-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CJyk/Aem4opsKbLgnSWUps6TPCZDxPL32IIGKRkINxZ9/0twp4585YCGA5iwuGPb xrj+JnXv+uxdXJ69C/Fi2g== 0001047469-99-012583.txt : 19990402 0001047469-99-012583.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012583 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANS WORLD ENTERTAINMENT CORP CENTRAL INDEX KEY: 0000795212 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL- COMPUTER & PRERECORDED TAPE STORES [5735] IRS NUMBER: 141541629 STATE OF INCORPORATION: NY FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-14818 FILM NUMBER: 99579871 BUSINESS ADDRESS: STREET 1: 38 CORPORATE CIRCLE CITY: ALBANY STATE: NY ZIP: 12203 BUSINESS PHONE: 5184521242 MAIL ADDRESS: STREET 1: 38 CORPORATE CIRCLE CITY: ALBANY STATE: NY ZIP: 12203 FORMER COMPANY: FORMER CONFORMED NAME: TRANS WORLD MUSIC CORP DATE OF NAME CHANGE: 19920703 10-K/A 1 10-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] FOR THE FISCAL YEAR ENDED JANUARY 31, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT FOR THE TRANSITION PERIOD FROM ____ TO ____ COMMISSION FILE NUMBER: 0-14818 TRANS WORLD ENTERTAINMENT CORPORATION ------------------------------------- (Exact name of registrant as specified in its charter) New York 14-1541629 ---------- ------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 38 Corporate Circle Albany, New York 12203 ------------------------------------- (Address of principal executive offices, including zip code) (518) 452-1242 ------------------------------------- (Registrant's telephone number, including area code) Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's Knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or an amendment to this Form 10-K. [ ] As of March 26, 1998, 19,816,143 shares of the Registrant's Common Stock, excluding 70,788 shares of stock held in Treasury, were issued and outstanding. The aggregate market value of such shares held by non-affiliates of the Registrant, based upon the closing sale price of $28.75 on the Nasdaq National Market on March 26, 1998, was approximately $272,900,000. Shares of Common Stock held by the Company's controlling shareholder, who controls approximately 52.1% of the outstanding Common Stock, have been excluded for purposes of this computation. Because of such shareholder's control, shares owned by other officers, directors and 5% shareholders have not been excluded from the computation. -1- INTRODUCTORY NOTE: Trans World Entertainment Corporation is amending this Form 10-K to reflect a restatement for changes made to its fiscal year ended February 3, 1996 financial statements (see note 12 on page 38) and to provide revised disclosures made in connection with its Form S-4 filing on March 30, 1999. PART I Item 1. BUSINESS General Trans World Entertainment Corporation (which, together with its consolidated subsidiaries, is referred to herein as the "Company") was incorporated in New York in 1972. Trans World Entertainment Corporation owns 100% of the outstanding common stock of Record Town, Inc., through which the Company's principal retail operations are conducted. The Company operates a chain of retail entertainment stores in a single industry segment. Sales were $571.3 million during the fiscal year ended January 31, 1998 (referred to herein as "1997"). The Company is one of the largest specialty retailers of compact discs, prerecorded audio cassettes, prerecorded videocassettes and related accessories in the United States. At January 31, 1998, the Company operated 539 stores totaling about 2.4 million square feet in 34 states, the District of Columbia and the Virgin Islands, with the majority of the stores concentrated in the Eastern half of the United States. The Company's business is highly seasonal in nature, with the peak selling period being the Christmas holiday in the fourth fiscal quarter. In October 1997, the Company acquired 90 out of a total of 118 stores owned by Strawberries, Inc., a privately held non-mall music specialty retailer operating primarily in New England. The stores operate under the names "Strawberries" and "Waxie Maxie" and are primarily located in freestanding and strip center locations. On December 15, 1997 the Company split its common stock two-for-one in the form of a 100% stock dividend. The total shares issued at January 31, 1998 were 19,815,357 compared to a total of 19,619,188 at February 1, 1997, on a split adjusted basis. All references throughout this report to number of shares, per share amounts, stock option data and market prices of the Company's common stock have been restated to reflect the stock split. -2- The Company closed 78 stores in 1997 and a total of 342 since the fourth quarter of 1994 as part of two restructuring plans announced in the fourth quarter of 1994 and the fourth quarter of 1995. The Company expects the restructuring to be completed during 1998. A total of 62 stores are forecast to close in 1998; however, only 49 closings are associated with the restructuring. The remaining 13 stores will be closed or relocated as part of the Company's ongoing business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." The Company's central distribution facility currently serves all of its retail stores with weekly shipments to each store providing for approximately 78% of their retail product requirements. The balance of the stores' requirements are satisfied through direct shipments from manufacturers or redistribution from other Company-operated stores. The Company's principal executive offices are located at 38 Corporate Circle, Albany, New York, 12203, and its telephone number is (518) 452-1242. Store Concepts The Company's strategy is to offer customers a broad selection of music and video titles at competitive prices in convenient, attractive stores. The Company has developed a number of distinct store concepts to take advantage of real estate opportunities and to satisfy varying consumer demands. Mall Stores The Company's mall stores include five concepts, all of which have been designed to offer consumers a fun and exciting shopping experience. In the mall stores, the Company puts an emphasis on a strong in-store presentation message, broad product selection and competitive pricing to attract the casual impulse buyer. Full-Line Music Stores. The Company's full-line mall stores are located in large, regional shopping malls and are generally named Record Town. There were 178 such stores at January 31, 1998. This store concept utilizes an average space of approximately 3,300 square feet with, certain stores ranging in excess of 7,000 square feet depending on the availability of preferred space and the expected volume of the store. Saturday Matinee Stores. These stores are dedicated to the sale of pre-recorded video products. These stores are located in large, regional shopping malls and average 2,200 square feet in size. There were 44 such locations in operation at January 31, 1998. The Company's strategy is to combine this store with a Record Town in its combination store concept whenever possible. -3- Combination Stores. At January 31, 1998, the company operated 79 combination Record Town/Saturday Matinee stores. The combination store concept occupies an average of 7,300 square feet. These stores share common storefronts and offer the consumer an exciting combination of music and video products in one store location. The Company believes that the combination of the two concepts creates a marketing synergy by attracting different target customers. For Your Entertainment Stores. At January 31, 1998, the Company operated five F.Y.E. stores. These stores combine a broad assortment of music and video products with a game arcade and an extensive selection of games, portable electronics, accessories and boutique items. This format is designed to be a semi-anchor or destination retailer in major regional malls. The prototype F.Y.E. store is 25,000 square feet. Specialty Music Stores. The specialty music concept is also located in large, regional shopping malls, but contrasts with full-line music stores in that they carry a less diverse product selection. These stores, 34 of which were in operation at January 31, 1998, are generally operated under the name Tape World. The specialty mall stores operate in approximately 1,300 square feet. The Company's strategy is to reposition and expand these stores into Record Town stores or combination stores as opportunities become available. Non-Mall Stores The Company's non-mall concept accounted for 199 stores in operation at January 31, 1998, which primarily operate under the names Coconuts and Strawberries. These stores are designed for freestanding, strip center and downtown locations in areas of high population density. The majority of the non-mall stores range in size from 3,000 to 8,000 square feet. Non-mall stores carry an extensive product assortment and have an emphasis on competitive pricing. The Company's non-mall stores include 22 video rental stores. These stores operate under the tradename "Movies Plus" and average approximately 5,300 square feet. On October 27, 1997, the Company acquired "Planet Music," a 31,000 square foot, freestanding superstore in Virginia Beach, VA. The store operates in a strip center and offers an extensive catalog of predominantly music. The store also has a video department and sells other non-music related products, similar to what would be carried in a large Coconuts store. The acquisition also includes the rights to the "Planet Music" name and trademark, which offers the Company potential expansion opportunities. Products The Company's stores offer a full assortment of compact discs, prerecorded audio cassettes, prerecorded video (including DVD) and related accessories. Sales by category as a percent of total sales over the past three years were as follows:
January 31, February 1, February 3, 1998 1997 1996 ----------- ----------- ----------- Compact discs 55.5% 50.1% 49.2% Prerecorded audio cassettes 18.9 22.2 25.5 Prerecorded video 16.3 18.6 16.7 Other 9.3 9.1 8.6 ----------- ------------ ---------- TOTAL 100.0% 100.0% 100.0% =========== ============ ==========
-4- Pre-recorded Music. The Company's music stores offer a full assortment of compact discs and prerecorded audio cassettes purchased primarily from six major manufacturers. Music categories include rock, pop, rap, soundtracks, alternative, Latin, urban, heavy metal, country, dance, vocals, jazz and classical. Merchandise inventory is generally classified for inventory management purposes in three groups: "hits", which are the best selling new releases, "fast moving" titles, which generally constitute the top 1,000 titles with the highest rate of sale in any given month, and "catalog" items that customers purchase to build their collections. Video Products. The Company offers pre-recorded videocassettes for sale in a majority of its stores. DVD, a new video technology, was introduced to the retail consumer in 1997. DVD offers a quality that exceeds both the current VHS and CD formats and also offers the consumer more storage than the current CD. The Company believes that the DVD player will replace the sales of laser disc players and VCRs as the new technology becomes more accessible. The Company is anticipating the increased availability of DVD players and plans to capitalize on this technology by making software increasingly available as this technology becomes more widely accepted by the consumer. DVD sales were less than 1% of the Company's retail sales in 1997. Other Products. The Company stocks and promotes brand name blank audio cassette and videocassette tapes as well as accessory products for compact discs, audio cassettes and videocassettes. These accessories include maintenance and cleaning products, portable electronics, storage cases, headphones and video games. Advertising The Company makes extensive use of in-store advertising circulars and signs and also pursues a mass-media marketing program for its freestanding stores through advertisements in newspapers, radio, and television. Most of the vendors from whom the Company purchases merchandise offer their customers advertising allowances to promote their products. Industry and Competitive Environment According to industry sources, the U.S. retail market for music and video products was approximately $20 billion in 1996. Prerecorded music amounted to $12.5 billion of that total, and this segment of the market has grown at an annual rate of 9.5% over the past 15 years. Fueled in part by this growth, in the early 1990's, music retailers began aggressive expansion programs which grew total square footage at a rate that outpaced consumer demand, resulting in an overcapacity of selling space in the U.S. Furthermore, new music retailing entrants, including mass merchants (e.g. Wal-Mart, K-Mart, Target) and consumer electronics stores (e.g. Best Buy, Circuit City) promoted aggressive loss-leader pricing strategies in an effort to increase store traffic. The additional retailing square footage and the loss-leader -5- pricing strategy forced music specialty retailers to reduce prices, resulting in decreased sales and gross margins of music specialty retailers. As