<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 29, 1997
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 reports), 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 20,
1997 as reported on the NASDAQ National Market System, was approximately
$4,333,668. 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 20, 1997, Registrant had outstanding 4,872,000 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 17, 1997 (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 prerecorded home entertainment
products, including compact discs ("CD"), audio cassettes, videos and related
accessories. According to Billboard magazine, the Company is the seventh
largest specialty retailer of prerecorded music in the country as measured by
number of stores. The Company is a leading specialty music retailer in its core
western Pennsylvania/eastern Ohio market.
As of March 29, 1997, the Company operated 147 stores in 27 states
primarily in the eastern part of the United States. The Company has four
distinct store concepts: National Record Mart or NRM Music; Waves Music; Music
Oasis and Vibes Music. The Company over the past year has redesigned the Waves
Music store concept as a strategic mall-based growth format for the future. The
prototype Waves store ranges from 4,000 to 7,000 square feet with an expanded
inventory capacity of $400,000. The Waves strategy is to dominate the retail
music category within the mall where the store is located and, where stores are
located in a number of malls in a geographic area, to dominate in such area.
The Company's focus is marketing and merchandising. The Company has
designed, tested and deployed its new marketing program, Passport. The Company
believes that the Passport marketing initiative will create incremental sales,
increase the average purchase per transaction, produce customer loyalty and
provide our vendors the opportunity to focus on the sale of specific products
and music genres.
The administrative focus of the Company will be targeted to
maintaining and improving margins through a combination of price management,
inventory management and prevention of losses through theft.
The Company opened 8 new stores and closed 12 under-performing units
for a net decrease of 4 stores during fiscal 1997. Although the Company does
not expect to change its store count significantly in the foreseeable future,
the Company will remain alert to the opportunities to acquire other music
retail businesses which may be offered for sale as industry consolidation
continues.
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. Such factors include: the pricing and marketing
activities of large diversified retailers within the geographic area of the
Company's operations; the extent to which recording artists release "hit"
recordings; changes in sales and advertising promotion practices by the major
music distributors; weather, especially during the Christmas selling season;
and interest rates, which affect the Company's financing costs.
TRENDS AND CHANGES AFFECTING THE MUSIC INDUSTRY
As described in Billboard and other industry publications,
the specialty music retailing industry continues to experience financial
distress, caused largely by pressure on margins resulting from competition from
large diversified retailers and other factors. This distress is evidenced by an
industry-wide reduction in store count, and several bankruptcy filings among
specialty retailers. This situation has created certain opportunities. For
example, store closings create favorable real estate acquisition possibilities.
In addition, vendors have begun to quote extended payment terms to retailers
who are financially stable. Also, vendors are increasing their emphasis upon
Minimum Advertising Policies. Under these policies, funds which are ordinarily
made available by vendors to fund advertising
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expenditures by retailers are withheld for varying periods of time for
retailers which sell at retail prices below minimum prices established by the
vendors.
The sales for many new releases by established "superstar" artists
have fallen short of industry expectations. The retail music business
environment is marked by limited sales peaks, of short duration, by developing
artists, particularly in the rap music genre.
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 and related accessories with a more limited selection of movie
and music videos. The following table shows the percentage of the Company's
total merchandise sales attributable to each product group:
<TABLE>
<CAPTION>
Products Fiscal Years
- -------- 1997 1996 1995
--------- --------- -------
<S> <C> <C> <C>
CDs 66.8% 61.6% 59.0%
Prerecorded audio cassettes 17.7 22.1 28.0
Singles 6.5 6.9 5.1
Movie and music videos 2.3 2.4 2.7
Accessories and other * 6.7 7.0 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 Video cassettes. The Company's stores offer for sale a
selection of prerecorded video cassettes, 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.
Tickets
To increase customer traffic, the Company offers tickets to
entertainment events in most of its stores located in certain markets and
states, including Pittsburgh, Youngstown, Cleveland, Cincinnati,
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Columbus, Dayton, Green Bay, Madison, Chicago, Louisville, Milwaukee, and Iowa,
Kansas and Rhode Island. 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 "Sound Discoveries" program. "Sound Discoveries" features
releases by new artists in pop and alternative formats and new releases by
established artists in other genres.
Passport, the Company's newly-launched marketing program, allows a
customer to earn points on every CD or tape purchase, which may be redeemed for
a free CD or cassette of choice. The program combines the standard customer
loyalty incentives of frequent buyer programs, with cross-promotional pricing
and marketing opportunities for music manufacturers and other retail chains.
Passport also provides for database marketing directly to consumers on a
sophisticated, targeted basis. The Company believes that Passport has the
potential to differentiate its stores from the competition, while creating
incremental sales and increasing the average purchase per transaction.
CUSTOMER SERVICE
Customer service continues to receive the highest priority in the
Company's stores. In fiscal 1997 a restructured field supervisor team and human
resource department were developed to support customer service programs at the
store level. Additionally, the Company remerchandised its stores and upgraded
employee standards to broaden its appeal to older, more affluent customers.
Furthermore, the frequent buyer program Passport was designed to improve
customer loyalty to the Company's stores.
STORE EXPANSION STRATEGY
The Company's strategy is to redeploy its store related assets from
the stores it considers under-performing or where leases are expiring to
retail opportunities that provide greater potential than formerly generated.
The Company added 8 stores in fiscal 1997, and closed 12 stores, which
were performing under the Company's expectations. During fiscal 1996, the
Company opened 16 locations, and closed 6 stores.
INVENTORY MANAGEMENT
The Company utilizes a proprietary interactive management information
and point of sale system, FOCUS 1000. This combined system permits complete
sales data and customer transactions to interact with the Company's purchasing,
inventory control and accounting functions.
Inventory Management System. FOCUS 1000 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
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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 parameters 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. The
system segments the Company's products into over twenty specific music
categories and tracks sales in each store by category to fit the sales by
category, so as to optimize sales/inventory ratios in each store.
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 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.
Loss Prevention. The Company experienced a significant increase in
overall inventory shrinkage during fiscal 1997. Inventory shrinkage includes
internal and external theft. In the first quarter of fiscal 1998, the Company
instituted a comprehensive loss prevention program which includes: increased
cycle counts, more frequent store audits, more selective recruiting and
training of store employees and the services of an external asset protection
firm.
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 material
long-term purchase agreements with its suppliers.
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.
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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, an incentive payment
is issued on most purchases and a penalty restocking fee is charged on only the
product returned. If the retailer returns-to-purchases ratio with the major
vendors is below a certain point, (generally 14% to 17%) the retailer will
benefit. The Company's return 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 prerecorded music 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. Recently, numerous internet-based music
mail order companies have entered the competitive marketplace. 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.
