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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, 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
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(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1666 N.W. 82ND AVENUE
MIAMI, FLORIDA 33126
- - - ----------------------------------- --------
(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 the 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, 1997, the aggregate market value of the common stock
held by non-affiliates of the registrant was approximately $3,689,675.
As of October 22, 1997 the number of shares of common stock of the
Registrant issued and outstanding was 5,300,319.
DOCUMENTS INCORPORATED BY REFERENCE
Part III--Definitive Proxy statement for the 1997 Annual Meeting of
Shareholders.
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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
Executive Officers .................................... 11
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 7A. Quantitative and Qualitative Disclosures about
Market Risks .......................................... 19
Item 8. Financial Statements and Supplementary Data ........... 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................... 35
Item 10. Directors and Executive Officers of the
Registrant ............................................ 35
Item 11. Executive Compensation ................................ 35
Item 12. Security Ownership of Certain Beneficial Owners
and Management ....................................... 35
Item 13. Certain Relationships and Related Transactions ........ 35
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ........................................... 36
ITEM 1. BUSINESS
GENERAL
Spec's Music, Inc., founded in 1948 and headquartered in Miami, Florida
operates 45 stores in Florida and Puerto Rico. Spec's is 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, laser discs and digital video discs
(DVD's); blank audio and video tapes; a wide range of audio and video
accessories; and boutique items such as t-shirts, posters, and
collectibles. In addition, customers can rent video movies at one of
eight locations.
The Company re-opened one store and closed eight under performing stores
during the fiscal year. The overwhelming majority of our stores (41)
are located in Florida, with the remaining four located 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 1997, we operated 17 stores in
enclosed traditional shopping malls and 28 stores in shopping centers
and free-standing downtown locations. Of these, 14 are "superstores",
which typically span 7,000-10,000 square feet of retail space.
Additionally, our "megastores" in Miami Beach 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 newest stores provide a unique opportunity for customers
to interact with our products. Specifically, they can sample music at
listening stations 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 87,000 active audio and
video titles.
During fiscal 1997, the Company refocused on its marketing and
merchandising. "Payback," the Company's new customer loyalty program,
was inaugurated in
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December 1996. The Company believes that the Payback program will
create incremental sales, increase the average purchase per transaction,
produce customer loyalty and provide our vendors the opportunity to
target the sale of specific product and music genres.
In May 1997, Spec's acquired the assets of three specialty Latin music
businesses. The new subsidiary of Spec's, known as "D S Latino,"
includes both a music distribution company and the easy-listening Latin
music record label "Hits Only" together with its recording studio. D S
Latino will maintain a broad-based inventory of pre-recorded music and
entertainment related products and accessories, including product
manufactured by the six major recording companies and by the majority of
the independent Latin labels. The Company believes that this
acquisition complements its existing business and will provide new
opportunities for growth in the world of Latin Music.
PRODUCTS
In fiscal 1997, the sale of audio products comprised approximately 84.4%
of total revenue. This represents a slight increase over fiscal 1996's
82% and fiscal 1995's 81%. Of that number 69% came from the sale of
compact discs as compared to 65% in fiscal 1996 and 61% in fiscal 1995.
Cassette tapes comprised 15% of total revenue in fiscal 1997, a decrease
over fiscal 1996's 17% and fiscal 1995's 20%. CD's in particular have
increased significantly as a percentage of total revenues. Conversely,
revenue from video product sales and rentals declined to 7% in fiscal
1997, down from 10% in fiscal 1996 and 11% in fiscal 1995. This trend
reflects Spec's decision to eliminate video rentals in all but 8 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 manufacturers as Sony Music, Warner/Elektra/Atlantic
(subsidiary of Time Warner), BMG Music (subsidiary of Bertelsman
Entertainment); Universal Music Distribution; PGD (subsidiary of
Philips) and EMI Music Distribution. 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 average price of about $17 which include used copies
which were previously part of the rental inventory. Additionally, we
also sell prerecorded
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movies on laser disc format, with prices ranging from $20 to $94, with
an average price of roughly $39. Most recently, the newest video
format, Digital Video Disc, or DVD, is gaining consumer interest. A
good selection of titles, advanced technology and a moderate price of
approximately $25 promises to be a growing format.
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 other items such as posters, t-shirts, magazines, jewelry and post
cards.
SEASONALITY
The Company experiences higher sales volume during the second quarter
which includes the Holiday selling season. Revenues during the month of
December, as a percentage of annual revenues, were 14.3%, 15.7% and
16.7% in fiscal 1997, 1996 and 1995, respectively. The seasonality
decreases can be attributed to continued increased competition and heavy
sales promoting during the Holiday season.
ADVERTISING AND MARKETING
Spec's, through its marketing and advertising programs, is dedicated to
being a dominant music entertainment retailer in both Florida and Puerto
Rico. 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.
In December 1996, Spec's launched "Payback," a customer loyalty program.
Payback currently has over 70,000 members and is growing monthly. The
Payback database allows us to provide our customers with additional
value by awarding them with exclusive music, entertainment and special
promotions. We are committed to building a continuing relationship with
our customers so that we can better understand their needs and
preferences.
-5-
In fiscal 1996, Spec's introduced a unique new campaign. In this
program, we are buying back thousands of used CD's for $3 a piece 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.
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 six 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 product 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 1997, we
returned about 17% of our total purchases to manufacturers.
During fiscal 1997, a returns recycling system was developed in order to
minimize penalties and freight charges associated with returns. Product
returned from stores is processed through this system to determine if
there is a need in another store. Previously, all product returned from
stores was returned directly to the vendor.
