United States Securities and Exchange Commission
Washington,UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X]X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 3, 1996FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
OF 1934
For the transition period from............ to ..............
Commission file numberFOR 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 YORKNew York 14-1541629
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(State or other jurisdiction (I.R.Sof (I.R.S. Employer
of
incorporation or organization) Identification No.)Number)
38 Corporate Circle
Albany, New York 12203
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(Address of principal executive offices) (Zip Code)
Registrant'soffices, including zip code)
(518) 452-1242
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(Registrant's telephone number, including area code: (518) 452-1242
---------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------------------
(Title of class)code)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by SectionSections 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge,Knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or an
amendment to this Form 10-K. [ ]
As of April 24, 1996 9,732,81423, 1997 9,747,849 shares of the Registrant's Common Stock,
excluding 48,39441,394 shares of stock held in Treasury, were issued and
outstanding. The aggregate market value of such shares held by non-affiliates
of the Registrant, based upon the closing sale price of $5.25$11 3/8 on the NASDAQ
National Market System on April 24, 1996,23, 1997, was approximately $23,000,000.$48,500,000.
Shares of Common Stock held by the Company's controlling shareholder, who
controls approximately 54.7% of the outstanding Common Stock, have been
excluded for purposes of this computation. Because of such shareholder's
control, shares owned by other officers, directors and 5% shareholders have
not been excluded from the computation.
PART I
Item 1. BUSINESS
General
Trans World Entertainment Corporation (which, together with its consolidated
subsidiaries, is referred to herein as the "Company") was incorporated in New
York in 1972. Trans World Entertainment Corporation owns 100% of the
outstanding common stock of Record Town, Inc., through which the Company's
principal retail operations are conducted.
The Company operates a chain of retail entertainment stores in a single
industry segment, the operation of retail
entertainment stores.segment. Sales were $517.0$481.7 million during the fiscal year ended
February 3, 19961, 1997 (referred to herein as "1995""1996"). The Company is one of the
largest specialty retailers of compact discs, prerecorded audio cassettes,
prerecorded videocassettes and related accessories in the United States. At
February 3, 1996,1, 1997, the Company operated 542479 stores in 34 states, the District
of Columbia and the Virgin Islands, with the majority of the stores
concentrated in the Eastern half of the United States. The Company's business
is highly seasonal in nature, with the peak selling period being the Christmas
holiday in the fourth fiscal quarter.
In 1995, in order to streamline operations and increase profitability, the Company
closed 85 stores in 1996, 151 stores in 1995 and 28 stores in 1994 as part of
a restructuring plan originally announced in the fourth quarter of 1994. During the fourth quarter of 1995, the Company
announced a second restructuring charge of $35 million to reflect the
anticipated costs associated with a program to close 163 stores over the next
two fiscal years. New
store openings werehave been significantly curtailed with only 22 new stores
opening in 1996 and 9 new stores opening in 1995. The Company anticipates
that its restructuring plan will be completed during 1995
and will continue to be curtailed until the restructuring program is
substantially completed. Continued store growth will depend largely on
refinancing the Company's debt structure.1997. See "Business
Restructuring" below and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - LiquidityOperations-Liquidity and Capital Resources".
The Company's central distribution facility currently serves all of its retail
stores. Weeklystores with weekly shipments to each store provideproviding for approximately 70%80% of
their retail product requirements. The balance of the stores' requirements
are satisfied through direct shipments from manufacturers or distribution fromdistributors and
other Company operated stores.wholesale companies.
The Company's principal executive offices are located at 38 Corporate Circle,
Albany, New York, 12203, and its telephone number is (518) 452-1242.
Business Restructuring
Background. DuringThe Company's performance in 1996 confirmed the fourth quartersuccess of 1994, the Company undertook a comprehensive examination of store profitability and adopted a business
restructuring (the "1994 Restructuring")
plan that gave due consideration to a
potential overcapacity in the retail segment of the music industry and
included a reduction in store inventory levels and the selective opening of
new stores. The 1994 Restructuring resulted in a pretax charge of $21 million
and the closing of 179 stores (versus a plan of 143). During the fourth
quarter of 1995, the Company recorded a pretax restructuring charge of $35
million (the "1995 Restructuring") against fiscal 1995 earnings to close an
additional 163 stores. The components of the restructuring charge and an
analysis of the amounts charged against the reserve are outlined in Note 2 of
the Notes to Consolidated Financial Statements.
Store Openings and Closings. During 1995 the Company's focus was on
improving profitability of existing stores while closing unprofitable store
locations and reducing overhead by streamlining operations. Future expansion
is expected to be primarily limited to existing markets. As part of the 1994
Restructuring, 63 stores closedbegan in the fourth quarter of 1995.1994. Management concluded that
intense competition from existing retailers and new entrants, combined with
changing customer demand and declining mall traffic, was adversely impacting
certain of the Company's retail markets. The Company recognized and responded
to these conditions before any of its competitors and as a result has nearly
completed its restructuring.
The Company's restructuring included closing underperforming stores, improving
operating efficiencies and restructuring its debt. In accordance
withorder to reduce its
portfolio of stores to a strong core of profitable locations in desirable
geographic markets, the 1995 Restructuring 163Company continued to focus on improving the
profitability of existing stores will beand streamlining its operations by closing
unprofitable stores. As of February 1, 1997, the Company has closed or
relocated a total of 264 stores and an additional 77 stores are forecasted to
close or relocate in 1996 and 1997. The
closings are not concentrated in a particular store format or geographic area.
The principal factors considered in identifying stores for closure include:
(1) whether a store generated sufficient cash flow at the store level to
provide an acceptable return on current investment; (2) whether the latest
sales trends indicated a likely improvement in the historical store results;
(3) whether recent or imminent competition would make sales improvements less
likely; and (4) whether a store's performances warrants lease renewal where
the lease was scheduled to expire.
To illustrate the impact of the store closings, the table below sets forth the
store openings and closings over the past threetwo fiscal years, and a preliminary forecast for
the 19961997 fiscal year. TheStore closings are not concentrated in a particular
format or geographic region and store openings in the forecast do not
necessarily represent commitments, and are subject to a number of factors,
including constraints under the Company's credit agreements.commitments. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations and Financial
Condition - LiquidityOperations-Liquidity and Capital
Resources".
Fiscal Year
---------------------------------------------------------
Forecast
1997 1996 1995
1994 1993
---------------------------------------------------------
MALL
Number of Stores,
Beginning of period 378the Period 356 379 431
442 439
Openings 566 19 7
26 41
Closings (65)(70) (42) (59)
(37) (38)
---------------------------------
Number of Stores,------------------------
End of period 318the Period 352 356 379
431 442
---------------------------------
NON-MALL/NON MALL/OTHER
Number of Stores,
Beginning of period 164the Period 123 163 253
242 215
Openings ---4 3 2
29 40
Closings (35)(7) (43) (92)
(18) (13)
---------------------------------
Number of Stores,------------------------
End of period 129the Period 120 123 163 253 242
---------------------------------
TOTAL COMPANY
Number of Stores,
Beginning of periodthe Period 479 542 684
684 654
Openings 570 22 9
55 81
Closings * (100)(77) (85) (151)
(55) (51)
---------------------------------
Number of Stores,------------------------
End of period 447the Period 472 479 542
684 684
=================================
* The 1995 Restructuring includes closing 63 additional stores in 1997.========================
Debt Restructuring.Store Formats
The second elementCompany operates stores in a number of the 1995 Restructuring involved
modifications to the Company's senior credit agreements.distinct formats. The Company's
borrowings consistmerchandising strategy is to offer customers a broad selection of a $65.3 million available amount of revolving credit
facilities (the "Revolver")titles at
competitive prices in convenient and $56.5 million in long-term senior notes (the
"Notes") totalling $121.8 million. In December 1995attractive store locations.
Mall Stores. At February 1, 1997, the Company began
discussions with its lenders to renegotiate and extend the terms and
conditions of the Revolver and the Notes. Additionally, covenant
non-compliance was temporarily waived at February 3, 1996, while modifications
to the credit agreements were being negotiated.
On May 1, 1996 the Company entered into an agreement with its lenders to
restructure the Revolver and the Notes. The lenders have extended the
maturity of the Company's debt to July 31, 1998 at which time all of the
outstanding amounts mature. The revised credit agreements contain
restrictions on capital expenditures, dividends, acquisitions, cash flow,
working capital and consolidated tangible net worth. For additional
discussion of the credit agreements see Note 3 to the Consolidated Financial
Statements and "Management's Discussion and Analysis of Operations and
Financial Condition - Liquidity and Capital Resources".
Store Formats
Mall Stores. The Company operated 181177 full-line mall
stores, at February 3,
1996, generally under the name of "Record Town."Town". These stores, utilize anlocated
primarily in large shopping malls, average
space of approximately 3,000 square feet,
butwith certain stores range to as much
as 7,500ranging in excess of 7,000 square feet. Mall stores focus
on in-store presentation, broad selection of products and convenient
locations. The full-line mall storesformat averaged approximately $275
sales per square foot during 1995. Management believes the in-store
presentation, broad product selection and convenient location make these
stores attractive to the customer.
Specialty Mall stores, operated under the names "Music World" and "Tape
World", carry a smaller product assortment than the full-line mall stores. On
February 3, 1996, the Company operated 65 of these stores averaging
approximately 1,300 square feet. These stores averaged approximately $390$280 in sales per
square foot in 1995.
Video-for-Sale stores are operated1996.
Specialty Mall Stores. Operating under the name "Saturday Matinee" and
are"Tape World", the Company had
52 specialty mall stores at February 1, 1997. The average square footage of
these specialty stores was approximately 1,300 square feet, generating average
sales per square foot of $400 in 1996. These specialty mall stores offer a
less diverse product selection than the larger full-line mall stores.
Video-for-Sale. Dedicated primarily dedicated to the sale of prerecorded video
products. On
February 3, 1996,products, the Company operated 62 of56 stores under the name "Saturday Matinee" on
February 1, 1997. Located in shopping malls, these stores in mall locations
which averaged 2,1502,100
square feet in size and generatedfeet. The average sales per square foot of $300was $325 in 1995.1996.
Combination Stores shareStores. Combination stores sharing common storefrontsstore fronts of "Record
Town" and "Saturday Matinee." AsMatinee" accounted for 70 of the 479 total stores in
operation at February 3, 1996, the Company operated 69 stores with an
averaging approximately 7,0001, 1997. This format averages 7,500 square feet with
combination superstores having square footage as largegreat as 17,00016,000 square feet.
These stores offer the consumer an exciting combination of music and
video-for-sale products conveniently located in one store location. During 1995, these stores
averaged approximately $235store. In 1996, the
average sales per square foot.
During 1993,foot was approximately $240.
The Company currently operates two multimedia superstores under the Company introducedname
"F.Y.E." or "For Your Entertainment", or "F.Y.E."
These stores combine book, multimedia merchandise and a video game
entertainment room,. First introduced in addition to the Company's other lines1993, F.Y.E
combines its broad assortment of music and video merchandise. At February 3, 1996,titles with a game arcade,
coffee bar, and an extensive product mix of books, games, accessories and
boutique items. F.Y.E is designed to be a semi-anchor or destination retailer
in major regional malls. The two "F.Y.E." stores werethat are currently in operation.operation are
located in Trumbull, CT and Victor, NY with square footage of approximately
27,000 and 45,000 square feet, respectively.
Non-Mall Stores. Freestanding Storesstores accounted for 112100 of the 479 stores in
operation at February 3, 1996,1, 1997, substantially all of which operate under the
name "Coconuts.""Coconuts". These stores are designed for free-standing, strip center
and downtown locations in areas of high population density. The majority of
the freestanding stores range in size from 4,000 to 8,000 square feet. EightSix of
the freestanding stores are Coconuts "superstores" that average approximately
14,000 square feet in size.feet. Freestanding stores carry a more extensive product
assortment and have a pricing structure that is morewith an emphasis on competitive than a mall store.pricing. Average sales per square
foot were approximately $190 per square foot for 1995.$205 in 1996.
The Company's non-mall stores also include a video rental store format and
a licensed operation format. The Company operated 36 video rental locations
in 1995 averaging 4,700 square feet, including 27These
stores that operate under the tradename "Movies Plus."Plus". As of February 1, 1997, the
Company operated 22 stores averaging approximately 5,500 square feet.
Products
The Company's nine video rental department
locations that operated withinstores offer a discount retail store were sold on February
14, 1996. The Company also operated 15 licensed musicfull assortment of compact discs, prerecorded
audio cassettes, prerecorded videocassettes, blank audio and video departments,
within retail department stores, which average 2,500 square feet and offer
music and video entertainment products and related accessories.
Strategic Alliances. At February 3, 1996 the Company was a venture partner
with Tandy Corporation in seventeen music and video departments averaging
12,000 square feet which are contained within Tandy Corporation's electronics
megastore, Incredible Universe. The venture partners currently expect to open
two new Incredible Universe music and video departments during 1996.
