United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 28, 1995
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 number 0-14818
NEW YORK 14-1541629
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(State or other jurisdiction (I.R.S Employer
of incorporation or organization) Identification No.)
38 Corporate Circle, Albany, New York 12203
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(Address of principal executive offices) (Zip Code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or an amendment to this Form 10-K. [X]
As of April 21, 1995, 9,682,814 shares of the Registrant's Common Stock, excluding 48,394 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 $4.50 on the NASDAQ National Market System on April 21, 1995, was approximately $19,000,000. Shares of Common Stock held by the Company's controlling shareholder, who controls approximately 56% 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. The Company changed its name from "Trans World Music Corp." in September 1994. 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 in a single industry segment, the operation of retail entertainment stores. Sales revenue was $536.8 million during the fiscal year ended January 28, 1995 (referred to herein as "1994"). The Company is one of the largest specialty retailers of compact discs, prerecorded audio cassettes, prerecorded videocassettes and related accessories in the United States. At January 28, 1995, the Company operated 684 stores in 36 states, the District of Columbia, the Virgin Islands and the Commonwealth of Puerto Rico, 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, when the Company has earned all of its annual profits in the past three fiscal years.
For the past five years, the Company has pursued a strategy of expansion, primarily through the opening of 410 new stores. During 1994 the Company opened 55 stores and closed or relocated 55 stores. In 1995, in order to streamline operations and increase profitability, the Company intends to close 80 stores as part of a restructuring reserve announced in the fourth quarter of 1994. The Company has identified a total of 143 stores for closure. See "Business Restructuring" below.
New store openings will be significantly curtailed in 1995 and beyond until the restructuring program is substantially completed. Continued store growth will depend largely on refinancing the Company's debt structure. See "Business Restructuring" below and Item 7, "Management's Discussion and Analysis of Results of Operations - Liquidity and Capital Resources".
The Company's central distribution facility currently serves all of its retail stores. Weekly shipments to each store provide approximately 70% of their retail product requirements. The balance of the stores' requirements are satisfied through direct shipments from manufacturers or distribution from other Company operated stores.
The Company's principal executive offices are located at 38 Corporate Circle, Albany, New York, 12203, and its telephone number is (518) 452-1242.
Business Restructuring
Background. After the close of the third fiscal quarter of 1994 the Company was not in compliance with the fixed charge ratio covenant in its senior credit agreements. The borrowings consist of a $75 million maximum available amount of revolving credit facilities (the "Revolver") and $65 million in long-term senior notes (the "Notes"), totaling up to $140 million. The Company negotiated waiver agreements with its lenders relating to the third quarter covenant non-compliance and began discussions for permanent modifications to the terms and conditions of the respective credit agreements.
The Company undertook a comprehensive examination of store profitability in the fourth quarter, and adopted a business restructuring (the "1994 Restructuring") plan that included the closing of 143 stores. Additional measures under way include initiatives to reduce store inventories to lower levels and to selectively open new stores, giving due consideration to a potential overcapacity in the retail segment of the music industry. As a result of the restructuring plan, the Company recorded a pre-tax charge of $21 million against earnings, leading to a loss for the 1994 fiscal year. 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. For the three year period ended January 28, 1995, the Company pursued an aggressive store growth strategy by taking advantage of soft real estate market conditions. Factors including potential location, estimated sales volume and gross margins, targeted consumer group and competition, occupancy costs and lease terms are all considered when evaluating a potential new store location. Future expansion is expected to be limited to pursuing existing profitable locations and markets. As part of the 1994 Restructuring, 143 store closings are expected to be completed over an 18 month period, with 28 stores closed in the fourth quarter of 1994. The restructuring will be completed with the closing of 80 stores in 1995 and 35 stores in 1996. 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 positive cash flow at the store level, before accounting for home office overhead; (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) marginal stores where the leases were scheduled to expire.
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 1995 fiscal year. The store openings in the
forecast do not represent commitments, and are subject to a number of
factors, including constraints under the Company's credit agreements. See
Item 7, "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Liquidity and Capital Resources".
Fiscal Year
---------------------------------
Forecast
1995 1994 1993 1992
---------------------------------
MALL
Number of Stores,
Beginning of period 431 442 439 437
Openings 10 26 41 26
Closings (41) (37) (38) (24)
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Number of Stores,
End of Period 400 431 442 439
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NON-MALL/OTHER
Number of Stores,
Beginning of period 253 242 215 160
Openings 4 29 40 67
Closings (39) (18) (13) (12)
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Number of Stores,
End of Period 218 253 242 215
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TOTAL COMPANY
Number of Stores,
Beginning of period 684 684 654 597
Openings 14 55 81 93
Closings (80)* (55) (51) (36)
----------------------------------
Number of Stores,
End of Period 618 684 684 654
==================================
* The 1994 Restructuring includes closing 35 additional stores in 1996.
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Debt Restructuring. The second element of the 1994 Restructuring involved modifications to the Company's senior credit agreements. In December 1994 the Company began discussions with its lenders to renegotiate terms and conditions of the Revolver and the Notes. Additional covenant non-compliance was temporarily waived at January 28, 1995, while modifications to the credit agreements were negotiated.
In April 1995 the Company entered into an agreement with its lenders to restructure the Revolver and the Notes. The lenders have allowed the Company until July 31, 1996 to refinance its debt structure, at which time all of the outstanding amounts mature. The revised credit agreements contain restrictions on capital expenditures, dividends, acquisitions and new covenants as to 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 Item 7, "Management's Discussion and Analysis of Operations and Financial Condition".
Store Formats
Mall Stores. The Company operated 203 full-line mall stores at January 28, 1995, generally under the name "Record Town." These stores utilize an average space of approximately 3,000 square feet, but certain stores range to as much as 8,000 square feet. The full mall stores have averaged approximately $280 sales per square foot annually over the past two years. 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 January 28, 1995, the Company operated 92 of these stores having an average space of approximately 1,300 square feet. These stores have averaged approximately $385 sales per square foot annually over the past two years.
Video-for-Sale stores are operated under the name "Saturday Matinee" and are primarily dedicated to the sale of prerecorded video products. On January 28, 1995, the Company operated 69 stand alone locations along with 66 Saturday Matinee operations contained in the Company's combination stores. They average 2,100 square feet in size and generated average sales per square foot of $288 in 1994 and $258 in 1993. In the past two fiscal years the Company has expanded "Saturday Matinee" through the combination format instead of stand-alone locations.
Combination Stores share common storefronts of "Record Town" and "Saturday Matinee." As of January 28, 1995, the Company operated 66 stores with an average size of approximately 7,000 square feet or, with the new superstores, as large as 17,000 square feet. These stores offer the consumer an exciting combination of music and video-for-sale products in one store location. These stores have averaged approximately $240 per square foot annually over the past two years.
During 1993, the Company introduced "For Your Entertainment", or "F.Y.E." This store combines retail book, multimedia merchandise and a video game entertainment room, in addition to the Company's other lines of music and video merchandise. At January 28, 1995, one 27,000 square foot "F.Y.E." store was in operation.
Non-Mall Stores. Freestanding Stores accounted for 164 of the stores in operation at January 28, 1995, substantially all of which operate under the name "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 5,000 to 8,000 square feet. Eleven of the freestanding stores are Coconuts "superstores" that average approximately 14,000 square feet in size. Freestanding stores carry a more extensive product assortment and have a pricing structure that is more competitive than a mall store. Average sales per square foot was approximately $165 for the past two years.
The Company's non-mall stores also include a video rental store format and a licensed operation format. The Company's 44 video rental locations include 29 stores that operate under the tradename "Movies Plus." The Company's 45 licensed music and video departments, which operate within retail department stores, offer music and video entertainment products and related accessories.
Strategic Alliances. The Company is also expanding through joint venture opportunities. At January 28, 1995 the Company was a venture partner with Tandy Corporation in nine music and video departments contained within Tandy Corporation's new electronics megastore, Incredible Universe. The venture partners currently expect to open eight new Incredible Universe music and video departments during 1995. Tandy Corporation has announced its plans to have approximately 50 Incredible Universe megastores open by the end of 1998.
Products
The Company's stores offer a full assortment of prerecorded compact
discs, audio cassettes, prerecorded videocassettes, blank audio and video
tape and related accessories. Sales by category as a percent of total
sales over the past three years were as follows:
Fiscal Year Ended
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January 28, January 29, January 30,
1995 1994 1993
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Compact discs 46.9% 42.1% 37.9%
Prerecorded audio cassettes 28.2 33.5 38.7
Prerecorded videocassettes 15.8 14.6 13.1
Blank tape, video games,
accessories and other 9.1 9.8 10.3
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Total 100.0% 100.0% 100.0%
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Prerecorded Music. The Company's music stores offer a full assortment of compact discs and prerecorded audio cassettes purchased primarily from six major manufacturers. Music categories include rock, pop, vocal, country, classical, jazz, religious, rhythm and blues, and show and movie soundtracks. The merchandise inventory is generally classified for inventory management purposes in three groups: "hits", which are the best selling new releases, "fast moving" titles, which generally constitute the top 1,000 titles with the highest rate of sale in any given month, and "catalog" items, which are still popular releases 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. For the past two years dollar sales volume of compact discs has exceeded audio cassettes. In 1994, the unit sales volume of compact discs surpassed the unit sales of audio cassettes. Recording industry projections indicate that compact discs will continue to increase in market share 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 Audio and Video Tapes. The Company stocks and promotes brand name blank video and audio cassette tapes.
Accessory Products. Accessory products offered by the Company for compact discs, audio and video cassettes include maintenance and cleaning products, home and portable storage cases and headphones, 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 free-standing stores through advertisements in radio, television and newspapers. 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 is highly competitive. Products offered by competing retailers are virtually identical to the Company's product offerings, varying only by the breadth of the product assortment within store locations. Numerous chain stores, department stores and discount stores, many of which have greater financial resources than the Company, sell prerecorded music and video merchandise. Large national retail chains that operate book or electronics superstores have expanded their product lines to include music and video software products, and now offer music and video departments that are larger in square footage than the Company's typical specialty store. In addition, consumers receive television mail order offers and have access to mail order clubs affiliated with major manufacturers of prerecorded music.
The Company has formulated a number of different strategies to compete against the increased number of music and video software retailers. During 1994, the Company's new stores averaged 5,800 square feet in size, considerably larger than the Company's overall average store size of 3,600 square feet. This has enabled the Company 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. Additionally, in 1994, the Company introduced a more competitive pricing strategy in over one-third of its stores that conveys a simple, value-oriented message to consumers. Management believes the positioning of most of its stores within successful regional malls is more important as a competitive strength than lower prices, compared to its freestanding superstore competitors. A majority of the regional malls in which the Company operates have not been materially impacted by the increase in number of stores operated by non-mall competitors.
The increase in the number of competitors and their low prices has made achieving meaningful comparable store sales gains more difficult. The Company believes that its convenient locations and product assortments will enable it to remain competitive, but that the gross margin rate will continue to be under pressure for the near term.
Seasonality
The Company's business is seasonal in nature. The Christmas holiday in the fourth quarter constitutes the Company's peak selling period, totaling 38% of annual sales in 1994. The Company experiences operating losses in the first three fiscal quarters and typically earns all of its annual profits in the fourth quarter. Inventory levels are typically highest early in the fourth quarter.
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% of their product requirements. The balance of the stores' requirements are satisfied through direct shipments from manufacturers or redistribution from other stores.
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 automate more completely the product picking, distribution and return functions of its distribution center. Sortation equipment is being modified for the Company's products to replace many of the manual functions currently in use. Merchandise return sortation equipment is currently operational. The entire project is estimated to cost approximately $3 million, and will lead to lower handling costs and inventory balances. Equipment testing and implementation will continue during 1995, with anticipated completion in 1996. 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 70% of purchases in 1994 were made from the six largest suppliers: Sony Music, Warner/Electra/Atlantic Corp. (subsidiary of Time Warner), BMG Music (subsidiary of Bertelsman), MCA, Inc. (subsidiary of Matsushita), PolyGram (subsidiary of Philips), and CEMA (subsidiary of Thorn-EMI).
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 1994, and management does not anticipate that such manufacturing will constitute a significant element of its business in 1995.
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, 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 excess return penalties. Video rental products are not eligible for return to the manufacturers.
Currently, none of the Company's principal music suppliers limit product return privileges. Product return credit is applied as a reduction against current merchandise product payments. In some instances, the Company's videocassette suppliers limit return privileges relative to current gross videocassette 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 5,500 people, of whom 900 are employed on a full-time salaried basis, 1,400 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, 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 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 accumulated in the Company's central computer department, which utilizes the IBM AS/400 midrange configuration. The Company's information systems manage a database of over 200,000 sku'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.
The Company installed a merchandise replenishment system in 1993 intended to improve the in-stock inventory position and minimize excess inventory positions. After two years of effort the merchandise system was fully operational in the fourth quarter of 1994. Combined with improved merchandise planning, the new system provides current, accurate information of the Company's retail merchandise inventory.
Trademarks and Service Marks
The Company operates stores under various names and marks, including the service marks "Record Town", "Tape World", "Coconuts", "Saturday Matinee" and "Movies Plus" 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 January 28, 1995, the Company operated 684 retail outlets. The Company owns real estate sites for two stores and leases the remainder 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 and insurance.
The following table lists the number of leases due to expire (assuming no options are exercised) in each of the fiscal years shown, as of January 28, 1995:
1995 . . . . . .69 1999 . . . . . . 55 1996 . . . . . .56 2000 . . . . . . 52 1997 . . . . . .79 2001 . . . . . . 87 |
1998 . . . . . .82 2002 & beyond. .202
The Company expects that as these leases expire, it will be able either to obtain renewal leases, if desired, or to obtain leases for other suitable locations. Certain of the stores scheduled to close as part of 1994 Restructuring will take place upon the expiration of the applicable store leases.
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. This seven 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.
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 21, 1995, 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 February 1, 1993 through January
27, 1995, and the closing price as of April 21, 1995.
Last Sale
Prices
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High Low
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1993:
1st Quarter $16 3/4 $13 1/4
2nd Quarter 17 3/4 13
3rd Quarter 15 1/4 12 3/4
4th Quarter 16 1/4 13 1/4
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:
April 21, closing price $4.50.
