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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 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
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1666 N.W. 82ND AVENUE
MIAMI, FLORIDA 33126
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 592-7288
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
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(TITLE OF CLASS)
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, and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [X]
As of October 22, 1996, the aggregate market value of the common stock held
by non-affiliates of the Registrant was approximately $3,892,449.
As of October 22, 1996, the number of shares of common stock of the
Registrant issued and outstanding was 5,319,269.
DOCUMENTS INCORPORATED BY REFERENCE
Part III--Definitive Proxy Statement for the 1996 Annual Meeting of
Shareholders.
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<PAGE>
INDEX TO FORM 10-K
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 10
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters.............................. 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 14
Item 8. Financial Statements and Supplementary Data................. 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 32
Item 10. Directors and Executive Officers of the Registrant.......... 32
Item 11. Executive Compensation...................................... 32
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................... 32
Item 13. Certain Relationships and Related Transactions.............. 32
Item 14. Exhibits, Financial Statement Schedules, and Report
on Form 8-K.............................................. 33
<PAGE>
ITEM 1. BUSINESS
GENERAL
Spec's Music, Inc., founded in 1948 and headquartered in Miami, Florida,
operates 49 stores in Florida and Puerto Rico, including 20,000-square-foot
"megastores" in Miami Beach, Coconut Grove, and the Sawgrass Mills Mall in
Sunrise, Florida. As such, we are among the most highly recognized and largest
retailers of specialty music in the Miami/Ft. Lauderdale metropolitan area, and
Florida's Gold Coast. Our particular strength lies in the diversity of products
we offer, including audio compact discs (CD's); pre-recorded cassette tapes;
movies and music on VHS tapes and laser discs; blank audio and video tapes; a
wide range of audio and video accessories; and boutique items such as tee
shirts, posters, and collectibles. In addition, customers can rent video movies
at one of nine locations.
Spec's market area continued to expand in fiscal 1996 with the opening of two
new stores, including our hot new "megastore" on Miami Beach. To remain
competitive, however, we also closed eight under performing stores during the
fiscal year. At fiscal year end, therefore, we operated 52 stores, down from
last year's total of 58. The overwhelming majority of our stores (48) are
located in Florida, with the remainder throughout the island of Puerto Rico. The
design and format of each of our stores has been tailored specifically to best
serve the needs of our customers in a specific locale. At the end of fiscal
1996, we operated 19 stores in enclosed traditional shopping malls and 30 stores
in shopping centers and free-standing downtown locations. Of these, 19 are
"superstores", which typically span 7,000-10,000 square feet of retail space.
Additionally, our "megastores" in Miami Beach, Coconut Grove, and the Sawgrass
Mills Mall are comprised of more than 20,000 square feet each.
We are particularly proud of our diverse product mix, which offers a wide
variety of audio and video products to shoppers of every age and taste. In
Florida alone there are more than 25 million tourists annually, in addition to
the state's 14 million permanent residents. Studies have shown that music
preferences which tend to correlate with the ethnic backgrounds of its listeners
are highly fragmented among segments of the population. This in turn creates
both challenges and opportunities for us to offer the best product mix -- store
by store -- and to position ourselves in a number of specialty music categories.
Spec's is committed to maintaining its position as the dominant specialty
retailer of prerecorded music and music-related products and offering the
highest quality service to its customers. While all of our stores maintain a
comprehensive selection of diverse music categories, our newly opened stores
provide a unique opportunity for customers to interact with our products.
Specifically, they can sample music at listening stations
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throughout the store and search on-line at information kiosks for product
listings throughout the Spec's network, as well as accessibility to more than
130,000 titles available via special order. We currently offer more than 93,000
active audio and video titles.
Perhaps as important as our reputation in the retail music industry is our
commitment to creating a top working environment for our employees. Spec's is
honored to have been named the number one public company in the United States
for women to work for, according to a study by BUSINESS ETHICS. In its May/June
1996 issue, the Minneapolis-based magazine cited Spec's high percentage of
female members of its board of directors (60%), women in management (44%), and
female employees (47%). Further, Spec's ranked 61 on the list of the magazine's
top 100 companies, which compared environmental performance, community
relations, employee relations, and financial performance.
PRODUCTS
In fiscal 1996, the sale of audio products comprised approximately 82% of total
revenue. This represents a slight increase over fiscal 1995's 81% and fiscal
1994's 79%. Of that number 65% came from the sale of compact discs as compared
to 61% in fiscal 1995 and 57% in fiscal 1994. Cassette tapes comprised 17% of
total revenue in fiscal 1996, a decrease over fiscal 1995's 20% and fiscal
1994's 22%. CD's in particular have increased significantly as a percentage of
total revenues, and industry projections suggest that sales of CD players are
likely to increase in the foreseeable future. Conversely, revenue from video
product sales and rental declined during fiscal 1996, down to 10% from 11% in
fiscal 1995 and 13% in fiscal 1994. This trend reflects Spec's decision to
eliminate video rentals in all but 9 stores for competitive reasons.
AUDIO PRODUCTS
Spec's sells prerecorded compact discs and cassette tapes manufactured by
leading domestic and foreign manufacturers, as well as blank audio cassettes.
Each of our stores carries a wide assortment of CD's and cassettes of popular
recording artists on such prominent labels as Columbia, Warner Brothers, Sony,
Elektra, Atlantic, Polygram, RCA, MCA, Motown, A&M, Arista, Capitol, EMI, SBK,
and Geffin Records. We also offer a diverse range of music including pop, rock,
rap, country, jazz, classical, Latin, folk, Broadway, children's, and many
others.
VIDEO PRODUCTS
While Spec's has reduced the number of video rental departments within its music
stores, each store continues to sell prerecorded video movies. Our broad
selection of movies includes popular feature films, children's films, classic
movies, music videos, educational titles, and sports-related titles. They range
in price from $9 to $99, with an
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average price of about $17 -- including used copies which were previously part
of the rental inventory. Additionally, we also sell prerecorded movies on laser
disc format, with prices ranging from $20 to $94, with an average price of
roughly $39.
OTHER PRODUCTS
Spec's offers numerous music-related accessories such as storage and carrying
cases for cassettes, CD's, and movies, as well as cleaning and maintenance kits,
songbooks, and sheet music. We also carry unique items such as posters, buttons,
and tee shirts, and, in our "megastores", magazines, jewelry, trading cards,
post cards, and musical instruments.
SEASONALITY
The Company experiences higher sales volume during the Christmas selling season.
Revenues during the month of December, as a percentage of annual revenues, were
15.7%, 16.7% and 16.0% in fiscal 1996, 1995 and 1994, respectively.
ADVERTISING AND MARKETING
Spec's, through its marketing and advertising programs, is dedicated to
remaining the foremost music entertainment retailer in both its Florida and
Puerto Rico locations. We are accomplishing this by highlighting our unsurpassed
selection and everyday value pricing.
Our traditional means of mass media advertising include radio, television,
print, and mass mailings, the majority of which is directed toward radio. Radio
advertising affords us the unique opportunity to target specific niche listening
audiences, such as those interested in classical music, jazz, Latin music,
alternative rock, and so forth. Radio also enables us to advertise on short
notice the availability of new products and promotions. Further, in conjunction
with major music suppliers, we occasionally participate in special promotions
for appearances of prominent recording artists. We have also developed a mailing
list which targets these listeners.
In fiscal 1996, Spec's introduced a unique new campaign. In this program, we are
buying back thousands of used CD's for $3. apiece in "Spec's Bucks", which can
be used to buy new products in our stores. The used CD's, in turn, are resold to
other customers. We think this is a definite win-win situation!
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PURCHASING AND INVENTORY
Almost all of our products are purchased under individual purchase orders from
manufacturers who deliver the merchandise within several days after the order is
placed. In order to remain competitive, we purchase merchandise from more than
200 suppliers, although a large majority of our orders are placed with the eight
largest vendors.
Roughly 95% of our merchandise is delivered directly to Spec's distribution
center in Miami. From there, individual store deliveries are made via truck
twice a week to stores in southeast Florida. We use common carriers providing
next-day service to our stores in Puerto Rico and outside the southeast Florida
truck delivery area. A certain amount of merchandise is also directly shipped to
stores by individual vendors. We utilize recent store sales trends to determine
the amount of merchandise distributed to each individual store.
Current trade practices in the prerecorded music industry enable us to return
most of our unsold products to the manufacturers. The great majority of these
manufacturers do not have limits on the number of these returns but rather
impose a return penalty ranging from zero to 35% of the unit cost. Manufacturers
of video movies limit the return privilege to approximately 10-20% of purchases.
During fiscal 1996, we returned about 17% of our total purchases to
manufacturers.
STORE OPERATIONS AND PERSONNEL
Each of our stores is typically open seven days a week, including weekdays and
Saturday evenings. A manager and an assistant manager serve each store, paying
particular attention to a high level of customer service and ease of store
operation. Store and district managers are encouraged to reach performance goals
by the availability of a cash incentive program.
We recognize the importance to customers of a trained management and sales
staff, and we strive to hire experienced staff at all levels of our
organization.
Spec's processes its sales transactions on point-of-sale (POS) cash terminals.
In fiscal 1996, about 64% of our sales were made by either cash or check. The
balance was transacted by any of a number of national credit cards, for which we
pay between 1.7% and 3% of sales as a service charge.
At July 31, 1996, Spec's had approximately 321 full-time and 355 part-time
employees (associates), who are paid strictly on an hourly basis with no sales
commissions. In
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order to provide the best in customer service, we also add temporary associates
during peak sales periods. None of our associates are covered by collective
bargaining agreements, and we have never experienced a strike or work stoppage.
We are very proud of the continuing excellent working relationship we have with
all of our staff.
MANAGEMENT INFORMATION SYSTEMS
Our automated inventory management and distribution system, which is bar
code-based, enables us to centrally purchase and manage our inventory, control
the quantity and mix of product in each store, and minimize payroll and
production costs. We also adjust our stock levels in individual stores to
correspond to recent sales trends in each market area. During fiscal 1996, we
enhanced our distribution system by introducing a new cross docking system which
reduced our inventory and allowed just-in-time purchasing.
Our automated store transfer and product returns inventory handling system
allows us to routinely return non-selling merchandise, which is scanned into a
computer for tracking purposes. The computer then decides whether the
merchandise should be returned to regular warehouse stock or to the vendor. This
process has greatly increased both accuracy and productivity in processing
transfers and returns, and enables us to replenish inventory between stores
without ultimately sending the product back to the vendor.
Our on-line customer service network has been very successful in providing
inventory status on special orders, transmitting special orders to the
distribution center, or communicating special orders directly with specific
vendors via Electronic Data Interchange (EDI). We believe this customer service
network is unique among music retailers. The EDI program includes electronic
transmission of purchase orders directly to our vendors' computers, the
electronic receipt of vendor invoices, and direct shipment of products to our
stores.
SERVICEMARKS
All of our stores operate under the "Spec's" name. The mark "Spec's" and our
company logo are servicemarks registered with the U.S. Patent and Trademark
Office. We believe that both the mark and logo are important name recognition
devices and serve us well in advertising and promotional activities. Our name
and logo are also registered separately in the State of Florida.
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<PAGE>
COMPETITION
There is no doubt that the retail music business is highly competitive. Among
our competitors are mass merchants, discount stores, video rental outlets,
electronic and computer stores, book stores, mail order clubs, warehouse
outlets, and specialty music stores. Many of these competitors are national in
scope and therefore have greater financial resources than we do. The Company
anticipates non-traditional retailers will continue to sell music and video
products at highly discounted prices. Also, we face further entertainment-based
competition from movies, concerts, video games, and CD-ROM computers.
Additionally, we compete with a broad range of retail businesses for new store
locations and for existing locations when leases are up for renewal.
However, we believe that our competitive advantages are many: 1) our large
number of stores afford us sufficient critical mass for effective marketing
programs while simultaneously allowing us to respond quickly to shifts in the
market; 2) after more than 49 years in the business, our name recognition and
customer loyalty is particularly strong; 3) we are sought out for our
unsurpassed selection of both Latin and classical music; and 4) we are
recognized as a value price leader in the retail music industry.
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<PAGE>
ITEM 2. PROPERTIES
Spec's leases 48 stores throughout Florida and Puerto Rico, and owns the
building which houses its Miami Beach store. In addition, the company owns the
building of a former store in Tampa, which is currently being leased to another
retailer. Our stores contain an average of 6,644 square feet of total space. At
the end of fiscal 1996, we operated 19 stores in enclosed traditional shopping
malls and 30 stores in shopping centers and free-standing downtown locations. Of
these, 19 are "superstores", which typically span 7,000-10,000 square feet of
retail space. Additionally, our "megastores" in Miami Beach, Coconut Grove, and
Sawgrass Mills Mall are comprised of more than 20,000 square feet each.
Store leases generally provide for fixed monthly rental payments and require us
to pay real estate taxes and certain other charges. Some leases also subject us
to escalation formulas and others to additional rent based on a percentage of
net sales -- often ranging from 3% to 7%. The terms of our leases range from
three to fifteen years, and many have renewal options for longer terms. For the
year ended July 31, 1996, Spec's rental expense was approximately $10.1 million,
including $118,287 in percentage rental. All of our stores are leased from
unrelated parties, except the Coral Gables store on South Dixie Highway and the
St. Petersburg store on 66th Street, which are leased from trusts; the trustees
and beneficiaries of these trusts include Ann S. Lieff, president of Spec's, and
Rosalind S. Zacks, vice president of the Company. See Item 13, Certain
Relationships and Related Transactions.
Spec's executive offices and distribution center comprise 46,000 square feet of
space at 1666 NW 82nd Avenue, Miami, Florida, near the Miami International
Airport.
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ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the Company is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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EXECUTIVE OFFICERS
All executive officers of the Company were elected to their present offices at
the Annual Meeting of the Board of Directors held on December 12, 1995. The
following table sets forth, as of October 1, 1996, certain information regarding
the executive officers of the Company.
<TABLE>
<CAPTION>
PRINCIPAL BUSINESS EXPERIENCE
NAME AGE DURING THE PAST FIVE YEARS
- ---- --- -----------------------------
<S> <C> <C>
Martin W. Spector 91 Chairman Emeritus since 1996. Chairman of the Board of
Directors of the Company 1980 - 1996; President and Chief
Executive Officer and Director of the Company and its
predecessors 1948-1980.
Barry J. Gibbons 50 Chairman of the Board, since 1996. Director since 1995.
Ann S. Lieff 44 President and Chief Executive Officer of the Company since
1980; Director since 1979.
Jeffrey J. Fletcher 44 Executive Vice President, Chief Operating and Financial Officer
since 1996.
Dorothy J. Spector 77 Secretary of the Company since its incorporation in 1970.
Rosalind S. Zacks 46 Vice President since April 1993; Executive Vice President and
Treasurer of the Company from 1981 to 1993; Director since
1979.
</TABLE>
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
STOCK PRICE INFORMATION
The Company's Common Stock is traded in the NASDAQ National Market System under
the symbol "SPEK." The following table shows high and low bid price information
as quoted by NASDAQ for the two most recent fiscal years. Such quotations
reflect inter-dealer prices, without retail mark-ups, markdowns or commissions,
and may not necessarily represent actual transactions.
1996 HIGH LOW 1995 HIGH LOW
First quarter 4 1/8 2 1/2 First quarter 5 3/4 4 1/4
Second quarter 3 1/8 1 1/4 Second quarter 6 4 1/4
Third quarter 2 5/8 1 3/4 Third quarter 6 1/2 3 1/2
Fourth quarter 2 1/8 1 3/8 Fourth quarter 4 1/4 3
The Company has not paid any cash dividends on its common stock during the
periods shown, and does not intend to pay dividends in the foreseeable future.
On October 25, 1996, the Company had 5,319,269 shares of common stock
outstanding held by 392 stockholders of record, and approximately 1,500
beneficial owners.
