- -----------------------------------------------------------------------------
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 AUGUST 3, 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 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 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, 9,740,314 shares outstanding as of September 7,
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 -- August 3, 1996,
February 3, 1996 and July 29, 1995 3
Condensed Consolidated Statements of Income -- Thirteen
Weeks and Twenty-Six Weeks Ended August 3, 1996
and July 29, 1995 4
Condensed Consolidated Statements of Cash Flows --
Twenty-Six Weeks Ended August 3, 1996 and July 29, 1995 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 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
August 3, February 3, July 29,
1996 1996 1995
-------- ----------- --------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 7,783 $ 86,938 $ 8,248
Merchandise inventory 168,718 194,577 207,640
Refundable income taxes --- 8,308 ---
Deferred tax asset 8,465 8,465 9,596
Other current assets 12,069 11,008 12,635
-------- -------- --------
Total current assets 197,035 309,296 238,119
-------- -------- --------
VIDEOCASSETTE RENTAL INVENTORY, NET 7,163 6,722 7,762
DEFERRED TAX ASSET 430 430 505
FIXED ASSETS:
Property, plant and equipment 169,273 171,716 176,137
Less: Fixed asset write-off reserve 10,430 12,324 6,934
Accumulated depreciation
and amortization 93,401 89,391 88,041
-------- -------- --------
65,442 70,001 81,162
-------- -------- --------
OTHER ASSETS 3,525 3,882 4,025
-------- -------- --------
TOTAL ASSETS $273,595 $390,331 $331,573
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 76,517 $131,302 $ 70,778
Notes payable 19,813 65,260 65,214
Accrued expenses and other 7,686 6,266 5,360
Store closing reserve 17,152 24,275 5,374
Current portion of long-term
debt and capital leases 5,465 3,420 4,183
-------- -------- --------
Total current liabilities 126,633 230,523 150,909
-------- -------- --------
LONG-TERM DEBT, less
current portion 46,024 53,770 59,716
CAPITAL LEASE OBLIGATIONS,
less current portion 6,553 6,594 6,611
OTHER LIABILITIES 5,300 5,340 5,075
-------- -------- --------
TOTAL LIABILITIES 184,510 296,227 222,311
-------- -------- --------
SHAREHOLDERS' EQUITY
Common stock ($.01 par value;
20,000,000 shares authorized;
9,781,708, 9,731,208 and
9,731,208 issued, respectively) 98 97 97
Additional paid-in capital 24,413 24,236 24,236
Treasury stock, at cost (41,394,
48,394 & 48,394 shares,
respectively) (407) (503) (503)
Unearned compensation - restricted stock (162) --- ---
Retained earnings 65,143 70,274 85,432
-------- -------- --------
Total shareholders' equity 89,085 94,104 109,262
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $273,595 $390,331 $331,573
======== ======== ========
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
----------------------
August 3, July 29,
1996 1995
-------- --------
Sales $96,717 $104,292
Cost of sales 62,101 68,977
-------- --------
Gross profit 34,616 35,315
Selling, general and administrative expenses 31,666 37,558
Depreciation and amortization 3,527 4,110
-------- --------
Loss from operations (577) (6,353)
Interest expense 3,106 3,845
-------- --------
Loss before income tax benefit (3,683) (10,198)
Income tax benefit (1,291) (4,069)
-------- --------
NET LOSS ($2,392) ($6,129)
======== ========
LOSS PER SHARE ($0.25) ($0.63)
======== ========
Weighted average number of common
shares outstanding 9,739 9,733
======== ========
Twenty-Six Weeks Ended
-----------------------
August 3, July 29,
1996 1995
-------- --------
Sales $203,339 $216,204
Cost of sales 131,554 141,235
-------- --------
Gross profit 71,785 74,969
Selling, general and administrative expenses 66,363 76,291
Depreciation and amortization 7,180 8,355
-------- --------
Loss from operations (1,758) (9,677)
Interest expense 6,143 7,319
-------- --------
Loss before income tax benefit (7,901) (16,996)
Income tax benefit (2,770) (6,781)
-------- --------
NET LOSS ($5,131) ($10,215)
======== ========
LOSS PER SHARE ($0.53) ($1.05)
======== ========
Weighted average number of common
shares outstanding 9,737 9,726
======== ========
See Notes to Condensed Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Twenty-Six Weeks Ended
-----------------------
August 3, July 29,
1996 1995
-------- --------
NET CASH USED BY OPERATING ACTIVITIES ($26,812) ($65,513)
------- -------
INVESTING ACTIVITIES:
Acquisition of property and equipment (2,951) (3,758)
Purchases of videocassette rental
inventory, net of amortization (441) (290)
------- -------
Net cash used by investing activities (3,392) (4,048)
------- -------
FINANCING ACTIVITIES:
Net increase (decrease) in revolving line of credit (45,447) (9,733)
Payments of long-term debt and capital
lease obligations (3,520) (2,549)
Other 16 ---
------- -------
Net cash used by financing activities (48,951) (12,282)
------- -------
Net decrease in cash and cash equivalents (79,155) (81,843)
Cash and cash equivalents, beginning of period 86,938 90,091
------- -------
Cash and cash equivalents, end of period $ 7,783 $ 8,248
======= =======
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 were 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 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 fiscal 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 includes estimated legal, lender, and consulting fees, including
those that the Company was obligated to pay on behalf of its lenders while it
worked to renegotiate its credit agreements.
