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National Record Mart Inc/DE – ‘10-K’ for 3/27/99

On:  Friday, 6/25/99   ·   For:  3/27/99   ·   Accession #:  950128-99-824   ·   File #:  0-22074

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 6/25/99  National Record Mart Inc/DE       10-K        3/27/99    3:90K                                    Bowne of Pittsbur..01/FA

Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Fiscal Year Ended March 27, 1999                      32    177K 
 2: EX-23.1     Consent of Ernst and Young LLP                         1      6K 
 3: EX-27       Financial Data Schedule                                1      6K 


10-K   —   Fiscal Year Ended March 27, 1999
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
2Item 1. Business
6Trademarks and Service Marks
"Item 2. Properties
7Item 3. Legal Proceedings
"Item 4. Submission of Matters to A Vote of Security Holders
9Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
10Item 6. Selected Financial Data
11Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition
14Item 8. Financial Statements and Supplementary Data
"Item 9. Changes or Disagreements With Accountants on Accounting and Financial Disclosure
"Item 10. (a) AND (b). 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
"Item 14. Exhibits, Financial Statement Schedules and Report on Form 8-K
24Earnings per Share
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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 27, 1999 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. [ ] 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 23, 1999 as reported on the NASDAQ National Market System, was approximately $24,606,889. 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 25, 1999, Registrant had outstanding 5,047,567 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 23, 1999 (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, operates in a single industry segment as 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 fourth 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 27, 1999, the Company operated 174 stores in 30 states primarily in the eastern part of the United States. The Company has five distinct store concepts: National Record Mart or NRM Music; Waves Music; Music Oasis; Vibes Music; and the newest concept, Music X. The Music X store format is a joint marketing effort in combination with a dominant radio station to co-brand a music destination store. The Company has redesigned the Waves Music store as a strategic mall-based growth format for the future. The prototype Waves store ranges from 6,000 to 10,000 square feet with an expanded inventory capacity of $400,000. The Waves strategy is to intertwine the newest customer retail technologies with one of the largest offerings of prerecorded music and other entertainment products available in a traditional specialty retail mall environment. 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. INDUSTRY AND COMPETITIVE ENVIRONMENT The US retail music industry increased by 12% to $13.7 billion from $12.2 billion in the prior year according to the Recording Industry Association of America (RIAA). Full length CD's continued to increase, accounting for 74.8% of the total market sales, while the cassette continued its decade long decline to 14.8% from 18.2% of total market sales. Retail outlets continue to dominate as the primary choice for purchasing music by the consumer, representing 86% of the population according to the RIAA 1998 consumer profile report. Purchases made at traditional music retail stores represented 51% of the market, consumer electronic and specialty stores received 34% of the market share while 1.1% of music purchases were made on-line via the Internet. 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. 2
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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: [Download Table] Products Fiscal Years -------- 1999 1998 1997 ------ ------ ------ CDs 73.9% 70.7% 66.8% Prerecorded audio cassettes 11.2 13.6 17.7 Singles 3.8 6.3 6.5 Movie and music videos* 3.6 2.6 2.3 Accessories and other** 7.5 6.8 6.7 ------ ------ ------ Total 100.0% 100.0% 100.0% ====== ====== ====== * Includes DVD ** 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 music categories including rock, pop, alternative, adult contemporary, country, easy listening, classical, jazz, religious, new age, rhythm and blues, children's, educational, show tunes, movie soundtracks, world music and others. 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 18,000 titles per store. The Company also offers a selection of over 265,000 SKU's which can be ordered through the Company's special order process. 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, "cut-outs" (low-priced items which have been deleted from a manufacturer's current catalog) and used CDs. Prerecorded Video Cassettes. The Company's stores offer for sale a varied selection of prerecorded VHS video cassettes and DVD (digital versatile discs). DVD sales continue to increase while the price of the hardware decreases and more titles are offered. Titles are offered in all categories with an emphasis on 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, and other items. Tickets. To increase customer traffic, the Company offers tickets to entertainment events in many of its stores located in certain states including Pennsylvania, Ohio, Michigan, Wisconsin, Illinois, West Virginia, Kentucky, Rhode Island, Kansas, Iowa, North Carolina and South Carolina. 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. 3
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ADVERTISING The Company supports its retail sales through its own and various vendor supported marketing and advertising programs. This support is realized in the form of price and position subsidies from vendors; store signage point of purchase displays and print, direct mail and media broadcast. In addition, the Company exposes its customers to new releases through its "Street Date Sales impact" program. This program features new releases, in all genre formats, with special pricing and placement in our stores for the first three weeks of a new album release. More than 850,000 store customers participate in the Passport program. Passport allows a customer to earn points on every CD, tape or video purchase, which may be redeemed for a free CD, cassette, or video of choice. The program combines the standard customer loyalty incentives of frequent buyer programs, with opportunities for discount on music and video products and other products sold by other retailers. 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. The Company supports its Internet sales through various marketing and advertising programs. This support is realized by vendor supported site advertising, exclusive premiers and banner ads. The Company also has begun to sign exclusive music retailer packages with other entertainment related sites such as Titan Sports, Inc., which does business as the World Wrestling Federation on the web site, www.wwf.com. E-COMMERCE In December 1998, the Company launched its Internet commerce sites www.nrmmusic.com and www.wavesmusic.com. These sites offer a wide variety of music, over 265,000 titles, and movies for purchase. The site also offers the consumer the ability to create customized CD's from a library of song tracks at a cost of 99 cents per song and the ability to download music. While on-line music sales remain a small percentage of total music sales industry wide, the Company believes that this will gradually increase over time and anticipates continuing its involvement in this area. CUSTOMER SERVICE Customer service continues to be a primary focus of every employee of the Company, including the field supervisory team, corporate operations department and the human resources area. STORE EXPANSION STRATEGY The Company intends to add approximately 16 new stores during fiscal year 2000. Most of these stores will be of the Waves Music format. The Company will continue to seek opportunities to improve the operations of under performing stores or to close those stores. The Company also expects to begin a strategic rollout of its Music X store format. Three incremental mall based locations have been secured and are scheduled to be opened this year. The Company added 33 stores in fiscal 1999, and closed 7 stores, which were performing under the Company's expectations. During fiscal 1998, the Company opened 11 locations, and closed 10 stores. 4
