxes, minority
interest and repositioning and related charges ("segment income").
The tables below present information about reported segments for the years
ended May 1, 1999, May 2, 1998 and May 3, 1997 (in thousands of dollars):
<TABLE>
<CAPTION>
Fiscal 1999: H.E.R. NCE International Total
-------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
Revenues, external customers $869,051 $136,522 $50,829 $1,056,402
Intersegment revenues 2,409 14,578 -- 16,987
Segment income (loss) 43,038 17,981 (5,460) 55,559
Total assets 441,815 162,249 24,857 628,921
Capital expenditures 10,822 4,057 2,175 17,054
</TABLE>
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
____________________
<TABLE>
<CAPTION>
Fiscal 1998: H.E.R. NCE International Total
--------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Revenues, external customers $ 931,383 $ 91,660 $62,808 $1,085,851
Intersegment revenues 1,082 19,053 -- 20,135
Segment income (loss) 18,387 12,072 (6,951) 23,508
Total assets 520,726 132,365 63,039 716,130
Capital expenditures 16,200 1,367 3,802 21,369
Fiscal 1997: H.E.R. NCE International Total
--------------- --------------- --------------- --------------
Revenues, external customers $1,019,143 $ 84,532 $56,710 $1,160,385
Intersegment revenues 464 27,200 -- 27,664
Segment income 4,294 13,683 2,913 20,890
Total assets 606,483 116,796 33,265 756,544
Capital expenditures 19,198 697 2,740 22,635
</TABLE>
A reconciliation of total segment revenues to consolidated revenues, total
segment income to total consolidated income before income taxes and total
segment assets to total consolidated assets for the years ended May 1, 1999, May
2, 1998 and May 3, 1997 is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1999 1998 1997
--------------- -------------- ------------
Revenues
---------------------------------------------------
<S> <C> <C> <C>
Total segment revenue $1,073,389 $1,105,986 $1,188,049
Revenue for sold operation (Sofsource) 2,692 20,562 22,678
Elimination of intersegment revenue (17,528) (22,026) (29,690)
---------- ---------- ----------
Consolidated revenue $1,058,553 $1,104,522 $1,181,037
========== ========== ==========
Income Before Income Taxes
---------------------------------------------------
Total segment income for reportable segments $ 55,559 $ 23,508 $ 20,890
Segment income (loss) for sold operation
(Sofsource) (135) 1,990 3,450
Interest revenue 1,392 274 1,132
Interest expense (9,480) (12,593) (12,099)
Repositioning and related charges (127,362) (13,684) --
Gain on sale of subsidiary 31,000 -- --
Intersegment profit elimination (236) 776 (368)
---------- ---------- ----------
Consolidated income (loss) before income taxes $ (49,262) $ 271 $ 13,005
========== ========== ==========
Assets
---------------------------------------------------
Total segment assets $ 628,921 $ 716,130 $ 756,544
Elimination of intercompany receivables
and payables (141,065) (103,074) (88,658)
---------- ---------- ----------
Total consolidated assets $ 487,856 $ 613,056 $ 667,886
========== ========== ==========
</TABLE>
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
__________________
The following is revenue and long-lived asset information by geographic area as
of and for the years ended May 1, 1999, May 2, 1998 and May 3, 1997:
<TABLE>
<CAPTION>
Revenue
---------------------------------------------------------
1999 1998 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
United States $ 926,573 $ 970,107 $1,050,592
Canada 76,994 69,065 69,702
Other foreign 54,986 65,350 60,743
---------- ---------- ----------
$1,058,553 $1,104,522 $1,181,037
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Long-lived Assets
---------------------------------------------------------
1999 1998 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
United States $ 107,103 $ 135,731 $ 157,596
Canada 3,888 3,755 4,574
Other foreign 3,320 7,258 5,310
---------- ---------- ----------
$ 114,311 $ 146,744 $ 167,480
========== ========== ==========
</TABLE>
Foreign revenue is based upon the country in which the legal subsidiary
is domiciled. Revenue from no single foreign country other than Canada was
material to the consolidated revenues of the Company.
For the years ended May 1, 1999, May 2, 1998 and May 3, 1997, one customer
accounted for approximately 31 percent, 33 percent and 38 percent of the
Company's net sales, respectively, and a second customer accounted for
approximately 39 percent, 32 percent and 23 percent of the Company's net sales,
respectively. Approximately 96 percent, 95 percent and 95 percent of the
combined revenues for these two customers are included in the H.E.R. segment for
the years ended May 1, 1999, May 2, 1998 and May 3, 1997, respectively.
Collectively, these customers accounted for approximately 66 percent, 45 percent
and 54 percent of accounts receivable at May 1, 1999, May 2, 1998 and May 3,
1997, respectively.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
__________________
3. Repositioning and Related Charges:
----------------------------------
On June 2, 1998 the Board of Directors approved a comprehensive strategic
repositioning program designed to focus the Company on its core music
distribution business. The 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;
. Sell Sofsource, the Company's software publishing subsidiary; and
. Implement a new common stock repurchase program of up to $70 million
through December 1999, of which $21.0 million has been spent as of May
1, 1999.
The repositioning program was in addition to the 1998 consolidation of the
Albany, Atlanta and Baltimore distribution centers into the Indianapolis
automated distribution center. The $13,684,000 repositioning and related
charge recognized in the fourth quarter of fiscal 1998 included costs
associated with the closing of the Albany and Atlanta warehouses, the
abandonment of certain investments, as well as already incurred
repositioning related costs.
The repositioning program resulted in a $110 million charge to earnings in
the first quarter of fiscal 1999, representing asset adjustments and cost
accruals directly related to the repositioning program, other than those
costs actually incurred and charged to earnings in fiscal 1998 and certain
costs that were expensed as incurred in the last three quarters of fiscal
1999. The operational repositioning activities, including employee
severance programs, were all completed during fiscal 1999.
A summary of the components of the $127.4 million (pre-tax) repositioning
and related charge recognized in fiscal 1999 is as follows (in millions):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Fiscal 1999
------------ ----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Adjustments of assets to net realizable value $ 84.5 $ 84.5
Intangibles write-off 13.0 13.0
Other repositioning related costs 12.5 7.0 6.9 3.5 29.9
------ ---- ---- ---- ------
Total $110.0 $7.0 $6.9 $3.5 $127.4
====== ==== ==== ==== ======
</TABLE>
Adjustments of assets to net realizable value includes adjustments to reflect
the estimated recovery amount of assets disposed of during fiscal 1999 that were
directly related to exited businesses or customers no longer serviced. The
components of the provision were, principally, inventory of $31.6 million and
property and equipment of $11.8 million, as well as certain adjustments to the
carrying value of receivables of $27.2 million, payables of $4.1 million and
investments, including international investments of $9.2 million. Intangibles
related to either businesses exited, or customers no longer serviced, are
included in the intangibles write-off. Other repositioning related costs
recorded in the first quarter of fiscal 1999 were principally employee severance
costs of $3.5 million, advisory fees of $3.0 million, debt restructuring costs
of $2.0 million and inventory handling costs of $2.0 million. Other
repositioning related costs recognized in subsequent quarters were primarily
employee stay bonus costs and advisory fees, which were not accruable as part of
the initial repositioning charge, and therefore, were expensed as incurred.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
__________________
The amount of each element of the overall repositioning charge was determined
based upon actual cost of the asset and management estimates of recoverability.
In the case of receivables the fact that certain accounts would be settled with
customer product returns rather than cash, which resulted in a reversal of gross
margin, was taken into consideration, as well as liquidation value of the
inventory returned since ongoing relationships with certain vendors no longer
existed and, therefore, return authorizations would be difficult to obtain. In
the case of property and equipment, which was principally display fixtures in
customer stores, the charge represented the net book value of such abandoned
display fixtures. There were no adjustments necessary to the original estimated
repositioning provision of $110 million recognized in the first quarter of
fiscal 1999.
The repositioning program resulted in a reduction of approximately 1,000
positions (approximately 30% of the Company's total workforce). This reduction
occurred predominantly in the H.E.R. division. For the most part, the reductions
were in the following areas: field sales representatives; distribution facility
employees; and the corporate headquarters. Employee severance amounts were
determined based upon an employee's length of service, salary grade level and
compensation. Total employee severance paid in fiscal 1999 in connection with
the repositioning program was approximately $3.5 million.
A reconciliation of the beginning provision for repositioning and related
charges and the remaining liability balance follows (in thousands):
<TABLE>
<CAPTION>
Other
Repositioning
Adjustment of Related Costs, Accrued
Assets to Net Intangibles Including Exit Liability
Realizable Value Write-off Costs Account
---------------- ----------- -------------- ---------
<S> <C> <C> <C> <C>
Amount provided during the
fourth quarter ended May 2, 1998 $ 10,208 -- $ 3,476 $ 13,684
Charges resulting from asset
write-offs and cash
expenditures (9,455) -- (1,336) (10,791)
---------------- ----------- -------------- ---------
Remaining balance as of
May 2, 1998 753 -- 2,140 2,893
Amount provided during the
first quarter ended August
1, 1998 84,500 13,000 12,500 110,000
Charges resulting from asset
write-offs and cash
expenditures (85,253) (13,334) (14,075) (112,662)
Reclassify residual
intangibles write-off 334 (334) --
---------------- ------------- -------------- ---------
Remaining balance as of
May 1, 1999 $ -- $ -- $ 231 $ 231
================ ============= ============== =========
</TABLE>
The remaining balance is included in accrued and other liabilities in the May 1,
1999 balance sheet.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
__________________
4. Pension Plan:
------------
The Handleman Company Pension Plan's benefit obligation, plan assets, funded
status, net periodic benefit cost and the amount which is recorded in the
Company's consolidated balance sheet at May 1, 1999, May 2, 1998 and May 3, 1997
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Change in projected benefit obligation:
Benefit obligation at beginning of year $22,748,000 $18,158,000 $16,918,000
Service cost 981,000 887,000 886,000
Interest cost 1,518,000 1,365,000 1,321,000
Actuarial loss 454,000 3,271,000 419,000
Benefits paid (1,360,000) (933,000) (1,386,000)
----------- ----------- -----------
Benefit obligation at end of year $24,341,000 $22,748,000 $18,158,000
----------- ----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of year $20,413,000 $16,492,000 $15,627,000
Actual return on plan assets 1,422,000 639,000 643,000
Net realized gain on the sale of assets 1,462,000 1,163,000 1,164,000
Unrealized appreciation (depreciation) (1,564,000) 2,692,000 240,000
Company contribution -- 360,000 204,000
Benefits paid (1,360,000) (933,000) (1,386,000)
----------- ----------- -----------
Fair value of plan assets at end of year $20,373,000 $20,413,000 $16,492,000
----------- ----------- -----------
Funded status $(3,968,000) $(2,335,000) $(1,666,000)
Unrecognized net loss from past experience
different from that assumed 1,506,000 346,000 188,000
Unrecognized net gain from excess funding (490,000) (609,000) (728,000)
Unrecognized prior service cost 154,000 235,000 246,000
----------- ----------- -----------
Accrued benefit cost included in
accrued and other liabilities $(2,798,000) $(2,363,000) $(1,960,000)
=========== =========== ===========
</TABLE>
Assumptions used in determining the actuarial present value of the projected
benefit obligation included a weighted average discount rate of 6.75% for 1999,
6.75% for 1998 and 7.75% for 1997, and a rate of increase in future compensation
levels of 5% for all years.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
Components of net periodic benefit cost:
<S> <C> <C> <C>
Service cost $ 981,000 $ 887,000 $ 886,000
Interest cost 1,518,000 1,365,000 1,321,000
Expected return on plan assets (1,701,000) (1,381,000) (1,312,000)
Amortization of unrecognized transition
asset, prior service cost and actuarial gain (39,000) (108,000) (108,000)
----------- ----------- -----------
Net periodic benefit cost $ 759,000 $ 763,000 $ 787,000
=========== =========== ===========
</TABLE>
The expected long-term rate of return on assets was 8.5% for all years. Plan
assets are invested in various pooled investment funds and mutual funds
maintained by the Plan trustee, as well as Handleman Company common stock valued
at $1,040,000 at May 1, 1999, $786,000 at May 2, 1998 and $462,000 at May 3,
1997.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
________________________
5. Debt:
----
The Company has an unsecured, $150,000,000 line of credit with a consortium
of banks, which is scheduled to expire in September 2002. At May 1, 1999,
borrowings available under the credit agreement, after $7,570,000 of letters
of credit, were $142,430,000 of which no borrowings were 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 May 1, 1999, the interest rate
was 5.30%. The weighted average amount outstanding under the credit
agreement was $32,494,000, $56,612,000 and $45,360,000 for the years ended
May 1, 1999, May 2, 1998 and May 3, 1997, respectively, and the weighted
average interest rate under the credit agreement was 6.8% for all years.
