<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] FOR THE FISCAL YEAR ENDED JANUARY 31, 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
38 Corporate Circle
Albany, New York 12203
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(Address of principal executive offices, including zip code)
(518) 452-1242
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(Registrant's telephone number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's Knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or an
amendment to this Form 10-K. [ ]
As of March 26, 1998, 19,816,143 shares of the Registrant's Common Stock,
excluding 70,788 shares of stock held in Treasury, were issued and outstanding.
The aggregate market value of such shares held by non-affiliates of the
Registrant, based upon the closing sale price of $28.75 on the Nasdaq National
Market on March 26, 1998, was approximately $272,900,000. Shares of Common Stock
held by the Company's controlling shareholder, who controls approximately 52.1%
of the outstanding Common Stock, have been excluded for purposes of this
computation. Because of such shareholder's control, shares owned by other
officers, directors and 5% shareholders have not been excluded from the
computation.
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INTRODUCTORY NOTE: Trans World Entertainment Corporation is amending this
Form 10-K to reflect a restatement for changes made to its fiscal year ended
February 3, 1996 financial statements (see note 12 on page 38) and to provide
revised disclosures made in connection with its Form S-4 filing on March 30,
1999.
PART I
Item 1. BUSINESS
General
Trans World Entertainment Corporation (which, together with its consolidated
subsidiaries, is referred to herein as the "Company") was incorporated in New
York in 1972. Trans World Entertainment Corporation owns 100% of the outstanding
common stock of Record Town, Inc., through which the Company's principal retail
operations are conducted.
The Company operates a chain of retail entertainment stores in a single industry
segment. Sales were $571.3 million during the fiscal year ended January 31, 1998
(referred to herein as "1997"). The Company is one of the largest specialty
retailers of compact discs, prerecorded audio cassettes, prerecorded
videocassettes and related accessories in the United States. At January 31,
1998, the Company operated 539 stores totaling about 2.4 million square feet in
34 states, the District of Columbia and the Virgin Islands, with the majority of
the stores concentrated in the Eastern half of the United States. The Company's
business is highly seasonal in nature, with the peak selling period being the
Christmas holiday in the fourth fiscal quarter.
In October 1997, the Company acquired 90 out of a total of 118 stores owned by
Strawberries, Inc., a privately held non-mall music specialty retailer
operating primarily in New England. The stores operate under the names
"Strawberries" and "Waxie Maxie" and are primarily located in freestanding
and strip center locations.
On December 15, 1997 the Company split its common stock two-for-one in the form
of a 100% stock dividend. The total shares issued at January 31, 1998 were
19,815,357 compared to a total of 19,619,188 at February 1, 1997, on a split
adjusted basis. All references throughout this report to number of shares, per
share amounts, stock option data and market prices of the Company's common stock
have been restated to reflect the stock split.
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The Company closed 78 stores in 1997 and a total of 342 since the fourth
quarter of 1994 as part of two restructuring plans announced in the fourth
quarter of 1994 and the fourth quarter of 1995. The Company expects the
restructuring to be completed during 1998. A total of 62 stores are forecast
to close in 1998; however, only 49 closings are associated with the
restructuring. The remaining 13 stores will be closed or relocated as part of
the Company's ongoing business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital
Resources."
The Company's central distribution facility currently serves all of its retail
stores with weekly shipments to each store providing for approximately 78% of
their retail product requirements. The balance of the stores' requirements are
satisfied through direct shipments from manufacturers or redistribution from
other Company-operated stores.
The Company's principal executive offices are located at 38 Corporate Circle,
Albany, New York, 12203, and its telephone number is (518) 452-1242.
Store Concepts
The Company's strategy is to offer customers a broad selection of music and
video titles at competitive prices in convenient, attractive stores. The Company
has developed a number of distinct store concepts to take advantage of real
estate opportunities and to satisfy varying consumer demands.
Mall Stores
The Company's mall stores include five concepts, all of which have been designed
to offer consumers a fun and exciting shopping experience. In the mall stores,
the Company puts an emphasis on a strong in-store presentation message, broad
product selection and competitive pricing to attract the casual impulse buyer.
Full-Line Music Stores. The Company's full-line mall stores are located in
large, regional shopping malls and are generally named Record Town. There were
178 such stores at January 31, 1998. This store concept utilizes an average
space of approximately 3,300 square feet with, certain stores ranging in excess
of 7,000 square feet depending on the availability of preferred space and the
expected volume of the store.
Saturday Matinee Stores. These stores are dedicated to the sale of pre-recorded
video products. These stores are located in large, regional shopping malls and
average 2,200 square feet in size. There were 44 such locations in operation at
January 31, 1998. The Company's strategy is to combine this store with a Record
Town in its combination store concept whenever possible.
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Combination Stores. At January 31, 1998, the company operated 79 combination
Record Town/Saturday Matinee stores. The combination store concept occupies an
average of 7,300 square feet. These stores share common storefronts and offer
the consumer an exciting combination of music and video products in one store
location. The Company believes that the combination of the two concepts creates
a marketing synergy by attracting different target customers.
For Your Entertainment Stores. At January 31, 1998, the Company operated five
F.Y.E. stores. These stores combine a broad assortment of music and video
products with a game arcade and an extensive selection of games, portable
electronics, accessories and boutique items. This format is designed to be a
semi-anchor or destination retailer in major regional malls. The prototype
F.Y.E. store is 25,000 square feet.
Specialty Music Stores. The specialty music concept is also located in large,
regional shopping malls, but contrasts with full-line music stores in that they
carry a less diverse product selection. These stores, 34 of which were in
operation at January 31, 1998, are generally operated under the name Tape World.
The specialty mall stores operate in approximately 1,300 square feet. The
Company's strategy is to reposition and expand these stores into Record Town
stores or combination stores as opportunities become available.
Non-Mall Stores
The Company's non-mall concept accounted for 199 stores in operation at January
31, 1998, which primarily operate under the names Coconuts and Strawberries.
These stores are designed for freestanding, strip center and downtown locations
in areas of high population density. The majority of the non-mall stores range
in size from 3,000 to 8,000 square feet. Non-mall stores carry an extensive
product assortment and have an emphasis on competitive pricing. The Company's
non-mall stores include 22 video rental stores. These stores operate under the
tradename "Movies Plus" and average approximately 5,300 square feet.
On October 27, 1997, the Company acquired "Planet Music," a 31,000 square foot,
freestanding superstore in Virginia Beach, VA. The store operates in a strip
center and offers an extensive catalog of predominantly music. The store also
has a video department and sells other non-music related products, similar to
what would be carried in a large Coconuts store. The acquisition also includes
the rights to the "Planet Music" name and trademark, which offers the Company
potential expansion opportunities.
Products
The Company's stores offer a full assortment of compact discs, prerecorded audio
cassettes, prerecorded video (including DVD) and related accessories.
Sales by category as a percent of total sales over the past three years were as
follows:
<TABLE>
<CAPTION>
January 31, February 1, February 3,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Compact discs 55.5% 50.1% 49.2%
Prerecorded audio cassettes 18.9 22.2 25.5
Prerecorded video 16.3 18.6 16.7
Other 9.3 9.1 8.6
----------- ------------ ----------
TOTAL 100.0% 100.0% 100.0%
=========== ============ ==========
</TABLE>
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Pre-recorded Music. The Company's music stores offer a full assortment of
compact discs and prerecorded audio cassettes purchased primarily from six major
manufacturers. Music categories include rock, pop, rap, soundtracks,
alternative, Latin, urban, heavy metal, country, dance, vocals, jazz and
classical. Merchandise inventory is generally classified for inventory
management purposes in three groups: "hits", which are the best selling new
releases, "fast moving" titles, which generally constitute the top 1,000 titles
with the highest rate of sale in any given month, and "catalog" items that
customers purchase to build their collections.
Video Products. The Company offers pre-recorded videocassettes for sale in a
majority of its stores. DVD, a new video technology, was introduced to the
retail consumer in 1997. DVD offers a quality that exceeds both the current VHS
and CD formats and also offers the consumer more storage than the current CD.
The Company believes that the DVD player will replace the sales of laser disc
players and VCRs as the new technology becomes more accessible. The Company is
anticipating the increased availability of DVD players and plans to capitalize
on this technology by making software increasingly available as this technology
becomes more widely accepted by the consumer. DVD sales were less than 1% of the
Company's retail sales in 1997.
Other Products. The Company stocks and promotes brand name blank audio cassette
and videocassette tapes as well as accessory products for compact discs, audio
cassettes and videocassettes. These accessories include maintenance and cleaning
products, portable electronics, storage cases, headphones and video games.
Advertising
The Company makes extensive use of in-store advertising circulars and signs and
also pursues a mass-media marketing program for its freestanding stores through
advertisements in newspapers, radio, and television. Most of the vendors from
whom the Company purchases merchandise offer their customers advertising
allowances to promote their products.
Industry and Competitive Environment
According to industry sources, the U.S. retail market for music and video
products was approximately $20 billion in 1996. Prerecorded music amounted to
$12.5 billion of that total, and this segment of the market has grown at an
annual rate of 9.5% over the past 15 years. Fueled in part by this growth, in
the early 1990's, music retailers began aggressive expansion programs which grew
total square footage at a rate that outpaced consumer demand, resulting in an
overcapacity of selling space in the U.S. Furthermore, new music retailing
entrants, including mass merchants (e.g. Wal-Mart, K-Mart, Target) and consumer
electronics stores (e.g. Best Buy, Circuit City) promoted aggressive loss-leader
pricing strategies in an effort to increase store traffic. The additional
retailing square footage and the loss-leader
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pricing strategy forced music specialty retailers to reduce prices, resulting in
decreased sales and gross margins of music specialty retailers. As a result,
many music specialty retailers experienced financial difficulties which lead to
corporate restructurings and bankruptcies. During 1996, many of the major music
vendors began to enforce programs such as the Minimum Advertised Pricing ("MAP")
program to eliminate loss-leader pricing strategies. These programs penalize
sellers that fail to comply with vendor pricing programs by limiting advertising
support. The enforcement of the MAP program has been successful in stabilizing
prices in the industry. Non-traditional music retailers have since reduced their
music and video selections and maintained less aggressive pricing policies.
Seasonality
The Company's business is highly seasonal. The fourth quarter constitutes the
Company's peak selling period. In 1997, the fourth quarter accounted for
approximately 42% of annual sales and substantially all of net income. In
anticipation of increased sales activity during these months, the Company
purchases substantial amounts of inventory and hires a significant number of
temporary employees to bolster its permanent store staff. If for any reason the
Company's net sales were below seasonal norms during the fourth quarter,
including as a result of merchandise delivery delays due to receiving or
distribution problems, the Company's operating results, particularly operating
and net income, could be adversely affected. The fourth quarter percentage of
annual sales in 1997 was higher than normal due to the Strawberries acquisition
in October 1997. Quarterly results are affected by timing and strength of new
releases, the timing of holidays, new store openings and sales performance of
existing stores.
