-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AAYl42iXZVggQN7YWSmpmeSrPgvwoyfy1xGNmU+QjWs3Ul5dB/L6nYJGseZzjVGP u6reEetT53sxaW0/PUs4gA== 0001047469-98-012566.txt : 19980331 0001047469-98-012566.hdr.sgml : 19980331 ACCESSION NUMBER: 0001047469-98-012566 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANS WORLD ENTERTAINMENT CORP CENTRAL INDEX KEY: 0000795212 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL- COMPUTER & PRERECORDED TAPE STORES [5735] IRS NUMBER: 141541629 STATE OF INCORPORATION: NY FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14818 FILM NUMBER: 98579451 BUSINESS ADDRESS: STREET 1: 38 CORPORATE CIRCLE CITY: ALBANY STATE: NY ZIP: 12203 BUSINESS PHONE: 5184521242 MAIL ADDRESS: STREET 1: 38 CORPORATE CIRCLE CITY: ALBANY STATE: NY ZIP: 12203 FORMER COMPANY: FORMER CONFORMED NAME: TRANS WORLD MUSIC CORP DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] FOR THE FISCAL YEAR ENDED JANUARY 31, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT FOR THE TRANSITION PERIOD FROM ____ TO ____ COMMISSION FILE NUMBER: 0-14818 TRANS WORLD ENTERTAINMENT CORPORATION ------------------------------------- (Exact name of registrant as specified in its charter) New York 14-1541629 ---------- ------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 38 Corporate Circle Albany, New York 12203 ------------------------------------- (Address of principal executive offices, including zip code) (518) 452-1242 ------------------------------------- (Registrant's telephone number, including area code) Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's Knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or an amendment to this Form 10-K. [ ] As of March 26, 1998, 19,816,143 shares of the Registrant's Common Stock, excluding 70,788 shares of stock held in Treasury, were issued and outstanding. The aggregate market value of such shares held by non-affiliates of the Registrant, based upon the closing sale price of $28.75 on the Nasdaq National Market on March 26, 1998, was approximately $272,900,000. Shares of Common Stock held by the Company's controlling shareholder, who controls approximately 52.1% of the outstanding Common Stock, have been excluded for purposes of this computation. Because of such shareholder's control, shares owned by other officers, directors and 5% shareholders have not been excluded from the computation. -1- PART I Item 1. BUSINESS General Trans World Entertainment Corporation (which, together with its consolidated subsidiaries, is referred to herein as the "Company") was incorporated in New York in 1972. Trans World Entertainment Corporation owns 100% of the outstanding common stock of Record Town, Inc., through which the Company's principal retail operations are conducted. The Company operates a chain of retail entertainment stores in a single industry segment. Sales were $571.3 million during the fiscal year ended January 31, 1998 (referred to herein as "1997"). The Company is one of the largest specialty retailers of compact discs, prerecorded audio cassettes, prerecorded videocassettes and related accessories in the United States. At January 31, 1998, the Company operated 539 stores totaling about 2.4 million square feet in 34 states, the District of Columbia and the Virgin Islands, with the majority of the stores concentrated in the Eastern half of the United States. The Company's business is highly seasonal in nature, with the peak selling period being the Christmas holiday in the fourth fiscal quarter. In October 1997, the Company acquired 90 out of a total of 118 stores owned by Strawberries, Inc., a privately held non-mall music specialty retailer operating primarily in New England. The stores operate under the names "Strawberries" and "Waxie Maxie" and are primarily located in freestanding and strip center locations. On December 15, 1997 the Company split its common stock two-for-one in the form of a 100% stock dividend. The total shares issued at January 31, 1998 were 19,815,357 compared to a total of 19,619,188 at February 1, 1997, on a split adjusted basis. All references throughout this report to number of shares, per share amounts, stock option data and market prices of the Company's common stock have been restated to reflect the stock split. -2- The Company closed 78 stores in 1997 and a total of 342 since the fourth quarter of 1994 as part of a restructuring plan announced in the fourth quarter of 1994. The Company expects the restructuring to be completed during 1998. A total of 62 stores are forecast to close or relocate in 1998; however, only 49 closings are associated with the restructuring. The remaining 13 stores will be closed or relocated as part of the Company's ongoing business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." The Company's central distribution facility currently serves all of its retail stores with weekly shipments to each store providing for approximately 78% of their retail product requirements. The balance of the stores' requirements are satisfied through direct shipments from manufacturers or redistribution from other Company-operated stores. The Company's principal executive offices are located at 38 Corporate Circle, Albany, New York, 12203, and its telephone number is (518) 452-1242. Store Concepts The Company's strategy is to offer customers a broad selection of music and video titles at competitive prices in convenient, attractive stores. The Company has developed a number of distinct store concepts to take advantage of real estate opportunities and to satisfy varying consumer demands. Mall Stores The Company's mall stores include five concepts, all of which have been designed to offer consumers a fun and exciting shopping experience. In the mall stores, the Company puts an emphasis on a strong in-store presentation message, broad product selection and competitive pricing to attract the casual impulse buyer. Full-Line Music Stores. The Company's full-line mall stores are located in large, regional shopping malls and are generally named Record Town. There were 178 such stores at January 31, 1998. This store concept utilizes an average space of approximately 3,300 square feet with, certain stores ranging in excess of 7,000 square feet depending on the availability of preferred space and the expected volume of the store. Saturday Matinee Stores. These stores are dedicated to the sale of pre-recorded video products. These stores are located in large, regional shopping malls and average 2,200 square feet in size. There were 44 such locations in operation at January 31, 1998. The Company's strategy is to combine this store with a Record Town in its combination store concept whenever possible. -3- Combination Stores. At January 31, 1998, the company operated 79 combination Record Town/Saturday Matinee stores. The combination store concept occupies an average of 7,300 square feet. These stores share common storefronts and offer the consumer an exciting combination of music and video products in one store location. The Company believes that the combination of the two concepts creates a marketing synergy by attracting different target customers. For Your Entertainment Stores. At January 31, 1998, the Company operated five F.Y.E. stores. These stores combine a broad assortment of music and video products with a game arcade and an extensive selection of games, portable electronics, accessories and boutique items. This format is designed to be a semi-anchor or destination retailer in major regional malls. The prototype F.Y.E. store is 25,000 square feet. Specialty Music Stores. The specialty music concept is also located in large, regional shopping malls, but contrasts with full-line music stores in that they carry a less diverse product selection. These stores, 34 of which were in operation at January 31, 1998, are generally operated under the name Tape World. The specialty mall stores operate in approximately 1,300 square feet. The Company's strategy is to reposition and expand these stores into Record Town stores or combination stores as opportunities become available. Non-Mall Stores The Company's non-mall concept accounted for 199 stores in operation at January 31, 1998, which primarily operate under the names Coconuts and Strawberries. These stores are designed for freestanding, strip center and downtown locations in areas of high population density. The majority of the non-mall stores range in size from 3,000 to 8,000 square feet. Non-mall stores carry an extensive product assortment and have an emphasis on competitive pricing. The Company's non-mall stores include 22 video rental stores. These stores operate under the tradename "Movies Plus" and average approximately 5,300 square feet. On October 27, 1997, the Company acquired "Planet Music," a 31,000 square foot, freestanding superstore in Virginia Beach, VA. The store operates in a strip center and offers an extensive catalog of predominantly music. The store also has a video department and sells other non-music related products, similar to what would be carried in a large Coconuts store. The acquisition also includes the rights to the "Planet Music" name and trademark, which offers the Company potential expansion opportunities. Products The Company's stores offer a full assortment of compact discs, prerecorded audio cassettes, prerecorded video (including DVD) and related accessories. Sales by category as a percent of total sales over the past three years were as follows:
January 31, February 1, February 3, 1998 1997 1996 ----------- ----------- ----------- Compact discs 55.5% 50.1% 49.2% Prerecorded audio cassettes 18.9 22.2 25.5 Prerecorded video 16.3 18.6 16.7 Other 9.3 9.1 8.6 ----------- ------------ ---------- TOTAL 100.0% 100.0% 100.0% =========== ============ ==========
-4- Pre-recorded Music. The Company's music stores offer a full assortment of compact discs and prerecorded audio cassettes purchased primarily from six major manufacturers. Music categories include rock, pop, rap, soundtracks, alternative, Latin, urban, heavy metal, country, dance, vocals, jazz and classical. Merchandise inventory is generally classified for inventory management purposes in three groups: "hits", which are the best selling new releases, "fast moving" titles, which generally constitute the top 1,000 titles with the highest rate of sale in any given month, and "catalog" items that customers purchase to build their collections. Video Products. The Company offers pre-recorded videocassettes for sale in a majority of its stores. DVD, a new video technology, was introduced to the retail consumer in 1997. DVD offers a quality that exceeds both the current VHS and CD formats and also offers the consumer more storage than the current CD. The Company believes that the DVD player will replace the sales of laser disc players and VCRs as the new technology becomes more accessible. The Company is anticipating the increased availability of DVD players and plans to capitalize on this technology by making software increasingly available as this technology becomes more widely accepted by the consumer. DVD sales were less than 1% of the Company's retail sales in 1997. Other Products. The Company stocks and promotes brand name blank audio cassette and videocassette tapes as well as accessory products for compact discs, audio cassettes and videocassettes. These accessories include maintenance and cleaning products, portable electronics, storage cases, headphones and video games. Advertising The Company makes extensive use of in-store advertising circulars and signs and also pursues a mass-media marketing program for its freestanding stores through advertisements in newspapers, radio, and television. Most of the vendors from whom the Company purchases merchandise offer their customers advertising allowances to promote their products. Industry and Competitive Environment According to industry sources, the U.S. retail market for music and video products was approximately $20 billion in 1996. Prerecorded music amounted to $12.5 billion of that total, and this segment of the market has grown at an annual rate of 9.5% over the past 15 years. Fueled in part by this growth, in the early 1990's, music retailers began aggressive expansion programs which grew total square footage at a rate that outpaced consumer demand, resulting in an overcapacity of selling space in the U.S. Furthermore, new music retailing entrants, including mass merchants (e.g. Wal-Mart, K-Mart, Target) and consumer electronics stores (e.g. Best Buy, Circuit City) promoted aggressive loss-leader pricing strategies in an effort to increase store traffic. The additional retailing square footage and the loss-leader -5- pricing strategy forced music specialty retailers to reduce prices, resulting in decreased sales and gross margins of music specialty retailers. As a result, many music specialty retailers experienced financial difficulties which lead to corporate restructurings and bankruptcies. During 1996, many of the major music vendors began to enforce programs such as the Minimum Advertised Pricing ("MAP") program to eliminate loss-leader pricing strategies. These programs penalize sellers that fail to comply with vendor pricing programs by limiting advertising support. The enforcement of the MAP program has been successful in stabilizing prices in the industry. Non-traditional music retailers have since reduced their music and video selections and maintained less aggressive pricing policies. Seasonality The Company's business is highly seasonal. The fourth quarter constitutes the Company's peak selling period. In 1997, the fourth quarter accounted for approximately 42% of annual sales and substantially all of net income. In anticipation of increased sales activity during these months, the Company purchases substantial amounts of inventory and hires a significant number of temporary employees to bolster its permanent store staff. If for any reason the Company's net sales were below seasonal norms during the fourth quarter, including as a result of merchandise delivery delays due to receiving or distribution problems, the Company's operating results, particularly operating and net income, could be adversely affected. The fourth quarter percentage of annual sales in 1997 was higher than normal due to the Strawberries acquisition in October 1997. Quarterly results are affected by timing and strength of new releases, the timing of holidays, new store openings and sales performance of existing stores. Distribution and Merchandise Operations The Company's distribution facility uses certain automated and computerized systems designed to manage product receipt, storage and shipment. Store inventories of regular product are replenished in response to detailed product sale information that is transmitted to the central computer system from each store after the close of the business day. Shipments from the facility to each of the Company's stores are made at least once a week and currently provide the Company's stores with approximately 78% of their product requirements. The balance of the stores' requirements are satisfied through direct shipments from manufacturers or redistribution from other sources. -6- Company-owned trucks service approximately 36% of the Company's stores; the balance is serviced by several common carriers chosen on the basis of geographic and rate considerations. No contractual arrangements exist between the Company and any common carriers. The Company's sales volume and centralized product distribution facility enable it to take advantage of transportation economies. The Company believes that the existing distribution center is adequate to meet the Company's planned business needs, and additional improvements will be completed primarily for operational efficiency. Suppliers and Purchasing The Company purchases inventory for its stores from approximately 450 suppliers. Approximately 68% of purchases in 1997 were made from the six largest suppliers: WEA (Warner/Electra/Atlantic Corp)., Sony Music, PolyGram Distribution, Universal Distribution, BMG (Bertelsmann Music Group) and EMD (EMI Music Distribution). As is typical in this industry, the Company has no material long-term purchase contracts and deals with its suppliers principally on an order-by-order basis. In the past, the Company has not experienced difficulty in obtaining satisfactory sources of supply, and management believes that it will retain access to adequate sources of supply. The Company also expects to continue to pass on to customers any price increases imposed by the suppliers of prerecorded music and videocassettes. The Company produces store fixtures for all of its new stores and store remodels in its manufacturing facility located in Johnstown, New York. The Company believes that the costs of production are lower than purchasing from an outside manufacturer. Trade Customs and Practices Under current trade practices, retailers of pre-recorded compact discs and audio cassettes are entitled to return products they have purchased from major vendors for other titles carried by these vendors; however, the returns are subject to merchandise return penalties. This industry practice permits the Company to carry a wider selection of music titles and at the same time reduce the risk of obsolete inventory. Most manufacturers and distributors of pre-recorded videocassettes offer return privileges comparable to those with pre-recorded music, but with no merchandise return penalties. Video rental products are not eligible for return to the manufacturers. The merchandise return policies have not changed significantly during the past five years, but any future changes in these policies could impair the value of the Company's inventory. The Company generally has adapted its purchasing policies to changes in the policies of its suppliers. Employees As of January 31, 1998, the Company employed approximately 6,100 people, of whom 850 were employed on a full-time salaried basis, 1,700 were employed on a full-time hourly basis, and the remainder were employed on a part-time hourly basis. The Company hires temporary sales associates during peak seasons to assure continued levels of customer service. Store managers report to district managers, each of who, inturn, reports to a -7- regional manager. In addition to their salaries, store managers, district managers and regional managers have the potential to receive incentive compensation based on profitability. None of the Company's employees are covered by collective bargaining agreements, and management believes that the Company enjoys favorable relations with its employees. Retail Information Systems All store sales data and product purchasing information is collected centrally utilizing the IBM AS/400 midrange configuration. The Company's information systems manage a database of over 150,000 active SKUs in pre-recorded music, video and accessory products. The system processes inventory, accounting, payroll, telecommunications and other operating information for all of the Company's operations. The Company has piloted a new point-of-sale system that will be rolled out chain wide during the summer of 1998. This new system is expected to improve customer service while increasing the accuracy of perpetual inventories at the store level. See discussion on Year 2000 compliance in "Management's Discussion and Analysis of Financial Condition and Results of Operations." Item 2. PROPERTIES Retail Stores At January 31, 1998, the Company operated 539 retail outlets. The Company owns one real estate site, which it formerly operated as a retail outlet and currently leases to an unrelated party. All of the Company's retail stores are under operating leases with various terms and options. Substantially all of its stores provide for payment of fixed monthly rentals, a percentage of the gross receipts of the store in excess of specified sales levels, and operating expenses for maintenance, property taxes, insurance and utilities. The following table lists the number of leases due to expire (assuming no renewal options are exercised) in each of the fiscal years shown, as of January 31, 1998: Year Leases Year Leases ------ -------- ------ -------- 1998 94 2002 58 1999 49 2003 73 2000 77 2004 56 2001 53 2005 & Beyond 79 The Company expects that as these leases expire, it will be able either to obtain renewal leases, if desired, or to obtain leases for other suitable locations. Included in the table above are 38 month-to-month leases under negotiations for renewal; these leases are included as part of leases due to -8- expire in 1998. Certain of the stores scheduled to close will do so upon the expiration of the applicable store lease. Corporate Offices and Distribution Center Facility The Company leases its Albany, New York distribution facility and the majority of the corporate office space from its principal shareholder and Chief Executive Officer under two capital leases that extend through the year 2015. Both leases are at fixed rentals with provisions for biennial increases based upon increases in the Consumer Price Index. Under such leases, the Company pays all property taxes, insurance and maintenance. The office portion of the facility is comprised of 21,000 square feet. The distribution center portion is comprised of approximately 138,000 square feet. The principal shareholder and Chief Executive Officer is currently constructing a 20,000 square foot expansion to the existing corporate offices with an estimated completion date of July 1998. This property will be leased to the Company under similar terms as the two existing capital leases. The Company leases an 83,000 square foot facility in Johnstown, NY, where it manufactures its store fixtures. The seven-year operating lease expires in June 1998. The Company anticipates it will negotiate a new lease. Item 3. LEGAL PROCEEDINGS The Company has no material legal proceedings pending against it. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At a special meeting of shareholders held on November 14, 1997, shareholders approved an amendment to the Company's Certificate of Incorporation authorizing up to 50 million shares of common stock. Previously the Company was authorized to issue up to 20 million shares. Voting results were are follows: FOR - 7,551,676 AGAINST - 1,081,165 ABSTAIN - 17,076 Supplementary Item - Identification of Executive Officers of the Registrant - --------------------------------------------------------------------------- (Pursuant to Instruction 3 to Item 401(b) of Regulation S-K) The name, age, principal occupation and period of service as an executive officer of the Company for each executive officer are set forth below. Robert J. Higgins Age 56 President, Chief Executive Officer, Chairman of the Board and Director Since 1973 Robert J. Higgins founded the Company in 1972 and has participated in its operations since 1973. Mr. Higgins has served as President, Chief Executive Officer and a director of the Company for more than the past five years, and is the principal shareholder in the Company. -9- James A. Litwak Age 44 Executive Vice President of Merchandising and Marketing Since 1996 James A. Litwak joined the Company in May 1996 as Executive Vice President of Merchandising and Marketing. Prior to joining the Company, Mr. Litwak served as Senior Vice President and General Merchandise Manager of DFS Group Limited, an international operator of in-airport duty free shops. Prior to joining DFS Group Limited, Mr. Litwak held several executive positions in his fourteen year career at R.H. Macy's Company with the most recent being President of Merchandising for Macy's West responsible for developing marketing, merchandising and product launch programs to fuel growth for the 50 store division. Edward W. Marshall, Jr. Age 52 Executive Vice President-Operations Since 1989 Edward W. Marshall, Jr. has been Executive Vice President of the Company since August 1994. He served as Senior Vice President-Operations of the Company since January 1991 and was Vice President of Operations upon joining the Company in May 1989. Prior to joining the Company, Mr. Marshall was Vice President of Operations for Morse Shoe, a retail store operator. Bruce J. Eisenberg Age 37 Senior Vice President of Real Estate Since 1993 Bruce J. Eisenberg has been Senior Vice President of Real Estate at the Company since May of 1995. He joined the Company in August of 1993 as Vice President of Real Estate. Prior to joining the Company, Mr. Eisenberg was responsible for leasing, finance and construction of new regional mall development at The Pyramid Companies. Carol A. Stevens Age 47 Senior Vice President - Human Resources Since 1998 Carol A. Stevens has been Senior Vice President of Human Resources since she joined the Company in February 1998. Prior to joining the Company, Ms. Stevens was Senior Vice President of Human Resources at Hechinger Company from 1994 to 1997 and served as Vice President prior to 1994. John J. Sullivan Age 45 Senior Vice President, Treasurer and Chief Financial Officer Since 1991 John J. Sullivan has been Senior Vice President, Treasurer and Chief Financial Officer of the Company since May 1995. Mr. Sullivan joined the Company in June 1991 as the Corporate Controller and was named Vice President of Finance and Treasurer in June of 1994. Prior to joining the Company, Mr. Sullivan was Vice President and Controller for Ames Department Stores, a discount department store chain. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information. The Company's initial public offering was completed on July 24, 1986, and since that date the shares of the Company's Common Stock have been traded on the over-the-counter market and quoted on the Nasdaq National Market under the symbol "TWMC." As of January 31, 1998, there were approximately 400 shareholders of record. The following table sets forth high and low last reported sale -10- prices for each fiscal quarter during the period from February 3, 1996 through March 26, 1998.
