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United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 28, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 (I.R.S Employer
of incorporation or organization) Identification No.)
38 Corporate Circle, Albany, New York 12203
--------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 452-1242
---------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such 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. [X]
As of April 21, 1995, 9,682,814 shares of the Registrant's Common
Stock, excluding 48,394 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
$4.50 on the NASDAQ National Market System on April 21, 1995, was
approximately $19,000,000. Shares of Common Stock held by the Company's
controlling shareholder, who controls approximately 56% 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.
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. The Company changed its name from "Trans
World Music Corp." in September 1994. 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 in a single industry segment, the operation of
retail entertainment stores. Sales revenue was $536.8 million during the
fiscal year ended January 28, 1995 (referred to herein as "1994"). 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 28, 1995, the Company
operated 684 stores in 36 states, the District of Columbia, the Virgin
Islands and the Commonwealth of Puerto Rico, 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, when the
Company has earned all of its annual profits in the past three fiscal
years.
For the past five years, the Company has pursued a strategy of
expansion, primarily through the opening of 410 new stores. During 1994
the Company opened 55 stores and closed or relocated 55 stores. In 1995,
in order to streamline operations and increase profitability, the Company
intends to close 80 stores as part of a restructuring reserve announced in
the fourth quarter of 1994. The Company has identified a total of 143
stores for closure. See "Business Restructuring" below.
New store openings will be significantly curtailed in 1995 and beyond
until the restructuring program is substantially completed. Continued
store growth will depend largely on refinancing the Company's debt
structure. See "Business Restructuring" below and Item 7, "Management's
Discussion and Analysis of Results of Operations - Liquidity and Capital
Resources".
The Company's central distribution facility currently serves all of
its retail stores. Weekly shipments to each store provide approximately
70% of their retail product requirements. The balance of the stores'
requirements are satisfied through direct shipments from manufacturers or
distribution 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.
Business Restructuring
Background. After the close of the third fiscal quarter of 1994 the
Company was not in compliance with the fixed charge ratio covenant in its
senior credit agreements. The borrowings consist of a $75 million maximum
available amount of revolving credit facilities (the "Revolver") and $65
million in long-term senior notes (the "Notes"), totaling up to $140
million. The Company negotiated waiver agreements with its lenders
relating to the third quarter covenant non-compliance and began discussions
for permanent modifications to the terms and conditions of the respective
credit agreements.
The Company undertook a comprehensive examination of store
profitability in the fourth quarter, and adopted a business restructuring
(the "1994 Restructuring") plan that included the closing of 143 stores.
Additional measures under way include initiatives to reduce store
inventories to lower levels and to selectively open new stores, giving due
consideration to a potential overcapacity in the retail segment of the
music industry. As a result of the restructuring plan, the Company
recorded a pre-tax charge of $21 million against earnings, leading to a
loss for the 1994 fiscal year. The components of the restructuring charge
and an analysis of the amounts charged against the reserve are outlined in
Note 2 of the Notes to Consolidated Financial Statements.
Store Openings and Closings. For the three year period ended January
28, 1995, the Company pursued an aggressive store growth strategy by taking
advantage of soft real estate market conditions. Factors including
potential location, estimated sales volume and gross margins, targeted
consumer group and competition, occupancy costs and lease terms are all
considered when evaluating a potential new store location. Future
expansion is expected to be limited to pursuing existing profitable
locations and markets. As part of the 1994 Restructuring, 143 store
closings are expected to be completed over an 18 month period, with 28
stores closed in the fourth quarter of 1994. The restructuring will be
completed with the closing of 80 stores in 1995 and 35 stores in 1996. The
closings are not concentrated in a particular store format or geographic
area. The principal factors considered in identifying stores for closure
include: (1) whether a store generated positive cash flow at the store
level, before accounting for home office overhead; (2) whether the latest
sales trends indicated a likely improvement in the historical store
results; (3) whether recent or imminent competition would make sales
improvements less likely; and (4) marginal stores where the leases were
scheduled to expire.
To illustrate the impact of the store closings, the table below sets
forth the store openings and closings over the past three fiscal years, and
a preliminary forecast for the 1995 fiscal year. The store openings in the
forecast do not represent commitments, and are subject to a number of
factors, including constraints under the Company's credit agreements. See
Item 7, "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Liquidity and Capital Resources".
Fiscal Year
---------------------------------
Forecast
1995 1994 1993 1992
---------------------------------
MALL
Number of Stores,
Beginning of period 431 442 439 437
Openings 10 26 41 26
Closings (41) (37) (38) (24)
----------------------------------
Number of Stores,
End of Period 400 431 442 439
----------------------------------
NON-MALL/OTHER
Number of Stores,
Beginning of period 253 242 215 160
Openings 4 29 40 67
Closings (39) (18) (13) (12)
----------------------------------
Number of Stores,
End of Period 218 253 242 215
----------------------------------
TOTAL COMPANY
Number of Stores,
Beginning of period 684 684 654 597
Openings 14 55 81 93
Closings (80)* (55) (51) (36)
----------------------------------
Number of Stores,
End of Period 618 684 684 654
==================================
* The 1994 Restructuring includes closing 35 additional stores in 1996.
Debt Restructuring. The second element of the 1994 Restructuring involved
modifications to the Company's senior credit agreements. In December 1994
the Company began discussions with its lenders to renegotiate terms and
conditions of the Revolver and the Notes. Additional covenant
non-compliance was temporarily waived at January 28, 1995, while
modifications to the credit agreements were negotiated.
In April 1995 the Company entered into an agreement with its lenders to
restructure the Revolver and the Notes. The lenders have allowed the
Company until July 31, 1996 to refinance its debt structure, at which time
all of the outstanding amounts mature. The revised credit agreements
contain restrictions on capital expenditures, dividends, acquisitions and
new covenants as to cash flow, working capital and consolidated tangible
net worth. For additional discussion of the credit agreements see Note 3
to the Consolidated Financial Statements and Item 7, "Management's
Discussion and Analysis of Operations and Financial Condition".
Store Formats
Mall Stores. The Company operated 203 full-line mall stores at January 28,
1995, generally under the name "Record Town." These stores utilize an
average space of approximately 3,000 square feet, but certain stores range
to as much as 8,000 square feet. The full mall stores have averaged
approximately $280 sales per square foot annually over the past two years.
Management believes the in-store presentation, broad product selection and
convenient location make these stores attractive to the customer.
Specialty Mall stores operated under the names "Music World" and "Tape
World" carry a smaller product assortment than the full-line mall stores.
On January 28, 1995, the Company operated 92 of these stores having an
average space of approximately 1,300 square feet. These stores have
averaged approximately $385 sales per square foot annually over the past
two years.
Video-for-Sale stores are operated under the name "Saturday Matinee"
and are primarily dedicated to the sale of prerecorded video products. On
January 28, 1995, the Company operated 69 stand alone locations along with
66 Saturday Matinee operations contained in the Company's combination
stores. They average 2,100 square feet in size and generated average sales
per square foot of $288 in 1994 and $258 in 1993. In the past two fiscal
years the Company has expanded "Saturday Matinee" through the combination
format instead of stand-alone locations.
Combination Stores share common storefronts of "Record Town" and
"Saturday Matinee." As of January 28, 1995, the Company operated 66 stores
with an average size of approximately 7,000 square feet or, with the new
superstores, as large as 17,000 square feet. These stores offer the
consumer an exciting combination of music and video-for-sale products in
one store location. These stores have averaged approximately $240 per
square foot annually over the past two years.
During 1993, the Company introduced "For Your Entertainment", or
"F.Y.E." This store combines retail book, multimedia merchandise and a
video game entertainment room, in addition to the Company's other lines of
music and video merchandise. At January 28, 1995, one 27,000 square foot
"F.Y.E." store was in operation.
Non-Mall Stores. Freestanding Stores accounted for 164 of the stores in
operation at January 28, 1995, substantially all of which operate under the
name "Coconuts." These stores are designed for free-standing, strip center
and downtown locations in areas of high population density. The majority
of the freestanding stores range in size from 5,000 to 8,000 square feet.
Eleven of the freestanding stores are Coconuts "superstores" that average
approximately 14,000 square feet in size. Freestanding stores carry a more
extensive product assortment and have a pricing structure that is more
competitive than a mall store. Average sales per square foot was
approximately $165 for the past two years.
The Company's non-mall stores also include a video rental store format
and a licensed operation format. The Company's 44 video rental locations
include 29 stores that operate under the tradename "Movies Plus." The
Company's 45 licensed music and video departments, which operate within
retail department stores, offer music and video entertainment products and
related accessories.
Strategic Alliances. The Company is also expanding through joint venture
opportunities. At January 28, 1995 the Company was a venture partner with
Tandy Corporation in nine music and video departments contained within
Tandy Corporation's new electronics megastore, Incredible Universe. The
venture partners currently expect to open eight new Incredible Universe
music and video departments during 1995. Tandy Corporation has announced
its plans to have approximately 50 Incredible Universe megastores open by
the end of 1998.
Products
The Company's stores offer a full assortment of prerecorded compact
discs, audio cassettes, prerecorded videocassettes, blank audio and video
tape and related accessories. Sales by category as a percent of total
sales over the past three years were as follows:
Fiscal Year Ended
------------------------------------
January 28, January 29, January 30,
1995 1994 1993
------------------------------------
Compact discs 46.9% 42.1% 37.9%
Prerecorded audio cassettes 28.2 33.5 38.7
Prerecorded videocassettes 15.8 14.6 13.1
Blank tape, video games,
accessories and other 9.1 9.8 10.3
------------------------------------
Total 100.0% 100.0% 100.0%
------------------------------------
Prerecorded 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, vocal,
country, classical, jazz, religious, rhythm and blues, and show and movie
soundtracks. The 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, which are still popular releases that customers purchase
to build their collections.
The Company's prerecorded music product mix has continued to shift
from audio cassettes to the increasingly popular compact discs. For the
past two years dollar sales volume of compact discs has exceeded
audio cassettes. In 1994, the unit sales volume of compact discs surpassed
the unit sales of audio cassettes. Recording industry projections indicate
that compact discs will continue to increase in market share in the future.
Video Products. The Company offers prerecorded videocassettes for
sale in a majority of its stores, with the selection of titles ranging up
to 8,000 depending on the size and sales volume of each store. The
sell-through business has been stimulated by lower list prices offered by
the movie studios creating a greater acceptance by the consumer.
Blank Audio and Video Tapes. The Company stocks and promotes brand
name blank video and audio cassette tapes.
Accessory Products. Accessory products offered by the Company for
compact discs, audio and video cassettes include maintenance and cleaning
products, home and portable storage cases and headphones, and also include
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 free-standing
stores through advertisements in radio, television and newspapers. Most of
the vendors from whom the Company purchases merchandise offer their
customers advertising allowances to promote their products.
Competition
The retail sale of prerecorded music and video is highly competitive.
