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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 OCTOBER 29, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-14818
TRANS WORLD ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
New York 14-1541629
(State or otherjurisdiction 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 such 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,
9,687,814 shares outstanding as of December 5, 1994
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TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets -- October 29, 1994,
January 29, 1994 and October 30, 1993 3
Condensed Consolidated Statements of Income -- Thirteen
Weeks and Thirty-Nine Weeks Ended October 29, 1994
and October 30, 1993 4
Condensed Consolidated Statements of Cash Flows --
Thirty-Nine Weeks Ended October 29, 1994 and
October 30, 1993 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 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
October 29, January 29, October 30,
ASSETS 1994 1994 1993
- - - - - ------ ---------- ---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $7,501 $26,046 $7,029
Merchandise inventory 265,875 238,949 244,457
Other current assets 20,584 12,764 11,596
---------- ---------- ----------
Total current assets 293,960 277,759 263,082
---------- ---------- ----------
VIDEOCASSETTE RENTAL INVENTORY,NET 7,123 6,166 6,362
FIXED ASSETS:
Property, plant and equipment 179,066 167,203 158,753
Less allowances for depreciation
and amortization 83,372 73,157 72,319
---------- ---------- ----------
95,694 94,046 86,434
---------- ---------- ----------
OTHER ASSETS 3,202 2,293 2,467
---------- ---------- ----------
TOTAL ASSETS $399,979 $380,264 $358,345
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- - - - - ------------------------------------
CURRENT LIABILITIES:
Accounts payable $130,056 $156,263 $128,696
Notes payable 63,841 --- 26,561
Other current liabilities 21,836 19,958 10,975
---------- ---------- ----------
Total current liabilities 215,733 76,221 166,232
---------- ---------- ----------
LONG-TERM DEBT,less current portion 53,930 66,054 68,982
CAPITAL LEASE OBLIGATIONS, less
current portion 6,808 7,044 7,133
OTHER LIABILITIES 5,179 4,871 3,680
SHAREHOLDERS'EQUITY
Common stock ($.01 par value;
20,000,000 shares authorized;
9,731,208 issued) 97 97 97
Treasury stock, at cost(43,394,12,000
& 12,000 shares,respectively) (503) (162) (162)
Additional paid-in capital 24,236 24,236 24,229
Retained earnings 94,499 101,903 88,154
---------- ---------- ----------
Total shareholders'equity 118,329 126,074 112,318
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $399,979 $380,264 $358,345
========== ========== ==========
See Notes to Condensed Consolidated Financial Statements.
3
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
Thirteen Weeks Ended
------------------------
October 29, October 30,
1994 1993
---------- ----------
Sales $114,086 $101,784
Cost of sales 71,992 62,313
Gross profit ---------- ----------
42,094 39,471
Selling, general and
administrative expenses 39,889 36,450
Depreciation and amortization 4,279 3,878
---------- ----------
Loss from operations (2,074) (857)
Interest expense 2,447 1,695
---------- ----------
Loss before income tax benefit (4,521) (2,552)
Income tax benefit (1,804) (1,001)
---------- ----------
NET LOSS ($2,717) ($1,551)
========== ==========
LOSS PER SHARE ($0.28) ($0.16)
========== ==========
Weighted average number of common
shares outstanding 9,688 9,722
========== ==========
Thirty-Nine Weeks Ended
------------------------
October 29, October 30,
1994 1993
---------- ----------
Sales $330,264 $301,651
Cost of sales 207,865 188,123
---------- ----------
Gross profit 122,399 113,528
Selling, general and
administrative expenses 114,780 104,778
Depreciation and amortization 12,593 10,895
---------- ----------
Loss from operations (4,974) (2,145)
Interest expense 7,346 4,281
---------- ----------
Loss before income tax benefit (12,320) (6,426)
Income tax benefit (4,916) (2,500)
---------- ----------
NET LOSS ($7,404) ($3,926)
========== ==========
LOSS PER SHARE ($.76) ($0.40)
========== ==========
Weighted average number of common
shares outstanding 9,707 9,724
========== ==========
See Notes to Condensed Consolidated Financial Statements.