Products
The Company's stores offer a full assortment of compact discs, audio
cassettes, prerecorded videocassettes, blank audio and video tapevideotape and
related accessories. Sales by category as a percent of total sales over the
past three years were as follows:
Fiscal Year Ended
------------------------------------February 1, February 3, January 28,
January 29,1997 1996 1995 1994
------------------------------------
Compact discs 50.1% 49.2% 46.5% 41.9%
Prerecorded audio cassettes 22.2 25.5 28.9
33.8
Prerecorded videocassettes 18.6 16.7 15.5
14.5
Blank tape, video games,
accessories and otherOther 9.1 8.6 9.1
9.8
------------------------------------
Total----------- ----------- ------------
TOTAL 100.0% 100.0% 100.0%
------------------------------------=========== =========== ============
Prerecorded Music. The Company's music stores offer a full assortment of
compact discs and prerecorded audio cassettes approximately 67% of which is
purchased primarily from six major manufacturers. Music categories include rock,
country, urban, pop, vocal, country,rap, gospel, jazz, classical jazz, religious, rhythm and blues, and show and movie soundtracks.
The merchandiseMerchandise inventory is generally classified for inventory management
purposes in three groups: "hits", which are the best selling new releases,
"fast moving" titles, which generally constitute the top 1,000 titles with the
highest rate of sale in any given month, and "catalog" items that customers
purchase to build their collections.
The Company's prerecorded music product mix has continued to shift from audio
cassettes to the increasingly popular compact discs. Since 1994, the unit
sales volume of compact discs has exceeded the unit sales of audio cassettes. The
Company believes this trend will continue in the future.
Video Products. The Company offers prerecorded videocassettes for sale in a
majority of its stores, with the selection of titles ranging up to 8,000
depending on the size and sales volume of each store. The sell-through
business has been stimulated by lower list prices offered by the movie studios
creating a greater acceptance by the consumer.
Blank AudioDigital Versatile Discs ("DVD"), a new video technology, was introduced in
March 1997. DVD offers a quality that exceeds both the current VHS and Video Tapes.CD
formats; in addition, DVD offers the consumer more storage than the current
CD. The Company is currently testing consumer acceptance of this product by
making it available in select markets, but does not expect the product will
have a significant financial impact in 1997.
Other Products. The Company stocks and promotes brand name blank video and
audio cassette tapes.
Accessory Products. Accessorytapes as well as accessory products offered by the Company for compact discs, audio
cassettes and video cassettes includevideocassettes including maintenance and cleaning products, home
and portable storage cases, and headphones, portable electronics and also include video games.
Advertising
The Company makes extensive use of in-store advertising circulars and signs
and also pursues a mass-media marketing program for its freestanding stores
through advertisements in newspapers, radio, television and newspapers.television. Most of the
vendors from whom the Company purchases merchandise offer their customers
advertising allowances to promote their products.
Competition
The retail sale of prerecorded music and video specialty retail industry is highly
competitive.
Products offered by competing retailers are identical to the Company's product
offerings, varying only by the breadth of the product assortment within store
locations. Numerous chain storescompetitive with numerous chains and discount stores many of which have
greater financial resources than the Company, sellselling prerecorded music
and video merchandise. LargeSeveral large national retail chains, that operate
book or electronicselectronic superstores have expanded their product lines to include
music and video software products,departments in an effort to increase store traffic. The
impact of the national chains on the traditional specialty retailer has been
to reduce customer traffic and now offer music and video departments that are larger
in square footage thanrevenues. As a result, many of the Company's
typical specialty store. In addition,
consumers receive television mail order offerscompetitors are experiencing financial difficulties which have resulted in
increased bankruptcy filings and corporate restructurings. Many of the major
music vendors are enforcing programs to eliminate loss leader pricing
strategies, such as the Minimum Advertised Pricing ("MAP") programs, which
penalizes sellers for not complying with vendor pricing programs. The MAP
programs have been a success and have access to mail order
clubs affiliated with major manufacturers of prerecorded music.stabilized prices.
The Company has formulated a number of different strategies to compete against
the increased number of music and video software retailers. During
1995, the Company's 9 new stores averaged 11,600 square feet in size,
considerably larger than the Company's overall average store size of 4,000
square feet. This has enabled theThe Company
continues to respond to consumer needs for
increased product selection by increasing the number of titles offered for
sale in both the music and video products. In 1995, the Company continued to
expand moreuse competitive pricing programs that convey a simple, value-oriented
message to consumers. Althoughbased on market conditions, and
although competitive pricing is important, management believes the positioning
of its stores within successful regional malls is equally important in
competing for mall customers. Management believes that the majority of thelarge regional
malls in which the Company operates have not been materially impacted by the
increase in the number of stores operated by non-mall competitors. In general, regional malls are largely impacted by mall shopping
traffic.
The increase in the number of competitors and their pricing structures has
made achieving meaningful comparable store sales gains more difficult.difficult; however,
during 1996 the Company experienced positive comparable store sales in each of
its fiscal quarters. The Company believes that its convenient locations,
customer service and product assortments in addition to its pricing strategies
will enable it to remain competitive, but that the gross margin rate will continue
to be under pressure for the near term.
competitive.
Seasonality
The Company's business is seasonal in nature. The fourth quarter which
includes the month of December and the Christmas holiday in
the fourth quarterseason constitutes
the Company's peak selling period, totaling 38%37.5% of annual sales in 1995. Prior to 1995, the Company experienced operating
losses in the first three fiscal quarters and typically earned all of its
annual profits, before restructuring charges, in the fourth quarter. During
1995, the Company's fourth quarter profitability, prior to the $35 million
restructuring charge, would not have been great enough to offset the losses
from the first three quarters to have a profitable year.1996.
Distribution and Merchandise Operations
The Company's distribution facility uses certain automated and computerized
systems designed to manage product receipt, storage and shipment. Generally,
price tickets and bar-coded product information are attached to each piece of
merchandise before it leaves the distribution center. Store inventories of
regular product are replenished in response to detailed product sale
information that is transmitted to the central computer system from each
outlet after the close of the business day. Shipments from the facility to
each of the Company's stores are made at least weekly and currently provide
the Company's stores with approximately 70%80% of their product requirements.
The balance of the stores' requirements are satisfied through direct shipments
from manufacturers or redistribution fromdistributors and other stores.wholesale company's.
Company-owned trucks service approximately 30% of the Company's stores; the
balance is serviced by several common carriers chosen on the basis of
geographic and rate considerations. No contractual arrangements exist between
the Company and any common carriers. The Company's sales volume and
centralized product distribution facility enable it to take advantage of
transportation economies.
During 1994, the Company contracted with an equipment supplier and a
facilities
engineering company to more completely automate the product picking,
distribution and returnreturns functions of its distribution center. Merchandise return sortationThese
enhancements were operational in 1996 and the Company is continuing to fine
tune its operations. The remaining equipment is currently operational. Equipment testing and implementation
for the remaining sortation equipment willcontinued in 1996 and is expected to be completed during 1996.in 1997. The Company
believes that the existing distribution center is adequate to meet the
Company's planned business needs, and additional improvements will be
completed primarily for operational efficiency.
Suppliers and Purchasing
The Company purchases inventory for its stores from approximately 400
suppliers on an unsecured basis. Approximately 62%67% of purchases in 19951996 were
made from the six largest suppliers: Sony Music, Warner/Electra/Atlantic Corp. (subsidiary of Time Warner), Sony
Music, EMD, PolyGram, Universal and BMG Music (subsidiary of Bertelsman), MCA,
Inc. (subsidiary of Matsushita), PolyGram (subsidiary of Philips), and CEMA
(subsidiary of Thorn-EMI).Music.
As is typical in this industry, the Company has no material long-term purchase
contracts and deals with its suppliers principally on an order-by-order basis.
In the past, the Company has not experienced difficulty in obtaining
satisfactory sources of supply, and management believes that it will retain
access to adequate sources of supply. The Company also expects to continue to
pass on to customers any price increases imposed by the suppliers of
prerecorded music and videocassettes.
The Company produces store fixtures for all of its new stores and store
remodels in its manufacturing facility located in Johnstown, New York.
Production of store fixtures did not have a material financial impact in 1995,1996,
and management does not anticipate that such manufacturing will constitute a
significant element of its business in 1996.
1997.
Trade Customs and Practices
Under current trade practices, retailers of prerecorded audio cassettes and
compact discs are entitled to return products they have purchased from major
vendors for other titles carried by these vendors,vendors; however, the returns are
subject to merchandise return penalties. This industry practice permits the
Company to carry a wider selection of music titles and at the same time reduce
the risk of obsolete inventory. Most manufacturers and distributors of
prerecorded videocassettes offer return privileges comparable to those with
prerecorded music, but with fewer merchandise return penalties. Video rental
products are not eligible for return to the manufacturers. Product return
credit is applied as a reduction against current merchandise product payments.
In some instances, the Company's suppliers limit return privileges relative to
current gross inventory purchases. However, manufacturers' return privilege
policies have changed in the past and may change in the future. The
merchandise return policies have not changed significantly during the past
five years, but any future changes in these policies could impair the value of
the Company's inventory. The Company generally has adapted its purchasing
policies to changes in the policies of its suppliers.
Employees
The Company employs approximately 4,100 people, of whom 700 are employed on a
full-time salaried basis, 1,2001,300 are employed on a full-time hourly basis, and
the remainder on a part-time hourly basis. The Company hires temporary help
during peak seasons to assure continued levels of customer service. Store
managers report to district managers, each of whom,who, in turn, reports to a
regional manager. In addition to their salaries, store managers, district
managers and regional managers have the potential to receive incentive
compensation based on store sales and profitability. None of the Company's
employees are covered by collective bargaining agreements, and management
believes that the Company enjoys favorable relations with its employees.
Retail Information Systems
All store sales data and product purchasing information are collected
centrally utilizing the IBM AS/400 midrange configuration. The Company's
information systems manage a database of over 150,000 active skussku's in
prerecorded music, video and accessory products. The system processes
inventory, accounting, payroll, telecommunications and other operating
information for all of the Company's operations.
Trademarks and Service Marks
The Company operates stores under various names and marks, including the
service marks "Record Town", "Tape World", "Coconuts", "Saturday Matinee",
"Movies Plus" and "FYE""F.Y.E." that are registered in the United States Patent and
Trademark Office. The Company intends to continue to use these names and
marks, among others, for its stores, with the choice of name for a specific
store depending upon the type of store and its location.
Item 2. PROPERTIES
Retail Stores
At February 3, 1996,1, 1997, the Company operated 542479 retail outlets. The Company
owns one real estate site, which it formerly operated as a retail outlet. The
Company now leases this location to a tenant.outlet and
currently leases. All of the Company's retail stores are under operating
leases with various terms and options. Substantially all of its stores
provide for payment of fixed monthly rentals, a percentage of the gross
receipts of the store in excess of specified sales levels, and operating
expenses for maintenance, property taxes, insurance and insurance.utilities. The
following table lists the number of leases due to expire (assuming no renewal
options are exercised) in each of the fiscal years shown, as of February 3,
1996:
1996 . . . . . .16 2000 . . . . . . 39
1997 . . . . . .80 2001 . . . . . . 82
1998 . . . . . .92 2002 . . . . . . 52
1999 . . . . . .57 20031,
1997:
1997............92 2001............52
1998............45 2002............45
1999............37 2003............57
2000............73 2004 & beyond. .124Beyond...78
The Company expects that as these leases expire, it will be able to either
to
obtain renewal leases, if desired, or to obtain leases for other suitable
locations. Included in the table above are several month-to-month leases
under negotiations for renewal; these leases are included as part of leases
due to expire in 1997. Certain of the stores scheduled to close as part of
the 1995
Restructuringrestructuring plan will be closed upon the expiration of the applicable
store leases.lease.
Corporate Offices and Distribution Center Facility
The Company leases its Albany, New York distribution facility and the majority
of the corporate office space from its principal shareholder and Chief
Executive Officer under two leases that extend through the year 2015. Both
leases are at fixed rentals with provisions for biennial increases based upon
increases in the Consumer Price Index. Under such leases, the Company pays
all property taxes, insurance and maintenance. The office portion of the
facility is comprised of 21,000 square feet. The distribution center portion
is comprised of approximately 138,000 square feet.
The Company leases an 86,000 square foot facility in Johnstown, N.Y., where it
manufactures its store fixtures. The seven yearseven-year operating lease expires in
1998.
Item 3. LEGAL PROCEEDINGS
The Company has no material legal proceedings pending against it.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.applicable
Supplementary Items - Identification of Executive Officers of the Registrant
- - - ----------------------------------------------------------------------------------------------------------------------------------------------------------
(Pursuant to Instruction 3 to Item 401(b) of Regulation S-K)
The name, age, principal occupation and period of service as an executive
officer of the Company for each executive officer are set forth below.
Robert J. Higgins Age 5455
President, Chief Executive Officer,
Chairman of the Board and Director Since 1973
Robert J. Higgins founded the Company in 1972 and has participated in its
operations since 1973. Mr. Higgins has served as President, Chief Executive
Officer and a director of the Company for more than the past five years, and
is the principal shareholder in the Company.
Edward W. Marshall, Jr. Age 5051
Executive Vice President-OperationsPresident of Operations Since 1989
Edward W. Marshall, Jr. has been Executive Vice President of the Company since
August 1994. He served as Senior Vice President-Operations of the Company
since January 1991 and was Vice President-OperationsPresident of Operations upon joining the
Company in May 1989. For more than five years prior thereto, hePrior to joining the Company, Mr. Marshall was the Vice
President-OperationsPresident of Operations for Morse Shoe, a retail store operator.
