DEFM14A 1 nt10007873x2_defm14a.htm DEFM14A

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No.  )

Filed by the Registrant ☒

Filed by a party other than the Registrant o

Check the appropriate box:

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Preliminary Proxy Statement
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
Definitive Proxy Statement
o
Definitive Additional Materials
o
Soliciting Material under § 240.14a-12

Trans World Entertainment Corporation
(Name of Registrant as Specified In Its Charter)

N/A
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

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No fee required.
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
 
(1)
Title of each class of securities to which transaction applies: N/A
 
 
 
 
(2)
Aggregate number of securities to which transaction applies: N/A
 
 
 
 
(3)
Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): N/A
 
 
 
 
(4)
Proposed maximum aggregate value of transaction: $11,900,000
 
 
 
 
(5)
Total fee paid: $1,544.62
 
 
 
Fee paid previously with preliminary materials.
o
Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
 
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Amount Previously Paid:
 
 
 
 
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Form, Schedule or Registration Statement No.:
 
 
 
 
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Date Filed:
 
 
 

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TRANS WORLD ENTERTAINMENT CORPORATION
38 Corporate Circle
Albany, New York 12203
(518) 452-1242

February 7, 2020

Dear Shareholder:

You are cordially invited to attend the special meeting of the shareholders (the “Special Meeting”) of Trans World Entertainment Corporation, a New York corporation (the “Company” or “Parent”), to be held at Trans World Entertainment Corporation, 38 Corporate Circle, Albany, NY 12203, on Monday, February 17, 2020, at 10:00 A.M., Eastern time.

The principal business matters to be considered at the Special Meeting will be proposals (1) to approve the sale of certain assets and liabilities of our fye segment pursuant to the Asset Purchase Agreement, dated January 23, 2020, by and among Record Town, Inc., Record Town USA LLC, Record Town Utah LLC, Trans World FL LLC, Trans World New York, LLC, and, 2428392 INC., solely with respect to Sections 6.3, 6.13, 6.14 and 10.13, Trans World Entertainment Corporation, and solely with respect to Section 10.14, 2428391 ONTARIO INC. o/a Sunrise Records (the “Transaction”); (2) to approve, by non-binding, advisory vote, certain compensation arrangements for certain named executive officers of the Company following the Transaction (the “Post-Transaction Compensation Arrangements”); (3) to adjourn or postpone the Special Meeting to a later date, if necessary or appropriate, to allow for the solicitation of additional proxies in favor of the proposal to approve the Transaction if there are insufficient votes to approve the Transaction; and (4) to transact such other business as may properly be brought before the Special Meeting or any adjournment or postponement thereof.

Details of the proposals are set forth in the enclosed proxy statement, which you are urged to read carefully. The Board of Directors believes that the proposals are in the best interests of the Company and its shareholders. In arriving at its decision to recommend the proposals, the Board of Directors carefully reviewed and considered the terms and conditions of the proposals and the factors described in the enclosed proxy statement. If the Transaction is consummated, you will retain your shares of the Company’s Common Stock and you will not be entitled to receive any cash proceeds of the Transaction.

Your Board of Directors has unanimously approved each of the proposals and recommends that the holders of common stock vote FOR the approval of each of the proposals.

The Board of Directors has fixed January 27, 2020 as the record date for the Special Meeting. Only shareholders of record at the close of business on that date will receive notice of and be entitled to vote at the Special Meeting. All shareholders are cordially invited to attend the Special Meeting.

Your vote is very important. Regardless of the number of shares you own, please vote. You can vote your shares by the Internet, toll-free telephone call or by marking, signing, dating and returning the enclosed proxy card (if you are a registered holder), or the voting instruction card provided by your bank or broker (if you hold your shares through an account with a bank or broker). Your prompt cooperation is greatly appreciated.

 
Sincerely,
   
 
 
/s/ Michael Feurer
 
Michael Feurer
Chief Executive Officer

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TRANS WORLD ENTERTAINMENT CORPORATION
38 Corporate Circle
Albany, New York 12203
(518) 452-1242

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

Date and Time
Monday, February 17, 2020, at 10:00 A.M., Eastern Time
Place
Trans World Entertainment Corporation
38 Corporate Circle
Albany, NY 12203
 
 
 
Items of Business
(1)
To approve the sale of certain assets and liabilities of our fye segment pursuant to the Asset Purchase Agreement, dated January 23, 2020, by and among Record Town, Inc., Record Town USA LLC, Record Town Utah LLC, Trans World FL LLC, Trans World New York, LLC, and, 2428392 INC., solely with respect to Sections 6.3, 6.13, 6.14 and 10.13, Trans World Entertainment Corporation, and solely with respect to Section 10.14, 2428391 ONTARIO INC. o/a Sunrise Records (the “Transaction”);
 
(2)
To approve, by non-binding, advisory vote, certain compensation arrangements for certain named executive officers of the Company following the Transaction (the “Post-Transaction Compensation Arrangements”);
 
(3)
To approve the adjournment or postponement of the Special Meeting to a later date, if necessary or appropriate, to allow for the solicitation of additional proxies in favor of the proposal to approve the Transaction if there are insufficient votes to approve the Transaction; and
 
(4)
To transact such other business as may be properly presented at the Special Meeting or any adjournment or postponement thereof.
Record Date
Shareholders of record as of January 27, 2020 (the “Record Date”) are eligible to vote.
Proxy Voting
You can vote your shares by the Internet, toll-free telephone call or by marking, signing, dating and returning the enclosed proxy card (if you are a registered holder), or the voting instruction card provided by your bank or broker (if you hold your shares through an account with a bank or broker). We strongly encourage shareholders to vote by the Internet or toll-free telephone, however, a proxy and return envelope, not requiring postage if mailed in the United States, is provided for your convenience. Please vote by the Internet, toll-free telephone or complete and return your proxy card as promptly as possible.
 
 
 
 
All shareholders are cordially invited to attend the Special Meeting in person. Whether or not you plan to attend the meeting, your vote is important. Please vote by the Internet, toll-free telephone or complete and return your proxy card as promptly as possible to assure a quorum is present at the Special Meeting and save the Company expense.
 
 
 
 
Any shareholder attending the Special Meeting may vote in person even if such shareholder has returned a proxy, as long as the shares are held in the shareholder’s name or the brokerage firm, bank or other holder of record acting as the shareholder’s nominee confirms the shareholder’s ownership in writing. A list of shareholders entitled to vote at the Special Meeting will be available for inspection at our offices.

The proposals to be considered at the Special Meeting are more fully described in the proxy statement accompanying this notice. The Company’s Board of Directors recommends that you vote “FOR” Proposals 1, 2 and 3.

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If the Transaction is consummated, you will retain your shares of the Company’s Common Stock and you will not be entitled to receive any cash proceeds of the Transaction. If the Transaction is consummated, a shareholder who does not vote to approve the Transaction and who follows the procedures prescribed under Sections 623 and 910 of the New York Business Corporation Law (the “NYBCL”) may exercise dissenters’ rights as provided under the NYBCL, for the shares of the Company’s common stock held by such shareholder. See “PROPOSAL ONE -- Dissenting Shareholders’ Rights in Respect of the Transaction” in the accompanying Proxy Statement. This notice and the proxy statement shall constitute notice to you from the Company of the availability of dissenters’ rights under Sections 623 and 910 of the NYBCL.

The Special Meeting may be postponed or canceled by action of the Board of Directors upon public notice given prior to the time previously scheduled for the Special Meeting or adjourned by action of the chairman of the Special Meeting.

 
By Order of the Board of Directors,
   
 
/s/ Edwin J. Sapienza
 
Edwin J. Sapienza,
Secretary

Albany, New York
Dated: February 7, 2020

Note Regarding Proxy Materials

If shareholders have any questions, require assistance with voting, or need additional copies of the proxy materials, please contact the Company at 518-452-1242.

Important Notice Regarding the Availability of Proxy Materials for the Special Meeting of Shareholders to be Held on Monday, February 17, 2020: The notice of special meeting, the proxy statement and the form of proxy card are available at www.proxyvote.com

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TRANS WORLD ENTERTAINMENT CORPORATION
38 Corporate Circle
Albany, New York 12203

PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS

This Proxy Statement is furnished to the shareholders of Trans World Entertainment Corporation, a New York corporation (the “Company” or “Parent”), in connection with the solicitation of proxies by the Board of Directors (the “Board”) for use at the Special Meeting of Shareholders of the Company to be held on Monday, February 17, 2020, at 10:00 A.M., Eastern time, (the “Special Meeting”), and any adjournment or adjournments thereof. A copy of the notice of meeting accompanies this proxy statement. It is anticipated that the mailing of this proxy statement and the form of proxy/voting instruction card will commence on February 7, 2020.

As permitted by rules of the Securities and Exchange Commission (“SEC”), we are also making our proxy materials, which includes our notice of special meeting and this proxy statement, available to our shareholders over the Internet. An electronic version of the notice of special meeting, this proxy statement and the form of proxy/voting instruction card is available at www.proxyvote.com.

VOTING SECURITIES

The Company has only one class of voting securities, its common stock, par value $.01 per share (the “Common Stock”). On the Record Date, 1,816,311 shares of Common Stock were outstanding. Each shareholder of record at the close of business on the Record Date will be entitled to one vote for each share of Common Stock owned on that date, as to each matter presented at the Special Meeting.

QUORUM AND TABULATION OF VOTES

The By-Laws of the Company provide that a majority of the shares of our Common Stock entitled to vote at the Special Meeting, present in person or by proxy, shall constitute a quorum at the Special Meeting. An inspector from Broadridge Financial Solutions, Inc. appointed by the Company will determine the presence of a quorum and will certify and tabulate the votes. Shares of Common Stock represented by a properly signed and returned proxy are considered as present at the Special Meeting for purposes of determining a quorum.

Shareholders of record who are present at the Special Meeting, in person or by proxy, and who abstain from voting, including brokers holding customers’ shares of record who cause abstentions to be recorded at the Special Meeting, will be included in the number of shareholders present at the Special Meeting for purposes of determining whether a quorum is present. However, these shares will not be taken into account in determining the outcome of any of the proposals.

A shareholder (including a broker) who does not give authority to a proxy to vote on a certain proposal will not be considered present and entitled to vote on that proposal. If you are a beneficial owner and hold your shares in the name of a bank, broker or other holder of record and do not return the voting instruction card, the broker or other nominee will not be able to vote for or against the proposals to be considered at the Special Meeting as these are “non-routine” proposals.

A proxy may be revoked at any time prior to the voting at the Special Meeting by submitting a later dated proxy (including a proxy by Internet or telephone), by giving timely written notice of such revocation to the Secretary of the Company or by attending the Special Meeting and voting in person. However, if you hold any shares of Common Stock in “street name” (that is through a bank, broker or other nominee) you may not vote these shares in person at the Special Meeting unless you bring with you a legal proxy from the holder of record of such shares.

The Company will pay the costs of soliciting, preparing, printing and mailing this Notice of Special Meeting of Shareholders and Proxy Statement, and the proxy/voting instruction card. In accordance with the regulations of the SEC, we also reimburse brokerage firms and other custodians, nominees and fiduciaries for their

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reasonable expenses incurred in connection with their forwarding of proxies and proxy solicitation materials to beneficial owners of our Common Stock as of the Record Date. The solicitation of proxies will be conducted primarily by mail, but may also include the Internet, telephone, facsimile or oral communications by directors, officers or regular employees of the Company acting without special compensation. The Company will also request persons, firms and corporations holding shares in their names, or in the names of their nominees, which are beneficially owned by others, to send or cause to be sent proxy materials to, and obtain proxies from, such beneficial owners, and, on request, will reimburse such holders for their reasonable expenses in so doing.

SUMMARY TERM SHEET

This summary term sheet highlights selected information contained in this proxy statement relating to the Transaction and may not contain all the information that may be important to you regarding the Transaction. Accordingly, we encourage you to carefully read this proxy statement, its annexes and the documents referred to in this proxy statement in their entirety. Each item in this summary includes a page reference directing you to a more complete description of that topic.

The Parties to the Transaction (page 17)

Trans World Entertainment Corporation (“Parent”), Record Town, Inc. (“Record Town”), Record Town’s subsidiaries

Trans World Entertainment Corporation, a New York corporation (“Parent”), was incorporated in 1972. Parent owns, directly or indirectly, 100% of the outstanding equity interests of Record Town, Inc., a New York corporation (“Record Town”), Record Town USA LLC, a Delaware limited liability company (“Record Town USA”), Record Town Utah LLC, a Utah limited liability company (“Record Town Utah”), Trans World FL LLC, a Florida limited liability company (“Trans World FL”) and Trans World New York, LLC, a New York limited liability company (“Trans World NY” and together with Record Town, Record Town USA, Record Town Utah, and Trans World FL, collectively the “Seller Entities”). The Seller Entities operate the Company’s For Your Entertainment (“fye”) segment, a chain of 206 retail entertainment stores in the United States and Puerto Rico, and the ecommerce sites www.fye.com and www.secondspin.com.

The Company and Record Town are headquartered in Albany, New York. The mailing address of the headquarters is 38 Corporate Circle, Albany, New York 12203 and the telephone number is (518) 452-1242. The Company’s corporate website address is www.twec.com. The Company’s common stock, $0.01 par value per share (the “Common Stock”) is quoted on the NASDAQ Stock Market (“NASDAQ”) under the symbol “TWMC”.

2428392 INC. and 2428391 Ontario Inc.

2428392 INC., a Delaware corporation (“Purchaser”) and 2428391 Ontario Inc., an Ontario corporation doing business as Sunrise Records (“Sunrise”) are headquartered in Ancaster, Ontario. Sunrise is a Canadian record store chain that operates approximately 85 locations across Canada, The mailing address of the headquarters is 1430 Cormorant Road, Ancaster, Ontario, Canada, L9G 4V5 and the telephone number is (905) 304-1010.

The Special Meeting (page 12)

The Special Meeting is to be held at Trans World Entertainment Corporation, 38 Corporate Circle, Albany, NY 12203, on Monday, February 17, 2020, at 10:00 A.M., Eastern time, or at any adjournment or postponement thereof.

The purpose of the Special Meeting is for our shareholders to consider and vote upon the following proposals:

1.To approve the sale of certain assets and liabilities of our fye segment pursuant to the Asset Purchase Agreement dated January 23, 2020 (the “Asset Purchase Agreement” or “APA”), by and among Record Town, Inc., Record Town USA LLC, Record Town Utah LLC, Trans World FL LLC, Trans World New York, LLC, and, 2428392 INC., solely with respect to Sections 6.3, 6.13, 6.14 and 10.13, Trans World Entertainment Corporation, and solely with respect to Section 10.14, 2428391 ONTARIO INC. o/a Sunrise Records (the “Transaction”);

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2.To approve, by non-binding, advisory vote, certain compensation arrangements for certain named executive officers of the Company following the Transaction (the “Post-Transaction Compensation Arrangements”);
3.To approve the adjournment or postponement of the Special Meeting to a later date, if necessary or appropriate, to allow for the solicitation of additional proxies in favor of the proposal to approve the Transaction if there are insufficient votes to approve the Transaction; and
4.To transact such other business as may properly be brought before the Special Meeting or any adjournment or postponement thereof.

