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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED DECEMBER 25, 1999
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 - 22074
NATIONAL RECORD MART, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 11-2782687
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(State or jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
507 FOREST AVENUE
CARNEGIE, PENNSYLVANIA 15106-2873
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(Address of principal executive offices, including zip code)
(412) 276-6200
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(Registrant's telephone number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 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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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
COMMON STOCK, $.01 PAR VALUE,
5,048,167 SHARES OUTSTANDING AS OF FEBRUARY 8, 2000
EXHIBIT INDEX ON PAGE 11.
THIS DOCUMENT CONSISTS OF 12 PAGES.
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NATIONAL RECORD MART, INC.
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheets: December 25, 1999 (unaudited) and March 27, 1999 3
Statements of Operations: Thirteen and Thirty-nine Weeks Ended
December 25, 1999 (unaudited) and December 26, 1998 (unaudited) 4
Statements of Cash Flows: Thirty-nine Weeks Ended December 25, 1999
(unaudited) and December 26, 1998 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6 -7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8-10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 10-11
Item 6. Exhibits and Reports on Form 8-K 11
Signature 11
Exhibit 11 Calculation, etc. 12
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NATIONAL RECORD MART, INC.
CONSOLIDATED BALANCE SHEETS
December 25, March 27,
1999 1999
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Assets (unaudited)
Current assets:
Cash and cash equivalents $ 5,904,486 $ 853,222
Merchandise inventory 54,659,407 44,137,192
Due from stockholder 415,316 494,249
Deferred income taxes 417,000 417,000
Refundable income taxes 641,316 229,860
Other current assets 4,081,337 3,358,625
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Total current assets 66,118,862 49,490,148
Property and equipment, at cost 44,289,520 36,014,844
Accumulated depreciation and amortization (20,735,549) (17,771,446)
------------ ------------
Property and equipment, net 23,553,971 18,243,398
Other assets:
Deferred income taxes 1,726,319 1,726,319
Intangibles, net 2,476,861 2,534,646
Other 769,939 499,180
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Total other assets 4,973,119 4,760,145
------------ ------------
Total assets $ 94,645,952 $ 72,493,691
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 34,359,691 $ 15,537,814
Deferred Income 2,755,340 1,505,954
Other liabilities and accrued expenses 4,694,586 4,281,331
Current maturities of long-term debt 189,961 106,695
------------ ------------
Total current liabilities 41,999,578 21,431,794
Long-term debt:
Notes payable - subordinated 14,179,562 13,845,464
Revolving credit facility 23,323,985 21,373,000
------------ ------------
Total long-term debt 37,503,547 35,218,464
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 9,000,000 shares authorized, 5,494,984 shares
issued at December 25, 1999 and 5,494,384 issued at March 27, 1999,
5,048,167 outstanding at December 25, 1999, and 5,049,567 outstanding
at March 27, 1999 54,950 54,944
Additional paid-in capital 15,860,416 15,858,922
Retained earnings 1,896,686 1,590,432
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16,812,052 17,504,298
Less treasury stock, 446,817 and 444,817 shares at December 25, 1999
and March 27, 1999, respectively (1,669,225) (1,660,865)
------------ ------------
Total stockholders' equity 15,142,827 15,843,433
------------ ------------
Total liabilities and stockholders' equity $ 94,645,952 $ 72,493,691
============ ============
See accompanying notes to consolidated financial statements
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NATIONAL RECORD MART, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Thirteen Thirteen Thirty-nine Thirty-nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
December 25, December 26, December 25, December 26,
1999 1998 1999 1998
------------ ------------ ------------- ------------
Net sales $ 48,756,029 $ 47,715,531 $ 109,738,339 $ 98,518,525
Cost of sales 29,827,915 30,508,609 67,057,493 61,882,287
------------ ------------ ------------- ------------
Gross profit 18,928,114 17,206,922 42,680,846 36,636,238