Distribution and Merchandise Operations
The Company's distribution facility uses certain automated and computerized
systems designed to manage product receipt, storage and shipment. Store
inventories of regular product are replenished in response to detailed product
sale information that is transmitted to the central computer system from each
store after the close of the business day. Shipments from the facility to each
of the Company's stores are made at least once a week and currently provide
the Company's stores with approximately 78% of their product requirements. The
balance of the stores' requirements are satisfied through direct shipments
from manufacturers or redistribution from other sources.
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Company-owned trucks service approximately 36% of the Company's stores; the
balance is serviced by several common carriers chosen on the basis of geographic
and rate considerations. No contractual arrangements exist between the Company
and any common carriers. The Company's sales volume and centralized product
distribution facility enable it to take advantage of transportation economies.
The Company believes that the existing distribution center is adequate to meet
the Company's planned business needs, and additional improvements will be
completed primarily for operational efficiency.
Suppliers and Purchasing
The Company purchases inventory for its stores from approximately 450 suppliers.
Approximately 68% of purchases in 1997 were made from the six largest suppliers:
WEA (Warner/Electra/Atlantic Corp)., Sony Music, PolyGram Distribution,
Universal Distribution, BMG (Bertelsmann Music Group) and EMD (EMI Music
Distribution). As is typical in this industry, the Company has no material
long-term purchase contracts and deals with its suppliers principally on an
order-by-order basis. In the past, the Company has not experienced difficulty
in obtaining satisfactory sources of supply, and management believes that it
will retain access to adequate sources of supply. The Company also expects to
continue to pass on to customers any price increases imposed by the suppliers
of prerecorded music and videocassettes.
The Company produces store fixtures for all of its new stores and store remodels
in its manufacturing facility located in Johnstown, New York. The Company
believes that the costs of production are lower than purchasing from an outside
manufacturer.
Trade Customs and Practices
Under current trade practices, retailers of pre-recorded compact discs and audio
cassettes are entitled to return products they have purchased from major vendors
for other titles carried by these vendors; however, the returns are subject to
merchandise return penalties. This industry practice permits the Company to
carry a wider selection of music titles and at the same time reduce the risk of
obsolete inventory. Most manufacturers and distributors of pre-recorded
videocassettes offer return privileges comparable to those with pre-recorded
music, but with no merchandise return penalties. Video rental products are not
eligible for return to the manufacturers. The merchandise return policies have
not changed significantly during the past five years, but any future changes in
these policies could impair the value of the Company's inventory. The Company
generally has adapted its purchasing policies to changes in the policies of its
suppliers.
Employees
As of January 31, 1998, the Company employed approximately 6,100 people, of whom
850 were employed on a full-time salaried basis, 1,700 were employed on a
full-time hourly basis, and the remainder were employed on a part-time hourly
basis. The Company hires temporary sales associates during peak seasons to
assure continued levels of customer service. Store managers report to district
managers, each of who, inturn, reports to a
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regional manager. In addition to their salaries, store managers, district
managers and regional managers have the potential to receive incentive
compensation based on profitability. None of the Company's employees are covered
by collective bargaining agreements, and management believes that the Company
enjoys favorable relations with its employees.
Retail Information Systems
All store sales data and product purchasing information is collected centrally
utilizing the IBM AS/400 midrange configuration. The Company's information
systems manage a database of over 150,000 active SKUs in pre-recorded music,
video and accessory products. The system processes inventory, accounting,
payroll, telecommunications and other operating information for all of the
Company's operations. The Company has piloted a new point-of-sale system that
will be rolled out chain wide during the summer of 1998. This new system is
expected to improve customer service while increasing the accuracy of perpetual
inventories at the store level. See discussion on Year 2000 compliance in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Item 2. PROPERTIES
Retail Stores
At January 31, 1998, the Company operated 539 retail outlets. The Company owns
one real estate site, which it formerly operated as a retail outlet and
currently leases to an unrelated party. All of the Company's retail stores are
under operating leases with various terms and options. Substantially all of its
stores provide for payment of fixed monthly rentals, a percentage of the gross
receipts of the store in excess of specified sales levels, and operating
expenses for maintenance, property taxes, insurance and utilities. The following
table lists the number of leases due to expire (assuming no renewal options are
exercised) in each of the fiscal years shown, as of January 31, 1998:
Year Leases Year Leases
------ -------- ------ --------
1998 94 2002 58
1999 49 2003 73
2000 77 2004 56
2001 53 2005 & Beyond 79
The Company expects that as these leases expire, it will be able either to
obtain renewal leases, if desired, or to obtain leases for other suitable
locations. Included in the table above are 38 month-to-month leases under
negotiations for renewal; these leases are included as part of leases due to
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expire in 1998. Certain of the stores scheduled to close will do so upon the
expiration of the applicable store lease.
Corporate Offices and Distribution Center Facility
The Company leases its Albany, New York distribution facility and the majority
of the corporate office space from its principal shareholder and Chief Executive
Officer under two capital leases that extend through the year 2015. Both leases
are at fixed rentals with provisions for biennial increases based upon increases
in the Consumer Price Index. Under such leases, the Company pays all property
taxes, insurance and maintenance. The office portion of the facility is
comprised of 21,000 square feet. The distribution center portion is comprised of
approximately 138,000 square feet.
The principal shareholder and Chief Executive Officer is currently constructing
a 20,000 square foot expansion to the existing corporate offices with an
estimated completion date of July 1998. This property will be leased to the
Company under similar terms as the two existing capital leases.
The Company leases an 83,000 square foot facility in Johnstown, NY, where it
manufactures its store fixtures. The seven-year operating lease expires in June
1998. The Company anticipates it will negotiate a new lease.
Item 3. LEGAL PROCEEDINGS
The Company has no material legal proceedings pending against it.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting of shareholders held on November 14, 1997, shareholders
approved an amendment to the Company's Certificate of Incorporation authorizing
up to 50 million shares of common stock. Previously the Company was authorized
to issue up to 20 million shares. Voting results were are follows:
FOR - 7,551,676
AGAINST - 1,081,165
ABSTAIN - 17,076
Supplementary Item - Identification of Executive Officers of the Registrant
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(Pursuant to Instruction 3 to Item 401(b) of Regulation S-K)
The name, age, principal occupation and period of service as an executive
officer of the Company for each executive officer are set forth below.
Robert J. Higgins Age 56
President, Chief Executive Officer,
Chairman of the Board and Director Since 1973
Robert J. Higgins founded the Company in 1972 and has participated in its
operations since 1973. Mr. Higgins has served as President, Chief Executive
Officer and a director of the Company for more than the past five years, and is
the principal shareholder in the Company.
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James A. Litwak Age 44
Executive Vice President
of Merchandising and Marketing Since 1996
James A. Litwak joined the Company in May 1996 as Executive Vice President of
Merchandising and Marketing. Prior to joining the Company, Mr. Litwak served as
Senior Vice President and General Merchandise Manager of DFS Group Limited, an
international operator of in-airport duty free shops. Prior to joining DFS Group
Limited, Mr. Litwak held several executive positions in his fourteen year career
at R.H. Macy's Company with the most recent being President of Merchandising for
Macy's West responsible for developing marketing, merchandising and product
launch programs to fuel growth for the 50 store division.
Edward W. Marshall, Jr. Age 52
Executive Vice President-Operations Since 1989
Edward W. Marshall, Jr. has been Executive Vice President of the Company since
August 1994. He served as Senior Vice President-Operations of the Company since
January 1991 and was Vice President of Operations upon joining the Company in
May 1989. Prior to joining the Company, Mr. Marshall was Vice President of
Operations for Morse Shoe, a retail store operator.
Bruce J. Eisenberg Age 37
Senior Vice President of Real Estate Since 1993
Bruce J. Eisenberg has been Senior Vice President of Real Estate at the Company
since May of 1995. He joined the Company in August of 1993 as Vice President of
Real Estate. Prior to joining the Company, Mr. Eisenberg was responsible for
leasing, finance and construction of new regional mall development at The
Pyramid Companies.
Carol A. Stevens Age 47
Senior Vice President - Human Resources Since 1998
Carol A. Stevens has been Senior Vice President of Human Resources since she
joined the Company in February 1998. Prior to joining the Company, Ms. Stevens
was Senior Vice President of Human Resources at Hechinger Company from 1994 to
1997 and served as Vice President prior to 1994.
John J. Sullivan Age 45
Senior Vice President, Treasurer and
Chief Financial Officer Since 1991
John J. Sullivan has been Senior Vice President, Treasurer and Chief Financial
Officer of the Company since May 1995. Mr. Sullivan joined the Company in
June 1991 as the Corporate Controller and was named Vice President of Finance
and Treasurer in June of 1994. Prior to joining the Company, Mr. Sullivan was
Vice President and Controller for Ames Department Stores, a discount
department store chain.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information. The Company's initial public offering was completed on July
24, 1986, and since that date the shares of the Company's Common Stock have been
traded on the over-the-counter market and quoted on the Nasdaq National Market
under the symbol "TWMC." As of January 31, 1998, there were approximately 400
shareholders of record. The following table sets forth high and low last
reported sale
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prices for each fiscal quarter during the period from February 3,
1996 through March 26, 1998.
<TABLE>
<CAPTION>
Last
Sales
Prices
High Low
<S> <C> <C>
1996
1st Quarter $ 2 5/8 $ 1 1/4
2nd Quarter 3 5/8 2 1/4
3rd Quarter 4 3/8 2 9/16
4th Quarter 4 1/16 3 1/8
1997
1st Quarter $ 6 3/16 $ 3 5/8
2nd Quarter 9 5/8 5 15/16
3rd Quarter 16 3/8 9 1/16
4th Quarter 28 1/8 14 5/8
1998
1st Quarter (through
March 26, 1998) $29 1/4 $24
</TABLE>
On March 26, 1998, the last reported sale price on the Common Stock on the
Nasdaq National Market was $28 3/4.
On March 6, 1998, options for the Company's Common Stock began trading on the
Chicago Board Options Exchange and the American Stock Exchange.
