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 MAY 4, 1996
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,
9,739,814 shares outstanding as of June 3, 1996
==================================================================
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 -- May 4, 1996,
February 3, 1996 and April 29, 1995 3
Condensed Consolidated Statements of Income -- Thirteen
Weeks Ended May 4, 1996 and April 29, 1995 5
Condensed Consolidated Statements of Cash Flows
Thirteen Weeks Ended May 4, 1996 and April 29, 1995 6
Notes to Condensed Consolidated Financial Statements 7
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)
May 4, February 3, April 29,
ASSETS 1996 1996 1995
- ------ --------- --------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 50,655 $ 86,938 $ 27,632
Merchandise inventory 180,205 194,577 217,870
Other current assets 22,164 27,781 17,756
------- ------- -------
Total current assets 253,024 309,296 263,258
------- ------- -------
VIDEOCASSETTE RENTAL INVENTORY, net 6,862 6,722 7,695
DEFERRED TAX ASSET 430 430 505
FIXED ASSETS:
Property, plant and equipment 170,564 171,716 180,297
Less: Fixed asset write-off reserve 11,522 12,324 9,175
Accumulated depreciation
and amortization 92,144 89,391 87,842
------- ------- -------
66,898 70,001 83,280
------- ------- -------
OTHER ASSETS 3,752 3,882 3,957
------- ------- -------
TOTAL ASSETS $330,966 $390,331 $358,695
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 78,826 $ 131,302 $ 76,506
Notes payable 65,260 65,260 74,947
Store closing reserve 20,967 24,275 7,244
Current portion of long-term
debt and capital lease obligations 10,239 3,420 6,559
Accrued expenses and other 5,368 6,266 6,202
------- ------- -------
Total current liabilities 180,660 230,523 171,458
------- ------- -------
LONG-TERM DEBT, less current portion 46,953 53,770 59,716
CAPITAL LEASE OBLIGATIONS, less
current portion 6,574 6,594 6,653
OTHER LIABILITIES 5,355 5,340 5,476
------- ------- -------
TOTAL LIABILITIES 239,542 296,227 243,303
------- ------- -------
SHAREHOLDERS' EQUITY
Common stock ($.01 par value; 20,000,000
shares authorized; 9,781,208 issued) 98 97 97
Additional paid-in capital 24,446 24,236 24,236
Treasury stock, at cost (46,394, 48,394
and 48,394 shares, respectively) (475) (503) (503)
Unearned compensation - restricted
stock (50,000 shares) (180) --- ---
Retained earnings 67,535 70,274 91,562
------- ------- -------
Total shareholders' equity 91,424 94,104 115,392
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $330,966 $390,331 $358,695
======= ======= =======
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
----------------------
May 4, April 29,
1996 1995
--------- ---------
Sales $106,622 $111,912
Cost of sales 69,453 72,258
------- -------
Gross profit 37,169 39,654
Selling, general and administrative expenses 34,697 38,733
Depreciation and amortization 3,653 4,246
------- -------
Income (Loss) from operations (1,181) (3,325)
Interest expense 3,037 3,474
------- -------
Loss before income taxes (4,218) (6,799)
Income tax benefit (1,479) (2,713)
------- -------
NET LOSS $ (2,739) $ (4,086)
======= =======
LOSS PER SHARE $ (0.28) $ (0.42)
======= =======
Weighted average number of common
shares outstanding 9,734 9,707
===== =====
See Notes to Condensed Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Thirteen Weeks Ended
----------------------
May 4, April 29,
1996 1995
--------- ---------
NET CASH USED BY OPERATING ACTIVITIES $(35,396) $(60,521)
------ ------
INVESTING ACTIVITIES:
Acquisition of property and equipment (788) (1,584)
Purchases of videocassette rental
inventory, net of amortization (140) (223)
------ ------
Net cash used by investing activities (928) (1,807)
------ -----
FINANCING ACTIVITIES:
Payments of long-term debt and
capital lease obligations (18) (131)
Proceeds from issuance of common stock 1 ---
Increase in additional paid in capital 232 ---
Decrease in treasury stock due to reissuance of shares 28 ---
Unearned compensation from issuance of shares of
restricted stock (180) ---
Decrease in additional paid-in capital due to
reissuance of treasury stock (22) ---
------ ------
Net cash provided by financing activities 41 (131)
------ ------
Net decrease in cash and cash equivalents (36,283) (62,459)
Cash and cash equivalents, beginning of period 86,938 90,091
------ ------
Cash and cash equivalents, end of period $50,655 $27,632
====== ======
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 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 February 3,
1996.