STORE OPERATIONS AND PERSONNEL
Each of our stores is typically open seven days a week including
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 managers are encouraged to reach performance
goals by the availability of a cash incentive program.
-6-
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.
At July 31, 1997, Spec's had approximately 322 full-time and 323 part-time
employees (associates). In 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.
Spec's processes its sales transactions on point-of-sale (POS) cash
terminals. In fiscal 1997, about 66% 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.
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.
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.
-7-
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. The Company has obtained registrations of the
trademarks "Payback, The Music Club From Spec's," "D S Latino," the D S
Latino logo, "Hits Only," "Tropical Sound Orchestra," "Oro Latino,"
"Epicentro Musical" and "Raiz Latina." We believe that the mark and
logo are important name recognition devices in advertising and
promotional activities. The "Spec's" name and logo are also registered
separately in the State of Florida.
COMPETITION
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 Spec's. 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 certain competitive advantages include: 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 50 years in the
business, our name recognition and customer loyalty is particularly
strong; and 3) we are sought out for our unsurpassed selection of both
Latin and classical music.
-8-
ITEM 2. PROPERTIES
Spec's leases 44 stores throughout Florida and Puerto Rico, and owns the
building which houses its Miami Beach "megastore." 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
6,123 square feet of total space. At the end of fiscal 1997, we
operated 17 stores in enclosed traditional shopping malls and 28 stores
in shopping centers and free-standing downtown locations. Of these, 14
are "superstores", which typically span 7,000-10,000 square feet of
retail space. Additionally, our "megastores" in Miami Beach 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, 1997,
Spec's rental expense was approximately $8.4 million, including $71,000
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
10, 1996 and will serve in such positions until the next annual meeting
of the Board of Directors. The following table sets forth, as of
October 1, 1997, certain information regarding the executive officers
of the Company.
PRINCIPAL BUSINESS EXPERIENCE
NAME AGE DURING THE PAST FIVE YEARS
- - - ----- --- ---------------------------------
Martin W. Spector 92 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.
Ann S. Lieff 45 President and Chief Executive Officer
of the Company since 1980; Director
since 1979.
Donald A. Molta 37 Vice President and Chief Financial
Officer since 1996. Between February
1995 and December 1996, Mr. Molta,
served as Vice President and Chief
Financial Officer of All For A Dollar,
Inc., a publicly traded retail company
that had filed a voluntary petition
under the federal bankruptcy laws prior
to the time Mr. Molta joined the
Company. The company emerged from
bankruptcy and then filed a second
voluntary petition under the federal
bankruptcy laws in October 1996.
Between 1993 and 1994, Mr. Molta served
as Vice President of Finance for Bob's
Stores, Inc., a subsidiary of Melville,
Corporation.
Dorothy J. Spector 78 Secretary of the Company since
its incorporation in 1970.
Rosalind S. Zacks 47 Vice President since April 1993;
Executive Vice President and Treasurer
of the Company from 1981 to
1993; Director since 1979.
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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 SmallCap Market
System under the symbol "SPEK." The following table shows high and low
bid price information as quoted by Nasdaq for each quarter during 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.
1997 HIGH LOW 1996 HIGH LOW
First quarter 2 1 First quarter 4 1/8 2 1/2
Second quarter 1 5/16 5/8 Second quarter 3 1/8 1 1/4
Third quarter 1 3/16 5/8 Third quarter 2 5/8 1 3/4
Fourth quarter 15/16 1/2 Fourth quarter 2 1/8 1 3/8
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 27, 1997, the Company had 5,300,319 shares of common stock
outstanding held by 341 stockholders of record, and approximately 1,300
beneficial owners.
SALES OF UNREGISTERED SECURITIES
On December 10, 1996, December 18, 1996, January 1, 1997, February 12,
1997 and June 1, 1997, the Company granted options to purchase an
aggregate of 427,000 shares of its common stock to its employees and
directors pursuant to the Company's 1993 Employee Stock Plan, its 1993
Non-Employee Director Plan and its 1996 Non-Employee Directors Plan in
partial consideration for services rendered by such persons. All such
options are exercisable at the fair market value of the common stock on
the date of grant. The grant of such options was exempt from
registration pursuant to section 4(2) of the Securities Act of 1933, as
amended (the "Act").
On September 30, 1996, December 31, 1996, March 31, 1997 and June 30,
1997, the Company contributed an aggregate of 48,721 shares of its
common stock to its 401(k) Plan in partial consideration for services
rendered by its employees. The issuance of such shares was exempt from
registration pursuant to section 4(2) of the Act.
On January 1, 1997, the Company granted options to purchase 50,000
shares of its common stock to Backus Turner International in partial
payment for advertising services. The options are exercisable at $1.00,
which was the fair market value of the common stock on the date of grant
of the options. The grant of such options was exempt from registration
pursuant to Section 4(2) of the Act.
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ITEM 6. SELECTED FINANCIAL DATA.
