HANDLEMAN CO /MI/, DEF 14A, 1999-08-09

HANDLEMAN CO /MI/
DEF 14A, 1999-08-09
DURABLE GOODS, NEC

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<PAGE> 1

SCHEDULE 14A
(RULE 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))

[X] Definitive Proxy Statement

[ ] Definitive Additional Materials

[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

Handleman Company
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.

(1) Title of each class of securities to which transaction applies:

- --------------------------------------------------------------------------------

(2) Aggregate number of securities to which transaction applies:

- --------------------------------------------------------------------------------

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):

- --------------------------------------------------------------------------------

(4) Proposed maximum aggregate value of transaction:

- --------------------------------------------------------------------------------

(5) Total fee paid:

- --------------------------------------------------------------------------------

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.

(1) Amount previously paid:

- --------------------------------------------------------------------------------

(2) Form, schedule or registration statement no.:

- --------------------------------------------------------------------------------

(3) Filing party:

- --------------------------------------------------------------------------------

(4) Date filed:

- --------------------------------------------------------------------------------

<PAGE> 2
HANDLEMAN COMPANY
- -------------------------------------------------------------------------------
August 6, 1999

Dear Fellow Shareholder:

You are cordially invited to join the Board of Directors and Management
of Handleman Company at the Somerset Inn, 2601 West Big Beaver, Troy, Michigan
for the Annual Meeting of Shareholders on Wednesday, September 8, 1999 at 2:00
p.m.

The Notice of Annual Meeting, proxy statement and proxy card accompanying
this letter describe in detail the matters to be acted upon at the meeting.

It is important that your shares be represented and voted at the Annual Meeting,
regardless of the number that you hold. Whether or not you plan to attend the
meeting, you are urged to sign, date and return your proxy card as soon as
possible in the enclosed envelope to which no postage need be affixed if mailed
in the United States. This will not prevent you from voting your shares in
person at the meeting before voting closes if you wish to do so.

We look forward to seeing you on September 8.

Sincerely,

/s/ Stephen Strome

Stephen Strome
President and Chief Executive Officer

<PAGE> 3

HANDLEMAN COMPANY
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 8, 1999

To the Shareholders of Handleman Company:

The Annual Meeting of Shareholders of Handleman Company (the "Company") will
be held at the Somerset Inn, 2601 West Big Beaver, Troy, Michigan 48084-3390, on
Wednesday, September 8, 1999, at 2:00 p.m., Eastern Daylight Time, for the
following purposes:

(1) To elect two Directors of the Company to serve until the Annual Meeting
of Shareholders in 2002.

(2) To consider such other business as may properly come before the meeting.

Only shareholders of record of Handleman Company at the close of business on
July 14, 1999 will be entitled to vote at the meeting.

A copy of the Annual Report of the Company for the fiscal year ended May 1,
1999 accompanies this Notice.

By Order of the Board of Directors,

/s/ Leonard A. Brams

Leonard A. Brams,
Senior Vice President/Finance,
Chief Financial Officer and Secretary

Troy, Michigan
August 6, 1999

<PAGE> 4

HANDLEMAN COMPANY
500 Kirts Boulevard
Troy, Michigan 48084-4142

-----------------

PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD SEPTEMBER 8, 1999

GENERAL INFORMATION

This proxy statement contains information related to the Annual Meeting of
Shareholders of Handleman Company (the "Company") to be held at the Somerset
Inn, 2601 West Big Beaver, Troy, Michigan 48084-3390, on Wednesday, September 8,
1999, at 2:00 p.m., Eastern Daylight Time. The approximate mailing date for this
proxy statement and the proxy is August 6, 1999.

At the Company's Annual Meeting, shareholders will act upon the matters
outlined in the accompanying Notice of Annual Meeting, including the election of
Directors. In addition, the Company's management will report on the performance
of the Company during fiscal 1999 and respond to questions from shareholders.

It is important that your shares be represented at the meeting. If you are
unable to attend the meeting, please sign and date the enclosed proxy and return
it to the Company. The proxy is solicited by the Board of Directors of the
Company. The shares represented by valid proxies in the enclosed form will be
voted if received in time for the Annual Meeting. The expenses in connection
with the solicitation of proxies will be borne by the Company and may include
requests by mail and personal contact by its Directors, Officers and employees.
In addition, the Company has retained Corporate Investor Communications, Inc.,
111 Commerce Road, Carlstadt, New Jersey 07072-2586, to aid in the solicitation
of proxies from brokers, banks, other nominees and institutional holders at a
fee not to exceed $4,000 plus out-of-pocket expenses. The Company will reimburse
brokers or other nominees for their expenses in forwarding proxy materials to
principals. Any person giving a proxy has the power to revoke it at any time
before it is voted.

VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF

Only holders of record of shares of $.01 par value common stock (the "Common
Stock") at the close of business on July 14, 1999 are entitled to notice of, and
to vote at, the meeting or at any adjournment or adjournments thereof, each
share having one vote. On the date of record, the Company had issued and
outstanding 30,322,450 shares of Common Stock.

Based on information filed with the Securities and Exchange Commission
("SEC"), or otherwise provided to the Company, as of July 14, 1999, a) Franklin
Resources Inc., 777 Mariners Island Blvd., San Mateo, California 94404, owns
2,000,000 shares (6.6%) of the Company's outstanding Common Stock, and b)
Dimensional Fund Advisors, 1299 Ocean Avenue, Santa Monica, California 90401,
owns 1,550,336 shares (5.1%) of the Company's outstanding Common Stock.
Management does not know of any other person who, as of July 14, 1999,
beneficially owned more than 5% of the Company's Common Stock.

<PAGE> 5

I. ELECTION OF DIRECTORS

The Board of Directors proposes that Messrs. David Handleman and Richard H.
Cummings be elected as Directors of the Company to hold office until the Annual
Meeting of Shareholders in 2002 or until their successors are elected and
qualified. The persons named in the accompanying proxy intend to vote all valid
proxies received by them for the election of the nominees named above, unless
such proxies are marked to the contrary. The two nominees receiving the greatest
number of votes cast at the meeting or its adjournment shall be elected.
Abstentions, withheld votes and broker non-votes will not be deemed votes cast
in determining which nominees receive the greatest number of votes cast. In case
any nominee is unable or declines to serve, which is not anticipated, it is
intended that the proxies be voted in accordance with the best judgment of the
proxy holders.

The following information is furnished with respect to each nominee for
election as a Director, each person whose term of office as a Director will
continue after the meeting and each Executive Officer of the Company as of May
1, 1999 named in the Summary Compensation Table herein. The term of Gilbert R.
Whitaker, Jr. as a Director expires with this Annual Meeting, and Mr. Whitaker
has chosen not to be nominated for re-election.

