<PAGE>
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 FEBRUARY 1, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ............ TO ............
COMMISSION FILE NUMBER: 0-14818
TRANS WORLD ENTERTAINMENT CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 14-1541629
------------------------------ --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
38 Corporate Circle
Albany, New York 12203
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(518) 452-1242
---------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for 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, 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 an
amendment to this Form 10-K. [ ]
As of April 23, 1997 9,747,849 shares of the Registrant's Common Stock,
excluding 41,394 shares of stock held in Treasury, were issued and
outstanding. The aggregate market value of such shares held by non-affiliates
of the Registrant, based upon the closing sale price of $11 3/8 on the NASDAQ
National Market System on April 23, 1997, was approximately $48,500,000.
Shares of Common Stock held by the Company's controlling shareholder, who
controls approximately 54.7% of the outstanding Common Stock, have been
excluded for purposes of this computation. Because of such shareholder's
control, shares owned by other officers, directors and 5% shareholders have
not been excluded from the computation.
<PAGE>
PART I
Item 1. BUSINESS
General
Trans World Entertainment Corporation (which, together with its consolidated
subsidiaries, is referred to herein as the "Company") was incorporated in New
York in 1972. Trans World Entertainment Corporation owns 100% of the
outstanding common stock of Record Town, Inc., through which the Company's
principal retail operations are conducted.
The Company operates a chain of retail entertainment stores in a single
industry segment. Sales were $481.7 million during the fiscal year ended
February 1, 1997 (referred to herein as "1996"). The Company is one of the
largest specialty retailers of compact discs, prerecorded audio cassettes,
prerecorded videocassettes and related accessories in the United States. At
February 1, 1997, the Company operated 479 stores in 34 states, the District
of Columbia and the Virgin Islands, with the majority of the stores
concentrated in the Eastern half of the United States. The Company's business
is highly seasonal in nature, with the peak selling period being the Christmas
holiday in the fourth fiscal quarter.
In order to streamline operations and increase profitability, the Company
closed 85 stores in 1996, 151 stores in 1995 and 28 stores in 1994 as part of
a restructuring plan originally announced in the fourth quarter of 1994. New
store openings have been significantly curtailed with only 22 new stores
opening in 1996 and 9 new stores opening in 1995. The Company anticipates
that its restructuring plan will be completed during 1997. See "Business
Restructuring" below and "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources".
The Company's central distribution facility currently serves all of its retail
stores with weekly shipments to each store providing for approximately 80% of
their retail product requirements. The balance of the stores' requirements
are satisfied through direct shipments from manufacturers distributors and
other wholesale companies.
The Company's principal executive offices are located at 38 Corporate Circle,
Albany, New York, 12203, and its telephone number is (518) 452-1242.
Business Restructuring
The Company's performance in 1996 confirmed the success of a restructuring
plan that began in the fourth quarter of 1994. Management concluded that
intense competition from existing retailers and new entrants, combined with
changing customer demand and declining mall traffic, was adversely impacting
certain of the Company's retail markets. The Company recognized and responded
to these conditions before any of its competitors and as a result has nearly
completed its restructuring.
The Company's restructuring included closing underperforming stores, improving
operating efficiencies and restructuring its debt. In order to reduce its
portfolio of stores to a strong core of profitable locations in desirable
geographic markets, the Company continued to focus on improving the
profitability of existing stores and streamlining its operations by closing
unprofitable stores. As of February 1, 1997, the Company has closed or
relocated a total of 264 stores and an additional 77 stores are forecasted to
close or relocate in 1997.
<TABLE>
To illustrate the impact of the store closings, the table below sets forth the
store openings and closings over the past two fiscal years, and a forecast for
the 1997 fiscal year. Store closings are not concentrated in a particular
format or geographic region and store openings in the forecast do not
necessarily represent commitments. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations-Liquidity and Capital
Resources".
<PAGE>
<CAPTION>
Fiscal Year
------------------------
Forecast
1997 1996 1995
------------------------
<S> <C> <C> <C>
MALL
Beginning of the Period 356 379 431
Openings 66 19 7
Closings (70) (42) (59)
------------------------
End of the Period 352 356 379
NON MALL/OTHER
Beginning of the Period 123 163 253
Openings 4 3 2
Closings (7) (43) (92)
------------------------
End of the Period 120 123 163
TOTAL COMPANY
Beginning of the Period 479 542 684
Openings 70 22 9
Closings (77) (85) (151)
------------------------
End of the Period 472 479 542
========================
</TABLE>
Store Formats
The Company operates stores in a number of distinct formats. The Company's
merchandising strategy is to offer customers a broad selection of titles at
competitive prices in convenient and attractive store locations.
Mall Stores. At February 1, 1997, the Company operated 177 full-line mall
stores, generally under the name of "Record Town". These stores, located
primarily in large shopping malls, average approximately 3,000 square feet,
with certain stores ranging in excess of 7,000 square feet. Mall stores focus
on in-store presentation, broad selection of products and convenient
locations. The full-line mall format averaged approximately $280 in sales per
square foot in 1996.
Specialty Mall Stores. Operating under the name "Tape World", the Company had
52 specialty mall stores at February 1, 1997. The average square footage of
these specialty stores was approximately 1,300 square feet, generating average
sales per square foot of $400 in 1996. These specialty mall stores offer a
less diverse product selection than the larger full-line mall stores.
Video-for-Sale. Dedicated primarily to the sale of prerecorded video
products, the Company operated 56 stores under the name "Saturday Matinee" on
February 1, 1997. Located in shopping malls, these stores averaged 2,100
square feet. The average sales per square foot was $325 in 1996.
Combination Stores. Combination stores sharing common store fronts of "Record
Town" and "Saturday Matinee" accounted for 70 of the 479 total stores in
operation at February 1, 1997. This format averages 7,500 square feet with
combination superstores having square footage as great as 16,000 square feet.
These stores offer the consumer an exciting combination of music and
video-for-sale products conveniently located in one store. In 1996, the
average sales per square foot was approximately $240.
The Company currently operates two multimedia superstores under the name
"F.Y.E." or "For Your Entertainment". First introduced in 1993, F.Y.E
combines its broad assortment of music and video titles with a game arcade,
coffee bar, and an extensive product mix of books, games, accessories and
boutique items. F.Y.E is designed to be a semi-anchor or destination retailer
in major regional malls. The two stores that are currently in operation are
located in Trumbull, CT and Victor, NY with square footage of approximately
27,000 and 45,000 square feet, respectively.
<PAGE>
Non-Mall Stores. Freestanding stores accounted for 100 of the 479 stores in
operation at February 1, 1997, substantially all of which operate under the
name "Coconuts". These stores are designed for free-standing, strip center
and downtown locations in areas of high population density. The majority of
the freestanding stores range in size from 4,000 to 8,000 square feet. Six of
the freestanding stores are Coconuts "superstores" that average approximately
14,000 square feet. Freestanding stores carry a more extensive product
assortment with an emphasis on competitive pricing. Average sales per square
foot were approximately $205 in 1996.
The Company's non-mall stores also include a video rental format. These
stores operate under the tradename "Movies Plus". As of February 1, 1997, the
Company operated 22 stores averaging approximately 5,500 square feet.
Products
The Company's stores offer a full assortment of compact discs, prerecorded
audio cassettes, prerecorded videocassettes, blank audio and videotape and
related accessories. Sales by category as a percent of total sales over the
past three years were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
February 1, February 3, January 28,
1997 1996 1995
<S> <C> <C> <C>
Compact discs 50.1% 49.2% 46.5%
Prerecorded audio cassettes 22.2 25.5 28.9
Prerecorded videocassettes 18.6 16.7 15.5
Other 9.1 8.6 9.1
----------- ----------- ------------
TOTAL 100.0% 100.0% 100.0%
=========== =========== ============
</TABLE>
Prerecorded Music. The Company's music stores offer a full assortment of
compact discs and prerecorded audio cassettes approximately 67% of which is
purchased from six major manufacturers. Music categories include rock,
country, urban, pop, rap, gospel, jazz, classical and soundtracks.
Merchandise inventory is generally classified for inventory management
purposes in three groups: "hits", which are the best selling new releases,
"fast moving" titles, which generally constitute the top 1,000 titles with the
highest rate of sale in any given month, and "catalog" items that customers
purchase to build their collections.
The Company's prerecorded music product mix has continued to shift from audio
cassettes to the increasingly popular compact discs. Since 1994, the unit
sales of compact discs has exceeded the unit sales of audio cassettes. The
Company believes this trend will continue in the future.
Video Products. The Company offers prerecorded videocassettes for sale in a
majority of its stores, with the selection of titles ranging up to 8,000
depending on the size and sales volume of each store. The sell-through
business has been stimulated by lower list prices offered by the movie studios
creating a greater acceptance by the consumer.
Digital Versatile Discs ("DVD"), a new video technology, was introduced in
March 1997. DVD offers a quality that exceeds both the current VHS and CD
formats; in addition, DVD offers the consumer more storage than the current
CD. The Company is currently testing consumer acceptance of this product by
making it available in select markets, but does not expect the product will
have a significant financial impact in 1997.
<PAGE>
Other Products. The Company stocks and promotes brand name blank video and
audio cassette tapes as well as accessory products for compact discs, audio
cassettes and videocassettes including maintenance and cleaning products, home
and portable storage cases, headphones, portable electronics and video games.
Advertising
The Company makes extensive use of in-store advertising circulars and signs
and also pursues a mass-media marketing program for its freestanding stores
through advertisements in newspapers, radio, and television. Most of the
vendors from whom the Company purchases merchandise offer their customers
advertising allowances to promote their products.
Competition
The prerecorded music and video specialty retail industry is highly
competitive with numerous chains and discount stores selling prerecorded music
and video merchandise. Several large national retail chains, that operate
book or electronic superstores have expanded their product lines to include
music and video departments in an effort to increase store traffic. The
impact of the national chains on the traditional specialty retailer has been
to reduce customer traffic and revenues. As a result, many of the Company's
competitors are experiencing financial difficulties which have resulted in
increased bankruptcy filings and corporate restructurings. Many of the major
music vendors are enforcing programs to eliminate loss leader pricing
strategies, such as the Minimum Advertised Pricing ("MAP") programs, which
penalizes sellers for not complying with vendor pricing programs. The MAP
programs have been a success and have stabilized prices.
The Company has formulated a number of different strategies to compete against
the increased number of music and video software retailers. The Company
continues to use competitive pricing programs based on market conditions, and
although competitive pricing is important, management believes the positioning
of its stores within successful regional malls is equally important in
competing for mall customers. Management believes that the large regional
malls in which the Company operates have not been materially impacted by the
increase in the number of stores operated by non-mall competitors.
The increase in the number of competitors and their pricing structures has
made achieving meaningful comparable store sales gains difficult; however,
during 1996 the Company experienced positive comparable store sales in each of
its fiscal quarters. The Company believes that its convenient locations,
customer service and product assortments in addition to its pricing strategies
will enable it to remain competitive.
Seasonality
The Company's business is seasonal in nature. The fourth quarter which
includes the month of December and the Christmas holiday season constitutes
the Company's peak selling period, totaling 37.5% of annual sales in 1996.
Distribution and Merchandise Operations
The Company's distribution facility uses certain automated and computerized
systems designed to manage product receipt, storage and shipment. Generally,
price tickets and bar-coded product information are attached to each piece of
merchandise before it leaves the distribution center. Store inventories of
regular product are replenished in response to detailed product sale
information that is transmitted to the central computer system from each
outlet after the close of the business day. Shipments from the facility to
each of the Company's stores are made at least weekly and currently provide
the Company's stores with approximately 80% of their product requirements.
The balance of the stores' requirements are satisfied through direct shipments
from manufacturers distributors and other wholesale company's.
<PAGE>
Company-owned trucks service approximately 30% of the Company's stores; the
balance is serviced by several common carriers chosen on the basis of
geographic and rate considerations. No contractual arrangements exist between
the Company and any common carriers. The Company's sales volume and
centralized product distribution facility enable it to take advantage of
transportation economies.
