-----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, SUO3B6uUq+2h+a1GjKYqP4E4w7y5cOWbRK6eKaHfu1kbJ1SEkafFb1In3N8HZL0l D7RZfpJTb1228JdpB+Lnow== 0001047469-99-012585.txt : 19990402 0001047469-99-012585.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012585 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980502 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-Q/A SEC ACT: SEC FILE NUMBER: 000-14818 FILM NUMBER: 99579875 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-Q/A 1 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A INTRODUCTORY NOTE: Trans World Entertainment Corporation is Amending this Form 10-Q to provide revised disclosures made to its interim financial information in connection with its Form S-4 filing on March 30, 1999. /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 2, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT FOR THE TRANSITION PERIOD FROM ____ TO ____ COMMISSION FILE NUMBER: 0-14818 TRANS WORLD ENTERTAINMENT CORPORATION ------------------------------------- (Exact name of registrant as specified in its charter) NEW YORK 14-1541629 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 38 Corporate Circle Albany, New York 12203 ---------------------- (Address of principal executive offices, including zip code) (518) 452-1242 -------------- (Registrant's telephone number, including area code) Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value, 21,674,012 shares outstanding as of May 30, 1998 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Form 10-Q Page No. PART 1. FINANCIAL INFORMATION Item 1 - Financial Statements (unaudited) Condensed Consolidated Balance Sheets at May 2, 1998, January 31, 1998 and May 3, 1997 3 Condensed Consolidated Statements of Income - Thirteen Weeks Ended May 2, 1998 and May 3, 1997 5 Condensed Consolidated Statements of Cash Flows - Thirteen Weeks Ended ended May 2, 1998 and May 3, 1997 6 Notes to Condensed Consolidated Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II. OTHER INFORMATION Item 4 - Submission of Matters of Vote of Security Holders 15 Item 6 - Exhibits and Reports on Form 8-K 16 Signatures 16 TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES PART 1. FINANACIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED) CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED)
MAY 2, JANUARY 31, MAY 3, 1998 1998 1997 ------------------ ------------- ---------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $20,275 $94,732 $10,303 Merchandise inventory 189,902 189,394 159,699 Other current assets 6,099 6,224 9,691 ------------------ ------------- ---------------- Total current assets 216,276 290,350 179,693 ------------------ ------------- ---------------- VIDEOCASSETTE RENTAL INVENTORY, net 4,022 4,099 4,626 DEFERRED TAX ASSET 4,550 4,726 2,576 FIXED ASSETS, net 73,690 72,068 65,394 OTHER ASSETS 2,814 2,776 3,363 ------------------ ------------- ---------------- TOTAL ASSETS $301,352 $374,019 $255,652 ------------------ ------------- ---------------- ------------------ ------------- ----------------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. -3- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED)
MAY 2, JANUARY 31, MAY 3, 1998 1998 1997 ------------------ ------------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $100,243 $162,981 $75,124 Income taxes payable 1,969 11,155 --- Accrued expenses and other 12,217 17,346 7,729 Store closing reserve 8,221 8,692 11,259 Current deferred taxes 604 1,103 --- Current portion of long-term debt and capital lease obligations 96 99 4,733 ------------------ ------------- ----------- Total current liabilities 123,350 201,376 98,845 ------------------ ------------- ----------- LONG-TERM DEBT, less current portion -- 35,000 41,691 CAPITAL LEASE OBLIGATIONS, less current portion 6,389 6,409 6,484 OTHER LIABILITIES 7,142 6,712 6,537 ------------------ ------------- ------------ TOTAL LIABILITIES 136,881 249,497 153,557 ------------------ ------------- ------------ SHAREHOLDERS' EQUITY: Preferred stock ($.01 par value; 5,000,000 shares authorized; none issued) --- --- --- Common stock ($.01 par value; 50,000,000 shares authorized; 21,423,150, 19,815,357 and 19,630,162 shares issued, respectively) 214 198 196 Additional paid-in capital 62,686 25,386 24,463 Treasury stock, at cost (70,288, 70,788 and 72,788 shares, respectively) (390) (394) (407) Unearned compensation - restricted stock (158) (175) (228) Retained earnings 102,119 99,507 78,071 ------------------ ------------- ----------- TOTAL SHAREHOLDERS' EQUITY 164,471 124,522 102,095 ------------------ ------------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $301,352 $374,019 $255,652 ------------------ ------------- -----------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. -4- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THIRTEEN WEEKS ENDED ----------------- ---------------- MAY 2, MAY 3, 1998 1997 ----------------- ---------------- Sales $145,062 $109,512 Cost of sales 92,605 70,248 ----------------- ---------------- Gross profit 52,457 39,264 Selling, general and administrative expenses 47,334 38,935 ----------------- ---------------- Income from operations 5,123 329 Interest expense 1,097 1,836 Other expenses (income), net (256) (94) ----------------- ---------------- Income (loss) before income taxes 4,282 (1,413) Income tax expense (benefit) 1,670 (551) ----------------- ---------------- NET INCOME (LOSS) $2,612 ($862) ----------------- ---------------- ----------------- ---------------- BASIC EARNINGS (LOSS) PER SHARE $0.13 ($0.04) ----------------- ---------------- ----------------- ---------------- Weighted average number of common shares outstanding 19,827 19,540 ----------------- ---------------- ----------------- ---------------- DILUTED EARNINGS (LOSS) PER SHARE $0.12 ($0.04) ----------------- ---------------- ----------------- ---------------- Adjusted weighted average number of common shares outstanding 21,334 19,540 ----------------- ---------------- ----------------- ----------------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. -5- TRANS WORLD ENTERTAINMENT AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THIRTEEN WEEKS ENDED -------------------- MAY 2, MAY 3, 1998 1997 ------------------ ------------- NET CASH USED BY OPERATING ACTIVITIES ($70,861) ($35,678) ------------------ ------------- INVESTING ACTIVITIES: Acquisition of property and equipment (5,965) (1,830) Disposals of rental inventory, net 77 158 ------------------ ------------- Net cash used by investing activities (5,888) (1,672) ------------------ ------------- FINANCING ACTIVITIES: Payments of long-term debt and capital lease obligations (35,024) (7,139) Proceeds from issuance of common stock 36,772 --- Exercise of stock options 544 21 ------------------ ------------- Net cash provided (used) by financing activities 2,292 (7,118) ------------------ ------------- Net decrease in cash and cash equivalents (74,457) (44,468) Cash and cash equivalents, beginning of period 94,732 54,771 ------------------ ------------- Cash and cash equivalents, end of period $20,275 $10,303 ------------------ ------------- ------------------ ------------- SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Income tax benefit resulting from exercise of stock options $ 915 $ 34
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. -6- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MAY 2, 1998 AND MAY 3, 1997 (UNAUDITED) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements consist of Trans World Entertainment Corporation and its subsidiaries, (the "Company"), all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated. These interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in these condensed consolidated financial statements reflects all normal, recurring adjustments which, in the opinion of management, are necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations applicable to interim financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1998. NOTE 2. RESTRUCTURING CHARGE The Company recorded a pre-tax restructuring charge of $21 million in 1994 to reflect the anticipated costs associated with a program to close 143 stores and to restructure the Company's debt agreements. The restructuring charge included the write-down of fixed assets, estimated cash payments to landlords for the early termination of operating leases, inventory-related costs (including the cost for returning all remaining merchandise after the store was closed), and employee termination benefits. The charge also included estimated professional fees related to the development of the store closing plan and the negotiations with landlords related to the termination of leases. Inventory-related costs were included in cost of sales. An analysis of the January 28, 1995 balance in the 1994 restructuring reserve and 1995 charges against the reserve is as follows:
