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
JULY 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT FOR THE TRANSITION PERIOD
FROM ------- TO -------
COMMISSION FILE NUMBER: 0-14818
TRANS WORLD ENTERTAINMENT CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 14-1541629
------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
38 Corporate Circle
Albany, New York 12203
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(518) 452-1242
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all
reports required to be filed by Sections 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for shorter
period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES_X_NO__
Indicate 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,
52,707,405 shares outstanding as of August 28, 1999
<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
- July 31, 1999, January 30, 1999 and
August 1, 1998 3
Condensed Consolidated Statements of Income
- Thirteen Weeks Ended and Twenty-Six Weeks
Ended July 31, 1999 and August 1, 1998 4
Condensed Consolidated Statements of Cash Flows
- Twenty-Six Weeks Ended July 31, 1999 and August 1, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
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
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for share amounts)
(unaudited)
<TABLE>
<CAPTION>
July 31, January 30, August 1,
1999 1999 1998
---------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 83,797 $139,411 $ 32,486
Merchandise inventory 398,726 426,078 374,212
Current deferred tax asset 4,664 633 ---
Other current assets 15,061 15,182 21,424
-------- -------- --------
Total current assets 502,248 581,304 428,122
-------- -------- --------
VIDEOCASSETTE RENTAL INVENTORY, net 1,076 1,238 3,661
DEFERRED TAX ASSET 31,841 29,580 25,127
NET FIXED ASSETS 136,669 139,124 135,182
OTHER ASSETS 44,952 47,364 53,019
-------- ------- -------
TOTAL ASSETS $716,786 $798,610 $645,111
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $206,229 $220,636 $177,301
Accrued expenses and other 31,556 68,597 30,422
Store closing reserve --- --- 7,367
Current portion of long-term debt
and capital lease obligations 4,497 4,802 1,709
Income taxes payable --- 12,734 1,515
-------- -------- --------
Total current liabilities 242,282 306,769 218,314
-------- -------- --------
LONG-TERM DEBT, less current portion --- 20,000 25,000
CAPITAL LEASE OBLIGATIONS, less
current portion 19,394 16,065 12,051
OTHER LIABILITIES 18,941 23,400 21,770
-------- -------- --------
TOTAL LIABILITIES 280,617 366,234 277,135
-------- -------- --------
SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value;
5,000,000 shares authorized;
none issued) --- --- ---
Common stock ($.01 par value;
200,000,000 shares authorized;
52,875,437, 52,185,258 and
52,100,740 shares issued,
respectively) 529 522 521
Additional paid-in capital 278,519 271,805 262,292
Treasury stock, at cost (104,432,
105,432 and 105,432 shares,
respectively) (386) (390) (394)
Unearned compensation -
restricted stock (57) (78) (210)
Retained earnings 157,564 160,517 105,767
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 436,169 432,376 367,976
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $716,786 $798,610 $645,111
======== ======== ========
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 data)
(unaudited)
<TABLE>
Thirteen Weeks Ended Twenty-Six Weeks Ended
---------------------- ------------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
---------------------- ------------------------
<S> <C> <C> <C> <C>
Sales $277,275 $262,561 $564,294 $513,944
Cost of sales 174,705 166,749 356,780 327,719
--------- --------- ---------- --------
Gross profit 102,570 95,812 207,514 186,225
Selling, general and
administrative expenses 92,293 89,369 185,993 174,467
Costs related to the
Camelot merger --- --- 25,721 ---
--------- --------- ---------- --------
Income (loss)
from operations 10,277 6,443 (4,200) 11,758
Interest expense 465 438 892 815
--------- --------- ---------- --------
Income (loss) before
income taxes 9,812 6,005 (5,092) 10,943
Income tax expense
(benefit) 4,121 2,431 (2,139) 5,208
--------- --------- ---------- --------
