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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 February 3, 1996
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. [ ]
As of April 24, 1996 9,732,814 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 $5.25 on the NASDAQ
National Market System on April 24, 1996, was approximately $23,000,000.
Shares of Common Stock held by the Company's controlling shareholder, who
controls approximately 54.7% 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. 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 were $517.0 million during the fiscal year ended
February 3, 1996 (referred to herein as "1995"). 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
February 3, 1996, the Company operated 542 stores in 34 states, the District
of Columbia and the Virgin Islands, with the majority of the stores
concentrated in the Eastern half of the United States. The Company's business
is highly seasonal in nature, with the peak selling period being the Christmas
holiday in the fourth fiscal quarter.
In 1995, in order to streamline operations and increase profitability, the
Company closed 151 stores as part of a restructuring plan announced in the
fourth quarter of 1994. During the fourth quarter of 1995, the Company
announced a second restructuring charge of $35 million to reflect the
anticipated costs associated with a program to close 163 stores over the next
two fiscal years. New store openings were significantly curtailed during 1995
and will continue to be curtailed 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 "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. During the fourth quarter of 1994, the Company undertook a
comprehensive examination of store profitability and adopted a business
restructuring (the "1994 Restructuring") plan that gave due consideration to a
potential overcapacity in the retail segment of the music industry and
included a reduction in store inventory levels and the selective opening of
new stores. The 1994 Restructuring resulted in a pretax charge of $21 million
and the closing of 179 stores (versus a plan of 143). During the fourth
quarter of 1995, the Company recorded a pretax restructuring charge of $35
million (the "1995 Restructuring") against fiscal 1995 earnings to close an
additional 163 stores. 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. During 1995 the Company's focus was on
improving profitability of existing stores while closing unprofitable store
locations and reducing overhead by streamlining operations. Future expansion
is expected to be primarily limited to existing markets. As part of the 1994
Restructuring, 63 stores closed in the fourth quarter of 1995. In accordance
with the 1995 Restructuring 163 stores will be closed in 1996 and 1997. 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 sufficient cash flow at the store level to
provide an acceptable return on current investment; (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) whether a store's performances warrants lease renewal where
the lease was 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 1996 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
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Liquidity and Capital Resources".
Fiscal Year
---------------------------------
Forecast
1996 1995 1994 1993
---------------------------------
MALL
Number of Stores,
Beginning of period 378 431 442 439
Openings 5 7 26 41
Closings (65) (59) (37) (38)
---------------------------------
Number of Stores,
End of period 318 379 431 442
---------------------------------
NON-MALL/OTHER
Number of Stores,
Beginning of period 164 253 242 215
Openings --- 2 29 40
Closings (35) (92) (18) (13)
---------------------------------
Number of Stores,
End of period 129 163 253 242
---------------------------------
TOTAL COMPANY
Number of Stores,
Beginning of period 542 684 684 654
Openings 5 9 55 81
Closings * (100) (151) (55) (51)
---------------------------------
Number of Stores,
End of period 447 542 684 684
=================================
* The 1995 Restructuring includes closing 63 additional stores in 1997.
Debt Restructuring. The second element of the 1995 Restructuring involved
modifications to the Company's senior credit agreements. The Company's
borrowings consist of a $65.3 million available amount of revolving credit
facilities (the "Revolver") and $56.5 million in long-term senior notes (the
"Notes") totalling $121.8 million. In December 1995 the Company began
discussions with its lenders to renegotiate and extend the terms and
conditions of the Revolver and the Notes. Additionally, covenant
non-compliance was temporarily waived at February 3, 1996, while modifications
to the credit agreements were being negotiated.
On May 1, 1996 the Company entered into an agreement with its lenders to
restructure the Revolver and the Notes. The lenders have extended the
maturity of the Company's debt to July 31, 1998 at which time all of the
outstanding amounts mature. The revised credit agreements contain
restrictions on capital expenditures, dividends, acquisitions, 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 "Management's Discussion and Analysis of Operations and
Financial Condition - Liquidity and Capital Resources".
Store Formats
Mall Stores. The Company operated 181 full-line mall stores at February 3,
1996, 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 7,500 square feet. The full-line mall stores averaged approximately $275
sales per square foot during 1995. 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
February 3, 1996, the Company operated 65 of these stores averaging
approximately 1,300 square feet. These stores averaged approximately $390
sales per square foot in 1995.
Video-for-Sale stores are operated under the name "Saturday Matinee" and
are primarily dedicated to the sale of prerecorded video products. On
February 3, 1996, the Company operated 62 of these stores in mall locations
which averaged 2,150 square feet in size and generated average sales per
square foot of $300 in 1995.
Combination Stores share common storefronts of "Record Town" and "Saturday
Matinee." As of February 3, 1996, the Company operated 69 stores with an
averaging approximately 7,000 square feet with 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. During 1995, these stores
averaged approximately $235 sales per square foot.
During 1993, the Company introduced "For Your Entertainment", or "F.Y.E."
These stores combine book, multimedia merchandise and a video game
entertainment room, in addition to the Company's other lines of music and
video merchandise. At February 3, 1996, two "F.Y.E." stores were in
operation.
Non-Mall Stores. Freestanding Stores accounted for 112 of the stores in
operation at February 3, 1996, 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 4,000 to 8,000 square feet. Eight
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 were
approximately $190 per square foot for 1995.
The Company's non-mall stores also include a video rental store format and
a licensed operation format. The Company operated 36 video rental locations
in 1995 averaging 4,700 square feet, including 27 stores that operate under
the tradename "Movies Plus." The Company's nine video rental department
locations that operated within a discount retail store were sold on February
14, 1996. The Company also operated 15 licensed music and video departments,
within retail department stores, which average 2,500 square feet and offer
music and video entertainment products and related accessories.
Strategic Alliances. At February 3, 1996 the Company was a venture partner
with Tandy Corporation in seventeen music and video departments averaging
12,000 square feet which are contained within Tandy Corporation's electronics
megastore, Incredible Universe. The venture partners currently expect to open
two new Incredible Universe music and video departments during 1996.
Products
The Company's stores offer a full assortment of 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
------------------------------------
February 3, January 28, January 29,
1996 1995 1994
------------------------------------
Compact discs 49.2% 46.5% 41.9%
Prerecorded audio cassettes 25.5 28.9 33.8
Prerecorded videocassettes 16.7 15.5 14.5
Blank tape, video games,
accessories and other 8.6 9.1 9.8
------------------------------------
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 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. Since 1994, the
unit sales volume of compact discs has exceeded the unit sales of audio
cassettes. The Company believes this trend will continue 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 freestanding
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 identical to the Company's product
offerings, varying only by the breadth of the product assortment within store
locations. Numerous chain 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
1995, the Company's 9 new stores averaged 11,600 square feet in size,
considerably larger than the Company's overall average store size of 4,000
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. In 1995, the Company continued to
expand more competitive pricing programs that convey a simple, value-oriented
message to consumers. Although competitive pricing is important, management
believes the positioning of its stores within successful regional malls is
equally important in competing for mall customers. Management believes that
the 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. In general, regional malls are largely impacted by mall shopping
traffic.