CHARGES BALANCE AT AGAINST REMAINING JANUARY 28, 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 -7- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MAY 2, 1998 AND MAY 3, 1997 (CONTINUED) (UNAUDITED) NOTE 2. RESTRUCTURING CHARGE (CONTINUED) second charge were similar to those recorded in 1994, and also included a provision for exiting the rental video store format, the write-off of goodwill related to a previous acquisition and a provision for closing the Company's fixture manufacturing operation. An analysis of the charges against the 1995 reserve for the thirteen week period ended May 2, 1998 is as follows:
CHARGES AGAINST THE RESERVE BALANCE AT ---------- BALANCE AT JANUARY 31, 1998 1ST QTR MAY 2, 1998 ---------------- ----------- ----------- (in thousands) Video rental assets...................... $ 3,071 $ 8 $ 3,063 --------- ----- --------- Non cash write-offs.................... 3,071 8 3,063 --------- ----- --------- Lease obligations........................ 4,008 149 3,859 Inventory-related costs.................. 610 319 291 Termination benefits..................... 803 -- 803 Professional fees........................ 157 7 150 Other costs.............................. 43 (12) 55 --------- ----- --------- Cash outflows.......................... 5,621 463 5,158 --------- ----- --------- Total.................................. $ 8,692 $ 471 $ 8,221 --------- ----- -------- --------- ----- --------
In determining the components of the reserves, management analyzed all aspects of the restructuring plan and the costs that would be incurred. The write-off of leasehold improvements and furniture and fixtures represented the estimated net book value of these items at the forecasted closing date. In determining the provision for lease obligations, the Company considered the amount of time remaining on each store's lease and estimated the amount necessary for either buying out the lease or continued rent payments subsequent to store closure. Inventory-related costs include the cost to pack and ship the inventory on hand after the closing of the store as well as the penalty paid to the vendor for additional product returns resulting from the restructurings. Termination benefits represented the severance payments expected to be made to terminated employees. Professional fees represented amounts expected to be paid to advisors related to the development of the store closing plan ($3.5 million in total for both plans), and the negotiations with landlords related to the termination of leases ($2.3 million in total). The cash outflows for both restructurings were financed from operating cash flows and the liquidation of merchandise inventory from the stores closed. The timing of store closures depended on the Company's ability to negotiate reasonable lease termination agreements. The restructuring reserve is included in the accompanying balance sheet under the caption "store closing reserve." -8- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MAY 2, 1998 AND MAY 3, 1997 (CONTINUED) (UNAUDITED) NOTE 2. RESTRUCTURING CHARGE (CONTINUED) The Company closed 5 stores during the thirteen week period ended May 2, 1998 that were related to the restructuring reserve. A summary of store closures related to each restructuring is as follows:
1994 1995 RESTRUCTURING RESTRUCTURING TOTAL ----------------- ----------------- ----- Number of stores originally expected to close............ 143 163 306 --- --- --- --- --- --- Number of stores closed through May 2, 1998.............. 179 168 347 --- --- --- --- --- --- Number of stores to be closed subsequent to May 2, 1998.. -- 23 23 --- --- --- --- --- ---
Sales related to stores that were closed were $678,000 (unaudited) and $1.4 million (unaudited) during the thirteen week period ended May 2, 1998 and May 3, 1997, respectively. Store operating losses related to stores that were closed were $90,000 (unaudited) and $283,000 (unaudited) during the thirteen week period ended May 2, 1998 and May 3, 1997, respectively. The provision for termination benefits was based on the expectation that 338 employees would be terminated in connection with the restructuring programs. Through May 2, 1998, 75 employees had been terminated and the Company expects to terminate an additional 23 employees in fiscal 1998. The Company has not terminated as many employees as originally planned because higher than normal levels of attrition occurring after the announcement of the restructurings resulted in a reduced need for involuntary terminations. Subsequent to the adoption of the restructuring programs, improving economic conditions in certain markets, improvement in individual store performance and the inability to negotiate reasonable lease termination agreements have led the Company to keep open certain stores that were originally expected to be closed. During the thirteen week period ended May 2, 1998, 21 stores were removed from the list of stores expected to be closed. Conversely, deteriorating economic conditions and store performance in certain markets have led the Company to close certain stores that were not originally expected to be closed. In addition, the timing of store closures has also been affected by the ability or inability to negotiate reasonable lease termination agreements. The net effect of changes made to the timing of store closures and the stores to be closed under the 1995 restructuring program has not been material. Through May 2, 1998, the Company has closed 347 stores in connection with the restructuring programs, compared to the originally planned closures of 306 stores. During the remainder of 1998, the Company plans to close an additional 23 stores as it completes the restructuring programs. Any remaining balance in the restructuring reserve at January 30, 1999 will be credited to operations. NOTE 3. SEASONALITY The Company's business is seasonal in nature, with the highest sales and earnings occurring in the fourth fiscal quarter. NOTE 4. DEPRECIATION AND AMORTIZATION Depreciation and amortization of videocassette rental inventory included in cost of sales totalled $413,000 and $547,000 for the thirteen week periods ended May 2, 1998 and May 3, 1997, respectively. Depreciation and amortization of fixed assets is included in the condensed consolidated statements of income as follows:
THIRTEEN WEEKS ENDED ------------------------------------ MAY 2, MAY 3, 1998 1997 ----------------- ----------------- (in thousands) Cost of Sales .................................... $ 300 $ 260 -------- -------- -------- -------- Selling, general and administrative expenses...... $ 4,043 $ 3,586 -------- -------- -------- --------
