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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER: 0-14818
TRANS WORLD ENTERTAINMENT CORPORATION
-------------------------------------
(Exact name of registrant as specified in its charter)
New York 14-1541629
---------- ------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
38 Corporate Circle
Albany, New York 12203
-------------------------------------
(Address of principal executive offices, including zip code)
(518) 452-1242
-------------------------------------
(Registrant's telephone number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate 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 March 26, 1998, 19,816,143 shares of the Registrant's Common Stock,
excluding 70,788 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 $28.75 on the Nasdaq National
Market on March 26, 1998, was approximately $272,900,000. Shares of Common Stock
held by the Company's controlling shareholder, who controls approximately 52.1%
of the outstanding Common Stock, have been excluded for purposes of this
computation. Because of such shareholder's control, shares owned by other
officers, directors and 5% shareholders have not been excluded from the
computation.
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PART I
Item 1. BUSINESS
General
Trans World Entertainment Corporation (which, together with its consolidated
subsidiaries, is referred to herein as the "Company") was incorporated in New
York in 1972. Trans World Entertainment Corporation owns 100% of the outstanding
common stock of Record Town, Inc., through which the Company's principal retail
operations are conducted.
The Company operates a chain of retail entertainment stores in a single industry
segment. Sales were $571.3 million during the fiscal year ended January 31, 1998
(referred to herein as "1997"). The Company is one of the largest specialty
retailers of compact discs, prerecorded audio cassettes, prerecorded
videocassettes and related accessories in the United States. At January 31,
1998, the Company operated 539 stores totaling about 2.4 million square feet in
34 states, the District of Columbia and the Virgin Islands, with the majority of
the stores concentrated in the Eastern half of the United States. The Company's
business is highly seasonal in nature, with the peak selling period being the
Christmas holiday in the fourth fiscal quarter.
In October 1997, the Company acquired 90 out of a total of 118 stores owned by
Strawberries, Inc., a privately held non-mall music specialty retailer
operating primarily in New England. The stores operate under the names
"Strawberries" and "Waxie Maxie" and are primarily located in freestanding
and strip center locations.
On December 15, 1997 the Company split its common stock two-for-one in the form
of a 100% stock dividend. The total shares issued at January 31, 1998 were
19,815,357 compared to a total of 19,619,188 at February 1, 1997, on a split
adjusted basis. All references throughout this report to number of shares, per
share amounts, stock option data and market prices of the Company's common stock
have been restated to reflect the stock split.
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The Company closed 78 stores in 1997 and a total of 342 since the fourth quarter
of 1994 as part of a restructuring plan announced in the fourth quarter of 1994.
The Company expects the restructuring to be completed during 1998. A total of 62
stores are forecast to close or relocate in 1998; however, only 49 closings are
associated with the restructuring. The remaining 13 stores will be closed or
relocated as part of the Company's ongoing business. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
The Company's central distribution facility currently serves all of its retail
stores with weekly shipments to each store providing for approximately 78% of
their retail product requirements. The balance of the stores' requirements are
satisfied through direct shipments from manufacturers or redistribution from
other Company-operated stores.
The Company's principal executive offices are located at 38 Corporate Circle,
Albany, New York, 12203, and its telephone number is (518) 452-1242.
Store Concepts
The Company's strategy is to offer customers a broad selection of music and
video titles at competitive prices in convenient, attractive stores. The Company
has developed a number of distinct store concepts to take advantage of real
estate opportunities and to satisfy varying consumer demands.
Mall Stores
The Company's mall stores include five concepts, all of which have been designed
to offer consumers a fun and exciting shopping experience. In the mall stores,
the Company puts an emphasis on a strong in-store presentation message, broad
product selection and competitive pricing to attract the casual impulse buyer.
Full-Line Music Stores. The Company's full-line mall stores are located in
large, regional shopping malls and are generally named Record Town. There were
178 such stores at January 31, 1998. This store concept utilizes an average
space of approximately 3,300 square feet with, certain stores ranging in excess
of 7,000 square feet depending on the availability of preferred space and the
expected volume of the store.
Saturday Matinee Stores. These stores are dedicated to the sale of pre-recorded
video products. These stores are located in large, regional shopping malls and
average 2,200 square feet in size. There were 44 such locations in operation at
January 31, 1998. The Company's strategy is to combine this store with a Record
Town in its combination store concept whenever possible.
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Combination Stores. At January 31, 1998, the company operated 79 combination
Record Town/Saturday Matinee stores. The combination store concept occupies an
average of 7,300 square feet. These stores share common storefronts and offer
the consumer an exciting combination of music and video products in one store
location. The Company believes that the combination of the two concepts creates
a marketing synergy by attracting different target customers.
For Your Entertainment Stores. At January 31, 1998, the Company operated five
F.Y.E. stores. These stores combine a broad assortment of music and video
products with a game arcade and an extensive selection of games, portable
electronics, accessories and boutique items. This format is designed to be a
semi-anchor or destination retailer in major regional malls. The prototype
F.Y.E. store is 25,000 square feet.
Specialty Music Stores. The specialty music concept is also located in large,
regional shopping malls, but contrasts with full-line music stores in that they
carry a less diverse product selection. These stores, 34 of which were in
operation at January 31, 1998, are generally operated under the name Tape World.
The specialty mall stores operate in approximately 1,300 square feet. The
Company's strategy is to reposition and expand these stores into Record Town
stores or combination stores as opportunities become available.
Non-Mall Stores
The Company's non-mall concept accounted for 199 stores in operation at January
31, 1998, which primarily operate under the names Coconuts and Strawberries.
These stores are designed for freestanding, strip center and downtown locations
in areas of high population density. The majority of the non-mall stores range
in size from 3,000 to 8,000 square feet. Non-mall stores carry an extensive
product assortment and have an emphasis on competitive pricing. The Company's
non-mall stores include 22 video rental stores. These stores operate under the
tradename "Movies Plus" and average approximately 5,300 square feet.
On October 27, 1997, the Company acquired "Planet Music," a 31,000 square foot,
freestanding superstore in Virginia Beach, VA. The store operates in a strip
center and offers an extensive catalog of predominantly music. The store also
has a video department and sells other non-music related products, similar to
what would be carried in a large Coconuts store. The acquisition also includes
the rights to the "Planet Music" name and trademark, which offers the Company
potential expansion opportunities.
Products
The Company's stores offer a full assortment of compact discs, prerecorded audio
cassettes, prerecorded video (including DVD) and related accessories.
Sales by category as a percent of total sales over the past three years were as
follows:
January 31, February 1, February 3,
1998 1997 1996
----------- ----------- -----------
Compact discs 55.5% 50.1% 49.2%
Prerecorded audio cassettes 18.9 22.2 25.5
Prerecorded video 16.3 18.6 16.7
Other 9.3 9.1 8.6
----------- ------------ ----------
TOTAL 100.0% 100.0% 100.0%
=========== ============ ==========
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Pre-recorded Music. The Company's music stores offer a full assortment of
compact discs and prerecorded audio cassettes purchased primarily from six major
manufacturers. Music categories include rock, pop, rap, soundtracks,
alternative, Latin, urban, heavy metal, country, dance, vocals, jazz and
classical. Merchandise inventory is generally classified for inventory
management purposes in three groups: "hits", which are the best selling new
releases, "fast moving" titles, which generally constitute the top 1,000 titles
with the highest rate of sale in any given month, and "catalog" items that
customers purchase to build their collections.
Video Products. The Company offers pre-recorded videocassettes for sale in a
majority of its stores. DVD, a new video technology, was introduced to the
retail consumer in 1997. DVD offers a quality that exceeds both the current VHS
and CD formats and also offers the consumer more storage than the current CD.
The Company believes that the DVD player will replace the sales of laser disc
players and VCRs as the new technology becomes more accessible. The Company is
anticipating the increased availability of DVD players and plans to capitalize
on this technology by making software increasingly available as this technology
becomes more widely accepted by the consumer. DVD sales were less than 1% of the
Company's retail sales in 1997.
Other Products. The Company stocks and promotes brand name blank audio cassette
and videocassette tapes as well as accessory products for compact discs, audio
cassettes and videocassettes. These accessories include maintenance and cleaning
products, portable electronics, storage cases, headphones and video games.
Advertising
The Company makes extensive use of in-store advertising circulars and signs and
also pursues a mass-media marketing program for its freestanding stores through
advertisements in newspapers, radio, and television. Most of the vendors from
whom the Company purchases merchandise offer their customers advertising
allowances to promote their products.
