<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
INTRODUCTORY NOTE: Trans World Entertainment Corporation is amending this
Form 10-Q to provide revised disclosures made to its interim financial
information in connection with its Form S-4 filing on March 30, 1999.
/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 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,
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 11
PART II. OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 16
Item 6 - Exhibits and Reports on Form 8-K 17
Signatures 18
Page 2
<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)
August 1, January 31, August 2,
1998 1998 1997
-------- -------- --------
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 5,779 4,726 3,039
FIXED ASSETS, net 83,086 72,068 64,754
OTHER ASSETS 2,793 2,776 3,179
-------- -------- --------
TOTAL ASSETS $305,720 $374,019 $246,532
======== ======== ========
See Notes to Condensed Consolidated Financial Statements.
Page 3
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
August 1, January 31, August 2,
1998 1998 1997
-------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 92,844 $ 162,981 $ 77,684
Notes payable -- -- 1,241
Accrued expenses and other 12,466 17,346 7,073
Store closing reserve 7,368 8,692 10,549
Current portion of long-term debt
and capital lease obligations 1,709 99 93
Income Taxes Payable 975 11,155 --
Deferred Tax Liability 1,709 1,103 --
-------- -------- --------
Total current liabilities 117,071 201,376 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 136,566 249,497 144,988
-------- -------- --------
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 104,777 99,507 77,238
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 169,154 124,522 101,544
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $305,720 $374,019 $246,532
======== ======== ========
See Notes to Condensed Consolidated Financial Statements.
Page 4
<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 48,690 39,351 96,024 78,284
-------- -------- -------- --------
Income from operations 4,774 176 9,897 506
Interest expense 501 1,562 1,599 3,397
Other expenses (income), net (84) (19) (341) (112)
-------- -------- -------- --------
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 5
<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: $(60,904) $(23,511)
-------- --------
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 2,567 272
-------- --------
Net cash provided (used) by financing activities 11,590 (16,982)
-------- --------
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
-------- --------
-------- --------
Supplemental disclosure of non-cash investing
and financing activities:
Issuance of treasury stock under incentive
stock programs $ 13 $ 4
Income tax benefit resulting from exercise
of stock options 5,809 268
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Page 6
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 1, 1998 AND AUGUST 2, 1997
(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.
These 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 condensed 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 January 31, 1998.
NOTE 2. RESTRUCTURING CHARGE
The Company recorded a pre-tax restructuring charge of $21 million in 1994
to reflect the anticipated costs associated with a program to close 143 stores
and to restructure the Company's debt agreements. The restructuring charge
included the write-down of fixed assets, estimated cash payments to landlords
for the early termination of operating leases, inventory-related costs
(including the cost for returning all remaining merchandise after the store was
closed), and employee termination benefits. The charge also included estimated
professional fees related to the development of the store closing plan and the
negotiations with landlords related to the termination of leases.
Inventory-related costs were included in cost of sales.
An analysis of the January 28, 1995 balance in the 1994 restructuring
reserve and 1995 charges against the reserve is as follows:
<TABLE>
<CAPTION>
CHARGES
BALANCE AT AGAINST REMAINING
JANUARY 28, 1995 RESERVE BALANCE
------------------ --------- --------------
(in thousands)
<S> <C> <C> <C>
Lease obligations.................................. $ 4,250 $ 3,436 $ 814
Inventory-related costs............................ 4,249 3,581 668
Termination benefits............................... 200 200 --
Professional fees.................................. 3,986 3,328 658
Other costs........................................ 827 154 673
------- --------- -----------
Total cash outflows.............................. $ 13,512 $ 10,699 $ 2,813
------- --------- -----------
------- --------- -----------
</TABLE>
Page 7
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 1, 1998 AND AUGUST 2, 1997 (CONTINUED)
(UNAUDITED)
NOTE 2. RESTRUCTURING CHARGE (CONTINUED)
The Company completed the 1994 restructuring in 1995, resulting in the
closure of 179 stores (versus an original plan of 143 stores). The remaining
balance in the 1994 restructuring reserve of $2.8 million was credited to
operations in the 4th quarter of 1995.
The Company recorded a second restructuring charge of $33.8 million in
1995 to reflect the anticipated costs associated with a program to close an
additional 163 stores. The components of this second charge were similar to
those recorded in 1994, and also included a provision for exiting the rental
video store format, the write-off of goodwill related to a previous
acquisition and a provision for closing the Company's fixture manufacturing
operation.
