<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) April 22, 1999
---------------
Trans World Entertainment Corporation
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(Exact name of registrant as specified in its charter)
New York 0-14818 14-1541629
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
38 Corporate Circle, Albany, New York 12203
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (518) 452-1242
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None.
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(Former name or former address, if changed since last report.)
<PAGE>
Certain of the matters discussed herein include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Exchange Act of 1934. Statements that are predictive in nature,
that depend upon or refer to future events or conditions, or that include
words such as "expects", "anticipates", "intends", "plans", "believes",
"estimates" and similar expressions are forward-looking statements. The
actions of current and potential new competitors, changes in technology,
seasonality, business cycles, new regulatory requirements, general economic
conditions and other uncertainties and events outside the Company's control
may cause the Company's actual results to differ from the expectations
expressed in such forward-looking statements.
Item 2. Acquisition or Disposition of Assets
On April 22 , 1999, the registrant, Trans World Entertainment Corporation
("Trans World"), a New York corporation, acquired all of the issued and
outstanding common stock of Camelot Music Holdings, Inc. ("Camelot"), a
Delaware corporation, pursuant to the terms of an Agreement and Plan of Merger,
dated October 26, 1998, by CAQ Corporation, a Delaware corporation and wholly
owned subsidiary of Trans World, with and into Camelot. Upon completion of the
merger, Camelot became a wholly owned subsidiary of Trans World.
Pursuant to the terms and conditions of the merger agreement, each share of
common stock, par value $0.01 per share, of Camelot was converted into 1.9
shares of common stock, par value $0.01 per share, of Trans World. In
addition, each option to acquire Camelot common stock outstanding immediately
prior to the completion of the merger, whether or not then exercisable, was
converted into 1.9 fully vested and exercisable options to acquire Trans World
common stock on the terms set forth in the merger agreement. The option strike
price was adjusted accordingly for the 1 for 1.9 exchange ratio. As a result,
Trans World issued approximately 19.4 million shares of common stock and 1.3
million options to purchase common stock.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Page
----
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of the Business Acquired
Camelot Music Holdings, Inc. ("Camelot") F-1
Audited Consolidated Financial Statements as of and for the fifty-two week
period ended January 30, 1999. Financial statements for Camelot for any period
prior to January 31, 1998 are not provided because Camelot adopted "fresh start
reporting" effective as of January 31, 1998 in accordance with Statement of
Position ("SOP") 90-7, issued by the American Institute of Certified Public
Accountants. An entity adopting "fresh start reporting" is analogous to a
newly incorporated enterprise for financial reporting purposes and, therefore,
Camelot did not exist prior to January 31, 1998.
(b) Pro Forma Financial Information F-21
Unaudited Pro Forma Condensed Combined Financial Information of Trans World
Entertainment Corporation and Camelot Music Holdings, Inc. as of January 30,
1999 and for each of the years in the three-year period ended January 30, 1999.
(c) Exhibits.
Exhibit Description
- --------- -----------
23.1 Consent of KPMG LLP.
</TABLE>
<PAGE>
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: May 7, 1999
TRANS WORLD ENTERTAINMENT CORPORATION
By: /s/ John J. Sullivan
--------------------
Name: John J. Sullivan
Title: Senior Vice President - Finance
and Chief Financial Officer
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION
INDEX TO FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL INFORMATION
CAMELOT MUSIC HOLDINGS, INC. CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-2
Consolidated Balance Sheet as of January 30, 1999 F-3
Consolidated Statement of Operations for the
52-week period ended January 30, 1999 F-4
Consolidated Statement of Stockholders' Equity for the
52-week period ended January 30, 1999 F-5
Consolidated Statement of Cash Flows for the
52-week period ended January 30, 1999 F-6
Notes to Consolidated Financial Statements F-7
UNAUDITED CONDENSED COMBINED FINANCIAL INFORMATION F-21
<PAGE>
Independent Auditors' Report
The Board of Directors
Camelot Music Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Camelot Music
Holdings, Inc. and subsidiaries as of January 30, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the 52-week period then ended. 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
audit.
We conducted our audit 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 the disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of Camelot Music
Holdings, Inc. and subsidiaries as of January 30, 1999, and the results of
their operations and their cash flows for the 52-week period then ended in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
April 21, 1999,
except as to Note 17,
which is as of
April 22, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
CAMELOT MUSIC HOLDINGS, INC.
Consolidated Balance Sheet
January 30, 1999
(in thousands of dollars, except share information)
<S> <C>
Assets
Current assets:
Cash and cash equivalents $22,991
Accounts receivable 2,652
Inventories 214,700
Deferred income taxes 6,223
Other current assets 4,134
-------
Total current assets 250,700
Property, plant and equipment, net 50,221
Goodwill, net of accumulated amortization of $1,722 32,404
Intangible assets, net of accumulated amortization of $1,410 1,431
Deferred income taxes 23,415
Favorable lease values, net of accumulated amortization of $3,760 9,782
Other assets 561
--------
Total assets $368,514
========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, trade $61,116
Accrued expenses and other liabilities 48,453
Current portion of notes payable 2,000
-------
Total current liabilities 111,569
Notes payable, less current portion 20,000
Unfavorable lease values, net of accumulated amortization of $4,230 11,716
Other long-term liabilities 4,836
-------
Total liabilities 148,121
Stockholders' equity:
Common stock ($0.01 par value, 30,000,000 shares authorized,
10,180,662 issued and outstanding) 102
Additional paid-in capital 199,893
Retained earnings 20,398
-------
Total stockholders' equity 220,393
-------
Total liabilities and stockholders' equity $368,514
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
CAMELOT MUSIC HOLDINGS, INC.