4
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Thirty-Nine Weeks Ended
------------------------
October 29, October 30,
1994 1993
---------- ----------
NET CASH USED BY OPERATING ACTIVITIES ($61,642) ($55,818)
---------- ----------
INVESTING ACTIVITIES:
Acquisition of property and equipment (15,967) (22,510)
Purchases of videocassette rental
inventory, net of amortization (957) (205)
---------- ----------
Net cash used by investing activities (16,924) (22,715)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from the issuance of
long-term debt --- 51,566
Payments of long-term debt and capital
lease obligations (3,479) (673)
Net increase in revolving line of credit 63,841 26,561
Other (341) (85)
---------- ----------
Net cash provided by financing activities 60,021 77,369
---------- ----------
Net decrease in cash and cash equivalents (18,545) (1,164)
Cash and cash equivalents, beginning of period 26,046 8,193
---------- ----------
Cash and cash equivalents, end of period $7,501 $7,029
========== ==========
See Notes to Condensed Consolidated Financial Statements.
5
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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. Joint
venture investments, none of which were material, are accounted for using
the equity method.
The condensed consolidated financial statements for the interim periods
presented are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. The information
furnished in the 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 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, 1994.
Note 2. Seasonality
The Company's business is seasonal in nature, with the highest sales
and earnings occurring in the fourth fiscal quarter. In the past three
fiscal years, the fourth quarter has represented substantially all of the
Company's net income for the year.
Note 3. Earnings (Loss) Per Share
Earnings (Loss) per share is based on the weighted average number of
common shares outstanding during each reporting period. Common stock
equivalents, which relate to employee stock options, are excluded from
the calculations, as their inclusion would have an anti-dilutive impact
on the loss per share.
6
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - Continued
Note 4. Debt
The Company utilizes an aggregate amount of $75 million in revolving
credit facilities from four commercial banks, with a stated maturity date
of July 1996. At October 29, 1994 the Company had outstanding $63.8
million in such revolving credit facilities. In addition, the Company had
outstanding $65 million in senior notes held by five insurance companies.
All of such senior debt facilities contain a fixed charge ratio covenant
that the Company was not in compliance with for the quarter ended October
29, 1994. The Company obtained permanent waivers of the technical
default from all of its lenders and, in addition, the Company entered into
an amendment of the revolving credit agreements with the four commercial
banks party to the revolving credit facilities. Such amendments increased
the contractual interest rate on the revolving credit facilities by 7/8%
to a floating interest rate of 1.75% over the LIBOR and CD-based borrowing
rates.
Note 5. Benefit Plans.
The Company adopted a nonqualified, unfunded 1994 Director Retirement
Plan that provides retirement benefits to Directors over age 62 who have
attained at least 5 years of service with the Company as a Director. The
benefits equal $15,000 per year and are payable for a maximum of ten years.
7
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Thirteen Weeks Ended October 29, 1994 Compared to
Thirteen Weeks Ended October 30,1993
- - - - - -------------------------------------------------
Sales. The Company's sales increased 12.1% for the thirteen week period
ended October 29, 1994 over the thirteen week period ended October 30,
1993. The $12.3 million sales increase is primarily due to the sales
generated from new stores opened by the Company since October 30, 1993.
Comparable store sales increased 2.3% in 1994's third quarter, including
1% in the music category and 19% in the video sell-through category. The
Company attributes the strong performance in video sales to the
reassortment of video inventories previously completed in the second
quarter. The reassortment of music inventories at the store level were
substantially completed at the end of the third quarter, and its impact
on music sales has not yet been determined.
One factor that adversely impacted comparable store sales in the third
quarter for the music category was a new release schedule that was
somewhat weaker than last year, as a number of significant releases were
delayed into the fourth quarter. In addition, retail competition
increased in all of the Company's geographic markets due to the openings
of large, freestanding music stores and the expansion of music departments
in national electronics superstores. Compact discs, which have a higher
average retail selling price than audio cassettes, comprised an increasing
portion of the Company's sales, and the share of audio cassettes declined,
continuing trends from earlier years.
Gross Profit. Gross profit as a percentage of sales decreased from
38.8% to 36.9% in the thirteen week period ended October 29, 1994,
compared to 1993. The decrease in the gross profit rate was primarily
due to the implementation of a competitive price program in many of the
Company's markets and an increase in merchandise return penalties
incurred as the Company improves product assortments in its stores.