NOTE 5. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," which was effective for the Company for the fiscal year ended January 31, 1998. This standard requires the Company to disclose basic earnings per share and diluted earnings per share. Basic earnings per share is calculated by dividing net income by the weighted average common shares outstanding. Diluted earnings per share is calculated by dividing net income by the sum of the weighted average shares that would have been outstanding if the dilutive potential common shares had been issued for the Company's common stock options from the Company's stock option plans. For the thirteen weeks ended May 2, 1998 and May 3, 1997 the additional potentially dilutive common shares included in the diluted earnings per share calculation were 1,507,000 and zero, respectively. Total stock options to purchase zero and 3,236,000 shares of common stock outstanding during the thirteen weeks ended May 2, 1998 and May 3, 1997, respectively, were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive. NOTE 6. COMMON STOCK OFFERING At the end of the first quarter of 1998 the Company sold an additional 1.5 million shares of its Common Stock in a public offering for approximately $37 million net of issuance costs. A portion of the -9- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MAY 2, 1998 AND MAY 3, 1997 (CONTINUED) (UNAUDITED) NOTE 6. COMMON STOCK OFFERING (CONTINUED) proceeds was used to repay long-term debt and the balance of the proceeds was used for general corporate purposes including investments in additional stores, fixtures and inventory. NOTE 7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income", issued in June 1997 and effective for fiscal years ending after December 15, 1997, establishes standards for reporting and display of the total net income and the components of all other non-owner changes in equity, or comprehensive income (loss) in the statement of operations, in a separate statement of comprehensive income (loss) or within the statement of changes of stockholder's equity. The Company has no items of other comprehensive income. Financial Accounting Standards Board Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information", issued in June 1997 and effective for fiscal years beginning after December 15, 1997, will change the way companies report selected segment information in annual financial statements and also requires those companies to report selected segment information in interim financial statements. Management has evaluated the impact of the application of the new rules on the Company's Consolidated Financial Statements and the new rules will not change its financial presentation. Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", issued in June, 1998 and effective for all fiscal quarters of fiscal years beginning after June 15, 1999, with earlier application permitted, requires companies to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Management has evaluated the impact of the application of the new rules on the Company's Consolidated Financial Statements and concluded that there will be no impact on its results of operations or its financial position. The Accounting Standards Executive Committee Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", issued in March 1998 and effective for fiscal years beginning after December 15, 1998 with earlier application permitted, provides guidance on accounting for the costs of computer software developed or obtained for internal use. The Company will adopt the statement for the fiscal year beginning January 31, 1999. Management has evaluated the impact of the application of the new rules on the Company's Consolidated Financial Statements and concluded that there will be no impact on its results of operations or its financial position. The Accounting Standards Executive Committee Statement of Position 98-5, "Accounting for the Costs of Start-up Activities", issued in April 1998 and effective for fiscal years beginning after December 15, 1998 with earlier application permitted, provides guidance on the financial reporting of start-up costs and organization costs. The Company will adopt the statement for the fiscal year beginning January 31, 1999. Management has evaluated the impact of the application of the new rules on the Company's Consolidated Financial Statements and concluded that there will be no impact on its results of operations or its financial position. -10- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is an analysis of the Company's results of operations, liquidity and capital resources. To the extent that such analysis contains statements which are not of a historical nature, such statements are forward-looking statements, which involve risks and uncertainties. These risks include, but are not limited to, changes in the competitive environment for the Company's products, including the entry or exit of non-traditional retailers of the Company's products to or from its markets; the release by the music industry of an increased or decreased number of "hit releases", general economic factors in markets where the Company's products are sold; and other factors discussed in the Company's filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS THIRTEEN WEEKS ENDED MAY 2, 1998 COMPARED TO THE THIRTEEN WEEKS ENDED MAY 3, 1997 SALES. The Company's total sales increased 32.5% to $145.1 million for the thirteen weeks ended May 2, 1998 compared to $109.5 million for the same period last year. The increase was primarily attributable to a comparable store sales increase of 10.3%, the acquisition of 90 Strawberries' stores in October 1997, and the opening of 16 stores partially offset by the closing of 25 stores. Management attributes the comparable store sales increase, its ninth consecutive quarter of such increases, primarily to its strategic decision to eliminate unprofitable stores and focus on customer service, superior retail locations, inventory management and merchandise presentation. Comparable store sales in the Company's music stores increased 12.6% while comparable sales in the video stores increased 3.6%. GROSS PROFIT. Gross profit as a percentage of sales improved to 36.2% from 35.9% in the thirteen week period ended May 2, 1998 compared to the same period in 1997. The increase is primarily due to the leveraging of expenses in the Company's distribution center. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses ("S,G&A"), as a percentage of sales, decreased from 35.6% to 32.6% in the thirteen week period ended May 2, 1998 compared to the same period in 1997. The improvement is primarily due to a reduction of store occupancy costs as a percentage of sales. The Company continues to leverage its depreciation and amortization and operating expenses against sales. INTEREST EXPENSE. Net interest expense was reduced from $1.8 million in the thirteen week period ended May 3, 1997 to $1.1 million for the thirteen week period ending May 2, 1998. -11- The decrease is due to a reduction in long-term debt and lower interest rates as a result of the refinancing completed in fiscal 1997. TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) NET INCOME. The Company increased its net income to $2.6 million in the thirteen weeks ended May 2, 1998 from a net loss of $862 thousand during the same period last year. The improved bottom line performance can be attributed to the comparable store sales increase, improved gross margin rates, leverage of S,G&A expenses and lower interest expense. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY AND SOURCES OF CAPITAL. At the end of the first quarter of 1998 the Company sold an additional 1.5 million shares of its Common Stock in a public offering for approximately $37 million net of issuance costs. A portion of the proceeds was used to repay long-term debt and the balance of the proceeds, which is reflected in the $20.3 million of cash and cash equivalents at May 2, 1998, will be used for general corporate purposes including investments in additional stores, fixtures and inventory and future acquisition and investment opportunities. The impact of this issuance of Common Stock had an immaterial effect on earnings per share in the first quarter. On July 9, 1997 the Company entered into a $100 million secured revolving credit facility with Congress Financial Corporation. The Revolving Credit Facility combined the Company's long-term debt with its revolving credit line to create a $100 million credit facility with a three year term at interest rates below the prime rate. The Revolving Credit Facility contains certain restrictive provisions, including provisions governing cash dividends and acquisitions, is secured by merchandise inventory and has a minimum net worth convenant. At quarter end, the Company had unused lines of credit aggregating $100 million. The Company's working capital at May 2, 1998 was $92.9 million and its ratio of current assets to current liabilities was 1.8 to 1. During the first three months of 1998, the Company's net cash used by operations was $70.9 million, compared to $35.7 million used in the first three months of 1997. The most significant operating use of cash during the period was $62.7 million in seasonal reductions of accounts payable. The Company used an additional $35 million for the reduction of long-term debt. CAPITAL EXPENDITURES During the first quarter of 1998, the Company had capital expenditures of $6 million out of