First 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 APRIL 29, 2000
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 (I.R.S. Employer
of incorporation or organization) Identifaction 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,
48,374,076 shares outstanding as of May 27, 2000
<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
Condensed Consolidated Balance Sheets at
April 29, 2000 (unaudited), January 29, 2000
and May 1, 1999 (unaudited) 3
Condensed Consolidated Statements of Income -
Thirteen Weeks Ended April 29, 2000 (unaudited)
and May 1, 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Thirteen Weeks Ended April 29, 2000 (unaudited)
and May 1, 1999 (unaudited) 5
Notes to Condensed Consolidated Financial
Statements (unaudited) 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 12
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
Item 1 - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
April 29, January 29, May 1,
2000 2000 1999
(unaudited) (unaudited)
------------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $113,331 $280,026 $46,994
Merchandise inventory 421,588 437,363 412,754
Other current assets 10,115 11,176 22,003
-------- -------- -------
Total current assets 545,034 728,565 481,751
-------- -------- -------
DEFERRED TAX ASSET 34,899 34,431 30,947
NET FIXED ASSETS 137,343 144,694 131,458
OTHER ASSETS 49,949 48,720 45,291
-------- -------- --------
TOTAL ASSETS $767,225 $956,410 $689,447
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $215,769 $353,294 $180,864
Income taxes payable 8,565 21,908 12,755
Accrued expenses and other 25,279 32,021 35,416
Current deferred taxes 12,507 12,469 ---
Current portion of long-term debt
and capital lease obligations 5,330 5,311 2,845
-------- -------- --------
Total current liabilities 267,450 425,003 231,880
LONG-TERM DEBT, less current portion --- --- ---
CAPITAL LEASE OBLIGATIONS,
less current portion 18,134 19,461 15,334
OTHER LIABILITIES 17,789 17,773 17,864
-------- -------- --------
TOTAL LIABILITIES 303,373 462,237 265,078
-------- -------- --------
SHAREHOLDERS' EQUITY:
Preferred stock ($0.01 par value;
5,000,000 shares authorized;
non issued) --- --- ---
Common stock ($0.01 par value;
200,000,000 shares authorized;
53,460,736, 53,425,867 and
52,261,082 shares issued,
respectively) 535 534 523
Additional paid-in capital 284,026 283,932 272,426
Treasury stock, at cost
(5,104,432, 1,177,432 and
104,432 shares, respectively) (51,281) (11,855) (385)
Unearned compensation -
restricted stock (320) (348) (68)
Retained earnings 230,892 221,910 151,873
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 463,852 494,173 424,369
-------- -------- --------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $767,225 $956,410 $689,447
======== ======== ========
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
<TABLE>
Thirteen Weeks Ended
-----------------------
April 29, May 1,
2000 1999
-----------------------
<S> <C> <C>
Sales $310,116 $287,019
Cost of sales 199,272 182,075
--------- ---------
Gross profit 110,844 104,944
Selling, general and administrative expenses 97,703 93,700
Costs related to the Camelot merger --- 25,721
--------- ---------
Income (loss) from operations 13,141 (14,477)
Interest expense (income) (1,231) 427
--------- ---------
Income (loss) before income taxes 14,372 (14,904)
Income tax expense (benefit) 5,390 (6,260)
--------- ---------
NET INCOME (LOSS) $8,982 ($8,644)
========= =========
BASIC EARNINGS (LOSS) PER SHARE $0.18 ($0.17)
========= =========
Weighted average number of common shares
outstanding - basic 49,721 51,969
========= =========
DILUTED EARNINGS (LOSS) PER SHARE $0.18 ($0.17)
========= =========
Weighted average number of common shares
outstanding - diluted 50,684 51,969
========= =========
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>
Thirteen Weeks Ended
-----------------------
April 29, May 1,
2000 1999
-----------------------
<S> <C> <C>
Net cash used by operating activities ($124,397) ($62,696)
---------- ---------
Cash Flows from Investing Activities:
Acquisition of property and equipment (1,655) (7,693)
(Acquisition)/disposal of videocassette
rental inventory, net (31) 34
---------- ---------
Net cash used by investing activities (1,686) (7,659)
---------- ---------
Cash Flows from Financing Activities:
Purchase of treasury shares (39,426) ---
Exercise of stock options 123 626
Payments of long-term debt & lease obligations (1,309) (22,688)
---------- ---------
Net cash used by financing activities (40,612) (22,062)
---------- ---------
Decrease in cash and cash equivalents (166,695) (92,417)
Cash and cash equivalents, beginning balance 280,026 139,411
---------- ---------
Cash and cash equivalents, ending balance $113,331 $46,994
========== =========
Supplemental Disclosure of Non-Cash Investing
and Financing Activities:
Income tax benefit resulting from exercise
of stock options $105 $181
Issuance of treasury stock under incentive
stock programs --- 4
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 29, 2000 and May 1, 1999
(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 inter-company 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. 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.
