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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 28, 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 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,
9,732,814 shares outstanding as of December 5, 1995
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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 28, 1995,
January 28, 1995 and October 29, 1994 3
Condensed Consolidated Statements of Income -- Thirteen
Weeks and Thirty-Nine Weeks Ended October 28, 1995
and October 29, 1994 4
Condensed Consolidated Statements of Cash Flows --
Thirty-Nine Weeks Ended October 28, 1995 and
October 29, 1994 5
Notes to Condensed Consolidated Financial Statements 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 13
SIGNATURES 14
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
October 28, January 28, October 29,
ASSETS 1995 1995 1994
- ------ ---------- ---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 6,618 $ 90,091 $ 7,501
Merchandise inventory 258,379 222,358 265,875
Other current assets 34,221 16,527 20,584
---------- ---------- ----------
Total current assets 299,218 328,976 293,960
---------- ---------- ----------
VIDEOCASSETTE RENTAL INVENTORY,NET 7,334 7,472 7,123
FIXED ASSETS:
Property, plant and equipment 177,431 182,262 179,066
Less: Fixed asset write-off reserve 6,346 10,485 ---
Accumulated depreciation
and amortization 91,510 85,620 83,372
---------- ---------- ----------
79,575 86,157 95,694
---------- ---------- ----------
OTHER ASSETS 4,553 4,334 3,202
---------- ---------- ----------
TOTAL ASSETS $390,680 $426,939 $399,979
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $132,942 $135,493 $130,056
Notes payable 69,759 74,947 63,841
Income taxes payable --- 1,961 ---
Store closing reserve 2,514 9,276 ---
Current portion of long-term
debt and capital leases 63,106 6,618 12,576
Other current liabilities 5,820 7,250 9,260
---------- ---------- ----------
Total current liabilities 274,141 235,545 215,733
---------- ---------- ----------
LONG-TERM DEBT,less current portion 574 59,770 53,930
CAPITAL LEASE OBLIGATIONS, less
current portion 6,615 6,671 6,808
OTHER LIABILITIES 5,181 5,476 5,179
---------- ---------- ----------
TOTAL LIABILITIES 286,511 307,462 281,650
---------- ---------- ----------
SHAREHOLDERS' EQUITY
Common stock ($.01 par value;
20,000,000 shares authorized;
9,781,208, 9,731,208, and
9,731,208 shares issued,
respectively) 97 97 97
Treasury stock, at cost(48,394 shares) (503) (503) (503)
Additional paid-in capital 24,236 24,236 24,236
Retained earnings 80,339 95,647 94,499
---------- ---------- ----------
Total shareholders' equity 104,169 119,477 118,329
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $390,680 $426,939 $399,979
========== ========== ==========
See Notes to Condensed Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
Thirteen Weeks Ended
------------------------
October 28, October 29,
1995 1994
---------- ----------
Sales $103,165 $114,086
Cost of sales 67,195 71,992
Gross profit ---------- ----------
35,970 42,094
Selling, general and administrative expenses 36,832 39,889
Depreciation and amortization 3,978 4,279
---------- ----------
Loss from operations (4,840) (2,074)
Interest expense 3,635 2,447
---------- ----------
Loss before income tax benefit (8,475) (4,521)
Income tax benefit (3,382) (1,804)
---------- ----------
NET LOSS ($ 5,093) ($ 2,717)
========== ==========
LOSS PER SHARE ($0.52) ($0.28)
========== ==========
Weighted average number of common
shares outstanding 9,733 9,688
========== ==========
Thirty-Nine Weeks Ended
------------------------
October 28, October 29,
1995 1994
---------- ----------
Sales $319,369 $330,264
Cost of sales 208,430 207,865
---------- ----------
Gross profit 110,939 122,399
Selling, general and administrative expenses 113,123 114,780
Depreciation and amortization 12,333 12,593
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Loss from operations (14,517) (4,974)
Interest expense 10,954 7,346
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Loss before income tax benefit (25,471) (12,320)
Income tax benefit (10,163) (4,916)
---------- ----------
NET LOSS ($15,308) ($7,404)
========== ==========
LOSS PER SHARE ($1.57) ($0.76)
========== ==========
Weighted average number of common
shares outstanding 9,723 9,707
========== ==========
See Notes to Condensed Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Thirty-Nine Weeks Ended
------------------------
October 28, October 29,
1995 1994
---------- ----------
NET CASH USED BY OPERATING ACTIVITIES ($69,305) ($61,642)
---------- ----------
INVESTING ACTIVITIES:
Acquisition of property and equipment (6,354) (15,967)
Disposal (purchases) of videocassette rental
inventory, net of amortization 138 (957)
---------- ----------
Net cash used by investing activities (6,216) (16,924)
---------- ----------
FINANCING ACTIVITIES:
Net increase (decrease) in revolving line of credit (5,188) 63,841
Payments of long-term debt and
capital lease obligations (2,764) (3,479)
Purchase of common shares for treasury stock --- (341)
---------- ----------
Net cash provided (used) by financing activities (7,952) 60,021
---------- ----------
Net decrease in cash and cash equivalents (83,473) (18,545)
Cash and cash equivalents, beginning of period 90,091 26,046
---------- ----------
Cash and cash equivalents, end of period $ 6,618 $ 7,501
========== ==========
See Notes to Condensed Consolidated Financial Statements.