The increase in the number of competitors and their pricing structures 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 1995. Prior to 1995, the Company experienced operating
losses in the first three fiscal quarters and typically earned all of its
annual profits, before restructuring charges, in the fourth quarter. During
1995, the Company's fourth quarter profitability, prior to the $35 million
restructuring charge, would not have been great enough to offset the losses
from the first three quarters to have a profitable year.
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 more completely automate the product
picking, distribution and return functions of its distribution center.
Merchandise return sortation equipment is currently operational. Equipment
testing and implementation for the remaining sortation equipment will be
completed during 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 62% of purchases in 1995 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 1995,
and management does not anticipate that such manufacturing will constitute a
significant element of its business in 1996.
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 merchandise return penalties. Video rental
products are not eligible for return to the manufacturers. Product return
credit is applied as a reduction against current merchandise product payments.
In some instances, the Company's suppliers limit return privileges relative to
current gross 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 4,100 people, of whom 700 are employed
on a full-time salaried basis, 1,200 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 sales and 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 collected
centrally utilizing the IBM AS/400 midrange configuration. The Company's
information systems manage a database of over 150,000 active skus 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.
Trademarks and Service Marks
The Company operates stores under various names and marks, including the
service marks "Record Town", "Tape World", "Coconuts", "Saturday Matinee",
"Movies Plus" and "FYE" 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 February 3, 1996, the Company operated 542 retail outlets. The Company
owns one real estate site which it formerly operated as a retail outlet. The
Company now leases this location to a tenant. All of the Company's retail
stores are under operating leases with various terms and options.
Substantially all of its stores provide for payment of fixed monthly rentals,
a percentage of the gross receipts of the store in excess of specified sales
levels, and operating expenses for maintenance, property taxes 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 February 3,
1996:
1996 . . . . . .16 2000 . . . . . . 39
1997 . . . . . .80 2001 . . . . . . 82
1998 . . . . . .92 2002 . . . . . . 52
1999 . . . . . .57 2003 & beyond. .124
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 the 1995
Restructuring will be closed 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. The 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.
Supplementary Items - Identification of Executive Officers of the Registrant
- - - ------------------------------------------------------------------------------
(Pursuant to Instruction 3 to Item 401(b) of Regulation S-K)
The name, age, principal occupation and period of service as an executive
officer of the Company for each executive officer are set forth below.
Robert J. Higgins Age 54
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.
Edward W. Marshall, Jr. Age 50
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.
John J. Sullivan Age 43
Senior Vice President and Chief Financial Officer Since 1991
John J. Sullivan has been Senior Vice President, Treasurer and Chief Financial
Officer of the Company since May 1995. Mr. Sullivan joined the Company in
June 1991 as the Corporate Controller and was named Vice President of Finance
and Treasurer in June of 1994. Prior to joining the Company Mr. Sullivan was
Vice President and Controller for Ames Department Stores, a discount
department store chain.
Bruce J. Eisenberg Age 36
Senior Vice President of Real Estate Since 1993
Bruce J. Eisenberg has been Senior Vice President of Real Estate at the
Company since May of 1995. He joined the Company in August of 1993 as Vice
President of Real Estate. For the five years prior to joining the Company,
Mr. Eisenberg was responsible for leasing, finance and construction of new
regional mall development at The Pyramid Companies.
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 24, 1996, 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 January 31, 1994 through February 2, 1996, and the closing
price as of April 24, 1996.
Last Sale
Prices
---------
High Low
------- -------
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:
1st Quarter $ 6 $ 4
2nd Quarter 5 1/4 3 3/8
3rd Quarter 4 7/8 2 1/4
4th Quarter 3 1/2 1 3/4
1996:
April 24, closing price $5 1/4.
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 (1)
----------------------------------------------------------
February 3, January 28, January 29, January 30, February 1,
1996 1995 1994 1993 1992
----------------------------------------------------------
(in thousands, except per share and store data)
INCOME STATEMENT DATA:
Sales $517,046 $536,840 $492,553 $454,916 $411,131
Cost of sales 340,754 341,422 307,834 280,572 256,110
---------------------------------------------------------
Gross profit 176,292 195,418 184,719 174,344 155,021
Selling,
general and
administrative
expenses 150,628 158,637 147,644 133,768 117,370
Restructuring
charge 35,000 21,000 --- --- ---
Depreciation and
amortization 16,125 16,932 14,655 13,310 11,664
---------------------------------------------------------
Income (Loss) from
operations (25,461) (1,151) 22,420 27,266 25,987
Interest expense 14,222 9,540 5,971 5,627 5,946
---------------------------------------------------------
Income (Loss) before
income taxes (39,683) (10,691) 16,449 21,639 20,041
Income tax expense
(benefit) (14,310) (4,435) 6,626 8,374 8,012
---------------------------------------------------------
Net income (loss) $(25,373) $ (6,256) $ 9,823 $ 13,265 $ 12,029
=========================================================
Earnings (Loss)
per share $ (2.61) $ (0.64) $ 1.01 $ 1.40 $ 1.32
=========================================================
Weighted average
number of shares
outstanding 9,726 9,701 9,723 9,474 9,087
=========================================================
BALANCE SHEET DATA:
(at end of period)
Working capital $ 78,773 $ 93,431 $101,538 $ 63,058 $ 43,372
Total assets 390,331 426,939 380,264 286,873 248,022
Current portion
of long-term
obligations 3,420 6,618 3,695 910 12,349
Long-term
obligations 60,364 66,441 73,098 25,512 26,281
Shareholders'
equity 94,104 119,477 126,074 116,329 92,620
Store Count:
Number of stores
open at end of
period 542 684 684 654 597
(1) Each year consisted of 52 weeks except the fiscal year ended February 3,
1996 which consisted of 53 weeks.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS, FISCAL YEARS 1995, 1994 AND 1993
The following table sets forth certain income and expense items as a
percentage of sales for the periods indicated:
Fiscal Year Ended
-------------------------------------
February 3, January 28, January 29,
1996 1995 1994
-------------------------------------
Sales 100.0% 100.0% 100.0%
Gross profit 34.1 36.4 37.5
Selling, general and
administrative expenses 29.1 29.6 30.0
Restructuring charge 6.8 3.9 ---
Depreciation and amortization 3.1 3.2 3.0
--------------------------------------
Income (Loss) from operations -4.9 -0.2 4.5
Interest expense 2.8 1.8 1.2
--------------------------------------
Income (Loss) before income taxes -7.7 -2.0 3.3
Income tax expense (benefit) -2.8 -0.8 1.3
--------------------------------------
Net income (loss) -4.9% -1.2% 2.0%
______________________________________
Change in comparable store sales -3.5% 1.1% -2.1%
Fiscal Year Ended February 3, 1996 ("1995")
Compared to January 28, 1995 ("1994")
-------------------------------------------
Sales. The Company's sales decreased by $19.8 million, or 3.7%, from
1994. The decrease was primarily attributable to a net decrease of 340,000
square feet which resulted from closing 151 stores while opening 9 stores.
