TROY, Mich., June 28 /PRNewswire-FirstCall/ -- Handleman Company
(NYSE:HDL), http://www.handleman.com/, today announced results for
its fourth quarter and fiscal year ended April 28, 2007. Revenues
for the fiscal year ended April 28, 2007 ("fiscal 2007") were $1.32
billion, up slightly from $1.31 billion for the fiscal year ended
April 29, 2006 ("fiscal 2006"). Net loss for fiscal 2007 was $53.4
million or $2.65 per diluted share, compared to net income of $13.6
million or $.65 per diluted share for fiscal 2006. On a pro-forma
basis, the loss from continuing operations before income taxes for
fiscal 2007 was $25.7 million, compared to income of $12.5 million
for fiscal 2006. The GAAP loss from continuing operations before
income taxes for fiscal 2007 was $51.6 million, compared to GAAP
income of $17.4 million in fiscal 2006. The following table
reconciles GAAP income (loss) from continuing operations before
income taxes to pro-forma amounts. The items excluded from the
pro-forma amounts are not considered expenses of an ongoing nature.
Therefore, the Company believes the pro-forma amounts provide a
more meaningful picture of operating performance. Three Months
Ended * Fiscal Year Ended * April 28, April 29, April 28, April 29,
2007 2006 2007 2006 (Loss) income from continuing operations before
income taxes $(27,125) $(8,384) $(51,626) $17,375 Inventory
liquidation reserve resulting from the termination of the Company's
music supply agreement with ASDA 9,000 - 9,000 - Operating losses
due to start up expenses related to new business initiatives in the
United Kingdom 4,251 - 11,268 - Implementation and consulting
expenses related to the Company's cost savings initiatives 1,585 -
8,689 - Income from a CD anti-trust settlement (3,054) - (3,054)
(453) Gain on sale of investment in PRN - - - (4,390) Pro-forma
(loss) income from continuing operations before income taxes
$(15,343) (8,384) (25,723) 12,532 * Amounts in thousands Revenues
for the fourth quarter of fiscal 2007 were $268.5 million, compared
to $284.7 million for the fourth quarter of fiscal 2006. During the
fourth quarter of this year the Company had a net loss of $37.5
million or $1.85 per diluted share, compared to a net loss of $6.5
million or $.32 per diluted share for the fourth quarter of last
year. On a pro-forma basis, the loss from continuing operations
before income taxes for the fourth quarter of fiscal 2007 was $15.3
million. This compared to a pro-forma loss of $8.4 million for the
fourth quarter of last year. On a GAAP basis, loss from continuing
operations before income taxes was $27.1 million for the fourth
quarter of fiscal 2007, compared to a loss of $8.4 million for the
same period in fiscal 2006. Stephen Strome, the Company's Chairman
and CEO stated, "The financial results for fiscal 2007 were
disappointing and did not meet our expectations. In response, the
Company has implemented several programs to streamline costs,
including work force reductions, consolidation of distribution
facilities, reductions in benefit programs, and several initiatives
to lower customer product returns. The Company expects to realize
annual cost savings in excess of $20 million in fiscal 2008 as a
result of these initiatives. In addition, during the year we made
substantial investments, each aligned with our core competencies,
that diversify and strengthen the Company by adding new product
categories and new customers. In the United Kingdom we expanded our
operations to provide music, video and video games to Tesco PLC,
the UK's largest supermarket and general merchandise retailer. This
required substantial investments in advance of recognizing any
revenue. These changes will improve performance in fiscal 2008."