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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 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, so as to optimize sales/inventory ratios in each store. The Company expects to begin its implementation of a new point of sale (POS) system this year. The adoption of the new software and equipment along with greatly enhanced data switching relay equipment will permit the two way transfer of significantly more information in less time and at a lower cost than the current POS system. 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. In the first quarter of fiscal 1998, the Company instituted a comprehensive loss prevention program which included: increased cycle counts, more frequent store audits, more selective recruiting and training of store employees and the services of an external asset protection firm. Due to the Company's continuing efforts in this area it has maintained the same level of shrinkage as a percent of sales in fiscal 1999 as compared to fiscal 1998, which was a 40% decrease from fiscal 1997. SUPPLIERS AND PURCHASING A substantial portion of the Company's music products are purchased directly from the five major music distributors. They include: Sony Music; Warner/Elektra/Atlantic (subsidiary of Time Warner); BMG Music (subsidiary of Bertelsman); UNI Distribution; and EMD (subsidiary of Thorn-EMI). These five 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 5
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receipt of such notice, the Company can use the information stored in FOCUS 1000 to determine the number of units to be returned and from which locations. Major vendors generally offer some form of price protection in the event the wholesale price of current stock is reduced. Typically, vendors will either (i) provide product credit, advertising credit or free goods to cover the difference between the original price and the reduced price, (ii) provide additional discounts on new products, (iii) allow the Company to return older products for the original (higher) cost or (iv) notify the Company in advance of price reductions and give the Company a period of time to sell the product or return it for full credit. These industry practices of return and exchange privileges, catalog change notice and price protection permit the Company to carry a wider selection of music titles and at the same time reduce the risk of carrying inventory. The exchange privilege practices of manufacturers have been changed in the past and may change in the future. The major music vendors offer retailers a returns incentive/ disincentives plan that has been beneficial for the Company. To encourage retailers to buy carefully by limiting returns, 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. 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, One Stop Entertainment, Music X, House of Music and Tempo Music. The Company has obtained federal registrations of its trademarks and service marks for Waves Music, NRM Music, Oasis Music & Video, Music Oasis, Music X and has applied for registration of its service marks in Vibes Music. The application for registration of the service mark Vibes Music has been opposed by one party. This opposition is currently pending before the Trademark trial and appeal board. The trade name Tempo Music was acquired through an acquisition in November 1998 and will eventually be changed to Waves Music. PERSONNEL As of March 27, 1999, the Company employed 1,600 persons, 156 of whom worked at the Company's headquarters (including 10 part-time employees) or were area supervisors and 1,444 of whom worked at the Company's stores (including 987 part-time employees). The Company also adds part-time personnel during the Christmas season. In December 1998, the Company employed approximately 352 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 $148,000 per year. 6
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Store Leases. All of the Company's stores are subject to operating leases with various remaining terms, including renewal options, through the year 2010. 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: 1999 24 2003 22 2000 15 2004 10 2001 22 2005 9 2002 14 2006 and thereafter 58 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 1999. SUPPLEMENTARY ITEM. IDENTIFICATION OF EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with respect to the executive officers of the Company as of June 23, 1999. [Download Table] Name Age Office with the Company ---- --- ----------------------- William A. Teitelbaum 48 Chairman, CEO, President and Director Theresa Carlise 40 Senior Vice President, CFO, Treasurer, Secretary and Director Scott Bargerstock 49 Vice President of Business Development James Benedetti 36 Vice President of Information Systems John Grandoni 49 Vice President of Purchasing Charles Michael Stephenson 44 Vice President of Marketing Steven Zimmerman 43 Vice President of Store Operations 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 while retaining the position of Chairman and Chief Executive Officer. In January of 1998, Mr. Teitelbaum resumed the position of President. 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 Funding Corp., a New York investment firm. 7
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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. Scott Bargerstock is Vice President of Business Development and has served the Company since 1971 in various positions including Store Manager, District Manager and Regional Manager. Mr. Bargerstock was promoted in February of 1998 to his current position. James Benedetti is Vice President of Information Systems and has been with the Company for ten years as Manager and Director of Information Systems. In February of 1998 Mr. Benedetti was promoted to his current position. John Grandoni is Vice President of Purchasing and has twenty-two years of specialty music retail experience in various positions. Prior to joining the Company in 1996 Mr. Grandoni was Vice President of Purchasing for Cavages, a music specialty retailer based in Buffalo, New York. In February of 1998 Mr. Grandoni was promoted to his current position. Charles Michael Stephenson started his career at NRM with a music retail background of twenty years with Camelot Music in Canton, Ohio. In April of 1996 he joined NRM as Director of Marketing. In February of 1998, Mr. Stephenson became Vice President of Marketing for the Company. Steven Zimmerman is Vice President of Store Operations and has been in the store operations area for over twenty years in various capacities at Camelot Music in Canton, Ohio. Mr. Zimmerman joined NRM in November of 1995 as Director of Store Operations and has been in the position of Vice President since February of 1998. Officers are elected annually to serve until the ensuing year or until their successors are duly elected. 8
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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 23, 1999, the approximate number of common stockholders of record was 90. The approximate number of total stockholders as of that date was 1,600. DIVIDEND POLICY In conjunction with the Company's senior credit facility, the Company is prohibited from paying cash dividends on its common stock. 9