a total of $47 million, net of construction allowances, planned for the year. Included in the total for the year is $17 million for a new Point of Sale register system. Also during the quarter, the Company opened or relocated 16 new stores and closed 25 stores while total retail selling space increased slightly. The Company plans on opening approximately the same number of stores in -12- Fiscal 1998 as it closes but anticipates that total retail footage will increase as the average size of new stores continues to increase. YEAR 2000 COMPLIANCE The Company has completed an awareness of the business risks related to the Year 2000 issue. The results of the awareness indicate that: - - awareness of Year 2000 issues is well known throughout the Company; - - assessment of Year 2000 sensitive items will completed; - - a list of items and business relationships sensitive to the Year 2000 issue will be compiled; - - renovation of the core information technology ("IT") systems will be completed; - - third-party compliance tracking will be done; and - - verification of embedded chip ("non-IT") system readiness for Year 2000 compliance will be done. The Company's Year 2000 issue remediation process includes the following phases: Awareness, Assessment, Renovation, Validation, and Implementation. As indicated above, the Awareness and Assessment phases are complete. The Awareness phase included establishing an internal Year 2000 committee, interviewing key Company personnel at all levels, including those at the stores, distribution center and home office, and vendor compliance tracking. Activities in the Assessment phase will include contacting merchandise vendors regarding their Year 2000 remediation activities, discussions with the Company's software vendors and service providers, identification of all source code and all imbedded chip logic that could contain date logic, analyzing source codes for its systems identifying each individual occurrence of date logic, and simulating the Year 2000 environment by rolling forward the date in test files of its principal IT systems. Assessment and Renovation efforts are underway. For the Renovation phase, all core IT system programming modifications will be completed by its internal systems development staff. The system programming modifications include upgrading the distribution, inventory management and accounting systems and converting the POS registers to a Year 2000 compliant system. Replacements for the other (non-core) IT systems are being implemented on schedule. The non core IT Systems being replaced include a product return system, a system for tracking the opening of new stores and managing lease payments. For the Validation and Implementation phases, formal systems testing for both IT and non-IT systems is expected to be completed by the end of the second quarter of fiscal 1999. In order to complete the Validation and Implementation phases, the Company will process daily, weekly and monthly transactions on the main corporate IT systems platform, IBM AS/400. The compliance testing will be completed in a dedicated environment within the AS/400 to assure acceptance of all transactions in the year 2000. The Company is exposed to both internal and external Year 2000 risks. Internal risks exist due to its dependence on its IT and non-IT systems. The Company is dependent on its IT and non-IT systems for many of its everyday operations including inventory management, product distribution, cash management, accounting and financial reporting. The Company utilizes a variety of vendors for its system needs and has initiated discussions with its vendors and monitored their Year 2000 compliance programs and the compliance of their products or services with required standards. Although the majority of these vendors represent that their products are Year 2000 compliant, the Company will perform testing to validate the vendor representations no later than the second quarter of fiscal 1999. In the normal course of business, the Company will replace its POS register system with a Year 2000 compliant system during fiscal 1998. Additionally, the Company plans to replace its product return center's processing system no later than the end of the second quarter of fiscal 1999. The replacement system will be Year 2000 compliant. Preliminary contingency plans for failure of internal systems include implementing manual procedures such as the use of manual merchandise picking and shipping to replace automated distribution center equipment. -13- External risks are represented by the fact that the Company utilizes approximately 2,500 different suppliers in the normal course of its business. Six major merchandise vendors account for more than 60% of all purchases. Additionally, 50 other merchandise vendors account for nearly 15% of purchases. The Company is also dependent on financial institutions for consolidation of cash collections, and for cash payments. Although the Company uses its own trucks for shipment of product to approximately 36% of its stores, it does rely on a number of trucking companies for the remainder of its product distribution. Evaluation of its vendors' Year 2000 readiness will begin in the fourth quarter of fiscal 1998, and is expected to be completed by the end of the first quarter of fiscal 1999. Upon completion of the assessment of vendor readiness, contingency plans will be developed for all third-parties where Year 2000 compliance appears to be at risk. The Company presently believes that its most likely worst-case Year 2000 scenarios would relate to the possible failure in one or more geographic regions of third party systems over which it has no control and for which it has no ready substitute, such as, but not limited to, power and telecommunications services. The Company has in place a disaster recovery plan that addresses recovery from various kinds of disasters, including recovery from significant interruptions to data flows and distribution capabilities at its data systems center and distribution center. The Company's disaster recovery plan provides specific routines for actions, personnel assignments and back-up arrangements to ensure effective response to a disaster affecting key business functions including merchandise replenishment, cash management and distribution center operations. Common routines and back up arrangements include off-site storage of information, manual processing of critical applications and the establishment of a chain of communication for key personnel. The Company is using that plan to further develop specific Year 2000 contingency plans identified by our third-party assessment phase which will emphasize locating alternate sources of supply, methods of distribution and ways of processing information. The Company's direct costs for its Year 2000 remediation efforts total $100,000 through May 2, 1998. Anticipated future costs include an additional $1 million to address Year 2000 issues identified as a result of remediation testing and a new product return center processing system. Future costs will be funded by cash flows generated from operations. The Company's estimates of the costs of achieving Year 2000 compliance and the date by which Year 2000 compliance will be achieved are based on management's best estimates, which were derived using numerous assumptions about future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no assurance that these estimates will be achieved, and actual results could differ materially from these estimates. Specific facts that might cause such material differences include the availability and cost of personnel trained in Year 2000 remediation work, the ability to locate and correct all relevant computer codes, the success achieved by its customers and suppliers in reaching Year 2000-readiness, the timely availability of necessary replacement items and similar uncertainties. -14- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A) An Annual Meeting of Shareholders of Trans World Entertainment Corporation was held on Wednesday, June 3, 1998. B) In the case of each individual nominee named below, authority to vote was withheld with respect to the number of shares shown opposite their name in Column 1, and each nominee received the number of votes set opposite their name in Column 2 for election as director of the Corporation.
