<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 30, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-22074
NATIONAL RECORD MART, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 11-2782687
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
507 FOREST AVENUE, CARNEGIE, PENNSYLVANIA 15106
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 276-6200
Securities registered pursuant to Section 12 (b) of the Act: none
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $0.01 PAR VALUE.
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 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 report(s)), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained herein, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes X No
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on June 14,
1996 as reported on the NASDAQ National Market System, was approximately
$8,670,670. Shares of Common Stock held by each officer and director and by
each person who owns more than 5% of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. The determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of June 14, 1996, Registrant had outstanding 4,871,176 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
stockholders to be held September 18, 1996 (the "Proxy Statement") are
incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
National Record Mart, Inc. (the "Company"), a Delaware corporation,
founded in 1937, is a specialty retailer of home entertainment products,
including compact discs ("CD"), prerecorded audio cassettes, videos and related
accessories. The Company is the ninth largest specialty retailer of prerecorded
music in the country as measured by number of stores and is the leading
specialty music retailer in its core western Pennsylvania/eastern Ohio market.
As of March 30, 1996, the Company operated 151 stores in 27 states
primarily in the eastern part of the United States. The Company has developed
four distinct store concepts, each of which targets a different customer base:
National Record Mart or NRM Music, focusing on the 12-28 year old demographic
and located primarily in enclosed shopping malls; Waves Music, designed to
appeal to the adult consumer with locations in upscale retail centers; Music
Oasis, a larger, value-price oriented store featuring a broad music selection
for the heavy music user, typically located in strip centers or freestanding
locations as a destination store and Vibes Music, a college-based concept with
an eclectic product mix geared to appeal to students situated on campus.
The Company intends to focus on: margin improvement; merchandising
enhancements; and participation in the expected consolidation within the retail
music industry. The Company expects to improve margins as a result of changes
in the product mix with a shift in emphasis away from highly competitive
products toward more profitable core products. The Company expects to further
enhance margins through retail price increases, cross marketing efforts,
targeted marketing promotions and more aggressive purchasing practices. The
mature consumer will be the focus of the Company's merchandising strategies,
which appeal to the changing demographics of the marketplace.
The Company opened 16 new stores and closed 6 under performing units
for a net gain of 10 stores during fiscal 1996. Expansion in fiscal 1997 will
be at a reduced rate as compared to fiscal 1996 and fiscal 1995. It is unlikely
the Company will participate in additional significant growth as a result of
incremental store openings. Rather, the Company intends to focus its attention
and endeavors in attempting to be a participant in the consolidation of the
music retail sector. It is the Company's belief that acquisition opportunities
may present opportunities for more efficient use of the Company's capital, with
greater potential rates of return on investment.
Certain statements in this annual report on Form 10-K are
forward-looking statements concerning the future operations of the Company.
Such statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, and there are many important factors
that could cause actual results to differ materially from those in the
forward-looking statements.
TRENDS AND CHANGES AFFECTING THE MUSIC INDUSTRY
The consumer conversion from cassette to CD continues to be the
predominant trend in the music retail industry. CD sales for the Company
approached 62% for the year ended March 30, 1996, compared to 59% for the prior
year. CDs traditionally carry a lower margin than cassettes.
In calendar year 1995, the industry continued to be impacted by the
"Big Box" retail phenomenon. "Big Box" retail chains make greater use of
prerecorded music as an incremental product line to customers not necessarily
shopping for prerecorded music. In the more aggressive instances, "Big Box"
retailers used music as a loss leader offering to attract customer traffic for
other parts of their retail offerings. Typical cross selling would involve a
retailer selling music at or below cost in order to attract
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significant numbers of customers into its stores for the purpose of selling
electronics equipment or home appliances.
A reduction in the number of specialty retail music stores began in
calendar 1995, which appears to be continuing in calendar 1996.
SEASONALITY
The Company's business is seasonal, with its highest sales and net
income levels historically occurring during the third quarter of its fiscal
year, which includes the Christmas selling season.
MERCHANDISING
The Company's stores offer a full assortment of CDs, prerecorded audio
cassettes, movie and music videos and related accessories. The following table
shows the percentage of the Company's total merchandise sales attributable to
each product group:
<TABLE>
<CAPTION>
Products Fiscal Years
- - --------
1996 1995 1994
--------- --------- -------
<S> <C> <C> <C>
CDs 61.6% 59.0% 53.6%
Prerecorded audio cassettes 22.1 28.0 32.6
Singles 6.9 5.1 6.2
Movie and music videos 2.4 2.7 2.4
Accessories and other * 7.0 5.2 5.2
--------- --------- -------
Total 100.0% 100.0% 100.0%
-------- -------- --------
</TABLE>
* Includes apparel, blank tapes, cleaning products, storage cases, posters,
sheet music, LPs, magazines, books and miscellaneous items.
Prerecorded Music. The Company's stores offer a broad array of CDs and
cassettes in all major music categories, including rock, pop, alternative,
country, easy listening, classical, jazz, religious, new age, rhythm and blues,
children's, educational, show tunes and movie soundtracks and world music. The
Company maintains a broad inventory base, with individual store inventory
tailored to serve the particular customer demand in each store. The Company's
stores offer from 6,000 to 35,000 titles, with an average of 15,000 titles per
store. The selection of prerecorded music offered at the Company's stores
includes "hits" which are best selling newer releases, "catalog" items, which
are older but still popular releases, and seasonal and promotional items such
as Christmas music, developing artist programs and "cut-outs" (low-priced items
which have been deleted from a manufacturer's current catalog).
Prerecorded Videocassettes. The Company's stores offer for sale a
selection of prerecorded videocassettes, including instructional, exercise,
children, sports, music and movies.
Accessories and Other Products. The Company's stores carry a variety
of accessories such as blank video and audio cassette tapes, maintenance and
cleaning products, home and portable storage cases, sheet music, posters,
T-shirts, magazines, books and other items.
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TICKETS
To increase customer traffic, the Company offers tickets in most of
its stores located in certain markets, including Pittsburgh, Youngstown,
Cleveland, Cincinnati, Columbus, Dayton, Madison, Chicago, Louisville, and
Milwaukee. The Company's ticket outlets provide customers with access to
tickets offered by Ticketmaster as well as tickets to other local concerts and
sporting events.
ADVERTISING
The Company supports prerecorded music products through multimedia
advertising programs. The Company's product advertising is paid for by
cooperative programs funded by manufacturers. Advertising programs utilize
store signs, point of purchase displays, mall circulars, in-store flyers,
billboards, busboards, print, radio and television advertisements and
sponsorships. In addition, the Company exposes its customers to new artists
through its "No Risk Music" program. "No Risk Music" features releases by new
artists in pop and alternative formats and new releases by established artists
in other genres.
The Company intends to introduce a new marketing promotional concept
whose intent is to reduce the ultimate cost of product to the end consumer and
at the same time increase the average purchase, dollar-wise. The program is
intended to combine cross promotional pricing incentives with participating
retailers and manufacturers.
The Company has engaged the services of a specialty graphics design
firm as well as a store design firm to create a clear consistent visual
presentation in all current stores, and future new units.
CUSTOMER SERVICE
The Company is committed to the highest quality of store customer
service. To this extent a new position of Director of Sales was created whose
main objective is to provide increased levels of accountability as it relates
to customer service. To support this endeavor a restructured human resources
department and field management team has been implemented. Among the objectives
of these changes is to upscale or improve the diversity and maturity of our
store employees, to appeal to a broader demographic.
STORE EXPANSION STRATEGY
The Company added 16 stores in fiscal 1996, and closed 6 stores which
were performing under the Company's expectations. During fiscal 1995, the
Company opened 32 locations, 4 of which were seasonal and closed for the winter
months, one of which was opened at Christmas as a kiosk only, and permanently
closed 4 stores. The Company anticipates opportunistic expansion during fiscal
1997, although it has no binding agreement to do so at this time. The Company
also may enlarge existing stores and selectively expand into new geographic
areas, should the opportunities arise.
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INVENTORY MANAGEMENT
Management of the Company is dependent on its proprietary interactive
management information system (MIS) and point of sale (POS) systems, FOCUS
1000. This combined system permits complete sales data and customer
transactions to interact with its purchasing, inventory control and accounting
functions. The Company seeks to make more efficient use of the capabilities of
the FOCUS 1000 system. The Company is continually upgrading and enhancing the
capabilities of FOCUS 1000 and believes the system has adequate capacity to
manage 300 stores without significant incremental overhead cost.
Inventory Management System. FOCUS 1000 fully integrates the Company's
purchasing, warehousing, distribution, pricing and sales information, enabling
the Company to set the appropriate quantity and mix of products in each of its
stores, turn over inventory more quickly, minimize returns to suppliers and
limit out-of-stock situations. Individual store sale profiles are utilized to
set overall purchase quantities and store-by-store allocations of new releases,
current hits and catalog products. These profiles are periodically updated
based on sales trends and demand patterns. In addition to utilizing FOCUS 1000,
stock levels are also monitored by the Company's product distribution group to
further assure appropriate store inventory levels, as well as providing
micro-marketing capabilities.
Substantially all of the products sold by the Company are bar-coded.
Retail transactions and inventory shipped by vendors directly to stores are
captured through point-of-sale terminals at each store with data transmitted
nightly to the Company's central computer. This perpetual inventory system,
coupled with FOCUS 1000's replenishment system, determines target in-stock
levels for each store.
Distribution. The Company operates one distribution center from which
store inventories are replenished and items are returned to manufacturers.
FOCUS 1000 also permits inter-store transfers of inventory to achieve improved
stock balancing without requiring products to be routed through the Company's
distribution facility.
Shipments from the distribution center and between stores are normally
made weekly, with more frequent shipments made to stores having very high
inventory turnover and to most stores during the Christmas shopping season.
Shipments are made by Company-owned vehicles and by commercial shipping
services such as United Parcel Service. Certain new releases and other products
are shipped directly by manufacturers to the Company's stores.
SUPPLIERS AND PURCHASING
A substantial portion of the Company's music products are purchased
directly from the six major music distributors. They include: Sony Music;
Warner/Elektra/Atlantic (subsidiary of Time Warner); BMG Music (subsidiary of
Bertelsman); UNI Distribution; PGD (subsidiary of Philips) and EMD (subsidiary
of Thorn-EMI). These six majors account for a substantial majority of shipments
to the Company. As is typical in its industry, the Company has no long-term
purchase contracts with its suppliers.
The Company has recognized a trend of increased sales and purchases of
nonmajor music distributor products, more commonly referred to as independent
products. For fiscal year 1996, independent-related product mix accounted for
27.4% of the Company's total purchases as compared to 23.0% for the prior
fiscal year.
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Vendors generally permit the Company to return and exchange products
for other titles carried by the vendors subject to certain volume limitations
and penalties. Return and exchange privileges apply only as long as a
particular title and format is in the manufacturer's current catalog. Prior to
removal of titles and formats from their current catalog, manufacturers give
customers approximately 60 to 90 days advance notice of such deletion. Upon
receipt of such notice, the Company can use the information stored in FOCUS
1000 to determine the number of units to be returned and from which locations.