During 1994, the Company contracted with an equipment supplier and facilities
engineering company to more completely automate the product picking,
distribution and returns functions of its distribution center. These
enhancements were operational in 1996 and the Company is continuing to fine
tune its operations. The remaining equipment testing and implementation
continued in 1996 and is expected to be completed in 1997. The Company
believes that the existing distribution center is adequate to meet the
Company's planned business needs, and additional improvements will be
completed primarily for operational efficiency.
Suppliers and Purchasing
The Company purchases inventory for its stores from approximately 400
suppliers on an unsecured basis. Approximately 67% of purchases in 1996 were
made from the six largest suppliers: Warner/Electra/Atlantic Corp., Sony
Music, EMD, PolyGram, Universal and BMG Music.
As is typical in this industry, the Company has no material long-term purchase
contracts and deals with its suppliers principally on an order-by-order basis.
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. The Company also expects to continue to
pass on to customers any price increases imposed by the suppliers of
prerecorded music and videocassettes.
The Company produces store fixtures for all of its new stores and store
remodels in its manufacturing facility located in Johnstown, New York.
Production of store fixtures did not have a material financial impact in 1996,
and management does not anticipate that such manufacturing will constitute a
significant element of its business in 1997.
Trade Customs and Practices
Under current trade practices, retailers of prerecorded audio cassettes and
compact discs are entitled to return products they have purchased from major
vendors for other titles carried by these vendors; however, the returns are
subject to merchandise return penalties. This industry practice permits the
Company to carry a wider selection of music titles and at the same time reduce
the risk of obsolete inventory. Most manufacturers and distributors of
prerecorded videocassettes offer return privileges comparable to those with
prerecorded music, but with fewer merchandise return penalties. Video rental
products are not eligible for return to the manufacturers. Product return
credit is applied as a reduction against current merchandise product payments.
In some instances, the Company's suppliers limit return privileges relative to
current gross inventory purchases. However, manufacturers' return privilege
policies have changed in the past and may change in the future. The
merchandise return policies have not changed significantly during the past
five years, but any future changes in these policies could impair the value of
the Company's inventory. The Company generally has adapted its purchasing
policies to changes in the policies of its suppliers.
Employees
The Company employs approximately 4,100 people, of whom 700 are employed on a
full-time salaried basis, 1,300 are employed on a full-time hourly basis, and
the remainder on a part-time hourly basis. The Company hires temporary help
during peak seasons to assure continued levels of customer service. Store
managers report to district managers, each of who, in turn, reports to a
regional manager. In addition to their salaries, store managers, district
managers and regional managers have the potential to receive incentive
compensation based on store sales and profitability. None of the Company's
employees are covered by collective bargaining agreements, and management
believes that the Company enjoys favorable relations with its employees.
<PAGE>
Retail Information Systems
All store sales data and product purchasing information are collected
centrally utilizing the IBM AS/400 midrange configuration. The Company's
information systems manage a database of over 150,000 active sku's in
prerecorded music, video and accessory products. The system processes
inventory, accounting, payroll, telecommunications and other operating
information for all of the Company's operations.
Trademarks and Service Marks
The Company operates stores under various names and marks, including the
service marks "Record Town", "Tape World", "Coconuts", "Saturday Matinee",
"Movies Plus" and "F.Y.E." that are registered in the United States Patent and
Trademark Office. The Company intends to continue to use these names and
marks, among others, for its stores, with the choice of name for a specific
store depending upon the type of store and its location.
Item 2. PROPERTIES
Retail Stores
At February 1, 1997, the Company operated 479 retail outlets. The Company
owns one real estate site, which it formerly operated as a retail outlet and
currently leases. All of the Company's retail stores are under operating
leases with various terms and options. Substantially all of its stores
provide for payment of fixed monthly rentals, a percentage of the gross
receipts of the store in excess of specified sales levels, and operating
expenses for maintenance, property taxes, insurance and utilities. The
following table lists the number of leases due to expire (assuming no renewal
options are exercised) in each of the fiscal years shown, as of February 1,
1997:
1997............92 2001............52
1998............45 2002............45
1999............37 2003............57
2000............73 2004 & Beyond...78
The Company expects that as these leases expire, it will be able to either
obtain renewal leases, if desired, or to obtain leases for other suitable
locations. Included in the table above are several month-to-month leases
under negotiations for renewal; these leases are included as part of leases
due to expire in 1997. Certain of the stores scheduled to close as part of
the restructuring plan will be closed upon the expiration of the applicable
store lease.
Corporate Offices and Distribution Center Facility
The Company leases its Albany, New York distribution facility and the majority
of the corporate office space from its principal shareholder and Chief
Executive Officer under two leases that extend through the year 2015. Both
leases are at fixed rentals with provisions for biennial increases based upon
increases in the Consumer Price Index. Under such leases, the Company pays
all property taxes, insurance and maintenance. The office portion of the
facility is comprised of 21,000 square feet. The distribution center portion
is comprised of approximately 138,000 square feet.
The Company leases an 86,000 square foot facility in Johnstown, N.Y., where it
manufactures its store fixtures. The seven-year operating lease expires in
1998.
<PAGE>
Item 3. LEGAL PROCEEDINGS
The Company has no material legal proceedings pending against it.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
<PAGE>
Supplementary Items - Identification of Executive Officers of the Registrant
- ----------------------------------------------------------------------------
(Pursuant to Instruction 3 to Item 401(b) of Regulation S-K)
The name, age, principal occupation and period of service as an executive
officer of the Company for each executive officer are set forth below.
Robert J. Higgins Age 55
President, Chief Executive Officer,
Chairman of the Board and Director Since 1973
Robert J. Higgins founded the Company in 1972 and has participated in its
operations since 1973. Mr. Higgins has served as President, Chief Executive
Officer and a director of the Company for more than the past five years, and
is the principal shareholder in the Company.
Edward W. Marshall, Jr. Age 51
Executive Vice President of Operations Since 1989
Edward W. Marshall, Jr. has been Executive Vice President of the Company since
August 1994. He served as Senior Vice President-Operations of the Company
since January 1991 and was Vice President of Operations upon joining the
Company in May 1989. Prior to joining the Company, Mr. Marshall was Vice
President of Operations for Morse Shoe, a retail store operator.
James A. Litwak Age 43
Executive Vice President of Merchandising and Marketing Since 1996
James A. Litwak joined the Company in May 1996 as Executive Vice President of
Merchandising and Marketing. Prior to joining the Company, Mr. Litwak served
as Senior Vice President and General Merchandise Manager of DFS Group Limited,
an international retailer of in-airport duty free shops. Prior to joining DFS
Group Limited, Mr. Litwak held several executive positions in his fourteen
year career at R.H. Macy's Company with the most recent being President of
Merchandising for Macy's West responsible for developing marketing,
merchandising and product launch programs to fuel growth for the 50 store
division.
John J. Sullivan Age 44
Senior Vice President, Treasurer and Chief Financial Officer Since 1991
John J. Sullivan has been Senior Vice President, Treasurer and Chief Financial
Officer of the Company since May 1995. Mr. Sullivan joined the Company in
June 1991 as the Corporate Controller and was named Vice President of Finance
and Treasurer in June of 1994. Prior to joining the Company, Mr. Sullivan was
Vice President and Controller for Ames Department Stores, a discount
department store chain.
Bruce J. Eisenberg Age 37
Senior Vice President of Real Estate Since 1993
Bruce J. Eisenberg has been Senior Vice President of Real Estate at the
Company since May of 1995. He joined the Company in August of 1993 as Vice
President of Real Estate. Prior to joining the Company, Mr. Eisenberg was
responsible for leasing, finance and construction of new regional mall
development at The Pyramid Companies.
<PAGE>
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
over-the-counter market and quoted on the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ") National Market System
under the symbol "TWMC". As of April 23, 1997, there were approximately 400
shareholders of record. However, management believes that a significant
number of shares are held by brokers under a "nominee name" and that the
actual beneficial shareholder count exceeds 1,000. The following table sets
forth fiscal quarterly high and low last sale prices as reported by NASDAQ for
the period from January 30, 1995 through January 31, 1997, and the closing
price as of April 23, 1997.
<TABLE>
<CAPTION>
Last
Sales
Prices
1995 High Low
<S> <C> <C>
1st Quarter $6 $4
2nd Quarter 5 1/4 3 3/8
3rd Quarter 4 7/8 2 1/4
4th Quarter 3 1/2 1 3/4
1996
1st Quarter $5 3/8 $2 1/2
2nd Quarter 7 1/4 4 1/2
3rd Quarter 9 1/2 4 7/8
4th Quarter 8 3/4 6 1/4
1997
April 23, closing price $ 11 3/8
</TABLE>
Dividend Policy. The Company has never declared or paid cash dividends on its
Common Stock. The Company's credit agreements currently in place do not
permit payment of cash dividends. Any future determination as to the payment
of dividends would depend upon capital requirements and limitations imposed by
the Company's credit agreements and such other factors as the Board of
Directors of the Company may consider.
<PAGE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data and other
operating information of the Company. The selected balance sheet and income
statement data set forth below is derived from the consolidated financial
statements of the Company. The selected consolidated financial data should be
read in conjunction with the consolidated financial statements and related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
Fiscal Year Ended (1)
February 1, February 3, January 28, January 29, January 30,
1997 1996 1995 1994 1993
---------------------------------------------------------------
(in thousands except per share and store data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales $481,657 $517,046 $536,840 $492,553 $454,916
Cost of sales 308,952 340,754 341,422 307,834 280,572
------------------------------------------------------------
Gross profit 172,705 176,292 195,418 184,719 174,344
Selling, general and
administrative expenses 136,084 150,628 158,637 147,644 133,768
Restructuring charge --- 35,000 21,000 --- ---
Depreciation and
amortization 14,134 16,125 16,932 14,655 13,310
-----------------------------------------------------------
Income (Loss) from operations 22,487 (25,461) (1,151) 22,420 27,266
Interest expense 10,767 14,222 9,540 5,971 5,627
-----------------------------------------------------------
Income (Loss) before
income taxes 11,720 (39,683) (10,691) 16,449 21,639
Income tax expense (benefit) 4,618 (14,310) (4,435) 6,626 8,374
-----------------------------------------------------------
Net income (loss) $7,102 ($25,373) ($6,256) $9,823 $13,265
===========================================================
Earnings (Loss) per share $0.73 ($2.61) ($0.64) $1.01 $1.40
===========================================================
Weighted average number of
shares outstanding 9,757 9,726 9,701 9,723 9,474
===========================================================
BALANCE SHEET DATA: (at the end of the period)
Working capital $81,247 $78,773 $93,431 $101,538 $63,058
Total assets 310,053 390,331 426,939 380,264 286,873
Current portion of
long-term obligations 9,557 3,420 6,618 3,695 910
Long-term obligations 50,490 60,364 66,441 73,098 25,512
Shareholders' equity 101,362 94,104 119,477 126,074 116,329
Store Count:
Number of stores open
at end of period 479 542 684 684 654
(1) Each year consisted of 52 weeks except the fiscal year ended February 3,
1996 which consisted of 53 weeks.
</TABLE>
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS, FISCAL YEARS 1996, 1995 AND 1994
The following is an analysis of the Company's results of operations, liquidity
and capital resources. To the extent that such analysis contains statements
which are not of a historical nature, such statements are forward-looking
statements, which involve risks and uncertainties. These risks include, but
are not limited to, changes in the competitive environment for the Company's
products, including the entry or exit of non-traditional retailers of the
Company's product to or from its markets; the release by the music industry of
an increased or decreased number of "hit releases"; general economic factors
in markets where the Company's products are sold; and other factors discussed
in the Company's filings with the Securities and Exchange Commission.
