<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the 1st quarter ended July 31, 1999 Commission File Number 1-7923
Handleman Company
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1242806
------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 KIRTS BOULEVARD TROY, MICHIGAN 48084-4142 Area Code 248 362-4400
- ---------------------------------- ---------- ----------------------
(Address of principal executive (Zip code) (Registrant's telephone
offices) number)
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
YES X NO
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS DATE SHARES OUTSTANDING
- ----------------------------- ----------------- -----------------------
Common Stock - $.01 Par Value September 3, 1999 30,089,779
<PAGE>
HANDLEMAN COMPANY
INDEX
PAGE NUMBER
-----------
PART I - FINANCIAL INFORMATION
Consolidated Statement of Operations................ 1
Consolidated Balance Sheet.......................... 2
Consolidated Statement of Shareholders' Equity...... 3
Consolidated Statement of Cash Flows................ 4
Notes to Consolidated Financial Statements.......... 5 - 7
Management's Discussion and Analysis of Operations.. 8 - 13
PART II - OTHER INFORMATION AND SIGNATURES................. 14
<PAGE>
<TABLE>
<CAPTION>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(amounts in thousands except per share data)
Three Months (13 Weeks) Ended
---------------------------------
July 31, August 1,
1999 1998
---------- ---------
<S> <C> <C>
Revenues $226,357 $221,877
Costs and expenses:
Direct product costs 169,208 168,565
Selling, general and
administrative expenses 54,958 55,853
Interest expense, net 505 2,353
Repositioning and related charges -- 110,000
Gain on sale of subsidiary -- (31,000)
--------- ---------
Income (loss) before income
taxes and minority interest 1,686 (83,894)
Income tax (expense) benefit (807) 24,997
Minority interest (197) (141)
---------- ---------
Net income (loss) $ 682 ($ 59,038)
========= =========
Net income (loss) per share - basic and diluted $ 0.02 ($ 1.86)
========= =========
Weighted average number of shares
outstanding during the period - basic 30,705 31,808
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
1
<PAGE>
<TABLE>
<CAPTION>
HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(amounts in thousands except share data)
July 31, May 1,
1999 1999
-------- ------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 31,722 $ 27,405
Accounts receivable, less allowance of $13,537 at
July 31, 1999 and $13,760 at May 1, 1999, respectively,
for the gross profit impact of estimated future returns 192,535 217,968
Merchandise inventories 116,374 102,589
Other current assets 20,925 21,560
--------- ---------
Total current assets 361,556 369,522
--------- ---------
Property and equipment:
Land 3,332 3,354
Buildings and improvements 16,931 16,227
Display fixtures 46,875 45,486
Equipment, furniture and other 46,388 43,830
--------- ---------
113,526 108,897
Less accumulated depreciation and amortization 59,004 55,478
--------- ---------
54,522 53,419
--------- ---------
Other assets, net of allowances 64,988 64,915
--------- ---------
Total assets $ 481,066 $ 487,856
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 163,556 $ 156,300
Debt, current portion 18,571 18,571
Accrued and other liabilities 39,010 41,930
--------- ---------
Total current liabilities 221,137 216,801
--------- ---------
Debt, non-current 39,857 39,857
Other liabilities 5,746 5,512
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value; 1,000,000 shares
authorized; none issued -- --
Common stock, $.01 par value; 60,000,000 shares
authorized; 30,140,000 and 31,049,000 shares
issued at July 31, 1999 and May 1, 1999, respectively 301 310
Paid-in capital 0 6,828
Foreign currency translation adjustment (6,431) (5,220)
Unearned compensation (1,248) (1,557)
Retained earnings 221,704 225,325
--------- ---------
Total shareholders' equity 214,326 225,686
--------- ---------
Total liabilities and shareholders' equity $ 481,066 $ 487,856
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(amounts in thousands)
Three Months (13 Weeks) Ended July 31, 1999
-----------------------------------------------------------------------------------
Common Stock
---------------------
Foreign
Currency Total
Shares Paid-in Translation Unearned Retained Shareholders'
Issued Amount Capital Adjustment Compensation Earnings Equity
------ ------ ------- ---------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
