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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 3, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM............TO............
COMMISSION FILE NUMBER: 0-14818
Trans World Entertainment Corporation
-------------------------------------
(Exact name of registrant as specified in its charter)
New York 14-1541629
-------- ----------
(State or other jurisdiction of (I.R.S. Employer 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 30, 2001, 42,113,342 shares of the Registrant's Common Stock,
excluding 11,596,432 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 $8.97 on the NASDAQ
National Market on April 30, 2001, was approximately $270,312,672. Shares of
Common Stock held by the Company's controlling shareholder, who controls
approximately 28.4% 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, through various subsidiaries.
The Company operates a chain of retail entertainment stores and an e-commerce
site in a single industry segment. Sales were $1.41 billion during the fiscal
year ended February 3, 2001 (referred to herein as "2000"). The Company is one
of the largest specialty retailers of compact discs, prerecorded audio
cassettes, prerecorded videocassettes, digital versatile discs ("DVDs") and
related products in the United States. At February 3, 2001, the Company operated
984 stores totaling approximately 5.3 million square feet in 46 states, the
District of Columbia, the Commonwealth of Puerto Rico 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 seasonal in nature, with the peak
selling period being the Christmas holiday season in the Company's fourth fiscal
quarter.
On October 30, 2000, the Company acquired certain assets and assumed certain
liabilities and operating lease commitments of 112 stores from Wax Works, Inc.,
a privately-held music and video retailer. The stores operate under the name
"Disc Jockey" and are located primarily in mall locations throughout the Midwest
and Southern United States. The acquisition was accounted for using the purchase
method of accounting. The Company acquired the assets for $49.8 million,
including merchandise inventory, fixed assets, leasehold interests and other
related current assets. The Company recognized approximately $10.2 million in
goodwill related to the acquisition. The goodwill will be amortized on a
straight-line basis over a 15-year period.
On August 11, 2000, the Company acquired a majority interest in SecondSpin.com
for $4.2 million, net of cash acquired.. The acquisition was accounted for under
the purchase method of accounting. SecondSpin.com operates on-line and in store
marketplaces for buying and selling of used CDs, videos and DVDs. SecondSpin
operates four stores in California and Colorado.
On April 22, 1999, the Company merged with Camelot Music Holdings, Inc.
("Camelot"). The Company exchanged 1.9 shares of its common stock for each share
of Camelot common stock. The Company issued approximately 19.3 million shares of
its common stock in exchange for all outstanding Camelot common stock. The
transaction was accounted for as a pooling-of-interests. Accordingly, prior
period consolidated financial statements have been restated to include combined
results of operations, financial position and cash flows of Camelot as though it
had been a part of the Company since Camelot's adoption of "fresh-start"
accounting on January 31, 1998.
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 offers a broad selection of music and video titles at competitive
prices in convenient, attractive stores. The Company has 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 currently include four concepts, all of which offer
consumers an exciting shopping experience. The mall stores emphasize a strong
in-store marketing message, and a broad merchandise selection 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 operate under the trade names of Record
Town, Camelot Music, Disc Jockey or The Wall. There were 627 such stores at
February 3, 2001. This concept averages approximately 4,700 square feet with
stores ranging in excess of 10,000 square feet.
1
SATURDAY MATINEE STORES. These stores sell prerecorded video merchandise and
related accessories. These stores are located in large, regional shopping
malls and average 2,200 square feet in size. There were 24 such locations at
February 3, 2001.
COMBINATION STORES. At February 3, 2001, the Company operated 90 combination
Record Town/Saturday Matinee stores. The combination store concept averages
8,300 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 February 3, 2001, the Company operated 14
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 location in major regional
malls. The F.Y.E. concept averages 23,800 square feet.
BRANDING
On March 19, 2001, the Company announced its strategic plan to re-brand its
mall-based stores and its web site under a single, unified brand, FYE (For
Your Entertainment). The re-branding initiative is the result of an 18-month
in-depth analysis of the changing entertainment marketplace, the technology
revolution, as well as extensive customer research. The unified brand enables
the Company to leverage its strength as the nation's largest music specialty
retailer and differentiate FYE from the competition. For the first time,
customers nationwide will enjoy a consistent shopping experience in every
store, in every market and in every channel. This enhanced brand experience,
which will include industry-leading product sampling and selection tools, is
designed to cultivate customer loyalty, drive sales and build market share
for the Company. FYE will create a more relevant shopping experience for
consumers, expanding product selection across the entertainment spectrum. The
brand positioning also enables the Company to broaden its customer base and
fully realize the benefits of a multi-market, multi-channel strategy. The
re-branding effort will be rolled out nationally to all stores by the end of
fiscal 2001. The Company's e-commerce site will be re-launched as fye.com in
August 2001 for an unparalleled bricks and clicks presence. Management
anticipates the investment in the branding initiative to be approximately $40
million in 2001, including operating expenses of $19 million including
depreciation.
FREESTANDING STORES
The Company's freestanding concept included 228 stores in operation at
February 3, 2001, which primarily operate under the names Coconuts,
Strawberries Music and Spec's Music. These stores are designed for
freestanding, strip center and downtown locations. These stores average
approximately 5,200 square feet, and carry an extensive merchandise
assortment. The Company's freestanding stores include 9 video rental stores
operating under the name Movies Plus.
The Company also operates "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.
E-COMMERCE
In November 1998, the Company launched TWEC.COM, which is the on-line hub for
the Company's retail stores. The site features all of the music CDs and
cassettes, video games, DVD and VHS home videos that are available at its retail
stores, and more. The Company will replace TWEC.COM when it launches fye.com in
fiscal 2001.
2
MERCHANDISE
The Company's stores offer a full assortment of compact discs, prerecorded audio
cassettes, prerecorded video, DVDs and related products. Sales by merchandise
category as a percent of total sales over the past three years were as follows:
------------------------------------------
FEBRUARY 3, JANUARY 29, JANUARY 30,
2001 2000 1999
------------------------------------------
Compact discs 66.6% 67.0% 64.3%
Prerecorded audio cassettes 6.9 9.5 12.2
Singles 1.6 2.9 3.6
Prerecorded video 14.5 11.2 10.3
Other 10.4 9.4 9.6
------------------------------------------
TOTAL 100.0% 100.0% 100.0%
------------------------------------------
PRERECORDED MUSIC. The Company's 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.
PRERECORDED VIDEO. The Company offers prerecorded videocassettes and DVDs for
sale in a majority of its stores. In 2000, DVD sales increased to 42% of the
Company's total video sales. The Company believes that the DVD player will
continue to replace VCRs. Paul Kagan Associates, an entertainment/media research
firm, estimated that more than 4 million households owned a DVD player by the
end of 2000 and as many as 43 million households will own a DVD player by the
end of 2008. The Company plans to capitalize on this trend by making DVDs
increasingly available in its stores.
OTHER MERCHANDISE. The Company stocks and promotes brand name blank audio
cassettes, compact discs and videocassette tapes as well as accessory
merchandise for compact discs, audio cassettes and videocassettes, including
maintenance and cleaning products, storage cases, portable electronics and
headphones. The Company also features video games, consumer electronics and
boutique items.
ADVERTISING
The Company makes extensive use of in-store signs and 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 advertising allowances to promote their merchandise.
3
INDUSTRY AND COMPETITIVE ENVIRONMENT
According to the Recording Industry Association of America, the U.S. retail
music market was approximately $14.3 billion in 2000. 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. Sam
Goody, Wherehouse Entertainment, Tower Records), as well as mass merchants (e.g.
Wal-Mart, K-Mart, Target), book stores (e.g. Barnes and Noble, Borders) and
consumer electronics stores (e.g. Best Buy, Circuit City), some of which may
have greater financial or other resources than the Company.
The Company also competes with mail order clubs (e.g. BMG Music, Columbia House)
and Internet companies (e.g. Amazon.com, CDnow.com). The Company believes that
sales via the Internet will continue to become more significant over time.
SEASONALITY
The Company's business is highly seasonal, with the fourth quarter constituting
the Company's peak selling period. In fiscal 2000, the fourth quarter accounted
for approximately 39% of annual sales and 75% of net income, excluding
one-time charges. 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 supplement its permanent store
sales staff. If for any reason the Company's net sales were below seasonal norms
during the fourth quarter, 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 can be affected by the timing and strength of new releases, the
timing of holidays, new store openings and the sales performance of existing
stores.
DISTRIBUTION AND MERCHANDISE OPERATIONS
The Company's two distribution facilities use automated and computerized systems
designed to manage merchandise receipt, storage and shipment. Store inventories
of regular merchandise are replenished using daily sales information that is
transmitted to the Company's central computer system from each store after the
close of the business day. Shipments from the distribution facilities to the
Company's stores are made at least once a week and currently provide
approximately 78% of all merchandise requirements. The balance of the stores'
requirements is satisfied through direct shipments from manufacturers.
Company-owned trucks service approximately 21% of the Company's stores. The
balance of stores are serviced by several common carriers chosen on the basis of
geography and rate considerations. The Company does not have any long-term
contractual arrangements with common carriers. The Company's sales volume and
centralized merchandise distribution facilities enable them to take advantage of
transportation economies.
The Company believes that its existing distribution centers are adequate to meet
the Company's planned business needs.
4
SUPPLIERS AND PURCHASING
The Company purchases inventory from approximately 660 suppliers. Approximately
71% of purchases in fiscal 2000 were made from five 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, the Company does not have 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 material price increases imposed by the suppliers of prerecorded
music and video.
