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 27, 1998
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.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2782687
(State or jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
507 FOREST AVENUE
CARNEGIE, PENNSYLVANIA 15106-2873
(Address of principal executive offices, including zip code)
(412-276-6200)
(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,
4,844,624 SHARES OUTSTANDING AS OF AUGUST 11, 1998
EXHIBIT INDEX ON PAGE 10.
THIS DOCUMENT CONSISTS OF 11 PAGES.
NATIONAL RECORD MART, INC.
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INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheets: June 27, 1998 (unaudited) and March 28, 1998 3
Statements of Operations: Thirteen Weeks Ended June 27, 1998
and June 28, 1997 (unaudited) 4
Statements of Cash Flows: Thirteen Weeks Ended June 27, 1998
and June 28, 1997 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
Signature 10
NATIONAL RECORD MART, INC.
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CONSOLIDATED BALANCE SHEETS
June 27, March 28,
1998 1998
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Assets (unaudited)
Current assets:
Cash and cash equivalents $ 609,982 $ 384,304
Merchandise inventory 40,757,743 37,000,610
Due from stockholder 417,385 399,544
Deferred income taxes 343,000 343,000
Refundable income taxes 63,419 63,522
Other current assets 3,812,301 1,886,692
----------- -----------
Total current assets 46,003,830 40,077,672
Property and equipment, at cost 27,220,820 25,108,592
Accumulated depreciation and amortization (15,576,125) (15,006,851)
----------- -----------
Property and equipment, net 11,644,695 10,101,741
Other assets:
Deferred income taxes 984,000 984,000
Intangibles, net 1,591,944 1,001,845
Other 383,987 374,810
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Total other assets 2,959,931 2,360,655
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Total assets $60,608,456 $52,540,068
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $17,010,885 $12,327,619
Other liabilities and accrued expenses 3,485,775 3,659,547
Current maturities of long-term debt 135,507 17,127
Income Taxes payable - 181,782
----------- -----------
Total current liabilities 20,632,167 16,186,075
Long-term debt:
Notes payable 7,774 12,301
Notes payable - subordinated 13,511,366 -
Revolving credit facility 9,116,748 19,383,236
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Total long-term debt 22,635,888 19,395,537
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued - -
Common stock, $.01 par value, 9,000,000 shares authorized, 5,037,916 shares
issued at June 27, 1998 and March 28, 1998, 4,844,624 outstanding
at June 27, 1998, and March 28, 1998 50,379 50,379
Warrants to Purchase Common Stock 1,600,000 -
Additional paid-in capital 14,057,288 14,057,288
Retained earnings 2,063,718 3,281,773
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17,771,385 17,389,440
Less treasury stock, 193,292 shares (430,984) (430,984)
----------- -----------
Total stockholders' equity 17,340,401 16,958,456
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Total liabilities and stockholders' equity $60,608,456 $52,540,068
=========== ===========
See accompanying notes to consolidated financial statements
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NATIONAL RECORD MART, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Thirteen Thirteen
Weeks Ended Weeks Ended
June 27, June 28,
1998 1997
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Net sales $24,435,235 $21,012,948
Cost of sales 15,020,462 12,975,337
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Gross profit 9,414,773 8,037,611
Selling, general and administrative expenses 9,775,673 8,434,864
Depreciation and amortization 813,545 711,054
Interest expense 701,751 461,175
Interest income (11,311) (9,280)
Other expense (income) 38,295 (141,740)
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Total expenses 11,317,953 9,456,073
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Net loss before income taxes (1,903,180) (1,418,462)
Income tax benefit 685,125 510,647
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Net loss $(1,218,055) $ (907,815)
=========== ===========
Basic net loss per share $ (.25) $ (.19)
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Diluted net loss per share $ (.25) $ (.19)
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Weighted average number of common shares
and common equivalent shares
outstanding 4,844,624 4,844,624
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See accompanying notes to consolidated financial statements
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NATIONAL RECORD MART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Thirteen Thirteen
Weeks Ended Weeks Ended
June 27, June 28,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,218,055) $ (907,815)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 813,545 711,055
Accretion of notes payable for value assigned to warrants 111,366 -
Other 7,733 5,611
Changes in operating assets and liabilities:
Merchandise inventory (3,757,133) (2,723,310)
Other assets (2,578,497) 15,327
Accounts payable 4,683,266 2,822,319
Other liabilities and accrued expenses (357,945) (937,448)
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Net cash used in operating activities (2,295,720) (1,014,261)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,308,126) (478,166)
Other long term assets - (15,148)
Amounts loaned to stockholders (17,841) (16,156)
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Net cash used in investing activities (2,325,967) (509,470)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on debt (44,359,139) (25,378,623)
Borrowings on revolving line of credit 49,206,504 26,496,005
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Net cash provided by financing activities 4,847,365 1,117,382
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Net increase (decrease) in cash and cash equivalents 225,678 (406,349)
Cash and cash equivalents, beginning of period 384,304 834,889
------------ ------------
Cash and cash equivalents, end of period $ 609,982 $ 428,540
============ ============
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 first quarter ended June 27, 1998 were of
a normal recurring nature. The results of operations for the first quarter ended
June 27, 1998 are not necessarily indicative of the results of operations to be
expected for the entire fiscal year ending March 27, 1999. Additional
information is contained in the Company's audited consolidated financial
statements for the year ended March 28, 1998, 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 27, 1998 and June 28, 1997, 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 $28,000,000 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 total borrowings under this facility shall not exceed the
limit of $28 million. The interest rate is the bank's borrowing rate (8.50% at
June 27, 1998) plus .25% or Libor (5.65625% at June 27, 1998) plus 2.375%. 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
$2,750. 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 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 will be accreted as additional interest expense over the term of the
note.
