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Trans World Entertainment Corp – ‘424B4’ on 4/28/98

As of: Tuesday, 4/28/98 · Accession #: 1047469-98-16763 · File #: 333-48891

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 4/28/98  Trans World Entertainment Corp    424B4                  1:151K                                   Merrill Corp/New/FA

Prospectus — Rule 424(b)(4)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B4       Prospectus                                            52    268K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Available Information Business Capitalization Combination Stores Consolidated Statements of Cash Flows Description of Capital Stock Dividend Policy Experts Gross profit Incorporation of Certain Documents by Reference Interest expense Liquidity and Capital Resources Management Management's Discussion and Analysis of Financial Condition and Results of Operations Notes to Consolidated Financial Statements Offering, The Price Range of Common Stock Principal and Selling Shareholder Prospectus Summary Risk Factors Sales Selected Consolidated Financial Data Selling, general and administrative expenses The Offering Underwriting Use of Proceeds Validity of Common Stock
1	1st Page - Filing Submission
3	Prospectus Summary
5	The Offering
8	Risk Factors
11	Use of Proceeds
12	Price Range of Common Stock
"	Dividend Policy
13	Capitalization
14	Selected Consolidated Financial Data
15	Management's Discussion and Analysis of Financial Condition and Results of Operations
"	Sales
16	Gross profit
"	Selling, general and administrative expenses
"	Interest expense
17	Liquidity and Capital Resources
20	Business
21	Combination Stores
26	Management
28	Principal and Selling Shareholder
29	Description of Capital Stock
31	Validity of Common Stock
"	Experts
"	Available Information
"	Incorporation of Certain Documents by Reference
37	Consolidated Statements of Cash Flows
38	Notes to Consolidated Financial Statements
49	Underwriting

424B4 1st Page of 52 TOC ↑Top Previous Next ↓Bottom Just 1st
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-48891
3,500,000 SHARES

[LOGO]
TRANS WORLD ENTERTAINMENT
CORPORATION
COMMON STOCK

(PAR VALUE $.01 PER SHARE)
------------------------

Of the 3,500,000 shares of Common Stock offered hereby, 1,500,000 shares are
being sold by the Company and 2,000,000 shares are being sold by the Selling
Shareholder. See "Principal and Selling Shareholder". The Company will not
receive any of the proceeds from the sale of the shares being sold by the
Selling Shareholder.

The last reported sale price of the Common Stock, which is quoted on the
Nasdaq National Market under the symbol "TWMC", on April 27, 1998 was $26.94 per
share. See "Price Range of Common Stock".

SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------

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INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) SHAREHOLDER(3)
---------------- ---------------- ---------------- -------------------

Per Share............................. $26.25 $1.32 $24.93 $24.93
Total(3).............................. $91,875,000 $4,620,000 $37,395,000 $49,860,000

------------------------

(1) The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting".

(2) Before deducting estimated expenses of $644,000 payable by the Company.

(3) The Selling Shareholder has granted the Underwriters an option for 30 days
to purchase up to an additional 525,000 shares at the initial public
offering price per share, less the underwriting discount, solely to cover
over-allotments. If such option is exercised in full, the total initial
public offering price, underwriting discount and proceeds to the Selling
Shareholder will be $105,656,250, $5,313,000 and $62,948,250, respectively.
See "Underwriting".
------------------------

The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York on or about May
1, 1998, against payment therefor in immediately available funds.

GOLDMAN, SACHS & CO.

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

NATIONSBANC MONTGOMERY SECURITIES LLC

EVEREN SECURITIES, INC.
------------------

The date of this Prospectus is April 28, 1998.

424B4 2nd Page of 52 TOC 1st Previous Next ↓Bottom Just 2nd
[inside front cover]

[COLOR MAP OF UNITED STATES PLOTTED WITH STORE LOCATIONS]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THIS
OFFERING. IN ADDITION, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS, IF ANY)
ALSO MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 UNDER THE SECURITIES EXCHANGE
ACT OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".

424B4 3rd Page of 52 TOC 1st Previous Next ↓Bottom Just 3rd
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES,
(I) ALL REFERENCES TO THE COMPANY INCLUDE THE COMPANY AND ITS CONSOLIDATED
SUBSIDIARIES, (II) REFERENCES HEREIN TO YEARS ARE TO THE FISCAL YEARS OF THE
COMPANY WHICH END ON THE SATURDAY NEAREST JANUARY 31 OF THE FOLLOWING CALENDAR
YEAR, (III) THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED, AND (IV) ALL REFERENCES TO
THE NUMBER OF SHARES OF COMMON STOCK AND PER SHARE AMOUNTS HAVE BEEN ADJUSTED TO
REFLECT A TWO-FOR-ONE STOCK SPLIT OF THE COMMON STOCK EFFECTED ON DECEMBER 15,
1997.

THE COMPANY

GENERAL

Trans World Entertainment Corporation (the "Company") is one of the largest
music and video specialty retailers in the United States. The Company offers a
wide selection of entertainment products, including compact discs, audio
cassettes and videocassettes, digital versatile discs ("DVD") and related
accessories. At January 31, 1998, the Company operated 539 stores in 34 states,
the District of Columbia and the U.S. Virgin Islands, with the majority of its
stores concentrated in the Eastern half of the United States. The Company
operates its stores under two real estate categories: mall and non-mall. Mall
stores include "Record Town," "Saturday Matinee" and "F.Y.E. For Your
Entertainment" ("F.Y.E."). Non-mall stores include "Coconuts," "Strawberries"
and "Planet Music."

In the early 1990s, music retailers aggressively expanded their store base,
which led to an overcapacity of music and video product selling space in the
United States. Furthermore, entry into this category by mass-merchants and
consumer electronics stores, which enacted loss-leader pricing strategies to
increase store traffic, adversely impacted sales and gross margins of music
specialty retailers.

In the fourth quarter of 1994, management concluded that these events were
adversely affecting the Company's operations. Management's ability to identify
these trends at an early stage enabled the Company to undertake a repositioning
program (the "Repositioning"), which included closing and relocating
underperforming stores, opening profitable new stores, improving operating
efficiencies and reducing debt levels. In order to reduce its portfolio of
stores to a strong core of profitable locations in desirable markets, the
Company closed or relocated a total of 342 stores through January 31, 1998. An
additional 62 stores are forecasted to be closed or relocated in 1998. In
conjunction with the Repositioning, the Company increased sales and net income
by 18.6% and 189.7%, respectively, in 1997 over 1996. As a result, the Company
is now in a stronger financial condition and is well-positioned to continue to
execute its business strategy.

BUSINESS STRATEGY

The Company's strategy is to increase sales and net income through a
combination of new store openings, relocation of existing stores, merchandising
and marketing initiatives and strategic acquisitions.

MALL STORES. The Company's mall stores have been designed to offer
consumers a fun and exciting shopping experience. In the mall stores, the
Company puts an emphasis on a strong in-store presentation, broad product
selection and competitive pricing to attract the casual impulse buyer. The
Company's strategy for mall stores is to operate profitable stores in high
traffic locations while controlling occupancy costs. The Company intends to
concentrate on combination music/video stores which offer the customer a more
extensive product selection as well as an entertaining shopping environment.

424B4 4th Page of 52 TOC 1st Previous Next ↓Bottom Just 4th
Larger Record Town/Saturday Matinee combination stores ("Combination Stores")
and the F.Y.E. multimedia superstores are the Company's primary vehicles for
growth in mall stores. The Company believes that the economies of scale and
greater merchandising opportunities provided by large multimedia stores will
permit the Company to achieve greater sales and profits than it could in smaller
store formats.

NON-MALL STORES. The Company's non-mall stores target the serious music
shopper and offer a broad and deep product selection. The Company believes there
is still significant growth potential in certain markets where it already has
substantial market share. Such markets include New England, the Mid-Atlantic
states, the Midwest, specifically Ohio and Illinois, and the New York
metropolitan area. By clustering non-mall stores in those markets, the Company
is able to take advantage of economies of scale in advertising, distribution and
other overhead expenses.

REAL ESTATE. The Company believes that it has favorable relationships with
the real estate developer community at both the local and national levels, and
that it is known for delivering exciting retail stores that add value to any
retail environment. The Company will continue to capitalize on its financial
strengths and on its dominant market position within its target markets to
negotiate favorable lease terms in prime store locations.

MERCHANDISING AND MARKETING INITIATIVES. The Company's primary goal in
merchandising and marketing is to provide its customers a fun and exciting
shopping experience. The Company continuously develops merchandising and
marketing programs to attract both the casual impulse shopper as well as the
serious music shopper. Examples of these initiatives include in-store artist
appearances, exclusive product offerings and a music selection tailored to the
local market.

ACQUISITIONS. The Company believes that its experienced management team and
financial strength have positioned it to be a leader in any consolidation of the
music specialty retail industry. The Company's acquisition strategy focuses on
acquiring those music specialty retailers that allow the Company to leverage its
strengths and that can be acquired on terms consistent with its financial
objectives. In October 1997, the Company acquired 90 out of a total of 118
stores owned by Strawberries, Inc., a privately held non-mall music specialty
retailer operating primarily in New England.

424B4 5th Page of 52 TOC 1st Previous Next ↓Bottom Just 5th
THE OFFERING

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Common Stock offered by the Company.......... 1,500,000 shares

Common Stock offered by the Selling
Shareholder................................ 2,000,000 shares(1)

Total.................................... 3,500,000 shares(1)

Common Stock to be outstanding after the
Offering................................... 21,244,569 shares(2)

Nasdaq National Market symbol................ TWMC

Use of the proceeds by the Company........... The net proceeds to the Company from the
Offering are expected to be used to reduce
outstanding indebtedness under the Revolving
Credit Facility (as defined) and for general
corporate purposes. Amounts repaid under the
Revolving Credit Facility are available for
reborrowing. See "Use of Proceeds."

------------------------

(1) Assumes that the over-allotment option granted by the Selling Shareholder to
the Underwriters is not exercised. See "Underwriting."

(2) Based upon shares of Common Stock outstanding as of January 31, 1998.
Excludes (i) 2,984,741 shares issuable upon the exercise of stock options
outstanding as of January 31, 1998, (ii) 510,974 shares reserved for
issuance for future employee stock option grants and (iii) 328,000 shares
reserved for issuance for future director stock option grants. At its annual
meeting of shareholders to be held in June 1998, the Company intends to seek
shareholder approval of a new employee stock option plan that would permit
the issuance of options to acquire up to an aggregate of 1,000,000 shares of
Common Stock.

424B4 6th Page of 52 TOC 1st Previous Next ↓Bottom Just 6th
SUMMARY CONSOLIDATED FINANCIAL DATA

The following table sets forth consolidated summary financial data and other
operating information of the Company. The summary income statement for the five
fiscal years ended January 31, 1998 and the summary balance sheet data as of
January 31, 1998 set forth below are derived from the audited consolidated
financial statements of the Company. The summary consolidated financial data
should be read in conjunction with the Company's audited consolidated financial
statements and notes thereto and other financial information included herein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

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FISCAL YEAR ENDED(1)
----------------------------------------------------------------

JAN. 31, FEB. 1, FEB. 3, JAN. 28, JAN. 29,
1998 1997 1996 1995 1994
----------- ------------ ----------- ----------- -----------

(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)

INCOME STATEMENT DATA:
Sales........................................ $ 571,314 $ 481,657 $ 517,046 $ 536,840 $ 492,553
Cost of sales................................ 361,422 308,952 340,754 341,422 307,834
----------- ------------ ----------- ----------- -----------
Gross profit................................. 209,892 172,705 176,292 195,418 184,719
Selling, general and administrative
expenses................................... 155,678 136,084 150,628 158,637 147,644
Restructuring charge(2)...................... -- -- 35,000 21,000 --
Depreciation and amortization................ 15,156 14,134 16,125 16,932 14,655
----------- ------------ ----------- ----------- -----------
Income (loss) from operations................ 39,058 22,487 (25,461) (1,151) 22,420
Interest expense............................. 4,995 10,767 14,222 9,540 5,971
----------- ------------ ----------- ----------- -----------
Income (loss) before income taxes............ 34,063 11,720 (39,683) (10,691) 16,449
Income tax expense (benefit)................. 13,489 4,618 (14,310) (4,435) 6,626
----------- ------------ ----------- ----------- -----------
Net income (loss)............................ $ 20,574 $ 7,102 $ (25,373) $ (6,256) $ 9,823
----------- ------------ ----------- ----------- -----------
----------- ------------ ----------- ----------- -----------

Basic earnings (loss) per share(3)........... $ 1.05 $ 0.36 $ (1.30) $ (0.32) $ 0.51
----------- ------------ ----------- ----------- -----------
----------- ------------ ----------- ----------- -----------

Weighted average number of shares
outstanding(3)............................. 19,655 19,514 19,452 19,402 19,446

Diluted earnings (loss) per share (3)(4)..... $ 0.99 $ 0.36 $ (1.30) $ (0.32) $ 0.50
----------- ------------ ----------- ----------- -----------
----------- ------------ ----------- ----------- -----------
Adjusted weighted average number of shares
outstanding (3)(4)......................... 20,688 19,798 19,452 19,402 19,497

OPERATING DATA:
Number of stores open at end of period
Mall..................................... 340 357 379 431 443
Non-mall................................. 199 122 163 253 241
----------- ------------ ----------- ----------- -----------
Total.................................... 539 479 542 684 684
Comparable store sales increase (decrease)
(5)........................................ 10.2% 3.6% (3.5)% 1.1% (2.1)%
Total square footage (in thousands).......... 2,442 2,008 2,140 2,544 2,414

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JAN. 31, 1998
-------------------------

AS
ACTUAL ADJUSTED(6)
--------- --------------

(IN THOUSANDS)

BALANCE SHEET DATA:
Working capital....................................................................... $ 89,853 $ 91,604
Total assets.......................................................................... 371,583 373,334
Long-term debt and capital lease obligations, including current portion............... 41,508 6,508
Shareholders' equity.................................................................. 122,965 159,716

------------------------

(1) Each year consisted of 52 weeks, except the fiscal year ended February 3,
1996, which consisted of 53 weeks.

