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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 30, 1999
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ............ TO ............
COMMISSION FILE NUMBER: 0-14818
TRANS WORLD ENTERTAINMENT CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 14-1541629
------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Identification Number)
incorporation or organization)
38 Corporate Circle
Albany, New York 12203
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(518) 452-1242
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's Knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or an
amendment to this Form 10-K. [ ]
As of April 23, 1999, 52,107,411 shares of the Registrant's Common Stock,
excluding 104,432 shares of stock held in Treasury, were issued and
outstanding. The aggregate market value of such shares held by non-affiliates
of the Registrant, based upon the closing sale price of $14.375 on the Nasdaq
National Market on April 23, 1999, was approximately $576,049,533. Shares of
Common Stock held by the Company's controlling shareholder, who controls
approximately 23.1% of the outstanding Common Stock, have been excluded for
purposes of this computation. Because of such shareholder's control, shares
owned by other officers, directors and 5% shareholders have not been excluded
from the computation.
PART I
Item 1. BUSINESS
General
- -------
Trans World Entertainment Corporation (which, together with its consolidated
subsidiaries, is referred to herein as the "Company") was incorporated in New
York in 1972. Trans World Entertainment Corporation owns 100% of the
outstanding common stock of Record Town, Inc., through which the Company's
principal retail operations are conducted.
The Company operates a chain of retail entertainment stores in a single
industry segment. Sales were $698.5 million during the fiscal year ended
January 30, 1999 (referred to herein as "1998"). The Company is one of the
largest specialty retailers of compact discs, prerecorded audio cassettes,
prerecorded video and related accessories in the United States. At January
30, 1999, the Company operated 501 stores totaling about 2.5 million square
feet in 33 states, the District of Columbia and the U.S. Virgin Islands, with
the majority of the stores concentrated in the Eastern half of the United
States. The Company's business is highly seasonal in nature, with the peak
selling period being the Christmas holiday season in the Company's fourth
fiscal quarter.
In October 1997, the Company acquired 90 out of a total of 118 stores owned by
Strawberries, Inc., a privately held freestanding music specialty store
retailer operating primarily in New England. The stores operate under the
names "Strawberries" and "Waxie Maxie" and are primarily located in
freestanding and strip center locations.
On September 15, 1998, the Company split its common stock three-for-two in the
form of a 50% stock dividend. All references throughout this report to number
of shares, per share amounts, stock option data and market prices of the
Company's common stock have been adjusted to reflect the stock split. The
total shares issued at January 30, 1999 were 32.8 million compared to a total
of 29.7 million at January 31, 1998.
On October 26, 1998, the Company and Camelot Music Holdings, Inc. announced
the signing of a definitive agreement to merge in a stock-for-stock
transaction that would create the nation's largest music retailing company
with approximately 1,000 retail locations. On April 22, 1999, each company
held a special meeting of its shareholders at which they voted on and approved
a proposal to exchange 1.9 shares of the Company's common stock for each share
of Camelot common stock. The Company issued 19.4 million shares of its common
stock and 1.3 million stock options to purchase the Company's stock. The
transaction was accounted for as a pooling-of-interests. Though the
transaction was not completed until 1999, the Company has included information
related to Camelot in Item 1. "Business" and Note 12 in the Notes to
Consolidated Financial Statements.
The Company's principal executive offices are located at 38 Corporate Circle,
Albany, New York, 12203, and its telephone number is (518) 452-1242.
Store Concepts
- --------------
The Company's strategy is to offer customers a broad selection of music and
video titles at competitive prices in convenient, attractive stores. The
Company has developed a number of distinct store concepts to take advantage of
real estate opportunities and to satisfy varying consumer demands.
Mall Stores
The Company's mall stores include five concepts, all of which have been
designed to offer consumers a fun and exciting shopping experience. In the
mall stores, the Company emphasizes on a strong in-store presentation message,
broad merchandise selection and competitive pricing to attract the casual
impulse buyer.
Full-Line Music Stores. The Company's full-line mall stores are located in
large, regional shopping malls and are generally named Record Town. There
were 161 such stores at January 30, 1999. This store concept utilizes an
average space of approximately 3,500 square feet with certain stores ranging
in excess of 7,000 square feet depending on the availability of preferred
space and the expected volume of the store. This concept would also include
290 Camelot Music, 124 The Wall and 18 Spec's Music stores operated by Camelot
at January 30, 1999, which averaged approximately 4,000 square feet of space.
Camelot Music and The Wall stores were acquired on April 22, 1999.
Saturday Matinee Stores. These stores are dedicated to the sale of
prerecorded video merchandise. These stores are located in large, regional
shopping malls and average 2,200 square feet in size. There were 37 such
locations in operation at January 30, 1999. The Company's strategy is to
combine this store with a Record Town in its combination store concept
whenever possible.
Combination Stores. At January 30, 1999, the Company operated 92 combination
Record Town/Saturday Matinee stores. The combination store concept occupies
an average of 8,000 square feet. These stores share common storefronts and
offer the consumer an exciting combination of music and video merchandise in
one store location. The Company believes that the combination of the two
concepts creates a marketing synergy by attracting different target customers.
For Your Entertainment Stores. At January 30, 1999, the Company operated
seven F.Y.E. stores. These stores carry a broad assortment of music and video
merchandise and an extensive selection of games, portable electronics,
accessories and boutique items, as well as a game arcade. This format makes
the traditional superstore experience available to shopping mall consumers.
This format is designed to be a semi-anchor or destination retailer in major
regional malls. The F.Y.E. concept occupies an average of 27,100 square feet.
Specialty Music Stores. The specialty music concept is also located in large,
regional shopping malls, but contrasts with full-line music stores in that
they carry a less diverse merchandise selection. These stores, 16 of which
were in operation at January 30, 1999, are generally operated under the name
Tape World. The specialty mall stores operate in approximately 1,200 square
feet. The Company's strategy is to reposition and expand these stores into
Record Town stores or combination stores as opportunities become available.
Freestanding Stores
The Company's freestanding concept accounted for 188 stores in operation at
January 30, 1999, which primarily operate under the names Coconuts and
Strawberries. These stores are designed for freestanding, strip center and
downtown locations in areas of high population density. The majority of the
freestanding stores range in size from 3,000 to 8,000 square feet.
Freestanding stores carry an extensive merchandise assortment and have an
emphasis on competitive pricing. The Company's freestanding stores include 12
video rental stores. These stores operate under the tradename "Movies Plus"
and average approximately 5,200 square feet. This concept would also include
10 Camelot Music, 21 The Wall and 24 Spec's Music stores operated by Camelot
at January 30, 1999, which averaged approximately 5,500 square feet of space.
These stores were acquired on April 22, 1999.
In October 1997, the Company acquired "Planet Music," a 31,000 square foot,
freestanding superstore in Virginia Beach, VA. The store offers an extensive
catalog of music, video and other related merchandise, similar to what would
be carried in large freestanding stores. The acquisition also included the
rights to the "Planet Music" name and trademark, which offers the Company
potential expansion opportunities.
E-Commerce
During 1998, the Company established a subsidiary to develop a strategy to
conduct business over the internet. In November 1998, the Company launched
TWEC.com, its internet commerce site. The site offers a wide variety of
music, movies and games for sale, as well as hosting live events and
interactive chats with celebrities.
Merchandise
- -----------
The Company's stores offer a full assortment of compact discs, prerecorded
audio cassettes, prerecorded video (including DVD) and related accessories.
Sales by merchandise category as a percent of total sales over the past three
years were as follows:
---------------------------------------
January 30, January 31, February 1,
1999 1998 1997
---------------------------------------
Compact discs 58.6% 55.5% 50.1%
Prerecorded audio cassettes 11.8 14.2 16.9
Singles 3.3 4.3 4.8
Prerecorded video 15.2 16.3 18.6
Other 11.1 9.7 9.6
---------------------------------------
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 five
major manufacturers. Music categories include rock, pop, rap, soundtracks,
alternative, latin, urban, heavy metal, country, dance, vocals, jazz and
classical. Merchandise inventory is generally classified for inventory
management purposes in three groups: "hits", which are the best selling new
releases, "fast moving" 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.
Prerecorded Video. The Company offers prerecorded video for sale in a
majority of its stores. DVD, a new video technology, was introduced to the
retail consumer during 1997. DVD offers a quality that exceeds both the
current VHS and CD formats and also offers the consumer more storage than the
current CD. During 1998, DVD sales were 7.9% of the Company's total retail
video sales. The Company believes that the DVD player will replace the sales
of laser disc players and gradually replace VCRs as the DVD technology becomes
more affordable and accessible. The Company is anticipating the increased
availability of DVD players and plans to capitalize on this technology by
making software increasingly available as this technology becomes more widely
accepted by the consumer. Paul Kagan Associates, an entertainment/media
research firm, estimated that as many as 1.1 million households owned a DVD
player by the end of 1998 and as many as 48 million households will own a DVD
player by the end of 2010.
Other Merchandise. The Company stocks and promotes brand name blank audio
cassette and videocassette tapes as well as accessory merchandise for compact
discs, audio cassettes and videocassettes. These accessories include
maintenance and cleaning products, boutique items, storage cases, portable
electronics, headphones and video games.
Advertising
- -----------
The Company makes extensive use of in-store advertising circulars and signs
and also pursues a mass-media marketing program for its freestanding stores
through advertisements in newspapers, radio, and television. Most of the
vendors from whom the Company purchases merchandise offer their customers
advertising allowances to promote their merchandise.
Industry and Competitive Environment
- ------------------------------------
According to the Recording Industry Association of America, the U.S. retail
music market was approximately $13.7 billion in 1998 and is expected to grow
at a compound annual rate of 5.5% through 2002. The video sell-through
market, including VHS and DVD, totaled an estimated $8.9 billion in 1998 and
is expected to grow at a compounded annual rate of 6% through 2007. The
retail home entertainment industry is highly competitive. The Company's
retail stores compete primarily with other specialty retail music and video
chains (e.g. Musicland, Wherehouse Entertainment and Tower Records), as well
as mass merchants (e.g. Wal-Mart, K-Mart, Target) and consumer electronics
stores (e.g. Best Buy, Circuit City), some of which may have greater
financial or other resources than the Company. The recent trend in industry
consolidation not only included the Company's acquisitions of Camelot Music
Holdings, Inc. and Strawberries, Inc., but also Camelot's previous acquisition
of The Wall and Spec's Music, as well as the acquisition of Blockbuster Music
by Wherehouse Entertainment, Inc.
The Company also competes with mail order clubs (e.g. BMG Music and Columbia
House) and the Internet companies (e.g. Amazon.com and CDnow). In addition,
a uniform format is being developed that will enable music companies to sell
their products via direct Internet download. The Company believes that sales
via the Internet will continue to become more significant over time. The
Company launched its internet commerce site in the late fall of 1998.
Seasonality
- -----------
The Company's business is highly seasonal. The fourth quarter constitutes the
Company's peak selling period. In fiscal 1998, the fourth quarter accounted
for approximately 38.3% of annual sales and 76.4% of net income. In
anticipation of increased sales activity during these months, the Company
purchases substantial amounts of inventory and hires a significant number of
temporary employees to bolster its permanent store sales staff. If for any
reason the Company's net sales were below seasonal norms during the fourth
quarter, including as a result of merchandise delivery delays due to receiving
or distribution problems, the Company's operating results, particularly
operating and net income, could be adversely affected. Quarterly results are
affected by the timing and strength of new releases, the timing of holidays,
new store openings and the sales performance of existing stores. Camelot
experiences seasonality similar to the Company's.
Distribution and Merchandise Operations
- ---------------------------------------
The Company's and Camelot's distribution facilities use certain automated and
computerized systems designed to manage merchandise receipt, storage and
shipment. Store inventories of regular merchandise are replenished in
response to detailed merchandise sales information that is transmitted to the
central computer system from each store after the close of the business day.
Shipments from the facility to each of the Company's stores are made at least
once a week and currently provide the Company's stores with approximately 78%
and Camelot's stores with approximately 75% of their merchandise requirements.
The balance of the stores' requirements are satisfied through direct shipments
from manufacturers or redistribution from other Company-operated stores.