Dividend Policy. The Company has never declared or paid cash dividends on its
Common Stock. The Revolving Credit Facility sets certain restrictions on the
payment of cash dividends. Any future determination as to the payment of
dividends would depend upon capital requirements and limitations imposed by the
Revolving Credit Facility and such other factors as the Board of Directors of
the Company may consider.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data and other
operating information of the Company. The selected income statement and
balance sheet data for the five fiscal years ended Janaury 31, 1998 set forth
below are derived from the audited consolidated financial statements of the
Company. Each fiscal year of Trans World consisted of 52 weeks except fiscal
year ended February 3, 1996 which consisted of 53 weeks. All share and per
share amounts have been adjusted for all periods to reflect a two-for-one
stock split effected on December 15, 1997. The selected consolidated
financial data should be read in conjunction with the Company's audited
consolidated financial statements and other financial information included
herein and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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<TABLE>
<CAPTION>
Fiscal Year Ended
January 31, February 1, February 3, January 28, January 29,
1998 1997 1996 1995 1994
-----------------------------------------------------------
(in thousands, except per share and store data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales $571,314 $481,657 $517,046 $536,840 $492,553
Cost of sales (1) 361,422 308,952 347,554 345,720 307,834
--------------------------------------------------------
Gross profit 209,892 172,705 169,492 191,120 184,719
Selling, general and
administrative expenses 170,834 150,218 168,313 175,569 162,299
Restructuring charge, net (1) --- --- 24,204 16,702 ---
--------------------------------------------------------
Income (loss) from operations 39,058 22,487 (23,025) (1,151) 22,420
Interest expense 5,148 12,110 15,201 10,058 6,268
Other expenses (income), net (153) (1,343) (979) (518) (297)
--------------------------------------------------------
Income (loss) before
income taxes 34,063 11,720 (37,247) (10,691) 16,449
Income tax expense (benefit) 13,489 4,618 (13,431) (4,435) 6,626
--------------------------------------------------------
Net income (loss) $20,574 $7,102 ($23,816) ($6,256) $9,823
========================================================
Basic earnings (loss)
per share $1.05 $0.36 ($1.22) ($0.32) $0.51
========================================================
Weighted average number
of shares outstanding 19,655 19,514 19,452 19,402 19,446
========================================================
Diluted earnings (loss)
per share $0.99 $0.36 ($1.22) ($0.32) $0.50
========================================================
Adjusted weighted average
number of shares
outstanding 20,688 19,798 19,452 19,402 19,497
========================================================
BALANCE SHEET DATA: (at the end of the period)
Working capital $88,974 $80,368 $78,773 $93,431 $101,538
Total assets 374,019 311,610 391,888 426,939 380,264
Current portion of
long-term obligations 99 9,557 3,420 6,818 3,695
Long-term obligations 41,409 50,490 60,364 66,441 73,098
Shareholders' equity 124,522 102,919 95,661 119,477 126,074
OPERATING DATA:
Store Count (open at end of period):
Mall stores 340 357 379 431 443
Non-mall stores 199 122 163 253 241
-------------------------------------------------------
Total stores 539 479 542 684 684
Comparable store sales increase
(decrease)(2) 10.2% 3.6% (3.5)% 1.1% (2.1)%
Total square footage
(in thousands) 2,442 2,008 2,140 2,544 2,414
</TABLE>
(1) The restructuring charge includes the write-down of assets, estimated
cash payments to landlords for the early termination of operating leases,
and early termination benefits. The charge also includes estimated legal,
lender and consulting fees. Inventory-related costs, including the cost
of returning merchandise after the store closes, are included in cost
of sales. The restructuring charge for the year ended February 3, 1996 has
been restated. See note 12 to the companies consolidated financial
statements.
(2) A store is included in comparable store sales calculations at the
beginning of its 13th full month of operation.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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
The following table sets forth, for the periods indicated, certain income and
expense items as a percentage of sales:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------
January 31, February 1, February 3,
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Gross profit 36.7% 35.9% 32.8%
Selling, general and
administrative expenses 29.9% 31.2% 32.6%
Restructuring charge 0.0% 0.0% 4.7%
-------------------------------------
Income (loss) from operations 6.8% 4.7% (4.5)%
Interest expense 0.9% 2.5% 2.9%
Other expenses (income), net (0.0)% (0.3)% (0.1)%
-------------------------------------
Income (loss) before income taxes 6.0% 2.5% (7.2)%
Income tax expense (benefit) 2.4% 1.0% (2.6)%
-------------------------------------
Net income (loss) 3.6% 1.5% (4.6)%
=====================================
Change in comparable store sales 10.2% 3.6% (3.5)%
=====================================
</TABLE>
Fiscal Year Ended January 31, 1998 ("1997")
Compared to Fisal Year Ended February 1, 1997 ("1996")
Sales. The Company's sales increased $89.7 million, or 18.6%, from 1996. The
-13-
<PAGE>
increase was primarily attributable to a comparable store sales increase of
10.2%, a sales increase of 8.4% resulting from the acquisition of 90
Strawberries' stores in October 1997, and the opening of 48 stores partially
offset by the closing of 78 stores. Management attributes the comparable store
sales increase primarily to its strategic decision to eliminate unprofitable
stores and focus on customer service, superior retail locations, inventory
management and merchandise presentation. Sales by product configuration are
shown in the following table:
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------
January 31, February 1, February 3,
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Compact discs 55.5% 50.1% 49.2%
Prerecorded audio cassettes 18.9 22.2 25.5
Prerecorded video 16.3 18.6 16.7
Other 9.3 9.1 8.6
-----------------------------------------
Total 100.0% 100.0% 100.0%
=========================================
</TABLE>
For 1997, comparable store sales increased 11.0% for mall stores and 9.6% for
non-mall stores. By product configuration, comparable store sales increased
11.4% in music and 2.6% in video.
Gross Profit. Gross profit, as a percentage of sales, increased to 36.7% in 1997
from 35.9% in 1996 as a result of reduced merchandise shrinkage and increased
purchase discounts combined with a strong performance from higher margin catalog
sales.
Selling, General and Administrative Expenses. SG&A, as a percentage of sales,
decreased to 29.9% in 1997 from 31.2% in 1996. The 1.3% decrease can be
attributed to the leverage of SG&A expenses on the 10.2% comparable store
sales increase, as well as the overall sales increase.
Interest Expense. Interest expense decreased 57.5% to $5.1 million in 1997
from $12.1 in 1996. The decrease is due to lower average outstanding
borrowings and lower interest rates due to the refinancing completed during
the year.
Income Tax Expense. The effective income tax rate was 39.6% in 1997. See Note 4
of Notes to Consolidated Financial Statements for a reconciliation of the
statutory tax rate to the Company's effective tax rate.
Net Income. In 1997, the Company's net income increased to $20.6 million
compared to a net income of $7.1 million in 1996. The improved bottom line
performance can be attributed to the profitability of the additional stores and
the ongoing success of the Company's restructuring plan.
-14-
<PAGE>
Additionally, the Company benefited from a comparable store sales increase,
higher gross margin rate and improved leverage of SG&A expenses.
Fiscal Year Ended February 1, 1997 ("1996")
Compared to Fiscal Year Ended February 3, 1996 ("1995")
Sales. The Company's sales decreased $35.4 million, or 6.8%, from 1995 while the
number of stores in operation decreased by 12%. The decrease was primarily
attributable to a net decrease of approximately 151,000 square feet, which
resulted from the closing of 85 stores offset slightly by the opening of 22
stores. In 1995 there were 53 weeks in the fiscal year, with the extra week
contributing $6.9 million in sales. Comparable store sales for fiscal year 1996
increased by 3.6%. Management attributes the comparable store sales increase to
its strategic decision to eliminate unprofitable stores and focus on customer
service, superior retail locations, inventory management and merchandise
presentation.
The Company's comparable store formats showed positive growth in 1996 compared
to 1995. Comparable store sales increased 2.8% for mall stores and 7.4% for
non-mall stores. By product configuration, comparable store sales increased 1.9%
in music and 12.4% in video, as video benefitted from continued growth of the
video sell-through market
Gross Profit. Gross profit, as a percentage of sales, increased to 35.9% in
1996 from 32.8% in 1995 as a result of a $6.8 million non-recurring charge
in 1995 for inventory-related costs as part of closing stores under the
Company's restructuring plan. Also contributing to the increase was increased
purchase discounts combined with a strong performance from higher margin
catalog sales.
Expenses. SG&A, as a percentage of sales, decreased to 31.2% in 1996 from
32.6% in 1995. The 1.4% decrease can be attributed to the closing of
underperforming stores, a 3.6% increase in comparable store sales and the
receipt of $2.5 million upon termination of a business agreement in the
second quarter 1996. The Company had an agreement with a third party to
provide data for the purpose of assessing the marketability of sales
information of prerecorded music, prerecorded video and other home
entertainment related products. In return for providing this data, the
Company has compensated to recover the expenses it incurred. In exchange for
terminating the agreement, the Company received $2.5 million in additional
compensation. The Company recorded the fee in the same manner that the annual
fee had been recorded. Also contributing to the decrease was $1.6 million
non-recurring fees paid to lenders in 1995 for the waiver of debt covenant
violations. Interest expense decreased 20% to $12.1 million in 1996 from
$15.2 in 1995. The decrease was due to lower average outstanding borrowings
offset in part by increased weighted average interest rates. The effective
income tax rate was 39.4% in 1996.
Net Income. In 1996, the Company's net income increased to $7.1 million
compared to a net loss of $23.8 million in 1995. The improved bottom line
performance can be attributed to the success of the Company's restructuring
plan. Additionally, the Company benefited from a comparable store sales
increase, higher gross margin rate and lower SG&A expenses.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources. Cash flow from operations and funds available
under revolving credit facilities are the Company's primary sources of
liquidity. During the first three fiscal quarters, cash flow is typically
consumed by payments to merchandise vendors and store construction expenditures.
The revolving credit facilities provide the Company with liquidity until
December, when the Company's cash position has historically been the highest,
providing sufficient cash to repay all outstanding borrowings under the
revolving credit facilities.
-15-
<PAGE>
During 1997, cash provided by operations was $93.7 million compared to $45.1
million for 1996. The increased cash flow from operations was due primarily to
the $13.5 million increase in net income and continued improvement in inventory
management. Leverage of accounts payable to inventory improved to 86.1% in 1997
from 72.8% in 1996.
The Company ended fiscal 1997 with cash balances of approximately $94.7 million
compared to 1996 when the Company had cash balances of $54.8 million. In both
years, the Company had no short term borrowings.
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 averaging
below the prime rate. The Revolving Credit Facility, combined with lower
borrowing needs, was responsible for the Company's interest expense decreasing
to $5.1 million for the year ended January 31, 1998 from $12.1 for the year
ended February 1, 1997
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 covenant.
Capital Expenditures. Most of the Company's capital expenditures are for new
store expansion and relocation of existing stores. The Company typically
finances its capital expenditures through internally generated cash and
borrowings under its revolving credit facility. In addition the Company
typically receives financing from landlords in the form of construction
allowances or rent concessions for a portion of the capital expenditure.
Total capital expenditures were approximately $15.5 million in 1997 with
significantly all of this amount being related to new stores and store
remodels and reconfigurations. Included in this figure was approximately $2
million related to the development and pilot of a new point-of-sale ("POS")
system. The system will be rolled out to all stores during the summer of 1998.
In fiscal 1998, the Company plans to spend approximately $47 million, net of
construction allowances, in capital expenditures. Included in such $47 million
is approximately $17 million for the new POS system.
PROVISION FOR BUSINESS RESTRUCTURING
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 product 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 have been included in cost of sales in the accompanying
consolidated staements of income.