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Dividend Policy. The Company has never declared or paid cash dividends on the 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 are 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
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January 28, January 29, January 30, February 1, February 2,
1995 1994 1993 1992 1991
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(in thousands, except per share and store data)
INCOME STATEMENT DATA:
Sales $536,840 $492,553 $454,916 $411,131 $356,564
Cost of sales 341,422 307,834 280,572 256,110 221,180
---------------------------------------------------------
Gross profit 195,418 184,719 174,344 155,021 135,384
Selling,
general and
administrative
expenses 158,637 147,644 133,768 117,370 96,621
Restructuring
charges 21,000 --- --- --- ---
Depreciation and
amortization 16,932 14,655 13,310 11,664 9,530
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Income (loss) from
operations (1,151) 22,420 27,266 25,987 29,233
Interest expense 9,540 5,971 5,627 5,946 5,332
---------------------------------------------------------
Income (loss) before
income taxes (10,691) 16,449 21,639 20,041 23,901
Income tax expense
(benefit) (4,435) 6,626 8,374 8,012 9,420
---------------------------------------------------------
Net income (loss) $ (6,256) $ 9,823 $ 13,265 $ 12,029 $ 14,481
=========================================================
Earnings (loss)
per share $ (0.64) $ 1.01 $ 1.40 $ 1.32 $ 1.60
=========================================================
Weighted average
number of shares
outstanding 9,701 9,723 9,474 9,087 9,065
=========================================================
BALANCE SHEET DATA:
(at end of period)
Working capital $ 93,431 $101,538 $ 63,058 $ 43,372 $ 44,219
Total assets 426,939 380,264 286,873 248,022 242,304
Current portion
of long-term
obligations 6,618 3,695 910 12,349 805
Long-term
obligations 66,441 73,098 25,512 26,281 31,144
Shareholders'
equity 119,477 126,074 116,329 92,620 80,151
Store Count:
Number of stores
open at end of
period 684 684 654 597 546
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS, FISCAL YEARS 1994, 1993 AND 1992
The following table sets forth certain income and expense items as a
percentage of sales for the periods indicated:
Fiscal Year Ended
-------------------------------------
January 28, January 29, January 30,
1995 1994 1993
-------------------------------------
Sales 100.0% 100.0% 100.0%
Gross profit 36.4 37.5 38.3
Selling, general and
administrative expenses 29.6 30.0 29.4
Restructuring charges 3.9 --- ---
Depreciation and amortization 3.2 3.0 2.9
--------------------------------------
Income (loss) from operations -0.2 4.5 6.0
Interest expense 1.8 1.2 1.3
--------------------------------------
Income (loss) before income taxes -2.0 3.3 4.7
Income tax expense (benefit) -0.8 1.3 1.8
--------------------------------------
Net income (loss) -1.2% 2.0% 2.9%
______________________________________
Change in comparable store sales 1.1% -2.1% ---
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Sales. The Company's sales increased by $44.3 million, 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 the fiscal year 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, 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.
Sales by product configuration are shown in the following table:
Fiscal Year Ended
-------------------------------------
January 28, January 29, January 30,
1995 1994 1993
-------------------------------------
Compact discs 46.9% 42.1% 37.9%
Prerecorded audio cassettes 28.2 33.5 38.7
Prerecorded videocassettes 15.8 14.6 13.1
Blank tape, video games, accessories
and other 9.1 9.8 10.3
------ ------ ------
Total 100.0% 100.0% 100.0%
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Comparable store sales have been affected primarily by lower unit selling prices, which in turn have led to somewhat lower gross margins. The average unit selling price of the Company's predominant product configuration, compact discs, declined 5% in 1994 while the unit sales volume increased 31%, which contributed to a $50.2 million increase in sales. The average unit selling price of audio cassettes declined 3%, while the unit sales volume also declined 3%, which contributed to a $7.4 million decline in sales. The average unit selling price of prerecorded videocassettes declined 5% while the unit sales volume increased 28%, which contributed to a $15.2 million increase in sales.
The Company's store formats performed similarly in 1994. Comparable store sales for mall stores increased 1.9%, while non-mall stores decreased 1.0%. By product configuration, comparable store sales in music increased 0.7% while video sell-through, a smaller component of the Company's business, increased 9.7% on a comparable store basis, benefiting from the continued growth of the video sell-through market.
The Company has experienced increased competition from diversified retailers entering the music business, including book superstores and consumer electronics superstores, which often emphasize discount pricing, a trend expected to continue in 1995 and beyond.
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. Compact discs have a gross margin that is approximately 5% lower than audio cassettes.
Selling, General & Administrative Expenses. Selling, general and administrative expenses ("SG&A"), as a percentage of sales, decreased from 30.0% in 1993 to 29.6% in 1994. The decrease in SG&A, as a percent of sales, was primarily due to leveraging fixed overhead costs on a total sales increase of 9%, offset somewhat by an increase in store operating costs, as a percentage of sales.
Interest Expense. Interest expense increased $3.6 million over 1993. The $50 million increase in the Company's average borrowings contributed to substantially all of the increase.
Management expects 1995 interest expense to increase approximately $3.5 million over 1994 due to higher interest rates on $65 million in long-term notes outstanding, and higher interest rates on the revolving credit facilities, which are expected to carry average outstanding balances of approximately $60 million. See the discussion in "Liquidity and Capital Resources" below.
Income Tax Expense. The effective income tax rates, prior to the restructuring charge, are 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.
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.
Sales. The Company's sales increased by $37.6 million, or 8.3%, over 1992. The increase was primarily attributed to an increase in square footage resulting from the opening of new stores and the expansion of existing stores. Comparable store sales for the fiscal year declined 2.1%. Management attributes the decline in comparable store sales to the implementation of its new merchandise replenishment system, which led to lost sales through incorrect product assortments and bottlenecks in the central distribution center during the peak holiday period.
Gross Profit. Gross profit, as a percentage of sales, decreased from 38.3% in 1992 to 37.5% in 1993. Increased promotional pricing and the continued shift of sales from higher gross profit prerecorded audio cassettes to lower gross profit compact discs led to the reduced gross profit percentage.
Selling, General & Administrative Expenses. Selling, general and administrative expenses ("SG&A"), as a percentage of sales, increased from 29.4% in 1992 to 30.0% in 1993, primarily due to increased store occupancy expenses compared with declining comparable store sales. SG&A, as a percentage of sales, was favorably impacted by a net reduction in administrative expenses at the Company's corporate headquarters.
Interest Expense. Interest expense increased $0.3 million over 1992, reflecting an increase in the Company's average borrowings of approximately $15 million for 1993, offset somewhat by a decrease in the average borrowing rate on the Company's floating rate revolving credit debt of approximately 0.9%.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain measures of the Company's
liquidity:
Fiscal Year Ended
------------------------------
1994 1993 1992
------------------------------
(in thousands)
Net income (loss) plus depreciation,
amortization and restructuring reserve $32,691 $25,538 $27,553
Net cash provided by operating activities 16,739 3,427 7,850
Working capital 93,431 101,538 63,058
Current ratio 1.4:1 1.6:1 1.4:1
Long-term obligations to equity ratio 56% 58% 22%
------------------------------
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Liquidity and Sources of Capital. Cash flow from operations and funds available under revolving credit facilities have typically been the Company's primary sources of liquidity. During 1994, cash provided by operations was $16.7 million, compared to $3.4 million for 1993. The increased cash flow was due primarily to a decrease in inventory in 1994, attributed to improved inventory management. At January 28, 1995, merchandise inventory had decreased from $239 million in 1993 to $222 million. During the 1994 fiscal year, the Company experienced losses in the first three quarters, but after adding back depreciation and amortization, the Company improved its net operating cash flow. Payment terms from the Company's suppliers have not changed significantly from those available to the Company over the last three fiscal years.
Unlike previous years, the Company accumulated cash balances in December 1994 and January 1995 instead of repaying the balances under its $75 million revolving credit facilities (the "Revolver"). The credit agreements did not require the Company to pay down the outstanding balances under the Revolver at year end. Accordingly, the Company ended the fiscal 1994 year with cash balances of approximately $90 million. During the period subsequent to January 28, 1995, the Company used the accumulated cash balances to satisfy its liquidity requirements, primarily repaying accounts payable. 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 1995, and would have had lower balances outstanding under the Revolver than in the first quarter of fiscal 1994.
Effective January 28, 1995, the Company was operating under temporary waivers from its lenders relating to non-compliance with two financial covenants, including the fixed charge ratio. The aggregate amount of the senior debt, totaling a maximum available amount of $140 million, including the Revolver and $65 million in outstanding long-term notes (the "Notes") ranks pari passu and is unsecured. The nine lenders (the "Lending Group") that are party to the applicable credit agreements granted waivers to the Company effective through March 31, 1995 and subsequently extended through May 15, 1995. 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 April 28, 1995 the Company entered into an agreement in principle with the Lending Group to restructure all of the Company's $140 million aggregate principal amount of senior debt. The Company continues to operate under temporary waivers from the Lending Group until the final loan documents are completed. The Company will be required to make principal repayment on the Notes of $2.3 million on June 30, 1995 and $3.7 on January 31, 1996. The maximum borrowings available on the Company's Revolver will be reduced to $72.3 million on June 30, 1995 and to $68.0 on January 31, 1996. Final maturity of the Notes and the Revolver is July 31, 1996. Effective April 28, 1995, interest rates for the Notes and the Revolver were converted to a floating rate equal to the greater of 10.5% or 1-1/2% over the prime lending rate.
The revised credit agreements contain restrictive provisions governing dividends, capital expenditures and acquisitions, and modified covenants as to working capital, cash flow and consolidated tangible net worth to reflect the $21 million restructuring charge recorded in 1994 and lower earnings levels than expected when the credit agreements were amended in January 1994. In the past, the Company has violated its fixed charge ratio covenant, which requires a specified pretax earnings coverage of the aggregate of interest expense and real estate rent. The modified fixed charge ratio covenant now aggregates depreciation and amortization with pre-tax earnings for the coverage test. The Company would be in compliance with the modified covenant if the Company is profitable for the 1995 fiscal year. The Revolver as modified requires the Company to pay down the outstanding balances for a 15 day period between December 25, 1995 and January 31, 1996.
The Company's ability to continue to meet its liquidity requirements on a long-term basis is dependent on its ability to successfully obtain new financing to replace the senior debt maturing in July 1996. In the interim period, cash flow from operations, continued reductions in absolute inventory levels, and reduced capital expenditures should assure that the Company has ample liquidity to meet its operating requirements.
Capital Expenditures.
The store closings in 1995 and 1996 will continue to reduce the overall store count and total retail square footage. See "Provision for Business Restructuring" below.
The Company has invested the most significant portion of its capital resources in new stores growth during the past several years. During 1994 the Company added 55 new stores, totaling 0.3 million square feet. Combined with 55 stores that were closed or relocated, and store expansions, total retail square footage increased on a net basis by 4% to 2.5 million square feet. In 1994, the average store size was greater than in past years, a trend that is expected to continue in 1995. Total capital expenditures were $22.3 million in 1994, including new stores, store remodels and reconfigurations and, to a lesser extent, home office investments.
In fiscal 1995, the Company plans to spend approximately $11 million, net of construction allowances, in capital expenditures. These funds will be provided by cash flow from net income and depreciation. The Company's plans include the opening of approximately 14 new stores, totaling 0.1 million square feet of retail space, and approximately $3 million for operational improvements being made to the central distribution center for the implementation of the automated sortation equipment.
The store closings in 1995 and 1996 will reduce the overall store count and total retail square footage, as discussed in the "Provision for Business Restructuring".
Capital expenditures are being substantially curtailed in 1995 because of restrictions imposed by the Company's credit agreements, and will be limited in future years by the willingness of the Lending Group or any new lenders to permit the Company to open new stores. The Company does not expect to continue the rapid growth characterized by the three year period ended January 28, 1995. Any excess cash flow will be used primarily to retire debt.
Provision for Business Restructuring.
During the fourth quarter of 1994 the Company undertook a comprehensive examination of store profitability and adopted a business restructuring plan that included the closing of 143 stores out of over 700 stores then open and operating. Management concluded that select retail entertainment markets had begun to reflect an overcapacity of retail outlets, and large discount-priced electronics stores and other superstores were having an adverse impact on certain of the Company's retail stores. As a result of the restructuring plan, the Company recorded a pre-tax charge of $21 million against earnings, leading to a loss for the 1994 fiscal year. The components of the restructuring charge included approximately $8.7 million in reserves for future cash outlays, and approximately $12.3 million in asset write-offs. 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 an 18 month period, with 28 stores closed in the fourth quarter of 1994. See Item 1, "Business - Business Restructuring" of this Annual Report on Form 10-K. 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 1995 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.
Fiscal Year
-----------------------------
Forecast
1995 1994 1993 1992
-----------------------------
TOTAL COMPANY
Number of Stores,
Beginning of period 684 684 654 597
Openings 14 55 81 93
Closings (80)* (55) (51) (36)
-----------------------------
Number of Stores,
End of Period 618 684 684 654
=============================
* The 1994 Restructuring includes closing 35 additional stores in 1996.
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The lease obligations, termination benefits and other expenditures will require cash outlays totaling approximately $8.7 million of that total; $5.5 million is anticipated to be incurred in fiscal 1995, with the balance planned for fiscal 1996. The cash outflows will be financed from operating cash flows. In particular, merchandise inventory from the stores identified for closure that will be returned for credit will provide an increase of approximately $13 million in working capital, net of the corresponding accounts payable. The timing of store closures will depend somewhat on the Company's ability to negotiate reasonable lease termination agreements, and management will continually review the opportunity to accelerate the closing of underperforming stores.
Sales associated with the stores identified for closing totaled $72.8 million in 1994. Management currently anticipates that pre-tax losses at the store level, before corporate overhead and other indirect costs, during the period of store closures will approximate $6.0 to $8.0 million , and after adding back depreciation the pre-tax cash flow will approximate a negative $4.0 to $6.0 million. Because the store closures will be phased in over 1995 and 1996, the Company does not currently expect to receive most of the earnings or cash flow benefits from the restructuring program until fiscal 1996.
Impact of Inflation. Although the Company cannot accurately determine the precise effect of inflation on its operations, management does not believe inflation has had a material effect on the results of operations in the last three fiscal years. When the cost of merchandise items has increased, the Company 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. In the past three years, the fourth fiscal quarter has represented all of the Company's net income for the year. See the unaudited note to the audited consolidated financial statements for quarterly financial highlights.
Dividend Policy. The Company has never paid cash dividends and does not anticipate paying cash dividends in 1995. The Company's credit agreements currently prohibit the payment of cash dividends.
New Accounting Standards. The Financial Accounting Standards Board issued Statement No. 112, "Employers' Accounting for Postemployment Benefits", in November 1992, which was effective for years beginning after December 15, 1993. The implementation of this accounting standard, in 1994, did not have a material effect on the Company's financial statements.
In March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" which is effective for the Company in fiscal 1996. Management of the Company does not believe that the implementation of this new accounting standard will have a material effect on the Company's financial statements.
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 7 of the Consolidated Financial Statements.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Change in Company's Certifying Accountant
On September 1, 1994, the Company's certifying accountant, the firm Ernst & Young LLP, sold its Albany, New York practice to another national firm, KPMG Peat Marwick LLP. At a meeting held August 26, 1994, the Audit Committee of the Board of Directors approved the engagement of KPMG Peat Marwick LLP as its independent auditors for the fiscal year ending January 28, 1995, to replace the firm of Ernst & Young LLP, which declined to stand for reelection as auditors of the Company, effective immediately.
Ernst & Young LLP was the Company's auditors since the Company's initial public offering in 1986. The reports of Ernst & Young LLP on the Company's financial statements for the past two fiscal years did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles.