Company-owned trucks service approximately 38.3% of the Company's stores; the
balance are serviced by several common carriers chosen on the basis of
geographic and rate considerations. Camelot services all of its stores with
common carriers. No contractual arrangements exist between common carriers
and either the Company or Camelot. The Company's and Camelot's sales volume
and centralized merchandise distribution facilities enable them to take
advantage of transportation economies.
The Company believes that its existing distribution center and the Camelot
distribution center are adequate to meet the combined Company's planned
business needs, and improvements will be completed primarily for operational
efficiency.
Suppliers and Purchasing
- ------------------------
The Company purchases inventory for its stores from approximately 475
suppliers. Approximately 69% of purchases in fiscal 1998 were made from the
five largest suppliers: WEA (Warner/Electra/Atlantic Corp.), Sony Music,
Universal Distribution, BMG (Bertelsmann Music Group) and EMD (EMI Music
Distribution). As is typical in this industry, neither the Company nor
Camelot has material long-term purchase contracts and deals with its suppliers
principally on an order- by-order basis. In the past, the Company has not
experienced difficulty in obtaining satisfactory sources of supply, and
management believes that it will retain access to adequate sources of supply.
The Company also expects to continue to pass on to customers any price
increases imposed by the suppliers of prerecorded music and video.
The Company has surveyed its vendors regarding Year 2000 compliance. Vendors
representing 84% of its merchandise purchases in fiscal 1998 represent that
their systems are compliant. Camelot conducts business with substantially the
same vendors as the Company and has conducted a similar survey. Management
believes the remaining vendors will complete Year 2000 compliance and that any
vendor non-compliance is not likely to cause significant disruption to the
Company's business because the Year 2000 begins shortly after the Company's
peak selling period when purchasing activity is low.
The Company produces store fixtures for all of its new stores and store
remodels in its manufacturing facility located in Johnstown, New York. The
Company believes that its costs of production are lower than purchasing from
an outside manufacturer.
Trade Customs and Practices
- ---------------------------
Under current trade practices with four of the five largest suppliers,
retailers of compact discs and prerecorded audio cassettes are entitled to
return merchandise they have purchased for other titles carried by these
suppliers; however, the returns are subject to merchandise return penalties.
The other large supplier recently changed its policy on merchandise returns to
eliminate penalties on the majority of its merchandise. 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 video offer return privileges comparable to those
with prerecorded music, but with no merchandise return penalties. Video
rental merchandise is not eligible for return to the manufacturers. The
merchandise return policies have not changed significantly during the past
five years, except for one of the five largest suppliers eliminating penalties
on the majority of merchandise returns, but any future changes in these
policies could impair the value of the Company's inventory. The Company
generally has adapted its purchasing policies to changes in the policies of
its suppliers.
Employees
- ---------
As of January 30, 1999, the Company employed approximately 6,700 people, of
whom 800 were employed on a full-time salaried basis, 1,800 were employed on a
full-time hourly basis, and the remainder were employed on a part-time hourly
basis. As of January 30, 1999, Camelot employed approximately 6,100 people,
of whom 1,100 were employed on a full- time salaried basis, 800 were employed
on a full-time hourly basis, and the remainder were employed on a part-time
hourly basis. The Company and Camelot hire temporary sales associates during
peak seasons to assure continued levels of customer service. Store managers
report to district managers, each of who, 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 the profitability of stores for which they are responsible. None of the
employees are covered by collective bargaining agreements, and management
believes that the Company and Camelot enjoy favorable relations with their
employees. Increases in the minimum wage have had a significant effect on the
Company's compensation expense during prior periods. Any future increases in
the minimum wage may have a material adverse effect on the Company's results
of operations and financial condition.
Retail Information Systems
- --------------------------
All store sales data and merchandise purchasing information is collected
centrally utilizing the IBM AS/400 computer system. The Company's information
systems manage a database of over 250,000 active SKUs in prerecorded music,
video and accessory merchandise. The system processes inventory, accounting,
payroll, telecommunications and other operating information for all of the
Company's operations. During fiscal 1998, the Company rolled out a new
point-of-sale system chain wide. This new system has improved customer
service while increasing the accuracy of perpetual inventories at the store
level. Features of the system include enhanced inventory management functions
including merchandise receiving, returns and the ability to lookup by SKU a
stores current in-stock inventory position. Additionally, the system
facilitates streamlined checkout procedures and daily electronic communication
between stores, the corporate offices and field management. Operations from
the acquired Camelot stores will be integrated into the Company's systems.
The same point-of-sale system currently used by the Company will be rolled out
to the acquired Camelot stores during the summer of 1999.
Item 2. PROPERTIES
Retail Stores
- -------------
At January 30, 1999, the Company operated 501 retail locations and Camelot
operated 487 retail locations. The Company owns one real estate site, which
it formerly operated as a retail outlet and currently leases to an unrelated
party. All of the Company's and Camelot's retail stores are under operating
leases with various terms and options. Substantially all of the stores
provide for payment of fixed monthly rentals, a percentage of the gross
receipts of the store in excess of specified sales levels, and operating
expenses for maintenance, property taxes, insurance and utilities. The
following table lists the number of leases due to expire (assuming no renewal
options are exercised) in each of the fiscal years shown, as of January 30,
1999:
Year Leases Year Leases
---- ------ ---- ------
Trans Trans
World Camelot World Camelot
----- ------- ----- -------
1999 81 69 2003 76 58
2000 69 53 2004 54 81
2001 48 75 2005 16 46
2002 53 47 2006
& Beyond 104 56
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 will do so upon the
expiration of the applicable store lease. In addition, Camelot owns two of
the Spec's Music store locations.
Corporate Offices and Distribution Center Facility
- --------------------------------------------------
The Company leases its Albany, New York distribution facility and corporate
office space from its largest shareholder and Chief Executive Officer under
three capital leases that extend through the year 2015. All three leases are
at fixed rentals with provisions for biennial increases based upon increases
in the Consumer Price Index. Under such leases, the Company pays all property
taxes, insurance and maintenance. The office portion of the facility is
comprised of approximately 38,000 square feet. The distribution center
portion is comprised of approximately 140,000 square feet. Camelot owns its
200,000 square foot distribution center and 40,000 square feet of commercial
office space in North Canton, Ohio.
The Company leases an 83,000 square foot facility in Johnstown, New York,
where it manufactures its store fixtures. The three-year operating lease
expires in June 2001. The Company also leases 13,000 square feet of
commercial office space in Albany, New York. The five-year operating lease
expires in November 2002.
The Company's corporate offices will remain in its existing Albany, New York
location and the Company will continue to operate both distribution centers.
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
No matters were submitted to a vote of security holders by Trans World during
the fourth quarter of the fiscal year ended January 30, 1999.
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 Nasdaq National Market under the
symbol "TWMC." As of January 30, 1999, there were approximately 4,800
shareholders of record. The following table sets forth high and low last
reported sale prices, adjusted for stock splits, for each fiscal quarter
during the period from February 1, 1997 through April 23, 1999.
Closing
Sales
Prices
High Low
1997
1st Quarter $4.13 $2.42
2nd Quarter 6.42 3.96
3rd Quarter 10.92 6.04
4th Quarter 18.75 9.75
1998
1st Quarter $21.96 $16.00
2nd Quarter 29.58 18.25
3rd Quarter 26.75 11.33
4th Quarter 24.38 13.25
1999
1st Quarter
(through
April 23, 1999) $15.25 $9.63
On April 23, 1999, the last reported sale price on the Common Stock on the
Nasdaq National Market was $14.38.
Options for the Company's Common Stock trade on the Chicago Board Options
Exchange and the American Stock Exchange.
Dividend Policy. The Company has never declared or paid cash dividends on its
Common Stock. The Company's credit agreement currently allows the Company to
pay a cash dividend once in each calendar year. Such dividends would be
restricted to ten percent of the most recent fiscal year's consolidated net
income and could only be paid if, after dividend payment, the Company
maintains $25 million of available borrowings under the credit agreement. Any
future determination as to the payment of dividends will depend upon capital
requirements and limitations imposed by the Company's credit agreement and
such other factors as the board of directors of the Company may consider.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data and other
operating information of the Company. The selected income statement and
balance sheet data for the five fiscal years ended January 30, 1999 set forth
below are derived from the audited consolidated financial statements of the
Company. Portions of the restructuring charges for the years ended February
3, 1996 and January 28, 1995 have been reclassified and the restructuring
charge for the year ended February 3, 1996 has been restated, as discussed in
Form 10-K/A filed with the Securities and Exchange Commission on March 31,
1999. Each fiscal year of the Company consisted of 52 weeks except the fiscal
year ended February 3, 1996, which consisted of 53 weeks. All share and per
share amounts have been adjusted for stock splits. The information is only a
summary and you should read it in conjunction with the Company's audited
consolidated financial statements and related notes and other financial
information included herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Fiscal Year Ended
January 30, January 31, February 1, February 3, January 28,
1999 1998 1997 1996 1995
-----------------------------------------------------------
(in thousands, except per share and store data)
INCOME STATEMENT DATA:
Sales $698,469 $571,314 $481,657 $517,046 $536,840
Cost of sales (1) 434,406 361,422 308,952 347,554 345,720
--------------------------------------------------------
Gross profit 264,063 209,892 172,705 169,492 191,120
Selling, general and
administrative expenses 196,437 170,834 150,218 168,313 175,569
Restructuring and impairment
charges (reversal), net (1) (492) --- --- 24,204 16,702
--------------------------------------------------------
Income (loss) from operations 68,118 39,058 22,487 (23,025) (1,151)
Interest expense 2,949 5,148 12,110 15,201 10,058
Other expenses (income), net (1,408) (153) (1,343) (979) (518)
--------------------------------------------------------
Income (loss) before
income taxes 66,577 34,063 11,720 (37,247) (10,691)
Income tax expense (benefit) 25,965 13,489 4,618 (13,431) (4,435)
---------------------------------------------------------
Net income (loss) $40,612 $20,574 $7,102 ($23,816) ($6,256)
=========================================================
Basic earnings (loss)
per share $1.28 $0.70 $0.24 ($0.82) ($0.21)
=========================================================
Weighted average number
of shares outstanding 31,779 29,483 29,271 29,178 29,103
=========================================================
Diluted earnings (loss)
per share $1.20 $0.66 $0.24 ($0.82) ($0.21)
=========================================================
Weighted average number of
shares outstanding 33,737 31,032 29,697 29,178 29,103
=========================================================
BALANCE SHEET DATA(at the end of the period):
Working capital $135,404 $88,974 $80,368 $78,773 $93,431
Total assets 435,686 374,019 311,610 391,888 426,939
Current portion of
long-term obligations 2,802 99 9,557 3,420 6,618
Long-term obligations 16,065 41,409 50,490 60,364 66,441
Shareholders' equity 211,983 124,522 102,919 95,661 119,477
OPERATING DATA:
Store Count (open at end of period):
Mall stores 313 340 357 379 431
Freestanding stores 188 199 122 163 253
---------------------------------------------------------
Total stores 501 539 479 542 684
Comparable store sales increase
(decrease) (2) 7.5% 10.2% 3.6% (3.5%) 1.1%
Total square footage
(in thousands) 2,514 2,442 2,008 2,140 2,544
(1) The restructuring and impairment charges (reversal), net, during the years
ended February 3, 1996 and January 28, 1995, included the write-down of
assets, estimated cash payments to landlords for the early termination of
operating leases, and early termination benefits. The charges also included
estimated professional fees. Inventory-related costs, including the cost of
returning merchandise after the store closes, are included in cost of sales.
During the year ended January 30, 1999, restructuring and impairment charges
(reversal), net, included a reversal of the remaining balance of $2.2 million
in the store closing reserve originally established during the fiscal year
ended February 3, 1996, and an asset impairment charge of $1.7 million to
write down the carrying amount of certain fixed assets at stores, primarily
leasehold improvements. See notes 1 and 2 to the consolidated financial
statements.