Industry and Competitive Environment
According to industry sources, the U.S. retail market for music and video
products was approximately $20 billion in 1996. Prerecorded music amounted to
$12.5 billion of that total, and this segment of the market has grown at an
annual rate of 9.5% over the past 15 years. Fueled in part by this growth, in
the early 1990's, music retailers began aggressive expansion programs which grew
total square footage at a rate that outpaced consumer demand, resulting in an
overcapacity of selling space in the U.S. Furthermore, new music retailing
entrants, including mass merchants (e.g. Wal-Mart, K-Mart, Target) and consumer
electronics stores (e.g. Best Buy, Circuit City) promoted aggressive loss-leader
pricing strategies in an effort to increase store traffic. The additional
retailing square footage and the loss-leader
-5-
pricing strategy forced music specialty retailers to reduce prices, resulting in
decreased sales and gross margins of music specialty retailers. As a result,
many music specialty retailers experienced financial difficulties which lead to
corporate restructurings and bankruptcies. During 1996, many of the major music
vendors began to enforce programs such as the Minimum Advertised Pricing ("MAP")
program to eliminate loss-leader pricing strategies. These programs penalize
sellers that fail to comply with vendor pricing programs by limiting advertising
support. The enforcement of the MAP program has been successful in stabilizing
prices in the industry. Non-traditional music retailers have since reduced their
music and video selections and maintained less aggressive pricing policies.
Seasonality
The Company's business is highly seasonal. The fourth quarter constitutes the
Company's peak selling period. In 1997, the fourth quarter accounted for
approximately 42% of annual sales and substantially all of net income. In
anticipation of increased sales activity during these months, the Company
purchases substantial amounts of inventory and hires a significant number of
temporary employees to bolster its permanent store staff. If for any reason the
Company's net sales were below seasonal norms during the fourth quarter,
including as a result of merchandise delivery delays due to receiving or
distribution problems, the Company's operating results, particularly operating
and net income, could be adversely affected. The fourth quarter percentage of
annual sales in 1997 was higher than normal due to the Strawberries acquisition
in October 1997. Quarterly results are affected by timing and strength of new
releases, the timing of holidays, new store openings and sales performance of
existing stores.
Distribution and Merchandise Operations
The Company's distribution facility uses certain automated and computerized
systems designed to manage product receipt, storage and shipment. Store
inventories of regular product are replenished in response to detailed product
sale information that is transmitted to the central computer system from each
store after the close of the business day. Shipments from the facility to each
of the Company's stores are made at least once a week and currently provide
the Company's stores with approximately 78% of their product requirements. The
balance of the stores' requirements are satisfied through direct shipments
from manufacturers or redistribution from other sources.
-6-
Company-owned trucks service approximately 36% of the Company's stores; the
balance is serviced by several common carriers chosen on the basis of geographic
and rate considerations. No contractual arrangements exist between the Company
and any common carriers. The Company's sales volume and centralized product
distribution facility enable it to take advantage of transportation economies.
The Company believes that the existing distribution center is adequate to meet
the Company's planned business needs, and additional improvements will be
completed primarily for operational efficiency.
Suppliers and Purchasing
The Company purchases inventory for its stores from approximately 450 suppliers.
Approximately 68% of purchases in 1997 were made from the six largest suppliers:
WEA (Warner/Electra/Atlantic Corp)., Sony Music, PolyGram Distribution,
Universal Distribution, BMG (Bertelsmann Music Group) and EMD (EMI Music
Distribution). As is typical in this industry, the Company has no material
long-term purchase contracts and deals with its suppliers principally on an
order-by-order basis. In the past, the Company has not experienced difficulty
in obtaining satisfactory sources of supply, and management believes that it
will retain access to adequate sources of supply. The Company also expects to
continue to pass on to customers any price increases imposed by the suppliers
of prerecorded music and videocassettes.
The Company produces store fixtures for all of its new stores and store remodels
in its manufacturing facility located in Johnstown, New York. The Company
believes that the costs of production are lower than purchasing from an outside
manufacturer.
Trade Customs and Practices
Under current trade practices, retailers of pre-recorded compact discs and audio
cassettes are entitled to return products they have purchased from major vendors
for other titles carried by these vendors; however, the returns are subject to
merchandise return penalties. This industry practice permits the Company to
carry a wider selection of music titles and at the same time reduce the risk of
obsolete inventory. Most manufacturers and distributors of pre-recorded
videocassettes offer return privileges comparable to those with pre-recorded
music, but with no merchandise return penalties. Video rental products are not
eligible for return to the manufacturers. The merchandise return policies have
not changed significantly during the past five years, but any future changes in
these policies could impair the value of the Company's inventory. The Company
generally has adapted its purchasing policies to changes in the policies of its
suppliers.
Employees
As of January 31, 1998, the Company employed approximately 6,100 people, of whom
850 were employed on a full-time salaried basis, 1,700 were employed on a
full-time hourly basis, and the remainder were employed on a part-time hourly
basis. The Company hires temporary sales associates during peak seasons to
assure continued levels of customer service. Store managers report to district
managers, each of who, inturn, reports to a
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regional manager. In addition to their salaries, store managers, district
managers and regional managers have the potential to receive incentive
compensation based on profitability. None of the Company's employees are covered
by collective bargaining agreements, and management believes that the Company
enjoys favorable relations with its employees.
Retail Information Systems
All store sales data and product purchasing information is collected centrally
utilizing the IBM AS/400 midrange configuration. The Company's information
systems manage a database of over 150,000 active SKUs in pre-recorded music,
video and accessory products. The system processes inventory, accounting,
payroll, telecommunications and other operating information for all of the
Company's operations. The Company has piloted a new point-of-sale system that
will be rolled out chain wide during the summer of 1998. This new system is
expected to improve customer service while increasing the accuracy of perpetual
inventories at the store level. See discussion on Year 2000 compliance in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Item 2. PROPERTIES
Retail Stores
At January 31, 1998, the Company operated 539 retail outlets. The Company owns
one real estate site, which it formerly operated as a retail outlet and
currently leases to an unrelated party. All of the Company's retail stores are
under operating leases with various terms and options. Substantially all of its
stores provide for payment of fixed monthly rentals, a percentage of the gross
receipts of the store in excess of specified sales levels, and operating
expenses for maintenance, property taxes, insurance and utilities. The following
table lists the number of leases due to expire (assuming no renewal options are
exercised) in each of the fiscal years shown, as of January 31, 1998:
Year Leases Year Leases
------ -------- ------ --------
1998 94 2002 58
1999 49 2003 73
2000 77 2004 56
2001 53 2005 & Beyond 79
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. Included in the table above are 38 month-to-month leases under
negotiations for renewal; these leases are included as part of leases due to
-8-
expire in 1998. Certain of the stores scheduled to close will do so upon the
expiration of the applicable store lease.
Corporate Offices and Distribution Center Facility
The Company leases its Albany, New York distribution facility and the majority
of the corporate office space from its principal shareholder and Chief Executive
Officer under two capital leases that extend through the year 2015. Both leases
are at fixed rentals with provisions for biennial increases based upon increases
in the Consumer Price Index. Under such leases, the Company pays all property
taxes, insurance and maintenance. The office portion of the facility is
comprised of 21,000 square feet. The distribution center portion is comprised of
approximately 138,000 square feet.
The principal shareholder and Chief Executive Officer is currently constructing
a 20,000 square foot expansion to the existing corporate offices with an
estimated completion date of July 1998. This property will be leased to the
Company under similar terms as the two existing capital leases.
The Company leases an 83,000 square foot facility in Johnstown, NY, where it
manufactures its store fixtures. The seven-year operating lease expires in June
1998. The Company anticipates it will negotiate a new lease.
Item 3. LEGAL PROCEEDINGS
The Company has no material legal proceedings pending against it.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting of shareholders held on November 14, 1997, shareholders
approved an amendment to the Company's Certificate of Incorporation authorizing
up to 50 million shares of common stock. Previously the Company was authorized
to issue up to 20 million shares. Voting results were are follows:
FOR - 7,551,676
AGAINST - 1,081,165
ABSTAIN - 17,076
Supplementary Item - Identification of Executive Officers of the Registrant
- ---------------------------------------------------------------------------
(Pursuant to Instruction 3 to Item 401(b) of Regulation S-K)
The name, age, principal occupation and period of service as an executive
officer of the Company for each executive officer are set forth below.
Robert J. Higgins Age 56
President, Chief Executive Officer,
Chairman of the Board and Director Since 1973
Robert J. Higgins founded the Company in 1972 and has participated in its
operations since 1973. Mr. Higgins has served as President, Chief Executive
Officer and a director of the Company for more than the past five years, and is
the principal shareholder in the Company.
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James A. Litwak Age 44
Executive Vice President
of Merchandising and Marketing Since 1996
James A. Litwak joined the Company in May 1996 as Executive Vice President of
Merchandising and Marketing. Prior to joining the Company, Mr. Litwak served as
Senior Vice President and General Merchandise Manager of DFS Group Limited, an
international operator of in-airport duty free shops. Prior to joining DFS Group
Limited, Mr. Litwak held several executive positions in his fourteen year career
at R.H. Macy's Company with the most recent being President of Merchandising for
Macy's West responsible for developing marketing, merchandising and product
launch programs to fuel growth for the 50 store division.
Edward W. Marshall, Jr. Age 52
Executive Vice President-Operations Since 1989
Edward W. Marshall, Jr. has been Executive Vice President of the Company since
August 1994. He served as Senior Vice President-Operations of the Company since
January 1991 and was Vice President of Operations upon joining the Company in
May 1989. Prior to joining the Company, Mr. Marshall was Vice President of
Operations for Morse Shoe, a retail store operator.