Total costs charged to the restructuring reserves during the first half of
1996 are summarized as follows:
First First Second Second
Quarter Quarter Quarter Quarter
Beginning Charges Charges Ending
Reserve Against Against Reserve
Balance Reserve Reserve Balance
-------------------------------------------
(in thousands)
Non-cash write-offs $13,906 $ 1,810 $ 1,139 $10,957
Cash outflows 22,693 2,300 3,768 16,625
------------------------------------------
Total $36,599 $ 4,110 $ 4,907 $27,582
==========================================
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 fiscal
years, the fourth 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, 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
The following is an analysis of the Company's results of operations, liquidity
and capital resources. To the extent that such analysis contains statements
which are not of a historical nature, such statements are forward-looking
statements, which involve risks and uncertainties. These risks include, but
are not limited to, changes in the competitive environment for the Company's
products, including the entry or exit of non-traditional retailers of the
Company's products to or from its markets; the release by the music industry
of an increased or decreased number of "hit releases"; general economic
factors in markets where the Company's products are sold; and other factors
discussed in the Company's filings with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
Thirteen Weeks Ended August 3, 1996 (Second Quarter 1996) Compared to Thirteen
Weeks Ended July 29, 1995 (Second Quarter 1995)
- ------------------------------------------------------------------------------
Sales. The Company's total sales declined $7.6 million or 7.3% for the
second quarter ended August 3, 1996 compared to the second quarter ended July
29, 1995. The decrease in sales is due to the Company operating approximately
20% fewer stores offset by a comparable store sales increase of 3.4%. During
the past 12 months, the Company opened 2 stores and closed 119 stores,
resulting in a 347,000 net decrease in square footage to 2.0 million square
feet in operation.
Comparable store sales in the mall division increased 1.9% and comparable
store sales in the non-mall division increased 8.0%. The Company's video
rental stores had a 1.0% comparable sales decline.
Gross Profit. Gross profit as a percentage of sales increased to 35.8% in
the second quarter ended August 3, 1996, from 33.9% in the second quarter
ended July 29, 1995. The increase in the gross margin rate is due to an
improved merchandise mix, offset in part by increased merchandise shrink.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") as a percentage of sales decreased to 32.7%
in the second quarter of 1996, from 36.0% in the second quarter of 1995. The
increase in comparable store sales, closing of underperforming stores and
receipt of $2.5 million upon the termination of a business development
agreement led to the $5.9 million decrease in SG&A expenses.
Interest Expense. Interest expense decreased $0.7 million in the second
quarter ended August 3, 1996 compared to the second quarter ended July 29,
1995 due to a decrease in the weighted average outstanding borrowings
partially offset by an increase in the Company's weighted average interest
rates.
Net Loss. The $2.4 million net loss for the second quarter ended August
3, 1996 compares to a $6.1 million net loss in the second quarter ended July
29, 1995. The $3.7 million reduction in the loss for the quarter is due to
the comparable store sales increase, higher gross margin rate, lower SG&A
expenses and lower interest expense.
Twenty-Six Weeks Ended August 3, 1996 Compared to Twenty-Six Weeks Ended July
29, 1995
- ------------------------------------------------------------------------------
Sales. The Company's sales decreased by $12.9 million or 6.0% in the
first half of 1996 compared to the first half of 1995 while the Company
operated approximately 20% fewer stores. During the first half of the year,
comparable store sales increased 4.8%.
