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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 OCTOBER 31, 1995
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 DECEMBER 1, 1995: 5,235,311
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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<PAGE>
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
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................ 8
PART II.
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................... 11
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SPEC'S MUSIC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
OCTOBER 31, JULY 31,
1995 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 107,406 $ 552,224
Receivables 461,032 722,945
Inventories 27,726,221 24,464,990
Prepaid expenses 1,012,912 1,017,706
Prepaid income taxes 920,938 280,000
Deferred tax asset 410,000 537,000
------------ ------------
Total current assets 30,638,509 27,574,865
Video rental inventory, net 731,938 722,899
Property and equipment, net 18,331,980 16,587,026
Other assets 771,913 1,173,371
------------ ------------
Total assets $ 50,474,340 $ 46,058,161
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturity of long-term debt $ 11,800,000 --
Accounts payable 13,124,061 $ 8,308,785
Accrued expenses 3,158,225 2,751,813
Restructuring charge 148,890 251,203
------------ ------------
Total current liabilities 28,231,176 11,311,801
------------ ------------
Long-term debt -- 11,400,000
Capital lease obligation 26,272 34,732
Deferred income taxes 66,000 144,000
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; 10,000,000
shares authorized; 5,340,958 and 5,343,808
shares issued at October 1995 and
July 1995, respectively 53,410 53,439
Additional paid-in capital 3,819,982 3,835,604
Retained earnings 18,757,549 19,762,157
Less 95,347 and 96,046 shares in treasury
at October 1995 and July 1995, respectively, at cost (480,049) (483,572)
------------ ------------
Total stockholders' equity 22,150,892 23,167,628
------------ ------------
Total liabilities and stockholders' equity $ 50,474,340 $ 46,058,161
============ ============
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
SPEC'S MUSIC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1995 AND 1994
(UNAUDITED)
1995 1994
---- ----
<C> <C> <C>
Product sales $ 17,525,096 $ 16,647,496
Video rentals 447,633 625,313
------------ ------------
TOTAL REVENUES 17,972,729 17,272,809
Cost of goods sold - sales 11,780,598 11,066,511
Cost of goods sold - rental 190,728 252,946
------------ ------------
TOTAL COST OF SALES 11,971,326 11,319,457
------------ ------------
GROSS PROFIT 6,001,403 5,953,352
Store operating, general and
administrative expenses 7,416,071 6,011,951
------------ ------------
Operating income (loss) (1,414,668) (58,599)
Other income (expenses), net (204,940) (28,104)
------------ ------------
Earnings (loss) before income taxes (1,619,608) (86,703)
Provision (benefit) for income taxes (615,000) (33,000)
============ ============
NET (LOSS) EARNINGS $ (1,004,608) $ (53,703)
============ ============
(LOSS) EARNINGS PER SHARE $ (.19) $ (.01)
============ ============
Weighted average number of
common shares outstanding 5,248,000 5,249,000
============ ============
</TABLE>
See notes to Consolidated Condensed Financial Statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
SPEC'S MUSIC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED OCTOBER 31, 1995 AND 1994
(UNAUDITED)
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ($1,004,608) ($ 53,703)
ADJUSTMENTS TO RECONCILE NET (LOSS) EARNINGS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Amortization of video rental inventory 220,906 269,776
Depreciation and amortization of property and equipment 675,688 432,582
Amortization of preopening expenses 207,736 43,895
Gain on disposal of video rental inventory (30,196) (55,559)
(Increase) decrease in assets:
Receivables 261,913 129,406
Inventories (3,261,231) (5,070,659)
Prepaid expenses (202,942) (45,627)
Prepaid income taxes (640,938) (72,000)
Other assets 382,286 (434,125)
Deferred tax asset 127,000 3,000
Increase (decrease) in liabilities:
Accounts payable 4,815,276 4,260,851
Accrued expenses 408,684 567,963
Restructuring charge (102,313) 24,397
Deferred income taxes (78,000) 1,000
----------- -----------
Net cash provided by operating activities 1,779,261 1,197
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of video rental inventory (232,996) (302,984)
Disposition of video rental inventory 33,247 68,105
Additions to property and equipment (2,448,442) (2,084,680)
Disposition of property and equipment 32,572 --
----------- -----------
Net cash used in investing activities (2,615,619) (2,319,559)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from credit facilities 400,000 1,700,000
Repayment of capital lease (8,460) (7,897)
----------- -----------
Net cash provided by financing activities 391,540 1,692,103
----------- -----------
Net decrease in cash (444,818) (626,259)
Cash at beginning of period 552,224 1,339,140
----------- -----------
Cash at end of period 107,406 712,881
=========== ===========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
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<PAGE>
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, 1995.