Bruce J. Eisenberg Age 37
Senior Vice President of Real Estate Since 1993
Bruce J. Eisenberg has been Senior Vice President of Real Estate at the Company
since May of 1995. He joined the Company in August of 1993 as Vice President of
Real Estate. Prior to joining the Company, Mr. Eisenberg was responsible for
leasing, finance and construction of new regional mall development at The
Pyramid Companies.
Carol A. Stevens Age 47
Senior Vice President - Human Resources Since 1998
Carol A. Stevens has been Senior Vice President of Human Resources since she
joined the Company in February 1998. Prior to joining the Company, Ms. Stevens
was Senior Vice President of Human Resources at Hechinger Company from 1994 to
1997 and served as Vice President prior to 1994.
John J. Sullivan Age 45
Senior Vice President, Treasurer and
Chief Financial Officer Since 1991
John J. Sullivan has been Senior Vice President, Treasurer and Chief Financial
Officer of the Company since May 1995. Mr. Sullivan joined the Company in
June 1991 as the Corporate Controller and was named Vice President of Finance
and Treasurer in June of 1994. Prior to joining the Company, Mr. Sullivan was
Vice President and Controller for Ames Department Stores, a discount
department store chain.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information. The Company's initial public offering was completed on July
24, 1986, and since that date the shares of the Company's Common Stock have been
traded on the over-the-counter market and quoted on the Nasdaq National Market
under the symbol "TWMC." As of January 31, 1998, there were approximately 400
shareholders of record. The following table sets forth high and low last
reported sale
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prices for each fiscal quarter during the period from February 3,
1996 through March 26, 1998.
Last
Sales
Prices
High Low
1996
1st Quarter $ 2 5/8 $ 1 1/4
2nd Quarter 3 5/8 2 1/4
3rd Quarter 4 3/8 2 9/16
4th Quarter 4 1/16 3 1/8
1997
1st Quarter $ 6 3/16 $ 3 5/8
2nd Quarter 9 5/8 5 15/16
3rd Quarter 16 3/8 9 1/16
4th Quarter 28 1/8 14 5/8
1998
1st Quarter (through
March 26, 1998) $29 1/4 $24
On March 26, 1998, the last reported sale price on the Common Stock on the
Nasdaq National Market was $28 3/4.
On March 6, 1998, options for the Company's Common Stock began trading on the
Chicago Board Options Exchange and the American Stock Exchange.
Dividend Policy. The Company has never declared or paid cash dividends on its
Common Stock. The Revolving Credit Facility sets certain restrictions on the
payment of cash dividends. Any future determination as to the payment of
dividends would depend upon capital requirements and limitations imposed by the
Revolving Credit Facility and such other factors as the Board of Directors of
the Company may consider.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data and other
operating information of the Company. The selected income statement and balance
sheet data for the five fiscal years ended Janaury 31, 1998 set forth below are
derived from the audited consolidated financial statements of the Company. The
selected consolidated financial data should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto and other
financial information included herein and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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Fiscal Year Ended (1)
January 31, February 1, February 3, January 28, January 29,
1998 1997 1996 1995 1994
-----------------------------------------------------------
(in thousands, except per share and store data)
INCOME STATEMENT DATA:
Sales $571,314 $481,657 $517,046 $536,840 $492,553
Cost of sales 361,422 308,952 340,754 341,422 307,834
--------------------------------------------------------
Gross profit 209,892 172,705 176,292 195,418 184,719
Selling, general and
administrative expenses 155,678 136,084 150,628 158,637 147,644
Restructuring charge (2) --- --- 35,000 21,000 ---
Depreciation and amortization 15,156 14,134 16,125 16,932 14,655
--------------------------------------------------------
Income (loss) from operations 39,058 22,487 (25,461) (1,151) 22,420
Interest expense 4,995 10,767 14,222 9,540 5,971
--------------------------------------------------------
Income (loss) before
income taxes 34,063 11,720 (39,683) (10,691) 16,449
Income tax expense (benefit) 13,489 4,618 (14,310) (4,435) 6,626
--------------------------------------------------------
Net income (loss) $20,574 $7,102 ($25,373) ($6,256) $9,823
========================================================
Basic earnings (loss)
per share(3) $1.05 $0.36 ($1.30) ($0.32) $0.51
========================================================
Weighted average number
of shares outstanding(3) 19,655 19,514 19,452 19,402 19,446
========================================================
Diluted earnings (loss)
per share(3)(4) $0.99 $0.36 ($1.30) ($0.32) $0.50
========================================================
Adjusted weighted average
number of shares
outstanding(3)(4) 20,688 19,798 19,452 19,402 19,497
========================================================
BALANCE SHEET DATA: (at the end of the period)
Working capital $89,853 $81,247 $78,773 $93,431 $101,538
Total assets 371,583 310,053 390,331 426,939 380,264
Current portion of
long-term obligations 99 9,557 3,420 6,618 3,695
Long-term obligations 41,409 50,490 60,364 66,441 73,098
Shareholders' equity 122,965 101,362 94,104 119,477 126,074
OPERATING DATA:
Store Count (open at end of period):
Mall stores 340 357 379 431 443
Non-mall stores 199 122 163 253 241
-------------------------------------------------------
Total stores 539 479 542 684 684
Comparable store sales increase
(decrease)(5) 10.2% 3.6% (3.5)% 1.1% (2.1)%
Total square footage
(in thousands) 2,442 2,008 2,140 2,544 2,414
(1) Each year consisted of 52 weeks except the Fiscal year ended February 3,
1996 which consisted of 53 weeks.
(2) The restructuring charge includes the write-down of assets, estimated
cash payments to landlords for the early termination of operating leases,
and the cost for returning products to the Company's distribution center
and vendors. The charge also includes estimated legal, lender and
consulting fees.
(3) All share and per share amounts have been adjusted for all periods to
reflect a two-for-one stock split approved by the Board of Directors on
November 14, 1997, which was effected in the form of a 100% stock dividend
on December 15, 1997.
(4) In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 which requires the
disclosure of basic earnings per share and diluted earnings per share.
(5) A store is included in comparable store sales calculations at the
beginning of its 13th full month of operation.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
The following is an analysis of the Company's results of operations, liquidity
and capital resources. To the extent that such analysis contains statements
which are not of a historical nature, such statements are forward-looking
statements, which involve risks and uncertainties. These risks include, but are
not limited to, changes in the competitive environment for the Company's
products, including the entry or exit of non-traditional retailers of the
Company's products to or from its markets; the release by the music industry of
an increased or decreased number of "hit releases", general economic factors in
markets where the Company's products are sold, and other factors discussed in
the Company's filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain income and
expense items as a percentage of sales:
Fiscal Year Ended
------------------------------------
January 31, February 1, February 3,
1998 1997 1996
-------------------------------------
Sales 100.0% 100.0% 100.0%
Gross profit 36.7% 35.9% 34.1%
Selling, general and
administrative expenses 27.2% 28.3% 29.1%
Restructuring charge 0.0% 0.0% 6.8%
Depreciation and amortization 2.7% 2.9% 3.1%
-------------------------------------
Income (loss) from operations 6.8% 4.7% (4.9)%
Interest expense 0.8% 2.2% 2.8%
-------------------------------------
Income (loss) before income taxes 6.0% 2.5% (7.7)%
Income tax expense (benefit) 2.4% 1.0% (2.8)%
-------------------------------------
Net income (loss) 3.6% 1.5% (4.9)%
=====================================
Change in comparable store sales 10.2% 3.6% (3.5)%
=====================================
Fiscal Year Ended January 31, 1998 ("1997")
Compared to Fisal Year Ended February 1, 1997 ("1996")
Sales. The Company's sales increased $89.7 million, or 18.6%, from 1996. The
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increase was primarily attributable to a comparable store sales increase of
10.2%, a sales increase of 8.4% resulting from the acquisition of 90
Strawberries' stores in October 1997, and the opening of 48 stores partially
offset by the closing of 78 stores. Management attributes the comparable store
sales increase primarily to its strategic decision to eliminate unprofitable
stores and focus on customer service, superior retail locations, inventory
management and merchandise presentation. Sales by product configuration are
shown in the following table:
Fiscal Year Ended
----------------------------------------
January 31, February 1, February 3,
1998 1997 1996
----------------------------------------
Compact discs 55.5% 50.1% 49.2%
Prerecorded audio cassettes 18.9 22.2 25.5
Prerecorded video 16.3 18.6 16.7
Other 9.3 9.1 8.6
-----------------------------------------
Total 100.0% 100.0% 100.0%
=========================================
For 1997, comparable store sales increased 11.0% for mall stores and 9.6% for
non-mall stores. By product configuration, comparable store sales increased
11.4% in music and 2.6% in video.
