Second Quarter Filing on Form 10-Q
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
AUGUST 1, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT FOR THE TRANSITION PERIOD
FROM ........ TO ........
COMMISSION FILE NUMBER: 0-14818
TRANS WORLD ENTERTAINMENT CORPORATION
-------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 14-1541629
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
38 Corporate Circle
Albany, New York 12203
(Address of principal executive offices, including zip
(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,
21,823,982 shares outstanding as of August 29, 1998
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Form 10-Q
Page No.
PART 1. FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Condensed Consolidated Balance Sheets - August 1, 1998,
January 31, 1998 and August 2, 1997 3
Condensed Consolidated Statements of Income - Thirteen Weeks
Ended and Twenty-Six Weeks Ended August 1, 1998 and August
2, 1997 5
Condensed Consolidated Statements of Cash Flows - Twenty-Six
Weeks Ended August 1, 1998 and August 2, 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial
Conditions and Results of Operations 9
PART II. OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 12
Item 6 - Exhibits and Reports on Form 8-K 13
Signatures 13
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for share amounts)
(unaudited)
<TABLE>
<CAPTION>
August 1, January 31, August 2,
1998 1998 1997
-----------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $24,267 $94,732 $9,757
Merchandise inventory 179,592 189,394 151,563
Other current assets 6,542 6,224 10,037
-----------------------------------------
Total current assets 210,401 290,350 171,357
VIDEOCASSETTE RENTAL INVENTORY, net 3,661 4,099 4,203
DEFERRED TAX ASSET 6,658 4,726 3,918
FIXED ASSETS:
Property, plant and equipment 187,635 175,506 168,729
Less: Fixed asset write-off
reserve 3,540 4,279 6,500
Allowances for depreciation
and amoritization 103,445 101,595 99,911
-----------------------------------------
80,650 69,632 62,318
-----------------------------------------
OTHER ASSETS 2,793 2,776 3,179
-----------------------------------------
TOTAL ASSETS $304,163 $371,583 $244,975
=========================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
August 1, January 31, August 2,
1998 1998 1997
------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $92,844 $162,981 $77,684
Notes payable --- --- 1,241
Accrued expenses and other 12,467 17,347 7,073
Store closing reserve 7,367 8,691 10,549
Current portion of long-term
debt and capital lease
obligations 1,709 99 93
Income Taxes Payable 975 11,155 ---
Deferred Tax Liabilities 1,709 224 ---
------------------------------------------
Total current liabilities 117,071 200,497 96,640
------------------------------------------
LONG-TERM DEBT,
less current portion --- 35,000 35,000
CAPITAL LEASE OBLIGATIONS,
less current portion 12,051 6,409 6,459
OTHER LIABILITIES 7,444 6,712 6,889
------------------------------------------
TOTAL LIABILITIES 136,566 248,618 144,988
------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value;
5,000,000 shares authorized;
none issued) --- --- ---
Common stock ($.01 par value;
50,000,000 shares authorized
21,864,022, 19,815,357 and
19,744,764 shares issued,
respectively) 219 198 196
Additional paid-in capital 64,702 25,386 24,714
Treasury stock, at cost (70,288,
70,788 and 80,788
shares, respectively) (390) (394) (394)
Unearned compensation -
restricted stock (154) (175) (210)
Retained earnings 103,220 97,950 75,681
-----------------------------------------
TOTAL SHAREHOLDERS' EQUITY 167,597 122,965 99,987
-----------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $304,163 $371,583 $244,975
==========================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Twenty-Six Weeks
Ended Ended
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
-------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $142,198 $105,024 $287,260 $214,536
Cost of sales 88,734 65,497 181,339 135,746
-------------------------------------------------------
Gross profit 53,464 39,527 105,921 78,790
-------------------------------------------------------
Selling, general and
administrative expenses 44,112 35,708 87,403 71,056
Depreciation and
amortization 4,578 3,643 8,621 7,228
-------------------------------------------------------
Income from operations 4,774 176 9,897 506
Interest expense 417 1,543 1,258 3,285
-------------------------------------------------------
Income (loss) before
income taxes 4,357 (1,367) 8,639 (2,779)
Income tax expense (benefit) 1,699 (533) 3,369 (1,084)
-------------------------------------------------------
NET INCOME (LOSS) $2,658 $(834) $5,270 $(1,695)
=======================================================
BASIC EARNINGS (LOSS)
PER SHARE $0.12 $(0.04) $0.25 $(0.09)
=======================================================
Weighted average number of
common shares outstanding 21,690 19,612 20,758 19,576
=======================================================
DILUTED EARNINGS (LOSS)
PER SHARE $0.12 $(0.04) $0.24 $(0.09)
=======================================================
Adjusted weighted average
number of common shares
outstanding 23,092 19,612 22,156 19,576
=======================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Twenty Six Weeks Ended
August 1, August 2,
1998 1997
-----------------------
<S> <C> <C>
NET CASH USED BY OPERATING ACTIVITIES: $(60,929) $(23,559)
-----------------------
INVESTING ACTIVITIES:
Acquisition of property and equipment (21,589) (5,102)
Disposal of rental inventory, net 438 581
-----------------------
Net cash used by investing activities (21,151) (4,521)
-----------------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt --- 35,000
Proceeds from capital lease 7,440 ---
Payments of long-term debt and capital
lease obligations (35,189) (53,495)
Net increase in revolving line of credit --- 1,241
Proceeds from issuance of common stock 36,772 ---
Exercise of stock options 2,567 ---
Increase in additional paid-in capital --- 272
Decrease in treasury stock due to
reissuance of shares 4 13
Unearned compensation from issuance
of shares of restricted stock 21 35
-----------------------
Net cash provided (used) by financing
activities 11,615 (16,934)
-----------------------
Net decrease in cash and cash equivalents (70,465) (45,014)
Cash and cash equivalents, beginning
of period 94,732 54,771
-----------------------
Cash and cash equivalents, end of period $24,267 $9,757
=======================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Basis of Presentation
The accompanying unaudited 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.