In fiscal 1995, the Company entered into a $100,000,000 senior note
agreement, as amended, with a group of insurance companies. The balance
outstanding as of May 1, 1999 was $58,428,000 of which $18,571,000 is
classified as a current liability. These notes bear interest at rates of
8.06% to 8.84%.
Scheduled maturities for the senior note agreement are as follows:
2000 $18,571,000
2001 $14,571,000
2002 $14,570,000
2003 $ 3,572,000
2004 $ 3,572,000
After 2004 $ 3,572,000
The senior note and the credit agreements contain certain restrictions and
covenants, relating to, among others, interest coverage ratio, working
capital, debt and net worth. As of May 1, 1999, the Company was in
compliance with these various provisions. In connection with the
repositioning program, the Company amended its bank credit agreement and
senior note agreement to effect compliance with existing restrictions and
covenants.
Interest expense for the years ended May 1, 1999, May 2, 1998 and May 3,
1997 was $9,480,000, $12,593,000 and $12,099,000, respectively. Interest
paid for the years ended May 1, 1999, May 2, 1998 and May 3, 1997 was
$9,526,000, $12,796,000 and $11,770,000, respectively.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
__________________
6. Income Taxes:
-------------
The domestic and foreign components of income (loss) before income taxes and
minority interest for the years ended May 1, 1999, May 2, 1998 and May 3, 1997
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Domestic $(44,121,000) $ 12,378,000 $10,896,000
Foreign (5,141,000) (12,107,000) 2,109,000
------------ ------------ -----------
Income (loss) before income
taxes and minority interest $(49,262,000) $ 271,000 $13,005,000
============ ============ ===========
</TABLE>
Provisions for income taxes for the years ended May 1, 1999, May 2, 1998 and May
3, 1997 consist of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ----------- ------------
<S> <C> <C> <C>
Currently payable:
Federal $ (2,686,000) $1,995,000 $ 9,054,000
Foreign 814,000 483,000 477,000
State and other (392,000) 531,000 794,000
Deferred, net:
Federal (12,180,000) 291,000 (4,646,000)
Foreign (996,000) (221,000) 326,000
State and other (1,009,000) (279,000) (1,096,000)
------------ ---------- -----------
$(16,449,000) $2,800,000 $ 4,909,000
============ ========== ===========
</TABLE>
The following table provides a reconciliation of the Company's resulting income
tax to the statutory federal income tax:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ -----------
<S> <C> <C> <C>
Federal statutory tax $(17,241,000) $ 95,000 $4,552,000
State and local income taxes (1,401,000) 164,000 (234,000)
Effect of foreign losses with no
tax benefit 1,617,000 6,386,000 ---
Write off of intangible assets 1,914,000 --- ---
Prior years' tax accruals no longer
necessary (1,846,000) (3,335,000) ---
Other 508,000 (510,000) 591,000
------------ ----------- ----------
Resulting tax $(16,449,000) $ 2,800,000 $4,909,000
============ =========== ==========
</TABLE>
Items that gave rise to significant portions of the deferred tax accounts at May
1, 1999, May 2, 1998 and May 3, 1997 are as follows:
<TABLE>
<CAPTION>
May 1, 1999 May 2, 1998 May 3, 1997
----------------------------- -------------------------- ------------------------
Deferred Deferred Deferred
Deferred Tax Tax Deferred Tax Tax Deferred Tax
Assets Liabilities Assets Liabilities Tax Assets Liabilities
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Allowances $13,615,000 $ 8,783,000 $ 9,294,000 $ 5,919,000 $10,612,000 $ 6,503,000
Foreign carryover losses
including net temporary 8,300,000 -- 7,700,000 --- 3,200,000 ---
differences
Employee benefits 4,788,000 -- 2,675,000 458,000 2,139,000 10,000
Property and equipment 8,327,000 6,656,000 1,759,000 7,875,000 738,000 8,190,000
Inventory 366,000 1,587,000 474,000 2,223,000 906,000 2,053,000
Other 1,734,000 -- 588,000 325,000 550,000 408,000
----------- ----------- ----------- ----------- ----------- -----------
37,130,000 17,026,000 22,490,000 16,800,000 18,145,000 17,164,00
Valuation allowance (6,300,000) -- (7,700,000) -- (3,200,000) --
----------- ----------- ----------- ----------- ----------- -----------
Net $30,830,000 $17,026,000 $14,790,000 $16,800,000 $14,945,000 $17,164,000
=========== =========== =========== =========== =========== ===========
</TABLE>
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
__________________
The Company reinvests the majority of its undistributed Canadian earnings.
Accordingly, the potential withholding tax of approximately $700,000 on these
undistributed earnings has not been recorded as of May 1, 1999. The Company has
net operating loss carryforwards in its remaining foreign subsidiaries for tax
purposes of approximately $21,000,000 which expire predominantly in 2001 to
2008. A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The Company
has established valuation allowances for its foreign loss carryforwards.
Income taxes paid in 1999, 1998 and 1997 were approximately $5,203,000,
$9,824,000 and $8,833,000, respectively.
7. Property and Equipment:
-----------------------
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Land $ 3,354,000 $ 4,012,000 $ 4,238,000
Buildings and improvements 16,227,000 20,544,000 24,564,000
Display fixtures 45,486,000 89,954,000 96,721,000
Equipment, furniture and other 43,830,000 72,366,000 67,450,000
------------ ------------- ------------
108,897,000 186,876,000 192,973,000
Less accumulated depreciation and
amortization 55,478,000 108,165,000 97,254,000
------------ ------------- ------------
$ 53,419,000 $ 78,711,000 $ 95,719,000
============ ============= ============
</TABLE>
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
_________________
8. Stock Plans:
-----------
The Company's shareholders approved the adoption of the Handleman Company
1998 Performance Incentive Plan (the "Plan"), which authorizes the granting
of stock options, stock appreciation rights and restricted stock. The
Company's 1992 Performance Incentive Plan was terminated concurrent with
the approval of the 1998 Performance Incentive Plan, except as to then
outstanding awards under the 1992 Plan.
The maximum number of shares of stock which may be issued under the Plan
pursuant to restricted stock awards or granted pursuant to stock options or
stock appreciation rights is 1,500,000 shares. After deducting restricted
stock, options and awards issued or granted under the Plan since adoption
in September 1998, 1,497,000 shares of the Company's stock are available
for use under the Plan as of May 1, 1999.
During fiscal 1999, the Company issued 216,109 shares of restricted stock,
net of forfeitures, of which 10,920 shares have vested with the recipients
and 205,189 shares remain to vest based upon pre-determined periods of
continued employment. Compensation expense recorded in fiscal 1999 related
to the restricted stock awards was $1,293,000.
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 May 3, 1997, May 2, 1998 and May 1, 1999 is
set forth below. Options were granted during such years at no less than
fair market value at the date of grant.
<TABLE>
<CAPTION>
Weighted
Number Average
of Shares Price
------------ -----------
<S> <C> <C>
Balance, April 27, 1996 1,302,684 $13.48
Granted 350,000 6.80
Repriced 56,975 7.03
Terminated, including repriced options (396,744) 12.93
Exercised -- --
---------- ------
Balance, May 3, 1997 1,312,915 13.48
Granted 322,850 6.53
Repriced 66,575 6.95
Terminated, including repriced options (277,171) 11.70
Exercised (17,750) 6.55
---------- ------
Balance, May 2, 1998 1,407,419 10.24
Granted 292,100 12.06
Terminated (278,919) 11.60
Exercised (257,962) 9.61
---------- ------
Balance, May 1, 1999 1,162,638 $10.53
========== ======
Number of shares exercisable
at May 1, 1999 477,176 $13.05
========== ======
</TABLE>
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
_________________
The exercise price range of outstanding options as of May 3, 1997, May 2, 1998
and May 1, 1999 was $6.38-$21.83, $5.75-$21.83 and $6.00-$21.83, respectively.
Approximately 55% of outstanding options as of May 1, 1999 had exercise prices
of $10.00 per share or more. The average remaining exercise period for shares
exercisable at May 1, 1999 was three years.
The Company has elected to continue to apply the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
accordingly, no stock option compensation expense is included in the
determination of net income in the statement of operations. Had stock option
compensation expense been determined pursuant to the methodology of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the pro forma effects on the Company's earnings and earnings per
share in fiscal years 1999, 1998 and 1997 would not have been material.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (continued)
_________________
9. Quarterly Financial Summary (Unaudited):
----------------------------------------
(amounts in thousands except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
Fiscal Year 1999 Aug. 1, Oct. 31, Jan. 31, May 1,
- --------------- 1998 1998 1999 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $221,877 $289,565 $290,115 $256,996
Income (loss) before income taxes
and minority interest (83,894) 11,550 10,153 12,929
Net income (loss) (59,038) 6,085 5,628 12,273*
Earnings (loss) per share - basic and diluted (1.86) .19 .18 .39
Aug. 2, Nov. 1, Jan. 31, May 2,
Fiscal Year 1998 1997 1997 1998 1998
- ---------------- ---- ---- ---- ----
Revenues $209,037 $315,285 $308,202 $271,998
Income (loss) before income taxes
and minority interest (9,733) 10,969 9,897 (10,862)
Net income (loss) (6,470) 8,320 6,954 (8,492)
Earnings (loss) per share - basic and diluted (.19) .25 .21 (.26)**
July 27, Oct. 26, Jan. 31, May 3,
Fiscal Year 1997 1996 1997 1997 1997
- ---------------- ---- ---- ---- ----
Revenues $225,026 $347,080 $330,532 $278,399
Income (loss) before income taxes
and minority interest (11,967) 11,897 12,076 999
Net income (loss) (8,181) 6,822 6,527 184
Earnings (loss) per share - basic and diluted (.24) .20 .19 .01**
</TABLE>
*The low effective tax rate in the fourth quarter of fiscal 1999 resulted from
an increase in the estimated tax benefit to be realized on the full-year
repositioning and related charges. See note 3 to the consolidated financial
statements for further information regarding repositioning and related charges,
by quarter.
**Earnings per common share were improved by $.06 for the fourth quarters of
both fiscal 1998 and fiscal 1997, resulting from various year-end adjustments to
previous accrual estimates. The adjustments in both fiscal 1998 and fiscal 1997
were primarily related to the reversal of a provision for potential inventory
shrinkage determined not to be required by the completion of a year-end physical
inventory count and valuation.
41
<PAGE>
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 1999 Annual Meeting of Shareholders
to be filed on or before August 28, 1999 and such information is incorporated
herein by reference. All officers serve at the discretion of the Board of
Directors.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name and Age Office and Year First Elected
- ----------------------- ------------------------------------------------------------------------------------
<S> <C>
Stephen Strome 54 (1) President (1990), Chief Executive Officer (1991) and Director (1989)
Peter J. Cline 52 (2) Executive Vice President/President of H.E.R. (1994)
Stephen Nadelberg 58 (3) Senior Vice President/President of NCE (1997)
Arnold Gross 58 (4) Senior Vice President/President of Handleman International (1997)
Leonard A. Brams 48 (5) Senior Vice President/Finance, Chief Financial Officer and Secretary (1997)
Samuel Milicia 57 (6) Senior Vice President/Music Purchasing, Handleman Entertainment
Resources (1998)
Thomas C. Braum, Jr. 44 (7) Vice President (1992) and Corporate Controller (1988)
</TABLE>
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.
3. Stephen Nadelberg has served as Senior Vice President/President of North
Coast Entertainment since joining the Company in February 1997. Prior to
joining Handleman Company, Mr. Nadelberg was employed from 1974 to 1996 by
Allied Domecq Spirits & Wines, parent company of Hiram Walker, Inc., where
he held various positions most recently as Vice President and General
Manager of global product development.
4. Arnold Gross has served as Senior Vice President/International since 1996.
In June of 1997, Mr. Gross was elected Senior Vice President/President of
Handleman International. From 1994 to 1995, Mr. Gross served as Director
General of Rackjobbing, S.A. de C.V., the Company's joint venture in Mexico.
Prior to joining Handleman Company, Mr. Gross served from 1983 to 1993 as
President of A&M Development.
5. Leonard A. Brams has served as Senior Vice President/Finance, Chief
Financial Officer and Secretary since joining the Company in June 1997.
Prior to joining Handleman Company, Mr. Brams was Vice
President/Administration and Chief Financial Officer for Talon LLC from 1995
until 1997, and Vice President Finance of United Technologies Automotive
from 1990 until 1994.
6. Samuel Milicia has served as Senior Vice President/Music Purchasing since
January of 1998. Mr. Milicia served as Vice President/Operations for
Handleman Entertainment Resources since June 1990 and was elected Senior
Vice President in April 1996.
7. Thomas C. Braum, Jr. has served as Corporate Controller since June 1988. In
February 1992, Mr. Braum was elected Vice President.