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 three month period ended October 31, 1995
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. LONG TERM DEBT
On September 20, 1994, the Company entered into a new 10 year credit
agreement which includes a $15 million revolving credit facility (declining
to $6 million by 2003) and a $1 million standby letter of credit facility
which expires December 1996. Under its new credit agreement, the Company has
agreed not to incur or create certain additional indebtedness or liens on
the Company's assets other than real estate mortgage financing and unsecured
convertible subordinated debt, without the lender's consent. The Company is
further required to maintain certain financial ratios related to net worth,
leverage and fixed charges coverage and has further agreed to limit the
amount of cash dividends paid to 25% of net earnings. Effective July 31,
1995, the Company and its lender entered into a modification to its credit
agreement to ease certain of the financial covenants contained therein. As
of November 30, 1995, the Company was technically in default under the
credit agreement since it had not yet selected a chief financial officer
reasonably acceptable to its lender. In addition, although the Company has
not yet completed its November 1995 financial statements, it anticipates
that it will not meet one of the financial covenants in its credit agreement
as of November 30, 1995. As a result, the Company has reclassified all
amounts due under the credit agreement as current liabilities. The Company
is continuing to negotiate with its lender to obtain modifications to
certain of the covenants. In the event the Company is unable to obtain such
modifications, the Company may, if appropriate, seek to refinance such loan,
the ability of which no assurance can be given. Borrowings under the new
credit agreement bear interest at the LIBOR rate plus 150 basis points or
the Company may fix its interest rate for periods not to exceed five years
at 150 basis points over the corresponding U.S. Treasury security yield. The
interest rate at October 31, 1995 was 7.31%.
-6-
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONT'D.
3. STATEMENT OF CASH FLOWS INFORMATION
The following is supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
----------------------------
1995 1994
---- ----
<S> <C> <C>
Interest paid $213,475 $ 30,202
Income tax paid -0- 35,000
</TABLE>
Supplemental noncash financing activities information:
During the three months ended October 31, 1995, no awards were granted
and awards totaling $14,400 were canceled. During the three months
ended October 31, 1994, Restricted Stock Awards totaling $131,850 were
granted and $17,550 were canceled.
The Company contributed $2,272 and $14,815 in common stock to the
Company's 401(k) Plan during the three months ended October 31, 1995
and 1994, respectively.
4. EARNINGS PER SHARE
Earnings per share are computed based on net earnings for each period,
divided by the weighted average number of common shares and equivalents
outstanding during each period. Stock options have been included in the
earnings per share computation.
-7-
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1995 AND 1994
REVENUES
Total revenues increased by $700,000 or 4.1% during the first quarter of fiscal
1996 compared to the first quarter of fiscal 1995. On a same-store basis (stores
open for more than one year), revenues decreased by 12% over last year.
Revenues from product sales rose by 5.2% for the chain as a whole and decreased
by 12% on a same-store basis. The increase in product sales is due to the net
addition of three new stores during the first fiscal quarter of 1996 compared to
the same quarter in fiscal 1995. Same-store revenues declined because of the
lack of significant new hit release titles which contribute not only to greater
sales but to greater in-store traffic.
Same-store revenue also declined due to an increase in competition. During the
past two years, a large number of mass merchandisers have begun to sell compact
discs and cassettes at or near cost in order to attract customers to their
stores to generate sales of other products. During the fourth quarter of fiscal
1995, a national electronic mass merchandiser entered the South Florida market
with a significant number of new stores which offer compact discs and cassettes
at prices which are lower than those offered by the Company. The entry of this
competitor has caused other competitors in the market to lower their prices. In
response, the Company has selectively reduced its compact disc prices which
resulted in lower revenues and lower margins.
The Company plans to continue to review and adjust its prices and increase its
marketing and advertising campaign, particularly as it relates to its new
megastore concept. However, the Company believes that in the foreseeable future,
same-store revenues may decrease.
Video rental revenue decreased by 28% for the chain as a whole and by 24% on a
same-store basis as compared to fiscal 1995. The closing of one video rental
department, and lower demand contributed to lower revenue.
GROSS PROFIT
Gross profits from product sales, which are net of product management and
distribution costs, were 32.8% and 33.5% during the first quarters of fiscal
1996 and 1995, respectively. Gross profit, as a percentage of revenue, declined
primarily because of promotional markdowns and the continued shift in sales mix
to compact and laser discs, which have lower gross margins than audio cassettes
and VHS tapes. However, the Company experienced slightly lower inventory
shrinkage during the first quarter of fiscal 1996 as compared to the first
fiscal quarter of 1995.
Gross profits from video rentals were 57.4% and 59.5% during the first quarters
of fiscal 1996 and 1995, respectively. Since the first quarter of fiscal 1995,
the Company closed one video rental department.
Total gross profits were 33.4% and 34.5% of revenue during the first quarters of
fiscal 1996 and 1995, respectively. The Company expects total gross profit, as a
percentage of revenues, to
-8-
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS, CONTINUED
decline in the foreseeable future because of the continued shift in the sales
mix to compact discs, the continued decline of video rental revenues and the
increased pricing pressures due to a heightened competitive environment,
described above.
STORE OPERATING GENERAL AND ADMINISTRATIVE EXPENSES
Store operating, general and administrative expenses, as a percentage of
revenue, were 41.3% and 34.8% during the first quarters of fiscal 1996 and 1995,
respectively. Store occupancy costs, as a percentage of revenue, increased
significantly because of a decline in same-store revenue and because of the
impact of eleven new store openings during the last three quarters of fiscal
1995, and two new store openings in the first quarter of fiscal 1996, whose
expenses were higher relative to revenue in their initial year of operations. In
addition, depreciation and amortization during the first quarter of fiscal 1996,
increased as a percentage of revenue because of capital investment associated
with new stores. This increase was offset in part by lower general and
administrative expenses, as a result of lower labor and outside service costs.
