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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, 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
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1666 N.W. 82ND AVENUE
MIAMI, FLORIDA 33126
--------------------------------- ---------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 592-7288
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
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(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [X]
As of October 16, 1995, the aggregate market value of the common stock held
by non-affiliates of the Registrant was approximately $8,256,378.
As of October 16, 1995, the number of shares of common stock of the
Registrant issued and outstanding was 5,247,762.
DOCUMENTS INCORPORATED BY REFERENCE
Part III--Definitive Proxy Statement for the 1995 Annual Meeting of
Shareholders.
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INDEX TO FORM 10-K
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 13
Item 3. Legal Proceedings............................................. 16
Item 4. Submission of Matters to a Vote of Security Holders........... 16
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters............................. 18
Item 6. Selected Financial Data....................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................... 20
Item 8. Financial Statements and Supplementary Data................... 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 38
Item 10. Directors and Executive Officers of the Registrant............ 38
Item 11. Executive Compensation........................................ 38
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................... 38
Item 13. Certain Relationships and Related Transactions................ 38
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................. 39
PART I
ITEM 1. BUSINESS.
GENERAL
Spec's Music, Inc. (the "Company") incorporated in 1948, is one of the
largest specialty retailers of prerecorded music and related products in Florida
and Puerto Rico, and the largest such retailer in the South Florida and Tampa
Bay markets, by number of stores. The Company sells cassettes; audio compact
discs; video movies and music on VHS tape and laser disc; blank audio and video
tapes; and a variety of audio and video accessories and boutique items. In
addition, the Company rents video movies and operates cafe's in certain stores.
The Company opened eleven new stores, renovated one store and closed
eight stores during fiscal 1995, and as of July 31, 1995, operated an aggregate
of 58 stores of which 54 are located in Florida and four are located in Puerto
Rico. Of these stores, 21 are located in enclosed malls, nine stores are
freestanding and the remainder are located in shopping centers and downtown
areas. The Company operates 21 "superstores" which typically contain
7,000-10,000 square feet and two "megastores" with at least 20,000 square feet
in the Sawgrass Mills Mall in Sunrise, Florida, and in the Coconut Grove area of
Miami. Subsequent to year end, the Company opened its third megastore in South
Miami Beach as well as an additional store in an enclosed mall location.
The following table summarizes the number of stores opened and closed
during the five year period ended July 31, 1995:
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Number of stores:
At beginning of period 55 56 63 57 55
Opened during the period 11 5 5 8* 5
Closed during the period (8) (6) (12) (2) (3)
-- -- -- -- --
At end of period 58 55 56 63 57
== == == == ==
<FN>
* Includes the acquisition of four Q Records and Tapes stores.
</FN>
3
The Company maintains a wide assortment of products at its stores at
competitive prices, with a strong emphasis placed on customer service, store
appearance and atmosphere. In the past several years, the product mix in the
stores has evolved, in response to changing consumer demands and technological
developments, from primarily records and cassettes to include a wider range of
home entertainment products, such as prerecorded videos, audio compact discs,
blank video tapes, and laser discs. Management continually monitors developing
trends and demands in its markets and adapts the Company's product lines in
response.
During fiscal 1993, the Company undertook a strategic planning process,
which included a major expansion of the chain, new store and logo designs,
organizational changes and a significant shift in the Company's merchandising
mix and market coverage. Since the implementation of the 1993 strategic plan,
the Company opened 18 new stores, including the two opened subsequent to year
end, renovated six stores, closed 14 unproductive stores and thirty video rental
departments and successfully implemented its new megastore concept design which
it now operates in three locations. The Company has substantially completed its
1993 strategic plan.
The Company intends to concentrate its resources on being the dominant
specialty retailer providing prerecorded music and music related products in
each of its markets. The Company plans to seek store sites in multiple
destination centers that feature music, video and bookstores, and entertainment
such as multi screen theaters and comedy clubs, etc. The two new Coconut Grove
and South Miami Beach megastores that opened in fiscal 1995 and 1996,
respectively, are located in such areas.
The design of new and renovated stores allow the Company to provide
customers with a unique shopping experience. While committing to maintain a
comprehensive selection in virtually all music categories, the Company's new
stores feature listening posts where hit songs and new releases can be
previewed, information kiosks that customers can use to search product listings
and an on-line customer service network accessing over 130,000 industry titles
for special orders. During fiscal 1995, the Company increased the number of
music and video titles it actively manages from 63,000 to 83,000.
The Company believes that its new megastore concept is unique because of
its extensive inventory, variety of product and services, its event oriented
marketing styles and their locations, which are heavily trafficked tourist and
night life destinations. The Company's megastores typically stay open past
midnight and feature hundreds of listening posts, multi-media attractions, cafes
and classical listening rooms, and periodically feature local and national
artists who perform and sign autographs in these stores. The Company considers
these stores an "Amusement Park for the Ears."
4
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.
During the past two years, a large number of mass merchandisers have
begun to sell CDs and cassettes at or below 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 entered the South Florida market. In
response, the Company adjusted its regular and promotional pricing and changed
and enhanced its marketing and advertising campaigns. See "Competition."
5
PRODUCTS
The following table shows the percentage of total revenues attributable
to each product group sold in the Company's stores during each of the last five
fiscal years:
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Audio Products:
Compact Discs 61% 57% 49% 44% 39%
Cassettes 20 22 25 27 29
Video Products:
Rentals 3 5 8 12 15
Sales 8 8 10 9 9
--- --- --- --- ---
Other Products: 8 8 8 8 8
=== === === === ===
100% 100% 100% 100% 100%
AUDIO PRODUCTS
The Company sells prerecorded compact discs and cassettes manufactured
by all major domestic and certain foreign manufacturers. The Company also sells
blank audio cassettes.
All of the Company's stores carry a wide assortment of compact discs
and cassettes of popular artists on prominent labels, including Columbia, Warner
Bros., Sony, Elektra, Atlantic, Polygram, RCA, MCA, Motown, A&M, Arista,
Capitol, EMI, SBK and Geffen Records. The Company sells a broad range of music
including current popular selections, as well as rock, pop, rap, country, jazz,
classical, Latin and other recordings. During fiscal 1995 and 1994 as part of
its strategic plan, the Company significantly increased the number of CD and
cassette titles it carries in its inventory, particularly in its superstores and
megastores.
Sales of compact discs increased significantly as a percentage of
total revenues, from 44% in fiscal 1992 to 61% in fiscal 1995. Estimated market
penetration of compact disc players is currently at 44%, and industry
projections suggest that sales of compact disc players are likely to increase in
the foreseeable future.
6
VIDEO PRODUCTS
As part of its 1993 strategic plan, the Company determined that it
would exit the video rental business. As a result of that decision, the Company
closed a total of 30 video rental departments during the past three years. The
remaining 11 video rental departments may be phased out over the next few years,
depending on market conditions.
All of the Company's stores sell prerecorded video movies. The
Company's prerecorded video products consist of current popular feature films,
children's films, movie classics, music videos, educational and entertainment
titles such as concerts, sporting events and exercise programs. Prerecorded
video movies range in sales price from approximately $9 to $99 and average
approximately $17, including used copies which were previously in rental
inventory. The Company also sells prerecorded movies on laser disc format in 54
of its stores. The retail price of laser discs range in price from $20 to $99
and average approximately $39.
OTHER PRODUCTS
The Company carries music-related accessories such as storage and
carrying cases for cassettes, compact discs and movies, cleaning and maintenance
kits for these products, songbooks and sheet music. The stores also sell
music-related boutique items, such as posters, buttons and t-shirts. The new
megastores carry items such as magazines, jewelry, trading cards, post cards and
musical instruments.
The Company has opened cafes in its Melbourne, Coconut Grove and South
Miami Beach locations serving specialty coffee drinks, premium waters, gourmet
teas, pastries, yogurt, sandwiches and salads. The cafe is viewed as a
value-added service to the customer, encouraging the customer to remain in the
store for longer periods of time. Two of the Company's cafes also sell coffee by
the pound, coffee mugs and coffee related gift packages. Magazines and
newspapers are merchandised near the cafe area. The cafe in the South Miami
Beach location has become a venue for local artists who perform informally.
