<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 29, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--
SECURITIES EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ............ TO ............
COMMISSION FILE NUMBER: 0-14818
TRANS WORLD ENTERTAINMENT CORPORATION
-------------------------------------
(Exact name of registrant as specified in its charter)
New York 14-1541629
-------- ----------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
38 Corporate Circle
Albany, New York 12203
----------------------
(Address of principal executive offices, including zip code)
(518) 452-1242
--------------
(Registrant's telephone number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's Knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or an
amendment to this Form 10-K. [ ]
As of April 26, 2000, 48,356,304 shares of the Registrant's Common Stock,
excluding 5,104,432 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 $10.25 on the NASDAQ
National Market on April 26, 2000, was approximately $372,876,080. Shares of
Common Stock held by the Company's controlling shareholder, who controls
approximately 24.8% of the outstanding Common Stock, have been excluded for
purposes of this computation. Because of such shareholder's control, shares
owned by other officers, directors and 5% shareholders have not been excluded
from the computation.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Trans World Entertainment Corporation (which, together with its consolidated
subsidiaries, is referred to herein as the "Company") was incorporated in New
York in 1972. Trans World Entertainment Corporation owns 100% of the outstanding
common stock of Record Town, Inc., through which the Company's principal retail
operations are conducted.
The Company operates a chain of retail entertainment stores and an e-commerce
site in a single industry segment. Sales were $1.36 billion during the fiscal
year ended January 29, 2000 (referred to herein as "1999"). The Company is
one of the largest specialty retailers of compact discs, prerecorded audio
cassettes, prerecorded videocassettes, digital versatile discs ("DVDs") and
related accessories in the United States. At January 29, 2000, the Company
operated 967 stores totaling approximately 4.9 million square feet in 44
states, the District of Columbia, the Commonwealth of Puerto Rico and the
U.S. Virgin Islands, with the majority of the stores concentrated in the
Eastern half of the United States. The Company's business is seasonal in
nature, with the peak selling period being the Christmas holiday season in
the Company's fourth fiscal quarter.
On April 22, 1999, the Company merged with Camelot Music Holdings, Inc.
("Camelot"). The Company exchanged 1.9 shares of its common stock for each
share of Camelot common stock. The Company issued approximately 19.3 million
shares of its common stock in exchange for all outstanding Camelot common stock.
The transaction was accounted for as a pooling-of-interests. Accordingly,
prior period consolidated financial statements have been restated to include
combined results of operations, financial position and cash flows of Camelot
as though it had been a part of the Company since Camelot's adoption of
"fresh-start" accounting on January 31, 1998.
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 offers a broad selection of music and video titles at competitive
prices in convenient, attractive stores. The Company has 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 are designed to
offer consumers an exciting shopping experience. The mall stores emphasize a
strong in-store marketing message, and a broad merchandise selection 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 operate under the trade names of Record Town,
Camelot Music or The Wall. There were 572 such stores at January 29, 2000. This
concept utilizes an average space of approximately 4,300 square feet with
certain stores ranging in excess of 10,000 square feet. Camelot Music and The
Wall stores were acquired as part of the Camelot acquisition.
SATURDAY MATINEE STORES. These stores are dedicated to the sale of
prerecorded video merchandise and related accessories. These stores are
located in large, regional shopping malls and average 2,200 square feet in
size. There were 38 such locations in operation at January 29, 2000.
COMBINATION STORES. At January 29, 2000, the Company operated 92 combination
Record Town/Saturday Matinee stores. The combination store concept occupies an
average of 8,300 square feet. These stores share common storefronts and offer
the consumer an exciting combination of music and video merchandise 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 29, 2000, the Company operated 12
F.Y.E. stores. These stores carry a broad assortment of music and video
merchandise and an extensive selection of games, portable electronics,
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accessories and boutique items, as well as a game arcade. This format makes the
traditional superstore experience available to shopping mall consumers. This
format is designed to be a semi-anchor or destination location in major regional
malls. The F.Y.E. concept occupies an average of 24,000 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 merchandise selection. These stores, 9 of which were in
operation at January 29, 2000, are generally operated under the name Tape World.
The specialty mall stores operate in approximately 1,200 square feet. The
Company's strategy is to reposition and expand these stores into Record Town
stores or combination stores as opportunities become available.
FREESTANDING STORES
The Company's freestanding concept included 243 stores in operation at January
29, 2000, which primarily operate under the names Coconuts, Strawberries Music
and Spec's Music. These stores are designed for freestanding, strip center and
downtown locations in areas of high population density. These stores occupy an
average space of approximately 5,200 square feet, and carry an extensive
merchandise assortment. The Spec's Music stores were acquired as part of the
Camelot acquisition. The Company's freestanding stores include 10 video
rental stores operating under the name Movies Plus.
The Company also operates "Planet Music," a 31,000 square foot, freestanding
superstore in Virginia Beach, VA. The store offers an extensive catalog of
music, video and other related merchandise.
E-COMMERCE
During 1998, the Company established a subsidiary to develop a strategy to
conduct business on the Internet. In November 1998, the Company officially
launched TWEC.COM, its Internet commerce site. TWEC.COM is the on-line hub for
Trans World Entertainment's retail stores. With worldwide distribution spanning
16 countries in addition to the United States, the site features all of the
music CDs and cassettes, video games, DVD and VHS home videos that are available
at its retail stores, and more. The Company's strategy is to develop a
profitable e-commerce business by establishing marketing, selling and customer
service capabilities that take advantage of the synergies between its retail
stores and its e-commerce site. The Company markets its e-commerce site through
the same advertising and marketing channels used for its retail stores, as
well as through strategic alliances with well-known Internet companies, such
as Yahoo! and Real Networks. Customers can return on-line purchases at retail
store locations. The Company currently fulfills its on-line sales through a
third party and plans to provide its own fulfillment by the third quarter of
fiscal 2000.
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MERCHANDISE
The Company's stores offer a full assortment of compact discs, prerecorded audio
cassettes, prerecorded video, DVDs and related accessories. Sales by merchandise
category as a percent of total sales over the past three years were as follows:
<TABLE>
<CAPTION>
----------------------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
----------------------------------------------
<S> <C> <C> <C>
Compact discs 67.0% 64.3% 55.5%
Prerecorded audio cassettes 9.5 12.2 14.2
Singles 2.9 3.6 4.3
Prerecorded video 11.2 10.3 16.3
Other 9.4 9.6 9.7
----------------------------------------------
TOTAL 100.0% 100.0% 100.0%
----------------------------------------------
</TABLE>
PRERECORDED MUSIC. The Company's music stores offer a full assortment of
compact discs and prerecorded audio cassettes purchased primarily from five
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", which are the top 1,000 titles with the highest rate
of sale in any given month, and "catalog", which are items that customers
purchase to build their collections.
PRERECORDED VIDEO. The Company offers prerecorded video cassettes and DVDs for
sale in a majority of its stores. In 1999, DVD sales were 22% of the Company's
total video sales. The Company believes that the DVD player will gradually
replace VCRs as the DVD technology becomes more affordable and accessible. Paul
Kagan Associates, an entertainment/media research firm, estimated that more than
2 million households owned a DVD player by the end of 1999 and as many as 43
million households will own a DVD player by the end of 2008. The Company plans
to capitalize on this trend by making DVDs increasingly available in its stores.
OTHER MERCHANDISE. The Company stocks and promotes brand name blank audio
cassette and videocassette tapes as well as accessory merchandise for compact
discs, audio cassettes and videocassettes, including maintenance and cleaning
products, storage cases, portable electronics, headphones and video games.
ADVERTISING
The Company makes extensive use of in-store 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 merchandise.
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INDUSTRY AND COMPETITIVE ENVIRONMENT
According to the Recording Industry Association of America, the U.S. retail
music market was approximately $14.6 billion in 1999. According to Paul Kagan
Associates, the video sell-through market, including VHS and DVD, totaled an
estimated $9.5 billion in 1999 and is expected to grow at a compounded annual
rate of 8.6% through 2003. The retail home entertainment industry is highly
competitive. The Company's retail stores compete primarily with other
specialty retail music and video chains (e.g. Musicland, Wherehouse
Entertainment and Tower Records), as well as mass merchants (e.g. Wal-Mart,
K-Mart, Target), book stores (e.g. Barnes and Noble, Borders) and consumer
electronics stores (e.g. Best Buy, Circuit City), some of which may have
greater financial or other resources than the Company. The recent trend in
the consolidation of specialty retailers included not only the Company's
acquisitions of Camelot Music Holdings, Inc. and Strawberries, Inc., but also
Camelot's previous acquisition of The Wall and Spec's Music, as well as the
acquisition of Blockbuster Music by Wherehouse Entertainment, Inc.
The Company also competes with mail order clubs (e.g. BMG Music and Columbia
House) and Internet companies (e.g. Amazon.com and CDnow.com). In addition, a
uniform format is being developed that will enable music companies to sell their
products via direct Internet download. The Company believes that sales via the
Internet will continue to become more significant over time. The Company
launched its Internet commerce site in the late fall of 1998.
SEASONALITY
The Company's business is highly seasonal, with the fourth quarter constituting
the Company's peak selling period. In fiscal 1999, the fourth quarter accounted
for approximately 38% of annual sales and 79% of net income, excluding the
one-time Camelot merger charge. 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 supplement its permanent
store sales 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. Quarterly results can be affected by the timing and strength of new
releases, the timing of holidays, new store openings and the sales performance
of existing stores.
DISTRIBUTION AND MERCHANDISE OPERATIONS
The Company's two distribution facilities use certain automated and computerized
systems designed to manage merchandise receipt, storage and shipment. Store
inventories of regular merchandise are replenished using daily merchandise sales
information that is transmitted to the Company's central computer system from
each store after the close of the business day. Shipments from the facilities
to the Company's stores are made at least once a week and currently provide
approximately 77% of all merchandise requirements. The balance of the stores'
requirements is satisfied through direct shipments from manufacturers.
Company-owned trucks service approximately 21% of the Company's stores. The
balance is serviced by several common carriers chosen on the basis of
geography and rate considerations. The Company does not have any contractual
arrangements with common carriers. The Company's sales volume and centralized
merchandise distribution facilities enable them to take advantage of
transportation economies.
The Company believes that its existing distribution centers are adequate to meet
the Company's planned business needs.
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SUPPLIERS AND PURCHASING
The Company purchases inventory from approximately 500 suppliers.
Approximately 73% of purchases in fiscal 1999 were made from five suppliers:
WEA (Warner/Electra/Atlantic Corp.), Sony Music, Universal Distribution, BMG
(Bertelsmann Music Group) and EMD (EMI Music Distribution). As is typical in
this industry, the Company does not have 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 video.
The Company produces store fixtures for its new and existing stores in its
manufacturing facility located in Johnstown, New York. The Company believes that
its costs of production are lower than purchasing from an outside manufacturer.
TRADE CUSTOMS AND PRACTICES
Under current trade practices with four of the five largest suppliers, retailers
of compact discs and prerecorded audio cassettes are entitled to return
merchandise they have purchased for other titles carried by these suppliers;
however, the returns are subject to merchandise return penalties. The remaining
supplier continues to accept merchandise returns, and recently changed its
policy on merchandise returns to eliminate return penalties on the majority of
its merchandise. This return practice permits the Company to carry a wider
selection of music titles and reduce the risk of obsolete inventory. Most
manufacturers and distributors of prerecorded video offer return privileges
comparable to those with prerecorded music, but without merchandise return
penalties. Except for the one large merchandiser mentioned above, merchandise
return policies have not changed significantly during the past five years.
Historically, the Company generally has adapted its purchasing policies to
changes in the policies of its suppliers.
EMPLOYEES
As of January 29, 2000, the Company employed approximately 10,300 associates,
of whom 4,300 were employed on a full-time basis. The remainder were employed
on a part-time or temporary basis. The Company hires seasonal sales
associates during peak seasons to assure continued levels of customer
service. Store managers report to district managers, who, in turn, report to
a regional manager. Store managers, district managers and regional managers
may be eligible to receive incentive compensation based on the profitability
of stores for which they are responsible. None of the employees are covered by
collective bargaining agreements, and management believes that the Company
enjoys favorable relations with its employees. Increases in the minimum wage
have had a significant effect on the Company's compensation expense in prior
years. Future increases in the minimum wage may have an adverse effect on the
Company's results of operations and financial condition.
RETAIL INFORMATION SYSTEMS
The Company utilizes an IBM AS/400 computer system for the majority of its
information processing. The system processes sales, inventory, accounting,
payroll, telecommunications and other operating information. During fiscal 1998
and 1999, the Company completed a chain-wide rollout of a new point-of-sale
system. This system has improved customer service while increasing the
accuracy of perpetual inventory records at the store level. Features of the
system include enhanced inventory management functions, including merchandise
receiving and returns, and the ability to lookup, by SKU, a store's current
in-stock inventory position. Additionally, the system facilitates streamlined
checkout procedures and daily electronic communication between stores, the
corporate offices and field management.
YEAR 2000
To date, the Company has not experienced any significant business disruptions
and has had no delays in receiving product from its suppliers as a result of
the Year 2000. While the risks associated with Year 2000 readiness peaked
with the change of the date from December 31, 1999 to January 1, 2000, there
is a risk that a Year 2000 related issue could surface within the year. The
Company plans to devote the necessary resources to resolve any Year 2000
issues in a timely manner. However, if third parties upon which the Company
relies fail to adequately address any of their Year 2000 problems, it could
disrupt the Company's business. In the most reasonably likely worst case
scenarios, the Company could experience delays in receiving product from
vendors, shipping product to stores, accessing various types of information or
communicating effectively with financial institutions or vendors.
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The Company's Year 2000 readiness process for its internal systems was
substantially complete by the third quarter of 1999. Incremental costs of
addressing the Year 2000 issue, which have totaled approximately $721,000, were
charged to expense as incurred. The Company primarily utilized internal
resources for the completion of Year 2000 remediation.
