Second 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
AUGUST 2, 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,
9,846,509 shares outstanding as of August 29, 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 - August 2, 1997,
February 1, 1997 and August 3, 1996 3
Condensed Consolidated Statements of Income - Thirteen Weeks Ended
and Twenty-Six Weeks Ended August 2, 1997 and August 3, 1996 5
Condensed Consolidated Statements of Cash Flows - Twenty-Six Weeks
Ended August 2, 1997 and August 3, 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial
Conditions and Results of Operations 10
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 15
Signatures 15
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
August 2, February 1, August 3,
1997 1997 1996
--------- --------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,757 $ 54,771 $ 7,783
Merchandise inventory 151,563 163,509 168,718
Other current assets 10,037 14,654 20,534
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Total current assets 171,357 232,934 197,035
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VIDEOCASSETTE RENTAL INVENTORY, net 4,203 4,784 7,163
DEFERRED TAX ASSET 3,918 3,098 430
FIXED ASSETS:
Property, plant and equipment 168,729 169,292 169,273
Less: Fixed asset write-off reserve 6,500 7,571 10,430
Allowances for depreciation and amortization 99,911 96,747 93,401
--------- --------- ---------
62,318 64,974 65,442
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OTHER ASSETS 3,179 4,263 3,525
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TOTAL ASSETS $244,975 $310,053 $273,595
========= ========= =========
See Notes to Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
August 2, February 1, August 3,
1997 1997 1996
--------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 77,684 $118,980 $ 76,517
Notes payable 1,241 --- 19,813
Accrued expenses and other 7,073 9,403 7,686
Store closing reserve 10,549 13,747 17,152
Current portion of long-term debt
and capital lease obligations 93 9,557 5,465
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Total current liabilities 96,640 151,687 126,633
--------- --------- ---------
LONG-TERM DEBT, less current portion 35,000 43,983 46,024
CAPITAL LEASE OBLIGATIONS,
less current portion 6,459 6,507 6,553
OTHER LIABILITIES 6,889 6,514 5,300
--------- --------- ---------
TOTAL LIABILITIES 144,988 208,691 184,510
--------- --------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value; 5,000,000 shares
authorized; none issued) --- --- ---
Common stock ($.01 par value; 20,000,000 shares
authorized; 9,872,382, 9,809,594 and 9,731,208
shares issued respectively) 98 98 98
Additional paid-in capital 24,812 24,540 24,413
Treasury stock, at cost (40,394, 41,394
and 48,394 shares, respectively) (394) (407) (407)
Unearned compensation - restricted stock (210) (245) (162)
Retained earnings 75,681 77,376 65,143
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TOTAL SHAREHOLDERS' EQUITY 99,987 101,362 89,085
--------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $244,975 $310,053 $273,595
========= ========= =========
See Notes to Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Thirteen Weeks Ended Twenty-Six Weeks Ended
------------------------- -------------------------
August 2, August 3, August 2, August 3,
1997 1996 1997 1996
---------- ---------- ---------- ----------
Sales $105,024 $ 96,717 $214,536 $203,339
Cost of sales 65,497 62,101 135,746 131,554
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Gross profit 39,527 34,616 78,790 71,785
Selling, general and
administrative expense 35,708 31,666 71,056 66,363
Depreciation and amortization 3,643 3,527 7,228 7,180
--------- --------- --------- ---------
Income (Loss) from operations 176 (577) 506 (1,758)
Interest expense 1,543 3,106 3,285 6,143
--------- --------- --------- ---------
Loss before income taxes (1,367) (3,683) (2,779) (7,901)
Income tax expense benefit (533) (1,291) (1,084) (2,770)
--------- --------- --------- ---------
NET LOSS $ (834) $ (2,392) $ (1,695) $ (5,131)
========= ========= ========= =========
LOSS PER SHARE $ (0.09) $ (0.25) $ (0.17) $ (0.53)
========= ========= ========= =========
Weighted average number of
common shares outstanding 9,806 9,739 9,788 9,737
========= ========= ========= =========
See Notes to Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Twenty-Six Weeks Ended
-------------------------
August 2, August 3,
1997 1996
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---------- ----------
NET CASH USED BY OPERATING ACTIVITIES: $(23,559) $(26,908)
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INVESTING ACTIVITIES:
Acquisition of property and equipment (5,102) (2,951)
Disposal(Purchase) of videocassette
rental inventory, net 581 (441)
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Net cash used by investing activities (4,521) (3,392)
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FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 35,000 ---
Payments of long-term debt and capital
lease obligations (53,495) (3,520)
Net increase(decrease) in revolving
line of credit 1,241 (45,447)
Proceeds from issuance of common stock --- 1
Increase in additional paid-in capital 272 177
Decrease in treasury stock due to
reissuance of shares 13 96
Decrease(Increase) unearned compensation from
issuance of shares of restricted stock 35 (162)
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Net cash used by financing activities (16,934) (48,855)
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Net decrease in cash and cash equivalents (45,014) (79,155)
Cash and cash equivalents, beginning of period 54,771 86,938
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Cash and cash equivalents, end of period $ 9,757 $ 7,783
========== ==========
See Notes to Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO 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.
