First Quarter Filing on Form 10-Q
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 3, 1997
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT FOR THE TRANSITION PERIOD
FROM ............ TO ............
COMMISSION FILE NUMBER: 0-14818
TRANS WORLD ENTERTAINMENT CORPORATION
-------------------------------------
(Exact name of registrant as specified in its charter)
New York 14-1541629
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(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,
9,782,577 shares outstanding as of May 31, 1997
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Form 10-Q
Page No.
PART 1. FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
at May 3, 1997, February 1, 1997
and May 4, 1996 3
Condensed Consolidated Statements of Income
- Thirteen Weeks Ended May 3, 1997 and May 4, 1996 5
Condensed Consolidated Statements of Cash Flows - Thirteen
Weeks Ended ended May 3, 1997 and May 4, 1996 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 12
Signatures 12
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
May 3, February 1, May 4,
1997 1997 1996
--------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $10,303 $54,771 $50,655
Merchandise inventory 159,699 163,509 180,205
Other current assets 9,691 14,654 22,164
--------- --------- ---------
Total current assets 179,693 232,934 253,024
VIDEOCASSETTE RENTAL INVENTORY, net 4,626 4,784 6,862
DEFERRED TAX ASSET 3,455 3,098 430
FIXED ASSETS:
Property, plant and equipment 169,906 169,292 170,564
Less: Fixed asset write-off reserve 7,303 7,571 11,522
Allowances for depreciation
and amortization 99,645 96,747 92,144
--------- --------- ---------
62,958 64,974 66,898
--------- --------- ---------
OTHER ASSETS 3,363 4,263 3,752
--------- --------- ---------
TOTAL ASSETS $254,095 $310,053 $330,966
========= ========= =========
See Notes to Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share amounts)
(unaudited)
May 3, February 1, May 4,
1997 1997 1996
--------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $75,124 $118,980 $78,826
Notes payable --- --- 65,260
Accrued expenses and other 7,729 9,403 5,368
Store closing reserve 11,259 13,747 20,967
Current portion of long-term debt
and capital lease obligations 4,733 9,557 10,239
--------- --------- ---------
Total current liabilities 98,845 151,687 180,660
LONG-TERM DEBT, less current portion 41,691 43,983 46,953
CAPITAL LEASE OBLIGATIONS,
less current portion 6,484 6,507 6,574
OTHER LIABILITIES 6,537 6,514 5,355
--------- --------- ---------
TOTAL LIABILITIES 153,557 208,691 239,542
--------- --------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value; 5,000,000
shares authorized; none issued) --- --- ---
Common stock ($.01 par value; 20,000,000
shares authorized; 9,815,081, 9,809,594
and 9,731,208 shares issued, respectively) 98 98 98
Additional paid-in capital 24,561 24,540 24,446
Treasury stock, at cost (41,394, 41,394
and 48,394 shares, respectively) (407) (407) (475)
Unearned compensation - restricted stock (228) (245) (180)
Retained earnings 76,514 77,376 67,535
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 100,538 101,362 91,424
--------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $254,095 $310,053 $330,966
========= ========= =========
</TABLE.
See Notes to Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share amounts)
(unaudited)
Thirteen Weeks Ended
May 3, May 4,
1997 1996
--------- --------
Sales $109,512 $106,622
Cost of sales 70,248 69,453
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Gross Profit 39,264 37,169
Selling, general and
administrative expenses 35,349 34,697
Depreciation and amortization 3,586 3,653
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Income (Loss) from operations 329 (1,181)
Interest expense 1,742 3,037
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Loss before income taxes (1,413) (4,218)
Income tax expense benefit (551) (1,479)
--------- --------
NET LOSS ($862) ($2,739)
========= ========
LOSS PER SHARE ($0.09) ($0.28)
========= ========
Weighted average number
of common shares outstanding 9,770 9,734
========= ========
See Notes to Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(unaudited)
Thirteen Weeks Ended
May 3, May 4,
1997 1996
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NET CASH USED BY OPERATING ACTIVITIES ($35,695) ($35,396)
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INVESTING ACTIVITIES:
Acquisition of property and equipment (1,830) (788)
Purchases of videocassette rental inventory, net 158 (140)
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Net cash used by investing activities (1,672) (928)
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FINANCING ACTIVITIES:
Payments of long-term debt and
capital lease obligations (7,139) (18)
Proceeds from issuance of common stock --- 1
Increase in additional paid-in capital 21 210
Decrease in treasury stock due to reissuance of shares --- 28
Unearned compensation from issuance of shares of
restricted stock 17 (180)
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Net cash (used by) provided by financing activities (7,101) 41
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Net decrease in cash and cash equivalents (44,468) (36,283)
Cash and cash equivalents, beginning of period 54,771 86,938
-------- --------
Cash and cash equivalents, end of period $10,303 $50,655
======== ========
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Basis of Presentation
The accompanying unaudited 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 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 reflect 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 the 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 1, 1997.
Note 2. Restructuring Charge
In order to streamline operations and close unprofitable store locations, the
Company recorded pre-tax restructuring charges of $35 million in 1995 and $21
million 1994. The restructuring charges include the write-down of assets,
estimated cash payments to landlords for the early termination of operating
leases and the cost for 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 working to renegotiate its credit agreements.
