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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 APRIL 30, 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 JUNE 5, 1998: 5,292,230
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 6. EXHIBITS AND REPORTS ON FORM 8-K............................14
PART I.
ITEM 1. FINANCIAL STATEMENTS
SPEC'S MUSIC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
April 30, July 31,
1998 1997
----------- -----------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and equivalents $ 366,944 $ 59,397
Trade receivables 1,063,021 192,286
Income tax receivable -- 1,890,498
Inventories 5,916,175 4,629,312
Prepaid expenses 324,596 294,373
---------- ----------
Total current assets $17,670,736 $17,065,866
Video rental inventory, net 51,241 369,734
Property and equipment, net 9,897,485 11,157,024
Other assets 441,411 659,911
---------- ----------
Total Assets $28,060,873 $29,252,535
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturity of long-term debt $ 7,054,630 $ --
Accounts payable 9,150,893 9,860,269
Accrued expenses 2,511,146 2,437,332
Store closing reserve -- 650,000
---------- ----------
Total current liabilities 18,716,669 12,947,601
---------- ----------
Long term debt -- 6,695,994
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; 10,000,000
shares authorized; 5,300,469 and
5,300,319 shares issued at April 1998
and July 1997, respectively 53,006 53,004
Additional paid-in capital 3,462,359 3,551,326
Retained earnings 5,869,863 6,134,540
Less 8,239 and 25,879 shares in treasury at
April 1998, and July 1997, respectively,
at cost (41,024) (129,930)
---------- ----------
Total stockholders' equity 9,344,204 9,608,940
---------- ----------
Total Liabilities and Stockholders' equity $28,060,873 $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 Nine Months Ended
April 30, April 30,
1998 1997 1998 1997
--------- --------- --------- ---------
Product sales $ 16,023,411 $ 16,249,846 $ 50,613,546 $ 52,933,216
Video rentals 71,158 260,214 407,703 827,083
----------- ----------- ----------- -----------
TOTAL REVENUES 16,094,569 16,510,060 51,021,249 53,760,299
----------- ----------- ----------- -----------
Cost of goods sold - sales 10,641,477 10,937,930 33,332,580 35,335,951
Cost of goods sold - rental 218,499 112,875 385,235 384,348
----------- ----------- ----------- -----------
TOTAL COST OF SALES 10,859,976 11,050,805 33,717,815 35,720,299
----------- ----------- ----------- -----------
GROSS PROFIT 5,234,593 5,459,255 17,303,434 18,040,000
Store operating, general and
administrative expenses 5,528,827 6,632,227 16,858,693 20,115,927
Restructuring charge -- -- -- 250,000
Store closing expenses -- -- -- 269,569
----------- ----------- ----------- -----------
Operating income (loss) (294,234) (1,172,972) 444,741 (2,595,496)
Other expense, net (253,715) (206,651) (709,418) (681,424)
----------- ----------- ----------- -----------
Loss before income taxes (547,949) (1,379,623) (264,677) (3,276,920)
Provision (benefit) for income taxes -- 677,824 -- (27,820)
----------- ----------- ----------- -----------
NET LOSS $ (547,949) $ (2,057,447) $ (264,677) $ (3,249,100)
----------- ----------- ----------- -----------
BASIC LOSS PER SHARE $ (.10) $ (.39) $ (.05) $ (.62)
----------- ----------- ----------- -----------
Weighted average number of
common shares outstanding - basic 5,288,000 5,254,000 5,278,000 5,249,000
----------- ----------- ----------- -----------
See Notes to Consolidated Condensed Financial Statements.
