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
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SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 30, 199929, 2000
OR
[]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ............ TO ............
COMMISSION FILE NUMBER: 0-14818
TRANS WORLD ENTERTAINMENT CORPORATION
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(Exact name of registrant as specified in its charter)
New York 14-1541629
------------------------------- -------------------------------------- ----------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
incorporation
or organization) Number)
38 Corporate Circle
Albany, New York 12203
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(Address of principal executive offices, including zip code)
(518) 452-1242
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(Registrant's telephone number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's Knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or an
amendment to this Form 10-K. [ ]
As of April 23, 1999, 52,107,41126, 2000, 48,356,304 shares of the Registrant's Common Stock,
excluding 104,4325,104,432 shares of stock held in Treasury, were issued and
outstanding. The aggregate market value of such shares held by non-affiliates
of the Registrant, based upon the closing sale price of $14.375$10.25 on the NasdaqNASDAQ
National Market on April 23, 1999,26, 2000, was approximately $576,049,533.$372,876,080. Shares of
Common Stock held by the Company's controlling shareholder, who controls
approximately 23.1%24.8% of the outstanding Common Stock, have been excluded for
purposes of this computation. Because of such shareholder's control, shares
owned by other officers, directors and 5% shareholders have not been excluded
from the computation.
PART I
ItemITEM 1. BUSINESS
General
- -------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 and an e-commerce
site in a single industry segment. Sales were $698.5 million$1.36 billion during the fiscal
year ended January 30, 199929, 2000 (referred to herein as "1998""1999"). The Company is
one of the largest specialty retailers of compact discs, prerecorded audio
cassettes, prerecorded videovideocassettes, digital versatile discs ("DVDs") and
related accessories in the United States. At January 30, 1999,29, 2000, the Company
operated 501967 stores totaling about 2.5approximately 4.9 million square feet in 3344
states, the District of Columbia, the Commonwealth of Puerto Rico and the
U.S. Virgin Islands, with the majority of the stores concentrated in the
Eastern half of the United States. The Company's business is highly seasonal in
nature, with the peak selling period being the Christmas holiday season in
the Company's fourth fiscal quarter.
In October 1997,On April 22, 1999, the Company acquired 90 out of a total of 118 stores owned by
Strawberries, Inc., a privately held freestanding music specialty store
retailer operating primarily in New England. The stores operate under the
names "Strawberries" and "Waxie Maxie" and are primarily located in
freestanding and strip center locations.
On September 15, 1998, the Company split its common stock three-for-two in the
form of a 50% stock dividend. All references throughout this report to number
of shares, per share amounts, stock option data and market prices of the
Company's common stock have been adjusted to reflect the stock split. The
total shares issued at January 30, 1999 were 32.8 million compared to a total
of 29.7 million at January 31, 1998.
On October 26, 1998, the Company andmerged with Camelot Music Holdings, Inc.
announced
the signing of a definitive agreement to merge in a stock-for-stock
transaction that would create the nation's largest music retailing company
with approximately 1,000 retail locations. On April 22, 1999, each company
held a special meeting of its shareholders at which they voted on and approved
a proposal to exchange("Camelot"). The Company exchanged 1.9 shares of the Company'sits common stock for each
share of Camelot common stock. The Company issued 19.4approximately 19.3 million
shares of its common stock and 1.3 million stock options to purchase the Company'sin exchange for all outstanding Camelot common stock.
The transaction was accounted for as a pooling-of-interests. Though the
transaction was not completed until 1999,Accordingly,
prior period consolidated financial statements have been restated to include
combined results of operations, financial position and cash flows of Camelot
as though it had been a part of the Company has included information
related to Camelot in Item 1. "Business" and Note 12 in the Notes to
Consolidated Financial Statements.since Camelot's adoption of
"fresh-start" accounting on January 31, 1998.
The Company's principal executive offices are located at 38 Corporate Circle,
Albany, New York, 12203, and its telephone number is (518) 452-1242.
Store Concepts
- --------------STORE CONCEPTS
The Company's strategy is to offer customersCompany offers 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 StoresMALL STORES
The Company's mall stores include five concepts, all of which have beenare designed to
offer consumers a fun andan exciting shopping experience. In theThe mall stores the Company emphasizes onemphasize a
strong in-store presentationmarketing message, and a broad merchandise selection and competitive pricing to
attract the casual impulse buyer.
Full-Line Music Stores.FULL-LINE MUSIC STORES. The Company's full-line mall stores are located in
large, regional shopping malls and are generally namedoperate under the trade names of Record Town.Town,
Camelot Music or The Wall. There were 161572 such stores at January 30, 1999.29, 2000. This store
concept utilizes an average space of approximately 3,5004,300 square feet with
certain stores ranging in excess of 7,00010,000 square feet depending on the availability of preferred
space and the expected volume of the store. This concept would also include
290 Camelot Music, 124 The Wall and 18 Spec's Music stores operated by Camelot
at January 30, 1999, which averaged approximately 4,000 square feet of space.feet. Camelot Music and The
Wall stores were acquired on April 22, 1999.
Saturday Matinee Stores.as part of the Camelot acquisition.
SATURDAY MATINEE STORES. These stores are dedicated to the sale of
prerecorded video merchandise.merchandise and related accessories. These stores are
located in large, regional shopping malls and average 2,200 square feet in
size. There were 3738 such locations in operation at January 30, 1999. The Company's strategy is to
combine this store with a Record Town in its combination store concept
whenever possible.
Combination Stores.29, 2000.
COMBINATION STORES. At January 30, 1999,29, 2000, the Company operated 92 combination
Record Town/Saturday Matinee stores. The combination store concept occupies an
average of 8,0008,300 square feet. These stores share common storefronts and offer
the consumer an exciting combination of music and video merchandise in one store
location. The Company believes that the combination of the two concepts creates
a marketing synergy by attracting different target customers.
For Your Entertainment Stores.FOR YOUR ENTERTAINMENT STORES. At January 30, 1999,29, 2000, the Company operated seven12
F.Y.E. stores. These stores carry a broad assortment of music and video
merchandise and an extensive selection of games, portable electronics,
1
accessories and boutique items, as well as a game arcade. This format makes the
traditional superstore experience available to shopping mall consumers. This
format is designed to be a semi-anchor or destination retailerlocation in major regional
malls. The F.Y.E. concept occupies an average of 27,10024,000 square feet.
Specialty Music Stores.SPECIALTY MUSIC STORES. The specialty music concept is also located in large,
regional shopping malls, but contrasts with full-line music stores in that they
carry a less diverse merchandise selection. These stores, 169 of which were in
operation at January 30, 1999,29, 2000, are generally operated under the name Tape World.
The specialty mall stores operate in approximately 1,200 square feet. The
Company's strategy is to reposition and expand these stores into Record Town
stores or combination stores as opportunities become available.
Freestanding StoresFREESTANDING STORES
The Company's freestanding concept accounted for 188included 243 stores in operation at January
30, 1999,29, 2000, which primarily operate under the names Coconuts, Strawberries Music
and Strawberries.Spec's Music. These stores are designed for freestanding, strip center and
downtown locations in areas of high population density. The majorityThese stores occupy an
average space of the
freestanding stores range in size from 3,000 to 8,000approximately 5,200 square feet.
Freestanding storesfeet, and carry an extensive
merchandise assortment and have an
emphasis on competitive pricing.assortment. The Spec's Music stores were acquired as part of the
Camelot acquisition. The Company's freestanding stores include 1210 video
rental stores. These stores operateoperating under the tradename "Movies Plus"
and average approximately 5,200 square feet. This concept wouldname Movies Plus.
The Company also include
10 Camelot Music, 21 The Wall and 24 Spec's Music stores operated by Camelot
at January 30, 1999, which averaged approximately 5,500 square feet of space.
These stores were acquired on April 22, 1999.
In October 1997, the Company acquiredoperates "Planet Music," a 31,000 square foot, freestanding
superstore in Virginia Beach, VA. The store offers an extensive catalog of
music, video and other related merchandise, similar to what would
be carried in large freestanding stores. The acquisition also included the
rights to the "Planet Music" name and trademark, which offers the Company
potential expansion opportunities.
E-Commercemerchandise.
E-COMMERCE
During 1998, the Company established a subsidiary to develop a strategy to
conduct business overon the internet.Internet. In November 1998, the Company officially
launched TWEC.com,TWEC.COM, its internetInternet commerce site. TWEC.COM is the on-line hub for
Trans World Entertainment's retail stores. With worldwide distribution spanning
16 countries in addition to the United States, the site features all of the
music CDs and cassettes, video games, DVD and VHS home videos that are available
at its retail stores, and more. The Company's strategy is to develop a
profitable e-commerce business by establishing marketing, selling and customer
service capabilities that take advantage of the synergies between its retail
stores and its e-commerce site. The Company markets its e-commerce site offers a wide variety of
music, moviesthrough
the same advertising and gamesmarketing channels used for sale,its retail stores, as
well as hosting live eventsthrough strategic alliances with well-known Internet companies, such
as Yahoo! and interactive chats with celebrities.Real Networks. Customers can return on-line purchases at retail
store locations. The Company currently fulfills its on-line sales through a
third party and plans to provide its own fulfillment by the third quarter of
fiscal 2000.
2
Merchandise
- -----------MERCHANDISE
The Company's stores offer a full assortment of compact discs, prerecorded audio
cassettes, prerecorded video, (including DVD)DVDs and related accessories. Sales by merchandise
category as a percent of total sales over the past three years were as follows:
---------------------------------------
January----------------------------------------------
JANUARY 29, JANUARY 30, JanuaryJANUARY 31,
February 1,2000 1999 1998
1997
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Compact discs 58.6%67.0% 64.3% 55.5% 50.1%
Prerecorded audio cassettes 11.89.5 12.2 14.2
16.9
Singles 3.32.9 3.6 4.3 4.8
Prerecorded video 15.211.2 10.3 16.3
18.6
Other 11.19.4 9.6 9.7
9.6
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TOTAL 100.0% 100.0% 100.0%
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Prerecorded Music.PRERECORDED MUSIC. The Company's music stores offer a full assortment of
compact discs and prerecorded audio cassettes purchased primarily from five
major manufacturers. Music categories include rock, pop, rap, soundtracks,
alternative, latin,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 constituteare the top 1,000 titles with the highest rate
of sale in any given month, and "catalog", which are items that customers
purchase to build their collections.
Prerecorded Video.PRERECORDED VIDEO. The Company offers prerecorded video cassettes and DVDs for
sale in a majority of its stores. DVD, a new video technology, was introduced to the
retail consumer during 1997. DVD offers a quality that exceeds both the
current VHS and CD formats and also offers the consumer more storage than the
current CD. During 1998,In 1999, DVD sales were 7.9%22% of the Company's
total retail video sales. The Company believes that the DVD player will replace the sales
of laser disc players and gradually
replace VCRs as the DVD technology becomes more affordable and accessible. The Company is anticipating the increased
availability of DVD players and plans to capitalize on this technology by
making software increasingly available as this technology becomes more widely
accepted by the consumer. Paul
Kagan Associates, an entertainment/media research firm, estimated that as many as 1.1more than
2 million households owned a DVD player by the end of 19981999 and as many as 4843
million households will own a DVD player by the end of 2010.
Other Merchandise.2008. The Company plans
to capitalize on this trend by making DVDs increasingly available in its stores.
OTHER MERCHANDISE. The Company stocks and promotes brand name blank audio
cassette and videocassette tapes as well as accessory merchandise for compact
discs, audio cassettes and videocassettes. These accessories includevideocassettes, including maintenance and cleaning
products, boutique items, storage cases, portable electronics, headphones and video games.
Advertising
- -----------ADVERTISING
The Company makes extensive use of in-store advertising circulars and signs and also pursues a mass-media
marketing program for its freestanding stores through advertisements in
newspapers, radio, and television. Most of the vendors from whom the Company
purchases merchandise offer their customers advertising allowances to promote
their merchandise.
3
Industry and Competitive Environment
- ------------------------------------INDUSTRY AND COMPETITIVE ENVIRONMENT
According to the Recording Industry Association of America, the U.S. retail
music market was approximately $13.7$14.6 billion in 1998 and is expected1999. According to grow
at a compound annual rate of 5.5% through 2002. ThePaul Kagan
Associates, the video sell-through market, including VHS and DVD, totaled an
estimated $8.9$9.5 billion in 19981999 and is expected to grow at a compounded annual
rate of 6%8.6% through 2007.2003. The retail home entertainment industry is highly
competitive. The Company's retail stores compete primarily with other
specialty retail music and video chains (e.g. Musicland, Wherehouse
Entertainment and Tower Records), as well as mass merchants (e.g. Wal-Mart,
K-Mart, Target), book stores (e.g. Barnes and Noble, Borders) and consumer
electronics stores (e.g. Best Buy, Circuit City), some of which may have
greater financial or other resources than the Company. The recent trend in
industrythe consolidation of specialty retailers included not only included the Company's
acquisitions of Camelot Music Holdings, Inc. and Strawberries, Inc., but also
Camelot's previous acquisition of The Wall and Spec's Music, as well as the
acquisition of Blockbuster Music by Wherehouse Entertainment, Inc.
The Company also competes with mail order clubs (e.g. BMG Music and Columbia
House) and the Internet companies (e.g. Amazon.com and CDnow)CDnow.com). In addition, a
uniform format is being developed that will enable music companies to sell their
products via direct Internet download. The Company believes that sales via the
Internet will continue to become more significant over time. The Company
launched its internetInternet commerce site in the late fall of 1998.
Seasonality
- -----------SEASONALITY
The Company's business is highly seasonal. Theseasonal, with the fourth quarter constitutesconstituting
the Company's peak selling period. In fiscal 1998,1999, the fourth quarter accounted
for approximately 38.3%38% of annual sales and 76.4%79% of net income.income, excluding the
one-time Camelot merger charge. 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 bolstersupplement its permanent
store sales staff. If for any reason the Company's net sales were below
seasonal norms during the fourth quarter, including as a result of merchandise
delivery delays due to receiving or distribution problems, the Company's
operating results, particularly operating and net income, could be adversely
affected. Quarterly results arecan be affected by the timing and strength of new
releases, the timing of holidays, new store openings and the sales performance
of existing stores.
Camelot
experiences seasonality similar to the Company's.
Distribution and Merchandise Operations
- ---------------------------------------DISTRIBUTION AND MERCHANDISE OPERATIONS
The Company's and Camelot'stwo distribution facilities use certain automated and computerized
systems designed to manage merchandise receipt, storage and shipment. Store
inventories of regular merchandise are replenished in
response to detailedusing daily merchandise sales
information that is transmitted to the Company's central computer system from
each store after the close of the business day. Shipments from the facilityfacilities
to each of the Company's stores are made at least once a week and currently provide
the Company's stores with approximately 78%
and Camelot's stores with approximately 75%77% of theirall merchandise requirements. The balance of the stores'
requirements areis satisfied through direct shipments from manufacturers or redistribution from other Company-operated stores.manufacturers.
Company-owned trucks service approximately 38.3%21% of the Company's stores; thestores. The
balance areis serviced by several common carriers chosen on the basis of
geographicgeography and rate considerations. Camelot services all of its storesThe Company does not have any contractual
arrangements with common carriers. No contractual arrangements exist between common carriers
and either the Company or Camelot. The Company's and Camelot's sales volume and centralized
merchandise distribution facilities enable them to take advantage of
transportation economies.
The Company believes that its existing distribution center and the Camelot
distribution centercenters are adequate to meet
the combined Company's planned business needs, and improvements will be completed primarily for operational
efficiency.needs.
4
Suppliers and Purchasing
- ------------------------SUPPLIERS AND PURCHASING
The Company purchases inventory for its stores from approximately 475500 suppliers.
Approximately 69%73% of purchases in fiscal 19981999 were made from the
five largest suppliers:
WEA (Warner/Electra/Atlantic Corp.), Sony Music, Universal Distribution, BMG
(Bertelsmann Music Group) and EMD (EMI Music Distribution). As is typical in
this industry, neither the Company nor
Camelot hasdoes not have material long-term purchase
contracts and deals with its suppliers principally on an order- by-orderorder-by-order
basis. In the past, the Company has not experienced difficulty in obtaining
satisfactory sources of supply, and management believes that it will retain
access to adequate sources of supply. The Company also expects to continue to
pass on to customers any price increases imposed by the suppliers of
prerecorded music and video.
The Company has surveyed its vendors regarding Year 2000 compliance. Vendors
representing 84% of its merchandise purchases in fiscal 1998 represent that
their systems are compliant. Camelot conducts business with substantially the
same vendors as the Company and has conducted a similar survey. Management
believes the remaining vendors will complete Year 2000 compliance and that any
vendor non-compliance is not likely to cause significant disruption to the
Company's business because the Year 2000 begins shortly after the Company's
peak selling period when purchasing activity is low.
The Company produces store fixtures for all of its new stores and store
remodelsexisting stores in its
manufacturing facility located in Johnstown, New York. The Company believes that
its costs of production are lower than purchasing from an outside manufacturer.
Trade Customs and Practices
- ---------------------------TRADE CUSTOMS AND PRACTICES
Under current trade practices with four of the five largest suppliers, retailers
of compact discs and prerecorded audio cassettes are entitled to return
merchandise they have purchased for other titles carried by these suppliers;
however, the returns are subject to merchandise return penalties. The other largeremaining
supplier continues to accept merchandise returns, and recently changed its
policy on merchandise returns to eliminate return penalties on the majority of
its merchandise. This industryreturn practice permits the Company to carry a wider
selection of music titles and at
the same time reduce the risk of obsolete inventory. Most
manufacturers and distributors of prerecorded video offer return privileges
comparable to those with prerecorded music, but with nowithout merchandise return
penalties. Video
rental merchandise is not eligibleExcept for return to the manufacturers. Theone large merchandiser mentioned above, merchandise
return policies have not changed significantly during the past five years, except for one ofyears.
