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 APRIL 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER 0-14323
SPEC'S MUSIC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 59-1362127
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1666 N.W. 82ND AVENUE
MIAMI, FLORIDA 33126
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(305) 592-7288
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SHARES OF COMMON STOCK OUTSTANDING
AS OF JUNE 2, 1995: 5,245,999
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 [ ]
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 EARNINGS...................... 4
CONSOLIDATED CONDENSED STATEMENTS OF
CASH FLOWS........................................................ 5
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS.............................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS..................................................... 8
PART II.
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................... 13
PART I.
ITEM 1. FINANCIAL STATEMENTS
SPEC'S MUSIC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
APRIL 30, JULY 31,
1995 1994
----------- --------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 439,473 $ 1,339,140
Receivables 530,138 462,210
Inventories 26,254,305 23,638,987
Prepaid expenses 898,396 570,166
Prepaid income taxes -- 87,000
Deferred tax asset 1,080,000 897,000
----------- -----------
Total current assets 29,202,312 26,994,503
Video rental inventory, net 763,581 835,296
Property and equipment, net 13,781,109 8,652,579
Other assets 1,028,841 881,597
----------- -----------
Total Assets $44,775,843 $37,363,975
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line-of-credit facility $ -- $ 1,600,000
Accounts payable 8,750,339 10,398,392
Accrued expenses 2,854,777 2,146,626
Restructuring charge 579,312 732,155
Income taxes payable 199,000
----------- -----------
Total current liabilities 12,383,428 14,877,173
----------- -----------
Long term debt 8,300,000 --
Capital lease obligations 43,048 67,152
Deferred income taxes 463,000 420,000
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; 10,000,000
shares authorized; 5,347,408 and
5,345,758 shares issued at April, 1995
and July, 1994, respectively 53,458 53,552
Additional paid-in capital 3,850,978 3,918,256
Retained earnings 20,184,216 18,729,886
Less 99,759 and 139,391 shares in treasury at
April, 1995, and July 1994, respectively, at cost (502,285) (702,044)
----------- -----------
Total stockholders' equity 23,586,367 21,999,650
----------- -----------
Total Liabilities and Stockholder's equity $44,775,843 $37,363,975
=========== ===========
See Notes to Consolidated Condensed Financial Statements.
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SPEC'S MUSIC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
------------------------------ -------------------------------
1995 1994 1995 1994
---- ---- ---- ----
Product sales $ 17,818,938 $ 17,494,681 $ 60,460,308 $ 57,476,922
Video rentals 551,617 833,393 1,715,744 2,917,215
------------ ------------ ------------ ------------
TOTAL REVENUES 18,370,555 18,328,074 62,176,052 60,394,137
------------ ------------ ------------ ------------
Cost of goods sold - sales 11,200,438 11,131,418 39,212,470 36,901,616
Cost of goods sold - rental 237,431 467,401 728,402 1,336,462
------------ ------------ ------------ ------------
TOTAL COST OF SALES 11,437,869 11,598,819 39,940,872 38,238,078
------------ ------------ ------------ ------------
GROSS PROFIT 6,932,686 6,729,255 22,235,180 22,156,059
Store operating, general and
administrative expenses 6,735,494 6,030,046 19,681,004 18,189,950
------------ ------------ ------------ ------------
Operating income 197,192 699,209 2,554,176 3,966,109
Other income (expense), net (143,440) 22,341 (218,844) 56,858
------------ ------------ ------------ ------------
Earnings before income taxes 53,752 721,550 2,335,332 4,022,967
Provision for income taxes 22,000 265,000 881,000 1,466,000
------------ ------------ ------------ ------------
NET EARNINGS $ 31,752 $ 456,550 $ 1,454,332 $ 2,556,967
============ ============ ============ ============
EARNINGS PER SHARE $ .01 $ .09 $ .28 $ .49
============ ============ ============ ============
Weighted average number of
common shares outstanding 5,249,000 5,269,000 5,256,000 5,259,000
============ ============ ============ ============
See Notes to Consolidated Condensed Financial Statements.