Consolidated Statement of Operations
For the 52-Week Period Ended January 30, 1999
(in thousands, except per share data)
<S> <C>
Net sales $583,916
Cost of sales 361,905
--------
Gross profit 222,011
Selling, general and administrative expenses 173,021
Special items (Note 10) 5,457
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Income from operations 43,533
Other expenses (income):
Interest income (988)
Interest expense 1,787
Amortization of financing fees 253
Other, net 175
--------
Total other expenses (income), net 1,227
Income before income taxes 42,306
Income tax expense 21,908
--------
Net income $20,398
========
Basic earnings per share $2.00
========
Weighted average number of common shares outstanding 10,178
========
Diluted earnings per share $1.97
========
Adjusted weighted average number of common shares outstanding 10,342
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
CAMELOT MUSIC HOLDINGS, INC.
Consolidated Statement of Stockholders' Equity
For the 52-Week Period Ended January 30, 1999
(in thousands)
Unearned
Additional Compensation
Common Stock Paid-in Stock Option Retained
Shares Amount Capital Plans Earnings Total
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<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1998 10,176 $102 $194,266 $ --- $ --- $194,368
Issuance of 687,000 options
under stock option plan --- --- 5,112 (5,112) --- ---
Exercise of stock options 5 --- 93 --- --- 93
Directors-stock options granted --- --- 234 --- --- 234
Stock issued --- --- 188 --- --- 188
Net income --- --- --- --- 20,398 20,398
Amortization of unearned
compensation - stock option plan --- --- --- 5,112 --- 5,112
--------------------------------------------------------------------
Balance at January 30, 1999 10,181 $102 $199,893 $ --- $20,398 $220,393
====================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
CAMELOT MUSIC HOLDINGS, INC.
Consolidated Statement of Cash Flows
For the 52-Week Period Ended January 30, 1999
(in thousands of dollars)
<S> <C>
Cash flows from operating activities:
Net income $20,398
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 16,005
Amortization of favorable/unfavorable lease values, net (388)
Amortization of financing fees 253
Write-down of long-lived assets 2,029
Compensation expense related to stock options 5,346
Deferred income tax expenses 1,481
Changes in assets and liabilities:
Accounts receivable and refundable income taxes (730)
Inventories (51,573)
Other current assets 707
Other assets 750
Accounts payable, trade 21,249
Accrued expenses and other liabilities 3,087
Accrued income taxes 17,534
-------
Net cash provided by operating activities 36,148
-------
Cash flows from investing activities:
Additions to property, plant and equipment (17,926)
Proceeds from sale of equipment 152
Acquisition of businesses, net of cash acquired of $692 (103,264)
Other assets and liabilities, net (235)
-------
Net cash used in investing activities (121,273)
-------
Cash flows from financing activities:
Payment of financing fees (281)
Proceeds from exercise of stock options 93
Proceeds from long-term borrowings 25,000
Payments on long-term borrrowings (3,000)
-------
Net cash provided by financing activities 21,812
-------
Decrease in cash and cash equivalents (63,313)
Cash and cash equivalents at beginning of period 86,304
-------
Cash and cash equivalents at end of period $22,991
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CAMELOT MUSIC HOLDINGS, INC.
Notes to Consolidated Financial Statements
January 30, 1999
(1) Nature of Operations
Camelot Music Holdings, Inc. (the "Company") is a mall-based specialty
retailer of pre-recorded music, pre-recorded video cassettes and other
entertainment products and related accessories, and operates in 37 states
across the United States and Puerto Rico. The Company operates in a single
industry segment, the operation of a chain of retail entertainment stores. At
January 30, 1999, the Company operated 483 stores nationwide and four stores
in Puerto Rico under the "Camelot Music", "The Wall" and "Spec's Music" names.
The Company and its predecessor entity filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code on August 9, 1996,
and emerged from bankruptcy on January 27, 1998. Effective as of January 31,
1998, the Company adopted "fresh-start reporting" for its consolidated
financial statements in accordance with Statement of Position 90-7 issued by
the American Institute of Certified Public Accountants. Under fresh-start
reporting, the reorganization value of the Company has been allocated to the
emerging Company's assets on the basis of the purchase method of accounting.
Deferred income taxes were reported in conformity with the liability method of
accounting for income taxes and no pre-confirmation net operating loss
carryforwards were recorded at February 1, 1998.
(2) Summary of Significant Accounting Policies
The significant accounting policies used in the preparation of the
consolidated financial statements are as follows:
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries, all of which are wholly owned.
All significant intercompany accounts and transactions have been
eliminated. The active subsidiaries of the Company include Camelot
Music, Inc., Camelot Distribution Co., Inc., Camelot Northeast Region,
Inc., Camelot Southeast Region, Inc., Camelot Western Region, Inc.,
Camelot Midwest Region, Inc., and Spec's Music, Inc.
(b) Use of Estimates in the Preparation of Financial Statements
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 consolidated financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(c) Revenue Recognition
Revenue from the sale of merchandise is recognized at the point of sale
to the consumer, at which time payment is tendered. There are no
provisions for uncollectable amounts since payment is received at the
time of sale.
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash
equivalents are stated at cost, which approximates market value.
(e) Concentration of Credit Risks
The Company maintains centralized cash management programs whereby
excess cash balances are invested in short-term funds and are
considered cash equivalents. Certain cash balances are insured by the
Federal Deposit Insurance Corporation up to $100 thousand. As of
January 30, 1999, uninsured bank cash balances were $15.0 million.
(f) Concentration of Business Risks
The Company purchases its products from a large number of suppliers,
with approximately 74% of purchases, net of returns, being made from
five suppliers. The Company has not experienced difficulty in
obtaining satisfactory sources of supply; however, the loss of a major
supplier could cause a possible loss of sales, which would have an
adverse effect on consolidated operating results and result in a
decrease in vendor support for the Company's advertising programs.