Only holders of Common Stock at the close of business on January 27, 2020, the Record Date, are entitled to notice of and to vote at the Special Meeting. As of the Record Date, there were 1,816,311 shares of Common Stock outstanding and entitled to vote. You may cast one vote for each share of Common Stock that you owned on that date. Approval of Proposal No. 1, the Transaction, requires the affirmative vote of shareholders holding at least two-thirds of the outstanding shares of Common Stock at the close of business on the Record Date. Approval of each of Proposal No. 2, the non-binding, advisory vote to approve the Post-Transaction Compensation Arrangements, and Proposal No. 3 requires the affirmative vote of a majority of the votes cast on the proposal at the Special Meeting.

Please see the section of this proxy statement captioned “Questions and Answers About the Special Meeting” for additional information on the Special Meeting, including how to vote your shares of Common Stock.

Proposal to Approve the Transaction (page 17)

General

Pursuant to the APA, we agreed to sell certain assets and liabilities of our fye segment (the “Business”) to Purchaser effective as of 12:00 A.M. Eastern time on February 1, 2020 (the “Effective Time”), subject to shareholder approval and certain other conditions. A copy of the APA is attached as Annex A. We encourage you to read the APA carefully and in its entirety.

Recommendation of the Board of Directors

After careful consideration, the Board unanimously recommends that you vote “FOR” the proposal to approve the Transaction, and “FOR” the proposal to adjourn or postpone the Special Meeting, if necessary or appropriate, to allow for the solicitation of additional proxies.

Net Proceeds from the Transaction and Expected Use of Net Proceeds (page 32)

Pursuant to the APA, consideration for the Transaction will consist of the base purchase price of $10,000,000 (the “Base Purchase Price”) (as (x) increased or decreased by the net inventory adjustment and (y) increased by Purchaser’s portion of pre-paid taxes and pre-paid expenses; provided that the amount of such adjustments will not be paid until seven business days after closing to the extent Purchaser obtains a credit facility on or before closing, or seven business days after the Purchaser obtains a credit facility after closing or March 15, 2020 if no credit facility is obtained), payable in cash, of which $1,000,000 will be held in escrow.

We expect to use all of the proceeds from the Transaction to repay outstanding indebtedness under our revolving credit facility with Wells Fargo Bank (the “Wells Fargo Credit Facility”) and to satisfy other unassumed liabilities.

Our Business Following the Transaction (page 32)

The fye specialty retail business constitutes our primary source of revenue and gross profit, but has been generating substantial operating losses and using cash flows in its operations. We expect that after the Transaction is completed our business operations and incoming cash flows will be limited to our etailz segment, a digital marketplace retailer that generates substantially all of its revenue through Amazon Marketplace. Following the Transaction, we intend to continue the implementation of the etailz performance improvement plan, continue to pursue efforts to establish a credit facility at the etailz segment and otherwise improve the Company’s liquidity position, pursue one or more corporate initiatives to reduce costs at the parent company

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level (which could include a voluntary delisting from NASDAQ and deregistering of our Common Stock in order to substantially eliminate the costs associated with being a public company), satisfying all unassumed liabilities of the fye segment and other strategic alternatives including selling all or part of the remaining business of the Company.

Effect of the Transaction on Stock Options and Restricted Stock (page 39)

The 2005 Plan contains a definition of change in control that states, among other things, that a change in control occurs upon a sale of substantially all of our assets, subject to certain limited exceptions, and provides that, unless otherwise provided at the time of grant, all restrictions and limitations on vesting of awards granted under the 2005 Plan will lapse upon a change of control.

Accordingly, upon consummation of the Transaction, any unvested restricted stock units and any unvested options to purchase shares of Common Stock will vest.

Interests of Certain Persons in the Transaction (page 39)

None of our directors or named executive officers is entitled to receive payments in connection with the Closing other than to the vesting of awards under the 2005 Plan, described above.

However, our named executive officers may be entitled to certain other payments under their employment arrangements in the event they experience a qualifying termination of employment following the Transaction.

In addition, as disclosed in the Company’s previous filings with the Securities and Exchange Commission, one of our directors, W. Michael Reickert, also serves as a trustee of the Robert J. Higgins TWMC Trust, which is our largest shareholder. The Company leases its distribution center in Albany, New York, from RJHDC, LLC, of which a trustee of our largest shareholder is the manager and sole member. Following the Transaction, the Purchaser is expected to enter into a new lease with respect to the distribution center which may influence our largest shareholder’s vote in regard to the Transaction.

Shareholder Approval Requirement (page 38)

We are organized under the corporate laws of the State of New York. The Transaction may constitute the sale of “substantially all” of our assets under the Business Corporation Law of the State of New York (“NYBCL”) Section 909. Section 909 of the NYBCL requires that, for corporations in existence on the effective date of clause 909(a) where the certificate of incorporation does not expressly provide for approval by a majority vote of all outstanding shares for the sale of “all or substantially all the assets of a corporation,” a corporation must obtain the approval of the holders of at least two-thirds of the corporation’s outstanding stock entitled to vote thereon. The Company was in existence on the effective date of clause 909(a) and the Certificate of Incorporation does not expressly provide for approval by a majority vote of all outstanding shares. In light of this requirement, after taking into account the specific facts and circumstances of the Transaction, we are seeking approval of the Transaction by holders of at least two-thirds of the Company’s outstanding stock entitled to vote thereon.

Additionally, obtaining the affirmative vote or consent of the holders of at least two-thirds of the outstanding shares of Parent’s common stock (the “Required Vote”) is a closing condition under the APA.

Dissenting Shareholders’ Rights in Respect of the Transaction (page 41)

Under the NYBCL, you are entitled to assert dissenters’ rights. If the Closing occurs, and if you do not vote to approve the Transaction and follow the procedures prescribed under the NYBCL, you may require the Company to pay the “fair value,” determined as provided under the NYBCL, for your shares of Common Stock.

The Asset Purchase Agreement (page 47)

Under the terms of the APA, we agreed to sell certain assets and liabilities of our fye segment (the “Business”) to Purchaser effective as of 12:00 A.M. Eastern time on February 1, 2020 (the “Effective Time”), subject to shareholder approval and certain other conditions. Certain assets and liabilities of the Business will be retained by us following the Closing, including, without limitation, all pre-Effective Time operating expenses, all

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liabilities related to excluded assets, all pre-Closing taxes; and all liabilities under benefit plans, compensation or other arrangements, termination of employees before Closing or after Closing (except with respect to transferred employees) and any WARN liability arising after Closing.

The consideration for the sale will consist of the base purchase price of $10,000,000 (the “Base Purchase Price”) (as (x) increased or decreased by a net inventory adjustment and (y) increased by Purchaser’s portion of pre-paid taxes and pre-paid expenses; provided that the amount of such adjustments will not be paid until seven business days after closing to the extent Purchaser obtains a credit facility on or before closing, or seven business days after the Purchaser obtains a credit facility after closing or March 15, 2020 if no credit facility is obtained), payable in cash, of which $1,000,000 will be held in escrow.

The Base Purchase Price is based on the delivery to Purchaser at the Effective Time of $40,000,000 of Net Inventory (the “Target Net Inventory”). The Base Purchase Price shall be adjusted at Closing as follows: (A) for every $1.00 by which Net Inventory delivered at the Effective Time exceeds the Target Net Inventory, up to $42,000,000, the Base Purchase Price will be increased by $0.50, (B) for every $1.00 by which Net Inventory delivered at the Effective Time exceeds $42,000,000, the Base Purchase Price will be increased by $0.25, (C) for every $1.00 by which Net Inventory delivered at the Effective Time is less than the Target Net Inventory, down to $37,000,000, the Base Purchase Price will be decreased by $0.50, and (D) for every $1.00 by which Net Inventory delivered at the Effective Time is less than $37,000,000, the Base Purchase Price will be decreased by $0.75.

Agreements Related to the Asset Purchase Agreement (page 38)

At the Closing, the parties will enter into an escrow agreement pursuant to which $1,000,000 will be held in escrow to serve as security for payments in satisfaction of (i) the Post-Closing Adjustment (as defined in the APA), (ii) annual bonus payments due to transferred employees on May 1, 2020, (iii) retention bonus payments due to transferred employees on May 1, 2020, and (iv) our indemnification obligations in respect of any claim submitted prior to release of the escrow.

The parties will also enter into (i) a transition services agreement to be agreed in good faith by Purchaser and the Seller Entities relating to the provision by the Seller Entities or their affiliates of transition services to Purchaser as reasonably requested and necessary or would customarily be provided for the conduct of the Business immediately following the Closing and for a reasonable time period thereafter, and (ii) a transition services agreement to be agreed in good faith by Purchaser and the Seller Entities relating to the provision by Purchaser or its affiliates of transition services to the Seller Entities as reasonably requested and necessary for the Seller Entities to meet their obligations under the APA and to give effect to the Transactions contemplated thereby immediately following the Closing and for a reasonable time period thereafter.

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING

The following questions and answers are intended to address briefly some questions you may have regarding the Transaction, the Asset Purchase Agreement and the Special Meeting. These questions and answers may not address all questions that may be important to you as a shareholder of the Company. Please refer to the “Summary Term Sheet” at the beginning of this proxy statement and the more detailed information contained elsewhere in this proxy statement, including in the annexes to this proxy statement.

Q:Why did I receive these materials?
A:The Board is soliciting your proxy to vote at the Special Meeting so that our shareholders may consider and vote upon the following proposals:
1.To approve the Transaction;
2.To approve the Post-Transaction Compensation Arrangements on a non-binding, advisory basis;
3.To approve the adjournment or postponement of the Special Meeting to a later date, if necessary or appropriate, to allow for the solicitation of additional proxies in favor of the proposal to approve the Transaction if there are insufficient votes to approve the Transaction; and
4.To transact such other business as may properly be brought before the Special Meeting or any adjournment or postponement thereof.

With respect to the approval of the Transaction in particular, the Board is seeking shareholder approval of the Transaction because we are a New York corporation and the Transaction may constitute the sale of “substantially all” of our assets under the NYBCL Section 909. Section 909 of the NYBCL requires that, for corporations in existence on the effective date of clause 909(a) where the certificate of incorporation does not expressly provide for approval by a majority vote of all outstanding shares for the sale of “all or substantially all the assets of a corporation,” a corporation must obtain the approval of the holders of at least two-thirds of the corporation’s outstanding stock entitled to vote thereon. The Company was in existence on the effective date of clause 909(a) and the Certificate of Incorporation does not expressly provide for approval by a majority vote of all outstanding shares. In light of this requirement, after taking into account the specific facts and circumstances of the Transaction, we are seeking approval of the Transaction by holders of at least two-thirds of the Company’s outstanding stock entitled to vote thereon. Additionally, obtaining such shareholder approval is a closing condition under the APA.

Q:When and where is the Special Meeting?
A: The Special Meeting is to be held at Trans World Entertainment Corporation, 38 Corporate Circle, Albany, NY 12203, on Monday, February 17, 2020, at 10:00 A.M., Eastern time, or at any adjournment or postponement thereof.
Q:Who is entitled to vote at the Special Meeting?
A:Only holders of Common Stock at the close of business on the Record Date are entitled to notice of and to vote at the Special Meeting. Such shareholders will be entitled to one vote for each share held on each matter submitted to a vote at the Special Meeting. On the Record Date, there were 1,816,311 shares of Common Stock issued and outstanding, each of which is entitled to one vote on each matter to be voted upon. Shareholders may vote in person or by proxy.
Q:Who is buying the fye segment and for what consideration?
A:We are proposing to sell certain assets and liabilities of our fye segment currently operated by Record Town and its subsidiaries to 2428392 Inc. (“Purchaser”). Purchaser is a Delaware corporation and a subsidiary of 2428391 ONTARIO INC. o/a Sunrise Records. See “PROPOSAL ONE — The Parties to the Transaction” for more information regarding the parties to the Asset Purchase Agreement. Our understanding is that, following the Closing, Sunrise intends to retain substantially all fye employees and intends to continue to operate the Business under the fye brand.

Pursuant to the APA, consideration for the Transaction will consist of the base purchase price of $10,000,000 (the “Base Purchase Price”) (as (x) increased or decreased by a net inventory adjustment and

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(y) increased by Purchaser’s portion of pre-paid taxes and pre-paid expenses; provided that the amount of such adjustments will not be paid until seven business days after closing to the extent Purchaser obtains a credit facility on or before closing, or seven business days after the Purchaser obtains a credit facility after closing or March 15, 2020 if no credit facility is obtained), payable in cash, of which $1,000,000 will be held in escrow. The terms of the APA are more fully described below under the section titled “The Asset Purchase Agreement”.

Q:What will the net proceeds from the Transaction be used for?
A:We expect to use all of the proceeds from the Transaction to repay outstanding indebtedness under the Wells Fargo Credit Facility and to satisfy other unassumed liabilities.
Q:Why are you selling the fye segment?
A:As disclosed in the Company’s previous filings with the Securities and Exchange Commission (attached hereto as Annex E and Annex F), the Company has suffered recurring losses from operations and the Company’s primary sources of liquidity are borrowing capacity under its revolving credit facility, and available cash and cash equivalents all of which are limited. Therefore, the ability of the Company to meet its liabilities and to continue as a going concern is dependent on, among other things, improved profitability, the continued implementation of the performance improvement plan for the etailz segment, and the availability of future funding for the etailz segment. Our Board has determined that this Transaction is an important step toward enabling the Company to continue as a going concern by providing some liquidity to pay down debts and by eliminating the accruing of further obligations related to operation of the fye segment. However, the Company has concluded that, even after consummation of the Transaction, the Company’s ability to continue as a going concern will still be dependent on the continued implementation of the performance improvement plan for the etailz segment, the availability of future funding for the etailz segment, implementation of one or more corporate initiatives to reduce costs at the parent company level (which could include a voluntary delisting from NASDAQ and deregistering of our Common Stock in order to substantially eliminate the costs associated with being a public company), satisfying all unassumed liabilities of the fye segment and other strategic alternatives, including selling all or part of the remaining business or assets of the Company. The unaudited pro forma financial information included in this proxy statement do not include any adjustments that might result from the outcome of these uncertainties.
Q:What will happen if the Transaction is not approved by shareholders or the Closing does not occur for any other reason?
A:If the Closing does not occur, (i) in certain circumstances, we will be required to pay to Purchaser a Termination Fee in the amount of $3,500,000, (ii) we may have difficulty recouping the significant transaction costs incurred in connection with negotiating the Transaction, (iii) our relationships with the customers, business partners and employees of the Business may be damaged and the Business may be harmed, and (iv) the market price for our Common Stock may decline.