These interim condensed financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. The
information furnished in these condensed 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 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 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.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 2. Restructuring Charge (cont'd)
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 August 2, 1997 are
outlined below (in thousands):
Balance Charges against Balance
as of the Reserve as of
02/01/97 1st Qtr 2nd Qtr 08/02/97
-------- -------- -------- ---------
Non-cash write-offs $ 7,671 $ 445 $ 855 $ 6,371
Cash outflows 13,647 2,311 658 10,678
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Total $ 21,318 $ 2,756 $ 1,513 $ 17,049
======== ======== ======== =========
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-diltive impact on the loss per share.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 5. Recently Issued Accounting Standards
Financial Accounting Standards Board Statement No. 128, "Earnings per Share"
("Statement No. 128"), issued in February 1997 and effective for fiscal years
ending after December 15, 1997, establishes and simplifies standards for
computing and presenting earnings per share ("EPS"). Implementation of
Statement No. 128 will not have a material impact on the Company's computation
or presentation of EPS, as the Company's common stock equivalents either have
had no material effect on EPS amounts or have been anti-dilutive with respect
to losses.
Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income" ("Statement No. 130"), issued in June 1997 and effective
for fiscal years beginning after December 15, 1997, establishes standards for
reporting and display of the total of net income and the components of all
other nonowner changes in equity, or comprehensive income, either below net
income(loss) in the statement of operations, in a separate statement of
comprehensive income(loss) or within the statement of changes of stockholders'
equity. The Company has had no significant items of other comprehensive
income.
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
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Thirteen Weeks Ended August 2, 1997
Compared to the Thirteen Weeks Ended August 3, 1996
Sales. Total sales increased 8.6% to $105.0 million for the thirteen weeks
ended August 2, 1997 compared to $96.7 million for the same period last year.
The Company operated 35 fewer stores in 1997 than in 1996, a decrease of
approximately 83,000 square feet of retail selling space. The increase in
total sales is due to the comparable sales increase of 8.7%, which is measured
against last year's 3.4% increase and is the Company's sixth consecutive
quarter of comparable store sales growth.
Comparable store sales in the Company's music stores increased 9.1% while
comparable sales in the video stores increased 6.6%.
Gross Profit. Gross profit as a percentage of sales improved to 37.6% from
35.8% in the thirteen week period ended August 2, 1997 compared to the same
period in 1996. The increase is due to a higher initial markon and lower
markdowns in the quarter.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("S,G&A"), expressed as a percentage of sales,
increased from 32.7% to 34.0% in the thirteen week period ended August 2, 1997
when compared to the same period in 1996. The 1996 percentage includes the
receipt of $2.5 million upon the termination of a business development
agreement which was recorded as a reduction of S,G&A. Excluding the receipt of
$2.5 million, S,G&A as a percentage of sales improved in 1997 from 35.3% in
1996 as the Company continues to leverage its operating expenses against
sales.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Interest Expense. Net interest expense was reduced to $1.5 million in the
thirteen week period ended August 2, 1997 from $3.1 million in 1996. The
decrease is due to a reduction of approximately $35 million of total debt,
compared to the second quarter of 1996 and reduced interest rates during the
last month of the quarter which is the result of the complete refinancing of
the Company's debt, completed on July 9, 1997.
Net Loss. The Company reduced its net loss to $0.8 million for the thirteen
weeks ended August 2, 1997 from a net loss of $2.4 million for the same period
in 1996. The 1996 loss includes the receipt of $2.5 million upon the
termination of a business development agreement. Excluding the receipt of
$2.5 million the Company's net loss in 1996 would have been $4.0 million. The
improved bottom line performance can be attributed to the comparable store
sales increase, improved gross margin rates, leverage of SG&A expense and
lower interest expense.