TRADEMARKS AND SERVICE MARKS
The Company operates its stores under various names and service marks,
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 obtained federal
registrations of its trademarks and service marks Waves Music, NRM Music, Oasis
Music & Video and Music Oasis and has applied for registration of its service
marks in Vibes Music, Music X and Passport. The application for registration of
the service mark Vibes Music has been opposed by two parties. These oppositions
are currently pending before the Trademark trial and appeal board. In addition,
the Company is currently maintaining an action against one of the opposers in
the United States District Court for the Western District of Pennsylvania
seeking a determination that no likelihood of confusion exists between the
Company's Vibes Music service mark and the mark of that opposer. 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.
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PERSONNEL
As of March 29, 1997, the Company employed 1,186 persons, 135 of whom
worked at the Company's headquarters (including 8 part-time employees) or were
area supervisors and 1,077 of whom worked at the Company's stores (including
704 part-time employees). The Company also adds part-time personnel during the
Christmas season. In December 1996, the Company employed approximately 422
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 2007. 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>
1997 6 2001 23
1998 16 2002 16
1999 27 2003 13
2000 14 2004 and thereafter 32
</TABLE>
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. See "Item 1. Business - Trademarks and Service Marks"
for a description of certain litigation relating to one of the Company's
service marks.
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 1997.
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EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with
respect to the executive officers of the Company as of June 20, 1997.
<TABLE>
<CAPTION>
Name Age Office with the Company
---- --- -----------------------
<S> <C> <C>
William A. Teitelbaum 46 Chairman, CEO and
Director
Larry K. Mundorf 48 President and COO
Theresa Carlise 38 Senior Vice President, CFO,
Treasurer and Director
George Balicky 47 Vice President of Merchandising
Lynda J. Huffman 53 Secretary and Audit Manager
</TABLE>
William Teitelbaum has served as Chairman of the Company since 1986 and served
as President since 1991. In January of 1997 Mr. Teitelbaum resigned as
President in order to recognize the contribution to the Company of Mr. Mundorf.
Mr. Teitelbaum retains his position as Chairman and Chief Executive Officer.
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.
Larry Mundorf joined NRM in January of 1996 as Executive Vice President and
Chief Operating Officer. In January of 1997, the Board of Directors appointed
Mr. Mundorf President. 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.
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.
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.
Officers are elected annually to serve until the ensuing year or until
their successors are duly elected.
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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 9 of
Notes to Consolidated Financial Statements.
As of June 20, 1997, the approximate number of common stockholders of
record was 102. The approximate number of total stockholders as of that date
was 1,500.
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 29, March 30, March 25, March 26, March 27,
1997 1996(1)(5) 1995 1994(2)(4) 1993(3)(4)
--------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales $ 99,439 $ 99,084 $95,697 $80,628 $72,720
Gross profit 37,106 36,538 35,847 32,281 29,364
Selling, general and administrative expenses 34,385 34,542 30,589 25,279 22,987
Depreciation and amortization 2,725 3,117 2,683 2,064 1,925
Impairment of assets write-down -- 2,906 -- -- --
Interest expense, net 1,696 1,597 1,011 571 615
Other (income) expense, net (26) 446 450 175 544
Net (loss) income before income tax (benefit) expense (1,674) (6,069) 1,115 4,192 3,293
Net (loss) income (1,101) (3,884) 712 2,490 2,275
Net (loss) income per share ($ .23) ($ .79) $ .14 $ .53 $ .59
Weighted average number of shares outstanding 4,852 4,927 5,205 4,735 3,873
SELECTED OPERATING DATA:
Stores open at beginning of year 151 141 118 100 95
Stores opened /acquired during year 8 16 32 21 6
Stores closed /sold during year 12 6 9 3 1
Stores open at end of year 147 151 141 118 100
Comparable store net sales (decrease) increase (.4)% (3)% 3% 5% 17%
BALANCE SHEET DATA:
Working capital $ 23,964 $ 22,245 $25,017 $19,771 $ 8,558
Total assets 55,020 52,924 53,824 45,809 32,644
Long-term debt, including current maturities 21,370 19,468 19,853 12,053 11,385
Stockholders' equity 16,066 17,178 21,173 20,574 8,235
</TABLE>
(1) Each fiscal year consisted of 52 weeks except the fiscal year ended
March 30, 1996, 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 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
OPERATIONS 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
--------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 62.7 63.1 62.5
------ ------ ----
Gross profit 37.3 36.9 37.5
Selling, general and administrative expenses 34.6 34.9 32.0
Impairment of assets write-down -- 2.9 --
Depreciation and amortization 2.7 3.1 2.8
Interest expense, net 1.7 1.6 1.0
Other expense 0.0 0.5 0.5
------ ------ ----
(Loss) income before income taxes (benefit) expense (1.7) (6.1) 1.2
(Benefit) income taxes (0.6) (2.2) 0.4
------ ------ ----
Net (loss) income (1.1)% (3.9)% 0.8%
====== ====== ====
</TABLE>
Net Sales. Net sales increased during fiscal 1997 by $354,000, or 0.4%
compared to fiscal 1996. The sales results are impacted by one less week in
fiscal 1997 compared to the prior year. Comparing the same fifty-two weeks in
each fiscal year results in a total sales increase of 2.0% and a comparable
store increase of 1.2%. For the fifty-three week year in fiscal 1996 the extra
week accounted for approximately $1.6 million in sales. Net sales were also
affected as a result of 8 new stores and 12 store closings for a reduction of 4
stores and a comparable store sales decrease of 0.4%. Comparable store results
were consistent with our industry. The Recording Industry of America, the
industry trade group, stated that calendar 1996 produced 17% fewer platinum
records, those selling at least a million copies, and 20% fewer multi-platinum
records, those selling two million or more, while gold albums, those selling at
least 500,000 copies after returns, increased 14%. Album sales for 1996 were
616.6 million units through December 29, 1996 compared to 616.3 million in 1995
according to SoundScan Inc., a company that tabulates actual music sales.
Net sales increased during fiscal 1996 by 3.5% compared to fiscal
1995, due to 10 additional stores net, and a comparable store decrease of 2.7%.
Lower prices, increased competition, and a reduction in the number of hit music
releases all combined to create a reduction in comparable store sales.
Gross Profit. Gross profit, expressed as a percentage of net sales,
increased from 36.9% in fiscal 1996 to 37.3% or $569,000 in fiscal 1997. The
increase in margin can be attributed to the Company increasing purchase
discounts and increasing its shelf pricing on CD's resulting in a CD gross
profit margin of 35.5%, up from 34.2% in fiscal 1996. Sales of CD's increased
to 66.8% of total sales from 61.6% in fiscal 1996. The margin increase is
partly offset by the Company's increase in inventory shrinkage. As a percentage
of sales, inventory shrinkage increased from 1.0% to 1.8%, resulting in a
reduction in gross profit of 0.8% for fiscal 1997. Gross profit decreased from
37.5% in fiscal 1995 to 36.9% in fiscal 1996 due primarily to an increased
consumer preference to purchase compact discs versus prerecorded cassettes.