-4-
SPEC'S MUSIC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED APRIL 30, 1995 AND 1994
(UNAUDITED)
1995 1994
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,454,332 $ 2,556,967
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and amortization of property and equipment 1,556,508 1,177,560
Amortization of video rental inventory 837,523 1,395,173
Loss on disposal of property and equipment -- 3,820
(Gain) loss on disposal of video rental inventory (108,339) (62,993)
(Increase) decrease in assets:
Receivables (67,928) (43,062)
Inventories (2,615,318) (5,985,650)
Prepaid expenses (328,230) 169,302
Prepaid income taxes 87,000 --
Other assets (162,100) (796,068)
Deferred tax asset (183,000) 189,000
Increase (decrease) in liabilities:
Accounts payable (1,648,053) 2,515,407
Accrued expenses 840,536 678,664
Restructuring charge (152,843) (702,234)
Income taxes 199,000 65,466
Deferred income taxes 43,000 (133,000)
------------ ------------
Net cash (used in) provided by operating activities (247,912) 1,028,352
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of video rental inventory, net (657,469) (782,966)
Additions to property and equipment, net (6,670,182) (2,625,708)
------------ ------------
Net cash used in investing activities (7,327,651) (3,408,674)
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net borrowings from credit facilities 6,700,000 1,400,000
Repayments of capital lease (24,104) (22,485)
------------ ------------
Net cash provided by financing activities 6,675,896 1,377,515
------------ ------------
Net decrease in cash (899,667) (1,002,807)
Cash at beginning of period 1,339,140 1,994,422
------------ ------------
Cash at end of period $ 439,473 $ 991,615
============ ============
See Notes to Consolidated Condensed Financial Statements.
-5-
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, 1994, as amended by the
Company's Form 10-K/A No. 1.
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 nine month period ended April 30,
1995 are not necessarily indicative of the operating results for the
full fiscal year. Certain items have been reclassified on the Balance
Sheets and the Statements of Earnings to conform to fiscal 1995
classifications. 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
At July 31, 1994, the Company had a $7 million unsecured revolving
line-of-credit, which had an outstanding balance of $1.6 million. On
September 20, 1994, the Company entered into a new 10 year credit
agreement which includes a $15 million revolving credit facility
(declining to $6 million by 2003) and a $1 million standby letter of
credit facility which expires December 1996. Under its new credit
agreement, the Company has agreed not to incur or create certain
additional indebtedness or liens on the Company's assets other than
real estate mortgage financing and unsecured convertible subordinated
debt, without the lender's consent. The Company is further required to
maintain certain financial ratios related to net worth, leverage and
fixed charges coverage and has further agreed to limit the amount of
cash dividends paid to 25% of net earnings. Borrowings under the new
credit agreement bear interest at the LIBOR rate plus 150 basis points
or the Company may fix its interest rate for periods not to exceed five
years at 150 basis points over the corresponding U.S. Treasury security
yield. At April 30, 1995, the Company had an outstanding balance of
$8.3 million under this credit agreement.
3. STATEMENT OF CASH FLOWS INFORMATION
For the purposes of the Statement of Cash Flows, the Company considers
all highly liquid short-term investments purchased with a maturity of
three months or less to be cash equivalents.
-6-
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONT'D.
The following is supplemental disclosure of cash flow information:
NINE MONTHS ENDED
APRIL 30,
---------------------------
1995 1994
---- ----
Interest paid $196,034 $ 17,249
Income tax paid 735,000 1,363,000
Supplemental noncash financing activities information:
Restricted Stock Awards totalling $131,850 and $173,400 were granted
and awards totaling $48,449 and $15,201 were canceled during the nine
months ended April 30, 1995 and 1994, respectively.
The Company contributed $42,062 and $44,000 in common stock to the
Company's 401(k) Plan during the nine months ended April 30, 1995 and
1994, respectively.
4. EARNINGS PER SHARE
Earnings per share are computed based on net earnings for each period,
divided by the weighted average number of shares outstanding during
each period.