<TABLE>
The following table sets forth certain income and expense items as a
percentage of sales for the periods indicated:
<CAPTION>
Fiscal Year Ended
-------------------------------------------
February 1, February 3, January 28,
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Gross profit 35.9 34.1 36.4
Selling, general and
administrative expenses 28.3 29.1 29.6
Restructuring charges 0.0 6.8 3.9
Depreciation and amortization 2.9 3.1 3.1
---------------------------------------
Income (Loss) from operations 4.7 (4.9) (0.2)
Interest expense 2.2 2.8 1.8
---------------------------------------
Income (Loss) before income taxes 2.5 (7.7) (2.0)
Income tax expense (benefit) 1.0 (2.8) (0.8)
---------------------------------------
NET INCOME (LOSS) 1.5% (4.9)% (1.2)%
=======================================
Change in comparable store sales 3.6% (3.5)% 1.1%
=======================================
</TABLE>
Fiscal Year Ended February 1, 1997 ("1996")
Compared to February 3, 1996 ("1995")
Sales. The Company's sales decreased $35.4 million, or 6.8%, from 1995 while
the number of stores in operation decreased by 12%. The decrease was
primarily attributable to a net decrease of approximately 151,000 square feet
of retail selling space, which resulted from closing 85 stores offset slightly
by the opening of 22 stores. In 1995 there were 53 weeks in the fiscal year,
with the extra week accounting for $6.9 million in sales. Comparable store
sales for fiscal year 1996 increased by 3.6%. Management attributes the
comparable store sales increase to its strategic decision to eliminate
unprofitable stores and focus on customer service, superior retail locations,
inventory management and merchandise presentation. Sales by product
configuration are shown in the following table:
<TABLE>
<CAPTION>
Fiscal Year Ended
February 1, February 3, January 28,
1997 1996 1995
<S> <C> <C> <C>
Compact discs 50.1% 49.2% 46.5%
Prerecorded audio cassettes 22.2 25.5 28.9
Prerecorded videocassettes 18.6 16.7 15.5
Other 9.1 8.6 9.1
----------- ----------- ------------
TOTAL 100.0% 100.0% 100.0%
=========== =========== ============
</TABLE>
<PAGE>
Changes in unit selling prices in 1996 did not materially affect sales. The
overall unit sales volume decreased in 1996 as a result of the Company's store
closing program. Comparable store unit sales volume for compact discs and
prerecorded videos increased 7.8% while audio cassettes declined 13.2%.
The Company's store formats showed positive comparable growth in 1996 compared
to 1995. Comparable store sales for mall stores increased 2.8% while non-mall
stores increased 7.4%. By product configuration, comparable store sales in
music increased 1.9% while the video sell-through, benefiting from continued
growth of the video sell-through market, increased 12.4%.
Gross Profit. Gross profit, as a percentage of sales, increased to 35.9% in
1996 from 34.1% in 1995 as a result of reduced merchandise shrinkage and
increased purchase discounts combined with a strong performance from higher
margin catalog sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A"), as a percentage of sales, decreased to 28.3%
in 1996 from 29.1% in 1995. The 0.8% decrease can be attributed to the
closing of underperforming stores, the receipt of $2.5 million upon
termination of a business agreement in the second quarter 1996 and a 3.6%
increase in comparable store sales.
Interest Expense. Interest expense decreased 24% to $10.8 million in 1996
from $14.2 in 1995. The decrease is due to lower average outstanding
borrowings offset in part by increased weighted average interest rates.
Income Tax Expense. The effective income tax rate was 39.4% in 1996. See
Note 4 of the Notes to Consolidated Financial Statements for a reconciliation
of the statutory tax rates to the Company's effective tax rate.
Net Income. In 1996, the Company's net income increased to $7.1 million
compared to a net loss of $25.4 million in 1995. The improved bottom line
performance can be attributed to the success of the Company's restructuring
plan. Additionally, the Company benefited from a comparable store sales
increase, higher gross margin rate and lower SG&A.
Fiscal Year Ended February 3, 1996 ("1995")
Compared to January 28, 1995 ("1994")
Sales. The Company's sales decreased by $19.8 million, or 3.7%, from 1994.
The decrease was primarily attributable to a net decrease of 340,000 square
feet of retail selling space, which resulted from closing 151 stores while
opening 9 stores. Comparable store sales for the fiscal year decreased 3.5%.
Management attributes the comparable store sales decline to the sluggish
retail environment throughout 1995 and weaker new releases compared to the
prior year.
Gross Profit. Gross profit, as a percentage of sales, decreased from 36.4% in
1994 to 34.1% in 1995. Approximately half of the decline was due to the
increase in merchandise shrink. The remaining decline was due to the
continued shift in sales mix from prerecorded audio cassettes to lower margin
compact discs, increased merchandise return penalties incurred in returning
product to vendors and, to a lesser extent, increased promotional markdowns.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A"), as a percentage of sales, decreased from
29.6% in 1994 to 29.1% in 1995. The Company reduced operating overhead
expenses by $3.2 million in 1995 due primarily to the reduction in the number
of stores, which resulted in a 0.6% decrease as a percentage of sales. Store
expenses, as a percent of sales, were higher in 1995 due to the decline in
comparable store sales and the timing of closing underperforming stores
throughout the year.
Interest Expense. Interest expense increased to $14.2 million, $4.7 million
over 1994. The increase is due to the increase in the Company's weighted
average interest rate.
<PAGE>
Income Tax Benefit. The effective income tax rates, prior to the
restructuring charge, were slightly lower than Federal statutory rates as a
result of permanent tax differences
Net Loss. The three principal factors contributing to the reduction in income
from operations, before recording the $35 million pretax restructuring charge,
were: (1) the 3.7% decline in total retail sales; (2) the 2.3% decline in
gross margin, as a percent of sales; and (3) the $4.7 million increase in
interest expense. The after-tax effect of the $35 million restructuring
charge increased losses from $0.23 per share to $2.61 per share.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain measures of the Company's liquidity:
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------
1996 1995 1994
(in thousands)
-----------------------------
<S> <C> <C> <C>
Net cash provided
by operating activities 44,934 24,136 16,739
Working capital 81,247 78,773 93,431
Current ratio 1.5:1 1.3:1 1.4:1
Long-term debt obligations
to equity ratio 50% 64% 56%
-----------------------------
</TABLE>
Liquidity and Sources of Capital. Cash flow from operating activities and
funds available under a revolving credit facility are the Company's primary
sources of liquidity. During the first three fiscal quarters, cash flow is
typically consumed by payments to merchandise vendors and store construction
expenditures. The revolving credit facility provides the Company with its
liquidity until December, when the Company's cash position has historically
been the highest, providing sufficient cash to repay all outstanding
borrowings under the revolving credit facility.
During 1996 the cash provided by operating activities was $44.9 million
compared to $24.1 million for 1995. The increased cash flow from operations
was due primarily to a decrease in inventory balances in 1996 which is the
result of improved inventory management and a reduction in the number of
stores. Merchandise inventory decreased to $164 million from $195 million at
the end of 1995. Leverage of accounts payable to inventory improved to 73% in
1996 from 67% in 1995.
The Company ended fiscal 1996 with cash balances of approximately $54.8
million and no outstanding balance on its Revolving Credit Facility. In 1995,
the Company accumulated cash balances in December and January instead of
repaying the balances under its revolving credit facility.
On July 26, 1996, the Company executed Amended and Restated Credit Facilities
with its lenders to extend the maturity of it's senior debt. The Company is
required to make principal repayments on the Amended and Restated Note
Agreements (the "Notes") aggregating a total of $15.6 million through May 31,
1998. The maximum borrowings available on the Company's Amended and Restated
Revolving Credit Agreement (the "Revolver") will be reduced in the aggregate
total of $18.2 million by May 31, 1998. Final maturity of the then remaining
Notes of $40.9 million and the then available Revolver of $47.1 million is due
on July 31, 1998. Effective May 1, 1996, the interest rates for the Revolver
and the Notes were increased from 10.5% to 11.0% and 11.5%, respectively.
The Amended and Restated Credit Facilities contain restrictive provisions
governing dividends, capital expenditures and acquisitions, covenants as to
working capital, cash flow, consolidated tangible net worth and debt to
tangible net worth.
<PAGE>
Capital Expenditures. Most of the Company's capital expenditures are for new
store expansion and relocation of existing stores. The Company typically
finances its capital expenditures through internally generated cash and
borrowings under its revolving credit facility. In addition, the Company
typically receives financing from landlords in the form of construction
allowances or rent concessions for a portion of the capital expenditure.
Total capital expenditures were approximately $10 million in 1996 with
significantly all of it being related to new stores, store remodels and store
reconfiguration.
In fiscal 1997, the Company plans to spend approximately $12 million, net of
construction allowances, in capital expenditures.
Provision for Business Restructuring. The Company's performance in 1996
confirmed the success of a restructuring plan that began in the fourth quarter
of 1994. Management concluded that intense competition from existing
retailers and new entrants combined with changing customer demand and
declining mall traffic was adversely impacting certain of the Company's retail
markets. The Company recognized and responded to these conditions before any
of its competitors and as a result has nearly completed its restructuring.
The Company's restructuring included closing underperforming stores, improving
operating efficiencies and restructuring its debt. In order to reduce its
portfolio of stores to a strong core of profitable locations in desirable
geographic markets, the Company continued to focus on improving the
profitability of existing stores and streamlining operations by closing
unprofitable stores. As of February 1, 1997, the Company has closed or
relocated a total of 264 stores and an additional 77 stores are forecasted to
close or relocate in 1997.
To illustrate the impact of the store closings, the table below sets forth the
store openings and closings over the past three fiscal years, and a forecast
for the 1997 fiscal year. The store openings in the forecast do not
necessarily represent commitments.
<TABLE>
<CAPTION>
Fiscal Year
------------------------
Forecast
1997 1996 1995
------------------------
<S> <C> <C> <C>
TOTAL COMPANY
Number of stores,
beginning of period 479 542 684
Openings 70 22 9
Closings (77) (85) (151)
-------------------------
Number of stores,
end of period 472 479 542
=========================
</TABLE>
The Company is experiencing improved earnings and cash flow benefits as a
result of the restructuring program and expects continued improvement as the
remaining store closures are completed throughout the remainder of 1997.
Dissolution of Joint Venture. During 1996, the Company was a venture partner
with Tandy Corporation. The venture partnership will terminate in 1997 with
the closing of the joint venture stores. The Company does not anticipate this
will have a material impact on its financial position or results of operations
in 1997.
Impact of Inflation. Although the Company cannot accurately determine the
precise effect of inflation on its operations, management does not believe
inflation has had a material affect on the results of operations in the last
three fiscal years. When the cost of merchandise items has increased, the
Company generally has been able to pass the increase on to customers.
Seasonality. The Company's business is seasonal in nature, with the highest
sales and earnings occurring in the fourth fiscal quarter. See Note 9 of the
Notes to Consolidated Financial Statements for quarterly financial highlights.
<PAGE>
Dividend Policy. The Company has never paid cash dividends and does not
anticipate paying cash dividends in 1997. The Company's credit agreements
currently prohibit the payment of cash dividends.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to the Consolidated Financial Statements of the Company is included
in Item 14, and the financial statements follow the signature page to this
Annual Report on Form 10-K.
The quarterly results of operations are included herein in Note 9 of the
Consolidated Financial Statements.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
The information appearing under the captions "Election of Directors" and
"Board of Directors Meetings and Its Committees" in the definitive Proxy
Statement for the Registrant's 1997 Annual Meeting of Shareholders is
incorporated herein by reference.
(b) Identification of Executive Officers
The information required with respect to the executive officers of the
Registrant is set forth under the caption "Supplementary Item" on page 8 of
this Annual Report on Form 10-K.
Item 11. EXECUTIVE COMPENSATION
The information appearing under the caption "Executive Officers and
Compensation" in the definitive Proxy Statement for the Registrant's 1997
Annual Meeting of Shareholders is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the caption "Principal Shareholders" and
"Election of Directors" in the definitive Proxy Statement for the Registrant's
1997 Annual Meeting of Shareholders is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Certain Transactions" in the
definitive Proxy Statement for the Registrant's 1997 Annual Meeting of
Shareholders is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K"
14(a)(1) Financial Statements
- -------------------------------
The consolidated financial statements and notes are listed in the Index to
Financial Statements on page 18 of this report.