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ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEARS ENDED JULY 31, 1996 1995 1994 1993 1992
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenues $77,532 $79,603 $78,388 $ 72,733 $ 63,056
Gross profit 26,090 28,406 28,590 26,664 22,929
Store operating, general and administrative expenses 29,065 26,338 24,136 22,834 20,157
Store closing expenses 3,251 -- -- -- --
Restructuring charge -- -- -- 3,204 --
Interest (expense) and other income (918) (410) 44 1,013 128
--------- --------- --------- ---------- ---------
Earnings (loss) before income taxes (7,144) 1,658 4,498 1,639 2,900
Provision (benefit) for income taxes (2,651) 626 1,681 485 970
--------- --------- --------- ---------- ---------
Net earnings (loss) $ (4,493) $ 1,032 $ 2,817 $ 1,154 $ 1,930
========= ========= ========= ========== =========
Cash flow from operating activities 4,671 380 2,319 4,223 8,020
========= ========= ========= ========== =========
Net earnings (loss) per common share $ ( .86) $ .20 $ .54 $ .22 $ .36
========= ========= ========= ========== =========
Weighted average number of common shares outstanding 5,246 5,248 5,264 5,195 5,338
========= ========= ========= ========== =========
BALANCE SHEET DATA (AS OF JULY 31,):
Working capital $ 10,822 $ 16,702 $ 12,117 $ 10,779 $ 8,325
Total assets 42,125 46,497 37,364 31,155 29,035
Capital lease obligation and long term debt 9,654 11,435 67 97 126
Common stockholders' equity 18,647 23,168 22,000 18,971 18,269
Common stockholders' equity per share 3.55 4.41 4.22 3.66 3.47
Return on sales (5.8%) 1.3% 3.6% 1.6% 3.1%
Return on average common stockholders' equity (21.5%) 4.6% 13.8% 6.2% 11.0%
OPERATING DATA:
Number of stores (at July 31) 52 58 55 56 63
Weighted average revenue per store $1,424,000 $1,385,000 $1,375,000 $1,198,000 $1,095,000
Square feet of selling space (at July 31) 323,323 336,130 280,100 273,400 323,900
Weighted average revenue per square foot
of selling space $ 227 $ 266 $ 279 $ 242 $ 210
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following table sets forth, for the periods indicated, the relative
percentages that certain items in the Company's Consolidated Statements of
Operations bear to revenues and the percentage change in those items from period
to period.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
YEARS ENDED JULY 31, 1996 1995 1994
<S> <C> <C> <C>
Product sales 98.0% 97.1% 95.3%
Video rental 2.0 2.9 4.7
----- ----- -----
Total revenues 100.0 100.0 100.0
Gross profit - product sales 33.2 35.1 35.6
Gross profit - video rental 54.2 55.9 55.1
----- ----- -----
Total gross profit 33.7 35.7 36.5
Store operating, general and administrative expenses 37.5 33.1 30.8
Store closing expenses 4.2 -- --
Other income (expense) (1.2) (0.5) 0.1
----- ----- -----
Earnings (loss) before income taxes (9.2) 2.1 5.7
Provision (benefit) for income taxes (3.4) 0.8 2.1
----- ----- -----
NET EARNINGS (LOSS) (5.8) 1.3 3.6
----- ----- -----
PERIOD TO PERIOD PERCENTAGE
INCREASE (DECREASE)
YEARS ENDED JULY 31, 1996 1995 1994
Product sales (1.7)% 3.5% 12.0%
Video rental (33.1)% (38.0) (38.6)
Total revenues (2.6) 1.6 7.8
Gross profit - product sales (6.9) 2.2 11.8
Gross profit - video rental (35.2) (37.1) (30.0)
Total gross profit (8.2) (0.6) 7.2
Store operating, general and administrative expenses 10.4 9.1 5.7
Store closing expenses 100.0 -- --
Other income (expense) 123.9 n/m (95.7)
Earnings (loss) before income taxes (530.8) (63.1) 174.3
Provision (benefit) for income taxes (523.6) (62.8) 246.1
NET EARNINGS (LOSS) (535.2) (63.4) 144.1
</TABLE>
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The following is an analysis of the Company's results of operations, liquidity
and capital resources. To the extent that such analysis and other information in
this annual report contain 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; and other factors discussed in the Company's
filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
REVENUES
Total revenues decreased by $2,071,000 or 2.6% from fiscal 1995 to fiscal 1996.
On a same-store basis (stores open more than one year) revenues decreased by
5.7% over last year.
Revenue from product sales decreased by 1.7% for the chain as a whole and
decreased by 5.4% 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. Same-store 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 33.1% for the chain as a whole and by 23.3% on
a same-store basis as compared to fiscal 1995. The Company maintains video
rental departments in limited stores based on customer demand and has not
aggressively promoted this business. During fiscal 1996, the Company closed
three video rental departments.
The Company plans to continue to review and adjust its prices and focus its
marketing and advertising campaign to differentiate its product offering 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 store.
Total revenues increased by $1,215,000 or 1.6% from fiscal 1994 to fiscal 1995.
On a same-store basis, revenues decreased by 2.3%.
During fiscal 1995, revenue from product sales rose by 3.5% for the chain as a
whole and decreased by .8% on a same-store basis. The increase in product sales
was due to the addition of eleven new stores. Same-store revenues declined
primarily because of the lack of significant new hit release titles which
contribute not only to greater sales but to greater in-store traffic. In
addition, the entry of a significant new competitor in the Company's South
Florida market contributed to lower same-store revenues particularly in the
fourth quarter of fiscal 1995.
Video rental revenue decreased by 38% for the chain as a whole and by 15% on a
same-store basis during fiscal 1995 as compared to 1994. The closing of one
video rental department during fiscal 1995, and lower demand contributed to
lower revenue.
Weighted average revenue per store increased by 2.8% to $1,424,000 in fiscal
1996 and increased by .7% in fiscal 1995. The weighted average revenue per
square foot of selling space decreased to $227, or 14.7% in fiscal 1996 and
decreased to $266, or 4.7% in fiscal 1995. The decrease in fiscal 1996 reflects
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<PAGE>
the addition of two mega stores early in the year which tended to bring down the
average during the development period. The decrease in fiscal 1995 reflects the
addition of larger stores toward the end of the fiscal year.
GROSS PROFIT
Gross profit for product sales, which is net of product management and
distribution costs, was 33.2%, 35.1% and 35.6% in fiscal 1996, 1995 and 1994,
respectively. Gross profit declined in fiscal 1996 primarily because of the
continued shift in sales mix to compact and laser discs, which have lower gross
margins than audio cassettes and VHS tapes.
Gross profit for video rentals was 54.2%, 55.9% and 55.1% in fiscal 1996, 1995
and 1994, respectively.
Total gross profit was 33.7, 35.7% and 36.5% in fiscal 1996, 1995 and 1994,
respectively. The Company expects gros profit as a percentage of revenues to
continue to decline as a result of competitive pricing pressures and the shift
in product mix.
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Store operating, general and administrative expenses were 37.5%, 33.1% and 30.8%
of revenues in fiscal 1996, 1995 and 1994, respectively. Store occupancy costs
increased in fiscal 1996 because of the addition of two new mega stores whose
operating expenses were higher relative to revenue in their initial year of
operation. Depreciation and amortization also increased in fiscal 1996 because
of the capital investment and pre-opening expenses associated with the new
stores.
Store occupancy costs, as a percentage of revenue, increased because of a
decline in same-store revenue and because of the impact of eleven new store
openings during fiscal 1995. In addition, depreciation and amortization during
fiscal 1995 also increased as a percentage of revenue because of capital
investment associated with new stores and the expansion and renovation of one
store and the Company's distribution center.
STORE CLOSING EXPENSE
In fiscal 1996, as part of its response to industry conditions, the Company
provided a charge of $3,251,000 to cover the costs of closing unprofitable
stores. During the year, the Company closed eight such stores and has closed or
plans to close six additional stores in fiscal 1997. The major portion of the
store closing expense relates to costs and writeoffs associated with the planned
closing of the Coconut Grove mega store, which has been unprofitable and would
likely remain unprofitable in the current competitive environment.
INTEREST EXPENSE AND OTHER INCOME
The Company incurred interest expense of $1,074,000 in fiscal 1996, $442,000 in
fiscal 1995 and $46,000 in fiscal 1994. Interest expense increased in fiscal
1996 as a result of capital investment and working capital related to new store
expansion and renovations in fiscal 1995 which required the Company to increase
its borrowings to $9.7 million at the end of 1996 and $11.4 million at the end
of 1995. The Company expects its borrowings to be reduced in the foreseeable
future due to a significant reduction in capital expenditures and accordingly
expects interest expense in fiscal 1997 to be lower than it was in fiscal 1996.
16
<PAGE>
INCOME TAXES
The effective income tax rate as a percentage of earnings (loss) before income
taxes, was 37.1%, 37.8% and 37.4% in fiscal 1996, 1995 and 1994, respectively.
NET EARNINGS
The net loss for fiscal 1996 was $(4,493,000) or $(.86) per share compared to
net earnings of $1,032,000 or $.20 per share in fiscal 1995. The fiscal 1996
loss resulted from lower same-store sales resulting from increased competition,
lower gross margins resulting from product mix shifts, higher store operating
expenses associated with new store openings and the store closing expense
charge. Fiscal 1995 earnings decreased from $2,817,000 or $.54 per share in
fiscal 1994 because of lower same-store sales and lower gross margins resulting
from increased competition and higher store operating, general and
administrative costs associated with new store openings.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $10.8 million, $16.3 million and $12.1 million at July 31,
1996, 1995 and 1994, respectively. The decrease in working capital in fiscal
1996 resulted from a decrease in the Company's inventory levels and to losses
incurred during the current year. The increase in working capital in fiscal 1995
was the result of working capital provided by operations, the reclassification
of the company's line-of-credit facility to long-term debt and the use of
long-term debt to finance inventory.
Cash flows from operating activities provided $4.7 million, $.4 million and $2.3
million in fiscal 1996, 1995, and 1994, respectively. In fiscal 1996, inventory
reductions, obtained from just-in-time buying practices, contributed $4.5
million to increased operating cash flows. In fiscal 1995, the increase in
inventory level, net of accounts payable, which increased by $2.9 million,
contributed to lower operating cash flows. During fiscal 1995, the Company
increased its inventory level by increasing the number of titles offered in many
of its stores and by opening new and larger stores.
Cash flows used in investing activities decreased from $10.9 million in fiscal
1995 to $2.8 million in fiscal 1996. The primary reason for the increase is the
significant capital investment related to property and equipment for 11 new
stores opened during fiscal 1995 and preparation for two stores which opened in
the first quarter of fiscal 1996.
At July 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 July 31, 1996, the Company had an
outstanding balance of $9,654,000 under the revolving credit agreement. There
were no borrowings under the stand-by letter of credit during fiscal 1996.
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 improved 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 convenants, and the availability of
capital resources necessary to conduct its business.
17
<PAGE>
The Company plans capital investments in fiscal 1997 for store remodeling and
store fixture upgrades. The investment program will be financed with cash from
operating activities.
NEW ACCOUNTING PRONOUNCEMENTS
The Company will adopt the following Statements of Financial Accounting
Standards ("SFAS") in the year ending July 31, 1997:
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" 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 should be based on the fair value of the asset. Long-lived assets
and certain 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. SFAS No. 121 is effective for fiscal years that begin after
December 15, 1995. Management has not yet determined the effect of SFAS No. 121
on the Company's financial position or results of operations.
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes financial
accounting and reporting standards for stock-based employee compensation plans,
including stock options, stock purchase plans, restricted stock and stock
appreciation rights. SFAS No. 123 defines and encourages the use of the fair
value method of accounting for employee stock-based compensation. Continuing use
of the intrinsic value based method of accounting prescribed in Accounting
Principles Board Opinion No. 25 ("APB 25") for measurement of employee
stock-based compensation is allowed with pro-forma disclosures of net income and
earnings per share as if the fair value method of accounting had been applied.
Transactions in which equity instruments are issued in exchange for goods or
services from non-employees must be accounted for based on the fair value of the
consideration received or of the equity instrument issued, whichever is more
reliably measurable. SFAS No. 123 is effective for transactions entered into in
fiscal years that begin after December 15, 1995. The Company has determined that
it will continue to use the method of accounting prescribed in APB 25 for
measurement of employee stock-based compensation, and will begin providing the
required pro-forma disclosure in its financial statements for the year ending
July 31, 1997 as allowed by SFAS No. 123.
INFLATION AND ECONOMIC TRENDS
The Company is affected by general economic trends, particularly in Florida and
Puerto Rico. The Company does not believe that inflation has had a material
effect on the results of its operations during the past three fiscal years.
SEASONALITY
The Company experiences higher sales volume during the Christmas selling season.
Revenues during the month of December, as a percentage of annual revenues, were
15.7%, 16.7% and 16.0% in fiscal 1996, 1995 and 1994, respectively.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Spec's Music, Inc., and Subsidiary
Miami, Florida
We have audited the accompanying consolidated balance sheets of Spec's Music,
Inc. and Subsidiary (the "Company") as of July 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended July 31, 1996. Our audits
also included the financial statement schedule listed in the Index at Item
14(a)2. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Spec's Music, Inc. and Subsidiary
as of July 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended July 31, 1996 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
October 18, 1996
19
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
July 31, 1996 1995
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 405,753 $ 552,224
Trade receivables 293,681 722,945
Income tax receivable 1,236,641 --
Inventories 19,704,076 24,464,990
Prepaid expenses 589,984 1,017,706
Prepaid income taxes -- 280,000
Deferred tax asset 2,122,384 976,000
------------ ------------
Total current assets 24,352,519 28,013,865
Video rental inventory, net 489,649 722,899
Property and equipment, net 16,714,965 16,587,026
Other assets 567,892 1,173,371
------------ ------------
Total assets $ 42,125,025 $ 46,497,161
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 8,408,500 8,308,785
Accrued expenses 2,262,378 2,751,813
Store closing reserve 2,859,289 --
Restructuring charge -- 251,203
------------ ------------
Total current liabilities 13,530,167 11,311,801
Long term debt 9,654,094 11,400,000
Capital lease obligation -- 34,732
Deferred income taxes 293,663 583,000
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; 10,000,000
shares authorized; 5,319,269 and 5,343,808
shares issued at 1996 and
1995, respectively 53,194 53,439
Additional paid-in capital 3,700,043 3,835,604
Retained earnings 15,269,348 19,762,157
Less 74,600 and 96,046 shares in treasury,
at cost, in 1996 and 1995, respectively (375,484) (483,572)
------------ ------------
Total stockholders' equity 18,647,101 23,167,628
------------ ------------
Total liabilities and stockholders' equity $ 42,125,025 $ 46,497,161
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
20
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended July 31, 1996 1995 1994
<S> <C> <C> <C>
REVENUES:
Product sales $ 75,996,009 $ 77,306,250 $ 74,681,858
Video rentals 1,535,652 2,296,892 3,705,869
------------ ------------ ------------
Total revenues 77,531,661 79,603,142 78,387,727
Cost of goods sold - product sales 50,737,316 50,182,698 48,132,054
Cost of goods sold - video rental 704,003 1,014,070 1,665,758
------------ ------------ ------------
Gross profit 26,090,342 28,406,374 28,589,915
Store operating, general and
administrative expenses 29,064,731 26,337,806 24,136,232
Store closing expenses 3,251,203 -- --
------------ ------------ ------------
Operating income (loss) (6,225,592) 2,068,568 4,453,683
Other income (expense):
Interest income 58,986 -- 26,526
Interest expense (1,074,497) (441,527) (46,100)
Other 96,769 31,230 63,216
------------ ------------ ------------
Total other income (expense) (918,742) (410,297) 43,642
------------ ------------ ------------
Earnings (loss) before income taxes (7,144,334) 1,658,271 4,497,325
Provision (benefit) for income taxes (2,651,525) 626,000 1,680,549
------------ ------------ ------------
NET EARNINGS (LOSS) $(4,492,809) $ 1,032,271 $ 2,816,776
============ ============ ============
NET EARNINGS (LOSS) PER COMMON SHARE $ (.86) $ .20 $ .54
============ ============ ============
Weighted average number of
common shares outstanding 5,246,000 5,248,000 5,264,000
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
ADDITIONAL
COMMON STOCK PAID-IN RETAINED TREASURY STOCK
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1993 5,362,858 $53,629 $3,915,658 $15,913,110 (181,212) ($911,553) $18,970,844
Net earnings -- -- -- 2,816,776 -- -- 2,816,776
Exercise of stock options -- -- 130 -- 3,168 15,967 16,097
Contribution to 401(K) Plan -- -- 11,192 -- 9,753 49,042 60,234
Cancellation of restricted
stock award (7,700) (77) (37,624) -- -- -- (37,701)
Restricted stock awards granted -- -- 28,900 -- 28,900 144,500 173,400
--------- ------- ---------- ----------- -------- --------- -----------
Balance, July 31, 1994 5,355,158 $53,552 $3,918,256 $18,729,886 (139,391) ($702,044) $21,999,650
Net earnings -- -- -- 1,032,271 -- -- 1,032,271
Exercise of stock options -- -- 187 -- 1,334 6,737 6,924
Contributions to 401(K) Plan -- -- (9,006) -- 12,711 64,063 55,057
Cancellation of restricted
stock award (11,350) (113) (58,011) -- -- -- (58,124)
Restricted stock awards granted -- -- (15,822) -- 29,300 147,672 131,850
--------- ------- ---------- ----------- -------- --------- -----------
Balance, July 31, 1995 5,343,808 $53,439 $3,835,604 $19,762,157 (96,046) ($483,572) $23,167,628
Net loss -- -- -- (4,492,809) -- -- (4,492,809)
Contributions to 401(K) Plan -- -- (67,487) -- 21,446 108,088 40,601
Cancellation of restricted
stock award (24,539) (245) (105,055) -- -- -- (105,300)
Deferred compensation expense -- -- 36,981 -- -- -- 36,981
--------- ------- ---------- ----------- -------- --------- -----------
Balance, July 31, 1996 5,319,269 $53,194 $3,700,043 $15,269,348 (74,600) $(375,484) $18,647,101
========= ======= ========== =========== ======== ========= ===========
</TABLE>
See Notes to Consolidated Financial Statements.