An analysis of the charges against the 1995 reserve for the twenty-six
week period ended August 1, 1998 is as follows:
<TABLE>
<CAPTION>
CHARGES AGAINST
THE RESERVE
BALANCE AT ------------------------ BALANCE AT
JANUARY 31, 1998 1ST QTR 2ND QTR AUGUST 1, 1998
---------------- ----------- ----------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Video rental assets...................... $ 3,071 $ 8 $ 352 $ 2,711
--------- ----- ----------- -----------
Non cash write-offs.................... 3,071 8 352 2,711
--------- ----- ----------- -----------
Lease obligations........................ 4,008 149 408 3,451
Inventory-related costs.................. 610 319 55 236
Termination benefits..................... 803 -- -- 803
Professional fees........................ 157 7 5 145
Other costs.............................. 43 (12) 33 22
--------- ----- ----------- -----------
Cash outflows.......................... 5,621 463 501 4,657
--------- ----- ----------- -----------
Total.................................. $ 8,692 $ 471 $ 853 $ 7,368
--------- ----- ----------- -----------
--------- ----- ----------- -----------
</TABLE>
In determining the components of the reserves, management analyzed all
aspects of the restructuring plan and the costs that would be incurred. The
write-off of leasehold improvements and furniture and fixtures represented the
estimated net book value of these items at the forecasted closing date. In
determining the provision for lease obligations, the Company considered the
amount of time remaining on each store's lease and estimated the amount
necessary for either buying out the lease or continued rent payments subsequent
to store closure. Inventory-related costs include the cost to pack and ship the
inventory on hand after the closing of the store as well as the penalty paid to
the vendor for additional product returns resulting from the restructurings.
Termination benefits represented the severance payments expected to be made to
terminated employees. Professional fees represented amounts expected to be paid
to advisors related to the development of the store closing plan ($3.5 million
in total for both plans), and the negotiations with landlords related to the
termination of leases ($2.3 million in total).
Page 8
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 1, 1998 AND AUGUST 2, 1997 (CONTINUED)
(UNAUDITED)
NOTE 2. RESTRUCTURING CHARGE (CONTINUED)
The cash outflows for both restructurings were financed from operating cash
flows and the liquidation of merchandise inventory from the stores closed. The
timing of store closures depended on the Company's ability to negotiate
reasonable lease termination agreements.
The restructuring reserve is included in the accompanying balance sheet
under the caption "store closing reserve."
The Company closed 10 stores during the twenty-six week period ended
August 1, 1998 that were related to the restructuring reserve. A summary of
store closures related to each restructuring is as follows:
<TABLE>
<CAPTION>
1994 1995
RESTRUCTURING RESTRUCTURING TOTAL
----------------- ----------------- -----
<S> <C> <C> <C>
Number of stores originally expected to close............ 143 163 306
--- --- ---
--- --- ---
Number of stores closed through August 1, 1998........... 179 173 352
--- --- ---
--- --- ---
Number of stores to be closed subsequent to August 1,
1998................................................... --- 18 18
--- --- ---
--- --- ---
</TABLE>
Sales related to stores that were closed were $4.0 million (unaudited)
and $15.4 million (unaudited) during the twenty-six week period ended August
1, 1998 and August 2, 1997, respectively. Store operating losses related to
stores that were closed were $77,000 (unaudited) and $654,000 (unaudited)
during the twenty-six week period ended August 1, 1998 and August 2, 1997,
respectively.
The provision for termination benefits was based on the expectation that
338 employees would be terminated in connection with the restructuring
programs. Through August 1, 1998, 75 employees had been terminated and the
Company expects to terminate an additional 18 employees in fourth quarter of
fiscal 1998. The Company has not terminated as many employees as originally
planned because higher than normal levels of attrition occurring after the
announcement of the restructurings resulted in a reduced need for involuntary
terminations.
Subsequent to the adoption of the restructuring programs, improving
economic conditions in certain markets, improvement in individual store
performance and the inability to negotiate reasonable lease termination
agreements have led the Company to keep open certain stores that were
originally expected to be closed. During the twenty-six week period ended
August 1, 1998, 21 stores were removed from the list of stores expected to be
closed. Conversely, deteriorating economic conditions and store performance
in certain markets have led the Company to close certain stores that were not
originally expected to be closed. In addition, the timing of store closures
has also been affected by the ability or inability to negotiate reasonable
lease termination agreements. The net effect of changes made to the timing of
store closures and the stores to be closed under the 1995 restructuring
program has not been material. Through August 1, 1998, the Company has
closed 352 stores in connection with the restructuring programs, compared to
the originally planned closures of 306 stores. During the remainder of 1998,
the Company plans to close an additional 18 stores as it completes the
restructuring programs. Any remaining balance in the restructuring reserve at
January 30, 1999 will be credited to operations.
