a higher gross margin percentage and a reduction in SG&A expenses partially offset by the decline in gross profit from lower sales.
For the thirty-nine weeks ended October 29, 2011, the Company’s net loss decreased $29.0 million to $14.3 million from $43.3 million for the thirteen weeks ended October 30, 2010. The decreased loss was due to a higher gross margin percentage and a reduction in SG&A expenses partially offset by the decline in gross profit from lower sales.
Management anticipates that any cash requirements due to a shortfall in cash from operations will be funded by the Company’s revolving credit facility, discussed hereafter. Cash flows from investing and financing activities during Fiscal 2011 are expected to be comparable with Fiscal 2010. The Company does not expect any material changes in the mix (between equity and debt) or the relative cost of capital resources.
The following table sets forth a summary of key components of cash flow and working capital for each of the thirty-nine weeks ended October 29, 2011 and October 30, 2010, or at those dates:
The Company had cash and cash equivalents of $19.0 million at October 29, 2011, compared to $75.2 million at January 29, 2011 and $6.1 million at October 30, 2010. Merchandise inventory was $77 per square foot at October 29, 2011, compared to $76 per square foot at October 30, 2010.
Cash used by operating activities was $53.5 million for the thirty-nine weeks ended October 29, 2011. The primary use of cash was a $51.5 million seasonal reduction of accounts payable. The Company’s merchandise inventory and accounts payable are influenced by the seasonality of its business. A significant reduction of accounts payable occurs annually in the fiscal first half, reflecting payments for merchandise inventory sold during the prior year’s holiday season.
Cash used by investing activities, which was constituted entirely of capital expenditures, was $1.6 million for the thirty-nine weeks ended October 29, 2011.
Cash used by financing activities was $1.0 million for the thirty-nine weeks ended October 29, 2011 for the payment on long term debt and capital lease obligations.
In April 2010, the Company entered into a $100 million amended and restated Credit Agreement (“Amended Credit Facility”). The principal amount of all outstanding loans under the Amended Credit Facility together with any accrued but unpaid interest, are due and payable in April 2013, unless otherwise paid earlier pursuant to the terms of the Amended Credit Facility. Payments of amounts due under the Amended Credit Facility are secured by the assets of the Company.
The Amended Credit Facility includes customary provisions, including affirmative and negative covenants, which include representations, warranties and restrictions on additional indebtedness and acquisitions. The Amended Credit Facility also includes customary events of default, including, among other things, material adverse effect, bankruptcy, and certain changes of control. The Amended Credit Facility also contains other terms and conditions including prohibiting the payment of dividends and covenants around the number of store closings. It also changed the formula for interest rates.
Interest under the Amended Credit Facility will accrue, at the election of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable Margin, which is determined by reference to the level of Availability as defined in the Credit Agreement, with the Applicable Margin for LIBO Rate loans ranging from 4.00% to 4.50% and the Applicable Margin for Base Rate loans ranging from 3.00% to 3.50%. In addition, a commitment fee of 0.75% is also payable on unused commitments.
The availability under the Amended Credit Facility is subject to limitations based on sufficient inventory levels. Based on inventory levels at the end of the quarter, the availability under the credit facility was $88.8 million as of October 29, 2011. As of October 29, 2011, the Company didn’t have any borrowings outstanding under the Amended Credit Facility and had $1.2 million in outstanding letter of credit obligations. The Company has not had any borrowings during the first nine months of the year.
As of October 30, 2010, the Company had $8.6 million outstanding on the Amended Credit Facility and had $1.1 million in outstanding letter of credit obligations and $80.3 million was available for borrowing. The weighted average interest rate on outstanding borrowings for the thirteen weeks ended October 30, 2010 was 5.42%.
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Capital Expenditures.During the thirty-nine weeks ended October 29, 2011, the Company made capital expenditures of $1.6 million. The Company plans to spend under $3.0 million for capital expenditures in fiscal 2011.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires that management apply accounting policies and make estimates and assumptions that affect results of operations and the reported amounts of assets and liabilities in the financial statements. Management continually evaluates its estimates and judgments including those related to merchandise inventory and return costs, valuation of long-lived assets, income taxes and accounting for gift card liability. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Form 10-K for the year ended January 29, 2011 includes a summary of the critical accounting policies and methods used by the Company in the preparation of its condensed consolidated financial statements. There have been no material changes or modifications to the policies since January 29, 2011.
Recently Issued Accounting Pronouncements:
There are no recently issued accounting standards that are expected to have a material effect on our financial condition, results of operations or cash flows.
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TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART I – FINANCIAL INFORMATION
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
To the extent the Company borrows under its Credit Facility, the Company is subject to risk resulting from interest rate fluctuations since interest on the Company’s borrowings under its Credit Facility can be variable Interest under the Amended Credit Facility will accrue, at the election of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable Margin, which is determined by reference to the level of Availability as defined in the Credit Agreement, with the Applicable Margin for LIBO Rate loans ranging from 4.00% to 4.50% and the Applicable Margin for Base Rate loans ranging from 3.00% to 3.50%. If interest rates on the Company’s Credit Facility were to increase by 25 basis points, and to the extent borrowings were outstanding, for every $1,000,000 outstanding on the facility, income before income taxes would be reduced by $2,500 per year. For a discussion of the Company’s accounting policies for financial instruments and further disclosures relating to financial instruments, see “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended January 29, 2011. The Company does not currently hold any derivative instruments.
Item 4 – Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of October 29, 2011, have concluded that as of such date the Company’s disclosure controls and procedures were effective and designed to ensure that (i) information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal controls. There have been no changes in the Company’s internal controls over financial reporting that occurred during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
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TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
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Item 1 – Legal Proceedings |
The Company is subject to legal proceedings and claims that have arisen in the ordinary course of its business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these matters, it is management’s opinion, based upon the information available at this time, that the expected outcome of these matters, individually and in the aggregate, will not have a material adverse effect on the results of operations and financial condition of the Company. |
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Item 1A – Risk Factors |
Risks relating to the Company’s business and Common Stock are described in detail in Item 1A of the Company’s most recently filed Annual Report on Form 10-K for the year ended January 30, 2011. |
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Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds |
None. |
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Item 3 – Defaults Upon Senior Securities |
None. |
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Item 4 – Submissions of Matters to a Vote of Security Holders |
None. |
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Item 5 – Other Information |
None. |
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Item 6 - Exhibits |
(A) Exhibits -
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Exhibit No. | | Description | |
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31.1 | | Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 | | Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32 | | Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS | | XBRL Instance Document (furnished herewith) |
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101.SCH | | XBRL Taxonomy Extension Schema (furnished herewith) |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase (furnished herewith) |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase (furnished herewith) |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase (furnished herewith) |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase (furnished herewith) |
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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.
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TRANS WORLD ENTERTAINMENT CORPORATION |
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December 9, 2011 | By: /s/ Robert J. Higgins | |
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| Robert J. Higgins | |
| Chairman and Chief Executive Officer | |
| (Principal Executive Officer) | |
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December 9, 2011 | By: /s/ John J. Sullivan | |
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| John J. Sullivan | |
| Principal Accounting Officer (Chief Accounting Officer) |
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