The Company’s expectation is that absent the consummation of the Transaction, it would immediately initiate the wind down of the fye segment, and as a result, the Company would likely become cash flow insolvent during the fiscal year ending 2021. The wind down of the fye segment is not expected to be more favorable to shareholders than the Transaction. See “Wind Down Analysis and Retained Business Information.” Based on recurring losses from operations, expectation of operating losses for the foreseeable future, and uncertainty with respect to any available future funding and any alternative or additional strategic alternatives, the Company has concluded that there is substantial doubt about the Company’s ability to continue as a going concern.

Q:When is the Transaction expected to be completed?
A:If the Transaction is approved by our shareholders at the Special Meeting, we expect the Closing to occur on the first business day after the date all of the remaining closing conditions under the APA have been satisfied or waived or such other date the parties to the APA may mutually determine, which we anticipate will occur promptly following the Special Meeting. The Company expects the Transaction to close in the first quarter of 2020. The exact timing of the Closing cannot be predicted, although the APA may be terminated by Purchaser if the Closing has not occurred on or before March 31, 2020.

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Q:How will the Transaction affect outstanding equity awards held by our directors and named executive officers?
A:The Company’s 2005 Long Term Incentive and Share Award Plan (the “2005 Plan”) contains a definition of change in control that states, among other things, that a change in control occurs upon a sale of substantially all of our assets, subject to certain limited exceptions, and provides that, unless otherwise provided at the time of grant, all restrictions and limitations on vesting of awards granted under the 2005 Plan will lapse upon a change of control.

Accordingly, upon consummation of the Transaction, any unvested restricted stock units and any unvested options to purchase shares of Common Stock will vest.

Q:Will the Transaction trigger any payments to our current or former named executive officers or directors?
A:None of our directors or named executive officers is entitled to receive payments in connection with the Closing other than the vesting of equity awards under the 2005 Plan, described above.

However, our named executive officers may be entitled to certain other payments under their employment arrangements in the event they experience a qualifying termination of employment following the Transaction.

For additional information regarding these matters, see “PROPOSAL ONE — Interests of Certain Persons in the Transaction”.

Q:Will our Common Stock continue to be publicly traded and quoted on the NASDAQ Stock Market following the Transaction?
A:Immediately following the Transaction, we expect to continue to be publicly traded and quoted on NASDAQ and remain subject to the rules and regulations of the SEC. However, following the Transaction, one of our strategic alternatives will be to pursue one or more corporate initiatives to reduce costs at the parent company level (which could include a voluntary delisting from NASDAQ and deregistering of our Common Stock in order to substantially eliminate the costs associated with being a public company). In addition, there can be no assurance that following the Transaction we will continue to meet the NASDAQ minimum bid price requirement or other NASDAQ listing requirements. See “Risk Factors Relating to the Proposal to Approve the Transaction”.
Q:What will be the nature of our business following the Closing?
A:We expect that after the Transaction is completed our business operations and incoming cash flows will be limited to our etailz segment, a digital marketplace retailer that generates substantially all of its revenue through Amazon Marketplace and which has historically generated operating losses. Based on recurring losses from operations, expectation of operating losses for the foreseeable future, and uncertainty with respect to any available future funding and any alternative or additional strategic alternatives, the Company has concluded that, following the Transaction, there still will be substantial doubt about the Company’s ability to continue as a going concern. See “Risk Factors Relating to the Proposal to Approve the Transaction”.
Q:Am I entitled to dissenters’ rights in connection with the Transaction or the proposal to adjourn or postpone the Special Meeting?
A:Under New York law, you are entitled to assert dissenters’ rights in connection with the Transaction. If the Closing occurs, if you do not vote to approve the Transaction and follow the procedures prescribed under the NYBCL, you may require the Company to pay the “fair value,” determined as provided under the NYBCL, for your shares of Common Stock. Please see the section of this proxy statement “PROPOSAL ONE — Dissenting Shareholders’ Rights in Respect of the Transaction” for additional information on dissenters’ rights.
Q:Why am I being asked to cast a non-binding, advisory vote to approve the compensation proposal?
A:Under SEC rules, we are required to seek an advisory vote with respect to arrangements and compensation

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payable to our named executive officers based on or otherwise relating to the Transaction. The results of the vote are non-binding and are not a condition to payment of the compensation or to completion of the Transaction. See “PROPOSAL TWO — Advisory Vote on Compensation Related to the Transaction”.

Q:What will happen if shareholders do not approve the compensation proposal at the Special Meeting?
A:Approval of the compensation proposal is not a condition to the consummation of the Transaction. This non-binding proposal regarding certain Transaction-related executive compensation arrangements is merely an advisory vote which will not be binding on the Company, or our Board. Further, the underlying plans and arrangements are contractual in nature and not, by their terms, subject to shareholder approval. Accordingly, regardless of the outcome of the advisory vote, if the Transaction is consummated, certain of our named executive officer will be eligible to receive various payments in accordance with the terms and conditions applicable to those payments. See “Interests of Certain Persons in the Transaction”.
Q:What is the Proposal to approve the adjournment or postponement of the Special Meeting?
A:The Proposal to approve the adjournment or postponement of the Special Meeting is a proposal to permit us to adjourn or postpone the Special Meeting for the purpose of soliciting additional proxies in the event that, at the Special Meeting, the affirmative vote in favor of the Transaction is less than two-thirds of the outstanding shares of our Common Stock entitled to vote at the Special Meeting.
Q:What will happen if the Proposal to approve the adjournment or postponement of the Special Meeting is not approved by our shareholders?
A:If there are insufficient votes at the time of the Special Meeting to approve the Transaction Proposal and the Proposal to adjourn or postpone the Special Meeting is not approved at the Special Meeting, we will not be able to adjourn or postpone the Special Meeting for purposes of soliciting additional proxies to approve the Transaction Proposal. If you have previously submitted a proxy on the proposals discussed in this proxy statement and wish to revoke it upon adjournment or postponement of the Special Meeting, you may do so.
Q:What vote is required for shareholders to approve the proposals at the Special Meeting?
A:The affirmative vote of at least two-thirds of the shares of Common Stock outstanding on the Record Date is required to approve Proposal One. The affirmative vote of a majority of the votes cast is required to approve each of the other proposals.
Q:How does the Board recommend that I vote?
A:After careful consideration of a variety of factors described in this proxy statement, the Board unanimously recommends that you vote “FOR” Proposal One, “FOR” Proposal Two, and “FOR” Proposal Three.
Q:How do I vote?
A:You may vote using any of the following methods:
Proxy card or voting instruction card. Be sure to complete, sign and date the card and return it in the prepaid envelope.
By telephone or over the Internet. If you are a shareholder of record, you may vote by telephone or over the Internet by following the instructions on your proxy card. If you hold shares in street name, you will receive separate voting instructions from your bank, broker or other nominee and may vote by telephone or over the Internet if they offer that alternative. Although most brokers, banks and nominees offer telephone and Internet voting, availability and the specific procedures vary.
In person at the Special Meeting. All shareholders may vote in person at the Special Meeting. You may also be represented by another person at the Special Meeting by executing a proper proxy designating that person. If you hold shares in street name, you must obtain a legal proxy from your bank, broker or other nominee and present it to the inspector of election with your ballot when you vote at the Special Meeting.

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Q:What can I do if I change my mind after I vote my shares?
A:If you are a shareholder of record, you may revoke your proxy at any time before it is voted at the Special Meeting by:
sending a written notice of revocation to our Corporate Secretary;
submitting a new, proper proxy dated later than the date of the revoked proxy;
voting over the Internet at a later time; or
attending the Special Meeting and voting in person.

If you hold shares in street name through your bank, broker or other nominee, you may submit new voting instructions by contacting your bank, broker or other nominee. You may also vote in person at the Special Meeting if you obtain a legal proxy as described in the answer to the next question. Attendance at the Special Meeting will not, by itself, revoke a proxy.

Q:How can I attend the Special Meeting?
A:You are entitled to attend the Special Meeting only if you were a shareholder of the Company as of the close of business on the Record Date for the Special Meeting, or hold a valid proxy for the Special Meeting. You should be prepared to present photo identification for admittance. In addition, if you are a shareholder of record, your ownership will be verified against the list of shareholders of record on the Record Date prior to being admitted. If you are not a shareholder of record but hold shares in street name, you should be prepared to provide proof of beneficial ownership as of the Record Date (such as your most recent account statement prior to the Record Date), a copy of the voting instruction card provided to you by your bank, broker, or other nominee, or similar evidence of ownership. If you do not provide photo identification or comply with the other procedures outlined above, you will not be admitted to the Special Meeting.

The Special Meeting will begin promptly at 10 A.M., Eastern time, on Monday, February 17, 2020. You should allow adequate time for the check-in procedures.

Q:What happens if additional matters are presented at the Special Meeting?
A:Other than the three items of business described in this proxy statement, we are not aware of any other business to be acted upon at the Special Meeting. If you grant a proxy, the persons named as proxy holders, Michael Solow and Michael Feurer, will have the discretion to vote your shares on any additional matters properly presented for a vote at the Special Meeting.
Q:What if I return a signed proxy card, but do not vote for some of the matters listed on the proxy card?
A:If you return a signed proxy card without indicating your vote, your shares will be voted in accordance with the Board’s recommendations as follows: “FOR” the proposal to approve the Transaction, “FOR” the proposal to approve the post-Transaction Compensation Arrangements, and “FOR” the proposal to approve the adjournment or postponement of the Special Meeting, if necessary or appropriate, to allow for the solicitation of additional proxies.
Q:If my shares are held in “street name” by my bank, broker or other nominee, will my bank, broker or other nominee vote my shares for me?
A:Your bank, broker or other nominee will only be permitted to vote your shares held in street name if you instruct them how to vote. You should follow the procedures on the voting instruction card provided by your bank, broker or other nominee regarding the voting of your shares. The failure to instruct your bank, broker or other nominee how to vote your shares will have the same effect as a vote “AGAINST” Proposal 1, but will not have an effect on Proposal 2 or Proposal 3. Please vote using one of the methods set forth on your voting instruction card so your vote can be counted.

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Q:What do I do if I receive more than one proxy or set of voting instructions?
A:If your shares are registered differently or are held in more than one account, you may receive more than one proxy and/or set of voting instructions relating to the Special Meeting. To ensure that all of your shares are voted, please complete, sign, date and return each proxy card and voting instruction card that you receive, or vote your shares by telephone or over the Internet.
Q:What is the deadline for voting my shares?
A:If you hold shares as the shareholder of record, your vote by proxy must be received before the polls close at the Special Meeting.

If you hold shares in street name, please follow the voting instructions provided by your broker, trustee or nominee. You may vote your shares in person at the Special Meeting only if you obtain a legal proxy from your bank, broker or other nominee and present it to the inspector of election with your ballot when you vote at the Special Meeting.

Q:Who will bear the cost of this solicitation?
A:We are making this solicitation and will bear the entire cost of the solicitation, including the preparation, assembly, printing and mailing of this proxy statement and any additional materials furnished to our shareholders. The initial solicitation of proxies by mail may be supplemented by telephone, fax, e-mail, Internet and personal solicitation by our directors, officers or other regular employees. No additional compensation for soliciting proxies will be paid to our directors, officers or other regular employees for their proxy solicitation efforts. We expect to reimburse banks, brokers and other persons for their reasonable out-of-pocket expenses in handling proxy materials for beneficial owners of our common stock.
Q:Who can help answer any other questions that I have?
A:If you have additional questions, need assistance in submitting your proxy or voting your shares of our Common Stock, or need additional copies of this proxy statement or the enclosed proxy card, please contact the Company at 518-452-1242.

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THE SPECIAL MEETING

Meeting, Place and Time. The Board is soliciting proxies to be used at the Special Meeting to be held at Trans World Entertainment Corporation, 38 Corporate Circle, Albany, New York 12203, on Monday, February 17, 2020, at 10:00 A.M., Eastern time, or at any adjournment or postponement thereof.

Record Date and Voting. The Board fixed the close of business on January 27, 2020, as the record date for the determination of holders of outstanding shares of the Company entitled to notice of and to vote on all matters presented at the Special Meeting. Such shareholders will be entitled to one vote for each share held on each matter submitted to a vote at the Special Meeting. On the Record Date, there were 1,816,311 shares of the Common Stock, issued and outstanding, each of which is entitled to one vote on each matter to be voted upon. Shareholders may vote in person or by proxy.

Purposes of the Meeting. The purpose of the Special Meeting is for our shareholders to consider and vote upon the following proposals: (i) to approve the Transaction, (ii) to approve the post-Transaction Compensation Arrangements, (iii) to approve the adjournment or postponement of the Special Meeting to a later date, if necessary or appropriate, to allow for the solicitation of additional proxies in favor of the proposal to approve the Transaction if there are insufficient votes to approve the Transaction, and (iv) to transact such other business as may properly be brought before the Special Meeting or any adjournment or postponement thereof.

Quorum. The required quorum for the transaction of business at the Special Meeting is a majority of the votes eligible to be cast by holders of shares of Common Stock issued and outstanding on the Record Date. Shares that are voted “FOR,” “AGAINST” or “ABSTAIN” regarding a matter are treated as being present at the Special Meeting for purposes of establishing a quorum and are also treated as shares entitled to vote at the Special Meeting with respect to such matter.

Abstentions and Broker Non-Votes. Broker “non-votes” and the shares of Common Stock as to which a shareholder abstains are included for purposes of determining whether a quorum of shares of Common Stock is present at a meeting. A broker “non-vote” occurs when a nominee holding shares of Common Stock for the beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that item and has not received instructions from the beneficial owner. Neither broker “non-votes” nor abstentions are included in the tabulation of the voting results on Proposal 1 and will have the effect of a vote against Proposal 1.

Voting of Proxies. The Board is asking for your proxy. Giving the Board your proxy means you authorize it to vote your shares at the Special Meeting in the manner you direct in your proxy card. You may vote “FOR,” “AGAINST,” or “ABSTAIN” on Proposals 1, 2 and 3. If you “ABSTAIN,” from voting on Proposal 1, it has the same effect as a vote “AGAINST.” All valid proxies received prior to the Special Meeting will be voted. All shares represented by a proxy will be voted, and where a shareholder specifies by means of the proxy a choice with respect to any matter to be acted upon, the shares will be voted in accordance with the specification so made. If no choice is indicated on the proxy, the shares will be voted FOR Proposals 1, 2 and 3 and as the proxy holders may determine in their discretion with respect to any other matters that properly come before the Special Meeting.

A shareholder giving a proxy has the power to revoke his or her proxy, at any time prior to the time it is voted, by delivering to the Secretary of the Company a written instrument that revokes the proxy or a validly executed proxy with a later date, or by attending the Special Meeting and voting in person.

The affirmative vote of at least two-thirds of the shares of Common Stock outstanding on the Record Date is required to approve Proposal 1. The affirmative vote of a majority of the votes cast is required to approve Proposal 2 and Proposal 3. As of the Record Date, there were 1,816,311 shares of the Company’s Common Stock issued and outstanding.

The form of proxy accompanying this proxy statement confers discretionary authority upon the named proxyholders with respect to amendments or variations to the matters identified in the accompanying Notice of Special Meeting and with respect to any other matters which may properly come before the Special Meeting. As of the date of this proxy statement, management of the Company knows of no such amendment or variation or of any matters expected to come before the Special Meeting which are not referred to in the accompanying Notice of Special Meeting.