During fiscal 1996, compact discs generated an average margin of 34.2% as
compared to prerecorded cassettes with an average margin of 41.3%, while the
sales of the higher profit margin cassettes decreased, as a percentage of total
sales from 28% to 22% for that year.
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Expenses. Selling, general and administrative (SG&A) expenses as a
percentage of sales, decreased from 34.9% in fiscal 1996 to 34.6% in fiscal
1997. The combination of the reduction of operating expenses and the more
effective management of the Company's promotional advertising and marketing
programs are primarily responsible for the reduction in SG&A. As a percentage
of sales, SG&A increased from 32.0% in fiscal 1995 to 34.9% in fiscal 1996.
This net increase was attributable to the 23 additional stores, net, opened in
fiscal 1995.
Depreciation and amortization decreased from $3.1 million in fiscal
1996 to $2.7 million in fiscal 1997. In March of 1996, the Company adopted
Financial Accounting Standards Board Statement No. 121 which resulted in a net
property write-down of approximately $2.9 million. This reduction of property
value decreased depreciation by $573,000 in fiscal 1997. The additional
depreciation associated with new stores and capital improvements was offset by
the elimination of depreciation on fully depreciated assets. In fiscal 1996,
depreciation and amortization increased to $3.1 million from $2.7 million,
primarily due to new stores and capital improvements.
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.
Interest Expense. Interest expense increased to $1.7 million in fiscal
1997 from $1.6 million in fiscal 1996. This slight increase is primarily due to
the increase in borrowings relating to capital improvements and 8 new stores.
In fiscal 1996, interest expense increased to $1.6 million from $1.0 million in
fiscal 1995. The increase is primarily attributable to an increase in the
average interest rate and increased borrowings in connection with the opening
of 16 new stores.
Income Taxes. The Company's effective tax rate in fiscal 1997 and 1996
was 35% and 36%, respectively.
As of March 29, 1997, the Company had net deferred tax assets of
$1,512,000. The ultimate realization of the deferred tax assets is dependent
upon the generation of future taxable income and 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. While the potential for the carryback of
tax losses and reversal of deferred liabilities have been considered,
significant consideration was given to tax planning strategies. Management has
quantified their strategy and has projected that it is sufficient to absorb the
deferred tax asset as of March 29, 1997.
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 36% of the Company's net sales for
fiscal 1997 were generated in the third quarter. (See Note 9 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
RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 128, "Earnings per
Share" ("Statement No. 128"), issued in February 1997 and effective for fiscal
years ending after December 15, 1997 establishes and simplifies standards for
computing and presenting earnings per share ("EPS"). Implementation of this
statement will not have a material impact on the Company's computation or
presentation of EPS.
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 $0.8 million in fiscal
1997, $4.2 million in fiscal 1996 and ($2.4) million in fiscal 1995. During
fiscal 1997, the $0.8 million in cash provided by operating activities was
primarily attributable to improved management of accounts payable and inventory
purchasing. In fiscal 1996 and 1995, the Company's net cash provided by (used
in) operating activities was primarily due to accounts payable management and
the purchase of merchandise inventory and payment of income taxes,
respectively.
During fiscal 1997, 1996 and 1995, the Company used $2.9 million, $3.6
million and $5.0 million, respectively, to purchase property and equipment. The
Company opened 8 new stores and closed 12 stores in fiscal 1997 compared to 16
new stores and 6 closed stores in fiscal 1996. The Company anticipates opening
fewer stores in fiscal 1998 as compared to fiscal 1997. Management estimates
that the capital cost of opening the new stores will be approximately $150,000
per store which will be funded through operating cash flow and the revolving
credit facility excluding inventory of approximately $200,000 per store which
is obtained through trade credit.
The Company maintains a revolving line of credit from an institutional
lender, under which the Company is permitted to borrow up to $26 million,
subject to a borrowing base calculation based upon inventory levels. Advances
under the facility bear interest at a floating rate equal to the lender's base
rate (8.50% at March 29, 1997 plus .50% or, at the Company's option, the 30-day
LIBOR rate (5.5375% at March 29, 1997) plus 2.75%. The five year term of the
revolving line of credit expires in June of 1998.
As of March 29, 1997, the Company's outstanding credit balance on its
Revolver was $21.2 million. The Company's borrowing availability at March 29,
1997 was $926,000. The Revolver balance and the Company's cash requirements
peak in February when the Company's trade payables becomes due from the
Christmas selling season.
The Company is expected to receive in its second and third quarter of
fiscal 1998 refundable income tax payments totaling approximately $1,523,000.
Upon receipt of the refunds the Company will apply the payments to its
revolving credit facility.
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 29, 1997, the Company had purchased 193,292 shares of its stock.
Management believes that cash flows from operations, amounts available
under the revolving credit facility and refundable income tax payments will be
sufficient to meet the Company's current liquidity and capital needs at least
through fiscal 1998.
13
<PAGE> 14
EFFECT OF ECONOMIC PATTERNS AND INFLATION
Issues relating to the results that the Company achieves include the
number and 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 in the last three fiscal years. 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.
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.
14
<PAGE> 15
(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.
(3) EXHIBITS
See exhibit index on page 30.
(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***
10.10 Amendment to the Loan and Security Agreement dated as
of October 17, 1996 between the Company and Fleet Bank
formerly Barclays Business Credit, Inc.****
10.11 Second Amended and Restated Revolving Credit Note
between the Company and Fleet Bank, formerly Barclays
Business Credit****
11 Statement re: Computation of Per Share Earnings****
21 List of Subsidiaries of the Company***
23.1 Consent of Independent Auditors****
* 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 as an exhibit to the Company's annual report on Form 10-K filed for
the fiscal year ended March 30, 1996.
**** Filed herewith.
15
<PAGE> 16
(d) OTHER FINANCIAL STATEMENTS
Not applicable.
