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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, 1996
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 9, 1996: 5,318,169
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........................................ 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................... 9-11
PART II.
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................. 12
<PAGE>
<TABLE>
<CAPTION>
PART I
ITEM 1. FINANCIAL STATEMENTS
SPEC'S MUSIC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
OCTOBER 31, JULY 31,
ASSETS 1996 1996
------------ ------------
(UNAUDITED)
CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents $ 65,603 $ 405,753
Trade receivables 174,302 293,681
Income tax receivable 1,236,641 1,236,641
Inventories 20,197,861 19,704,076
Prepaid expenses 831,532 589,984
Deferred tax asset 2,604,384 2,122,384
------------ ------------
Total current assets 25,110,323 24,352,519
Video rental inventory, net 501,940 489,649
Property and equipment, net 15,937,522 16,714,965
Other assets 586,945 567,892
------------ ------------
Total assets $ 42,136,730 $ 42,125,025
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 9,923,347 $ 8,408,500
Accrued expenses 2,145,455 2,262,378
Store closing reserve 2,351,716 2,859,289
------------ ------------
Total current liabilities 14,420,518 13,530,167
------------ ------------
Long-term debt 9,566,189 9,654,094
Deferred income taxes 293,663 293,663
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; 10,000,000
shares authorized; 5,318,169 and 5,319,269
shares issued at October 1996 and
July 1996, respectively 53,183 53,194
Additional paid-in capital 3,685,372 3,700,043
Retained earnings 14,448,100 15,269,348
Less 65,634 and 74,600 shares in treasury
at October 1996 and July 1996, (330,295) (375,484)
respectively, at cost ------------ ------------
Total stockholders' equity 17,856,360 18,647,101
------------ ------------
Total liabilities and stockholders' equity $ 42,136,730 $ 42,125,025
------------ ------------
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
-3-
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1996 AND 1995
(UNAUDITED)
1996 1995
------------ ------------
Product sales $ 15,503,958 $ 17,525,096
Video rentals 285,042 447,633
------------ ------------
TOTAL REVENUES 15,789,000 17,972,729
Cost of goods sold - sales 10,244,308 11,780,598
Cost of goods sold - rental 130,944 190,728
------------ ------------
TOTAL COST OF SALES 10,375,252 11,971,326
------------ ------------
GROSS PROFIT 5,413,748 6,001,403
Store operating, general and
administrative expenses 6,446,264 7,416,071
------------ ------------
Operating loss (1,032,516) (1,414,668)
Other income (expenses), net (270,732) (204,940)
------------ ------------
Loss before income taxes (1,303,248) (1,619,608)
Benefit for income taxes (482,000) (615,000)
------------ ------------
NET LOSS $ (821,248) $ (1,004,608)
------------ ------------
LOSS PER SHARE $ (.16) $ (.19)
------------ ------------
Weighted average number of
common shares outstanding 5,247,583 5,248,000
------------ ------------
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, 1996 AND 1995
(UNAUDITED)
1996 1995
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings (loss) ($821,248) ($1,004,608)
ADJUSTMENTS TO RECONCILE NET (LOSS) EARNINGS TO
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Amortization of video rental inventory 127,652 220,906
Depreciation and amortization of property and equipment 641,024 675,688
Amortization of preopening expenses 26,018 207,736
Gain on disposal of video rental inventory -- (30,196)
Loss on disposal of property and equipment 24,141 --
Deferred compensation expense 21,217 --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(Increase) decrease in assets:
Trade receivables 119,379 261,913
Inventories (493,785) (3,261,231)
Prepaid expenses (267,566) (202,942)
Prepaid income taxes -- (640,938)
Other assets (29,151) 382,286
Deferred tax asset (482,000) 127,000
Increase (decrease) in liabilities:
Accounts payable 1,514,847 4,815,276
Accrued expenses (102,308) 408,684
Restructuring charge -- (102,313)
Store closing reserve (507,573) --
Deferred income taxes -- (78,000)
--------- ---------
Net cash provided by (used in) operating activities (229,353) 1,779,261
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of video rental inventory (139,943) (232,996)
Disposition of video rental inventory -- 33,247
Additions to property and equipment (28,457) (2,448,442)
Disposition of property and equipment 145,508 32,572
--------- ----------
Net cash used in investing activities (22,892) (2,615,619)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 20,145,267 6,700,000
Repayments of borrowings (20,233,172) (6,300,000)
--------- ----------
Repayment of capital lease -- (8,460)
--------- ----------
Net cash provided by (used in) financing activities (87,905) 391,540
--------- ----------
Net decrease in cash (340,150) (444,818)
Cash at beginning of period 405,753 552,224
--------- ----------
Cash at end of period 65,603 107,406
--------- ----------
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
-5-
<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, 1996.