NET INCOME (LOSS) $ 5,691 $ 3,574 $ (2,953) $ 5,735
========= ========= ========== ========
BASIC EARNINGS (LOSS)
PER SHARE $ 0.11 $ 0.07 $ (0.06) $ 0.11
========= ========= ========== ========
Weighted average number
of common shares
outstanding 52,191 51,704 52,080 50,300
DILUTED EARNINGS (LOSS)
PER SHARE $ 0.11 $ 0.07 $ (0.06) $ 0.11
========== ========= ========== ========
Adjusted weighted average
number of common
shares outstanding 53,646 54,486 52,080 53,017
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>
Twenty Six Weeks Ended
------------------------
July 31, August 1,
1999 1998
------------------------
<S> <C> <C>
NET CASH USED BY OPERATING ACTIVITIES: $(23,079) $(84,439)
------------------------
INVESTING ACTIVITIES:
Acquisition of property and equipment (22,346) (131,683)
Disposal of rental inventory, net 162 438
------------------------
Net cash used by investing activities (22,184) (131,245)
------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt --- 30,750
Proceeds from capital lease 6,407 7,440
Payments of long-term debt and capital
lease obligations (23,383) (35,189)
Net increase in revolving line of credit --- 24,794
Proceeds from issuance of common stock --- 36,772
Exercise of stock options 6,625 2,567
-------------------------
Net cash provided (used) by financing
activities (10,351) 67,134
------------------------
Net decrease in cash and cash equivalents (55,614) (148,550)
Cash and cash equivalents, beginning of period 139,411 181,036
------------------------
Cash and cash equivalents, end of period $ 83,797 $ 32,486
========================
Supplemental disclosure of non-cash investing
and financing activities:
Income tax benefit resulting from exercise
of stock options $ 858 $ 5,809
Issuance of treasury stock under incentive
stock programs 13 13
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999 and August 1, 1998(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.
On April 22, 1999, the Company acquired all of the issued and outstanding common
stock of Camelot Music Holdings, Inc. ("Camelot") pursuant to the terms of an
Agreement and Plan of Merger, dated October 26, 1998, by CAQ Corporation, a
wholly-owned subsidiary of the Company, with and into Camelot. Upon completion
of the merger, Camelot became a wholly-owned subsidiary of the Company. The
merger was accounted for as a tax-free pooling-of-interests. All financial and
per share information for prior periods has been restated to reflect the results
of the combined company.
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 30, 1999.
Note 2. Seasonality
The Company's business is seasonal in nature, with the highest sales and
earnings occurring in the fourth fiscal quarter.
Note 3. Depreciation and Amortization
Depreciation and amortization of video cassette rental inventory included in
cost of sales totaled $263,000 and $354,000 for the thirteen week periods
ended July 31, 1999 and August 1, 1998, respectively. Depreciation and
amortization of video cassette rental inventory included in cost of sales
totaled $499,000 and $767,000 for the twenty-six week periods ended July
31, 1999 and August 1, 1998, respectively.
Depreciation and amortization of fixed assets for the companies' distribution
centers is included in the condensed consolidated statements of income in cost
of sales and was $390,000 and $437,000 for the thirteen week periods ended
July 31, 1999 and August 1, 1998, respectively. For the twenty-six week periods
periods ended July 31, 1999 and August 1, 1998 depreciation and amortization of
fixed assets for the companies' distribution centers included in the condensed
consolidated statements of income in cost of sales was $793,000 and $806,000.
Depreciation and amortization for the remaining fixed assets is included in
Selling, General & Administrative expenses and was $9.0 million and $7.8
million for the thirteen week periods ended July 31, 1999 and August 1, 1998,
respectively. Depreciation and amortization included in Selling, General &
Administrative expenses was $17.4 million and $14.5 million for the twenty-six
week periods ended July 31, 1999 and August 1, 1998, respectively.