a result, many music specialty retailers experienced financial difficulties which lead to corporate restructurings and bankruptcies. During 1996, many of the major music vendors began to enforce programs such as the Minimum Advertised Pricing ("MAP") program to eliminate loss-leader pricing strategies. These programs penalize sellers that fail to comply with vendor pricing programs by limiting advertising support. The enforcement of the MAP program has been successful in stabilizing prices in the industry. Non-traditional music retailers have since reduced their music and video selections and maintained less aggressive pricing policies. Seasonality The Company's business is highly seasonal. The fourth quarter constitutes the Company's peak selling period. In 1997, the fourth quarter accounted for approximately 42% of annual sales and substantially all of net income. In anticipation of increased sales activity during these months, the Company purchases substantial amounts of inventory and hires a significant number of temporary employees to bolster its permanent store staff. If for any reason the Company's net sales were below seasonal norms during the fourth quarter, including as a result of merchandise delivery delays due to receiving or distribution problems, the Company's operating results, particularly operating and net income, could be adversely affected. The fourth quarter percentage of annual sales in 1997 was higher than normal due to the Strawberries acquisition in October 1997. Quarterly results are affected by timing and strength of new releases, the timing of holidays, new store openings and sales performance of existing stores. Distribution and Merchandise Operations The Company's distribution facility uses certain automated and computerized systems designed to manage product receipt, storage and shipment. Store inventories of regular product are replenished in response to detailed product sale information that is transmitted to the central computer system from each store after the close of the business day. Shipments from the facility to each of the Company's stores are made at least once a week and currently provide the Company's stores with approximately 78% of their product requirements. The balance of the stores' requirements are satisfied through direct shipments from manufacturers or redistribution from other sources. -6- Company-owned trucks service approximately 36% of the Company's stores; the balance is serviced by several common carriers chosen on the basis of geographic and rate considerations. No contractual arrangements exist between the Company and any common carriers. The Company's sales volume and centralized product distribution facility enable it to take advantage of transportation economies. The Company believes that the existing distribution center is adequate to meet the Company's planned business needs, and additional improvements will be completed primarily for operational efficiency. Suppliers and Purchasing The Company purchases inventory for its stores from approximately 450 suppliers. Approximately 68% of purchases in 1997 were made from the six largest suppliers: WEA (Warner/Electra/Atlantic Corp)., Sony Music, PolyGram Distribution, Universal Distribution, BMG (Bertelsmann Music Group) and EMD (EMI Music Distribution). As is typical in this industry, the Company has no material long-term purchase contracts and deals with its suppliers principally on an order-by-order basis. In the past, the Company has not experienced difficulty in obtaining satisfactory sources of supply, and management believes that it will retain access to adequate sources of supply. The Company also expects to continue to pass on to customers any price increases imposed by the suppliers of prerecorded music and videocassettes. The Company produces store fixtures for all of its new stores and store remodels in its manufacturing facility located in Johnstown, New York. The Company believes that the costs of production are lower than purchasing from an outside manufacturer. Trade Customs and Practices Under current trade practices, retailers of pre-recorded compact discs and audio cassettes are entitled to return products they have purchased from major vendors for other titles carried by these vendors; however, the returns are subject to merchandise return penalties. This industry practice permits the Company to carry a wider selection of music titles and at the same time reduce the risk of obsolete inventory. Most manufacturers and distributors of pre-recorded videocassettes offer return privileges comparable to those with pre-recorded music, but with no merchandise return penalties. Video rental products are not eligible for return to the manufacturers. The merchandise return policies have not changed significantly during the past five years, but any future changes in these policies could impair the value of the Company's inventory. The Company generally has adapted its purchasing policies to changes in the policies of its suppliers. Employees As of January 31, 1998, the Company employed approximately 6,100 people, of whom 850 were employed on a full-time salaried basis, 1,700 were employed on a full-time hourly basis, and the remainder were employed on a part-time hourly basis. The Company hires temporary sales associates during peak seasons to assure continued levels of customer service. Store managers report to district managers, each of who, inturn, reports to a -7- regional manager. In addition to their salaries, store managers, district managers and regional managers have the potential to receive incentive compensation based on profitability. None of the Company's employees are covered by collective bargaining agreements, and management believes that the Company enjoys favorable relations with its employees. Retail Information Systems All store sales data and product purchasing information is collected centrally utilizing the IBM AS/400 midrange configuration. The Company's information systems manage a database of over 150,000 active SKUs in pre-recorded music, video and accessory products. The system processes inventory, accounting, payroll, telecommunications and other operating information for all of the Company's operations. The Company has piloted a new point-of-sale system that will be rolled out chain wide during the summer of 1998. This new system is expected to improve customer service while increasing the accuracy of perpetual inventories at the store level. See discussion on Year 2000 compliance in "Management's Discussion and Analysis of Financial Condition and Results of Operations." Item 2. PROPERTIES Retail Stores At January 31, 1998, the Company operated 539 retail outlets. The Company owns one real estate site, which it formerly operated as a retail outlet and currently leases to an unrelated party. All of the Company's retail stores are under operating leases with various terms and options. Substantially all of its stores provide for payment of fixed monthly rentals, a percentage of the gross receipts of the store in excess of specified sales levels, and operating expenses for maintenance, property taxes, insurance and utilities. The following table lists the number of leases due to expire (assuming no renewal options are exercised) in each of the fiscal years shown, as of January 31, 1998: Year Leases Year Leases ------ -------- ------ -------- 1998 94 2002 58 1999 49 2003 73 2000 77 2004 56 2001 53 2005 & Beyond 79 The Company expects that as these leases expire, it will be able either to obtain renewal leases, if desired, or to obtain leases for other suitable locations. Included in the table above are 38 month-to-month leases under negotiations for renewal; these leases are included as part of leases due to -8- expire in 1998. Certain of the stores scheduled to close will do so upon the expiration of the applicable store lease. Corporate Offices and Distribution Center Facility The Company leases its Albany, New York distribution facility and the majority of the corporate office space from its principal shareholder and Chief Executive Officer under two capital leases that extend through the year 2015. Both leases are at fixed rentals with provisions for biennial increases based upon increases in the Consumer Price Index. Under such leases, the Company pays all property taxes, insurance and maintenance. The office portion of the facility is comprised of 21,000 square feet. The distribution center portion is comprised of approximately 138,000 square feet. The principal shareholder and Chief Executive Officer is currently constructing a 20,000 square foot expansion to the existing corporate offices with an estimated completion date of July 1998. This property will be leased to the Company under similar terms as the two existing capital leases. The Company leases an 83,000 square foot facility in Johnstown, NY, where it manufactures its store fixtures. The seven-year operating lease expires in June 1998. The Company anticipates it will negotiate a new lease. Item 3. LEGAL PROCEEDINGS The Company has no material legal proceedings pending against it. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At a special meeting of shareholders held on November 14, 1997, shareholders approved an amendment to the Company's Certificate of Incorporation authorizing up to 50 million shares of common stock. Previously the Company was authorized to issue up to 20 million shares. Voting results were are follows: FOR - 7,551,676 AGAINST - 1,081,165 ABSTAIN - 17,076 Supplementary Item - Identification of Executive Officers of the Registrant - --------------------------------------------------------------------------- (Pursuant to Instruction 3 to Item 401(b) of Regulation S-K) The name, age, principal occupation and period of service as an executive officer of the Company for each executive officer are set forth below. Robert J. Higgins Age 56 President, Chief Executive Officer, Chairman of the Board and Director Since 1973 Robert J. Higgins founded the Company in 1972 and has participated in its operations since 1973. Mr. Higgins has served as President, Chief Executive Officer and a director of the Company for more than the past five years, and is the principal shareholder in the Company. -9- James A. Litwak Age 44 Executive Vice President of Merchandising and Marketing Since 1996 James A. Litwak joined the Company in May 1996 as Executive Vice President of Merchandising and Marketing. Prior to joining the Company, Mr. Litwak served as Senior Vice President and General Merchandise Manager of DFS Group Limited, an international operator of in-airport duty free shops. Prior to joining DFS Group Limited, Mr. Litwak held several executive positions in his fourteen year career at R.H. Macy's Company with the most recent being President of Merchandising for Macy's West responsible for developing marketing, merchandising and product launch programs to fuel growth for the 50 store division. Edward W. Marshall, Jr. Age 52 Executive Vice President-Operations Since 1989 Edward W. Marshall, Jr. has been Executive Vice President of the Company since August 1994. He served as Senior Vice President-Operations of the Company since January 1991 and was Vice President of Operations upon joining the Company in May 1989. Prior to joining the Company, Mr. Marshall was Vice President of Operations for Morse Shoe, a retail store operator. Bruce J. Eisenberg Age 37 Senior Vice President of Real Estate Since 1993 Bruce J. Eisenberg has been Senior Vice President of Real Estate at the Company since May of 1995. He joined the Company in August of 1993 as Vice President of Real Estate. Prior to joining the Company, Mr. Eisenberg was responsible for leasing, finance and construction of new regional mall development at The Pyramid Companies. Carol A. Stevens Age 47 Senior Vice President - Human Resources Since 1998 Carol A. Stevens has been Senior Vice President of Human Resources since she joined the Company in February 1998. Prior to joining the Company, Ms. Stevens was Senior Vice President of Human Resources at Hechinger Company from 1994 to 1997 and served as Vice President prior to 1994. John J. Sullivan Age 45 Senior Vice President, Treasurer and Chief Financial Officer Since 1991 John J. Sullivan has been Senior Vice President, Treasurer and Chief Financial Officer of the Company since May 1995. Mr. Sullivan joined the Company in June 1991 as the Corporate Controller and was named Vice President of Finance and Treasurer in June of 1994. Prior to joining the Company, Mr. Sullivan was Vice President and Controller for Ames Department Stores, a discount department store chain. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information. The Company's initial public offering was completed on July 24, 1986, and since that date the shares of the Company's Common Stock have been traded on the over-the-counter market and quoted on the Nasdaq National Market under the symbol "TWMC." As of January 31, 1998, there were approximately 400 shareholders of record. The following table sets forth high and low last reported sale -10- prices for each fiscal quarter during the period from February 3, 1996 through March 26, 1998.