May 1, 1999 31,049 $310 $6,828 ($5,220) ($1,557) $225,325 $225,686
Net income 682 682
Adjustment for foreign
currency translation (1,211) (1,211)
------------
Comprehensive loss, net of tax (529)
------------
Common stock issuances, net
of forfeitures, in connection
with employee benefit plans 34 179 309 488
Common stock repurchased (943) (9) (7,007) (4,303) (11,319)
------ ------- ------ -------- -------- ------- -----------
July 31, 1999 30,140 $301 -- ($6,431) ($1,248) $221,704 $214,326
======= ======= ======= ======== ======== ======== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
Three Months (13 Weeks) Ended
------------------------------------------
July 31, August 1,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $682 ($59,038)
--------- ---------
Adjustments to reconcile net income (loss) to net cash net cash provided by
operating activities:
Depreciation 3,765 4,393
Amortization of acquisition costs 696 538
Recoupment of license advances 1,665 1,245
Repositioning charge -- 110,000
Gain on sale of subsidiary -- (31,000)
Loss on sale of book business -- 1,291
(Increase) decrease in operating assets 11,295 (4,582)
Increase (decrease) in operating liabilities 4,394 (12,410)
--------- ---------
Total adjustments 21,815 69,475
--------- ---------
Net cash provided from operating activities 22,497 10,437
--------- ---------
Cash flows from investing activities:
Additions to property and equipment (4,753) (3,011)
Retirements of property and equipment 61 704
License advances (1,446) (4,342)
Cash investment in The itsy bitsy
Entertainment Company, Inc. -- (4,754)
Proceeds from sale of book business and other -- 2,665
--------- ---------
Net cash used by investing activities (6,138) (8,738)
--------- ---------
Cash flows from financing activities:
Issuances of debt -- 492,700
Repayments of debt -- (496,399)
Repurchase of common stock (11,319) (9,783)
Other changes in shareholders' equity, net (723) (3,465)
--------- ---------
Net cash used by financing activities (12,042) (16,947)
--------- ---------
Net increase (decrease) in cash and cash equivalents 4,317 (15,248)
Cash and cash equivalents at beginning of period 27,405 25,562
--------- ---------
Cash and cash equivalents at end of period $31,722 $10,314
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4
<PAGE>
HANDLEMAN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of Management, the accompanying consolidated balance sheet
and consolidated statement of operations, shareholders' equity and cash
flows contain all adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial position of the
Company as of July 31, 1999, and the results of operations and changes in
cash flows for the three months then ended. Because of the seasonal nature
of the Company's business, sales and earnings results for the three months
ended July 31, 1999 are not necessarily indicative of what the results will
be for the full year. The consolidated balance sheet as of May 1, 1999
included in this Form 10-Q was derived from the audited consolidated
financial statements of the Company included in the Company's 1999 Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
Reference should be made to the Company's Form 10-K for the year ended May
1, 1999.
2. 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 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 required to be
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. Reference should be made
to the Company's Form 10-K for the year ended May 1, 1999 for additional
discussion regarding repositioning and related charges.
In connection with the repositioning program announced on June 2, 1998, the
Board of Directors approved a common stock repurchase program. During the
first three months of fiscal 2000, the Company purchased 943,000 shares at
a cost of $11.3 million under the repurchase program. Since the inception
of this program, the Company has repurchased 2,685,000 shares at a cost of
$32.3 million. The Company believes it will acquire between $45 and $50
million of common stock under this authorization that expires in December
1999.
3. 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.
5
<PAGE>
Notes to Consolidated Financial Statements (continued)
4. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. This
statement will be adopted in fiscal 2001. The Company does not believe the
impact of SFAS 133 on reported earnings and financial position will be
material.