(2) The restructuring charge includes the write-down of assets, estimated cash
payments to landlords for the early termination of operating leases, and the
cost for returning products to the Company's distribution center and
vendors. The charge also includes estimated legal, lender and consulting
fees.

(3) All share and per share amounts have been adjusted for all periods to
reflect a two-for-one stock split approved by the Board of Directors on
November 14, 1997, which was effected in the form of a 100% stock dividend
on December 15, 1997.

(4) In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, which requires the
disclosure of basic earnings per share and diluted earnings per share.

(5) A store is included in comparable store sales calculations at the beginning
of its 13th full month of operation.

(6) Adjusted to give effect to the sale of 1,500,000 shares of Common Stock by
the Company in the Offering at a public offering price of $26.25 per share
less estimated underwriting discount and offering expenses and the
application of the proceeds therefrom. See "Use of Proceeds."

424B4 8th Page of 52 TOC 1st Previous Next ↓Bottom Just 8th
RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS IN EVALUATING AN INVESTMENT IN THE COMMON STOCK.

COMPETITION

The prerecorded music and video specialty retail industry is highly
competitive with numerous chains and discount stores selling prerecorded music
and video merchandise. Several large national retail chains that operate book or
electronics superstores have expanded their product lines to include music and
video departments in an effort to increase store traffic. As a result of deep
discounting by competitors, many music specialty retailers, including the
Company, have experienced financial difficulties which have resulted in reduced
sales and profitability and corporate restructurings. Since 1994, the Company
has pursued an aggressive repositioning plan which included closing and
relocating underperforming stores, improving operating efficiencies and reducing
its level of debt during which time the Company's stock price and perceived
market outlook dropped significantly. Although the Company has improved the
performance of its store base, there can be no assurance that the repositioning
will continue to allow the Company to compete successfully in a competitive
environment. Furthermore, although deep discount pricing by retailers of
entertainment products abated in 1997, there can be no assurance that if such
practice returns, the Company will continue to achieve satisfactory gross
margins while remaining competitive.

CONTROL BY AND DEPENDENCE ON KEY PERSONNEL

The selling shareholder, Robert J. Higgins (the "Selling Shareholder"),
serves as the President, Chief Executive Officer and Chairman of the Board of
Directors of the Company, and owns approximately 52.3% of the outstanding Common
Stock as of January 31, 1998. After completion of the Offering, the Selling
Shareholder will own 39.2% of the outstanding Common Stock (36.7% if the
over-allotment option granted by the Selling Shareholder to the Underwriters is
exercised in full) and will continue to effectively control the Company. His
ownership will allow him to predominate in any vote requiring a majority of the
Company's outstanding shares, such as any vote to amend the Certificate of
Incorporation, and also any votes affecting the election of directors or,
indirectly, any proposed business combination requiring approval under
applicable provisions of New York's Business Corporation Law. See "Principal and
Selling Shareholder" and "Description of Capital Stock."

The Company is dependent on the active participation of Mr. Higgins in the
Company's operations and its strategic planning for expansion opportunities. The
loss of his services could have a material adverse effect on the Company.

GROWTH STRATEGY

The opening of new stores is contingent upon the availability of desirable
locations and the negotiation of suitable lease terms, and the acquisition of
stores is dependent upon the availability of desirable stores at acceptable
prices. The success of any expansion will depend on business conditions, the
availability of desirable sites obtainable on an acceptable economic basis, the
ability to expand internal systems to accommodate the Company's growth and
manage the Company's increased distribution demands the ability to attract and
retain qualified managers and sales associates and the availability of
sufficient capital. Further, acquisitions may involve a number of special risks,
including diversion of management's attention, the inability to integrate
successfully any acquired business, the incurrence of legal liabilities and
unanticipated events or circumstances, some or all of which could have a
material adverse effect on the Company's results of operations, financial
condition, business and prospects. See "Business."

424B4 9th Page of 52 TOC 1st Previous Next ↓Bottom Just 9th
AVAILABILITY OF HIT PRODUCTS

Entertainment product sales are dependent to some extent upon the
availability of hit products, which can create cyclical trends that do not
necessarily follow trends in the general economy. It is not possible to
determine the timing of these cycles or the future availability of hit products.
The availability of hit products is important for generating customer traffic in
the Company's stores. During recent years, industry growth and sales of music
and video products slowed due to the lack of strong new releases. Although the
situation in the music industry improved in 1997, the Company has no control
over the availability and strength of hit products and is dependent upon the
major music and movie producers continuing to produce current hits. To the
extent that current hits are not available, or not available at prices
attractive to consumers, the Company's business may be adversely affected.

NEW TECHNOLOGIES

The emergence of new technologies and the switch of consumers from one
technology to another, such as the shift from records to audio cassettes, and
the later shift from cassettes to compact discs, may reduce sales and profit
margins of existing technologies. The Company intends to monitor carefully such
technology shifts and to adjust as necessary to respond to customer demand.
Sales may be adversely affected and product returns may be increased if the
Company is unable to effectively manage this transition. There can be no
assurance that the Company will be successful in interpreting the desires of
consumers or predicting which of any new technologies or formats will be
accepted by consumers. Although the Company believes that new technologies such
as DVD products may contribute to sales growth, there can be no assurance that
DVD will gain significant consumer acceptance generally or among the Company's
customers. Even if DVD is successful, any significant impact on sales may not be
seen for several years.

In addition to the emergence of new technologies affecting product
offerings, emerging technologies are facilitating the offering by the internet,
cable companies, direct broadcast satellite companies, telephone companies and
other telecommunications companies of a wide selection of music and video
services to consumers. The Company expects this trend to continue. There is no
assurance that these new technologies will not have an adverse impact on sales.

DIVIDENDS

The Company has never declared or paid cash dividends on its Common Stock.
The Revolving Credit Facility sets certain restrictions on the payment of cash
dividends. Any future determination as to the payment of dividends would depend
upon capital requirements and limitations imposed by the Revolving Credit
Facility and such other factors as the Board of Directors of the Company may
consider.

SEASONALITY

The Company's business is highly seasonal. The fourth quarter constitutes
the Company's peak selling period. In 1997, the fourth quarter accounted for
approximately 42% of annual sales and substantially all of net income. In
anticipation of increased sales activity during these months, the Company
purchases substantial amounts of inventory and hires a significant number of
temporary employees to bolster its permanent store staff. If for any reason the
Company's net sales were below seasonal norms during the fourth quarter,
including as a result of merchandise delivery delays due to receiving or
distribution problems, the Company's operating results, particularly operating
and net income, could be adversely affected. The fourth quarter percentage of
annual sales in 1997 was higher than normal due to the Strawberries acquisition
in October 1997. Quarterly results are affected by the timing and strength of
new releases, the timing of holidays, new store openings and sales performance
of existing stores. There can be no assurance that economic conditions will not
adversely affect the Company's sales and earnings, particularly during the
fourth quarter of the year.

424B4 10th Page of 52 TOC 1st Previous Next ↓Bottom Just 10th
RELATIONSHIPS WITH VENDORS

The Company purchases inventory for its stores from approximately 450
suppliers. Approximately 68% of purchases were made from its six largest vendors
in 1997. In the past, the Company has not experienced difficulty in obtaining
satisfactory sources of supply, and management believes that it will retain
access to adequate sources of supply. However, a loss of a major supplier could
cause a possible loss of sales, which would have an adverse effect on operating
results and result in a decrease in vendor support for the Company's advertising
programs.

YEAR 2000 COMPLIANCE

The Company has assessed its systems and equipment with respect to Year 2000
compliance and has developed a project plan. Many of the Year 2000 issues,
including the processing of credit card transactions, have been addressed. The
remaining Year 2000 issues will be addressed either with scheduled system
upgrades or through the Company's internal systems development staff. The
incremental costs will be charged to expense as incurred and are not expected to
have a material impact on the financial position or results of operations of the
Company. However, the Company could be adversely impacted if Year 2000
modifications are not properly completed by either the Company or its vendors,
banks or any other entity with whom the Company conducts business.

POSSIBLE VOLATILITY OF STOCK PRICE

The market price of the Company's Common Stock, which is quoted on the
Nasdaq National Market, may be subject to significant fluctuations in response
to operating results, comparable store sales announcements, announcements by
competitors and other factors. In addition, the stock market in recent years has
experienced extreme price and volume fluctuations that often have been unrelated
or disproportionate to the operating performance of individual companies. These
market fluctuations, as well as general economic conditions, may adversely
affect the market price of the Common Stock.

FORWARD-LOOKING STATEMENTS

The information herein contains forward-looking statements that involve a
number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of the Company, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors include,
but are not limited to, the competitive environment in the entertainment
industry, especially for music and video product, inflation, changes in costs of
goods and services, economic conditions in general and in the Company's
business, demographic changes, changes in prevailing interest rates and the
availability of and terms of financing to fund the anticipated growth of the
Company's business, the ability to attract and retain qualified personnel,
changes in the Company's acquisition and capital expenditure plans, and other
factors referenced herein and in the Company's filings with the Commission. In
addition, such forward-looking statements are necessarily dependent upon
assumptions, estimates and dates that may be incorrect or imprecise and involve
known and unknown risks, uncertainties and other factors. Accordingly, any
forward-looking statements included herein do not purport to be predictions of
future events or circumstances and may not be realized. Forward-looking
statements can be identified by, among other things, the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," "seeks,"
"pro forma," "anticipates," "intends" or the negative of any thereof, or other
variations thereon or comparable terminology, or by discussions of strategy or
intentions. Given these uncertainties, prospective investors are cautioned not
to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to announce publicly the
results of any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.

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USE OF PROCEEDS

The net proceeds of the offering received by the Company, after deducting
estimated offering expenses and underwriting discount, are estimated to be
$36,751,000, based on a public offering price of $26.25 per share.

Such proceeds will initially be used to reduce indebtedness under the
Revolving Credit Facility by and among Congress Financial Corporation, as
lender, the Company and its subsidiary, Record Town, Inc., as borrowers (the
"Revolving Credit Facility") and for general corporate purposes. As of January
31, 1998, approximately $35 million of long-term debt was outstanding under the
Revolving Credit Facility, bearing interest at the Eurodollar interest rate plus
1.75% (7.69% at January 31, 1998). Amounts repaid under the Revolving Credit
Facility may be reborrowed for store expansion requirements, such as investments
in additional stores, fixtures and inventory, for general corporate purposes and
for future acquisition or investment opportunities. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

The Company will not receive any of the proceeds from the shares being sold
by the Selling Shareholder.

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PRICE RANGE OF COMMON STOCK

The Company's initial public offering was completed on July 24, 1986, and
since that date the shares of the Company's Common Stock have been traded on the
over-the-counter market and quoted on the Nasdaq National Market under the
symbol "TWMC." As of January 31, 1998, there were approximately 400 shareholders
of record. The following table sets forth high and low last reported sale prices
for each fiscal quarter during the period from Feb. 3, 1996 through April 27,
1998.

[Download Table]

LAST SALE
------------------

HIGH LOW
------- -------
FISCAL YEAR 1996:
1st Quarter..... $ 2 5/8 $ 1 1/4
2nd Quarter..... 3 5/8 2 1/4
3rd Quarter..... 4 3/8 2 9/16
4th Quarter..... 4 1/16 3 1/8
FISCAL YEAR 1997:
1st Quarter..... $ 6 3/16 $ 3 5/8
2nd Quarter..... 9 5/8 5 15/16
3rd Quarter..... 16 3/8 9 1/16
4th Quarter..... 28 1/8 14 5/8
FISCAL YEAR 1998:
1st Quarter
(through April
27, 1998)..... $32 15/16 $24

On April 27, 1998, the last reported sale price of the Common Stock on the
Nasdaq National Market was $26.94 per share.

DIVIDEND POLICY

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CAPITALIZATION

The following table sets forth the capitalization of the Company as of
January 31, 1998 and as adjusted to give effect to the sale of the Common Stock
offered by the Company at a public offering price of $26.25 per share, less
estimated underwriting discount and offering expenses and the application of the
proceeds therefrom. This table should be read in conjunction with the
consolidated financial statements and notes thereto incorporated by reference
herein and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

[Enlarge/Download Table]

JANUARY 31, 1998
--------------------------

ACTUAL AS ADJUSTED (1)
--------- ---------------

(IN THOUSANDS)

Long-term debt and capital lease obligations, including current
portion....................................................... $ 41,508 $ 6,508
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; none issued................................... -- --
Common stock, $.01 par value; 50,000,000 shares authorized;
19,815,357 shares issued; 21,315,357 shares issued, as
adjusted(2)............................................... 198 213
Additional paid-in capital...................................... 25,386 62,122
Unearned compensation--restricted stock......................... (175) (175)
Treasury stock at cost (70,788 shares).......................... (394) (394)
Retained earnings............................................... 97,950 97,950
--------- ---------------
Total shareholders' equity.............................. 122,965 159,716
--------- ---------------
Total capitalization............................................ $ 164,473 $ 166,224
--------- ---------------
--------- ---------------

------------------------

(1) Reflects the sale of the Common Stock offered by the Company and the
application of the net proceeds therefrom.

(2) Excludes (i) 2,984,741 shares issuable upon the exercise of stock options
outstanding as of January 31, 1998, (ii) 510,974 shares reserved for
issuance for future employee stock option grants and (iii) 328,000 shares
reserved for issuance for future director stock option grants. At its annual
meeting of shareholders to be held in June 1998, the Company intends to seek
shareholder approval of a new employee stock option plan that would permit
the issuance of options to acquire up to an aggregate of 1,000,000 shares of
Common Stock.