Last Sales Prices High Low 1996 1st Quarter $ 2 5/8 $ 1 1/4 2nd Quarter 3 5/8 2 1/4 3rd Quarter 4 3/8 2 9/16 4th Quarter 4 1/16 3 1/8 1997 1st Quarter $ 6 3/16 $ 3 5/8 2nd Quarter 9 5/8 5 15/16 3rd Quarter 16 3/8 9 1/16 4th Quarter 28 1/8 14 5/8 1998 1st Quarter (through March 26, 1998) $29 1/4 $24
On March 26, 1998, the last reported sale price on the Common Stock on the Nasdaq National Market was $28 3/4. On March 6, 1998, options for the Company's Common Stock began trading on the Chicago Board Options Exchange and the American Stock Exchange. Dividend Policy. The Company has never declared or paid cash dividends on its Common Stock. The Revolving Credit Facility sets certain restrictions on the payment of cash dividends. Any future determination as to the payment of dividends would depend upon capital requirements and limitations imposed by the Revolving Credit Facility and such other factors as the Board of Directors of the Company may consider. Item 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data and other operating information of the Company. The selected income statement and balance sheet data for the five fiscal years ended Janaury 31, 1998 set forth below are derived from the audited consolidated financial statements of the Company. Each fiscal year of Trans World consisted of 52 weeks except fiscal year ended February 3, 1996 which consisted of 53 weeks. All share and per share amounts have been adjusted for all periods to reflect a two-for-one stock split effected on December 15, 1997. The selected consolidated financial data should be read in conjunction with the Company's audited consolidated financial statements and other financial information included herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations." -11-
Fiscal Year Ended January 31, February 1, February 3, January 28, January 29, 1998 1997 1996 1995 1994 ----------------------------------------------------------- (in thousands, except per share and store data) INCOME STATEMENT DATA: Sales $571,314 $481,657 $517,046 $536,840 $492,553 Cost of sales (1) 361,422 308,952 347,554 345,720 307,834 -------------------------------------------------------- Gross profit 209,892 172,705 169,492 191,120 184,719 Selling, general and administrative expenses 170,834 150,218 168,313 175,569 162,299 Restructuring charge, net (1) --- --- 24,204 16,702 --- -------------------------------------------------------- Income (loss) from operations 39,058 22,487 (23,025) (1,151) 22,420 Interest expense 5,148 12,110 15,201 10,058 6,268 Other expenses (income), net (153) (1,343) (979) (518) (297) -------------------------------------------------------- Income (loss) before income taxes 34,063 11,720 (37,247) (10,691) 16,449 Income tax expense (benefit) 13,489 4,618 (13,431) (4,435) 6,626 -------------------------------------------------------- Net income (loss) $20,574 $7,102 ($23,816) ($6,256) $9,823 ======================================================== Basic earnings (loss) per share $1.05 $0.36 ($1.22) ($0.32) $0.51 ======================================================== Weighted average number of shares outstanding 19,655 19,514 19,452 19,402 19,446 ======================================================== Diluted earnings (loss) per share $0.99 $0.36 ($1.22) ($0.32) $0.50 ======================================================== Adjusted weighted average number of shares outstanding 20,688 19,798 19,452 19,402 19,497 ======================================================== BALANCE SHEET DATA: (at the end of the period) Working capital $88,974 $80,368 $78,773 $93,431 $101,538 Total assets 374,019 311,610 391,888 426,939 380,264 Current portion of long-term obligations 99 9,557 3,420 6,818 3,695 Long-term obligations 41,409 50,490 60,364 66,441 73,098 Shareholders' equity 124,522 102,919 95,661 119,477 126,074 OPERATING DATA: Store Count (open at end of period): Mall stores 340 357 379 431 443 Non-mall stores 199 122 163 253 241 ------------------------------------------------------- Total stores 539 479 542 684 684 Comparable store sales increase (decrease)(2) 10.2% 3.6% (3.5)% 1.1% (2.1)% Total square footage (in thousands) 2,442 2,008 2,140 2,544 2,414
(1) The restructuring charge includes the write-down of assets, estimated cash payments to landlords for the early termination of operating leases, and early termination benefits. The charge also includes estimated legal, lender and consulting fees. Inventory-related costs, including the cost of returning merchandise after the store closes, are included in cost of sales. The restructuring charge for the year ended February 3, 1996 has been restated. See note 12 to the companies consolidated financial statements. (2) A store is included in comparable store sales calculations at the beginning of its 13th full month of operation. -12- Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND The following is an analysis of the Company's results of operations, liquidity and capital resources. To the extent that such analysis contains statements which are not of a historical nature, such statements are forward-looking statements, which involve risks and uncertainties. These risks include, but are not limited to, changes in the competitive environment for the Company's products, including the entry or exit of non-traditional retailers of the Company's products to or from its markets; the release by the music industry of an increased or decreased number of "hit releases", general economic factors in markets where the Company's products are sold, and other factors discussed in the Company's filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain income and expense items as a percentage of sales:
Fiscal Year Ended ------------------------------------ January 31, February 1, February 3, 1998 1997 1996 ------------------------------------- Sales 100.0% 100.0% 100.0% Gross profit 36.7% 35.9% 32.8% Selling, general and administrative expenses 29.9% 31.2% 32.6% Restructuring charge 0.0% 0.0% 4.7% ------------------------------------- Income (loss) from operations 6.8% 4.7% (4.5)% Interest expense 0.9% 2.5% 2.9% Other expenses (income), net (0.0)% (0.3)% (0.1)% ------------------------------------- Income (loss) before income taxes 6.0% 2.5% (7.2)% Income tax expense (benefit) 2.4% 1.0% (2.6)% ------------------------------------- Net income (loss) 3.6% 1.5% (4.6)% ===================================== Change in comparable store sales 10.2% 3.6% (3.5)% =====================================
Fiscal Year Ended January 31, 1998 ("1997") Compared to Fisal Year Ended February 1, 1997 ("1996") Sales. The Company's sales increased $89.7 million, or 18.6%, from 1996. The -13- increase was primarily attributable to a comparable store sales increase of 10.2%, a sales increase of 8.4% resulting from the acquisition of 90 Strawberries' stores in October 1997, and the opening of 48 stores partially offset by the closing of 78 stores. Management attributes the comparable store sales increase primarily to its strategic decision to eliminate unprofitable stores and focus on customer service, superior retail locations, inventory management and merchandise presentation. Sales by product configuration are shown in the following table:
Fiscal Year Ended ---------------------------------------- January 31, February 1, February 3, 1998 1997 1996 ---------------------------------------- Compact discs 55.5% 50.1% 49.2% Prerecorded audio cassettes 18.9 22.2 25.5 Prerecorded video 16.3 18.6 16.7 Other 9.3 9.1 8.6 ----------------------------------------- Total 100.0% 100.0% 100.0% =========================================
For 1997, comparable store sales increased 11.0% for mall stores and 9.6% for non-mall stores. By product configuration, comparable store sales increased 11.4% in music and 2.6% in video. Gross Profit. Gross profit, as a percentage of sales, increased to 36.7% in 1997 from 35.9% in 1996 as a result of reduced merchandise shrinkage and increased purchase discounts combined with a strong performance from higher margin catalog sales. Selling, General and Administrative Expenses. SG&A, as a percentage of sales, decreased to 29.9% in 1997 from 31.2% in 1996. The 1.3% decrease can be attributed to the leverage of SG&A expenses on the 10.2% comparable store sales increase, as well as the overall sales increase. Interest Expense. Interest expense decreased 57.5% to $5.1 million in 1997 from $12.1 in 1996. The decrease is due to lower average outstanding borrowings and lower interest rates due to the refinancing completed during the year. Income Tax Expense. The effective income tax rate was 39.6% in 1997. See Note 4 of Notes to Consolidated Financial Statements for a reconciliation of the statutory tax rate to the Company's effective tax rate. Net Income. In 1997, the Company's net income increased to $20.6 million compared to a net income of $7.1 million in 1996. The improved bottom line performance can be attributed to the profitability of the additional stores and the ongoing success of the Company's restructuring plan. -14- Additionally, the Company benefited from a comparable store sales increase, higher gross margin rate and improved leverage of SG&A expenses. Fiscal Year Ended February 1, 1997 ("1996") Compared to Fiscal Year Ended February 3, 1996 ("1995") Sales. The Company's sales decreased $35.4 million, or 6.8%, from 1995 while the number of stores in operation decreased by 12%. The decrease was primarily attributable to a net decrease of approximately 151,000 square feet, which resulted from the closing of 85 stores offset slightly by the opening of 22 stores. In 1995 there were 53 weeks in the fiscal year, with the extra week contributing $6.9 million in sales. Comparable store sales for fiscal year 1996 increased by 3.6%. Management attributes the comparable store sales increase to its strategic decision to eliminate unprofitable stores and focus on customer service, superior retail locations, inventory management and merchandise presentation. The Company's comparable store formats showed positive growth in 1996 compared to 1995. Comparable store sales increased 2.8% for mall stores and 7.4% for non-mall stores. By product configuration, comparable store sales increased 1.9% in music and 12.4% in video, as video benefitted from continued growth of the video sell-through market Gross Profit. Gross profit, as a percentage of sales, increased to 35.9% in 1996 from 32.8% in 1995 as a result of a $6.8 million non-recurring charge in 1995 for inventory-related costs as part of closing stores under the Company's restructuring plan. Also contributing to the increase was increased purchase discounts combined with a strong performance from higher margin catalog sales. Expenses. SG&A, as a percentage of sales, decreased to 31.2% in 1996 from 32.6% in 1995. The 1.4% decrease can be attributed to the closing of underperforming stores, a 3.6% increase in comparable store sales and the receipt of $2.5 million upon termination of a business agreement in the second quarter 1996. The Company had an agreement with a third party to provide data for the purpose of assessing the marketability of sales information of prerecorded music, prerecorded video and other home entertainment related products. In return for providing this data, the Company has compensated to recover the expenses it incurred. In exchange for terminating the agreement, the Company received $2.5 million in additional compensation. The Company recorded the fee in the same manner that the annual fee had been recorded. Also contributing to the decrease was $1.6 million non-recurring fees paid to lenders in 1995 for the waiver of debt covenant violations. Interest expense decreased 20% to $12.1 million in 1996 from $15.2 in 1995. The decrease was due to lower average outstanding borrowings offset in part by increased weighted average interest rates. The effective income tax rate was 39.4% in 1996. Net Income. In 1996, the Company's net income increased to $7.1 million compared to a net loss of $23.8 million in 1995. The improved bottom line performance can be attributed to the success of the Company's restructuring plan. Additionally, the Company benefited from a comparable store sales increase, higher gross margin rate and lower SG&A expenses. LIQUIDITY AND CAPITAL RESOURCES Liquidity and Capital Resources. Cash flow from operations and funds available under revolving credit facilities are the Company's primary sources of liquidity. During the first three fiscal quarters, cash flow is typically consumed by payments to merchandise vendors and store construction expenditures. The revolving credit facilities provide the Company with liquidity until December, when the Company's cash position has historically been the highest, providing sufficient cash to repay all outstanding borrowings under the revolving credit facilities. -15- During 1997, cash provided by operations was $93.7 million compared to $45.1 million for 1996. The increased cash flow from operations was due primarily to the $13.5 million increase in net income and continued improvement in inventory management. Leverage of accounts payable to inventory improved to 86.1% in 1997 from 72.8% in 1996. The Company ended fiscal 1997 with cash balances of approximately $94.7 million compared to 1996 when the Company had cash balances of $54.8 million. In both years, the Company had no short term borrowings. On July 9, 1997 the Company entered into a $100 million secured revolving credit facility with Congress Financial Corporation. The revolving credit facility combined the Company's long-term debt with its revolving credit line to create a $100 million credit facility with a three year term at interest rates averaging below the prime rate. The Revolving Credit Facility, combined with lower borrowing needs, was responsible for the Company's interest expense decreasing to $5.1 million for the year ended January 31, 1998 from $12.1 for the year ended February 1, 1997 The revolving credit facility contains certain restrictive provisions, including provisions governing cash dividends and acquisitions, is secured by merchandise inventory and has a minimum net worth covenant. Capital Expenditures. Most of the Company's capital expenditures are for new store expansion and relocation of existing stores. The Company typically finances its capital expenditures through internally generated cash and borrowings under its revolving credit facility. In addition the Company typically receives financing from landlords in the form of construction allowances or rent concessions for a portion of the capital expenditure. Total capital expenditures were approximately $15.5 million in 1997 with significantly all of this amount being related to new stores and store remodels and reconfigurations. Included in this figure was approximately $2 million related to the development and pilot of a new point-of-sale ("POS") system. The system will be rolled out to all stores during the summer of 1998. In fiscal 1998, the Company plans to spend approximately $47 million, net of construction allowances, in capital expenditures. Included in such $47 million is approximately $17 million for the new POS system. PROVISION FOR BUSINESS RESTRUCTURING The Company recorded a pre-tax restructuring charge of $21 million in 1994 to reflect the anticipated costs associated with a program to close 143 stores and to restructure the Company's debt agreements. The restructuring charge included the write-down of fixed assets, estimated cash payments to landlords for the early termination of operating leases, inventory-related costs (including the cost for returning all remaining product after the store was closed), and employee termination benefits. The charge also included estimated professional fees related to the development of the store closing plan and the negotiations with landlords related to the termination of leases. Inventory-related costs have been included in cost of sales in the accompanying consolidated staements of income. An analysis of the January 28, 1995 balance in the 1994 restructuring reserve and 1995 charges against the reserve is as follows:
BALANCE AS OF CHARGES JANUARY 28, AGAINST REMAINING 1995 RESERVE BALANCE --------------- --------- ----------- (in thousands) Lease obligations........................................................ $ 4,250 $ 3,436 $ 814 Inventory-related costs.................................................. 4,249 3,581 668 Termination benefits..................................................... 200 200 -- Professional fees........................................................ 3,986 3,328 658 Other costs.............................................................. 827 154 673 ------- --------- ----------- Total cash outflows.................................................. $ 13,512 $ 10,699 $ 2,813 ------- --------- ----------- ------- --------- -----------