James A. Litwak Age 43
Executive Vice President of Merchandising and Marketing Since 1996
James A. Litwak joined the Company in May 1996 as Executive Vice President of
Merchandising and Marketing. Prior to joining the Company, Mr. Litwak served
as Senior Vice President and General Merchandise Manager of DFS Group Limited,
an international retailer of in-airport duty free shops. Prior to joining DFS
Group Limited, Mr. Litwak held several executive positions in his fourteen
year career at R.H. Macy's Company with the most recent being President of
Merchandising for Macy's West responsible for developing marketing,
merchandising and product launch programs to fuel growth for the 50 store
division.
John J. Sullivan Age 4344
Senior Vice President, Treasurer and Chief Financial Officer Since 1991
John J. Sullivan has been Senior Vice President, Treasurer and Chief Financial
Officer of the Company since May 1995. Mr. Sullivan joined the Company in
June 1991 as the Corporate Controller and was named Vice President of Finance
and Treasurer in June of 1994. Prior to joining the Company, Mr. Sullivan was
Vice President and Controller for Ames Department Stores, a discount
department store chain.
Bruce J. Eisenberg Age 3637
Senior Vice President of Real Estate Since 1993
Bruce J. Eisenberg has been Senior Vice President of Real Estate at the
Company since May of 1995. He joined the Company in August of 1993 as Vice
President of Real Estate. For the five years priorPrior to joining the Company, Mr. Eisenberg was
responsible for leasing, finance and construction of new regional mall
development at The Pyramid Companies.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information. The Company's Common Stock is traded on the
over-the-counter market and quoted on the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ") National Market System
under the symbol "TWMC". As of April 23, 1997, there were approximately 400
shareholders of record. However, management believes that a significant
number of shares are held by brokers under a "nominee name" and that the
actual beneficial shareholder count exceeds 1,000. The following table sets
forth fiscal quarterly high and low last sale prices as reported by NASDAQ for
the period from January 30, 1995 through January 31, 1997, and the closing
price as of April 23, 1997.
Market Information. The Company's Common Stock is traded on the
over-the-counter market and quoted on the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ") National Market System
under the symbol "TWMC". As of April 24, 1996, there were approximately 400
shareholders of record. However, management believes that a significant
number of shares are held by brokers under a "nominee name" and that the
actual beneficial shareholder count exceeds 1,000. The following table sets
forth fiscal quarterly high and low last sale prices as reported by NASDAQ for
the period from January 31, 1994 through February 2, 1996, and the closing
price as of April 24, 1996.
Last
SaleSales
Prices
---------1995 High Low
------- -------
1994:
1st Quarter $14 $11 1/2
2nd Quarter 12 5/8 10 1/4
3rd Quarter 12 3/4 10 1/2
4th Quarter 12 3/4 5 1/2
1995:
1st Quarter $ 6 $ 4$6 $4
2nd Quarter 5 1/4 3 3/8
3rd Quarter 4 7/8 2 1/4
4th Quarter 3 1/2 1 3/4
1996:1996
1st Quarter $5 3/8 $2 1/2
2nd Quarter 7 1/4 4 1/2
3rd Quarter 9 1/2 4 7/8
4th Quarter 8 3/4 6 1/4
1997
April 24,23, closing price $5 1/4.$ 11 3/8
Dividend Policy. The Company has never declared or paid cash dividends on theits
Common Stock. The Company's credit agreements currently in place do not
permit payment of cash dividends. Any future determination as to the payment
of dividends would depend upon capital requirements and limitations imposed by
the Company's credit agreements and such other factors as the Board of
Directors of the Company may consider.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data and other operating
information of the Company. The selected balance sheet and income statement
data set forth below areThe following table sets forth selected consolidated financial data and other
operating information of the Company. The selected balance sheet and income
statement data set forth below is derived from the consolidated financial
statements of the Company. The selected consolidated financial data should be
read in conjunction with the consolidated financial statements and related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Fiscal Year Ended (1)
----------------------------------------------------------February 1, February 3, January 28, January 29, January 30,
February 1,1997 1996 1995 1994 1993
1992
-------------------------------------------------------------------------------------------------------------------------
(in thousands except per share and store data)
INCOME STATEMENT DATA:
Sales $481,657 $517,046 $536,840 $492,553 $454,916
$411,131
Cost of sales 308,952 340,754 341,422 307,834 280,572
256,110
---------------------------------------------------------------------------------------------------------------------
Gross profit 172,705 176,292 195,418 184,719 174,344 155,021
Selling, general and
administrative expenses 136,084 150,628 158,637 147,644 133,768
117,370
Restructuring charge --- 35,000 21,000 --- --- ---
Depreciation and
amortization 14,134 16,125 16,932 14,655 13,310
11,664
--------------------------------------------------------------------------------------------------------------------
Income (Loss) from operations 22,487 (25,461) (1,151) 22,420 27,266
25,987
Interest expense 10,767 14,222 9,540 5,971 5,627
5,946
--------------------------------------------------------------------------------------------------------------------
Income (Loss) before
income taxes 11,720 (39,683) (10,691) 16,449 21,639
20,041
Income tax expense (benefit) 4,618 (14,310) (4,435) 6,626 8,374
8,012
--------------------------------------------------------------------------------------------------------------------
Net income (loss) $(25,373) $ (6,256) $ 9,823 $ 13,265 $ 12,029
=========================================================$7,102 ($25,373) ($6,256) $9,823 $13,265
===========================================================
Earnings (Loss) per share $ (2.61) $ (0.64) $ 1.01 $ 1.40 $ 1.32
=========================================================$0.73 ($2.61) ($0.64) $1.01 $1.40
===========================================================
Weighted average number of
shares outstanding 9,757 9,726 9,701 9,723 9,474
9,087
====================================================================================================================
BALANCE SHEET DATA: (at the end of the period)
Working capital $ 78,773 $ 93,431$81,247 $78,773 $93,431 $101,538 $ 63,058 $ 43,372$63,058
Total assets 310,053 390,331 426,939 380,264 286,873 248,022
Current portion of
long-term obligations 9,557 3,420 6,618 3,695 910
12,349
Long-term obligations 50,490 60,364 66,441 73,098 25,512
26,281
Shareholders' equity 101,362 94,104 119,477 126,074 116,329 92,620
Store Count:
Number of stores open
at end of period 479 542 684 684 654 597
(1) Each year consisted of 52 weeks except the fiscal year ended February 3,
1996 which consisted of 53 weeks.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS, FISCAL YEARS 1996, 1995 AND 1994
AND 1993The following is an analysis of the Company's results of operations, liquidity
and capital resources. To the extent that such analysis contains statements
which are not of a historical nature, such statements are forward-looking
statements, which involve risks and uncertainties. These risks include, but
are not limited to, changes in the competitive environment for the Company's
products, including the entry or exit of non-traditional retailers of the
Company's product to or from its markets; the release by the music industry of
an increased or decreased number of "hit releases"; general economic factors
in markets where the Company's products are sold; and other factors discussed
in the Company's filings with the Securities and Exchange Commission.
The following table sets forth certain income and expense items as a
percentage of sales for the periods indicated:
Fiscal Year Ended
--------------------------------------------------------------------------------
February 1, February 3, January 28,
January 29,1997 1996 1995
1994
--------------------------------------------------------------------------------
Sales 100.0% 100.0% 100.0%
Gross profit 35.9 34.1 36.4 37.5
Selling, general and
administrative expenses 28.3 29.1 29.6
30.0
Restructuring chargecharges 0.0 6.8 3.9 ---
Depreciation and amortization 2.9 3.1 3.2 3.0
--------------------------------------3.1
---------------------------------------
Income (Loss) from operations -4.9 -0.2 4.54.7 (4.9) (0.2)
Interest expense 2.2 2.8 1.8
1.2
-----------------------------------------------------------------------------
Income (Loss) before income taxes -7.7 -2.0 3.32.5 (7.7) (2.0)
Income tax expense (benefit) -2.8 -0.8 1.3
--------------------------------------
Net income (loss) -4.9% -1.2% 2.0%
______________________________________1.0 (2.8) (0.8)
---------------------------------------
NET INCOME (LOSS) 1.5% (4.9)% (1.2)%
=======================================
Change in comparable store sales -3.5%3.6% (3.5)% 1.1%
-2.1%=======================================
Fiscal Year Ended February 1, 1997 ("1996")
Compared to February 3, 1996 ("1995")
Sales. The Company's sales decreased $35.4 million, or 6.8%, from 1995 while
the number of stores in operation decreased by 12%. The decrease was
primarily attributable to a net decrease of approximately 151,000 square feet
of retail selling space, which resulted from closing 85 stores offset slightly
by the opening of 22 stores. In 1995 there were 53 weeks in the fiscal year,
with the extra week accounting for $6.9 million in sales. Comparable store
sales for fiscal year 1996 increased by 3.6%. Management attributes the
comparable store sales increase to its strategic decision to eliminate
unprofitable stores and focus on customer service, superior retail locations,
inventory management and merchandise presentation. Sales by product
configuration are shown in the following table:
Fiscal Year Ended
February 1, February 3, January 28,
1997 1996 1995
Compact discs 50.1% 49.2% 46.5%
Prerecorded audio cassettes 22.2 25.5 28.9
Prerecorded videocassettes 18.6 16.7 15.5
Other 9.1 8.6 9.1
----------- ----------- ------------
TOTAL 100.0% 100.0% 100.0%
=========== =========== ============
Changes in unit selling prices in 1996 did not materially affect sales. The
overall unit sales volume decreased in 1996 as a result of the Company's store
closing program. Comparable store unit sales volume for compact discs and
prerecorded videos increased 7.8% while audio cassettes declined 13.2%.
The Company's store formats showed positive comparable growth in 1996 compared
to 1995. Comparable store sales for mall stores increased 2.8% while non-mall
stores increased 7.4%. By product configuration, comparable store sales in
music increased 1.9% while the video sell-through, benefiting from continued
growth of the video sell-through market, increased 12.4%.
Gross Profit. Gross profit, as a percentage of sales, increased to 35.9% in
1996 from 34.1% in 1995 as a result of reduced merchandise shrinkage and
increased purchase discounts combined with a strong performance from higher
margin catalog sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A"), as a percentage of sales, decreased to 28.3%
in 1996 from 29.1% in 1995. The 0.8% decrease can be attributed to the
closing of underperforming stores, the receipt of $2.5 million upon
termination of a business agreement in the second quarter 1996 and a 3.6%
increase in comparable store sales.
Interest Expense. Interest expense decreased 24% to $10.8 million in 1996
from $14.2 in 1995. The decrease is due to lower average outstanding
borrowings offset in part by increased weighted average interest rates.
Income Tax Expense. The effective income tax rate was 39.4% in 1996. See
Note 4 of the Notes to Consolidated Financial Statements for a reconciliation
of the statutory tax rates to the Company's effective tax rate.
Net Income. In 1996, the Company's net income increased to $7.1 million
compared to a net loss of $25.4 million in 1995. The improved bottom line
performance can be attributed to the success of the Company's restructuring
plan. Additionally, the Company benefited from a comparable store sales
increase, higher gross margin rate and lower SG&A.
Fiscal Year Ended February 3, 1996 ("1995")
Compared to January 28, 1995 ("1994")
-------------------------------------------
Sales. The Company's sales decreased by $19.8 million, or 3.7%, from 1994.
The decrease was primarily attributable to a net decrease of 340,000 square
feet of retail selling space, which resulted from closing 151 stores while
opening 9 stores.
The sales decrease was somewhat offset by an additional week included in
fiscal 1995 sales results which accounted for $6.9 million in sales. Comparable store sales for the fiscal year decreased 3.5%.
Management attributes the comparable store sales decline to the sluggish
retail environment throughout 1995 and weaker new releases compared to the
prior year.
Sales by product configuration are shown in the following table:
Fiscal Year Ended
-------------------------------------
February 3, January 28, January 29,
1996 1995 1994
-------------------------------------
Compact discs 49.2% 46.5% 41.9%
Prerecorded audio cassettes 25.5 28.9 33.8
Prerecorded videocassettes 16.7 15.5 14.5
Blank tape, video games, accessories
and other 8.6 9.1 9.8
------ ------ ------
Total 100.0% 100.0% 100.0%
====== ====== ======
Sales were not materially affected by unit selling prices which remained
constant in 1995. The unit sales volume for compact discs and prerecorded
video remained constant while audio cassettes declined 19%, accounting for the
decline in retail sales.
The Company's store formats performed similarly in 1995. Comparable store
sales for mall stores decreased 4.1%, while non-mall stores decreased 2.6%.
By product configuration, comparable store sales in music decreased 3.2% while
video sell-through, a smaller component of the Company's business, increased
1.3% on a comparable store basis, benefiting from the continued growth of the
video sell-through market.
The Company continues to experience increased competition from diversified
retailers entering the music business, including consumer electronics
superstores, which often emphasize discount pricing.
Gross Profit. Gross profit, as a percentage of sales, decreased from 36.4% in
1994 to 34.1% in 1995. Approximately half of the decline was due to the
increase in merchandise shrink. The remaining decline was due to the
continued shift in sales mix from prerecorded audiocassettesaudio cassettes to lower margin
compact discs, increased merchandise return penalties incurred in returning
product to vendors and, to a lesser extent, increased promotional markdowns.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A"), as a percentage of sales, decreased from
29.6% in 1994 to 29.1% in 1995. The Company reduced operating overhead
expenses by $3.2 million in 1995 due primarily to the reduction in the number
of stores, which resulted in a 0.6% decrease as a percentage of sales. Store
expenses, as a percent of sales, were higher in 1995 due to the decline in
comparable store sales and the timing of closing underperforming stores
throughout the year.
