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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 SEPTEMBER 26, 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,
4,750,079 SHARES OUTSTANDING AS OF NOVEMBER 10, 1998
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: September 26, 1998 (unaudited) and March 28, 1998 3
Statements of Operations: Thirteen and Twenty-six Weeks Ended
September 26, 1998 (unaudited) and September 27, 1997 (unaudited) 4
Statements of Cash Flows: Twenty-six Weeks Ended September 26, 1998
(unaudited) and September 27, 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 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
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NATIONAL RECORD MART, INC.
CONSOLIDATED BALANCE SHEETS
September 26, March 28,
1998 1998
------------ -----------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 232,537 $ 384,304
Merchandise inventory 44,304,704 37,000,610
Due from stockholder 448,170 399,544
Deferred income taxes 343,000 343,000
Refundable income taxes 58,489 63,522
Other current assets 5,484,411 1,886,692
------------ ------------
Total current assets 50,871,311 40,077,672
Property and equipment, at cost 28,942,477 25,108,592
Accumulated depreciation and amortization (16,116,971) (15,006,851)
------------ ------------
Property and equipment, net 12,825,506 10,101,741
Other assets:
Deferred income taxes 984,000 984,000
Intangibles, net 1,756,073 1,001,845
Other 358,698 374,810
------------ ------------
Total other assets 3,098,771 2,360,655
------------ ------------
Total assets $ 66,795,588 $ 52,540,068
============ ============
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 18,934,513 $ 12,327,619
Other liabilities and accrued expenses 3,903,120 3,659,547
Current maturities of long-term debt 47,912 17,127
Income taxes payable -- 181,782
------------ ------------
Total current liabilities 22,885,545 16,186,075
Long-term debt:
Notes payable 3,144 12,301
Notes payable - subordinated 13,622,732 --
Revolving credit facility 14,561,586 19,383,236
------------ ------------
Total long-term debt 28,187,462 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, 5,054,671 and 5,037,916
shares issued at September 26, 1998, and March 28, 1998, respectively, 4,750,079
and 4,844,624 outstanding at September 26, 1998, and March 28, 1998, respectively 50,547 50,379
Warrants to purchase common stock 1,600,000 --
Additional paid-in capital 14,057,120 14,057,288
Retained earnings 984,131 3,281,773
------------ ------------
16,691,798 17,389,440
Less treasury stock, 304,592 and 193,292 shares, respectively (969,217) (430,984)
------------ ------------
Total stockholders' equity 15,722,581 16,958,456
------------ ------------
Total liabilities and stockholders' equity $ 66,795,588 $ 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 Twenty-six Twenty-six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net sales $26,367,759 $23,690,788 $50,802,994 $44,703,736
Cost of sales 16,353,216 14,723,878 31,373,678 27,699,215
----------- ----------- ----------- -----------
Gross profit 10,014,543 8,966,910 19,429,316 17,004,521
Selling, general and administrative expenses 9,997,491 8,981,528 19,773,164 17,416,392
Depreciation and amortization 836,941 691,910 1,650,486 1,402,964
Interest expense 808,509 487,602 1,510,260 948,777
Interest income (9,572) (9,198) (20,883) (18,478)
Other expenses (income) 68,029 51,416 106,324 (90,324)
----------- ----------- ----------- -----------
Total expenses 11,701,398 10,203,258 23,019,351 19,659,331
----------- ----------- ----------- -----------
Net loss before income taxes (1,686,855) (1,236,348) (3,590,035) (2,654,810)
Income tax benefit 607,268 445,086 1,292,393 955,733
----------- ----------- ----------- -----------
Net loss $(1,079,587) $ (791,262) (2,297,642) (1,699,077)
=========== =========== =========== ===========
Basic net loss per share $ (0.22) $ (0.16) $ (0.47) $ (0.35)
=========== =========== =========== ===========
Diluted net loss per share $ (0.22) $ (0.16) $ (0.47) $ (0.35)
=========== =========== =========== ===========
Weighted average number of common shares
and common equivalent shares
outstanding 4,838,918 4,844,624 4,841,771 4,844,624
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements
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NATIONAL RECORD MART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Twenty-six Twenty-six
Weeks Ended Weeks Ended
September 26, September 27,
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,297,642) $ (1,699,077)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,650,486 1,402,964
Accretion of notes payable for value assigned to warrants 222,732 --
Other 41,911 32,093
Changes in operating assets and liabilities:
Merchandise inventory (7,304,094) (7,960,500)