Major vendors generally offer some form of price protection in the
event the wholesale price of current stock is reduced. Typically, vendors will
either (i) provide product credit, advertising credit or free goods to cover
the difference between the original price and the reduced price, (ii) provide
additional discounts on new products, (iii) allow the Company to return older
products for the original (higher) cost or (iv) notify the Company in advance
of price reductions and give the Company a period of time to sell the product
or return it for full credit.
These industry practices of return and exchange privileges, catalog
change notice and price protection permit the Company to carry a wider
selection of music titles and at the same time reduce the risk of carrying
inventory. The exchange privilege practices of manufacturers have been changed
in the past and may change in the future.
The major music vendors offer retailers a returns incentive/
disincentives plan that has been beneficial for the Company. To encourage
retailers to buy carefully by limiting returns, a .7% to 2.4% incentive discount
is issued on every cassette and compact disc purchased and a disincentive of 5%
to 15% is issued on only the product returned. If the retailers'
returns-to-purchases with the major vendors are lower than 14% to 17% (the
break-even as determined by dividing the incentive by the disincentive), the
retailer earns additional discounts by retaining what incentives were already
earned. The Company's returns percentages have been lower than the break-even
with the majority of its major vendors allowing the Company to benefit from
their returns policies.
As part of FOCUS 1000, the Company utilizes electronic data
interchange (EDI) with its major vendors. This direct computer link enables
automatic and immediate transmission of purchase orders and, with certain
vendors, return requests, expediting their execution.
COMPETITION
The retail sale of home entertainment products is highly competitive
and fragmented. The Company competes with national and regional home
entertainment product chains, mass merchandisers, electronic retail chains,
discount stores, warehouse clubs, music, video and other home entertainment
product stores and mail order clubs. Some of the Company's competitors have
substantially greater resources than the Company. The largest mail order clubs
are affiliated with major manufacturers of prerecorded music and may have
advantageous marketing arrangements with their affiliates. In addition, the
Company's products may compete with other forms of entertainment, such as
movies, concerts, sporting events, cable television and video games.
The Company believes that its ability to compete successfully depends
on offering broad product selection, securing convenient sites, maintaining
attractive locations, managing merchandise efficiently, establishing and
maintaining name recognition, pricing its products competitively and providing
effective customer service and management.
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TRADEMARKS
The Company operates its stores under various names, including
National Record Mart, NRM Music, Waves Music, Music Oasis, Vibes Music, Waves
Music and Gifts, Surplus Sounds, One Stop Entertainment, Merle's Record Rack,
Music For You and Music X. The Company has registered its trademarks for Waves
Music, NRM Music and Oasis Music & Video and has applied for registration of
its trademark in Vibes Music. The application for registration of the trademark
Vibes Music has been objected to by two parties. The Company is currently
seeking court approval that no infringement issues exist. The trade names One
Stop Entertainment, Merle's Record Rack, and Music For You were acquired
through an acquisition in November 1993 and will eventually be changed to NRM
Music.
PERSONNEL
As of March 30, 1996, the Company employed 1,324 persons, 136 of whom
worked at the Company's headquarters (including 7 part-time employees) or were
area supervisors and 1,188 of whom worked at the Company's stores (including
797 part-time employees). The Company also adds part-time personnel during the
Christmas season. In December 1995, the Company employed approximately 262
seasonal employees. None of the Company's employees are represented by a union.
The Company believes that its employee relations are good.
ITEM 2. PROPERTIES
Corporate Headquarters and Distribution Facility. The Company's
headquarters and distribution center is located in Carnegie, Pennsylvania, a
suburb of Pittsburgh. This leased facility consists of approximately 60,000
square feet of distribution and warehouse space and 10,000 square feet of
office space on approximately 3.5 acres of land. Management believes that its
distribution center can service up to 350 stores with a minimal increase in
personnel and fixtures. The Company's lease expires on April 30, 2005 and
provides for rental payments of an average of approximately $162,000 per year.
Store Leases. All of the Company's stores are subject to operating
leases with various remaining terms, including renewal options, through the
year 2011. The leases have initial terms ranging from 5 to 15 years, with the
average initial term being 8 years. The Company's store leases typically
provide for a fixed minimum rental, payable monthly, plus payment of a
percentage of gross receipts in excess of certain sales levels and common area
maintenance, real estate taxes and other charges. Certain of the Company's mall
store leases contain provisions permitting the landlord to relocate the
Company's store or terminate the lease upon failure to achieve specified
minimum sales levels or upon certain other conditions. In addition, many leases
restrict the Company from opening new stores within a specified mileage radius.
The following table lists the number of leases for the Company's stores due to
expire in each calendar year, including renewal options:
<TABLE>
<S> <C> <C> <C>
1996 9 2000 17
1997 8 2001 20
1998 19 2002 15
1999 26 2003 and thereafter 37
</TABLE>
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ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Company is a party
or to which any of its properties is subject, other than routine litigation
incidental to its business which is covered by insurance or which is not
expected to have a material adverse effect on the Company's financial condition
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1996.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
executive officers of the Company as of June 14, 1996.
<TABLE>
<CAPTION>
Name Age Office with the Company
---- --- -----------------------
<S> <C> <C> <C>
William A. Teitelbaum 45 Chairman, President and
Director
Theresa Carlise 37 Senior Vice President, CFO,
Treasurer and Director
Larry Mundorf 47 Executive Vice President and COO
George Balicky 46 Vice President of Merchandising
Lynda J. Huffman 52 Secretary and Audit Manager
</TABLE>
William Teitelbaum has served as Chairman of the Company since 1986 and has
served as President since 1991. He also served as Vice President and Treasurer
from 1986 to 1991. From 1980 to 1985, he was a partner of Bear Stearns & Co. In
addition, since 1985, Mr. Teitelbaum has been the sole shareholder and Chairman
of Remsen Partners, Ltd., a New York investment firm.
Theresa Carlise joined the Company in July of 1986 as a financial systems
consultant and subsequently became Controller of the Company in 1987. She
served as Vice President of Finance of the Company from April 1990 to April
1993, when she became Senior Vice President, Chief Financial Officer and a
Director of the Company. Since January of 1991, she has also served as
Treasurer of the Company.
Larry Mundorf joined NRM in January of 1996 as Executive Vice President and
Chief Operating Officer. Mr. Mundorf spent 23 years with Camelot Music, Inc.
rising through the ranks to Senior Vice President of Operations and Director.
In 1991, he joined manufacturer Alpha Enterprises, located in Canton, Ohio, a
supplier to the music and video industry, as Vice President of Marketing until
1995.
George Balicky is Vice President of Merchandising. Mr. Balicky has served with
the Company in various capacities since 1970, including Director of
Advertising, Director of Store Operations and Vice President of Merchandising.
He is a member of the Retailers Advisory Board of the National Association of
Recording Merchandisers. He has been Vice President of Merchandising since
1985.
Lynda J. Huffman joined the Company in 1990 as an Internal Auditor. In 1992 she
received the title of Audit Manager and in September of 1995 she began serving
as Secretary to the Corporation.
The executive officers are elected by the Board of Directors of the
Company to serve at the pleasure of the Board, except as provided in any such
officer's employment agreement.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is traded on the NASDAQ National Market
System under the symbol NRMI. For common stock price information, see Note 11
of Notes to Consolidated Financial Statements.
As of June 14, 1996, the approximate number of common stockholders of
record was 111. The approximate number of total stockholders as of that date
was 1,096.
DIVIDEND POLICY
In conjunction with the Company's senior credit facility, the Company
is restricted from paying cash dividends on its common stock.
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ITEM 6. SELECTED FINANCIAL DATA
NATIONAL RECORD MART, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND SELECTED OPERATING DATA)
<TABLE>
<CAPTION>
Fiscal Year Ended (1)
--------------------------------------------------------------------------------
March 30, March 25, March 26, March 27, March 28, (1)
1996(1)(6) 1995 1994(2)(4) 1993(3)(4) 1992(3)(4)(5)
---------- --------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales $99,084 $95,697 $80,628 $72,720 $73,616
Gross profit 36,538 35,847 32,281 29,364 28,766
Selling, general and administrative expenses 34,542 30,589 25,279 22,987 25,299
Depreciation and amortization 3,117 2,683 2,064 1,925 2,379
Impairment of assets write-down 2,906 - - - -
Interest expense, net 1,597 1,011 571 615 1,154
Net gain from sale of stores - - - - (7,191)
Other expense, net 446 450 175 544 355
Net (loss) income before income tax
(benefit) expense (6,069) 1,115 4,192 3,293 6,770
Net (loss) income (3,884) 712 2,490 2,275 4,547
Net (loss) income per share ($.79) $.14 $.53 $.59 $1.18
Weighted average number of shares outstanding 4,927 5,205 4,735 3,873 3,851
SELECTED OPERATING DATA:
Stores open at beginning of year 141 118 100 95 110
Stores opened /acquired during year 16 32 21 6 10
Stores closed /sold during year 6 9 3 1 25
Stores open at end of year 151 141 118 100 95
Comparable store net sales (decrease) increase (3)% 3% 5% 17% (5)%
BALANCE SHEET DATA:
Working capital (deficiency) $22,245 $25,017 $19,771 $ 8,558 $(2,612)
Total assets 52,924 53,824 45,809 32,644 25,750
Long-term debt, including current maturities 19,468 19,853 12,053 11,385 5,959
Stockholders' equity 17,178 21,173 20,574 8,235 5,961
</TABLE>
(1) Each fiscal year consisted of 52 weeks except the fiscal year ended
March 30, 1996 and March 28, 1992, which consisted of 53 weeks.
(2) The Company purchased a nine-store music chain in November 1993. The
results of operations from the date of acquisition for these stores are
included in the Consolidated Statements of Operations.
(3) The Company recorded an accrual of $600,000 ($.16 per share) in
connection with a proposed IRS adjustment during fiscal 1991. This
accrual was reduced by $300,000 ($.08 per share) in each of fiscal 1992
and 1993.
(4) A warrant to purchase 185,880 shares of common stock was canceled on
June 11, 1993. Such shares were treated as outstanding for purposes of
determining net income (loss) per share for all years prior to fiscal
1994.
(5) The Company sold 20 stores (including inventory) in March 1992 to an
unaffiliated buyer for consideration of approximately $11.7 million,
resulting in a net gain (before taxes) of approximately $7.2 million
($1.12 per share after taxes). Excluding such gain, net income for
fiscal 1992 would have been $232,000.
