Handleman Company Reports Results for Fourth Quarter and Fiscal Year 2005

Handleman Company Reports Results for Fourth Quarter and Fiscal Year 2005

Fiscal Year 2005 Earnings per Share from Continuing Operations Were the Highest in the Company's History

TROY, Mich., June 27 /PRNewswire-FirstCall/ -- Handleman Company (NYSE:HDL), http://www.handleman.com/ , today announced results for its fourth quarter and fiscal year ended April 30, 2005.

Revenues for the fiscal year ended April 30, 2005 ("fiscal 2005") were $1.26 billion, compared to $1.22 billion for the fiscal year ended May 1, 2004 ("fiscal 2004"). Net income for fiscal 2005 was $34.2 million or $1.51 per diluted share, compared to $35.8 million or $1.45 per diluted share for fiscal 2004. Fiscal 2005 net income included a loss from discontinued operations of $.7 million or $.03 per diluted share, whereas fiscal 2004 net income included income from discontinued operations of $1.8 million or $.07 per diluted share. Accordingly, income from continuing operations for fiscal 2005 was $34.9 million or $1.54 per diluted share (highest in the Company's history) compared to $34.0 million or $1.38 per diluted share for fiscal 2004.

Revenues for the fourth quarter of fiscal 2005 were $273.9 million, compared to $297.2 million for the fourth quarter of fiscal 2004. Net income for the fourth quarter of this year was $4.4 million or $.20 per diluted share, compared to $5.3 million or $.22 per diluted share for the fourth quarter of last year.

Stephen Strome, the Company's Chairman and CEO stated, "Despite a weaker than expected fourth quarter, fiscal 2005 was a solid year for the Company. Earnings per share from continuing operations of $1.54 were the highest in our history. In addition, we continued to generate a significant amount of cash, and returned nearly $54 million to our shareholders through our dividend and share repurchase programs. During the year, our continued focus on these programs resulted in the Company increasing its quarterly cash dividend to 8 cents per share and authorizing a new 15% share repurchase program. At the end of the fiscal year the Company had no debt and our balance sheet remained strong."

Fiscal 2005

Revenues for fiscal 2005 were $1.26 billion, compared to $1.22 billion for fiscal 2004. The increase this year resulted from higher revenues in the Company's United Kingdom and Canadian operations. Combined revenues within these two operations this year were $433 million, compared to $362 million last year, an increase of 20%. The increase this year was due to higher sales to customers, as well as a stronger British pound sterling and Canadian dollar compared to the U.S. dollar. (Consolidated results are expressed in U.S. dollars.)

The Company's gross profit margin, as a percent of revenues, was 19.4% for fiscal 2005, compared to 20.6% for fiscal 2004. The decline in the gross profit margin percentage this year was primarily due to a greater proportion of discounted sales to support ongoing customer promotions, and a greater proportion of international sales.

Selling, general and administrative (SG&A) expenses for fiscal 2005 were $193.4 million or 15.3% of revenues, compared to $200.0 million or 16.4% of revenues for fiscal 2004. The reduction in SG&A expense this year offset a substantial portion of the Company's decline in gross profit margin. As a result, operating income as a percent of revenues was 4.0% for fiscal 2005, down slightly from 4.2% for fiscal 2004.

Stock Repurchase

During fiscal 2005, the Company repurchased over 2.2 million shares of its common stock at an average price of $20.88 per share. This included the repurchase of 395,900 shares authorized by the Board of Directors under a 15% share repurchase program announced in February 2005. This leaves approximately 2.9 million shares remaining under this authorization. As of April 30, 2005, the Company had 21,445,873 shares outstanding.

Fourth Quarter of Fiscal 2005

Revenues for the fourth quarter of fiscal 2005 were $273.9 million, compared to $297.2 million for the fourth quarter of fiscal 2004. The decrease in revenues during the fourth quarter this year was primarily due to a weaker new release schedule in the United States compared to the same period the prior year, and higher customer product returns.

