TROY, Mich., March 7 /PRNewswire-FirstCall/ -- Handleman Company , http://www.handleman.com/, today announced results for its third quarter of fiscal year 2007, which ended January 31, 2007.
Revenues for the third quarter of this year were $485.0 million, equal to revenues of the third quarter of last year. Net income for the third quarter was $4.2 million or $.21 per diluted share, compared to $14.0 million or $.68 per diluted share for the same quarter of last year. On a pro-forma basis, net income for the third quarter of this fiscal year was $7.3 million or $.36 per diluted share. Pro-forma net income excludes start-up costs related to new business initiatives in the Company's United Kingdom (UK) operation and implementation expenses related to the Company's cost saving initiatives.
Stephen Strome, the Company's Chairman and CEO stated, "Results for this fiscal year have not met our expectations. However, the Company has several initiatives underway to improve results by leveraging its core competencies into new product categories and with new customers. During this fiscal year we have made substantial investments to expand our operations in the United Kingdom to provide music, video and video games to Tesco PLC, the UK's largest supermarket and general merchandise retailer. These include leasing a distribution facility in the UK, installing new automated distribution equipment, as well as hiring and training staff. Shipping to this new customer will begin in April. In addition, earlier this fiscal year we added greeting cards to our product assortment in the UK. We also have taken several steps to improve our performance and streamline our operations. These included work force reductions as well as several initiatives to lower customer product returns. The Company expects to realize annual cost savings of at least $20 million as its fiscal year 2008 begins."
The following table reconciles GAAP net income (loss) to pro-forma amounts. The Company believes the pro-forma amounts provide a meaningful comparison of operating performance between the third quarters and nine months of fiscal 2007 and 2006.
Three Months Ended * Nine Months Ended *
Jan 31, Jan 31, Jan 31, Jan 31,
2007 2006 2007 2006
Net income (loss) $4,229 $13,976 $(15,951) $20,102
Start up expenses related to
new business initiatives in
the United Kingdom 2,624 - - 4,632 - -
Implementation and consulting
expenses related to the
Company's cost
savings initiatives 399 - - 4,689 - -
Gain on sale of investment in
PRN - - - - - - (2,440)
Tax benefit due to utilization
of capital losses and other
benefits - - - - - - (3,146)
Pro-forma net income (loss) $7,252 $13,976 $(6,630) $14,516
Pro-forma net income (loss)
per diluted share $.36 $.68 $( .33) $.69
* Amounts in thousands, except per share data. Amounts are after tax.
Revenues for the third quarter of this year and last year were $485.0 million. During the third quarter of this year:
* Crave Entertainment Group (Crave), which was acquired approximately
three weeks after the start of the Company's fiscal third quarter last
year, had revenues of $88.5 million compared to $53.8 million last year.
The increase of $34.7 million was primarily due to the three weeks of
additional operations in this year's third quarter.
* Music revenues in the Company's United States, UK, and Canadian
operations of $331.5 million were down $46.0 million, or 12.2% from the
third quarter of last year. The overall music industry experienced a
similar sales decline of physical product during this period in each of
these markets.
* Other revenues, which primarily consist of REPS in-store service
revenues, and category management and distribution of greeting cards and
DVD's in the UK, were $65.0 million for the third quarter of this year,
up $11.2 million or 20.9% from the same period of last year. The
increase was due to expanding the category management and distribution
of greeting cards, offset in part by lower DVD and in-store service
revenues.
The Company's gross profit margin, as a percentage of revenues, was 14.9% for the third quarter of this year, compared to 16.8% for the third quarter of last year. The decline in the gross profit margin percentage was primarily due to Crave, whose products generally earn a lower gross profit margin than the Company's consolidated gross profit margin. Crave also incurred a $1.8 million charge to adjust its prepaid license advances and software development costs to net realizable value in the third quarter of this fiscal year, which also had a negative impact on margins.