Interest Expense. Interest expense increased to $14.2 million, $4.7 million
over 1994. The increase is due to the increase in the Company's weighted
average interest rate.
Management expects 1996 interest expense to
decrease due to lower average outstanding borrowings offset in part by
increased weighted average interest rates.
Income Tax Expense.Benefit. The effective income tax rates, prior to the
restructuring charge, were slightly lower than Federal statutory rates as a
result of permanent tax differences. See Note 4 of Notes to Consolidated
Financial Statements for a reconciliation of the statutory tax rates to the
Company's effective tax rate.differences
Net Loss. The three principal factors contributing to the reduction in income
from operations, before recording the $35 million pretax restructuring charge,
were: (1) the 3.7% decline in total retail sales; (2) the 2.3% decline in
gross margin, as a percent of sales; and (3) the $4.7 million increase in
interest expense. The after-tax effect of the $35 million restructuring
charge increased losses from $0.23 per share to $2.61 per share.
Fiscal Year Ended January 28, 1995 ("1994")
Compared to January 29, 1994 ("1993")
-------------------------------------------
Sales. The Company's sales increased by $44.3 million in 1994, or 9.0%,
over 1993. The increase was primarily attributable to a net increase of
130,000 square feet which resulted from opening new stores and expanding
existing stores. Comparable store sales for 1994 increased 1.1%. Comparable
store sales were adversely impacted by delays in the implementation of the
merchandise replenishment system through the first three quarters of 1994. In
the fourth quarter of 1994, comparable store sales increased 3.3%. Management
attributes this increase to the benefits of the merchandise replenishment
system and a strong new release schedule in music.
Gross Profit. Gross profit, as a percentage of sales, decreased from
37.5% in 1993 to 36.4% in 1994. This decline was weighted equally among three
principal factors: (1) competitive pricing programs implemented in many of
the Company's markets, as competition increased from diversified retailers;
(2) penalties incurred in returning product to vendors in a continuing effort
to improve inventory mix; and (3) the continued shift in sales mix from
prerecorded audio cassettes to compact discs which have lower gross margins.
Selling, General and Administrative Expenses. As a percentage of sales,
SG&A decreased from 30.0% in 1993 to 29.6% in 1994. This decrease was
primarily due to leveraging fixed overhead costs on a total sales increase of
9%, offset in part by an increase in store operating costs, as a percentage of
sales.
Interest Expense. Interest expense increased $3.6 million over 1993. A
$50 million increase in the Company's average borrowings contributed to
substantially all of the increase.
Income Tax Expense. The effective income tax rate, prior to the
restructuring charge, was slightly lower than Federal statutory rates as a
result of permanent tax differences.
Net Loss. The two principal factors contributing to the reduction in
income from operations, before recording the $21 million pretax restructuring
charge, were: (1) the $2.0 million increase in merchandise return costs; and
(2) the $3.6 million increase in interest expense. The after-tax effect of
the $21 million restructuring charge reduced earnings from $0.65 per share to
a loss of $0.64 per share.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain measures of the Company's liquidity:
Fiscal Year
Ended
-----------------------------------------------------------
1996 1995 1994
1993
------------------------------
(in thousands)
-----------------------------
Net income (loss) plus depreciation,
amortization and restructuring charge $26,772 $32,691 $25,538
Net cash provided
by operating activities 44,934 24,136 16,739
3,427
Working capital 81,247 78,773 93,431
101,538
Current ratio 1.5:1 1.3:1 1.4:1 1.6:1
Long-term debt obligations
to equity ratio 50% 64% 56%
58%
-----------------------------------------------------------
Liquidity and Sources of Capital. Cash flow from operationsoperating activities and
funds available under a revolving credit facilities have typically beenfacility are the Company's primary
sources of liquidity. During 1995,the first three fiscal quarters, cash flow is
typically consumed by payments to merchandise vendors and store construction
expenditures. The revolving credit facility provides the Company with its
liquidity until December, when the Company's cash position has historically
been the highest, providing sufficient cash to repay all outstanding
borrowings under the revolving credit facility.
During 1996 the cash provided by operationsoperating activities was $24.1$44.9 million
compared to $16.7$24.1 million for 1994.1995. The increased cash flow from operations
was due primarily to a decrease in inventory balances in 1995, attributed to1996 which is the
result of improved inventory management and reductionsa reduction in the number of
stores. At February 3,
1996,Merchandise inventory had decreased to $195$164 million from $222$195 million at
the end of 1994.
As1995. Leverage of accounts payable to inventory improved to 73% in
the previous year,1996 from 67% in 1995.
The Company ended fiscal 1996 with cash balances of approximately $54.8
million and no outstanding balance on its Revolving Credit Facility. In 1995,
the Company accumulated cash balances in December and January instead of
repaying the balances under its revolving credit facilities (the "Revolver"). A temporary waiver of a covenant requiring a 15
day paydown of the Revolver between December 25 and January 31 was received on
December 14, 1995. Accordingly, the Company ended fiscal 1995 with cash
balances of approximately $86.9 million and $65.3 million outstanding on its
Revolver. During the period subsequent to February 3,facility.
On July 26, 1996, the Company used
the accumulated cash balances primarily to repay accounts payable in
accordanceexecuted Amended and Restated Credit Facilities
with normal payment terms. On a pro forma basis, assuming cash
balances were used to pay down the Revolver, the Company was more liquid in
the first quarter of fiscal 1996, and would have had lower balances
outstanding under the Revolver, than in the first quarter of fiscal 1995.
Effective February 3, 1996, the Company was operating under temporary
waivers from its lenders relating to non-compliance with certain technical
covenants, including the 15 day paydown of the Revolver, the Tangible Net
Worth requirement and the Debt to Tangible Net Worth requirement. The
aggregate amount of the senior debt, totaling a maximum available amount of
$121.8 million, including the Revolver and $56.5 million in outstanding
long-term notes (the "Notes") ranks pari passu. The Company was required to
remain fully borrowed during the temporary waiver period on all senior debt
instruments pending negotiation and restructuring of the modified credit
agreements.
On May 1, 1996 the Company entered into an agreement in principle with its
nine lenders to extend the maturity of the Company'sit's senior debt. The Company continues to operate under temporary waivers from its lenders until the final
loan documents are completed. The Company will beis
required to make principal repayments on the NotesAmended and Restated Note
Agreements (the "Notes") aggregating a total of $15.6 million through May 31,
1998. The maximum borrowings available on the Company's RevolverAmended and Restated
Revolving Credit Agreement (the "Revolver") will be reduced in the aggregate
total of $18.2 million by May 31, 1998. Final maturity of the then remaining
Notes of $40.9 million and the then available Revolver of $47.1 million is due
on July 31, 1998. Effective May 1, 1996, the interest rates for the Revolver
and the Notes were increased from 10.5% to 11.0% and 11.5%, respectively.
The revised credit agreementsAmended and Restated Credit Facilities contain restrictive provisions
governing dividends, capital expenditures and acquisitions, and modified covenants as to
working capital, cash flow, consolidated tangible net worth and debt to
tangible net worth to reflectworth.
Capital Expenditures. Most of the $35 million restructuring charge recorded in
1995.
Cash flow from operations, continued reductions in absolute inventory
levels, and reducedCompany's capital expenditures should assure thatare for new
store expansion and relocation of existing stores. The Company typically
finances its capital expenditures through internally generated cash and
borrowings under its revolving credit facility. In addition, the Company
has
ample liquidity to meet its operating requirements.
Capital Expenditures.
The store closingstypically receives financing from landlords in 1996 and 1997 will continue to reduce the overall
store count and total retail square footage. During 1995form of construction
allowances or rent concessions for a portion of the Company added 9
new stores, totaling 0.1 million square feet. Combined with 151 stores that
were closed or relocated, total retail square footage decreased on a net basis
by 12% to 2.2 million square feet. In 1995, the average store size was
greater than in past years, a trend that is expected to continue in 1996.capital expenditure.
Total capital expenditures were $10.0approximately $10 million in 1995, including1996 with
significantly all of it being related to new stores, store remodels and reconfigurations and the automation of the Company's
distribution center.
store
reconfiguration.
In fiscal 1996,1997, the Company plans to spend approximately $12 million, net of
construction allowances, in capital expenditures.
These funds will be
provided by cash flow from operations. The Company's plans include the
opening of approximately 5 new stores and approximately $2 million for
operational improvements being made to the central distribution center for the
implementation of automated sortation equipment.
Provision for Business Restructuring. DuringThe Company's performance in 1996
confirmed the success of a restructuring plan that began in the fourth quarter
of 1995 the Company undertook a comprehensive
examination of store profitability and adopted a second business restructuring
plan which when combined with the 1994 Restructuring included closing over 300
stores out of over 700 stores in operation during 1994. Management concluded that select retail entertainment markets had begun to reflect overcapacity of
retail outletsintense competition from existing
retailers and large discount-priced electronics storesnew entrants combined with changing customer demand and
other
superstores were having an adverse impact ondeclining mall traffic was adversely impacting certain of the Company's retail
stores. This resultedmarkets. The Company recognized and responded to these conditions before any
of its competitors and as a result has nearly completed its restructuring.
The Company's restructuring included closing underperforming stores, improving
operating efficiencies and restructuring its debt. In order to reduce its
portfolio of stores to a strong core of profitable locations in desirable
geographic markets, the Company recordingcontinued to focus on improving the
profitability of existing stores and streamlining operations by closing
unprofitable stores. As of February 1, 1997, the Company has closed or
relocated a $35 million pretax
restructuring chargetotal of 264 stores and an additional 77 stores are forecasted to
close or relocate in 1995, thereby increasing the 1995 loss from $0.23 per
share to $2.61 per share. The components of the restructuring charge included
approximately $24 million in reserves for future cash outlays and
approximately $11 million in asset writedowns. The cash outflows will be
financed from operating cash flows and liquidation of merchandise inventory
from the stores identified for closure. The timing of store closures will
depend on the Company's ability to negotiate reasonable lease termination
agreements. A detailed discussion and analysis of the amounts included in and
charged against the restructuring reserve is set forth in Note 2 of the Notes
to Consolidated Financial Statements.
The store closings are expected to be completed over a two year period.
See "Business - Business Restructuring" of this Annual Report on Form 10-K.1997.
To illustrate the impact of the store closings, the table below sets forth the
store openings and closings over the past three fiscal years, and a preliminary forecast
for the 19961997 fiscal year. The store openings in the forecast do not
necessarily represent commitments, which are subject to a
number of factors, including restrictions under the Company's credit
agreements.commitments.
Fiscal Year
--------------------------------------------------------
Forecast
1997 1996 1995
1994 1993
--------------------------------------------------------
TOTAL COMPANY
Number of stores,
beginning of period 479 542 684
684 654
Openings 570 22 9
55 81
Closings * (100)(77) (85) (151)
(55) (51)
---------------------------------------------------------
Number of stores,
end of period 447472 479 542
684 684
================================
* The 1995 Restructuring includes closing 63 additional stores in=========================
The Company is experiencing improved earnings and cash flow benefits as a
result of the restructuring program and expects continued improvement as the
remaining store closures are completed throughout the remainder of 1997.
ManagementDissolution of Joint Venture. During 1996, the Company was a venture partner
with Tandy Corporation. The venture partnership will continually review the opportunity to accelerateterminate in 1997 with
the closing of underperformingthe joint venture stores. Sales associated with the stores identified for future closing totaled
$100 million in 1995. Management currently anticipates that pretax losses at
the store level, before corporate overhead and other indirect costs, during
the period of store closures will approximate $2.6 to $2.8 million. Because
store closures will take place throughout 1996 and 1997, theThe Company does not currently expect to receive mostanticipate this
will have a material impact on its financial position or results of the earnings or cash flow benefits from
the 1995 Restructuring until fiscal years 1997 and 1998.
operations
in 1997.
Impact of Inflation. Although the Company cannot accurately determine the
precise effect of inflation on its operations, management does not believe
inflation has had a material effectaffect on the results of operations in the last
three fiscal years. When the cost of merchandise items has increased, the
Company generally has been able to pass the increase on to customers.
Seasonality. The Company's business is seasonal in nature, with the highest
sales and earnings occurring in the fourth fiscal quarter. See Note 9 of the
Notes to Consolidated Financial Statements for quarterly financial highlights.
Dividend Policy. The Company has never paid cash dividends and does not
anticipate paying cash dividends in 1996.1997. The Company's credit agreements
currently prohibit the payment of cash dividends.
New Accounting Standards. In March 1995, the Financial Accounting
Standards Board issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" which the
Company adopted for the fiscal year ended February 3, 1996. The 1995
restructuring charge addressed the impaired assets of the Company as a whole,
and, therefore, the adoption of this accounting standard had no effect on the
Company's financial results.