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 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>
Chairman of the Board,
/s/ WILLIAM A. TEITELBAUM Chief Executive Officer and Director June 27, 1997
- -------------------------
William A. Teitelbaum
Senior Vice President-
Finance, Chief Financial
Officer, Chief Accounting
/s/ THERESA CARLISE Officer, Treasurer and Director June 27, 1997
- -------------------------
Theresa Carlise
/s/ SAMUEL S. ZACHARIAS Director June 27, 1997
- -------------------------
Samuel S. Zacharias
/s/ IRWIN B. GOLDSTEIN Director June 27, 1997
- -------------------------
Irwin B. Goldstein
</TABLE>
16
<PAGE> 17
NATIONAL RECORD MART, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
<TABLE>
<S> <C>
Report of Independent Auditors 18
Consolidated Statements of Operations for the fiscal years
ended March 29, 1997, March 30, 1996, and March 25, 1995 19
Consolidated Balance Sheets as of March 29, 1997 and March 30, 1996 20
Consolidated Statements of Cash Flows for the fiscal years
ended March 29, 1997, March 30, 1996, and March 25, 1995 21
Consolidated Statements of Stockholders' Equity for the fiscal years
ended March 29, 1997, March 30, 1996, and March 25, 1995 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. and Subsidiary
We have audited the accompanying consolidated balance sheets of National Record
Mart, Inc. and subsidiary as of March 29, 1997 and March 30, 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 29, 1997. 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. and subsidiary at March 29, 1997 and March 30, 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 29, 1997, 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
June 6, 1997
18
<PAGE> 19
NATIONAL RECORD MART, INC. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended March 29, 1997, March 30, 1996 and March 25, 1995
<TABLE>
<CAPTION>
Years Ended
---------------------------------------------------
March 29, March 30, March 25,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales $ 99,438,863 $ 99,084,459 $ 95,696,889
Cost of sales 62,332,670 62,546,760 59,849,675
------------ ------------ ------------
Gross profit 37,106,193 36,537,699 35,847,214
Selling, general and administrative expense 34,385,354 34,541,524 30,588,512
Depreciation and amortization 2,725,030 3,116,547 2,683,056
Impairment of assets write-down -- 2,906,481 --
Interest expense 1,730,893 1,631,208 1,031,459
Interest income (34,656) (34,274) (20,495)
Other (income) expense (26,450) 445,613 449,629
------------ ------------ ------------
Total expenses 38,780,171 42,607,099 34,732,161
------------ ------------ ------------
Net (loss) income before income tax (benefit) expense (1,673,978) (6,069,400) 1,115,053
(Benefit) provision for income taxes (573,307) (2,184,984) 402,855
------------ ------------ ------------
Net (loss) income $ (1,100,671) $ (3,884,416) $ 712,198
============ ============ ============
Net (loss) income per share $ (0.23) $ (0.79) $ 0.14
Weighted average number of common shares and common
equivalent shares (warrants and options) outstanding 4,851,694 4,927,425 5,205,479
</TABLE>
See accompanying notes to consolidated financial statements
19
<PAGE> 20
NATIONAL RECORD MART, INC. and Subsidiary
CONSOLIDATED BALANCE SHEETS
As of March 29, 1997 and March 30, 1996
<TABLE>
<CAPTION>
March 29, March 30,
1997 1996
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 834,889 $ 560,337
Merchandise inventory 37,510,462 35,352,623
Due from stockholder 370,725 388,071
Deferred income taxes 263,000 319,000
Refundable income taxes 1,523,139 1,107,000
Other current assets 1,205,309 1,298,990
----------- -----------
Total current assets 41,707,524 39,026,021
Property and equipment, at cost 23,037,427 20,503,860
Accumulated depreciation and amortization (12,803,745) (10,602,382)
------------ -----------
Property and equipment, net 10,233,682 9,901,478
Other assets:
Deferred income taxes 1,249,000 1,739,000
Long-term investments 262,884 488,704
Intangibles 1,098,984 1,246,434
Other assets 468,205 521,954
----------- -----------
Total other assets 3,079,073 3,996,092
----------- -----------
Total assets $55,020,279 $ 52,923,591
=========== =============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $14,535,131 $13,395,403
Other liabilities and accrued expenses 3,049,032 2,882,922
Current maturities of long-term debt 159,301 503,187
----------- -----------
Total current liabilities 17,743,464 16,781,512
Long-term debt:
Notes payable 34,803 258,415
Revolving credit facility 21,176,204 18,705,943
----------- -----------
Total long-term debt 21,211,007 18,964,358
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 4,844,624
shares and 4,871,716 shares outstanding at
March 29, 1997 and March 30, 1996, respectively 50,379 50,379
Additional paid-in capital 14,057,288 14,004,188
Retained earnings 2,389,125 3,489,796
----------- -----------
16,496,792 17,544,363
Less Treasury Stock, 193,292 shares and 166,200
shares at March 29, 1997 and March 30, 1996,
respectively (430,984) (366,642)
----------- -------------
Total stockholders' equity 16,065,808 17,177,721
----------- -------------
Total liabilities and stockholders' equity $55,020,279 $ 52,923,591
=========== =============
</TABLE>
See accompanying notes to consolidated financial statements
20
<PAGE> 21
NATIONAL RECORD MART, INC. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 29, 1997, March 30, 1996 and March 25, 1995
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------------
March 29, March 30, March 25,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (1,100,671) $ (3,884,416) $ 712,198
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,725,030 3,116,547 2,683,056
Impairment of assets write-down -- 2,906,481 --
Loss from sale of property and equipment 116,269 25,777 75,755
Other (221,900) 158,947 74,002
Deferred income taxes 546,000 (1,078,000) (281,000)
Changes in operating assets and liabilities:
Merchandise inventory (2,157,839) (678,225) (3,921,564)
Other assets (363,945) 151,264 (648,542)
Accounts payable 1,139,728 3,242,626 (658,104)
Other liabilities and accrued expenses 166,110 223,102 660,192
Income taxes payable -- -- (1,123,615)
------------- ------------- -------------
Net cash provided by (used in) operating activities 848,782 4,184,103 (2,427,622)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,942,008) (3,583,214) (4,953,519)
Amounts received from (loaned to) stockholders 17,346 (96,441) (29,101)
Other long-term investments 172,669 219,233 (70,338)
------------- ------------- -------------
Net cash used in investing activities (2,751,993) (3,460,422) (5,052,958)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on debt (115,442,498) (113,891,190) (109,537,847)
Borrowings on revolving line of credit 117,620,261 113,505,662 116,958,902
Deferred financing fees incurred -- -- (22,988)
Costs for initial public offering -- -- (22,472)
Purchases of Treasury Stock -- (185,279) (164,175)
------------- ------------- -------------
Net cash provided by (used in) financing activities 2,177,763 (570,807) 7,211,420
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 274,552 152,874 (269,160)
Cash and cash equivalents, beginning of year 560,337 407,463 676,623
------------- ------------- -------------
Cash and cash equivalents, end of year $ 834,889 $ 560,337 $ 407,463
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements
21
<PAGE> 22
NATIONAL RECORD MART, INC. and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended March 29, 1997, March 30, 1996 and March 25, 1995
<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>
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
Net loss - - - (1,100,671) - - (1,100,671)
Shares obtained in exchange
for notes receivable - - - - 27,092 (64,342) (64,342)
Compensatory stock options - - 53,100 - - - 53,100
----------- -------- ----------- ---------- -------- --------- -----------
Balance at March 29, 1997 5,037,916 $50,379 $14,057,288 $2,389,125 193,292 $(430,984) $16,065,808
=========== ======== =========== ========== ======== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
22
<PAGE> 23
NATIONAL RECORD MART, INC. AND SUBSIDIARY
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 29, 1997, the Company operated 147 stores in 27
states primarily in the eastern part of the United States and operates under
four distinct store concepts, National Record Mart or NRM Music, Waves Music,
Vibes Music 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 1997, 1996 and 1995 ended on March 29 (52
weeks), March 30 (53 weeks) and March 25 (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.