14(a)(2) Financial Statement Schedules
- -----------------------------------------
None of the schedules for which provision is made in the applicable accounting
regulations under the Securities Exchange Act of 1934, as amended, are
required.
14(a)(3) Exhibits
- -----------------
Exhibits are as set forth in the "Index to Exhibits" which follows the Notes
to the Consolidated Financial Statements and immediately precedes the exhibits
filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TRANS WORLD ENTERTAINMENT CORPORATION
Date May 2, 1997 By: /s/ROBERT J. HIGGINS
Robert J. Higgins, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ ROBERT J. HIGGINS Chairman, President and May 2, 1997
(Robert J. Higgins) Chief Executive Officer
(Principal Executive Officer)
/s/ JOHN J. SULLIVAN Senior Vice President, Treasurer and
(John J. Sullivan) Chief Financial Officer May 2, 1997
(Principal Financial Officer
and Chief Accounting Officer)
/s/ MATTHEW H. MATARASO Secretary and Director May 2, 1997
(Matthew H. Mataraso)
/s/ GEORGE W. DOUGAN Director May 2, 1997
(George W. Dougan)
/s/ CHARLOTTE G. FISHER Director May 2, 1997
(Charlotte G. Fisher)
/s/ ISAAC KAUFMAN Director May 2, 1997
(Isaac Kaufman)
/s/ DEAN S. ADLER Director May 2, 1997
(Dean S. Adler)
/s/ JOSEPH G. MORONE Director May 2, 1997
(Joseph G. Morone)
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Form 10-K
Page No.
Independent Auditor's Report 19
Consolidated Financial Statements
Consolidated Balance Sheets at February 1, 1997
and February 3,1996 20
Consolidated Statements of Income - Fiscal years ended
February 1, 1997, February 3, 1996 and January 28, 1995 22
Consolidated Statements of Shareholders' Equity - Fiscal
years ended February 1, 1997, February 3, 1996 and January 28, 1995 23
Consolidated Statements of Cash Flows - Fiscal years
ended February 1, 1997, February 3, 1996, and January 28, 1995 24
Notes to Consolidated Financial Statements 25
<PAGE>
Report of KPMG Peat Marwick LLP
Independent Auditors Report
The Board of Directors and Shareholders
Trans World Entertainment Corporation:
We have audited the accompanying consolidated balance sheets of Trans World
Entertainment Corporation and subsidiaries as of February 1, 1997 and February
3, 1996, and the related condolidated statements of income, shareholders'
equity and cash flows for each of the fiscal years in the three-year period
ended February 1, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 managment, 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Trans
World Entertainment Corporation and subidiaries as of February 1, 1997 and
February 3, 1996, and the results of their operations and their cash flows for
each of the fiscal years in the three-year period ended February 1, 1997, in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Albany, New York
March 5, 1997
<PAGE>
<TABLE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
February 1, February 3,
1997 1996
---------------------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $54,771 $86,938
Accounts receivable 8,826 8,079
Merchandise inventory 163,509 194,577
Refundable income taxes 564 8,308
Deferred tax asset 2,774 8,465
Prepaid expenses and other 2,490 2,929
---------------------------
Total current assets 232,934 309,296
---------------------------
VIDEOCASSETTE RENTAL INVENTORY, net 4,784 6,722
DEFERRED TAX ASSET 3,098 430
FIXED ASSETS:
Buildings 7,774 7,774
Fixtures and equipment 85,776 84,386
Leasehold improvements 75,742 79,556
---------------------------
169,292 171,716
Less: Fixed asset write-off reserve 7,571 12,324
Allowances for depreciation and amortization 96,747 89,391
---------------------------
64,974 70,001
---------------------------
OTHER ASSETS 4,263 3,882
---------------------------
TOTAL ASSETS $310,053 $390,331
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $118,980 $131,302
Notes payable --- 65,260
Accrued expenses and other 9,403 6,266
Store closing reserve 13,747 24,275
Current portion of long-term debt
and capital lease obligations 9,557 3,420
---------------------------
Total current liabilities 151,687 230,523
LONG-TERM DEBT, less current portion 43,983 53,770
CAPITAL LEASE OBLIGATIONS, less current portion 6,507 6,594
OTHER LIABILITIES 6,514 5,340
---------------------------
TOTAL LIABILITIES 208,691 296,227
---------------------------
SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value; 5,000,000
shares authorized; none issued.) --- ---
Common stock ($.01 par value; 20,000,000
shares authorized;9,809,594 and 9,731,208 shares
issued in 1996 and 1995, respectively) 98 97
Additional paid-in capital 24,540 24,236
Treasury stock at cost (41,394 & 48,394
shares in 1996 & 1995, respectively) (407) (503)
Unearned compensation - restricted stock (245) ---
Retained earnings 77,376 70,274
---------------------------
TOTAL SHAREHOLDERS' EQUITY 101,362 94,104
---------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $310,053 $390,331
===========================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<CAPTION>
Fiscal Year Ended
----------------------------------------
February 1, February 3, January 28,
1997 1996 1995
<S> <C> <C> <C>
Sales $481,657 $517,046 $536,840
Cost of sales 308,952 340,754 341,422
-------------------------------------
Gross profit 172,705 176,292 195,418
Selling, general and
administrative expenses 136,084 150,628 158,637
Restructuring charges --- 35,000 21,000
Depreciation and amortization 14,134 16,125 16,932
-------------------------------------
Income (Loss) from operations 22,487 (25,461) (1,151)
Interest expense 10,767 14,222 9,540
-------------------------------------
Income (Loss) before income taxes 11,720 (39,683) (10,691)
Income tax expense (benefit) 4,618 (14,310) (4,435)
-------------------------------------
NET INCOME (LOSS) $7,102 ($25,373) ($6,256)
=====================================
EARNINGS (LOSS) PER SHARE $0.73 ($2.61) ($0.64)
=====================================
Weighted average number of common
shares outstanding 9,757 9,726 9,701
=====================================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<CAPTION>
Total Unearned
Additional Compensation Share-
Common Paid in Treasury Restricted Retained holder's
Stock Capital Stock Stock Earnings Equity
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance 1/29/94 $97 $24,236 ($162) $--- $101,903 $126,074
(9,731,208 shares issued)
Purchase of 36,394 shares
of common stock,
held in treasury --- --- (341) --- --- (341)
Net Loss --- --- --- --- (6,256) (6,256)
-------------------------------------------------------------
Balance 1/28/95 97 24,236 (503) --- 95,647 119,477
(9,731,208 shares issued)
Net Loss --- --- --- --- (25,373) (25,373)
-------------------------------------------------------------
Balance 2/3/96 97 24,236 (503) --- 70,274 94,104
(9,731,208 shares issued)
Issuance of 7,000 treasury
shares under incentive
stock programs --- (59) 96 --- --- 37
Issuance of common stock
under incentive
stock programs 1 351 --- (245) --- 107
Exercise of
stock options --- 12 --- --- --- 12
Net Income --- --- --- --- 7,102 7,102
-------------------------------------------------------------
Balance 2/1/97 $98 $24,540 ($407) ($245) $77,376 $101,362
(9,809,594 shares issued)
=============================================================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Fiscal Year Ended
February 1, February 3, January 28,
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $7,102 ($25,373) ($6,256)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 15,225 17,145 17,947
Fixed asset write-off reserve --- 8,088 11,400
Store closing reserve --- 26,912 9,600
Deferred tax expense(benefit) 3,023 (5,446) (7,050)
Loss on sale and disposal of
property and equipment --- --- 802
Changes in operating assets and liabilities
Accounts receivable (747) 1,097 (1,463)
Merchandise inventory 31,068 27,781 16,591
Refundable income taxes 7,744 (8,308) ---
Prepaid expenses and other 439 1,478 644
Other assets (381) (53) (1,536)
Accounts payable (12,322) (4,191) (20,770)
Income taxes payable --- (1,961) (3,470)
Accrued expenses and other 3,137 (984) (418)
Store closing reserve (10,528) (11,913) (324)
Other liabilities 1,174 (136) 1,042
-----------------------------------
Net cash provided by operating activities 44,934 24,136 16,739
-----------------------------------
INVESTING ACTIVITIES:
Acquisition of property and equipment (10,198) (10,006) (22,260)
Proceeds from sale of fixed assets --- 929 ---
Purchases of videocassette
rental inventory, net 1,938 750 (1,306)
-----------------------------------
Net cash used in investing activities (8,260) (8,327) (23,566)
-----------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in
revolving line of credit (65,260) (9,687) 74,947
Payments of long-term debt (3,661) (8,902) (3,398)
Payments of capital lease obligations (76) (373) (336)
Purchase of common stock for treasury --- --- (341)
Issuance of stock under incentive
stock programs 144 --- ---
Exercise of stock options 12 --- ---
-----------------------------------
Net cash provided (used) by
financing activities (68,841) (18,962) 70,872
-----------------------------------
Net (decrease) increase in
cash and cash equivalents (32,167) (3,153) 64,045
Cash and cash equivalents,
beginning of year 86,938 90,091 26,046
-----------------------------------
Cash and cash equivalents, end of year $54,771 $86,938 $90,091
===================================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations. Trans World Entertainment Corporation is one of the
largest specialty retailers of music, video and related accessories in the
United States. The Company operates in a single industry segment, the
operation of a chain of retail entertainment stores. At February 1, 1997, the
Company operated 479 stores in 34 states, the District of Columbia and the
Virgin Islands, with a majority of the stores concentrated in the Eastern half
of the United States. The Company changed its name in 1994 from Trans World
Music Corp.
Basis of Presentation. The consolidated financial statements consist of Trans
World Entertainment Corporation and its subsidiaries, all of which are wholly
owned. All significant intercompany accounts and transactions have been
eliminated. Joint venture investments, none of which are material, are
accounted for using the equity method. The preparation of financial
statements, in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Fiscal Year. The Company's fiscal year is a 52- or 53-week period ending on
the Saturday nearest to January 31. Fiscal year 1996 ended February 1, 1997
and consisted of 52 weeks. Fiscal years 1995 and 1994, which ended February
3, 1996 and January 28, 1995, respectively, consisted of 53 and 52 weeks,
respectively.
Dividend Policy. The Company has never paid cash dividends and does not
anticipate paying cash dividends in 1997. The Company's credit agreements
currently prohibit the payment of cash dividends.
Stock-Based Compensation. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") is effective
for the Company in fiscal 1996. As permitted under SFAS No. 123, the Company
has elected not to adopt the fair value based method of accounting for its
stock-based compensation plans, but will continue to account for such
compensation under the provisions of APB Opinion No. 25. The Company has
provided the required proforma disclosure in Note 6.
Cash and Cash Equivalents. The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents. The carrying amounts reported in the balance sheet for cash and
cash equivalents are at fair value.
Merchandise Inventory and Return Costs. Inventory is stated at the lower of
cost (first-in, first-out) or market as determined principally by the retail
inventory method. The Company is entitled to return merchandise purchased
from major vendors for credit against other purchases from these vendors. The
vendors often reduce the credit with a merchandise return charge ranging from
0% to 20% of the original product purchase price depending on the type of
product being returned. The Company records the merchandise return costs in
cost of sales.
Videocassette Rental Inventory. The cost of videocassette rental tapes is
capitalized and amortized on a straight-line basis over their estimated
economic life with a provision for salvage value. Major movie release
additions are amortized over twelve months while other titles are amortized
over thirty-six months.
Fixed Assets. Fixed assets are stated at cost. Major improvements and
betterments to existing facilities and equipment are capitalized.