The sales decrease was somewhat offset by an additional week included in
fiscal 1995 sales results which accounted for $6.9 million in sales.
Comparable store sales for the fiscal year decreased 3.5%. Management
attributes the comparable store sales decline to the sluggish retail
environment throughout 1995 and weaker new releases compared to the prior
year.
Sales by product configuration are shown in the following table:
Fiscal Year Ended
-------------------------------------
February 3, January 28, January 29,
1996 1995 1994
-------------------------------------
Compact discs 49.2% 46.5% 41.9%
Prerecorded audio cassettes 25.5 28.9 33.8
Prerecorded videocassettes 16.7 15.5 14.5
Blank tape, video games, accessories
and other 8.6 9.1 9.8
------ ------ ------
Total 100.0% 100.0% 100.0%
====== ====== ======
Sales were not materially affected by unit selling prices which remained
constant in 1995. The unit sales volume for compact discs and prerecorded
video remained constant while audio cassettes declined 19%, accounting for the
decline in retail sales.
The Company's store formats performed similarly in 1995. Comparable store
sales for mall stores decreased 4.1%, while non-mall stores decreased 2.6%.
By product configuration, comparable store sales in music decreased 3.2% while
video sell-through, a smaller component of the Company's business, increased
1.3% on a comparable store basis, benefiting from the continued growth of the
video sell-through market.
The Company continues to experience increased competition from diversified
retailers entering the music business, including consumer electronics
superstores, which often emphasize discount pricing.
Gross Profit. Gross profit, as a percentage of sales, decreased from
36.4% in 1994 to 34.1% in 1995. Approximately half of the decline was due to
the increase in merchandise shrink. The remaining decline was due to the
continued shift in sales mix from prerecorded audiocassettes to lower margin
compact discs, increased merchandise return penalties incurred in returning
product to vendors and, to a lesser extent, increased promotional markdowns.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A"), as a percentage of sales, decreased from
29.6% in 1994 to 29.1% in 1995. The Company reduced operating overhead
expenses by $3.2 million in 1995 due primarily to the reduction in the number
of stores, which resulted in a 0.6% decrease as a percentage of sales. Store
expenses, as a percent of sales, were higher in 1995 due to the decline in
comparable store sales and the timing of closing underperforming stores
throughout the year.
Interest Expense. Interest expense increased to $14.2 million, $4.7
million over 1994. The increase is due to the increase in the Company's
weighted average interest rate. Management expects 1996 interest expense to
decrease due to lower average outstanding borrowings offset in part by
increased weighted average interest rates.
Income Tax Expense. The effective income tax rates, prior to the
restructuring charge, were 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 three principal factors contributing to the reduction in
income from operations, before recording the $35 million pretax restructuring
charge, were: (1) the 3.7% decline in total retail sales; (2) the 2.3%
decline in gross margin, as a percent of sales; and (3) the $4.7 million
increase in interest expense. The after-tax effect of the $35 million
restructuring charge increased losses from $0.23 per share to $2.61 per share.
Fiscal Year Ended January 28, 1995 ("1994")
Compared to January 29, 1994 ("1993")
-------------------------------------------
Sales. The Company's sales increased by $44.3 million in 1994, 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 1994 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 of 1994, 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.
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 which have lower gross margins.
Selling, General and Administrative Expenses. As a percentage of sales,
SG&A decreased from 30.0% in 1993 to 29.6% in 1994. This decrease was
primarily due to leveraging fixed overhead costs on a total sales increase of
9%, offset in part by an increase in store operating costs, as a percentage of
sales.
Interest Expense. Interest expense increased $3.6 million over 1993. A
$50 million increase in the Company's average borrowings contributed to
substantially all of the increase.
Income Tax Expense. The effective income tax rate, prior to the
restructuring charge, was slightly lower than Federal statutory rates as a
result of permanent tax differences.
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.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain measures of the Company's
liquidity:
Fiscal Year Ended
------------------------------
1995 1994 1993
------------------------------
(in thousands)
Net income (loss) plus depreciation,
amortization and restructuring charge $26,772 $32,691 $25,538
Net cash provided by operating activities 24,136 16,739 3,427
Working capital 78,773 93,431 101,538
Current ratio 1.3:1 1.4:1 1.6:1
Long-term debt obligations to equity ratio 64% 56% 58%
------------------------------
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 1995, cash provided by operations was
$24.1 million, compared to $16.7 million for 1994. The increased cash flow
was due primarily to a decrease in inventory in 1995, attributed to improved
inventory management and reductions in the number of stores. At February 3,
1996, inventory had decreased to $195 million from $222 million at the end of
1994.
As in the previous year, the Company accumulated cash balances in December
and January instead of repaying the balances under its revolving credit
facilities (the "Revolver"). A temporary waiver of a covenant requiring a 15
day paydown of the Revolver between December 25 and January 31 was received on
December 14, 1995. Accordingly, the Company ended fiscal 1995 with cash
balances of approximately $86.9 million and $65.3 million outstanding on its
Revolver. During the period subsequent to February 3, 1996, the Company used
the accumulated cash balances primarily to repay accounts payable in
accordance with normal payment terms. 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 1996, and would have had lower balances
outstanding under the Revolver, than in the first quarter of fiscal 1995.
Effective February 3, 1996, the Company was operating under temporary
waivers from its lenders relating to non-compliance with certain technical
covenants, including the 15 day paydown of the Revolver, the Tangible Net
Worth requirement and the Debt to Tangible Net Worth requirement. The
aggregate amount of the senior debt, totaling a maximum available amount of
$121.8 million, including the Revolver and $56.5 million in outstanding
long-term notes (the "Notes") ranks pari passu. 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 May 1, 1996 the Company entered into an agreement in principle with its
nine lenders to extend the maturity of the Company's senior debt. The Company
continues to operate under temporary waivers from its lenders until the final
loan documents are completed. The Company will be required to make principal
repayments on the Notes aggregating a total of $15.6 million through May 31,
1998. The maximum borrowings available on the Company's Revolver will be
reduced in the aggregate total of $18.2 million by May 31, 1998. Final
maturity of the then remaining Notes of $40.9 million and the then available
Revolver $47.1 million is July 31, 1998. Effective May 1, 1996, the interest
rates for the Revolver and the Notes were increased from 10.5% to 11.0% and
11.5%, respectively.