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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) [Enlarge/Download Table] FISCAL YEAR ENDED (1) --------------------------------------------------------------------- March 27, March 28, March 29, March 30, March 25, 1999 1998 1997 1996(2) 1995 --------- --------- --------- --------- --------- STATEMENTS OF OPERATIONS DATA: Net sales $ 129,902 $ 112,448 $ 99,439 $ 99,084 $ 95,697 Gross profit 48,217 42,963 37,106 36,538 35,847 Selling, general and administrative expenses 43,743 36,859 34,385 34,542 30,589 Depreciation and amortization 3,540 2,801 2,725 3,117 2,683 Impairment of assets write-down -- -- -- 2,906 -- Interest expense, net 3,082 1,822 1,696 1,597 1,011 Other expense (income), net 539 104 (26) 446 450 (Loss) income before income tax (benefit) expense (2,688) 1,378 (1,674) (6,069) 1,115 Net (loss) income (1,691) 893 (1,101) (3,884) 712 Basic net (loss) income per share $ (.35) $ .18 $ (.23) $ (.79) $ .14 Diluted net (loss) income per share $ (.35) $ .18 $ (.23) $ (.79) $ .14 Basic weighted average number of shares outstanding 4,801 4,845 4,852 4,927 5,205 Weighted average number of common shares and common share equivalent shares (warrants and options) outstanding 4,801 5,057 4,852 4,927 5,205 SELECTED OPERATING DATA: Stores open at beginning of year 148 147 151 141 118 Stores opened /acquired during year 33 11 8 16 32 Stores closed during year 7 10 12 6 9 Stores open at end of year 174 148 147 151 141 Comparable store net sales increase (decrease) (3) 4% 13% (0.4)% (3)% 3% BALANCE SHEET DATA: Working capital $ 28,058 $ 23,892 $ 23,964 $ 22,245 $ 25,017 Total assets 72,494 52,540 55,020 52,924 53,824 Long-term debt, including current maturities 35,325 19,413 21,370 19,468 19,853 Stockholders' equity 15,843 16,958 16,066 17,178 21,173 (1) Each fiscal year consisted of 52 weeks except the fiscal year ended March 30, 1996, which consisted of 53 weeks. Each fiscal year is hereafter referred to by the year in which it ended, e.g., the fiscal year ended March 27,1999 is "fiscal 1999" (2) 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. (3) A store is included in comparable store sales calculations at the beginning of its 13th full month of operation. 10
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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: [Enlarge/Download Table] Fiscal Years --------------------------------------- 1999 1998 1997 ------ ------ ------ Net sales 100.0% 100.0% 100.0% Cost of sales 62.9 61.8 62.7 ------ ------ ------ Gross profit 37.1 38.2 37.3 Selling, general and administrative expenses 33.7 32.7 34.6 Depreciation and amortization 2.7 2.5 2.7 Interest expense, net 2.3 1.7 1.7 Other expense .4 0.1 0.0 ------ ------ ------ (Loss) income before income taxes expense (benefit) (2.0) 1.2 (1.7) (Benefit) expense income taxes (.7) .4 (0.6) ------ ------ ------ Net (loss) income (1.3)% 0.8% (1.1)% ====== ====== ===== Net Sales. Net sales increased during fiscal 1999 by $17.4 million or 15.5% compared to fiscal 1998. Factors that contributed to the increase in total sales are the increase in comparable store sales of 4.2% and the opening of 33 new stores and the closing of 7 under-performing stores. Net sales increased during fiscal 1998 by 13.1% compared to fiscal 1997, due primarily to the increase in comparable store sales of 12.8% compared to fiscal 1997. This increase was primarily due to strong new releases in all genres of music and the Company's marketing programs. Gross Profit. Gross profit expressed as a percentage of net sales, decreased from 38.2% in fiscal 1998 to 37.1% in fiscal 1999. A portion of the decrease, expressed as a percentage of sales, is attributable to competitive pricing factors and the continued shift in consumer preference from higher profit margin cassettes to lower profit margin CD's. Gross profit increased from 37.3% in fiscal 1997 to 38.2% in fiscal 1998. The increase in margin was largely attributable to the Company's 40% decrease in overall inventory shrinkage. Expenses. Selling, general and administrative expenses, (SG&A) expressed as a percentage of net sales increased from 32.7% in fiscal 1998 to 33.7% in fiscal 1999. The Company's increase in SGA is related to the added expenses for 33 new stores and 14 store remodels and expansions of which sales have not proportionately matured. As a percentage of sales, SG&A decreased in fiscal 1998 to 32.7% from 34.6% in fiscal 1997. This reduction is attributable to the increase in comparable store sales of 12.8% and an overall reduction of operating costs. Depreciation and amortization increased from $2.8 million in fiscal 1998 to $3.5 million in fiscal 1999 primarily due to the addition of 33 new stores and the amortization of the costs associated with the private placement of its subordinated debt. Depreciation and amortization increased from $2.7 million in fiscal 1997 to $2.8 million in fiscal 1998 due to the addition of 11 new stores. Interest Expense. Interest expense expressed as a percentage of net sales was 2.4% or $3.2 million for fiscal 1999 compared to 1.7% or $1.9 million for fiscal 1998. The increase in interest expense of approximately $1.3 million in fiscal 1999 is due to the accretion of approximately $455,000 of the $1,600,000 of the subordinated debt discount originating in the first month of the fiscal year and an increase in borrowings relating to the addition of 33 new stores. 11
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In fiscal 1998 interest expense was 1.7% expressed as a percentage of sales or $1.9 million as compared to 1.7% in fiscal 1997 or $1.7 million. Income Taxes. The Company's effective tax rate in fiscal 1999 and 1998 was 34% and 35%, respectively. As of March 27, 1999, the Company had net deferred tax assets of $2,144,000. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income. See Note 5 of Notes to Consolidated Financial Statements. 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 operating activities was $1.1 million in fiscal 1999 compared to net cash provided by operating activities of $3.8 million in fiscal 1998 and $0.8 million in fiscal 1997. During fiscal 1999, the $1.1 million provided by operating activities was primarily due to increase in depreciation and amortization and increase in other liabilities and accrued expenses. In fiscal 1998 and 1997 the net cash provided by operating activities was attributable to net income, plus depreciation and amortization and refundable income taxes of prior years, offset to some extent by a decrease in accounts payable. During fiscal 1999, 1998 and 1997, the Company used $10.3 million, $2.5 million and $2.9 million, respectively, to purchase property and equipment. The Company opened 33 new stores and closed 7 stores in fiscal 1999 compared to 11 new stores and 10 closed stores in fiscal 1998. Included in the 33 new stores are two acquisitions. The Company acquired 4 stores from Record Den Inc. and DJK Records & Video Inc. for approximately $933,000 and 13 stores from Happy Town and Tempo for approximately $3.6 million. The Company anticipates opening 16 stores in fiscal 2000. Management estimates that the capital cost of opening the new stores will be approximately $300,000 per store which will be funded through operating cash flow and its credit facilities, excluding inventory of approximately $300,000 per store which is obtained through trade credit. On February 17, 1998 the Company renewed its revolving line of credit from an institutional lender through June 10, 2003. Under the line, the Company is permitted to borrow up to $28 million, subject to a borrowing base calculation based upon inventory levels. Between