(In thousands, except per share and operating data)
Years Ended July 31, 1997 1996 1995 1994 1993
OPERATIONS STATEMENT DATA:
Revenues $68,536 $77,532 $79,603 $78,388 $72,733
Gross profit 22,258 26,090 28,406 28,590 26,664
Store operating, general and administrative expenses 28,036 29,065 26,338 24,136 22,834
Impairment of long-lived assets 1,500 -- -- -- --
Store closing expenses 898 3,251 -- -- --
Restructuring charge 215 -- -- -- 3,204
Interest (expense) and other income (905) (918) (410) 44 1,013
------ ------ ------ ------ ------
Earnings (loss) before income taxes (9,296) (7,144) 1,658 4,498 1,639
Provision (benefit) for income taxes (161) (2,651) 626 1,681 485
------ ------ ------ ------ ------
Net earnings (loss) $(9,135) $(4,493) $1,032 $2,817 $1,154
====== ====== ====== ====== ======
Cash flow from operating activities 3,253 4,671 380 2,319 4,223
====== ====== ====== ====== ======
Net earnings (loss) per common share $(1.74) $( .86) $ .20 $ .54 $ .22
====== ====== ====== ====== ======
Weighted average number of common shares outstanding 5,252 5,246 5,248 5,264 5,195
====== ====== ====== ====== ======
BALANCE SHEET DATA (AS OF JULY 31,):
Working capital $ 4,118 $10,822 $16,702 $12,117 $10,779
Total assets 29,253 42,125 46,497 37,364 31,155
Capital lease obligation and long term debt 6,696 9,654 11,435 67 97
Common stockholders' equity 9,609 18,647 23,168 22,000 18,971
Common stockholders' equity per share 1.83 3.55 4.41 4.22 3.66
Return on sales (13.3%) (5.8%) 1.3% 3.6% 1.6%
Return on average common stockholders' equity (64.7%) (21.5%) 4.6% 13.8% 6.2%
OPERATING DATA:
Number of stores (at July 31) 45 52 58 55 56
Weighted average revenue per store $1,444,000 $1,424,000 $1,385,000 $1,375,000 $1,198,000
Square feet of selling space (at July 31) 266,307 323,323 336,130 280,100 273,400
Weighted average revenue per square foot
of selling space $ 236 $ 227 $ 266 $ 279 $ 242
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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.
PERCENTAGE OF REVENUES
YEARS ENDED JULY 31, 1997 1996 1995
Product sales 98.0% 98.0% 97.1%
Video rental 2.0 2.0 2.9
----- ----- -----
Total revenues 100.0 100.0 100.0
Gross profit - product sales 32.2 33.2 35.1
Gross profit - video rental 49.2 54.2 55.9
----- ----- -----
Total gross profit 32.5 33.7 35.7
Store operating, general and
administrative expenses 40.9 37.5 33.1
Store closing expenses 1.3 4.2 --
Impairment of long-lived assets 2.2 -- --
Other income (expense) (1.3) (1.2) (0.5)
----- ----- -----
Earnings (loss) before income taxes (13.6) (9.2) 2.1
Provision (benefit) for income taxes (0.3) (3.4) 0.8
----- ----- -----
Net earnings (loss) (13.3)% (5.8)% 1.3%
----- ----- -----
PERIOD TO PERIOD PERCENTAGE
INCREASE (DECREASE)
YEARS ENDED JULY 31, 1997 1996 1995
----- ----- -----
Product sales (11.2)% (1.7)% 3.5%
Video rental (30.5) (33.1) (38.0)
Total revenues (11.6) (2.6) 1.6
Gross profit - product sales (14.0) (6.9) 2.2
Gross profit - video rental (36.9) (35.2) (37.1)
Total gross profit (14.7) (8.2) (0.6)
Store operating, general and
administrative expenses (3.5) 10.4 9.1
Store closing expenses (72.4) 100.0 --
Impairment of long-lived assets 100.0 -- --
Other income (expense) (1.5) 123.9 n/m
Earnings (loss) before income taxes (30.1) (530.8) (63.1)
Provision (benefit) for income taxes (93.9) (523.6) (62.8)
NET EARNINGS (LOSS) (103.3) (535.2) (63.4)
-14-
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 $8,995,000 or 11.6% from fiscal 1996 to
fiscal 1997. On a same-store basis (stores open more than one year)
revenues were flat against last year.
Revenue from product sales in fiscal 1997 decreased by 11.2% for the
chain as a whole and decreased by 0.5% on a same-store basis. Revenues
declined because the Company operated seven fewer stores than in fiscal
1996 and increased unit sales of compact discs were more than offset by
decreased unit sales of cassettes and video product. Same-store
revenues remained flat 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 remaining flat.
Video rental revenue in fiscal 1997 decreased by 30.5% for the chain as
a whole and by 25.1% on a same-store basis as compared to fiscal 1996.
The Company maintains video rental departments in a limited number of
stores based on customer demand and has not aggressively promoted this
business. The closing of three video rental departments since the
third quarter of fiscal 1996 and a lower demand for video rentals
contributed to lower rental revenues.
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 reductions, and
the planned closure of additional under performing stores in fiscal
1998.
Total revenues decreased by $2,071,000 or 2.6% from fiscal 1995 to
fiscal 1996. On a same-store basis, revenues decreased by 5.7%.
During fiscal 1996, 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 the lack of significant new
hit release titles which contribute not only to greater sales but to
greater in-store traffic.
Video rental revenue decreased by 33.1% for the chain as a whole and by
23.3% on a same-store basis during fiscal 1996 as compared to 1995. The
closing of three video rental departments during fiscal 1996, and lower
demand contributed to the decrease in revenue.
Weighted average revenue per store increased by 1.4% to $1,444,000 in
fiscal 1997 and increased by 2.8% in fiscal 1996. The weighted average
revenue per square foot of selling space increased to $236, or
-15-
3.9% in fiscal 1997 and decreased to $227, or 14.7% in fiscal 1996.
The increase in fiscal 1997 is due to the closing of eight under
performing stores. The decrease in fiscal 1996 reflects the addition of
two mega stores early in the year which tended to bring down the average
during the development period.