5. 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 operates in
two business segments: Handleman Entertainment Resources (H.E.R.) is
responsible for music category management and distribution operations, and
North Coast Entertainment (NCE) is responsible for the Company's
proprietary operations, which include music, video and licensing
operations. Handleman International (music category management and
distribution operations in Mexico and Brazil), which was reported as a
separate segment for fiscal 1999, has been included within H.E.R. for both
the first quarter this year and last year due to a change in H.E.R.
responsibility for the segment effective at the beginning of fiscal 2000.
The tables below present information about reported segments for the three
months ended July 31, 1999 and August 1, 1998 (in thousands of dollars):
<TABLE>
<CAPTION>
Three Months Ended July 31, 1999: H.E.R. NCE Total
-------- -------- --------
<S> <C> <C> <C>
Revenues, external customers $199,965 $ 26,392 $226,357
Intersegment revenues -- 2,186 2,186
Segment income 261 2,116 2,377
Total assets 482,024 140,373 622,397
Capital expenditures 3,942 811 4,753
Three Months Ended August 1, 1998: H.E.R. NCE Total
-------- -------- --------
Revenues, external customers $197,211 $ 22,022 $219,233
Intersegment revenues 35 1,897 1,932
Segment income (loss) (3,917) 1,551 (2,366)
Total assets 609,703 159,937 769,640
Capital expenditures 1,840 1,171 3,011
</TABLE>
6
<PAGE>
Notes to Consolidated Financial Statements (continued)
A reconciliation of total segment revenues to consolidated revenues, total
segment income to total consolidated income before income taxes and minority
interest, and total segment assets to total consolidated assets for the three
months ended July 31, 1999 and August 1, 1998 is as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
July 31, 1999 August 1,1998
------------- -------------
<S> <C> <C>
Revenues
- --------
Total segment revenues $ 228,543 $ 221,165
Revenue for sold operation (Sofsource) -- 2,692
Elimination of intersegment revenues (2,186) (1,980)
--------- ---------
Consolidated revenue $ 226,357 $ 221,877
========= =========
Income Before Income Taxes and Minority Interest
- ------------------------------------------------
Total segment income (loss) for reportable segments $ 2,377 $ (2,366)
Operating loss for sold operation (Sofsource) -- (135)
Interest revenue 705 252
Interest expense (1,210) (2,605)
Repositioning and related charges -- (110,000)
Gain on sale of Sofsource subsidiary -- 31,000
Intersegment profit elimination (186) (40)
--------- ---------
Consolidated income (loss) before income taxes
and minority interest $ 1,686 $ (83,894)
========= =========
Assets
- ------
Total segment assets $ 622,397 $ 769,640
Elimination of intercompany receivables
and payables (141,331) (182,406)
--------- ---------
Total consolidated assets $ 481,066 $ 587,234
========= =========
</TABLE>
7
<PAGE>
Handleman Company
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Revenues for the first quarter of fiscal 2000 which ended July 31, 1999
increased 2% to $226.4 million, from $221.9 million for the first quarter of
fiscal 1999 which ended August 1, 1998. Net income for the first quarter of
fiscal 2000 was $.7 million or $.02 per share, compared to a net loss of $59.0
million or $1.86 per share for the first quarter of fiscal 1999. The Company's
results for the first quarter ended August 1, 1998 included pre-tax
repositioning and related charges of $110 million and a pre-tax gain on sale of
the Company's Sofsource subsidiary of $31.0 million, as well as the operating
results for Sofsource and the book distribution business, which were sold during
the first quarter of fiscal 1999.
The Company has two operating segments: Handleman Entertainment Resources
("H.E.R.") encompasses the Company's music category management and distribution
operations, and North Coast Entertainment ("NCE") is responsible for the
Company's proprietary operations, which include music and video products, as
well as licensing operations. Handleman International (which encompasses music
category management and distribution operations in Mexico and Brazil), which was
reported as a separate segment for fiscal 1999, has been included within H.E.R.
for both this year and last year due to a change in H.E.R. responsibility for
the segment effective at the beginning of fiscal 2000.