6
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ITEM 2. PROPERTIES
RETAIL STORES
At January 29, 2000, the Company operated 967 retail locations. All of the
Company's retail stores are under operating leases with various terms and
options. Substantially all of the stores provide for payment of fixed monthly
rentals, a percentage of 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 29, 2000:
<TABLE>
<CAPTION>
# of # of
YEAR LEASES YEAR LEASES
---- ------ ---- ------
<S> <C> <C> <C> <C>
2000 184 2004 146
2001 116 2005 65
2002 99 2006 31
2003 133 2007 & Beyond 193
</TABLE>
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.
CORPORATE OFFICES AND DISTRIBUTION CENTER FACILITIES
The Company leases its Albany, New York distribution facility and corporate
office space from its largest shareholder and Chief Executive Officer under
three capital leases that extend through the year 2015. All three 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
approximately 40,300 square feet. The distribution center portion is comprised
of approximately 128,100 square feet. The Company owns its 236,600 square foot
distribution center and 59,200 square feet of commercial office space in North
Canton, Ohio.
The Company leases an 82,000 square foot facility in Johnstown, New York, where
it manufactures its store fixtures. The operating lease expires in December
2000. The Company also leases 20,700 square feet of commercial office space in
Albany, New York. There is currently no written lease for this facility.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to various claims, legal actions, and complaints arising
in the ordinary course of its business, including pre-petition assessments by
the Internal Revenue Service ("IRS") aggregating approximately $7.9 million
and relating to Camelot's corporate-owned life insurance program. No judgment
has been rendered regarding these IRS assessments as of January 29, 2000. A
trial to decide the matter began in March 2000 in the Federal District Court
for the District of Delaware. A decision is expected to be rendered in the
third or fourth quarter of fiscal 2000. In the event that a judgment is
rendered against the Company in the full amount of the proposed assessment,
the Company's results of operations would be materially adversely affected
with a charge to earnings of approximately $7.9 million plus interest since
January 1998. In the opinion of management, the IRS assessments and all other
claims, legal actions and complaints are without merit or involve such amounts
that unfavorable disposition will not have a material impact on the financial
position, results of operations or cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended January 29, 2000.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION. The Company's Common Stock trades on The NASDAQ Stock Market
under the symbol "TWMC." As of January 29, 2000, there were approximately 6,900
shareholders of record. The following table sets forth high and low last
reported sale prices, adjusted for stock splits, for each fiscal quarter during
the period from February 1, 1998 through April 26, 2000.
CLOSING
SALES
PRICES
High Low
1998
1st Quarter $21.96 $ 16.00
2nd Quarter 29.58 18.25
3rd Quarter 26.75 11.33
4th Quarter 24.38 13.25
1999
1st Quarter $15.75 $ 9.63
2nd Quarter 15.25 10.44
3rd Quarter 13.13 10.19
4th Quarter 12.25 9.25
2000
1st Quarter (through
April 26, 2000) $10.69 $ 9.25
On April 26, 2000, the last reported sale price on the Common Stock on the
NASDAQ National Market was $10.25.
Options for the Company's Common Stock trade on the Chicago Board Options
Exchange.
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. Such dividends would be
restricted to ten percent of the most recent fiscal year's consolidated net
income and could only be paid if, after any payment of dividends, the Company
maintains $25 million of availability under the credit agreement. Any future
determination as to the payment of dividends will 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.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data and other
operating information of the Company and gives retroactive effect to the
acquisition of Camelot for the periods subsequent to its "fresh-start
reporting" on January 31, 1998, upon its reemergence from bankruptcy. The
acquisition was accounted for using the pooling-of-interests method of
accounting. The selected income statement and balance sheet data for the five
fiscal years ended January 29, 2000 set forth below are derived from the
audited consolidated financial statements of the Company. Each fiscal year of
the Company consisted of 52 weeks except the fiscal year ended February 3,
1996, which consisted of 53 weeks. All share and per share amounts have been
adjusted for stock splits. The information is only a summary and should be
read in conjunction with the Company's audited consolidated financial
statements and related notes and other financial information included herein
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------------
JANUARY 29, JANUARY 30, JANUARY 31, FEBRUARY 1, FEBRUARY 3,
2000 1999 1998 1997 1996
-------------------------------------------------------------------
INCOME STATEMENT DATA: (in thousands, except per share and store data)
<S> <C> <C> <C> <C> <C>
Sales $1,358,132 $1,282,385 $571,314 $481,657 $517,046
Cost of sales 858,588 796,311 361,422 308,952 347,554
-------------------------------------------------------------------
Gross profit 499,544 486,074 209,892 172,705 169,492
Selling, general and
administrative expenses 371,998 372,886 170,834 150,218 168,313
Camelot merger-related costs (1) 25,473 --- --- --- ---
Asset impairment charge and
restructuring charge
(reversal), net (2) --- 1,537 --- --- 24,204
-------------------------------------------------------------------
Income (loss) from operations 102,073 111,651 39,058 22,487 (23,025)
Interest expense 3,496 4,989 5,148 12,110 15,201
Other expenses (income), net (4,086) (2,221) (153) (1,343) (979)
-------------------------------------------------------------------
Income (loss) before income
taxes 102,663 108,883 34,063 11,720 (37,247)
Income tax expense (benefit) 41,270 47,873 13,489 4,618 (13,431)
-------------------------------------------------------------------
Net income (loss) $61,393 $61,010 $20,574 $7,102 ($23,816)
===================================================================
Basic earnings (loss) per share $1.17 $1.19 $0.70 $0.24 ($0.82)
===================================================================
Weighted average number
of shares outstanding-basic 52,457 51,105 29,483 29,271 29,178
===================================================================
Diluted earnings (loss) per share $1.15 $1.14 $0.66 $0.24 ($0.82)
===================================================================
Weighted average number
of shares outstanding-diluted 53,354 53,530 31,032 29,697 29,178
===================================================================
BALANCE SHEET DATA: (AT THE END OF THE PERIOD)
Working capital $303,562 $274,535 $88,974 $80,368 $78,773
Total assets 956,410 798,610 374,019 311,610 391,888
Current portion of long-term
obligations 5,311 4,802 99 9,557 3,420
Long-term obligations 19,461 36,065 41,409 50,490 60,364
Shareholders' equity 494,173 432,376 124,522 102,919 95,661
OPERATING DATA:
Store Count (open at end of period):
Mall stores 723 741 340 357 379
Freestanding stores 244 247 199 122 163
------------------------------------------------------------------
Total stores 967 988 539 479 542
Comparable store sales increase
(decrease) (3) 2.0% 7.5% 10.2% 3.6% (3.5)%
Total square footage (in thousands) 4,913 4,693 2,442 2,008 2,140
</TABLE>
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(1) THE CAMELOT MERGER-RELATED COSTS INCLUDED THE WRITE-OFF OF THE BOOK
VALUE OF RETIRED ASSETS, PROFESSIONAL FEES ASSOCIATED WITH THE
COMPLETION OF THE MERGER, SEVERANCE COSTS, JOINT PROXY PRINTING AND
DISTRIBUTION COSTS, AND REGULATORY FILING FEES.
(2) THE ASSET IMPAIRMENT CHARGE AND RESTRUCTURING CHARGE (REVERSAL), NET,
DURING THE YEAR ENDED JANUARY 30, 1999, INCLUDED AN ASSET IMPAIRMENT
CHARGE OF $3.7 MILLION TO WRITE DOWN THE CARRYING AMOUNT OF CERTAIN
FIXED ASSETS AT STORES, PRIMARILY LEASEHOLD IMPROVEMENTS, AND THE
ONE-TIME REVERSAL OF THE REMAINING BALANCE OF $2.2 MILLION IN THE STORE
CLOSING RESERVE ORIGINALLY ESTABLISHED DURING THE FISCAL YEAR ENDED
FEBRUARY 3, 1996. SEE NOTES 1 AND 2 TO THE CONSOLIDATED FINANCIAL
STATEMENTS. DURING THE YEAR ENDED FEBRUARY 3, 1996, IT INCLUDED THE
WRITE-DOWN OF ASSETS, ESTIMATED CASH PAYMENTS TO LANDLORDS FOR THE EARLY
TERMINATION OF OPERATING LEASES, EARLY TERMINATION BENEFITS AND
ESTIMATED PROFESSIONAL FEES. INVENTORY-RELATED COSTS, INCLUDING THE COST
OF RETURNING MERCHANDISE AFTER THE STORE CLOSES, ARE INCLUDED IN COST OF
SALES
(3) 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 RESULTS
OF OPERATIONS
The following is an analysis of the Company's results of operations, liquidity
and capital resources. To the extent that such analysis contains statements
which are not of a historical nature, such statements are forward-looking
statements, which involve risks and uncertainties. These risks include, but are
not limited to, changes in the competitive environment for the Company's
merchandise, including the entry or exit of non-traditional retailers of the
Company's merchandise 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 merchandise is 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 29, January 30, January 31,
2000 1999 1998
--------------------------------------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Gross profit 36.8% 37.9% 36.7%
Selling, general and
administrative expenses 27.4% 29.1% 29.9%
Camelot merger-related costs 1.9% --- ---
Restructuring charge reversal and
impairment charge, net --- 0.1% ---
--------------------------------------
Income from operations 7.5% 8.7% 6.8%
Interest expense 0.3% 0.4% 0.8%
Other expenses (income), net (0.3)% (0.2)% 0.0%
--------------------------------------
Income before income taxes 7.5% 8.5% 6.0%
Income tax expense 3.0% 3.7% 2.4%
--------------------------------------
Net income 4.5% 4.8% 3.6%
======================================
Change in comparable store sales 2.0% 7.5% 10.2%
======================================
</TABLE>
FISCAL YEAR ENDED JANUARY 29, 2000 ("1999")
COMPARED TO FISCAL YEAR ENDED JANUARY 30, 1999 ("1998")
SALES. The Company's sales increased $75.7 million, or 5.9%, from 1998. The
increase was primarily attributable to a comparable store sales increase of 2.0%
and the addition of approximately 220,000 square feet of retail selling space
through the opening of 34 stores and relocation of 46 stores, which was
partially offset by the closing of 55 stores. Management attributes the
comparable store sales increase to its focus on customer service, superior
retail locations, inventory and merchandise presentation.
For 1999, comparable store sales increased 1.6% for mall stores and 4.2% for
freestanding stores. By merchandise category, comparable store sales
increased 1.1% in music, 9.9% in video and decreased 4.5% in other
merchandise.
GROSS PROFIT. Gross profit, as a percentage of sales, decreased to 36.8% in
1999 from 37.9% in 1998 primarily as a result of higher inventory shrinkage in
the acquired Camelot stores. The Company has taken action to reduce shrink at
the Camelot stores, including implementing policies and procedures that have
successfully kept shrink at reduced levels for the Company in the past.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A, as a percentage of sales,
decreased to 27.4% in 1999 from 29.1% in 1998. The 1.7% decrease can be
attributed to the leverage of SG&A on the total sales increase and the reduction
of corporate overhead expenses through the consolidation of the Camelot
corporate offices.
11
<PAGE>
CAMELOT MERGER-RELATED COSTS. The Camelot merger costs, net, represents the
one-time charge of $25.5 million for costs directly related to completing the
merger with Camelot Music Holdings, Inc. The costs included the write-off of the
book value of retired assets, professional fees associated with the completion
of the merger, severance costs, joint proxy printing and distribution costs, and
regulatory filing fees.
INTEREST EXPENSE. Interest expense decreased from $5.0 million in 1998 to $3.5
million in 1999. The decrease is due to lower average outstanding borrowings and
lower interest rates.
INCOME TAX EXPENSE. The effective income tax rate was 40.2% in 1999. See Note 6
of Notes to Consolidated Financial Statements for a reconciliation of the
statutory tax rate to the Company's effective tax rate.
NET INCOME. In 1999, the Company's net income increased to $61.4 million
compared to a net income of $61.0 million in 1998. Excluding the one-time
Camelot merger-related costs, pro forma 1999 net income is $76.6 million. The
improved bottom line performance as compared to 1998 can be attributed to the
improved leverage of SG&A expenses due to higher sales and the reduction of
corporate overhead expenses.
FISCAL YEAR ENDED JANUARY 30, 1999 ("1998")
COMPARED TO FISCAL YEAR ENDED JANUARY 31, 1998 ("1997")
SALES. The Company's sales increased $711.1 million, or 124.5%, from 1997.
The increase was primarily attributable to the retroactive effect of the
acquisition of Camelot for the periods subsequent to its "fresh-start
reporting" on January 31, 1998, upon its reemergence from bankruptcy, a
comparable store sales increase of 7.5% and the sales increase resulting from
the inclusion for a full year of 90 Strawberries' stores acquired in October
1997.
For 1998, comparable store sales increased 6.9% for mall stores and 9.7% for
freestanding stores. By merchandise category, comparable store sales increased
6.6% in music, 10.2% in video and 10.2% in other merchandise.
GROSS PROFIT. Gross profit, as a percentage of sales, increased to 37.9% in 1998
from 36.7% in 1997 as a result of reduced inventory shrinkage, increased
purchase discounts and a strong performance from higher margin merchandise
categories.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A, as a percentage of sales,
decreased to 29.1% in 1998 from 29.9% in 1997. The 0.8% decrease can be
attributed to the leverage of SG&A expenses on the increased sales.
IMPAIRMENT CHARGE AND RESTRUCTURING CHARGE REVERSAL, NET. The impairment
charge and restructuring charge reversal, net, represents a $3.7 million
charge taken related to the impairment of fixed assets at certain stores
where the carrying amount of such assets exceeded their estimated fair value.
This was offset by a one-time reversal of a $2.2 million reserve remaining
from restructuring charges taken in 1995. The restructuring was completed
during the fourth quarter of 1998.
INTEREST EXPENSE. Interest expense decreased from $5.1 million in 1997 to $5.0
million in 1998. The decrease is due to lower average outstanding borrowings
resulting from the equity offering in May 1998, partially offset by interest on
long-term debt held by Camelot Music related to the Spec's acquisition.