Note 4. Earnings Per Share
The Company discloses basic earnings per share and diluted earnings per share
based on Financial Accounting Standards Board Statement No. 128, "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 potential dilutive common shares had been
issued for the Company's common stock options from the Company's stock option
plans. For the thirteen weeks ended July 31, 1999 and August 1, 1998 the
additional potentially dilutive common shares included in the diluted earnings
per share calculation were 1,455,000 and 2,782,000, respectively. All stock
options to purchase shares of common stock which were outstanding during the
thirteen weeks ended July 31, 1999 and August 1, 1998, respectively, were
included in the computation of diluted earnings per share. For the twenty-six
weeks ended July 31, 1999 and August 1, 1998 the additional potentially dilutive
common shares included in the diluted earnings per share calculation were zero
and 2,717,000, respectively. Stock options to purchase 5,475,000 and zero
shares of common stock which were outstanding during the twenty-six weeks
periods ending July 31, 1999 and August 1, 1998, respectively, were not included
in the computation of diluted earnings per share because to do so would have
been anti-dilutive.
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1999 and August 1, 1998(unaudited)
(continued)
Note 5. Recently Issued Accounting Standards
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
issued in June 1998, as amended by SFAS No. 137, is effective for all quarters
of fiscal years beginning after June 15, 2000, will require companies to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Management has
evaluated the impact of the new rules on the Company's consolidated financial
statements and concluded that there will be no impact on its current results of
operations or its financial position.
The Accounting Standard's Executive Committee Statement of Position 98-1 ("SOP
98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," issued in March 1998 and effective for fiscal years beginning
after December 15, 1998, requires that certain costs of computer software
developed or obtained for internal use be capitalized. The Company adopted SOP
98-1 for the fiscal year beginning January 31, 1999. The application of this
statement to the Company's consolidated financial statements did not have a
material impact on its results of operations or its financial position because a
substantial portion of the Company's software is purchased from outside vendors.
The Accounting Standard's Executive Committee Statement of Position 98-5 ("SOP
98-5"), "Accounting for the Costs of Start-up Activities," issued in April 1998
and effective for fiscal years beginning after December 15, 1998, requires
start-up costs and organization costs to be expensed as incurred. The Company
adopted SOP 98-5 for the fiscal year beginning January 31, 1999. The
application of this statement to the Company's consolidated financial statements
did not have a material impact on its results of operations or its financial
position because such costs are already being expensed as incurred.
<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 July 31, 1999
Compared to the Thirteen Weeks Ended August 1, 1998
Sales. The Company's total sales increased 5.6% to $277.3 million for the
thirteen weeks ended July 31, 1999, compared to $262.6 million for the same
period last year. The increase was primarily attributable to the addition of
new stores, including Spec's which was acquired in July 1998. Comparable store
sales were flat with last year. Comparable store sales for the recently
acquired Camelot stores decreased 5%, while the comparable store sales
excluding the Camelot stores increased 5%.
Gross Profit. Gross profit, as a percentage of sales, improved to 37.0% for the
thirteen weeks ended July 31, 1999 compared to 36.5% for the same period in
1998. The improvement is due to improved shrink results and an increase in gross
margin for the stores acquired through the Camelot acquisition.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("S,G&A"), expressed as a percentage of sales, decreased
from 34.1% to 33.2% in the thirteen week period ended July 31, 1999 when
compared to the same period in 1998. The improvement is primarily due to the
increased leveraging of operating expenses resulting from higher sales and the
reduction of Camelot's administrative expenses.
Interest Expense. Net interest expense was $465,000 in the thirteen week period
ended July 31, 1999 compared to $438,000 in 1998.
Income Tax Expense (Benefit). The Company's effective tax rate increased to
42.0% for the thirteen weeks ended July 31, 1999 from 40.5% for the thirteen
weeks ended August 31, 1998. The increase is due to the Company incurring
non-deductible expenses related to the Camelot merger.
Net Income. The Company increased its net income to $5.7 million for the
thirteen weeks ended July 31, 1999 from net income of $3.6 million for the same
period in 1998. The improved bottom line performance is attributable to the
increased sales and gross margin and the leveraging of S,G&A expenses.
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
RESULTS OF OPERATIONS (continued)
Twenty-Six Weeks Ended July 31, 1999
Compared to the Twenty-Six Weeks Ended August 1, 1998
Sales. The Company's total sales increased 9.8% to $564.3 million for the
twenty-six weeks ended July 31, 1999 compared to $513.9 million for the same
period last year. Comparable store sales increased 2%. Comparable store sales
for the recently acquired Camelot stores decreased 3%, while the comparable
store sales for the remaining stores excluding Camelot increased 5%.
