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<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ________
Commission File Number 0-14323
SPEC'S MUSIC, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-1362127
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1666 N.W. 82nd Avenue
Miami, Florida 33126
(Address of principal executive offices, including zip code)
(305) 592-7288
(Registrant's telephone number, including area code)
SHARES OF COMMON STOCK OUTSTANDING
AS OF NOVEMBER 10, 1997: 5,295,669
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes[X] No[ ]
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<PAGE>
SPEC'S MUSIC, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS .................. 3
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS ........ 4
CONSOLIDATED CONDENSED STATEMENTS OF
CASH FLOWS ........................................... 5
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS ................................. 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ........................................ 9-11
PART II.
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ....................... 12
<PAGE>
<TABLE>
<CAPTION>
PART I
ITEM 1. FINANCIAL STATEMENTS
SPEC'S MUSIC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
October 31, July 31,
1997 1997
ASSETS ---------- ----------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents $ 737,555 $ 59,397
Trade receivables 450,926 192,286
Income tax receivable -- 1,890,498
Inventories 17,090,686 14,629,312
Prepaid expenses 347,988 294,373
---------- ----------
Total current assets $18,627,155 $17,065,866
Video rental inventory, net 355,099 369,734
Property and equipment, net 10,747,379 11,157,024
Other assets 660,510 659,911
---------- ----------
Total assets $30,390,143 $29,252,535
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturity of long-term debt $ 7,625,144 $ --
Accounts payable 11,567,444 9,860,269
Accrued expenses 2,186,979 2,437,332
Store closing reserve 330,000 650,000
---------- ----------
Total current liabilities 21,709,567 12,947,601
---------- ----------
Long-term debt -- 6,695,994
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; 10,000,000
shares authorized; 5,300,319 and 5,300,319
shares issued at October 1997 and
July 1997, respectively 53,004 53,004
Additional paid-in capital 3,556,353 3,551,326
Retained earnings 5,205,594 6,134,540
Less 26,761 and 25,879 shares in treasury at
October 1997 and July 1997, respectively,
at cost (134,375) (129,930)
---------- ----------
Total stockholders' equity 8,680,576 9,608,940
---------- ----------
Total liabilities and stockholders' equity $30,390,143 $29,252,535
========== ==========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
SPEC'S MUSIC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1997 AND 1996
(UNAUDITED)
1997 1996
---------- ----------
<S> <C> <C>
Product sales $ 14,013,921 $ 15,503,958
Video rentals 169,759 285,042
---------- ----------
TOTAL REVENUES 14,183,680 15,789,000
Cost of goods sold - sales 9,275,096 10,244,308
Cost of goods sold - rental 91,912 130,944
---------- ----------
TOTAL COST OF SALES 9,367,008 10,375,252
---------- ----------
GROSS PROFIT 4,816,672 5,413,748
Store operating, general and
administrative expenses 5,523,914 6,446,264
---------- ----------
Operating loss (707,242) (1,032,516)
Other expenses, net (221,704) (270,732)
---------- ----------
Loss before income taxes (928,946) (1,303,248)
Benefit for income taxes -- (482,000)
---------- ----------
NET LOSS $ (928,946) $ (821,248)
---------- ----------
LOSS PER SHARE $ (.18) $ (.16)
---------- ----------
Weighted average number of common
shares outstanding 5,271,108 5,247,583
---------- ----------
</TABLE>
See notes to Consolidated Condensed Financial Statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
SPEC'S MUSIC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED OCTOBER 31, 1997 AND 1996
(UNAUDITED)
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 928,946) ($ 821,248)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES:
Amortization of video rental inventory 88,942 127,652
Depreciation and amortization of property and equipment 501,996 641,024
Amortization of preopening expenses -- 26,018
Loss on disposal of property and equipment -- 24,141
Deferred compensation expense -- 21,217
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(Increase) decrease in assets:
Trade receivables (258,640) 119,379
Income tax receivable 1,890,498 --
Inventories (2,461,374) (493,785)
Prepaid expenses (53,615) (267,566)
Other assets (22,191) (29,151)
Deferred tax asset -- (482,000)
Increase (decrease) in liabilities:
Accounts payable 1,707,175 1,514,847
Accrued expenses (249,771) (102,308)
Store closing reserve (320,000) (507,573)
---------- ----------
Net cash used in operating activities (105,926) (229,353)
---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of video rental inventory (74,307) (139,943)
Additions to property and equipment (70,759) (28,457)
Disposition of property and equipment -- 145,508
---------- ----------
Net cash used in investing activities (145,066) (22,892)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 23,264,750 20,145,267
Repayments of borrowings (22,335,600) (20,233,172)
---------- ----------
Net cash provided by (used in) financing activities 929,150 (87,905)
---------- ----------
Net increase (decrease) in cash 678,158 (340,150)
Cash at beginning of period 59,397 405,753
---------- ----------
Cash at end of period $ 737,555 $ 65,603
========== ==========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
-5-
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The accompanying consolidated condensed financial statements should be read
in conjunction with the Company's consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal
year ended July 31, 1997.