Note 2. Restructuring Reserve
The Company recorded a pre-tax restructuring charge of $35 million in 1995
to reflect the anticipated costs associated with a program to close 163 stores
through the first quarter of 1997. This charge is in addition to a $21
million restructuring charge recorded in 1994 to reflect the costs associated
with the closing of 179 stores (versus a plan of 143). The restructuring
charge includes 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, lender and consulting fees, including those that the
Company is obligated to pay on behalf of its lenders while working to
renegotiate its credit agreements.
Total costs charged to the restructuring reserves during the first quarter
of 1996 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 $13,906 $1,810 $12,096
Cash outflows 22,693 2,300 20,393
------------------------------
Total $36,599 $4,110 $32,489
==============================
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 been the Company's most profitable quarter.
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.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Thirteen Weeks Ended May 4, 1996 Compared to Thirteen Weeks Ended April 29,
1995
- ------------------------------------------------------------------------------
Sales. The Company's total sales decreased 4.7% for the thirteen weeks
ended May 4, 1996 over the thirteen weeks ended April 29, 1995 while the
Company operated 20% fewer stores. This was primarily due to the 6.1%
comparable sales increase. This increase is due primarily to increased
promotional advertising and improved inventory position. During the past 12
months, the Company opened 6 stores and closed or relocated 145 stores
resulting in a 382,000 net decrease in retail square footage.
In the Company's music stores, the comparable store sales increased 6.3%
while the video stores increased 8.1%. The Company's video rental stores had
a 7.3% comparable sales decline. Comparable store sales for mall stores
increased 5.0%, while non-mall stores increased 8.9%.
Gross Profit. Gross profit, as a percentage of sales, decreased from
35.4% to 34.9% in the thirteen week period ended May 4, 1996, when compared to
1995. The lower gross margin is primarily due to increased merchandise shrink.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A"), as a percentage of sales, decreased from
34.6% to 32.5% in the thirteen week period ended May 4, 1996 when compared to
1995. Increased comparable store sales combined with the closing of
underperforming stores (which operate on a higher expense, as a percentage of
sales) resulted in a $4.0 million or 2.1% improvement in SG&A, as a percentage
of sales.
Interest Expense. The $0.4 million decrease in interest expense for the
thirteen week period ended May 4, 1996, compared to 1995, was due to a
decrease in the Company's weighted average outstanding borrowings offset in
part by an increase in the Company's weighted average interest rates.
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 been the Company's primary source of
liquidity. As in the previous year, the Company accumulated cash balances in
December 1995 and January 1996 instead of repaying the balances under its
revolving credit facilities (the "Revolver"). A temporary waiver of a
covenant requiring a 15 day paydown of the Revolver between December 25 and
January 31 was received on December 18, 1995. Accordingly, the Company ended
fiscal year 1995 with cash balances of approximately $86.9 million and $65.3
million outstanding on its Revolver. During the first quarter of 1996, the
Company used the accumulated cash balances primarily to repay accounts payable
in accordance with normal payment terms. On a proforma basis, assuming cash
balances were used to pay down the Revolver, the Company was more liquid in
the first quarter of fiscal 1996, and would have had lower balances
outstanding under the Revolver, than in the first quarter of fiscal 1995.
