Handleman Company Reports Second Quarter Fiscal Year 2008 Results

Handleman Company Reports Second Quarter Fiscal Year 2008 Results

TROY, Mich., Dec. 6 /PRNewswire-FirstCall/ -- Handleman Company (NYSE:HDL) , www.handleman.com, today announced results for its second quarter of fiscal year 2008, which ended October 27, 2007.

        Revenues for the second quarter of this fiscal year were $315.5        million, compared to $330.5 million for the second quarter of last        year.         Loss before income taxes for the second quarter of this year was        $15.0 million, compared to a loss of $8.2 million for the second        quarter of last year.         Net loss for the second quarter of this year was $15.9 million or        $.78 per diluted share, compared to a net loss of $14.2 million or        $.70 per diluted share for the same quarter of last year.    

The Company believes certain categories of expense, in both this year and last year, should be excluded in order to provide a meaningful comparison of operating performance. These consist of consulting and implementation expenses related to the Company's cost saving initiatives; foreign exchange gains or losses (primarily on inter-company accounts receivable / payable balances); loss on an investment in, and loan receivable from, a digital content management company; and start-up costs related to new business initiatives in the United Kingdom (UK). Excluding these categories, pro-forma loss before income taxes for the second quarter of this fiscal year was $1.5 million, compared to a pro-forma loss before income taxes of $2.6 million for the second quarter of last year.

The following table reconciles GAAP loss before income taxes to pro-forma amounts.

                                Three Months Ended *     Six Months Ended *                                 Oct 27,    Oct 28,       Oct 27,     Oct 28,                                  2007       2006          2007        2006    Loss before income taxes   $(15,031)   $(8,173)     $(32,696)    $(30,572)    Implementation and    consulting expenses    related to the Company's    cost savings initiatives     5,280      3,420         6,561        6,392    Loss on an investment in,    and a receivable from, a    digital content management    company                      6,621        - -         6,621          - -    Foreign exchange losses /    (gains) primarily on    inter-company accounts    receivable / payable    balances                     1,585       (273)        1,839         (498)    Start-up losses related to    new business initiatives    in the UK                      - -      2,466           - -        2,937    Pro-forma loss before    income taxes               $(1,545)   $(2,560)     $(17,675)    $(21,741)    * Amounts in thousands    

Second quarter revenues this year were $315.5 million, a decline of $15.0 million or 5% from the same period of last year. Revenues for the second quarters of this year and last year are summarized below.

                                                         Three Months Ended *                                                          Oct 27,     Oct 28,                                                           2007         2006   Revenues      Category management - primarily music and video    $216,513     $280,110     Greeting cards                                       17,742            0     Fee for services                                     16,021        5,242     Video game related distribution                      65,253       45,157      Total revenues                                     $315,529     $330,509    * Amounts in thousands       -- The decline in category management revenues for music, video and        other products was primarily due to lower music sales in the United        States and Canada, as well as the termination of the Company's supply        agreement with ASDA in the UK at the end of August 2007.     -- Greeting card revenues began in the second half of fiscal 2007.     -- The increase in fee for service revenues was due to an agreement that        began during the latter part of fiscal 2007 to distribute and service        entertainment products for a key retailer in the UK.     -- The increase in video game revenues was mainly attributable to the        release of new platforms in the video game industry.    

On November 28, 2007 the Company announced the election of Albert A. Koch to President and Chief Executive Officer, succeeding Stephen Strome.

Mr. Koch said, "The Company's performance in the second quarter underscores the need to accelerate the pace of change and restore profitability. At a time when the music industry is undergoing dramatic change, Handleman must continue to expand its horizons and pursue opportunities to grow revenues and profit margins, while keeping costs under control. To this end, I am encouraged by the diversification efforts the Company has achieved by adding greeting cards, fee for service and console video game revenues. We will continue to monitor these businesses closely and investigate ways to improve their performance."

