1
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 JUNE 30, 2001
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,
5,051,667 SHARES OUTSTANDING AS OF SEPTEMBER 5, 2001
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: June 30, 2001 (unaudited) and March 31, 2001 3
Statements of Operations: Thirteen Weeks Ended June 30, 2001
and June 24, 2000 (unaudited) 4
Statements of Cash Flows: Thirteen Weeks Ended June 31, 2001
and June 24, 2000 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8-10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signature 11
(2)
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NATIONAL RECORD MART, INC.
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2001 2001
------------ ------------
Assets (unaudited) (unaudited)
Current assets:
Cash and cash equivalents $ 791,383 $ 1,232,449
Merchandise inventory 38,225,796 41,153,818
Due from stockholder 389,916 382,860
Other current assets 987,119 932,158
------------ ------------
Total current assets 40,394,214 43,701,285
Property and equipment, at cost 38,815,175 38,964,286
Accumulated depreciation and amortization (21,422,722) (20,631,943)
------------ ------------
Property and equipment, net 17,392,453 18,332,343
Other assets:
Intangibles, net 1,802,473 1,858,028
Other 524,694 539,600
------------ ------------
Total other assets 2,327,167 2,397,628
------------ ------------
Total assets $ 60,113,834 $ 64,431,256
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 30,620,950 $ 25,583,207
Other liabilities and accrued expenses 5,598,775 6,156,435
Current maturities of long-term debt 15,009,697 15,027,027
------------ ------------
Total current liabilities 51,229,422 46,766,669
Long-term debt:
Notes payable 129,050 131,584
Revolving credit facility 23,433,592 25,682,174
------------ ------------
Total long-term debt 23,562,642 25,813,758
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 9,000,000 shares authorized, 5,498,484
issued at June 30, 2001 and March 31, 2001 and 5,051,167
outstanding at June 30, 2001, and March 31, 2001 54,985 54,985
Additional paid-in capital 15,902,474 15,902,474
Retained earnings (28,966,464) (22,437,405)
------------ ------------
(13,009,005) (6,479,946)
Less treasury stock, 446,817 shares at June 30, 2001 and
March 31, 2001 (1,669,225) (1,669,225)
------------ ------------
Total stockholders' equity (14,678,230) (8,149,171)
------------ ------------
Total liabilities and stockholders' equity $ 60,113,834 $ 64,431,256
============ ============
See accompanying notes to consolidated financial statements
(3)
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NATIONAL RECORD MART, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Thirteen Thirteen
Weeks Ended Weeks Ended
June 30, June 24,
2001 2000
----------- -----------
Net sales $20,633,051 $30,230,906
Cost of sales 13,372,352 19,475,385
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Gross profit 7,260,699 10,755,521
Selling, general and administrative expenses 10,892,278 12,404,706
Depreciation and amortization 1,069,860 1,228,373
Interest expense 1,071,029 1,293,608
Interest income (7,729) (9,517)
Other expense (income) 764,320 14,831
----------- -----------
Total expenses 13,789,758 14,932,001
----------- -----------
Loss before income taxes (6,529,059) (4,176,480)
Income tax benefit -- --
----------- -----------
Net loss $(6,529,059) $(4,176,480)
=========== ===========
Basic net loss per share $ (1.29) $ (.83)
=========== ===========
Diluted net loss per share $ (1.29) $ (.83)
=========== ===========
Weighted average number of common shares
and common equivalent shares
outstanding 5,051,667 5,051,667
=========== ===========
See accompanying notes to consolidated financial statements
(4)
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NATIONAL RECORD MART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Thirteen Thirteen
Weeks Ended Weeks Ended
June 30, June 24,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (6,529,059) $ (4,176,480)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,069,860 1,228,373
Deferred Income Taxes -- 1,452,560
Accretion of notes payable for value assigned to warrants 32,006 137,676
Other -- 1,450
Loss from disposal of property and equipment 40,186 --
Changes in operating assets and liabilities:
Merchandise inventory 2,928,022 497,931
Other assets (44,426) (1,161,801)
Accounts payable 5,037,743 628,353
Other liabilities and accrued expenses (557,660) (1,184,103)
------------ ------------
Net cash provided by (used in) operating activities 1,976,672 (2,576,041)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (110,230) (770,632)
Amounts (loaned to) repaid by stockholders (7,056) 16,816
------------ ------------
Net cash used in investing activities (117,286) (753,816)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on debt (23,453,178) (34,630,659)
Borrowings on revolving line of credit 21,152,726 37,919,643
------------ ------------
Net cash (used in) provided by financing activities (2,300,452) 3,288,984
------------ ------------
Net decrease in cash and cash equivalents (441,066) (40,843)
Cash and cash equivalents, beginning of period 1,232,449 1,935,092
------------ ------------
Cash and cash equivalents, end of period $ 791,383 $ 1,894,219
============ ============
See accompanying notes to consolidated financial statements
(5)
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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 first quarter ended June 30, 2001 were of
a normal recurring nature. The results of operations for the first quarter ended
June 30, 2001 are not necessarily indicative of the results of operations to be
expected for the entire fiscal year ending March 30, 2002. Additional
information is contained in the Company's consolidated financial statements for
the year ended March 31, 2001, 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. The Company has historically operated at a loss in the
first quarter of its fiscal year.