(6) The Company adopted Financial Accounting Standards Board Statement No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed
of," in fiscal 1996. In connection with this adoption, the Company
wrote down $2,906,481 of assets, which increased its net loss by
$1,860,148 or $0.38 per share for fiscal year ended March 30, 1996.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATION AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items
in the Consolidated Statements of Operations as a percentage of net sales:
<TABLE>
<CAPTION>
Fiscal Years
------------------------------------
1996 1995 1994
-------- ------ ------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 63.1 62.5 60.0
------ ------ ------
Gross profit 36.9 37.5 40.0
Selling, general and administrative expenses 34.9 32.0 31.3
Impairment of assets write-down 2.9 0 0
Depreciation and amortization 3.1 2.8 2.6
Interest expense, net 1.6 1.0 0.7
Other expense 0.5 0.5 0.2
------ ------ ------
(Loss) income before income taxes (benefit) expense (6.1) 1.2 5.2
(Benefit) income taxes (2.2) 0.4 2.1
------ ------ ------
Net (loss) income (3.9)% 0.8% 3.1%
----- ------ ------
</TABLE>
Net Sales. Net sales increased during fiscal 1996 by $3.4 million, or
3.5% compared to fiscal 1995. This increase was the result of 16 new stores and
6 store closings for a net of 10 additional stores and a comparable store sales
decrease of 2.7%. Net sales increased during fiscal 1995 by 18.7% compared to
fiscal 1994, due to 23 additional stores net, and a comparable store increase
of 2.7%. Comparable store results were consistent with our general industry.
Lower prices, increased competition, and a reduction in the number of hit music
releases all combined to impact a reduction in comparable store sales. The
Company expects the more competitive environment to continue throughout the
year.
For fiscal 1995, the Company experienced an increase in comparative
numbers of 2.7%. The Christmas quarter of the prior year included a 5.3%
increase in comparative sales as compared to 9.5% decrease in comparative store
sales for fiscal 1996. This swing of nearly 14% impacted the decrease versus
prior year increase for comparative store sales.
Gross Profit. Gross profit, expressed as a percentage of net sales,
decreased from 37.5% in fiscal 1995 to 36.9% in fiscal 1996. The significant
factor causing the decline of gross profit margin was the increased consumer
preference to purchase compact discs versus prerecorded cassettes. Compact
discs generated an average margin of 34.2% as compared to prerecorded cassettes
with an average margin of 41.3%. Sales of cassettes for the year as a
percentage of sales declined from 28% to 22% for the current fiscal year. Gross
margin dollars associated with the current year decline amounted to $2.4
million. Gross profit decreased from 40.0% in fiscal 1994 to 37.5% in fiscal
1995 due primarily to the aforementioned shift in sales mix from cassettes to
CDs, as well as price competition in the compact disc sector of the business.
Expenses. Selling, general and administrative expenses ("SG&A")
expenses increased $4.0 million in fiscal 1996 to $34.5 million from $30.5
million. Occupancy and Personnel costs associated with noncomp stores (stores
opened less than one full year) represent $1.9 million; comparative store
incremental SG&A represents $0.9 million; and costs associated with the
nonrecurring additional week in its current fiscal year were $0.7 million. As a
percentage of sales, SG&A increased from 32.0% in fiscal
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1995 to 34.9% in fiscal 1996. In fiscal 1995, SG&A expenses increased from $25.3
million in fiscal 1994 to $30.6 million. This net increase was attributable to
the 23 additional stores, net, opened in fiscal 1995. Expressed as a percentage
of net sales, SG&A expenses increased slightly from 31.3% in fiscal 1994 to
32.0% in fiscal 1995.
Depreciation and amortization increased from $2.7 million in fiscal
1995 to $3.1 million in fiscal 1996. The additional depreciation associated
with new stores and capital improvements was partially offset by the
elimination of depreciation on fully depreciated assets. In fiscal 1995,
depreciation and amortization increased to $2.7 million from $2.1 million.
Adoption of New Accounting Standard. During the fourth quarter of
1996, the Company adopted Financial Accounting Standards Board Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of" ("Statement No. 121"), issued in March 1995. In March of
1996, in connection with the adoption of Statement No. 121 the Company wrote
down $2,906,481 of property, which increased its net loss by $1,860,148 or
$0.38 per share for the fiscal year ended March 30, 1996. This reduction of
property value will reduce future depreciation by $0.05 per share through the
year 2003 based upon a seven year average remaining useful life of the impaired
property.
The financial statement values of the long-lived assets, were reviewed
for possible impairment as a result of competitive changes and declines in
sales (see Competition, Item 1 Business). These circumstances have led to
certain stores generating projected undiscounted future cash flows at aggregate
amounts less than the carrying amount of the property for the stores, which
indicates impairment has occurred.
Interest Expense. Interest expense increased to $1.6 million in fiscal
1996 from $1.0 million in fiscal 1995. The increase is primarily due to two
factors: (i) average interest rate charged for fiscal 1996 was 9.19% compared
to 8.58% in the prior year; (ii) in fiscal 1995 the borrowing base increased
$7.0 million to $18.6 million, whereas the borrowing base remained consistently
higher in fiscal 1996 resulting in the net increase in interest charges. In
fiscal 1995, interest expense increased to $1.0 million from $621,000 in fiscal
1994. The increase is primarily attributable to increased borrowings in
connection with the opening of 32 new stores.
Income Taxes. The Company's effective tax rate in fiscal 1996 and 1995
was 36%. In fiscal 1994, the Company's effective tax rate was 40.6% compared to
36.0% in fiscal 1995. The decrease is due primarily to a reduction in the
Company's effective state income tax rate.
As of March 30, 1996, the Company had net deferred tax assets of
$2,058,000. The Company may be required to earn approximately $5,717,000 of
future taxable income in order to realize the benefit of the net deferred tax
assets.
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. Approximately 34% of the Company's net sales for
fiscal 1996 were generated in the third quarter. (See Note 11 of Notes to the
Consolidated Financial Statements for quarterly financial data.) Year to year
comparisons of quarterly results and comparable store net sales can be affected
by a variety of factors, including the success and timing of new releases by
manufacturers, the timing and duration of the holiday selling seasons and the
timing of new store openings and sales promotions.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash generated by
operations, trade credit, and amounts available under its credit facility. Net
cash provided by (used in) operating activities was $4.2 million in fiscal
1996, ($2.4) million in fiscal 1995 and ($4.6) million in fiscal 1994. During
fiscal 1996, the $4.2 million in cash provided by operating activities was
primarily attributable to improved management of accounts payable. In fiscal
1995 and fiscal 1994, the Company's net cash used in operating activities was
primarily due to the purchase of merchandise inventory and the payment of
income taxes.
During fiscal 1996, 1995 and 1994, the Company used $3.6 million, $5.0
million and $3.5 million, respectively, to purchase property and equipment. The
Company opened 16 new stores and closed 6 stores in fiscal 1996 compared to 32
new stores and 9 closed stores in fiscal 1995. The Company anticipates opening
fewer stores in fiscal 1997 as compared to fiscal 1996. Management estimates
that the capital cost of opening the new stores will be approximately $110,000
per store excluding inventory of $200,000 per store, which will be funded
through operating cash flow, revolving credit facility and trade vendors.
On June 11, 1993, the Company obtained a new five-year $17 million
revolving line of credit (the "Revolver") from an institutional lender which
replaced the then existing revolving credit facility. Advances under this
facility bear interest at a floating rate equal to the lender's base rate
(8.75% at March 30, 1996) plus .50% or, at the Company's option, the 30-day
LIBOR rate (5.5% at March 30, 1996) plus 2.75%. In October 1994, the Revolver
was amended to increase maximum borrowings to $22 million, subject to a
borrowing base calculation tied to inventory levels, and to decrease the
interest rates from prime plus .75% to prime plus .5% and LIBOR plus 3.25% to
LIBOR plus 2.75%. This new facility replaced the Company's prior revolving
credit facility which carried an interest rate of prime plus 2.5%.
As of March 30, 1996, the Company's outstanding credit balance on its
Revolver was $18.7 million. The Company's borrowing availability at March 30,
1996 was $1.8 million. The Revolver balance and the Company's cash needs peak
in February when the Company's trade payable becomes due from the Christmas
selling season.
The Company is expected to receive in its second quarter of fiscal
1997 a refundable income tax payment of approximately $1.1 million. Upon
receipt the Company will apply the refund to its revolving credit facility.
On August 4, 1993, the Company completed its initial public offering
of 1,700,000 shares of common stock, of which 200,000 shares were sold by
certain shareholders of the Company. The initial public offering price was
$7.50 per share and the net proceeds of the offering to the Company after legal
and professional fees were approximately $9,775,852.
As indicated in the Company's Registration Statement (Form S-1), a
portion of the proceeds of the offering was used to repay the remaining balance
of $1,250,000 plus accrued interest on a subordinated note to RMF Investment
Company and principal and interest on a $1,750,000 subordinated note to Remsen
Partners Ltd. The balance of the proceeds of the offering was used to reduce
the Revolver from $10 million to $5 million (minimum borrowing balance) and
invest in short-term securities.
On February 23, 1994, the Board of Directors approved a program for
the Company to purchase up to $1,000,000 of its common stock. Such purchases
will be made from time to time in the marketplace at the Company's discretion.
As of March 30, 1996, the Company had purchased 166,200 shares of its stock.
13
<PAGE> 14
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 1997.
EFFECT OF ECONOMIC PATTERNS AND INFLATION
Issues relating to the results that the Company achieves include the
quality of new releases, competitive factors, environmental and overall
economic conditions including consumer preferences and inflationary patterns.
While the Company attempts to pass on increases in costs and expenses
from operations, the ability to do so is conditioned by competitive factors.
Although the Company's operations are affected by general economic trends, the
Company does not believe that inflation has had a material effect on the
results of its operations. When the cost of an item of merchandise has
increased, the Company generally has been able to pass the increase on to its
customers.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and related notes are included
in Item 14 of this report. See Index to Consolidated Financial Statements
contained in Item 14 herein.
ITEM 9. CHANGES OR DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by these items of Part III will be set forth
in the Company's Proxy Statement under similar captions and is incorporated
herein by reference.
14
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT
ON FORM 8-K
(A) DOCUMENTS FILED AS A PART OF THIS REPORT:
(1) CONSOLIDATED FINANCIAL STATEMENTS
See Index to Consolidated Financial Statements on Page 17.
(2) FINANCIAL STATEMENT SCHEDULES
Schedules for which provision is made to the applicable
accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable and therefore have been omitted.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the
last quarter of the period covered by this Report.
