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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1998
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission File Number 0-14323
SPEC'S MUSIC, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-1362127
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1666 N.W. 82nd Avenue
Miami, Florida 33126
(Address of principal executive offices, including zip code)
(305) 592-7288
(Registrant's telephone number, including area code)
SHARES OF COMMON STOCK OUTSTANDING
AS OF FEBRUARY 25, 1998: 5,295,669
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes (X) No ( )
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SPEC'S MUSIC, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS..................3
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS........4
CONSOLIDATED CONDENSED STATEMENTS OF
CASH FLOWS...........................................5
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS.................................6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................9-13
PART II.
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................15
PART I.
ITEM 1. FINANCIAL STATEMENTS
SPEC'S MUSIC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
January 31, July 31,
Assets 1998 1997
----------- ---------
(Unaudited)
CURRENT ASSETS:
Cash and equivalents $ 306,947 $ 59,397
Trade receivables 732,498 192,286
Income tax receivable -- 1,890,498
Inventories 15,777,075 14,629,312
Prepaid expenses 349,160 294,373
---------- ----------
Total current assets 17,165,680 17,065,866
Video rental inventory, net 344,588 369,734
Property and equipment, net 10,314,194 11,157,024
Other assets 542,248 659,911
---------- ----------
Total assets $28,366,710 $ 29,252,535
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturity of long-term debt $ 6,359,189 $ --
Accounts payable 9,814,802 9,860,269
Accrued expenses 2,291,574 2,437,332
Store closing reserve -- 650,000
---------- -----------
Total current liabilities 18,465,565 12,947,601
---------- ----------
Long-term debt -- 6,695,994
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; 10,000,000
shares authorized; 5,300,319 and 5,300,319
shares issued at January 1998 and
July 1997, respectively 53,004 53,004
Additional paid-in capital 3,493,862 3,551,326
Retained earnings 6,417,812 6,134,540
Less 12,705 and 25,879 shares in treasury
at January 1998 and July 1997,
respectively, at cost (63,533) (129,930)
--------- ----------
Total stockholders' equity 9,901,145 9,608,940
--------- ----------
Total liabilities and
stockholders' equity $28,366,710 $29,252,535
========== ==========
See Notes to Consolidated Condensed Financial Statements.
-3-
SPEC'S MUSIC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
January 31, January 31,
1998 1997 1998 1997
--------- --------- --------- ---------
Product sales $ 20,576,214 $ 21,179,412 $ 34,590,135 $ 36,683,370
Video rentals 166,786 281,827 336,545 566,869
---------- ---------- ---------- ----------
TOTAL REVENUES 20,743,000 21,461,239 34,926,680 37,250,239
---------- ---------- ---------- ----------
Cost of goods sold - sales 13,416,007 14,153,713 22,691,103 24,398,021
Cost of goods sold - rental 74,824 140,529 166,736 271,473
---------- ---------- ---------- ----------
TOTAL COST OF SALES 13,490,831 14,294,242 22,857,839 24,669,494
---------- ---------- ---------- ----------
GROSS PROFIT 7,252,169 7,166,997 12,068,841 12,580,745
Store operating, general and
administrative expenses 5,805,951 7,037,436 11,329,865 13,483,700
Restructuring charge -- 250,000 -- 250,000
Store closing expenses -- 269,569 -- 269,569
---------- ----------- ---------- ----------
Operating income (loss) 1,446,218 (390,008) 738,976 (1,422,524)
Other expense, net (234,000) (204,041) (455,704) (474,773)
---------- ---------- ---------- ----------
Earnings (loss) before income taxes 1,212,218 (594,049) 283,272 (1,897,297)
Benefit for income taxes -- (223,646) -- (705,646)
---------- ---------- ---------- ---------
NET EARNINGS (LOSS) $ 1,212,218 $ (370,403) $ 283,272 $(1,191,651)
---------- ---------- ---------- ---------
BASIC EARNINGS(LOSS) PER SHARE $ .23 $ (.07) $ .05 $ (.23)
---------- ---------- ---------- ----------
DILUTED EARNINGS (LOSS) PER SHARE $ .22 $ (.07) $ .05 $ (.23)
---------- ----------- ---------- ----------
Weighted average number of common
shares outstanding - basic 5,275,000 5,242,000 5,273,000 5,245,000
---------- ----------- ---------- ----------
Weighted average number of common
shares outstanding - diluted 5,445,000 5,242,000 5,417,000 5,245,000
---------- ----------- ---------- ----------
See Notes to Consolidated Condensed Financial Statements.