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SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data and
other operating information of the Company. The selected income statement and
balance sheet data for the five fiscal years ended January 31, 1998 set forth
below are derived from the audited consolidated financial statements of the
Company. The selected consolidated financial data should be read in conjunction
with the Company's audited consolidated financial statements and notes thereto
and other financial information included herein and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

[Enlarge/Download Table]

FISCAL YEAR ENDED(1)
----------------------------------------------------------------

JAN. 31, FEB. 1, FEB. 3, JAN. 28, JAN. 29,
1998 1997 1996 1995 1994
----------- ------------ ----------- ----------- -----------

(IN THOUSANDS, EXCEPT PER SHARE DATA)

INCOME STATEMENT DATA:
Sales.................................................. $ 571,314 $ 481,657 $ 517,046 $ 536,840 $ 492,553
Cost of sales.......................................... 361,422 308,952 340,754 341,422 307,834
----------- ------------ ----------- ----------- -----------
Gross profit........................................... 209,892 172,705 176,292 195,418 184,719
Selling, general and administrative expenses........... 155,678 136,084 150,628 158,637 147,644
Restructuring charge(2)................................ -- -- 35,000 21,000 --
Depreciation and amortization.......................... 15,156 14,134 16,125 16,932 14,655
----------- ------------ ----------- ----------- -----------
Income (loss) from operations.......................... 39,058 22,487 (25,461) (1,151) 22,420
Interest expense....................................... 4,995 10,767 14,222 9,540 5,971
----------- ------------ ----------- ----------- -----------
Income (loss) before income taxes...................... 34,063 11,720 (39,683) (10,691) 16,449
Income tax expense (benefit)........................... 13,489 4,618 (14,310) (4,435) 6,626
----------- ------------ ----------- ----------- -----------
Net income (loss)...................................... $ 20,574 $ 7,102 $ (25,373) $ (6,256) $ 9,823
----------- ------------ ----------- ----------- -----------
----------- ------------ ----------- ----------- -----------
Basic earnings (loss) per share(3)..................... $ 1.05 $ 0.36 $ (1.30) $ (0.32) $ 0.51
----------- ------------ ----------- ----------- -----------
----------- ------------ ----------- ----------- -----------

Weighted average number of shares outstanding(3)....... 19,655 19,514 19,452 19,402 19,446

Diluted earnings (loss) per share(3)(4)................ $ 0.99 $ 0.36 $ (1.30) $ (0.32) $ 0.50
----------- ------------ ----------- ----------- -----------
----------- ------------ ----------- ----------- -----------
Adjusted weighted average number of shares
outstanding(3)(4).................................... 20,688 19,798 19,452 19,402 19,497

BALANCE SHEET DATA (at end of period):
Working capital........................................ $ 89,853 $ 81,247 $ 78,773 $ 93,431 $ 101,538
Total assets........................................... 371,583 310,053 390,331 426,939 380,264
Current portion of long-term obligations............... 99 9,557 3,420 6,618 3,695
Long-term obligations.................................. 41,409 50,490 60,364 66,441 73,098
Shareholders' equity................................... 122,965 101,362 94,104 119,477 126,074

------------------------------

(1) Each year consisted of 52 weeks, except the fiscal year ended February 3,
1996, which consisted of 53 weeks.

(2) The restructuring charge includes the write-down of assets, estimated cash
payments to landlords for the early termination of operating leases, and the
cost for returning product to the Company's distribution center and vendors.
The charge also includes estimated legal, lender and consulting fees.

(4) In 1997, the Financial Accounting Standards Board issued SFAS No. 128 which
requires the disclosure of basic earnings per share and diluted earnings per
share.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain income
and expense items as a percentage of sales;

[Download Table]

FISCAL YEAR ENDED
---------------------------------------------

JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
--------------- ------------- -------------
Sales............................... 100.0% 100.0% 100.0%
----- ----- -----
Gross profit........................ 36.7 35.9 34.1
Selling, general and administrative
expenses.......................... 27.2 28.3 29.1
Restructuring charge................ 0.0 0.0 6.8
Depreciation and amortization....... 2.7 2.9 3.1
----- ----- -----

Income (loss) from operations....... 6.8 4.7 (4.9)
Interest expense.................... 0.8 2.2 2.8
----- ----- -----

Net (loss) before income taxes...... 6.0 2.5 (7.7)
Income tax expense (benefit)........ 2.4 1.0 (2.8)
----- ----- -----

Net income (loss)................... 3.6% 1.5% (4.9)%
----- ----- -----
----- ----- -----

Change in comparable store sales.... 10.2% 3.6% (3.5 )%
----- ----- -----
----- ----- -----

FISCAL YEAR ENDED JANUARY 31, 1998 ("1997")

COMPARED TO FISCAL YEAR ENDED FEBRUARY 1, 1997 ("1996")

SALES. The Company's sales increased $89.7 million, or 18.6%, from 1996.
The increase was primarily attributable to a comparable store sales increase of
10.2%, a sales increase of 8.4% resulting from the acquisition of 90
Strawberries stores in October 1997, and the opening of 48 stores partially
offset by the closing of 78 stores. Management attributes the comparable store
sales increase primarily to its strategic decision to eliminate unprofitable
stores and focus on customer service, superior retail

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locations, inventory management and merchandise presentation. Sales by product
configuration are shown in the following table:

[Enlarge/Download Table]

FISCAL YEAR ENDED
---------------------------------------------

JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
--------------- ------------- -------------
Compact discs....................................... 55.5% 50.1% 49.2%
Prerecorded audio cassettes......................... 18.9 22.2 25.5
Prerecorded video................................... 16.3 18.6 16.7
Other............................................... 9.3 9.1 8.6
----- ----- -----
Total........................................... 100.0% 100.0% 100.0%

For 1997, comparable store sales increased 11.0% for mall stores and 9.6%
for non-mall stores. By product configuration, comparable store sales increased
11.4% in music and 2.6% in video.

GROSS PROFIT. Gross profit, as a percentage of sales, increased to 36.7% in
1997 from 35.9% in 1996 as a result of reduced merchandise shrinkage and
increased purchase discounts combined with a strong performance from higher
margin catalog sales.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A"), as a percentage of sales, decreased to 27.2%
in 1997 from 28.3% in 1996. The 1.1% decrease can be attributed to the leverage
of SG&A expenses on the 10.2% comparable store sales increase, as well as the
overall sales increase.

INTEREST EXPENSE. Interest expense decreased 53.6% to $5.0 million in 1997
from $10.8 in 1996. The decrease is due to lower average outstanding borrowings
and lower interest rates due to the refinancing completed during the year.

INCOME TAX EXPENSE. The effective income tax rate was 39.6% in 1997. See
Note 4 of Notes to Consolidated Financial Statements for a reconciliation of the
statutory tax rate to the Company's effective tax rate.

NET INCOME. In 1997, the Company's net income increased to $20.6 million
compared to a net income of $7.1 million in 1996. The improved bottom line
performance can be attributed to the profitability of the additional stores and
the ongoing success of the Company's restructuring plan. Additionally, the
Company benefited from a comparable store sales increase, higher gross margin
rate and improved leverage of SG&A expenses.

FISCAL YEAR ENDED FEBRUARY 1, 1997 ("1996")

COMPARED TO FISCAL YEAR ENDED FEBRUARY 3, 1996 ("1995")

SALES. The Company's sales decreased $35.4 million, or 6.8%, from 1995
while the number of stores in operation decreased by 12%. The decrease was
primarily attributable to a net decrease of approximately 151,000 square feet,
which resulted from the closing of 85 stores offset slightly by the opening of
22 stores. In 1995 there were 53 weeks in the fiscal year, with the extra week
contributing $6.9 million in sales. Comparable store sales for fiscal year 1996
increased by 3.6%. Management attributes the comparable store sales increase to
its strategic decision to eliminate unprofitable stores and focus on customer
service, superior retail locations, inventory management and merchandise
presentation.

The Company's comparable store formats showed positive growth in 1996
compared to 1995. Comparable store sales increased 2.8% for mall stores and 7.4%
for non-mall stores. By product configuration, comparable store sales increased
1.9% in music and 12.4% in video, as video benefitted from continued growth of
the video sell-through market.

GROSS PROFIT. Gross profit, as a percentage of sales, increased to 35.9% in
1996 from 34.1% in 1995 as a result of reduced merchandise shrinkage and
increased purchase discounts combined with a strong performance from higher
margin catalog sales.

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EXPENSES. SG&A, as a percentage of sales, decreased to 28.3% in 1996 from
29.1% in 1995. The 0.8% decrease can be attributed to the closing of
underperforming stores, the receipt of $2.5 million upon termination of a
business agreement in the second quarter 1996 and a 3.6% increase in comparable
store sales. Interest expense decreased 24% to $10.8 million in 1996 from $14.2
million in 1995. The decrease was due to lower average outstanding borrowings
offset in part by increased weighted average interest rates. The effective
income tax rate was 39.4% in 1996.

NET INCOME. In 1996, the Company's net income increased to $7.1 million
compared to a net loss of $25.4 million in 1995. The improved bottom line
performance can be attributed to the success of the Company's restructuring
plan. Additionally, the Company benefited from a comparable store sales
increase, higher gross margin rate and lower SG&A.

LIQUIDITY AND CAPITAL RESOURCES.

Cash flow from operations and funds available under revolving credit
facilities are the Company's primary sources of liquidity. During the first
three fiscal quarters, cash flow is typically consumed by payments to
merchandise vendors and store construction expenditures. The revolving credit
facilities provide the Company with its liquidity until December, when the
Company's cash position has historically been the highest, providing sufficient
cash to repay all outstanding borrowings under the revolving credit facilities.

During 1997, cash provided by operations was $93.2 million compared to $44.9
million for 1996. The increased cash flow from operations was due primarily to
the $13.5 million increase in net income and continued improvements in inventory
management. Leverage of accounts payable to inventory improved to 86.1% in 1997
from 72.8% in 1996.

The Company ended fiscal 1997 with cash balances of approximately $94.7
million compared to 1996 when the Company had cash balances of $54.8 million. In
both years, the Company had no short term borrowings.

On July 9, 1997 the Company entered into a $100 million secured revolving
credit facility with Congress Financial Corporation. The Revolving Credit
Facility combined the Company's long-term debt with its revolving credit line to
create a $100 million credit facility with a three year term at interest rates
averaging below the prime rate. The Revolving Credit Facility, combined with
lower borrowing needs, was responsible for the Company's interest expense
decreasing to $5.0 million for the year ended January 31, 1998 from $10.8
million for the year ended February 1, 1997.

The Revolving Credit Facility contains certain restrictive provisions,
including provisions governing cash dividends and acquisitions, is secured by
merchandise inventory and has a minimum net worth covenant.

CAPITAL EXPENDITURES. Most of the Company's capital expenditures are for
new store expansion and relocation of existing stores. The Company typically
finances its capital expenditures through internally generated cash and
borrowings under the Revolving Credit Facility. In addition the Company
typically receives financing from landlords in the form of construction
allowances or rent concessions for a portion of the capital expenditure. Total
capital expenditures were approximately $15.5 million in 1997 with significantly
all of this amount being related to new stores and store remodels and
reconfigurations. Included in this figure was approximately $2 million related
to the development and pilot of a new point-of-sale ("POS") system. The system
will be rolled out to all stores during the summer of 1998.

In fiscal 1998, the Company plans to spend approximately $47 million, net of
construction allowances, in capital expenditures. Included in such $47 million
is approximately $17 million for the new POS system.

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PROVISION FOR BUSINESS RESTRUCTURING

Company performance in 1997 confirmed the success of a restructuring plan
that began in the fourth quarter of 1994. Management concluded that intense
competition from existing retailers and new entrants, combined with changing
customer demand and declining mall traffic was adversely affecting certain of
the Company's retail markets. The Company recognized and responded to negative
industry trends before its competitors and has nearly completed its
restructuring.

The Company's restructuring included closing underperforming stores,
improving operating efficiencies and refinancing its debt. In order to reduce
its portfolio of stores to a strong core of profitable locations in desirable
markets, the Company continued to focus on improving the profitability of
existing stores and streamlining operations by closing unprofitable stores. As
of January 31, 1998, the Company has closed or relocated a total of 342 stores.
An additional 62 stores are forecasted to close or relocate in 1998; however,
only 49 are associated with the restructuring. The remaining 13 stores are to be
closed or relocated as part of the Company's ongoing business.

The Company is experiencing improved earnings and cash flow benefits as a
result of the restructuring program and expects continued improvement as the
remaining store closings are completed throughout the remainder of 1998.

IMPACT OF INFLATION

Although the Company cannot accurately determine the precise effect of
inflation on its operations, management does not believe inflation has had a
material effect on the results of operations in the last three fiscal years.
When the cost of merchandise items has increased, the Company has generally been
able to pass the increase on to its customers.

SEASONALITY.

The Company's business is highly seasonal, with the highest sales and
earnings occurring in the fourth fiscal quarter. The following table shows
certain unaudited quarterly financial information for the Company.

[Enlarge/Download Table]

FISCAL YEAR ENDED JANUARY 31, 1998
---------------------------------------------------------------

FISCAL YEAR NOV.-JAN. AUG.-OCT. MAY-JULY FEB.-APRIL
----------- ----------- ----------- ----------- -----------

(IN THOUSANDS, EXCEPT PER SHARE DATA)

Sales............................. $ 571,314 $ 242,041 $ 114,737 $ 105,024 $ 109,512
Gross profit...................... 209,892 87,439 43,662 39,527 39,264
Net income (loss)................. 20,574 21,291 979 (834) (862)
Basic earnings (loss) per share... 1.05 1.08 0.05 (0.04) (0.04)
[Enlarge/Download Table]

FISCAL YEAR ENDED FEBRUARY 1, 1997
---------------------------------------------------------------

FISCAL YEAR NOV.-JAN. AUG.-OCT. MAY-JULY FEB.-APRIL
----------- ----------- ----------- ----------- -----------

(IN THOUSANDS, EXCEPT PER SHARE DATA)

Sales............................. $ 481,657 $ 180,735 $ 97,583 $ 96,717 $ 106,622
Gross profit...................... 172,705 64,703 36,217 34,616 37,169
Net income (loss)................. 7,102 14,710 (2,477) (2,392) (2,739)
Basic earnings (loss) per share... 0.36 0.75 (0.13) (0.12) (0.14)

YEAR 2000 COMPLIANCE. The Company has assessed its systems and equipment
with respect to Year 2000 compliance and has developed a project plan. Many of
the Year 2000 issues, including the processing of credit card transactions, have
been addressed. The remaining Year 2000 issues will be addressed either with
scheduled system upgrades or through the Company's internal systems development
staff. The incremental costs will be charged to expenses as incurred and are not
expected to have a material impact on the financial position or results of
operations of the Company. However, the Company

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could be adversely impacted if Year 2000 modifications are not properly
completed by either the Company or its vendors, banks or any other entity with
whom the Company conducts business.