Gross Profit. Gross profit as a percentage of sales improved to 36.8% in the
twenty-six weeks ended July 31, 1999 compared to 36.2% for the same period in
1998. The increase in gross margin is due to improved shrink results and an
increase in gross margin for the stores acquired through the Camelot
acquisition.
Selling, General and Administrative Expenses. SG&A expenses, as a percentage
of sales, decreased to 32.9% in the first twenty-six weeks of 1999 from 33.9%
in the first twenty-six weeks of 1998. The improvement is primarily due to
the increased leveraging of operating expenses resulting from higher sales and
the reduction of Camelot's administrative expenses.
Interest Expense. Net interest expense was $892,000 in the twenty-six week
period ended July 31, 1999 compared to $815,000 for the twenty-six week period
ending August 1, 1998. The increase is due to additional interest expense
related to the capital lease for new point-of-sale equipment installed in 1998.
Income Tax Expense (Benefit). The Company's effective tax rate decreased to
42.0% for the twenty-six weeks ended July 31, 1999 from 47.6% for the twenty-six
weeks ended August 1, 1998. The Company's 1998 tax rate was impacted by
non-deductible amortization expense for the issuance of stock options. During
1999, the Company's effective tax rate was impacted by the non-deductibility of
certain expenses related to the Camelot merger, offset by timing differences of
asset impairments in accordance with SFAS 121.
Costs related to the Camelot merger. A one-time pre-tax charge of $25.7 million
for costs related to the merger with Camelot was taken in the twenty-six weeks
ended July 31, 1999. The charge includes a write-off of redundant assets
between the two companies of $8 million, investment banking fees and other
professional costs of $10 million, printing and mailing costs for the joint
proxy/prospectus filed on March 29, 1999 of $2 million, system and integration
costs of $2 million and severance costs of $4 million.
Net Income (Loss). The Company incurred a net loss of $3.0 million in the
twenty-six weeks ended July 31, 1999 compared to a net income of $5.7 million
during the same period last year. The loss was caused by the $25.7 million one-
time Camelot merger charge. Excluding the one-time merger charge, the resultant
increase in net income is due to the increase in gross margin and the leveraging
of selling, general and administrative expenses. The after-tax effect of the
$25.7 million Camelot merger charge reduced earnings from $0.22 per share to a
loss of $0.06 per share.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. Cash generated from operations is the Company's primary source of
liquidity. The Company had unused lines of credit aggregating $100 million at
July 31, 1999.
The Company's working capital at July 31, 1999 was $260.0 million and its ratio
of current assets to current liabilities was 2.1 to 1.0. During the twenty-six
weeks ended July 31, 1999, the Company's net cash used by operations was $23.1
million, compared to $84.4 million in the same period of 1998. The most
significant uses of cash for operating purposes were $30 million in payments for
income taxes and a $24.4 million reduction in accounts payable.
Capital Resources. On April 22, 1999, the Company acquired by merger Camelot
Music Holdings, Inc., a Delaware corporation ("Camelot") by issuing 1.9 shares
of the Company's common stock in exchange for each share of Camelot's
outstanding common stock. Upon consummation of the merger, Camelot became a
wholly-owned subsidiary of the Company. The Company gained an additional 483
stores and 2.1 million square feet of selling space, as a result of the merger.
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES(continued)
The merger was accounted for as a tax-free pooling-of-interests. All financial
and per share information for prior periods have been restated to reflect the
results of the combined company.
During the twenty-six weeks ended July 31, 1999, the Company had capital
expenditures of $22.3 million. $8.8 million of the total capital expenditures
made so far this year were for upgrading the point-of-sale register system in
the Camelot stores. During the first half of 1998, the Company opened 10
stores, relocated 10 stores and closed 29 stores.
