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 2, 1998
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
-------- ----------
(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 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,
21,674,012 shares outstanding as of May 30, 1998
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 2, 1998,
January 31, 1998 and May 3, 1997 3
Condensed Consolidated Statements of Income - Thirteen Weeks
Ended May 2, 1998 and May 3, 1997 5
Condensed Consolidated Statements of Cash Flows - Thirteen
Weeks Ended ended May 2, 1998 and May 3, 1997 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 4 - Submission of Matters of Vote of Security Holders 11
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 12
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANACIAL INFORMATION
Item 1 - Financial Statements (unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
May 2, January 31, May 3,
1998 1998 1997
--------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $20,275 $94,732 $10,303
Merchandise inventory 189,902 189,394 159,699
Other current assets 6,099 6,224 9,691
---------------------------------
Total current assets 216,276 290,350 179,693
---------------------------------
VIDEOCASSETTE RENTAL INVENTORY, net 4,022 4,099 4,626
DEFERRED TAX ASSET 5,429 4,726 3,455
FIXED ASSETS:
Property, plant and equipment 179,379 175,506 169,906
Less: Fixed asset write-off reserve 4,223 4,279 7,303
Allowances for depreciation
and amortization 103,902 101,595 99,645
---------------------------------
71,254 69,632 62,958
---------------------------------
OTHER ASSETS 2,814 2,776 3,363
---------------------------------
TOTAL ASSETS $299,795 $371,583 $254,095
=================================
See Notes to Condensed Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
May 2, January 31, May 3,
1998 1998 1997
--------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $100,243 $162,981 $75,124
Income taxes payable 1,969 11,155 ---
Accrued expenses and other 12,218 17,347 7,729
Store closing reserve 8,220 8,691 11,259
Current deferred taxes 604 224 ---
Current portion of long-term debt
and capital lease obligations 96 99 4,733
---------------------------------
Total current liabilities 123,350 200,497 98,845
---------------------------------
LONG-TERM DEBT, less current portion --- 35,000 41,691
CAPITAL LEASE OBLIGATIONS,
less current portion 6,389 6,409 6,484
OTHER LIABILITIES 7,142 6,712 6,537
---------------------------------
TOTAL LIABILITIES 136,881 248,618 153,557
---------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value;
5,000,000 shares authorized;
none issued) --- --- ---
Common stock ($.01 par value;
50,000,000 shares authorized;
21,423,150, 19,815,357 and
19,630,162 shares issued,
respectively) 214 198 196
Additional paid-in capital 62,686 25,386 24,463
Treasury stock, at cost (70,288,
70,788 and 72,788 shares
respectively) (390) (394) (407)
Unearned compensation -
restricted stock (158) (175) (228)
Retained earnings 100,562 97,950 76,514
----------------------------------
TOTAL SHAREHOLDERS' EQUITY 162,914 122,965 100,538
----------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $299,795 $371,583 $254,095
==================================
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 2, May 3,
1998 1997
------------------------
Sales $145,062 $109,512
Cost of sales 92,605 70,248
------------------------
Gross profit 52,457 39,264
------------------------
Selling, general and administrative expenses 43,291 35,349
Depreciation and amortization 4,043 3,586
------------------------
Income from operations 5,123 329
Interest expense 841 1,742
------------------------
Income (loss) before income taxes 4,282 (1,413)
Income tax expense (benefit) 1,670 (551)
------------------------
NET INCOME (LOSS) 2,612 ($862)
========================
BASIC EARNINGS (LOSS) PER SHARE $0.13 ($0.04)
========================
Weighted average number of
common shares outstanding 19,827 19,540
========================
DILUTED EARNINGS (LOSS) PER SHARE $0.12 ($0.04)
========================
Adjusted weighted average number of
common shares outstanding 21,334 19,540
========================
See Notes to Condensed Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Thirteen Weeks Ended
May 2, May 3,
1998 1997
-----------------------
NET CASH USED BY OPERATING ACTIVITIES ($70,882) ($35,695)
-----------------------
INVESTING ACTIVITIES:
Acquisition of property and equipment (5,965) (1,830)
Disposals of rental inventory, net 77 158
-----------------------
Net cash used by investing activities (5,888) (1,672)
-----------------------
FINANCING ACTIVITIES:
Payments of long-term debt and
capital lease obligations (35,024) (7,139)
Proceeds from issuance of common stock 36,772 ---
Exercise of stock options 544 21
Decrease in treasury stock due
to reissuance of shares 4 ---
Unearned compensation from issuance of shares of
restricted stock 17 17
-----------------------
Net cash provided (used) by financing activities 2,313 (7,101)
-----------------------
Net decrease in cash and cash equivalents (74,457) (44,468)
Cash and cash equivalents, beginning of period 94,732 54,771
-----------------------
Cash and cash equivalents, end of period $20,275 $10,303
=======================
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 financial statements consist of Trans
World Entertainment Corporation and its subsidiaries, (the
"Company"), all of which are wholly owned. All significant
inter-company 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
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
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 January 31, 1998.
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. An analysis of the
amounts comprising the restructuring reserve and the charges
against the reserve for the period from January 31, 1998 through
May 2, 1998 are outlined below (in thousands):
Balance Charges Balance
as of against as of
1/31/98 the Reserve 5/2/98
-----------------------------------------
Total non cash
write-offs $4,126 $56 $4,070
Cash outflows 8,844 471 8,373
-----------------------------------------
$12,970 $527 $12,443
=========================================
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share," which was effective for the Company for
fiscal year 1997. This standard requires the Company to disclose
basic earnings per share and diluted earnings per share. Basic
earnings per share is calculated by dividing net income by the
weighted average common shares outstanding. Diluted earnings per
share is calculated by dividing net income by the sum of the
weighted average shares and additional common shares that would
have been outstanding if the dilutive potential common shares had
been issued for the Company's common stock options from the
Company's Stock Option Plans. As required by SFAS No. 128, all
outstanding common stock options were included even though their
exercise may be contingent upon vesting.