(g) Inventories and Return Costs
Inventories are valued at the lower of cost or market. Cost is
determined principally by the average cost method. Inventories consist
primarily of resaleable prerecorded music, video cassettes, video games
and other related products. The Company is entitled to return product
to its vendors. The vendors often reduce the return credit with a
product 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 product return charges in cost of sales.
(h) Property, Plant and Equipment
Property, plant and equipment is stated at cost. Significant additions
and improvements are capitalized while expenditures for maintenance and
repairs are charged to operations as incurred. The direct costs of
computer software developed or obtained for internal use are
capitalized, as required by SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", and all
other related costs are expensed as incurred. The cost of assets
retired or otherwise disposed of and the related accumulated
depreciation are eliminated from the accounts in the year of disposal.
Gains and losses resulting from disposals are included in operations.
Depreciation is computed using the straight-line method based on the
following ranges of estimated useful lives:
Buildings and improvements 10-40 years
Leasehold improvements Shorter of life
of lease or
7 years
Furniture, fixtures and equipment Shorter of life
of lease or
5 years
Computer software 3 years
(j) Goodwill
Goodwill represents the adjusted amount of the cost of acquisitions in
excess of fair value of net assets acquired in purchase transactions,
and is being amortized on a straight-line basis over a period of 20
years. The 20-year amortization period was determined by taking into
consideration the following factors: the critical market position and
establishment of brand names; the combined store mass of the companies;
the amortization periods generally used in the retail music business;
the highly competitive nature of the business including emerging forms
of competition, and the overall history of profitability of the
acquired businesses.
(k) Intangible Assets and Favorable (Unfavorable) Lease Values
Financing fees are being amortized on a straight-line basis over the
terms of the related financings, which vary with the terms of the
agreements ranging from one to four years.
The trade names acquired in purchase transactions are being amortized
on a straight-line basis over a period of two years.
Favorable (unfavorable) lease values were determined based upon a
comparison of existing lease terms to current market rental rates for
comparable properties, and were calculated by an independent appraiser.
Such lease values are being amortized to rent expense based on the
present value of the difference between actual rent and market rent.
(l) Fair Value of Long-Lived Assets
Property, plant and equipment and other long-lived assets are reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair
value of the assets.
(m) Fair Value of Financial Instruments
Financial instruments of the Company consist of a revolving credit
facility (including letters of credit) which is carried at an amount
which approximates fair value (see Note 7). The carrying amounts
reported in the consolidated balance sheet for cash and cash
equivalents, other current assets, accounts payable, and other current
liabilities approximate fair value because of the immediate or
short-term maturity of these financial instruments.
(n) Advertising Costs
Advertising costs are expensed during the period incurred. The amount
charged to advertising expense during the 52-week period ended January
30, 1999 was $9.8 million.
(o) Store Opening and Other Start-Up Costs
The expenses associated with the opening of new stores and other
start-up costs are charged to expense as incurred.
(p) Earnings Per Share
Basic earnings per share is calculated by dividing net income by the
weighted average shares outstanding. Diluted earnings per share is
calculated by dividing net income, by the sum of the weighted average
shares and additional common shares that would have been outstanding if
the dilutive potential common shares calculated using the treasury
method had been issued for common stock options from the Company's
stock option plans. The additional dilutive potential common shares
included in diluted earnings per share for the 52-week period ended
January 30, 1999 were 163,362. There were zero outstanding stock
options not included in the computation of diluted earnings per share.
As required by Statement of Financial Accounting ("SFAS") No.128,
"Earnings Per Share", all outstanding common stock options are
considered included even though their exercise may be contingent upon
vesting.
(q) Income Taxes
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 at
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. 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.
(r) Stock-Based Compensation
The Company follows Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations
in accounting for its employee stock options. Under APB No. 25,
because the exercise price of employee stock options granted in January
1998 was less than the market price of the underlying stock on the date
of the grant, compensation expense is being recognized over the vesting
period (see Note 9). The Company adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation",
for options issued to employees and directors.
(s) Dividend Policy
The Company has never declared or paid cash dividends on its common
stock, and does not anticipate paying any dividends in the foreseeable
future. In addition, the Company's revolving credit facility limits
its ability to pay dividends under certain circumstances.
(t) Comprehensive Income
The Company does not have other items of comprehensive income as defined
by SFAS No. 130, "Reporting Comprehensive Income." Accordingly,
comprehensive income is equal to net income.
(3) Acquisitions
Effective February 28, 1998, the Company acquired certain assets and assumed
certain liabilities and operating lease commitments of The Wall Music, Inc.
("The Wall") pursuant to an Asset Purchase Agreement dated December 10, 1997.
The purchase price of The Wall was $74.6 million, net of cash acquired,
(including approximately $2.3 million of acquisition costs) and was paid in
cash. The acquisition has been accounted for as a purchase, with the excess
of the purchase price over the fair values of the net assets acquired
(goodwill) of $24.7 million being amortized on a straight-line basis over 20
years.
Effective July 29, 1998, the Company acquired all of the outstanding common
stock of Spec's Music, Inc. ("Spec's") under the terms of an Agreement and
Plan of Merger dated June 3, 1998. Spec's is a retailer of prerecorded music
operating 41 stores in South Florida and Puerto Rico. As of July 29, 1998,
Spec's operated 16 mall-based and 25 stores in shopping centers and
freestanding locations. The Spec's acquisition has been accounted for as a
purchase. The total purchase price was $42.7 million, net of cash acquired,
including a cash payment of $18.6 million, repayment of Spec's indebtedness of
$9.2 million, assumption of liabilities aggregating $14.0 million and
acquisition costs of $0.9 million. The excess of the purchase price over the
fair values of the net assets acquired (goodwill) of $9.4 million is being
amortized on a straight-line basis over 20 years.