The Company produces its own store fixtures for its stores at a 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 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 the suppliers; however, four of
the five charge a related merchandise return penalty. This return practice
permits the Company to carry a wider selection of music titles and reduces the
risk of inventory obsolescence. Most manufacturers and distributors of
prerecorded video offer return privileges comparable to those of prerecorded
music, but they do not charge a return penalty. Merchandise return policies have
not changed significantly during the past five years. Historically, the Company
generally has adapted its purchasing policies to changes in the policies of its
suppliers.
EMPLOYEES
As of February 3, 2001, the Company employed approximately 10,000 associates, of
whom 4,600 were employed on a full-time basis. The remainder were employed on a
part-time or temporary basis. The Company hires seasonal sales associates during
peak seasons to ensure continued levels of customer service. Store managers
report to district managers, who, in turn, report to regional managers. Store
managers, district managers and regional managers are eligible 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 enjoys favorable relations
with its employees. Increases in the minimum wage have had a significant effect
on the Company's compensation expense in recent years. Future increases in the
minimum wage may have an adverse effect on the Company's results of operations
and financial condition.
RETAIL INFORMATION SYSTEMS
The Company utilizes an IBM AS/400 computer system for the majority of its
information processing. The system processes sales, inventory, accounting,
payroll, telecommunications and other operating information. During fiscal 1998
and 1999, the Company completed a chain-wide rollout of a new point-of-sale
system. This system improved customer service by increasing the accuracy of
perpetual inventory records at the store level, which improved in-stock levels.
The system includes enhanced inventory management functions, including
merchandise receiving and returns, and the ability to look up, by SKU, a store's
current in-stock inventory position. Additionally, the system facilitates
streamlined checkout procedures and daily electronic communication between
stores, the corporate offices and field management.
5
ITEM 2. PROPERTIES
RETAIL STORES
At February 3, 2001, the Company operated 984 retail locations. All of the
Company'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 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 February 3, 2001:
# of # of
Year Leases Year Leases
---- ------ ---- ------
2001 122 2005 82
2002 104 2006 32
2003 138 2007 62
2004 170 2008 & Beyond 274
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.
CORPORATE OFFICES AND DISTRIBUTION CENTER FACILITIES
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 40,300 square feet. The distribution center portion is comprised
of approximately 128,100 square feet. The Company owns its 236,600 square foot
distribution center and 59,200 square feet of commercial office space in North
Canton, Ohio.
The Company leases an 82,000 square foot facility in Johnstown, New York, where
it manufactures its store fixtures. The operating lease expires in December
2003. The Company also leases 20,700 square feet of commercial office space in
Albany, New York. The operating lease expires in December of 2001.
ITEM 3. LEGAL PROCEEDINGS
On October 16, 2000, the United States District Court for the District of
Delaware issued an opinion in favor of the Internal Revenue Service ("IRS"), in
the case of the IRS vs. CM Holdings Inc. ("Camelot"), a wholly-owned subsidiary
of the Company. The case was brought against Camelot by the IRS to challenge the
deduction of interest expense for certain tax years that ended on or before
February 1994, related to corporate-owned life insurance policies held by
Camelot. The court ruled that the interest deductions should not be allowed and
the Company is responsible for interest and penalties. As a result of the
ruling, the Company reserved $11.0 million during 2000. The Company has filed a
notice of appeal in the United States Third Circuit Court of Appeals in
response to the decision.
On August 8, 2000, 30 Attorneys General served a complaint against the Company,
the five major music distributors and two other specialty retailers in the U.S.
District Court for the Southern District of New York ("AG's suit"). The
complaint has been subsequently amended to add additional states as plaintiffs
and to reflect the transfer of the case to U.S. District Court in Maine pursuant
to the Multidistrict Litigation Rules. The AG's suit alleges that the
distributors and retailers conspired to violate the anti-trust laws and to fix
prices by requiring retailers to adhere to minimum advertised prices in order to
receive cooperative advertising funds from the labels. The complaint alleges
that consumers were damaged in an unspecified amount and seeks treble damages
and civil penalties. Following the services of the AG's suit, these same
defendants were named as defendants in private class action suits ("Class
Actions"), each with similar allegations as in the AG's suit. The Class
Actions have been consolidated along with the AG's suit in the
6
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
U.S. District Court in Maine. It is management's belief that the lawsuit is
without merit and the Company will ultimately prevail in this regard.
The Company is subject to other legal proceedings and claims that have arisen in
the ordinary course of its business and have not been finally adjudicated.
Although there can be no assurance as to the ultimate disposition of these
matters, it is management's opinion, based upon the information available at
this time, that the expected outcome of these matters, individually or in the
aggregate, will not have a material adverse effect on the results of operations
and financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended February 3, 2001.
7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION. The Company's Common Stock trades on The NASDAQ Stock Market
under the symbol "TWMC." As of February 3, 2001, there were approximately 925
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, 1999 through April 30, 2001.
CLOSING
SALES
PRICES
High Low
2000
1st Quarter $10.69 $ 9.25
2nd Quarter 12.88 9.50
3rd Quarter 12.06 7.63
4th Quarter 10.19 7.44
1999
1st Quarter $21.96 $16.00
2nd Quarter 29.58 18.25
3rd Quarter 26.75 11.33
4th Quarter 24.38 13.25
2001 $ 9.88 $ 8.02
1st Quarter (through
April 30, 2001)
On April 30, 2001, the last reported sale price on the Common Stock on the
NASDAQ National Market was $8.97.
Options for the Company's Common Stock trade on the Chicago Board Options
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 any payment of dividends, the Company maintains $25
million in availability 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.
8
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data and other
operating information of the Company and gives retroactive effect to the
acquisition of Camelot for the periods subsequent to its "fresh-start reporting"
on January 31, 1998, upon its reemergence from bankruptcy. The acquisition was
accounted for using the pooling-of-interests method of accounting. The selected
income statement and balance sheet data for the five fiscal years ended February
3, 2001 set forth below are derived from the audited consolidated financial
statements of the Company. Each fiscal year of the Company consisted of 52
weeks, except the fiscal year ended February 3, 2001, which consisted of 53
weeks. All share and per share amounts have been adjusted for stock splits. The
information is only a summary and should be read 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
-------------------------------------------------------------------
FEBRUARY 3, JANUARY 29, JANUARY 30, JANUARY 31, FEBRUARY 1,
2001 2000 1999 1998 1997
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(in thousands, except per share and store data)
INCOME STATEMENT DATA:
Sales $1,414,589 $1,358,132 $1,282,385 $571,314 $481,657
Cost of sales 917,354 858,588 796,311 361,422 308,952
-------------------------------------------------------------------
Gross profit 497,235 499,544 486,074 209,892 172,705
Selling, general and
Administrative expenses 416,990 371,998 372,886 170,834 150,218
Camelot merger-related costs (1) -- 25,473 -- -- --
Asset impairment charge and
restructuring charge
(reversal), net (2) -- -- 1,537 -- --
-------------------------------------------------------------------
Income from operations 80,245 102,073 111,651 39,058 22,487
Interest expense 3,128 3,496 4,989 5,148 12,110
Other expenses (income), net (6,543) (4,086) (2,221) (153) (1,343)
-------------------------------------------------------------------
Income before income
taxes 83,660 102,663 108,883 34,063 11,720
Income tax expense 43,510 41,270 47,873 13,489 4,618
-------------------------------------------------------------------
Net income 40,150 $61,393 $61,010 $20,574 $7,102
===================================================================
Basic earnings per share $0.84 $1.17 $1.19 $0.70 $0.24
===================================================================
Weighted average number
of shares outstanding - basic 47,597 52,457 51,105 29,483 29,271
===================================================================
Diluted earnings per share $0.83 $1.15 $1.14 $0.66 $0.24
===================================================================
Weighted average number
of shares outstanding - diluted 48,498 53,354 53,530 31,032 29,697
===================================================================
BALANCE SHEET DATA: (AT THE END OF THE PERIOD)
Working capital $244,716 $303,562 $274,535 $88,974 $80,368
Total assets 1,002,002 956,410 798,610 374,019 311,610
Current portion of
Long-term obligations 5,702 5,311 4,802 99 9,557
Long-term obligations 13,767 19,461 36,065 41,409 50,490
Shareholders' equity 448,822 494,173 432,376 124,522 102,919
OPERATING DATA:
Store count (open at end of
period):
Mall stores 755 723 741 340 357
Freestanding stores 229 244 247 199 122
------------------------------------------------------------------
Total stores 984 967 988 539 479
Comparable store sales increase (3) 0.2% 2.0% 3.7% 10.2% 3.6%
Total square footage (in thousands) 5,322 4,913 4,693 2,442 2,008
9
(1) THE CAMELOT MERGER-RELATED COSTS INCLUDED THE WRITE-OFF OF THE BOOK VALUE
OF RETIRED ASSETS, PROFESSIONAL FEES ASSOCIATED WITH THE COMPLETION OF THE
MERGER, SEVERANCE COSTS, JOINT PROXY PRINTING AND DISTRIBUTION COSTS, AND
REGULATORY FILING FEES.
(2) THE ASSET IMPAIRMENT CHARGE AND RESTRUCTURING CHARGE (REVERSAL), NET,
DURING THE YEAR ENDED JANUARY 30, 1999, INCLUDED AN ASSET IMPAIRMENT
CHARGE OF $3.7 MILLION TO WRITE DOWN THE CARRYING AMOUNT OF CERTAIN FIXED
ASSETS AT STORES, PRIMARILY LEASEHOLD IMPROVEMENTS, AND THE ONE-TIME
REVERSAL OF THE REMAINING BALANCE OF $2.2 MILLION IN THE STORE CLOSING
RESERVE ORIGINALLY ESTABLISHED DURING THE FISCAL YEAR ENDED FEBRUARY 3,
1996. SEE NOTE 3 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
(3) A STORE IS INCLUDED IN COMPARABLE STORE SALES CALCULATIONS AT THE
BEGINNING OF ITS 13TH FULL MONTH OF OPERATION.