(2) A store is included in comparable store sales calculations at the
beginning of its 13th full month of operation.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is an analysis of the Company's results of operations, liquidity
and capital resources. To the extent that such analysis contains statements
which are not of a historical nature, such statements are forward-looking
statements, which involve risks and uncertainties. These risks include, but
are not limited to, changes in the competitive environment for the Company's
merchandise, including the entry or exit of non-traditional retailers of the
Company's merchandise to or from its markets; the release by the music
industry of an increased or decreased number of "hit releases," general
economic factors in markets where the Company's merchandise are sold, and
other factors discussed in the Company's filings with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain income and
expense items as a percentage of sales:
Fiscal Year Ended
-----------------------------------------------
January 30, January 31, February 1,
1999 1998 1997
-----------------------------------------------
Sales 100.0% 100.0% 100.0%
Gross profit 37.8% 36.7% 35.9%
Selling, general and
administrative expenses 28.1% 29.9% 31.2%
Restructuring charge reversal
and impairment charge, net 0.0% - -
-----------------------------------------------
Income from operations 9.7% 6.8% 4.7%
Interest expense 0.4% 0.8% 2.5%
Other expenses (income), net (0.2)% 0.0% (0.3)%
-----------------------------------------------
Income before income taxes 9.5% 6.0% 2.5%
Income tax expense 3.7% 2.4% 1.0%
-----------------------------------------------
Net income 5.8% 3.6% 1.5%
===============================================
Change in comparable
store sales 7.5% 10.2% 3.6%
===============================================
Fiscal Year Ended January 30, 1999 ("1998")
Compared to Fiscal Year Ended January 31, 1998 ("1997")
Sales. The Company's sales increased $127.2 million, or 22.3%, from 1997.
The increase was primarily attributable to a comparable store sales increase
of 7.5%, a sales increase resulting from the inclusion for a full year of 90
Strawberries stores acquired in October 1997, and the opening of 56 stores,
partially offset by the closing of 94 stores. Management attributes the
comparable store sales increase primarily to its strategic decision to
eliminate unprofitable stores and focus on customer service, superior retail
locations, inventory management and merchandise presentation.
For 1998, comparable store sales increased 6.9% for mall stores and 9.7% for
freestanding stores. By merchandise configuration, comparable store sales
increased 6.6% in music, 10.2% in video and 10.2% in other merchandise.
Gross Profit. Gross profit, as a percentage of sales, increased to 37.8% in
1998 from 36.7% in 1997 as a result of reduced merchandise shrinkage and
increased purchase discounts combined with a strong performance from higher
margin merchandise categories.
Selling, General and Administrative Expenses. SG&A, as a percentage of sales,
decreased to 28.1% in 1998 from 29.9% in 1997. The 1.8% decrease can be
attributed to the leverage of SG&A expenses on the 7.5% comparable store sales
increase, as well as the overall sales increase.
Restructuring Charge Reversal and Impairment Charge, net. Restructuring
charge reversal and impairment charge, net, represents the one-time reversal
of the $2.2 million reserve remaining from the restructuring charge taken for
the 1995 restructuring program which was completed during the fourth quarter
of 1998. This was offset by a $1.7 million charge taken related to the
impairment of fixed assets at stores, primarily leasehold improvements, where
the carrying amount of such assets exceeded their estimated fair value.
Interest Expense. Interest expense decreased from $5.1 million in 1997 to
$2.9 million in 1998. The decrease is due to lower average outstanding
borrowings resulting from the equity offering in May 1998, and lower interest
rates due to the refinancing completed during 1997.
Income Tax Expense. The effective income tax rate was 39.0% in 1998. See
Note 4 of Notes to Consolidated Financial Statements for a reconciliation of
the statutory tax rate to the Company's effective tax rate.
Net Income. In 1998, the Company's net income increased to $40.6 million
compared to a net income of $20.6 million in 1997. The improved bottom line
performance can be attributed to the profitability of the additional stores.
Also, the Company benefited from a comparable store sales increase, higher
gross margin rate and improved leverage of SG&A expenses.
Fiscal Year Ended January 31, 1998 ("1997")
Compared to Fiscal Year Ended February 1, 1997 ("1996")
Sales. The Company's sales increased $89.7 million, or 18.6%, from 1996. The
increase was primarily attributable to a comparable store sales increase of
10.2%, a sales increase of 8.4% resulting from the acquisition of 90
Strawberries stores in October 1997, and the opening of 48 stores partially
offset by the closing of 78 stores. Management attributes the comparable
store sales increase primarily to its strategic decision to eliminate
unprofitable stores and focus on customer service, superior retail locations,
inventory management and merchandise presentation. For 1997, comparable store
sales increased 11.0% for mall stores and 9.6% for freestanding stores. By
merchandise configuration, comparable store sales increased 11.4% in music and
2.6% in video.
Gross Profit. Gross profit, as a percentage of sales, increased to 36.7% in
1997 from 35.9% in 1996 as a result of reduced merchandise shrinkage and
increased purchase discounts combined with a strong performance from higher
margin catalog sales.
Selling, General and Administrative Expenses. SG&A, as a percentage of sales,
decreased to 29.9% in 1997 from 31.2% in 1996. The 1.3% decrease can be
attributed to the leverage of SG&A expenses on the 10.2% comparable store
sales increase, as well as the overall sales increase.
Interest Expense. Interest expense decreased 57.5% to $5.1 million in 1997
from $12.1 million in 1996. The decrease is due to lower average outstanding
borrowings and lower interest rates due to the refinancing completed during
the year.
Income Tax Expense. The effective income tax rate was 39.6% in 1997. See
Note 4 of Notes to Consolidated Financial Statements for a reconciliation of
the statutory tax rate to the Company's effective tax rate.
Net Income. In 1997, the Company's net income increased to $20.6 million
compared to a net income of $7.1 million in 1996. The improved bottom line
performance can be attributed to the profitability of the additional stores
and the ongoing success of the Company's restructuring plan. Additionally,
the Company benefited from a comparable store sales increase, higher gross
margin rate and improved leverage of SG&A expenses.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. During 1998, cash flow from operations and the proceeds from a
public stock offering were the Company's primary sources of liquidity. On May
1, 1998, the Company sold an additional 2.25 million shares of its common
stock in a public offering for approximately $37 million, net of issuance
costs. A portion of the proceeds was used to repay long-term debt and the
balance of the proceeds was used for general corporate purposes, including
investments in additional stores, fixtures and inventory.
During 1998, cash provided by operations was $41.6 million compared to $93.7
million for 1997. The decrease was substantially due to an increase in
inventory and the timing of payments to vendors for the merchandise inventory
purchases prior to and throughout the Christmas holiday season. During 1998,
the Company's accounts payable balance decreased $3.5 million compared to an
increase in the balance of $42.8 million (excluding the effect of the
acquisition of Strawberries, Inc.) during 1997. The increase in payables at
fiscal year end 1997 was primarily related to the acquisition of inventory for
the Strawberries stores acquired in October 1997.
The Company ended fiscal 1998 with cash balances of approximately $116.4
million compared to 1997, when the Company had cash balances of $94.7 million.
In both years, the Company had no short-term borrowings outstanding at
year-end.
In July 1997, the Company entered into a $100 million secured revolving credit
facility with Congress Financial Corporation. The Revolving Credit Facility
combined the Company's long-term debt with its revolving credit line to create
a $100 million credit facility with a three year term at interest rates
averaging below the prime rate. The Revolving Credit Facility, combined with
lower borrowing needs, was responsible for the Company's interest expense
decreasing to $2.9 million for the year ended January 30, 1999 from $5.1
million for the year ended January 31, 1998.
The Revolving Credit Facility contains certain restrictive provisions,
including provisions governing cash dividends and acquisitions, is secured by
merchandise inventory and has a minimum net worth covenant. On January 30,
1999, the Company had no outstanding borrowings under the Revolving Credit
Facility, and $100 million was available.
Capital Expenditures. Most of the Company's capital expenditures are for new
store expansion and the relocation of existing stores. The Company typically
finances its capital expenditures through internally generated cash and
borrowings under its revolving credit facility. In addition, the Company may
receive financing from landlords in the form of construction allowances or
rent concessions for a portion of the capital expenditure. Total capital
expenditures were approximately $39.4 million in 1998. Included in this
figure was approximately $12.4 million related to the development and
installation of a new point-of-sale ("POS") system. The system was rolled out
to all stores during the second quarter of fiscal 1998. The remaining
expenditures were related to new stores and store remodels and
reconfigurations.
In 1999, the Company plans to spend approximately $32.0 million, net of
construction allowances, for additions to fixed assets.
Provision For Business Restructuring. The Company recorded a pre-tax
restructuring charge of $33.8 million in 1995 to reflect the anticipated costs
associated with a program to close 163 stores. The restructuring charge
included the write-down of fixed assets, estimated cash payments to landlords
for the early termination of operating leases, inventory-related costs
(including the cost for returning all remaining merchandise after the store
was closed), and employee termination benefits. The charge also included
estimated professional fees related to the development of the store closing
plan and the negotiations with landlords related to the termination of leases,
a provision for exiting the rental video store format, the write-off of
goodwill related to a previous acquisition and a provision for closing the
Company's fixture manufacturing operation. Inventory-related costs have been
included in cost of sales in the accompanying consolidated statements of
income.
An analysis of the amounts comprising the restructuring charge and the charges
against the related reserve for each year in the four-year period ended
January 30, 1999 are outlined below:
Charges Balance Charges Balance Charges Balance Charges
1995 against as of against as of against as of against Remaining Reserve
Reserve Reserve 2/3/96 Reserve 2/1/97 Reserve 1/31/98 Reserve Balance Reversal
--------------------------------------------------------------------------------------- --------
(in thousands)
Leasehold improvements $6,660 $6,660 --- --- --- --- --- --- --- ---
Furniture and fixtures 3,228 3,228 --- --- --- --- --- --- --- ---
Video rental assets 4,174 --- 4,174 1,078 3,096 25 3,071 3,023 48 (48)
Goodwill 339 339 --- --- --- --- --- --- --- ---
--------------------------------------------------------------------------------------- --------
Non cash write-offs 14,401 10,227 4,174 1,078 3,096 25 3,071 3,023 48 (48)
--------------------------------------------------------------------------------------- --------
Lease obligations 7,540 --- 7,540 2,627 4,913 905 4,008 2,855 1,153 (1,153)
Inventory-related costs 6,800 --- 6,800 3,421 3,379 2,769 610 610 --- ---
Termination benefits 976 69 907 88 819 16 803 4 799 (799)
Professional fees 2,500 --- 2,500 1,632 868 711 157 20 137 (137)
Other costs 1,600 806 794 122 672 629 43 23 20 (20)
--------------------------------------------------------------------------------------- --------
Cash outflows 19,416 875 18,541 7,890 10,651 5,030 5,621 3,512 2,109 (2,109)
--------------------------------------------------------------------------------------- --------
Total $33,817 $11,102 $22,715 $8,968 $13,747 $5,055 $8,692 $6,535 $2,157 $(2,157)
======================================================================================= ========
The Company completed the 1995 restructuring program in 1998, resulting in the
closure of 191 stores (versus an original plan of 163 stores). The remaining
balance in the store closing reserve of $2.2 million was credited to
operations in the 4th quarter of 1998.
In determining the components of the reserve, management analyzed all aspects
of the restructuring plan and the costs that would be incurred. The write-off
of leasehold improvements and furniture and fixtures represented the estimated
net book value of these items at the forecasted closing date. In determining
the provision for lease obligations, the Company considered the amount of time
remaining on each store's lease and estimated the amount necessary for either
buying out the lease or continued rent payments subsequent to store closure.
Inventory-related costs include the cost to pack and ship the inventory on
hand after the closing of the store as well as the penalty paid to the vendor
for additional merchandise returns resulting from the restructuring.
Termination benefits represented the severance payments expected to be made to
terminated employees. Professional fees represented amounts expected to be
paid to advisors related to the development of the store closing plan and the
negotiations with landlords related to the termination of leases. Payments to
lenders for the waiver of covenant violations totaling $1.6 million were
included in selling, general and administrative expenses in the 1995
consolidated statement of income.
The cash outflows for the restructuring was financed from operating cash flows
and the liquidation of merchandise inventory from the closed stores. The
timing of store closures depended on the Company's ability to negotiate
reasonable lease termination agreements. The restructuring reserve balance is
included in the accompanying balance sheets under the caption "store closing
reserve."
Sales related to stores that were closed as part of the 1995 restructuring
program were $9.0 million, $19.5 million and $18.9 million in 1998, 1997 and
1996, respectively, in the year of closure. Store operating losses, excluding
corporate allocations, related to stores that were closed were $322,000,
$736,000 and $753,000 in 1998, 1997 and 1996, respectively.
