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, 1995
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 other jurisdiction (I.R.S. Employer
of 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,
9,732,814 shares outstanding as of June 9, 1995
==================================================================
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 -- April 29, 1995,
January 28, 1995 and April 30, 1994 3
Condensed Consolidated Statements of Income -- Thirteen
Weeks Ended April 29, 1995 and April 30, 1994 4
Condensed Consolidated Statements of Cash Flows
Thirteen Weeks Ended April 29, 1995 and April 30, 1994 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 12
SIGNATURES 13
2
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
April 29, January 28, April 30,
ASSETS 1995 1995 1994
- ------ --------- --------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 27,632 $ 90,091 $ 8,061
Merchandise inventory 217,870 222,358 226,828
Other current assets 17,756 16,527 12,167
------- ------- -------
Total current assets 263,258 328,976 247,056
------- ------- -------
VIDEOCASSETTE RENTAL INVENTORY, net 7,695 7,472 6,670
DEFERRED TAX ASSET 505 505 ---
FIXED ASSETS:
Property, plant and equipment 180,297 182,262 171,782
Less: Fixed asset write-off reserve 9,175 10,485 ---
Accumulated depreciation
and amortization 87,842 85,620 76,628
------- ------- -------
83,280 86,157 95,154
------- ------- -------
OTHER ASSETS 3,957 3,829 1,968
------- ------- -------
TOTAL ASSETS $358,695 $426,939 $350,848
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 76,506 $ 135,493 $ 72,603
Notes payable 74,947 74,947 62,995
Store closing reserve 7,244 9,276 ---
Current portion of long-term
debt and capital lease obligations 6,559 6,618 3,501
Other current liabilities 6,202 9,211 10,250
------- ------- -------
Total current liabilities 171,458 235,545 149,349
------- ------- -------
LONG-TERM DEBT, less current portion 59,716 59,770 65,976
CAPITAL LEASE OBLIGATIONS, less
current portion 6,653 6,671 6,952
OTHER LIABILITIES 5,476 5,476 4,379
------- ------- -------
TOTAL LIABILITIES 243,303 307,462 226,656
------- ------- -------
SHAREHOLDERS' EQUITY
Common stock ($.01 par value; 20,000,000
shares authorized; 9,731,208 issued) 97 97 97
Additional paid-in capital 24,236 24,236 24,236
Treasury stock, at cost (48,394, 48,394
& 12,000 shares, respectively) (503) (503) (162)
Retained earnings 91,562 95,647 100,021
------- ------- -------
Total shareholders' equity 115,392 119,477 124,192
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $358,695 $426,939 $350,848
======= ======= =======
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
----------------------
April 29, April 30,
1995 1994
--------- ---------
Sales $111,912 $109,200
Cost of sales 72,258 68,370
------- -------
Gross profit 39,654 40,830
Selling, general and administrative expenses 38,733 37,562
Depreciation and amortization 4,246 4,168
------- -------
Income (Loss) from operations (3,325) (900)
Interest expense 3,474 2,232
------- -------
Loss before income taxes (6,799) (3,312)
Income tax benefit (2,713) (1,250)
------- -------
NET LOSS $ (4,086) $ (1,882)
======= =======
LOSS PER SHARE $ (0.42) $ (0.19)
======= =======
Weighted average number of common
shares outstanding 9,688 9,719
===== =====
See Notes to Condensed Consolidated Financial Statements.
4
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Thirteen Weeks Ended
----------------------
April 29, April 30,
1995 1994
--------- ---------
NET CASH USED BY OPERATING ACTIVITIES $(60,521) $(74,547)
------ ------
INVESTING ACTIVITIES:
Acquisition of property and equipment (1,584) (5,565)
Purchases of videocassette rental
inventory, net of amortization (223) (504)
------ ------
Net cash used by investing activities (1,807) (6,069)
------ -----
FINANCING ACTIVITIES:
Payments of long-term debt and
capital lease obligations (131) (364)
Net increase in revolving line of credit --- 62,995
Other --- ---
------ ------
Net cash provided by financing activities (131) 62,631
------ ------
Net decrease in cash and cash equivalents (62,459) (17,985)
Cash and cash equivalents, beginning of period 90,091 26,046
------ ------
Cash and cash equivalents, end of period $27,632 $ 8,061
====== ======
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 and
income, none of which are material, are accounted for using the equity method.
The unaudited 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 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 28,
1995.
Note 2. Restructuring Reserve
During the fourth quarter of 1994 the Company recorded a pre-tax
restructuring charge of $21 million to reflect the anticipated costs
associated with a program to close 143 stores through the first quarter of
1996. The restructuring charge included the write-down of fixed assets,
estimated cash payments to landlords for early termination of operating leases
and the cost of returning product to the Company's distribution center and
vendors. The charge also included estimated legal and consulting fees,
including those that the Company is obligated to pay on behalf of its lenders
while working to renegotiate its credit agreements.