In connection with the audits of the Company's financial statements for each of the two fiscal years ended January 29, 1994, and in the subsequent interim period, there were no disagreements on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to make reference to the matter in their report.
The Company requested Ernst & Young LLP to furnish a letter addressed to the Securities and Exchange Commission stating it agrees with the statements set forth above in this item. A copy of this letter was filed on a Current Report on Form 8-K on August 31, 1994, reporting a change in the Company's Certifying Accountant from Ernst & Young LLP to KPMG Peat Marwick LLP.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
The name, age, principal occupation and period of service as a director of the Company for each director are set forth below:
Robert J. Higgins Age 53 Director since 1973
Robert J. Higgins, is Chairman of the Board, founded the Company in 1972, and he 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. He is also the Company's principal shareholder.
Matthew H. Mataraso Age 65 Director since 1976
Matthew H. Mataraso has served as Secretary and a director of the Company for more than the past five years, and has practiced law in Albany, New York during the same period.
George W. Dougan Age 55 Director since 1984
George W. Dougan has been Chief Executive Officer and a member of the Board of Directors of Evergreen Bancorp Inc. since March 7, 1994, and Chairman of the Board since May 19, 1994. Mr. Dougan was the Chairman of the Board and Chief Executive Officer of the Bank of Boston - Florida from June 1992 to March 1994, was the Senior Vice President and Director of Retail Banking of The Bank of Boston Massachusetts from February 1990 to June 1992, and a Regional President of The Bank of Boston from August 1988 to February 1990.
Charlotte G. Fischer Age 45 Director since 1991
Charlotte G. Fischer has been Chairman of the Board, President and Chief Executive Officer of Paul Harris Stores, Inc., a publicly-held specialty retailer of women's apparel, since January 28, 1995. Mrs. Fischer was the Vice Chairman of the Board and Chief Executive Officer-designate from April 29, 1994 through January 28, 1995. In November 1992, Mrs. Fischer established C.G.F. Inc., and was President and Chief Executive Officer of Hearts Int., a specialty retailer she founded, and has also served as a consultant to retail organizations, including the Company. Mrs. Fischer was President and Chief Executive Officer of Claire's Boutiques, Inc. from September 1989 until October 1991 , and was on the Board of Directors of Claire's Stores, Inc., the publicly-held parent company.
Issac Kaufman Age 48 Director since 1991
Isaac Kaufman has been an Executive Vice President of Merry-Go-Round Enterprises, Inc. ("Merry-Go-Round"), a publicly-held specialty retailer, and on its Board of Directors since April 3, 1991, and has been Chief Financial Officer, Secretary and Treasurer of the Company since 1983. Mr. Kaufman has held various finance positions with Merry-Go-Round for the past 18 years. Merry-Go-Round filed for protection from its creditors under Chapter 11 of the U.S. Bankruptcy Code on January 11, 1994.
J. Markham Green Age 51 Director since 1993
J. Markham Green has been a limited partner of The Goldman Sachs Group, L.P., an affiliate of Goldman, Sachs & Co., since November 1992. He was a General Partner and a Vice President with Goldman, Sachs & Co., the New York investment firm, for more than five years before. Mr. Green serves on the Board of Directors of Park Communications, Inc., a publicly- held communications company.
Compensation Of Directors
Cash Compensation. Each director who is not a salaried employee of the Company receives a $15,000 retainer per annum plus a $1,000 attendance fee for each committee meeting and board meeting attended, except that the compensation for telephone conference meetings is $500. A Committee chairperson earns an additional $1,000 retainer per year.
Director Stock Option Plan. Each outside Director is entitled to participate in the Company's 1990 Stock Option Plan for Non-Employee Directors.
Consulting Arrangements. The Company utilized the services of Charlotte G. Fischer during fiscal 1993 and the first two months of fiscal 1994. The per diem fees earned in fiscal 1994 by Mrs. Fischer equaled $37,500. Matthew Mataraso received $58,000 in cash compensation from the Company in fiscal 1994 for his services as Secretary of the Company and as counsel.
Retirement Plan. The Company provides the Board of Directors with a noncontributory, unfunded retirement plan that pays a retired director a retirement benefit of $15,000 per year for up to 10 years, depending on the length of service, or the life of the director and his or her spouse, whichever period is shorter. To become vested in the retirement plan a director must reach age 62 and have served on the Board of Directors for a minimum of five consecutive years.
(b) Identification of Executive Officers
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 53
President, Chief Executive Officer,
Chairman of the Board and Director since 1973
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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.
Robert A. Helpert Age 51
Executive Vice President, Chief
Administrative Officer and Chief
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Financial Officer Since 1994
Robert A. Helpert has been Executive Vice President, Chief Administrative Officer and Chief Financial Officer of the Company since February 1994. He was President and Chief Operating Officer of the news and gift store division of W.H. Smith Inc., a subsidiary of W.H. Smith PLC for more than the prior five years.
Edward W. Marshall,Jr. Age 49 Executive Vice President-Operations Since 1989
Edward W. Marshall, Jr. has been Executive Vice President of the Company since August 1994. He served as Senior Vice President-Operations of the Company since January 1991 and was Vice President-Operations upon joining the Company in May 1989. For more than five years prior thereto, he was the Vice President-Operations for Morse Shoe, a retail store operator.
All executive officers other than the Chief Executive Officer serve at the pleasure of the Board of Directors, but generally for a term of one year. The Chief Executive Officer's term is governed by an employment agreement that expires January 31, 1996.
Item 11. EXECUTIVE COMPENSATION
The Company's executive officers are identified below. At year end, three officers met the definition of "executive officer" under applicable regulations for fiscal year 1994, including the Chief Executive. Executive officers of the Company currently hold the same respective positions with Record Town, Inc., the Company's wholly-owned subsidiary through which all retail operations are conducted. The Summary Compensation Table sets forth the compensation paid by the Company and its subsidiaries for services rendered in all capacities during the last three fiscal years to each of the three executive officers of the Company whose cash compensation for that year exceeded $100,000.
Summary Compensation Table
Long Term
Compen-
sation
---------
Annual Compensation Awards
-----------------------------------------
Securities
Underlying All
Other Annual Options/ Other
Name and Salary Bonus Compensation SARs Compen-
Principal Position Year ($) ($) ($) (#) sation
- ------------------------------------------------------------------------------
ROBERT J. HIGGINS 1994 550,000 0 79,514 (1) 0 78,960 (1)
Chairman, President 1993 550,000 0 91,027 (1) 0 45,255 (1)
and Chief 1992 530,882 553,462 83,424 (1) 0 65,631 (1)
Executive Officer
ROBERT A. HELPERT 1994 271,635 0 106,120 (4) 100,000 -
Executive 1993 - - - - -
Vice President (4) 1992 - - - - -
EDWARD W. 1994 234,826 50,000 26,875 (5) - 4,146 (3)
MARSHALL, JR. 1993 190,751 0 - (2) 45,000 3,854 (3)
Executive Vice 1992 183,806 55,200 - (2) 5,000 3,850 (3)
President-
Operations
- -----------------------
(1) "Other Annual Compensation" in fiscal 1994, 1993 and 1992 for Mr.
Higgins includes $71,040, $ 82,208, and $ 83,424, respectively, in payments
for or reimbursement of life insurance premiums made on behalf of Mr.
Higgins or his beneficiaries, pursuant to his employment agreement. "All
Other Compensation" in fiscal 1994 for Mr. Higgins consists of the maximum
dollar value of premiums paid by the Company with respect to split dollar
life insurance policies that the Company owns on the lives of Mr. Higgins
and his wife. The Company will recoup most or all of such premiums upon
maturity of the policies, but the maximum potential value is calculated in
line with current SEC instructions as if the 1994 premiums were advanced
without interest until the time that the Company expects to recover the
premium.
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(2) "Other Annual Compensation" for the named executive was less than $50,000 and also less than 10% of the total of annual salary and bonus reported. (3) "All Other Compensation" for the named executive consists of matching contributions for the 401(k) Savings Plan. (4) Mr. Helpert began his employment with the Company in 1994. "Other Annual Compensation" for Mr. Helpert includes $95,136 for moving expenses and a tax gross-up on the reimbursement. (5) "Other Annual Compensation" for Mr. Marshall included $25,000 for forgiveness of a loan. |
Options/SAR Grants In Last Fascal Year(1)
The following table sets forth information concerning individual grants of
stock options made during the fiscal year ended January 28, 1995 to each of
the executive officers of the Company named in the Summary Compensation
Table above:
Individual Grants
------------------------------------------------------- Potential
Realizable Value at
Number of Assumed Annual
Securities Percent of Rates of Stock
Underlying Total Options Exercise Price Appreciation
Stock Options Granted to or Base for Option Term (3)
Granted (#) Employees in Price Expiration -------------------
Name (1)(2) Fiscal Year ($/share) Date 5% ($) 10% ($)
- ---------------------------------------------------------------------------------------------
Mr. Higgins 0 N/A -- -- -- --
Mr. Helpert 100,000 42.4% $12.75 2004 $803,250 $2,027,250
Mr. Marshall 0 N/A -- -- -- --
- -------------------------
(1) No SARs were granted.
(2) Stock Options are exercisable annually in 4 equal installments,
commencing on the first anniversary of the date of grant, and vest
earlier upon the officer's death or disability. The stock options have
a term of ten years. The grant on February 7, 1994 to Mr. Helpert
included options exercisable into 50,000 shares that vest in one
installment on the fourth anniversary of the date of grant and options
exercisable into 50,000 shares that vest in four annual installments
ratably. All options granted under the stock option plan may become
immediately exercisable upon the occurrence of certain business
combinations. The Compensation Committee of the Board of Directors may
accelerate or extend the exercisability of any options subject to such
terms and conditions as the Committee deems appropriate. The option
exercise price was set at the fair market value (last reported sale
price) on the date of grant.
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(3) These amounts are based on assumed appreciation rates of 5% and 10% as
prescribed by Securities and Exchange Commission rules, and are not
intended to forecast possible future appreciation, if any, of the
Company's stock price. The Company's stock price was $5.50 at January
28, 1995, the fiscal year end, below the stock price used to calculate
the assumed appreciation value.
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Aggregated Option Exercises And Fiscal Year-End Option Value Table (1)
The following table sets forth information concerning each exercise of
stock options during the fiscal year ended January 28, 1995 by each of the
executive officers named in the Summary Compensation Table above and the
value of unexercised options held by such persons as of January 28, 1995:
Number of Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Shares Year-End (#) at Fiscal Year-End ($)
Acquired ---------------------------------------------
on Exercise Value Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable (2)
- ---------------------------------------------------------------------------------------------
Mr. Higgins -- -- -- --
Mr. Helpert -- -- 0/100,000 0/0
Mr. Marshall -- -- 25,000/90,000 0/0
- -------------------------
(1) There have been no SARs issued and there are no SARs outstanding.
(2) Calculated on the basis of the fair market value of the underlying
securities as of January 28, 1995 minus the exercise price.
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Employment Contracts And Termination Of Employment And Change-In-Control Arrangements
As founder and Chief Executive Officer of the Company, Robert J. Higgins has been instrumental in the operations of the Company. Mr. Higgins is employed as President and Chief Executive Officer of the Company pursuant to a one year employment agreement, effective February 1, 1994 through January 31, 1995, unless earlier terminated pursuant to its terms. In January 1995 the Compensation Committee agreed to extend the Employment Agreement for one year, through January 31, 1996. Pursuant to its terms, Mr. Higgins earns a minimum annual salary of $550,000, is reimbursed for two club memberships, and is entitled to payment of or reimbursement for life insurance premiums of up to $150,000 per year on insurance policies for the benefit of persons designated by Mr. Higgins. In addition, Mr. Higgins is eligible to participate in the Company's management bonus plan, health and accident insurance plans, stock option plans, and in other fringe benefit programs adopted by the Company for the benefit of its executive employees. For the fiscal year ended January 28, 1995, Mr. Higgins earned no incentive compensation under the employment agreement.
In the event of a change in control of the Company, Mr. Higgins may elect to serve as a consultant to the Company at his then current compensation level for the remainder of the term of the Employment Agreement or elect to receive two and one-half times his annual compensation in the most recently completed fiscal year. The employment agreement provides for no further compensation to Mr. Higgins if he is terminated for cause, as defined therein.
Robert A. Helpert and Edward W. Marshall each has a severance agreement in effect that provides, under certain conditions, payment of severance equal to one year of annual compensation, at a level not less than their current salaries of $275,000 and $250,000, respectively, upon their termination following severance without cause (as defined), including termination following a change in control of the Company. Each severance agreement contains an "evergreen" provision for automatic renewal each year.
Compensation Committee Interlocks And Insider Participation
There were no Compensation Committee interlocks during fiscal 1994. The Directors who comprised the Compensation Committee of the Board of Directors during 1994 were: Messrs. Dougan, Green, Greenhut and Kaufman. During 1994, none of these members were an officer or employee of the Company, a former officer of the Company, or a party to any relationship requiring disclosure under Item 404 of Regulation S-K under the Securities Exchange of 1934, as amended. There was no Chairman of the Committee during 1994 after Arnold S. Greenhut declined to stand for reelection as director.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The only persons known by the Board of Directors to be the beneficial
owners of more than five percent of the outstanding shares of the Common
Stock as of April 21, 1995, the record date, are indicated below:
Name and Address of Amount and Nature of Percent Of
Beneficial Owner Beneficial Ownership Class
- ----------------------------------------------------------------------
Robert J. Higgins 5,442,850 (1) 56.2%
38 Corporate Circle
Albany, New York 12203
J.P. Morgan & Co., Incorporated 1,347,200 (2) 13.9%
60 Wall Street
New York, New York 10260
- ----------------
(1) Information is as of April 21, 1995, as provided by the holder.
Includes 16,850 shares owned by the wife of Robert J. Higgins, but excludes
81,250 shares owned by certain other family members of Robert J. Higgins,
none of whom share his residence. Mr. Higgins disclaims beneficial
ownership with respect to those shares owned by family members other than
his wife.
(2) Information is as of March 31, 1995, as provided by the holder. J.P.
Morgan & Co., Incorporated, a bank holding company, subsidiaries of which,
a national bank and a registered investment advisor, hold shares in the
Company in a fiduciary capacity. J.P. Morgan reported sole voting power
with respect to 962,800 shares and sole dispositive power with respect to
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The following table sets forth the beneficial ownership of Common stock
as of April 21, 1995 by each director and named executive officer of the
Company and all directors and officers as a group. All shares listed in
the table are owned directly by the named individuals unless otherwise
indicated therein. Except as otherwise stated or as to shares owned by
spouses, the Company believes that the beneficial owners have sole voting
and investment power over their shares.