Selling, general and administrative expenses 12,315,826 11,365,629 37,091,437 31,138,793
Depreciation and amortization 1,200,940 894,566 3,334,248 2,545,052
Interest expense 1,241,048 819,725 3,278,091 2,329,985
Interest income (9,795) (10,086) (27,604) (30,969)
Other expenses 34,904 321,769 84,830 428,093
------------ ------------ ------------- ------------
Total expenses 14,782,923 13,391,603 43,761,002 36,410,954
------------ ------------ ------------- ------------
Income (loss) before income taxes 4,145,191 3,815,319 (1,080,156) 225,284
Income tax expense (benefit) 1,491,560 1,373,515 (386,410) 81,122
------------ ------------ ------------- ------------
Net income (loss) 2,653,631 2,441,804 (693,746) 144,162
============ ============ ============= ============
Basic net income (loss) per share $ 0.53 $ 0.51 $ (0.14) $ 0.03
============ ============ ============= ============
Diluted net income (loss) per share $ 0.50 $ 0.44 $ (0.14) $ 0.03
============ ============ ============= ============
Basic weighted average common shares
Outstanding 5,048,167 4,793,184 5,048,372 4,788,803
============ ============ ============= ============
Weighted average number of common shares
and common equivalent shares
outstanding 5,336,654 5,603,273 5,048,372 5,559,067
============ ============ ============= ============
See accompanying notes to consolidated financial statements
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NATIONAL RECORD MART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Thirty-nine Thirty-nine
Weeks Ended Weeks Ended
December 25, December 26,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (693,746) $ 144,162
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 3,334,248 2,545,052
Accretion of notes payable for value assigned to warrants 334,098 334,098
Other (263,009) 93,697
Changes in operating assets and liabilities:
Merchandise inventory (10,522,215) (13,232,918)
Other assets (1,143,377) (3,503,055)
Accounts payable 18,821,877 22,650,312
Other liabilities and accrued expenses 1,662,640 2,832,913
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Net cash provided by operating activities 11,530,516 11,864,261
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (8,585,577) (8,288,276)
Other long term assets -- --
Amounts repaid by (loaned to) stockholders 78,933 (75,874)
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Net cash used in investing activities (8,506,644) (8,364,150)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on debt (120,538,252) (124,282,723)
Borrowings on revolving line of credit 122,322,504 111,909,070
Borrowings on subordinated notes payable -- 15,000,000
Borrowings on note 250,000 --
Exercise of options 1,500 --
Purchases of treasury stock (8,360) (923,897)
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Net cash provided by financing activities 2,027,392 1,702,450
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Net increase in cash and cash equivalents 5,051,264 5,202,561
Cash and cash equivalents, beginning of period 853,222 384,304
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Cash and cash equivalents, end of period $ 5,904,486 $ 5,586,865
============= =============
See accompanying notes to consolidated financial statements
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NATIONAL RECORD MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying interim consolidated financial statements of National Record
Mart, Inc. (the "Company") and subsidiary are unaudited. However, in the opinion
of management, they include all adjustments necessary for a fair presentation of
financial position, results of operations and cash flows for the interim
periods. All adjustments made for the third quarter ended December 25, 1999 were
of a normal recurring nature. The results of operations for the third quarter
ended December 25, 1999 are not necessarily indicative of the results of
operations to be expected for the entire fiscal year ending March 25, 2000.
Additional information is contained in the Company's audited consolidated
financial statements for the year ended March 27, 1999, included in the
Company's Form 10K and should be read in conjunction with this quarterly report.
The Consolidated Financial Statements include the accounts of the Company and
its wholly owned subsidiary, National Record Mart Investments, Inc., a Delaware
holding company. All intercompany accounts and transactions have been eliminated
in consolidation.
NOTE 2 - SEASONALITY
The Company's business is seasonal in nature, with the highest sales and
earnings occurring in the third quarter of its fiscal year, which includes the
Christmas selling season.