Gross Profit. Gross profit, as a percentage of sales, increased to 36.7% in 1997
from 35.9% in 1996 as a result of reduced merchandise shrinkage and increased
purchase discounts combined with a strong performance from higher margin catalog
sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A"), as a percentage of sales, decreased to 27.2%
in 1997 from 28.3% in 1996. The 1.1% decrease can be attributed to the leverage
of SG&A expenses on the 10.2% comparable store sales increase, as well as the
overall sales increase.
Interest Expense. Interest expense decreased 53.6% to $5.0 million in 1997 from
$10.8 in 1996. The decrease is due to lower average outstanding borrowings and
lower interest rates due to the refinancing completed during the year.
Income Tax Expense. The effective income tax rate was 39.6% in 1997. See Note 4
of Notes to Consolidated Financial Statements for a reconciliation of the
statutory tax rate to the Company's effective tax rate.
Net Income. In 1997, the Company's net income increased to $20.6 million
compared to a net income of $7.1 million in 1996. The improved bottom line
performance can be attributed to the profitability of the additional stores and
the ongoing success of the Company's restructuring plan.
-14-
Additionally, the Company benefited from a comparable store sales increase,
higher gross margin rate and improved leverage of SG&A expenses.
Fiscal Year Ended February 1, 1997 ("1996")
Compared to Fiscal Year Ended February 3, 1996 ("1995")
Sales. The Company's sales decreased $35.4 million, or 6.8%, from 1995 while the
number of stores in operation decreased by 12%. The decrease was primarily
attributable to a net decrease of approximately 151,000 square feet, which
resulted from the closing of 85 stores offset slightly by the opening of 22
stores. In 1995 there were 53 weeks in the fiscal year, with the extra week
contributing $6.9 million in sales. Comparable store sales for fiscal year 1996
increased by 3.6%. Management attributes the comparable store sales increase to
its strategic decision to eliminate unprofitable stores and focus on customer
service, superior retail locations, inventory management and merchandise
presentation.
The Company's comparable store formats showed positive growth in 1996 compared
to 1995. Comparable store sales increased 2.8% for mall stores and 7.4% for
non-mall stores. By product configuration, comparable store sales increased 1.9%
in music and 12.4% in video, as video benefitted from continued growth of the
video sell-through market
Gross Profit. Gross profit, as a percentage of sales, increased to 35.9% in 1996
from 34.1% in 1995 as a result of reduced merchandise shrinkage and increased
purchase discounts combined with a strong performance from higher margin catalog
sales.
Expenses. SG&A, as a percentage of sales, decreased to 28.3% in 1996 from 29.1%
in 1995. The 0.8% decrease can be attributed to the closing of underperforming
stores, the receipt of $2.5 million upon termination of a business agreement in
the second quarter 1996 and a 3.6% increase in comparable store sales. Interest
expense decreased 24% to $10.8 million in 1996 from $14.2 in 1995. The decrease
was due to lower average outstanding borrowings offset in part by increased
weighted average interest rates. The effective income tax rate was 39.4% in
1996.
Net Income. In 1996, the Company's net income increased to $7.1 million compared
to a net loss of $25.4 million in 1995. The improved performance can be
attributed to the success of the Company's restructuring plan. Additionally, the
Company benefited from a comparable store sales increase, higher gross margin
rate and lower SG&A expenses.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources. Cash flow from operations and funds available
under revolving credit facilities are the Company's primary sources of
liquidity. During the first three fiscal quarters, cash flow is typically
consumed by payments to merchandise vendors and store construction expenditures.
The revolving credit facilities provide the Company with liquidity until
December, when the Company's cash position has historically been the highest,
providing sufficient cash to repay all outstanding borrowings under the
revolving credit facilities.
-15-
During 1997, cash provided by operations was $93.2 million compared to $44.9
million for 1996. The increased cash flow from operations was due primarily to
the $13.5 million increase in net income and continued improvement in inventory
management. Leverage of accounts payable to inventory improved to 86.1% in 1997
from 72.8% in 1996.
The Company ended fiscal 1997 with cash balances of approximately $94.7 million
compared to 1996 when the Company had cash balances of $54.8 million. In both
years, the Company had no short term borrowings.
On July 9, 1997 the Company entered into a $100 million secured revolving credit
facility with Congress Financial Corporation. The Revolving Credit Facility
combined the Company's long-term debt with its revolving credit line to create a
$100 million credit facility with a three year term at interest rates averaging
below the prime rate. The Revolving Credit Facility, combined with lower
borrowing needs, was responsible for the Company's interest expense decreasing
to $5.0 million for the year ended January 31, 1998 from $10.8 for the year
ended February 1, 1997
The Revolving Credit Facility contains certain restrictive provisions, including
provisions governing cash dividends and acquisitions, is secured by merchandise
inventory and has a minimum net worth covenant.
Capital Expenditures. Most of the Company's capital expenditures are for new
store expansion and relocation of existing stores. The Company typically
finances its capital expenditures through internally generated cash and
borrowings under its revolving credit facility. In addition the Company
typically receives financing from landlords in the form of construction
allowances or rent concessions for a portion of the capital expenditure. Total
capital expenditures were approximately $15.5 million in 1997 with significantly
all of this amount being related to new stores and store remodels and
reconfigurations. Included in this figure was approximately $2 million related
to the development and pilot of a new point-of-sale ("POS") system. The system
will be rolled out to all stores during the summer of 1998.
In fiscal 1998, the Company plans to spend approximately $47 million, net of
construction allowances, in capital expenditures. Included in such $47 million
is approximately $17 million for the new POS system.
Provision for Business Restructuring. Company performance in 1997 confirmed the
success of a restructuring plan that began in the fourth quarter of 1994.
Management concluded that intense competition from existing retailers and new
entrants, combined with changing customer demand and declining mall traffic was
adversely affecting certain of the Company's retail markets. The Company
recognized and responded to negative industry trends before any of its
competitors and has nearly completed its restructuring.
The Company's restructuring included closing underperforming stores, improving
operating efficiencies and refinancing its debt. In order to reduce its
portfolio of stores to a strong core of profitable locations in desirable
markets, the Company continued to focus on improving the profitability of
existing stores and streamlining operations by closing unprofitable stores. As
of January 31, 1998, the Company has closed or relocated a total of 342 stores.
An additional 62 stores are forecasted to close or relocate in 1998; however,
only 49 are associated with the
-16-
restructuring. The remaining 13 stores are to be closed or relocated as part of
the Company's ongoing business.
The Company is experiencing improved earnings and cash flow benefits as a result
of the restructuring program and expects continued improvement as the remaining
store closings are completed throughout the remainder of 1998.
Impact of Inflation. Although the Company cannot accurately determine the
precise effect of inflation on its operations, management does not believe
inflation has had a material effect on the results of operations in the last
three fiscal years. When the cost of merchandise items has increased, the
Company has been able to pass the increase on to its customers.
Seasonality. The Company's business is highly seasonal, with the highest sales
and earnings occurring in the fourth fiscal quarter. See Note 10 of the Notes to
Consolidated Financial Statements for quarterly financial highlights.
Year 2000 Compliance. The Company has assessed its systems and equipment with
respect to Year 2000 compliance and has developed a project plan. Many of the
Year 2000 issues, including the processing of credit card transactions, have
been addressed. The remaining Year 2000 issues will be addressed either with
scheduled system upgrades or through the Company's internal systems development
staff. The incremental costs will be charged to expenses as incurred and are not
expected to have a material impact on the financial position or results of
operations of the Company. However, the Company could be adversely impacted if
Year 2000 modifications are not properly completed by either the Company, or its
vendors, banks or any other entity with whom the Company conducts business.
Accounting Policies. During fiscal year 1997, the Company adopted the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," which requires that the Company disclose both basic earnings per share
and diluted earnings per share. The Company adopted the provisions of SFAS No.
128 retroactively for 1996 and 1995, as required.
In 1998, the Company will adopt the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which requires that the Company disclose as comprehensive
income all changes in equity during a period that are not a result of
investments by owners and distributions to owners.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," will not have an effect on the Company because it operates in a
single segment. SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," will not have an effect on the Company because it does
not have a defined benefit pension plan.
Dividend Policy. The Company has never declared or paid cash dividends on Common
Stock. The Revolving Credit Facility sets certain restrictions on the payment of
cash dividends. Any future determination as to the payment of dividends would
depend upon capital requirements and limitations imposed by the Revolving Credit
Facility and such other factors as the Board of Directors of the Company may
consider.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-17-
The index to the Consolidated Financial Statements of the Company is included in
Item 14, and the financial statements follow the signature page to this Annual
Report on Form 10-K.
The quarterly results of operations are included herein in Note 11 of the
Consolidated Financial Statements.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
Incorporated herein by reference is the information appearing under the captions
"Election of Directors" and "Board of Directors Meetings and Its Committees" in
the Company's definitive Proxy Statement for the Registrant's 1998 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after January 31, 1998.
(b) Identification of Executive Officers
The information required with respect to the executive officers of the
Registrant is set forth under the caption Supplementary Item on page 9 of this
Annual Report on Form 10-K.
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 1998 Annual Meeting of Shareholders to be filed
with the Securities and Exchange Commission within 120 days after January 31,
1998.