---------------- --------------- Column 1 Column 2 Name of Nominee Withheld Votes for ------------------------- ------------------- -------------- Robert J. Higgins 100,726 18,750,148 Dean S. Adler 100,560 18,750,314 George W. Dougan 2,822,671 16,028,203 Charlotte G. Fischer 2,822,671 16,028,203 Isaac Kaufman 101,100 18,749,774 Matthew H. Mataraso 100,560 18,750,314 Dr. Joseph G. Morone 2,822,671 16,028,203
C) A proposal to amend Trans World Entertainment Corporation's 1990 Stock Option Plan for Non-Employee Directors to authorize the Board to award discretionary option grants, was approved as follows: FOR- 17,734,130 AGAINST- 1,109,746 ABSTAIN- 6,998 D) A proposal to institute Trans World Entertainment Corporation's 1998 Employee Stock Option Plan, was approved as follows: FOR- 12,928,411 AGAINST- 3,832,986 ABSTAIN- 5,469 -15- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS - EXHIBIT NO DESCRIPTION PAGE NO. ---------- ----------- -------- 10.4 Trans World Entertainment 13 Corporation Employment Agreement with Robert J. Higgins 27 Financial Data Schedule N/A (electronic filing only) (B) REPORTS ON FORM 8-K - None Omitted from this part II are items which are not applicable or to which the answer is negative to the periods covered. SIGNATURES ---------- Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRANS WORLD ENTERTAINMENT CORPORATION March 30, 1999 BY /s/ ROBERT J. HIGGINS ---------------------- Robert J. Higgins Chairman, President and Chief Executive Officer (Principal Executive Officer) March 30, 1999 BY: /s/ JOHN J. SULLIVAN --------------------- John J. Sullivan Senior Vice President-Finance and Chief Financial Officer (Chief Financial and Accounting Officer) -16- EX-10.4 2 EMPLOYMENT AGREEMENT Exhibit 10.4 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is effective as of the 1st day of May, 1998, by and between Trans World Entertainment Corporation, a New York corporation (the Company), and Robert J. Higgins (Higgins). Background WHEREAS, Higgins has served as the President and Chief Executive Officer of the Company and as the Chairman of its Board of Directors since 1973; and WHEREAS, Higgins and the Company executed an employment agreement effective as of February 1, 1996, which will end on January 30, 1999 (the 1996 Employment Agreement); and WHEREAS, the Company recognizes that Higgins' contribution to the growth and success of the Company has continued to be substantial throughout the term of the 1996 Employment Agreement and that without his continued leadership and vision the Company would not have achieved and maintained its current status in the industry; and WHEREAS, the Company desires to renegotiate and extend the terms of the 1996 Employment Agreement to assure the Company of Higgins' continued services in a leadership capacity and to compensate him therefor; and WHEREAS, Higgins is willing to commit to continue serving the Company on the terms and conditions provided in this Agreement. NOW THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and intending to be legally bound hereby, the parties agree as follows: SECTION 1. CAPACITY AND DUTIES 1.1 Employment. The Company hereby employs Higgins and Higgins hereby accepts employment by the Company upon the terms and conditions hereinafter set forth for a term commencing on the date hereof and expiring on April 30, 2003 (unless Higgins' service is sooner terminated as set forth below) (the Contract Period). 1.2 Capacity and Duties. 1.2.1 Higgins shall be employed by the Company generally as its President and Chief Executive Officer and shall have the executive authority, consistent with these positions, as may from time to time be specified by the Board of Directors of the Company or any duly authorized committee thereof (the Board). 1.2.2 Higgins shall devote his full working time, energy, skill and best efforts to the performance of his duties hereunder, in a manner that will faithfully and diligently serve the business and interests of the Company and its affiliates (as defined below), provided that Higgins may devote such time as is reasonably required for charitable and other personal activities in accordance with the Company's practices and policies. 1.2.3 For the purposes of this Agreement, an affiliate of the Company means any person or entity that controls the Company, is controlled by the Company, or which is under common control with the Company. For the purposes of this definition of affiliate, control means the power to direct the management and policies of a person or entity, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms controlling and controlled shall have correlative meanings; provided that any person or entity who owns beneficially, either directly or through one or more intermediaries, more than 20% of the ownership interests in a specified entity shall be presumed to control such entity for the purposes of this Agreement. SECTION 2. COMPENSATION 2.1 Base Compensation. As compensation for Higgins' services hereunder, the Company shall pay Higgins a salary at the annual rate of $600,000. This salary shall be payable in installments in accordance with the Company's regular payroll practices in effect from time to time. This salary shall be subject to increase based on normal periodic merit review by the Compensation Committee of the Board (the Compensation Committee) in accordance with the corporate policies of the Company (such salary, including the foregoing adjustments, if any, is hereinafter referred to as base salary); provided, however, that the amount of such increase shall not be less than the percentage amount, if any, by which the CPI (as defined below) for the calendar month immediately preceding such anniversary date exceeds the CPI for same month of the immediately preceding year. For the purposes of this Section 2.1, the term CPI shall mean the Consumer Price Index for All Urban Consumers for all items for New York, New York, as published by the Bureau of Labor Statistics of the United States Department of Labor, or of any revised or successor index hereafter published by the Bureau of Labor Statistics or other agency of the United States government succeeding to its functions. The annual base salary of Higgins shall not be decreased at any time during the Contract Period from the amount then in effect, unless Higgins otherwise agrees in writing. Participation in deferred compensation, discretionary bonus, retirement and other employee benefit plans and in fringe benefits shall not reduce the annual base salary payable to Higgins under this Section 2.1. 2.2 Benefits. 2.2.1 During the Contract Period, Higgins (and his family, if applicable) shall be entitled to participate in all incentive, savings, retirement, welfare and other employee benefit plans, practices, policies and programs that the Company may provide for the benefit of its executive employees generally (together with the fringe benefits described below, Employee Benefits). Higgins shall also be entitled to participate in any other fringe benefits which may be or become applicable to the Company's executive employees, including the payment of reasonable expenses for attending annual and periodic meetings of trade associations and any other benefits that are commensurate with the duties and responsibilities to be performed by Higgins under this Agreement. In no event shall the Employee Benefits provided to Higgins be less favorable, in the aggregate, than the employee benefits plans, practices, policies and programs provided to Higgins immediately preceding the effective date of this Agreement. 2.2.2 If Higgins becomes a participant in any employee benefit plan, practice or policy of the Company or its affiliates, Higgins shall be given credit under such plan for all service in the employ of the Company and any predecessors thereto or affiliates thereof prior to the date hereof, for purposes of eligibility and vesting, benefit accrual and for all other purposes for which such service is either taken into account or recognized under the terms of such plan, practice or policy. 2.2.3 During the Contract Period, Higgins shall be entitled to a private office, and such secretarial services as have been previously provided to Higgins, and such other assistance and accommodations as shall be suitable to the character of Higgins' position with the Company and adequate for the performance of Higgins' duties hereunder. 