In determining the components of the reserves, management analyzed all of the
aspects of closing stores and the costs that are incurred. An analysis of the
amounts comprising the restructuring reserve and the charges against the
reserve for the period from February 1, 1997 through May 3, 1997 are outlined
below (in thousands):
Balance Charges Balance
as of against as of
2/1/97 Reserve 5/3/97
-------- -------- --------
Total non cash write-offs $7,671 $445 $7,226
Cash outflows 13,647 2,311 11,336
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$21,318 $2,756 $18,562
======== ======== ========
Note 3. Seasonality
The Company's business is seasonal in nature, with the highest sales and
earnings occurring in the fourth fiscal 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, 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
PART 1. FINANCIAL INFORMATION
Item 2 - 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 May 3, 1997
Compared to the Thirteen Weeks Ended May 4, 1996
Sales. The Company's total sales increased 2.7% to $109.5 million for the
thirteen weeks ended May 3, 1997 compared to $106.6 million for the same
period last year while the Company operated 49 fewer stores, representing a
decrease of 108,000 square feet of retail selling space. The increase in
sales is primarily due to a 5.3% comparable store sales increase, which is
measured against last year's 6.1% increase, representing the Company's fifth
consecutive quarter of comparable store sales growth.
Comparable store sales in the Company's music stores increased approximately
5.8% while comparable sales in the video stores increased 0.6% and is offset
by a slight decrease in video rental store sales.
Gross Profit. Gross profit as a percentage of sales improved to 35.9% from
34.9% in the thirteen week period ended May 3, 1997 compared to the same
period in 1996. The increase is due to a greater percentage of higher margin
catalog sales and higher purchase discounts received from vendors.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("S,G&A"), as a percentage of sales, decreased from
32.5% to 32.3% in the thirteen week period ended May 3, 1997 when compared to
the same period in 1996. The improvement is primarily due to a reduction of
store occupancy costs as a percentage of sales. The Company continues to
leverage its operating expenses against sales.
Interest Expense. Net interest expense was reduced from $3.0 million in the
thirteen week period ended May 4, 1996 to $1.7 million for the thirteen week
period ending May 3, 1997. The decrease is due to a reduction of
approximately $32 million of total debt. The Company had no
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of
Operations (continued)
outstanding borrowings under its revolving line of credit, at quarter end, for
the first time since before its initial public offering in 1986.
Net Loss. The Company reduced its net loss to $0.9 million in the thirteen
weeks ended May 3, 1997 from a net loss of $2.8 million during the same period
last year. The improved bottom line performance can be attributed to the
comparable store sales increase, improved gross margin rates, leverage of
S,G&A expenses and lower interest expense.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Liquidity and Sources of Capital. Cash generated from earnings was the
Company's primary source of liquidity during the first thirteen weeks of the
fiscal year. The Company had unused lines of credit aggregating $53.5
million, at quarter end.
The Company's working capital at May 3, 1997 was $80.8 million and its ratio
of current assets to current liabilities was 1.8 to 1. During the first three
months of 1997, the Company's net cash used by operations was $35.7 million,
compared to $35.4 million used in the first three months of 1996. The most
significant uses of cash during the period were $43.9 million in normal
reductions of accounts payable, $7.1 million in total debt reduction and $4.2
million relating to the reduction of accrued expenses and store closing
reserves.
The Company is in compliance with all convenants under its line of credit and
long-term note agreements as of and for the period ended May 3, 1997. The
Company has tentatively agreed to refinance it's existing debt. The new
agreement will replace the existing debt by making $100 million available to
the Company at favorable financing terms. Under the terms of the new
agreement, based on current borrowing levels, the Company would save up to
$2.5 million in annual interest charges.
CAPITAL EXPENDITURES
- --------------------
During the first quarter of 1997, the Company had capital expenditures of $1.8
million out of a total of $12 million, net of construction allowances, planned
for the year. Also during the quarter, the Company opened or relocated 7 new
stores and closed 8 stores while total retail selling space remained
unchanged. The Company plans on opening approximately the same number of
stores in fiscal 1997 as it closes but anticipates that total retail footage
will increase as the average size of new stores continues to increase.
PROVISION FOR BUSINESS RESTRUCTURING
- ------------------------------------
The Company is experiencing the earnings and cash flow benefits which are the
result of a comprehensive business restructuring plan that began in the 4th
quarter of 1994.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Through the first quarter of 1997, the Company has closed or relocated a total
of 272 stores that were performing below financial expectations. The Company
continues to monitor the financial performance of its stores and continues to
close underperforming stores, closing 8 stores during the quarter, while
opening or relocating 7 stores. The Company expects to close approximately 75
stores throughout 1997. The restructuring is expected to be complete in 1997
and the Company will open new stores that meet its standards for projected
sales and profitability.
Additionally, the restructuring has allowed the Company to achieve key
financial efficiencies. Through the first quarter of 1997, the Company has
reduced it's investment in inventory to $160 million compared to $180 million
last year. It also reduced total debt to $46 million from $78 million in
1996.
PART II-OTHER INFORMATION
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits
Exhibits No Description Page No
10.1 Trans World Entertainment
Corporation Supplemental
Executive Retirement Plan
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 to the periods covered.
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 17, 1997 By: /s/ ROBERT J. HIGGINS
-------------------------
Robert J. Higgins
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
June 17, 1997 By: /s/ JOHN J. SULLIVAN
------------------------
John J. Sullivan
Senior Vice President-Finance
and Chief Financial Officer
(Chief Financial and Accounting Officer)