TROY, Mich., Dec. 6 /PRNewswire-FirstCall/ -- Handleman Company
(NYSE:HDL), http://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, http://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. DATASOURCE: 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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