NOTE 3 - INCOME TAXES
The Company provides for income taxes in interim periods on an estimated basis.
For the first quarter ended June 30, 2001 and June 24, 2000, the effective
income tax rate is 0 and 35%, respectively. For income tax purposes, National
Record Mart, Inc. and its subsidiary have approximately $33.3 million of net
operating losses available to offset against future taxable income, subject to
certain limitations. Such losses expire beginning in 2019 - 2021.
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 is available in
addition to the borrowing base as calculated by levels of inventory in the
amount of $1.5 million. In any event, the total borrowings under this facility
shall not exceed the limit of $35 million. 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 lender under the Revolver
has agreed to continue to extend credit under the Revolver on an interim basis
during the pendancy of the bankruptcy proceedings. The Bankruptcy Court has
authorized such financing on an interim basis pending a hearing on September 12,
2001.
The Revolver also contains various financial and other covenants that place
restrictions or limitations on the Company and its subsidiaries, 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. The covenants have been waived through August 15, 2001. On August
15, 2001, the Company consented to the entry of an Order for Relief under
Chapter 11 of the Bankruptcy Code. This constitutes an event of default under
the revolver.
(6)
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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 Originally, the notes carried an interest rate of
11.75% payable semiannually and matured April 15, 2001. By agreement dated April
13, 2001, the maturity of the notes was extended to October 15, 2001, the
interest payment due on April 15, 2001 was deferred until October 15, 2001,
certain financial covenants were waived and the noteholders agreed to forbear
from the enforcement of remedies resulting from the failure to make interest
payments through but not including October 12, 2001. The forbearance obligation
terminates upon certain events of default, including a bankruptcy filing by the
company, which occurred on August 15, 2001 when the Company consented to an
Order for Relief under Chapter 11 of the Bankruptcy Code. In consideration of
the placement, the Company issued 400,000 common stock warrants with an exercise
price of $0.01. The Company has allocated $1,600,000 of value for accounting
purposes to the warrants, which has been recorded as a reduction of the
$15,000,000 and has been fully amortized as of April 16, 2001. This reduction
was accreted as additional interest expense over the term of the note. The
Company has 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 the year ended March 27, 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 15 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 15 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 15 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),
(7)
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NATIONAL RECORD MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
"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.
NOTE 8 - LITIGATION
On June 19, 2001, an involuntary petition under Title 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") was filed against the Company in the
United States Bankruptcy Court for the Western District of Pennsylvania
requesting relief under Chapter 7 (the "Involuntary Petition"). The Involuntary
Petition was filed by five of the Company's major suppliers: Universal Music and
Video Distribution, Inc., BMG Distribution, EMI Music Distribution, Sony Music
Entertainment, Inc. and Warner/Elektra/Atlantic (WEA) Corporation. The
Involuntary Petition indicates that the five suppliers hold an aggregate of
approximately $18,753,000 of claims against the Company incurred in the ordinary
course of their respective supply relationship with the Company. On August 15,
2001, the Company consented to an Order for Relief under Chapter 11 of the
Bankruptcy Code. For additional discussion of the impact of the Involuntary
Petition on the Company see "Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Liquidity and Capital
Resources."