The Company completed the 1994 restructuring in 1995, resulting in the closure of 179 stores (versus an original plan of 143 stores). The remaining balance in the 1994 restructuring reserve of $2.8 million was credited to operations in the 4th quarter of 1995. The Company recorded a second restructuring charge of $33.8 million in 1995 to reflect the anticipated costs associated with a program to close an additional 163 stores. The components of this second charge were similar to those recorded in 1994, and also included a provision for exiting the rental video store format, the write-off of goodwill related to a previous acquisition and a provision for closing the Company's fixture manufacturing operation. -16- An analysis of the amounts comprising the 1995 restructuring charge and the charges against the related reserve for each year in the three-year period ended January 31, 1998 are outlined below:
BALANCE BALANCE CHARGES AS OF CHARGES AS OF CHARGES 1995 AGAINST FEBRUARY 3, AGAINST FEBRARY 1, AGAINST RESERVE THE RESERVE 1996 THE RESERVE 1997 THE RESERVE ----------- ----------- ----------- ------------- ----------- ----------- (IN THOUSANDS) Leasehold improvements........................ $ 6,660 $ 6,660 -- -- -- -- Furniture and fixtures........................ 3,228 3,228 -- -- -- -- Video rental assets........................... 4,174 -- $ 4,174 1,078 3,096 25 Goodwill...................................... 339 339 -- -- -- -- ----------- ------------ ---------- ------- ----------- ------ Non cash write-offs......................... 14,401 10,227 4,174 1,078 3,096 25 ----------- ------------ ---------- ------- ----------- ------ Lease obligations............................. 7,540 -- 7,540 2,627 4,913 905 Inventory-related costs....................... 6,800 -- 6,800 3,421 3,379 2,769 Termination benefits.......................... 976 69 907 88 819 16 Professional fees............................. 2,500 -- 2,500 1,632 868 711 Other costs................................... 1,600 806 794 122 672 629 ----------- ----------- ----------- ------ ----------- ------ Cash outflows............................... 19,416 875 18,541 7,890 10,651 5,030 ----------- ----------- ----------- ------ ----------- ------ Total....................................... $ 33,817 $ 11,102 $ 22,715 $ 8,968 $ 13,747 $ 5,055 ----------- ----------- ----------- ------ ----------- ------ ----------- ----------- ----------- ------ ----------- ------ BALANCE AS OF JANUARY 31, 1998 ----------- Leasehold improvements........................ -- Furniture and fixtures........................ -- Video rental assets........................... 3,071 Goodwill...................................... -- ----------- Non cash write-offs......................... 3,071 ----------- Lease obligations............................. 4,008 Inventory-related costs....................... 610 Termination benefits.......................... 803 Professional fees............................. 157 Other costs................................... 43 ----------- Cash outflows............................... 5,621 ----------- Total....................................... $ 8,692 ----------- -----------
In determining the components of the reserves, management analyzed all aspects of the restructuring plan and the costs that would be incurred. The write-off of leasehold improvements, and furniture and fixtures represented the estimated net book value of these items at the forecasted closing date. In determining the provision for lease obligations, the Company considered the amount of time remaining on each store's lease and estimated the amount necessary for either buying out the lease or continued rent payments subsequent to store closure. Inventory-related costs include the cost to pack and ship the inventory on hand after the closing of the store as well as the penalty paid to the vendor for additional product returns resulting from the restructurings. Termination benefits represented the severance payments expected to be made to terminated employees. Professional fees represented amounts expected to be paid to advisors related to the development of the store closing plan ($3.5 million in total for both plans) and the negotiations with landlords related to the termination of leases ($2.3 million in total). Payments to lenders for the waiver of covenant violations totalling $1.6 million have been included in selling, general and administrative expenses in the 1995 consolidated statement of income. The cash outflows for both restructurings were financed from operating cash flows and the liquidation of merchandise inventory from the stores closed. The timing of store closures depended on the Company's ability to negotiate reasonable lease termination agreements. The restructuring reserve balances are included in the accompanying balance sheets under the caption "store closing reserve." The Company closed 78, 85 and 151 stores in fiscal 1997, 1996 and 1995, respectively. A summary of store closures related to each restructuring is as follows:
1994 1995 RESTRUCTURING RESTRUCTURING TOTAL ----------------- ----------------- ----- Number of stores originally expected to be closed........ 143 163 306 --- --- --- --- --- --- Number of stores closed through January 31, 1998......... 179 163 342 --- --- --- --- --- --- Number of stores to be closed subsequent to January 31, 1998................................................... -- 49 49 --- --- --- --- --- ---
-17- Sales related to stores that were closed were $39 million (unaudited), $20 million (unaudited) and $40 million (unaudited) in fiscal 1997, 1996 and 1995, respectively. Store operating losses (income) related to stores that were closed were $(1.5) million (unaudited), $1.0 million (unaudited) and $4.1 million (unaudited) in fiscal 1997, 1996 and 1995. The provision for termination benefits was based on the expectation that 338 employees would be terminated in connection with the restructuring programs. Through January 31, 1998, 75 employees had been terminated and the Company expects to terminate an additional 49 employees in fiscal 1998. Trans World has not terminated as many employees as originally planned because higher than normal levels of attrition occurring after the announcement of the restructurings resulted in a reduced need for involuntary terminations. Subsequent to the adoption of the restructuring programs, improving economic conditions in certain markets, improvement in individual store performance and the inability to negotiate reasonable lease termination agreements have led the Company to keep open certain stores that were originally expected to be closed. During the three-year period ended January 31, 1998, a total of 36 stores were removed from the list of stores expected to be closed. Conversely, deteriorating economic conditions and store performance in certain markets have led the Company to close certain stores that were not originally expected to be closed. During the three-year period ended January 31, 1998, a total of 85 stores were added to the list of stores to be closed. In addition, the timing of store closures has also been affected by the ability or inability to negotiate reasonable lease termination agreements. The net effect of changes made to the timing of store closures and the stores to be closed under the 1995 restructuring program has not been material. Through January 31, 1998, the Company has closed 342 stores in connection with the restructuring programs, compared to the originally planned closures of 306 stores. During the year ending January 30, 1999, the Company plans to close an additional 49 stores as it completes the restructuring programs. Any remaining balance in the restructuring reserve at January 30, 1999 will be credited to operations. YEAR 2000 COMPLIANCE Year 2000 Compliance. The Company has assessed its systems and equipment with respect to Year 2000 compliance and has developed a project plan. Many of the Year 2000 issues, including the processing of credit card transactions, have been addressed. The remaining Year 2000 issues will be addressed either with scheduled system upgrades or through the Company's internal systems development staff. The incremental costs will be charged to expenses as incurred and are not expected to have a material impact on the financial position or results of operations of the Company. However, the Company could be adversely impacted if Year 2000 modifications are not properly completed by either the Company, or its vendors, banks or any other entity with whom the Company conducts business. Accounting Policies. During fiscal year 1997, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which requires that the Company disclose both basic earnings per share and diluted earnings per share. The Company adopted the provisions of SFAS No. 128 retroactively for 1996 and 1995, as required. In 1998, the Company will adopt the provisions of SFAS No. 130, "Reporting Comprehensive Income," which requires that the Company disclose as comprehensive income all changes in equity during a period that are not a result of investments by owners and distributions to owners. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," will not have an effect on the Company because it operates in a single segment. SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," will not have an effect on the Company because it does not have a defined benefit pension plan. Dividend Policy. The Company has never declared or paid cash dividends on Common Stock. The Revolving Credit Facility sets certain restrictions on the payment of cash dividends. Any future determination as to the payment of dividends would depend upon capital requirements and limitations imposed by the Revolving Credit Facility and such other factors as the Board of Directors of the Company may consider. -17- Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The index to the Consolidated Financial Statements of the Company is included in Item 14, and the financial statements follow the signature page to this Annual Report on Form 10-K. The quarterly results of operations are included herein in Note 11 of the Consolidated Financial Statements. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Identification of Directors Incorporated herein by reference is the information appearing under the captions "Election of Directors" and "Board of Directors Meetings and Its Committees" in the Company's definitive Proxy Statement for the Registrant's 1998 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after January 31, 1998. (b) Identification of Executive Officers The information required with respect to the executive officers of the Registrant is set forth under the caption Supplementary Item on page 9 of this Annual Report on Form 10-K. Item 11. EXECUTIVE COMPENSATION Incorporated herein by reference is the information appearing under the caption "Executive Officers and Compensation" in the Company's definitive Proxy Statement for the Registrant's 1998 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after January 31, 1998. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference is the information appearing under the captions "Principal Shareholders" and "Election of Directors" in the Company's definitive Proxy Statement for the Registrant's 1998 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after January 31, 1998. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference is the information appearing under the caption "Certain Transactions" in the Company's definitive Proxy Statement for the Registrant's 1998 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after January 31, 1998. -18- PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 14(a)(1) Financial Statements - ----------------------------- The consolidated financial statements and notes are listed in the Index to Financial Statements on page 18 of this report. 14(a)(2) Financial Statement Schedules - --------------------------------------- None of the schedules for which provision is made in the applicable accounting regulations under the Securities Exchange Act of 1934, as amended, are required. 14(a)(3) Exhibits - ----------------- Exhibits are as set forth in the "Index to Exhibits" which follows the Notes to the Consolidated Financial Statements and immediately precedes the exhibits filed. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRANS WORLD ENTERTAINMENT CORPORATION Date: March 30, 1999 By: /s/ ROBERT J. HIGGINS ---------------------------- Robert J. Higgins, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Title Date /s/ ROBERT J. HIGGINS Chairman, President and (Robert J. Higgins) Chief Executive Officer March 30, 1999 (Principal Executive Officer) /s/ JOHN J. SULLIVAN Senior Vice President, Treasurer March 30, 1999 (John J. Sullivan) and Chief Financial Officer (Principal Financial and Chief Accounting Officer) /s/ MATTHEW H. MATARASO Secretary and Director March 30, 1999 (Matthew H. Mataraso) /s/ GEORGE W. DOUGAN Director March 30, 1999 (George W. Dougan) /s/ CHARLOTTE G. FISCHER Director March 30, 1999 (Charlotte G. Fischer) /s/ ISAAC KAUFMAN Director March 30, 1999 (Isaac Kaufman) /s/ DEAN S. ADLER Director March 30, 1999 (Dean S. Adler) /s/ JOSEPH G. MORONE Director March 30, 1999 (Joseph G. Morone) /s/ MARTIN E. HANAKA Director March 30, 1999 (Martin E. Hanaka) -19- TRANS WORLD ENTERTAINMENT CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Form 10-K Page No. Independent Auditor's Report 20 Consolidated Financial Statements Consolidated Balance Sheets at January 31, 1998 and February 1, 1997 21 Consolidated Statements of Income - Fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996 22 Consolidated Statements of Shareholders' Equity - Fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996 23 Consolidated Statements of Cash Flows - Fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996 24 Notes to Consolidated Financial Statements 25 Report of KPMG LLP Independent Auditors The Board of Directors and Shareholders Trans World Entertainment Corporation: We have audited the accompanying consolidated balance sheets of Trans World Entertainment Corporation and subsidiaries as of January 31, 1998 and February 1, 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the fiscal years in the three-year period ended January 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Trans World Entertainment Corporation and subsidiaries as of January 31, 1998 and February 1, 1997, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended January 31, 1998, in conformity with generally accepted accounting principles. As discussed in note 12, the Company restated is consolidated financial statements as of and for the year ended February 3, 1996. /s/ KPMG LLP Albany, New York March 13, 1998, except as to note 12, which is as of March 26, 1999 -20- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
January 31, February 1, 1998 1997 -------------------------- ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $94,732 $54,771 Accounts receivable 3,105 8,826 Merchandise inventory 189,394 163,509 Refundable income taxes --- 564 Deferred tax asset --- 1,895 Prepaid expenses and other 3,119 2,490 ------------------------- Total current assets 290,350 232,055 -------------------------- VIDEOCASSETTE RENTAL INVENTORY, net 4,099 4,784 DEFERRED TAX ASSET 4,726 3,098 FIXED ASSETS: Buildings 7,774 7,774 Fixtures and equipment 87,214 76,932 Leasehold improvements 74,997 64,102 -------------------------- 169,985 148,088 Less: Allowances for depreciation and amortization 97,917 81,398 -------------------------- 72,068 67,410 -------------------------- OTHER ASSETS 2,776 4,263 -------------------------- TOTAL ASSETS $374,019 $311,610 ========================== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Accounts payable $162,981 $118,980 Income taxes payable 11,155 --- Accrued expenses and other 17,346 9,403 Store closing reserve 8,692 13,747 Current deferred taxes 1,103 --- Current portion of long-term debt and capital lease obligations 99 9,557 -------------------------- Total current liabilities 201,376 151,687 LONG-TERM DEBT, less current portion 35,000 43,983 CAPITAL LEASE OBLIGATIONS, less current portion 6,409 6,507 OTHER LIABILITIES 6,712 6,514 -------------------------- TOTAL LIABILITIES 249,497 208,691 -------------------------- SHAREHOLDERS' EQUITY: Preferred stock ($.01 par value; 5,000,000 shares authorized; none issued.) --- --- Common stock ($.01 par value; 50,000,000 shares authorized; 19,815,357 shares and 19,619,188 shares issued in 1997 and 1996, respectively) 198 197 Additional paid-in capital 25,386 24,441 Unearned compensation - restricted stock (175) (245) Treasury stock at cost (70,788 and 72,788 shares in 1997 and 1996, respectively) (394) (407) Retained earnings 99,507 78,933 -------------------------- TOTAL SHAREHOLDERS' EQUITY 124,522 102,919 -------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $374,019 $311,610 ========================== See Notes to Consolidated Financial Statements.