YEAR 2000 COMPLIANCE
The Company has completed an assessment of the business risks related to the
Year 2000 issue. The results of the assessment indicated that:
- awareness of Year 2000 issues is well known throughout the Company;
- the assessment of Year 2000 sensitive items is complete;
- a list of items and business relationships sensitive to the Year 2000
issue has been compiled;
- renovation of the core information technology ("IT") systems has been
completed;
- third-party compliance tracking is complete; and
- verification of embedded chip ("non-IT") system readiness for Year
2000 compliance is complete.
The Company's Year 2000 issue remediation process includes the following phases:
Awareness, Assessment, Renovation, Validation, and Implementation. As indicated
above, all phases are complete. The Awareness phase included establishing an
internal Year 2000 committee, interviewing key Company personnel at all levels,
including those at the stores, distribution center and home office, and vendor
compliance tracking. Activities in the Assessment phase included contacting
merchandise vendors regarding their Year 2000 remediation activities,
discussions with the Company's software vendors and service providers,
identification of all source code and all imbedded chip logic that could contain
date logic, analyzing source codes for the Company systems identifying each
individual occurrence of date logic, and simulating the Year 2000 environment by
rolling forward the date in test files of its principal IT systems. For the
Renovation phase, all core IT system programming modifications have been
completed by the Company's systems development staff. The system programming
modifications included upgrading the distribution, inventory management and
accounting systems and installation of new Year 2000 compliant POS registers and
software. Installation of the new POS system and software in the Trans World
stores was completed during the second quarter of fiscal 1998. This POS system
was installed in the recently acquired Camelot stores during the second quarter
of fiscal 1999. Replacements for the other (non-core) IT systems are being
implemented on schedule. The non-core IT systems being replaced include a
system for tracking the opening of new stores and a system for managing lease
payments. Activities in the Validation and Implementation phases included
formal systems testing for both IT and non-IT systems. The Company processed
daily, weekly and monthly transactions on the main corporate IT systems
platform, IBM AS/400. The compliance testing was completed in a dedicated
environment within the AS/400 to assure acceptance of all transactions in the
year 2000. As a result of the formal systems testing, a minimal amount of
remediation work is required to upgrade or modify programming on non-core
applications. All remaining work will be performed by the Company's system
development staff.
The Company previously evaluated the pre-merger Year 2000 compliance efforts of
Camelot Music and determined that third party compliance tracking and
verification of non-IT system readiness for Year 2000 compliance needed to be
completed. During the second quarter of fiscal 1999 the Core IT systems,
including inventory management, accounting and POS were replaced by Trans World
systems which were evaluated as part of the Company's Validation and
Implementation phases. Additionally, those Camelot systems that were not
replaced, including the systems used in the Canton distribution center, were
tested to validate the vendor compliance representations.
The Company is exposed to both internal and external Year 2000 risks. Internal
risks exist due to the Company's dependence on its IT and non-IT systems. The
Company is dependent on its IT and non-IT systems for many of its
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
YEAR 2000 COMPLIANCE (continued)
everyday operations including inventory management, merchandise distribution,
cash management, accounting and financial reporting. The Company utilizes a
variety of vendors for its system needs. The Company had discussions with its
vendors and monitored their Year 2000 compliance programs and the compliance of
their merchandise or services with required standards. Although the majority of
these vendors represent that their products are Year 2000 compliant, the Company
performed testing to validate the vendor representations. In the normal course
of business, the Company replaced its POS register system with a Year 2000
compliant system during 1998. Preliminary contingency plans for failure of
internal systems include implementing manual procedures such as the use of
manual merchandise picking and shipping to replace automated distribution center
equipment.
External risks are represented by the fact that the Company utilizes
approximately 2,700 different suppliers in the normal course of its business.
Five major merchandise vendors account for approximately 73% of all purchases.
Additionally, 50 other merchandise vendors account for nearly 15% of purchases.
The Company is also dependent on financial institutions for consolidation of
cash collections, and for cash payments. Although the Company uses its own
trucks for shipment of merchandise to approximately 20% of its stores, the
Company does rely on a number of trucking companies for the remainder of its
merchandise distribution. Evaluation of the Company's vendors' Year 2000
readiness began in the fourth quarter of 1998, and was completed during the
second quarter of fiscal 1999. After completion of the assessment of vendor
readiness, contingency plans were developed for all third parties where Year
2000 compliance appears to be at risk. All contingency plans developed will be
re-evaluated during the third and fourth quarter of fiscal 1999 for
reasonableness and revision where necessary.