An analysis of the January 28, 1995 balance in the 1994 restructuring
reserve and 1995 charges against the reserve is as follows:
<TABLE>
<CAPTION>
BALANCE AS OF CHARGES
JANUARY 28, AGAINST REMAINING
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 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.
-16-
<PAGE>
An analysis of the amounts comprising the 1995 restructuring charge and the
charges against the related reserve for each year in the three-year period ended
January 31, 1998 are outlined below:
<TABLE>
<CAPTION>
BALANCE BALANCE
CHARGES AS OF CHARGES AS OF CHARGES
1995 AGAINST FEBRUARY 3, AGAINST FEBRARY 1, AGAINST
RESERVE THE RESERVE 1996 THE RESERVE 1997 THE RESERVE
----------- ----------- ----------- ------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Leasehold improvements........................ $ 6,660 $ 6,660 -- -- -- --
Furniture and fixtures........................ 3,228 3,228 -- -- -- --
Video rental assets........................... 4,174 -- $ 4,174 1,078 3,096 25
Goodwill...................................... 339 339 -- -- -- --
----------- ------------ ---------- ------- ----------- ------
Non cash write-offs......................... 14,401 10,227 4,174 1,078 3,096 25
----------- ------------ ---------- ------- ----------- ------
Lease obligations............................. 7,540 -- 7,540 2,627 4,913 905
Inventory-related costs....................... 6,800 -- 6,800 3,421 3,379 2,769
Termination benefits.......................... 976 69 907 88 819 16
Professional fees............................. 2,500 -- 2,500 1,632 868 711
Other costs................................... 1,600 806 794 122 672 629
----------- ----------- ----------- ------ ----------- ------
Cash outflows............................... 19,416 875 18,541 7,890 10,651 5,030
----------- ----------- ----------- ------ ----------- ------
Total....................................... $ 33,817 $ 11,102 $ 22,715 $ 8,968 $ 13,747 $ 5,055
----------- ----------- ----------- ------ ----------- ------
----------- ----------- ----------- ------ ----------- ------
<CAPTION>
BALANCE
AS OF
JANUARY 31,
1998
-----------
<S> <C>
Leasehold improvements........................ --
Furniture and fixtures........................ --
Video rental assets........................... 3,071
Goodwill...................................... --
-----------
Non cash write-offs......................... 3,071
-----------
Lease obligations............................. 4,008
Inventory-related costs....................... 610
Termination benefits.......................... 803
Professional fees............................. 157
Other costs................................... 43
-----------
Cash outflows............................... 5,621
-----------
Total....................................... $ 8,692
-----------
-----------
</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). Payments to lenders for the
waiver of covenant violations totalling $1.6 million have been included in
selling, general and administrative expenses in the 1995 consolidated statement
of income.
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 balances are included in the accompanying balance
sheets under the caption "store closing reserve."
The Company closed 78, 85 and 151 stores in fiscal 1997, 1996 and 1995,
respectively. 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 be closed........ 143 163 306
--- --- ---
--- --- ---
Number of stores closed through January 31, 1998......... 179 163 342
--- --- ---
--- --- ---
Number of stores to be closed subsequent to January 31,
1998................................................... -- 49 49
--- --- ---
--- --- ---
</TABLE>
-17-
<PAGE>
Sales related to stores that were closed were $39 million (unaudited), $20
million (unaudited) and $40 million (unaudited) in fiscal 1997, 1996 and 1995,
respectively. Store operating losses (income) related to stores that were closed
were $(1.5) million (unaudited), $1.0 million (unaudited) and $4.1 million
(unaudited) in fiscal 1997, 1996 and 1995.
The provision for termination benefits was based on the expectation that 338
employees would be terminated in connection with the restructuring programs.
Through January 31, 1998, 75 employees had been terminated and the Company
expects to terminate an additional 49 employees in fiscal 1998. Trans World 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 three-year period ended January 31, 1998, a total of 36 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.
During the three-year period ended January 31, 1998, a total of 85 stores were
added to the list of stores 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 January 31, 1998, the
Company has closed 342 stores in connection with the restructuring programs,
compared to the originally planned closures of 306 stores. During the year
ending January 30, 1999, the Company plans to close an additional 49 stores as
it completes the restructuring programs. Any remaining balance in the
restructuring reserve at January 30, 1999 will be credited to operations.
YEAR 2000 COMPLIANCE
Year 2000 Compliance. The Company has assessed its systems and equipment with
respect to Year 2000 compliance and has developed a project plan. Many of the
Year 2000 issues, including the processing of credit card transactions, have
been addressed. The remaining Year 2000 issues will be addressed either with
scheduled system upgrades or through the Company's internal systems
development staff. The incremental costs will be charged to expenses as
incurred and are not expected to have a material impact on the financial
position or results of operations of the Company. However, the Company could
be adversely impacted if Year 2000 modifications are not properly completed
by either the Company, or its vendors, banks or any other entity with whom
the Company conducts business.
Accounting Policies. During fiscal year 1997, the Company adopted the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," which requires that the Company disclose both basic earnings per share
and diluted earnings per share. The Company adopted the provisions of SFAS No.
128 retroactively for 1996 and 1995, as required.
In 1998, the Company will adopt the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which requires that the Company disclose as comprehensive
income all changes in equity during a period that are not a result of
investments by owners and distributions to owners.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," will not have an effect on the Company because it operates in a
single segment. SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," will not have an effect on the Company because it does
not have a defined benefit pension plan.
Dividend Policy. The Company has never declared or paid cash dividends on Common
Stock. The Revolving Credit Facility sets certain restrictions on the payment of
cash dividends. Any future determination as to the payment of dividends would
depend upon capital requirements and limitations imposed by the Revolving Credit
Facility and such other factors as the Board of Directors of the Company may
consider.
-17-
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to the Consolidated Financial Statements of the Company is included in
Item 14, and the financial statements follow the signature page to this Annual
Report on Form 10-K.
The quarterly results of operations are included herein in Note 11 of the
Consolidated Financial Statements.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
Incorporated herein by reference is the information appearing under the captions
"Election of Directors" and "Board of Directors Meetings and Its Committees" in
the Company's definitive Proxy Statement for the Registrant's 1998 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after January 31, 1998.
(b) Identification of Executive Officers
The information required with respect to the executive officers of the
Registrant is set forth under the caption Supplementary Item on page 9 of this
Annual Report on Form 10-K.
Item 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information appearing under the caption
"Executive Officers and Compensation" in the Company's definitive Proxy
Statement for the Registrant's 1998 Annual Meeting of Shareholders to be filed
with the Securities and Exchange Commission within 120 days after January 31,
1998.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the information appearing under the captions
"Principal Shareholders" and "Election of Directors" in the Company's definitive
Proxy Statement for the Registrant's 1998 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission within 120 days after January
31, 1998.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the information appearing under the caption
"Certain Transactions" in the Company's definitive Proxy Statement for the
Registrant's 1998 Annual Meeting of Shareholders to be filed with the Securities
and Exchange Commission within 120 days after January 31, 1998.
-18-
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
14(a)(1) Financial Statements
- -----------------------------
The consolidated financial statements and notes are listed in the Index to
Financial Statements on page 18 of this report.
14(a)(2) Financial Statement Schedules
- ---------------------------------------
None of the schedules for which provision is made in the applicable accounting
regulations under the Securities Exchange Act of 1934, as amended, are required.
14(a)(3) Exhibits
- -----------------
Exhibits are as set forth in the "Index to Exhibits" which follows the Notes to
the Consolidated Financial Statements and immediately precedes the exhibits
filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TRANS WORLD ENTERTAINMENT CORPORATION
Date: March 30, 1999 By: /s/ ROBERT J. HIGGINS
----------------------------
Robert J. Higgins, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Name Title Date
/s/ ROBERT J. HIGGINS Chairman, President and
(Robert J. Higgins) Chief Executive Officer March 30, 1999
(Principal Executive Officer)
/s/ JOHN J. SULLIVAN Senior Vice President, Treasurer March 30, 1999
(John J. Sullivan) and Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
/s/ MATTHEW H. MATARASO Secretary and Director March 30, 1999
(Matthew H. Mataraso)
/s/ GEORGE W. DOUGAN Director March 30, 1999
(George W. Dougan)
/s/ CHARLOTTE G. FISCHER Director March 30, 1999
(Charlotte G. Fischer)
/s/ ISAAC KAUFMAN Director March 30, 1999
(Isaac Kaufman)
/s/ DEAN S. ADLER Director March 30, 1999
(Dean S. Adler)
/s/ JOSEPH G. MORONE Director March 30, 1999
(Joseph G. Morone)
/s/ MARTIN E. HANAKA Director March 30, 1999
(Martin E. Hanaka)
-19-
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Form 10-K
Page No.
Independent Auditor's Report 20
Consolidated Financial Statements
Consolidated Balance Sheets at January 31, 1998 and February 1, 1997 21
Consolidated Statements of Income - Fiscal years ended
January 31, 1998, February 1, 1997 and February 3, 1996 22
Consolidated Statements of Shareholders' Equity - Fiscal years ended
January 31, 1998, February 1, 1997 and February 3, 1996 23
Consolidated Statements of Cash Flows - Fiscal years ended
January 31, 1998, February 1, 1997, and February 3, 1996 24
Notes to Consolidated Financial Statements 25
<PAGE>
Report of KPMG LLP
Independent Auditors
The Board of Directors and Shareholders
Trans World Entertainment Corporation:
We have audited the accompanying consolidated balance sheets of Trans World
Entertainment Corporation and subsidiaries as of January 31, 1998 and February
1, 1997, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the fiscal years in the three-year period ended
January 31, 1998. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Trans World
Entertainment Corporation and subsidiaries as of January 31, 1998 and February
1, 1997, and the results of their operations and their cash flows for each of
the fiscal years in the three-year period ended January 31, 1998, in conformity
with generally accepted accounting principles.
As discussed in note 12, the Company restated is consolidated financial
statements as of and for the year ended February 3, 1996.