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1995 AND 1994
REVENUES
Total revenues increased by $42,000 or .2% during the third quarter of
fiscal 1995 compared to the same quarter of fiscal 1994. On a same-store
basis, revenues decreased by 4.5% since the third quarter of a year ago.
Revenues from product sales rose by 1.9% for the chain as a whole and
decreased by 3.3% on a same-store basis during the third quarter of fiscal
1995. This increase is due to the addition of eight new stores. Same-store
revenues declined primarily because of the lack of significant hit new
release titles which contribute not only to greater sales but to greater
in-store traffic. In addition, entry of new competitors in certain of the
Company's markets also caused same-store sales to decline.
Video rental revenues decreased by 33.8% for the chain as a whole and by
15.6% on a same-store basis. The closing of four video rental departments
since the third quarter of fiscal 1994 and lower demand for video rentals
contributed to lower rental revenues. The Company expects video rental
revenue to continue to decline in the foreseeable future.
During the past two years, a large number of mass merchandisers have begun
to sell cassettes and CDs at or near cost in order to attract customers to
their stores to generate sales of other products. During the fourth quarter
of fiscal 1995, a major mass merchandiser will enter the South Florida
Market with a significant number of new stores which will offer cassettes
and CDs at prices which are expected to be lower than those offered by the
Company. In response, the Company has selectively reduced its compact disc
prices which will result in lower revenues and lower margins. Despite these
price pressures, the Company believes that it will remain competitive due
to its extensive selection of titles and premium customer service, neither
of which are typically offered by mass merchandisers.
GROSS PROFIT
Gross profit from product sales, which is net of product management and
distribution costs, was 37.1% and 36.4% during the third quarter of fiscal
1995 and 1994, respectively. Gross profit, which is expressed as a
percentage of revenue, increased due to lower promotional markdowns and
fewer hit new release titles which improved gross margins because such
titles are typically sold at significant markdowns. Gross profit for video
rentals was 57.0% and 43.9% during the third quarter of fiscal 1995 and
1994, respectively. Lower video inventory levels and lower new release
purchases contributed to lower depreciation expense which increased gross
profit on video rental.
Total gross profit was 37.7% and 36.7% of revenue during the third quarter
of fiscal 1995 and 1994, respectively. As stated above, lower promotional
markdowns, as a percentage of gross sales, by comparison to a year ago and
improved video rental gross profit are the primary reasons for the
improvement. The Company expects total gross profit, as a percentage of
revenues, to decline in the foreseeable future due to competitive
conditions described above.
-8-
MANAGEMENT'S DISCUSSION
AND ANALYSIS, CONTINUED
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Store operating, general and administrative expenses, as a percentage of
revenue, were 36.7% and 32.9% during the third quarter of fiscal 1995 and
1994, respectively. Store occupancy costs, as a percentage of revenue, rose
during the third quarter of fiscal 1995 because of a decline in same-store
revenue and the impact of eight new store openings during the first nine
months of fiscal 1995, who's expenses are higher relative to revenues in
the initial year of operations. Depreciation and amortization during the
third quarter of fiscal 1995 also increased as a percentage of revenue
because of the capital investment associated with the completion of eight
new stores and the expansion and renovation of one store and the Company's
distribution center. General and administrative expenses, as a percentage of
sales, rose during the third quarter of fiscal 1995 because of non-recurring
professional fees associated with the engagement of PaineWebber Incorporated,
described below.
RESTRUCTURING CHARGE
During fiscal 1993, the Company adopted a five-year strategic plan. As part
of the plan, the Company provided for a $3.2 million ($2.0 million after
tax or $.38 per share) restructuring charge to cover the cost of closing 11
stores, eliminating all video rental departments including rental inventory
write-down, and abandoning certain assets as part of its new design
renovation program. The plan also included a major expansion of the chain,
new logo and store design, organizational changes and a planned shift in
the Company's merchandising mix and market coverage. Inclusive of the
stores to be opened and renovated in fiscal 1995, the Company plans to
renovate many of its existing stores, open approximately 40 new stores and
upgrade its inventory management and distribution systems over the next
three fiscal years. See "Liquidity and Capital Resources."