42
<PAGE>
Item 11. EXECUTIVE COMPENSATION
Information required by this item is contained in the Handleman
Company definitive Proxy Statement for its 1999 Annual Meeting of Shareholders,
to be filed on or before August 28, 1999 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 1999 Annual Meeting of Shareholders,
to be filed on or before August 28, 1999 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 1999 Annual Meeting of Shareholders,
to be filed on or before August 28, 1999 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 May 1, 1999, May 2, 1998 and May
3, 1997.
Consolidated Statement of Operations - Years Ended May 1,
1999, May 2, 1998 and May 3, 1997.
Consolidated Statement of Shareholders' Equity - Years Ended
May 1, 1999, May 2, 1998 and May 3, 1997.
Consolidated Statement of Cash Flows - Years Ended May 1,
1999, May 2, 1998 and May 3, 1997.
Notes to Consolidated Financial Statements
43
<PAGE>
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.
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, were filed with the Form 10-K dated May 3,
1997, and are incorporated herein by reference.
S-K Item 601 (10)
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.
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 Registrant's 1998 Stock Option and Incentive Plan was filed
with the Commission in Form S-8, dated December 21, 1998, File
No. 333-69389.
The advisory agreement with David Handleman was filed with the
Form 10-K for the year ended April 28, 1990.
The Note Agreement dated as of November 1, 1994 was filed with
the Form 10-K for the year ended April 28, 1995.
The First Amendment dated as of September 4, 1998 to Note
Agreement dated as of November 1, 1994 is filed as Exhibit A to
this Form 10-K.
The Credit Agreement among Handleman Company, the Banks named
therein and NBD Bank, N.A., as Agent, dated September 3, 1997 was
filed with the Form 10-K for the year ended May 2, 1998.
The First Amendment to Credit Agreement dated as of June 26, 1998
is filed as Exhibit B to this Form 10-K.
The change in control agreements dated March 17, 1997 and October
30 and 31, 1997 between Handleman Company and certain executive
officers of the Company were filed with the Form 10-K for the
year ended May 3, 1997 and Form 10-K for the year ended May 2,
1998, respectively.
44
<PAGE>
S-K Item 601 (21) - Subsidiaries of the Registrant:
American Sterling Corp., a Delaware Corporation
Anchor Bay Entertainment, Inc., a Michigan Corporation
Anchor Bay Entertainment, GmbH, a German Corporation
Anchor Bay International, Ltd., a United Kingdom Corporation
Bosco Music, Inc., a Michigan Corporation
Handleman Company of Canada, Limited, an Ontario Corporation
Handleman de Mexico, S. de R.L. de C.V., a Mexican Limited
Liability Company
Handleman do Brasil Commercial Ltd., a Brazilian Corporation
Hanley Advertising Company, a Michigan Corporation
HGV Video Productions, Inc. an Ontario Corporation
Madacy Entertainment Group, Inc., a Michigan Corporation
Madacy Entertainment Group, Ltd., a Canadian Corporation
Madacy Entertainment (U.K.) Limited
Mediaphon, GmbH, a German Corporation
Michigan Property and Risk Management Company, a Michigan
Corporation
North Coast Entertainment, Inc., a Michigan Corporation
North Coast Entertainment, Ltd., a Canadian Corporation
Rackjobbing Services, S.A. de C.V., a Mexican Corporation
Sellthrough Entertainment, Inc., a Michigan Corporation
The itsy bitsy Entertainment Company, a Delaware Corporation
S-K Item 601 (23) - Consent of Independent Accountants:
Filed with this report.
(b) No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
Note: The Exhibits attached to this report will be furnished to requesting
security holders upon payment of a reasonable fee to reimburse the
Registrant for expenses incurred by Registrant in furnishing such
Exhibits.
45
<PAGE>
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 No. 33-42018) and Form S-8
(File Nos. 2-95421, 33-59100, 33-16637, 33-69030, 333-69389 and 333-60205) of
our report dated June 8, 1999, on our audits of the consolidated financial
statements and financial statement schedule of Handleman Company and
Subsidiaries as of May 1, 1999, May 2, 1998 and May 3, 1997 and for the years
then ended, which report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Detroit, Michigan
July 26, 1999
46
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED MAY 3, 1997, MAY 2, 1998 AND MAY 1, 1999
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
--------- -------- -------- -------- --------
Deductions:
Balance at Additions: Adjustments
Beginning Charged to of, or Charge Balance at
Description of Period Expense to, Reserve End of Period
----------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Year ended May 3, 1997:
Accounts receivable,
allowance for gross
profit impact of estimated
future returns $22,141,000 $ 7,959,000 $ 8,266,000 $21,834,000
=========== =========== =========== ===========
Other assets, collectability
allowance for receivables
from bankrupt customers $13,950,000 $ 3,805,000 $ 4,754,000 $13,001,000
=========== =========== =========== ===========
Year ended May 2, 1998:
Accounts receivable,
allowance for gross
profit impact of estimated
future returns $21,834,000 $ 8,873,000 $13,368,000 $17,339,000
=========== =========== =========== ===========
Other assets, collectability
allowance for receivables
from bankrupt customers $13,001,000 $ 1,895,000 $ 9,555,000 $ 5,341,000
=========== =========== =========== ===========
Year ended May 1, 1999:
Accounts receivable,
allowance for gross
profit impact of estimated
future returns $17,339,000 $ 7,260,000 $10,839,000 $ 13,760,000
=========== =========== =========== ============
Other assets, collectability
allowance for receivables
from bankrupt customers $ 5,341,000 $ 875,000 $ 269,000 $ 5,947,000
=========== ========== =========== ===========
</TABLE>
47
<PAGE>
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 28, 1999 BY: /s/ Stephen Strome
---------------------------- -------------------------------
Stephen Strome, President, Chief
Executive Officer and Director
Pursuant to the requirements of the Securities and 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/ Leonard A. Brams /s/ Thomas C. Braum, Jr.
- --------------------------------- -----------------------------------
Leonard A. Brams, Thomas C. Braum, Jr.,
Senior Vice President, Vice President,
Finance and Chief Financial Officer Corporate Controller
(Principal Financial Officer) (Principal Accounting Officer)
July 28, 1999 July 28, 1999
- --------------------------------- -----------------------------------
DATE DATE
/s/ David Handleman /s/ John M. Barth
- --------------------------------- -----------------------------------
David Handleman, Director John M. Barth, Director
(Chairman of the Board)
July 28, 1999 July 28, 1999
- --------------------------------- -----------------------------------
DATE DATE
/s/ Elizabeth A. Chappell /s/ Richard H. Cummings
- --------------------------------- -----------------------------------
Elizabeth A. Chappell, Director Richard H. Cummings
July 28, 1999 July 28, 1999
- --------------------------------- -----------------------------------
DATE DATE
/s/ James B. Nicholson /s/ Lloyd E. Reuss
- --------------------------------- -----------------------------------
James B. Nicholson, Director Lloyd E. Reuss, Director
July 28, 1999 July 28, 1999
- --------------------------------- -----------------------------------
DATE DATE
/s/ Alan E. Schwartz /s/ Gilbert R. Whitaker
- -------------------------------- -----------------------------------
Alan E. Schwartz, Director Gilbert R. Whitaker, Jr., Director
July 28, 1999 July 28, 1999
- --------------------------------- -----------------------------------
DATE DATE
48
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-01-1999
<PERIOD-START> MAY-03-1998
<PERIOD-END> MAY-01-1999
<CASH> 27,405
<SECURITIES> 0
<RECEIVABLES> 217,968
<ALLOWANCES> 0
<INVENTORY> 102,589
<CURRENT-ASSETS> 369,522
<PP&E> 108,897
<DEPRECIATION> 55,478
<TOTAL-ASSETS> 487,856
<CURRENT-LIABILITIES> 216,801
<BONDS> 39,857
0
0
<COMMON> 310
<OTHER-SE> 225,376
<TOTAL-LIABILITY-AND-EQUITY> 487,856
<SALES> 1,058,553
<TOTAL-REVENUES> 1,058,553
<CGS> 791,683
<TOTAL-COSTS> 791,683
<OTHER-EXPENSES> 339,044
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,088
<INCOME-PRETAX> (49,262)
<INCOME-TAX> (16,449)
<INCOME-CONTINUING> (35,052)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,052)<F1>
<EPS-BASIC> (1.11)
<EPS-DILUTED> (1.11)
<FN>
<F1>The Company recognized minority interest expense in the amount of $2,239,000 in
the consolidated statement of operations, which represents the minority
shareholder portion of the income for less than wholly-owned subsidiaries. The
minority interest share of the net assets of these subsidiaries of $5,244,000
as of May 1, 1999 is included in other liabilities in the consolidated balance
sheet of the Company.
</FN>
</TABLE>
<PAGE>
Exhibit 99.A
================================================================================
Handleman Company
____________________________________
First Amendment
Dated as of September 4, 1998
to
Note Agreements
Dated as of November 1, 1994
____________________________________
Re: $20,000,000 7.81% Series A Senior Notes
Due April 21, 2000
$55,000,000 8.26% Series B Senior Notes
Due November 18, 2001
$25,000,000 8.59% Series C Senior Notes
Due February 28, 2005
===============================================================================
<PAGE>
First Amendment to Note Agreements
This First Amendment dated as of September 4, 1998 (this "First Amendment")
to the Note Agreements dated as of November 1, 1994 is between Handleman
Company, a Michigan corporation (the "Company"), and each of the institutions
which is a signatory to this First Amendment (collectively, the "Noteholders").
Recitals:
A. The Company and each of the Noteholders have heretofore entered into
separate and several Note Agreements, each dated as of November 1, 1994
(collectively, the "Note Agreements"). The Company has heretofore issued
$20,000,000 aggregate principal amount of its 7.81% Series A Senior Notes due
April 21, 2000 (the "Series A Notes") dated April 21, 1995, $55,000,000
aggregate principal amount of its 8.26% Series B Senior Notes due November 18,
2001 (the "Series B Notes") dated November 18, 1994 and $25,000,000 aggregate
principal amount of its 8.59% Series C Senior Notes due February 28, 2005 (the
"Series C Notes" and together with the Series A Notes and the Series B Notes
collectively, the "Notes") dated February 28, 1995 pursuant to the Note
Agreements.
B. The Company and the Noteholders now desire to amend the Note
Agreements in the respects, but only in the respects, hereinafter set forth.
C. Capitalized terms used herein shall have the respective meanings
ascribed thereto in the Note Agreements unless herein defined or the context
shall otherwise require.
D. All requirements of law have been fully complied with and all other
acts and things necessary to make this First Amendment a valid, legal and
binding instrument according to its terms for the purposes herein expressed have
been done or performed.
Now, therefore, upon the full and complete satisfaction of the conditions
precedent to the effectiveness of this First Amendment set forth in (S)3.1
hereof, and in consideration of good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, the Company and the Noteholders do
hereby agree as follows:
Section 1. Amendments.
The Note Agreements shall be and are hereby amended as follows:
1.1. From and after September 4, 1998 (the "Effective Date"):
(a) interest on the Series A Notes shall accrue at the rate of
8.06% per annum on any payment of interest, principal or premium, if any,
prior to the same becoming overdue and thereafter at the applicable overdue
interest rate provided for in the Series A Note plus .25%;
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<PAGE>
(b) interest on the Series B Notes shall accrue at the rate of
8.51% per annum on any payment of interest, principal or premium, if any,
prior to the same becoming overdue and thereafter at the applicable overdue
interest rate provided for in the Series B Note plus .25%; and
(c) interest on the Series C Notes shall accrue at the rate of
8.84% per annum on any payment of interest, principal or premium, if any,
prior to the same becoming overdue and thereafter at the applicable overdue
interest rate provided for in the Series C Note plus .25%.
1.2. Sections 5.5 through 5.12 shall be and are hereby amended in
their entirety to read as follows:
"Section 5.5. Nature of Business. (a) Neither the Company nor any
Significant Subsidiary will 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 the businesses in which it is engaged in on the date
hereof, other than as contemplated by the Repositioning.
(b) At all times after the First Closing Date, Non-Significant
Subsidiaries shall not, in the aggregate, own more than 30% of Consolidated
Total Assets.
Section 5.6. Current Ratio and Working Capital. The Company will at all
times keep and maintain (a) the ratio of Consolidated Current Assets of the
Company and its Subsidiaries to Consolidated Current Liabilities of the Company
and its Subsidiaries at not less than 1.50 to 1.0 and (b) the Consolidated
Working Capital of the Company and its Subsidiaries in an amount not less than
$125,000,000.
Section 5.7. Net Worth Ratios. (a) Consolidated Net Worth. The Company
will at all times maintain Consolidated Net Worth of the Company and its
Subsidiaries at an amount not less than the sum of (i) the greater of (y)
$246,000,000 minus 100% of the after-tax repositioning charge to be taken by the
Company in the fiscal year ending April 30, 1999 pursuant to the Repositioning
in an amount not to exceed $90,000,000 plus 90% of any after tax gain on the
sale of assets which have a value in aggregate amount of at least $5,000,000 and
(z) 85% of Consolidated Net Worth on and as of April 30, 1999, plus (ii) 50% of
positive Consolidated Net Income, if any, for each of the fiscal years of the
Company ending after April 30, 1999, provided that in no event shall there be a
reduction made in the sum to be maintained pursuant hereto if Consolidated Net
Income for any fiscal year is a deficit figure.