Expenditures for maintenance and repairs which do not extend the life of the
applicable asset are charged to expense as incurred. Buildings are amortized
over a 30-year term. Fixtures and equipment are depreciated using the
straight-line method over estimated useful lives, which range from three to
seven years. Leasehold improvements are amortized over the shorter of their
estimated useful life or the related lease term. Primarily all of the
Company's operating leases are ten years in term. Amortization of capital
lease assets is included in depreciation and amortization expense.
<PAGE>
Depreciation and amortization expense related to the Company's videocassette
rental inventory, distribution center facility and distribution center
equipment is included in cost of sales.
Store Opening and Closing Costs. Costs associated with opening a store are
expensed as incurred. When a store is closed, estimated unrecoverable costs
are charged to expense. Such costs include the net book value of abandoned
fixtures, equipment, leasehold improvements and a provision for lease
obligations, less estimated sub-rental income. Residual fixed asset values
from mall relocations are transferred to the relocated store.
Income Taxes. The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". Under the asset and liability method of Statement 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Earnings (Loss) Per Share. Earnings (Loss) per share is based on the weighted
average number of common shares outstanding during each fiscal year. Common
stock equivalents related to stock options, which would have a dilutive effect
based on current market prices, did not have a material effect on earnings
(loss) per share in the years presented.
Note 2. Restructuring Charge
In order to streamline operations and close unprofitable store locations, the
Company recorded pre-tax restructuring charges of $35 million in 1995 and $21
million in 1994. The restructuring charges include the write-down of assets,
estimated cash payments to landlords for the early termination of operating
leases and the cost for returning product to the Company's distribution
center and vendors. The charge also includes estimated legal, lender and
consulting fees, including those that the Company was obligated to pay on
behalf of its lenders while working to renegotiate its credit agreements.
In determining the components of the reserves, management analyzed all of the
aspects of closing stores and the costs that are incurred. An analysis of the
amounts comprising the restructuring reserve and the charges against the
reserve through February 1, 1997 are outlined below (in thousands):
<TABLE>
<CAPTION>
Charges Charges Charges
against Balance against Balance against Balance
1994 the as of 1995 the as of the as of
Reserve Reserve 1/28/95 Reserve Reserve 2/3/96 Reserve 2/1/97
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total
non cash
write-offs $12,344 $915 $11,429 $10,799 $8,322 $13,906 $6,235 $7,671
Cash
outflows 8,656 324 8,332 24,201 9,840 22,693 9,046 13,647
--------------------------------------------------------------------
$21,000 $1,239 $19,761 $35,000 $18,162 $36,599 $15,281 $21,318
====================================================================
</TABLE>
<PAGE>
Note 3. Debt
<TABLE>
Long-term debt consisted of the following:
<CAPTION>
February 1, February 3,
1997 1996
(in thousands)
---------------------------
<S> <C> <C>
Senior unsecured notes (see discussion below) $53,077 $56,559
Installment notes and other obligations 375 554
---------------------------
53,452 57,113
Less current portion 9,469 3,343
---------------------------
Long-term debt $43,983 $53,770
===========================
</TABLE>
On July 26, 1996, the Company executed Amended and Restated Credit Facilities
with its senior lenders (the "Lending Group") to extend and restructure the
terms and conditions of $121.8 million of indebtedness consisting of $65.3
million for an Amended and Restated Revolving Credit Agreement (the
"Revolver") and $56.5 million for Amended and Restated Note Agreements (the
"Notes"). The modifications to the credit facilities extend the term through
July 1998 and require quarterly reductions of the Revolver and principal
repayments on the Notes aggregating $18.2 million and $15.6 million,
respectively, through May 31, 1998 with the remaining $88.0 million maturing
on July 31, 1998. The Revolver and the Notes are secured prorata by liens on
a primary concentration deposit account, proceeds of certain asset sales by
the Company and trademark mortgages on all trademarks, tradenames and other
intangibles relating to goodwill.
Effective May 1, 1996, the interest rates for the Revolver and the Notes were
increased from 10.5% to 11.0% and 11.5%, respectively.
During fiscal years 1996, 1995, and 1994, the highest aggregate balances
outstanding under the Revolver were $65.3 million, $74.9 million and $74.9
million, respectively. The weighted average interest rates during 1996, 1995
and 1994 based on average daily balances, were 11.01%, 10.40% and 5.69%,
respectively. The unused balances under the Revolver at year end 1996, 1995
and 1994 were $61.2 million, $0 and $0, respectively.
At February 1, 1997 the fair market value of long-term debt, including that
due within one year, approximates book value. The fair value was estimated
using discounted cash flow analyses, based on the Company's current
incremental borrowing rates.
Interest paid during 1996, 1995 and 1994 was approximately $11.8 million,
$16.0 million and $9.6 million, respectively. Future maturities of long-term
debt are $9.5 million during 1997 and $44.0 million during 1998.
Note 4. Income Taxes
<TABLE>
Income tax expense (benefit) consists of the following:
<CAPTION>
1996 1995 1994
------------------------------
<S> <C> <C> <C>
Federal - current $1,364 ($9,117) $1,805
State - current 231 253 810
Deferred 3,023 (5,446) (7,050)
-------------------------------
$4,618 ($14,310) ($4,435)
===============================
</TABLE>
<PAGE>
A reconciliation of the Company's effective tax rates with the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
Fiscal Year
------------------------------
1996 1995 1994
------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% (35.0)% (35.0)%
State income taxes (benefit), net of
federal income tax effect 4.7 (1.5) (6.0)
Other (0.3) 0.4 (0.5)
------------------------------
Effective income tax rate 39.4% (36.1)% (41.5)%
==============================
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
-------------------------------
<S> <C> <C>
CURRENT DEFERRED TAX ASSETS
Restructuring reserve $8,556 $14,756
-------------------------------
Total Current Deferred Tax Assets 8,556 14,756
-------------------------------
CURRENT DEFERRED TAX LIABILITIES
Inventory valuation 5,463 6,138
Other 319 153
-------------------------------
Total Current Deferred Tax Liabilities 5,782 6,291
-------------------------------
Net Current Deferred Tax Assets $2,774 $8,465
===============================
NON-CURRENT DEFERRED TAX ASSETS
Accrued rent, lease accounting $2,824 $2,621
Capitalized leases 829 803
Other 148 128
-------------------------------
Total Non-Current Deferred Tax Assets 3,801 3,552
-------------------------------
NON-CURRENT DEFERRED TAX LIABILITIES
Tax over book depreciation 588 3,012
Other 115 110
-------------------------------
Total Non-Current Deferred Tax Liabilities 703 3,122
-------------------------------
Net Non-Current Deferred Tax Assets $3,098 $430
===============================
TOTAL NET DEFERRED TAX ASSET $5,872 $8,895
===============================
</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 carryback
can be applied. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, taxable income in the carryback
period and tax planning strategies in making this assessment. Based upon
the level of projected future taxable income over the periods in which the
deferred tax assets are deductible and the amount of tax loss carryback
available, management believes it is more likely than not that the Company
will realize the benefits of those deductible differences. The amount of the
deferred tax asset considered realizable could be reduced if estimates of
future taxable income during the carryforward period are reduced.
<PAGE>
The Company paid income taxes of approximately $0.3 million, $2.2 million and
$6.1 million during 1996, 1995 and 1994, respectively.
Note 5. Leases
The Company leases its distribution center and administrative offices under
two leases, dated April 1, 1985 and November 1, 1989, from its Chief Executive
Officer and principal shareholder. The leases are classified as capital
leases for accounting purposes. Aggregate rental payments under both leases
were $1.2 million for 1996, 1995 and 1994. Biennial increases are contained
in each lease based on the Consumer Price Index with the next scheduled
increase on January 1, 1998. Both leases expire in the year 2015.
Fixed asset amounts for all capitalized leases are as follows:
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
------------------------------------
<S> <C> <C>
Buildings $7,105 $7,105
Fixtures and equipment 1,625 1,625
------------------------------------
8,730 8,730
Allowances for depreciation
and amortization 4,034 3,777
------------------------------------
$4,696 $4,953
=====================================
</TABLE>
The Company leases substantially all of its stores, many of which contain
renewal options, for periods ranging from five to twenty-five years, with the
majority being ten years. Most leases also provide for payment of operating
expenses, real estate taxes, and for additional rent based on a percentage of
sales.
Net rental expense was as follows:
<TABLE>
<CAPTION>
Fiscal Year
------------------------------------
1996 1995 1994
------------------------------------
<S> <C> <C> <C>
Minimum rentals $49,653 $57,420 $58,750
Contingent rentals 274 246 464
------------------------------------
$49,927 $57,666 $59,214
=====================================
</TABLE>
Future minimum rental payments required under all leases that have initial or
remaining noncancelable lease terms in excess of one year at February 1, 1997
are as follows:
<PAGE>
<TABLE>
<CAPTION>
Operating Capitalized
Leases Leases
(in thousands)
----------------------------
<S> <C> <C>
1997 $44,836 $1,232
1998 39,737 1,232
1999 36,563 1,232
2000 32,361 1,232
2001 26,197 1,232
Thereafter 64,853 16,904
--------------------------
Total minimum payments required $244,547 23,064
=========
Amounts representing interest 16,469
-----------
Present value of minimum lease payments 6,595
Less current portion 88
-----------
Long-term capital lease obligations $6,507
===========
</TABLE>
Note 6. Benefit Plans
Stock Option Plans
Under the Company's 1986 and 1994 Stock Option Plans (the "Plans"), the
Compensation Committee of the Board of Directors may grant options to acquire
shares of common stock, to employees of the Company and its subsidiaries, at
the fair market value of the common stock on the date of grant. Under the
Plans, options generally become exercisable commencing one year from the date
of grant in increments of 25% per year with a maximum term of ten years.
Shares authorized for issuance under the 1986 and 1994 Stock Option Plans were
1,100,000 and 1,000,000, respectively. As of June 1, 1995, the Company
stopped issuing stock options under the 1986 Stock Option Plan. At February
1, 1997, of the 2,100,000 options authorized for issuance under the Plans,
1,008,238 have been granted and are outstanding, 151,850 of which were vested
and exercisable. Shares available for future grants at February 1, 1997 and
February 3, 1996 were 695,886 and 801,750, respectively. The following table
summarizes information about the stock options outstanding under the Plans
at February 1, 1997:
<TABLE>
<CAPTION>
----------------------------------- ---------------------
Outstanding Exercisable
----------------------------------- ---------------------
<S> <C> <C> <C> <C> <C>
Weighted Weighted
Average Average Average
Exercise Remaining Excercise Excercise
price range Shares Life Price Shares Price
- -----------------------------------------------------------------------------
$2.25-$3.75 169,812 8.4 $3.60 41,203 $3.60
4.50-5.25 526,426 9.2 4.76 2,897 4.98
6.00-7.50 115,000 9.4 6.14 0 0.00
8.00-13.75 104,000 7.4 12.14 19,250 12.26
$14.25-$18.50 93,000 4.3 14.78 88,500 14.77
--------- ------
Total 1,008,238 8.5 $6.41 151,850 $11.24
========= =======
</TABLE>
The Company also has a stock option plan for non-employee directors (the "1990
Plan"). Options under this plan are granted at 85% of the fair value at the
date of grant. Under the 1990 Plan options generally become exercisable
commencing one year from the date of grant in increments of 25% per year with
a maximum term of ten years. As of February 1, 1997, there were 250,000
shares authorized for issuance and 70,000 have been granted and are
outstanding, 55,000 of which were vested and exercisable. There are 180,000
shares of common stock reserved for possible future option grants under the
1990 Plan. The following table summarizes information about the stock options
outstanding under the 1990 Plan at February 1, 1997.
