<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
INTRODUCTORY NOTE: Trans World Entertainment Corporation is Amending this
Form 10-Q to provide revised disclosures made to its interim financial
information in connection with its Form S-4 filing on March 30, 1999.
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 2, 1998
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value,
21,674,012 shares outstanding as of May 30, 1998
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Form 10-Q
Page No.
PART 1. FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at May 2, 1998,
January 31, 1998 and May 3, 1997 3
Condensed Consolidated Statements of Income - Thirteen
Weeks Ended May 2, 1998 and May 3, 1997 5
Condensed Consolidated Statements of Cash Flows - Thirteen
Weeks Ended ended May 2, 1998 and May 3, 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 4 - Submission of Matters of Vote of Security Holders 15
Item 6 - Exhibits and Reports on Form 8-K 16
Signatures 16
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANACIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
MAY 2, JANUARY 31, MAY 3,
1998 1998 1997
------------------ ------------- ----------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $20,275 $94,732 $10,303
Merchandise inventory 189,902 189,394 159,699
Other current assets 6,099 6,224 9,691
------------------ ------------- ----------------
Total current assets 216,276 290,350 179,693
------------------ ------------- ----------------
VIDEOCASSETTE RENTAL INVENTORY, net 4,022 4,099 4,626
DEFERRED TAX ASSET 4,550 4,726 2,576
FIXED ASSETS, net 73,690 72,068 65,394
OTHER ASSETS 2,814 2,776 3,363
------------------ ------------- ----------------
TOTAL ASSETS $301,352 $374,019 $255,652
------------------ ------------- ----------------
------------------ ------------- ----------------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-3-
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
MAY 2, JANUARY 31, MAY 3,
1998 1998 1997
------------------ ------------- -----------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $100,243 $162,981 $75,124
Income taxes payable 1,969 11,155 ---
Accrued expenses and other 12,217 17,346 7,729
Store closing reserve 8,221 8,692 11,259
Current deferred taxes 604 1,103 ---
Current portion of long-term debt and capital lease obligations 96 99 4,733
------------------ ------------- -----------
Total current liabilities 123,350 201,376 98,845
------------------ ------------- -----------
LONG-TERM DEBT, less current portion -- 35,000 41,691
CAPITAL LEASE OBLIGATIONS, less current portion 6,389 6,409 6,484
OTHER LIABILITIES 7,142 6,712 6,537
------------------ ------------- ------------
TOTAL LIABILITIES 136,881 249,497 153,557
------------------ ------------- ------------
SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value; 5,000,000 shares authorized;
none issued) --- --- ---
Common stock ($.01 par value; 50,000,000 shares authorized;
21,423,150, 19,815,357 and 19,630,162 shares issued, respectively) 214 198 196
Additional paid-in capital 62,686 25,386 24,463
Treasury stock, at cost (70,288, 70,788 and 72,788
shares, respectively) (390) (394) (407)
Unearned compensation - restricted stock (158) (175) (228)
Retained earnings 102,119 99,507 78,071
------------------ ------------- -----------
TOTAL SHAREHOLDERS' EQUITY 164,471 124,522 102,095
------------------ ------------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $301,352 $374,019 $255,652
------------------ ------------- -----------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-4-
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
----------------- ----------------
MAY 2, MAY 3,
1998 1997
----------------- ----------------
<S> <C> <C>
Sales $145,062 $109,512
Cost of sales 92,605 70,248
----------------- ----------------
Gross profit 52,457 39,264
Selling, general and administrative expenses 47,334 38,935
----------------- ----------------
Income from operations 5,123 329
Interest expense 1,097 1,836
Other expenses (income), net (256) (94)
----------------- ----------------
Income (loss) before income taxes 4,282 (1,413)
Income tax expense (benefit) 1,670 (551)
----------------- ----------------
NET INCOME (LOSS) $2,612 ($862)
----------------- ----------------
----------------- ----------------
BASIC EARNINGS (LOSS) PER SHARE $0.13 ($0.04)
----------------- ----------------
----------------- ----------------
Weighted average number of common shares outstanding 19,827 19,540
----------------- ----------------
----------------- ----------------
DILUTED EARNINGS (LOSS) PER SHARE $0.12 ($0.04)
----------------- ----------------
----------------- ----------------
Adjusted weighted average number of common shares outstanding 21,334 19,540
----------------- ----------------
----------------- ----------------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-5-
<PAGE>
TRANS WORLD ENTERTAINMENT AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
--------------------
MAY 2, MAY 3,
1998 1997
------------------ -------------
<S> <C> <C>
NET CASH USED BY OPERATING ACTIVITIES ($70,861) ($35,678)
------------------ -------------
INVESTING ACTIVITIES:
Acquisition of property and equipment (5,965) (1,830)
Disposals of rental inventory, net 77 158
------------------ -------------
Net cash used by investing activities (5,888) (1,672)
------------------ -------------
FINANCING ACTIVITIES:
Payments of long-term debt and capital lease obligations (35,024) (7,139)
Proceeds from issuance of common stock 36,772 ---
Exercise of stock options 544 21
------------------ -------------
Net cash provided (used) by financing activities 2,292 (7,118)
------------------ -------------
Net decrease in cash and cash equivalents (74,457) (44,468)
Cash and cash equivalents, beginning of period 94,732 54,771
------------------ -------------
Cash and cash equivalents, end of period $20,275 $10,303
------------------ -------------
------------------ -------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Income tax benefit resulting from exercise of stock options $ 915 $ 34
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-6-
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 2, 1998 AND MAY 3, 1997
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
consist of Trans World Entertainment Corporation and its subsidiaries, (the
"Company"), all of which are wholly owned. All significant intercompany accounts
and transactions have been eliminated.
These interim condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
The information furnished in these condensed consolidated financial statements
reflects all normal, recurring adjustments which, in the opinion of management,
are necessary for a fair presentation of such financial statements. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to rules and regulations applicable to interim
financial statements.
These unaudited condensed consolidated financial statements should be read
in conjunction with the audited financial statements included in the Company's
Annual Report on Form 10-K for the fiscal year ended January 31, 1998.
NOTE 2. RESTRUCTURING CHARGE
The Company recorded a pre-tax restructuring charge of $21 million in 1994
to reflect the anticipated costs associated with a program to close 143 stores
and to restructure the Company's debt agreements. The restructuring charge
included the write-down of fixed assets, estimated cash payments to landlords
for the early termination of operating leases, inventory-related costs
(including the cost for returning all remaining merchandise after the store was
closed), and employee termination benefits. The charge also included estimated
professional fees related to the development of the store closing plan and the
negotiations with landlords related to the termination of leases.
Inventory-related costs were included in cost of sales.