Last Sales Prices High Low 1996 1st Quarter $ 2 5/8 $ 1 1/4 2nd Quarter 3 5/8 2 1/4 3rd Quarter 4 3/8 2 9/16 4th Quarter 4 1/16 3 1/8 1997 1st Quarter $ 6 3/16 $ 3 5/8 2nd Quarter 9 5/8 5 15/16 3rd Quarter 16 3/8 9 1/16 4th Quarter 28 1/8 14 5/8 1998 1st Quarter (through March 26, 1998) $29 1/4 $24
On March 26, 1998, the last reported sale price on the Common Stock on the Nasdaq National Market was $28 3/4. On March 6, 1998, options for the Company's Common Stock began trading on the Chicago Board Options Exchange and the American Stock Exchange. Dividend Policy. The Company has never declared or paid cash dividends on its Common Stock. The Revolving Credit Facility sets certain restrictions on the payment of cash dividends. Any future determination as to the payment of dividends would depend upon capital requirements and limitations imposed by the Revolving Credit Facility and such other factors as the Board of Directors of the Company may consider. Item 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data and other operating information of the Company. The selected income statement and balance sheet data for the five fiscal years ended Janaury 31, 1998 set forth below are derived from the audited consolidated financial statements of the Company. The selected consolidated financial data should be read in conjunction with the Company's audited consolidated financial statements and notes thereto and other financial information included herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations." -11-
Fiscal Year Ended (1) January 31, February 1, February 3, January 28, January 29, 1998 1997 1996 1995 1994 ----------------------------------------------------------- (in thousands, except per share and store data) INCOME STATEMENT DATA: Sales $571,314 $481,657 $517,046 $536,840 $492,553 Cost of sales 361,422 308,952 340,754 341,422 307,834 -------------------------------------------------------- Gross profit 209,892 172,705 176,292 195,418 184,719 Selling, general and administrative expenses 155,678 136,084 150,628 158,637 147,644 Restructuring charge (2) --- --- 35,000 21,000 --- Depreciation and amortization 15,156 14,134 16,125 16,932 14,655 -------------------------------------------------------- Income (loss) from operations 39,058 22,487 (25,461) (1,151) 22,420 Interest expense 4,995 10,767 14,222 9,540 5,971 -------------------------------------------------------- Income (loss) before income taxes 34,063 11,720 (39,683) (10,691) 16,449 Income tax expense (benefit) 13,489 4,618 (14,310) (4,435) 6,626 -------------------------------------------------------- Net income (loss) $20,574 $7,102 ($25,373) ($6,256) $9,823 ======================================================== Basic earnings (loss) per share(3) $1.05 $0.36 ($1.30) ($0.32) $0.51 ======================================================== Weighted average number of shares outstanding(3) 19,655 19,514 19,452 19,402 19,446 ======================================================== Diluted earnings (loss) per share(3)(4) $0.99 $0.36 ($1.30) ($0.32) $0.50 ======================================================== Adjusted weighted average number of shares outstanding(3)(4) 20,688 19,798 19,452 19,402 19,497 ======================================================== BALANCE SHEET DATA: (at the end of the period) Working capital $89,853 $81,247 $78,773 $93,431 $101,538 Total assets 371,583 310,053 390,331 426,939 380,264 Current portion of long-term obligations 99 9,557 3,420 6,618 3,695 Long-term obligations 41,409 50,490 60,364 66,441 73,098 Shareholders' equity 122,965 101,362 94,104 119,477 126,074 OPERATING DATA: Store Count (open at end of period): Mall stores 340 357 379 431 443 Non-mall stores 199 122 163 253 241 ------------------------------------------------------- Total stores 539 479 542 684 684 Comparable store sales increase (decrease)(5) 10.2% 3.6% (3.5)% 1.1% (2.1)% Total square footage (in thousands) 2,442 2,008 2,140 2,544 2,414
(1) Each year consisted of 52 weeks except the Fiscal year ended February 3, 1996 which consisted of 53 weeks. (2) The restructuring charge includes the write-down of assets, estimated cash payments to landlords for the early termination of operating leases, and the cost for returning products to the Company's distribution center and vendors. The charge also includes estimated legal, lender and consulting fees. (3) All share and per share amounts have been adjusted for all periods to reflect a two-for-one stock split approved by the Board of Directors on November 14, 1997, which was effected in the form of a 100% stock dividend on December 15, 1997. (4) In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 which requires the disclosure of basic earnings per share and diluted earnings per share. (5) A store is included in comparable store sales calculations at the beginning of its 13th full month of operation. -12- Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND The following is an analysis of the Company's results of operations, liquidity and capital resources. To the extent that such analysis contains statements which are not of a historical nature, such statements are forward-looking statements, which involve risks and uncertainties. These risks include, but are not limited to, changes in the competitive environment for the Company's products, including the entry or exit of non-traditional retailers of the Company's products to or from its markets; the release by the music industry of an increased or decreased number of "hit releases", general economic factors in markets where the Company's products are sold, and other factors discussed in the Company's filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain income and expense items as a percentage of sales:
Fiscal Year Ended ------------------------------------ January 31, February 1, February 3, 1998 1997 1996 ------------------------------------- Sales 100.0% 100.0% 100.0% Gross profit 36.7% 35.9% 34.1% Selling, general and administrative expenses 27.2% 28.3% 29.1% Restructuring charge 0.0% 0.0% 6.8% Depreciation and amortization 2.7% 2.9% 3.1% ------------------------------------- Income (loss) from operations 6.8% 4.7% (4.9)% Interest expense 0.8% 2.2% 2.8% ------------------------------------- Income (loss) before income taxes 6.0% 2.5% (7.7)% Income tax expense (benefit) 2.4% 1.0% (2.8)% ------------------------------------- Net income (loss) 3.6% 1.5% (4.9)% ===================================== Change in comparable store sales 10.2% 3.6% (3.5)% =====================================
Fiscal Year Ended January 31, 1998 ("1997") Compared to Fisal Year Ended February 1, 1997 ("1996") Sales. The Company's sales increased $89.7 million, or 18.6%, from 1996. The -13- increase was primarily attributable to a comparable store sales increase of 10.2%, a sales increase of 8.4% resulting from the acquisition of 90 Strawberries' stores in October 1997, and the opening of 48 stores partially offset by the closing of 78 stores. Management attributes the comparable store sales increase primarily to its strategic decision to eliminate unprofitable stores and focus on customer service, superior retail locations, inventory management and merchandise presentation. Sales by product configuration are shown in the following table:
Fiscal Year Ended ---------------------------------------- January 31, February 1, February 3, 1998 1997 1996 ---------------------------------------- Compact discs 55.5% 50.1% 49.2% Prerecorded audio cassettes 18.9 22.2 25.5 Prerecorded video 16.3 18.6 16.7 Other 9.3 9.1 8.6 ----------------------------------------- Total 100.0% 100.0% 100.0% =========================================
For 1997, comparable store sales increased 11.0% for mall stores and 9.6% for non-mall stores. By product configuration, comparable store sales increased 11.4% in music and 2.6% in video. Gross Profit. Gross profit, as a percentage of sales, increased to 36.7% in 1997 from 35.9% in 1996 as a result of reduced merchandise shrinkage and increased purchase discounts combined with a strong performance from higher margin catalog sales. Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A"), as a percentage of sales, decreased to 27.2% in 1997 from 28.3% in 1996. The 1.1% decrease can be attributed to the leverage of SG&A expenses on the 10.2% comparable store sales increase, as well as the overall sales increase. Interest Expense. Interest expense decreased 53.6% to $5.0 million in 1997 from $10.8 in 1996. The decrease is due to lower average outstanding borrowings and lower interest rates due to the refinancing completed during the year. Income Tax Expense. The effective income tax rate was 39.6% in 1997. See Note 4 of Notes to Consolidated Financial Statements for a reconciliation of the statutory tax rate to the Company's effective tax rate. Net Income. In 1997, the Company's net income increased to $20.6 million compared to a net income of $7.1 million in 1996. The improved bottom line performance can be attributed to the profitability of the additional stores and the ongoing success of the Company's restructuring plan. -14- Additionally, the Company benefited from a comparable store sales increase, higher gross margin rate and improved leverage of SG&A expenses. Fiscal Year Ended February 1, 1997 ("1996") Compared to Fiscal Year Ended February 3, 1996 ("1995") Sales. The Company's sales decreased $35.4 million, or 6.8%, from 1995 while the number of stores in operation decreased by 12%. The decrease was primarily attributable to a net decrease of approximately 151,000 square feet, which resulted from the closing of 85 stores offset slightly by the opening of 22 stores. In 1995 there were 53 weeks in the fiscal year, with the extra week contributing $6.9 million in sales. Comparable store sales for fiscal year 1996 increased by 3.6%. Management attributes the comparable store sales increase to its strategic decision to eliminate unprofitable stores and focus on customer service, superior retail locations, inventory management and merchandise presentation. The Company's comparable store formats showed positive growth in 1996 compared to 1995. Comparable store sales increased 2.8% for mall stores and 7.4% for non-mall stores. By product configuration, comparable store sales increased 1.9% in music and 12.4% in video, as video benefitted from continued growth of the video sell-through market Gross Profit. Gross profit, as a percentage of sales, increased to 35.9% in 1996 from 34.1% in 1995 as a result of reduced merchandise shrinkage and increased purchase discounts combined with a strong performance from higher margin catalog sales. Expenses. SG&A, as a percentage of sales, decreased to 28.3% in 1996 from 29.1% in 1995. The 0.8% decrease can be attributed to the closing of underperforming stores, the receipt of $2.5 million upon termination of a business agreement in the second quarter 1996 and a 3.6% increase in comparable store sales. Interest expense decreased 24% to $10.8 million in 1996 from $14.2 in 1995. The decrease was due to lower average outstanding borrowings offset in part by increased weighted average interest rates. The effective income tax rate was 39.4% in 1996. Net Income. In 1996, the Company's net income increased to $7.1 million compared to a net loss of $25.4 million in 1995. The improved performance can be attributed to the success of the Company's restructuring plan. Additionally, the Company benefited from a comparable store sales increase, higher gross margin rate and lower SG&A expenses. LIQUIDITY AND CAPITAL RESOURCES Liquidity and Capital Resources. Cash flow from operations and funds available under revolving credit facilities are the Company's primary sources of liquidity. During the first three fiscal quarters, cash flow is typically consumed by payments to merchandise vendors and store construction expenditures. The revolving credit facilities provide the Company with liquidity until December, when the Company's cash position has historically been the highest, providing sufficient cash to repay all outstanding borrowings under the revolving credit facilities. -15- During 1997, cash provided by operations was $93.2 million compared to $44.9 million for 1996. The increased cash flow from operations was due primarily to the $13.5 million increase in net income and continued improvement in inventory management. Leverage of accounts payable to inventory improved to 86.1% in 1997 from 72.8% in 1996. The Company ended fiscal 1997 with cash balances of approximately $94.7 million compared to 1996 when the Company had cash balances of $54.8 million. In both years, the Company had no short term borrowings. On July 9, 1997 the Company entered into a $100 million secured revolving credit facility with Congress Financial Corporation. The Revolving Credit Facility combined the Company's long-term debt with its revolving credit line to create a $100 million credit facility with a three year term at interest rates averaging below the prime rate. The Revolving Credit Facility, combined with lower borrowing needs, was responsible for the Company's interest expense decreasing to $5.0 million for the year ended January 31, 1998 from $10.8 for the year ended February 1, 1997 The Revolving Credit Facility contains certain restrictive provisions, including provisions governing cash dividends and acquisitions, is secured by merchandise inventory and has a minimum net worth covenant. Capital Expenditures. Most of the Company's capital expenditures are for new store expansion and relocation of existing stores. The Company typically finances its capital expenditures through internally generated cash and borrowings under its revolving credit facility. In addition the Company typically receives financing from landlords in the form of construction allowances or rent concessions for a portion of the capital expenditure. Total capital expenditures were approximately $15.5 million in 1997 with significantly all of this amount being related to new stores and store remodels and reconfigurations. Included in this figure was approximately $2 million related to the development and pilot of a new point-of-sale ("POS") system. The system will be rolled out to all stores during the summer of 1998. In fiscal 1998, the Company plans to spend approximately $47 million, net of construction allowances, in capital expenditures. Included in such $47 million is approximately $17 million for the new POS system. Provision for Business Restructuring. Company performance in 1997 confirmed the success of a restructuring plan that began in the fourth quarter of 1994. Management concluded that intense competition from existing retailers and new entrants, combined with changing customer demand and declining mall traffic was adversely affecting certain of the Company's retail markets. The Company recognized and responded to negative industry trends before any of its competitors and has nearly completed its restructuring. The Company's restructuring included closing underperforming stores, improving operating efficiencies and refinancing its debt. In order to reduce its portfolio of stores to a strong core of profitable locations in desirable markets, the Company continued to focus on improving the profitability of existing stores and streamlining operations by closing unprofitable stores. As of January 31, 1998, the Company has closed or relocated a total of 342 stores. An additional 62 stores are forecasted to close or relocate in 1998; however, only 49 are associated with the -16- restructuring. The remaining 13 stores are to be closed or relocated as part of the Company's ongoing business. The Company is experiencing improved earnings and cash flow benefits as a result of the restructuring program and expects continued improvement as the remaining store closings are completed throughout the remainder of 1998. Impact of Inflation. Although the Company cannot accurately determine the precise effect of inflation on its operations, management does not believe inflation has had a material effect on the results of operations in the last three fiscal years. When the cost of merchandise items has increased, the Company has been able to pass the increase on to its customers. Seasonality. The Company's business is highly seasonal, with the highest sales and earnings occurring in the fourth fiscal quarter. See Note 10 of the Notes to Consolidated Financial Statements for quarterly financial highlights. Year 2000 Compliance. The Company has assessed its systems and equipment with respect to Year 2000 compliance and has developed a project plan. Many of the Year 2000 issues, including the processing of credit card transactions, have been addressed. The remaining Year 2000 issues will be addressed either with scheduled system upgrades or through the Company's internal systems development staff. The incremental costs will be charged to expenses as incurred and are not expected to have a material impact on the financial position or results of operations of the Company. However, the Company could be adversely impacted if Year 2000 modifications are not properly completed by either the Company, or its vendors, banks or any other entity with whom the Company conducts business. Accounting Policies. During fiscal year 1997, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which requires that the Company disclose both basic earnings per share and diluted earnings per share. The Company adopted the provisions of SFAS No. 128 retroactively for 1996 and 1995, as required. In 1998, the Company will adopt the provisions of SFAS No. 130, "Reporting Comprehensive Income," which requires that the Company disclose as comprehensive income all changes in equity during a period that are not a result of investments by owners and distributions to owners. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," will not have an effect on the Company because it operates in a single segment. SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," will not have an effect on the Company because it does not have a defined benefit pension plan. Dividend Policy. The Company has never declared or paid cash dividends on Common Stock. The Revolving Credit Facility sets certain restrictions on the payment of cash dividends. Any future determination as to the payment of dividends would depend upon capital requirements and limitations imposed by the Revolving Credit Facility and such other factors as the Board of Directors of the Company may consider. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -17- The index to the Consolidated Financial Statements of the Company is included in Item 14, and the financial statements follow the signature page to this Annual Report on Form 10-K. The quarterly results of operations are included herein in Note 11 of the Consolidated Financial Statements. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Identification of Directors Incorporated herein by reference is the information appearing under the captions "Election of Directors" and "Board of Directors Meetings and Its Committees" in the Company's definitive Proxy Statement for the Registrant's 1998 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after January 31, 1998. (b) Identification of Executive Officers The information required with respect to the executive officers of the Registrant is set forth under the caption Supplementary Item on page 9 of this Annual Report on Form 10-K. Item 11. EXECUTIVE COMPENSATION Incorporated herein by reference is the information appearing under the caption "Executive Officers and Compensation" in the Company's definitive Proxy Statement for the Registrant's 1998 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after January 31, 1998. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference is the information appearing under the captions "Principal Shareholders" and "Election of Directors" in the Company's definitive Proxy Statement for the Registrant's 1998 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after January 31, 1998. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference is the information appearing under the caption "Certain Transactions" in the Company's definitive Proxy Statement for the Registrant's 1998 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after January 31, 1998. -18- PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 14(a)(1) Financial Statements - ----------------------------- The consolidated financial statements and notes are listed in the Index to Financial Statements on page 17 of this report. 14(a)(2) Financial Statement Schedules - --------------------------------------- None of the schedules for which provision is made in the applicable accounting regulations under the Securities Exchange Act of 1934, as amended, are required. 14(a)(3) Exhibits - ----------------- Exhibits are as set forth in the "Index to Exhibits" which follows the Notes to the Consolidated Financial Statements and immediately precedes the exhibits filed. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRANS WORLD ENTERTAINMENT CORPORATION Date: March 30, 1998 By: /s/ ROBERT J. HIGGINS ---------------------------- Robert J. Higgins, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Title Date /s/ ROBERT J. HIGGINS Chairman, President and (Robert J. Higgins) Chief Executive Officer March 30, 1998 (Principal Executive Officer) /s/ JOHN J. SULLIVAN Senior Vice President, Treasurer March 30, 1998 (John J. Sullivan) and Chief Financial Officer (Principal Financial and Chief Accounting Officer) /s/ MATTHEW H. MATARASO Secretary and Director March 30, 1998 (Matthew H. Mataraso) /s/ GEORGE W. DOUGAN Director March 30, 1998 (George W. Dougan) /s/ CHARLOTTE G. FISCHER Director March 30, 1998 (Charlotte G. Fischer) /s/ ISAAC KAUFMAN Director March 30, 1998 (Isaac Kaufman) /s/ DEAN S. ADLER Director March 30, 1998 (Dean S. Adler) /s/ JOSEPH G. MORONE Director March 30, 1998 (Joseph G. Morone) -19- TRANS WORLD ENTERTAINMENT CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Form 10-K Page No. Independent Auditor's Report 21 Consolidated Financial Statements Consolidated Balance Sheets at January 31, 1998 and February 1, 1997 22 Consolidated Statements of Income - Fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996 23 Consolidated Statements of Shareholders' Equity - Fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996 24 Consolidated Statements of Cash Flows - Fiscal years ended January 31, 1998, February 1, 1997, and February 3, 1996 25 Notes to Consolidated Financial Statements 26 Report of KPMG Peat Marwick LLP Independent Auditors The Board of Directors and Shareholders Trans World Entertainment Corporation: We have audited the accompanying consolidated balance sheets of Trans World Entertainment Corporation and subsidiaries as of January 31, 1998 and February 1, 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the fiscal years in the three-year period ended January 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Trans World Entertainment Corporation and subsidiaries as of January 31, 1998 and February 1, 1997, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended January 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Albany, New York March 13, 1998 -20- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
January 31, February 1, 1998 1997 -------------------------- ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $94,732 $54,771 Accounts receivable 3,105 8,826 Merchandise inventory 189,394 163,509 Refundable income taxes --- 564 Deferred tax asset --- 2,774 Prepaid expenses and other 3,119 2,490 ------------------------- Total current assets 290,350 232,934 -------------------------- VIDEOCASSETTE RENTAL INVENTORY, net 4,099 4,784 DEFERRED TAX ASSET 4,726 3,098 FIXED ASSETS: Buildings 7,774 7,774 Fixtures and equipment 89,968 85,776 Leasehold improvements 77,764 75,742 -------------------------- 175,506 169,292 Less: Fixed asset write-off reserve 4,279 7,571 Allowances for depreciation and amortization 101,595 96,747 -------------------------- 69,632 64,974 -------------------------- OTHER ASSETS 2,776 4,263 -------------------------- TOTAL ASSETS $371,583 $310,053 ========================== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Accounts payable $162,981 $118,980 Income taxes payable 11,155 --- Accrued expenses and other 17,347 9,403 Store closing reserve 8,691 13,747 Current deferred taxes 224 --- Current portion of long-term debt and capital lease obligations 99 9,557 -------------------------- Total current liabilities 200,497 151,687 LONG-TERM DEBT, less current portion 35,000 43,983 CAPITAL LEASE OBLIGATIONS, less current portion 6,409 6,507 OTHER LIABILITIES 6,712 6,514 -------------------------- TOTAL LIABILITIES 248,618 208,691 -------------------------- SHAREHOLDERS' EQUITY: Preferred stock ($.01 par value; 5,000,000 shares authorized; none issued.) --- --- Common stock ($.01 par value; 50,000,000 shares authorized; 19,815,357 shares and 19,619,188 shares issued in 1997 and 1996, respectively) 198 197 Additional paid-in capital 25,386 24,441 Unearned compensation - restricted stock (175) (245) Treasury stock at cost (70,788 and 72,788 shares in 1997 and 1996, respectively) (394) (407) Retained earnings 97,950 77,376 -------------------------- TOTAL SHAREHOLDERS' EQUITY 122,965 101,362 -------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $371,583 $310,053 ========================== See Notes to Consolidated Financial Statements.
