Handleman Company Reports Third Quarter Fiscal Year 2008 Results

Handleman Company Reports Third Quarter Fiscal Year 2008 Results

Company Enters Into Amendment To Credit Agreements To Provide Sufficient Liquidity As It Develops Long-Term Business Plan Over Next Three Months

TROY, Mich., March 11 /PRNewswire-FirstCall/ -- Handleman Company (NYSE:HDL), www.handleman.com, today announced results for its third quarter of fiscal year 2008, which ended January 31, 2008. The Company also announced that it has entered into an amendment to its credit agreements that, at its request, is intended to provide sufficient liquidity to fund the Company's day-to-day operations through May 31, 2008. Handleman intends to use this three-month period to finalize its fiscal 2009 business plan and then revise the terms of its credit agreements based on that plan.

Revenues for the third quarter of this fiscal year were $346.9 million, compared to $485.0 million for the third quarter of last year. The decline in revenue was due primarily to the termination of the Company's unprofitable music supply agreement with ASDA in the United Kingdom (UK) at the end of August 2007 as well as lower music sales in the United States. This decline was offset somewhat by an increase in higher margin fee-for-services and video game revenues. Operating income for the third quarter of this year was $8.0 million, compared to $7.8 million for the third quarter of last year. Net income for the third quarter of this year was $2.4 million or $.12 per diluted share, compared to $4.2 million or $.21 per diluted share for the same quarter of last year.

Albert A. Koch, President and Chief Executive Officer of Handleman, said, "Handleman's financial results in the third quarter are indicative of the considerable challenges the Company is facing as it continues to contend with rapid and dramatic change in the music industry. We are mindful of the changes underway in the music industry and, accordingly, we are focused on diversification of our revenue base, controlling costs and finding other opportunities to leverage our core competencies."

He continued, "We are pleased to have entered into an amendment to our credit agreements that we believe will provide sufficient liquidity during the next three months as we put the final touches on our fiscal 2009 operating plan and then revise our long-term credit agreements based on that plan. We appreciate the ongoing support of our customers and vendors as we pursue actions intended to ensure that the Company operates successfully in the future."

Financial Results

Third quarter revenues this year were $346.9 million, a decline of $138.1 million from the same period of last year. Revenues for the third quarters of this year and last year are summarized below.

Three Months Ended *

Jan 31, 2008 Jan 31, 2007
Revenues

Category management (primarily music) $207,554 $369,399
Greeting cards 20,289 20,494
Fee-for-services 23,240 6,618
Video game related distribution 95,807 88,514

Total revenues $346,890 $485,025

* Amounts in thousands

-- The decline in category management revenues was primarily due to the
termination of the Company's music supply agreement with ASDA in the
UK at the end of August 2007 as well as lower music sales in the
United States.
-- Greeting card revenues, which began as a test within the Company's UK
operation in the second half of fiscal 2007, were down slightly from
the previous year. The Company will discontinue handling this product
category at the end of April 2008 due to its customer's desire to work
directly with the greeting card manufacturer.
-- The increase in fee-for-services 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 and the success of
internally developed and exclusive distribution video game software
titles.

The Company's gross profit margin, as a percentage of revenues, was 19.0% for the third quarter of this year, compared to 14.9% for the third quarter of last year. The increase this year was primarily due to an increase in fee- for-services revenues, which carry a higher gross profit margin than the Company's consolidated margin, and a higher gross profit margin within the Company's console video game operation. The higher console video game margin was predominantly due to higher revenues from internally developed and exclusive distribution video game software titles.

Selling, general & administrative expenses for the third quarter of this year were $57.9 million or 16.7% of revenues, compared to $64.6 million or 13.3% of revenues last year. The dollar decrease this year was primarily due to lower SG&A expense resulting from the termination of the Company's music supply agreement with ASDA in the UK and a result of the Company's cost savings initiatives.

Revenues for the first nine months this year were $936.6 million compared to $1.1 billion for the same period last year. The decrease was due to the termination of the Company's music supply agreement in the UK and lower music sales in the United States, offset in part by higher video games and fee-for- services revenues. Net loss was $31.2 million or $1.54 per diluted share this year, compared to a net loss of $16.0 million or $.79 per diluted share last year.

Liquidity Update

As of January 31, 2008, the Company had excess availability under its credit agreements to borrow an additional $5.6 million. After the holiday season, as anticipated, the Company experienced a significant reduction in its collateral assets (accounts receivable and inventory), primarily due to its collection of accounts receivable balances and an overall reduction in inventory levels. At the same time, the Company had a significant increase in its cash position. This reduction in collateral assets led to a default in an affirmative covenant related to the Company having sufficient collateral assets to support its outstanding debt. The Company's request for an amendment had been discussed with the Company's lenders well in advance of the default.