22
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ($4,492,809) $1,032,271 $2,816,776
ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Amortization of video rental inventory 704,003 1,176,621 1,794,682
Depreciation and amortization of property and equipment 2,760,052 2,150,366 1,641,258
Amortization of preopening expenses 704,092 281,779 218,479
Loss on disposal of property and equipment 264,516 9,007 3,820
Gain on disposal of video rental inventory (79,368) (192,840) (93,581)
Amortization of intangibles 19,091 19,091 19,091
Deferred compensation expense 36,981 -- --
Changes in assets and liabilities:
(Increase) decrease in assets:
Trade receivables 429,264 (260,735) (74,458)
Income tax receivable (1,236,641) -- --
Inventories 4,760,914 (826,005) (5,441,590)
Prepaid expenses (276,370) (729,319) (247,238)
Prepaid income taxes 280,000 (193,000) (87,000)
Deferred tax asset (1,146,384) 360,000 308,000
Other assets (25,630) (336,221) (345,154)
Increase (decrease) in liabilities:
Accounts payable 99,715 (2,089,607) 2,833,798
Accrued expenses (448,834) 735,111 374,195
Store closing reserve 2,859,289 -- --
Restructuring charge (251,203) (480,952) (1,140,872)
Income taxes payable -- -- (140,787)
Deferred income taxes (289,337) (276,000 ) (120,000)
----------- ---------- ----------
Net cash provided by operating activities 4,671,341 379,567 2,319,419
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of video rental inventory (691,496) (1,114,239) (1,802,214)
Disposition of video rental inventory 300,111 242,855 926,207
Additions to property and equipment (2,883,518) (10,701,608) (4,352,716)
Disposition of property and equipment 460,549 632,005 667,972
----------- ---------- ----------
Net cash (used in) investing activities (2,814,354) (10,940,987) (4,560,751)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 32,924,426 36,500,000 17,200,000
Repayments of borrowings and capital lease (34,705,064) (26,732,420) (15,630,047)
Exercise of stock options -- 6,924 16,097
Payment of debt issue costs (222,820) -- --
----------- ---------- ----------
Net cash provided by (used in) financing activities (2,003,458) 9,774,504 1,586,050
----------- ---------- ----------
Net (decrease) in cash and equivalents (146,471) (786,916) (655,282)
Cash and equivalents at beginning of year 552,224 1,339,140 1,994,422
----------- ---------- ----------
Cash and equivalents at end of year $ 405,753 $ 552,224 $1,339,140
----------- ---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A / SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS AND BUSINESS RISKS 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 improved 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 the availability of capital resources necessary to
conduct its business.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires that management make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of the
Company and its wholly-owned subsidiary. All material intercompany transactions
and balances have been eliminated.
CASH EQUIVALENTS
The Company considers all highly liquid short-term investments purchased with a
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis) or
market.
VIDEO RENTAL INVENTORY
The cost of video rental inventory is being amortized in proportion to the
estimated rental income of the tapes without salvage value. Opening stock of new
stores is amortized on a straight line method over three years. All other video
rental tapes are amortized on an accelerated method over a period of two years.
The cost and accumulated amortization of video tapes which are sold or otherwise
disposed are removed from their appropriate accounts and the resulting gain or
loss is reflected in gross profit.
PREOPENING EXPENSES
The Company defers certain expenses incurred in connection with the opening of
new stores. Such preopening expenses are included in prepaid expenses and are
amortized over the twelve-month period following the opening of each store.
Unamortized preopening expenses at July 31, 1996 and 1995 were $27,000 and
$570,000, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on property and
equipment is provided by the straight-line method over their estimated useful
lives. Leasehold improvements are amortized on a straight-line method over the
life of the lease, including renewal options that are probable of exercise, or
the estimated useful lives of the assets, whichever is shorter.
24
<PAGE>
INCOME TAXES
Deferred income taxes are provided in amounts sufficient to give effect to
temporary differences between financial and tax reporting, in accordance with
Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes."
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense was
$843,845, $752,506 and $600,687 for the years ended July 31, 1996, 1995 and
1994.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are computed based on net earnings (loss) for the
year, divided by the weighted average number of common shares and equivalents
outstanding during the respective years. Stock options have been included in the
earnings per share computation for years ended July 31, 1995 and 1994. Stock
options were antidilutive to the July 31, 1996 calculation and were therefore
excluded.
NEW ACCOUNTING PRONOUNCEMENTS
The Company will adopt the following Statement of Financial Accounting Standards
("SFAS") in the year ending July 31, 1997:
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" 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 should be based on the fair value of the asset. Long-lived assets
and certain 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. SFAS No. 121 is effective for fiscal years that begin after
December 15, 1995. Management has not yet determined the effect of SFAS No. 121
on the Company's financial position or results of operations.
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes financial
accounting and reporting standards for stock-based employee compensation plans,
including stock options, stock purchase plans, restricted stock and stock
appreciation rights. SFAS No. 123 defines and encourages the use of the fair
value method of accounting for employee stock-based compensation. Continuing use
of the intrinsic value based method of accounting prescribed in Accounting
Principles Board Opinion No. 25 ("APB 25") for measurement of employee
stock-based compensation is allowed with pro-forma disclosures of net income and
earnings per share as if the fair value method of accounting had been applied.
Transactions in which equity instruments are issued in exchange for goods or
services from non-employees must be accounted for based on the fair value of the
consideration received or of the equity instrument issued, whichever is more
reliably measurable. SFAS No. 123 is effective for transactions entered into in
fiscal years that begin after December 15, 1995. The Company has determined that
it will continue to use the method of accounting prescribed in APB 25 for
measurement of employee stock-based compensation, and will begin providing the
required pro-forma disclosure in its financial statements for the year ending
July 31, 1997 as allowed by SFAS No. 123.
RECLASSIFICATIONS
Certain 1995 amounts have been reclassifed to conform with the current year
presentation.
B / FAIR VALUE OF FINANCIAL INSTRUMENTS:
In accordance with SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments," the Company has estimated the fair value of financial instruments.
The estimated fair value has been determined by the Company using available
market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting data to develop such
estimates. Accordingly, the
25
<PAGE>
estimates presented herein are not necessarily indicative of the amounts that
the Company could realize in a current market exchange.
The following methods and assumptions were used to estimate the fair value of
the Company's financial instruments for which it was practicable to estimate
that value:
/bullet/ The carrying amounts of cash and equivalents, receivables and accounts
payable approximate fair value due to their short term nature; and
/bullet/ Discounted cash flows using current interest rates for financial
instruments with similar characteristics and maturity were used to
determine the fair value of the long-term debt.
There were no significant differences as of July 31, 1996 and 1995 in the
carrying value and fair value of financial instruments.
C / SUPPLEMENTAL CASH FLOW INFORMATION:
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION FOR THE YEARS ENDED JULY 31 IS
AS FOLLOWS:
Cash paid during the year for: 1996 1995 1994
Interest $1,013,000 $378,000 $ 46,000
Income taxes 0 700,000 1,720,000
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES INFORMATION
The Company contributed approximately $41,000, $55,000 and $60,000 of treasury
stock to the Company's 401(k) Plan during the year ended July 31, 1996, 1995 and
1994, respectively.
During the fiscal years ended July 31, 1996, 1995 and 1994, the Company canceled
restricted stock awards totaling approximately $105,000, $58,000 and $38,000,
respectively.
During fiscal 1996 no restricted stock awards were granted. The Company granted
29,000 shares of treasury stock totaling approximately $132,000 as restricted
stock awards during fiscal 1995. The Company also granted 29,000 shares of
treasury stock totaling approximately $173,000 as restricted stock awards during
fiscal 1994.
D / VIDEO RENTAL TAPES:
The following comprise cost and accumulated amortization of video rental tapes
at July 31:
1996 1995
Cost $2,056,098 $2,945,477
Less accumulated amortization 1,566,449 2,222,578
---------- ----------
$ 489,649 $ 722,899
========== ==========
26
<PAGE>
E / PROPERTY AND EQUIPMENT:
The following comprise property and equipment at July 31:
USEFUL LIVES 1996 1995
Land -- $ -- $ 177,571
Building 31 years 4,991,505 212,054
Equipment, furniture and fixtures 5-8 years 11,424,206 10,473,740
Transportation equipment 2-5 years 131,089 125,558
Signs 1-10 years 1,857,114 1,343,217
Leasehold improvements 1-31 years 8,053,107 8,122,626
Construction in progress -- -- 4,031,897
----------- -----------
26,457,021 24,486,663
Less accumulated depreciation
and amortization 9,742,056 7,899,637
----------- -----------
$16,714,965 $16,587,026
----------- -----------
F / 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 Credit Agreement). 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 fiscal 1996.
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 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 July 31, 1996 was 8.325%.
The outstanding amount under the Revolving Credit Facility was approximately
$9.7 million as of July 31, 1996.
27
<PAGE>
G / INCOME TAXES:
Components of income taxes for the years ended July 31, consist of the
following:
1996 1995 1994
FEDERAL:
Current $(1,215,804) $463,000 $1,295,200
Deferred (1,170,120) 71,000 177,700
----------- -------- ----------
(2,385,924) 534,000 1,472,900
----------- -------- ----------
STATE:
Current $ 0 $ 79,000 $ 197,349
Deferred (265,601) 13,000 10,300
----------- -------- ----------
(265,601) 92,000 207,649
----------- -------- ----------
$(2,651,525) $626,000 $1,680,549
=========== ======== ==========
The difference between the expected federal income tax rate and the Company's
effective tax rate for the years ended July 31, are as follows:
1996 1995 1994
Expected federal tax rate 34.0% 34.0% 34.0%
State income tax, net of federal
income tax effects 3.1 3.1 3.1
Tax credits, net -- (2.3) (2.4)
Other -- 3.0 2.7
---- ---- ----
37.1% 37.8% 37.4%
==== ==== ====
The approximate tax effect of each type of temporary difference that gave rise
to the Company's deferred tax asset and liability on the accompanying balance
sheet is as follows:
<TABLE>
<CAPTION>
JULY 31, 1996
----------------------------------------
ASSETS LIABILITIES TOTAL
------ ----------- -----
<S> <C> <C> <C>
Accelerated depreciation on property
and equipment for tax purposes $ -- ($ 283,538) ($ 283,538)
Capitalization for tax purposes of
inventory related costs 333,167 -- 333,167
Preopening expenses -- (10,125) (10,125)
Accrued return authorization reserve 95,194 -- 95,194
Store closing reserve 1,075,101 -- 1,075,101
Accrued rent 115,400 -- 115,400
Accrued vacation 60,022 -- 60,022
Accrued insurance 54,958 -- 54,958
Deferred compensation 26,103 -- 26,103
State net operating loss carry forward 229,311 -- 229,311
Shrinkage reserve 133,128 -- 133,128
---------- ---------- ----------
$2,122,384 ($ 293,663) $1,828,721
========== ========== ==========
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
JULY 31, 1995
-----------------------------------------
ASSETS LIABILITIES TOTAL
------ ----------- -------
<S> <C> <C> <C>
Accelerated depreciation on property
and equipment for tax purposes $ -- ($369,000) ($369,000)
Capitalization for tax purposes of
inventory related costs 339,000 -- 339,000
Preopening expenses -- (214,000) (214,000)
Restructuring charge 94,000 -- 94,000
Accrued rent 151,000 -- 151,000
Return authorization reserve 141,000 -- 141,000
Other 251,000 -- 251,000
--------- --------- --------
$ 976,000 ($583,000) $393,000
========= ========= ========
</TABLE>
H / PROFIT-SHARING PLAN:
The Company has a profit-sharing plan which includes a salary deferral provision
under section 401(k) of the Internal Revenue Code. Participation in the plan is
available to all full-time employees who are over 20 1/2 years old and have
completed six months of continuous service. Contributions are determined
annually by the Board of Directors. For the years ended July 31, 1996, 1995 and
1994, the Company provided approximately $73,000, $86,000 and $69,000
respectively, for contribution to the 401(k) Plan. Approximately $41,000,
$55,000 and $60,000 of the contribution was made in the Company's common stock
for fiscal 1996, 1995 and 1994, respectively.
I / STOCKHOLDERS' EQUITY:
COMMON STOCK
During fiscal 1991, the Board of Directors authorized a common stock repurchase
program of up to 300,000 shares of the Company's common stock. The Board of
Directors authorized the purchase of an additional 300,000 shares of the
Company's common stock during fiscal year 1993. During fiscal 1995 and 1996 no
shares were purchased. In connection with contributions to the 401(k) Plan,
grants of restricted stock awards and the exercise of stock options, 21,446,
43,345 and 41,821 shares were issued from treasury stock in 1996, 1995 and 1994,
respectively. The remaining shares are included in treasury stock at July 31,
1996.
STOCK OPTION PLANS
In May 1986, the Board of Directors approved the adoption of an employee stock
option plan. Under the plan, 500,000 shares of common stock have been reserved
for issuance. In fiscal 1987, the plan was amended and restated as an incentive
stock plan which includes stock options, stock appreciation rights, restricted
stock and performance shares. As of May 1996, no additional grants of stock
options can be made under the plan.
On September 21, 1993, the Board of Directors created two new plans: The 1993
Non-Employee Director Plan and the 1993 Employee Stock Option Plan. The Company
reserved 50,000 shares under the Director's plan and granted 15,000 options. The
Company reserved 500,000 shares for the 1993 Employee Stock Option Plan.
Transactions and other information relating to stock options granted are
summarized as follows:
29
<PAGE>
NUMBER OF OPTION PRICE
SHARES PER SHARE
Outstanding, July 31, 1993 194,855 $4.50-5.19
Granted 112,000 $5.00-6.00
Exercised (3,835) $4.50-5.19
Canceled (8,500) $4.50-6.00
-------
Outstanding, July 31, 1994 294,520 $4.50-6.00
Granted 119,000 $3.00-4.50
Exercised (1,334) $5.19
Canceled (68,312) $4.50-6.00
-------
Outstanding, July 31, 1995 343,874 $3.00-6.00
Granted 472,766 $1.13-1.31
Canceled (130,135) $4.50-6.00
-------
Outstanding, July 31, 1996 686,505 $1.13-6.00
=======
All stock options with the exception of those listed below were granted with
option prices that were equal to market value at the date of grant. The term of
the options granted may be no more than ten years from the effective date of
grant. During fiscal 1992 and 1993, the Company extended the exercise period of
the 1987 outstanding stock options from September 1992 to September 1994. On
September 14, 1994, the Company's Board of Directors extended the current
expiration dates on all outstanding stock options to a nine year term. At July
31, 1996, options to purchase 237,411 shares of common stock were exercisable.
During fiscal 1997, in connection with various consulting agreements, the
Company granted 469,766 compensatory stock options which became effective as of
fiscal 1996. The options, granted at prices below the fair market value at the
date of grant of $254,604, vest over the term of the agreements. Compensation
expense will be charged to earnings on a pro-rata basis over the life of the
consulting agreements. Compensation expense was recorded for $36,981 during the
year ended July 31, 1996.
On October 23, 1992, the Board of Directors granted 23,700 shares of restricted
stock to 77 management associates which vest 50% after two years and the
remaining 50% after three years. At July 31, 1996, 6,750 shares of restricted
stock awards remain outstanding after cancellations. On October 25, 1993, the
Board of Directors granted 28,900 shares of restricted stock to 80 management
associates which vest as described above. At July 31, 1996, 21,500 shares remain
outstanding after cancellations. On September 30, 1994, the Board of Directors
granted 29,300 shares of restricted stock to 86 management associates which vest
as described above. At July 31, 1996, 26,050 shares remain outstanding after
cancellations.