(b) Consolidated Tangible Net Worth. The Company will at all times keep
and maintain Consolidated Tangible Net Worth of the Company and its Subsidiaries
at an amount not less than the sum of (i) the greater of (y) $235,000,000 minus
100% of the after-tax repositioning charge to be taken by the Company in the
fiscal year ending April 30, 1999 pursuant to the Repositioning in an amount not
to exceed $90,000,000 plus 90% of any after tax gain on the sale of assets which
have a value in aggregate amount of at least $5,000,000 and (z) 85% of
Consolidated Net Worth on and as of April 30, 1999 minus $11,000,000, plus (ii)
50% of
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<PAGE>
positive Consolidated Net Income, if any, for each of the fiscal years of the
Company ending after April 30, 1999, provided that in no event shall there be a
reduction made in the sum to be maintained pursuant hereto if Consolidated Net
Income for any fiscal year is a deficit figure.
Section 5.8. Ratios Relating to Indebtedness. (a) Interest Coverage
Ratio. The Company will at all times keep and maintain the Interest Coverage
Ratio at not less than (a) 2.0 to 1.0 as of the end of any fiscal quarter,
commencing with the fiscal quarter ending after the Effective Date up to but
excluding the fiscal quarter ending May 3, 1999, and (b) 3.0 to 1.0 as of the
end of each fiscal quarter thereafter.
(b) Funded Debt to Total Capitalization. The Company will not at any time
permit the ratio of Consolidated Funded Debt of the Company and its Subsidiaries
to Consolidated Total Capitalization of the Company and its Subsidiaries to
exceed 0.45 to 1.0.
(c) Funded Debt to Tangible Capitalization. The Company will not at any
time permit the ratio of Consolidated Funded Debt of the Company and its
Subsidiaries to Consolidated Tangible Capitalization of the Company and its
Subsidiaries to exceed 0.55 to 1.0.
Section 5.9. Limitations on Funded Debt and Current Debt. (a) The Company
will not, and will not permit any Subsidiary to, create, issue, assume,
guarantee, incur, permit or suffer to exist or in any manner be or become liable
in respect of any Funded Debt or Current Debt, except:
(1) Funded Debt evidenced by the Notes;
(2) Funded Debt of the Company and its Subsidiaries outstanding as of
the Effective Date and reflected on Annex 1 to the First Amendment to Note
Agreement;
(3) Funded Debt of the Company and its Subsidiaries, provided that at
the time of issuance thereof and after giving effect thereto and to the
application of the proceeds thereof,
(A) the aggregate unpaid principal amount of Consolidated Funded
Debt shall not exceed the lesser of (x) 45% of Consolidated Total
Capitalization, and (y) 55% of Consolidated Tangible Capitalization;
(B) the aggregate unpaid principal amount of Funded Debt of the
Company secured by Liens permitted by (S)5.10(b) shall not exceed 5%
of Consolidated Tangible Net Worth;
(C) the sum of (i) the aggregate unpaid principal amount of
Controlled Funded Debt of Subsidiaries plus (ii) the aggregate unpaid
principal amount of all Funded Debt of the Company secured by Liens
permitted by (S)5.10(b) shall not exceed 15% of Consolidated Tangible
Net Worth; and
(D) no Default or Event of Default would exist;
-3-
<PAGE>
(4) unsecured Current Debt of the Company, provided that during the
365-day period immediately preceding the date of any determination
hereunder, there shall have been a period of at least 30 consecutive days
during which either (i) the amount of Current Debt of the Company
outstanding was zero or (ii) after giving effect to the inclusion in the
definition of the term "Funded Debt" of the amounts described in clause
(iv) of the definition of such term set forth in (S)8.1 hereof, the Company
would have been permitted to incur at least $1.00 of additional Funded Debt
pursuant to the provisions of (S)5.9(a)(3);
(5) Funded Debt or Current Debt of a Wholly-owned Subsidiary to the
Company or to another Wholly-owned Subsidiary; and
(6) refundings, renewals or extensions of Funded Debt and Current
Debt permitted by the foregoing clauses (1) and (2) of this (S)5.9 without
increase to the aggregate unpaid principal amount outstanding at the time
of such refunding, renewal or extension.
(b) Any corporation which becomes a Subsidiary after the date hereof shall
for all purposes of this (S)5.9 be deemed to have created, issued, assumed or
incurred at the time it becomes a Subsidiary all Funded Debt of such corporation
existing immediately after it becomes a Subsidiary.
Section 5.10. Limitation on Liens. (a) The Company will not, and will not
permit any Subsidiary to, create, incur or suffer to exist any Lien on any of
the assets, rights, revenues or property, real, personal or mixed, tangible or
intangible, whether now owned or hereafter acquired, of the Company or any of
its Subsidiaries, other than:
(1) Liens for taxes not delinquent or for taxes being contested in
good faith by appropriate proceedings and as to which adequate financial
reserves have been established on its books and records;
(2) Liens (other than any Lien imposed by ERISA) created and
maintained in the ordinary course of business which are not material in the
aggregate, and which would not have a material adverse effect on the
business or operations of the Company and its Subsidiaries taken as a whole
and which constitute (A) pledges or deposits under worker's compensation
laws, unemployment insurance laws or similar legislation, (B) good faith
deposits in connection with bids, tenders, contracts or leases to which the
Company or any of its Subsidiaries is a party for a purpose other than
borrowing money or obtaining credit, including rent security deposits, (C)
Liens imposed by law, such as those of carriers, warehousemen and
mechanics, if payment of the obligation secured thereby is not yet due, (D)
Liens securing taxes, assessments or other governmental charges or levies
not yet subject to penalties for nonpayment, and (E) pledges or deposits to
secure public or statutory obligations of the Company or any of its
Subsidiaries, or surety, customs or appeal bonds to which the Company or
any of its Subsidiaries is a party;
-4-
<PAGE>
(3) Liens affecting real property which constitute minor survey
exceptions or defects or irregularities in title, minor encumbrances,
easements or reservations of, or rights of others for, rights of way,
sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of such real
property, provided that all of the foregoing, in the aggregate, do not at
any time materially detract from the value of said properties or materially
impair their use in the operation of the businesses of the Company and its
Subsidiaries taken as a whole;
(4) Liens existing as of the Effective Date and reflected in Annex 2
attached to the First Amendment to Note Agreement may be suffered to exist
upon the same terms as those existing on the date hereof, including
extensions, renewals and replacements thereof so long as such extension,
renewal or replacement does not increase the principal amount of the Funded
Debt secured or extend such Lien to any other property, assets, rights or
revenues;
(5) (A) any Lien in property or in rights relating thereto to secure
any rights granted with respect to such property in connection with the
provision of all or a part of the purchase price or cost of the
construction of such property created contemporaneously with, or within 360
days after such acquisition or the completion of such construction, or (B)
any Lien in property existing in such property at the time of acquisition
thereof, whether or not the debt secured thereby is assumed by the Company
or a Subsidiary, or (C) any Lien existing in the property of a corporation
at the time such corporation is merged into or consolidated with the
Company or a Subsidiary or at the time of a sale, lease, or other
disposition of the properties of a corporation or firm as an entirety or
substantially as an entirety to the Company or a Subsidiary; provided, in
the case of (A), (B) and (C), no such Liens shall exceed 100% of the fair
market value of the related property and not more than one such Lien shall
encumber such property at any one time;
(6) Liens granted by any Subsidiary in favor of the Company or any
other Substantially-owned Subsidiary; and
(7) The interest or title of a lessor under any lease otherwise
permitted under this Agreement with respect to the property subject to such
lease to the extent performance of the obligations of the Company or its
Subsidiary thereunder is not delinquent.
(b) Notwithstanding the foregoing paragraphs (1) through (7), 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 5% of Consolidated Tangible Net Worth of the Company
and its Subsidiaries.
Section 5.11. Merger; Etc. (a) The Company will not, and will not permit
any Subsidiary to merge or consolidate or amalgamate with any other Person or
take any other action having a similar effect, provided, however, (1) a
Subsidiary of the Company may merge with the Company, provided that the Company
shall be the surviving corporation, (2) a Subsidiary of the Company may merge or
consolidate with another Substantially-owned Subsidiary of the
-5-
<PAGE>
Company and (3) this (S)5.11(a) shall not prohibit any merger if the surviving
or continuing corporation is incorporated in the United States and, immediately
after such merger, no Default or Event of Default shall exist or shall have
occurred and be continuing and, prior to the consummation of such merger, the
Company shall have provided to the holders of the Notes an express written
assumption by such surviving or continuing corporation in form and substance
satisfactory to the holders of at least 51% in aggregate principal amount of
outstanding Notes of all obligations of the Company hereunder and under the
Credit Agreement and an opinion of counsel and a certificate of the chief
financial officer of the Company (attaching computations to demonstrate
compliance with all financial covenants hereunder), each stating that such
merger complies with this (S)5.11(a) and that any other conditions under this
Agreement relating to such transaction have been satisfied.
(b) Disposition of Assets; Etc. The Company will not, and will not permit
any Subsidiary to sell, lease, license, transfer, assign or otherwise dispose of
all or a substantial portion of its business, assets, rights, revenues or
property, real, personal or mixed, tangible or intangible, whether in one or a
series of transactions, other than inventory sold in the ordinary course of
business upon customary credit terms and sales of scrap or obsolete material or
equipment, provided, however, that this (S)5.11(b) shall not prohibit any such
sale, lease, license, transfer, assignment or other disposition if the aggregate
book value (disregarding any write-downs of such book value other than ordinary
depreciation and amortization) of all of the business, assets, rights, revenues
and property disposed of after the date of this Agreement shall be less than 10%
of such aggregate book value of the Consolidated total assets of the Company and
its Subsidiaries as of the most recently ended fiscal year, and if immediately
after such transaction, no Default or Event of Default shall exist or shall have
occurred and be continuing. Notwithstanding the foregoing, (1) any Subsidiary
may sell, lease, transfer or otherwise dispose of its assets to the Company or
any other Substantially-owned Subsidiary, and (2) the Company or any Subsidiary
may sell, lease, transfer or otherwise dispose of its assets in excess of the
limitation set forth above so long as the proceeds of such sale are used to
purchase or committed to purchase other property of a similar nature of at least
equivalent value within twelve (12) months of such sale. Notwithstanding the
foregoing or anything else in this Agreement to the contrary, any sale of assets
contemplated by the Repositioning shall be permitted, and 100% of the proceeds
of all liquidation of assets pursuant to the Repositioning shall be used to
prepay Indebtedness outstanding under the Credit Agreement.
Section 5.12. Guaranties. (a) The Company will not, and will not permit
any Significant Subsidiary to, become or be liable in respect of any Guaranty
except (i) Guaranties by the Company which are limited in amount to a stated
maximum dollar exposure and included in Current Debt or Funded Debt, (ii)
Guaranties by the Company of obligations incurred by any Subsidiary in
compliance with (S)5.9(a)(3), or (iii) Guaranties by any Significant Subsidiary
of Funded Debt incurred by the Company in compliance with (S)5.9(a)(2) or (3)
and ranking pari passu with the Notes, so long as such Significant Subsidiary
shall guarantee the Notes equally and ratably and in a manner reasonably
satisfactory to the holders of 66-2/3% of the aggregate principal amount of
Notes then outstanding.
(b) The Company will cause each Subsidiary which delivers or creates a
Guaranty or Contingent Liability inuring to the benefit of any party to the
Credit Agreement to concurrently
-6-
<PAGE>
enter into a Guaranty of the Notes, and within three business days thereafter
shall deliver to each of the holders of the Notes the following items:
(i) an executed counterpart of such Subsidiary Guaranty or a joinder
agreement in respect of an existing Subsidiary Guaranty, as appropriate;
(ii) a certificate signed by the President, a Vice President or
another authorized officer of such Subsidiary making representations and
warranties to the effect of those contained in paragraphs 10, 12 and 17 of
Exhibit B attached hereto, but with respect to such Subsidiary and such
Subsidiary Guaranty, as applicable;
(iii) such documents and evidence with respect to such Subsidiary as
any holder of the Notes may reasonably request in order to establish the
existence and good standing of such Subsidiary and the authorization of the
transactions contemplated by such Subsidiary Guaranty;
(iv) an opinion of counsel satisfactory to the holders of at least
51% of the outstanding principal amount of the Notes to the effect that
such Subsidiary Guaranty has been duly authorized, executed and delivered
and constitutes the legal, valid and binding contract and agreement of such
Subsidiary enforceable in accordance with its terms, except as an
enforcement of such terms may be limited by bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles; and
(v) an executed counterpart of an intercreditor agreement among the
holders of the Notes and each of the parties to the Credit Agreement, which
agreement shall provide that the proceeds from the enforcement of any
Guaranty or Contingent Liability or of any obligation of any borrower or
obligor in respect of Indebtedness outstanding hereunder or outstanding
under the Credit Agreement entered into or created after the Effective Date
shall be shared on an equal and ratable basis with the holders of the
Notes."