The Company's gross profit margin, as a percentage of revenues, was 19.8% for the fourth quarter, compared to 21.8% for the fourth quarter of last year. The decline in the gross profit margin percentage this year was primarily due to a greater proportion of discounted sales to support customer promotions. SG&A expense for the fourth quarter was $48.2 million or 17.6% of revenues, compared to $57.0 million or 19.2% of revenues for the same quarter of last year.

Outlook - Fiscal 2006

The Company expects its customers' market share growth to continue within the music industry. This should result in higher revenues for the Company during its fiscal year 2006 when compared to fiscal year 2005 (in percentage terms in the mid-single digits).

The Company further anticipates, as a result of changes in revenue mix, its gross profit margin, as a percent of revenues, to be lower than in fiscal 2005. It is anticipated that revenues will include a greater percentage of promotional products as well as non-serviced and international revenues. The Company earns a lower gross profit margin percentage on promotional products as well as non-serviced and certain international revenues.

The lower gross profit margin percent during the Company's fiscal year 2006 is expected to be somewhat offset by lower selling, general and administrative expenses, as a percent of revenues. This is due to the Company's continued focus on productivity and cost control. As a result, net income for the Company's fiscal year 2006 is expected to be slightly ahead of its fiscal year 2005 results.

Stephen Strome commented further, "Handleman Company's first quarter is traditionally its weakest quarter in terms of both revenues and earnings. It is our most difficult quarter, and the first quarter of fiscal 2006 will be no exception. We expect the Company's fully diluted earnings per share for its first quarter of fiscal 2006 to be below the $.04 per diluted share reported for its first quarter of last year. For the full-year, however, we remain confident in our outlook for net income being ahead of fiscal 2005. The Company will also continue to repurchase shares of its common stock under the February 2005 Board authorization, thus reducing its shares outstanding. As a result of fewer shares outstanding, coupled with slightly higher net income, the Company expects an increase, in percentage terms in the mid-single digits, in the Company's fully diluted earnings per share over its prior fiscal year. Our ability to grow revenues and earnings will support the continued return of capital to our shareholders."

Call Notice

Handleman Company will host a conference call to discuss the fourth quarter of fiscal year 2005 financial and operating results on Monday, June 27, 2005 at 2:00 p.m. (Eastern Time). To participate in the teleconference call (in listen mode only), please dial 800-442-9683 at least five minutes before the start of the conference call. In addition, Handleman Company will simulcast the conference live via the Internet. The web cast can be accessed and will be available for 30 days on the investor relations page of Handleman Company's web site, http://www.handleman.com/ . A telephone replay of the conference call will be available until Friday, July 1, 2005 at midnight by calling 800-642-1687 (PIN Number 6569998).

About Handleman Company

Handleman Company is a category manager and distributor of prerecorded music to mass merchants in the United States, United Kingdom and Canada. As a category manager, the Company manages a broad assortment of titles to optimize sales and inventory productivity in retail stores and also provides direct-to- store shipments, marketing and in-store merchandising.

Forward-Looking and Cautionary Statements

Information in this press release contains forward-looking statements, which are not historical facts. These statements involve risks and uncertainties and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results, events and performance could differ materially from those contemplated by these forward- looking statements including, without limitation, risks associated with changes in the music industry, continuation of satisfactory relationships with existing customers and suppliers, establishing satisfactory relationships with new customers and suppliers, effects of electronic commerce inclusive of digital music distribution, dependency on technology, ability to control costs, relationships with the Company's lenders, pricing and competitive pressures, dependence on third-party carriers to deliver products to customers, the ability to secure funding or generate sufficient cash required to build and grow new businesses, the occurrence of catastrophic events or acts of terrorism, certain global and regional economic conditions, and other factors discussed in this press release and those detailed from time to time in the Company's filings with the Securities and Exchange Commission. Handleman Company notes that the preceding conditions are not a complete list of risks and uncertainties. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date of this press release.