10
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 is 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
--------------------------------------
February 3, January 29, January 30,
2001 2000 1999
--------------------------------------
Sales 100.0% 100.0% 100.0%
Gross profit 35.2% 36.8% 37.9%
Selling, general and
administrative expenses 29.5% 27.4% 29.1%
Camelot merger-related costs -- 1.9% --
Restructuring charge reversal
and impairment charge, net -- -- 0.1%
--------------------------------------
Income from operations 5.7% 7.5% 8.7%
Interest expense 0.2% 0.3% 0.4%
Other expenses (income), net (0.4)% (0.3)% (0.2)%
--------------------------------------
Income before income taxes 5.9% 7.5% 8.5%
Income tax expense 3.1% 3.0% 3.7%
--------------------------------------
Net income 2.8% 4.5% 4.8%
======================================
Change in comparable store sales 0.2% 2.0% 3.7%
======================================
FISCAL YEAR ENDED FEBRUARY 3, 2001 ("2000")
COMPARED TO FISCAL YEAR ENDED JANUARY 29, 2000 ("1999")
SALES. The Company's sales increased $56.5 million, or 4.2%, from 1999. The
increase was primarily attributable to a comparable store sales increase of 0.2%
and the addition of approximately 409,000 square feet of retail selling space
through the opening of 12 stores, acquisition of 112 stores (purchase of retail
assets from Wax Works, Inc., a privately-held music and video retailer) and
relocation of 36 stores, which was partially offset by the closing of 107
stores.
For 2000, comparable store sales increased 0.2% for mall stores and 0.3% for
freestanding stores. By merchandise category, comparable store sales decreased
5.4% in music, increased 29.7% in video and 7.7% in other merchandise. The
increase in comparable sales for video was driven by DVD sales.
GROSS PROFIT. Gross profit, as a percentage of sales, decreased to 35.2% in 2000
from 36.8% in 1999 primarily as a result of declining sales in the high margin
singles and audio cassette categories, increased sales in the lower margin DVD
category, and increased promotional pricing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A, as a percentage of sales,
increased to 29.5% in 2000 from 27.4% in 1999. The increase can be attributed to
increased spending on strategic initiatives including the unified branding of
mall stores, supply chain enhancement and e-commerce development.
11
INTEREST EXPENSE. Interest expense decreased from $3.5 million in 1999 to $3.1
million in 2000 due to lower average outstanding borrowings.
OTHER EXPENSES (INCOME), NET. Other income, net increased from $4.1 million
in 1999 to $6.5 million in 2000. The increase was due to interest income from
higher average cash balances during the year.
INCOME TAX EXPENSE. The effective income tax rate was 52.0% in 2000. Included in
income tax expense was an $11.0 million charge, which resulted from a court
decision disallowing the deduction of interest expenses related to corporate-
owned life insurance policies held by Camelot. Excluding the charge, the
Company's effective tax rate was 38.9% in 2000. See Note 6 of Notes to
Consolidated Financial Statements for a reconciliation of the statutory tax rate
to the Company's effective income tax rate.
NET INCOME. In 2000, the Company's net income decreased to $40.2 million
compared to a net income of $61.4 million in 1999. The decrease in net income is
attributable to lower gross margins, higher SG&A expenses and the increase in
income tax expense related to the court decision on corporate-owned life
insurance policies.
Comparisons of 2000 and 1999 are affected by an additional week of results in
the 2000 reporting year. Because the Company's year ends on the Saturday nearest
to January 31, a fifty-third week is added every five or six years. The
fifty-third week in 2000 increased sales by an estimated $23.7 million,
operating income by an estimated $4.0 million and net income by an estimated
$2.5 million or $0.05 per share.
FISCAL YEAR ENDED JANUARY 29, 2000 ("1999")
COMPARED TO FISCAL YEAR ENDED JANUARY 30, 1999 ("1998")
SALES. The Company's sales increased $75.7 million, or 5.9%, from 1998. The
increase was primarily attributable to a comparable store sales increase of 2.0%
and the addition of approximately 220,000 square feet of retail selling space
through the opening of 34 stores and relocation of 46 stores, which was
partially offset by the closing of 55 stores. Management attributes the
comparable store sales increase to its focus on customer service, superior
retail locations, inventory and merchandise presentation.
For 1999, comparable store sales increased 1.6% for mall stores and 4.2% for
freestanding stores. By merchandise category, comparable store sales increased
1.1% in music, 9.9% in video and decreased 4.5% in other merchandise.
GROSS PROFIT. Gross profit, as a percentage of sales, decreased to 36.8% in 1999
from 37.9% in 1998 primarily as a result of higher inventory shrinkage in the
acquired Camelot stores. The Company has taken action to reduce shrink at the
Camelot stores, including implementing policies and procedures that have
successfully kept shrink at reduced levels for the Company in the past.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A, as a percentage of sales,
decreased to 27.4% in 1999 from 29.1% in 1998. The 1.7% decrease can be
attributed to the leverage of SG&A on the total sales increase and the reduction
of corporate overhead expenses through the consolidation of the Camelot
corporate offices.
CAMELOT MERGER-RELATED COSTS. The Camelot merger costs, net, represents the
one-time charge of $25.5 million for costs directly related to completing the
merger with Camelot Music Holdings, Inc. The costs included the write-off of the
book value of retired assets, professional fees associated with the completion
of the merger, severance costs, joint proxy printing and distribution costs, and
regulatory filing fees.
INTEREST EXPENSE. Interest expense decreased from $5.0 million in 1998 to $3.5
million in 1999. The decrease is due to lower average outstanding borrowings and
lower interest rates.
OTHER EXPENSES (INCOME), NET. Other income, net increased from $2.2 million
in 1998 to $4.1 million in 1999. The increase was due to interest income from
higher average cash balances during the year.
INCOME TAX EXPENSE. The effective income tax rate was 40.2% in 1999. See Note 6
of Notes to Consolidated Financial Statements for a reconciliation of the
statutory tax rate to the Company's effective income tax rate.
NET INCOME. In 1999, the Company's net income increased to $61.4 million
compared to net income of $61.0 million in 1998. Excluding the one-time Camelot
merger-related costs, pro forma 1999 net income is $76.6 million. The improved
bottom line performance as compared to 1998 can be attributed to the improved
leverage of SG&A expenses due to higher sales and the reduction of corporate
overhead expenses.
12
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL RESOURCES. The Company's primary sources of working
capital are cash flows provided by operations and borrowing capacity under
its revolving credit facility. The Company ended fiscal 2000 with cash
balances of approximately $265.1 million, compared to $280.0 million at the
end of 1999. The decrease primarily relates to an increase in cash used in
investing and financing activities.
Cash used in investing activities was $92.0 million in 2000, as compared to
$53.3 million in 1999. In 2000, the primary uses of cash were $55.9 million for
acquisitions, primarily relating to the acquired Disc Jockey stores, and $32.8
million for the acquisition of property and equipment. In 1999, the acquisition
of property and equipment accounted for $51.2 million of cash used in investing
activities.
Cash used in financing activities was $90.2 million in 2000, as compared to
$18.2 million in 1999. In 2000, the primary use of cash was $85.7 million to
repurchase outstanding shares of the Company's common stock under programs
authorized by the Board of Directors. As of February 3, 2001, the Company had
purchased approximately 10.5 million shares of the 15.0 million shares
authorized by the Board of Directors under three separate programs of 5.0
million shares each. During 1999, the two largest uses of cash were a payment
of $22.0 million to pay off the remaining debt associated with the Camelot
acquisition and $11.5 million to repurchase outstanding shares of the
Company's common stock.
The Company has a three-year $100 million secured revolving credit facility with
Congress Financial Corporation that expires in July 2003 and automatically
renews on a year-to-year basis thereafter at the discretion of both parties.
Interest expense decreased to $3.1 million in 2000 from $3.5 million in 1999. As
of February 3, 2001 and January 29, 2000, the Company did not have any
borrowings outstanding under the facility, and $100 million was available.
The revolving credit facility contains certain restrictive provisions, including
provisions governing cash dividends and acquisitions, is collateralized by
merchandise inventory and has a minimum net worth covenant.
CAPITAL EXPENDITURES. The majority of the Company's capital expenditures are for
new stores and the relocation of existing stores. The Company typically finances
its capital expenditures through cash generated from operations. The Company may
also receive financing from landlords in the form of construction allowances or
rent concessions. Total capital expenditures were approximately $32.8 million in
2000.
In fiscal 2001, the Company plans to spend approximately $56.0 million, net of
construction allowances, for additions to fixed assets, including costs for the
rebranding of the mall stores.
SEASONALITY. The Company's business is highly seasonal, with the highest sales
and earnings occurring in the fourth fiscal quarter. See Note 12 of the Notes to
Consolidated Financial Statements for quarterly financial highlights.
ACCOUNTING POLICIES. In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133, as
amended by SFAS No. 137 and SFAS No. 138, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
required to be adopted in years beginning after June 15, 2000. The Company will
adopt SFAS No. 133 effective February 4, 2001. As the Company is not active in
the use of derivative instruments or arrangements, management has determined
that adoption of SFAS No. 133 will not have a material financial impact on the
Company's consolidated financial statements. The Company will continue to
evaluate future contractual arrangements entered into that may affect this
determination.
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 any payment of dividends, the Company maintains $25
million of availability 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
13
The Company does not hold any financial instruments that expose it to
significant market risk 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 12 of the
Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
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 2001 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after February 3, 2001.
(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 2001 Annual Meeting of Shareholders to be filed
with the Securities and Exchange Commission within 120 days after February 3,
2001.