/s/ KPMG LLP
Albany, New York
March 13, 1998, except as to
note 12, which is as of
March 26, 1999
-20-
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
--------------------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $94,732 $54,771
Accounts receivable 3,105 8,826
Merchandise inventory 189,394 163,509
Refundable income taxes --- 564
Deferred tax asset --- 1,895
Prepaid expenses and other 3,119 2,490
-------------------------
Total current assets 290,350 232,055
--------------------------
VIDEOCASSETTE RENTAL INVENTORY, net 4,099 4,784
DEFERRED TAX ASSET 4,726 3,098
FIXED ASSETS:
Buildings 7,774 7,774
Fixtures and equipment 87,214 76,932
Leasehold improvements 74,997 64,102
--------------------------
169,985 148,088
Less: Allowances for depreciation and
amortization 97,917 81,398
--------------------------
72,068 67,410
--------------------------
OTHER ASSETS 2,776 4,263
--------------------------
TOTAL ASSETS $374,019 $311,610
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $162,981 $118,980
Income taxes payable 11,155 ---
Accrued expenses and other 17,346 9,403
Store closing reserve 8,692 13,747
Current deferred taxes 1,103 ---
Current portion of long-term debt and
capital lease obligations 99 9,557
--------------------------
Total current liabilities 201,376 151,687
LONG-TERM DEBT, less current portion 35,000 43,983
CAPITAL LEASE OBLIGATIONS, less current portion 6,409 6,507
OTHER LIABILITIES 6,712 6,514
--------------------------
TOTAL LIABILITIES 249,497 208,691
--------------------------
SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value; 5,000,000
shares authorized; none issued.) --- ---
Common stock ($.01 par value; 50,000,000 shares
authorized; 19,815,357 shares and 19,619,188
shares issued in 1997 and 1996, respectively) 198 197
Additional paid-in capital 25,386 24,441
Unearned compensation - restricted stock (175) (245)
Treasury stock at cost (70,788 and 72,788 shares
in 1997 and 1996, respectively) (394) (407)
Retained earnings 99,507 78,933
--------------------------
TOTAL SHAREHOLDERS' EQUITY 124,522 102,919
--------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $374,019 $311,610
==========================
See Notes to Consolidated Financial Statements.
</TABLE>
-21-
<PAGE>
<TABLE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<CAPTION>
Fiscal Year Ended
January 31, February 1, February 3,
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Sales $571,314 $481,657 $517,046
Cost of sales 361,422 308,952 347,554
-----------------------------------------
Gross profit 209,892 172,705 169,492
Selling, general and
administrative expenses 170,834 150,218 168,313
Restructuring charges, net --- --- 24,204
-----------------------------------------
Income (loss) from operations 39,058 22,487 (23,025)
Interest expense 5,148 12,110 15,201
Other expenses (income), net (153) (1,343) (979)
-----------------------------------------
Income (loss) before income taxes 34,063 11,720 (37,247)
Income tax expense (benefit) 13,489 4,618 (13,431)
-----------------------------------------
NET INCOME (LOSS) $20,574 $7,102 ($23,816)
=========================================
BASIC EARNINGS (LOSS) PER SHARE $1.05 $0.36 ($1.22)
=========================================
Weighted average number of common
shares outstanding 19,655 19,514 19,452
=========================================
DILUTED EARNINGS (LOSS) PER SHARE $0.99 $0.36 ($1.22)
=========================================
Adjusted weighted average number of
common shares outstanding 20,688 19,798 19,452
=========================================
See Notes to Consolidated Financial Statements.
</TABLE>
-22-
<PAGE>
<TABLE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share and option amounts)
<CAPTION>
Unearned
Additional Compensation Share-
Common Paid in Restricted Treasury Retained holders'
Stock Capital Stock Stock Earnings Equity
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 28, 1995,
restated to reflect two-for-one
stock split in 1997
(19,462,416 shares issued) $195 $24,138 $ --- $(503) $95,647 $119,477
Net Loss --- --- --- --- (23,816) (23,816)
----------------------------------------------------------------
Balance as of February 3, 1996
(19,462,416 shares issued) 195 24,138 --- (503) 71,831 95,661
Issuance of 14,000 shares
of treasury stock under
incentive stock programs --- (59) --- 96 --- 37
Issuance of 150,000 shares of
common stock-restricted stock
plan, net 2 350 (245) --- --- 107
Exercise of 6,772
stock options --- 12 --- --- --- 12
Net Income --- --- --- --- 7,102 7,102
----------------------------------------------------------------
Balance as of February 1, 1997
(19,619,188 shares issued) $197 $24,441 $(245) $(407) $78,933 $102,919
Issuance of 2,000 shares
of treasury stock under
incentive stock programs --- --- --- 13 --- 13
Amortization of unearned
compensation - restricted
stock plan --- --- 70 --- --- 70
Exercise of 196,169
stock options 1 545 --- --- --- 546
Income tax benefit arising
from exercise of employee
stock options --- 400 --- --- --- 400
Net Income --- --- --- --- 20,574 20,574
----------------------------------------------------------------
Balance as of January 31, 1998
(19,815,357 shares issued) $198 $25,386 $(175) $(394) $99,507 $124,522
----------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
-23-
<PAGE>
<TABLE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Fiscal Year Ended
January 31, February 1, February 3,
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $20,574 $7,102 ($23,816)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation and amortization 16,257 15,225 17,145
Fixed asset write-off reserve --- --- 9,888
Store closing reserve --- --- 21,116
Stock compensation programs 83 144 --
Deferred tax expense (benefit) 1,370 3,023 (4,567)
Changes in operating assets and liabilities:
Accounts receivable 5,868 (747) 1,097
Merchandise inventory (9,872) 31,068 27,781
Refundable income taxes 564 7,744 (8,308)
Prepaid expenses and other (408) 439 1,478
Other assets 2,481 (381) (53)
Accounts payable 42,751 (12,322) (4,191)
Income taxes payable 11,555 --- (1,961)
Accrued expenses and other 7,344 3,137 576
Store closing reserve (5,056) (10,528) (11,913)
Other liabilities 198 1,174 (136)
---------------------------------------
Net cash provided by operating
activities 93,709 45,078 24,136
---------------------------------------
INVESTING ACTIVITIES:
Acquisition of property and equipment (15,538) (10,198) (10,006)
Acquisition of businesses, net (20,901) --- ---
Proceeds from sale of fixed assets --- --- 929
(Purchases) disposals of videocassette
rental inventory, net 685 1,938 750
---------------------------------------
Net cash used in investing activities (35,754) (8,260) (8,327)
---------------------------------------
FINANCING ACTIVITIES:
Net decrease in revolving line
of credit --- (65,260) (9,687)
Payments of long-term debt (18,440) (3,661) (8,902)
Payments of capital lease obligations (99) (76) (373)
Exercise of stock options, including
tax benefit 545 12 ---
---------------------------------------
Net cash used by financing activities (17,994) (68,985) (18,962)
---------------------------------------
Net increase (decrease) in cash and
cash equivalents 39,961 (32,167) (3,153)
Cash and cash equivalents, beginning
of year 54,771 86,938 90,091
---------------------------------------
Cash and cash equivalents, end of year $94,732 $54,771 $86,938
=======================================
Supplemental disclosure of non-cash investing
and financing activities:
Issuance of treasury stock under incentive
stock options $ 13 $ 37 --
Income tax benefit resulting from exercises
of stock options 400 -- --
</TABLE>
See Notes to Consolidated Financial Statements.
-24-
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations: Trans World Entertainment Corporation is one of the
largest specialty retailers of music, video and related accessories in the
United States. The Company operates in a single industry segment, the operation
of a chain of retail entertainment stores. At January 31, 1998, the Company
operated 539 stores in 34 states, the District of Columbia and the U.S. Virgin
Islands, with a majority of the stores concentrated in the Eastern half of the
United States.
Basis of Presentation: The consolidated financial statements consist of Trans
World Entertainment Corporation and its subsidiaries, all of which are wholly
owned. All significant intercompany accounts and transactions have been
eliminated. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fiscal Year: The Company's fiscal year is a 52- or 53-week period ending on the
Saturday nearest to January 31. Fiscal years 1997 and 1996 ended January 31,
1998 and February 1, 1997, respectively, and consisted of 52 weeks. Fiscal year
1995, which ended February 3, 1996, consisted of 53 weeks.
Dividend Policy: The Company has never declared or paid cash dividends on its
Common Stock. The Company's credit agreement currently allows the Company to
pay a cash dividend once in each calendar year. These dividends are
restricted to ten percent of the most recent year's consolidated net income
and can only be paid if, after the dividend payment, the Company maintain $25
million of available borrowing under the credit agreement. Any future
determination as to the payment of dividends would depend upon capital
requirements and limitations imposed by the Company's credit agreement and
such other factors as the Board of Directors of the Company may consider.
Revenue Recognition: Revenue from sales of merchandise is recognized at the
point of sale to the consumer, at which time payment is tendered. There are
no provisions for uncollectible amounts since payment is received at the time
of sale.
Cash and Cash Equivalents: The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents. The
carrying amounts reported in the balance sheet for cash and cash equivalents are
at fair value.
Merchandise Inventory and Return Costs: Inventory is stated at the lower of cost
(first-in, first-out) or market as determined principally by the retail
inventory method. The Company is entitled to return merchandise purchased from
major vendors for credit against other purchases from these vendors. The vendors
often reduce the credit with a merchandise return charge ranging from 0% to 20%
of the original product purchase price depending on the type of product being
returned. The Company records the merchandise return charges in cost of sales.
-25-
<PAGE>
Videocassette Rental Inventory: The cost of videocassette rental tapes is
capitalized and amortized on a straight-line basis over their estimated
economic life with a provision for salvage value. Major movie release
additions which have a relatively short economic life due to the frequency of
rental, are amortized over twelve months while other titles are amortized
over thirty-six months.
Fixed Assets: Fixed assets are stated at cost. Major improvements and
betterments to existing facilities and equipment are capitalized. Expenditures
for maintenance and repairs, which do not extend the life of the applicable
asset, are charged to expense as incurred. Buildings are amortized over a
30-year term. Fixtures and equipment are depreciated using the straight-line
method over their estimated useful lives, which range from three to seven years.
Leasehold improvements are amortized over the shorter of their estimated useful
life or the related lease term. Primarily all of the Company's operating leases
are ten years in term. Amortization of capital lease assets is included in
depreciation and amortization expense.
Depreciation and amortization expense related to the Company's videocassette
rental inventory totalling $2,215,000, $2,477,000 and $3,395,000 in 1997,
1996 and 1995, respectively, is included in cost of sales. Also included in
cost of sales is depreciation and amortization expense related to the
Company's distribution center facility and equipment of $1,101,000, $865,000
and $803,000 in 1997, 1996 and 1995, respectively. All other depreciation and
amortization of fixed assets is included in selling, general and
administrative expenses.
Advertising Costs: The costs of advertising are expensed in the first period in
which such advertising takes place. Total advertising expense was $8,366,000,
$8,951,000 and $7,010,000 in 1997, 1996 and 1995, respectively.
Store Opening and Closing Costs: Costs associated with opening a store are
expensed as incurred. When a store is closed, estimated unrecoverable costs are
charged to expense. Such costs include the net book value of abandoned fixtures,
equipment, leasehold improvements and a provision for lease obligations, less
estimated sub-rental income. The residual value of any fixed asset moved to a
store as part of a relocation is transferred to the relocated store.