-21- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts)
Fiscal Year Ended January 31, February 1, February 3, 1998 1997 1996 ----------------------------------------- Sales $571,314 $481,657 $517,046 Cost of sales 361,422 308,952 340,754 ----------------------------------------- Gross profit 209,892 172,705 176,292 Selling, general and administrative expenses 155,678 136,084 150,628 Restructuring charges --- --- 35,000 Depreciation and amortization 15,156 14,134 16,125 ----------------------------------------- Income (loss) from operations 39,058 22,487 (25,461) Interest expense 4,995 10,767 14,222 ----------------------------------------- Income (loss) before income taxes 34,063 11,720 (39,683) Income tax expense (benefit) 13,489 4,618 (14,310) ----------------------------------------- NET INCOME (LOSS) $20,574 $7,102 ($25,373) ========================================= BASIC EARNINGS (LOSS) PER SHARE $1.05 $0.36 ($1.30) ========================================= Weighted average number of common shares outstanding 19,655 19,514 19,452 ========================================= DILUTED EARNINGS (LOSS) PER SHARE $0.99 $0.36 ($1.30) ========================================= Adjusted weighted average number of common shares outstanding 20,688 19,798 19,452 ========================================= See Notes to Consolidated Financial Statements.
-22- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share and option amounts)
Total Unearned Additional Compensation Share- Common Paid in Restricted Treasury Retained holders' Stock Capital Stock Stock Earnings Equity ---------------------------------------------------------------- Balance as of January 28, 1995, restated to reflect two-for-one stock split in 1997 (19,462,416 shares issued) $195 $24,138 $ --- $(503) $95,647 $119,477 Net Loss --- --- --- --- (25,373) (25,373) ---------------------------------------------------------------- Balance as of February 3, 1996 (19,462,416 shares issued) 195 24,138 --- (503) 70,274 94,104 Issuance of 14,000 shares of treasury stock under incentive stock programs --- (59) --- 96 --- 37 Issuance of 150,000 shares of common stock-restricted stock plan, net 2 350 (245) --- --- 107 Exercise of 6,772 stock options --- 12 --- --- --- 12 Net Income --- --- --- --- 7,102 7,102 ---------------------------------------------------------------- Balance as of February 1, 1997 (19,619,188 shares issued) $197 $24,441 $(245) $(407) $77,376 $101,362 Issuance of 2,000 shares of treasury stock under incentive stock programs --- --- --- 13 --- 13 Amortization of unearned compensation - restricted stock plan --- --- 70 --- --- 70 Exercise of 196,169 stock options 1 545 --- --- --- 546 Income tax benefit arising from exercise of employee stock options --- 400 --- --- --- 400 Net Income --- --- --- --- 20,574 20,574 ---------------------------------------------------------------- Balance as of January 31, 1998 (19,815,357 shares issued) $198 $25,386 $(175) $(394) $97,950 $122,965 ----------------------------------------------------------------
See Notes to Consolidated Financial Statements. -23- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Fiscal Year Ended January 31, February 1, February 3, 1998 1997 1996 --------------------------------------- OPERATING ACTIVITIES: Net income (loss) $20,574 $7,102 ($25,373) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 16,257 15,225 17,145 Fixed asset write-off reserve --- --- 8,088 Store closing reserve --- --- 26,912 Deferred tax expense (benefit) 1,370 3,023 (5,446) Changes in operating assets and liabilities: Accounts receivable 5,868 (747) 1,097 Merchandise inventory (9,872) 31,068 27,781 Refundable income taxes 564 7,744 (8,308) Prepaid expenses and other (408) 439 1,478 Other assets 2,481 (381) (53) Accounts payable 42,751 (12,322) (4,191) Income taxes payable 11,155 --- (1,961) Accrued expenses and other 7,344 3,137 (984) Store closing reserve (5,056) (10,528) (11,913) Other liabilities 198 1,174 (136) --------------------------------------- Net cash provided by operating activities 93,226 44,934 24,136 --------------------------------------- INVESTING ACTIVITIES: Acquisition of property and equipment (15,538) (10,198) (10,006) Acquisition of businesses, net (20,901) --- --- Proceeds from sale of fixed assets --- --- 929 (Purchases) disposals of videocassette rental inventory, net 685 1,938 750 --------------------------------------- Net cash used in investing activities (35,754) (8,260) (8,327) --------------------------------------- FINANCING ACTIVITIES: Net decrease in revolving line of credit --- (65,260) (9,687) Payments of long-term debt (18,440) (3,661) (8,902) Payments of capital lease obligations (99) (76) (373) Issuance of stock under incentive stock programs 83 144 --- Exercise of stock options, including tax benefit 945 12 --- --------------------------------------- Net cash used by financing activities (17,511) (68,841) (18,962) --------------------------------------- Net increase (decrease) in cash and cash equivalents 39,961 (32,167) (3,153) Cash and cash equivalents, beginning of year 54,771 86,938 90,091 --------------------------------------- Cash and cash equivalents, end of year $94,732 $54,771 $86,938 =======================================
See Notes to Consolidated Financial Statements. -24- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations: Trans World Entertainment Corporation is one of the largest specialty retailers of music, video and related accessories in the United States. The Company operates in a single industry segment, the operation of a chain of retail entertainment stores. At January 31, 1998, the Company operated 539 stores in 34 states, the District of Columbia and the U.S. Virgin Islands, with a majority of the stores concentrated in the Eastern half of the United States. Basis of Presentation: The consolidated financial statements consist of Trans World Entertainment Corporation and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fiscal Year: The Company's fiscal year is a 52- or 53-week period ending on the Saturday nearest to January 31. Fiscal years 1997 and 1996 ended January 31, 1998 and February 1, 1997, respectively, and consisted of 52 weeks. Fiscal year 1995, which ended February 3, 1996, consisted of 53 weeks. Dividend Policy: The Company has never declared or paid cash dividends on its Common Stock. The Company's credit agreement currently in place sets certain restrictions on the payment of cash dividends. Any future determination as to the payment of dividends would depend upon capital requirements and limitations imposed by the Company's credit agreement and such other factors as the Board of Directors of the Company may consider. Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The carrying amounts reported in the balance sheet for cash and cash equivalents are at fair value. Merchandise Inventory and Return Costs: Inventory is stated at the lower of cost (first-in, first-out) or market as determined principally by the retail inventory method. The Company is entitled to return merchandise purchased from major vendors for credit against other purchases from these vendors. The vendors often reduce the credit with a merchandise return charge ranging from 0% to 20% of the original product purchase price depending on the type of product being returned. The Company records the merchandise return charges in cost of sales. -25- Videocassette Rental Inventory: The cost of videocassette rental tapes is capitalized and amortized on a straight-line basis over their estimated economic life with a provision for salvage value. Major movie release additions are amortized over twelve months while other titles are amortized over thirty-six months. Fixed Assets: Fixed assets are stated at cost. Major improvements and betterments to existing facilities and equipment are capitalized. Expenditures for maintenance and repairs, which do not extend the life of the applicable asset, are charged to expense as incurred. Buildings are amortized over a 30-year term. Fixtures and equipment are depreciated using the straight-line method over their estimated useful lives, which range from three to seven years. Leasehold improvements are amortized over the shorter of their estimated useful life or the related lease term. Primarily all of the Company's operating leases are ten years in term. Amortization of capital lease assets is included in depreciation and amortization expense. Depreciation and amortization expense related to the Company's videocassette rental inventory, distribution center facility and distribution center equipment is included in cost of sales. Advertising Costs: The costs of advertising are expensed in the first period in which such advertising takes place. Store Opening and Closing Costs: Costs associated with opening a store are expensed as incurred. When a store is closed, estimated unrecoverable costs are charged to expense. Such costs include the net book value of abandoned fixtures, equipment, leasehold improvements and a provision for lease obligations, less estimated sub-rental income. The residual value of any fixed asset moved to a store as part of a relocation is transferred to the relocated store. Income Taxes: The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Earnings (Loss) Per Share: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which was effective for the Company for fiscal year 1997. This standard requires the Company to disclose basic earnings per share and diluted earnings per share. Basic earnings per share is calculated by dividing net income by the weighted average common shares outstanding. Diluted earnings per share is calculated by dividing net income, adjusted in 1997 for the $400,000 tax benefit resulting from stock option exercise activity, by the sum of the weighted average shares and additional common shares that would have been outstanding if the dilutive potential common shares had been issued for the Company's common stock options from the Company's Stock Option Plans (see Note 6). In Fiscal years 1997, 1996 and 1995 the additional dilutive potential common shares were 1,033,000, 284,000, and 0, respectively. As required by SFAS No. 128, all outstanding common stock options were included even though their exercise may be contingent upon vesting. The Company has presented Fiscal 1997 earnings per -26- share data and restated all prior-period earnings per share data in accordance with SFAS No. 128. See the Consolidated Statements of Income for the required disclosures. All earnings and loss per share information has been adjusted for the two-for-one stock split effected in the form of a 100% stock dividend on December 15, 1997. All references to number of shares, per share amounts, stock option data and market prices of the Company's common stock have been restated. See Note 7, "Shareholders' Equity." Note 2. Restructuring Charge In order to streamline operations and close unprofitable store locations, the company recorded pre-tax restructuring charges of $35.0 million in Fiscal year 1995 and $21.0 million in Fiscal 1994. The restructuring charges include the write-down of assets, estimated cash payments to landlords for the early termination of operating leases, and the cost of returning product to the Company's distribution center and vendors. The charge also includes estimated legal, lender and consulting fees. In determining the components of the reserves, management analyzed all of the aspects of closing stores and the costs that are incurred. An analysis of the amounts comprising the restructuring reserve and the charges against the reserve for each year in the three-year period ended January 31, 1998 are outlined below (in thousands):
Balance Charges Balance Charges Balance Charges Balance as of 1995 against the as of against the as of against the as of 1/28/95 Reserve Reserve 2/3/96 Reserve 2/1/97 Reserve 1/31/98 ----------------------------------------------------------------------------- Total Non Cash Write-offs $11,429 $10,799 $8,322 $13,906 $6,235 $7,671 $3,545 $4,126 Cash Outflows 8,332 24,201 9,840 22,693 9,046 13,647 4,803 8,844 ------------------------------------------------------------------------------ $19,761 $35,000 $18,162 $36,599 $15,281 $21,318 $8,348 $12,970 ==============================================================================
Note 3. Debt Long-term debt consisted of the following:
January 31, February 1, 1998 1997 ---------------------------- (in thousands) Senior unsecured notes $ --- $53,077 Long-term portion of revolving credit facility 35,000 --- Installment notes and other obligations --- 375 ---------------------------- 35,000 53,452 Less current portion --- 9,469 ---------------------------- Long-term debt $35,000 $43,983 ============================
-27- In July 1997, the Company replaced its existing $65.3 million revolving credit facility and $56.5 million note agreement with a $100.0 million secured revolving credit facility with a bank. The facility matures in July 2000, and bears interest at the prime interest rate or the Eurodollar interest rate plus 1.75% (7.69% at January 31, 1998). The facility is secured by the Company's assets allowing the Company to borrow up to 65% of its eligible merchandise inventory to a maximum of $100.0 million. During Fiscal years 1997, 1996, and 1995, the highest aggregate balances outstanding under the revolver were $45.9 million, $65.3 million and $74.9 million, respectively. The weighted average interest rates during Fiscal years 1997, 1996 and 1995 based on average daily balances, were 8.58%, 11.01% and 10.40%, respectively. The balances outstanding under the Company's revolving credit agreements at Fiscal years ended 1997, 1996 and 1995 were $35.0 million, $0.0 and $65.3 million, respectively. The Company's policy is to classify $35.0 million of borrowing under its new revolving credit facility as long-term, since the Company has the intent and ability to maintain these obligations for longer than one year, or to refinance them on a long-term basis. At January 31, 1998, the fair market value of this revolving credit facility approximates the carrying value. Interest paid during Fiscal years 1997, 1996 and 1995 was approximately $5.8 million, $11.8 million and $16.0 million, respectively. Note 4. Income Taxes Income tax expense (benefit) consists of the following:
Fiscal Year 1997 1996 1995 ------------------------------- (in thousands) Federal - current $10,813 $1,364 $(9,117) State - current 1,306 231 253 Deferred 1,370 3,023 (5,446) -------------------------------- $13,489 $4,618 $(14,310) ================================
A reconciliation of the Company's effective tax rates with the federal statutory rate is as follows:
Fiscal Year 1997 1996 1995 ------------------------------ Federal statutory rate 35.0% 35.0% (35.0%) State income taxes (benefit), net of Federal income tax effect 3.0% 4.7% (1.5%) Other 1.6% (0.3%) 0.4% ------------------------------ Effective income tax rate 39.6% 39.4% (36.1%) ==============================
Significant components of the Company's deferred tax assets and liabilities are as follows:
January 31, February 1, 1998 1997 --------------------------- (in thousands) CURRENT DEFERRED TAX ASSETS Restructuring reserve $5,205 $8,556 --------------------------- Total Current Deferred Tax Asset 5,205 8,556 --------------------------- CURRENT DEFERRED TAX LIABILITIES Inventory valuation 5,177 5,463 Other 252 319 -------------------------- Total Current Deferred Tax Liabilities 5,429 5,782 -------------------------- Net Current Deferred Tax Asset (Liability) $ (224) $2,774 -------------------------- NON-CURRENT DEFERRED TAX ASSETS Accrued rent, lease accounting $3,046 $2,824 Capitalized leases 895 829 Book over tax depreciation 623 --- Other 254 148 -------------------------- Total Non-Current Deferred Tax Assets 4,818 3,801 -------------------------- NON-CURRENT DEFERRED TAX LIABILITIES Tax over book depreciation --- 588 Other 92 115 -------------------------- Total Non-Current Deferred Tax Liabilities 92 703 -------------------------- Net Non-Current Deferred Tax Asset $4,726 $3,098 -------------------------- TOTAL NET DEFERRED TAX ASSET $4,502 $5,872 ==========================
-28- In assessing the propriety of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the taxable income in the three previous tax years to which tax loss carryback can be applied. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of projected future taxable income over the periods in which the deferred tax assets are deductible management believes it is more likely than not that the Company will realize the benefits of those deductible differences. The amount of the deferred tax asset considered realizable could be reduced if estimates of future taxable income during the carryforward period are reduced. The Company paid income taxes of approximately $0.3 million, $0.3 million and $2.2 million during Fiscal years 1997, 1996 and 1995, respectively. Note 5. Leases The Company leases its distribution center and administrative offices under two leases, dated April 1, 1985 and November 1, 1989, from its Chief Executive Officer and principal shareholder. The leases are classified as capital leases for accounting purposes. Aggregate rental payments under both leases were $1.2 million for Fiscal years 1997, 1996 and 1995. Biennial increases are contained in each lease based on the Consumer Price Index with the next scheduled increase on January 1, 2000. Both leases expire in the year 2015. Fixed asset amounts for all capitalized leases are as follows:
January 31, February 1, 1998 1997 --------------------------- (in thousands) Buildings $7,105 $7,105 Fixtures and equipment 1,625 1,625 --------------------------- 8,730 8,730 Allowances for depreciation and amortization 4,291 4,034 --------------------------- $4,439 $4,696 ===========================
The Company leases substantially all of its stores, many of which contain renewal options, for periods ranging from five to twenty-five years, with the majority being ten years. Most leases also provide for payment of operating expenses, real estate taxes, and for additional rent based on a percentage of sales. Net rental expense was as follows:
Fiscal Year 1997 1996 1995 ------------------------------- (in thousands) Minimum rentals $50,237 $49,653 $57,420 Contingent rentals 719 274 246 ------------------------------- $50,956 $49,927 $57,666 ===============================
-29- Future minimum rental payments required under all leases that have initial or remaining noncancelable lease terms in excess of one year at January 31, 1998 are as follows:
Operating Capitalized Leases Leases ------------------------- (in thousands) 1998 $43,486 $ 1,294 1999 49,865 1,294 2000 47,404 1,294 2001 43,920 1,294 2002 38,174 1,294 Thereafter 118,663 16,473 ---------------------- Total minimum payments required $341,512 22,943 ======== Amounts representing interest 16,435 ------- Present value of minimum lease payments 6,508 Less current portion 99 ------- Long-term capital lease obligations $ 6,409 =======
bNote 6. Benefit Plans Stock Option Plans Under the Company's 1986 Stock Option Plan and 1994 Stock Option Plan (the "Plans"), the Compensation Committee of the Board of Directors may grant options to acquire shares of common stock to employees of the Company and its subsidiaries at the fair market value of the common stock on the date of grant. Under the Plans, options generally become exercisable commencing one year from the date of grant in increments of 25% per year with a maximum term of ten years. Shares authorized for issuance under the 1986 and 1994 Stock -30- Option Plans were 2,200,000 and 2,000,000 (adjusted), respectively. As of June 1, 1995, the Company stopped issuing stock options under the 1986 Stock Option Plan. At January 31, 1998, of the 4,200,000 options authorized for issuance under the Plans, 2,812,741 have been granted and are outstanding, 572,647 of which were vested and exercisable. Shares available for future grants at January 31, 1998 and February 1, 1997 were 510,974 and 1,391,772, respectively. The following table summarizes information about the stock options outstanding under the Plans at January 31, 1998:
--------------------------------- ---------------------------- Outstanding Exercisable --------------------------------- ---------------------------- Weighted Weighted Average Average Average Exercise Remaining Exercise Exercise price range Shares Life Price Shares Price ---------------------------------------------- ---------------------------- $1.13-$1.82 272,118 7.3 $1.80 114,618 $1.80 2.32-2.63 912,123 8.2 2.38 73,029 2.37 3.00-3.69 230,000 8.4 3.07 57,500 3.07 4.00-6.88 598,500 8.4 5.97 141,500 6.71 7.13-16.80 800,000 7.9 14.46 186,000 7.39 --------- -------- Total 2,812,741 8.1 $6.58 572,647 $5.03 ========= ========
The Company also has a stock option plan for non-employee directors (the "1990 Plan"). Options under this plan are granted at 85% of the fair value at the date of grant. Under the 1990 Plan, options generally become exercisable commencing one year from the date of grant in increments of 25% per year with a maximum term of ten years. As of January 31, 1998, there were 500,000 shares authorized for issuance and 172,000 shares have been granted and are outstanding, 94,500 of which were vested and exercisable. There are 328,000 shares of common stock reserved for possible future option grants under the 1990 Plan. The following table summarizes information about the stock options outstanding under the 1990 Plan at January 31, 1998:
----------------------------- --------------------- Outstanding Exercisable ----------------------------- --------------------- Weighted Weighted Average Average Average Exercise Remaining Exercise Exercise price range Shares Life Price Shares Price - -------------------------------------------------------------------- $1.78-$2.02 18,000 7.7 $1.90 6,750 $1.86 3.14-5.53 113,000 7.0 4.73 46,750 5.20 6.91-13.71 41,000 3.5 10.88 41,000 10.88 ------- ------ Total 172,000 6.2 $5.90 94,500 $7.43 ======= ======
