10-Q 1 j8626301e10-q.txt NATIONAL RECORD MART, INC. 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 23, 2000 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, 5,051,667 SHARES OUTSTANDING AS OF FEBRUARY 6, 2001 EXHIBIT INDEX ON PAGE 10. THIS DOCUMENT CONSISTS OF 11 PAGES. 2 NATIONAL RECORD MART, INC. INDEX

NATIONAL RECORD MART, INC. 2 3 NATIONAL RECORD MART, INC. CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements 3 4 NATIONAL RECORD MART, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

See accompanying notes to consolidated financial statements 4 5 NATIONAL RECORD MART, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

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 23, 2000 were of a normal recurring nature. The results of operations for the third quarter ended December 23, 2000 are not necessarily indicative of the results of operations to be expected for the entire fiscal year ending March 31, 2001. Additional information is contained in the Company's audited consolidated financial statements for the year ended March 25, 2000, 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 third quarter ended December 23, 2000 and December 25, 1999, the effective income tax rate is 35% and 36%, respectively. Based on assessment of all available evidence, including the fact that the Company is in a cumulative loss position, management concluded that the deferred tax asset should be reduced by a valuation allowance equal to the net deferred tax asset. A valuation allowance of approximately $4.2 and $3.0 million was recorded in the fourth quarter of fiscal 2000 and the first, second and third quarters of fiscal 2001, respectively. NOTE 4 - REVOLVING CREDIT FACILITY The Company has a revolving credit facility (the "Revolver") which expires on June 10, 2003. The maximum borrowings under the Revolver are $35,000,000 and are based upon eligible inventory levels as defined therein. During the months of October through December 31 of each year, an overadvance 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 $35 million. The interest rate is the bank's borrowing rate (9.50% at December 23, 2000) or Libor (6.66375% at December 23, 2000) 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 $3,500. 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 covenants, as defined, (ii) a restriction on dividends, and (iii) limitation on capital expenditures. The Company received a waiver from its lender for the Cash Flow covenant under the Revolver for the quarter ended December 23, 2000. 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 received a waiver for the Cash Flow covenant relating to the subordinated debt for the quarter ended December 23, 2000. An aggregate principal amount of $7,500,000 of the senior subordinated notes is collateralized, on a basis subordinated to the revolver, by substantially all the assets of the Company, including inventory, property and equipment. NOTE 6 - 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 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. 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 25, 2000 ("fiscal 2000") included in the Company's Form 10K. RESULTS OF OPERATIONS NET SALES: The Company's net sales decreased during the third quarter ended December 23, 2000 of the Company's fiscal year ending March 31, 2001 ("fiscal 2001") by $9.0 million or 18.4%, over the third quarter of fiscal 2000. Net comparable store sales for the third quarter were down 16.1% or $7.5 million. The decrease in total sales is attributable to the 16.1% decrease in comparable store sales. Sales for the thirty-nine weeks ended December 23, 2000 decreased $12.4 million or 11.3% compared to the thirty-nine weeks ended December 25, 1999. Net comparable store sales for the thirty-nine weeks ended December 23, 2000 decreased 11.1% or $11.6 million as compared to the same period in the prior year. The comparative store sales decreases were primarily due to an increase in competition of loss leader mass merchants in key market areas. 7 8 ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) GROSS PROFIT: Gross profit decreased $3.6 million or 19.0% from the same quarter in the previous year. As a percentage of net sales, gross profit decreased to 38.5% for the third quarter of fiscal 2001 from 38.8% in the third quarter of fiscal 2000. Gross profit for the thirty-nine weeks ended December 23, 2000 was 36.9% as compared to 38.9% for the thirty-nine weeks ended December 25, 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 and competitive shelf pricing. EXPENSES: Selling, general and administrative (SG&A) expenses, decreased $274,000 or 2.2% to $12.0 million during the third quarter of fiscal 2001 from $12.3 million in the third quarter of fiscal 2000. Expressed as a percentage of sales, SG&A expenses increased to 30.3% for the third quarter ending December 23, 2000 