-4-
<CAPTIONS>
SPEC'S MUSIC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JANUARY 31, 1998 AND 1997
(UNAUDITED)
1998 1997
--------- ---------
Cash flows from operating activities:
Net earnings (loss) $ 283,272 $(1,191,651)
Adjustments to reconcile net earnings
(loss)to net cash provided by
operating activities:
Depreciation and amortization of
property and equipment 975,379 1,258,019
Amortization of video rental inventory 163,387 269,439
Loss on disposal of property and equipment -- 269,569
Deferred compensation expense -- 42,434
Amortization of preopening expenses -- 28,294
Amortization of intangibles 75,144 --
(Increase) decrease in assets:
Receivables (540,212) (33,185)
Income tax receivable 1,890,498 --
Inventories (1,147,763) 391,819
Prepaid expenses (54,787) (675,640)
Other assets 42,519 (11,170)
Deferred tax asset -- (705,646)
Increase (decrease) in liabilities:
Accounts payable (45,467) 2,382,013
Accrued expenses (136,825) 455,713
Store closing reserve (650,000) (752,356)
----------- -----------
Net cash provided by operating activities 855,145 1,727,652
----------- -----------
Cash flows provided by
(used in) investing activities:
Purchases of video rental inventory (138,241) (263,109)
Additions to property and equipment (132,549) (162,425)
Disposition of property and equipment -- 145,390
----------- -----------
Net cash used in investing activities (270,790) (280,144)
----------- -----------
Cash flows provided by (used in)
financing activities:
Proceeds from borrowings 47,352,859 44,710,844
Repayment of borrowings (47,689,664) (46,168,734)
----------- -----------
Net cash used in financing activities (336,805) (1,457,890)
----------- -----------
Net (decrease) increase in cash 247,550 (10,382)
Cash at beginning of period 59,397 405,753
----------- -----------
Cash at end of period $ 306,947 $ 395,371
========== ===========
See Notes to Consolidated Condensed Financial Statements.
-5-
SPEC'S MUSIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. Consolidated Condensed Financial Statements
The accompanying consolidated condensed financial statements should
be read in conjunction with the Company's consolidated financial
statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended July 31, 1997.
The consolidated condensed financial statements were prepared from
the books and records of the Company without audit or verification.
In the opinion of management, all adjustments which are of a normal
recurring nature and necessary to present fairly the financial
position, results of operations and cash flows for all the periods
presented have been made. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted.
The results of operations for the six month period ended January 31,
1998 are not necessarily indicative of the operating results for the
full fiscal year. The accompanying financial statements include the
accounts of the Company and its wholly-owned subsidiary. All
significant intercompany balances and transactions have been
eliminated.
2. Current Maturity of Long-Term Debt
In May 1996, the Company obtained a new two year credit agreement
(the "Revolving Credit Facility"), which includes a $3,000,000
stand-by letter of credit facility, both expiring in May 1998.
Under the Company's new Revolving Credit Facility, it may borrow up
to the lesser of (a) $15,000,000 or (b) 60% of the Company's
eligible inventory (as defined in the "Revolving Credit Facility").
A commitment fee of 3/8% of the unused portion is payable monthly.
There were no borrowings under the stand-by letter of credit during
the first six months of fiscal 1998.
The Revolving Credit Facility and all of the Company's obligations
in connection therewith are secured by a first-priority security
interest in substantially all of the Company's assets, and the
Company may not further pledge its assets without the prior approval
of its lender. The Company is also required to meet certain monthly
financial covenants, including but not limited to minimum earnings,
current ratio, fixed charge coverage and tangible net worth levels.
In addition, the Company may not exceed certain capital expenditures
and inventory cost levels. The Company received a waiver of non
compliance and an amendment which revised a financial covenant for
the second quarter ending January 31, 1998.
The Revolving Credit Facility bears interest at a floating rate,
adjusted monthly, equal to the Index Rate (as defined below) plus
2.875%. The "Index Rate" is the last month-end published rate for
30-day dealer-placed commercial paper sold through dealers by major
corporations as published in the Money Rates section of the Wall
Street Journal. Accrued interest is payable monthly in arrears.