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 2001 Annual Meeting of Shareholders to be filed
with the Securities and Exchange Commission within 120 days after February 3,
2001.
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 2001 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission within 120 days after February
3, 2001.
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 2001 Annual Meeting of Shareholders to be filed with the Securities
and Exchange Commission within 120 days after February 3, 2001.
15
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
Not applicable.
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.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TRANS WORLD ENTERTAINMENT CORPORATION
Date: May 4, 2001 By: /s/ ROBERT J. HIGGINS
-------------------------
Robert J. Higgins, Chairman and Chief
Executive Officer
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 and Chief Executive Officer May 4, 2000
- -------------------------- (Principal Executive Officer)
(Robert J. Higgins)
/s/ JOHN J. SULLIVAN Senior Vice President, Treasurer and Chief Financial Officer May 4, 2001
- -------------------------- (Principal Financial and Chief Accounting Officer)
(John J. Sullivan)
/s/ MATTHEW H. MATARASO Secretary and Director May 4, 2001
- --------------------------
(Matthew H. Mataraso)
/s/ GEORGE W. DOUGAN Director May 4, 2001
- --------------------------
(George W. Dougan)
/s/ ISAAC KAUFMAN Director May 4, 2001
- --------------------------
(Isaac Kaufman)
/s/ DEAN S. ADLER Director May 4, 2001
- --------------------------
(Dean S. Adler)
/s/ DR. JOSEPH G. MORONE Director May 4, 2001
- --------------------------
(Dr. Joseph G. Morone)
/s/ MARTIN E. HANAKA Director May 4, 2001
- --------------------------
(Martin E. Hanaka)
/s/ MICHAEL B. SOLOW Director May 4, 2001
- --------------------------
(Michael B. Solow)
17
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 February 3, 2001 and January 29, 2000 F-3
Consolidated Statements of Income - Fiscal years ended February 3,
2001, January 29, 2000 and January 30, 1999 F-4
Consolidated Statements of Shareholders' Equity - Fiscal years ended
February 3, 2001, January 29, 2000 and January 30, 1999 F-5
Consolidated Statements of Cash Flows - Fiscal years ended February 3,
2001, January 29, 2000 and January 30, 1999 F-6
Notes to Consolidated Financial Statements F-7
F-1
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 February 3, 2001 and January
29, 2000, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the fiscal years in the three-year period
ended February 3, 2001. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Trans World
Entertainment Corporation and subsidiaries as of February 3, 2001 and January
29, 2000, and the results of their operations and their cash flows for each of
the fiscal years in the three-year period ended February 3, 2001, in conformity
with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Albany, New York
March 16, 2001
F-2
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
FEBRUARY 3, JANUARY 29,
2001 2000
-------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 265,084 $ 280,026
Accounts receivable 8,726 5,973
Merchandise inventory 475,747 437,363
Prepaid expenses and other 5,771 5,203
-------------------------------
Total current assets 755,328 728,565
-------------------------------
FIXED ASSETS, net 152,741 144,694
DEFERRED TAX ASSET 34,317 34,431
GOODWILL 43,773 31,433
OTHER ASSETS 15,843 17,287
-------------------------------
TOTAL ASSETS $ 1,002,002 $ 956,410
===============================
LIABILITIES
CURRENT LIABILITIES:
Accounts payable $ 430,185 $ 353,294
Income taxes payable 28,114 21,908
Accrued expenses and other 37,380 32,021
Deferred taxes 9,231 12,469
Current portion of capital lease obligations 5,702 5,311
------------------------------
Total current liabilities 510,612 425,003
CAPITAL LEASE OBLIGATIONS, less current portion 13,767 19,461
OTHER LIABILITIES 28,801 17,773
------------------------------
TOTAL LIABILITIES 553,180 462,237
------------------------------
SHAREHOLDERS' EQUITY
Preferred stock ($0.01 par value; 5,000,000 shares authorized;
none issued) -- --
Common stock ($0.01 par value; 200,000,000 shares authorized;
53,676,756 shares and 53,425,867 shares issued in
2000 and 1999, respectively) 537 534
Additional paid-in capital 285,292 283,932
Unearned compensation - restricted stock (6) (348)
Treasury stock at cost (10,568,432 and 1,177,432 shares in
2000 and 1999, respectively) (97,579) (11,855)
Accumulated other comprehensive loss (1,482) --
Retained earnings 262,060 221,910
------------------------------
TOTAL SHAREHOLDERS' EQUITY 448,822 494,173
------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,002,002 $ 956,410
==============================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED
---------------------------------------------
FEBRUARY 3, JANUARY 29, JANUARY 30,
2001 2000 1999
---------------------------------------------
Sales $ 1,414,589 $ 1,358,132 $ 1,282,385
Cost of sales 917,354 858,588 796,311
---------------------------------------------
Gross profit 497,235 499,544 486,074
Selling, general and administrative expenses 416,990 371,998 372,886
Camelot merger-related costs, net -- 25,473 --
Asset impairment charge and restructuring charge reversal, net -- -- 1,537
---------------------------------------------
Income from operations 80,245 102,073 111,651
Interest expense 3,128 3,496 4,989
Other expense (income), net (6,543) (4,086) (2,221)
---------------------------------------------
Income before income taxes 83,660 102,663 108,883
Income tax expense 43,510 41,270 47,873
---------------------------------------------
NET INCOME $ 40,150 $ 61,393 $ 61,010
=============================================
BASIC EARNINGS PER SHARE $ 0.84 $ 1.17 $ 1.19
=============================================
Weighted average number of common shares outstanding - basic 47,597 52,457 51,105
=============================================
DILUTED EARNINGS PER SHARE $ 0.83 $ 1.15 $ 1.14
=============================================
Weighted average number of common shares outstanding - diluted 48,498 53,354 53,530
=============================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
UNEARNED ACCUM.
ADDITIONAL COMPENSATION OTHER
COMMON STOCK PAID IN STOCK TREASURY COMP. RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL PLANS STOCK LOSS EARNINGS EQUITY
-------------------------------------------------------------------------------------
Balance as of January 31, 1998
as previously reported 29,723 $ 297 $ 25,287 $ (175) $ (394) $ -- $ 99,507 $ 124,522
Opening equity balances of Camelot upon
adoption of "fresh-start" accounting 19,301 193 194,175 -- -- -- -- 194,368
- ----------------------------------------------------------------------------------------------------------------------------------
Balance as of January 31, 1998, as
restated 49,024 $ 490 $ 219,462 $ (175) $ (394) -- $ 99,507 $ 318,890
Issuance of treasury stock under
incentive stock programs -- -- 10 -- 4 -- -- 14
Stock issued -- -- 188 -- -- -- -- 188
Issuance of shares of common
stock in a public offering 2,250 23 36,600 -- -- -- -- 36,623
Amortization of unearned
compensation - restricted stock -- -- -- 44 -- -- -- 44
Issuance of director stock options -- -- 346 -- -- -- -- 346
Issuance of options under Camelot
1998 Stock Option Plan -- -- 5,112 (5,112) -- -- -- --
Amortization of unearned compensation -
Camelot 1998 Stock Option Plan -- -- -- 5,112 -- -- -- 5,112
Forfeiture of unearned compensation -
restricted stock -- -- (53) 53 -- -- -- --
Exercise of stock options and related tax
benefit 908 9 10,140 -- -- -- -- 10,149
Net Income -- -- -- -- -- -- 61,010 61,010
- ----------------------------------------------------------------------------------------------------------------------------------
Balance as of January 30, 1999 52,182 $ 522 $271,805 $ (78) $ (390) -- $160,517 $ 432,376
Issuance of treasury stock under
incentive stock programs -- -- 9 -- 4 -- -- 13
Repurchase of shares of treasury stock -- -- -- -- (11,469) -- -- (11,469)
Issuance of restricted stock under
incentive stock programs 30 -- 336 (336) -- -- -- --
Amortization of unearned
compensation - restricted stock -- -- -- 66 -- -- -- 66
Issuance of director stock options -- -- 64 -- -- -- -- 64
Exercise of stock options and related tax
benefit 1,214 12 11,718 -- -- -- -- 11,730
Net Income -- -- -- -- -- -- 61,393 61,393
- ----------------------------------------------------------------------------------------------------------------------------------
Balance as of January 29, 2000 53,426 $ 534 $ 283,932 $ (348) $(11,855) -- $221,910 $ 494,173
Comprehensive income:
Net Income -- -- -- -- -- -- 40,150
Unrealized loss on available for sale
securities -- -- -- -- -- (1,482) --
Total comprehensive income 38,668
Issuance of treasury stock under
incentive stock programs -- -- 6 -- 4 -- -- 10
Repurchase of shares of treasury stock -- -- -- -- (85,728) -- -- (85,728)
Forfeiture of unearned compensation -
restricted stock (30) -- (335) 335 -- -- -- --
Amortization of unearned
compensation - restricted stock -- -- -- 7 -- -- -- 7
Issuance of director stock options -- -- 284 -- -- -- -- 284
Exercise of stock options and related tax
benefit 281 3 1,405 -- -- -- -- 1,408
- ----------------------------------------------------------------------------------------------------------------------------------
Balance as of February 3, 2001 53,677 $ 537 $285,292 $ (6) $(97,579) $(1,482) $262,060 $ 448,822
==================================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED
-------------------------------------------
FEBRUARY 3, JANUARY 29, JANUARY 30,
2001 2000 1999
-------------------------------------------
OPERATING ACTIVITIES:
Net income $40,150 $61,393 $61,010
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 38,433 37,709 35,478
Amortization of financing fees -- -- 253
Amortization of lease valuations, net (712) (2,765) (388)
Reversal of restructuring charge -- -- (2,157)
Loss on impairment from fixed assets -- 6,649 3,694
Stock compensation programs 301 143 5,568
Loss on disposal of assets 2,546 3,670 1,560
Write-off of investment in unconsolidated affiliate 2,100 -- --
Deferred tax expense (3,124) 8,251 4,529
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (2,753) (173) (773)
Merchandise inventory (7,766) (11,285) (73,557)
Prepaid expenses and other (230) 4,179 (1,422)
Other assets 45 (1,272) 178
Accounts payable 74,525 132,658 17,788
Income taxes payable 6,777 (6,261) 26,461
Accrued expenses and other 4,612 (18,766) 5,884
Store closing reserve -- -- (6,535)
Other liabilities 13,024 (1,996) 135
-------------------------------------------
Net cash provided by operating activities 167,928 212,134 77,706
-------------------------------------------
INVESTING ACTIVITIES:
Purchases of fixed assets (32,782) (51,234) (57,143)
Acquisition of businesses, net of cash acquired (56,539) -- (103,264)
Purchase of investments in unconsolidated affiliates (1,453) (2,100) (235)
Purchase of available for sale securities (2,000) -- --
Disposal of videocassette rental inventory, net of purchases 98 23 2,860
-------------------------------------------
Net cash used by investing activities (92,676) (53,311) (157,782)
-------------------------------------------
FINANCING ACTIVITIES:
Payments of long-term debt and financing fees -- (22,000) (38,281)
Proceeds from long-term debt -- -- 25,000
Payments of capital lease obligations (5,303) (4,036) (1,292)
Proceeds from capital leases -- 9,941 13,651
Payments for purchases of treasury stock (85,728) (11,469) --
Proceeds from public offering of common stock -- -- 36,623
Exercise of stock options 837 9,356 2,750
-------------------------------------------
Net cash (used) provided by financing activities (90,194) (18,208) 38,451
-------------------------------------------
Opening cash balance of Camelot upon adoption of "fresh-start" accounting -- -- 86,304
Net (decrease) increase in cash and cash equivalents (14,942) 140,615 (41,625)
Cash and cash equivalents, beginning of year 280,026 139,411 94,732
-------------------------------------------
Cash and cash equivalents, end of year $265,084 $280,026 $139,411
===========================================
Supplemental disclosure of non-cash investing and financing activities:
Issuance of treasury stock under incentive stock programs $10 $13 $14
Issuance of restricted shares under restricted stock plan -- 336 --
Income tax benefit resulting from exercises of stock options 571 2,374 7,347
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
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 February 3, 2001, the Company
operated 984 stores in 46 states, the District of Columbia, Commonwealth of
Puerto Rico 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, its wholly-owned subsidiary, Record Town, Inc.