An analysis of the January 28, 1995 balance in the 1994 restructuring
reserve and 1995 charges against the reserve is as follows:
<TABLE>
<CAPTION>
CHARGES
BALANCE AT AGAINST REMAINING
JANUARY 28, 1995 RESERVE BALANCE
------------------ --------- -----------
(in thousands)
<S> <C> <C> <C>
Lease obligations.................................. $ 4,250 $ 3,436 $ 814
Inventory-related costs............................ 4,249 3,581 668
Termination benefits............................... 200 200 --
Professional fees.................................. 3,986 3,328 658
Other costs........................................ 827 154 673
------- --------- -----------
Total cash outflows.............................. $ 13,512 $ 10,699 $ 2,813
------- --------- -----------
------- --------- -----------
</TABLE>
The Company completed the 1994 restructuring in 1995, resulting in the
closure of 179 stores (versus an original plan of 143 stores). The remaining
balance in the 1994 restructuring reserve of $2.8 million was credited to
operations in the 4th quarter of 1995.
The Company recorded a second restructuring charge of $33.8 million in
1995 to reflect the anticipated costs associated with a program to close an
additional 163 stores. The components of this
-7-
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 2, 1998 AND MAY 3, 1997 (CONTINUED)
(UNAUDITED)
NOTE 2. RESTRUCTURING CHARGE (CONTINUED)
second charge were similar to those recorded in 1994, and also included a
provision for exiting the rental video store format, the write-off of
goodwill related to a previous acquisition and a provision for closing the
Company's fixture manufacturing operation.
An analysis of the charges against the 1995 reserve for the thirteen week
period ended May 2, 1998 is as follows:
<TABLE>
<CAPTION>
CHARGES AGAINST
THE RESERVE
BALANCE AT ---------- BALANCE AT
JANUARY 31, 1998 1ST QTR MAY 2, 1998
---------------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Video rental assets...................... $ 3,071 $ 8 $ 3,063
--------- ----- ---------
Non cash write-offs.................... 3,071 8 3,063
--------- ----- ---------
Lease obligations........................ 4,008 149 3,859
Inventory-related costs.................. 610 319 291
Termination benefits..................... 803 -- 803
Professional fees........................ 157 7 150
Other costs.............................. 43 (12) 55
--------- ----- ---------
Cash outflows.......................... 5,621 463 5,158
--------- ----- ---------
Total.................................. $ 8,692 $ 471 $ 8,221
--------- ----- --------
--------- ----- --------
</TABLE>
In determining the components of the reserves, management analyzed all
aspects of the restructuring plan and the costs that would be incurred. The
write-off of leasehold improvements and furniture and fixtures represented the
estimated net book value of these items at the forecasted closing date. In
determining the provision for lease obligations, the Company considered the
amount of time remaining on each store's lease and estimated the amount
necessary for either buying out the lease or continued rent payments subsequent
to store closure. Inventory-related costs include the cost to pack and ship the
inventory on hand after the closing of the store as well as the penalty paid to
the vendor for additional product returns resulting from the restructurings.
Termination benefits represented the severance payments expected to be made to
terminated employees. Professional fees represented amounts expected to be paid
to advisors related to the development of the store closing plan ($3.5 million
in total for both plans), and the negotiations with landlords related to the
termination of leases ($2.3 million in total).
The cash outflows for both restructurings were financed from operating cash
flows and the liquidation of merchandise inventory from the stores closed. The
timing of store closures depended on the Company's ability to negotiate
reasonable lease termination agreements.
The restructuring reserve is included in the accompanying balance sheet
under the caption "store closing reserve."
-8-
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 2, 1998 AND MAY 3, 1997 (CONTINUED)
(UNAUDITED)
NOTE 2. RESTRUCTURING CHARGE (CONTINUED)
The Company closed 5 stores during the thirteen week period ended
May 2, 1998 that were related to the restructuring reserve. A summary of
store closures related to each restructuring is as follows:
<TABLE>
<CAPTION>
1994 1995
RESTRUCTURING RESTRUCTURING TOTAL
----------------- ----------------- -----
<S> <C> <C> <C>
Number of stores originally expected to close............ 143 163 306
--- --- ---
--- --- ---
Number of stores closed through May 2, 1998.............. 179 168 347
--- --- ---
--- --- ---
Number of stores to be closed subsequent to May 2, 1998.. -- 23 23
--- --- ---
--- --- ---
</TABLE>
Sales related to stores that were closed were $678,000 (unaudited) and
$1.4 million (unaudited) during the thirteen week period ended May 2, 1998
and May 3, 1997, respectively. Store operating losses related to stores that
were closed were $90,000 (unaudited) and $283,000 (unaudited) during the
thirteen week period ended May 2, 1998 and May 3, 1997, respectively.
The provision for termination benefits was based on the expectation that
338 employees would be terminated in connection with the restructuring
programs. Through May 2, 1998, 75 employees had been terminated and the
Company expects to terminate an additional 23 employees in fiscal 1998.
The Company has not terminated as many employees as originally planned
because higher than normal levels of attrition occurring after the
announcement of the restructurings resulted in a reduced need for involuntary
terminations.
Subsequent to the adoption of the restructuring programs, improving
economic conditions in certain markets, improvement in individual store
performance and the inability to negotiate reasonable lease termination
agreements have led the Company to keep open certain stores that were
originally expected to be closed. During the thirteen week period ended
May 2, 1998, 21 stores were removed from the list of stores expected to be
closed. Conversely, deteriorating economic conditions and store performance
in certain markets have led the Company to close certain stores that were not
originally expected to be closed. In addition, the timing of store closures
has also been affected by the ability or inability to negotiate reasonable
lease termination agreements. The net effect of changes made to the timing of
store closures and the stores to be closed under the 1995 restructuring
program has not been material. Through May 2, 1998, the Company has closed
347 stores in connection with the restructuring programs, compared to the
originally planned closures of 306 stores. During the remainder of 1998, the
Company plans to close an additional 23 stores as it completes the
restructuring programs. Any remaining balance in the restructuring reserve at
January 30, 1999 will be credited to operations.
NOTE 3. SEASONALITY
The Company's business is seasonal in nature, with the highest sales and
earnings occurring in the fourth fiscal quarter.
NOTE 4. DEPRECIATION AND AMORTIZATION
Depreciation and amortization of videocassette rental inventory included
in cost of sales totalled $413,000 and $547,000 for the thirteen week periods
ended May 2, 1998 and May 3, 1997, respectively.
Depreciation and amortization of fixed assets is included in the
condensed consolidated statements of income as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
------------------------------------
MAY 2, MAY 3,
1998 1997
----------------- -----------------
(in thousands)
<S> <C> <C>
Cost of Sales .................................... $ 300 $ 260
-------- --------
-------- --------
Selling, general and administrative expenses...... $ 4,043 $ 3,586
-------- --------
-------- --------
</TABLE>
NOTE 5. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
which was effective for the Company for the fiscal year ended January 31,
1998. This standard requires the Company to disclose basic earnings per share
and diluted earnings per share. Basic earnings per share is calculated by
dividing net income by the weighted average common shares outstanding.