GROSS PROFIT
Gross profit for product sales, which is net of product management and
distribution costs, was 32.2%, 33.2% and 35.1% in fiscal 1997, 1996 and
1995, respectively. Gross profit as a percentage of revenue, decreased
in fiscal 1997 because of promotional markdowns and the continued shift
in sales mix to compact and laser discs, which have lower gross margins
than audio cassettes and VHS tapes.
Gross profit for video rentals was 49.2%, 54.2% and 55.9% in fiscal
1997, 1996 and 1995, respectively. Some fluctuations in gross profit
margins may be expected due to the fixed nature of the video rental
inventory being amortized on an accelerated method over a three year
period.
Total gross profit was 32.5%, 33.7% and 35.7% in fiscal 1997, 1996 and
1995, respectively. The Company expects gross profit 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 cost of product for sale and in part to the Company's
promotional strategies.
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Store operating, general and administrative expenses were 40.9%, 37.5%
and 33.1% of revenues in fiscal 1997, 1996 and 1995, respectively.
Store operating expenses decreased due to operating seven fewer stores
compared to fiscal 1996. General and administrative expenses for fiscal
1997 increased slightly compared to fiscal 1996. However, as a
percentage of revenue, the increase of store operating, general and
administrative expenses was due to the significant decline in total
revenues.
STORE CLOSING EXPENSE
In fiscal 1997, the Company recorded $898,000 in store closing expenses
for costs associated with closing eight under performing stores.
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. The major portion of the store closing expense relates to costs
and writeoffs associated with the closing of the Coconut Grove
"megastore," which was unprofitable.
IMPAIRMENTS
During fiscal 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of." This
standard requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Based on projected future
cash flows of certain stores, the Company recorded an estimated write
down of $1,500,000 for the impairment of long lived assets.
INTEREST EXPENSE AND OTHER INCOME
The Company incurred interest expense of $952,000 in fiscal 1997,
$1,074,000 in fiscal 1996 and $442,000 in fiscal 1995. Interest
expense decreased in fiscal 1997 as a result of lower borrowing
requirements.
-16-
INCOME TAXES
The effective income tax rate as a percentage of earnings (loss) before
income taxes, was 1.7% due to the non recognition of any tax credits
from net operating loss carry forwards in fiscal 1997. The effective
income tax rate, as a percentage of earnings (loss) before income taxes,
was 37.1% and 37.8% in fiscal 1996 and 1995, respectively.
NET EARNINGS (LOSS)
The net loss for fiscal 1997 was $(9,135,000) or $(1.74) per share
compared to a net loss of $(4,493,000) or $(.86) per share in fiscal
1996. The fiscal 1997 loss resulted from lower gross margins due to
increased competition, store closing expense charges, and the impairment
of long-lived assets charge. Fiscal 1996 earnings decreased from
$1,032,000, or $.20 per share in fiscal 1995 because of lower same-store
sales resulting from increased competition, lower gross margins due to
product mix shifts and higher store operating, general and
administrative costs associated with new store openings and the store
closing expense charge.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $4.1 million, $10.8 million and $16.7 million at
July 31, 1997, 1996 and 1995, respectively. The decrease in working
capital in both fiscal 1997 and 1996 resulted from a reduction in the
Company's inventory levels as well as losses incurred during both years.
Cash flows from operating activities provided $3.3 million, $4.7 million
and $.4 million in fiscal 1997, 1996 and 1995, respectively. The
primary reason for the decline in cash flows from operating activities
for fiscal 1997 relates to an increase in the net loss. In fiscal 1996,
inventory reductions, obtained from just-in-time buying practices,
contributed $4.5 million to increased operating cash flows.
Cash flows used in investing activities decreased from $2.8 million in
fiscal 1996 to $.6 million in fiscal 1997. The primary reason for the
decline in cash flows used in investing activities relate to fewer
additions to property and equipment in fiscal 1997 compared to fiscal
1996.
At July 31, 1997, 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, 1997, the Company had an outstanding balance of $6,696,000
and an additional $338,000 was available under the terms of the
agreement. There were no borrowings under the stand-by letter of credit
during fiscal 1997.
On October 3, 1997, the Company obtained an extension to August 1, 1998
on its 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
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 and allows the
Company to borrow from another lender up to an additional $1 million
above the existing Revolving Credit Facility.
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, eliminating
unprofitable stores, the competitive environment, its ability to meet
its debt covenants, and the
-17-
availability of capital resources necessary to conduct its business.
Management believes that its cash flow from operations and availability
under its existing credit agreements 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 the availability of capital resources necessary to
conduct its business.
The Company plans capital investments in fiscal 1998 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, 1998:
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-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. The Company believes SFAS No. 128 will not
significantly alter previously reported earnings per share data.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," was issued. SFAS No. 131 establishes
standards for the way that public companies report selected information
about operating segments in annual financial statements and requires
that those companies report selected information about segments in
interim financial reports issued to shareholders. Operating segments
are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to
be reported on the basis that it is used internally for evaluating
segment performance and deciding how to allocate resources to segments.
SFAS No. 131 requires that a public company report a measure of segment
profit or loss, certain specific revenue and expense items and segment
assets. SFAS No. 131 is effective for financial statements for 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.
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.
-18-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company does not trade or conduct activities in derivative financial
instruments, other financial instruments or derivative commodity
instruments. The Company's trade accounts receivable are obligations of
domestic entities and thus do not subject the Company to any foreign
currency fluctuation risks. In addition, the amount of such trade
accounts receivable as of July 31, 1997 was approximately $192,000, and
represented an immaterial amount of the Company's approximately
$29,253,000 in assets. Accordingly, the Company believes that any
market risk with respect to such instruments is immaterial.