Percentage of
Total
Shares Common
of Common Stock of the
Stock Company
Positions and Officers Beneficially Beneficially Term
Name and Year First with the Company and Other Owned as of Owned as of to
Became a Director Age Principal Occupations July 14, 1999 July 14, 1999 Expire
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NOMINEES FOR ELECTION AS DIRECTORS
FOR A THREE-YEAR TERM
David Handleman (1946).......... 83 Chairman of the Board....................... 610,842 2.0% 2002
Richard H. Cummings (1962)...... 77 Retired Senior Vice Chairman of the
Board of NBD
Bancorp., Inc. and of NBD Bank.............. 12,261 * 2002

DIRECTORS CONTINUING IN OFFICE
Alan E. Schwartz (1969)......... 73 Partner of the law firm of Honigman
Miller Schwartz and Cohn.................... 3,156 * 2001
John M. Barth (1995)............ 53 President and Chief Operating Officer
of Johnson Controls, Inc.................... 3,261 * 2001
Elizabeth A. Chappell (1999).... 41 President and Chief Executive Officer
of The Chappell Group....................... 4,967 * 2001
Stephen Strome (1989)........... 54 President and Chief Executive Officer
of the Company.............................. 413,786(1) 1.4% 2000
James B. Nicholson (1991)....... 56 President and Chief Executive Officer
of PVS Chemicals, Inc. ..................... 7,361 * 2000
Lloyd E. Reuss (1993)........... 63 Former President of General Motors
Corporation................................. 8,461 * 2000

OTHER EXECUTIVE OFFICERS
Peter J. Cline.................. 52 Executive Vice President - President
of Handleman Entertainment Resources........ 72,620(1) * --
Leonard A. Brams................ 48 Senior Vice President - Finance, Chief
Financial Officer and Secretary............. 20,123(1) * --
Stephen Nadelberg............... 58 Senior Vice President - President of
North Coast Entertainment................... 18,796(1) * --
Samuel Milicia.................. 57 Senior Vice President - Music Purchasing/
Handleman Entertainment Resources........... 24,961(1) * --

All Directors and Executive Officers as a group (14 persons)......................... 1,234,268(2) 4.1% --
</TABLE>

- ------------------------
(*) Less than 1%

(1) The number shown above as beneficially owned by Messrs. Strome, Cline,
Brams, Nadelberg, and Milicia includes 239,000, 48,000, 9,000, 14,000 and
16,750 shares, respectively, which they have the right to acquire within 60
days of July 14, 1999 pursuant to the Company's stock option plans
(assuming, in certain instances that the stock price reaches certain levels
-- see "Aggregated Option Exercise in the Last Fiscal Year and Fiscal
Year-End Option Values"), 36,828, 17,493, 8,585, 3,376, and 5,064 shares
which represent restricted stock awards granted to Messrs. Strome, Cline,
Nadelberg, Brams and Milicia, respectively, in June 1998 (which have not
vested) and 719, 494, 645, 170 and 730 shares, respectively, which have been
credited to each of Messrs. Strome, Cline, Brams, Nadelberg and Milicia
under the Company's salary deferral plan (the "401(k) Plan").

(2) All Executive Officers and Directors of the Company as a group (14 persons)
beneficially owned 1,234,268 shares (4.1%) of the Company's outstanding
Common Stock as of July 14, 1999, including 345,125 shares which they have
the right to acquire within 60 days of that date pursuant to the Company's
stock option plans, 75,428 shares representing restricted stock awards
granted in June 1998 and 3,361 shares which have been credited to them under
the 401(k) Plan.

<PAGE> 6

OTHER INFORMATION RELATING TO NOMINEES AND DIRECTORS

Following each Director's name and the year in which he or she first became
a Director is a brief account of the business experience of each nominee and
continuing Director of the Company during the past five years.

DAVID HANDLEMAN 1946

Mr. Handleman has served as Chairman of the Board since December 1, 1974.
Mr. Handleman was also Chief Executive Officer from December 1, 1974 to March 9,
1988 and from December 12, 1989 to May 1, 1991. Mr. Handleman retired as an
Officer and employee of the Company effective July 1, 1993, but is continuing in
the non-officer position of Chairman of the Board. Mr. Handleman also performs
services for the Company as part of an advisory and non-compete agreement
entered into with the Company in 1989.

RICHARD H. CUMMINGS 1962

Mr. Cummings is the retired Senior Vice Chairman of the Board of Directors
of NBD Bancorp, Inc. and NBD Bank.

ALAN E. SCHWARTZ 1969

Mr. Schwartz is a partner of the law firm of Honigman Miller Schwartz and
Cohn, Detroit, Michigan, which firm serves as general counsel for the Company.
It is expected that such law firm will continue to be retained by the Company in
the current fiscal year. Mr. Schwartz is also a Director of Pulte Corporation.

STEPHEN STROME 1989

Mr. Strome has served as President and Chief Executive Officer of the
Company since May 1, 1991. From May 3, 1990 through April 30, 1991, Mr. Strome
served as President and Chief Operating Officer of the Company.

JAMES B. NICHOLSON 1991

Mr. Nicholson has served as President and Chief Executive Officer of PVS
Chemicals, Inc. since 1979. Mr. Nicholson is a Director of PVS Chemicals, Inc.
and Standard Federal Bank. Mr. Nicholson is also Chairman of the Board of
Amerisure Companies.

LLOYD E. REUSS 1993

Mr. Reuss served as General Motors Corporation's Executive Vice President of
New Vehicles and Systems from April 6, 1992 through his retirement on January 1,
1993. Mr. Reuss served as President of General Motors Corporation from August 1,
1990 through April 5, 1992. Mr. Reuss is a Director of International Speedway
Corporation and U.S. Sugar Corporation. He is also Vice Chairman of the Board of
Directors of Detroit Mortgage & Realty.

JOHN M. BARTH 1995

Mr. Barth has served as President and Chief Operating Officer of Johnson
Controls, Inc. since September 23, 1998. From October 1, 1992 through September
22, 1998, Mr. Barth served as Executive Vice President of Johnson Controls, Inc.
Mr. Barth is a Director of Johnson Controls, Inc. and Edwards Brothers.

ELIZABETH A. CHAPPELL 1999

Ms. Chappell is the President and Chief Executive Officer of The Chappell
Group Inc., a consulting firm she founded that specializes in strategic
planning, organizational development and sales and marketing strategies. Prior
to forming The Chappell Group, Ms. Chappell spent 15 years with AT&T
Corporation. Her most recent position with AT&T was as Global Services Vice
President. Ms. Chappell is a director of Compuware Corporation.

During the fiscal year ended May 1, 1999, the Board of Directors held eight
meetings.

<PAGE> 7

COMMITTEES OF THE BOARD OF DIRECTORS

The Company has a standing Audit Committee. The current members of the Audit
Committee are Richard H. Cummings (Chairman), John M. Barth, Elizabeth A.
Chappell and Lloyd E. Reuss. During fiscal year 1999, the Audit Committee held
four meetings. The duties of the Audit Committee are briefly: recommending to
the Board of Directors the retention or discharge of the independent public
accountants; reviewing the arrangements and scope of the audit and non-audit
engagements and the compensation of the independent public accountants;
reviewing with the independent public accountants and the Company's financial
officers the adequacy of the Company's internal auditing, accounting and
financial controls; reviewing major changes in accounting policies; and
reviewing the scope, status and results of examinations conducted by the
internal audit department of the Company.