The provision for termination benefits was based on the expectation that 163
employees would be terminated in connection with the restructuring program.
Through January 30, 1999, 55 employees had been terminated. The Company did
not terminate as many employees as originally planned because higher than
normal levels of attrition occurring after the announcement of the
restructuring resulted in a reduced need for involuntary terminations.
Subsequent to the adoption of the restructuring program, improving economic
conditions in certain markets, improvement in individual store performance and
the inability to negotiate reasonable lease termination agreements have led
the Company to keep open certain stores that were originally expected to be
closed. The Company also decided not to close its fixture manufacturing
operation. During 1998, a total of 21 stores were removed from the list of
stores expected to be closed. Conversely, deteriorating economic conditions
and store performance in certain markets have led the Company to close certain
stores that were not originally expected to be closed. During 1998, no stores
were added to the list of stores to be closed. In addition, the timing of
store closures has also been affected by the ability or inability to negotiate
reasonable lease termination agreements. The net effect of changes made to
the timing of store closures and the stores to be closed under the 1995
restructuring program has not been material. The restructuring program was
completed January 30, 1999, and the remaining balance of $2.2 million in the
store closing reserve was credited to operations.
Seasonality. The Company's business is highly seasonal, with the highest
sales and earnings occurring in the fourth fiscal quarter. See Note 11 of the
Notes to Consolidated Financial Statements for quarterly financial highlights.
Year 2000 Compliance. The Company has completed an assessment of the business
risks related to the Year 2000 issue. The results of the assessment indicated
that:
- - awareness of Year 2000 issues is well known throughout the Company;
- - the assessment of Year 2000 sensitive items is complete;
- - a list of items and business relationships sensitive to the Year 2000 issue
has been compiled;
- - renovation of the core information technology ("IT") systems has been
completed;
- - third-party compliance tracking has begun; and
- - verification of embedded chip ("non-IT") system readiness for Year 2000
compliance is ready to begin.
The Company's Year 2000 issue remediation process includes the following
phases: Awareness, Assessment, Renovation, Validation, and Implementation.
As indicated above, the Awareness, Assessment and Renovation phases are
complete. The Awareness phase included establishing an internal Year 2000
committee, interviewing key Company personnel at all levels, including those
at the stores, distribution center and home office, and vendor compliance
tracking. Activities in the Assessment phase included contacting merchandise
vendors regarding their Year 2000 remediation activities, discussions with the
Company's software vendors and service providers, identification of all source
code and all imbedded chip logic that could contain date logic, analyzing
source codes for the Company systems identifying each individual occurrence of
date logic, and simulating the Year 2000 environment by rolling forward the
date in test files of its principal IT systems. For the Renovation phase, all
core IT system programming modifications have been completed by the Company's
systems development staff. The system programming modifications included
upgrading the distribution, inventory management and accounting systems and
installation of new Year 2000 compliant POS registers and software.
Installation of the new POS system and software in the Trans World stores was
completed during the second quarter of fiscal 1998. Replacements for the
other (non-core) IT systems are being implemented on schedule. The non-core
IT systems being replaced include a system for tracking the opening of new
stores and a system for managing lease payments. Validation and
Implementation efforts are underway. Formal systems testing for both IT and
non-IT systems is expected to be completed by the end of the second quarter of
fiscal 1999. In order to complete the Validation and Implementation phases,
the Company will process daily, weekly and monthly transactions on the main
corporate IT systems platform, IBM AS/400. The compliance testing will be
completed in a dedicated environment within the AS/400 to assure acceptance of
all transactions in the year 2000.
The Company is exposed to both internal and external Year 2000 risks.
Internal risks exist due to the Company's dependence on its IT and non-IT
systems. The Company is dependent on its IT and non-IT systems for many of
its everyday operations including inventory management, merchandise
distribution, cash management, accounting and financial reporting. The
Company utilizes a variety of vendors for its system needs. The Company has
initiated discussions with its vendors and monitored their Year 2000
compliance programs and the compliance of their merchandise or services with
required standards. Although the majority of these vendors represent that
their products are Year 2000 compliant, the Company will perform testing to
validate the vendor representations no later than the second quarter of fiscal
1999. In the normal course of business, the Company replaced its POS register
system with a Year 2000 compliant system during 1998. Preliminary contingency
plans for failure of internal systems include implementing manual procedures
such as the use of manual merchandise picking and shipping to replace
automated distribution center equipment.
External risks are represented by the fact that the Company utilizes
approximately 2,700 different suppliers in the normal course of its business.
Five major merchandise vendors account for approximately 69% of all purchases.
Additionally, 50 other merchandise vendors account for nearly 15% of
purchases. The Company is also dependent on financial institutions for
consolidation of cash collections, and for cash payments. Although the
Company uses its own trucks for shipment of merchandise to approximately 38%
of its stores, the Company does rely on a number of trucking companies for the
remainder of its merchandise distribution. Evaluation of the Company's
vendors' Year 2000 readiness began in the fourth quarter of 1998, and is
expected to be completed by the end of the second quarter of fiscal 1999.
Upon completion of the assessment of vendor readiness, contingency plans will
be developed for all third parties where Year 2000 compliance appears to be at
risk.
The Company presently believes that its most likely worst-case Year 2000
scenarios would relate to the possible failure in one or more geographic
regions of third-party systems over which the Company has no control and for
which it has no ready substitute, such as, but not limited to, power and
telecommunications services. Each Trans World store has a "crash kit" which
allows it to operate without power and telecommunications services and
includes the ability to manually process all sales transactions. However, in
the event of a power disruption, it is highly unlikely that a store would be
open for business due to the lack of lighting and the security-related
concerns. The Company has in place a disaster recovery plan that addresses
recovery from various kinds of disasters, including recovery from significant
interruptions to data flows and distribution capabilities at its data systems
center and distribution center. The Company's disaster recovery plan provides
specific routines for actions, personnel assignments and back-up arrangements
to ensure effective response to a disaster affecting key business functions
including merchandise replenishment, cash management and distribution center
operations. Common routines and back up arrangements include off-site storage
of information, manual processing of critical applications and the
establishment of a chain of communication for key personnel. The Company is
using that plan to further develop specific Year 2000 contingency plans
identified by its third-party assessment phase which will emphasize locating
alternate sources of supply, methods of distribution and ways of processing
information.
The Company's direct costs for its Year 2000 remediation efforts total
$167,000 to date. Anticipated future costs are $590,000, but could include an
additional $600,000 to address Year 2000 issues identified as a result of
remediation testing. These costs do not include expenditures made in the
normal course of business, during 1997 and 1998, to upgrade its distribution,
inventory management and accounting systems, or costs to install new Year 2000
compliant POS registers and software. Future costs will be funded by cash
flows generated from operations.
The Company's estimate of the costs of achieving Year 2000 compliance and the
date by which Year 2000 compliance will be achieved are based on management's
best estimates, which were derived using numerous assumptions about future
events including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no assurance that
these estimates will be achieved, and actual results could differ materially
from these estimates. Specific facts that might cause such material
differences include the availability and cost of personnel trained in Year
2000 remediation work, the ability to locate and correct all relevant computer
codes, the success achieved by the Company's customers and suppliers in
reaching Year 2000 readiness, the timely availability of necessary replacement
items and similar uncertainties.
Accounting Policies. Financial Accounting Standards Board Statement No. 130,
"Reporting Comprehensive Income," issued in June 1997 and effective for fiscal
years ending after December 15, 1997, established standards for reporting and
display of the total net income and the components of all other non-owner
changes in equity, or comprehensive income, in the statement of operations, in
a separate statement of comprehensive income or within the statement of
changes in stockholders' equity. The Company adopted Statement No. 130 at the
beginning of fiscal 1998, and has no items of other comprehensive income.
Financial Accounting Standards Board Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," issued in June 1997 and
effective for fiscal years ending after December 15, 1997, changed the way
companies report selected segment information in annual financial statements
and also requires those companies to report selected segment information in
interim financial statements. The Company adopted Statement No. 131 at the
beginning of fiscal 1998. The adoption had no impact on the Company's
financial presentation because it operates in a single business segment.
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," issued in June 1998 and
effective for all quarters of fiscal years beginning after June 15, 1999, will
require companies to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. Management has evaluated the impact of the new rules on the Company's
consolidated financial statements and concluded that there will be no impact
on its results of operations or its financial position.
The Accounting Standards Executive Committee Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," issued in March 1998 and effective for fiscal years beginning
after December 15, 1998, requires that certain costs of computer
software developed or obtained for internal use be capitalized. The Company
will adopt this statement for the fiscal year beginning January 31, 1999.
Management has evaluated the impact of the application of the new rules on the
Company's consolidated financial statements and concluded that the impact on
its results of operations or its financial position will not be material
because a substantial portion of the software the Company uses is purchased
from outside vendors.
The Accounting Standards Executive Committee Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities," issued in April 1998 and
effective for fiscal years beginning after December 15, 1998, requires
start-up costs and organization costs to be expensed as incurred. The Company
will adopt this statement for the fiscal year beginning January 31, 1999.
Management has evaluated the impact of the application of the new rules on the
Company's consolidated financial statements and concluded that there will be
no impact on its results of operations or its financial position because such
costs are already being expensed as incurred.
Dividend Policy. The Company has never declared or paid cash dividends on its
common stock. The Company's credit agreement currently allows the Company to
pay a cash dividend once in each calendar year. These dividends are
restricted to ten percent of the most recent fiscal year's consolidated net
income and can only be paid if, after dividend payment, the Company maintains
$25 million of available borrowings under the credit agreement. Any future
determination as to the payment of dividends would depend upon capital
requirements and limitations imposed by the Company's credit agreement and
such other factors as the board of directors of the Company may consider.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not hold any derivative instruments and does not engage in
hedging activities. Information about the fair value of financial instruments
is included in note 1 of the Notes to Consolidated Financial Statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to the Consolidated Financial Statements of the Company is included
in Item 14, and the consolidated financial statements follow the signature
page to this Annual Report on Form 10-K.
The quarterly results of operations are included herein in Note 11 of the
Consolidated Financial Statements.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
Incorporated herein by reference is the information appearing under the
captions "Election of Directors" and "Board of Directors Meetings and Its
Committees" in the Company's definitive Proxy Statement for the Registrant's
1999 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission within 120 days after January 30, 1999.
(b) Identification of Executive Officers
Incorporated herein by reference is the information appearing under the
caption "Executive Officers and Compensation" in the Company's definitive
Proxy Statement for the Registrant's 1999 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission within 120 days after
January 30, 1999.
Item 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information appearing under the
caption "Executive Officers and Compensation" in the Company's definitive
Proxy Statement for the Registrant's 1999 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission within 120 days after
January 30, 1999.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the information appearing under the
captions "Principal Shareholders" and "Election of Directors" in the Company's
definitive Proxy Statement for the Registrant's 1999 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within
120 days after January 30, 1999.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the information appearing under the
caption "Related Party Transactions" in the Company's definitive Proxy
Statement for the Registrant's 1999 Annual Meeting of Shareholders to be filed
with the Securities and Exchange Commission within 120 days after January 30,
1999.
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 November 2, 1998, the Company filed a report on Form 8-K announcing the
signing of a definitive agreement to merge with Camelot Music Holdings, Inc.
in a stock-for-stock transaction to be accounted for as a
pooling-of-interests.
14(c) Exhibits
- --------------
Exhibits are as set forth in the "Index to Exhibits" which follows the Notes
to the Consolidated Financial Statements and immediately precedes the exhibits
filed.