The interest rate at January 31, 1998 was 8.375%.
The outstanding principal amount under the Revolving Credit Facility
was approximately $5.9 million as of January 31, 1998, and an
additional $2.6 million was available under the terms of the
agreement.
On October 3, 1997, the Company obtained an extension to August 1,
1998 on the Revolving Credit Facility. Under this extended credit
facility the lender waived any defaults or events of default which
had previously arisen from violations of the original financial
covenants. New financial covenants have been set for the term of
the agreement.
-6-
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, Cont'd.
Additionally, the lender entered into a Subordination and
Intercreditor Agreement, which is effective through August 1, 1998,
which allows the Company to borrow from another lender, up to an
additional $1 million above the existing Revolving Credit Facility.
This facility bears interest at a floating rate, adjusted monthly,
equal to the Prime Rate plus 8.25%. Accrued interest is payable
monthly in arrears. The interest rate at January 31, 1998, was
16.75%. The outstanding balance under the Subordination and
Intercreditor Agreement was $.5 million as of January 31, 1998 and
an additional $.5 million was available under the terms of the
Agreement.
The Agreements contain restrictions on the declaration and payment
of dividends.
3. Statement of Cash Flows Information
The following is supplemental disclosure of cash flow information:
Six months ended
January 31,
-----------------
1998 1997
------ ------
Interest paid $ 345,964 $ 405,652
Income tax paid -0- -0-
Supplemental noncash financing activities information:
During the six months ended January 31, 1998, no Restricted Stock
Awards were granted and all awards have lapsed. During the six
months ended January 31, 1997, no Restricted Stock Awards were
granted and $81,375 were canceled.
The Company contributed $18,205 and $29,378 in common stock to the
Company's 401(k) Plan during the six months ended January 31, 1998
and 1997, respectively. During the six months ended January 31,
1998, the Company's 401k Plan returned $9,272 in common stock to the
Company.
4. Earnings (loss) Per Share
During the quarter ended January 31, 1998, the Company adopted
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings Per Share". In accordance with SFAS 128, primary earnings
per share have been replaced with basic earnings per share, and
fully diluted earnings per share have been replaced with diluted
earnings per share which includes potentially dilutive securities
such as outstanding options. Prior periods have been presented to
conform to SFAS 128, however, as the Company had a net loss in the
prior year comparable periods, basic and diluted loss per share are
the same as the primary loss per share previously presented. The
following table sets forth the computation of weighted average
common shares outstanding.
-7-
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, Cont'd.
Three Months Ended Six Months Ended
January 31, January 31,
------------------- -------------------
1998 1997 1998 1997
----- ----- ----- -----
Net income (loss)
available to
shareholders $ 1,212,218 $ (370,403) $ 283,272 $(1,191,651)
=========== =========== =========== ============
Weighted average
common shares
outstanding-basic 5,275,000 5,242,000 5,273,000 5,245,000
Net effect of potential
diluted securities 170,000 -- 144,000 --
----------- ---------- --------- -----------
Weighted average common
shares outstanding -
diluted 5,445,000 5,242,000 5,417,000 5,245,000
Earnings (loss)
per share - basic $ .23 $ (.07) $ .05 $ (.23)
=========== =========== =========== ============
Earnings (loss)
per share - diluted $ .22 $ (.07) $ .05 $ (.23)
=========== =========== =========== ============
During the second quarter of fiscal 1998, 24,000 shares of common
stock ranging in price from $.75 - .875 were granted and included in
the computation of diluted EPS. For the second quarter of fiscal
1998, options of 350,000 shares of common stock ranging in price
from $1.25 - $6.00 per share were not included in the computation of
diluted EPS because the options' exercise prices were greater than
the average market price of the common shares. Options of 611,766
shares of common stock ranging in price from $1.125 - $6.00 per
share for the six months ending January 31, 1998 were not
included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the
common shares.
5. New Accounting Pronouncements
In June 1997, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," was issued. SFAS No. 131
establishes standards for the way that public companies report
selected information about operating segments in annual financial
statements and requires that those companies report selected
information about segments in interim financial reports issued to
shareholders. Operating segments are components of an enterprise
about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance
and deciding how to allocate resources to segments. SFAS No. 131
requires that a public company report a measure of segment profit or
loss, certain specific revenue and expense items and segment assets.
SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. The Company has not determined
the effects, if any, that SFAS No. 131 will have on the disclosures
in its consolidated financial statements.
6. Store Closing Reserve
As a result of the planned closing of store locations, the Company
has recorded store closing reserves representing lease termination
costs, write-down of assets, rent expense, and other miscellaneous
expenses. As of January 31,1998, all planned closings were
completed.
-8-
PART I.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is an analysis of the Company's results of operations,
liquidity and capital resources. To the extent that such analysis
contains statements which are not of a historical nature, such
statements are forward-looking statements, which involve risks and
uncertainties. These risks include changes in the competitive
environment for the Company's products, including the entry or exit of
non-traditional retailers of the Company's products to or from its
markets; the ability of the Company to refinance its credit line, and
the terms of any such refinanced line; the release by the music industry
of an increased or decreased number of "hit releases"; unfavorable
developments with respect to a lease; general economic factors in
markets where the Company's products are sold; and other factors
discussed in the Company's filings with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 1998 AND 1997
Revenues
Total revenues decreased by $718,239, or 3.3% during the second quarter
of fiscal 1998 compared to the second quarter of fiscal 1997. As of
the end of the second fiscal quarter ended January 31, 1998, the Company
operated five fewer stores than in the second fiscal quarter of 1997.
On a same-store basis (stores open for more than one year), revenues
decreased by 1.1% over last year.
Revenues from product sales decreased by 2.8% for the chain as a whole
and increased by 0.1% on a same-store basis as compared to the second
quarter of fiscal 1997. Same-store revenues remained relatively flat in
part because of the excess of retailers selling specialty music in the
Florida and Puerto Rico markets.
Video rental revenue decreased for the quarter by 40.8% for the Company
as a whole and by 42.4% on a same-store basis as compared to the second
quarter in fiscal 1997. The Company maintains video rental departments
in limited stores based on customer demand and has not aggressively
promoted this business. Since the second quarter of fiscal 1997, the
Company closed one video rental department. The Company plans to close
five video rental departments during the third quarter of fiscal 1998.
The Company plans to continue to review and adjust its prices and focus
its marketing and advertising campaign to differentiate itself from
price oriented mass merchants and discount electronics stores.
Nevertheless, the Company is likely to continue to experience revenue
declines due to the closure of
under-performing stores in fiscal 1998.
Gross Profit
Gross profits from product sales, which are net of product management
and distribution costs, were 34.8% and 33.2% during the second quarters
of fiscal 1998 and 1997, respectively. Gross profit, as a percentage
of revenue, increased because of a decrease in promotional markdowns
during the holiday season and better buying practices combined with an
improvement in the product mix.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS, Cont'd
Gross profits from video rentals were 55.1% and 50.1% during the second
quarters of fiscal 1998 and 1997, respectively. This fluctuation is
largely due to the fixed nature of the video rental inventory being
amortized on an accelerated method over a three year period.
Total gross profit was 35.0% and 33.4% of revenue during the second
quarters of fiscal 1998 and 1997, respectively. The Company expects
total gross profit, as a percentage of revenues to increase as a result
of better buying practices combined with an improvement in the product
mix. Some fluctuation in gross profit margins may be expected due in
part to the many factors that affect the Company's purchases for sale
and due in part to the Company's promotional strategies.
Store Operating, General and Administrative Expenses
Store operating, general and administrative expenses, as a percentage of
revenue, were 28.0% and 32.8% during the second quarters of fiscal 1998
and 1997, respectively. Store occupancy, depreciation costs and
general and administrative expenses, as a percentage of revenue,
decreased due to the closing of under performing stores combined with
the savings results from cost reduction programs. As of January 31,
1998, the Company operated five fewer stores than in the second fiscal
quarter of 1997.
Restructuring Charge / Store Closing Expense
During the second quarter of fiscal 1997, the Company announced plans to
restructure its business. A provision of $250,000 was recorded
representing costs for severance, outplacement and other miscellaneous
costs. There were no costs recorded for restructuring during the second
quarter ending January 31, 1998.
In the second quarter of fiscal 1997, the Company closed one location
and recorded a $269,569 charge associated with the write down of assets.