ADVERTISING AND MARKETING
The Company's marketing strategy is to position itself as the dominant
music entertainment retailer in the geographic areas in which it operates by
providing a broad selection of inventory at competitive prices and a high level
of customer service. The Company's objective is to appeal to customers' desires
for new products and to respond to customers' demands for existing products.
The Company pursues mass media advertising programs, primarily through
radio, television, newspapers and mass mailings, and frequently offers specials
and promotions. In conjunction with major music suppliers, the Company
participates in special promotions for appearances of prominent recording
artists. The Company
7
attempts to maximize the cost effectiveness of radio and television advertising
by concentrating its stores around major media markets. Approximately 60% of the
Company's advertising budget will be placed on radio. This enables the Company
to target specific customer musical tastes such as Latin, classical, jazz and
alternative rock. The Company is also developing a mailing list to target
classical and jazz customers as well as customers who purchase children's
product.
The Company has hired an events coordinator to book local and national
recording artists of all musical genres to perform in its megastores. This has
resulted in a differentiated shopping experience for the Company's customers and
a unique marketing strategy. The events coordinator is also responsible for
community relations and promotions with local charities.
The Company's advertising stresses promotional pricing, broad
assortment and depth of merchandise, as well as the convenience of its store
locations. The Company's approach is to be flexible in decisions regarding
advertising and to make changes, where necessary, to advertising on short notice
in order to publicize product promotions and to take advantage of new products
or unexpected market developments.
Most of the suppliers from whom the Company purchases prerecorded
music and blank audio and video tapes offer their customers an advertising
allowance which is often based on a percentage of the customer's purchases.
Usually these allowances require a participating customer to submit advertising
campaigns to the appropriate vendor for approval prior to their use. The Company
takes full advantage of such advertising allowances.
During fiscal 1993, the Company completed a new store design which
includes a new layout, fixtures, wall and window treatments, newly designed
signage materials, listening posts and special display areas featuring new
releases, information kiosks and an on-line customer service network. The
Company renovated five stores to its new design in fiscal 1994 and one store in
fiscal 1995. The Company plans to build all future stores using elements of its
new store design.
PURCHASING AND INVENTORY
Substantially all the products sold by the Company are purchased under
individual purchase orders from manufacturers who deliver the merchandise within
several days after an order is placed. The Company purchases merchandise for all
of its stores from approximately 200 suppliers. Approximately 59% of the
merchandise
8
purchased during the year ended July 31, 1995, came from the nine largest
vendors, with one vendor supplying 14% of the merchandise purchased. Management
believes that alternate sources of supply are available for each category of
merchandise purchased by the Company.
Approximately 93% of merchandise for sale in the Company's stores is
delivered directly to the Company's Miami, Florida distribution center and is
generally distributed two times a week to the stores in Southeast Florida on two
Company trucks. Deliveries from the distribution center to stores outside of
this area, including Puerto Rico, are made by common carriers which in most
cases provide next day service. The balance of the inventory for the Company's
stores is shipped by suppliers directly to the stores. The amount of merchandise
distributed to each store is based on model stock levels which are adjusted
dynamically based on recent sales trends for each store.
Under current trade practices in the prerecorded music industry, the
Company may return most products to manufacturers. Most manufacturers from whom
the Company purchases prerecorded music do not have limitations on product
returns, but have return penalties which range from zero to 35% of unit cost.
Manufacturers of video movies limit the return privilege to approximately 10-20%
of purchases. Video rental products usually are not eligible for return to the
manufacturer. Notwithstanding these limitations, the Company has been able to
return substantially all music and video inventory that it has desired to
return. The return privilege policy as currently offered by manufacturers of
prerecorded music and video cassettes may change in the future. During fiscal
1995, the Company returned approximately 18% of its purchases to the
manufacturers.
STORE OPERATIONS AND PERSONNEL
All of the Company's stores are typically open seven days a week,
including weekday and Saturday evenings. Each store has a manager and assistant
manager who are responsible for supervising customer service associates and
generally assuring that the store is managed in accordance with the Company's
guidelines and procedures. The Vice President - Store Operations and Human
Resources and two district managers supervise the operation of the Company's
stores within their territories and visit those stores regularly to provide
on-site management and support of the store managers. A Senior Manager program
has been implemented which gives experienced managers responsiblity for three to
five stores while continuing to manage their own stores. The Company has an
incentive cash bonus plan for its district and store managers based upon various
performance criteria.
The number of trained managers and assistant managers of the Company's
existing stores provides it with a pool of experienced managers with which to
help staff
9
its future stores. In addition, the Company recruits managers with prior
experience from outside sources. The Company has a formal "Manager-in-Training"
program for associates who have been identified or hired as potential store
managers. The program includes a manager's handbook, video training films,
classroom study and on-the-job training, and assures the Company the continued
availability of talented and well trained managers. The Vice President - Store
Operations and Human Resources oversees the Company's recruiting, training,
compensation and benefits programs.
Customer sales transactions are processed on point-of-sale cash
terminals. Approximately 66% of the Company's sales are made for cash or check,
with the balance under national credit card plans in which the Company assumes
no credit risk and pays between 1.7% and 3% of credit card sales as a service
charge. The Company's policy is to exchange or give refunds for merchandise that
is defective or unopened or for which customers express dissatisfaction.
As of July 31, 1995, the Company had approximately 526 full-time and
420 part-time employees (associates). Additional temporary associates are
usually added during peak sales periods. None of the Company's associates are
covered by any collective bargaining agreement. The Company has never
experienced a strike or work stoppage, and management believes that relations
with its associates are good.
All customer service associates are compensated on an hourly basis and
do not receive sales commissions. To encourage sales efforts, the Company
jointly with its vendors sponsor store sales and display contests. The Company
stresses promotion from within its organization.
MANAGEMENT INFORMATION SYSTEMS
The Company has an automated, bar code based, inventory management and
distribution system, which enables it to centrally purchase and manage
inventory, control the quantity and type of inventory in each store, and keep
in-store payroll and product costs to a minimum. With this system, substantially
all products are purchased centrally and distributed to the Company's stores.
The Company uses a model stock concept to control store inventory levels. Such
model stock levels are adjusted dynamically, on an on-going basis, based
primarily on recent sales trends.
The Company has an automated store transfer and product returns
inventory handling system. The Company routinely calls back non-selling
merchandise from its stores. Merchandise returned from a store is scanned into
the computer by an operator using bar-code laser scanners. The computer
instructs the operator as to the product's disposition. Such merchandise may
either be returned to regular warehouse stock or returned to the vendor,
depending on its status and recent sales history. This process
10
has reduced handling and increased accuracy and productivity in processing store
transfers and product returns. Under this system, returns made by one store can
be used to replenish the inventory of another store thereby avoiding return
penalties and lowering purchasing costs.
During fiscal 1989, the Company installed new point-of-sale ("POS")
hardware and software. The Company's POS system utilizes laser scanners which
read the product bar code, perform price look-up (including items on "sale"),
capture complete and accurate sales data and process credit card transactions.
The POS terminals are polled nightly by the Company's central computer to
retrieve cash accountability, sales and inventory data. Simultaneously with the
nightly polling process, the Company updates its sales, cash management,
perpetual inventory and inventory replenishment files. On a daily basis, cash
accountability, sales audit and exception reports are reviewed to determine if
further audit is needed. Utilizing the POS terminals, store managers can order
products, report cash deposits, enter information about newly hired associates
and report payroll hours. The Company continues to utilize portable data
collection devices to process store transfers and physical inventories.
During fiscal 1995, the Company installed a new POS system, which is
multi-user, micro-computer based. The new software allows enhanced functionality
and increased efficiencies in the selling process including faster checkout and
credit card authorization and streamlining of certain transactions such as gift
certificates and concert ticket sales. The system gives the store manager new
back office functionality to control shrinkage by providing more detailed
information on customer transactions by cashier. There are also new reporting
features at the store level for top sellers allowing the store managers to
identify and replenish fast-selling products. Certain high traffic stores are
equipped with electronic journaling, signature capture and check verification.