14(d) Other Financial Statements
- --------------------------------
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TRANS WORLD ENTERTAINMENT CORPORATION
Date: April 30 , 1999 By: /s/ ROBERT J. HIGGINS
---------------------
Robert J. Higgins,
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ ROBERT J. HIGGINS Chairman, President April 30, 1999
- --------------------- and Chief Executive Officer
(Robert J. Higgins) (Principal Executive Officer)
/s/ JOHN J. SULLIVAN Senior Vice President, April 30, 1999
- -------------------- Treasurer and Chief Finanacial
(John J. Sullivan) Officer
(Principal Financial and
Chief Accounting Officer)
/s/ MATTHEW H. MATARASO Secretary and Director April 30 , 1999
- -----------------------
(Matthew H. Mataraso)
/s/ GEORGE W. DOUGAN Director April 30 , 1999
- --------------------
(George W. Dougan)
/s/ CHARLOTTE G. FISCHER Director April 30, 1999
- ------------------------
(Charlotte G. Fischer)
/s/ ISAAC KAUFMAN Director April 30, 1999
- -----------------
(Isaac Kaufman)
/s/ DEAN S. ADLER Director April 30, 1999
- -----------------
(Dean S. Adler)
/s/ DR. JOSEPH G. MORONE Director April 30, 1999
- -------------------------
(Dr. Joseph G. Morone)
/s/ MARTIN E. HANAKA Director April 30, 1999
- --------------------
(Martin E. Hanaka)
/s/ MICHAEL B. SOLOW Director April 30, 1999
- --------------------
(Michael B. Solow)
/s/ GEORGE R. ZOFFINGER Director April 30, 1999
- -----------------------
(George R. Zoffinger)
TRANS WORLD ENTERTAINMENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Form 10-K
Page No.
Independent Auditors' Report F-2
Consolidated Financial Statements
Consolidated Balance Sheets at January 30, 1999 and
January 31, 1998 F-3
Consolidated Statements of Income - Fiscal years ended
January 30, 1999, January 31, 1998 and February 1, 1997 F-5
Consolidated Statements of Shareholders' Equity -
Fiscal years ended January 30, 1999, January 31, 1998
and February 1, 1997 F-6
Consolidated Statements of Cash Flows - Fiscal years ended
January 30, 1999, January 31, 1998 and February 1, 1997 F-7
Notes to Consolidated Financial Statements F-8
Report of KPMG LLP
Independent Auditors
The Board of Directors and Shareholders
Trans World Entertainment Corporation:
We have audited the accompanying consolidated balance sheets of Trans World
Entertainment Corporation and subsidiaries as of January 30, 1999 and January
31, 1998, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the fiscal years in the three-year period
ended January 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Trans
World Entertainment Corporation and subsidiaries as of January 30, 1999 and
January 31, 1998, and the results of their operations and their cash flows for
each of the fiscal years in the three-year period ended January 30, 1999, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Albany, New York
March 19, 1999, except
as to note 12, which is
as of April 22, 1999
F-2
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
January 30, January 31,
1999 1999
--------------------------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $116,420 $94,732
Accounts receivable 3,148 3,105
Merchandise inventory 211,378 189,394
Prepaid expenses and other 5,248 3,119
-----------------------------
Total current assets 336,194 290,350
-----------------------------
VIDEOCASSETTE RENTAL INVENTORY, net 1,238 4,099
DEFERRED TAX ASSET 6,165 4,726
FIXED ASSETS:
Buildings 10,011 7,774
Fixtures and equipment 110,475 87,214
Leasehold improvements 75,239 74,997
-----------------------------
195,725 169,985
Allowances for depreciation
and amortization 106,822 97,917
-----------------------------
88,903 72,068
-----------------------------
OTHER ASSETS 3,186 2,776
-----------------------------
TOTAL ASSETS $435,686 $374,019
=============================
F-3
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
January 30, January 31,
1999 1999
--------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $159,520 $162,981
Income taxes payable 12,734 11,155
Accrued expenses and other 20,144 17,346
Store closing reserve --- 8,692
Current deferred taxes 5,590 1,103
Current portion of long-term debt
and capital lease obligations 2,802 99
-----------------------------
Total current liabilities 200,790 201,376
LONG-TERM DEBT, less current portion --- 35,000
CAPITAL LEASE OBLIGATIONS, less
current portion 16,065 6,409
OTHER LIABILITIES 6,848 6,712
-----------------------------
TOTAL LIABILITIES 223,703 249,497
-----------------------------
SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value;
5,000,000 shares authorized;
none issued.) --- ---
Common stock ($.01 par value;
50,000,000 shares authorized;
32,842,000 shares and 29,723,036
shares issued in fiscal 1998 and
1997, respectively) 328 297
Additional paid-in capital 72,004 25,287
Unearned compensation-restricted stock (78) (175)
Treasury stock at cost (105,432 and
106,182 shares in fiscal 1998 and 1997,
respectively) (390) (394)
Retained earnings 140,119 99,507
-----------------------------
TOTAL SHAREHOLDERS' EQUITY 211,983 124,522
-----------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $435,686 $374,019
=============================
See Notes to Consolidated Financial Statements.
F-4
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Fiscal Year Ended
---------------------------------------------
January 30, January 31, February 1,
1999 1998 1997
---------------------------------------------
Sales $698,469 $571,314 $481,657
Cost of sales 434,406 361,422 308,952
---------------------------------------------
Gross profit 264,063 209,892 172,705
Selling, general and
administrative expenses 196,437 170,834 150,218
Restructuring charge
reversal and asset
impairment charge, net (492) --- ---
---------------------------------------------
Income from operations 68,118 39,058 22,487
Interest expense 2,949 5,148 12,110
Other expense (income), net (1,408) (153) (1,343)
---------------------------------------------
Income before income taxes 66,577 34,063 11,720
Income tax expense 25,965 13,489 4,618
---------------------------------------------
NET INCOME $40,612 $20,574 $7,102
=============================================
BASIC EARNINGS PER SHARE $1.28 $0.70 $0.24
=============================================
Weighted average number
of common shares
outstanding 31,779 29,483 29,271
=============================================
DILUTED EARNINGS PER SHARE $1.20 $0.66 $0.24
==============================================
Adjusted weighted average
number of common shares
outstanding 33,737 31,032 29,697
==============================================
See Notes to Consolidated Financial Statements.
F-5
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Unearned
Additional Compensation
Common Paid in Restricted Treasury Retained Shareholders'
Stock Capital Stock Stock Earnings Equity
------ ---------- ------------ -------- -------- -------------
Balance as of February 3, 1996
(29,193,624 shares issued) $292 $24,041 --- $(503) $71,831 $95,661
Issuance of 21,000 shares
of treasury stock under
incentive stock programs --- (59) --- 96 --- 37
Issuance of 225,000 shares
of common stock - restricted
stock plan, net 2 350 (245) --- --- 107
Exercise of 10,158
stock options --- 12 --- --- --- 12
Net Income --- --- --- --- 7,102 7,102
- ------------------------------------------------------------------------------------------------------------------------------
Balance as of February 1, 1997
(29,428,782 shares issued) 294 24,344 (245) (407) 78,933 102,919
Issuance of 3,000 shares of
treasury stock under
incentive stock programs --- --- --- 13 --- 13
Amortization of unearned
compensation - restricted
stock plan --- --- 70 --- --- 70
Exercise of 294,254 stock options and
related tax benefit 3 943 --- --- --- 946
Net Income --- --- --- --- 20,574 20,574
- ------------------------------------------------------------------------------------------------------------------------------
Balance as of January 31, 1998
(29,723,036 shares issued) 297 25,287 (175) (394) 99,507 124,522
Issuance of 750 shares of
treasury stock under
incentive stock programs --- 10 --- 4 --- 14
Issuance of 2,250,000 shares of
common stock in a public offering 23 36,600 --- --- --- 36,623
Amortization of unearned
compensation - restricted stock plan --- --- 44 --- --- 44
Issuance of director stock options --- 112 --- --- --- 112
Forfeiture of unearned compensation
- restricted stock plan (1) (52) 53 --- --- ---
Exercise of 898,993 stock options and
related tax benefit 9 10,047 --- --- --- 10,056
Net Income --- --- --- --- 40,612 40,612
- ------------------------------------------------------------------------------------------------------------------------------
Balance as of January 30, 1999
(32,842,000 shares issued) $328 $72,004 $(78) $(390) $140,119 $211,983
==============================================================================================================================
See Notes to Consolidated Financial Statements.
F-6
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Ended
January 30, January 31, February 1,
1999 1998 1997
-------------------------------------
OPERATING ACTIVITIES:
Net income $40,612 $20,574 $7,102
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 19,473 16,257 15,225
Reversal of restructuring charge (2,157) --- ---
Loss on impairment from fixed assets 1,665 --- ---
Stock compensation programs 222 83 144
Loss on disposal of assets 1,560 --- ---
Deferred tax expense 3,048 1,370 3,023
Changes in operating assets and liabilities:
Accounts receivable (43) 5,868 (747)
Merchandise inventory (21,984) (9,872) 31,068
Refundable income taxes --- 564 7,744
Prepaid expenses and other (2,129) (408) 439
Other assets (572) 2,481 (381)
Accounts payable (3,461) 42,751 (12,322)
Income taxes payable 8,927 11,555 ---
Accrued expenses and other 2,797 7,344 3,137
Store closing reserve (6,535) (5,056) (10,528)
Other liabilities 135 198 1,174
---------------------------------------
Net cash provided by operating activities 41,558 93,709 45,078
---------------------------------------
INVESTING ACTIVITIES:
Acquisition of property and equipment (39,369) (15,538) (10,198)
Acquisition of businesses, net --- (20,901) ---
Purchases of videocassette rental
inventory, net 2,860 685 1,938
----------------------------------------
Net cash used by investing activities (36,509) (35,754) (8,260)
----------------------------------------
FINANCING ACTIVITIES:
Net decrease in revolving line of credit --- --- (65,260)
Payments of long-term debt (35,000) (18,440) (3,661)
Payments of capital lease obligations (1,292) (99) (76)
Proceeds from capital lease 13,651 --- ---
Proceeds from public offering
of common stock 36,623 --- ---
Exercise of stock options 2,657 545 12
----------------------------------------
Net cash provided (used) by
financing activities 16,639 (17,994) (68,985)
----------------------------------------
Net increase (decrease) in cash and
cash equivalents 21,688 39,961 (32,167)
Cash and cash equivalents, beginning of year 94,732 54,771 86,938
----------------------------------------
Cash and cash equivalents, end of year $116,420 $94,732 $54,771
========================================
Supplemental disclosure of non-cash
investing and financing activities:
Issuance of treasury stock under
incentive stock programs $14 $13 $37
Income tax benefit resulting from
exercises of stock options 7,347 400 ---
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 a chain of retail entertainment stores. At January 30, 1999, the
Company operated 501 stores in 33 states, the District of Columbia and the
U.S. Virgin Islands, with a majority of the stores concentrated in the Eastern
half of the United States.
Basis of Presentation: The consolidated financial statements consist of Trans
World Entertainment Corporation and its subsidiaries, all of which are wholly
owned. All significant intercompany accounts and transactions have been
eliminated. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fiscal Year: The Company's fiscal year is a 52- or 53-week period ending on
the Saturday nearest to January 31. Fiscal 1998, 1997 and 1996 ended January
30, 1999, January 31, 1998 and February 1, 1997, respectively, and each fiscal
year consisted of 52 weeks.
Dividend Policy: The Company has never declared or paid cash dividends on its
common stock. The Company's credit agreement currently allows the Company to
pay a cash dividend once in each calendar year. These dividends are
restricted to ten percent of the most recent fiscal year's consolidated net
income and can only be paid if, after dividend payment, the Company maintains
$25 million of available borrowings under the credit agreement. Any future
determination as to the payment of dividends would depend upon capital
requirements and limitations imposed by the Company's credit agreement and
such other factors as the board of directors of the Company may consider.
Revenue Recognition: Revenue from sales of merchandise is recognized at the
point of sale to the consumer, at which time payment is tendered. There are
no provisions for uncollectible amounts since payment is received at the time
of sale.
Cash and Cash Equivalents: The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents.
Merchandise Inventory and Return Costs: Inventory is stated at the lower of
cost (first-in, first-out) or market as determined principally by the average
cost method. The Company is entitled to return merchandise purchased from
major vendors for credit against other purchases from these vendors. The
vendors often reduce the credit with a merchandise return charge ranging from
0% to 20% of the original merchandise purchase price depending on the type of
merchandise being returned. The Company records the merchandise return
charges in cost of sales.
Videocassette Rental Inventory: The cost of videocassette rental tapes is
capitalized and amortized on a straight-line basis over their estimated
economic life with a provision for salvage value. Major movie release
additions, which have a relatively short economic life due to the frequency of
rental, are amortized over twelve months while other titles are amortized over
thirty-six months.
Fixed Assets and Depreciation: Fixed assets are stated at cost. Major
improvements and betterments to existing facilities and equipment are
capitalized. Expenditures for maintenance and repairs, which do not extend
the life of the applicable asset, are charged to expense as incurred.