-31- The following tables summarize activity under the 1986 and 1994 Plans and the 1990 Plan:
------------------------ ------------------------ 1986 and 1994 Plans 1990 Plan ------------------------ ------------------------ Number of Option Number of Option Shares Price Shares Price Subject Range Subject Range to per to per Option Share Option Share - -------------------------------------------------------------------- Balance Jan. 28, 1995 1,868,512 $5.50-$12.13 142,000 $5.00-$13.71 Granted 448,174 1.13-2.63 12,000 1.78 Exercised Canceled (555,150) 1.81-11.25 (23,000) 1.78-6.33 - -------------------------------------------------------------------- Balance Feb. 3, 1996 1,761,536 1.13-12.13 131,000 1.78-13.71 Granted 1,376,198 1.75-4.00 9,000 2.02 Exercised (6,772) 2.81-4.13 Canceled (1,114,486) 1.25-12.13 - -------------------------------------------------------------------- Balance Feb. 1, 1997 2,016,476 1.13-9.25 140,000 1.78-13.71 Granted 1,062,608 5.00-16.80 69,000 3.14-5.05 Exercised (191,169) 1.44-5.50 (5,000) 5.53 Canceled (75,174) 1.81-5.94 (32,000) 5.00-13.71 - -------------------------------------------------------------------- Balance Jan. 31, 1998 2,812,741 $1.13-$16.80 172,000 $1.78-$13.71 ====================================================================
The per share weighted-average fair value of the stock options granted during Fiscal years 1997, 1996 and 1995 was $4.14, $1.05 and $0.57 respectively using the Black Scholes option pricing model, with the following weighted-average assumptions; 1997 - expected dividend yield 0.0%, risk-free interest rate of 5.5%, expected life of five years and stock volatility of 48%; 1996 - expected dividend yield 0.0%, risk-free interest rate of 6.7%, expected life of five years and stock volatility of 72%; 1995 - expected dividend yield 0.0%, risk-free interest rate of 6.7%, expected life of five years and stock volatility of 47% The Company applies APB Opinion No. 25 in accounting for its Plans and, accordingly, no compensation cost has been recognized for its stock options in -32- the financial statements. Had the Company determined compensation cost based on fair value in accordance with SFAS 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
Fiscal Year ------------------------------ 1997 1996 1995 ------------------------------ Net income (loss), as reported $20,574 $7,102 ($25,373) Basic earnings (loss) per share, as reported $1.05 $0.36 ($1.30) Diluted earnings (loss) per share, as reported $0.99 $0.36 ($1.30) Pro forma net income (loss) $19,074 $6,658 ($25,476) Pro forma basic earnings (loss) per share $0.97 $0.34 ($1.31) Pro forma diluted earnings (loss) per share $0.92 $0.34 ($1.31)
Restricted Stock Plan Under the 1990 Restricted Stock Plan, the Compensation Committee of the Board of Directors is authorized to grant awards for up to 600,000 restricted shares of Common Stock to executive officers and other key employees of the Company and its subsidiaries. The shares are issued as restricted stock and are held in the custody of the Company until all vesting restrictions are satisfied. If conditions or terms under which an award is granted are not satisfied, the shares are forfeited. Shares begin to vest under these grants after three years and are fully vested after five years, with vesting criteria which includes continuous employment until applicable vesting dates have expired. At January 31, 1998, a total of 150,000 shares have been granted, of which 50,000 were granted in 1996 with a fair market value of $118,750; the remaining 100,000 were granted in 1995 with a fair value on the date of grant of $232,500. As of January 31, 1998, a total of 30,000 of these shares had vested. Unearned compensation is recorded at the date of award, based on the market value of the shares, and is included as a separate component of shareholders' equity and is amortized over the applicable vesting period. The amount amortized to expense in Fiscal years 1997 and 1996 was approximately $70,000 and $107,000, respectively. At January 31, 1998, outstanding awards and shares available for grant totaled 150,000 and 450,000, respectively. 401 (k) Savings Plan The Company offers a 401(k) Savings Plan to eligible employees meeting certain age and service requirements. This plan permits participants to contribute up to 16% of their salary, including bonuses, up to the maximum allowable by Internal Revenue Service regulations. Participants are immediately vested in their voluntary contributions plus actual earnings thereon. Participant vesting of the Company's matching and profit sharing contribution is based on the years of service completed by the participant. Participants are fully vested upon the completion of four years of service. All participant forfeitures of nonvested benefits are used to reduce the Company's contributions in future years. The Company matching contribution totaled $529,000, $465,000 and $470,000 in Fiscal years 1997, 1996 and 1995, respectively. -33- Supplemental Executive Retirement Plan (SERP) In 1997, the Company introduced a non-qualified Supplemental Executive Retirement Plan (SERP) effective March 1, 1997. The SERP, which is unfunded, provides eligible executives defined pension benefits that supplement benefits under other retirement arrangements. The annual benefit amount has been predetermined as part of the plan and vests based on years of service and age at retirement. For Fiscal year 1997, expenses related to the plan totaled approximately $361,000. The present value of the projected benefit obligation was approximately $2.3 million at January 31, 1998. The January 31, 1998 Consolidated Balance Sheet includes $313,000 of accrued expense. Note 7. Shareholders' Equity On November 14, 1997, the shareholders approved an amendment to the Company's Certificate of Incorporation to increase authorized common shares from 20 million shares of $0.01 par value common stock to 50 million shares of $0.01 par value common stock. On that date, the Board of Directors approved a two-for-one common stock split to be distributed in the form of a 100% stock dividend. As a result, 9,898,758 were issued on December 15, 1997 to shareholders of record on December 1, 1997. Accordingly, amounts equal to the par value of the additional shares issued have been charged to additional paid in capital and credited to common stock. All references throughout this annual report to number of shares, per share amounts, stock option data and market prices of the Company's common stock has been restated to reflect the stock split. At January 31, 1998 and February 1, 1997, the Company held 70,788 and 72,788 shares, respectively, in treasury stock resulting from the repurchase of common stock through open market purchases. Note 8. Strawberries Acquisition In October 1997, the Company acquired 90 out of a total of 118 stores owned by Strawberries, Inc., a privately held non-mall music specialty retailer operating primarily in New England. The stores operate under the names "Strawberries" and "Waxie Maxie" and are primarily located in freestanding or strip center locations. The acquisition has been accounted for using the purchase method of accounting. At the time of the acquisition, the Company paid $21 million for the assets which included the fixed assets, merchandise inventories, other related current assets and $683,043 in goodwill. This goodwill is being amortized on a straight-line basis over a 15 year period. Pro forma results of operations including Strawberries for Fiscal years 1997 and 1996 are not presented because such information was not considered to be -34- reliable because of Strawberries' bankruptcy filing. Note 9. Concentration of Business Risks The Company purchases inventory for its stores from approximately 450 suppliers, with approximately 68% of purchases being made from six suppliers. In the past, the Company has not experienced difficulty in obtaining satisfactory sources of supply, and management believes that it will retain access to adequate sources of supply. However, a loss of a major supplier could cause a possible loss of sales, which would have an adverse affect on operating results and result in a decrease in vendor support for the Company's advertising programs. Note 10. Quarterly Financial Information (Unaudited) ----------------------------------------------------- Fiscal 1997 Quarter Ended 1997 1/31/98 11/1/97 8/2/97 5/3/97 ----------------------------------------------------- (in thousands, except per share amounts) Sales $571,314 $242,041 $114,737 $105,024 $109,512 Gross profit 209,892 87,439 43,662 39,527 39,264 Net income (loss) 20,574 21,291 979 (834) (862) Basic earnings (loss) per share $1.05 $1.08 $0.05 $(0.04) $(0.04) Diluted earnings (loss) per share $0.99 $1.01 $0.05 $(0.04) $(0.04)
----------------------------------------------------- Fiscal 1996 Quarter Ended 1996 2/1/97 11/2/96 8/3/96 5/4/96 ----------------------------------------------------- (in thousands, except per share amounts) Sales $481,657 $180,735 $97,583 $96,717 $106,622 Gross profit 172,705 64,703 36,217 34,616 37,169 Net income (loss) 7,102 14,710 (2,477) (2,392) (2,739) Basic earnings (loss) per share $0.36 $0.75 $(0.13) $(0.12) $(0.14) Diluted earnings (loss) per share $0.36 $0.74 $(0.13) $(0.12) $(0.14)
-35- Index to Exhibits ----------------- Document Number and Description - ------------------------------- Exhibit No. 3.1 Restated certificate of Incorporation -- incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1994. Commission File No. 0-14818. 3.2 Certificate of Amendment to the Certificate of Incorporation -- incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 1994. Commission File No. 0-14818. 3.3 Amended By-Laws--incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 1991. Commission File No. 0-14818. *3.4 Certificate of Amendment to the Certificate of Incorporation. 4.1 Loan and Security Agreement, dated July 9, 1998, between Congress Financial Corporation and the Company, for the secured revolving credit agreement -- incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 2, 1997. Commission File No. 0-14818. 10.1 Lease, dated April 1, 1985, between Robert J. Higgins, as Landlord, and Record Town, Inc. and Trans World Music Corporation, as Tenant and Amendment thereto dated April 28, 1986 -- incorporated herein by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1, No. 33-6449. 10.2 Second Addendum, dated as of November 30, 1989, to Lease, dated April 1, 1985, among Robert J. Higgins, and Trans World Music Corporation, and Record Town, Inc., exercising five year renewal option -- incorporated herein by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 1990. Commission File No. 0-14818. 10.3 Lease, dated November 1, 1989, between Robert J. Higgins, as Landlord, and Record Town, Inc. and Trans World Music Corporation, as Tenant -- incorporated here by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 1991. Commission File No. 0-14818. 10.4 Employment Agreement, dated as of February 1, 1996 between the Company and Robert J. Higgins -- incorporated herein by reference to Exhibit 10.4 to the Company's Annual Report of Form 10-K for the fiscal year ended February 1, 1997. Commission File No. 0-14818 10.5 Trans World Music Corporation 1986 Incentive and Non-Qualified Stock Option Plan, as amended and restated, and Amendment No. 3 thereto -- incorporated herein by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 1991. Commission File No. 0-14818. 10.6 Trans World Music Corporation 1990 Stock Option Plan for Non-Employee Directors -- incorporated herein by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-2, No. 33-36012. 10.7 Trans World Music Corporation 1990 Restricted Stock Plan -- incorporated herein by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-2, No. 33-36012. 10.8 Form of Restricted Stock Agreement dated February 1, 1995 and May 1, 1995 between the Company and Edward W. Marshall, Jr., Executive Vice President of Operations and Bruce J. Eisenberg, Senior Vice President of Real Estate, respectively, incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended -36- April 29, 1995. Commission File No. 0-14818. 10.9 Form of Restricted Stock Agreement dated May 1, 1996 between the Company and John J. Sullivan, Senior Vice President-Finance and Chief Financial Officer, incorporated herein by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 1997. Commission File No. 0-14818. 10.10 Severance Agreement, dated May 20, 1996 between Trans World Entertainment Corporation and James A. Litwak, Executive Vice President of Merchandising and Marketing, incorporated herein by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 1997. Commission File No. 0-14818. 10.11 Severance Agreement, dated October 1, 1994, between Trans World Entertainment Corporation and Edward Marshall, Senior Vice President-Operations - -- incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 1994. Commission File No. 0-14818. 10.12 Trans World Entertainment Corporation 1994 Stock Option Plan -- incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 30, 1994. Commission File No. 0-14818. 10.13 Trans World Entertainment Corporation 1994 Director Retirement Plan -- incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1994. Commission File No. 0-14818. 10.14 Form of Indemnification Agreement dated May 1, 1995 between the Company and its officers and directors incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 29, 1995. Commission File No. 0-14818. 10.15 Trans World Entertainment Corporation 1997 Supplemental Executive Retirement Plan -- incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 3, 1997. Commission File No. 0-14818. *10.16 Trans World Entertainment Corporation Asset Purchase Agreement with Strawberries, Inc. 11 Statement re computation of per share earnings. *22 Significant Subsidiaries of the Registrant. *23 Consent of KPMG Peat Marwick LLP. *27 Financial Data Schedule (For electronic filing purposes only) - --------------------------------------------------------------------- *Filed herewith. -37- EXHIBIT INDEX 3.4 Certificate of Amendment to the Certificate of Incorporation. 10.16 Trans World Entertainment Corporation Asset Purchase Agreement with Strawberries, Inc. 22 Significant Subsidiaries of the Registrant. 23 Consent of KPMG Peat Marwick LLP. 27 Financial Data Schedule (electronic filing only) EX-3.4 2 CERTIFICATE OF AMENDMENT TO THE CERT. OF INC. EXHIBIT 3.4 CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF TRANS WORLD ENTERTAINMENT CORPORATION UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW The undersigned, being the President and Secretary of Trans World Entertainment Corporation, do hereby certify: (1)The name of the corporation is Trans World Entertainment Corporation. The name under which the corporation was originally incorporated is Trans-World Music Corp. (2)The certificate of incorporation of said corporation was filed by the Department of State on the 7th day of February, 1972. (3)The certificate of incorporation is amended to increase the aggregate number of shares the corporation is authorized to issue. The first two sentences of paragraph "Fourth" of the certificate of incorporation which refers to the authorized shares is amended to read as follows: "FOURTH": "The total number of shares of stock which the corporation shall have authority to issue is 55,000,000. Of said shares, 5,000,000 shares shall be of a class designated as Preferred Stock with a par value of $.01 each and 50,000,000 shares shall be of a class designated as Common Stock with a par value of $.01 each." (4)This amendment to the certificate of incorporation of Trans World Entertainment Corporation was authorized by a majority of the board of directors followed by a vote of the holders of a majority of all outstanding shares of capital stock entitled to vote thereon at a meeting of the shareholders. IN WITNESS WHEREOF, the undersigned have executed and signed this certificate of amendment the 14th day of November, 1997, and we affirm the statements contained therein as true under penalties of perjury. /s/ ROBERT J.HIGGINS -------------------- Robert J. Higgins, President /s/ MATTHEW MATARASO -------------------- Matthew Mataraso, Secretary EX-10.16 3 CORPORATION ASSET PURCHASE AGREEMENT W/STRAW. INC. EXHIBIT 10.16 ASSET PURCHASE AGREEMENT among STRAWBERRIES INC., RECORD TOWN, INC. and TRANS WORLD ENTERTAINMENT CORPORATION Dated as of September 24, 1997 TABLE OF CONTENTS Page SECTION 1. DEFINITIONS 2 1.1 General Terms 2 1.2 Accounting Terms 7 1.3 Other Definitional Conventions 7 SECTION 2. PURCHASE AND SALE OF ASSETS; LIABILITIES 7 2.1 Assets to be Transferred 7 2.2 Excluded Assets 8 2.3 Additional Purchased Assets 9 2.4 Assignability and Consents 9 2.5 Assumed Liabilities 9 2.6 Excluded Liabilities 10 SECTION 3. PURCHASE PRICE 12 3.1 Purchase Price 12 3.2 Adjustment of Purchase Price 13 3.3 Allocation of Purchase Price 13 SECTION 4. CLOSING 13 4.1 General 13 4.2 Deliveries by the Debtor 13 4.3 Deliveries by the Purchaser 14 4.4 Other Documents to be Delivered 15 SECTION 5. REPRESENTATIONS AND WARRANTIES 15 5.1 Representations and Warranties of Debtor 15 5.2 Representations and Warranties of Purchaser 20 5.3 General 21 SECTION 6. CONDITIONS 21 6.1 Conditions to Purchaser's Obligations 21 6.2 Conditions to Debtor's Obligations 22 6.3 Conditions to all Obligations 23 SECTION 7. COVENANTS 24 7.1 Confidentiality 24 7.2 Access 24 7.3 Further Assurances; Customer and Supplier Relationships 24 7.4 Transfer Taxes 25 7.6 Maintenance of Insurance 25 7.7 Accounts Receivable 25 7.8 Name Change Filings 26 7.9 WARN Act Obligations 26 7.10 Press Releases and Disclosure 26 7.11 Cooperation in the Defense of Claims 26 7.12 Regulatory Approvals 27 7.13 Purchased Lease Covenants 27 SECTION 8. TERMINATION 28 8.1 Termination 28 8.2 Effect of Termination 28 SECTION 9. INDEMNIFICATION 30 9.1 Indemnification by the Purchaser 30 9.2 Indemnification by the Debtor 30 9.3 Notice of Claim; Right to Participate in and Defend Third Party Claim 31 9.4 Termination 32 SECTION 10. MISCELLANEOUS 32 10.1 Amendments 32 10.2 Entire Agreement 32 10.3 Governing Law 32 10.4 Notices 33 10.5 Counterparts 33 10.6 Assignment 34 10.7 Waivers 34 10.8 Severability 34 10.9 Construction 34 10.10 Third Parties 34 10.11 Schedules and Exhibits 34 10.12 Headings 34 10.13 References to Agreements 34 10.14 Remedies Not Exclusive 35 EXHIBITS AND SCHEDULES Exhibits - -------- Exhibit A Form of Instrument of Assignment and Assumption and Bill of Sale Exhibit B Form of Assignment and Assumption of Lease Exhibit C Form of Occupancy Agreement Exhibit D Form of Guaranty (Trans World) Exhibit E Procedures for the Physical Inventory Count Schedules - --------- Schedule 2.1(E) Real Property Leases Schedule 2.1(I) Purchased Contracts Schedule 2.2(D) Excluded Assets Schedule 2.4 Material Consents Schedule 3.3 Allocation of Purchase Price Schedule 5.1(A) Jurisdictions that Debtor is Qualified as a Foreign Corporation Schedule 5.1(E) Encumbrances on Purchased Assets Schedule 5.1(G) Litigation Matters Schedule 5.1(I) Intellectual Property Schedule 5.1(J) Material Permits Schedule 5.1(L) Debtor Employee Plan Matters Schedule 5.1(O) Taxes Schedule 5.1(Q) Brokers, Finders and Agents (Debtor) Schedule 5.1(R) Insurance Matters Schedule 5.1(S) Material Consents Not Obtained Schedule 5.2(B) Required Governmental Consents (Purchaser) Schedule 5.2(C) Brokers, Finders and Agents (Purchaser) ASSET PURCHASE AGREEMENT This Asset Purchase Agreement, made as of September 24, 1997 (this "Agreement"), is among Strawberries Inc., a Delaware corporation (the "Debtor"), Record Town, Inc., a New York Corporation (the "Purchaser"), and Trans World Entertainment Corporation, a New York corporation ("Trans World"). PRELIMINARY STATEMENTS: ----------------------- 1. The Debtor is engaged in the business of the retail distribution of pre-recorded music and other home entertainment products, including compact discs, audio and video cassettes and cassette and compact disc holders (the "Business"). 2. On February 19, 1997 (the "Petition Date"), the Debtor and Strawberries Holding, Inc., a Delaware corporation ("Strawberries Holding"), filed petitions for relief under chapter 11 of the United States Bankruptcy Code, 11 U.S.C. SS 101-1330 (the "Bankruptcy Code"), in the United States Bankruptcy Court for the District of Delaware. The bankruptcy cases are currently pending before the United States District Court for the District of Delaware (the "Court") and are being jointly administered under Case No. 97-309 (RRM) (collectively, the "Chapter 11 Case"). The Debtor is currently operating the Business as debtor-in-possession under the authority of Sections 1107(a) and 1108 of the Bankruptcy Code. 3. On August 19, 1997, the Debtor and Trans World entered into a letter of intent (the "Letter of Intent") to provide, among other things, for the payment of a break-up fee in favor of Trans World under certain circumstances specified in the Letter of Intent. On the same date, the Court entered an order authorizing the Debtor to enter into the Letter of Intent and approving the break-up fee provisions thereof. 4. The Purchaser desires to purchase from the Debtor, and the Debtor desires to sell to the Purchaser, substantially all of the Debtor's assets, properties, rights and interests. -1- 5. The Debtor desires to transfer to the Purchaser, and the Purchaser desires to accept and assume from the Debtor, certain liabilities and obligations of the Debtor specifically disclosed in this Agreement. 