-19-
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, 1997 and 1996,
and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the
period ended July 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the
period ended July 31, 1997 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
October 24, 1997
-20-
Consolidated Balance Sheets
July 31, 1997 1996
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 59,397 $ 405,753
Trade receivables 192,286 293,681
Income tax receivable 1,890,498 1,236,641
Inventories 14,629,312 19,704,076
Prepaid expenses 294,373 589,984
Deferred tax asset -- 2,122,384
----------- -----------
Total current assets 17,065,866 24,352,519
Video rental inventory, net 369,734 489,649
Property and equipment, net 11,157,024 16,714,965
Other assets 659,911 567,892
----------- -----------
Total assets $29,252,535 $42,125,025
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 9,860,269 $ 8,408,500
Accrued expenses 2,437,332 2,262,378
Store closing reserve 650,000 2,859,289
----------- -----------
Total current liabilities 12,947,601 13,530,167
Long term debt 6,695,994 9,654,094
Deferred income taxes -- 293,663
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; 10,000,000
shares authorized; 5,300,319 and
5,319,269 shares issued at 1997
and 1996, respectively 53,004 53,194
Additional paid-in capital 3,551,326 3,700,043
Retained earnings 6,134,540 15,269,348
Less 25,879 and 74,600 shares
in treasury, at cost, in 1997
and 1996, respectively (129,930) (375,484)
----------- -----------
Total stockholders' equity 9,608,940 18,647,101
----------- -----------
Total liabilities and
stockholders' equity $29,252,535 $42,125,025
=========== ===========
See Notes to Consolidated Financial Statements.
-21-
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended July 31, 1997 1996 1995
REVENUES:
Product sales $ 67,469,876 $ 75,996,009 $ 77,306,250
Video rentals 1,066,566 1,535,652 2,296,892
------------ ------------ ------------
Total revenues 68,536,442 77,531,661 79,603,142
Cost of goods sold - product sales 45,736,342 50,737,316 50,182,698
Cost of goods sold - video rental 541,833 704,003 1,014,070
------------ ------------ ------------
Gross profit 22,258,267 26,090,342 28,406,374
Store operating, general and
administrative expenses 28,036,172 29,064,731 26,337,806
Restructuring charge 214,780 -- --
Store closing expenses 898,434 3,251,203 --
Impairment of long-lived assets 1,500,000 -- --
------------ ------------ ------------
Operating income (loss) (8,391,119) (6,225,592) 2,068,568
Other income (expense):
Interest income 3,698 58,986 --
Interest expense (951,517) (1,074,497) (441,527)
Other 43,270 96,769 31,230
------------ ------------ ------------
Total other income (expense) (904,549) (918,742) (410,297)
------------ ------------ ------------
Earnings (loss) before income taxes (9,295,668) (7,144,334) 1,658,271
Provision (benefit) for income taxes (160,860) (2,651,525) 626,000
------------ ------------ ------------
NET EARNINGS (LOSS) $ (9,134,808) $ (4,492,809) $ 1,032,271
============ ============ ============
NET EARNINGS (LOSS) PER COMMON SHARE $ (1.74) $ (.86) $ .20
============ ============ ============
Weighted average number of
common shares outstanding 5,252,000 5,246,000 5,248,000
============ ============ ============
See Notes to Consolidated Financial Statements.
-22-
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
Additional
Common Stock Paid-in Retained Treasury Stock
Shares Amount Capital Earnings Shares Amount Total
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
Net loss -- -- -- (9,134,808) -- -- (9,134,808)
Contributions to 401(K) Plan -- -- (193,362) -- 48,721 245,554 52,192
Cancellation of restricted
stock award (18,950) (190) (95,511) -- -- -- (95,701)
Deferred compensation expense -- -- 140,156 -- -- -- 140,156
--------- ------- ---------- ---------- -------- --------- ----------
Balance, July 31, 1997 5,300,319 $53,004 $3,551,326 $6,134,540 (25,879) $(129,930) $9,608,940
========= ======= ========== ========== ======== ========= ==========
See Notes to Consolidated Financial Statements.
-23-
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(9,134,808) $(4,492,809) $1,032,271
ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Amortization of video rental inventory 541,833 704,003 1,176,621
Depreciation and amortization of property
and equipment 2,450,507 2,760,052 2,150,366
Amortization of preopening expenses 26,018 704,092 281,779
Loss on disposal of property and equipment 1,923,706 264,516 9,007
Gain on disposal of video rental inventory (7,705) (79,368) (192,840)
Amortization of intangibles 29,397 19,091 19,091
Deferred compensation expense 140,156 36,981 --
Impariment of long-lived assets 1,500,000 -- --
Changes in assets and liabilities:
(Increase) decrease in assets:
Trade receivables 101,395 429,264 (260,735)
Income tax receivable (653,857) (1,236,641) --
Inventories 5,074,764 4,760,914 (826,005)
Prepaid expenses 269,593 (276,370) (729,319)
Prepaid income taxes -- 280,000 (193,000)
Deferred tax asset 2,122,384 (1,146,384) 360,000
Other assets (306,521) (25,630) (336,221)
Increase (decrease) in liabilities:
Accounts payable 1,451,769 99,715 (2,089,607)
Accrued expenses 227,146 (448,834) 735,111
Store closing reserve (2,209,289) 2,859,289 --
Restructuring charge -- (251,203) (480,952)
Deferred income taxes (293,663) (289,337) (276,000)
---------- ---------- ----------
Net cash provided by operating activities 3,252,825 4,671,341 379,567
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of video rental inventory (513,133) (691,496) (1,114,239)
Disposition of video rental inventory 98,920 300,111 242,855
Additions to property and equipment (244,158) (2,883,518) (10,701,608)
Disposition of property and equipment 17,290 460,549 632,005
---------- ---------- ----------
Net cash (used in) investing activities (641,081) (2,814,354) (10,940,987)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 82,346,812 32,924,426 36,500,000
Repayments of borrowings and capital
lease (85,304,912) (34,705,064) (26,732,420)
Exercise of stock options -- -- 6,924
Payment of debt issue costs -- (222,820) --
---------- ---------- ----------
Net cash provided by (used in) financing
activities (2,958,100) (2,003,458) 9,774,504
---------- ---------- ----------
Net (decrease) in cash and equivalents (346,356) (146,471) (786,916)
Cash and equivalents at beginning of year 405,753 552,224 1,339,140
---------- ---------- ----------
Cash and equivalents at end of year $ 59,397 $ 405,753 $ 552,224
========== ========== ==========
See Notes to Consolidated Financial Statements.