Buildings are amortized over a 30-year term. Fixtures and equipment are
depreciated using the straight-line method over their estimated useful lives,
which range from three to seven years. Leasehold improvements are amortized
over the shorter of their estimated useful life or the related lease term.
Primarily all of the Company's operating leases are ten years in term.
Amortization of capital lease assets is included in depreciation and
amortization expense.
F-8
Depreciation and amortization expense related to the Company's videocassette
rental inventory totaling $1.2 million, $2.2 million and $2.5 million in
fiscal 1998, 1997 and 1996, respectively, is included in cost of sales. Also
included in cost of sales is depreciation and amortization expense related to
the Company's distribution center facility and equipment of $1.3 million, $1.1
million and $865,000 in fiscal 1998, 1997 and 1996, respectively. All other
depreciation and amortization of fixed assets is included in selling, general
& administrative expenses. Depreciation and amortization of fixed assets is
included in the condensed consolidated statements of income as follows:
Fiscal Year
1998 1997 1996
-------------------------------
(in thousands)
Cost of sales $1,270 $1,101 $865
================================
Selling, general and
administrative expenses $18,172 $15,115 $14,134
================================
Fixed assets and other long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
During fiscal 1998, the Company recorded an impairment loss of $1.7 million to
write-down the carrying amount of fixed assets at stores, primarily leasehold
improvements, where the estimated future cash flows through the end of the
store's lease were less than the carrying amount of that store's fixed assets.
Advertising Costs: The costs of advertising are expensed in the first period
in which such advertising takes place. Total advertising expense was $10.5
million, $8.4 million and $9.0 million in fiscal 1998, 1997 and 1996,
respectively.
Store Opening and Closing Costs: Costs associated with opening a store are
expensed as incurred. When it is determined that a store will be closed,
estimated unrecoverable costs are charged to expense. Such costs include the
net book value of abandoned fixtures, equipment, leasehold improvements and a
provision for lease obligations, less estimated sub-rental income. The
residual value of any fixed asset moved to a store as part of a relocation is
transferred to the relocated store.
Income Taxes: Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Earnings Per Share: The Company accounts for earnings per share under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share." This standard requires the Company to disclose basic
earnings per share and diluted earnings per share. Basic earnings per share
is calculated by dividing net income by weighted average common shares
outstanding. Diluted earnings per share is calculated by dividing net income
by the sum of the weighted average shares and additional common shares that
would have been outstanding if the dilutive potential common shares, adjusted
in fiscal 1998 and 1997 for the $7.3 million and $0.4 million, respectively,
tax benefit resulting from stock option exercise activity, had been issued for
the Company's common stock options from the Company's Stock Option Plans (see
Note 6). In fiscal 1998, 1997 and 1996, the additional dilutive potential
common shares were 2.0 million, 1.5 million and 426,000, respectively. As
required by SFAS No. 128, all outstanding common stock options were included
even though their exercise may be contingent upon vesting.
All earnings and loss per share information has been adjusted for a
two-for-one stock split effected in the form of a 100% stock dividend on
December 15, 1997 and a three-for-two stock split effected in the form of a
50% stock dividend on September 15, 1998. All references to number of shares,
per share amounts, stock option data and market prices of the Company's common
stock have been adjusted to reflect the stock splits. See Note 7,
"Shareholders' Equity."
F-9
Fair Value of Financial Instruments: The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents, other current
assets, accounts payable, borrowings under the revolving credit agreement and
other current liabilities approximate fair value because of the immediate or
short-term maturity of these financial instruments.
Comprehensive Income: The Company does not have other items of comprehensive
income as defined by SFAS No. 130, "Reporting Comprehensive Income."
Accordingly, comprehensive income is equal to net income.
Reclassifications: Certain amounts in prior years' financial statements have
been reclassified to conform with the current year presentation.
Note 2. Restructuring Charge
The Company recorded a pre-tax restructuring charge of $33.8 million in fiscal
1995 to reflect the anticipated costs associated with a program to close 163
stores. The restructuring charge included the write-down of fixed assets,
estimated cash payments to landlords for the early termination of operating
leases, inventory-related costs (including the cost for returning all
remaining merchandise after the store was closed), and employee termination
benefits. The charge also included estimated professional fees related to the
development of the store closing plan and negotiations with landlords related
to the termination of leases, a provision for exiting the rental video store
format, the write-off of goodwill related to a previous acquisition and a
provision for closing the Company's fixture manufacturing operation.
Inventory-related costs have been included in cost of sales in the
accompanying consolidated statements of income.
An analysis of the amounts comprising the restructuring charge and the charges
against the related reserve for each year in the four-year period ended
January 30, 1999 are outlined below:
Charges Balance Charges Balance Charges Balance Charges
1995 against as of against as of against as of against Remaining Reserve
Reserve Reserve 2/3/96 Reserve 2/1/97 Reserve 1/31/98 Reserve Balance Reversal
--------------------------------------------------------------------------------------- --------
(in thousands)
Leasehold improvements $6,660 $6,660 --- --- --- --- --- --- --- ---
Furniture and fixtures 3,228 3,228 --- --- --- --- --- --- --- ---
Video rental assets 4,174 --- 4,174 1,078 3,096 25 3,071 3,023 48 (48)
Goodwill 339 339 --- --- --- --- --- --- --- ---
--------------------------------------------------------------------------------------- --------
Non cash write-offs 14,401 10,227 4,174 1,078 3,096 25 3,071 3,023 48 (48)
--------------------------------------------------------------------------------------- --------
Lease obligations 7,540 --- 7,540 2,627 4,913 905 4,008 2,855 1,153 (1,153)
Inventory-related costs 6,800 --- 6,800 3,421 3,379 2,769 610 610 --- ---
Termination benefits 976 69 907 88 819 16 803 4 799 (799)
Professional fees 2,500 --- 2,500 1,632 868 711 157 20 137 (137)
Other costs 1,600 806 794 122 672 629 43 23 20 (20)
--------------------------------------------------------------------------------------- --------
Cash outflows 19,416 875 18,541 7,890 10,651 5,030 5,621 3,512 2,109 (2,109)
--------------------------------------------------------------------------------------- --------
Total $33,817 $11,102 $22,715 $8,968 $13,747 $5,055 $8,692 $6,535 $2,157 $(2,157)
======================================================================================= ========
The Company completed the 1995 restructuring program in fiscal 1998, resulting
in the closure of 191 stores (versus an original plan of 163 stores). The
remaining balance in the store closing reserve of $2.2 million was credited to
operations in the 4th quarter of fiscal 1998.
In determining the components of the reserve, management analyzed all aspects
of the restructuring plan and the costs that would be incurred. The write-off
of leasehold improvements and furniture and fixtures represented the estimated
net book value of these items at the forecasted closing date. In determining
the provision for lease obligations, the Company considered the amount of time
remaining on each store's lease and estimated the amount necessary for either
buying out the lease or continued rent payments subsequent to store closure.
Inventory-related costs include the cost to pack and ship the inventory on
hand after the closing of the store as well as the penalty paid to the vendor
for additional merchandise returns resulting from the restructuring.
Termination benefits represented the severance payments expected to be made to
terminated employees. Professional fees represented amounts expected to be
paid to advisors related to the development of the store closing plan and the
negotiations with landlords related to the termination of leases. Payments to
lenders for the waiver of covenant violations totaling $1.6 million were
included in selling, general and administrative expenses in the 1995
consolidated statement of income.
F-10
The cash outflows for the restructuring was financed from operating cash flows
and the liquidation of merchandise inventory from the closed stores. The
timing of store closures depended on the Company's ability to negotiate
reasonable lease termination agreements. The restructuring reserve balance is
included in the accompanying balance sheets under the caption "store closing
reserve."
Sales related to stores that were closed as part of the 1995 restructuring
program were $9.0 million (unaudited), $19.5 million (unaudited) and $18.9
million (unaudited) in fiscal 1998, 1997 and 1996, respectively, in the year
of closure. Store operating losses, excluding corporate allocations, related
to stores that were closed were $322,000 (unaudited), $736,000 (unaudited) and
$753,000 (unaudited) in fiscal 1998, 1997 and 1996, respectively.
The provision for termination benefits was based on the expectation that 163
employees would be terminated in connection with the restructuring program.
Through January 30, 1999, 55 employees had been terminated. The Company did
not terminate as many employees as originally planned because higher than
normal levels of attrition occurring after the announcement of the
restructuring resulted in a reduced need for involuntary terminations.
Subsequent to the adoption of the restructuring program, improving economic
conditions in certain markets, improvement in individual store performance and
the inability to negotiate reasonable lease termination agreements have led
the Company to keep open certain stores that were originally expected to be
closed. The Company also decided not to close its fixture manufacturing
operation. During fiscal 1998, a total of 21 stores were removed from the
list of stores expected to be closed. Conversely, deteriorating economic
conditions and store performance in certain markets have led the Company to
close certain stores that were not originally expected to be closed. During
fiscal 1998, no stores were added to the list of stores to be closed. In
addition, the timing of store closures has also been affected by the ability
or inability to negotiate reasonable lease termination agreements. The net
effect of changes made to the timing of store closures and the stores to be
closed under the 1995 restructuring program has not been material. The
restructuring program was completed January 30, 1999, and the remaining
balance of $2.2 million in the store closing reserve was credited to
operations.
Note 3. Debt
In July 1997, the Company replaced its existing $65.3 million revolving credit
facility and $56.5 million note agreement with a $100.0 million secured
revolving credit facility with Congress Financial Corporation. The facility
matures in July 2000, and bears interest at the prime interest rate or the
Eurodollar interest rate plus 1.75% (6.72% at January 30, 1999). The facility
is secured by the Company's assets allowing the Company to borrow up to 65% of
its eligible merchandise inventory to a maximum of $100.0 million.
During fiscal 1998, 1997, and 1996, the highest aggregate balances outstanding
under the current and previous revolving credit facilities were $35.0 million,
$45.9 million and $65.3 million, respectively. The weighted average interest
rates during fiscal 1998, 1997 and 1996 based on average daily balances were
8.50%, 8.58%, and 11.01%, respectively. The balances outstanding under the
Company's revolving credit agreements at the end of fiscal 1998 and 1997 were
$0 and $35.0 million, respectively.
Interest paid during fiscal 1998, 1997 and 1996 was approximately $2.8
million, $5.8 million and $11.8 million, respectively.
Note 4. Income Taxes
Income tax expense consists of the following:
Fiscal Year
1998 1997 1996
----------------------------------
(in thousands)
Federal - current $19,686 $10,813 $1,364
State - current 3,231 1,306 231
Deferred 3,048 1,370 3,023
----------------------------------
$25,965 $13,489 $4,618
==================================
F-11
A reconciliation of the Company's effective tax rates with the federal
statutory rate is as follows:
Fiscal Year
1998 1997 1996
--------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
Federal income tax effect 3.8% 3.0% 4.7%
Other 0.2% 1.6% (0.3%)
--------------------------------------
Effective income tax rate 39.0% 39.6% 39.4%
======================================
Significant components of the Company's deferred tax assets and liabilities
are as follows:
January 30, January 31,
1999 1998
---------------------------------
(in thousands)
CURRENT DEFERRED TAX ASSETS
Store closing reserve $--- $4,326
---------------------------------
Total Current Deferred Tax Asset --- 4,326
---------------------------------
CURRENT DEFERRED TAX LIABILITIES
Inventory valuation 5,483 5,177
Other 107 252
---------------------------------
Total Current Deferred Tax Liabilities 5,590 5,429
---------------------------------
Net Current Deferred Tax Liability $(5,590) $(1,103)
=================================
NON-CURRENT DEFERRED TAX ASSETS
Accrued rent, lease accounting $2,961 $3,046
Capitalized leases 914 895
Tax over book asset basis 1,413 623
Compensation related 107 116
Executive retirement plan 252 126
Other 601 12
---------------------------------
Total Non-Current Deferred Tax Assets 6,248 4,818
---------------------------------
NON-CURRENT DEFERRED TAX LIABILITIES
Other 83 92
---------------------------------
Total Non-Current
Deferred Tax Liabilities 83 92
---------------------------------
Net Non-Current Deferred Tax Asset $6,165 $4,726
=================================
TOTAL NET DEFERRED TAX ASSET $575 $3,623
=================================
In assessing the propriety of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based
upon the level of projected future taxable income over the periods in which
the deferred tax assets are deductible, management believes it is more likely
than not that the Company will realize the benefits of those deductible
differences. The amount of the deferred tax asset considered realizable could
be reduced if estimates of future taxable income during the carryforward
period are reduced.