1.3. New Sections 5.18 through 5.25 shall be and are hereby added
to Section 5 of the Note Agreement to read as follows:
"Section 5.18. Acquisitions. The Company will not, and it will not permit
any Subsidiary to, acquire all or any substantial portion of the assets or
securities of any Person if the total cash or cash equivalent consideration,
including promissory notes but excluding stock or other consideration that is
not cash or the equivalent of cash, and other acquisition costs would exceed
$25,000,000 in the aggregate in any twelve month period; provided that any such
acquisition shall be done only by North Coast Entertainment and the target of
any such acquisition shall be in the same line of business as North Coast
Entertainment.
Section 5.19. Investments, Loans and Advances. The Company will not, and
it will not permit any Subsidiary to, 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
-7-
<PAGE>
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
(a) 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, (b) other
investments consistent with the investment policy of the Company in effect as of
the Effective Date, (c) acquisitions and investments permitted pursuant to
(S)5.18, (d) advances in the ordinary course of business for proprietary
products and (e) investments, loans and advances in and to any Subsidiary or
existing Affiliate of the Company.
Section 5.20. Dividends, Redemptions and Other Distributions. The Company
will not, except as hereinafter provided: (a) declare or pay any dividends,
either in cash or property, on any shares of its capital stock of any class
(except dividends or other distributions payable solely in shares of common
stock of the Company), (b) directly or indirectly, or through any Subsidiary or
through any Affiliate of the Company, purchase, redeem or acquire shares of its
capital stock of any class or any warrants, rights or options to purchase or
acquire any shares of its capital stock (other than in exchange for or out of
the net cash proceeds to the Company from the substantially concurrent issue or
sale of shares of common stock of the Company or warrants, rights or options to
purchase or acquire any shares of its common stock), or (c) make any other
payment or distribution, either directly or indirectly or through any
Subsidiary, in respect of its capital stock, provided, however, that if (i) no
Default or Event of Default shall exist or would be caused thereby, (ii) the
proceeds from the Repositioning shall have been applied as provided in the last
sentence of (S)5.11(b)(1), and (iii) Senior Debt has been less than $91,000,000
for a period of 15 consecutive days, the Company may, during the period from and
after June 3, 1998 through and including November 30, 1999 and for so long as,
and only for so long as, Senior Debt during such period is less than
$110,000,000, redeem shares of common stock of the Company for an aggregate
purchase price not to exceed the lesser of (y) the sum of $10,000,000 plus an
amount equal to 50% of the cash proceeds of asset sales (other than asset sales
in the ordinary course of business) and (z) $70,000,000.
Section 5.21. Additional Covenants. If at any time the Company or any
of its Subsidiaries shall enter into or be a party to any instrument or
agreement, including all such instruments or agreements in existence as of the
Effective Date and all such instruments or agreements entered into after the
Effective Date, 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 Company shall promptly so advise
the holders of the Notes. Thereupon, if the holders of the Notes shall request,
upon notice to the Company, the holders of at least 51% in aggregate principal
amount of the Notes shall enter into an amendment to this Agreement or an
additional agreement (as such holders may request), providing for substantially
the same covenants and defaults and/or such more favorable covenants or
defaults, as the case may be, as those provided for in such instrument or
agreement to the extent required and as may be selected by such holders. In
addition to the foregoing, any covenants or defaults in any existing agreements
or other documents evidencing or relating to any Indebtedness of the Company not
substantially provided for in this Agreement or more favorable to the holders of
such
-8-
<PAGE>
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 affect any such covenants or defaults as incorporated
herein.
Section 5.22. Limitations on Restrictive Agreements. The Company will not,
and will not permit any Subsidiary to, enter into, or suffer to exist, any
agreement with any Person which in any way restricts or limits the ability of
the Company to amend, modify, supplement or otherwise alter the terms applicable
to the Notes or this Agreement, except, as otherwise expressly provided in
Section 5.2(n) of the Credit Agreement as in effect on the Effective Date.
Section 5.23. Payments and Modification of Debt. The Company will not (a)
amend or otherwise modify the Credit Agreement or any other instrument or
agreement under which the Company or any of its Subsidiaries' Indebtedness is
issued or created or otherwise related thereto, except for any amendment which
does not (i) increase the interest rate, fees or other amounts payable thereon,
(ii) change to any earlier dates any dates upon which any payments of principal,
interest or other amounts are due thereon, (iii) change any event of default or
condition to an event of default with respect thereto (other than to eliminate
any such existing event of default or make it more favorable to the Company),
(iv) change any affirmative or negative covenant in any significant respect
(other than to eliminate such covenant or make it more favorable to the
Company), (v) change the redemption, prepayment or defeasance provisions thereof
(other than any change which would make such provisions more favorable to the
Company) or (vi) make any other amendment or modification which, together with
all other amendments or modifications made, would increase materially the
obligations of the Company or any Subsidiary thereunder or to confer any
additional rights on the holders of such Indebtedness which would be adverse to
the Company or any of its Subsidiaries or any holder of the Notes, or (b) other
than the Indebtedness owing to the holders of the Notes, 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 such Indebtedness; provided that
any such existing Indebtedness may be refinanced and extended provided that such
refinancing does not decrease the amount of or allow any payment on such
Indebtedness other than those currently required, shorten the maturity of any
such Indebtedness, including any installments due on such Indebtedness, or
impose any more restrictive covenants or defaults than imposed by such existing
Indebtedness; provided further, that anything contained in this (S)5.23 to the
contrary notwithstanding, (1) the Company may enter into an amendment,
restatement or other modification of the Credit Agreement for the purpose of
reducing (but not increasing) the aggregate amount of Indebtedness which the
Company may from time to time borrow under the Credit Agreement as in effect on
and as of the Effective Date, (2) the Company may prepay Indebtedness
outstanding under the Credit Agreement as and to the extent contemplated by the
Repositioning, and (3) the Company may, if it obtains the express written
consent of the parties to the Credit Agreement to do so, prepay not more than
$3,268,000 aggregate principal amount of the Variable Rate Demand Industrial
Development Bond of the Development Authority of Conyers, Georgia relating to
the facility of the Company located in Conyers, Georgia.
Section 5.24. Notes to Rank Pari Passu. The Notes and all other
obligations under this Agreement of the Company are and at all times shall
remain obligations of the Company ranking
-9-
<PAGE>
pari passu as against the assets of the Company with all other present and
future Indebtedness (actual or contingent) of the Company and its Subsidiaries
due and owing pursuant to the Credit Agreement.
Section 5.25. Certain Prohibited Subsidiary Actions. The Company will not
cause or permit any of its Subsidiaries to (a) be designated as, or to be or
become, a "Borrowing Subsidiary" as such term is used in the Credit Agreement or
to otherwise incur or become liable in respect of any Indebtedness from time to
time due and owing under and pursuant to the Credit Agreement or (b) become a
guarantor of any such Indebtedness pursuant to Section 5.1(f) of the Credit
Agreement or otherwise unless concurrently therewith the Company shall have
complied with the requirements of (S)5.12(b)."
1.4. Section 6.1 of the Note Agreement shall be and is hereby amended
in the following respects:
(a) Section 6.1(c) shall be and is hereby amended in its
entirety to read as follows :
"Default shall occur in the observance or performance
of any covenant or agreement contained in (S)5.5, (S)5.10,
(S)5.11, (S)5.18 or (S)5.19; or"
(b) Section 6.1(d) shall be and is hereby amended in its
entirety to read as follows:
"(d) Default shall occur in the observance or
performance of any other covenant, agreement or provision
of this Agreement which is not remedied within 10 days
after the day on which the Company first receives notice
thereof from a holder of a Note; or"
(c) Section 6.1(e) of the Note Agreement shall be and is hereby
deleted in its entirety:
(d) Sections 6.1(f), (g), (h), (i), (j), (k) and (l) of the Note
Agreement shall be and are hereby renumbered respectively as Sections
6.1(e), (f), (g), (h), (i), (j) and (k).
1.5. The first three full sentences of Section 6.3 of the Note
Agreement shall be and are hereby amended in their entirety to read as follows:
"When any Event of Default described in paragraph (a) or
(b) of (S)6.1 has happened and is continuing, any holder of any
Note may, and when any Event of Default described in paragraphs
(c) through (h), inclusive, of (S)6.1 has happened and is
continuing, the holder or holders of 51% or more of the
principal amount of the Notes at the time outstanding may, by
notice to the Company, declare the entire principal and all
interest accrued on all Notes to
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be, and all Notes shall thereupon become, forthwith due and
payable, without any presentment, demand, protest or other
notice of any kind, all of which are hereby expressly waived.
When any Event of Default described in paragraph (i), (j) or
(k) of (S)6.1 has occurred, then all outstanding Notes shall
immediately become due and payable without presentment, demand
or notice of any kind. Upon the Notes becoming due and payable
as a result of any Event of Default as aforesaid, the Company
will forthwith pay to the holders of the Notes the entire
principal and interest accrued on such Notes and, in the case
of any Event of Default described in paragraphs (a) through
(h), inclusive of (S)6.1, pay to such holders, to the extent
not prohibited by applicable law, an amount as liquidated
damages for the loss of the bargain evidenced hereby (and not
as a penalty) equal to the applicable Make-Whole Amount,
determined as of the date on which such Notes shall so become
due and payable."
1.6. The reference in Section 6.4 of the Note Agreement to "(k)" is
hereby deleted and "(j)" is hereby substituted therefor.
1.7. Section 8.1 of the Note Agreements shall be and is hereby amended
in its 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, and (c) extraordinary
items (net of any extraordinary gains) and special reserves, all as determined
in accordance with generally accepted accounting principles.
"Affiliate" when used with respect to any Person shall mean any other
Person which, directly or indirectly, controls or is controlled by or is under
common control with such Person. For purposes of this definition "control"
(including the correlative meanings of the terms "controlled by" and "under
common control with"), with respect to any Person, shall mean possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of voting
securities or by contract or otherwise.
"Capital Lease" of any Person shall mean any lease which, in accordance
with generally accepted accounting principles, is or should be capitalized on
the books of such Person.
"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.
"Change of Control" shall have the meaning set forth in (S)2.3(c).
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"Closing Dates" shall have the meaning set forth in (S)1.2.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Company" shall mean Handleman Company, a Michigan corporation, and any
Person who succeeds to all, or substantially all, of the assets and business of
Handleman Company.
"Company Notice" shall have the meaning set forth in (S)2.3(a).
"Consolidated" or "consolidated" shall mean, when used with reference to
any financial term in this Agreement, the aggregate for two or more Persons of
the amounts signified by such term for all such Persons determined on a
consolidated basis in accordance with generally accepted accounting principles.
"Contingent Liabilities" of any Person shall mean, as of any date, all
obligations of such Person or of others for which such Person is contingently
liable, as obligor, guarantor, surety or in any other capacity, or in respect of
which obligations such Person assures a creditor against loss or agrees to take
any action to prevent any such loss (other than endorsements of negotiable
instruments for collection in the ordinary course of business), including
without limitation all reimbursement obligations of such Person in respect of
any letters of credit, surety bonds or similar obligations and all obligations
of such Person to advance funds to, or to purchase assets, property or services
from, any other Person in order to maintain the financial condition of such
other Person.
"Control" and "Controlled" shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of Voting Stock, by contract
or otherwise.
"Controlled Funded Debt of Subsidiaries" shall mean all Funded Debt of
Subsidiaries but shall exclude Funded Debt of a Subsidiary resulting from the
guarantee by such Subsidiary of Funded Debt of the Company ranking pari passu
with the Notes, provided that such Subsidiary shall guarantee the Notes equally
and ratably and in a manner reasonably satisfactory to the holders of 66-2/3% in
aggregate principal amount of the Notes then outstanding.
"Credit Agreement" shall mean the Credit Agreement dated as of September
3, 1997, as amended by the First Amendment thereto dated as of June 26, 1998 and
as from time to time further supplemented or amended, between the Company and
NBD Bank, as Agent, and the Banks named therein.
"Current Assets" and "Current Liabilities" of any Person shall mean, as of
any date, all assets or liabilities, respectively, of such Person which, in
accordance with generally accepted accounting principles, are (or, if the
balance sheet is qualified, should be) classified as current assets or current
liabilities, respectively, on a balance sheet of such Person.
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<PAGE>
"Current Debt" of any Person shall mean, as of the date of any
determination thereof, (i) all Indebtedness of such Person for borrowed money
other than Funded Debt of such Person and (ii) Guaranties by such Person of
Current Debt of others.