Amount and Nature
of Beneficial
Ownership of
Position(s) With Common Stock as Percent
Name the Company of April 12, 1995 of Class
- ------------------------------------------------------------------------------
Robert J. Higgins Chairman of the Board, 5,442,850 (1) 56.2%
President, Chief Executive
Officer and a Director
Matthew H. Mataraso Secretary and a Director 37,000 (2) *
Charlotte G. Fischer Director 12,250 (2) *
George W. Dougan Director 13,750 (2) *
Isaac Kaufman Director 13,500 (2) *
J. Markham Green Director 2,500 (2) *
- ------------------------------------------------------------------------------
Robert A. Helpert Executive Vice President, 12,500 (2) *
Chief Administrative Officer
and Chief Financial Officer
Edward W. Marshall, Jr. Executive Vice President- 25,000 (2) *
Operations
- ------------------------------------------------------------------------------
All directors and executive officers
as a group (8 persons) 5,559,350(1)(2) 57.4%
* Less than 1%
- -------------------
(1) Includes 16,850 shares owned by the wife of Robert J. Higgins, but
excludes 81,250 shares owned by certain other family members of Robert J.
Higgins, who do not share his residence. Mr. Higgins disclaims beneficial
ownership with respect to those shares owned by family members other than
his wife.
(2) Included in the shares listed as "beneficially owned" are the following
shares which the persons listed have the right to acquire within sixty days
pursuant to stock options: (a) under the 1990 Director Stock Option Plan -
Mrs. Fischer (12,250), Mr. Dougan (13,750), Mr. Green (2,500) and Mr.
Kaufman (12,250); (b) under the 1986 Incentive and Non-Qualified Stock
Option Plan - Mr. Mataraso (32,500); Mr. Helpert (12,500); Mr. Marshall
(25,000); and (c) under all stock option plans - All directors and
executive officers as a group (110,750).
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Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases its 159,000 square foot distribution center/office facility in Albany, New York from Robert J. Higgins, its Chairman, Chief Executive Officer and principal shareholder, under two capitalized leases that expire in the year 2015. The original distribution center/office facility was constructed in 1985. A 77,135 square foot distribution center expansion (the "Expansion") was completed in October 1989 on real property adjoining the existing facility.
Under the original lease, dated as of April 1, 1985, as amended (the "Original Lease"), the Company paid Mr. Higgins in fiscal 1994 an annual rental of $732,061 (of which $528,061 is allocable to real property and $204,000 is allocable to personal property). The portion of the Original Lease allocable to personal property expires in July, 1995, when title passes to the Company. In 1989, the Company entered into a new lease, dated as of November 1, 1989 (the "Expansion Lease"), for the Expansion, with a current annual rental rate of $641,726. The aggregate annual rental paid to Mr. Higgins under the Original Lease and the Expansion Lease was $1,373,787 in fiscal 1994. On January 1, 1996, the portion of the aggregate rental allocable to real property ($1,169,787) under the Original Lease and Expansion Lease will increase in accordance with the biennial increase in the Consumer Price Index, pursuant to the provisions of each lease.
Neither lease contains any real property purchase option at the expiration of its term. Under the terms of both leases, the Company pays all property taxes, insurance and other operating costs with respect to the premises. Mr. Higgins' obligation for principal and interest on his underlying indebtedness relating to the real property approximates $70,000 per month.
The Company leases two of its retail stores from Mr. Higgins under long-term leases, each at an annual rental of $35,000 per year, plus property taxes, maintenance and a contingent rental if a specified sales level is achieved. In fiscal 1994 the Company paid Mr. Higgins $30,000 for a one year lease, expiring on October 31, 1995, for certain parking facilities contiguous to the Premises.
The Company regularly utilizes privately-chartered aircraft for its executives, primarily those owned or partially owned by Mr. Higgins. During fiscal 1994, the Company chartered an airplane under an unwritten agreement with Quail Aero Services of Syracuse, Inc., a corporation in which Mr. Higgins is a one-third shareholder. Payments made by the Company during fiscal 1994 were $59,961. The Company also chartered an aircraft from Crystal Jet Aviation, Inc., a corporation wholly owned by Mr. Higgins. During fiscal 1994 payments to Crystal Jet aggregated $132,642. The Company believes that the charter rate and terms are as favorable to the Company as those generally available to it from other commercial charterers.
During fiscal 1994 the Company extended a loan to Robert A. Helpert, a newly-hired Executive Vice President, in the amount of $150,000 on an unsecured basis for one year, at an annual interest rate of 4%. The loan was repaid in April 1995.
The transactions that were entered into with an "interested director" were approved by a majority of disinterested directors of the Board of Directors, either by the Audit Committee or at a meeting of the Board of Directors. The Board of Directors believes that the leases and other provisions are at rates and on terms that are at least as favorable as those that would have been available to the Company from unaffiliated third parties under the circumstances.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TRANS WORLD ENTERTAINMENT CORPORATION
Date April 28, 1995 By: /s/ROBERT J. HIGGINS
Robert J. Higgins, President
|
Pursuant to the requirements of the Securities 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 President and Director April 28, 1995
(Robert J. Higgins) (Principal Executive Officer)
/s/ ROBERT A. HELPERT Executive Vice President and April 28, 1995
(Robert A. Helpert) Chief Administrative Officer
(Principal Financial Officer)
/s/ JOHN J. SULLIVAN Vice President - Finance April 28, 1995
(John J. Sullivan) (Chief Accounting Officer)
/s/ MATTHEW H. MATARASO Secretary and Director April 28, 1995
(Matthew H. Mataraso)
/s/ J. MARKHAM GREEN Director April 28, 1995
(J. Markham Green)
/s/ GEORGE W. DOUGAN Director April 28, 1995
(George W. Dougan)
/s/ CHARLOTTE G. FISCHER Director April 28, 1995
(Charlotte G. Fischer)
/s/ ISAAC KAUFMAN Director April 28, 1995
(Isaac Kaufman)
|
TRANS WORLD ENTERTAINMENT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Form 10-K
Page No.
---------
Independent Auditors' Reports F-2
Consolidated Financial Statements
Consolidated Balance Sheets at January 28, 1995
and January 29, 1994 F-4
Consolidated Statements of Income - Fiscal years ended
January 28, 1995, January 29, 1994 and January 30, 1993 F-5
Consolidated Statements of Shareholders' Equity - Fiscal
years ended January 28, 1995, January 29, 1994 and
January 30, 1993 F-6
Consolidated Statements of Cash Flows - Fiscal years
ended January 28, 1995, January 29, 1994 and
January 30, 1993 F-7
Notes to Consolidated Financial Statements F-8
|
Independent Auditors' Report
The Board of Directors and Stockholders
Trans World Entertainment Corporation:
We have audited the accompanying consolidated balance sheet of Trans World Entertainment Corporation (formerly Trans World Music Corp.) and subsidiaries as of January 28, 1995, and the related consolidated statements of income, shareholders' equity and cash flows for the fiscal year then ended. 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 audit.
We conducted our audit 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Trans World Entertainment Corporation and subsidiaries as of January 28, 1995, and the results of their operations and their cash flows for the fiscal year then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Albany, New York
March 24, 1995, except as to
note 3, which is as of
April 28, 1995
Report of Independent Auditors'
The Board of Directors and Stockholders
Trans World Entertainment Corporation:
We have audited the accompanying consolidated balance sheet of Trans World Entertainment Corporation (formerly Trans World Music Corp.) and subsidiaries as of January 29, 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the two fiscal years in the period 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 audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Trans World Entertainment Corporation and subsidiaries as of January 29, 1994, and the consolidated results of their operations and their cash flows for each of the two fiscal years in the period ended January 29, 1994, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Albany, New York
March 24, 1994
Trans World Entertainment Corporation and subsidiaries
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
January 28, January 29,
ASSETS 1995 1994
- --------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 90,091 $ 26,046
Accounts receivable 9,176 7,713
Merchandise inventory 222,358 238,949
Deferred tax asset 2,944 ---
Prepaid expenses and other 4,407 5,051
- --------------------------------------------------------------------------
Total current assets 328,976 277,759
- --------------------------------------------------------------------------
VIDEOCASSETTE RENTAL INVENTORY, net 7,472 6,166
DEFERRED TAX ASSET 505 ---
FIXED ASSETS:
Building 8,599 8,599
Fixtures and equipment 87,544 78,569
Leasehold improvements 86,119 80,035
- --------------------------------------------------------------------------
182,262 167,203
Less: Fixed asset write-off reserve 10,485 ---
Allowances for depreciation
and amortization 85,620 73,157
- --------------------------------------------------------------------------
86,157 94,046
- --------------------------------------------------------------------------
OTHER ASSETS 3,829 2,293
- --------------------------------------------------------------------------
TOTAL ASSETS $426,939 $380,264
==========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $135,493 $156,263
Notes payable 74,947 ---
Income taxes payable 1,961 5,431
Accrued expenses and other 7,250 7,668
Store closing reserve 9,276 ---
Current portions of long-term debt
and capital lease obligations 6,618 3,695
Deferred income taxes --- 3,164
- --------------------------------------------------------------------------
Total current liabilities 235,545 176,221
- --------------------------------------------------------------------------
LONG-TERM DEBT, less current portion 59,770 66,054
CAPITAL LEASE OBLIGATIONS, less current portion 6,671 7,044
OTHER LIABILITIES 5,476 4,434
DEFERRED INCOME TAXES --- 437
- --------------------------------------------------------------------------
TOTAL LIABILITIES 307,462 254,190
- --------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock ($.01 par value; 5,000,000 shares
authorized; none issued) --- ---
Common stock ($.01 par value; 20,000,000 shares
authorized; 9,731,208 issued) 97 97
Additional paid-in capital 24,236 24,236
Treasury stock at cost (48,394 and 12,000 shares,
respectively) (503) (162)
Retained earnings 95,647 101,903
- --------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 119,477 126,074
- --------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $426,939 $380,264
==========================================================================
See Notes to Consolidated Financial Statements
|
Trans World Entertainment Corporation and subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
Fiscal Year Ended
January 28, January 29, January 30,
1995 1994 1993
- ------------------------------------------------------------------------
Sales $536,840 $492,553 $454,916
Cost of sales 341,422 307,834 280,572
- ------------------------------------------------------------------------
Gross profit 195,418 184,719 174,344
Selling, general and
administrative expenses 158,637 147,644 133,768
Restructuring charge 21,000 --- ---
Depreciation and amortization 16,932 14,655 13,310
- ------------------------------------------------------------------------
Income (loss) from operations (1,151) 22,420 27,266
Interest expense 9,540 5,971 5,627
- ------------------------------------------------------------------------
Income (loss) before income taxes (10,691) 16,449 21,639
Income tax expense (benefit) (4,435) 6,626 8,374
- ------------------------------------------------------------------------
NET INCOME (LOSS) $ (6,256) $ 9,823 $ 13,265
========================================================================
EARNINGS (LOSS) PER SHARE $ (0.64) $ 1.01 $ 1.40
========================================================================
Weighted average number of
common shares outstanding 9,701 9,723 9,474
========================================================================
See Notes to Consolidated Financial Statements.
|
Trans World Entertainment Corporation and subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
Total
Additional Share-
Common Paid-In Treasury Retained holders'
Stock Capital Stock Earnings Equity
- --------------------------------------------------------------------------
Balance,
February 1,1992
(9,101,151 shares) $91 $13,714 $ --- $ 78,815 $ 92,620
Sale of common stock,
net of offering costs
(600,000 shares) 6 9,964 --- --- 9,970
Issuance of stock under
incentive stock programs --- 502 --- --- 502
Purchase of 2,000 shares
of common stock, held
in treasury --- --- (28) --- (28)
Net income --- --- --- 13,265 13,265
- --------------------------------------------------------------------------
Balance,
January 30, 1993
(9,727,358 shares) 97 24,180 (28) 92,080 116,329
Issuance of stock under
incentive stock programs --- 56 --- --- 56
Purchase of 10,000 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) 101,903 126,074
Purchase of 36,394 shares
of common stock, held
in treasury --- --- (341) --- (341)
Net loss --- --- --- (6,256) (6,256)
- --------------------------------------------------------------------------
Balance,
January 28, 1995
(9,731,208 shares) $97 $24,236 $(503) $ 95,647 $119,477
==========================================================================
See Notes to Consolidated Financial Statements
|
Trans World Entertainment Corporation and subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
Fiscal Year Ended
January 28, January 29, January 30,
1995 1994 1993
- --------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ (6,256) $ 9,823 $ 13,265
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and amortization 17,947 15,715 14,288
Fixed asset write-off reserve 11,400 --- ---
Store closing reserve 9,600 --- ---
Deferred tax expense (benefit) (7,050) 308 (509)
Loss on sale and disposal of
property and equipment 802 289 337
Changes in operating assets and
liabilities:
Accounts receivable (1,463) (3,716) (1,866)
Merchandise inventory 16,591 (50,781) (44,775)
Prepaid expenses and other 644 (1,485) (338)
Other assets (1,536) 307 (411)
Accounts payable (20,770) 34,304 21,635
Income taxes payable (3,470) (2,844) 1,797
Accrued expenses and other (418) 526 974
Store closing reserve (324) --- ---
Other liabilities 1,042 981 3,453
- --------------------------------------------------------------------------
Net cash provided by operating
activities 16,739 3,427 7,850
- --------------------------------------------------------------------------
INVESTING ACTIVITIES:
Acquisition of property and
equipment (22,260) (34,460) (19,407)
Purchases of videocassette
rental inventory, net (1,306) (9) (275)
-------------------------------------------------------------------------
Net cash used by investing
activities (23,566) (34,469) (19,682)
- --------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in revolving line
of credit 74,947 --- ---
Proceeds of long-term debt --- 50,000 ---
Payments of long-term debt (3,398) (739) (12,141)
Payments of capital lease
obligations (336) (288) (247)
Proceeds from issuance of
common stock --- 56 10,472
Purchase of common stock for
treasury (341) (134) (28)
- --------------------------------------------------------------------------
Net cash provided (used) by
financing activities 70,872 48,895 (1,944)
- --------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 64,045 17,853 (13,776)
Cash and cash equivalents,
beginning of year 26,046 8,193 21,969
- --------------------------------------------------------------------------
Cash and cash equivalents,
end of year $90,091 $26,046 $ 8,193
==========================================================================
See Notes to Consolidated Financial Statements.
|
Trans World Entertainment Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
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 Company changed its name in 1994 from Trans World Music Corp.
Fiscal Year. The Company's fiscal year is a 52- or 53-week period ending on the Saturday nearest to January 31. The fiscal years 1994, 1993 and 1992, which ended January 28, 1995; January 29, 1994 and January 30 1993; respectively, consisted of 52 weeks.
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 cost. During fiscal years 1994, 1993 and 1992, the Company incurred merchandise return costs of $7.4 million, $5.4 million and $4.0 million, respectively, which reflect return costs 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.
Depreciation and Amortization. Fixtures and equipment are depreciated using the straight-line method over their estimated useful lives, which range from three to seven years. Buildings and leasehold improvements are amortized over the shorter of their estimated useful life or the related lease 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.
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 net income (loss) per share in the years presented.
Trans World Entertainment Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 2. Restructuring Charge
The Company recorded a pre-tax restructuring charge of $21 million in 1994 to reflect the anticipated costs associated with a program to close 143 stores through the first quarter of 1996. The restructuring charge includes the write-down of fixed 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 and consulting fees, including those that the Company is obligated to pay on behalf of its lenders while working to renegotiate the credit agreements.