Diluted earnings per share is calculated by dividing net income by the sum of
the weighted average shares that would have been outstanding if the dilutive
potential common shares had been issued for the Company's common stock
options from the Company's stock option plans. For the thirteen weeks ended
May 2, 1998 and May 3, 1997 the additional potentially dilutive common
shares included in the diluted earnings per share calculation were 1,507,000
and zero, respectively. Total stock options to purchase zero and 3,236,000
shares of common stock outstanding during the thirteen weeks ended May 2,
1998 and May 3, 1997, respectively, were not included in the computation of
diluted earnings per share because to do so would have been anti-dilutive.
NOTE 6. COMMON STOCK OFFERING
At the end of the first quarter of 1998 the Company sold an additional 1.5
million shares of its Common Stock in a public offering for approximately $37
million net of issuance costs. A portion of the
-9-
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 2, 1998 AND MAY 3, 1997 (CONTINUED)
(UNAUDITED)
NOTE 6. COMMON STOCK OFFERING (CONTINUED)
proceeds was used to repay long-term debt and the balance of the proceeds was
used for general corporate purposes including investments in additional stores,
fixtures and inventory.
NOTE 7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income", issued in June 1997 and effective for fiscal years ending
after December 15, 1997, establishes standards for reporting and display of the
total net income and the components of all other non-owner changes in equity, or
comprehensive income (loss) in the statement of operations, in a separate
statement of comprehensive income (loss) or within the statement of changes of
stockholder's equity. The Company has no items of other comprehensive income.
Financial Accounting Standards Board Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information", issued in June 1997 and
effective for fiscal years beginning after December 15, 1997, will change the
way companies report selected segment information in annual financial statements
and also requires those companies to report selected segment information in
interim financial statements. Management has evaluated the impact of the
application of the new rules on the Company's Consolidated Financial Statements
and the new rules will not change its financial presentation.
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities", issued in June, 1998 and
effective for all fiscal quarters of fiscal years beginning after June 15, 1999,
with earlier application permitted, requires companies to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Management has evaluated
the impact of the application of the new rules on the Company's Consolidated
Financial Statements and concluded that there will be no impact on its results
of operations or its financial position.
The Accounting Standards Executive Committee Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", issued in March 1998 and effective for fiscal years beginning
after December 15, 1998 with earlier application permitted, provides guidance
on accounting for the costs of computer software developed or obtained for
internal use. The Company will adopt the statement for the fiscal year
beginning January 31, 1999. Management has evaluated the impact of the
application of the new rules on the Company's Consolidated Financial
Statements and concluded that there will be no impact on its results of
operations or its financial position.
The Accounting Standards Executive Committee Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities", issued in April 1998 and
effective for fiscal years beginning after December 15, 1998 with earlier
application permitted, provides guidance on the financial reporting of start-up
costs and organization costs. The Company will adopt the statement for the
fiscal year beginning January 31, 1999. Management has evaluated the impact of
the application of the new rules on the Company's Consolidated Financial
Statements and concluded that there will be no impact on its results of
operations or its financial position.
-10-
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 products 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.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MAY 2, 1998
COMPARED TO THE THIRTEEN WEEKS ENDED MAY 3, 1997
SALES. The Company's total sales increased 32.5% to $145.1 million for the
thirteen weeks ended May 2, 1998 compared to $109.5 million for the same period
last year. The increase was primarily attributable to a comparable store sales
increase of 10.3%, the acquisition of 90 Strawberries' stores in October 1997,
and the opening of 16 stores partially offset by the closing of 25 stores.
Management attributes the comparable store sales increase, its ninth consecutive
quarter of such increases, primarily to its strategic decision to eliminate
unprofitable stores and focus on customer service, superior retail locations,
inventory management and merchandise presentation.
Comparable store sales in the Company's music stores increased 12.6% while
comparable sales in the video stores increased 3.6%.
GROSS PROFIT. Gross profit as a percentage of sales improved to 36.2% from
35.9% in the thirteen week period ended May 2, 1998 compared to the same period
in 1997. The increase is primarily due to the leveraging of expenses in the
Company's distribution center.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("S,G&A"), as a percentage of sales, decreased from
35.6% to 32.6% in the thirteen week period ended May 2, 1998 compared to the
same period in 1997. The improvement is primarily due to a reduction of store
occupancy costs as a percentage of sales. The Company continues to leverage its
depreciation and amortization and operating expenses against sales.
INTEREST EXPENSE. Net interest expense was reduced from $1.8 million in the
thirteen week period ended May 3, 1997 to $1.1 million for the thirteen week
period ending May 2, 1998.
-11-
<PAGE>
The decrease is due to a reduction in long-term debt and lower interest rates as
a result of the refinancing completed in fiscal 1997.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NET INCOME. The Company increased its net income to $2.6 million in the
thirteen weeks ended May 2, 1998 from a net loss of $862 thousand during the
same period last year. The improved bottom line performance can be attributed
to the comparable store sales increase, improved gross margin rates, leverage of
S,G&A expenses and lower interest expense.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND SOURCES OF CAPITAL. At the end of the first quarter of 1998 the
Company sold an additional 1.5 million shares of its Common Stock in a public
offering for approximately $37 million net of issuance costs. A portion of the
proceeds was used to repay long-term debt and the balance of the proceeds, which
is reflected in the $20.3 million of cash and cash equivalents at May 2, 1998,
will be used for general corporate purposes including investments in additional
stores, fixtures and inventory and future acquisition and investment
opportunities. The impact of this issuance of Common Stock had an immaterial
effect on earnings per share in the first quarter.
On July 9, 1997 the Company entered into a $100 million secured revolving credit
facility with Congress Financial Corporation. The Revolving Credit Facility
combined the Company's long-term debt with its revolving credit line to create a
$100 million credit facility with a three year term at interest rates below the
prime rate. The Revolving Credit Facility contains certain restrictive
provisions, including provisions governing cash dividends and acquisitions, is
secured by merchandise inventory and has a minimum net worth convenant. At
quarter end, the Company had unused lines of credit aggregating $100 million.
The Company's working capital at May 2, 1998 was $92.9 million and its ratio of
current assets to current liabilities was 1.8 to 1. During the first three
months of 1998, the Company's net cash used by operations was $70.9 million,
compared to $35.7 million used in the first three months of 1997. The most
significant operating use of cash during the period was $62.7 million in
seasonal reductions of accounts payable. The Company used an additional $35
million for the reduction of long-term debt.
CAPITAL EXPENDITURES
During the first quarter of 1998, the Company had capital expenditures of $6
million out of a total of $47 million, net of construction allowances, planned
for the year. Included in the total for the year is $17 million for a new Point
of Sale register system. Also during the quarter, the Company opened or
relocated 16 new stores and closed 25 stores while total retail selling space
increased slightly. The Company plans on opening approximately the same number
of stores in
-12-
<PAGE>
Fiscal 1998 as it closes but anticipates that total retail footage will increase
as the average size of new stores continues to increase.