Products offered by competing retailers are virtually identical to the
Company's product offerings, varying only by the breadth of the product
assortment within store locations. Numerous chain stores, department
stores and discount stores, many of which have greater financial resources
than the Company, sell prerecorded music and video merchandise. Large
national retail chains that operate book or electronics superstores have
expanded their product lines to include music and video software products,
and now offer music and video departments that are larger in square footage
than the Company's typical specialty store. In addition, consumers receive
television mail order offers and have access to mail order clubs affiliated
with major manufacturers of prerecorded music.
The Company has formulated a number of different strategies to compete
against the increased number of music and video software retailers.
During 1994, the Company's new stores averaged 5,800 square feet in size,
considerably larger than the Company's overall average store size of 3,600
square feet. This has enabled the Company to respond to consumer needs for
increased product selection by increasing the number of titles offered for
sale in both the music and video products. Additionally, in 1994, the
Company introduced a more competitive pricing strategy in over one-third of
its stores that conveys a simple, value-oriented message to consumers.
Management believes the positioning of most of its stores within successful
regional malls is more important as a competitive strength than lower
prices, compared to its freestanding superstore competitors. A majority of
the regional malls in which the Company operates have not been materially
impacted by the increase in number of stores operated by non-mall
competitors.
The increase in the number of competitors and their low prices has
made achieving meaningful comparable store sales gains more difficult. The
Company believes that its convenient locations and product assortments will
enable it to remain competitive, but that the gross margin rate will
continue to be under pressure for the near term.
Seasonality
The Company's business is seasonal in nature. The Christmas holiday
in the fourth quarter constitutes the Company's peak selling period,
totaling 38% of annual sales in 1994. The Company experiences operating
losses in the first three fiscal quarters and typically earns all of its
annual profits in the fourth quarter. Inventory levels are typically
highest early in the fourth quarter.
Distribution and Merchandise Operations
The Company's distribution facility uses certain automated and
computerized systems designed to manage product receipt, storage and
shipment. Generally, price tickets and bar-coded product information are
attached to each piece of merchandise before it leaves the distribution
center. Store inventories of regular product are replenished in response
to detailed product sale information that is transmitted to the central
computer system from each outlet after the close of the business day.
Shipments from the facility to each of the Company's stores are made at
least weekly and currently provide the Company's stores with approximately
70% of their product requirements. The balance of the stores' requirements
are satisfied through direct shipments from manufacturers or redistribution
from other stores.
Company-owned trucks service approximately 30% 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.
During 1994, the Company contracted with an equipment supplier and a
facilities engineering company to automate more completely the product
picking, distribution and return functions of its distribution center.
Sortation equipment is being modified for the Company's products to replace
many of the manual functions currently in use. Merchandise return
sortation equipment is currently operational. The entire project is
estimated to cost approximately $3 million, and will lead to lower handling
costs and inventory balances. Equipment testing and implementation will
continue during 1995, with anticipated completion in 1996. 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 400
suppliers on an unsecured basis. Approximately 70% of purchases in 1994
were made from the six largest suppliers: Sony Music,
Warner/Electra/Atlantic Corp. (subsidiary of Time Warner), BMG Music
(subsidiary of Bertelsman), MCA, Inc. (subsidiary of Matsushita), PolyGram
(subsidiary of Philips), and CEMA (subsidiary of Thorn-EMI).
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. Production of store fixtures did not have a material financial
impact in 1994, and management does not anticipate that such manufacturing
will constitute a significant element of its business in 1995.
Trade Customs and Practices
Under current trade practices, retailers of prerecorded audio
cassettes and compact discs 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 prerecorded videocassettes offer return
privileges comparable to those with prerecorded music, but with fewer
excess return penalties. Video rental products are not eligible for return
to the manufacturers.
Currently, none of the Company's principal music suppliers limit
product return privileges. Product return credit is applied as a reduction
against current merchandise product payments. In some instances, the
Company's videocassette suppliers limit return privileges relative to
current gross videocassette inventory purchases. However, manufacturers'
return privilege policies have changed in the past and may change in the
future. 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
The Company employs approximately 5,500 people, of whom 900 are
employed on a full-time salaried basis, 1,400 are employed on a full-time
hourly basis, and the remainder on a part-time hourly basis. The Company
hires temporary help during peak seasons to assure continued levels of
customer service. Store managers report to district managers, each of
whom, in turn, reports to a regional manager. In addition to their
salaries, store managers, district managers and regional managers have the
potential to receive incentive compensation based on store 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 are
accumulated in the Company's central computer department, which utilizes
the IBM AS/400 midrange configuration. The Company's information systems
manage a database of over 200,000 sku's in prerecorded 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 installed a merchandise replenishment system in 1993
intended to improve the in-stock inventory position and minimize excess
inventory positions. After two years of effort the merchandise system was
fully operational in the fourth quarter of 1994. Combined with improved
merchandise planning, the new system provides current, accurate information
of the Company's retail merchandise inventory.
Trademarks and Service Marks
The Company operates stores under various names and marks, including
the service marks "Record Town", "Tape World", "Coconuts", "Saturday
Matinee" and "Movies Plus" that are registered in the United States Patent
and Trademark Office. The Company intends to continue to use these names
and marks, among others, for its stores, with the choice of name for a
specific store depending upon the type of store and its location.
Item 2. PROPERTIES
Retail Stores
At January 28, 1995, the Company operated 684 retail outlets. The
Company owns real estate sites for two stores and leases the remainder
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 and insurance.
The following table lists the number of leases due to expire (assuming
no options are exercised) in each of the fiscal years shown, as of January
28, 1995:
1995 . . . . . .69 1999 . . . . . . 55
1996 . . . . . .56 2000 . . . . . . 52
1997 . . . . . .79 2001 . . . . . . 87
1998 . . . . . .82 2002 & beyond. .202
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. Certain of the stores scheduled to close as part of
1994 Restructuring will take place upon the expiration of the applicable
store leases.
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 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 Company leases an 86,000 square foot facility in Johnstown, N.Y.,
where it manufactures its store fixtures. This seven year operating lease
expires in 1998.
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
Not applicable.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market Information. The Company's Common Stock is traded on the
over-the-counter market and quoted on the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ") National
Market System under the symbol "TWMC". As of April 21, 1995, there were
approximately 400 shareholders of record. However, management believes
that a significant number of shares are held by brokers under a "nominee
name" and that the actual beneficial shareholder count exceeds 1,000. The
following table sets forth fiscal quarterly high and low last sale prices
as reported by NASDAQ for the period from February 1, 1993 through January
27, 1995, and the closing price as of April 21, 1995.
Last Sale
Prices
---------
High Low
------- -------
1993:
1st Quarter $16 3/4 $13 1/4
2nd Quarter 17 3/4 13
3rd Quarter 15 1/4 12 3/4
4th Quarter 16 1/4 13 1/4
1994:
1st Quarter $14 $11 1/2
2nd Quarter 12 5/8 10 1/4
3rd Quarter 12 3/4 10 1/2
4th Quarter 12 3/4 5 1/2
1995:
April 21, closing price $4.50.
Dividend Policy. The Company has never declared or paid cash
dividends on the Common Stock. The Company's credit agreements currently
in place do not permit payment of cash dividends. Any future determination
as to the payment of dividends would depend upon capital requirements and
limitations imposed by the Company's credit agreements 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 financial data and other
operating information of the Company. The selected balance sheet and
income statement data set forth below are derived from the consolidated
financial statements of the Company. The selected consolidated financial
data should be read in conjunction with the consolidated financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Fiscal Year Ended
----------------------------------------------------------
January 28, January 29, January 30, February 1, February 2,
1995 1994 1993 1992 1991
----------------------------------------------------------
(in thousands, except per share and store data)
INCOME STATEMENT DATA:
Sales $536,840 $492,553 $454,916 $411,131 $356,564
Cost of sales 341,422 307,834 280,572 256,110 221,180
---------------------------------------------------------
Gross profit 195,418 184,719 174,344 155,021 135,384
Selling,
general and
administrative
expenses 158,637 147,644 133,768 117,370 96,621
Restructuring
charges 21,000 --- --- --- ---
Depreciation and
amortization 16,932 14,655 13,310 11,664 9,530
---------------------------------------------------------
Income (loss) from
operations (1,151) 22,420 27,266 25,987 29,233
Interest expense 9,540 5,971 5,627 5,946 5,332
---------------------------------------------------------
Income (loss) before
income taxes (10,691) 16,449 21,639 20,041 23,901
Income tax expense
(benefit) (4,435) 6,626 8,374 8,012 9,420
---------------------------------------------------------
Net income (loss) $ (6,256) $ 9,823 $ 13,265 $ 12,029 $ 14,481
=========================================================
Earnings (loss)
per share $ (0.64) $ 1.01 $ 1.40 $ 1.32 $ 1.60
=========================================================
Weighted average
number of shares
outstanding 9,701 9,723 9,474 9,087 9,065
=========================================================
BALANCE SHEET DATA:
(at end of period)
Working capital $ 93,431 $101,538 $ 63,058 $ 43,372 $ 44,219
Total assets 426,939 380,264 286,873 248,022 242,304
Current portion
of long-term
obligations 6,618 3,695 910 12,349 805
Long-term
obligations 66,441 73,098 25,512 26,281 31,144
Shareholders'
equity 119,477 126,074 116,329 92,620 80,151
Store Count:
Number of stores
open at end of
period 684 684 654 597 546
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS, FISCAL YEARS 1994, 1993 AND 1992
The following table sets forth certain income and expense items as a
percentage of sales for the periods indicated:
Fiscal Year Ended
-------------------------------------
January 28, January 29, January 30,
1995 1994 1993
-------------------------------------
Sales 100.0% 100.0% 100.0%
Gross profit 36.4 37.5 38.3
Selling, general and
administrative expenses 29.6 30.0 29.4
Restructuring charges 3.9 --- ---
Depreciation and amortization 3.2 3.0 2.9
--------------------------------------
Income (loss) from operations -0.2 4.5 6.0
Interest expense 1.8 1.2 1.3
--------------------------------------
Income (loss) before income taxes -2.0 3.3 4.7
Income tax expense (benefit) -0.8 1.3 1.8
--------------------------------------
Net income (loss) -1.2% 2.0% 2.9%
______________________________________
Change in comparable store sales 1.1% -2.1% ---
Fiscal Year Ended January 28, 1995 ("1994")
Compared to January 29, 1994 ("1993")
-------------------------------------------
Sales. The Company's sales increased by $44.3 million, or 9.0%, over
1993. The increase was primarily attributable to a net increase of 130,000
square feet which resulted from opening new stores and expanding existing
stores. Comparable store sales for the fiscal year increased 1.1%.
Comparable store sales were adversely impacted by delays in the
implementation of the merchandise replenishment system through the first
three quarters of 1994. In the fourth quarter, comparable store sales
increased 3.3%. Management attributes this increase to the benefits of the
merchandise replenishment system and a strong new release schedule in
music.