6. The execution and delivery of this Agreement and the consummation of the transactions set forth in this Agreement are conditioned, among other things, upon the entry of an order of the Court approving this Agreement and the transactions contemplated by this Agreement under sections 363 and 365 of the Bankruptcy Code (the "Sale Order"). AGREEMENT: --------- In consideration of the foregoing and the mutual agreements contained in this Agreement, the Debtor and the Purchaser agree as follows: SECTION 1. DEFINITIONS ----------- SECTION 1.1 General Terms. When used in this Agreement, the ------------- following terms have the following meanings: "Accounts Receivable" means (i) all trade and customer accounts and notes receivable arising out of the sale of goods or the rendition of services (including, without limitation, all amounts due (including any established reserves) from credit card issuers and credit card processors), (ii) all unused and unapplied credits and refunds relating to inventory (and any associated vendor advertising programs) purchased by the Debtor after the Petition Date and relating to any other post-Petition Date liability or obligation being assumed under Section 2.5(A), (iii) all amounts receivable in connection with employee loans and the Debtor's manager conference and (iv) any payments received with respect to the foregoing after the Closing Date, unpaid interest accrued thereon and any security or collateral relating thereto. "Affiliate" means any Person that directly, or indirectly through one or more entities, controls, is controlled by or is under control with the person specified or, directly or indirectly, is related to or otherwise associated with any such Person. "Agreement" means this Asset Purchase Agreement. "Assumed Liabilities" has the meaning set forth in Section 2.5. "Bankruptcy Code" has the meaning set forth in the second Preliminary Statement. "Business" has the meaning set forth in the first Preliminary Statement. "Chapter 11 Case" has the meaning set forth in the second Preliminary Statement. "Claim" has the meaning assigned to such term in section 101(5) of the Bankruptcy Code. -2- "Closing" means the date and time at which the Debtor consummates the sale, assignment, transfer and delivery of the Purchased Assets to the Purchaser as provided in this Agreement by the contemporaneous (i) execution and delivery by the Debtor of the documents and instruments referred to in Section 4.2, (ii) delivery by the Purchaser of the documents and payments provided in Sections 3.1 and 4.3 and (iii) delivery by the Debtor, the Purchaser and the other Persons referred to in this Agreement of the additional documents referred to in Section 4.4. "Closing Date" means the business day following the day on which notice is given by the Debtor to the Purchaser or by the Purchaser to the Debtor that all of the conditions contained in Section 6 have been satisfied or waived by the Debtor or the Purchaser, as the case may be, or at such other time and on such other day as is mutually agreed upon in writing by the parties to this Agreement. "Consents" means all consents, novations, approvals, authorizations, requirements (including filing and registration requirements), waivers and agreements from any Persons necessary to authorize, approve or permit the full and complete sale, conveyance, assignment, sublease or transfer of the Purchased Assets and to consummate and make effective the transactions contemplated by this Agreement. "Contracts" means all contracts, agreements, commitments, instruments, guaranties, bids, orders and proposals to which the Debtor is a party (including, without limitation, the Leases). "Court" has the meaning set forth in the second Preliminary Statement. "Debtor" means Strawberries Inc., a Delaware corporation. "Debtor Employee Plans" has the meaning set forth in Section 5.1(L). "Deposit" means the $500,000 deposit made by Trans World with the Debtor under the Letter of Intent as an earnest money deposit and maintained in a segregated, interest-bearing account. "DOJ" means the Antitrust Division of the United States Department of Justice. "Environmental Law" means any and all laws, statues, judgments, orders, decrees, ordinances, rules, regulations, permits, concessions, grants, franchises or licenses regulating Hazardous Materials, health, safety, the environment or the release of any Hazardous Material into the environment. "Equipment Leases" means all of the Debtor's interest in the machinery and equipment used or held for use by the Debtor under equipment leases (other than the Debtor's point of sale equipment or AS400 computer system). "Excluded Assets" has the meaning set forth in Section 2.2. "Excluded Liabilities" has the meaning set forth in Section 2.6. -3- "FTC" means the Federal Trade Commission. "Fixed Assets" means all machinery, equipment, furniture, fixtures, motor vehicles, leasehold and other improvements and other tangible personal property, including, without limitation, the Equipment Leases included in the Contracts; provided, that "Fixed Assets" does not include any leasehold or other improvements on property subject to real property leases listed on Schedule 2.2(D) that cannot be removed without damaging the underlying property. "Foothill Facility" has the meaning set forth in Section 3.1. "Governmental Authority" means any government or political subdivision, whether federal, state, local or foreign, or any agency or instrumentality of any such government or political subdivision, or any federal state, local or foreign court or arbitrator. "H-S-R Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Hazardous Materials" means any chemical, substance, material, object, condition, waste or combination thereof known to be hazardous to human health or safety or to the environment due to its reactivity, explosiveness, toxicity, carcinogenicity, infectiousness or other harmful or properties or effects including, without limitation, all of those defined or regulated by any Environmental Law. "Intellectual Property" means all know-how, trademarks, service marks, trade names (including all right, title and interest of the Debtor in and to the names "Strawberries," "Waxie Maxie's" and all derivations thereof), designs, logos, art work, copyrights, patents, licenses, developments, research data, designs, technology, test procedures, marketing plans, processes, confidential information and all other intellectual and intangible property rights, inventions (whether or not patentable), discoveries, business methods and trade secrets of the Debtor whatsoever (and applications for, and extensions and reissuances of, any of the foregoing and rights therein). "Inventory" means all of the Debtor's inventories of products, work-in-process, finished goods, raw materials and supplies. "Leased Real Property" means all of the Debtor's rights and incidents of interest in and to any deposits or other security given or made in respect of the Real Property Leases and all of the buildings, structures, improvements, fixtures and other property attached thereto or located thereon. "Leases" means the Real Property Leases and the Equipment Leases. "Letter of Intent" has the meaning set forth in the third Preliminary Statement. "Liens" means any mortgage, lien, pledge, security interest, charge and other encumbrances other than Permitted Liens. "Losses" has the meaning set forth in Section 9.1. -4- "Material Adverse Effect" means a material adverse effect on the Business or in the condition or value of the Purchased Assets, in each case taken as a whole, other than as has been previously forecasted and disclosed to the Purchaser by the Debtor. "Material Consent" means any Consent (i) needed in connection with the Real Property Leases or the Contracts listed on Schedule 2.1(I) or (ii) of which the failure to obtain could reasonably be expected to have a Material Adverse Effect. "Permits" means all licenses, permits, approvals, franchises, authorizations, variances, waivers or consents issued to the Debtor by any Governmental Authority. "Permitted Lien" means all easements and similar rights of third parties and all defects in title that do not, individually or in the aggregate, have a Material Adverse Effect. "Person" means an individual, partnership, corporation, association, joint stock company, trust, joint venture, limited liability company or Governmental Authority. "Petition Date" has the meaning set forth in the second Preliminary Statement. "Purchased Assets" has the meaning set forth in Section 2.1. "Purchase Price" has the meaning set forth in Section 3.1. "Purchaser" means Record Town, Inc., a New York corporation. "Real Property Leases" means the real property leased by the Debtor under the real property leases listed on Schedule 2.1(E) and the additional real property leases identified by the Purchaser under the terms of Section 2.3. "Records" means all books, records, ledgers, files, documents, forms, correspondence, lists, plats, drawings, diagrams, designs, creative materials, advertising and promotional materials (including, without limitation, catalogs, brochures, customer and supplier lists, manuals, handbooks and labels and packaging), studies, reports and other printed or written materials (including, without limitation, any of such materials held or produced by third parties for the Debtor) relating to the Business or the Purchased Assets (including, without limitation, any confidential or other business information that has been reduced to writing or other medium). "Sale Order" has the meaning set forth in the sixth Preliminary Statement. "Strawberries Holding" means Strawberries Holding, Inc., a Delaware corporation of which the Debtor is a wholly owned subsidiary. "Taxes" means income, gross receipts, property, sales, use, license, excise, franchise, employment, social security, governmental pension or insurance, withholding or similar taxes or contributions, together with any interest, additions or penalties with respect thereto and any interest in -5- respect of such additions or penalties. "Termination Date" means October 31, 1997. "Third Party Claim" has the meaning set forth in Section 9.3(A). "Trans World" means Trans World Entertainment Corporation, a New York corporation of which the Purchaser is a wholly owned subsidiary. "Warehouse Facility" means the Debtor's warehouse, administrative and office facility located in Milford, Massachusetts. "WARN Act" means the Worker Adjustment and Retraining Notification Act of 1988, as amended. SECTION 1.2 Accounting Terms. Any accounting terms used in this ---------------- Agreement which are not specifically defined in this Agreement have the meanings customarily given them in accordance with generally accepted accounting principles, as in effect in the United States from time to time. SECTION 1.3 Other Definitional Conventions. ------------------------------ (A) The words "hereof", "herein", "hereunder" and "hereto" and words of similar import when used in this Agreement refer to this Agreement as a whole and not any particular provision of this Agreement, and section, subsection, clause, exhibit and schedule references are to this Agreement, unless otherwise specified. (B) All terms defined in this Agreement in the singular have comparable meanings when used in the plural and vice versa, unless otherwise specified. SECTION 2. PURCHASE AND SALE OF ASSETS; LIABILITIES ---------------------------------------- SECTION 2.1 Assets to be Transferred. Subject to the terms of the ------------------------ Sale Order, the provisions set forth in Section 6 and sections 363 and 365 of the Bankruptcy Code, at the Closing and effective as of the Closing Date, the Purchaser will purchase and acquire from the Debtor, and the Debtor will sell, assign, convey, transfer and deliver to the Purchaser (except as described in Section 2.2), all of the assets, properties, rights and interests of the Debtor, free and clear of all Liens, wherever situated, including, without limitation, the following (collectively with the additional assets, properties and interest acquired under Section 2.3, the "Purchased Assets"): (A) all cash on hand (including, without limitation, any and all cash in the possession of, controlled by, or held in any bank account or safe deposit box maintained by the Debtor), certificates of deposit, bankers' acceptances, commercial paper and government or other securities of any kind; (B) all Inventory, including, without limitation, all Inventory located at the Warehouse Facility and the leased real property listed on Schedules 2.1(E) and 2.2(D); (C) all Accounts Receivable; -6- (D) all Fixed Assets; (E) the Real Property Leases, including the Leased Real Property; (F) all Records; (G) all Intellectual Property; (H) all Permits; (I) all Contracts identified on Schedule 2.1(I); (J) all rights arising from advance payments, prepaid expenses, prepaid rents (including any prepaid fixed rents) and deposits made to or owing from suppliers, licensors, utilities, taxing authorities (to the extent related to the overpayment of sales or use taxes and net of any offsets) and landlords (other than security deposits made in connection with real property leases listed on Schedule 2.2(D)), but excluding any such rights and claims that are created by actions taken by the Debtor after the Closing Date that are outside the ordinary course of business or do not relate to the transactions contemplated by this Agreement; (K) all unfilled purchase and sale orders (including releases of quantities pursuant thereto); (L) all rights and benefits of the Debtor in, to or under all insurance policies maintained by the Debtor for the Business or the Purchased Assets through the expiration date of such policies, but excluding any such rights and claims that are created by actions taken by the Debtor after the Closing Date that are outside the ordinary course of business or do not relate to the transactions contemplated by this Agreement; and (M) the goodwill of the Debtor as a going concern, if any. SECTION 2.2 Excluded Assets. Notwithstanding any other provision of this Agreement but subject to Section 2.3, the following rights, properties and assets are not included in the Purchased Assets (collectively, the "Excluded Assets"): (A) the Warehouse Facility; (B) any and all rights, claims, demands and causes of action of the Debtor, including any avoidance claims, fraudulent conveyance claims and causes of action of the Debtor's bankruptcy estate under the Chapter 11 Case; (C) the Debtor's minute books, stock books, stock ledger and corporate seal; (D) all of the assets, properties, rights and interests identified on Schedule 2.2(D) (which schedule includes, subject to Section 2.3, all real property leases not included on Schedule 2.1(E) and all Contracts not included on Schedule 2.1(I)); provided, that such schedule may be amended by the Purchaser at any time on or prior to the Closing Date to include such additional assets that the Purchaser, without adjustment to the Purchase Price, elects, in its sole discretion, not to have included in the Purchased -7- Assets); (E) any and all credits, refunds and rights that are specifically excluded from Purchased Assets in Section 2.1; and (F) all security deposits made in connection with real property leases listed on Schedule 2.2(D)). SECTION 2.3 Additional Purchased Assets. At any time on or prior --------------------------- to the Closing Date, the Purchaser may elect, by giving the Debtor written notice of such election, to include as Purchased Assets under Section 2.1 any real property leases of the Debtor listed on Schedule 2.2(D), subject to Section 3.2(B). SECTION 2.4 Assignability and Consents. Schedule 2.4 sets forth a -------------------------- list of all Material Consents that the Debtor reasonably believes are required to convey the Purchased Assets or otherwise consummate the transactions contemplated by this Agreement and that relate to Contracts, Permits and Leases, if any, that are non-assignable or non-transferable or cannot be subleased to Purchaser without the consent of some other Person (subject to, and to the extent negated by, the terms of the Sale Order and sections 363 and 365 of the Bankruptcy Code). The Debtor will take, or cause to be taken by others, all reasonable actions required to obtain or satisfy, at the earliest practicable date, all Material Consents and to continue such efforts as may be required after the Closing Date to facilitate the full and expeditious transfer of legal title, or the sublease as the case may be, of the Purchased Assets. SECTION 2.5 Assumed Liabilities. Subject to the terms of the Sale ------------------- Order, the provisions set forth in Section 6 and under sections 363 and 365 of the Bankruptcy Code, the Purchaser will assume and become responsible for, and will thereafter pay, perform and discharge as and when due the liabilities of the Debtor set forth below (collectively, the "Assumed Liabilities"): (A) those liabilities and obligations of the Debtor, net of any credits, refunds or like adjustment applicable or related thereto, that arose after the Petition Date due to those vendors and suppliers (or in connection with those product sources and services) and as listed on a schedule to the instrument of assignment and assumption and bill of sale described in Section 4.3(E); provided, however, that the aggregate amount of such liabilities and obligations will not exceed $4,000,000 on the Closing Date; (B) those liabilities and obligations of the Debtor arising under the Debtor's employee retention program as such program applies to each full-time employee of the Debtor, including Designated Employees (as defined in the motion filed with the Court by the Debtor on June 20, 1997); (C) those liabilities and obligations of the Debtor arising from gift certificates issued by the Debtor prior to the Closing Date and returns of merchandise sold by the Debtor prior to the Closing Date; and (D) with respect to any employee employed by the Debtor at the Warehouse Facility immediately prior to the Closing Date, any liabilities or -8- obligations relating to, based in whole or in part on events or conditions occurring or existing in connection with, or arising out of, the shutdown or relocation of any operations and facilities utilized by the Debtor in connection with the Business, including, without limitation, any action which could be construed as a "plant closing" or "mass layoff," as those terms are defined in the WARN Act or any "employment loss," as defined in the WARN Act, which any such employee may suffer or may be deemed to suffer; SECTION 2.6 Excluded Liabilities. Notwithstanding any provision --------------------- in this Agreement to the contrary, the Purchaser does not assume or become responsible or liable for, and will not be deemed to have assumed or have become responsible or liable for, any other liability or obligation of the Debtor whatsoever whether or not relating to the Business, whether fixed, contingent or otherwise and whether known or unknown, other than as specifically set forth in Section 2.5, including without limitation, those liabilities and obligations set forth below (collectively, the "Excluded Liabilities"): (A) any liability or obligation of the Debtor or its directors, officers, stockholders or agents (acting in such capacities), arising out of, or relating to, this Agreement or the transactions contemplated by this Agreement, whether incurred prior to, at or subsequent to the Closing Date, including, without limitation, all finder's or broker's fees and expenses and any and all fees and expenses of any attorneys and accountants of the Debtor; (B) all liabilities and obligations relating to events or conditions occurring or existing in connection with or arising out of, the Business as operated prior to the Closing Date, or the ownership, possession, use, operation or sale or other disposition prior to the Closing Date of any Purchased Assets (or any other assets, properties, rights or interests associated, at any time prior to the Closing Date, with the Business); (C) all liabilities and obligations to any persons at any time employed by the Debtor or its predecessors-in-interest at any time or to any such person's spouses, children, other dependents or beneficiaries, with respect to incidents, events, exposures or circumstances occurring at any time during the period or periods of any such persons' employment by the Debtor or its predecessors-in-interest, whenever such claims mature or are asserted (other than those assumed by the Purchaser under Section 2.5(D)), including, without limitation, all liabilities and obligations arising (i) under a Debtor Employee Plan, except as specifically set forth in Section 2.5(B), (ii) under any employment, wage and hour restriction, equal opportunity, discrimination, plant closing or immigration and naturalization laws, (iii) under any collective bargaining Laws, agreements or arrangements or (iv) in connection with any workers' compensation or any other employee health, accident, disability or safety claims; (D) all liabilities and obligations relating to the Purchased Assets based on events or conditions occurring or existing prior to the Closing Date and connected with, arising out of or relating to (i) any dispute for services rendered or goods manufactured, including, without limitation, product warranty claims and product liability claims, and claims for refunds, returns, personal injury and property damage (other than as set forth in Section 2.5(C)), (ii) Hazardous Materials or Environmental Laws, (iii) claims relating to employee health and safety, including claims for injury, sickness, -9- disease or death of any Person or (iv) compliance with any Laws relating to any of the foregoing; (E) all liabilities and obligations, known or unknown, fixed, contingent or otherwise, the existence of which is a breach of, or inconsistent with, any representation, warranty, covenant, obligation or agreement of the Debtor set forth in this Agreement or in any of the other documents or agreements contemplated by this Agreement; (F) any liability, claim or obligation relating to any litigation or legal proceeding pending on the Closing Date, or instituted thereafter, based on events or conditions occurring or existing in connection with, or arising out of, the Business as operated by the Debtor, or the ownership, possession, use or sale of the Purchased Assets or the Leased Real Property, prior to the Closing Date; (G) any liability or obligation for any federal, state or local taxes attributable to periods prior to the Closing Date together with any interest, additions