The new POS system also allows for tracking the effectiveness of coupon
promotions.
The Company also has an on-line customer service network which allows
store personnel to access information in the Company's central computer system.
Using the customer service network, associates can inquire about inventory
status and availability, or take customer special orders which are trasmitted to
the Company's distribution center or directly to a vendor using Electronic Data
Interchange (EDI). The Company believes the customer service network is unique
among music retailers in its markets.
During the fourth quarter of fiscal 1994, the Company completed the
installation of a new Data General Aviion 9500 UNIX based, high availability
central computer. The conversion to a new central computer has enabled the
Company to increase
11
productivity and response time and implement a local area network and data base
sales analysis tools.
During fiscal 1995, the Company utilized Electronic Data Interchange
(EDI) to conduct business with several of its suppliers. The EDI program
includes electronic transmission of purchase orders directly to the vendors'
computer, the electronic receipt of the vendors' invoice and direct shipment of
product to the stores. Merchandise received in the stores is entered and matched
against the electronic invoice transmission which is further used to update the
Company's perpetual inventory and accounts payable files. The Company plans to
expand its EDI program during fiscal 1996 to include many of its major vendors.
SERVICEMARKS
All of the Company's stores operate under the name "Spec's." The mark
"Spec's" and the Company's logo are servicemarks registered with the United
States Patent and Trademark Office. The mark and logo are important to the
Company's business in connection with its advertising and promotional
activities. The Company has also registered the name "Spec's" and logo as a
servicemark in the State of Florida.
COMPETITION
The business in which the Company operates is highly competitive in
that there are many retailers which sell many of the same products carried by
the Company. The Company competes with mass merchants, discount stores, video
rental outlets, electronic and computer stores, book stores, mail order clubs,
warehouse outlets and specialty music stores. Many of the Company's competitors
are national in scope and have greater financial resources than the Company. In
addition, the Company's products may compete with other forms of entertainment
such as movies, concerts, video games, CD ROM, computers and software. The
Company also competes for new store locations and for existing locations as
leases come up for renewal.
The Company competes principally by offering a broad selection of
merchandise at competitive prices, with a strong emphasis on customer service,
store appearance and atmosphere. The Company believes that its success is
dependent primarily upon the widespread consumer recognition of the "Spec's"
name in its geographic markets, the number, quality and location of its stores,
its pricing policies, its marketing expertise, which enables it to respond
quickly to consumers' changing tastes, the depth and breadth of merchandise
offered in its stores, and its advertising program.
12
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, a
national electronic retailer entered the South Florida market with seven stores.
During the summer of 1995, several other South Florida competitors lowered
prices on compact discs and cassettes in response to the new arrival. The
Company is constantly revising and evaluating its pricing policy in order to
remain competitive. Despite these pricing pressures, the Company believes that
its superior locations, megastore concept, extensive selection of titles and
premium customer service will allow it to compete effectively in its markets.
ITEM 2. PROPERTIES.
The Company leases 56 stores and owns the land and building of a
former store located in Gainesville, Florida, which was sublet subsequent to
year end. The Company also owns the buildings of stores located in Tampa,
Florida and Miami Beach, Florida, the latter of which opened subsequent to
fiscal 1995 year-end. The stores contain an average of approximately 6,400
square feet of total space with selling area averaging approximately 91% of
total space. Twenty-one of the Company's stores are located in enclosed malls,
nine stores are freestanding and the remainder are located in shopping centers
and downtown areas. The Company operates 21 superstores which typically contain
7,000-10,000 square feet and two megastores with at least 20,000 square feet in
the Sawgrass Mills Mall in Sunrise, Florida, and in the Coconut Grove area of
Miami. Subsequent to year end, the Company opened its third megastore in South
Miami Beach and an additional store in an enclosed mall location.
Store leases generally provide for fixed monthly rental payments and
require the Company to pay real estate taxes and certain other charges. In some
leases, the monthly rental payment is subject to escalation formulas and, in
other leases, additional rent based on a percentage of net sales, ranging from
3% to 7%, may also be due. The Company's leases have terms ranging from three to
fifteen years and many have renewal options for longer terms. The Company's
leases expire at various times between 1995 and 2010. For the year ended July
31, 1995, the Company's rental expense was $8,542,000 including $383,000 in
percentage rental. All of the Company's stores are leased from unrelated
parties, except the South Dixie Highway store in Coral Gables and 66th Street in
St. Petersburg which are leased from trusts; the trustees and beneficiaries of
which include Ann S. Lieff, President of the Company, and Rosalind S. Zacks and
William A. Lieff, Vice Presidents of the Company. The lease for the Coral Gables
store expires during the first quarter of fiscal 1996. In March, 1995,
disinterested members of the Board of Directors approved a renewal of this
lease, which the Company is currently negotiating.
13
The Company's executive offices and distribution center comprise 56,000
square feet of space located near Miami International Airport. The lease for the
premises contains a five year term and expires in 1996, with renewal options.
During the first quarter of fiscal 1995, the Company air conditioned its
distribution center and built a 7,000 square foot addition to its second floor
mezzanine.
14
Spec's Music Locations
FLORIDA
NORTH CENTRAL
/bullet/ University Drive
Gainesville
/bullet/ 34th Street Plaza
Gainesville
/bullet/ Silver Springs Boulevard
Ocala
/bullet/ Paddock Mall
Ocala
/bullet/ Parkway Center
Tallahassee
SOUTH CENTRAL
/bullet/ South Florida Avenue
Lakeland
/bullet/ Spring Lake Square
Winter Haven
/bullet/ Winter Haven Mall
Winter Haven
/bullet/ Walden Wood
Plant City
/bullet/ Lakeland Square Mall
Lakeland
TAMPA BAY
/bullet/ Cortez Road
Bradenton
/bullet/ Seminole Mall (2)
Seminole
/bullet/ Highway 60
Brandon
/bullet/ 66th Street
St Petersburg
/bullet/ Fowler Avenue
Tampa
/bullet/ North Dale Mabry
Tampa
/bullet/ Town & Country
Tampa
SOUTHWEST
/bullet/ Gulf Gate Mall
Sarasota
/bullet/ Tamiami Trail
Sarasota
/bullet/ Sarasota Square Mall
Sarasota
/bullet/ Winkler Avenue
Ft. Myers
/bullet/ Tamiami Trail
Naples
/bullet/ Pelican Bay Mall
Naples
CENTRAL
/bullet/ Shoppes of Melbourne
Melbourne
TREASURE COAST
/bullet/ Luria Plaza
Vero Beach
/bullet/ Regency Plaza
Stuart
/bullet/ Market Place
Jensen Beach
/bullet/ Okeechobee Boulevard
Palm Beach
/bullet/ Palm Beach Mall
West Palm Beach
/bullet/ Congress Avenue
Boynton Beach
SOUTHEAST
/bullet/ South Dixie Highway
Coral Gables
/bullet/ Westland Mall
Hialeah
/bullet/ Dadeland Mall
Miami
/bullet/ Miracle Center
Miami
/bullet/ Mall of the Americas
Miami
/bullet/ SE 1st Street
Downtown Miami
/bullet/ Columbus Bazaar
Downtown Miami
/bullet/ Biscayne Boulevard
North Miami
/bullet/ NE 209th Street
North Miami
/bullet/ 163rd Street Mall
North Miami Beach
/bullet/ Kennedy Drive
Key West
/bullet/ Duval Street
Key West
/bullet/ Suniland Center
South Miami
/bullet/ Sawgrass Mills
Sunrise
/bullet/ Washington & Lincoln (2)
Miami Beach
/bullet/ South Dixie Highway
Miami
/bullet/ Kendall Drive
Miami
/bullet/ Pines Boulevard
Pembroke Pines
/bullet/ Cutler Ridge Mall
Miami
/bullet/ Crossroads
Homestead
/bullet/ Aventura Mall
North Miami
/bullet/ Miami International Mall
Miami
/bullet/ 49th Street
Hialeah
/bullet/ Grand Avenue
Coconut Grove
/bullet/ 5th & Collins (1)
South Miami Beach
/bullet/ Coral Square Mall (1)
Coral Springs
PUERTO RICO
/bullet/ Plaza Las Americas
Hato Rey
/bullet/ Plaza Del Caribe Mall
Ponce
/bullet/ Santa Rosa Mall
Bayamon
/bullet/ Monteheidra Mall
Monteheidra
- -------------------------
(1) Opened in fiscal 1996
(2) Closed in fiscal 1996
15
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.