Twenty-Six Weeks Ended August 2, 1997
Compared to the Twenty-Six Weeks Ended August 3, 1996
Sales. The Company's total sales increased 5.5% to $214.5 million for the
twenty-six weeks ended August 2, 1997 compared to $203.3 million for the same
period last year, while operating 35 fewer stores. The increase in sales is
due to enhanced merchandising and marketing initiatives combined with an
overall improvment in the music and video specialty retail industry.
Comparable store sales increased by 6.9% which is measured against last year's
4.8% increase.
Comparable store sales in the Company's music stores increased approximately
7.3% while comparable sales in the video stores increased 5.7%.
Gross Profit. Gross profit as a percentage of sales improved to 36.7% from
35.3% in the first half of 1997, compared to 1996. The increase is due to
a higher initial markon and higher purchase discounts combined with a greater
percentage of higher margin catalog sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("S,G&A"), as a percentage of sales, increased to
33.1% in the first half of 1997 from 32.6% in the first half of 1996. The
1996 percentage includes the receipt of $2.5 million upon the termination of a
business development agreement which, was recorded as a reduction of S,G&A.
Excluding the receipt of $2.5 million, S,G&A as a percentage of sales improved
in 1997 from 33.8% in 1996 as the Company continues to leverage its operating
expenses against sales.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
Interest Expense. Net interest expense was reduced to $3.3 million in the
twenty-six week period ended August 2, 1997 from $6.1 million for the
twenty-six week period ending August 3, 1997. The decrease is due to a
reduction of approximately $86 million of total debt since the beginning of
1996.
Net Loss. The Company reduced its net loss to $1.7 million in the twenty-six
weeks ended August 2, 1997 from a net loss of $5.1 million during the same
period last year. The 1996 loss includes the receipt of of $2.5 million upon
the termination of a business development agreement. Excluding the receipt of
$2.5 million the Company's net loss in 1996 would have been $6.8 million. The
improved bottom line performance can be attributed to the comparable store
sales increase, improved gross margin rates, leverage of SG&A expense 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 generated from earnings continued to
be the Company's primary source of liquidity during the first half of the
fiscal year. The Company had unused lines of credit aggregating $63.8
million, at August 2, 1997.
The Company's working capital at August 2, 1997 was $74.7 million and its
ratio of current assets to current liabilities was 1.8 to 1. During the first
half of 1997, the Company's net cash used by operations was $23.6 million,
compared to $26.9 million used in the first half of 1996. The most
significant uses of cash during the period were $41.3 million in normal
reductions of accounts payable, $17.2 million in total debt reduction and $5.5
million relating to the reduction of accrued expenses and store closing
reserves.
On July 9, 1997, the Company finalized a new Loan and Security Agreement with
Congress Financial Corporation. The new agreement replaced the Company's
existing debt by making $100 million available to the Company under a new
revolving credit facility, at favorable financing terms.
CAPITAL EXPENDITURES
- --------------------
During the twenty-six weeks ended August 2, 1997, the Company had capital
expenditures of $5.1 million out of a total of $12 million, net of
construction allowances, planned for the year. During the first half of 1997
the Company has opened or relocated 19 new stores and closed 30 stores while
total retail selling space has declined slightly. While the Company is
closing more stores than it is opening it anticipates that total retail
footage for the year will increase as the average size of new stores continues
to increase.
On August 4, 1997 the Company announced the signing of a Letter of Intent to
acquire Strawberries Inc., a privately-held retailer of pre-recorded music and
video, based in Milford, MA. Final closing of the acquisition is subject to
the approval of the U.S. District Court and the signing of a definitive
agreement.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
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. Through the first half of 1997, the Company has closed or
relocated a total of 294 stores that were performing below financial
expectations. The Company continues to monitor the financial performance of
it's stores and continues to close underperforming stores. The restructuring
is expected to be substantially complete in the next twelve months 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 half of 1997, the Company has
reduced it's investment in inventory to $152 million compared to $169 million
last year. It also reduced total debt to $36 million from $71 million in
1996.
PART II. OTHER INFORMATION
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits
Exhibit No. Description Page No.
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Trans World Entertainment Corporation
10.1 Loan and Security Agreement 15
27 Financial Data Schedule
News Release - Letter of Intent to
99.1 acquire Strawberries Inc. 93
(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
September 16, 1997 By: /s/ ROBERT J. HIGGINS
--------------------------
Robert J. Higgins
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
September 16, 1997 By: /s/ JOHN J. SULLIVAN
-------------------------
John J. Sullivan
Senior Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)