On March 11, 2008, the Company entered into a fifth amendment to its credit agreements. The Company believes its credit agreements, as amended, along with cash provided from operations, will provide sufficient liquidity to fund the Company's day-to-day operations through May 31, 2008. This amendment will assist both the Company and its lenders in negotiating longer term agreements with terms that are mutually acceptable.

During the next three months the Company expects to complete its fiscal 2009 business plan and projected cash flows, which the Company will use in attempting to negotiate a new amendment. While Handleman intends to revise the terms of its credit agreements based on its fiscal 2009 budget plan, the Company cannot make any assurances that it will reach an agreement with its lenders. If the Company cannot reach an agreement with its lenders and the lenders exercise their rights to accelerate the payment of the outstanding loan balance, then the Company will not have sufficient liquidity to fund its day-to-day operations.

Call Notice

Handleman Company will host a conference call to discuss the third quarter of fiscal year 2008 financial and operating results on Wednesday, March 12, 2008 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 Friday, March 14, 2008 at midnight by calling 800-642-1687 (PIN Number 32764806).

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, the ability to secure funding beyond the Company's fifth amendment, the ability to comply with all lending covenants, 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 maintain, build or grow its business, 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 Nine Months
(14/13 Weeks) Ended (40/39 Weeks) Ended
Jan. 31, Jan. 31, Jan. 31, Jan. 31,
2008 2007 2008 2007

Revenues $346,890 $ 485,025 $936,603 $1,055,940

Costs and expenses
Direct product
costs (280,939) (412,570) (774,160) (896,134)
Selling, general and
administrative
expenses (57,931) (64,642) (179,054) (179,765)
Operating income
(loss) 8,020 7,813 (16,611) (19,959)

Interest expense (3,488) (2,671) (9,862) (5,947)
Investment (loss) /
income (195) 929 (1,886) 1,405
Income (loss) before
income taxes 4,337 6,071 (28,359) (24,501)

Income tax (expense)
benefit (1,932) (1,842) (2,829) 8,550

Net income (loss) $2,405 $4,229 $(31,188) $(15,951)

Weighted average
number of shares
outstanding - basic 20,357 20,163 20,315 20,102
- diluted 20,357 20,201 20,315 20,102

Net income (loss)
per share - basic $.12 $.21 $(1.54) $(.79)
- diluted $.12 $.21 $(1.54) $(.79)

CONSOLIDATED CONDENSED BALANCE SHEETS
(amounts in thousands)
(unaudited)

Jan. 31, 2008 Jan. 31, 2007
Assets
Cash and cash equivalents $32,406 $3,230
Accounts receivable, less allowances of
$12,649 at January 31, 2008 and $16,426 at
January 31, 2007 175,423 300,506
Merchandise inventories 116,941 143,043
Other current assets 17,263 19,988
Total current assets 342,033 466,767
Property and equipment, net of
depreciation and amortization 56,835 65,532
Other assets, net 84,937 106,961
Total assets $483,805 $ 639,260

Liabilities
Debt, current $90,000 $88,894
Accounts payable 145,523 230,071
Other current liabilities 31,260 22,576
Total current liabilities 266,783 341,541
Other liabilities 8,284 14,189

Shareholders' equity 208,738 283,530
Total liabilities and
shareholders' equity $483,805 $ 639,260

ADDITIONAL INFORMATION (amounts in thousands)

Three Months Nine Months
(14/13 Weeks) Ended (40/39 Weeks) Ended
Jan. 31, Jan. 31, Jan. 31, Jan. 31,
2008 2007 2008 2007

Net income (loss) $2,405 $4,229 $(31,188) $(15,951)
Investment loss / (income) 195 (929) 1,886 (1,405)
Interest expense (income) 3,488 2,671 9,862 5,947
Income tax expense (benefit) 1,932 1,842 2,829 (8,550)
Depreciation/amortization
expense 5,519 5,731 17,825 18,438
Recoupment of development
costs and acquired rights 3,728 2,993 7,727 6,014
Loss on disposal of
property and equipment 1,446 351 2,332 609
Adjusted EBITDA $18,713 $16,888 $11,273 $5,102

Additions to property
and equipment $2,328 $12,308 $5,955 $23,233

* Adjusted EBITDA is computed as net income (loss) 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: Khaled Haram, Senior Vice President and CFO, +1-248-362-4400
Ext. 8765, or Greg Mize, Vice President of Investor Relations and Treasurer,
+1-248-362-4400 Ext. 211, both of Handleman Company

Web site:

http://www.handleman.com/

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