During the second quarter ending January 31, 1998, no costs were
recorded for store closings.
Other Income (Expense)
The Company incurred interest expenses of $250,000 and $234,000 during
the second quarter of fiscal 1998 and 1997, respectively. The increase
is due to the interest expense associated with the Subordination and
Intercreditor Agreement combined with the higher amortization of
deferred costs relating to the extension on the Revolving Credit
Facility.
Income Taxes
The effective income tax rate, as a percentage of earnings before income
taxes, was 0.0% and 37.6% during the second quarter of fiscal 1998 and
1997, respectively. The second quarter fiscal 1998 net earnings do not
include any income tax expense, due to the Company recognizing net
operating loss carry forwards. A $224,000 income tax benefit was
recorded in the second quarter of fiscal 1997.
Net Earnings (Loss)
During the second quarter of fiscal 1998, the Company had net earnings
of $1,212,000 or $.22 per share compared to a loss of ($370,000) or
$(.07) per share during the second quarter of fiscal 1997. Net earnings
increased primarily because of an improvement in gross profit combined
with a reduction in store operating and general and administrative
expenses, as well as the non-recurrence of restructuring charges and
store closing expenses.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS, Cont'd.
SIX MONTHS ENDED JANUARY 31, 1998 AND 1997
Revenues
Total revenues decreased by $2,323,559 or 6.2%, in the first six months
of fiscal 1998, compared to the same period in fiscal 1997. On a same-store
basis, revenues decreased by 1.9%, compared to the same period in
1997.
Revenues from product sales decreased by 5.7% for the chain as a whole
and by 1.2% on a same-store basis during the first six months of fiscal
1998. This decrease is due in part to the Company operating five fewer
stores than in the second quarter of fiscal 1997.
Video rental revenues decreased by 40.6% for the chain as a whole and by
42.0% on a same-store basis. The closing of one video rental department
since the second quarter of fiscal 1997 and a lower demand for video
rentals contributed to lower rental revenues. The Company plans to
close five video rental departments during the third quarter of fiscal
1998.
Gross Profit
Gross profit from product sales, which is net of product management and
distribution costs, was 34.4% and 33.5% during the first six months of
fiscal 1998 and 1997, respectively. Gross profit, as a percentage of
revenue, increased because of a decrease in promotional markdowns during
the holiday season and better buying practices combined with an
improvement in the product mix. Gross profit for video rentals was
50.5% and 52.1% during the first six months of fiscal 1998 and 1997,
respectively. This fluctuation is largely due to the fixed nature of
the video rental inventory being amortized on an accelerated method over
a three year period.
Total gross profit was 34.6% and 33.8% of revenue during the first six
months of fiscal 1998, and 1997, respectively. The increase in gross
profit from product sales was partially offset by a decrease in gross
profits from video rentals. Some fluctuation in gross profit margins
may be expected due in part to the many factors that affect the
Company's purchases for sale and in part to the Company's promotional
strategies.
Store Operating, General and Administrative Expenses
Store operating, general and administrative expenses, as a percentage of
revenue, were 32.4% and 36.2% during the first six months of fiscal 1998
and 1997, respectively. Store occupancy, depreciation costs and
general and administrative expenses, as a percentage of revenue,
decreased due to the closing of under performing stores combined with
the savings results from cost reduction programs. As of January 31,
1998, the Company operated five fewer stores than in the second fiscal
quarter of 1997.
Restructuring Charge / Store Closing
During the second quarter of fiscal 1997, the Company announced plans to
restructure its business. A provision of $250,000 was recorded
representing costs for severance, outplacement and other miscellaneous
costs. There were no costs recorded for restructuring during the six
months ending January 31, 1998.
In the six months of fiscal 1997, the Company recorded a $269,569 charge
associated with the write down of assets due to the closure of one
location. For the six months ending January 31, 1998, no charges were
recorded for store closings.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS, Cont'd.
Other Income (Expense)
Other expenses include interest expense of $482,000 and $480,000 during
the first six months of fiscal 1998 and 1997, respectively. The
increase is due to the interest expense associated with the
Subordination and Intercreditor Agreement combined with the higher
amortization of deferred costs relating to the extension on the
Revolving Credit Facility. These were offset partially by a lower
average borrowing for the six month period ending January 31, 1998.