INCOME TAX EXPENSE. The effective income tax rate was 44.0% in 1998. See Note 6
of Notes to Consolidated Financial Statements for a reconciliation of the
statutory tax rate to the Company's effective tax rate.
NET INCOME. In 1998, the Company's net income increased to $61.0 million
compared to a net income of $20.6 million in 1997. The improved bottom line
performance can be attributed to the merger with Camelot in April 1999 with
"fresh-start reporting" effective for periods subsequent to January 31, 1998,
and the profitability of the additional new stores opened in 1998. The merger
with Camelot added $20.4 million in net income in 1998. Also, the Company
benefited from a comparable store sales increase, higher gross margin rate and
improved SG&A leverage.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL RESOURCES. The Company's primary sources of working
capital are cash flows from operations and borrowings under its revolving
credit facility. The Company ended fiscal 1999 with cash balances of
approximately $280.0 million, compared to $139.4 million at the end of 1998.
The increase was due to an increase in cash generated from operations. Cash
provided by operations was $212.1 million in 1999 compared to $77.7 million
in 1998. The increase was primarily related to improved inventory purchasing
activities, as reflected by the net change in inventory and accounts payable.
The net change in inventory and accounts payable was a net cash inflow of
$121.4 million in 1999, as compared to a net cash outflow of $55.8 million in
1998. During 1999, the Company's accounts payable balance increased $132.7
million, compared to an increase in the balance of $17.8 million during 1998.
The increase in accounts payable is due to improved payment terms for
inventory purchased during the holiday season. Inventory increased $11.3
million in 1999, as compared to a $73.6 million increase in 1998. The large
increase in inventory during 1998 was due to increased inventory requirements
for stores acquired as part of the acquisitions of Spec's and The Wall.
Cash used in financing activities was $18.2 million in 1999, as compared to a
net cash inflow of $38.5 million in 1998. In 1999, the primary uses of cash
were a payment of $22.0 million to payoff the remaining debt associated with
the Spec's acquisition and $11.5 million to repurchase outstanding shares of
the Company's common stock under a program authorized by the Board of
Directors on January 7, 2000. As of January 29, 2000, the Company had
purchased approximately 1.1 million shares of the 5.0 million shares
authorized by the Board. During 1998, the two largest sources of cash were
$36.6 million received in a public offering of its common stock and $25.0
million borrowed for the acquisition of Spec's, partially offset by a $38.3
million repayment of long-term debt.
The Company has a three-year $100 million secured revolving credit facility
with Congress Financial Corporation that expires in July 2000 and
automatically renews on a year-to-year basis thereafter at the discretion of
both parties. The Company fully expects to extend the current facility for three
more years. The Revolving Credit Facility, with its below prime average lending
rate, combined with lower borrowing needs, was responsible for the Company's
interest expense decreasing to $3.5 million in 1999 from $5.0 million in
1998. As of January 29, 2000 and January 30, 1999, the Company had $0 and
$20.0 million of long-term borrowings outstanding, respectively.
The Revolving Credit Facility contains certain restrictive provisions,
including provisions governing cash dividends and acquisitions, is
collateralized by merchandise inventory and has a minimum net worth covenant.
On January 29, 2000, the Company had no outstanding borrowings under the
Revolving Credit Facility, and $100 million was available.
CAPITAL EXPENDITURES. Most of the Company's capital expenditures are for new
stores and the relocation of existing stores. The Company typically finances its
capital expenditures through cash generated from operations. The Company may
also receive financing from landlords in the form of construction allowances or
rent concessions. Total capital expenditures were approximately $51.2 million in
1999. This includes approximately $9.9 million related to the installation of a
new point-of-sale ("POS") system in the Camelot stores acquired in April 1999.
In fiscal 2000, the Company plans to spend approximately $35.0 million, net of
construction allowances, for additions to fixed assets.
SEASONALITY. The Company's business is highly seasonal, with the highest sales
and earnings occurring in the fourth fiscal quarter. See Note 12 of the Notes to
Consolidated Financial Statements for quarterly financial highlights.
ACCOUNTING POLICIES. Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," issued
in June 1998 and, as amended, effective for all quarters of fiscal years
beginning after June 15, 2000, will require companies to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Management is currently
evaluating the impact of SFAS No. 133 and anticipates the adoption of the
statement will not have a material effect on the Company's consolidated
financial statements.
The Accounting Standards Executive Committee Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," issued in March 1998 and effective for fiscal years beginning
after December 15, 1998, requires that certain costs of computer software
developed or obtained for internal use be capitalized. The Company adopted this
statement for the fiscal year beginning January 31, 1999. There was no impact on
the Company's results of operations or financial position because it did not
develop any new software internally, nor did it purchase any software.
13
<PAGE>
The Accounting Standards Executive Committee Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities," issued in April 1998 and
effective for fiscal years beginning after December 15, 1998, requires start-up
costs and organization costs to be expensed as incurred. The Company adopted
this statement for the fiscal year beginning January 31, 1999. There was no
impact on the Company's results of operations or financial position because such
costs were already being expensed as incurred.
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 fiscal year's consolidated net income and can
only be paid if, after any payment of dividends, the Company maintains $25
million of availability 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not hold any financial instruments that expose it to
significant market risk and does not engage in hedging activities. Information
about the fair value of financial instruments is included in Note 1 of the Notes
to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to the Consolidated Financial Statements of the Company is included in
Item 14, and the consolidated financial statements follow the signature page to
this Annual Report on Form 10-K.
The quarterly results of operations are included herein in Note 12 of the
Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
<PAGE>
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 2000 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after January 29, 2000.
(b) Identification of Executive Officers
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 2000 Annual Meeting of Shareholders to be filed
with the Securities and Exchange Commission within 120 days after January 29,
2000.
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 2000 Annual Meeting of Shareholders to be filed
with the Securities and Exchange Commission within 120 days after January 29,
2000.
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 2000 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission within 120 days after January
29, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the information appearing under the caption
"Related Party Transactions" in the Company's definitive Proxy Statement for the
Registrant's 2000 Annual Meeting of Shareholders to be filed with the Securities
and Exchange Commission within 120 days after January 29, 2000.
15
<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 F-1 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.
14(B) REPORTS ON FORM 8-K
On January 14, 2000, the Company filed a Form 8-K related to the implementation
of an Accelerated Stock Repurchase Program.
14(C) 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.
14(D) OTHER FINANCIAL STATEMENTS
Not applicable.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TRANS WORLD ENTERTAINMENT CORPORATION
Date: April 28 , 2000 By: /s/ ROBERT J. HIGGINS
--------------------------------
Robert J. Higgins, Chairman and Chief
Executive Officer
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.
<TABLE>
<CAPTION>
NAME TITLE DATE
<S> <C> <C>
/S/ ROBERT J. HIGGINS Chairman and Chief Executive Officer April 28, 2000
- --------------------- (Principal Executive Officer)
(Robert J. Higgins)
/S/ JOHN J. SULLIVAN Senior Vice President, Treasurer and Chief Financial Officer April 28, 2000
- -------------------- (Principal Financial and Chief Accounting Officer)
(John J. Sullivan)
/S/ MATTHEW H. MATARASO Secretary and Director April 28, 2000
- -----------------------
(Matthew H. Mataraso)
/S/ GEORGE W. DOUGAN Director April 28, 2000
- --------------------
(George W. Dougan)
/S/ CHARLOTTE G. FISCHER Director April 28, 2000
- ------------------------
(Charlotte G. Fischer)
/S/ ISAAC KAUFMAN Director April 28, 2000
- -----------------
(Isaac Kaufman)
/S/ DEAN S. ADLER Director April 28, 2000
- -----------------
(Dean S. Adler)
/S/ DR. JOSEPH G. MORONE Director April 28, 2000
- -------------------------
(Dr. Joseph G. Morone)
/S/ MARTIN E. HANAKA Director April 28, 2000
- --------------------
(Martin E. Hanaka)
/S/ MICHAEL B. SOLOW Director April 28, 2000
- --------------------
(Michael B. Solow)
</TABLE>
17
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Form 10-K
Page No.
Independent Auditors' Report F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at January 29, 2000 and January 30, 1999 F-3
Consolidated Statements of Income - Fiscal years
ended January 29, 2000, January 30, 1999 and January 31, 1998 F-4
Consolidated Statements of Shareholders' Equity - Fiscal years
ended January 29, 2000, January 30, 1999 and January 31, 1998 F-5
Consolidated Statements of Cash Flows - Fiscal years ended
January 29, 2000, January 30, 1999 and January 31, 1998 F-6
Notes to Consolidated Financial Statements F-7
F-1
<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 29, 2000 and January
30, 1999, 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 29, 2000. 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 29, 2000 and January
30, 1999, and the results of their operations and their cash flows for each of
the fiscal years in the three-year period ended January 29, 2000, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Albany, New York
March 17, 2000
F-2
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30,
2000 1999
-------------------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 280,026 $ 139,411
Accounts receivable 5,973 5,800
Merchandise inventory 437,363 426,078
Deferred tax asset --- 633
Prepaid expenses and other 5,203 9,382
-------------------------------
Total current assets 728,565 581,304
-------------------------------
FIXED ASSETS, net 144,694 139,124
DEFERRED TAX ASSET 34,431 29,580
GOODWILL 31,433 33,026
OTHER ASSETS 17,287 15,576
-------------------------------
TOTAL ASSETS $ 956,410 $ 798,610
===============================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 353,294 $ 220,636
Income taxes payable 21,908 30,544
Accrued expenses and other 32,021 50,787
Deferred tax liability 12,469 ---
Current portion of long-term debt and capital lease obligations 5,311 4,802
------------------------------
Total current liabilities 425,003 306,769
------------------------------
LONG-TERM DEBT, less current portion --- 20,000
CAPITAL LEASE OBLIGATIONS, less current portion 19,461 16,065
OTHER LIABILITIES 17,773 23,400
------------------------------
TOTAL LIABILITIES 462,237 366,234
------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock ($0.01 par value; 5,000,000 shares authorized;
none issued.) --- ---
Common stock ($0.01 par value; 200,000,000 shares authorized;
53,425,867 shares and 52,182,408 shares issued in
1999 and 1998, respectively) 534 522
Additional paid-in capital 283,932 271,805
Unearned compensation - restricted stock (348) (78)
Treasury stock at cost (1,177,432 and 105,432 shares in
1999 and 1998, respectively) (11,855) (390)
Retained earnings 221,910 160,517
------------------------------
TOTAL SHAREHOLDERS' EQUITY 494,173 432,376
------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 956,410 $ 798,610
==============================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
---------------------------------------------
<S> <C> <C> <C>
Sales $ 1,358,132 $ 1,282,385 $ 571,314
Cost of sales 858,588 796,311 361,422
---------------------------------------------
Gross profit 499,544 486,074 209,892
Selling, general and administrative expenses 371,998 372,886 170,834
Camelot merger-related costs, net 25,473 --- ---
Asset impairment charge and restructuring charge reversal, net --- 1,537 ---
---------------------------------------------
Income from operations 102,073 111,651 39,058
Interest expense 3,496 4,989 5,148
Other expense (income), net (4,086) (2,221) (153)
---------------------------------------------
Income before income taxes 102,663 108,883 34,063
Income tax expense 41,270 47,873 13,489
---------------------------------------------
NET INCOME $ 61,393 $ 61,010 $ 20,574
=============================================
BASIC EARNINGS PER SHARE $ 1.17 $ 1.19 $ 0.70
=============================================
Weighted average number of common shares outstanding-basic 52,457 51,105 29,483
=============================================
DILUTED EARNINGS PER SHARE $ 1.15 $ 1.14 $ 0.66
=============================================
Weighted average number of common shares outstanding-diluted 53,354 53,530 31,032
=============================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
<TABLE>
<CAPTION>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
UNEARNED
ADDITIONAL COMPENSATION
COMMON STOCK PAID IN STOCK TREASURY RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL PLANS STOCK EARNINGS EQUITY
------ ------ ----------- ------------ -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of February 1, 1997 29,429 $ 294 $ 24,344 $ (245) $ (407) $ 78,933 $ 102,919
Issuance of treasury stock under
incentive stock programs --- --- --- --- 13 --- 13
Amortization of unearned
compensation - restricted stock --- --- --- 70 --- --- 70
Exercise of stock options and
related tax benefit 294 3 943 --- --- --- 946
Net Income --- --- --- --- --- 20,574 20,574
- -----------------------------------------------------------------------------------------------------------------------------
Balance as of January 31, 1998
as previously reported 29,723 297 25,287 (175) (394) 99,507 124,522
Opening equity balances of Camelot
upon adoption of "fresh-start"
accounting 19,301 193 194,175 --- --- --- 194,368
- -----------------------------------------------------------------------------------------------------------------------------
Balance as of January 31, 1998, as
restated 49,024 490 219,462 (175) (394) 99,507 318,890
Issuance of treasury stock under
incentive stock programs --- --- 10 --- 4 --- 14
Stock issued --- --- 188 --- --- --- 188
Issuance of shares of common
stock in a public offering 2,250 23 36,600 --- --- --- 36,623
Amortization of unearned
compensation - restricted stock --- --- --- 44 --- --- 44
Issuance of director stock options --- --- 346 --- --- --- 346
Issuance of options under Camelot
1998 Stock Option Plan --- --- 5,112 (5,112) --- --- ---
Amortization of unearned
compensation - Camelot 1998 Stock --- --- --- 5,112 --- --- 5,112
Option Plan
Forfeiture of unearned compensation -
restricted stock --- --- (53) 53 --- --- ---
Exercise of stock options and
related tax benefit 908 9 10,140 --- --- --- 10,149
Net Income --- --- --- --- --- 61,010 61,010
- -----------------------------------------------------------------------------------------------------------------------------
Balance as of January 30, 1999 52,182 522 271,805 (78) (390) 160,517 432,376
Issuance of treasury stock under
incentive stock programs --- --- 9 --- 4 --- 13
Repurchase of shares of treasury stock --- --- --- --- (11,469) --- (11,469)
Issuance of restricted stock under
incentive stock programs 30 --- 336 (336) --- --- ---
Amortization of unearned
compensation - restricted stock --- --- --- 66 --- --- 66
Issuance of director stock options --- --- 64 --- --- --- 64
Exercise of stock options and
related tax benefit 1,214 12 11,718 --- --- --- 11,730
Net Income --- --- --- --- --- 61,393 61,393
- -----------------------------------------------------------------------------------------------------------------------------
Balance as of January 29, 2000 53,426 $ 534 $ 283,932 $ (348) $(11,855) $ 221,910 $ 494,173
=============================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
<TABLE>
<CAPTION>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED
------------------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $61,393 $61,010 $20,574
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 37,709 35,478 16,257
Amortization of financing fees --- 253 ---
Amortization of lease valuations, net (2,765) (388) ---
Reversal of restructuring charge --- (2,157) ---
Loss on impairment from fixed assets 6,649 3,694 ---
Stock compensation programs 143 5,568 83
Loss on disposal of assets 3,670 1,560 ---
Deferred tax expense 8,251 4,529 1,370
Changes in operating assets and liabilities:
Accounts receivable (173) (773) 5,868
Merchandise inventory (11,285) (73,557) (9,872)
Prepaid expenses and other 4,179 (1,422) (408)
Other assets (1,272) 178 2,481
Accounts payable 132,658 17,788 42,751
Income taxes payable (6,261) 26,461 12,119
Accrued expenses and other (18,766) 5,884 7,344
Store closing reserve --- (6,535) (5,056)
Other liabilities (1,996) 135 198
------------------------------------------
Net cash provided by operating activities 212,134 77,706 93,709
------------------------------------------
INVESTING ACTIVITIES:
Acquisition of property and equipment (51,234) (57,143) (15,538)
Acquisition of businesses, net --- (103,264) (20,901)
Other assets and liabilities, net (2,100) (235) ---
Disposal of videocassette rental inventory, net of purchases 23 2,860 685
------------------------------------------
Net cash used by investing activities (53,311) (157,782) (35,754)
------------------------------------------
FINANCING ACTIVITIES:
Payments of long-term debt and financing fees (22,000) (38,281) (18,440)
Proceeds from long-term debt --- 25,000 ---
Payments of capital lease obligations (4,036) (1,292) (99)
Proceeds from capital lease 9,941 13,651 ---
Payments for purchases of treasury stock (11,469) --- ---
Proceeds from public offering of common stock --- 36,623 ---
Exercise of stock options 9,356 2,750 545
------------------------------------------
Net cash provided (used) by financing activities (18,208) 38,451 (17,994)
------------------------------------------
Opening cash balance of Camelot upon adoption of "fresh-start" accounting --- 86,304 ---
Net increase (decrease) in cash and cash equivalents 140,615 (41,625) 39,961
Cash and cash equivalents, beginning of year 139,411 94,732 54,771
------------------------------------------
Cash and cash equivalents, end of year $280,026 $139,411 $94,732
==========================================
Supplemental disclosure of non-cash investing and financing activities:
Issuance of treasury stock under incentive stock programs $13 $14 $13
Issuance of restricted shares under restricted stock plan 336 --- ---
Income tax benefit resulting from exercises of stock options 2,374 7,347 400
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<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 29, 2000, the Company
operated 967 stores in 44 states, the District of Columbia, Commonwealth of
Puerto Rico 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, its wholly-owned subsidiary, Record Town,
Inc. ("Record Town"), and Record Town's 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. On April 22, 1999, the Company merged with Camelot Music Holdings,
Inc. ("Camelot"). The transaction was accounted for as a
pooling-of-interests. Accordingly, prior period consolidated financial
statements have been restated to include combined results of operations,
financial position and cash flows of Camelot as though it had been a part of
the Company since Camelot's adoption of "fresh-start" accounting on January
31, 1998.