These interim condensed financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. The
information furnished in these condensed consolidated financial statements
reflect 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 January 31, 1998.
Note 2. Restructuring Charge
In order to streamline operations and close unprofitable store locations, the
Company recorded pre-tax restructuring charges of $35 million in 1995 and $21
million 1994. An analysis of the amounts comprising the restructuring reserve
and the charges against the reserve for the period from January 31, 1998
through August 1, 1998 is outlined below (in thousands):
<TABLE>
<CAPTION>
Balance Charges against Balance
as of the Reserve as of
1/31/98 1st Qtr 2nd Qtr 08/01/98
------------------------------------------
<S> <C> <C> <C> <C>
Non-cash write-offs $4,126 $56 $683 $3,387
Cash outflows 8,844 471 853 7,520
------------------------------------------
Total $12,970 $527 $1,536 $10,907
==========================================
</TABLE>
Note 3. Seasonality
The Company's business is seasonal in nature, with the highest sales and
earnings occurring in the fourth fiscal quarter.
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 4. Earnings 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 by the sum of the weighted average 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.
As required by SFAS No. 128, all outstanding common stock options were
included even though their exercise may be contingent upon vesting. The 1997
quarterly amounts have been restated to adopt SFAS No. 128.
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 August 1, 1998
Compared to the Thirteen Weeks Ended August 2, 1997
Sales. Total sales increased 35% to $142.2 million for the thirteen weeks
ended August 1, 1998, compared to $105.0 million for the same period last
year. The Company operated 55 more stores in 1998 than in 1997, an increase
of approximately 500,000 square feet of retail selling space. The increase is
primarily attributable to a comparable store sales increase of 10%, the
acquisition of 88 Strawberries' stores in October 1997, and the opening of 53
stores partially offset by the closing of 86 stores since the end of the
second quarter 1997. This was the Company's tenth consecutive quarter of
increased comparable store sales.
Comparable sales in the Company's music category increased 9.2% while
comparable sales in the video category increased 15.6%.
Gross Profit. Gross profit, as a percentage of sales, was 37.6% for the
thirteen week period ended August 1, 1998, the same percentage as in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("S,G&A"), expressed as a percentage of sales,
decreased from 34.0% to 31.0% in the thirteen week period ended August 1, 1998
when compared to the same period in 1997. The improvement is primarily due to
a reduction of store occupancy costs as a percentage of sales, and the
continued leveraging of operating expenses against sales.
Interest Expense. Net interest expense was reduced to $417,000 in the
thirteen week period ended August 1, 1998 from $1.5 million in 1997. The
decrease is due to a reduction in long-term debt.
Net Income. The Company increased its net income to $2.7 million for the
thirteen weeks ended August 1, 1998 from a net loss of $834,000 for the same
period in 1997. The improved bottom line performance is attributable to
comparable store sales increase, leverage of S,G&A expenses and lower interest
expense.
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(continued)
Twenty-Six Weeks Ended August 1, 1998
Compared to the Twenty-Six Weeks Ended August 2, 1997
Sales. The Company's total sales increased 34.0% to $287.3 million for the
twenty-six weeks ended August 1, 1998 compared to $214.5 million for the same
period last year. The increase in sales is due to an overall improvement in
the music and video specialty retail industry. Comparable store sales
increased by 10%. Management attributes the comparable store sales increase
primarily to its focus on customer service, superior retail locations,
inventory management and merchandise presentation.