The Company presently believes that its most likely worst-case Year 2000
scenarios would relate to the possible failure in one or more geographic regions
of third-party systems over which the Company has no control and for which it
has no ready substitute, such as, but not limited to, power and
telecommunications services. Each store has a "crash kit" which allows it to
operate without power and telecommunications services and includes the ability
to manually process all sales transactions. However, in the event of a power
disruption, it is highly unlikely that a store would be open for business due to
the lack of lighting and the security-related concerns. The Company has in
place a disaster recovery plan that addresses recovery from various kinds of
disasters, including recovery from significant interruptions to data flows and
distribution capabilities at its data systems center and distribution center.
The Company's disaster recovery plan provides specific routines for actions,
personnel assignments and back-up arrangements to ensure effective response to a
disaster affecting key business functions including merchandise replenishment,
cash management and distribution center operations. Common routines and back up
arrangements include off-site storage of information, manual processing of
critical applications and the establishment of a chain of communication for key
personnel. The Company is using that plan to further develop specific Year 2000
contingency plans identified by its third-party assessment phase which will
emphasize locating alternate sources of supply, methods of distribution and ways
of processing information.
The Company's direct costs for its Year 2000 remediation efforts total $568,000
to date, as of July 31, 1999. Anticipated future costs are $153,000 to address
Year 2000 issues identified as a result of remediation testing. These costs do
not include expenditures made in the normal course of business, during 1997 and
1998, to upgrade its distribution, inventory management and accounting systems,
or costs to install new Year 2000 compliant POS registers and software. Future
costs will be funded by cash flows generated from operations.
The Company's estimate of the costs of achieving Year 2000 compliance and the
date by which Year 2000 compliance will be achieved are based on management's
best estimates, which were derived using numerous assumptions about future
events including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no assurance that
these estimates will be achieved, and actual results could differ materially
from these estimates. Specific facts that might cause such material differences
include the availability and cost of personnel trained in Year 2000 remediation
work, the ability to locate and correct all relevant computer codes, the success
achieved by the Company's customers and suppliers in reaching Year 2000
readiness, the timely availability of necessary replacement items and similar
uncertainties.
<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 9, 1999.
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>
George W. Dougan 3,446,955 29,320,488
Isaac Kaufman 3,447,255 29,320,188
Martin Hanaka 3,447,255 29,320,188
</TABLE>
C) A proposal to institute Trans World Entertainment Corporation's 1999
Employee Stock Option Plan, was approved as follows:
FOR- 16,763,124
AGAINST- 5,862,907
ABSTAIN- 15,998
D) A proposal to amend Trans World Entertainment Corporation's 1990
Restricted Stock Plan to extend the duration through 2009 was approved
as follows:
FOR- 21,245,005
AGAINST- 1,520,983
ABSTAIN- 19,019
<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 14, 1999 By: /s/ ROBERT J. HIGGINS
Robert J. Higgins
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
September 14, 1999 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 DATE 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
<CAPTION>
AMOUNT
ITEM DESCRIPTION (IN THOUSANDS, EXCEPT PER SHARE DATA)
- ---------------- -------------------------------------
<S> <C>
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JUL-31-1999
<PERIOD-TYPE> 6-MOS
<CASH> 83,797
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 398,726
<CURRENT-ASSETS> 502,248
<PP&E> 260,867
<DEPRECIATION> 124,198
<TOTAL-ASSETS> 716,786
<CURRENT-LIABILITIES> 242,282
<BONDS> 0
0
0
<COMMON> 529
<OTHER-SE> 435,640
<TOTAL-LIABILITY-AND-EQUITY> 716,786
<SALES> 564,294
<TOTAL-REVENUES> 564,294
<CGS> 356,780
<TOTAL-COSTS> 356,780
<OTHER-EXPENSES> 211,714
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 892
<INCOME-PRETAX> (4,200)
<INCOME-TAX> (2,139)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,953)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