Historically, the five largest suppliers eliminating penalties
on the majority of merchandise returns, but any future changes in these
policies could impair the value of the Company's inventory. The Company generally has adapted its purchasing policies to
changes in the policies of its suppliers.
Employees
- ---------EMPLOYEES
As of January 30, 1999,29, 2000, the Company employed approximately 6,700 people,10,300 associates,
of whom 8004,300 were employed on a full-time salaried basis, 1,800 were employed on a
full-time hourly basis, and thebasis. The remainder were employed
on a part-time hourly
basis. As of January 30, 1999, Camelot employed approximately 6,100 people,
of whom 1,100 were employed on a full- time salaried basis, 800 were employed
on a full-time hourly basis, and the remainder were employed on a part-time
hourlyor temporary basis. The Company and Camelot hire temporaryhires seasonal sales
associates during peak seasons to assure continued levels of customer
service. Store managers report to district managers, each of who, in turn, reportsreport to
a regional manager. In addition to their salaries, storeStore managers, district managers and regional managers
have the potentialmay be eligible to receive incentive compensation based on the profitability
of stores for which they are responsible. None of the employees are covered by
collective bargaining agreements, and management believes that the Company
and Camelot enjoyenjoys favorable relations with theirits employees. Increases in the minimum wage
have had a significant effect on the Company's compensation expense duringin prior
periods. Any futureyears. Future increases in the minimum wage may have a materialan adverse effect on the
Company's results of operations and financial condition.
Retail Information Systems
- --------------------------
All store sales data and merchandise purchasing information is collected
centrally utilizing theRETAIL INFORMATION SYSTEMS
The Company utilizes an IBM AS/400 computer system. The Company'ssystem for the majority of its
information systems manage a database of over 250,000 active SKUs in prerecorded music,
video and accessory merchandise.processing. The system processes sales, inventory, accounting,
payroll, telecommunications and other operating information for all of the
Company's operations.information. During fiscal 1998
and 1999, the Company rolled outcompleted a chain-wide rollout of a new point-of-sale
system chain wide.system. This new system has improved customer service while increasing the
accuracy of perpetual inventoriesinventory records at the store level. Features of the
system include enhanced inventory management functions, including merchandise
receiving and returns, and the ability to lookup, by SKU, a storesstore's current
in-stock inventory position. Additionally, the system facilitates streamlined
checkout procedures and daily electronic communication between stores, the
corporate offices and field management.
OperationsYEAR 2000
To date, the Company has not experienced any significant business disruptions
and has had no delays in receiving product from its suppliers as a result of
the acquired Camelot stores will be integrated intoYear 2000. While the risks associated with Year 2000 readiness peaked
with the change of the date from December 31, 1999 to January 1, 2000, there
is a risk that a Year 2000 related issue could surface within the year. The
Company plans to devote the necessary resources to resolve any Year 2000
issues in a timely manner. However, if third parties upon which the Company
relies fail to adequately address any of their Year 2000 problems, it could
disrupt the Company's systems.business. In the most reasonably likely worst case
scenarios, the Company could experience delays in receiving product from
vendors, shipping product to stores, accessing various types of information or
communicating effectively with financial institutions or vendors.
5
The same point-of-sale system currently usedCompany's Year 2000 readiness process for its internal systems was
substantially complete by the Company will be rolled out
to the acquired Camelot stores during the summerthird quarter of 1999. Incremental costs of
addressing the Year 2000 issue, which have totaled approximately $721,000, were
charged to expense as incurred. The Company primarily utilized internal
resources for the completion of Year 2000 remediation.
6
ItemITEM 2. PROPERTIES
Retail Stores
- -------------RETAIL STORES
At January 30, 1999,29, 2000, the Company operated 501967 retail locations and Camelot
operated 487 retail locations. The Company owns one real estate site, which
it formerly operated as a retail outlet and currently leases to an unrelated
party. All of the
Company's and Camelot's retail stores are under operating leases with various terms and
options. Substantially all of the stores provide for payment of fixed monthly
rentals, a percentage of the gross receipts of the store in excess of specified
sales levels, and operating expenses for maintenance, property taxes, insurance
and utilities. The following table lists the number of leases due to expire
(assuming no renewal options are exercised) in each of the fiscal years shown,
as of January 30,
1999:29, 2000:
Year Leases Year Leases# of # of
YEAR LEASES YEAR LEASES
---- ------ ---- ------
Trans Trans
World Camelot World Camelot
----- ------- ----- -------
1999 81 692000 184 2004 146
2001 116 2005 65
2002 99 2006 31
2003 76 58
2000 69 53 2004 54 81
2001 48 75 2005 16 46
2002 53 47 2006133 2007 & Beyond 104 56193
The Company expects that as these leases expire, it will be able either to
obtain renewal leases, if desired, or to obtain leases for other suitable
locations.
Certain of the stores scheduled to close will do so upon the
expiration of the applicable store lease. In addition, Camelot owns two of
the Spec's Music store locations.
Corporate Offices and Distribution Center Facility
- --------------------------------------------------CORPORATE OFFICES AND DISTRIBUTION CENTER FACILITIES
The Company leases its Albany, New York distribution facility and corporate
office space from its largest shareholder and Chief Executive Officer under
three capital leases that extend through the year 2015. All three leases are at
fixed rentals with provisions for biennial increases based upon increases in the
Consumer Price Index. Under such leases, the Company pays all property taxes,
insurance and maintenance. The office portion of the facility is comprised of
approximately 38,00040,300 square feet. The distribution center portion is comprised
of approximately 140,000128,100 square feet. CamelotThe Company owns its 200,000236,600 square foot
distribution center and 40,00059,200 square feet of commercial office space in North
Canton, Ohio.
The Company leases an 83,00082,000 square foot facility in Johnstown, New York, where
it manufactures its store fixtures. The three-year operating lease expires in June 2001.December
2000. The Company also leases 13,00020,700 square feet of commercial office space in
Albany, New York. The five-year operatingThere is currently no written lease expires in November 2002.
The Company's corporate offices will remain in its existing Albany, New York
location and the Company will continue to operate both distribution centers.
Itemfor this facility.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to various claims, legal actions, and complaints arising
in the ordinary course of its business, including pre-petition assessments by
the Internal Revenue Service ("IRS") aggregating approximately $7.9 million
and relating to Camelot's corporate-owned life insurance program. No judgment
has nobeen rendered regarding these IRS assessments as of January 29, 2000. A
trial to decide the matter began in March 2000 in the Federal District Court
for the District of Delaware. A decision is expected to be rendered in the
third or fourth quarter of fiscal 2000. In the event that a judgment is
rendered against the Company in the full amount of the proposed assessment,
the Company's results of operations would be materially adversely affected
with a charge to earnings of approximately $7.9 million plus interest since
January 1998. In the opinion of management, the IRS assessments and all other
claims, legal actions and complaints are without merit or involve such amounts
that unfavorable disposition will not have a material legal proceedings pending against it.
Itemimpact on the financial
position, results of operations or cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders by Trans World during the fourth
quarter of the fiscal year ended January 30, 1999.29, 2000.
7
PART II
ItemITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information.MARKET INFORMATION. The Company's Common Stock is tradedtrades on the
over-the-counter market and quoted on the Nasdaq NationalThe NASDAQ Stock Market
under the symbol "TWMC." As of January 30, 1999,29, 2000, there were approximately 4,8006,900
shareholders of record. The following table sets forth high and low last
reported sale prices, adjusted for stock splits, for each fiscal quarter during
the period from February 1, 19971998 through April 23, 1999.
Closing
Sales
Prices
High Low
1997
1st Quarter $4.13 $2.42
2nd Quarter 6.42 3.96
3rd Quarter 10.92 6.04
4th Quarter 18.75 9.75
1998
1st Quarter $21.96 $16.00
2nd Quarter 29.58 18.25
3rd Quarter 26.75 11.33
4th Quarter 24.38 13.25
1999
1st Quarter
(through
April 23, 1999) $15.25 $9.63
26, 2000.
CLOSING
SALES
PRICES
High Low
1998
1st Quarter $21.96 $ 16.00
2nd Quarter 29.58 18.25
3rd Quarter 26.75 11.33
4th Quarter 24.38 13.25
1999
1st Quarter $15.75 $ 9.63
2nd Quarter 15.25 10.44
3rd Quarter 13.13 10.19
4th Quarter 12.25 9.25
2000
1st Quarter (through
April 26, 2000) $10.69 $ 9.25
On April 23, 1999,26, 2000, the last reported sale price on the Common Stock on the
NasdaqNASDAQ National Market was $14.38.$10.25.
Options for the Company's Common Stock trade on the Chicago Board Options
Exchange and the American Stock Exchange.
Dividend Policy.DIVIDEND POLICY: The Company has never declared or paid cash dividends on its
Common Stock. The Company's credit agreement currently allows the Company to
pay a cash dividend once in each calendar year. Such dividends would be
restricted to ten percent of the most recent fiscal year's consolidated net
income and could only be paid if, after dividendany payment of dividends, the Company
maintains $25 million of available borrowingsavailability under the credit agreement. Any future
determination as to the payment of dividends will depend upon capital
requirements and limitations imposed by the Company's credit agreement and
such other factors as the board of directors of the Company may consider.
8
ItemITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data and other
operating information of the Company.Company and gives retroactive effect to the
acquisition of Camelot for the periods subsequent to its "fresh-start
reporting" on January 31, 1998, upon its reemergence from bankruptcy. The
acquisition was accounted for using the pooling-of-interests method of
accounting. The selected income statement and balance sheet data for the five
fiscal years ended January 30, 199929, 2000 set forth below are derived from the
audited consolidated financial statements of the Company. Portions of the restructuring charges for the years ended February
3, 1996 and January 28, 1995 have been reclassified and the restructuring
charge for the year ended February 3, 1996 has been restated, as discussed in
Form 10-K/A filed with the Securities and Exchange Commission on March 31,
1999. Each fiscal year of
the Company consisted of 52 weeks except the fiscal year ended February 3,
1996, which consisted of 53 weeks. All share and per share amounts have been
adjusted for stock splits. The information is only a summary and you should be
read it in conjunction with the Company's audited consolidated financial
statements and related notes and other financial information included herein
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Fiscal Year Ended
JanuaryFISCAL YEAR ENDED
-------------------------------------------------------------------
JANUARY 29, JANUARY 30, JanuaryJANUARY 31, FebruaryFEBRUARY 1, FebruaryFEBRUARY 3,
January 28,2000 1999 1998 1997 1996
1995
------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA: (in thousands, except per share and store data)
INCOME STATEMENT DATA:
Sales $698,469$1,358,132 $1,282,385 $571,314 $481,657 $517,046
$536,840
Cost of sales (1) 434,406858,588 796,311 361,422 308,952 347,554
345,720
---------------------------------------------------------------------------------------------------------------------------
Gross profit 264,063499,544 486,074 209,892 172,705 169,492 191,120
Selling, general and
administrative expenses 196,437371,998 372,886 170,834 150,218 168,313
175,569
RestructuringCamelot merger-related costs (1) 25,473 --- --- --- ---
Asset impairment charge and
impairment
chargesrestructuring charge
(reversal), net (1) (492)(2) --- 1,537 --- --- 24,204
16,702
---------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 68,118102,073 111,651 39,058 22,487 (23,025)
(1,151)
Interest expense 2,9493,496 4,989 5,148 12,110 15,201 10,058
Other expenses (income), net (1,408)(4,086) (2,221) (153) (1,343) (979)
(518)
---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes 66,577102,663 108,883 34,063 11,720 (37,247) (10,691)
Income tax expense (benefit) 25,96541,270 47,873 13,489 4,618 (13,431)
(4,435)
----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $40,612$61,393 $61,010 $20,574 $7,102 ($23,816)
($6,256)
============================================================================================================================
Basic earnings (loss) per share $1.28$1.17 $1.19 $0.70 $0.24 ($0.82)
($0.21)
============================================================================================================================
Weighted average number
of shares outstanding 31,779outstanding-basic 52,457 51,105 29,483 29,271 29,178
29,103
============================================================================================================================
Diluted earnings (loss) per share $1.20$1.15 $1.14 $0.66 $0.24 ($0.82)
($0.21)
============================================================================================================================
Weighted average number
of shares outstanding 33,737outstanding-diluted 53,354 53,530 31,032 29,697 29,178
29,103
============================================================================================================================
BALANCE SHEET DATA(at the end of the period):DATA: (AT THE END OF THE PERIOD)
Working capital $135,404$303,562 $274,535 $88,974 $80,368 $78,773
$93,431
Total assets 435,686956,410 798,610 374,019 311,610 391,888 426,939
Current portion of long-term
obligations 2,8025,311 4,802 99 9,557 3,420
6,618
Long-term obligations 16,06519,461 36,065 41,409 50,490 60,364
66,441
Shareholders' equity 211,983494,173 432,376 124,522 102,919 95,661 119,477
OPERATING DATA:
Store Count (open at end of period):
Mall stores 313723 741 340 357 379
431
Freestanding stores 188244 247 199 122 163
253
---------------------------------------------------------------------------------------------------------------------------
Total stores 501967 988 539 479 542 684
Comparable store sales increase
(decrease) (2)(3) 2.0% 7.5% 10.2% 3.6% (3.5%) 1.1%(3.5)%
Total square footage (in thousands) 2,5144,913 4,693 2,442 2,008 2,140 2,544
(1) The restructuring and impairment charges (reversal), net, during the years
ended February 3, 1996 and January 28, 1995, included the write-down of
assets, estimated cash payments to landlords for the early termination of
operating leases, and early termination benefits. The charges also included
estimated professional fees. Inventory-related costs, including the cost of
returning merchandise after the store closes, are included in cost of sales.
During the year ended January 30, 1999, restructuring and impairment charges
(reversal), net, included a reversal of the remaining balance of $2.2 million
in the store closing reserve originally established during the fiscal year
ended February 3, 1996, and an asset impairment charge of $1.7 million to
write down the carrying amount of certain fixed assets at stores, primarily
leasehold improvements. See notes 1 and 2 to the consolidated financial
statements.
(2) A store is included in comparable store sales calculations at the
beginning of its 13th full month of operation.
9
Item(1) THE CAMELOT MERGER-RELATED COSTS INCLUDED THE WRITE-OFF OF THE BOOK
VALUE OF RETIRED ASSETS, PROFESSIONAL FEES ASSOCIATED WITH THE
COMPLETION OF THE MERGER, SEVERANCE COSTS, JOINT PROXY PRINTING AND
DISTRIBUTION COSTS, AND REGULATORY FILING FEES.
(2) THE ASSET IMPAIRMENT CHARGE AND RESTRUCTURING CHARGE (REVERSAL), NET,
DURING THE YEAR ENDED JANUARY 30, 1999, INCLUDED AN ASSET IMPAIRMENT
CHARGE OF $3.7 MILLION TO WRITE DOWN THE CARRYING AMOUNT OF CERTAIN
FIXED ASSETS AT STORES, PRIMARILY LEASEHOLD IMPROVEMENTS, AND THE
ONE-TIME REVERSAL OF THE REMAINING BALANCE OF $2.2 MILLION IN THE STORE
CLOSING RESERVE ORIGINALLY ESTABLISHED DURING THE FISCAL YEAR ENDED
FEBRUARY 3, 1996. SEE NOTES 1 AND 2 TO THE CONSOLIDATED FINANCIAL
STATEMENTS. DURING THE YEAR ENDED FEBRUARY 3, 1996, IT INCLUDED THE
WRITE-DOWN OF ASSETS, ESTIMATED CASH PAYMENTS TO LANDLORDS FOR THE EARLY
TERMINATION OF OPERATING LEASES, EARLY TERMINATION BENEFITS AND
ESTIMATED PROFESSIONAL FEES. INVENTORY-RELATED COSTS, INCLUDING THE COST
OF RETURNING MERCHANDISE AFTER THE STORE CLOSES, ARE INCLUDED IN COST OF
SALES
(3) A STORE IS INCLUDED IN COMPARABLE STORE SALES CALCULATIONS AT THE
BEGINNING OF ITS 13TH FULL MONTH OF OPERATION.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is an analysis of the Company's results of operations, liquidity
and capital resources. To the extent that such analysis contains statements
which are not of a historical nature, such statements are forward-looking
statements, which involve risks and uncertainties. These risks include, but are
not limited to, changes in the competitive environment for the Company's
merchandise, including the entry or exit of non-traditional retailers of the
Company's merchandise to or from its markets; the release by the music industry
of an increased or decreased number of "hit releases," general economic factors
in markets where the Company's merchandise areis 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 29, January 30, January 31,
February 1,2000 1999 1998
1997
-------------------------------------------------------------------------------------
Sales 100.0% 100.0% 100.0%
Gross profit 37.8%36.8% 37.9% 36.7% 35.9%
Selling, general and
administrative expenses 28.1%27.4% 29.1% 29.9%
31.2%Camelot merger-related costs 1.9% --- ---
Restructuring charge reversal and
impairment charge, net 0.0% - -
-------------------------------------------------- 0.1% ---
--------------------------------------
Income from operations 9.7%7.5% 8.7% 6.8% 4.7%
Interest expense 0.3% 0.4% 0.8% 2.5%
Other expenses (income), net (0.3)% (0.2)% 0.0%
(0.3)%
-------------------------------------------------------------------------------------
Income before income taxes 9.5%7.5% 8.5% 6.0% 2.5%
Income tax expense 3.0% 3.7% 2.4%
1.0%
-------------------------------------------------------------------------------------
Net income 5.8%4.5% 4.8% 3.6%
1.5%
=====================================================================================
Change in comparable store sales 2.0% 7.5% 10.2%
3.6%
=====================================================================================
Fiscal Year Ended JanuaryFISCAL YEAR ENDED JANUARY 29, 2000 ("1999")
COMPARED TO FISCAL YEAR ENDED JANUARY 30, 1999 ("1998")
Compared to Fiscal Year Ended January 31, 1998 ("1997")
Sales.SALES. The Company's sales increased $127.2$75.7 million, or 22.3%5.9%, from 1997.1998. The
increase was primarily attributable to a comparable store sales increase of 7.5%2.0%
and the addition of approximately 220,000 square feet of retail selling space
through the opening of 34 stores and relocation of 46 stores, which was
partially offset by the closing of 55 stores. Management attributes the
comparable store sales increase to its focus on customer service, superior
retail locations, inventory and merchandise presentation.