FISCAL YEAR: The Company's fiscal year is a 52 or 53-week period ending on the
Saturday nearest to January 31. Fiscal 1999, 1998 and 1997 ended January 29,
2000, January 30, 1999 and January 31, 1998, respectively, and each fiscal year
consisted of 52 weeks.
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 an original maturity of three months or less to be cash
equivalents.
CONCENTRATION OF CREDIT RISKS: The Company maintains centralized cash management
and investment programs whereby excess cash balances are invested in short-term
funds and money market instruments considered to be cash equivalents. The
Company's investment portfolio is diversified and consists of short-term
investment grade securities consistent with its investment guidelines. These
guidelines include the provision that sufficient liquidity will be maintained to
meet anticipated cash flow needs. The Company maintains cash and cash
equivalents with various major financial institutions. At times, such amounts
may exceed the F.D.I.C. limits. The Company limits the amount of credit
exposure with any one financial institution and believes that no significant
concentration of credit risk exists with respect to cash investments.
CONCENTRATION OF BUSINESS RISKS: The Company purchases inventory for its stores
from approximately 500 suppliers, with approximately 73% of purchases being made
from five suppliers. In the past, the Company has not experienced difficulty in
obtaining satisfactory sources of supply, and management believes that it will
retain access to adequate sources of supply. However, a loss of a major supplier
could cause a loss of sales, which would have an adverse effect on operating
results and also result in a decrease in vendor support for the Company's
advertising programs.
MERCHANDISE INVENTORY AND RETURN COSTS: Inventory is stated at the lower of
cost or market as determined principally by the average cost 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 merchandise purchase price depending on the type of merchandise
being returned. The Company records the merchandise return charges in cost of
sales.
F-7
<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. Depreciation and amortization expense related to the Company's
videocassette rental inventory totaling $921,000, $1.2 million and $2.2 million
in fiscal 1999, 1998 and 1997, respectively, is included in cost of sales.
FIXED ASSETS AND DEPRECIATION: Fixed assets are stated at cost. Major
improvements and betterments to existing facilities and equipment are
capitalized. Expenditures for maintenance and repairs that do not extend the
life of the applicable asset are charged to expense as incurred. Buildings
are depreciated 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 using the
straight-line method 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.
FAIR VALUE OF LONG-LIVED ASSETS: Fixed assets and other long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. During fiscal 1999, the Company
recorded an impairment loss of $6.7 million as part of the Camelot merger
charge for the write-down of certain fixed assets acquired in the merger.
During fiscal 1998, the Company recorded an impairment loss of $3.7 million
to write-down the carrying amount of fixed assets, primarily leasehold
improvements, at stores where the estimated future cash flows through the end
of the store's lease were less than the carrying amount of that store's fixed
assets.
GOODWILL: Goodwill represents the adjusted amount of the cost of acquisitions in
excess of fair value of net assets acquired in purchase transactions, and is
being amortized on a straight-line basis over estimated useful lives ranging
from 15 to 20 years. The amortization period is determined by taking into
consideration the following factors: the critical market position and
establishment of brand names; the combined store mass of the companies; the
amortization periods generally used in the retail music business; the highly
competitive nature of the business including emerging forms of competition, and
the overall history of profitability of the acquired businesses.
ADVERTISING COSTS: The costs of advertising are expensed in the first period in
which such advertising takes place. Total advertising expense was $18.8 million,
$19.2 million and $8.4 million in fiscal 1999, 1998 and 1997, respectively.
STORE OPENING AND CLOSING COSTS: Costs associated with opening a store are
expensed as incurred. When it is determined that a store will be 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: 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. 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.
F-8
<PAGE>
EARNINGS PER SHARE: The Company accounts for earnings per share under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share." 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 weighted average common shares outstanding.
Diluted earnings per share is calculated by dividing net income by the sum of
the weighted average shares outstanding and additional common shares that would
have been outstanding if the dilutive potential common shares, adjusted in
fiscal 1999 and 1998 for the $2.4 million and $7.3 million, respectively, 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
9). In fiscal 1999, 1998 and 1997, the additional dilutive potential common
shares were 0.9 million, 2.4 million and 1.5 million, respectively. As required
by SFAS No. 128, all outstanding common stock options were included even though
their exercise may be contingent upon vesting.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents, accounts receivable,
accounts payable, and other current liabilities approximate fair value because
of the immediate or short-term maturity of these financial instruments. The
carrying value of long-term debt approximates fair value because its variable
interest rate is adjusted to the current market rate on a monthly basis.
COMPREHENSIVE INCOME: The Company does not have other items of comprehensive
income as defined by SFAS No. 130, "Reporting Comprehensive Income."
Accordingly, comprehensive income is equal to net income.
RECLASSIFICATIONS: Certain amounts in prior years' financial statements have
been reclassified to conform with the current year presentation.
NOTE 2. BUSINESS COMBINATIONS
On April 22, 1999, under the Agreement and Plan of Merger dated October 26,
1998, the Company acquired Camelot, a specialty retailer of prerecorded
music, videocassettes and DVDs, and related accessories, in a stock-for-stock
transaction accounted for as a pooling-of-interests. Camelot operated over
480 retail locations in 38 states, the District of Columbia and the
Commonwealth of Puerto Rico. Upon completion of the merger, Camelot became a
wholly owned subsidiary of the Company. In the merger, each share of
Camelot's common stock was converted into 1.9 shares of the Company's common
stock. Each outstanding option to purchase Camelot common stock immediately
prior to the completion of the merger was converted into 1.9 fully vested and
exercisable options to acquire the Company's common stock. The exercise
prices of these options were adjusted accordingly for the 1.9 to 1 conversion
ratio. As a result, the Company issued approximately 19.3 million shares of
its common stock and converted 1.3 million options to acquire its common
stock. In connection with the merger, all of Camelot's outstanding notes
payable were repaid.
Effective July 29, 1998, Camelot acquired all of the outstanding common stock
of Spec's Music, Inc. ("Spec's") under the terms of an Agreement and Plan of
Merger dated June 3, 1998. Spec's is a retailer of prerecorded music stores
in South Florida and Puerto Rico. The Spec's acquisition was accounted for as
a purchase. The total purchase price was $42.7 million, net of cash acquired,
including cash payment of $18.6 million, repayment of Spec's indebtedness of
$9.2 million, assumption of liabilities aggregating $14 million and
acquisition costs of $900,000. The excess of the purchase price over
the fair values of the net assets acquired (goodwill) of $9.4 million is
being amortized on a straight-line basis over 20 years.
Effective February 28, 1998, Camelot acquired certain assets and assumed certain
liabilities and operating lease commitments of The Wall Music, Inc. ("The Wall")
pursuant to an Asset Purchase Agreement dated December 10, 1997. The purchase
price of The Wall was $74.6 million, net of cash acquired, (including
approximately $2.3 million of acquisition costs) and was paid in cash. The
acquisition was accounted for as a purchase, with the excess purchase price over
fair values of the net assets acquired (goodwill) of $24.7 million being
amortized on a straight-line basis over 20 years.
Effective October 8, 1997, the Company acquired 90 out of a total of 118 stores
owned by Strawberries, Inc., a privately held freestanding 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.
NOTE 3. RESTRUCTURING CHARGE
F-9
<PAGE>
The Company completed its 1995 restructuring program in fiscal 1998. The
remaining balance in the store closing reserve of $2.2 million was credited to
operations in the 4th quarter of fiscal 1998.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
January 29, January 30,
2000 1999
--------------- ---------------
Buildings $ 18,926 $ 19,530
Fixtures and equipment 166,229 148,752
Leasehold improvements 99,903 94,828
--------------- ---------------
285,058 263,110
Allowances for depreciation and
amortization (140,364) (123,986)
--------------- ---------------
$ 144,694 $ 139,124
=============== ===============
Depreciation and amortization expense related to the Company's distribution
center facility and equipment of $1.6 million, $1.6 million and $1.1 million in
fiscal 1999, 1998 and 1997, respectively, is included in cost of sales. All
other depreciation and amortization of fixed assets is included in selling,
general & administrative expenses. Depreciation and amortization of fixed assets
is included in the condensed consolidated statements of income as follows:
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------------
1999 1998 1997
-------------- ---------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cost of sales $ 1,612 $ 1,567 $ 1,101
============== ================ ==============
Selling, general and administrative expenses $ 33,732 $ 30,552 $ 15,141
============== ================ ==============
</TABLE>
F-10
<PAGE>
NOTE 5. DEBT
The Company's $100.0 million secured revolving credit facility with Congress
Financial Corporation matures in July 2000 and automatically renews on a
year-to-year basis thereafter at the discretion of both parties. The Company
fully expects to extend the current facility for three more years. The
facility bears interest at the prime interest rate or the Eurodollar interest
rate plus 1.75% (7.97% at January 29, 2000), and is collateralized 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 1999, 1998, and 1997, the highest aggregate balances outstanding
under the current and previous revolving credit facilities were $3.3 million,
$35.0 million and $45.9 million, respectively. The weighted average interest
rates during fiscal 1999, 1998 and 1997 based on average daily balances were
7.44%, 8.50%, and 8.58%, respectively. The balances outstanding under the
Company's revolving credit agreements at the end of fiscal 1999 and 1998 were
$0.
Interest paid during fiscal 1999, 1998 and 1997 was approximately $3.6 million,
$4.4 million, and $5.8 million, respectively.
On April 22, 1999, upon completion of the merger, the Company paid off and
terminated the amended Camelot Revolving Credit Agreement, which had been in
effect since June 12, 1998. The amended facility provided for working capital
loans of up to $50 million during the peak period (October through December) and
up to $35 million during the non-peak period (including in each case up to $5
million of letters of credit). In no case could the amount of loans exceed the
borrowing base, which was 60% of eligible inventory. Camelot had $35 million of
availability at January 30, 1999. The amended Revolving Credit Agreement also
provided the ability to obtain a $25 million term loan to finance the Spec's
acquisition. The term loan (drawn against effective July 29, 1998), which bore
the same interest rate terms as the working capital portion of the Revolving
Credit Agreement, was fully repaid upon completion of the Camelot acquisition.