ACCOUNTING POLICIES. During fiscal year 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") NO. 128,
"Earnings per Share," which requires that the Company disclose both basic
earnings per share and diluted earnings per share. The Company adopted the
provisions of SFAS No. 128 retroactively for 1996 and 1995, as required.

In 1998, the Company will adopt the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which requires that the Company disclose as comprehensive
income all changes in equity during a period that are not a result of
investments by owners and distributions to owners.

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," will not have an effect on the Company because it operates in a
single segment. SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," will not have an effect on the Company because it does
not have a defined benefit pension plan.

DIVIDEND POLICY. The Company has never declared or paid cash dividends on
its Common Stock. The Revolving Credit Facility sets certain restrictions on the
payment of cash dividends. Any future determination as to the payment of
dividends would depend upon capital requirements and limitations imposed by the
Revolving Credit Facility and such other factors as the Board of Directors of
the Company may consider.

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BUSINESS

GENERAL

In the fourth quarter of 1994, management concluded that these events were
adversely affecting the Company's operations. Management's ability to identify
these trends at an early stage enabled the Company to undertake a repositioning
program (the "Repositioning"), which included closing and relocating
underperforming stores, opening profitable new stores, improving operating
efficiencies and reducing debt levels. In order to reduce its portfolio of
stores to a strong core of profitable locations in desirable markets, the
Company closed or relocated a total of 342 stores through January 31, 1998. An
additional 62 stores are forecasted to be closed or relocated in 1998. In
conjunction with the Repositioning, the Company increased sales and net income
18.6% and 189.7%, respectively, in 1997 over 1996. As a result, the Company is
now in a stronger financial condition and is well-positioned to continue to
execute its business strategy.

BUSINESS STRATEGY

MALL STORES. The Company's mall stores have been designed to offer
consumers a fun and exciting shopping experience. In the mall stores, the
Company puts an emphasis on strong in-store presentation, broad product
selection and competitive pricing to attract the casual impulse buyer. The
Company's strategy for mall stores is to operate profitable stores in high
traffic locations while controlling occupancy costs. The Company intends to
concentrate on combination music/video stores which offer the customer a more
extensive product selection as well as an entertaining shopping environment.
Larger Record Town/Saturday Matinee combination stores ("Combination Stores")
and the F.Y.E. multimedia superstores are the Company's primary vehicles for
growth in mall stores. The Company believes that the economies of scale and
greater merchandising opportunities provided by large multimedia stores will
permit the Company to achieve greater sales and profits than it could in smaller
store formats.

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REAL ESTATE. The Company believes that it has favorable relationships with
the real estate developer community at both the local and national levels, and
that it is known for delivering exciting retail stores that add value to any
retail environment. The Company will continue to capitalize on its financial
strengths and on its dominant market position within its target markets to
negotiate favorable lease terms in prime store locations.

STORE CONCEPTS

The Company's strategy is to offer customers a broad selection of music and
video titles at competitive prices in convenient, attractive stores. The Company
has developed a number of distinct store concepts to take advantage of real
estate opportunities and to satisfy varying consumer demands.

MALL STORES

The Company's mall stores include five concepts, all of which have been
designed to offer consumers a fun and exciting shopping experience. In the mall
stores, the Company puts an emphasis on a strong in-store presentation, broad
product selection and competitive pricing to attract the casual impulse buyer.

FULL-LINE MUSIC STORES. The Company's full-line mall stores are located in
large, regional shopping malls and are generally named Record Town. There were
178 such stores at January 31, 1998. This store concept utilizes an average
space of approximately 3,300 square feet with certain stores ranging in excess
of 7,000 square feet depending on the availability of preferred space and the
expected volume of the store.

SATURDAY MATINEE STORES. These stores are dedicated to the sale of
prerecorded video products. These stores are located in large, regional shopping
malls and average 2,200 square feet in size. There were 44 such stores in
operation at January 31, 1998. The Company's strategy is to combine this store
with a Record Town in its combination store concept whenever possible.

COMBINATION STORES. At January 31, 1998, the Company operated 79
combination Record Town/ Saturday Matinee stores. The combination store concept
occupies an average of 7,300 square feet. These stores share common storefronts
and offer the consumer an exciting combination of music and video products in
one store location. The Company believes that the combination of the two
concepts creates a marketing synergy by attracting different target customers.

FOR YOUR ENTERTAINMENT STORES. At January 31, 1998, the Company operated
five F.Y.E. stores. These stores combine a broad assortment of music and video
products with a game arcade and an extensive selection of games, portable
electronics, accessories and boutique items. This format makes the traditional
superstore experience available to shopping mall consumers. F.Y.E. is designed
to be a

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semi-anchor or destination retailer in major regional malls. The prototype
F.Y.E. store is 25,000 square feet.

SPECIALTY MUSIC STORES. The specialty music concept is also located in
large, regional shopping malls, but contrasts with full-line music stores in
that they carry a less diverse product selection. These stores, 34 of which were
in operation at January 31, 1998, are generally operated under the name Tape
World. The specialty mall stores operate in approximately 1,300 square feet. The
Company's strategy is to reposition and expand these stores into Record Town
stores or combination stores as opportunities become available.

NON-MALL STORES.

The Company's non-mall concepts accounted for 199 stores in operation at
January 31, 1998, which primarily operate under the names Coconuts and
Strawberries. These stores are designed for freestanding, strip center and
downtown locations in areas of high population density. The majority of the
non-mall stores range in size from 3,000 to 8,000 square feet. Non-mall stores
carry an extensive product assortment and have an emphasis on competitive
pricing. The Company's non-mall stores include 22 video rental stores. These
stores operate under the tradename "Movies Plus" and average approximately 5,300
square feet.

On October 27, 1997, the Company acquired Planet Music, a 31,000 square
foot, freestanding superstore in Virginia Beach, Virginia. The store operates in
a strip center and offers an extensive catalog of predominantly music. The store
also has a video department and sells other non-music related products, similar
to what would be carried in a large Coconuts store. The acquisition also
includes the rights to the Planet Music name and trademark, which offers the
Company potential expansion opportunities.

INDUSTRY AND COMPETITIVE ENVIRONMENT

According to industry sources, the U.S. retail market for music and video
products was approximately $20 billion in 1996. Prerecorded music amounted to
$12.5 billion of that total, and this segment of the market has grown at an
annual rate of 9.5% over the past 15 years. Fueled in part by this growth, in
the early 1990's, music retailers began aggressive expansion programs which grew
total square footage at a rate that outpaced consumer demand, resulting in an
overcapacity of selling space in the U.S. Furthermore, new music retailing
entrants, including mass merchants (E.G., Wal-Mart, K-Mart, Target) and consumer
electronic stores (E.G., Best Buy, Circuit City) promoted aggressive loss-leader
pricing strategies in an effort to increase store traffic. The additional
retailing square footage and the loss-leader pricing strategy forced music
specialty retailers to reduce prices, resulting in decreased sales and gross
margins of music specialty retailers. As a result, many music specialty
retailers experienced financial difficulties which led to corporate
restructurings and bankruptcies. During 1996, many of the major music vendors
began to enforce programs such as the Minimum Advertised Pricing ("MAP") program
to eliminate loss-leader pricing strategies. These programs penalize sellers
that fail to comply with vendor pricing programs by limiting advertising
support. The enforcement of the MAP program has been successful in stabilizing
prices in the industry. Non-traditional music retailers have since reduced their
music and video selections and maintained less aggressive pricing policies.

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PRODUCTS

The Company's stores offer a full assortment of compact discs, prerecorded
audio cassettes, prerecorded video and related accessories. Sales by category as
a percentage of total sales over the past three years were as follows:

[Enlarge/Download Table]

JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
--------------- ------------- -------------

Compact discs....................................... 55.5% 50.1% 49.2%
Prerecorded audio cassettes......................... 18.9 22.2 25.5
Prerecorded video................................... 16.3 18.6 16.7
Other............................................... 9.3 9.1 8.6
----- ----- -----
TOTAL........................................... 100.0% 100.0% 100.0%
----- ----- -----
----- ----- -----

PRERECORDED MUSIC. The Company's music stores offer a full assortment of
compact discs and prerecorded audio cassettes purchased primarily from six major
manufacturers. Music categories include rock, pop, rap, soundtracks,
alternative, Latin, urban, heavy metal, country, dance, vocals, jazz, and
classical. Merchandise inventory is generally classified for inventory
management purposes in three groups: "hits", which are the best selling new
releases, "fast moving" titles, which generally constitute the top 1,000 titles
with the highest rate of sale in any given month, and "catalog" items that
customers purchase to build their collections.

VIDEO PRODUCTS. The Company offers prerecorded videocassettes for sale in a
majority of its stores. DVD, a new technology, was introduced to the retail
consumer in 1997. DVD offers a quality that exceeds both the current VHS and CD
formats and also offers the consumer more storage than the current CD. The
Company believes that the DVD player will replace the sales of laser disc
players and VCR's as the new technology becomes more accessible. The Company is
anticipating the increased availability of DVD players and plans to capitalize
on this new technology by making software increasingly available as this
technology becomes more widely accepted by the consumer. DVD sales were less
than 1% of the Company's retail sales in 1997.

OTHER PRODUCTS. The Company stocks and promotes brand name blank audio
cassette and videocassette tapes as well as accessory products for compact
discs, audio cassettes and videocassettes. These accessories include maintenance
and cleaning products, portable electronics, storage cases, headphones and video
games.

ADVERTISING

The Company makes extensive use of in-store advertising circulars and signs
and also pursues a mass-media marketing program for its stores through
advertisements in newspapers, radio, and television. Most of the vendors from
whom the Company purchases merchandise offer their customers advertising
allowances to promote their products.

SUPPLIERS AND PURCHASING

The Company purchases inventory for its stores from approximately 450
suppliers. Approximately 68% of purchases in 1997 were made from the six largest
suppliers: WEA (Warner/Electra/Atlantic Corp.), Sony Music, PolyGram
Distribution, Universal Distribution, BMG (Bertelsmann Music Group) and EMD (EMI
Music Distribution). As is typical in this industry, the Company has no material
long-term purchase contracts and deals with its suppliers principally on an
order-by-order basis. In the past, the Company has not experienced difficulty in
obtaining satisfactory sources of supply, and management believes that it will
retain access to adequate sources of supply. The Company also expects to
continue

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to pass on to customers any price increases imposed by the suppliers of
prerecorded music and videocassettes.

The Company produces store fixtures for all of its new stores and store
remodels in its manufacturing facility located in Johnstown, New York. The
Company believes that the costs of production are lower than the costs of
purchasing from an outside manufacturer.

TRADE CUSTOMS AND PRACTICES

Under current trade practices, retailers of prerecorded compact discs and
audio cassettes are entitled to return products they have purchased from major
vendors for other titles carried by these vendors; however, the returns are
subject to merchandise return penalties. This industry practice permits the
Company to carry a wider selection of music titles and at the same time reduce
the risk of obsolete inventory. Most manufacturers and distributors of
prerecorded videocassettes offer return privileges comparable to those with
prerecorded music, but with no merchandise return penalties. Video rental
products are not eligible for return to the manufacturers. The merchandise
return policies have not changed significantly during the past five years, but
any future changes in these policies could impair the value of the Company's
inventory. The Company generally has adapted its purchasing policies to changes
in the policies of its suppliers.

DISTRIBUTION AND MERCHANDISE OPERATIONS

The Company's distribution facility uses automated and computerized systems
designed to manage product receipt, storage and shipment. Store inventories of
regular product are replenished in response to detailed product sale information
that is transmitted to the central computer system from each outlet after the
close of the business day. Shipments from the facility to each of the Company's
stores are made at least once a week and currently provide the Company's stores
with approximately 78% of their product requirements. The balance of the stores'
requirements are satisfied through direct shipments from manufacturers or other
distribution sources.

Company-owned trucks service approximately 36% of the Company's stores; the
balance is serviced by several common carriers chosen on the basis of geographic
and rate considerations. No contractual arrangements exist between the Company
and any common carriers. The Company's sales volume and centralized product
distribution facility enable it to take advantage of transportation economies.

The Company believes that the existing distribution center is adequate to
meet the Company's planned business needs, and additional improvements will be
completed primarily for operational efficiency.

RETAIL INFORMATION SYSTEMS

All stores sales data and product purchasing information is collected
centrally utilizing the IBM AS/400 midrange configuration. The Company's
information systems manage a database of over 150,000 active SKUs in prerecorded
music, video and accessory products. The system processes inventory, accounting,
payroll, telecommunications and other operating information for all of the
Company's operations. The Company has piloted a new POS system that will be
rolled out chain wide during the summer of 1998. This new system is expected to
improve customer service while increasing the accuracy of perpetual inventories
at the store level.