the months of October 1 and December 31 an overadvance of $1.5 million is available to the Company in addition to its borrowing base calculation, not to exceed $28 million. As of February 1, 1999 the Company's institutional lender reduced its interest rates. Borrowings under the amended facility bear interest at a floating rate equal to the lender's base rate (7.75% at March 27, 1999) or, at the Company's option, the 30-day LIBOR rate (4.9375 at March 27, 1999) plus 2.0%. As of March 27, 1999, the Company's outstanding credit balance on its revolver was $21.4 million. The Company's borrowing availability at March 27, 1999 was $6.2 million. The revolver balance and the Company's cash requirements peak in February when the Company's trade payables become due from the Christmas selling season. On April 16, 1998, the Company completed a private placement of $15,000,000 of senior subordinated notes to a group of institutional lenders. The notes carry an interest rate of 11.75% payable semi-annually and are due on April 16, 2001. In consideration of the placement the Company issued warrants to purchase 400,000 shares of common stock at $.01 per share. The Company is using the funds to expand its store base, update its point of sale equipment and general working capital purposes. On February 23, 1994, the Board of Directors approved a program for the Company to purchase up to $1,000,000 in value of its common stock. On September 17, 1998 the Board of Directors approved the company to purchase up to 500,000 additional shares of the Company's common stock. Such purchases will be made from time to 12
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time in the marketplace at the Company's discretion. Since the inception of the program, the Company had purchased 444,817 shares of its stock. Management believes that cash flows from operations, amounts available under the revolving credit facility and the subordinated debt facility will be sufficient to meet the Company's current liquidity and capital needs at least through fiscal 2000. 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 37% of the Company's net sales for fiscal 1999 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. EFFECT OF ECONOMIC PATTERNS AND INFLATION While the Company attempts to pass on increases in costs and expenses from operations, its ability to do so may be limited 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. YEAR 2000 COMPLIANCE State of Readiness. The Company has completed evaluation of its information technology issues relative to computer programs being unable to distinguish between the year 1900 and the year 2000. As a result of such review, the Company has concluded that its point of sale information systems will need to be upgraded. The Company has selected a replacement system, which will be installed beginning in July 1999 and anticipates completion before the Christmas selling season Subsequent to such installation, testing will be conducted of such systems to verify year 2000 compliance. In addition, the Company has determined that reprogramming of certain of its other proprietary information systems programs will be required. Such reprogramming has begun and is approximately 33 % completed. It is anticipated that such reprogramming will be completed by August 1999, after which time testing of such reprogrammed systems for year 2000 compliance will be conducted. The Company's evaluation of year 2000 issues relating to non-information technology systems, such as embedded microchips and automatic processors, is substantially completed. The Company has not yet identified any material problems in this area. The Company is dependent upon music suppliers from whom it purchases products. Based upon informal inquiries, the Company believes that year 2000 issues will not pose material problems with respect to such suppliers continuing to do business with the Company on customary terms and conditions. If such problems arise, the Company has no practical alternatives to dealing with its existing suppliers, as the five largest suppliers dominate the music distribution industry. The Company is also dependent on normal telecommunications and banking systems and is relying upon the providers of such services not encountering material difficulties with regard to year 2000 compliance. Costs to Address Year 2000 Issues. The costs of the required upgrade of the Company's inventory management and point of sale systems is expected to be approximately $10,000 per store (currently the Company operates 174 stores) or $1.7 million. These costs are expected to be incurred in the first and second quarter of the fiscal year ending March 2000, but will, where appropriate, be capitalized and amortized over the useful lives of the applicable assets. The Company to date has incurred capitalized costs of $80,000. The Company does not expect to incur material costs in internally reprogramming its other information systems software. 13
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Risks of Year 2000 Issues. The Company believes that the most reasonably likely worst case scenario with regard to year 2000 matters would relate to the effect that year 2000 issues would have upon music suppliers to the Company. If such suppliers were unable to continue to do business with the Company on comparable terms as conducted in the past, the Company's business could be materially adversely affected. The Company's Contingency Plan. The Company has begun discussions with its suppliers to provide assurance of business continuation in the event of year 2000 issues, with a view to developing a plan for continuing the Company's access to music product in the event of the suppliers' year 2000 difficulties. Such a plan, however, has not yet been developed. We cannot assure you that our efforts will prevent all consequences and there may be undetermined future costs due to business disruption that may be caused by suppliers or unforeseen circumstances. 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 None. PART III ITEM 10. (a) AND (b) 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 for its 1999 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after March 27, 1999 under similar captions and is incorporated herein by reference, except that the information required with respect to the executive officers of the Company under Item 10 (b) is set forth immediately following Item 4. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K (a) DOCUMENTS FILED AS A PART OF THIS REPORT: (1) CONSOLIDATED FINANCIAL STATEMENTS See Index to Consolidated Financial Statements on Page 17. (2) FINANCIAL STATEMENT SCHEDULES 14
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None of the schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are required. (3) EXHIBITS See Exhibit Index on pages 31 through 32. (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: See Exhibit Index on pages 31 through 32. (d) OTHER FINANCIAL STATEMENTS Not applicable. 15
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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. NATIONAL RECORD MART, INC. BY: /s/ William A. Teitelbaum -------------------------------- William A. Teitelbaum Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: [Download Table] Signature Capacity Date --------- -------- ---- Chairman of the Board, President /s/ William A. Teitelbaum Chief Executive Officer and Director June 25, 1999 --------------------------- William A. Teitelbaum Senior Vice President Chief Financial Officer, Chief Accounting Officer, /s/ Theresa Carlise Treasurer, Secretary and Director June 25, 1999 --------------------------- Theresa Carlise /s/ Samuel S. Zacharias Director June 25, 1999 --------------------------- Samuel S. Zacharias /s/ Irwin B. Goldstein Director June 25, 1999 --------------------------- Irwin B. Goldstein 16