-21- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts)
Fiscal Year Ended January 31, February 1, February 3, 1998 1997 1996 ----------------------------------------- Sales $571,314 $481,657 $517,046 Cost of sales 361,422 308,952 347,554 ----------------------------------------- Gross profit 209,892 172,705 169,492 Selling, general and administrative expenses 170,834 150,218 168,313 Restructuring charges, net --- --- 24,204 ----------------------------------------- Income (loss) from operations 39,058 22,487 (23,025) Interest expense 5,148 12,110 15,201 Other expenses (income), net (153) (1,343) (979) ----------------------------------------- Income (loss) before income taxes 34,063 11,720 (37,247) Income tax expense (benefit) 13,489 4,618 (13,431) ----------------------------------------- NET INCOME (LOSS) $20,574 $7,102 ($23,816) ========================================= BASIC EARNINGS (LOSS) PER SHARE $1.05 $0.36 ($1.22) ========================================= Weighted average number of common shares outstanding 19,655 19,514 19,452 ========================================= DILUTED EARNINGS (LOSS) PER SHARE $0.99 $0.36 ($1.22) ========================================= Adjusted weighted average number of common shares outstanding 20,688 19,798 19,452 ========================================= See Notes to Consolidated Financial Statements.
-22- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share and option amounts)
Unearned Additional Compensation Share- Common Paid in Restricted Treasury Retained holders' Stock Capital Stock Stock Earnings Equity ---------------------------------------------------------------- Balance as of January 28, 1995, restated to reflect two-for-one stock split in 1997 (19,462,416 shares issued) $195 $24,138 $ --- $(503) $95,647 $119,477 Net Loss --- --- --- --- (23,816) (23,816) ---------------------------------------------------------------- Balance as of February 3, 1996 (19,462,416 shares issued) 195 24,138 --- (503) 71,831 95,661 Issuance of 14,000 shares of treasury stock under incentive stock programs --- (59) --- 96 --- 37 Issuance of 150,000 shares of common stock-restricted stock plan, net 2 350 (245) --- --- 107 Exercise of 6,772 stock options --- 12 --- --- --- 12 Net Income --- --- --- --- 7,102 7,102 ---------------------------------------------------------------- Balance as of February 1, 1997 (19,619,188 shares issued) $197 $24,441 $(245) $(407) $78,933 $102,919 Issuance of 2,000 shares of treasury stock under incentive stock programs --- --- --- 13 --- 13 Amortization of unearned compensation - restricted stock plan --- --- 70 --- --- 70 Exercise of 196,169 stock options 1 545 --- --- --- 546 Income tax benefit arising from exercise of employee stock options --- 400 --- --- --- 400 Net Income --- --- --- --- 20,574 20,574 ---------------------------------------------------------------- Balance as of January 31, 1998 (19,815,357 shares issued) $198 $25,386 $(175) $(394) $99,507 $124,522 ----------------------------------------------------------------
See Notes to Consolidated Financial Statements. -23- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Fiscal Year Ended January 31, February 1, February 3, 1998 1997 1996 --------------------------------------- OPERATING ACTIVITIES: Net income (loss) $20,574 $7,102 ($23,816) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 16,257 15,225 17,145 Fixed asset write-off reserve --- --- 9,888 Store closing reserve --- --- 21,116 Stock compensation programs 83 144 -- Deferred tax expense (benefit) 1,370 3,023 (4,567) Changes in operating assets and liabilities: Accounts receivable 5,868 (747) 1,097 Merchandise inventory (9,872) 31,068 27,781 Refundable income taxes 564 7,744 (8,308) Prepaid expenses and other (408) 439 1,478 Other assets 2,481 (381) (53) Accounts payable 42,751 (12,322) (4,191) Income taxes payable 11,555 --- (1,961) Accrued expenses and other 7,344 3,137 576 Store closing reserve (5,056) (10,528) (11,913) Other liabilities 198 1,174 (136) --------------------------------------- Net cash provided by operating activities 93,709 45,078 24,136 --------------------------------------- INVESTING ACTIVITIES: Acquisition of property and equipment (15,538) (10,198) (10,006) Acquisition of businesses, net (20,901) --- --- Proceeds from sale of fixed assets --- --- 929 (Purchases) disposals of videocassette rental inventory, net 685 1,938 750 --------------------------------------- Net cash used in investing activities (35,754) (8,260) (8,327) --------------------------------------- FINANCING ACTIVITIES: Net decrease in revolving line of credit --- (65,260) (9,687) Payments of long-term debt (18,440) (3,661) (8,902) Payments of capital lease obligations (99) (76) (373) Exercise of stock options, including tax benefit 545 12 --- --------------------------------------- Net cash used by financing activities (17,994) (68,985) (18,962) --------------------------------------- Net increase (decrease) in cash and cash equivalents 39,961 (32,167) (3,153) Cash and cash equivalents, beginning of year 54,771 86,938 90,091 --------------------------------------- Cash and cash equivalents, end of year $94,732 $54,771 $86,938 ======================================= Supplemental disclosure of non-cash investing and financing activities: Issuance of treasury stock under incentive stock options $ 13 $ 37 -- Income tax benefit resulting from exercises of stock options 400 -- --
See Notes to Consolidated Financial Statements. -24- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations: Trans World Entertainment Corporation is one of the largest specialty retailers of music, video and related accessories in the United States. The Company operates in a single industry segment, the operation of a chain of retail entertainment stores. At January 31, 1998, the Company operated 539 stores in 34 states, the District of Columbia and the U.S. Virgin Islands, with a majority of the stores concentrated in the Eastern half of the United States. Basis of Presentation: The consolidated financial statements consist of Trans World Entertainment Corporation and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fiscal Year: The Company's fiscal year is a 52- or 53-week period ending on the Saturday nearest to January 31. Fiscal years 1997 and 1996 ended January 31, 1998 and February 1, 1997, respectively, and consisted of 52 weeks. Fiscal year 1995, which ended February 3, 1996, consisted of 53 weeks. Dividend Policy: The Company has never declared or paid cash dividends on its Common Stock. The Company's credit agreement currently allows the Company to pay a cash dividend once in each calendar year. These dividends are restricted to ten percent of the most recent year's consolidated net income and can only be paid if, after the dividend payment, the Company maintain $25 million of available borrowing under the credit agreement. Any future determination as to the payment of dividends would depend upon capital requirements and limitations imposed by the Company's credit agreement and such other factors as the Board of Directors of the Company may consider. Revenue Recognition: Revenue from sales of merchandise is recognized at the point of sale to the consumer, at which time payment is tendered. There are no provisions for uncollectible amounts since payment is received at the time of sale. Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The carrying amounts reported in the balance sheet for cash and cash equivalents are at fair value. Merchandise Inventory and Return Costs: Inventory is stated at the lower of cost (first-in, first-out) or market as determined principally by the retail inventory method. The Company is entitled to return merchandise purchased from major vendors for credit against other purchases from these vendors. The vendors often reduce the credit with a merchandise return charge ranging from 0% to 20% of the original product purchase price depending on the type of product being returned. The Company records the merchandise return charges in cost of sales. -25- Videocassette Rental Inventory: The cost of videocassette rental tapes is capitalized and amortized on a straight-line basis over their estimated economic life with a provision for salvage value. Major movie release additions which have a relatively short economic life due to the frequency of rental, are amortized over twelve months while other titles are amortized over thirty-six months. Fixed Assets: Fixed assets are stated at cost. Major improvements and betterments to existing facilities and equipment are capitalized. Expenditures for maintenance and repairs, which do not extend the life of the applicable asset, are charged to expense as incurred. Buildings are amortized over a 30-year term. Fixtures and equipment are depreciated using the straight-line method over their estimated useful lives, which range from three to seven years. Leasehold improvements are amortized over the shorter of their estimated useful life or the related lease term. Primarily all of the Company's operating leases are ten years in term. Amortization of capital lease assets is included in depreciation and amortization expense. Depreciation and amortization expense related to the Company's videocassette rental inventory totalling $2,215,000, $2,477,000 and $3,395,000 in 1997, 1996 and 1995, respectively, is included in cost of sales. Also included in cost of sales is depreciation and amortization expense related to the Company's distribution center facility and equipment of $1,101,000, $865,000 and $803,000 in 1997, 1996 and 1995, respectively. All other depreciation and amortization of fixed assets is included in selling, general and administrative expenses. Advertising Costs: The costs of advertising are expensed in the first period in which such advertising takes place. Total advertising expense was $8,366,000, $8,951,000 and $7,010,000 in 1997, 1996 and 1995, respectively. Store Opening and Closing Costs: Costs associated with opening a store are expensed as incurred. When a store is closed, estimated unrecoverable costs are charged to expense. Such costs include the net book value of abandoned fixtures, equipment, leasehold improvements and a provision for lease obligations, less estimated sub-rental income. The residual value of any fixed asset moved to a store as part of a relocation is transferred to the relocated store. Income Taxes: The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Earnings (Loss) Per Share: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which was effective for the Company for fiscal year 1997. This standard requires the Company to disclose basic earnings per share and diluted earnings per share. Basic earnings per share is calculated by dividing net income by the weighted average common shares outstanding. Diluted earnings per share is calculated by dividing net income, by the sum of the weighted average shares and additional common shares that would have been outstanding if the dilutive potential common shares adjusted in 1997 for the $400,000 tax benefit resulting from stock option exercise activity, had been issued for the Company's common stock options from the Company's Stock Option Plans (see Note 6). In Fiscal years 1997, 1996 and 1995 the additional dilutive potential common shares were 1,033,000, 284,000, and 0, respectively. The weighted average number of outstanding stock options not included in the computation of diluted earnings per share during fiscal years 1997, 1996 and 1995 were 128,000, 890,000 and 1,951,000, respectively. To include these options in the computation would have been antidilutive. As required by SFAS No. 128, all outstanding common stock options were included even though their exercise may be contingent upon vesting. The Company has presented Fiscal 1997 earnings per -26- share data and restated all prior-period earnings per share data in accordance with SFAS No. 128. See the Consolidated Statements of Income for the required disclosures. All earnings and loss per share information has been adjusted for the two-for-one stock split effected in the form of a stock dividend on December 15, 1997. All references to number of shares, per share amounts, stock option data and market prices of the Company's common stock have been restated. See Note 7, "Shareholders' Equity." NOTE 2. RESTRUCTURING CHARGE The Company recorded a pre-tax restructuring charge of $21 million in 1994 to reflect the anticipated costs associated with a program to close 143 stores and to restructure the Company's debt agreements. The restructuring charge included the write-down of fixed assets, estimated cash payments to landlords for the early termination of operating leases, inventory-related costs (including the cost for returning all remaining product after the store was closed), and employee termination benefits. The charge also included estimated professional fees related to the development of the store closing plan and the negotiations with landlords related to the termination of leases. Inventory-related costs have been included in cost of sales in the accompanying consolidated statements of income. An analysis of the January 28, 1995 balance in the 1994 restructuring reserve and 1995 charges against the reserve is as follows:
BALANCE AT CHARGES JANUARY 28, AGAINST REMAINING 1995 RESERVE BALANCE --------------- --------- ----------- (IN THOUSANDS) Lease obligations..................... $ 4,250 $ 3,436 $ 814 Inventory-related costs............... 4,249 3,581 668 Termination benefits.................. 200 200 -- Professional fees..................... 3,986 3,328 658 Other costs........................... 827 154 673 ------- --------- ----------- Total cash outflows............... $ 13,512 $ 10,699 $ 2,813 ------- --------- ----------- ------- --------- -----------
The Company completed the 1994 restructuring in 1995, resulting in the closure of 179 stores (versus an original plan of 143 stores). The remaining balance in the 1994 restructuring reserve of $2.8 million was credited to operations in the 4th quarter of 1995. The Company recorded a second restructuring charge of $33.8 million in 1995 to reflect the anticipated costs associated with a program to close an additional 163 stores. The components of this second charge were similar to those recorded in 1994, and also included a provision for exiting the rental video store format, the write-off of goodwill related to a previous acquisition and a provision for closing the Company's fixture manufacturing operation. -27- An analysis of the amounts comprising the 1995 restructuring charge and the charges against the related reserve for each year in the three-year period ended January 31, 1998 are outlined below:
BALANCE BALANCE BALANCE CHARGES AT CHARGES AT CHARGES AT 1995 AGAINST FEBRUARY 3, AGAINST FEBRUARY 1, AGAINST JANUARY 31, RESERVE THE RESERVE 1996 THE RESERVE 1997 THE RESERVE 1998 ----------- ----------- ----------- ------------- ----------- ------------- ----------- (IN THOUSANDS) Leasehold improvements...... $ 6,660 $ 6,660 -- -- -- -- -- Furniture and fixtures...... 3,228 3,228 -- -- -- -- -- Video rental assets......... 4,174 -- $ 4,174 1,078 3,096 25 3,071 Goodwill.................... 339 339 -- -- -- -- -- ----------- ----------- ----------- ------ ----------- ------ ----------- Non cash write-offs....... 14,401 10,227 4,174 1,078 3,096 25 3,071 ----------- ----------- ----------- ------ ----------- ------ ----------- Lease obligations........... 7,540 -- 7,540 2,627 4,913 905 4,008 Inventory-related costs..... 6,800 -- 6,800 3,421 3,379 2,769 610 Termination benefits........ 976 69 907 88 819 16 803 Professional fees........... 2,500 -- 2,500 1,632 868 711 157 Other costs................. 1,600 806 794 122 672 629 43 ----------- ----------- ----------- ------ ----------- ------ ----------- Cash outflows............. 19,416 875 18,541 7,890 10,651 5,030 5,621 ----------- ----------- ----------- ------ ----------- ------ ----------- Total..................... $ 33,817 $ 11,102 $ 22,715 $ 8,968 $ 13,747 $ 5,055 $ 8,692 ----------- ----------- ----------- ------ ----------- ------ ----------- ----------- ----------- ----------- ------ ----------- ------ -----------
In determining the components of the reserves, management analyzed all aspects of the restructuring plan and the costs that would be incurred. The write-off of leasehold improvements, and furniture and fixtures represented the estimated net book value of these items at the forecasted closing date. In determining the provision for lease obligations, the Company considered the amount of time remaining on each store's lease and estimated the amount necessary for either buying out the lease or continued rent payments subsequent to store closure. Inventory-related costs include the cost to pack and ship the inventory on hand after the closing of the store as well as the penalty paid to the vendor for additional product returns resulting from the restructurings. Termination benefits represented the severance payments expected to be made to terminated employees. Professional fees represented amounts expected to be paid to advisors related to the development of the store closing plan ($3.5 million in total for both plans) and the negotiations with landlords related to the termination of leases ($2.3 million in total). Payments to lenders for the waiver of covenant violations totalling $1.6 million have been included in selling, general and administrative expenses in the 1995 consolidated statement of income. The cash outflows for both restructurings were financed from operating cash flows and the liquidation of merchandise inventory from the stores closed. The timing of store closures depended on the Company's ability to negotiate reasonable lease termination agreements. The restructuring reserve balances are included in the accompanying balance sheets under the caption "store closing reserve." The Company closed 78, 85 and 151 stores in fiscal 1997, 1996 and 1995, respectively. A summary of store closures related to each restructuring is as follows:
1994 1995 RESTRUCTURING RESTRUCTURING TOTAL ----------------- ----------------- ----- Number of stores originally expected to be closed........ 143 163 306 --- --- --- --- --- --- Number of stores closed through January 31, 1998......... 179 163 342 --- --- --- --- --- --- Number of stores to be closed subsequent to January 31, 1998................................................... -- 49 49 --- --- --- --- --- ---
-28- Sales related to stores that were closed were $39 million (unaudited), $20 million (unaudited) and $40 million (unaudited) in fiscal 1997, 1996 and 1995, respectively. Store operating losses (income) related to stores that were closed were $(1.5) million (unaudited), $1.0 million (unaudited) and $4.1 million (unaudited) in fiscal 1997, 1996 and 1995. The provision for termination benefits was based on the expectation that 338 employees would be terminated in connection with the restructuring programs. Through January 31, 1998, 75 employees had been terminated and the Company expects to terminate an additional 49 employees in fiscal 1998. The Company has not terminated as many employees as originally planned because higher than normal levels of attrition occurring after the announcement of the restructurings resulted in a reduced need for involuntary terminations. Subsequent to the adoption of the restructuring programs, improving economic conditions in certain markets, improvement in individual store performance and the inability to negotiate reasonable lease termination agreements have led the Company to keep open certain stores that were originally expected to be closed. During the three-year period ended January 31, 1998, a total of 36 stores were removed from the list of stores expected to be closed. Conversely, deteriorating economic conditions and store performance in certain markets have led the Company to close certain stores that were not originally expected to be closed. During the three-year period ended January 31, 1998, a total of 85 stores were added to the list of stores to be closed. In addition, the timing of store closures has also been affected by the ability or inability to negotiate reasonable lease termination agreements. The net effect of changes made to the timing of store closures and the stores to be closed under the 1995 restructuring program has not been material. Through January 31, 1998, the Company has closed 342 stores in connection with the restructuring programs, compared to the originally planned closures of 306 stores. During the year ending January 30, 1999, the Company plans to close an additional 49 stores as it completes the restructuring programs. Any remaining balance in the restructuring reserve at January 30, 1999 will be credited to operations. Note 3. Debt Long-term debt consisted of the following:
January 31, February 1, 1998 1997 ---------------------------- (in thousands) Senior unsecured notes $ --- $53,077 Long-term portion of revolving credit facility 35,000 --- Installment notes and other obligations --- 375 ---------------------------- 35,000 53,452 Less current portion --- 9,469 ---------------------------- Long-term debt $35,000 $43,983 ============================
-29- In July 1997, the Company replaced its existing $65.3 million revolving credit facility and $56.5 million note agreement with a $100.0 million secured revolving credit facility with a bank. The facility matures in July 2000, and bears interest at the prime interest rate or the Eurodollar interest rate plus 1.75% (7.69% at January 31, 1998). The facility is secured by the Company's assets allowing the Company to borrow up to 65% of its eligible merchandise inventory to a maximum of $100.0 million. During Fiscal years 1997, 1996, and 1995, the highest aggregate balances outstanding under the revolver were $45.9 million, $65.3 million and $74.9 million, respectively. The weighted average interest rates during Fiscal years 1997, 1996 and 1995 based on average daily balances, were 8.58%, 11.01% and 10.40%, respectively. The balances outstanding under the Company's revolving credit agreements at Fiscal years ended 1997, 1996 and 1995 were $35.0 million, $0.0 and $65.3 million, respectively. The Company's policy is to classify $35.0 million of borrowing under its new revolving credit facility as long-term, since the Company has the intent and ability to maintain these obligations for longer than one year, or to refinance them on a long-term basis. At January 31, 1998, the fair market value of this revolving credit facility approximates the carrying value. Interest paid during Fiscal years 1997, 1996 and 1995 was approximately $5.8 million, $11.8 million and $16.0 million, respectively. Note 4. Income Taxes Income tax expense (benefit) consists of the following:
Fiscal Year 1997 1996 1995 ------------------------------- (in thousands) Federal - current $10,813 $1,364 $(9,117) State - current 1,306 231 253 Deferred 1,370 3,023 (4,567) -------------------------------- $13,489 $4,618 $(13,431) ================================
A reconciliation of the Company's effective tax rates with the federal statutory rate is as follows:
Fiscal Year 1997 1996 1995 ------------------------------ Federal statutory rate 35.0% 35.0% (35.0%) State income taxes (benefit), net of Federal income tax effect 3.0% 4.7% (1.5%) Other 1.6% (0.3%) 0.4% ------------------------------ Effective income tax rate 39.6% 39.4% (36.1%) ==============================
Significant components of the Company's deferred tax assets and liabilities are as follows:
January 31, February 1, 1998 1997 --------------------------- (in thousands) CURRENT DEFERRED TAX ASSETS Restructuring reserve $4,326 $7,677 --------------------------- Total Current Deferred Tax Asset 4,326 7,677 --------------------------- CURRENT DEFERRED TAX LIABILITIES Inventory valuation 5,177 5,463 Other 252 319 -------------------------- Total Current Deferred Tax Liabilities 5,429 5,782 -------------------------- Net Current Deferred Tax Asset (Liability) $(1,103) $1,895 -------------------------- NON-CURRENT DEFERRED TAX ASSETS Accrued rent, lease accounting $3,046 $2,824 Capitalized leases 895 829 Book over tax depreciation 623 --- Other 254 148 -------------------------- Total Non-Current Deferred Tax Assets 4,818 3,801 -------------------------- NON-CURRENT DEFERRED TAX LIABILITIES Tax over book depreciation --- 588 Other 92 115 -------------------------- Total Non-Current Deferred Tax Liabilities 92 703 -------------------------- Net Non-Current Deferred Tax Asset $4,726 $3,098 -------------------------- TOTAL NET DEFERRED TAX ASSET $3,623 $4,993 ==========================