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 1998 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission within 120 days after January
31, 1998.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the information appearing under the caption
"Certain Transactions" in the Company's definitive Proxy Statement for the
Registrant's 1998 Annual Meeting of Shareholders to be filed with the Securities
and Exchange Commission within 120 days after January 31, 1998.
-18-
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 17 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.
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: March 30, 1998 By: /s/ ROBERT J. HIGGINS
----------------------------
Robert J. Higgins, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Name Title Date
/s/ ROBERT J. HIGGINS Chairman, President and
(Robert J. Higgins) Chief Executive Officer March 30, 1998
(Principal Executive Officer)
/s/ JOHN J. SULLIVAN Senior Vice President, Treasurer March 30, 1998
(John J. Sullivan) and Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
/s/ MATTHEW H. MATARASO Secretary and Director March 30, 1998
(Matthew H. Mataraso)
/s/ GEORGE W. DOUGAN Director March 30, 1998
(George W. Dougan)
/s/ CHARLOTTE G. FISCHER Director March 30, 1998
(Charlotte G. Fischer)
/s/ ISAAC KAUFMAN Director March 30, 1998
(Isaac Kaufman)
/s/ DEAN S. ADLER Director March 30, 1998
(Dean S. Adler)
/s/ JOSEPH G. MORONE Director March 30, 1998
(Joseph G. Morone)
-19-
TRANS WORLD ENTERTAINMENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Form 10-K
Page No.
Independent Auditor's Report 21
Consolidated Financial Statements
Consolidated Balance Sheets at January 31, 1998 and February 1, 1997 22
Consolidated Statements of Income - Fiscal years ended
January 31, 1998, February 1, 1997 and February 3, 1996 23
Consolidated Statements of Shareholders' Equity - Fiscal years ended
January 31, 1998, February 1, 1997 and February 3, 1996 24
Consolidated Statements of Cash Flows - Fiscal years ended
January 31, 1998, February 1, 1997, and February 3, 1996 25
Notes to Consolidated Financial Statements 26
Report of KPMG Peat Marwick LLP
Independent Auditors
The Board of Directors and Shareholders
Trans World Entertainment Corporation:
We have audited the accompanying consolidated balance sheets of Trans World
Entertainment Corporation and subsidiaries as of January 31, 1998 and February
1, 1997, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the fiscal years in the three-year period ended
January 31, 1998. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Trans World
Entertainment Corporation and subsidiaries as of January 31, 1998 and February
1, 1997, and the results of their operations and their cash flows for each of
the fiscal years in the three-year period ended January 31, 1998, in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Albany, New York
March 13, 1998
-20-
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
January 31, February 1,
1998 1997
--------------------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $94,732 $54,771
Accounts receivable 3,105 8,826
Merchandise inventory 189,394 163,509
Refundable income taxes --- 564
Deferred tax asset --- 2,774
Prepaid expenses and other 3,119 2,490
-------------------------
Total current assets 290,350 232,934
--------------------------
VIDEOCASSETTE RENTAL INVENTORY, net 4,099 4,784
DEFERRED TAX ASSET 4,726 3,098
FIXED ASSETS:
Buildings 7,774 7,774
Fixtures and equipment 89,968 85,776
Leasehold improvements 77,764 75,742
--------------------------
175,506 169,292
Less: Fixed asset write-off reserve 4,279 7,571
Allowances for depreciation and
amortization 101,595 96,747
--------------------------
69,632 64,974
--------------------------
OTHER ASSETS 2,776 4,263
--------------------------
TOTAL ASSETS $371,583 $310,053
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $162,981 $118,980
Income taxes payable 11,155 ---
Accrued expenses and other 17,347 9,403
Store closing reserve 8,691 13,747
Current deferred taxes 224 ---
Current portion of long-term debt and
capital lease obligations 99 9,557
--------------------------
Total current liabilities 200,497 151,687
LONG-TERM DEBT, less current portion 35,000 43,983
CAPITAL LEASE OBLIGATIONS, less current portion 6,409 6,507
OTHER LIABILITIES 6,712 6,514
--------------------------
TOTAL LIABILITIES 248,618 208,691
--------------------------
SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value; 5,000,000
shares authorized; none issued.) --- ---
Common stock ($.01 par value; 50,000,000 shares
authorized; 19,815,357 shares and 19,619,188
shares issued in 1997 and 1996, respectively) 198 197
Additional paid-in capital 25,386 24,441
Unearned compensation - restricted stock (175) (245)
Treasury stock at cost (70,788 and 72,788 shares
in 1997 and 1996, respectively) (394) (407)
Retained earnings 97,950 77,376
--------------------------
TOTAL SHAREHOLDERS' EQUITY 122,965 101,362
--------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $371,583 $310,053
==========================
See Notes to Consolidated Financial Statements.
-21-
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Fiscal Year Ended
January 31, February 1, February 3,
1998 1997 1996
-----------------------------------------
Sales $571,314 $481,657 $517,046
Cost of sales 361,422 308,952 340,754
-----------------------------------------
Gross profit 209,892 172,705 176,292
Selling, general and
administrative expenses 155,678 136,084 150,628
Restructuring charges --- --- 35,000
Depreciation and amortization 15,156 14,134 16,125
-----------------------------------------
Income (loss) from operations 39,058 22,487 (25,461)
Interest expense 4,995 10,767 14,222
-----------------------------------------
Income (loss) before income taxes 34,063 11,720 (39,683)
Income tax expense (benefit) 13,489 4,618 (14,310)
-----------------------------------------
NET INCOME (LOSS) $20,574 $7,102 ($25,373)
=========================================
BASIC EARNINGS (LOSS) PER SHARE $1.05 $0.36 ($1.30)
=========================================
Weighted average number of common
shares outstanding 19,655 19,514 19,452
=========================================
DILUTED EARNINGS (LOSS) PER SHARE $0.99 $0.36 ($1.30)
=========================================
Adjusted weighted average number of
common shares outstanding 20,688 19,798 19,452
=========================================
See Notes to Consolidated Financial Statements.
-22-
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share and option amounts)
Total Unearned
Additional Compensation Share-
Common Paid in Restricted Treasury Retained holders'
Stock Capital Stock Stock Earnings Equity
----------------------------------------------------------------
Balance as of January 28, 1995,
restated to reflect two-for-one
stock split in 1997
(19,462,416 shares issued) $195 $24,138 $ --- $(503) $95,647 $119,477
Net Loss --- --- --- --- (25,373) (25,373)
----------------------------------------------------------------
Balance as of February 3, 1996
(19,462,416 shares issued) 195 24,138 --- (503) 70,274 94,104
Issuance of 14,000 shares
of treasury stock under
incentive stock programs --- (59) --- 96 --- 37
Issuance of 150,000 shares of
common stock-restricted stock
plan, net 2 350 (245) --- --- 107
Exercise of 6,772
stock options --- 12 --- --- --- 12
Net Income --- --- --- --- 7,102 7,102
----------------------------------------------------------------
Balance as of February 1, 1997
(19,619,188 shares issued) $197 $24,441 $(245) $(407) $77,376 $101,362
Issuance of 2,000 shares
of treasury stock under
incentive stock programs --- --- --- 13 --- 13
Amortization of unearned
compensation - restricted
stock plan --- --- 70 --- --- 70
Exercise of 196,169
stock options 1 545 --- --- --- 546
Income tax benefit arising
from exercise of employee
stock options --- 400 --- --- --- 400
Net Income --- --- --- --- 20,574 20,574
----------------------------------------------------------------
Balance as of January 31, 1998
(19,815,357 shares issued) $198 $25,386 $(175) $(394) $97,950 $122,965
----------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-23-
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Ended
January 31, February 1, February 3,
1998 1997 1996
---------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $20,574 $7,102 ($25,373)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation and amortization 16,257 15,225 17,145
Fixed asset write-off reserve --- --- 8,088
Store closing reserve --- --- 26,912
Deferred tax expense (benefit) 1,370 3,023 (5,446)
Changes in operating assets and liabilities:
Accounts receivable 5,868 (747) 1,097
Merchandise inventory (9,872) 31,068 27,781
Refundable income taxes 564 7,744 (8,308)
Prepaid expenses and other (408) 439 1,478
Other assets 2,481 (381) (53)
Accounts payable 42,751 (12,322) (4,191)
Income taxes payable 11,155 --- (1,961)
Accrued expenses and other 7,344 3,137 (984)
Store closing reserve (5,056) (10,528) (11,913)
Other liabilities 198 1,174 (136)
---------------------------------------
Net cash provided by operating
activities 93,226 44,934 24,136
---------------------------------------
INVESTING ACTIVITIES:
Acquisition of property and equipment (15,538) (10,198) (10,006)
Acquisition of businesses, net (20,901) --- ---
Proceeds from sale of fixed assets --- --- 929
(Purchases) disposals of videocassette
rental inventory, net 685 1,938 750
---------------------------------------
Net cash used in investing activities (35,754) (8,260) (8,327)
---------------------------------------
FINANCING ACTIVITIES:
Net decrease in revolving line
of credit --- (65,260) (9,687)
Payments of long-term debt (18,440) (3,661) (8,902)
Payments of capital lease obligations (99) (76) (373)
Issuance of stock under incentive
stock programs 83 144 ---
Exercise of stock options, including
tax benefit 945 12 ---
---------------------------------------
Net cash used by financing activities (17,511) (68,841) (18,962)
---------------------------------------
Net increase (decrease) in cash and
cash equivalents 39,961 (32,167) (3,153)
Cash and cash equivalents, beginning
of year 54,771 86,938 90,091
---------------------------------------
Cash and cash equivalents, end of year $94,732 $54,771 $86,938
=======================================
See Notes to Consolidated Financial Statements.