Sales by product configuration are shown in the following table:
Fiscal Year Ended
-------------------------------------
January 28, January 29, January 30,
1995 1994 1993
-------------------------------------
Compact discs 46.9% 42.1% 37.9%
Prerecorded audio cassettes 28.2 33.5 38.7
Prerecorded videocassettes 15.8 14.6 13.1
Blank tape, video games, accessories
and other 9.1 9.8 10.3
------ ------ ------
Total 100.0% 100.0% 100.0%
====== ====== ======
Comparable store sales have been affected primarily by lower unit
selling prices, which in turn have led to somewhat lower gross margins.
The average unit selling price of the Company's predominant product
configuration, compact discs, declined 5% in 1994 while the unit sales
volume increased 31%, which contributed to a $50.2 million increase in
sales. The average unit selling price of audio cassettes declined 3%,
while the unit sales volume also declined 3%, which contributed to a $7.4
million decline in sales. The average unit selling price of prerecorded
videocassettes declined 5% while the unit sales volume increased 28%, which
contributed to a $15.2 million increase in sales.
The Company's store formats performed similarly in 1994. Comparable
store sales for mall stores increased 1.9%, while non-mall stores decreased
1.0%. By product configuration, comparable store sales in music increased
0.7% while video sell-through, a smaller component of the Company's
business, increased 9.7% on a comparable store basis, benefiting from the
continued growth of the video sell-through market.
The Company has experienced increased competition from diversified
retailers entering the music business, including book superstores and
consumer electronics superstores, which often emphasize discount pricing, a
trend expected to continue in 1995 and beyond.
Gross Profit. Gross profit, as a percentage of sales, decreased from
37.5% in 1993 to 36.4% in 1994. This decline was weighted equally among
three principal factors: (1) competitive pricing programs implemented in
many of the Company's markets, as competition increased from diversified
retailers; (2) penalties incurred in returning product to vendors in a
continuing effort to improve inventory mix; and (3) the continued shift in
sales mix from prerecorded audio cassettes to compact discs. Compact discs
have a gross margin that is approximately 5% lower than audio cassettes.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses ("SG&A"), as a percentage of sales, decreased from
30.0% in 1993 to 29.6% in 1994. The decrease in SG&A, as a percent of
sales, was primarily due to leveraging fixed overhead costs on a total
sales increase of 9%, offset somewhat by an increase in store operating
costs, as a percentage of sales.
Interest Expense. Interest expense increased $3.6 million over 1993.
The $50 million increase in the Company's average borrowings contributed to
substantially all of the increase.
Management expects 1995 interest expense to increase approximately
$3.5 million over 1994 due to higher interest rates on $65 million in
long-term notes outstanding, and higher interest rates on the revolving
credit facilities, which are expected to carry average outstanding balances
of approximately $60 million. See the discussion in "Liquidity and Capital
Resources" below.
Income Tax Expense. The effective income tax rates, prior to the
restructuring charge, are slightly lower than Federal statutory rates as a
result of permanent tax differences. See Note 4 of Notes to Consolidated
Financial Statements for a reconciliation of the statutory tax rates to the
Company's effective tax rate.
Net Loss. The two principal factors contributing to the reduction in
income from operations, before recording the $21 million pretax
restructuring charge, were: (1) the $2.0 million increase in merchandise
return costs; and (2) the $3.6 million increase in interest expense. The
after-tax effect of the $21 million restructuring charge reduced earnings
from $0.65 per share to a loss of $0.64 per share.
Fiscal Year Ended January 29, 1994 ("1993")
Compared to January 30, 1993 ("1992")
-------------------------------------------
Sales. The Company's sales increased by $37.6 million, or 8.3%, over
1992. The increase was primarily attributed to an increase in square
footage resulting from the opening of new stores and the expansion of
existing stores. Comparable store sales for the fiscal year declined 2.1%.
Management attributes the decline in comparable store sales to the
implementation of its new merchandise replenishment system, which led to
lost sales through incorrect product assortments and bottlenecks in the
central distribution center during the peak holiday period.
Gross Profit. Gross profit, as a percentage of sales, decreased from
38.3% in 1992 to 37.5% in 1993. Increased promotional pricing and the
continued shift of sales from higher gross profit prerecorded
audio cassettes to lower gross profit compact discs led to the reduced
gross profit percentage.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses ("SG&A"), as a percentage of sales, increased from
29.4% in 1992 to 30.0% in 1993, primarily due to increased store occupancy
expenses compared with declining comparable store sales. SG&A, as a
percentage of sales, was favorably impacted by a net reduction in
administrative expenses at the Company's corporate headquarters.
Interest Expense. Interest expense increased $0.3 million over 1992,
reflecting an increase in the Company's average borrowings of approximately
$15 million for 1993, offset somewhat by a decrease in the average
borrowing rate on the Company's floating rate revolving credit debt of
approximately 0.9%.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain measures of the Company's
liquidity:
Fiscal Year Ended
------------------------------
1994 1993 1992
------------------------------
(in thousands)
Net income (loss) plus depreciation,
amortization and restructuring reserve $32,691 $25,538 $27,553
Net cash provided by operating activities 16,739 3,427 7,850
Working capital 93,431 101,538 63,058
Current ratio 1.4:1 1.6:1 1.4:1
Long-term obligations to equity ratio 56% 58% 22%
------------------------------
Liquidity and Sources of Capital. Cash flow from operations and funds
available under revolving credit facilities have typically been the
Company's primary sources of liquidity. During 1994, cash provided by
operations was $16.7 million, compared to $3.4 million for 1993. The
increased cash flow was due primarily to a decrease in inventory in 1994,
attributed to improved inventory management. At January 28, 1995,
merchandise inventory had decreased from $239 million in 1993 to $222
million. During the 1994 fiscal year, the Company experienced losses in
the first three quarters, but after adding back depreciation and
amortization, the Company improved its net operating cash flow. Payment
terms from the Company's suppliers have not changed significantly from
those available to the Company over the last three fiscal years.
Unlike previous years, the Company accumulated cash balances in
December 1994 and January 1995 instead of repaying the balances under its
$75 million revolving credit facilities (the "Revolver"). The credit
agreements did not require the Company to pay down the outstanding balances
under the Revolver at year end. Accordingly, the Company ended the fiscal
1994 year with cash balances of approximately $90 million. During the
period subsequent to January 28, 1995, the Company used the accumulated
cash balances to satisfy its liquidity requirements, primarily repaying
accounts payable. On a pro forma basis, assuming cash balances were used
to pay down the Revolver, the Company was more liquid in the first quarter
of fiscal 1995, and would have had lower balances outstanding under the
Revolver than in the first quarter of fiscal 1994.
Effective January 28, 1995, the Company was operating under temporary
waivers from its lenders relating to non-compliance with two financial
covenants, including the fixed charge ratio. The aggregate amount of the
senior debt, totaling a maximum available amount of $140 million, including
the Revolver and $65 million in outstanding long-term notes (the "Notes")
ranks pari passu and is unsecured. The nine lenders (the "Lending Group")
that are party to the applicable credit agreements granted waivers to the
Company effective through March 31, 1995 and subsequently extended through
May 15, 1995. The Company was required to remain fully borrowed during the
temporary waiver period on all senior debt instruments pending negotiation
and restructuring of the modified credit agreements.
On April 28, 1995 the Company entered into an agreement in principle
with the Lending Group to restructure all of the Company's $140 million
aggregate principal amount of senior debt. The Company continues to
operate under temporary waivers from the Lending Group until the final loan
documents are completed. The Company will be required to make principal
repayment on the Notes of $2.3 million on June 30, 1995 and $3.7 on January
31, 1996. The maximum borrowings available on the Company's Revolver will
be reduced to $72.3 million on June 30, 1995 and to $68.0 on January 31,
1996. Final maturity of the Notes and the Revolver is July 31, 1996.
Effective April 28, 1995, interest rates for the Notes and the Revolver
were converted to a floating rate equal to the greater of 10.5% or 1-1/2%
over the prime lending rate.
The revised credit agreements contain restrictive provisions governing
dividends, capital expenditures and acquisitions, and modified covenants as
to working capital, cash flow and consolidated tangible net worth to
reflect the $21 million restructuring charge recorded in 1994 and lower
earnings levels than expected when the credit agreements were amended in
January 1994. In the past, the Company has violated its fixed charge ratio
covenant, which requires a specified pretax earnings coverage of the
aggregate of interest expense and real estate rent. The modified fixed
charge ratio covenant now aggregates depreciation and amortization with
pre-tax earnings for the coverage test. The Company would be in compliance
with the modified covenant if the Company is profitable for the 1995 fiscal
year. The Revolver as modified requires the Company to pay down the
outstanding balances for a 15 day period between December 25, 1995 and
January 31, 1996.
The Company's ability to continue to meet its liquidity requirements on
a long-term basis is dependent on its ability to successfully obtain new
financing to replace the senior debt maturing in July 1996. In the interim
period, cash flow from operations, continued reductions in absolute
inventory levels, and reduced capital expenditures should assure that the
Company has ample liquidity to meet its operating requirements.
Capital Expenditures.
The store closings in 1995 and 1996 will continue to reduce the overall
store count and total retail square footage. See "Provision for Business
Restructuring" below.
The Company has invested the most significant portion of its capital
resources in new stores growth during the past several years. During 1994
the Company added 55 new stores, totaling 0.3 million square feet.
Combined with 55 stores that were closed or relocated, and store
expansions, total retail square footage increased on a net basis by 4% to
2.5 million square feet. In 1994, the average store size was greater than
in past years, a trend that is expected to continue in 1995. Total capital
expenditures were $22.3 million in 1994, including new stores, store
remodels and reconfigurations and, to a lesser extent, home office
investments.
In fiscal 1995, the Company plans to spend approximately $11 million,
net of construction allowances, in capital expenditures. These funds will
be provided by cash flow from net income and depreciation. The Company's
plans include the opening of approximately 14 new stores, totaling 0.1
million square feet of retail space, and approximately $3 million for
operational improvements being made to the central distribution center for
the implementation of the automated sortation equipment.
The store closings in 1995 and 1996 will reduce the overall store count
and total retail square footage, as discussed in the "Provision for
Business Restructuring".
Capital expenditures are being substantially curtailed in 1995 because
of restrictions imposed by the Company's credit agreements, and will be
limited in future years by the willingness of the Lending Group or any new
lenders to permit the Company to open new stores. The Company does not
expect to continue the rapid growth characterized by the three year period
ended January 28, 1995. Any excess cash flow will be used primarily to
retire debt.
Provision for Business Restructuring.
During the fourth quarter of 1994 the Company undertook a comprehensive
examination of store profitability and adopted a business restructuring
plan that included the closing of 143 stores out of over 700 stores then
open and operating. Management concluded that select retail entertainment
markets had begun to reflect an overcapacity of retail outlets, and large
discount-priced electronics stores and other superstores were having an
adverse impact on certain of the Company's retail stores. As a result of
the restructuring plan, the Company recorded a pre-tax charge of $21
million against earnings, leading to a loss for the 1994 fiscal year. The
components of the restructuring charge included approximately $8.7 million
in reserves for future cash outlays, and approximately $12.3 million in
asset write-offs. A detailed discussion and analysis of the amounts
included in and charged against the restructuring reserve is set forth in
Note 2 of the Notes to Consolidated Financial Statements.