or penalties with respect thereto and any interest in respect of such additions or penalties, including, without limitation, (i) Taxes, (ii) capital gain, income and other taxes imposed on, or accruing as a result of the purchase and sale of the Purchased Assets and (iii) taxes attributable to, or resulting from, recapture, or otherwise arising from the transactions contemplated by this Agreement; (H) any liability or obligation relating to events or conditions occurring or existing in connection with, or arising out of, the Excluded Assets; (I) any liability or obligation incurred by the Debtor or their respective directors, officers, stockholders, agents or employees (acting it such capacities) after the date of this Agreement; (J) with respect to any employee not employed by the Debtor at the Warehouse Facility immediately prior to the Closing Date, any liabilities or obligations relating to, based in whole or in part on events or conditions occurring or existing in connection with, or arising out of, the shutdown or relocation of any operations and facilities utilized by the Debtor in connection with the Business, including, without limitation, any action which could be construed as a "plant closing" or "mass layoff," as those terms are defined in the WARN Act or any "employment loss," as defined in the WARN Act, which any such employee may suffer or may be deemed to suffer; (K) any liabilities and obligations of the Debtor arising under the mortgage for the Warehouse Facility; and (L) any liability, obligation or claim of or against the Debtor that has been filed under section 521 of the Bankruptcy Code and Federal Rule of Bankruptcy Procedure 1007(b). SECTION 3. PURCHASE PRICE -------------- SECTION 3.1 Purchase Price. Subject to the terms of the Sale -------------- Order and the provisions set forth in Section 6, the full consideration for -10- the transfer of the Purchased Assets and the other undertakings of the Debtor contained in this Agreement (including, without limitation, Section 6) is (i) an amount (the "Purchase Price") in cash, adjusted as described in Section 3.2, equal to the sum of (a) $9,500,000 (of which $5,000,000 will be paid at the Closing and the remainder of which, after making the adjustment described in Section 3.2, will be paid, if necessary, no later than the first business day after the physical inventory count described in Section 6.3(B) is completed), (b) an amount equal to the amount necessary to pay all obligations outstanding under the Debtor's debtor in possession credit facility with Foothill Capital Corporation (capped at 60.5% of the book value of all of the Debtor's Inventory) (the "Foothill Facility") and (c) an amount equal to the lesser of (1) the Court approved fees and expenses charged by persons rendering professional services to the Debtor or to any committee in connection with the Chapter 11 Case from the Petition Date through the Closing Date, less any amounts already paid on account of such services on or subsequent to the Petition Date and (2) $200,000 and (ii) the assumption of the Assumed Liabilities under Section 2.5. The Deposit will be credited towards the Purchase Price. SECTION 3.2 Adjustment of Purchase Price. (A) The cash component ---------------------------- of the purchase price set forth in Section 3.1 will be reduced downward on a dollar for dollar basis to the extent the actual results of the physical inventory count described in Section 6.3(B) are less than $18,500,000. (B) If the Purchaser elects to acquire additional real property leases of the Debtor under Section 2.3, the Purchaser will pay the requisite cure amounts due to the lessors under such real property leases as required under section 365(b)(1) of the Bankruptcy Code. SECTION 3.3 Allocation of Purchase Price. The Purchase Price will ---------------------------- be allocated among the Purchased Assets and the Assumed Liabilities for tax purposes only in the amounts set forth on Schedule 3.3. The Purchaser and the Debtor will make any and all filings with any taxing authorities consistent with the allocations set forth on Schedule 3.3. Such allocation of the Purchase Price will not be binding in the Chapter 11 Case upon the Debtor's creditors and other parties in interest and will not have precedential value with respect to any allocations of value contained in a plan of reorganization involving the Debtor. SECTION 4. CLOSING ------- SECTION 4.1 General. In the absence of a prior termination of ------- this Agreement by one of the parties in accordance with Section 8, the Closing will take place at the offices of Kaye, Scholer, Fierman, Hays & Handler, LLP at 10:00 A.M. on the Closing Date. Legal title, equitable title and risk of loss with respect to the Purchased Assets will not pass to Purchaser until the Purchased Assets are transferred at the Closing, which transfer, once it has occurred, will be deemed effective for tax, accounting and other computational purposes as of 12:01 A.M. (Eastern Time) on the Closing Date. SECTION 4.2 Deliveries by the Debtor. At the Closing, the Debtor ------------------------ -11- will deliver to the Purchaser the following items: (A) copies of (i) resolutions of the board of directors of the Debtor authorizing and approving this Agreement and all other transactions and agreements contemplated by this Agreement, (ii) the Debtor's certificate of incorporation and (iii) the Debtor's by-laws, all certified by an officer of the Debtor; (B) a long-form good standing certificate for the Debtor from Secretary of the State of Delaware and from the appropriate state and tax authorities in each jurisdiction in which the Debtor is qualified to do business as a foreign corporation with respect to the ownership, possession, use or operation of any of the Purchased Assets, dated not more than ten days prior to the Closing Date; (C) an incumbency certificate of the officers of the Debtor; (D) an executed copy of an instrument of assignment and assumption and bill of sale, in substantially the form of Exhibit A, assigning the Assumed Liabilities and transferring the Purchased Assets to the Purchaser, free and clear of any and all Liens; (E) an executed copy of an assignment of leases for the Leases, in substantially the form of Exhibit B, relating to Leased Real Property and any other documents necessary, in the sole discretion of the Purchaser, to assign the Leases to the Purchaser; (F) to the extent required under the Bankruptcy Code, copies of all Material Consents; (G) evidence satisfactory to the Purchaser of the release and termination of any and all Liens on the Purchased Assets (which condition is satisfied by the entry of the Sale Order); (H) instruments of assignment to the Purchaser of all of the Intellectual Property identified on Schedule 5.1(I); (I) evidence of the due filing by the Debtor with the FTC and the DOJ under the H-S-R Act and the expiration of the waiting period thereunder; (J) such other deeds, bills of sale, endorsements, assignments, affidavits and other good and sufficient instruments of sale, assignment, conveyance and transfer, in form and substance reasonably satisfactory to the Purchaser and its counsel, as are required to effectively vest in the Purchaser good and marketable title and all of the Debtor's right, title and interest in and to all of the Purchased Assets, free and clear of any and all Liens. SECTION 4.3 Deliveries by the Purchaser. At the ---------------------------- Closing, the Purchaser will deliver to the Debtor the following items: (A) copies of (i) resolutions of the board of directors of the Purchaser authorizing and approving this Agreement and all other transactions and agreements contemplated by this Agreement, (ii) the Purchaser's certificate of incorporation and (iii) the Purchaser's by-laws, all certified -12- by an officer of the Purchaser; (B) a long-form good standing certificate for the Purchaser from Secretary of the State of New York dated not more than ten days prior to the Closing Date; (C) an incumbency certificate of the officers of the Purchaser; (D) evidence of the due filing by the Purchaser with the FTC and the DOJ under the H-S-R Act and the expiration of the waiting period thereunder; and (E) an executed copy of an instrument of assignment and assumption and bill of sale, in substantially the form of Exhibit A, assuming the Assumed Liabilities. SECTION 4.4 Other Documents to be Delivered. At the Closing: ------------------------------- (A) the Purchaser and the Debtor will execute and deliver an occupancy agreement substantially in the form of Exhibit C; and (B) Trans World will execute and deliver a guaranty substantially in the form of Exhibit D. SECTION 5. REPRESENTATIONS AND WARRANTIES ------------------------------ SECTION 5.1 Representations and Warranties of Debtor. The Debtor ---------------------------------------- represents and warrants to the Purchaser, except for the Liens established by the Foothill Facility, that: (A) Corporate Organization. The Debtor is a corporation duly ----------------------- organized and validly existing under the laws of the State of Delaware. The Debtor is duly qualified and in good standing to do business as a foreign corporation in each jurisdiction listed on Schedule 5.1(A). (B) Articles and By-laws. The Debtor has, prior to the date of -------------------- this Agreement, delivered to the Purchaser true and complete copies of its certificate of incorporation and by-laws, each as amended to date and as currently in effect. (C) Investments. The Debtor does not have any equity interest, ----------- directly or indirectly, in any Person in excess of 10% of the outstanding shares or other equity interests having ordinary voting power for the election of directors or comparable managers of such Person, whether or not at the time the shares of any other class or classes or other equity interests of such Person have or might have voting power by reason of the happening of any contingency. (D) No Conflicts; Consents. Subject to the terms of the Sale ---------------------- -13- Order and sections 363 and 365 of the Bankruptcy Code, the execution and delivery of this Agreement by the Debtor, and the consummation of the transactions contemplated by this Agreement and compliance with the terms of this Agreement do not, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation under, or loss of a benefit relating to the Business under, or result in the creation of any Lien upon any of the Purchased Assets, any provision of (i) the certificate of incorporation or by-laws of the Debtor, (ii) subject to applicable bankruptcy law provisions, any agreement or obligation to which the Debtor is a party or by which any of the Purchased Assets are bound or (iii) any law, statute, judgment, decree, order, rule or regulation of any Governmental Authority. (E) Sufficiency and Title to the Purchased Assets. The Purchased ---------------------------------------------- Assets constitute all of the assets or property used or held for use primarily in the Business, except for the Excluded Assets. Except as set forth on Schedule 5.1(E), the Debtor has good and marketable title to each of the Purchased Assets (it being understood that the Debtor is not making a representation as to the collectability of the Accounts Receivable). The entry of the Sale Order and the delivery to the Purchaser of the instruments of transfer of ownership contemplated by this Agreement will vest good and marketable title to the Purchased Assets in the Purchaser, free and clear of all Liens and, to the Debtor's knowledge, free and clear of any Claims. (F) Leases; Assumed Contracts. On the Petition Date, the Debtor -------------------------- was the lessee under each of the Real Property Leases. Since the Petition Date, the Debtor has not rejected any of the Real Property Leases under section 365 of the Bankruptcy Code. (G) Litigation. Other than in connection with the Chapter 11 Case ---------- and as set forth on Schedule 5.1(G), the Debtor is not subject to any order of, or written agreement or memorandum or understanding with, any Governmental Authority relating to the Business, and there is no litigation, action, suit, claim or proceeding pending or, to the actual knowledge of the executive officers of the Debtor, any litigation, action, suit, investigation, claim or proceeding threatened against or affecting the Debtor, the Business or the Purchased Assets that would have a Material Adverse Effect or which would materially and adversely affect the transactions contemplated by this Agreement, at law or in equity or before any Governmental Authority. (H) Regulatory Compliance. To the actual knowledge of the ---------------------- executive officers of the Debtor, the Debtor has conducted the Business, maintained the Purchased Assets and is currently in compliance with all material applicable laws, regulations and orders of any Governmental Authority (including, without limitation, civil rights and occupational health and safety regulations), and no material expenditures are or will be required by the Purchaser to comply with any such laws, regulations and orders of Governmental Authorities. To the actual knowledge of the executive officers of the Debtor, the Debtor is not in default under, and no event has occurred that, with the lapse of time or action by a third party, could result in -14- default under, the terms of any rules or regulations of any Governmental Authority or of any judgment, decree, order or writ of any Governmental Authority, whether at law or in equity. (I) Intellectual Property. Schedule 5.1(I) sets forth a complete --------------------- and correct list (with an indication of the record owner and identifying number) of all material patents, trademarks, service marks, trade names and copyrights for which registrations have been obtained (and all applications for, or extensions or reissuances of, any of the foregoing) that are or have been used in the conduct of, or which relate to, the Business. The Debtor is the sole owner and has the exclusive right to use, free and clear of any payment or other Lien, all material patents, trademarks, service marks, trade names and copyrights. No material patents, trademarks, service marks, trade names and copyrights (or any applications for, or extensions or reissuances of any of the foregoing) that are or have been used in the conduct of, or which relate to, the Business are owned otherwise than by the Debtor. There is no claim or demand of any Person that has been asserted to the Debtor in writing pertaining to, or any proceedings which are pending or, to the knowledge of the Debtor, threatened, that challenge the exclusive rights of the Debtor in respect of any material patents, trademarks, service marks, trade names or copyrights (or applications for, or extensions or reissuances of, any of the foregoing) that are or have been used in the conduct of, or which relate to, the Business. (J) Permits. Schedule 5.1(J) sets forth a true, correct and ------- complete list of all material Permits issued to the Debtor that relate to the Business. The Debtor has and maintains in full force and effect all the material Permits necessary or required for the operation of the Business as it is currently being operated. (K) Labor Matters; Collective Bargaining Agreements. There are no ----------------------------------------------- controversies pending, or to the knowledge of the Debtor, threatened that involve any employees employed in connection with the Business. The Debtor has complied, and is in substantial compliance, with all laws relating to the employment of labor, including, without limitation, any provision thereof relating to wages, hours, collective bargaining, employee health, safety and welfare, and the payment of social security and similar taxes. The Debtor is not a party to any collective bargaining or other labor union contract. To the Debtor's knowledge, there are presently no material unfair labor practice complaints, other material labor controversies pending against the Debtor, union representation questions involving persons employed by the Debtor, current activities or proceedings of any labor union (or representatives thereof) to organize any unorganized employees of the Debtor or any strikes, slowdowns, work stoppages, lockouts, or threats thereof, by or with respect to any employees of the Debtor. (L) Employees and Employee Plans. Except as set forth on ------------------------------- Schedule 5.1(L) (the "Debtor Employee Plans"), the Debtor does not maintain or contribute to any employee pension benefit or welfare plan, as defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or any other severance, bonus, stock option, stock appreciation, stock purchase, retirement, insurance, pension, profit-sharing or deferred compensation plan, -15- agreements or arrangements for the benefit of the employees of the Debtor (collectively, "Employee Plans"), nor has the Debtor or any of its officers or directors taken any action, directly or indirectly, to obligate the Debtor to institute any such Employee Plan. The Debtor and the Subsidiaries have complied with all material terms and conditions of the Debtor Employee Plans. The Debtor has made all contributions required to be made to the Employee Plans, or properly accrued for such contribution. All of the Debtor Employee Plans have been maintained in material compliance with all laws, regulations and orders of all Governmental Authorities, including, without limitation, ERISA that apply to such Plans. Each of the Debtor Employee Plans that is intended to be qualified within the meaning of Sections 401(a) and 501(a) of the Internal Revenue Code of 1986, as amended, has received a favorable determination from the Internal Revenue Service. (M) Environmental and Safety Compliance. Neither (i) the -------------------------------------- operation of the Business by the Debtor nor (ii) the processes, practices or conditions on any former or present owned or leased property of the Debtor, violate applicable Environmental Law in any material respect. The Debtor has not (a) caused any Hazardous Materials to be released, transported, disposed, treated, stored or discharged under, on, beneath or about any of the former or present properties of the Debtor (whether leased or owned) or (b) received notice, formal or informal, from any Person that the operation of the Business or any of the conditions on any of the Debtor's former or present properties (whether leased or owned), violates in any material respect or could subject the Debtor to liabilities, including response costs, under any Environmental Law. (N) Copies of Documents. The Debtor has delivered, or will -------------------- deliver at least 10 days prior to the Closing Date, to the Purchaser true, correct and complete copies of all Leases, Contracts and other agreements and other documents listed in the Schedules to, or referenced in, this Agreement, and all modifications and amendments thereto, other than immaterial contracts, agreements or other documents. (O) Taxes. Except as set forth on Schedule 5.1(O) (which schedule ----- may be supplemented until three days prior to the Closing Date), no claim for any Taxes has been proposed in writing or assessed against the Debtor and, to the Debtor's knowledge, no facts exists that make such a claim likely. Schedule 5.1(O) identifies the Tax returns of the Debtor that have been audited and, where applicable, accepted by the relevant taxing authorities for the years indicated in such schedule and, except as indicated therein, there is no ongoing audit, litigation or similar proceeding concerning any Tax returns of the Debtor with respect to the Business nor does there exist any waiver or agreement for the extension of time for the assessment of any Taxes against the Debtor with respect to the Business. Except as set forth on Schedule 5.1(O), there are no Liens on any of the Purchased Assets that arose in connection with any failure (or alleged failure) to pay any Tax and there are no claims for Taxes, and no basis for which a ny such claims might be made, that might result in any such Liens. (P) No Changes. Taking into account the Debtor's status as a ---------- debtor in possession under the Bankruptcy Code, the Debtor, since June 30, -16- 1997, has not: (1) sold, transferred, licensed or otherwise disposed of or agreed to sell, transfer, license or otherwise dispose of any Purchased Assets, other than sales of Inventory in the ordinary and normal course of business; (2) entered into any other agreements, commitment, contracts or undertakings, except agreements, commitments, contracts or understandings made in the ordinary and normal course of business; or (3) waived or released any of its rights under, amended or otherwise modified any Leases, Contracts or any other agreements, commitments, contracts or understandings to which it is a party. (Q) Brokers, Finders and Agents. Neither the Debtor nor any ------------------------------ Affiliate of the Debtor is directly or indirectly obligated to anyone acting as a broker, finder or in any other similar capacity in connection with this Agreement or the transactions contemplated by this Agreement, except as disclosed on Schedule 5.1(Q). (R) Insurance. Schedule 5.1(R) lists all insurance policies --------- (specifying the location, insured, insurer, amount of coverage, type of insurance and policy number) maintained by the Debtor with respect to the Business and the Purchased Assets. All such policies are in full force and effect, all premiums with respect thereto covering all periods up to and including the Closing Date have been paid, and no notice of cancellation or termination has been received with respect to any such policy. (S) Material Consents. Subject to, and to the extent negated by, ----------------- the terms of the Sale Order and sections 363 and 365 of the Bankruptcy Code, no Material Consent is required to sell, convey, assign, sublease or transfer any of the Purchased Assets to the Purchaser except those Material Consents (i) that have