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, cassettes, 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:
<TABLE>
<CAPTION>
March 29, March 30,
Assets Asset Lives 1997 1996
------ ----------- ------------- --------
<S> <C> <C> <C>
Leasehold improvements 8 years $ 10,106,215 $ 9,137,273
Fixtures and equipment 7 years 12,859,493 11,283,779
Vehicles 5 years 71,719 82,808
------------- -------------
Total 23,037,427 20,503,860
Less accumulated depreciation (12,803,745) (10,602,382)
------------ -------------
Property and equipment, net $ 10,233,682 $ 9,901,478
============= =============
</TABLE>
Depreciation expense for the years ended March 29, 1997, March 30, 1996 and
March 25, 1995 was approximately $2,487,000, $2,878,000 and $2,446,000,
respectively.
23
<PAGE> 24
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 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 29, 1997 and March 30,
1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheets for the Company's financial
instruments approximates its fair value.
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 29, 1997, March 30, 1996 and March
25, 1995 were $2,011,000, $2,466,000, and $2,165,000, respectively.
STOCK OPTION PLANS
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 123, "Accounting for Stock-Based Compensation", which establishes
financial accounting and reporting standards for stock based employee
compensation plans. The statement defines a fair value based method of
accounting for an employee stock option, but allows companies to continue to
measure compensation costs for such plans using the intrinsic value based method
of accounting prescribed in Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees." Beginning in 1996, companies
electing to remain with accounting under APB 25 must provide pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting had been applied. The Company plans to continue accounting
for its stock-based employee compensation plan under APB 25. See pro forma
disclosures required under FASB Statement No. 123 in Note 5.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, The Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact of Statement No. 128 on the
calculation of fully diluted earnings per share is not expected to be material.
24
<PAGE> 25
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", 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.
During fiscal 1996, the Company experienced declining sales due to an increase
in competitive factors. These circumstances led to certain stores generating
projected undiscounted future cash flows less than the carrying amount of
property for the stores, which indicated impairment. This resulted in a net
property write-down of $2,906,481 recorded in the fourth quarter of 1996.
3. REVOLVING CREDIT FACILITY AND TERM DEBT
Long-term debt consisted of the following as of:
<TABLE>
<CAPTION>
March 29, March 30,
1997 1996
--------- ---------
<S> <C> <C>
Revolving Credit Facility -- Bears interest at
-------------------------
the bank's base rate (8.5% at March 29, 1997)
plus .5% or the 30-day LIBOR rate (5.5375% at
March 29, 1997) plus 2.75%. Secured by
substantially all of the assets of the Company. $ 21,176,204 $ 18,705,943
Capital Lease Obligations -- Bear interest at
-------------------------
various rates ranging from 7.04% to 9.00%.
Secured by the leased assets. Principal and
interest due in equal monthly amounts through
March 2000. 106,393 309,933
Other 87,711 451,669
----- ------------- -------------
21,370,308 19,467,545
Less current maturities 159,301 503,187
------------- -------------
Long-term debt $ 21,211,007 $ 18,964,358
============= =============
</TABLE>
The Company has a revolving credit facility (the "Revolver") which expires on
June 11, 1998. The maximum borrowings under the Revolver are $26,000,000 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>
1998 159,301
1999 21,192,826
2000 18,181
-------------
Total $ 21,370,308
=============
</TABLE>
25
<PAGE> 26
Although the balance of the Revolver at March 29, 1997 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 $1,731,000, $1,611,000, and $965,000 were made during the
fiscal years ended March 29, 1997, March 30, 1996 and March 25, 1995,
respectively.
4. 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, participants 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.
Contributions made by the Company to its 401(k) plan were $49,000 and $33,000
for the years ended March 29, 1997 and March 30, 1996, respectively.
5. STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees" and the related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123 (FASB 123), "Accounting for Stock-Based Compensation,"
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options is greater than the market price of the
underlying stock on the date of the grant, no compensation expense is
recognized.
The National Record Mart, Inc. 1993 Stock Option Plan (the "Plan") provides for
the grant of 185,000 incentive or non-statutory stock options to purchase
common stock. Employees who share the responsibility for the management growth
or protection of the business of the Company, are eligible to receive options
which are approved by a committee of the Board of Directors. These options
primarily vest over five years and are exercisable for a ten-year period from
the date of the grant.
Additionally, the Company's Board of Directors adopted the National Record
Mart, Inc. 1993 Non-Employee Director Stock Option Plan (the "Director Plan").
The Director Plan provides for the grant of 15,000 stock options to purchase
common stock to all independent members (the "Directors") of the Board of
Directors who are not employees of the Company and who are disinterested
persons (as used in Rule 16b-3 promulgated under the Securities Exchange Act of
1934). These options vest over five years and are exercisable for a ten-year
period from the date of grant.
On 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, 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, or a sale of the Company, or
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. The
option expires on June 15, 2007.
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.
Effective December 18, 1996, Mr. William A. Teitelbaum cancelled his right to
purchase such options. There have been no options granted to Mr. Teitelbaum for
specific replacement of these options. Included in the Consolidated Statements
of Operations for the years ended March 29, 1997, March 30, 1996 and March 25,
26
<PAGE> 27
1995 is compensation expense of approximately $53,000, $74,000, and $74,002,
respectively, related to the cancelled options.
Pro forma information regarding net income and earnings per share is required
by FASB 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted beginning in the
fiscal year subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for years ending March 29, 1997 and March 30, 1996: risk-free
interest rate of 6.53%; no dividend yield; volatility factors of the expected
market price of the Company's common stock of .784; and weighted-average
expected life of the option of five years.
The Black -Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
March 29, March 30,
1997 1996
--------- ---------
<S> <C> <C>
Pro forma net (loss) $ (1,100,671) $ (3,884,416)
Pro forma net (loss) per share:
Primary $ (0.23) $ (0.79)
Fully diluted $ (0.23) $ (0.79)
</TABLE>
Stock options granted prior to March 26, 1995 are specifically excluded from
the determination of pro forma net income.