6
Total costs charged to the restructuring reserves during the first quarter
of 1995 are summarized as follows:
First First First
Quarter Quarter Quarter
Beginning Charges Ending
Reserve Against Reserve
Balance Reserve Balance
-------------------------------
(in thousands)
Non-cash write-offs
- -------------------
Leasehold improvements $ 7,077 $ 393 $ 6,684
Furniture and fixtures 3,408 917 2,491
Excess inventory shrinkage 944 0 944
------------------------------
Total non-cash 11,429 1,310 10,119
------------------------------
Cash outflows
- -------------
Lease obligations 4,250 568 3,682
Return penalties and related costs 2,725 325 2,400
Termination benefits 200 135 65
Consulting and legal fees 1,157 1,004 153
------------------------------
Total cash outflows 8,332 2,032 6,300
------------------------------
Total $19,761 $3,342 $16,419
==============================
Note 3. 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 years, the
fourth fiscal quarter has represented substantially all of the Company's net
income for the year.
Note 4. Earnings (Loss) Per Share
Earnings (Loss) per share is based on the weighted average number of
common shares outstanding during each fiscal period. Common stock
equivalents, relating to stock options, are excluded from the calculations, as
their inclusion would have an anti-dilutive impact on the loss per share.
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 April 29, 1995 Compared to Thirteen Weeks Ended April 30,
1994
- ------------------------------------------------------------------------------
Sales. The Company's total sales increased 2.5% for the thirteen weeks
ended April 29, 1995 over the thirteen weeks ended April 30, 1994. The $2.7
million sales increase is attributable to the sales generated from new stores
opened by the Company since April 30, 1994. During the past 12 months, the
Company opened 41 stores and closed or relocated 69 stores resulting in a
80,000 net increase in retail square footage. Comparable store sales declined
2% from the prior year. The decrease is due primarily to a weak new release
schedule and lower traffic in the retail malls.
Comparable store sales for mall stores decreased 3.4%, while non-mall
stores increased 1.0%. By product category, comparable store sales in audio
decreased 2.4% while video sell-through increased 2.4%.
Gross Profit. Gross profit, as a percentage of sales, decreased from
37.4% to 35.4% in the thirteen week period ended April 29, 1995, when compared
to 1994. The lower gross margin is primarily due to increased promotional
markdowns in the period. To a lesser extent, the continued shift in sales mix
from prerecorded audio cassettes to compact discs and prerecorded
videocassettes also contributed to the decline. Compact discs and prerecorded
videocassettes carry a lower gross profit than prerecorded audio cassettes.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A"), as a percentage of sales, increased from
34.4% to 34.6% in the thirteen week period ended April 29, 1995 when compared
to 1994. The $1.2 million or 0.2% increase in SG&A, as a percent of sales,
was due primarily to a 3.1% increase in SG&A expenses while total sales
increased 2.5%. The decline in comparable store sales impacted the increase
in SG&A as a percentage of sales.
Interest Expense. The $1.2 million increase in interest expense for the
thirteen week period ended April 29, 1995, compared to 1994, was primarily
attributed to an increase in the Company's weighted average borrowing rate.
8
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. During the first quarter, funds available
under revolving credit facilities have typically been the Company's primary
source of liquidity. Unlike previous years, the Company accumulated cash
balances in December 1994 and January 1995 instead of repaying the balances
under its $75 million revolving credit facilities (the "Revolver"). The
credit facilities did not require the Company to pay down the outstanding
balances under the Revolver at year end. Accordingly, the Company ended
fiscal year 1994 with cash balances of approximately $90.1 million. During
the first quarter of 1995, the Company used the accumulated cash balances to
satisfy the $59.0 million seasonal reduction in accounts payable, its most
significant use of cash in the thirteen week period ended April 29, 1995.
During the first quarter of 1995, the Company was operating under temporary
waivers from its lenders relating to non-compliance with two financial
covenants at January 28, 1995. The aggregate amount of the senior debt,
totaling a maximum available amount of $140 million, including the Revolver
and $65 million in outstanding long-term notes (the"Notes") ranks pari pasu
and is unsecured. The nine lenders (the"Lending Group") that are party to the
applicable credit agreements granted waivers to the Company effective through
March 31, 1995 and subsequently extended through May 15, 1995. During this
waiver period the Company was required to remain fully borrowed on all senior
debt instruments pending negotiation and restructuring of the modified credit
agreements.
On April 28, 1995 the Company entered into an agreement in principle with
the Lending Group to restructure all of the Company's $140 million aggregate
principal amount of senior debt. Under the provisions of the modified credit
agreements, the Company will be required to make principal repayment on the
Notes of $2.3 million on June 30, 1995 and $3.7 on January 31, 1996. The
maximum borrowings available on the Company's Revolver will be reduced to
$72.3 million on June 30, 1995 and to $68.0 million on January 31, 1996.
Final maturity of the Notes and the Revolver is July 31, 1996. Effective
April 28, 1995, interest rates for the Notes and the Revolver were converted
to a floating rate equal to the greater of 10.5% or 1-1/2% over the prime
lending rate.