For 1999, comparable store sales increased 1.6% for mall stores and 4.2% for
freestanding stores. By merchandise category, comparable store sales
increased 1.1% in music, 9.9% in video and decreased 4.5% in other
merchandise.
GROSS PROFIT. Gross profit, as a percentage of sales, decreased to 36.8% in
1999 from 37.9% in 1998 primarily as a result of higher inventory shrinkage in
the acquired Camelot stores. The Company has taken action to reduce shrink at
the Camelot stores, including implementing policies and procedures that have
successfully kept shrink at reduced levels for the Company in the past.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A, as a percentage of sales,
decreased to 27.4% in 1999 from 29.1% in 1998. The 1.7% decrease can be
attributed to the leverage of SG&A on the total sales increase and the reduction
of corporate overhead expenses through the consolidation of the Camelot
corporate offices.
11
CAMELOT MERGER-RELATED COSTS. The Camelot merger costs, net, represents the
one-time charge of $25.5 million for costs directly related to completing the
merger with Camelot Music Holdings, Inc. The costs included the write-off of the
book value of retired assets, professional fees associated with the completion
of the merger, severance costs, joint proxy printing and distribution costs, and
regulatory filing fees.
INTEREST EXPENSE. Interest expense decreased from $5.0 million in 1998 to $3.5
million in 1999. The decrease is due to lower average outstanding borrowings and
lower interest rates.
INCOME TAX EXPENSE. The effective income tax rate was 40.2% in 1999. See Note 6
of Notes to Consolidated Financial Statements for a reconciliation of the
statutory tax rate to the Company's effective tax rate.
NET INCOME. In 1999, the Company's net income increased to $61.4 million
compared to a net income of $61.0 million in 1998. Excluding the one-time
Camelot merger-related costs, pro forma 1999 net income is $76.6 million. The
improved bottom line performance as compared to 1998 can be attributed to the
improved leverage of SG&A expenses due to higher sales and the reduction of
corporate overhead expenses.
FISCAL YEAR ENDED JANUARY 30, 1999 ("1998")
COMPARED TO FISCAL YEAR ENDED JANUARY 31, 1998 ("1997")
SALES. The Company's sales increased $711.1 million, or 124.5%, from 1997.
The increase was primarily attributable to the retroactive effect of the
acquisition of Camelot for the periods subsequent to its "fresh-start
reporting" on January 31, 1998, upon its reemergence from bankruptcy, a
comparable store sales increase of 7.5% and the sales increase resulting from
the inclusion for a full year of 90 StrawberriesStrawberries' stores acquired in October
1997, and the opening of 56 stores,
partially offset by the closing of 94 stores. Management attributes the
comparable store sales increase primarily to its strategic decision to
eliminate unprofitable stores and focus on customer service, superior retail
locations, inventory management and merchandise presentation.1997.
For 1998, comparable store sales increased 6.9% for mall stores and 9.7% for
freestanding stores. By merchandise configuration,category, comparable store sales increased
6.6% in music, 10.2% in video and 10.2% in other merchandise.
Gross Profit.GROSS PROFIT. Gross profit, as a percentage of sales, increased to 37.8%37.9% in 1998
from 36.7% in 1997 as a result of reduced merchandiseinventory shrinkage, and increased
purchase discounts combined withand a strong performance from higher margin merchandise
categories.
Selling, General and Administrative Expenses.SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A, as a percentage of sales,
decreased to 28.1%29.1% in 1998 from 29.9% in 1997. The 1.8%0.8% decrease can be
attributed to the leverage of SG&A expenses on the 7.5% comparable store sales
increase, as well as the overall sales increase.
Restructuring Charge Reversalincreased sales.
IMPAIRMENT CHARGE AND RESTRUCTURING CHARGE REVERSAL, NET. The impairment
charge and Impairment Charge, net. Restructuringrestructuring charge reversal, and impairment charge, net, represents the one-time reversal
of the $2.2 million reserve remaining from the restructuring charge taken for
the 1995 restructuring program which was completed during the fourth quarter
of 1998. This was offset by a $1.7$3.7 million
charge taken related to the impairment of fixed assets at certain stores primarily leasehold improvements,
where the carrying amount of such assets exceeded their estimated fair value.
Interest Expense.This was offset by a one-time reversal of a $2.2 million reserve remaining
from restructuring charges taken in 1995. The restructuring was completed
during the fourth quarter of 1998.
INTEREST EXPENSE. Interest expense decreased from $5.1 million in 1997 to $2.9$5.0
million in 1998. The decrease is due to lower average outstanding borrowings
resulting from the equity offering in May 1998, and lowerpartially offset by interest rates dueon
long-term debt held by Camelot Music related to the refinancing completed during 1997.
Income Tax Expense.Spec's acquisition.
INCOME TAX EXPENSE. The effective income tax rate was 39.0%44.0% in 1998. See Note 46
of Notes to Consolidated Financial Statements for a reconciliation of the
statutory tax rate to the Company's effective tax rate.
Net Income.NET INCOME. In 1998, the Company's net income increased to $40.6$61.0 million
compared to a net income of $20.6 million in 1997. The improved bottom line
performance can be attributed to the merger with Camelot in April 1999 with
"fresh-start reporting" effective for periods subsequent to January 31, 1998,
and the profitability of the additional stores.new stores opened in 1998. The merger
with Camelot added $20.4 million in net income in 1998. Also, the Company
benefited from a comparable store sales increase, higher gross margin rate and
improved leverage of SG&A expenses.
Fiscal Year Ended January 31, 1998 ("1997")
Compared to Fiscal Year Ended February 1, 1997 ("1996")
Sales. The Company's sales increased $89.7 million, or 18.6%, from 1996. The
increase was primarily attributable to a comparable store sales increase of
10.2%, a sales increase of 8.4% resulting from the acquisition of 90
Strawberries stores in October 1997, and the opening of 48 stores partially
offset by the closing of 78 stores. Management attributes the comparable
store sales increase primarily to its strategic decision to eliminate
unprofitable stores and focus on customer service, superior retail locations,
inventory management and merchandise presentation. For 1997, comparable store
sales increased 11.0% for mall stores and 9.6% for freestanding stores. By
merchandise configuration, comparable store sales increased 11.4% in music and
2.6% in video.
Gross Profit. Gross profit, as a percentage of sales, increased to 36.7% in
1997 from 35.9% in 1996 as a result of reduced merchandise shrinkage and
increased purchase discounts combined with a strong performance from higher
margin catalog sales.
Selling, General and Administrative Expenses. SG&A, as a percentage of sales,
decreased to 29.9% in 1997 from 31.2% in 1996. The 1.3% decrease can be
attributed to the leverage of SG&A expenses on the 10.2% comparable store
sales increase, as well as the overall sales increase.
Interest Expense. Interest expense decreased 57.5% to $5.1 million in 1997
from $12.1 million in 1996. The decrease is due to lower average outstanding
borrowings and lower interest rates due to the refinancing completed during
the year.
Income Tax Expense. The effective income tax rate was 39.6% in 1997. See
Note 4 of Notes to Consolidated Financial Statements for a reconciliation of
the statutory tax rate to the Company's effective tax rate.
Net Income. In 1997, the Company's net income increased to $20.6 million
compared to a net income of $7.1 million in 1996. The improved bottom line
performance can be attributed to the profitability of the additional stores
and the ongoing success of the Company's restructuring plan. Additionally,
the Company benefited from a comparable store sales increase, higher gross
margin rate and improved leverage of SG&A expenses.leverage.
12
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. During 1998, cash flow from operations and the proceeds from a
public stock offering were theLIQUIDITY AND CAPITAL RESOURCES. The Company's primary sources of liquidity. On May
1, 1998, theworking
capital are cash flows from operations and borrowings under its revolving
credit facility. The Company sold an additional 2.25 million sharesended fiscal 1999 with cash balances of
its common
stock in a public offering for approximately $37 million, net of issuance
costs. A portion of the proceeds was used to repay long-term debt and the
balance of the proceeds was used for general corporate purposes, including
investments in additional stores, fixtures and inventory.
During 1998, cash provided by operations was $41.6$280.0 million, compared to $93.7$139.4 million for 1997.at the end of 1998.
The decreaseincrease was substantially due to an increase in cash generated from operations. Cash
provided by operations was $212.1 million in 1999 compared to $77.7 million
in 1998. The increase was primarily related to improved inventory purchasing
activities, as reflected by the net change in inventory and the timingaccounts payable.
The net change in inventory and accounts payable was a net cash inflow of
payments$121.4 million in 1999, as compared to vendors for the merchandise inventory
purchases prior to and throughout the Christmas holiday season.a net cash outflow of $55.8 million in
1998. During 1998,1999, the Company's accounts payable balance decreased $3.5increased $132.7
million, compared to an increase in the balance of $42.8$17.8 million (excludingduring 1998.
The increase in accounts payable is due to improved payment terms for
inventory purchased during the effectholiday season. Inventory increased $11.3
million in 1999, as compared to a $73.6 million increase in 1998. The large
increase in inventory during 1998 was due to increased inventory requirements
for stores acquired as part of the acquisitions of Spec's and The Wall.
Cash used in financing activities was $18.2 million in 1999, as compared to a
net cash inflow of $38.5 million in 1998. In 1999, the primary uses of cash
were a payment of $22.0 million to payoff the remaining debt associated with
the Spec's acquisition and $11.5 million to repurchase outstanding shares of
the Company's common stock under a program authorized by the Board of
Directors on January 7, 2000. As of January 29, 2000, the Company had
purchased approximately 1.1 million shares of the 5.0 million shares
authorized by the Board. During 1998, the two largest sources of cash were
$36.6 million received in a public offering of its common stock and $25.0
million borrowed for the acquisition of Strawberries, Inc.) during 1997. The increase in payables at
fiscal year end 1997 was primarily related to the acquisitionSpec's, partially offset by a $38.3
million repayment of inventory for
the Strawberries stores acquired in October 1997.long-term debt.
The Company ended fiscal 1998 with cash balances of approximately $116.4
million compared to 1997, when the Company had cash balances of $94.7 million.
In both years, the Company had no short-term borrowings outstanding at
year-end.
In July 1997, the Company entered intohas a three-year $100 million secured revolving credit facility
with Congress Financial Corporation.Corporation that expires in July 2000 and
automatically renews on a year-to-year basis thereafter at the discretion of
both parties. The Company fully expects to extend the current facility for three
more years. 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,average lending
rate, combined with lower borrowing needs, was responsible for the Company's
interest expense decreasing to $2.9$3.5 million for the year endedin 1999 from $5.0 million in
1998. As of January 29, 2000 and January 30, 1999, from $5.1the Company had $0 and
$20.0 million for the year ended January 31, 1998.of long-term borrowings outstanding, respectively.
The Revolving Credit Facility contains certain restrictive provisions,
including provisions governing cash dividends and acquisitions, is
securedcollateralized by merchandise inventory and has a minimum net worth covenant.
On January 30,
1999,29, 2000, the Company had no outstanding borrowings under the
Revolving Credit Facility, and $100 million was available.
Capital Expenditures.CAPITAL EXPENDITURES. Most of the Company's capital expenditures are for new
store expansionstores and the relocation of existing stores. The Company typically finances its
capital expenditures through internallycash generated cash and
borrowings under its revolving credit facility. In addition, thefrom operations. The Company may
also receive financing from landlords in the form of construction allowances or
rent concessions for a portion of the capital expenditure.concessions. Total capital expenditures were approximately $39.4$51.2 million in
1998. Included in this
figure was1999. This includes approximately $12.4$9.9 million related to the development and installation of a
new point-of-sale ("POS") system. The system was rolled out
to allin the Camelot stores during the second quarter ofacquired in April 1999.
In fiscal 1998. The remaining
expenditures were related to new stores and store remodels and
reconfigurations.
In 1999,2000, the Company plans to spend approximately $32.0$35.0 million, net of
construction allowances, for additions to fixed assets.
Provision For Business Restructuring. The Company recorded a pre-tax
restructuring charge of $33.8 million in 1995 to reflect the anticipated costs
associated with a program to close 163 stores. The restructuring charge
included the write-down of fixed assets, estimated cash payments to landlords
for the early termination of operating leases, inventory-related costs
(including the cost for returning all remaining merchandise after the store
was closed), and employee termination benefits. The charge also included
estimated professional fees related to the development of the store closing
plan and the negotiations with landlords related to the termination of leases,
a provision for exiting the rental video store format, the write-off of
goodwill related to a previous acquisition and a provision for closing the
Company's fixture manufacturing operation. Inventory-related costs have been
included in cost of sales in the accompanying consolidated statements of
income.
An analysis of the amounts comprising the restructuring charge and the charges
against the related reserve for each year in the four-year period ended
January 30, 1999 are outlined below:
Charges Balance Charges Balance Charges Balance Charges
1995 against as of against as of against as of against Remaining Reserve
Reserve Reserve 2/3/96 Reserve 2/1/97 Reserve 1/31/98 Reserve Balance Reversal
--------------------------------------------------------------------------------------- --------
(in thousands)
Leasehold improvements $6,660 $6,660 --- --- --- --- --- --- --- ---
Furniture and fixtures 3,228 3,228 --- --- --- --- --- --- --- ---
Video rental assets 4,174 --- 4,174 1,078 3,096 25 3,071 3,023 48 (48)
Goodwill 339 339 --- --- --- --- --- --- --- ---
--------------------------------------------------------------------------------------- --------
Non cash write-offs 14,401 10,227 4,174 1,078 3,096 25 3,071 3,023 48 (48)
--------------------------------------------------------------------------------------- --------
Lease obligations 7,540 --- 7,540 2,627 4,913 905 4,008 2,855 1,153 (1,153)
Inventory-related costs 6,800 --- 6,800 3,421 3,379 2,769 610 610 --- ---
Termination benefits 976 69 907 88 819 16 803 4 799 (799)
Professional fees 2,500 --- 2,500 1,632 868 711 157 20 137 (137)
Other costs 1,600 806 794 122 672 629 43 23 20 (20)
--------------------------------------------------------------------------------------- --------
Cash outflows 19,416 875 18,541 7,890 10,651 5,030 5,621 3,512 2,109 (2,109)
--------------------------------------------------------------------------------------- --------
Total $33,817 $11,102 $22,715 $8,968 $13,747 $5,055 $8,692 $6,535 $2,157 $(2,157)
======================================================================================= ========
The Company completed the 1995 restructuring program in 1998, resulting in the
closure of 191 stores (versus an original plan of 163 stores). The remaining
balance in the store closing reserve of $2.2 million was credited to
operations in the 4th quarter of 1998.
In determining the components of the reserve, management analyzed all aspects
of the restructuring plan and the costs that would be incurred. The write-off
of leasehold improvements and furniture and fixtures represented the estimated
net book value of these items at the forecasted closing date. In determining
the provision for lease obligations, the Company considered the amount of time
remaining on each store's lease and estimated the amount necessary for either
buying out the lease or continued rent payments subsequent to store closure.
Inventory-related costs include the cost to pack and ship the inventory on
hand after the closing of the store as well as the penalty paid to the vendor
for additional merchandise returns resulting from the restructuring.
Termination benefits represented the severance payments expected to be made to
terminated employees. Professional fees represented amounts expected to be
paid to advisors related to the development of the store closing plan and the
negotiations with landlords related to the termination of leases. Payments to
lenders for the waiver of covenant violations totaling $1.6 million were
included in selling, general and administrative expenses in the 1995
consolidated statement of income.
The cash outflows for the restructuring was financed from operating cash flows
and the liquidation of merchandise inventory from the closed stores. The
timing of store closures depended on the Company's ability to negotiate
reasonable lease termination agreements. The restructuring reserve balance is
included in the accompanying balance sheets under the caption "store closing
reserve."
Sales related to stores that were closed as part of the 1995 restructuring
program were $9.0 million, $19.5 million and $18.9 million in 1998, 1997 and
1996, respectively, in the year of closure. Store operating losses, excluding
corporate allocations, related to stores that were closed were $322,000,
$736,000 and $753,000 in 1998, 1997 and 1996, respectively.
The provision for termination benefits was based on the expectation that 163
employees would be terminated in connection with the restructuring program.
Through January 30, 1999, 55 employees had been terminated. The Company did
not terminate as many employees as originally planned because higher than
normal levels of attrition occurring after the announcement of the
restructuring resulted in a reduced need for involuntary terminations.