J / COMMITMENTS:
The Company leases certain facilities and equipment under noncancellable
operating leases which expire at various dates through fiscal 2010. Future
minimum lease payments under leases that have terms in excess of one year are:
1997.......................................................... 6,179,000
1998.......................................................... 5,711,000
1999.......................................................... 4,602,000
2000.......................................................... 4,234,000
2001.......................................................... 3,512,000
Thereafter....................................................$ 15,853,000
------------
$ 40,091,000
============
30
<PAGE>
Base rent expenses, including real estate taxes, insurance, and related common
area repairs and maintenance, were approximately $10,080,000, $8,542,000 and
$7,465,000 for each of the years ended July 31, 1996, 1995 and 1994,
respectively. Some leases provide for additional contingent rent based on
applying a specified percentage of sales in excess of a predetermined base. Such
contingent rent expense was approximately $118,287, $383,000 and $399,000 in
each of the years ended July 31, 1996, 1995 and 1994, respectively. Most leases
contain renewal options.
K / RELATED-PARTY TRANSACTIONS:
The Company leases its store in Coral Gables, Florida from the Martin W. Spector
Irrevocable Trust, certain of whose trustees and beneficiaries are officers and
directors of the Company. Rental payments for each of the three years ended July
31, 1996, 1995 and 1994 were approximately $163,000, $154,000 and $151,000
respectively.
The Company also leases a store located in St. Petersburg, Florida, from the
Lieff Family Trust and the Zacks Family Trust, whose trustees are officers and
directors of the Company. Rental payments for each of the years ended July 31,
1996, 1995 and 1994 were approximately $164,000, $157,000 and $154,000,
respectively.
L / 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 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.
M / QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Summarized quarterly financial results for fiscal 1996 and 1995, are as follows:
(IN THOUSANDS, EXCEPT PER SHARE)
WEIGHTED
NET AVERAGE NET EARNINGS
GROSS EARNINGS SHARES (LOSS) PER
REVENUES PROFIT (LOSS) OUTSTANDING COMMON SHARE
1996:
First quarter $17,973 $6,001 $(1,005) 5,248 $(0.19)
Second quarter 24,979 8,484 424 5,364 0.08
Third quarter 17,929 6,012 (812) 5,247 (0.15)
Fourth quarter 16,651 5,593 (3,100) 5,246 (0.59)
1995:
First quarter $17,273 $5,953 $ (54) 5,249 $(0.01)
Second quarter 26,533 9,349 1,476 5,270 0.28
Third quarter 18,371 6,933 32 5,249 0.01
Fourth quarter 17,422 6,171 (422) 5,248 (0.08)
31
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the directors of the Company set forth under
the caption "Election of Directors" in the definitive Proxy Statement of the
Company for its 1996 Annual Meeting of Shareholders (the "1996 Proxy Statement")
is incorporated herein by reference.
Information concerning the executive officers of the Company is
included in Part I herein under the caption "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth in the 1996 Proxy Statement under the caption
"Compensation of Officers" and "Board of Directors - Compensation of Directors"
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information set forth under the caption "Principal Stockholders and
Security Ownership of Management" in the 1996 Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Transactions with
Management and Others" in the 1996 Proxy Statement is incorporated herein by
reference.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS. FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The following consolidated financial statements of the Company are included
herein:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report 20
Consolidated Balance Sheets as of July 31, 1996 and 1995 21
Consolidated Statements of Operations for each of the years in the three year
period ended July 31, 1996 22
Consolidated Statements of Changes in Stockholders' Equity for each of the years
in the three year period ended July 31, 1996 23
Consolidated Statements of Cash Flows for each of the years in the
three year period ended July 31, 1996 24
Notes to Consolidated Financial Statements 25
(a) 2. Financial Statement Schedules.
PAGE
----
Schedule II - Valuation and Qualifying
Accounts and Reserve 36
</TABLE>
(a) 3. Exhibits.
*3.1 Articles of Incorporation of the Company (Exhibit 3.1 to Registration
Statement No. 33-00178-A).
*3.2 Bylaws of the Company (Exhibit 3.2 to Registration Statement No.
33-00178-A).
*10.2 Shareholders' Agreement and Right of First Refusal, dated as of
September 5, 1985, between Ann S. Lieff and Rosalind S. Zacks (formerly
Rosalind S. Spooner) (Exhibit 10.4 to Registration Statement No.
33-00178-A).
*10.3 Spec's Music, Inc. 1986 Incentive Stock Plan, as Amended (Exhibit 28
to Registration Statement on Form S-8 No. 33-16778).
*10.4 Business Lease, effective August 1, 1991, between Lieff Family 1989
Trust, Rosalind S. Zacks Family 1989 Trust and the Company (Exhibit
10.6 to 1991 Form 10-K No. 0-14323).
*10.7 Spec's Music, Inc. 1993 Incentive Stock Plan (Exhibit 10.7 to 1994
Form 10-K).
*10.8 Spec's Music, Inc. 1993 Non-Employee Directors Stock Option Plan
(Exhibit 10.8 to 1994 Form 10-K).
*10.10 Master Equipment Lease Agreement dated October 18, 1994 between the
Company and AT&T Capital Corporation. (Exhibit 10.10 to 1995 Form
10-K).
*10.12 Revised Agreement with Gibbons dated January 1, 1996, between the
Company and Barry Gibbons d/b/a Festina (Exhibit 10.1 to Form 10-Q for
the quarter ended January 31, 1996).
*10.13 Revised Agreement with TSI dated January 23, 1996, between the Company
and Transition Strategies, Inc. (Exhibit 10.2 to Form 10-Q for the
quarter ended January 31, 1996).
33
<PAGE>
*10.14 Credit Agreement Dated as of May 22, 1996 between Spec's Music, Inc. As
Borrower and GENERAL ELECTRIC CAPITAL CORPORATION as Lender (Exhibit
10.1 to Form 10-Q for the quarter ended April 30, 1996)
10.15 Business Lease, effective as of March 1, 1996, between the Martin W.
Spector Irrevocable Trust and the Company.
*21 Subsidiaries of the Company (Exhibit 22 to 1988 Form 10-K No. 0-14323).
23 Consent of Independent Auditors relating to Registration Statement on
Form S-8 No. 33-16778.
24 Power of Attorney - see signature page of this report.
**27 Financial Data Schedule.
--------------------
* Incorporated by reference to indicated filings.
** Included only in electronic filing.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of
fiscal 1996.
34
<PAGE>
<TABLE>
<CAPTION>
SPEC'S MUSIC, INC. AND SUBSIDIARY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVE
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- -------- -------- --------
Additions
Balance at Charged to
Description Beginning of Cost of Balance at
Period Period Goods Sold Deductions * End of
- ----------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Accumulated
amortization
deducted from
video rental
inventory
Year ended:
July 31, 1994 $4,719,814 $1,794,682 $4,037,787 $2,476,709
July 31, 1995 2,476,709 1,176,621 1,430,752 2,222,578
July 31, 1996 2,222,578 704,003 1,360,132 1,566,449
</TABLE>
- ----------------------
* Accumulated amortization on video rental tape disposals.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on this 28th day of
October, 1996. The registrant and each person whose signature appears below
hereby authorizes and appoints Ann S. Lieff as attorney-in-fact to sign and file
on behalf of the registrant and each such person, in each capacity below, any
and all amendments to this report.
SPEC'S MUSIC, INC.
By: /s/ ANN S. LIEFF
------------------------------
Ann S. Lieff, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
/s/ ANN S. LIEFF President, Chief Executive OCTOBER 28, 1996
- ----------------------------- Officer and Director
Ann S. Lieff (Principal Executive Officer)
/s/ JEFFREY J. FLETCHER Executive Vice President, Chief OCTOBER 28, 1996
- ----------------------------- Operating and Financial Officer
Jeffrey J. Fletcher (Principal Financial and Accounting Officer)
/s/ BARRY J. GIBBONS Director OCTOBER 28, 1996
- -----------------------------
Barry J. Gibbons
/s/ ARTHUR H. HERTZ Director OCTOBER 28, 1996
- -----------------------------
Arthur H. Hertz
/s/ MARTIN W. SPECTOR Director OCTOBER 28, 1996
- -----------------------------
Martin W. Spector
/s/ CYNTHIA COHEN TURK Director OCTOBER 28, 1996
- -----------------------------
Cynthia Cohen Turk
/s/ ROSALIND S. ZACKS Director OCTOBER 28, 1996
- -----------------------------
Rosalind S. Zacks
</TABLE>
36
EXHIBIT 10.15
LEASE AGREEMENT
THIS LEASE made and entered into as of the 1st day of March, 1996, by and
between THE MARTIN W. SPECTOR IRREVOCABLE TRUST, DOROTHY JOY SPECTOR, TRUSTEE,
MICHAEL J. SPECTOR, TRUSTEE, ROSALIND S. ZACKS, TRUSTEE, BAYARD SPECTOR, TRUSTEE
AND ANN S. LIEFF, TRUSTEE, hereinafter referred to as "Landlord," "Lessor," or
"Owner" and SPEC'S MUSIC, INC., a Florida corporation, hereinafter referred to
as "Tenant" or "Lessee":
W I T N E S S E T H:
ARTICLE I - PREMISES, TERM & OCCUPANCY
SECTION 1.1 - LEASED PREMISES:
The Landlord does hereby lease unto Tenant and Tenant does hereby hire and
take from Landlord, those certain premises, now erected in Coral Gables, Dade
County, Florida located at 1570 - 1574 South Dixie Highway, Coral Gables,
Florida 33146 hereinafter sometimes referred to as "the leased premises" or the
"premises" or the "demised premises". The legal description for the leased
premises is more particularly described as :
LOTS C,D,E, F, G, AND H TO REPLAT OF A PORTION OF BLOCK 199 OF CORAL
GABLES RIVIERA SECTION PART 14, ACCORDING TO THE PLAT THEREOF AS RECORDED
IN PLAT BOOK 53 AT PAGE 97 OF THE PUBLIC RECORDS OF DADE COUNTY, FLORIDA
The Building located on property taxed under Dade County Folio Numbers:
03 4130 010 0020, 03 4130 010 0030, 03 4130 010 0040, 03 4130 010 0050.
It is understood and agreed that such description of the leased premises
is intended to and shall be construed to include the store front, all exterior
walls of the Building, the roof, soffits, exterior doors, display windows.
Tenant shall have the right to use the parking lot and any alleyways surrounding
the Building, for employee and customer ingress and egress to and from the
leased premises, loading and unloading and for other reasonable purposes, in
common with others entitled by law to use the Alley and/or parking lot.
Landlord reserves the right from time to time to make changes, additions
and eliminations to the Building, including the alleyways and parking lot
surrounding the Building, sometimes referred to in this Lease as the "Alley" or
"Alleyway") provided that these changes, additions and eliminations do not
unreasonably and materially interfere with the leased premises or with the
Tenant's use of the leased of the leased premises and provided that any such
modification does not eliminate more than 5% (Five ) percent of the parking for
the premises without the Tenants approval and provided that any such
modification does not modify access through the frontage of the premises .
Landlord and Tenant agree to execute the necessary documents and to
acknowledge such modifications, and such modifications shall in no way
invalidate this lease, provided that these modifications do not violate the
conditions set forth in the immediately preceding paragraph.
SECTION 1.2 - TERM:
(a) BASE TERM. This Lease shall commence as of March 1, 1996 (the Lease
Commencement Date). The base term is that period of time from the Lease
Commencement Date through and including the close of business on the 31st day of
January, 1999.
(b) OPTION TERM. There are no renewal options granted hereunder.
SECTION 1.3 - OCCUPANCY:
Except as hereinafter in this Lease specifically provided, Landlord shall
deliver possession of the leased premises in "AS IS" condition, without warranty
or representation on the part of the Landlord as
- --------------/--------------/
Lessor Tenant
1
<PAGE>
to the condition of the premises. Landlord shall have no responsibility or
liability for loss or damage to fixtures, facilities or equipment installed or
left on the premises, except as otherwise specifically provided in this Lease.
By occupying the leased premises, Tenant shall be deemed to have accepted the
same and to have acknowledged that the premises are in the initial condition
required by this Lease. The parties acknowledge that the Tenant is currently in
possession of the premises pursuant to the terms and conditions of a prior lease
between the parties.
ARTICLE II - MINIMUM RENT AND RENT PROVISIONS,
SECURITY DEPOSIT, ADDITIONAL RENT AND PERCENTAGE RENT
SECTION 2.1
A. MINIMUM RENTAL IN BASE YEAR:
Lessee shall pay to the Lessor (subject to Article VII, "Eminent Domain"
or any other section of this Lease, if any, that may specifically provide for a
change in Minimum Rent), a total minimum rental of FOUR HUNDRED SEVENTY EIGHT
THOUSAND EIGHT HUNDRED and no/100 ($478,800.00) Dollars, plus applicable sales
tax for the term of this lease, together with all other amounts payable by the
Lessee pursuant to the terms of this lease. Said rental shall be paid in
installments in advance on or before the first day of each month during the base
term of this lease, each installment to be paid in the amount of THIRTEEN
THOUSAND SIX HUNDRED EIGHTY and no/100 ($13,680.00) dollars per month, PLUS
APPLICABLE FLORIDA SALES TAX. Lessee shall pay the minimum rent herein reserved,
without any demand, deduction or set off, promptly upon the days the same
becomes due and payable, to the Lessor at 6900 Barquera Street, Coral Gables,
Florida 33146-3818 or at such other address or to such other person as may from
time to time be designated by the Lessor.
Should the Rent Commencement Date occur on a day other than the first day
of a calendar month, then the Rent for the period from such date to the first
day of the first full month shall be prorated on a per-diem basis.
B. PERCENTAGE RENT: (as hereinafter defined) calculated and paid as
provided in Section 2.4.
C. SURVIVAL OF RENTAL OBLIGATION: Tenant's obligation to pay rent and all
other amounts due hereunder shall survive the expiration or termination of this
Lease due to the lapse of time or otherwise.
D. ALL PAYMENTS DUE AS RENT: Notwithstanding anything in this Lease to the
contrary, all amounts payable by Tenant to Landlord under this Lease, whether
denominated as other charges and whether or not expressly denominated as rent
shall constitute rent for purposes of this Lease and for purposes of the
Bankruptcy Code.
SECTION 2.2 - SECURITY DEPOSIT:
A. AMOUNT OF SECURITY DEPOSIT.
1. The Landlord agrees to waive the requirement of a security
deposit from the Tenant subject to the provisions of Section 2.2 A.
2. In the event the Tenant transfers or sells its leasehold interest
herein, any successive Tenant shall post a security deposit with the Landlord
equal to three months rent based upon the monthly amount of the maximum base
rent due under this lease, which shall be treated by the Landlord as the rent
for the last month of this Lease, with the balance thereof applied as a
"Security Deposit" for the faithful performance by the Tenant of each and every
obligation under the terms of this Lease Agreement.
3. In the event the Tenant is in default in the performance of any
material monetary obligation pursuant to the terms of this Lease which remain
uncured for a period of 30 days after written notification has been given to the
Tenant, then and in those events, the Landlord may demand that the Tenant post a
security deposit equal to 2 months rent with the Landlord.
- --------------/--------------/
Lessor Tenant
2
<PAGE>
4. Any Security Deposit made hereunder may be commingled with other
funds of Lessor, and Lessor shall have no liability for the accrual or payment
of any interest thereon. In the event of the failure of Tenant to keep and
perform any of the terms, covenants and conditions of this Lease to be kept and
performed by Tenant, then Lessor, at its option, may apply said Security
Deposit, or as much thereof as Lessor may deem necessary, to compensate Lessor
for all loss or damage sustained or suffered by Lessor due to such default or
failure on the part of Tenant, and Tenant shall remit to Lessor, within five
days of Lessor's demand, such additional funds as is necessary to restore
Tenant's Security Deposit to its previous level and failure to do so shall
constitute a breach of this Lease. Provided however that this provision is not
intended to be construed to mean that the Tenant is authorized to transfer or
sell its leasehold interest.
B. LANDLORD'S TRANSFER OF SECURITY DEPOSIT.
Lessor may deliver any Security Deposit it may be holding to the
assignee of Lessor's interest in the BUILDING PREMISES, in the event that such
interest be sold, and upon the transferee's receipt Lessor shall be discharged
from any further liability with respect to such Security Deposit.