-24-
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, eliminating
unprofitable stores, the competitive environment, its ability to meet
its debt covenants, and the availability of capital resources necessary
to conduct its business. Management believes that its cash flow from
operations and availability under its existing credit agreements 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 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. All
video rental tapes are amortized on an accelerated method over a period
of three 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, 1997
and 1996 were $0 and $27,000, 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.
-25-
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 $1,737,479, $843,845 and $752,506 for the years ended July 31, 1997,
1996 and 1995.
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 the year ended
July 31, 1995. Stock options were antidilutive to the July 31, 1997 and
July 31, 1996 calculations and were therefore excluded.
NEW ACCOUNTING PRONOUNCEMENTS ADOPTED
SFAS NO. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS 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.
The Company adopted SFAS No. 121 in fiscal 1997, (see Note E).
SFAS NO. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION."
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.
The Company has continued to use the method of accounting
prescribed in APB 25 for measurement of employee stock-based
compensation.
NEW ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED
("SFAS") No. 128, "EARNINGS PER SHARE."
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-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. The Company believes
SFAS No. 128 will not significantly alter previously reported
earnings per share data.
SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION."
SFAS No. 131 establishes standards for the way that public
companies report selected information about operating segments
in annual financial statements and requires that those companies
report selected information about segments in interim financial
reports issued to shareholders. Operating segments are components
of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in
assessing
-26-
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.
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 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:
o The carrying amounts of cash and equivalents, receivables and
accounts payable approximate fair value due to their short term
nature; and
o 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, 1997 and 1996 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: 1997 1996 1995
Interest $ 749,512 $1,013,000 $ 378,000
Income taxes 0 0 700,000
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES INFORMATION
The Company contributed approximately $52,000, $41,000 and $55,000 of
treasury stock to the Company's 401(k) Plan during the year ended July
31, 1997, 1996 and 1995, respectively.
During the fiscal years ended July 31, 1997, 1996 and 1995 the Company
canceled restricted stock awards totaling approximately $96,000,
$105,000 and $58,000, respectively.
During fiscal 1997 and 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.
D / VIDEO RENTAL TAPES:
The following comprise cost and accumulated amortization of video rental
tapes at July 31:
-27-
1997 1996
Cost $ 1,751,132 $ 2,056,098
Less accumulated amortization 1,381,398 1,566,449
---------- ----------
$ 369,734 $ 489,649
========== ==========
E / PROPERTY AND EQUIPMENT:
The following comprise property and equipment at July 31:
Useful Lives 1997 1996
Building 31 years $ 4,995,707 $ 4,991,505
Equipment, furniture and fixtures 5-8 years 9,281,906 11,424,206
Transportation equipment 2-5 years 141,981 131,089
Signs 1-10 years 1,155,341 1,857,114
Leasehold improvements 1-31 years 5,088,367 8,053,107
----------- -----------
20,663,302 26,457,021
Less accumulated depreciation
and amortization 9,506,278 9,742,056
----------- -----------
$11,157,024 $16,714,965
----------- -----------
During fisal 1997, in accordance with Statement of Finacial Accounting
Standards ("SFAS") No. 121, "Accounting For The Impairment Of Long-lived
Assets and For Long-lived Assets To Be Disposed Of," the Company recorded
an estimated write down of $1,500,000 based on projected future cash
flows of certain stores.
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 % of the
unused portion is payable monthly. There were no borrowings under the
stand-by letter of credit during fiscal 1997.
The Revolving Credit Facility and all of the Company's obligations in
connection therewith are secured by a first-priority security interest
in substantially all of the Company's assets, and the Company may not
further pledge its assets without the prior approval of its lender. The
Company is also required to meet certain monthly financial covenants,
including, but not limited to minimum earnings, current ratio, fixed
charge coverage and tangible net worth levels. In addition, the Company
may not exceed certain capital expenditures and inventory cost levels.
The Revolving Credit Facility bears interest at a floating rate,
adjusted monthly, equal to the Index Rate (as defined below) plus
2.875%. The "Index Rate" is the last month-end published rate for 30-day
dealer-placed commercial paper sold through dealers by major
corporations as published in the Money Rates section of THE WALL STREET
JOURNAL. Accrued interest is payable monthly in arrears. The interest
rate at July 31, 1997 was 8.445%.
-28-
The outstanding amount under the Revolving Credit Facility was
approximately $6.7 million as of July 31, 1997 and an additional
$338,000 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
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 Agreements contain restrictions on the declaration and payment of
dividends.
