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 26, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
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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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
COMMON STOCK, $.01 PAR VALUE,
5,048,167 SHARES OUTSTANDING AS OF AUGUST 10, 1999
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 26, 1999 (unaudited) and March 27, 1999 3
Statements of Operations: Thirteen Weeks Ended June 26, 1999
and June 27, 1998 (unaudited) 4
Statements of Cash Flows: Thirteen Weeks Ended June 26, 1999
and June 27, 1998 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8-10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signature 11
(2)
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NATIONAL RECORD MART, INC.
CONSOLIDATED BALANCE SHEETS
June 26, March 27,
1999 1999
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Assets (unaudited)
Current assets:
Cash and cash equivalents $ 1,801,926 $ 853,222
Merchandise inventory 51,758,745 44,137,192
Due from stockholder 475,765 494,249
Deferred income taxes 417,000 417,000
Refundable income taxes 1,166,562 229,860
Other current assets 3,600,131 3,358,625
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Total current assets 59,220,129 49,490,148
Property and equipment, at cost 38,504,639 36,014,844
Accumulated depreciation and amortization (18,683,369) (17,771,446)
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Property and equipment, net 19,821,270 18,243,398
Other assets:
Deferred income taxes 1,726,319 1,726,319
Intangibles, net 2,440,826 2,534,646
Other 528,237 499,180
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Total other assets 4,695,382 4,760,145
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Total assets $ 83,736,781 $ 72,493,691
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 24,742,754 $ 15,537,814
Deferred income 1,445,363 1,505,954
Other liabilities and accrued expenses 3,334,154 4,281,331
Current maturities of long-term debt 102,168 106,695
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Total current liabilities 29,624,439 21,431,794
Long-term debt:
Notes payable - subordinated 13,956,830 13,845,464
Revolving credit facility 26,148,990 21,373,000
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Total long-term debt 40,105,820 35,218,464
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 9,000,000 shares authorized, 5,494,984
and 5,494,384 shares issued at June 26, 1999 and March 27, 1999
and 5,048,167 and 5,049,567 outstanding at June 26, 1999, and
March 27, 1999 54,950 54,944
Additional paid-in capital 15,860,416 15,858,922
Retained earnings (239,619) 1,590,432
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15,675,747 17,504,298
Less treasury stock, 446,817 and 444,817 shares at June 26, 1999 and
March 27,1999, respectively (1,669,225) (1,660,865)
Total stockholders' equity 14,006,522 15,843,433
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Total liabilities and stockholders' equity $ 83,736,781 $ 72,493,691
============ ============
See accompanying notes to consolidated financial statements
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NATIONAL RECORD MART, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Thirteen Thirteen
Weeks Ended Weeks Ended
June 26, June 27,
1999 1998
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Net sales $ 30,300,457 $ 24,435,235
Cost of sales 19,008,331 15,020,462
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Gross profit 11,292,126 9,414,773
Selling, general and administrative expenses 12,080,976 9,775,673
Depreciation and amortization 1,074,562 813,545
Interest expense 991,393 701,751
Interest income (7,374) (11,311)
Other expense (income) 12,718 38,295
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Total expenses 14,152,275 11,317,953
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Loss before income taxes (2,860,149) (1,903,180)
Income tax benefit 1,030,098 685,125
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Net loss $ (1,830,051) $ (1,218,055)
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Basic net loss per share $ (.36) $ (.25)
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Diluted net loss per share $ (.36) $ (.25)
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Weighted average number of common shares
and common equivalent shares
outstanding 5,048,167 4,844,624
============ ============
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 26, June 27,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,830,051) $ (1,218,055)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,074,562 813,545
Accretion of notes payable for value assigned to warrants 111,366 111,366
Other -- 7,733
Changes in operating assets and liabilities:
Merchandise inventory (7,621,553) (3,757,133)
Other assets (1,201,438) (2,578,497)
Accounts payable 9,204,940 4,683,266
Other liabilities and accrued expenses (1,007,768) (357,945)
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Net cash used in operating activities (1,269,942) (2,295,720)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,564,441) (2,308,126)
Amounts repaid by (loaned to) stockholders 18,484 (17,841)
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Net cash used in investing activities (2,545,957) (2,325,967)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on debt (35,032,525) (44,359,139)
Borrowings on revolving line of credit 39,803,988 49,206,504
Exercise of options 1,500 --
Purchases of Treasury Stock (8,360) --
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Net cash provided by financing activities 4,764,603 4,847,365
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Net increase in cash and cash equivalents 948,704 225,678
Cash and cash equivalents, beginning of period 853,222 384,304
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Cash and cash equivalents, end of period $ 1,801,926 $ 609,982
============ ============
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 26, 1999 were of
a normal recurring nature. The results of operations for the first quarter ended
June 26, 1999 are not necessarily indicative of the results of operations to be
expected for the entire fiscal year ending March 25, 2000. Additional
information is contained in the Company's audited consolidated financial
statements for the year ended March 27, 1999, included in the Company's Form 10K
and should be read in conjunction with this quarterly report.