Subsequent to the adoption of the restructuring program, improving economic
conditions in certain markets, improvement in individual store performance and
the inability to negotiate reasonable lease termination agreements have led
the Company to keep open certain stores that were originally expected to be
closed. The Company also decided not to close its fixture manufacturing
operation. During 1998, a total of 21 stores were removed from the list of
stores expected to be closed. Conversely, deteriorating economic conditions
and store performance in certain markets have led the Company to close certain
stores that were not originally expected to be closed. During 1998, no stores
were added to the list of stores to be closed. In addition, the timing of
store closures has also been affected by the ability or inability to negotiate
reasonable lease termination agreements. The net effect of changes made to
the timing of store closures and the stores to be closed under the 1995
restructuring program has not been material. The restructuring program was
completed January 30, 1999, and the remaining balance of $2.2 million in the
store closing reserve was credited to operations.
Seasonality.SEASONALITY. The Company's business is highly seasonal, with the highest sales
and earnings occurring in the fourth fiscal quarter. See Note 1112 of the Notes to
Consolidated Financial Statements for quarterly financial highlights.
Year 2000 Compliance. The Company has completed an assessmentACCOUNTING POLICIES. Statement of the business
risks related to the Year 2000 issue. The results of the assessment indicated
that:
- - awareness of Year 2000 issues is well known throughout the Company;
- - the assessment of Year 2000 sensitive items is complete;
- - a list of items and business relationships sensitive to the Year 2000 issue
has been compiled;
- - renovation of the core information technology ("IT") systems has been
completed;
- - third-party compliance tracking has begun; and
- - verification of embedded chip ("non-IT") system readiness for Year 2000
compliance is ready to begin.
The Company's Year 2000 issue remediation process includes the following
phases: Awareness, Assessment, Renovation, Validation, and Implementation.
As indicated above, the Awareness, Assessment and Renovation phases are
complete. The Awareness phase included establishing an internal Year 2000
committee, interviewing key Company personnel at all levels, including those
at the stores, distribution center and home office, and vendor compliance
tracking. Activities in the Assessment phase included contacting merchandise
vendors regarding their Year 2000 remediation activities, discussions with the
Company's software vendors and service providers, identification of all source
code and all imbedded chip logic that could contain date logic, analyzing
source codes for the Company systems identifying each individual occurrence of
date logic, and simulating the Year 2000 environment by rolling forward the
date in test files of its principal IT systems. For the Renovation phase, all
core IT system programming modifications have been completed by the Company's
systems development staff. The system programming modifications included
upgrading the distribution, inventory management and accounting systems and
installation of new Year 2000 compliant POS registers and software.
Installation of the new POS system and software in the Trans World stores was
completed during the second quarter of fiscal 1998. Replacements for the
other (non-core) IT systems are being implemented on schedule. The non-core
IT systems being replaced include a system for tracking the opening of new
stores and a system for managing lease payments. Validation and
Implementation efforts are underway. Formal systems testing for both IT and
non-IT systems is expected to be completed by the end of the second quarter of
fiscal 1999. In order to complete the Validation and Implementation phases,
the Company will process daily, weekly and monthly transactions on the main
corporate IT systems platform, IBM AS/400. The compliance testing will be
completed in a dedicated environment within the AS/400 to assure acceptance of
all transactions in the year 2000.
The Company is exposed to both internal and external Year 2000 risks.
Internal risks exist due to the Company's dependence on its IT and non-IT
systems. The Company is dependent on its IT and non-IT systems for many of
its everyday operations including inventory management, merchandise
distribution, cash management, accounting and financial reporting. The
Company utilizes a variety of vendors for its system needs. The Company has
initiated discussions with its vendors and monitored their Year 2000
compliance programs and the compliance of their merchandise or services with
required standards. Although the majority of these vendors represent that
their products are Year 2000 compliant, the Company will perform testing to
validate the vendor representations no later than the second quarter of fiscal
1999. In the normal course of business, the Company replaced its POS register
system with a Year 2000 compliant system during 1998. Preliminary contingency
plans for failure of internal systems include implementing manual procedures
such as the use of manual merchandise picking and shipping to replace
automated distribution center equipment.
External risks are represented by the fact that the Company utilizes
approximately 2,700 different suppliers in the normal course of its business.
Five major merchandise vendors account for approximately 69% of all purchases.
Additionally, 50 other merchandise vendors account for nearly 15% of
purchases. The Company is also dependent on financial institutions for
consolidation of cash collections, and for cash payments. Although the
Company uses its own trucks for shipment of merchandise to approximately 38%
of its stores, the Company does rely on a number of trucking companies for the
remainder of its merchandise distribution. Evaluation of the Company's
vendors' Year 2000 readiness began in the fourth quarter of 1998, and is
expected to be completed by the end of the second quarter of fiscal 1999.
Upon completion of the assessment of vendor readiness, contingency plans will
be developed for all third parties where Year 2000 compliance appears to be at
risk.
The Company presently believes that its most likely worst-case Year 2000
scenarios would relate to the possible failure in one or more geographic
regions of third-party systems over which the Company has no control and for
which it has no ready substitute, such as, but not limited to, power and
telecommunications services. Each Trans World store has a "crash kit" which
allows it to operate without power and telecommunications services and
includes the ability to manually process all sales transactions. However, in
the event of a power disruption, it is highly unlikely that a store would be
open for business due to the lack of lighting and the security-related
concerns. The Company has in place a disaster recovery plan that addresses
recovery from various kinds of disasters, including recovery from significant
interruptions to data flows and distribution capabilities at its data systems
center and distribution center. The Company's disaster recovery plan provides
specific routines for actions, personnel assignments and back-up arrangements
to ensure effective response to a disaster affecting key business functions
including merchandise replenishment, cash management and distribution center
operations. Common routines and back up arrangements include off-site storage
of information, manual processing of critical applications and the
establishment of a chain of communication for key personnel. The Company is
using that plan to further develop specific Year 2000 contingency plans
identified by its third-party assessment phase which will emphasize locating
alternate sources of supply, methods of distribution and ways of processing
information.
The Company's direct costs for its Year 2000 remediation efforts total
$167,000 to date. Anticipated future costs are $590,000, but could include an
additional $600,000 to address Year 2000 issues identified as a result of
remediation testing. These costs do not include expenditures made in the
normal course of business, during 1997 and 1998, to upgrade its distribution,
inventory management and accounting systems, or costs to install new Year 2000
compliant POS registers and software. Future costs will be funded by cash
flows generated from operations.
The Company's estimate of the costs of achieving Year 2000 compliance and the
date by which Year 2000 compliance will be achieved are based on management's
best estimates, which were derived using numerous assumptions about future
events including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no assurance that
these estimates will be achieved, and actual results could differ materially
from these estimates. Specific facts that might cause such material
differences include the availability and cost of personnel trained in Year
2000 remediation work, the ability to locate and correct all relevant computer
codes, the success achieved by the Company's customers and suppliers in
reaching Year 2000 readiness, the timely availability of necessary replacement
items and similar uncertainties.
Accounting Policies. Financial Accounting Standards Board Statement No. 130,
"Reporting Comprehensive Income," issued in June 1997 and effective for fiscal
years ending after December 15, 1997, established standards for reporting and
display of the total net income and the components of all other non-owner
changes in equity, or comprehensive income, in the statement of operations, in
a separate statement of comprehensive income or within the statement of
changes in stockholders' equity. The Company adopted Statement No. 130 at the
beginning of fiscal 1998, and has no items of other comprehensive income.
Financial Accounting Standards Board Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," issued in June 1997 and
effective for fiscal years ending after December 15, 1997, changed the way
companies report selected segment information in annual financial statements
and also requires those companies to report selected segment information in
interim financial statements. The Company adopted Statement No. 131 at the
beginning of fiscal 1998. The adoption had no impact on the Company's
financial presentation because it operates in a single business segment.
Financial Accounting Standards Board Statement(SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," issued
in June 1998 and, as amended, effective for all quarters of fiscal years
beginning after June 15, 1999,2000, will require companies to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Management has evaluatedis currently
evaluating the impact of SFAS No. 133 and anticipates the new rulesadoption of the
statement will not have a material effect on the Company's consolidated
financial statements and concluded that there will be no impact
on its results of operations or its financial position.statements.
The Accounting Standards Executive Committee Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," issued in March 1998 and effective for fiscal years beginning
after December 15, 1998, requires that certain costs of computer software
developed or obtained for internal use be capitalized. The Company will adoptadopted this
statement for the fiscal year beginning January 31, 1999. Management has evaluated theThere was no impact of the application of the new rules on
the Company's consolidated financial statements and concluded that the impact on
its results of operations or its financial position willbecause it did not
be material
because a substantial portion of thedevelop any new software the Company uses is purchased
from outside vendors.internally, nor did it purchase any software.
13
The Accounting Standards Executive Committee Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities," issued in April 1998 and
effective for fiscal years beginning after December 15, 1998, requires start-up
costs and organization costs to be expensed as incurred. The Company will adoptadopted
this statement for the fiscal year beginning January 31, 1999. Management has evaluated theThere was no
impact of the application of the new rules on the Company's consolidated financial statements and concluded that there will be
no impact on its results of operations or its financial position because such
costs arewere already being expensed as incurred.
Dividend Policy.DIVIDEND POLICY: The Company has never declared or paid cash dividends on its
common stock.Common Stock. The Company's credit agreement currently allows the Company to pay
a cash dividend once in each calendar year. These dividends are restricted to
ten percent of the most recent fiscal year's consolidated net income and can
only be paid if, after dividendany payment of dividends, the Company maintains $25
million of available borrowingsavailability under the credit agreement. Any future determination
as to the payment of dividends would depend upon capital requirements and
limitations imposed by the Company's credit agreement and such other factors
as the board of directors of the Company may consider.
ItemITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not hold any derivativefinancial instruments that expose it to
significant market risk and does not engage in hedging activities. Information
about the fair value of financial instruments is included in noteNote 1 of the Notes
to Consolidated Financial Statements.
ItemITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to the Consolidated Financial Statements of the Company is included in
Item 14, and the consolidated financial statements follow the signature page to
this Annual Report on Form 10-K.
The quarterly results of operations are included herein in Note 1112 of the
Consolidated Financial Statements.
ItemITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
PART III
ItemITEM 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 19992000 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after January 30, 1999.29, 2000.
(b) Identification of Executive Officers
Incorporated herein by reference is the information appearing under the caption
"Executive Officers and Compensation" in the Company's definitive Proxy
Statement for the Registrant's 19992000 Annual Meeting of Shareholders to be filed
with the Securities and Exchange Commission within 120 days after January 30, 1999.
Item29,
2000.
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 19992000 Annual Meeting of Shareholders to be filed
with the Securities and Exchange Commission within 120 days after January 30, 1999.
Item29,
2000.
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 19992000 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission within 120 days after January
30, 1999.
Item29, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the information appearing under the caption
"Related Party Transactions" in the Company's definitive Proxy Statement for the
Registrant's 19992000 Annual Meeting of Shareholders to be filed with the Securities
and Exchange Commission within 120 days after January 30,
1999.29, 2000.
15
PART IV
ItemITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
14(a)14(A) (1) Financial Statements
- ------------------------------FINANCIAL STATEMENTS
The consolidated financial statements and notes are listed in the Index to
Financial Statements on page F-1 of this report.
14(a)14(A) (2) Financial Statement Schedules
- ---------------------------------------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)14(A) (3) Exhibits
- ------------------EXHIBITS
Exhibits are as set forth in the "Index to Exhibits" which follows the Notes to
the Consolidated Financial Statements and immediately precedes the exhibits
filed.
14(b) Reports on Form14(B) REPORTS ON FORM 8-K
- -------------------------
On November 2, 1998,January 14, 2000, the Company filed a report on Form 8-K announcingrelated to the signingimplementation
of a definitive agreement to merge with Camelot Music Holdings, Inc.
in a stock-for-stock transaction to be accounted for as a
pooling-of-interests.
14(c) Exhibits
- --------------an Accelerated Stock Repurchase Program.
14(C) EXHIBITS
Exhibits are as set forth in the "Index to Exhibits" which follows the Notes to
the Consolidated Financial Statements and immediately precedes the exhibits
filed.
14(d) Other Financial Statements
- --------------------------------14(D) OTHER FINANCIAL STATEMENTS
Not applicable.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TRANS WORLD ENTERTAINMENT CORPORATION
Date: April 3028 , 19992000 By: /s/ ROBERT J. HIGGINS
-----------------------------------------------------
Robert J. Higgins, PresidentChairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Name Title Date
/s/ ROBERT J. HIGGINS Chairman, President April 30, 1999
- --------------------- and Chief Executive Officer
(Robert J. Higgins) (Principal Executive Officer)
/s/ JOHN J. SULLIVAN Senior Vice President, April 30, 1999
- -------------------- Treasurer and Chief Finanacial
(John J. Sullivan) Officer
(Principal Financial and
Chief Accounting Officer)
/s/ MATTHEW H. MATARASO Secretary and Director April 30 , 1999
- -----------------------
(Matthew H. Mataraso)
/s/ GEORGE W. DOUGAN Director April 30 , 1999
- --------------------
(George W. Dougan)
/s/ CHARLOTTE G. FISCHER Director April 30, 1999
- ------------------------
(Charlotte G. Fischer)
/s/ ISAAC KAUFMAN Director April 30, 1999
- -----------------
(Isaac Kaufman)
/s/ DEAN S. ADLER Director April 30, 1999
- -----------------
(Dean S. Adler)
/s/ DR. JOSEPH G. MORONE Director April 30, 1999
- -------------------------
(Dr. Joseph G. Morone)
/s/ MARTIN E. HANAKA Director April 30, 1999
- --------------------
(Martin E. Hanaka)
/s/ MICHAEL B. SOLOW Director April 30, 1999
NAME TITLE DATE
/S/ ROBERT J. HIGGINS Chairman and Chief Executive Officer April 28, 2000
- --------------------- (Principal Executive Officer)
(Robert J. Higgins)
/S/ JOHN J. SULLIVAN Senior Vice President, Treasurer and Chief Financial Officer April 28, 2000
- -------------------- (Principal Financial and Chief Accounting Officer)
(John J. Sullivan)
/S/ MATTHEW H. MATARASO Secretary and Director April 28, 2000
- -----------------------
(Matthew H. Mataraso)
/S/ GEORGE W. DOUGAN Director April 28, 2000
- --------------------
(George W. Dougan)
/S/ CHARLOTTE G. FISCHER Director April 28, 2000
- ------------------------
(Charlotte G. Fischer)
/S/ ISAAC KAUFMAN Director April 28, 2000
- -----------------
(Isaac Kaufman)
/S/ DEAN S. ADLER Director April 28, 2000
- -----------------
(Dean S. Adler)
/S/ DR. JOSEPH G. MORONE Director April 28, 2000
- -------------------------
(Dr. Joseph G. Morone)
/S/ MARTIN E. HANAKA Director April 28, 2000
- --------------------
(Martin E. Hanaka)
/S/ MICHAEL B. SOLOW Director April 28, 2000
- --------------------
(Michael B. Solow)
/s/ GEORGE R. ZOFFINGER Director April 30, 1999
- -----------------------
(George R. Zoffinger)
17
TRANS WORLD ENTERTAINMENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Form 10-K
Page No.