G / INCOME TAXES:
Components of income taxes for the years ended July 31, consist of the
following:
1997 1996 1995
FEDERAL:
Current $(1,989,581) $(1,215,804) $ 463,000
Deferred 1,563,433 (1,170,120) 71,000
----------- ----------- ----------
(426,148) (2,385,924) 534,000
----------- ----------- ----------
STATE:
Current $ 0 $ 0 $ 79,000
Deferred 265,288 (265,601) 13,000
----------- ----------- ----------
265,288 (265,601) 92,000
----------- ----------- ----------
$ (160,860) $(2,651,525) $ 626,000
----------- ----------- ----------
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:
1997 1996 1995
Expected federal tax rate 34.0% 34.0% (34.0)%
State income tax, net of federal
income tax effects (1.9) 3.1 (3.1)
Change in valuation allowance (42.1) -- --
Reversal of previously recorded
deferred tax liabilities 5.8 -- --
Other 5.9 -- (0.7)
------ ------ ------
1.7% 37.1% (37.8)%
------ ------ ------
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:
-29-
July 31, 1997
---------------------------------
ASSETS LIABILITIES TOTAL
-------- ----------- -------
Accelerated depreciation on property
and equipment for tax purposes $ 14,961 $ -- $ 14,961
Capitalization for tax purposes of
inventory related costs 238,498 -- 238,498
Accrued return authorization reserve 42,568 -- 42,568
Store closing reserve 297,461 -- 297,461
Accrued rent 59,121 -- 59,121
Accrued vacation 73,311 -- 73,311
Accrued insurance 3,528 -- 3,528
Deferred compensation 26,103 -- 26,103
Shrinkage reserve 38,629 -- 38,629
Impairment of assets 564,000 -- 564,000
Contributions 10,749 -- 10,749
Preopening expenses (15,872) (15,872)
Net operating loss carry forwards 2,562,969 -- 2,562,969
---------- ---------- ----------
3,931,898 (15,872) 3,916,026
Valuation Allowance (3,931,898) 15,872 (3,916,026)
---------- ---------- ----------
$ 0 $ 0 $ 0
========== ========== ==========
July 31, 1996
-----------------------------------
ASSETS LIABILITIES TOTAL
--------- ----------- ---------
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
--------- ----------- ---------
In view of continuing losses from operations, the Company has recorded
in fiscal 1997 a valuation allowance on deferred asset amounts which may
not be recoverable through the future utiilization of operating losses.
The Company has received a $1,890,00 federal income tax refund in
October 1997 for the fiscal year ending July 31, 1997.
The Company has available federal net operating loss carryforwards
totaling approximately $6,005,892 which expire in 2012. In addition,
the Company has available state operating loss carryforwards totaling
approximately $14,351,667 expiring in years 2011 and 2012.
-30-
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, 1997, 1996 and 1995 the Company
provided approximately $66,000, $73,000 and $86,000 respectively, for
contribution to the 401(k) Plan. Approximately $52,000, $41,000 and
$55,000 of the contribution was made in the Company's common stock for
fiscal 1997, 1996 and 1995, 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 1997 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, 48,721, 21,446 and 43,345 shares were
issued from treasury stock in 1997, 1996 and 1995, respectively. The
remaining shares are included in treasury stock at July 31, 1997.
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.
On December 10, 1996, the Shareholders approved the 1996 Non-Employee
Directors Stock Option Plan. The Company reserved 150,000 shares under
the Non-employee Directors Plan.
At July 31, 1997, the Company has two stock options plans, which are
described above. The Company applies Accounting Principle Board ("APB")
Opinion 25 and related interpretations in measuring compensation expense
for its plans. Accordingly, no compensation has been recognized for its
fixed stock option plans. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value
at the grant dates for awards under those plans, the Company's net loss
and loss per share would have been increased to the pro-forma amounts
indicated below:
1997 1996
Net loss
As reported ............... $ (9,134,808) $ (4,492,809)
Pro forma ................. (9,266,349) (4,536,692)
Loss per share
As reported ............... (1.74) (0.86)
Pro forma ................. (1.76) (0.86)
-31-
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions for the grants:
1997 1996
Expected volatility ...................... 61% 44%
Expected lives ........................... 5 years 3 years
Dividend yield ........................... 0% 0%
Risk free interest rate .................. 5.88 - 6.50% 5.11%
Transactions and other information relating to stock options granted are
summarized as follows:
Number of Weighted Average
Shares Exercise Price
Outstanding, July 31, 1994 294,520 $5.14
Granted 119,000 $4.41
Exercised (1,334) $5.19
Canceled (68,312) $4.92
---------
Outstanding, July 31, 1995 343,874 $4.93
Granted 472,766 $1.21
Canceled (130,135) $4.80
---------
Outstanding, July 31, 1996 686,505 $2.39
---------
Granted 477,000 $0.78
Canceled (286,910) $2.28
---------
Outstanding, July 31, 1997 876,595 $1.55
---------
The weighted average fair values of options granted during the years
ended July 31, 1997 and 1996 were $.44 and $.85, respectively.
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, 1997,
options to purchase 661,727 shares of common stock were exercisable.
During fiscal 1996, in connection with various consulting agreements,
the Company granted 469,766 compensatory stock options which do not
become effective until fiscal 1997. 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 is charged to
earnings on a pro-rata basis over the life of the consulting agreements.
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, 1997, 5,500 shares remain outstanding after
cancellations.
