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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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER 0-14323
SPEC'S MUSIC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 59-1362127
(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 10, 1996: 5,246,405
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
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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.......................... 12
PART I.
ITEM 1. FINANCIAL STATEMENTS
SPEC'S MUSIC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
April 30, July 31,
1996 1995
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 2,905,105 $ 552,224
Receivables 379,075 722,945
Inventories 21,255,051 24,464,990
Prepaid expenses 669,142 1,017,706
Prepaid income taxes 961,845 280,000
Deferred tax asset 360,000 537,000
------------ ------------
Total current assets 26,530,218 27,574,865
Video rental inventory, net 483,220 722,899
Property and equipment, net 17,411,399 16,587,026
Other assets 870,200 1,173,371
------------ ------------
Total Assets $ 45,295,037 $ 46,058,161
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,905,630 $ 8,308,785
Accrued expenses 3,103,837 2,751,813
Restructuring charge -- 251,203
------------ ------------
Total current liabilities 12,009,467 11,311,801
------------ ------------
Long term debt 11,500,000 11,400,000
Capital lease obligations 9,097 34,732
Deferred income taxes 53,000 144,000
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; 10,000,000
shares authorized; 5,325,258 and
5,343,808 shares issued at April, 1996
and July, 1995, respectively 53,253 53,439
Additional paid-in capital 3,698,246 3,835,604
Retained earnings 18,368,893 19,762,157
Less 78,853 and 96,046 shares in treasury at
April, 1996, and July 1995, respectively, at cost (396,919) (483,572)
------------ ------------
Total stockholders' equity 21,723,473 23,167,628
------------ ------------
Total Liabilities and Stockholders' equity $ 45,295,037 $ 46,058,161
============ ============
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,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Product sales $ 17,565,238 $ 17,818,938 $ 59,704,005 $ 60,460,308
Video rentals 363,724 551,617 1,176,694 1,715,744
------------- ------------ ------------ ------------
TOTAL REVENUES 17,928,962 18,370,555 60,880,699 62,176,052
------------- ------------ ------------ ------------
Cost of goods sold - sales 11,757,449 11,200,438 39,856,678 39,212,470
Cost of goods sold - rental 159,086 237,431 526,571 728,402
------------- ------------ ------------ ------------
TOTAL COST OF SALES 11,916,535 11,437,869 40,383,249 39,940,872
------------- ------------ ------------ ------------
GROSS PROFIT 6,012,427 6,932,686 20,497,450 22,235,180
Store operating, general and
administrative expenses 7,071,513 6,735,494 22,082,907 19,681,004
------------- ------------ ------------ ------------
Operating income (loss) (1,059,086) 197,192 (1,585,457) 2,554,176
Other income (expense), net (249,129) (143,440 ) (660,805) (218,844)
------------- ------------ ------------ ------------
Earnings (loss) before income taxes (1,308,215) 53,752 (2,246,262) 2,335,332
Provision (benefit) for income taxes (496,000) 22,000 (853,000) 881,000
------------- ------------ ------------ ------------
NET EARNINGS (LOSS) $ (812,215) $ 31,752 $ (1,393,262) $ 1,454,332
============= ============ ============ ============
EARNINGS (LOSS) PER SHARE $ (.15) $ .01 $ ( .25) $ .28
============= ============ ============ ============
Weighted average number of
common shares outstanding 5,449,000 5,249,000 5,492,000 5,256,000
============= ============ ============ ============
See Notes to Consolidated Condensed Financial Statements.