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 $495,000 resulting in $145,000 of goodwill which is being
amortized using the straight line method over 15 years, $320,000 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.
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. 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 - EARNINGS PER SHARE
In February 1997, The Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", which was effective for the Company for fiscal 1998.
This statement establishes and simplifies the standards for computing and
presenting earnings per share ("EPS") and makes them comparable to international
EPS standards. Statement No. 128 replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement. Earnings per share amounts for all
periods have been restated to give effect to the application of FASB 128. The
effect of the restatement on earnings per share for the restated periods is
immaterial.
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 28, 1998 ("fiscal 1998") included
in the Company's Form 10K.
RESULTS OF OPERATIONS
NET SALES: The Company's net sales increased during the first quarter
(ended June 27, 1998) of the Company's fiscal year ending March 27, 1999
("fiscal 1999") by $3,422,287, or 16.3%, over the first quarter of fiscal 1998.
Net comparable store sales for the first quarter were up 10.7% or $2,188,392.
The increase in total sales is attributable to the 10.7% increase in same store
sales and the opening of 20 stores, which was partially offset by the closing of
10 stores. The
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ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
comparative store sales increases were primarily due to the increase in product
selection, the Company's marketing efforts and consumer demand.
GROSS PROFIT: Gross profit increased $1,377,162 or 17.1% from the same
quarter in the previous year. As a percentage of net sales, gross profit
increased to 38.5% for the first quarter of fiscal 1999 from 38.3% in the first
quarter of fiscal 1998. The slight increase in margin as a percentage of net
sales is related to the Company's increase in purchase discounts and the
increase in shelf pricing on CD's which were partially offset by the continued
shift from higher margin cassettes to lower margin compact discs.
EXPENSES: Selling, general and administrative (SG&A) expenses,
expressed as a percentage of net sales, decreased to 40.0% during the first
quarter of fiscal 1999 from 40.1% in the first quarter of fiscal 1998. The
decrease expressed as a percentage of sales is attributable to the increase in
same-store sales and the closing of ten under performing stores.
Net interest expense increased $238,545 to $690,440 in the first
quarter of fiscal 1999 from $451,895 in the first quarter of fiscal 1998. The
increase is due to a private placement of $15,000,000 in senior subordinated
notes on April 16, 1998, which carries 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 8.75%. The Company is expensing $1.6 million,
the valuation of common stock warrants for accounting purposes, in consideration
of the private placement as interest expense over a three year period.
NET LOSS: The Company had a net loss of ($1,218,055), or ($0.25) per
share, in the first quarter of fiscal 1999 compared to a net loss of ($907,815)
or ($0.19) per share, in the same quarter of fiscal 1998. The increase in the
net loss is primarily attributable to the costs associated with the opening and
financing of 20 additional stores. The new store sales have not matured
proportionately to their expenses. Typically new stores become profitable after
their first twelve months of sales, which includes the Christmas selling season.
INCOME TAXES: The Company's effective tax rate in the first quarter of
fiscal 1999 and 1998 was 36%.
As of June 27, 1998 the Company had net deferred tax assets of
$1,327,000. 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 three months of fiscal 1999 and 1998 the Company had
net cash used in operating activities of $2,295,720 and $1,014,261, respectively
due to merchandise inventory purchasing, purchase of other assets, amortization
of private placement costs and the loss from operations.
The Company made capital expenditures during the first three months of
fiscal 1999 of $2,308,126, relating to store equipment, fixtures and leaseholds
for ten new stores, and six remodels and expansions.
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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. Advances under the
Revolver bears interest at a floating rate equal to the lender's base rate
(8.50% at June 27, 1998) plus .25% or Libor (5.65625 at June 27, 1998) plus
2.375.
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. The Company anticipates using the funds to expand its Waves
Music store concept and other retail store growth with the addition of
approximately 30 new stores in fiscal 1999, update its point of sale equipment,
create a new sales market with on-line Internet music sales and general working
capital purposes.
Management believes that cash flows from operations and amounts
available under the credit facilities will be sufficient to meet the Company's
current liquidity and capital needs at least through fiscal 1999.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description Page No.
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11 Calculation of Net Loss Per
Common Share - For the thirteen weeks
ended June 27, 1998 and June 28, 1997 11
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the thirteen
weeks ended June 27, 1998.
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: August 11, 1998
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