YEAR 2000 COMPLIANCE
The Company has completed an awareness of the business risks related to the
Year 2000 issue. The results of the awareness indicate that:
- - awareness of Year 2000 issues is well known throughout the Company;
- - assessment of Year 2000 sensitive items will
completed;
- - a list of items and business relationships sensitive to the
Year 2000 issue will be compiled;
- - renovation of the core information
technology ("IT") systems will be completed;
- - third-party compliance tracking will be done; and
- - verification of embedded chip ("non-IT") system readiness for Year 2000
compliance will be done.
The Company's Year 2000 issue remediation process includes the following
phases: Awareness, Assessment, Renovation, Validation, and Implementation. As
indicated above, the Awareness and Assessment phases are complete. The
Awareness phase included establishing an internal Year 2000 committee,
interviewing key Company personnel at all levels, including those at the
stores, distribution center and home office, and vendor compliance tracking.
Activities in the Assessment phase will include contacting merchandise
vendors regarding their Year 2000 remediation activities, discussions with
the Company's software vendors and service providers, identification of all
source code and all imbedded chip logic that could contain date logic,
analyzing source codes for its systems identifying each individual occurrence
of date logic, and simulating the Year 2000 environment by rolling forward
the date in test files of its principal IT systems. Assessment and Renovation
efforts are underway. For the Renovation phase, all core IT system
programming modifications will be completed by its internal systems
development staff. The system programming modifications include upgrading the
distribution, inventory management and accounting systems and converting the
POS registers to a Year 2000 compliant system. Replacements for the other
(non-core) IT systems are being implemented on schedule. The non core IT
Systems being replaced include a product return system, a system for tracking
the opening of new stores and managing lease payments. For the Validation and
Implementation phases, formal systems testing for both IT and non-IT systems
is expected to be completed by the end of the second quarter of fiscal 1999.
In order to complete the Validation and Implementation phases, the Company
will process daily, weekly and monthly transactions on the main corporate IT
systems platform, IBM AS/400. The compliance testing will be completed in a
dedicated environment within the AS/400 to assure acceptance of all
transactions in the year 2000.
The Company is exposed to both internal and external Year 2000 risks.
Internal risks exist due to its dependence on its IT and non-IT systems. The
Company is dependent on its IT and non-IT systems for many of its everyday
operations including inventory management, product distribution, cash
management, accounting and financial reporting. The Company utilizes a
variety of vendors for its system needs and has initiated discussions with
its vendors and monitored their Year 2000 compliance programs and the
compliance of their products or services with required standards. Although
the majority of these vendors represent that their products are Year 2000
compliant, the Company will perform testing to validate the vendor
representations no later than the second quarter of fiscal 1999. In the
normal course of business, the Company will replace its POS register system
with a Year 2000 compliant system during fiscal 1998. Additionally, the
Company plans to replace its product return center's processing system no
later than the end of the second quarter of fiscal 1999. The replacement
system will be Year 2000 compliant. Preliminary contingency plans for failure
of internal systems include implementing manual procedures such as the use of
manual merchandise picking and shipping to replace automated distribution
center equipment.
-13-
<PAGE>
External risks are represented by the fact that the Company utilizes
approximately 2,500 different suppliers in the normal course of its business.
Six major merchandise vendors account for more than 60% of all purchases.
Additionally, 50 other merchandise vendors account for nearly 15% of
purchases. The Company is also dependent on financial institutions for
consolidation of cash collections, and for cash payments. Although the
Company uses its own trucks for shipment of product to approximately 36% of
its stores, it does rely on a number of trucking companies for the remainder
of its product distribution. Evaluation of its vendors' Year 2000 readiness
will begin in the fourth quarter of fiscal 1998, and is expected to be
completed by the end of the first quarter of fiscal 1999. Upon completion of
the assessment of vendor readiness, contingency plans will be developed for
all third-parties where Year 2000 compliance appears to be at risk.
The Company presently believes that its most likely worst-case Year 2000
scenarios would relate to the possible failure in one or more geographic
regions of third party systems over which it has no control and for which it
has no ready substitute, such as, but not limited to, power and
telecommunications services. The Company has in place a disaster recovery
plan that addresses recovery from various kinds of disasters, including
recovery from significant interruptions to data flows and distribution
capabilities at its data systems center and distribution center. The
Company's disaster recovery plan provides specific routines for actions,
personnel assignments and back-up arrangements to ensure effective response
to a disaster affecting key business functions including merchandise
replenishment, cash management and distribution center operations. Common
routines and back up arrangements include off-site storage of information,
manual processing of critical applications and the establishment of a chain
of communication for key personnel. The Company is using that plan to further
develop specific Year 2000 contingency plans identified by our third-party
assessment phase which will emphasize locating alternate sources of supply,
methods of distribution and ways of processing information.
The Company's direct costs for its Year 2000 remediation efforts total
$100,000 through May 2, 1998. Anticipated future costs include an additional
$1 million to address Year 2000 issues identified as a result of remediation
testing and a new product return center processing system. Future costs will
be funded by cash flows generated from operations.
The Company's estimates of the costs of achieving Year 2000 compliance and
the date by which Year 2000 compliance will be achieved are based on
management's best estimates, which were derived using numerous assumptions
about future events including the continued availability of certain
resources, third party modification plans and other factors. However, there
can be no assurance that these estimates will be achieved, and actual results
could differ materially from these estimates. Specific facts that might cause
such material differences include the availability and cost of personnel
trained in Year 2000 remediation work, the ability to locate and correct all
relevant computer codes, the success achieved by its customers and suppliers
in reaching Year 2000-readiness, the timely availability of necessary
replacement items and similar uncertainties.
-14-
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A) An Annual Meeting of Shareholders of Trans World Entertainment Corporation
was held on Wednesday, June 3, 1998.
B) In the case of each individual nominee named below, authority to vote was
withheld with respect to the number of shares shown opposite their name in
Column 1, and each nominee received the number of votes set opposite their
name in Column 2 for election as director of the Corporation.
<TABLE>
<CAPTION>
---------------- ---------------
<S> <C> <C>
Column 1 Column 2
Name of Nominee Withheld Votes for
------------------------- ------------------- --------------
Robert J. Higgins 100,726 18,750,148
Dean S. Adler 100,560 18,750,314
George W. Dougan 2,822,671 16,028,203
Charlotte G. Fischer 2,822,671 16,028,203
Isaac Kaufman 101,100 18,749,774
Matthew H. Mataraso 100,560 18,750,314
Dr. Joseph G. Morone 2,822,671 16,028,203
</TABLE>
C) A proposal to amend Trans World Entertainment Corporation's 1990 Stock
Option Plan for Non-Employee Directors to authorize the Board to award
discretionary option grants, was approved as follows:
FOR- 17,734,130
AGAINST- 1,109,746
ABSTAIN- 6,998
D) A proposal to institute Trans World Entertainment Corporation's 1998
Employee Stock Option Plan, was approved as follows:
FOR- 12,928,411
AGAINST- 3,832,986
ABSTAIN- 5,469
-15-
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS -
EXHIBIT NO DESCRIPTION PAGE NO.