2.2.4 The Company shall pay or reimburse Higgins for all reasonable expenses (including expenses of travel and accommodations) incurred or paid by Higgins in connection with the performance of Higgins' duties hereunder upon receipt of itemized vouchers therefor and such other supporting information as the Company shall reasonably require. 2.2.5 During the Contract Period, the Company shall continue to provide Higgins with an automobile for use by Higgins consistent with past practices and shall continue to pay or reimburse Higgins for expenses he reasonably incurs for the maintenance and operation of such automobile upon receipt of itemized vouchers therefor and such other supporting information as the Company shall reasonably require. 2.2.6 During the Contract Period, Higgins shall be entitled to paid vacations in a manner commensurate with Higgins' status as the President and Chief Executive Officer of the Company, which shall not be less than the annual vacation period to which Higgins is presently entitled. 2.3 Executive Bonus Plan. The Company maintains the Executive Bonus Plan (the EBP) to provide performance-based incentive compensation to Higgins and certain other executives of the Company. During the Contract Period, Higgins shall be eligible to earn an annual performance bonus of 0 to 150% of his annual base salary in effect for that year (incentive compensation), calculated in such fashion and based on the achievement of certain performance criteria as are approved by the Board or the Compensation Committee prior to the beginning of such year under the EBP. 2.4 Insurance. Under the 1996 Employment Agreement the Company assisted in providing life insurance protection for Higgins' family at an annual cost to the Company of $150,000. During the Contract Period, the Company shall continue to assist Higgins by paying or advancing each year under an arrangement selected by Higgins an amount which has an annual net after tax cost to the Company of $150,000. 2.5 Additional Compensation. The Board, although under no obligation to do so, may determine from time to time to pay to Higgins compensation in addition to the annual base salary and incentive compensation required to be paid above. The Board may grant Higgins options to purchase shares of common stock of the Company (Common Stock), may issue him restricted Common Stock or may award him stock appreciation rights. SECTION 3. TERMINATION OF EMPLOYMENT 3.1 Death or Disability of Higgins. 3.1.1 Higgins' employment hereunder shall immediately terminate upon his death, upon which the Company shall pay the amounts due under Section 2 (including base salary, Employee Benefits, expense reimbursements and compensation for unused vacation time) accrued as of the date of Higgins' death in accordance with generally accepted accounting principles (GAAP). 3.1.2 If Higgins, in the reasonable opinion of the Company, is Disabled (as defined below), the Company shall have the right to terminate Higgins' employment upon 30 days prior written notice to Higgins at any time after the expiration of the 180 day period referred to below, in which event the Company shall pay the amounts due under Section 2 (including base salary, Employee Benefits, expense reimbursements and compensation for unused vacation time) accrued in accordance with GAAP as of the date of Higgins' termination because of Disability. As used in this Agreement, the term Disabled or Disability shall mean the inability of Higgins to perform substantially Higgins' duties and responsibilities to the Company by reason of a physical or mental disability or infirmity for a continuous period of at least 180 days. The date of Disability shall be on the last day of such 180 day period. The determination of whether the Disability has occurred shall be made by a licensed physician chosen by the Board. The benefits payable under Sections 3.1, 3.2 or otherwise under this Agreement shall be reduced by the amount of any benefits to which Higgins may be entitled under the benefit plans and programs of the Company, including any disability plan, supplementary retirement plan or agreement or insurance policies maintained by the Company for the benefit of Higgins. 3.2 Continuing Benefits Following Death or Disability. In addition to any payments or benefits contemplated by Section 3.1, if Higgins' employment is terminated for death or Disability, Higgins (and, as applicable, his family and estate) shall continue to receive all base salary, incentive compensation and all Employee Benefits Higgins (and, as applicable, his family) would have received for the balance of the Contract Period had his employment not been so terminated; provided, however, that if Higgins' employment is terminated for death the total amount payable under this Section 3 shall in no event be less than be less than 2.99 times the average of the aggregate base salary and incentive compensation paid to Higgins over the preceding five years. 3.3 Date of Termination. 3.3.1 Except as otherwise provided in this Agreement, the employment of Higgins hereunder shall terminate upon the earliest to occur of the dates specified below: 3.3.1.1 the end of the Contract Period; 3.3.1.2 the close of business on the date of Higgins' death; 3.3.1.3 the close of business on the date which is 30 days after the date on which the Company delivers to Higgins a written notice of the Company's election to terminate Higgins' employment for Cause (as defined below); 3.3.1.4 the close of business on the date which is 30 days after the date on which the Company delivers to Higgins a written notice of the Company's election to terminate Higgins' employment because of Disability; 3.3.1.5 the close of business on the date which is 30 days after the date on which Higgins delivers to the Company a notice of Higgins' election to terminate Higgins' employment for Good Reason (as defined below); 3.3.1.6 the close of business on the date which is 30 days after the date on which Higgins delivers to the Company a notice of Higgins' election to terminate Higgins' employment in accordance with Section 3.5.2 following a change in the present control of the Company (as defined below); provided, however, Higgins shall not have the right to terminate this agreement pursuant to this Section 3.3.1.6 to the extent a change in the present control of the Company resulted solely from the sale or other transfer of ownership interests by Higgins to a person or entity; or 3.3.1.7 the close of business on the date which is 60 days after the date on which the Company delivers to Higgins a written notice that the Board has adopted a resolution terminating the Higgins' employment and such termination is not for death, Cause or Disability. 3.3.2 Any purported termination by the Company or by Higgins shall be communicated by written Notice of Termination to the other. For the purposes of this Agreement, a Notice of Termination shall mean a notice which indicates the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Higgins' employment under the provision so indicated. No such purported termination shall be effective without delivery of such Notice of Termination. Termination of employment will not cause a termination of this Agreement, the terms of which shall survive any termination of employment in accordance with the express terms hereof. 3.4 Termination for Cause. 3.4.1 In the event Higgins' employment is terminated (i) by the Company for Cause, or (ii) by Higgins for any reason other than Good Reason or in accordance with Section 3.5.2 following a change in the present control of the Company (as defined below), the Company's remaining obligations under this Agreement shall terminate as of the date provided in Section 3.3. 