NOTE 6. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------
1999 1998 1997
--------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal - current $30,498 $36,207 $10,813
State - current 2,521 7,137 1,306
Deferred 8,251 4,529 1,370
--------------------------------------------
$41,270 $47,873 $13,489
============================================
</TABLE>
A reconciliation of the Company's effective tax rates with the federal statutory
rate is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal income tax effect 1.4% 4.4% 3.0%
Unearned compensation - stock options --- 1.9% ---
Plan of reorganization adjustments --- 2.2% ---
Merger costs 3.6% --- ---
Other 0.2% 0.5% 1.6%
--------------------------------------------
Effective income tax rate 40.2% 44.0% 39.6%
============================================
</TABLE>
F-11
<PAGE>
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30,
2000 1999
--------------------------------
(IN THOUSANDS)
<S> <C> <C>
CURRENT DEFERRED TAX ASSETS
Accruals $ 1,570 $ 2,803
Other 36 286
--------------------------------
Total Current Deferred Tax Assets 1,606 3,089
--------------------------------
CURRENT DEFERRED TAX LIABILITIES
Inventory 13,632 2,078
Prepaid expenses 443 378
--------------------------------
Total Current Deferred Tax Liabilities 14,075 2,456
--------------------------------
Net Current Deferred Tax Asset (Liability) ($12,469) $ 633
================================
NON-CURRENT DEFERRED TAX ASSETS
Tax over book asset basis $20,911 $18,441
Federal and state net operating loss carryforwards 6,804 4,421
Accrued rent 4,448 2,877
Lease values 1,663 1,809
Capitalized leases 882 914
Executive retirement plan 1,336 252
Accruals 890 1,300
Amortization 344 1,062
Compensation related 87 107
Other 73 1,054
--------------------------------
Total Non-Current Deferred Tax Assets 37,438 32,237
--------------------------------
NON-CURRENT DEFERRED TAX LIABILITIES
Goodwill 3,007 2,657
--------------------------------
Total Non-Current Deferred Tax Liabilities $3,007 $2,657
--------------------------------
Net Non-Current Deferred Tax Asset $34,431 $29,580
================================
TOTAL NET DEFERRED TAX ASSET $21,962 $30,213
================================
</TABLE>
At January 29, 2000 and January 30, 1999, the Company had gross deferred tax
assets of $39.0 million and $35.3 million, respectively, and gross deferred
tax liabilities of $17.1 million and $5.1 million, respectively. The Company
had a net operating loss carryforward of $10.0 million for Federal income tax
purposes for fiscal 1999 and 1998, and $71.3 million and $17.9 million for
state income tax purposes for fiscal 1999 and 1998, respectively, that expire
at various times through 2013 and are subject to certain limitations.
In assessing the propriety of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the level of
projected future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not that the
Company will realize the benefits of those deductible differences. The amount of
the deferred tax asset considered realizable could be reduced if estimates of
future taxable income during the carryforward period are reduced.
The Company paid income taxes of approximately $39.3 million, $17.1 million and
$300,000 during fiscal 1999, 1998 and 1997, respectively.
F-12
<PAGE>
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company is party to various claims, legal actions, and complaints arising
in the ordinary course of its business, including pre-petition assessments by
the Internal Revenue Service ("IRS") aggregating approximately $7.9 million
and relating to Camelot's corporate-owned life insurance program. No judgment
has been rendered regarding these IRS assessments as of January 29, 2000. A
trial to decide the matter began in March 2000 in the Federal District Court
for the District of Delaware. A decision is expected to be rendered in the
third or fourth quarter of fiscal 2000. In the event that a judgment is
rendered against the Company in the full amount of the proposed assessment,
the Company's results of operations would be materially adversely affected
with a charge to earnings of approximately $7.9 million plus interest since
January 1998. In the opinion of management, the IRS assessments and all other
claims, legal actions and complaints are without merit or involve such amounts
that unfavorable disposition will not have a material impact on the financial
position, results of operations or cash flows of the Company.
NOTE 8. LEASES
As more fully discussed in Note 11, the Company leases its distribution center
and administrative offices under three capital leases with its Chief Executive
Officer and largest shareholder. The Company also has a capital lease for its
point-of-sale system.
Fixed asset amounts for capital leases, which are included in the fixed assets
on the accompanying balance sheets, are as follows:
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30,
2000 1999
----------------------------------
(IN THOUSANDS)
<S> <C> <C>
Buildings $9,342 $ 9,342
Fixtures and equipment 26,890 16,061
-------------------------------
36,232 25,403
Allowances for depreciation
and amortization (10,729) (6,312)
===============================
$25,503 $19,091
===============================
</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
--------------------------------------------------
1999 1998 1997
--------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Minimum rentals $108,818 $102,130 $ 50,237
Contingent rentals 2,957 1,310 719
==================================================
$111,775 $103,440 $ 50,956
==================================================
</TABLE>
F-13
<PAGE>
Future minimum rental payments required under all leases that have initial or
remaining non-cancelable lease terms in excess of one year at January 29, 2000
are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
----------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
2000 $103,668 $7,807
2001 94,873 7,807
2002 85,918 6,318
2003 75,248 2,994
2004 60,312 1,679
Thereafter 159,733 18,075
----------------------------------
Total minimum payments required $579,752 44,680
================
Less: Amounts representing interest 19,908
------------------
Present value of minimum lease payments 24,772
Less current portion 5,311
------------------
Long-term capital lease obligations $19,461
==================
</TABLE>
NOTE 9. BENEFIT PLANS
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 20% 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 non-vested benefits are used to reduce the
Company's contributions in future years. The Company matching contribution
totaled $962,000, $1.1 million and $529,000 in fiscal 1999, 1998 and 1997,
respectively.
STOCK OPTION PLANS
The Company has four employee stock option plans, the 1986 Stock Option Plan,
the 1994 Stock Option Plan, the 1998 Stock Option Plan, and the 1999 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. Options authorized for issuance under the Plans
totaled 12.3 million. The Company stopped issuing stock options under the
1986 Stock Option Plan as of June 1, 1995. At January 29, 2000, of the 10.8
million remaining options authorized for issuance under the Plans, 4.5
million have been granted and are outstanding, 1.6 million of which were
vested and exercisable. Options available for future grants at
January 29, 2000 and January 30, 1999 were 3.3 million and 2.5 million,
respectively.
Under the terms of the Camelot merger agreement, all options issued under the
Camelot 1998 Stock Option Plan (the "Camelot Plan") were converted to Trans
World options. The Camelot Plan provided for the granting of either incentive
stock options or nonqualified stock options to purchase shares of the
Company's common stock. Vesting of the options was originally over a
four-year period with a maximum term of ten years. Based on the terms of the
Camelot Plan, vesting was accelerated based on the market performance of the
Company's common stock whereby 50% of the options vested on March 13, 1998.
The remaining 50% vested on April 22, 1999 in connection with the merger. At
January 29, 2000, 530,500 options were outstanding and exercisable. The
Company stopped issuing stock options under the Camelot Stock Option Plan as
of April 22, 1999. The Company recognized $5.1 million in compensation
expense during 1998, related to stock options granted below the market price
at the date of grant and accelerated vesting.
F-14
<PAGE>
The following table summarizes information about the stock options outstanding
under the Plans and the Camelot Plan at January 29, 2000:
<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> <C>
$1.21-$2.67 1,150,524 6.1 $1.61 745,784 $1.52
2.68-5.33 567,552 6.1 4.17 311,052 4.32
5.34-10.67 10,000 10.0 10.00 0 0.00
10.68-13.33 2,183,700 8.4 11.34 957,700 11.05
13.34-16.00 725,050 9.2 15.18 25,300 14.02
16.01-18.67 414,561 8.2 17.84 94,680 17.82
18.68-21.33 5,000 8.7 19.75 1,250 19.75
21.34-24.00 2,000 8.9 23.75 500 23.75
24.01-26.67 6,000 8.4 25.79 1,500 25.79
---------------- ---------------
Total 5,064,387 7.7 $9.44 2,137,766 $7.10
================ ===============
</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 29, 2000, there were 750,000 options authorized
for issuance and 280,750 options have been granted and are outstanding,
194,435 of which were vested and exercisable. There are 439,250 shares of common
stock reserved for possible future option grants under the 1990 Plan.
Under the terms of the Camelot merger agreement, all options issued under the
Camelot Outside Director Stock Option Plan (the "Camelot Director Plan") were
converted to Trans World options. As of January 29, 2000, there were 4,750
options outstanding and exercisable under the Camelot Director Plan. During
1998, the Company recognized $234,000 in compensation expense based on the
market value of the stock on the date of grant in June 1998 in connection with
the initial grant of stock options under the Camelot Director Plan. The Company
no longer issues options under the Camelot Director Plan.
The following table summarizes information about the stock options outstanding
under the two Director Plans at January 29, 2000:
<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> <C>
$1.19-$2.67 49,500 6.3 $ 1.64 38,625 $ 1.58
2.68-5.33 138,000 4.8 3.46 101,250 3.57
5.34-8.00 18,000 2.0 6.10 18,000 6.10
8.01-10.67 45,000 3.1 9.49 33,750 9.26
10.68-13.33 23,750 9.1 12.24 4,750 10.92
13.34-15.12 11,250 8.3 15.12 2,810 15.12
---------------- ---------------
Total 285,500 5.1 $5.45 199,185 $4.71
================ ===============
</TABLE>
F-15
<PAGE>
The following tables summarize activity under the Stock Option Plans:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
EMPLOYEE STOCK OPTION PLANS DIRECTOR STOCK OPTION PLANS
------------------------------------------------------------------------------------------------
Number of Option Weighted Number of Option Weighted
Shares Subject Price Range Average Shares Subject Price Range Average
To Option Per Share Exercise Price To Option Per Share Exercise Price
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance February 1, 1997 3,139,696 $0.75-$6.17 $2.12 210,000 $1.19-$9.14 $5.28
Granted 2,865,500 3.33-11.20 9.42 103,500 2.09-3.37 2.86
Exercised (285,086) 0.96-3.67 1.74 (7,500) 3.69 3.69
Canceled (203,514) 0.96-4.58 1.79 (48,000) 3.33-9.14 7.57
- ---------------------------------------------------------------------------------------------------------------------------------
Balance January 31, 1998 5,516,596 $0.75-$11.20 $5.94 258,000 $1.19-$9.14 $3.93
Granted 529,600 13.88-26.67 17.61 50,000 10.20-15.12 11.65
Exercised (885,043) 0.75-10.92 3.08 (22,500) 2.09-3.68 3.15
Canceled (259,134) 1.21-17.79 4.64 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance January 30, 1999 4,902,019 $0.75-$26.67 $7.79 285,500 $1.19-$15.12 $5.34
Granted 1,501,000 10.00-15.25 13.42 29,000 12.22-12.96 12.45
Exercised (1,194,899) 0.75-17.79 7.65 (19,000) 10.92 10.92
Canceled (143,733) 0.75-17.79 9.65 (10,000) 12.22 12.22
- ---------------------------------------------------------------------------------------------------------------------------------
Balance January 29, 2000 5,064,387 $1.21-$26.67 $9.44 285,500 $1.19-$15.12 $5.45
=============== ================
</TABLE>
The per share weighted-average fair value of the stock options granted during
fiscal 1999, 1998 and 1997 was $5.01, $6.48 and $2.82, respectively, using the
Black Scholes option pricing model, with the following weighted-average
assumptions; 1999 - expected dividend yield 0.0%, risk-free interest rate of
6.47%, expected life of five years and stock volatility of 72%; 1998 - expected
dividend yield 0.0%, risk-free interest rate of 5.15%, expected life of five
years and stock volatility of 70%; 1997 - expected dividend yield 0.0%,
risk-free interest rate of 6.7%, expected life of five years and stock
volatility of 48%.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements for employee stock options, which are issued at the
closing stock price on the day of grant. During fiscal 1999, 1998 and 1997, the
Company recognized expenses of $64,000, $57,000 and $52,000, 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 No. 123, the Company's
net income would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net income, as reported $ 61,393 $ 61,010 $ 20,574
Basic earnings per share, as reported $ 1.17 $ 1.19 $ 0.70
Diluted earnings per share, as reported $ 1.15 $ 1.14 $ 0.66
Pro forma net income $ 57,621 $ 59,016 $ 19,168
Pro forma basic earnings per share $ 1.10 $ 1.15 $ 0.65
Pro forma diluted earnings per share $ 1.08 $ 1.10 $ 0.62
</TABLE>
F-16
<PAGE>
RESTRICTED STOCK PLAN
Under the 1990 Restricted Stock Plan, the Compensation Committee of the Board
of Directors is authorized to grant awards for up to 900,000 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 29, 2000, a total of 255,000 shares have been
granted, of which 75,000 were granted in fiscal 1996 with a weighted average
grant date fair market value of $1.58, aggregating a total value of $118,750;
an additional 150,000 were granted in fiscal 1995 with a weighted average
grant date fair value of $1.55 per share, aggregating a total of $232,500 and
an additional 30,000 were granted in fiscal 1999 with a weighted average
grant date fair value of $11.19 aggregating a total of $335,625. As of
January 29, 2000, a total of 120,000 of these shares had vested and 30,000
shares with an unamortized unearned compensation balance of $53,000, had been
forfeited. 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 1999, 1998 and 1997 was approximately
$66,000, $44,000 and $70,000, respectively. At January 29, 2000, outstanding
awards and shares available for grant totaled 105,000 and 675,000,
respectively.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The executive officers of the Company have a non-qualified Supplemental
Executive Retirement Plan (SERP). 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 1999, 1998 and 1997, expenses related to the plan totaled approximately
$481,000, $342,000 and $361,000, respectively. The present value of the
projected benefit obligation was approximately $3.6 million at January 29, 2000.
The January 29, 2000 consolidated balance sheet includes $3.6 million of accrued
expense for the SERP and a $2.5 million intangible asset for unrecognized prior
service costs.
NOTE 10. SHAREHOLDERS' EQUITY
On May 1, 1998, the Company sold an additional 2.25 (adjusted) million shares of
its common stock in a public offering for approximately $36.6 million net of
issuance costs. A portion of the proceeds was used to repay long-term debt and
the balance of the proceeds was used for general corporate purposes including
investments in additional stores, fixtures and inventory.