In determining the components of the reserve, management analyzed all of
the aspects of closing stores and the costs that are incurred. An analysis
of the amounts comprising the reserve and the amounts charged against the
reserve as of January 28, 1995 are outlined below:
Charges
Initial Against Ending
Reserve Reserve Reserve
-----------------------------------
(in thousands)
Non-cash write-offs
- -------------------
Leasehold improvements $ 7,400 $ 323 $ 7,077
Furniture and fixtures 4,000 592 3,408
Excess inventory shrinkage 944 -0- 944
-----------------------------------
Total non-cash 12,344 915 11,429
-----------------------------------
Future cash outflows
- --------------------
Lease obligations 4,305 55 4,250
Return penalties and
related costs 2,774 49 2,725
Termination benefits 200 -0- 200
Consulting and legal fees 1,377 220 1,157
-----------------------------------
Total future cashflows 8,656 324 8,332
-----------------------------------
Total $21,000 $1,239 $19,761
===================================
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Sales associated with the stores identified for closure were approximately $72.8 million (unaudited), $71.7 million (unaudited) and $67.3 million (unaudited) for the fiscal years 1994, 1993 and 1992, respectively.
Note 3. Debt
Long-term debt as of January 28, 1995 consisted of the following:
January 28, January 29,
1995 1994
- -----------------------------------------------------------------------
(in thousands)
Senior unsecured notes issued to four
insurance companies (see discussion
below) $47,500 $50,000
Senior unsecured note issued to an
insurance company (see discussion
below) 17,500 17,500
Installment notes and other obligations 1,015 1,913
- -----------------------------------------------------------------------
66,015 69,413
Less current portion 6,245 3,359
- -----------------------------------------------------------------------
Long-term debt $59,770 $66,054
=======================================================================
|
Because of the 1994 operating results, including the restructuring charge, as of January 28, 1995, the Company obtained modifications or waivers of the noncompliance with certain financial covenants contained in its senior indebtedness. On April 28, 1995, the Company executed an agreement in principle with its senior lenders (the "Lending Group") to restructure the terms and conditions of $140 million of indebtedness: the aggregate principal amount of $75 million revolving credit facilities (the "Revolver") and $65 million senior unsecured notes (the "Notes"). The amendments take into account recent and forecasted operating results and the planned closing of underperforming stores.
The credit agreements, as modified, require principal repayments of $5 million on June 30, 1995 and $8 million on January 31, 1996, of which $6 million will be applied to the Notes and $7 million will be a reduction to the balances available under the Revolver. For the fiscal year ended January 28, 1995, the $47.5 million principal amount of the Notes carried a fixed interest rate of 7.50%, and the $17.5 million portion of the Notes carried a fixed interest rate of 9.18%.
Effective April 28, 1995, interest rates for the Notes and the Revolver
have been converted to a floating rate equal to the greater of 10.5% or
1-1/2% over the prime lending rate. Under the modified agreement, the
Notes and Revolver mature on July 31, 1996. The April 28, 1995
modifications to the Revolver include a provision for mandatory repayment
of all outstanding balances for a 15 day period between December 25, 1995
and January 31, 1996, and all of the credit agreements provide for less
restrictive covenant tests than under the original agreements, including:
a cash flow fixed charge ratio covenant; a tangible net worth covenant; and
an inventory turnover ratio covenant. The modified credit agreements
preclude the Company from paying dividends or incurring additional debt and
impose limitations on capital expenditures.
During fiscal years 1994, 1993 and 1992, the highest aggregate balances outstanding under the Revolver were $74.9 million, $69.4 million and $54.1 million, respectively. The weighted average interest rates during 1994, 1993 and 1992, based on average daily balances, were 5.69%, 4.35% and 5.23%, respectively. The balances outstanding under the Revolver at year end 1994, 1993 and 1992 were $74.9 million, $0 and $0, respectively.
At January 28, 1995 and January 29, 1994, the fair value of long-term debt, including that due within one year, was approximately $66.0 million and $70.1 million, respectively. The fair value was estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates.
Interest paid on a cash basis during 1994, 1993 and 1992 was approximately $9.6 million, $5.7 million and $5.9 million, respectively. Future maturities of long-term debt are $6.2 million during 1995; $59.2 million during 1996; $0.2 million during 1997; $0.3 during 1998; and $0.1 million thereafter.
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 Year Ended
1994 1993 1992
- --------------------------------------------------------------------
(in thousands)
Federal - current $ 1,805 $5,146 $7,660
State - current 810 1,172 1,223
Deferred (7,050) 308 (509)
- --------------------------------------------------------------------
$(4,435) $6,626 $8,374
============================
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A reconciliation of the Company's effective tax rates with the federal
statutory rate is as follows:
Fiscal Year Ended
1994 1993 1992
- ----------------------------------------------------------------------
Federal statutory rate (35.0%) 34.7% 34.0%
State income taxes (benefit), net of
federal income tax effect (6.0) 4.7 4.9
Targeted jobs credit (1.6) --- ---
Other 1.1 0.9 (0.2)
- ----------------------------------------------------------------------
Effective income tax rate (41.5%) 40.3% 38.7%
======================================================================
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Trans World Entertainment Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 4. Income Taxes (Cont'd)
The tax effects of temporary differences that give rise to significant
components of the Company's deferred tax assets and liabilities are as
follows:
January 28, January 29,
1995 1994
- -----------------------------------------------------------------------
(in thousands)
CURRENT DEFERRED TAX ASSETS
- ---------------------------
Restructuring reserve $7,806 $ ---
Other --- 326
- -----------------------------------------------------------------------
Total current deferred tax assets 7,806 326
- -----------------------------------------------------------------------
CURRENT DEFERRED TAX LIABILITIES
- --------------------------------
Inventory valuation 4,739 3,379
Other 123 111
- -----------------------------------------------------------------------
Total current deferred tax liabilities 4,862 3,490
- -----------------------------------------------------------------------
Net current deferred
tax assets (liabilities) $2,944 $(3,164)
=======================================================================
NON-CURRENT DEFERRED TAX ASSETS
- -------------------------------
Accrued rent, lease accounting $2,261 $1,721
Capitalized leases 736 672
Other 26 25
- -----------------------------------------------------------------------
Total non-current deferred tax assets 3,023 2,418
- -----------------------------------------------------------------------
NON-CURRENT DEFERRED TAX LIABILITIES
- ------------------------------------
Tax over book depreciation 2,423 2,770
Other 95 85
- -----------------------------------------------------------------------
Total non-current deferred tax liabilities 2,518 2,855
- -----------------------------------------------------------------------
Net non-current deferred
tax assets (liabilities) 505 ( 437)
- -----------------------------------------------------------------------
Total net deferred tax asset (liability) $3,449 $(3,601)
=======================================================================
|
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 during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of those deductible differences.
The Company paid income taxes of approximately $6.1 million, $9.2 million, $6.8 million during 1994, 1993 and 1992, respectively.
The effect of adopting Statement of Financial Accounting Standards No.109, "Accounting for Income Taxes" in 1992, did not have a material impact on the Company's financial position or results of operations.
Trans World Entertainment Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. Aggregate rental payments under both leases, which are capitalized for accounting purposes, were $1.2 million, $1.1 million, and $1.1 million in 1994, 1993 and 1992, respectively. Biennial increases are contained in each lease based on the Consumer Price Index with the next scheduled increase on January 1, 1996. Both leases expire in the year 2015.
The Company leases certain distribution center equipment from its Chief Executive Officer and principal shareholder, for which annual payments were $204,000 in each of 1994, 1993, and 1992, and $102,000 through July 31, 1995, when title to such equipment passes to the Company. Additionally, the Company leases certain distribution center equipment from a bank, providing for total annual rental payments of $136,000 in each of 1994, 1993 and 1992. During fiscal 1995, the Company will pay a total of $222,000 through December 15, 1995, at which time the title to such equipment passes to the Company. Both equipment leases are capitalized for accounting purposes.
Fixed asset amounts for all capitalized leases are as follows:
January 28, January 29,
1995 1994
- -----------------------------------------------------------------------
(in thousands)
Building $7,105 $7,105
Fixtures and equipment 1,625 1,625
- -----------------------------------------------------------------------
8,730 8,730
Allowances for depreciation and amortization 3,342 2,892
- -----------------------------------------------------------------------
$5,388 $5,838
===========================
|
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 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 Ended
1994 1993 1992
- ---------------------------------------------------------------------
(in thousands)
Minimum rentals $57,992 $51,610 $47,275
Contingent rentals 464 647 833
- ---------------------------------------------------------------------
$58,456 $52,257 $48,108
===========================
|
Future minimum rental payments required under all leases that have initial
or remaining noncancelable lease terms in excess of one year at January 28,
1995, are as follows:
Operating Capitalized
Fiscal Year Leases Leases
1995 1994
- -----------------------------------------------------------------------
(in thousands)
1995 $58,257 $1,494
1996 53,183 1,170
1997 46,884 1,170
1998 39,709 1,170
1999 34,732 1,170
Thereafter 103,312 18,398
- -----------------------------------------------------------------------
Total minimum payments required $336,077 24,572
========
Amounts representing interest 17,528
- -----------------------------------------------------------------------
Present value of minimum lease payments 7,044
Less current portion 373
- -----------------------------------------------------------------------
7Long-term capital lease obligations $6,671
=======================================================================
|
Trans World Entertainment Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 6. Benefit Plans
At January 28, 1995, the Company had three benefit plans. Such plans had an aggregate of 2,650,000 shares of Common Stock authorized, of which 513,447 shares were reserved for future option grants.
Under the 1986 Stock Option Plan and the 1994 Stock Option Plan, the (the "Plans"), options generally become exercisable commencing one year from the date of grant in increments of 25% per year. The option prices below represent the fair market value of the shares on the dates of grant. At January 28, 1995, of the 2,100,000 shares authorized for issuance under the Plans, there were 934,256 shares of Common Stock subject to stock options granted and outstanding 375,825 of which were vested and exercisable. Shares available for future grant at January 28, 1995 and January 29, 1994 were 1,034,447 and 143,372, respectively.
The Company has a stock option plan for non-employee directors ("1990 Plan"). Options under this plan are granted at 85% of the fair market value at the date of grant. As of January 28, 1995, there were 250,000 shares authorized for issuance and 179,000 shares of Common Stock reserved for possible future option grants under the 1990 Plan. As of January 28, 1995, 49,250 of the shares granted were vested and exercisable.
The following tables summarize activity under the 1986 Plan and the 1990
Plan:
1986 Plan 1990 Plan
---------------------------- ---------------------------
Number of Option Number of Option
Shares Subject Price Range Shares Subject Price Range
To Option Per Share To Option Per Share
- --------------------------------------------------------------------------
Balance,
February 1, 1992 646,389 $11.00-$25.75 43,000 $11.05-$27.42
Granted 69,400 13.00 6,000 18.81
Exercised (26,207) 11.00- 21.33
Cancelled (52,450) 14.25- 25.75
- --------------------------------------------------------------------------
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,
January 29, 1994 825,331 11.00- 24.25 65,000 11.05- 27.42
Granted 236,000 11.00- 13.38 6,000 10.00
Exercised --- --- --- ---
Cancelled (127,075) 13.00- 23.75 --- ---
- --------------------------------------------------------------------------
Balance,
January 28, 1995 934,256 $11.00-$24.25 71,000 $10.00-$27.42
==========================================================================
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The Company has a restricted stock plan under which 300,000 shares are authorized for issuance. No shares have been issued under such plan.
The Company offers a 401(k) Savings Plan to eligible employees meeting certain age and service requirements. This plan, implemented in October 1991, permits participants to contribute up to 10% 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's matching contribution totaled $413,000, $300,000 and $370,000 for 1994, 1993 and 1992, respectively.
Trans World Entertainment Corporation and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 7. Treasury Stock
At January 28, 1995 and January 29, 1994 the Company held 48,394 and 12,000 shares in treasury, respectively, resulting from the repurchase of common stock through open market purchases or privately negotiated transactions.
Note 8. Quarterly Financial Information (unaudited)
Fiscal Quarter Ended 1994
April 30, July 30, Oct 29, Jan 28, Fiscal
1994 1994 1994 1995 1994
- --------------------------------------------------------------------------
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)
Income (loss) per share (.19) (.29) (.28) .11 (.64)
- --------------------------------------------------------------------------
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Fiscal Quarter Ended 1993
May 1, July 31, Oct 30, Jan 29, Fiscal
1993 1993 1993 1994 1993
- --------------------------------------------------------------------------
Sales $103,224 $ 96,643 $101,784 $190,902 $492,553
Gross Profit 38,101 35,956 39,471 71,191 184,719
Net income (loss) (327) (2,048) (1,551) 13,749 9,823
Income (loss) per share (.03) (.21) (.16) 1.41 1.01
- --------------------------------------------------------------------------
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Exhibit No.
3.1 Restated certificate of Incorporation -- incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1994. Commission File No. 0-14818.
3.2 Certificate of Amendment to the Certificate of Incorporation -- incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 1994. Commission File No. 0-14818.
3.3 Amended By-Laws -- incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 1991. Commission File No. 0-14818.
4.1 Note and Security Agreement, dated June 20, 1991, between Aetna Life Insurance Company and the Company, for $17,500,000 of 9.18% Senior Notes due June 30, 1998 -- 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 9.18% Senior Notes due June 30, 1998 -- 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 9.18% Senior Notes due June 30, 1998 -- 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.
4.4 Amendment, dated March 30, 1994, between Aetna Life Insurance Company and the Company, relating to the 9.18% Senior Notes due June 30, 1998 -- 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 Agreement in Principle, dated April 28, 1995, amoung Aetna Life Insurance Company relating to the 9.18% Senior Notes due June 30, 1998, the Purchasers of the Registrant's $50 million Senior Notes due June 30, 1999, the commercial banks in the Registrant's $75 million revolving credit facilities, due July 31, 1996, and the Trans World Entertainment Corporation and Record Town, Inc.
4.6 Note Agreement, dated July 2, 1993, among the Company, Record Town, Inc. and the Purchasers listed on Exhibit A thereto, relating to 6.91% 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.
4.7 Form of Amendment, dated as of March 24, 1994, among the Company, Record Town, Inc. and each of the holders of the 7.50% Senior Notes due June 30, 1999. -- 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.
4.8 Credit Agreement and Note, dated as of June 11, 1993, between the Company and Chemical Bank -- 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. Commission File No. 0-14818.
4.9 Credit Agreement and Note, dated as of June 11, 1993, between the Company and Chase Manhattan Bank, 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.
4.10 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.
4.11 Credit Agreement and Note, dated as of June 11, 1993, between the Company and National Westminster Bank, 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.
4.12 Form of First Amendment and Waiver, dated March 17, 1994, between the Company and each of the commercial banks in the Registrant's $75 million 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.
4.13 Form of Second Amendment to Credit Agreement, dated as of December 5, 1994, between the Company and each of the commercial banks in the Registrant's $75 million 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.