F-12
The Company paid income taxes of approximately $14.0 million, $0.3 million and
$0.3 million during fiscal 1998, 1997 and 1996, respectively.
Note 5. Leases
As more fully discussed in Note 10, the Company leases its distribution center
and administrative offices under three capital leases with its Chief Executive
Officer and largest shareholder. The Company also has a capital lease for its
point- of-sale system.
Fixed asset amounts for capital leases are as follows:
January 30, January 31,
1999 1998
--------------------------------
(in thousands)
Buildings $9,342 $7,105
Fixtures and equipment 16,061 1,625
--------------------------------
25,403 8,730
Allowances for depreciation
and amortization 6,312 4,291
--------------------------------
$19,091 $4,439
================================
The Company leases substantially all of its stores, many of which contain
renewal options, for periods ranging from five to twenty-five years, with the
majority being ten years. Most leases also provide for payment of operating
expenses, real estate taxes, and for additional rent based on a percentage of
sales.
Net rental expense was as follows:
Fiscal Year
1998 1997 1996
------------------------------
(in thousands)
Minimum rentals $55,810 $50,237 $49,653
Contingent rentals 1,310 719 274
------------------------------
$57,120 $50,956 $49,927
==============================
Future minimum rental payments required under all leases that have initial or
remaining noncancelable lease terms in excess of one year at January 30, 1999
are as follows:
Operating Capital
Leases Leases
----------------------------------
(in thousands)
1999 $56,389 $4,876
2000 59,786 4,876
2001 56,609 4,876
2002 52,094 3,387
2003 48,617 1,609
Thereafter 158,251 18,932
----------------------------------
Total minimum payments required $431,746 38,556
============
Amounts representing interest 19,689
-----------
Present value of minimum lease payments 18,867
Less current portion 2,802
-----------
Long-term capital lease obligations $16,065
===========
F-13
Note 6. Benefit Plans
Stock Option Plans
- ------------------
Under the Company's 1986 Stock Option Plan, 1994 Stock Option Plan and 1998
Stock Option Plan (the "Plans"), the Compensation Committee of the Board of
Directors may grant options to acquire shares of common stock to employees of
the Company and its subsidiaries at the fair market value of the common stock
on the date of grant. Under the Plans, options generally become exercisable
commencing one year from the date of grant in increments of 25% per year with
a maximum term of ten years. Shares authorized for issuance under the Plans
were 3.3 million, 3.0 million and 1.5 million, respectively. As of June 1,
1995, the Company stopped issuing stock options under the 1986 Stock Option
Plan. At January 30, 1999, of the 7.8 million options authorized for issuance
under the Plans, 3.6 million have been granted and are outstanding, 1.1
million of which were vested and exercisable. Shares available for future
grants at January 30, 1999 and January 31, 1998 were 1.7 million and 766,461,
respectively. The following table summarizes information about the stock
options outstanding under the Plans at January 30, 1999:
------------------------------------- ----------------------------------
Outstanding Exercisable
------------------------------------- ----------------------------------
Weighted Weighted
Average Average Average
Exercise Remaining Exercise Exercise
price range Shares Life Price Shares Price
- -------------------------------------------------------- ----------------------------------
$0.75-$2.65 1,518,154 7.1 $1.62 646,955 $1.60
2.66- 5.33 696,454 7.3 4.03 239,922 4.37
5.34-10.67 2,250 8.5 6.25 --- ---
10.68-13.33 900,000 8.8 11.20 225,000 11.20
13.34-16.00 22,000 9.6 14.59 --- ---
16.01-18.67 432,675 9.2 17.84 --- ---
18.68-21.33 5,000 9.7 19.75 --- ---
21.34-24.00 2,000 9.9 23.75 --- ---
24.01-26.67 6,000 9.4 25.79 --- ---
---------- ---------
Total 3,584,533 7.8 $6.61 1,111,877 $4.14
========== =========
The Company also has a stock option plan for non-employee directors (the "1990
Plan"). Options under this plan are granted at 85% of the fair value at the
date of grant. Under the 1990 Plan, options generally become exercisable
commencing one year from the date of grant in increments of 25% per year with
a maximum term of ten years. As of January 30, 1999, there were 750,000
shares authorized for issuance and 261,750 shares have been granted and are
outstanding, 155,250 of which were vested and exercisable. There are 458,250
shares of common stock reserved for possible future option grants under the
1990 Plan. The following table summarizes information about the stock options
outstanding under the 1990 Plan at January 30, 1999:
------------------------------------- ----------------------------------
Outstanding Exercisable
------------------------------------- ----------------------------------
Weighted Weighted
Average Average Average
Exercise Remaining Exercise Exercise
price range Shares Life Price Shares Price
- ------------------------------------------------------- ----------------------------------
$1.19-$2.67 49,500 7.3 $1.64 24,375 $1.51
2.68 -5.33 138,000 5.8 3.46 82,875 3.66
5.34- 8.00 18,000 3.0 6.10 18,000 6.10
8.01-10.67 45,000 4.1 9.49 30,000 9.14
10.68-15.12 11,250 9.3 15.12 --- ---
------------ ------------
Total 261,750 5.8 $4.84 155,250 $4.66
============ ============
F-14
The following tables summarize activity under the 1986, 1994 and 1998 Plans
and the 1990 Plan:
--------------------------------------------------------------------------------------------------------
1986, 1994 and 1998 Plans 1990 Plan
--------------------------------------------------------------------------------------------------------
Number of Option Weighted Number of Option Weighted
Shares Subject Price Range Average Shares Subject Price Range Average
To Option Per Share Exercise Price To Option Per Share Exercise Price
--------------------------------------------------------------------------------------------------------
Balance February 3, 1996 2,642,304 $0.75-$8.09 $4.16 196,500 $1.19-$9.14 $5.55
Granted 2,064,297 1.17- 2.67 1.69 13,500 1.35 1.35
Exercised (10,158) 1.87- 2.75 1.21 --- --- ---
Canceled (1,671,729) 0.83- 8.09 4.80 --- --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
Balance February 1, 1997 3,024,714 0.75- 6.17 2.14 210,000 1.19- 9.14 5.28
Granted 1,593,912 3.33-11.20 8.00 103,500 2.09- 3.37 2.86
Exercised (286,753) 0.96- 3.67 1.78 (7,500) 3.69 3.69
Canceled (112,761) 1.21- 3.96 1.97 (48,000) 3.33- 9.14 7.57
- -----------------------------------------------------------------------------------------------------------------------------------
Balance January 31, 1998 4,219,112 0.75-11.20 4.38 258,000 1.19- 9.14 3.93
Granted 500,150 13.88-26.67 17.83 26,250 10.20-15.12 12.31
Exercised (876,493) 0.75- 6.25 3.00 (22,500) 2.09- 3.68 3.15
Canceled (258,236) 1.21-17.79 4.35 --- --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
Balance January 30, 1999 3,584,533 $0.75-$26.67 $6.61 261,750 $1.19-$15.12 $4.84
========================================================================================================
The per share weighted-average fair value of the stock options granted during
fiscal 1998, 1997 and 1996 was $6.70, $2.76 and $0.70, respectively, using the
Black Scholes option pricing model, with the following weighted-average
assumptions; 1998 - expected dividend yield 0.0%, risk-free interest rate of
5.15%, expected life of five years and stock volatility of 70%; 1997 -
expected dividend yield 0.0%, risk-free interest rate of 6.7%, expected life
of five years and stock volatility of 48%; 1996 - expected dividend yield
0.0%, risk-free interest rate of 6.7%, expected life of five years and stock
volatility of 72%.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements for employee stock options which are issued at the
closing stock price on the day of grant. During fiscal 1998, 1997 and 1996,
the Company recognized expenses of $57,000, $52,000 and $3,000, respectively,
for stock options issued to non-employee directors at 85% of the closing stock
price on the date of grant. Had the Company determined compensation cost for
employee stock options based on fair value in accordance with SFAS No. 123,
the Company's net income would have been reduced to the pro forma amounts
indicated below:
Fiscal Year
1998 1997 1996
------------------------------------
(in thousands, except per share amounts)
Net income, as reported $40,612 $20,574 $7,102
Basic earnings per share, as reported $1.28 $0.70 $0.24
Diluted earnings per share, as reported $1.20 $0.66 $0.24
Pro forma net income $38,538 $19,074 $6,658
Pro forma basic earnings per share $1.21 $0.65 $0.23
Pro forma diluted earnings per share $1.14 $ $0.61 $0.23
F-15
Restricted Stock Plan
- ---------------------
Under the 1990 Restricted Stock Plan, the Compensation Committee of the Board
of Directors is authorized to grant awards for up to 900,000 restricted shares
of common stock to executive officers and other key employees of the Company
and its subsidiaries. The shares are issued as restricted stock and are held
in the custody of the Company until all vesting restrictions are satisfied.
If conditions or terms under which an award is granted are not satisfied, the
shares are forfeited. Shares begin to vest under these grants after three
years and are fully vested after five years, with vesting criteria which
includes continuous employment until applicable vesting dates have expired.
At January 30, 1999, a total of 225,000 shares have been granted, of which
75,000 were granted in fiscal 1996 with a weighted average grant date fair
market value of $1.58, aggregating a total value of $118,750; the remaining
150,000 were granted in fiscal 1995 with a weighted average grant date fair
value of $1.55 per share, aggregating a total of $232,500. As of January 30,
1999, a total of 60,000 of these shares had vested and 30,000 shares with an
unamortized unearned compensation balance of $53,000, had been forfeited.
Unearned compensation is recorded at the date of award, based on the market
value of the shares, and is included as a separate component of shareholders'
equity and is amortized over the applicable vesting period. The amount
amortized to expense in fiscal 1998 and 1997 was approximately $44,000 and
$70,000, respectively. At January 30, 1999, outstanding awards and shares
available for grant totaled 135,000 and 675,000, respectively.
401 (k) Savings Plan
- --------------------
The Company offers a 401(k) Savings Plan to eligible employees meeting certain
age and service requirements. This plan permits participants to contribute up
to 20% of their salary, including bonuses, up to the maximum allowable by
Internal Revenue Service regulations. Participants are immediately vested in
their voluntary contributions plus actual earnings thereon. Participant
vesting of the Company's matching and profit sharing contribution is based on
the years of service completed by the participant. Participants are fully
vested upon the completion of four years of service. All participant
forfeitures of nonvested benefits are used to reduce the Company's
contributions in future years. The Company matching contribution totaled
$599,000, $529,000 and $465,000 in fiscal 1998, 1997 and 1996, respectively.
Supplemental Executive Retirement Plan
- --------------------------------------
In fiscal 1997, the Company introduced a non-qualified Supplemental Executive
Retirement Plan (SERP). The SERP, which is unfunded, provides eligible
executives defined pension benefits that supplement benefits under other
retirement arrangements. The annual benefit amount has been predetermined as
part of the plan and vests based on years of service and age at retirement.
For fiscal 1998 and 1997, expenses related to the plan totaled approximately
$342,000 and $361,000, respectively. The present value of the projected
benefit obligation was approximately $2.3 million at January 30, 1999. The
January 30, 1999 consolidated balance sheet includes $656,000 of accrued
expense for the SERP.
Note 7. Shareholders' Equity
On May 1, 1998, the Company sold an additional 2.25 (adjusted) million shares
of its common stock in a public offering for approximately $37 million net of
issuance costs. A portion of the proceeds was used to repay long-term debt
and the balance of the proceeds was used for general corporate purposes
including investments in additional stores, fixtures and inventory.
On July 31, 1998, the Board of Directors approved a three-for-two common stock
split to be distributed in the form of a 50% stock dividend. As a result,
10,937,104 shares were issued on September 15, 1998 to shareholders of record
on September 1, 1998. Accordingly, amounts equal to the par value of the
additional shares issued have been charged to additional paid in capital and
credited to common stock. All references throughout these financial
statements to number of shares, per share amounts, stock option data and
market prices of the Company's common stock have been adjusted to reflect this
stock split.