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You may vote using any of the following methods:

Proxy card or voting instruction card. Be sure to complete, sign and date the card and return it in the prepaid envelope.
By telephone or over the Internet. If you are a shareholder of record, you may vote by telephone or over the Internet by following the instructions on your proxy card. If you hold shares in street name, you will receive separate voting instructions from your bank, broker or other nominee and may vote by telephone or over the Internet if they offer that alternative. Although most brokers, banks and nominees offer telephone and Internet voting, availability and the specific procedures vary.
In person at the Special Meeting. All shareholders may vote in person at the Special Meeting. You may also be represented by another person at the Special Meeting by executing a proper proxy designating that person. If you hold shares in street name, you must obtain a legal proxy from your bank, broker or other nominee and present it to the inspector of election with your ballot when you vote at the Special Meeting.

Attendance at the Meeting.

Only holders of Common Stock as of the Record Date, their proxy holders and the Company’s invited guests may attend the Special Meeting. If you wish to attend the Special Meeting in person but you hold your shares through someone else, such as a stockbroker, you must bring proof of your ownership and identification with a photo at the Special Meeting. For example, you could bring an account statement showing that you beneficially owned shares of Common Stock of the Company as of the Record Date as acceptable proof of ownership.

Costs of Solicitation.

We are making this solicitation and will bear the entire cost of the solicitation, including the preparation, assembly, printing and mailing of this proxy statement and any additional materials furnished to our shareholders. The initial solicitation of proxies by mail may be supplemented by telephone, fax, e-mail, Internet and personal solicitation by our directors, officers or other regular employees. No additional compensation for soliciting proxies will be paid to our directors, officers or other regular employees for their proxy solicitation efforts. We expect to reimburse banks, brokers and other persons for their reasonable out-of-pocket expenses in handling proxy materials for beneficial owners of our common stock.

Certain Financial and Other Information About the Company.

Please take note that:

(i) the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2019, (the “Form 10-K”) (without exhibits) is included in this proxy statement as Annex E, and includes:

a description of the Company’s business (See Item 1 of Form 10-K, beginning at page E-2), properties (See Item 2 of Form 10-K, beginning at page E-15) and legal proceedings (See Item 3 of Form 10-K, beginning at page E-16),
the Company’s audited consolidated financial statements for the fiscal years ended February 2, 2019, and February 3, 2018 (See Item 8 of Form 10-K, beginning at page E-29),
management’s discussion and analysis of financial condition and results of operations for such periods (See Item 7 of Form 10-K, beginning at page E-17) and quantitative and qualitative disclosures about market risk (See Item 7A of Form 10-K, beginning at page E-28),
selected quarterly financial data for each full quarter within the two most recent fiscal years (See Note 13 of Notes to the Consolidated Financial Statements, beginning at page E-60), and
disclosures of changes in and disagreements with accountants on accounting and financial disclosure (See Item 9 of Form 10-K, beginning at page E-29);

(ii) the Company’s Quarterly Reports on Form 10-Q for the fiscal periods ended May 4, 2019 (the “First Quarter 10-Q”), August 3, 2019 (the “Second Quarter 10-Q”), and November 2, 2019 (the “Third Quarter 10-Q”) (in each case, without exhibits) are included in this proxy statement as Annex F, and includes:

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the Company’s unaudited condensed consolidated balance sheets at November 2, 2019, February 2, 2019 and November 3, 2018, the unaudited condensed consolidated statements of operations, comprehensive loss, and shareholders’ equity for the thirteen and thirty-nine weeks ended November 2, 2019, and November 3, 2018, the unaudited condensed consolidated statements of cash flows for the thirty-nine weeks ended November 2, 2019 and November 3, 2018, and the related notes (See Item 1 of the Third Quarter 10-Q, beginning at page F-3), and
management’s discussion and analysis of financial condition and results of operations for such periods (See Item 2 of the Third Quarter 10-Q, beginning at page F-19); and

(iii) the unaudited condensed financial statements of the fye business for the fiscal years ended February 2, 2019, and February 3, 2018, and the thirty-nine weeks ended November 2, 2019, are included in this proxy statement as Annex D.

In addition, any shareholder of the Company may obtain without charge copies of the Company’s Form 10-K, First Quarter 10-Q, Second Quarter 10-Q and Third Quarter 10-Q, and any exhibits thereto, as filed with the SEC, by writing to the Corporate Secretary, 38 Corporate Circle, Albany, New York 12203 or by calling our Corporate Secretary at (518) 452-1242.

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PRINCIPAL SHAREHOLDERS

The only persons known to the Board of Directors to be the beneficial owners of more than five percent of the outstanding shares of Common Stock as of February 6, 2020, are indicated below;

Name and Address of Beneficial Owner
Amount and Nature
of
Beneficial Ownership
Percent of
Class
The Robert J. Higgins TWMC Trust
38 Corporate Circle
Albany, New York 12203
 
713,986(1
) 
 
39.3
%
Neil S. Subin
3300 South Dixie Highway, Suite 1-365
West Palm Beach, 33405
 
300,090(2
) 
 
16.5
%
Josh Neblett
38 Corporate Circle
Albany, NY 12033
 
96,676(3
) 
 
5.3
%
(1)Based on Form 5, filed February 21, 2017, by The Robert J Higgins TWMC Trust.
(2)Based on Form 13G/A, filed February 13, 2019, by Neil S. Subin.
(3)Based on Form 5, filed February 26, 2019, by Mr. Neblett. Includes 18,049 shares owned by the wife of Josh Neblett.

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EQUITY OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the beneficial ownership of Common Stock as of February 6, 2020, by each Director and named executive officer of the Company and all Directors and executive officers as a group. All shares listed in the table are owned directly by the named individuals, unless otherwise indicated therein. The Company believes that the beneficial owners have sole voting and investment power over their shares, except as otherwise stated or as to shares owned by spouses.

Name
Positions With the
Company
Age
Year
First
Elected
as
Director/
Officer
Direct
Ownership
Shares that
may be
acquired
within
60 days
of
February 6,
2020
Total
Shares
Beneficially
Owned
Percent
of
Class
Michael B. Solow
Chairman of the Board
 
61
 
 
1999
 
 
815
 
 
621
 
 
1,436
 
 
 
*
Martin Hanaka(2)
 
70
 
 
2013
 
 
689
 
 
 
 
689
 
 
 
*
Jeff Hastings
Director
 
49
 
 
2019
 
 
 
 
750
 
 
750
 
 
 
*
Robert E. Marks
Director
 
67
 
 
2012
 
 
4,980
 
 
750
 
 
5,730
 
 
 
*
Michael Nahl
Director
 
76
 
 
2011
 
 
738
 
 
750
 
 
1,488
 
 
 
*
W. Michael Reickert
Director
 
55
 
 
2016
 
 
3,200
(1) 
 
563
 
 
3,763
 
 
 
*
Michael Feurer
Chief Executive
Officer, Director
 
50
 
 
2014
 
 
8,553
 
 
33,483
 
 
42,036
 
 
2.3
%
Edwin J. Sapienza
Chief Financial
Officer
 
49
 
 
2018
 
 
437
 
 
3,994
 
 
4,431
 
 
 
*
Bruce J. Eisenberg
Executive Vice
President-Real Estate
 
59
 
 
1995
 
 
 
 
18,625
 
 
18,625
 
 
1.0
%
All Directors and Executive Officers as a group
(9 persons)
 
 
 
 
 
 
 
 
19,412
 
 
59,536
 
 
78,948
 
 
4.3
%
*Less than 1% of issued and outstanding Common Stock
(1)Excludes 713,986 shares held in the Robert J Higgins TWMC Trust of which Mr. Reickert is a Trustee.
(2)Mr. Hanaka did not stand for re-election at the 2019 annual meeting and ceased to be a board member as of June 27, 2019.

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PROPOSAL ONE:
PROPOSAL TO APPROVE THE TRANSACTION

The Parties to the Transaction

Trans World Entertainment Corporation (“Parent”), Record Town, Inc. (“Record Town”), Record Town’s subsidiaries

Trans World Entertainment Corporation, a New York corporation (“Parent”), was incorporated in 1972. Parent owns, directly or indirectly, 100% of the outstanding equity interests of RECORD TOWN, INC., a New York corporation (“Record Town”), RECORD TOWN USA LLC, a Delaware limited liability company (“Record Town USA”), RECORD TOWN UTAH LLC, a Utah limited liability company (“Record Town Utah”), TRANS WORLD FL LLC, a Florida limited liability company (“Trans World FL”) and TRANS WORLD NEW YORK, LLC, a New York limited liability company (“Trans World NY” and together with Record Town, Record Town USA, Record Town Utah, and Trans World FL, collectively the “Seller Entities”). The Seller Entities operate the Company’s For Your Entertainment (“fye”) segment, a chain of 206 retail entertainment stores in the United States, the District of Columbia and the U.S. Virgin Islands and the ecommerce sites www.fye.com and www.secondspin.com.

The Company and Record Town are headquartered in Albany, New York. The mailing address of the headquarters is 38 Corporate Circle, Albany, New York 12203 and the telephone number is (518) 452-1242. The Company’s corporate website address is www.twec.com. The Company’s common stock, $0.01 par value per share (the “Common Stock”) is quoted on the NASDAQ Stock Market under the symbol “TWMC”.

2428392 INC. and 2428391 Ontario Inc.

2428392 INC., a Delaware corporation (“Purchaser”) and 2428391 Ontario Inc., an Ontario corporation doing business as Sunrise Records (“Sunrise”), are headquartered in Ancaster, Ontario. Sunrise is a Canadian record store chain that operates approximately 85 locations across Canada, The mailing address of the headquarters is 1430 Cormorant Road, Ancaster, Ontario, Canada, L9G 4V5 and the telephone number is (905) 304-1010.

Background of the Transaction

The Company’s board of directors (the “Board”) and management team continually review the Company’s long-term strategic plan, with the goal of maximizing shareholder value. As a component of such review, the Board and management routinely evaluate potential alternatives to the Company’s current plan, including strategic transactions involving third parties and, given the Company’s rapidly deteriorating liquidity position, the potential wind down of all or part of the Company’s operations.

In an effort to be able to respond quickly to strategic opportunities explored by or otherwise presented to the Company, on March 29, 2018, the Board established a working committee consisting of Messrs. Marks, Feurer, and Solow (the “Strategic Committee”) to engage in discussions with interested third parties, including investment banks, advisors, consultants and others, regarding potential alternatives involving the fye segment, the etailz segment or the Company as a whole.

Upon the recommendation of the Strategic Committee, in May 2018, the Company engaged a financial advisor to explore a sale of part of the Company. Although that process did not yield any viable offers, it did result in the Company’s management team initiating conversations with two asset recovery firms, Party A and Party B, regarding the disposition of assets of the fye segment. During this time, the Company also explored the possibility of buying out the Company’s long-term leases, including its distribution center, and transitioning to a third-party fulfillment center model, both of which were ultimately determined to not be beneficial to the Company due to the limited, if any, benefit to be received by the Company, and the significant upfront cash required relative to the Company’s diminishing liquidity.

In an effort to better understand the implications of these pathways, and to more fully understand the other prospective strategic pathways, in September 2018 the Board approved the engagement by the Company of a business advisory firm to assist in evaluating various strategic, operational and tactical alternatives, and requested that they present their strategic alternatives recommendations to the Board at the October 2018 Board meeting.

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On October 3, 2018, at a regularly scheduled board meeting, management of the Company and representatives from the Company’s business advisory firm presented the Board with several prospective strategic pathways, which included improving organizational efficiencies and conserving working capital needs to support the growth of the etailz segment (the “etailz performance improvement plan”), inventory management in the fye segment, buyout of the Company’s long-term leases, a sale of all or part of the Company (including the disposition of fye assets to Party A or Party B) and a wind down of all or part of the Company’s operations. The timeline for implementation for each pathway was also discussed. It was determined that the Board would continue discussions regarding these pathways at the December 2018 Board meeting.

On November 14, 2018, the Company’s Vice President of Merchandising informed Mr. Feurer that the Company had recently completed a sale of overstock inventory to Sunrise and that Sunrise’s President, Mr. Doug Putman, may be contacting him to discuss partnering in the future. That same day Mr. Feurer received an email from Mr. Putman proposing a meeting.

Mr. Feurer and Mr. Putman spoke by phone on November 16, 2018 during which call Mr. Putman expressed interest in exploring a potential transaction involving the fye segment. Following this discussion, Mr. Putman emailed Mr. Feurer a draft non-disclosure agreement (“NDA”) in order to continue confidential discussions.

Between November 16, 2018 and December 20, 2018, representatives of the Company and representatives of Sunrise negotiated the NDA and, on December 27, 2018, the Company and Sunrise executed the NDA.

In the interim, on December 7, 2018, at a regularly scheduled board meeting, the Board discussed (i) the October 2018 presentation, (ii) management’s continued efforts find a prospective buyer for all or part of the Company, including the status of discussions with Party A and Party B, and (iii) the Company’s diminishing liquidity position and strategies to improve the Company’s performance, operations, and cash flow. At that time, it was determined to implement various strategic initiatives, including the etailz performance improvement plan and fye inventory management program. It was also determined that management of the Company would continue to engage in discussions with Party A, Party B and Sunrise following the execution of the NDA and would continue efforts to identify a buyer for all or part of the Company. During 2018 and 2019, the Company’s efforts to identify a buyer resulted in the Company entering into non-disclosure agreements with eight potentially interested parties.

On January 2, 2019, Mr. Feurer and Mr. Putman spoke by phone to discuss the next steps in the sharing of information. Mr. Feurer informed Mr. Putman that he would discuss the same with the Board at the next Board meeting on January 24, 2019.

On January 24, 2019, at a regularly scheduled board meeting, the Board discussed the continued interest of Party A who had been conducting due diligence for several months, and noted that Party B had not been actively engaged in discussions or diligence for several months. The Board also discussed the execution of the NDA with Sunrise and the progress of the Company’s performance improvement initiatives, including vendor rationalization, working capital improvements and SG&A reductions.

The Company continued its discussions with Party A until February 2019 when Party A indicated they were no longer interested. In the months that followed, the Company continued its discussions with Sunrise, and also continued its efforts to find other prospective buyers for all or part of the Company, which included contact with various strategic and financial buyers to gauge interest. Ultimately, none of these other potential buyers were interested in pursuing a transaction with the Company.

Between January 24, 2019 and March 4, 2019, Sunrise requested by email certain financial and store operations information from the Company in order to evaluate a potential transaction involving the Company’s fye segment, and the Company promptly responded to such requests.

On March 15, 2019, Mr Putman called Mr. Feurer and confirmed Sunrise’s continued interest in a potential transaction with respect to the fye segment. Mr. Putman requested that the Company indicate its asking price/valuation.