"Default" shall mean any event or condition, the occurrence of which would,
with the lapse of time or the giving of notice, or both, constitute an Event of
Default.
"Effective Date" shall mean September 4, 1998.
"Environmental Laws" shall mean the Resource Conservation and Recovery Act
of 1976, the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, any so-called "Superfund" or "Superlien" law, the Toxic Substances
Control Act, or any other federal, state or local statute, law, ordinance, code,
rule, regulation, order or decree regulating, relating to or imposing liability
or standards of conduct concerning, public health, safety or the environment,
including any of the foregoing which concerns Hazardous Materials, toxic or
dangerous waste, substance or material, as now or any time hereafter in effect.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time. References
to sections of ERISA shall be construed to also refer to any successor sections.
"ERISA Affiliate" shall mean any corporation, trade or business that is,
along with the Company, a member of a controlled group of corporations or a
controlled group of trades or businesses, as described in section 414(b) and
414(c), respectively, of the Code or Section 4001 of ERISA.
"Event of Default" shall have the meaning set forth in (S)6.1.
"First Amendment to Note Agreement" shall mean that First Amendment dated
as of the Effective Date to this Agreement.
"First Closing Date" shall have the meaning set forth in (S)1.2.
"Funded Debt" of any Person shall mean all Indebtedness that would, in
accordance with generally accepted accounting principles, constitute long term
debt, including (a) any Indebtedness with a maturity of one year or longer after
the creation of such Indebtedness, (b) any Indebtedness outstanding under a
revolving credit or similar agreement (and any renewal or extension thereof)
providing for borrowings which constitute long term debt, (c) any Capital Lease
and (d) any guarantee with respect to Funded Debt of another Person.
Notwithstanding the foregoing, (i) any portion of Funded Debt included in
Current Liabilities (other than the Indebtedness owing under the Credit
Agreement, including without limitation all Swingline Loans, as such term is
defined in the Credit Agreement, which shall be considered Funded Debt subject
to the following clause (ii) of this sentence) shall be excluded from Funded
Debt and (ii) only the highest amount of the aggregate Indebtedness outstanding
under the Credit Agreement
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<PAGE>
which have not been paid off for thirty consecutive days during the most recent
six month period ended as of any day Funded Debt is measured shall be Funded
Debt.
"GAAP" shall mean generally accepted accounting principles in effect in the
United States on the date of this Agreement.
"Guaranties" by any Person shall mean all obligations (other than
endorsements in the ordinary course of business of negotiable instruments for
deposit or collection) of such Person guaranteeing, or in effect guaranteeing,
any Indebtedness, dividend or other obligation, of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, including,
without limitation, all obligations incurred through an agreement, contingent or
otherwise, by such Person: (i) to purchase such Indebtedness or obligation or
any property or assets constituting security therefor, (ii) to advance or supply
funds (x) for the purchase or payment of such Indebtedness or obligation, (y) to
maintain working capital or other balance sheet condition or otherwise to
advance or make available funds for the purchase or payment of such Indebtedness
or obligation, (iii) to lease property or to purchase Securities or other
property or services primarily for the purpose of assuring the owner of such
Indebtedness or obligation of the ability of the primary obligor to make payment
of the Indebtedness or obligation, or (iv) otherwise to assure the owner of the
Indebtedness or obligation of the primary obligor against loss in respect
thereof. For the purposes of all computations made under this Agreement, a
Guaranty in respect of any Indebtedness for borrowed money shall be deemed to be
Indebtedness equal to the principal amount of such Indebtedness for borrowed
money which has been guaranteed, and a Guaranty in respect of any other
obligation or liability or any dividend shall be deemed to be Indebtedness equal
to the maximum aggregate amount of such obligation, liability or dividend.
"Hazardous Materials" shall mean any hazardous substance defined as such in
(or for purposes of) any Environmental Law including, without limitation, crude
oil or any fraction thereof not occurring naturally in the soil or ground water,
polychlorinated biphenyls (PCB's), urea formaldehyde, any radioactive material
or asbestos.
"Indebtedness" of any Person shall mean, as of any date, (a) all
obligations of such Person for borrowed money, (b) all obligations of such
Person as lessee under any Capital Lease, (c) the unpaid purchase price for
goods, property or services acquired by such Person, except for accounts payable
arising in the ordinary course of business, (d) all obligations of such Person
to purchase goods, property or services where payment therefor is required
regardless of whether delivery of such goods or property or the performance of
such services is ever made or tendered (generally referred to as "take or pay
contracts"), other than obligations incurred in the ordinary course of business,
(e) all obligations of such Person in respect of any interest rate or currency
swap, rate cap or other similar transaction (valued in an amount equal to the
highest termination payment, if any, that would be payable by such Person upon
termination for any reason on the date of determination), and (f) all
obligations of others similar in character to those described in clauses (a)
through (e) of this definition for which such Person is contingently liable, as
obligor, guarantor, surety or in any other capacity, or in respect of which
obligations such Person assures a creditor against loss or agrees to take any
action to prevent any such loss (other than endorsements of negotiable
instruments for collection in the ordinary course of business),
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<PAGE>
including without limitation all reimbursement obligations of such Person in
respect of letters of credit, surety bonds or similar obligations and all
obligations of such Person to advance funds to, or to purchase assets, property
or services from, any other Person in order to maintain the financial condition
of such other Person. Notwithstanding the foregoing, clause (f) shall not
include (i) obligations or guarantees owing or guaranteed by any Subsidiary or
the Company to or for the benefit of any other Subsidiary or the Company, or
(ii) Unfunded Benefit Liabilities.
"Institutional Holder" shall mean any insurance company, bank, savings and
loan association, trust company, investment company, charitable foundation,
employee benefit plan (as defined in ERISA) or other institutional investor or
financial institution.
"Interest Coverage Ratio" shall mean, as of any date, the ratio of (a)
Consolidated Adjusted EBIT for the Company and its Subsidiaries as calculated
for the four most recently ended consecutive fiscal quarters of the Company to
(b) Consolidated Net Interest Expense of the Company and its Subsidiaries as
calculated for the same four fiscal quarters.
"Lien" shall mean any interest in property securing an obligation owed to,
or a claim by, a Person other than the owner of the property, whether such
interest is based on the common law, statute or contract, and including but not
limited to the security interest lien arising from a mortgage, encumbrance,
pledge, conditional sale or trust receipt or a lease, consignment or bailment
for security purposes. The term "Lien" shall include reservations, exceptions,
encroachments, easements, rights-of-way, covenants, conditions, restrictions,
leases and other title exceptions and encumbrances (including, with respect to
stock, stockholder agreements, voting trust agreements, buy-back agreements and
all similar arrangements) affecting property. For the purposes of this
Agreement, the Company or a Subsidiary shall be deemed to be the owner of any
property which it has acquired or holds subject to a conditional sale agreement,
Capitalized Lease or other arrangement pursuant to which title to the property
has been retained by or vested in some other Person for security purposes and
such retention or vesting shall constitute a Lien.
"Make-Whole Amount" shall mean, in connection with any prepayment or
acceleration of the Notes of any Series, the excess, if any, of (i) the
aggregate present value as of the date of such prepayment of each dollar of
principal of such Series being prepaid and the amount of interest (exclusive of
interest accrued to the date of prepayment) that would have been payable in
respect of such dollar if such prepayment had not been made (all taking into
account the application of such prepayment required by (S)2.1), determined by
discounting such amounts at the Reinvestment Rate from the respective dates on
which they would have been payable, over (ii) 100% of the principal amount of
the outstanding Notes of such Series being prepaid. If the Reinvestment Rate is
equal to or higher than the interest rate applicable to the Series of Notes then
being prepaid, the Make-Whole Amount with respect to Notes of such Series shall
be zero, it being understood and agreed by the Company and the holders of the
Notes that for purposes of any determination of the amount of the Make-Whole
Amount in connection with any prepayment pursuant to (S) 2.2 of the Note
Agreement (and only a prepayment pursuant to said (S) 2.2) the interest rate
payable in respect to the Notes shall be deemed to be 7.935% in the case of
Series A Notes, 8.385% in the case of the Series B Notes and 8.715% in the case
of the Series C Notes. The Make-Whole Amount, if any, to be paid in connection
with the prepayment of any Notes
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shall be determined as of the date three business days prior to the date of such
prepayment. For purposes of any determination of the Make-Whole Amount:
"Reinvestment Rate" shall mean (a) the sum of (x) 0.50% plus (y) the
yield to maturity for actively traded marketable U.S. Treasury fixed
interest rate securities having a maturity (rounded to the nearest month)
corresponding to the remaining Weighted Average Life to Maturity of the
Series of Notes being prepaid (taking into account the application of such
prepayment required by (S)2.1), as set forth on the page designated "USD"
of the Bloomberg Financial Markets Service (or, if not available, any other
nationally recognized trading screen reporting on-line intraday trading in
United States government securities) at 10:00 A.M. (New York time), or (b)
in the event that no such nationally recognized trading screen reporting
on-line trading in U.S. Treasury fixed interest rate securities is
available, "Reinvestment Rate" shall mean the sum of (x) 0.50%, plus (y)
the arithmetic mean of the yields for the two columns under the heading
"Week Ending" published in the Statistical Release under the caption
"Treasury Constant Maturities" for the maturity (rounded to the nearest
month) corresponding to the Weighted Average Life to Maturity of the Series
of Notes being prepaid (taking into account the application of such
prepayment required by (S)2.1). For purposes of (a) and (b) of the
preceding sentence, if no maturity exactly corresponds to such Weighted
Average Life to Maturity of the Series of Notes being prepaid, yields for
the two published maturities most closely corresponding to such Weighted
Average Life to Maturity shall be calculated pursuant to the immediately
preceding sentence and the Reinvestment Rate shall be interpolated or
extrapolated from such yields on a straight-line basis, rounding in each of
such relevant periods to the nearest month. For the purposes of calculating
the Reinvestment Rate, the most recent Statistical Release published prior
to the date of determination of the Make-Whole Amount shall be used.
"Statistical Release" shall mean the then most recently published
statistical release designated "H.15(519)" or any successor publication
which is published weekly by the Federal Reserve System and which
establishes yields on actively traded U.S. Government Securities adjusted
to constant maturities or, if such statistical release is not published at
the time of any determination hereunder, then such other reasonably
comparable index which shall be designated by the holders of 66-2/3% in
aggregate principal amount of the outstanding Notes of each Series.
"Weighted Average Life to Maturity" of the principal amount of the
Notes of the Series being prepaid shall mean, as of the time of any
determination thereof, the number of years obtained by dividing the then
Remaining Dollar-Years of such principal by the aggregate amount of such
principal. The term "Remaining Dollar-Years" of such principal shall mean
the amount obtained by (i) multiplying (x) the remainder of (1) the amount
of principal that would have become due on each scheduled payment date with
respect to the Notes of such Series if such prepayment had not been made,
less (2) the amount of principal on the Notes of such Series scheduled to
become due on such date after giving effect to such prepayment and the
application thereof in accordance with the provisions of (S)2.1, by (y) the
number of years (calculated to the nearest one-twelfth)
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which will elapse between the date of determination and such scheduled
payment date, and (ii) totaling the products obtained in (i).
"Material Subsidiary" shall mean any Subsidiary having a Net Worth
determined as at the end of the immediately preceding fiscal year of such
Subsidiary that equaled or exceeded $1,000,000.
"Multiemployer Plan" shall have the same meaning as in ERISA.
"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.
"Net Interest Expense" of any Person shall mean, for any period, all
interest paid or payable by such Person during such period, net of any interest
income for such period.
"Net Worth" of any Person shall mean, as of any date, the amount of any
preferred stock, paid in capital and similar equity accounts plus (or minus in
the case of a deficit) the capital surplus and retained earnings of such Person
and the amount of any foreign currency translation adjustment account shown as a
capital account of such Person.
"Non-Significant Subsidiary" shall mean any Subsidiary which is not, at the
time of any determination hereunder, a Significant Subsidiary.
"North Coast Entertainment" shall mean North Coast Entertainment, Inc., a
Michigan corporation.
"Notes" shall have the meaning set forth in (S)1.1.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Person" or "person" shall include an individual, a corporation, a limited
liability company, an association, a partnership, a trust or estate, a joint
stock company, an unincorporated organization, a joint venture, a trade or
business (whether or not incorporated), a government (foreign or domestic) and
any agency or political subdivision thereof, or any other entity.
"Plan" means a "pension plan," as such term is defined in ERISA,
established or maintained by the Company or any ERISA Affiliate or as to which
the Company or any ERISA Affiliate contributed or is a member or otherwise may
have any liability.
"Purchasers" shall have the meaning set forth in (S)1.1.
"Reportable Event" shall have the same meaning as in ERISA.
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"Repositioning" shall mean the repositioning to be undertaken by the
Company as described on Annex 3 to the First Amendment to Note Agreement.
"Second Closing Date" shall have the meaning set forth in (S)1.2.