In October, 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") which is
effective for the Company in fiscal 1996. As permitted under SFAS No. 123,
the Company has elected not to adopt the fair value based method of accounting
for its stock-based compensation plans, but will continue to account for such
compensation under the provisions of APB Opinion No. 25. The Company will
comply with the disclosure requirements of SFAS No. 123 in 1996.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a)
The index to the Consolidated Financial Statements of the Company is included
in Item 14, and the financial statements follow the signature page to this
Annual Report on Form 10-K.
(b) The quarterly results of operations are included herein in Note 9 of the
Consolidated Financial Statements.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
The information appearing under the captions "Election of Directors" and
"Board of Directors Meetings and Its Committees" in the definitive Proxy
Statement for the Registrant's 19961997 Annual Meeting of Shareholders is
incorporated herein by reference.
(b) Identification of Executive Officers
The information required with respect to the executive officers of the
Registrant is set forth under the caption "Supplementary Item" on page 118 of
this Annual Report on Form 10-K.
Item 11. EXECUTIVE COMPENSATION
The information appearing under the caption "Executive Officers and
Compensation" in the definitive Proxy Statement for the Registrant's 19961997
Annual Meeting of Shareholders is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the caption "Principal Shareholders" and
"Election of Directors" in the definitive Proxy Statement for the Registrant's
19961997 Annual Meeting of Shareholders is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Certain Transactions" in the
definitive Proxy Statement for the Registrant's 19961997 Annual Meeting of
Shareholders is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K8-K"
14(a)(1) Financial Statements
------------------------------- -------------------------------
The consolidated financial statements and notes are listed in the "IndexIndex to
Financial Statements"Statements on page F-118 of this report.
14(a)(2) Financial Statement Schedules
--------------------------------------- -----------------------------------------
None of the schedules for which provision is made in the applicable accounting
regulations under the Securities Exchange Act of 1934, as amended, are
required.
14(a)(3) Exhibits
- -----------------
Exhibits are as set forth in the "Index to Exhibits" which follows the Notes
to the Consolidated Financial Statements and immediately precedes the exhibits
filed.
14(b) Reports on Form 8-K
-------------------------
On February 7, 1996, the Company filed a report on Form 8-K with the
Securities and Exchange Commission, announcing three principal
developments: (1) a store closing charge for its fiscal quarter ended
February 3, 1996; (2) a forecasted net loss, after the store closing
charge; and (3) a default and accompanying temporary waiver of two
covenant tests under the Registrant's senior credit facilities.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TRANS WORLD ENTERTAINMENT CORPORATION
Date May 3, 19962, 1997 By: /s/ROBERT J. HIGGINS
Robert J. Higgins, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ ROBERT J. HIGGINS Chairman, President and Director May 3, 19962, 1997
(Robert J. Higgins) Chief Executive Officer
(Principal Executive Officer)
/s/ JOHN J. SULLIVAN Senior Vice President, Treasurer and Chief May 3, 1996
(John J. Sullivan) Chief Financial Officer May 2, 1997
(Principal Financial Officer
and Chief Accounting Officer)
/s/ MATTHEW H. MATARASO Secretary and Director May 3, 19962, 1997
(Matthew H. Mataraso)
/s/ GEORGE W. DOUGAN Director May 3, 19962, 1997
(George W. Dougan)
/s/ CHARLOTTE G. FISCHERFISHER Director May 3, 19962, 1997
(Charlotte G. Fischer)Fisher)
/s/ ISAAC KAUFMAN Director May 3, 19962, 1997
(Isaac Kaufman)
/s/ DEAN S. ADLER Director May 2, 1997
(Dean S. Adler)
/s/ JOSEPH G. MORONE Director May 2, 1997
(Joseph G. Morone)
TRANS WORLD ENTERTAINMENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Form 10-K
Page No.
---------
Independent Auditors' Reports F-2Auditor's Report 19
Consolidated Financial Statements
Consolidated Balance Sheets at February 3, 19961, 1997
and January 28, 1995 F-4February 3,1996 20
Consolidated Statements of Income - Fiscal years ended
February 1, 1997, February 3, 1996 and January 28, 1995 and January 29, 1994 F-522
Consolidated Statements of Shareholders' Equity - Fiscal
years ended February 1, 1997, February 3, 1996 and January 28, 1995 and
January 29, 1994 F-623
Consolidated Statements of Cash Flows - Fiscal years
ended February 1, 1997, February 3, 1996, and January 28, 1995 and
January 29, 1994 F-724
Notes to Consolidated Financial Statements F-8
F-125
Report of KPMG Peat Marwick LLP
Independent Auditors'Auditors Report
The Board of Directors and Shareholders
Trans World Entertainment Corporation:
We have audited the accompanying consolidated balance sheets of Trans World
Entertainment Corporation and subsidiaries as of February 1, 1997 and February
3, 1996, and January
28, 1995, and the related consolidatedcondolidated statements of income, shareholders'
equity and cash flows for each of the fiscal years then ended.in the three-year period
ended February 1, 1997. 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,managment, 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 subsidiariessubidiaries as of February 1, 1997 and
February 3, 1996, and
January 28, 1995, and the results of their operations and their cash flows for
each of the fiscal years thenin the three-year period ended February 1, 1997, in
conformity with generally accepted accounting principles.
/s/KPMG PEAT MARWICK LLP
Albany, New York
March 13, 1996,
except as to
Note 3, which is
as of May 1, 1996
F-2
Report of Independent Auditors'
Board of Directors and Shareholders
Trans World Entertainment Corporation:
We have audited the accompanying consolidated statements of income,
shareholders' equity, and cash flows of Trans World Entertainment Corporation
and subsidiaries for the fiscal year ended January 29, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows
of Trans World Entertainment Corporation and subsidiaries for the fiscal year
ended January 29, 1994, in conformity with generally accepted accounting
principles.
/s/ERNST & YOUNG LLP
Albany, New York
March 24, 1994
F-35, 1997
Trans World Entertainment Corporation and subsidiariesTRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)(in thousands)
February 1, February 3,
January 28,
ASSETS1997 1996
1995
- - - -----------------------------------------------------------------------------------------------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 86,938 $ 90,091$54,771 $86,938
Accounts receivable 8,826 8,079 9,176
Merchandise inventory 163,509 194,577 222,358
Refundable income taxes 564 8,308 ---
Deferred tax asset 2,774 8,465 2,944
Prepaid expenses and other 2,490 2,929
4,407
- - - -----------------------------------------------------------------------------------------------------
Total current assets 232,934 309,296
328,976
- - - -----------------------------------------------------------------------------------------------------
VIDEOCASSETTE RENTAL INVENTORY, net 4,784 6,722 7,472
DEFERRED TAX ASSET 3,098 430 505
FIXED ASSETS:
BuildingBuildings 7,774 8,5997,774
Fixtures and equipment 85,776 84,386 87,544
Leasehold improvements 75,742 79,556
86,119
- - - -----------------------------------------------------------------------------------------------------
169,292 171,716 182,262
Less: Fixed asset write-off reserve 7,571 12,324 10,485
Allowances for depreciation and amortization 96,747 89,391
85,620
- - - -----------------------------------------------------------------------------------------------------
64,974 70,001
86,157
- - - -----------------------------------------------------------------------------------------------------
OTHER ASSETS 4,263 3,882
3,829
- - - -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $310,053 $390,331
$426,939
=====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- - - --------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $118,980 $131,302 $135,493
Notes payable 65,260 74,947
Income taxes payable --- 1,96165,260
Accrued expenses and other 9,403 6,266 7,250
Store closing reserve 13,747 24,275
9,276
Current portionsportion of long-term debt
and capital lease obligations 9,557 3,420
6,618
- - - -----------------------------------------------------------------------------------------------------
Total current liabilities 151,687 230,523 235,545
- - - --------------------------------------------------------------------------
LONG-TERM DEBT, less current portion 43,983 53,770 59,770
CAPITAL LEASE OBLIGATIONS, less current portion 6,507 6,594 6,671
OTHER LIABILITIES 6,514 5,340
5,476
- - - -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 208,691 296,227
307,462
- - - -----------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITYEQUITY:
Preferred stock ($.01 par value; 5,000,000
shares authorized; none issued)issued.) --- ---
Common stock ($.01 par value; 20,000,000
shares authorized;9,809,594 and 9,731,208 issued) 97shares
issued in 1996 and 1995, respectively) 98 97
Additional paid-in capital 24,23624,540 24,236
Treasury stock at cost (48,394 shares)(41,394 & 48,394
shares in 1996 & 1995, respectively) (407) (503)
(503)Unearned compensation - restricted stock (245) ---
Retained earnings 77,376 70,274
95,647
- - - -----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 101,362 94,104
119,477
- - - -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $310,053 $390,331
$426,939
=====================================================================================================
See Notes to Consolidated Financial StatementsStatements.
F-4
Trans World Entertainment Corporation and subsidiariesTRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)(in thousands, except per share amounts)
Fiscal Year Ended
----------------------------------------
February 1, February 3, January 28,
January 29,1997 1996 1995 1994
- - - ------------------------------------------------------------------------
Sales $481,657 $517,046 $536,840 $492,553
Cost of sales 308,952 340,754 341,422
307,834
- - - -------------------------------------------------------------------------------------------------------------
Gross profit 172,705 176,292 195,418 184,719
Selling, general and
administrative expenses 136,084 150,628 158,637
147,644
Restructuring chargecharges --- 35,000 21,000 ---
Depreciation and amortization 14,134 16,125 16,932
14,655
- - - -------------------------------------------------------------------------------------------------------------
Income (loss)(Loss) from operations 22,487 (25,461) (1,151)
22,420
Interest expense 10,767 14,222 9,540
5,971
- - - -------------------------------------------------------------------------------------------------------------
Income (loss)(Loss) before income taxes 11,720 (39,683) (10,691) 16,449
Income tax expense (benefit) 4,618 (14,310) (4,435)
6,626
- - - -------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(25,373) $ (6,256) $ 9,823
========================================================================$7,102 ($25,373) ($6,256)
=====================================
EARNINGS (LOSS) PER SHARE $ (2.61) $ (0.64) $ 1.01
========================================================================$0.73 ($2.61) ($0.64)
=====================================
Weighted average number of common
shares outstanding 9,757 9,726 9,701
9,723
=============================================================================================================
See Notes to Consolidated Financial Statements.
F-5
Trans World Entertainment Corporation and subsidiariesTRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)(in thousands)
Total Unearned
Additional Compensation Share-
Common Paid-InPaid in Treasury Restricted Retained holders'holder's
Stock Capital Stock Stock Earnings Equity
- - - -----------------------------------------------------------------------------------------------------------------------------------------
Balance January 30, 1993
(9,727,358 shares)1/29/94 $97 $24,180 $ (28) $92,080 $116,329
Issuance of stock under
incentive stock programs --- 56 --- --- 56
Purchase of 10,000$24,236 ($162) $--- $101,903 $126,074
(9,731,208 shares of common stock, held
in treasury --- --- (134) --- (134)
Net income --- --- --- 9,823 9,823
- - - ----------------------------------------------------------------------------
Balance,
January 29, 1994
(9,731,208 shares) 97 24,236 (162) 101,903 126,074issued)
Purchase of 36,394 shares
of common stock,
held in treasury --- --- (341) --- --- (341)
Net lossLoss --- --- --- --- (6,256) (6,256)
- - - -----------------------------------------------------------------------------------------------------------------------------------------
Balance January 28, 1995
(9,731,208 shares)1/28/95 97 24,236 (503) --- 95,647 119,477
(9,731,208 shares issued)
Net lossLoss --- --- --- --- (25,373) (25,373)
- - - -----------------------------------------------------------------------------------------------------------------------------------------
Balance February 3, 19962/3/96 97 24,236 (503) --- 70,274 94,104
(9,731,208 shares) $97 $24,236 $(503) $ 70,274 $ 94,104
============================================================================shares issued)
Issuance of 7,000 treasury
shares under incentive
stock programs --- (59) 96 --- --- 37
Issuance of common stock
under incentive
stock programs 1 351 --- (245) --- 107
Exercise of
stock options --- 12 --- --- --- 12
Net Income --- --- --- --- 7,102 7,102
-------------------------------------------------------------
Balance 2/1/97 $98 $24,540 ($407) ($245) $77,376 $101,362
(9,809,594 shares issued)
=============================================================
See Notes to Consolidated Financial StatementsStatements.