The Company's gross profit margin, as a percentage of revenues, was 17.4% for the second quarter of this year, compared to 15.7% for the second quarter of last year. The increase in the gross profit margin percentage was primarily the result of increases in higher margin service revenues and internally developed video game software revenues.

Selling, general & administrative expenses for the second quarter of this year were $63.6 million or 20.2% of revenues, compared to $58.9 million or 17.8% of revenues last year. The dollar increase this year was primarily due to:

     -- The write-off of a loan receivable balance of $3.2 million from a        digital content management company, in which the Company has an        equity investment.     -- Foreign exchange net losses, primarily on inter-company accounts        receivable/payable balances, of $1.6 million this year, compared to a        net foreign exchange gain of $273,000 last year.     -- Implementation and consulting expenses related to the Company's cost        savings initiatives of $5.3 million this year, compared to $3.4        million last year.     -- Expenses related to the Company's new businesses in the UK.    

Investment loss for the second quarter of this year was $3.1 million compared to investment income of $470,000 in the second quarter of last year. During the second quarter of this year the Company wrote down its investment in a digital content management company by $3.5 million and now has a remaining investment of $497,000. The Company acquired a minority interest in this start-up venture in 2005 as part of its strategy to diversify and participate in the digital distribution of entertainment products.

Interest expense for the second quarter of this year was $3.1 million, compared to $1.5 million in the second quarter of last year. The higher expense this year was related to an increased level of borrowings and higher interest rates.

Income tax expense for the second quarter of this year was $846,000 despite a loss before income taxes of $15.0 million. The expense this year was due to income taxes payable in tax jurisdictions where the Company was profitable and tax expense related to reserves provided for uncertain tax benefits. The requirement to record valuation allowances negated recognizing any tax carryforward benefits the Company may realize from losses incurred in other tax jurisdictions. However, the income tax benefits remain available to offset income tax liabilities the Company may incur on potential future earnings. For the second quarter of last year, the Company incurred an income tax expense of $6.1 million, despite a pretax loss of $8.2 million. This expense eliminated a substantial portion of the income tax benefit recorded during the first quarter of last year.

Revenues for the first six months this year were $589.7 million, up $18.8 million or 3% from the same period last year. The increase was due to higher revenues from video games, greeting cards and fee for service, offset in part by lower music revenues. Net loss was $33.6 million or $1.66 per diluted share this year, compared to a net loss of $20.2 million or $1.00 per diluted share last year. On a pro-forma basis, loss before income taxes for the first six months of this year was $17.7 million, compared to a loss of $21.7 million for the first six months of last year. A reconciliation of GAAP losses to pro- forma amounts for the six month period appears in a table earlier in this release.

Call Notice

Handleman Company will host a conference call to discuss the second quarter of fiscal year 2008 financial and operating results on Thursday, December 6, 2007 at 11:00 a.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, www.handleman.com. A telephone replay of the conference call will be available until Monday, December 10, 2007 at midnight by calling 800-642-1687 (PIN Number 24826105).

About Handleman Company:

Handleman Company is a category manager and distributor of prerecorded music and console video game hardware, software and accessories to leading retailers 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. Services offered include product selection, 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 the Company's responsibilities required under its agreement with Tesco PLC, improving operating performance after the termination of the Company's music supply agreement with ASDA and generating cash from reducing working capital investment, the ability to secure funding or generate sufficient cash required to build and grow other new businesses, achieving the business integration objectives expected with the Crave Entertainment Group and REPS acquisitions, achievement of cost saving strategies identified or in the process of being implemented, changes in the music and console video game industries, 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 and console video game distribution, success of new music and video game releases, dependency on technology, ability to control costs, relationships with the Company's lenders, pricing and competitive pressures, successfully executing new business initiatives, dependence on third-party carriers to deliver products to customers, the occurrence of catastrophic events or acts of terrorism, retaining and/or recruiting key executives, 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.