-24-
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations: Trans World Entertainment Corporation is one of the
largest specialty retailers of music, video and related accessories in the
United States. The Company operates in a single industry segment, the operation
of a chain of retail entertainment stores. At January 31, 1998, the Company
operated 539 stores in 34 states, the District of Columbia and the U.S. Virgin
Islands, with a majority of the stores concentrated in the Eastern half of the
United States.
Basis of Presentation: The consolidated financial statements consist of Trans
World Entertainment Corporation and its subsidiaries, all of which are wholly
owned. All significant intercompany accounts and transactions have been
eliminated. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fiscal Year: The Company's fiscal year is a 52- or 53-week period ending on the
Saturday nearest to January 31. Fiscal years 1997 and 1996 ended January 31,
1998 and February 1, 1997, respectively, and consisted of 52 weeks. Fiscal year
1995, which ended February 3, 1996, consisted of 53 weeks.
Dividend Policy: The Company has never declared or paid cash dividends on its
Common Stock. The Company's credit agreement currently in place sets certain
restrictions on the payment of cash dividends. Any future determination as to
the payment of dividends would depend upon capital requirements and limitations
imposed by the Company's credit agreement and such other factors as the Board of
Directors of the Company may consider.
Cash and Cash Equivalents: The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents. The
carrying amounts reported in the balance sheet for cash and cash equivalents are
at fair value.
Merchandise Inventory and Return Costs: Inventory is stated at the lower of cost
(first-in, first-out) or market as determined principally by the retail
inventory method. The Company is entitled to return merchandise purchased from
major vendors for credit against other purchases from these vendors. The vendors
often reduce the credit with a merchandise return charge ranging from 0% to 20%
of the original product purchase price depending on the type of product being
returned. The Company records the merchandise return charges in cost of sales.
-25-
Videocassette Rental Inventory: The cost of videocassette rental tapes is
capitalized and amortized on a straight-line basis over their estimated economic
life with a provision for salvage value. Major movie release additions are
amortized over twelve months while other titles are amortized over thirty-six
months.
Fixed Assets: Fixed assets are stated at cost. Major improvements and
betterments to existing facilities and equipment are capitalized. Expenditures
for maintenance and repairs, which do not extend the life of the applicable
asset, are charged to expense as incurred. Buildings are amortized over a
30-year term. Fixtures and equipment are depreciated using the straight-line
method over their estimated useful lives, which range from three to seven years.
Leasehold improvements are amortized over the shorter of their estimated useful
life or the related lease term. Primarily all of the Company's operating leases
are ten years in term. Amortization of capital lease assets is included in
depreciation and amortization expense.
Depreciation and amortization expense related to the Company's videocassette
rental inventory, distribution center facility and distribution center equipment
is included in cost of sales.
Advertising Costs: The costs of advertising are expensed in the first period in
which such advertising takes place.
Store Opening and Closing Costs: Costs associated with opening a store are
expensed as incurred. When a store is closed, estimated unrecoverable costs are
charged to expense. Such costs include the net book value of abandoned fixtures,
equipment, leasehold improvements and a provision for lease obligations, less
estimated sub-rental income. The residual value of any fixed asset moved to a
store as part of a relocation is transferred to the relocated store.
Income Taxes: The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under the asset and liability method of Statement 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Earnings (Loss) Per Share: In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share," which was effective for the Company for fiscal year 1997.
This standard requires the Company to disclose basic earnings per share and
diluted earnings per share. Basic earnings per share is calculated by dividing
net income by the weighted average common shares outstanding. Diluted earnings
per share is calculated by dividing net income, adjusted in 1997 for the
$400,000 tax benefit resulting from stock option exercise activity, by the sum
of the weighted average shares 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
6). In Fiscal years 1997, 1996 and 1995 the additional dilutive potential common
shares were 1,033,000, 284,000, and 0, respectively. As required by SFAS No.
128, all outstanding common stock options were included even though their
exercise may be contingent upon vesting. The Company has presented Fiscal 1997
earnings per
-26-
share data and restated all prior-period earnings per share data in accordance
with SFAS No. 128. See the Consolidated Statements of Income for the required
disclosures.
All earnings and loss per share information has been adjusted for the
two-for-one stock split effected in the form of a 100% stock dividend on
December 15, 1997. All references to number of shares, per share amounts, stock
option data and market prices of the Company's common stock have been restated.
See Note 7, "Shareholders' Equity."
Note 2. Restructuring Charge
In order to streamline operations and close unprofitable store locations, the
company recorded pre-tax restructuring charges of $35.0 million in Fiscal year
1995 and $21.0 million in Fiscal 1994. The restructuring charges include the
write-down of assets, estimated cash payments to landlords for the early
termination of operating leases, and the cost of returning product to the
Company's distribution center and vendors. The charge also includes estimated
legal, lender and consulting fees.
In determining the components of the reserves, management analyzed all of the
aspects of closing stores and the costs that are incurred. An analysis of the
amounts comprising the restructuring reserve and the charges against the reserve
for each year in the three-year period ended January 31, 1998 are outlined below
(in thousands):
Balance Charges Balance Charges Balance Charges Balance
as of 1995 against the as of against the as of against the as of
1/28/95 Reserve Reserve 2/3/96 Reserve 2/1/97 Reserve 1/31/98
-----------------------------------------------------------------------------
Total
Non Cash
Write-offs $11,429 $10,799 $8,322 $13,906 $6,235 $7,671 $3,545 $4,126
Cash
Outflows 8,332 24,201 9,840 22,693 9,046 13,647 4,803 8,844
------------------------------------------------------------------------------
$19,761 $35,000 $18,162 $36,599 $15,281 $21,318 $8,348 $12,970
==============================================================================
Note 3. Debt
Long-term debt consisted of the following:
January 31, February 1,
1998 1997
----------------------------
(in thousands)
Senior unsecured notes $ --- $53,077
Long-term portion of revolving credit facility 35,000 ---
Installment notes and other obligations --- 375
----------------------------
35,000 53,452
Less current portion --- 9,469
----------------------------
Long-term debt $35,000 $43,983
============================
-27-
In July 1997, the Company replaced its existing $65.3 million revolving credit
facility and $56.5 million note agreement with a $100.0 million secured
revolving credit facility with a bank. The facility matures in July 2000, and
bears interest at the prime interest rate or the Eurodollar interest rate plus
1.75% (7.69% at January 31, 1998). The facility is secured by the Company's
assets allowing the Company to borrow up to 65% of its eligible merchandise
inventory to a maximum of $100.0 million.
During Fiscal years 1997, 1996, and 1995, the highest aggregate balances
outstanding under the revolver were $45.9 million, $65.3 million and $74.9
million, respectively. The weighted average interest rates during Fiscal years
1997, 1996 and 1995 based on average daily balances, were 8.58%, 11.01% and
10.40%, respectively. The balances outstanding under the Company's revolving
credit agreements at Fiscal years ended 1997, 1996 and 1995 were $35.0 million,
$0.0 and $65.3 million, respectively. The Company's policy is to classify $35.0
million of borrowing under its new revolving credit facility as long-term, since
the Company has the intent and ability to maintain these obligations for longer
than one year, or to refinance them on a long-term basis.
At January 31, 1998, the fair market value of this revolving credit facility
approximates the carrying value.
Interest paid during Fiscal years 1997, 1996 and 1995 was approximately $5.8
million, $11.8 million and $16.0 million, respectively.