The Company has a standing Compensation and Stock Option Committee. The
current members of the Compensation and Stock Option Committee are James B.
Nicholson (Chairman), Lloyd E. Reuss and Gilbert R. Whitaker, Jr. During fiscal
year 1999, the Committee held three meetings and made recommendations to the
Board of Directors. The duties of the Committee are: recommending to the Board
of Directors the remuneration arrangements for senior management; recommending
to the Board of Directors compensation plans in which Officers are eligible to
participate; and granting stock options, stock appreciation rights and
restricted stock awards under the Company's 1998 Stock Option and Incentive
Plan.

The Company has a standing Nominating Committee. The current members of the
Nominating Committee are Alan E. Schwartz (Chairman), John M. Barth, James B.
Nicholson and Stephen Strome. During fiscal year 1999, the Nominating Committee
held two meetings. The Nominating Committee considers the performance of
incumbent Directors and recommends to the shareholders nominees for election as
Directors. The Nominating Committee will consider nominees for Directors
recommended by shareholders, which recommendations for the 2000 Annual Meeting
of Shareholders should be submitted to the Chairman of the Nominating Committee
at the Company's executive offices, no later than March 8, 2000.

The Company has a standing Corporate Governance Committee (the "Governance
Committee"). The current members of the Governance Committee are Gilbert R.
Whitaker, Jr. (Chairman), John M. Barth and Alan E. Schwartz. In lieu of formal
meetings, members of the Committee held informal discussions during fiscal 1999.
In February 1998, the Board of Directors adopted corporate governance guidelines
recommended by the Governance Committee. The guidelines are reviewed annually
and are monitored by the Governance Committee. The guidelines establish
corporate governance standards, outline the respective responsibilities of
management and the Board and provide a process for evaluating the performance of
the Board. The Board has the discretion to change the guidelines and also to
make exceptions to the guidelines when it is deemed to be in the best interest
of the Company and its shareholders to do so. A copy of the guidelines is
attached as Appendix A to this Proxy Statement.

Each of the Directors attended at least 75% of the meetings held during
fiscal 1999 by the Board and by each Committee of which the Director is a
member.

CERTAIN TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS

Mr. David Handleman, Chairman of the Board of the Company since 1974,
retired as an Officer and employee of the Company effective July 1, 1993. Mr.
Handleman continues as a Director of the Company and as the non-officer Chairman
of the Board. Effective July 1, 1993, and during his lifetime, Mr. Handleman
will receive annual payments of $300,000 per year in consideration of his
performance of advisory and related services to the Company and execution of a
non-competition covenant entered into with the Company in 1989. Such amount is
in addition to the annual amount ($288,564) Mr. Handleman receives pursuant to
the Company's pension plan. In addition, the Company paid $71,765 for certain
life insurance, health insurance, automotive and club dues benefits for Mr.
Handleman pursuant to his agreement with the Company.

4
<PAGE> 8

COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

DIRECTORS' COMPENSATION IN FISCAL 1999

Officers of the Company who are Directors do not receive any additional
compensation for services as a Director or as a Committee member. During fiscal
1999, all other Directors received annual retainers of $12,000 in restricted
stock with 100% vesting after one year and $10,000 in cash payable in four
quarterly installments of $2,500. Each Director received meeting fees of $1,000
for each Board of Directors meeting attended. Each member on a Committee of the
Board of Directors was paid at the rate of $750 for each Committee meeting
attended. Non-Committee Directors who are requested in advance to participate in
any Committee meeting were also paid the $750 meeting fee. In addition, during
fiscal year 1999, each Committee Chairman received an annual fee of $3,000.
Directors are reimbursed for travel and other expenses related to attendance at
Board and Committee meetings. The Company has approved a Deferral Plan for
Payment of Director Fees which permits members of the Board of Directors to
elect to defer to a future date all or any portion of their Director fees
(including retainer fees, attendance fees and Committee fees), with interest to
be added to deferred amounts. The Company had adopted a Director Retirement Plan
which provided that after 10 years of service any outside Director would be,
upon retirement, entitled to receive 50% of the annual Director fee then in
effect for the lesser of the number of years the participant served as a outside
Director of the Company or the life of the participant. The Director Retirement
Plan was terminated during fiscal 1998. As of the termination date, Messrs.
Cummings and Schwartz were fully vested and therefore eligible to receive the
retirement compensation upon retirement from the Board. However, no additional
years of service will be accrued and their benefits will be frozen as of the
termination date of the Retirement Plan. No other outside Directors will receive
any retirement benefits.

A one-time stock award of 500 shares of the Company's Common Stock is
awarded to new outside Directors when first elected to the Board. In addition a
one-time award of 500 shares of the Company's stock was made to current
Directors in fiscal 1999. The 1998 Stock Option and Incentive Plan allows stock
option grants to outside Directors. In September 1998, options for 1,500 shares
were awarded to outside Directors with a three-year graded vesting. It is
contemplated the 1,500 share stock option grant will be awarded annually to
outside Directors.

Mr. David Handleman is not entitled to receive any Director or Committee
member fees during the term of his advisory agreement. See "Certain Transactions
with Executive Officers and Directors" for additional information regarding
amounts paid to Mr. Handleman for advisory services.

Under resolutions of the Board of Directors presently in effect, if a
Corporate, Division or Subsidiary Officer or Director should die while serving
in such capacity, the Company will pay to the surviving spouse, or if there is
no surviving spouse then to the decedent's estate, the equivalent of one year's
salary (excluding bonuses) based upon the amount being received by the decedent
at the time of his or her death, in 24 equal monthly installments commencing one
month after death.

<PAGE> 9

SUMMARY COMPENSATION TABLE

The following table sets forth information for each of the fiscal years
ended May 1, 1999, May 2, 1998 and May 3, 1997 concerning the compensation of
the Company's Chief Executive Officer and each of the Company's other four most
highly compensated Executive Officers as of May 1, 1999 (collectively, the
"named Executive Officers") whose annual salary and bonus exceeded $100,000.

LONG-TERM
ANNUAL COMPENSATION(2) COMPENSATION AWARDS
------------------- -------------------

(3) (4)
Restricted Options/SARs
Stock Underlying All Other
(1) Fiscal Salary Bonus Awards Securities Compensation
NAME AND PRINCIPAL POSITION Year ($) ($) (#) (#) ($)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Stephen Strome 1999 494,230 500,000 36,828 60,000 861
President and Chief 1998 447,115 -- -- 60,000 1,375
Executive Officer 1997 425,000 -- -- 59,000 1,177

Peter J. Cline
Executive Vice President - 1999 295,772 291,885 23,324 14,000 1,100
President of Handleman 1998 275,409 108,944 -- 14,000 1,327
Entertainment Resources 1997 260,769 33,000 -- 15,000 515

Leonard A. Brams
Senior Vice President/ 1999 192,692 155,034 11,447 12,000 488
Finance, Chief Financial 1998 165,192 37,600 -- 12,000 --
Officer and Secretary

Stephen Nadelberg
Senior Vice President - 1999 222,692 119,981 4,501 12,000 1,300
President of North Coast 1998 213,846 9,736 -- 12,000 --
Entertainment 1997 48,854 10,000 -- 10,000 338

Samuel Milicia
Senior Vice President - 1999 170,385 117,906 6,752 7,000 1,324
Music Purchasing/Handleman 1998 151,923 61,605 -- 7,000 1,184
Entertainment Resources 1997 145,385 10,000 8,000 1,001

- ---------------------
</TABLE>

(1) Salary deferred by the named Executive Officers pursuant to the Companys
401(k)Plan follows:

<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Stephen Strome $3,442 $5,173 $4,871
Peter J. Cline 4,399 4,444 2,269
Leonard A. Brams 1,953 -- --
Stephen Nadelberg 5,204 1,015 --
Samuel Milicia 5,294 4,738 4,005
</TABLE>

(2) Non-cash compensation did not exceed the lesser of $50,000 or 10% of
individual cash compensation for any named Executive Officer.