Gross Profit. Gross profit as a percentage of sales increased to 35.3% in
the second quarter ended August 3, 1996, from 34.7% in the second quarter
ended July 29, 1995. The increase in the gross margin rate is due to an
improved merchandise mix, offset in part by increased merchandise shrink.
Selling, General and Administrative Expenses. SG&A as a percentage of
sales decreased to 32.6% in the first half of 1996 from 35.3% in the first
half of 1995. The $9.9 million decrease in SG&A was due to the increase in
comparable store sales, closing of underperforming stores and receipt of $2.5
million upon the termination of a business development agreement.
Interest Expense. Interest expense decreased $1.2 million in the first
half of 1996 compared to the first half of 1995. The decrease was due to a
decrease in the weighted average outstanding borrowings partially offset by an
increase in the Company's weighted average interest rates.
Net Loss. The $5.1 million net loss for the first half of 1996 compares
to a $10.2 million net loss in the first half of 1995. The $5.1 million
reduction in the loss for the first half is due to the comparable store sales
increase, higher gross margin rate, lower SG&A expenses and lower interest
expense.
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. Cash used by operating and investing
activities in the first half of the fiscal year were financed through
borrowings under the Company's revolving credit facilities, which permit
aggregate borrowings of up to $61.2 million.
The Company's cash flow from operating activities typically decreases
significantly during the second quarter and year-to-date periods due to
repayments of accounts payable and lower sales volume at this time of year.
During the first half of 1996 the Company's cash flow used by operations was
$26.8 million, compared to $65.5 million in the first half of 1995. The most
significant uses of cash in the period were the $54.8 million in normal
reductions of accounts payable and $6.1 million of expenditures relating to
the Company's underperforming store closing program. Cash flow from the
reduction of merchandise inventory was $25.9 million in the first half of
1996.
The level of the revolving credit facilities is considered adequate to
finance the seasonally higher inventory requirements in the second half of the
year. At fiscal year end 1996 and through the first half of fiscal 1997,
inventory reduction will continue due to the additional store closings. The
Company is currently in compliance with all covenants under its credit and
long-term note agreements as of and for the period ended August 3, 1996.
CAPITAL EXPENDITURES
During the second quarter of 1996, the Company had capital expenditures of
$2.2 million. Total capital expenditures for the first half of 1996 were $3.0
million out of a planned fiscal 1996 capital expenditure budget of
approximately $12.0 million, net of construction allowances. During the first
half of 1996 two stores were relocated and no new stores were opened. Capital
expenditures and new store growth will continue to be curtailed throughout
1996 while management's strategy continues to be focused 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 electroncis 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 charge 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.
Twenty-six stores were closed in the second quarter of 1996, bringing the
total number of closures to 222 through the end of the second quarter of 1996.
Annual sales associated with the stores closed in the second quarter of 1996
totaled $13.1 million in 1995. Because the remaining 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 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
The Company's 1996 Annual Meeting of Shareholders was held on June 5,
1996. At the meeting, all of management's nominees for directors were
elected to the Board of Directors.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(A) Exhibits
Exhibit No. Description Page No.
----------- ----------- --------
4.1 Amended and Restated Note Agreement among the Company and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Oaktree
Capital Management, LLC, as agent and on behalf of certain
funds and accounts, Fernwood Associates, L.P., Fernwood
Restructuring, Ltd. and Internationale Nederlanden (U.S.)
Capital Corporation
4.2 Amended and Restated Note Agreement among the Company and
Merrill Lynch, Pierce, Fenner & Smith Incorporated
4.3 Form of Amended and Restated Revolving Credit Agreement
entered into among the Company and each of NBD Bank, Bear,
Stearns & Co., Inc., Banco Santander Trust & Banking
Corporation (Bahamas) Ltd. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated
(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
September 17, 1996 By: /s/ ROBERT J. HIGGINS
---------------------
Robert J. Higgins
President and Director
(Principal Executive Officer)
September 17, 1996 By: /s/ JOHN J. SULLIVAN
--------------------
John J. Sullivan
Senior Vice President - Finance
Chief Financial Officer
(Chief Financial and
Accounting Officer)