H.E.R. had net sales of $200.0 million for the first quarter of fiscal 2000,
compared to net sales of $197.2 million for the first quarter last year. Within
H.E.R., U.S. and Canadian music sales grew 23% to $195.0 million for the first
quarter of this year, from $158.8 million in the first quarter of last year. The
increase in music business primarily resulted from strong retail sales of new
hit releases. In addition, H.E.R. achieved reduced customer product return rates
driven by implementation of enhanced category management processes and new
systems. H.E.R. net sales for the first quarter last year included sales from
exited product lines (video, book and software) and the Argentine operation
(sold during the fourth quarter of fiscal 1999) of $29.6 million.
NCE sales were $28.6 million for the first quarter of fiscal 2000, compared to
$23.9 million for the first quarter of fiscal 1999 (excluding sales at the
Sofsource subsidiary), a 20% increase. This increase was attributable to strong
performance across all business units, including The itsy bitsy Entertainment
Company which continued to increase revenues from its licensed products,
including Teletubbies which was just being introduced in the first quarter last
year.
Direct product costs as a percentage of revenues was 74.8% for the first quarter
ended July 31, 1999, compared to 76.0% for the comparable prior year period. The
year-over-year reduction in direct product costs as a percentage of revenues was
primarily attributable to a change in the sales mix within H.E.R. (increased
music sales, and reduced video, book and software sales), as well as an increase
in the proportion of NCE sales to the overall sales level.
Selling, general and administrative ("SG&A") expenses for the first quarter this
year were $55.0 million (24.3% of revenues), compared to $55.9 million (25.2% of
revenues) for the first quarter last year.
8
<PAGE>
Income before interest, income taxes, minority interest, repositioning and
related charges and gain on sale of subsidiary ("operating income") for the
first quarter of fiscal 2000 was $2.2 million, compared to an operating loss of
$2.5 million for the first quarter of fiscal 1999. The $4.7 million improvement
in operating income was primarily attributable to the year-over-year reduction
in direct product costs as a percentage of revenues as previously described.
H.E.R. operating income improved by $4.2 million to $.3 million for the first
quarter this year, from an operating loss of $3.9 million for the first quarter
last year. NCE operating income improved to $2.1 million for the first quarter
of fiscal 2000, from $1.6 million for the comparable period last year.
Interest expense for the first quarter ended July 31, 1999 was $.5 million,
compared to $2.4 million for the first quarter ended August 1, 1998. The
decrease in interest expense was attributable to lower borrowing levels.
The Company's first quarter is traditionally its weakest quarter. The Company
has historically generated the majority of its earnings in subsequent fiscal
quarters.
Accounts receivable at July 31, 1999 were $192.5 million, compared to $218.0
million at May 1, 1999. The decrease in accounts receivable principally resulted
from lower sales volume during the first quarter of fiscal 2000, compared to the
fourth quarter of fiscal 1999.
Merchandise inventories increased to $116.4 million at July 31, 1999, from
$102.6 million at May 1, 1999. The increase in merchandise inventories was
mainly due to increased inventory purchases to support the higher sales level
anticipated for the second quarter of fiscal 2000.
In connection with the repositioning program announced on June 2, 1998, the
Board of Directors approved a common stock repurchase program. During the first
three months of fiscal 2000, the Company purchased 943,000 shares at a cost of
$11.3 million under the repurchase program. Since the inception of this program,
the Company has repurchased 2,685,000 shares at a cost of $32.3 million. The
Company believes it will acquire between $45 and $50 million of common stock
under this authorization that expires in December 1999.
As mentioned above, based upon a change in management responsibility, the
Company has determined that it now operates in two business segments; H.E.R. and
NCE. To facilitate understanding of the two business segments, the Company is
herein providing as supplemental data, revised revenue and operating income
information for fiscal 1999 based upon the business segments as now determined.