Following discussions with the Strategic Committee, on April 3, 2019, Mr. Feurer told Mr. Putman that he could reasonably take to the Board a proposal involving a cash transaction value of $35 million, including assumption of all of the assets and certain of the liabilities of the fye stores, distribution center, and necessary personnel related to fye segment.

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During April and May 2019, the Company continued to provide diligence materials to Sunrise, while also continuing efforts to find a prospective buyer for all or part of the Company and focusing on the execution of the performance improvement initiatives. During this time, discussions and diligence with Party B resumed.

On May 17, 2019, Mr. Putman indicated by email to Mr. Feurer that based on Sunrise’s evaluation of the fye segment, Sunrise was unable to support a valuation of $35 million for the fye segment. Mr. Feurer and Mr. Putman spoke several times over the next several days, with both parties indicating that they would like to continue the discussion regarding a potential transaction following the upcoming Memorial Day weekend, however no further communications occurred until August 2019.

At the regularly scheduled Board meeting on June 27, 2019, the Board discussed the recently received offer from Party B, which the Board concluded was not viable as the Company’s wind down analysis with respect to the fye segment yielded a higher return for shareholders. Following the meeting, the Company informed Party B that it was not interested in continuing discussions with respect to their offer.

In the months that followed, the Board and management met several times to discuss management’s continued efforts to find a prospective buyer, reviewed the Company’s expiring real estate leases, store profitability and store closings, fye segment wind down analysis and retained business information, reviewed sensitivities used for its going concern analysis and an asset recovery plan prepared by the Company’s business advisory firm.

On August 12, 2019, Mr. Putman emailed Mr. Feurer, explained that Sunrise had been fully engaged on another transaction over the past several months, but that they would like to rekindle discussions with respect to a potential transaction involving the fye segment. The Strategic Committee instructed Mr. Feurer to reengage in discussions with Mr. Putman.

In the months that followed, the Company provided various diligence updates to Sunrise. Also, during this time, the Board and management met several times to discuss the Company’s diminishing liquidity position, management’s continued efforts to find a prospective buyer for all or part of the Company, reviewed the Company’s expiring real estate leases, store profitability and store closings, reviewed the updated fye segment wind down analysis and retained business information, reviewed sensitivities used for its going concern analysis and discussed establishing a credit facility at etailz as a means of providing additional liquidity.

On October 2, 2019, Mr. Sapienza, the Company’s Chief Financial Officer, received a call from a representative of Party C, a real estate investment firm, asking to engage in a discussion regarding a possible sale of the stock of the Company. Mr. Sapienza requested that the parties sign a nondisclosure agreement, and the parties signed the same later that day.

On October 4, 2019, Mr. Sapienza received a proposal from Party C indicating an interest in purchasing the stock of the Company at a price of $4.32 per share (a 50% premium to the stock price of $2.84 on such date, resulting in an aggregate purchase price of approximately $7.8 million), subject to due diligence. The proposal lacked any credible detail regarding the structure of the transaction, their plans for financing the transaction or any information regarding the potential purchaser. It also indicated that the offer would expire on October 10, 2019.

On October 8, 2019, the Board discussed Party C’s offer and determined that the Strategic Committee would oversee discussions with Party C and Sunrise. They also instructed Mr. Sapienza to speak with a representative of Party C regarding their plans for financing the transaction, the structure of the transaction and to seek an extension through October 18, 2019. During such conversation, the representative indicated that they would need to seek debt financing for the transaction, but would also be contributing their own equity and cash. He also indicated that they expected to purchase the stock of the Company, but also mentioned the possibility of an asset purchase, in either case with no clear indication of specific terms. On October 10, 2019, an extension of the offer to October 18, 2019 was confirmed in writing by Party C to Mr. Sapienza.

Based on the recommendation of the Strategic Committee, in the weeks that followed, the Company continued efforts to find a prospective buyer for all or part of the Company and refreshed its analysis of the other strategic alternatives, including a wind down of the fye segment. In addition, the Strategic Committee instructed the Company to conduct due diligence on Party C to determine if they possessed the capitalization required to support their offer. Following the due diligence exercise and a discussion among the Strategic

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Committee members, the Strategic Committee determined, and informed the Board, that Party C’s offer was not viable due to the Party C’s inability to provide the Company with information confirming that they could reasonably obtain the financial support required by its offer.

On October 19, 2019, following several months of sporadic engagement with respect to diligence, Mr. Putman again expressed to Mr. Feurer that Sunrise was unable to support a valuation of $35 million for the fye segment. Following several discussions, the Strategic Committee instructed Mr. Feurer to continue discussions with Mr. Putman and encourage Mr. Putman to submit a proposal for the purchase of the fye segment.

On November 4, 2019, Mr. Solow and Mr. Feurer met with Mr. Putman, during which meeting Mr. Feurer and Mr. Putman discussed the fye segment, Mr. Putman’s valuation of the business and Mr. Putman potentially putting forth a proposal to purchase the fye segment.

On November 6, 2019, Sunrise sent to the Company a letter of intent (“LOI”) proposing the acquisition by Sunrise of all of the assets and certain of the liabilities of the fye segment at a valuation of $10,000,000, subject to a holdback of $2,000,000 and other terms and conditions as set forth in the LOI.

On November 7, 2019, the Board met to discuss (i) the Company’s diminishing liquidity position, (ii) the LOI and management’s efforts to find other prospective buyers for all or part of the Company, (iii) the Company’s expiring real estate leases, store profitability and store closings, (iv) the updated fye segment wind down analysis and retained business information, (v) sensitivities used for its going concern analysis in connection with its Form 10-Q for the period ended November 2, 2019, and (vi) establishing a credit facility at etailz as a means of providing additional liquidity. Following the discussion, given the serious liquidity challenge facing the Company and doubt about its ability to continue as a going concern, the Board instructed Mr. Feurer and Mr. Solow to move forward with a negotiation of the LOI with Sunrise since they were the only potential buyer still expressing interest.

Between November 7 and November 23, 2019, representatives of the Company and Sunrise, including Mr. Solow, Mr. Feurer and Mr. Putman, negotiated the LOI. Following a special meeting of the Board on November 21, 2019 in which the LOI and the other strategic alternatives, including a wind down of the fye segment, were discussed, the Board determined that the Company should execute the LOI and enter into exclusive negotiations with Sunrise through January 3, 2020. On November 23, 2019, the parties executed the LOI.

On November 25, 2019, Sunrise submitted diligence requests to the Company, and the Company opened a virtual data room to which representatives of Sunrise were given access to continue due diligence. From November 25, 2019 through December 8, 2019, representatives of Sunrise conducted due diligence and submitted supplemental diligence requests to the Company, to which the Company promptly responded.

The Sunrise team, including Mr. Putman, conducted onsite due diligence at the Company’s headquarters in Albany, NY the week of December 9 through December 13, 2019, and Sunrise’s legal counsel, Aird & Berlis LLP (“AB”) and Morrison Foerster (“MoFo”) submitted a legal due diligence request to the company’s legal counsel, Cahill Gordon & Reindel LLP (“Cahill”), on December 12, 2019 (the “Legal DD Request”). On December 13, 2019, representatives of AB and MoFo were granted access to the Company’s virtual data room and the Company began uploading material responsive to the Legal DD Request, and AB and MoFo began their legal due diligence.

On December 16 and 17, 2019, following a discussion with Company management, Mr. Solow updated the Board on the status of Sunrise’s onsite due diligence and anticipated next steps.

On December 18, 2019, AB and MoFo submitted a first draft of an Asset Purchase Agreement (“APA”) to Cahill, and over the next several days, Cahill discussed the APA with the Company, including Mr. Solow and Mr. Feurer. During such time, Mr. Solow and Mr. Feurer also had discussions with Mr. Putman regarding the terms set forth in the APA.

On December 23, 2019, Cahill submitted a revised draft of the APA to AB and MoFo reflecting these discussions. The proposed terms on which the Company’s negotiations focused included, among others, the size of termination fee, the exclusion of prepaid expenses from the Transaction, indemnification levels, obtaining a guarantee from the parent company of the proposed buyer entity and timing to closing of the transaction.

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On December 26, 2019, following a discussion with Cahill and Company management, Mr. Solow updated the Board on the status of negotiations with Sunrise.

Between December 26, 2019 and December 31, 2019, Sunrise continued to conduct both legal and business due diligence, and representatives of the Company and Sunrise, including Mr. Solow, Mr. Feurer and Mr. Putman, continued to discuss the business terms set forth in the APA.

On December 31, 2019, AB and MoFo submitted a revised draft of the APA to Cahill. Following several discussions between the Company and Cahill, and representatives of the Company and Sunrise, including Mr. Solow, Mr. Feurer and Mr. Putman, Cahill submitted revised drafts of the APA to AB and MoFo on January 2, 2020 and January 3, 2020 reflecting these discussions.

On January 4, 2020, AB and MoFo submitted a revised draft of the APA to Cahill, and all parties discussed the revised draft over the course of January 5 and January 6, 2020.

On January 5, 2020, following a discussion with Cahill and Company management, Mr. Solow updated the Board on the status of negotiations with Sunrise and, as previously discussed with the Board, recommended that the Board engage Houlihan Lokey Capital, Inc. (“Houlihan Lokey”) to render to it an opinion as to whether the consideration to be received by the Company in a potential transaction is fair to the Company from a financial point of view.

On January 6, 2020, the Board formally engaged Houlihan Lokey. From January 6, 2020 through January 22, 2020, the Company provided Houlihan Lokey access to the virtual dataroom and certain information relating to the historical and current operations and financial condition of the Company and the fye segment. This information included estimates of the net proceeds to the Company of a wind down of the fye segment both before and after the settlement of net debt, as well as information related to net proceeds to the Company in connection with the proposed transaction with Sunrise (also before and after the settlement of net debt), including estimates of the inventory adjustment to the base purchase price, estimates of the value of retained or excluded assets, and estimates related to retained liabilities and expense obligations, including following a wind down of any retained portions of the fye segment following a transaction with Sunrise. During that time, the Company also provided Houlihan Lokey additional requested materials and held several telephonic meetings with Houlihan Lokey regarding the materials.

On January 7, 2020, Cahill submitted a revised draft of the APA to AB and MoFo, along with draft disclosure schedules. In addition, following a discussion with Cahill and Company management, Mr. Solow updated the Board on the status of negotiations with Sunrise and scheduled a Board meeting for January 14, 2020, to approve the APA if it was in final form. In addition, given the progress made in negotiations but with some issues still remaining, it was determined that extending the exclusivity period set forth in the LOI until midnight on January 15, 2020 was reasonable, and an exclusivity extension letter was executed by the parties on January 8, 2020.

On January 8 and 9, 2020, Mr. Feurer and Mr. Putman met in person to discuss the status of the transaction.

On January 9 and 10, 2020, AB and MoFo submitted a revised draft of the APA, disclosure schedules and certain ancillary documents to Cahill reflecting those discussions, and Cahill submitted additional disclosure schedules to AB and MoFo for review.

On January 13 and 14, 2020, Mr. Solow and Mr. Putman met to discuss the status of the transaction. Following those meetings, Cahill submitted a revised draft of the APA and disclosure schedules to AB and MoFo on January 14 and 15, 2020.

Given the remaining open issues on the APA, on January 12, 2020, Mr. Solow rescheduled the Board meeting for January 17, 2020, at which meeting the Board, together with representatives from Cahill, discussed (i) the current status of the transaction with Sunrise, (ii) the Company’s diminishing liquidity position, the current status of discussions with the Company’s existing lender and the Company’s efforts to establish a credit facility at etailz as a means of providing additional liquidity, and (iii) the Company’s ability to fund the remaining operations following a closing of the Sunrise transaction if that were to happen. The Board instructed the Company and the Strategic Committee to continue work on the various workstreams and to provide the Board with an update on January 22, 2020.

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On January 20, 2020, Mr. Feurer and Mr. Solow met with Mr. Putman to discuss the current terms and conditions of the transaction with Sunrise. The Company expressed serious concerns about being able to fund its liquidity needs if a transaction could not be consummated by January 31, 2020, the originally anticipated closing date. As a result, Sunrise agreed that the effective time of the Transaction would be 12:00 A.M. on February 1, 2020, regardless of when the Transaction would close, and Mr. Feurer and Mr. Solow stated they would present that proposal to the Board at the upcoming meeting.

Cahill and AB revised the APA to reflect this change in structure, and shared the revised APA with the Board at the meeting on January 22, 2020. The Board discussed the revised APA, as well as (i) the current status of discussions with the Company’s existing lender and the Company’s efforts to establish a credit facility at etailz as a means of providing additional liquidity, and (ii) the Company’s ability to fund the remaining operations following the closing of the Sunrise transaction. Representatives from Cahill reviewed the legal duties of directors and reviewed a detailed summary of the transaction terms, as revised. The Board instructed the Company and the Strategic Committee to continue work towards finalizing the APA, as well as continue work on the other workstreams.

On January 23, 2020, the Board, together with representatives from Cahill and Houlihan Lokey, held a telephonic meeting. At the meeting, Houlihan Lokey rendered to the Board its oral opinion, which was subsequently confirmed in writing (the “Opinion”), to the effect that as of such date and based upon and subject to the factors, assumptions, qualifications and limitations set forth therein, the Parent Net Consideration (as defined in the Opinion) is fair to the Company from a financial point of view. Houlihan Lokey’s opinion is attached to this proxy statement as Annex C. After careful consideration and discussion, the members of the Board, by unanimous vote, approved and declared advisable the execution, delivery and performance of the APA and the transactions contemplated thereby, and determined that the APA and the transactions contemplated thereby were advisable and in the best interests of the Company’s shareholders. Immediately thereafter, the parties exchanged executed signature pages to the APA.

Past Contacts, Transactions or Negotiations

Other than as described under “Background of the Transaction” above, neither the Company nor any of the Selling Entities, on the one hand, and the Purchaser and Sunrise, on the other hand, have had prior contacts, transactions, or negotiations. Other than as described therein or in the section titled “Interests of Certain Persons in this Transactions”, there are no present or proposed material agreements, arrangements, understandings or relationships between our or our subsidiaries’ executive officers or directors and the Purchaser’s or Sunrise’s executive officers or directors.