16
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 June 12, 1995. The
following table sets forth, as of October 1, 1995, certain information regarding
the executive officers of the Company.
PRINCIPAL BUSINESS EXPERIENCE
NAME AGE DURING THE PAST FIVE YEARS
- ---- --- -----------------------------
Martin W. Spector 90 Chairman of the Board of Directors of the Company
since 1980; President and Chief Executive Officer
and Director of the Company and its predecessors
1948-1980.
Ann S. Lieff 43 President and Chief Executive Officer of the Company
since 1980; Director since 1979.
Vicki Carmichael 45 Vice President - Store Operations and Human
Resources since April, 1995; Vice President - Human
Resources from April 1993 to April 1995; Vice
President from September 1987 to April 1993;
Assistant to the President of the Company 1985 -
September 1987; Regional Director 1983 - 1985; Store
Manager 1979 - 1983.
Jeffrey Clifford 44 Vice President - Merchandising and Marketing since
April, 1995; Vice President - Store Operations from
April 1993 to April 1995; Vice President from
September 1987 to April 1993; Regional Supervisor
from 1985 to September 1987; Store Manager 1978 -
1985.
William A. Lieff 51 Vice President - Development of the Company since
1980; Store Manager and other positions 1975 - 1980.
Dorothy J. Spector 76 Secretary and a Director of the Company since its
incorporation in 1970.
Rosalind S. Zacks 45 Vice President since April 1993; Executive Vice
President and Treasurer of the Company from 1981 to
1993; Director since 1979.
17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
STOCK PRICE INFORMATION
The Company's Common Stock is traded in the NASDAQ National Market System under
the symbol "SPEK." The following table shows high and low bid price information
as quoted by NASDAQ for the two most recent fiscal years. Such quotations
reflect inter-dealer prices, without retail mark-ups, markdowns or commissions,
and may not necessarily represent actual transactions.
1995 HIGH LOW 1994 HIGH LOW
First quarter 5-3/4 4-1/4 First quarter 6-1/2 3-7/8
Second quarter 6 4-1/4 Second quarter 8-1/4 5-3/4
Third quarter 6-1/2 3-1/2 Third quarter 8-1/4 4-1/2
Fourth quarter 4-1/4 3 Fourth quarter 7-1/4 5
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.
Under the Company's new credit agreement, cash dividends are limited to 25% of
earnings. (See Item 8, Note E.)
On October 16, 1995, the Company had 5,247,762 shares of common stock
outstanding held by 447 stockholders of record, and approximately 2,100
beneficial owners.
18
ITEM 6. SELECTED FINANCIAL DATA.
YEARS ENDED JULY 31, 1995 1994 1993 1992 1991
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
EARNINGS STATEMENT DATA:
Revenues $79,603 $78,388 $ 72,733 $ 63,056 $ 59,534
Gross profit 28,406 28,590 26,664 22,929 22,156
Store operating, general and administrative expenses 26,338 24,136 22,834 20,157 19,248
Restructuring charge -- -- 3,204 -- --
Interest (expense) and other income (410) 44 1,013 128 (113)
------- ------- -------- -------- --------
Earnings before income taxes 1,658 4,498 1,639 2,900 2,795
Income taxes 626 1,681 485 970 1,029
------- ------- -------- -------- --------
Net earnings $ 1,032 $ 2,817 $ 1,154 $ 1,930 $ 1,766
======= ======= ======== ======== ========
Net earnings per common share $ .20 $ .54 $ .22 $ .36 $ .33
======= ======= ======== ======== ========
Weighted average number of common shares outstanding 5,248 5,264 5,195 5,338 5,342
======= ======= ======== ======== ========
BALANCE SHEET DATA (AS OF JULY 31,):
Working capital $16,263 $12,117 $ 10,779 $ 8,325 $ 7,342
Total assets 46,058 37,364 31,155 29,035 26,840
Capital lease obligation and long term debt 11,435 67 97 126 1,600
Common stockholders' equity 23,168 22,000 18,971 18,269 16,692
Common stockholders' equity per share 4.41 4.22 3.66 3.47 3.13
Return on sales 1.3% 3.6% 1.6% 3.1% 3.0%
Return on average common stockholders' equity 4.6% 13.8% 6.2% 11.0% 11.2%
OPERATING DATA:
Number of stores (at July 31) 58 55 56 63 57
Weighted average revenue per store $1,385,000 $1,375,000 $1,198,000 $1,095,000 $1,037,000
Square feet of selling space (at July 31) 336,130 280,100 273,400 323,900 288,300
Weighted average revenue per square foot
of selling space $ 266 $ 279 $ 242 $ 210 $ 210
19
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
Earnings bear to revenues and the percentage change in those items from period
to period.
PERCENTAGE OF REVENUES
YEARS ENDED JULY 31, 1995 1994 1993
Product sales 97.1% 95.3% 91.7%
Video rental 2.9 4.7 8.3
----- ----- -----
Total revenues 100.0 100.0 100.0
Gross profit - product sales 35.1 35.6 35.6
Gross profit - video rental 55.9 55.1 48.3
----- ----- -----
Total gross profit 35.7 36.5 36.7
Store operating, general and administrative expenses 33.1 30.8 31.4
Restructuring charge -- -- 4.4
Other income (0.5) 0.1 1.4
----- ----- -----
Earnings before income taxes 2.1 5.7 2.3
Income taxes .8 2.1 0.7
----- ----- -----
NET EARNINGS 1.3 3.6 1.6
===== ===== =====
PERIOD TO PERIOD PERCENTAGE
INCREASE (DECREASE)
YEARS ENDED JULY 31, 1995 1994 1993
Product sales 3.5% 12.0% 20.2%
Video rental (38.0) (38.6) (20.1)
Total revenues 1.6 7.8 15.3
Gross profit - product sales 2.2 11.8 21.6
Gross profit - video rental (37.1) (30.0) (14.0)
Total gross profit (.6) 7.2 16.3
Store operating, general and administrative expenses 9.1 5.7 13.3
Restructuring charge -- -- n/m
Other income (expense) n/m (95.7) 691.1
Earnings before income taxes (63.1) 174.3 (43.5)
Income taxes (62.8) 246.1 (50.0)
NET EARNINGS (63.4) 144.1 (40.2)
20
RESULTS OF OPERATIONS
REVENUES
Total revenues increased by $1,215,000 or 1.6% from fiscal 1994 to fiscal 1995.
On a same-store basis (stores open more than one year) revenue decreased by 2.3%
over last year.
Revenue from product sales rose by 3.5% for the chain as a whole and decreased
by .8% on a same-store basis. The increase in product sales is due to the
addition of eleven new stores during fiscal 1995. Same-store revenues declined
primarily because of the lack of significant new hit release titles which
contribute not only to greater sales but to greater in-store traffic. In
addition, the entry of a significant new competitor in the Company's South
Florida market has contributed to lower same-store revenues particularly in the
fourth quarter.
Video rental revenue decreased by 38% for the chain as a whole and by 15% on a
same-store basis as compared to fiscal 1994. The closing of one video rental
department, and lower demand contributed to lower revenue.
Revenue also declined due to an increase in competition. During the past two
years, a large number of mass merchandisers have begun to sell CDs and cassettes
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 national
electronic mass merchandiser has entered the South Florida market with a
significant number of new stores which offer CDs and cassettes at prices which
are lower than those offered by the Company. The entry of this competitor has
caused other competitors in the market to lower their prices. In response, the
Company has selectively reduced its compact disc prices which resulted in lower
revenues and lower margins. See "Competition."
The Company plans to continue to review and adjust its prices and increase its
marketing and advertising campaign, particularly as it relates to its new
megastore concept. However, the Company believes that in the foreseeable future,
same-store revenues may decrease.