(C) EXHIBITS:
3.1 Amended and Restated Certificate of Incorporation of
the Registrant*
3.2 Amended and Restated By-Laws of the Registrant*
3.3 Amendment to Restated Certificate of Incorporation of
the Registrant**
10.1 Stock Option Agreement dated May 10, 1993 between the
Company and William A. Teitelbaum and Registrant Rights
Agreement dated May 10, 1993 between the Company and
Mr. Teitelbaum*
10.2 Employment Agreement dated April 1, 1993 between the
Company and Mr. Teitelbaum*
10.3 Sublease dated July 1, 1992 between the Company and
General Motors*
10.4 National Record Mart, Inc. 1993 Stock Option Plan*
10.5 National Record Mart, Inc. Non-Employee Director Stock
Option Plan*
10.6 Loan and Security Agreement dated July 11, 1993 between
the Company and Barclays Business Credit, Inc. *
10.7 Amendment to the Loan and Security Agreement dated as of
July 11, 1993 between the Company and Barclays Business
Credit, Inc. **
10.8 Employment Agreement dated as of January 1, 1996 between
the Company and Theresa Carlise***
10.9 1996 Stock Option Agreement for William A. Teitelbaum***
11 Statement re: Computation of Per Share Earnings***
21 List of Subsidiaries of the Company***
* Filed as an exhibit to the Company's registration statement of Form S-1
(No. 33-62622) filed May 12, 1993, as amended by Amendment No. 1 filed
July 8, 1993 and Amendment No. 2 filed August 2, 1993.
** Filed as an exhibit to the Company's annual report on Form 10-K filed
for the fiscal year ended March 25, 1995.
*** Filed herewith.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL RECORD MART, INC.
BY: /S/ WILLIAM A. TEITELBAUM
-------------------------
William A. Teitelbaum
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- - --------- -------- ----
<S> <C> <C>
/S/ WILLIAM A. TEITELBAUM Chairman of the Board,
- - ------------------------- President and Director June 25, 1996
William A. Teitelbaum
/S/ THERESA CARLISE Senior Vice President-
- - ------------------ Finance, Chief Financial
Theresa Carlise Officer, Chief Accounting
Officer, Treasurer and Director June 25, 1996
/S/ SAMUEL S. ZACHARIAS Director June 25, 1996
- - -----------------------
Samuel S. Zacharias
/S/ IRWIN B. GOLDSTEIN Director June 25, 1996
- - ----------------------
Irwin B. Goldstein
</TABLE>
16
<PAGE> 17
NATIONAL RECORD MART, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Page
----
Report of Independent Auditors 18
Consolidated Statements of Operations for the fiscal years
ended March 30, 1996, March 25, 1995, and March 26, 1994 19
Consolidated Balance Sheets as of March 30, 1996 and March 25, 1995 20
Consolidated Statements of Cash Flows for the fiscal years
ended March 30, 1996, March 25, 1995, and March 26, 1994 21
Consolidated Statements of Stockholders' Equity for the fiscal years
ended March 30, 1996, March 25, 1995, and March 26, 1994 22
Notes to Consolidated Financial Statements 23
</TABLE>
17
<PAGE> 18
Report of Independent Auditors
To the Board of Directors and Stockholders
of National Record Mart, Inc.
We have audited the accompanying consolidated balance sheets of National Record
Mart, Inc. as of March 30, 1996 and March 25, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended March 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of National Record
Mart, Inc. at March 30, 1996 and March 25, 1995, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended March 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the Consolidated Financial Statements, in the fourth
quarter of fiscal 1996 the Company changed its method of accounting for
long-lived assets.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
May 31, 1996
18
<PAGE> 19
NATIONAL RECORD MART, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 30, 1996, March 25, 1995 and March 26, 1994
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------
March 30, March 25, March 26,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $99,084,459 $95,696,889 $80,627,923
Cost of sales 62,546,760 59,849,675 48,347,081
----------- ----------- -----------
Gross profit 36,537,699 35,847,214 32,280,842
Selling, general and administrative expenses 34,541,524 30,588,512 25,278,891
Depreciation and amortization 3,116,547 2,683,056 2,064,126
Impairment of assets write-down 2,906,481 -- --
Interest expense 1,631,208 1,031,459 620,596
Interest income (34,274) (20,495) (49,577)
Other expenses 445,613 449,629 175,182
----------- ----------- -----------
Total expenses 42,607,099 34,732,161 28,089,218
----------- ----------- -----------
Net (loss) income before income tax (benefit) expense (6,069,400) 1,115,053 4,191,624
(Benefit) provision for income taxes (2,184,984) 402,855 1,702,000
----------- ----------- -----------
Net (loss) income $(3,884,416) $ 712,198 $ 2,489,624
=========== =========== ===========
Net (loss) income per share $ (0.79) $ 0.14 $ 0.53
Weighted average number of common shares and common
equivalent shares (warrants and options) outstanding 4,927,425 5,205,479 4,734,730
</TABLE>
See accompanying notes to consolidated financial statements
19
<PAGE> 20
NATIONAL RECORD MART, INC.
CONSOLIDATED BALANCE SHEETS
As of March 30, 1996 and March 25, 1995
<TABLE>
<CAPTION>
March 30, March 25,
1996 1995
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 560,337 $ 407,463
Merchandise inventory 35,352,623 34,759,345
Due from stockholder 388,071 291,630
Deferred income taxes 319,000 352,000
Refundable income taxes 1,107,000 --
Other current assets 1,298,990 2,606,274
------------ ------------
Total current assets 39,026,021 38,416,712
Property and equipment, at cost 20,503,860 26,408,210
Accumulated depreciation and amortization (10,602,382) (14,280,112)
------------ ------------
Property and equipment, net 9,901,478 12,128,098
Other assets:
Deferred income taxes 1,739,000 729,000
Long-term investments 488,704 583,054
Intangibles 1,246,434 1,393,885
Other assets 521,954 573,652
------------ ------------
Total other assets 3,996,092 3,279,591
------------ ------------
Total assets $ 52,923,591 $ 53,824,401
============ ============
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 13,395,403 $ 10,152,777
Other liabilities and accrued expenses 2,882,922 2,645,135
Current maturities of long-term debt 503,187 601,969
------------ ------------
Total current liabilities 16,781,512 13,399,881
Long-term debt:
Notes payable 258,415 564,346
Revolving credit facility 18,705,943 18,686,758
------------ ------------
Total long-term debt 18,964,358 19,251,104
Commitments and contingencies
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, and 4,871,716 shares and 4,993,816 shares
outstanding at March 30, 1996 and March 25, 1995, respectively 50,379 50,379
Additional paid-in capital 14,004,188 13,930,188
Retained earnings 3,489,796 7,374,212
------------ ------------
17,544,363 21,354,779
Less Treasury Stock, 166,200 shares and 44,100 shares at
March 30, 1996 and March 25, 1995, respectively (366,642) (181,363)
------------ ------------
Total stockholders' equity 17,177,721 21,173,416
------------ ------------
Total liabilities and stockholders' equity $ 52,923,591 $ 53,824,401
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
20
<PAGE> 21
NATIONAL RECORD MART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 30, 1996, March 25, 1995 and March 26, 1994
<TABLE>
<CAPTION>
March 30, March 25, March 26,
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net(loss)income $ (3,884,416) $ 712,198 $ 2,489,624
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,116,547 2,683,056 2,064,126
Impairment of assets write-down 2,906,481 -- --
Loss from sale of property and equipment 25,777 75,755 44,646
Other 158,947 74,002 67,833
Deferred income taxes (1,078,000) (281,000) (325,000)
Changes in operating assets and liabilities:
Merchandise inventory (678,225) (3,921,564) (8,502,226)
Other assets 151,264 (648,542) (342,883)
Accounts payable 3,242,626 (658,104) 1,292,223
Other liabilities and accrued expenses 223,102 660,192 171,460
Income taxes payable -- (1,123,615) (1,577,137)
------------- ------------- ------------
Net cash provided by (used in) operating activities 4,184,103 (2,427,622) (4,617,334)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (3,583,214) (4,953,519) (3,472,616)
Amounts loaned to stockholders (96,441) (29,101) 232,315
Other long-term investments 219,233 (70,338) (583,054)
Payment for acquisition of business -- -- (1,150,400)
------------- ------------- ------------
Net cash used in investing activities (3,460,422) (5,052,958) (4,973,755)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on debt (113,891,190) (109,537,847) (68,059,170)
Borrowings on revolving line of credit 113,505,662 116,958,902 67,425,845
Deferred financing fees incurred -- (22,988) (370,476)
Other borrowings -- -- 333,483
(Costs for) / proceeds from initial public offering -- (22,472) 9,798,324
Purchases of Treasury Stock (185,279) (164,175) (17,188)
------------- ------------- ------------
Net cash (used in) provided by financing activities (570,807) 7,211,420 9,110,818
------------- ------------- ------------
Net increase (decrease) in cash and cash equivalents 152,874 (269,160) (480,271)
Cash and cash equivalents, beginning of year 407,463 676,623 1,156,894
------------- ------------- ------------
Cash and cash equivalents, end of year $ 560,337 $ 407,463 $ 676,623
============= ============= ============
</TABLE>
See accompanying notes to consolidated financial statements
21
<PAGE> 22
NATIONAL RECORD MART, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended March 30, 1996, March 25, 1995 and March 26, 1994
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Retained Treasury Stock Stockholders'
Shares Amount Capital Earnings Shares Amount Equity
--------- ------- ----------- ----------- ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 27, 1993 3,537,916 $35,379 $ 4,027,501 $ 4,172,390 -- -- $ 8,235,270
Net income -- -- -- 2,489,624 -- -- 2,489,624
Proceeds from initial
public offering 1,500,000 15,000 9,783,324 -- -- -- 9,798,324
Purchases of Treasury Stock -- -- -- -- 3,000 (17,188) (17,188)
Compensatory stock options -- -- 67,833 -- -- -- 67,833
--------- ------- ----------- ----------- ------- --------- -----------
Balance at March 26, 1994 5,037,916 50,379 13,878,658 6,662,014 3,000 (17,188) 20,573,863
Net income -- -- -- 712,198 -- -- 712,198
Purchases of Treasury Stock -- -- -- -- 41,100 (164,175) (164,175)
Additional IPO costs -- -- (22,472) -- -- -- (22,472)
Compensatory stock options -- -- 74,002 -- -- -- 74,002
--------- ------- ----------- ----------- ------- --------- -----------
Balance at March 25, 1995 5,037,916 50,379 13,930,188 7,374,212 44,100 (181,363) 21,173,416
Net loss -- -- -- (3,884,416) -- -- (3,884,416)
Purchases of Treasury Stock -- -- -- -- 122,100 (185,279) (185,279)
Compensatory stock options -- -- 74,000 -- -- -- 74,000
--------- ------- ----------- ----------- ------- --------- -----------
Balance at March 30, 1996 5,037,916 $50,379 $14,004,188 $ 3,489,796 166,200 $(366,642) $17,177,721
========= ======= =========== =========== ======= ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements
22
<PAGE> 23
NATIONAL RECORD MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
National Record Mart, Inc. (the "Company") is a specialty retailer of home
entertainment products, including compact discs, audio and video cassettes, and
related accessories. As of March 30, 1996, the Company operated 151 stores in 27
states primarily in the eastern part of the United States and operates under
five distinct store concepts, National Record Mart or NRM Music, Waves Music,
Vibes Music, Waves Music and Gifts and Music Oasis, each of which targets a
different customer base. The Company's fiscal year is the 52 or 53 weeks ending
on the Saturday in March closest to March 31. Fiscal years 1996, 1995 and 1994
ended on March 30 (53 weeks), March 25 (52 weeks) and March 26 (52 weeks),
respectively.