(3) See Long-Term Incentive Plan Awards in Last Fiscal Year for information
regarding restrictive stock awards for the fiscal year ended May 1, 1999.

(4) Represents amounts contributed to the named Executive Officers' 401(k)
Plan accounts for the Company matching of employee contributions.

6
<PAGE> 10

OPTION GRANTS IN THE LAST FISCAL YEAR

The following table provides details regarding stock options granted to
the named Executive Officers in the last fiscal year.

(4)
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
----------------------------------------------------------------- ----------------------------------------
(1)
% of Total
Options
Granted (2)
Number of to Employees in Exercise Price (3)
Name Options Granted Fiscal Year Per Share Expiration Date 5% 10%
- -----------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C>
Stephen Strome 60,000 21.2% $12.219 June 1, 2008 461,040 1,168,440

Peter J. Cline 14,000 4.9 12.219 June 1, 2008 107,576 272,636

Leonard A. Brams 12,000 4.2 12.219 June 1, 2008 92,208 233,688

Stephen Nadelberg 12,000 4.2 12.219 June 1, 2008 92,208 233,688

Samuel Milicia 7,000 2.5 12.219 June 1, 2008 53,788 133,618

- ---------------------
</TABLE>

(1) The total number of shares subject to options granted to employees in fiscal
1999 was 283,100.

(2) The exercise price (which corresponded to the fair market value of the
Common Stock on the date of grant) may be paid in cash, or, with the consent
of the Compensation and Stock Option Committee, in Common Stock of the
Company, by a promissory note, or in such other manner as the Committee
determines is appropriate in its sole discretion. The Compensation and Stock
Option Committee has approved the issuance of reload options in certain
circumstances and with certain restrictions. A reload option is an option
granted to an employee when the employee exercises an option using
previously owned shares.

(3) The options become exercisable up to 50% on or after June 2, 1999 and prior
to June 1, 2000; and up to 100% on or after June 2, 2000.

(4) The Potential Realizable Value is calculated based on the fair market value
on the date of grant, which is equal to the exercise price of options
granted in fiscal 1999, assuming that the stock appreciates in value from
the date of grant until the end of the option term at the annual rate
specified (5% and 10%). Potential Realizable Value is net of the option
exercise price. The assumed rates of appreciation are specified in rules of
the SEC, and do not represent the Company's estimate or projection of future
stock price. Actual gains, if any, resulting from stock option exercises and
Common Stock holdings are dependent on the future performance of the Common
Stock and overall stock market conditions, as well as the optionee's
continued employment through the exercise/ vesting period. There can be no
assurance that the amounts reflected in this table will be achieved.

<PAGE> 11

AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

The following table sets forth information concerning stock options
exercised by the named Executive Officers during the fiscal year ended May 1,
1999, as well as the value of unexercised options held by such persons on May 1,
1999. This table also includes the number of shares covered by both exercisable
and non-exercisable stock options as of the last day of the fiscal year.

Value of Unexercised
Shares Number of Unexercised In-the-Money Options at
Acquired Options at Fiscal Year-End (#) Fiscal Year End ($)
On Exercise Exercisable (E)/ Exercisable (E)/
Name of Individual (#) Value Realized Unexercisable (U) Unexercisable (U)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stephen Strome 115,000 $406,094 239,000 (E) $670,699 (E)
104,500 (U) 609, 941 (U)

Peter J. Cline 30,000 105,237 48,000 (E) 94,109 (E)
25,000 (U) 146,829 (U)

Leonard A. Brams -- -- 9,000 (E) 33,656 (E)
15,000 (U) 78,845 (U)

Stephen Nadelberg -- -- 14,000 (E) 70,218 (E)
20,000 (U) 115,407 (U)

Samuel Milicia -- -- 16,750 (E) 101,851 (E)
12,750 (U) 75,243 (U)

- ----------------------
</TABLE>

(1) Values are calculated by subtracting the exercise price from the fair market
value of the stock as of exercise date.

(2) Assumes, for all unexercised in-the-money options, the difference between
the exercise price and the market price ($14.0625 per share) of the
Company's Common Stock as of May 1, 1999.

LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR

The following table sets forth the restricted stock awards made under the
Company's Long-Term Incentive Plan to the named Executive Officers during the
fiscal year ended May 1, 1999.

PERFORMANCE OR
NUMBER OF OTHER PERIOD UNTIL ESTIMATED FUTURE PAYOUT
SHARES, UNITS MATURATION OR UNDER NON-STOCK
OR OTHER PAYOUT PRICE-BASED PLANS
NAME RIGHTS (FISCAL YEARS) ($)
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
Stephen Strome 36,828 3 Years 517,894

Peter J. Cline 23,324 3 Years 327,994

Leonard A. Brams 11,447 3 Years 160,973

Stephen Nadelberg 4,501 3 Years 63,295

Samuel Milicia 6,752 3 Years 94,950

- -------------------
</TABLE>

The Compensation and Stock Option Committee used the services of an outside
consultant who recommended that the Company make a special one-time restricted
stock award to key employees to facilitate employee retention, particularly
during the implementation of the Company's strategic repositioning program,
which program was announced on June 2, 1998. Stephen Strome's restricted stock
award vests 50% on the second anniversary from the grant date and the remaining
50% on the third anniversary. Restricted stock grants to all other key employees
vest 25% on the first anniversary; 25% on the second anniversary and the
remaining 50% on the third anniversary. The estimated future payout is based on
the market price ($14.0625 per share) of the Company's Common Stock as of May 1,
1999.

<PAGE> 12

PENSION PLAN

The Company has a pension plan (the "plan") covering all employees of the
Company who have reached the age of 21 and completed one year of service, except
for employees covered by a collective bargaining agreement which does not
provide for plan coverage. The plan provides pension benefits, death benefits
and disability benefits for covered employees. For the fiscal year ended May 1,
1999, employees with five or more years of service were entitled to monthly
pension benefits beginning at normal retirement age (65). The computation of
benefits under the plan is based upon a formula which takes into consideration
retirement age, years of service up to 30 years, average annual compensation
during the highest five consecutive year period within the 10 years preceding
retirement, and the average of the taxable wage base for social security
purposes over the employee's career. The plan permits early retirement at ages
55- 64 for employees with 10 or more years of service. A death benefit equal to
a portion of the employee's accrued benefit is paid to the employee's spouse if
the employee dies after becoming vested under the plan. An employee with 10 or
more years of service whose employment by the Company terminates prior to his or
her normal retirement date due to his or her permanent and total disability is
entitled to receive a disability retirement benefit.