Independent Auditors' Report F-2
Consolidated Financial StatementsCONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at January 30, 199929, 2000 and January 31, 199830, 1999 F-3
Consolidated Statements of Income - Fiscal years
ended January 29, 2000, January 30, 1999 and January 31, 1998 and February 1, 1997 F-5F-4
Consolidated Statements of Shareholders' Equity - Fiscal years
ended January 29, 2000, January 30, 1999 and January 31, 1998 and February 1, 1997 F-6F-5
Consolidated Statements of Cash Flows - Fiscal years ended
January 29, 2000, January 30, 1999 and January 31, 1998 and February 1, 1997 F-7F-6
Notes to Consolidated Financial Statements F-8F-7
F-1
Report ofREPORT OF KPMG LLP
Independent AuditorsINDEPENDENT AUDITORS
The Board of Directors and Shareholders
Trans World Entertainment Corporation:
We have audited the accompanying consolidated balance sheets of Trans World
Entertainment Corporation and subsidiaries as of January 30, 199929, 2000 and January
31, 1998,30, 1999, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the fiscal years in the three-year period
ended January 30, 1999.29, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Trans World
Entertainment Corporation and subsidiaries as of January 30, 199929, 2000 and January
31, 1998,30, 1999, and the results of their operations and their cash flows for each of
the fiscal years in the three-year period ended January 30, 1999,29, 2000, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Albany, New York
March 19, 1999, except
as to note 12, which is
as of April 22, 199917, 2000
F-2
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
JanuaryJANUARY 29, JANUARY 30,
January 31,2000 1999
1999
---------------------------------------------------------------
ASSETS
CURRENT ASSETS:
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $116,420 $94,732$ 280,026 $ 139,411
Accounts receivable 3,148 3,1055,973 5,800
Merchandise inventory 211,378 189,394437,363 426,078
Deferred tax asset --- 633
Prepaid expenses and other 5,248 3,119
-----------------------------5,203 9,382
-------------------------------
Total current assets 336,194 290,350
-----------------------------
VIDEOCASSETTE RENTAL INVENTORY,728,565 581,304
-------------------------------
FIXED ASSETS, net 1,238 4,099144,694 139,124
DEFERRED TAX ASSET 6,165 4,726
FIXED ASSETS:
Buildings 10,011 7,774
Fixtures and equipment 110,475 87,214
Leasehold improvements 75,239 74,997
-----------------------------
195,725 169,985
Allowances for depreciation
and amortization 106,822 97,917
-----------------------------
88,903 72,068
-----------------------------34,431 29,580
GOODWILL 31,433 33,026
OTHER ASSETS 3,186 2,776
-----------------------------17,287 15,576
-------------------------------
TOTAL ASSETS $435,686 $374,019
=============================
F-3
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
January 30, January 31,
1999 1999
--------------------------------
$ 956,410 $ 798,610
===============================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $159,520 $162,981$ 353,294 $ 220,636
Income taxes payable 12,734 11,15521,908 30,544
Accrued expenses and other 20,144 17,346
Store closing reserve32,021 50,787
Deferred tax liability 12,469 --- 8,692
Current deferred taxes 5,590 1,103
Current portion of long-term debt and capital lease obligations 2,802 99
-----------------------------5,311 4,802
------------------------------
Total current liabilities 200,790 201,376425,003 306,769
------------------------------
LONG-TERM DEBT, less current portion --- 35,00020,000
CAPITAL LEASE OBLIGATIONS, less current portion 19,461 16,065 6,409
OTHER LIABILITIES 6,848 6,712
-----------------------------17,773 23,400
------------------------------
TOTAL LIABILITIES 223,703 249,497
-----------------------------462,237 366,234
------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock ($.010.01 par value; 5,000,000 shares authorized;
none issued.) --- ---
Common stock ($.010.01 par value; 50,000,000200,000,000 shares authorized;
32,842,00053,425,867 shares and 29,723,03652,182,408 shares issued in
fiscal1999 and 1998, and
1997, respectively) 328 297534 522
Additional paid-in capital 72,004 25,287283,932 271,805
Unearned compensation-restrictedcompensation - restricted stock (348) (78) (175)
Treasury stock at cost (105,432(1,177,432 and 106,182105,432 shares in
fiscal1999 and 1998, and 1997,
respectively) (11,855) (390) (394)
Retained earnings 140,119 99,507
-----------------------------221,910 160,517
------------------------------
TOTAL SHAREHOLDERS' EQUITY 211,983 124,522
-----------------------------494,173 432,376
------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $435,686 $374,019
=============================
See Notes to Consolidated Financial Statements.$ 956,410 $ 798,610
==============================
F-4SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Fiscal Year Ended
---------------------------------------------
JanuaryFISCAL YEAR ENDED
JANUARY 29, JANUARY 30, JanuaryJANUARY 31,
February 1,2000 1999 1998 1997
---------------------------------------------
Sales $698,469 $571,314 $481,657$ 1,358,132 $ 1,282,385 $ 571,314
Cost of sales 434,406858,588 796,311 361,422 308,952
---------------------------------------------
Gross profit 264,063499,544 486,074 209,892 172,705
Selling, general and administrative expenses 196,437371,998 372,886 170,834
150,218
RestructuringCamelot merger-related costs, net 25,473 --- ---
Asset impairment charge and restructuring charge reversal, and asset
impairment charge, net (492) --- 1,537 ---
---------------------------------------------
Income from operations 68,118102,073 111,651 39,058 22,487
Interest expense 2,9493,496 4,989 5,148 12,110
Other expense (income), net (1,408)(4,086) (2,221) (153) (1,343)
---------------------------------------------
Income before income taxes 66,577102,663 108,883 34,063 11,720
Income tax expense 25,96541,270 47,873 13,489 4,618
---------------------------------------------
NET INCOME $40,612 $20,574 $7,102$ 61,393 $ 61,010 $ 20,574
=============================================
BASIC EARNINGS PER SHARE $1.28 $0.70 $0.24$ 1.17 $ 1.19 $ 0.70
=============================================
Weighted average number of common shares outstanding 31,779outstanding-basic 52,457 51,105 29,483 29,271
=============================================
DILUTED EARNINGS PER SHARE $1.20 $0.66 $0.24
==============================================
Adjusted weighted$ 1.15 $ 1.14 $ 0.66
=============================================
Weighted average number of common shares outstanding 33,737outstanding-diluted 53,354 53,530 31,032
29,697
==============================================
See Notes to Consolidated Financial Statements.=============================================
F-5SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Unearned
Additional Compensation
Common Paid in Restricted Treasury Retained Shareholders'
Stock Capital Stock Stock Earnings Equity(IN THOUSANDS)
UNEARNED
ADDITIONAL COMPENSATION
COMMON STOCK PAID IN STOCK TREASURY RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL PLANS STOCK EARNINGS EQUITY
------ ---------------- ----------- ------------ -------- -------- -------------
Balance as of February 3, 1996
(29,193,624 shares issued) $292 $24,041 --- $(503) $71,831 $95,6611, 1997 29,429 $ 294 $ 24,344 $ (245) $ (407) $ 78,933 $ 102,919
Issuance of 21,000 shares of treasury stock under
incentive stock programs --- (59) --- 96 --- 37
Issuance of 225,000 shares
of common stock - restricted
stock plan, net 2 350 (245) --- --- 107
Exercise of 10,158
stock options --- 12 --- --- --- 12
Net Income --- --- --- --- 7,102 7,102
- ------------------------------------------------------------------------------------------------------------------------------
Balance as of February 1, 1997
(29,428,782 shares issued) 294 24,344 (245) (407) 78,933 102,919
Issuance of 3,000 shares of
treasury stock under
incentive stock programs --- --- --- 13 --- 13
Amortization of unearned
compensation - restricted stock plan--- --- --- 70 --- --- 70
Exercise of 294,254 stock options and
related tax benefit 294 3 943 --- --- --- 946
Net Income --- --- --- --- --- 20,574 20,574
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance as of January 31, 1998
(29,723,036 shares issued)as previously reported 29,723 297 25,287 (175) (394) 99,507 124,522
IssuanceOpening equity balances of 750 sharesCamelot
upon adoption of "fresh-start"
accounting 19,301 193 194,175 --- --- --- 194,368
- -----------------------------------------------------------------------------------------------------------------------------
Balance as of January 31, 1998, as
restated 49,024 490 219,462 (175) (394) 99,507 318,890
Issuance of treasury stock under
incentive stock programs --- --- 10 --- 4 --- 14
Stock issued --- --- 188 --- --- --- 188
Issuance of 2,250,000 shares of common
stock in a public offering 2,250 23 36,600 --- --- --- 36,623
Amortization of unearned
compensation - restricted stock plan--- --- --- 44 --- --- 44
Issuance of director stock options --- 112--- 346 --- --- --- 112346
Issuance of options under Camelot
1998 Stock Option Plan --- --- 5,112 (5,112) --- --- ---
Amortization of unearned
compensation - Camelot 1998 Stock --- --- --- 5,112 --- --- 5,112
Option Plan
Forfeiture of unearned compensation -
restricted stock plan (1) (52)--- --- (53) 53 --- --- ---
Exercise of 898,993 stock options and
related tax benefit 908 9 10,04710,140 --- --- --- 10,05610,149
Net Income --- --- --- --- 40,612 40,612--- 61,010 61,010
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance as of January 30, 1999 (32,842,00052,182 522 271,805 (78) (390) 160,517 432,376
Issuance of treasury stock under
incentive stock programs --- --- 9 --- 4 --- 13
Repurchase of shares issued) $328 $72,004 $(78) $(390) $140,119 $211,983
==============================================================================================================================
See Notes to Consolidated Financial Statements.of treasury stock --- --- --- --- (11,469) --- (11,469)
Issuance of restricted stock under
incentive stock programs 30 --- 336 (336) --- --- ---
Amortization of unearned
compensation - restricted stock --- --- --- 66 --- --- 66
Issuance of director stock options --- --- 64 --- --- --- 64
Exercise of stock options and
related tax benefit 1,214 12 11,718 --- --- --- 11,730
Net Income --- --- --- --- --- 61,393 61,393
- -----------------------------------------------------------------------------------------------------------------------------
Balance as of January 29, 2000 53,426 $ 534 $ 283,932 $ (348) $(11,855) $ 221,910 $ 494,173
=============================================================================================================================
F-6SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Ended
January(IN THOUSANDS)
FISCAL YEAR ENDED
------------------------------------------
JANUARY 29, JANUARY 30, JanuaryJANUARY 31,
February 1,2000 1999 1998
1997
-------------------------------------------------------------------------------
OPERATING ACTIVITIES:
OPERATING ACTIVITIES:
Net income $40,612$61,393 $61,010 $20,574 $7,102
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 19,47337,709 35,478 16,257
15,225Amortization of financing fees --- 253 ---
Amortization of lease valuations, net (2,765) (388) ---
Reversal of restructuring charge --- (2,157) --- ---
Loss on impairment from fixed assets 1,665 ---6,649 3,694 ---
Stock compensation programs 222143 5,568 83 144
Loss on disposal of assets 3,670 1,560 --- ---
Deferred tax expense 3,0488,251 4,529 1,370 3,023
Changes in operating assets and liabilities:
Accounts receivable (43)(173) (773) 5,868 (747)
Merchandise inventory (21,984)(11,285) (73,557) (9,872) 31,068
Refundable income taxes --- 564 7,744
Prepaid expenses and other (2,129)4,179 (1,422) (408) 439
Other assets (572)(1,272) 178 2,481 (381)
Accounts payable (3,461)132,658 17,788 42,751 (12,322)
Income taxes payable 8,927 11,555 ---(6,261) 26,461 12,119
Accrued expenses and other 2,797(18,766) 5,884 7,344 3,137
Store closing reserve --- (6,535) (5,056)
(10,528)
Other liabilities (1,996) 135 198
1,174
---------------------------------------------------------------------------------
Net cash provided by operating activities 41,558212,134 77,706 93,709
45,078
---------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Acquisition of property and equipment (39,369)(51,234) (57,143) (15,538) (10,198)
Acquisition of businesses, net --- (103,264) (20,901)
Other assets and liabilities, net (2,100) (235) ---
PurchasesDisposal of videocassette rental inventory, net of purchases 23 2,860 685
1,938
----------------------------------------------------------------------------------
Net cash used by investing activities (36,509)(53,311) (157,782) (35,754)
(8,260)
----------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net decrease in revolving line of credit --- --- (65,260)
Payments of long-term debt (35,000)and financing fees (22,000) (38,281) (18,440)
(3,661)Proceeds from long-term debt --- 25,000 ---
Payments of capital lease obligations (4,036) (1,292) (99) (76)
Proceeds from capital lease 9,941 13,651 ---
Payments for purchases of treasury stock (11,469) --- ---
Proceeds from public offering of common stock --- 36,623 --- ---
Exercise of stock options 2,6579,356 2,750 545
12
----------------------------------------------------------------------------------
Net cash provided (used) by financing activities 16,639(18,208) 38,451 (17,994)
(68,985)
----------------------------------------------------------------------------------
Opening cash balance of Camelot upon adoption of "fresh-start" accounting --- 86,304 ---
Net increase (decrease) in cash and cash equivalents 21,688140,615 (41,625) 39,961 (32,167)
Cash and cash equivalents, beginning of year 139,411 94,732 54,771
86,938
----------------------------------------------------------------------------------
Cash and cash equivalents, end of year $116,420$280,026 $139,411 $94,732
$54,771
==================================================================================
Supplemental disclosure of non-cash investing and financing activities:
Issuance of treasury stock under incentive stock programs $13 $14 $13
$37Issuance of restricted shares under restricted stock plan 336 --- ---
Income tax benefit resulting from exercises of stock options 2,374 7,347 400 ---
See Notes to Consolidated Financial Statements.
F-7SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NoteNOTE 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations:NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: Trans World Entertainment Corporation is one of the
largest specialty retailers of music, video and related accessories in the
United States. The Company operates in a single industry segment, the operation
of a chain of retail entertainment stores. At January 30, 1999,29, 2000, the Company
operated 501967 stores in 3344 states, the District of Columbia, Commonwealth of
Puerto Rico and the U.S. Virgin Islands, with a majority of the stores
concentrated in the Eastern half of the United States.
Basis of Presentation:BASIS OF PRESENTATION: The consolidated financial statements consist of Trans
World Entertainment Corporation, its wholly-owned subsidiary, Record Town,
Inc. ("Record Town"), and itsRecord Town's subsidiaries, all of which are wholly
owned. All significant intercompany accounts and transactions have been
eliminated. The preparation of financial statements in conformity with
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:On April 22, 1999, the Company merged with Camelot Music Holdings,
Inc. ("Camelot"). The transaction was accounted for as a
pooling-of-interests. Accordingly, prior period consolidated financial
statements have been restated to include combined results of operations,
financial position and cash flows of Camelot as though it had been a part of
the Company since Camelot's adoption of "fresh-start" accounting on January
31, 1998.
FISCAL YEAR: The Company's fiscal year is a 52-52 or 53-week period ending on the
Saturday nearest to January 31. Fiscal 1999, 1998 and 1997 and 1996 ended January 29,
2000, January 30, 1999 and January 31, 1998, and February 1, 1997, respectively, and each fiscal year
consisted of 52 weeks.
Dividend Policy: The Company has never declared or paid cash dividends on its
common stock. The Company's credit agreement currently allows the Company to
pay a cash dividend once in each calendar year. These dividends are
restricted to ten percent of the most recent fiscal year's consolidated net
income and can only be paid if, after dividend payment, the Company maintains
$25 million of available borrowings under the credit agreement. Any future
determination as to the payment of dividends would depend upon capital
requirements and limitations imposed by the Company's credit agreement and
such other factors as the board of directors of the Company may consider.
Revenue Recognition:REVENUE RECOGNITION: Revenue from sales of merchandise is recognized at the
point of sale to the consumer, at which time payment is tendered. There are no
provisions for uncollectible amounts since payment is received at the time of
sale.
Cash and Cash Equivalents:CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments
purchased with aan original maturity of three months or less to be cash
equivalents.
Merchandise InventoryCONCENTRATION OF CREDIT RISKS: The Company maintains centralized cash management
and Return Costs:investment programs whereby excess cash balances are invested in short-term
funds and money market instruments considered to be cash equivalents. The
Company's investment portfolio is diversified and consists of short-term
investment grade securities consistent with its investment guidelines. These
guidelines include the provision that sufficient liquidity will be maintained to
meet anticipated cash flow needs. The Company maintains cash and cash
equivalents with various major financial institutions. At times, such amounts
may exceed the F.D.I.C. limits. The Company limits the amount of credit
exposure with any one financial institution and believes that no significant
concentration of credit risk exists with respect to cash investments.
CONCENTRATION OF BUSINESS RISKS: The Company purchases inventory for its stores
from approximately 500 suppliers, with approximately 73% of purchases being made
from five suppliers. In the past, the Company has not experienced difficulty in
obtaining satisfactory sources of supply, and management believes that it will
retain access to adequate sources of supply. However, a loss of a major supplier
could cause a loss of sales, which would have an adverse effect on operating
results and also result in a decrease in vendor support for the Company's
advertising programs.
MERCHANDISE INVENTORY AND RETURN COSTS: Inventory is stated at the lower of
cost (first-in, first-out) or market as determined principally by the average cost method. The
Company is entitled to return merchandise purchased from major vendors for
credit against other purchases from these vendors. The vendors often reduce
the credit with a merchandise return charge ranging from 0% to 20% of the
original merchandise purchase price depending on the type of merchandise
being returned. The Company records the merchandise return charges in cost of
sales.
Videocassette Rental Inventory:F-7
VIDEOCASSETTE RENTAL INVENTORY: The cost of videocassette rental tapes is
capitalized and amortized on a straight-line basis over their estimated economic
life with a provision for salvage value. Major movie release additions, which
have a relatively short economic life due to the frequency of rental, are
amortized over twelve months, while other titles are amortized over thirty-six
months. Fixed AssetsDepreciation and Depreciation:amortization expense related to the Company's
videocassette rental inventory totaling $921,000, $1.2 million and $2.2 million
in fiscal 1999, 1998 and 1997, respectively, is included in cost of sales.
FIXED ASSETS AND DEPRECIATION: Fixed assets are stated at cost. Major
improvements and betterments to existing facilities and equipment are
capitalized. Expenditures for maintenance and repairs whichthat do not extend the
life of the applicable asset are charged to expense as incurred. Buildings
are amortizeddepreciated over a 30-year term. Fixtures and equipment are depreciated
using the straight-line method over their estimated useful lives, which range
from three to seven years. Leasehold improvements are amortized using the
straight-line method over the shorter of their estimated useful life or the
related lease term. Primarily all of the Company's operating leases are ten
years in term. Amortization of capital lease assets is included in
depreciation and amortization expense.
F-8
Depreciation and amortization expense related to the Company's videocassette
rental inventory totaling $1.2 million, $2.2 million and $2.5 million in
fiscal 1998, 1997 and 1996, respectively, is included in cost of sales. Also
included in cost of sales is depreciation and amortization expense related to
the Company's distribution center facility and equipment of $1.3 million, $1.1
million and $865,000 in fiscal 1998, 1997 and 1996, respectively. All other
depreciation and amortization of fixed assets is included in selling, general
& administrative expenses. Depreciation and amortization of fixed assets is
included in the condensed consolidated statements of income as follows:
Fiscal Year
1998 1997 1996
-------------------------------
(in thousands)
Cost of sales $1,270 $1,101 $865
================================
Selling, general and
administrative expenses $18,172 $15,115 $14,134
================================
FAIR VALUE OF LONG-LIVED ASSETS: Fixed assets and other long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. During fiscal 1999, the Company
recorded an impairment loss of $6.7 million as part of the Camelot merger
charge for the write-down of certain fixed assets acquired in the merger.
During fiscal 1998, the Company recorded an impairment loss of $1.7$3.7 million
to write-down the carrying amount of fixed assets, at stores, primarily leasehold
improvements, at stores where the estimated future cash flows through the end
of the store's lease were less than the carrying amount of that store's fixed
assets.