Income Taxes: The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under the asset and liability method of Statement 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Earnings (Loss) Per Share: In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share," which was effective for the Company for fiscal
year 1997. 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 and additional common shares that would have
been outstanding if the dilutive potential common shares adjusted in 1997 for
the $400,000 tax benefit resulting from stock option exercise activity, had
been issued for the Company's common stock options from the Company's Stock
Option Plans (see Note 6). In Fiscal years 1997, 1996 and 1995 the additional
dilutive potential common shares were 1,033,000, 284,000, and 0,
respectively. The weighted average number of outstanding stock options not
included in the computation of diluted earnings per share during fiscal years
1997, 1996 and 1995 were 128,000, 890,000 and 1,951,000, respectively. To
include these options in the computation would have been antidilutive. As
required by SFAS No. 128, all outstanding common stock options were included
even though their exercise may be contingent upon vesting. The Company has
presented Fiscal 1997 earnings per
-26-
<PAGE>
share data and restated all prior-period earnings per share data in accordance
with SFAS No. 128. See the Consolidated Statements of Income for the required
disclosures.
All earnings and loss per share information has been adjusted for the
two-for-one stock split effected in the form of a stock dividend on
December 15, 1997. All references to number of shares, per share amounts, stock
option data and market prices of the Company's common stock have been restated.
See Note 7, "Shareholders' Equity."
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 product 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 have been included in cost of sales in the accompanying
consolidated statements of income.
An analysis of the January 28, 1995 balance in the 1994 restructuring
reserve and 1995 charges against the reserve is as follows:
<TABLE>
<CAPTION>
BALANCE AT CHARGES
JANUARY 28, AGAINST REMAINING
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 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.
-27-
<PAGE>
An analysis of the amounts comprising the 1995 restructuring charge and the
charges against the related reserve for each year in the three-year period ended
January 31, 1998 are outlined below:
<TABLE>
<CAPTION>
BALANCE BALANCE BALANCE
CHARGES AT CHARGES AT CHARGES AT
1995 AGAINST FEBRUARY 3, AGAINST FEBRUARY 1, AGAINST JANUARY 31,
RESERVE THE RESERVE 1996 THE RESERVE 1997 THE RESERVE 1998
----------- ----------- ----------- ------------- ----------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Leasehold improvements...... $ 6,660 $ 6,660 -- -- -- -- --
Furniture and fixtures...... 3,228 3,228 -- -- -- -- --
Video rental assets......... 4,174 -- $ 4,174 1,078 3,096 25 3,071
Goodwill.................... 339 339 -- -- -- -- --
----------- ----------- ----------- ------ ----------- ------ -----------
Non cash write-offs....... 14,401 10,227 4,174 1,078 3,096 25 3,071
----------- ----------- ----------- ------ ----------- ------ -----------
Lease obligations........... 7,540 -- 7,540 2,627 4,913 905 4,008
Inventory-related costs..... 6,800 -- 6,800 3,421 3,379 2,769 610
Termination benefits........ 976 69 907 88 819 16 803
Professional fees........... 2,500 -- 2,500 1,632 868 711 157
Other costs................. 1,600 806 794 122 672 629 43
----------- ----------- ----------- ------ ----------- ------ -----------
Cash outflows............. 19,416 875 18,541 7,890 10,651 5,030 5,621
----------- ----------- ----------- ------ ----------- ------ -----------
Total..................... $ 33,817 $ 11,102 $ 22,715 $ 8,968 $ 13,747 $ 5,055 $ 8,692
----------- ----------- ----------- ------ ----------- ------ -----------
----------- ----------- ----------- ------ ----------- ------ -----------
</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). Payments to lenders for the
waiver of covenant violations totalling $1.6 million have been included in
selling, general and administrative expenses in the 1995 consolidated statement
of income.
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 balances are included in the accompanying balance
sheets under the caption "store closing reserve."
The Company closed 78, 85 and 151 stores in fiscal 1997, 1996 and 1995,
respectively. 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 be closed........ 143 163 306
--- --- ---
--- --- ---
Number of stores closed through January 31, 1998......... 179 163 342
--- --- ---
--- --- ---
Number of stores to be closed subsequent to January 31,
1998................................................... -- 49 49
--- --- ---
--- --- ---
</TABLE>
-28-
<PAGE>
Sales related to stores that were closed were $39 million (unaudited), $20
million (unaudited) and $40 million (unaudited) in fiscal 1997, 1996 and 1995,
respectively. Store operating losses (income) related to stores that were closed
were $(1.5) million (unaudited), $1.0 million (unaudited) and $4.1 million
(unaudited) in fiscal 1997, 1996 and 1995.
The provision for termination benefits was based on the expectation that 338
employees would be terminated in connection with the restructuring programs.
Through January 31, 1998, 75 employees had been terminated and the Company
expects to terminate an additional 49 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 three-year period ended January 31, 1998, a total of 36 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.
During the three-year period ended January 31, 1998, a total of 85 stores were
added to the list of stores 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 January 31, 1998, the
Company has closed 342 stores in connection with the restructuring programs,
compared to the originally planned closures of 306 stores. During the year
ending January 30, 1999, the Company plans to close an additional 49 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. Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
----------------------------
(in thousands)
<S> <C> <C>
Senior unsecured notes $ --- $53,077
Long-term portion of revolving credit facility 35,000 ---
Installment notes and other obligations --- 375
----------------------------
35,000 53,452
Less current portion --- 9,469
----------------------------
Long-term debt $35,000 $43,983
============================
</TABLE>
-29-
<PAGE>
In July 1997, the Company replaced its existing $65.3 million revolving credit
facility and $56.5 million note agreement with a $100.0 million secured
revolving credit facility with a bank. The facility matures in July 2000, and
bears interest at the prime interest rate or the Eurodollar interest rate plus
1.75% (7.69% at January 31, 1998). The facility is secured by the Company's
assets allowing the Company to borrow up to 65% of its eligible merchandise
inventory to a maximum of $100.0 million.
During Fiscal years 1997, 1996, and 1995, the highest aggregate balances
outstanding under the revolver were $45.9 million, $65.3 million and $74.9
million, respectively. The weighted average interest rates during Fiscal years
1997, 1996 and 1995 based on average daily balances, were 8.58%, 11.01% and
10.40%, respectively. The balances outstanding under the Company's revolving
credit agreements at Fiscal years ended 1997, 1996 and 1995 were $35.0 million,
$0.0 and $65.3 million, respectively. The Company's policy is to classify $35.0
million of borrowing under its new revolving credit facility as long-term, since
the Company has the intent and ability to maintain these obligations for longer
than one year, or to refinance them on a long-term basis.
At January 31, 1998, the fair market value of this revolving credit facility
approximates the carrying value.
Interest paid during Fiscal years 1997, 1996 and 1995 was approximately $5.8
million, $11.8 million and $16.0 million, respectively.
Note 4. Income Taxes
<TABLE>
Income tax expense (benefit) consists of the following:
<CAPTION>
Fiscal Year
1997 1996 1995
-------------------------------
(in thousands)
<S> <C> <C> <C>
Federal - current $10,813 $1,364 $(9,117)
State - current 1,306 231 253
Deferred 1,370 3,023 (4,567)
--------------------------------
$13,489 $4,618 $(13,431)
================================
</TABLE>
A reconciliation of the Company's effective tax rates with the federal statutory
rate is as follows:
<TABLE>
<CAPTION>
Fiscal Year
1997 1996 1995
------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% (35.0%)
State income taxes (benefit), net of
Federal income tax effect 3.0% 4.7% (1.5%)
Other 1.6% (0.3%) 0.4%
------------------------------
Effective income tax rate 39.6% 39.4% (36.1%)
==============================
</TABLE>
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
---------------------------
(in thousands)
<S> <C> <C>
CURRENT DEFERRED TAX ASSETS
Restructuring reserve $4,326 $7,677
---------------------------
Total Current Deferred Tax Asset 4,326 7,677
---------------------------
CURRENT DEFERRED TAX LIABILITIES
Inventory valuation 5,177 5,463
Other 252 319
--------------------------
Total Current Deferred Tax Liabilities 5,429 5,782
--------------------------
Net Current Deferred Tax Asset (Liability) $(1,103) $1,895
--------------------------
NON-CURRENT DEFERRED TAX ASSETS
Accrued rent, lease accounting $3,046 $2,824
Capitalized leases 895 829
Book over tax depreciation 623 ---
Other 254 148
--------------------------
Total Non-Current Deferred Tax Assets 4,818 3,801
--------------------------
NON-CURRENT DEFERRED TAX LIABILITIES
Tax over book depreciation --- 588
Other 92 115
--------------------------
Total Non-Current Deferred Tax Liabilities 92 703
--------------------------
Net Non-Current Deferred Tax Asset $4,726 $3,098
--------------------------
TOTAL NET DEFERRED TAX ASSET $3,623 $4,993
==========================
</TABLE>
-30-
<PAGE>
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 be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income and the taxable income in the three
previous tax years to which tax loss carryback can be applied. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income 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 taxable income during the carryforward period are reduced.
The Company paid income taxes of approximately $0.3 million, $0.3 million and
$2.2 million during Fiscal years 1997, 1996 and 1995, respectively.
Note 5. Leases
The Company leases its distribution center and administrative offices under two
leases, from its Chief Executive Officer and principal shareholder. The
significant terms of the leases are discussed in Note 11 "Related Party
Transactions" to the consolidated financial statements.
Fixed asset amounts for all capitalized leases are as follows:
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
---------------------------
(in thousands)
<S> <C> <C>
Buildings $7,105 $7,105
Fixtures and equipment 1,625 1,625
---------------------------
8,730 8,730
Allowances for depreciation and amortization 4,291 4,034
---------------------------
$4,439 $4,696
===========================
</TABLE>
The Company leases substantially all of its stores, many of which contain
renewal options, for periods ranging from five to twenty-five years, with the
majority being ten years. Most leases also provide for payment of operating
expenses, real estate taxes, and for additional rent based on a percentage of
sales.
Net rental expense was as follows:
<TABLE>
<CAPTION>
Fiscal Year
1997 1996 1995
-------------------------------
(in thousands)
<S> <C> <C> <C>
Minimum rentals $50,237 $49,653 $57,420
Contingent rentals 719 274 246
-------------------------------
$50,956 $49,927 $57,666
===============================
</TABLE>
-31-
<PAGE>
Future minimum rental payments required under all leases that have initial or
remaining noncancelable lease terms in excess of one year at January 31, 1998
are as follows:
<TABLE>
<CAPTION>
Operating Capitalized
Leases Leases
-------------------------
(in thousands)
<S> <C> <C>
1998 $43,486 $ 1,294
1999 49,865 1,294
2000 47,404 1,294
2001 43,920 1,294
2002 38,174 1,294
Thereafter 118,663 16,473
----------------------
Total minimum payments required $341,512 22,943
========
Amounts representing interest 16,435
-------
Present value of minimum lease payments 6,508
Less current portion 99
-------
Long-term capital lease obligations $ 6,409
=======
</TABLE>
Note 6. Benefit Plans
Stock Option Plans
Under the Company's 1986 Stock Option Plan and 1994 Stock Option Plan (the
"Plans"), the Compensation Committee of the Board of Directors may grant options
to acquire shares of common stock to employees of the Company and its
subsidiaries at the fair market value of the common stock on the date of grant.