---------- ----------- --------
10.4 Trans World Entertainment 13
Corporation Employment
Agreement with Robert J.
Higgins
27 Financial Data Schedule N/A
(electronic filing only)
(B) REPORTS ON FORM 8-K - None
Omitted from this part II are items which are not applicable or to which the
answer is negative to the periods covered.
SIGNATURES
----------
Pursuant to the requirements of the Securities and 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
March 30, 1999 BY /s/ ROBERT J. HIGGINS
----------------------
Robert J. Higgins
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
March 30, 1999 BY: /s/ JOHN J. SULLIVAN
---------------------
John J. Sullivan
Senior Vice President-Finance
and Chief Financial Officer
(Chief Financial and Accounting Officer)
-16-
<PAGE>
Exhibit 10.4
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is effective as of the 1st day of May, 1998, by
and between Trans World Entertainment Corporation, a New York corporation (the
Company), and Robert J. Higgins (Higgins).
Background
WHEREAS, Higgins has served as the President and Chief Executive Officer of
the Company and as the Chairman of its Board of Directors since 1973; and
WHEREAS, Higgins and the Company executed an employment agreement effective
as of February 1, 1996, which will end on January 30, 1999 (the 1996 Employment
Agreement); and
WHEREAS, the Company recognizes that Higgins' contribution to the growth
and success of the Company has continued to be substantial throughout the term
of the 1996 Employment Agreement and that without his continued leadership and
vision the Company would not have achieved and maintained its current status in
the industry; and
WHEREAS, the Company desires to renegotiate and extend the terms of the
1996 Employment Agreement to assure the Company of Higgins' continued services
in a leadership capacity and to compensate him therefor; and
WHEREAS, Higgins is willing to commit to continue serving the Company on
the terms and conditions provided in this Agreement.
NOW THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein and intending to be legally bound hereby, the
parties agree as follows:
SECTION 1. CAPACITY AND DUTIES
1.1 Employment. The Company hereby employs Higgins and Higgins hereby
accepts employment by the Company upon the terms and conditions hereinafter set
forth for a term commencing on the date hereof and expiring on April 30, 2003
(unless Higgins' service is sooner terminated as set forth below) (the Contract
Period).
1.2 Capacity and Duties.
1.2.1 Higgins shall be employed by the Company generally as its
President and Chief Executive Officer and shall have the executive authority,
consistent with these positions, as may from time to time be specified by the
Board of Directors of the Company or any duly authorized committee thereof (the
Board).
<PAGE>
1.2.2 Higgins shall devote his full working time, energy, skill
and best efforts to the performance of his duties hereunder, in a manner that
will faithfully and diligently serve the business and interests of the Company
and its affiliates (as defined below), provided that Higgins may devote such
time as is reasonably required for charitable and other personal activities in
accordance with the Company's practices and policies.
1.2.3 For the purposes of this Agreement, an affiliate of the
Company means any person or entity that controls the Company, is controlled by
the Company, or which is under common control with the Company. For the
purposes of this definition of affiliate, control means the power to direct the
management and policies of a person or entity, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms controlling and controlled shall have correlative meanings; provided that
any person or entity who owns beneficially, either directly or through one or
more intermediaries, more than 20% of the ownership interests in a specified
entity shall be presumed to control such entity for the purposes of this
Agreement.
SECTION 2. COMPENSATION
2.1 Base Compensation. As compensation for Higgins' services hereunder,
the Company shall pay Higgins a salary at the annual rate of $600,000. This
salary shall be payable in installments in accordance with the Company's regular
payroll practices in effect from time to time. This salary shall be subject to
increase based on normal periodic merit review by the Compensation Committee of
the Board (the Compensation Committee) in accordance with the corporate policies
of the Company (such salary, including the foregoing adjustments, if any, is
hereinafter referred to as base salary); provided, however, that the amount of
such increase shall not be less than the percentage amount, if any, by which the
CPI (as defined below) for the calendar month immediately preceding such
anniversary date exceeds the CPI for same month of the immediately preceding
year. For the purposes of this Section 2.1, the term CPI shall mean the
Consumer Price Index for All Urban Consumers for all items for New York, New
York, as published by the Bureau of Labor Statistics of the United States
Department of Labor, or of any revised or successor index hereafter published by
the Bureau of Labor Statistics or other agency of the United States government
succeeding to its functions. The annual base salary of Higgins shall not be
decreased at any time during the Contract Period from the amount then in effect,
unless Higgins otherwise agrees in writing. Participation in deferred
compensation, discretionary bonus, retirement and other employee benefit plans
and in fringe benefits shall not
reduce the annual base salary payable to Higgins under this Section 2.1.
2.2 Benefits.
2.2.1 During the Contract Period, Higgins (and his family, if
applicable) shall be entitled to participate in all incentive, savings,
retirement, welfare and other employee benefit plans, practices, policies and
programs that the Company may provide for the benefit of its executive employees
generally (together with the fringe benefits described below, Employee
Benefits). Higgins shall also be entitled to participate in any other fringe
benefits which may be or become applicable to the Company's executive employees,
including the payment of reasonable expenses for attending annual and periodic
meetings of trade associations and any other benefits that are commensurate with
the duties and responsibilities to be performed by Higgins under this Agreement.
In no event shall the Employee Benefits provided to Higgins be less favorable,
in the aggregate, than the employee benefits plans, practices, policies and
programs provided to Higgins immediately preceding the effective date of this
Agreement.
2.2.2 If Higgins becomes a participant in any employee benefit
plan, practice or
<PAGE>
policy of the Company or its affiliates, Higgins shall be given credit under
such plan for all service in the employ of the Company and any predecessors
thereto or affiliates thereof prior to the date hereof, for purposes of
eligibility and vesting, benefit accrual and for all other purposes for which
such service is either taken into account or recognized under the terms of such
plan, practice or policy.
2.2.3 During the Contract Period, Higgins shall be entitled to a
private office, and such secretarial services as have been previously provided
to Higgins, and such other assistance and accommodations as shall be suitable to
the character of Higgins' position with the Company and adequate for the
performance of Higgins' duties hereunder.
2.2.4 The Company shall pay or reimburse Higgins for all
reasonable expenses (including expenses of travel and accommodations) incurred
or paid by Higgins in connection with the performance of Higgins' duties
hereunder upon receipt of itemized vouchers therefor and such other supporting
information as the Company shall reasonably require.
2.2.5 During the Contract Period, the Company shall continue to
provide Higgins with an automobile for use by Higgins consistent with past
practices and shall continue to pay or reimburse Higgins for expenses he
reasonably incurs for the maintenance and operation of such automobile upon
receipt of itemized vouchers therefor and such other supporting information as
the Company shall reasonably require.
2.2.6 During the Contract Period, Higgins shall be entitled to
paid vacations in a manner commensurate with Higgins' status as the President
and Chief Executive Officer of the Company, which shall not be less than the
annual vacation period to which Higgins is presently entitled.