NOTE 3 - INCOME TAXES
The Company provides for income taxes in interim periods on an estimated basis.
For the third quarter ended December 25, 1999 and December 26, 1998, the
effective income tax rate is 36%.
NOTE 4 - REVOLVING CREDIT FACILITY
The Company has a revolving credit facility (the "Revolver") which expires on
June 10, 2003. The maximum borrowings under the Revolver are $35,000,000 and are
based upon eligible inventory levels as defined therein. During the months of
October through December 31 of each year, an overadvance in the amount of $1.5
million is available in addition to the borrowing base as calculated by levels
of inventory. The interest rate is the bank's borrowing rate (7.75 at December
25, 1999) or Libor (6.175% at December 25, 1999) plus 2.0%. The Company is
required to pay a monthly commitment fee of .25% per annum on the unused portion
of the Revolver and a monthly collateral-monitoring fee of $3,500. The Revolver
also contains various financial and other covenants that place restrictions or
limitations on the Company and its subsidiary, the more restrictive of which
include: (i) maintenance of a number of financial ratios, as defined, (ii) a
restriction on dividends, and (iii) limitation on capital expenditures.
Borrowings are collateralized by substantially all assets of the Company,
including inventory, property and equipment.
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NATIONAL RECORD MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
NOTE 5 - SUBORDINATED DEBT
On April 16, 1998, the Company secured a private placement of $15,000,000 in
senior subordinated notes. The notes carry an interest rate of 11.75% payable
semi-annually and expire April 16, 2001. In consideration of the placement the
Company issued 400,000 common stock warrants with an exercise price of $0.01.
The Company allocated $1,600,000 of value for accounting purposes to the
warrants, which was recorded as a reduction of the $15,000,000. This reduction
will be accreted as additional interest expense over the term of the note. The
Company issued 39,990 warrants for an additional expense of $205,000 in the
third quarter of fiscal 1999. The additional warrants are a settlement for the
delay in the effective date of registering the 400,000 warrants noted above with
the SEC. During fiscal 1999, both the 400,000 and 39,990 warrants were
exercised.
NOTE 6 - ASSET PURCHASE
On May 4, 1998, the Company purchased certain of the assets of Record Den Inc.
and DJK Records & Video Inc., totaling four stores. The acquisition was
accounted for using the purchase method of accounting for a purchase price of
approximately $933,000 resulting in $195,000 of goodwill which is being
amortized using the straight line method over 40 years, $708,000 for purchased
assets and a $30,000 consulting and noncompete agreement for a period of three
years. The purchase price was paid in cash upon completion of the agreement.
On November 13, 1998, the Company purchased certain of the assets of Happy Town
Inc. and Tempo, totaling twelve stores. The acquisition was accounted for using
the purchase method of accounting for a purchase price of approximately
$3,574,000 resulting in $869,000 of goodwill which is being amortized using the
straight line method over 40 years, $2,648,000 for purchased assets and a
$57,000 consulting and noncompete agreement for a period of three years. The
purchase price was paid in cash upon completion of the agreement.
On May 5, 1999, the Company amended its asset purchase agreement with Tempo One
Stop Records Inc. and Happy Town Inc. to provide for the additional purchase of
two stores located in Guam. The acquisition was accounted for using the purchase
method of accounting for a purchase price of $250,000 resulting in $187,000 of
goodwill, which is being amortized using the straight line method over 40 years,
and $63,000 for purchased assets. The purchase price is being paid through
monthly installments equal to 7% of sales of the store with the highest sales
for the applicable month.
NOTE 7 - ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees" and the related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123 (FASB 123), "Accounting for Stock-Based Compensation,"
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options is greater than the market price of the
underlying stock on the date of the grant, no compensation expense is
recognized.
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ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included elsewhere in this
report and with the Company's audited consolidated financial statements and
notes thereto for the fiscal year ended March 27, 1999 ("fiscal 1999") included
in the Company's Form 10K.