9
<PAGE>
<TABLE>
<CAPTION>
Fiscal 1999 Revenue (in Millions)
-----------------------------------------------------------------------------------
Elimination of
Exited Intersegment Consolidated
H.E.R. NCE Activities Revenue Revenue
------- ------ ---------- ------- -------
<S> <C> <C> <C> <C> <C>
First Quarter $167.7 $ 23.9 $32.3 $ (2.0) $ 221.9
Second Quarter 243.4 40.3 14.3 (8.4) 289.6
Third Quarter 255.3 36.8 1.3 (3.3) 290.1
Fourth Quarter 222.0 38.0 .8 (3.8) 257.0
------ ------ ----- -------- --------
Fiscal Year $888.4 $139.0 $48.7 $(17.5) $1,058.6
====== ====== ===== ======== ========
</TABLE>
Note - Exited activities include revenues related to the video,
book and software product lines, the Sofsource subsidiary
and the Argentine operation.
<TABLE>
<CAPTION>
Fiscal 1999 Operating Income (Loss) [in Millions]
--------------------------------------------------------------------
Consolidated
Consolidating Operating
H.E.R. NCE Adjustments Income (Loss)
------- --- ----------- ----------------
<S> <C> <C> <C> <C>
First Quarter $ (3.9) $ 1.6 (.2) $ (2.5)
Second Quarter 13.8 7.3 (.1) 21.0
Third Quarter 13.6 5.4 (.1) 18.9
Fourth Quarter 12.6 5.8 (.6) 17.8
----- ----- ------ ------
Fiscal Year $36.1 $20.1 $(1.0) $ 55.2
===== ===== ====== ======
</TABLE>
10
<PAGE>
Year2000
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 all the remediation and testing of its mission critical
enterprise applications by June 30, 1999. The Company anticipates the completion
of its enterprise Year2000 project by September 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 and targeted to be complete by September 1999.
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.
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.
11
<PAGE>
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 has completed 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 $4.2 million of the total project costs have been incurred
as of July 31, 1999.
The Company has also accelerated the replacement of certain non-ready systems to
meet Year2000 requirements. In July 1998, the Company launched an Oracle
Financials Implementation Project to replace its existing general ledger, fixed
assets and accounts receivables systems. The Company is using third party
consulting firms, in conjunction with its own information technology staff, to
implement the Oracle Financials System. The Company has implemented general
ledger and fixed assets with accounts receivable targeted for September 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.
12
<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 that 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, 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-Q
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. Additional information that could cause actual
results to differ materially from any forward-looking statements may be
contained in the Company's Annual Report and Form 10-K.
13
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits or Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
SIGNATURES: Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
HANDLEMAN COMPANY
DATE: September 14, 1999 BY: /s/ Stephen Strome
------------------------------ ----------------------------
STEPHEN STROME
President and
Chief Executive Officer
DATE: September 14, 1999 BY: /s/ Leonard A. Brams
------------------------------- ----------------------------
LEONARD A. BRAMS
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-29-2000
<PERIOD-START> MAY-02-1999
<PERIOD-END> JUL-31-1999
<CASH> 31,722
<SECURITIES> 0
<RECEIVABLES> 192,535
<ALLOWANCES> 0
<INVENTORY> 116,374
<CURRENT-ASSETS> 361,556
<PP&E> 113,526
<DEPRECIATION> 59,004
<TOTAL-ASSETS> 481,066
<CURRENT-LIABILITIES> 221,137
<BONDS> 39,857
0
0
<COMMON> 301
<OTHER-SE> 214,025
<TOTAL-LIABILITY-AND-EQUITY> 481,066
<SALES> 226,357
<TOTAL-REVENUES> 226,357
<CGS> 169,208
<TOTAL-COSTS> 169,208
<OTHER-EXPENSES> 54,958
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 505
<INCOME-PRETAX> 1,686
<INCOME-TAX> 807
<INCOME-CONTINUING> 682
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 682<F1>
<EPS-BASIC> .02
<EPS-DILUTED> .02
<FN>
<F1>The Company recognized minority interest expense in the amount of $197,000
in the consolidated statement of operations, which represents the minority
shareholders' portion of the income for less than wholly-owned subsidiaries.
</FN>
</TABLE>