The store closings are expected to be completed over an 18 month
period, with 28 stores closed in the fourth quarter of 1994. See Item 1,
"Business - Business Restructuring" of this Annual Report on Form 10-K. To
illustrate the impact of the store closings, the table below sets forth the
store openings and closings over the past three fiscal years, and a
preliminary forecast for the 1995 fiscal year. The store openings in the
forecast do not necessarily represent commitments, which are subject to a
number of factors, including restrictions under the Company's credit
agreements.
Fiscal Year
-----------------------------
Forecast
1995 1994 1993 1992
-----------------------------
TOTAL COMPANY
Number of Stores,
Beginning of period 684 684 654 597
Openings 14 55 81 93
Closings (80)* (55) (51) (36)
-----------------------------
Number of Stores,
End of Period 618 684 684 654
=============================
* The 1994 Restructuring includes closing 35 additional stores in 1996.
The lease obligations, termination benefits and other expenditures will
require cash outlays totaling approximately $8.7 million of that total;
$5.5 million is anticipated to be incurred in fiscal 1995, with the balance
planned for fiscal 1996. The cash outflows will be financed from operating
cash flows. In particular, merchandise inventory from the stores
identified for closure that will be returned for credit will provide an
increase of approximately $13 million in working capital, net of
the corresponding accounts payable. The timing of store closures will
depend somewhat on the Company's ability to negotiate reasonable lease
termination agreements, and management will continually review the
opportunity to accelerate the closing of underperforming stores.
Sales associated with the stores identified for closing totaled $72.8
million in 1994. Management currently anticipates that pre-tax losses at
the store level, before corporate overhead and other indirect costs, during
the period of store closures will approximate $6.0 to $8.0 million , and
after adding back depreciation the pre-tax cash flow will approximate a
negative $4.0 to $6.0 million. Because the store closures will be phased
in over 1995 and 1996, the Company does not currently expect to receive
most of the earnings or cash flow benefits from the restructuring program
until fiscal 1996.
Impact of Inflation. Although the Company cannot accurately determine
the precise effect of inflation on its operations, management does not
believe inflation has had a material effect on the results of operations in
the last three fiscal years. When the cost of merchandise items has
increased, the Company generally has been able to pass the increase on to
customers.
Seasonality. The Company's business is seasonal in nature, with the
highest sales and earnings occurring in the fourth fiscal quarter. In the
past three years, the fourth fiscal quarter has represented all of the
Company's net income for the year. See the unaudited note to the audited
consolidated financial statements for quarterly financial highlights.
Dividend Policy. The Company has never paid cash dividends and does
not anticipate paying cash dividends in 1995. The Company's credit
agreements currently prohibit the payment of cash dividends.
New Accounting Standards. The Financial Accounting Standards Board
issued Statement No. 112, "Employers' Accounting for Postemployment
Benefits", in November 1992, which was effective for years beginning after
December 15, 1993. The implementation of this accounting standard, in
1994, did not have a material effect on the Company's financial statements.
In March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" which is effective for the Company
in fiscal 1996. Management of the Company does not believe that the
implementation of this new accounting standard will have a material effect
on the Company's financial statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) 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.
(b) The quarterly results of operations are included herein in Note 7 of
the Consolidated Financial Statements.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Change in Company's Certifying Accountant
On September 1, 1994, the Company's certifying accountant, the firm
Ernst & Young LLP, sold its Albany, New York practice to another national
firm, KPMG Peat Marwick LLP. At a meeting held August 26, 1994, the Audit
Committee of the Board of Directors approved the engagement of KPMG Peat
Marwick LLP as its independent auditors for the fiscal year ending January
28, 1995, to replace the firm of Ernst & Young LLP, which declined to stand
for reelection as auditors of the Company, effective immediately.
Ernst & Young LLP was the Company's auditors since the Company's
initial public offering in 1986. The reports of Ernst & Young LLP on the
Company's financial statements for the past two fiscal years did not
contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope, or accounting
principles.
In connection with the audits of the Company's financial statements for
each of the two fiscal years ended January 29, 1994, and in the subsequent
interim period, there were no disagreements on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope
and procedures which, if not resolved to the satisfaction of Ernst & Young
LLP, would have caused Ernst & Young LLP to make reference to the matter in
their report.
The Company requested Ernst & Young LLP to furnish a letter addressed
to the Securities and Exchange Commission stating it agrees with the
statements set forth above in this item. A copy of this letter was filed
on a Current Report on Form 8-K on August 31, 1994, reporting a change in
the Company's Certifying Accountant from Ernst & Young LLP to KPMG Peat
Marwick LLP.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
The name, age, principal occupation and period of service as a director of
the Company for each director are set forth below:
Robert J. Higgins Age 53
Director since 1973
Robert J. Higgins, is Chairman of the Board, founded the Company in 1972,
and he 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. He is also the Company's principal
shareholder.
Matthew H. Mataraso Age 65
Director since 1976
Matthew H. Mataraso has served as Secretary and a director of the Company
for more than the past five years, and has practiced law in Albany, New
York during the same period.
George W. Dougan Age 55
Director since 1984
George W. Dougan has been Chief Executive Officer and a member of the Board
of Directors of Evergreen Bancorp Inc. since March 7, 1994, and Chairman of
the Board since May 19, 1994. Mr. Dougan was the Chairman of the Board and
Chief Executive Officer of the Bank of Boston - Florida from June 1992 to
March 1994, was the Senior Vice President and Director of Retail Banking of
The Bank of Boston Massachusetts from February 1990 to June 1992, and a
Regional President of The Bank of Boston from August 1988 to February 1990.
Charlotte G. Fischer Age 45
Director since 1991
Charlotte G. Fischer has been Chairman of the Board, President and Chief
Executive Officer of Paul Harris Stores, Inc., a publicly-held specialty
retailer of women's apparel, since January 28, 1995. Mrs. Fischer was the
Vice Chairman of the Board and Chief Executive Officer-designate from April
29, 1994 through January 28, 1995. In November 1992, Mrs. Fischer
established C.G.F. Inc., and was President and Chief Executive Officer of
Hearts Int., a specialty retailer she founded, and has also served as a
consultant to retail organizations, including the Company. Mrs. Fischer
was President and Chief Executive Officer of Claire's Boutiques, Inc. from
September 1989 until October 1991 , and was on the Board of Directors of
Claire's Stores, Inc., the publicly-held parent company.
Issac Kaufman Age 48
Director since 1991
Isaac Kaufman has been an Executive Vice President of Merry-Go-Round
Enterprises, Inc. ("Merry-Go-Round"), a publicly-held specialty retailer,
and on its Board of Directors since April 3, 1991, and has been Chief
Financial Officer, Secretary and Treasurer of the Company since 1983. Mr.
Kaufman has held various finance positions with Merry-Go-Round for the past
18 years. Merry-Go-Round filed for protection from its creditors under
Chapter 11 of the U.S. Bankruptcy Code on January 11, 1994.
J. Markham Green Age 51
Director since 1993
J. Markham Green has been a limited partner of The Goldman Sachs Group,
L.P., an affiliate of Goldman, Sachs & Co., since November 1992. He was a
General Partner and a Vice President with Goldman, Sachs & Co., the New
York investment firm, for more than five years before. Mr. Green serves on
the Board of Directors of Park Communications, Inc., a publicly- held
communications company.
Compensation Of Directors
Cash Compensation. Each director who is not a salaried employee of the
Company receives a $15,000 retainer per annum plus a $1,000 attendance fee
for each committee meeting and board meeting attended, except that the
compensation for telephone conference meetings is $500. A Committee
chairperson earns an additional $1,000 retainer per year.
Director Stock Option Plan. Each outside Director is entitled to
participate in the Company's 1990 Stock Option Plan for Non-Employee
Directors.
Consulting Arrangements. The Company utilized the services of Charlotte G.
Fischer during fiscal 1993 and the first two months of fiscal 1994. The
per diem fees earned in fiscal 1994 by Mrs. Fischer equaled $37,500.
Matthew Mataraso received $58,000 in cash compensation from the Company in
fiscal 1994 for his services as Secretary of the Company and as counsel.
Retirement Plan. The Company provides the Board of Directors with a
noncontributory, unfunded retirement plan that pays a retired director a
retirement benefit of $15,000 per year for up to 10 years, depending on the
length of service, or the life of the director and his or her spouse,
whichever period is shorter. To become vested in the retirement plan a
director must reach age 62 and have served on the Board of Directors for a
minimum of five consecutive years.
(b) Identification of Executive Officers
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 53
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.
Robert A. Helpert Age 51
Executive Vice President, Chief
Administrative Officer and Chief
Financial Officer Since 1994
Robert A. Helpert has been Executive Vice President, Chief Administrative
Officer and Chief Financial Officer of the Company since February 1994. He
was President and Chief Operating Officer of the news and gift store
division of W.H. Smith Inc., a subsidiary of W.H. Smith PLC for more than
the prior five years.
Edward W. Marshall,Jr. Age 49
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-Operations upon joining
the Company in May 1989. For more than five years prior thereto, he was
the Vice President-Operations for Morse Shoe, a retail store operator.
All executive officers other than the Chief Executive Officer serve at
the pleasure of the Board of Directors, but generally for a term of one
year. The Chief Executive Officer's term is governed by an employment
agreement that expires January 31, 1996.
Item 11. EXECUTIVE COMPENSATION
The Company's executive officers are identified below. At year end,
three officers met the definition of "executive officer" under applicable
regulations for fiscal year 1994, including the Chief Executive. Executive
officers of the Company currently hold the same respective positions with
Record Town, Inc., the Company's wholly-owned subsidiary through which all
retail operations are conducted. The Summary Compensation Table sets forth
the compensation paid by the Company and its subsidiaries for services
rendered in all capacities during the last three fiscal years to each of
the three executive officers of the Company whose cash compensation for
that year exceeded $100,000.
Summary Compensation Table
Long Term
Compen-
sation
---------
Annual Compensation Awards
-----------------------------------------
Securities
Underlying All
Other Annual Options/ Other
Name and Salary Bonus Compensation SARs Compen-
Principal Position Year ($) ($) ($) (#) sation
- ------------------------------------------------------------------------------
ROBERT J. HIGGINS 1994 550,000 0 79,514 (1) 0 78,960 (1)
Chairman, President 1993 550,000 0 91,027 (1) 0 45,255 (1)
and Chief 1992 530,882 553,462 83,424 (1) 0 65,631 (1)
Executive Officer
ROBERT A. HELPERT 1994 271,635 0 106,120 (4) 100,000 -
Executive 1993 - - - - -
Vice President (4) 1992 - - - - -
EDWARD W. 1994 234,826 50,000 26,875 (5) - 4,146 (3)
MARSHALL, JR. 1993 190,751 0 - (2) 45,000 3,854 (3)
Executive Vice 1992 183,806 55,200 - (2) 5,000 3,850 (3)
President-
Operations
- -----------------------
(1) "Other Annual Compensation" in fiscal 1994, 1993 and 1992 for Mr.