2.3 Executive Bonus Plan. The Company maintains the Executive Bonus Plan
(the EBP) to provide performance-based incentive compensation to Higgins and
certain other executives of the Company. During the Contract Period, Higgins
shall be eligible to earn an annual performance bonus of 0 to 150% of his annual
base salary in effect for that year (incentive compensation), calculated in such
fashion and based on the achievement of certain performance criteria as are
approved by the Board or the Compensation Committee prior to the beginning of
such year under the EBP.
2.4 Insurance. Under the 1996 Employment Agreement the Company assisted
in providing life insurance protection for Higgins' family at an annual cost to
the Company of $150,000. During the Contract Period, the Company shall
continue to assist Higgins by paying or advancing each year under an arrangement
selected by Higgins an amount which has an annual net after tax cost to the
Company of $150,000.
2.5 Additional Compensation. The Board, although under no obligation to
do so, may determine from time to time to pay to Higgins compensation in
addition to the annual base salary and incentive compensation required to be
paid above. The Board may grant Higgins options to purchase shares of common
stock of the Company (Common Stock), may issue him restricted Common Stock or
may award him stock appreciation rights.
SECTION 3. TERMINATION OF EMPLOYMENT
3.1 Death or Disability of Higgins.
3.1.1 Higgins' employment hereunder shall immediately terminate
upon his
<PAGE>
death, upon which the Company shall pay the amounts due under Section 2
(including base salary, Employee Benefits, expense reimbursements and
compensation for unused vacation time) accrued as of the date of Higgins' death
in accordance with generally accepted accounting principles (GAAP).
3.1.2 If Higgins, in the reasonable opinion of the Company, is
Disabled (as defined below), the Company shall have the right to terminate
Higgins' employment upon 30 days prior written notice to Higgins at any time
after the expiration of the 180 day period referred to below, in which event the
Company shall pay the amounts due under Section 2 (including base salary,
Employee Benefits, expense reimbursements and compensation for unused vacation
time) accrued in accordance with GAAP as of the date of Higgins' termination
because of Disability. As used in this Agreement, the term Disabled or
Disability shall mean the inability of Higgins to perform substantially Higgins'
duties and responsibilities to the Company by reason of a physical or mental
disability or infirmity for a continuous period of at least 180 days. The date
of Disability shall be on the last day of such 180 day period. The
determination of whether the Disability has occurred shall be made by a licensed
physician chosen by the Board. The benefits payable under Sections 3.1, 3.2 or
otherwise under this Agreement shall be reduced by the amount of any benefits to
which Higgins may be entitled under the benefit plans and programs of the
Company, including any disability plan, supplementary retirement plan or
agreement or insurance policies maintained by the Company for the benefit of
Higgins.
3.2 Continuing Benefits Following Death or Disability. In addition to any
payments or benefits contemplated by Section 3.1, if Higgins' employment is
terminated for death or Disability, Higgins (and, as applicable, his family and
estate) shall continue to receive all base salary, incentive compensation and
all Employee Benefits Higgins (and, as applicable, his family) would have
received for the balance of the Contract Period had his employment not been so
terminated; provided, however, that if Higgins' employment is terminated for
death the total amount payable under this Section 3 shall in no event be less
than be less than 2.99 times the average of the aggregate base salary and
incentive compensation paid to Higgins over the preceding five years.
3.3 Date of Termination.
3.3.1 Except as otherwise provided in this Agreement, the
employment of Higgins hereunder shall terminate upon the earliest to occur of
the dates specified below:
3.3.1.1 the end of the Contract Period;
3.3.1.2 the close of business on the date of Higgins' death;
3.3.1.3 the close of business on the date which is 30 days after
the date on which the Company delivers to Higgins a written notice of the
Company's election to terminate Higgins' employment for Cause (as defined
below);
3.3.1.4 the close of business on the date which is 30 days after
the date on which the Company delivers to Higgins a written notice of the
Company's election to terminate Higgins' employment because of Disability;
3.3.1.5 the close of business on the date which is 30 days after
the date on which Higgins delivers to the Company a notice of Higgins' election
to terminate Higgins' employment for Good Reason (as defined below);
<PAGE>
3.3.1.6 the close of business on the date which is 30 days after
the date on which Higgins delivers to the Company a notice of Higgins' election
to terminate Higgins' employment in accordance with Section 3.5.2 following a
change in the present control of the Company (as defined below); provided,
however, Higgins shall not have the right to terminate this agreement pursuant
to this Section 3.3.1.6 to the extent a change in the present control of the
Company resulted solely from the sale or other transfer of ownership interests
by Higgins to a person or entity; or
3.3.1.7 the close of business on the date which is 60 days after
the date on which the Company delivers to Higgins a written notice that the
Board has adopted a resolution terminating the Higgins' employment and such
termination is not for death, Cause or Disability.
3.3.2 Any purported termination by the Company or by Higgins shall
be communicated by written Notice of Termination to the other. For the purposes
of this Agreement, a Notice of Termination shall mean a notice which indicates
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of Higgins' employment under the provision so indicated.
No such purported termination shall be effective without delivery of such Notice
of Termination. Termination of employment will not cause a termination of this
Agreement, the terms of which shall survive any termination of employment in
accordance with the express terms hereof.
3.4 Termination for Cause.
3.4.1 In the event Higgins' employment is terminated (i) by the
Company for Cause, or (ii) by Higgins for any reason other than Good Reason or
in accordance with Section 3.5.2 following a change in the present control of
the Company (as defined below), the Company's remaining obligations under this
Agreement shall terminate as of the date provided in Section 3.3.
3.4.2 For the purposes of this Agreement, the term Cause shall
mean:
3.4.2.1 fraud, theft, misappropriation or embezzlement of the
Company's funds;
3.4.2.2 conviction of any felony, crime involving fraud or
misrepresentation, or of any other crime (whether or not connected with his
employment) the effect of which is likely to adversely affect the Company,
except if Higgins' actions which result in such a conviction were taken in good
faith and in a manner Higgins reasonably believed not to be adverse to the
interests of the Company;
3.4.2.3 after a written demand for substantial performance to
Higgins from the Board (the mailing of such written demand having been
authorized by at least 60% of the directors then in office) which specifically
identifies the manner in which the Board believes that Higgins has intentionally
materially breached Higgins' duties and provides Higgins with a 30 day period in
which to cure such breach, the willful and continuing intentional material
breach by Higgins substantially to perform Higgins' duties with the Company
(other than any such failure resulting from Disability); or
3.4.2.4 abuse of alcohol or other drugs which interferes with
the
<PAGE>
performance by Higgins of his duties, provided that Higgins has been given 30
days notice by the Company of its intent to terminate Higgins pursuant to this
provision during which time Higgins has not demonstrated the cessation of such
abuse to the reasonable satisfaction of the Board.