Comparable sales in the Company's music category increased approximately 10.9%
while comparable sales in the video category increased 8.9%.
Gross Profit. Gross profit as a percentage of sales improved to 36.9% from
36.7% in the twenty-six weeks ended August 1, 1998 as compared to the same
period in 1997. Management attributes the increase to an improved competitive
environment and the leveraging of expenses in the Company's distribution
center.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("S,G&A"), as a percentage of sales, decreased to
30.4% in the first twenty-six weeks of 1998 from 33.1% in the first twenty-six
weeks of 1997. The improvement is primarily due to the leveraging of store
occupancy and variable costs. The Company continues to leverage expenses
against sales.
Interest Expense. Net interest expense was reduced to $1.3 million in the
twenty-six week period ended August 1, 1998 from $3.3 million for the
twenty-six week period ending August 2, 1997. The decrease is due to a
reduction of long-term debt and lower interest rates as a result of the
refinancing completed in fiscal 1997.
Net Income. The Company increased its net income to $5.3 million in the
twenty-six weeks ended August 1, 1998 from a net loss of $1.7 million during
the same period last year. The improved bottom line performance can be
attributed to the comparable store sales increase, improved gross margin
rates, leverage of S,G&A expense and lower interest expense.
<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. The Company's working capital at August 1,
1998 was $93.3 million and its ratio of current assets to current liabilities
was 1.8 to 1. During the first twenty-six weeks of 1998, the Company's net
cash used by operations was $60.9 million, compared to $23.6 million used in
the same period in 1997. The most significant uses of cash during the period
were $70.1 million in the normal reduction of accounts payable.
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 below the prime rate. The Revolving Credit Facility contains certain
restrictive provisions, governing cash dividends and acquisitions, is secured
by merchandise inventory and has a minimum net worth covenant. On August 1,
1998, the Company had unused lines of credit aggregating $100 million.
CAPITAL EXPENDITURES
During the twenty-six weeks ended August 1, 1998, the Company had capital
expenditures of $21.6 million. $11.3 million of the total capital
expenditures made so far this year was for the new Point of Sales register
system. During the first half of 1998, the Company has opened or relocated 24
stores and closed 40 stores while total retail selling space has increased
slightly.
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
A) An Annual Meeting of Shareholders of Trans World Entertainment
Corporation was held on Wednesday, June 3, 1998.
B) In the case of each individual nominee named below, authority to vote
was withheld with respect to the number of shares shown opposite their
name in Column 1, and each nominee received the number votes set
opposite their name in Column 2 for election as director of the
Corporation.
<TABLE>
<CAPTION>
--------------------------
Column 1 Column 2
Name of Nominee Withheld Votes for
--------------- --------------------------
<S> <C> <C>
Robert J. Higgins 100,726 18,750,148
Dean S. Adler 100,560 18,750,314
George W. Dougan 2,822,671 16,028,203
Charlotte G. Fischer 2,822,671 16,028,203
Isaac Kaufman 101,100 18,749,774
Matthew H. Mataraso 100,560 18,750,314
Dr. Joseph G. Morone 2,822,671 16,028,203
</TABLE>
C) A proposal to amend Trans World Entertainment Corporation's 1990
Stock Option Plan for Non-Employee Directors to authorize the Board to
award discretionary option grants was approved as follows:
FOR 17,734,130
AGAINST 1,109,746
ABSTAIN 6,998
D) A proposal to institute Trans World Entertainment Corporation's
1998 Employee Stock Option Plan, was approved as follows:
FOR 12,928,411
AGAINST 3,832,986
ABSTAIN 5,469
<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 N/A
(electronic 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 to the periods covered.
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
September 15, 1998 By: /s/ ROBERT J. HIGGINS
--------------------------
Robert J. Higgins
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
September 15, 1998 By: /s/ JOHN J. SULLIVAN
-------------------------
John J. Sullivan
Senior Vice President-Finance
and Chief Financial Officer
(Principal Financial 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> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> AUG-01-1998
<PERIOD-TYPE> 6-MOS
<CASH> 24,267
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 179,592
<CURRENT-ASSETS> 210,401
<PP&E> 187,635
<DEPRECIATION> 103,445
<TOTAL-ASSETS> 304,163
<CURRENT-LIABILITIES> 117,071
<BONDS> 0
0
0
<COMMON> 219
<OTHER-SE> 167,378
<TOTAL-LIABILITY-AND-EQUITY> 304,163
<SALES> 287,260
<TOTAL-REVENUES> 287,260
<CGS> 181,339
<TOTAL-COSTS> 181,339
<OTHER-EXPENSES> 96,024
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,258
<INCOME-PRETAX> 8,639
<INCOME-TAX> 3,369
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,270
<EPS-PRIMARY> .25
<EPS-DILUTED> .24
</TABLE>