-4-
SPEC'S MUSIC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED APRIL 30, 1998 AND 1997
(UNAUDITED)
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (264,677) $ (3,249,100)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization of property
and equipment 1,440,816 1,863,228
Amortization of video rental inventory 200,331 381,886
Loss on disposal of property and equipment -- 269,569
Deferred compensation expense -- 63,651
Amortization of preopening expenses -- 8,294
Amortization of intangibles 81,964 --
(Increase) decrease in assets:
Receivables (870,735) (24,811)
Income tax receivable 1,890,498 253,501
Inventories (1,166,173) 2,597,117
Prepaid expenses (30,223) (597,183)
Other assets 115,611 (66,897)
Deferred tax asset -- 1,294,559
Increase (decrease) in liabilities:
Accounts payable (709,376) 1,074,222
Accrued expenses 91,680 202,454
Store closing reserve (650,000) (1,020,525)
Deferred income taxes -- (240,158)
---------- ----------
Net cash provided by operating activities 129,716 2,829,807
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
Purchases of video rental inventory (180,633) (307,112)
Disposition of video rental inventory 178,105 --
Additions to property and equipment (181,278) (224,386)
Disposition of property and equipment -- 145,390
---------- ----------
Net cash used in investing activities (183,806) (386,108)
---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Proceeds from borrowings 68,433,178 65,289,974
Repayments of borrowings (68,074,542) (67,782,409)
Proceeds from exercise of stock options 3,001 --
---------- ----------
Net cash provided by (used in)
financing activities 361,637 (2,492,435)
---------- ----------
Net increase (decrease) in cash 307,547 (48,736)
Cash at beginning of period 59,397 405,753
---------- ----------
Cash at end of period $ 366,944 $ 357,017
=========== ===========
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 nine month period ended April 30,
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 2 year credit agreement (the
"Revolving Credit Facility"), which includes a $3,000,000 stand-by
letter of credit facility, both of which expire 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 nine 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 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 April 30, 1998 was 8.425%.
The outstanding principal amount under the Revolving Credit Facility
was approximately $6.6 million as of April 30, 1998, and an
additional $1.9 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. Financial covenants were revised for the term of
the agreement, as discussed above.
-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 April 30, 1998, was
16.75%. The outstanding balance under the Subordination and
Intercreditor Agreement was $.5 million as of April 30, 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:
Nine months ended
April 30,
------------------
1998 1997
-------- --------
Interest paid $ 512,176 $ 584,464
Income tax paid -0- -0-
Supplemental noncash financing activities information:
During the nine months ended April 30, 1998, no Restricted Stock
Awards were granted and awards totaling $20,879 were canceled. All
Restricted Stock Awards have lapsed. During the nine months ended
April 30, 1997, no Restricted Stock Awards were granted and $95,286
were canceled.
The Company contributed $27,138 and $85,346 in common stock to the
Company's 401(k) Plan during the nine months ended April 30, 1998
and 1997, respectively.
4. 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
current and prior year comparable periods, basic and diluted loss
per share are the same. The following table sets forth the
computation of loss per share.
-7-
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, Cont'd.
Three Months Ended Nine Months Ended
April 30, April 30,
1998 1997 1998 1997
Loss available to shareholders $ (547,949) $(2,057,447) $(264,677) $(3,249,100)
======== ========= ======== ==========
Weighted average common shares
outstanding - basic 5,288,000 5,254,000 5,278,000 5,249,000
Loss per share - basic $ (.10) $ (.39) $ (.05) $ (.62)
======== ========= ======== ==========
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 fiscal years
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.
7. Merger Agreement
On June 3, 1998, the Company entered into a definitive Merger
Agreement with Camelot Music Holdings, Inc., the nation's third-
largest mall-based music retailer. The agreement calls for Camelot
to acquire the Company by a merger of a newly created subsidiary of
Camelot into the Company. Pursuant to the merger, Camelot will
acquire all of the outstanding shares of Spec's Music common stock
for $3.30 per share. The Boards of both companies have unanimously
approved the proposed merger. The transaction is subject to a
number of customary conditions including the receipt of required
regulatory approvals and approval by the stockholders of Spec's
Music. In connection with the merger agreement, certain
stockholders owning, in the aggregate, approximately 46 percent of
the outstanding shares of Spec's Music, have agreed to vote all of
their shares for the approval of the merger at the meeting of the
stockholders. The stockholder's meeting is expected to be held in
late July, 1998. The merger is anticipated to be completed by
July 31, 1998.
-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 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; the Company's ability to meet the renegotiated financial
covenants contained in the Revolving Credit Facility; and other factors
discussed in the Company's filings with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1998 AND 1997
REVENUES
Total revenues decreased by $415,491 or 2.5%, during the third quarter
of fiscal 1998 compared to the third quarter of fiscal 1997. As of the
end of the third fiscal quarter ended April 30, 1998, the Company
operated five fewer stores than in the third fiscal quarter of 1997. On
a same-store basis (stores open for more than one year), revenues were
unchanged over last year.