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, 1994 and amended as of January 30, 1995 between the Company and Robert J. Higgins.
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 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.
10.9 Severance Agreement, dated January 7, 1994, between Trans World Music Corp. and Robert A. Helpert, Executive Vice President and Chief Administrative Officer -- incorporated herein by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended January 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.
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 Consent of KPMG Peat Marwick LLP.
* 23.2 Consent of Ernst & Young LLP.
EXHIBIT INDEX
4.5 Amendment, dated April 28, 1995, between Aetna Life Insurance Company relating to the 9.18% Senior Notes due June 30, 1998, the Purchasers of the Registrant's $50 million Senior Notes due June 30, 1999, the commercial banks in the Registrant's $75 million revolving credit facilities, due July 31, 1996, and the Company.
10.4 Higgins Employment Agreement
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Ernst & Young LLP.
AGREEMENT IN PRINCIPLE
As of April 28, 1995
Trans World Entertainment Corporation
38 Corporate Circle
Albany, New York 12203
Attn:Robert Higgins, Chairman and
Chief Executive Officer
Record Town, Inc.
38 Corporate Circle
Albany, New York 12203
Attn:Robert Higgins, President
Re: Debt Restructuring Agreement
Gentlemen:
Reference is hereby made to (i) the separate Credit Agreements (as amended from time to time, the "Credit Agreement"), each dated as of June 11, 1993, between Trans World Entertainment Corporation (formerly Trans World Music Corp., the "Company") and, respectively, each of the Banks named on the signature pages hereto (collectively, the "Banks"), (ii) the 7.50% Senior Notes due June 30, 1999 (as amended from time to time, the "1993 Notes") issued by the Company pursuant to the Note Agreement (as amended from time to time, the "1993 Note Agreement"), dated as of July 2, 1993, among the Company, its wholly-owned subsidiary, Record Town, Inc. ("Record Town"), Hartford Life Insurance Company ("Hartford Life"), Hartford Accident and Indemnity Company ("Hartford Accident"), The Equitable Life Assurance Society of the United States ("Equitable Life"), Equitable Variable Life Insurance Company ("Equitable Variable"), Massachusetts Mutual Life Insurance Company ("Mass Mutual"), and Phoenix American Life Insurance Company ("Phoenix") (Hartford Life, Hartford Accident, Equitable Life, Equitable Variable, Mass Mutual and Phoenix are referred to herein, collectively, as the "1993 Noteholders"), and (iii) the 9.18% Notes due June 30, 1998 (as amended from time to time, the "Aetna Notes") issued by the Company pursuant to the Note and Security Agreement (as amended from time to time, the "Aetna Note Agreement"), dated as of June 20, 1991, between the Company and Aetna Life Insurance Company ("Aetna"). The 1993 Noteholders and Aetna are referred to herein, individually, as a "Noteholder", and collectively, as the "Noteholders." The 1993 Note Agreement and the Aetna Note Agreement are referred to herein, collectively, as the "Note Agreement."
This is to confirm that each of the Banks and each of the Noteholders have agreed in principle to amend or restate, as appropriate, the Credit Agreement, the Notes, and the Note Agreement in accordance with the primary terms set forth in (i) the Terms for Restructuring of Trans World Entertainment Corporation, Bank and Insurance Company Debt, attached hereto as Exhibit A (the "Term Sheet").
The agreement of the Banks and the Noteholders to consummate the restructuring contemplated by the Term Sheet (the "Proposed Restructuring") is expressly conditioned upon the following:
(i) the preparation, execution and delivery of documents in form, scope and substance satisfactory to the Banks, the Noteholders and their respective special counsel;
(ii) the payment by the Company of all fees and expenses (including, without limitation, all legal fees and expenses and full replenishment of any reserves in connection therewith) incurred by the Banks and the Noteholders in connection with the negotiation, preparation, structuring and documentation of the Proposed Restructuring whether or not the Proposed Restructuring is consummated;
(iii)the receipt of evidence of the corporate power, authority and authorization of the parties hereto to enter into the agreements and instruments evidencing the Proposed Restructuring;
(iv) the receipt by the Banks and the Noteholders of a satisfactory opinion of counsel to the Company and Record Town with respect to customary matters as the Banks and the Noteholders may reasonably request; and
(v) a Termination Date (as defined in the Waiver Agreements among the Company, Record Town, the Banks and Noteholders) shall not exist under the currently existing Waiver Agreements, and the Company shall deliver all customary closing representations and warranties including compliance with covenants as modified herein.
The Company and Record Town hereby acknowledge that this agreement in principle has been executed by each of the Banks and the Noteholders in reliance upon information furnished by the Company which is hereby certified to be true and correct. In the event of a material misrepresentation or omission regarding such information, in addition to any other rights the Banks and the Noteholders may have, the Banks and the Noteholders shall have the right to terminate this agreement in principle.
The delivery of this letter shall not constitute a waiver of any right, power or remedy of the Banks under the Credit Agreement, or of the Noteholders under the Notes or the Note Purchase Agreement. The Credit Agreement, the Notes and the Note Purchase Agreement shall remain in full force and effect and are hereby ratified and confirmed.
This agreement in principle shall terminate if the Proposed Restructuring has not closed on or prior to June 30, 1995. In furtherance of the provisions of this agreement, any termination of this agreement in principle shall not impair the effectiveness of the Credit Agreement, the Notes or the Note Purchase Agreement, it being the intention of the parties hereto that such agreements remain in full force and effect in all respects under such circumstances.
This Agreement may be executed in a number of identical counterparts, each of which for all purposes shall be deemed an original, but all of which shall constitute collectively one agreement. No party to this agreement shall be bound until a counterpart of this Agreement shall have been executed by the Company, Record Town, each of the Banks and each of the Noteholders.
Very truly yours,
Aetna Life Insurance Company
By: /s/Peter C. Nilsen
Name: Peter C. Nilsen
Title: Investment Officer
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Hartford Life Insurance Company
By: /s/Joseph H. Gareau
Name: Joseph H. Gareau
Title: Executive Vice President
|
Hartford Accident and Indemnity Company
By: /s/Joseph H. Gareau
Name: Joseph H. Gareau
Title: Executive Vice President
|
The Equitable Life Assurance Society of the United States
By: /s/Sheryl Rothman
Name: Sheryl Rothman
Title: Investment Officer
|
Equitable Variable Life Insurance Company
By: /s/Sheryl Rothman
Name: Sheryl Rothman
Title: Investment Officer
|
Massachusetts Mutual Life Insurance Company
By: /s/Richard C. Morrison
Name: Richard C. Morrison
Title: Vice President
|
Phoenix American Life Insurance Company
By: /s/Michael E. Haylon
Name: Michael E. Haylon
Title: Vice President
|
Chemical Bank
By: /s/Ann Kurinskas
Name: Ann Kurinskas
Title: Vice President
|
Chase Manhattan Bank, N.A.
By: /s/Roger Odell
Name: Roger Odell
Title: Vice President
|
NBD Bank, N.A.
By: /s/Andrew Arton
Name: Andrew Arton
Title: 2nd Vice President
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NatWest Bank N.A.
(formerly National Westminster Bank USA)
By: /s/James Gallagher
Name: James Gallagher
Title: Vice President
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Agreed and Accepted:
Trans World Entertainment Corporation
By: /s/Robert A. Helpert
Name: Robert A. Helpert
Title: Executive Vice-President
|
Record Town, Inc.
By: /s/Robert A. Helpert
Name: Robert A. Helpert
Title: Executive Vice-President
|
EXHIBIT A
Terms for Restructuring of
Trans World Entertainment Corporation Bank and Insurance Company Debt
This Termsheet, dated as of April 28, 1995, sets forth the terms and conditions for the restructuring of Trans World Entertainment Corporation's ("TWE") indebtedness to (a) each of Chemical Bank, Chase Manhattan Bank, N.A., NatWest Bank N.A. (formerly National Westminster Bank USA) and NBD Bank, N.A. (collectively, the "Banks") and (b) each of Aetna Life Insurance Company, Hartford Accident and Indemnity Company, Hartford Life Insurance Company, Equitable Variable Life Insurance Company, The Equitable Life Assurance Society of the United States, Phoenix American Life Insurance Company and Massachusetts Mutual Life Insurance Company (collectively, the "Insurance Companies"). Capitalized terms not specifically defined herein shall have the meanings ascribed thereto in the respective loan or note documentation.
I. The Banks' Credit Facilities
A. Obligors: TWE and Record Town, Inc. will be co-obligors.
B. Maturity: The maturity of each of the Banks' credit facilities shall remain July 31, 1996.
C. Reduction of Commitments: The aggregate loan commitments of the Banks shall be permanently reduced by $2.6785 million effective June 30, 1995 and an additional $4.2856 million effective January 31, 1996. This reduction shall be applied to each Bank on a pro- rata basis. All borrowings under the Banks' credit facilities after the restructuring will be on a pro-rata basis.
D. Interest Rate Increase: The interest rate on all loans shall be
increased to the greater of (i) Prime plus
1.5% per annum under each Bank facility or
(ii) 10.5% per annum, retroactive to the date
of this Termsheet. Default rates shall be
re-set at the greater of (i) 200 basis points
over non-default rate or (ii) 12.5%.
E. Financial Covenants and Related Definitions: Financial covenants shall be amended to provide as follows; provided, however, that debt currently classified as long-term debt on the Company's balance sheet as of January 28, 1995 shall be deemed to remain non-current and shall not be considered a current liability of the Company through July 31, 1996 for purposes of financial covenant calculations and all other definitional purposes in this Termsheet and the agreements contemplated herein:
(i) Section 6.11 of each Bank facility (Limitation on Current Ratio) shall be amended to read in its entirety as follows:
"Permit the ratio of current assets to current liabilities of the Company to be less than 1.40 to 1.0 at the end of each of the first, second and fourth fiscal quarters and 1.25 to 1.0 at the end of the third fiscal quarter, excluding for purposes of such computation of current liabilities, the portion of the debt issued pursuant to the Aetna Agreement and the Note Agreement (as each is hereinafter defined) and all amendments, modifications, refinancings and restructurings thereof, shown as a current liability on the Company's balance sheet."
(ii) Section 6.12 of each Bank facility (Maintenance of Consolidated Tangible Net Worth) shall be amended to read in its entirety as follows:
"Permit the Consolidated Tangible Net Worth to be less than an amount equal to $103,000,000 at the end of each of the first three quarters of each fiscal year and $112,000,000 at the end of each fiscal year."
(iii) Section 6.13 of each Bank facility (Limitation on Debt to Consolidated Tangible Net Worth) shall be amended to read in its entirety as follows:
"Permit the ratio of (a) total liabilities less then non-current portion of Subordinated Debt to (b) Consolidated Tangible Net Worth plus the non-current portion of Subordinated Debt to exceed (i) 2.15 to 1.0 at any fiscal year end; (ii) 2.30 to 1.0 as of the end of each first quarterly period for any fiscal year; (iii) 2.5 to 1.0 as of the end of each second quarterly period for any fiscal year; or (iv) 3.0 to 1.0 as of the end of each third quarterly period for any fiscal year. For any calculations herein, the actual cash balance shall be reduced by the amount in excess of $10,000 per retail store actually open for business on the date of such computation. Such excess shall be applied to reduce accounts payable in the pro forma computation of Debt to Consolidated Tangible Net Worth under this Section 6.13."
(iv) Section 6.14 of each Bank facility (Limitation on Inventory Turnover) shall be amended to read in its entirety as follows:
"Permit Inventory Turnover to fall
below the following amounts at the end
of the following fiscal quarters to each
fiscal year:
Fiscal Quarter Amount
first .30
second .60
third .70
fourth 1.4"
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(v) Section 5.9 of each Bank facility (Fixed Charge Ratio) shall be amended to read in its entirety as follows:
"Maintain, at the end of each of the first, second and third fiscal quarters for each fiscal year Consolidated Income Available for Fixed Charges of not less than 120% of Consolidated Fixed Charges for the immediately preceding 12-month period and, at the end of the fiscal year then ending, Consolidated Income Available for Fixed Charges of not less than 115% of Consolidated Fixed Charges for the immediately preceding 12-month period."
(vi) The definition of Consolidated Income Available for Fixed Charges shall be amended to read in its entirety as follows:
"Consolidated Income Available for Fixed Charges" with respect to the Company and all Restricted Subsidiaries, means for any period the sum of: (1) Consolidated EBITDA and (2) all fixed minimum rent expenses of real estate leases, in each case determined on a Consolidated basis."
(vii) A new definition for Consolidated EBITDA shall be added as follows:
"Consolidated EBITDA" means, with
respect to the Company for any period,
the Consolidated Net Income of the
Company for such period plus, to the
extent deducted in determining such
Consolidated Net Income, depreciation
and amortization expense, interest
expenses with respect to the Company's
liabilities for borrowed money, and all
Federal, state and foreign income
taxes."
(viii) The definition of Consolidated
Adjusted Net Income shall be deleted and
replaced in its entirety with the following
new definition:
"Consolidated Net Income" means,
for any period, the aggregate net income
of the Company for such period on a
consolidated basis, determined in
accordance with GAAP, provided that
there shall be excluded therefrom, after
giving effect to any related tax effect,
(a) gains and losses from Asset Sales or
reserves relating thereto, (b) items
classified as extraordinary or
nonrecurring (including any
|
restructuring reserves), (c) the
writeoff of deferred financing costs and
(d) the cumulative effect of changes in
accounting principles in the year of
adoption of such change."
(ix) A new covenant shall be added providing that the Company shall not permit Consolidated EBITDA to be less than the following amounts for any of the following periods:
For the period from January 29, 1995 to April 29, 1995 ($1,000,000)
For the period from January 29, 1995 to July 29, 1995 ($2,000,000)
For the period from January 29, 1995 to October 28, 1995 ($2,000,000)
For the period from January 29, 1995 to February 3, 1996 $24,000,000
For the period from February 4, 1996 to May 4, 1996 ($1,000,000)
F. Mandatory Clean-Down: Provisions shall be added to the Bank facilities requiring that (i) all cash of the Company in excess of $10 million be applied to reduce the loans (on a pro-rata basis) from December 15 through December 25 of each year and (ii) there will be no outstanding balances under any of the Bank facilities (other than outstanding Letters of Credit) for a period of 15 consecutive days (the "Clean-Down Period"), which Clean-Down Period may take place at any time between December 25 and January 31 of each fiscal year.
G. Prepayment Penalties: There shall be no prepayment penalties under any Bank facility or for reductions of commitments.
H. Intercreditor True-Up: There shall be no permanent reduction in the Bank facility commitments unless such reductions are matched by pro-rata amortization payments on the Insurance Company Notes. There shall be no amortization payments on the Insurance Company Notes unless such payments are matched by pro-rata permanent commitment reductions under the Bank facilities. It is the intent of the parties that all payments to either the Banks or Insurance Companies, other than payments on the revolving loans and interest payments, shall be shared among the Banks and Insurance Companies on a pro-rata basis. The Banks and Insurance Company shall enter into an Intercreditor Agreement providing for a "true-up" mechanism whereby upon a triggering event thereunder, paydowns on the Bank facilities or Insurance Company Notes shall be shared pro- rata, to the extent necessary to re-establish the ratio of Bank debt to Insurance Company debt of 75:65.