A summary of the Company's stock option activity follows:
<TABLE>
<CAPTION>
March 29, 1997 March 30, 1996 March 25, 1995
------------------- -------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------- -------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -
beginning of year 240,500 $0.75 249,700 $1.75 249,700 $1.57
Granted 228,500 $2.50 29,000 $2.50 - -
Exercised - - - - - -
Cancelled (200,500) $1.04 (38,200) $7.50 - -
--------------------- ------------------------ ----------------------
Outstanding -
end of year 268,500 $2.72 240,500 $0.75 249,700 $1.57
--------------------- ------------------------ ----------------------
Exercisable - end of year 58,400 $3.46 37,987 $1.50 35,737 $3.53
---------------------- ------------------------- ------------------------
</TABLE>
27
<PAGE> 28
6. INCOME TAXES
The (benefit) provision for income taxes, as shown in the accompanying
Consolidated Statements of Operations, includes the following components:
<TABLE>
<CAPTION>
March 29, March 30, March 25,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current provision:
Federal $ (1,068,980) $ (1,054,984) $ 599,000
State (50,327) (52,000) 84,855
------------- ------------- -----------
(1,119,307) (1,106,984) 683,855
Deferred 546,000 (1,078,000) (281,000)
------------- ------------- -----------
Total (benefit) provision for
income taxes $ (573,307) $ (2,184,984) $ 402,855
============ ============ ===========
</TABLE>
A reconciliation of the Company's effective income tax rate with the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
March 29, March 30, March 25,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate 34% 34% 34%
State income taxes, net of federal tax benefit - 3 1
Nontaxable amounts 1 (1) -
Other - - 1
------ ------ ------
Effective income tax rate 35% 36% 36%
====== ====== ======
</TABLE>
Tax (refunds) payments of approximately $(1,019,000), $205,000, and $1,918,000
were made during the fiscal years ended March 29, 1997, March 30, 1996 and
March 25, 1995, respectively.
Significant components of the Company's deferred tax assets and liabilities as
of March 29, 1997 and March 30, 1996 are as follows:
<TABLE>
<CAPTION>
March 29, March 30,
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Excess tax basis in property and equipment $1,269,000 $ 1,635,000
Excess tax basis in inventory 240,000 305,000
Other 319,000 371,000
----------- -----------
1,828,000 2,311,000
Deferred tax liabilities:
Excess book basis in other current assets 316,000 253,000
------------ -----------
Net deferred tax assets $1,512,000 $ 2,058,000
========== ===========
</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 on the amount of tax
loss carryback available, and a certain tax planning strategy, 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.
28
<PAGE> 29
The Company's current year net operating loss of $1,100,671 and favorable prior
year adjustments resulting from an IRS audit, were applied against previous
years taxable income which resulted in refundable income tax of $1,523,139 at
March 29, 1997.
7. 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 2007. 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 29, 1997 are as follows:
<TABLE>
<S> <C>
1998 $10,373,590
1999 9,416,208
2000 8,165,115
2001 6,945,730
Thereafter 17,855,957
-------------
Total future minimum lease payments $ 52,756,600
=============
</TABLE>
Rent expense for the years ended March 29, 1997, March 30, 1996 and March 25,
1995 was $10,699,000, $10,410,000 and $9,160,000, respectively, and contingent
rentals were $144,000, $157,000 and $230,000, respectively.
8. CONCENTRATION OF BUSINESS RISKS
The company purchases inventory for its stores from approximately 500
suppliers, with approximately 72% of purchases being made from six suppliers.
In the past the Company has not experienced difficulty in obtaining
satisfactory sources of supply, and management believes that it will retain
access to adequate sources of supply. However, a loss of a major supplier could
cause a possible loss of sales, which would have an adverse effect on operating
results and result in a decrease in vendor support for the Company's
advertising programs.
9. 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>
1997:
First $20,142 $ 7,750 $ (1,276) $ (0.26) $2.375 $1.313
Second 21,023 8,082 (1,086) (0.22) 1.875 1.500
Third 35,959 13,357 2,461 0.49 1.500 1.250
Fourth 22,315 7,917 (1,200) (0.24) 1.750 1.250
------- ------- -------- ----------
Total $99,439 $37,106 $ (1,101) $ (0.23)
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)
</TABLE>
29
<PAGE> 30
INDEX TO EXHIBITS
The following documents are filed as part of this 10K for the year ended March
29, 1997
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
----------- ----------- --------
<S> <C> <C>
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 ***
10.10 Amendment to the Loan and Security Agreement dated as of
October 17, 1996 between the Company and Fleet Bank formerly
Barclays Business Credit, Inc. 31
10.11 Second Amended and Restated Revolving Credit Note dated as of
October 17, 1996 between the Company and Fleet Bank formerly
Barclays Business Credit 36
11 Statement re: Computation of Per Share Earnings 39
21 List of Subsidiaries of the Company ***
23.1 Consent of Independent Auditors 40
</TABLE>
* 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 as an exhibit to the Company's annual report on Form 10-K filed for
the fiscal year ended March 30, 1996.
30
<PAGE> 1
EXHIBIT NO. 10.10
AMENDMENT NO. 5
TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 5 ("Amendment No. 5") is entered into as of October
17, 1996, by and between NATIONAL RECORD MART, INC. ("Borrower") and FLEET
CAPITAL CORPORATION ("Lender").
BACKGROUND
----------
Borrower and Lender are parties to a Loan and Security Agreement dated
June 11, 1993 (as amended by that certain (a) letter agreement dated January
12, 1995; (b) letter agreement dated February 24, 1995; (c) letter agreement
dated September 8, 1995; (d) Waiver and Amendment No. 4 dated July 19, 1996 and
as same may be further amended, modified, restated or supplemented from time to
time, the "Loan Agreement") pursuant to which Lender provides Borrower with
certain financial accommodations.
Borrower has requested that Lender amend the Loan Agreement to (i)
increase the total credit facility and (ii) amend certain financial covenants
and Lender is willing to do so on the terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or grant of
credit heretofore or hereafter made to or for the account of Borrower by
Lender, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree
as follows:
1. Definitions. All capitalized terms not otherwise defined herein
shall have the meanings given to them in the Loan Agreement.
2. Amendment to Loan Agreement.
(a) Section 1.1 of the Loan Agreement is hereby amended by
deleting the following definitions in their entirety to provide as follows:
Bank - Fleet National Bank.
Capital Expenditures - expenditures made and liabilities
incurred for the acquisition of any fixed assets or
improvements, replacements, substitutions or additions
thereto which have a useful life of more than one year,
including the total principal portion of Capitalized
Lease Obligations.
Cash Flow - for any period, an amount equal to (i)
Adjusted Net Earnings from Operations of Borrower, plus
(ii) amounts
31
<PAGE> 2
attributable to depreciation and amortization which were
deducted in determining Adjusted Net Earnings form
Operations for such fiscal period; plus (iii) amounts
contributed to the equity of Borrower during such fiscal
period; plus (iv) any subordinated loans or advances
made to Borrower during such fiscal period, minus (v)
any non-financed Capital Expenditures made during such
fiscal period, minus (vi) all Distributions paid during
such fiscal period and minus (vii) scheduled repayments
of principal on Indebtedness for Money Borrowed other
than Revolving Credit Loans for such fiscal period.
Maximum Revolving Amount - Twenty-Six Million Dollars
($26,000,000).
Note - the secured promissory note executed by Borrower
in favor of Lender in substantially the form of Exhibit
A to this Agreement.
(b) The introductory paragraph of Section 2 of the
Loan Agreement is hereby amended by deleting "SEVENTEEN MILLION DOLLARS
($17,000,000)" and inserting "TWENTY-SIX MILLION DOLLARS ($26,000,000)" in its
place and stead.