The following table summarizes information about the option plans as of
July 31, 1997:
-32-
Options Outstanding Options Exercisable
--------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Life Exercise Number Exercise
Exercise Prices Outstanding (in years) Price Exerciseable Price
- - - -------------- ----------- ---------------- -------- ------------ --------
$ 1.13 50,000 0.4 $ 1.13 50,000 1.13
1.13-1.31 279,595 2.0 1.23 279,595 1.23
4.50 16,000 2.2 4.50 16,000 4.50
4.75 18,000 3.2 4.75 18,000 4.75
1.00 2,000 3.4 1.00 -- 1.00
1.88 20,000 3.9 1.88 7,215 1.88
4.50 18,000 4.3 4.50 18,000 4.50
6.00 30,000 5.3 6.00 22,500 6.00
5.00 5,000 6.2 5.00 3,750 5.00
4.50 33,000 7.2 4.50 16,500 4.50
3.00 1,000 7.9 3.00 1,000 3.00
1.25 1,000 8.4 1.25 1,000 1.25
1.00 36,000 9.4 1.00 7,000 1.00
0.63 192,000 9.6 0.63 192,000 0.63
0.69 175,000 9.9 0.69 29,167 0.69
---- ------- ---- ------ ------- ------
$0.63-$6.00 876,595 5.9 $ 1.49 661,727 $ 1.55
=========== ======= ==== ====== ======= ======
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:
1998 ............................................. $ 6,211,187
1999 ............................................. 5,723,885
2000 ............................................. 4,961,589
2001 ............................................. 3,851,757
2002 ............................................. 3,167,831
Thereafter ....................................... 8,770,767
------------
$ 32,687,016
============
Base rent expenses, including real estate taxes, insurance, and related
common area repairs and maintenance, were approximately $8,400,000,
$10,080,000 and $8,542,000 for each of the years ended July 31, 1997,
1996 and 1995, respectively. Some leases include contingent rent based
on applying a specified percentage of sales in excess of a predetermined
base. Such contingent rent expense was approximately $71,000, $118,000
and $383,000 in each of the years ended July 31, 1997, 1996 and 1995,
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, 1997, 1996 and 1995 were approximately
$175,000, $163,000 and $154,000, respectively.
-33-
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, 1997, 1996 and 1995 were approximately $169,000,
$164,000 and $157,000, respectively.
L / STORE CLOSING AND RESTRUCTURING RESERVES
In fiscal 1997 and 1996, the Company adopted a plan as part of its
response to industry conditions to close certain unprofitable store
locations. In connection therewith, the following was charged to
operations:
1997 1996
Loss on disposal of assets $431,000 $1,512,000
Lease expense 467,000 1,300,000
Other -- 439,000
--------- ----------
$ 898,000 $3,251,000
========= ==========
These charges are based on a series of estimates and final actual
results could vary from these estimates, depending on certain factors.
Additionally, in fiscal 1997, the Company recorded a $215,000
restructuring charge primarily for severance associated with eliminated
positions.
M / QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Summarized quarterly financial results for fiscal 1997 and 1996, are as
follows:
(In thousands, except per share)
Weighted
Net Average Net Earnings
Gross Earnings Shares (Loss) Per
Revenues Profit (Loss) Outstanding Common Share
1997:
First quarter $15,789 $5,414 $ (821) 5,247 $(0.16)
Second quarter 21,461 7,167 (370) 5,242 (0.07)
Third quarter 16,510 5,459 (2,057) 5,254 (0.39)
Fourth quarter 14,776 4,218 (5,886) 5,252 (1.12)
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) 5,449 (0.15)
Fourth quarter 16,651 5,593 (3,100) 5,246 (0.59)
-34-
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 1997 Annual Meeting of Shareholders
(the "1997 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 1997 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 1997 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 1997 Proxy Statement is incorporated
herein by reference.
-35-
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:
Page
----
Independent Auditors' Report 20
Consolidated Balance Sheets as of July 31, 1997 and 1996 21
Consolidated Statements of Operations for each of the years
in the three year period ended July 31, 1997 22
Consolidated Statements of Changes in Stockholders' Equity
for each of the years in the three year period ended
July 31, 1997 23
Consolidated Statements of Cash Flows for each of the years
in the three year period ended July 31, 1997 24
Notes to Consolidated Financial Statements 25
(a) 2. Financial Statement Schedules.
No schedules required.
(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).
*10.14 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 (Exhibit
10.15 to 1996 Form 10-K).
-36-
10.16 First Modification of Credit Agreement, dated October 3,
1997 between Spec's Music, Inc. as Borrower and GENERAL
ELECTRIC CAPITAL CORPORATION as Lender.
10.17 Credit Agreement as of October 3, 1997 between Spec's Music,
Inc. as Borrower and MUSIC FUNDING I, LLC, as lender.
* 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 1997.
-37-
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, 1997. 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 regis-
trant and each such person, in each capacity below, any and all amend-
ments 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.
SIGNATURE CAPACITY DATE
/s/ Ann S. Lieff President, Chief Executive October 28, 1997
- - - ------------------------- Officer and Director
Ann S. Lieff (Principal Executive Officer)
/s/ Donald A. Molta Vice President and Chief October 28, 1997
- - - ------------------------- Financial Officer (Principal
Donald A. Molta Financial and Accounting Officer)
/s/ Arthur H. Hertz Director October 28, 1997
- - - -------------------------
Arthur H. Hertz
/s/ Richard J. Lampen Director October 28, 1997
- - - -------------------------
Richard J. Lampen
/s/ Martin W. Spector Director October 28, 1997
- - - -------------------------
Martin W. Spector
/s/ Rosalind S. Zacks Director October 28, 1997
- - - -------------------------
Rosalind S. Zacks
-38-