Higgins includes $71,040, $ 82,208, and $ 83,424, respectively, in payments
for or reimbursement of life insurance premiums made on behalf of Mr.
Higgins or his beneficiaries, pursuant to his employment agreement. "All
Other Compensation" in fiscal 1994 for Mr. Higgins consists of the maximum
dollar value of premiums paid by the Company with respect to split dollar
life insurance policies that the Company owns on the lives of Mr. Higgins
and his wife. The Company will recoup most or all of such premiums upon
maturity of the policies, but the maximum potential value is calculated in
line with current SEC instructions as if the 1994 premiums were advanced
without interest until the time that the Company expects to recover the
premium.
(2) "Other Annual Compensation" for the named executive was less than
$50,000 and also less than 10% of the total of annual salary and bonus
reported.
(3) "All Other Compensation" for the named executive consists of matching
contributions for the 401(k) Savings Plan.
(4) Mr. Helpert began his employment with the Company in 1994. "Other
Annual Compensation" for Mr. Helpert includes $95,136 for moving expenses
and a tax gross-up on the reimbursement.
(5) "Other Annual Compensation" for Mr. Marshall included $25,000 for
forgiveness of a loan.
Options/SAR Grants In Last Fascal Year(1)
The following table sets forth information concerning individual grants of
stock options made during the fiscal year ended January 28, 1995 to each of
the executive officers of the Company named in the Summary Compensation
Table above:
Individual Grants
------------------------------------------------------- Potential
Realizable Value at
Number of Assumed Annual
Securities Percent of Rates of Stock
Underlying Total Options Exercise Price Appreciation
Stock Options Granted to or Base for Option Term (3)
Granted (#) Employees in Price Expiration -------------------
Name (1)(2) Fiscal Year ($/share) Date 5% ($) 10% ($)
- ---------------------------------------------------------------------------------------------
Mr. Higgins 0 N/A -- -- -- --
Mr. Helpert 100,000 42.4% $12.75 2004 $803,250 $2,027,250
Mr. Marshall 0 N/A -- -- -- --
- -------------------------
(1) No SARs were granted.
(2) Stock Options are exercisable annually in 4 equal installments,
commencing on the first anniversary of the date of grant, and vest
earlier upon the officer's death or disability. The stock options have
a term of ten years. The grant on February 7, 1994 to Mr. Helpert
included options exercisable into 50,000 shares that vest in one
installment on the fourth anniversary of the date of grant and options
exercisable into 50,000 shares that vest in four annual installments
ratably. All options granted under the stock option plan may become
immediately exercisable upon the occurrence of certain business
combinations. The Compensation Committee of the Board of Directors may
accelerate or extend the exercisability of any options subject to such
terms and conditions as the Committee deems appropriate. The option
exercise price was set at the fair market value (last reported sale
price) on the date of grant.
(3) These amounts are based on assumed appreciation rates of 5% and 10% as
prescribed by Securities and Exchange Commission rules, and are not
intended to forecast possible future appreciation, if any, of the
Company's stock price. The Company's stock price was $5.50 at January
28, 1995, the fiscal year end, below the stock price used to calculate
the assumed appreciation value.
Aggregated Option Exercises And Fiscal Year-End Option Value Table (1)
The following table sets forth information concerning each exercise of
stock options during the fiscal year ended January 28, 1995 by each of the
executive officers named in the Summary Compensation Table above and the
value of unexercised options held by such persons as of January 28, 1995:
Number of Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Shares Year-End (#) at Fiscal Year-End ($)
Acquired ---------------------------------------------
on Exercise Value Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable (2)
- ---------------------------------------------------------------------------------------------
Mr. Higgins -- -- -- --
Mr. Helpert -- -- 0/100,000 0/0
Mr. Marshall -- -- 25,000/90,000 0/0
- -------------------------
(1) There have been no SARs issued and there are no SARs outstanding.
(2) Calculated on the basis of the fair market value of the underlying
securities as of January 28, 1995 minus the exercise price.
Employment Contracts And Termination Of Employment And Change-In-Control
Arrangements
As founder and Chief Executive Officer of the Company, Robert J.
Higgins has been instrumental in the operations of the Company. Mr.
Higgins is employed as President and Chief Executive Officer of the Company
pursuant to a one year employment agreement, effective February 1, 1994
through January 31, 1995, unless earlier terminated pursuant to its terms.
In January 1995 the Compensation Committee agreed to extend the Employment
Agreement for one year, through January 31, 1996. Pursuant to its terms,
Mr. Higgins earns a minimum annual salary of $550,000, is reimbursed for
two club memberships, and is entitled to payment of or reimbursement for
life insurance premiums of up to $150,000 per year on insurance policies
for the benefit of persons designated by Mr. Higgins. In addition, Mr.
Higgins is eligible to participate in the Company's management bonus plan,
health and accident insurance plans, stock option plans, and in other
fringe benefit programs adopted by the Company for the benefit of its
executive employees. For the fiscal year ended January 28, 1995, Mr.
Higgins earned no incentive compensation under the employment agreement.
In the event of a change in control of the Company, Mr. Higgins may
elect to serve as a consultant to the Company at his then current
compensation level for the remainder of the term of the Employment
Agreement or elect to receive two and one-half times his annual
compensation in the most recently completed fiscal year. The employment
agreement provides for no further compensation to Mr. Higgins if he is
terminated for cause, as defined therein.
Robert A. Helpert and Edward W. Marshall each has a severance agreement
in effect that provides, under certain conditions, payment of severance
equal to one year of annual compensation, at a level not less than their
current salaries of $275,000 and $250,000, respectively, upon their
termination following severance without cause (as defined), including
termination following a change in control of the Company. Each severance
agreement contains an "evergreen" provision for automatic renewal each
year.
Compensation Committee Interlocks And Insider Participation
There were no Compensation Committee interlocks during fiscal 1994.
The Directors who comprised the Compensation Committee of the Board of
Directors during 1994 were: Messrs. Dougan, Green, Greenhut and Kaufman.
During 1994, none of these members were an officer or employee of the
Company, a former officer of the Company, or a party to any relationship
requiring disclosure under Item 404 of Regulation S-K under the Securities
Exchange of 1934, as amended. There was no Chairman of the Committee
during 1994 after Arnold S. Greenhut declined to stand for reelection as
director.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The only persons known by the Board of Directors to be the beneficial
owners of more than five percent of the outstanding shares of the Common
Stock as of April 21, 1995, the record date, are indicated below:
Name and Address of Amount and Nature of Percent Of
Beneficial Owner Beneficial Ownership Class
- ----------------------------------------------------------------------
Robert J. Higgins 5,442,850 (1) 56.2%
38 Corporate Circle
Albany, New York 12203
J.P. Morgan & Co., Incorporated 1,347,200 (2) 13.9%
60 Wall Street
New York, New York 10260
- ----------------
(1) Information is as of April 21, 1995, as provided by the holder.
Includes 16,850 shares owned by the wife of Robert J. Higgins, but excludes
81,250 shares owned by certain other family members of Robert J. Higgins,
none of whom share his residence. Mr. Higgins disclaims beneficial
ownership with respect to those shares owned by family members other than
his wife.
(2) Information is as of March 31, 1995, as provided by the holder. J.P.
Morgan & Co., Incorporated, a bank holding company, subsidiaries of which,
a national bank and a registered investment advisor, hold shares in the
Company in a fiduciary capacity. J.P. Morgan reported sole voting power
with respect to 962,800 shares and sole dispositive power with respect to
1,347,200 shares.
The following table sets forth the beneficial ownership of Common stock
as of April 21, 1995 by each director and named executive officer of the
Company and all directors and officers as a group. All shares listed in
the table are owned directly by the named individuals unless otherwise
indicated therein. Except as otherwise stated or as to shares owned by
spouses, the Company believes that the beneficial owners have sole voting
and investment power over their shares.
Amount and Nature
of Beneficial
Ownership of
Position(s) With Common Stock as Percent
Name the Company of April 12, 1995 of Class
- ------------------------------------------------------------------------------
Robert J. Higgins Chairman of the Board, 5,442,850 (1) 56.2%
President, Chief Executive
Officer and a Director
Matthew H. Mataraso Secretary and a Director 37,000 (2) *
Charlotte G. Fischer Director 12,250 (2) *
George W. Dougan Director 13,750 (2) *
Isaac Kaufman Director 13,500 (2) *
J. Markham Green Director 2,500 (2) *
- ------------------------------------------------------------------------------
Robert A. Helpert Executive Vice President, 12,500 (2) *
Chief Administrative Officer
and Chief Financial Officer
Edward W. Marshall, Jr. Executive Vice President- 25,000 (2) *
Operations
- ------------------------------------------------------------------------------
All directors and executive officers
as a group (8 persons) 5,559,350(1)(2) 57.4%
* Less than 1%
- -------------------
(1) Includes 16,850 shares owned by the wife of Robert J. Higgins, but
excludes 81,250 shares owned by certain other family members of Robert J.
Higgins, who do not share his residence. Mr. Higgins disclaims beneficial
ownership with respect to those shares owned by family members other than
his wife.
(2) Included in the shares listed as "beneficially owned" are the following
shares which the persons listed have the right to acquire within sixty days
pursuant to stock options: (a) under the 1990 Director Stock Option Plan -
Mrs. Fischer (12,250), Mr. Dougan (13,750), Mr. Green (2,500) and Mr.
Kaufman (12,250); (b) under the 1986 Incentive and Non-Qualified Stock
Option Plan - Mr. Mataraso (32,500); Mr. Helpert (12,500); Mr. Marshall
(25,000); and (c) under all stock option plans - All directors and
executive officers as a group (110,750).
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases its 159,000 square foot distribution center/office
facility in Albany, New York from Robert J. Higgins, its Chairman, 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 77,135 square foot distribution center
expansion (the "Expansion") was completed in October 1989 on real property
adjoining the existing facility.
Under the original lease, dated as of April 1, 1985, as amended (the
"Original Lease"), the Company paid Mr. Higgins in fiscal 1994 an annual
rental of $732,061 (of which $528,061 is allocable to real property and
$204,000 is allocable to personal property). The portion of the Original
Lease allocable to personal property expires in July, 1995, when title
passes to the Company. In 1989, the Company entered into a new lease,
dated as of November 1, 1989 (the "Expansion Lease"), for the Expansion,
with a current annual rental rate of $641,726. The aggregate annual rental
paid to Mr. Higgins under the Original Lease and the Expansion Lease was
$1,373,787 in fiscal 1994. On January 1, 1996, the portion of the
aggregate rental allocable to real property ($1,169,787) under the Original
Lease and Expansion Lease will increase in accordance with the biennial
increase in the Consumer Price Index, pursuant to the provisions of each
lease.
Neither lease contains any real property purchase option at the
expiration of its term. Under the terms of both 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 $70,000
per month.