(c) Section 3.1(B) of the Loan Agreement is hereby
deleted in its entirety and "Intentionally Omitted" is inserted in its place
and stead.
(d) Section 9.2(L) of the Loan Agreement is hereby
amended in its entirety to provide as follows:
(L) Capital Expenditures - Make Capital
Expenditures in any Fiscal Year commencing with
Fiscal Year ending March 31, 1998 (including,
without limitation, by way of capitalized
leases) in excess of the lesser of (a) 50% of
projected EBITDA (as defined under GAAP) for
such Fiscal Year as set forth in the Projections
for such Fiscal Year or (b) 60% of actual EBITDA
(as defined under GAAP) for the preceding Fiscal
Year as set forth in the audited financial
statements of Borrower and its Subsidiaries as
at the end of such Fiscal Year.
(e) A new subsection (Z) is hereby added to Section
9.2 of the Loan Agreement at the end thereof:
(Z) Retail Store Openings. Open more than six
(6) new retail store locations during the period
commencing on October 1, 1996 through and
including the last day of the Fiscal Year ended
March 31, 1997.
32
<PAGE> 3
(f) Section 9.3 of the Loan Agreement is hereby amended in its entirety to
provide as follows:
During the term of this Agreement, and thereafter for so long as there are
any Obligations to Lender, Borrower covenants that, unless otherwise consented
to in writing, it shall:
(A) Minimum working Capital - Maintain Working Capital of not less
than (a) $250,000 during the period commencing September 1, 1996
through and including November 30, 1996 and (b) $1,500,000 at all
times thereafter.
(B) Minimum Adjusted Tangible Net Worth - Maintain at the end of each
month commencing with the month ended December 31 1996, a Minimum
Adjusted Tangible Net Worth of not less than $10,000,000 during the
Fiscal Year ended March 31, 1997, which amount shall be increased by
$250,000 on the last day of such Fiscal Year and on the last day of
each Fiscal Year thereafter.
(C) Current Ratio. Maintain at the end of each month commencing with
the month ended December 31, 1996, a ratio of Current Assets to
Current Liabilities of not less than 1.03 to 1.00.
(D) Cash Flow. Achieve Cash Flow of not less than $250,000 for (i)
the fiscal quarter ended December 31, 1996, (ii) for the two fiscal
quarters ended March 31, 1997, (iii) for the three fiscal quarters
ended June 30, 1997 and (iv) for each fiscal quarter thereafter,
measured on a rolling four quarter basis ending on the last day of
such fiscal quarter.
(g) Exhibit a to this Amendment No. 5 is hereby added to the Loan
Agreement.
3. Conditions of Effectiveness. This Amendment No. 5 shall become
effective upon satisfaction of the following conditions precedent: (i) Lender
shall have received (a) four (4) copies of this Amendment No. 5 executed by
Borrower; (b) a duly executed Second Amended and Restated Revolving Credit Note;
(c) evidence of the authorization by the Board of Directors of Borrower of the
execution of this Amendment No. 5; (d) an acknowledgement from NRM Investment,
Inc. ("NRM") of the continuing validity of the Subordination Agreement dated May
9, 1996 between Lender and NRM; and (e) such other certificates, instruments,
documents and agreements as may be required by Lender or its counsel, each of
which shall be in form and substance satisfactory to Lender and its counsel, and
(ii) Lender
33
<PAGE> 4
shall have received (a) payment of a $20,000 line increase fee from Borrower
and (b) payment of all legal fees and expenses incurred by Lender in connection
with the preparation and negotiation of this Amendment No. 5.
4. Representations and Warranties. Borrower hereby represents and
warrants as follows:
(a) This Amendment No. 5 and the Loan Agreement, as amended hereby,
constitute legal, valid and binding obligations of Borrower and are
enforceable against Borrower in accordance with their respective terms.
(b) Upon the effectiveness of this Amendment No. 5, Borrower hereby
reaffirms all covenants, representations and warranties made in the Loan
Agreement to the extent the same are not amended hereby and agree that all
such covenants, representations and warranties shall be deemed to have been
remade as of the effective date of this Amendment No. 5.
(c) Borrower has no defense, counterclaim or offset with respect to
the Loan Agreement.
(d) No Default or Event of Default would exist after giving effect to
this Amendment No. 5.
5. Effect on the Loan Agreement.
(a) Upon the effectiveness of Section 2 hereof, each reference in the Loan
Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like
import shall mean and be a reference to the Loan Agreement as amended hereby.
(b) Except as specifically amended herein, the Loan Agreement, and all
other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment No. 5
shall not operate as a waiver of any other right, power or remedy of Lender, nor
constitute a waiver of any other provision of the Loan Agreement, or any other
documents, instruments or agreements executed and/or delivered under or in
connection therewith.
6. Governing Law. This Amendment No. 5 shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns
and shall be governed by and construed in accordance with the laws of the State
of New York.
7. Headings. Section headings in this Amendment No. 5 are included herein
for convenience of reference only and shall not constitute a part of this
Amendment No. 5 for any other purpose.
34
<PAGE> 5
8. Counterparts. This Amendment No. 5 may be executed by the parties
hereto in one or more counterparts, each of which taken together shall be deemed
to constitute one and the same instrument.
IN WITNESS WHEREOF, this Amendment No. 5 has been duly executed as of the
day and year first written above.
NATIONAL RECORD MART, INC.
By: /s/THERESA CARLISE
-----------------------------
Name: Theresa Carlise
Title: Senior Vice President and
Chief Financial Officer
FLEET CAPITAL CORPORATION
By: /s/TIMOTHY G. JOHNSON
-----------------------------
Name: Timothy G. Johnson
Title: Vice President
35
<PAGE> 1
EXHIBIT NO. 10.11
EXHIBIT A
SECOND AMENDED AND RESTATED
REVOLVING CREDIT NOTE
$26,000,000.00 New York, New York
as of October 17, 1996
This Second Amended and Restated Revolving Credit Note is executed and
delivered under and pursuant to the terms of that certain Loan and Security
Agreement dated June 11, 1993 (as amended by a letter agreement dated January
12, 1995, a letter agreement dated February 24, 1995, a letter agreement
dated September 8, 1995, Waiver and Amendment No. 4 dated July 19, 1996,
Amendment No. 5 dated as of the date hereof and as same may be further amended,
supplemented or modified from time to time, the "Loan Agreement") by and
between National Record Mart, Inc., a Delaware corporation having its chief
executive office at 507 Forest Avenue, Carnegie, Pennsylvania 15106 and Fleet
Capital Corporation (the "Lender"). Capitalized terms not otherwise defined
herein shall have the meanings ascribed thereto in the Loan Agreement.