I. Termination of Waiver Agreement: The Waiver Agreement shall be extended until June 30, 1995 and shall be terminated effective upon the closing of the transactions contemplated hereby; the covenants in the Waiver Agreement shall be incorporated into the Bank facilities, to the extent not inconsistent with the other provisions of this Termsheet, provided that the store opening and closing covenants and lease covenants will be modified to be consistent with TWE's business plan; prior defaults shall be permanently waived.
J. Other Warranties and Covenants: Additional changes shall be made to
provisions in Articles 5 and 6 of the
Bank facilities, which changes have been
agreed to in principle pursuant to the
draft of such provisions dated April 24,
1995 by counsel for the Banks, as
modified by agreement by the Banks and
TWE.
K. Fees: TWE shall pay a restructuring fee of 1/4 of a point on the outstanding principal balance of the Bank loans, such fee to be paid at Closing.
L. Other Terms: TWE shall maintain its cash management system with the Banks. If TWE obtains an offer from other financial institution(s) regarding cash management that TWE believes is more favorable to TWE, TWE shall request that the Banks match the terms and conditions of such offer. If the Banks do not match the terms and conditions of such offer, TWE shall have the right to transfer its cash management system to such offering institution(s). II.
Insurance Company Debt
A. Obligors: TWE and Record Town, Inc. will be co-obligors.
B. Maturity: The Insurance Company debt will mature on July 31, 1996.
C. Amortization: (i) The current amortization schedule for the indebtedness under the Aetna Note and Security Agreement, dated as of June 20, 1991, and amended by Letter Agreements dated as of March 5, 1992, November 17, 1992 and March 10, 1994 ("Aetna Agreement"), for fiscal 1995 shall be revised to provide solely for one $.625 million amortization payment on June 30, 1995 and one $.999 million amortization payment on January 31, 1996.
(ii) The current amortization schedule for the indebtedness under the Note Agreement, dated as of July 2, 1993, and amended by Amendment No. 1, dated as of January 30, 1994, with respect to the 7.5% Senior Notes Due June 30, 1999 ("Note Agreement") for fiscal 1995 shall be revised to provide solely for one $1.6964 million amortization payment on June 30, 1995 and one $2.714 million amortization payment on January 31, 1996.
D. Interest Rate Increase: The interest rate on all Insurance Company debt shall be increased to (i) the greater of Prime plus 1.5% per annum or (ii) 10.5% per annum, retroactive to the date of this Termsheet. Default rates shall be re-set at the greater of (i) 100 basis points over non-default rate or (ii) 11.5% for the debt of all Insurance Companies except Aetna, for which the default rate shall be re-set at the greater of (i) 150 basis points over non-default rate or (ii) 12%.
E. Prepayment Penalties: (i) (a) Section 2.2 of the Aetna Agreement shall be amended to read in its entirety as follows:
"The Company may prepay the Notes
in whole or part at any time by payment
of (a) interest accrued to the date of
prepayment on the principal being
prepaid and (b) such principal amount;
provided, however, that a pro-rata
prepayment is made on the notes issued
pursuant to the Note Agreement. Any
partial prepayments will be applied to
the outstanding principal amount of the
Notes, in inverse order of payment
maturity. The Company will give notice
of any optional prepayment of the Notes
to each holder of the Notes at least 30
days before the date fixed for
prepayment, specifying (1) such date,
(2) the principal amount of the Notes
and of such holder's Notes to be prepaid
on such date, and (3) the accrued
interest applicable to the prepayment."
(b) The definition of Make-Whole Premium Amount shall be deleted in its entirety.
(ii) (a) Section 5.2 of the Note Agreement shall be amended to read in its entirety as follows:
"Optional repayments to repay the Notes, in whole or in part, may be made by the Company or Record Town, in multiples of $1,000,000, at any time at a price equal to the principal amount to be repaid together with accrued interest on the principal amount so repaid to the repayment date; provided, however, that a pro-rata prepayment is made on the notes issued pursuant to the Aetna Agreement. All such optional repayments shall be allocated among the outstanding Notes held by each holder, as nearly as may be practicable, on a pro-rata basis in proportion to the respective unpaid principal amounts so held."
(b) Section 5.3 of the Note Agreement shall be amended to read in its entirety as follows:
"The Company will give notice of any optional repayment of the Notes to each holder of the Notes not less than 30 days nor more than 60 days before the date fixed for repayment, specifying (a) such date, (b) the principal amount of the Notes and of such holder's Notes to be repaid on such date, and (c) the accrued interest applicable to the repayment. Notice of the repayment having been so given, the principal amount of the Notes specified in such notice, together with the accrued interest thereon, shall become due and payable on the repayment date."
(c) The definition of Make Whole Price shall be deleted in its entirety.
F. Financial Covenants and Related Definitions: Financial covenants shall be amended to provide as follows; provided, however, that debt currently classified as long-term debt on the Company's balance sheet as of January 28, 1995 shall be deemed to remain non-current and shall not be considered a current liability of the Company through July 31, 1996 for purposes of financial covenant calculations and all other definitional purposes in this Termsheet and the agreements contemplated herein:
(i) Section 4.12 of the Aetna Agreement, and
Section 7.10 of the Note Agreement (Tangible
Net Worth) shall each be amended to read in
their entirety as follows:
"The Company shall at all times maintain Consolidated Tangible Net Worth of not less than $103,000,000 at the end of each of the first three quarters of each fiscal year and $112,000,000 at the end of each fiscal year."
(ii) The definition of Consolidated Tangible Net Worth in each of the Aetna Agreement and the Note Agreement shall be amended to read in their entirety as follows:
"Consolidated Tangible Net Worth"
shall mean, at any time, the amount by
which (i) all amounts that would, in
conformity with GAAP, be included in
shareholders' equity on the Consolidated
Balance Sheets of the Company exceeds
(ii) the aggregate amount carried as
consolidated assets on the books of the
Company for goodwill, licenses, patents,
trademarks, unamortized debt discount
and expense, and other intangibles as
determined in conformity with GAAP, for
cost of investments in excess of net
assets at the time of acquisition by the
Company, and for any write-up in the
book value of any assets of the Company
resulting from reevaluation thereof
subsequent to the date hereof."
(iii) A new covenant shall be added to each of the Aetna Agreement and the Note Agreement as follows:
"The Company shall not permit the
ratio of (a) total liabilities less then
non- current portion of Subordinated
Debt to (b) Consolidated Tangible Net
Worth plus the non-current portion of
Subordinated Debt to exceed (i) 2.15 to
1.0 at any fiscal year end; (ii) 2.30 to
1.0 as of the end of each first
quarterly period for any fiscal year;
(iii) 2.5 to 1.0 as of the end of each
second quarterly period for any fiscal
year; or (iv) 3.0 to 1.0 as of the end
of each third quarterly period for any
fiscal year. For any calculations
herein, the actual cash balance shall be
reduced by the amount in excess of
$10,000 per retail store actually open
for business on the date of such
computation. Such excess shall be
applied to reduce accounts payable in
the pro forma computation of Debt to
Consolidated Tangible Net Worth under
this Section ____. For purposes of this
Section ____, "Subordinated Debt" shall
mean all indebtedness of the Company
which is subordinated in right of
payment to all indebtedness of the
Company under the Notes."
(iv) The following covenant shall (a) be
added to the Aetna Agreement and (b) replace
in its entirety Section 7.23 of the Note
Agreement:
"The Company shall not permit
Inventory Turnover to fall below the
following amounts at the end of the
following fiscal quarters to each fiscal
year:
Fiscal Quarter Amount
first .30
second .60
third .70
fourth 1.4"
|
(v) Section 4.11 of the Aetna Agreement and
Section 7.9 of the Note Agreement (Fixed
Charge Ratio) shall be amended to read in
their entirety as follows:
"The Company shall maintain, at the end of each of the first, second and third fiscal quarters for each fiscal year Consolidated Income Available for Fixed Charges of not less than 120% of Consolidated Fixed Charges for the immediately preceding 12-month period and, at the end of the fiscal year then ending, Consolidated Income Available for Fixed Charges of not less than 115% of Consolidated Fixed Charges for the immediately preceding 12-month period."
(vi) The definition of Consolidated Income Available for Fixed Charges in each of the Aetna Agreement and the Note Agreement shall be amended to read in its entirety as follows:
"Consolidated Income Available for Fixed Charges" with respect to the Company and all Restricted Subsidiaries, means for any period the sum of: (1) Consolidated EBITDA and (2) all fixed minimum rent expenses of real estate leases, in each case determined on a Consolidated basis."
(vii) A new definition for Consolidated EBITDA shall be added to each of the Aetna Agreement and the Note Agreement as follows:
"Consolidated EBITDA" means, with respect to the Company for any period, the Consolidated Net Income of the Company for such period plus, to the extent deducted in determining such Consolidated Net Income, depreciation and amortization expense, interest expenses with respect to the Company's liabilities for borrowed money, and all Federal, state and foreign income taxes."
(viii) The definition of Consolidated Adjusted Net Income in each of the Aetna Agreement and the Note Agreement shall be deleted and replaced in its entirety with the following new definition:
"Consolidated Net Income" means, for any
period, the aggregate net income of the
Company for such period on a consolidated
basis, determined in accordance with GAAP,
provided that there shall be excluded
therefrom, after giving effect to any related
tax effect, (a) gains and losses from Asset
Sales or reserves relating thereto, (b) items
classified as extraordinary or nonrecurring
(including any restructuring reserves), (c)
the writeoff of deferred financing costs and
(d) the cumulative effect of changes in
accounting principles in the year of adoption
of such change."
(ix) (a) Section 4.2 of the Aetna Agreement shall be deleted in its entirety.
(b) Section 7.5 of the Note Agreement shall be deleted in its entirety.
(c) Section 7.24 of the Note Agreement shall be deleted in its entirety.
(x) A new covenant shall be added providing that the Company shall not permit Consolidated EBITDA to be less than the following amounts for any of the following periods:
For the period from January 29, 1995 to April 29, 1995 ($1,000,000)
For the period from January 29, 1995 to July 29, 1995 ($2,000,000)
For the period from January 29, 1995 to October 28, 1995 ($2,000,000)
For the period from January 29, 1995 to February 3, 1996 $24,000,000
For the period from February 4, 1996 to May 4, 1996($1,000,000)
G. Intercreditor True-Up: There shall be no permanent reduction in the bank facility commitments unless such reductions are matched by pro-rata amortization payments on the Insurance Company Notes. There shall be no amortization payments on the Insurance Company Notes unless such payments are matched by pro-rata permanent commitment reductions under the Bank facilities. It is the intent of the parties that all payments to either the Bank or Insurance Companies, other than payments on the revolving loans and interest payments, shall be shared among the Banks and Insurance Companies on a pro-rata basis. The Banks and Insurance Company shall enter into an Intercreditor Agreement providing for a "true-up" mechanism whereby upon a triggering event thereunder, paydowns on the Bank facilities or Insurance Company Notes shall be shared pro- rata, to the extent necessary to re-establish the ratio of Bank debt to Insurance Company debt of 75:65.
H. Termination of Waiver Agreement: The Waiver Agreement shall be extended until June 30, 1995 and shall be terminated effective upon the closing of the transactions contemplated hereby; the covenants in the Waiver Agreement shall be incorporated into the Insurance Company note agreements, to the extent not inconsistent with the other provisions of this Termsheet, provided that the store opening and closing covenants and lease covenants will be modified to be consistent with TWE's business plan; prior defaults shall be permanently waived.
I. Fees: TWE shall pay a restructuring fee of 1/4 of a point on the outstanding principal balance of the Insurance Company debt, such fee to be paid at Closing.
J. Other Terms: All other terms and provisions of the Insurance Company note agreements shall remain unchanged, except to the extent necessary to be consistent with the provisions specifically set forth above, including that the changes to articles 5 and 6 of the Bank facilities referred to in Section I.J above shall be reasonably agreeable to the Noteholders and shall be incorporated into the Insurance Company note agreements.
EMPLOYMENT AGREEMENT
AGREEMENT, dated January 30, 1995, by and between TRANS WORLD ENTERTAINMENT CORP., a New York corporation with offices at 38 Corporate Circle, Albany, New York 12203, (together with RECORD TOWN, INC., and its other subsidiaries, the "Company"), and ROBERT J. HIGGINS, whose address is 54 Sunset Boulevard, Albany, New York ("Higgins").
WHEREAS, the parties hereto did enter into a certain employment agreement dated as of February, 1994 (the "Employment Agreement"), a copy of which is attached hereto as Exhibit "A"; and
WHEREAS, the company believes that it is essential to the future well being of the Company that Higgins be retained as President and Chief Executive Officer; and
WHEREAS, the previous employment agreement between the parties is due to terminate on January 31, 1995 and it is the desire of the parties to extend the terms thereof;
NOW, THEREFORE, the Company and Higgins agree as follows:
1. The Employment Agreement is hereby extended through the fiscal year ending January 1996 and any reference in said agreement to January 31, 1995 shall be changed to January 31, 1996, and except for the change in such date, shall continue to be in full force and effect until January 31, 1996.
IN WITNESS WHEREOF, the parties hereto have duly executed this agreement as of the date first above written.
WITNESS: TRANS WORLD ENTERTAINMENT CORP.
RECORD TOWN, INC.
BY:/S/Robin Blaauboer BY:/S/Matthew H. Mataraso |
WITNESS: ROBERT J. HIGGINS
BY:/S/Daniel Gerron /S/Robert J. Higgins |
EXHIBIT A
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of February 1, 1994, by and between TRANS WORLD MUSIC CORP., a New York corporation with offices at 38 Corporate Circle, Albany, New York 12203, (together with RECORD TOWN, INC., and its other subsidiaries, the "Company"), and ROBERT J. HIGGINS, whose address is 54 Sunset Boulevard, Albany, New York ("Higgins").
WHEREAS, Higgins has unique knowledge of business and competitive position of the Company, has special expertise in the management and future planning of its affairs, and has helped in the past to develop the image of said business; and
WHEREAS, it is regarded as essential by the Company that Higgins be available to aid in its management and planning in the future; and
WHEREAS, a previous employment agreement terminated on January 31, 1994 and it is the desire of the parties to extend the terms thereof.