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NATIONAL RECORD MART, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS [Download Table] Page ---- Report of Independent Auditors 18 Consolidated Statements of Operations for the fiscal years ended March 27, 1999, March 28, 1998, and March 29, 1997 19 Consolidated Balance Sheets as of March 27, 1999 and March 28, 1998 20 Consolidated Statements of Cash Flows for the fiscal years ended March 27, 1999, March 28, 1998, and March 29, 1997 21 Consolidated Statements of Stockholders' Equity for the fiscal years ended March 27, 1999, March 28, 1998, and March 29, 1997 22 Notes to Consolidated Financial Statements 23 17
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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 27, 1999 and March 28, 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended March 27, 1999. 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 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 27, 1999 and March 28, 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 27, 1999, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Pittsburgh, Pennsylvania June 11, 1999 18
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NATIONAL RECORD MART, INC. and Subsidiary CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended March 27, 1999, March 28, 1998 and March 29, 1997 [Enlarge/Download Table] Years Ended -------------------------------------------- March 27, March 28, March 29, 1999 1998 1997 ------------- ------------- ------------- Net sales $ 129,902,083 $ 112,488,429 $ 99,438,863 Cost of sales 81,685,053 69,524,955 62,332,670 ------------- ------------- ------------- Gross profit 48,217,030 42,963,474 37,106,193 Selling, general and administrative expenses 43,743,424 36,858,670 34,385,354 Depreciation and amortization 3,540,141 2,801,248 2,725,030 Interest expense 3,165,988 1,859,661 1,730,893 Interest income (83,493) (37,935) (34,656) Other expense (income) 539,173 104,321 (26,450) ------------- ------------- ------------- Total expenses 50,905,233 41,585,965 38,780,171 ------------- ------------- ------------- (Loss) income before income tax expense (benefit) (2,688,203) 1,377,509 (1,673,978) (Benefit) provision for income taxes (996,862) 484,861 (573,307) ------------- ------------- ----------- Net (loss) income $ (1,691,341) $ 892,648 $ (1,100,671) ============= ============= ============= Basic net (loss) income per share $ (0.35) $ 0.18 $ (0.23) Diluted net (loss) income per share $ (0.35) $ 0.18 $ (0.23) Basic weighted average common shares outstanding 4,800,867 4,844,624 4,851,694 Weighted average number of common shares and common equivalent shares (warrants and options) outstanding 4,800,867 5,057,323 4,851,694 See accompanying notes to consolidated financial statements 19
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NATIONAL RECORD MART, INC. and Subsidiary CONSOLIDATED BALANCE SHEETS As of March 27, 1999 and March 28, 1998 [Enlarge/Download Table] March 27, March 28, 1999 1998 ------------ ------------ Assets Current assets: Cash and cash equivalents $ 853,222 $ 384,304 Merchandise inventory 44,137,192 37,000,610 Due from stockholder 494,249 399,544 Deferred income taxes 417,000 343,000 Refundable income taxes 229,860 63,522 Other current assets 3,358,625 1,886,692 ------------ ------------ Total current assets 49,490,148 40,077,672 Property and equipment, at cost 36,014,844 25,108,592 Accumulated depreciation and amortization (17,771,446) (15,006,851) ------------ ------------ Property and equipment, net 18,243,398 10,101,741 Other assets: Deferred income taxes 1,726,319 984,000 Intangibles 2,534,646 1,001,845 Other assets 499,180 374,810 ------------ ------------ Total other assets 4,760,145 2,360,655 ------------ ------------ Total assets $ 72,493,691 $ 52,540,068 ============ ============ Liabilities and stockholders' equity Current liabilities: Accounts payable $ 15,537,814 $ 12,327,619 Deferred income 1,505,954 1,193,132 Other liabilities and accrued expenses 4,281,331 2,466,415 Current maturities of long-term debt 106,695 17,127 Income taxes payable -- 181,782 ------------ ------------ Total current liabilities 21,431,794 16,186,075 Long-term debt: Notes payable 13,845,464 12,301 Revolving credit facility 21,373,000 19,383,236 ------------ ------------ Total long-term debt 35,218,464 19,395,537 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, 5,494,384 and 5,037,916 shares issued, and 5,049,567 and 4,844,624 shares outstanding at March 27, 1999 and March 28, 1998, respectively 54,944 50,379 Additional paid-in capital 15,858,922 14,057,288 Retained earnings 1,590,432 3,281,773 ------------ ------------ 17,504,298 17,389,440 Less Treasury Stock, 444,817 and 193,292 shares at March 27, 1999 and March 28, 1998, respectively (1,660,865) (430,984) ------------ ------------ Total stockholders' equity 15,843,433 16,958,456 ------------ ------------ Total liabilities and stockholders' equity $ 72,493,691 $ 52,540,068 ============ ============ See accompanying notes to consolidated financial statements 20
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NATIONAL RECORD MART, INC. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended March 27, 1999, March 28, 1998 and March 29, 1997 [Enlarge/Download Table] Years Ended ------------------------------------------------------------- March 27, March 28, March 29, 1999 1998 1997 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $ (1,691,341) $ 892,648 $ (1,100,671) Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 3,540,141 2,801,248 2,725,030 Accretion of notes payable for value assigned for warrants 445,464 -- -- Loss from sale of property and equipment 144,101 185,475 116,269 Deferred income taxes (816,319) 185,000 546,000 Other 31,085 -- (221,900) Changes in operating assets and liabilities: Merchandise inventory (4,862,139) 466,564 (2,157,839) Other assets (636,789) (721,147) (363,945) Refundable income taxes (166,338) 1,459,617 -- Accounts payable 3,210,195 (2,207,512) 1,139,728 Deferred income 312,822 214,201 226,152 Other liabilities and accrued expenses 1,805,352 351,269 (60,042) Income taxes payable (181,782) 181,782 -- ------------- ------------- ------------- Net cash (used in) provided by operating activities (1,134,452) 3,809,145 848,782 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (10,300,704) (2,508,714) (2,942,008) Asset purchases (see Note 8) (4,507,275) -- -- Amounts (loaned to) received from stockholders (94,705) (28,819) 17,346 Other long-term investments -- 235,447 172,669 ------------- ------------- ------------- Net cash used in investing activities (14,902,689) (2,302,086) (2,751,993) CASH FLOWS FROM FINANCING ACTIVITIES Payments on debt (164,655,790) (130,704,676) (115,442,498) Borrowings on revolving line of credit 180,122,821 128,747,032 117,620,261 Purchases of Treasury Stock (1,229,881) -- -- ------------- ------------- ------------- Net cash provided (used in) by financing activities 14,237,150 (1,957,644) 2,177,763 ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents 468,918 (450,585) 274,552 Cash and cash equivalents, beginning of year 384,304 834,889 560,337 ------------- ------------- ------------- Cash and cash equivalents, end of year $ 853,222 $ 384,304 $ 834,889 ============= ============= ============= See accompanying notes to consolidated financial statements 21