("Record Town"), and Record Town's subsidiaries, all of which are wholly-owned.
All significant intercompany accounts and transactions have been eliminated. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
On April 22, 1999, the Company merged with Camelot Music Holdings, Inc.
("Camelot"). The transaction was accounted for as a pooling-of-interests.
Accordingly, prior period consolidated financial statements have been restated
to include combined results of operations, financial position and cash flows of
Camelot as though it had been a part of the Company since Camelot's adoption of
"fresh-start" accounting on January 31, 1998.
ITEMS AFFECTING COMPARABILITY: The Company's fiscal year is a 52 or 53-week
period ending on the Saturday nearest to January 31. Fiscal 2000, 1999 and 1998
ended February 3, 2001, January 29, 2000 and January 30, 1999, respectively, and
each fiscal year consisted of 52 weeks, except for fiscal year 2000, which
consisted of 53 weeks. The fifty-third week in 2000 increased sales by an
estimated $23.7 million, operating income by an estimated $4.0 million and net
income by an estimated $2.5 million or $0.05 per share.
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 an original maturity of three months or less to be cash
equivalents.
CONCENTRATION OF CREDIT RISKS: The Company maintains centralized cash management
and investment programs whereby excess cash balances are invested in short-term
funds and money market instruments considered to be cash equivalents. The
Company's investment portfolio is diversified and consists of short-term
investment grade securities consistent with its investment guidelines. These
guidelines include the provision that sufficient liquidity will be maintained to
meet anticipated cash flow needs. The Company maintains cash and cash
equivalents with various financial institutions. At times, such amounts may
exceed the F.D.I.C. limits. The Company limits the amount of credit exposure
with any one financial institution and believes that no significant
concentration of credit risk exists with respect to cash investments.
CONCENTRATION OF BUSINESS RISKS: The Company purchases inventory for its stores
from approximately 660 suppliers, with approximately 71% 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 loss of sales, which would have an adverse effect on operating
results and also result in a decrease in vendor support for the Company's
advertising programs.
MERCHANDISE INVENTORY AND RETURN COSTS: Inventory is stated at the lower of cost
or market as determined by the average cost method. The Company is entitled to
return merchandise purchased from major vendors for credit against other
purchases from these vendors. These 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.
F-7
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. Depreciation and amortization expense related to the Company's
videocassette rental inventory totaling $816,000, $921,000 and $1.2 million in
fiscal 2000, 1999 and 1998, respectively, is included in cost of sales.
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 that do not extend the
life of the applicable asset, are charged to expense as incurred. Buildings are
depreciated 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 using the
straight-line method over the shorter of their estimated useful lives or the
related lease term. A majority of the Company's operating leases are ten years
in term. Amortization of capital lease assets is included in depreciation and
amortization expense.
IMPAIRMENT VALUE OF LONG-LIVED ASSETS: 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 undiscounted future net cash flows expected to be generated by the
asset over its remaining useful life. 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. Fair value
is generally measured based on discounted estimated future cash flows. During
fiscal 1999, the Company recorded an impairment loss of $6.7 million as part of
the Camelot merger charge for the write-down of certain fixed assets acquired in
the merger. During fiscal 1998, the Company recorded an impairment loss of $3.7
million to write-down the carrying amount of fixed assets, primarily leasehold
improvements, at stores 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.
GOODWILL: Goodwill represents the adjusted amount of the cost of acquisitions in
excess of fair value of net assets acquired in purchase transactions, and is
being amortized on a straight-line basis over estimated useful lives ranging
from 10 to 20 years. The amortization period is determined by taking into
consideration the following factors: the critical market position and
establishment of brand names; the combined store mass of the companies; the
amortization periods generally used in the retail music business; the highly
competitive nature of the business including emerging forms of competition; and
the overall history of profitability of the acquired businesses. The Company
periodically evaluates the carrying amount of goodwill, as well as the related
amortization periods to determine whether adjustments to these amounts or useful
lives are required based on current events and circumstances. The Company
performs an analysis of the recoverability of goodwill using a cash flow
approach consistent with the analysis of the impairment of long-lived assets.
ADVERTISING COSTS: The costs of advertising are expensed in the first period in
which such advertising takes place. Total advertising expense was $22.3 million,
$18.8 million and $19.2 million in fiscal 2000, 1999 and 1998, 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.
F-8
COMPREHENSIVE INCOME: The Company accounts for comprehensive income in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income". SFAS No. 130 requires only additional
disclosures in the consolidated financial statements; it does not affect the
Company's financial position or results of operations. Comprehensive income
for 2000 consists of net income and net unrealized losses on available for
sale securities and is presented in the consolidated statements of
shareholders' equity. During 1999 and 1998, the Company did not have other
items of comprehensive income as defined by SFAS No. 130, and accordingly,
comprehensive income is equal to net income.
INVESTMENT SECURITIES: Certain investments are categorized as available for
sale securities in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", and are recorded at fair value
based upon quoted market prices. Unrealized gains and losses are excluded
from earnings and reflected in shareholders' equity until realized. Realized
gains and losses for available for sale securities are included in earnings
and are computed using the specific identification method for determining the
cost of securities sold. A decline in the market value of any available for
sale security below cost that is deemed other than temporary is charged to
earnings, resulting in the establishment of a new cost basis for the security.
As of February 3, 2001, the amortized cost, gross unrealized loss and fair
value of the Company's available for sale securities was $2.0 million, ($1.5
million) and $0.5 million, respectively.
EARNINGS PER SHARE: The Company accounts for earnings per share under the
provisions of 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 the weighted
average common shares outstanding for the period. Diluted earnings per share is
calculated by dividing net income by the sum of the weighted average shares
outstanding and additional common shares that would have been outstanding if the
dilutive potential common shares had been issued for the Company's common stock
options from the Company's Stock Option Plans (see Note 9). As required by SFAS
No. 128, all outstanding common stock options were included even though their
exercise may be contingent upon vesting. Weighted average shares are calculated
as follows:
Fiscal Year
-----------------------------------------------------
2000 1999 1998
-------------- -------------- ------------
Weighted average common shares outstanding - basic 47,597 52,457 51,105
Dilutive effect of employee stock options 901 897 2,425
-------------- -------------- ------------
Weighted average common shares outstanding - diluted 48,498 53,354 53,530
============== ============== ============
Antidilutive stock options 3,232 1,707 32
============== ============== ============
Antidilutive stock options outstanding were excluded from the computation of
diluted earnings per share because the exercise price of the options was greater
than the average market price of the common shares during the period.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents, accounts receivable,
accounts payable and other current liabilities approximate fair value because
of the immediate or short-term maturity of these financial instruments.
NOTE 2. BUSINESS COMBINATIONS
On October 30, 2000, the Company acquired certain assets and assumed certain
liabilities and operating lease commitments of 112 stores from Wax Works,
Inc., a privately-held music and video retailer. The stores operate under the
name "Disc Jockey" and are located primarily in mall locations throughout the
Midwest and Southern United States. The acquisition was accounted for using
the purchase method of accounting. The Company paid $49.8 million, net of
cash acquired, for the assets, including merchandise inventory, fixed assets,
leasehold interests and other related current assets. The Company recognized
approximately $10.2 million in goodwill related to the acquisition. The
goodwill is being amortized on a straight-line basis over a 15-year period.
