1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
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 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
--- ---
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,
4,651,529 SHARES OUTSTANDING AS OF FEBRUARY 9, 1999
EXHIBIT INDEX ON PAGE 11.
THIS DOCUMENT CONSISTS OF 12 PAGES.
2
NATIONAL RECORD MART, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheets: December 26, 1998 (unaudited) and March 28, 1998 3
Statements of Operations: Thirteen and Thirty-nine Weeks Ended
December 26, 1998 (unaudited) and December 27, 1997 (unaudited) 4
Statements of Cash Flows: Thirty-nine Weeks Ended December 26, 1998
(unaudited) and December 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 7-10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signature 11
2
3
NATIONAL RECORD MART, INC.
CONSOLIDATED BALANCE SHEETS
December 26, March 28,
1998 1998
------------ ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 5,586,865 $ 384,304
Merchandise inventory 50,233,528 37,000,610
Due from stockholder 475,418 399,544
Deferred income taxes 343,000 343,000
Refundable income taxes 57,811 63,522
Other current assets 3,778,686 1,886,692
------------ ------------
Total current assets 60,475,308 40,077,672
Property and equipment, at cost 32,960,805 25,108,592
Accumulated depreciation and amortization (16,889,272) (15,006,851)
------------ ------------
Property and equipment, net 16,071,533 10,101,741
Other assets:
Deferred income taxes 984,000 984,000
Intangibles, net 2,361,811 1,001,845
Other 318,524 374,810
------------ ------------
Total other assets 3,664,335 2,360,655
------------ ------------
Total assets $ 80,211,176 $ 52,540,068
============ ============
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 34,977,931 $ 12,327,619
Other liabilities and accrued expenses 6,537,203 3,659,547
Current maturities of long-term debt 16,727 17,127
Income taxes payable 144,212 181,782
------------ ------------
Total current liabilities 41,676,073 16,186,075
Long-term debt:
Notes payable -- 12,301
Notes payable - subordinated 13,734,098 --
Revolving credit facility 7,022,284 19,383,236
------------ ------------
Total long-term debt 20,756,382 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 shares issued at December 26, 1998 and 5,037,916 shares
issued at March 28, 1998, 4,660,729 outstanding at December 26,
1998, and 4,844,624 outstanding at March 28, 1998 50,547 50,379
Warrants to purchase common stock 1,600,000 --
Additional paid-in capital 14,057,120 14,057,288
Retained earnings 3,425,935 3,281,773
------------ ------------
19,133,602 17,389,440
Less treasury stock, 393,942 and 193,292 shares, respectively (1,354,881) (430,984)
------------ ------------
Total stockholders' equity 17,778,721 16,958,456
------------ ------------
Total liabilities and stockholders' equity $ 80,211,176 $ 52,540,068
============ ============
See accompanying notes to consolidated financial statements
3
4
NATIONAL RECORD MART, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Thirteen Thirteen Thirty-nine Thirty-nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
December 26, December 27, December 26, December 27,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net sales $47,715,531 $41,706,057 $98,518,525 $86,409,793
Cost of sales 30,508,609 26,311,654 61,882,287 54,010,869
----------- ----------- ----------- -----------
Gross profit 17,206,922 15,394,403 36,636,238 32,398,924
Selling, general and administrative
expenses 11,365,629 9,605,104 31,138,793 27,021,496
Depreciation and amortization 894,566 695,967 2,545,052 2,098,931
Interest expense 819,725 535,573 2,329,985 1,484,350
Interest income (10,086) (9,565) (30,969) (28,043)
Other expenses (income) 321,769 60,473 428,093 (29,851)
----------- ----------- ----------- -----------
Total expenses 13,391,603 10,887,552 36,410,954 30,546,883
----------- ----------- ----------- -----------
Net income before income taxes 3,815,319 4,506,851 225,284 1,852,041
Income tax expense 1,373,515 1,622,466 81,122 666,733
----------- ----------- ----------- -----------
Net income 2,441,804 2,884,385 144,162 1,185,308
=========== =========== =========== ===========
Basic net income per share $0.51 $0.60 $0.03 $0.24
===== ===== ===== =====
Diluted net income per share $0.44 $0.56 $0.03 $0.23
===== ===== ===== =====
Basic weighted average common shares
Outstanding 4,793,184 4,844,624 4,788,803 4,844,624
=========== =========== =========== ===========
Weighted average number of common shares
and common equivalent shares
outstanding 5,603,273 5,151,044 5,559,067 5,054,736
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements
4
5
NATIONAL RECORD MART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Thirty-nine Thirty-nine
Weeks Ended Weeks Ended
December 26, December 27,
1998 1997
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 144,162 $ 1,185,308
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 2,545,052 2,098,931
Interest capitalization 16,140 --
Loss from disposal of property and equipment 70,384 75,671
Accretion of notes payable for value assigned to warrants 334,098 --
Other 7,173 --
Changes in operating assets and liabilities:
Merchandise inventory (13,232,918) (6,129,174)
Other assets (3,503,055) (540,470)
Accounts payable 22,650,312 12,213,438
Other liabilities and accrued expenses 2,870,483 1,392,703
Income taxes payable (37,570) 733,341
------------- ------------
Net cash provided by operating activities 11,864,261 11,029,748
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (8,288,276) (2,001,885)
Other long term assets -- (28,580)
Amounts loaned to stockholders (75,874) (41,917)
------------- ------------
Net cash used in investing activities (8,364,150) (2,072,382)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on debt (124,282,723) (97,758,500)
Borrowings on revolving line of credit 111,909,070 89,812,140
Borrowings on subordinated notes payable 15,000,000 --
Purchases of treasury stock (923,897) --
------------- ------------
Net cash provided by (used in) financing activities 1,702,450 (7,946,360)
------------- ------------
Net increase in cash and cash equivalents 5,202,561 1,011,006
Cash and cash equivalents, beginning of period 384,304 834,889
------------- ------------
Cash and cash equivalents, end of period $ 5,586,865 $ 1,845,895
============= ============
See accompanying notes to consolidated financial statements
5
6
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 26, 1998 were
of a normal recurring nature. The results of operations for the third quarter
ended December 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results may differ from those estimates.