The revised credit agreements contain restrictive provisions governing
dividends, capital expenditures and acquisitions, and modified covenants as to
working capital, cash flow, consolidated tangible net worth and debt to
tangible net worth to reflect the $35 million restructuring charge recorded in
1995.
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 1996 and 1997 will continue to reduce the overall
store count and total retail square footage. During 1995 the Company added 9
new stores, totaling 0.1 million square feet. Combined with 151 stores that
were closed or relocated, total retail square footage decreased on a net basis
by 12% to 2.2 million square feet. In 1995, the average store size was
greater than in past years, a trend that is expected to continue in 1996.
Total capital expenditures were $10.0 million in 1995, including new stores,
store remodels and reconfigurations and the automation of the Company's
distribution center.
In fiscal 1996, the Company plans to spend approximately $12 million, net
of construction allowances, in capital expenditures. These funds will be
provided by cash flow from operations. The Company's plans include the
opening of approximately 5 new stores and approximately $2 million for
operational improvements being made to the central distribution center for the
implementation of automated sortation equipment.
Provision for Business Restructuring.
During the fourth quarter of 1995 the Company undertook a comprehensive
examination of store profitability and adopted a second business restructuring
plan which when combined with the 1994 Restructuring included closing over 300
stores out of over 700 stores in operation during 1994. Management concluded
that select retail entertainment markets had begun to reflect 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. This resulted in the Company recording a $35 million pretax
restructuring charge in 1995, thereby increasing the 1995 loss from $0.23 per
share to $2.61 per share. The components of the restructuring charge included
approximately $24 million in reserves for future cash outlays and
approximately $11 million in asset writedowns. The cash outflows will be
financed from operating cash flows and liquidation of merchandise inventory
from the stores identified for closure. The timing of store closures will
depend on the Company's ability to negotiate reasonable lease termination
agreements. 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 a two year period.
See "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 1996 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
1996 1995 1994 1993
--------------------------------
TOTAL COMPANY
Number of stores,
beginning of period 542 684 684 654
Openings 5 9 55 81
Closings * (100) (151) (55) (51)
--------------------------------
Number of stores,
end of period 447 542 684 684
================================
* The 1995 Restructuring includes closing 63 additional stores in 1997.
Management will continually review the opportunity to accelerate the
closing of underperforming stores.
Sales associated with the stores identified for future closing totaled
$100 million in 1995. Management currently anticipates that pretax losses at
the store level, before corporate overhead and other indirect costs, during
the period of store closures will approximate $2.6 to $2.8 million. Because
store closures will take place throughout 1996 and 1997, the Company does not
currently expect to receive most of the earnings or cash flow benefits from
the 1995 Restructuring until fiscal years 1997 and 1998.
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. See Note 9
of the Notes to Consolidated Financial Statements for quarterly financial
highlights.
Dividend Policy. The Company has never paid cash dividends and does not
anticipate paying cash dividends in 1996. The Company's credit agreements
currently prohibit the payment of cash dividends.
New Accounting Standards. In March 1995, the Financial Accounting
Standards Board issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" which the
Company adopted for the fiscal year ended February 3, 1996. The 1995
restructuring charge addressed the impaired assets of the Company as a whole,
and, therefore, the adoption of this accounting standard had no effect on the
Company's financial results.
In October, 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") which is
effective for the Company in fiscal 1996. As permitted under SFAS No. 123,
the Company has elected not to adopt the fair value based method of accounting
for its stock-based compensation plans, but will continue to account for such
compensation under the provisions of APB Opinion No. 25. The Company will
comply with the disclosure requirements of SFAS No. 123 in 1996.
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 9 of the
Consolidated Financial Statements.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
The information appearing under the captions "Election of Directors" and
"Board of Directors Meetings and Its Committees" in the definitive Proxy
Statement for the Registrant's 1996 Annual Meeting of Shareholders is
incorporated herein by reference.
(b) Identification of Executive Officers
The information required with respect to the executive officers of the
Registrant is set forth under the caption "Supplementary Item" on page
11 of this Annual Report on Form 10-K.
Item 11. EXECUTIVE COMPENSATION
The information appearing under the caption "Executive Officers and
Compensation" in the definitive Proxy Statement for the Registrant's 1996
Annual Meeting of Shareholders is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the caption "Principal Shareholders" and
"Election of Directors" in the definitive Proxy Statement for the
Registrant's 1996 Annual Meeting of Shareholders is incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Certain Transactions" in the
definitive Proxy Statement for the Registrant's 1996 Annual Meeting of
Shareholders is incorporated herein by reference.
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 7, 1996, 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
February 3, 1996; (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 May 3, 1996 By: /s/ROBERT J. HIGGINS
Robert J. Higgins, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ ROBERT J. HIGGINS President and Director May 3, 1996
(Robert J. Higgins) (Principal Executive Officer)
/s/ JOHN J. SULLIVAN Senior Vice President and Chief May 3, 1996
(John J. Sullivan) Financial Officer
(Principal Financial Officer)
/s/ MATTHEW H. MATARASO Secretary and Director May 3, 1996
(Matthew H. Mataraso)
/s/ GEORGE W. DOUGAN Director May 3, 1996
(George W. Dougan)
/s/ CHARLOTTE G. FISCHER Director May 3, 1996
(Charlotte G. Fischer)
/s/ ISAAC KAUFMAN Director May 3, 1996
(Isaac Kaufman)
TRANS WORLD ENTERTAINMENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Form 10-K
Page No.
---------
Independent Auditors' Reports F-2
Consolidated Financial Statements
Consolidated Balance Sheets at February 3, 1996
and January 28, 1995 F-4
Consolidated Statements of Income - Fiscal years ended
February 3, 1996, January 28, 1995 and January 29, 1994 F-5
Consolidated Statements of Shareholders' Equity - Fiscal
years ended February 3, 1996, January 28, 1995 and
January 29, 1994 F-6
Consolidated Statements of Cash Flows - Fiscal years
ended February 3, 1996, January 28, 1995 and
January 29, 1994 F-7
Notes to Consolidated Financial Statements F-8
F-1
Independent Auditors' Report
The Board of Directors and Shareholders
Trans World Entertainment Corporation:
We have audited the accompanying consolidated balance sheets of Trans World
Entertainment Corporation and subsidiaries as of February 3, 1996 and January
28, 1995, and the related consolidated statements of income, shareholders'
equity and cash flows for the fiscal years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Trans
World Entertainment Corporation and subsidiaries as of February 3, 1996 and
January 28, 1995, and the results of their operations and their cash flows for
the fiscal years then ended in conformity with generally accepted accounting
principles.