Reasons for the Transaction

In reaching its decision to approve the Transaction, and to recommend that our shareholders vote to approve the Transaction, our Board consulted with management, legal advisors, business advisors and financial advisors, including Houlihan Lokey. Our Board considered all of the material factors relating to the Transaction, many of which the Board believed supported its decision, including:

the significant diminishing liquidity position of the Company;
the substantial near term cash needs of the fye segment including payments for inventory and store leases;
the lack of an available alternative to generate liquidity despite the Company’s implementation of strategic initiatives over a year ago and the Company’s attempts to solicit interest from prospective purchasers to acquire all or part of the Company for nearly two years;
the implications of not moving forward with the Transaction, which is the only viable option to generate near term liquidity, in light of the previously disclosed conclusion that there is substantial doubt about the Company’s ability to continue as a going concern through the fiscal year ending February 2021;
the view of the Board, especially considering its doubt about our ability to continue as a going concern, that the only viable alternative was to wind down the fye segment, which would involve significant delay, cost and uncertainties and is less favorable to our shareholders than the Transaction;

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the fact that the industry in which the fye segment operates continues to experience significant challenges, including increasing competition from entertainment retailers and online retailers, some of whom have greater financial and other resources than the Company and frequently sell their product at discounted prices, decline in sales of physical media and electronics products as content continues to shift to digital and streaming platforms, and reduced traffic at shopping malls where most of our stores are located;
the projected financial impact of winding down the fye segment instead of moving forward with the Transaction as set forth below under “Wind-down Analysis and Restained Business Information;”
the fact that our shareholders would continue to own shares in the Company and would retain the opportunity to participate in future earnings, if any, potential growth of our etailz segment and any potential value generated by any other strategic initiatives or alternatives we might pursue for our business or assets;
the amount and form of consideration to be received, including the assumption of all of the Company’s lease liabilities;
the fact that, pursuant to the Asset Purchase Agreement, the Purchaser has agreed to consummate the Transaction effective as of 12:00 A.M. on February 1, 2020, which mitigates the Company’s obligation to fund the cash needs of the fye segment for periods beginning on or after February 1, 2020;
the reasonable likelihood of completing the Transaction in light of the fact that the Closing is not contingent on Purchaser’s ability to secure financing commitments;
the ability to consider, evaluate and accept unsolicited superior proposals in the period after signing of the Asset Purchase Agreement and prior to approval of the Transaction by our shareholders;
the fact that the Transaction will be subject to the approval of the holders of at least two-thirds of our outstanding common stock entitled to vote thereon; and
the financial analysis reviewed by Houlihan Lokey with the Board as well as the oral opinion of Houlihan Lokey (which was subsequently confirmed in writing) that as of the date thereof, and based upon and subject to the factors, assumptions, qualifications and limitations set forth therein, the Parent Net Consideration is fair to the Company from a financial point of view. See “—Opinion of our Financial Advisor”.

Our Board also considered and balanced against the potential benefits of the Transaction a number of potentially adverse and other factors concerning the Transaction, including the following:

after the Transaction, the Company’s business operations and incoming cash flows will be limited to our etailz segment which has historically generated negative cash flow and operating losses, and which will require a working capital line of credit to continue operating;
selling the fye segment may make the remaining etailz segment less attractive to potential lenders and potential buyers;
the Transaction will not generate sufficient cash proceeds to eliminate the Company’s liquidity issues and going concern issues;
the possible disruption of the Business due to the announcement of the Transaction and the resulting distraction of the attention of management and employees of the Business;
the restrictions on the conduct of the fye segment prior to Closing, requiring us to conduct the Business only in the ordinary course of business, subject to specific limitations, which may delay or prevent us from undertaking business opportunities that may arise pending Closing;
the significant costs involved in consummating the Transaction, including legal, accounting and other costs;
consummating the Transaction will require obtaining a payoff and release letter from Wells Fargo Bank with respect to amounts outstanding under the Wells Fargo Credit Facility, and there can be no assurance that the proceeds from the Transaction will be sufficient to satisfy such payoff;

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changing the Board’s recommendation would likely trigger a requirement under the Asset Purchase Agreement to pay the Termination Fee of $3,500,000;
certain liabilities of the fye segment will not be assumed by the Purchaser and will remain obligations of the Company after the Closing, which given the Company’s liquidity issues, may not be able to be supported; and
the indemnification and other post-closing obligations set forth in the Asset Purchase Agreement.

After careful and due consideration, our Board concluded that overall, the risks, uncertainties, restrictions and potentially negative factors associated with the Transaction were outweighed by the potential benefits of the Transaction, and that many of these risks would not be mitigated by any other available alternative, including a wind down of the fye segment, but could potentially be managed to try to avoid a material adverse effect on the Company.

The foregoing information and factors considered by our Board are not intended to be exhaustive. In view of the variety of factors and the amount of information considered, our Board did not find it practicable to, and did not quantify, rank or otherwise assign relative weights to the specific factors it considered in approving the Transaction. In addition, individual members of our Board may have given different weights to different factors. Our Board considered all of these factors as a whole, and overall considered them to be favorable and to support its determination.

Opinion of our Financial Advisor

On January 23, 2020, Houlihan Lokey orally rendered its opinion to the Board (which was subsequently confirmed in writing), as to whether, as of the date thereof, the Parent Net Consideration (as defined below) is fair to Parent from a financial point of view.

Houlihan Lokey’s opinion was directed to the Board (in its capacity as such) and only addressed whether, as of the date thereof, the Parent Net Consideration is fair to Parent from a financial point of view, and did not address any other aspect or implication of the transaction or any other agreement, arrangement or understanding. The summary of Houlihan Lokey’s opinion in this proxy statement is qualified in its entirety by reference to the full text of its written opinion, which is attached as Annex C to this proxy statement and describes the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in connection with the preparation of its opinion. However, neither Houlihan Lokey’s opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and do not constitute, advice or a recommendation to the Board, any security holder of Parent or any other person as to how to act or vote with respect to any matter relating to the transaction.

In connection with Houlihan Lokey’s opinion, management of Parent directed Houlihan Lokey to assume for the purposes of Houlihan Lokey’s analysis, and Houlihan Lokey did assume, that:

(i)following the consummation of the Transaction, Parent will cause the wind down of the operations of the portions of the fye segment (the “Business”) that were not transferred to Purchaser pursuant to the Transaction (the “Retained Business”, and such wind down, the “Retained Business Wind Down”);
(ii)the value of the liabilities of the Business that will not be transferred to Purchaser pursuant to the Transaction consists of (1) $4.1 million of accrued expenses relating to the Business, (2) $5.0 million to $7.4 million of estimated transition services, Retained Business Wind Down and severance expenses of the Business on a present value basis, and (3) $1.5 million of transaction fees and expenses associated with the Transaction (collectively in the aggregate, the “Retained Expense Amount”);
(iii)the value of the assets of the Business that will not be transferred to Purchaser pursuant to the Transaction consists of $1.8 million of receivables, $1.0 million in prepaid expenses and $0.5 million in deposits (collectively in the aggregate, the “Retained Asset Value”); and
(iv)the net debt related to the Business and Parent is equal to $(12.1) million, consisting of $2.0 million in cash and $14.1 million in principal amount of note payable (the “Net Debt”), with such Net Debt payable in connection with both the Full Business Wind Down (defined below) and the Transaction and the Retained Business Wind Down (together, the “Transactions”).

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Management of Parent also directed Houlihan Lokey to assume for purposes of Houlihan Lokey’s analysis, and Houlihan Lokey has assumed, that the net inventory adjustment pursuant to the Asset Purchase Agreement shall be an increase of $1.9 million to the Base Purchase Price. The Base Purchase Price, as adjusted, is also subject to certain post-closing adjustments, as to which adjustments Houlihan Lokey expressed no opinion.

Accordingly, based on the foregoing assumptions, the sum of (1) the Base Purchase Price, as adjusted, net of the Retained Expense Amount, and (2) the Retained Asset Value ranges from $2.2 million to $4.6 million prior to the settlement of Net Debt, and ranges from $(9.9) million to $(7.5) million following the settlement of Net Debt (such sum, the “Parent Net Consideration”).

Management of Parent also directed Houlihan Lokey to assume for purposes of Houlihan Lokey’s analysis, and Houlihan Lokey has assumed, that absent the Transaction, the Board would immediately initiate the wind down of the entirety of the Business (the “Full Business Wind Down”), and as a result Parent would likely become cash flow insolvent during the fiscal year ending February 2021. Accordingly, management of Parent directed Houlihan Lokey to assume for purposes of Houlihan Lokey’s analysis, and Houlihan Lokey has assumed, that the consummation of the Transaction is not expected to have a material impact on Parent’s liquidity outlook for Parent for the fiscal year ending February 2021.

In arriving at its opinion, Houlihan Lokey, among other things:

1.reviewed the draft dated January 21, 2020 of the Asset Purchase Agreement;
2.reviewed certain information relating to the historical and current operations and financial condition of the Business and Parent made available to Houlihan Lokey by Parent, including estimates of the net proceeds to Parent of the Full Business Wind Down both before and after the settlement of Net Debt (the “Wind Down Case”) and estimates of the components of the Retained Expense Amount and the Retained Asset Value and estimates of Net Debt (collectively, the “Estimates”);
3.spoken with certain members of the management of Parent and certain of its representatives and advisors regarding the business, operations, financial condition and prospects of the Business, the liquidity outlook for Parent, the Transaction, the Full Business Wind Down, the Retained Business Wind Down and related matters;
4.compared the financial and operating performance of the Business with that of public companies that Houlihan Lokey deemed to be relevant;
5.reviewed the current and historical market prices and trading volume for certain of Parent’s publicly traded securities, and the current and historical market prices and trading volume of the publicly traded securities of certain other companies that Houlihan Lokey deemed to be relevant;
6.reviewed a written confirmation addressed to Houlihan Lokey from senior management of Parent which contains, among other things, representations regarding the accuracy of the information, data and other materials (financial or otherwise) provided to, or discussed with, Houlihan Lokey by or on behalf of Parent; and
7.conducted such other financial studies, analyses and inquiries and considered such other information and factors as Houlihan Lokey deemed appropriate.

Houlihan Lokey relied upon and assumed, without independent verification, the accuracy and completeness of all data, material and other information furnished, or otherwise made available, to Houlihan Lokey, discussed with or reviewed by Houlihan Lokey, or publicly available, and did not assume any responsibility with respect to such data, material and other information. In addition, management of Parent advised Houlihan Lokey, and Houlihan Lokey assumed, that the Wind Down Case and the Estimates reviewed by Houlihan Lokey were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of such management as to the matters covered thereby, and Houlihan Lokey expresses no opinion with respect to such Wind Down Case, Estimates or the assumptions on which they are based. Houlihan Lokey relied upon and assumed, without independent verification, that there had been no change in the businesses, assets, liabilities, financial condition, results of operations, cash flows or prospects of the Business or Parent since the respective dates of the most recent financial statements and other information, financial or otherwise, provided to Houlihan Lokey that would be material to Houlihan Lokey’s analyses or opinion, and that there is no information or any facts that would make any of the information reviewed by Houlihan Lokey incomplete or misleading. Houlihan

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Lokey also relied upon, without independent verification, the assessments of the management of Parent as to the liquidity outlook of Parent. Houlihan Lokey assumed, with the consent of the Board, that there would be no developments with respect to any such matters that would be meaningful in any respect to Houlihan Lokey’s analyses or its opinion.

Houlihan Lokey relied upon and assumed, without independent verification, that (a) the representations and warranties of all parties to the Asset Purchase Agreement and all other related documents and instruments that are referred to therein were true and correct, (b) each party to the Asset Purchase Agreement and other related documents and instruments would fully and timely perform all of the covenants and agreements required to be performed by such party, (c) all conditions to the consummation of the Transactions would be satisfied without waiver thereof, and (d) the Transactions would be consummated in a timely manner in accordance with the terms described in the Asset Purchase Agreement and other related documents and instruments, without any amendments or modifications thereto. Houlihan Lokey relied upon and assumed, without independent verification, that (i) the Transactions would be consummated in a manner that complies in all respects with all applicable foreign, federal and state statutes, rules and regulations, and (ii) all governmental, regulatory, and other consents and approvals necessary for the consummation of the Transactions would be obtained and that no delay, limitations, restrictions or conditions would be imposed or amendments, modifications or waivers made that would have an effect on the Transactions, or the Business or Parent that would be material to Houlihan Lokey’s analyses or its opinion. In addition, Houlihan Lokey relied upon and assumed, without independent verification, that the final form of the Asset Purchase Agreement would not differ in any respect from the draft of the Asset Purchase Agreement identified above.

Furthermore, in connection with its opinion, Houlihan Lokey was not requested to make, and did not make, any physical inspection or independent appraisal or evaluation of any of the assets, properties or liabilities (fixed, contingent, derivative, off-balance-sheet or otherwise) of the Business or Parent or any other party. Houlihan Lokey did not estimate, and expressed no opinion regarding, the liquidation value of any entity or business, other than the Wind Down Case and the Estimates as Parent management has directed Houlihan Lokey to assume for purposes of its analysis. Houlihan Lokey undertook no independent analysis of any potential or actual litigation, regulatory action, possible unasserted claims or other contingent liabilities, to which the Business, Parent or Purchaser is or may be a party or is or may be subject, or of any governmental investigation of any possible unasserted claims or other contingent liabilities to which the Business, Parent or Purchaser is or may be a party or is or may be subject.

Houlihan Lokey was not requested to, and did not, (a) initiate or participate in any discussions or negotiations with, or solicit any indications of interest from, third parties with respect to the Transactions, the securities, assets, business or operations of the Business, Parent or any other party, or any alternatives to the Transactions, (b) negotiate the terms of the Transactions, or (c) advise the Board or any other party with respect to alternatives to the Transactions. Houlihan Lokey’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to Houlihan Lokey as of, the date its opinion. Houlihan Lokey did not undertake, and is under no obligation, to update, revise, reaffirm or withdraw its opinion, or otherwise comment on or consider events occurring or coming to Houlihan Lokey’s attention after the date of its opinion.

Houlihan Lokey’s opinion was furnished for the use of the Board in its capacity as such in connection with its evaluation of the Transactions and may not be used for any other purpose without Houlihan Lokey’s prior written consent. Houlihan Lokey’s opinion is not intended to be, and does not constitute, a recommendation to the Board, any security holder or any other party as to how to act or vote with respect to any matter relating to the Transactions or otherwise.

Houlihan Lokey was not requested to opine as to, and its opinion did not express an opinion as to or otherwise address, among other things: (i) the underlying business decision of the Board, Parent, its security holders or any other party to proceed with or effect the Transactions, (ii) the terms of any arrangements, understandings, agreements or documents related to, or the form, structure or any other portion or aspect of, the Transactions or otherwise (other than the Parent Net Consideration to the extent expressly specified in Houlihan Lokey’s opinion), (iii) the fairness of any portion or aspect of the Transactions to the holders of any class of securities, creditors or other constituencies of Parent, or to any other party, except if and only to the extent expressly set forth in the last sentence of Houlihan Lokey’s opinion, (iv) the relative merits of the Transactions as compared to any alternative business strategies or transactions that might be available for Parent or any other

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party, (v) the fairness of any portion or aspect of the Transactions to any one class or group of Parent’s or any other party’s security holders or other constituents vis-à-vis any other class or group of Parent’s or such other party’s security holders or other constituents (including, without limitation, the allocation of any consideration amongst or within such classes or groups of security holders or other constituents), (vi) whether or not Parent, Purchaser, their respective security holders or any other party is receiving or paying reasonably equivalent value in the Transactions, (vii) the solvency, creditworthiness or fair value of the Parent or any of its subsidiaries, Purchaser, or any other participant in the Transactions, or any of their respective assets, under any applicable laws relating to bankruptcy, insolvency, fraudulent conveyance or similar matters, (viii) the impact of the Transactions on the solvency or viability of Parent or any of its subsidiaries or the ability of Parent or any of its subsidiaries to pay their respective obligations when they come due, or (ix) the fairness, financial or otherwise, of the amount, nature or any other aspect of any compensation to or consideration payable to or received by any officers, directors or employees of any party to the Transactions, any class of such persons or any other party, relative to the Parent Net Consideration or any component thereof or otherwise. Furthermore, no opinion, counsel or interpretation was intended in matters that require legal, regulatory, accounting, insurance, tax or other similar professional advice. Houlihan Lokey assumed that such opinions, counsel or interpretations have been or will be obtained from the appropriate professional sources. Furthermore, Houlihan Lokey relied, with the consent of the Board, on the assessments by the Board, Parent and their respective advisors, as to all legal, regulatory, accounting, insurance, tax and other similar matters with respect to the Business, the Full Business Wind Down and the Transactions or otherwise. The issuance of Houlihan Lokey’s opinion was approved by a committee authorized to approve opinions of this nature.