been obtained by the Debtor, (ii) are listed on Schedule 5.1(S), (iii) relate to compliance with and filings under the H-S-R Act or (iv) relate to compliance with any notices, motions, orders or approvals required by the Court or the Bankruptcy Code and the rules thereunder. (T) Limitation. Except as expressly set forth in this Section 5, ---------- the Debtor makes no representations or warranties of any kind or nature as to the condition of the Purchased Assets. THE PURCHASED ASSETS WILL BE TRANSFERRED "AS IS." NO STATUTORY OR OTHER WARRANTIES AS TO THE CONDITION OF THE PURCHASED ASSETS OR THE MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE PURCHASED ASSETS IS IMPLIED AND THE DEBTOR EXPRESSLY DISCLAIMS ANY REPRESENTATION OR WARRANTY AS TO THE CONDITION OF THE PURCHASED ASSETS OR THE MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. SECTION 5.2 Representations and Warranties of Purchaser. The -------------------------------------------- Purchaser and Trans World each represents and warrants to the Debtor that: (A) Organization and Standing; Corporate Power and Authority. The -------------------------------------------------------- -17- Purchaser and Trans World each is a corporation duly organized, validly existing and in good standing under the laws of the State of New York. The Purchaser and Trans World each has all requisite corporate power and authority to execute and deliver this Agreement and to perform its obligations under this Agreement and to consummate the transactions contemplated by this Agreement. This Agreement and the transactions and other agreements and instruments contemplated by this Agreement have been duly approved by all necessary corporate action on the part of the Purchaser and Trans World, have been executed and delivered by the Purchaser and Trans World, as applicable, and constitutes the valid and binding obligations of the Purchaser or Trans World, as applicable, enforceable in accordance with their respective terms. (B) No Conflicts; Consents. The execution and delivery of this ------------------------ Agreement by the Purchaser, and the consummation of the transactions contemplated by this Agreement and compliance with the terms of this Agreement do not, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation under any provision of (i) the certificate of incorporation or by-laws of the Purchaser, (ii) any agreement or obligation to which the Purchaser is a party or (iii) any law, statute, judgment, decree, order, rule or regulation of any Governmental Authority. Except as set forth on Schedule 5.2(B), no consent, approval, license, permit, order or authorization of, or registration, declaration or filing with, any Governmental Authority is required to be obtained or made by or with respect to the Purchaser in connection with the execution, delivery and performance of this Agreement or the consummation o f the transactions contemplated by this Agreement, other than (i) compliance with and filings under the H-S-R Act, if applicable and (ii) compliance with any notices, motions, orders or approvals required by the Court or the Bankruptcy Code and the rules thereunder. (C) Brokers, Finders and Agents. Neither the Purchaser nor Trans --------------------------- World is directly or indirectly obligated to anyone as a broker, finder or in any other similar capacity in connection with this Agreement or the transactions contemplated by this Agreement, except as disclosed on Schedule 5.2(C). (D) Availability of Funds. The Purchaser has funds available --------------------- (either cash on hand or under financing agreements) or other property sufficient to satisfy all its obligations under this Agreement. (E) Reliance. The Purchaser acknowledges that (i) it has made -------- such investigation into the Purchased Assets and has been offered the opportunity to ask such questions of appropriate officers of the Debtor relating to the Purchased Assets or the Business as the Purchaser deems appropriate to enter into this Agreement and (ii) except for the specific representations and warranties contained in this Agreement, the Purchaser is not relying on any representation and warranty by the Debtor or any other Person in entering into this Agreement (and will not rely on any other representation or warranty in effecting the Closing). SECTION 5.3 General. The representations and warranties of the ------- -18- parties to this Agreement made in this Agreement, subject to the exceptions thereto, will not be affected by any information furnished to, or any investigation conducted by, any of them or their representatives in connection with the subject matter of this Agreement. The representations and warranties set forth in Sections 5.1(E), 5.1(F), 5.1(I), 5.1(N), 5.1(Q), 5.2(C) and 5.2(E) survive the Closing and continue until the date that is sixty days after the Closing Date. All other representations and warranties do not survive the Closing. SECTION 6. CONDITIONS ---------- SECTION 6.1 Conditions to Purchaser's Obligations. The obligation ------------------------------------- of the Purchaser to consummate the transactions provided for by this Agreement is subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by the Purchaser except for the conditions set forth in Section 6.1(D) (as to Consents of Governmental Authorities): (A) Representations and Warranties. Each of the representations ------------------------------ and warranties of the Debtor made in Section 5.1 of this Agreement are true and correct both on the date of this Agreement and as of the Closing Date as though made at such time. (B) Covenants. The Debtor has performed and complied with all --------- covenants and agreements required to be performed or complied with by it on or prior to the Closing Date. (C) Material Adverse Change. Since the date of this Agreement, ------------------------- there has occurred no material adverse change, or discovery of a condition or occurrence of any event which might result in any such change, in the condition (financial or otherwise), business, assets, properties, operations or prospects of the Debtor or the Business, other than those changes as have been previously forecasted and disclosed to the Purchaser by the Debtor. (D) Consents. All Material Consents necessary to consummate the -------- transactions contemplated under this Agreement, except to the extent negated by the terms of the Sale Order or sections 363 or 365 of the Bankruptcy Code, have been obtained and the applicable waiting period under the H-S-R Act has expired without extension. (E) No Proceeding or Litigation. No litigation, action, suit, ------------------------------ investigation, claim or proceeding challenging the legality of, or seeking to restrain, prohibit or materially modify, the transactions provided for in this Agreement has been instituted and not settled or otherwise terminated. (F) Certificate of Debtor. At the Closing, the Debtor has ----------------------- delivered to the Purchaser a Certificate signed by the Debtor's President, -19- attested to by its Secretary or an Assistant Secretary and dated the Closing Date to the effect that to the best of the knowledge and belief of such officers the conditions specified in Sections 6.1(A), (B), (C) and (D) have been fulfilled. (G) Certificate; Documents. The Debtor and the other Persons have ---------------------- delivered the certificates, opinion of counsel and other documents required by Sections 4.2 and 4.4. SECTION 6.2 Conditions to Debtor's Obligations. The obligations ------------------------------------ of the Debtor to consummate the transactions provided for by this Agreement are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by the Debtor except for the conditions set forth in Section 6.2(C) (as to Consents of Governmental Authorities): (A) Representations and Warranties. Each of the representations ------------------------------- and warranties of the Purchaser and Trans World made in Section 5.2 of this Agreement are true and correct both on the date of this Agreement and as of the Closing Date as though made at such time. (B) Covenants. the Purchaser has performed and complied with all --------- covenants and agreements required to be performed or complied with by it on or prior to the Closing Date. (C) Consents. All material Consents necessary to consummate the -------- transactions contemplated under this Agreement, except to the extent negated by the terms of the Sale Order or sections 363 or 365 of the Bankruptcy Code, have been obtained and the applicable waiting period under the H-S-R Act has expired without extension. (D) No Proceeding or Litigation. No litigation, action, suit, --------------------------- investigation, claim or proceeding challenging the legality of, or seeking to restrain, prohibit or materially modify, the transactions provided for in this Agreement has been instituted and not settled or otherwise terminated. (E) Certificate of the Purchaser. At the Closing, the Purchaser ----------------------------- has delivered to the Debtor a Certificate signed by the President or a Vice President of the Purchaser, attested to by the Secretary or an Assistant Secretary of the Purchaser and dated the Closing Date to the effect that to the best of the knowledge of such officers the conditions specified in Section 6.2(A), (B) and (C) have been fulfilled. (F) Certificates; Documents. The Purchaser has delivered the ------------------------ certificates and other documents required by Sections 4.3 and 4.4. SECTION 6.3 Conditions to all Obligations. The obligations of -------------------------------- -20- both the Purchaser and the Debtor to consummate the transactions provided for by this Agreement are subject, on or prior to the Closing Date, of each of the following additional conditions: (A) Sale Order. The Court has entered the Sale Order, such order ---------- is in form and substance satisfactory to the Purchaser and such order, unless waived by the Purchaser, has not been reversed, stayed, modified or amended, and as to which the time to appeal or seek certiorari has expired and as to which no appeal or petition for certiorari has been timely filed or taken or as to which any petition for certiorari that has been timely filed, and which has been resolved by the highest court to which the action or judgment was appealed from or from which certiorari was sought. (B) Physical Inventory Count. Unless waived in whole or in part ------------------------ by the Purchaser, a third party designated by the Purchaser will conduct, at the Purchaser's cost, a physical inventory count of the Debtor's inventory and will provide the results of such physical inventory count to both the Purchaser and the Debtor. The procedures under which such physical inventory count will be conducted are set forth on Exhibit E. SECTION 7. COVENANTS --------- SECTION 7.1 Confidentiality. Except as is required in connection --------------- with the Chapter 11 Case, the Debtor will, and will cause its officers, employees, representatives, consultants, advisors or agents, to hold in confidence all information that remains in the possession of the Debtor or its Affiliates concerning the Business and the Purchased Assets after the date of this Agreement. Except as is required in connection with the Chapter 11 Case, the Purchaser will, and will cause its officers, employees, representatives, consultants, advisors or agents, to hold in confidence all information not available to the public relating to the Debtor as it exists after the transactions contemplated by this Agreement. SECTION 7.2 Access. From and after the Closing Date until the ------ closing of the Chapter 11 Case, each party to this Agreement will provide reasonable access to the other parties, at the requesting party's cost and expense, to the books, records, files, data and other written materials and information maintained by such party that relate to the Purchased Assets or are otherwise necessary to the conduct of the Business. The Purchaser will maintain the Records and the Debtor will maintain all of its books, records, files, data and other written materials and information related to the Purchased Assets or the Business (but which are not included in the Purchased Assets) under their standard retention policies; provided, that no such records will be -------- destroyed unless the holder provides the other party with at least 90 days prior written notice of such destruction. Upon receipt of notice of destruction, the non-holder will have the option, at its sole cost and expense, to take possession of such records in which case the non-holder assumes all further cost of storage and destruction of such records. SECTION 7.3 Further Assurances; Customer and Supplier --------------------------------------------- -21- Relationships. After the Closing Date, the Debtor will take such steps as - ------------- may be necessary to put the Purchaser in actual possession and operating control of the Purchased Assets and the Business. The Debtor and the Purchaser will each use its reasonable efforts to implement the provisions of this Agreement and for such purpose, each party, at the request of the other, on or after the Closing Date, will promptly execute and deliver, or cause to be executed and delivered, such assignments, bills of sale, consents and other instruments in addition to those required by this Agreement, in form and substance satisfactory to the Purchaser, and take all such other actions, as the requesting party may reasonably deem necessary or desirable to implement any provision of this Agreement and to more effectively transfer to and vest in the Purchaser, and to put the Purchaser in possession of, all of the Purchased Assets, free and clear of all Liens. Until the Closing Date and taking into account the Debtor's status as a debtor in possession, the Debtor will use its reasonable commercial efforts to assure that the Debtor's current customers and suppliers continue to do business with the Purchaser in accordance with the terms and for the periods of time set forth in any contract, agreement, lease, commitment or undertaking (including the Leases and Contracts), whether oral or written, and whether currently in effect or proposed to be entered into by the Debtor. SECTION 7.4 Transfer Taxes. The Debtor and the Purchaser --------------- acknowledge that they may be exempt under section 1146(c) of the Bankruptcy Code and the Sale Order from all state and local transfer, recording, stamp or other similar transfer taxes (collectively, "Transfer Taxes") that may be imposed by reason of the sale, transfer, assignment and delivery of the Purchased Assets; provided, that any Transfer Taxes that are imposed for any reason will be borne by the Debtor. SECTION 7.5 Transaction Expenses. Except as otherwise agreed in -------------------- this Agreement, the Purchaser will pay all expenses incurred by the Purchaser in connection with the transactions contemplated by this Agreement (whether consummated or not), and the Debtor will pay all expenses incurred by the Debtor in connection with the transactions contemplated by this Agreement (whether consummated or not). SECTION 7.6 Maintenance of Insurance. The Debtor will ---------------------------- (i) maintain all policies of insurance in effect on the date of this Agreement through and until the Closing and (ii) after the Closing use its reasonable efforts to maintain any policies of insurance which cover liabilities associated with the operation of the Business prior to the Closing; provided, that after the Closing the Debtor will not be required to pay any additional premiums in respect of such policies or maintain in effect any insurance coverage other than coverage disclosed on Schedule 5.1(S). SECTION 7.7 Accounts Receivable. In the event that the Debtor or ------------------- any of its Affiliates receives any payment relating to any Account Receivable outstanding on or after the Closing Date, such payment will be the property of, and will be promptly forwarded and remitted to, the Purchaser. The Debtor or such Affiliate will promptly endorse and deliver to the Purchaser any cash, -22- checks or other documents received by the Debtor on account of any such Accounts Receivable. The Debtor or such Affiliate will advise the Purchaser (promptly following the Debtor's becoming aware thereof) of any counterclaims or set-offs that may arise subsequent to the Closing Date with respect to any Account Receivable. SECTION 7.8 Name Change Filings. The Debtor will, within 10 days ------------------- following the Closing, deliver to the Purchaser evidence of filing with the Secretary of State of Delaware of an amendment to the Debtor's certificate of incorporation to change its name from Strawberries Inc. to a name which is not deceptively similar to "Strawberries" or "Waxie Maxie's." In addition, the Debtor will, within 30 days after the Closing, take such actions and file such documents as are necessary to (i) reflect such name changes in all States in which the Debtor is qualified to do business as a foreign corporation and will deliver to the Purchaser copies of such documents evidencing such name change filings, (ii) change the trademarks and trade names associated with any products available through the Debtor to discontinue the use of the trademark and trade names "Strawberries" and "Waxie Maxie's" and (iii) otherwise discontinue the use of such trademarks and trade names in connection with the Debtor's business operations. SECTION 7.9 WARN Act Obligations. If the Purchaser or any of its -------------------- Affiliates takes any action which could be construed as a "plant closing" or "mass layoff" or which results in any employee employed by the Debtor immediately prior to the Closing Date at the Warehouse Facility suffering or deeming to have suffered any "employment loss," as those terms are defined in WARN Act, the Purchaser and such Affiliates will be solely responsible for providing any notice required by WARN Act to such employees and for making payments, if any, which may be required under WARN Act for failure to provide appropriate notice. The Debtor will be solely responsible for providing any notice required by WARN Act to all other employees of the Debtor and for making payments, if any, which may be required under WARN Act for failure to provide appropriate notice. SECTION 7.10 Press Releases and Disclosure. The parties agree ------------------------------- that neither the Debtor, the Purchaser nor their respective Affiliates will issue or cause publication of any press release or other announcement or public communication with respect to this Agreement or the transactions contemplated by this Agreement or otherwise disclose this Agreement or the transactions contemplated by this Agreement to any third party (other than attorneys, advisors and accountants to the Debtor or the Purchaser) without the consent of the other party to this Agreement, which consent will not be unreasonably withheld; provided, that nothing in this Section 7.10 prohibits any party from issuing or causing publication of any press release, announcement or public communication to the extent that such party deems such action to be required by law or stock exchange; provided, further, that such party will consult with the other party concerning the timing and content of such press release, announcement or communication before such press release, announcement or communication is issued or published. SECTION 7.11 Cooperation in the Defense of Claims. In the event ------------------------------------ that a claim is asserted against the Purchaser or its Affiliates with respect -23- to events or conditions occurring or existing in connection with, or arising out of, the operation of the Business prior to the Closing or the ownership, possession, use or sale of the Purchased Assets prior to the Closing, the Debtor will cooperate with the Purchaser in the defense of any such claim. In the event that a claim is asserted against the Debtor or its Affiliates with respect to events or conditions occurring or existing in connection with, or arising out of, the operation of the Business after the Closing or the ownership, possession, use or sale of the Purchased Assets after the Closing, the Purchaser will cooperate with the Debtor in the defense of any such claim. SECTION 7.12 Regulatory Approvals. The Debtor will, and will -------------------- cause its appropriate Affiliates to, and the Purchaser will, and will cause its appropriate Affiliates to, use, in each case, reasonable efforts to obtain any authorizations, consents, orders and approvals of any Governmental Authority necessary for the performance of its respective obligations under this Agreement and any of the other transaction documents, and the consummation of the transactions contemplated by this Agreement and by the other transaction documents and will cooperate fully with each other in all reasonable respects in promptly seeking to obtain such authorizations, consents, orders and approvals. Neither the Debtor nor the Purchaser will take any action that will have the effect of delaying, impairing or impeding the receipt of any required regulatory approvals. Without limiting the generality of the foregoing, the Debtor, the Purchaser and their respective ultimate parent entities will promptly file or cause to be filed with the FTC and the DOJ, Notification and Report Forms and documentary materials which substantially comply with the provisions of the H-S-R Act and the rules thereunder. The Debtor will pay (or will reimburse the Purchaser for) all fees associated with the filing of any such Notification and Report Forms or related materials and information (other than the fees and expenses of the Purchaser's legal, financial or other professionals engaged to provide services in respect of such filing). The Purchaser and the Debtor will promptly file any additional information requested as soon as practicable after receipt of a request for additional information. The Purchaser and the Debtor will use reasonable efforts