C. TENANT'S ENCUMBERING OR TRANSFER OF SECURITY DEPOSIT.
Tenant shall not pledge, assign or encumber said Security Deposit.
SECTION 2.3 - LATE RENT CHARGES:
Lessee acknowledges that late payment by Lessee to Lessor of rent will
cause Lessor to incur costs not contemplated by this lease, the exact amount of
such costs being extremely difficult and impractical to fix. Such costs include,
without limitation, processing and accounting charges, and late charges that may
be imposed on Lessor for late payment of obligations paid out of the cash flow
from Lessee. Therefore, if any installment of rent due from Lessee is not
received by Lessor when due, or within 15 days thereafter, Lessee shall pay to
Lessor, as a late charge, an additional sum of one per cent (1%) of the minimum
monthly rent due. Provided, however, that the Tenant shall be entitled to two
(2) late payments per annum before any fee is charged. The parties agree that
this late charge represents a fair and reasonable estimate of the costs that the
Lessor will incur. Acceptance of a late charge shall not constitute a waiver of
Lessee's default with respect to the overdue amount, or prevent Lessor from
exercising any of the other rights and remedies available to Lessor.
SECTION 2.4 - PERCENTAGE RENT:
A. PERCENTAGE RENT RATE: Four percent (4%) of Gross Sales.
B. PERCENTAGE RENT PERIOD: Calendar year.
C. TRADE AREA: A radius of one (1) mile from the premises. Tenant
covenants and agrees at all times during the term and such further time as the
Tenant occupies the premises or any part thereof that in the event it competes
directly or indirectly with the premises by operating, managing or having any
interest in any other store located within the stated Trade Area, which is used
for the same or a similar use as any one of the uses which is a "USE" hereunder
or which utilizes the same or a similar Trade Name as that specified herein; or,
if Tenant is a corporation, if any officer or director or any other shareholder
owning a controlling interest in Tenant or any entity affiliated with Tenant in
any manner whatsoever, having any such interest, directly or indirectly operates
or manages such store; or, if Tenant is a Partnership, if any partner owning
more than 10% of the Partnership interests owned by all Partners have any such
interest, directly or indirectly operates or manages such store, then and in
that event, the parties agree that the Annual Minimum Rental shall be increased
by the percentage rent paid by the Tenant to the Landlord pursuant to Section
2.4 herein for the preceding twelve (12) month period and such Minimum Rental
shall in no event during the remaining term of this Lease Agreement be less than
the Annual Minimum Rental plus the Percentage Rent paid for the preceding twelve
month (12) month period. In the event of any increase in the Minimum Rental due
to the infringement by the Tenant of the "Trade Area" in accordance with this
Article II Section 2.4 C., Percentage Rental shall continue, however the
"Breakpoint" shall be adjusted as set forth below in Article II Section 2.4 F.
- --------------/--------------/
Lessor Tenant
3
<PAGE>
Tenant hereby represents and warrants that as of the date of this Lease there is
no store existing within Tenants Trade Area of the type described above.
D. OPERATING YEAR: The term "Operating Year" means a period of twelve (12)
consecutive calendar months with the first Operating Year commencing on the
Commencement Date, unless the Commencement Date does not fall on the first day
of a calendar month, in which event the first Operating Year shall commence on
the first day of the first calendar month immediately following the Commencement
Date and each succeeding Operating Year commencing upon the anniversary date of
the first day of the first Operating Year.
E. DEFINITION OF GROSS SALES: The term "Gross Sales" is defined to mean
the total amount in dollars of the actual sales price, or in the event of trade
or barter, the fair market value at retail of any item or service traded or
bartered, whether for cash, credit, trade, barter or otherwise or partly for
cash, partly on credit, partly for trade and/or partly for barter, of all goods,
wares and merchandise sold, charges for all services performed and all other
receipts of business conducted in or from the Premises without deduction or
reserve for uncollected or uncollectible amounts, including, without limitation,
all catalogue, mail, telephone, telegraph and/or electronic sales and orders
received or filled at or from the Premises, all deposits not refunded to
purchasers, all orders taken in and from the Premises whether or not such orders
are filled elsewhere, receipts or sales through any vending machine or other
coin or token operated device, receipts from any rentals made from the Premises
and receipts or sales by any sublessee, concessionaire, licensee and any other
person or entity doing business in or from the Premises. Nothing contained in
this Article shall be deemed to permit Tenant to sublease all or a portion of
the Premises or allow a concessionaire to conduct business therein, without
Landlord's prior written consent. Gross Sales shall not include any sums
collected and paid out by Tenant for any sales or retail excise tax imposed by
any duly constituted governmental authority, any exchange of goods or
merchandise between the stores of Tenant where such exchange of goods or
merchandise is made solely for the convenient operation of the business of
Tenant and not for the purpose of consummating a sale which has been made at, in
or from the Premises, the amount of returns to shippers or manufacturers, the
amount of any cash or credit refund made with respect to any sale where the
merchandise sold at or from the Premises, or some part hereof, is thereafter
returned by the purchasers and accepted by Tenant, nor sales of fixtures which
are not a part of Tenant's stock-in-trade. Each sale upon installment or credit
shall be treated as a sale for the full price in the month during which such
sale is made, irrespective of the time when Tenant may receive payment from its
customer and no deduction shall be allowed for uncollected or uncollectible
credit accounts. No deduction shall be made from Gross Sales for any franchise,
income or gross receipts taxes, or for any other taxes based upon income of
Tenant or for any use, intangible or property tax assessed against Tenant.
Notwithstanding the foregoing, Gross Sales shall not include, or if included in
the calculation of Gross Sales, there shall be deducted, as the case may be,
provided that specific record is made at the time of each transaction: (I) the
actual net amount of refunds, credits or allowances actually made or allowed by
Tenant in accordance with reasonable business practices upon transactions
included within Gross Sales where the item is returned by the purchaser to and
accepted by the Tenant (provided that anything given in exchange for returned
items and any such credits to customers shall be included in Gross Sales when
used): (ii) sales or retailers excise taxes which are separately added by Tenant
to the sales price, paid directly by the customer, collected by Tenant and
actually paid over to the governmental taxing authorities, but not deducting
from Gross Sales any other tax of any nature: (iii) the exchange of merchandise
between stores of Tenant where such exchanges are made solely for the convenient
operation of Tenant's business and not for the purpose of consummating a sale
which has been made at, on, in or from the Leased Premises herein: (iv) returns
to shippers or manufacturers for credit: (v) sales of fixtures which are not
part of Tenant's stock in trade: (vi) bulk sales or wholesale transfers of
merchandise not in the ordinary course of business: and (vii) the following,
only to the extent that they do not, in the aggregate, exceed two percent (2%)
of Gross Sales in any Lease Year or Partial Lease Year: (a) sales to employees
of Tenant at a discount: (b) Tenant's accounts receivable consisting of bad
checks and bad debts; provided, however, if such accounts are actually collected
later, the amounts shall be included in Gross Sales at such time, and further
provided Tenant shall use reasonable efforts within the retail trade to collect
such bad checks and bad debts: (c) service charges levied against sales through
the use of national bank cards or other similar third party credit services such
as Visa or MasterCard and check verification charges: (d) the amount received
from the sale of gift certificates at the Leased Premises pursuant to Tenant's
bookkeeping practices: (e) the cost of Special Event Tickets less the amount of
commission earned thereon (provided, however, that Tenant shall keep separate
records evidencing the cost of such tickets and the commission
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earned and all such commission shall be included in Gross Sales): and (f)
discounts received by Tenant from the State of Florida taxing authority for T
enant's payment of sales tax.
F. PERCENTAGE RENT DEFINED: During each calendar year and partial calendar
year during the Term, Tenant shall pay Landlord, as additional rent, percentage
rent (the "Percentage Rent") in an amount equal to the product of the Percentage
Rent Rate multiplied by the amount, if any, by which Tenant's total Gross Sales
for such calendar year or partial calendar year exceeds the sum of the total
Monthly Base Rent due and payable for such calendar year or partial year divided
by the Percentage Rent Rate (the "Breakpoint"). The Percentage Rent shall first
be paid within the earlier of: (I) 30 days after the expiration or termination
of this Lease or (ii) 30 days after the first calendar month in which Tenant's
total Gross Sales for such calendar year or partial calendar year shall first
have exceeded the Breakpoint and thereafter shall be paid on all additional
Gross Sales made during the remainder of such calendar year or partial calendar
year within the earlier of: (I) 30 days after each remaining calendar month for
such calendar year or partial calendar year or (ii) 30 days after the expiration
or termination of this Lease. Promptly after receipt by landlord of Tenant's
Annual Statement of Tenant's Gross Sales, as provided in paragraph "G" below,
there shall be an adjustment between Landlord and Tenant, with payment to or
credit by Landlord, as the case may require, to the end that Landlord shall be
paid with respect to each calendar year or partial calendar year, an amount
equal to the product of the Percentage Rent Rate multiplied by an amount equal
to the excess, if any, of Tenant's Gross Sales during each calendar year or
partial calendar year over the Breakpoint. Each party's obligations under this
Section shall survive the expiration or termination of this Lease due to the
lapse of time or otherwise. Anything else to the contrary notwithstanding, the
parties agree that in the event the Monthly Base Rent is increased in accordance
with the terms of Article II Section 2.4 C., the "Breakpoint" shall also be
readjusted up-ward to correspond with the definition established in this
Subparagraph (F).
G. MAINTENANCE OF RECORDS AND EXAMINATION: Tenant shall utilize cash
registers equipped with sealed continuous, cumulative totals, or such other
method as may be first approved by Landlord in writing, to record all Gross
Sales during the Term. During and for at least thirty-six (36) months after the
expiration of each calendar year or partial calendar year, Tenant shall keep at
Tenants main corporate office in Florida all original books and records
conforming to generally accepted accounting practices showing all of the Gross
Sales and such other information with respect to such Gross Sales, at, from and
upon the Premises for such calendar year or partial calendar year, including,
but not limited to, all tax reports, sales slips, sales checks, bank deposit
records and other supporting data. Tenant shall notify Landlord of the
manufacturer, model and serial number of all cash registers used on the Premises
and of any changes or additions within five (5) days after the use thereof has
commenced. If Landlord contends there may be an error with respect to any of
Tenant's books, records, papers or files and Landlord so notifies Tenant prior
to the expiration of such thirty-six (36) month period, such period shall be
extended until Landlord's contention has been finally determined. Within fifteen
(15) days after the end of each calendar month or partial calendar month during
the Term, Tenant shall furnish Landlord with a written statement, sworn to by
Tenant, if an individual, by a general partner of Tenant, if a partnership, or
by one of Tenant's executive officers if a corporation, of Tenant's Gross Sales
during such month or partial calendar month. Within sixty (60) days after the ed
of each calendar year or partial calendar year during the Term, Tenant shall
furnish Landlord with a written statement prepared and certified by Tenant's
Chief Financial Officer, of Tenant's Gross Sales during such calendar year or
partial calendar year (the "Annual Statement"). Landlord shall have the right
from time to time to audit or have its accountants or other representatives
audit all Annual Statements of Gross Sales and in connection with such audits to
examine all of Tenant's records (including any supporting data) of Gross Sales
and Tenant shall make all such records available for such examination at the
Tenants main corporate office in Florida. If any audit discloses that the actual
Gross Sales by Tenant exceeded those reported, Tenant shall pay the Percentage
Rent due with respect to the excess plus interest thereon at the Default Rate,
as hereinafter defined, from the date such amount should have been paid to
Landlord. If such audit discloses that the actual Gross Sales exceeded those
reported by Tenant by more than two percent (2%), Tenant shall also pay, in
addition to any deficiency in Percentage Rent plus interest at the Default Rate,
the cost of such audit and examination. If such audit discloses that the actual
Gross Sales exceeded those reported by Tenant by more than five percent (5%),
Landlord shall have, in addition to all other available rights and remedies, the
remedies provided for in this Section and the balance of this Lease Agreement
and the Tenant shall promptly pay Landlord, the cost of such audit along with
the deficiency in such Percentage Rate plus interest at the Default Rate. If any
such audit discloses that actual Gross Sales by Tenant were less than those
reported, and, as a result thereof, Tenant paid more Percentage Rent than was
due hereunder,
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Landlord shall refund to Tenant the amount of the excess Percentage Rent. If
Tenant shall fail to furnish the Annual Statement within sixty (60) days after
each calender or partial calender year, or if Tenant's Gross Sales cannot be
verified due to the insufficiency or inadequacy of Tenant's records, then the
Landlord shall have the right to cause a Certified Public Accountant to audit,
at Tenant's expense, Tenant's records and prepare and certify therefrom the
Annual Statement and Tenant shall make all records available for such audit. Any
information obtained by Landlord pursuant to the provisions of this Section
shall be treated as confidential except in any dispute, litigation or
arbitration proceedings between the parties, provided that Landlord may disclose
such information to its mortgagees and to prospective buyers, brokers, lenders,
tax authorities and pursuant to legal requirements. Landlord's right to audit
Tenant's books and records as provided herein shall be limited to the books,
records, entries and other data relating to Tenant's business in and from the
Premises only and Landlord shall not have the right to inspect or audit any
books and records relating to other business locations of Tenant. The Default
Rate is defined in Article X Section 10.11 below.
ARTICLE III - USE OF PREMISES
SECTION 3.1 - COMPLIANCE WITH REGULATIONS
Tenant shall promptly comply with all laws, ordinances and governmental
regulations relating to Tenant's use of the leased premises, unless the Tenant
is prevented from doing so by the action or inaction of the Landlord.
Tenant shall have the right upon giving notice to Landlord to diligently
contest in good faith any obligation imposed upon Tenant pursuant to the
provisions of this Section 3.1 and to defer compliance during the pendency of
such contest, provided that the failure of Tenant to so comply will not subject
Landlord to prosecution or penalty, nor delay the payment of Rent and other sums
due to Landlord when otherwise due. Any penalties or fines shall be paid by the
Tenant. Landlord shall cooperate with Tenant in such contest and shall execute
any documents reasonably required in furtherance of such purpose.
SECTION 3.2 - CARE OF PREMISES:
Tenant shall not perform any acts or carry on any practices which may
injure the building or be a nuisance or menace in the community and shall keep
the premises under its control including the sidewalks adjacent to the premises
and loading areas allocated for the use of the Tenant, clean and free from
rubbish and dirt at all times, and shall store all trash and garbage within the
leased premises or special areas provided for such use. Tenant shall not burn
any trash or garbage of any kind in or about the building or the alley behind
the building. Tenant agrees that the plumbing facilities will not be misused and
any damage so caused is to be borne by the Tenant. Tenant further agrees that it
will not create a waste or nuisance on the premises, and will do nothing and
perform no act upon the premises which would materially and adversely affect the
business of surrounding merchants in the building.
SECTION 3.3 - MISCELLANEOUS USE PROVISIONS:
(a). In the operation of its business, the tenant shall not use or
obstruct the sidewalks adjacent to the demised premises.
(b). Tenant agrees not to indulge in or to permit any fraudulent or
misleading advertisement or promotion concerning its business.
(c). Tenant agrees that no auction, fire, bankruptcy or any other sales of
any kind may be conducted in the demised premises without prior written consent
of Landlord, which said consent shall not be unreasonably withheld.
(d). Tenant shall not permit any business to be operated in or from the
leased premises by any concessionaire or licensee without the prior written
consent of Landlord, which consent shall not be unreasonably withheld.
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SECTION 3.4 - PERMITTED PURPOSE, USE, AND CHANGE OF USE, OF PREMISES:
(a) The sale to the general public of all forms of prerecorded music,
which include LP's, cassettes, digital compact cassette, compact discs, mini
discs, digital audio tape, and similar products. The sale and rental of
pre-recorded movies and videos on VHS, beta, laser disc on CLV and DCV formats,
and the retail sale of all music, video, video books and magazines (as a use
incidental to the other uses listed herein) computer software including CD-I and
CD-ROM, and accessories, which include but are not limited to blank audio and
video tape, personal electronics, sheet music, video games, cleaning kits,
related boutique items such as T-shirts, buttons, carrying cases, headphones,
radios, boom boxes, entertainment industry related products, posters and
concert, show and sporting event tickets, and for such other purposes as the may
be specifically approved by the Landlord from time to time.
(b) No change of use from that described in ss.3.4(a), above, or from
another use that has been previously and duly approved in writing by the
Landlord, is permitted under this Lease without the prior written consent of the
Landlord, which consent may be unreasonably withheld.