The following summarized unaudited pro forma financial information assumes the
acquisitions of The Wall and Spec's had occurred as of February 1, 1998 (in
thousands):
Pro forma 52-week
period ended
January 30, 1999
-------------------
Net sales $625,038
========
Net income $15,298
========
Pro forma amounts are based on certain assumptions and estimates,
and do not reflect any benefits from the economies which might have
been achieved from combined operations. The pro forma results do
not necessarily represent results which would have been achieved on
the basis assumed above, nor are they indicative of the results of
future combined operations.
(4) Property, Plant and Equipment
<TABLE>
Property, plant and equipment consists of the following (in thousands):
<S> <C>
Land and buildings $10,189
Leasehold improvements 14,829
Office furniture and fixtures 593
Store furniture and fixtures 23,597
Machinery and equipment 10,873
Remodeling-in-progress 2,406
-------
62,487
Less accumulated depreciation and amortization (12,266)
-------
Total $50,221
=======
</TABLE>
Depreciation of property, plant and equipment is included in the consolidated
statement of operations as follows (in thousands):
Cost of sales $297
=======
Selling, general and administrative expenses $12,380
=======
(5) Intangible Assets
Intangible assets consists of the following (in thousands):
Financing fees $1,716
Trade name 1,025
Covenant not to compete 100
------
2,841
Less accumulated amortization (1,410)
------
Total $1,431
======
(6) Accrued Expenses and Other Liabilities
<TABLE>
Accrued expenses and other liabilities consists of the following (in
thousands:)
<CAPTION>
<S> <C>
Payroll and related costs $10,036
Taxes other than income 4,735
Gift certificate liability 7,575
Income taxes 17,810
Customer product guarantee program 596
Customer loyalty program liability 876
Reorganization liabilities (see Notes 10 and 13) 1,767
Other 5,058
-------
Total $48,453
=======
</TABLE>
(7) Financing Arrangements
Effective June 12, 1998, the Company revised its Revolving Credit Agreement.
The amended facility provides for working capital loans of up to $50 million
during the peak period (October through December) and up to $35 million during
the non-peak period (including in each case up to $5,000 of letters of
credit). In no case can the amount of loans exceed the borrowing base, which
is 60% of eligible inventory. The Company had no borrowings under the working
capital portion of the facility as of January 30, 1999 and had $35 million of
availability at January 30, 1999. The amended Revolving Credit Agreement also
provided the ability to obtain a $25 million term loan to finance the Spec's
acquisition. The term loan (drawn against effective July 29, 1998), which
bears the same interest rate terms as the working capital portion of the
Revolving Credit Agreement, requires future mandatory repayments of $2 million
in fiscal 1999, $10 million in fiscal 2000, and $10 million in fiscal 2001. A
fee of $125 thousand was paid to modify the Revolving Credit Agreement. The
facility terminates on January 27, 2002. The Company's borrowings under the
Agreement are collateralized by substantially all of its assets. The Company
has pledged to the lenders its capital stock and the capital stock of its
subsidiaries.
Loans bear interest, at the option of the Company, at either (a) the
Eurodollar Rate (as defined) plus 1.75% or (b) the greater of (i) the bank's
Prime Rate, (ii) the Base CD Rate (as defined) plus 1%, or (iii) the Federal
Funds Effective Rate (as defined) plus 3/8 of 1%. The weighted-average
interest rates related to the working capital and term loan portions of the
Revolving Credit Agreement were 8.09% and 7.62%, respectively, for the 52-week
period ended January 30, 1999. The Company also pays an annual commitment fee
of 3/8 of 1% on the available working capital commitment. The Company is
required to use any excess proceeds from asset sales of more than $750
thousand to reduce the commitments under the working capital facility. In
addition, the Company is required for 45 consecutive days during each year to
reduce the principal amount of all outstanding working capital loans to zero.
The Revolving Credit Agreement contains certain customary negative covenants
which, under certain circumstances, limit the Company's ability to incur
additional indebtedness, pay dividends, make capital expenditures and engage
in certain extraordinary corporate transactions. The Revolving Credit
Agreement also requires the Company to maintain minimum consolidated EBITDA
(as defined) levels. The Company was in compliance with these covenants at
January 30, 1999.
Interest expense on long-term debt amounted to $974 thousand for the 52-week
period ended January 30, 1999. There were no interest charges capitalized
during the period.
(8) Common Stock
At January 30, 1999, an aggregate of 945,594 shares of common stock, were
reserved for future exercise of stock options under the 1998 Stock Option Plan
and the Outside Director's Stock Option Plan (see Note 9).
(9) Stock Option Plans and Purchase Agreement
The Camelot Music Holdings, Inc. 1998 Stock Option Plan (the "Stock Option
Plan") provides for the granting of either incentive stock options or
nonqualified stock options to purchase shares of the Company's common stock to
officers and key employees responsible for the direction and management of the
Company. Vesting of the options was originally over a four-year period with a
maximum term of ten years. Based on the terms of the Stock Option Plan,
vesting has been accelerated based on the market performance of the Company's
common stock whereby 50% of the options vested on March 13, 1998. The
remaining 50% vested on January 30, 1999 in connection with the merger
discussed in Note 17. At January 30, 1999, 820,594 shares of common stock
were reserved for future issuance under the Stock Option Plan based on a
requirement that 7.5% of total outstanding shares on a diluted basis be
reserved for the Stock Option Plan. The Company recognized $5.1 million in
compensation expense during the 52-week period ended January 30, 1999, related
to the January 27, 1998 stock option grant of 687,000 shares, based on the
grant price of $20.75 being below the market price of $28.19 at date of grant
and due to the accelerated vesting. On September 1, 1998, the Company granted
17,500 options under the Stock Option Plan. Per the provisions of the Stock
Option Plan, these options were granted at the averages of the closing bid and
ask prices on the over-the-counter market on the date of grant; therefore, no
compensation expense was recognized.
