<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT FOR THE QUARTERLY PERIOD ENDED
_X_ NOVEMBER 2, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
___ SECURITIES EXCHANGE ACT
COMMISSION FILE NUMBER: 0-14818
TRANS WORLD ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
New York 14-1541629
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
38 Corporate Circle
Albany, New York 12203
(Address of principal executive offices, including zip code)
(518) 452-1242
(Registrant's telephone number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value,
9,742,325 shares outstanding as of November 30, 1996.
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Condensed Consolidated Balance Sheets -- November 2, 1996,
February 3, 1996 and October 28, 1995 3
Condensed Consolidated Statements of Income -- Thirteen
Weeks and Thirty-Nine Weeks Ended November 2, 1996
and October 28, 1995 5
Condensed Consolidated Statements of Cash Flows --
Thirty-Nine Weeks Ended November 2, 1996 and
October 28, 1995 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 13
Signatures 13
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
November 2, February 3, October 28,
1996 1996 1995
-----------------------------------
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $8,324 $86,938 $6,618
Merchandise inventory 214,084 194,577 258,379
Refundable income taxes --- 8,308 ---
Deferred tax asset 14,478 8,465 13,585
Other current assets 11,193 11,008 20,636
--------------------------------
Total current assets 248,079 309,296 299,218
--------------------------------
VIDEOCASSETTE RENTAL INVENTORY, NET 5,926 6,722 7,334
DEFERRED TAX ASSET 430 430 505
FIXED ASSETS:
Property, plant and equipment 170,288 171,716 177,431
Less: Fixed asset write-off reserve 9,781 12,324 6,346
Accumulated depreciation
and amortization 96,106 89,391 91,510
--------------------------------
64,401 70,001 79,575
--------------------------------
OTHER ASSETS 3,558 3,882 4,048
--------------------------------
TOTAL ASSETS $322,394 $390,331 $390,680
================================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
November 2, February 3, October 28,
1996 1996 1995
-----------------------------------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $116,936 $131,302 $132,942
Notes payable 32,806 65,260 69,759
Accrued expenses and other 4,418 6,266 5,820
Store closing reserve 15,262 24,275 2,514
Current portion of long-term
debt and capital leases 8,603 3,420 63,106
--------------------------------
Total current liabilities 178,025 230,523 274,141
--------------------------------
LONG-TERM DEBT, less
current portion 44,912 53,770 574
CAPITAL LEASE OBLIGATIONS,
less current portion 6,531 6,594 6,615
OTHER LIABILITIES 6,296 5,340 5,181
--------------------------------
TOTAL LIABILITIES 235,764 296,227 286,511
--------------------------------
SHAREHOLDERS' EQUITY:
Common stock ($.01 par value;
20,000,000 shares authorized;
9,783,594, 9,731,208 and
9,731,208 issued, respectively) 98 97 97
Additional paid-in capital 24,417 24,236 24,236
Treasury stock at cost (41,394,
48,394 & 48,394 shares,
respectively) (407) (503) (503)
Unearned compensation - restricted stock (144) --- ---
Retained earnings 62,666 70,274 80,339
--------------------------------
Total shareholders' equity 86,630 94,104 104,169
--------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $322,394 $390,331 $390,680
================================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-----------------------------------------------
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
-----------------------------------------------
<S> <C> <C> <C> <C>
Sales $97,583 $103,165 $300,922 $319,369
Cost of sales 61,366 67,195 192,920 208,430
-------------------------------------------
Gross profit 36,217 35,970 108,002 110,939
Selling, general and
administrative expnses 33,899 36,832 100,262 113,123
Depreciation and amortization 3,475 3,978 10,655 12,333
-------------------------------------------
Loss from operations (1,157) (4,840) (2,915) (14,517)
Interest expense 2,657 3,635 8,800 10,954
-------------------------------------------
Loss before income tax benefit (3,814) (8,475) (11,715) (25,471)
Income tax benefit (1,337) (3,382) (4,107) (10,163)
-------------------------------------------
NET LOSS ($2,477) ($5,093) ($7,608) ($15,308)
===========================================
LOSS PER SHARE ($0.25) ($0.52) ($0.78) ($1.57)
===========================================
Weighted average number of common
shares outstanding 9,741 9,733 9,738 9,723
===========================================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-----------------------
November 2, October 28,
1996 1995
-----------------------
<S> <C> <C>
NET CASH USED BY OPERATING ACTIVITIES ($37,680) ($69,305)
-----------------------
INVESTING ACTIVITIES:
Acquisition of property and equipment (5,576) (6,354)
Disposal of videocassette rental
inventory, net of amortization 796 138
-----------------------
Net cash used by investing activities (4,780) (6,216)
-----------------------