Net Earnings (Loss)
For the six month period ended January 31, 1998, the net earnings were
$283,000 or $.05 per share, compared to a net loss of $(1,192,000) or
$(.23) per share for the first six months of fiscal 1997. Net earnings
increased primarily because of a reduction in store operating and
general and administrative expenses, as well as the
non-recurrence of restructuring charges and store closing expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1998, the Company's working capital deficit was $(1.3)
million compared to working capital of $4.1 million at July 31, 1997.
The decrease in working capital during the first six months of fiscal
1998 was primarily the result of the reclassification of long-term debt
to current debt. The reclassification occurred because the Company's
Revolving Credit Agreement matures less than one year after the end of
the first quarter of 1998.
Cash flows from operating activities provided $.8 million, in the second
quarter of fiscal 1998, compared to providing $1.7 million in fiscal
1997. The primary reason for the change in cash flows from operating
activities relates to the increase in inventory combined with a decrease
in accounts payable in the first six months of fiscal 1998.
Cash flow used in investing activities decreased from $280,000 in the
first six months of fiscal 1997 to $271,000 in the first six months of
fiscal 1998. The primary reason for the change in cash flows from
investing activities relate to the reduction of purchases of video
rental inventory in the first six months of fiscal 1998 compared to the
first six months of fiscal 1997.
At January 31, 1998, the Company had a $15 million secured Revolving
Credit Agreement, expiring August 1, 1998, which includes a $3,000,000
stand-by letter of credit facility. Under the Revolving Credit
Agreement, the Company may borrow up to the lesser of (a) $15,000,000 or
(b) 60% of the Company's eligible inventory (as defined in the credit
agreement). The outstanding amount under the Revolving Credit Facility
was $5,859,000 as of January 31, 1998 and an additional $2,553,000 was
available under the terms of the Agreement. There were no borrowings
under the stand-by letter of credit during the second quarter of fiscal
1998.
In addition, the lender entered into a Subordination and Intercreditor
Agreement, which is effective through August 1, 1998, which allows the
Company to borrow from another lender, up to an additional $1 million
above the existing Revolving Credit Facility. At January 31, 1998, the
Company had an outstanding balance under the Subordination and
Intercreditor Agreement of $500,000 and an additional $500,000 was
available under the terms of the Agreement.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS, Cont'd.
The Company is a specialty retailer in Florida and Puerto Rico of
prerecorded music and video products and is also engaged in the rental
of video tapes. The industry has experienced increased competition
during the past few years, which coupled with other business related
factors, has negatively impacted the Company's performance. The Company
anticipates the competitive conditions will continue into the
foreseeable future. The Company's profitability and continuity into the
future is dependent upon various factors including improving sales and
profit margins, reducing expenses, and eliminating unprofitable stores.
Management believes that its cash flow from operations and availability
under its existing credit agreement should be adequate to cover the
Company's projected cash requirements during the year ending July 31,
1998. Operating results are however, subject to various uncertainties
and contingencies, many of which are beyond the Company's control. The
Company's future profitability or the lack thereof, could have a
substantial impact on its liquidity, its ability to meet its debt
covenants, and its availability of capital resources necessary to
conduct its business.
-13-
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on December 12,
1997 at the Radisson Mart Plaza Hotel, Salon H., 711 N.W. 72nd
Avenue, Miami, Florida 33126.
The following individuals were elected directors until the next
annual meeting of shareholders or until their successors are
elected and qualified:
Votes Votes
For Withheld
----- ---------
Arthur H. Hertz 4,909,201 49,673
Richard J. Lampen 4,909,101 49,773
Ann S. Lieff 4,875,226 83,648
Martin W. Spector 4,880,651 78,223
Rosalind S. Zacks 4,875,876 82,998
All members of the previous Board of Directors were nominees and there
has been no change in the Board of Directors as a result of this
election.
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ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule. (Attached to electronic filing only.)
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the quarter
ended January 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SPEC'S MUSIC, INC.
------------------------------
(Registrant)
March 11, 1998 /s/ Ann S. Lieff
- ----------------- ------------------------------
Date ANN S. LIEFF
President and Chief Executive
Officer (Principal Executive Officer)
March 11, 1998 /s/ Donald A. Molta
----------------- ------------------------------
Date DONALD A. MOLTA
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
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