The consolidated condensed financial statements were prepared from the books
and records of the Company without audit or verification. In the opinion of
management all adjustments, which are of a normal recurring nature and
necessary to present fairly the financial position, results of operations and
cash flows for all the periods presented have been made. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted.
The results of operations for the three month period ended October 31, 1997
are not necessarily indicative of the operating results for the full fiscal
year. The accompanying financial statements include the accounts of the
Company and its wholly-owned subsidiary. All significant intercompany
balances and transactions have been eliminated.
2. LONG TERM DEBT
In May 1996, the Company obtained a new 2 year credit agreement (the
"Revolving Credit Facility"), which includes a $3,000,000 stand-by letter of
credit facility, both of which expire in May 1998. Under the Company's new
Revolving Credit Facility, it may borrow up to the lesser of (a) $15,000,000
or (b) 60% of the Company's eligible inventory (as defined in the "Revolving
Credit Facility"). A commitment fee of 3/8% of the unused portion is payable
monthly. There were no borrowings under the stand-by letter of credit during
the first quarter of fiscal 1998.
The Revolving Credit Facility and all of the Company's obligations in
connection therewith are secured by a first-priority security interest in
substantially all of the Company's assets, and the Company may not further
pledge its assets without the prior approval of its lender. The Company is
also required to meet certain monthly financial covenants, including minimum
earnings, current ratio, fixed charge coverage and tangible net worth levels.
In addition, the Company may not exceed certain capital expenditures and
inventory costs levels.
The Revolving Credit Facility bears interest at a floating rate, adjusted
monthly, equal to the Index Rate (as defined below) plus 2.875%. The "Index
Rate" is the last month-end published rate for 30-day dealer-placed
commercial paper sold through dealers by major corporations as published in
the Money Rates section of the Wall Street Journal. Accrued interest is
payable monthly in arrears. The interest rate at October 31, 1997 was 8.405%.
The outstanding amount under the Revolving Credit Facility was approximately
$7.1 million as of October 31, 1997 and an additional $2.4 million was
available under the terms of the agreement.
On October 3, 1997, the Company obtained an extension to August 1, 1998 on
the Revolving Credit Facility. Under this extended credit facility the
lender waived any defaults or events of default which had previously arisen
from violations of the original financial covenants. New
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<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, Cont'd.
financial covenants have been set for the term of the agreement.
Additionally, the lender entered into a Subordination and Intercreditor
Agreement, which is effective through August 1, 1998, which allows the
Company to borrow from another lender, up to an additional $1 million above
the existing Revolving Credit Facility. This facility bears interest at a
floating rate, adjusted monthly, equal to the Prime Rate plus 8.25%. The
outstanding balance under the Subordination and Intercreditor Agreement was
$.5 million as of October 31, 1997 and an additional $.5 million was
available under the terms of the Agreement.
The Agreements contain restrictions on the declaration and payment of
dividends.
3. STATEMENT OF CASH FLOWS INFORMATION
The following is supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
Three months ended
October 31,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
Interest paid $ 169,805 $ 209,652
Income tax paid -0- -0-
</TABLE>
Supplemental noncash financing activities information:
During the three months ended October 31, 1997, no Restricted Stock Awards
were granted and no awards were canceled. During the three months ended
October 31, 1996, no Restricted Stock Awards were granted and $5,325 were
canceled.
The Company contributed $9,855 and $14,615 in common stock to the Company's
401(k) Plan during the three months ended October 31, 1997 and 1996,
respectively. During the three months ended October 31, 1997, the Company's
401(k) Plan refunded $9,272 in common stock back to the Company.
4. LOSS PER SHARE
Loss per share is computed based on losses for each period, divided by the
weighted average number of common shares and equivalents outstanding during
each period. Stock options have been excluded from the loss per share
computations for both years as they were antidilutive to the calculation.
5. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," was issued. SFAS No. 128, which supersedes
Accounting Principles Board ("APB") Opinion No. 15, requires a dual
presentation of basic and diluted earnings per share on the face of the
income statement. Basic earnings per share excludes dilution and is computed
by dividing income or loss attributable to common stockholders by the
weighted-
-7-
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, Cont'd.
average number of common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. When adopted, all prior-period earnings per share
data are required to be restated. For the period ended October 31, 1997 and
1996, diluted earnings per share, as computed under SFAS No. 128, would be
the same as fully diluted earnings per share shown on the accompanying
Consolidated Condensed Statements of Operations.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," was issued. SFAS No. 131 establishes standards for the
way that public companies report selected information about operating seg-
ments in annual financial statements and requires that those companies report
selected information about segments in interim financial reports issued to
shareholders. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and
in assessing performance. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. SFAS No. 131
requires that a public company report a measure of segment profit or loss,
certain specific revenue and expense items and segment assets. SFAS No. 131
is effective for financial statements for periods beginning after December
15, 1997. The Company has not determined the effects, if any, that SFAS No.
131 will have on the disclosures in its consolidated financial statements.
6. STORE CLOSING RESERVE
As a result of the planned closing of store locations, the Company has
recorded store closing reserves representing lease termination costs, write-
down of assets, rent expense, and other miscellaneous expenses. As of October
31, 1997, all planned closings were completed and the reserve balance
represents the remaining obligations persuant to such closings.
-8-
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is an analysis of the Company's results of operations, liquidity
and capital resources. To the extent that such analysis contains statements
which are not of a historical nature, such statements are forward-looking
statements, which involve risks and uncertainties. These risks include changes
in the competitive environment for the Company's products, including the entry
or exit of nontraditional retailers of the Company's products to or from its
markets; the release by the music industry of an increased or decreased number
of "hit releases"; unfavorable developments with respect to a lease; general
economic factors in markets where the Company's products are sold; and other
factors discussed in the Company's filings with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1997 AND 1996
REVENUES
Total revenues decreased by $1,605,000 or 10.2% during the first quarter of
fiscal 1998 compared to the first quarter of fiscal 1997. As of October 31,
1997, the Company operated two fewer stores than in the first fiscal quarter of
1997. On a same-store basis (stores open for more than one year), revenues
decreased by 3.0% from last year.
Revenues from product sales decreased by 9.6% for the Company as a whole and
decreased by 3.2% on a same-store basis. Revenues declined because the Company
operated two fewer stores than in the first quarter of fiscal 1997. Same-store
revenues declined primarily because of certain stores directly competing with
non-traditional music retailers, which often sell compact discs near or at cost.
Video rental revenue decreased by 40.4% for the Company as a whole and by 41.6%
on a same-store basis as compared to the first quarter in fiscal 1997. The
Company maintains video rental departments in limited stores based on customer
demand and has not aggressively promoted this business. Since the first quarter
of fiscal 1997, the Company closed one video rental department.
The Company plans to continue to review and adjust its prices and focus its
marketing and advertising campaign to differentiate itself from price oriented
mass merchants and discount electronics stores. Nevertheless, the Company is
likely to continue to experience revenue declines due to the planned closure of
additional under-performing stores in fiscal 1998.
GROSS PROFIT
Gross profits from product sales, which are net of product management and
distribution costs, were 33.8% and 33.9% during the first quarters of fiscal
1998 and 1997, respectively.
Gross profits from video rentals were 45.9% and 54.1% during the first quarters
of fiscal 1998 and 1997, respectively. Some fluctuation in gross profit margins
may be expected due to the fixed nature of the video rental inventory being
amortized on an accelerated method over a three year period.
-9-
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS, CONTINUED
Total gross profits were 34.0% and 34.3% of revenue during the first quarters of
fiscal 1998 and 1997, respectively. The Company expects gross proft, as a
percentage of revenues, to increase as a result of better buying practices
combined with an improvement in product mix. Some fluctuation in gross profit
margins may be expected due in part to the many factors that affect the
Company's purchases for sale and in part to the Company's promotional
strategies.
STORE OPERATING GENERAL AND ADMINISTRATIVE EXPENSES
Store operating, general and administrative expenses, as a percentage of
revenue, were 38.9% and 40.8% during the first quarters of fiscal 1998 and 1997,
respectively. Store labor, occupancy and depreciation costs decreased primarily
because of the closing of under performing stores. As of the 1998 first fiscal
quarter ended October 31, 1997, the Company operated two fewer stores than in
the first fiscal quarter of 1997.
INTEREST EXPENSE AND OTHER INCOME
The Company incurred interest expense of $232,000 and $246,000 during the first
quarters of fiscal 1998 and 1997, respectively. The decrease is due to lower
average borrowing for the fiscal 1998 quarter.