The Company leases two of its retail stores from Mr. Higgins under
long-term leases, each at an annual rental of $35,000 per year, plus
property taxes, maintenance and a contingent rental if a specified sales
level is achieved. In fiscal 1994 the Company paid Mr. Higgins $30,000 for
a one year lease, expiring on October 31, 1995, for certain parking
facilities contiguous to the Premises.
The Company regularly utilizes privately-chartered aircraft for its
executives, primarily those owned or partially owned by Mr. Higgins.
During fiscal 1994, the Company chartered an airplane under an unwritten
agreement with Quail Aero Services of Syracuse, Inc., a corporation in
which Mr. Higgins is a one-third shareholder. Payments made by the Company
during fiscal 1994 were $59,961. The Company also chartered an aircraft
from Crystal Jet Aviation, Inc., a corporation wholly owned by Mr. Higgins.
During fiscal 1994 payments to Crystal Jet aggregated $132,642. The
Company believes that the charter rate and terms are as favorable to the
Company as those generally available to it from other commercial
charterers.
During fiscal 1994 the Company extended a loan to Robert A. Helpert, a
newly-hired Executive Vice President, in the amount of $150,000 on an
unsecured basis for one year, at an annual interest rate of 4%. The loan
was repaid in April 1995.
The transactions that were entered into with an "interested director"
were approved by a majority of disinterested directors of the Board of
Directors, either by the Audit Committee or at a meeting of the Board of
Directors. The Board of Directors believes that the leases and other
provisions are at rates and on terms that are at least as favorable as
those that would have been available to the Company from unaffiliated third
parties under the circumstances.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
14(a)(1) Financial Statements
------------------------------
The consolidated financial statements and notes are listed in the
"Index to Financial Statements" on page F-1 of this report.
14(a)(2) Financial Statement Schedules
--------------------------------------
None of the schedules for which provision is made in the applicable
accounting regulations under the Securities Exchange Act of 1934, as
amended, are required.
14(a)(3) Exhibits
-----------------
Exhibits are as set forth in the "Index to Exhibits" which follows the
Notes to the Consolidated Financial Statements and immediately precedes
the exhibits filed.
14(b) Reports on Form 8-K
-------------------------
On February 3, 1995, the Company filed a report on Form 8-K with the
Securities and Exchange Commission, announcing three principal
developments: (1) a store closing charge for its fiscal quarter ended
January 28, 1995; (2) a forecasted net loss, after the store closing
charge; and (3) a default and accompanying temporary waiver of two
covenant tests under the Registrant's senior credit facilities.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TRANS WORLD ENTERTAINMENT CORPORATION
Date April 28, 1995 By: /s/ROBERT J. HIGGINS
Robert J. Higgins, President
Pursuant to the requirements of the Securities 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 President and Director April 28, 1995
(Robert J. Higgins) (Principal Executive Officer)
/s/ ROBERT A. HELPERT Executive Vice President and April 28, 1995
(Robert A. Helpert) Chief Administrative Officer
(Principal Financial Officer)
/s/ JOHN J. SULLIVAN Vice President - Finance April 28, 1995
(John J. Sullivan) (Chief Accounting Officer)
/s/ MATTHEW H. MATARASO Secretary and Director April 28, 1995
(Matthew H. Mataraso)
/s/ J. MARKHAM GREEN Director April 28, 1995
(J. Markham Green)
/s/ GEORGE W. DOUGAN Director April 28, 1995
(George W. Dougan)
/s/ CHARLOTTE G. FISCHER Director April 28, 1995
(Charlotte G. Fischer)
/s/ ISAAC KAUFMAN Director April 28, 1995
(Isaac Kaufman)
TRANS WORLD ENTERTAINMENT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Form 10-K
Page No.
---------
Independent Auditors' Reports F-2
Consolidated Financial Statements
Consolidated Balance Sheets at January 28, 1995
and January 29, 1994 F-4
Consolidated Statements of Income - Fiscal years ended
January 28, 1995, January 29, 1994 and January 30, 1993 F-5
Consolidated Statements of Shareholders' Equity - Fiscal
years ended January 28, 1995, January 29, 1994 and
January 30, 1993 F-6
Consolidated Statements of Cash Flows - Fiscal years
ended January 28, 1995, January 29, 1994 and
January 30, 1993 F-7
Notes to Consolidated Financial Statements F-8
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
Trans World Entertainment Corporation:
We have audited the accompanying consolidated balance sheet of Trans World
Entertainment Corporation (formerly Trans World Music Corp.) and
subsidiaries as of January 28, 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for the fiscal
year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the 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 28, 1995,
and the results of their operations and their cash flows for the fiscal
year then ended in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Albany, New York
March 24, 1995, except as to
note 3, which is as of
April 28, 1995
F-2
Report of Independent Auditors'
The Board of Directors and Stockholders
Trans World Entertainment Corporation:
We have audited the accompanying consolidated balance sheet of Trans World
Entertainment Corporation (formerly Trans World Music Corp.) and
subsidiaries as of January 29, 1994, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
two fiscal years in the period ended January 29, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Trans
World Entertainment Corporation and subsidiaries as of January 29, 1994,
and the consolidated results of their operations and their cash flows for
each of the two fiscal years in the period ended January 29, 1994, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Albany, New York
March 24, 1994
F-3
Trans World Entertainment Corporation and subsidiaries
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
January 28, January 29,
ASSETS 1995 1994
- --------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 90,091 $ 26,046
Accounts receivable 9,176 7,713
Merchandise inventory 222,358 238,949
Deferred tax asset 2,944 ---
Prepaid expenses and other 4,407 5,051
- --------------------------------------------------------------------------
Total current assets 328,976 277,759
- --------------------------------------------------------------------------
VIDEOCASSETTE RENTAL INVENTORY, net 7,472 6,166
DEFERRED TAX ASSET 505 ---
FIXED ASSETS:
Building 8,599 8,599
Fixtures and equipment 87,544 78,569
Leasehold improvements 86,119 80,035
- --------------------------------------------------------------------------
182,262 167,203
Less: Fixed asset write-off reserve 10,485 ---
Allowances for depreciation
and amortization 85,620 73,157
- --------------------------------------------------------------------------
86,157 94,046
- --------------------------------------------------------------------------
OTHER ASSETS 3,829 2,293
- --------------------------------------------------------------------------
TOTAL ASSETS $426,939 $380,264
==========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $135,493 $156,263
Notes payable 74,947 ---
Income taxes payable 1,961 5,431
Accrued expenses and other 7,250 7,668
Store closing reserve 9,276 ---
Current portions of long-term debt
and capital lease obligations 6,618 3,695
Deferred income taxes --- 3,164
- --------------------------------------------------------------------------
Total current liabilities 235,545 176,221
- --------------------------------------------------------------------------
LONG-TERM DEBT, less current portion 59,770 66,054
CAPITAL LEASE OBLIGATIONS, less current portion 6,671 7,044
OTHER LIABILITIES 5,476 4,434
DEFERRED INCOME TAXES --- 437
- --------------------------------------------------------------------------
TOTAL LIABILITIES 307,462 254,190
- --------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock ($.01 par value; 5,000,000 shares
authorized; none issued) --- ---
Common stock ($.01 par value; 20,000,000 shares
authorized; 9,731,208 issued) 97 97
Additional paid-in capital 24,236 24,236
Treasury stock at cost (48,394 and 12,000 shares,
respectively) (503) (162)
Retained earnings 95,647 101,903
- --------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 119,477 126,074
- --------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $426,939 $380,264
==========================================================================
See Notes to Consolidated Financial Statements
F-4
Trans World Entertainment Corporation and subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
Fiscal Year Ended
January 28, January 29, January 30,
1995 1994 1993
- ------------------------------------------------------------------------
Sales $536,840 $492,553 $454,916
Cost of sales 341,422 307,834 280,572
- ------------------------------------------------------------------------
Gross profit 195,418 184,719 174,344
Selling, general and
administrative expenses 158,637 147,644 133,768
Restructuring charge 21,000 --- ---
Depreciation and amortization 16,932 14,655 13,310
- ------------------------------------------------------------------------
Income (loss) from operations (1,151) 22,420 27,266
Interest expense 9,540 5,971 5,627
- ------------------------------------------------------------------------
Income (loss) before income taxes (10,691) 16,449 21,639
Income tax expense (benefit) (4,435) 6,626 8,374
- ------------------------------------------------------------------------
NET INCOME (LOSS) $ (6,256) $ 9,823 $ 13,265
========================================================================
EARNINGS (LOSS) PER SHARE $ (0.64) $ 1.01 $ 1.40
========================================================================
Weighted average number of
common shares outstanding 9,701 9,723 9,474
========================================================================
See Notes to Consolidated Financial Statements.
F-5
Trans World Entertainment Corporation and subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
Total
Additional Share-
Common Paid-In Treasury Retained holders'
Stock Capital Stock Earnings Equity
- --------------------------------------------------------------------------
Balance,
February 1,1992
(9,101,151 shares) $91 $13,714 $ --- $ 78,815 $ 92,620
Sale of common stock,
net of offering costs
(600,000 shares) 6 9,964 --- --- 9,970
Issuance of stock under
incentive stock programs --- 502 --- --- 502
Purchase of 2,000 shares
of common stock, held
in treasury --- --- (28) --- (28)
Net income --- --- --- 13,265 13,265
- --------------------------------------------------------------------------
Balance,
January 30, 1993
(9,727,358 shares) 97 24,180 (28) 92,080 116,329
Issuance of stock under
incentive stock programs --- 56 --- --- 56
Purchase of 10,000 shares
of common stock, held
in treasury --- --- (134) --- (134)
Net income --- --- --- 9,823 9,823
- --------------------------------------------------------------------------
Balance,
January 29, 1994
(9,731,208 shares) 97 24,236 (162) 101,903 126,074
Purchase of 36,394 shares
of common stock, held
in treasury --- --- (341) --- (341)
Net loss --- --- --- (6,256) (6,256)
- --------------------------------------------------------------------------
Balance,
January 28, 1995
(9,731,208 shares) $97 $24,236 $(503) $ 95,647 $119,477
==========================================================================
See Notes to Consolidated Financial Statements
F-6
Trans World Entertainment Corporation and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
Fiscal Year Ended
January 28, January 29, January 30,
1995 1994 1993
- --------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ (6,256) $ 9,823 $ 13,265
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and amortization 17,947 15,715 14,288
Fixed asset write-off reserve 11,400 --- ---
Store closing reserve 9,600 --- ---
Deferred tax expense (benefit) (7,050) 308 (509)
Loss on sale and disposal of
property and equipment 802 289 337
Changes in operating assets and
liabilities:
Accounts receivable (1,463) (3,716) (1,866)
Merchandise inventory 16,591 (50,781) (44,775)
Prepaid expenses and other 644 (1,485) (338)
Other assets (1,536) 307 (411)
Accounts payable (20,770) 34,304 21,635
Income taxes payable (3,470) (2,844) 1,797
Accrued expenses and other (418) 526 974
Store closing reserve (324) --- ---
Other liabilities 1,042 981 3,453
- --------------------------------------------------------------------------
Net cash provided by operating
activities 16,739 3,427 7,850
- --------------------------------------------------------------------------
INVESTING ACTIVITIES:
Acquisition of property and
equipment (22,260) (34,460) (19,407)
Purchases of videocassette
rental inventory, net (1,306) (9) (275)
-------------------------------------------------------------------------
Net cash used by investing
activities (23,566) (34,469) (19,682)
- --------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in revolving line
of credit 74,947 --- ---
Proceeds of long-term debt --- 50,000 ---
Payments of long-term debt (3,398) (739) (12,141)
Payments of capital lease
obligations (336) (288) (247)
Proceeds from issuance of
common stock --- 56 10,472
Purchase of common stock for
treasury (341) (134) (28)
- --------------------------------------------------------------------------
Net cash provided (used) by
financing activities 70,872 48,895 (1,944)
- --------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 64,045 17,853 (13,776)
Cash and cash equivalents,
beginning of year 26,046 8,193 21,969
- --------------------------------------------------------------------------
Cash and cash equivalents,
end of year $90,091 $26,046 $ 8,193
==========================================================================
See Notes to Consolidated Financial Statements.