to obtain early termination of the applicable waiting period under the H-S-R Act. The parties to this Agreement will coordinate and cooperate with one another in exchanging such information and providing such reasonable assistance as may be requested in connection with such filing. The Debtor will supply the Purchaser with copies of all correspondence, filings or communications (or memoranda setting forth the substance thereof) between the Debtor or its representatives, on the one hand, and the FTC, the DOJ or any other Governmental Authority or members of their respective staffs, on the other hand, with respect to this Agreement or the transactions contemplated by this Agreement. SECTION 7.13 Purchased Lease Covenants. The Debtor will pay all ------------------------- cure amounts due to the lessors under each Real Property Lease listed on Schedule 2.1(E) as required under section 365(b)(1) of the Bankruptcy Code. SECTION 8. TERMINATION ----------- SECTION 8.1 Termination. This Agreement and the transactions ----------- contemplated by this Agreement may be terminated at any time prior to the -24- Closing: (A) by mutual written consent of the Debtor and the Purchaser; (B) by the Purchaser if the Closing has not occurred on or before the Termination Date; (C) by the Purchaser, if there has been a material breach by the Debtor of any of its representations, warranties, covenants, obligations or agreements set forth in this Agreement or in any writing delivered by the Debtor under this Agreement; (D) by the Debtor, if there has been a material breach by the Purchaser of any of its representations, warranties, covenants, obligations or agreements set forth in this Agreement or in any writing delivered by the Purchaser under this Agreement; (E) by the Debtor or the Purchaser if consummation of the transactions contemplated by this Agreement violates any non-appealable final order, decree or judgment of any court or Governmental Authority having competent jurisdiction, including, without limitation, the Court; (F) by the Purchaser, if since the date of this Agreement there has been a material adverse change in the condition (financial or otherwise), business, assets, properties, operations or prospects of the Debtor or the Business, other than those changes that have been previously forecasted and disclosed to the Purchaser by the Debtor; (G) by the Purchaser, if any condition precedent to the Purchaser's obligation to effect the Closing as set forth in Section 6.1 is not satisfied, or has become incapable of fulfillment, and such condition is not waived, if waivable, by the Purchaser on or prior to the Termination Date; and (H) by the Debtor, if any condition precedent to the Debtor's obligation to effect the Closing as set forth in Section 6.2 is not satisfied, or has become incapable of fulfillment, and such condition is not waived, if waivable, by the Debtor on or prior to the Termination Date. SECTION 8.2 Effect of Termination. If this Agreement is ------------------------ terminated under Section 8.1, written notice thereof will forthwith be given to the other party and this Agreement will thereafter become void and have no further force and effect and, except for those provisions that expressly survive the termination of this Agreement, all further obligations of the Debtor and the Purchaser to each other under this Agreement will terminate without further obligation or liability of the Debtor or the Purchaser to the other, except that: (A) each party will return all documents, workpapers and other material of any other party relating to the transactions contemplated by this Agreement, whether so obtained before or after the execution of this Agreement, to the party furnishing the same, and all confidential information received by any party to this Agreement with respect to the business of any other party will be treated in accordance with Section 7.1. -25- (B) If this Agreement is terminated under Section 8.1 and the Debtor accepts, or the Court approves, another transaction in which substantially all of the Debtor's stock or assets are sold, transferred or otherwise disposed of, including, without limitation, a stand alone plan of reorganization for the Debtor, the Debtor will (i) reimburse the Purchaser and its Affiliates for their actual, reasonable and documented out-of-pocket expenses in connection with the transaction contemplated by this Agreement, including, without limitation, amounts incurred in connection with their due diligence investigation and their legal fees and (ii) pay the Purchaser a fee equal to 2.75% of the total value to the Debtor of the winning bidder's bid (up to but not exceeding $27 million) plus 10% of the amount by which the total value to the Debtor (as agreed by the parties or determined by the Court) of the winning bidder's bid exceeds $27 million, in cash (collectively, the "Break-Up Fee"). The Break-Up Fee will be payable upon consummation of such other transaction and the Break-Up Fee will be granted administrative expense priority in the Debtor's bankruptcy estate. In addition, the Deposit will be returned to Trans World if the Purchaser is not the winning bidder for the Purchased Assets, within 3 business days of entry of an order by the Court approving such other bidder's bid. Notwithstanding the foregoing, if the transactions contemplated by this Agreement are not approved by the Court for any reason other than the existence of a competing offer, the Break-Up Fee will not be payable if there is subsequently approved a stand alone plan of reorganization for the Debtor. (C) If the Closing does not occur as the result of the Debtor's willful and material breach of any of the obligations set forth in this Agreement, provided that the Purchaser either has satisfied or is reasonably likely to satisfy the conditions set forth in this Agreement which are within the Purchaser's control to satisfy, the Debtor will pay to the Purchaser $740,000 as liquidated damages for such breach or default. (D) If the Closing does not occur as the result of the Purchaser's willful and material breach of any of the obligations set forth in this Agreement, provided that the Debtor either has satisfied or is reasonably likely to satisfy the conditions set forth in this Agreement which are within the Debtor's control to satisfy, the Deposit will be held by the Debtor pending resolution of any dispute with respect to this Agreement and if such dispute is resolved in favor of the Debtor, the Debtor will be entitled to retain the Deposit to apply towards any damages it may incur as a result of such breach or default. (E) If this Agreement is terminated by either the Debtor or the Purchaser for any reason other than as set forth in clause (D) above, the ---------- Debtor will promptly refund the Deposit to Trans World. SECTION 9. INDEMNIFICATION --------------- SECTION 9.1 Indemnification by the Purchaser. From and after the -------------------------------- date of this Agreement, the Purchaser will indemnify, defend and hold the Debtor and its respective officers, directors, employees and agents harmless from and against any and all claims, actions, suits, demands, assessments, judgments, losses, liabilities, damages, penalties, costs and expenses (including, without limitation, reasonable attorneys' fees to the extent -26- permitted by law and accounting fees and investigation costs) (collectively, "Losses") that may be incurred by any such indemnified party and, directly or indirectly, resulting or arising from, related to or incurred in connection with (i) the use or operation of the Purchased Assets or the conduct of the Business after the Closing Date, (ii) the Assumed Liabilities, (iii) those liabilities and obligations arising after the Closing Date under the Contracts and Leases included in the Purchased Assets and acquired by the Purchaser under Section 2.1; provided, however, that this Section 9.1 does not apply to any such liabilities and obligations arising from breaches of such Leases or Contract or defaults under such Leases or Contracts by the Debtor, except to the extent set forth in Section 2.5(A) and (iv) any breach of any representation or warranty that expressly survives the Closing under Section 5.3 or any covenant, obligation or agreement of the Purchaser contained in this Agreement other than those to be performed on or before the Closing Date. SECTION 9.2 Indemnification by the Debtor. From and after the ----------------------------- date of this Agreement, the Debtor will indemnify, defend and hold the Purchaser, its Affiliates and their respective officers, directors, employees and agents harmless from and against any and all Losses that may be incurred by any such indemnified party and, directly or indirectly, resulting or arising from, related to or incurred in connection with (i) the Excluded Liabilities, (ii) the Excluded Assets and (iii) any breach of any representation or warranty that expressly survives the Closing under Section 5.3 or any covenant, obligation or agreement of the Purchaser contained in this Agreement other than those to be performed on or before the Closing Date. SECTION 9.3 Notice of Claim; Right to Participate in and Defend ------------------------------------------------------ Third Party Claim. In the event that any indemnified party (which term - ----------------- includes all Persons entitled to indemnification under this Section 9 and their successors and assigns) receives notice of the assertion of any claim, the commencement of any suit, action or proceeding or the imposition of any penalty or assessment by a third party in respect of which indemnity may be sought under this Agreement ("Third Party Claim") and the indemnified party intends to seek indemnity under this Agreement, then the indemnified party will promptly provide the indemnifying party with notice of the Third Party Claim. The failure by an indemnified party to notify an indemnifying party of a Third Party Claim does not relieve the indemnifying party of any indemnification responsibility under this Section 9 unless and only to the extent that such failure adversely prejudices the ability of the indemnifying party to defend such Third Party Claim. (A) The indemnifying party has the right to control the defense, compromise or settlement of the Third Party Claim with counsel of its choosing if the indemnifying party delivers written notice to the indemnified party within seven calendar days following the indemnifying party's receipt of notice of the Third Party Claim from the indemnified party acknowledging its obligations to indemnify the indemnified party with respect to such Third Party Claim in accordance with this Section 9 and establishes security in form and substance reasonably satisfactory to the indemnified party to secure the indemnifying party's obligations under this Section 9 with respect to such Third Party Claim. In its defense, compromise or settlement of any Third Party Claim, the indemnifying party will provide the indemnified party, in a timely manner, with such information with respect to such defense, compromise -27- or settlement as the indemnified party requests and will not assume any position or take any action that would impose an obligation of any kind or restrict the actions of the indemnified party. The indemnified party will be entitled (at the indemnified party's expense) to participate in the defense by the indemnifying party of any Third Party Claim with its own counsel. Notwithstanding the foregoing, if the indemnifying party fails, in the reasonable opinion of the indemnified party, to take reasonable steps necessary to defend a Third Party Claim within ten calendar days after receiving notice from the indemnified party that the indemnified party believes the indemnifying party has failed to take such steps, the indemnified party may assume its own defense, and the indemnifying party will be responsible for any reasonable expenses therefor. Without the prior written consent of the indemnified party, the indemnifying party will not enter into any settlement or compromise of any Third Party Claim which could lead to liability or create any financial or other obligation on the part of the indemnified party for which the indemnified party is not entitled to reimbursement under this Agreement. (B) In the event that the indemnifying party does not undertake the defense, compromise or settlement of a Third Party Claim, the indemnified party has the right to control the defense or settlement of such Third Party Claim with counsel of its choosing at the cost of the indemnifying party; provided, however, that the indemnified party will not settle or compromise any Third Party Claim without the indemnifying party's prior written consent, unless (i) the terms of such settlement or compromise release the indemnified party and the indemnifying party from any and all liability with respect to the Third Party Claim or (ii) the indemnifying party has not (a) acknowledged its obligations to indemnify the indemnified party with respect to such Third Party Claim in accordance with this Section 9 and (b) established security in form and substance reasonably satisfactory to the indemnified party to secure the indemnifying party's obligations under this Section 9 with respect to such Third Party Claim. (C) Any indemnifiable claim under this Agreement that is not a Third Party Claim will be asserted by the indemnified party by promptly delivering notice thereof to the indemnifying party. If the indemnifying party does not respond to such notice within 30 calendar days after its receipt, it has no further right to contest the validity of such claim. SECTION 9.4 Termination. All indemnification obligations set ----------- forth in this Section 9 (other than with respect to indemnification claims that have been asserted) will terminate and be of no further force and effect on the date that is sixty days after the Closing Date. SECTION 10. MISCELLANEOUS ------------- SECTION 10.1 Amendments. This Agreement may be amended only by a ---------- writing executed by all of the parties to this Agreement. SECTION 10.2 Entire Agreement. This Agreement and the other ----------------- agreements expressly provided for in this Agreement contain the entire agreement of the parties with respect to the transactions contemplated by this -28- Agreement and supersede all prior contracts, agreements, arrangements, communications and discussions whether oral or written with respect thereto. SECTION 10.3 Governing Law; Jurisdiction. This Agreement is in ---------------------------- all respects governed by and construed in accordance with the internal laws of the State of New York without regard to conflict of laws principles. For so long as the Debtor is subject to the jurisdiction of the Court, the parties irrevocably elect the Court as the sole judicial forum for the adjudication of any matters arising under or in connection with this Agreement and consent to the jurisdiction of the Court. SECTION 10.4 Notices. Any notice, request or other communication ------- required or permitted under this Agreement must be in writing and are deemed to have been duly given (i) when received if personally delivered, (ii) within five calendar days after being sent by registered or certified mail, return receipt requested, postage prepaid, (iii) after being sent by facsimile, with confirmed answerback and (iv) within one business day of being sent by established overnight courier, to the parties at their respective addresses set forth below. To the Debtor: Strawberries Inc. 205 Fortune Boulevard Milford, Massachusetts 01757 Attn: Telephone: Facsimile: With a copy to: Kaye, Scholer, Fierman, Hays & Handler, LLP 425 Park Avenue New York, New York 10022 Attn: Mitchel H. Perkiel, Esq. Telephone: (212) 836-8000 Facsimile: (212) 836-8689 To the Purchaser or Trans World: Record Town, Inc. or Trans World Entertainment Corporation 38 Corporate Circle Albany, New York 12203 Attn: Robert J. Higgins John J. Sullivan Telephone: (518) 452-1242 Facsimile: (518) 452-7833 With a copy to: Jones, Day, Reavis & Pogue 77 West Wacker Chicago, Illinois 60601 Attn: Timothy R. Pohl, Esq. Telephone: (312) 782-3939 Facsimile: (312) 782-8585 Any party by written notice to the others given in accordance with this Section 10.4 may change the address or the persons to whom notices or copies -29- thereof are to be directed. SECTION 10.5 Counterparts. This Agreement may be executed in any ------------ number of counterparts, each of which is deemed to be an original and all of which together will constitute one and the same instrument. SECTION 10.6 Assignment. This Agreement is binding upon and ---------- inures to the benefit of the successors and assigns of each party to this Agreement (including, any trustee appointed in respect of the Debtor under the Bankruptcy Code), but no rights, obligations or liabilities under this Agreement may be assignable by any party without the prior written consent of the other party. SECTION 10.7 Waivers. Any waiver by any party of any violation ------- of, breach of or default under any provision of this Agreement or any other agreements provided for in this Agreement, by the other parties will not be construed as, or constitute, a continuing waiver of such provision, or waiver of any other violation of, breach of or default under any other provision of this Agreement or any other agreements provided for in this Agreement. SECTION 10.8 Severability. Any term or provision of this ------------ Agreement that is invalid or unenforceable in any situation in any jurisdiction will not affect the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. SECTION 10.9 Construction. The parties have participated jointly ------------ in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement will be construed as if drafted jointly by the parties and no presumption or burden of proof will arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local or foreign statute or law is deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "knowledge" means knowledge obtained or obtainable after due inquiry and reasonable investigation. SECTION 10.10 Third Parties. Nothing expressed or implied in this ------------- Agreement is intended, or will be construed, to confer upon or give any person or entity other than the Purchaser and the Debtor any rights or remedies under or by reason of this Agreement. SECTION 10.11 Schedules and Exhibits. The Schedules and Exhibits ---------------------- attached to this Agreement are incorporated in this Agreement and are a part of this Agreement for all purposes. SECTION 10.12 Headings. The headings in this Agreement are solely -------- for convenience of reference and will not be given any effect in the construction or interpretation of this Agreement. -30- SECTION 10.13 References to Agreements. All references in this ------------------------ Agreement to other agreements refer to such agreements as amended, restated, supplemented or otherwise modified from time to time, unless such reference specifically states otherwise. SECTION 10.14 Remedies Not Exclusive. No remedy conferred by any ---------------------- of the specific provisions of this Agreement is intended to be exclusive of any other remedy and each remedy will be cumulative and will be in addition to every other remedy given under this Agreement or hereafter existing at law or in equity or by statute or otherwise. No remedy will be deemed to be a limitation on the amount or measure of damages resulting from any breach of this Agreement. The election of any one or more remedies does not constitute a waiver of the right to pursue other available remedies. * * * -31- Executed as of the day and year first above written. STRAWBERRIES INC. By: /s/ROBERT L. KLIEWE ------------------------- Name: Robert L. Kliewe Title: Chief Financial Officer RECORD TOWN, INC. By: /s/JOHN J. SULLIVAN ------------------------- Name: John J. Sullivan Title: Senior Vice President of Finance and Chief Financial Officer TRANS WORLD ENTERTAINMENT CORPORATION By:/s/ JOHN J. SULLIVAN ------------------------- Name: John J. Sullivan Title: Senior Vice President of Finance and Chief Financial Officer -32- EX-22 4 SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT EXHIBIT 22 TRANS WORLD ENTERTAINMENT CORPORATION SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT Name of Significant Name(s) Under Which the Subsidiary State of Incorporation Subsidiary Does Business - ------------------- ---------------------- ------------------------ Media Logic, Inc. New York Media Logic, Inc. Record Town, Inc. New York Record Town Saturday Matinee Movies Plus Tape World Coconuts Music World F.Y.E. (For Your Entertainment) Strawberries Waxie Maxie Planet Music EX-23 5 CONSENT (PEAT MARWICK LLP) EXHIBIT 23 Consent of Independent Auditors We consent to incorporation by reference in the registration statements (No. 33-14572, No. 33-40399, No. 33-51094, No. 33-51516, and No. 33-59319) on Form S-8 pertaining to the 1986 Incentive and Non-Qualified Stock Option Plan, the 1990 Stock Option Plan for Non-Employee Directors and the 1994 Stock Option Plan of Trans World Entertainment Corporation of our report dated March 13, 1998, relating to the consolidated balance sheets of Trans World Entertainment Corporation and subsidiaries as of January 31, 1998 and February 1, 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the fiscal years in the three-year period ended January 31, 1998, which report appears in the Annual Report on Form 10-K of Trans World Entertainment Corporation and subsidiaries for the fiscal year ended January 31, 1998. /s/ KPMG Peat Marwick LLP Albany, New York March 30, 1998 EX-27 6 FDS
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 0000795212 TRANS WORLD ENTERTAINMENT CORPORATION 1,000 12-MOS JAN-31-1998 FEB-02-1997 JAN-31-1998 94,732 0 3,105 0 189,394 290,350 175,506 101,595 371,583 200,497 41,409 0 0 198 122,767 371,583 571,314 571,314 361,422 361,422 170,834 0 4,995 34,063 13,489 0 0 0 0 20,574 1.05 0.99
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