On August 11, 2000, the Company acquired a majority interest in SecondSpin.com
for $4.2 million, net of cash acquired. The acquisition was accounted for under
the purchase method of accounting. SecondSpin.com operates on-line and in store
marketplaces for buying and selling of used CDs, videos and DVDs.
SecondSpin.com operates four stores in California and Colorado. In addition,
the Company provided SecondSpin.com $2.5 million in the form of convertible
debt to repay long-term obligations under a recapitalization agreement with
the other shareholders of SecondSpin.com The Company recognized approximately
$4.4 million in goodwill related to the acquisition. The goodwill is being
amortized on a straight-line basis over a 10-year period.
F-9
On April 22, 1999, under the Agreement and Plan of Merger dated October 26,
1998, the Company acquired Camelot, a specialty retailer of prerecorded music,
videocassettes and DVDs, and related accessories, in a stock-for-stock
transaction accounted for as a pooling-of-interests. Camelot operated over 480
retail locations in 38 states, the District of Columbia and the Commonwealth of
Puerto Rico. 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 outstanding
option to purchase Camelot common stock immediately prior to the completion of
the merger was converted into 1.9 fully vested and exercisable options to
acquire the Company's common stock. The exercise prices of these options were
adjusted accordingly for the 1.9 to 1 conversion ratio. As a result, the Company
issued approximately 19.3 million shares of its common stock and converted 1.3
million options to acquire its common stock. In connection with the merger, all
of Camelot's outstanding notes payable were repaid.
Effective July 29, 1998, Camelot acquired all of the outstanding common stock of
Spec's Music, Inc. ("Spec's") under the terms of an Agreement and Plan of Merger
dated June 3, 1998. Spec's is a retailer of prerecorded music in South
Florida and Puerto Rico. The Spec's acquisition was accounted for using the
purchase method of accounting. The total purchase price was $42.7 million, net
of cash acquired, including cash payment of $18.6 million, repayment of Spec's
indebtedness of $9.2 million, assumption of liabilities aggregating $14.0
million and acquisition costs of $900,000. The Company recognized approximately
$9.4 million in goodwill related to the acquisition. The goodwill is being
amortized on a straight-line basis over a 20-year period.
Effective February 28, 1998, Camelot acquired certain assets and assumed certain
liabilities and operating lease commitments of The Wall Music, Inc. ("The Wall")
pursuant to an Asset Purchase Agreement dated December 10, 1997. The purchase
price of The Wall was $74.6 million, net of cash acquired, (including
approximately $2.3 million of acquisition costs) and was paid in cash. The
acquisition was accounted for using the purchase method of accounting. The
Company recognized approximately $24.7 million in goodwill related to the
acquisition. The goodwill is being amortized on a straight-line basis over a
20-year period.
During 2000, 1999 and 1998, total amortization related to goodwill was $2.3
million, $2.4 million and $1.8 million, respectively.
NOTE 3. RESTRUCTURING CHARGE
The Company completed its 1995 restructuring program in fiscal 1998. The
remaining balance in the store closing reserve of $2.2 million was credited to
operations in the 4th quarter of fiscal 1998.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
February 3, January 29,
2001 2000
--------------- --------------
Buildings $ 18,926 $ 18,926
Fixtures and equipment 189,186 166,229
Leasehold improvements 111,057 99,903
--------------- --------------
319,169 285,058
Allowances for depreciation and amortization (166,428) (140,364)
--------------- --------------
$ 152,741 $ 144,694
=============== ==============
Depreciation and amortization expense related to the Company's distribution
center facility and equipment of $1.6 million in fiscal 2000, 1999 and 1998,
respectively, is included in cost of sales. All other depreciation and
amortization of fixed assets is included in selling, general and administrative
expenses. Depreciation and amortization of fixed assets is included in the
condensed consolidated statements of income as follows:
Fiscal Year
----------------------------------------------
2000 1999 1998
-------------- ---------------- --------------
(IN THOUSANDS)
Cost of sales $ 1,637 $ 1,612 $ 1,567
============== ================ ==============
Selling, general and administrative expenses $ 34,567 $ 33,732 $ 30,552
============== ================ ==============
F-10
NOTE 5. DEBT
The Company's $100.0 million secured revolving credit facility with Congress
Financial Corporation expires in July 2003, and automatically renews on a
year-to-year basis thereafter at the discretion of both parties. The facility
bears interest at the prime interest rate or the Eurodollar interest rate plus
1.75% (7.4% at February 3, 2001), and is collateralized 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 2000, 1999 and 1998, the highest aggregate balances outstanding
under the current and previous revolving credit facilities were $12.5 million,
$3.3 million and $35.0 million, respectively. The weighted average interest
rates during fiscal 2000, 1999 and 1998 based on average daily balances were
9.50%, 7.44%, and 8.50%, respectively. The Company didn't have any balances
outstanding under the Company's revolving credit agreements at the end of fiscal
2000 and 1999.
Interest paid during fiscal 2000, 1999 and 1998 was approximately $3.1 million,
$3.6 million and $4.4 million, respectively.
NOTE 6. INCOME TAXES
Income tax expense consists of the following:
FISCAL YEAR
--------------------------------------------
2000 1999 1998
--------------------------------------------
(IN THOUSANDS)
Federal - current $ 41,664 $ 30,498 $ 36,207
State - current 4,970 2,521 7,137
Deferred (3,124) 8,251 4,529
--------------------------------------------
$ 43,510 $ 41,270 $ 47,873
============================================
A reconciliation of the Company's effective tax rates with the federal statutory
rate is as follows:
FISCAL YEAR
--------------------------------------------
2000 1999 1998
--------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal income tax effect 0.8% 1.4% 4.4%
Unearned compensation - stock options -- -- 1.9%
Plan of reorganization adjustments -- -- 2.2%
Merger costs -- 3.6% --
Change in valuation allowance 1.4% -- --
Corporate-owned life insurance
disallowance 13.1% -- --
Other 1.7% 0.2% 0.5%
--------------------------------------------
Effective income tax rate 52.0% 40.2% 44.0%
============================================
On October 16, 2000, the United States District Court for the District of
Delaware issued an opinion in favor of the Internal Revenue Service ("IRS"), in
the case of the IRS vs. CM Holdings Inc. ("Camelot"), a wholly-owned subsidiary
of the Company. The case was brought against Camelot by the IRS to challenge the
deduction of interest expense for certain tax years that ended on or before
February 1994, related to corporate-owned life insurance policies held by
Camelot. The court ruled that the interest deductions should not be allowed and
the Company is responsible for interest and penalties. As a result of the
ruling, the Company reserved $11.0 million during the fiscal year ended February
3, 2001. The Company has filed a notice of appeal in the United States Third
Circuit Court of Appeals in response to the decision.
F-11
Significant components of the Company's deferred tax assets and liabilities are
as follows:
FEBRUARY 3, JANUARY 29,
2001 2000
--------------------------
(IN THOUSANDS)
CURRENT DEFERRED TAX ASSETS
Accrued expenses $ 1,287 $ 1,570
Other 105 36
--------------------------
Total current deferred tax assets 1,392 1,606
--------------------------
CURRENT DEFERRED TAX LIABILITIES
Inventory 10,593 13,632
Prepaid expenses 30 443
--------------------------
Total current deferred tax liabilities 10,623 14,075
--------------------------
Net current deferred tax liability $ (9,231) $ (12,469)
==========================
NON-CURRENT DEFERRED TAX ASSETS
Fixed assets $ 22,459 $ 20,911
Federal and state net operating loss carryforwards 5,401 6,804
Accrued rent 5,319 4,448
Capitalized leases 1,001 882
Losses on investments 1,396 --
Accrued expenses 220 820
Amortization of lease valuations and other assets 2,120 2,085
Pension and compensation related accruals 739 1,423
Other -- 11
--------------------------
Total non-current deferred tax assets before valuation allowance 38,655 37,384
Less: valuation allowance (1,396) --
--------------------------
Total non-current deferred tax assets $ 37,259 $ 37,384
--------------------------
NON-CURRENT DEFERRED TAX LIABILITIES
Goodwill 2,942 2,953
--------------------------
Total non-current deferred tax liabilities $ 2,942 $ 2,953
--------------------------
Net non-current deferred tax asset $ 34,317 $ 34,431
==========================
TOTAL NET DEFERRED TAX ASSET $ 25,086 $ 21,962
==========================
At February 3, 2001 and January 29, 2000, the Company had gross deferred tax
assets of $40.0 million and $39.0 million, respectively, and gross deferred tax
liabilities of $13.6 million and $17.0 million, respectively. The Company had a
net operating loss carryforward of $8.1 million for Federal income tax purposes
as of the end of fiscal 2000 and approximately $87.6 million for state income
tax purposes as of the end of fiscal 2000 that expire at various times through
2014 and are subject to certain limitations. The state net operating loss
carryforwards are also subject to various business apportionment factors and
multiple jurisdictional requirements when utilized.
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, the valuation allowance was increased from $0 to $1.4
million, a level where management believes that it is more likely than not that
the tax benefit will be realized. The valuation allowance was increased to
reserve for deferred tax assets attributable to losses on investments. 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, net of refunds, of approximately $28.8 million,
$39.3 million and $17.1 million during fiscal 2000, 1999 and 1998, respectively.