On July 31, 1998, the Board of Directors approved a three-for-two common stock
split to be distributed in the form of a 50% stock dividend. As a result,
10,937,104 shares were issued on September 15, 1998 to shareholders of record on
September 1, 1998. 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 these financial statements to number of
shares, per share amounts, stock option data and market prices of the Company's
common stock have been adjusted to reflect this stock split.
On January 7, 2000, the Board of Directors approved a stock repurchase plan
authorizing the purchase of up to 5 million shares of the Company's common
stock. As of January 29, 2000, the Company had purchased approximately 1.1
million shares of the 5 million shares authorized by the Board. At January 29,
2000 and January 30, 1999, the Company held 1,177,432 and 105,432 shares,
respectively, in treasury stock.
NOTE 11. RELATED PARTY TRANSACTIONS
The Company leases its 168,400 square foot distribution center/office facility
in Albany, New York from Robert J. Higgins, its Chairman, Chief Executive
Officer and largest shareholder, under three capitalized leases that expire in
the year 2015. The original distribution center/office facility was constructed
in 1985. A 77,100 square foot distribution center expansion was completed in
October 1989 on real property adjoining the existing facility. A 19,100 square
foot expansion was completed in September 1998 adjoining the existing facility.
Under the three capitalized leases, dated April 1, 1985, November 1, 1989 and
September 1, 1998 (the "Leases"), the Company paid Mr. Higgins an annual rent of
$1.6 million, $1.4 million and $1.3 million in fiscal 1999, 1998 and 1997,
respectively. On January 1, 2000, the aggregate rental payment increased in
F-17
<PAGE>
accordance with the biennial increase in the Consumer Price Index, pursuant to
the provisions of each lease. Effective January 1, 2002, and every two years
thereafter, the rental payment increases in accordance with the biennial
increase in the Consumer Price Index, pursuant to the provisions of the lease.
None of the leases contains 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 is approximately $1.1 million per year.
The Company leases two of its retail stores from Mr. Higgins under long-term
leases. Under the first store lease, annual rent payments were $40,000 in
fiscal 1999 and 1998 and $35,000 in fiscal 1997. Under the second store
lease, annual rent payments were $35,000 in fiscal 1999, 1998 and 1997. Under
the terms of the leases, the Company pays property taxes, maintenance and a
contingent rental if a specified sales level is achieved. Total additional
charges for both locations, including contingent rent, was approximately
$17,700, $18,100 and $16,900 in fiscal 1999, 1998 and 1997, respectively. In
fiscal 1998 and 1997, the Company paid Mr. Higgins $30,000 under one-year
operating leases expiring on October 31, 1998 and October 31, 1997,
respectively, for certain parking facilities contiguous to the Company's
distribution center/office facility. This lease was not renewed upon its
expiration on October 31, 1998.
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 $110,000, $65,000 and $59,000 for chartered
aircraft services in fiscal 1999, 1998 and 1997, respectively. The Company
also charters an aircraft from Crystal Jet, a corporation wholly owned by Mr.
Higgins. Payments to Crystal Jet aggregated $64,000, $180,000 and $199,000 in
fiscal 1999, 1998 and 1997, respectively. The Company also charters an
aircraft from Richmor Aviation, an unaffiliated corporation that leases an
aircraft owned by Mr. Higgins. Payments to Richmor Aviation in fiscal 1999,
1998 and 1997 were $325,000, $0 and $0, 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 charters.
The transactions that were entered into with an "interested director" were
approved by a majority of disinterested directors of the Board of Directors,
either by the Audit Committee or at a meeting of the Board of Directors. The
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.
In September 1999, in connection with his hiring as President and Chief
Operating Officer, the Company made a $200,000 interest-free loan to Michael
J. Madden.
F-18
<PAGE>
NOTE 12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
FISCAL 1999 QUARTER ENDED
----------------------------------------------------------------------------------
1999 1/29/00 10/30/99 7/31/99 5/1/99
----------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Sales $ 1,358,132 $ 517,870 $ 275,968 $ 277,275 $ 287,019
Gross profit 499,544 195,049 96,981 102,570 104,944
Net income 61,393 60,569 3,777 5,691 (8,644)
Basic earnings per share $ 1.17 $ 1.15 $ 0.07 $ 0.11 $ (0.17)
----------------------------------------------------------------------------------
Diluted earnings per share $ 1.15 $ 1.12 $ 0.07 $ 0.11 $ (0.17)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
FISCAL 1998 QUARTER ENDED
----------------------------------------------------------------------------------
1998 1/30/99 10/31/98 8/1/98 5/2/98
----------------------------------------------------------------------------------
(in thousands, except per share amounts)
Sales $ 1,282,385 $ 497,735 $ 270,706 $ 262,561 $ 251,383
Gross profit 486,074 198,410 101,439 95,812 90,413
Net income 61,010 51,532 3,743 3,574 2,161
Basic earnings per share $ 1.19 $ 1.01 $ 0.07 $ 0.07 $ 0.04
----------------------------------------------------------------------------------
Diluted earnings per share $ 1.14 $ 0.97 $ 0.07 $ 0.07 $ 0.04
----------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE>
INDEX TO EXHIBITS
DOCUMENT NUMBER AND DESCRIPTION
EXHIBIT NO.
2.1 Agreement and Plan of Merger dated October 26, 1998 by and among Trans
World, CAQ Corporation and Camelot incorporated herein by reference to
Exhibit 2.1 to the Company's Registration Statement on Form S-4,
No. 333-75231.
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 Certificate of Amendment to the Certificate of Incorporation --
incorporated herein by reference to Exhibit 3.4 to the Company's Annual
Report on Form 10-K for the year ended January 31, 1998. Commission File
No. 0-14818.
*3.4 Amended By-Laws
3.5 Certificate of Amendment to the Certificate of Incorporation--incorporated
herein by reference to Exhibit 3.5 to the Company's Registration Statement
on Form S-4, No. 333-75231.
3.6 Certificate of Amendment to the Certificate of Incorporation--incorporated
herein by reference to Exhibit 3.6 to the Company's Registration Statement
on Form S-4, No. 333-75231.
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 herein 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 Lease dated September 1, 1998, between Robert J. Higgins, as Landlord, and
Record Town, Inc. and Trans World, as Tenant, for additional office space
at 38 Corporate Circle -- 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, 1998. Commission File No. 0-14818.
10.5 Employment Agreement, dated as of May 1, 1998 between the Company and
Robert J. Higgins - incorporated herein by reference to Exhibit 10.4 to the
Company's Quarterly Report of Form 10-Q for the fiscal quarter ended May 2,
1998. Commission File No. 0-14818.
10.6 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.
10.7 Trans World Music Corporation 1990 Stock Option Plan for Non-Employee
Directors, as amended and restated -- incorporated herein by reference to
Annex A to Trans World's Definitive Proxy Statement on Form 14A filed as of
May 7, 1998. Commission File No. 0-14818.
F-20
<PAGE>
10.8 Trans World Entertainment Corporation Amended 1990 Restricted Stock Plan --
incorporated herein by reference to Annex B to Trans World's Difinitive
Proxy Statement on Form 14A filed as of May 17, 1999. Commission File
No. 0-14818.
10.9 Form of Restricted Stock Agreement dated May 1, 1995 between the Company
and Bruce J. Eisenberg, Senior Vice President of Real Estate, 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.
10.10 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.
10.11 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.
10.12 Trans World Entertainment Corporation 1998 Stock Option Plan --
incorporated herein by reference to Annex B to Trans World's Definitive
Proxy Statement on Form 14A filed as of May 7, 1998. Commission File No.
0-14818.
10.13 Trans World Entertainment Corporation 1999 Stock Option Plan --
incorporated herein by reference to Annex A to Trans World's Definitive
Proxy Statement on Form 14A filed as of May 17, 1999. Commission File No.
0-14818.
10.14 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.
10.15 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.
10.16 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.
10.17 Trans World Entertainment Corporation Asset Purchase Agreement with
Strawberries, Inc.--incorporated herein by reference to Exhibit 10.16 to
Trans World's Annual Report on Form 10-K for the year ended January 31,
1998. Commission File No. 0-14818.
10.18 Voting Agreement dated October 26, 1998 between Trans World and certain
stockholders named therein--incorporated herein by reference to Exhibit
10.20 to the Company's Registration Statement on Form S-4, No. 333-75231.
10.19 Form of Restricted Stock Agreement dated September 27, 1999 between the
Company and Michael Madden, President and Chief Operating Officer,
incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended October 30, 1999.
Commission File No. 0-14818.
*10.20 Severance Agreement dated March 10, 2000 between the Company and Michael
Madden, President and Chief Operating Officer.
* 22 Significant Subsidiaries of the Registrant.
* 23 Consent of KPMG LLP.
* 27 Financial Data Schedule (For electronic filing purposes only)
- --------------------------------------------------------------------------------
*Filed herewith.
F-21
<PAGE>
EXHIBIT 3.4
TRANS WORLD ENTERTAINMENT CORPORATION
A New York Corporation
BY-LAWS
------------------------
ARTICLE I
SHAREHOLDERS
SECTION 1.1. ANNUAL MEETING.
An annual meeting of shareholders for the purpose of electing directors and of
transacting such other business as may come before it shall be held each year at
such date, time, and place, either within or without the State of New York, as
may be specified by the Board of Directors.
SECTION 1.2. SPECIAL MEETINGS.
Special meetings of shareholders shall be held at such time and place, within or
without the state of New York, as may be designated in the notice of the
meeting, whenever called by the Chairman of the Board, if any, the Chief
Executive Officer, or a majority of the Board of Directors.
SECTION 1.3. NOTICE OF MEETINGS.
Written notice of shareholders meetings, stating the place, date, and hour
thereof and, unless it is the annual meeting, stating the purpose or purposes
for which the meeting is called, shall be given by the Chairman of the Board, if
any, the Chief Executive Officer, the President, any Vice President, the
Secretary, or an Assistant Secretary to each shareholder entitled to vote
thereat not less than ten nor more than sixty days before the date of the
meeting.
SECTION 1.4. QUORUM.
Except as otherwise provided by law or in the Certificate of Incorporation or
these By-Laws, at any meeting of shareholders, the holders of a majority of the
outstanding shares the holders of which are entitled to vote thereat shall be
present in person or represented by proxy in order to constitute a quorum for
the transaction of any business. A quorum which is present to organize a meeting
shall not be broken by the subsequent withdrawal of one or more shareholders.
If a quorum shall not be present at the time fixed for any meeting, the
shareholders present in person or by proxy and entitled to vote thereat shall
have the power to adjourn the meeting from time to time, without notice other
than an announcement at the meeting of the place, date and hour of the adjourned
meeting, until a quorum shall be present; and at any such adjourned meeting at
which a quorum shall be present, any business may be transacted which might have
been transacted had a quorum been present at the time originally fixed for the
meeting; provided, that if after any such adjourned meeting, a new record date
is fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each shareholder entitled to vote thereat.
SECTION 1.5. ORGANIZATION.
The Chairman of the Board, if any, or in his absence the Chief Executive
Officer, or in their absence the President or any Vice President, shall call to
order meetings of shareholders and shall act as chairman of such meetings. The
Board of Directors or, if the Board fails to act, the shareholders may appoint
any shareholder, director, or officer of
A-1
<PAGE>
the Corporation to act as chairman of any meeting in the absence of the Chairman
of the Board, the Chief Executive Officer, the President, and all Vice
Presidents.
The Secretary of the Corporation shall act as secretary of all meetings of
shareholders, but, in the absence of the Secretary, the chairman of the meeting
may appoint any other person to act as secretary of any meeting.
SECTION 1.6. VOTING.
Except as otherwise provided by law or in the Certificate of Incorporation or
these By-Laws and except for the election of directors, at any meeting duly
called and held at which a quorum is present, a majority of the votes cast at
such meeting upon a given question by the holders of outstanding shares of stock
of all classes of stock of the Corporation entitled to vote thereon who are
present in person or by proxy shall decide such question. At any meeting duly
called and held for the election of directors at which a quorum is present,
directors shall be elected by a plurality of the votes cast by the holders
(acting as such) of shares of stock of the corporation entitled to elect such
directors.
SECTION 1.7. CONDUCT OF MEETINGS.
At each meeting of stockholders, the chairman of the meeting shall fix and
announce the date and time of the opening and the closing of the polls for each
matter upon which the stockholders will vote at the meeting and shall determine
the order of business and all other matters of procedure. Except to the extent
inconsistent with any such rules and regulations as adopted by the Board of
Directors, the chairman of the meeting may establish rules to maintain order and
safety and for the conduct of the meeting. Without limiting the foregoing, he
may:
(a) restrict attendance at any time to bona fide stockholders
of record and their proxies and other persons in attendance
at the invitation of the chairman;
(b) restrict dissemination of solicitation materials and use of
audio or visual recording devices at the meeting;
(c) establish seating arrangements;
(d) adjourn the meeting without a vote of the stockholders,
whether or not there is a quorum present; and
(e) make rules governing speeches and debate including time
limits and access to microphones.
The chairman of the meeting acts in his absolute discretion and his rulings are
not subject to appeal.
ARTICLE II
BOARD OF DIRECTORS
SECTION 2.1. NUMBER AND TERM OF OFFICE.
The business, property, and affairs of the Corporation shall be managed under
the direction of its Board of Directors. The number of directors of the
Corporation shall be fixed by resolution duly adopted from time to time by a
majority of the entire Board; provided, however, that any decrease in the number
of directors shall not shorten the term of any incumbent director.
SECTION 2.2. CHAIRMAN OF THE BOARD.
The directors may elect one of their members to be Chairman of the Board of
Directors. The Chairman shall be subject to the control of and may be removed by
the Board of Directors. He shall perform such duties as may from time to time be
assigned to him under these by-laws and by the Board.
SECTION 2.3. MEETINGS.
The annual meeting of the Board of Directors, for the election of officers and
the transaction of such other business as may come before the meeting, shall be
held at the same place as, and immediately following, the annual meeting of
shareholders.