ARTICLE IV - REPAIRS AND ALTERATIONS
SECTION 4.1 - REPAIRS:
(a) Tenant shall be solely responsible for and shall keep and repair at
its own expense entire premises, including but not limited to the roof, the
exterior walls of the leased premises (including but not limited to: painting,
graffiti removal, vandalism and damage), the ventilating, plumbing, electrical
wiring, lights, fixtures, glass, doors, floors and floor coverings, sewage
facilities, grease traps, air conditioning and heating and all other structural
and non-structural parts of the premises, interior and exterior in good
condition including exterior painting and roof repairs. Landlord may, but IS NOT
REQUIRED TO MAKE any such repairs which become necessary or desirable by reason
of the neglect or negligence of the Tenant, its agents, servants, employees or
customers. The Tenant shall be responsible to maintain the roof (in a watertight
condition), gutters, foundation, exterior walls of the Building (including glass
and doors) down spouts and all other major structural portions of the premises,
the parking and alleyways surrounding the building and the building including
the concrete floors in good condition. In no event shall the Landlord shall be
liable to tenant for any water damage caused by any defect or required repair to
the roof or any portion of the premises. Notwithstanding that the Lessee shall
be responsible for all repairs to the premises, the Tenant agrees to give
Landlord immediate notice in writing of any major repairs required and/or being
performed.
(b) Lessee agrees to keep and maintain the parking lot and the alleyways
immediately surrounding the leased premises and to keep the Premises, free from
its trash and debris. In the event the Tenant fails or refuses to so maintain
the premises or any portion thereof, the Landlord may, at its option, do so at
the expense of the Tenant.
SECTION 4.2 - ALTERATIONS:
Tenant shall not make any substantial alterations or substantial additions
to the leased premises without first procuring Landlord's written consent and
delivering to Landlord the plans and specifications therefor, and furnishing
indemnification against liens, costs, damages and expenses as may be required by
Landlord, which consent shall not be unreasonably withheld.
All alterations, additions, improvements and fixtures, other than
removable trade fixtures, which may be made or installed by upon the premises by
the Tenant unless same are in any manner attached to the floors, walls or
ceiling, shall remain upon and be surrendered with the premises as a part
hereof, without disturbance, molestation or injury at the expiration of this
Lease and any extensions hereof. Any linoleum or other floor covering of similar
character which may be cemented or otherwise adhesively affixed to the floor of
the herein leased premises shall be and become the property of the Landlord
absolutely.
The tenant shall not subject the premises to the lien of any mechanic or
materialman.
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ARTICLE V - UTILITY SERVICES AND CHARGES
SECTION 5.1 - ELECTRICITY & TELEPHONE, ETC.:
The Tenant shall be responsible for, at its own cost, and shall make its
own arrangements with utility service companies for telephone, water, gas,
electric, garbage and sanitation, and such other services as may be required by
the Tenant.
Landlord shall have no responsibility for the discontinuance of any of the
above services contracted for by the Tenant, unless due to Landlord's actions,
and the discontinuance or interruption of services shall not be construed as an
eviction or disturbance of possession by the Landlord.
ARTICLE VI - INSURANCE
SECTION 6.1 - COVENANT TO HOLD HARMLESS:
With the exception of the Landlords gross negligence, the Tenant agrees to
indemnify and save Landlord harmless against and from any and all claims for
bodily injury and property damage and all costs and expenses, including
reasonable attorney's fees, arising from the conduct or management of the
business conducted by Tenant in the leased premises, or from any act of
negligence of Tenant, its agents, contractors, servants, employees, sublessees,
concessionaires or licensees in or about the leased premises. In case any action
or proceeding is brought against Landlord by reason of any such claim, Tenant
upon notice from Landlord, covenants to defend such action or proceeding by
counsel satisfactory to Landlord. It is further understood and agreed that
Landlord shall not be liable, and Tenant waives all claims for damage to person
or property sustained by Tenant or Tenant's employees agents, servants, invitees
and customers resulting from the building in which the leased premises are
situated or the leased premises, or any equipment or appurtenance, becoming out
of repair, or resulting from any accident in or about said building or the
leased premises, or resulting directly or indirectly from any act or negligence
of any subtenant.
SECTION 6.2 - LIABILITY INSURANCE:
Tenant shall, during the entire term hereof, keep in full force and effect
a policy of public and/or commercial general liability with bodily injury and
property damage insurance, with respect to its property in the demised premises
and the business operated by the Tenant and/or any subtenants or concessionaires
of Tenant in the demised premises which will fully cover the Tenants contractual
liability to the Landlord under this lease, and which the limits of public
liability for bodily injury shall be not less than $500,000.00 PER PERSON AND
$1,000,000.00 PER ACCIDENT, and property damage liability shall not be less than
$1,000,000.00 per accident. Tenant agrees to maintain insurance coverage as
required above naming Landlord as an additional insured and agrees to provide a
copy of said insurance to the Landlord.
SECTION 6.3 - PLATE GLASS INSURANCE:
Tenant shall carry plate glass insurance at the full insurable value
thereof on all exterior plate glass and other glass in the demised premises and
in the storefront. In the alternative, provided the Tenant is not in default in
the payment of rent or in the performance of other covenants and obligations
under this Lease, the Tenant may self insure for any casualty provided for in
this section.
SECTION 6.4 - INSURANCE ON TENANT'S FIXTURES:
Tenant will carry fire and extended coverage insurance on all fixtures in
the leased premises for at least eighty (80%) per cent of their insurable value.
SECTION 6.5 - COPIES OF POLICIES:
A copy of all policies or certificates of insurance, which shall include
protection of Landlord's interests as required by this Lease, shall be delivered
to Landlord with a commitment from the insurance carrier endorsed thereon, which
provides that said policy will remain in force and effect until at least
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after thirty (30) days notice in writing is given to the Landlord of any change
and/or cancellation of coverage.
SECTION 6.6 - FIRE AND EXTENDED COVERAGE INSURANCE ON THE BUILDING:
Landlord shall obtain fire and extended coverage insurance (or
substantially similar insurance denominated in the insurance trade by any other
name or label such as Special or All Risk) on the Building and premises, the
cost of same shall be paid by the Tenant.
SECTION 6.7 - BUSINESS INTERRUPTION INSURANCE:
Tenant shall at its own expense carry business interruption insurance for
the purpose of insuring that Landlord shall suffer no loss of rent in the event
of fire or other such casualty.
SECTION 6.8 - LANDLORD'S RIGHT TO PLACE INSURANCE:
If, after Ten (10) days written notice, Tenant refuses or neglects to
place insurance required by this Lease, and/or refuses or neglects to furnish
Landlord with copies of such policies as required by this article, Landlord may
place and pay for such insurance or any part thereof, and in that event Tenant
will pay to Landlord, on demand, the amount of the premiums paid by Landlord.
SECTION 6.9 - RELEASE BY TENANT:
Notwithstanding any other provision of this Lease, Landlord shall not be
liable or responsible for, and Tenant hereby releases the Landlord and its
partners, officers, directors, agents, employees and beneficiaries from, any and
all liability or responsibility to Tenant or any Person claiming by, through or
under Tenant, by way of subrogation or otherwise, for any injury, loss or damage
to Tenant's property covered by valid and collectible fire insurance policy with
extended coverage endorsement.
ARTICLE VII - LOSS OF FACILITIES BY EMINENT DOMAIN
SECTION 7.1 - IF WHOLE TAKEN:
If the whole of the demised premises should be taken under the power of
eminent domain then the term of this Lease shall cease as of the day possession
shall be so taken.
SECTION 7.2 - IF ANY TAKEN:
If any of the floor area of the demised premises shall be taken under the
power of eminent domain and the portion not so taken will not be reasonably
adequate for the operation of Tenant's business after the Landlord completes
such repairs or alterations as the Landlord is obligated or elects to make,
Tenant shall have the right to elect either to terminate this Lease or, subject
to landlord's right of termination as set forth in Section 7.4 of this Article,
to continue in possession of the remainder of the demised premises, and shall
notify Landlord in writing within ten (10) days after such taking of Tenant's
election. In the event Tenant elects to remain in possession, all of the terms
herein provided shall continue in effect, except that the minimum rent shall be
adjusted as provided in Section 7.3, below, but such work shall not exceed the
scope of the work done in originally constructing said building.
SECTION 7.3 - DAMAGES, HOW ALLOCATED:
Anything in this Lease to the contrary notwithstanding, all damages and
proceeds awarded for such taking (full or partial) under the power of eminent
domain or taken under threat of eminent domain, whether for the whole or a part
of the demised premises, shall be just and equitable under the circumstances,
and in the event of a partial taking, rent shall be abated as shall be just and
equitable under the circumstances. If the Parties hereto are unable to agree
upon what division, annual abatement of rent or other adjustments are just and
equitable within thirty (30) days after the fruits of any award have been
received by Lessor, then the matters in dispute shall, by appropriate
proceedings, be submitted to the court having jurisdiction over the subject
matter of such a controversy in Dade County, Florida, for its decision and
adjudication of the matters in dispute.
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SECTION 7.4 - OPTION OF LANDLORD AND TENANT TO TERMINATE:
(a) If fifty per cent (50%) or more of the floor area of the building in
which the demised premises are located or twenty per cent (20%) of the parking
shall be taken under power of eminent domain, or if any portion shall be taken
within ninety (90) days prior to the expiration date of this Lease, Landlord
may, by written notice to Tenant delivered within thirty (30) days after the
date of surrendering possession to public authority pursuant to such taking,
terminate this Lease.
(b) If either a part of the parking area for the Premises is condemned and
taken (not including the Building) or part of the Building itself is condemned
and taken, to such an extent as to render Tenant's utilization of the Tenant's
Premises "commercially impracticable" (e.g., materially affecting gross volume),
then Tenant shall have the right, at its sole discretion, and without prejudice
to its other rights herein, to cancel and terminate this Lease upon the date of
possession of the premises which are the subject of the partial taking, and all
rentals shall be paid up to the date of such cancellation.
SECTION 7.5 - RENT ADJUSTMENT:
If this Lease is terminated as provided in this Article, the rent shall be
paid up to the date that possession is so taken by public authority and Landlord
shall make an equitable pro-rata refund of any rent paid by Tenant in advance
and not yet earned.
ARTICLE VIII - LOSS OF FACILITIES BY DAMAGE
SECTION 8.1 - LOSS BY INSURABLE CASUALTY:
If the demised premises should be damaged or destroyed during the demised
term by any casualty insurable under the required Special/All Risk insurance
policies Landlord shall maintain, Landlord shall (except as hereafter provided),
subject to any unavoidable delay, repair and/or rebuild the same to
substantially the condition in which the same were immediately prior to such
damage or destruction. Landlord's financial obligation to pay for the repairs
required by Lessor under this Section 8.1 shall in no event exceed the proceeds
of its aforementioned casualty insurance policy on building and the demises
premises. Landlord agrees to keep the building and the demised premises insured
against loss or damage caused by fire or any other casualty covered by said
policy to the extent of the replacement value of the Building, from responsible
insurance companies licensed to do business in Florida. Tenant shall, in the
event of any such damage or destruction, caused by said fire or other covered
casualty, unless this Lease shall be terminated as hereinafter provided,
forthwith replace or fully repair all exterior signs, trade fixtures, equipment,
display cases, and other installations originally installed by the Tenant.
Landlord shall have no interest in the proceeds of any insurance carried by
Tenant on Tenant's interest in this Lease and Tenant shall have no interest in
the proceeds of any insurance carried by Landlord.
SECTION 8.2 - OPERATION AND RENT DURING REPAIR PERIOD:
Tenant agrees during any period of reconstruction or repair of the demised
premises and/or of said building to continue the operation of its business in
the demised premises to the extent reasonably practicable from the standpoint of
good business. The rent and all other charges payable by Tenant under this
lease, shall not be abated during any period in which by reason of any such
damage or destruction there is a substantial interference with the operation of
the business of Tenant in the demised premises. However, in the event the Tenant
shall be forced to cease operations due to repairs, this lease shall be extended
for a period of time equal to the time the Tenant ceased operations.
SECTION 8.3 - OPTION TO TERMINATE:
If the building in which the demised premises are located should be
damaged or destroyed to the extent of fifty per cent (50%) or more of the then
monetary value thereof by any cause, and if any such damage occurs at a time
when there is less than two (2) years remaining on this Lease prior to the
expiration date hereof, then the Landlord may either terminate this Lease or
elect to repair or restore said damage or destruction in which latter event
Landlord shall, within six months of the cause of the
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damage or destruction, repair and/or rebuild the same as provided in Section 8.1
and the minimum rent shall be abated proportionately as provided in Section 8.2.
If such damage or destruction occurs and this Lease is not so terminated by the
Landlord, this Lease shall remain in full force and effect and the parties waive
the provisions of any law to the contrary. The Landlord's obligation under this
paragraph shall in no event exceed the scope of the work to be done by the
Landlord in the original construction of said building and the demised premises,
or the proceeds received from any insurance policy or policies in effect,
whichever amount shall be less.
SECTION 8.4 - TYPE OF TENANT INSURANCE:
Tenant agrees to comply with all of the rules and regulations of Rating
Bureaus having jurisdiction with respect to the types of insurance carried by
Tenant in accordance with the requirements of this Lease and will not do,
suffer, or permit an act to be done in or about the demised premises which will
increase any insurance with respect thereto existing upon substantial completion
of said building.
ARTICLE IX - REMEDIES
SECTION 9.1 - BANKRUPTCY:
Neither this Lease, nor any interest therein nor any estate thereby
created shall pass to any trustee or receiver or assignee for the benefit of
creditors or otherwise by operation of law.
In the event the estate created hereby shall be taken in execution or by
other process of law, or if Tenant shall be adjudicated insolvent or bankrupt
pursuant to the provisions of any state or federal insolvency or bankruptcy act,
or if Tenant voluntarily petitions for bankruptcy, or if a receiver or trustee
of the property of Tenant shall be appointed by reason of Tenant's property
being taken, attached or operated for the benefit of creditors, then and in any
such events, Landlord may at its option terminate this Lease and all rights of
Tenant hereunder, by giving to Tenant notice in writing of the election of
Landlord to so terminate.
SECTION 9.2 - DEFAULT BY TENANT:
If any rent payable by Tenant to Landlord shall not be paid on its due
date and shall be and remain unpaid for five (5) days after written notice is
given to Tenant, or if Tenant shall violate or default any of the other
covenants, agreements, stipulations or conditions herein, and such violation or
default shall continue for a period of thirty (30) days after written notice of
such violation or default, then it shall be optional for Landlord to declare
this Lease forfeited and the term thereof ended. Any property belonging to
Tenant or any person holding by, through or under it or otherwise found upon the
demised premises may be removed therefrom and stored in any public warehouse at
the cost of and for the account of Tenant. If Tenant abandons, vacates or
surrenders said premises or be dispossessed by process of law, any personal
property left upon said premises shall be deemed abandoned at the option of
Landlord.
SECTION 9.3 - RE-ENTRY BY LANDLORD:
Upon any such termination of the estate as aforesaid, Landlord may
re-enter the leased premises with due process of law using such force as may be
necessary, and remove all persons and chattels therefrom and Landlord shall not
be liable for damages or otherwise by reason of such re-entry or termination of
the term of this Lease. Notwithstanding such termination, the liability of
Tenant for the rent herein provided for shall not be extinguished for the
balance of the term remaining after such termination, and Landlord, and except
as otherwise specifically provided in this Lease, shall be entitled to recover
immediately as liquidated damages an amount equal to the minimum rent for the
balance of the term as provided in Article II. In the event it becomes necessary
for the Landlord to re-enter the premises in the event of a default by the
Tenant the parties specifically agree that the Landlord shall have the right,
but not the obligation, to re-rent the premises (at the option of the Landlord)
and to hold the Tenant liable for any and all sums due including rental
deficiencies, costs including but not limited to real estate brokerage
commissions and reasonable attorney's fees relating to such re-rental.
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SECTION 9.4 - LANDLORD'S PERFORMANCE OF TENANT'S COVENANTS:
In the event upon written demand by Landlord, Tenant fails, neglects, or
refuses to perform within a reasonable time any covenant, agreement or condition
in this Lease provided by it to be done, the Landlord may perform such covenant,
condition or agreement, and any money expended thereon shall be charged to the
account of the Tenant, payable forthwith, on demand, as additional rent, and the
failure of the Tenant to repay Landlord for any money so paid out and expended
shall constitute a default under this Lease.