Note 4. Income Taxes
Income tax expense (benefit) consists of the following:
Fiscal Year
1997 1996 1995
-------------------------------
(in thousands)
Federal - current $10,813 $1,364 $(9,117)
State - current 1,306 231 253
Deferred 1,370 3,023 (5,446)
--------------------------------
$13,489 $4,618 $(14,310)
================================
A reconciliation of the Company's effective tax rates with the federal statutory
rate is as follows:
Fiscal Year
1997 1996 1995
------------------------------
Federal statutory rate 35.0% 35.0% (35.0%)
State income taxes (benefit), net of
Federal income tax effect 3.0% 4.7% (1.5%)
Other 1.6% (0.3%) 0.4%
------------------------------
Effective income tax rate 39.6% 39.4% (36.1%)
==============================
Significant components of the Company's deferred tax assets and liabilities are
as follows:
January 31, February 1,
1998 1997
---------------------------
(in thousands)
CURRENT DEFERRED TAX ASSETS
Restructuring reserve $5,205 $8,556
---------------------------
Total Current Deferred Tax Asset 5,205 8,556
---------------------------
CURRENT DEFERRED TAX LIABILITIES
Inventory valuation 5,177 5,463
Other 252 319
--------------------------
Total Current Deferred Tax Liabilities 5,429 5,782
--------------------------
Net Current Deferred Tax Asset (Liability) $ (224) $2,774
--------------------------
NON-CURRENT DEFERRED TAX ASSETS
Accrued rent, lease accounting $3,046 $2,824
Capitalized leases 895 829
Book over tax depreciation 623 ---
Other 254 148
--------------------------
Total Non-Current Deferred Tax Assets 4,818 3,801
--------------------------
NON-CURRENT DEFERRED TAX LIABILITIES
Tax over book depreciation --- 588
Other 92 115
--------------------------
Total Non-Current Deferred Tax Liabilities 92 703
--------------------------
Net Non-Current Deferred Tax Asset $4,726 $3,098
--------------------------
TOTAL NET DEFERRED TAX ASSET $4,502 $5,872
==========================
-28-
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 be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income and the taxable income in the three
previous tax years to which tax loss carryback can be applied. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based upon
the level of projected future taxable income over the periods in which the
deferred tax assets are deductible management believes it is more likely than
not that the Company will realize the benefits of those deductible differences.
The amount of the deferred tax asset considered realizable could be reduced if
estimates of future taxable income during the carryforward period are reduced.
The Company paid income taxes of approximately $0.3 million, $0.3 million and
$2.2 million during Fiscal years 1997, 1996 and 1995, respectively.
Note 5. Leases
The Company leases its distribution center and administrative offices under two
leases, dated April 1, 1985 and November 1, 1989, from its Chief Executive
Officer and principal shareholder. The leases are classified as capital leases
for accounting purposes. Aggregate rental payments under both leases were $1.2
million for Fiscal years 1997, 1996 and 1995. Biennial increases are contained
in each lease based on the Consumer Price Index with the next scheduled increase
on January 1, 2000. Both leases expire in the year 2015.
Fixed asset amounts for all capitalized leases are as follows:
January 31, February 1,
1998 1997
---------------------------
(in thousands)
Buildings $7,105 $7,105
Fixtures and equipment 1,625 1,625
---------------------------
8,730 8,730
Allowances for depreciation and amortization 4,291 4,034
---------------------------
$4,439 $4,696
===========================
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
1997 1996 1995
-------------------------------
(in thousands)
Minimum rentals $50,237 $49,653 $57,420
Contingent rentals 719 274 246
-------------------------------
$50,956 $49,927 $57,666
===============================
-29-
Future minimum rental payments required under all leases that have initial or
remaining noncancelable lease terms in excess of one year at January 31, 1998
are as follows:
Operating Capitalized
Leases Leases
-------------------------
(in thousands)
1998 $43,486 $ 1,294
1999 49,865 1,294
2000 47,404 1,294
2001 43,920 1,294
2002 38,174 1,294
Thereafter 118,663 16,473
----------------------
Total minimum payments required $341,512 22,943
========
Amounts representing interest 16,435
-------
Present value of minimum lease payments 6,508
Less current portion 99
-------
Long-term capital lease obligations $ 6,409
=======
bNote 6. Benefit Plans
Stock Option Plans
Under the Company's 1986 Stock Option Plan and 1994 Stock Option Plan (the
"Plans"), the Compensation Committee of the Board of Directors may grant options
to acquire shares of common stock to employees of the Company and its
subsidiaries at the fair market value of the common stock on the date of grant.
Under the Plans, options generally become exercisable commencing one year from
the date of grant in increments of 25% per year with a maximum term of ten
years. Shares authorized for issuance under the 1986 and 1994 Stock
-30-
Option Plans were 2,200,000 and 2,000,000 (adjusted), respectively. As of June
1, 1995, the Company stopped issuing stock options under the 1986 Stock Option
Plan. At January 31, 1998, of the 4,200,000 options authorized for issuance
under the Plans, 2,812,741 have been granted and are outstanding, 572,647 of
which were vested and exercisable. Shares available for future grants at January
31, 1998 and February 1, 1997 were 510,974 and 1,391,772, respectively. The
following table summarizes information about the stock options outstanding under
the Plans at January 31, 1998:
--------------------------------- ----------------------------
Outstanding Exercisable
--------------------------------- ----------------------------
Weighted Weighted
Average Average Average
Exercise Remaining Exercise Exercise
price range Shares Life Price Shares Price
---------------------------------------------- ----------------------------
$1.13-$1.82 272,118 7.3 $1.80 114,618 $1.80
2.32-2.63 912,123 8.2 2.38 73,029 2.37
3.00-3.69 230,000 8.4 3.07 57,500 3.07
4.00-6.88 598,500 8.4 5.97 141,500 6.71
7.13-16.80 800,000 7.9 14.46 186,000 7.39
--------- --------
Total 2,812,741 8.1 $6.58 572,647 $5.03
========= ========
The Company also has a stock option plan for non-employee directors (the "1990
Plan"). Options under this plan are granted at 85% of the fair value at the date
of grant. Under the 1990 Plan, options generally become exercisable commencing
one year from the date of grant in increments of 25% per year with a maximum
term of ten years. As of January 31, 1998, there were 500,000 shares authorized
for issuance and 172,000 shares have been granted and are outstanding, 94,500 of
which were vested and exercisable. There are 328,000 shares of common stock
reserved for possible future option grants under the 1990 Plan. The following
table summarizes information about the stock options outstanding under the 1990
Plan at January 31, 1998:
----------------------------- ---------------------
Outstanding Exercisable
----------------------------- ---------------------
Weighted Weighted
Average Average Average
Exercise Remaining Exercise Exercise
price range Shares Life Price Shares Price
- --------------------------------------------------------------------
$1.78-$2.02 18,000 7.7 $1.90 6,750 $1.86
3.14-5.53 113,000 7.0 4.73 46,750 5.20
6.91-13.71 41,000 3.5 10.88 41,000 10.88
------- ------
Total 172,000 6.2 $5.90 94,500 $7.43
======= ======
-31-
The following tables summarize activity under the 1986 and 1994 Plans and the
1990 Plan:
------------------------ ------------------------
1986 and 1994 Plans 1990 Plan
------------------------ ------------------------
Number of Option Number of Option
Shares Price Shares Price
Subject Range Subject Range
to per to per
Option Share Option Share
- --------------------------------------------------------------------
Balance
Jan. 28, 1995 1,868,512 $5.50-$12.13 142,000 $5.00-$13.71
Granted 448,174 1.13-2.63 12,000 1.78
Exercised
Canceled (555,150) 1.81-11.25 (23,000) 1.78-6.33
- --------------------------------------------------------------------
Balance
Feb. 3, 1996 1,761,536 1.13-12.13 131,000 1.78-13.71
Granted 1,376,198 1.75-4.00 9,000 2.02
Exercised (6,772) 2.81-4.13
Canceled (1,114,486) 1.25-12.13
- --------------------------------------------------------------------
Balance
Feb. 1, 1997 2,016,476 1.13-9.25 140,000 1.78-13.71
Granted 1,062,608 5.00-16.80 69,000 3.14-5.05
Exercised (191,169) 1.44-5.50 (5,000) 5.53
Canceled (75,174) 1.81-5.94 (32,000) 5.00-13.71
- --------------------------------------------------------------------
Balance
Jan. 31, 1998 2,812,741 $1.13-$16.80 172,000 $1.78-$13.71
====================================================================
The per share weighted-average fair value of the stock options granted during
Fiscal years 1997, 1996 and 1995 was $4.14, $1.05 and $0.57 respectively using
the Black Scholes option pricing model, with the following weighted-average
assumptions;
1997 - expected dividend yield 0.0%, risk-free interest rate of 5.5%, expected
life of five years and stock volatility of 48%;
1996 - expected dividend yield 0.0%, risk-free interest rate of 6.7%, expected
life of five years and stock volatility of 72%;
1995 - expected dividend yield 0.0%, risk-free interest rate of 6.7%, expected
life of five years and stock volatility of 47%
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options in
-32-
the financial statements. Had the Company determined compensation cost based on
fair value in accordance with SFAS 123, the Company's net income would have been
reduced to the pro forma amounts indicated below:
Fiscal Year
------------------------------
1997 1996 1995
------------------------------
Net income (loss), as reported $20,574 $7,102 ($25,373)
Basic earnings (loss) per share, as reported $1.05 $0.36 ($1.30)
Diluted earnings (loss) per share, as reported $0.99 $0.36 ($1.30)
Pro forma net income (loss) $19,074 $6,658 ($25,476)
Pro forma basic earnings (loss) per share $0.97 $0.34 ($1.31)
Pro forma diluted earnings (loss) per share $0.92 $0.34 ($1.31)
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 600,000 restricted shares of
Common Stock to executive officers and other key employees of the Company and
its subsidiaries. The shares are issued as restricted stock and are held in the
custody of the Company until all vesting restrictions are satisfied. If
conditions or terms under which an award is granted are not satisfied, the
shares are forfeited. Shares begin to vest under these grants after three years
and are fully vested after five years, with vesting criteria which includes
continuous employment until applicable vesting dates have expired. At January
31, 1998, a total of 150,000 shares have been granted, of which 50,000 were
granted in 1996 with a fair market value of $118,750; the remaining 100,000 were
granted in 1995 with a fair value on the date of grant of $232,500. As of
January 31, 1998, a total of 30,000 of these shares had vested. 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 years 1997 and 1996 was approximately $70,000 and $107,000, respectively.