NOTE 7. COMMITMENTS AND CONTINGENCIES
On October 16, 2000, the United States District Court for the District of
Delaware issued an opinion in favor of the Internal Revenue Service, in the case
of the IRS vs. CM Holdings Inc., a wholly-owned subsidiary of the Company. The
case was brought against Camelot by the IRS to challenge the deduction of
interest expense for certain tax years that ended on or before February 1994,
related to corporate-owned life insurance policies held by Camelot. The court
ruled that the interest deductions should not be allowed and the Company is
responsible for interest and penalties. As a result of the ruling, the Company
reserved $11.0 million during 2000, which is reflected in other (long-term)
liabilities in the consolidated balance sheet as of February 3, 2001. The
Company has filed a notice of appeal in the United States Third Circuit Court
of Appeals in response to the decision.
On August 8, 2000, 30 Attorneys General served a complaint against the
Company, the five major music distributors and two other specialty retailers
in the U.S. District Court for the Southern District of New York ("AG's
suit"). The complaint has been subsequently amended to add additional states
as plaintiffs and to reflect the transfer of the case to U.S. District Court
in Maine pursuant to the Multidistrict Litigation Rules. The AG's suit
alleges that the distributors and retailers conspired to violate the
anti-trust laws and to fix prices by requiring retailers to adhere to minimum
advertised prices in order to receive cooperative advertising funds from the
labels. The complaint alleges that consumers were damaged in an unspecified
amount and seeks treble damages and civil penalties. Following the services
of the AG's suit, these same defendants were named as defendants in private
class action suits ("Class Actions"), each with similar allegations as in the
AG's suit. The Class Actions have been consolidated along with the AG's suit
in the U.S. District Court in Maine. It is management's belief that the
lawsuit is without merit and the Company will ultimately prevail in this
regard.
The Company is subject to other legal proceedings and claims that have arisen in
the ordinary course of its business and have not been finally adjudicated.
Although there can be no assurance as to the ultimate disposition of these
matters, it is management's opinion, based upon the information available at
this time, that the expected outcome of these matters, individually or in the
aggregate, will not have a material adverse effect on the results of operations
and financial condition of the Company.
NOTE 8. LEASES
As more fully discussed in Note 11, 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.
F-13
Fixed asset amounts for capital leases, which are included in the fixed assets
on the accompanying balance sheets, are as follows:
FEBRUARY 3, JANUARY 29,
2001 2000
-----------------------------
(IN THOUSANDS)
Buildings $ 9,342 $ 9,342
Fixtures and equipment 28,682 26,890
-----------------------------
38,024 36,232
Allowances for depreciation
and amortization (16,266) (10,729)
-----------------------------
$ 21,758 $ 25,503
=============================
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
--------------------------------------------------
2000 1999 1998
--------------------------------------------------
(IN THOUSANDS)
Minimum rentals $ 118,029 $ 108,818 $ 102,130
Contingent rentals 2,372 2,957 1,310
-------------------------------------------------
$ 120,401 $ 111,775 $ 103,440
=================================================
Future minimum rental payments required under all leases that have initial or
remaining non-cancelable lease terms in excess of one year at February 3, 2001
are as follows:
OPERATING CAPITAL
LEASES LEASES
----------------------------------
(IN THOUSANDS)
2001 $ 114,724 $ 7,807
2002 106,396 6,318
2003 95,929 2,994
2004 79,360 1,679
2005 61,967 1,679
Thereafter 180,656 16,396
----------------------------------
Total minimum payments required $ 639,032 36,873
================
Less: amounts representing interest 17,404
------------------
Present value of minimum lease payments 19,469
Less: current portion 5,702
------------------
Long-term capital lease obligations $ 13,767
==================
NOTE 9. BENEFIT PLANS
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 non-vested
benefits are used to reduce the Company's contributions in future
F-14
years. The Company matching contribution totaled $943,000, $962,000 and $1.1
million in fiscal 2000, 1999 and 1998, respectively.
STOCK OPTION PLANS
The Company has four employee stock option plans, the 1986 Stock Option Plan,
the 1994 Stock Option Plan, the 1998 Stock Option Plan and the 1999 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. Options authorized for issuance under the Plans totaled 12.3 million. At
February 3, 2001, of the 10.8 million options remaining authorized for issuance
under the Plans, 4.9 million have been granted and are outstanding, 2.2 million
of which were vested and exercisable. Options available for future grants at
February 3, 2001 and January 29, 2000 were 2.6 million and 3.3 million,
respectively.
Under the terms of the Camelot merger agreement, all options issued under the
Camelot 1998 Stock Option Plan (the "Camelot Plan") were converted to Trans
World options. The Camelot Plan provided for the granting of either incentive
stock options or nonqualified stock options to purchase shares of the Company's
common stock. Vesting of the options was originally over a four-year period with
a maximum term of ten years. Based on the terms of the Camelot Plan, vesting was
accelerated based on the market performance of the Company's common stock
whereby 50% of the options vested on March 13, 1998. The remaining 50% vested on
April 22, 1999 in connection with the merger. At February 3, 2001, 100,700
options were outstanding and exercisable. The Company stopped issuing stock
options under the Camelot Stock Option Plan as of April 22, 1999. The Company
recognized $5.1 million in compensation expense during 1998, related to stock
options granted below the market price at the date of grant and accelerated
vesting.
The following table summarizes information about the stock options outstanding
under the Plans and the Camelot Plan at February 3, 2001:
------------------------------------------------ -------------------------------
OUTSTANDING EXERCISABLE
------------------------------------------------ -------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE EXERCISE
PRICE RANGE SHARES LIFE PRICE SHARES PRICE
------------------------------------------------------------------- -------------------------------
$ 1.21-$2.67 891,402 5.1 $ 1.59 891,402 $ 1.59
2.68- 5.33 477,427 4.9 4.21 371,034 4.27
5.34-10.67 513,500 9.7 9.24 2,500 10.00
10.68-13.33 2,276,400 7.8 11.25 852,050 11.19
13.34-16.00 568,025 8.2 15.19 83,433 15.01
16.01-18.67 282,450 7.2 17.80 142,266 17.80
18.68-23.75 2,000 7.8 23.75 1,000 23.75
---------------- ---------------
Total 5,011,204 7.2 $ 9.48 2,343,685 $ 6.98
================ ===============
The Company also has a stock option plan for non-employee directors (the "1990
Plan"). Options under this plan are granted at an exercise price determined by
the Compensation Committee of the board of directors. 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 February
3, 2001, there were 750,000 options authorized for issuance and 284,875 options
have been granted and are outstanding, 227,500 of which were vested and
exercisable. There are 413,909 shares of common stock reserved for possible
future option grants under the 1990 Plan.
Under the terms of the Camelot merger agreement, all options issued under the
Camelot Outside Director Stock Option Plan (the "Camelot Director Plan") were
converted to Trans World options. As of February 3, 2001, there were 4,750
options outstanding and exercisable under the Camelot Director Plan. During
1998, the Company recognized $234,000 in compensation expense based on the
market value of the stock on the date of grant in June 1998 in connection with
the initial grant of stock options under the Camelot Director Plan. The Company
no longer issues options under the Camelot Director Plan.
F-15
The following table summarizes information about the stock options outstanding
under the two Director Plans at February 3, 2001:
------------------------------------------------ -------------------------------
OUTSTANDING EXERCISABLE
------------------------------------------------ -------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE EXERCISE
PRICE RANGE SHARES LIFE PRICE SHARES PRICE
------------------------------------------------------------------- -------------------------------
$ 1.19-$2.67 49,500 4.5 $ 1.64 49,500 $ 1.64
2.68- 5.33 129,375 4.8 3.45 112,125 3.50
5.34- 8.00 18,000 0.8 6.10 18,000 6.10
8.01-10.67 54,000 8.8 9.79 37,500 9.84
10.68-13.33 28,625 8.2 11.94 9,500 11.75
13.34-15.12 10,125 6.5 15.12 5,625 15.12
---------------- ---------------
Total 289,625 5.7 $ 5.73 232,250 $ 4.95
================ ===============
The following tables summarize activity under the Stock Option Plans:
---------------------------------------------------------------------------------------------------
EMPLOYEE STOCK OPTION PLANS DIRECTOR STOCK OPTION PLANS
---------------------------------------------------------------------------------------------------
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 January 31, 1998 5,516,596 $ 0.75-$11.20 $ 5.94 258,000 $ 1.19-$9.14 $ 3.93
Granted 529,600 13.88-26.67 17.61 50,000 10.20-15.12 11.65
Exercised (885,043) 0.75-10.92 3.08 (22,500) 2.09-3.68 3.15
Canceled (259,134) 1.21-17.79 4.64 -- -- --
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Balance January 30, 1999 4,902,019 $ 0.75-$26.67 $ 7.79 285,500 $ 1.19-$15.12 $ 5.34
Granted 1,501,000 10.00-15.25 13.42 29,000 12.22-12.96 12.45
Exercised (1,194,899) 0.75-17.79 7.65 (19,000) 10.92 10.92
Canceled (143,733) 0.75-17.79 9.65 (10,000) 12.22 12.22
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Balance January 29, 2000 5,064,387 $ 1.21-$26.67 $ 9.44 285,500 $ 1.19-$15.12 $ 5.45
Granted 1,633,800 8.25-12.06 10.34 58,716 0.00-10.94 7.52
Exercised (259,673) 1.20-10.92 3.12 (21,216) 0.00-3.68 1.30
Canceled (1,427,310) 1.21-26.67 11.47 (33,375) 3.36-15.12 9.28
- ------------------------------------------------------------------------------------------------------------------------------------
Balance February 3, 2001 5,011,204 $ 1.21-$23.75 $ 9.48 289,625 $ 1.18-$15.12 $ 4.95
=============== ================
The per share weighted-average fair value of the stock options granted during
fiscal 2000, 1999 and 1998 was $3.57, $5.01 and $6.48, respectively, using the
Black Scholes option pricing model, with the following weighted-average
assumptions;
2000 - expected dividend yield 0.0%, risk-free interest rate of 5.20%, expected
life of five years and stock volatility of 62%;
1999 - expected dividend yield 0.0%, risk-free interest rate of 6.47%, expected
life of five years and stock volatility of 72%;
1998 - expected dividend yield 0.0%, risk-free interest rate of 5.15%, expected
life of five years and stock volatility of 70%.