FINANCING ACTIVITIES:
Net decrease in revolving line of credit (32,454) (5,188)
Payments of long-term debt and capital
lease obligations (3,738) (2,764)
Capital stock transactions, net 38 ---
-----------------------
Net cash used by financing activities (36,154) (7,952)
-----------------------
Net decrease in cash and cash equivalents (78,614) (83,473)
Cash and cash equivalents, beginning of period 86,938 90,091
-----------------------
Cash and cash equivalents, end of period $8,324 $6,618
=======================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
consist of Trans World Entertainment Corporation and its subsidiaries (the
Company), all of which are wholly owned. All significant intercompany
accounts and transactions have been eliminated. Joint venture investments,
none of which are material, are accounted for using the equity method.
The unaudited interim condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. The information furnished in these consolidated financial
statements reflects all normal, recurring adjustments which, in the opinion
of management, are necessary for a fair presentation of such financial
statements. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to rules and
regulations applicable to interim financial statements.
These unaudited condensed consolidated financial statements should be read in
conjunction with the audited financial statements included in the Company's
Annual Report on Form 10-K for the fiscal year ended February 3, 1996.
Note 2. Restructuring Reserve
The Company recorded a pre-tax restructuring charge of $35 million in
January, 1996 to reflect the anticipated costs associated with a program to
close 163 stores through fiscal 1997. This charge is in addition to a $21
million restructuring charge recorded in fiscal 1994 to reflect the costs
associated with the closing of 179 stores (versus a plan of 143). The
restructuring charge includes the write-down of fixed assets, estimated cash
payments to landlords for 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, including
those that the Company was obligated to pay on behalf of its lenders while it
worked to renegotiate its credit agreements.
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2. Restructuring Reserve (cont'd)
<TABLE>
<CAPTION>
Total costs charged to the restructuring reserves during the first nine
months of 1996 are summarized as follows:
First First Second Third Third
Quarter Quarter Quarter Quarter Quarter
Beginning Charges Charges Charges Ending
Reserve Against Against Against Reserve
Balance Reserve Reserve Reserve Balance
-------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Non-cash write-offs $13,906 $1,810 $1,139 $1,026 $9,931
Cash outflows 22,693 2,300 3,768 1,513 15,112
-------------------------------------------------------
Total $36,599 $4,110 $4,907 $2,539 $25,043
=======================================================
</TABLE>
Note 3. Seasonality
The Company's business is seasonal in nature, with the highest sales and
earnings occurring in the fourth fiscal quarter. In the past three fiscal
years, before considering restructuring charges, the fourth quarter has
represented substantially all of the Company's net income for the year.
Note 4. Earnings (Loss) Per Share
Earnings (Loss) per share is based on the weighted average number of common
shares outstanding during each fiscal period. Common stock equivalents,
which relate to employee stock options, are excluded from the calculations,
as their inclusion would have an anti-dilutive impact on the loss per share.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following is an analysis of the Company's results of operations,
liquidity and capital resources. To the extent that such analysis contains
statements which are not of a historical nature, such statements are
forward-looking statements, which involve risks and uncertainties. These
risks include, but are not limited to, changes in the competitive environment
for the Company's products, including the entry or exit of non-traditional
retailers of the Company's products to or from its markets; the release by
the music industry of an increased or decreased number of "hit releases";
general economic factors in markets where the Company's products are sold;
and other factors discussed in the Company's filings with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS
Thirteen Weeks Ended November 2, 1996 (Third Quarter 1996) Compared to
Thirteen Weeks Ended October 28, 1995 (Third Quarter 1995)
- ------------------------------------------------------------------------------
Sales. The Company's total sales declined $5.6 million or 5.4% for the third
quarter ended November 2, 1996 compared to the third quarter ended October
28, 1995. The decrease in sales is due to the Company operating
approximately 20% fewer stores offset by a comparable store sales increase of
4.3%. During the past 12 months, the Company opened 5 stores and closed 113
stores, resulting in a 0.4 million net decrease in square footage to 2.2
million square feet in operation.