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, 1996
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
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 quarter of 1997.
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 minimum
earnings, current ratio, fixed charge coverage and tangible net worth
levels. In addition, the Company may not exceed certain capital expenditures
and inventory costs 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 October 31, 1996 was
8.255%.
The outstanding principal amount under the Revolving Credit Facility was
approximately $9.6 million as of October 31, 1996.
-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:
THREE MONTHS ENDED
OCTOBER 31,
-------------------------
1996 1995
---- ----
Interest paid $ 209,652 $ 213,475
Income tax paid -0- -0-
Supplemental noncash financing activities information:
During the three months ended October 31, 1996, no Restricted Stock
Awards were granted and awards totaling $5,325 were canceled. During
the three months ended October 31, 1995, no Restricted Stock Awards
were granted and $14,400 were canceled.
The Company contributed $14,615 and $2,272 in common stock to the
Company's 401(k) Plan during the three months ended October 31, 1996
and 1995, respectively.
4. LOSS PER SHARE
Loss per share is computed based on losses for each period, divided by
the weighted average number of common shares and equivalents
outstanding during each period. Stock options have been excluded from
the loss per share computations for both years as they were
antidilutive to the calculation.
5. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF:
During the first quarter of fiscal 1997, the Company adopted SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" which establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used
and for long-lived assets and certain identifiable intangibles to be
disposed of. Long-lived assets and certain identifiable intangibles to
be held and used by a company are required to be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Measurement of
an impairment loss for such long-lived assets and identifiable
intangibles to be disposed of are required to be reported generally at
the lower of the carrying amount or fair value less the cost to sell.
Management has determined that the adoption of SFAS No. 121 has no
effect on the Company's financial position or results of operations.
6. STORE CLOSING RESERVE
In July 1996, the Company adopted a plan as part of its response to
industry conditions to close four unprofitable store locations. As a
result of the planned closing of the store
-7-
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONT'D.
locations, the Company has recorded a charge of approximately
$3,251,000 ($2,045,000 after income tax benefits) representing lease
termination costs, write-down of assets, rent expense, and other
miscellaneous expenses. These store locations are expected to be closed
during fiscal 1997. During the first quarter of fiscal 1997, the
Company closed three of the four stores that were reserved for. The
outstanding reserve balance was $2,352,000 as of October 31, 1996.
-8-
<PAGE>
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 nontraditional 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; and other
factors discussed in the Company's filings with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1996 AND 1995
REVENUES
Total revenues decreased by $2,184,000 or 12.2% during the first quarter of
fiscal 1997 compared to the first quarter of fiscal 1996. As of the 1997 first
fiscal quarter ended October 31, 1996, the Company operated 10 fewer stores than
in the first fiscal quarter of 1996. On a samestore basis (stores open for more
than one year), revenues decreased by 3.1% over last year.
Revenues from product sales decreased by 11.5% for the Company as a whole and
decreased by 2.7% on a same-store basis. Revenues declined because increased
unit sales of compact discs were more than offset by decreased unit sales of
cassettes and video product. Samestore revenues declined primarily because of
fewer new hit release titles which contribute not only to greater sales but to
greater in-store traffic. In addition, the Company has seen significant
expansion of competitive music retail space by non-traditional music retailers,
which often sell compact discs near or at cost in certain markets, which
contributed to same-store sales declines.
Video rental revenue decreased by 36.3% for the Company as a whole and by 21.3%
on a samestore basis as compared to the first quarter in fiscal 1996. The
Company maintains video rental departments in limited stores based on customer
demand and has not aggressively promoted this business. Since the first quarter
of fiscal 1996, the Company closed three and opened one video rental department.
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 non-traditional
retailers' price slashing. In addition, revenues are expected to decline after
the closure of the Coconut Grove mega store during the 1997 fiscal year.