/s/KPMG PEAT MARWICK LLP
Albany, New York
March 13, 1996,
except as to
Note 3, which is
as of May 1, 1996
F-2
Report of Independent Auditors'
Board of Directors and Shareholders
Trans World Entertainment Corporation:
We have audited the accompanying consolidated statements of income,
shareholders' equity, and cash flows of Trans World Entertainment Corporation
and subsidiaries for the fiscal year 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 audit.
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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows
of Trans World Entertainment Corporation and subsidiaries for the fiscal year
ended January 29, 1994, in conformity with generally accepted accounting
principles.
/s/ERNST & YOUNG LLP
Albany, New York
March 24, 1994
F-3
Trans World Entertainment Corporation and subsidiaries
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
February 3, January 28,
ASSETS 1996 1995
- - - --------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 86,938 $ 90,091
Accounts receivable 8,079 9,176
Merchandise inventory 194,577 222,358
Refundable income taxes 8,308 ---
Deferred tax asset 8,465 2,944
Prepaid expenses and other 2,929 4,407
- - - --------------------------------------------------------------------------
Total current assets 309,296 328,976
- - - --------------------------------------------------------------------------
VIDEOCASSETTE RENTAL INVENTORY, net 6,722 7,472
DEFERRED TAX ASSET 430 505
FIXED ASSETS:
Building 7,774 8,599
Fixtures and equipment 84,386 87,544
Leasehold improvements 79,556 86,119
- - - --------------------------------------------------------------------------
171,716 182,262
Less: Fixed asset write-off reserve 12,324 10,485
Allowances for depreciation
and amortization 89,391 85,620
- - - --------------------------------------------------------------------------
70,001 86,157
- - - --------------------------------------------------------------------------
OTHER ASSETS 3,882 3,829
- - - --------------------------------------------------------------------------
TOTAL ASSETS $390,331 $426,939
==========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- - - --------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $131,302 $135,493
Notes payable 65,260 74,947
Income taxes payable --- 1,961
Accrued expenses and other 6,266 7,250
Store closing reserve 24,275 9,276
Current portions of long-term debt
and capital lease obligations 3,420 6,618
- - - --------------------------------------------------------------------------
Total current liabilities 230,523 235,545
- - - --------------------------------------------------------------------------
LONG-TERM DEBT, less current portion 53,770 59,770
CAPITAL LEASE OBLIGATIONS, less current portion 6,594 6,671
OTHER LIABILITIES 5,340 5,476
- - - --------------------------------------------------------------------------
TOTAL LIABILITIES 296,227 307,462
- - - --------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock ($.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 shares) (503) (503)
Retained earnings 70,274 95,647
- - - --------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 94,104 119,477
- - - --------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $390,331 $426,939
==========================================================================
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
February 3, January 28, January 29,
1996 1995 1994
- - - ------------------------------------------------------------------------
Sales $517,046 $536,840 $492,553
Cost of sales 340,754 341,422 307,834
- - - ------------------------------------------------------------------------
Gross profit 176,292 195,418 184,719
Selling, general and
administrative expenses 150,628 158,637 147,644
Restructuring charge 35,000 21,000 ---
Depreciation and amortization 16,125 16,932 14,655
- - - ------------------------------------------------------------------------
Income (loss) from operations (25,461) (1,151) 22,420
Interest expense 14,222 9,540 5,971
- - - ------------------------------------------------------------------------
Income (loss) before income taxes (39,683) (10,691) 16,449
Income tax expense (benefit) (14,310) (4,435) 6,626
- - - ------------------------------------------------------------------------
NET INCOME (LOSS) $(25,373) $ (6,256) $ 9,823
========================================================================
EARNINGS (LOSS) PER SHARE $ (2.61) $ (0.64) $ 1.01
========================================================================
Weighted average number of
common shares outstanding 9,726 9,701 9,723
========================================================================
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,
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
Net loss --- --- --- (25,373) (25,373)
- - - ----------------------------------------------------------------------------
Balance,
February 3, 1996
(9,731,208 shares) $97 $24,236 $(503) $ 70,274 $ 94,104
============================================================================
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
February 3, January 28, January 29,
1996 1995 1994
- - - ---------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $(25,373) $ (6,256) $ 9,823
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and amortization 17,145 17,947 15,715
Fixed asset write-off reserve 8,088 11,400 ---
Store closing reserve 26,912 9,600 ---
Deferred tax expense (benefit) (6,171) (7,050) 308
Loss on sale and disposal of
property and equipment --- 802 289
Changes in operating assets and
liabilities:
Accounts receivable 1,097 (1,463) (3,716)
Merchandise inventory 27,781 16,591 (50,781)
Refundable income taxes (8,308) --- ---
Deferred tax asset 725 --- ---
Prepaid expenses and other 1,478 644 (1,485)
Other assets (53) (1,536) 307
Accounts payable (4,191) (20,770) 34,304
Income taxes payable (1,961) (3,470) (2,844)
Accrued expenses and other (984) (418) 526
Store closing reserve (11,913) (324) ---
Other liabilities (136) 1,042 981
- - - -------------------------------------------------------------------------
Net cash provided by operating
activities 24,136 16,739 3,427
- - - -------------------------------------------------------------------------
INVESTING ACTIVITIES:
Acquisition of property and
equipment (10,006) (22,260) (34,460)
Proceeds from sale of fixed assets 929 --- ---
Purchases of videocassette
rental inventory, net 750 (1,306) (9)
------------------------------------------------------------------------
Net cash used by investing
activities (8,327) (23,566) (34,469)
- - - -------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in revolving
line of credit (9,687) 74,947 ---
Proceeds of long-term debt --- --- 50,000
Payments of long-term debt (8,902) (3,398) (739)
Payments of capital lease
obligations (373) (336) (288)
Proceeds from issuance of
common stock --- --- 56
Purchase of common stock for
treasury --- (341) (134)
- - - -------------------------------------------------------------------------
Net cash provided (used) by
financing activities (18,962) 70,872 48,895
- - - -------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (3,153) 64,045 17,853
Cash and cash equivalents,
beginning of year 90,091 26,046 8,193
- - - -------------------------------------------------------------------------
Cash and cash equivalents,
end of year $86,938 $90,091 $26,046
=========================================================================
See Notes to Consolidated Financial Statements.
F-7
Trans World Entertainment Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations. Trans World Entertainment Corporation is one of the
largest specialty retailers of music, video and related accessories in the
United States. The Company operates in a single industry segment, the
operation of retail entertainment stores. At February 3, 1996, the Company
operated 542 stores in 34 states, the District of Columbia and the Virgin
Islands, with a majority of the stores concentrated in the Eastern half of the
United States. The Company changed its name in 1994 from Trans World Music
Corp.