A-2
<PAGE>
Regular meetings of the Board of Directors may be held without notice at such
time and place as shall from time to time be determined by the Board.
Special meetings of the Board of Directors shall be held at such time and place
as shall be designated in the notice of the meeting whenever called by the
Chairman of the Board, if any, the Chief Executive Officer, or by a majority of
the directors then in office.
SECTION 2.4. NOTICE OF SPECIAL MEETINGS.
The Secretary, or in his absence any other officer of the Corporation, shall
give each director notice of the time and place of holding of special meetings
of the Board of Directors by mail at least three days before the meeting, or by
telegram, cable, radiogram, facsimile transmission, electronic mail transmission
or personal service at least one day before the meeting. Unless otherwise stated
in the notice thereof
SECTION 2.5. QUORUM AND ORGANIZATION OF MEETINGS.
A majority of the entire Board of Directors or any committee of the Board
constituted from time to time shall constitute a quorum for the transaction of
business, but, if at any meeting of the Board of Directors or any committee of
the Board (whether or not adjourned from a previous meeting) there shall be less
than a quorum present, a majority of those present may adjourn the meeting to
another time and place, and the meeting may be held as adjourned without further
notice or waiver. Except as otherwise provided by law or in the Certificate of
Incorporation or these By-Laws, a majority of the directors or members of the
committee present at any meeting at which a quorum is present may decide any
question brought before such meeting. Meetings shall be presided over by the
Chairman of the Board, if any, or in his absence by the Chief Executive Officer,
or in the absence of both by such other person as the directors may select. The
Secretary of the Corporation shall act as secretary of the meeting, but in his
absence the chairman of the meeting may appoint any person to act as secretary
of the meeting.
SECTION 2.6. COMMITTEES.
The Board of Directors, by resolution adopted by a majority of the entire Board,
may designate from among its members one or more committees, each consisting of
one or more directors, and each of which, to the extent provided in such
resolution, shall have all the authority of the Board (except as otherwise
provided by law or in the Certificate of Incorporation or these By-Laws).
However, no such committee shall have authority as to any of the following
matters:
(a) the submission to shareholders of any action as to which
shareholders' authorization and approval is required by
law, the Certificate of Incorporation, or these By-Laws;
(b) the filling of vacancies in the Board of Directors or in
any committee;
(c) the fixing of compensation of the directors for serving on
the Board or on any committee;
(d) the amendment or repeal of these By-Laws, or the adoption
of new By-Laws; or
(e) the amendment or repeal of any resolution of the Board of
Directors which by its terms shall not be so amendable or
repealable.
The Board may designate one or more directors as alternate members of any such
committee, who may replace any absent member or members at any meeting of such
committee.
Each such committee shall serve at the pleasure of and be responsible to the
Board. It shall keep minutes of its meetings and report the same to the Board.
SECTION 2.7. ACTION WITHOUT A MEETING.
Nothing contained in these By-Laws shall be deemed to restrict the power of
directors or members of any committee to take any action required or permitted
to be taken by them without a meeting.
A-3
<PAGE>
SECTION 2.8. TELEPHONE MEETINGS.
Any one or more members of the Board or any committee thereof may participate in
a meeting of the Board or committee by means of a conference telephone or
similar communications equipment allowing all persons participating in the
meeting to hear each other at the same time. Participation by such means shall
constitute presence in person at a meeting.
ARTICLE III
OFFICERS
SECTION 3.1. EXECUTIVE OFFICERS.
The executive officers of the Corporation shall be a Chief Executive Officer, a
President, one or more Vice-Presidents, a Treasurer, and a Secretary, each of
whom shall be elected by the Board of Directors. The Board of Directors may
elect or appoint such other officers (including one or more Assistant Treasurers
and Assistant Secretaries) as it may deem necessary or desirable. Each officer
shall hold office for such term as may be prescribed by the Board of Directors
from time to time. Any person may hold at one time two or more offices.
SECTION 3.2. POWERS AND DUTIES.
The Chairman of the Board, if any, or, in his absence, the Chief Executive
Officer (if he shall be a director), shall preside at all meetings of the Board
of Directors. If the offices of President and Chief Executive Officer are not
held by the same person, the President shall be the chief operating officer of
the Corporation. In the absence of the Chief Executive Officer, the President or
a Vice President, as appointed by the Chief Executive Officer or, if the Chief
Executive Officer fails to make such appointment, by the Board, shall perform
all the duties of the Chief Executive Officer. The officers and agents of the
Corporation shall each have such powers and authority and shall perform such
duties in the management of the business, properties, and affairs of the
Corporation as generally pertain to their respective offices, as well as such
powers an authority and such duties as from time may be prescribed by the Board
of Directors.
ARTICLE IV
RESIGNATIONS, REMOVALS, AND VACANCIES
SECTION 4.1. RESIGNATIONS.
Any director or office of the Corporation, or any member of any committee, may
resign at any time by giving written notice to the Board of Directors, the
Chairman of the Board, if any, the Chief Executive Officer, the President, or
the Secretary. Any such resignation shall take effect at the time specified
therein or, if the time be not specified therein, then upon receipt thereof. The
acceptance of such resignation shall not be necessary to make it effective.
SECTION 4.2. REMOVALS.
The Board of Directors, by a vote of not less than a majority of the entire
Board, at any meeting thereof, or by written consent, at any time, may, to the
extent permitted by law, remove with or without cause from office or terminate
the employment of any officer.
SECTION 4.3. VACANCIES.
Any vacancy occurring for any reason (including a removal without cause) in the
office of any officer may be filled at any time by a majority of the directors
then in office (even though less than a quorum remains) and, subject to the
provisions of this Article IV, the person so chosen shall hold office until his
successor shall have been elected and qualified.
ARTICLE V
CERTIFICATES REPRESENTING SHARES
SECTION 5.1. FORM OF CERTIFICATES.
The shares of the Corporation shall be represented by certificates which shall
be in such form as is prescribed by law and approved from time to time by the
Board of Directors.
A-4
<PAGE>
SECTION 5.2. TRANSFER OF SHARES.
Shares of capital stock of the Corporation may be transferred on the books of
the Corporation only by the holder of such shares or by his duly authorized
attorney, upon the surrender to the Corporation or its transfer agent of the
certificate representing such stock properly endorsed.
SECTION 5.3. LOST CERTIFICATES.
The Board of Directors or any transfer agent of the Corporation may direct a new
certificate or certificates representing stock of the Corporation to be issued
in place of any certificate or certificates theretofore issued by the
Corporation, alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate to be lost,
stolen, or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors (or any transfer agent of the Corporation
authorized to do so by a resolution of the Board of Directors) may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen, or destroyed certificate or certificates, or his
legal representative, to give the Corporation a bond in such sum as the Board of
Directors (or any transfer agent so authorized) shall direct to indemnify the
Corporation against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed or
the issuance of such new certificates, and such requirement may be general or
confined to specific instances.
SECTION 5.4. REGULATIONS.
The Board of Directors shall have power and authority to make all such rules and
regulations as it may deem expedient concerning the issue, transfer,
registration, cancellation, and replacement of certificates representing stock
of the Corporation.
ARTICLE VI
GENERAL PROVISIONS
SECTION 6.1. FIXING RECORD DATE.
For the purpose of determining the shareholders entitled to notice of or to vote
at any meeting of shareholders or any adjournment thereof, or for the purpose of
determining the shareholders entitled to receive payment of any dividend or the
allotment of any right, or for the purpose of any other action, the Board of
Directors may fix, in advance, a date as the record date for any such
determination of shareholders. Such date shall, unless otherwise provided by
law, not be more than sixty nor less than ten days before the date of any
meeting nor more than sixty days prior to the payment of any dividend, or the
allotment of any right, or any other action.
SECTION 6.2. CORPORATE SEAL.
The corporate seal shall have inscribed thereon the name of the Corporation, the
year of its organization, and the words "Corporate Seal" and "New York," and
shall be in such form as may be approved from time to time by the Board of
Directors.
SECTION 6.3. FISCAL YEAR.
The fiscal year of the Corporation shall be determined from time to time by
resolution of the Board of Directors.
SECTION 6.4. NOTICES AND WAIVERS THEREOF.
Whenever any notice is required by law, the Certificate of Incorporation, or
these By-Laws to be given to any shareholder, director, or officer, such notice,
except as otherwise provided by law, may be given personally, or by mail, or, in
the case of directors or officers, by telegram, cable, radiogram, facsimile
transmission or electronic mail transmission addressed to such address as
appears on the books of the Corporation. Any notice given by telegram, cable,
radiogram, facsimile transmission or electronic mail transmission shall be
deemed to have been given when it shall have been delivered for transmission and
any notice given by mail shall be deemed to have been given when it shall have
been deposited in the United States mail with postage thereon prepaid.
A-5
<PAGE>
Whenever any notice is required to be given by law, the Certificate of
Incorporation, or these By-Laws, a written waiver thereof, signed by the person
entitled to such notice, whether before or after the meeting or the time stated
therein, shall be deemed equivalent in all respects to such notice to the full
extent permitted by law.
Timely written notice of any stockholder proposal (including for the election of
directors) shall be given to the Board of Directors before any annual meeting of
stockholders. To be timely, a stockholder's notice must be received not less
than sixty days nor more than ninety days prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is advanced by more than thirty days or delayed by
more than sixty days from such anniversary, notice by the stockholder to be
timely must be so received not earlier than the ninetieth day prior to such
annual meeting and not later than the close of business on the later of (1) the
sixtieth day prior to such annual meeting or (2) the tenth day following the
date on which notice of the date of the annual meeting was mailed or public
disclosure thereof was made, whichever first occurs. Each such notice shall set
forth as to each matter the stockholder proposes to bring before the annual
meeting: (a) a brief description of the business desired to be brought before
the annual meeting and the reasons for conducting such business at the meeting,
(b) the name and address, as they appear on the corporation's books, of the
stockholder proposing such business, (c) the class, series and number of shares
of the corporation which are beneficially owned by the stockholder and (d) any
material interest of the stockholder in such business. The presiding officer of
the annual meeting shall, if the facts warrant, determine and declare to the
meeting that business was not properly brought before the meeting and in
accordance with the provisions of this Section 6.4, and if he should so
determine, any such business not properly brought before the meeting shall not
be transacted. Nothing herein shall be deemed to affect any right of
stockholders to request inclusion of proposals in the corporation's proxy
statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended.
SECTION 6.5. SECURITIES OF OTHER CORPORATION OR OTHER INTERESTS.
Unless otherwise ordered by the Board of Directors, the Chairman of the Board,
if any, the President, the Secretary, and such attorneys or agents of the
Corporation as may from time to time be authorized by the Board of Directors or
the President, shall have full power and authority on behalf of this Corporation
to attend and to act and vote in person or proxy at any meeting of the holders
or securities of any corporation or other entity in which this Corporation may
own or hold shares or other securities, and at such meetings shall possess and
may exercise all the rights and powers incident to the ownership of such shares
or other securities which this Corporation, as the owner or holder thereof,
might have possessed and exercised if present. The Chairman of the Board, if
any, the President, the Secretary, or such attorneys or agents may also execute
and deliver on behalf of this Corporation powers of attorney, proxies, consents,
waivers, and other instruments relating to the shares or securities owned or
held by this Corporation.
SECTION 6.6. INDEMNIFICATION OF DIRECTORS, OFFICERS, INCORPORATORS,
EMPLOYEES, AND AGENTS.
Except to the extent expressly prohibited by the New York Business Corporation
Law, the Corporation shall indemnify each person made or threatened to be made a
party to any action or proceedings, whether civil or criminal, by reason of the
fact that such person or such person's testator or intestate is or was a
director or officer of the Corporation, or serves or served at the request of
the Corporation any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise in any capacity, against judgments,
fines, penalties, amounts paid in settlement and reasonable expenses, including
attorneys' fees, incurred n connection with such action or proceedings, or any
appeal therein, provided that no such indemnification shall be made if a
judgment or other final adjudication adverse to such person establishes that his
or her acts were committed in bad faith or were the result of active and
deliberate dishonesty and were material to the cause of action as adjudicated,
or that he or she personally gained in fact a financial profit or other
advantage to which he or she was not legally entitled, and provided further that
no such indemnification shall be required with respect to any settlement or
other nonadjudicated disposition of any threatened or pending action or
proceedings unless the Corporation has given its prior consent to such
settlement or other disposition.
The Corporation shall advance or promptly reimburse upon request any
person entitled to indemnification hereunder for all expenses, including
attorneys' fees, reasonably incurred in defending any action or proceeding in
advance of the final disposition thereof upon receipt of an undertaking by or on
behalf of such person to repay such amount if such person is ultimately found
not be entitled to indemnification or, where indemnification is granted, to the
extent the expenses so advanced or reimbursed exceed the amount to which such
person is entitled, provided, however, that such person shall cooperate in good
faith with any request by the Corporation that common counsel be utilized by the
parties to an action or proceeding who are similarly situated unless to do so
would be inappropriate due to actual or potential differing interests between or
among such parties.
A-6
<PAGE>
Nothing herein shall limit or affect any right of any person otherwise
than hereunder to indemnification or expenses, including attorneys' fees, under
any statute, rule, regulation, certificate or incorporation, by-law, insurance
policy, contract or otherwise.
Anything in these by-laws to the contrary notwithstanding, no
elimination of this by-law, and no amendment of this by-law adversely affecting
he right of any person to indemnification or advancement or expenses hereunder
shall be effective until the 60th day following notice to such person of such
action, and no elimination of or amendment to this by-law shall deprive any
person of his or her rights hereunder arising out of alleged or actual
occurrences, acts or failures to act prior to such 60th day.
The Corporation shall not, except by elimination or amendment of this
by-law in a manner consistent with the preceding paragraph, take any corporate
action or enter into any agreement which prohibits, or otherwise limits the
rights of any person to, indemnification in accordance with the provisions of
this by-law. The indemnification of any person provided by this by-law shall
continue after such person has ceased to be a director, officer or employee of
the Corporation and shall inure to the benefit of such person's heirs,
executors, administrators and legal representatives.