Other assets (4,472,231) (1,246,794)
Accounts payable 6,606,894 7,724,213
Other liabilities and accrued expenses 57,009 (698,713)
------------ ------------
Net cash used in operating activities (5,494,935) (2,445,814)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (4,269,951) (1,090,537)
Other long term assets -- (30,295)
Amounts loaned to stockholders (48,626) (35,754)
------------ ------------
Net cash used in investing activities (4,318,577) (1,156,586)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on debt (74,535,734) (53,207,997)
Borrowings on revolving line of credit 69,735,712 56,502,324
Borrowings on subordinated notes payable 15,000,000 --
Purchases of treasury stock (538,233) --
------------ ------------
Net cash provided by financing activities 9,661,745 3,294,327
------------ ------------
Net decrease in cash and cash equivalents (151,767) (308,073)
Cash and cash equivalents, beginning of period 384,304 834,889
------------ ------------
Cash and cash equivalents, end of period $ 232,537 $ 526,816
============ ============
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 second quarter ended September 26, 1998
were of a normal recurring nature. The results of operations for the second
quarter ended September 26, 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.
NOTE 3 - INCOME TAXES
The Company provides for income taxes in interim periods on an estimated basis.
For the second quarter ended September 26, 1998 and September 27, 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 $28,000,000. The interest rate is the bank's borrowing rate (8.50% at
September 26, 1998) plus .25% or Libor (5.59375% at September 26, 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.
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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 28, 1998 ("fiscal 1998") included
in the Company's Form 10K.
RESULTS OF OPERATIONS
- ---------------------
NET SALES: The Company's net sales increased during the second quarter
(ended September 26, 1998) of the Company's fiscal year ending March 27, 1999
("fiscal 1999") by $2.7 million, or 11.3%, over the second quarter of fiscal
1998. Net comparable store sales for the second quarter were up 2.3% or $0.5
million. The increase in total sales was attributable to the 2.3% increase in
same store sales, as well as the operation of nine additional stores in the
second quarter of fiscal 1998. Sales for the twenty-six weeks ended September
26, 1998 increased $6.1 million or 13.6%. Net comparable store sales for the
twenty-six weeks ended September 26, 1998 were up 6.2% or $2.7 million compared
to the twenty-six weeks ended September 27, 1997. The 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 $1.0 million or 11.7% from the
same quarter in the previous year. As a percentage of net sales, gross profit
increased to 38.0% for the second quarter of fiscal 1999 from 37.8% in the
second quarter of fiscal 1998. Gross profit for the twenty-six weeks ended
September 26, 1998 was 38.2% compared to 38.0% for the twenty-six weeks ended
September 27, 1997. 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
sales of higher margin cassettes to lower margin compact discs.
EXPENSES: Selling, general and administrative (SG&A) expenses,
expressed as a percentage of net sales, remained the same at 37.9% or $10.0
million during the second quarter of fiscal 1999 compared to 37.9% or $9.0
million in the second quarter of fiscal 1998. SG&A expenses, expressed as a
percentage of sales, decreased to 38.9% for the twenty six weeks ended September
26, 1998 from 39.0% for the twenty six weeks ended September 27, 1997. The
decrease expressed as a percentage of sales is attributable to the closing of
under-performing stores and comparable store sales increases.
Net interest expense increased to $798,937 in the second quarter of fiscal 1999
from $478,404 in the second 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 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 8.75% 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 LOSS: The Company had a net loss of ($1.1) million, or basic net
loss per share of ($0.22), in the second quarter of fiscal 1999 compared to a
net loss of ($.8) million, or ($0.16) per share, in the same quarter of fiscal
1998. The net loss for the twenty-six weeks ended September 26, 1998 was ($2.3)
million, or basic net loss per share of ($0.47), compared to ($1.7) million, or
($0.35) per share, for the twenty-six weeks ended September 27, 1997. The
increase in the net loss is primarily attributable to the costs associated with
the opening and financing of 18 additional stores. The new store sales have not
yet matured proportionately to their expenses. Typically new stores become
profitable after their first twelve months of sales, which includes the
Christmas selling season.