Advertising Costs:GOODWILL: Goodwill represents the adjusted amount of the cost of acquisitions in
excess of fair value of net assets acquired in purchase transactions, and is
being amortized on a straight-line basis over estimated useful lives ranging
from 15 to 20 years. The amortization period is determined by taking into
consideration the following factors: the critical market position and
establishment of brand names; the combined store mass of the companies; the
amortization periods generally used in the retail music business; the highly
competitive nature of the business including emerging forms of competition, and
the overall history of profitability of the acquired businesses.
ADVERTISING COSTS: The costs of advertising are expensed in the first period in
which such advertising takes place. Total advertising expense was $10.5$18.8 million,
$8.4$19.2 million and $9.0$8.4 million in fiscal 1999, 1998 and 1997, and 1996,
respectively.
Store Opening and Closing Costs:STORE OPENING AND CLOSING COSTS: Costs associated with opening a store are
expensed as incurred. When it is determined that a store will be closed,
estimated unrecoverable costs are charged to expense. Such costs include the net
book value of abandoned fixtures, equipment, leasehold improvements and a
provision for lease obligations, less estimated sub-rental income. The residual
value of any fixed asset moved to a store as part of a relocation is transferred
to the relocated store.
Income Taxes:INCOME TAXES: Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Earnings Per Share:F-8
EARNINGS PER SHARE: The Company accounts for earnings per share under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share." This standard requires the Company to disclose basic
earnings per share and diluted earnings per share. Basic earnings per share is
calculated by dividing net income by weighted average common shares outstanding.
Diluted earnings per share is calculated by dividing net income by the sum of
the weighted average shares outstanding and additional common shares that would
have been outstanding if the dilutive potential common shares, adjusted in
fiscal 19981999 and 19971998 for the $7.3$2.4 million and $0.4$7.3 million, respectively, tax
benefit resulting from stock option exercise activity, had been issued for the
Company's common stock options from the Company's Stock Option Plans (see Note
6)9). In fiscal 1999, 1998 1997 and 1996,1997, the additional dilutive potential common
shares were 2.00.9 million, 1.52.4 million and 426,000,1.5 million, respectively. As required
by SFAS No. 128, all outstanding common stock options were included even though
their exercise may be contingent upon vesting.
All earnings and loss per share information has been adjusted for a
two-for-one stock split effected in the form of a 100% stock dividend on
December 15, 1997 and a three-for-two stock split effected in the form of a
50% stock dividend on September 15, 1998. All references to number of shares,
per share amounts, stock option data and market prices of the Company's common
stock have been adjusted to reflect the stock splits. See Note 7,
"Shareholders' Equity."
F-9
Fair Value of Financial Instruments:FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents, other current
assets,accounts receivable,
accounts payable, borrowings under the revolving credit agreement and other current liabilities approximate fair value because
of the immediate or short-term maturity of these financial instruments. Comprehensive Income:The
carrying value of long-term debt approximates fair value because its variable
interest rate is adjusted to the current market rate on a monthly basis.
COMPREHENSIVE INCOME: The Company does not have other items of comprehensive
income as defined by SFAS No. 130, "Reporting Comprehensive Income."
Accordingly, comprehensive income is equal to net income.
Reclassifications:RECLASSIFICATIONS: Certain amounts in prior years' financial statements have
been reclassified to conform with the current year presentation.
NoteNOTE 2. Restructuring ChargeBUSINESS COMBINATIONS
On April 22, 1999, under the Agreement and Plan of Merger dated October 26,
1998, the Company acquired Camelot, a specialty retailer of prerecorded
music, videocassettes and DVDs, and related accessories, in a stock-for-stock
transaction accounted for as a pooling-of-interests. Camelot operated over
480 retail locations in 38 states, the District of Columbia and the
Commonwealth of Puerto Rico. Upon completion of the merger, Camelot became a
wholly owned subsidiary of the Company. In the merger, each share of
Camelot's common stock was converted into 1.9 shares of the Company's common
stock. Each outstanding option to purchase Camelot common stock immediately
prior to the completion of the merger was converted into 1.9 fully vested and
exercisable options to acquire the Company's common stock. The exercise
prices of these options were adjusted accordingly for the 1.9 to 1 conversion
ratio. As a result, the Company recordedissued approximately 19.3 million shares of
its common stock and converted 1.3 million options to acquire its common
stock. In connection with the merger, all of Camelot's outstanding notes
payable were repaid.
Effective July 29, 1998, Camelot acquired all of the outstanding common stock
of Spec's Music, Inc. ("Spec's") under the terms of an Agreement and Plan of
Merger dated June 3, 1998. Spec's is a pre-tax restructuring chargeretailer of $33.8prerecorded music stores
in South Florida and Puerto Rico. The Spec's acquisition was accounted for as
a purchase. The total purchase price was $42.7 million, net of cash acquired,
including cash payment of $18.6 million, repayment of Spec's indebtedness of
$9.2 million, assumption of liabilities aggregating $14 million and
acquisition costs of $900,000. The excess of the purchase price over
the fair values of the net assets acquired (goodwill) of $9.4 million is
being amortized on a straight-line basis over 20 years.
Effective February 28, 1998, Camelot acquired certain assets and assumed certain
liabilities and operating lease commitments of The Wall Music, Inc. ("The Wall")
pursuant to an Asset Purchase Agreement dated December 10, 1997. The purchase
price of The Wall was $74.6 million, net of cash acquired, (including
approximately $2.3 million of acquisition costs) and was paid in fiscal
1995 to reflectcash. The
acquisition was accounted for as a purchase, with the anticipated costs associated withexcess purchase price over
fair values of the net assets acquired (goodwill) of $24.7 million being
amortized on a program to close 163
stores.straight-line basis over 20 years.
Effective October 8, 1997, the Company acquired 90 out of a total of 118 stores
owned by Strawberries, Inc., a privately held freestanding music specialty
retailer operating primarily in New England. The restructuring chargestores 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 write-down of fixed assets, estimated cash payments to landlords for the early termination of operating
leases, inventory-related costs (including the cost for returning all
remaining merchandise
after the store was closed),inventories, other related current assets and employee termination
benefits. The charge also included estimated professional fees related to the
development of the store closing plan and negotiations with landlords related
to the termination of leases,$683,000 in goodwill. This
goodwill is being amortized on a provision for exiting the rental video store
format, the write-off of goodwill related tostraight-line basis over a previous acquisition and a
provision for closing the Company's fixture manufacturing operation.
Inventory-related costs have been included in cost of sales in the
accompanying consolidated statements of income.
An analysis of the amounts comprising the restructuring charge and the charges
against the related reserve for each year in the four-year period ended
January 30, 1999 are outlined below:
Charges Balance Charges Balance Charges Balance Charges
1995 against as of against as of against as of against Remaining Reserve
Reserve Reserve 2/3/96 Reserve 2/1/97 Reserve 1/31/98 Reserve Balance Reversal
--------------------------------------------------------------------------------------- --------
(in thousands)
Leasehold improvements $6,660 $6,660 --- --- --- --- --- --- --- ---
Furniture and fixtures 3,228 3,228 --- --- --- --- --- --- --- ---
Video rental assets 4,174 --- 4,174 1,078 3,096 25 3,071 3,023 48 (48)
Goodwill 339 339 --- --- --- --- --- --- --- ---
--------------------------------------------------------------------------------------- --------
Non cash write-offs 14,401 10,227 4,174 1,078 3,096 25 3,071 3,023 48 (48)
--------------------------------------------------------------------------------------- --------
Lease obligations 7,540 --- 7,540 2,627 4,913 905 4,008 2,855 1,153 (1,153)
Inventory-related costs 6,800 --- 6,800 3,421 3,379 2,769 610 610 --- ---
Termination benefits 976 69 907 88 819 16 803 4 799 (799)
Professional fees 2,500 --- 2,500 1,632 868 711 157 20 137 (137)
Other costs 1,600 806 794 122 672 629 43 23 20 (20)
--------------------------------------------------------------------------------------- --------
Cash outflows 19,416 875 18,541 7,890 10,651 5,030 5,621 3,512 2,109 (2,109)
--------------------------------------------------------------------------------------- --------
Total $33,817 $11,102 $22,715 $8,968 $13,747 $5,055 $8,692 $6,535 $2,157 $(2,157)
======================================================================================= ========
15-year period.
NOTE 3. RESTRUCTURING CHARGE
F-9
The Company completed theits 1995 restructuring program in fiscal 1998, resulting
in the closure of 191 stores (versus an original plan of 163 stores).1998. The
remaining balance in the store closing reserve of $2.2 million was credited to
operations in the 4th quarter of fiscal 1998.
In determining the components of the reserve, management analyzed all aspects
of the restructuring planNOTE 4. PROPERTY, PLANT AND EQUIPMENT
January 29, January 30,
2000 1999
--------------- ---------------
Buildings $ 18,926 $ 19,530
Fixtures and the costs that would be incurred. The write-off
of leaseholdequipment 166,229 148,752
Leasehold improvements 99,903 94,828
--------------- ---------------
285,058 263,110
Allowances for depreciation and
furnitureamortization (140,364) (123,986)
--------------- ---------------
$ 144,694 $ 139,124
=============== ===============
Depreciation and fixtures represented the estimated
net book value of these items at the forecasted closing date. In determining
the provision for lease obligations, the Company considered the amount of time
remaining on each store's lease and estimated the amount necessary for either
buying out the lease or continued rent payments subsequent to store closure.
Inventory-related costs include the cost to pack and ship the inventory on
hand after the closing of the store as well as the penalty paid to the vendor
for additional merchandise returns resulting from the restructuring.
Termination benefits represented the severance payments expected to be made to
terminated employees. Professional fees represented amounts expected to be
paid to advisorsamortization expense related to the developmentCompany's distribution
center facility and equipment of the store closing plan and the
negotiations with landlords related to the termination of leases. Payments to
lenders for the waiver of covenant violations totaling $1.6 million, were$1.6 million and $1.1 million in
fiscal 1999, 1998 and 1997, respectively, is included in cost of sales. All
other depreciation and amortization of fixed assets is included in selling,
general & administrative expenses. Depreciation and administrative expenses in the 1995
consolidated statementamortization of income.
F-10
The cash outflows for the restructuring was financed from operating cash flows
and the liquidation of merchandise inventory from the closed stores. The
timing of store closures depended on the Company's ability to negotiate
reasonable lease termination agreements. The restructuring reserve balancefixed assets
is included in the accompanying balance sheets under the caption "store closing
reserve."
Sales related to stores that were closedcondensed consolidated statements of income as part of the 1995 restructuring
program were $9.0 million (unaudited), $19.5 million (unaudited) and $18.9
million (unaudited) in fiscal 1998, 1997 and 1996, respectively, in the year
of closure. Store operating losses, excluding corporate allocations, related
to stores that were closed were $322,000 (unaudited), $736,000 (unaudited) and
$753,000 (unaudited) in fiscal 1998, 1997 and 1996, respectively.follows:
Fiscal Year
----------------------------------------------
1999 1998 1997
-------------- ---------------- --------------
(IN THOUSANDS)
Cost of sales $ 1,612 $ 1,567 $ 1,101
============== ================ ==============
Selling, general and administrative expenses $ 33,732 $ 30,552 $ 15,141
============== ================ ==============
F-10
NOTE 5. DEBT
The provision for termination benefits was based on the expectation that 163
employees would be terminated in connection with the restructuring program.
Through January 30, 1999, 55 employees had been terminated. The Company did
not terminate as many employees as originally planned because higher than
normal levels of attrition occurring after the announcement of the
restructuring resulted in a reduced need for involuntary terminations.
Subsequent to the adoption of the restructuring program, improving economic
conditions in certain markets, improvement in individual store performance and
the inability to negotiate reasonable lease termination agreements have led
the Company to keep open certain stores that were originally expected to be
closed. The Company also decided not to close its fixture manufacturing
operation. During fiscal 1998, a total of 21 stores were removed from the
list of stores expected to be closed. Conversely, deteriorating economic
conditions and store performance in certain markets have led the Company to
close certain stores that were not originally expected to be closed. During
fiscal 1998, no stores were added to the list of stores to be closed. In
addition, the timing of store closures has also been affected by the ability
or inability to negotiate reasonable lease termination agreements. The net
effect of changes made to the timing of store closures and the stores to be
closed under the 1995 restructuring program has not been material. The
restructuring program was completed January 30, 1999, and the remaining
balance of $2.2 million in the store closing reserve was credited to
operations.
Note 3. Debt
In July 1997, the Company replaced its existing $65.3 million revolving credit
facility and $56.5 million note agreement with aCompany's $100.0 million secured revolving credit facility with Congress
Financial Corporation. The facilityCorporation matures in July 2000 and automatically renews on a
year-to-year basis thereafter at the discretion of both parties. The Company
fully expects to extend the current facility for three more years. The
facility bears interest at the prime interest rate or the Eurodollar interest
rate plus 1.75% (6.72%(7.97% at January 30, 1999). The facility29, 2000), and is securedcollateralized 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 1999, 1998, 1997, and 1996,1997, the highest aggregate balances outstanding
under the current and previous revolving credit facilities were $3.3 million,
$35.0 million $45.9 million and $65.3$45.9 million, respectively. The weighted average interest
rates during fiscal 1999, 1998 1997 and 19961997 based on average daily balances were
8.50%7.44%, 8.58%8.50%, and 11.01%8.58%, respectively. The balances outstanding under the
Company's revolving credit agreements at the end of fiscal 1999 and 1998 and 1997 were
$0 and $35.0 million, respectively.$0.
Interest paid during fiscal 1999, 1998 1997 and 19961997 was approximately $2.8$3.6 million,
$4.4 million, and $5.8 million, respectively.
On April 22, 1999, upon completion of the merger, the Company paid off and
$11.8terminated the amended Camelot Revolving Credit Agreement, which had been in
effect since June 12, 1998. The amended facility provided for working capital
loans of up to $50 million respectively.
Note 4. Income Taxesduring the peak period (October through December) and
up to $35 million during the non-peak period (including in each case up to $5
million of letters of credit). In no case could the amount of loans exceed the
borrowing base, which was 60% of eligible inventory. Camelot had $35 million of
availability at January 30, 1999. The amended Revolving Credit Agreement also
provided the ability to obtain a $25 million term loan to finance the Spec's
acquisition. The term loan (drawn against effective July 29, 1998), which bore
the same interest rate terms as the working capital portion of the Revolving
Credit Agreement, was fully repaid upon completion of the Camelot acquisition.
NOTE 6. INCOME TAXES
Income tax expense consists of the following:
Fiscal YearFISCAL YEAR
--------------------------------------------
1999 1998 1997
1996
----------------------------------
(in thousands)--------------------------------------------
(IN THOUSANDS)
Federal - current $19,686$30,498 $36,207 $10,813 $1,364
State - current 3,2312,521 7,137 1,306
231
Deferred 3,0488,251 4,529 1,370
3,023
----------------------------------
$25,965--------------------------------------------
$41,270 $47,873 $13,489
$4,618
==============================================================================
F-11
A reconciliation of the Company's effective tax rates with the federal statutory
rate is as follows:
Fiscal YearFISCAL YEAR
--------------------------------------------
1999 1998 1997
1996
----------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
Federalfederal income tax effect 3.8%1.4% 4.4% 3.0%
4.7%Unearned compensation - stock options --- 1.9% ---
Plan of reorganization adjustments --- 2.2% ---
Merger costs 3.6% --- ---
Other 0.2% 0.5% 1.6%
(0.3%)
----------------------------------------------------------------------------------
Effective income tax rate 39.0%40.2% 44.0% 39.6%
39.4%
==================================================================================
F-11
Significant components of the Company's deferred tax assets and liabilities are
as follows:
JanuaryJANUARY 29, JANUARY 30,
January 31,2000 1999
1998
---------------------------------
(in thousands)--------------------------------
(IN THOUSANDS)
CURRENT DEFERRED TAX ASSETS
Store closing reserve $--- $4,326
---------------------------------Accruals $ 1,570 $ 2,803
Other 36 286
--------------------------------
Total Current Deferred Tax Asset --- 4,326
---------------------------------Assets 1,606 3,089
--------------------------------
CURRENT DEFERRED TAX LIABILITIES
Inventory valuation 5,483 5,177
Other 107 252
---------------------------------13,632 2,078
Prepaid expenses 443 378
--------------------------------
Total Current Deferred Tax Liabilities 5,590 5,429
---------------------------------14,075 2,456
--------------------------------
Net Current Deferred Tax Liability $(5,590) $(1,103)
=================================Asset (Liability) ($12,469) $ 633
================================
NON-CURRENT DEFERRED TAX ASSETS
Accrued rent, lease accounting $2,961 $3,046
Capitalized leases 914 895
Tax over book asset basis 1,413 623
Compensation related 107 116$20,911 $18,441
Federal and state net operating loss carryforwards 6,804 4,421
Accrued rent 4,448 2,877
Lease values 1,663 1,809
Capitalized leases 882 914
Executive retirement plan 1,336 252
126Accruals 890 1,300
Amortization 344 1,062
Compensation related 87 107
Other 601 12
---------------------------------73 1,054
--------------------------------
Total Non-Current Deferred Tax Assets 6,248 4,818
---------------------------------37,438 32,237
--------------------------------
NON-CURRENT DEFERRED TAX LIABILITIES
Other 83 92
---------------------------------Goodwill 3,007 2,657
--------------------------------
Total Non-Current Deferred Tax Liabilities 83 92
---------------------------------$3,007 $2,657
--------------------------------
Net Non-Current Deferred Tax Asset $6,165 $4,726
=================================$34,431 $29,580
================================
TOTAL NET DEFERRED TAX ASSET $575 $3,623
=================================$21,962 $30,213
================================
At January 29, 2000 and January 30, 1999, the Company had gross deferred tax
assets of $39.0 million and $35.3 million, respectively, and gross deferred
tax liabilities of $17.1 million and $5.1 million, respectively. The Company
had a net operating loss carryforward of $10.0 million for Federal income tax
purposes for fiscal 1999 and 1998, and $71.3 million and $17.9 million for
state income tax purposes for fiscal 1999 and 1998, respectively, that expire
at various times through 2013 and are subject to certain limitations.