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 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 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 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 was obligated to pay on behalf of its lenders
while working to renegotiate its credit agreements. Management believes that
the reserve balance at the end of the third quarter is sufficient to cover the
costs of closing the remaining stores included in the restructuring program.
Total costs charged to the restructuring reserves during the first nine
months of fiscal 1995 are summarized as follows:
First First Second Third Third
Quarter Quarter Quarter Quarter Quarter
Beginning Charges Charges Charges Ending
Reserve Against Against Against Reserve
Balance Reserve Reserve Reserve Balance
-----------------------------------------------
(in thousands)
Non-cash write-offs
- -------------------
Leasehold improvements $ 7,077 $ 393 $1,351 $ 373 $ 4,960
Furniture and fixtures 3,408 917 890 215 1,386
Excess inventory shrinkage 944 0 240 1,125 (421)
Other assets --- --- 364 --- (364)
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Total non-cash 11,429 1,310 2,845 1,713 5,561
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Cash outflows
- -------------
Lease obligations 4,250 568 457 973 2,252
Return penalties and
related costs 2,725 325 261 518 1,621
Termination benefits 200 135 27 62 (24)
Consulting and legal fees 1,157 1,004 521 182 (550)
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Total cash outflows 8,332 2,032 1,266 1,735 3,299
----------------------------------------------
Total $19,761 $3,342 $4,111 $3,448 $ 8,860
==============================================
Note 3. Debt
On April 28, 1995, the Company reached an agreement with its senior
lenders to modify $75.0 million in revolving credit facilities (the
"Revolver") and $65.0 million in unsecured notes (the "Notes"). Subsequently,
on June 30, 1995 when the final credit agreements were completed, the Company
was required to pay down $5.0 million to its senior lenders. An additional
$8.0 million pay down is required on January 31, 1996. Final maturity of the
Notes and the Revolver is July 31, 1996.
Under the terms of the new agreement, on June 30, 1995, the balance
available under the Revolver was reduced from $75.0 million to $72.3 million
and a payment of $2.3 million was made to reduce the Notes from $65.0 million
to $62.7 million. The terms of the agreement require a further reduction of
$4.3 million in the balance available under the Revolver on January 31, 1996
and a payment of $3.7 million to reduce the Notes to $59.0 million. Cash
provided from the liquidation of inventory from closing stores will be used to
pay down the Notes and allow the Company to operate under a reduced Revolver.
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 inventory levels,
and reduced capital expenditures should assure that the Company has ample
liquidity to meet its operating requirements.
Note 4. 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 5. 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.
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 28, 1995 Compared to Thirteen Weeks Ended
October 29, 1994
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Sales. The Company's sales decreased 9.6% or $10.9 million for the
thirteen weeks ended October 28, 1995 compared to the thirteen weeks ended
October 29, 1994. The sales decrease is attributed to the reduction in the
number of stores in operation since the third quarter of 1994 and a 7.5%
decline in comparable store sales.
In the Company's music division, the comparable store sales declined 7.2%,
while the video division experienced a decline of 8.6%. The comparable store
sales decline is primarily attributed to a weaker new music release schedule
in the thirteen weeks ended October 28, 1995 compared to the thirteen weeks
ended October 29, 1994. Increased industry competition 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 and bookstores has also contributed to the decline in comparable
store sales. Available industry sales information shows this trend throughout
the industry.
Gross Profit. Gross profit as a percentage of sales decreased from 36.9%
to 34.9% in the thirteen weeks ended October 28, 1995 compared to the thirteen
weeks ended October 29, 1994. The decrease in the gross profit rate was due
to continued price competition and an increase in inventory shrinkage.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") as a percentage of sales increased from 35.0%
to 35.7% in the thirteen weeks ended October 28, 1995 compared to the thirteen
weeks ended October 29, 1994. The increase in SG&A as a percent of sales was
primarily due to the decline in comparable sales.
Interest Expense. Interest expense increased $1.2 million in the thirteen
weeks ended October 28, 1995 compared to the thirteen weeks ended October 29,
1994. The increase was due to the increase in the Company's weighted average
borrowing rate.