Gross Profit. Gross profit as a percentage of sales increased to 37.1% in
the third quarter ended November 2, 1996 from 34.9% in the third quarter
ended October 28, 1995. The increase in the gross margin rate is due to
improvements in merchandising mix and merchandise discounts received from
vendors.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("S,G&A") as a percentage of sales decreased to 34.7%
in the third quarter of 1996, from 35.7% in the third quarter of 1995. The
percentage decrease is due to an increase in comparable store sales and a
decrease in S,G&A expenses, primarily related to the closure of
underperforming stores.
Interest Expense. Interest expense decreased to $2.7 million in the third
quarter ended November 2, 1996 from $3.6 million in the third quarter ended
October 28, 1995. Although interest rates were higher in the third quarter
of 1996, amounts outstanding under the Company's loan agreements were lower
than in the same period of 1995. Total debt as of November 2, 1996 is $86
million, versus $133 million a year ago. Long-term debt is $53 million,
compared to $63 million in the comparable 1995 period.
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Net Loss. The $2.5 million net loss for the third quarter ended November 2,
1996 compares to a $5.1 million net loss in the third quarter ended October
28, 1995. The $2.6 million reduction in the loss for the quarter is due to a
comparable store sales increase, higher gross margin rate, lower SG&A
expenses and lower interest expense.
Thirty-Nine Weeks (Nine Months) Ended November 2, 1996 Compared to
Thirty-Nine Weeks (Nine Months) Ended October 28, 1995
-----------------------------------------------------------------------------
Sales. The Company's sales decreased by $18.4 million or 5.8% in the first
nine months of 1996 compared to the first nine months of 1995 while the
Company operated approximately 20% fewer stores. During the first nine
months of the year, comparable store sales increased 4.6%.
Gross Profit. Gross profit as a percentage of sales increased to 35.9% in
the nine months ended November 2, 1996 from 34.7% in the nine months ended
October 28, 1995. The increase in the gross margin rate is due to
improvements in merchandising mix and merchandise discounts received from
vendors.
Selling, General and Administrative Expenses. S,G&A as a percentage of sales
decreased to 33.3% in the first nine months of 1996 from 35.4% in the first
nine months of 1995. Receipt of $2.5 million upon the termination of a
business development agreement accounted for 0.8% of the improved percentage.
The increase in comparable store sales and the closing of underperforming
stores also contributed to the improved percentage.
Interest Expense. Interest expense decreased to $8.8 million in the nine
months ended November 2, 1996 from $11.0 million in the nine months ended
October 28, 1995. Although interest rates were higher in 1996, amounts
outstanding under the Company's loan agreements were lower than in the same
period of 1995. Total debt as of November 2, 1996 is $86 million, versus
$133 million a year ago. Long-term debt is $53 million, compared to $63
million in the comparable 1995 period.
Net Loss. The $7.6 million net loss for the first nine months of 1996
compares to a $15.3 million net loss in the first nine months of 1995. The
$7.7 million reduction in the loss for the first nine months is due to the
comparable store sales increase, higher gross margin rate, lower SG&A
expenses, lower interest expense and a $1.6 million after tax benefit upon
termination of a business development agreement.
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Sources of Capital. Cash used by operating and investing
activities in the first nine months of the fiscal year were financed through
borrowings under the Company's revolving credit facilities, which permit
aggregate borrowings of up to $61.2 million.
The Company's working capital at November 2, 1996 was $70.0 million and its
ratio of current assets to current liabilities was 1.4 to 1. During the
first nine months of 1996 the Company's cash flow used by operations was
$37.7 million, compared to $69.3 million used in the first nine months of
1995. The most significant uses of cash in the period were $14.3 million in
normal reductions of accounts payable, $19.5 million in inventory purchases
and $9.0 million of expenditures relating to the Company's underperforming
store closing program.