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 preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Fiscal Year. The Company's fiscal year is a 52- or 53-week period ending on
the Saturday nearest to January 31. Fiscal year 1995 ended February 3, 1996
and consisted of 53 weeks. Fiscal years 1994 and 1993, which ended January
28, 1995 and January 29, 1994, respectively, consisted of 52 weeks.
Dividend Policy. The Company has never paid cash dividends and does not
anticipate paying cash dividends in 1996. The Company's credit agreements
currently prohibit the payment of cash dividends.
New Accounting Standards. In March 1995, the Financial Accounting Standards
Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" which the Company adopted for the
fiscal year ended February 3, 1996. The 1995 restructuring charge addressed
the impaired assets of the Company as a whole, and, therefore, the adoption of
this accounting standard had no effect on the Company's financial results.
In October, 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") which is
effective for the Company in fiscal 1996. As permitted under SFAS No. 123,
the Company has elected not to adopt the fair value based method of accounting
for its stock-based compensation plans, but will continue to account for such
compensation under the provisions of APB Opinion No. 25. The Company will
comply with the disclosure requirements of SFAS No. 123 in 1996.
Cash and Cash Equivalents. The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents. The carrying amounts reported in the balance sheet for cash and
cash equivalents are at fair value.
Merchandise Inventory and Return Costs. Inventory is stated at the lower of
cost (first-in, first-out) or market as determined principally by the retail
inventory method. The Company is entitled to return merchandise purchased
from major vendors for credit against other purchases from these vendors. The
vendors often reduce the credit with a merchandise return charge ranging from
0% to 20% of the original product purchase price depending on the type of
product being returned. The Company records the merchandise return 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. The buildings, which are
accounted for under capital leases, are amortized over their 30 year lease
term. Fixtures and equipment are depreciated using the straight-line method
over their estimated useful lives, which range from three to seven years.
Leasehold improvements are amortized over the shorter of their estimated
useful life or the related lease term. Primarily all of the Company's
operating leases are ten years in term. Amortization of capital lease assets
is included in depreciation and amortization expense.
Depreciation and amortization expense related to the Company's videocassette
rental inventory, distribution center facility and distribution center
equipment is included in cost of sales.
F-8
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 earnings
(loss) per share in the years presented.
Note 2. Restructuring Charge
The Company recorded a pre-tax restructuring charge of $35 million in 1995
(the "1995 Reserve") to reflect the anticipated costs associated with a
program to close 163 stores through the first quarter of 1997. This charge is
in addition to a $21 million restructuring charge recorded in 1994 (the "1994
Reserve) to reflect the costs associated with the closing of 179 stores
(versus a plan of 143). The restructuring charge includes the write-down of
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,
lender and consulting fees, including those that the Company is obligated to
pay on behalf of its lenders while working to renegotiate its credit
agreements.
In determining the components of the reserves, management analyzed all of the
aspects of closing stores and the costs that are incurred. An analysis of the
amounts comprising the 1994 Reserve, the 1995 Reserve and charges against the
reserves through February 3, 1996 are outlined below:
Charges Balance Charges Balance
1994 Against as of 1995 Against as of
Reserve Reserve 1/28/95 Reserve Reserve 2/3/96
---------------------------------------------------
(in thousands)
Total non-cash
write-offs $12,344 $ 915 $11,429 $10,799 $ 8,322 $13,906
Cash outflows 8,656 324 8,332 24,201 9,840 22,693
---------------------------------------------------
Total $21,000 $1,239 $19,761 $35,000 $18,162 $36,599
===================================================
Sales associated with the stores identified for closure in 1996 and 1997, in
the 1995 Reserve, were approximately $100.2 million (unaudited), $102.4
million (unaudited) and $94.0 million (unaudited) for the fiscal years 1995,
1994 and 1993, respectively.
F-9
Note 3. Debt
Long-term debt consisted of the following:
February 3, January 28,
1996 1995
- - - -----------------------------------------------------------------------
(in thousands)
Senior unsecured notes issued to four
insurance companies (see discussion
below) $41,332 $47,500
Senior unsecured note issued to an
insurance company (see discussion
below) 15,227 17,500
Installment notes and other obligations 554 1,015
- - - -----------------------------------------------------------------------
57,113 66,015
Less current portion 3,343 6,245
- - - -----------------------------------------------------------------------
Long-term debt $53,770 $59,770
=======================================================================
Because of the 1995 operating results, including the restructuring charge, as
of February 3, 1996, the Company obtained modifications or waivers of the
noncompliance with certain financial covenants contained in its senior
indebtedness. On May 1, 1996, the Company executed an agreement in principle
with its senior lenders (the "Lending Group") to extend and restructure the
terms and conditions of $121.8 million of indebtedness: the aggregate
available amount of $65.3 million revolving credit facilities (the "Revolver")
and $56.5 million senior unsecured notes (the "Notes"). The modifications
take into account recent and forecasted operating results and the planned
closing of underperforming stores.
The modifications to the credit agreements extend the term through July 1998
and require quarterly reductions of the Revolver and principal repayments on
the Notes aggregating $18.2 million and $15.6 million, respectively, through
May 31, 1998 with the remaining $88.0 million maturing on July 31, 1998. The
Revolver and the Notes are secured prorata by liens on the Company's tax
refund rights, primary concentration deposit accounts, certain asset sales by
the Company and trademark mortgages on all trademarks, tradenames and other
intangibles relating to goodwill.
Effective May 1, 1996 the interest rates for the Revolver and the Notes were
increased from 10.5% to 11.0% and 11.5%, respectively.
During fiscal years 1995, 1994 and 1993, the highest aggregate balances
outstanding under the Revolver were $74.9 million, $74.9 million and $69.4
million, respectively. The weighted average interest rates during 1995, 1994
and 1993, based on average daily balances, were 10.40%, 5.69% and 4.35%,
respectively. The balances outstanding under the Revolver at year end 1995,
1994 and 1993 were $65.3 million, $74.9 and $0, respectively.
At February 3, 1996 the fair value of long-term debt, including that due
within one year, approximates book value. The fair value was estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates.
Interest paid during 1995, 1994 and 1993 was approximately $16.0 million, $9.6
million and $5.7 million, respectively. Future maturities of long-term debt
are $3.3 million during 1996; $9.9 million during 1997; and $43.9 million
during 1998.