On June 4, 1998, the Company established the Outside Director's Stock Option
Plan (the "Directors Plan"). Eligible participants include all non-employee
directors. Options granted under the Directors Plan have a three-year vesting
schedule, except for the initial grant of 12,500 options made on June 4, 1998,
which vested immediately. The Company recognized $234 thousand in
compensation expense based on the market value of the stock on the date of
grant in June 1998 in connection with the initial grant of stock options under
the Directors Plan. A total of 125,000 shares were reserved for future
issuance under the Directors Plan.
At January 30, 1999, 708,000 options under the Stock Option Plan were
exercisable. Information relating to stock options is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Optioned Exercise
Shares Price
--------- --------
<S> <C> <C>
Shares under option at January 31, 1998 687,000 $20.75
Granted 30,000 24.10
Exercised (4,500) 20.75
Forfeited (4,500) 20.75
------- -----
Shares under option at January 30, 1999 708,000 $20.89
======= =====
</TABLE>
All outstanding options are exercisable at January 30, 1999.
A summary of outstanding stock options by exercise price as of January 30,
1999 is as follows:
Weighted Weighted-Average
Number of Average Remaining
Optioned Exercise Contractual
Shares Price Life (Years)
------- ----- ------------
690,500 $20.75 9.0
17,500 26.50 9.6
------- ------ ---
708,000 $20.89 9.0
======= ====== ===
Pro forma information regarding net income and net income per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions:
Risk-free interest rate 5.15%
Dividend yield 0%
Volatility factor 70%
Weighted average expected life 3.98 years
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.
The Company's pro forma net income (in thousands) and net income per share for
the 52-week period ended January 30, 1999 were as follows:
Net earnings - as reported $20,398
Net earnings - pro forma $15,974
Basic earnings per share $1.57
Diluted earnings per share $1.54
(10) Special Items
Special items consist of the following (in thousands):
Expenses related to a filing of a
registration statement with the Securities
and Exchange Commission $ 928
Write-down of long-lived assets 2,029
Legal fees relating to an open
reorganization claim 2,500
------
Total $5,457
======
Expenses Related to a Filing of a Registration Statement with the Securities
and Exchange Commission: During the 52-week period ended January 30, 1999,
the Company announced its intention to register with the Securities and
Exchange Commission for an initial public offering of its common stock. The
intention to register was withdrawn when the Company entered into a definitive
agreement to merge with Trans World Entertainment Corporation (see Note 17).
All costs related to the filing of the initial public offering registration
have been charged to expense in the consolidated statement of operations.
Legal Fees Relating to an Open Reorganization Claim: The Company is involved
with a pre- bankruptcy petition assessment by the Internal Revenue Service
(see Note 13).
Write Down of Long-Lived Assets: The Company develops an operating plan for
each store on an annual basis, at which time it reviews each store's
long-lived assets for impairment based upon estimated future cash flows.
During the 52-week period ended January 30, 1999, the Company recorded an
impairment loss of $0.7 million to write-down the carrying amount of property,
plant and equipment at stores, primarily leasehold improvements and immovable
fixtures, where the estimated future cash flows through the end of the store's
lease were less than the carrying amount of that store's property, plant and
equipment. The Company also wrote off the $1.3 million remaining net book
value of its older point-of-sale ("POS") hardware and software because of the
Company's decision in August 1998 to install a new POS system.
(11) Leases
The Company leases its retail stores under noncancelable leases expiring in
various years through fiscal 2009. Several of the leases are subject to
renewal options under various terms and generally all of the leases require
the Company to pay real estate taxes and common area maintenance charges.
Minimum rental commitments are summarized as follows (in thousands):
1999 $42,903
2000 40,629
2001 36,430
2002 30,987
2003 25,861
Thereafter 43,249
--------
Total minimum payments $220,059
========
Rental expense totaled $45.4 million for the 52-week period ended January 30,
1999. Rental expense included contingent rentals of $2.6 million. The
contingent rentals are based on sales volume in excess of specified minimums.
(12) Income Taxes
The provision for income taxes includes current and deferred income taxes as
follows (in thousands):
Current taxes:
Federal $16,521
State and local 3,906
-------
Total 20,427
-------
Deferred taxes:
Federal 1,907
State and local (426)
-------
Total 1,481
-------
Total provision $21,908
=======
The significant differences between the Federal U.S. statutory rate and the
Company's effective tax rate are as follows:
Statutory tax rate 35.0%
Unearned compensation - stock option plan 4.8
State taxes, net of federal benefit 5.3
Plan of reorganization adjustments 5.7
Other adjustments, net 1.0
----
Effective tax rate 51.8%
====
<TABLE>
<CAPTION>
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<S> <C>
Net current deferred income tax assets:
Inventory reserves $3,405
Accrued compensation 2,304
Accrued rent 327
Other, net 187
------
6,223
------
Net long-term deferred income tax assets:
Depreciation differences 17,028
Net federal and state operating loss carryforwards 4,421
Accruals 2,362
Goodwill acquired (2,657)
Lease values 1,809
Other, net 452
------
23,415
------
Net deferred tax assets on the
consolidated balance sheet $29,638
=======
</TABLE>
At January 30, 1999, the Company had gross deferred tax assets of $32.3
million and gross deferred tax liabilities of $2.7 million, respectively.
Included in such amounts, the Company had net operating loss carryforwards of
$10.0 million for Federal income tax purposes and $17.9 million for state
income tax purposes that expire in 2013 and are subject to certain
limitations. In assessing the propriety of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of projected future taxable income over the
periods in which the deferred tax assets are deductible, 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 income during the
carryforward period are reduced.