Fiscal 2007 Revenues for fiscal 2007 were $1.32 billion, compared
to $1.31 billion for fiscal 2006. Increased revenues during fiscal
2007 for console video game products and greeting cards offset
lower music revenues. -- Console video game revenues for fiscal
2007 were $219.7 million, an increase of $134.2 million over
revenues in fiscal 2006. The Company acquired Crave Entertainment
Group (Crave), a distributor of console video game products, in
late November 2005 and thus fiscal 2006 included less than six
months of revenues from such products. -- Greeting card revenues
during fiscal 2007 were $39.3 million, compared to $5.9 million in
fiscal 2006. The increase was due to expansion of the category
management and distribution of greeting cards to additional retail
stores. -- Music revenues of $947.6 million during fiscal 2007
declined $151.9 million, or 14%, from the prior year. The decrease
was due to continued weakness in the overall music industry and
reductions in CD store inventory levels by the Company's retail
customers. -- All other revenues, which include REPS service, DVDs
and children's books, were $117.8 million during fiscal year 2007,
compared to $121.5 million in fiscal 2006. The Company's gross
profit margin, as a percentage of revenues, was 15.2% for fiscal
2007, compared to 17.2% for fiscal 2006. The decline in the gross
profit margin percentage was due primarily to: -- an inventory
liquidation reserve of $9 million resulting from the termination of
the Company's music supply agreement with ASDA, and -- a change in
revenue mix to include a greater proportion of console video game
products, which generally earn a lower gross profit margin than the
Company's consolidated gross profit margin. Selling, general and
administrative (SG&A) expenses for fiscal 2007 were $247.6
million or 18.7% of revenues, compared to $210.0 million or 16.0%
of revenues for fiscal 2006. The dollar increase this year was due
to: -- an increase in Crave SG&A expenses of $9.8 million as
the result of a full year's expenses, compared to less than six
months during fiscal 2006, -- an increase in the amortization of
intangible assets related to the acquisition of Crave of $5.3
million. -- start-up costs in the UK of $8.2 million related to the
new business arrangement with Tesco, -- expenses of $10.7 million
relating to the Company's greeting card business in the UK, and --
an increase in lending and related fees of $2.6 million, as a
result of changes in the Company's credit agreement. In the
Company's U.S. operations, SG&A cost savings from the expense
reduction programs during the fiscal year were substantially offset
by implementation and related consulting expenses. However, the
Company expects to realize annual cost savings during its fiscal
year 2008 in excess of $20 million as a result of these programs
initiated in fiscal 2007. Interest expense for fiscal 2007
increased to $8.0 million from $4.8 million for fiscal 2006. This
year-over-year change was primarily due to increased borrowings
mainly related to the financing of the Crave acquisition.
Investment income for fiscal 2007 decreased to $2.0 million from
$6.7 million for fiscal 2006. During fiscal 2006, the Company
recorded investment income of $4.4 million related to gains on the
sale of an investment in PRN, a company that provides in-store
media networks. Income tax expense for fiscal 2007 was $1.8
million, despite a loss from continuing operations before income
taxes of $51.6 million. During fiscal 2007 the Company recognized
income tax expenses in excess of tax benefits due to: -- recording
a valuation allowance of $11.5 million on deferred tax assets,
primarily related to net operating losses in the UK, -- recording a
valuation allowance of $3.8 million on foreign tax credits, and --
additional tax expense of $1.4 million related to non-deductible
stock-based compensation expense. The low effective income tax rate
for fiscal 2006 of 14.7% was due to the utilization of capital
losses and other tax benefits. A normal tax rate for the Company is
approximately 36%. Fourth Quarter of Fiscal 2007 Revenues for the
fourth quarter of fiscal 2007 were $268.5 million, compared to
$284.7 million for the fourth quarter of fiscal 2006. During the
fourth quarter of fiscal 2007 console video game revenues were
$55.2 million, an increase of $23.5 million or 74% over the fourth
quarter of last year. The increase this year was due in part to an
increase in consumer demand for console video game products driven
by the introduction of two new hardware platforms, Sony's
PlayStation 3 and Nintendo's Wii, in late calendar 2006. Greeting
card revenues of $12.8 million during the fourth quarter of fiscal
2007 increased $9.7 million due to expanding the category
management and distribution to additional retail stores. These
gains somewhat offset lower music revenues of $48.8 million, caused
by a reduction in retail store CD inventory levels and continued
softness in the music industry. The Company's gross profit margin,
as a percentage of revenues, was 15.7% for the fourth quarter of
fiscal 2007, compared to 17.4% for the fourth quarter of last year.