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NATIONAL RECORD MART, INC. and Subsidiary CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended March 27, 1999, March 28, 1998 and March 29, 1997 [Enlarge/Download Table] Additional Total Common Stock Paid-in Retained Treasury Stock Stockholders' Shares Amount Capital Earnings Shares Amount Equity --------- ------- ------------ ------------ ------- ------------ ------------- 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 Net income -- -- -- 892,648 -- -- 892,648 --------- ------- ------------ ------------ ------- ------------ ------------ Balance at March 28, 1998 5,037,916 50,379 14,057,288 3,281,773 193,292 (430,984) 16,958,456 Warrants issued and exercised 455,968 4,560 1,800,389 -- -- -- 1,804,949 Stock options exercised 500 5 1,245 -- -- -- 1,250 Net loss -- -- -- (1,691,341) -- -- (1,691,341) Purchases of treasury stock -- -- -- -- 251,525 (1,229,881) (1,229,881) --------- ------- ------------ ------------ ------- ------------ ------------ Balance at March 27, 1999 5,494,384 $54,944 $ 15,858,922 $ 1,590,432 444,817 $ (1,660,865) $ 15,843,433 ========= ======= ============ ============ ======= ============ ============ See accompanying notes to consolidated financial statements 22
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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 27, 1999, the Company operated 174 stores in 30 states primarily in the eastern part of the United States and operates under five distinct store concepts, National Record Mart or NRM Music, Waves Music, Vibes Music, Music Oasis and Music X,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 1999, 1998 and 1997 ended on March 27 (52 weeks), March 28 (52 weeks) and March 29 (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: [Download Table] March 27, March 28, Assets Asset Lives 1999 1998 ------ ----------- ------------- ------------- Leasehold improvements 10 years $ 15,804,791 $ 10,638,275 Fixtures and equipment 7 years 20,138,334 14,398,598 Vehicles 5 years 71,719 71,719 ---------- ------------- Total 36,014,844 25,108,592 Less accumulated depreciation (17,771,446) (15,006,851) ------------- ------------- Property and equipment, net $ 18,243,398 $ 10,101,741 ============= ============= Depreciation expense for the years ended March 27, 1999, March 28, 1998 and March 29, 1997 was approximately $3,096,000, $2,562,000 and $2,487,000, respectively. INTANGIBLE ASSETS Intangible assets recorded by the Company are being amortized using the straight-line method over their estimated useful lives. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in the original acquisition of the Company and the acquisitions of businesses in fiscal 1994 and fiscal 1999, and is being amortized over periods of 40 and 15 years, respectively. The estimated useful life of other intangible assets is five years. 23
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FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the balance sheets for the Company's financial instruments approximates their 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 expenses for the fiscal years ended March 27, 1999, March 28, 1998 and March 29, 1997 were $2,046,000, $1,900,000, and $2,011,000, 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 Company continues to account for its stock-based employee compensation plan under Accounting Principles Board No. 25. See pro forma disclosures required under FASB Statement No. 123 in Note 4. 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. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share", which was effective for the Company for fiscal 1998. Accordingly, the Company adopted the statement for fiscal 1998, (FASB 128). Earnings per share amounts for all periods have been restated to give effect to the application of FASB 128. The effect of the restatement on earnings per share for the restated periods is immaterial. The following table shows the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of dilutive potential common stock. 24
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[Enlarge/Download Table] March 27, March 28, March 29, 1999 1998 1997 ----------- ----------- ----------- Weighted average common shares outstanding 4,800,867 4,844,624 4,851,694 Dilutive common stock equivalents -- 442,429 -- Treasury stock assumed to be repurchased using proceeds from options and warrants -- (229,730) -- ----------- ----------- ----------- Weighted average common shares and equivalents outstanding 4,800,867 5,057,323 4,851,694 =========== =========== =========== Net (Loss) Income $(1,691,341) $ 892,648 $(1,100,671) =========== =========== =========== RECLASSIFICATION Certain reclassifications have been made to the Consolidated Financial Statements for prior periods in order to conform to the March 27, 1999 presentation. 2. REVOLVING CREDIT FACILITY AND TERM DEBT Long-term debt consisted of the following as of: [Download Table] March 27, March 28, 1999 1998 ------------- ------------- Revolving Credit Facility-- Bears interest at the bank's base rate (7.75% at March 27, 1999) or the 30-day LIBOR rate (4.9375% at March 27, 1999) plus 2.0%. Secured by substantially all of the assets of the Company. $ 21,373,000 $ 19,383,236 Subordinated Notes -- $15 million notes with interest rate of 11.75%. Notes net of discount of $1,154,536 as of March 27, 1999. 13,845,464 -- Other 106,695 29,428 ------------- ------------- 35,325,159 19,412,664 Less current maturities 106,695 17,127 ------------- ------------- Long-term debt $ 35,218,464 $ 19,395,537 ============= ============= The Company has a revolving credit facility (the "Revolver") which expires on June 10, 2003. The maximum borrowings under the Revolver are $28,000,000 and are based upon eligible inventory levels as defined therein. During the months of October through December 31 of each year, an overadvance is available in addition to the borrowing base as calculated by levels of inventory in the amount of $1.5 million. In any event the total borrowings under this facility shall not exceed the limit of $28 million. 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. On April 16, 1998, the Company secured a private placement of $15,000,000 in senior subordinated notes. The notes carry an interest rate of 11.75% payable semi-annually and expire April 16, 2001. In consideration of the placement the Company issued 400,000 common stock warrants with an exercise price of $0.01. The Company has allocated $1,600,000 of value for accounting purposes to the warrants, which has been recorded as a reduction of the $15,000,000. This reduction will be accreted as additional interest expense over the term of the note. The Company has issued 39,990 warrants for an additional expense of $205,000 in the third quarter of fiscal 1999. The additional warrants are a settlement for the delay in the effective date of registering the 400,000 warrants noted above with the SEC. During the year, both the 400,000 and 39,990 warrants were exercised. 25
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Future scheduled maturities of long-term debt are as follows: [Download Table] Year Ended March ---------- 2000 $ 106,695 2001 -- 2002 15,000,000 2003 -- 2004 21,373,000 Thereafter -- ----------- 36,479,695 Discount to be accreted (1,154,536) ----------- Total $35,325,159 =========== Interest payments of $2,363,000, $1,860,000, and $1,731,000 were made during the fiscal years ended March 27, 1999, March 28, 1998 and March 29, 1997, respectively. 3. 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 $64,000, $50,000 and $49,000 for the years ended March 27, 1999, March 28, 1998 and March 29, 1997, respectively. 4. 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. 26