(13) Commitments and Contingencies:
Claims and Legal Actions: The Company is a party to various claims, legal
actions and complaints arising in the ordinary course of its business,
including proposed pre-petition assessments by the Internal Revenue Service
("IRS") aggregating approximately $7.9 million of which the Company has
accrued $800 thousand based upon management's best estimate of the ultimate
liability. No judgement has been rendered regarding these IRS assessments as
of January 30, 1999. In the event that a judgment is rendered against the
Company in the full amount of the proposed assessment, Camelot's results of
operations would be materially adversely affected with a charges to earnings
of approximately $7.1 million plus interest since January 1998. Such a
judgment, unless paid or bonded for appeal, would be an event of default under
the Company's amended credit facility. In the opinion of management, all
other claims, legal actions and compliants not accrued for are without merit
or involve such amounts that unfavorable disposition will not have a material
impact on the financial position, results of operations or cash flows of the
Company.
Self-Insurance Commitments: The Company is self-insured with respect to
workers' compensation benefits within the State of Ohio and medical benefits
for all of its employees. The Company maintains insurance coverage for
workers' compensation claims in excess of $300 thousand per incident and for
annual medical claims in excess of $75 thousand per employee, and accrues for
estimated claims that have been incurred but not reported.
Other: The Company occasionally enters into standby letters of agreements to
guarantee certain operating activities. These agreements, which expire in
1999, provide credit availability to various beneficiaries if certain
contractual events occur. Amounts outstanding under these agreements total
approximately $200 thousand at January 30, 1999.
(14) Elective Savings and Plan
The Company sponsors the Camelot Music Inc. Elective Savings 401(k) and Profit
Sharing Plan (the "401(k) Plan"). The 401(k) Plan covers substantially all
employees and provides for a 15% to 50% matching contribution of employee
elective contributions up to a maximum of 15% of wages, not to exceed the
statutory limit. Such matching contributions were approximately $503 thousand
for the 52-week period ended January 30, 1999. The Company may, at the
discretion of the Board of Directors, contribute additional funds to the Plan
as deemed appropriate. No such contributions were made during the period.
(15) Supplemental Disclosures of Cash Flow Information
<TABLE>
<S> <C>
Supplemental disclosures of non-cash investing and
financing activities (in thousands):
Acquisition of The Wall Music, Inc.:
Fair value of assets acquired $86,038
Cash paid 74,737
-------
Liabilities assumed $11,301
=======
Acquisition of Spec's Music, Inc.:
Fair value of assets acquired 43,269
Cash paid (including payment of Spec's debt) 29,219
-------
Liabilities assumed $14,050
=======
Common stock issued in settlement of payable
for professional services $188
Supplemental disclosures of cash flow
information (in thousands):
Cash paid during the fiscal year for:
Interest $1,615
Income taxes paid 3,098
</TABLE>
(16) Quarterly Financial Information (Unaudited)
<TABLE>
13-Week Period Ended
-------------------------------------------
Total 1/30/99 10/31/98 8/1/98 5/2/98
------- -------- -------- ------ ------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Sales $583,916 229,924 127,308 120,363 106,321
Gross profit 222,011 95,472 46,234 42,349 37,956
Net income 20,398 20,499 (568) 917 (450)
Basic earnings per share $2.00 $2.01 $(0.06) $0.09 $(0.04)
Diluted earnings per share $1.97 $1.98 $(0.06) $0.09 $(0.04)
</TABLE>
(17) Subsequent Events
On April 22, 1999, the Company merged with Trans World Entertainment
Corporation ("Trans World") a specialty retailer of music, video and related
accessories which operates over 500 retail locations in 33 states, the
District of Columbia and the U.S. Virgin Islands, in a stock-for-stock
transaction accounted for as a pooling-of-interests. Upon completion of the
merger, Camelot became a wholly owned subsidiary of Trans World.
In the merger, each share of Camelot's common stock was converted into 1.9
shares of Trans World's common stock. Each Camelot stock option outstanding
immediately prior to the completion of the merger was converted into 1.9 fully
vested and exercisable options to acquire one share of Trans World's common
stock. The exercise prices of these options was adjusted accordingly for the
1.9 for 1 conversion ratio. As a result, Trans World issued approximately
19.4 million shares of its common stock and 1.3 million options to acquire its
common stock.
In connection with the merger, all of the Company's outstanding notes payable
were repaid.
<PAGE>
(b) Pro Forma Financial Information
TRANS WORLD ENTERTAINMENT CORPORATION AND CAMELOT MUSIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The accompanying unaudited pro forma condensed combined financial statements
give retroactive effect to the acquisition of Camelot Music Holdings, Inc.
("Camelot") and include the operations of Trans World for all periods
presented and for Camelot for periods subsequent to its adoption of
"fresh-start reporting" on January 31, 1998. The acquisition has been
accounted for using the pooling-of-interests method of accounting.
The unaudited pro forma condensed combined income statements reflect the
combination of the historical operating results of Trans World for the years
ended January 30, 1999, January 31, 1998 and February 1, 1997. The historical
results of Camelot for the fifty-two week period ended January 30, 1999 are
included. Financial data for Camelot for periods prior to the adoption of
"fresh-start reporting" on January 31, 1998 is not included in the pro forma
information because an entity adopting "fresh-start reporting" is analogous to
a newly incorporated enterprise for financial reporting purposes.
Accordingly, for pro forma purposes, Camelot did not exist prior to January
31, 1998. The unaudited pro forma condensed combined balance sheet reflects
the combination of the historical balance sheets of Trans World and Camelot at
January 30, 1999.
For all applicable periods in the unaudited pro forma condensed combined
income statements, shares used in the computation of basic and diluted
earnings per share assume an exchange ratio of 1.9 Trans World shares for each
Camelot share. Outstanding shares for Camelot for periods prior to Camelot's
adoption of "fresh start reporting" on January 31, 1998 were not used in the
computations.
The unaudited pro forma condensed combined financial statements are not
necessarily indicative of the results of operations or the financial position
of the combined companies that actually would have occurred had the merger
been consummated on the dates indicated or that may be obtained in the future.