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INCOME TAXES: The Company's effective tax rate in the second 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 six months of fiscal 1999 and 1998 the Company had net
cash used by operating activities of $5.5 million and $2.4 million, respectively
due to merchandise inventory purchasing, purchase of other assets, and the loss
from operations.
The Company made capital expenditures during the first six months of
fiscal 1999 of $4.3 million, relating to store equipment, fixtures and
leaseholds for twelve new stores as well as for three expansions and five
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 bear interest at a floating rate equal to the lender's base rate (8.50%
at September 26, 1998) plus .25% or Libor rate (5.59375% at September 26, 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 Revolver will be sufficient to meet the Company's current
liquidity and capital needs at least through fiscal 1999.
YEAR 2000 COMPLIANCE
- --------------------
State of Readiness. The Company has completed evaluation of its
information technology issues relative to computer programs being unable to
distinguish between the year 1900 and the year 2000. As a result of such review,
the Company has concluded that its inventory management and point of sale
information systems will need to be upgraded. The Company has selected
replacement systems, which will be installed beginning in February 1999.
Subsequent to such installation, testing will be conducted of such systems to
verify year 2000 compliance. In addition, the Company has determined that
reprogramming of certain of its other proprietary information systems programs
will be required. Such reprogramming has begun and is approximately 15 %
completed. It is anticipated that such reprogramming will be completed by March
1999, after which time testing of such reprogrammed systems for year 2000
compliance will be conducted.
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ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 COMPLIANCE (CONTINUED)
- --------------------------------
The Company's evaluation of year 2000 issues relating to
non-information technology systems, such as embedded microchips and automatic
processors, is substantially completed. The Company has not yet identified any
material problems in this area.
The Company is dependent upon music suppliers from whom it purchases
products. Based upon informal inquiries, the Company believes that year 2000
issues will not pose material problems with respect to such suppliers continuing
to do business with the Company on customary terms and conditions. If such
problems arise, the Company has no practical alternatives to dealing with its
existing suppliers, as the six largest suppliers dominate the music distribution
industry. The Company is also dependent on normal telecommunications and banking
systems and is relying upon the furnishers of such systems not encountering
material difficulties with regard to year 2000 compliance.
Costs to Address Year 2000 Issues. The costs of the required upgrade of
the Company's inventory management and point of sale systems is expected to be
approximately $10,000 per store (currently the Company operates 157 stores) or
$1.6 million. These costs are expected to be incurred in the fiscal year ended
March 1999, but will, where appropriate, be capitalized over the useful lives of
the applicable assets. The Company to date has incurred capitalized costs of
$80,000. The Company does not expect to incur material costs in internally
reprogramming its other information systems software.
Risks of Year 2000 Issues. The Company believes that the most
reasonably likely worst case scenario with regard to year 2000 matters would
relate to the effect that year 2000 issues would have upon music suppliers to
the Company. If such suppliers were unable to continue to do business with the
Company on comparable terms as conducted in the past, the Company's business
could be materially adversely affected.
The Company's Contingency Plan. The Company has begun discussions with
its suppliers to provide assurance of business continuation in the event of year
2000 issues, with a view to developing a plan for continuing the Company's
access to music product in the event of the supplier's year 2000 difficulties.
Such a plan, however, has not yet been developed.
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,
September 17, 1998 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 4,839,279 for 12,235 against
Theresa Carlise 4,839,379 for 12,135 against
Samuel S. Zacharias 4,839,279 for 12,235 against
Irwin B. Goldstein 4,837,879 for 13,635 against
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The appointment of Ernst & Young to audit the Company's financial
statement for the 1999 fiscal year was ratified by a vote of
4,844,504 for; 4,300 against and 2,710 abstaining
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 and twenty-six
weeks ended September 26, 1998 and
September 27, 1997
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the thirteen weeks
ended September 26, 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
-------------------------------------------
Theresa Carlise
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
Date: November 10, 1998
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