SECTION 9.5 - RIGHTS CUMULATIVE:
All rights and remedies of Landlord and Tenant herein enumerated shall be
cumulative and none shall exclude any other right or remedy allowed by law, and
said rights and remedies may be exercised and enforced concurrently and whenever
and as often as occasion therefor arises.
SECTION 9.6 - ATTORNEY'S FEES:
If on account of any failure of either party to perform, or violation or
default in the performance of any obligation to pay rent, or any other term,
provision, agreement, covenant, stipulation, obligation or condition hereof, it
shall become necessary for either party to employ an attorney or attorneys to
enforce any of its rights or remedies hereunder, or to defend itself in any
controversy or litigation with the other party, whether or not suit be
instituted, then in any such event, reasonable attorneys' fees shall be
recovered by the prevailing party.
ARTICLE X - MISCELLANEOUS
SECTION 10.1 - SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT:
Tenant agrees that this Lease is, and shall be, subordinate to any
mortgage, deed or trust or any other hypothecation for security which may
hereafter be placed upon said premises or the land or building of which they are
a part and such subordination is hereby effective without any further act by
Tenant PROVIDED that any lender encumbering the Building shall recognize the
interest of the Tenant and execute a Subordination, Non-Disturbance and
Attornment Agreement, along with Lessor, in a form reasonably acceptable to any
lender requiring same, unless this Lease has been terminated, in which case the
Tenant agrees provide written confirmation of same.
SECTION 10.2 - SURRENDER:
On the last day of the term demised or on the sooner termination thereof,
Tenant shall peaceably and quietly surrender the leased premises in good order,
condition and repair, fire (and other unavoidable casualty) and reasonable wear
and tear, and casualty covered by insurance, excepted. All alterations,
additions, improvements and fixtures (other than trade fixtures and signs
installed at Tenant's expense, all of which shall be removed by Tenant) which
may be made or installed by either Landlord or Tenant upon the leased premises,
all air conditioning systems and equipment, ceiling treatments and lights, and
all hard surface bonded or adhesively affixed flooring and tiles shall become
the property of Landlord and shall remain upon and be surrendered with the
leased premises as a part without disturbance, molestation or injury at the
termination of the term of this Lease, whether by the elapse of time or
otherwise, all without compensation or credit to Tenant. Tenant shall also
surrender all keys for the leased premises to Landlord at the place then fixed
for payment of rent and shall inform Landlord of combinations on any locks,
safes and vaults, if any, on the leased premises.
SECTION 10.3 - HOLDING OVER:
In the event Tenant remains in possession of the demised premises after
the expiration of this Lease and without the execution of a new lease, it shall
be deemed to be occupying said premises as a tenant from month-to-month, subject
to all the conditions, provisions and obligations of this Lease insofar as the
same are applicable to a month-to-month tenancy.
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SECTION 10.4 - SALE OF PROPERTY
Landlord shall have the right at any time to sell, transfer and convey the
real estate, improvements and building of which the leased premises are a part
to any person, firm or corporation whatsoever, and upon any such sale, transfer
or conveyance, Landlord shall cease to be liable under any covenant, condition
or obligation imposed upon it by this Lease accruing subsequent to such sale,
transfer or conveyance; provided however, that any such sale, transfer or
conveyance shall be subject to this Lease and that all of the Landlord's
covenants and obligations contained herein shall run with the land and be
binding upon the subsequent owner or owners thereof.
SECTION 10.5 - EXCAVATIONS:
In case any excavation shall be made for buildings or improvements or for
any other purpose upon the land adjacent to or near the leased premises, Tenant
will afford to Landlord, or the person or persons, firms or corporations causing
or making such excavation, license to enter upon the leased premises for the
purpose of doing such work as Landlord or such person or persons, firms or
corporation shall deem to be necessary to preserve the walls or structures of
the building from injury, and to protect the building by proper securing of
foundations. Insofar as Landlord may have control over the same, all such work
shall be done in a manner as will not materially interfere with the operation of
Tenant's business in the leased premises. The parties do hereby specifically
agree that all such work to be performed shall be done without any claim for
damages against the Landlord and without a reduction or rebatement of the rent.
SECTION 10.6 - CONSTRUCTION OF RELATIONSHIP BETWEEN THE PARTIES:
Nothing contained herein shall be deemed or construed by the parties
hereto nor by any third party, as creating the relationship of principal and
agent or of partnership or of joint venture between the parties hereto, it being
understood and agreed that neither the method of computation of rent, nor any
other provision contained herein, nor any acts of the parties herein, shall be
deemed to create any relationship between the parties hereto other than the
relationship of Landlord and Tenant. Whenever herein the singular number is
used, the same shall include the plural, and the neuter gender shall include the
masculine gender and the feminine gender.
SECTION 10.7 - ACCESS TO PREMISES:
Landlord shall have the right to enter upon the leased premises at all
reasonable working hours, upon giving reasonable notice to Tenant, for the
purpose of inspecting the same, or of making required repairs, additions or
alterations to the demised premises or any property owned or controlled by
Landlord. If Landlord deems any repairs required to be made by Tenant necessary,
it may demand in writing that Tenant will make the same forthwith, and if Tenant
refuses or neglects to commence such repairs and complete the same with
reasonable dispatch, Landlord may make or cause such repairs to be made, at the
expense of the Tenant, and shall not be responsible to Tenant for any loss or
damage that may accrue to its stock or business by reason thereof, and if
Landlord makes or causes such repairs to be made, Tenant agrees that it will
forthwith, on demand, pay to Landlord the cost thereof. Nothing herein contained
shall obligate the Landlord to make or perform any repairs which are the
obligation of the Tenant.
Landlord may have reasonable access to the premises herein demised for the
purpose of exhibiting the same to prospective tenants and to place on said
premises the usual "For Lease" or "For Sale" signs, all without rebate of rent
to Tenant, and Tenant specifically agrees that said action by the Landlord shall
not constitute an eviction of Tenant, nor a loss or interruption of the Tenant's
business. The Lessor shall have the right to enter the leased premises and place
for rent, signs in the windows or any other appropriate place of the lease
premises within four months (4) prior to the expiration of this Lease.
SECTION 10.8 - NON-LIABILITY:
Except for acts of gross negligence, the Landlord shall not be responsible
or liable to Tenant for any loss or damage that may be occasioned by or through
the acts or omissions of persons occupying
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adjoining premises or any part of the premises adjacent to or connected with the
leased premises or any part of the building of which the leased premises are a
part of or any persons transacting any business in said leased premises or
present in said leased premises for any other purpose or for any loss or damage
resulting to Tenant or its property from burst pipes, stopped or leaking water,
gas, sewer or steam pipes or plumbing fixtures or from any failure of a defect
in any electric line, circuit or facility, or on account of the interruption of
any utility or utilities for maintenance or replacement. Landlord shall not be
responsible or liable to Tenant for any loss or damage resulting to Tenant
arising on account of riots, acts of God, acts of declared or undeclared war,
labor disputes or the making of repairs by Landlord.
SECTION 10.9 - SUCCESSORS AND ASSIGNS - ORIGINAL TENANT'S LIABILITY- RENTAL
INCREASES OR PROFITS TO LANDLORD ON ASSIGNMENT:
Tenant shall not have the right to sell, assign, transfer, mortgage,
encumber, pledge, sublease or in any manner dispose of this Lease or any estate
or interest therein, or permit the premises to be occupied by anyone (all the
foregoing hereinafter a "Transfer") without the previous written consent of
Landlord which said consent SHALL NOT BE UNREASONABLY withheld. However,
Landlord's consent shall not be required for a "Transfer" which occurs as a
result of the sale by Tenant of its assets, or by merger, consolidation or
otherwise or by sale or disposition of control or ownership of the Tenant, in
all of which cases, the Landlord agrees to recognize the successor to the
Tenant, although contemporaneous notice shall be given by the Tenant /Assignor
and any such transfer made in accordance with this Section 10.9 shall not serve
to invoke the provisions of Section 2.2 A. 2.
Consent by Landlord to one or more assignments of this Lease or to one or
more sublettings of said premises shall not operate to exhaust Landlord's rights
under this paragraph.
The voluntary or other surrender of this Lease by Tenant or a mutual
cancellation hereof shall not work a merger, and shall, at the option of
Landlord, terminate all or any existing subleases or subtenancies or shall
operate as an assignment to Landlord of such subleases or subtenancies.
In the event of the assignment or "Transfer" of this Lease whether by
assignment, merger, acquisition or otherwise, by the Tenant which results in the
payment of increased rent, a finders fees, key money or which generates any
similar remuneration or profits, all such proceeds shall be and belong to the
Landlord herein notwithstanding the approval or lack thereof by the Landlord of
any such assignment.
SECTION 10.10 - PAYMENT REQUIRED OF TENANT OTHER THAN MINIMUM AND
PERCENTAGE RENTS:
Any payments required to be made to Landlord by Tenant other than as
minimum rent including Landlord advances for repairs and to cure defaults, not
repaid to Landlord within the time period specified for repayment, or if no time
period is specified for repayment, such repayment shall be within ten (10) days
of demand and shall be considered additional rent for so long as the amounts
shall remain unpaid.
SECTION 10.11 - INTEREST ON DELINQUENT PAYMENTS - DEFAULT RATE:
All amounts payable by Tenant to Landlord as minimum rent, percentage rent
(if and when applicable), or additional rent, or other rent, as defined in
Section 10.10 hereinabove and elsewhere, shall bear interest at the highest rate
allowable by the laws of the State of Florida from due date until paid and for
purposes of this Lease Agreement shall be referred to as the Default Rate.
SECTION 10.12 - PLACE OF PAYMENT:
All payments for rent or otherwise due and payable from Tenant to Landlord
shall be paid to Landlord at 6900 Barquera Street, Coral Gables, Florida
33146-3818 or at such other place as might be designated by Landlord in writing.
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SECTION 10.13 - TENANT TO PAY REAL ESTATE TAXES - MONTHLY ESCROW
Commencing on the Rent Commencement Date, and thereafter for the balance
of the term of this Lease Agreement, as additional rent, the Tenant shall pay
all Real Estate Property Taxes, general and specific due on the property upon
which the leased premises are located (the BUILDING PREMISES), which is
currently taxed under folio numbers 03 4130 010 0020, 03 4130 010 0030, 03 4130
010 0040, 03 4130 010 0050. The taxes referred to in this section shall mean the
combined real property taxes levied and assessed by all taxing authorities
against and upon the building enclosing the leasable space and the land
underlying and surrounding such building and shall include any special
improvement assessments. Said taxes shall be paid monthly to Landlord, if
required by the Landlord. A monthly escrow by the Tenant shall be established
which allows the Landlord to take advantage of all discounts allowed by said
taxing authorities. The Landlord shall not be responsible for the payment of
interest on the escrow. Tenant's responsibility for payment of taxes hereunder
is predicated upon Landlord's payment of the taxes when due in time to take
advantage of the maximum discount available, provided however, that the Tenant
shall first have made payment to the Landlord in time for the Landlord to
reasonably take advantage of the maximum discount available. Provided however,
that so long as the Tenant herein is the original Tenant to this Lease and
further provided that said Tenant shall not be in default of any material
monetary obligation under the terms of this Lease, the Landlord agrees that the
Tenant may at the option of the Tenant avoid any monthly escrow by paying said
taxes each year in time to take advantage of the maximum discount which is
currently November, and providing satisfactory proof of payment of same to the
Landlord.
SECTION 10.14 - PRORATIONS:
Whenever in this Lease any amounts are required to be paid or calculated
for a particular period of time and it becomes necessary or equitable to adjust
such amounts for any fractional portion of such period, such adjustment shall be
made by dividing the amount which would be paid for the particular period by the
number of days in such period and then multiplying such result by the number of
days in such fractional period.
SECTION 10.15 - NOTICES:
Any notice required or permitted under this Lease shall be deemed
sufficiently given if sent by registered or certified mail, postage prepaid,
return receipt requested to Tenant at its administrative offices, currently
located at 1666 N.W. 82 Avenue, Miami, Florida 33126, and to Landlord at the
address then fixed for the payment of rent, with a copy of any such notice sent
in the same fashion to Michael J. Spector, currently located at P.O. Box 706,
Dorado, Puerto Rico 00646, and either party may by like written notice at any
time designate a different address to which notices shall subsequently be sent.
SECTION 10.16 - CONDITIONAL LIMITATION:
Each term and provision as provided herein is and shall be construed as
both a covenant and a condition of this Lease.
SECTION 10.17 - WAIVER BY LANDLORD NOT TO APPLY TO SUBSEQUENT DEFAULT:
Landlord's consent to waive any condition or covenant of this Lease shall
not be construed as a waiver of subsequent performance of a similar condition or
covenant or any other condition or covenant of this Lease.
SECTION 10.18 - LIENS:
Tenant agrees that it will pay or cause to be paid all costs for work done
and/or materials supplied to the demised premises by or on behalf of Tenant and
that it will keep the leased premises free and clear of all mechanics' and/or
materialman's liens and other liens on account of work done and/or materials
supplied by or for Tenant or by or for person claiming under Tenant. Tenant
hereby agrees to and shall indemnify and save Landlord free and harmless against
liability, loss, damage, costs, attorney's
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fees, and all other expenses on account of claims of lien of laborers and/or
materialmen or others for work performed or materials or supplied furnished for
Tenant or persons claiming under Tenant.
It is hereby expressly prohibited and Tenant shall have no authority
whatsoever to create any liens or claims for labor or material or otherwise on
the Landlord's interest in the demised premises and all persons contracting with
the Tenant for the improvement, alteration, or repair of any building or other
improvements on the demised premises and all materialmen, contractors,
mechanics, laborers and others are hereby charged with notice that they must
look solely to the Tenant and to the Tenant's interest only in the demised
premises to secure the payment of any claim, bill or bills for work done,
material furnished or otherwise during the term of this Lease.
Landlord and Tenant acknowledge and confirm that any work performed by
Tenant to improve the demised premises, including but not limited to Tenant's
work, as hereinabove referenced, is not required by Landlord to be performed,
but any and all such work is and shall be subject to Landlord's approval as
hereinabove set forth which shall not be unreasonably withheld.
SECTION 10.19 - LEASE NOT TO BE RECORDED:
Landlord and Tenant agree that this Lease shall not be recorded and any
attempt to record same shall be null and void, unless mutually agreed to in
writing by both parties hereto.
SECTION 10.20 - SINGULAR, PLURAL AND DEFINITIONS:
The words "Tenant" and/or "Lessee" shall be deemed and taken to mean each
and every person or party mentioned as a Tenant herein, be the same one or more,
and the use of the neuter singular pronoun to refer to Tenant shall be deemed a
proper reference even though Tenant may be an individual, a partnership, a
corporation, or a group of two or more individuals or corporations. The
necessary grammatical changes required to make the provisions of this Lease
apply in the plural sense where there is more than one Tenant and to either
corporations, associations, partnerships, or individuals, males or females,
shall in all instances be assumed as though in each case fully expressed.
SECTION 10.21 - SIGNAGE:
The Lessor agrees not to unreasonably withhold approval of signage. The
Lessee shall have the right to post approved signage upon the premises, provided
that the same shall not violate any state, federal or local municipal ordinance.
The parties agree that the current signage is hereby approved.
SECTION 10.22 - CONSTRUCTION OF TERMS IN THIS LEASE/VENUE:
The paragraph headings, subheadings and captions in this Lease are
inserted for convenience of reference only and shall not be deemed to define,
limit, describe or expand upon any of the provisions of the paragraphs to which
they refer, or of this Lease, nor shall they affect its meaning, construction,
interpretation, scope, effect, or intent.
This Lease has been prepared both by Lessor and its professional advisors
and by Tenant and its professional advisors and has been reviewed by both
Parties. The Parties believe this Lease is the product of all of their efforts,
that it expresses their agreement, and that it (or any part of it) should not be
interpreted in favor of either Lessor or Tenant or against either Lessor or
Tenant, merely because of their efforts in preparing it (or any part of it).
SECTION 10.23 - TITLE OF THE BUILDING PREMISES/TENANT'S ACCEPTANCE OF TITLE
The parties understand and agree that at the time of execution of this
lease agreement, the Tenant has not been provided an abstract or prior title
insurance policy evidencing ownership of the property. The Tenant is relying
upon representations of the Landlord that the Landlord is the owner of the
property. Nothing contained above shall be deemed to prevent Lessor from
executing any mortgage(s) encumbering all or a portion of the BUILDING PREMISES.