"Security" shall have the same meaning as in Section 2(1) of the Securities
Act of 1933, as amended.
"Senior Debt" shall mean the sum, without duplication, of all Indebtedness
owing under the Credit Agreement and all consolidated unsecured Indebtedness of
the Company and its Subsidiaries, inclusive, in any event, of the Notes and
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.
"Series" shall have the meaning set forth in (S)1.1.
"Series A Notes" shall have the meaning set forth in (S)1.1.
"Series B Notes" shall have the meaning set forth in (S)1.1.
"Series C Notes" shall have the meaning set forth in (S)1.1.
"Significant Subsidiary" shall mean any Subsidiary having total assets,
determined in accordance with GAAP, which, (a) as at the end of the immediately
preceding fiscal year of the Company equaled or exceeded 10% of Consolidated
Total Assets, or (b) has been designated as a Significant Subsidiary pursuant to
the provisions of (S)5.16.
"Subsidiary" of any Person shall mean any other Person (whether now
existing or hereafter organized or acquired) in which (other than directors'
qualifying shares required by law) at least a majority of the securities or
other ownership interests of each class having ordinary voting power or
analogous right (other than securities or other ownership interests which have
such power or right only by reason of the happening of a contingency), at the
time as of which any determination is being made, are owned, beneficially and of
record, by such Person or by one or more of the other Subsidiaries of such
Person or by any combination thereof. Unless otherwise specified, reference to
"Subsidiary" shall mean a Subsidiary of the Company.
"Subordinated Debt" of any Person shall mean, as of any date, that
Indebtedness of such Person for borrowed money which is expressly subordinate
and junior in the right of payment to the Indebtedness of such Person
outstanding pursuant to the Credit Agreement or the Note Agreement in manner and
by agreement satisfactory in form and substance to the holders of at least 51%
in aggregate principal amount of outstanding Notes, which consent and agreement
may not be unreasonably withheld.
"Substantially-owned" when used in connection with any Subsidiary shall
mean a Subsidiary of which not less than 75% of the issued and outstanding
shares of stock (except
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shares required as directors' qualifying shares) shall be owned by Company
and/or one or more of its Substantially-owned Subsidiaries.
"Tangible Capitalization" of any Person shall mean the sum of Tangible Net
Worth of such Person and Funded Debt of such Person.
"Tangible Net Worth" of any Person shall mean, as of any date, (a) the
amount of any preferred stock, paid in capital and similar equity accounts plus
(or minus in the case of a deficit) the capital surplus and retained earnings of
such Person and the amount of any foreign currency translation adjustment
account shown as a capital account of such Person, less (b) the net book value
of all items of the following character which are included in the assets of such
Person: (i) goodwill, including without limitation, the excess of cost over book
value of any asset, (ii) organization or experimental expenses, (iii)
unamortized debt discount and expense, (iv) patents, trademarks, trade names and
copyrights, (v) deferred taxes and deferred charges, (vi) franchises, licenses
and permits, and (vii) other assets which are deemed intangible assets under
generally accepted accounting principles other than (xx) licenses giving the
Company rights to manufacture and distribute certain video, music, books and
software products, and plus (c) the net book value of the items set forth in
clause (b) above in an amount not to exceed 15% of Consolidated Net Worth of the
Company.
"Third Closing Date" shall have the meaning set forth in (S)1.2.
"Total Assets" shall mean, as of the date of any determination thereof, the
total amount of all assets of the Company and its Subsidiaries determined in
accordance with GAAP, as shown on a consolidated balance sheet of the Company
and its Subsidiaries as at the end of the immediately preceding fiscal year.
"Total Capitalization" of any Person shall mean the sum of Net Worth of
such Person and Funded Debt of such Person.
"Unfunded Benefit Liabilities" shall mean, with respect to any Plan as of
any date, the amount of the unfunded benefit liabilities determined in
accordance with Section 4001(a)(18) of ERISA.
"Voting Stock" shall mean Securities of any class or classes, the holders
of which are ordinarily, in the absence of contingencies, entitled to elect a
majority of the corporate directors (or Persons performing similar functions).
"Wholly-owned" when used in connection with any Subsidiary shall mean a
Subsidiary of which all of the issued and outstanding shares of stock (except
shares required as directors' qualifying shares) and all Funded Debt and Current
Debt shall be owned by the Company and/or one or more of its Wholly-owned
Subsidiaries.
"Working Capital" of any Person shall mean, as of any date, the amount, if
any, by which the Current Assets of such Person exceed the Current Liabilities
of such Person.
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Section 2. Representations And Warranties Of The Company.
2.1. To induce the Noteholders to execute and deliver this First
Amendment (which representations shall survive the execution and delivery of
this First Amendment), the Company represents and warrants to the Noteholders
that:
(a) this First Amendment has been duly authorized, executed and
delivered by it and this First Amendment, when executed by the Company and
the holders of the Notes, shall constitute the legal, valid and binding
obligation, contract and agreement of the Company enforceable against it in
accordance with its terms, except as enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws or
equitable principles relating to or limiting creditors' rights generally
(regardless of whether enforcement is sought in a proceeding in equity or
at law);
(b) the Note Agreements, as amended by this First Amendment,
constitute the legal, valid and binding obligations, contracts and
agreements of the Company enforceable against it in accordance with their
respective terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws or equitable
principles relating to or limiting creditors' rights generally (regardless
of whether enforcement is sought in a proceeding in equity or at law);
(c) the execution, delivery and performance by the Company of this
First Amendment (i) has been duly authorized by all requisite corporate
action and, if required, shareholder action, (ii) does not require the
consent or approval of any governmental or regulatory body or agency, and
(iii) will not (A) violate (1) any provision of law, statute, rule or
regulation or its articles of incorporation or bylaws, (2) any order of any
court or any rule, regulation or order of any other agency or government
binding upon it, or (3) any provision of any material indenture, agreement
or other instrument to which it is a party or by which its properties or
assets are or may be bound, including, without limitation, the Credit
Agreement dated as of September 3, 1997, as amended by the First Amendment
thereto dated as of June 26, 1998 and the Second Amendment thereto dated as
of August 31, 1998, between the Company, NBD Bank, as Agent, and the Banks
named therein ("Credit Agreement") or (B) result in a breach or constitute
(alone or with due notice or lapse of time or both) a default under any
indenture, agreement or other instrument referred to in clause (iii)(A)(3)
of this (S) 2.1(c);
(d) none of the Subsidiaries of the Company is a "Borrower" or
"Borrowing Subsidiary" as each such term is used in the Credit Agreement
nor is any Subsidiary a Significant Subsidiary required to be a guarantor
pursuant to Section 5.1(f) of the Credit Agreement other than North Coast
Entertainment, Inc., a Michigan corporation ("North Coast Entertainment");
(e) as of the date hereof and after giving effect to this First
Amendment, no Default or Event of Default has occurred which is continuing;
and
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(f) all the representations and warranties contained in Section 3.1
of the Note Agreements and Exhibit B thereto are true and correct in all
material respects with the same force and effect as if made by the Company
on and as of the date hereof, except as any such representation or warranty
may be affected by the consummation of the Repositioning.
Section 3. Conditions To Effectiveness Of This First Amendment; Certain Closing
Conditions.
3.1. Executed counterparts of this First Amendment, duly executed by
the Company and the holders of 100% of the outstanding principal of the Notes,
having been delivered, this First Amendment shall have become effective on and
as of the Effective Date.
3.2. Not later than the Effective Date, each and every one of the
following conditions shall have been satisfied:
(a) the Noteholders shall have received a written consent to this
First Amendment duly executed by the Agent and the Banks, which consent
shall be in form and substance satisfactory to the Noteholders;
(b) the Noteholders shall have received a Guaranty from North Coast
Entertainment of the obligations of the Company under and in respect of the
Notes and the Note Agreement in a form acceptable to the holders of the
Notes and evidence satisfactory to them that none of the Company's
Subsidiaries is a "Borrower" or "Borrowing Subsidiary" as each such term is
used in the Credit Agreement;
(c) the Noteholders shall have received (i) a copy of the
resolutions of the Board of Directors of the Company authorizing the
execution, delivery and performance by the Company of this First Amendment,
certified by its Secretary or an Assistant Secretary and (ii) a copy of the
resolutions of the Board of Directors of North Coast Entertainment
authorizing execution, delivery and performance by North Coast
Entertainment of the Guaranty contemplated by clause (b) of this (S) 3.2,
certified by its Secretary or Assistant Secretary;
(d) the representations and warranties of the Company set forth in
(S) 2 hereof are true and correct on and with respect to the date hereof;
(e) the Noteholders shall have received the favorable opinion of
counsel to the Company substantially in the form delivered on each Closing
Date under the Note Agreement, but with respect to the matters contemplated
by this First Amendment; and
(f) each Noteholder shall have received payment from the Company in
an amount equal to 0.15% of the principal amount of the Notes of each
series then outstanding held by such Noteholder.
Upon receipt of all of the foregoing, this First Amendment shall become
effective.
-21-
<PAGE>
Section 4. Payment of Noteholders' Counsel Fees and Expenses.
The Company agrees to pay upon demand, the reasonable fees and expenses of
Chapman and Cutler, counsel to the Noteholders, in connection with (a) the
negotiation, preparation, approval, execution and delivery of this First
Amendment and (b) in connection with the review from time to time after the
Effective Date of any waiver, amendment or other modification of the Credit
Agreement.
Section 5. Certain Future Modifications of the Note Agreement.
Each of the holders of the Notes, by its execution of this First Amendment,
understands and agrees that the first (and only the first) time that the Company
shall enter into an amendment, restatement or other modification of or to the
Credit Agreement after the Effective Date, which amendment, restatement or
modification has the effect of loosening or otherwise making less restrictive
any of the covenants contained in Sections 5.2(a) through (r) of the Credit
Agreement (and the definitions contained in Section 1 of the Credit Agreement
relating thereto) as in effect on the Effective Date, then and in such event,
the Noteholders shall, subject always to clauses (a) and (b) of this (S)5, enter
into an amendment to the Note Agreement which, where applicable, conforms any
covenant or covenants contained in the Note Agreement with such covenant or
covenants contained in the Credit Agreement so loosened or made less restrictive
as a result of such amendment, restatement or modification of the Credit
Agreement, provided that notwithstanding the foregoing agreement of the
Noteholders, (a) in no event shall any covenant or covenants contained in the
Note Agreement be made looser or less restrictive on the Company than was the
case at the time the original form of the Note Agreement was entered into, and
(b) in no event shall (S)5.7(a) or (S)5.8(b) of the Note Agreement, as amended
by this First Amendment (or any of the definitions relating thereto), be
loosened, made less restrictive or otherwise modified from the form thereof
contained in the Note Agreement, as amended by this First Amendment.
Section 6. Miscellaneous.
6.1. This First Amendment shall be construed in connection with and
as part of each of the Note Agreements, and except as modified and expressly
amended by this First Amendment, all terms, conditions and covenants contained
in the Note Agreements and the Notes are hereby ratified and shall be and remain
in full force and effect.
6.2. Any and all notices, requests, certificates and other
instruments executed and delivered after the execution and delivery of this
First Amendment may refer to the Note Agreements without making specific
reference to this First Amendment but nevertheless all such references shall
include this First Amendment unless the context otherwise requires.
6.3. The descriptive headings of the various Sections or parts of
this First Amendment are for convenience only and shall not affect the meaning
or construction of any of the provisions hereof.
-22-
<PAGE>
6.4. This First Amendment shall be governed by and construed in
accordance with New York law.
-23-
<PAGE>
6.5. The execution hereof by you shall constitute a contract between
us for the uses and purposes hereinabove set forth, and this First Amendment may
be executed in any number of counterparts, each executed counterpart
constituting an original, but all together only one agreement.
Handleman Company
By
Its________________________________
-24-
<PAGE>
Accepted and Agreed to:
Nationwide Life Insurance Company
By
Its________________________________
West Coast Life Insurance Company
By
Its________________________________
Financial Services Life Insurance
Company
By: Conning Asset Management
By
Authorized Officer
General American Life Insurance
Company
By: Conning Asset Management
By
Authorized Officer
-25-
<PAGE>
Peninsular Life Insurance Company
By: Conning Asset Management
By
Authorized Officer
Pennsylvania Life Insurance Company
By: Conning Asset Management
By
Authorized Officer
Occidental Life Insurance Company of
California
By: Conning Asset Management
By
Authorized Officer
Executive Risk Indemnity Inc.