In performing its analyses, Houlihan Lokey considered general business, economic, industry and market conditions, financial and otherwise, and other matters as they existed on, and could be evaluated as of, the date of its opinion. No company or transaction used in Houlihan Lokey’s analyses for comparative purposes (illustrative or otherwise) is identical to the Business or the Transactions and an evaluation of the results of those analyses is not entirely mathematical. As a consequence, mathematical derivations (such as the high, low, mean and median) of financial data are not by themselves meaningful and in selecting the ranges of multiples to be applied for illustrative purposes were considered in conjunction with experience and the exercise of judgment. The estimates prepared by the management of Parent and the implied reference range values indicated by Houlihan Lokey’s analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, any analyses relating to the value of assets, businesses or otherwise do not purport to be appraisals or to reflect the prices at which assets or businesses actually may be sold, which may depend on a variety of factors, many of which are beyond the control of Parent. Much of the information used in, and accordingly the results of, Houlihan Lokey’s analyses are inherently subject to substantial uncertainty.

Houlihan Lokey’s opinion was only one of many factors considered by the Board in evaluating the Transactions. Neither Houlihan Lokey’s opinion nor its analyses were determinative of the consideration or of the views of the Board or management with respect to the transaction or the consideration. Under the terms of its engagement by Parent, neither Houlihan Lokey’s opinion nor any other advice or services rendered by it in connection with the Transactions or otherwise, should be construed as creating, and Houlihan Lokey should not be deemed to have, any fiduciary duty to, or agency relationships with, the Board, Parent, Purchaser, any security holder or creditor of Parent or Purchaser or any other person, regardless of any prior or ongoing advice or relationships. The type and amount of consideration payable in the transaction were determined through negotiation between Parent and Purchaser, and the decision to enter into the Asset Purchase Agreement was solely that of the Board.

Financial Analyses

In preparing its opinion to the Board, Houlihan Lokey performed a variety of analyses, including those described below. The summary of Houlihan Lokey’s analyses is not a complete description of the analyses underlying Houlihan Lokey’s opinion. The preparation of such an opinion is a complex process involving various quantitative and qualitative judgments and determinations with respect to the financial, comparative and other analytical methods employed and the adaptation and application of these methods to the unique facts and circumstances presented. As a consequence, neither Houlihan Lokey’s opinion nor its underlying analyses is readily susceptible to summary description. Houlihan Lokey arrived at its opinion based on the results of all analyses undertaken by it and assessed as a whole and did not draw, in isolation, conclusions from or with regard

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to any individual analysis or factor. While the results of each analysis were taken into account in reaching Houlihan Lokey’s overall conclusion with respect to fairness, Houlihan Lokey did not make separate or quantifiable judgments regarding individual analyses. Accordingly, Houlihan Lokey believes that its analyses and the following summary must be considered as a whole and that selecting portions of its analyses and factors, without considering all analyses and factors, could create a misleading or incomplete view of the processes underlying Houlihan Lokey’s analyses and opinion.

The following is a summary of the material financial analyses performed by Houlihan Lokey in connection with the preparation of its opinion and reviewed with the Board on January 23, 2020. The analyses summarized below include information presented in tabular format. The tables alone do not constitute a complete description of the analyses. Considering the data in the tables below without considering the full narrative description of the analyses, as well as the methodologies underlying, and the assumptions, qualifications and limitations affecting, each analysis, could create a misleading or incomplete view of Houlihan Lokey’s analyses.

Management of the Company indicated to Houlihan Lokey that (i) there were substantial doubts as to Parent’s ability to operate as a going concern due to continued operating losses and liquidity considerations and that (ii) absent the Transaction, the Company would immediately effectuate a wind down of the Business. Management of the Company also indicated to Houlihan Lokey that the wind down analysis information in “–Wind Down Analysis and Retained Business Information” below reflected management’s best estimates as to the future prospects of the Business absent entering into the Transaction.

Wind Down Analysis

Houlihan Lokey performed a wind down analysis which compares a reference range of values attainable to the Company in a full wind down of the Business (the “Illustrative Wind Down Reference Range”) to a reference range of values attainable to the Company pursuant to the Transactions and the Retained Business Wind Down (the “Parent Net Consideration Reference Range”). In calculating the Illustrative Wind Down Reference Range, Houlihan Lokey used the wind down analysis information as set forth in “—Wind Down Analysis and Retained Business Information” below, which was provided by the management of Parent to Houlihan Lokey for use in connection with its financial analyses. In calculating the Parent Net Consideration Reference Range, Houlihan Lokey used estimates of Closing Date Purchase Price, the Retained Expense Amount and the Retained Asset Value ranges as provided by the management of Parent to Houlihan Lokey for use in connection with its financial analyses. Houlihan Lokey conducted the comparison of the Illustrative Wind Down Reference Range to the Parent Net Consideration Reference Range both before (for illustrative purposes) and after settlement of estimates of Net Debt as provided by the management of Parent to Houlihan Lokey for use in connection with its financial analyses. Houlihan Lokey calculated that, before the settlement of Net Debt, the Illustrative Wind Down Reference Range was from ($8.7 million) to $0.7 million, compared to the Parent Net Consideration Reference Range of $2.2 million to $4.6 million. Houlihan Lokey also calculated that, after the settlement of Net Debt, the Illustrative Wind Down Reference Range was from ($20.8) million to ($11.4) million, compared to the Parent Net Consideration Reference Range of ($9.9) million to ($7.5) million.

Illustrative Selected Companies Analysis

For purposes of its Illustrative Selected Companies Analysis, Houlihan Lokey reviewed financial metrics, including enterprise value. Generally, enterprise value means the value as of a specified date of the relevant company’s outstanding equity securities (taking into account outstanding options and other securities convertible, exercisable or exchangeable into or for equity securities of the company) plus the amount of its net debt (the amount of its outstanding indebtedness, non-convertible preferred stock, capital lease obligations and non-controlling interests less the amount of cash and cash equivalents on its balance sheet).

Unless the context indicates otherwise, enterprise values used in the selected companies analysis described below were calculated using the closing price of Parent’s common stock and the common stock of the selected companies listed below as of January 17, 2020. Net debt for the selected companies was reviewed based on both (i) latest quarterly information available as of January 17, 2020 and (ii) average of information for the last four available quarters as of January 17, 2020 to adjust for the effect of seasonality on the enterprise value calculation. The estimates of the future financial performance of the Business for the Fiscal Year ended

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February 1, 2020 (“FY 2020”) relied upon for the illustrative financial analyses described below were based on the information provided by the management of Parent. The estimates of the future financial performance of the selected companies listed below were based on certain publicly available research analyst estimates based on Bloomberg consensus for those companies.

Houlihan Lokey reviewed certain data for selected companies, with publicly traded equity securities, that Houlihan Lokey deemed relevant.

The financial data reviewed included:

Enterprise value and Adjusted Enterprise Value1 (“EV”) as a multiple of estimated latest 12 months (“LTM”) revenue; and
Enterprise value and Adjusted Enterprise Value as a multiple of estimated FY 2020 revenue2.

The selected companies and resulting data were as follows:

Entertainment Retail

Indigo Books & Music, Inc.
GameStop Corp.
Barnes & Noble Education, Inc.

Specialty Retail

Office Depot, Inc.
Pier 1 Imports, Inc.
Build-A-Bear Workshop, Inc.
Bed Bath & Beyond Inc.
Chico’s FAS, Inc.
Francesca’s Holdings Corporation
Kirkland’s Inc.
Express, Inc.

Multiples based on average net debt for the four most recently available quarters

 
Entertainment Retail
Specialty Retail
 
EV/LTM
Revenue
EV/FY2020E
Revenue
EV/LTM
Revenue
EV/FY2020E
Revenue
Low
 
(0.02x
)
 
(0.02x
)
 
0.00x
 
 
0.07x
 
High
 
0.14x
 
 
0.14x
 
 
0.22x
 
 
0.23x
 
Median
 
0.02x
 
 
0.02x
 
 
0.18x
 
 
0.19x
 
Mean
 
0.05x
 
 
0.05x
 
 
0.14x
 
 
0.18x
 

Multiples based on net debt for the most recent available quarter

 
Entertainment Retail
Specialty Retail
 
EV/LTM
Revenue
EV/FY2020E
Revenue
EV/LTM
Revenue
EV/FY2020E
Revenue
Low
 
0.04x
 
 
0.04x
 
 
0.06x
 
 
0.06x
 
1Adjusted Enterprise Value means: equity market value as of January 17, 2020 plus the average quarter end debt over the latest twelve months plus the preferred stock and minority interests for the most recently completed quarterly period for which financial information has been made public minus the average quarter-end cash over the latest twelve months.
2For Parent, GameStop Corp., Build-A-Bear Wrkshop, Inc., Chico’s FAS, Inc., Francesca’s Holdings Corporation, Kirkland’s Inc., and Express, Inc., FY 2020 refers to year ended 2/1/2020. For Pier 1 Imports, Inc. and Bed Bath & Beyond Inc., FY 2020 refers to year ended 3/2/2020. For Indigo Books & Music, Inc., FY 2020 refers to year ended 3/30/2020. For Barnes & Noble Education, Inc., FY 2020 refers to year ended 4/27/2020. For Office Depot, Inc., FY 2020 refers to year ended 12/29/2019.

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Entertainment Retail
Specialty Retail
 
EV/LTM
Revenue
EV/FY2020E
Revenue
EV/LTM
Revenue
EV/FY2020E
Revenue
High
 
0.09x
 
 
0.09x
 
 
0.26x
 
 
0.23x
 
Median
 
0.06x
 
 
0.07x
 
 
0.20x
 
 
0.20x
 
Mean
 
0.06x
 
 
0.06x
 
 
0.16x
 
 
0.18x
 

Taking into account the results of the illustrative selected companies analysis, Houlihan Lokey applied selected multiple ranges of 0.000x to 0.075x enterprise value to latest 12 months revenue and enterprise value to FY 2020 estimated revenue to corresponding financial data for the Business. The illustrative selected companies analysis indicated illustrative implied enterprise value reference ranges of $0.0 to $14.6 million based on the selected range of multiples of enterprise value to latest 12 months revenue, and $0.0 to $14.5 million based on the selected range of multiples of enterprise value to FY 2020 estimated revenue, as compared to the base purchase price of $10.0 million.

Miscellaneous

Houlihan Lokey was engaged by Parent to provide an opinion to the Board as to whether, as of the date thereof, the Parent Net Consideration is fair to Parent from a financial point of view. Parent engaged Houlihan Lokey based on Houlihan Lokey’s experience and reputation. Houlihan Lokey is regularly engaged to render financial opinions in connection with mergers, acquisitions, divestitures, leveraged buyouts, and for other purposes. Pursuant to its engagement by Parent, Houlihan Lokey is entitled to an aggregate fee of $400,000 for its services, a portion of which became payable upon the execution of Houlihan Lokey’s engagement letter and the balance of which became payable upon the delivery of Houlihan Lokey’s opinion. No portion of Houlihan Lokey’s fee is contingent upon the successful completion of the Transaction. Parent has also agreed to reimburse Houlihan Lokey for certain expenses and to indemnify Houlihan Lokey, its affiliates and certain related parties against certain liabilities and expenses, including certain liabilities under the federal securities laws, arising out of or related to Houlihan Lokey’s engagement.

In the ordinary course of business, certain of Houlihan Lokey’s employees and affiliates, as well as investment funds in which they may have financial interests or with which they may co-invest, may acquire, hold or sell, long or short positions, or trade, in debt, equity, and other securities and financial instruments (including loans and other obligations) of, or investments in, the Business, Parent, Purchaser or any other party that may be involved in the Transactions and their respective affiliates or security holders or any currency or commodity that may be involved in the Transactions.

Houlihan Lokey and certain of its affiliates may provide investment banking, financial advisory and/or other financial or consulting services to the Business, Parent, Purchaser or other participants in the Transactions or certain of their respective affiliates or security holders in the future, for which Houlihan Lokey and its affiliates may receive compensation. Furthermore, in connection with bankruptcies, restructurings, distressed situations and similar matters, Houlihan Lokey and certain of its affiliates may have in the past acted, may currently be acting and may in the future act as financial advisor to debtors, creditors, equity holders, trustees, agents and other interested parties (including, without limitation, formal and informal committees or groups of creditors) that may have included or represented and may include or represent, directly or indirectly, or may be or have been adverse to, the Business, Parent, Purchaser, other participants in the Transactions or certain of their respective affiliates or security holders, for which advice and services Houlihan Lokey and its affiliates have received and may receive compensation.

Wind Down Analysis and Retained Business Information

The Company does not as a matter of course make public projections as to its financial position or results of operations due to, among other reasons, the uncertainty of the underlying assumptions and estimates. However, the Company is including selected unaudited wind down analysis and retained business information with respect to the fye segment in this proxy statement to provide our shareholders with access to certain non-public unaudited projected financial information that was made available to the Board and Houlihan Lokey in connection with the Transaction, and which management directed Houlihan Lokey to use for purposes of its financial analyses.. The unaudited wind down analysis and retained business information was not prepared with a view toward public disclosure, and the inclusion of this information should not be regarded as an indication that

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either the Company or Houlihan Lokey or any other recipient of this information considered, or now considers, it to be predictive of actual future results. The Company does not assume any responsibility for the accuracy of this information. The unaudited wind down analysis and retained business information is not being included in this proxy statement to influence any shareholder’s decision whether to vote in favor of the Transaction (Proposal I), but because it represents projected financial information prepared by management of the Company that was used for purposes of the financial analyses performed by our financial advisor.

The unaudited wind down analysis and retained business information was not prepared with a view toward complying with GAAP, the published guidelines of the SEC regarding projections or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. Neither the Company’s independent registered public accounting firm, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the unaudited wind down analysis and retained business information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability.

The unaudited wind down analysis and retained business information relied upon by Houlihan Lokey in connection with its opinion rendered to the Board on January 23, 2020 does not take into account any circumstances or events occurring after January 22, 2020, the date such information was prepared. The unaudited wind down analysis does not give effect to the Transaction. The retained business information represents the Company’s estimation of the value of the liabilities and assets of the fye segment that will not be transferred to Purchaser pursuant to the Transaction, including the costs of the wind down of the retained business.