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SEASONALITY

EMPLOYEES

As of January 31, 1998, the Company employed approximately 6,100 people, of
whom 850 were employed on a full-time salaried basis, 1,700 were employed on a
full-time hourly basis, and the remainder were employed on a part-time hourly
basis. The Company hires temporary sales associates during peak seasons to
assure continued levels of customer service. Store managers report to district
managers, each of whom, in turn, reports to a regional manager. In addition to
their salaries, store managers, district managers and regional managers have the
potential to receive incentive compensation based on profitability. None of the
Company's employees are covered by collective bargaining agreements, and
management believes that the Company enjoys favorable relations with its
employees.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Set forth below are the names, ages and positions of the executive officers
and directors of the Company:

[Enlarge/Download Table]

NAME POSITIONS WITH THE COMPANY AGE
------------------------------------------ ------------------------------------------ ---

Robert J. Higgins......................... Chairman of the Board, President, Chief
Executive Officer and a Director 56
James A. Litwak........................... Executive Vice President--Merchandising
and Marketing 44
Edward W. Marshall........................ Executive Vice President--Operations 52
Bruce J. Eisenberg........................ Senior Vice President--Real Estate 38
Carol A. Stevens.......................... Senior Vice President--Human Resources 47
John J. Sullivan.......................... Senior Vice President--Finance, Chief
Financial Officer and Treasurer 45
Matthew H. Mataraso....................... Secretary and a Director 68
Dean S. Adler............................. Director 41
George W. Dougan.......................... Director 58
Charlotte G. Fischer...................... Director 48
Isaac Kaufman............................. Director 51
Dr. Joseph G. Morone...................... Director 45

ROBERT J. HIGGINS, Chairman of the Board, founded the Company in 1972, and
he has participated in its operations since 1973. Mr. Higgins has served as
President, Chief Executive Officer and a director of the Company for more than
the past five years. He is also the Company's principal shareholder. See
"Principal and Selling Shareholders."

JAMES A. LITWAK joined the Company in May 1996 as Executive Vice President
of Merchandising and Marketing. Prior to joining the Company, Mr. Litwak served
as Senior Vice President and General Merchandise Manager of DFS Group Limited,
an international operator of in-airport duty free shops. Prior to joining DFS
Group Limited, Mr. Litwak held several executive positions in his fourteen year
career at R.H. Macy's Company with the most recent being President of
Merchandising for Macy's West responsible for developing marketing,
merchandising and product launch programs to fuel growth for the 50 store
division.

EDWARD W. MARSHALL, JR. has been Executive Vice President of the Company
since August 1994. He served as Senior Vice President-Operations of the Company
since January 1991 and was Vice President of Operations upon joining the Company
in May 1989. Prior to joining the Company, Mr. Marshall was Vice President of
Operations for Morse Shoe, a retail store operator.

BRUCE J. EISENBERG has been Senior Vice President of Real Estate at the
Company since May of 1995. He joined the Company in August of 1993 as Vice
President of Real Estate. Prior to joining the Company, Mr. Eisenberg was
responsible for leasing, finance and construction of new regional mall
development at The Pyramid Companies.

CAROL A. STEVENS has been Senior Vice President of Human Resources since she
joined the Company in February 1998. Prior to joining the Company, Ms. Stevens
was Senior Vice President of Human Resources at Hechinger Company from 1994 to
1997 and served as Vice President at Hechinger Company prior to 1994.

JOHN J. SULLIVAN has been Senior Vice President, Treasurer and Chief
Financial Officer of the Company since May 1995. Mr. Sullivan joined the Company
in June 1991 as the Corporate Controller and was named Vice President of Finance
and Treasurer in June of 1994. Prior to joining the Company,

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Mr. Sullivan was Vice President and Controller for Ames Department Stores, a
discount department store chain.

MATTHEW H. MATARASO has served as Secretary and a director of the Company
for more than the past five years, and has practiced law in Albany, New York
during the same period.

DEAN S. ADLER has been a principal of Lubert/Adler Partners, LP, a limited
partnership investing primarily in under-valued and opportunistic real estate
and real estate-related ventures since March, 1997. For ten years prior thereto,
Mr. Adler was a principal and co-head of the private equity group of CMS
Companies, which specialized in acquiring operating businesses and real estate
within the private equity market. Mr. Adler was also an instructor at The
Wharton School of the University of Pennsylvnia. Mr. Adler serves on the Boards
of Directors of The Lane Company, US Franchise Systems, Inc. and Developers
Diversified Realty Corporation.

GEORGE W. DOUGAN has been Chief Executive Officer and a member of the Board
of Directors of Evergreen Bancorp Inc. since March 7, 1994, and Chairman of the
Board since May 19, 1994. Mr. Dougan was the Chairman of the Board and Chief
Executive Officer of the Bank of Boston-Florida from June 1992 to March 1994,
was the Senior Vice President and Director of Retail Banking of The Bank of
Boston Massachusetts from February 1990 to June 1992.

CHARLOTTE G. FISCHER has been Chairman of the Board, President and Chief
Executive Officer of Paul Harris Stores, Inc., a publicly held specialty
retailer of women's apparel, since January 28, 1995. Mrs. Fischer was the Vice
Chairman of the Board and Chief Executive Officer-designate from April 29, 1994
through January 28, 1995. Mrs. Fischer has also served as a consultant to retail
organizations, including the Company. Mrs. Fischer was President and Chief
Executive Officer of Claire's Boutiques, Inc. from September 1989 until October
1991, and was on the Board of Directors of Claire's Stores Inc., the
publicly-held parent company.

ISAAC KAUFMAN has been Executive Vice President and Chief Financial Officer
of Bio Science Contract Production Corp., a contract manufacturer of biologics
and pharmaceutical products, since February 1998. From November 1996 to February
1998, he was Chief Financial Officer of VSI Group, Inc., a provider of contract
staffing and management services. Mr. Kaufman was an Executive Vice President of
Merry-Go-Round Enterprises, Inc. ("Merry-Go-Round"), a publicly held specialty
retailer, and on its Board of Directors from April 3, 1991 to February 2, 1996
and had been its Chief Financial Officer, Secretary and Treasurer since 1983.
Merry-Go-Round filed for protection from its creditors under Chapter 11 of the
U.S. Bankruptcy Code on January 11, 1994 and is currently in a Chapter 7
liquidation.

DR. JOSEPH G. MORONE has been President of Bentley College, since August 1,
1997. Previously, Dr. Morone was Dean of Rensselaer Polytechnic Institute's
Lally School of Management and Technology and held that position since July
1993. Prior to his appointment as dean, Dr. Morone held the Andersen Consulting
Professorship of Management and was Director of the School of Management's
Center for Science and Technology Policy. Before joining the School of
Management in 1988, Dr. Morone was a senior associate for the Keyworth Company,
a consulting firm specializing in technology management and science policy. Dr.
Morone also spent 7 years at General Electric Company's Corporate Research and
Development. Dr. Morone serves on the Boards of Directors of Albany Medical
Center, Albany International Corp. and NView Corporation.

Directors of the Company hold office until the next Annual Meeting of
Shareholders or until his or her respective successor has been elected and
qualified. Officers of the Company serve at the discretion of the Board of
Directors.

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PRINCIPAL AND SELLING SHAREHOLDER

The following table and accompanying notes set forth, as of January 31,
1998, certain information regarding the beneficial ownership of the Company's
Common Stock by each person who is known by the Company to own beneficially more
than 5% of the Company's Common Stock. Robert J. Higgins, the Selling
Shareholder, is offering 2,000,000 shares of Common Stock pursuant to this
Prospectus (excluding an over-allotment option of 525,000 shares granted to the
Underwriters). The Selling Shareholder is the President, Chief Executive Officer
and Chairman of the Board of Directors of the Company.

[Enlarge/Download Table]

SHARES TO BE SHARES TO BE OWNED
SHARES OWNED SOLD IN THE
PRIOR TO THE OFFERING OFFERING (1) AFTER THE OFFERING (1)
----------------------- -------------- ----------------------

NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
--------------------------------- ---------- ----------- --------- -----------
Robert J. Higgins................ 10,324,600 52.3% 2,000,000 8,324,600 39.2%
Dimensional Fund Advisors Inc.... 1,091,400(2) 5.5% -- 1,091,400 5.1%

------------------------

(1) Assumes that the over-allotment option of 525,000 shares granted to the
Underwriters is not exercised. Includes 33,700 shares owned by the wife of
Robert J. Higgins and 25,000 owned by a foundation controlled by Robert J.
Higgins, and excludes 588,934 shares owned by certain other family members
of Robert J. Higgins who do not share his residence. Mr. Higgins disclaims
beneficial ownership with respect to those shares owned by family members
other than his wife.

(2) Dimensional Fund Advisors Inc., a registered investment advisor, holds the
Common Stock in a fiduciary capacity.

Because of his ownership of 39.2% of the outstanding shares of the Company's
Common Stock after the Offering (36.7% if the over-allotment option granted by
the Selling Shareholder to the Underwriters is exercised in full), the Selling
Shareholder will continue to control the Company.

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DESCRIPTION OF CAPITAL STOCK

The Company is authorized to issue 50,000,000 shares of Common Stock, $.01
par value per share, and 5,000,000 shares of Preferred Stock, $.01 par value per
share. As of January 31, 1998, there were outstanding 19,744,569 shares of
Common Stock. No shares of Preferred Stock are outstanding.

COMMON STOCK

Each outstanding share of Common Stock is entitled to one vote on all
matters submitted to a vote of shareholders, including the election of
directors. All shareholder action may be effected at a duly called meeting at
which a quorum is present, except as otherwise provided by law. A majority of
votes cast by shareholders is required for any action to which shareholders are
entitled to vote, except as otherwise provided by law and except that directors
are elected by a plurality of votes cast. The holders of Common Stock do not
have cumulative voting rights. Dividends may be paid to holders of Common Stock
when and if declared by the Board of Directors out of funds legally available
therefor.

Holders of Common Stock have no conversion, redemption or preemptive rights.
All outstanding shares of Common Stock are fully paid and nonassessable. In the
event of any liquidation, dissolution or winding-up of the affairs of the
Company, holders of Common Stock will be entitled to share ratably in the assets
of the Company remaining after provision for payment of creditors and after the
liquidation preference, if any, of Preferred Stock outstanding at the time.

PREFERRED STOCK

No shares of Preferred Stock have been issued. The Company's Board of
Directors may, without further action by the Company's shareholders, from time
to time authorize the issuance of up to 5,000,000 shares of Preferred Stock in
series and may, at the time of issuance, determine the rights, preferences and
limitations of each series. Satisfaction of any dividend preferences of
outstanding Preferred Stock would reduce the amount of funds available for the
payment of dividends on Common Stock. Also, holders of Preferred Stock would
normally be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of the Company before any payment is made
to the holders of Common Stock. In addition, under certain circumstances, the
issuance of such Preferred Stock may render more difficult or tend to discourage
a merger, tender offer or proxy contest, the assumption of control by a holder
of a large block of the Company's securities or the removal of incumbent
management. Although the Company presently has no plans to issue any shares of
Preferred Stock, the Board of Directors of the Company, without shareholder
approval, may issue Preferred Stock with voting and conversion rights that could
adversely affect the holders of Common Stock.

NEW YORK ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS

Section 912 of the New York Business Corporation Law prohibits a New York
corporation from engaging in a "business combination" with an "interested
shareholder" for a period of five years from the date that such interested
shareholder acquired its stock unless such acquisition or the business
combination was approved by the corporation's board of directors prior to the
interested shareholder's becoming such. Thereafter, the business combination
must be approved by a majority of shareholders other than the interested
shareholder or the price paid to all shareholders must meet certain conditions
relating to the type and minimum amount of consideration to be paid to
shareholders other than the interested shareholder. Because Robert J. Higgins
owned his shares of Common Stock prior to the enactment of Section 912, Section
912 would not apply to a business combination with Mr. Higgins.

For purposes of Section 912, a "business combination" includes a merger or
consolidation, a sale, lease, pledge or other disposition of assets, a stock
issuance or transfer, a liquidation or dissolution, a reclassification of
securities, a recapitalization or any transaction in which an interested
shareholder benefits disproportionately in relation to any other shareholder. An
"interested shareholder" is defined

424B4 30th Page of 52 TOC 1st Previous Next ↓Bottom Just 30th
as any person or entity that currently owns , directly or indirectly, or in the
case of affiliates and associates of the corporation, that owned at any time
during the past five years, more than 20% of the outstanding voting stock of the
corporation.

These provisions may discourage open market purchases or a non-negotiated
tender or exchange offer for the stock of a New York corporation such as the
Company, and, accordingly, may be adverse to the interests of a shareholder who
would desire to participate in such a transaction.

TRANSFER AGENT AND REGISTRAR

Chase Mellon Shareholder Services is the transfer agent and registrar for
the Company's Common Stock.

424B4 31st Page of 52 TOC 1st Previous Next ↓Bottom Just 31st
VALIDITY OF COMMON STOCK

The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Shareholder by Cahill Gordon & Reindel (a partnership
including a professional corporation), New York, New York, and for the
Underwriters by Sullivan & Cromwell, New York, New York.

EXPERTS

The consolidated financial statements of the Company at January 31, 1998,
and for each of the three fiscal years in the period ended January 31, 1998, and
appearing in this Prospectus and Registration Statement have been audited by
KPMG Peat Marwick LLP, independent auditors, as set forth in their reports
thereon appearing elsewhere herein and incorporated by reference in the
Registration Statement, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports and other information filed by the
Company may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located
at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials can be obtained upon written request from the Public Reference Section
of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates, and its public reference facilities
in New York, New York and Chicago, Illinois. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants (such as the Company) that file electronically with the
Commission. The address of such site is http:// www.sec.gov.

The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Act"), with respect to the shares of Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. Statements contained in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete and in each instance reference is made to the copy of such
contract, agreement or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information, reference is hereby made to the Registration
Statement, which may be inspected or copied at the addresses and Web site
indicated above.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The Company's Annual Report on Form 10-K for the fiscal year ended January
31, 1998, as amended by Amendment No. 1 to Annual Report on Form 10-K/A filed on
April 24, 1998 (Commission File No. 0-14818) and all documents subsequently
filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act prior to the termination of the Offering, shall be deemed to be
incorporated by reference into this Prospectus. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.

The Company will furnish without charge to each person to whom this
Prospectus is delivered, upon such person's written or oral request, a copy of
any or all of the documents described herein, other than exhibits to such
documents (unless such exhibits are specifically incorporated by reference into
such documents). Requests should be directed to Trans World Entertainment
Corporation, 38 Corporate Circle, Albany, New York 12203, Attention: Chief
Financial Officer, Telephone (518) 452-1242.