Net Loss. The $5.1 million net loss for the thirteen weeks ended October
28, 1995 compares to a $2.7 million net loss in thirteen weeks ended October
29, 1994. The increased net loss resulted from a combination of the decline
in comparable store sales, the decrease in gross profit, and the increase in
interest expense.
Thirty-Nine Weeks Ended October 28, 1995 Compared to Thirty-Nine Weeks Ended
October 29, 1994
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Sales. The Company's sales decreased 3.3% or $10.9 million for the
thirty-nine weeks ended October 28, 1995 when compared to the same period in
1994. During the first thirty-nine weeks of the year, comparable store sales
were down 4.8%.
Gross Profit. Gross profit as a percentage of sales decreased from 37.1%
to 34.7% for the thirty-nine weeks ended October 28, 1995 when compared to the
same period in 1994. The decrease in the gross profit rate was due to
continued price competition, increases in return penalties, and increased
inventory shrinkage.
Selling, General and Administrative Expenses. SG&A as a percentage of
sales increased from 34.7% to 35.4% for the thirty-nine weeks ended October
28, 1995 when compared to the same period in 1994. SG&A as a percent of sales
increased due to the decline in comparable store sales.
Interest Expense. Interest expense increased $3.6 million in the
thirty-nine weeks ended October 28, 1995 when compared to the same period in
1994. The increase is attributed to an increase in the Company's weighted
average borrowing rate.
Net Loss. The $15.3 million net loss for the thirty-nine weeks ended
October 28, 1995 compares to a $7.4 million net loss for the same period in
1994. The increased loss is due to the decline in comparable store sales, the
decrease in gross profit, and the increase in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Sources of Capital. During the first thirty-nine weeks of
the fiscal year, 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 the $75.0 million 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 thirty-nine week period ended October 28, 1995, the cash balance
of $90.1 million was used to reduce the Revolver by $5.2 million, to purchase
merchandise inventory, to pay $6.8 million in costs incurred in closing stores
under the Company's restructuring plan, and to fund the $6.4 million in
capital expenditures.
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 inventory levels,
and reduced capital expenditures should assure that the Company has ample
liquidity to meet its operating requirements.
CAPITAL EXPENDITURES
The Company opened one new store and closed thirteen stores in the third
quarter of 1995, ending the period with 604 stores in operation and total
retail square footage of 2.4 million. In addition, the Company is also a
joint venture partner in 16 Incredible Universe stores with Tandy Corporation.
Management plans to open one store in the fourth quarter, which will bring the
total number of stores opened in fiscal 1995 to eight. Capital expenditures
related to the Company's eight new stores, store remodels and the automation
of the distribution facility were $6.4 million for the first nine months of
1995. The Company expects that the total capital expenditures for fiscal 1995
will be slightly less than the original plan of $10.6 million, net of
construction allowances. Any excess cash flow will be used primarily to
retire debt. Total retail square footage is estimated to be approximately 2.2
million at the end of the 1995 fiscal year.
The terms of the Company's revolving credit and long-term debt agreements
require the Company to meet certain 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,
could limit the Company's ability to obtain future financing and to engage in
certain corporate activities.
The Company is currently in compliance with all covenants under its credit and
long-term note agreements as of and for the periods ended October 28, 1995.
The Company anticipates it will be in compliance with all covenants for the
fiscal year ending February 3, 1996.
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. As a result of the restructuring plan, the Company recorded a
pre-tax charge of $21 million against earnings. 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.
Thirteen stores were closed in the third quarter of 1995 bringing the total
closures to 116 through the end of the third quarter of 1995. Asset
write-offs charged to the reserve account totaled $1.7 million in the third
quarter of 1995 and $6.8 million since the inception of the business
restructuring plan. Cash expenditures charged to the store closing reserve
totaled $1.7 million in the third quarter of 1995 and $5.4 million since the
inception of the business restructuring plan.
The cash outflows for store closings in the first nine months and outflows for
the remainder of the fiscal 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 third quarter of 1995
totaled $6.2 million in 1994. Because the store closures will not be
completed until early 1996, the Company will not receive most of the earnings
or cash flow benefits from the restructuring program until fiscal 1996.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(A) Exhibits
Number Description Page
------ ----------- ----
27 Financial Data Schedule
(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 for the periods covered.
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 12, 1995 By:/s/ ROBERT J.HIGGINS
-----------------------
Robert J.Higgins
President and Director
(Principal Executive Officer)
December 12, 1995 By:/s/ JOHN J. SULLIVAN
-----------------------
John J.Sullivan
Senior Vice President - Finance
(Chief Financial and
Accounting Officer)