<PAGE>
<TABLE>
<CAPTION>
----------------------------------- ---------------------
Outstanding Exercisable
----------------------------------- ---------------------
<S> <C> <C> <C> <C> <C>
Weighted Weighted
Average Average Average
Exercise Remaining Excercise Excercise
price range Shares Life Price Shares Price
- -----------------------------------------------------------------------------
$3.50-$10.00 15,000 8.2 $6.28 3,375 $7.85
11.00-19.00 35,000 4.6 13.35 31,625 13.14
$27.00-$27.50 20,000 3.3 27.42 20,000 27.42
-------- -------
Total 70,000 5.0 $15.85 55,000 $18.01
======== =======
</TABLE>
<TABLE>
The following table summarizes the activity under the 1986 and 1994 Plans and
the 1990 Plan:
<CAPTION>
------------------------------- ----------------------------
1986 and 1994 Plans 1990 Plan
------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Number Number
of Option Weighted of Option Weighted
Stock Shares Price Averge Shares Price Average
Option Subject Range Exercise Subject Range Exercise
Activity To Per Price To Per Price
Option Share Option Share
- -----------------------------------------------------------------------------
Balance
Jan 29, 1994 825,331 $11.00-$24.25 $15.46 65,000 $11.05-$27.42 $17.57
Granted 236,000 11.00- 13.38 12.48 6,000 10.00 10.00
Exercised
Canceled (127,075) 13.00-23.75 15.95
- -----------------------------------------------------------------------------
Balance
Jan. 28, 1995 934,256 11.00-24.25 14.64 71,000 10.00-27.42 16.93
Granted 224,087 2.25- 5.25 3.68 6,000 3.55 3.55
Exercised
Canceled (277,575) 3.63-22.50 12.59 (11,500) 3.55-12.65 11.46
- -----------------------------------------------------------------------------
Balance
Feb. 3,1996 880,768 2.25-24.25 12.49 65,500 3.55-27.42 16.66
Granted 688,099 3.50- 8.00 5.07 4,500 4.04 4.04
Exercised (3,386) 5.63- 8.25 3.63
Canceled (557,243) 2.50-24.25 14.39
- -----------------------------------------------------------------------------
Balance
Feb. 1, 1997 1,008,238 $2.25-$18.50 $6.41 70,000 $3.55-$27.42 $15.85
=============================================================================
</TABLE>
The per share weighted-average fair value of the stock options granted during
1996, 1995 and 1994 was $2.05, $1.47 and $4.53, respectively, using the Black
Scholes option pricing model, with the following weighted-average assumptions;
1996 - expected dividend yield of 0.0%, risk free interest rate of 6.7%,
expected life of 5 years and stock volatility of 72%; 1995 - expected dividend
yield of 0.0%, risk free interest rate of 6.7%, expected life of 5 years and
stock volatility of 47%; 1994 - expected dividend yield of 0.0%, risk free
interest rate of 6.7%, expected life of 5 years and stock volatility of 46%.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based
on fair value in accordance with SFAS 123, the Company's net income would have
been reduced to the proforma amounts indicated below:
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------
1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
Net income (loss), as reported $7,102 ($25,373) ($6,256)
Earnings (loss) per share, as reported $0.73 ($2.61) ($0.64)
Pro forma net income (loss) $6,791 ($25,458) ($6,287)
Pro forma earnings (loss) per share $0.70 ($2.62) ($0.65)
</TABLE>
<PAGE>
Restricted Stock Plan
Under the 1990 Restricted Stock Plan, the Compensation Committee of the Board
of Directors is authorized to grant awards for up to 300,000 restricted shares
of common stock to executive officers and other key employees of the Company
and its subsidiaries. The shares are issued as restricted stock and are held
in the custody of the Company until all vesting restrictions are satisfied.
If conditions or terms under which an award is granted are not satisfied, the
shares are forfeited. Shares begin to vest under these grants after three
years and are fully vested after five years, with vesting criteria which
includes continuous employment until applicable vesting dates have expired.
At February 1, 1997, a total of 75,000 shares have been granted, of which
25,000 were granted in 1996 with a fair market value on the date of grant of
$118,750; the remaining 50,000 were granted in 1995 with a fair value on the
date of grant of $232,500. None of the shares have vested. Unearned
compensation is recorded at the d ate of the award, based on the market value
of the shares, and is included as a separate component of shareholders equity
and is amortized to expense over the applicable vesting period. The amount
amortized to expense in 1996 was $106,000. At February 1, 1997, outstanding
awards and shares available for grant were 75,000 and 225,000, respectively.
401 (k) Savings Plan
The Company offers a 401 (k) Savings Plan to eligible employees meeting
certain age and service requirements. This plan permits participants to
contribute up to 16% of their salary, including bonuses, up to the maximum
allowable by Internal Revenue Service regulations. Participants are
immediately vested in their voluntary contributions plus actual earnings
thereon. Participant vesting of the Company's matching and profit sharing
contribution is based on the years of service completed by the participant.
Participants are fully vested upon the completion of four years of service.
All participant forfeitures of nonvested benefits are used to reduce the
Company's contributions in future years. The Company matching contribution
totaled $465,000, $470,000 and $413,000 in 1996, 1995 and 1994, respectively.
Note 7. Treasury Stock
At February 1, 1997 and February 3, 1996, the Company held 41,394 and 48,394
shares, respectively, in treasury resulting from the repurchase of common
stock through open market purchases.
Note 8. Concentration of Business Risks
The Company purchases inventory for its stores from approximately 400
suppliers, with approximately 67% 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 affect on
operating results and result in a decrease in vendor support for the Company's
advertising programs.
<PAGE>
Note 9. Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
------------------------------------------------------------
Fiscal 1996 Quarter Ended
------------------------------------------------------------
5/4/96 8/3/96 11/2/96 2/1/97 1996
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $106,622 $96,717 $97,583 $180,735 $481,657
Gross Profit 37,169 34,616 36,217 64,703 172,705
Net Income(Loss) (2,739) (2,392) (2,477) 14,710 7,102
Earnings (Loss)
per share ($0.28) ($0.25) ($0.25) $1.51 $0.73
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------
Fiscal 1995 Quarter Ended
------------------------------------------------------------
4/29/95 7/29/95 10/28/95 2/3/96 1995
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $111,912 $104,292 $103,165 $197,677 $517,046
Gross Profit 39,654 35,315 35,970 65,353 176,292
Net Income(Loss) (4,086) (6,129) (5,093) (10,065) (25,373)
Earnings (Loss)
per share ($0.42) ($0.63) ($0.52) ($1.03) ($2.61)
------------------------------------------------------------
</TABLE>
<PAGE>
Index to Exhibits
- -----------------
Document Number and Description
- -------------------------------
Exhibit No.
3.1 Restated certificate of Incorporation -- incorporated herein by reference
to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year
ended January 29, 1994. Commission File No. 0-14818.
3.2 Certificate of Amendment to the Certificate of Incorporation--incorporated
herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended October 29, 1994. Commission File No.
0-14818.
3.3 Amended By-Laws--incorporated herein by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended February 2,
1991. Commission File No. 0-14818.
4.1 Note and Security Agreement, dated June 20, 1991, between Aetna Life
Insurance Company and the Company, for the Senior Notes due June 30,
1998--incorporated herein by reference to Exhibit 4 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 3, 1991. Commission File No.
0-14818.
4.2 Amendment and Waiver, dated March 5, 1992, between Aetna Life Insurance
Company and the Company, relating to the Senior Notes due June 30,
1998--incorporated herein by reference to Exhibit 4.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 1, 1992. Commission
File No. 0-14818.
4.3 Amendment and Waiver, dated as of November 17, 1992, between Aetna Life
Insurance Company and the Company, relating to the Senior Notes due June 30,
1998--incorporated herein by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended October 31, 1992.
Commission File No. 0-14818.
4.4 Amendment, dated March 30, 1994, between Aetna Life Insurance Company and
the Company, relating to the Senior Notes due June 30, 1998--incorporated
herein by reference to Exhibit 4.4 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 29, 1994. Commission File No. 0-14818.
4.5 Form of Amended and Restated Note Agreements, dated June 29, 1995, between
Aetna Life Insurance Company relating to the Company's Variable Rate Senior
Notes due July 31, 1996, the Purchasers of the Company's Variable Rate Senior
Notes due July 31, 1996 and Trans World Entertainment Corporation and Record
Town, Inc. -- incorporated herein by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended July 29, 1995.
Commission File No. 0-14818.
4.7 Note Agreement, dated July 2, 1993, among the Company, Record Town, Inc.
and the Purchasers listed on Exhibit A thereto, relating to Senior Notes due
June 30, 2000, incorporated herein by reference to Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31,
1993. Commission File No. 0-14818. 4.8 Form of Amendment, dated as of March
24, 1994, among the Company, Record Town, Inc. and each of the holders of the
Senior Notes due June 30, 1999.--incorporated herein by reference to Exhibit
4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended
January 29, 1994. Commission File No. 0-14818.
4.9 Credit Agreement and Note, dated as of June 11, 1993, between the Company
and Chemical Bank--incorporated herein by reference to Exhibit 4.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July
31,1993. Commission File No. 0-14818.
4.10 Credit Agreement and Note, dated as of June 11, 1993, between the Company
and Chase Manhattan Bank, N.A.-- incorporated herein by reference to Exhibit
4.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended July 31, 1993. Commission File No. 0-14818.
4.11 Credit Agreement and Note, dated as of June 11, 1993, between the Company
and NBD Bank, N.A. - incorporated herein by reference to Exhibit 4.4 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31,
1993. Commission File No. 0-14818.
4.12 Credit Agreement and Note, dated as of June 11, 1993, between the Company
and National Westminster Bank, U.S.A.-- incorporated herein by reference to
Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 31, 1993. Commission File No. 0-14818.
4.13 Form of First Amendment and Waiver, dated March 17, 1994, between the
Company and each of the commercial banks in the Company's revolving credit
facility -- incorporated herein by reference to Exhibit 4.11 to the Company's
Annual Report on Form 10-K for the fiscal year ended January 29, 1994.
Commission File No. 0-14818.
4.14 Form of Second Amendment to Credit Agreement, dated as of December 5,
1994, between the Company and each of the commercial banks in the Company's
revolving credit facility -- incorporated herein by reference to Exhibit 4.1
to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
October 29, 1994. Commission File No.0-14818.
4.15 Form of Amended and Restated Revolving Credit Agreement, dated June 29,
1995, between the Company and each of the commercial banks in the Company's
revolving credit facility -- incorporated herein by reference to Exhibit 4.2
to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
July 29, 1995. Commission File No. 0-14818.
4.16 Amended and Restated Note Agreement, dated July 26, 1996, between the
Company and Merrill Lynch, Pierce Fenner & Smith Incorporated, Oaktree Capital
Management, LLC, as agent and on behalf of certain funds and accounts,
Fernwood Associates, LP, Fernwood Restructuring, Ltd and Internationale
Nederlanden (U.S.) Capital Corporation - incorporated herein by reference to
Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended August 3, 1996. Commission File No. 0-14818.
4.17 Amended and Restated Note Agreement, dated July 26, 1996, between the
Company and Merrill Lynch, Pierce Fenner & Smith Incorporated - incorporated
herein by reference to Exhibit 4.2 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended August 3, 1996. Commission File No.
0-14818.
4.18 Amended and Restated Note Agreement, dated July 26, 1996, between the
Company and each of NBD Bank, Bear, Sterns & Co., Inc., Banco Santander Trust
& Banking Corporation (Bahamas) Ltd. And Merrill Lynch, Pierce Fenner & Smith
Incorporated - incorporated herein by reference to Exhibit 4.3 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 3,
1996. Commission File No. 0-14818.
10.1 Lease, dated April 1, 1985, between Robert J. Higgins, as Landlord, and
Record Town, Inc. and Trans World Music Corp., as Tenant and Amendment thereto
dated April 28, 1986 -- incorporated herein by reference to Exhibit 10.3 to
the Company's Registration Statement on Form S-1, No. 33-6449.
10.2 Second Addendum, dated as of November 30, 1989, to Lease, dated April 1,
1985, among Robert J. Higgins, and Trans World Music Corp., and Record Town,
Inc., exercising five year renewal option -- incorporated herein by reference
to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal
year ended February 3, 1990. Commission File No. 0-14818.