FOR VALUE RECEIVED, Borrower hereby promises to pay to the order of
Lender at Lender's offices located at 200 Glastonbury Boulevard, Glastonbury,
Connecticut 06033 or at such other place as the holder may from time to time
designate:
(i) the principal sum of TWENTY SIX MILLION AND 00/100 DOLLARS,
($26,000,000.00) or, if different from such amount, the unpaid principal balance
of the Revolving Credit Loan as may be due and owing from time to time under the
Loan Agreement, payable in accordance with the provisions of the Loan Agreement
and subject to acceleration upon the occurrence of an Event of Default under the
Loan Agreement or earlier termination of the Loan Agreement pursuant to the
terms thereof; and
(ii) interest on the principal amount of this Note from time to time
outstanding until such principal amount is paid in full at such interest rates
and at such times as are specified in the Loan Agreement. In no event, however,
shall interest hereunder exceed the maximum interest rate permitted by law.
Upon and after the declaration of an Event of Default, and during the
continuation thereof, interest shall be payable at the Default Rate.
This Note is the Note referred to in the Loan Agreement and is secured,
inter alia, by the Liens granted to Lender in the Collateral pursuant to the
Loan Agreement and the Loan Documents and the various other agreements related
thereto delivered by the Borrower to the Lender, is entitled to the benefits of
the Loan Agreement and the Loan Documents and is subject to all of the
agreements, terms and conditions therein contained.
36
<PAGE> 2
This Note may be prepaid, in whole or in part, on the terms and
conditions set forth in the Loan Agreement.
If an Event of Default under Section 11.1(I) of the Loan Agreement
shall occur, then this Note shall immediately become due and payable, without
notice, together with reasonable attorneys' fees if the collection hereof is
placed in the hands of an attorney. If any other Event of Default shall occur
under the Loan Agreement which is not cured within any applicable grace period,
then this Note may, as provided in the Loan Agreement, be declared to be
immediately due and payable, without notice, together with reasonable
attorneys' fees if the collection hereof is placed in the hands of an attorney.
This Note is being delivered in the State of New York, and shall be
construed and enforced in accordance with the laws of such State for contracts
to be fully performed within the State of New York. Any judicial proceeding by
the Borrower against the Lender involving, directly or indirectly, any matter
or claim in any way arising out of, related to or connected with this Amended
and Restated Note or any related agreement, shall be brought only in federal or
state court located in the City of New York, State of New York. Any judicial
proceeding brought against Borrower with respect to any of the Obligations, or
with respect to this Note or any related agreement may be brought in any court
of competent jurisdiction in the City of New York, State of New York, United
States of America, and, by execution and delivery of this Amended and Restated
Note, Borrower accepts, generally and unconditionally, the non-exclusive
jurisdiction of the aforesaid courts, and irrevocably agrees to be bound by any
judgment rendered thereby in connection with this Note or any related
agreement. Nothing herein shall affect the right to serve process in any manner
permitted by law or shall limit the right of the Lender to bring proceedings
against the Borrower in the courts of any other jurisdiction. Borrower waives
any objection to jurisdiction and venue of any action instituted hereunder and
shall not assert any defense based on lack of jurisdiction or venue or based
upon forum non conveniens.
BORROWER EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AMENDED AND RESTATED
NOTE OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN
CONNECTION HEREWITH, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL
TO THE DEALINGS OF THE HOLDER AND THE BORROWER HERETO OR ANY OF THEM WITH
RESPECT TO THIS AMENDED AND RESTATED NOTE OR ANY OTHER INSTRUMENT, DOCUMENT OR
AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE TRANSACTIONS
RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE; AND BORROWER
HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT THE HOLDER OR
THE BORROWER MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH
ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT TO THE WAIVER OF THE RIGHT TO
TRIAL BY JURY.
37
<PAGE> 3
This Note restates in its entirety and is given in substitution for and
in replacement of (but not in satisfaction of) that certain Amended and
Restated Revolving Credit Note dated as of February 24, 1995 from Borrower to
Lender in the original principal amount of $22,000,000.
Borrower expressly waives any presentment, demand, protest, notice of
protest, or notice of any kind except as expressly provided in the Loan
Agreement.
Witness: NATIONAL RECORD MART, INC.
/s/ PAULA J. FINELLO By: /s/ THERESA CARLISE
- -------------------- -------------------
Name: Theresa Carlise
Its: Senior Vice President and
Chief Financial Officer
STATE OF PENNSYLVANIA )
: ss.:
COUNTY OF ALLEGHENY )
On the 17th day of October, 1996, before me personally came Theresa
Carlise, to me known, who being by me duly sworn, did depose and say that he is
the Sr. Vice President of National Record Mart, Inc., the corporation described
in and which executed the foregoing instrument; and that he was authorized to
sign his name thereto.
/s/ GERALDINE A. STEELE
-----------------------
Notary Public
38
<PAGE> 1
EXHIBIT 11
NATIONAL RECORD MART, INC. AND SUBSIDIARY
CALCULATION OF NET INCOME PER COMMON SHARE
FOR THE YEARS ENDED MARCH 29, 1997, MARCH 30, 1996 AND MARCH 25, 1995
<TABLE>
<CAPTION>
March 29, March 30, March 25,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding 4,851,694 4,937,103 5,010,264
Dilutive common stock equivalents - - 200,000
Treasury stock assumed to be repurchased using
proceeds from options and warrants - (9,678) (4,785)
----------- ----------- -----------
Weighted average common shares and equivalents
outstanding 4,851,694 4,927,425 5,205,479
=========== ============ ===========
Net (Loss) Income $(1,100,671) $(3,884,416) $ 712,198
=========== ============ ===========
Primary and fully diluted earnings per share $ (0.23) $ (0.79) $ 0.14
=========== ============ ===========
</TABLE>
39
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8) pertaining to the National Record Mart, Inc. 1993 Stock Option Plan
of our report dated June 6, 1997, with respect to the consolidated financial
statements of National Record Mart, Inc. and Subsidiary included in the Annual
Report (Form 10-K) for the year ended March 29, 1997.
/s/ ERNST & YOUNG
Pittsburgh, Pennsylvania
June 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000904535
<NAME> NATIONAL RECORD MART
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-29-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> MAR-29-1997
<CASH> 834,889
<SECURITIES> 0
<RECEIVABLES> 7,507
<ALLOWANCES> 0
<INVENTORY> 37,510,462
<CURRENT-ASSETS> 41,707,524
<PP&E> 23,037,427
<DEPRECIATION> 12,803,745
<TOTAL-ASSETS> 55,020,279
<CURRENT-LIABILITIES> 17,743,464
<BONDS> 0
0
0
<COMMON> 50,379
<OTHER-SE> 16,015,429
<TOTAL-LIABILITY-AND-EQUITY> 55,020,279
<SALES> 99,438,863
<TOTAL-REVENUES> 99,438,863
<CGS> 62,332,670
<TOTAL-COSTS> 62,332,670
<OTHER-EXPENSES> 37,049,278
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,730,893
<INCOME-PRETAX> (1,673,978)
<INCOME-TAX> (573,307)
<INCOME-CONTINUING> (1,100,671)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,100,671)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