The Company is in compliance with all covenants under its credit and
long-term note agreements as of and for the period ended November 2, 1996.
CAPITAL EXPENDITURES
During the third quarter of 1996, the Company had capital expenditures of
$2.6 million. Total capital expenditures for the first nine months of 1996
were $5.6 million out of a planned fiscal 1996 capital expenditure budget of
approximately $12.0 million, net of construction allowances. During the
quarter ten stores were either opened or relocated bringing the year-to-date
total to twelve new stores. Although management's strategy continues to be
focused on closing underperforming stores and reducing outstanding debt, new
stores are being opened and existing stores are being relocated if the
economic conditions are favorable.
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
PROVISION FOR BUSINESS RESTRUCTURING
During the fourth quarter of fiscal 1995 the Company undertook a
comprehensive examination of store profitability and adopted a second
business restructuring plan which when combined with the 1994 restructuring
charge included closing over 300 stores out of 700 stores in operation during
1994. Management concluded that select retail entertainment markets had
begun to reflect an overcapacity of retail outlets, and large discount-priced
electronics stores and other superstores were having an adverse impact on
certain of the Company's retail stores. This resulted in the Company
recording a $35 million pre-tax restructuring charge in 1995. The components
of the restructuring charge included approximately $24 million in reserves
for future cash outlays and approximately $11 million in asset writedowns.
The cash outflows will be financed from operating cash flows and liquidation
of merchandise inventory from the stores identified for closure. The timing
of the store closures will depend on the Company's ability to negotiate
reasonable lease termination agreements. Management will continually review
the opportunity to accelerate the closing of underperforming stores.
Sixteen stores were closed in the third quarter of 1996, bringing the total
number of closures to 238 through the end of the third quarter of 1996.
Annual sales associated with the stores closed in the third quarter of 1996
totaled $8.1 million in 1995. The Company is experiencing improved earnings
and cash flow benefits as a result of the restructuring program and expects
continued improvement as the remaining store closures are completed
throughout the remainder of 1996 and 1997.
<PAGE>
PART II - OTHER INFORMATION
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Item 6 - Exhibits and Reports on Form 8-K
-----------------------------------------
(A) Exhibits
Exhibit No. Description Page No.
----------- ----------- --------
27 Financial Data Schedule
(electronically filing only)
(B) Reports on Form 8-K - None.
Omitted from this Part II are items which are not applicable or to which
the answer is negative for the periods covered.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANS WORLD ENTERTAINMENT CORPORATION
December 17, 1996 By: /s/ ROBERT J. HIGGINS
-------------------------
Robert J. Higgins
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
December 17, 1996 By: /s/ JOHN J. SULLIVAN
------------------------
John J. Sullivan
Senior Vice President - Finance
Chief Financial Officer
(Chief Financial and Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS DATA EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS,
AND THE CONSOLIDATED STATEMENTS OF
INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
<CIK> 0000795212
<NAME> TRANS WORLD ENTERTAINMENT CORPORATION
<MULTIPLIER> 1,000
<CAPTION>
Amount
Item Description (in thousands, except per share data)
----------------- -------------------------------------
<S> <C>
<FISCAL-YEAR-END> FEB-1-1997
<PERIOD-START> FEB-4-1996
<PERIOD-END> NOV-2-1996
<PERIOD-TYPE> 9-MOS
<CASH> 8,324
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 214,084
<CURRENT-ASSETS> 248,079
<PP&E> 170,288
<DEPRECIATION> 96,106
<TOTAL-ASSETS> 322,394
<CURRENT-LIABILITIES> 178,025
<BONDS> 51,443
0
0
<COMMON> 98
<OTHER-SE> 86,532
<TOTAL-LIABILITY-AND-EQUITY> 322,394
<SALES> 300,922
<TOTAL-REVENUES> 300,922
<CGS> 192,920
<TOTAL-COSTS> 192,920
<OTHER-EXPENSES> 110,917
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,800
<INCOME-PRETAX> (11,715)
<INCOME-TAX> (4,107)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,608)
<EPS-PRIMARY> (0.78)
<EPS-DILUTED> (0.78)
</TABLE>