F-6
Trans World Entertainment Corporation and subsidiariesTRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)(in thousands)
Fiscal Year Ended
February 1, February 3, January 28,
January 29,1997 1996 1995
1994
- - - -----------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $(25,373) $ (6,256) $ 9,823$7,102 ($25,373) ($6,256)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 15,225 17,145 17,947 15,715
Fixed asset write-off reserve --- 8,088 11,400 ---
Store closing reserve --- 26,912 9,600
---
Deferred tax expense (benefit) (6,171)expense(benefit) 3,023 (5,446) (7,050) 308
Loss on sale and disposal of
property and equipment --- --- 802 289
Changes in operating assets and liabilities:liabilities
Accounts receivable (747) 1,097 (1,463)
(3,716)
Merchandise inventory 31,068 27,781 16,591 (50,781)
Refundable income taxes 7,744 (8,308) --- ---
Deferred tax asset 725 --- ---
Prepaid expenses and other 439 1,478 644
(1,485)
Other assets (381) (53) (1,536)
307
Accounts payable (12,322) (4,191) (20,770) 34,304
Income taxes payable --- (1,961) (3,470) (2,844)
Accrued expenses and other 3,137 (984) (418) 526
Store closing reserve (10,528) (11,913) (324)
---
Other liabilities 1,174 (136) 1,042
981
- - - ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 44,934 24,136 16,739
3,427
- - - ------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Acquisition of property and equipment (10,198) (10,006) (22,260) (34,460)
Proceeds from sale of fixed assets --- 929 --- ---
Purchases of videocassette
rental inventory, net 1,938 750 (1,306)
(9)
-----------------------------------------------------------------------------------------------------------
Net cash used byin investing activities (8,260) (8,327) (23,566)
(34,469)
- - - ------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in
revolving line of credit (65,260) (9,687) 74,947 ---
Proceeds of long-term debt --- --- 50,000
Payments of long-term debt (3,661) (8,902) (3,398) (739)
Payments of capital lease obligations (76) (373) (336) (288)
Proceeds from issuance of
common stock --- --- 56
Purchase of common stock for treasury --- --- (341)
(134)
- - - -------------------------------------------------------------------------Issuance of stock under incentive
stock programs 144 --- ---
Exercise of stock options 12 --- ---
-----------------------------------
Net cash provided (used) by
financing activities (68,841) (18,962) 70,872
48,895
- - - ------------------------------------------------------------------------------------------------------------
Net (decrease) increase (decrease) in
cash and cash equivalents (32,167) (3,153) 64,045 17,853
Cash and cash equivalents,
beginning of year 86,938 90,091 26,046
8,193
- - - ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $54,771 $86,938 $90,091
$26,046
============================================================================================================
See Notes to Consolidated Financial Statements.
F-7
Trans World Entertainment Corporation and subsidiariesTRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations. Trans World Entertainment Corporation is one of the
largest specialty retailers of music, video and related accessories in the
United States. The Company operates in a single industry segment, the
operation of a chain of retail entertainment stores. At February 3, 1996,1, 1997, the
Company operated 542479 stores in 34 states, the District of Columbia and the
Virgin Islands, with a majority of the stores concentrated in the Eastern half
of the United States. The Company changed its name in 1994 from Trans World
Music Corp.
Basis of Presentation. The consolidated financial statements consist of Trans
World Entertainment Corporation and its subsidiaries, all of which are wholly
owned. All significant intercompany accounts and transactions have been
eliminated. Joint venture investments, none of which are material, are
accounted for using the equity method. The preparation of financial
statements, in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Fiscal Year. The Company's fiscal year is a 52- or 53-week period ending on
the Saturday nearest to January 31. Fiscal year 1996 ended February 1, 1997
and consisted of 52 weeks. Fiscal years 1995 and 1994, which ended February
3, 1996 and January 28, 1995, respectively, consisted of 53 weeks. Fiscal years 1994 and 1993, which ended January
28, 1995 and January 29, 1994, respectively, consisted of 52 weeks.weeks,
respectively.
Dividend Policy. The Company has never paid cash dividends and does not
anticipate paying cash dividends in 1996.1997. The Company's credit agreements
currently prohibit the payment of cash dividends.
New Accounting Standards. In March 1995, theStock-Based Compensation. Statement of Financial Accounting Standards
Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" which the Company adopted for the
fiscal year ended February 3, 1996. The 1995 restructuring charge addressed
the impaired assets of the Company as a whole, and, therefore, the adoption of
this accounting standard had no effect on the Company's financial results.
In October, 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") which is effective
for the Company in fiscal 1996. As permitted under SFAS No. 123, the Company
has elected not to adopt the fair value based method of accounting for its
stock-based compensation plans, but will continue to account for such
compensation under the provisions of APB Opinion No. 25. The Company will
comply withhas
provided the required proforma disclosure requirements of SFAS No. 123 in 1996.Note 6.
Cash and Cash Equivalents. The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents. The carrying amounts reported in the balance sheet for cash and
cash equivalents are at fair value.
Merchandise Inventory and Return Costs. Inventory is stated at the lower of
cost (first-in, first-out) or market as determined principally by the retail
inventory method. The Company is entitled to return merchandise purchased
from major vendors for credit against other purchases from these vendors. The
vendors often reduce the credit with a merchandise return charge ranging from
0% to 20% of the original product purchase price depending on the type of
product being returned. The Company records the merchandise return costs in
cost of sales.
Videocassette Rental Inventory. The cost of videocassette rental tapes is
capitalized and amortized on a straight-line basis over their estimated
economic life with a provision for salvage value. Major movie release
additions are amortized over twelve months while other titles are amortized
over thirty-six months.
Fixed Assets. Fixed assets are stated at cost. Major improvements and
betterments to existing facilities and equipment are capitalized.
Expenditures for maintenance and repairs which do not extend the life of the
applicable asset are charged to expense as incurred. The buildings, which are
accounted for under capital leases,Buildings are amortized
over their 30 year leasea 30-year term. Fixtures and equipment are depreciated using the
straight-line method over their estimated useful lives, which range from three to
seven years. Leasehold improvements are amortized over the shorter of their
estimated useful life or the related lease term. Primarily all of the
Company's operating leases are ten years in term. Amortization of capital
lease assets is included in depreciation and amortization expense.
Depreciation and amortization expense related to the Company's videocassette
rental inventory, distribution center facility and distribution center
equipment is included in cost of sales.
F-8
Store Opening and Closing Costs. Costs associated with opening a store are
expensed as incurred. When a store is closed, estimated unrecoverable costs
are charged to expense. Such costs include the net book value of abandoned
fixtures, equipment, leasehold improvements and a provision for lease
obligations, less estimated sub-rental income. Residual fixed asset values
from mall relocations are transferred to the relocated store.
Income Taxes. The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". Under the asset and liability method of Statement 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Earnings (Loss) Per Share. Earnings (Loss) per share is based on the weighted
average number of common shares outstanding during each fiscal year. Common
stock equivalents related to stock options, which would have a dilutive effect
based on current market prices, did not have a material effect on earnings
(loss) per share in the years presented.
Note 2. Restructuring Charge
TheIn order to streamline operations and close unprofitable store locations, the
Company recorded a pre-tax restructuring chargecharges of $35 million in 1995 (the "1995 Reserve") to reflect the anticipated costs associated with a
program to close 163 stores through the first quarter of 1997. This charge is
in addition to aand $21
million restructuring charge recorded in 1994 (the "1994
Reserve) to reflect the costs associated with the closing of 179 stores
(versus a plan of 143).1994. The restructuring charge includescharges include the write-down of assets,
estimated cash payments to landlords for the early termination of operating
leases and the cost for returning product to the Company's distribution
center and vendors. The charge also includes estimated legal, lender and
consulting fees, including those that the Company iswas obligated to pay on
behalf of its lenders while working to renegotiate its credit agreements.
In determining the components of the reserves, management analyzed all of the
aspects of closing stores and the costs that are incurred. An analysis of the
amounts comprising the restructuring reserve and the charges against the
reserve through February 1, 1997 are outlined below (in thousands):
In determining the components of the reserves, management analyzed all of the
aspects of closing stores and the costs that are incurred. An analysis of the
amounts comprising the 1994 Reserve, the 1995 Reserve and charges against the
reserves through February 3, 1996 are outlined below:
Charges Charges Charges
against Balance Chargesagainst Balance against Balance
1994 Againstthe as of 1995 Againstthe as of the as of
Reserve Reserve 1/28/95 Reserve Reserve 2/3/96 ---------------------------------------------------
(in thousands)Reserve 2/1/97
---------------------------------------------------------------------
Total
non-cashnon cash
write-offs $12,344 $ 915$915 $11,429 $10,799 $ 8,322$8,322 $13,906 $6,235 $7,671
Cash
outflows 8,656 324 8,332 24,201 9,840 22,693 ---------------------------------------------------
Total9,046 13,647
--------------------------------------------------------------------
$21,000 $1,239 $19,761 $35,000 $18,162 $36,599 ===================================================$15,281 $21,318
====================================================================
Sales associated with the stores identified for closure in 1996 and 1997, in
the 1995 Reserve, were approximately $100.2 million (unaudited), $102.4
million (unaudited) and $94.0 million (unaudited) for the fiscal years 1995,
1994 and 1993, respectively.
F-9
Note 3. Debt
Long-term debt consisted of the following:
February 1, February 3,
January 28,1997 1996 1995
- - - -----------------------------------------------------------------------
(in thousands)
---------------------------
Senior unsecured notes issued to four
insurance companies (see discussion below) $41,332 $47,500
Senior unsecured note issued to an
insurance company (see discussion
below) 15,227 17,500$53,077 $56,559
Installment notes and other obligations 375 554
1,015
- - - --------------------------------------------------------------------------------------------------
53,452 57,113 66,015
Less current portion 9,469 3,343
6,245
- - - --------------------------------------------------------------------------------------------------
Long-term debt $43,983 $53,770
$59,770
==================================================================================================
Because of the 1995 operating results, including the restructuring charge, as
of February 3, 1996, the Company obtained modifications or waivers of the
noncompliance with certain financial covenants contained in its senior
indebtedness. On May 1,July 26, 1996, the Company executed an agreement in principleAmended and Restated Credit Facilities
with its senior lenders (the "Lending Group") to extend and restructure the
terms and conditions of $121.8 million of indebtedness: the aggregate
available amountindebtedness consisting of $65.3
million revolving credit facilitiesfor an Amended and Restated Revolving Credit Agreement (the
"Revolver") and $56.5 million senior unsecured notesfor Amended and Restated Note Agreements (the
"Notes"). The modifications take into account recent and forecasted operating results and the planned
closing of underperforming stores.
The modifications to the credit agreementsfacilities extend the term through
July 1998 and require quarterly reductions of the Revolver and principal
repayments on the Notes aggregating $18.2 million and $15.6 million,
respectively, through May 31, 1998 with the remaining $88.0 million maturing
on July 31, 1998. The Revolver and the Notes are secured prorata by liens on
the Company's tax
refund rights,a primary concentration deposit accounts,account, proceeds of certain asset sales by
the Company and trademark mortgages on all trademarks, tradenames and other
intangibles relating to goodwill.
Effective May 1, 1996, the interest rates for the Revolver and the Notes were
increased from 10.5% to 11.0% and 11.5%, respectively.
During fiscal years 1996, 1995, 1994 and 1993,1994, the highest aggregate balances
outstanding under the Revolver were $74.9$65.3 million, $74.9 million and $69.4$74.9
million, respectively. The weighted average interest rates during 1996, 1995
1994
and 1993,1994 based on average daily balances, were 10.40%11.01%, 5.69%10.40% and 4.35%5.69%,
respectively. The unused balances outstanding under the Revolver at year end 1996, 1995
and 1994 and 1993 were $65.3$61.2 million, $74.9$0 and $0, respectively.
At February 3, 19961, 1997 the fair market value of long-term debt, including that
due within one year, approximates book value. The fair value was estimated
using discounted cash flow analyses, based on the Company's current
incremental borrowing rates.
Interest paid during 1996, 1995 1994 and 19931994 was approximately $11.8 million,
$16.0 million $9.6
million and $5.7$9.6 million, respectively. Future maturities of long-term
debt are $3.3$9.5 million during 1996; $9.91997 and $44.0 million during 1997; and $43.9 million
during 1998.
F-10
Trans World Entertainment Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 4. Income Taxes
Income tax expense (benefit) consists of the following:
Fiscal Year1996 1995 1994
1993
- - - ---------------------------------------------------------------------
(in thousands)------------------------------
Federal - current $ (8,392) $ 1,805 $5,146$1,364 ($9,117) $1,805
State - current 231 253 810
1,172
Deferred (6,171)3,023 (5,446) (7,050)
308
- - - ---------------------------------------------------------------------
$(14,310) $(4,435) $6,626
==============================-------------------------------
$4,618 ($14,310) ($4,435)
===============================
F-11
A reconciliation of the Company's effective tax rates with the federal
statutory rate is as follows:
Fiscal Year
Ended------------------------------
1996 1995 1994
1993
- - - --------------------------------------------------------------------------------------------------
Federal statutory rate (35.0%) (35.0%) 34.7%35.0% (35.0)% (35.0)%
State income taxes (benefit), net of
federal income tax effect 4.7 (1.5) (6.0)
4.7
Targeted job credit --- (1.6) ---
Other (0.3) 0.4 1.1 0.9
- - - --------------------------------------------------------------------(0.5)
------------------------------
Effective income tax rate (36.1%) (41.5%) 40.3%
====================================================================39.4% (36.1)% (41.5)%
==============================
Note 4. Income Taxes (Cont'd)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
February 1, February 3,
January 28,1997 1996
1995
- - - ----------------------------------------------------------------------
(in thousands)-------------------------------
CURRENT DEFERRED TAX ASSETS
- - - ---------------------------
Restructuring reserve $8,556 $14,756
$7,806
- - - -----------------------------------------------------------------------------------------------------
Total current deferred tax assetsCurrent Deferred Tax Assets 8,556 14,756
7,806
- - - -----------------------------------------------------------------------------------------------------
CURRENT DEFERRED TAX LIABILITIES
- - - --------------------------------
Inventory valuation 5,463 6,138
4,739
Other 319 153
123
- - - -----------------------------------------------------------------------------------------------------
Total current deferred tax liabilitiesCurrent Deferred Tax Liabilities 5,782 6,291
4,862
- - - -----------------------------------------------------------------------------------------------------
Net current deferred
tax assets $ 8,465 $2,944
======================================================================Current Deferred Tax Assets $2,774 $8,465
===============================
NON-CURRENT DEFERRED TAX ASSETS
- - - -------------------------------
Accrued rent, lease accounting $ 2,621 $2,261$2,824 $2,621
Capitalized leases 829 803
736
Other 148 128
26
- - - -----------------------------------------------------------------------------------------------------
Total non-current deferred tax assetsNon-Current Deferred Tax Assets 3,801 3,552
3,023
- - - -----------------------------------------------------------------------------------------------------
NON-CURRENT DEFERRED TAX LIABILITIES
- - - ------------------------------------
Tax over book depreciation 588 3,012
2,423
Other 115 110
95
- - - -----------------------------------------------------------------------------------------------------
Total non-current deferred tax liabilitiesNon-Current Deferred Tax Liabilities 703 3,122
2,518
- - - -----------------------------------------------------------------------------------------------------
Net non-current deferred
tax assets 430 505
- - - ----------------------------------------------------------------------
Total net deferred tax asset $ 8,895 $3,449
======================================================================Non-Current Deferred Tax Assets $3,098 $430
===============================
TOTAL NET DEFERRED TAX ASSET $5,872 $8,895
===============================
F-12
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income and the
taxable income in the three previous tax years to which tax loss carryback
can be applied. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, taxable income in the carryback
period and tax planning strategies in making this assessment. Based upon
the level of projected future taxable income over the periods in which the
deferred tax assets are deductible and the amount of tax loss carryback
available, management believes it is more likely than not that the Company
will realize the benefits of those deductible differences. The amount of the
deferred tax asset considered realizable could be reduced if estimates of
future taxable income during the carryforward period are reduced.