Under the Plans, options generally become exercisable commencing one year from
the date of grant in increments of 25% per year with a maximum term of ten
years. Shares authorized for issuance under the 1986 and 1994 Stock
-32-
<PAGE>
Option Plans were 2,200,000 and 2,000,000 (adjusted), respectively. As of June
1, 1995, the Company stopped issuing stock options under the 1986 Stock Option
Plan. At January 31, 1998, of the 4,200,000 options authorized for issuance
under the Plans, 2,812,741 have been granted and are outstanding, 572,647 of
which were vested and exercisable. Shares available for future grants at January
31, 1998 and February 1, 1997 were 510,974 and 1,391,772, respectively. The
following table summarizes information about the stock options outstanding under
the Plans at January 31, 1998:
<TABLE>
<CAPTION>
--------------------------------- ----------------------------
Outstanding Exercisable
--------------------------------- ----------------------------
Weighted Weighted
Average Average Average
Exercise Remaining Exercise Exercise
price range Shares Life Price Shares Price
---------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
$1.13-$1.82 272,118 7.3 $1.80 114,618 $1.80
2.32-2.63 912,123 8.2 2.38 73,029 2.37
3.00-3.69 230,000 8.4 3.07 57,500 3.07
4.00-6.88 598,500 8.4 5.97 141,500 6.71
7.13-16.80 800,000 7.9 14.46 186,000 7.39
--------- --------
Total 2,812,741 8.1 $6.58 572,647 $5.03
========= ========
</TABLE>
The Company also has a stock option plan for non-employee directors (the "1990
Plan"). Options under this plan are granted at 85% of the fair value at the date
of grant. Under the 1990 Plan, options generally become exercisable commencing
one year from the date of grant in increments of 25% per year with a maximum
term of ten years. As of January 31, 1998, there were 500,000 shares authorized
for issuance and 172,000 shares have been granted and are outstanding, 94,500 of
which were vested and exercisable. There are 328,000 shares of common stock
reserved for possible future option grants under the 1990 Plan. The following
table summarizes information about the stock options outstanding under the 1990
Plan at January 31, 1998:
<TABLE>
<CAPTION>
----------------------------- ---------------------
Outstanding Exercisable
----------------------------- ---------------------
Weighted Weighted
Average Average Average
Exercise Remaining Exercise Exercise
price range Shares Life Price Shares Price
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.78-$2.02 18,000 7.7 $1.90 6,750 $1.86
3.14-5.53 113,000 7.0 4.73 46,750 5.20
6.91-13.71 41,000 3.5 10.88 41,000 10.88
------- ------
Total 172,000 6.2 $5.90 94,500 $7.43
======= ======
</TABLE>
-33-
<PAGE>
The following tables summarize activity under the 1986 and 1994 Plans and the
1990 Plan:
<TABLE>
<CAPTION>
---------------------------------- ------------------------------------
1986 and 1994 Plans 1990 Plan
---------------------------------- ------------------------------------
Number of Option Number of Option
Shares Price Weighted Shares Price Weighted
Subject Range Average Subject Range Average
to per Exercise to per Exercise
Option Share Price Option Share Price
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance
Jan. 28, 1995 1,868,512 $5.50-$12.13 $7.32 142,000 $5.00-$13.71 $8.46
Granted 448,174 1.13-2.63 1.85 12,000 1.78 1.79
Exercised
Canceled (555,150) 1.81-11.25 6.30 (23,000) 1.78-6.33 5.73
- -----------------------------------------------------------------------------------------
Balance
Feb. 3, 1996 1,761,536 1.13-12.13 6.24 131,000 1.78-13.71 8.33
Granted 1,376,198 1.75-4.00 2.54 9,000 2.02 2.03
Exercised (6,772) 2.81-4.13 6.82
Canceled (1,114,486) 1.25-12.13 7.20
- -----------------------------------------------------------------------------------------
Balance
Feb. 1, 1997 2,016,476 1.13-9.25 3.21 140,000 1.78-13.71 7.92
Granted 1,062,608 5.00-16.80 12.00 69,000 3.14-5.05 4.29
Exercised (191,169) 1.44-5.50 2.67 (5,000) 5.53 5.54
Canceled (75,174) 1.81-5.94 2.96 (32,000) 5.00-13.71 11.36
- -----------------------------------------------------------------------------------------
Balance
Jan. 31, 1998 2,812,741 $1.13-$16.80 $6.37 172,000 $1.78-$13.71 $5.90
=========================================================================================
</TABLE>
The per share weighted-average fair value of the stock options granted during
Fiscal years 1997, 1996 and 1995 was $4.14, $1.05 and $0.57 respectively using
the Black Scholes option pricing model, with the following weighted-average
assumptions;
1997 - expected dividend yield 0.0%, risk-free interest rate of 5.5%, expected
life of five years and stock volatility of 48%;
1996 - expected dividend yield 0.0%, risk-free interest rate of 6.7%, expected
life of five years and stock volatility of 72%;
1995 - expected dividend yield 0.0%, risk-free interest rate of 6.7%, expected
life of five years and stock volatility of 47%
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized
-34-
<PAGE>
the financial statements for employee stock options which are issued at the
closing stock price on the date of grant. During fiscal years 1997, 1996 and
1995, the Company recognized expenses of $52,000, $3,000 and $3,000,
respectively, for stock options issued to non-employee directors at 85% of
the closing stock price on the date of grant. Had the Company determined
compensation cost, for employee stock options, based on fair value in
accordance with SFAS 123, the Company's net income would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Fiscal Year
------------------------------
1997 1996 1995
------------------------------
<S> <C> <C> <C>
Net income (loss), as reported $20,574 $7,102 ($23,816)
Basic earnings (loss) per share, as reported $1.05 $0.36 ($1.22)
Diluted earnings (loss) per share, as reported $0.99 $0.36 ($1.22)
Pro forma net income (loss) $19,074 $6,658 ($23,919)
Pro forma basic earnings (loss) per share $0.97 $0.34 ($1.23)
Pro forma diluted earnings (loss) per share $0.92 $0.34 ($1.23)
</TABLE>
Restricted Stock Plan
Under the 1990 Restricted Stock Plan, the Compensation Committee of the Board of
Directors is authorized to grant awards for up to 600,000 restricted shares of
Common Stock to executive officers and other key employees of the Company and
its subsidiaries. The shares are issued as restricted stock and are held in the
custody of the Company until all vesting restrictions are satisfied. If
conditions or terms under which an award is granted are not satisfied, the
shares are forfeited. Shares begin to vest under these grants after three years
and are fully vested after five years, with vesting criteria which includes
continuous employment until applicable vesting dates have expired. At January
31, 1998, a total of 150,000 shares have been granted, of which 50,000 were
granted in 1996 with a weighted average grant date fair market value of
$2.37 per share, aggregating a total of $118,750; the remaining 100,000 were
granted in 1995 with a weighted average grant date fair value of $2.33
per share, aggregating a total of $232,500. As of January 31, 1998, a
total of 30,000 of these shares had vested. Unearned compensation is
recorded at the date of award, based on the market value of the shares,
and is included as a separate component of shareholders' equity and is
amortized over the applicable vesting period. The amount amortized to expense in
Fiscal years 1997 and 1996 was approximately $70,000 and $107,000, respectively.
At January 31, 1998, outstanding awards and shares available for grant totaled
150,000 and 450,000, respectively.
401 (k) Savings Plan
The Company offers a 401(k) Savings Plan to eligible employees meeting certain
age and service requirements. This plan permits participants to contribute up to
16% of their salary, including bonuses, up to the maximum allowable by Internal
Revenue Service regulations. Participants are immediately vested in their
voluntary contributions plus actual earnings thereon. Participant vesting of the
Company's matching and profit sharing contribution is based on the years of
service completed by the participant. Participants are fully vested upon the
completion of four years of service. All participant forfeitures of nonvested
benefits are used to reduce the Company's contributions in future years. The
Company matching contribution totaled $529,000, $465,000 and $470,000 in Fiscal
years 1997, 1996 and 1995, respectively.
-35-
<PAGE>
Supplemental Executive Retirement Plan (SERP)
In 1997, the Company introduced a non-qualified Supplemental Executive
Retirement Plan (SERP) effective March 1, 1997. The SERP, which is unfunded,
provides eligible executives defined pension benefits that supplement benefits
under other retirement arrangements. The annual benefit amount has been
predetermined as part of the plan and vests based on years of service and age at
retirement. For Fiscal year 1997, expenses related to the plan totaled
approximately $361,000. The present value of the projected benefit obligation
was approximately $2.3 million at January 31, 1998. The January 31, 1998
Consolidated Balance Sheet includes $313,000 of accrued expense.
Note 7. Shareholders' Equity
On November 14, 1997, the shareholders approved an amendment to the Company's
Certificate of Incorporation to increase authorized common shares from 20
million shares of $0.01 par value common stock to 50 million shares of $0.01 par
value common stock. On that date, the Board of Directors approved a two-for-one
common stock split to be distributed in the form of a 100% stock dividend. As a
result, 9,898,758 were issued on December 15, 1997 to shareholders of record on
December 1, 1997. Accordingly, amounts equal to the par value of the additional
shares issued have been charged to additional paid in capital and credited to
common stock. All references throughout this annual report to number of shares,
per share amounts, stock option data and market prices of the Company's common
stock has been restated to reflect the stock split.
At January 31, 1998 and February 1, 1997, the Company held 70,788 and 72,788
shares, respectively, in treasury stock resulting from the repurchase of common
stock through open market purchases.
Note 8. Strawberries Acquisition
In October 1997, the Company acquired 90 out of a total of 118 stores owned
by Strawberries, Inc., a privately held non-mall music specialty retailer
operating primarily in New England. The stores operate under the names
"Strawberries" and "Waxie Maxie" and are primarily located in freestanding or
strip center locations. The acquisition has been accounted for
using the purchase method of accounting. At the time of the acquisition, the
Company paid $21 million for the assets which included the fixed assets,
merchandise inventories, other related current assets and $683,000 in
goodwill. This goodwill is being amortized on a straight-line basis over a 15
year period.
Pro forma combined net sales, including the 90 Strawberries stores acquired,
was $610 million (unaudited) in Fiscal 1997. Pro forma net sales for Fiscal
1996 and pro forma net income for Fiscal 1997 and 1996 are not presented
because such information was not available as a result of Strawberries'
bankruptcy filing and subsequent liquidation.
-36-
<PAGE>
Note 9. Concentration of Business Risks
The Company purchases inventory for its stores from approximately 450 suppliers,
with approximately 68% of purchases being made from six suppliers. In the past,
the Company has not experienced difficulty in obtaining satisfactory sources of
supply, and management believes that it will retain access to adequate sources
of supply. However, a loss of a major supplier could cause a possible loss of
sales, which would have an adverse affect on operating results and result in a
decrease in vendor support for the Company's advertising programs.