The compensation covered by the plan includes all earnings from the Company
as reported on the employee's W-2 form, for base pay plus overtime and bonus
payments only, plus salary deferrals, up to a maximum of $160,000 for calendar
year 1999.

The following table illustrates current annual benefits payable under the
plan upon retirement at age 65 to persons in certain compensation and years of
service classifications. The benefits are computed on the basis of a straight
life annuity and are not subject to deductions for social security or other
offset amounts.

Final Average Ten Years Twenty Years Thirty Years
Compensation of Service of Service of Service
-----------------------------------------------------------------
<S> <C> <C> <C>
$160,000* $20,251.00 $40,502.00 $60,753.00
</TABLE>

*Compensation which may be considered for any purpose under a qualified
pension plan is limited for 1999 to $160,000.

The Internal Revenue Code limits the benefits which can be paid from any
funded pension plan that qualifies for federal tax exemption. The amount for
calendar year 1999 is $130,000.

As of May 1, 1999, the credited years of service under the plan for the
named Executive Officers were as follows: 21 for Stephen Strome; 5 for Peter J.
Cline; 2 for Leonard A. Brams; 2 for Stephen Nadelberg and 29 for Samuel J.
Milicia.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

The Company sponsors a Supplemental Executive Retirement Plan (the "SERP")
covering a select group of management employees of the Company. The SERP
provides supplemental retirement income, and death and disability benefits.
Covered employees with five or more years of service are entitled to monthly
retirement income beginning at normal retirement age (65). The SERP permits
early retirement at ages 55-64 for employees with 10 or more years of service.
The computation of benefits under the SERP is based upon a formula which takes
into consideration retirement age, years of service up to a maximum of 30 years,
and average annual compensation during the highest five consecutive years within
the 10 years preceding retirement. A death benefit equal to a portion of the
employee's accrued benefit is paid to the employee's spouse if the employee dies
after becoming vested under the SERP. An employee with 10 or more years of
service whose employment by the Company terminates prior to his or her normal
retirement date due to his or her total and permanent disability is entitled to
receive a disability retirement benefit.

The compensation covered by the SERP includes all earnings from the Company
as reported on the employee's W-2 form, for base pay, overtime, and bonus
payments, plus salary deferrals. No maximum applies to compensation covered
under the SERP.

The benefit amount calculated under the formula is computed on the basis of
a straight life annuity and is subject to an offset by benefits provided under
the pension plan.

The following table illustrates current annual benefits payable under the
SERP upon normal retirement at age 65 to persons in certain compensation and
years of service classifications. These benefits are in addition to benefits
payable under the Company pension plan.

Final Average Ten Years Twenty Years Thirty Years
Compensation of Service of Service of Service
--------------------------------------------------------------
<S> <C> <C> <C>
160,000 3,749 7,498 11,247
250,000 17,249 34,498 51,547
350,000 32,249 64,498 96,747
450,000 47,249 94,498 141,747
550,000 62,249 124,498 186,747
</TABLE>

As of May 1, 1999 the credited years of service under the SERP for the named
Executive Officers were as follows: 21 for Stephen Strome; 5 for Peter J. Cline;
2 for Leonard A. Brams; 2 for Stephen Nadelberg; and 29 for Samuel J. Milicia.

<PAGE> 13

CHANGE IN CONTROL AGREEMENTS

The Company entered into Change in Control Agreements (the "Agreements")
with Stephen Strome, Peter J. Cline, Leonard A. Brams and Stephen Nadelberg in
the event their employment is terminated as a result of, or in the connection
with, a change in control (as defined in the Agreements). The Agreements end
December 31, 1999 and are automatically renewed to December 31 of each
subsequent year unless and until the Company or the named Executive Officer
sends a written notice of termination to the other party.

In event of termination of employment or other specified changes in the
employment relationship within 24 months following a change in control, the
Agreements generally provide for payments of accrued salary and bonus not paid
plus a severance payment equal to the sum of base salary and the average of the
annual bonus accrued during the three fiscal years prior to the termination date
times (i) 1.99 if the named Executive Officer has been employed by the Company
for less than two years; (ii) 2.99 when the named Executive Officer has been
employed by the Company for two years or more. The Agreements also entitle each
named Executive Officer to continue participation in the Company's life and
health insurance benefits for 36 months following the termination date. In
addition, all stock options granted to the named Executive Officer under the
Company's 1998 Stock Option and Incentive Plan or any other incentive plan or
arrangement will become 100% vested and immediately exercisable.

The Agreements with Messrs. Strome and Cline became effective on March 17,
1997. The Agreements with Messrs. Brams and Nadelberg became effective on
October 30, 1997. Based on current salaries, if Messrs. Strome, Cline, Brams or
Nadelberg had terminated their employment as of May 1, 1999 under circumstances
entitling them to severance pay as described above, they would have been
entitled to receive lump sum cash payments of $1,993,334, $1,344,334, $585,691,
$812,000, respectively.

PERFORMANCE GRAPH

The following line graph compares the cumulative total shareholder return
for the Company's Common Stock with the cumulative total return of the Standard
& Poor's 500 Composite Index and the Russell 2500 Index, for the past five-year
period.

COMPARISON OF FIVE YEAR CUMULATIVE
TOTAL RETURN AMONG COMPANY,
S&P 500 AND RUSSELL 2500

1994 1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HANDLEMAN 100 102 59 65 105 139
S&P 500 100 117 153 194 272 329
RUSSELL 2500 100 110 147 159 218 204
</TABLE>

Assumes an investment of $100 in the Company's Common Stock, the S&P 500
Composite Index and Russell 2500 Index as of the last day of fiscal 1994. It
shows the cumulative total return for the Company's last five fiscal years
assuming reinvestment of dividends.

The Company does not believe it feasible to provide a peer group comparison
since any entities that could conceivably be deemed "peers" are either
privately-held companies or subsidiaries or divisions of larger publicly-held
companies. Therefore, the Company has selected the Russell 2500 Index on the
basis of similar market capitalization.

<PAGE> 14

REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE

INTRODUCTION

The Compensation and Stock Option Committee (the "Committee") of the Board
is composed of three independent outside Directors who have no interlocking
relationships as defined by the SEC. The members of the Committee are Messrs.
James B. Nicholson (Chairman), Lloyd E. Reuss and Gilbert R. Whitaker, Jr. The
Committee establishes the compensation policy for the Company's executives and
reviews the salaries, bonuses and stock incentives of each of the Executive
Officers including the Chief Executive Officer. The Committee administers the
Company's 1998 Stock Option and Incentive Plan and prior stock option plans.