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On June 30, 1997, the Company's Board of Directors approved the 1997 Non-Employee Directors Stock Option Plan. The 1997 Directors' Plan provides for the grant of 25,000 shares to all independent members of the board who are not employees. The options are vested as of grant date and are exercisable over a ten year period from the date of grant at an exercise price of $2.50. The Company's Board of Directors approved on July 1, 1997 the issuance of options to purchase 200,000 shares of the Company's common stock to William A. Teitelbaum. The options vest over twenty years and are exercisable at $0.10, with an expiration date of July 1, 2024. The options have a vesting event to automatically vest in full upon termination, death, merger, acquisition or liquidation. 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 the year ended March 27, 1999: risk free rate of 5.48%; no dividend yield; volatility factors of the expected market price of the Company's common stock of 1.283; and weighted-average expected life of the option of five years. For the year ended March 28, 1998: risk-free interest rate of 6.38%; no dividend yield; volatility factors of the expected market price of the Company's common stock of .805; and weighted-average expected life of the option of five years. For the year ending March 29, 1997: 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: [Enlarge/Download Table] March 27, March 28, March 29, 1999 1998 1997 ------------- ------------- -------------- Pro forma net income (loss) $ (1,744,919) $ 845,579 $ (1,100,671) Pro forma net income (loss) per share: Basic $ (0.36) $ 0.17 $ (0.23) Fully diluted $ (0.36) $ 0.17 $ (0.23) Stock options granted prior to March 26, 1995 are excluded from the determination of pro forma net income. 27
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A summary of the Company's stock option activity follows: [Enlarge/Download Table] March 27, 1999 March 28, 1998 March 29, 1997 -------------------------- -------------------------- --------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price -------------------------- -------------------------- --------------------------- Outstanding - beginning of year 503,300 $ 1.63 268,500 $ 2.72 240,500 $ 0.75 Granted 34,350 5.90 235,900 0.47 228,500 2.50 Exercised (500) 2.50 -- -- -- -- Cancelled (20,200) 2.50 (1,100) 2.50 (200,500) 0.11 -------------------------- -------------------------- --------------------------- Outstanding - end of year 516,950 $ 1.88 503,300 $ 1.63 268,500 $ 2.72 ========================== ========================== =========================== Exercisable - end of year 134,600 $ 2.77 68,860 $ 3.20 58,400 $ 3.46 ========================== ========================== =========================== 5. INCOME TAXES The provision (benefit) for income taxes, as shown in the accompanying Consolidated Statements of Operations, includes the following components: [Download Table] March 27, March 28, March 29, 1999 1998 1997 ----------- ----------- ----------- Current provision: Federal $ (175,520) $ 294,741 $(1,068,980) State (5,023) 5,120 (50,327) ----------- ----------- ----------- (180,543) 299,861 (1,119,307) Deferred (816,319) 185,000 546,000 ----------- ----------- ----------- Total provision (benefit) for income taxes $ (996,862) $ 484,861 $ (573,307) =========== =========== =========== A reconciliation of the Company's effective income tax rate with the federal statutory rate is as follows: [Enlarge/Download Table] March 27, March 28, March 29, 1999 1998 1997 ----------- ----------- ----------- Federal statutory rate 34% 34% 34% State income taxes, net of federal tax benefit -- 1 -- Nontaxable amounts -- -- 1 ----------- ----------- ----------- Effective income tax rate 34% 35% 35% =========== =========== =========== Tax refunds of approximately $9,300, $1,324,000 and $1,019,000 were received during the fiscal years ended March 27, 1999, March 28, 1998 and March 29, 1997, respectively. 28
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Significant components of the Company's deferred tax assets and liabilities as of March 27, 1999 and March 28, 1998 are as follows: [Download Table] March 27, March 28, 1999 1998 ---------- ----------- Deferred tax assets: Excess tax basis in property and equipment $1,029,000 $ 1,093,000 Excess tax basis in inventory 296,000 247,000 Other 523,000 388,000 NOL Carry Forward 811,000 ---------- ----------- 2,659,000 1,728,000 Deferred tax liabilities: Excess book basis in other current assets (515,000) (401,000) ---------- ----------- Net deferred tax assets $2,144,000 $ 1,327,000 ========== =========== In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the amount of current and projected taxable income, management believes it is more likely than not that the Company will realize the benefits of those deductible differences. The amount of the deferred tax asset considered realizable could be reduced if estimates of future taxable income during the carryforward period are reduced. 6. 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 27, 1999 are as follows: [Download Table] 2000 $ 14,499,789 2001 13,671,175 2002 12,715,729 2003 11,754,301 Thereafter 47,665,378 ------------- Total future minimum lease payments $ 100,306,372 ============= Rent expense for the years ended March 27, 1999, March 28, 1998 and March 29, 1997 was $13,168,000, $10,981,000 and $10,699,000 respectively, including contingent rentals of $197,000, $161,000 and $144,000, respectively. 7. CONCENTRATION OF BUSINESS RISKS The Company purchases inventory for its stores from approximately 500 suppliers, with approximately 74% of purchases being made from five 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. 8. ASSET PURCHASES On May 4, 1998, the Company purchased certain of the assets of Record Den Inc. and DJK Records & Video Inc., totaling four stores. The acquisition was accounted for using the purchase method of accounting for a purchase price of approximately $933,000 resulting in $195,000 of goodwill which is being amortized using the straight line method over 15 years, $708,000 for purchased assets and a $30,000 consulting and noncompete agreement for a period of three years. The purchase price was paid in cash upon completion of the agreement. 29
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On November 13, 1998, the Company purchased certain of the assets of Happy Town Inc. and Tempo, totaling twelve stores. The acquisition was accounted for using the purchase method of accounting for a purchase price of approximately $3,574,000 resulting in $869,000 of goodwill which is being amortized using the straight line method over 15 years, $2,648,000 for purchased assets and a $57,000 consulting and noncompete agreement for a period of three years. The purchase price was paid in cash upon completion of the agreement. 9. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) [Enlarge/Download Table] BASIC DILUTED NET NET (LOSS) NET (LOSS) COMMON STOCK GROSS INCOME INCOME INCOME PRICE SALES PROFIT (LOSS) PER SHARE PER SHARE HIGH LOW ----- ------ ------ --------- --------- ---- --- 1999: First $ 24,435 $ 9,414 $ (1,218) $ (0.25) $ (0.25) $ 12.875 $ 5.625 Second 26,368 10,015 (1,080) (0.22) (0.22) 10.375 3.375 Third 47,716 17,207 2,442 0.51 0.44 19.125 3.875 Fourth 31,383 11,581 (1,835) (0.38) (0.38) 9.875 3.625 -------- -------- -------- ------- ------- Total $129,902 $ 48,217 $ (1,691) $ (0.35)* $ (0.35)* ======== ======== ======== ======= ======= 1998: First $ 21,013 $ 8,038 $ (908) $ (0.19) $ (0.19) $ 1.563 $ 1.250 Second 23,691 8,967 (791) (0.16) (0.16) 4.625 2.688 Third 41,706 15,394 2,884 0.60 0.56 4.500 3.500 Fourth 26,078 10,564 (292) (0.06) (0.06) 6.500 3.500 -------- -------- -------- ------- ------- Total $112,488 $ 42,963 $ 893 $ 0.18 * $ 0.18 * ======== ======== ======== ======= ======= * data rounded in quarterly calculations 30