-30- In assessing the propriety of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the taxable income in the three previous tax years to which tax loss carryback can be applied. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of projected future taxable income over the periods in which the deferred tax assets are deductible management believes it is more likely than not that the Company will realize the benefits of those deductible differences. The amount of the deferred tax asset considered realizable could be reduced if estimates of future taxable income during the carryforward period are reduced. The Company paid income taxes of approximately $0.3 million, $0.3 million and $2.2 million during Fiscal years 1997, 1996 and 1995, respectively. Note 5. Leases The Company leases its distribution center and administrative offices under two leases, from its Chief Executive Officer and principal shareholder. The significant terms of the leases are discussed in Note 11 "Related Party Transactions" to the consolidated financial statements. Fixed asset amounts for all capitalized leases are as follows:
January 31, February 1, 1998 1997 --------------------------- (in thousands) Buildings $7,105 $7,105 Fixtures and equipment 1,625 1,625 --------------------------- 8,730 8,730 Allowances for depreciation and amortization 4,291 4,034 --------------------------- $4,439 $4,696 ===========================
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:
Fiscal Year 1997 1996 1995 ------------------------------- (in thousands) Minimum rentals $50,237 $49,653 $57,420 Contingent rentals 719 274 246 ------------------------------- $50,956 $49,927 $57,666 ===============================
-31- Future minimum rental payments required under all leases that have initial or remaining noncancelable lease terms in excess of one year at January 31, 1998 are as follows:
Operating Capitalized Leases Leases ------------------------- (in thousands) 1998 $43,486 $ 1,294 1999 49,865 1,294 2000 47,404 1,294 2001 43,920 1,294 2002 38,174 1,294 Thereafter 118,663 16,473 ---------------------- Total minimum payments required $341,512 22,943 ======== Amounts representing interest 16,435 ------- Present value of minimum lease payments 6,508 Less current portion 99 ------- Long-term capital lease obligations $ 6,409 =======
Note 6. Benefit Plans Stock Option Plans Under the Company's 1986 Stock Option Plan and 1994 Stock Option Plan (the "Plans"), the Compensation Committee of the Board of Directors may grant options to acquire shares of common stock to employees of the Company and its subsidiaries at the fair market value of the common stock on the date of grant. Under the Plans, options generally become exercisable commencing one year from the date of grant in increments of 25% per year with a maximum term of ten years. Shares authorized for issuance under the 1986 and 1994 Stock -32- Option Plans were 2,200,000 and 2,000,000 (adjusted), respectively. As of June 1, 1995, the Company stopped issuing stock options under the 1986 Stock Option Plan. At January 31, 1998, of the 4,200,000 options authorized for issuance under the Plans, 2,812,741 have been granted and are outstanding, 572,647 of which were vested and exercisable. Shares available for future grants at January 31, 1998 and February 1, 1997 were 510,974 and 1,391,772, respectively. The following table summarizes information about the stock options outstanding under the Plans at January 31, 1998:
--------------------------------- ---------------------------- Outstanding Exercisable --------------------------------- ---------------------------- Weighted Weighted Average Average Average Exercise Remaining Exercise Exercise price range Shares Life Price Shares Price ---------------------------------------------- ---------------------------- $1.13-$1.82 272,118 7.3 $1.80 114,618 $1.80 2.32-2.63 912,123 8.2 2.38 73,029 2.37 3.00-3.69 230,000 8.4 3.07 57,500 3.07 4.00-6.88 598,500 8.4 5.97 141,500 6.71 7.13-16.80 800,000 7.9 14.46 186,000 7.39 --------- -------- Total 2,812,741 8.1 $6.58 572,647 $5.03 ========= ========
The Company also has a stock option plan for non-employee directors (the "1990 Plan"). Options under this plan are granted at 85% of the fair value at the date of grant. Under the 1990 Plan, options generally become exercisable commencing one year from the date of grant in increments of 25% per year with a maximum term of ten years. As of January 31, 1998, there were 500,000 shares authorized for issuance and 172,000 shares have been granted and are outstanding, 94,500 of which were vested and exercisable. There are 328,000 shares of common stock reserved for possible future option grants under the 1990 Plan. The following table summarizes information about the stock options outstanding under the 1990 Plan at January 31, 1998:
----------------------------- --------------------- Outstanding Exercisable ----------------------------- --------------------- Weighted Weighted Average Average Average Exercise Remaining Exercise Exercise price range Shares Life Price Shares Price - -------------------------------------------------------------------- $1.78-$2.02 18,000 7.7 $1.90 6,750 $1.86 3.14-5.53 113,000 7.0 4.73 46,750 5.20 6.91-13.71 41,000 3.5 10.88 41,000 10.88 ------- ------ Total 172,000 6.2 $5.90 94,500 $7.43 ======= ======
-33- The following tables summarize activity under the 1986 and 1994 Plans and the 1990 Plan:
---------------------------------- ------------------------------------ 1986 and 1994 Plans 1990 Plan ---------------------------------- ------------------------------------ Number of Option Number of Option Shares Price Weighted Shares Price Weighted Subject Range Average Subject Range Average to per Exercise to per Exercise Option Share Price Option Share Price - ----------------------------------------------------------------------------------------- Balance Jan. 28, 1995 1,868,512 $5.50-$12.13 $7.32 142,000 $5.00-$13.71 $8.46 Granted 448,174 1.13-2.63 1.85 12,000 1.78 1.79 Exercised Canceled (555,150) 1.81-11.25 6.30 (23,000) 1.78-6.33 5.73 - ----------------------------------------------------------------------------------------- Balance Feb. 3, 1996 1,761,536 1.13-12.13 6.24 131,000 1.78-13.71 8.33 Granted 1,376,198 1.75-4.00 2.54 9,000 2.02 2.03 Exercised (6,772) 2.81-4.13 6.82 Canceled (1,114,486) 1.25-12.13 7.20 - ----------------------------------------------------------------------------------------- Balance Feb. 1, 1997 2,016,476 1.13-9.25 3.21 140,000 1.78-13.71 7.92 Granted 1,062,608 5.00-16.80 12.00 69,000 3.14-5.05 4.29 Exercised (191,169) 1.44-5.50 2.67 (5,000) 5.53 5.54 Canceled (75,174) 1.81-5.94 2.96 (32,000) 5.00-13.71 11.36 - ----------------------------------------------------------------------------------------- Balance Jan. 31, 1998 2,812,741 $1.13-$16.80 $6.37 172,000 $1.78-$13.71 $5.90 =========================================================================================
The per share weighted-average fair value of the stock options granted during Fiscal years 1997, 1996 and 1995 was $4.14, $1.05 and $0.57 respectively using the Black Scholes option pricing model, with the following weighted-average assumptions; 1997 - expected dividend yield 0.0%, risk-free interest rate of 5.5%, expected life of five years and stock volatility of 48%; 1996 - expected dividend yield 0.0%, risk-free interest rate of 6.7%, expected life of five years and stock volatility of 72%; 1995 - expected dividend yield 0.0%, risk-free interest rate of 6.7%, expected life of five years and stock volatility of 47% The Company applies APB Opinion No. 25 in accounting for its Plans and, accordingly, no compensation cost has been recognized -34- the financial statements for employee stock options which are issued at the closing stock price on the date of grant. During fiscal years 1997, 1996 and 1995, the Company recognized expenses of $52,000, $3,000 and $3,000, respectively, for stock options issued to non-employee directors at 85% of the closing stock price on the date of grant. Had the Company determined compensation cost, for employee stock options, based on fair value in accordance with SFAS 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
Fiscal Year ------------------------------ 1997 1996 1995 ------------------------------ Net income (loss), as reported $20,574 $7,102 ($23,816) Basic earnings (loss) per share, as reported $1.05 $0.36 ($1.22) Diluted earnings (loss) per share, as reported $0.99 $0.36 ($1.22) Pro forma net income (loss) $19,074 $6,658 ($23,919) Pro forma basic earnings (loss) per share $0.97 $0.34 ($1.23) Pro forma diluted earnings (loss) per share $0.92 $0.34 ($1.23)
Restricted Stock Plan Under the 1990 Restricted Stock Plan, the Compensation Committee of the Board of Directors is authorized to grant awards for up to 600,000 restricted shares of Common Stock to executive officers and other key employees of the Company and its subsidiaries. The shares are issued as restricted stock and are held in the custody of the Company until all vesting restrictions are satisfied. If conditions or terms under which an award is granted are not satisfied, the shares are forfeited. Shares begin to vest under these grants after three years and are fully vested after five years, with vesting criteria which includes continuous employment until applicable vesting dates have expired. At January 31, 1998, a total of 150,000 shares have been granted, of which 50,000 were granted in 1996 with a weighted average grant date fair market value of $2.37 per share, aggregating a total of $118,750; the remaining 100,000 were granted in 1995 with a weighted average grant date fair value of $2.33 per share, aggregating a total of $232,500. As of January 31, 1998, a total of 30,000 of these shares had vested. Unearned compensation is recorded at the date of award, based on the market value of the shares, and is included as a separate component of shareholders' equity and is amortized over the applicable vesting period. The amount amortized to expense in Fiscal years 1997 and 1996 was approximately $70,000 and $107,000, respectively. At January 31, 1998, outstanding awards and shares available for grant totaled 150,000 and 450,000, respectively. 401 (k) Savings Plan The Company offers a 401(k) Savings Plan to eligible employees meeting certain age and service requirements. This plan permits participants to contribute up to 16% of their salary, including bonuses, up to the maximum allowable by Internal Revenue Service regulations. Participants are immediately vested in their voluntary contributions plus actual earnings thereon. Participant vesting of the Company's matching and profit sharing contribution is based on the years of service completed by the participant. Participants are fully vested upon the completion of four years of service. All participant forfeitures of nonvested benefits are used to reduce the Company's contributions in future years. The Company matching contribution totaled $529,000, $465,000 and $470,000 in Fiscal years 1997, 1996 and 1995, respectively. -35- Supplemental Executive Retirement Plan (SERP) In 1997, the Company introduced a non-qualified Supplemental Executive Retirement Plan (SERP) effective March 1, 1997. The SERP, which is unfunded, provides eligible executives defined pension benefits that supplement benefits under other retirement arrangements. The annual benefit amount has been predetermined as part of the plan and vests based on years of service and age at retirement. For Fiscal year 1997, expenses related to the plan totaled approximately $361,000. The present value of the projected benefit obligation was approximately $2.3 million at January 31, 1998. The January 31, 1998 Consolidated Balance Sheet includes $313,000 of accrued expense. Note 7. Shareholders' Equity On November 14, 1997, the shareholders approved an amendment to the Company's Certificate of Incorporation to increase authorized common shares from 20 million shares of $0.01 par value common stock to 50 million shares of $0.01 par value common stock. On that date, the Board of Directors approved a two-for-one common stock split to be distributed in the form of a 100% stock dividend. As a result, 9,898,758 were issued on December 15, 1997 to shareholders of record on December 1, 1997. Accordingly, amounts equal to the par value of the additional shares issued have been charged to additional paid in capital and credited to common stock. All references throughout this annual report to number of shares, per share amounts, stock option data and market prices of the Company's common stock has been restated to reflect the stock split. At January 31, 1998 and February 1, 1997, the Company held 70,788 and 72,788 shares, respectively, in treasury stock resulting from the repurchase of common stock through open market purchases. Note 8. Strawberries Acquisition In October 1997, the Company acquired 90 out of a total of 118 stores owned by Strawberries, Inc., a privately