Revenues from product sales decreased by 1.4% for the chain as a whole
and increased by 2.4% on a same-store basis. Same-store revenues from
product sales improved over last year due to an increase in new hit
release titles.
Video rental revenue decreased by 72.7% for the Company as a whole and
by 72.7% on a same-store basis as compared to the third 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 third quarter of fiscal 1997, the Company closed
six video rental departments, and will close three video rental
departments during the fourth quarter of fiscal 1998. No video rental
departments will remain open.
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 33.6% and 32.7% during the third quarters
of fiscal 1998 and 1997, respectively. Gross profit, as a percentage of
revenue, increased because of the decrease in promotional markdowns and
better buying practices combined with an improvement in product mix.
-9-
MANAGEMENT'S DISCUSSION
AND ANALYSIS, CONTINUED
Gross profits from video rentals were (207.1%) and 56.6% during the
third quarters of fiscal 1998 and 1997, respectively. The significant
negative gross profit from video rentals was due to the write-down of
video rental inventory associated with the closing of the video rental
departments.
Total gross profit was 32.5% and 33.1% of revenue during the third
quarters of fiscal 1998 and 1997, respectively. Gross profit, as a
percentage of revenues, decreased primarily because of the write down of
video rental inventory associated with the closing of the video rental
departments. 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 fluctuations 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 34.4% and 40.2% during the third 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 April 30, 1998,
the Company operated five fewer stores than in the third 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 for
severance, outplacement and other miscellaneous costs. There were no
costs recorded for restructuring during the third quarter ended April
30, 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 third quarter ended April 30, 1998, no costs were recorded
for store closings.
OTHER INCOME (EXPENSE)
The Company incurred interest expenses of $263,000 and $253,000 during
the third 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, which was partially offset by lower average borrowing for the
quarter.
INCOME TAXES
The effective income tax rate, as a percentage of earnings before income
taxes, was 0.0% during the third quarter of fiscal 1998. The third
quarter fiscal 1998 net loss does not include any income tax credits,
due to the Company not recognizing income tax benefits applicable to net
operating loss carry forwards. In the third quarter of 1997, a
provision for income taxes of $678,000 was recorded to reduce the
deferred tax asset associated with the Company's net operating loss
carry forwards.
-10-
MANAGEMENT'S DISCUSSION
AND ANALYSIS, CONTINUED
NET EARNINGS (LOSS)
During the third quarter of fiscal 1998, the Company incurred a loss of
$(547,949) or $(.10) per share compared to $(2,057,447) or $(.39) per
share during the third quarter of fiscal 1997. The decrease in the net
loss was primarily due to the reduction in store operating, general and
administrative expenses.
NINE MONTHS ENDED APRIL 30, 1998 AND 1997
REVENUES
Total revenues decreased by $2,739,050 or 5.1% in the first nine months
of fiscal 1998, compared to the same period in fiscal 1997. On a same-store
basis, revenues decreased by 1.3% compared to the first nine
months of fiscal 1997.
Revenues from product sales decreased by 4.4% for the chain as a whole
and were unchanged on a same-store basis during the first nine months of
fiscal 1998. This decrease was due in part to the Company operating
five fewer stores than in the third quarter of fiscal 1997.
Video rental revenues decreased by 50.7% for the chain as a whole and by
51.3% on a same-store basis. The decrease was due to the closing of six
video rental departments since the third quarter of fiscal 1997. The
Company plans to close an additional three video rental departments
during the fourth quarter of fiscal 1998. No video rental departments
will remain open.
GROSS PROFIT
Gross profit from product sales, which is net of product management and
distribution costs, was 34.1% and 33.2% during the first nine months of
fiscal 1998 and 1997, respectively. Gross profit, as a percentage of
revenue, increased because of a decrease in promotional markdowns, and
better buying practices combined with an improved product mix.
Gross profit for video rentals was 5.5% and 53.5% during the first nine
months of fiscal 1998 and 1997, respectively. The significant decrease
in gross profit from video rentals was the result of the write-down of
video rental inventory associated with the closing of the video rental
departments.
Total gross profit was 33.9% and 33.6% of revenue during the first nine
months of fiscal 1998, and 1997, respectively. The increase in gross
profit from product sales was offset by a decrease in gross profits from
video rentals as a result of the write-down of video rental inventory
associated with the closing of the video rental departments. 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 33.0% and 37.4% during the first nine 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 April 30, 1998,
the Company operated five fewer stores than in the third fiscal quarter
of 1997.