The modified credit agreements contain restrictive provisions governing
dividends, capital expenditures and acquisitions, and modified covenants as to
working capital, cash flow and consolidated tangible net worth to reflect the
$21 million restructuring charge recorded in 1994 and lower earnings levels
than expected when the credit agreements were amended in January 1994. In the
past, the Company has violated its fixed charge ratio covenant, which requires
a specified pretax earnings coverage of the aggregate of interest expense and
real estate rent. The modified fixed charge ratio covenant now aggregates
depreciation and amortization with pre-tax earnings for the coverage test.
The Company will be in compliance with the modified covenant if it is
profitable for the 1995 fiscal year. The Revolver as modified requires the
Company to pay down the outstanding balances for a 15 day period between
December 25, 1995 and January 31, 1996.
9
The Company's ability to continue to meet its liquidity requirements on a
long-term basis is dependent on its ability to successfully obtain new
financing to replace the senior debt maturing in July 1996. In the interim
period, cash flow from operations, continued reductions in absolute inventory
levels, and reduced capital expenditures should assure that the Company has
ample liquidity to meet its operating requirements.
Capital Expenditures.
During the first quarter of 1995, the Company had capital expenditures of
$1.6 million of the planned total capital expenditures of approximately $11
million, net of construction allowances, for fiscal 1995. The Company opened
3 of the 14 new stores planned to open in fiscal 1995 and closed 23 of the 80
stores anticipated to close in 1995. On a net basis, retail square footage
was reduced by 40,000 square feet since January 28, 1995. The new stores
averaged 5,800 square feet of retail space. This is larger than the average
store size of the Company.
Capital expenditures and new store growth will continue to be curtailed
throughout 1995 while management's strategy continues to be concentrated on
closing underperforming stores. Some limitations on capital expenditures have
also been imposed by the Company's lending agreements. The Company does not
expect to continue the rapid growth experienced in the past and any excess
cash flow will be used primarily to retire debt.
Provision for Business Restructuring.
During the fourth quarter of 1994 the Company undertook a comprehensive
examination of store profitability and adopted a business restructuring plan
that included the closing of 143 stores out of 712 stores then open and
operating. Management concluded that select retail entertainment markets had
begun to reflect an overcapacity of retail outlets, and large discount-priced
electronics stores and other superstores were having an adverse impact on
certain of the Company's retail stores. As a result of the restructuring
plan, the Company recorded a pre-tax charge of $21 million against earnings,
leading to a loss for the 1994 fiscal year. The components of the
restructuring charge included approximately $8.7 million in reserves for
future cash outlays, and approximately $12.3 million in asset write-offs.
Twenty-three stores were closed in the first quarter of 1995 bringing
total closures to 51 through the end of the first quarter of 1995. Fixed
asset write-offs charged to the reserve account totaled $1.3 million in the
first quarter of 1995 and $2.2 million since the inception of the business
restructuring plan. Cash expenditures for lease obligations, termination
benefits and other expenditures charged to the store closing reserve totaled
$2.0 million in the first quarter of 1995 and $2.4 million since the inception
of the business restructuring plan.
10
Remaining cash outlays relating to lease obligations, termination benefits
and other expenditures are anticipated to total approximately $3.5 million in
fiscal 1995 and $4.8 million in fiscal 1996. The cash outflows for store
closings in the first quarter and outflows for the remainder of the year have
been financed and will continue to be financed through disposition of
merchandise inventory from the closed stores. The timing of continued store
closures will depend somewhat on the Company's ability to negotiate reasonable
lease termination agreements and continued review of the opportunities to
accelerate the closing of underperforming stores.
Annual sales associated with the stores closed in the first quarter of
1995 totaled $10.2 million in 1994. Because the store closures will be phased
out over 1995 and early 1996, the Company will not receive most of the
earnings or cash flow benefits from the restructuring program until fiscal
1996.
11
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.
---------- ----------- --------
10.1 Form of Restricted Stock Agreement 14
dated 2/1/95 between the Company and
Edward W. Marshall, Jr., Executive
Vice President-Operations and 5/1/95
Bruce J. Eisenberg, Senior Vice
President-Real Estate
10.2 Form of Indemnification Agreement 19
dated May 1, 1995 between the
Company and its officers and directors
27 Financial Data Schedule 31
(B) Reports on Form 8-K.
The Company filed a report on form 8-K on announcing a
restructuring charge for closing underperforming stores and debt
restructuring.
- -------------------------------------------------------------------------------
Omitted from this Part II are items which are not applicable or to which the
answer is negative for the periods covered.
12
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
JUNE 13, 1995 By: /s/ ROBERT J. HIGGINS
---------------------
Robert J. Higgins,
President and Director
(Principal Executive Officer)
JUNE 13, 1995 By: /s/ JOHN J. SULLIVAN
---------------------
John J. Sullivan
Senior Vice President
Chief Financial Officer
(Principal Financial and
Accounting Officer)
13