GENERAL POLICIES

The Company's compensation policies reflect its belief that the compensation
of its key employees (including Executive Officers) should: (1) provide a
compensation program that motivates key employees to achieve their strategic
goals by tying compensation to the performance of the Company and applicable
business units, as well as, to individual performance; (2) provide compensation
reasonably comparable to that offered by other leading companies to attract and
retain talented executives; and to (3) align the interests of its key employees
with the long-term interests of the Company's shareholders through the award of
stock incentives. The compensation packages offered to key employees are based
on the review of compensation survey studies and the advice of compensation
consultants. In assessing salary levels from a comparability standpoint, the
Committee refers to compensation surveys based on different groups of
corporations with approximately the same sales volume as the Company.

The Committee has not taken into the account the impact of Section 162(m) of
the Internal Revenue Code (which disallows certain deductions for executive
compensation exceeding $1,000,000 per year) in determining the level of
executive compensation since there has been to date no immediate relationship
between the Company's compensation levels and the provisions of Section 162(m).

BASE SALARIES

Base salaries are established by analyzing and evaluating the
responsibilities of a given position and a comparison of compensation levels of
similar positions in the competitive marketplace on both a regional and national
basis. Each position is included in a structure of graduated salary levels that
have been set up by reference to the pay practices of the companies included in
the outside consultant's compensation surveys. Salary levels are reviewed
annually and are subject to adjustment based on the general movement in salaries
in the job market, as well as the individual's job performance, contributions to
the Company and changes in job responsibilities.

BONUSES

The Company's bonus program is intended to encourage and reward the
achievement of corporate objectives. Key management employees participate in the
bonus program. For fiscal 1999, the Company continued to utilize a goal
attainment annual incentive plan. Although the bonus program's fundamental
design was similar to that of prior years, certain of its features were modified
in order to ensure alignment and support of the Company's strategic
restructuring program which was announced on June 2, 1998. Awards under the
bonus program, during fiscal 1999, were based on the Company attaining certain
levels of operating income and cash generation. In fiscal 1999, Messrs. Cline,
Brams, Nadelberg and Milicia received bonuses based on the operating performance
of their individual business units and their contribution to the successful
implementation of the Company's strategic repositioning program.

STOCK PLANS

The Company's shareholders approved the adoption of the Handleman Company
1992 Performance Incentive Plan and the 1998 Stock Option and Incentive Plan
(the "Plans") which authorize the granting of stock options, stock appreciation
rights and restricted stock.

The Committee believes that stock ownership by key employees (including
Executive Officers) and stock-based performance compensation arrangements foster
an interest in the enhancement of shareholder value and thus align management's
interests with that of the shareholders. In fiscal 1999, stock options were
awarded pursuant to the Plans to key employees in amounts reflecting the
participant's position and ability to influence the Company's overall
performance. In determining the size of individual awards, the Committee
considered the amount of options outstanding and previously granted, both in the
aggregate and with respect to the particular executive and the amount of options
remaining available for grant under the Plans. The Committee's policy has been
to utilize vesting periods to encourage key employees to continue in the employ
of the Company, and to grant options to provide a long-term incentive. The
exercise price of the options is based on the fair market value of the
underlying shares on the date of the grant. Thus, such options have value only
if the price of the underlying share increases.

In fiscal 1999, restricted shares awarded totaled 216,109 shares (net of
forfeitures). See "Long-Term Incentive Plan Awards in Last Fiscal Year" for
information regarding restricted stock awards for the fiscal year ended May 1,
1999. This was a special one-time award to key employees to facilitate employee
retention, particularly during the implementation of the Company's strategic
repositioning program, which program was announced on June 2, 1998.

<PAGE> 15

STOCK OWNERSHIP PROGRAM

The Company has adopted certain minimum stock ownership guidelines for key
management. For the Chief Executive Officer it is expected that he would own
shares having a value of three times his base salary. For other members of
management the value of shares owned would range from .33 to 2.0 times base
salary.

The employees will be given until April 30, 2002 to achieve the stock
ownership guidelines, which may be satisfied through direct ownership of shares,
including shares received upon exercise of options. Restricted shares, however,
are not taken into account until the shares vest.

The Company also adopted minimum stock ownership guidelines for outside
Directors. Each outside Director of the Company will be expected to own
Handleman Company Common Stock by April 30, 2002 generally equivalent to a
market price equal to three times the annual cash and stock retainer paid to the
outside Director by the Company.

OTHER COMPENSATION

At various times in the past the Company has adopted certain broad-based
employee benefit plans in which key management employees have been permitted to
participate and has adopted certain Executive Officer retirement, life and
health insurance and automotive plans. Other than with respect to the Company's
401(k) Plan, which includes a Company Common Stock Fund so as to further align
employees' and shareholders' long-term financial interests, benefits under these
plans are not directly or indirectly tied to Company performance.

CHIEF EXECUTIVE OFFICER COMPENSATION

The annual base salary earned in fiscal 1999 by Stephen Strome, the
Company's Chief Executive Officer, was $500,000. Compensation for the Chief
Executive Officer is determined through a process similar to that discussed for
other Executive Officers. Mr. Strome was paid a bonus of $500,000 in fiscal 1999
based on the overall performance of the Company with primary emphasis on the
successful implementation of the Company's strategic repositioning program in
terms of operating results and cash generation. In fiscal 1999, Mr. Strome was
awarded a Non-qualified Stock Option Grant to purchase 60,000 shares of the
Company's stock (see "Option Grants in the Last Fiscal Year"). The goal of the
grant is to ensure attention to the Company's long-term strategies and
objectives. During fiscal 1999, Mr. Strome was awarded a restricted stock grant
of 36,828 shares (see "Long-Term Incentive Plan Awards in Last Fiscal Year" for
information regarding restricted stock awards for the fiscal year ended May 1,
1999). This was a special one-time grant with the primary purpose of the
retention of Mr. Strome's services, particularly during the implementation of
the Company's strategic repositioning program. Mr. Strome's restricted shares
vest 50% on the second anniversary and the remaining 50% on the third
anniversary. The Committee believes Mr. Strome's compensation to be competitive
with compensation practices of the companies included in the survey prepared by
the outside consultant.

BY THE COMPENSATION AND STOCK OPTION COMMITTEE:

James B. Nicholson (Chairman)
Lloyd E. Reuss
Gilbert R. Whitaker, Jr.

<PAGE> 16

III. OTHER MATTERS

RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANT

Pricewaterhouse Coopers LLP is the independent public accountant for the
Company and its subsidiaries and has reported on the Company's consolidated
financial statements for the fiscal year ended May 1, 1999. The Company's
independent public accountant is appointed by the Board of Directors after
receiving recommendations from the Audit Committee. Pricewaterhouse Coopers LLP
has been reappointed for fiscal year 2000.

Representatives from Pricewaterhouse Coopers LLP are expected to be present
at the Annual Meeting of Shareholders and will have the opportunity to make a
statement at the meeting if they desire to do so, and are expected to be
available to respond to appropriate questions.

OTHER PROPOSALS

Neither the Company nor the members of its Board of Directors intend to
bring before the Annual Meeting any matters other than those set forth in the
Notice of Annual Meeting, and they have no present knowledge that any other
matters will be presented for action at the meeting by others. However, if any
other matters properly come before the meeting, it is the intention of the
persons named in the enclosed form of proxy to vote in accordance with their
best judgment.