In assessing the propriety of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the level of
projected future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not that the
Company will realize the benefits of those deductible differences. The amount of
the deferred tax asset considered realizable could be reduced if estimates of
future taxable income during the carryforward period are reduced.
F-12
The Company paid income taxes of approximately $14.0$39.3 million, $0.3$17.1 million and
$0.3 million$300,000 during fiscal 1999, 1998 and 1997, respectively.
F-12
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company is party to various claims, legal actions, and 1996, respectively.
Note 5. Leasescomplaints arising
in the ordinary course of its business, including pre-petition assessments by
the Internal Revenue Service ("IRS") aggregating approximately $7.9 million
and relating to Camelot's corporate-owned life insurance program. No judgment
has been rendered regarding these IRS assessments as of January 29, 2000. A
trial to decide the matter began in March 2000 in the Federal District Court
for the District of Delaware. A decision is expected to be rendered in the
third or fourth quarter of fiscal 2000. In the event that a judgment is
rendered against the Company in the full amount of the proposed assessment,
the Company's results of operations would be materially adversely affected
with a charge to earnings of approximately $7.9 million plus interest since
January 1998. In the opinion of management, the IRS assessments and all other
claims, legal actions and complaints are without merit or involve such amounts
that unfavorable disposition will not have a material impact on the financial
position, results of operations or cash flows of the Company.
NOTE 8. LEASES
As more fully discussed in Note 10,11, the Company leases its distribution center
and administrative offices under three capital leases with its Chief Executive
Officer and largest shareholder. The Company also has a capital lease for its
point- of-salepoint-of-sale system.
Fixed asset amounts for capital leases, which are included in the fixed assets
on the accompanying balance sheets, are as follows:
JanuaryJANUARY 29, JANUARY 30,
January 31,2000 1999
1998
--------------------------------
(in thousands)----------------------------------
(IN THOUSANDS)
Buildings $9,342 $7,105$ 9,342
Fixtures and equipment 26,890 16,061
1,625
---------------------------------------------------------------
36,232 25,403 8,730
Allowances for depreciation
and amortization 6,312 4,291
--------------------------------(10,729) (6,312)
===============================
$25,503 $19,091
$4,439
===============================================================
The Company leases substantially all of its stores, many of which contain
renewal options, for periods ranging from five to twenty-five years, with the
majority being ten years. Most leases also provide for payment of operating
expenses, real estate taxes, and for additional rent based on a percentage of
sales.
Net rental expense was as follows:
Fiscal YearFISCAL YEAR
--------------------------------------------------
1999 1998 1997
1996
------------------------------
(in thousands)--------------------------------------------------
(IN THOUSANDS)
Minimum rentals $55,810 $50,237 $49,653$108,818 $102,130 $ 50,237
Contingent rentals 2,957 1,310 719
274
------------------------------
$57,120 $50,956 $49,927
================================================================================
$111,775 $103,440 $ 50,956
==================================================
F-13
Future minimum rental payments required under all leases that have initial or
remaining noncancelablenon-cancelable lease terms in excess of one year at January 30, 199929, 2000
are as follows:
Operating Capital
Leases LeasesOPERATING CAPITAL
LEASES LEASES
----------------------------------
(in thousands)(IN THOUSANDS)
1999 $56,389 $4,876
2000 59,786 4,876$103,668 $7,807
2001 56,609 4,87694,873 7,807
2002 52,094 3,38785,918 6,318
2003 48,617 1,60975,248 2,994
2004 60,312 1,679
Thereafter 158,251 18,932159,733 18,075
----------------------------------
Total minimum payments required $431,746 38,556
============$579,752 44,680
================
Less: Amounts representing interest 19,689
-----------19,908
------------------
Present value of minimum lease payments 18,86724,772
Less current portion 2,802
-----------5,311
------------------
Long-term capital lease obligations $16,065
===========$19,461
==================
F-13
Note 6. Benefit Plans
Stock Option Plans
- ------------------
UnderNOTE 9. BENEFIT PLANS
401(K) SAVINGS PLAN
The Company offers a 401(k) Savings Plan to eligible employees meeting
certain age and service requirements. This plan permits participants to
contribute up to 20% of their salary, including bonuses, up to the maximum
allowable by Internal Revenue Service regulations. Participants are
immediately vested in their voluntary contributions plus actual earnings
thereon. Participant vesting of the Company's matching and profit sharing
contribution is based on the years of service completed by the participant.
Participants are fully vested upon the completion of four years of service.
All participant forfeitures of non-vested benefits are used to reduce the
Company's contributions in future years. The Company matching contribution
totaled $962,000, $1.1 million and $529,000 in fiscal 1999, 1998 and 1997,
respectively.
STOCK OPTION PLANS
The Company has four employee stock option plans, the 1986 Stock Option Plan,
the 1994 Stock Option Plan, the 1998 Stock Option Plan, and 1998the 1999 Stock
Option Plan (the "Plans"), the. 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. SharesOptions authorized for issuance under the Plans
were 3.3 million, 3.0 million and 1.5 million, respectively. As of June 1,
1995, thetotaled 12.3 million. The Company stopped issuing stock options under the
1986 Stock Option Plan.Plan as of June 1, 1995. At January 30, 1999,29, 2000, of the 7.810.8
million remaining options authorized for issuance under the Plans, 3.64.5
million have been granted and are outstanding, 1.11.6 million of which were
vested and exercisable. SharesOptions available for future grants at
January 29, 2000 and January 30, 1999 and January 31, 1998 were 1.73.3 million and 766,461,2.5 million,
respectively.
Under the terms of the Camelot merger agreement, all options issued under the
Camelot 1998 Stock Option Plan (the "Camelot Plan") were converted to Trans
World options. The Camelot Plan provided for the granting of either incentive
stock options or nonqualified stock options to purchase shares of the
Company's common stock. Vesting of the options was originally over a
four-year period with a maximum term of ten years. Based on the terms of the
Camelot Plan, vesting was accelerated based on the market performance of the
Company's common stock whereby 50% of the options vested on March 13, 1998.
The remaining 50% vested on April 22, 1999 in connection with the merger. At
January 29, 2000, 530,500 options were outstanding and exercisable. The
Company stopped issuing stock options under the Camelot Stock Option Plan as
of April 22, 1999. The Company recognized $5.1 million in compensation
expense during 1998, related to stock options granted below the market price
at the date of grant and accelerated vesting.
F-14
The following table summarizes information about the stock options outstanding
under the Plans and the Camelot Plan at January 30, 1999:29, 2000:
------------------------------------- ----------------------------------
Outstanding Exercisable
------------------------------------- ----------------------------------
Weighted Weighted
Average Average Average
Exercise Remaining Exercise Exercise
price range Shares Life Price Shares Price
- -------------------------------------------------------- ---------------------------------------------------------------------------------- -------------------------------
OUTSTANDING EXERCISABLE
------------------------------------------------ -------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE EXERCISE
PRICE RANGE SHARES LIFE PRICE SHARES PRICE
------------------------------------------------------------------- -------------------------------
$0.75-
$1.21-$2.65 1,518,154 7.1 $1.62 646,955 $1.60
2.66- 5.33 696,454 7.3 4.03 239,922 4.372.67 1,150,524 6.1 $1.61 745,784 $1.52
2.68-5.33 567,552 6.1 4.17 311,052 4.32
5.34-10.67 2,250 8.5 6.25 --- ---10,000 10.0 10.00 0 0.00
10.68-13.33 900,000 8.8 11.20 225,000 11.202,183,700 8.4 11.34 957,700 11.05
13.34-16.00 22,000 9.6 14.59 --- ---725,050 9.2 15.18 25,300 14.02
16.01-18.67 432,675 9.2414,561 8.2 17.84 --- ---94,680 17.82
18.68-21.33 5,000 9.78.7 19.75 --- ---1,250 19.75
21.34-24.00 2,000 9.98.9 23.75 --- ---500 23.75
24.01-26.67 6,000 9.48.4 25.79 --- ---
---------- ---------1,500 25.79
---------------- ---------------
Total 3,584,533 7.8 $6.61 1,111,877 $4.14
========== =========5,064,387 7.7 $9.44 2,137,766 $7.10
================ ===============
The Company also has a stock option plan for non-employee directors (the "1990
Plan"). Options under this plan are granted at 85% of the fair value at the date
of grant. Under the 1990 Plan, options generally become exercisable commencing
one year from the date of grant in increments of 25% per year with a maximum
term of ten years. As of January 30, 1999,29, 2000, there were 750,000 sharesoptions authorized
for issuance and 261,750 shares280,750 options have been granted and are outstanding,
155,250194,435 of which were vested and exercisable. There are 458,250439,250 shares of common
stock reserved for possible future option grants under the 1990 Plan.
Under the terms of the Camelot merger agreement, all options issued under the
Camelot Outside Director Stock Option Plan (the "Camelot Director Plan") were
converted to Trans World options. As of January 29, 2000, there were 4,750
options outstanding and exercisable under the Camelot Director Plan. During
1998, the Company recognized $234,000 in compensation expense based on the
market value of the stock on the date of grant in June 1998 in connection with
the initial grant of stock options under the Camelot Director Plan. The Company
no longer issues options under the Camelot Director Plan.
The following table summarizes information about the stock options outstanding
under the 1990 Plantwo Director Plans at January 30, 1999:29, 2000:
------------------------------------- ----------------------------------
Outstanding Exercisable
------------------------------------- ----------------------------------
Weighted Weighted
Average Average Average
Exercise Remaining Exercise Exercise
price range Shares Life Price Shares Price
- ------------------------------------------------------- ---------------------------------------------------------------------------------- -------------------------------
OUTSTANDING EXERCISABLE
------------------------------------------------ -------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE EXERCISE
PRICE RANGE SHARES LIFE PRICE SHARES PRICE
------------------------------------------------------------------- -------------------------------
$1.19-$2.67 49,500 7.3 $1.64 24,375 $1.51
2.68 -5.336.3 $ 1.64 38,625 $ 1.58
2.68-5.33 138,000 5.84.8 3.46 82,875 3.66
5.34- 8.00101,250 3.57
5.34-8.00 18,000 3.02.0 6.10 18,000 6.10
8.01-10.67 45,000 4.13.1 9.49 30,000 9.14
10.68-15.1233,750 9.26
10.68-13.33 23,750 9.1 12.24 4,750 10.92
13.34-15.12 11,250 9.38.3 15.12 --- ---
------------ ------------2,810 15.12
---------------- ---------------
Total 261,750 5.8 $4.84 155,250 $4.66
============ ============285,500 5.1 $5.45 199,185 $4.71
================ ===============
F-14F-15
The following tables summarize activity under the 1986, 1994 and 1998 Plans
and the 1990 Plan:Stock Option Plans:
--------------------------------------------------------------------------------------------------------
1986, 1994 and 1998 Plans 1990 Plan
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
EMPLOYEE STOCK OPTION PLANS DIRECTOR STOCK OPTION PLANS
------------------------------------------------------------------------------------------------
Number of Option Weighted Number of Option Weighted
Shares Subject Price Range Average Shares Subject Price Range Average
To Option Per Share Exercise Price To Option Per Share Exercise Price
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance February 3, 1996 2,642,3041, 1997 3,139,696 $0.75-$8.09 $4.16 196,5006.17 $2.12 210,000 $1.19-$9.14 $5.55$5.28
Granted 2,064,297 1.17- 2.67 1.69 13,500 1.35 1.35
Exercised (10,158) 1.87- 2.75 1.21 --- --- ---
Canceled (1,671,729) 0.83- 8.09 4.80 --- --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
Balance February 1, 1997 3,024,714 0.75- 6.17 2.14 210,000 1.19- 9.14 5.28
Granted 1,593,9122,865,500 3.33-11.20 8.009.42 103,500 2.09- 3.372.09-3.37 2.86
Exercised (286,753) 0.96- 3.67 1.78(285,086) 0.96-3.67 1.74 (7,500) 3.69 3.69
Canceled (112,761) 1.21- 3.96 1.97(203,514) 0.96-4.58 1.79 (48,000) 3.33- 9.143.33-9.14 7.57
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance January 31, 1998 4,219,112 0.75-11.20 4.385,516,596 $0.75-$11.20 $5.94 258,000 1.19- $1.19-$9.14 3.93$3.93
Granted 500,150529,600 13.88-26.67 17.83 26,25017.61 50,000 10.20-15.12 12.3111.65
Exercised (876,493) 0.75- 6.25 3.00(885,043) 0.75-10.92 3.08 (22,500) 2.09- 3.682.09-3.68 3.15
Canceled (258,236)(259,134) 1.21-17.79 4.35 --- --- ---4.64 -- -- --
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balance January 30, 1999 3,584,5334,902,019 $0.75-$26.67 $6.61 261,750$7.79 285,500 $1.19-$15.12 $4.84
========================================================================================================$5.34
Granted 1,501,000 10.00-15.25 13.42 29,000 12.22-12.96 12.45
Exercised (1,194,899) 0.75-17.79 7.65 (19,000) 10.92 10.92
Canceled (143,733) 0.75-17.79 9.65 (10,000) 12.22 12.22
- ---------------------------------------------------------------------------------------------------------------------------------
Balance January 29, 2000 5,064,387 $1.21-$26.67 $9.44 285,500 $1.19-$15.12 $5.45
=============== ================
The per share weighted-average fair value of the stock options granted during
fiscal 1999, 1998 and 1997 was $5.01, $6.48 and 1996 was $6.70, $2.76 and $0.70,$2.82, respectively, using the
Black Scholes option pricing model, with the following weighted-average
assumptions; 1999 - expected dividend yield 0.0%, risk-free interest rate of
6.47%, expected life of five years and stock volatility of 72%; 1998 - expected
dividend yield 0.0%, risk-free interest rate of 5.15%, expected life of five
years and stock volatility of 70%; 1997 - expected dividend yield 0.0%,
risk-free interest rate of 6.7%, expected life of five years and stock
volatility of 48%; 1996 - expected dividend yield
0.0%, risk-free interest rate of 6.7%, expected life of five years and stock
volatility of 72%.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements for employee stock options, which are issued at the
closing stock price on the day of grant. During fiscal 1999, 1998 1997 and 1996,1997, the
Company recognized expenses of $64,000, $57,000 $52,000 and $3,000,$52,000, respectively, for
stock options issued to non-employee directors at 85% of the closing stock price
on the date of grant. Had the Company determined compensation cost for employee
stock options based on fair value in accordance with SFAS No. 123, the Company's
net income would have been reduced to the pro forma amounts indicated below:
Fiscal YearFISCAL YEAR
---------------------------------------------------
1999 1998 1997
1996
---------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Net income, as reported $40,612 $20,574 $7,102$ 61,393 $ 61,010 $ 20,574
Basic earnings per share, as reported $1.28 $0.70 $0.24$ 1.17 $ 1.19 $ 0.70
Diluted earnings per share, as reported $1.20 $0.66 $0.24$ 1.15 $ 1.14 $ 0.66
Pro forma net income $38,538 $19,074 $6,658$ 57,621 $ 59,016 $ 19,168
Pro forma basic earnings per share $1.21 $0.65 $0.23$ 1.10 $ 1.15 $ 0.65
Pro forma diluted earnings per share $1.14 $ $0.61 $0.231.08 $ 1.10 $ 0.62
F-15F-16
Restricted Stock Plan
- ---------------------RESTRICTED STOCK PLAN
Under the 1990 Restricted Stock Plan, the Compensation Committee of the Board
of Directors is authorized to grant awards for up to 900,000 restricted
shares of common stock to executive officers and other key employees of the
Company and its subsidiaries. The shares are issued as restricted stock and
are held in the custody of the Company until all vesting restrictions are
satisfied. If conditions or terms under which an award is granted are not
satisfied, the shares are forfeited. Shares begin to vest under these grants
after three years and are fully vested after five years, with vesting
criteria which includes continuous employment until applicable vesting dates
have expired. At January 30, 1999,29, 2000, a total of 225,000255,000 shares have been
granted, of which 75,000 were granted in fiscal 1996 with a weighted average
grant date fair market value of $1.58, aggregating a total value of $118,750;
the remainingan additional 150,000 were granted in fiscal 1995 with a weighted average
grant date fair value of $1.55 per share, aggregating a total of $232,500.$232,500 and
an additional 30,000 were granted in fiscal 1999 with a weighted average
grant date fair value of $11.19 aggregating a total of $335,625. As of
January 30,
1999,29, 2000, a total of 60,000120,000 of these shares had vested and 30,000
shares with an unamortized unearned compensation balance of $53,000, had been
forfeited. Unearned compensation is recorded at the date of award, based on
the market value of the shares, and is included as a separate component of
shareholders' equity and is amortized over the applicable vesting period. The
amount amortized to expense in fiscal 1999, 1998 and 1997 was approximately
$66,000, $44,000 and $70,000, respectively. At January 30, 1999,29, 2000, outstanding
awards and shares available for grant totaled 135,000105,000 and 675,000,
respectively.
401 (k) Savings Plan
- --------------------SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company offers a 401(k) Savings Plan to eligible employees meeting certain
age and service requirements. This plan permits participants to contribute up
to 20% of their salary, including bonuses, up to the maximum allowable by
Internal Revenue Service regulations. Participants are immediately vested in
their voluntary contributions plus actual earnings thereon. Participant
vestingexecutive officers of the Company's matching and profit sharing contribution is based on
the years of service completed by the participant. Participants are fully
vested upon the completion of four years of service. All participant
forfeitures of nonvested benefits are used to reduce the Company's
contributions in future years. The Company matching contribution totaled
$599,000, $529,000 and $465,000 in fiscal 1998, 1997 and 1996, respectively.