Notwithstanding the foregoing or any other provision hereof, Higgins shall not
be deemed to have been terminated for Cause unless there shall have been
delivered to Higgins a copy of a resolution duly adopted by the affirmative vote
of not less than 60% of the entire membership of the Board at a meeting of the
Board called and held for that purpose (after at least 15 days prior written
notice to Higgins and an opportunity for Higgins, together with Higgins'
counsel, to be heard before the Board), finding that, in the good faith opinion
of the Board, Higgins was guilty of conduct set forth above and specifying the
particulars thereof in reasonable detail.
3.4.3 For the purposes of this Agreement, the term Good Reason
shall mean the occurrence of any of the events or conditions described in the
following subparagraphs without Higgins' express written consent:
3.4.3.1 a material diminution of Higgins' status, title,
position, scope of authority or responsibilities (including reporting
responsibilities), the assignment to Higgins of any duties or responsibilities
which, in Higgins' reasonable judgment, are inconsistent with such status,
title, position, authorities or responsibilities, Higgins ceasing to be Chairman
of the Board of Directors, or any removal of Higgins from or failure to
reappoint or reelect Higgins to any of such positions, except in connection with
the termination of Higgins' employment for Disability, Cause, as a result of
Higgins' death or by Higgins other than for Good Reason;
3.4.3.2 a reduction by the Company in Higgins' compensation or
benefits as in effect on the date hereof or as the same may be increased from
time to time;
3.4.3.3 the relocation of the Company's principal executive
offices to a location outside a 25-mile radius of Albany, New York or the
Company's requiring Higgins to be based at any place other than Albany, New
York, except for reasonably required travel on the Company's business;
3.4.3.4 the materially adverse and substantial alteration in the
nature and quality of the office space within which Higgins performs Higgins'
duties, including the size and location thereof, as well as the secretarial and
administrative support provided to Higgins;
3.4.3.5 any material breach by the Company of any material
provision of this Agreement; and
3.4.3.6 the failure of the Company to obtain a satisfactory
agreement from any purchaser of the Company or successor or permitted assignee
of the Company to assume and agree to perform this Agreement.
Provided, however, that a termination by Higgins in accordance with Section
3.5.2 following a change in the present control of the Company (as defined
below) shall not constitute a termination by Higgins for Good Reason under this
Agreement.
3.5 Termination Without Cause.
3.5.1 In the event Higgins' employment is terminated (i) by the
Company for any reason other than Cause, or the death or Disability of Higgins,
or (ii) by Higgins for Good
<PAGE>
Reason, the Company shall immediately pay Higgins the amounts due under Section
2 (including base salary, Employee Benefits, expense reimbursements and
compensation for unused vacation time) accrued as of the date of such
termination in accordance with GAAP. In such event, Higgins (and, as
applicable, his family) shall also continue to receive from the Company until
two years after the end of the Contract Period then in effect, all base salary,
incentive compensation and Employee Benefits that Higgins (and, as applicable,
his family) would have received had he continued employment and such event had
not occurred.
3.5.2 In the event Higgins elects to terminate his employment by
written notice to the Company within the 90 day period immediately following a
change in the present control of the Company, the Company shall immediately pay
Higgins the amounts due under Section 2 (including base salary, Employee
Benefits, expense reimbursements and compensation for unused vacation time)
accrued as of the date of such termination in accordance with GAAP. In such
event, the Company shall also pay Higgins within 60 days thereafter a single sum
amount equal to 2.99 his base amount (within the meaning of Section 2806(b)(3)
of the Internal Revenue Code of 1986, as amended).
3.5.3 There shall be no requirement on the part of Higgins to seek
other employment or otherwise mitigate damages in order to be entitled to the
full amount of any payments or benefits to be made pursuant to this Agreement or
any other agreement between Higgins and the Company or any of its affiliates;
provided, however, if Higgins' employment is terminated by the Company other
than for Cause or the death or Disability of Higgins, or by Higgins for Good
Reason, Higgins shall, for so long as he is being paid amounts in respect of
base salary hereunder, use reasonable efforts following 12 months after his
employment has been so terminated, to find alternative employment; provided,
however, such reasonable efforts shall not require Higgins to move, commute more
than 20 miles to his office or accept employment of a stature materially less
than the position Higgins had with the Company. No payment or benefit under any
portion of this Agreement shall be subject to offset.
SECTION 4. RESTRICTIVE COVENANTS
4.1 Confidentiality. Higgins acknowledges a duty of confidentiality owed
to the Company and shall not, directly or indirectly, at any time during or
after his employment by the Company, divulge, furnish, or make accessible to
anyone, without the express authorization of the Board, any trade secret,
private or confidential or proprietary information or know-how of the Company or
any of its affiliates obtained or acquired by him while so employed. All
computer software and books paid for by the Company, and all records and files
generated or acquired while an employee of the Company are acknowledged to be
the property of and shall not be removed from the Company's possession or made
use of other than in pursuit of the Company's business and, upon termination of
employment for any reason, Higgins shall deliver to the Company, without further
demand, all copies thereof which are then in his possession or under his
control. The provisions of this Section 4.1 shall not apply to information
which (i) is or becomes generally available to the public other than as a result
of a disclosure by Higgins, (ii) was available to Higgins on a non-confidential
basis prior to its disclosure to Higgins, (iii) becomes available to Higgins on
a non-confidential basis from a source other than the Company, (iv) must be
disclosed by law or by order of a court or governmental authority, or (v) is
used to enforce Higgins' rights with the Company. This Section 4.1 shall
terminate on the date that a sale or other transfer of the Company is completed.
4.2 Noncompetition.
4.2.1 At any time while employed hereunder and, except as provided
in the last
<PAGE>
sentence of this Section 4.2.1, for a period of one year following termination
of Higgins' employment for any reason, Higgins shall not, directly or
indirectly: (i) engage, anywhere in the Territory (as defined in Section 4.2.2
below), in the retail sale of music, video or related products; (ii) be or
become a stockholder, partner, owner, officer, director or employee or agent
of, or a consultant to or give financial or other assistance to, any person or
entity engaging in any such activities; (iii) seek in competition with the
business of the Company to procure orders from or do business with any customer
of the Company; or (iv) solicit or contact with a view to the engagement or
employment by any person or entity of any person who is an employee of the
Company as of the date of this Agreement, provided this will not preclude hiring
any person who contacts Higgins for employment and who has not been employed by
the Company at any time during the preceding 6 months. Nothing herein shall
prohibit Higgins without the written consent of the Board from owning, as a
passive investor, in the aggregate not more than 5% of the outstanding publicly
traded stock of any corporation so engaged. The duration of Higgins' covenants
set forth in this Section shall be extended by a period of time equal to the
number of days, if any, during which Higgins is in violation of the provisions
hereof. Higgins shall not be bound by this Section 4.2.1 following the
termination of his employment (a) by the Company without Cause, or (b) by
Higgins for Good Reason.
4.2.2 For the purposes of this Agreement, Territory means the
United States.