In the event of a default by the Lessor in
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the payment of any such mortgage(s), the Tenant shall have the right to cure any
such default and receive credit for any advances made therefor.
SECTION 10.24 - LESSOR'S DEFAULT:
Subject to any shorter time frames specifically provided for elsewhere in
this Lease, if Lessor shall breach any of its warranties in this Lease or fail
to perform any covenant required to be performed by Lessor under the terms of
this Lease or otherwise fails to perform any of its obligations under this Lease
and such breach or failure shall continue for thirty (30) days after receipt by
Lessor from Tenant of notice thereof duly given (provided that if such breach or
failure cannot reasonably be cured within thirty (30) days, then if Lessor is
making bona fide efforts and diligent efforts to cure the same, a reasonable
time beyond thirty (30) days shall be allowed Lessor, and provided further that
Lessor's time for cure shall be extended by any delay occasioned by Force
Majeure), then Lessor shall be considered in default of this lease.
SECTION 10.25 - SUCCESSORS:
All rights, liabilities, covenants, indemnities, agreements, in this Lease
(or exhibits) given to, or imposed upon, the respective Parties hereto, shall
extend to and bind, and inure to the benefit of, the Parties, and their
respective heirs, executors, administrators, successors, legal representatives,
and permitted assigns, of said Parties; if there shall be more than one Lessor
or Tenant, they shall be bound jointly and severally by the terms, covenants and
agreements herein. In the event Lessor conveys its interest in the BUILDING
PREMISES and the purchaser assumes Lessor's obligations and covenants, Lessor
shall thereupon be relieved of all further obligations hereunder which arise
subsequent, but not prior, to the date of conveyance. The terms Lessor and
Tenant in this Lease include any successors to or assigns of the original Lessor
and Tenant.
SECTION 10.26 - LESSOR'S COVENANT OF QUIET ENJOYMENT:
Lessor hereby covenants and agrees that it has the lawful right to make
this Lease. Upon the observance, performance, and keeping, of all the covenants,
terms, agreements and conditions, in this Lease, on Tenant's part to be
observed, kept and performed, Tenant shall peaceably and quietly have, hold and
enjoy the Tenant's Premises for the Lease Term (which includes any exercised
Option Term) without hindrance or interruption by Lessor or any other person or
entity lawfully or equitably claiming by, through or under, Lessor, subject
however, to the exceptions, reservations and conditions contained in this Lease.
SECTION 10.27 - ENTIRE AGREEMENT:
This Lease with all its Exhibits, which are deemed incorporated as part of
this Lease whether or not they are physically attached hereto, constitutes and
embodies all agreements, conditions and understandings, between Lessor and
Tenant. All representations, either oral or written, shall be deemed to be
merged into this Lease Agreement. No subsequent alteration, waiver, change,
modification, or addition, to this Lease shall be binding upon Lessor or Tenant
unless reduced to writing and signed by the Party against whom the enforcement
of any such change, alteration or modification is sought.
SECTION 10.28 - EXCUSE OR POSTPONEMENT OF PERFORMANCE OF COVENANTS
("FORCE MAJEURE"):
The Parties to this Lease shall not be deemed in default with respect to
failure to perform any of the terms, covenants and conditions of this Lease if
such failure to perform shall be due to any strike, lockout, civil commotion,
national defense preemption, war like operation, extreme weather conditions,
invasion, rebellion, military power, sabotage, government regulations or
controls, inability to obtain any material or utilities, Act of God, or any
other similar cause beyond the control of such Party which is typically
considered "Force Majeure." Failure to pay rent or any other sums due, by
Tenant, shall be conclusively deemed not to be "beyond the control of" Tenant.
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SECTION 10.29 - TIME OF THE ESSENCE:
The parties agree that in the payment of all sums due hereunder and in the
performance of all covenants and obligations hereunder, time shall be of the
essence.
SECTION 10.30 - TRIPLE NET LEASE:
It is the purpose and intent of the parties hereto, that this lease be a
triple net non-subordinated Lease and that the rent hereinabove provided to be
paid to the Landlord by the Lessee be absolutely net to the Landlord, so that
this Lease shall, except as provided to the contrary, yield net to the Landlord
the rent stated above in Article II. It is further agreed that all costs and
expenses of every kind and nature whatsoever relating to the demised premises,
or any improvements thereon which may arise of become due during the term of
this Lease, shall be paid by the Lessee. However, nothing herein shall be
construed to require the Lessee to pay or discharge any lien or mortgage which
shall be placed upon the premises by the Landlord.
Lessee agrees to cooperate in all reasonable respects with the refinancing
of the premises by the Lessee, providing any such refinancing contains a
non-disturbance provision.
ARTICLE XI - ABANDONING & VACATING
If the Lessee:
(a). Fails to take possession of the Leased Premises; or
(b). Should vacate, abandon, or desert the demised premises after opening
for business to the Public;
then in any such event, Lessee shall be in default, and Lessor may pursue any
remedy pursuant to this Lease, including but not limited to its rights under
Section 9.3 (Re-entry By Landlord) and the rights to use force, consistent with
due process, as described therein.
ARTICLE XII - DEFAULT
SECTION 12.1:
If any one or more of the following events (herein sometimes called
"events of default") shall happen:
(a). If default shall be made in the payment of any rents herein reserved
upon the date the same become due and payable and such default continues for a
period of five (5) days after written notice, unless otherwise specified herein
to be paid within another period of time;
(b). If default shall be made by Lessee in the performance of or
compliance with any of the covenants, agreements, terms or conditions contained
in this lease other than those referred to in the foregoing subparagraph (a) and
such default shall continue for a period of thirty (30) days after written
notice thereof from Lessor to Lessee; or unless otherwise specified herein to be
paid within another period of time;
(c). If Lessee shall: (i) generally not pay its debts as they come due,
(ii) admit in writing its inability to pay its debts, (iii) make a general
assignment for the benefit of creditors, (iv) commence any case, proceeding or
other action, seeking any reorganization, arrangement, composition, adjustment,
liquidation, wage earner's plan, dissolution or similar relief under the present
or any future law relating to bankruptcy, insolvency, reorganization or relief
of debtors, (v) seek or consent to or acquiesce in the appointment of any
trustee, receiver, custodian, or other similar official for Lessee or for all or
any substantial part of Lessee's assets or of the demised property, or (vi) take
any corporate action to authorize any of the actions set forth in clauses (i)
through (v) of this Article XII, Section 12.1 (c);
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(d). Any case, proceeding or other action against Lessee shall be
commenced seeking to have an order for relief entered against it as debtor, or
seeking reorganization, arrangement, adjustment, liquidation, dissolution or
composition of it or its debts under any law relating to bankruptcy, insolvency,
reorganization or relief of debtors, or seeking appointment of a receiver,
trustee, custodian or other similar official for it or for all or any
substantial part of its property, and such case, proceeding or other action (i)
results in the entry of an order for relief against it which is not fully stayed
within 30 days after the entry thereof or (ii) remains undismissed for a period
of 90 days; or
(e). If the demised premises shall be seized under any levy, execution,
attachment or other process of court and the same shall not be promptly vacated
or stayed on appeal or otherwise, or if the Lessee's interest in the demised
premises is sold by judicial sale and the sale is not promptly vacated or stayed
on appeal or otherwise; then, and in any of such events, Lessor may at any time
hereafter terminate this lease and retake possession, declare the balance of the
entire rent for the entire rental term of this lease to be immediately due and
payable, in which event Lessor may then proceed to collect all of the unpaid
rent called for by this lease by distress or otherwise, or pursue any other
remedy afforded by law, provided that such default and all other defaults at the
time existing have not been fully cured, and all expenses and costs incurred by
the Lessor, including reasonable attorneys' fees, in connection with enforcing
this lease, shall not have been fully paid. Any such termination shall apply to
any extension or renewal of the term herein demised, and to any right or option
on the part of the Lessee that may be contained in this lease or any agreement.
Nothing herein contained shall be construed as precluding the Lessor from having
such remedy as may be and become necessary in order to preserve the Lessor's
right or the interest of the Lessor in the premises and in this lease, even
before the expiration of any grace or notice periods provided for in Section
12.1 (b) above, or elsewhere in this lease, if under particular circumstances
then existing the allowance of such grace or the giving of such notice will
prejudice or will endanger the rights and estate of the Lessor in this Lease and
in the demised premises.
ARTICLE XIII - STATEMENT BY LESSEE AND LESSOR-SUBORDINATION TO LENDER
SECTION 13.1:
Upon demand of Lessor, or any prospective purchaser, mortgagee or lessee
of the building of which the demised premises are a part, Lessee agrees to
execute a statement of the condition of this lease, including the amount of
monthly rental and the date to which the same has been paid, the amount of
security held by Lessor, the expiration date of this Lease, and whether any
breach hereof exists.
SECTION 13.2:
Upon demand of Lessee, or any mortgagee of the Lessee, Lessor agrees to
execute a statement of the condition of this lease, including the amount of
monthly rental and the date to which the same has been paid, the amount of
security held by Lessor, the expiration date of this Lease, and whether any
breach hereof exists.
SECTION 13.3 - ESTOPPEL CERTIFICATE:
Tenant and Lessor agree that they will, at any time and from time to time,
within ten (10) days following written notice by Lessor or Tenant or any
mortgagee of Lessor or Tenant, given pursuant to this Section 13.3, execute,
acknowledge and deliver to Lessor or Tenant or such mortgagee a statement in
writing certifying whether or not this Lease is unmodified and in full force and
effect (or, if there have been modifications, whether or not the same is in full
force and effect and stating the modifications), whether or not any option
rights to extend the Lease Term have been exercised and the date on which this
Lease will terminate, and the date to which the Minimum Rent and any other
payments due from Tenant have been paid in advance, if any, and stating whether
or not there are defenses or offsets claimed by Tenant or Lessor, as the case
may be, and whether or not to the best of said Party's knowledge the other Party
to this Lease is in default in performance of any covenant, agreement or
condition contained in this Lease, and if so, specifying each such default,
supply any other facts or information regarding the operation of the Lease which
the requesting Party may reasonably request. The failure of either Party to
execute, acknowledge and deliver a statement in accordance with the provisions
of this Section 13.3 within said ten (10) day period shall constitute a default
under this Lease if not cured within five (5) days from notice from the other
Party. Any certificate issued by either Party
- --------------/--------------/
Lessor Tenant
19
<PAGE>
may be relied upon by the other Party and by any other pertinent Party (e.g.,
prospective mortgagee, assignee, purchaser). If one Party submits a completed
certificate to another Party who then fails to object to its contents within ten
(10) days after its receipt of the completed certificate, the matters stated in
the certificate will conclusively be deemed to be correct if not objected after
second notice and five (5) days to object.
SECTION 13.4 - SUBORDINATION TO LENDER:
This lease and every undertaking hereunder is subordinate to the mortgage
loan to the Trustees of the Martin W. Spector Trust from Jefferson Bank of
Florida, its successors and/or assigns which said loan is in the original
principal amount of $600,000.00 and to any increases, modifications and
extensions of said mortgage loan. This subordination shall extend to the lien of
any lender whose loan replaces the loan of Jefferson Bank of Florida. The
Landlord agrees to use reasonable efforts to obtain a Non-Disturbance Agreement
from any lender which encumbers the leased premises.
Any Landlords' lien created hereunder shall be subordinate to any
financing by Tenant on any trade fixtures and inventory.
ARTICLE XIV - WAIVER OF JURY TRIAL AND COUNTERCLAIM
Tenant shall waive with the owner, trial by jury in any action, proceeding
or counterclaim brought by either of the parties against the other on any
matters whatsoever arising out of or in any way connected with this Lease, the
relationship of owner and tenant, tenant's use and occupancy of the premises,
and/or any claim of injury or damage. In the event owner commences any
proceedings for non-payment of rent, minimum rent or additional rent, tenant
shall not interpose any Counterclaim of whatever nature or description in any of
such proceedings, except for a compulsory counterclaim. This shall not, however,
be construed as a waiver of the Tenant's right to assert such claims in any
separate action or actions brought by the tenant.
ARTICLE XV - SEVERABILITY OF CLAUSES
SECTION 15.1:
If any part of this Lease shall be declared unenforceable or invalid by
any court of law having jurisdiction over the subject matter of this Lease, the
remainder of said Lease shall nonetheless be valid and enforceable between the
parties.
ARTICLE XVI - GOVERNING LAW
SECTION 16.1:
This Lease shall be governed by and construed in accordance with the laws
of the State of Florida, and venue shall lie in Dade County, Florida.
ARTICLE XVII- REAL ESTATE BROKERAGE COMMISSION
SECTION 17.1:
Each of the parties warrants and represents that there are no claims for
brokerage commissions, rental fees or finder's fees in connection with the
execution of this Lease and each of the parties agrees to indemnify the other
and hold it harmless from all liabilities arising under any such claim.
- --------------/--------------/
Lessor Tenant
20
<PAGE>
IN WITNESS WHEREOF, the Landlord has caused this instrument to be executed in
its name by its duly authorized officers and its corporate seal to be affixed
and the Tenant has caused this instrument to be executed in its name by its duly
authorized officers and its corporate seal to be affixed this the day and year
first hereinabove written.
<TABLE>
<S> <C>
Signed, Sealed and Delivered In The Presence TENANT:
of the following witnesses:
/s/ DEBORA A. PARKER SPEC'S MUSIC, INC.
- ----------------------------------
Witness #1 (signature) By: /s/ JEFF CLIFFORD
--------------------------------
DEBORA A PARKER Jeff Clifford, Vice President
- ----------------------------------
Print Name Of Witness #1 Date: 3-18-96
------------------------------
/s/ MICHAEL A. RUBIN Attest:
- ---------------------------------- -----------------------------
Witness #2 (signature)
MICHAEL A. RUBIN Date: _______________________, 1995
- ----------------------------------
Print Name of Witness #2
Signed, Sealed and Delivered In The Presence LESSOR:
of the following witnesses:
THE MARTIN W. SPECTOR
/s/ MICHAEL A. RUBIN IRREVOCABLE TRUST, DOROTHY
- ---------------------------------- JOY SPECTOR, TRUSTEE, MICHAEL
Witness #1 (signature) J. SPECTOR, TRUSTEE, ROSALIND
S. ZACKS, TRUSTEE, BAYARD
MICHAEL A. RUBIN SPECTOR, TRUSTEE AND ANN S.
- ---------------------------------- LIEFF, TRUSTEE,
Print Name Of Witness #1
/s/ DEBRA M. RUBIN By: /s/ DOROTHY JOY SPECTOR
- ---------------------------------- ---------------------------------
Witness #2 (signature) Dorothy Joy Spector, Trustee
By: /s/ MICHAEL J. SPECTOR
DEBRA M. RUBIN ----------------------------------
- ---------------------------------- Michael J. Spector, Trustee
Print Name of Witness #2
By: /s/ ROSALIND S. ZACKS
----------------------------------
Rosalind S. Zacks, Trustee
By: /s/ BAYARD W. SPECTOR
----------------------------------
Bayard W. Spector, Trustee
By: /s/ ANN S. LIEFF
----------------------------------
Ann S. Lieff, Trustee
</TABLE>
- --------------/--------------/
Lessor Tenant
21
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-16778 of Spec's Music, Inc. on Form S-8 of our report dated October 18, 1996
appearing in the Annual Report on Form 10-K of Spec's Music, Inc., for the year
ended July 31, 1996.
/s/ DELOITTE & TOUCHE LLP
- ----------------------------
Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
October 28, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> JUL-31-1996
<CASH> 405,753
<SECURITIES> 0
<RECEIVABLES> 293,681
<ALLOWANCES> 0
<INVENTORY> 19,704,076
<CURRENT-ASSETS> 24,352,519
<PP&E> 26,457,021
<DEPRECIATION> (9,742,056)
<TOTAL-ASSETS> 42,125,025
<CURRENT-LIABILITIES> 13,530,167
<BONDS> 9,654,094
0
0
<COMMON> 53,194
<OTHER-SE> 18,593,907
<TOTAL-LIABILITY-AND-EQUITY> 42,125,025
<SALES> 75,996,009
<TOTAL-REVENUES> 77,531,661
<CGS> 50,737,316
<TOTAL-COSTS> 51,441,319
<OTHER-EXPENSES> 32,315,934
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,074,497
<INCOME-PRETAX> (7,144,334)
<INCOME-TAX> (2,651,525)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,492,809)
<EPS-PRIMARY> (0.86)
<EPS-DILUTED> (0.86)
</TABLE>