PRINCIPLES OF CONSOLIDATION
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.
RECLASSIFICATIONS
Certain amounts for the fiscal year ended March 26, 1994 have been reclassified
to conform to the presentation for the fiscal years ended March 25, 1995 and
March 30, 1996.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
MERCHANDISE INVENTORY
Inventory is comprised of records, tapes, compact discs, video tapes and
accessories and is stated at the lower of average cost or market. Market is net
realizable value.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Equipment and major improvements to
existing locations are capitalized. Expenditures for repairs and maintenance
which do not extend the useful life of assets are charged to expense as
incurred. Provisions for depreciation are computed using the straight-line
method for book purposes and accelerated methods for tax purposes based upon
the estimated useful lives of the assets. Leasehold improvements are amortized
over the shorter of the useful life of the improvement or the lease term which
includes anticipated renewal periods. Property and equipment of the Company
consist of the following:
23
<PAGE> 24
<TABLE>
<CAPTION>
March 30, March 25,
Assets Asset Lives 1996 1995
------ ----------- --------- ---------
<S> <C> <C> <C>
Leasehold improvements 8 years $ 9,137,273 $ 13,198,584
Fixtures and equipment 7 years 11,283,779 12,482,251
Vehicles 5 years 82,808 81,292
Video cassettes - rental 3 years -- 646,083
------------ ------------
Total 20,503,860 26,408,210
Less accumulated depreciation (10,602,382) (14,280,112)
------------ ------------
Property and equipment, net $ 9,901,478 $ 12,128,098
============ ============
</TABLE>
Depreciation expense for the years ended March 30, 1996, March 25, 1995 and
March 26, 1994 was $2,877,579, $2,446,088 and $1,948,779, respectively.
INTANGIBLE ASSETS
Intangible assets recorded by the Company are being amortized using the
straight-line method over their estimated useful lives. Goodwill represents the
excess of the purchase price over the fair value of the net assets acquired in
the original acquisition of the Company and the acquisition of a business in
fiscal 1994 (see Note 9 ) and is being amortized over periods of 40 and 15
years, respectively. The estimated useful life of other intangible assets is
five years.
INVESTMENTS
Investments include equity securities carried at cost, which approximates
market. These securities are held primarily for their dividend yield and
represent less than a 20% investment in the invested companies. Securities which
the Company intends to hold for a limited period are classified as short-term
investments. Securities intended to be held for periods in excess of one year
are classified as long-term investments. No unrealized gains or losses were
recorded by the Company in the years ended March 30, 1996 and March 25, 1995.
STORE OPENING COSTS
The expenses associated with the opening of new stores are charged to expense
as incurred.
ADVERTISING COSTS
Advertising and sales promotional programs are charged to expense during the
period in which they are incurred. Total advertising and sales promotional
expense for the fiscal years ended March 30, 1996, March 25, 1995, and March
26, 1994 were $2,465,620, $2,165,308, and $1,943,350, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheets for the Company's financial
instruments approximates its fair value.
RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No 123, "Accounting for
Stock-Based Compensation" ("Statement No. 123"), issued in October 1995 and
effective for fiscal years beginning after December 15, 1995, encourages, but
does not require, a fair value-based method of accounting for employee stock
options or similar equity instruments. It also allows an entity to elect to
continue to measure compensation cost under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), but requires
pro forma disclosures of net income and earnings per share as if the fair
value-based method of accounting had been applied. The Company expects to adopt
Statement No. 123 in 1997. While the Company is still evaluating Statement No.
123, it currently
24
<PAGE> 25
expects to elect to continue to measure compensation cost under APB No. 25 and
comply with the pro forma disclosure requirements.
2. IMPAIRMENT OF ASSETS WRITE-DOWN
During the fourth quarter of 1996, the Company adopted Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of" ("Statement No. 121"), issued
in March 1995. In connection with the adoption of Statement No. 121, the
carrying value of long-lived assets of certain stores was reviewed for
recoverability and possible impairment.
Since the beginning of fiscal 1996, the Company has been experiencing declining
sales due to an increase in competitive factors. These circumstances have led to
certain stores generating projected undiscounted future cash flows less than
the carrying amount of property for the stores, which indicates impairment has
occurred. This resulted in a net property write-down of $2,906,481 recorded in
the fourth quarter of 1996.
3. INITIAL PUBLIC OFFERING
On August 4, 1993, the Company commenced the IPO of its common stock. In this
offering, 1,700,000 shares were sold at $7.50 per share, of which 1,500,000
shares were sold by the Company and 200,000 shares were sold by certain
stockholders. The net proceeds of the offering to the Company, after
underwriting discounts, commissions, and various legal and professional fees,
were approximately $9,775,852. Upon receipt of the net proceeds, the Company
utilized $3,250,000 to repay the balance of subordinated notes payable in the
principal amounts of $1,750,000 and $1,500,000. The remainder of the proceeds
was used to reduce the revolving line of credit facility balance and invest in
short-term securities.
4. REVOLVING CREDIT FACILITY AND TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consisted of the following as of:
March 30, March 25,
1996 1995
------------ ------------
<S> <C> <C>
REVOLVING CREDIT FACILITY -- Bears interest at
the bank's base rate (8.75% at March 30, 1996)
plus .5% or the 30-day LIBOR rate (5.5% at
March 30, 1996) plus 2.75%. Secured by
substantially all of the assets of the Company. $ 18,705,943 $ 18,686,758
NONCOMPETE AGREEMENT -- Debt resulting
from the acquisition of a business (see Note 9).
Payments due in equal monthly installments
through December 1996. 176,669 275,596
NOTES PAYABLE -- Debt resulting from the
acquisition of a business (see Note 9).
Amounts due at various dates through
January 1998, contingent upon certain events. 275,000 350,000
CAPITAL LEASE OBLIGATIONS -- Bear interest at
various rates ranging from 7.04% to 8.98%.
Secured by the leased assets. Principal and
interest due in equal monthly amounts through
February 1998. 309,933 540,719
------------ ------------
19,467,545 19,853,073
Less current maturities 503,187 601,969
------------ ------------
Long-term debt $ 18,964,358 $ 19,251,104
============ ============
</TABLE>
25
<PAGE> 26
On June 11, 1993, the Company obtained a five-year revolving credit facility
(the "Revolver") from a lender. The maximum borrowings under the Revolver are
$22,000,000 and are based upon eligible inventory levels as defined therein. 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 subsidiaries, 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.
Future scheduled maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ended
March
----------
<S> <C>
1997 $ 503,187
1998 258,415
1999 18,705,943
-----------
Total $19,467,545
===========
</TABLE>
Although the balance of the Revolver at March 30, 1996 is scheduled to mature in
fiscal 1999, the Company intends to renegotiate or extend such debt prior to, or
at, its maturity.
Interest payments of $1,611,133, $965,020, and $647,739 were made during the
fiscal years ended March 30, 1996, March 25, 1995 and March 26, 1994,
respectively.
5. EMPLOYEE BENEFIT PLANS
Profit Sharing Plan. The Company has a qualified, noncontributory profit
sharing plan for eligible employees. Contributions to the plan, as determined by
the Board of Directors, are discretionary but generally may not exceed 15% of
the defined annual compensation paid to all participating employees. No
contributions were made to the plan for any of the years presented.
401(k) Plan. During fiscal 1996, the Company adopted a 401(k) plan for eligible
employees. Employees who have attained age 21 and are paid for 1,000 or more
hours of service within the twelve months from the date hired are eligible to
participate. Under provisions of the plan, each participant may contribute up to
15% of their eligible compensation to the plan. These contributions are made
through payroll deductions and are partially matched by the Company.
6. STOCK OPTION PLANS
Effective November 3, 1995 the Company's Board of Directors approved the
issuance to certain employees of nonqualified options to purchase a total of
34,400 shares of common stock at an exercise price of $2.50 per share, in
consideration of the cancellation of the outstanding options previously granted
to such individuals with an exercise price of $7.50 per share. The employees'
right to exercise such options will vest in equal amounts over a period of five
years on each anniversary of the date of issuance. In addition, the Company
granted 28,500 options to certain employees effective June 10, 1996 at an
exercise price of $2.50 per share. The employees' right to exercise such options
will vest in equal amounts over a period of five years on each anniversary of
the date of issuance. There were no options exercised in fiscal 1996 or fiscal
1995.
During August 1993, in accordance with the Non Employee Director Stock Option
Plan, the Company issued to certain nonemployee members of its Board of
Directors options to purchase a total of 15,000 shares of common stock at an
exercise price of $7.50 per share. The nonemployee Board of Directors' right to
exercise such options will vest in equal amounts over a period of five years on
each anniversary of the date of issuance. There were no options exercised in
fiscal 1996 or fiscal 1995, and 5,000 options were canceled in fiscal 1996 in
conjunction with the resignation of one of the nonemployee directors.
26
<PAGE> 27
On May 10, 1993, the Company's Board of Directors approved the issuance, to Mr.
William A. Teitelbaum, the president of the Company, of options to purchase a
total of 200,000 shares of common stock at an exercise price of $.10 per share.
Mr. Teitelbaum's right to exercise all such options will vest in equal amounts
over a period of 20 years on each anniversary of the date of issuance, provided
that all options will vest automatically upon (i) acquisition by a third party
or group of a majority of the Company's outstanding equity securities of a sale
of the Company of all or substantially all of its assets, (ii) termination of
Mr. Teitelbaum's employment without proper cause, (iii) a reorganization, merger
or consolidation which results in a change in control of the Company or (iv) Mr.
Teitelbaum's death. If Mr. Teitelbaum ceases to be employed by the Company for
any other reason, the unvested portion of the options will be extinguished.
Included in the Consolidated Statements of Operations for the years ended March
30, 1996, March 25, 1995 and March 26, 1994 is compensation expense of $74,000,
$74,002 and $67,833, respectively The Company will recognize annual
compensation expense of $74,000 through fiscal year 2113.
Effective June 10, 1996, the Company's Board of Directors granted Mr. William A.
Teitelbaum the option to purchase 200,000 shares of Common Stock par value $.01
per share of the Company at an option exercise price of $2.50 per share. The
right to exercise such option will vest in four equal installments over a
period of four years beginning on June 15, 1997. The option expires on June 15,
2007. The option contains provisions for the acceleration of vesting
substantially similar to those contained in Mr. Teitelbaum's May 1993 option.
7. STOCK SPLIT
On June 3, 1993, the Company's shareholders approved a change in the Company's
authorized capital from 150,000 shares of common stock, $1 par value, to
20,000,000 shares of common stock, $.01 par value, 2,000,000 shares of
preferred stock, $.01 par value, and an aggregate 6,196-for-one split of the
Company's common stock. Net income per share amounts and all references to
common stock and additional paid-in capital have been retroactively restated
for all years presented to reflect the increased number of common shares
outstanding resulting from the stock split. During fiscal 1995, the Company
reduced its number of authorized shares from 20,000,000 to 9,000,000 pursuant
to a stockholder vote.