GROSS PROFIT
Gross profits from product sales, which are net of product management and
distribution costs, were 33.9% and 32.8% during the first quarters of fiscal
1997 and 1996, respectively. Gross profit, as a percentage of revenue, increased
because of fewer promotional markdowns and an increase in sales of higher margin
accessory items.
-9-
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS, CONTINUED
Gross profits from video rentals were 54.1% and 57.4% during the first quarters
of fiscal 1997 and 1996, respectively. Some fluctuation in gross profit margins
may be expected due to the fixed nature of the video rental inventory being
amortized on an accelerated method over a three year period.
Total gross profits were 34.3% and 33.4% of revenue during the first quarters of
fiscal 1997 and 1996, 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 40.8% and 41.3% during the first quarters of fiscal 1997 and 1996,
respectively. Store occupancy costs, as a percentage of revenue decreased
primarily because of the closing of under performing stores. As of the 1997
first fiscal quarter ended October 31, 1996, the Company operated 10 fewer
stores than in the first fiscal quarter of 1996.
INTEREST EXPENSE AND OTHER INCOME
The Company incurred interest expense of $246,000 and $213,000 during the first
quarters of fiscal 1997 and 1996, respectively. The increase is due to a higher
interest rate on the company's Revolving Credit Facility combined with the
amortization of deferred financing costs which were partially offset by lower
average borrowings for the quarter.
INCOME TAXES
The effective income tax rate, as a percentage of earnings before income taxes,
was 37.0% and 38.0% during the first quarters of fiscal 1997 and 1996,
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 1997, the Company incurred a loss of
($821,000) or ($.16) per share, compared to a loss of ($1,005,000) or ($.19) per
share, during the first quarter of fiscal 1996. The net loss declined because of
the improvement in margins combined with a reduction in operating costs.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1996, the Company's working capital remained consistent at
$10.7 million compared to $10.8 million at July 31, 1996.
Cash flows from operating activities used $229,000, in the first quarter of
fiscal 1997, compared to providing $1.8 million in fiscal 1996. The primary
reason for the change in cash flows from operating activities relate to the
inventory reductions in the first quarter of fiscal 1996, obtained from
just-in-time buying practices.
-10-
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS, CONTINUED
Cash flow used in investing activities decreased from $2.6 million in the first
quarter of fiscal 1996 to $23,000 in the first quarter of fiscal 1997. The
primary reason for the change in cash flows from investing activities relate to
fewer additions to property and equipment in the first quarter of fiscal 1997
compared to the first quarter of fiscal 1996.
At October 31, 1996, the Company had a $15 million secured Revolving Credit
Agreement, expiring May 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). At October 31, 1996, the Company had an
outstanding balance of $9,566,189 under the Revolving Credit Agreement. There
were no borrowings under the stand-by letter of credit during the first quarter
of fiscal 1997.
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, 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, 1997.
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.
-11-
<PAGE>
PART II - OTHER INFORMATION
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 October 31, 1996.
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, 1996 /s/ANN S. LIEFF
------------------ -------------------------------------
Date ANN S. LIEFF
President and Chief Executive Officer
(Principal Executive Officer)
DECEMBER 12, 1996 /s/JEFFREY J. FLETCHER
------------------ -------------------------------------
Date JEFFREY J. FLETCHER
Executive Vice President, Chief Operating
And Financial Officer
(Principal Financial and Accounting Officer)
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> OCT-31-1996
<CASH> 65,603
<SECURITIES> 0
<RECEIVABLES> 174,302
<ALLOWANCES> 0
<INVENTORY> 20,197,861
<CURRENT-ASSETS> 25,110,323
<PP&E> 25,590,042
<DEPRECIATION> (9,652,520)
<TOTAL-ASSETS> 42,136,730
<CURRENT-LIABILITIES> 14,420,517
<BONDS> 9,566,189
0
0
<COMMON> 53,183
<OTHER-SE> 17,803,178
<TOTAL-LIABILITY-AND-EQUITY> 42,136,730
<SALES> 15,503,958
<TOTAL-REVENUES> 15,789,000
<CGS> 10,244,308
<TOTAL-COSTS> 10,375,252
<OTHER-EXPENSES> 6,446,264
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (245,598)
<INCOME-PRETAX> (1,303,248)
<INCOME-TAX> (482,000)
<INCOME-CONTINUING> (821,248)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (821,248)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> 0.00
</TABLE>