The 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
reflect all normal, recurring adjustments which, in the opinion of management,
are necessary for the fair presentation of such financial statements. Certain
information and footnote disclosures normally included in the 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 29, 2000.
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 videocassette rental inventory included in cost
of sales totaled $239,000 and $236,000 for the thirteen weeks ended April 29,
2000 and May 1, 1999, respectively.
Depreciation and amortization of fixed assets for the Company's distribution
centers included in cost of sales totaled $407,000 and $402,000 for the thirteen
weeks ended April 29, 2000 and May 1, 1999, respectively. Depreciation and
amortization for the remaining fixed assets included in Selling, General &
Administrative expenses totaled $8.2 million and $7.7 million in the thirteen
weeks ended April 29, 2000 and May 1, 1999, respectively.
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 29, 2000 and May 1, 1999
(unaudited)
(continued)
Note 4. Earnings Per Share
Weighted average shares is calculated as follows:
<TABLE>
Thirteen Weeks ended
--------------------
April 29, May 1,
2000 1999
--------------------
(in thousands)
<S> <C> <C>
Weighted average common shares
outstanding - basic 49,721 51,969
Dilutive effect of employee stock options 963 ---
------ ------
Weighted average common shares
outstanding - diluted 50,684 51,969
====== ======
</TABLE>
Unexercised employee stock options to purchase 2.9 million and 5.1 million
common shares as of April 29, 2000 and May 1, 1999, respectively, were not
included in the weighted average shares outstanding calculation because such
options have an antidilutive effect.
Note 5. Recently Issued Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," issued in June 1998 and, as
amended, 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 is currently evaluating the impact of SFAS No. 133
and anticipates that the adoption of the statement will not have a material
effect on the Company's consolidated financial statements.
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, requires that certain costs of computer software
developed or obtained for internal use be capitalized. The Company adopted this
statement for the fiscal year beginning January 31, 1999. There was no impact
on the Company's results of operations or financial position because it did not
develop any new software internally, nor did it purchase any software.
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, requires start-up
costs and organization costs to be expensed as incurred. The Company adopted
this statement for the fiscal year beginning January 31, 1999. There was no
impact on the Company's results of operations or financial position because such
costs were already being expensed as incurred.
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 29, 2000 and May 1, 1999
(unaudited)
(continued)
Note 6. Legal Proceedings
The Company is party to various claims, legal actions, and complaints arising in
the ordinary course of its business, including pre-petition assessments by the
Internal Revenue Service ("IRS") aggregating approximately $7.9 million and
relating to Camelot's corporate-owned life insurance program. No judgment has
been rendered regarding these IRS assessments as of April 29, 2000. A trial to
decide the matter was concluded on May 5, 2000 in the Federal District Court for
the District of Delaware. A decision is expected to be rendered in the third or
fourth quarter of fiscal 2000. In the event that a judgment is rendered against
the Company in the full amount of the proposed assessment, the Company's results
of operations would be materially adversely affected with a charge to earnings
of approximately $7.9 million plus interest since January 1998. In the opinion
of management, the IRS assessments and all other claims, legal actions and
complaints are without merit or involve such amounts that unfavorable
disposition will not have a material impact on the financial position, results
of operations or cash flows of the Company.
<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 April 29, 2000
Compared to the Thirteen Weeks Ended May 1, 1999
Sales. The Company's total sales increased 8% to $310.1 million for the
thirteen weeks ended April 29, 2000 compared to $287.0 million for the thirteen
weeks ended May 1, 1999. The increase was attributable to a comparable store
sales increase of 8%.