From fiscal 1993 to fiscal 1994, total revenues increased by $5,655,000 or 7.8%
for the chain as a whole. On a same-store basis, revenues increased by 10%.
Revenue from product sales rose by 12% for the chain as a whole and by 13% on a
same-store basis in fiscal 1994. This increase is due in part to a 50% increase
in the number of titles carried in many of the Company's stores to meet
increased demand for audio compact discs and video laser discs. Audio compact
discs and video laser discs are the Company's fastest growing configurations and
have higher retail prices than audio cassettes and VHS tape which experienced
declining sales in fiscal 1994. During fiscal 1994, the Company converted a
portion of the seling square footage in nine stores from video rental to product
sales, which also contributed to increased product sales.
In fiscal 1994, video rental revenue decreased by 39% for the chain as a whole
and by 9% on a same-store basis. The closing of 13 video rental departments,
including nine in existing stores and lower demand for video rentals contributed
to lower revenue.
Weighted average revenue per store increased by .7% to $1,385,000 in fiscal 1995
and increased by 15% in fiscal 1994. The weighted average revenue per square
foot of selling space decreased to $266, or 4.7% in fiscal 1995 and increased to
$279 or 15% in fiscal 1994. The decrease in fiscal 1995 reflects the addition of
larger stores toward the end of the fiscal year. The improvement in 1994 was
achieved by increasing inventory levels and product selection which increased
demand for the Company's products and the closure of 12 underperforming stores
in 1993 and six stores in 1994.
21
GROSS PROFIT
Gross profit for product sales, which is net of product management and
distribution costs, was 35.1% in fiscal 1995 and 35.6% in fiscal 1994 and 1993.
Gross profit declined in fiscal 1995 primarily 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.
During the course of the year, and in particular during the fourth quarter, the
Company reduced its regular shelf and promotional prices in certain markets for
certain products in order to respond to a changing competitive environment. The
Company believes that it will be necessary to continue to offer such reduced
prices during the current fiscal year.
Gross profit for video rentals was 55.9%, 55.1% and 48.3% in fiscal 1995, 1994
and 1993, respectively. Since fiscal 1993, the Company closed 30 video rental
departments. Most of the departments closed had experienced declining revenue
and gross profits.
Total gross profit was 35.7%, 36.5% and 36.7% in fiscal 1995, 1994 and 1993,
respectively. The Company expects total gross profit as a percentage of revenue
to decline in the foreseeable future because of its continued shift in sales mix
to compact discs, continued decline of video rental revenues and increased
pricing pressures due to a heightened competitive environment, described above.
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Store operating, general and administrative expenses were 33.1%, 30.8% and 31.4%
of revenues in fiscal 1995, 1994 and 1993, respectively. Store occupancy costs,
as a percentage of revenue, increased significantly because of a decline in
same-store revenue and because of the impact of eleven new store openings during
fiscal 1995, whose expenses were higher relative to revenue in their initial
year of operations. In addition, depreciation and amortization during fiscal
1995 also increased as a percentage of revenue because of capital investment
associated with new stores and the expansion and renovation of one store and the
Company's distribution center. During fiscal 1995, the Company incurred
significantly higher professional fees associated with the engagement of
PaineWebber, Incorporated, described below. Store operating, general and
administrative expenses declined as a percentage of revenues in fiscal 1994 due
to same-store revenue increases and the closure of underperforming stores.
RESTRUCTURING CHARGE
As part of its 1993 strategic 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.
Since the adoption of its strategic plan, the Company has opened 18 new stores,
renovated 6 stores, closed 14 stores, eliminated 30 video rental departments and
abandoned certain assets as part of its store renovation program at a combined
cost of approximately $2.9 million. The Company considers its 1993 strategic
plan substantially completed.
INTEREST EXPENSE AND OTHER INCOME
The Company incurred interest expense of $442,000 in fiscal 1995, $46,000 in
fiscal 1994 and $21,000 in fiscal 1993. The significant increase in fiscal 1995
is due to capital investment and working capital related to new store expansion
and renovations in fiscal 1995 which required the Company to increase its
22
borrowings to $11.4 million at the end of such fiscal year. The Company expects
its borrowings to remain at or near the current level in the foreseeable future
and accordingly expects interest expense in fiscal 1996 to be higher than it was
in fiscal 1995. During fiscal 1993, the Company recorded a $954,000 ($585,000
after tax or $.11 per share) gain from insurance proceeds for business
interruption and property damage incurred from Hurricane Andrew, which is
included in other income.
INCOME TAXES
The effective income tax rate as a percentage of earnings before income taxes,
was 37.7%, 37.4% and 29.6% in fiscal 1995, 1994 and 1993, respectively. The
decrease in the effective rates in fiscal 1993 is due principally to the
availability of certain tax credits which reduced the federal and state income
tax liability.
NET EARNINGS
Net earnings for fiscal 1995, were $1,032,000 or $.20 per share, compared to
$2,817,000 or $.54 per share in fiscal 1994. Fiscal 1995 earnings decreased by
63.4% because of lower same-store sales and lower gross margins resulting from
increased competition and higher store operating, general and administrative
costs associated with new store openings. Fiscal 1994 earnings increased because
of increased same-store revenue and the absence of the restructuring charge from
fiscal 1993.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $16.3 million, $12.1 million and $10.8 million at July 31,
1995, 1994 and 1993, respectively. The increase in working capital in fiscal
1995 was the result of working capital provided by operations, the
reclassification of the company's line-of-credit facility to long-term debt and
the use of long-term debt to finance inventory. The increase in working capital
during fiscal 1994 was the result of working capital provided by operations
reduced by the cost of property and equipment acquired for new and existing
stores.
Cash flows from operating activities provided $.4 million, $2.3 million and $4.2
million in fiscal 1995, 1994 and 1993, respectively. In both fiscal 1995 and
1994, increases in inventory levels net of accounts payable, which increased by
$3.1 million, $2.6 million and $1.8 million in 1995, 1994 and 1993,
respectively, contributed to lower operating cash flows. During fiscal 1995 and
1994, the Company increased its inventory level by increasing the number of
titles offered in many of its stores and by opening new and larger stores.
Cash flows used in investing activities increased from $4.6 million in fiscal
1994 to $10.9 million in fiscal 1995. The primary reason for the increase is the
significant capital investment related to property and equipment for 11 new
stores opened during fiscal 1995 and preparation for two stores which opened in
the first quarter of fiscal 1996. This increase in property and equipment was
partially offset by a decrease in net video rental inventory investing
activities.
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.
Effective July 31, 1995, the Company and its lender entered into a modification
to its credit agreement to ease certain of the financial covenants contained
therein. The Company is continuing to negotiate with its lender to obtain
additional modifications to certain of the covenants. In the event the Company
is unable to obtain such modifications, the Company may, if appropriate, seek to
refinance such loan, the ability of which no assurance can be given. 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
23
over the corresponding U.S. Treasury security yield. At July 31, 1995, the
Company had an outstanding balance of $11.4 million under the credit agreement.
The Company substantially completed its current expansion program during the
first quarter of fiscal 1996. The Company's future liquidity and its ability to
reduce its long term debt level depends upon its ability to generate cash flow
from operating activities by reducing its store operating, general and
adminstrative expenses and increasing its inventory turnover rate. The Company's
future profitibility or the lack thereof, will have a substantial impact on its
liquidity and the availability of capital resources necessary to conduct its
business, renovate its stores and open additional new stores.
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 opportunities that will enhance the Company's
value.
INFLATION AND ECONOMIC TRENDS
The Company is affected by general economic trends, particularly in Florida and
Puerto Rico. The Company does not believe that inflation has had a material
effect on the results of its operations during the past three fiscal years.
SEASONALITY
The Company experiences higher sales volume during the Christmas selling season.
Revenues during the month of December, as a percentage of annual revenues, were
16.7%, 16.0% and 15.3% in fiscal 1995, 1994 and 1993, respectively.