These unaudited pro forma condensed combined financial statements should be
read in conjunction with the related historical financial statements of Trans
World included in its annual report on Form 10-K for the year ended January
30, 1999 and the historical financial statements of Camelot included in this
Form 8-K/A.
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND CAMELOT MUSIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JANUARY 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
--------------------
Trans Pro Forma
World Camelot Adjustments Combined
-------- --------- ------------ ----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $116,420 $22,991 --- $139,411
Merchandise inventory 211,378 214,700 --- 426,078
Deferred tax asset --- 6,223 (5,590)(1) 633
Prepaid expenses and other 8,396 6,786 15,182
-------- ------- ------- --------
Total current assets 336,194 250,700 (5,590) 581,304
-------- ------- ------- --------
VIDEO CASSETTE RENTAL
INVENTORY, net 1,238 --- 1,238
PROPERTY, PLANT AND
EQUIPMENT, net 88,903 50,221 139,124
INTANGIBLE ASSETS, net --- 1,431 1,431
GOODWILL 622 32,404 33,026
DEFERRED INCOME TAXES 6,165 23,415 29,580
OTHER ASSETS 2,564 10,343 12,907
--------- -------- ------- --------
TOTAL ASSETS $435,686 $368,514 $(5,590) $798,610
======== ======== ======= ========
</TABLE>
See accompanying notes to the unaudited pro forma condensed combined financial
statements
(continued)
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND CAMELOT MUSIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET, Continued
JANUARY 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
--------------------
Trans Pro Forma
World Camelot Adjustments Combined
-------- --------- ------------ ----------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $159,520 $ 61,116 $220,636
Income taxes payable 12,734 --- 12,734
Accrued expenses and other 20,144 48,453 68,597
Deferred taxes 5,590 --- (5,590)(1) ---
Current portion of long-term
debt and capitalized leases 2,802 2,000 4,802
-------- -------- ------- -------
Total current liabilities 200,790 111,569 (5,590) 306,769
-------- -------- ------- -------
LONG-TERM DEBT, less
current portion --- 20,000 20,000
CAPITAL LEASE OBLIGATIONS, less
current portion 16,065 --- 16,065
OTHER LIABILITIES 6,848 16,552 23,400
-------- ------- ------ -------
TOTAL LIABILITIES 223,703 148,121 (5,590) 366,234
-------- ------- ------ -------
SHAREHOLDERS' EQUITY
Preferred stock --- --- ---
Common stock 328 102 92 (2) 522
Additional paid in capital 72,004 199,893 (92)(2) 271,805
Unearned compensation
- restricted stock (78) --- (78)
Treasury stock at cost (390) --- (390)
Retained earnings 140,119 20,398 160,517
-------- ------- -------- -------
Total shareholders' equity 211,983 220,393 --- 432,376
-------- ------- -------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $435,686 $368,514 $ (5,590) $798,610
======== ======== ======== ========
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
</TABLE>
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND CAMELOT MUSIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JANUARY 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
--------------------
Trans Pro Forma
World Camelot Adjustments Combined
-------- --------- ------------- -----------
<S> <C> <C> <C> <C>
Sales $698,469 $583,916 $1,282,385
Cost of sales 434,406 361,905 796,311
-------- -------- -------- ----------
Gross profit 264,063 222,011 --- 486,074
Selling, general
& administrative expenses 196,437 173,021 3,428(3) 372,886
Special items --- 5,457 (3,428)(3) ---
(2,029)(4)
Restructuring charge reversal
and impairment charges, net (492) --- 2,029(4) 1,537
-------- ------- -------- ----------
Income from operations 68,118 43,533 --- 111,651
Interest expense 2,949 2,040 4,989
Other expense (income), net (1,408) (813) (2,221)
-------- ------- -------- ----------
Income before income taxes 66,577 42,306 --- 108,883
Income tax expense 25,965 21,908 47,873
-------- ------- -------- ----------
NET INCOME $40,612 $20,398 $ --- $61,010
======== ======= ======== ==========
Earnings per common share:
Basic $1.28 $2.00 --- $1.19
Diluted $1.20 $1.97 --- $1.14
Weighted average common shares
outstanding:
Basic 31,779 10,178 --- 51,117
Diluted 33,737 10,342 --- 53,387
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
</TABLE>
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND CAMELOT MUSIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
--------------------
Trans Pro Forma
World Camelot Adjustments Combined
-------- --------- ------------- -----------
<S> <C> <C> <C> <C>
Sales $571,314 $571,314
Cost of sales 361,422 361,422
-------- --------- ----------- --------
Gross profit 209,892 --- --- 209,892
Selling, general
& administrative expenses 170,834 170,834
-------- --------- ----------- --------
Income from operations 39,058 --- --- 39,058
Interest expense 5,148 5,148
Other expense (income), net (153) (153)
--------- -------- ----------- --------
Income before income taxes 34,063 --- --- 34,063
Income tax expense 13,489 13,489
--------- -------- ----------- --------
NET INCOME $20,574 --- --- $20,574
========= ======== =========== ========
Earnings per common share
Basic $0.70 --- --- $0.70
Diluted $0.66 --- --- $0.66
Weighted average common
shares outstanding
Basic 29,483 --- --- 29,483
Diluted 31,032 --- --- 31,032
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
</TABLE>
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND CAMELOT MUSIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
--------------------
Trans Pro Forma
World Camelot Adjustments Combined
-------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Sales $481,657 $481,657
Cost of sales 308,952 308,952
-------- --------- ----------- --------
Gross profit 172,705 --- --- 172,705
Selling, general
& administrative expenses 150,218 150,218
-------- --------- ----------- --------
Income from operations 22,487 --- --- 22,487
Interest expense 12,110 12,110
Other expense (income), net (1,343) (1,343)
-------- --------- ----------- -------
Income before income taxes 11,720 --- --- 11,720
Income tax expense 4,618 4,618
-------- --------- ----------- -------
NET INCOME $7,102 --- --- $7,102
======== ========= =========== =======
Earnings per common share:
Basic $0.24 --- --- $0.24
Diluted $0.24 --- --- $0.24
Weighted average common
shares outstanding:
Basic 29,271 --- --- 29,271
Diluted 29,697 --- --- 29,697
See accompanying notes to the unaudited pro forma condensed combined financial
statements.