compared to 25.3% for the quarter ending December 25, 1999. For the thirty-nine weeks ended December 23, 2000, SG&A expenses decreased $500,000 or 1.3% as compared to the same period of the prior year. Expressed as a percentage of sales, SG&A expenses increased to 37.6% for the thirty-nine weeks ended December 23, 2000 compared to 33.8% for the thirty-nine weeks ended December 25, 1999. The increase as a percentage of sales is primarily attributable to the decrease in comparable store sales of 16.1% for the quarter and 11.1% for the thirty-nine weeks. The decrease in SG&A expenses is attributable to personnel and operating costs. Net interest expense increased $155,000 to $1,386,000 in the third quarter of fiscal 2001 from $1,231,000 in the third quarter of fiscal 2000. The increase is due to an increase in borrowings. NET INCOME (LOSS): The Company had a net income of $603,000, or $0.12 per share, in the third quarter of fiscal 2001 compared to a net income of $2,654,000 or $0.53 per share, in the same quarter of fiscal 2000. The net loss for the thirty-nine weeks ended December 23, 2000 was ($8,494,000) or basic net loss per share ($1.68) compared to ($694,000) or ($0.14) per share for the thirty-nine weeks ended December 25, 1999. The increase in the net loss is primarily attributable to the decrease in sales and gross margin and the effect of recording a valuation allowance on the deferred tax asset in the first, second and third quarters of fiscal 2001. INCOME TAXES: The Company's effective tax rate in the third quarter of fiscal 2001 and 2000 was 35% and 36%, respectively. The Company recorded a valuation allowance in the fourth quarter of fiscal 2000 and the first, second and third quarter of fiscal 2001 of approximately $4.2 and $3.0 million, respectively. See Note 3 of notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES During the first nine months of fiscal 2001 and 2000 the Company had net cash provided by operating activities of $5.2 million and $11.5 million, respectively due to the cash loss from operations, more than offset by non-cash charges to operations and changes in operating assets and liabilities. The Company made capital expenditures during the first nine months of fiscal 2001 of $977,000 relating to store equipment, fixtures and leaseholds for one new store, and two 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 bear interest at a floating rate equal to the lender's base rate (9.5% at December 23, 2000) or Libor (6.66375% at December 23, 2000) plus 2.0%. 8 9 ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 2001 which ends March 31, 2001. The Company's ability to meet its liquidity and capital needs after March 31, 2001 will depend primarily upon its ability to refinance the $15,000,000 of senior subordinated notes due April 16, 2001. There can be no assurance that such refinancing will be effected. Forward-Looking Statements. This quarterly report on Form 10-Q contains certain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, and information relating to the Company that are based on the beliefs of the management of the Company as well as assumptions made by and information currently available to the management of the Company. Forward-looking statements can be identified by, among other things, the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "anticipates," "intends" or intentions. Accordingly, any forward-looking statements included therein do not purport to be predictions of future events or circumstances and may not be realized. Subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. 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 21, 2000 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. Six directors were voted on for appointment to the Board. All six were appointed by virtue of the vote as follows: William A. Teitelbaum 4,949,686 for 98,113 withheld Theresa Carlise 4,953,225 for 94,574 withheld Samuel S. Zacharias 4,958,086 for 89,713 withheld Irwin B. Goldstein 4,957,786 for 90,013 withheld Damian Georgino 4,958,486 for 89,313 withheld David Lang 4,980,525 for 67,274 withheld 2 The appointment of Ernst & Young to audit the Company's financial statement for the 2001 fiscal year was ratified by a vote of 5,000,860 for; 43,614 against and 3,325 abstaining. 9 10 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:

(b) Reports on Form 8-K: There was one report on Form 8-K filed during the thirteen weeks ended December 23, 2000. The date of report (date of earliest event reported) was November 10, 2000. The report disclosed, under Item 4 thereof, the resignation on November 10, 2000 of Ernst & Young LLP, the independent accountant previously engaged as the principal accountant to audit the financial statements of the registrant. 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: February 6, 2001 ------------------ 10

NATIONAL RECORD MART INC /DE/ 10-Q