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 2, 1998
Compared to the Thirteen Weeks Ended May 3, 1997
Sales. The Company's total sales increased 32.5% to $145.1
million for the thirteen weeks ended May 2, 1998 compared to
$109.5 million for the same period last year. The increase was
primarily attributable to a comparable store sales increase of
10.3%, the acquisition of 88 Strawberries' stores in October
1997, and the opening of 16 stores partially offset by the
closing of 25 stores. Management attributes the comparable store
sales increase, its ninth consecutive quarter of such increases,
primarily to its strategic decision to eliminate unprofitable
stores and focus on customer service, superior retail locations,
inventory management and merchandise presentation.
Comparable store sales in the Company's music stores increased
12.6% while comparable sales in the video stores increased 3.6%.
Gross Profit Gross profit as a percentage of sales improved to
36.2% from 35.9% in the thirteen week period ended May 2, 1998
compared to the same period in 1997. The increase is primarily
due to the leveraging of expenses in the Company's distribution
center.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses ("S,G&A"), as a percentage of sales,
decreased from 32.3% to 29.8% in the thirteen week period ended
May 2, 1998 compared to the same period in 1997. 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 $1.7
million in the thirteen week period ended May 3, 1997 to $841
thousand for the thirteen week period ending May 2, 1998. The
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
decrease is due to a reduction in long-term debt and lower
interest rates as a result of the refinancing completed in fiscal
1997.
Net Income. The Company increased its net income to $2.6 million
in the thirteen weeks ended May 2, 1998 from a net loss of $862
thousand 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. At the end of the first
quarter of 1998 the Company sold an additional 1.5 million shares
of its Common Stock in a public offering for approximately $37
million net of issuance costs. A portion of the proceeds was
used to repay long-term debt and the balance of the proceeds,
which is reflected in the $20.3 million of cash and cash
equivalents at May 2, 1998, will be used for general corporate
purposes including investments in additional stores, fixtures and
inventory and future acquisition and investment opportunities.
The impact of this issuance of Common Stock had an immaterial
effect on earnings per share in the first quarter.
On July 9, 1997 the Company entered into a $100 million secured
revolving credit facility with Congress Financial Corporation.
The Revolving Credit Facility combined the Company's long-term
debt with its revolving credit line to create a $100 million
credit facility with a three year term at interest rates below
the prime rate. The Revolving Credit Facility contains certain
restrictive provisions, including provisions governing cash
dividends and acquisitions, is secured by merchandise inventory
and has a minimum net worth convenant. At quarter end, the
Company had unused lines of credit aggregating $100 million.
The Company's working capital at May 2, 1998 was $92.9 million
and its ratio of current assets to current liabilities was 1.8 to
1. During the first three months of 1998, the Company's net cash
used by operations was $70.9 million, compared to $35.7 million
used in the first three months of 1997. The most significant
operating use of cash during the period was $62.7 million in
seasonal reductions of accounts payable. The Company used an
additional $35 million for the reduction of long-term debt.
CAPITAL EXPENDITURES
- --------------------
During the first quarter of 1998, the Company had capital
expenditures of $6 million out of a total of $47 million, net of
construction allowances, planned for the year. Included in the
total for the year is $17 million for a new Point of Sale
register system. Also during the quarter, the Company opened or
relocated 16 new stores and closed 25 stores while total retail
selling space increased slightly. The Company plans on opening
approximately the same number of stores in Fiscal 1998 as it
closes but anticipates that total retail footage will increase as
the average size of new stores continues to increase.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART II-OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
A) An Annual Meeting of Shareholders of Trans World
Entertainment Corporation was held on Wednesday, June
3, 1998.
B) In the case of each individual nominee named below,
authority to vote was withheld with respect to the
number of shares shown opposite their name in Column 1,
and each nominee received the number of votes set
opposite their name in Column 2 for election as director
of the Corporation.
------------------------------
Column 1 Column 2
Name of Nominee Withheld Votes for
---------------- ------------------------------
Robert J. Higgins 100,726 18,750,148
Dean S. Adler 100,560 18,750,314
George W. Dougan 2,822,671 16,028,203
Charlotte G. Fischer 2,822,671 16,028,203
Isaac Kaufman 101,100 18,749,774
Matthew H. Mataraso 100,560 18,750,314
Dr. Joseph G. Morone 2,822,671 16,028,203
C) A proposal to amend Trans World Entertainment
Corporation's 1990 Stock Option Plan for Non-Employee
Directors to authorize the Board to award discretionary
option grants, was approved as follows:
FOR 17,734,130
AGAINST 1,109,746
ABSTAIN 6,998
D) A proposal to institute Trans World Entertainment
Corporation's 1998 Employee Stock Option Plan, was
approved as follows:
FOR 12,928,411
AGAINST 3,832,986
ABSTAIN 5,469
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART II-OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits No Description Page No
10.4 Trans World Entertainment
Corporation Employment
Agreement with Robert J.
Higgins
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 15, 1998 By /s/ ROBERT J. HIGGINS
-------------------------
Robert J. Higgins
Chairman, President and Chief Executive
Officer
(Principal Executive Officer)
June 15, 1998 By: /s/ JOHN J. SULLIVAN
------------------------
John J. Sullivan
Senior Vice President-Finance
and Chief Financial Officer
(Chief Financial and Accounting Officer)