Since the adoption of its strategic plan, the Company has closed 12 stores,
eliminated 30 video rental departments and abandoned certain assets as part
of its store renovation program at a combined cost of approximately $2.6
million.
OTHER INCOME (Expenses)
Other expenses include interest expense of $144,000 and $7,000 during the
third quarter of fiscal 1995 and 1994, respectively. A significant increase
in leasehold improvements and equipment related to new store expansion
during the first nine months of fiscal 1995 required the Company to
increase its borrowings to $8.3 million at the end of the third quarter of
fiscal 1995. The Company expects to increase its reliance on long-term debt
as it continues its expansion activity during the remainder of fiscal 1995
and accordingly expects interest expense to increase during the fourth
fiscal quarter of 1995. See "Liquidity and Capital Resources."
INCOME TAXES
The effective income tax rate, as a percentage of earnings before income
taxes, was 40.9% and 36.7% during the third quarter of fiscal 1995 and
1994, respectively. The effective income tax rate increased as compared to
the prior fiscal year period due to availability of certain tax credits and
tax exempt interest income in fiscal 1994.
-9-
MANAGEMENT'S DISCUSSION
AND ANALYSIS, CONTINUED
NET EARNINGS
During the third quarter of fiscal 1995, the Company earned $32,000 or $.01
per share compared to net earnings of $457,000 or $.09 per share during the
third quarter of fiscal 1994. Earnings declined primarily because of the
impact of lower same-store revenues, higher store operating, general and
administrative expenses and interest expense, as described above.
NINE MONTHS ENDED APRIL 30, 1995 AND 1994
REVENUES
Total revenues increased by $1,782,000 or 3.0% in the first nine months of
fiscal 1995, compared to the same period in fiscal 1994. On a same-store
basis, revenues decreased by .4%.
Revenues from product sales rose by 5.1% for the chain as a whole and by
1.2% on a same-store basis during the first nine months of fiscal 1995.
This increase is due mostly to the addition of eight new stores and to the
increase in the number of titles carried in many of the Company's stores.
Video rental revenues decreased by 41.2% for the chain as a whole and by
13.8% on a same-store basis. The closing of four video rental departments
since the third quarter of fiscal 1994 and a lower demand for video rentals
contributed to lower rental revenues.
GROSS PROFIT
Gross profit from product sales, which is net of product management and
distribution costs, was 35.1% and 35.8% during the first nine months of
fiscal 1995 and 1994, respectively. Gross profit, which is expressed as a
percentage of revenues, declined primarily because of promotional markdowns
and the continued shift in sales mix to compact and laser discs, which have
a lower gross margin than audio cassettes and VHS tapes. Gross profit for
video rentals was 57.5% and 54.2% during the first nine months of fiscal
1995 and 1994, respectively.
Total gross profit was 35.8% and 36.7% of revenue during the first nine
months of fiscal 1995, and 1994, respectively. The Company expects total
gross profit, as a percentage of revenue, to decline in the foreseeable
future because of the continued shift in sales mix, and lower selling
prices and increased promotional markdowns to meet a heightened competitive
environment.
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Store operating, general and administrative expenses, as a percentage of
revenue, were 31.7% and 30.1% during the first nine months of fiscal 1995
and 1994, respectively. Store operating expenses increased due to higher
occupancy and depreciation costs associated with the capital spending
described above and decreasing same-store sales, which were partially
offset by lower store level labor costs. General and administrative
expenses as a percentage of revenue increased as a result of higher than
normal professional fees associates with the engagement of PaineWebber,
Incorporated for financial advisory services.
-10-
MANAGEMENT'S DISCUSSION
AND ANALYSIS, CONTINUED
OTHER INCOME (EXPENSE)
Other expenses include interest expense of $239,000 and net interest income
of $9,000 during the first nine months of fiscal 1995 and 1994,
respectively. A significant increase in leasehold improvements and
equipment related to new store expansion and higher inventory levels during
the first nine months of the fiscal year required the Company to increase
its borrowings to $8.3 million by the end of the third quarter of fiscal
1995. The Company expects to increase its reliance on long-term debt as it
continues its expansion activity during the remainder of fiscal 1995 and,
accordingly, expects interest expense to increase during the current fiscal
year. See "Liquidity and Capital Resources."