Wind Down Analysis (Does not give effect to the Transaction)

 
 
Low
High
(dollars in millions)
Projected
Book Value
1/31/2020
Estimated
Recovery
Rate
Estimated
Recovery
Value
Estimated
Recovery
Rate
Estimated
Recovery
Value
Total Cash & Receivables
$
3.8
 
 
88.4
%
$
3.4
 
 
97.4
%
$
3.7
 
Inventory
$
60.0
 
 
58.6
%
$
35.2
 
 
63.6
%
$
38.2
 
Total Other Assets
$
6.6
 
 
12.0
%
$
0.8
 
 
25.7
%
$
1.7
 
Total Trust Funds and Other Priority Payments
$
(4.4
)
 
77.3
%
$
(3.4
)
 
63.2
%
$
(2.8
)
Revolving Credit Facility
 
(14.1
)
 
 
 
 
(14.1
)
 
 
 
 
(14.1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Present Value of Going Out of Business and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wind Down Period Disbursements(1)
 
 
 
 
 
 
$
(16.7
)
 
 
 
$
(16.6
)
Estimated Creditor Claims(2)
$
(27.8
)
 
 
 
$
(25.9
)
 
 
 
$
(21.5
)
(1) Represents present value of estimated expenses that would be incurred during going out of business and wind down periods, calculated using discount rate range of 2.0% to 4.0% (including labor costs, insurance, other selling, general and administrative expenses, and severance and professional fees incurred during the wind down period in addition to certain direct going out of business costs factored into inventory recovery assumptions).
(2)Includes accounts payable, lease obligations, and other accrued expenses (excluding trust and priority payments and customer obligations, but including utilities, freight, property taxes, health insurance and other accrued expenses)

Retained Business Information (After giving effect to the Transaction)

(dollars in millions)
Estimated
Amounts
Accrued expenses of the fye segment
$(4.1)
Estimated transitions services, retained business wind down and severance expenses on a present value basis
$(5.0) - $(7.4)
Transaction fees and expenses
$(1.5)
Excluded Receivables of the fye segment
$1.8 
Excluded Prepaid Expenses of the fye segment
$1.0 
Excluded Deposits of the fye segment
$0.5 

As of 1/31/2020, the net debt related to the fye segment and the Company is projected to be equal to $12.1 million, consisting of $2.0 million in cash and $14.1 million in principal amount outstanding under the

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Company’s revolving credit facility, with such net debt payable in connection with both the full wind down of the fye segment (absent the Transaction) and the Transactions.

Readers of this proxy statement are cautioned not to place undue reliance on the unaudited wind down analysis and retained business information set forth above. Although presented with numeric specificity, the unaudited wind down analysis and retained business information reflects numerous estimates and assumptions, all of which are difficult to predict and many of which are beyond the Company’s control. The unaudited wind down analysis and retained business information was prepared solely for internal use and is subjective in many respects. As a result, although this information was prepared by management of the Company based on estimates and assumptions that management believed were reasonable at the time, there can be no assurance that the estimated net proceeds of a wind down of the fye segment would be realized or that actual net proceeds of a wind down of the fye segment would not be significantly higher or lower than estimated, and there can be no assurance that the estimated liabilities and assets of the retained business would not be significantly higher or lower than estimated.

No representation is made by the Company, Purchaser or any other person to any shareholder regarding the ultimate performance of the fye segment compared to the unaudited wind down analysis information or the actual amount of the retained assets and liabilities compared to the unaudited retained business information. No representation was made by the Company to Purchaser in the APA concerning this information. The wind down analysis and retained business information included in this proxy statement has been prepared by, and is the responsibility of, the Company's management. The Company and its management believe that the wind down analysis and retained business information has been prepared based on estimates and assumptions that management believed were reasonable at the time. However, because this information is highly subjective, it should not be relied on as necessarily indicative of the actual proceeds that would result from a wind down of the fye segment or actual value of the liabilities and assets of the retained business pro forma for the Transaction.

KPMG LLP (“KPMG”) has neither examined, compiled, nor performed any procedures with respect to the unaudited wind down analysis and retained business information contained herein and, accordingly, KPMG does not express an opinion or any other form of assurance on such information or its achievability. KPMG assumes no responsibility for and denies any association with the unaudited wind down analysis and retained business information. The KPMG report included in this proxy statement refers exclusively to the Company's historical audited consolidated financial statements. They do not extend to the unaudited wind down analysis and retained business information and should not be read to do so.

Except as may be required by applicable securities laws, the Company does not intend to update or otherwise revise the unaudited wind down analysis and retained business information to reflect circumstances existing after the date when made or to reflect the occurrence of future events, even in the event that any or all of the assumptions underlying such unaudited wind down analysis and retained business information are no longer appropriate.

Net Proceeds from the Transaction and Expected Use of such Net Proceeds

Pursuant to the APA, consideration for the Transaction will consist of the base purchase price of $10,000,000 (the “Base Purchase Price”) (as (x) increased or decreased by a net inventory adjustment and (y) increased by Purchaser’s portion of pre-paid taxes and pre-paid expenses; provided that the amount of such adjustments will not be paid until seven business days after closing to the extent Purchaser obtains a credit facility on or before closing, or seven business days after the Purchaser obtains a credit facility after closing or March 15, 2020 if no credit facility is obtained), payable in cash, of which $1,000,000 will be held in escrow.

We expect to use all of the proceeds from the Transaction to repay outstanding indebtedness under the Wells Fargo Credit Facility and to satisfy other unassumed liabilities.

Our Business Following the Transaction

We expect that after the Transaction is completed our business operations and incoming cash flows will be limited to our etailz segment, a digital marketplace retailer that generates substantially all of its revenue through Amazon Marketplace and which has historically generated operating losses. Based on recurring losses from operations, expectation of operating losses for the foreseeable future, and uncertainty with respect to any available future funding and any alternative or additional strategic alternatives, the Company has concluded that,

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following the Transaction, there still will be substantial doubt about the Company’s ability to continue as a going concern. See “Risk Factors Relating to the Proposal to Approve the Transaction”.

As disclosed in the Company’s previous filings with the Securities and Exchange Commission (attached hereto as Annex E and Annex F), the Company has suffered recurring losses from operations and the Company’s primary sources of liquidity are borrowing capacity under its revolving credit facility, available cash and cash equivalents, all of which are limited. Therefore, the ability of the Company to meet its liabilities and to continue as a going concern is dependent on, among other things, improved profitability, the continued implementation of the performance improvement plan for the etailz segment, and the availability of future funding for the etailz segment. Our Board has determined that this Transaction is an important step toward enabling the Company to continue as a going concern by providing some liquidity to pay down debts and by eliminating the accruing of further obligations related to operation of the fye segment. However, the Company has concluded that, even after consummation of the Transaction, the Company’s ability to continue as a going concern will still be dependent on the continued implementation of the performance improvement plan for the etailz segment, the availability of future funding for the etailz segment, implementation of one or more corporate initiatives to reduce costs at the parent company level (which could include a voluntary delisting from NASDAQ and deregistering of our Common Stock in order to substantially eliminate the costs associated with being a public company), satisfying all unassumed liabilities of the fye segment and other strategic alternatives, including selling all or part of the remaining business or assets of the Company. The unaudited pro forma financial information included in this proxy statement do not include any adjustments that might result from the outcome of these uncertainties.

Unaudited Pro Forma Condensed Consolidated Financial Statements

The following unaudited pro forma condensed consolidated statements of operations for the fiscal years ended February 3, 2018, February 2, 2019, and the thirty nine weeks ended November 2, 2019 present the Company’s results of operations as adjusted to give effect to the divestiture of certain assets and liabilities of the fye business (the “Transaction”) as if it had occurred at the beginning of the earliest period. The accompanying unaudited pro forma condensed consolidated balance sheet as of November 2, 2019 presents the Company’s financial position as if the Transaction had occurred on November 2, 2019. The unaudited pro forma condensed consolidated balance sheet as of November 2, 2019 reflects the elimination of certain assets and liabilities of the fye business to be sold as part of the Transaction, the elimination of all intercompany accounts, the inclusion of the cash proceeds from the Transaction, the application of such proceeds to repay certain outstanding debt, and the recognition of the estimated loss from the Transaction. The estimated loss on the sale of the fye business will change upon final determination and settlement of post-closing adjustments.

The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s most recent annual report on Form 10-K for the period ended February 2, 2019 (which is attached as Annex E to this proxy statement) and in the Company’s most recent quarterly report on Form 10-Q for the period ended November 2, 2019 (which is attached as Annex F to this proxy statement).

The unaudited pro forma information below is provided for information purposes only and is not indicative of what the actual financial position or results of operations of the Company would have been had the Transaction actually occurred on the dates indicated, nor does it purport to indicate the future financial position or results of operations of the Company. The pro forma adjustments are based upon available information and assumptions believed to be reasonable in the circumstances. There can be no assurance that such information and assumptions will not change from those reflected in the pro forma condensed financial statements and notes thereto.

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TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)

 
Historical
Trans World
Entertainment
Corporation
Year-ended
February 3,
2018
Disposition
of fye
Business(1)
Pro Forma
Adjustments
Pro Forma
Trans World
Entertainment
Corporation
Year-ended
February 3,
2018
Net sales
$
437,173
 
$
(262,714
)
$
 
$
174,459
 
Other revenue
 
5,683
 
 
(5,683
)
 
 
 
 
Total revenue
 
442,856
 
 
(268,397
)
 
 
 
174,459
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
 
299,013
 
 
(164,143
)
 
 
 
134,870
 
Gross profit
 
143,843
 
 
(104,254
)
 
 
 
39,589
 
Selling, general and administrative expenses
 
167,924
 
 
(124,408
)
 
4,547
(2) 
 
48,063
 
Income from joint venture
 
(1,787
)
 
 
 
 
 
(1,787
)
Asset impairment charges
 
29,107
 
 
(29,107
)
 
 
 
 
Loss from operations
 
(51,401
)
 
49,261
 
 
(4,547
)
 
(6,687
)
Interest expense
 
332
 
 
 
 
(155
)(3)
 
177
 
Other loss (income)
 
(8,881
)
 
149
 
 
 
 
(8,732
)
(Loss) income before income taxes
 
(42,852
)
 
49,112
 
 
(4,392
)
 
1,868
 
Income tax (benefit) expense
 
(299
)
 
285
 
 
 
 
(14
)
Net (loss) income
$
(42,553
)
 
48,827
 
 
(4,392
)
 
1,882
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted (loss) income per share:
 
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted loss per common share
$
(23.52
)
 
 
 
 
 
 
$
1.04
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding – basic
 
1,810
 
 
 
 
 
 
 
 
1,810
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding – diluted
 
1,810
 
 
 
 
 
 
 
 
1,811
 

Notes:

(1)Represents the elimination of the operating results of the fye business for the period presented, which is consistent with the terms of the Asset Purchase Agreement, as defined herein.
(2)Represents adjustment for the corporate level expenses of the parent company. Does not reflect (i) income or expenses arising out of the Transition Services Agreement or (ii) certain severance payments that will be payable by the Company in respect of employees not transferred to the Purchaser, which amounts will not be known prior to consummation of the Transaction.
(3)Represents an adjustment of interest expense assuming that $14.5 million of cash proceeds were received at the beginning of the period and applied to repay debt.

34

TABLE OF CONTENTS

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)

 
Historical
Trans World
Entertainment
Corporation
Year-ended
February 2,
2019
Disposition
of fye
Business(1)
Pro Forma
Adjustments
Pro Forma
Trans World
Entertainment
Corporation
Year-ended
February 2,
2019
Net sales
$
412,997
 
$
(226,097
)
$
 
$
186,900
 
Other revenue
 
5,193
 
 
(5,193
)
 
 
 
 
Total revenue
 
418,190
 
 
(231,290
)
 
 
 
186,900
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
 
290,116
 
 
(142,031
)
 
 
 
148,085
 
Gross profit
 
128,074
 
 
(89,259
)
 
 
 
38,815
 
Selling, general and administrative expenses
 
165,222
 
 
(111,768
)
 
7,750
(2) 
 
61,204
 
Asset impairment charges
 
59,658
 
 
(1,946
)
 
 
 
57,712
 
Loss from operations
 
(96,806
)
 
24,455
 
 
(7,750
)
 
(80,101
)
Interest expense
 
723
 
 
 
 
(498
)(3)
 
225
 
Other income
 
(227
)
 
227
 
 
 
 
 
Loss before income taxes
 
(97,302
)
 
24,228
 
 
(7,252
)
 
(80,326
)
Income tax expense
 
80
 
 
(53
)
 
 
 
27
 
Net loss
$
(97,382
)
 
24,281
 
 
(7,252
)
 
(80,353
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted loss per share:
 
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted loss per common share
$
(53.67
)
 
 
 
 
 
 
$
(44.30
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding – basic and diluted
 
1,814
 
 
 
 
 
 
 
 
1,814
 

Notes:

(1)The elimination of the operating results of the fye business for the period presented, which is consistent with the terms of the Asset Purchase Agreement, as defined herein.
(2)Represents adjustment for the corporate level expenses of the parent company. Does not reflect (i) income or expenses arising out of the Transition Services Agreement or (ii) certain severance payments that will be payable by the Company in respect of employees not transferred to the Purchaser, which amounts will not be known prior to consummation of the Transaction.
(3)Represents an adjustment of interest expense assuming that $14.5 million of cash proceeds were received at the beginning of the period and applied to repay debt.

35

TABLE OF CONTENTS

TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)

 
Historical
Trans World
Entertainment
Corporation
Thirty-nine
Weeks ended
November 2,
2019
Disposition
of fye
Business(1)
Pro Forma
Adjustments
Pro Forma
Trans World
Entertainment
Corporation
Thirty-nine
Weeks ended
November 2,
2019
Net sales
$
223,100
 
$
(125,092
)
$
 
$
98,008
 
Other revenue
 
2,510
 
 
(2,510
)
 
 
 
 
Total revenue
 
225,610
 
 
(127,602
)
 
 
 
 
98,008
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
 
152,025
 
 
(76,932
)
 
 
 
75,093
 
Gross profit
 
73,585
 
 
(50,670
)
 
 
 
22,915
 
Selling, general and administrative expenses
 
95,470
 
 
(68,915
)
 
6,525
(2) 
 
33,080
 
Asset impairment charges
 
16,035
 
 
(16,035
)
 
 
 
 
Loss from operations
 
(37,920
)
 
34,280
 
 
(6,525
)
 
(10,165
)
Interest expense
 
554
 
 
 
 
(445
)(3)
 
109
 
Other loss
 
388
 
 
(388
)
 
 
 
 
Loss before income taxes
 
(38,862
)
 
34,668
 
 
(6,080
)
 
(10,274
)
Income tax expense
 
223
 
 
(192
)
 
 
 
31
 
Net loss
$
(39,085
)
$
34,860
 
$
(6,080
)
$
(10,305
)
 
 
 
 
 
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