Competitive pricing is expected to put continued downward pressure on the
gross margin rate for the remainder of the year.
8
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") as a percentage of sales decreased from
35.8% to 35.0% in the thirteen week period ended October 29,1994 compared
to 1993. The decrease in SG&A as a percent of sales was primarily due to
SG&A expenses increasing 9.0% compared to a 12.1% increase in total sales
over the prior year.
Interest Expense. Interest expense increased $0.8 million in the
thirteen week period ended October 29, 1994 compared to 1993. The
increase is due to the increase in the Company's average borrowings and a
higher weighted average borrowing rate.
Net Loss. The $2.7 million net loss for the thirteen week period ended
October 29, 1994 compares to a $1.6 million net loss in 1993. The
increased loss resulted from a combination of the decline in the gross
profit rate due to increased return penalties and the increase in interest
expense in the third quarter. To achieve a profitable fiscal quarter,
comparable store sales growth would have had to improve substantially over
the 2.3% sales growth realized in 1994's third quarter.
Thirty-Nine Weeks Ended October 29, 1994 Compared to
Thirty-Nine Weeks Ended October 30, 1993
- - - - - -----------------------------------------------------
Sales. The Company's sales increased 9.5% for the thirty-nine weeks
ended October 29, 1994 over the thirty-nine weeks ended October 30, 1993.
During the first nine months of the year, comparable store sales were
flat. Comparable store sales decreased 4% in the first quarter and
improved to 1.0% and 2.3% increases in the second and third quarters,
respectively. The Company attributes the improving sales trend during
fiscal 1994 primarily to the substantial effort directed at balancing
the store inventories and improving its merchandise in-stock position at
the distribution center.
Gross Profit. Gross profit as a percentage of sales declined from 37.6%
to 37.1% for the thirty-nine week period ended October 29, 1994, when
compared to 1993. The decrease in the gross profit rate was primarily due
to the implementation of a competitive price program in many of the
Company's markets. The Company expects the competitive price program to
put downward pressure on the gross margin rate for the remainder of
fiscal 1994.
9
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Selling, General and Administrative Expenses. SG&A as a percentage of
sales remained at 34.7% for the thirty-nine week period ended October 29,
1994 when compared to 1993. SG&A as a percent of sales remained unchanged
because both SG&A expenses and sales increased 9.5% over the prior year.
Interest Expense. Interest expense increased $3.1 million in the
thirty-nine week period ended October 29, 1994 compared to 1993. The
increase is attributed to both an increase in the Company's average
borrowings and an increase in the Company's weighted average borrowing
rate. The higher rates are due to increases in variable interest rates
and higher contractual rates on the Company's senior debt instruments
through the amendments entered into at the beginning of the fiscal year.
For the full year 1994, the Company projects that interest expense will
be approximately $3.5 million greater than 1993.
Net Loss. The $7.4 million net loss for the thirty-nine week period
ended October 29, 1994 compares to a $3.9 million net loss in 1993. The
increased loss is due to the flat comparable store sales for the year to
date period, the 58 basis point decline in the gross margin percentage,
combined with the impact of expense growth in the stores, along with the
increase in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Sources of Capital. Cash used by operating and investing
activities in the first nine months of the fiscal year were financed
through borrowings under the Company's revolving credit facilities, which
permit aggregate borrowings of up to $75 million.
10
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
During the thirty-nine week period ended October 29, 1994 the Company's
cash flow used by operations was $61.6 million, $5.8 million higher than
the corresponding period in 1993 because of the increased pre-tax loss and
the lower proportion of accounts payable to merchandise inventory, or
inventory leverage. The most significant uses of cash in the period were
the $26.9 million seasonal increase in merchandise inventory, $26.2
million and $5.4 million normal reductions in accounts payable and income
taxes payable, respectively, along with $16.0 million in capital
expenditures used primarily in the Company's store expansion program.
Accordingly, the Company's utilization of its revolving credit facilities
increased from $26.6 million at October 30, 1993 to $63.8 million
outstanding at October 29, 1994.