NOTE 3. SEASONALITY
The Company's business is seasonal in nature, with the highest sales and
earnings occurring in the fourth fiscal quarter.
NOTE 4. DEPRECIATION AND AMORTIZATION
Depreciation and amortization of videocassette rental inventory included
in cost of sales totalled $767,000 and $1,129,000 for the twenty-six week
periods ended August 1, 1998 and August 2, 1997, respectively.
Depreciation and amortization of fixed assets is included in the
condensed consolidated statements of income as follows:
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
-------------------------
August 1, August 2,
1998 1997
---------- -----------
(in thousands)
<S> <C> <C>>
Cost of sales....................................... $ 619 $ 530
Selling, general and administrative expenses........ $ 8,621 $ 7,228
</TABLE>
NOTE 5. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share," which was
effective for the Company for the fiscal year ended January 31, 1998. 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. For the twenty-six weeks ended August 1, 1998 and August 2,
1997 the additional potentially dilutive common shares included in the diluted
earnings per share calculation were 1,398,000 and zero, respectively. Total
stock options to purchase zero and 2,525,000 shares of common stock outstanding
during the twenty-six weeks ended August 1, 1998 and August 2, 1997,
respectively, were not included in the computation of diluted earnings per share
because to do so would have been anti-dilutive.
NOTE 6. COMMON STOCK OFFERING
At the end of the first quarter of 1998 the Company sold an additional 1.5
million shares of its Common Stock in a public offering for approximately $37
million net of issuance costs. A portion of the
Page 9
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 1, 1998 AND AUGUST 2, 1997 (CONTINUED)
(UNAUDITED)
NOTE 6. COMMON STOCK OFFERING (CONTINUED)
proceeds was used to repay long-term debt and the balance of the proceeds was
used for general corporate purposes including investments in additional stores,
fixtures and inventory.
NOTE 7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income", issued in June 1997 and effective for fiscal years ending
after December 15, 1997, establishes standards for reporting and display of the
total net income and the components of all other non-owner changes in equity, or
comprehensive income (loss) in the statement of operations, in a separate
statement of comprehensive income (loss) or within the statement of changes of
stockholder's equity. The Company has no items of other comprehensive income.
Financial Accounting Standards Board Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information", issued in June 1997 and
effective for fiscal years beginning after December 15, 1997, will change the
way companies report selected segment information in annual financial statements
and also requires those companies to report selected segment information in
interim financial statements. Management has evaluated the impact of the
application of the new rules on the Company's Consolidated Financial Statements
and the new rules will not change its financial presentation.
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities", issued in June, 1998 and
effective for all fiscal quarters of fiscal years beginning after June 15, 1999,
with earlier application permitted, requires 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 application of the new rules on the Company's Consolidated
Financial Statements and concluded that there will be no impact on its results
of operations or its financial position.
The Accounting Standards Executive Committee Statement of Position 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 with earlier application permitted, provides guidance
on accounting for the costs of computer software developed or obtained for
internal use. The Company will adopt the statement for the fiscal year
beginning Janury 31, 1998. Management has evaluated the impact of the
application of the new rules on the Company's Consolidated Financial
Statements and concluded that there will be no impact on its results of
operations or its financial position.
The Accounting Standards Executive Committee Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities", issued in April 1998 and
effective for fiscal years beginning after December 15, 1998 with earlier
application permitted, provides guidance on the financial reporting of start-up
costs and organization costs. The Company will adopt the statement for the
fiscal year beginning January 31, 1999. Management has evaluated the impact of
the application of the new rules on the Company's Consolidated Financial
Statements and concluded that there will be no impact on its results of
operations or its financial position.
Page 10
<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 thatsuch 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 90 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 37.5% to 34.2% 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 depreciation and amortization and operating expenses against
sales.