F-10
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
1995 1994 1993
- - - ---------------------------------------------------------------------
(in thousands)
Federal - current $ (8,392) $ 1,805 $5,146
State - current 253 810 1,172
Deferred (6,171) (7,050) 308
- - - ---------------------------------------------------------------------
$(14,310) $(4,435) $6,626
==============================
F-11
A reconciliation of the Company's effective tax rates with the federal
statutory rate is as follows:
Fiscal Year Ended
1995 1994 1993
- - - --------------------------------------------------------------------
Federal statutory rate (35.0%) (35.0%) 34.7%
State income taxes (benefit), net of
federal income tax effect (1.5) (6.0) 4.7
Targeted job credit --- (1.6) ---
Other 0.4 1.1 0.9
- - - --------------------------------------------------------------------
Effective income tax rate (36.1%) (41.5%) 40.3%
====================================================================
Note 4. Income Taxes (Cont'd)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
February 3, January 28,
1996 1995
- - - ----------------------------------------------------------------------
(in thousands)
CURRENT DEFERRED TAX ASSETS
- - - ---------------------------
Restructuring reserve $14,756 $7,806
- - - ----------------------------------------------------------------------
Total current deferred tax assets 14,756 7,806
- - - ----------------------------------------------------------------------
CURRENT DEFERRED TAX LIABILITIES
- - - --------------------------------
Inventory valuation 6,138 4,739
Other 153 123
- - - ----------------------------------------------------------------------
Total current deferred tax liabilities 6,291 4,862
- - - ----------------------------------------------------------------------
Net current deferred
tax assets $ 8,465 $2,944
======================================================================
NON-CURRENT DEFERRED TAX ASSETS
- - - -------------------------------
Accrued rent, lease accounting $ 2,621 $2,261
Capitalized leases 803 736
Other 128 26
- - - ----------------------------------------------------------------------
Total non-current deferred tax assets 3,552 3,023
- - - ----------------------------------------------------------------------
NON-CURRENT DEFERRED TAX LIABILITIES
- - - ------------------------------------
Tax over book depreciation 3,012 2,423
Other 110 95
- - - ----------------------------------------------------------------------
Total non-current deferred tax liabilities 3,122 2,518
- - - ----------------------------------------------------------------------
Net non-current deferred
tax assets 430 505
- - - ----------------------------------------------------------------------
Total net deferred tax asset $ 8,895 $3,449
======================================================================
F-12
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 and the
taxable income in the three previous tax years to which tax loss carryback can
be applied. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, taxable income in the carryback
period, and tax planning strategies in making this assessment. Based upon the
level of projected future taxable income over the periods in which the
deferred tax assets are deductible and the amount of tax loss carryback
available, management believes it is more likely than not that the Company
will realize the benefits of those deductible differences. The amount of the
deferred tax asset considered realizable could be reduced if estimates of
future taxable income during the carryforward period are reduced.
The Company paid income taxes of approximately $2.2 million, $6.1 million and
$9.2 million during 1995, 1994 and 1993, respectively.
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. The leases are classified as capital
leases for accounting purposes. Aggregate rental payments under both leases
were $1.2 million, $1.2 million, and $1.1 million in 1995, 1994 and 1993,
respectively. Biennial increases are contained in each lease based on the
Consumer Price Index with the next scheduled increase on January 1, 1998.
Both leases expire in the year 2015.
The Company leased certain distribution center equipment from its Chief
Executive Officer and principal shareholder, for which annual payments were
$204,000 in each of 1994 and 1993, and $102,000 through July 31, 1995, when
title to such equipment passed to the Company. Additionally, the Company
financed certain distribution center equipment through a bank, providing for
total annual payments of $136,000 in each of 1994 and 1993 and $222,000
through December 15, 1995, at which time the title to such equipment passed to
the Company. Both equipment leases were capitalized for accounting purposes.
Fixed asset amounts for all capitalized leases are as follows:
February 3, January 28,
1996 1995
- - - -----------------------------------------------------------------------
(in thousands)
Building $7,105 $7,105
Fixtures and equipment 1,625 1,625
- - - -----------------------------------------------------------------------
8,730 8,730
Allowances for depreciation and amortization 3,777 3,342
- - - -----------------------------------------------------------------------
$4,953 $5,388
===========================
F-13
The Company leases substantially all of its stores, many of which contain
renewal options, for periods ranging from five to twenty-five years, with the
majority being ten years. Most leases also provide for payment of operating
expenses, real estate taxes, and for additional rent based on a percentage of
sales. 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
1995 1994 1993
- - - ---------------------------------------------------------------------
(in thousands)
Minimum rentals $57,420 $58,750 $51,610
Contingent rentals 246 464 647
- - - ---------------------------------------------------------------------
$57,666 $59,214 $52,257
===========================
Future minimum rental payments required under all leases that have initial or
remaining noncancelable lease terms in excess of one year at February 3, 1996,
are as follows:
Operating Capitalized
Leases Leases
- - - -------------------------------------------------------------------------
(in thousands)
1996 $ 49,568 $ 1,232
1997 44,041 1,232
1998 38,387 1,232
1999 34,978 1,232
2000 30,552 1,232
Thereafter 81,417 18,136
- - - ------------------------------------------------------------------------
Total minimum payments required $278,943 24,296
=======
Amounts representing interest 17,625
- - - ------------------------------------------------------------------------
Present value of minimum lease payments 6,671
Less current portion 77
- - - ------------------------------------------------------------------------
Long-term capital lease obligations $ 6,594
========================================================================
F-14
Trans World Entertainment Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 6. Benefit Plans
Stock Option Plans
Under the 1986 Stock Option Plan and the 1994 Stock Option Plan (the "Plans"),
the Compensation Committee may grant options to acquire shares of common stock
to employees of the Company and its subsidiaries at the fair market value of
the common stock on the date of grant. Under the Plans, options generally
become exercisable commencing one year from the date of grant in increments of
25% per year with a maximum term of ten years. Shares authorized for issuance
under the 1986 and 1994 Stock Option Plans were 1,100,000 and 1,000,000,
respectively. As of June 1, 1995, the Company stopped issuing stock options
under the 1986 Stock Option Plan. At February 3, 1996, of the 2,100,000
shares authorized for issuance under the Plans, there were 880,768 shares of
common stock subject to stock options granted and outstanding, 399,674 of
which were vested and exercisable. Shares available for future grants at
February 3, 1996 and January 28, 1995 were 801,750 and 1,034,447,
respectively.
The Company has a stock option plan for non-employee directors (the "1990
Plan"). Options under this plan are granted at 85% of the fair value at the
date of grant. As of February 3, 1996, there were 250,000 shares authorized
for issuance and 184,500 shares of common stock reserved for possible future
option grants under the 1990 Plan. As of February 3, 1996, 38,250 of the
options granted were vested and exercisable.