F-7
Trans World Entertainment Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
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. Joint venture investments, none of which are
material, are accounted for using the equity method. The Company changed
its name in 1994 from Trans World Music Corp.
Fiscal Year. The Company's fiscal year is a 52- or 53-week period ending
on the Saturday nearest to January 31. The fiscal years 1994, 1993 and
1992, which ended January 28, 1995; January 29, 1994 and January 30 1993;
respectively, consisted of 52 weeks.
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
cost. During fiscal years 1994, 1993 and 1992, the Company incurred
merchandise return costs of $7.4 million, $5.4 million and $4.0 million,
respectively, which reflect return costs 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 costs in cost of
sales.
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 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.
Depreciation and Amortization. Fixtures and equipment are depreciated
using the straight-line method over their estimated useful lives, which
range from three to seven years. Buildings and leasehold improvements are
amortized over the shorter of their estimated useful life or the related
lease 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, distribution center facility and
distribution center equipment is included in cost of sales.
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. Residual fixed asset
values from mall relocations are 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. Earnings (Loss) per share is based on the
weighted average number of common shares outstanding during each fiscal
year. Common stock equivalents related to stock options, which would have
a dilutive effect based on current market prices, did not have a material
effect on net income (loss) per share in the years presented.
F-8
Trans World Entertainment Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 through the first quarter of 1996. The restructuring charge
includes the write-down of fixed assets, estimated cash payments to
landlords for the early termination of operating leases, and the cost for
returning product to the Company's distribution center and vendors. The
charge also includes estimated legal and consulting fees, including those
that the Company is obligated to pay on behalf of its lenders while working
to renegotiate the credit agreements.
In determining the components of the reserve, management analyzed all of
the aspects of closing stores and the costs that are incurred. An analysis
of the amounts comprising the reserve and the amounts charged against the
reserve as of January 28, 1995 are outlined below:
Charges
Initial Against Ending
Reserve Reserve Reserve
-----------------------------------
(in thousands)
Non-cash write-offs
- -------------------
Leasehold improvements $ 7,400 $ 323 $ 7,077
Furniture and fixtures 4,000 592 3,408
Excess inventory shrinkage 944 -0- 944
-----------------------------------
Total non-cash 12,344 915 11,429
-----------------------------------
Future cash outflows
- --------------------
Lease obligations 4,305 55 4,250
Return penalties and
related costs 2,774 49 2,725
Termination benefits 200 -0- 200
Consulting and legal fees 1,377 220 1,157
-----------------------------------
Total future cashflows 8,656 324 8,332
-----------------------------------
Total $21,000 $1,239 $19,761
===================================
Sales associated with the stores identified for closure were approximately
$72.8 million (unaudited), $71.7 million (unaudited) and $67.3 million
(unaudited) for the fiscal years 1994, 1993 and 1992, respectively.
F-9
Note 3. Debt
Long-term debt as of January 28, 1995 consisted of the following:
January 28, January 29,
1995 1994
- -----------------------------------------------------------------------
(in thousands)
Senior unsecured notes issued to four
insurance companies (see discussion
below) $47,500 $50,000
Senior unsecured note issued to an
insurance company (see discussion
below) 17,500 17,500
Installment notes and other obligations 1,015 1,913
- -----------------------------------------------------------------------
66,015 69,413
Less current portion 6,245 3,359
- -----------------------------------------------------------------------
Long-term debt $59,770 $66,054
=======================================================================
Because of the 1994 operating results, including the restructuring charge,
as of January 28, 1995, the Company obtained modifications or waivers of
the noncompliance with certain financial covenants contained in its senior
indebtedness. On April 28, 1995, the Company executed an agreement in
principle with its senior lenders (the "Lending Group") to restructure the
terms and conditions of $140 million of indebtedness: the aggregate
principal amount of $75 million revolving credit facilities (the
"Revolver") and $65 million senior unsecured notes (the "Notes"). The
amendments take into account recent and forecasted operating results and
the planned closing of underperforming stores.
The credit agreements, as modified, require principal repayments of $5
million on June 30, 1995 and $8 million on January 31, 1996, of which $6
million will be applied to the Notes and $7 million will be a reduction to
the balances available under the Revolver. For the fiscal year ended
January 28, 1995, the $47.5 million principal amount of the Notes carried a
fixed interest rate of 7.50%, and the $17.5 million portion of the Notes
carried a fixed interest rate of 9.18%.
F-10
Effective April 28, 1995, interest rates for the Notes and the Revolver
have been converted to a floating rate equal to the greater of 10.5% or
1-1/2% over the prime lending rate. Under the modified agreement, the
Notes and Revolver mature on July 31, 1996. The April 28, 1995
modifications to the Revolver include a provision for mandatory repayment
of all outstanding balances for a 15 day period between December 25, 1995
and January 31, 1996, and all of the credit agreements provide for less
restrictive covenant tests than under the original agreements, including:
a cash flow fixed charge ratio covenant; a tangible net worth covenant; and
an inventory turnover ratio covenant. The modified credit agreements
preclude the Company from paying dividends or incurring additional debt and
impose limitations on capital expenditures.
During fiscal years 1994, 1993 and 1992, the highest aggregate balances
outstanding under the Revolver were $74.9 million, $69.4 million and $54.1
million, respectively. The weighted average interest rates during 1994,
1993 and 1992, based on average daily balances, were 5.69%, 4.35% and
5.23%, respectively. The balances outstanding under the Revolver at year
end 1994, 1993 and 1992 were $74.9 million, $0 and $0, respectively.
At January 28, 1995 and January 29, 1994, the fair value of long-term debt,
including that due within one year, was approximately $66.0 million and
$70.1 million, respectively. The fair value was estimated using discounted
cash flow analyses, based on the Company's current incremental borrowing
rates.
Interest paid on a cash basis during 1994, 1993 and 1992 was approximately
$9.6 million, $5.7 million and $5.9 million, respectively. Future
maturities of long-term debt are $6.2 million during 1995; $59.2 million
during 1996; $0.2 million during 1997; $0.3 during 1998; and $0.1 million
thereafter.
F-11
Trans World Entertainment Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 4. Income Taxes
Income tax expense (benefit) consists of the following:
Fiscal Year Ended
1994 1993 1992
- --------------------------------------------------------------------
(in thousands)
Federal - current $ 1,805 $5,146 $7,660
State - current 810 1,172 1,223
Deferred (7,050) 308 (509)
- --------------------------------------------------------------------
$(4,435) $6,626 $8,374
============================
A reconciliation of the Company's effective tax rates with the federal
statutory rate is as follows:
Fiscal Year Ended
1994 1993 1992
- ----------------------------------------------------------------------
Federal statutory rate (35.0%) 34.7% 34.0%
State income taxes (benefit), net of
federal income tax effect (6.0) 4.7 4.9
Targeted jobs credit (1.6) --- ---
Other 1.1 0.9 (0.2)
- ----------------------------------------------------------------------
Effective income tax rate (41.5%) 40.3% 38.7%
======================================================================
F-12
Trans World Entertainment Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 4. Income Taxes (Cont'd)
The tax effects of temporary differences that give rise to significant
components of the Company's deferred tax assets and liabilities are as
follows:
January 28, January 29,
1995 1994
- -----------------------------------------------------------------------
(in thousands)
CURRENT DEFERRED TAX ASSETS
- ---------------------------
Restructuring reserve $7,806 $ ---
Other --- 326
- -----------------------------------------------------------------------
Total current deferred tax assets 7,806 326
- -----------------------------------------------------------------------
CURRENT DEFERRED TAX LIABILITIES
- --------------------------------
Inventory valuation 4,739 3,379
Other 123 111
- -----------------------------------------------------------------------
Total current deferred tax liabilities 4,862 3,490
- -----------------------------------------------------------------------
Net current deferred
tax assets (liabilities) $2,944 $(3,164)
=======================================================================
NON-CURRENT DEFERRED TAX ASSETS
- -------------------------------
Accrued rent, lease accounting $2,261 $1,721
Capitalized leases 736 672
Other 26 25
- -----------------------------------------------------------------------
Total non-current deferred tax assets 3,023 2,418
- -----------------------------------------------------------------------
NON-CURRENT DEFERRED TAX LIABILITIES
- ------------------------------------
Tax over book depreciation 2,423 2,770
Other 95 85
- -----------------------------------------------------------------------
Total non-current deferred tax liabilities 2,518 2,855
- -----------------------------------------------------------------------
Net non-current deferred
tax assets (liabilities) 505 ( 437)
- -----------------------------------------------------------------------
Total net deferred tax asset (liability) $3,449 $(3,601)
=======================================================================
F-13
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. 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 historical taxable income and
projections for future taxable income over the periods which the deferred
tax assets are deductible, management believes it is more likely than not
the Company will realize the benefits of those deductible differences.
The Company paid income taxes of approximately $6.1 million, $9.2 million,
$6.8 million during 1994, 1993 and 1992, respectively.
The effect of adopting Statement of Financial Accounting Standards No.109,
"Accounting for Income Taxes" in 1992, did not have a material impact on
the Company's financial position or results of operations.
F-14
Trans World Entertainment Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 5. Leases
The Company leases its distribution center and administrative offices under
two leases, dated April 1, 1985 and November 1, 1989, from its Chief
Executive Officer and principal shareholder. Aggregate rental payments
under both leases, which are capitalized for accounting purposes, were
$1.2 million, $1.1 million, and $1.1 million in 1994, 1993 and 1992,
respectively. Biennial increases are contained in each lease based on the
Consumer Price Index with the next scheduled increase on January 1, 1996.
Both leases expire in the year 2015.