                   CONSOLIDATED STATEMENTS OF OPERATIONS               (amounts in thousands, except per share data)                                (unaudited)                                      Three Months            Six Months                                  (13 Weeks) Ended        (26 Weeks) Ended                                  Oct. 27,   Oct. 28,     Oct. 27,   Oct. 28,                                    2007      2006          2007       2006    Revenues                      $315,529   $330,509     $589,713   $570,915    Costs and expenses     Direct product costs        (260,726)  (278,750)    (493,221)  (483,564)     Selling, general and      administrative expenses     (63,604)   (58,907)    (121,123)  (115,123)   Operating loss                  (8,801)    (7,148)     (24,631)   (27,772)    Interest expense                (3,090)    (1,495)      (6,374)    (3,276)   Investment (loss) / income      (3,140)       470       (1,691)       476   Loss before income taxes       (15,031)    (8,173)     (32,696)   (30,572)    Income tax (expense) benefit      (846)    (6,064)        (897)    10,392    Net loss                      $(15,877)  $(14,237)    $(33,593)  $(20,180)    Weighted average number of     shares outstanding      - basic                      20,359     20,268       20,286     20,197      - diluted                    20,359     20,268       20,286     20,197    Net loss per share       - basic                      $(.78)     $(.70)      $(1.66)    $(1.00)       - diluted                    $(.78)     $(.70)      $(1.66)    $(1.00)                      CONSOLIDATED CONDENSED BALANCE SHEETS                           (amounts in thousands)                                (unaudited)                                            Oct. 27, 2007       Oct. 28, 2006   Assets        Cash and cash equivalents               $3,973              $16,875        Accounts receivable, less allowances         of $14,493 at October 27, 2007 and    252,078              291,066         $16,309 at October 28, 2006        Merchandise inventories                151,954              211,395        Other current assets                    35,204               17,390            Total current assets               443,209              536,726        Property and equipment, net of         depreciation and amortization          60,535               56,885        Other assets, net                       86,729              110,527            Total assets                      $590,473             $704,138    Liabilities        Debt, current                         $114,440              $96,560        Accounts payable                       218,613              289,074        Other current liabilities               39,619               23,943            Total current liabilities          372,672              409,577        Other liabilities                        8,937               15,901    Shareholders' equity                        208,864              278,660            Total liabilities and                 shareholders' equity         $590,473             $704,138                  ADDITIONAL INFORMATION (amounts in thousands)                                    Three Months             Six Months                                 (13 Weeks) Ended        (26 Weeks) Ended                                  Oct. 27,   Oct. 28,     Oct. 27,   Oct. 28,                                   2007       2006         2007       2006    Net loss                     $(15,877)  $(14,237)    $(33,593)  $(20,180)       Investment loss /(income)   3,140       (470)       1,691       (476)       Interest expense            3,090      1,495        6,374      3,276       Income tax expense (benefit)  846      6,064          897    (10,392)       Depreciation/amortization        expense                    5,902      6,313       12,306     12,707       Recoupment of development        costs and acquired rights  2,799      2,397        3,999      3,021       Loss on disposal of        property and equipment       847        159          886        243   Adjusted EBITDA                  $747     $1,721      $(7,440)  $(11,801)         Additions to property and         equipment                $2,412     $6,645       $3,627    $10,925    *  Adjusted EBITDA is computed as loss from continuing operations less      investment income and income tax benefit, plus investment loss,      interest expense, income tax expense, depreciation and amortization      expense, recoupment of development costs and acquired rights and loss      on disposal of property and equipment.  

First Call Analyst:
FCMN Contact:

Source: Handleman Company

CONTACT: Thomas Braum Executive Vice President and CFO, Ext. 718; Greg
Mize, Vice President of Investor Relations and Treasurer, Ext. 211, both of
Handleman Company, +1-248-362-4400

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

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Profile: International Entertainment