F-16
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", 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 2000, 1999 and 1998, the Company recognized expenses of
$165,000, $64,000 and $57,000, respectively, for stock options issued to
non-employee directors at an exercise price below 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
------------------------------------------------
2000 1999 1998
------------------------------------------------
(in thousands, except per share amounts)
Net income, as reported $ 40,150 $ 61,393 $ 61,010
Basic earnings per share, as reported $ 0.84 $ 1.17 $ 1.19
Diluted earnings per share, as reported $ 0.83 $ 1.15 $ 1.14
Pro forma net income $ 35,369 $ 57,621 $ 59,016
Pro forma basic earnings per share $ 0.74 $ 1.10 $ 1.15
Pro forma diluted earnings per share $ 0.73 $ 1.08 $ 1.10
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. As of
February 3, 2001, a total of 255,000 shares have been granted, of which 180,000
of these shares had vested and 60,000 shares with an unamortized unearned
compensation balance of $388,000, 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 2000,
1999 and 1998, net of the impact of forfeitures, was approximately $7,000,
$66,000 and $44,000, respectively. At February 3, 2001, outstanding awards and
shares available for grant totaled 15,000 and 705,000, respectively.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company maintains a non-qualified Supplemental Executive Retirement Plan
(SERP) for certain executive officers of the Company. 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. The Company accounts for the SERP in accordance with the provisions
of SFAS No. 87, "Employers' Accounting for Pensions". For fiscal 2000, 1999 and
1998, net periodic pension costs recognized under the plan totaled approximately
$492,000, $481,000 and $342,000, respectively. The projected and accumulated
benefit obligation for the SERP was approximately $3.9 million and $3.6 million
at February 3, 2001 and January 29, 2000, respectively, which is included in
accrued expenses in the consolidated balance sheet. In addition, an intangible
asset of approximately $2.3 million and $2.5 million were recorded at February
3, 2001 and January 29, 2000, respectively, which is included in other assets in
the consolidated balance sheet, to reflect the excess of the accumulated benefit
obligation over the fair value of plan assets ($0), net of accrued pension
costs.
F-17
NOTE 10. SHAREHOLDERS' EQUITY
On January 7, 2000, the Board of Directors approved a stock repurchase plan
authorizing the purchase of up to 5.0 million shares of the Company's common
stock. During fiscal 2000, the Board of Directors approved the repurchase of up
to an additional 10.0 million shares. As of February 3, 2001, the Company had
purchased 10.5 million of the 15.0 million shares authorized by the Board, at a
total cost of $85.7 million. At February 3, 2001 and January 29, 2000, the
Company held 10,568,432 and 1,177,432 shares, respectively, in treasury stock.
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.
On May 1, 1998, the Company sold an additional 2.25 (adjusted) million shares of
its common stock in a public offering for approximately $36.6 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.
NOTE 11. RELATED PARTY TRANSACTIONS
The Company leases its 168,400 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 77,100 square foot distribution center expansion was completed in
October 1989 on real property adjoining the existing facility. A 19,100 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
$1.7 million, $1.6 million and $1.4 million in fiscal 2000, 1999 and 1998,
respectively. On January 1, 2000, 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, 2002, and every two years
thereafter, the rental payment increases 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 $1.1 million per year.
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
2000, 1999 and 1998. Under the second store lease, annual rent payments were
$35,000 in fiscal 2000, 1999 and 1998. Under the terms of the leases, the
Company pays property taxes, maintenance and a contingent rental if a specified
sales level is achieved. Total additional charges for both locations, including
contingent rent, was approximately $14,700, $17,700 and $18,100 in fiscal 2000,
1999 and 1998, respectively. In fiscal 1998, the Company paid Mr. Higgins
$30,000 under one-year operating leases expiring on October 31, 1998, 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 $75,000, $110,000 and $65,000 for chartered aircraft services
in fiscal 2000, 1999 and 1998, respectively. The Company also charters an
aircraft from Crystal Jet, a corporation wholly-owned by Mr. Higgins. Payments
to Crystal Jet aggregated $85,000, $64,000 and $180,000 in fiscal 2000, 1999 and
1998, respectively. The Company also charters an aircraft from Richmor Aviation,
an unaffiliated corporation that leases an aircraft owned by Mr. Higgins.
Payments to Richmor Aviation in fiscal 2000, 1999 and 1998 were $217,000,
$325,000 and $0, 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-18
During 2000, the Company made loans aggregating $334,000 and $85,000 to John J.
Sullivan, the Company's Senior Vice President and Chief Financial Officer, and
Bruce J. Eisenberg, the Company's Senior Vice President - Real Estate,
respectively. The loans were in connection with income taxes due on the vesting
of restricted stock. The full principal amount of the loans was outstanding on
February 3, 2001. The loans bear interest at a rate of 5.88% per annum.
In September 1999, in connection with the hiring of former President and Chief
Operating Officer, Michael J. Madden, the Company made a $200,000 interest-free
loan which was repaid subsequent to February 3, 2001.
NOTE 12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
----------------------------------------------------------------------------------
FISCAL 2000 QUARTER ENDED
----------------------------------------------------------------------------------
2000 2/03/01 10/28/00 7/29/00 4/29/00
----------------------------------------------------------------------------------
(in thousands, except per share amounts)
Sales $ 1,414,589 $ 553,366 $ 265,597 $ 285,510 $ 310,116
Gross profit 497,235 190,693 91,701 103,997 110,844
Net income (loss) 40,150 40,097 (15,596) 6,667 8,982
Basic earnings (loss) per share $ 0.84 $ 0.91 $ (0.32) $ 0.14 $ 0.18
----------------------------------------------------------------------------------
Diluted earnings (loss) per share $ 0.83 $ 0.89 $ (0.32) $ 0.14 $ 0.18
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
FISCAL 1999 QUARTER ENDED
----------------------------------------------------------------------------------
1999 1/29/00 10/30/99 7/31/99 5/1/99
----------------------------------------------------------------------------------
(in thousands, except per share amounts)
Sales $ 1,358,132 $ 517,870 $ 275,968 $ 277,275 $ 287,019
Gross profit 499,544 195,049 96,981 102,570 104,944
Net income (loss) 61,393 60,569 3,777 5,691 (8,644)
Basic earnings (loss) per share $ 1.17 $ 1.15 $ 0.07 $ 0.11 $ (0.17)
----------------------------------------------------------------------------------
Diluted earnings (loss) per share $ 1.15 $ 1.12 $ 0.07 $ 0.11 $ (0.17)
----------------------------------------------------------------------------------
F-19
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 incorporated herein by reference to
Exhibit 2.1 to the Company's Registration Statement on Form S-4, No.
333-75231.
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 3.4 to
the Company's Annual Report on Form 10-K for the year ended January
29, 2000. 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.
3.6 Certificate of Amendment to the Certificate of Incorporation--incorporated
herein by reference to Exhibit 3.6 to the Company's Registration Statement
on Form S-4, No. 333-75231.
3.7 Certificate of Amendment to the Certificate of Incorporation--incorporated
herein by reference to Exhibit 4.2 to the Company's Current Report on Form
8-K filed August 11,2000. Commission File No. 0-14818.
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.
4.2 Amendment, Dated June 30, 2000, to the 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 4.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended July 29, 2000. Commission File No. 0-14818.
4.3 Rights agreement dated as of August 11, 2000, between Trans World
Entertainment Corporation and Chase Mellon Shareholder Services, L.L.C.,
as Rights Agent - incorporated herein by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K filed August 11, 2000.
Commission File No. 0-014818
4.4 Form of Right Certicate (Incorporated by reference to Exhibit B to the
Rights Agreement referred to in Exhibit 4.3 above)
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, 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 19, 2000. Commission File No. 0-14818.
10.8 Trans World Entertainment Corporation Amended 1990 Restricted Stock Plan
-- incorporated herein by reference to Annex B to Trans World's Definitive
Proxy Statement on Form 14A filed as of May 17, 1999. Commission File No.
0-14818.
10.9 Form of Restricted Stock Agreement dated May 1, 1996 between the Company
and John J. Sullivan, Senior Vice President-Finance and Chief Financial
Officer, incorporated herein by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K for the fiscal year ended February 1,
1997. Commission File No. 0-14818.
10.10 Trans World Entertainment Corporation 1994 Stock Option Plan --
incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended July 30, 1994.
Commission File No. 0-14818.
10.11 Trans World Entertainment Corporation 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.
10.12 Trans World Entertainment Corporation 1999 Stock Option Plan --
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.
10.13 Trans World Entertainment Corporation 1994 Director Retirement Plan --
incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended October 31,
1994. Commission File No. 0-14818.
10.14 Form of Indemnification Agreement dated May 1, 1995 between the Company
and its officers and directors incorporated herein by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended April 29, 1995. Commission File No. 0-14818.
10.15 Trans World Entertainment Corporation 1997 Supplemental Executive
Retirement Plan - incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May
3, 1997. Commission File No. 0-14818.
*10.16 Trans World Entertainment Corporation Asset Purchase Agreement with Wax
Works, Inc.
10.17 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.
- --------------------------------------------------------------------------------
* Filed herewith.