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), http://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, http://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. DATASOURCE: 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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