At January 30, 1999 and January 31, 1998, the Company held 105,432 and 106,182
shares, respectively, in treasury stock resulting from the repurchase of
common stock through open market purchases.
F-16
Note 8. Strawberries Acquisition
In October 1997, the Company acquired 90 out of a total of 118 stores owned by
Strawberries, Inc., a privately held freestanding music specialty retailer
operating primarily in New England. The stores operate under the names
"Strawberries" and "Waxie Maxie" and are primarily located in freestanding or
strip center locations. The acquisition has been accounted for using the
purchase method of accounting. At the time of the acquisition, the Company
paid $21 million for the assets which included the fixed assets, merchandise
inventories, other related current assets and $683,000 in goodwill. This
goodwill is being amortized on a straight-line basis over a 15 year period.
Note 9. Concentration of Business Risks
The Company purchases inventory for its stores from approximately 475
suppliers, with approximately 69% of purchases being made from five suppliers.
In the past, the Company has not experienced difficulty in obtaining
satisfactory sources of supply, and management believes that it will retain
access to adequate sources of supply. However, a loss of a major supplier
could cause a possible loss of sales, which would have an adverse affect on
operating results and result in a decrease in vendor support for the Company's
advertising programs.
Note 10. Related Party Transactions
The Company leases its 178,000 square foot distribution center/office facility
in Albany, New York from Robert J. Higgins, its Chairman, Chief Executive
Officer and largest shareholder, under three capitalized leases that expire in
the year 2015. The original distribution center/office facility was
constructed in 1985. A 77,135 square foot distribution center expansion was
completed in October 1989 on real property adjoining the existing facility. A
19,100 office square foot expansion was completed in September 1998 adjoining
the existing facility.
Under the three capitalized leases, dated April 1, 1985, November 1, 1989 and
September 1, 1998 (the "Leases"), the Company paid Mr. Higgins an annual rent
of $1.4 million, $1.3 million and $1.2 million in fiscal 1998, 1997 and 1996,
respectively. On January 1, 1998, the aggregate rental payment increased in
accordance with the biennial increase in the Consumer Price Index, pursuant to
the provisions of each lease. Effective January 1, 2000, and every two years
thereafter, the rental payment will increase in accordance with the biennial
increase in the Consumer Price Index, pursuant to the provisions of the lease.
None of the leases contains any real property purchase option at the
expiration of its term. Under the terms of the Leases, the Company pays all
property taxes, insurance and other operating costs with respect to the
premises. Mr. Higgins' obligation for principal and interest on his
underlying indebtedness relating to the real property is approximately $90,000
per month.
The Company leases two of its retail stores from Mr. Higgins under long-term
leases. Under the first store lease, annual rent payments were $40,000 in
fiscal 1998 and $35,000 in fiscal 1997 and 1996. Under the second store
lease, annual rent payments were $35,000 in fiscal 1998, 1997 and 1996. Under
the terms of the leases, the Company pays property taxes, maintenance and a
contingent rental if a specified sales level is achieved. Total charges
during fiscal 1998 for both locations was $93,000, including contingent rent.
In fiscal 1998, 1997, and 1996, the Company paid Mr. Higgins $30,000 under one
year operating leases expiring on October 31, 1998, October 31, 1997 and
October 31, 1996, respectively, for certain parking facilities contiguous to
the Company's distribution center/office facility. This lease was not renewed
upon its expiration on October 31, 1998.
The Company regularly utilizes privately-chartered aircraft owned or partially
owned by Mr. Higgins. Under an unwritten agreement with Quail Aero Services
of Syracuse, Inc., a corporation in which Mr. Higgins is a one-third
shareholder, the Company paid $65,000, $59,000 and $76,000 for chartered
aircraft services in fiscal 1998, 1997 and 1996, respectively. The Company
also chartered an aircraft from Crystal Jet, a corporation wholly owned by Mr.
Higgins. Payments to Crystal Jet aggregated $180,000, $199,000 and $227,000
in fiscal 1998, 1997 and 1996, respectively. The Company believes that the
charter rates and terms are as favorable to the Company as those generally
available to it from other commercial charters.
F-17
The transactions that were entered into with an "interested director" were
approved by a majority of disinterested directors of the Board of Directors,
either by the Audit Committee or at a meeting of the Board of Directors. The
Board of Directors believes that the leases and other provisions are at rates
and on terms that are at least as favorable as those that would have been
available to the Company from unaffiliated third parties under the
circumstances.
Note 11. Quarterly Financial Information (Unaudited)
------------------------------------------------------------------
Fiscal 1998 Quarter Ended
1998 1/30/99 10/31/98 8/1/98 5/2/98
------------------------------------------------------------------
(in thousands, except per share amounts)
Sales $698,469 $267,811 $143,398 $142,198 $145,062
Gross profit 264,063 102,938 55,205 53,463 52,457
Net income 40,612 31,030 4,312 2,658 2,612
------------------------------------------------------------------
Basic earnings per share $1.28 $0.95 $0.13 $0.08 $0.09
------------------------------------------------------------------
Diluted earnings per share $1.20 $0.90 $0.13 $0.08 $0.08
------------------------------------------------------------------
Fiscal 1997 Quarter Ended
1997 1/31/98 11/1/97 8/2/97 5/3/97
------------------------------------------------------------------
(in thousands, except per share amounts)
Sales $571,314 $242,041 $114,737 $105,024 $109,512
Gross profit 209,892 87,439 43,662 39,527 39,264
Net income (loss) 20,574 21,291 979 (834) (862)
------------------------------------------------------------------
Basic earnings (loss) per share $0.70 $0.72 $0.03 $(0.03) $(0.03)
------------------------------------------------------------------
Diluted earnings (loss) per share $0.66 $0.67 $0.03 $(0.03) $(0.03)
------------------------------------------------------------------
Note 12. Subsequent Events
On April 22, 1999, the Company merged with Camelot Music Holdings, Inc., a
music specialty retail chain which operates nearly 500 retail locations in 37
states and Puerto Rico, in a stock-for-stock transaction accounted for as a
pooling-of-interests. Upon completion of the merger, Camelot became a wholly
owned subsidiary of the Company.
In the merger, each share of Camelot's common stock was converted into 1.9
shares of the Company's common stock. Each Camelot stock option outstanding
immediately prior to the completion of the merger was converted into 1.9 fully
vested and exercisable options to acquire one share of the Company's common
stock. The exercise prices of these options was adjusted accordingly for the
1.9 for 1 conversion ratio. As a result, the Company issued approximately
19.4 million shares of its common stock and 1.3 million options to acquire its
common stock.
F-18
Index to Exhibits
-----------------
Document Number and Description
- -------------------------------
Exhibit No.
2.1 Agreement and Plan of Merger dated October 26, 1998 by and among Trans
World, CAQ Corporation and Camelot. Commission File No. 0-14818
3.1 Restated Certificate of Incorporation -- incorporated herein by reference
to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal
year ended January 29, 1994. Commission File No. 0-14818.
3.2 Certificate of Amendment to the Certificate of Incorporation --
incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended October 29, 1994.
Commission File No. 0-14818.
3.3 Certificate of Amendment to the Certificate of Incorporation --
incorporated herein by reference to Exhibit 3.4 to the Company's Annual
Report on Form 10-K for the year ended January 31, 1998. Commission File
No. 0-14818.
3.4 Amended By-Laws -- incorporated herein by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended February 2,
1991. Commission File No. 0-14818.
3.5 Certificate of Amendment to the Certificate of Incorporation-incorporated
herein by reference to Exhibit 3.5 to the Company's Registration Statement
on Form S-4, No. 333-75231.
4.1 Loan and Security Agreement, dated July 9, 1998, between Congress
Financial Corporation and the Company, for the secured revolving credit
agreement -- incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended August 2,
1997. Commission File No. 0-14818.
10.1 Lease, dated April 1, 1985, between Robert J. Higgins, as Landlord, and
Record Town, Inc. and Trans World Music Corporation, as Tenant and
Amendment thereto dated April 28, 1986 -- incorporated herein by
reference to Exhibit 10.3 to the Company's Registration Statement on Form
S-1, No. 33-6449.
10.2 Second Addendum, dated as of November 30, 1989, to Lease, dated April 1,
1985, among Robert J. Higgins, and Trans World Music Corporation, and
Record Town, Inc., exercising five year renewal option -- incorporated
herein by reference to Exhibit 10.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended February 3, 1990. Commission File
No. 0-14818.
10.3 Lease, dated November 1, 1989, between Robert J. Higgins, as Landlord,
and Record Town, Inc. and Trans World Music Corporation, as Tenant --
incorporated herein by reference to Exhibit 10.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 2, 1991.
Commission File No. 0-14818.
10.4 Lease dated September 1, 1998, between Robert J. Higgins, as Landlord,
and Record Town, Inc. and Trans World Entertainment Corporation, as
Tenant, for additional office space at 38 Corporate Circle --
incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended October 31,
1998. Commission File No. 0-14818.
10.5 Employment Agreement, dated as of May 1, 1998 between the Company and
Robert J. Higgins - incorporated herein by reference to Exhibit 10.4 to
the Company's Quarterly Report of Form 10-Q for the fiscal quarter ended
May 2, 1998. Commission File No. 0-14818.
10.6 Trans World Music Corporation 1986 Incentive and Non-Qualified Stock
Option Plan, as amended and restated, and Amendment No. 3 thereto --
incorporated herein by reference to Exhibit 10.5 of the Company's Annual
Report on Form 10-K for the fiscal year ended February 2, 1991.
Commission File No. 0-14818.
10.7 Trans World Music Corporation 1990 Stock Option Plan for Non-Employee
Directors, as amended and restated -- incorporated herein by reference to
Annex A to Trans World's Definitive Proxy Statement on Form 14A filed as
of May 7, 1998. Commission File No. 0-14818.
10.8 Trans World Music Corporation 1990 Restricted Stock Plan -- incorporated
herein by reference to Exhibit 10.7 to the Company's Registration
Statement on Form S-2, No. 33-36012.
10.9 Form of Restricted Stock Agreement dated May 1, 1995 between the Company
and Bruce J. Eisenberg, Senior Vice President of Real Estate,
incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended April 29,
1995. Commission File No. 0-14818.
10.10 Form of Restricted Stock Agreement dated May 1, 1996 between the Company
and John J. Sullivan, Senior Vice President-Finance and Chief Financial
Officer, incorporated herein by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K for the fiscal year ended February
1, 1997. Commission File No. 0-14818.
10.11 Severance Agreement, dated May 20, 1996 between Trans World
Entertainment Corporation and James A. Litwak, Executive Vice President
of Merchandising and Marketing, incorporated herein by reference to
Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal
year ended February 1, 1997. Commission File No. 0-14818.
10.12 Trans World Entertainment Corporation 1994 Stock Option Plan --
incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended July 30,
1994. Commission File No. 0- 14818.
10.13 Trans World Entertainment Corporation 1998 Stock Option Plan --
incorporated herein by reference to Annex B to Trans World's Definitive
Proxy Statement on Form 14A filed as of May 7, 1998. Commission File
No. 0-14818.
10.14 Trans World Entertainment Corporation 1994 Director Retirement Plan --
incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended October 31,
1994. Commission File No. 0-14818.
10.15 Form of Indemnification Agreement dated May 1, 1995 between the Company
and its officers and directors incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended April 29, 1995. Commission File No. 0-14818.
10.16 Trans World Entertainment Corporation 1997 Supplemental Executive
Retirement Plan - incorporated herein by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
May 3, 1997. Commission File No. 0-14818.
10.17 Trans World Entertainment Corporation Asset Purchase Agreement with
Strawberries, Inc.-incorporated herein by reference to Exhibit 10.16 to
Trans World's Annual Report on Form 10-K for the year ended January 31,
1998. Commission File No. 0-14818.
10.18 Voting Agreement dated October 26, 1998 between Trans World and certain
stockholders named therein- incorporated herein by reference to Exhibit
10.20 to the Company's Registration Statement on Form S-4, No.
333-75231.
* 22 Significant Subsidiaries of the Registrant.
* 23 Consent of KPMG LLP.
* 27 Financial Data Schedule (For electronic filing purposes only)
- -------------------------------------------------------------------------------
*Filed herewith.