8. INCOME TAXES
The (benefit) provision for income taxes, as shown in the accompanying
Consolidated Statements of Operations, includes the following components:
<TABLE>
<CAPTION>
March 30, March 25, March 26,
1996 1995 1994
----------- --------- ----------
<S> <C> <C> <C>
Current provision:
Federal $(1,054,984) $ 599,000 $1,572,000
State (52,000) 84,855 455,000
----------- --------- ----------
(1,106,984) 683,855 2,027,000
Deferred (1,078,000) (281,000) (325,000)
----------- --------- ----------
Total (benefit) provision for income taxes $(2,184,984) $ 402,855 $1,702,000
=========== ========= ==========
</TABLE>
27
<PAGE> 28
A reconciliation of the Company's effective income tax rate with the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
March 30, March 25, March 26,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Federal statutory rate (34)% 34% 34%
State income taxes, net of federal tax benefit 3 1 7
Nontaxable amounts (1) -- --
Other -- 1 --
---- ---- ----
Effective income tax rate 36% 36% 41%
==== ==== ====
</TABLE>
Tax payments of $205,000, $1,917,569, and $3,618,813 were made during the
fiscal years ended March 30, 1996, March 25, 1995 and March 26, 1994,
respectively.
Significant components of the Company's deferred tax assets and liabilities as
of March 30, 1996 and March 25, 1995 are as follows:
<TABLE>
<CAPTION>
March 30, March 25,
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Excess tax basis in property and equipment $1,635,000 $ 698,000
Excess tax basis in inventory 305,000 361,000
Other 371,000 253,000
---------- ----------
2,311,000 1,312,000
Deferred tax liabilities:
Excess book basis in other current assets 253,000 231,000
---------- ----------
Net deferred tax assets $2,058,000 $1,081,000
========== ==========
</TABLE>
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 and the taxable income in
the three previous tax years to which tax loss carrybacks can be applied.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, taxable income in the carryback period, and tax
planning strategies in making this assessment. Based upon the level of projected
future taxable income over the periods in which the deferred tax assets are
deductible and the amount of tax loss carryback available, 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.
The Company's current year net operating loss of $6,069,400 was applied against
previous years taxable income which resulted in refundable income tax of
$1,107,000 at March 30, 1996.
9. ACQUISITION OF BUSINESS
On November 19, 1993, the Company purchased certain of the assets of Leonard
Smith, Inc., a nine-store music chain located in the Northeast United States.
The acquisition was accounted for using the purchase method of accounting for a
purchase price of approximately $2,390,000 resulting in approximately $833,000
of goodwill which is being amortized using the straight-line method over 15
years. The purchase price was comprised of (i) a $300,000 general holdback due
in equal amounts on August 1994 and May 1995, (ii) a $200,000 specific holdback
with due dates and amounts due contingent upon a certain future event, (iii) a
$458,000 note payable for a five-year noncompete agreement due in equal monthly
installments over a three-year period beginning January 1, 1994, (iv) $1,150,400
paid in cash upon execution of the agreement and the remainder in short-term
payables paid in full subsequent to the acquisition. The holdback amounts are
accounted for as long-term debt in the accompanying consolidated balance sheets.
The results of operations for the period from November 19, 1993 to March 26,
1994 for these nine stores are
28
<PAGE> 29
included in the consolidated statement of operations for the year ended
March 26, 1994. One of the nine stores acquired was closed at the end of fiscal
1994 due to operating performance.
10. COMMITMENTS AND CONTINGENCIES
The Company leases its retail stores and distribution center under operating
leases. The lease agreements, including renewal options, expire on various dates
through 2011. Most leases provide for additional contingent rents based on a
percentage of sales and increases in real estate taxes. Future minimum annual
lease payments under noncancellable lease agreements in excess of one year at
March 30, 1996 are as follows:
<TABLE>
<S> <C>
1997 $10,105,955
1998 9,539,645
1999 8,668,778
2000 7,237,549
2001 5,989,418
Thereafter 13,329,925
-----------
Total future minimum lease payments $54,871,270
===========
</TABLE>
Rent expense for the years ended March 30, 1996, March 25, 1995 and March 26,
1994 was $10,409,824, $9,160,376 and $7,117,646, respectively, and contingent
rentals were $156,927, $230,024 and $231,894, respectively.
11. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Primary
Net Net (Loss) Common Stock
Gross (Loss) Income Price
Sales Profit Income per Share High Low
------- ------- ------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
1996:
First $19,017 $ 7,248 $(1,461) $(0.29) $3.375 $2.000
Second 20,865 7,901 (1,096) (0.22) 3.000 1.875
Third 33,857 11,860 1,622 0.32 2.750 0.750
Fourth 25,345 9,529 (2,949) (0.60) 2.250 0.938
------- ------- ------- ------
Total $99,084 $36,538 $(3,884) $(0.79)
1995:
First $18,063 7,234 $ (206) $(0.04) $5.750 $3.500
Second 19,932 7,963 (259) (0.05) 5.250 3.750
Third 35,834 12,568 2,054 0.40 5.000 3.500
Fourth 21,868 8,082 (877) (0.17) 4.000 2.500
------- ------- ------- ------
Total $95,697 $35,847 $ 712 $ 0.14
</TABLE>
29
<PAGE> 1
Exhibit 10.8
EMPLOYMENT AGREEMENT
THIS AGREEMENT, entered into as of this 1st day of January 1996, by
and between Theresa Carlise, an individual (the "Executive"), and NATIONAL
RECORD MART, INC., a Delaware Corporation (the "Company"),
WITNESSTH THAT:
WHEREAS, the Executive is the Senior Vice President and Chief Financial
Officer of the Company;
WHEREAS, the Company desires to assure itself of the continued benefit
of the Executive's services and experience and the Executive desires to
continue in the employ of the Company upon the terms and conditions herein set
forth;
NOW, THEREFORE, in consideration of the premises and covenants herein
contained, and intending to be legally bound, the parties hereto agree as
follows:
Section 1. TERM OF EMPLOYMENT.
(a) The term of employment of the Executive under this Agreement shall
be, initially, the three-year period commencing on January 1, 1996 an ending on
December 31, 1998. Said term shall be subject to automatic extension by
operation of the provisions of Section 1(b) hereof to a date not later than
December 31, 2000 (beyond which the term of employment shall not be extended
pursuant to Section 1(b)hereof.
(b) On December 31, 1997, the term of employment of the Executive
under this Agreement shall be automatically extended to December 31, 2000,
unless either party, acting under this Section 1(b), has elected to fix the
expiration date of the Executive's term of employment hereunder. Each of the
parties shall have the right, excercisable by written notice to the other, to
terminate the automatic renewal provided for herein and thereby to fix the
expiration of the term of employment under this Section 1, PROVIDED such notice
shall have been delivered no later than December 15, 1997. Notice of
termination of automatic renewal having been given as foresaid, the term of the
employment of the Executive under Section 1 shall continue until December 31,
1998 and then terminate. Said term shall not continue after December 31, 2000
whether or not such notice shall have been given.
(c) Notwithstanding the provisions of Sections 1(a) and (b), the term
of employment of the Executive under this Agreement shall be subject to
immediate early termination, at the election of the Company, by:
(i) dismissal of the Executive from her employment by William A.
Teitelbaum, ("WAT").
<PAGE> 2
(ii) determination of disability of the Executive pursuant to section 4
hereof; or
(iii) death of the Executive;
PROVIDED, HOWEVER, that (1) in the event of termination pursuant to paragraph
(i) above without "proper cause" (as defined in Section 5 of this Agreement),
the Company shall thereafter be and remain obligated to pay to the Executive
(or her estate) the compensation and benefits described in Section 3 (a), (b),
(c) (i) (limited of group life and health insurance coverages, excludes
vacation), if Company policies permit until expiration of the term of
employment established by section 1(a) as the same may theretofore have been
extended pursuant to Section 1(b) hereof; (2) in the event of termination
pursuant to paragraph (i) above for proper cause, the Company shall thereupon
be relieved of its obligations to pay any compensation and benefits under
Section 3 hereof (except for accrued and unpaid items); (3), in the event of
termination pursuant to paragraph (ii) above, the provisions of Section 4
hereof shall apply;
Section 2. SERVICES TO BE RENDERED.
The Company hereby agrees to employ the executive as the Senior Vice
President and Chief Financial Officer of the Company to serve at its
headquarters office which will be located in the Pittsburgh, Pennsylvania area,
or wherever so designated by WAT, subject to the terms, conditions and
provisions of this Agreement. The Executive hereby accepts such employment and
agrees to serve without additional compensation, if elected, as an officer
and/or director of the Company, subsidiary or future affiliate of the Company
in accordance with Section 9 hereof. The Executive shall devote her best
efforts to such employment. Executive agrees that, without express written
permission from the Chief Executive Officer of the Company, she shall not be
employed with or for any other person or entity, and shall not operate her own
business, while she is employed under this Agreement.
Section 3. COMPENSATION
In consideration for services rendered to the Company under this
Agreement the Company shall pay and provide to the executive the following
compensation and benefits.
(a) SALARY. The Company shall pay the Executive a minimum base salary
at the rate of $100,000 per year during the term hereof, to be paid in
accordance with the Company's normal payroll practice, with such minimum base
salary may be adjusted from time to time to reflect (i) such merit increases as
the Chief Executive Officer may determine appropriate and (ii) annual cost of
living increases commensurate with those given other key executive officers of
the Company.
(b) BONUS COMPENSATION. In addition to Base Salary, Executive will be
eligible to receive such incentive compensation as the Board of Directors of
the Company may determine to be appropriate.
2
<PAGE> 3
(c) FRINGE BENEFITS. The executive shall be entitled to (i) vacations
(three weeks per year), retirement benefits and other fringe benefits,
including but not limited to group life, a $250,000 split life insurance
coverage, disability and health insurance coverages, pursuant to compensation
policies and practices of the Company from time to time prevailing (now and in
the future) with respect to persons who are key executive officers of the
Company, (ii) the use of office space comparable to that to which she presently
occupies, and (iii) participation in any and all benefit plans adopted by the
Company. The Company shall provide the Executive with an automobile consistent
with the automobile heretofore provided to her by the Company, and the Company
shall maintain such automobile at its expense, including but not limited to
provided insurance for such vehicle. The Company shall reimburse the Executive
for business expenses reasonably incurred by her in connection with the
performance of her services to the Company under this agreement.
Section 4. DISABILITY.