3.4.2 For the purposes of this Agreement, the term Cause shall mean: 3.4.2.1 fraud, theft, misappropriation or embezzlement of the Company's funds; 3.4.2.2 conviction of any felony, crime involving fraud or misrepresentation, or of any other crime (whether or not connected with his employment) the effect of which is likely to adversely affect the Company, except if Higgins' actions which result in such a conviction were taken in good faith and in a manner Higgins reasonably believed not to be adverse to the interests of the Company; 3.4.2.3 after a written demand for substantial performance to Higgins from the Board (the mailing of such written demand having been authorized by at least 60% of the directors then in office) which specifically identifies the manner in which the Board believes that Higgins has intentionally materially breached Higgins' duties and provides Higgins with a 30 day period in which to cure such breach, the willful and continuing intentional material breach by Higgins substantially to perform Higgins' duties with the Company (other than any such failure resulting from Disability); or 3.4.2.4 abuse of alcohol or other drugs which interferes with the performance by Higgins of his duties, provided that Higgins has been given 30 days notice by the Company of its intent to terminate Higgins pursuant to this provision during which time Higgins has not demonstrated the cessation of such abuse to the reasonable satisfaction of the Board. Notwithstanding the foregoing or any other provision hereof, Higgins shall not be deemed to have been terminated for Cause unless there shall have been delivered to Higgins a copy of a resolution duly adopted by the affirmative vote of not less than 60% of the entire membership of the Board at a meeting of the Board called and held for that purpose (after at least 15 days prior written notice to Higgins and an opportunity for Higgins, together with Higgins' counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, Higgins was guilty of conduct set forth above and specifying the particulars thereof in reasonable detail. 3.4.3 For the purposes of this Agreement, the term Good Reason shall mean the occurrence of any of the events or conditions described in the following subparagraphs without Higgins' express written consent: 3.4.3.1 a material diminution of Higgins' status, title, position, scope of authority or responsibilities (including reporting responsibilities), the assignment to Higgins of any duties or responsibilities which, in Higgins' reasonable judgment, are inconsistent with such status, title, position, authorities or responsibilities, Higgins ceasing to be Chairman of the Board of Directors, or any removal of Higgins from or failure to reappoint or reelect Higgins to any of such positions, except in connection with the termination of Higgins' employment for Disability, Cause, as a result of Higgins' death or by Higgins other than for Good Reason; 3.4.3.2 a reduction by the Company in Higgins' compensation or benefits as in effect on the date hereof or as the same may be increased from time to time; 3.4.3.3 the relocation of the Company's principal executive offices to a location outside a 25-mile radius of Albany, New York or the Company's requiring Higgins to be based at any place other than Albany, New York, except for reasonably required travel on the Company's business; 3.4.3.4 the materially adverse and substantial alteration in the nature and quality of the office space within which Higgins performs Higgins' duties, including the size and location thereof, as well as the secretarial and administrative support provided to Higgins; 3.4.3.5 any material breach by the Company of any material provision of this Agreement; and 3.4.3.6 the failure of the Company to obtain a satisfactory agreement from any purchaser of the Company or successor or permitted assignee of the Company to assume and agree to perform this Agreement. Provided, however, that a termination by Higgins in accordance with Section 3.5.2 following a change in the present control of the Company (as defined below) shall not constitute a termination by Higgins for Good Reason under this Agreement. 3.5 Termination Without Cause. 3.5.1 In the event Higgins' employment is terminated (i) by the Company for any reason other than Cause, or the death or Disability of Higgins, or (ii) by Higgins for Good Reason, the Company shall immediately pay Higgins the amounts due under Section 2 (including base salary, Employee Benefits, expense reimbursements and compensation for unused vacation time) accrued as of the date of such termination in accordance with GAAP. In such event, Higgins (and, as applicable, his family) shall also continue to receive from the Company until two years after the end of the Contract Period then in effect, all base salary, incentive compensation and Employee Benefits that Higgins (and, as applicable, his family) would have received had he continued employment and such event had not occurred. 3.5.2 In the event Higgins elects to terminate his employment by written notice to the Company within the 90 day period immediately following a change in the present control of the Company, the Company shall immediately pay Higgins the amounts due under Section 2 (including base salary, Employee Benefits, expense reimbursements and compensation for unused vacation time) accrued as of the date of such termination in accordance with GAAP. In such event, the Company shall also pay Higgins within 60 days thereafter a single sum amount equal to 2.99 his base amount (within the meaning of Section 2806(b)(3) of the Internal Revenue Code of 1986, as amended). 3.5.3 There shall be no requirement on the part of Higgins to seek other employment or otherwise mitigate damages in order to be entitled to the full amount of any payments or benefits to be made pursuant to this Agreement or any other agreement between Higgins and the Company or any of its affiliates; provided, however, if Higgins' employment is terminated by the Company other than for Cause or the death or Disability of Higgins, or by Higgins for Good Reason, Higgins shall, for so long as he is being paid amounts in respect of base salary hereunder, use reasonable efforts following 12 months after his employment has been so terminated, to find alternative employment; provided, however, such reasonable efforts shall not require Higgins to move, commute more than 20 miles to his office or accept employment of a stature materially less than the position Higgins had with the Company. No payment or benefit under any portion of this Agreement shall be subject to offset. SECTION 4. RESTRICTIVE COVENANTS 4.1 Confidentiality. Higgins acknowledges a duty of confidentiality owed to the Company and shall not, directly or indirectly, at any time during or after his employment by the Company, divulge, furnish, or make accessible to anyone, without the express authorization of the Board, any trade secret, private or confidential or proprietary information or know-how of the Company or any of its affiliates obtained or acquired by him while so employed. All computer software and books paid for by the Company, and all records and files generated or acquired while an employee of the Company are acknowledged to be the property of and shall not be removed from the Company's possession or made use of other than in pursuit of the Company's business and, upon termination of employment for any reason, Higgins shall deliver to the Company, without further demand, all copies thereof which are then in his possession or under his control. The provisions of this Section 4.1 shall not apply to information which (i) is or becomes generally available to the public other than as a result of a disclosure by Higgins, (ii) was available to Higgins on a non-confidential basis prior to its disclosure to Higgins, (iii) becomes available to Higgins on a non-confidential basis from a source other than the Company, (iv) must be disclosed by law or by order of a court or governmental authority, or (v) is used to enforce Higgins' rights with the Company. This Section 4.1 shall terminate on the date that a sale or other transfer of the Company is completed. 4.2 Noncompetition. 4.2.1 At any time while employed hereunder and, except as provided in the last sentence of this Section 4.2.1, for a period of one year following termination of Higgins' employment for any reason, Higgins shall not, directly or indirectly: (i) engage, anywhere in the Territory (as defined in Section 4.2.2 below), in the retail sale of music, video or related products; (ii) be or become a stockholder, partner, owner, officer, director or employee or agent of, or a consultant to or give financial or other assistance to, any person or entity engaging in any such activities; (iii) seek in competition with the business of the Company to procure orders from or do business with any customer of the Company; or (iv) solicit or contact with a view to the engagement or employment by any person or entity of any person who is an employee of the Company as of the date of this Agreement, provided this will not preclude hiring any person who contacts Higgins for employment and who has not been employed by the Company at any time during the preceding 6 months. Nothing herein shall prohibit Higgins without the written consent of the Board from owning, as a passive investor, in the aggregate not more than 5% of the outstanding publicly traded stock of any corporation so engaged. The duration of Higgins' covenants set forth in this Section shall be extended by a period of time equal to the number of days, if any, during which Higgins is in violation of the provisions hereof. Higgins shall not be bound by this Section 4.2.1 following the termination of his employment (a) by the Company without Cause, or (b) by Higgins for Good Reason. 