A shareholder proposal which is intended to be presented at the 2000 Annual
Meeting of Shareholders must be received by the Company at its principal
executive offices by March 8, 2000.

By Order of the Board of Directors,

/s/ Leonard A. Brams

Leonard A. Brams,
Senior Vice President/Finance,
Chief Financial Officer and Secretary

Dated: August 6, 1999

<PAGE> 17

APPENDIX A
HANDLEMAN COMPANY
GUIDELINES ON CORPORATE GOVERNANCE ISSUES

1. SELECTION OF CHAIRMAN AND CEO; LEAD DIRECTOR: Currently, the Chairman of the
Board is not an executive officer of Handleman Company and the President is the
Chief Executive Officer (CEO). If the Board does not designate the Chairman of
the Board as the CEO, then the President by virtue of his office is the CEO.

The Board has no policy respecting the need to separate or combine the offices
of Chairman and CEO. The Board believes that this issue is part of the
succession planning process and that it is in the best interests of the Company
to make a determination whenever it elects a new CEO. The Board recognizes that
there may be circumstances in the future that would lead it to consolidate these
offices, but the Board believes there is no reason to do so at this time.

The Board may designate an independent Director to serve as Lead Director, with
such duties and responsibilities as determined by the Board. If no Lead Director
is designated by the Board, reference in these Guidelines to the Lead Director
shall refer to the Chair of the Compensation and Stock Option Committee.

2. MEETING WITHOUT CEO: In those instances where the outside Directors meet
without the CEO, the Lead Director will chair the meeting.

3. NUMBER OF COMMITTEES: The Board has the following committees: Audit,
Compensation and Stock Option, Nominating and Corporate Governance. The Board
has the flexibility to form a new committee or disband a current committee. It
is the policy of the Board that only independent Directors serve on the Audit
and Compensation and Stock Option committees.

4. ASSIGNMENT AND ROTATION OF COMMITTEE MEMBERS: The CEO and Chairman suggest
the appointment of members to the committees, the composition of which is
discussed and ratified by the entire Board, taking into account the desires and
suggestions of individual Directors. It is the belief of the Board that
committee rotation is a desirable principle, but should not be mandated as a
policy since there may be reasons at a given point in time to maintain an
individual Director's committee membership for a longer period or to shorten the
period. The learning time to become an active contributor on a particular
committee is also a factor.

5. FREQUENCY AND LENGTH OF COMMITTEE MEETINGS: The Chair of each committee, in
consultation with its members, determines the frequency and length of the
meetings of the committee.

6. COMMITTEE AGENDA: The Chair of each committee, in consultation with the
appropriate officers, will develop the committee's agenda. At the beginning of
the Board year (from annual shareholders meeting to annual meeting), each
committee will establish a schedule of agenda subjects to be discussed during
the year (to the extent these can be foreseen); the schedule for each committee
will be furnished to all Directors. The agenda for each meeting will be
distributed to all Directors in advance, and suggestions for changes or
additions will be solicited.

7. SELECTION OF AGENDA ITEMS FOR BOARD MEETINGS: The CEO, in consultation with
the Chairman, will establish the agenda for each Board meeting. At the beginning
of the Board year, the Chairman will establish a schedule of agenda subjects to
be discussed during the year (to the extent these can be foreseen). The agenda
for each meeting will be distributed to all Directors in advance, and
suggestions for changes or additions will be solicited. At least one Board
meeting each year will be a Board "retreat," the principal purpose of which will
be a Board review of long-term strategic plans and the principal issues that
Handleman Company will face in the future. The Board will have a minimum of six
scheduled meetings per Board year and will be on call for additional meetings as
needed.

8. BOARD MATERIALS DISTRIBUTED IN ADVANCE: Information and data that are
important to the Board's understanding of the business will be distributed in
writing to the Board the week before the scheduled Board meeting. The officers
will strive to make the information concise yet comprehensive, and will make an
ongoing effort to solicit suggestions from outside Directors on how to best meet
their information needs.

9. REGULAR ATTENDANCE OF NON-DIRECTORS AT BOARD MEETINGS: The CEO and Chairman
will invite senior officers to attend the meeting when their presence is
expected to significantly enhance the quality of Board decisions. Generally,
attendance of non-Directors will take place when their expertise is required or
where attendance is encouraged as noted in Item 11 (e.g., at the Board retreat).

10. EXECUTIVE SESSIONS OF OUTSIDE DIRECTORS: The outside Directors will meet in
executive session at the conclusion of each scheduled Board meeting. The Lead
Director will report to the CEO on the nature of the discussion immediately
following the Board meeting.

<PAGE> 18

11. BOARD ACCESS TO SENIOR MANAGEMENT: Board members have complete access to
Handleman's officers and counsel. It is assumed that Board members will use
appropriate judgment to be sure that this contact is not distracting to the
business operation of the Company and that such contact, if in writing, be
copied to the CEO under normal circumstances. Furthermore, the Board encourages
the CEO to, from time to time, bring executives into Board meetings who: (a) can
provide additional insight into the items being discussed because of personal
involvement in these areas or (b) represent executives with future potential
that the CEO believes should be given exposure to the Board. The Board may
retain outside counsel of its choice with respect to any issue relating to its
activities. The CEO will be advised on each such occasion of the law firm
selected and the issues to be addressed by it on behalf of the Board.

12. BOARD COMPENSATION REVIEW: It is appropriate for the officers to report once
a year to the Compensation and Stock Option Committee the status of Board
compensation in relation to other comparable U.S. companies and in consideration
of the most current best practices. Changes in Board compensation, if any,
should come at the suggestion of the Compensation and Stock Option Committee,
but with full discussion and concurrence by the Board.

13. SIZE OF THE BOARD: It is the opinion of the Board that the optimal size of
the Board under normal circumstances is 8 to 10 members. This size permits both
a diversity of skills and views available to contribute to the duties of the
Board and its Committees as well as the coordination and participation of all
Directors in Board deliberations. However, the Board would be willing to go to a
somewhat larger size in order to accommodate the availability of an outstanding
candidate.

14. MIX OF INSIDE AND OUTSIDE DIRECTORS: The Board believes that, as a matter of
policy, there should be a majority of independent Directors on the Handleman
Board.

15. DEFINITION OF INDEPENDENCE FOR OUTSIDE DIRECTORS: The Company has adopted
the following definition of an independent Director: one who (a) is not and has
not been employed by the Company or its subsidiaries in an executive capacity;
(b) is not a significant advisor or consultant to the Company; (c) is not
affiliated with a significant customer or supplier of the Company; (d) does not
have a significant personal services contract with the Company; (e) is not
affiliated with a tax-exempt entity that receives significant contributions from
the Company; and (f) is not a spouse, parent, sibling or child of a Board member
or senior executive of the Company. The Board believes that all outside
Directors with the exception of Alan E. Schwartz and David Handleman are
independent. Compliance with the definition of independence is reviewed annually
by the Nominating Committee. The ownership of stock in the Company by Directors
is encouraged. The Board's policy is that each Director should, by April 30,
2002, own Company stock valued at market price equal to three times the annual
retainer.