Note 10. Quarterly Financial Information (Unaudited)
<TABLE>
-----------------------------------------------------
Fiscal 1997 Quarter Ended
1997 1/31/98 11/1/97 8/2/97 5/3/97
-----------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Sales $571,314 $242,041 $114,737 $105,024 $109,512
Gross profit 209,892 87,439 43,662 39,527 39,264
Net income (loss) 20,574 21,291 979 (834) (862)
Basic earnings (loss)
per share $1.05 $1.08 $0.05 $(0.04) $(0.04)
Diluted earnings (loss)
per share $0.99 $1.01 $0.05 $(0.04) $(0.04)
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------
Fiscal 1996 Quarter Ended
1996 2/1/97 11/2/96 8/3/96 5/4/96
-----------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Sales $481,657 $180,735 $97,583 $96,717 $106,622
Gross profit 172,705 64,703 36,217 34,616 37,169
Net income (loss) 7,102 14,710 (2,477) (2,392) (2,739)
Basic earnings (loss)
per share $0.36 $0.75 $(0.13) $(0.12) $(0.14)
Diluted earnings (loss)
per share $0.36 $0.74 $(0.13) $(0.12) $(0.14)
</TABLE>
-37-
<PAGE>
Note 11. Related Party Transactions
The Company leases its 178,000 square foot distribution center/office
facility in Albany, New York from Robert J. Higgins, its Chief Executive
Officer and principal shareholder, under two capitalized leases that expire
in the year 2015. The original distribution center/office facility was
constructed in 1985. A 77,000 square foot distribution center expansion was
completed in October 1989 on real property adjoining the existing facility.
Under the capitalized leases dated April 1, 1985 and November 1, 1989, the
Company paid Mr. Higgins an annual rent of $1.3 million in fiscal 1997 and
$1.2 million in fiscal 1996 and 1995. On January 1, 1998, the aggregate
rental payment increased in accordance with the biennial increase in the
Consumer Price Index, pursuant to the provisions of each lease. Effective
January 1, 2000, and every two years thereafter, the rental payment will
increase in accordance with the biennial increase in the Consumer Price
Index, pursuant to the provisions of the lease. Neither of the leases contain
any real property purchase option at the expiration of its term. Under the
terms of the leases, the Company pays all property taxes, insurance and other
operating costs with respect to the premises. Mr. Higgins' obligation for
principal and interest on his underlying indebtedness relating to the real
property approximates $90,000 per month.
The Company leases two of its retail stores from Mr. Higgins under long-term
leases. For each of fiscal 1997, 1996 and 1995 the Company paid Mr. Higgins
$35,000 in annual rental payments. Under the terms of the leases, the Company
pays property taxes, maintenance and a contingent rental if a specified sales
level is achieved. In fiscal 1997, 1996 and 1995, the Company paid Mr.
Higgins $30,000 annually for a lease on certain parking facilities contiguous
to the Company's distribution center/office facility. The lease is a one year
lease renewed annually and was renewed through October 31, 1998, after
approval by the audit committee.
The Company regularly utilizes privately-chartered aircraft owned or
partially owned by Mr. Higgins. Under an unwritten agreement with Quail Aero
Services of Syracuse, Inc., a corporation in which Mr. Higgins is a one-third
shareholder, the Company paid $59,000, $76,000 and $70,000 in 1997, 1996 and
1995, respectively, for chartered aircraft services. The Company also
chartered an aircraft from Crystal Jet, a corporation wholly owned by Mr.
Higgins. During fiscal 1997, 1996, and 1995, payments to Crystal Jet, under
an unwritten agreement, aggregated $199,000, $227,000 and $167,000
respectively. The Company believes that the charter rates and terms are as
favorable to the Company as those generally available to it from other
commercial carriers.
The transactions that were entered into with an "interested director" were
approved by a majority of disinterested directors of the Company's board,
either by the audit committee or at a meeting of the board of directors. The
Trans World board of directors believes that the leases and other provisions
are at rates and on terms that are at least as favorable as those that would
have been available to the Company from unaffiliated third parties under the
circumstances.
NOTE 12. RESTATEMENT
The Company has restated its consolidated financial statements for the
fiscal year ended February 3, 1996 to correct an error in the calculation of the
1995 restructuring charge discussed in Note 2. The effect of the correction of
this error on the 1995 consolidated statement of income was a reduction in the
1995 restructuring charge of $2,436,000, an increase in income tax expense of
$879,000 and a decrease in the net loss of $1,557,000. The effect of the
correction of this error on the consolidated balance sheet as of February 3,
1996 was an increase in fixed assets, net, of $2,436,000, a decrease in deferred
tax assets of $879,000 and an increase in retained earnings of $1,557,000.
The correction of this error did not have an effect on the consolidated
statements of operations for either the fiscal year ended February 1, 1997 or
the fiscal year ended January 31, 1998. The effect of the correction of this
error on the consolidated balance sheets as of February 1, 1997 and January 31,
1998 was an increase in fixed assets, net, of $2,436,000, a decrease in deferred
tax assets (or increase in deferred tax liabilities) of $879,000 and an increase
in retained earnings of $1,557,000.
<PAGE>
Index to Exhibits
-----------------
Document Number and Description
- -------------------------------
Exhibit No.
3.1 Restated certificate of Incorporation -- incorporated herein by reference to
Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year
ended January 29, 1994. Commission File No. 0-14818.
3.2 Certificate of Amendment to the Certificate of Incorporation -- incorporated
herein by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended October 29, 1994. Commission
File No. 0-14818.
3.3 Amended By-Laws--incorporated herein by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended February 2, 1991.
Commission File No. 0-14818.
*3.4 Certificate of Amendment to the Certificate of Incorporation.
4.1 Loan and Security Agreement, dated July 9, 1998, between Congress Financial
Corporation and the Company, for the secured revolving credit agreement --
incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 2, 1997.
Commission File No. 0-14818.
10.1 Lease, dated April 1, 1985, between Robert J. Higgins, as Landlord, and
Record Town, Inc. and Trans World Music Corporation, as Tenant and Amendment
thereto dated April 28, 1986 -- incorporated herein by reference to Exhibit 10.3
to the Company's Registration Statement on Form S-1, No. 33-6449.
10.2 Second Addendum, dated as of November 30, 1989, to Lease, dated April 1,
1985, among Robert J. Higgins, and Trans World Music Corporation, and Record
Town, Inc., exercising five year renewal option -- incorporated herein by
reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended February 3, 1990. Commission File No. 0-14818.
10.3 Lease, dated November 1, 1989, between Robert J. Higgins, as Landlord, and
Record Town, Inc. and Trans World Music Corporation, as Tenant -- incorporated
here by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K
for the fiscal year ended February 2, 1991. Commission File No. 0-14818.
10.4 Employment Agreement, dated as of February 1, 1996 between the Company and
Robert J. Higgins -- incorporated herein by reference to Exhibit 10.4 to the
Company's Annual Report of Form 10-K for the fiscal year ended February 1, 1997.
Commission File No. 0-14818
10.5 Trans World Music Corporation 1986 Incentive and Non-Qualified Stock Option
Plan, as amended and restated, and Amendment No. 3 thereto -- incorporated
herein by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K
for the fiscal year ended February 2, 1991. Commission File No. 0-14818.
10.6 Trans World Music Corporation 1990 Stock Option Plan for Non-Employee
Directors -- incorporated herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-2, No. 33-36012.
10.7 Trans World Music Corporation 1990 Restricted Stock Plan -- incorporated
herein by reference to Exhibit 10.7 to the Company's Registration Statement on
Form S-2, No. 33-36012.
10.8 Form of Restricted Stock Agreement dated February 1, 1995 and May 1, 1995
between the Company and Edward W. Marshall, Jr., Executive Vice President of
Operations and Bruce J. Eisenberg, Senior Vice President of Real Estate,
respectively, incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
-38-
<PAGE>
April 29, 1995. Commission File No. 0-14818.
10.9 Form of Restricted Stock Agreement dated May 1, 1996 between the Company
and John J. Sullivan, Senior Vice President-Finance and Chief Financial Officer,
incorporated herein by reference to Exhibit 10.14 to the Company's Annual Report
on Form 10-K for the fiscal year ended February 1, 1997.
Commission File No. 0-14818.
10.10 Severance Agreement, dated May 20, 1996 between Trans World Entertainment
Corporation and James A. Litwak, Executive Vice President of Merchandising and
Marketing, incorporated herein by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the fiscal year ended February 1, 1997.
Commission File No. 0-14818.
10.11 Severance Agreement, dated October 1, 1994, between Trans World
Entertainment Corporation and Edward Marshall, Senior Vice President-Operations
- -- incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended October 29, 1994. Commission File No.
0-14818.
10.12 Trans World Entertainment Corporation 1994 Stock Option Plan --
incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended July 30, 1994. Commission
File No. 0-14818.
10.13 Trans World Entertainment Corporation 1994 Director Retirement Plan --
incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended October 31, 1994. Commission
File No. 0-14818.
10.14 Form of Indemnification Agreement dated May 1, 1995 between the Company
and its officers and directors incorporated herein by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
April 29, 1995. Commission File No. 0-14818.
10.15 Trans World Entertainment Corporation 1997 Supplemental Executive
Retirement Plan -- incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 3,
1997. Commission File No. 0-14818.
*10.16 Trans World Entertainment Corporation Asset Purchase Agreement with
Strawberries, Inc.
*21 Significant Subsidiaries of the Registrant.
*23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule (For electronic filing purposes only)
- ---------------------------------------------------------------------
*Filed previously.
-39-
<PAGE>
EXHIBIT INDEX
3.4 Certificate of Amendment to the Certificate of Incorporation.
10.16 Trans World Entertainment Corporation Asset Purchase Agreement with
Strawberries, Inc.
22 Significant Subsidiaries of the Registrant.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule (electronic filing only)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS DATA EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS, AND
THE CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000795212
<NAME> TRANS WORLD ENTERTAINMENT CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> JAN-31-1998
<CASH> 94,732
<SECURITIES> 0
<RECEIVABLES> 3,105
<ALLOWANCES> 0
<INVENTORY> 189,394
<CURRENT-ASSETS> 290,350
<PP&E> 169,985
<DEPRECIATION> 97,917
<TOTAL-ASSETS> 374,019
<CURRENT-LIABILITIES> 201,376
<BONDS> 41,409
0
0
<COMMON> 198
<OTHER-SE> 124,324
<TOTAL-LIABILITY-AND-EQUITY> 374,019
<SALES> 571,314
<TOTAL-REVENUES> 571,314
<CGS> 361,422
<TOTAL-COSTS> 361,422
<OTHER-EXPENSES> 170,834
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,148
<INCOME-PRETAX> 34,063
<INCOME-TAX> 13,489
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,574
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 0.99
</TABLE>