held non-mall music specialty retailer operating primarily in New England. The stores operate under the names "Strawberries" and "Waxie Maxie" and are primarily located in freestanding or strip center locations. The acquisition has been accounted for using the purchase method of accounting. At the time of the acquisition, the Company paid $21 million for the assets which included the fixed assets, merchandise inventories, other related current assets and $683,000 in goodwill. This goodwill is being amortized on a straight-line basis over a 15 year period. Pro forma combined net sales, including the 90 Strawberries stores acquired, was $610 million (unaudited) in Fiscal 1997. Pro forma net sales for Fiscal 1996 and pro forma net income for Fiscal 1997 and 1996 are not presented because such information was not available as a result of Strawberries' bankruptcy filing and subsequent liquidation. -36- Note 9. Concentration of Business Risks The Company purchases inventory for its stores from approximately 450 suppliers, with approximately 68% of purchases being made from six suppliers. In the past, the Company has not experienced difficulty in obtaining satisfactory sources of supply, and management believes that it will retain access to adequate sources of supply. However, a loss of a major supplier could cause a possible loss of sales, which would have an adverse affect on operating results and result in a decrease in vendor support for the Company's advertising programs. Note 10. Quarterly Financial Information (Unaudited) ----------------------------------------------------- Fiscal 1997 Quarter Ended 1997 1/31/98 11/1/97 8/2/97 5/3/97 ----------------------------------------------------- (in thousands, except per share amounts) Sales $571,314 $242,041 $114,737 $105,024 $109,512 Gross profit 209,892 87,439 43,662 39,527 39,264 Net income (loss) 20,574 21,291 979 (834) (862) Basic earnings (loss) per share $1.05 $1.08 $0.05 $(0.04) $(0.04) Diluted earnings (loss) per share $0.99 $1.01 $0.05 $(0.04) $(0.04)
----------------------------------------------------- Fiscal 1996 Quarter Ended 1996 2/1/97 11/2/96 8/3/96 5/4/96 ----------------------------------------------------- (in thousands, except per share amounts) Sales $481,657 $180,735 $97,583 $96,717 $106,622 Gross profit 172,705 64,703 36,217 34,616 37,169 Net income (loss) 7,102 14,710 (2,477) (2,392) (2,739) Basic earnings (loss) per share $0.36 $0.75 $(0.13) $(0.12) $(0.14) Diluted earnings (loss) per share $0.36 $0.74 $(0.13) $(0.12) $(0.14)
-37- Note 11. Related Party Transactions The Company leases its 178,000 square foot distribution center/office facility in Albany, New York from Robert J. Higgins, its Chief Executive Officer and principal shareholder, under two capitalized leases that expire in the year 2015. The original distribution center/office facility was constructed in 1985. A 77,000 square foot distribution center expansion was completed in October 1989 on real property adjoining the existing facility. Under the capitalized leases dated April 1, 1985 and November 1, 1989, the Company paid Mr. Higgins an annual rent of $1.3 million in fiscal 1997 and $1.2 million in fiscal 1996 and 1995. On January 1, 1998, the aggregate rental payment increased in accordance with the biennial increase in the Consumer Price Index, pursuant to the provisions of each lease. Effective January 1, 2000, and every two years thereafter, the rental payment will increase in accordance with the biennial increase in the Consumer Price Index, pursuant to the provisions of the lease. Neither of the leases contain any real property purchase option at the expiration of its term. Under the terms of the leases, the Company pays all property taxes, insurance and other operating costs with respect to the premises. Mr. Higgins' obligation for principal and interest on his underlying indebtedness relating to the real property approximates $90,000 per month. The Company leases two of its retail stores from Mr. Higgins under long-term leases. For each of fiscal 1997, 1996 and 1995 the Company paid Mr. Higgins $35,000 in annual rental payments. Under the terms of the leases, the Company pays property taxes, maintenance and a contingent rental if a specified sales level is achieved. In fiscal 1997, 1996 and 1995, the Company paid Mr. Higgins $30,000 annually for a lease on certain parking facilities contiguous to the Company's distribution center/office facility. The lease is a one year lease renewed annually and was renewed through October 31, 1998, after approval by the audit committee. The Company regularly utilizes privately-chartered aircraft owned or partially owned by Mr. Higgins. Under an unwritten agreement with Quail Aero Services of Syracuse, Inc., a corporation in which Mr. Higgins is a one-third shareholder, the Company paid $59,000, $76,000 and $70,000 in 1997, 1996 and 1995, respectively, for chartered aircraft services. The Company also chartered an aircraft from Crystal Jet, a corporation wholly owned by Mr. Higgins. During fiscal 1997, 1996, and 1995, payments to Crystal Jet, under an unwritten agreement, aggregated $199,000, $227,000 and $167,000 respectively. The Company believes that the charter rates and terms are as favorable to the Company as those generally available to it from other commercial carriers. The transactions that were entered into with an "interested director" were approved by a majority of disinterested directors of the Company's board, either by the audit committee or at a meeting of the board of directors. The Trans World board of directors believes that the leases and other provisions are at rates and on terms that are at least as favorable as those that would have been available to the Company from unaffiliated third parties under the circumstances. NOTE 12. RESTATEMENT The Company has restated its consolidated financial statements for the fiscal year ended February 3, 1996 to correct an error in the calculation of the 1995 restructuring charge discussed in Note 2. The effect of the correction of this error on the 1995 consolidated statement of income was a reduction in the 1995 restructuring charge of $2,436,000, an increase in income tax expense of $879,000 and a decrease in the net loss of $1,557,000. The effect of the correction of this error on the consolidated balance sheet as of February 3, 1996 was an increase in fixed assets, net, of $2,436,000, a decrease in deferred tax assets of $879,000 and an increase in retained earnings of $1,557,000. The correction of this error did not have an effect on the consolidated statements of operations for either the fiscal year ended February 1, 1997 or the fiscal year ended January 31, 1998. The effect of the correction of this error on the consolidated balance sheets as of February 1, 1997 and January 31, 1998 was an increase in fixed assets, net, of $2,436,000, a decrease in deferred tax assets (or increase in deferred tax liabilities) of $879,000 and an increase in retained earnings of $1,557,000. Index to Exhibits ----------------- Document Number and Description - ------------------------------- Exhibit No. 3.1 Restated certificate of Incorporation -- incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1994. Commission File No. 0-14818. 3.2 Certificate of Amendment to the Certificate of Incorporation -- incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 1994. Commission File No. 0-14818. 3.3 Amended By-Laws--incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 1991. Commission File No. 0-14818. *3.4 Certificate of Amendment to the Certificate of Incorporation. 4.1 Loan and Security Agreement, dated July 9, 1998, between Congress Financial Corporation and the Company, for the secured revolving credit agreement -- incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 2, 1997. Commission File No. 0-14818. 10.1 Lease, dated April 1, 1985, between Robert J. Higgins, as Landlord, and Record Town, Inc. and Trans World Music Corporation, as Tenant and Amendment thereto dated April 28, 1986 -- incorporated herein by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1, No. 33-6449. 10.2 Second Addendum, dated as of November 30, 1989, to Lease, dated April 1, 1985, among Robert J. Higgins, and Trans World Music Corporation, and Record Town, Inc., exercising five year renewal option -- incorporated herein by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 1990. Commission File No. 0-14818. 10.3 Lease, dated November 1, 1989, between Robert J. Higgins, as Landlord, and Record Town, Inc. and Trans World Music Corporation, as Tenant -- incorporated here by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 1991. Commission File No. 0-14818. 10.4 Employment Agreement, dated as of February 1, 1996 between the Company and Robert J. Higgins -- incorporated herein by reference to Exhibit 10.4 to the Company's Annual Report of Form 10-K for the fiscal year ended February 1, 1997. Commission File No. 0-14818 10.5 Trans World Music Corporation 1986 Incentive and Non-Qualified Stock Option Plan, as amended and restated, and Amendment No. 3 thereto -- incorporated herein by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 1991. Commission File No. 0-14818. 10.6 Trans World Music Corporation 1990 Stock Option Plan for Non-Employee Directors -- incorporated herein by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-2, No. 33-36012. 10.7 Trans World Music Corporation 1990 Restricted Stock Plan -- incorporated herein by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-2, No. 33-36012. 10.8 Form of Restricted Stock Agreement dated February 1, 1995 and May 1, 1995 between the Company and Edward W. Marshall, Jr., Executive Vice President of Operations and Bruce J. Eisenberg, Senior Vice President of Real Estate, respectively, incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended -38- April 29, 1995. Commission File No. 0-14818. 10.9 Form of Restricted Stock Agreement dated May 1, 1996 between the Company and John J. Sullivan, Senior Vice President-Finance and Chief Financial Officer, incorporated herein by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 1997. Commission File No. 0-14818. 10.10 Severance Agreement, dated May 20, 1996 between Trans World Entertainment Corporation and James A. Litwak, Executive Vice President of Merchandising and Marketing, incorporated herein by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 1997. Commission File No. 0-14818. 10.11 Severance Agreement, dated October 1, 1994, between Trans World Entertainment Corporation and Edward Marshall, Senior Vice President-Operations - -- incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 1994. Commission File No. 0-14818. 10.12 Trans World Entertainment Corporation 1994 Stock Option Plan -- incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 30, 1994. Commission File No. 0-14818. 10.13 Trans World Entertainment Corporation 1994 Director Retirement Plan -- incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1994. Commission File No. 0-14818. 10.14 Form of Indemnification Agreement dated May 1, 1995 between the Company and its officers and directors incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 29, 1995. Commission File No. 0-14818. 10.15 Trans World Entertainment Corporation 1997 Supplemental Executive Retirement Plan -- incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 3, 1997. Commission File No. 0-14818. *10.16 Trans World Entertainment Corporation Asset Purchase Agreement with Strawberries, Inc. *21 Significant Subsidiaries of the Registrant. *23 Consent of KPMG Peat Marwick LLP. 27 Financial Data Schedule (For electronic filing purposes only) - --------------------------------------------------------------------- *Filed previously. -39- EXHIBIT INDEX 3.4 Certificate of Amendment to the Certificate of Incorporation. 10.16 Trans World Entertainment Corporation Asset Purchase Agreement with Strawberries, Inc. 22 Significant Subsidiaries of the Registrant. 23 Consent of KPMG Peat Marwick LLP. 27 Financial Data Schedule (electronic filing only) EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS DATA EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS, AND THE CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000795212 TRANS WORLD ENTERTAINMENT CORPORATION 1,000 12-MOS JAN-31-1998 FEB-02-1997 JAN-31-1998 94,732 0 3,105 0 189,394 290,350 169,985 97,917 374,019 201,376 41,409 0 0 198 124,324 374,019 571,314 571,314 361,422 361,422 170,834 0 5,148 34,063 13,489 0 0 0 0 20,574 1.05 0.99
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