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SPEC'S MUSIC, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED APRIL 30, 1996 AND 1995
(UNAUDITED)
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (1,393,262) $ 1,454,332
ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization of property and equipment 2,056,318 1,354,885
Amortization of video rental inventory 599,972 837,523
Loss on disposal of property and equipment 76,858 --
Gain on disposal of video rental inventory (79,368) (108,339)
Amortization of preopening expenses 564,902 187,305
Amortization of intangibles 14,318 14,318
Deferred compensation expense 18,490 --
(Increase) decrease in assets:
Receivables 343,870 (67,928)
Inventories 3,209,939 (2,615,318)
Prepaid expenses (216,338) (328,230)
Prepaid income taxes (681,845) 87,000
Other assets 185,803 (162,100)
Deferred tax asset 177,000 (183,000)
Increase (decrease) in liabilities:
Accounts payable 596,845 (1,648,053)
Accrued expenses 385,693 840,536
Restructuring charge (251,203) (152,843)
Income taxes -- 199,000
Deferred income taxes (91,000) 43,000
------------ -----------
Net cash provided by (used in) operating activities 5,516,992 (247,912)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of video rental inventory (280,925) (657,469)
Additions to property and equipment (2,957,550) (6,670,182)
------------ -----------
Net cash used in investing activities (3,238,475) (7,327,651)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from credit facilities 100,000 6,700,000
Repayments of capital lease (25,636) (24,104)
------------ -----------
Net cash provided by financing activities 74,364 6,675,896
Net (decrease) increase in cash 2,352,881 (899,667)
Cash and equivalents at beginning of period 552,224 1,339,140
------------ -----------
Cash and equivalents at end of period $ 2,905,105 $ 439,473
============ ===========
See Notes to Consolidated Condensed Financial Statements.
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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, 1995.
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 period ended April 30, 1996 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 1996 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 April 30, 1996, the Company had a $15 million unsecured revolving
line-of-credit, which had an outstanding balance of $11.5 million. On May
30, 1996, the Company replaced this credit agreement with a new 2 year
credit agreement (the "Revolving Credit Facility"), which includes a
$3,000,000 stand-by letter of credit facility which expires two (2) years
from the closing date. Under the Company's new Revolving Credit Facility, it
may borrow up to the lesser of (a) $15,000,000 or (b) 60% of the Company's
eligible inventory.
The Revolving Credit Facility and all of the Company's obligations in
connection therewith are secured by first-priority security interests in
substantially all of the Company's assets, and the Company may not further
pledge its assets without the prior approval of its lender. The Company is
also required to meet certain financial covenants, including minimum
earnings, fixed charge coverage and tangible net worth levels. In addition,
the Company may not exceed certain capital expenditures and inventory cost
levels.
The Revolving Credit Facility bears interest at a floating rate, adjusted
monthly, equal to the Index Rate (as defined below) plus 2.875%. The "Index
Rate" is the last month-end published rate for 30-day dealer-placed
commercial paper sold through dealers by major corporations as published in
the Money Rates section of THE WALL STREET JOURNAL. Accrued interest is
payable monthly in arrears. The interest rate at May 31, 1996 was 8.275%.
The outstanding amount under the Revolving Credit Facility was approximately
$9.3 million as of June 11, 1996.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONT'D.
3. STATEMENT OF CASH FLOWS INFORMATION
The following is supplemental disclosure of cash flow information:
NINE MONTHS ENDED
APRIL 30,
-----------------
1996 1995
---- ----
Interest paid $ 598,287 $ 196,034
Income tax paid -0- 735,000
Supplemental noncash financing activities information:
During the nine months ended April 30, 1996, no restricted stock awards
were granted and awards totaling $102,865 were canceled. During the nine
months ended April 30, 1995, restricted stock awards totaling $131,850 were
granted and awards totaling $48,449 were canceled.
The Company contributed $33,669 and $42,062 in common stock to the
Company's 401(k) Plan during the nine months ended April 30, 1996 and 1995,
respectively.
4. EARNINGS PER SHARE
Earnings per share are computed based on net earnings for each period,
divided by the weighted average number of common shares and equivalents
outstanding during each period.
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PART I.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is an analysis of the Company's results of operations, liquidity
and capital resources. To the extent that such analysis contains statements
which are not of a historical nature, such statements are forward-looking
statements, which involve risks and uncertainties. These risks include changes
in the competitive environment for the Company's products, including the entry
or exit of non-traditional retailers of the Company's products to or from its
markets; the release by the music industry of an increased or decreased number
of "hit releases"; unfavorable developments with respect to a lease; general
economic factors in markets where the Company's products are sold; and other
factors discussed in the Company's filings with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1996 AND 1995
REVENUES
Total revenues decreased by $442,000 or 2.4%, during the third quarter of fiscal
1996 compared to the third quarter of fiscal 1995. On a same-store basis (stores
open for more than one year), revenues decreased by 2.1% over last year.