10.3 Lease, dated November 1, 1989, between Robert J. Higgins, as Landlord,
and Record Town, Inc. and Trans World Music Corp., as Tenant -- incorporated
here by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K
for the fiscal year ended February 2, 1991. Commission File No. 0-14818. *
10.4 Employment Agreement, dated as of February 1, 1996 between the Company
and Robert J. Higgins.-- incorporated herein by reference to Exhibit 10.4 to
the Company's Annual Report on Form 10-K for the fiscal year ended February 1,
1997 Commission File No. 0-14818.
10.5 Trans World Music Corp. 1986 Incentive and Non-Qualified Stock Option
Plan, as amended and restated, and Amendment No. 3 thereto -- incorporated
herein by reference to Exhibit 10.5 of the Company's Annual Report on Form
10-K for the fiscal year ended February 2, 1991. Commission File No. 0-14818.
10.6 Trans World Music Corp. 1990 Stock Option Plan for Non-Employee
Directors -- incorporated herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-2, No. 33-36012.
10.7 Trans World Music Corp. 1990 Restricted Stock Plan -- incorporated
herein by reference to Exhibit 10.7 to the Company's Registration Statement on
Form S-2, No. 33-36012.
10.8 Form of Restricted Stock Agreement dated February 1, 1995 and May 1, 1995
between the Company and Edward W. Marshall, Jr., Executive Vice President -
Operations and Bruce J. Eisenberg, Senior Vice President - Real Estate,
respectively, incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 29,
1995. Commission File No. 0-14818.
10.9 Severance Agreement, dated October 1, 1994, between Trans World
Entertainment Corporation and Edward Marshall, Senior Vice
President-Operations -- incorporated by reference to Exhibit 10.2 of the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended October
29, 1994. Commission File No. 0-14818.
10.10 Trans World Entertainment Corporation 1994 Stock Option Plan --
incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended July 30, 1994. Commission
File No. 0-14818.
10.11 Trans World Entertainment Corporation 1994 Director Retirement Plan --
incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended October 31, 1994. Commission
File No. 0-14818.
10.13 Form of Indemnification Agreement dated May 1, 1995 between the Company
and its officers and directors incorporated herein by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended April 29, 1995. Commission File No. 0-14818.
*10.14 Form of Restricted Stock Agreement dated May 1,1996 between the Company
and John J. Sullivan, Senior Vice President-Finance, Treasurer and Chief
Financial Officer.
*10.15 Severance Agreement, dated May 20, 1996 between Trans World
Entertainment Corporation and James A. Litwak, Executive Vice President of
Merchandising and Marketing.
*11 Statements re computation of per share earnings.
22 Significant Subsidiaries of the Registrant, incorporated by reference to
Exhibit 22 to the Company's Annual Report on Form 10-K for the fiscal year
ended January 28, 1995. Commission File No. 0-14818.
*23.1 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule (For electronic filing purposes only).
_________________________
*Filed herewith.
<PAGE>
EXHIBIT INDEX
10.14 Form of Restricted Stock Agreement dated May 1,1996 between the Company
and John J. Sullivan, Senior Vice President-Finance, Treasurer and Chief
Financial Officer
10.15 Severance Agreement, dated May 20, 1996 between Trans World
Entertainment Corporation and James A. Litwak, Executive Vice President of
Merchandising and Marketing
11 Statements re computation of per share earnings.
23.1 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule
(electronic filing only)
TRANS WORLD ENTERTAINMENT
CORPORATION
RESTRICTED STOCK AGREEMENT
This RESTRICTED STOCK AGREEMENT, dated as of May 1, 1996 (the "Agreement"), is
made by and between Trans World Entertainment Corporation, a New York
Corporation (the "Company"), and John J. Sullivan (the "Employee").
WHEREAS, the Employee has been designated by the Compensation Committee of
the Company's Board of Directors (the "Committee") to participate in the Trans
World Entertainment Corporation 1990 Restricted Stock Plan (the "Plan"), a
copy of which the Employee acknowledges receipt of.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties agree as follows:
Capitalized terms used herein and not defined shall have the meanings set
forth in the Plan.
1. Award of Shares. Pursuant to the provisions of the Plan, the terms of
which are incorporated herein by reference, the Employee is hereby awarded
25,000 shares of Restricted Stock (the "Award") on and made expressly subject
to the terms and conditions herein set forth.
2. Terms and Conditions. It is understood and agreed that the Award
evidenced hereby is subject to the following terms and conditions:
(a) Vesting of Award. Subject to the other terms and conditions of this
Agreement and the Plan, this Award shall become vested in three installments,
expressly conditioned on complete years of continuous employment (such yearly
periods to be measured beginning April 30, 1996): 20% of the shares of
Restricted Stock subject to the Award shall become vested April 30, 1999; an
additional 20% shall become vested on April 30, 2000, and the final 60% shall
become vested on April 30, 2001; provided, however, that, in accordance with
and subject to the Plan, the Committee may in its discretion accelerate the
vesting of the Award and/or remove any restrictions relating thereto.
(b) Vesting on Death or Disability. In the event the Employee's employment
with the Company is terminated prior to the lapse of the restrictions on his
Award by reason of death, Permanent Disability, or Retirement, the Restricted
Stock awarded hereunder shall vest in the name of the Employee as of the date
of such termination as to the full number of shares of Restricted Stock
awarded hereunder.
(c) Forfeiture of Unvested Shares. In the event of the termination of the
Employee's employment with the Company for any reason whatsoever, all shares
of Restricted Stock subject to the Award that have not vested in accordance
with Section 2(a) or 2(b) above shall be forfeited by the Employee and become
the property of the Company. If the Restricted Stock is forfeited, the
Company shall be entitled to have the certificates representing the shares of
Restricted Stock redelivered to it out of the escrow provided for in Section
2(d) hereof.
(d) Certificates. Each certificate issued in respect of Restricted Stock
awarded hereunder shall be deposited in escrow with the Company or its
designee, selected by the Company in the Company's sole discretion, together
with a stock power executed in blank by the Employee, and shall bear a legend
disclosing the restrictions on transferability imposed on such Restricted
Stock by this Agreement. Upon the vesting of Restricted Stock pursuant to
Section 2(a) or 2(b) hereof and the satisfaction of any withholding tax
liability pursuant to Section 5 hereof, the certificates evidencing such
vested Restricted Stock shall be delivered to the Employee.
(e) Rights of a Shareholder. Subject to Section 3 hereof, prior to the
time a share of Restricted Stock is fully vested hereunder, the Employee shall
have all the rights of a shareholder of the Company, including the right to
vote such shares of Restricted Stock: provided, however, that unless and
until the vesting restrictions and other terms and conditions applicable to
such Restricted Stock shall be held by the Company for the Employee's account,
and interest may be paid on any such dividends, at a rate and subject to such
terms as determined by the Committee in its sole and absolute discretion. If
Restricted Stock is forfeited pursuant to the terms of this Agreement, the
related dividends and interest, if any, shall likewise be forfeited to the
Company.
(f) No Right to Continued Employment. Neither the Plan, this Agreement, this
Award nor any other action taken pursuant to the Plan shall constitute or be
evidence of any agreement or understanding, express or implied, that the
Employee has a right to continue as an Employee for any period of time, or at
any rate of compensation, and shall not in any way interfere with the right of
the Company to terminate the Employee's employment at any time.
3.Restrictions on Transfer of Shares. Neither the shares of Restricted Stock
delivered hereunder nor any interest in them may be sold, assigned, disposed
of, pledged, hypothecated, encumbered or in any other manner transferred, in
whole or in part, until the vesting provisions herein and in the Plan have
been satisfied, and thereafter only if all of the following conditions have
been satisfied:
(a) The listing, or approval for listing upon notice of issuance, that may be
required of such shares on any securities exchange as may at the time be the
principal market for the shares;
(b) Any registration or other qualification of such shares under any state or
federal law or regulation, or the maintaining in effect of any such
registration or other qualification or an exemption therefrom supported by an
opinion of counsel, which the board of directors shall, in its absolute
discretion upon the advice of counsel, deem necessary or advisable, including
expiration of any requisite holding period under Rule 144 under the Securities
Act of 1933, as amended (the "Securities Act"); and
(c) The obtaining of any other consent, approval or permit for any state or
federal governmental agency which the board of directors shall, in its
absolute discretion based upon the advice of counsel, determine to be
necessary or advisable.
4. Legend on Restricted Stock. All certificates representing shares of
Restricted Stock, unless such shares are registered under the Securities Act,
shall bear the following legend or such other legend as the Company deems
appropriate:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933 AND
MAY NOT BE OFFERED OR SOLD IN THE ABSENCE OF SUCH REGISTRATION OR THE
AVAILABILITY OF AN EXEMPTION FROM SUCH REGISTRATION.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS AND VESTING CONDITIONS SET FORTH IN A RESTRICTED STOCK AGREEMENT
MAINTAINED WITH THE SECRETARY OF THE COMPANY.
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend or such other legend deemed appropriate by the
Company shall also bear such legend unless, in the opinion of counsel for the
Company, the securities represented thereby need no longer be subject to the
restriction contained herein. The provisions of this Section 4 shall be
binding upon all subsequent holders of certificates bearing the above legend.
5. Acquisition for Investment. The Employee represents and warrants that he
is acquiring the shares of Restricted Stock distributed hereby as an
investment and not with a view to distribution thereof. The Company also
reserves the right to place legend or other symbol on the share certificates
issued or transferred pursuant to this Agreement and the Plan and to furnish
any stop transfer or similar instructions to the transfer agent for its shares
with the Company, in its sole discretion, may deem necessary and proper to
ensure compliance with the above representation and warranty.
6. Adjustment Provisions. If the shares of Common Stock outstanding are
changed, such that its effect in any fiscal year is greater than 5% of the
Company's Common Stock capitalization, in number or class, by reason of a
split-up, merger, consolidation, reorganization, reclassification,
recapitalization, or any capital adjustment, including a stock dividend, or
other similar change is made in the corporate structure, appropriate
adjustments shall be made in the aggregate number and kind of shares or the
securities or property subject to this Agreement and the Plan.
7. Withholding. The Employee agrees that there shall be deducted from any
distribution of Restricted Stock under this Agreement the amount of any tax
required by any governmental authority to be withheld and paid over by the
Company to such governmental authority for the account of the Employee. With
respect to any distribution of Restricted Stock, the Company shall have the
right to sell without notice, such number of shares of the Restricted Stock,
distributable to the Employee as will provide funds for the payment of any tax
so required to be paid by the Company for the Employee's account, unless prior
to such sale, the Employee shall have paid to the Company the amount of such
tax. Any balance of the proceeds of such sale shall be paid to the Employee.
In effecting any such sale, the Company shall be deemed to be acting on
behalf, and for the account of, the Employee.
8. Designation of Beneficiary. The Employee may, with the consent of the
Committee, designate a person or persons to receive, in the event of his
death, any shares of Restricted Stock distributable hereunder. Such
designation shall be made upon forms supplied by and delivered to the Company
and may be revoked in writing. If the Employee fails effectively to designate
a beneficiary, then his estate shall be deemed to be his beneficiary.
9. References. References herein to rights and obligations of the Employee
shall apply, where appropriate, to the Employee's legal representative,
designated beneficiary or estate without regard to whether specific reference
to such legal representative, designated beneficiary or estate is contained in
a particular provision of this Agreement.
10. Notices. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been given when
delivered personally or by courier, or sent by certified or registered mail,
postage prepaid, return receipt requested, duly addressed to the party
concerned at the address indicated below or to such changed address as such
party may subsequently by similar process give notice of:
If to the Company: If to the Employee:
Trans World Entertainment Corporation John J. Sullivan
38 Corporate Circle 14 Wexford Road
Albany, New York 12203 Delmar, New York 12054
Attn.: Secretary
11. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard to its
principles regarding conflict of laws.