INCOME TAXES
The effective income tax rate, as a percentage of earnings before income
taxes, was 37.7% and 36.4% during the first nine months of fiscal 1995 and
1994, respectively. The effective income tax rate rose during the current
fiscal year because of the absence of certain tax credits and tax exempt
interest income available to the Company in the prior year.
NET EARNINGS
During the first nine months of fiscal 1995, the Company earned $1,454,000
or $.28 per share, compared to net earnings of $2,557,000 or $.49 per share
during the first nine months of fiscal 1994. Earnings declined primarily
because of lower same-store sales, the impact of lower gross margins,
higher store operating, general and administrative expenses and interest
expense, as described above.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1995, working capital was $16.8 million compared to $12.1
million at July 31, 1994. Working capital improved during the first nine
months of fiscal 1995 primarily as a result of the reclassification of the
Company's line-of-credit facility to long-term debt and the use of
long-term debt to finance working capital.
Cash flow from operating activities decreased $1.3 million during the first
nine months of fiscal 1995 from a year ago primarily due to the decline in
net earnings of $1.1 million.
Cash flow used in investing activities was $7.3 million and $3.4 million
during the first nine months of fiscal 1995 and 1994, respectively. The
increase is attributable to capital expenditures related to property and
equipment for eight new stores, one store renovation and renovation of the
Company's distribution center completed during the first nine months of
fiscal 1995.
In fiscal 1995, the Company plans to open a total of 13 new stores
including four relocations, renovate two stores and close five stores.
During the first nine months of fiscal 1995, the Company opened eight new
stores and renovated one store and its distribution center. As of April 30,
1995, five new stores were under construction which are expected to be
completed during the fourth quarter of fiscal 1995 at an estimated cost of
approximately $4 million. The Company expects the total cost of
implementing its fiscal 1995 expansion plan will be approximately $13
million and will be funded through borrowings from the Company's new
long-term credit facility and from cash flow generated by operations.
-11-
MANAGEMENT'S DISCUSSION
AND ANALYSIS, CONTINUED
At July 31, 1994, the Company had a $7 million unsecured revolving
line-of-credit, which had an outstanding balance of $1.6 million. On
September 20, 1994, the Company entered into a new 10 year credit agreement
which includes a $15 million revolving credit facility (declining to $6
million by 2003) and a $1 million standby letter of credit facility which
expires December 1996. Under its new credit agreement, the Company has
agreed not to incur or create certain additional indebtedness or liens on
the Company's assets other than real estate mortgage financing and
unsecured convertible subordinated debt, without the lender's consent. The
Company is further required to maintain certain financial ratios related to
net worth, leverage and fixed charges coverage and has further agreed to
limit the amount of cash dividends paid to 25% of net earnings. Borrowings
under the new credit agreement bear interest at the LIBOR rate plus 150
basis points or the Company may fix its interest rate for periods not to
exceed five years at 150 basis points over the corresponding U.S. Treasury
security yield. At April 30, 1995, the Company had an outstanding balance
of $8.3 million under this credit agreement.
On November 9, 1994, the Company announced that it had engaged PaineWebber
Incorporated to act as its financial advisor in connection with exploring a
potential sale of the Company and to review the Company's other strategic
and financial alternatives. On March 14, 1995, the Company announced that
it had ended its exploration of the sale of the Company. The Company
however, will continue to explore appropriate courses of action that will
enhance the Company's value. This includes but is not limited to a review
of current operations as well as reassessment of its long term strategic
plans.
-12-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
The Company filed a Form 8-K dated March 14, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPEC'S MUSIC, INC.
---------------------------
(Registrant)
JUNE 8, 1995 /S/ ANN S. LIEFF
- ----------------------- ---------------------------
Date ANN S. LIEFF
President and Chief
Executive Officer
(Principal Executive Officer)
JUNE 8, 1995 /S/ PETER BLEI
- ----------------------- ---------------------------
Date PETER BLEI
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting
Officer)
-13-