Revenues from product sales decreased by 1.4% for the chain as a whole and
decreased by 1.6% on a same-store basis. Total and same-store revenues declined
due to increased competition and fewer hit releases which contribute to greater
in-store traffic. In the past two years mass merchandisers have begun to sell
compact discs and cassettes at or near cost to attract customers to their
stores, and, late in fiscal 1995, a national electronic mass merchandiser
entered several of the Company's markets, increasing the retail space devoted to
music. In general, as a result of the increased competition, market prices of
music product have declined producing lower revenues and lower margins.
The Company has elected to compete on the basis of innovation, selection,
merchandising and customer service while taking actions to neutralize pricing
moves by competition. Nevertheless, the Company believes that in the foreseeable
future same-store revenues may decline.
The Company's lease for its Dadeland Mall store is scheduled to expire on June
30, 1996. The Company has not yet successfully negotiated a renewal of this
lease. It is probable that the lease will either not be renewed or that the
Company's store will be moved to a less favorable location in the mall. During
fiscal 1996, revenues from such store are projected to represent 3.8% of the
Company's total product sales.
Video rental revenue decreased by 34% for the chain as a whole and by 23% on a
same-store basis as compared to fiscal 1995. The closing of one video rental
department, and lower demand contributed to lower revenue.
GROSS PROFIT
Gross profit from product sales, which is net of product management and
distribution costs, was 33.1% and 37.1% during the third quarters of fiscal 1996
and 1995, respectively. Gross profit, as a percentage of revenue, declined
primarily because of promotional markdowns and the
-8-
continued shift in the sales mix to compact discs and laser discs, which have
lower gross margins than audio cassettes and VHS tapes.
Gross profits from video rentals were 56.3% and 57.0% during the third quarters
of fiscal 1996 and 1995, respectively, primarily due to the closure of four
video rental departments since the first quarter of fiscal 1995.
Total gross profit was 33.5% and 37.7% of revenue during the third quarters of
fiscal 1996 and 1995, respectively. The Company expects total gross profit, as a
percentage of revenues, to decline in the foreseeable future because of the
continued shift in the sales mix to compact and laser discs, the continued
decline of video rental revenues and the increased pricing pressures due to a
heightened competitive environment, as described above.
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Store operating, general and administrative expenses, as a percentage of
revenue, were 39.4% and 36.7% during the third quarters of fiscal 1996 and 1995,
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 the last three quarters of fiscal
1995, and two new store openings in the first quarter of fiscal 1996. New store
expenses are higher relative to revenue in their initial year of operation. In
addition, depreciation and amortization during the third quarter of fiscal 1996,
increased as a percentage of revenue because of capital investment associated
with new stores. This increase was offset in part by lower general and
administrative expenses, as a result of lower labor costs, services and
advertising costs.
OTHER INCOME (EXPENSE)
The Company incurred net interest expenses of $188,000 and $144,000 during the
third quarter of fiscal 1996 and 1995, respectively. The increase is due to
increased capital investment and working capital related to new store expansion
and renovations in fiscal 1995 and the first quarter of fiscal 1996, which
required the Company to increase its borrowings to $11.5 million at April 30,
1996.
INCOME TAXES
The effective income tax rate, as a percentage of earnings before income taxes,
was 37.9% and 37.7% during the third quarter of fiscal 1996 and 1995,
respectively. The effective income tax rate did not vary significantly from the
third quarter in the prior fiscal year.
NET EARNINGS (LOSS)
During the third quarter of fiscal 1996, the Company lost $(812,000) or $(.15)
per share compared to earnings of $32,000 or $.01 per share during the third
quarter of fiscal 1995. Earnings declined significantly because of lower sales,
lower gross margins resulting from increased competition and higher store
operating costs associated with new store openings.
-9-
NINE MONTHS ENDED APRIL 30, 1996 AND 1995
REVENUES
Total revenues decreased by $1,295,000 or 2.1%, in the first nine months of
fiscal 1996, compared to the same period in fiscal 1995. On a same-store basis,
revenues decreased by 7.1%, compared to the same period in 1995.