INTEREST EXPENSE. Net interest expense was reduced to $501,000 in the thirteen
week period ended August 1, 1998 from $1.6 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 11
<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 the acquisition of
Strawberries Music stores in October 1997 and an overall improvement in the
music and video specialty retail industry. Comparable store sales increased by
10.0%. 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
33.4% in the first twenty-six weeks of 1998 from 36.5% in the first
twenty-six weeks of 1997. The improvement is primarily due to the leveraging
of store occupancy, depreciation and amortization, and variable costs. The
Company continues to leverage expenses against sales.
INTEREST EXPENSE. Net interest expense was reduced to $1.6 million in the
twenty-six week period ended August 1, 1998 from $3.4 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 12
<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 $23.5 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.
YEAR 2000 COMPLIANCE
The Company has completed an assessment of the business risks related to the
Year 2000 issue. The results of the assessment indicate 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 is being compiled;
- renovation of the core information technology ("IT") systems will be
completed;
- third-party compliance tracking will be done; and
- verification of embedded chip ("non-IT") system readiness for Year 2000
compliance will be done.
The Company's Year 2000 issue remediation process includes the following
phases: Awareness, Assessment, Renovation, Validation, and Implementation. As
indicated above, the Awareness and
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<PAGE>
Assessment phases are complete. The Awareness phase included establishing an
internal Year 2000 committee, interviewing Company personnel at all
levels, including those at the stores, distribution center and home office,
and vendor compliance tracking. Activities in the Assessment phase include
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 its 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. Renovation and Validation and Implementation efforts are
underway. For the Renovation phase, all core IT system programming
modifications will be completed by its internal systems development staff.
The system programming modifications include upgrading the distribution,
inventory management and accounting systems and converting the POS registers
to a Year 2000 compliant system. Replacements for the other (non-core) IT
systems are being implemented on schedule. The non core IT Systems being
replaced include a product return system, a system for tracking the opening
of new stores and managing lease payments. For the Validation and
Implementation phases, formal systems testing for both IT and non-IT systems
is expected to be completed by the end of the second quarter of fiscal 1999.
In order to complete the Validation and Implementation phases, the Company
will process daily, weekly and monthly transactions on the main corporate IT
systems platform, IBM AS/400. The compliance testing will be completed in a
dedicated environment within the AS/400 to assure acceptance of all
transactions in the year 2000.
The Company is exposed to both internal and external Year 2000 risks.
Internal risks exist due to its dependence on its IT and non-IT
systems. The Company is dependent on its IT and non-IT systems for many of its
everyday operations including inventory management, product distribution,
cash management, accounting and financial reporting. The Company utilizes a
variety of vendors for its system needs and has initiated discussions with
its vendors and monitored their Year 2000 compliance programs and the
compliance of their products or services with required standards. Although
the majority of these vendors represent that their products are Year 2000
compliant, the Company will perform testing to validate the vendor
representations no later than the second quarter of fiscal 1999. In the
normal course of business, the Company replaced its POS register system with
a Year 2000 compliant system during the second quarter of 1998. Additionally,
the Company plans to replace its product return center's processing system no
later than the end of the second quarter of fiscal 1999. The replacement
system will be Year 2000 compliant. 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 2,500 different suppliers in the normal course of its business.
Six major merchandise vendors account for more than 60% 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 product to approximately 36% of
its stores, it does rely on a number of trucking companies for the remainder
of its product distribution. Evaluation of its vendors' Year 2000 readiness
will begin in the fourth quarter of fiscal 1998, and is expected to be
completed by the end of the first quarter of fiscal 1999. Upon completion of
the assessment of vendor readiness, contingency plans will be developed for
all third-parties where Year 2000 compliance appears to be at risk.
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 it has no control and for which it
has no ready substitute, such as, but not limited to, power and
telecommunications services. 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
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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 our 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
$200,000 through August 1, 1998. Anticipated future costs include an
additional $1 million to address Year 2000 issues identified as a result of
remediation testing and a new product return center processing system. Future
costs will be funded by cash flows generated from operations.
The Company's estimates 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 its customers and suppliers
in reaching Year 2000-readiness, the timely availability of necessary
replacement items and similar uncertainties.
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<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.
Column 1 Column 2
Name of Nominee Withheld Votes for
--------------- -------- ---------
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
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
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<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.
Page 17
<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
March 30, 1999 By: /s/ Robert J. Higgins
--------------------------------------
Robert J. Higgins
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
March 30, 1999 By: /s/ John J. Sullivan
--------------------------------------
John J. Sullivan
Senior Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)
Page 18
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<NAME> TRANS WORLD ENTERTAINMENT CORPORATION
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