24
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 consolidated balance sheets of Spec's Music, Inc. and
Subsidiary (the "Company") as of July 31, 1995 and 1994, and the related
consolidated statements of earnings, changes in stockholders' equity and cash
flows for each of the three years in the period ended July 31, 1995. Our audits
also included the financial statement schedule listed in the Index at Item
14(a)2. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 1995 and 1994, and the results of their operations and their cash
flows for each of the three years in the period ended July 31, 1995 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
October 6, 1995
25
CONSOLIDATED BALANCE SHEETS
July 31, 1995 1994
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 552,224 $ 1,339,140
Receivables 722,945 462,210
Inventories 24,464,990 23,638,987
Prepaid expenses 1,017,706 570,166
Prepaid income taxes 280,000 87,000
Deferred tax asset 537,000 897,000
------------ ------------
Total current assets 27,574,865 26,994,503
Video rental inventory, net 722,899 835,296
Property and equipment, net 16,587,026 8,652,579
Other assets 1,173,371 881,597
------------ ------------
Total assets $ 46,058,161 $ 37,363,975
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line-of-credit -- $ 1,600,000
Accounts payable 8,308,785 10,398,392
Accrued expenses 2,751,813 2,146,626
Restructuring charge 251,203 732,155
------------ ------------
Total current liabilities 11,311,801 14,877,173
Long term debt 11,400,000 --
Capital lease obligation 34,732 67,152
Deferred income taxes 144,000 420,000
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; 10,000,000
shares authorized; 5,343,808 and 5,355,158
shares issued at 1995 and
1994, respectively 53,439 53,552
Additional paid-in capital 3,835,604 3,918,256
Retained earnings 19,762,157 18,729,886
Less 96,046 and 139,391 shares in treasury,
at cost, in 1995 and 1994, respectively (483,572) (702,044)
------------ ------------
Total stockholders' equity 23,167,628 21,999,650
------------ ------------
Total liabilities and stockholders' equity $ 46,058,161 $ 37,363,975
============ ============
See Notes to Consolidated Financial Statements.
26
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended July 31, 1995 1994 1993
REVENUES:
Product sales $ 77,306,250 $ 74,681,858 $ 66,694,263
Video rentals 2,296,892 3,705,869 6,038,993
------------ ------------ ------------
Total revenues 79,603,142 78,387,727 72,733,256
Cost of goods sold - product sales 50,182,698 48,132,054 42,948,723
Cost of goods sold - video rental 1,014,070 1,665,758 3,120,799
------------ ------------ ------------
Gross profit 28,406,374 28,589,915 26,663,734
Store operating, general and administrative expenses 26,337,806 24,136,232 22,834,134
Restructuring charge -- -- 3,203,655
------------ ------------ ------------
Operating income 2,068,568 4,453,683 625,945
Other income (expense):
Insurance settlement -- -- 954,373
Interest income -- 26,526 29,101
Interest expense (441,527) (46,100) (21,100)
Other 31,230 63,216 51,111
------------ ------------ ------------
Total other income (expense) (410,297) 43,642 1,013,485
------------ ------------ ------------
Earnings before income taxes 1,658,271 4,497,325 1,639,430
Provision for income taxes 626,000 1,680,549 485,500
------------ ------------ ------------
NET EARNINGS $ 1,032,271 $ 2,816,776 $ 1,153,930
============ ============ ============
NET EARNINGS PER COMMON SHARE $ .20 $ .54 $ .22
============ ============ ============
Weighted average number of common shares outstanding 5,248,000 5,264,000 5,195,000
============ ============ ============
See Notes to Consolidated Financial Statements.
27
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, 1992 5,370,858 $ 53,709 $ 3,980,639 $14,759,180 (105,000) ($525,004) $18,268,524
Net earnings -- -- -- 1,153,930 -- -- 1,153,930
Repurchase of common stock -- -- -- -- (109,733) (554,154) (554,154)
Contributions to 401(K) Plan -- -- (1,303) -- 9,821 49,105 47,802
Cancellation of restricted
stock award (8,000) (80) (51,828) -- -- -- (51,908)
Restricted stock awards granted -- -- (11,850) -- 23,700 118,500 106,650
--------- -------- ----------- ----------- -------- --------- -----------
Balance, July 31, 1993 5,362,858 $ 53,629 $ 3,915,658 $15,913,110 (181,212) ($911,553) $18,970,844
Net earnings -- -- -- 2,816,776 -- -- 2,816,776
Exercise of stock options -- -- 130 -- 3,168 15,967 16,097
Contribution to 401(K) Plan -- -- 11,192 -- 9,753 49,042 60,234
Cancellation of restricted
stock award (7,700) (77) (37,624) -- -- -- (37,701)
Restricted stock awards granted -- -- 28,900 -- 28,900 144,500 173,400
--------- -------- ----------- ----------- -------- --------- -----------
Balance, July 31, 1994 5,355,158 $ 53,552 $ 3,918,256 $18,729,886 (139,391) ($702,044) $21,999,650
Net earnings -- -- -- 1,032,271 -- -- 1,032,271
Exercise of stock options -- -- 187 -- 1,334 6,737 6,924
Contributions to 401(K) Plan -- -- (9,006) -- 12,711 64,063 55,057
Cancellation of restricted
stock award (11,350) (113) (58,011) -- -- -- (58,124)
Restricted stock awards granted -- -- (15,822) -- 29,300 147,672 131,850
--------- -------- ----------- ----------- -------- --------- -----------
Balance, July 31, 1995 5,343,808 $ 53,439 $ 3,835,604 $19,762,157 (96,046) ($483,572) $23,167,628
========= ======== =========== =========== ======== ========= ===========
See Notes to Consolidated Financial Statements.
28
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $1,032,271 $2,816,776 $1,153,930
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Amortization of video rental inventory 1,176,621 1,794,682 3,423,439
Depreciation and amortization of property and equipment 2,150,366 1,641,258 1,466,150
Amortization of preopening expenses 281,779 218,479 321,550
Loss on disposal of property and equipment 9,007 3,820 197,282
Gain on disposal of video rental inventory (192,840) (93,581) (261,629)
Changes in assets and liabilities:
(Increase) decrease in assets:
Receivables (260,735) (74,458) (130,139)
Inventories (826,005) (5,441,590) (2,801,751)
Prepaid expenses (729,319) (247,238) (269,088)
Prepaid income taxes (193,000) (87,000) 165,545
Deferred tax asset 360,000 308,000 (887,000)
Other assets (317,130) (326,073) (269,623)
Increase (decrease) in liabilities:
Accounts payable (2,089,607) 2,833,798 (969,137)
Accrued expenses 735,111 374,195 1,128,451
Restructuring charge (480,952) (1,140,872) 1,873,027
Income taxes payable -- (140,787) 140,787
Deferred income taxes (276,000) (120,000) (59,000)
----------- ----------- -----------
Net cash provided by operating activities 379,567 2,319,419 4,222,794
----------- ----------- -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchases of video rental inventory (1,114,239) (1,802,214) (3,131,339)
Disposition of video rental inventory 242,855 926,207 1,040,084
Additions to property and equipment (10,701,608) (4,352,716) (1,767,266)
Disposition of property and equipment 632,005 667,972 575,231
----------- ----------- -----------
Net cash used in investing activities (10,940,987) (4,560,751) (3,283,290)
----------- ----------- -----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from borrowings 36,500,000 17,200,000 13,300,000
Repayments of debt and capital lease (26,732,420) (15,630,047) (13,328,394)
Exercise of stock options 6,924 16,097 --
Repurchase of common stock, net -- -- (554,154)
----------- ----------- -----------
Net cash provided by (used in) financing activities 9,774,504 1,586,050 (582,548)
----------- ----------- -----------
Net (decrease) increase in cash and equivalents (786,916) (655,282) 356,956
Cash and equivalents at beginning of year 1,339,140 1,994,422 1,637,466
----------- ----------- -----------
Cash and equivalents at end of year $ 552,224 $ 1,339,140 $ 1,994,422
=========== =========== ===========
See Notes to Consolidated Financial Statements.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A / SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of the
Company and its wholly-owned subsidiary. All material intercompany transactions
and balances have been eliminated.