The Consolidated Financial Statements include the accounts of the Company and
its wholly owned subsidiary, National Record Mart Investments, Inc., a Delaware
holding company. All intercompany accounts and transactions have been eliminated
in consolidation.
NOTE 2 - SEASONALITY
The Company's business is seasonal in nature, with the highest sales and
earnings occurring in the third quarter of its fiscal year, which includes the
Christmas selling season. 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 26, 1999 and June 27, 1998, the effective
income tax rate is 36%.
NOTE 4 - REVOLVING CREDIT FACILITY
The Company has a revolving credit facility (the "Revolver") which expires on
June 10, 2003. The maximum borrowings under the Revolver are $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
June 26, 1999) or Libor (5.0925% at June 26, 1999) plus 2.0%. The Company is
required to pay a monthly commitment fee of .25% per annum on the unused portion
of the Revolver and a monthly collateral monitoring fee of $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. 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 fiscal 1999, both the 400,000 and
39,990 warrants were exercised.
NOTE 6 - ASSET PURCHASE
On May 4, 1998, the Company purchased certain of the assets of Record Den Inc.
and DJK Records & Video Inc., totaling four stores. The acquisition was
accounted for using the purchase method of accounting for a purchase price of
approximately $933,000 resulting in $195,000 of goodwill which is being
amortized using the straight line method over 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
NOTE 7 - ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees" and the related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123 (FASB 123), "Accounting for Stock-Based Compensation,"
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options is greater than the market price of the
underlying stock on the date of the grant, no compensation expense is
recognized.
(7)
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ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included elsewhere in this
report and with the Company's audited consolidated financial statements and
notes thereto for the fiscal year ended March 27, 1999 ("fiscal 1999") included
in the Company's Form 10K.
RESULTS OF OPERATIONS
NET SALES: The Company's net sales increased during the first quarter
(ended June 26, 1999) of the Company's fiscal year ending March 25, 2000
("fiscal 2000") by $5,865,222, or 24.0%, over the first quarter of fiscal 1999.
Net comparable store sales for the first quarter were up 2.5% or $585,215. The
increase in total sales is attributable to the 2.5% increase in same store sales
and the opening of 32 stores, which was partially offset by the closing of 6
stores. 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 $1,877,353 or 19.9% from the same
quarter in the previous year. As a percentage of net sales, gross profit
decreased to 37.3% for the first quarter of fiscal 2000 from 38.5% in the first
quarter of fiscal 1999. 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, which as a percentage of sales represents 0.65%
of the reduction, and competitive shelf pricing.
EXPENSES: Selling, general and administrative (SG&A) expenses,
expressed as a percentage of net sales, decreased to 39.9% during the first
quarter of fiscal 2000 from 40.0% in the first quarter of fiscal 1999. 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 $293,579 to $984,019 in the first quarter of
fiscal 2000 from $690,440 in the first quarter of fiscal 1999. The increase is
due to a private placement of $15,000,000 in senior subordinated notes on April
16, 1998, which 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 ($1,830,051), or ($0.36) per
share, in the first quarter of fiscal 2000 compared to a net loss of
($1,218,055) or ($0.25) per share, in the same quarter of fiscal 1999. The
increase in the net loss is primarily attributable to the costs associated with
the opening and financing of 32 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 26, 1999 the Company had net deferred tax assets of
$2,143,000. 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
(8)
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ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 2000 and 1999 the Company had
net cash used in operating activities of $1,296,942 and $2,295,720, 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 2000 of $2,564,441, relating to store equipment, fixtures and leaseholds
for nine new stores, and four remodels and expansions.
The Company has a five-year revolving credit facility (the "Revolver")
from an institutional lender, which expires June 10, 2003. Advances under the
Revolver bears interest at a floating rate equal to the lender's base rate
(7.75% at June 26, 1999) or Libor (5.0925% at June 26, 1999) plus 2.0%.
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 credit facilities will be sufficient to meet the Company's
current liquidity and capital needs at least through fiscal 2000.
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 point of sale information systems will need
to be upgraded. The Company has selected a replacement system, which will be
installed beginning in August 1999 and anticipates completion before the
Christmas selling season. 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 55% completed. It is anticipated that such reprogramming will
be completed by September 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 five largest suppliers dominate
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the music distribution industry. The Company is also dependent on normal
telecommunications and banking systems and is relying upon the providers of such
services 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 181 stores) or
$1.7 million. These costs are expected to be incurred in the first and second
quarter of the fiscal year ending March 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 $262,505. 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 suppliers' year 2000 difficulties.
Such a plan, however, has not yet been developed. We cannot assure you that our
efforts will prevent all consequences and there may be undetermined future costs
due to business disruption that may be caused by suppliers or unforeseen
circumstances.
(10)
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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 26, 1999 and June 27, 1998 12
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the thirteen
weeks ended June 26, 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
NATIONAL RECORD MART, INC.
By: /s/ Theresa Carlise
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Theresa Carlise
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
Date: August 10, 1999
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(11)