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 26, 1998 and December 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 million. The interest rate is the bank's borrowing rate (7.75% at
December 26, 1998) plus .25% or Libor (5.6175% at December 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.
6
7
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.
The Company has issued 39,990 warrants for an additional expense of $205,000 in
the third quarter of fiscal 99. The additional warrants are a settlement for
the delay in the effective date of registering the 400,000 warrants noted above
with the SEC.
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.
On November 13, 1998, the Company purchased certain of the assets of Happy Town
Inc. and Tempo Records, totaling twelve stores. The acquisition was accounted
for using the purchase method of accounting for a purchase price of
approximately $1,475,300 resulting in $747,800 of goodwill which is being
amortized using the straight line method over 15 years, $677,500 for purchased
assets and a $50,000 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.
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 third quarter
(ended December 26, 1998) of the Company's fiscal year ending March 27, 1999
("fiscal 1999") by $6.0 million, or 14.4%, over the third quarter of fiscal
1998. Net comparable store sales for the third quarter were up 2.8% or $1.1
million. The increase in total sales was attributable to the 2.8% increase in
same store sales, as well as the operation of a net twenty-four additional
stores in the third quarter of fiscal 1999. Sales for the thirty-nine weeks
ended December 26, 1998 increased $12.1 million or 14.0%. Net comparable store
sales for the thirty-nine weeks ended December 26, 1998
7
8
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
were up 4.5% or $3.8 million compared to the thirty-nine weeks ended December
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 $1.8 million or 11.8% from the
same quarter in the previous year. As a percentage of net sales, gross profit
decreased to 36.1% for the third quarter of fiscal 1999 from 36.9% in the third
quarter of fiscal 1998. Gross profit for the thirty-nine weeks ended December
26, 1998 was 37.2% compared to 37.5% for the thirty-nine weeks ended December
27, 1997. The slight decrease in margin as a percentage of net sales is related
to 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, increased to 23.8% or $11.4 million
during the third quarter of fiscal 1999 compared to 23.0% or $9.6 million in the
third quarter of fiscal 1998. SG&A expenses, expressed as a percentage of sales,
increased to 31.6% for the thirty-nine weeks ended December 26, 1998 from 31.3%
for the thirty-nine weeks ended December 27, 1997. The increase expressed as a
percentage of sales is attributable to costs associated with a net twenty-four
additional stores of which sales have not yet matured proportionately to
expenses and increases in occupancy and personnel costs.
Net interest expense increased to $809,639 in the third quarter of fiscal 1999
from $526,008 in the third 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 8.0%. 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 $2.4 million, or basic and
diluted earnings per share, respectively, of $0.51 and $0.44 in the third
quarter of fiscal 1999 compared to a net income of $2.9 million, or basic and
diluted earnings per share of $0.60 and $0.56, in the same quarter of fiscal
1998. Net income for the thirty-nine weeks ended December 26, 1998 was $.1
million, or $0.03 per share basic and $0.03 per share diluted, compared to $1.2
million, or $0.24 per share basic and $0.23 per share diluted, for the
thirty-nine weeks ended December 27, 1997. The decrease in net income for the 39
weeks ended December 26, 1998 is primarily attributable to the costs associated
with the opening of thirty-two additional stores, increase in interest expense
relating to the $15,000,000 of senior subordinated notes, which was offset by an
adjustment to selling and general administration expense of $424,445. This
adjustment represents a settlement under renewal of a data retrieval contract
with a third party to provide data on the Company's consumer purchases. 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.
INCOME TAXES: The Company's effective tax rate in the third 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.
8
9
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the first nine months of fiscal 1999 and 1998 the Company had
net cash provided by operating activities of $11.9 million and $11.0 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 1999 of $8.3 million, relating to store equipment, fixtures and
leaseholds for thirty-one new stores as well as for four expansions and eight
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 (7.75%
at December 26, 1998) plus .25% or Libor rate (5.6175% at December 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.
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 March 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 40% completed. It is
anticipated that such reprogramming will be completed by May 1999, after which
time testing of such reprogrammed systems for year 2000 compliance will be
conducted.
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.
9
10
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 COMPLIANCE (CONTINUED)
- --------------------------------
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 174 stores) or
$1.7 million. These costs are expected to be incurred in the fiscal year ended
March 1999 and the first quarter of fiscal 2000, but will, where appropriate, be
capitalized and amortized 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.
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 Income Per Common
Share - For the thirteen and thirty-nine
weeks ended December 26, 1998 and
December 27, 1997 12
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the thirteen weeks
ended December 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: /s/ THERESA CARLISE
--------------------------------------------
Theresa Carlise
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
Date: February 9, 1999
11