CASH EQUIVALENTS
The Company considers all highly liquid short-term investments purchased with a
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out basis) or
market.
VIDEO RENTAL INVENTORY
The cost of video rental inventory is being amortized in proportion to the
estimated rental income of the tapes without salvage value. Opening stock of new
stores is amortized on a straight line method over three years. All other video
rental tapes are amortized on an accelerated method over a period of two years.
The cost and accumulated amortization of video tapes which are sold or otherwise
disposed are removed from their appropriate accounts and the resulting gain or
loss is reflected in gross profit.
PREOPENING EXPENSES
The Company defers certain expenses incurred in connection with the opening of
new stores. Such preopening expenses are included in prepaid expenses and are
amortized over the twelve-month period following the opening of each store.
Unamortized preopening expenses at July 31, 1995 and 1994 were $570,000 and
$120,000, 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.
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."
EARNINGS PER SHARE
Earnings per share are computed based on net earnings 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.
30
B / 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: 1995 1994 1993
Interest $ 378,000 $ 46,000 $ 21,000
Income taxes 700,000 1,720,000 1,065,000
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES INFORMATION
The Company contributed $55,000, $60,000 and $48,000 of treasury stock to the
Company's 401(K) Plan during the year ended July 31, 1995, 1994 and 1993,
respectively.
During the fiscal years ended July 31, 1995, 1994 and 1993, the Company
cancelled restricted stock awards totalling $58,000, $38,000 and $52,000,
respectively.
The Company granted 29,000 shares of treasury stock totalling $132,000 as
restricted stock awards during fiscal 1995. The Company also granted 29,000 and
24,000 shares of treasury stock totaling $173,000 and $107,000 as restricted
stock awards during fiscal 1994 and 1993, respectively.
C / VIDEO RENTAL TAPES:
The following comprise cost and accumulated amortization of video rental tapes
at July 31:
1995 1994
Cost $ 2,945,477 $ 3,312,005
Less accumulated amortization 2,222,578 2,476,709
----------- -----------
$ 722,899 $ 835,296
=========== ===========
D / PROPERTY AND EQUIPMENT:
The following comprise property and equipment at July 31:
USEFUL LIVES 1995 1994
Land -- $ 177,571 $ 177,571
Building 31 years 212,054 230,662
Equipment, furniture and fixtures 5-8 years 10,473,740 8,632,982
Transportation equipment 2-5 years 125,558 125,558
Signs 1-10 years 1,343,217 804,678
Leasehold improvements 1-31 years 8,122,626 5,328,419
Construction in progress -- 4,031,897 116,616
----------- -----------
24,486,663 15,416,486
Less accumulated depreciation
and amortization 7,899,637 6,763,907
----------- -----------
$16,587,026 $ 8,652,579
----------- -----------
31
Included in equipment, furniture and fixtures is equipment under a capital lease
with a cost of $152,000 and related accumulated amortization of $106,000 and
$89,000 as of July 31, 1995 and 1994, respectively.
E / DEBT AND CAPITAL LEASE OBLIGATION:
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.
Effective July 31, 1995, the Company and its lender entered into a modification
to its credit agreement to ease certain of the financial covenants contained
therein. The Company is continuing to negotiate with its lender to obtain
additional modifications to certain of the covenants. In the event the Company
is unable to obtain such modifications, the Company may, if appropriate, seek to
refinance such loan, the ability of which no assurance can be given. 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.
The interest rate at July 31, 1995 was 7.38%. The Company has classified the
entire balance as long-term.
Future minimum lease payments under the capital lease for equipment is
summarized as follows:
1996........................................................ $ 36,000
----------
Less amount representing interest........................... 1,368
----------
Present value of future minimum lease payments.............. $ 34,732
==========
The interest rate used in the present value calculation is 6.9%, equivalent to
the rates which would have been incurred to borrow, over a similar term, the
funds necessary to purchase the leased asset.
32
F / INCOME TAXES:
Components of income taxes for the years ended July 31, consist of the
following:
1995 1994 1993
FEDERAL:
Current $ 463,000 $ 1,295,200 $ 1,216,500
Deferred 71,000 177,700 (808,000)
---------- ----------- -----------
534,000 1,472,900 408,500
---------- ----------- -----------
STATE:
Current $ 79,000 $ 197,349 $ 215,000
Deferred 13,000 10,300 (138,000)
---------- ----------- -----------
92,000 207,649 77,000
---------- ----------- -----------
$ 626,000 $ 1,680,549 $ 485,500
========== =========== ===========
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:
1995 1994 1993
Expected federal tax rate 34.0% 34.0% 34.0%
State income tax, net of federal
income tax benefit 3.1 3.1 3.1
Tax credits, net (2.3) (2.4) (7.0)
Other 3.0 2.7 (.5)
----- ----- -----
37.8% 37.4% 29.6%
===== ===== =====
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:
JULY 31, 1995
-----------------------------------
ASSETS LIABILITIES TOTAL
------ ----------- -----
Accelerated depreciation on property
and equipment for tax purposes $ -- ($369,000) ($369,000)
Capitalization for tax purposes of
inventory related costs 339,000 -- 339,000
Preopening expenses -- (214,000) (214,000)
Restructuring charge 94,000 -- 94,000
Accrued rent 151,000 -- 151,000
Return authorization reserve 141,000 -- 141,000
Other 251,000 -- 251,000
-------- --------- ---------
$976,000 ($583,000) $393,000
======== ========= =========
33
JULY 31, 1994
-------------------------------------------
ASSETS LIABILITIES TOTAL
------ ----------- -----
Accelerated depreciation on property
and equipment for tax purposes $ -- ($ 420,000) ($ 420,000)
Capitalization for tax purposes of
inventory related costs 307,000 -- 307,000
Restructuring charge 275,000 -- 275,000
Accrued rent 140,000 -- 140,000
Return authorization reserve 107,000 -- 107,000
Other 68,000 -- 68,000
--------- ---------- ---------
$ 897,000 ($ 420,000) $ 477,000
========= ========== =========
G / 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 6 months of continuous service. Contributions are determined annually
by the Board of Directors. For the years ended July 31, 1995, 1994 and 1993, the
Company provided $86,000, $69,000 and $64,000 respectively, for contribution to
the 401(k) Plan. Approximately $55,000, $60,000 and $48,000 of the contribution
was made in the Company's common stock for fiscal 1995, 1994 and 1993,
respectively.
H / 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 1993, the Company
purchased 109,733 shares under those programs. During fiscal 1994 and 1995 no
shares were purchased. In connection with contributions to the 401(K) Plan,
grants of restricted stock awards and the exercise of stock options, 43,345,
41,821 and 33,521 shares were issued from treasury stock in 1995, 1994 and 1993,
respectively. The remaining shares are included in treasury stock at July 31,
1995.
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.
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.
34
Transactions and other information relating to stock options granted are
summarized as follows:
NUMBER OF OPTION PRICE
SHARES PER SHARE
Outstanding, July 31, 1992 156,987 $4.50-5.19
Granted, October 23, 1992 47,200 $4.50
Cancelled (9,332) $4.50-5.19
-------
Outstanding, July 31, 1993 194,855 $4.50-5.19
Granted, September 21, 1993 112,000 $5.00-6.00
Exercised (3,835) $4.50-5.19
Cancelled (8,500) $4.50-6.00
-------
Outstanding, July 31, 1994 294,520 $4.50-6.00
Granted, September 30, 1994 119,000 $3.00-4.50
Exercised (1,334) $5.19
Cancelled (68,312) $4.50-6.00
-------
Outstanding, July 31, 1995 343,874 $3.00-6.00
=======
All stock options 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, 1995, options to purchase 120,536 shares of
common stock were exercisable.
On October 23, 1992, the Board of Directors granted 23,700 shares of restricted
stock to 77 management associates which vest 50% after two years and the
remaining 50% after three years. At July 31, 1995, 6,750 shares of restricted
stock awards remain outstanding after cancellations. On October 25, 1993, the
Board of Directors granted 28,900 shares of restricted stock to 80 management
associates which vest as described above. At July 31, 1995, 21,500 shares remain
outstanding after cancellations. On September 30, 1994, the Board of Directors
granted 29,300 shares of restricted stock to 86 management associates which vest
as described above. At July 31, 1995, 25,200 shares remain outstanding after
cancellations.