The Company's senior debt facilities, including the $75 million in
revolving credit facilities and $65 million in senior unsecured notes,
contain a similar fixed charge ratio covenant, a specified ratio of pre-tax
income plus fixed charges (interest and rent expense) to fixed charges.
The Company was not in compliance with the targeted fixed charge ratio for
the quarter ended October 29, 1994, and accordingly it sought and obtained
permanent waivers of the technical default from all of its lenders. The
four banks that are party to the revolving credit facilities required an
increase in the applicable floating borrowing rate. The Company entered
into an amendment of each of the revolving credit agreements, increasing
the contractual interest rate by 7/8% to a floating interest rate of 1.75%
over the LIBOR and CD-based borrowing rates.
As disclosed in its Annual Report on Form 10-K for the fiscal year ended
January 29, 1994, the Company's earnings for the full fiscal year 1994
would have to increase at least 20% over 1993 to maintain compliance with
the fixed charge ratio covenant in the Company's senior debt facilities.
The Company does not currently expect to meet the higher fixed charge
ratio for the fourth fiscal quarter, and the Company is negotiating with
its commercial bank lenders to specify a lower target or obtain in advance
a waiver of the covenant. In addition, the Company expects that it will
have to commence discussions in January 1995 to amend all of its senior
debt facilities to reduce the targeted fixed charge ratio covenant for
fiscal 1995, which is likely to result in higher interest rates and new
covenant restrictions. Although the Company considers its relations with
the commercial banks and the senior noteholders to be satisfactory, there
can be no assurance that the Company will be successful in restructuring
the targeted fixed ratio covenant for 1995 and future years. In the
absence of finalizing new arrangements during the fourth quarter, the
Company would likely be in technical default in the first quarter of
fiscal 1995.
11
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The combination of the outstanding balances on the revolving credit
facilities and the strong cash flow in the fourth quarter is considered
adequate to finance working capital activities through the first quarter
of fiscal 1995. Continued progress on inventory reduction and the
corresponding improvement to inventory leverage will be important to
maintain or reduce the absolute level of borrowings on the Company's
revolving credit facilities during fiscal 1995.
CAPITAL EXPENDITURES
The Company opened sixteen new stores and closed eleven stores in the
third quarter of 1994, ending the period with 698 stores in operation and
total retail square footage of 2.5 million. The Company is also a joint
venture partner in 8 stores. Management plans to open approximately 20
stores in the fourth quarter and 50 to 60 stores for the entire fiscal
year, approximately 20 of which are relocations of existing stores. Total
retail square footage is estimated to be approximately 2.6 million at the
end of the 1994 fiscal year. New store openings, combined with the
Company's ongoing store renovation program and other capital improvements,
will require approximately $24 million in capital expenditures in 1994.
In addition, the store expansion program will require an increase in
merchandise inventory of approximately $350,000 per new store, which will
be partially funded by trade payables.
The terms of the Company's revolving credit and long-term debt
agreements require the Company to meet customary financial and operating
ratios, and limit the Company's ability, among other things, to incur
indebtedness, to make certain investments and to pay dividends. The
foregoing restrictions, as well as the possibility that certain of the
financial ratios may not be maintained at agreed upon levels, could limit
the Company's ability to meet its expansion objectives, to obtain future
financing and to engage in certain corporate activities. The Company has
not yet committed to a significant level of capital expenditures for
fiscal 1995.
12
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.
------------ ----------- --------
3.1 Certificate of Amendment
to the Certificate of
Incorporation 15
4.1 Second Amendment to Credit
Agreement, dated as of
December 5, 1994, between
National Westminster Bank USA
the Company 17
10.1 1994 Director Retirement Plan 22
10.2 Severance Agreement, dated as
of October 1, 1994, with Edward
W. Marshall 26
27 Financial Data Schedule 31
(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 for the periods covered.
13
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
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
December 13, 1994 By: /s/ ROBERT A.HELPERT
- - - - - ----------------- ------------------------
DATE Robert A.Helpert
Executive Vice President
and Chief Administrative Officer
(Duly authorized officer)
December 13, 1994 By: /s/ JOHN J. SULLIVAN
- - - - - ----------------- ------------------------
DATE John J.Sullivan
Vice President - Finance
(Chief Accounting Officer)
14