16. FORMER CHIEF EXECUTIVE OFFICER'S BOARD MEMBERSHIP: The Board believes this
is a matter to be decided in each individual instance. It is assumed that when
the Chief Executive Officer resigns from that position, he/she should offer
his/her resignation from the Board at the same time. Whether the individual
continues to serve on the Board is a matter for discussion at that time with the
new CEO and the Board.

17. BOARD MEMBERSHIP CRITERIA: The Nominating Committee is responsible for
reviewing with the Board periodically the appropriate skills and characteristics
required of Board members in the context of the current make-up of the Board.
This assessment should include issues of diversity, age, skills such as
understanding of marketing, finance, regulation and public policy, international
background, commitment to Handleman's shared values, etc. -- all in the context
of an assessment of the perceived needs of the Company and the Board at that
point in time.

18. SELECTION OF NEW DIRECTOR CANDIDATE/EXTENDING INVITATIONS TO BOARD: The
Board itself should be responsible, in fact as well as procedure, for selecting
its own members. The Board delegates the screening process involved to the
Nominating Committee with the direct input from the Chairman and the CEO. The
invitation to join the Board should be extended by the CEO and the Chair of the
Nominating Committee.

19. ASSESSING THE BOARD'S PERFORMANCE: The Board commits to participate in a
process of self-evaluation annually, led by the Nominating Committee. This will
be discussed with the full Board following the end of each fiscal year. This
assessment should be of the Board's contribution as a whole and should
specifically review areas in which the Nominating Committee or the CEO believe a
better contribution could be made. Its purpose is to increase the effectiveness
of the Board. The purpose of the evaluation will be to discover if there are
changes to the Board's structure and operations which will maximize the value
that the Board adds to the Company.

15
<PAGE> 19

20. DIRECTORS WHO CHANGE THEIR PRESENT JOB RESPONSIBILITY: It is the sense of
the Board that individual Directors who change in a substantial way the business
responsibility they held when they were elected to the Board, or who develop a
conflict as a Director of the Company with the person's position in or role with
another entity, should inform the Chairman and the Chair of the Nominating
Committee of the change. In addition, they must volunteer to resign from the
Board. It is not the sense of the Board that the Directors who retire from or
change substantially the position they held when they became a Director should
necessarily leave the Board. There should, however, be an opportunity for the
Board via the Nominating Committee to review the continued appropriateness of
Board membership under these circumstances.

21. RETIREMENT AGE: Directors will submit a written resignation to the Board
upon reaching the age of 72. The Nominating Committee will review the
desirability of continued service by that Director in light of the needs of the
Company at that time and make a recommendation to the Board. If continued
service is requested, that Director will then annually submit a written
resignation to be considered by the Board.

22. FORMAL EVALUATION OF THE CHIEF EXECUTIVE OFFICER: At the beginning of each
fiscal year, the CEO will set forth in writing to the Chair of the Compensation
and Stock Option Committee the CEO's personal goals for the performance of his
duties and responsibilities during such fiscal year. The outside Directors
should make this evaluation annually, and it should be communicated to the CEO
by the Chair of the Compensation and Stock Option Committee. The evaluation
should be based on objective criteria, including comparison of the CEO's goals
for the year against actual results, performance of the business, accomplishment
of long-term strategic objectives, management development, and the like. The
evaluation will be used by the Compensation and Stock Option Committee in the
course of its deliberations when considering the compensation of the CEO.

23. SUCCESSION PLANNING: There will be an annual report by the CEO to the Board
on succession planning. There should also be available, on a continuing basis,
the CEO's recommendations as to a successor should the CEO be unexpectedly
disabled.

24. MANAGEMENT DEVELOPMENT: There will be an annual report to the Board by the
CEO on Handleman's program for management development. This report should be
given to the Board at the same time as the succession planning report.

25. BOARD INTERACTION WITH INSTITUTIONAL INVESTORS, THE PRESS, CUSTOMERS, ETC.:
The Board believes that, in general, it is optimal for the appropriate Officers
to speak for the Company. Individual Board members may, from time to time, meet
or otherwise communicate with various constituencies that are involved with the
Company, including investors. It is expected that Board members would do this
with the knowledge of the CEO and, absent unusual circumstances, only at the
request of the CEO.

26. ADHERENCE TO CODE OF BUSINESS PRACTICES: Each Director shall be familiar
with and adhere to the Company's Code of Business Practices. The Directors shall
annually acknowledge in writing that the Director has complied with the Code of
Business Practices as it applies to the Director.

16
<PAGE> 20

================================================================================

HANDLEMAN COMPANY
ANNUAL MEETING OF SHAREHOLDERS

SEPTEMBER 8, 1999

PROXY SOLICITED BY THE BOARD OF DIRECTORS OF HANDLEMAN COMPANY

Stephen Strome, James B. Nicholson and Alan E. Schwartz and each of them,
are hereby authorized to represent and vote the stock of the undersigned at the
Annual Meeting of Shareholders to be held September 8, 1999, and at any
adjournment thereof:

1. THE BOARD RECOMMENDS A VOTE FOR THE NOMINEES LISTED BELOW.

<TABLE>
<S> <C> <C>
ELECTION OF [ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY
DIRECTORS (except as marked to the contrary below) to vote for all nominees listed
below
</TABLE>

David Handleman Richard H. Cummings

(INSTRUCTION: To withhold authority to vote for any individual
nominee, write that nominee's name in the space provided below)

----------------------------------------------------------------------

2. In their discretion with respect to any other matters that may properly
come before the meeting.

THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE HEREIN. IF NO SPECIFICATIONS ARE MADE, THIS PROXY WILL BE
VOTED FOR THE ELECTION OF THE NOMINEES FOR DIRECTORS LISTED ABOVE.

(Continued and to be signed on other side)

- --------------------------------------------------------------------------------

(Continued from other side)

THE UNDERSIGNED HEREBY REVOKES ANY PROXY OR PROXIES HERETOFORE GIVEN TO VOTE
SUCH STOCK, AND HEREBY RATIFIES AND CONFIRMS ALL THAT SAID ATTORNEYS AND
PROXIES, OR THEIR SUBSTITUTES, MAY DO BY VIRTUE HEREOF. IF ONLY ONE ATTORNEY AND
PROXY SHALL BE PRESENT AND ACTING, THEN THAT ONE SHALL HAVE AND MAY EXERCISE ALL
THE POWERS OF SAID ATTORNEYS AND PROXIES.

THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF SAID ANNUAL
MEETING OF SHAREHOLDERS, THE PROXY STATEMENT RELATING THERETO AND THE ANNUAL
REPORT FOR 1999.

Dated:

,1999
---------------------------------

---------------------------------

(Signature(s) of
Shareholders(s))

The signature(s) of shareholder(s)
should correspond exactly with the
name(s) stenciled hereon. Joint
owners should sign individually.
When signing as attorney,
executor, administrator, trustee
or guardian, please give your full
title as such.

PLEASE PROMPTLY DATE, SIGN AND MAIL
THIS PROXY IN THE ENCLOSED ENVELOPE.