The term of employment of the Executive under this Agreement may be
terminated at the election of the Company upon a determination by the Company,
that the Executive will be unable, by reason of physical or mental incapacity,
to perform the reasonably expected duties assigned to her pursuant to this
Agreement for a period longer than six consecutive months or more than nine
months, in any consecutive twelve month period. In the exercise of this
discretion, the Company shall give due consideration to, among such other
factors as he deems appropriate, the best interest of the Company, the opinion
of the Executive's personal physician or physicians. The Executive may submit to
examination by any physician or physicians selected by the Chief Executive
Officer and shall otherwise cooperate with the Company in making the
determination contemplated (such cooperation to include without limitation,
consenting to the release of information by any such physician(s) to the Chief
Executive Officer). In the event of such termination, the Company shall, by
written notice to executive, terminate Executive's employment hereunder. Upon
delivery to Executive of such notice, together with payment of any salary
accrued under Section 3 hereof, her employment and all obligations of the
Company shall forthwith terminate.
Section 5. TERMINATION FOR PROPER CAUSE. The occurrence of the
following events or circumstances shall constitute "proper cause" for
termination, at the election of the Chief Executive Officer, of the term of
employment of the Executive under this Agreement, to wit:
(a) the Executive shall resign as officer or employee of the Company
or any significant subsidiary without approval of Chief Executive Officer for
reasons other than a breach of this Agreement in any material respect by the
Company which has not been cured
3
<PAGE> 4
within a 30 calendar days after the Company's receipt of written notice of
such breach from the Executive;
(b) the perpetration of defalcations of the Executive involving the
Company or any of its affiliates, as established by certified public accountants
employed by the Company;
(c) failure by the Executive, after advance written notice to her, to
comply with reasonable policies or directives of the Chief Executive Officer; or
(d) the Executive shall breach this Agreement in any other material
respect and fail to cure such breach within 30 calendar days after the
Executive receives written notice of such breach from the Company.
Section 6. NON COMPETITION. Executive covenants and agrees that during
the period of her employment hereunder and for a period of one (1) year,
("Restricted Period") following the termination of her employment, Executive
shall not engage directly or indirectly whether as principal or as agent,
officer, director, consultant, employee, or otherwise alone, or in association
with any other person or corporation or other entity, in any Competitive
Enterprise. For purposes of this Agreement "Competitive Enterprise" shall mean:
(a) "Competitive Enterprise" means any person, firm or corporation
that directly or indirectly (i) is engaged in the retail distribution of
pre-recorded music and video products or any other activity which is
competitive with the Company or any of its future subsidiaries and (ii)
conducts such retail distribution or other activities described in clause (i)
above in any state in which the Company or any of its present or future
subsidiaries then operates.
If the employment of the Executive hereunder shall have been
terminated without proper cause pursuant to paragraph (i) of Section 1(c)
hereof or because of disability pursuant to (ii) of Section 1(c), the Executive
may at her election be discharged from the covenants of this section 6 at any
time during the Restricted Period hereof.
Section 7 CONFIDENTIALITY. Employee recognizes and acknowledges
that:
(a) in the course of her employment by the company it will be
necessary for her to acquire and or develop information concerning the
Company's current and prospective customers, its methods and ways of doing
business, its plans and goals for the future activities and other confidential
and proprietary information belonging to the Company or relating to the
Company's affairs (collectively referred to herein as the "Confidential
Information");
4
<PAGE> 5
(b) the Confidential Information is the property of the Company;
(c) the use, misappropriation or disclosure of the Confidentiality
would constitute a breach of trust and could cause irreparable injury to the
Company; and
(d) it is essential to the protection of the Company's good will and
to the maintenance of the Company's competitive position that the Confidential
Information be kept secret and not be disclosed to others or used to
executive's own advantage or advantage of others.
(e) obligation under Section 7 to continue after termination of this
agreement for any reason.
Section 8. RETURN OF MATERIALS. Upon the termination of Executive's
employment with the Company for any reason, she shall promptly deliver to the
Company all materials, documents or things containing or constituting
Confidential Information and all other company property.
Section 9. NON-SOLICITATION OF EMPLOYEES. Executive agrees that, during
her employment with the Company and for two years following the termination from
the Company for any reason, she shall not directly or indirectly solicit or
induce, or attempt to solicit or induce, any employee of the Company or any
Affiliate to leave the Company or any Affiliate for any reason whatsoever, or,
without the express approval of the Chief Executive Officer.
Section 10. INJUNCTIVE RELIEF. It is understood and agreed by and
between the parties hereto that the Company will not have an adequate remedy at
law for breach of the obligations in Sections 6, 7, 8 and 9 of this Agreement
and, therefore, Executive agrees that the Company shall have available for any
breach of said obligations the remedies of specific performance and injunctive
relief, together with all other available remedies at law and in equity. This
provision shall not be construed as a waiver of any of the remedies which the
Company may have for damages or otherwise.
Section 11. AUTHORIZATION TO MODIFY RESTRICTIONS. It is the intention
of the parties that the provisions of Section 6, 7, 8, 9 and 10 hereof shall be
enforceable to the fullest extent permissible under applicable law, but that
the unenforceability (or modification to conform to such law) of any provision
or provisions hereof shall not render unenforceable, or impair, the remainder
thereof. If any provision or provisions of this Agreement shall be deemed
invalid or unenforceable, either in whole or in part, this Agreement shall be
deemed amended to the minimal extent possible to delete or modify as necessary,
the
5
<PAGE> 6
offending provision or provisions and to alter the bounds thereof in order to
render it valid and enforceable.
Section 12. ENTIRE AGREEMENT. This Agreement sets forth the entire
understanding of the parties in respect of the subject matter contained herein
and may be amended only by a writing signed by both parties.
Section 13. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania.
Section 14. ARBITRATION. Any dispute or controversy as to the
validity, interpretation, construction, application or enforcement of, or
otherwise arising under or in connection with this Agreement, shall be
submitted at the request of either party hereto for resolution and settlement
through arbitration in Pittsburgh, Pennsylvania in accordance with the rules
then prevailing with the American Arbitration association. Any award rendered
therein shall be final and binding on each of the parties hereto and their
heirs, executors administrators and successors and assigns, and judgment may be
entered thereon in any court having jurisdiction. The provisions of Sections
12, 13, and 14 shall not be deemed to limit the rights and remedies reserved to
the Company under and pursuant to Section 10 hereof.
Section 15. NOTICES.
All notices and other communications which are required or may be
given under this agreement shall be in writing and shall be deemed to have been
given if delivered personally or sent by registered or certified mail, return
receipt requested, postage prepaid and addressed as follows:
(a) To the Company: National Record Mart, Inc.
507 Forest Avenue
Carnegie, PA 15106
Attention: William Teitelbaum
(b) To the Employee: Theresa Carlise
754 Shady Lane
Pittsburgh, PA 15228
(c) With a copy to: Robert F. Prorok, Esquire
Reed Smith Shaw and McClay
435 Sixth Avenue
Pittsburgh, PA 15219
6
<PAGE> 7
or to such other place as either party shall have specified by notice in
writing to the other.
Section 16. COUNTERPARTS, SECTION HEADINGS. This Agreement may be
executed in any number of counterparts, each of which shall be deemed to be an
original, but all of which together shall constitute one in the same
instrument. The section headings of this Agreement are for convenience of
reference only and shall not effect the construction or interpretation of any
of the provisions hereof.
Section 17. BOARD APPROVAL. This Agreement is subject to, and will not
become effective without, approval by the Board of Directors of the Company.
Section 18. AGREEMENT BINDING. This Agreement shall be binding upon,
and shall inure to the benefit of, the Executive and the Company and their
respective permitted successors, assigns, heirs, legal representatives and
beneficiaries.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
cause this Agreement to be executed this 1st day of May 1996.
WITNESS: EXECUTIVE
/s/ PAULA THOMPSON /s/ THERESA CARLISE
- - ----------------------------- -----------------------------
ATTEST: NATIONAL RECORD MART, INC.
By: /s/ LYNDA HUFFMAN By: /s/ WILLIAM A. TEITELBAUM
----------------------------- -----------------------------
Lynda Huffman, William A. Teitelbaum
Secretary Chief Executive Officer
7
<PAGE> 1
NATIONAL RECORD MART, INC.
507 Forest Avenue
Carnegie, Pennsylvania 15106
June 15, 1996
Mr. William A. Teitelbaum
16 Carlise Drive
Old Brookville, New York 11545
Re: STOCK OPTION AGREEMENT
Dear Mr. Teitelbaum:
1. OPTION GRANT.
I am pleased to advise you that in recognition of your
services to National Record Mart, Inc. (the "Company") and as an incentive for
you to continue to provide such services, as of the date hereof, the Company
hereby grants to you an option to purchase up to 200,000 shares (the "Shares")
of Common Stock, par value $.01 per share (the "Common Stock"), of the Company
at an option exercise price of $2.50 per share (the "Option").
2. VESTING SCHEDULE.
The option expires at 5:00 p.m. , Eastern Time, on June 15,
2007 (the "Expiration Date"). The Option shall not be exercisable other than in
accordance with the following vesting schedule: 50,000 Shares shall vest on
June 15, 1997; thereafter, 50,000 Shares of Common Stock shall vest on June 15
of each of the next succeeding three (3) years until June 15, 2000, except as
otherwise provided herein.
All Shares shall automatically vest in the event of a
"Vesting Event" (as hereinafter defined) and, upon the occurrence of such
event, the Option shall be immediately exercisable for a period of seven (7)
years thereafter. For the purposes of this Agreement, a "Vesting Event" shall
mean:
(a) The acquisition, in one or more transactions, by any
individual, entity or group, of beneficial ownership of a number of shares of
Common Stock (or other voting securities of the Company) in excess of fifty
percent (50%) of the total outstanding shares of Common Stock (or other voting
securities); or
(b) Approval by the shareholders of the Company of a
reorganization, merger or consolidation unless all of the individuals or
entities who were the respective
<PAGE> 2
William A. Teitelbaum 2 June 15, 1996
beneficial owners of outstanding Common Stock immediately prior to such
transaction own directly or indirectly more than fifty percent (50%) of
the outstanding Common Stock (or voting securities) following such
transaction; or
(c) Approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company or a sale or other disposition of all
or substantially all the assets of the Company; or
(d) Termination of your employment with the Company for any
reason other than "proper cause" (as such term is defined in that certain
Employment Agreement by and between you and the Company dated as of the 1st day
of April, 1993 (the "Employment Agreement"); or
(e) Your death.
3. TERMINATION OF OPTION.
If your employment with the Company is terminated for proper
cause, or if you elect to resign from the Company at any time prior to June 15,
2001, then (a) the Option shall terminate automatically on such date of
termination as to all unvested Shares and (b) the Option as to all vested
Shares may be exercised by you (or your personal representative should you die
thereafter, as the case may be) at any time within five years after such
termination, at the end of which period the Option shall automatically
terminate. Notwithstanding the foregoing, the Option may not be exercised
beyond the Expiration Date.