4.2.2 For the purposes of this Agreement, Territory means the United States. 4.2.3 If either party hereto learns of any breach or potential breach of this Agreement such party shall immediately notify the other party hereto of such event, specifying the basis therefor in reasonable detail. The Company may, in its sole discretion, afford Higgins an opportunity to remedy or otherwise cure such breach or potential breach before seeking legal redress, provided that Higgins is actively seeking to cure or remedy such breach or potential breach; but such opportunity to remedy shall be without prejudice to the right of the Company to seek and obtain injunctive or other relief. 4.3 Injunctive and Other Relief. Higgins acknowledges and agrees that the covenants contained in Section 4.1 and 4.2 above are fair and reasonable in light of the consideration paid hereunder, and that damages alone shall not be an adequate remedy for any breach by Higgins of his covenants contained herein and accordingly expressly agrees that, in addition to any other remedies which the Company may have, the Company shall be entitled to injunctive relief in any court of competent jurisdiction for any breach or threatened breach of any such covenants by Higgins. Nothing contained herein shall prevent or delay the Company from seeking, in any court of competent jurisdiction, specific performance or other equitable remedies in the event of any breach or intended breach by Higgins of any of his obligations hereunder. In the event the Company prevails in an action to enforce its rights under Sections 4.1 and 4.2, it shall be entitled to be reimbursed for its costs and reasonable attorneys' fees associated with so enforcing its rights. SECTION 5. MISCELLANEOUS 5.1 Reimbursement of Counsel Fees; Arbitration. The Company shall pay all reasonable legal fees, accounting fees and related expenses incurred by Higgins in connection with the preparation, negotiation and execution of this Agreement. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in New York, New York in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The prevailing party, shall be entitled to recover from the other party all of its legal fees, accounting fees and related expenses incurred in any such arbitration including without limitation, all expenses of arbitration, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees and all other disbursements or expenditures of the types customarily incurred in connection with prosecuting, defending or investigating any arbitration, action or suit. 5.2 Severability. The invalidity or unenforceability of any particular provision or part of any provision of this Agreement shall not affect the other provisions or parts hereof. If any provision hereof is determined to be invalid or unenforceable by a court of competent jurisdiction, Higgins shall negotiate in good faith to provide the Company with protection as nearly equivalent to that found to be invalid or unenforceable and if any such provision shall be so determined to be invalid or unenforceable by reason of the duration or geographical scope of the covenants contained therein, such duration or geographical scope, or both, shall be considered to be reduced to a duration or geographical scope to the extent necessary to cure such invalidity. 5.3 Assignment. Neither this Agreement nor any right or interest hereunder shall be assignable by Higgins, Higgins' beneficiaries, or legal representatives without the Company's prior written consent; provided, however, that nothing herein shall preclude (i) Higgins from designating a beneficiary to receive any benefit payable hereunder upon Higgins' death, or (ii) the executors, administrators, or other legal representatives of Higgins or Higgins' estate from assigning any rights hereunder to devisees, legatees, beneficiaries, testamentary trustees or other legal heirs of Higgins (each a Distributee). If Higgins should die while any amounts would still be payable to Higgins if Higgins had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Higgins' Distributee or, if there is no such Distributee, to Higgins' estate. 5.4 Notices. All notices hereunder shall be in writing and shall be sufficiently given if hand-delivered, sent by documented overnight delivery service or registered or certified mail, postage prepaid, return receipt requested or by telegram, fax or telecopy (confirmed by U.S. mail), receipt acknowledged, addressed as set forth below or to such other person and/or at such other address as may be furnished in writing by either party hereto to the other. Any such notice shall be deemed to have been given as of the date received, in the case of personal delivery, or on the date shown on the receipt or confirmation therefor, in all other cases. Any and all service of process and any other notice in any such action, suit or proceeding shall be effective against a party if given as provided in this Agreement; provided that nothing herein shall be deemed to affect the right of a party to serve process in any other manner permitted by law. If to the Company: Chief Financial Officer Trans World Entertainment Corporation 38 Corporate Circle Albany, NY 12203 Tel: (518) 452-1242 Fax: (518) 869-4819 If to Higgins: Mr. Robert J. Higgins 6 Sage Estates Menands, NY 12204 5.5 Entire Agreement and Modification. This Agreement (and any Employee Benefit plan or agreement contemplated hereby) constitutes the entire agreement between the parties hereto with respect to the matters contemplated herein and supersedes all prior agreements and understandings with respect thereto. Any amendment, modification, or waiver of this Agreement shall not be effective unless in writing. Neither the failure nor any delay on the part of any party to exercise any right, remedy, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power, or privilege with respect to any occurrence be construed as a waiver of any right, remedy, power, or privilege with respect to any other occurrence. 5.6 Governing Law. This Agreement is made pursuant to, and shall be construed and enforced in accordance with, the internal laws of the State of New York (and United States federal law, to the extent applicable), without giving effect to otherwise applicable principles of conflicts of law. 5.7 Headings; Counterparts. The headings of sections in this Agreement are for convenience only and shall not affect its interpretation. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which, when taken together, shall be deemed to constitute but one and the same Agreement. 5.8 Further Assurances. Each of the parties hereto shall execute such further instruments and take such other actions as any other party shall reasonably request in order to effectuate the purposes of this Agreement. 5.9 Indemnification. The Company shall pay, as additional compensation under this Agreement, an amount equal to Higgins' liability (including all taxes on such amount), if any, under Internal Revenue Code Section 4999 (or any successor provision) by reason of payments under any provision of this Agreement or otherwise. Throughout the Contract Period and for a period of five years thereafter, the Company shall indemnify and defend Higgins against all claims arising out of Higgins' activities as an officer, director or employee of the Company to the fullest extent permitted under the law of the applicable state of incorporation. In addition to the foregoing, Higgins shall, upon reasonable notice, furnish such information and proper assistance to the Company in connection with any litigation in which it is, or may become, a party. IN WITNESS WHEREOF, the parties have executed this Agreement on the dates set forth below. TRANS WORLD ENTERTAINMENT CORPORATION May 7, 1998 By: John J. Sullivan May 7, 1998 Robert J. Higgins EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS JAN-30-1999 FEB-01-1998 MAY-02-1998 20,275 0 0 0 189,902 216,276 174,179 100,489 301,352 123,350 0 0 0 214 164,257 301,352 145,062 145,062 92,605 92,605 47,334 0 1,097 4,282 1,670 0 0 0 0 2,612 .13 .12
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