For the thirteen weeks ended April 29, 2000, comparable stores sales increased
7% for mall stores and 10% for free standing stores. By merchandise category,
comparable store sales increased 5% in music, 26% in video and 24% in
accessories.
Gross Profit. Gross profit, as a percentage of sales, decreased to 35.7% from
36.6% in the thirteen weeks ended April 29, 2000 compared to the thirteen weeks
ended May 1, 1999. This decrease is primarily due to a more competitive pricing
structure implemented at the Camelot stores acquired during the first quarter
last year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A"), as a percentage of sales, decreased to 31.5%
from 32.6% in the thirteen weeks ended April 29, 2000 compared to the thirteen
weeks ended May 1, 1999. The improvement is primarily due to the leveraging of
operating expenses and the elimination of Camelot's administrative expenses
during the period.
Interest Expense (Income). Net interest income was $1.2 million in the thirteen
weeks ended April 29, 2000 compared to an expense of $427,000 for the thirteen
weeks ended May 1, 1999. The improvement in net interest is due to the
repayment of long-term debt related to Camelot's acquisition of Spec's Music and
increased investment income from higher average cash balances.
<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 (continued)
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 thirteen weeks
ended May 1, 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.
Income Tax Expense (Benefit). The Company's effective tax rate decreased to
37.5% for the thirteen weeks ended April 29, 2000 from 42.0% for the thirteen
weeks ended May 1, 1999. During 1999, the Company's effective tax rate was
impacted by certain non-deductible expenses related to the Camelot merger, which
were partially offset by timing differences relating to asset impairments in
accordance with SFAS 121.
Net Income. The Company's net income increased to $9.0 million for the thirteen
weeks ended April 29, 2000, compared to a net loss of $8.6 million for the same
period last year. Excluding the one-time Camelot merger-related costs, 1999 net
income was $6.6 million. The improved bottom line performance can be attributed
to increased sales, reduced SG&A and improved interest, net.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The Company's primary sources of working capital are cash flows from
operations and borrowings under its revolving credit facility. The Company had
cash balances of approximately $113.3 million for the quarter ended April 29,
2000, compared to $280.0 million at the end of fiscal 1999.
Cash used by operating activities was $124.4 million for the thirteen weeks
ended April 29, 2000. The primary uses of cash were a $137.5 million seasonal
reduction of accounts payable and a $13.8 million net reduction in income tax
payable, partially offset by a $15.8 million reduction in inventory.
Cash used in financing activities was $40.6 million for the thirteen weeks ended
April 29, 2000. The primary use of cash was for the purchase of 3.9 million
shares of common stock under a program authorized by the Board of Directors on
January 7, 2000. As of April 29, 2000, the Company had completed the purchase
of the 5.0 million shares authorized by the Board.
The Company has a three-year $100 million secured revolving credit facility with
Congress Financial Corporation that expires in July 2000 and automatically
renews on a year-to-year basis thereafter with the consent of both parties. The
Company expects to extend the current facility for three more years. The
Revolving Credit Facility contains certain restrictive provisions, including
provisions governing cash dividends and acquisitions, is collateralized by
merchandise inventory and has a
<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 (continued)
minimum net worth covenant. On April 29, 2000, the Company had no outstanding
borrowings under the Revolving Credit Facility, and $100 million was available.
Capital Resources. On April 22, 1999, the Company acquired by merger Camelot
Music Holdings, Inc., ("Camelot") a Delaware corporation, 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 retail selling space as a result of the
merger.
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.
During the first quarter of 2000, the Company had capital expenditures of $1.7
million. The Company plans to spend $35.0 million, net of construction
allowances, for capital expenditures in fiscal 2000. During the quarter, the
Company opened or relocated 8 stores and closed 29 stores.
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
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
June 13, 2000 By: /s/ ROBERT J. HIGGINS
-----------------------
Robert J. Higgins
Chairman and Chief Executive Officer
(Principal Executive Officer)
June 13, 2000 By: /s/ JOHN J. SULLIVAN
---------------------
John J. Sullivan
Senior Vice President
and Chief Financial Officer
(Chief Financial and Accounting
Officer)