The Company paid income taxes of approximately $0.3 million, $2.2 million and
$6.1 million during 1996, 1995 and $9.2 million during 1995, 1994, and 1993, respectively.
Note 5. Leases
The Company leases its distribution center and administrative offices under
two leases, dated April 1, 1985 and November 1, 1989, from its Chief Executive
Officer and principal shareholder. The leases are classified as capital
leases for accounting purposes. Aggregate rental payments under both leases
were $1.2 million $1.2 million,for 1996, 1995 and $1.1 million in 1995, 1994 and 1993,
respectively.1994. Biennial increases are contained
in each lease based on the Consumer Price Index with the next scheduled
increase on January 1, 1998. Both leases expire in the year 2015.
The Company leased certain distribution center equipment from its Chief
Executive Officer and principal shareholder, for which annual payments were
$204,000 in each of 1994 and 1993, and $102,000 through July 31, 1995, when
title to such equipment passed to the Company. Additionally, the Company
financed certain distribution center equipment through a bank, providing for
total annual payments of $136,000 in each of 1994 and 1993 and $222,000
through December 15, 1995, at which time the title to such equipment passed to
the Company. Both equipment leases were capitalized for accounting purposes.
Fixed asset amounts for all capitalized leases are as follows:
February 1, February 3,
January 28,1997 1996
1995
- - - -----------------------------------------------------------------------
(in thousands)------------------------------------
BuildingBuildings $7,105 $7,105
Fixtures and equipment 1,625 1,625
- - - -----------------------------------------------------------------------------------------------------------
8,730 8,730
Allowances for depreciation
and amortization 4,034 3,777
3,342
- - - -----------------------------------------------------------------------------------------------------------
$4,696 $4,953
$5,388
================================================================
F-13
The Company leases substantially all of its stores, many of which contain
renewal options, for periods ranging from five to twenty-five years, with the
majority being ten years. Most leases also provide for payment of operating
expenses, real estate taxes, and for additional rent based on a percentage of
sales.
During 1991, the Company entered into a series of five-year operating
leases for point-of-sale equipment. At the expiration of the leases, the
Company has the option to purchase the equipment at its then fair market
value.
Net rental expense was as follows:
Fiscal Year
------------------------------------
1996 1995 1994
1993
- - - ---------------------------------------------------------------------
(in thousands)------------------------------------
Minimum rentals $49,653 $57,420 $58,750
$51,610
Contingent rentals 274 246 464
647
- - - ---------------------------------------------------------------------------------------------------------
$49,927 $57,666 $59,214
$52,257
================================================================
Future minimum rental payments required under all leases that have initial or
remaining noncancelable lease terms in excess of one year at February 3, 1996,Future minimum rental payments required under all leases that have initial or
remaining noncancelable lease terms in excess of one year at February 1, 1997
are as follows:
Operating Capitalized
Leases Leases
- - - -------------------------------------------------------------------------
(in thousands)
----------------------------
1996 $ 49,568 $ 1,232
1997 44,041 1,232$44,836 $1,232
1998 38,38739,737 1,232
1999 34,97836,563 1,232
2000 30,55232,361 1,232
2001 26,197 1,232
Thereafter 81,417 18,136
- - - ------------------------------------------------------------------------64,853 16,904
--------------------------
Total minimum payments required $278,943 24,296
=======$244,547 23,064
=========
Amounts representing interest 17,625
- - - ------------------------------------------------------------------------16,469
-----------
Present value of minimum lease payments 6,6716,595
Less current portion 77
- - - ------------------------------------------------------------------------88
-----------
Long-term capital lease obligations $ 6,594
========================================================================$6,507
===========
F-14
Trans World Entertainment Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 6. Benefit Plans
Stock Option Plans
Under the Company's 1986 Stock Option Plan and the 1994 Stock Option PlanPlans (the "Plans"), the
Compensation Committee of the Board of Directors may grant options to acquire
shares of common stock, to employees of the Company and its subsidiaries, at
the fair market value of the common stock on the date of grant. Under the
Plans, options generally become exercisable commencing one year from the date
of grant in increments of 25% per year with a maximum term of ten years.
Shares authorized for issuance under the 1986 and 1994 Stock Option Plans were
1,100,000 and 1,000,000, respectively. As of June 1, 1995, the Company
stopped issuing stock options under the 1986 Stock Option Plan. At February
3, 1996,1, 1997, of the 2,100,000 sharesoptions authorized for issuance under the Plans,
there were 880,768 shares of
common stock subject to stock options1,008,238 have been granted and are outstanding, 399,674151,850 of which were vested
and exercisable. Shares available for future grants at February 1, 1997 and
February 3, 1996 were 695,886 and January 28, 1995 were 801,750, and 1,034,447, respectively. The following table
summarizes information about the stock options outstanding under the Plans
at February 1, 1997:
----------------------------------- ---------------------
Outstanding Exercisable
----------------------------------- ---------------------
Weighted Weighted
Average Average Average
Exercise Remaining Excercise Excercise
price range Shares Life Price Shares Price
- -----------------------------------------------------------------------------
$2.25-$3.75 169,812 8.4 $3.60 41,203 $3.60
4.50-5.25 526,426 9.2 4.76 2,897 4.98
6.00-7.50 115,000 9.4 6.14 0 0.00
8.00-13.75 104,000 7.4 12.14 19,250 12.26
$14.25-$18.50 93,000 4.3 14.78 88,500 14.77
--------- ------
Total 1,008,238 8.5 $6.41 151,850 $11.24
========= =======
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 February 3, 1996,1, 1997, there were 250,000
shares authorized for issuance and 184,50070,000 have been granted and are
outstanding, 55,000 of which were vested and exercisable. There are 180,000
shares of common stock reserved for possible future option grants under the
1990 Plan. As ofThe following table summarizes information about the stock options
outstanding under the 1990 Plan at February 3, 1996, 38,250 of the
options granted were vested and exercisable.1, 1997.
----------------------------------- ---------------------
Outstanding Exercisable
----------------------------------- ---------------------
Weighted Weighted
Average Average Average
Exercise Remaining Excercise Excercise
price range Shares Life Price Shares Price
- -----------------------------------------------------------------------------
$3.50-$10.00 15,000 8.2 $6.28 3,375 $7.85
11.00-19.00 35,000 4.6 13.35 31,625 13.14
$27.00-$27.50 20,000 3.3 27.42 20,000 27.42
-------- -------
Total 70,000 5.0 $15.85 55,000 $18.01
======== =======
The following tables summarizetable summarizes the activity under the 1986 and 1994 Plans and
the 1990 Plan:
------------------------------- ----------------------------
1986 and 1994 Plans 1990 Plan
---------------------------- ----------------------------
Number of Option Number of Option
Shares Subject Price Range Shares Subject Price Range
To Option Per Share To Option Per Share
----------------------------------------------------------------------------------------- -----------------------------
- -
Number Number
of Option Weighted of Option Weighted
Stock Shares Price Averge Shares Price Average
Option Subject Range Exercise Subject Range Exercise
Activity To Per Price To Per Price
Option Share Option Share
- -----------------------------------------------------------------------------
Balance
January 30, 1993 637,132 $11.00-$24.25 49,000 11.05- 27.42
Granted 384,500 13.75- 15.00 16,000 12.65- 13.82
Exercised (3,850) 11.00- 15.00
Cancelled (192,451) 11.00- 22.50
- - - -----------------------------------------------------------------------------
Balance,
JanuaryJan 29, 1994 825,331 11.00- $11.00-$24.25 $15.46 65,000 11.05- $11.05-$27.42 $17.57
Granted 236,000 11.00- 13.38 12.48 6,000 10.00 10.00
Exercised
CancelledCanceled (127,075) 13.00- 23.7513.00-23.75 15.95
- - - -----------------------------------------------------------------------------------------------------------------------------------------------------------
Balance
JanuaryJan. 28, 1995 934,256 11.00- 24.2511.00-24.25 14.64 71,000 10.00- 27.4210.00-27.42 16.93
Granted 224,087 2.25- 5.25 3.68 6,000 3.55 3.55
Exercised
CancelledCanceled (277,575) 3.63- 22.503.63-22.50 12.59 (11,500) 3.55- 12.653.55-12.65 11.46
- -----------------------------------------------------------------------------
Balance
Feb. 3,1996 880,768 2.25-24.25 12.49 65,500 3.55-27.42 16.66
Granted 688,099 3.50- 8.00 5.07 4,500 4.04 4.04
Exercised (3,386) 5.63- 8.25 3.63
Canceled (557,243) 2.50-24.25 14.39
- - -----------------------------------------------------------------------------------------------------------------------------------------------------------
Balance
February 3, 1996 880,768 Feb. 1, 1997 1,008,238 $2.25-$ 2.25-$24.25 65,500 $ 3.55-18.50 $6.41 70,000 $3.55-$27.42 ==============================================================================$15.85
=============================================================================
The per share weighted-average fair value of the stock options granted during
1996, 1995 and 1994 was $2.05, $1.47 and $4.53, respectively, using the Black
Scholes option pricing model, with the following weighted-average assumptions;
1996 - expected dividend yield of 0.0%, risk free interest rate of 6.7%,
expected life of 5 years and stock volatility of 72%; 1995 - expected dividend
yield of 0.0%, risk free interest rate of 6.7%, expected life of 5 years and
stock volatility of 47%; 1994 - expected dividend yield of 0.0%, risk free
interest rate of 6.7%, expected life of 5 years and stock volatility of 46%.
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. Had the Company determined compensation cost based
on fair value in accordance with SFAS 123, the Company's net income would have
been reduced to the proforma amounts indicated below:
Fiscal Year
----------------------------------
1996 1995 1994
-----------------------------------
Net income (loss), as reported $7,102 ($25,373) ($6,256)
Earnings (loss) per share, as reported $0.73 ($2.61) ($0.64)
Pro forma net income (loss) $6,791 ($25,458) ($6,287)
Pro forma earnings (loss) per share $0.70 ($2.62) ($0.65)
Restricted Stock Plan
Under the 1990 Restricted Stock Plan, the Compensation Committee mayof the Board
of Directors is authorized to grant awards for up to 300,000 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 February 3,1, 1997, a total of 75,000 shares have been granted, of which
25,000 were granted in 1996 with a fair market value on the date of grant of
$118,750; the remaining 50,000 were granted in 1995 with a fair value on the
date of grant of $232,500. None of the shares have vested. Unearned
compensation is recorded at the d ate of the award, based on the market value
of the shares, and is included as a separate component of shareholders equity
and is amortized to expense over the applicable vesting period. The amount
amortized to expense in 1996 was $106,000. At February 1, 1997, outstanding
awards and shares available for grant totaled 50,000were 75,000 and 250,000,225,000, respectively.
F-15
401 (k) Savings Plan
The Company offers a 401 (k) Savings Plan to eligible employees meeting
certain age and service requirements. This plan permits participants to
contribute up to 10%16% of their salary, including bonuses, up to the maximum
allowable by Internal Revenue Service regulations. Participants are
immediately vested in their voluntary contributions plus actual earnings
thereon. Participant vesting of the Company's matching and profit sharing
contribution is based on the years of service completed by the participant.
Participants are fully vested upon the completion of four years of service.
All participant forfeitures of nonvested benefits are used to reduce the
Company's contributions in future years. The Company matching contribution
totaled $465,000, $470,000 and $413,000 in 1996, 1995 and $300,000 in 1995, 1994, and 1993, respectively.
Note 7. Treasury Stock
At February 1, 1997 and February 3, 1996, and January 28, 1995, the Company held 41,394 and 48,394
shares, respectively, in treasury resulting from the repurchase of common
stock through open market purchases.