4.2.3 If either party hereto learns of any breach or potential
breach of this Agreement such party shall immediately notify the other party
hereto of such event, specifying the basis therefor in reasonable detail. The
Company may, in its sole discretion, afford Higgins an opportunity to remedy or
otherwise cure such breach or potential breach before seeking legal redress,
provided that Higgins is actively seeking to cure or remedy such breach or
potential breach; but such opportunity to remedy shall be without prejudice to
the right of the Company to seek and obtain injunctive or other relief.
4.3 Injunctive and Other Relief. Higgins acknowledges and agrees that the
covenants contained in Section 4.1 and 4.2 above are fair and reasonable in
light of the consideration paid hereunder, and that damages alone shall not be
an adequate remedy for any breach by Higgins of his covenants contained herein
and accordingly expressly agrees that, in addition to any other remedies which
the Company may have, the Company shall be entitled to injunctive relief in any
court of competent jurisdiction for any breach or threatened breach of any such
covenants by Higgins. Nothing contained herein shall prevent or delay the
Company from seeking, in any court of competent jurisdiction, specific
performance or other equitable remedies in the event of any breach or intended
breach by Higgins of any of his obligations hereunder. In the event the Company
prevails in an action to enforce its rights under Sections 4.1 and 4.2, it shall
be entitled to be reimbursed for its costs and reasonable attorneys' fees
associated with so enforcing its rights.
SECTION 5. MISCELLANEOUS
5.1 Reimbursement of Counsel Fees; Arbitration. The Company shall pay all
reasonable legal fees, accounting fees and related expenses incurred by Higgins
in connection with the preparation, negotiation and execution of this Agreement.
Any dispute or controversy arising under or in connection with this Agreement
shall be settled exclusively by arbitration in New York, New York in accordance
with the Commercial Arbitration Rules of the American Arbitration Association
then in effect. Judgment may be entered on the arbitrator's award in any court
having jurisdiction. The prevailing party, shall be entitled to recover from the
other party all of its legal fees, accounting fees and related expenses incurred
in any such arbitration
<PAGE>
including without limitation, all expenses of arbitration, court costs,
transcript costs, fees of experts, witness fees, travel expenses, duplicating
costs, printing and binding costs, telephone charges, postage, delivery service
fees and all other disbursements or expenditures of the types customarily
incurred in connection with prosecuting, defending or investigating any
arbitration, action or suit.
5.2 Severability. The invalidity or unenforceability of any particular
provision or part of any provision of this Agreement shall not affect the other
provisions or parts hereof. If any provision hereof is determined to be invalid
or unenforceable by a court of competent jurisdiction, Higgins shall negotiate
in good faith to provide the Company with protection as nearly equivalent to
that found to be invalid or unenforceable and if any such provision shall be so
determined to be invalid or unenforceable by reason of the duration or
geographical scope of the covenants contained therein, such duration or
geographical scope, or both, shall be considered to be reduced to a duration or
geographical scope to the extent necessary to cure such invalidity.
5.3 Assignment. Neither this Agreement nor any right or interest
hereunder shall be assignable by Higgins, Higgins' beneficiaries, or legal
representatives without the Company's prior written consent; provided, however,
that nothing herein shall preclude (i) Higgins from designating a beneficiary to
receive any benefit payable hereunder upon Higgins' death, or (ii) the
executors, administrators, or other legal representatives of Higgins or Higgins'
estate from assigning any rights hereunder to devisees, legatees, beneficiaries,
testamentary trustees or other legal heirs of Higgins (each a Distributee). If
Higgins should die while any amounts would still be payable to Higgins if
Higgins had continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to Higgins'
Distributee or, if there is no such Distributee, to Higgins' estate.
5.4 Notices. All notices hereunder shall be in writing and shall be
sufficiently given if hand-delivered, sent by documented overnight delivery
service or registered or certified mail, postage prepaid, return receipt
requested or by telegram, fax or telecopy (confirmed by U.S. mail), receipt
acknowledged, addressed as set forth below or to such other person and/or at
such other address as may be furnished in writing by either party hereto to the
other. Any such notice shall be deemed to have been given as of the date
received, in the case of personal delivery, or on the date shown on the receipt
or confirmation therefor, in all other cases. Any and all service of process
and any other notice in any such action, suit or proceeding shall be effective
against a party if given as provided in this Agreement; provided that nothing
herein shall be deemed to affect the right of a party to serve process in any
other manner permitted by law.
If to the Company:
Chief Financial Officer
Trans World Entertainment Corporation
38 Corporate Circle
Albany, NY 12203
Tel: (518) 452-1242
Fax: (518) 869-4819
If to Higgins:
Mr. Robert J. Higgins
6 Sage Estates
Menands, NY 12204
<PAGE>
5.5 Entire Agreement and Modification. This Agreement (and any Employee
Benefit plan or agreement contemplated hereby) constitutes the entire agreement
between the parties hereto with respect to the matters contemplated herein and
supersedes all prior agreements and understandings with respect thereto. Any
amendment, modification, or waiver of this Agreement shall not be effective
unless in writing. Neither the failure nor any delay on the part of any party
to exercise any right, remedy, power or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any right, remedy,
power or privilege preclude any other or further exercise of the same or of any
other right, remedy, power, or privilege with respect to any occurrence be
construed as a waiver of any right, remedy, power, or privilege with respect to
any other occurrence.
5.6 Governing Law. This Agreement is made pursuant to, and shall be
construed and enforced in accordance with, the internal laws of the State of New
York (and United States federal law, to the extent applicable), without giving
effect to otherwise applicable principles of conflicts of law.
5.7 Headings; Counterparts. The headings of sections in this Agreement
are for convenience only and shall not affect its interpretation. This
Agreement may be executed in two or more counterparts, each of which shall be
deemed to be an original and all of which, when taken together, shall be deemed
to constitute but one and the same Agreement.
5.8 Further Assurances. Each of the parties hereto shall execute such
further instruments and take such other actions as any other party shall
reasonably request in order to effectuate the purposes of this Agreement.
5.9 Indemnification. The Company shall pay, as additional compensation
under this Agreement, an amount equal to Higgins' liability (including all taxes
on such amount), if any, under Internal Revenue Code Section 4999 (or any
successor provision) by reason of payments under any provision of this Agreement
or otherwise. Throughout the Contract Period and for a period of five years
thereafter, the Company shall indemnify and defend Higgins against all claims
arising out of Higgins' activities as an officer, director or employee of the
Company to the fullest extent permitted under the law of the applicable state of
incorporation. In addition to the foregoing, Higgins shall, upon reasonable
notice, furnish such information and proper assistance to the Company in
connection with any litigation in which it is, or may become, a party.
IN WITNESS WHEREOF, the parties have executed this Agreement on the dates
set forth below.
TRANS WORLD ENTERTAINMENT CORPORATION
May 7, 1998 By: John J. Sullivan
May 7, 1998 Robert J. Higgins
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<PAGE>
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<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> MAY-02-1998
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