Additionally, the Company is involved, from time to time, in lawsuits that arise
in the normal course of business. The Company actively and vigorously defends
all lawsuits. Management believes there are no such lawsuits that will have a
material effect on the Company's financial position.
NOTE 9 - CONCENTRATION OF BUSINESS RISKS
The Company purchases inventory for its stores from approximately 250 suppliers,
with approximately 66% of purchases being made from five suppliers. As of
January of 2001, the Company has been operating without shipments from two of
its major suppliers and has decreased its purchasing from the remaining three.
The Company has increased the amount of purchases made through other suppliers
at a higher cost in order to maintain inventory levels. The Company's
advertising programs for the same period, have been adversely effected by the
decrease in purchases from its five major suppliers. These five major suppliers
filed the Involuntary Petition against the Company as discussed in Note 8.
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 consolidated financial statements and notes
thereto for the fiscal year ended March 31, 2001 ("fiscal 2001") included in the
Company's Form 10K.
RESULTS OF OPERATIONS
NET SALES: The Company's net sales decreased during the first quarter
(ended June 30, 2001) of the Company's fiscal year ending March 30, 2002
("fiscal 2002") by $9.6 million or 31.8%, over the first quarter of fiscal 2001.
Net comparable store sales for the first quarter were down 23.6% or $6.4
million. The decrease in total sales is attributable to the closing of 47 stores
and the 23.6% decrease in same store sales. The comparative store
(8)
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ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
sales decreases were primarily due to the Company's efforts to rebalance its
inventory mix and to become less dependent on the cyclical nature of hit
product.
GROSS PROFIT: Gross profit decreased $3.5 million or 32.0% from the
same quarter in the previous year. As a percentage of net sales, gross profit
decreased to 35.2% for the first quarter of fiscal 2002 from 35.6% in the first
quarter of fiscal 2001. The decrease in margin as a percentage of sales is
related to the continued shift of consumer preference from higher margin
cassettes to lower margin CD's , competitive shelf pricing and the Company's
inability to buy directly from its major suppliers.
EXPENSES: Selling, general and administrative (SG&A) expenses,
decreased $1.5 million from $12.4 million in the first quarter if fiscal 2001 to
$10.9 million in 2002. The decrease is attributable to the closing of 47 stores.
Expressed as a percentage of net sales, selling, general and administrative
(SG&A) expenses increased to 52.8% during the first quarter of fiscal 2002 from
41.0% in the first quarter of fiscal 2001. The increase expressed as a
percentage of sales is attributable to the decrease in same-store sales of 23.6%
and an increase in same store occupancy costs.
Net interest expense decreased $221,000 to $1,063,000 in the first quarter of
fiscal 2002 from $1,284,000 in the first quarter of fiscal 2001. In
consideration of the private placement of $15,000,000 in senior subordinated
notes on April 16, 1998, the Company issued 400,000 common stock warrants with
an exercise price of $0.01. The Company has allocated $1,600,000 of value for
accounting purposes to the warrants, which have been recorded as a reduction of
the $15,000,000. This reduction was accreted as additional interest expense over
the term of the note and was fully amortized on April 16, 2001.
NET LOSS: The Company recorded a net loss of $6.5 million, or ($1.29)
per share, in the first quarter of fiscal 2002 compared to a net loss of $4.2
million or ($0.83) per share, in the same quarter of fiscal 2001. The increase
in the net loss is primarily attributable to the decrease in total sales due to
47 less stores and a decrease in compartive store sales of 23.6%. Included in
the net loss is approximately $703,000 in restructuring costs for the first
quarter ended June 30, 2001.
INCOME TAXES: The Company's effective tax rate in the first quarter of
fiscal 2002 and 2001 was 0 and 35%, respectively. For income tax purposes,
National Record Mart, Inc. and its subsidiary have approximately $33.3 million
of net operating losses available to offset against future taxable income,
subject to certain limitations. Such losses expire beginning in 2019 - 2021.