4. RESTRICTIONS ON ALIENATION.
(a) Except as specifically provided below, the Option may not
be assigned or transferred, and the Option shall be exercisable during your
lifetime only by you. More particularly, but without limiting the generality of
the foregoing, the Option shall not be subject to anticipation, alienation,
sale, gift, assignment, or lien of any kind, either voluntary or involuntary,
whether arising at law or equity other than by testamentary gift, subject to
the limits on exercise of the Option by your person representative. Any
attempted anticipation, alienation, sale, gift, assignment, pledge,
hypothecation, encumbrance, charge, garnishment or other disposing of the
Option and any levy or any attachment or similar process upon the Option will
be null and void and without effect, and the Company may, in its discretion
upon the happening of any such event, terminate the Option immediately.
(b) The provisions of subsection (a) above shall not apply to
the transfer or retransfer of any Option right by you in any manner including
inter vivos gift or at death, and with or without consideration, to any spouse,
parent, child, grandchild or lineal descendant of such holder, provided all
such transferees shall take such Option rights subject to all the restrictions,
terms and conditions of this Agreement and shall execute
<PAGE> 3
William A. Teitelbaum 3 June 15, 1996
and deliver to the Secretary of the Company a written statement
confirming the same prior to acquiring any right to the Option.
(c) Each certificate representing Shares issued pursuant to
the Option may have noted thereon the following legend:
"The shares of stock represented by this certificate have not
been registered under the Securities Act of 1933, as amended,
or any state securities law (the "Acts") and may not be
transferred by the holder except (a) pursuant to a
Registration Statement effective under the Acts, or (b)
pursuant to an exemption from the registration requirements of
the Acts and the delivery of a legal option satisfactory to
counsel for National Record Mart, Inc. that such registration
is not required."
5. ADJUSTMENT OF COMMON STOCK.
The number of Shares (vested and unvested) which shall at any
time be and remain subject to purchase pursuant to exercise of the Option,
shall be adjusted in the following events:
(a) DIVIDENDS. In the event that a dividend shall be declared
upon the Common Stock of the Company payable in shares of said stock, the number
of Shares covered by the Option shall be adjusted by adding thereto the number
of shares of Common Stock which would have been distributable thereon if such
Shares had been outstanding on the date fixed for determining the stockholders
entitled to receive such stock dividend.
(b) REORGANIZATIONS, CONSOLIDATION, MERGERS. In the event that
the outstanding shares of Common Stock of the Company shall be changed into or
exchanged for a different number or kind of shares of stock or other securities
of the Company or of another corporation, whether through reorganization,
recapitalization, stock split-up, combination of shares, merger or
consolidation, then there shall be substituted for the Shares covered by the
Option, the number and kind of shares of stock or other securities which would
have been substituted therefor if such Shares had been outstanding on the date
fixed for determining the stockholders entitled to receive such changed or
substituted stock or other securities.
(c) OTHER CHANGES. In the event there shall be any change,
other than specified above or below in this Agreement, in the number or kind of
outstanding shares of Common Stock of the Company or of any stock or other
securities into which such Common Stock shall be changed or for which it shall
have been exchanged, then if the Board of Directors shall determine, in good
faith, that such change equitably requires an adjustment in the number or kind
of Shares covered by the Option, such adjustment
<PAGE> 4
William A. Teitelbaum 4 June 15, 1996
shall be made by the Board of Directors and shall be effective and binding for
all purposes on this Agreement.
The adjustment of the Common Stock to which this Section 5
applies shall be in the same manner, number and amount as all outstanding
Common Stock is adjusted, as determined by the Board.
6. OTHER OPTION TERMS.
Except as specifically set forth herein, on or before the
Expiration Date, the Option for vested shares may be exercised in whole or in
part any time and from time to time. The Option may be exercised by delivery of
written notice to the Company setting forth the election to exercise and the
number of shares to be purchased. The notice must be dated and signed by the
person(s) exercising the Option and must be accompanied by such documents as
the Company may reasonably request as specified below. If the Option is
exercised by someone other than yourself, the notice must be accompanied by
proof, satisfactory to the Company, of the right of such person(s) to exercise
the Option.
The option price upon exercise of all or part of the Option
must be paid in full in United States dollars in cash (by check, bank draft or
money order).
The date of exercise of the Option is the date on which the
notice of exercise, proof of right to exercise (if required) and payment in
full for the Shares to be purchased are received by the Company at its office
located at 507 Forest Avenue, Carnegie, PA 15105, to the attention of the
Company's Corporate Secretary. As of the date of exercise, you will be
considered by the Company for all purposes to be the owner of the Shares
purchased, subject to the terms set forth in this Agreement.
7. SECURITIES LAW MATTERS.
Neither this Agreement, nor the Shares issuable on exercise
of the Option have been registered under the Securities Act of 1933 or any
other securities laws (the "Acts"). Therefore, in order, among other things, to
ensure compliance with the Acts, notwithstanding anything else in this
Agreement to the contrary, you agree, by accepting this Agreement, as follows:
This Agreement and the Shares which may be issued upon the exercise of the
Option, may not be sold, transferred, pledged or hypothecated in the absence of
(i) an effective registration statement or post-effective amendment thereto for
such Option, or Shares, respectively, under the Acts; or (ii) the availability
of an exemption from the registration requirements of the Acts and, at the
reasonable request of the Company, an opinion of counsel reasonably
satisfactory to the Company that registration is not required under the Acts.
<PAGE> 5
William A. Teitelbaum 5 June 15, 1996
The Company is under no obligation to register the Common
Stock which may be issued or delivered upon the exercise of the Option under
the 1993 Act, to register such Common Stock, or take any other action, under
any state or foreign securities law in connection with the offer or sale of
such Common Stock or to prepare any disclosure document for distribution to you
under the 1933 Act or any state or foreign securities law in connection with
such offer or sale.
Prior to the issuance or delivery of any Shares pursuant to the
exercise of the Option in whole or in part, you may be required to represent
and warrant (i) that the Shares to be acquired upon exercise of the Option are
being acquired for investment for your own account and not with a view to the
resale or other distribution thereof and (ii) that you will not sell or
otherwise transfer any such Shares unless the Shares are registered under the
1933 Act or an exemption from registration is available. The certificate or
certificates representing the Shares to be issued or delivered upon exercise of
the Option may bear a legend to this effect and other legends required by any
applicable securities laws, and if the Company should at some time engage the
services of a stock transfer agent, appropriate stop-transfer instructions may
be issued by the Company to such stock transfer agent with respect to such
Common Stock.
8. MISCELLANEOUS.
When accepted by you, this Agreement shall constitute an
agreement which shall be binding upon the successors and assigns of the Company
and upon your heirs, legal representatives, successors and assigns. Except as
otherwise specifically set forth above, neither this Agreement, the Option, nor
any Shares acquired by you pursuant to the Option, may be assigned, transferred,
pledged, hypothecated or similarly disposed of except as provided herein.
The Company covenants that, so long as the Option is
exercisable, it will reserve from its authorized and unissued Common Stock a
sufficient number of shares to provide for the delivery of stock pursuant to
the exercise of the Option.
This Agreement does not confer upon you any rights of a
stockholder of the Company, including, without limitation, any right to vote or
to consent to or receive notice as a stockholder of the Company.
The exercise of the Option when the fair market value of the
Common Stock exceeds the option exercise price will cause you to recognize
taxable income equal to such excess. You hereby authorize the Company to
withhold from your salary or any other payment due to you, upon exercise of all
or any portion of the Option, the amount of any taxes required by law to be
withheld with respect to the exercise of the Option of any portion thereof, as
determined by the Company in its reasonable discretion. Such amount may be
withheld at any time after exercise of the Option or portion thereof, in a lump
sum or installments, in the Company's reasonable discretion.
<PAGE> 6
William A. Teitelbaum 6 June 15, 1996
This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania. If you wish to
accept this Agreement please sign, date and return one copy to the Secretary of
National Record Mart, Inc., 507 Forest Avenue, Carnegie, Pennsylvania 15106.
Very truly yours,
NATIONAL RECORD MART, INC.
By: /s/ THERESA CARLISE
---------------------------
Receipt Acknowledged and
Option Accepted:
/s/ WILLIAM A. TEITELBAUM
- - ------------------------------
William A. Teitelbaum
DATE: June 15, 1996
-------------------------
<PAGE> 1
EXHIBIT 11
NATIONAL RECORD MART, INC.
CALCULATION OF NET INCOME PER COMMON SHARE
FOR THE YEARS ENDED MARCH 30, 1996, MARCH 25, 1995 AND MARCH 26, 1994
<TABLE>
<CAPTION>
March 30, March 25, March 26,
1996 1995 1994
------------- ------------ ------------
<S> <C>
Weighted average common shares outstanding 4,937,103 5,010,264 4,507,620
Dilutive common stock equivalents - 200,000 211,946*
Incremental shares assumed to be outstanding
relating to previously existing stock warrants - - 38,704
Treasury stock assumed to be repurchased using
proceeds from options and warrants (9,678) (4,785) (23,540)
----------- ---------- ----------
Weighted average common shares and equivalents
outstanding 4,927,425 5,205,479 4,734,730
=========== ========== ==========
Net (Loss) Income $(3,884,416) $ 712,198 $2,489,624
=========== ========== ==========
Primary and fully diluted earnings per share $ (0.79) $ 0.14 $ 0.53
=========== ========== ==========
</TABLE>
* Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, stock options and warrants granted during the twelve-month period preceding
the date of the IPO have been included in the calculation of the weighted
average common shares outstanding for the entire year including the period
prior to the effective date of the IPO.
30
<PAGE> 1
EXHIBIT 21
SUBSIDIARY OF
NATIONAL RECORD MART, INC.
<TABLE>
<CAPTION>
NRM, INC.'S
JURISDICTION OF OWNERSHIP
COMPANY INCORPORATION INTEREST
- - ------- --------------- -----------
<S> <C> <C>
National Record Mart Investments, Inc. Delaware 100%
</TABLE>
31
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000904535
<NAME> NATIONAL RECORD MART INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-30-1996
<PERIOD-START> MAR-26-1995
<PERIOD-END> MAR-30-1996
<CASH> 560,337
<SECURITIES> 0
<RECEIVABLES> 8,212
<ALLOWANCES> 0
<INVENTORY> 35,352,623
<CURRENT-ASSETS> 39,026,021
<PP&E> 20,503,860
<DEPRECIATION> 10,602,382
<TOTAL-ASSETS> 52,923,591
<CURRENT-LIABILITIES> 16,781,512
<BONDS> 0
<COMMON> 50,379
0
0
<OTHER-SE> 17,127,342
<TOTAL-LIABILITY-AND-EQUITY> 52,923,591
<SALES> 99,084,459
<TOTAL-REVENUES> 99,084,459
<CGS> 62,546,760
<TOTAL-COSTS> 62,546,760
<OTHER-EXPENSES> 40,975,891
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,631,208
<INCOME-PRETAX> (6,069,400)
<INCOME-TAX> (2,184,984)
<INCOME-CONTINUING> (3,884,416)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,884,416)
<EPS-PRIMARY> (0.79)
<EPS-DILUTED> (0.79)
</TABLE>