The Corporation is authorized to enter into agreements with any of its
directors, officers or employees extending rights to indemnification and
advancement of expenses to such person to the fullest extent permitted by
applicable law, but the failure to enter into any such agreement shall not
affect or limit the rights of such person pursuant to this by-law, it being
expressly recognized hereby that all directors, officers and employees of the
Corporation, by serving as such after the adoption hereof, are acting in
reliance hereon and that the Corporation is estopped to contend otherwise.
In case any provision in this by-law shall be determined at any time to
be unenforceable in any respect, the other provisions shall not in any way be
affected or impaired thereby; and the affected provision shall be given the
fullest possible enforcement in the circumstances, it being the intention of the
Corporation to afford indemnification and advancement of expenses to its
directors, officers and employees, acting in such capacities or in the other
capacities mentioned herein, to the fullest extent permitted by law.
For purposes of this by-law, the Corporation shall be deemed to have
requested a person to serve an employee benefit plan where the performance by
such person of his or her duties to the Corporation also imposes duties on, or
otherwise involves services by, such person to the plan or participants or
beneficiaries of the plan, and excise taxes assessed on a person with respect to
an employee benefit plan pursuant to applicable law shall be considered
indemnifiable expenses. For purposes of this by-law, the term "Corporation"
shall include any legal successor to the Corporation, including any corporation
which acquires all or substantially all of the assets of the Corporation in one
or more transactions.
ARTICLE VII
AMENDMENTS
The holders of shares entitled at the time to vote for the election of directors
shall have power to adopt, amend, or repeal the By-Laws of the Corporation by
vote of not less than a majority of such shares, and the Board of Directors by
vote of not less than a majority of the entire Board shall have power equal in
all respects to that of the shareholders to adopt, amend, or repeal the By-Laws.
However, any By-Law adopted by the Board may be amended or repealed and any
By-Law repealed by the Board may be reinstated by vote of the holders of a
majority of the shares entitled at the time to vote for the election of
directors.
If any By-Law regulating an impending election of directors is adopted, amended,
or repealed by the Board of Directors, there shall be set forth in the notice of
the next meeting of shareholders for the election of directors the By-Law or
By-Laws so adopted, amended, or repealed, together with a concise statement of
the changes made.
A-7
<PAGE>
EXHIBIT 10.19
Michael J. Madden
10 Finn Court
Mahwah, New Jersey 07430
Re: SEVERANCE AGREEMENT
Dear Michael:
Trans World Entertainment Corporation, a New York Corporation, and its wholly
owned subsidiary, Record Town, Inc. (collectively, the "Company"), considers the
establishment and maintenance of a sound and vital management to be essential to
protecting and enhancing the best interests of the Company and its shareholders.
In order to induce you to join the Company, this Agreement sets forth the
severance benefits which the Company agrees will be provided to you in the event
your employment with the company is terminated without "Cause," as further
described below.
1. TERM OF AGREEMENT. This Agreement shall commence on the date hereof and
shall continue in effect until May 1, 2000 (the "Term"); provided, however,
that commencing of May 1, 2000 and each May thereafter, the term of this
Agreement shall automatically be extended for one additional year.
Notwithstanding anything in this Section 1 to the contrary, this Agreement
shall terminate if you otherwise separate your employment from the Company.
2. SEPARATION FOR DISABILITY OR FOR CAUSE.
a) You shall be entitled to the benefits provided in Section 3 if, during
the Term of this Agreement, your employment with the Company is ever
terminated for any reason other than Cause (defined below), unless such
termination is for Disability (defined below.)
b) DISABILITY. Termination by the Company of your employment based on
"Disability" shall mean termination because of your absence from your
duties with the Company on a full time basis for sixty (60) consecutive
days as a result of your incapacity due to physical or mental illness,
unless within thirty (30) days after notice of termination is given to
you following such absence you shall have returned to the full-time
performance of your duties. This provision shall not apply to
accidents.
c) CAUSE. Termination by the Company of your employment for "Cause" shall
mean termination for any of the following reasons: (i) the willful and
continued failure by you to perform substantially your duties with the
Company (other than any such failure resulting from your incapacity due
to physical or mental illness) after demand for substantial performance
is delivered to you by the Chairman of the Board or the CEO of the
Company, which demand specifically identifies the manner in which such
executive believes that you have not substantially performed your
duties; (ii) the willful engaging by you in illegal conduct that
materially and demonstrably damages the Company's business or
reputation; (iii) the commission of any act which injures, or in the
reasonable judgment of the Board could reasonably be expected to
injure, materially the reputation, business or business relationships
of the Company, including, without limitation, any breach of written
policies of the Company with respect to trading in securities; or (iv)
any conduct in the course of your employment that constitutes, in the
Company's reasonable judgement, gross negligence, fraud, embezzlement
or any acts of moral turpitude that result or are intended to result,
directly or indirectly, to your personal enrichment at the Company's
expense. For purposes of this Section 2(c), no act or failure to act on
your part shall be considered "willful" unless done, or omitted to be
done, by you in bad faith and without reasonable belief that your
action or omission was in, or not opposed to, the best interests of the
Company. Any act, or failure to act, based upon authority given
pursuant to a resolution duly adopted by the Board or based upon the
advise of counsel for the company shall be conclusively presumed to be
done, or omitted to be done, by you in good faith and in the best
interests of the corporation.
d) EMPLOYMENT AT WILL. The Company or you may separate your employment at
any time, subject to the Company's covenant to provide the benefits
specified in accordance with the terms of this Agreement.
B-1
<PAGE>
3. COMPENSATION UPON TERMINATION OR DURING DISABILITY: OTHER AGREEMENTS.
a) During any period that you fail to perform your duties as a result of
incapacity due to physical or mental illness, you shall continue to
receive your salary at the rate then in effect and any benefits or
awards under any benefit plans shall continue to accrue during such
period, which period shall be at least 90 days, until your employment
is terminated without cause. Thereafter, your benefits shall be
determined in accordance with any applicable benefit plans then in
effect.
b) If your employment shall be terminated, other than for Cause, by the
Company, then the Company shall pay you your base salary for 24 months
at the rate in effect just prior to the time a notice of termination is
given, plus (i) the lesser of (x) your bonus paid by the Company for
the last fiscal year (or guaranteed to be paid in the case of fiscal
1999) and (y) the bonus you would have earned for the current fiscal
year (not to exceed the bonus payable based upon achieving target) and
(ii) any benefits (including health, disability and 401(k) or awards
including both cash, bonus and stock components) which, pursuant to the
terms of any applicable plans, have been earned or become payable, but
which have not yet been paid to you (it being understood that options
and restricted stock awards that have not vested as of the date of
termination shall terminate upon such date of termination). Thereafter,
the Company shall have no further obligations to you under this
Agreement; provided that (i) your benefits under the Company's
Supplemental Executive Retirement Plan shall continue to accrue for a
period of two years from the date of termination or your subsequent
employment by a third party, whichever occurs sooner, at the rate
accrued in the last full fiscal year prior to the notice of
termination, and (ii) the Company shall continue your existing life
insurance and health benefits for a period of two years from the date
of termination or your subsequent employment by a third party,
whichever occurs sooner.
c) To the extent that you shall receive cash compensation that is subject
to federal income taxation in respect of other employment or a
consulting position with another organization, and that consideration
is payable to you solely in respect of the remainder of the Term of
this Agreement as in effect immediately prior to such termination, or a
portion thereof, the payments to be made by the Company under this
Section 3, shall be proportionately reduced.
d) To the extent that following a Change of Control (as such term is
defined in the Company's 1998 Stock Option Plan as in effect on the
date hereof) your responsibilities within the Company are materially
diminished, you shall have the right to deem your employment to have
been terminated, other than for Cause, by the Company by written notice
to the Company within 30 days of such diminution of such
responsibility.
4. TAXES. All payments to be made to you under this Agreement will be subject
to required withholding of federal, state, and local income and employment
taxes.
5. SURVIVAL. The respective obligations of, and benefits afforded to, the
Company or you as provided in this Agreement shall survive any expiration
or termination of this Agreement.
6. NOTICES. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United Sates
registered mail, return receipt requested, postage prepaid and addressed,
in the case of the Company, to the address set forth on the first page of
this Agreement, or, in the case of the undersigned employee, to the address
set forth below his signature, provided that all notices to the Company
shall be directed to the attention of the Chairman of the company, with a
copy to the Secretary of the Company, or to such other address as either
party may have furnished to the other in writing in accordance herewith,
except that notice of change of address shall be effective only upon
receipt.
7. MODIFICATION WAIVER: GOVERNING LAW. No provision of this Agreement may be
modified, waived or discharged unless such modification, waiver or
discharge is agreed to in writing signed by you and the Chairman of the
Board or the CEO of the Company. No waiver by either party hereto at any
time of any breach by the other party hereto of, or of compliance with, any
condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or other wise, expressed or implied, with respect to
the subject matter hereof have been made by either party, which are not
expressly set forth in this Agreement.
B-2
<PAGE>
The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of New York without
reference to its principles of conflict of laws.
8. ARBITRATION. Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration in Albany, New
York by three arbitrators in accordance with the rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrators' award in any court having jurisdiction. The Company shall bear
all costs and expenses arising in connection with any arbitration
proceeding pursuant to this Section 8.
9. EMPLOYEE'S CONTINUING COVENANTS.
a) For a period of 24 months after your employment is separated from the
Company for whatever reason, whether or not it is for Cause, you
covenant and agree not to compete with the Company, whether directly or
indirectly, alone or as an employee, independent contractor of any
type, partner, substantial shareholder (5% or greater) or holder of an
option or right to become a substantial shareholder, in any music or
video business in the United States. If any of the restrictions on
post-employment competitive activity contained in this Section 9 are
held by a court of competent jurisdiction to be excessively broad as to
duration, geographical scope, activity or subject such restrictions
shall be construed to be enforceable to the extent compatible with
applicable law as it shall then exist, it being understood that by the
execution of this Agreement the parties hereto regard such restrictions
as reasonable and compatible with their respective rights and
obligations.
b) In consideration for the Company's agreement hereunder, you agree that
subsequent to your period of employment with the Company, you will not
at any time communicate or disclose to any unauthorized person, without
the written consent of the Company, business information, trade
secrets, sales data or any proprietary processes of the Company or any
subsidiary or other confidential information concerning their business
affairs, products, suppliers, or customers, unless otherwise required
by law.
If this letter correctly sets forth our agreement on the subject matter hereof,
kindly sign and return it to the Company, which will then constitute our
agreement.
Sincerely,
TRANS WORLD ENTERTAINMENT CORP.
RECORD TOWN, INC.
BY:
__________________________________
Robert J. Higgins
Chairman & CEO
ACKNOWLEDGED AND AGREED TO:
By:
______________________________
Michael J. Madden
B-3
<PAGE>
EXHIBIT 22
TRANS WORLD ENTERTAINMENT CORPORATION
SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Name of Significant Name(s) Under Which the
Subsidiary State of Incorporation Subsidiary Does Business
----------------------- ----------------------------------- -------------------------------
<S> <C> <C>
Media Logic, Inc. New York Media Logic, Inc.
Record Town, Inc. New York Record Town
Saturday Matinee
Movies Plus
Tape World
Coconuts
Music World
F.Y.E. (For Your Entertainment)
Strawberries
Waxie Maxie
Planet Music
Camelot Music
The Wall
Record Town Michigan, Inc Delaware Record Town
Saturday Matinee
Tape World
Record Town Minnesota, Inc. Delaware Record Town
Spec's Music, Inc. Florida Spec's Music
Trans World New York, Inc. New York Trans World New York, Inc.
Trans World Management Company New York Trans World Management Company
TWEC.com. Delaware TWEC.com
Trans World Florida, Inc. Florida Trans World Florida, Inc.
</TABLE>
C-1
<PAGE>
EXHIBIT 23
ACCOUNTANTS' CONSENT
We consent to incorporation by reference in the registration statements (No.
33-14572, No. 33-40399, No. 33-51094, No. 33-51516, No. 33-59319, No.
333-75231 and No. 333-81685) on Form S-8 pertaining to the Trans World Music
Corp. 1986 Incentive and Non-Qualified Stock Option Plan, the Trans World
Music Corp. 1990 Stock Option Plan for Non-Employee Directors, the Trans
World Entertainmemt Corp. 1994 Stock Option Plan, the Camelot Music
Holdings, Inc. 1998 Stock Option Plan, the Camelot Music Holdings Inc.
Outside Directors Stock Option Plan, the Trans World Entertainment Corp. 1998
Stock Option Plan, and the Trans World Entertainment Corp. 1999 Stock Option
Plan of our report dated March 17, 2000, relating to the consolidated balance
sheets of Trans World Entertainment Corporation and subsidiaries as of
January 29, 2000 and January 30, 1999, 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 29, 2000, which report
appears in the Annual Report on Form 10-K of Trans World Entertainment
Corporation and subsidiaries for the fiscal year ended January 29, 2000.
/s/ KPMG LLP
Albany, New York
April 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS LEGEND 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-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JAN-29-2000
<CASH> 280,026
<SECURITIES> 0
<RECEIVABLES> 5,973
<ALLOWANCES> 0
<INVENTORY> 437,363
<CURRENT-ASSETS> 728,565
<PP&E> 285,058
<DEPRECIATION> 140,364
<TOTAL-ASSETS> 956,410
<CURRENT-LIABILITIES> 425,003
<BONDS> 0
0
0
<COMMON> 534
<OTHER-SE> 493,639
<TOTAL-LIABILITY-AND-EQUITY> 956,410
<SALES> 1,358,132
<TOTAL-REVENUES> 1,358,132
<CGS> 858,588
<TOTAL-COSTS> 858,588
<OTHER-EXPENSES> 393,385
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,496
<INCOME-PRETAX> 102,663
<INCOME-TAX> 41,270
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,393
<EPS-BASIC> 1.17
<EPS-DILUTED> 1.15
</TABLE>