Note 8. Concentration of Business Risks
The Company purchases inventory for its stores from approximately 400
suppliers, with approximately 62%67% of purchases being made from six suppliers.
In the past, the Company has not experienced difficulty in obtaining
satisfactory sources of supply, and management believes that it will retain
access to adequate sources of supply. However, a loss of a major supplier
could cause a possible loss of sales, which would have an adverse affect on
operating results and result in a decrease in vendor support for the Company's
advertising programs.
Note 9. Quarterly Financial Information (Unaudited)
Note 9. Quarterly Financial Information (unaudited)
- - - -----------------------------------------------------------------------------------------------------------------------------------------
Fiscal 1996 Quarter Ended
------------------------------------------------------------
5/4/96 8/3/96 11/2/96 2/1/97 1996
------------------------------------------------------------
Sales $106,622 $96,717 $97,583 $180,735 $481,657
Gross Profit 37,169 34,616 36,217 64,703 172,705
Net Income(Loss) (2,739) (2,392) (2,477) 14,710 7,102
Earnings (Loss)
per share ($0.28) ($0.25) ($0.25) $1.51 $0.73
------------------------------------------------------------
------------------------------------------------------------
Fiscal 1995 Quarter Ended
April 29, July 29, Oct 28, Feb 3, Fiscal------------------------------------------------------------
4/29/95 7/29/95 10/28/95 2/3/96 1995
1995 1995 1996 1995
- - - -----------------------------------------------------------------------------
(in thousands, except per share amounts)------------------------------------------------------------
Sales $111,912 $104,292 $103,165 $197,677 $517,046
Gross profitProfit 39,654 35,315 35,970 65,353 176,292
Net income (loss)Income(Loss) (4,086) (6,129) (5,093) (10,065) (25,373)
Earnings (loss) per share $(0.42) $(0.63) $(0.52) $(1.03) $(2.61)
- - - -----------------------------------------------------------------------------
- - - -----------------------------------------------------------------------------
Fiscal 1994 Quarter Ended
April 30, July 30, Oct 29, Jan 28, Fiscal
1994 1994 1994 1995 1994
- - - -----------------------------------------------------------------------------
(in thousands, except per share amounts)
Sales $109,200 $106,978 $114,086 $206,576 $536,840
Gross profit 40,830 39,475 42,094 73,019 195,418
Net income (loss) (1,882) (2,805) (2,717) 1,148 (6,256)
Earnings (Loss)
per share $(0.19) $(0.29) $(0.28) $0.11 $(0.64)
- - - -----------------------------------------------------------------------------($0.42) ($0.63) ($0.52) ($1.03) ($2.61)
------------------------------------------------------------
F-16
Index to Exhibits
- - - -----------------
Document Number and Description
- -
- -------------------------------
Exhibit No.
3.1 Restated certificate of Incorporation -- incorporated herein by reference
to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year
ended January 29, 1994. Commission File No. 0-14818.
3.2 Certificate of Amendment to the Certificate of Incorporation --
incorporatedIncorporation--incorporated
herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended October 29, 1994. Commission File No.
0-14818.
3.3 Amended By-Laws -- incorporatedBy-Laws--incorporated herein by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended February 2,
1991. Commission File No. 0-14818.
4.1 Note and Security Agreement, dated June 20, 1991, between Aetna Life
Insurance Company and the Company, for the Senior Notes due June 30,
1998
-- incorporated1998--incorporated herein by reference to Exhibit 4 to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 3, 1991. Commission File No.
0-14818.
4.2 Amendment and Waiver, dated March 5, 1992, between Aetna Life Insurance
Company and the Company, relating to the Senior Notes due June 30,
1998 --
incorporated1998--incorporated herein by reference to Exhibit 4.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 1, 1992. Commission
File No. 0-14818.
4.3 Amendment and Waiver, dated as of November 17, 1992, between Aetna Life
Insurance Company and the Company, relating to the Senior Notes due June 30,
1998 -- incorporated1998--incorporated herein by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended October 31, 1992.
Commission File No. 0- 14818.0-14818.
4.4 Amendment, dated March 30, 1994, between Aetna Life Insurance Company and
the Company, relating to the Senior Notes due June 30, 1998 --
incorporated1998--incorporated
herein by reference to Exhibit 4.4 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 29, 1994. Commission File No. 0-14818.
4.5 Form of Amended and Restated Note Agreements, dated June 29, 1995, between
Aetna Life Insurance Company relating to the Company's Variable Rate Senior
Notes due July 31, 1996, the Purchasers of the Company's Variable Rate Senior
Notes due July 31, 1996 and Trans World Entertainment Corporation and Record
Town, Inc. -- incorporated herein by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended July 29, 1995.
Commission File No. 0-14818.
* 4.6 Agreement in Principle, dated May 1, 1996, among Aetna Life Insurance
Company relating to the Variable Rate Senior Notes due July 31, 1996, the
Purchasers of the Company's Variable Rate Senior Notes due July 31, 1996,
the commercial banks in the Company's revolving credit facilities, due
July 31, 1996, and Trans World Entertainment Corporation and Record Town,
Inc.
4.7 Note Agreement, dated July 2, 1993, among the Company, Record Town, Inc.
and the Purchasers listed on Exhibit A thereto, relating to Senior Notes due
June 30, 2000, incorporated herein by reference to Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31,
1993. Commission File No. 0-14818. 4.8 Form of Amendment, dated as of March
24, 1994, among the Company, Record Town, Inc. and each of the holders of the
Senior Notes due June 30, 1999. -- incorporated1999.--incorporated herein by reference to Exhibit
4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended
January 29, 1994. Commission File No. 0-14818.
4.9 Credit Agreement and Note, dated as of June 11, 1993, between the Company
and Chemical Bank -- incorporatedBank--incorporated herein by reference to Exhibit 4.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July
31, 1993.31,1993. Commission File No. 0-14818.
4.10 Credit Agreement and Note, dated as of June 11, 1993, between the Company
and Chase Manhattan Bank, N.A. --N.A.-- incorporated herein by reference to Exhibit
4.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended July 31, 1993. Commission File No. 0-14818.
4.11 Credit Agreement and Note, dated as of June 11, 1993, between the Company
and NBD Bank, N.A. --- incorporated herein by reference to Exhibit 4.4 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31,
1993. Commission File No. 0-14818.
4.12 Credit Agreement and Note, dated as of June 11, 1993, between the Company
and National Westminster Bank, U.S.A. --U.S.A.-- incorporated herein by reference to
Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 31, 1993. Commission File No. 0-14818.
4.13 Form of First Amendment and Waiver, dated March 17, 1994, between the
Company and each of the commercial banks in the Company's revolving credit
facility -- incorporated herein by reference to Exhibit 4.11 to the Company's
Annual Report on Form 10-K for the fiscal year ended January 29, 1994.
Commission File No. 0-14818.
4.14 Form of Second Amendment to Credit Agreement, dated as of December 5,
1994, between the Company and each of the commercial banks in the Company's
revolving credit facility -- incorporated herein by reference to Exhibit 4.1
to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
October 29, 1994. Commission File No. 0-14818.No.0-14818.
4.15 Form of Amended and Restated Revolving Credit Agreement, dated June 29,
1995, between the Company and each of the commercial banks in the Company's
revolving credit facility -- incorporated herein by reference to Exhibit 4.2
to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
July 29, 1995. Commission File No. 0-14818.
4.16 Amended and Restated Note Agreement, dated July 26, 1996, between the
Company and Merrill Lynch, Pierce Fenner & Smith Incorporated, Oaktree Capital
Management, LLC, as agent and on behalf of certain funds and accounts,
Fernwood Associates, LP, Fernwood Restructuring, Ltd and Internationale
Nederlanden (U.S.) Capital Corporation - incorporated herein by reference to
Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended August 3, 1996. Commission File No. 0-14818.
4.17 Amended and Restated Note Agreement, dated July 26, 1996, between the
Company and Merrill Lynch, Pierce Fenner & Smith Incorporated - incorporated
herein by reference to Exhibit 4.2 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended August 3, 1996. Commission File No.
0-14818.
4.18 Amended and Restated Note Agreement, dated July 26, 1996, between the
Company and each of NBD Bank, Bear, Sterns & Co., Inc., Banco Santander Trust
& Banking Corporation (Bahamas) Ltd. And Merrill Lynch, Pierce Fenner & Smith
Incorporated - incorporated herein by reference to Exhibit 4.3 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 3,
1996. Commission File No. 0-14818.
10.1 Lease, dated April 1, 1985, between Robert J. Higgins, as Landlord, and
Record Town, Inc. and Trans World Music Corp., as Tenant and Amendment thereto
dated April 28, 1986 -- incorporated herein by reference to Exhibit 10.3 to
the Company's Registration Statement on Form S-1, No. 33-6449.
10.2 Second Addendum, dated as of November 30, 1989, to Lease, dated April 1,
1985, among Robert J. Higgins, and Trans World Music Corp., and Record Town,
Inc., exercising five year renewal option -- incorporated herein by reference
to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal
year ended February 3, 1990. Commission File No. 0-14818.
10.3 Lease, dated November 1, 1989, between Robert J. Higgins, as Landlord,
and Record Town, Inc. and Trans World Music Corp., as Tenant -- incorporated
here by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K
for the fiscal year ended February 2, 1991. Commission File No. 0-14818. *
10.4 Employment Agreement, dated as of February 1, 1996 between the Company
and Robert J. Higgins.Higgins.-- incorporated herein by reference to Exhibit 10.4 to
the Company's Annual Report on Form 10-K for the fiscal year ended February 1,
1997 Commission File No. 0-14818.
10.5 Trans World Music Corp. 1986 Incentive and Non-Qualified Stock Option
Plan, as amended and restated, and Amendment No. 3 thereto -- incorporated
herein by reference to Exhibit 10.5 of the Company's Annual Report on Form
10-K for the fiscal year ended February 2, 1991. Commission File No. 0-14818.
10.6 Trans World Music Corp. 1990 Stock Option Plan for Non-Employee
Directors -- incorporated herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-2, No. 33-36012.
10.7 Trans World Music Corp. 1990 Restricted Stock Plan -- incorporated
herein by reference to Exhibit 10.7 to the Company's Registration Statement on
Form S-2, No. 33-36012.
10.8 Form of Restricted Stock Agreement dated February 1, 1995 and May 1, 1995
between the Company and Edward W. Marshall, Jr., Executive Vice President -
Operations and Bruce J. Eisenberg, Senior Vice President - Real Estate,
respectively, incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 29,
1995. Commission File No. 0-14818.
10.9 Severance Agreement, dated October 1, 1994, between Trans World
Entertainment Corporation and Edward Marshall, Senior Vice
President-Operations -- incorporated by reference to Exhibit 10.2 of the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended October
29, 1994. Commission File No. 0-14818.
10.10 Trans World Entertainment Corporation 1994 Stock Option Plan --
incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended July 30, 1994. Commission
File No. 0-14818.
10.11 Trans World Entertainment Corporation 1994 Director Retirement Plan --
incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended October 31, 1994. Commission
File No. 0-14818.
10.12 Form of Restricted Stock Agreement dated February 1, 1995 and May 1,
1995 between the Company and Edward W. Marshall, Jr., Executive Vice
President - Operations and Bruce J. Eisenberg, Senior Vice President -
Real Estate, respectively, incorporated herein by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended April 29, 1995. Commission File No. 0-14818.
10.13 Form of Indemnification Agreement dated May 1, 1995 between the Company
and its officers and directors incorporated herein by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended April 29, 1995. Commission File No. 0-14818.
*10.14 Form of Restricted Stock Agreement dated May 1,1996 between the Company
and John J. Sullivan, Senior Vice President-Finance, Treasurer and Chief
Financial Officer.
*10.15 Severance Agreement, dated May 20, 1996 between Trans World
Entertainment Corporation and James A. Litwak, Executive Vice President of
Merchandising and Marketing.
*11 Statements re computation of per share earnings.
22 Significant Subsidiaries of the Registrant, incorporated by reference to
Exhibit 22 to the Company's Annual Report on Form 10-K for the fiscal year
ended January 28, 1995. Commission File No. 0-14818.
* 23.1*23.1 Consent of KPMG Peat Marwick LLP.
* 23.2 Consent of Ernst & Young LLP.
27 Financial Data Schedule (For electronic filing purposes only)
_____________________________
* Filed.
_________________________
*Filed herewith.
EXHIBIT INDEX
4.610.14 Form of Restricted Stock Agreement in Principle, dated May 1,1,1996 between the Company
and John J. Sullivan, Senior Vice President-Finance, Treasurer and Chief
Financial Officer
10.15 Severance Agreement, dated May 20, 1996 among Aetna Life Insurance
Company relating to the Variable Rate Senior Notes due July 31, 1996, the
Purchasers of the Company's Variable Rate Senior Notes due July 31, 1996,
the commercial banks in the Company's revolving credit facilities, due July
31, 1996, andbetween Trans World
Entertainment Corporation and Record Town, Inc.
10.4 Employment Agreement, dated asJames A. Litwak, Executive Vice President of
February 1, 1996 between the CompanyMerchandising and Robert J. Higgins.Marketing
11 Statements re computation of per share earnings.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Ernst & Young LLP.
27 Financial Data Schedule
(electronic filing only)