I / 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:
1996...................................................... 6,793,000
1997...................................................... 6,200,000
1998...................................................... 5,770,000
1999...................................................... 4,742,000
2000...................................................... 4,453,000
Thereafter................................................ $ 20,798,000
------------
$ 48,756,000
============
35
Base rent expenses, including real estate taxes, insurance, and related common
area repairs and maintenance, were $8,542,000, $7,465,000 and $7,512,000 for
each of the years ended July 31, 1995, 1994 and 1993, respectively. Some leases
provide for additional contingent rent based on applying a specified percentage
of sales in excess of a predetermined base. Such contingent rent expense was
$383,000, $399,000 and $302,000 in each of the years ended July 31, 1995, 1994
and 1993, respectively. Most leases contain renewal options.
J / 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, 1995, 1994 and 1993 were $154,000, $151,000 and $142,000 respectively.
The Company also leases a store located in St. Petersburg, Florida, from the
Lieff Family Trust and the Zacks Family Trust, whose trustees are officers and
directors of the Company. Rental payments for each of the years ended July 31,
1995, 1994 and 1993 were $157,000, $154,000 and $150,000, respectively.
K / RESTRUCTURING CHARGE:
During the third quarter of fiscal 1993, the Company adopted a five-year
strategic plan which included a major expansion of the chain, new store and logo
designs, organizational changes and a planned shift in the Company's
merchandising mix and market coverage. As part of the strategic plan, the
Company recorded a restructuring charge of $3,204,000 ($2.0 million after income
tax benefits) representing a provision for the closing of 11 stores including
lease termination costs, write-down of video rental inventory and write-down of
certain assets which the Company expected to abandon in the renovation process.
Since the adoption of its strategic plan, the Company has opened 18 stores,
renovated six stores, closed 14 stores, eliminated 30 video rental departments
and abandoned certain assets as part of its store renovation program at a
combined cost of approximately $2.9 million. The Company has substantially
completed its 1993 strategic plan and restructuring program.
L / OTHER INCOME:
On August 24, 1992, Hurricane Andrew struck Southern Dade County, Florida which
resulted in the loss of two stores. In addition, the Company experienced
business interruption in 15 stores located in the immediate area for periods
ranging up to four weeks.
During the second quarter of fiscal 1993, the Company settled its insurance
claim and received total proceeds of $1,653,000. The combined business
interruption and property gain from the settlement totaled $954,000. This amount
is included in the "other income (expense)" caption for 1993 in the accompanying
consolidated statements of earnings.
36
M / QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Summarized quarterly financial results for fiscal 1995 and 1994, are as follows:
(IN THOUSANDS, EXCEPT PER SHARE)
WEIGHTED
NET AVERAGE NET EARNINGS
GROSS EARNINGS SHARES (LOSS) PER
REVENUES PROFIT (LOSS) OUTSTANDING COMMON SHARE
1995:
First quarter $17,273 $5,953 $ (54) 5,249 $(0.01)
Second quarter 26,533 9,349 1,476 5,270 0.28
Third quarter 18,371 6,933 32 5,249 0.01
Fourth quarter 17,422 6,171 (422) 5,248 (0.08)
1994:
First quarter $16,798 $6,287 $ 274 5,196 $ 0.05
Second quarter 25,268 9,140 1,826 5,257 0.35
Third quarter 18,328 6,729 457 5,269 0.09
Fourth quarter 17,994 6,434 260 5,268 0.05
37
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 1995 Annual Meeting of Shareholders (the "1995 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 1995 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 1995 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 1995 Proxy Statement is incorporated herein by
reference.
38
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 25
Consolidated Balance Sheets as of July 31, 1995 and 1994 26
Consolidated Statements of Earnings for each of the years in the
three year period ended July 31, 1995 27
Consolidated Statements of Changes in Stockholders' Equity for
each of the years in the three year period ended July 31, 1995 28
Consolidated Statements of Cash Flows for each of the years in
the three year period ended July 31, 1995 29
Notes to Consolidated Financial Statements 30
(a) 2. Financial Statement Schedules.
PAGE
----
Schedule II - Valuation and Qualifying
Accounts and Reserve 41
(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).
*10.1 Business Lease, effective as of November 1, 1985, between the Martin W.
Spector Irrevocable Trust and the Company (Exhibit 10.3 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).
*10.5 First Amendment to Amended and Restated Credit Agreement dated October
17, 1991 between the Company and NCNB National Bank of Florida.
*10.6 Credit Agreement dated September 20, 1994 between the Company and
Nationsbank of Florida, N.A. (Exhibit 10.6 to 1994 Form 10-K).
*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).
10.9 First Amendment to Credit Agreement dated July 27, 1995 between the
Company and NationsBank of Florida, N.A.
39
10.10 Master Equipment Lease Agreement dated October 18, 1994 between the
Company and AT&T Capital Corporation.
10.11 Second Amendment to Credit Agreement dated November 2, 1995 between
the Company and NationsBank of Florida, N.A.
*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.
--------------------
* Incorporated by reference to indicated filings.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of fiscal
1995.
40
SPEC'S MUSIC, INC. AND SUBSIDIARY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVE
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------- ------------ ----------- ------------ -----------
ADDITIONS
BALANCE AT CHARGED TO
DESCRIPTION BEGINNING OF COST OF BALANCE AT
PERIOD PERIOD GOODS SOLD DEDUCTIONS * END OF
- ------------- ------------ ----------- ------------ -----------
Accumulated
amortization
deducted from
video rental
inventory
Year ended:
July 31, 1993 $ 6,565,010 $ 3,423,439 $ 5,268,635 $ 4,719,814
July 31, 1994 4,719,814 1,794,682 4,037,787 2,476,709
July 31, 1995 2,476,709 1,176,621 1,430,752 2,222,578
<FN>
- ----------------
* Accumulated amortization on video rental tape disposals.
</FN>
41
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 27th day of
October, 1995. The registrant and each person whose signature appears below
hereby authorizes and appoints Ann S. Lieff as attorney-in-fact to sign and file
on behalf of the registrant and each such person, in each capacity below, any
and all amendments to this report.
SPEC'S MUSIC, INC.
By: 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
ANN S. LIEFF President, Chief Executive October 27, 1995
- ------------------------------- Officer and Director
Ann S. Lieff (Principal Executive Officer;
Principal Financial and Accounting Officer)
BARRY J. GIBBONS Director October 27, 1995
- -------------------------------
Barry J. Gibbons
ARTHUR H. HERTZ Director October 27, 1995
- -------------------------------
Arthur H. Hertz
DOROTHY J. SPECTOR Director October 27, 1995
- -------------------------------
Dorothy J. Spector
MARTIN W. SPECTOR Director October 27, 1995
- -------------------------------
Martin W. Spector
CYNTHIA COHEN TURK Director October 27, 1995
- -------------------------------
Cynthia Cohen Turk
ROSALIND S. ZACKS Director October 27, 1995
- -------------------------------
Rosalind S. Zacks
42
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
*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).
*10.1 Business Lease, effective as of November 1, 1985, between
the Martin W. Spector Irrevocable Trust and the Company
(Exhibit 10-3 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. 33-00 1 78-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.
*10.5 First Amendment to Amended and Restated Credit Agreement
dated October 16, 1992 between the Company and NCNB
National Bank of Florida.
*10.6 Credit Agreement dated September 20, 1994 between the
Company and Nationsbank of Florida, N.A. (Exhibit 10.6 to
1994 Form 10-K).
*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).
10.9 First Amendment to Credit Agreement dated July 27, 1995
between the Company and NationsBank of Florida, N.A.
10.10 Master Equipment Lease Agreement dated October 18, 1994
between the Company and AT&T Capital Corporation.
10.11 Second Amendment to Credit Agreement dated November 2,
1995 between the Company and NationsBank of Florida, N.A.
*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.
--------------------
* Incorporated by reference to indicated filings.
43