INTEREST EXPENSE AND OTHER INCOME
The Company incurred interest expense of $213,000 and $41,000 during the first
quarter of fiscal 1996 and 1995, respectively. The increase is due to capital
investment and working capital related to new store expansion and renovations in
fiscal 1995 and the first quarter of fiscal 1996 which required the Company to
increase its borrowings to $11.8 million at October 31, 1995.
INCOME TAXES
The effective income tax rate, as a percentage of earnings before income taxes,
was 38.0% and 38.1% during the first quarter of fiscal 1996 and 1995,
respectively. The effective income tax rate did not vary significantly from the
first quarter in the prior fiscal year.
NET EARNINGS (LOSS)
During the first quarter of fiscal 1996, the Company incurred a loss of
($1,005,000) or ($.19) per share compared to ($54,000) or ($.01) per share
during the first quarter of fiscal 1995. Earnings declined significantly because
of lower same-store sales and lower gross margins resulting from increased
competition and higher store operating costs associated with new store openings.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1995, working capital was $2.4 million compared to $16.3
million at July 31, 1995. The decrease in working capital during the first
quarter of fiscal 1996 was primarily the result of the reclassification of
long-term debt to current debt.
Cash flow used in investing activities increased from $2.3 million in fiscal
1995 to $2.6 million in fiscal 1996. The primary reason for the increase is the
capital investment related to property and equipment for 2 new stores that
opened during the first quarter of fiscal 1996.
On September 20, 1994, the Company entered into a new 10 year credit agreement
which includes a $15 million revolving credit facility (declining to $6 million
by 2003) and a $1 million
-9-
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS, CONTINUED
standby letter of credit facility which expires December 1996. Under its new
credit agreement, the Company has agreed not to incur or create certain
additional indebtedness or liens on the Company's assets other than real estate
mortgage financing and unsecured convertible subordinated debt, without the
lender's consent. The Company is further required to maintain certain financial
ratios related to net worth, leverage and fixed charges coverage and has further
agreed to limit the amount of cash dividends paid to 25% of net earnings.
Effective July 31, 1995, the Company and its lender entered into a modification
to its credit agreement to ease certain of the financial covenants contained
therein. As of November 30, 1995, the Company was technically in default under
the credit agreement since it had not yet selected a chief financial officer
reasonably acceptable to its lender. In addition, although the Company has not
yet completed its November 1995 financial statements, it anticipates that it
will not meet one of the financial covenants in its credit agreement as of
November 30, 1995. As a result, the Company has reclassified all amounts due
under the credit agreement as current liabilities. The Company is continuing to
negotiate with its lender to obtain modifications to certain of the covenants.
In the event the Company is unable to obtain such modifications, the Company
may, if appropriate, seek to refinance such loan, the ability of which no
assurance can be given. Borrowings under the new credit agreement bear interest
at the LIBOR rate plus 150 basis points or the Company may fix its interest rate
for periods not to exceed five years at 150 basis points over the corresponding
U.S. Treasury security yield. At October 31, 1995, the Company had an
outstanding balance of $11.8 million under the credit agreement.
The Company substantially completed its expansion program during the first
quarter of fiscal 1996. The Company's future liquidity and its ability to reduce
its long term debt level depends upon its ability to generate sufficient cash
flow from operating activities by reducing its store operating, general and
administrative expenses and increasing its inventory turnover rate. The
Company's future profitability or the lack thereof, will have a substantial
impact on its liquidity and the availability of capital resources necessary to
conduct its business, renovate its stores and open additional new stores.
-10-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the
quarter ended October 31, 1995.
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)
DECEMBER 12, 1995 /s/ ANN S. LIEFF
- --------------------------- -------------------------------------------
Date ANN S. LIEFF
President and Chief Executive Officer
(Principal Executive Officer;
Principal Financial and Accounting Officer)
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> OCT-31-1995
<CASH> 107,406
<SECURITIES> 0
<RECEIVABLES> 461,032
<ALLOWANCES> 0
<INVENTORY> 27,726,221
<CURRENT-ASSETS> 30,638,509
<PP&E> 26,709,335
<DEPRECIATION> (8,377,355)
<TOTAL-ASSETS> 50,474,340
<CURRENT-LIABILITIES> 28,231,176
<BONDS> 11,826,272
<COMMON> 53,410
0
0
<OTHER-SE> 22,097,482
<TOTAL-LIABILITY-AND-EQUITY> 50,474,340
<SALES> 17,525,096
<TOTAL-REVENUES> 17,972,729
<CGS> 11,780,598
<TOTAL-COSTS> 11,971,326
<OTHER-EXPENSES> 7,416,071
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 204,940
<INCOME-PRETAX> (1,619,608)
<INCOME-TAX> (615,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,004,608)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