The lower gross profit margin this year was due to the
establishment of an inventory liquidation reserve of $9.0 million
as a result of the termination of the music supply agreement with
ASDA, offset in part by income from a CD anti-trust settlement of
$3.1 million. SG&A expenses for the fourth quarter of fiscal
2007 were $67.8 million or 25.3% of revenues, compared to $56.1
million or 19.7% of revenues for the same quarter of last year. The
fourth quarter this year included $4.3 million of expenses related
to new business initiatives in the UK, an increase of $2.0 million
in lending and related fees as a result of changes in the Company's
credit agreement, and implementation expenses of $1.6 million
related to the Company's cost savings initiatives. Income tax
expense for the fourth quarter of fiscal 2007 was $10.4 million,
despite a loss from continuing operations before income taxes of
$27.1 million. The income tax expense was a result of income tax
adjustments explained earlier in this press release. Stephen Strome
added: "Performance in fiscal 2007 was unacceptable. Therefore,
during the year we implemented several initiatives that will
diversify our customer base and products, reduce costs and improve
performance. In addition, the console video game industry is
expected to grow over 10% in calendar 2007, and will drive our
revenues of these products higher. As we begin our fiscal year
2008, we are confident that the plans we put in place will improve
our performance and operating results." Call Notice Handleman
Company will host a conference call to discuss the fourth quarter
and fiscal year 2007 financial and operating results on Friday,
June 29, 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, http://www.handleman.com/. A telephone replay of the
conference call will be available until Friday, July 6, 2007 at
midnight by calling 800- 642-1687 (PIN Number 4745359). 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
termination of the Company's music supply agreement with ASDA,
achieving the business integration objectives expected with the
Crave Entertainment Group acquisition, changes in the music and
video game industries, continuation of satisfactory relationships
with existing customers and suppliers, establishing satisfactory
relationships with new customers, including Tesco, PLC, and
suppliers, effects of electronic commerce inclusive of digital
music distribution, success of new music and video game releases,
dependency on technology, ability to control costs, relationships
with the Company's lenders, complying with the covenants in the
lending agreements, 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
sustain existing businesses while investing in and developing 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. CONSOLIDATED STATEMENTS OF INCOME (amounts in
thousands, except per share data) (unaudited) Three Months Year
ended (13 Weeks) Ended (52 Weeks) Ended April 28, April 29, April
28, April 29, 2007 2006 2007 2006 Revenues $268,543 $284,735
$1,324,483 $1,312,404 Costs and expenses: Direct product costs
(226,420) (235,282) (1,122,554) (1,086,928) Selling, general and
administrative expenses (67,846) (56,078) (247,611) (210,029)
Operating (loss) income (25,723) (6,625) (45,682) 15,447 Interest
expense (2,037) (2,105) (7,984) (4,808) Investment income 635 346
2,040 6,736 (Loss) income from continuing operations before income
taxes (27,125) (8,384) (51,626) 17,375 Income tax (expense) benefit
(10,352) 2,738 (1,802) (2,557) (Loss) income from continuing
operations (37,477) (5,646) (53,428) 14,818 (Loss) from
discontinued operations, net of taxes - (888) - (1,250) Net (loss)
income $(37,477) $(6,534) $(53,428) $13,568 Basic net (loss) income
per share: - From continuing $ (1.85) $ (.28) $ (2.65) $ .71
operations - From discontinued operations $ - $ (.04) $ - $ (.06)
Total basic net (loss) income per share $ (1.85) $ (.32) $ (2.65) $
.65 Diluted net (loss) income per share - From continuing
operations $ (1.85) $ (.28) $ (2.65) $ .71 - From discontinued
operations - (.04) - (.06) Total diluted net (loss) income per
share $ (1.85) $ (.32) $ (2.65) $ .65 Weighted average number of
shares outstanding - basic 20,217 20,311 20,149 20,806 - diluted
20,217 20,311 20,149 20,962 CONSOLIDATED CONDENSED BALANCE SHEETS
(amounts in thousands) (unaudited) April 28, 2007 April 29, 2006
Assets Cash and cash equivalents $18,457 $10,346 Accounts
receivable 236,069 257,942 Merchandise inventories 115,535 128,844
Other current assets 17,713 9,898 Total current assets 387,774
407,030 Property and equipment, net of depreciation and
amortization 65,128 54,099 Other assets, net 93,549 113,902 Total
assets $546,451 $575,031 Liabilities Debt, current $106,897 $3,960
Accounts payable 159,444 144,401 Other current liabilities 31,163
30,326 Total current liabilities 297,504 178,687 Debt, non-current
- 83,600 Other liabilities 9,402 15,755 Shareholders' equity
239,545 296,989 Total liabilities and shareholders' equity $546,451
$575,031 ADDITIONAL INFORMATION FROM CONTINUING OPERATIONS (amounts
in thousands) Three Months Twelve Months (13 Weeks) Ended (52
Weeks) Ended Apr. 28, Apr. 29, Apr. 28, Apr. 29, 2007 2006 2007
2006 (Loss) income from continuing operations $(37,477) $(5,646)
$(53,428) $14,818 Investment income (635) (346) (2,040) (6,736)
Interest expense 2,037 2,105 7,984 4,808 Income tax expense
(benefit) 10,352 (2,738) 1,802 2,557 Depreciation/ amortization
expense 5,919 5,610 24,357 19,645 Recoupment of license advances
1,310 1,790 7,324 3,419 Adjusted EBITDA* $(18,494) $775 $(14,001)
$38,511 Additions to property and equipment $3,591 $1,387 $26,824
$10,387 * Adjusted EBITDA is computed as (loss) income from
continuing operations, less investment income and income tax
benefit, plus interest expense, income tax expense, depreciation
and amortization expense, and recoupment of license advances.
DATASOURCE: Handleman Company CONTACT: Thomas Braum, Executive Vice
President and CFO, +1-248-362-4400, Ext. 718, or Greg Mize, Vice
President, Investor Relations, and Treasurer, +1-248-362-4400, Ext.
211, both of Handleman Company Web site: http://www.handleman.com/
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