Revenues from product sales decreased by 1.3% for the chain as a whole and by
6.7% on a same-store basis during the first nine months of fiscal 1996. This
decrease is due in part to the lack of significant new hit release titles and
increased competition, as described above.
Video rental revenues decreased by 31% for the chain as a whole and by 24% on a
same-store basis. The closing of four video rental departments since the second
quarter of fiscal 1995 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 33.2% and 35.1% during the first nine months of fiscal
1996 and 1995, 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 55.2% and
57.5% during the first nine months of fiscal 1996 and 1995, respectively,
primarily due to the closure of 3 video rental departments during the first nine
months of fiscal 1996.
Total gross profit was 33.7% and 35.8% of revenue during the first nine months
of fiscal 1996, and 1995, 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 to compact and laser discs, the continued decline
of video rental revenues and increased promotional markdowns due to a heightened
competitive environment, all as described previously herein.
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Store operating, general and administrative expenses, as a percentage of
revenue, were 36.3% and 31.7% during the first nine months of fiscal 1996 and
1995, respectively. Store operating expenses increased due to higher occupancy
and depreciation costs associated with the capital spending described above and
a decline in same-store sales. General and administrative expenses as a
percentage of revenue decreased from the prior year as a result of lower labor,
services and advertising costs.
OTHER INCOME (EXPENSE)
Other expenses include net interest expense of $622,000 and $239,000 during the
first nine months of fiscal 1996 and 1995, respectively. This increase in
interest expense is due to a significant increase in new store expansion during
fiscal 1995 and the first quarter of fiscal 1996, which required the Company to
increase its borrowings to $11.5 million at the end of the third quarter of
fiscal 1996.
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NET EARNINGS (LOSS)
For the nine month period ended April 30, 1996, the net loss was ($1,393,000) or
($.25) per share, compared to earnings of $1,454,000 or $.28 per share for the
first nine months of fiscal 1995. Reduced sales and lower margins due to
increased competition and costs associated with the new Spec's stores during the
first half of the year contributed to lower earnings for the first nine months
in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1996, working capital was $14.5 million compared to $16.3
million at July 31, 1995. The decrease in working capital during the first nine
months of fiscal 1996 was primarily the result of a reduction of inventory. Cash
balances as of April 30, 1996 were $2.9 million, up from $.6 million at July 31,
1995.
Cash flow used in investing activities decreased from $7.3 million in fiscal
1995 to $3.2 million in fiscal 1996. The primary reason for the decrease is the
capital investment related to property and equipment for six new stores that
opened during the first nine months of fiscal 1995.
At April 30, 1996, the Company had a $15 million unsecured revolving
line-of-credit, which had an outstanding balance of $11.5 million. On May 30,
1996, the Company replaced this credit agreement with a new two-year credit
agreement (the "Revolving Credit Facility"), which includes a two-year
$3,000,000 stand-by letter of credit facility. Under the Revolving Credit
Facility, the Company may borrow up to the the lesser of (a) $15,000,000 or
(b) 60% of the Company's eligible inventory.
The outstanding amount under the Revolving Credit Facility was approximately
$9.3 million as of June 11, 1996.
The Company substantially completed its expansion program during the first
quarter of fiscal 1996. The Company's future liquidity and its ability to reduce
its debt level will depend upon its ability to generate sufficient cash flow
from operating activities by reducing its store operating, general and
administrative expenses as a percentage of revenue and increasing its inventory
turnover rate. The Company's future profitability 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.
-11-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits
(a) 10.1 Credit Agreement dated as of May 22, 1996 between
Spec's Music, Inc., as Borrower and General Electric
Capital Corporation, as Lender.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended April 30, 1996.
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 13, 1996 /s/ ANN S. LIEFF
- --------------------------------- ----------------------------------------
Date ANN S. LIEFF
President and Chief
Executive Officer
(Principal Executive Officer)
JUNE 13, 1996 /s/ JEFFREY J. FLETCHER
- --------------------------------- ----------------------------------------
Date JEFFREY J. FLETCHER
Executive Vice President,
Chief Operating and Financial
Officer
(Principal Financial and Accounting
Officer)
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