The following tables summarize activity under the 1986 and 1994 Plans and the
1990 Plan:
1986 and 1994 Plans 1990 Plan
---------------------------- ----------------------------
Number of Option Number of Option
Shares Subject Price Range Shares Subject Price Range
To Option Per Share To Option Per Share
----------------------------------------------------------
- - - -----------------------------------------------------------------------------
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
Granted 224,087 2.25- 5.25 6,000 3.55
Exercised
Cancelled (277,575) 3.63- 22.50 (11,500) 3.55- 12.65
- - - ------------------------------------------------------------------------------
Balance,
February 3, 1996 880,768 $ 2.25-$24.25 65,500 $ 3.55-$27.42
==============================================================================
Restricted Stock Plan
Under the 1990 Restricted Stock Plan, the Compensation Committee may grant
awards for up to 300,000 shares of common stock to executive officers and
other key employees of the Company and its subsidiaries. The shares are
issued as restricted stock and are held in the custody of the Company until
all vesting restrictions are satisfied. If conditions or terms under which an
award is granted are not satisfied, the shares are forfeited. At February 3,
1996, outstanding awards and shares available for grant totaled 50,000 and
250,000, respectively.
F-15
401 (k) Savings Plan
The Company offers a 401 (k) Savings Plan to eligible employees meeting
certain age and service requirements. This plan permits participants to
contribute up to 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 matching contribution
totaled $470,000, $413,000 and $300,000 in 1995, 1994 and 1993, respectively.
Note 7. Treasury Stock
At February 3, 1996 and January 28, 1995, the Company held 48,394 shares in
treasury resulting from the repurchase of common stock through open market
purchases.
Note 8. Concentration of Business Risks
The Company purchases inventory for its stores from approximately 400
suppliers, with approximately 62% of purchases being made from six suppliers.
In the past, the Company has not experienced difficulty in obtaining
satisfactory sources of supply, and management believes that it will retain
access to adequate sources of supply. However, a loss of a major supplier
could cause a possible loss of sales, which would have an adverse affect on
operating results and result in a decrease in vendor support for the Company's
advertising programs.
Note 9. Quarterly Financial Information (unaudited)
- - - -----------------------------------------------------------------------------
Fiscal 1995 Quarter Ended
April 29, July 29, Oct 28, Feb 3, Fiscal
1995 1995 1995 1996 1995
- - - -----------------------------------------------------------------------------
(in thousands, except per share amounts)
Sales $111,912 $104,292 $103,165 $197,677 $517,046
Gross profit 39,654 35,315 35,970 65,353 176,292
Net income (loss) (4,086) (6,129) (5,093) (10,065) (25,373)
Earnings (loss) per share $(0.42) $(0.63) $(0.52) $(1.03) $(2.61)
- - - -----------------------------------------------------------------------------
- - - -----------------------------------------------------------------------------
Fiscal 1994 Quarter Ended
April 30, July 30, Oct 29, Jan 28, Fiscal
1994 1994 1994 1995 1994
- - - -----------------------------------------------------------------------------
(in thousands, except per share amounts)
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)
Earnings (Loss) per share $(0.19) $(0.29) $(0.28) $0.11 $(0.64)
- - - -----------------------------------------------------------------------------
F-16
Index to Exhibits
- - - -----------------
Document Number and Description
- - - -------------------------------
Exhibit No.
3.1 Restated certificate of Incorporation -- incorporated herein by
reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for
the fiscal year ended January 29, 1994. Commission File No. 0-14818.
3.2 Certificate of Amendment to the Certificate of Incorporation --
incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended October 29, 1994.
Commission File No. 0-14818.
3.3 Amended By-Laws -- incorporated herein by reference to Exhibit 3.2 to
the Company's Annual Report on Form 10-K for the fiscal year ended
February 2, 1991. Commission File No. 0-14818.
4.1 Note and Security Agreement, dated June 20, 1991, between Aetna Life
Insurance Company and the Company, for the 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 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 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 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 Form of Amended and Restated Note Agreements, dated June 29, 1995,
between Aetna Life Insurance Company relating to the Company's Variable
Rate Senior Notes due July 31, 1996, the Purchasers of the Company's
Variable Rate Senior Notes due July 31, 1996 and Trans World Entertainment
Corporation and Record Town, Inc. -- incorporated herein by reference to
Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 29, 1995. Commission File No. 0-14818.
* 4.6 Agreement in Principle, dated May 1, 1996, among Aetna Life Insurance
Company relating to the Variable Rate Senior Notes due July 31, 1996, the
Purchasers of the Company's Variable Rate Senior Notes due July 31, 1996,
the commercial banks in the Company's revolving credit facilities, due
July 31, 1996, and Trans World Entertainment Corporation and Record Town,
Inc.
4.7 Note Agreement, dated July 2, 1993, among the Company, Record Town,
Inc. and the Purchasers listed on Exhibit A thereto, relating to 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.
4.8 Form of Amendment, dated as of March 24, 1994, among the Company,
Record Town, Inc. and each of the holders of the 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.
4.9 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.
4.10 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.
4.11 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.
4.12 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.
4.13 Form of First Amendment and Waiver, dated March 17, 1994, between the
Company and each of the commercial banks in the Company's 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.
4.14 Form of Second Amendment to Credit Agreement, dated as of December 5,
1994, between the Company and each of the commercial banks in the
Company's 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.
4.15 Form of Amended and Restated Revolving Credit Agreement, dated June
29, 1995, between the Company and each of the commercial banks in the
Company's revolving credit facility -- incorporated herein by reference to
Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 29, 1995. 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, 1996 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 Form of Restricted Stock Agreement dated February 1, 1995 and May 1,
1995 between the Company and Edward W. Marshall, Jr., Executive Vice
President - Operations and Bruce J. Eisenberg, Senior Vice President -
Real Estate, respectively, incorporated herein by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended April 29, 1995. Commission File No. 0-14818.
10.9 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.
10.10 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.
10.12 Form of Restricted Stock Agreement dated February 1, 1995 and May 1,
1995 between the Company and Edward W. Marshall, Jr., Executive Vice
President - Operations and Bruce J. Eisenberg, Senior Vice President -
Real Estate, respectively, incorporated herein by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended April 29, 1995. Commission File No. 0-14818.
10.13 Form of Indemnification Agreement dated May 1, 1995 between the
Company and its officers and directors incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended April 29, 1995. Commission File No. 0-14818.
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
4.6 Agreement in Principle, dated May 1, 1996, among Aetna Life Insurance
Company relating to the Variable Rate Senior Notes due July 31, 1996, the
Purchasers of the Company's Variable Rate Senior Notes due July 31, 1996,
the commercial banks in the Company's revolving credit facilities, due July
31, 1996, and Trans World Entertainment Corporation and Record Town, Inc.
10.4 Employment Agreement, dated as of February 1, 1996 between the Company
and Robert J. Higgins.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Ernst & Young LLP.
27 Financial Data Schedule
(electronic filing only)