12. Counterparts. This Agreement may be executed in two counterparts each of
which shall constitute one and the same instrument.
13. Severability. If any provision or any term or condition of this
Agreement or any application thereof to any person or circumstances is
invalid, such provision, term, condition, or application shall to that extent
be void (or, in the discretion of the Committee, such provision, term or
condition may be amended to avoid such invalidity), and shall not affect other
provisions, terms or conditions or applications thereof, and to this extent
such provisions, terms and conditions are severable.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first set forth above.
TRANS WORLD ENTERTAINMENT EMPLOYEE
CORPORATION
By:
/s/Robert J. Higgins /s/ John J. Sullivan
____________________________________ ____________________________
Robert J. Higgins, Chairman, President John J. Sullivan
and Chief Executive Officer SS# ###-##-####
James A. Litwak
60 Stonepine Road
Hillsborough, CA 94010
re: Severance Agreement
Dear Jim:
Trans World Entertainment., a New York Corporation, and its wholly owned
subsidiary, Record Town, Inc. (collectively, the "Company"), considers the
establishment and maintenance of a sound and vital management to be essential
to protecting and enhancing the best interests of the Company and its
shareholders. In order to induce join the Company, this Agreement sets forth
the severance benefits which the Company agrees will be provided to you in the
event your employment with the company is terminated without "Cause", as
further described below.
1. Term of Agreement. This Agreement shall commence on the date hereof and
shall continue in effect until January 31, 1996 (the "Term" provided, however,
that commencing of February 1, 1997 and each February thereafter, the term of
this agreement shall automatically be extended for one additional year unless
at least 90 days prior to such February 1 date either the company or you shall
have given notice, you may, within 30 days thereafter, elect in writing to
treat such notice as a termination without cause. Notwithstanding anything in
this Section 1 to the contrary, this Agreement shall terminate if you
otherwise separate your employment with the company.
2. Separation for Disability or for Cause. (a) You shall be entitled to the
benefits provided in Section 3 if, during the Term of this Agreement, you
employment with the Company is ever terminated for any reason other than Cause
(defined below), unless termination is for Disability (defined below).
(b) Disability. Termination by the Company of your employment based on
"Disability" shall mean termination because of your absence from your duties
with the Company on a full time basis for sixty (60) consecutive days as a
result of your incapacity due to physical or mental illness, unless within
thirty (30) days after notice of termination is given to you following such
absence you shall have returned to the full time performance of your duties.
This provision shall not apply to accidents.
(c) Cause. Termination by the Company of your employment for "Cause" shall
mean termination for any of the following reasons: (i) the willful and
continued failure by you to perform substantially your duties with the Company
(other than any such failure resulting from your incapacity due to physical or
mental illness) after demand for substantial performance is delivered to you
by the Chairman of the Board or the President of the Company, which demand
specifically identifies the manner in which such executives believes that you
have not substantially performed your duties; or (ii) the willful engaging, by
you in illegal conduct that materially and demonstrably damages the Company's
business or reputation.; or (iii) any conduct in the course of your employment
that constitutes, in the Company's reasonable judgment, gross negligence,
fraud, embezzlement or any acts of moral turpitude that result or are intended
to result, directly or indirectly, to your personal enrichment at the
Company's expense. For purpo ses of this Section 2(c), no act or failure to
act on your part shall be considered "willful" unless done, or omitted to be
done, by you in bad faith and without reasonable belief that you action or
omission was in, or not opposed to the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution
duly adopted by the Board or based upon the advice of counsel for the Company
shall be conclusively presumed to be done, or omitted to be done, by you in
good faith and in the best interests of the corporation.
(d) Employment at Will. The Company or you may separate your employment at
any time, subject to the Company's covenant to provide the benefits specified
in accordance with the terms of this Agreement.
3. Compensation Upon Termination or During Disability: Other Agreements.
(a) During any period that you fail to perform your duties as a result of
incapacity due to physical or mental illness, you shall continue to receive
your salary at the rate then in effect and any benefits or awards under any
benefit plans shall continue to accrue during such period, which period shall
be at least 90 days, until your employment is terminated without cause.
Thereafter, your benefits shall be determined in accordance with any
applicable benefit plans then in effect. (b) If your employment shall be
terminated, other than for Cause, by the Company, then the Company shall pay
you your base salary for 12 months at the rate in effect just prior to the
time a notice of termination is given, plus any benefits (including health,
disability and 401(k)) or wards (including both the cash, bonus and stock
components) which, pursuant to the terms of any applicable plans, have been
earned or become payable, but with have not yet been paid to you. Thereafter,
the Company shall have no further obligations to you under this Agreement.
(c) To the extent that you shall receive cash compensation that is subject to
federal income taxation in respect of other employment or a consulting
position with another organization that consideration is payable to you solely
in respect of the remainder of the Term of this Agreement as in effect
immediately prior to such termination, or a portion thereof, the payments to
be made by the Company under this Section 3, shall be proportionately reduced.
Notwithstanding the foregoing, you shall not be required to minimize damages
or otherwise reduce severance payments payable under this Agreement by seeking
or accepting other employment for a consulting position.
4. Taxes. All Payments to be made to you under this Agreement will be
subject to required withholding of federal, state and local income and
employment taxes.
5. Survival. The respective obligations of, and benefits afforded to, the
Company or you as provided in this Agreement shall survive any expiration or
termination of this Agreement.
6. Notices. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and hall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid and addressed, in
the case of the Company, to the address set forth on the first page of the
Agreement or in the case of the undersigned employee, to the address set forth
below his signature, provided that all notices to the Company shall be
directed to the attention of the President of the company, with a copy of the
Secretary of the Company, or to such other address as wither party may have
furnished to the other in writing in accordance herewith, except that notice
of change of address hall be effective only upon receipt.
7. Modification: Waiver: Governing Law. No provision of this Agreement may
be modified, waived or discharged unless such modification, waiver or
discharge is agreed to in a writing signed by you and the Chairman of the
Board or President of the Company. No waiver by wither party hereto at any
time of any breach by the other party hereto of ,or of compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not expressly
set forth in this Agreement. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
New York without reference to its principles of conflict of laws.
8. Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in Albany, New
York by three arbitrators in accordance with the rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrators' award in any court having jurisdiction. The Company shall bear
all costs and expense arising in connection with any arbitration proceeding
pursuant to this Section 8.
9. Employee's Continuing Covenants. (a) For a period o 12 months after your
employment is separated from the Company for whatever reason, whether or not
it is for Cause, you covenant and agree not to complete with the Company,
whether directly or indirectly, alone or as an employee, independent
contractor of any type, partner, substantial shareholder (5% or greater) or
holder of an option or right to become a substantial shareholder, in any
retail music or video business. If any of the restrictions on post-employment
competitive activity contained in this Section 9 are held by a court of
competent jurisdiction to be excessively broad as to duration, geographical
scope, activity or subject such restrictions shall be construed to be
enforceable to the extent compatible with applicable law as it shall then
exist, it being understood that by the execution of this Agreement the parties
hereto regard such restrictions as reasonable and compatible with their
respective rights and obligations.
(b) In consideration for the Company's agreement hereunder, you agree that
subsequent to your period of employment with the Company, you will not at any
time communicate or disclose to any unauthorized person without the written
consent of the Company, business information, trade secrets, sales data or any
proprietary processes of the Company or any subsidiary or other confidential
information concerning their business affairs, products, suppliers, or
customers, unless otherwise required by law.
10. Effective Date. This Agreement shall not take effect unless and until
you have reported to the Company for full-time employment at its principal
office in Albany, New York on or before May 20, 1996. Time shall be of the
essence.
If this letter correctly sets forth our agreement on the subject matter
hereof, kindly sign and return it to the Company, which will then constitute
our agreement.
Sincerely,
TRANSWORLD ENTERTAINMENT CORP.
RECORD TOWN, INC.
BY. /s/ Robert J. Higgins
----------------------------
Robert J. Higgins, President
ACKNOWLEDGED AND AGREED TO:
/s/ James A. Litwak
-------------------
James A. Litwak
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Exhibit 11: Statement re computation of per share earnings
<TABLE>
<CAPTION>
Fiscal Year Ended
February 1, February 3, January 28,
1997 1996 1995
(In thousands except per share data.)
<S> <C> <C> <C>
Primary:
Weighted average shares
outstanding 9,757 9,726 9,701
Net effect of dilutive stock
options based on the treasury
stock method using average
market price 150 N/A N/A
-------- -------- --------
Total 9,907 9,726 9,701
======== ======== ========
Net Income $7,102 ($25,373) ($6,256)
======== ======== ========
Per share amount $0.72 (1) ($2.61) ($0.64)
======== ======== ========
Fully Diluted:
Weighted average shares
outstanding 9,757 9,726 9,701
Net effect of dilutive stock
options based on the treasury
stock method using the period
end market price, if higher
than the average market price 238 N/A N/A
-------- -------- --------
Total 9,995 9,726 9,701
======== ======== ========
Net Income $7,102 ($25,373) ($6,256)
======== ======== ========
Per share amount $0.71(2) ($2.61)(2) ($0.64)(2)
======== ======== ========
</TABLE>
- ----------
N/A = Not applicable as options would have an anti-dilutive effect.
(1) = The primary per share amount of $0.73, for the Fiscal year ended
February 1, 1997, reported in the consolidated financial statements
excludes the net effect of dilutive stock options as the aggregate
dilution from these securities was immaterial (less than three percent
of earnings per weighted average common share outstanding).
(2) = Fully diluted per share amounts have been excluded from the consolidated
financial statements, for each of the three fiscal years presented, as the
difference between primary and fully diluted per share amounts is immaterial
(less than three percent of earnings per weighted average common share
outstanding).
Consent of Independent Auditors
We consent to incorporation by reference in the registration statements (No.
33-14572, No. 33- 40399, No. 33-51094, No. 33-51516 and No. 33-59319) on Form
S-8 pertaining to the 1986 Incentive and Non-Qualified Stock Option Plan, the
1990 Stock Option Plan for Non-Employee Directors and the 1994 Stock Option
Plan of Trans World Entertainment Corporation of our report dated March 5,
1997, relating to the consolidated balance sheets of Trans World Entertainment
Corporation and subsidiaries as of February 1, 1997 and February 3, 1996, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the fiscal years in the three-year period ended February 1,
1997, which report appears in the Annual Report on Form 10-K of Trans World
Entertainment Corporation and subsidiaries for the fiscal year ended
February 1, 1997.
/s/ KPMG Peat Marwick LLP
Albany, New York
May 2, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS DATA EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEETS, AND THE CONSOLIDATED STATEMENTS OF INCOME
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<CIK> 0000795212
<NAME> TRANS WORLD ENTERTAINMENT CORPORATION
<MULTIPLIER> 1,000
<CAPTION>
AMOUNT
ITEM DESCRIPTION (IN THOUSANDS, EXCEPT PER SHARE DATA)
- ---------------- -------------------------------------
<S> <C>
<FISCAL-YEAR-END> Feb-01-1997
<PERIOD-START> Feb-04-1996
<PERIOD-END> Feb-01-1997
<PERIOD-TYPE> 12-MOS
<CASH> 54,771
<SECURITIES> 0
<RECEIVABLES> 8,826
<ALLOWANCES> 0
<INVENTORY> 163,509
<CURRENT-ASSETS> 232,934
<PP&E> 169,292
<DEPRECIATION> 96,747
<TOTAL-ASSETS> 310,053
<CURRENT-LIABILITIES> 151,687
<BONDS> 50,490
0
0
<COMMON> 98
<OTHER-SE> 101,264
<TOTAL-LIABILITY-AND-EQUITY> 310,053
<SALES> 481,657
<TOTAL-REVENUES> 481,657
<CGS> 308,952
<TOTAL-COSTS> 308,952
<OTHER-EXPENSES> 150,218
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,767
<INCOME-PRETAX> 11,720
<INCOME-TAX> 4,618
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,102
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.71
</TABLE>