The Company leases certain distribution center equipment from its Chief
Executive Officer and principal shareholder, for which annual payments were
$204,000 in each of 1994, 1993, and 1992, and $102,000 through July 31,
1995, when title to such equipment passes to the Company. Additionally,
the Company leases certain distribution center equipment from a bank,
providing for total annual rental payments of $136,000 in each of 1994,
1993 and 1992. During fiscal 1995, the Company will pay a total of
$222,000 through December 15, 1995, at which time the title to such
equipment passes to the Company. Both equipment leases are capitalized for
accounting purposes.
F-15
Fixed asset amounts for all capitalized leases are as follows:
January 28, January 29,
1995 1994
- -----------------------------------------------------------------------
(in thousands)
Building $7,105 $7,105
Fixtures and equipment 1,625 1,625
- -----------------------------------------------------------------------
8,730 8,730
Allowances for depreciation and amortization 3,342 2,892
- -----------------------------------------------------------------------
$5,388 $5,838
===========================
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
percentage of sales. During 1991, the Company entered into a series of
five-year operating leases for point-of-sale equipment. At the expiration
of the leases, the Company has the option to purchase the equipment at its
then fair market value.
Net rental expense was as follows:
Fiscal Year Ended
1994 1993 1992
- ---------------------------------------------------------------------
(in thousands)
Minimum rentals $57,992 $51,610 $47,275
Contingent rentals 464 647 833
- ---------------------------------------------------------------------
$58,456 $52,257 $48,108
===========================
F-16
Future minimum rental payments required under all leases that have initial
or remaining noncancelable lease terms in excess of one year at January 28,
1995, are as follows:
Operating Capitalized
Fiscal Year Leases Leases
1995 1994
- -----------------------------------------------------------------------
(in thousands)
1995 $58,257 $1,494
1996 53,183 1,170
1997 46,884 1,170
1998 39,709 1,170
1999 34,732 1,170
Thereafter 103,312 18,398
- -----------------------------------------------------------------------
Total minimum payments required $336,077 24,572
========
Amounts representing interest 17,528
- -----------------------------------------------------------------------
Present value of minimum lease payments 7,044
Less current portion 373
- -----------------------------------------------------------------------
7Long-term capital lease obligations $6,671
=======================================================================
F-17
Trans World Entertainment Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 6. Benefit Plans
At January 28, 1995, the Company had three benefit plans. Such plans had
an aggregate of 2,650,000 shares of Common Stock authorized, of which
513,447 shares were reserved for future option grants.
Under the 1986 Stock Option Plan and the 1994 Stock Option Plan, the
(the "Plans"), options generally become exercisable commencing one year
from the date of grant in increments of 25% per year. The option prices
below represent the fair market value of the shares on the dates of grant.
At January 28, 1995, of the 2,100,000 shares authorized for issuance under
the Plans, there were 934,256 shares of Common Stock subject to stock
options granted and outstanding 375,825 of which were vested and
exercisable. Shares available for future grant at January 28, 1995 and
January 29, 1994 were 1,034,447 and 143,372, respectively.
The Company has a stock option plan for non-employee directors ("1990
Plan"). Options under this plan are granted at 85% of the fair market
value at the date of grant. As of January 28, 1995, there were 250,000
shares authorized for issuance and 179,000 shares of Common Stock reserved
for possible future option grants under the 1990 Plan. As of January 28,
1995, 49,250 of the shares granted were vested and exercisable.
The following tables summarize activity under the 1986 Plan and the 1990
Plan:
1986 Plan 1990 Plan
---------------------------- ---------------------------
Number of Option Number of Option
Shares Subject Price Range Shares Subject Price Range
To Option Per Share To Option Per Share
- --------------------------------------------------------------------------
Balance,
February 1, 1992 646,389 $11.00-$25.75 43,000 $11.05-$27.42
Granted 69,400 13.00 6,000 18.81
Exercised (26,207) 11.00- 21.33
Cancelled (52,450) 14.25- 25.75
- --------------------------------------------------------------------------
Balance,
January 30, 1993 637,132 11.00- 24.25 49,000 11.05- 27.42
Granted 384,500 13.75- 15.00 16,000 12.65- 13.82
Exercised (3,850) 11.00- 15.00
Cancelled (192,451) 11.00- 22.50
- --------------------------------------------------------------------------
Balance,
January 29, 1994 825,331 11.00- 24.25 65,000 11.05- 27.42
Granted 236,000 11.00- 13.38 6,000 10.00
Exercised --- --- --- ---
Cancelled (127,075) 13.00- 23.75 --- ---
- --------------------------------------------------------------------------
Balance,
January 28, 1995 934,256 $11.00-$24.25 71,000 $10.00-$27.42
==========================================================================
The Company has a restricted stock plan under which 300,000 shares are
authorized for issuance. No shares have been issued under such plan.
The Company offers a 401(k) Savings Plan to eligible employees meeting
certain age and service requirements. This plan, implemented in October
1991, permits participants to contribute up to 10% 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's matching contribution totaled $413,000, $300,000 and
$370,000 for 1994, 1993 and 1992, respectively.
F-18
Trans World Entertainment Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 7. Treasury Stock
At January 28, 1995 and January 29, 1994 the Company held 48,394 and 12,000
shares in treasury, respectively, resulting from the repurchase of common
stock through open market purchases or privately negotiated transactions.
Note 8. Quarterly Financial Information (unaudited)
Fiscal Quarter Ended 1994
April 30, July 30, Oct 29, Jan 28, Fiscal
1994 1994 1994 1995 1994
- --------------------------------------------------------------------------
Sales $109,200 $106,978 $114,086 $206,576 $536,840
Gross Profit 40,830 39,475 42,094 73,019 195,418
Net income (loss) (1,882) (2,805) (2,717) 1,148 (6,256)
Income (loss) per share (.19) (.29) (.28) .11 (.64)
- --------------------------------------------------------------------------
Fiscal Quarter Ended 1993
May 1, July 31, Oct 30, Jan 29, Fiscal
1993 1993 1993 1994 1993
- --------------------------------------------------------------------------
Sales $103,224 $ 96,643 $101,784 $190,902 $492,553
Gross Profit 38,101 35,956 39,471 71,191 184,719
Net income (loss) (327) (2,048) (1,551) 13,749 9,823
Income (loss) per share (.03) (.21) (.16) 1.41 1.01
- --------------------------------------------------------------------------
F-19
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.
4.1 Note and Security Agreement, dated June 20, 1991, between Aetna Life
Insurance Company and the Company, for $17,500,000 of 9.18% Senior
Notes due June 30, 1998 -- incorporated herein by reference to
Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 3, 1991. Commission File No. 0-14818.
4.2 Amendment and Waiver, dated March 5, 1992, between Aetna Life
Insurance Company and the Company, relating to the 9.18% Senior
Notes due June 30, 1998 -- incorporated herein by reference to
Exhibit 4.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended February 1, 1992. Commission File No. 0-14818.
4.3 Amendment and Waiver, dated as of November 17, 1992, between Aetna
Life Insurance Company and the Company, relating to the 9.18%
Senior Notes due June 30, 1998 -- incorporated herein by reference
to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended October 31, 1992. Commission File No. 0- 14818.
4.4 Amendment, dated March 30, 1994, between Aetna Life Insurance
Company and the Company, relating to the 9.18% Senior Notes due
June 30, 1998 -- incorporated herein by reference to Exhibit 4.4 to
the Company's Annual Report on Form 10-K for the fiscal year ended
January 29, 1994. Commission File No. 0-14818.
* 4.5 Agreement in Principle, dated April 28, 1995, amoung Aetna Life
Insurance Company relating to the 9.18% Senior Notes due June 30,
1998, the Purchasers of the Registrant's $50 million Senior Notes
due June 30, 1999, the commercial banks in the Registrant's $75
million revolving credit facilities, due July 31, 1996, and the
Trans World Entertainment Corporation and Record Town, Inc.
4.6 Note Agreement, dated July 2, 1993, among the Company, Record Town,
Inc. and the Purchasers listed on Exhibit A thereto, relating to
6.91% Senior Notes due June 30, 2000, incorporated herein by
reference to Exhibit 4.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended July 31, 1993. Commission File
No. 0-14818.
4.7 Form of Amendment, dated as of March 24, 1994, among the Company,
Record Town, Inc. and each of the holders of the 7.50% Senior Notes
due June 30, 1999. -- incorporated herein by reference to Exhibit
4.6 to the Company's Annual Report on Form 10-K for the fiscal year
ended January 29, 1994. Commission File No. 0-14818.
4.8 Credit Agreement and Note, dated as of June 11, 1993, between the
Company and Chemical Bank -- incorporated herein by reference to
Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended July 31, 1993. Commission File No. 0-14818.
4.9 Credit Agreement and Note, dated as of June 11, 1993, between the
Company and Chase Manhattan Bank, N.A. -- incorporated herein by
reference to Exhibit 4.3 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended July 31, 1993. Commission File
No. 0-14818.
4.10 Credit Agreement and Note, dated as of June 11, 1993, between the
Company and NBD Bank, N.A. -- incorporated herein by reference to
Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended July 31, 1993. Commission File No. 0-14818.
4.11 Credit Agreement and Note, dated as of June 11, 1993, between the
Company and National Westminster Bank, U.S.A. -- incorporated
herein by reference to Exhibit 4.5 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended July 31, 1993.
Commission File No. 0-14818.
4.12 Form of First Amendment and Waiver, dated March 17, 1994, between
the Company and each of the commercial banks in the Registrant's
$75 million revolving credit facility -- incorporated herein by
reference to Exhibit 4.11 to the Company's Annual Report on Form
10-K for the fiscal year ended January 29, 1994. Commission File
No. 0-14818.
4.13 Form of Second Amendment to Credit Agreement, dated as of December
5, 1994, between the Company and each of the commercial banks in
the Registrant's $75 million revolving credit facility --
incorporated herein by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended October
29, 1994. 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 Corp., 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
Corp., 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 Corp., 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, 1994 and amended as of
January 30, 1995 between the Company and Robert J. Higgins.
10.5 Trans World Music Corp. 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 Corp. 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 Corp. 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 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.
10.9 Severance Agreement, dated January 7, 1994, between Trans World
Music Corp. and Robert A. Helpert, Executive Vice President and
Chief Administrative Officer -- incorporated herein by reference to
Exhibit 10.9 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 29, 1994. Commission File No. 0-14818.
10.10 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.
10.11 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.
22 Significant Subsidiaries of the Registrant, incorporated by
reference to Exhibit 22 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 28, 1995. Commission File No.
0-14818.
* 23.1 Consent of KPMG Peat Marwick LLP.
* 23.2 Consent of Ernst & Young LLP.
27 Financial Data Schedule
(For electronic filing purposes only)
_____________________________
* Filed herewith.
EXHIBIT INDEX
4.5 Amendment, dated April 28, 1995, between Aetna Life Insurance Company
relating to the 9.18% Senior Notes due June 30, 1998, the Purchasers
of the Registrant's $50 million Senior Notes due June 30, 1999,
the commercial banks in the Registrant's $75 million revolving
credit facilities, due July 31, 1996, and the Company.
10.4 Higgins Employment Agreement
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Ernst & Young LLP.