RESULTS OF OPERATIONS
NET SALES: The Company's net sales increased during the third quarter
(ended December 25, 1999) of the Company's fiscal year ending March 25, 2000
("fiscal 2000") by $1.0 million, or 2.2%, over the third quarter of fiscal 1999.
Net comparable store sales for the third quarter were down 7.97% or $3.6
million. The increase in total sales was attributable to the operation of a net
12 additional stores in the third quarter of fiscal 2000. Sales for the
thirty-nine weeks ended December 25, 1999 increased $11.2 million or 11.4%. Net
comparable store sales for the thirty-nine weeks ended December 25, 1999 were
down 3.5% or $3.4 million compared to the thirty-nine weeks ended December 26,
1998. The comparative store sales decreases were primarily due to the increase
in competition in some of the Company's primary markets and increases in retail
shelf pricing.
GROSS PROFIT: Gross profit increased $1.7 million or 10% from the same
quarter in the previous year. As a percentage of net sales, gross profit
increased to 38.8% for the third quarter of fiscal 2000 from 36.1% in the third
quarter of fiscal 1999. Gross profit for the thirty-nine weeks ended December
25, 1999 was 38.9% compared to 37.2% for the thirty-nine weeks ended December
26, 1998. The increase in margin as a percentage of net sales is related to the
increase in pricing which was implemented during the course of the year.
EXPENSES: Selling, general and administrative (SG&A) expenses,
expressed as a percentage of net sales, increased to 25.3% or $12.5 million
during the third quarter of fiscal 2000 compared to 23.8% or $11.4 million in
the third quarter of fiscal 1999. SG&A expenses, expressed as a percentage of
sales, increased to 33.8% for the thirty-nine weeks ended December 25, 1999 from
31.6% for the thirty-nine weeks ended December 26, 1998. The increases are
attributable to higher occupancy costs which were offset by a decrease in
comparative store operating and personnel costs of $0.8 million.
Net interest expense increased to $1.2 million in the third quarter of fiscal
2000 from $0.8 million in the third quarter of fiscal 1999. The increase is due
to a private placement of $15,000,000 in senior subordinated notes on April 16,
1998, which carry an interest rate of 11.75%. The remaining portion of long-term
debt was financed through the Company's revolving credit facility at an interest
rate of 7.75%. The Company is expensing $1.6 million, the valuation of common
stock warrants issued in connection with the private placement, as interest
expense over a three-year period.
NET INCOME: The Company had net income of $2.7 million, or basic and
diluted earnings per share of $0.53 and $0.50, respectively, in the third
quarter of fiscal 2000 compared to net income of $2.4 million, or basic and
diluted earnings per share of $0.51 and $0.44, respectively, in the same quarter
of fiscal 1999. Net loss for the thirty-nine weeks ended December 25, 2000 was
$(0.7) million, or ($0.14) basic earnings per share, compared to net income of
$0.1 million, or $0.03 basic earnings per share and $0.03 per share diluted, for
the thirty-nine weeks ended December 26, 1998. The decrease in net income from
the prior year is primarily attributable to the costs associated with the
opening of twenty additional stores, increase in interest expense relating to
the $15,000,000 of senior subordinated notes and a decrease in comparative store
sales, which was offset by the increase in gross profit.
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ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INCOME TAXES: The Company's effective tax rate in the third quarter of
fiscal 1999 and 1998 was 36%. As of December 25, 1999 the Company had net
deferred tax assets of $2,143,319. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based on the amount of current and projected taxable
income, management believes it is more likely than not that the Company will
realize the benefits of those deductible differences. The amount of the deferred
tax asset considered realizable could be reduced if estimates of future taxable
income during the carryforward period are reduced.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of fiscal 2000 and 1999 the Company had
net cash provided by operating activities of $11.5 million and $11.9 million,
respectively due to net income and increases in operating liabilities in excess
of operating assets.