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TRANS WORLD ENTERTAINMENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

[Enlarge/Download Table]

Independent Auditor's Report..................................................... F-2

Consolidated Balance Sheets at January 31, 1998 and February 1,1997.............. F-3

Consolidated Statements of Income--Fiscal years ended January 31, 1998, February
1, 1997 and February 3, 1996................................................... F-4

Consolidated Statements of Shareholders' Equity--Fiscal years ended January 31,
1998, February 1, 1997 and February 3, 1996.................................... F-5

Consolidated Statements of Cash Flows--Fiscal years ended January 31, 1998,
February 1, 1997, and February 3, 1996......................................... F-6

Notes to Consolidated Financial Statements....................................... F-7

F-1

424B4 33rd Page of 52 TOC 1st Previous Next ↓Bottom Just 33rd
REPORT OF KPMG PEAT MARWICK LLP
Independent Auditors

The Board of Directors and Shareholders
Trans World Entertainment Corporation:

We have audited the accompanying consolidated balance sheets of Trans World
Entertainment Corporation and subsidiaries as of January 31, 1998 and February
1, 1997, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the fiscal years in the three-year period ended
January 31, 1998. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Trans World
Entertainment Corporation and subsidiaries as of January 31, 1998 and February
1, 1997, and the results of their operations and their cash flows for each of
the fiscal years in the three-year period ended January 31, 1998, in conformity
with generally accepted accounting principles.

/s/ KPMG PEAT MARWICK LLP

Albany, New York
March 13, 1998

F-2

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TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

[Enlarge/Download Table]

JANUARY 31, FEBRUARY 1,
1998 1997
------------ -----------

ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................ $ 94,732 $ 54,771
Accounts receivable.................................................................. 3,105 8,826
Merchandise inventory................................................................ 189,394 163,509
Refundable income taxes.............................................................. -- 564
Deferred tax asset................................................................... -- 2,774
Prepaid expenses and other........................................................... 3,119 2,490
------------ -----------
Total current assets............................................................... 290,350 232,934
------------ -----------
VIDEOCASSETTE RENTAL INVENTORY, net.................................................... 4,099 4,784
DEFERRED TAX ASSET..................................................................... 4,726 3,098
FIXED ASSETS:
Buildings............................................................................ 7,774 7,774
Fixtures and equipment............................................................... 89,968 85,776
Leasehold improvements............................................................... 77,764 75,742
------------ -----------
175,506 169,292
Less: Fixed asset write-off reserve.................................................. 4,279 7,571
Allowances for depreciation and amortization.................................... 101,595 96,747
------------ -----------
69,632 64,974
------------ -----------
OTHER ASSETS........................................................................... 2,776 4,263
------------ -----------
TOTAL ASSETS....................................................................... $ 371,583 $ 310,053
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................................... $ 162,981 $ 118,980
Income taxes payable................................................................. 11,155 --
Accrued expenses and other........................................................... 17,347 9,403
Store closing reserve................................................................ 8,691 13,747
Current deferred taxes............................................................... 224 --
Current portion of long-term debt and capital lease obligations...................... 99 9,557
------------ -----------
Total current liabilities.......................................................... 200,497 151,687
------------ -----------
LONG-TERM DEBT, less current portion................................................... 35,000 43,983
CAPITAL LEASE OBLIGATIONS, less current portion........................................ 6,409 6,507
OTHER LIABILITIES...................................................................... 6,712 6,514
TOTAL LIABILITIES.................................................................. 248,618 208,691
SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value; 5,000,000 shares authorized; none issued.).......... -- --
Common stock ($.01 par value; 50,000,000 shares authorized; 19,815,357 shares and
19,619,188 shares issued and outstanding in 1997 and 1996, respectively)........... 198 197
Additional paid-in capital........................................................... 25,386 24,441
Unearned compensation--restricted stock.............................................. (175) (245)
Treasury stock at cost (70,788 and 72,788 shares in 1997 and 1996, respectively)..... (394) (407)
Retained earnings.................................................................... 97,950 77,376
------------ -----------
TOTAL SHAREHOLDERS' EQUITY......................................................... 122,965 101,362
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................................... $ 371,583 $ 310,053
------------ -----------
------------ -----------

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-3

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TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

[Enlarge/Download Table]

FISCAL YEAR ENDED
--------------------------------------

JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
------------ ----------- -----------
Sales.................................................................... $ 571,314 $ 481,657 $ 517,046
Cost of sales............................................................ 361,422 308,952 340,754
------------ ----------- -----------
Gross profit............................................................. 209,892 172,705 176,292
Selling, general and administrative expenses............................. 155,678 136,084 150,628
Restructuring charges.................................................... -- -- 35,000
Depreciation and amortization............................................ 15,156 14,134 16,125
------------ ----------- -----------
Income (loss) from operations............................................ 39,058 22,487 (25,461)
Interest expense......................................................... 4,995 10,767 14,222
------------ ----------- -----------
Income (loss) before income taxes........................................ 34,063 11,720 (39,683)
Income tax expense (benefit)............................................. 13,489 4,618 (14,310)
------------ ----------- -----------
NET INCOME (LOSS)........................................................ $ 20,574 $ 7,102 $ (25,373)
------------ ----------- -----------
------------ ----------- -----------

BASIC EARNINGS (LOSS) PER SHARE.......................................... $ 1.05 $ 0.36 $ (1.30)
------------ ----------- -----------
------------ ----------- -----------

Weighted average number of common shares outstanding..................... 19,655 19,514 19,452
------------ ----------- -----------
------------ ----------- -----------

DILUTED EARNINGS (LOSS) PER SHARE........................................ $ 0.99 $ 0.36 ($ 1.30)
------------ ----------- -----------
------------ ----------- -----------
Adjusted weighted average number of common shares outstanding............ 20,688 19,798 19,452
------------ ----------- -----------
------------ ----------- -----------

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-4

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TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND OPTION INFORMATION)

[Enlarge/Download Table]

TOTAL UNEARNED
ADDITIONAL COMPENSATION
COMMON PAID IN RESTRICTED TREASURY RETAINED SHAREHOLDERS'
STOCK CAPITAL STOCK STOCK EARNINGS EQUITY
----------- ----------- --------------- ----------- ---------- --------------

Balance as of January 28, 1995, restated
to reflect two-for-one stock split in
1997
(19,462,416 shares issued)................ $ 195 $ 24,138 $ -- $ (503) $ 95,647 $ 119,477
Net Loss.................................. -- -- -- -- (25,373) (25,373)
----- ----------- ------ ----------- ---------- --------------
Balance as of February 3, 1996............ 195 24,138 -- (503) 70,274 94,104
(19,462,416 shares issued)
Issuance of 14,000 shares of treasury
stock under incentive stock programs.... -- (59) -- 96 -- 37
Issuance of 150,000 shares of common
stock--restricted stock plan, net....... 2 350 (245) -- -- 107
Exercise of 6,772 stock options........... -- 12 -- -- -- 12
Net Income................................ -- -- -- -- 7,102 7,102
----- ----------- ------ ----------- ---------- --------------
Balance as of February 1, 1997
(19,619,188 shares issued)................ $ 197 $ 24,441 $ (245) $ (407) $ 77,376 $ 101,362
Issuance of 2,000 shares of treasury stock
under incentive stock programs.......... -- -- -- 13 -- 13
Amortization of unearned
compensation--restricted stock plan..... -- -- 70 -- -- 70
Exercise of 196,169 stock options......... 1 545 -- -- -- 546
Income tax benefit arising from exercise
of employee stock options............... -- 400 -- -- -- 400
Net Income................................ -- -- -- -- 20,574 20,574

Balance as of January 31, 1998
----- ----------- ------ ----------- ---------- --------------
(19,815,357 shares issued)................ $ 198 $ 25,386 $ (175) $ (394) $ 97,950 $ 122,965
----- ----------- ------ ----------- ---------- --------------
----- ----------- ------ ----------- ---------- --------------

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

[Enlarge/Download Table]

FISCAL YEAR ENDED
--------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
------------ ----------- -----------

OPERATING ACTIVITIES:
Net income (loss)........................................................ $ 20,574 $ 7,102 $ (25,373)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization.......................................... 16,256 15,225 17,145
Fixed asset write-off reserve.......................................... -- -- 8,088
Store closing reserve.................................................. -- -- 26,912
Deferred tax expense (benefit)......................................... 1,370 3,023 (5,446)
Changes in operating assets and liabilities:
Accounts receivable.................................................... 5,868 (747) 1,097
Merchandise inventory.................................................. (9,872) 31,068 27,781
Refundable income taxes................................................ 564 7,744 (8,308)
Prepaid expenses and other............................................. (408) 439 1,478
Other assets........................................................... 2,481 (381) (53)
Accounts payable....................................................... 42,751 (12,322) (4,191)
Income taxes payable................................................... 11,155 -- (1,961)
Accrued expenses and other............................................. 7,344 3,137 (984)
Store closing reserve.................................................. (5,056) (10,528) (11,913)
Other liabilities...................................................... 197 1,174 (136)
------------ ----------- -----------
Net cash provided by operating activities................................ 93,224 44,934 24,136
------------ ----------- -----------

INVESTING ACTIVITIES:
Acquisition of property and equipment.................................. (15,538) (10,198) (10,006)
Acquisition of businesses, net......................................... (20,901) -- --
Proceeds from sale of fixed assets..................................... -- -- 929
(Purchases) disposal of videocassette rental inventory, net............ 685 1,938 750
------------ ----------- -----------
Net cash used in investing activities.................................... 35,754 (8,260) (8,327)
------------ ----------- -----------

FINANCING ACTIVITIES:
Net decrease in revolving line of credit............................... -- (65,260) (9,687)
Payments of long-term debt............................................. (18,439) (3,661) (8,902)
Payments of capital lease obligations.................................. (99) (76) (373)
Issuance of stock under incentive stock programs....................... 83 144 --
Exercise of stock options, including tax benefit....................... 946 12 --
------------ ----------- -----------
Net cash used by financing activities.................................... (17,509) (68,841) (18,962)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents..................... 39,961 (32,167) (3,153)
Cash and cash equivalents, beginning of year............................. 54,771 86,938 90,091
------------ ----------- -----------
Cash and cash equivalents, end of year................................... $ 94,732 $ 54,771 $ 86,938
------------ ----------- -----------
------------ ----------- -----------

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS: Trans World Entertainment Corporation is one of the
largest specialty retailers of music, video and related accessories in the
United States. The Company operates in a single industry segment, the operation
of a chain of retail entertainment stores. At January 31, 1998, the Company
operated 539 stores in 34 states, the District of Columbia and the U.S. Virgin
Islands, with a majority of the stores concentrated in the Eastern half of the
United States.

BASIS OF PRESENTATION: The consolidated financial statements consist of
Trans World Entertainment Corporation and its subsidiaries, all of which are
wholly owned. All significant intercompany accounts and transactions have been
eliminated. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

FISCAL YEAR: The Company's fiscal year is a 52- or 53-week period ending on
the Saturday nearest to January 31. Fiscal years 1997 and 1996 ended January 31,
1998 and February 1, 1997, respectively, and consisted of 52 weeks. Fiscal year
1995, which ended February 3, 1996, consisted of 53 weeks.

DIVIDEND POLICY: The Company has never declared or paid cash dividends on
its Common Stock. The Company's credit agreement currently in place sets certain
restrictions on the payment of cash dividends. Any future determination as to
the payment of dividends would depend upon capital requirements and limitations
imposed by the Company's credit agreement and such other factors as the Board of
Directors of the Company may consider.

CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents. The carrying amounts reported in the balance sheet for cash and
cash equivalents are at fair value.

MERCHANDISE INVENTORY AND RETURN COSTS: Inventory is stated at the lower of
cost (first-in, first-out) or market as determined principally by the retail
inventory method. The Company is entitled to return merchandise purchased from
major vendors for credit against other purchases from these vendors. The vendors
often reduce the credit with a merchandise return charge ranging from 0% to 20%
of the original product purchase price depending on the type of product being
returned. The Company records the merchandise return charges in cost of sales.

VIDEOCASSETTE RENTAL INVENTORY: The cost of videocassette rental tapes is
capitalized and amortized on a straight-line basis over their estimated economic
life with a provision for salvage value. Major movie release additions are
amortized over twelve months while other titles are amortized over thirty-six
months.

FIXED ASSETS: Fixed assets are stated at cost. Major improvements and
betterments to existing facilities and equipment are capitalized. Expenditures
for maintenance and repairs, which do not extend the life of the applicable
asset, are charged to expense as incurred. Buildings are amortized over a
30-year term. Fixtures and equipment are depreciated using the straight-line
method over their estimated useful lives, which range from three to seven years.
Leasehold improvements are amortized over the shorter of their estimated useful
life or the related lease term. Primarily all of the Company's operating leases
are ten years in term. Amortization of capital lease assets is included in
depreciation and amortization expense.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Depreciation and amortization expense related to the Company's videocassette
rental inventory, distribution center facility and distribution center equipment
is included in cost of sales.

ADVERTISING COSTS: The costs of advertising are expensed in the first
period in which such advertising takes place.

STORE OPENING AND CLOSING COSTS: Costs associated with opening a store are
expensed as incurred. When a store is closed, estimated unrecoverable costs are
charged to expense. Such costs include the net book value of abandoned fixtures,
equipment, leasehold improvements and a provision for lease obligations, less
estimated sub-rental income. The residual value of any fixed asset moved to a
store as part of a relocation is transferred to the relocated store.

INCOME TAXES: The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under the asset and liability method of Statement 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.

EARNINGS (LOSS) PER SHARE: In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share," which was effective for the Company for fiscal year
1997. This standard requires the Company to disclose basic earnings per share
and diluted earnings per share. Basic earnings per share is calculated by
dividing net income by the weighted average common shares outstanding. Diluted
earnings per share is calculated by dividing net income, adjusted in 1997 for
the $400,000 tax benefit resulting from stock option exercise activity, by the
sum of the weighted average shares and additional common shares that would have
been outstanding if the dilutive potential common shares had been issued for the
Company's common stock options from the Company's Stock Option Plans (see Note
6). In Fiscal years 1997, 1996 and 1995 the additional dilutive potential common
shares were 1,033,000, 284,000 and 0, respectively. As required by SFAS No. 128,
all outstanding common stock options were included even though their exercise
may be contingent upon vesting. The Company has presented 1997 earnings per
share data and restated all prior-period earnings per share data in accordance
with SFAS No. 128. See Consolidated Statement of Income for the required
disclosures.