LIQUIDITY AND CAPITAL RESOURCES
During the first three months of fiscal 2002 and 2001 the Company had
net cash provided by (used in) operating activities of $1,976,672 and
($2,576,041) respectively. The change was primarily due to a reduction in
inventory and an increase in accounts payable, while being offset by the net
loss.
The Company made capital expenditures during the first three months of
fiscal 2002 of $110,230 relating primarily to sortation equipment in its
Distribution Center.
(9)
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ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company has a five-year revolving credit facility (the "Revolver")
from an institutional lender, which expires June 10, 2003. As of February 6,
2001, advances under the Revolver bear interest at a floating rate equal to the
lender's base rate (8.75% at June 30, 2001) plus two percentage points or Libor
(3.75% at June 30, 2001) plus four percentage points. On August 15, 2001, the
Company consented to the entry of an Order for Relief under Chapter 11 of the
Bankruptcy Code. This constitues an event of default under the Revolver. The
lender under the Revolver has agreed to continue to exdent credit under the
Revolver on an interim basis during the pendancy of the bankruptcy proceedings.
The Bankruptcy Court has authorized such financing on an interim basis pending a
hearing on September 12, 2001.
On April 16, 1998, the Company secured a private placement of
$15,000,000 in senior subordinated notes Originally, the notes carried an
interest rate of 11.75% payable semiannually and matured April 15, 2001. By
agreement dated April 13, 2001, the maturity of the notes was extended to
October 15, 2001, the interest payment due on April 15, 2001 was deferred until
October 15, 2001, certain financial covenants were waived and the noteholders
agreed to forbear from the enforcement of remedies resulting from the failure to
make interest payments through but not including October 12, 2001. The
forbearance obligation terminates upon certain events of default, including a
bankruptcy filing by the company, which occurred on August 15, 2001 when the
Company consented to an Order for Relief under Chapter 11 of the Bankruptcy
Code. In consideration of the placement, the Company issued 400,000 common stock
warrants with an exercise price of $0.01. The Company has allocated $1,600,000
of value for accounting purposes to the warrants, which has been recorded as a
reduction of the $15,000,000. This reduction was accreted as additional interest
expense over the term of the note and has been fully amortized as of April 16,
2001. The Company has 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 the year ended March 27, 1999, both
the 400,000 and 39,990 warrants were exercised.
As a debtor-in-possession, the Company is conducting normal business
operations subject to the jurisdiction of the Bankruptcy Court. As a
debtor-in-possession, the Company may not engage in transactions outside the
ordinary course of business without approval of the Bankruptcy Court.
Under Chapter 11, actions to enforce certain claims against the Company
are stayed if the claims arose, or are based on, events that occurred on or
before the date of the Involuntary Petition. The ultimate terms of settlement of
these claims will be determined in accordance with a plan of reorganization,
which requires voting of the impaired prepetition creditors and stockholders and
confirmation by the Bankruptcy Court. Other liabilities may arise or be subject
to compromise as a result of rejection of executory contracts, or unexpired
leases, or the Bankruptcy Court's resolution of claims for contingencies and
disputed amounts. The ultimate resolution of such liabilities, all of which are
subject to compromise, will be a part of the reorganization plan filed with the
Bankruptcy Court under Chapter 11.
A plan of reorganization would include a capital structure that will
enable the Company to generate sufficient cash flow after reorganization to meet
its restructured obligations. Accordingly, the rights of prepetition creditors
and the ultimate payment of their claims may be substantially changed, or even
eliminated under the Bankruptcy Code. It is not possible at this time to predict
the ultimate outcome of a reorganization under Chapter 11 or its effects on the
Company's business or on the interest of creditors or stockholders.
(10)
11
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description Page No.
----------- ----------- --------
11 Calculation of Net Loss Per
Common Share - For the thirteen weeks
ended June 30, 2001 and June 24, 2000 12
(b) Reports on Form 8-K:
On August 27, 2001, the Company filed a Form 8-K to report
that on August 15, 2001, the Company consented to the entry of an
Order for Relief of the United States Bankruptcy Cort for the
Western District of Pennsylvania under Chapter 11 of the Bankruptcy
Code.
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: Theresa Carlise
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Theresa Carlise
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
Date: September 5, 2001
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(11)