By: Conning Asset Management
By
Authorized Officer
-26-
<PAGE>
New York Life Insurance Company
By
Its________________________________
New York Life Insurance and Annuity
Corporation
By
Its________________________________
Principal Life Insurance Company, f/k/a
Principal Mutual Life Insurance
Company
By
Its________________________________
By
Its________________________________
________________________________
The Franklin Life Insurance Company
By
Its________________________________
-27-
<PAGE>
Teachers Insurance and Annuity
Association of America
By
Its________________________________
-28-
<PAGE>
EXHIBIT 99.B
FIRST AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
THIS FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of June 26, 1998
(this "Amendment"), is among HANDLEMAN COMPANY, a Michigan corporation (the
"Company"), each of the Subsidiaries of the Company set forth on the signature
pages hereof (the "Borrowing Subsidiaries") (the Company and the Borrowing
Subsidiaries may be collectively referred to as the "Borrowers") the banks set
forth on the signature pages hereof (the "Banks") and NBD BANK, a Michigan
banking corporation, as agent for the Banks (in such capacity, the "Agent").
RECITALS
--------
A. The Company, the Agent and the Banks are parties to a Credit
Agreement, dated as of September 3, 1997 (the "Credit Agreement").
B. The Borrowers desire to amend the Credit Agreement, 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" is amended by adding the
following to the end thereof: "provided, however, notwithstanding anything
herein to the contrary, the Applicable Facility Fee shall be (a) equal to 0.300%
(subject to any increase under clause (b) of this sentence) from and including
the First Amendment Effective Date to and including the date the Applicable
Facility Fee is reset based on the financial statements of the Company for the
fiscal quarter ending January 31, 1999 and (b) increased an additional 0.075%
above the per annum rate determined under this definition (including without
limitation the per annum rate determined pursuant to clause (a) of this
sentence)for the period from and including the First
<PAGE>
Amendment Effective Date to and including the earlier of (i) the date a
permanent waiver, in form and substance satisfactory to the Agent, is obtained
under the Senior Note Documents from the required number of holders of the
Senior Notes for any default that may be caused under the Senior Note Documents
due the Repositioning and (ii) the date the Applicable Facility Fee is reset
based on the financial statements of the Company for the fiscal quarter ending
January 31, 1999".
1.2 The definition of "Applicable Margin" is amended by adding the
following to the end thereof: "provided, however, notwithstanding anything
herein to the contrary, the Applicable Margin shall be (a) equal to 1.200%
(subject to any increase under clause (b) of this sentence) from and including
the First Amendment Effective Date to and including the date the Applicable
Facility Margin is reset based on the financial statements of the Company for
the fiscal quarter ending January 31, 1999 and (b) increased an additional
0.225% above the per annum rate determined under this definition (including
without limitation the per annum rate determined pursuant to clause (a) of this
sentence)for the period from and including the First Amendment Effective Date to
and including the earlier of (i) the date a permanent waiver, in form and
substance satisfactory to the Agent, is obtained under the Senior Note Documents
from the required number of holders of the Senior Notes for any default that may
be caused under the Senior Note Documents due the Repositioning and (ii) the
date the Applicable Facility Fee is reset based on the financial statements of
the Company for the fiscal quarter ending January 31, 1999".
1.3 The following new definitions are added to Section 1.1 in appropriate
alphabetical order:
"First Amendment" shall mean the First Amendment to Credit Agreement dated
---------------
June 26, 1998 among the Borrowers, the Banks and the Agent.
"First Amendment Effective Date" shall mean the effective date of the First
------------------------------
Amendment.
"Repositioning" shall mean the repositioning to be undertaken by the
-------------
Company as described on Schedule 2 hereto.
1.4 The penultimate sentence of Section 4.6 is restated as follows:
"There has been no material adverse change in the business, properties,
operations or financial condition of the Company and its Subsidiaries taken as a
whole since May 3, 1997, other than solely as a result of the transactions or
charges contemplated by the Repositioning. The Company has completed all
transactions contemplated to be completed by the Repositioning, all at the times
and in accordance with the terms of the Repositioning described on Schedule 2
hereto. Schedule 2 hereto completely and accurately describes the transactions
to be completed and changes to be taken in connection with the Repositioning,
and the pro forma and prospective financial statements delivered by the Company
to the Banks on or prior to the First Amendment Effective Date accurately
describes the transactions to be completed and changes to be taken in connection
with the Repositioning."
2
<PAGE>
1.5 Sections 5.2(b) and (c) are restated as follows:
(b) Net Worth. Permit or suffer Consolidated Net Worth of the Company
---------
and its Subsidiaries at any time to be less than $246,000,000 minus 100% of
the after-tax repositioning charge to be taken by the Company in the fiscal
year of 1999 pursuant to the Repositioning in an amount not to exceed
$90,000,000, plus (a) 50% of Consolidated Net Income of the Company and its
Subsidiaries for each fiscal year of the Company ending after May 3, 1997,
provided that if such Consolidated Net Income is negative for such fiscal
year, the amount added for such fiscal year shall be zero and it shall not
reduce the amount added for any other fiscal year, (b) 90% of any after tax
gain on the sale of assets which have a value in aggregate amount of at
least $5,000,000, and (c) 100% of the proceeds received by the Company from
the sale of any of any of its Capital Stock or any other new equity
received by the Company.
(c) Tangible Net Worth. Permit or suffer the Consolidated Tangible
------------------
Net Worth of the Company and its Subsidiaries at any time to be less than
$235,000,000 minus 100% of the after-tax repositioning charge to be taken
by the Company in the fiscal year of 1999 pursuant to the Repositioning in
an amount not to exceed $90,000,000, plus (a) 50% of Consolidated Net
Income for each fiscal year of the Company ending after May 3, 1997,
provided that if such Consolidated Net Income is negative for such fiscal
year, the amount added for such fiscal year shall be zero and it shall not
reduce the amount added for any other fiscal year, (b) 90% of any after-tax
gain on the sale of assets which have a value in aggregate amount of at
least $5,000,000, and (c) 100% of the proceeds received by the Company from
the sale of any of any of its Capital Stock or any other new equity
received by the Company.
1.6 Reference in the last sentence of Section 5.2(g) to "15%" is deleted
and "5%" is substituted in place thereof.
1.7 Section 5.2(i) is amended by adding the following to the end thereof:
"Notwithstanding the foregoing or anything else in this Agreement to the
contrary, any sale of assets contemplated by the Repositioning shall be
permitted, and 100% of the proceeds of all liquidation of assets pursuant to the
Repositioning or otherwise shall be used to prepay the Advances."
1.8 Section 5.2(j) is amended by deleting the reference therein to
"$50,000,000" and substituting "$25,000,000" in place thereof and adding the
following proviso to the end thereof:"; provided that any such acquisition shall
be done only by North Coast Entertainment, Inc. and the target of any such
acquisition shall be in the same line of business as North Coast Entertainment,
Inc."
1.9 Section 5.2(k) is amended by adding the following to the end thereof:
"other than as contemplated by the Repositioning."
3
<PAGE>
1.10 Section 5.2(n) is amended by adding the following to the end thereof:
"provided, further, that the Indebtedness owing pursuant to the Senior Notes may
be prepaid in full by an Advance hereunder or otherwise if (x) no Default or
Event of Default exists or would be caused thereby and (y) such prepayment does
not occur after August 31, 1998 or on or after the date any permanent waiver is
obtained under the Senior Note Documents from the required number of holders of
the Senior Notes for any default that may be caused under the Senior Note
Documents due the Repositioning, as determined by the Agent."
1.11 Section 5.2(p) is amended by deleting reference therein to "twenty
percent (20%)" and substituting "five percent (5%)" in place thereof.
1.12 A new Section 5.2(r) is hereby added as follows:
(r) Dividends, Redemptions and Other Distributions. Make, pay,
----------------------------------------------
declare or authorize any dividend, payment or other distribution in respect
of any class of its Capital Stock or any dividend, payment or distribution
in connection with the redemption, purchase, retirement or other
acquisition, directly or indirectly, of any shares of its Capital Stock
other than such dividends, payments or other distributions to the extent
payable solely in shares of Capital Stock of the Company, provided,
however, that if no Default or Event of Default shall exist or would be
caused thereby and if the Senior Debt is less than $110,000,000, the
Company may make, pay, declare or authorize any of the foregoing such
dividends, payments and other distributions which, in the aggregate, do not
exceed the sum of $10,000,000 plus an amount equal to 50% of the cash
proceeds of asset sales (other than asset sales in the ordinary course of
business) which occur after the date that the Senior Debt has been reduced
by $50,000,000 from the amount of Senior Debt as of May 2, 1998 for fifteen
consecutive days.
1.13 Schedule 2 attached hereto is hereby added to the Credit Agreement as
Schedule 2.
1.14 Schedule 5.2 attached to the Credit Agreement is hereby replaced with
Schedule 5.2 attached hereto.
ARTICLE II.
REPRESENTATIONS
---------------
Each Borrower represents and warrants to the Agent and the Banks that:
2.1 The execution, delivery and performance of this Amendment is within
its powers, has been duly authorized and is not in contravention with any law,
of the terms of its Articles of Incorporation or By-laws, or any undertaking to
which it is a party or by which it is bound.
4
<PAGE>
2.2 This Amendment is the legal, valid and binding obligation of it
enforceable against it in accordance with the terms hereof.
2.3 After giving effect to the amendments herein contained, the
representations and warranties contained in Article IV of the Credit Agreement
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.
2.4 No Event of Default or Default exists or has occurred and is
continuing on the date hereof and, without limiting the foregoing, no Event of
Default exists under the Senior Note Documents and the Borrowers are not within
a grace period with respect to any such Event of Default whether due to the
Repositioning or otherwise.
ARTICLE III.
CONDITIONS OF EFFECTIVENESS
---------------------------
This Amendment shall not become effective until each of the following
has been satisfied:
3.1 This Amendment shall be signed by the Borrowers and the Required
Banks.
3.2 Each of the Guarantors shall have executed the Consent and Agreement
at the end of this Amendment.
3.3 The Borrowers shall deliver a resolution, incumbency certificate and
related documents approving the execution, delivery and performance of this
Amendment.
3.4 The Borrowers shall have paid to the Agent, for the pro rata benefit
of the Lenders signing this Amendment on June 26, 1998, an amendment fee equal
to 0.15% of each such Lender's Commitment.
ARTICLE IV.
MISCELLANEOUS.
-------------
4.1 The Company agrees to grant, and cause each of its domestic
Subsidiaries to grant, a first priority security interest to the Agent, for the
benefit of the Agent and the Banks, in all of its accounts receivable and
related assets (including without limitation any accounts and chattel paper and
related instruments, as defined in the UCC), which security interest shall be
effective if and when the Senior Notes are paid, but not prior to such time.
The Company agrees to execute and deliver to the Agent (to be held in escrow by
the Agent and to effective if and when the Senior Notes are paid) on or before
July 3, 1998 all security agreements, financing statements and related
documents, in form and substance reasonably satisfactory to the Agent, to
5
<PAGE>
grant such a security interest. Failure to execute and deliver such documents on
or before July 3, 1998 shall be an Event of Default under the Credit Agreement.
4.2 References in any 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.
4.3 The Borrowers 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.
4.4 Each Borrower acknowledges and agrees that the Agent and the Banks
have fully performed all of their obligations under the Loan Documents and all
actions taken by the Agent and the Banks are reasonable and appropriate under
the circumstances and within their rights under the Loan Documents and otherwise
available. Each Borrower represents and warrants that it is not aware of any
claims or causes of action against the Agent or any Bank, any participant lender
or any of their successors or assigns.
4.5 Except as expressly amended hereby, each Borrower agrees that the Loan
Documents are ratified and confirmed and shall remain in full force and effect
and that it has 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.
4.6 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
By:____________________________
Its:___________________________
NORTH COAST ENTERTAINMENT, INC.
By:____________________________
Its:___________________________
6
<PAGE>
NBD BANK, as Agent and Individually as a Bank
By:______________________________
Its:_____________________________
7
<PAGE>
COMERICA BANK
By:_____________________
Its:____________________
KEYBANK NATIONAL ASSOCIATION
By:_____________________
Its:____________________
MICHIGAN NATIONAL BANK
By:_____________________
Its:____________________
THE FIFTH THIRD BANK
By:_____________________
Its:____________________
THE BANK OF NEW YORK
By:_____________________
Its:____________________
THE FUJI BANK, LIMITED
By:_____________________
Its:____________________
8
<PAGE>
CONSENT AND AGREEMENT
---------------------
As of the date and year first above written, each of the undersigned
hereby:
(a) fully consents to the terms and provisions of the above Amendment
and the consummation of the transactions contemplated hereby and agrees to
all terms and provisions of the above Amendment applicable to it;
(b) agrees that each Guaranty and all other agreements executed by any
of the undersigned in connection with the Credit Agreement or otherwise in
favor of the Agent or the Banks (collectively, the "Security Documents")
are hereby ratified and confirmed and shall remain in full force and
effect, and each of the undersigned acknowledges that it has no setoff,
counterclaim or defense with respect to any Security Document; and
(c) acknowledges that its consent and agreement hereto is a condition
to the Banks' obligation under this Amendment and it is in its interest and
to its financial benefit to execute this consent and agreement.
NORTH COAST ENTERTAINMENT, INC.
By:_________________________
Its:________________________
9