All earnings and loss per share information has been adjusted for the
two-for-one stock split effected in the form of a 100% stock dividend on
December 15, 1997. All references to number of shares, per share amounts, stock
option data and market prices of the Company's common stock have been restated.
See Note 7, "Shareholders' Equity."

NOTE 2. RESTRUCTURING CHARGE

In order to streamline operations and close unprofitable store locations,
the Company recorded pre-tax restructuring charges of $35.0 million in Fiscal
year 1995 and $21.0 million in Fiscal year 1994. The restructuring charges
include the write-down of assets, estimated cash payments to landlords for the
early termination of operating leases, and the cost of returning product to the
Company's distribution center and vendors. The charge also includes estimated
legal, lender and consulting fees.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2. RESTRUCTURING CHARGE (CONTINUED)
In determining the components of the reserves, management analyzed all of
the aspects of closing stores and the costs that are incurred. An analysis of
the amounts comprising the restructuring reserve and the charges against the
reserve for each year in the three-year period ended January 31, 1998 are
outlined below (in thousands):

[Enlarge/Download Table]

BALANCE CHARGES BALANCE CHARGES BALANCE CHARGES BALANCE
AS OF 1995 AGAINST AS OF AGAINST AS OF AGAINST AS OF
1/28/95 RESERVE THE RESERVE 2/3/96 THE RESERVE 2/1/97 THE RESERVE 1/31/98
--------- --------- ------------ --------- ------------ --------- ------------ ---------

Total Non Cash
Write-offs............ $ 11,429 $ 10,799 $ 8,322 $ 13,906 $ 6,235 $ 7,671 $ 3,545 $ 4,126
Cash Outflows........... 8,332 24,201 9,840 22,693 9,046 13,647 4,803 8,844
--------- --------- ------------ --------- ------------ --------- ------------ ---------
$ 19,761 $ 35,000 $ 18,162 $ 36,599 $ 15,281 $ 21,318 $ 8,348 $ 12,970
--------- --------- ------------ --------- ------------ --------- ------------ ---------
--------- --------- ------------ --------- ------------ --------- ------------ ---------

NOTE 3. DEBT

Long-term debt consisted of the following:

[Enlarge/Download Table]

JANUARY 31, FEBRUARY 1,
1998 1997
------------ -----------

(IN THOUSANDS)
Senior unsecured notes................................................................. $ -- $ 53,077
Long-term portion of revolving credit facility......................................... 35,000 --
Installment notes and other obligations................................................ -- 375
------------ -----------
35,000 53,452
Less current portion................................................................... -- 9,469
------------ -----------
Long-term debt......................................................................... $ 35,000 $ 43,983
------------ -----------
------------ -----------

In July 1997, the Company replaced its existing $65.3 million revolving
credit facility and $56.5 million note agreement with a $100.0 million secured
revolving credit facility with a bank. The facility matures in July 2000, and
bears interest at the prime interest rate or the Eurodollar interest rate plus
1.75% (7.69% at January 31, 1998). The facility is secured by the Company's
assets allowing the Company to borrow up to 65% of its eligible merchandise
inventory to a maximum of $100.0 million.

During Fiscal years 1997, 1996, and 1995, the highest aggregate balances
outstanding under the revolver were $45.9 million, $65.3 million and $74.9
million, respectively. The weighted average interest rates during Fiscal years
1997, 1996 and 1995 based on average daily balances, were 8.58%, 11.01% and
10.40%, respectively. The balances outstanding under the Company's revolving
credit agreements at Fiscal years ended 1997, 1996 and 1995 were $35.0 million,
$0.0 and $65.3 million, respectively. The Company's policy is to classify $35.0
million of borrowing under its new revolving credit facility as long-term, since
the Company has the intent and ability to maintain these obligations for longer
than one year, or to refinance them on a long-term basis.

At January 31, 1998, the fair market value of this revolving credit facility
approximates the carrying value.

Interest paid during Fiscal years 1997, 1996 and 1995 was approximately $5.8
million, $11.8 million and $16.0 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4. INCOME TAXES

Income tax expense (benefit) consists of the following:

[Enlarge/Download Table]

FISCAL YEAR
--------------------------------

1997 1996 1995
--------- --------- ----------

(IN THOUSANDS)

Federal--current............................................................... $ 10,813 $ 1,364 $ (9,117)
State--current................................................................. 1,306 231 253
Deferred....................................................................... 1,370 3,023 (5,446)
--------- --------- ----------
$ 13,489 $ 4,618 $ (14,310)
--------- --------- ----------
--------- --------- ----------

A reconciliation of the Company's effective tax rates with the federal
statutory rate is as follows:

[Enlarge/Download Table]

FISCAL YEAR
-------------------------------

1997 1996 1995
--------- --------- ---------
Federal statutory rate.................................................................... 35.0% 35.0% (35.0)%
State income taxes (benefit), net of Federal income tax effect............................ 3.0% 4.7% (1.5)%
Other..................................................................................... 1.6% (0.3)% 0.4%
--- --- ---------
Effective income tax rate................................................................. 39.6% 39.4% (36.1)%
--- --- ---------
--- --- ---------

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows:

[Enlarge/Download Table]

JANUARY 31, FEBRUARY 1,
1998 1997
------------ -----------

(IN THOUSANDS)
CURRENT DEFERRED TAX ASSETS
Restructuring reserve.................................................................. $ 5,205 $ 8,556
------------ -----------
Total Current Deferred Tax Assets...................................................... 5,205 8,556
------------ -----------
CURRENT DEFERRED TAX LIABILITIES
Inventory valuation.................................................................... 5,177 5,463
Other.................................................................................. 252 319
------------ -----------
Total Current Deferred Tax Liabilities................................................. 5,429 5,782
------------ -----------
Net Current Deferred Tax Assets (Liabilities).......................................... $ (224) $ 2,774
------------ -----------
------------ -----------
NON-CURRENT DEFERRED TAX ASSETS
Accrued rent, lease accounting......................................................... $ 3,046 $ 2,824
Capitalized leases..................................................................... 895 829
Book over tax depreciation............................................................. 623 --
Other.................................................................................. 254 148
------------ -----------
Total Non-Current Deferred Tax Assets.................................................. 4,818 3,801
------------ -----------
NON-CURRENT DEFERRED TAX LIABILITIES
Tax over book depreciation............................................................. -- 588
Other.................................................................................. 92 115
------------ -----------
Total Non-Current Deferred Tax Liabilities............................................. 92 703
------------ -----------
Net Non-Current Deferred Tax Asset..................................................... $ 4,726 $ 3,098
------------ -----------
------------ -----------
TOTAL NET DEFERRED TAX ASSET........................................................... $ 4,502 $ 5,872
------------ -----------
------------ -----------

In assessing the propriety of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income and the taxable income in
the three previous tax years to which tax loss carryback can be applied.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of projected future taxable income over the
periods in which the deferred tax assets are deductible management believes it
is more likely than not that the Company will realize the benefits of those
deductible differences. The amount of the deferred tax asset considered
realizable could be reduced if estimates of future taxable income during the
carryforward period are reduced.

The Company paid income taxes of approximately $0.3 million, $0.3 million
and $2.2 million during Fiscal years 1997, 1996 and 1995, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5. LEASES

The Company leases its distribution center and administrative offices under
two leases, dated April 1, 1985 and November 1, 1989, from its Chief Executive
Officer and principal shareholder. The leases are classified as capital leases
for accounting purposes. Aggregate rental payments under both leases were $1.2
million for Fiscal years 1997, 1996 and 1995. Biennial increases are contained
in each lease based on the Consumer Price Index with the next scheduled increase
on January 1, 2000. Both leases expire in the year 2015.

Fixed asset amounts for all capitalized leases are as follows:

[Enlarge/Download Table]

JANUARY 31, FEBRUARY 1,
1998 1997
------------ -----------

(IN THOUSANDS)
Buildings.............................................................................. $ 7,105 $ 7,105
Fixtures and equipment................................................................. 1,625 1,625
------------ -----------
8,730 8,730
Allowances for depreciation and amortization........................................... 4,291 4,034
------------ -----------
$ 4,439 $ 4,696
------------ -----------
------------ -----------

The Company leases substantially all of its stores, many of which contain
renewal options, for periods ranging from five to twenty-five years, with the
majority being ten years. Most leases also provide for payment of operating
expenses, real estate taxes, and for additional rent based on a percentage of
sales.

Net rental expense was as follows:

[Enlarge/Download Table]

FISCAL YEAR
-------------------------------

1997 1996 1995
--------- --------- ---------

(IN THOUSANDS)

Minimum rentals................................................................ $ 50,237 $ 49,653 $ 57,420
Contingent rentals............................................................. 719 274 246
--------- --------- ---------
$ 50,956 $ 49,927 $ 57,666
--------- --------- ---------
--------- --------- ---------

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5. LEASES (CONTINUED)
Future minimum rental payments required under all leases that have initial
or remaining noncancelable lease terms in excess of one year at January 31, 1998
are as follows:

[Enlarge/Download Table]

OPERATING CAPITALIZED
LEASES LEASES
----------- -----------

(IN THOUSANDS)
1998.................................................................................... $ 43,486 $ 1,294
1999.................................................................................... 49,865 1,294
2000.................................................................................... 47,404 1,294
2001.................................................................................... 43,920 1,294
2002.................................................................................... 38,174 1,294
Thereafter.............................................................................. 118,663 16,473
----------- -----------
Total minimum payments required......................................................... $ 341,512 22,943
----------- -----------
----------- -----------
Amounts representing interest........................................................... 16,435
-----------
Present value of minimum lease payments................................................. 6,508
Less current portion.................................................................... 99
-----------
Long-term capital lease obligations..................................................... $ 6,409
-----------
-----------

NOTE 6. BENEFIT PLANS

STOCK OPTION PLANS: Under the Company's 1986 Stock Option Plan and 1994
Stock Option Plan (the "Plans"), the Compensation Committee of the Board of
Directors may grant options to acquire shares of common stock to employees of
the Company and its subsidiaries at the fair market value of the common stock on
the date of grant. Under the Plans, options generally become exercisable
commencing one year from the date of grant in increments of 25% per year with a
maximum term of ten years. Shares authorized for issuance under the 1986 and
1994 Stock Option Plans were 2,200,000 and 2,000,000 (adjusted), respectively.
As of June 1, 1995, the Company stopped issuing stock options under the 1986
Stock Option Plan. At January 31, 1998, of the 4,200,000 options authorized for
issuance under the Plans, 2,812,741 have been granted and are outstanding,
572,647 of which were vested and exercisable. Shares available for future grants
at January 31, 1998 and February 1, 1997 were 510,974 and 1,391,772,
respectively. The following table summarizes information about the stock options
outstanding under the Plans at January 31, 1998:

[Enlarge/Download Table]

OUTSTANDING EXERCISABLE
----------------------------------------- ----------------------

WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE EXERCISE
PRICE RANGE SHARES LIFE PRICE SHARES PRICE
---------------------------------------------------- ----------- --------------- ----------- --------- -----------
$1.13 - $ 1.82...................................... 272,118 7.3 $ 1.80 114,618 $ 1.80
2.32 - 2.63...................................... 912,123 8.2 2.38 73,029 2.37
3.00 - 3.69...................................... 230,000 8.4 3.07 57,500 3.07
4.00 - 6.88...................................... 598,500 8.4 5.97 141,500 6.71
7.13 - 16.80...................................... 800,000 7.9 14.46 186,000 7.39
----------- ---------
Total............................................... 2,812,741 8.1 $ 6.58 572,647 $ 5.03
----------- ---------
----------- ---------

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6. BENEFIT PLANS (CONTINUED)
The Company also has a stock option plan for non-employee directors (the
"1990 Plan"). Options under this plan are granted at 85% of the fair value at
the date of grant. Under the 1990 Plan, options generally become exercisable
commencing one year from the date of grant in increments of 25% per year with a
maximum term of ten years. As of January 31, 1998, there were 500,000 shares
authorized for issuance and 172,000 shares have been granted and are
outstanding, 94,500 of which were vested and exercisable. There are 328,000
shares of common stock reserved for possible future option grants under the 1990
Plan. The following table summarizes information about the stock options
outstanding under the 1990 Plan at January 31, 1998:

[Enlarge/Download Table]

OUTSTANDING EXERCISABLE
----------------------------------------- ----------------------

WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE EXERCISE
PRICE RANGE SHARES LIFE PRICE SHARES PRICE
---------------------------------------------------- ----------- --------------- ----------- --------- -----------
$1.78 - $ 2.02...................................... 18,000 7.7 $ 1.90 6,750 $ 1.86
3.14 - 5.53...................................... 113,000 7.0 4.73 46,750 5.20
6.91 - 13.71...................................... 41,000 3.5 10.88 41,000 10.88
----------- ---------
Total............................................... 172,000 6.2 $ 5.90 94,500 $ 7.43
----------- ---------
----------- ---------

The following tables summarize activity under the 1986 and 1994 Plans and
the 1990 Plan:

[Enlarge/Download Table]