</TABLE>
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND CAMELOT MUSIC HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
Note A - Basis of Presentation
For accounting purposes, the merger has been accounted for as a pooling of
interests. Accordingly, the accompanying unaudited pro forma condensed
combined financial statements give retroactive effect to the merger and include
the operations of Trans World for all periods presented and Camelot for the
fifty-two week period ended January 30, 1999. Trans World's and Camelot's
fiscal year ended January 30, 1999 and Trans World's fiscal year ended January
31, 1998 and February 1, 1997 consisted of 52 weeks.
On January 27, 1998, Camelot's plan of reorganization under Chapter 11 of the
U.S. Bankruptcy Code became effective. In accordance with Statement of
Position 90-7 issued by the American Institute of Certified Public Accountants,
Camelot adopted "fresh-start reporting" effective as of January 31, 1998
whereby the reorganization value of Camelot's predecessor company, CM Holdings,
Inc., was allocated to Camelot's assets on the basis of the purchase method of
accounting.
Note B - Pro Forma Adjustments
(1) To reclassify the $5,590 deferred tax liability of Trans World to net
against the larger deferred tax asset of Camelot.
(2) To reclassify $0.01 per share from additional paid-in capital to common
stock for the issuance of 1.9 shares of Trans World common stock (19,344
shares) for each share of Camelot common stock outstanding at January 30, 1999
(10,181 shares), resulting in a net pro forma adjustment of $92 (the difference
of 19,344 shares minus 10,181 shares multiplied by $0.01 par value) from
additional paid-in capital to common stock. Outstanding options to acquire
Camelot common stock have not been considered in the computation of this
reclassification because they will be exchanged for options to acquire Trans
World common stock.
(3) To reclassify $3,428 from special items to S,G&A for fees related to
Camelot's filing of a registration statement with the Securities and Exchange
Commission ($928) and Camelot's legal fees related to an open reorganization
claim ($2,500).
(4) To reclassify $2,029 from special items to restructuring charge reversal
and impairment charge, net, for Camelot's asset impairment charge recorded in
accordance with No. SFAS 121.
Note C - Acquisitions
Effective February 28, 1998, Camelot acquired certain assets and assumed
certain liabilities and operating lease commitments of The Wall Music, Inc.
("The Wall") pursuant to an Asset Purchase Agreement dated December 10, 1997.
The purchase price of The Wall was $74.6 million, net of cash acquired,
(including approximately $2.3 million of acquisition costs) and was paid in
cash. The acquisition has been accounted for as a purchase, with the excess of
the purchase price over the fair values of the net assets acquired (goodwill)
of $24.7 million being amortized on a straight-line basis over 20 years.
Effective July 29, 1998, Camelot acquired all of the outstanding common stock
of Spec's Music, Inc. ("Spec's") under the terms of an Agreement and Plan of
Merger dated June 3, 1998. The Spec's acquisition has been accounted for as a
purchase. The total purchase price was $43.0 million, net of cash acquired,
including a cash payment of $18.6 million, repayment of Spec's indebtedness of
$9.2 million, assumption of liabilities aggregating $14.3 million and
acquisition costs of $0.9 million. The excess of the purchase price over the
fair values of the net assets acquired (goodwill) of $9.4 million is being
amortized on a straight-line basis over 20 years.
The following summarized pro forma financial information assumes the
acquisitions of The Wall and Spec's had occurred as of February 1, 1998 (in
thousands):
Pro forma fiscal
year ended
January 30, 1999
-------------------
Net sales $1,323,507
==========
Net income $55,910
=======
The pro forma amounts are based on certain assumptions and estimates, and do
not reflect any benefits from the economies which might have been achieved
from combined operations. The pro forma results do not necessarily represent
results which would have been achieved on the basis assumed above, nor are
they indicative of the results of future combined operations.
Note D - Transaction Costs and Expenses
Transaction costs and expenses of $2,171 incurred through January 30, 1999
have been deferred, and are not included in the historical income statements
presented. These costs, which are expected to total $25,700 ($19,900 net of
related tax benefit), were expensed upon consummation of the merger on April
22, 1999. Estimated transaction costs include financial advisory fees and
expenses ($5,500), professional fees and expenses ($4,000), printing, mailing
and other costs ($2,100), write-down of redundant assets ($8,000), systems
integration costs ($1,800) and compensation expense incurred as a result of
the acceleration of vesting of severence benefits ($4,300)in connection with
the merger, Camelot has established an employee retention program for nine of
its executive officers and approximately 175 of its other employees. Payment
of funds to participants is conditioned upon continued employment through the
period set forth for each participant in the the program. The estimated cost
associated with the employee retention program ($2,900) is not included in
this reclassification. It will be accrued over the retention period from the
closing date until termination.
<PAGE>
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
We consent to the inclusion in Form 8-K/A of Trans World Entertainment
Corporation dated as of April 22, 1999 of our report dated April 21, 1999,
except as to note 17, which is as of April 22, 1999, relating to the
consolidated balance sheets of Camelot Music Holdings, Inc. and subsidiaries as
of January 30, 1999, and the related consolidated statements of income,
shareholders' equity, and cash flows for the fifty-two week period then ended.
/s/ KPMG LLP
Albany, New York
May 11, 1999