Handleman Company Contact: Media Relations: Thomas Braum David Bassett Sr. Vice President and CFO (248) 855-6777, Ext. 132 (248) 362-4400, Ext. 718

Greg Mize, Fred Marx Vice President, Investor Relations (248) 855-6777, Ext. 131 (248) 362-4400, Ext. 211

- Tables Follow -

CONSOLIDATED STATEMENTS OF INCOME (amounts in thousands, except per share data)

Three Months Ended Year Ended April 30, 2005 May 1, 2004 April 30, 2005 May 1, 2004 (13 weeks) (13 weeks) (52 weeks) (52 weeks)

Revenues $273,916 $297,216 $1,260,585 $1,216,311

Costs and expenses Direct product costs 219,664 232,482 1,016,334 965,164 Selling, general and administrative expenses 48,193 56,962 193,412 199,969 Operating Income 6,059 7,772 50,839 51,178

Investment income, net 265 386 2,457 641

Income from continuing operations before income taxes 6,324 8,158 53,296 51,819

Income tax expense 1,768 2,096 18,413 17,831

Income from continuing operations 4,556 6,062 34,883 33,988

Income (loss) from discontinued operations, net of tax (204) (749) (687) 1,849

Net income $4,352 $5,313 $34,196 $35,837

Basic net income (loss) per share - From continuing operations $0.21 $0.25 $1.55 $1.39 - From discontinued operations (0.01) (0.03) (0.03) 0.07 Total basic net income per share $0.20 $0.22 $1.52 $1.46

Diluted net income (loss) per share - From continuing operations $0.21 $0.25 $1.54 $1.38 - From discontinued operations (0.01) (0.03) (0.03) 0.07 Total diluted net income per share $0.20 $0.22 $1.51 $1.45

Weighted average number of shares outstanding - basic 21,843 23,723 22,500 24,521

- diluted 22,061 23,972 22,584 24,661

CONSOLIDATED CONDENSED BALANCE SHEETS (amounts in thousands)

April 30, 2005 May 1, 2004 Assets Cash and cash equivalents $30,826 $63,813 Short-term investments -- 9,900 Accounts receivable, less allowances of $10,809 at April 30, 2005 and $10,606 at May 1, 2004 232,409 216,388 Merchandise inventories 115,672 105,472 Other current assets 12,954 13,581 Total current assets 391,861 409,154 Property and equipment, net of depreciation and amortization 60,180 62,124 Other assets, net 24,958 23,314 Total assets $476,999 $494,592

Liabilities Accounts payable $133,319 $129,776 Other current liabilities 31,019 46,501 Total current liabilities 164,338 176,277 Other liabilities 13,778 9,449 Total Liabilities 178,116 185,726

Shareholders' equity 298,883 308,866 Total liabilities and shareholders' equity $476,999 $494,592

ADDITIONAL INFORMATION FROM CONTINUING OPERATIONS (amounts in thousands)

Three Months Ended Year Ended April 30, 2005 May 1, 2004 April 30, 2005 May 1, 2004 (13 Weeks) (13 Weeks) (52 Weeks) (52 Weeks)

Income from continuing operations $4,556 $6,062 $34,883 $33,988 Investment income, net (265) (386) (2,457) (641) Income tax expense 1,768 2,096 18,413 17,831 Depreciation expense 4,535 4,171 17,636 15,948

Adjusted EBITDA* $10,594 $11,943 $68,475 $67,126

Additions to property and equipment $4,653 $5,738 $17,008 $23,227

*Adjusted EBITDA is computed as income from continuing operations less net investment income, plus income tax expense and depreciation expense.

Source: Handleman Company

CONTACT: Thomas Braum, Sr. Vice President and CFO, +1-248-362-4400, Ext. 718, Greg Mize, Vice President, Investor Relations, +1-248-362-4400, Ext. 211, both of Handleman Company; or Media Relations: David Bassett, +1-248-855-6777, Ext. 132, Fred Marx, +1-248-855-6777, Ext. 131, both for Handleman Company

Web site: http://www.handleman.com/

------- Profile: Ent