-11-
MANAGEMENT'S DISCUSSION
AND ANALYSIS, CONTINUED
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 for
severance, outplacement and other miscellaneous costs. There were no
costs recorded for restructuring during the nine months ending April 30,
1998.
In the second quarter 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 nine months ending April 30, 1998, no charges
were recorded for store closings.
OTHER INCOME (EXPENSE)
Other expenses include interest expense of $744,000 and $733,000 during
the first nine 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 nine month period ended April 30, 1998.
NET EARNINGS (LOSS)
For the nine month period ended April 30, 1998, the Company's net loss
was $(264,677) or $(.05) per share, compared to a net loss of
$(3,249,100) or $(.62) per share for the first nine months of fiscal
1997. The decrease in net loss was primarily due to a reduction in
store operating and general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1998, the Company's working capital deficit was $(1.0)
million compared to working capital of $4.1 million at July 31, 1997.
The decrease in working capital during the first nine 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 April
30, 1998 balance sheet date.
Cash flows from operating activities provided $130,000 in the nine
months of fiscal 1998, compared to providing $2.8 million in fiscal
1997. The primary reason for the decline in cash flows from operating
activities relate to the increase in inventory combined with a decrease
in accounts payable in the first nine months of fiscal 1998.
Cash flows used in investing activities decreased from $386,000 in the
first nine months of fiscal 1997 to $184,000 in the first nine months of
fiscal 1998. The primary reason for the decline in cash flows used in
investing activities relate to the purchase and disposition of video
rental inventory in the first nine months of fiscal 1998 compared to the
first nine months of fiscal 1997.
At April 30, 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 $6,554,630 as of April 30, 1998, and an additional $1,857,000 was
available under the terms of the Agreement. There were no borrowings
under the stand-by letter of credit during the third quarter of fiscal
1998.
-12-
MANAGEMENT'S DISCUSSION
AND ANALYSIS, CONTINUED
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 April 30, 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.
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. This 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 return to profitable operations and
continuity into the future is dependent upon various factors including
improving sales and profit margins, hit product, reducing expenses,
eliminating unprofitable stores, the competitive environment, and the
successful renegotiation of the terms of its Credit Agreement or
obtaining other credit facilities. 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.
MERGER AGREEMENT
On June 3, 1998, the Company entered into an agreement (the "Agreement")
with Camelot Music Holdings, Inc. ("Camelot") whereby Camelot agreed to
acquire the Company by merging a newly created subsidiary of Camelot
into the Company (the "Merger"). Pursuant to the Agreement, Camelot
will acquire all of the Company's outstanding common stock in exchange
for $3.30 per share. The Agreement also provides that each holder of an
outstanding stock option of the Company will receive a cash payment
equal to the excess, if any, of $3.30 per share over the per share
exercise price of such option, multiplied by the number of shares of
common stock underlying such option, less applicable taxes.
The boards of directors of both the Company and Camelot have approved
the Merger. Consummation of the Merger is subject to a number of
customary conditions including the receipt of required regulatory
approvals and approval by the stockholders of the Company. The
stockholders' meeting is expected to be held in late July 1998, and the
Merger is expected to be completed by July 31, 1998.
Concurrently with the execution of the Agreement, Ann S. Lieff, Rosalind
S. Zacks, and Martin W. Spector each executed an agreement with Camelot
whereby each agreed to vote in favor of the Merger all shares
beneficially owned by them on the record date of the special meeting of
the Company's stockholders, except for certain shares owned by them as
fiduciaries for the benefit of others. Excluding these shares and stock
options, the Spector family owns approximately 46% of the outstanding
common stock of the Company.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule (Exhibit only to electronic
filing).
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during
the quarter ended April 30, 1997.
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)
June 12, 1998 /s/ Ann S. Lieff
- ------------------ ---------------------------------
Date ANN S. LIEFF
President and Chief Executive
Officer (Principal Executive Officer)
June 12, 1998 /s/ Donald A. Molta
- ------------------ ---------------------------------
Date DONALD A. MOLTA
Vice President and Chief Financial
Officer (Principal Financial
and Accounting Officer)
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