Effective February 3, 1996, the Company was operating under temporary waivers
from its lenders relating to non-compliance with certain technical covenants,
including the 15 day paydown of the Revolver, the Tangible Net Worth
requirement and the Debt to Tangible Net Worth requirement. The aggregate
amount of the senior debt, totaling a maximum available amount of $121.8
million, including the Revolver and $56.5 million in outstanding long-term
notes (the"Notes") ranks pari pasu and is unsecured. 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 May 1, 1996 the Company entered into an agreement in principle with its
lenders to extend the maturity of its senior debt. The Company continues to
operate under temporary waivers from its lenders until final loan documents
are completed. The Company will be required to make principal repayments on
the Notes aggregating $15.6 million through May 31, 1998. The maximum
borrowings available on the Company's Revolver will be reduced an aggregate
total of $18.2 million by May 31, 1998. Final maturity of the then remaining
Notes of $40.9 million and the then available Revolver of $47.1 million is
July 31, 1998. Effective May 1, 1996, interest rates for the Revolver and the
Notes were increased from 10.5% to 11.0% and 11.5%, respectively.
The revised credit agreements contain restrictive provisions governing
dividends, capital expenditures and acquisitions, and modified covenants as to
working capital, cash flow, consolidated tangible net worth and debt to
tangible net worth to reflect the $35 million restructuring charge recorded in
1995.
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 1996, the Company had capital expenditures of
$0.8 million of planned total capital expenditures of approximately $12
million, net of construction allowances, for fiscal 1996. During the first
quarter, two stores were relocated and no new stores were opened. On a net
basis, retail square footage was reduced by 43,000 square feet since February
3, 1996. Capital expenditures and new store growth will continue to be
curtailed throughout 1996 while management's strategy continues to be
concentrated on closing underperforming stores and reducing outstanding debt.
Provision for Business Restructuring.
During the fourth quarter of 1995 the Company undertook a comprehensive
examination of store profitability and adopted a second business restructuring
plan which when combined with the 1994 restructuring charge included closing
over 300 stores out of 700 stores in operation during 1994. 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. This resulted in the Company recording a $35 million
pre-tax restructuring in 1995. The components of the restructuring charge
included approximately $24 million in reserves for future cash outlays and
approximately $11 million in asset writedowns. The cash outflows will be
financed from operating cash flows and liquidation of merchandise inventory
from the stores identified for closure. The timing of the store closures will
depend on the Company's ability to negotiate reasonable lease termination
agreements. Management will continually review the opportunity to accelerate
the closing of underperforming stores.
Seventeen stores were closed in the first quarter of 1996 bringing total
closures to 196 through the end of the first quarter of 1996. Asset
write-offs charged to the reserve account totaled $1.8 million in the first
quarter of 1996 and $11.0 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
$2.3 million in the first quarter of 1996 and $12.5 million since the
inception of the business restructuring plan.
Remaining cash outlays relating to lease obligations, termination benefits
and other expenditures are anticipated to total approximately $17.2 million in
fiscal 1996 and $3.2 million in fiscal 1997.
Annual sales associated with the stores closed in the first quarter of
1996 totaled $9.1 million in 1995. Because the store closures will be phased
out over 1996 and 1997, the Company will not receive most of the earnings or
cash flow benefits from the restructuring program until fiscal 1997.
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 13
(electronic filing only)
(B) Reports on Form 8-K.
On February 7, 1996 the Company filed a report on form 8-K
announcing a restructuring charge for closing underperforming
stores and extending debt agreements.
- -------------------------------------------------------------------------------
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
June 14, 1996 By: /s/ ROBERT J. HIGGINS
---------------------
Robert J. Higgins,
President and Director
(Principal Executive Officer)
June 14, 1996 By: /s/ JOHN J. SULLIVAN
---------------------
John J. Sullivan
Senior Vice President
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)