1986 AND 1994 PLANS 1990 PLAN
----------------------------------- ----------------------------------

NUMBER OF OPTION NUMBER OF OPTION
SHARES SUBJECT PRICE RANGE SHARES SUBJECT PRICE RANGE
TO OPTION PER SHARE TO OPTION PER SHARE
--------------- ------------------ --------------- -----------------
Balance Jan. 28, 1995.................. 1,868,512 $ 5.50 - $12.13 142,000 $ 5.00 - $ 13.71
Granted................................ 448,174 1.13 - 2.63 12,000 1.78
Exercised..............................
Canceled............................... (555,150) 1.81 - 11.25 (23,000) 1.78 - 6.33
--------------- ---------------
Balance Feb. 3, 1996................... 1,761,536 1.13 - 12.13 131,000 1.78 - 13.71
Granted................................ 1,376,198 1.75 - 4.00 9,000 2.02
Exercised.............................. (6,772) 2.81 - 4.13
Canceled............................... (1,114,486) 1.25 - 12.13
--------------- ---------------
Balance Feb. 1, 1997................... 2,016,476 1.13 - 9.25 140,000 1.78 - 13.71
Granted................................ 1,062,608 5.00 - 16.80 69,000 3.14 - 5.05
Exercised.............................. (191,169) 1.44 - 5.50 (5,000) 5.53
Canceled............................... (75,174) 1.81 - 5.94 (32,000) 5.00 - 13.71
--------------- ---------------
Balance Jan. 31, 1998.................. 2,812,741 $ 1.13 - $16.80 172,000 $ 1.78 - $13.71
--------------- ---------------
--------------- ---------------

The per share weighted-average fair value of the stock options granted
during Fiscal years 1997, 1996 and 1995 was $4.14, $1.05 and $0.57 respectively
using the Black Scholes option pricing model, with the following
weighted-average assumptions;

1997--expected dividend yield 0.0%, risk-free interest rate of 5.5%, expected
life of five years and stock volatility of 48%;

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6. BENEFIT PLANS (CONTINUED)
1996--expected dividend yield 0.0%, risk-free interest rate of 6.7%, expected
life of five years and stock volatility of 72%;

1995--expected dividend yield 0.0%, risk-free interest rate of 6.7%, expected
life of five years and stock volatility of 47%

The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
fair value in accordance with SFAS 123, the Company's net income would have been
reduced to the pro forma amounts indicated below:

[Enlarge/Download Table]

FISCAL YEAR
--------------------------------

1997 1996 1995
--------- --------- ----------
Net income (loss), as reported................................................. $ 20,574 $ 7,102 ($ 25,373)
Basic earnings (loss) per share, as reported................................... $ 1.05 $ 0.36 ($ 1.30)
Diluted earnings (loss) per share, as reported................................. $ 0.99 $ 0.36 ($ 1.30)

Pro forma net income (loss).................................................... $ 19,074 $ 6,658 ($ 25,476)
Pro forma basic earnings (loss) per share...................................... $ 0.97 $ 0.34 ($ 1.31)
Pro forma diluted earnings (loss) per share.................................... $ 0.92 $ 0.34 ($ 1.31)

RESTRICTED STOCK PLAN: Under the 1990 Restricted Stock Plan, the
Compensation Committee of the Board of Directors is authorized to grant awards
for up to 600,000 restricted shares of Common Stock to executive officers and
other key employees of the Company and its subsidiaries. The shares are issued
as restricted stock and are held in the custody of the Company until all vesting
restrictions are satisfied. If conditions or terms under which an award is
granted are not satisfied, the shares are forfeited. Shares begin to vest under
these grants after three years and are fully vested after five years, with
vesting criteria which includes continuous employment until applicable vesting
dates have expired. At January 31, 1998, a total of 150,000 shares have been
granted, of which 50,000 were granted in 1996 with a fair market value of
$118,750; the remaining 100,000 were granted in 1995 with a fair value on the
date of grant of $232,500. As of January 31, 1998, a total of 30,000 of these
shares had vested. Unearned compensation is recorded at the date of award, based
on the market value of the shares, and is included as a separate component of
shareholders' equity and is amortized over the applicable vesting period. The
amount amortized to expense in Fiscal years 1997 and 1996 was approximately
$70,000 and $107,000, respectively. At January 31, 1998, outstanding awards and
shares available for grant totaled 150,000 and 450,000, respectively.

401 (K) SAVINGS PLAN: The Company offers a 401(k) Savings Plan to eligible
employees meeting certain age and service requirements. This plan permits
participants to contribute up to 16% of their salary, including bonuses, up to
the maximum allowable by Internal Revenue Service regulations. Participants are
immediately vested in their voluntary contributions plus actual earnings
thereon. Participant vesting of the Company's matching and profit sharing
contribution is based on the years of service completed by the participant.
Participants are fully vested upon the completion of four years of service. All
participant forfeitures of nonvested benefits are used to reduce the Company's
contributions in future years. The Company matching contribution totaled
$529,000, $465,000 and $470,000 in Fiscal years 1997, 1996 and 1995,
respectively.

F-15

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TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6. BENEFIT PLANS (CONTINUED)
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (SERP): In 1997, the Company
introduced a non-qualified Supplemental Executive Retirement Plan (SERP)
effective March 1, 1997. The SERP, which is unfunded, provides eligible
executives defined pension benefits that supplement benefits under other
retirement arrangements. The annual benefit amount has been predetermined as
part of the plan and vests based on years of service and age at retirement. For
Fiscal year 1997, expenses related to the plan totaled approximately $361,000.
The present value of the projected benefit obligation was approximately $2.3
million at January 31, 1998. The January 31,1998 Consolidated Balance Sheet
includes $313,000 of accrued expense.

NOTE 7. SHAREHOLDERS' EQUITY

On November 14, 1997, the shareholders approved an amendment to the
Company's Certificate of Incorporation to increase authorized common shares from
20 million shares of $0.01 par value common stock to 50 million shares of $0.01
par value common stock. On that date, the Board of Directors approved a
two-for-one common stock split to be distributed in the form of a 100% stock
dividend. As a result, 9,898,758 were issued on December 15, 1997 to
shareholders of record on December 1, 1997. Accordingly, amounts equal to the
par value of the additional shares issued have been charged to additional
paid-in capital and credited to common stock. All references throughout this
annual report to number of shares, per share amounts, stock option data and
market prices of the Company's common stock has been restated to reflect the
stock split.

At January 31, 1998 and February 1, 1997, the Company held 70,788 and 72,788
shares, respectively, in treasury stock resulting from the repurchase of common
stock through open market purchases.

NOTE 8. STRAWBERRIES ACQUISITION

On October 8, 1997 the Company acquired 90 out of a total of 118 stores
owned by Strawberries, Inc., a privately-held non-mall music specialty retailer
operating primarily in New England. The stores operate under the names
"Strawberries" and "Waxie Maxie" and are primarily located in freestanding or
strip center locations. The acquisition has been accounted for using the
purchase method of accounting. At the time of the acquisition, the Company paid
$21 million for the assets which included the fixed assets, merchandise
inventories, other related current assets and $683,043 in goodwill. This
goodwill is being amortized on a straight-line basis over a 15 year period.

Pro forma results of operations including Strawberries for Fiscal years 1997
and 1996 are not presented because such information was not considered to be
reliable because of Strawberries' bankruptcy filing.

NOTE 9. CONCENTRATION OF BUSINESS RISKS

The Company purchases inventory for its stores from approximately 450
suppliers, with approximately 68% of purchases being made from six suppliers. In
the past, the Company has not experienced difficulty in obtaining satisfactory
sources of supply, and management believes that it will retain access to
adequate sources of supply. However, a loss of a major supplier could cause a
possible loss of sales, which would have an adverse affect on operating results
and result in a decrease in vendor support for the Company's advertising
programs.

F-16

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TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

[Enlarge/Download Table]

FISCAL YEAR
ENDED FISCAL 1997 QUARTER ENDED
JANUARY 31, --------------------------------------------------
1998 1/31/98 11/1/97 8/2/97 5/3/97
------------ ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Sales.......................................... $ 571,314 $ 242,041 $ 114,737 $ 105,024 $ 109,512
Gross profit................................... 209,892 87,439 43,662 39,527 39,264
Net income (loss).............................. 20,574 21,291 979 (834) (862)
Basic earnings (loss) per share................ $ 1.05 $ 1.08 $ 0.05 $ (0.04) $ (0.04)
Diluted earnings (loss) per share.............. $ 0.99 $ 1.01 $ 0.05 $ (0.04) $ (0.04)

[Enlarge/Download Table]

FISCAL YEAR
ENDED FISCAL 1996 QUARTER ENDED
FEBRUARY 1, ----------------------------------------------
1997 2/1/97 11/2/96 8/3/96 5/4/96
----------- ----------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Sales............................................. $ 481,657 $ 180,735 $ 97,583 $ 96,717 $ 106,622
Gross profit...................................... 172,705 64,703 36,217 34,616 37,169
Net income (loss)................................. 7,102 14,710 (2,477) (2,392) (2,739)
Basic earnings (loss) per share................... $ 0.36 $ 0.75 $ (0.13) $ (0.12) $ (0.14)
Diluted earnings (loss) per share................. $ 0.36 $ 0.74 $ (0.13) $ (0.12) $ (0.14)

F-17

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UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Shareholder have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman, Sachs
& Co., Donaldson, Lufkin & Jenrette Securities Corporation,
NationsBanc Montgomery Securities LLC and EVEREN Securities, Inc. are acting as
representatives, has severally agreed to purchase from the Company and the
Selling Shareholder, the respective number of shares of Common Stock set forth
opposite its name below:

[Download Table]

NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------------------------------------------------------- ---------------

Goldman, Sachs & Co........................................ 875,000
Donaldson, Lufkin & Jenrette Securities Corporation........ 875,000
NationsBanc Montgomery Securities LLC...................... 875,000
EVEREN Securities, Inc..................................... 175,000
BT Alex. Brown Incorporated................................ 175,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................... 175,000
Dain Rauscher Wessels, A Division of Dain Rauscher
Incorporated............................................. 70,000
First Albany Corporation................................... 70,000
Genesis Merchant Group Securities LLC...................... 70,000
C.L. King & Associates, Inc................................ 70,000
Scott & Stringfellow, Inc.................................. 70,000
---------------
Total................................................ 3,500,000
---------------
---------------

Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.

The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $0.78 per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $0.10 per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the representatives.

The Selling Shareholder has granted the Underwriters an option exercisable
for 30 days after the date of this Prospectus to purchase up to an aggregate of
525,000 additional shares of Common Stock solely to cover over-allotments, if
any. If the Underwriters exercise their over-allotment option, the Underwriters
have severally agreed, subject to certain conditions, to purchase approximately
the same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 3,500,000 shares of Common
Stock offered.

The Company and the Selling Shareholder have agreed that, during the period
beginning from the date of the Underwriting Agreement and continuing to and
including the date 180 days after the date of this Prospectus, they will not
offer, sell, contract to sell or otherwise dispose of any securities of the
Company (other than pursuant to existing stock purchase and option plans) which
are substantially similar to the shares of Common Stock or which are convertible
into or exchangeable for securities which are substantially similar to the
shares of Common Stock, without the prior written consent of the
representatives, except for the shares of Common Stock offered in connection
with the Offering.

U-1

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The Company and the Selling Shareholder have agreed to indemnify the several
Underwriters against certain liabilities under the Securities Act of 1933.

In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions, "passive" market making and purchases to cover
syndicate short positions created in connection with the Offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Common Stock; and syndicate
short positions involve the sale by the Underwriters of a greater number of
shares of Common Stock than they are required to purchase from the Company and
the Selling Shareholder in the Offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the Common Stock sold in the Offering for their
account may be reclaimed by the syndicate if such shares of Common Stock are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock, which may be higher than the price that might otherwise prevail in
the open market, and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter-market or otherwise.

As permitted by Rule 103 under the Exchange Act, Underwriters (and selling
group members, if any) that are market makers ("passive market makers") in the
Common Stock may make bids for or purchases of the Common Stock in the Nasdaq
National Market until such time, if any, when a stabilizing bid for such
securities has been made. Rule 103 generally provides that (i) a passive market
maker's net daily purchase of Common Stock may not exceed 30% of its average
daily trading volume in such securities for the two consecutive calendar months
(or any 60 consecutive days ending within the ten days) immediately preceding
the filing date of the registration statement of which this Prospectus forms a
part, (ii) a passive market maker may not effect transactions or display bids
for the Common Stock at a price that exceeds the highest independent bid for the
Common Stock by persons who are not passive market makers and (iii) bids made by
passive market makers must be identified as such.

U-2

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[INSIDE BACK COVER]
[PHOTOGRAPHS OF STORE FRONTS]

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--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

------------------------

TABLE OF CONTENTS

[Download Table]

PAGE
---------

Prospectus Summary............................ 3
Risk Factors.................................. 8
Use of Proceeds............................... 11
Price Range of Common Stock................... 12
Dividend Policy............................... 12
Capitalization................................ 13
Selected Consolidated Financial Data.......... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 15
Business...................................... 20
Management.................................... 26
Principal and Selling Shareholder............. 28
Description of Capital Stock.................. 29
Validity of Common Stock...................... 31
Experts....................................... 31
Available Information......................... 31
Incorporation of Certain Documents by
Reference................................... 31
Index to Consolidated Financial Statements.... F-1
Underwriting.................................. U-1

3,500,000 SHARES

TRANS WORLD
ENTERTAINMENT
CORPORATION

COMMON STOCK
(PAR VALUE $.01 PER SHARE)

------------------

[LOGO]

------------------

GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

NATIONSBANC MONTGOMERY
SECURITIES LLC

EVEREN SECURITIES, INC.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘424B4’ Filing	Date	First	Last	Other Filings

	1/1/00	43
	5/1/98	1
Filed on:	4/28/98	1
	4/27/98	1	12
	4/24/98	31		10-K/A
	3/13/98	33
	1/31/98	3	47	10-K, 10-K/A, 8-K
	12/15/97	3	47
	12/1/97	47
	11/14/97	7	47	DEFS14A
	10/27/97	22
	10/8/97	47
	8/1/97	27
	7/9/97	17
	3/1/97	47
	2/1/97	15	47	10-K
	2/3/96	7	45
	2/2/96	27
	6/1/95	44
	1/28/95	27	45	10-K
	5/19/94	27
	4/29/94	27
	3/7/94	27
	1/11/94	27
				List all Filings

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Filing Submission 0001047469-98-016763 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Trans World Entertainment Corp – ‘424B4’ on 4/28/98

As of: Tuesday, 4/28/98 · Accession #: 1047469-98-16763 · File #: 333-48891

Prospectus — Rule 424(b)(4)Filing Table of Contents

Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Prospectus — Rule 424(b)(4)
Filing Table of Contents