At January 31, 1998, outstanding awards and shares available for grant totaled
150,000 and 450,000, respectively.
401 (k) Savings Plan
The Company offers a 401(k) Savings Plan to eligible employees meeting certain
age and service requirements. This plan permits participants to contribute up to
16% of their salary, including bonuses, up to the maximum allowable by Internal
Revenue Service regulations. Participants are immediately vested in their
voluntary contributions plus actual earnings thereon. Participant vesting of the
Company's matching and profit sharing contribution is based on the years of
service completed by the participant. Participants are fully vested upon the
completion of four years of service. All participant forfeitures of nonvested
benefits are used to reduce the Company's contributions in future years. The
Company matching contribution totaled $529,000, $465,000 and $470,000 in Fiscal
years 1997, 1996 and 1995, respectively.
-33-
Supplemental Executive Retirement Plan (SERP)
In 1997, the Company introduced a non-qualified Supplemental Executive
Retirement Plan (SERP) effective March 1, 1997. The SERP, which is unfunded,
provides eligible executives defined pension benefits that supplement benefits
under other retirement arrangements. The annual benefit amount has been
predetermined as part of the plan and vests based on years of service and age at
retirement. For Fiscal year 1997, expenses related to the plan totaled
approximately $361,000. The present value of the projected benefit obligation
was approximately $2.3 million at January 31, 1998. The January 31, 1998
Consolidated Balance Sheet includes $313,000 of accrued expense.
Note 7. Shareholders' Equity
On November 14, 1997, the shareholders approved an amendment to the Company's
Certificate of Incorporation to increase authorized common shares from 20
million shares of $0.01 par value common stock to 50 million shares of $0.01 par
value common stock. On that date, the Board of Directors approved a two-for-one
common stock split to be distributed in the form of a 100% stock dividend. As a
result, 9,898,758 were issued on December 15, 1997 to shareholders of record on
December 1, 1997. 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 this annual report to number of shares,
per share amounts, stock option data and market prices of the Company's common
stock has been restated to reflect the stock split.
At January 31, 1998 and February 1, 1997, the Company held 70,788 and 72,788
shares, respectively, in treasury stock resulting from the repurchase of common
stock through open market purchases.
Note 8. Strawberries Acquisition
In October 1997, the Company acquired 90 out of a total of 118 stores owned
by Strawberries, Inc., a privately held non-mall music specialty retailer
operating primarily in New England. The stores operate under the names
"Strawberries" and "Waxie Maxie" and are primarily located in freestanding or
strip center locations. The acquisition has been accounted for
using the purchase method of accounting. At the time of the acquisition, the
Company paid $21 million for the assets which included the fixed assets,
merchandise inventories, other related current assets and $683,043 in
goodwill. This goodwill is being amortized on a straight-line basis over a 15
year period.
Pro forma results of operations including Strawberries for Fiscal years 1997 and
1996 are not presented because such information was not considered to be
-34-
reliable because of Strawberries' bankruptcy filing.
Note 9. Concentration of Business Risks
The Company purchases inventory for its stores from approximately 450 suppliers,
with approximately 68% of purchases being made from six suppliers. In the past,
the Company has not experienced difficulty in obtaining satisfactory sources of
supply, and management believes that it will retain access to adequate sources
of supply. However, a loss of a major supplier could cause a possible loss of
sales, which would have an adverse affect on operating results and result in a
decrease in vendor support for the Company's advertising programs.
Note 10. Quarterly Financial Information (Unaudited)
-----------------------------------------------------
Fiscal 1997 Quarter Ended
1997 1/31/98 11/1/97 8/2/97 5/3/97
-----------------------------------------------------
(in thousands, except per share amounts)
Sales $571,314 $242,041 $114,737 $105,024 $109,512
Gross profit 209,892 87,439 43,662 39,527 39,264
Net income (loss) 20,574 21,291 979 (834) (862)
Basic earnings (loss)
per share $1.05 $1.08 $0.05 $(0.04) $(0.04)
Diluted earnings (loss)
per share $0.99 $1.01 $0.05 $(0.04) $(0.04)
-----------------------------------------------------
Fiscal 1996 Quarter Ended
1996 2/1/97 11/2/96 8/3/96 5/4/96
-----------------------------------------------------
(in thousands, except per share amounts)
Sales $481,657 $180,735 $97,583 $96,717 $106,622
Gross profit 172,705 64,703 36,217 34,616 37,169
Net income (loss) 7,102 14,710 (2,477) (2,392) (2,739)
Basic earnings (loss)
per share $0.36 $0.75 $(0.13) $(0.12) $(0.14)
Diluted earnings (loss)
per share $0.36 $0.74 $(0.13) $(0.12) $(0.14)
-35-
Index to Exhibits
-----------------
Document Number and Description
- -------------------------------
Exhibit No.
3.1 Restated certificate of Incorporation -- incorporated herein by reference to
Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year
ended January 29, 1994. Commission File No. 0-14818.
3.2 Certificate of Amendment to the Certificate of Incorporation -- incorporated
herein by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended October 29, 1994. Commission
File No. 0-14818.
3.3 Amended By-Laws--incorporated herein by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended February 2, 1991.
Commission File No. 0-14818.
*3.4 Certificate of Amendment to the Certificate of Incorporation.
4.1 Loan and Security Agreement, dated July 9, 1998, between Congress Financial
Corporation and the Company, for the secured revolving credit agreement --
incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 2, 1997.
Commission File No. 0-14818.
10.1 Lease, dated April 1, 1985, between Robert J. Higgins, as Landlord, and
Record Town, Inc. and Trans World Music Corporation, as Tenant and Amendment
thereto dated April 28, 1986 -- incorporated herein by reference to Exhibit 10.3
to the Company's Registration Statement on Form S-1, No. 33-6449.
10.2 Second Addendum, dated as of November 30, 1989, to Lease, dated April 1,
1985, among Robert J. Higgins, and Trans World Music Corporation, and Record
Town, Inc., exercising five year renewal option -- incorporated herein by
reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended February 3, 1990. Commission File No. 0-14818.
10.3 Lease, dated November 1, 1989, between Robert J. Higgins, as Landlord, and
Record Town, Inc. and Trans World Music Corporation, as Tenant -- incorporated
here by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K
for the fiscal year ended February 2, 1991. Commission File No. 0-14818.
10.4 Employment Agreement, dated as of February 1, 1996 between the Company and
Robert J. Higgins -- incorporated herein by reference to Exhibit 10.4 to the
Company's Annual Report of Form 10-K for the fiscal year ended February 1, 1997.
Commission File No. 0-14818
10.5 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.
10.6 Trans World Music Corporation 1990 Stock Option Plan for Non-Employee
Directors -- incorporated herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-2, No. 33-36012.
10.7 Trans World Music Corporation 1990 Restricted Stock Plan -- incorporated
herein by reference to Exhibit 10.7 to the Company's Registration Statement on
Form S-2, No. 33-36012.
10.8 Form of Restricted Stock Agreement dated February 1, 1995 and May 1, 1995
between the Company and Edward W. Marshall, Jr., Executive Vice President of
Operations and Bruce J. Eisenberg, Senior Vice President of Real Estate,
respectively, incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
-36-
April 29, 1995. 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 Severance Agreement, dated May 20, 1996 between Trans World Entertainment
Corporation and James A. Litwak, Executive Vice President of Merchandising and
Marketing, incorporated herein by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the fiscal year ended February 1, 1997.
Commission File No. 0-14818.
10.11 Severance Agreement, dated October 1, 1994, between Trans World
Entertainment Corporation and Edward Marshall, Senior Vice President-Operations
- -- incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended October 29, 1994. Commission File No.
0-14818.
10.12 Trans World Entertainment Corporation 1994 Stock Option Plan --
incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended July 30, 1994. Commission
File No. 0-14818.
10.13 Trans World Entertainment Corporation 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
Strawberries, Inc.
11 Statement re computation of per share earnings.
*22 Significant Subsidiaries of the Registrant.
*23 Consent of KPMG Peat Marwick LLP.
*27 Financial Data Schedule (For electronic filing purposes only)
- ---------------------------------------------------------------------
*Filed herewith.
-37-
EXHIBIT INDEX
3.4 Certificate of Amendment to the Certificate of Incorporation.
10.16 Trans World Entertainment Corporation Asset Purchase Agreement with
Strawberries, Inc.
22 Significant Subsidiaries of the Registrant.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule (electronic filing only)