NOW, THEREFORE, the Company and Higgins agree as follows:
1. SCOPE OF EMPLOYMENT. The Company agrees to, and hereby does, employ Higgins in accordance with the terms and conditions hereinafter set forth. The scope of said employment, and the duties and responsibilities to be performed by Higgins shall consist of the general direction and the determination of policies for the conduct of the business of the Company, such duties and responsibilities to be performed by Higgins in collaboration with directors and executive officers of the Company. Higgins intends and expects that at all times during said employment he will serve as a director of the Company and hold the positions and titles of President and Chief Executive Officer. If the Board of Directors should fail to elect him President and Chief Executive Officer, or if Higgins should have a policy dispute with the Board of Directors, or if the shareholders should fail to elect him a director, Higgins shall have the right, at his election, to terminate this Agreement or to change his position to that of consultant and advisor, as described in Section 5 below. The period of such employment as an officer or consultant (the "Employment Period") shall commence upon the date of this Agreement and end on January 31, 1995, or at such earlier time as may be provided hereinabove or in Sections 4 and 6 below.
2. DUTIES OF HIGGINS. Higgins agrees to such employment and agrees to furnish services to the Company as set forth in Section 1 above. The Company recognizes that Higgins has and, it is anticipated, will continue to have throughout the Employment Period, investments and interests in enterprises other than the Company. Higgins may pursue such activities but only to the extent that they are non-competitive (as described in Section 7 below) with the business of the Company and do not interfere with the performance of his duties under this Agreement. During the Employment Period, the Company shall furnish to Higgins office space and secretarial and other office personnel on a level commensurate with a senior executive position to assist him with his duties and his personal investments. Higgins' base of operations during the Employment Period shall not be changed without his prior written consent, but he shall travel for the benefit of the Company, as necessary.
3. COMPENSATION. The minimum base salary of Higgins shall be at the rate of $550,000 per annum. Higgins' base salary shall be payable in substantially equal monthly or more frequent installments in accordance with the Company's customary payroll practice for its senior executives. In addition:
(a) Higgins shall be entitled to reimbursement for expenses reasonably and necessarily incurred by him in connection with the performance of his duties under this Agreement. Without limiting the generality of the foregoing, the Company deems it to be in its best interest for Higgins to meet with, and entertain in a social setting, business associates, investors, customers, and other persons with whom the Company has or may have a business or financial relationship. The Company shall pay throughout the Employment Period all reasonable expenses, including initiation fees and dues, related to his membership in the social clubs and other organizations used for such purposes.
(b) During the Employment Period and upon retirement, Higgins shall be entitled to such benefits as are provided on a non-discriminatory basis, relative to base salary, to senior executive officers of the Company under any retirement, medical, or other employment benefit or incentive plan or pursuant to other understandings. He shall also be provided with an automobile and shall be entitled to all fringe benefits and perquisites which he enjoys on the date of this Agreement or which he received from the Company in the past or such additional fringe benefits that may be bestowed on senior executive officers in the future.
(c) The Company agrees to reimburse Higgins for premiums paid by him for one or more life insurance policies, up to a maximum of $150,000 per annum.
(d) Higgins shall be entitled to participate in any bonus pool, stock option, stock award, stock purchase, or other stock plans adopted by the Company for its executives.
4. ACCELERATION OF COMPENSATION. (a) In the event there shall be a change in the present control of the Company, other than one attributed solely to Higgins' sale of shares, then Higgins shall have the sole and exclusive option, exercisable in writing at any time during the Employment Period after such event, (i) to terminate this Agreement and receive, as a lump sum payment payable within sixty (60) calendar days, 2.99 times the average of the aggregate base and incentive compensation paid to Higgins, over the preceding five years, grossed up to cover any excise taxes that may be payable by Higgins; or (ii) to change his position to that of consultant and advisor, as described in Section 5 below. For the purpose of this Agreement the term "control" shall have the same meaning as presently defined in Reg. 240.12b-2 under the Securities Exchange Act of 1934, as amended.
(b) Upon Higgins' death during the Employment Period, the heirs or legal representatives of Higgins shall be entitled to receive, as a lump sum payment payable within sixty (60) calendar days of his death, 2.99 times the average of the aggregate base and incentive compensation paid to Higgins over the preceding five years.
5. EMPLOYMENT AS CONSULTANT. Upon the election of Higgins as a result
of a change of position under Section 1, the election of Higgins under
Section 4, or the election of the Company under Section 6, the Company
agrees to retain Higgins and Higgins agrees to serve in a position of
consultant and advisor to the Company (with or without retention of his
position as President or Chief Executive Officer or as a director, at the
election of the Company), for a period commencing upon such election and
ending on January 31, 1995. During the period of consulting and advising,
Higgins shall render consulting and advisory services in matters relating
to business activities of the nature which were carried on by the Company
during the period of his employment by the Company. Higgins shall perform
such consulting and advisory services and attend meetings, as and when
reasonably requested by the Company in advance, provided that Higgins shall
not be required to devote thereto in the aggregate more than 30 days per
year and, notwithstanding Section 7 below, that he shall be free to engage
in any other business or enter into any other employment. He shall have
discretion in choosing the times and places of performance of his services
to the Company compatible with his other activities. Compensation to
Higgins under this Section 5 shall continue to be due from the Company as
if Higgins were employed in a capacity under Section 1 hereof.
6. DISABILITY. In the event of disability of Higgins either the Company or Higgins or his representative may give thirty (30) days written notice to the other of its or his intention to terminate the active employment of Higgins hereunder because of such disability. In the event Higgins' active employment is terminated pursuant to this Section 6, the Company may, at its option, pay Higgins all base salary then due and all base salary payable to him as if he were in the employ of the Company until January 31, 1995 or may elect to change his position to that of consultant pursuant to Section 5 above. "Disability" of Higgins for the purposes of this paragraph shall not be considered to be effective unless and until all of the following conditions are met: (a) Higgins shall be determined by a medical doctor selected by Higgins and the Company to be physically or mentally incapable (excluding infrequent and temporary absences due or ordinary illnesses) of properly performing the services required of him in a ccordance with his obligations hereunder; and (b) such incapacity shall exist for more than 120 days, as determined by such doctor, in the aggregate, during any period of twelve consecutive months.
7. NON-COMPETE COVENANT. Higgins agrees that, except as provided in
Section 5 or as allowed by Section 2, he will not (a) during the period he
is employed by the Company under this Agreement or otherwise engage in, or
otherwise directly or indirectly be employed by, or act as a consultant or
lender to, or be a director, officer, employee, owner, or partner of, any
other business or organization, whether or not such business or
organization now is or shall then be competing with the Company; and (b)
for a period of ninety (90) days after he ceases to be employed by the
Company under this Agreement or otherwise, directly or indirectly compete
with or be engaged in the same business as the Company, or be employed by,
or act as consultant or lender to , or be a director, officer, employee,
owner, or partner of, any business or organization which, at the time of
such cessation, competes with or is engaged in the same business the
Company, except that in each case the provisions of this Section 7 will not
be deemed breached merely because Higgins owns not more than 10% of the
outstanding common stock of a corporation, if, at the time of its
acquisition by Higgins, such stock is listed on a national securities
exchange, is reported on NASDAQ, or is regularly traded in the
over-the-counter market by a member of a national securities exchange.
8. ASSUMPTION OF OBLIGATIONS BY SUCCESSORS. Without limiting Higgins' other rights hereunder, (a) if there shall be a consolidation or merger of the Company with or into any other corporation, the terms, covenants, and conditions of the Agreement shall be kept and performed by that company which shall be formed by, or result from, any such consolidation or merger, as fully and effectually as if such successor company had been the original party to this Agreement; and (b) if the Company effects any sale or transfer of all, or substantially all of its properties and assets to any other company, such transferee shall, as a condition of such transfer, assume and observe all the terms, covenants, and conditions of this Agreement with the same force and effect as if such transferee had been the original party to this Agreement.
9. REMEDIES OF HIGGINS. If there shall be any breach of this Agreement by the Company, and Higgins shall institute any action (or counterclaim) in connection therewith, Higgins shall be entitled, if successful in such action or if the Company sues and if Higgins is successful in that action, to recover as damages the discounted value (at a rate of 6%) of all amounts unpaid under this Agreement, or Higgins may, at his election, recover as damages each monthly payment of salary and additional compensation at such time as it becomes payable or would have become payable under the terms of this Agreement, and the Company agrees not only to pay such sums, but, in addition thereto, interest thereon at the prime rate then in effect, until such payment is made, plus any and all reasonable counsel fees (not exceeding 15% of the total recovery), disbursements, and other legal expenses incurred by Higgins (regardless of whether the same are taxable costs) in any action undertaken by Higgins to recover any unpaid amounts or damages. In any such action, the fact that Higgins did or did not seek or engage in other employment or in other activities shall not affect, reduce or mitigate the amount of recovery allowable to Higgins. In addition to any other payments to which Higgins may be entitled, the Company shall also be liable to Higgins for any monies which would be due him under any fringe benefit plan of the Company, as if said plan and Higgins' status as an employee thereunder and his compensation immediately prior to such breach had continued in effect until the end of the term of this Agreement as the same may have been theretofore extended. Higgins' rights hereunder shall, upon his death, accrue to his legal representatives or to his designated beneficiary.
10. INVENTIONS AND DISCOVERIES. Higgins hereby gives and, in the event the consent of others is necessary, agrees to cause such others to give, the Company the right to use in its business, any ideas, research, concepts, discoveries, processes, inventions, devices, methods of manufacturing or improvements of any of the foregoing relating to any product, item or business of the Company discovered or developed by Higgins alone or in conjunction with others, prior to or subsequent to the date of this Agreement and during the Employment Period, whether patentable, copyrightable or not. Higgins understands and expressly agrees that if he breaches any of the provisions of this Section 10, the Company shall have the right to require Higgins' specific performance of al acts necessary to effect the intent and purpose of all provisions of this Section 10, in addition to any other of the Company's rights and remedies.
11. INJUNCTIVE RELIEF. Because Higgins shall acquire by reason of his employment and association with the Company an extensive knowledge of the Company's trade secrets, suppliers, procedures, and other confidential information, the parties hereto recognize that in the event of a breach or threat of breach by Higgins of the terms and provisions contained in Sections 7 and 10, monetary compensation alone to the Company would not be an adequate remedy for breach of those terms and provisions. Therefore, it is agreed that in the event of a breach for threat of a breach of the provisions of Sections 7 or 10 by Higgins, the Company shall be entitled, in addition to provable damages, to an immediate injunction from any court of competent jurisdiction restraining Higgins from committing or continuing to commit a breach of such provisions without the showing or proving of actual damages. Higgins hereby waives any right he may have to require the Company to post a bond or other security with respect to obtaining o r continuing any such injunction or temporary restraining order.
12. TERMINATION BY COMPANY. If Higgins commits any act or omits to take any action involving fraud, embezzlement, theft, dishonesty, gross misconduct or material breach of his fiduciary duty to the Company, to the material detriment of the Company, the Company shall have the right to give immediate notice of termination of the Agreement, whereupon Higgins shall not be entitled to any further compensation other than amounts received in retirement benefits.
13. NOTICE OF BREACH. Higgins shall not be deemed to be in breach of any of the provisions of this Agreement unless (a) the Company shall first give written notice to him at his home address, specifying in detail the breach; and (b) such breach shall not be corrected or cured by Higgins within thirty days following his receipt of such notice.
14. REPRESENTATION BY HIGGINS. Higgins represents and warrants to the Company that he is under no contractual or other restriction which is inconsistent with his execution of this Agreement, the performance by him of his duties under this Agreement, or the other rights of the Company under this Agreement.
15. MODIFICATION. This Agreement sets forth the entire understanding of this parties with respect to the employment of Higgins and may be modified only by a written instrument duly executed by each party.
16. NOTICES. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by registered mail or delivered against receipt (to the attention of the Secretary, in the case of the Company) to the address of the party first above set forth or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 16. Any notice or other communication mailed by registered mail shall be deemed given at the time of registration thereof.
17. PARTIES BOUND BY AGREEMENT. This Agreement is not assignable by Higgins. None of Higgins' rights under this Agreement shall be subject to any encumbrance or the claims of Higgins' creditors. This Agreement shall be binding upon the heirs and legal representatives of Higgins and shall be binding upon an inure to the benefit of the Company, its successors, and assigns, and shall likewise inure to the benefit of Higgins, his heirs and legal representative.
18. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York.
19. PARTIAL INVALIDITY. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written.
WITNESS: TRANS WORLD MUSIC CORP.
RECORD TOWN, INC.
BY: /S/Paul A. Cardinal By: /S/Matthew H. Mataraso
|
WITNESS: ROBERT J. HIGGINS
BY: /S/Paul A. Cardinal /S/Robert J. Higgins |
Consent of Independent Auditors
We consent to incorporation by reference in the registration statements (No. 33-14572, No. 33- 40399, No. 33-51094 and No. 33-51516) on Form S-8 pertaining to the 1986 Incentive and Non-Qualified Stock Option Plan and 1990 Stock Option Plan for Non-Employee Directors of Trans World Entertainment Corporation of our report dated March 24, 1995, relating to the consolidated balance sheet of Trans World Entertainment Corporation as of January 28, 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for the fiscal year then ended, which report appears in the Annual Report on Form 10-K for the fiscal year ended January 28, 1995.
KPMG Peat Marwick LLP
Albany, New York
April 28, 1995
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-14572, No. 33-40399, No. 33-51094 and No. 33-51516)
pertaining to the 1986 Incentive and Non-Qualified Stock Option Plan and
1990 Stock Option Plan for Non-Employee Directors of Trans World
Entertainment Corporation of our report dated March 24, 1994, with respect
to the consolidated financial statements of Trans World Entertainment
Corporation included in the Annual Report (Form 10-K) for the year ended
January 28, 1995.
ERNST & YOUNG LLP
Syracuse, New York
April 28, 1995
| ARTICLE 5 |
| THIS SCHEDULE CONTAINS DATA EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS, AND THE CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. |
| CIK: 0000795212 |
| NAME: TRANS WORLD ENTERTAINMENT CORPORATION |
| MULTIPLIER: 1,000 Amount Item Description (in thousands, except per share data) - ----------------- ------------------------------------- |
| FISCAL YEAR END | JAN 28 1995 |
| PERIOD START | JAN 30 1994 |
| PERIOD END | JAN 28 1995 |
| PERIOD TYPE | 12 MOS |
| CASH | 90,091 |
| SECURITIES | 0 |
| RECEIVABLES | 9,176 |
| ALLOWANCES | 0 |
| INVENTORY | 222,358 |
| CURRENT ASSETS | 328,976 |
| PP&E | 182,262 |
| DEPRECIATION | 85,620 |
| TOTAL ASSETS | 426,939 |
| CURRENT LIABILITIES | 235,545 |
| BONDS | 66,441 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 0 |
| COMMON | 97 |
| OTHER SE | 119,883 |
| TOTAL LIABILITY AND EQUITY | 426,939 |
| SALES | 536,840 |
| TOTAL REVENUES | 536,840 |
| CGS | 341,422 |
| TOTAL COSTS | 341,422 |
| OTHER EXPENSES | 196,569 |
| LOSS PROVISION | 0 |
| INTEREST EXPENSE | 9,540 |
| INCOME PRETAX | (10,691) |
| INCOME TAX | (4,435) |
| INCOME CONTINUING | 0 |
| DISCONTINUED | 0 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | (6,256) |
| EPS PRIMARY | (.64) |
| EPS DILUTED | (.64) |