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INDEX TO EXHIBITS The following documents are filed as part of this 10K for the year ended March 27, 1999 Exhibit No. Description ----------- ----------- 3.1 Amended and Restated Certificate of Incorporation of the Company, filed as Exhibit 3.2 to the Company's Registration Statement No. 33-62622 on Form S-1 and incorporated by reference herein 3.2 Amended and Restated By-Laws of the Company, filed as Exhibit 3.4 to the Company's Registration Statement No. 33-62622 on Form S-1 and incorporated by reference herein 3.3 Amendment to Restated Certificate of Incorporation of the Company, filed as Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended March 25, 1995 and incorporated by reference herein 4.1 Loan and Security Agreement, dated June 11, 1993, between the Company and Barclays Business Credit, Inc., filed as Exhibit 10.16 to the Company's Registration Statement No. 33-62622 on Form S-1 and incorporated by reference herein 4.2 Amendment, dated January 12, 1995, between the Company and Barclays Business Credit, Inc., to the Loan and Security Agreement, dated June 11, 1993, between the Company and Barclays Business Credit, Inc., filed as exhibit 4.2 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 and incorporated by reference herein. 4.3 Amendment, dated September 8, 1995, between the Company and Shawmut Capital Corporation, successor to Barclays Credit, Inc., to the Loan and Security Agreement, dated June 11, 1993, between the Company and Barclays Business Credit, Inc., filed as exhibit 4.3 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 and incorporated by reference herein. 4.4 Amendment, dated July 19, 1996, between the Company and Fleet Capital Corporation, successor to Shawmut Capital Corporation, to the Loan and Security Agreement, dated June 11, 1993, between the Company and Barclays Business Credit, Inc., filed as exhibit 4.4 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 and incorporated by reference herein. 4.5 Amendment, dated October 17, 1996, between the Company and Fleet Capital Corporation, to the Loan and Security Agreement, dated June 11, 1993, between the Company and Barclays Business Credit, Inc., filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1997 and incorporated by reference herein 4.6 Amendment, dated June 25, 1997, between the Company and Fleet Capital Corporation, to the Loan and Security Agreement, dated June 11, 1993, between the Company and Barclays Business Credit, Inc., filed as exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 and incorporated by reference herein. 4.7 Amendment, dated February 17, 1998, between the Company and Fleet Capital Corporation, to the Loan and Security Agreement, dated June 11, 1993, between the Company and Barclays Business Credit, Inc., filed as exhibit 4.7 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 and incorporated by reference herein. 4.8 Amendment, dated April 16, 1998, between the Company and Fleet Capital Corporation, to the Loan and Security Agreement, dated June 11, 1993, between the Company and Barclays Business Credit, Inc., filed as exhibit 4.8 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 and incorporated by reference herein. 4.9 Senior Subordinated Secured Note Purchase Agreement, dated as of April 16, 1998, among the Company, the Guarantors from time to time party thereto, the Purchasers from time to time party thereto, and Robert Fleming, Inc., as Agent, filed as exhibit 4.9 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 and incorporated by reference herein. 4.10 Senior Subordinated Note Purchase Agreement, dated as of April 16, 1998, among the Company, the Guarantors from time to time party thereto, the Purchasers from time to time party thereto, and Robert Fleming, Inc., as Agent, filed as exhibit 4.10 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 and incorporated by reference herein. 4.11 Issuer Security and Pledge Agreement, dated as of April 16, 1998, between the Company and Robert Fleming, Inc., as Agent, filed as exhibit 4.11 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 and incorporated by reference herein. 4.12 Guarantor Security and Pledge Agreement, dated as of April 16, 1998, between NRM Investments, Inc. and Robert Fleming, Inc., as Agent, filed as exhibit 4.12 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 and incorporated by reference herein. 4.13 Trademark Collateral Security Agreement, dated as of April 16, 1998, between the Company and Robert Fleming, Inc., as Agent, filed as exhibit 4.13 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 and incorporated by reference herein. 4.14 Subordination Agreement, dated as of April 16, 1998, between Robert Fleming, Inc., as Agent, and Fleet Capital Corporation, acknowledged by the Company and NRM Investments, Inc., filed as exhibit 4.14 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 and incorporated by reference herein. 4.15 Junior Subordination Agreement, dated as of April 16, 1998, between Robert Fleming, Inc., as Agent, and Fleet Capital Corporation, acknowledged by the Company and NRM Investments, Inc., filed as exhibit 4.15 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 and incorporated by reference herein. 31
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Exhibit No. Description ----------- ----------- 4.16 Collateral Sharing and Agency Agreement, dated as of April 16, 1998, among the Company, NRM Investments, Inc., Robert Fleming, Inc., as Agent, and Fleet Capital Corporation, for itself and as Collateral Agent, filed as exhibit 4.16 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 and incorporated by reference herein. 10.1 Sublease dated July 1, 1992 between the Company and General Motors Corporation, filed as Exhibit 10.12 to the Company's Registration Statement No. 33-62622 on Form S-1 and incorporated by reference herein 10.2 Employment Agreement dated April 1, 1993 between the Company and William A. Teitelbaum, filed as Exhibit 10.11 to the Company's Registration Statement No. 33-62622 on Form S-1 and incorporated by reference herein 10.3 Stock Option Agreement dated June 10, 1996 between the Company and William A. Teitelbaum, filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1996 and incorporated by reference herein 10.4 Stock Option Agreement dated July 1, 1997 between the Company and William A. Teitelbaum, filed as exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 and incorporated by reference herein. 10.5 Registration Rights Agreement dated July 1, 1997 between the Company and William A. Teitelbaum, filed as exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 and incorporated by reference herein. 10.6 Employment Agreement dated as of January 1, 1996 between the Company and Theresa Carlise, filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1996 and incorporated by reference herein 10.7 National Record Mart, Inc. 1993 Stock Option Plan, filed as Exhibit 10.14 to the Company's Registration Statement No. 33-62622 on Form S-1 and incorporated by reference herein 10.8 National Record Mart, Inc. Non-Employee Director Stock Option Plan, filed as Exhibit 10.15 to the Company's Registration Statement No. 33-62622 on Form S-1 and incorporated by reference herein 10.9 National Record Mart, Inc. 1997 Non-Employee Director Stock Option Plan, filed as exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 and incorporated by reference herein. 10.10 Warrant Agreement, dated as of April 16, 1998, between the Company, Robert Fleming, Inc. and Seneca Capital, L.P., filed as exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 and incorporated by reference herein. 10.11 Registration Rights Agreement, dated as of April 16, 1998, between the Company and the holders of registrable securities referred to therein, filed as exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 and incorporated by reference herein. 10.12 Tag Along Agreement, dated as of April 16, 1998, between the Company, Seneca Capital, L.P., Robert Fleming, Inc. and certain holders of shares of common stock of the Company, filed as exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 and incorporated by reference herein. 23.1 Consent of Ernst & Young LLP 32

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