Supplemental Executive Retirement Plan
- --------------------------------------
In fiscal 1997, the Company introducedhave a non-qualified Supplemental
Executive Retirement Plan (SERP). The SERP, which is unfunded, provides eligible
executives defined pension benefits that supplement benefits under other
retirement arrangements. The annual benefit amount has been predetermined as
part of the plan and vests based on years of service and age at retirement. For
fiscal 1999, 1998 and 1997, expenses related to the plan totaled approximately
$481,000, $342,000 and $361,000, respectively. The present value of the
projected benefit obligation was approximately $2.3$3.6 million at January 30, 1999.29, 2000.
The January 30, 199929, 2000 consolidated balance sheet includes $656,000$3.6 million of accrued
expense for the SERP.
Note 7. Shareholders' EquitySERP and a $2.5 million intangible asset for unrecognized prior
service costs.
NOTE 10. SHAREHOLDERS' EQUITY
On May 1, 1998, the Company sold an additional 2.25 (adjusted) million shares of
its common stock in a public offering for approximately $37$36.6 million net of
issuance costs. A portion of the proceeds was used to repay long-term debt and
the balance of the proceeds was used for general corporate purposes including
investments in additional stores, fixtures and inventory.
On July 31, 1998, the Board of Directors approved a three-for-two common stock
split to be distributed in the form of a 50% stock dividend. As a result,
10,937,104 shares were issued on September 15, 1998 to shareholders of record on
September 1, 1998. Accordingly, amounts equal to the par value of the additional
shares issued have been charged to additional paid in capital and credited to
common stock. All references throughout these financial statements to number of
shares, per share amounts, stock option data and market prices of the Company's
common stock have been adjusted to reflect this stock split.
On January 7, 2000, the Board of Directors approved a stock repurchase plan
authorizing the purchase of up to 5 million shares of the Company's common
stock. As of January 29, 2000, the Company had purchased approximately 1.1
million shares of the 5 million shares authorized by the Board. At January 29,
2000 and January 30, 1999, and January 31, 1998, the Company held 105,4321,177,432 and 106,182105,432 shares,
respectively, in treasury stock resulting from the repurchase of
common stock through open market purchases.
F-16
Note 8. Strawberries Acquisition
In October 1997, the Company acquired 90 out of a total of 118 stores owned by
Strawberries, Inc., a privately held freestanding music specialty retailer
operating primarily in New England. The stores operate under the names
"Strawberries" and "Waxie Maxie" and are primarily located in freestanding or
strip center locations. The acquisition has been accounted for using the
purchase method of accounting. At the time of the acquisition, the Company
paid $21 million for the assets which included the fixed assets, merchandise
inventories, other related current assets and $683,000 in goodwill. This
goodwill is being amortized on a straight-line basis over a 15 year period.
Note 9. Concentration of Business Risks
The Company purchases inventory for its stores from approximately 475
suppliers, with approximately 69% of purchases being made from five suppliers.
In the past, the Company has not experienced difficulty in obtaining
satisfactory sources of supply, and management believes that it will retain
access to adequate sources of supply. However, a loss of a major supplier
could cause a possible loss of sales, which would have an adverse affect on
operating results and result in a decrease in vendor support for the Company's
advertising programs.
Note 10. Related Party Transactionsstock.
NOTE 11. RELATED PARTY TRANSACTIONS
The Company leases its 178,000168,400 square foot distribution center/office facility
in Albany, New York from Robert J. Higgins, its Chairman, Chief Executive
Officer and largest shareholder, under three capitalized leases that expire in
the year 2015. The original distribution center/office facility was constructed
in 1985. A 77,13577,100 square foot distribution center expansion was completed in
October 1989 on real property adjoining the existing facility. A 19,100 office square
foot expansion was completed in September 1998 adjoining the existing facility.
Under the three capitalized leases, dated April 1, 1985, November 1, 1989 and
September 1, 1998 (the "Leases"), the Company paid Mr. Higgins an annual rent of
$1.6 million, $1.4 million $1.3 million and $1.2$1.3 million in fiscal 1999, 1998 1997 and 1996,1997,
respectively. On January 1, 1998,2000, the aggregate rental payment increased in
F-17
accordance with the biennial increase in the Consumer Price Index, pursuant to
the provisions of each lease. Effective January 1, 2000,2002, and every two years
thereafter, the rental payment will increaseincreases in accordance with the biennial
increase in the Consumer Price Index, pursuant to the provisions of the lease.
None of the leases contains any real property purchase option at the expiration
of its term. Under the terms of the Leases, the Company pays all property taxes,
insurance and other operating costs with respect to the premises. Mr. Higgins'
obligation for principal and interest on his underlying indebtedness relating to
the real property is approximately $90,000$1.1 million per month.year.
The Company leases two of its retail stores from Mr. Higgins under long-term
leases. Under the first store lease, annual rent payments were $40,000 in
fiscal 1999 and 1998 and $35,000 in fiscal 1997 and 1996.1997. Under the second store
lease, annual rent payments were $35,000 in fiscal 1999, 1998 1997 and 1996.1997. Under
the terms of the leases, the Company pays property taxes, maintenance and a
contingent rental if a specified sales level is achieved. Total additional
charges
during fiscal 1998 for both locations, was $93,000, including contingent rent.rent, was approximately
$17,700, $18,100 and $16,900 in fiscal 1999, 1998 and 1997, respectively. In
fiscal 1998 1997, and 1996,1997, the Company paid Mr. Higgins $30,000 under one
yearone-year
operating leases expiring on October 31, 1998 October 31, 1997 and October 31, 1996,1997,
respectively, for certain parking facilities contiguous to the Company's
distribution center/office facility. This lease was not renewed upon its
expiration on October 31, 1998.
The Company regularly utilizes privately-charteredprivately chartered aircraft owned or
partially owned by Mr. Higgins. Under an unwritten agreement with Quail Aero
Services of Syracuse, Inc., a corporation in which Mr. Higgins is a one-third
shareholder, the Company paid $110,000, $65,000 $59,000 and $76,000$59,000 for chartered
aircraft services in fiscal 1999, 1998 1997 and 1996,1997, respectively. The Company
also charteredcharters an aircraft from Crystal Jet, a corporation wholly owned by Mr.
Higgins. Payments to Crystal Jet aggregated $64,000, $180,000 $199,000 and $227,000$199,000 in
fiscal 1999, 1998 and 1997, respectively. The Company also charters an
aircraft from Richmor Aviation, an unaffiliated corporation that leases an
aircraft owned by Mr. Higgins. Payments to Richmor Aviation in fiscal 1999,
1998 and 1996,1997 were $325,000, $0 and $0, respectively. The Company believes
that the charter rates and terms are as favorable to the Company as those
generally available to it from other commercial charters.
F-17
The transactions that were entered into with an "interested director" were
approved by a majority of disinterested directors of the Board of Directors,
either by the Audit Committee or at a meeting of the Board of Directors. The
Board of Directors believes that the leases and other provisions are at rates
and on terms that are at least as favorable as those that would have been
available to the Company from unaffiliated third parties under the
circumstances.
Note 11. Quarterly Financial Information (Unaudited)In September 1999, in connection with his hiring as President and Chief
Operating Officer, the Company made a $200,000 interest-free loan to Michael
J. Madden.
F-18
NOTE 12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
------------------------------------------------------------------
Fiscal 1998 Quarter Ended
1998----------------------------------------------------------------------------------
FISCAL 1999 QUARTER ENDED
----------------------------------------------------------------------------------
1999 1/29/00 10/30/99 10/7/31/98 8/99 5/1/98 5/2/98
------------------------------------------------------------------99
----------------------------------------------------------------------------------
(in thousands, except per share amounts)
Sales $698,469 $267,811 $143,398 $142,198 $145,062$ 1,358,132 $ 517,870 $ 275,968 $ 277,275 $ 287,019
Gross profit 264,063 102,938 55,205 53,463 52,457499,544 195,049 96,981 102,570 104,944
Net income 40,612 31,030 4,312 2,658 2,612
------------------------------------------------------------------61,393 60,569 3,777 5,691 (8,644)
Basic earnings per share $1.28 $0.95 $0.13 $0.08 $0.09
------------------------------------------------------------------$ 1.17 $ 1.15 $ 0.07 $ 0.11 $ (0.17)
----------------------------------------------------------------------------------
Diluted earnings per share $1.20 $0.90 $0.13 $0.08 $0.08
------------------------------------------------------------------
Fiscal 1997 Quarter Ended
1997$ 1.15 $ 1.12 $ 0.07 $ 0.11 $ (0.17)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
FISCAL 1998 QUARTER ENDED
----------------------------------------------------------------------------------
1998 1/30/99 10/31/98 11/8/1/97 8/98 5/2/97 5/3/97
------------------------------------------------------------------98
----------------------------------------------------------------------------------
(in thousands, except per share amounts)
Sales $571,314 $242,041 $114,737 $105,024 $109,512$ 1,282,385 $ 497,735 $ 270,706 $ 262,561 $ 251,383
Gross profit 209,892 87,439 43,662 39,527 39,264486,074 198,410 101,439 95,812 90,413
Net income (loss) 20,574 21,291 979 (834) (862)
------------------------------------------------------------------61,010 51,532 3,743 3,574 2,161
Basic earnings (loss) per share $0.70 $0.72 $0.03 $(0.03) $(0.03)
------------------------------------------------------------------$ 1.19 $ 1.01 $ 0.07 $ 0.07 $ 0.04
----------------------------------------------------------------------------------
Diluted earnings (loss) per share $0.66 $0.67 $0.03 $(0.03) $(0.03)
------------------------------------------------------------------$ 1.14 $ 0.97 $ 0.07 $ 0.07 $ 0.04
----------------------------------------------------------------------------------
Note 12. Subsequent Events
On April 22, 1999, the Company merged with Camelot Music Holdings, Inc., a
music specialty retail chain which operates nearly 500 retail locations in 37
states and Puerto Rico, in a stock-for-stock transaction accounted for as a
pooling-of-interests. Upon completion of the merger, Camelot became a wholly
owned subsidiary of the Company.
In the merger, each share of Camelot's common stock was converted into 1.9
shares of the Company's common stock. Each Camelot stock option outstanding
immediately prior to the completion of the merger was converted into 1.9 fully
vested and exercisable options to acquire one share of the Company's common
stock. The exercise prices of these options was adjusted accordingly for the
1.9 for 1 conversion ratio. As a result, the Company issued approximately
19.4 million shares of its common stock and 1.3 million options to acquire its
common stock.
F-18F-19
Index to Exhibits
-----------------
Document Number and Description
- -------------------------------
Exhibit No.INDEX TO EXHIBITS
DOCUMENT NUMBER AND DESCRIPTION
EXHIBIT NO.
2.1 Agreement and Plan of Merger dated October 26, 1998 by and among Trans
World, CAQ Corporation and Camelot. Commission FileCamelot incorporated herein by reference to
Exhibit 2.1 to the Company's Registration Statement on Form S-4,
No. 0-14818333-75231.
3.1 Restated Certificate of Incorporation -- incorporated herein by reference
to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal
year ended January 29, 1994. Commission File No.
0-14818.
3.2 Certificate of Amendment to the Certificate of Incorporation --
incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended October 29, 1994.
Commission File No. 0-14818.
3.3 Certificate of Amendment to the Certificate of Incorporation --
incorporated herein by reference to Exhibit 3.4 to the Company's Annual
Report on Form 10-K for the year ended January 31, 1998. Commission File
No. 0-14818.
3.4*3.4 Amended By-Laws -- incorporated herein by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended February 2,
1991. Commission File No. 0-14818.
3.5 Certificate of Amendment to the Certificate of Incorporation-incorporatedIncorporation--incorporated
herein by reference to Exhibit 3.5 to the Company's Registration Statement
on Form S-4, No. 333-75231.
3.6 Certificate of Amendment to the Certificate of Incorporation--incorporated
herein by reference to Exhibit 3.6 to the Company's Registration Statement
on Form S-4, No. 333-75231.
4.1 Loan and Security Agreement, dated July 9, 1998, between Congress Financial
Corporation and the Company, for the secured revolving credit agreement --
incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 2, 1997. Commission File
No. 0-14818.
10.1 Lease, dated April 1, 1985, between Robert J. Higgins, as Landlord, and
Record Town, Inc. and Trans World Music Corporation, as Tenant and
Amendment thereto dated April 28, 1986 -- incorporated herein by reference
to Exhibit 10.3 to the Company's Registration Statement on Form S-1, No.
33-6449.
10.2 Second Addendum, dated as of November 30, 1989, to Lease, dated April 1,
1985, among Robert J. Higgins, and Trans World Music Corporation, and
Record Town, Inc., exercising five year renewal option -- incorporated
herein by reference to Exhibit 10.2 to the Company's Annual Report on Form
10-K for the fiscal year ended February 3, 1990. Commission File No.
0-14818.
10.3 Lease, dated November 1, 1989, between Robert J. Higgins, as Landlord, and
Record Town, Inc. and Trans World Music Corporation, as Tenant --
incorporated herein by reference to Exhibit 10.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 2, 1991. Commission
File No. 0-14818.
10.4 Lease dated September 1, 1998, between Robert J. Higgins, as Landlord, and
Record Town, Inc. and Trans World, Entertainment Corporation, as Tenant, for additional office space
at 38 Corporate Circle -- incorporated herein by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
October 31, 1998. Commission File No. 0-14818.
10.5 Employment Agreement, dated as of May 1, 1998 between the Company and
Robert J. Higgins - incorporated herein by reference to Exhibit 10.4 to the
Company's Quarterly Report of Form 10-Q for the fiscal quarter ended May 2,
1998. Commission File No. 0-14818.
10.6 Trans World Music Corporation 1986 Incentive and Non-Qualified Stock Option
Plan, as amended and restated, and Amendment No. 3 thereto -- incorporated
herein by reference to Exhibit 10.5 of the Company's Annual Report on Form
10-K for the fiscal year ended February 2, 1991. Commission File No.
0-14818.
10.7 Trans World Music Corporation 1990 Stock Option Plan for Non-Employee
Directors, as amended and restated -- incorporated herein by reference to
Annex A to Trans World's Definitive Proxy Statement on Form 14A filed as of
May 7, 1998. Commission File No. 0-14818.
F-20
10.8 Trans World MusicEntertainment Corporation Amended 1990 Restricted Stock Plan --
incorporated herein by reference to Exhibit 10.7Annex B to the Company's RegistrationTrans World's Difinitive
Proxy Statement on Form S-2,14A filed as of May 17, 1999. Commission File
No. 33-36012.0-14818.
10.9 Form of Restricted Stock Agreement dated May 1, 1995 between the Company
and Bruce J. Eisenberg, Senior Vice President of Real Estate, incorporated
herein by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended April 29, 1995. Commission File No.
0-14818.
10.10 Form of Restricted Stock Agreement dated May 1, 1996 between the Company
and John J. Sullivan, Senior Vice President-Finance and Chief Financial
Officer, incorporated herein by reference to Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the fiscal year ended February 1, 1997.
Commission File No.
0-14818.
10.11 Severance Agreement, dated May 20, 1996 between Trans World
Entertainment Corporation and James A. Litwak, Executive Vice President
of Merchandising and Marketing, incorporated herein by reference to
Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal
year ended February 1, 1997. Commission File No. 0-14818.
10.12 Trans World Entertainment Corporation 1994 Stock Option Plan --
incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended July 30, 1994.
Commission File No. 0- 14818.
10.130-14818.
10.12 Trans World Entertainment Corporation 1998 Stock Option Plan --
incorporated herein by reference to Annex B to Trans World's Definitive
Proxy Statement on Form 14A filed as of May 7, 1998. Commission File No.
0-14818.
10.13 Trans World Entertainment Corporation 1999 Stock Option Plan --
incorporated herein by reference to Annex A to Trans World's Definitive
Proxy Statement on Form 14A filed as of May 17, 1999. Commission File No.
0-14818.
10.14 Trans World Entertainment Corporation 1994 Director Retirement Plan --
incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended October 31, 1994.
Commission File No. 0-14818.
10.15 Form of Indemnification Agreement dated May 1, 1995 between the Company
and its officers and directors incorporated herein by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended April 29, 1995. Commission File No. 0-14818.
10.16 Trans World Entertainment Corporation 1997 Supplemental Executive
Retirement Plan - incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 3,
1997. Commission File No. 0-14818.
10.17 Trans World Entertainment Corporation Asset Purchase Agreement with
Strawberries, Inc.-incorporatedInc.--incorporated herein by reference to Exhibit 10.16 to
Trans World's Annual Report on Form 10-K for the year ended January 31,
1998. Commission File No. 0-14818.
10.18 Voting Agreement dated October 26, 1998 between Trans World and certain
stockholders named therein- incorporatedtherein--incorporated herein by reference to Exhibit
10.20 to the Company's Registration Statement on Form S-4, No. 333-75231.
10.19 Form of Restricted Stock Agreement dated September 27, 1999 between the
Company and Michael Madden, President and Chief Operating Officer,
incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended October 30, 1999.
Commission File No. 0-14818.
*10.20 Severance Agreement dated March 10, 2000 between the Company and Michael
Madden, President and Chief Operating Officer.
* 22 Significant Subsidiaries of the Registrant.
* 23 Consent of KPMG LLP.
* 27 Financial Data Schedule (For electronic filing purposes only)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
*Filed herewith.
F-21