The Company made capital expenditures during the first nine months of
fiscal 2000 of $8.6 million, relating to store equipment, fixtures and
leaseholds for eighteen new stores as well as for four expansions, four remodels
and two relocations.
The Company has a five-year revolving credit facility (the "Revolver")
from an institutional lender, which expires June 10, 2003. Advances under the
Revolver bears interest at a floating rate equal to the lender's base rate
(7.75% at December 25, 1999) or Libor rate (5.6175% at December 25, 1999) plus
2.0%. The Company's lender has recently increased the maximum borrowings under
the credit facility from $28,000,000 to $35,000,000, based upon eligible
inventory levels as defined therein. During the months of October through
December 31 of each year, an overadvance in the amount of $1.5 million is
available in addition to the borrowing base as calculated by levels of
inventory.
On April 16, 1998 the Company completed a private placement of
$15,000,000 of senior subordinated notes to a group of institutional lenders.
The notes carry an interest rate of 11.75% payable semi-annually and are due on
April 16, 2001.
Management believes that cash flows from operations and amounts
available under the Revolver will be sufficient to meet the Company's current
liquidity and capital needs at least through fiscal 2000.
YEAR 2000 COMPLIANCE
The Company recognized the material nature of the business issues
surrounding computer processing of dates into and beyond the year 2000 (Y2K) and
began taking corrective action in 1998. The Company's efforts included replacing
and testing Y2K affected mainframe computer code, identifying and resolving
non-mainframe computer code, identifying and resolving non-mainframe computer
hardware and software issues, assessing the Y2K readiness of the Company's
business partners and developing contingency plans. Management believes the
Company has completed all of the activities within its control to ensure that
the Company's systems are Y2K compliant.
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ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company's Y2K readiness costs were approximately $1.5 million. Of
the total costs $1.0 million was capitalized and amortized over the useful lives
of the applicable assets. For the remainder of the costs the Company entered
into an operating lease for approximately $471,000 for a term of 48 months of
which the Company has expensed to date $50,000. The Company funded both the
capital and expensed elements of resolving the Y2K issues through funds
generated from operations.
The Company successfully completed its Y2K rollover without any major
problems or disruptions. All of the Company's stores, logistics operations and
corporate support areas were fully functional subsequent to the Y2K rollover.
The Company is not aware that any of its major business partners have
experienced significant Y2K issues. While the Company believes that it has
pursued the appropriate course of action to ensure Y2K readiness, there can be
no assurances that this objective will be achieved as it relates to its major
business partners.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on Thursday
November 4, 1999 at 9:30 a.m. at the James H. Reed Building, 435 Sixth
Avenue, 9th Floor, Pittsburgh, Pennsylvania at which time the following
matters were voted upon:
1. Four directors were voted on for appointment to the Board. All
four were appointed by virtue of the vote as follows:
William A. Teitelbaum 4,786,669 for 67,057 withheld
Theresa Carlise 4,801,169 for 52,557 withheld
Samuel S. Zacharias 4,803,369 for 50,357 withheld
Irwin B. Goldstein 4,802,229 for 51,497 withheld
2. The ratification of the grant of stock options in June 1996
and July 1997 to William A. Teitelbaum. Having received a
majority of votes present and entitled to vote the options
were ratified by a vote of 2,362,167 for, 225,082 against and
10, 400 abstaining.
3. The appointment of Ernst & Young to audit the Company's
financial statement for the 2000 fiscal year was ratified by a
vote of 4,812,476 for; 38,200 against and 3,050 abstaining.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description Page No.
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11 Calculation of Net Income (Loss) Per Common
Share - For the thirteen and thirty-nine
weeks ended December 25, 1999 and
December 26, 1998 12
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the thirteen
weeks ended December 25, 1999.
SIGNATURE
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 thereto duly authorized.
NATIONAL RECORD MART, INC.
By: /s/ Theresa Carlise
---------------------------------------------
Theresa Carlise
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
Date: February 8, 2000
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