INCOME TAXES
The effective income tax rate, as a percentage of loss before income
taxes, was 0.0% and 37.0% during the first quarters of fiscal 1998 and 1997,
respectively. The first quarter fiscal 1998 net losses do not include any
income tax credits, due to the Company not recognizing income tax benefits
applicable to net operating loss carry forwards. A $482,000 income tax benefit
was recorded in the first quarter of fiscal 1997.
NET LOSS
During the first quarter of fiscal 1998, the Company incurred a loss of
($929,000) or ($.18) per share, compared to a loss of ($821,000) or ($.16) per
share, during the first quarter of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1997, the Company's working capital deficit was ($3.1) million
compared to working capital of $4.1 million at July 31, 1997. The decrease in
working capital at October 31, 1997 was primarily the result of the
reclassification of long term debt to current debt. Such reclassification
occured because the Company's Revolving Credit Agreement matures less than one
year after the end of the first quarter of fiscal 1998.
Cash flows from operating activities used $106,000 in the first quarter of
fiscal 1998, compared to using $229,000 in fiscal 1997.
Cash flow used in investing activities increased from $23,000 in the first
quarter of fiscal 1997 to $145,000 in the first quarter of fiscal 1998. The
primary reason for the change in cash flows from investing activities relate to
the disposition of property and equipment in the first quarter of fiscal 1997
compared to the first quarter of fiscal 1998.
-10-
<PAGE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS, CONTINUED
At October 31, 1997, the Company had a $15 million secured Revolving Credit
Agreement, expiring August 1, 1998, which includes a $3,000,000 stand-by letter
of credit facility. Under the Revolving Credit Agreement, the Company may
borrow up to the lesser of (a) $15,000,000 or (b) 60% of the Company's eligible
inventory (as defined in the credit agreement). The outstanding amount under
the Revolving Credit Facility was $7,125,000 as of October 31, 1997 and an
additional $2,417,000 was available under the terms of the Agreement. There
were no borrowings under the stand-by letter of credit during the first quarter
of fiscal 1998.
In addition, the lender entered into a Subordination and Intercreditor
Agreement, which is effective through August 1, 1998, which allows the Company
to borrow from another lender, up to an additional $1 million above the existing
Revolving Credit Facility. At October 31, 1997, the Company had an outstanding
balance under the Subordination and Intercreditor Agreement of $500,000 and an
additional $500,000 was available under the terms of the Agreement.
The Company is a specialty retailer in Florida and Puerto Rico of prerecorded
music and video products and is also engaged in the rental of video tapes. The
industry has experienced increased competition during the past few years, which
coupled with other business related factors, has negatively impacted the
Company's performance. The Company anticipates the competitive conditions will
continue into the foreseeable future. The Company's return to profitable
operations and continuity into the future is dependent upon various factors
including improving sales and profit margins, reducing expenses, and eliminating
unprofitable stores. Management believes that its cash flow from operations and
availability under its existing credit agreement should be adequate to cover the
Company's projected cash requirements during the year ending July 31, 1998.
Operating results are however, subject to various uncertainties and
contingencies, many of which are beyond the Company's control. The Company's
future profitability or the lack thereof, could have a substantial impact on its
liquidity, its ability to meet its debt covenants, and its availability of
capital resources necessary to conduct its business.
-11-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Exhibits.
(a) 27. Financial Data Schedule (Exhibit only to electronic filing).
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the quarter
ended October 31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPEC'S MUSIC, INC.
---------------------------------------
(Registrant)
November 25, 1997 /s/ Ann S. Lieff
- ------------------------- -----------------------------------------
Date ANN S. LIEFF
President and Chief Executive
Officer (Principal Executive Officer)
November 25, 1997 /s/ Donald A. Molta
- ------------------------- -----------------------------------------
Date DONALD A. MOLTA
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> OCT-31-1997
<CASH> 737,555
<SECURITIES> 0
<RECEIVABLES> 450,926
<ALLOWANCES> 0
<INVENTORY> 17,090,686
<CURRENT-ASSETS> 18,627,155
<PP&E> 20,747,265
<DEPRECIATION> (9,999,886)
<TOTAL-ASSETS> 30,390,143
<CURRENT-LIABILITIES> 21,709,567
<BONDS> 0
0
0
<COMMON> 53,004
<OTHER-SE> 8,627,572
<TOTAL-LIABILITY-AND-EQUITY> 30,390,143
<SALES> 14,013,921
<TOTAL-REVENUES> 14,183,680
<CGS> 9,275,096
<TOTAL-COSTS> 9,367,008
<OTHER-EXPENSES> 5,523,914
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 232,366
<INCOME-PRETAX> (928,946)
<INCOME-TAX> 0
<INCOME-CONTINUING> (928,946)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (928,946)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