Selling, general and administrative expenses for the third quarter of this year were $64.6 million or 13.3% of revenues, compared to $59.1 million or 12.2% of revenues last year. The dollar increase this year was due to start up expenses of $7.3 million related to the Company's new business initiatives in the UK.
Call Notice
Handleman Company will host a conference call to discuss the third quarter of fiscal year 2007 financial and operating results on Thursday, March 8, 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 Wednesday March 14, 2007 at midnight by calling 800-642- 1687 (PIN Number 1381228).
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 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, 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 Nine Months
(13 Weeks) Ended (39 Weeks) Ended
Jan 31, Jan 31, Jan 31, Jan 31,
2007 2006 2007 2006
Revenues $485,025 $485,021 $1,055,940 $1,027,669
Costs and expenses:
Direct product costs (412,570) (403,643) (896,134) (851,646)
Selling, general and
administrative expenses (64,642) (59,098) (179,765) (153,951)
Operating income (loss) 7,813 22,280 (19,959) 22,072
Interest expense (2,671) (2,455) (5,947) (2,703)
Investment income 929 1,320 1,405 6,390
Income (loss) from continuing
operations before income taxes 6,071 21,145 (24,501) 25,759
Income tax (expense) benefit (1,842) (7,169) 8,550 (5,295)
Income (loss) from continuing
operations 4,229 13,976 (15,951) 20,464
Loss from discontinued
operations, net of taxes - - - - - - (362)
Net income (loss) $4,229 $13,976 $(15,951) $20,102
Basic net income (loss) per
share:
- From continuing
operations $.21 $.69 $(.79) $.98
- From discontinued - - - - - -
operations - - - - - - (.02)
Total basic net income (loss)
per share $.21 $.69 $(.79) $.96
Diluted net income (loss) per
share
- From continuing
operations $.21 $.68 $(.79) $.97
- From discontinued
operations - - - - - - (.02)
Total diluted net income
(loss) per share $. 21 $.68 $(.79) $.95
Weighted average number of
shares outstanding
- basic 20,163 20,398 20,102 20,959
- diluted 20,201 20,692 20,102 21,167
CONSOLIDATED CONDENSED BALANCE SHEETS
(amounts in thousands)
(unaudited)
January 31, 2007 January 31, 2006
Assets
Cash and cash equivalents $3,230 $8,217
Accounts receivable 300,506 336,226
Merchandise inventories 143,043 193,191
Other current assets 19,988 15,711
Total current assets 466,767 553,345
Property and equipment, net of
depreciation and amortization 65,532 57,046
Other assets, net 106,961 103,572
Total assets $639,260 $713,963
Liabilities
Debt, current $88,894 $5,385
Accounts payable 230,071 266,443
Other current liabilities 22,576 35,811
Total current liabilities 341,541 307,639
Debt, non-current - - 97,000
Other liabilities 14,189 14,971
Shareholders' equity 283,530 294,353
Total liabilities and
shareholders' equity $639,260 $713,963
ADDITIONAL INFORMATION FROM CONTINUING OPERATIONS (amounts in thousands)
Three Months Nine Months
(13 Weeks) Ended (39 Weeks) Ended
Jan. 31, Jan. 31, Jan. 31, Jan. 31,
2007 2006 2007 2006
Income (loss) from
continuing operations $4,229 $13,976 $(15,951) $20,464
Investment income (929) (1,320) (1,405) (6,390)
Interest expense 2,671 2,455 5,947 2,703
Income tax expense
(benefit) 1,842 7,169 (8,550) 5,295
Depreciation/amortization
expense 5,731 5,166 18,438 14,035
Recoupment of license
advances 2,993 1,629 6,014 1,629
Adjusted EBITDA* $16,537 $29,075 $4,493 $37,736
Additions to property and
equipment $12,308 $1,408 $23,233 $9,000
*Adjusted EBITDA is computed as income (loss) 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.
